IN INCOME TAX APPELLATE TRIBUNAL B , BENCH MUMBAI BEFORE SHRI R.C.SHARMA, AM & SHRI MAHAVIR SINGH, JM ITA No.5157 to 5159/Mum/2010 (Assessment Year : 2006-07 to 2008-09) Dr. Narendra D. Desai, Vs. ACIT, CC-34, Mumbai Apar House, Corporate Park, Building No.5, Sion Trombay Road, Chembur, Mumbai- 400071 PAN/GIR No. : AACPD 5020 B (Appellant) (Respondent) Assessee by : Shri Vijay Mehta Revenue by : Shri N.P.Singh Date of Hearing : 31/03/2016 Date of Pronouncement 11/05/2016 O R D E R PER R.C.SHARMA (A.M): These are appeals filed by assessee against order of CIT(A)-Mumbai, for assessment years 2006-07 to 2008-09, in matter of order passed u/s.143(3) r.w.s.153A of Act. 2. Common grievance of assessee in all years pertains to disallowance of claim of management fees while computing short term capital gain u/s.48 of I.T.Act. 3. Rival contentions have been heard and record perused. Facts in brief are that assessee is individual, shown income under head short term capital gain. While computing same assessee has claimed 2 ITA No.5157-5159/10 management fees u/s.48 paid to portfolio manager. AO held that said amount debited is not allowable expenditure u/s.48 of IT Act for following reasons :- (i) assessee has paid said expenditure for portfolio management. ii) expenditure is not incurred as result of transfer of capital asset. (iii) Nor same has been expended as cost of acquisition of asset and cost of any improvement. 4. By impugned order, CIT(A) confirmed disallowance by observing as under :- 1.14 As per provisions of section 55, cost of improvement and cost of acquisition has been defined for purpose of section 48 and 49. appellant has acquired capital asset in form of equity shares or shares allotted to shareholder. cost of capital asset being share is cost of purchase of shares. 1.15 As per provisions of section 48 with reference to mode of computation of capital gain, only two type of expenditure are allowable as deduction. relevant portion of section 48 is reproduced as under:- Mode of computation 48. "The income chargeable under head "Capital gains" shall be computed, by deduction from full value of consideration received or accruing as result of transfer of capital asset following amounts, namely: (i) expenditure incurred wholly and exclusively in connection with such transfer; (ii) cost of acquisition of asset and cost of any improvement thereto" 1.16 portfolio management fees is not expenditure incurred wholly and exclusively in connection with transfer of asset. It is composite fees of services rendered by portfolio management manager, which includes fixed fees of 10% of corpus employed and variable fees of 25% beyond 10% absolute return from corpus employed. However, total fees i.e. fixed fees and variable fees shall be restricted to 15% of corpus employed. This fees include transaction fees, brokerage charges, demat fees, safe custody charges, statutory levies such as service tax and such other expenses incurred in respect of investments 3 ITA No.5157-5159/10 made under this agreement with fund managers. Thus, negligible part of this fees is attributable to expenditure for transfer of share which is brokerage, may 0.25% and stamp duty paid on transfer. No other fees charged. by portfolio manager is related to expenditure incurred wholly and exclusively in connection with transfer. 1.17 appellant has further claimed portfolio management fees as improvement to cost of asset i.e. shares purchased under portfolio management schemes. This contention of appellant is also not correct as Portfolio Managers cannot make any improvement to cost of share by this scheme. It is only strategy to sell asset at appropriate time to fetch maximum gain related to Portfolio Management system. Thus fees charged for service rendered by Fund Manager to get maximum gain therefore same cannot be claimed as deduction under section 48 of Income Tax Act as cost of improvement of capital asset. It is pertinent to mention here that neither appellant has incurred any expenditure in terms of interest on borrowed capital invested in corpus of fund nor any specific expenditure incurred as brokerage paid to brokers for sale of shares. In view of this fact, Assessing Officer is justified in not allowing deduction of portfolio management fees under section 48 of Income Tax Act to appellant. case law relied upon by appellant are distinguishable on facts and not applicable in case of appellant as none of case law related to allowability of portfolio management fees as deduction under section 48 of Income Tax Act against income under head capital gain. In view of this fact, ground of appeal No. 1 and 2 of appellant are not allowed. 5. On similar reasoning assessee s claim of management fees was declined in all three years under consideration, against which assessee is in further appeals before us. It was argued by ld. AR that amount paid for services rendered in respect of purchase and sale of asset is eligible for deduction u/s. 48 of Act and it is immaterial as to who renders services. assessee may purchase and sale asset like shares either directly or through appointed agent and can claim deduction u/s. 48 of Act for charges paid for purchase and sale of asset. It was further submitted that services rendered by Portfolio Managers for purchase and sale of shares are identical to, and 4 ITA No.5157-5159/10 improvised services than services rendered by share broker. share broker merely purchases and sales shares whereas under PMS, Portfolio Managers also use their expertise in identifying scripts and crucial timing of undertaking transactions of those scripts thereby enhancing gain. Hence, PMS charges paid to portfolio managers are eligible for deduction u/s. 48 of Act. 6. Our attention was invited to portfolio management agreements with various entities pursuant thereto assessee was under obligation to pay portfolio managers fees which was broadly categorised in following three segments. a. Upfront one-time fee based on amount invested. b. Periodical fees based on amount invested/net asset value (NAV) of fund invested c. Fees based on percentage of profit realised above benchmark prescribed. In view of above, ld. AR contended that assessee had entered into contracts with portfolios managers and subsequently transactions of purchase and sale of shares were undertaken by portfolio managers pursuant to these agreements. This itself clearly establishes that appellant was under obligation to pay to portfolio managers for transactions undertaken pursuant to these contracts. In other words, transactions of sale and purchase of shares were subject to prior obligation to pay portfolio managers, their fees falling into aforesaid 3 categories. It is submitted that such obligation to pay for acquisition as well as disposal of shares constitute 'cost of acquisition' 5 ITA No.5157-5159/10 of asset i.e. shares. Therefore, PMC charges paid also form part of cost of acquisition and are eligible for deduction u/s. 48 of Act. 6. As per ld. AR PMS charges are very akin to interest paid on amounts borrowed for acquisition of asset and eligible for deduction u/s. 48 of Act. transaction for purchase of asset and transaction to borrow interest bearing funds are distinct transactions. obligation to pay interest is undertaken at time of borrowing although interest accrues and paid subsequent to borrowing. However, interest paid forms part of cost of acquisition of asset if funds borrowed are utilised for acquisition of asset. Similar situation arises under PMS wherein obligation to pay PMS charges is undertaken prior to rendering services to acquire and sale shares although actual quantification and payment of PMS charges occurs subsequent to execution of such transactions. It is well settled in law that although interest is paid subsequent to purchase of asset, such interest constitutes 'cost of acquisition' of asset and same is eligible for deduction u/s. 48 of Act. In like manner, PMS charges also constitutes 'cost of purchase' and eligible for deduction u/s. 48 of Act. 7. Ld. AR further placed reliance on decision of Hon ble Delhi High Court in case of CIT v. Mithlesh Kumari [92 ITR 9 (Del)] issue before Hon'ble High Court was that whether interest and ground rent paid by assessee constituted actual cost of plot of land for purpose of determining capital gain. In that case, assessee had borrowed funds from her mother-in-law to pay price of land and 6 ITA No.5157-5159/10 paid interest thereon. assessee also incurred other expenditure related to said plot of land namely ground rent, penalty paid to Improvement Trust and brokerage on sale of land. assessee claimed deduction for these expenses while computing capital gains arising out of sale of plot of land to mother-in-law. income tax officer allowed expenditure only on account of brokerage and Appellate Assistant Commissioner upheld view taken by income tax officer. However, Tribunal allowed entire expenditure claimed by assessee and revenue filed reference before High Court challenging order of Tribunal. counsel appearing for revenue argued that actual cost of capital asset to assessee is actual cost of assessee as on date of acquisition of capital asset and it did not include expenditure which assessee may have incurred subsequently except that expenditure specifically mentioned in Section 12B(2)(ii) of I.T.Act, 1922. It was also argued that interest paid by assessee did not come under category of expenditure incurred for making any addition or alteration to capital asset and hence cannot be included in actual cost of capital asset. However, High Court rejected contentions of revenue and held that assessee was entitled to claim deduction on account of interest paid as it constituted part of actual cost of plot and that assessee was not entitled for deduction for ground rent paid by assessee. 8. Following para of Hon ble Delhi High Court judgment was emphasised wherein Hon ble Delhi High Court followed ratio of law 7 ITA No.5157-5159/10 laid down by Hon'ble Calcutta and Bombay High Court and observed as under:- "We are in respectful agreement with observations of Calcutta and Bombay High Courts in decisions referred to above. In present case, we find that assessee in order to purchase land had not only to borrow amount of Rs. 95,000 which was consideration for purchase of land, but also had to pay interest of Rs.16,878 on amount borrowed by her. amount of Rs.95, 000 plus interest paid by assessee constitutes actual cost to assessee of land fact that amount of Rs. 95,000 was paid by assessee to vendor and amount of interest of Rs. 16,878 was paid to different person namely, her mother-in-law, does not make any difference so far as assessee is concerned in respect of actual cost of land to her. It will not also make any difference whether interest was paid on date of purchase or whether it is paid subsequently. To exclude interest amount from actual cost of asset would lead to anomalous results. Supposing she had purchased land for Rs.1,00,000, by raising loan of that amount and had paid interest of Rs.20, 000 on said loan and had sold land for Rs.1,20,000. It would be unreasonable to hold under such circumstances by excluding interest amount from actual cost of land that she had made capital gain of Rs.20,000 when, as matter of fact, she had not made any profit at all by transaction. Applying said observations of Calcutta and Bombay High Courts to present case, we hold that Tribunal was right in adding interest amount of Rs. 16,878 towards actual cost of land. 9. Reliance was also placed by ld. AR on decision of Hon ble Andhra Pradesh High Court in case of ACIT v. K. S. Gupta [119 ITR 372 (AP)], identical issue of ascertaining 'actual cost' for purpose of determining capital gain was subject matter of reference made to High Court. In that case, assessee paid Rs.9,138 /- for purchase of 2 plots of land and paid interest of Rs.11,344/- on amounts borrowed by assessee for purchase of these plots. said interest was paid for period 1.1.1957 to 11.8.1966. assessee sold these plots for Rs. 32,100 and claimed deduction of Rs. 20,434 (i.e. 9138 8 ITA No.5157-5159/10 + 11,344) while computing capital gains on sale of plots. income tax officer rejected deduction claimed on account of interest for reason that such interest was allowed as revenue expenditure. AAC noticed that no such interest was allowed and hence, allowed deduction of interest by restricting it to extent of annual value of property. However, on further appeal, Tribunal allowed entire interest expenditure and Department filed reference before High Court. While disposing reference, Hon'ble High Court took into consideration meaning ascribed to expression 'actual cost' by Hon'ble Supreme Court in case of Challappalli Sugar Ltd. 10. In view of above, it was submitted that for purpose of determining gain arising on transfer of asset, cost of asset has to be determined on basis of well-established commercial principles and only 'real income' so commercially determined can be subjected to tax. 11. Reliance was also placed on decision of Hon ble Madras High Court in case of Trishul Investment Ltd. 305 ITR 434 in support of proposition that deduction on account of interest liability of borrowings made to acquire shares is to be considered. Ld. AR further submitted that SLP filed against order of Madras High Court was dismissed by Hon ble Supreme Court which was reported at 306 ITR (St.) 4. 12. Reliance was also placed by ld. AR on some of decisions in favour of assessee which are as follows :- a. DCIT v. KRA Holding & Trading P. Ltd. [ITA no. 356 and 240/PN/2011 for AY. 2007 -08 order dated 25.07.2012] (after 9 ITA No.5157-5159/10 taking into consideration decision of Tribunal, Mumbai Bench, in case of Homi K. Bhabha v ITO in IT ANo. 3287/Mum/2009 order dated 28.09.2011). Hon'ble Tribunal followed their order in assessee's own case for AY.2004-05 and also noted that Department has not preferred any appeal against that order on this issue. b. KRA Holding & Trading P. Ltd. v DCIT [ITA no. 703/PN/2012 for AY 2008-09 order dated 19.09.2013] (after taking into consideration decision of Tribunal, Mumbai Bench, in case of Homi K. Bhabha v ITO in ITA No. 3287/Mum/2009 order dated 28.09.2011 c. ARA Trading & Investments P. Ltd. v ACIT [ITA No.94 and 337/PN/2012 for AY. 2007 -08 (and others) order dated 19.09.2013] d. Serum Institute of India Ltd. v ACIT [ITA no. 1576 and 1617/PN/2012 for AY. 2007-08 order dated 18.02.2015] e. Amrit Diamond Trade Centre P. Ltd. v ACIT [ITA no. 2642/Mum/2013 for AY 2009-10 order dated 15-1-2016. 13. Ld. AR fairly conceded that some of decisions are also against assessee which are as under :- a. Devendra Motilal Kothari v DCIT [136 TTJ 188 (Mum)] b. Homi K. Bhabha v ITO [IT ANo. 3287/Mum/2009 for AY. 2006- 07 order dated 28.09.2011] c. Kushal N. Desai v ACIT [ITA no. 5160/Mum/2010 for AY. 2008- 09 order dated 25.01.2012. As per ld. AR decisions against appellant are distinguishable on facts and other reasons stated hereunder. Therefore, same may not be followed by Tribunal : a. decisions of High Courts cited by appellant were not taken into consideration. b. latest decision on issue by Tribunal, Mumbai Bench in case of Amrit Diamond Trade Centre P. Ltd. v ACIT (supra) is in favour of appellant. c. assessees in those cases were unable to demonstrate/correlate or explain how expenditure were 10 ITA No.5157-5159/10 exclusively incurred wholly in connection with sale of shares and securities or that expenditure incurred was forming part of cost of acquisition. 14. On other hand, ld. CIT DR Shri N.P.Singh submitted that assessee's claim has been disallowed as same was not covered by provisions of section 48 with regard to computation of capital gains. In support of orders of AO and CIT(A) following judicial pronouncements were placed before us in support of impugned disallowance: (1) Devendra Motilal Kothari vs. DCIT pronounced on 26/03/2010 reported in 13 Taxmann 15 (Mumbai) (2011) (2) Pradeep Kumar Harlalka vs. ACIT pronounced on 10/08/2011 47 SOT 204 (Mum) (2011) (3) Homi K. Bhabha vs. ITA pronounced on 28/09/2011 48 SOT 102 (Mum) (2011 ). It was submitted that Tribunal in above three cases after analyzing issue and dealing with various aspects of issue u/s. 48 have sustained disallowance as portfolio management fees is not found to be 'only and exclusively' in connection with transfer of shares u/s. 48 of Act. 15. Ld. CIT DR also brought to our notice case of assessee's son namely Shri Kushal M. Desai wherein identical disallowance was made and confirmed by first appellate authority. In second appeal, Tribunal 'A' Bench, Mumbai, in ITA No.5160/M/10 judgment pronounced on 25/1/12, have confirmed disallowance by relying on judgment of Devendra Motilal Kothari (supra) and held that claim of assessee regarding payment of management fee and its deduction 11 ITA No.5157-5159/10 u/s.48 while computing short term capital gain, is not admissible deduction. It was vehemently argued by ld. DR that decision relied on by ld. AR in case of K.S.Gupta(supra), Mithlesh Kumari (supra), Trishul Investment and Ms. Seema Harshit Savla, ITA No.6536/Mum/2010, dated 19-8-2015 are distinguishable on facts insofar as none of judgments on issue relating to computation of capital gain with respect to management fee u/s.48 of Act. As per ld. CIT DR decision in case of K.S. Gupta is on issue of interest paid on monies borrowed for purchase of land. issue in case of Trishul Investment pertains to purchase of shares out of borrowed funds and interest paid thereon. judgment in case of Mithlesh Kumari is on account of interest on money borrowed for purchase of plot and ground rent and decision in case of KRA Holdings is on issue of whether particular receipt is short term or long term capital gain. 16. With regard to decision of Hon ble Delhi High Court as relied by ld. AR, it was contended by ld. DR that decision of Hon'ble Delhi High Court is on issue whether profit on sale of shares is to be considered as business income or short term capital gain. decision of Hon'ble Tribunal in case of Ms. Seema Harshit Savla, ITA No.6536/Mum/2010, in which Hon'ble Tribunal has followed decision of Radials International is on issue of whether particular receipt on sale of shares is short term capital gain or business income. Therefore, there is 12 ITA No.5157-5159/10 no conflict between that judgment of Tribunal and earlier judgment of Tribunal (supra) relied on by Revenue. 17. We have considered rival contentions, carefully gone through orders of authorities below and also deliberated on judicial pronouncements cited at bar by ld. AR and DR during course of hearing before us as well as decision relied on by lower authorities while arriving at decision that portfolio management fees is not deductible u/s.48 while computing capital gains. From record we found that during all years under consideration assessee has earned huge capital gains out of sale of shares. While computing capital gains assessee has claimed deduction for portfolio management charges paid to various entities which was disallowed by lower authorities on plea that expenditure was not incurred as result of transfer of capital asset nor same has expended cost of acquisition of asset nor it amounts to cost of any improvement. scope of services of portfolio managers have been discussed in great detail by coordinate bench in case of Capt. Avinash Chander Batra, ITA No.7407/Mum/2011, dated 30- 3-2016, wherein Tribunal has observed as under :- business activities of portfolio managers in India are regulated by Securities and Exchange Board of India Act,1992(15 of 1992) (in short SEBI Act,1992 ) . SEBI Act,1992 provide s for establishment of Board (Hereinafter called SEBI ) to protect interests of investors in securities and to promote development of, and regulate , securities market and for matters connected therewith or incidental thereto. It is provided in Chapter IV of SEBI Act,1992 which deals with power and functions of Board u/s.11(1) of SEBI Act,1992 that it shall be duty of SEBI to protect interests of investors in securities and to promote development of, and regulate , securities market , by such measures as it thinks fit. Section 11(2)(b) of SEBI Act,1992 provides , inter-alia, that such measures to achieve objects of SEBI 13 ITA No.5157-5159/10 Act,1992 , Board may require registering and regulating working of portfolio managers. It is provided , inter-alia, in Chapter V u/s 12(1) of SEBI Act,1992 that no portfolio manager who may be associated with securities market shall buy, sell or deal in securities except under, and in accordance with , conditions of certificate of registration obtained from SEBI in accordance with regulations made under SEBI Act,1992. SEBI Act,1992 by virtue of provisions of Section 30 grants power to SEBI to make regulations by notification consistent with SEBI Act,1992 and rules made there-under to carry out purposes of Act which is primarily investor protection and to promote development of, and to regulate securities market. In exercise of powers u/s. 30 of SEBI Act,1992, SEBI came out with regulations to regulate business of portfolio managers in India by promulgating Securities and Exchange Board of India (Portfolio Managers) Regulation,1993 which were amended from time to time . Under clause 2(cb) of Securities and Exchange Board of India (Portfolio Managers) Regulation,1993 , portfolio manager is defined as under: (cb) portfolio manager means any person who pursuant to contract or arrangement with client, advises or directs or undertakes on behalf of client (whether as discretionary portfolio manager or otherwise) management or administration of portfolio of securities or funds of client, as case may be;] Under Clause 14 of Securities and Exchange Board of India (Portfolio Managers) Regulation,1993 , it is stipulated as to contract which portfolio manager is required to enter with client and disclosures to be made as under:- [14. Contract with clients and disclosures. (1) (a) portfolio manager shall, before taking up assignment of management of funds or portfolio of securities on behalf of client, enter into agreement in writing with such client clearly defining inter se relationship, and setting out their mutual rights, liabilities and obligations relating to management of funds or portfolio of securities containing details as specified in Schedule IV. (b) agreement between portfolio manager and client shall, inter alia, contain: (i) investment objectives and services to be provided; (ii) areas of investment and restrictions, if any, imposed by client with regard to investment in particular company or industry; (iii) type of instruments and proportion of exposure; (iv) tenure of portfolio investments; (v) terms for early withdrawal of funds or securities by clients; (vi) attendant risks involved in management of portfolio; (vii) period of contract and provision of early termination, if any; 14 ITA No.5157-5159/10 (viii) amount to be invested subject to restrictions provided under these regulations; (ix) procedure of settling client's account including form of repayment on maturity or early termination of contract; (x) fees payable to portfolio manager; (xi) quantum and manner of fees payable by client for each activity for which service is rendered by portfolio manager directly or indirectly (where such service is out sourced); (xii) custody of securities; (xiii) in case of discretionary portfolio manager condition that liability of client shall not exceed his investment with portfolio manager; (xiv) terms of accounts and audit and furnishing of reports to clients as per provisions of these regulations; (xv) other terms of portfolio investment subject to these regulations. portfolio managers general responsibilities are defined in clause 15 of Securities and Exchange Board of India (Portfolio Managers) Regulation,1993 as under :- 15. General responsibilities of Portfolio Manager. (1) discretionary portfolio manager shall individually and independently manage funds of each client in accordance with needs of client in manner which does not partake character of Mutual Fund, whereas non-discretionary portfolio manager shall manage funds in accordance with directions of client. [(1A) portfolio manager shall not accept from client, funds or securities worth less than five lacs rupees.] (2) portfolio manager shall act in fiduciary capacity with regard to client's funds. [(2A) portfolio manager shall keep funds of all clients in separate account to be maintained by it in Scheduled Commercial Bank. Explanation. For purposes of this sub-regulation, expression Scheduled Commercial Bank means any bank included in Second Schedule to Reserve Bank of India Act, 1934 (2 of 1934).] (3) portfolio manager shall transact in securities within limitation placed by client himself with regard to dealing in securities under provisions of Reserve Bank of India Act, 1934 (2 of 1934). (4) portfolio manager shall not derive any direct or indirect benefit out of client's funds or securities. [(4A) portfolio manager shall not borrow funds or securities on behalf of client.] 15 ITA No.5157-5159/10 [(5) portfolio manager shall not lend securities held on behalf of clients to third person except as provided under these regulations.] (6) portfolio manager shall ensure proper and timely handling of complaints from his clients and take appropriate action immediately . These Securities and Exchange Board of India (Portfolio Managers) Regulation,1993 were amended from time to time and relevant amendments so far concerning issue s under this appeal are reproduced below : These Regulations may be called Securities and Exchange Board of India (Portfolio Managers) (Amendment) Regulations, 2006. ******* 3. In Securities and Exchange Board of India (Portfolio Managers) Regulations, 1993: (i) in regulation 2, clause (d) shall be substituted with following, namely: (d) principal officer means employee of portfolio manager who has been designated as such by portfolio manager; (ii) in regulation 6, in sub-regulation (2), clause (c) shall be substituted with following, namely: (c) principal officer of applicant has either (i) professional qualification in finance, law, accountancy or business management from university or institution recognised by Central Government or any State Government or foreign university; or (ii) experience of at least ten years in related activities in securities market including in portfolio manager, stock broker or as fund manager. These Regulations may be called Securities and Exchange Board of India (Portfolio Managers) (Second Amendment) Regulations, 2006. c) after clause (c) following clauses shall be inserted, namely: (ca) portfolio means total holdings of securities belonging to any person; (cb) portfolio manager means any person who pursuant to contract or arrangement with client, advises or directs or undertakes on behalf of client (whether as discretionary portfolio manager or otherwise) management or administration of 16 ITA No.5157-5159/10 portfolio of securities or funds of client, as case may be; perusal of SEBI Act,1992 and regulations made there-to clearly reveals that business of portfolio managers in India is regulated and controlled business which requires mandatory registration with SEBI to carry on activities of portfolio management in India and is subject to continuous control, regulation and monitoring by SEBI with objective of investor protection and promote and regulate securities market. qualification and experience of portfolio manager is also specified in afore-stated regulations so that only professional, skilled, specialized and experienced persons are engaged in activities of portfolio management . roles and responsibilities of portfolio managers covers vast spectrum of activities provided to clients for fee ranging from providing advises , or direct or undertake on behalf of client management or administration of portfolio of securities or funds of client meaning thereby that portfolio managers does not act merely as stock-broker to buy and sell shares of clients in execution of instructions of client s for brokerage/commission , but portfolio manager renders vast spectrum of activities which involves giving advises to clients and/or management and administration of securities or fund portfolio s of client which is managed by experienced, specialized, skilled and qualified professionals who act as portfolio managers to render their expertise, skill and specialized knowledge to investor s client for fee with objective to create wealth for investor client s and maximizing gains for these investors client. highly specialized and skill services are rendered by these qualified and experienced portfolio managers on continuous basis to clients in highly volatile and complex securities market with objective of wealth creation and maximizing gains for investor s clients and are not rendering merely services connected with transfer of shares nor are they connected with cost of acquisition or sale of shares even if these PMS charges are paid based and calculated on purchases and sales of shares or even if these PMS charges are return based fees. These fees have major component towards advisory charges being highly skilled and specialized knowledge and expertise based services being managerial and consultancy services of experienced and qualified professionals acting as portfolio managers who render these specialized and skilled services on continuous basis to investor client for fee in highly volatile and complex securities market to maximize gains and to create wealth for investors , whether these fee paid to portfolio managers are calculated based on purchases or sales of securities, or return based fee etc. is not relevant and material but fact of matter is that these PMS charges are not paid towards cost of acquisition of capital assets or for improvement of capital asset nor are these fees being expenditure incurred wholly and exclusively in connection with transfer of capital asset and hence same cannot be allowed as deduction u/s. 48 of Act from full value of consideration 17 ITA No.5157-5159/10 received or accruing to assessee as result of transfer of capital asset being shares. Our above view is fortified by decision of jurisdictional Mumbai- tribunal in case of Devendra Motilal Kothari v. DCIT in (2011) 13 taxman.com 15 (Mum.-trib.), Homi K Bhabha v. ITO (2011)14 taxmann.com 165(Mum-trib.) and Pradeep Kumar Harlalka v. ACIT (2011) 14 taxmann.com 42(Mum-trib.). findings of Mumbai- tribunal in case of Devendra Motilal Kothari(supra) on identical issue are as under: 12. We have considered rival submissions and also perused relevant material on record. It is observed that profit arising to assessee on sale of shares and securities chargeable to tax under head "capital gains" and this position is not in dispute. only dispute is whether fees paid by assessee for PMS can be allowed as deduction in computing such income or not. In this regard, it is observed that charge of Income-tax is created by virtue of provisions contained in section 4 according to which Income-tax is charged for relevant assessment year in accordance with and subject to provisions of Income-tax Act in respect of total income of relevant previous year of every person. As per scheme of Act, income is broadly classified under five different heads and income chargeable to tax under these heads has to be computed as per relevant provisions applicable to respective heads of income section 45 to section 55A falling under Chapter IV-E deal with assessment of income under head 'capital gains' and section 48 in particular prescribes mode of computation of capital gains. As provided in section 48, expenditure incurred wholly and exclusively in connection with transfer and cost of acquisition of asset and cost of any improvement thereto are deductible from full value of consideration received or accruing to assessee as result of transfer of capital assets. 13. In present case, deduction on account of fees paid for PMS has been claimed by assessee as deduction in computing capital gains arising from sale of shares and securities. He however has failed to explain as to how said fees could be considered as cost of acquisition of shares and securities or cost of any improvement thereto. He has also failed to explain as to how said fees could be treated as expenditure incurred wholly and exclusively in connection with sale of shares and securities. On other hand, basis on which said fees was paid by assessee show that it had no direct nexus with purchase and sale of shares and as rightly contended by Ld. DR, said fees was payable by assessee going by basis thereof even without there being any purchase or sale of shares in particular period. As matter of fact, when ld. CIT(A) required assessee to allocate fees paid for PMS in relation to purchase and sale of shares as well as in relation to shares held as investment on last date of previous year, assessee could not furnish such details nor could 18 ITA No.5157-5159/10 he give any definite basis on which such allocation was possible. Having regard to all these facts of case, we are of view that fees paid by assessee for PMS was not inextricably linked with particular instance of purchase and sale of shares and securities so as to treat same as expenditure incurred wholly and exclusively in connection with such sale or cost of acquisition/improvement of shares and securities so as to be eligible for deduction in computing capital gains under section 48. 14. As regards case laws cited by Ld. Counsel for assessee in support of assessee's case on point under consideration, it is observed that facts involved therein were altogether different in as much as relevant amounts claimed by assessee as deduction in computing capital gains were found to be in nature of expenditure/cost covered by section 48. For instance, in case of Mathuradas Mangaldas Parekh (supra), payment of betterment charges made under town planning scheme had resulted in increase in potential value of land and same therefore were held to be cost of improvement of said land. Similarly, in case of Chemmancherry Estates Co. ( supra), funds borrowed by assessee were utilized for acquisition of land and interest paid thereon thus was held to forming part of cost of acquisition of land. In other cases also, brokerage expenses incurred by assessee were in respect of particular sale of capital assets and same therefore were held to be deductable while computing capital gain being expenditure incurred wholly and exclusively in connection with such transfer/sale. 15. At time of hearing before us, Ld, Counsel for assessee has raised alternative contention in support of assessee's claim for deduction on account of fees paid for PMS in computing capital gains relying on theory of real income and rule of diversion of income by overriding title. He has contended that fees for PMS being contractual liability directly relatable to capital gains, there was diversion of income from capital gain by overriding title to extent of amount of such fees and same therefore was not income belonging to assessee which was chargeable to tax under head "capital gains". In this regard, we may observe that even though assessee was under obligation to pay fees for PMS, mere existence of such obligation to pay said amount was not enough for application of rule of diversion of income by overriding title. true test for applicability of said rule is whether such obligation is in nature of charge on source i.e. profit earning apparatus itself and only in such cases where source of earning income is charged by overriding title, same can be considered as diversion of income by overriding title. 16. In case of Sitaldas Tirathdas (supra), it was held by Hon'ble Supreme Court that true test for application of 19 ITA No.5157-5159/10 rule of diversion of income by overriding title is whether amount sought to be deducted, in truth, never reached assessee as his income. Obligations, no doubt, are there in every case, but it is nature of obligation which is decisive fact. Explaining, further, it was observed by Hon'ble Supreme Court that there is difference between amount which person is obliged to apply out of his income and amount which by nature of obligation cannot be said to be part of income of assessee. Where by obligation, income is diverted before it reaches to assessee, it is deductible, but where income is required to be applied to discharge obligation after such income reaches assessee, same consequence, in law, does not follow. It was held by Hon'ble Supreme Court that it is first kind of payment which can truly be excluded and not second. second payment is merely obligation to pay another portion of one's own income which has been received and is since applied. 17. In present case, profit arising from sale of shares was received by assessee directly which constituted its income at point when it reached or accrued to assessee. fee for PMS on other hand was paid separately by assessee to discharge his contractual liability. It was thus case of obligation to apply income which had accrued or arisen to assessee and same amounted to mere application of income. We, therefore, have not hesitation to hold that payment of fees by assessee for PMS did not amount to diversion of income by overriding title and contentions raised by assessee in this regard cannot be accepted being devoid of any merit. 18. As regards contention of Ld. Counsel for assessee in support of assessee's claim for deduction on account of fees paid for PMS based on real income theory, we agree with ld. DR that theory of real income cannot be applied to allow deduction to assessee which is otherwise not permissible under Income-tax Act. In case of CIT v. Udayan Chinubhai [1996] 222 ITR 456 / 88 Taxman 114 (SC) it was held by Hon'ble Supreme Court in similar context that what is not permissible in law as deduction under any of heads cannot be allowed as deduction on principle of real income theory. 19. For reasons given above, we find no merit in arguments raised by Ld. Counsel for assessee in support of assessee's case on issue under consideration and rejecting same, we hold that fees paid by assessee for PMS was not deductible in computing capital gains as rightly held by Assessing Officer impugned order of Ld. CIT(A) confirming disallowance made by Assessing Officer on this issue is therefore upheld dismissing this appeal filed by Assessee. 20. In result, assessee's appeal is dismissed 20 ITA No.5157-5159/10 assesseee has placed reliance on decision s of Pune benches of Tribunal including in case of KRA Holding and Trading Private Limited (supra) which is distinguished by Mumbai Tribunal in case of Pradeep Kumar Harlalka(supra ) as under:- 13. Coming to decision of Pune Bench of Tribunal in case of KRA Holding & Trading (P.) Ltd. (supra), after perusing judgment very carefully we find that in that decision decision of co-ordinate Bench of Mumbai Tribunal in case of Devendra Motilal Kothari (supra) was distinguished mainly on basis of decision of Hon'ble Bombay High Court in case of Smt. Shakuntala Kantilal (supra). Pune Bench referred to various paras of Hon'ble Bombay High Court's decision in para-22 and ultimately concluded in para-23 that what was required was that claim should be bona fide and claim for such genuine expenditure has to be allowed so long as incurring of expenditure is matter of fact and necessity. However, as pointed out by Ld. DR this decision was specifically over ruled by Hon'ble Bombay High Court in case of Roshanbabu Mohd. Hussein Merchant (supra) and at placitum 18 it has been observed as under: "As regards decisions of this court in case of CIT v. Shakuntala Kantilal [1991] 190 ITR 56 followed in case of Abrar Alvi [2001] 247 ITR 312] and decision of Kerala High Court in case of Smt. Thressiamma Abraham (No. 1) [2001] 227 ITR 802which are strongly relied upon by counsel for assessee, we are of opinion that said decisions are no longer good law in light of subsequent decisions of apex court referred to hereinabove." Thus, without going into further details we would only like to observe that decision in case of Smt. Shakuntala Kantilal (supra) is no more good law in view of latest decision and therefore that decision cannot be relied for proposition that necessity of expenditure would make same allowable. Thus, Respectfully following afore-stated decision s of co- ordinate jurisdictional Benches of Mumbai Tribunal and our detailed discussions and reasoning in this order, we hold that these PMS expenses of Rs.20,04,393/- paid to portfolio managers being management expenses incurred with respect to securities / funds of assessee being managed by portfolio managers , being disallowed by AO and confirmed by CIT(A), are not allowable as deduction u/s 48 of Act from full value of consideration on sale of securities received or accruing to assessee . Accordingly, we dismiss this appeal filed by assessee. We order accordingly. 10. In result, appeal filed by assessee in ITA N0. 7407/Mum/2011 for assessment year 2008-09 is dismissed. 21 ITA No.5157-5159/10 18. sum and substance of decision referred by both authorities below as well as by ld. AR and DR have to be seen in context of nature of services rendered by portfolio managers for which they charge fees. It is clear from order of Tribunal in case of Capt. Avinash Chander Batra (supra) that PMS charges are not paid towards cost of capital i.e. shares or for improvement of capital assets nor these fees are being in nature of expenditure incurred wholly and exclusively in connection with transfer of capital assets and, hence, same cannot be allowed as deduction u/s.48 of Act. 19. It is case of computation of capital gains arising on sale and purchase of shares, which is to be done as per provisions of Section 45 to 55 of I.T.Act. Since there is no provision for deduction of portfolio management fees as expenditure u/s.48, we are going to uphold disallowance so made by AO and confirmed by CIT(A). It is also pertinent to bring on record that had assessee offered income on sale of shares under head profit and gains of business, position would be otherwise and assessee would have been eligible for claiming these expenditure incurred for earning business income. 20. In result, all appeals of assessee are dismissed. Order pronounced in open court on this 11/05/2016. Sd/- Sd/- (MAHAVIR SINGH) (R.C.SHARMA) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated 11/05/2016 . . /pkm, PS 22 ITA No.5157-5159/10 Copy of Order forwarded to : 1. Appellant 2. Respondent. 3. CIT(A), Mumbai. 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. BY ORDER, //True Copy// (Asstt. Registrar) ITAT, Mumbai Dr. Narendra D. Desai v. ACIT, CC-34, Mumbai