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Smart Summary

Structured Summary of the Tribunal Order (Assessment Year 2006-2007)

Factual and Procedural Background

This appeal by the assessee was directed against the order passed by the learned CIT(A) on 31.03.2009 relating to assessment year 2006-2007. The assessee originally challenged the impugned order on a solitary ground: non-allowance of a deduction of expenses incurred in connection with earning short term capital gains. Revised grounds were subsequently filed (four numbered grounds), which were admitted by the Tribunal.

On facts, the assessee declared gross long term capital gain of Rs. 67,32,921 and short term capital gain of Rs. 91,87,735. The assessee claimed deductions in respect of professional management fees and profit sharing fees paid to ENAM Asset Management Co. Ltd. (portfolio management services). The claimed deductions reduced the reported capital gains as follows (as presented in the opinion):

  • Long term capital gain: Rs. 67,32,921 less fees of Rs. 13,15,540 results in Rs. 54,17,381 (long term capital gain declared exempt and not in dispute).
  • Short term capital gain: Rs. 91,87,735 less fees of Rs. 17,95,185 results in Rs. 73,92,550 (deduction against short term capital gain was disallowed by the Assessing Officer).

The Assessing Officer disallowed the claimed deduction of Rs. 17,95,185 against short term capital gain, finding the fees unrelated to the transactions resulting in capital gain. The learned CIT(A) affirmed that view, holding the charges could not be allowed as deduction under section 48. The assessee appealed to the Tribunal challenging that disallowance.

Legal Issues Presented

  1. Whether the assessee is entitled to deduction for expenses (professional management fees and profit sharing fees paid to a portfolio manager) incurred in connection with earning short term capital gains.
  2. Whether the fees paid constitute a diversion of income by overriding title and therefore should be considered in computing income.
  3. Whether the full value of consideration received for transfers should be computed after deducting such fees paid.
  4. Whether the fees paid are to be added to the cost of acquisition or cost of improvement of the assets.

Arguments of the Parties

Appellant's Arguments

  • The fees paid to the portfolio manager (ENAM Asset Management Co. Ltd.) were incurred solely in connection with the purchase and sale of securities and therefore directly related to income from transfers (capital gains).
  • The fees should be allowed as deduction against short term capital gains as they were expended "wholly and exclusively" in connection with the transfer of shares.
  • Alternatively, the fees amount to a diversion of income by overriding title and should be taken into account while computing income.
  • Alternatively, the fees should be treated as part of the cost of acquisition or cost of improvement of the shares.
  • The assessee explained the contractual arrangement: placing Rs. 2.25 crore at the portfolio manager's discretion; fees included half percent of net asset value at the beginning of each quarter and a return-based fee of 20% per annum on profits in excess of 15% after expenses.
  • The assessee relied on certain case law, including CIT v. Sitaldas Tirathdas (1961) (Supreme Court), to support the contention about diversion of income and deductibility.

Respondent's (Departmental Representative) Arguments

  • The fees had no direct relation with the purchase or sale of shares and therefore could not be allowed as deduction against capital gains.
  • There was no infirmity in the view taken by the authorities below (Assessing Officer and CIT(A)), and the Tribunal's earlier orders of co-ordinate benches had already considered these aspects and decided the matter against the assessee.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Devendra Motilal Kothari v. Dy. CIT [2011] (Mumbai Bench of Tribunal) Payment of fees for portfolio management services is neither diversion of income by overriding title nor cost of acquisition/improvement for capital gains computation. The Tribunal noted this earlier Mumbai Bench decision decided the issue against the assessee and followed that view as part of its reasoning to disallow the fees.
KRA Holding & Trading (P.) Ltd. v. Dy. CIT [2011] 46 SOT 19 (Pune Bench) Held in favour of the assessee on similar facts; relied on Bombay High Court judgment in Commissioner Of Income-Tax v. Shakuntala Kantilal. Recognized as a contrary view; the Tribunal observed that this Pune Bench decision was based primarily on Shakuntala Kantilal (Bombay HC), which had later been overruled and thus did not persuade the Tribunal to depart from the Mumbai Bench view.
Pradeep Kumar Harlalka v. Asstt. CIT [IT Appeal No. 4501 (Mum.) of 2010] (Mumbai Bench, order dated 10.08.2011) Considered both Devendra Motilal Kothari and KRA Holding & Trading decisions and followed Devendra Motilal Kothari. Used as a later Mumbai Bench authority that followed the decision against the assessee; the Tribunal treated this as the latest and majority view to follow.
Commissioner Of Income-Tax v. Shakuntala Kantilal [1991] 190 ITR 56 (Bombay High Court) Interpreted in KRA Holding & Trading case to support deductibility/diversion arguments. The Tribunal noted that the Pune Bench relied on this case, but also observed that Shakuntala Kantilal had been subsequently held not to be good law by a later Bombay High Court decision (Roshanbabu).
CIT v. Roshanbabu Mohammed Hussein Merchant [2005] 275 ITR 231 Later Bombay High Court decision that, according to the Tribunal, overruled Shakuntala Kantilal. The Tribunal recorded that this later decision undermined the basis of the Pune Bench decision and supported following the Mumbai Bench view against the assessee.
CIT v. Sitaldas Tirathdas [1961] 41 ITR 367 (Supreme Court) Cited by the assessee to support the contention regarding diversion of income and deductibility. The Tribunal noted the assessee's reliance on this Supreme Court judgment but observed that the Mumbai Bench had already considered Sitaldas Tirathdas in Devendra Motilal Kothari and nonetheless reached an adverse conclusion; the Tribunal did not find grounds to depart from that adverse view.
Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 Cited as authority approving the doctrine of stare decisis (principle that earlier decisions should normally be followed). The Tribunal relied on the principle of stare decisis, as illustrated by this authority, in explaining why it was appropriate to follow the earlier co-ordinate-bench decisions unless established exceptions applied.

Court's Reasoning and Analysis

The Tribunal proceeded in the following analytical steps, drawing strictly from the material in the opinion:

  1. Admitted the revised grounds (including articulation of the original ground) and framed the appeal for hearing.
  2. Reviewed the factual matrix: amounts of long term and short term capital gains and the fees claimed as deductions (professional management fees and profit sharing fees paid to ENAM Asset Management Co. Ltd.).
  3. Noted the assessments below: the AO disallowed the fees against short term capital gains as not related to the transactions giving rise to capital gains; CIT(A) affirmed that the charges could not be allowed as deduction under section 48.
  4. Examined prior Tribunal decisions on the same point: a Mumbai Bench decision (Devendra Motilal Kothari) against the assessee; a Pune Bench decision (KRA Holding & Trading) in favour of the assessee (relying on Shakuntala Kantilal); and a later Mumbai Bench decision (Pradeep Kumar Harlalka) that, after considering both earlier orders and noting that Shakuntala Kantilal was held not to be good law by Roshanbabu, followed the Mumbai Bench view against the assessee.
  5. Considered the submissions of the assessee that the Mumbai Bench had not appreciated certain factual/contractual aspects (discretionary mandate of Rs. 2.25 crore; fee structure — 0.5% of net asset value and a 20% performance fee over 15% threshold) and that these established a direct link between the fees and transfers of shares. The assessee relied on authorities (including Sitaldas Tirathdas) to support diversion/cost arguments.
  6. Weighed the Department's position that the fees had no direct link to purchase/sale of shares and that co-ordinate benches had already considered and decided these contentions against the assessee.
  7. Applied the doctrine of precedent (stare decisis): the Tribunal emphasized that co-ordinate benches should normally follow earlier decisions of the same forum unless one of the recognized exceptions is present (conflict with the Supreme Court or jurisdictional High Court, decision rendered per incuriam, sub silentio, or other compelling reasons). The Tribunal explained that departing from precedent is an exception and that in the absence of compelling reasons the earlier view should be followed to maintain consistency.
  8. Concluded that the issue had been predominantly decided against the assessee by earlier Tribunal decisions after thorough analysis; that the factual matrix was in pari materia with those cases; and that none of the exceptions to following precedent applied in the present matter. Therefore, the Tribunal refused to revisit the correctness of the earlier decisions and sustained the disallowance.

Holding and Implications

APPEAL DISMISSED

Holding: The Tribunal upheld the disallowance of the professional management fees and profit sharing fees claimed by the assessee against short term capital gains and dismissed the appeal.

Implications:

  • Direct effect: The assessee's claimed deduction of Rs. 17,95,185 (professional management fees and profit sharing fees) against short term capital gains is not allowable; the disallowance as made by the Assessing Officer and affirmed by the CIT(A) is sustained.
  • Precedential effect: The Tribunal adhered to the existing line of Tribunal decisions (primarily Mumbai Bench decisions) that fees paid to a portfolio manager do not form part of computation of capital gains under section 48. The Tribunal declined to depart from that co-ordinate-bench view because the case did not fall within the recognized exceptions to stare decisis. The order does not announce a new principle of law beyond applying and following prior decisions.

Result: In view of the above, the appeal stands dismissed.

    Homi K. Bhabha v. Ito

    ORDER

    R.S. Syal, Accountant Member. - This appeal by the assessee is directed against the order passed by the ld. CIT(A) on 31.03.2009 in relation to the assessment years 2006-2007.

    2. Initially the assessee raised a solitary ground challenging the impugned order in not allowing deduction of expenses incurred in connection with the earning of short term capital gain. Subsequently revised grounds were filed reading as under:-

    "The learned Comm. Of Income tax (Appeals) - 10, Mumbai has erred:-


    1. in not allowing the appellant a deduction for expenses incurred in connection with earning of short term capital gains. He erred in not appreciating the nature of these expenses.
    2. in not appreciating that the fees so incurred were a diversion of income by overriding title and hence ought to have been considered while computing income.
    3. in not appreciating that the full value of consideration received had to be computed after deducting the fees which had been incurred and paid.
    4. in not adjudicating that the fees paid were to be added to the cost of acquisition / improvement of assets."

    3. The learned A.R. submitted that the ground taken in the original memo of appeal has been repeated as such as revised ground no.1 and the ground nos. 2 to 4 are additional grounds which arise out of an articulation of ground no.1. No serious objection was raised by the learned Departmental Representative against the admission of additional grounds. We, therefore, admit these grounds and take up the appeal for hearing.

    4. Briefly stated the facts of the case are that the assessee declared gross long term capital gain of Rs. 67,32,921 and short term capital gain of Rs. 91,87,735. Thereafter a deduction was claimed in respect of professional fees / profit sharing fees paid to ENAM Asset Management Co. Ltd. for rendering portfolio management services and the net income from capital gains was determined as under:-

        Rs. 67,32,921
    Long term capital gain    
    Less:    
    Professional    
    Management fees Rs. 3,05,688  
    Profit sharing fees Rs. 10,09,852 Rs. 13,15,540
        Rs. 54,17,381
        Rs. 91,87,735
    Short term capital gain    
    Less :    
    Professional Management fees Rs. 4,17,141  
    Profit sharing fees Rs. 13,78,044 Rs. 17,95,185
        Rs. 73,92,550

    5. The Assessing Officer observed that the Professional Management fees and Profit sharing fees (hereinafter collectively called as 'fees') paid to portfolio manager was unrelated to any profit or loss under the head 'Capital gains'. There is no dispute on the fact that the assessee claimed long term capital gain as exempt, which was duly accepted. The A.O. did not allow deduction for fees of Rs. 17,95,185 claimed by the assessee against the short term capital gain, as it was, in his opinion, not related to the transactions resulting in to capital gain. It was argued before the learned CIT(A) that the assessee was entitled to deduction on account of fees against the short term capital gain, as it was directly related to sale of shares and hence should be taken as expenditure incurred wholly and exclusively in connection with transfer of shares. An alternative argument for considering it as diversion of income by overriding title, was also raised. The learned CIT(A) was unconvinced with the assessee's submissions. He echoed the assessment order on this point by holding that such charges could not be allowed as deduction u/s 48. Now the assessee has assailed the impugned order in above terms.

    6. We have heard the rival submissions and perused the relevant material on record. Both the sides have placed on record copies of the orders passed by the Tribunal in support of their respective stands. The Mumbai Bench of the Tribunal in the case of Devendra Motilal Kothari v. Dy. CIT [2011] 13 Taxman.com 15] [to which one of us, namely, the ld. JM is party] decided the issue against the assessee by holding that the payment of fees by that assessee for portfolio management services was neither diversion of income by overriding title nor cost of acquisition nor cost of improvement and was consequently not eligible for deduction in computing capital gain. Thereafter, similar issue came up before the Pune Bench of the Tribunal in KRA Holding & Trading (P.) Ltd. v. Dy. CIT [2011] 46 SOT 19 /11 Taxman.com 250 in which the Revenue relied on the Mumbai Bench order in Devendra Motilal Kothari's case (supra). Vide its order dated May 2011 and after considering the case of Devendra Motilal Kothari (supra), the Pune Bench recorded a contrary view in assessee's favour. In so deciding, the Pune Bench, inter alia, relied on the judgement of the Hon'ble Bombay High Court in Commissioner Of Income-Tax v. Shakuntala Kantilal. [1991] 190 ITR 56/ 58 Taxman 106 . Once again similar issue came up before the Mumbai Bench of the Tribunal in Pradeep Kumar Harlalka v. Asstt. CIT [IT Appeal No. 4501 (Mum.) of 2010. Vide its order dated 10.08.2011, the Mumbai Bench considered both the earlier decisions on the point, viz., Devendra Motilal Kothari's case (supra) and KRA Holding & Trading (P.) Ltd.'s case (supra ). Through an elaborate order, the Mumbai Bench in latter case followed the decision in the case of Devendra Motilal Kothari (supra) in priority over that of KRA Holding & Trading (P.) Ltd.'s case (supra). In deciding so, the latter Bench observed that the decision of the Pune Bench in KRA Holding & Trading (P.) Ltd.'s case (supra) is primarily based on the judgement of the Hon'ble Bombay High Court in the case of Shakuntala Kantilal (supra), which has been subsequently held to be not a good law by the Hon'ble Bombay High Court in CIT v. Roshanbabu Mohammed Hussein Merchant [2005] 275 ITR 231 / 144 Taxman 720 . As the later judgement overruling the earlier judgement was not brought to the notice of the Pune Bench, the Mumbai Bench of the Tribunal in Pradeep Kumar Harlalka's case (supra) chose to follow the decision in the case of Devendra Motilal Kothari (supra), thereby deciding the issue against the assessee. The position discussed above has been fairly admitted by both the sides.

    7. From the above discussion it is seen that the first order on this issue was passed against the assessee in Devendra Motilal Kothari's case (supra). The second order, in the point of time by the Pune Bench in KRA Holding & Trading (P.) Ltd.'s case (supra), decided the issue in favour of the assessee after considering the first order. Third order, being the latest in the point of time in Pradeep Kumar Harlalka's case (supra), decided the issue against the assessee after considering both the earlier orders. Not only that, the third order also took note of the fact the basis of the Pune Bench order, being the judgment of the Hon'ble jurisdictional High Court in Shakuntala Kantilal's case (supra), already stood overruled by a subsequent judgment of the Hon'ble Bombay High Court in Roshanbabu Mohammed Hussein Merchant's case (supra), which fact was not brought to the notice of the Bench. No other order, in favour of the assessee, has been brought to our notice by the ld. AR. Accordingly it is vivid that the majority opinion (in terms of the number of orders) on the issue and also the latest order (in the point of time) together with the special circumstances of the Pune Bench case (in considering an overruled judgment), bring us to a stage where the current and the majority view taken by the tribunal so far on the point, is against the assessee.

    8. The learned Counsel for the assessee vehemently argued that certain important aspects of the matter were not taken into consideration by the Mumbai Benches of the Tribunal in both the cases in deciding the issue against the assessee. It was argued that there was no basis for excluding fees paid by the assessee to his portfolio manager from the computation of income under the head 'Capital gains' as there was no other purpose for its incurring, except in connection with the purchase and sale of shares. Referring to agreement of the assessee with the portfolio manager, ENAM Asset Management Co. Ltd., the learned A.R. explained that the assessee agreed to place a sum of Rs. 2.25 crore at the discretion of his portfolio manager, which was to be used for purchase and sale of securities etc. Referring to various clauses about the consideration payable to the portfolio manager, he stated that it was at half percent of the net asset value (market value of assets inclusive of all Securities and cash balances) under management at the beginning of each quarter and further the portfolio managers were entitled to a return based fee calculated at the rate of 20% per annum of the profits in excess of 15% of the profits after deducting all the expenses. The sum and substance of his submissions was that such fees paid by the assessee has direct relation with the income arising from the transfer of shares and hence the same should be allowed as deduction, either by considering it as diversion of income by overriding title from the sale proceeds; or as part of the cost of acquisition of the shares; or alternatively as an expenditure incurred wholly and exclusively in connection with the transfer of shares. These aspects constitute three additional grounds stated to be articulation of the main ground on disallowance of the amount of fees. He relied on certain judgments to drive home his point of view on deductibility of the fees. In this process, he also took us through the judgment of the Hon'ble Supreme Court in CIT v. Sitaldas Tirathdas [1961] 41 ITR 367 (SC) , which has been considered by the Mumbai bench in Devendra Motilal Kothari's case (supra), to argue that the ratio decidendi of this judgment was not properly understood by the Mumbai Bench in holding that there was no diversion of income.

    9. Sounding a contra note, the ld. DR stated that there was no infirmity in the view taken by the authorities below as the fees had no direct relation with the purchase or sale of shares and hence was liable to be excluded from consideration. He vigorously accentuated on the orders passed by the Mumbai Benches and contended that all the aspects now raised on behalf of the assessee, have been already considered and decided against the assessee and there was nothing new to justify going away from the earlier view.

    10. We are not inclined to accept the submissions tendered by the ld. AR that the Mumbai Benches of the tribunal have not properly appreciated the matter in right perspective in deciding the issue against the assessee. It can be easily noticed that the facts and circumstances of the case in question and the two cases decided by Mumbai Benches are similar. It is axiomatic that the nature of services provided by any portfolio manager cannot be materially different, as has been fairly conceded by the ld. AR during the course of hearing. It is further manifest that all the contentions raised before us, being the treatment of fees as cost of acquisition of shares; or expenses in connection with transfer of shares; or diversion of income by overriding title, have been elaborately discussed in these two cases. After considering all the aspects of the issue threadbare, the tribunal has held in both these cases that the fees cannot form part of computation of capital gains u/s 48 and has to be ignored. It is the only issue in the present appeal and the facts are in pari materia with those considered and decided by the Mumbai Benches.

    11. The arguments advanced by the assessee on merits are an attempt to persuade us for not following the aforenoted view taken against the assessee. We are not impressed with this argument. Judicial discipline requires that when a particular issue has been decided by a bench, then the subsequent co-ordinate benches should normally follow the same. At the same time, we want to clarify that there are no fetters on the powers of the subsequent benches to doubt the correctness of the earlier order, if they are not convinced with it. Whereas following the earlier decision is a rule, calling into question its correctness is only an exception. Unless there are compelling reasons for not following the earlier view, such as, if it is inconsistent with judgment of the Hon'ble Supreme Court or that of the jurisdictional High Court or earlier decisions of the same rank; or if it is sub silentio; or if it is rendered per incuriam in the sense that it is patently inconsistent with the statutory or settled legal position, the same should be respected and adhered to by the subsequent benches so that consistency in the approach of the tribunal is achieved. The above referred exceptions can be classified into two categories. First, when there is a direct contrary judgment of the Hon'ble Supreme court or that of the Hon'ble jurisdictional High Court on the point, rendered prior to or after the earlier tribunal order, the later Bench would be fully justified in differing from the earlier contrary view and following the higher wisdom. Second, when the subsequent bench perceives earlier view to be rendered per incuriam or sub silentio etc., the right course for it is to make a reference to the President of the tribunal for constitution of a Special Bench on the point so that the larger bench may consider whether the earlier view is correct or the perception of the latter bench is correct.

    12. Ordinarily neither the assessee nor the Revenue can be allowed to reargue the same issue over and over again, when it has already been decided by a coordinate bench of the tribunal. If such a course is allowed, then every single repetitive issue would require reconsideration time and again because the aggrieved party would always try to convince the later bench over its point of view. Following the earlier order or making a reference to the special bench depends on the satisfaction of the Bench about the correctness or otherwise of the earlier order and not that on the view point of the aggrieved party. It is only when a subsequent bench, on being seized of the matter, finds itself unable to endorse the earlier view, either suo motu or on the arguments of the parties, that it may make reference for the constitution of the special bench. The party dissatisfied with the earlier view cannot compel the later bench to either take a contrary view or make a reference for the constitution of the special bench. Thus it follows that once a particular view is taken, the subsequent benches of the tribunal become functus officio on that issue, subject to the exceptions discussed supra. Needless to mention at this juncture that the party unconvinced with the tribunal order is not without remedy as the Act enshrines the provisions enabling it to appeal to the Hon'ble High Court against the order and convince it about its stand.

    13. We are reminded of the well known latin maxim 'stare decisis', which means to stand by the things decided. It expresses the underlying basis of the doctrine of precedent, which, in turn, means to abide by the former precedent when the same points arises again in litigation. It has got the seal of approval from the Hon'ble Supreme Court in several cases including Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 (726,727)/ 132 Taxman 373 . The maxim stare decisis provides that when a point of law has been decided, it takes the form of a precedent which is to be followed subsequently and should not normally be departed from. A decision which is followed for a long time will generally be followed, even though the court before whom the matter arises afterwards, might be of different view.

    14. Adverting to the facts of the present case, we find that the issue raised before us has been predominantly decided in the above referred two cases against the assessee after making thorough analysis of the issue, dealing with all the aspects now raised by the ld. AR before us. These cases do not fall into the exceptions, as discussed supra, justifying departure from the earlier view. We are, therefore, not inclined to revisit all the relevant facts and the legal position on it with a view to test the correctness of these orders. Respectfully following the rule of precedent, we refuse to take a contrary view from that expressed by the Mumbai Benches in the afore-noted cases. The disallowance is thus sustained and resultantly the impugned order is upheld.

    15. In the result, the appeal stands dismissed.

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    Comments

    Homi K. Bhabha v. Ito
    (Sep 28, 2011)