Portfolio management fee: Is it tax deductible?

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Portfolio management fee: Is it tax deductible?

As per the Report of Portfolio Managers filed with SEBI, assets worth Rs 4.5 trillion are being managed by registered portfolio managers.

 

Portfolio management activity is on the rise with the rise in the share market. It has further resulted in the rise of the activity of the Portfolio Management Services (PMS). The question arises as to whether the PMS fee is deductible while calculating the taxable profit or not?

 

Normally, the income earned from portfolio investment is taxable as Capital Gain.  The taxpayers / investor received the sale proceeds from the broker which is net of Management Fees. Since the amount is received net of PMS Fee, the question arises whether Management Fees will be allowed as deduction under section 48 of the Income Tax or not? One may note that section 48 deals with calculation of cost and hence capital gain will be considered only after deduction of cost, any fees related to transfer etc. However, there are contrary opinions of the ITAT on this issue which is worth considering.

Let us see different ITAT ruling on this issue:

  1. Pune ITAT in the case of Dy. CIT v. KRA Holding & Trading (P.) Ltd. (2012) 54 SOT 493 (Pune) has held as under:“The twin services relating to the said portfolio management includes
    (i) acquisition of securities for the assessee-client and
    (ii) sale of the said securities for the assessee-client.

    Considering the genuineness and essentiality of the payment of fee to the portfolio manager and undisputedly for the predominantly for the said twin purposes of acquisition and sale of the securities, the claim has to be allowed.”

    In short, the ITAT Pune has decided the issue in favour of the taxpayers and allowed the deduction towards PMS Fee.

  2. Mumbai ITAT in the case of Mateen Pyarali Dholkia v. Dy. CIT [IT Appeal No. 6950 (Mum.) of 2016, A.Y. 2010-11] was confronted with the issue as to whether Portfolio management fee (PMS) is allowable as deduction while computing capital gains on sale of shares. 

    In this case, the assessee had earned capital gains from sale of shares kept under Portfolio Management Scheme (PMS) and claimed deduction of payment of PMS fee. AO disallowed the claim made by the assessee alleging that PMS fees paid neither fell under category of transfer fees, nor under the cost of acquisition/improvement. It observed that while computing capital gain on sale of shares kept under Portfolio Management Scheme (PMS), assessee could not claim deduction of PMS fee as the same neither fell under the category of transfer fee, nor under the category of cost of acquisition/improvement.  With this observation, It has held as under:

“The deduction claimed by the assessee was on account of fees paid for PMS based on real income theory and the theory of real income could not be applied to allow the deduction to the assessee. Therefore, deduction for the PMS fee was not allowable, as it neither fell under the category of transfer fees, nor under the category of cost of acquisition/improvement.”

It has held as under:

“(1) the decision of the Pune Bench in KRA Holding & Trading Pvt. Ltd. (supra) was primarily based on the judgment of the Hon’ble Bombay High Court in the case of CIT v. Smt. Shakuntala Kantilal (1991) 190 ITR 56 (Bom), which had 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 (Bom). The later judgment overruling the earlier judgment was not brought to the notice of the Hon’ble Pune Bench.”

  1. Kolkata ITAT in the case of Joy Beauty Care (P) Ltd. Vs DCIT has held that the PMS fee is a deductible expenditure. It has placed reliance on the decision of the Pune Tribunal and held that the fees are allowable as a deduction.

The same issue is also pending before various High Courts of the country which may bring some clarity as to the interpretation of law and deductibility of the PMS fee. It’s an undeniable fact that PMS fee is an expense of the investor and logically deduction should have been allowed. However, the computation mechanism of capital gain provides that only the “expenses in connection with the transfer” is allowable as deduction.

Subject to tax litigation, I am of the strong view that investors may claim the deduction of fees paid to portfolio managers as it is logical to claim the same as expenses and it may also be reckoned as the “expenses in connection with the transfer”. In my view, without PMS Fee, the investor may not be able to get back the amount as well.

In view of the prevailing controversy and divergent view of the ITAT, it would be better if the CBDT comes out with a clarification on the deductibility of fees paid to portfolio managers. Before the clarification, one needs to have a look at the logical side of the way the PMS industry is run and not mere technical provision in the Income Tax Law.

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