Are PMS & PFL Fees deductible against Capital Gain?

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Are PMS & PFL Fees deductible against Capital Gain?

Can you deduct Portfolio Management Fees from Capital Gains?

Many taxpayers avail Portfolio management services and they are liable to pay the Portfolio Management Fees or Performance linked fees to the service providers. The question arises, whether these fees can be deducted while computing capital gains? (Click here to understand the basics of computation of capital gains)

As per Section 48, any expenditure which is wholly and exclusively incurred in connection with the transfer is allowed as a deduction. 

Hence, one can argue that these fees can be deducted while computing capital gains. However, are these fees incidental to the transfer, or are the fees general in nature for the services received?

This has been discussed and concluded in a recent case law narrated below:

Case Law: ACIT vs. Apurva Mahesh Shah (2018) (ITAT-Mum.)
Facts and History

The Aseeing Officer (AO) passed an order u/s 143(3) of the Income Tax Act, 1961 where he disallowed a deduction of Rs.1,13,12,737/- on account of Portfolio Management Fees (PMS) and Performance Linked Fees (PLF).

Assessee carried the matter to CIT(A), where the CIT(A) held that the expenses are allowed as deduction.

Aggrieved by CIT(A), the revenue went in an appeal to ITAT questioning the decision of CIT(A) that PMS and PLF are allowed a deduction from Capital Gains.

Held

Section 48 states:-

The income chargeable under the head “Capital gains” shall be computed, by deducting the expenditure incurred wholly and exclusively in connection with such transfer from the full value of the consideration received or accruing as a result of the transfer of the capital asset. 

In short, Capital Gains = Full value of consideration – Expenditure incurred wholly and exclusively in connection with such transfer.

PMS and PFL are paid by the assessee to the portfolio manager for managing the portfolio of the assessee. These payments are only contractual payments and major portion relates to the advisory, managerial and consultancy charges. These payments are allocated by the assessee to the Capital Gains.

The above case has also been examined in the following case laws: –

  • Devendra Motilal Kothari v. DCIT (2011) 13 taxman.com 15 (ITAT-Mum)
  • Homi K Bhabha v. ITO (2011) 14 taxman.com 165 (ITAT-Mum.)
  • Pradeep Kumar Harlalka v. ACIT (2011) 14 taxman.com 42 (ITAT-Mum.)
  • CIT v. Roshan Babu Mohammed Hussein (2005) 275 ITR 231 (Bom.)

The following case laws having the contrary view are no longer good: –

  • CIT v. Shakuntala Kantilal (1991) 190 ITR 56 (Bom.)
  • Kerela High Court in case of Smt. Thressiamma Abraham (No. 1) (2001) 227 ITR 802

The order of CIT(A) was set aside and the order of A.O. was upheld.

Conclusion
Portfolio Management & Performance Linked Fees are not allowable as a deduction against Capital Gain.


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About CA Mehul Gupta 30 Articles
Chartered Accountant in practice, Certified GST Practitioner & Commerce Graduate. He is mainly engaged in the practice of Direct taxes, GST, International taxation, & assurance services. A visiting faculty in the Faridabad Branch of ICAI.

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