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Devendra Motilal Kothari v DCIT

Source : 50 DTR 369

Issue : Whether fees paid towards PMS allowable as expenditure while calculating capital fees?

Jan 18, 2016

Facts of the case

The AO while scrutinizing the return of the aforesaid assessee found that the fees paid for PMS amounting to Rs. 85,63,233 was added by the assessee to the purchase cost of shares while computing the long-term capital gain and short-term capital gain to the extent of Rs. 23,15,947 and Rs. 62,47,286 respectively.

In support of its claim, the assessee submitted that the fees and other charges form part of the cost of purchase and/or expenditure incurred by the appellant and therefore must be taken into account whilst determining the chargeable capital gain. Such fees and other expenses incurred by the appellant as an investor including fees for managing the investments constitute the cost of purchase and are allowable for the purpose of computing the short-term or long-term capital gain.

According to the AO, the fees paid by the assessee for PMS was not a part of purchase cost of the shares, therefore he did not allow these costs.

The assessee filed an appeal before CIT (Appeal) who also confirmed the order of A.O. After this, assessee filed second appeal before Honourable Tribunal.


At the time of hearing before Honourable Tribunal, the learned counsel for the assessee has raised an alternative contention in support of the assessee’s claim for deduction on account of fees paid for PMS in computing the capital gains relying on the theory of real income and the rule of diversion of income by an overriding title. He has contended that the fees for PMS being contractual liability directly relatable to the capital gains, there was a diversion of income from capital gain by an overriding title to the extent of the amount of such fees and the same therefore was not the income belonging to the assessee which was chargeable to tax under the head "Capital gains". In this regard, Honourable Members observed that even though the assessee was under an obligation to pay the fees for PMS, the mere existence of such obligation to pay the said amount was not enough for the application of the rule of diversion of income by an over-riding title. The true test for applicability of the said rule is whether such obligation is in the nature of a charge on source i.e. the profit earning apparatus itself and only in such cases where the source of earning income is charged by an over-riding title, the same can be considered as diversion of income by an overriding title.

In the present case, the profit arising from the sale of shares was received by the assessee directly which constituted its income at the point when it reached or accrued to the assessee. The fee for PMS on the other hand was paid separately by the assessee to discharge his contractual liability. It was thus a case of an obligation to apply income which had accrued or arisen to the assessee and the same amounted to a mere application of income. Honourable Members therefore, had no hesitation to hold that the payment of fees by the assessee for PMS did not amount to diversion of income by overriding title and the contentions raised by the assessee in this regard cannot be accepted being devoid of any merit.

As regards the contention of the learned counsel for the assessee in support of assessee’s claim for deduction on account of fees paid for PMS based on real income theory, Honourable Members agreed with the learned Departmental Representative that the theory of real income cannot be applied to allow deduction to the assessee which is otherwise not permissible under the IT Act. In the case of CIT us. Udayan Chinubhai and Ors. Etc. (1996) 135 CTR (SC) 430 : (1996) 222 ITR 456 (SC), it was held by the Hon’ble Supreme Court in the similar context that what is not permissible in law as deduction under any of the heads cannot be allowed as a deduction on the principle of real income theory.

Honourable Members found no merit in the arguments raised by the learned counsel for the assessee in support of the assessee’s case on the issue under consideration and rejecting the same, hence held that the fees paid by the assessee for PMS was not deductible in computing the capital gains as rightly held by the AO.