By Neeraj Agarwala
Portfolio management services give access to expert opinions to help you achieve your financial goals. In such cases, the investor’s returns are net of management fees. As the income earned from the portfolio is taxable as capital gains, the question arises whether such fees are deductible from the investor’s taxable income.
Fees paid for portfolio management
Section 48 of the Income-tax Act requires income chargeable under the head “capital gains” to be computed after deducting from the full value of consideration any expenditure incurred wholly and exclusively in connection with such transfer. The term “wholly and exclusively” is interpreted as a direct relation with income arising from the transfer of shares. In the case of fees paid to the portfolio manager, it can be argued that these have a proximate and perceptible nexus with the transfer of the shares.
However, tax authorities across various jurisdictions have taken a position that these fees are not wholly and exclusively in connection with transfer of shares and accordingly should not be allowed as a deduction. Further, even the Income Tax Appellate Tribunals appear to be undecided about the deductibility of these fees.
In the KRA Holdings case, the Pune Tribunal held “The twin services relating to the said portfolio management include (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 contrast, the Mumbai Tribunal noted that “Pune Benches relied on the judgment of the Bombay High Court in CIT vs. Smt. Sakuntala Kantilal, 190 ITR 56, which have been subsequently held to be not a good law by the Bombay High Court” and accordingly, fees to portfolio manager was held to be nondeductible.
The Kolkata Tribunal in Joy Beauty Care (P) Ltd. Vs DCIT, placed reliance on the decision of the Pune Tribunal and held that the fees are allowable as a deduction. The Bangalore Tribunal in another case discussed the apportionment of the deduction and the deduction itself was never questioned in law.
As per the Report of Portfolio Managers filed with SEBI, assets worth Rs 4.5 trillion are being managed by registered portfolio managers. It would help if the government issues a clarification on the deductibility of fees paid to portfolio managers. The issue is also pending before the Bombay High Court, which will hopefully bring about some clarity to the interpretation of law. Meanwhile, investors continue to claim a deduction of fees paid to portfolio managers even if the same may be subject to tax litigation.
The writer is partner, Nangia Andersen India. Inputs from Neetu Brahma