PMS Fees and Capital Gains: Can You Claim Deduction Under Section 48?

1. Introduction

The increasing use of Portfolio Management Services (PMS) and Investment Management Services (IMS) by high-net-worth individuals and investors has raised a persistent controversy under the Income-tax Act, 1961:

• Can PMS fees be deducted in computing capital gains under Section 48?
• Are such fees part of the cost of acquisition or improvement?
• Or do they qualify as expenditure incurred wholly and exclusively in connection with such transfer?

This article makes a comprehensive analysis of the issue, covering statutory language, judicial precedents, the SEBI PMS regulatory framework, practical allocation mechanisms, and litigation strategies.

The purpose of this article is to highlight that if you invest in a PMS scheme and you have profit in the current year, and you are filing your ITR, you need to carefully understand the position. This article specifically covers the situation where you are claiming PMS under capital gains, not under business and profession.

It must be noted that PMS investments can also be shown under the head business and profession. But in common practice, they are disclosed under capital gains. There is no prohibition in declaring them under business and profession. Showing PMS or share trading under business income vs. capital gains involves several pros and cons, which will be addressed separately in another article.

In this article, however, we limit the discussion to the scenario where you are willing to show PMS under capital gains.

2. Statutory Framework: Section 48

2.1 Language of Section 48

Section 48 provides the mode of computation of capital gains as:

Capital Gains = Full value of consideration − (i) Expenditure incurred wholly and exclusively in connection with such transfer − (ii) Cost of acquisition and cost of improvement.

2.2 Proviso: Express Disallowance of STT

The proviso to Section 48 specifically disallows the deduction of Securities Transaction Tax (STT).

Thus, STT, though directly relatable to transactions, cannot be deducted.This shows that Parliament intentionally excluded STT, but did not exclude PMS charges. Hence, PMS claims must be judged on the general principle of expenditure in connection with transfer.

3. Categories of Expenses in Capital Gains Context

4. Jurisprudence: Conflicting ITAT Lines

In this matter, there are two contrasting views: certain tribunals have disallowed PMS charges, while others have allowed them. A few sample judicial pronouncements with brief summaries are given below.

4.1 Disallowance Line (Predominantly Mumbai ITAT)

• Devendra Motilal Kothari v. DCIT (132 ITD 173, Mum):Held PMS fees are not part of cost of acquisition or cost of improvement and not deductible as transfer expenses.Reason: PMS fees are AUM/performance-linked, are payable even if there are no trades, and the assessee could not prove direct nexus with particular acquisitions or disposals.
• Homi K. Bhabha v. ITO (48 SOT 102, Mum):Deduction denied because fees were composite in nature, not attributable per scrip, therefore not wholly and exclusively connected with transfer.
• Capt. Avinash Chander Batra v. DCIT (158 ITD 604, Mum):Again disallowed PMS charges based on lack of direct relationship with the cost or actual transfer of securities.
• Mateen Pyarali Dholkia v. DCIT (171 ITD 294, Mum):Reiterated earlier view - treating PMS charges as fee for investment advisory services, and therefore not covered under Section 48.

Reasoning behind disallowance:

• PMS charges apply portfolio-wide, not trade-by-trade.
• Fees accrue even without transactions.
• Section 48 does not contain any specific enabling provision to permit PMS charges.

4.2 Allowance Line (Pune, Delhi, Kolkata ITAT, and some benches of Mumbai ITAT)

KRA Holding & Trading Pvt. Ltd. v. DCIT (46 SOT 19, Pune):Allowed PMS fees. The tribunal reasoned:

• The expression "in connection with such transfer" used in Section 48 is of wide scope (reference: Shakuntala Kantilal, Bombay HC, 190 ITR 56).
• PMS services include selecting what securities to buy, when to buy or sell, holding decisions, and ultimately impact the capital gains earned.
• PMS fees determined on NAV (excluding dividend/interest) demonstrate direct linkage with investment profits and sales decisions.
• Scientific allocation is possible across acquisitions, disposals, and closing holdings.
• A composite fee structure does not automatically mean disallowance.

Joy Beauty Care Pvt. Ltd. v. DCIT (Kolkata ITAT, 2018):Relied on KRA Holding and allowed deduction for PMS fees.

Shyam Sunder Dugal (HUF) v. ACIT (Mumbai ITAT, 2019):Although a Mumbai decision, it applied Supreme Court's Vegetable Products rule (88 ITR 192)-if two contrary views exist, one favorable to the assessee must be followed. Hence, PMS charges were allowed.

Hero MotoCorp Ltd. v. DCIT (Delhi ITAT, 2021):Followed KRA Holding and permitted PMS charges.

Reasoning for allowance:

• Deduction of fees paid for generating taxable capital gains through professional management is permitted.
• Section 48 includes expenses wholly and exclusively connected with transfer.
• Allocation methodology enables correct attribution between buy-side (to cost), sell-side (to transfer), and residual (to closing stock).
• The principle of real income means net profit must be taxed, not an inflated or illusory gain.

5. High Court and Supreme Court Interpretations of Section 48

• Bombay High Court in Shakuntala Kantilal (190 ITR 56):Expression "in connection with such transfer" has wider scope than "for the transfer". Any expenditure absolutely necessary to complete the transfer qualifies for deduction.
• Delhi High Court in Kaushalya Devi (404 ITR 136):The phrase "wholly and exclusively" requires only genuine nexus and proximate connection. Assessing Officers cannot question commercial expediency of taxpayer decisions. It reiterated that income tax must be levied on real gains.
• Supreme Court in Vegetable Products (88 ITR 192):Where two plausible legal views exist, the interpretation favorable to the taxpayer must be adopted.

These judicial principles strongly support allowance of PMS charges when direct nexus with investment transactions is established and supported with scientific allocation.

Important Note: Based on these judgments, it is clear that if you want to claim PMS charges as deduction, you must prove that there is a direct nexus between PMS expenses and trading in securities. The first step is to obtain clarification from your PMS manager or company as to the exact basis on which fees are charged. Thereafter, carefully analyze how these fees are linked to the buying or selling of securities.

If you still have doubt or difficulty, you may contact me at the phone number or email ID given below. It is essential that you ensure full compliance with law and case law, as it will be beneficial if the department raises any query. If a notice is issued, you will already be prepared with proper documentation and case law, rather than relying on an ad-hoc claim.

6. SEBI PMS Regulations: Documentary Evidence of Nexus

The SEBI (Portfolio Managers) Regulations, 2020 provide a strong documentary framework for proving nexus:

• PMS agreements must include scope of services such as security selection, timing decisions regarding buy/sell, and execution of trades.
• The fee basis (AUM-based, performance-linked, or hybrid) must be clearly specified.
• Mandatory disclosure documents contain service and fee structure details.

 Hence, PMS fees under SEBI regulations are directly related to acquisition and transfer decisions, and not merely passive maintenance or advisory.

7. Practical Litigation Strategy

7.1 Documents to Enclose

• PMS Agreement (showing advisory and execution scope).
• SEBI Disclosure Document (fee breakdown).
• Fee invoices.
• ISIN-wise trade register and contract notes.
• Demat DP debit advices.
• NAV-based fee working and allocation sheet.

7.2 Allocation Methodology (as per judicial precedents)

• Buy-side portion → Capitalized into cost of acquisition.
• Sell-side portion → Deducted as transfer expenses under Section 48(i).
• Residual portion → Loaded to the closing stock.

7.3 Exclusions

• STT (separately disallowed by statute).
• Dividend/interest-linked portions of fees (not connected to capital gains).

8. Anticipating AO Objections and Rebuttals

9. Filing Tips for ITR

• Report sale value net of brokerage, stamp duty, and DP charges.
• Do not deduct Securities Transaction Tax (STT).
• PMS fees can be claimed only with proper documentation. If you claim these in ITR without supporting working and documents, the claim will not hold.
• While documents do not need to be uploaded at the time of ITR filing, you must be ready to produce them if the department opens the case.
• Maintain allocation working, agreements, PMS fee details, etc., to strengthen defense of your claim.

10. Conclusion

The issue of claiming PMS fees under Section 48 has resulted in conflicting judicial interpretations. Some ITAT benches have taken a strict approach of disallowance, while others have accepted such charges as validly deductible.

Therefore, before making any claim, it is strongly advised to:

1. Consult a Chartered Accountant for case-specific advice.

2. Prepare and preserve all necessary documentation.

3. Ensure that a robust explanation is available demonstrating that PMS charges are connected with actual buying and selling of securities.

This precaution is critical in case of departmental scrutiny since your claim will stand better defended if based on facts, evidence, and case law rather than arbitrary deductions.

11. Professional Assistance

As highlighted above, each case may present different factual circumstances requiring careful review of transaction records, PMS agreements, and fee reconciliations. In some cases, technical corrections in filing may also be necessary. If you face any demand, scrutiny, or confusion in filing, professional guidance is recommended.

The author can also be reached at varunmukeshgupta96@gmail.com