TMI Blog2008 (8) TMI 429X X X X Extracts X X X X X X X X Extracts X X X X ..... ticed by the AO that under the head repairs and maintenance, the assessee had claimed expenses of Rs. 4,99,696 as under: -------------------------------------------- Particulars Date Amount -------------------------------------------- Antivirus software 24-7-2002 19,798 -------------------------------------------- Antivirus software 22-11-2002 7,250 -------------------------------------------- Laptop AMC charges 9-12-2002 85,000 -------------------------------------------- Data Cons AMC charges 13-1-2002 2,20,250 -------------------------------------------- Funds logistics 13-11-2002 27,500 -------------------------------------------- Advance adjusted 31-3-2002 1,39,398 -------------------------------------------- 4. The AO disallowed and added Rs. 4,99,696 for the reasons given in his order as under: "The assessee was requested to produce the bills for the above expenses. However, the assessee has not produced the bills for the above expenses. As the Antivirus software is a capital asset the same has to be disallowed. The AMC for laptop was stated to be Rs. 85,500. The cost of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ------------------------ S.No. Particulars Amount --------------------------------------------------- 1. Mutual fund launch expenses 26,38,776 --------------------------------------------------- 2. Mutual fund promotion expenses 1,61,61,088 --------------------------------------------------- 9. The AO disallowed the above expenses and his order was confirmed by the CIT(A). The assessee has challenged the order of CIT(A) in the present appeal. 10. Shri P.J. Pardiwala, the learned Authorised Representative, reiterated the arguments which were put forward on behalf of the assessee before the AO and the CIT(A). The submissions made by him are summarized below: - that the assessee was an asset management company vide agreement dt. 18th July, 1996. - that the expenses of Rs. 26,38,776 and of Rs. 1,61,61,088 were incurred by the assessee to meet the objects as stipulated in the tripartite agreement dt. 18th July, 1996. - that the said expenses, incurred by the assessee, were in accordance with the SEBI (Mutual Fund) Regulation, 1996. - that in consideration of the investment management services to be performed by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anagement company of the investments. The settlor company, the trustees, and the asset management company enter into a tripartite agreement which inter alia, deals with issues as under: - Appointment of AMC - Duties and responsibilities of AMC - Control and review of activities of the AMC by the trustees - Fees payable to AMC - Reimbursement of expenses, incurred by the AMC, out of the assets of the mutual fund, (Sch. 2) - Liability of the AMC 13.1 The trustees form different schemes and offer units in each such scheme for subscription to the public. The proceeds of such offering is invested in accordance with and subject to the terms and conditions contained in the trust deed. 14. In the present case a tripartite investment management agreement dt. 18th July, 1996 was entered into involving three parties as under: -------------------------------------------------------------- S. Parties Name Referred to as No. -------------------------------------------------------------- 1. First First Leasing Company of India Settlor part Ltd. (FLCI) -------------------------------------------------------------- 2. Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - 17. The AO disallowed the assessee's claim for the reasons given in his order as under: (5) The assessee has claimed a sum of Rs. 26,38,776 as mutual fund launch expenses and a sum of Rs. 1,61,61,088 as mutual fund promotion expenses. The assessee was requested to explain why the above expenses should not be capitalized. The assessee in his letter dt. 28th Feb., 2006 has stated that the expenses are incurred by the company. since the company is an asset management company involved in managing mutual fund schemes and the expenses under the relevant heads are incurred in the normal course of business. The company is acting as fund managers and the income earned by the assessee is in the advisory capacity as the fund manager of the mutual fund scheme. The assessee's explanation is not acceptable. The assessee company is the fund manager for the mutual fund company and the assessee company need not have to incur the mutual fund launch expenses and mutual fund promotion expenses. These expenses have to be borne by the mutual fund company. The assessee is only an asset management company and the assessee's job is to manage the fund collected by the mutual fund company. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ancial year. (4) In addition to the fees mentioned in sub-regulation (2), the asset management company may charge the mutual fund with the following expenses, namely: (a) initial expenses of launching schemes; (b) recurring expenses including: (i) marketing and selling expenses including agents commission, if any; (ii) brokerage and transaction cost; (iii) registrar services of transfer of units sold or redeemed; (iv) fees and expenses of trustees; (v) audit fees; (vi) custodian fees; (vii) costs related to investor communication; (viii) costs of fund transfer from location to location; (ix) costs of providing account statements and dividend/redemption cheques and warrants; (x) insurance premium paid by the fund; (xi) winding up costs for terminating a fund or a scheme; (xii) costs of statutory advertisements; and (xiii) such other costs as may be approved by the Board. (5) Any expense other than those specified in sub-regulations (2) and (4) shall be borne by the asset management company (or trustee or sponsors): Provided that initial expenses of floating the scheme shall not exceed six per cent of the initial resources raised under that scheme an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o calculated exceeds Rs. 100 crores. Such fee to accrue daily and be payable in arrears on the last working day of a month. (2) In addition, the asset management company may charge the mutual fund with the following expenses upto the limits mentioned hereinafter: (a) Initial issue costs of sponsoring mutual fund and its schemes, including the preparation and distribution of the scheme's prospectus and other offer documents and fees and expenses of accountants, attorneys and other third party service providers. (b) Recurring expenses including: (i) Marketing and selling expenses including agent's commission, if any; (ii) Brokerage and transaction costs; and (iii) Registrar services for transfer of shares sold or redeemed. (3) The asset management company shall meet all its expenses and be responsible to provide the following: (a) Office space, supplies and personnel including security analysts and portfolio managers; (b) Regulatory compliance and reporting services as these pertain to the asset management company; (c) Advertising and other sales material as these pertain to the asset management company; (d) Accounting services and preparation of tax returns a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The expression "wholly and exclusively" used in s. 37(1) of the IT Act 1961, does not mean 'necessarily'. Even an expenditure incurred 'voluntarily' without any 'necessity', would be permissible for deduction under s. 37(1) if it was incurred for promoting the assessee's business. We have seen in the above paras that in the present case the assessee was under a contractual obligation to incur these expenses. 22. The expression 'wholly and exclusively' used in s. 37(1) of the IT Act, 1961 was the subject-matter of discussion by the Supreme Court in the case of Sassoon J. David Co. (P) Ltd. vs. CIT (1979) 10 CTR (SC) 383 : (1979) 118 ITR 261 (SC). In that case, the Court held that the expression "wholly and exclusively" used in s. 10(2)(xv) of the IT Act, 1922 [s. 37(1) of the IT Act, 1961] does not mean "necessarily", that ordinarily it was for the assessee to decide whether any expenditure should be incurred in the course of his or its business, that such expenditure may be incurred 'voluntarily' and without any 'necessity' and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under s. 10(2)(xv) of the Act even though there was n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than the expression 'for the purpose of earning profits.----" The law directs attention to the purpose for which, and not to the motive with which, the expenditure is incurred." 24. In the case of Indian Aluminium Co. Ltd. vs. CIT 1972 CTR (SC) 51 : (1972) 84 ITR 735 (SC), it was held by the Supreme Court that if the expenditure laid out by the assessee was 'incidental' to the carrying on of his business, it should be allowed. 25. In the case of S.A. Builders Ltd. vs. CIT(A) Anr. (2006) 206 CTR (SC) 631 : (2007) 288 ITR 1 (SC), the Supreme Court held that once it was established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the AO cannot justifiably claim to put itself in the armchair of the businessman and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profit. The AO must put himself in the shoes of the assessee and see how a prudent businessman would act. The AO should not look at the matter from his own viewpoint but that of a prudent businessman. 26. In view of ..... 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