9911796707
TMI Blog2008 (8) TMI 429X X X X Extracts X X X X X X X X Extracts X X X X ..... During assessment proceeding, it was noticed 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 the laptop will be around Rs. 50,000 and the AMC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ----------------------------------------------- 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 AMC, the trustees, on behalf of the mutual fund were to pay to the assessee AMC a fee at the rate prescri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Second Dr. A.C. Muthiah, Mr. A.C. Trustees part Chakrabortti Dr. D. Jayavartha- navelu and Mr. Surendra Daulet Singh ---------------------------------------------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 company receives advisory fees for managing the funds of the mutual fund. Since the assessee need not have to incur the expenses for launching and promoting the mutual fund the expenses incurred by the assessee are disallowed and added to the total income. 18. The CIT(A) confirmed the disallowance made by the AO for the reasons given in his order, inter alia, as under: "6.5. -------- The business of the appellant co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 and such expenses shall be accounted in the books of account of the scheme as specified in the Tenth Schedule: Provided further that any excess over the 6 per cent initial issue expense shall be borne by the asset management company. (6) The total expenses of the scheme excluding issue or redemption expenses, whether initially borne by the mutual fund or by the asset management company, but including the investment management and advisory fee s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts, 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 as these pertain to the asset management company; and (e) Insurance coverage and other services as these pertain to the asset management company. (4) The fees payable to the trustees shall be charged to the mutual fund. (5) The fees payable to the custodian for safe keeping of fund assets and related matters shall be charged to the mutual fund. (6) The fees payable to the Registrar and transfer agency services provided and related matters shall be charged to the mutua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, 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 no compelling 'necessity' to incur such expenditure, that the fact that somebody other than the assessee was also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under s. 10(2)(xv) of the Act, if it satisfied otherwise the tests laid down by law. 22.1 The legislative history of s. 37 of the IT Act, 1961 was mentioned by the Supreme Court in its order in the case of Sassoon J. David & Co. (P) Ltd. as under: "........... It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 the facts and circumstances of the case and the legal position discussed in the above paras, we are of the opinion that the assessee's claim has to be allowed. In the cases relied upon by the learned Authorised Representative, a similar view was taken by Tribunal. The ground Nos. 3 and 4 are accordingly, allowed. Ground Nos. 5 and 6 5. That the order passed by the learned CIT(A) is without proper opportunity and bad in law. 6. That the order passed by learned CIT(A) is against the merit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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