TMI Blog2007 (5) TMI 369X X X X Extracts X X X X X X X X Extracts X X X X ..... by way of capital expenditure on the initial issue expenditure on the mutual funds. 2. On the facts and circumstances of the case and in law, the learned CIT(A) erred in deleting the disallowance of Rs. 8,12,450 by way of capital expenditure on the professional and legal charges." 2. The first issue is regarding disallowance of Rs. 20,15,85,238 in respect of initial issue expenses, which was deleted by the CIT(A). The assessee-company was registered as an Asset Management Company under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996. The assessee had been appointed as an Asset Management Company for the mutual funds launched by DSP Merrill Lynch. The activities of the assessee were regulated by the Provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mes of the DSP Merrill Lynch Mutual Fund. These expenses were not incurred for the purposes of increasing or issuing the capital of the assessee, but were for the purposes of increasing the financial resources for mutual fund. This expenditure did not result in any creation of any asset for the assessee. This expenditure also did not result in any creation of any benefit of enduring nature for the assessee. The assessee earns income from the mutual fund are computed as a percentage of the net assets of the mutual funds. At the most that the amount mobilized for the fund, the higher the amount available for investment, resulting in the net asset of the mutual fund being higher to that extent, ultimately resulting in higher fees for the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies that the assessee-company could carry out as being an Asset Management Company were regulated by the said SEBI Regulations. The duties, responsibilities and obligations of the assessee were also provided in the SEBI Regulations. The manner in which the assessee is to be remunerated for carrying on its business, as an Asset Management Company was also provided in the Regulations. Primarily, an Asset Management Company apart from carrying on the business of managing the mutual fund was not permitted to carry on any other business activities. 2.2 Regulation 25 of the said Regulation deals with the obligation of an Asset Management Company. This regulation requires an Asset Management Company to ensure that the investment of the funds p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee but for the mutual funds, which are independent entities. As far as the assessee is concerned, its capital structure does not get increased by the capital, as the same was raised for the mutual funds. 2.5 The nature of the expenses is to be seen in the context of the business of the assessee. The assessee is the business of asset management. The asset management business, inter alia , governed by the Securities Exchange Board of India (in short SEBI ). There is nothing on record to suggest out that the assessee had in any manner violated the Rules and Regulations set out by the said Regulatory Authority. For the purposes of conducting its business, there was no bar on the assessee to incur expenses, otherwise than the ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Revenue in this regard. Accordingly, the order of the CIT(A) is upheld. 3. The next issue is regarding disallowance of Rs. 8,12,450 by way of capital expenditure towards professional and legal fee charges. The Assessing Officer disallowed the professional and legal fee charges on the footing of disallowance amounting to Rs. 20,15,85,238 made by way of capital expenditure in respect of initial issue expenses incurred on Mutual Funds by taking a view that this expenses are capital in nature, which was deleted by the CIT(A) and we have confirmed the same in preceding paragraph. Following the same reasoning we uphold the deletion of disallowance towards professional and legal fee charges made by the Assessing Officer on the same footi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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