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TMI Blog2012 (6) TMI 629X X X X Extracts X X X X X X X X Extracts X X X X ..... of the mutual funds and, therefore, expenses for launching a new scheme of mutual funds cannot be considered as expenses of the assessee. The SEBI Regulations, 1996 applicable at the time when the new schemes were launched, with regard to the initial issue expenses, reads as follows. Regulation 52 deals with Limitation on fees and expenses on issue of scheme: "52. (1) All expenses should be clearly identfled and appropriated in the individual schemes (2) The Asset Management Company may charge the mutual fund with investment and advisory fees which are fully disclosed in the offer document subject to the following namely....... (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 (5) Any expense other than those specified in sub-regulation (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 percent of the initial resources raised under that scheme and such expenses shall be accounted in the books of accounts of the scheme as s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of expenditure which the AMC could have charged to the schemes of the Mutual fund are binding on the AMC. Therefore, in the instant case the amount of Rs. 82,000/- (excluding the amount as per the offer document of FT Flexi Cap Fund) was within the permissible limit in this regard which the AMC could have charged to the schemes of the Mutual fund, in accordance with the SEBI guidelines and the investment management Agreement . Accordingly, Initial Issue Expenses amounting to Rs. 82000/- is disallowed in case of the assessee company. The penalty proceedings u/s 271(1)(c) are also initiated." 5. The order of the AO was passed on 31/12/2007. Against the aforesaid order the assessee preferred an appeal before CIT(A) and Ground No.5 the assessee challenged this addition which reads as follows: "Ground No.5: Disallowance of initial issue Expenses of Rs. 82,000 The AO has erred in making a disallowance of Rs. 82,000, being the initial issue expenses incurred by the Appellant during the year and not charged to FTMF. In doing so, the learned AO has relied on contentions made in the context of the disallowances of Recurring Expenses. Additionally, the AO has also erred in contending th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he schemes of TMF. The Supreme Court has held in the case of CIT v. Mahendra Mills (2000) 243 ITR 56 that an option cannot be treated by the tax authorities as an obligation. The SEBI Regulations , which confer upon an AMC the option either to bear initial issue expenses on its own, or charge them subject to a ceiling to the Mutual Fund, do not make it mandatory for an AMC to charge the initial issue expenses to the Mutual Fund. Also, the non- charging of these expenses to the schemes of TMF cannot be construed to be a gratuitous or voluntary act on the part of the appellant since there is no compulsion for it to charge these expenses to TMF. The option available to the appellant cannot be made its obligation. In fact I find the issue to be squarely covered by the decision of the Tribunal in its own case for Assessment year 1997-98 where the Tribunal was dealing with the treatment of the excess over six percent of the initial issue expenses. The observation of the Tribunal in paragraph 7 of their order, at page 3 are reproduced below: " An examination of the nature of expenses incurred by the assessee company under various heads mentioned above shows that the assessee comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an AMC are in the nature of advertisement, commission expenses for popularizing the scheme which the AMC manages. As can be seen from the show cause notice as well as Annexure-1 to this order a sum of Rs. 13.53 crores had been incurred as expenditure for launching Franklin India Flexi Capital Funds, a new scheme of Franklin Templeton Mutual Funds, which was claimed by the assesse as a deduction. The assessee submitted that such expenses are allowed as deduction in the hands of the AMC and in this regard pointed out that the ITAT in assessee's own case for A.Y 1997-98 and 1998-99 in ITA No.2943/M/01 and ITA No.2413/M/04 dated 8/2/2005 and 8/12/2005 respectively have held that expenses for launching new schemes are not capital expenses and are revenue in nature. 10. The CIT however, did not agree with the submission made on behalf of the assessee. He found that in assessee's own case the Tribunal had followed the decision rendered by ITAT, Mumbai Bench in the case of Birla Sunlife AMC Ltd. According to CIT in that decision the Tribunal relied on the provisions of SEBI (Mutual Fund) Regulations 1993. According to the CIT those SEBI Regulations have under gone an amendment. The CIT ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee has not justified as to whether expenses to the extent of 6% of the initial resources raised has been collected from the Mutual Funesides, in view of the decisions cited above and as per SEBI Regulation and also taking into consideration the order of the ITAT in the case of Birla Sunlife Asset Management Scheme Ltd. the assessee should have amortized the expenses over a period of 5 years and its claim in the very first year is in contravention of the SEBI Regulation. Accordingly, the claim being allowed by the Assessing Officer without verifying the said facts has rendered the assessment order to be erroneous and consequently prejudicial to the interest of revenue, and has to be revised as per the provisions of Section 263 on this issue." 12. Aggrieved by the order of the CIT the assessee has filed the present appeal before the Tribunal. 13. We have heard the rival submissions. The ld. counsel for the assessee at the outset submitted that the CIT in the show case notice u/s. 263 of the Act sought to revise the order of the AO on the ground that the expenditure in question was a capital expenditure. However, while passing the order u/s. 263 of the Act, the CIT has pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion. We find force in the submissions made by the learned counsel for the assessee. In this regard we find that the show cause notice u/s. 263 of the Act was specific and related to the question as to whether the expenditure was capital or revenue. After the assessee highlighted in his reply to the show cause notice that initial issue expenses were in the nature of revenue expenses. While passing the order u/s.263 of the Act, the CIT proceeded on a totally different directions by treating the expenditure as revenue expenditure and further examined the question as to whether the they can be claimed in one year or have to be amortized as contemplated by the SEBI Regulations and in the light of the decision of the Hon'ble Supreme Court in the case of Madras Industrial Invesment Corporation (supra). Thus the CIT has proceeded on a totally new basis which was not the subject matter of the show cause notice. There is nothing to indicate that in the course of revision proceedings the CIT called upon the Assessee to explain its stand on amortization of initiation expenses as per the SEBI Regulations or the decision of Hon'ble Supreme Court in the case of Madras Industrial Investment Corp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d when the order of the AO is considered by the CIT(A). It was his submission that it was not open to the revenue to argue that question of amortization was not considered by the CIT(A) and therefore there was no question of merger of order of CIT(A) with the order of AO inviting embargo under Expln.-3 to Sec.263(1) of the Act. In this regard reliance was placed by the ld. counsel for the assessee on the following decisions laying down proposition similar to the submission made by the learned counsel for the Assessee: 1. Marico Industries Ltd. vs. ACIT, 115 TTJ 497 2. Smt. Sujata Grover vs. DCIT, 74 TTJ 347 3. Sonal Garments Vs. JCIT, 95 ITD 363. 18. The learned D.R. in reply submitted that the plea that the order of AO sought to be revised by the CIT u/s.263 of the Act already got merged with that of the CIT(A) and therefore it could be revised u/s.263 was not put forth before CIT in the proceedings u/s.263 of the Act. 19. We have considered the rival submissions. We have already seen that the order of the AO which was sought to be revised by the CIT in exercise of powers u/s.263 of the Act was passed on 31/12/2007. In the said order the AO had duly considered the allowabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .13.52 crores as deduction. 20. The next submission of the learned counsel for the Assessee was that in the case of ACIT vs. Standard Chartered Asset Management Co. Pvt. Ltd., the Tribunal has held that the SEBI Regulations 1996 regarding initial issue expenses are applicable only to mutual funds which float the scheme and not apply to the AMC. It was his further submission that even assuming those regulations applied to AMC it was only a method of accounting suggested by SEBI which is only directory and not mandatory. In any case those regulations will not be relevant while computing income under the Act. The ld. D.R submitted on the above submission that the decision of the ITAT in the case of Standard Chartered Bank (supra) has not decided the issue as to whether the SEBI Regulation referred to by the CIT in the order u/s. 263 of the Act would apply only to the Mutual Funds and not to the AMC and there was only a submission made by the Assessee which was not specifically accepted by the Tribunal in the order. 21. We have considered the rival submissions. We have also gone through the decision in the case of Standard Chartered Bank (supra). We find that the ratio laid down in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Investment Corporation (supra). The question before the Hon'ble Court was as to whether discount on issue of debentures was capital or revenue expenditure and as to whether such discount can be claimed in one year in a lump sum or has to be spread over for the period of the debentures. The Hon'ble Supreme Court that the expenditure in question was revenue expenditure. On the question of claiming the same in one year, the Hon'ble Court held as follows: "The Tribunal, however, held that since the entire liability to pay the discount had been incurred in the accounting year in question, the assesse was entitled to deduct the entire amount of Rs. 3,00,000 in that accounting year. This conclusion does not appear to be justified looking to the nature of the liability. It is true that the liability has been incurred in the accounting year. But the liability is a continuing liability which stretches over a period of 12 years. It is, therefore, a liability spread over a period of 12 years. Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a numbe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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