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2016 (4) TMI 740 - ITAT MUMBAI

2016 (4) TMI 740 - ITAT MUMBAI - TMI - Disallowance of expenditure incurred in connection with Offshore Fund II - revenue v/s capital expenditure - Held that:- We find from the assessee’s own arguments that if the desired funds had been raised by the assessee in regard to the said Offshore Fund II launched by the said trust, the assessee would have received advisory fees as well as reimbursement of expenses but this could not happen and therefore these expenses were claimed in the hands of the a .....

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he hands of the assessee, we have raised a query from the bench but the assessee could not answer. The gain or benefit accrual to the assessee for incurring these expenditure in the assessee’s own business. We find that the assessee in addition to fees, also received reimbursement of expenses incurred by Offshore Fund-II. Since the Offshore Fund II was not launched, no corpus was received and in the absence of such launch, the assessee company could not claim reimbursement of any such expenses a .....

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Court in the case of Trade Wings Ltd. (1989 (9) TMI 21 - BOMBAY High Court ). CIT(A) did not erred in confirming the actions of the Ld. AO disallowing expenditure incurred in connection with Offshore Fund II on the alleged ground that the said expenses are capital in nature - Decided against assessee

Disallowance of expenditure incurred on services procured from Parimal Enterprises Limited (PEL) - Held that:- The assessing authority made a disallowance only on the reason that the asse .....

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3, I.T.A. No. 3099/Mum/2013 - Dated:- 15-4-2016 - Shri R. C. Sharma, AM And Shri Mahavir Singh, JM For the Petitioner : Shri V. S. Jadhav For the Respondent : Shri Arun Chhabra ORDER Per Mahavir Singh, JM These are cross appeals, by Revenue and the assessee, are arising out of order of CIT(A), Mumbai in Appeal No. CIT(A)-14/IT.39/Rg.6(1)/11-12 dated 31.01.2013. Assessment was framed by ACIT, Range 6(1), Mumbai u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the Act ) for AY 2 .....

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es of the case and in law, the learned CIT(A) has erred in confirming the actions of the learned AO in applying provisions of Rule 8D of the Income Tax Rules, 1962 ("the Rules") while making disallowance of ₹ 6,967 under section 14A of the Income-tax Act, 1961 ("the Act"). 3. On facts and in circumstances of the case and in law, the learned CIT(A) has erred in not adjudicating on the disallowance of ₹ 2,50,00,000 being fees paid by Appellant to Piramal Enterprises .....

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me expenses as capital in nature. For this assessee has raised the following ground: 4. On facts and in circumstances of the case and in law, the Ld. CIT(A) has erred in confirming the actions of the Ld. AO disallowing expenditure incurred in connection with Offshore Fund II of ₹ 1,07,48,723/- on the alleged ground that the said expenses are capital in nature. 4. Briefly stated facts are that the assessee is engaged in the business of providing investment advisory services in the real esta .....

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essee company is in the business of providing investment advisory service whereas this expenditure is toward promotion of Offshore Fund II, which was launched during the year under consideration. According to the AO, this Offshore Fund which was proposed to be launched during the year under consideration of which desired funds could not be raised, hence the assessee company could not receive advisory fees as well as reimbursement of expenses, but claimed the same against the assessee. The nature .....

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lated at a percentage of the amount of total corpus of the management and once the offshore funds raised in respect to fund to, i.e., the desire funds. Accordingly, the assessee in addition to fees, the assessee company also received reimbursement of expenses incurred by it but since the Offshore Fund II was not launched, no corpus was received and in the absence of such launch, the assessee company could not claim reimbursement of any such expenses and these were met out of the income of the as .....

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n paras 8.7 and 8.8 as under: 8.7 Thus the facts are that the appellant established a trust called Ïndiareit Fund which was approved by SEBI and which was to carry on the activity of a venture capital fund under its different Schemes by pooling together resources and finances from institutional and high net worth investors. The said "Indiareit Fund" floated 'Offshore Fund-II' and the appellant assigned itself the responsibility of organising funds for the 'Offshore Fun .....

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fund trust' and earning the income there-from was a new activity and a new source of income for the appellant. Thus the appellant incurred expenses in respect of searching and exploring a new source of income, which could not fructify. Unless, a new business or source of income is set up and the same results in generation of revenue, the expenditure incurred cannot be termed as revenue expenditure. The same has to be held to be in the capital field. The summary of these facts is that the ap .....

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the Piramal group. Since the appellant was searching new avenues and new sources of income by establishing the said "Indiareit Fund trust" and working for raising the capital in respect of 'offshore fund-II' launched by the said trust, the expenditure incurred is nothing but the expenditure incurred in connection with exploring the feasibility of new sources of income or setting up new business venture. Hence, in my opinion, the AD has rightly held the same to be a capital exp .....

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ufactured are similar to what are already being made in the sense that the firm is engaged in making goods out of steel, like refrigerator, cabinets, furniture, bus bodybuilding etc and scooters, motorcycles, two and three wheelers sought to be manufactured are also of steel. From such slender similarities it cannot be contended that the expenditure incurred is in connection with the expansion of the old business". 6. We find that ld. CIT(A) also relied on the decision of Andhra Pradesh Hig .....

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Offshore Fund II to raise the desired level of funds from overseas investors. The assessee in order to generate interest among international investors, the employees of the assessee has to travel overseas for its business meetings and promotional events. In view of these facts, the ld. Counsel for the assessee stated that the expenses incurred by the assessee are necessarily in the course of regular business activity of the assessee since the assessee is engaged in the business of providing inv .....

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e, data, publications like Private Placement Memorandum ("PPM"), proposed investment regime, etc. • assist in raising and collecting Capital contributions for new Fund investments; • monitor the quality and performance of the investments, etc. 8. Ld. Counsel for the assessee also drew our attention to relevant portion of the terms of the agreement, which is reproduced in the assessment order as well as CIT(A) order and the same reads as under: Contribution agreement: Fund exp .....

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t this expenditure is incurred for the regular business activity of the assessee and it is not for the new business activity as alleged by the lower authorities. He also explained that by incurring these expenditure, the assessee s business had benefited a lot, reason being it is already engaged in the business of providing services to the funds and it has shown income from management fees from Indiareit Fund Scheme I and Scheme III and also shown monetary fees and advisory fee from Indiareit In .....

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During the year under consideration it has shown management fees from Indiareit Fund Scheme I and Scheme III and also shown monetary fees and advisory fees from Indiareit Investment Management Co. The assessee also claimed expenditure towards promotion of its Offshore Fund II, which was proposed to be launched by trust credit by the name Indiareit Fund, i.e., the assessee. We find from the assessee s own arguments that if the desired funds had been raised by the assessee in regard to the said O .....

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network individuals. But that could not happen and the assessee claimed these expenses in the hands of the assessee. In such circumstances, whether the expenses of other entity that also a new entity is allowable in the hands of the assessee, we have raised a query from the bench but the assessee could not answer. The gain or benefit accrual to the assessee for incurring these expenditure in the assessee s own business. We find that the assessee in addition to fees, also received reimbursement o .....

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profession rather this is expended for new business i.e. setting up of a new offshore fund called Offshore Fund II. In such circumstances, we find that the issue is clearly covered by the decision of Hon ble Bombay High Court in the case of Trade Wings Ltd. (supra). Accordingly, this issue of assessee s appeal is dismissed. 12. The only issue in this appeal of the Revenue is as regards to the order of the CIT(A) directing the A.O. to allow the expenditure after verifying the documents and evide .....

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power to set aside the assessment, this direction of verifying the facts post assessment tantamount to indirect setting aside, which is not within the powers of the CIT(A) as per the Act." 2. "On the facts and circumstances of case and the law, the Ld. CIT(A) erred in directing the A.O. to allow the expenditure of ₹ 2.5 crores, if the assessee produces evidence for rendering advisory services to the assessee, failing to note that A.O. has made disallowance also on the premise tha .....

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giving reasonable opportunity of being heard to the A.O. as required under Rule 46A of the IT. Rules". 13. We have heard the rival contentions and gone through the facts and circumstances of the case. We find that the AO has disallowed the expenditure of ₹ 2.50 crores incurred on services procured from Parimal Enterprises Limited (PEL), who was engaged for providing and giving advisory and support services. During the course of the assessment proceedings, the assessee provided to the .....

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ee. The CIT(A) merely directed the AO to verify the documents furnished by the assessee and then decide the allowability of the claim of the assessee by observing in para 7.3 to 7.5 as under: 7.3 I have considered the above submissions of the appellant as well as the facts of the case. The AO has disallowed the above expenditure of ₹ 2,50,00,000/- mainly on the ground that the Appellant had failed to furnish evidences for actual services rendered by PEL and the Appellant did not derive any .....

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