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2016 (10) TMI 1 - ITAT MUMBAI

2016 (10) TMI 1 - ITAT MUMBAI - TM - Disallowance of marketing and distribution fee paid to QIEF Management LLC, Mauritius - Held that:- The invoking of section 40A(2)(b) of the Act to disallow a portion of the expenditure in assessment year 2012-13 does not lend any support to the inference of the CIT(A) that the expenditure has not been made wholly and exclusively for the purpose of assessee’s business because what is envisaged by section 40A(2)(b) is to disallow an expenditure which is found .....

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Act, having regard to the stand of the Assessing Officer in the remand report as well as in the assessment for assessment year 2012- 13. The said burden, in our view, has not been discharged by the CIT(A) in the present case and, therefore, we are unable to acquiesce to the same. As a consequence, we hereby set-aside the order of the CIT(A) on this aspect and direct the Assessing Officer to delete the addition representing payment made to QIEF for marketing support services. - Disallowance o .....

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m such an activity in which assessee has a deep interest, may it be the affairs of the Asset Management Company or the Mutual Fund. No doubt, the advertisements are intended to secure investors for investing in the schemes of the Mutual Fund, which is a separate entity, so however, the incurrence of such expenditure vis-à-vis assessee’s business cannot be discounted even if its incurrence would result in a benefit to a third party. There can be no gain saying that-better the performance of the M .....

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e instant year has not been controverted by the Revenue and, therefore, on this limited point itself we find no reason to uphold invoking of Sec. 14A of the Act by CIT(A) in this year in order to disallow the impugned expenditure on advertisement. - Disallowance for ‘ brand building’ expenditure - complete newspaper cuttings of advertisements not having been filed - Held that:- As we find no specific determination by CIT(A) on this aspect. In any case, we find that before the CIT(A), assesse .....

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he plea of the Assessing Officer. Insofar as the nonfurnishing of some of the newspaper cuttings is concerned, before the CIT(A) assessee had explained it properly and we find that there are no credible reasons to disbelieve the assessee on this aspect, as the sample newspaper cuttings clearly support the invoices raised by M/s. Hansa Vision Pvt. Ltd. - In conclusion, having regard to the aforesaid discussion, we deem it fit and proper to set-aside the order of CIT(A) and direct the Assessin .....

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ated 29/05/2015, which in turn arises out of an order passed by the Assessing Officer under section 143(3) of the Income Tax Act, 1961 (in short the Act ) dated 20/03/2014. 2. In this appeal assessee has raised the following Grounds of Appeal:- 1:0 Re.: Disallowance of ₹ 3,26,05,268/- paid to QIEF Management LLC for 'marketing support services': I :I The Commissioner of Income-tax (Appeals) has erred in holding that the marketing and distribution fees paid by the Appellant during t .....

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portunity to the Appellant to showcause why the said disallowance should not be made. I : 4 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject the marketing and distribution fee i incurred by it wholly and exclusively for the purpose of its business and the stand taken by the Commissioner of Income-tax (Appeals) is misconceived, erroneous and not in accordance with law. I:5 The Appellant submits that the Assessing Officer be direc .....

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ioner of Income-tax (Appeals) has erred in making various erroneous and unsubstantiated observations (which ignore the facts submitted before him and/or are contrary to the facts on record) in the impugned Order to buttress his stand vis-a-vis the disallowance of marketing and development fees. 2:3 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject the advertising expenditure incurred by the Appellant was revenue in nature and was .....

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ed to delete the disallowance so made by him and to re-compute its total income and tax thereon accordingly. 3. As a perusal of the aforesaid Grounds of appeal reveal, appellant has raised two issues, which we shall deal in seriatim. The appellant is a company incorporated under the provisions of the Companies Act, 1956 and is carrying on the business as SEBI registered Portfolio Manager and Advisory Services. For the assessment year under consideration, it filed return of income declaring a tot .....

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Management LLC, Mauritius ( in short QEIF ). On being asked by the Assessing Officer to justify such expenditure, assessee had explained that the payment was made for marketing and distribution services rendered by QIEF and since the payee did not have a Permanent Establishment (PE) in India, such amounts were not taxable in India. The Assessing Officer however, noted that since QIEF was a group concern; its directors are residents in India; and, QIEF operates an administrative back-office in In .....

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g Officer on the aspect of applicability of section 40(a)(i) of the Act, instead he has retained the disallowance on a different ground. As per the CIT(A), the impugned expenditure does not qualify for deduction under section 37(1) of the Act. The reasons which weighed with the CIT(A) to hold so can be summarized as follows. Firstly, according to CIT(A), assessee had failed to demonstrate that the infrastructure available with QIEF was sufficient to canvass business on behalf of the assessee in .....

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bility of expenditure under section 37(1) of the Act . By relying on the ratio of the judgment of the Hon'ble Supreme Court in the case of Lachminarayan Madan Lal Vs. CIT, 86 ITR 439(SC) he observed that it was open for the Revenue to examine the relevant factors and determine allowability of expenditure under section 37(1) of the Act. According to him, the factors in the present case show that the amounts have not been laid out wholly and exclusively for the purpose of business, and he reta .....

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-338 of the Paper Book, it is sought to be canvassed that the US subsidiary of QIEF had on its rolls one Mr. Arvind Rangarajan, based in America, whose profile demonstrates expertise in India-related research and investment efforts. Apart therefrom, it has also been pointed out that Page 339 of the Paper Book contains a list of clients referred by QIEF alongwith the corresponding fees earned by the assessee from such clients, which clearly demonstrates that a substantial portion of assessee s i .....

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s for the clients located in USA. Ld. Representative for the assessee pointed out that the aforesaid material was very much before the lower authorities and there was no justification to disbelieve the same and hold that the requisite services were not provided by QIEF to the assessee. It was also canvassed that the agreement between assessee and QIEF has been duly acted upon and, therefore, it cannot be disbelieved by the Revenue and in this regard reliance was placed on the judgment of the Hon .....

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ls of business, inasmuch as, the gross revenues for 31/12/2010 amounted to USD 56,63,538/-, out of which the impugned marketing fee of USD 22,55,952 has been received from assessee company. By referring to relevant notes on Page 260 of the Paper Book it is sought to be pointed out that QIEF had entered into Fund development agreement with Celerity Venture LLC, a Delaware Limited liability company and the assessee company, under which the interests and obligations of Celerity Venture LLC were ass .....

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rendering marketing services to the assessee. 6. On the other hand, the Ld. Departmental Representative appearing for the Revenue has primarily reiterated the arguments taken by the CIT(A), which we have already adverted to in an earlier para, and are not being repeated for the sake of brevity. According to the Ld. Departmental Representative, the CIT(A) has denied the deduction under section 37(1) of the Act primarily for the reason that assessee could not establish rendering of services by QIE .....

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ce such expenditure was to be disallowed under section 40(a)(i) of the Act. This position did not find favour with the CIT(A) as according to him tax was not required to be deducted at source on the impugned amount, as it was not liable to be taxed in India in the hands of QIEF. On this aspect of the matter, there is no appeal preferred by the Revenue and, therefore, such finding of CIT(A) has attained finality. Therefore, we proceed to examine the basis on which the CIT(A) has sustained the dis .....

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einafter. 7.1 On the issue of availability of infrastructure with QIEF, in our view, the CIT(A) has merely brushed aside the material and evidence which the assessee sought to put-forth before him. In Para 1.13(a) of the order, the CIT(A) observes that assessee had failed to show the infrastructure available with QIEF to render services to assesseecompany. Such an observation by the CIT(A) is a bland assertion because the material which was before him, and which has also been placed in the Paper .....

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es to International Institutional clients such as sovereign funds, pension fund, etc. in relation to their investment exposures in India-listed securities. Ostensibly, such institutional clients would require appropriate and diligent evaluation of their Investment Manager and for that purpose assessee had undertaken marketing efforts through QIEF. In terms of the agreement with QIEF, the said concern was tasked to look for potential opportunities and to market the capabilities and experience of .....

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ional investors such as sovereign funds, pension funds, etc. in Europe, Middle East and Asia and also to private sector institutional clients in USA. In our considered opinion, the assertions which have been made by the assessee before the lower authorities as well as before us are borne out of record inasmuch as assessee has earned income through clients referred by QIEF, which is not disputed. Much has been made out by the CIT(A) that mere existence of an agreement between asessee and QIEP wou .....

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by the payee. In our considered opinion, having regard to the material and evidence on record, the CIT(A) has sought to disregard the agreement on a mere hypothetical basis, without any factual support. 7.2 Before parting, we may mention two more aspects which were before the CIT(A) . In the course of the assessment proceedings, the only objection of the Assessing Officer was based on non-deduction of tax at source and in so far as the issue of section 37(1) of the Act was concerned, the Assess .....

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was incurred during the course of normal business activity by the assessee and hence deductible under section 37(1) of the Act. Thus, impliedly the Assessing Officer reiterated the stand taken in the assessment order on the issue of section 37(1) of the Act. Second aspect which needs mentions is the assessment made by the Assessing Officer under section 143(3) of the Act for the assessment year 2012-13, wherein a portion of the marketing support fee paid to QIEF was disallowed by invoking sectio .....

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e Act. 7.3 In our considered opinion, the stand of the CIT(A) is misdirected and is based on a wrong perspective. In fact, the invoking of section 40A(2)(b) of the Act to disallow a portion of the expenditure in assessment year 2012-13 does not lend any support to the inference of the CIT(A) that the expenditure has not been made wholly and exclusively for the purpose of assessee s business because what is envisaged by section 40A(2)(b) is to disallow an expenditure which is found to be unreason .....

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gard to the stand of the Assessing Officer in the remand report as well as in the assessment for assessment year 2012- 13. The said burden, in our view, has not been discharged by the CIT(A) in the present case and, therefore, we are unable to acquiesce to the same. As a consequence, we hereby set-aside the order of the CIT(A) on this aspect and direct the Assessing Officer to delete the addition of ₹ 3,26,05,268/- representing payment made to QIEF for marketing support services. Thus, on .....

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7; 3,77,14,278/- was incurred by way of payment to M/s. Hansa Vision Pvt. Ltd. for placing advertisements in newspapers. On being asked to justify the claim of advertisement expenses, assessee furnished the detail of expenditure, sample copies of invoices raised by M/s. Hansa Vision Pvt. Ltd. and also photocopies of newspaper cuttings evidencing the advertisements placed. Assessee also explained that the advertisement expense was incurred in its capacity as the sponsor of Quantum Mutual Fund on .....

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e and, therefore, according to him, the expenditure was incurred for a group company and it was not allowable as a business expense in the hands of the assesseecompany. Before reaching to his ultimate conclusion, the Assessing Officer noted that the newspaper cuttings for the entire advertisement expenditure were not furnished; and, thus the entire claim of ₹ 3,77,14,278/- could not be said to be supported by documentary evidence. Further, the Assessing Officer observed that the advertisem .....

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and thus payment was made to one party; a confirmation from M/s. Hansa Vision Pvt. Ltd. was adduced as additional evidence by making application under Rule 46A of the Income-tax Rules, 1962; an agreement entered with M/s. Hansa Vision Pvt. Ltd. dated 15.2.2011 was also adduced as additional evidence by way of an application under Rule 46A of the Rules; that the Assessing Officer could not have questioned the business decision of the assessee to incur the impugned advertisement expenditure; that .....

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um Mutual Fund; that under such circumstances it could not be said that the expenditure was incurred for brand building ; that the name of the assessee was appearing in the newspaper advertisements as sponsor of the Mutual Fund and therefore it could not be said that the advertisements did not reflect the name of assessee-company; and, lastly that even if it was to be held that the expenditure was made for a group concern, it was pointed that the assessee-company had a direct interest in the bus .....

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aval (I) Pvt. Ltd. [2005] 149 Taxman 29 vi) S.A. Builders v/s CIT [2007] 158 Taxman 74 to say that an expenditure incurred for the purposes of business is allowable even if some benefit arises to a third party. Apart from relying on the aforesaid decisions, assessee also relied on the following decisions for the proposition that the nature of the impugned advertisement expenditure could not be construed as having been incurred for brand building :- i) ACIT v/s Global Healthline (P) Ltd. [2012] 1 .....

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tive submissions made by the assessee and called for a Remand report from the Assessing Officer on various issues, including the application of the assessee seeking admission of additional evidences under Rule 46A of the Rules. In response, the Assessing Officer submitted that M/s. Hansa Vision Pvt. Ltd. had raised all the invoices in the months of February and March, 2011 and even the agreement was dated 15.2.2011, which was towards the fag end of the year, which appeared to be doubtful. Second .....

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ght to have been incurred by the Mutual Fund itself and not by the assessee-company acting as a sponsor. In sum and substance, the Assessing Officer reiterated his earlier position and also opposed the plea of the assessee for admission of additional evidence. It is noticed from the order of CIT(A) that assessee also furnished its say on the Remand report submitted by the Assessing Officer, which has been reproduced by the CIT(A) in para 2.5 of his order. The CIT(A) considered the rival stands a .....

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m Quantum Asset Management Co. Pvt. Ltd. and thus, the action of incurring expenditure on promotion of various schemes of Quantum Mutual Fund was on relevant considerations. The CIT(A) declined to admit such an evidence as, according to him, the agreement did not pertain to the impugned assessment year as it was dated 1.6.2011. With regard to the merits, CIT(A) concluded that the expenditure did not qualify for deduction u/s 37(1) of the Act as it was not laid out wholly and exclusively for the .....

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ugned expenditure on advertisements can be considered to have been incurred for earning tax-free incomes and the same was not allowable u/s 14A of the Act. For the said reasons, he has affirmed the disallowance made by the Assessing Officer. 11. Before us, the learned representative for the assessee vehemently pointed out that the material on record clearly shows that the entire expenditure was incurred by the assessee for the purpose of attracting investors towards investing in the Quantum Mutu .....

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with M/s. Hansa Vision Pvt. Ltd. in February/March, 2011 and thereafter the incurrence of the advertisement expenditure started. In this manner, it was sought to be canvassed that incurrence of the expenditure towards the fag end of the year is not for any doubtful reasons , as made out by the lower authorities. Emphasizing that the expenditure was falling within the tests laid down in Sec. 37(1) of the Act, it was pointed out that the wholly owned subsidiary of the assessee-company, i.e., QAMC .....

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egulations, 1996 to point out the locus standi of the assessee-company to incur such advertisement expenditure for attracting investors to invest in the Mutual Fund. In particular, attention was invited to Regulation 52(7) of SEBI (Mutual Funds) Regulation, 1996 to emphasize that any expenditure in excess of the limits specified in the Regulations was liable to be borne only by the concerned Asset Management Company or by the Trustees or sponsors of the Mutual Fund. The learned representative ex .....

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m, the learned representative also pointed out that it was wrong on the part of the CIT(A) to have observed that the assesseecompany was entitled to earn only tax-exempt incomes from QAMC. In this context, reference was invited to the agreement dated 1.6.2011 with QAMC, a copy of which has been placed at pages 223 to 226 of the Paper Book, to show that assessee was entitled to earn Management fee also, which was a taxable receipt. The learned representative pointed out that the aforesaid crucial .....

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.5.2011. For this aspect, attention was invited to the relevant clause in the agreement dated 1.6.2011. It was, therefore, contended that the refusal of the CIT(A) to consider such an evidence was on irrelevant considerations. Notwithstanding the aforesaid, the learned representative pointed out that Sec. 14A of the Act was of no relevance for the period under consideration inasmuch as there was no tax-free dividend income earned by the assessee from QAMC, as no dividend has been paid by QAMC at .....

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case of Oriental Structural Engineers (P) Ltd., 35 Taxmann.com 210, order of Chennai Bench of Tribunal in the case of EIH Associated Hotels Ltd. (ITA No. 1503/Mds/2012 dated 17.7.2013), order of Mumbai Bench of Tribunal in the case of M/s. JM Financial Ltd. (ITA No. 4521/Mum/2012 dated 26.3.2014) and order of Delhi Bench of Tribunal in the case of Interglobe Enterprises Ltd. (ITA Nos. 1362 & 1032/Del/2013 dated 4.4.2014). For all the above reasons, the learned representative for the assesse .....

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AMC, which was the Asset Management Company of the Mutual Fund and not by the assessee who was sponsor of the Fund. With regard to the earning of taxable Management fee from QAMC, the ld. DR pointed out that such income earned by the assessee over the years was less than the expenditure incurred by the assessee on advertisement, etc., and it would not defeat the invoking of Sec. 14A of the Act. According to him, the incomes that assessee was liable to earn in future on account of dividend and Lo .....

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has established a Mutual Fund, i.e., Quantum Mutual Fund as a sponsor in terms of SEBI (Mutual Fund) Regulations, 1996. A Mutual Fund is set-up in the form of a Trust, which has a sponsor, trustees, Asset Management Company and a Custodian. In terms of SEBI (Mutual Fund) Regulations, 1996 a sponsor is akin to a promoter of a corporate body as it is the sponsor who establishes a Mutual Fund and registers it under the SEBI (Mutual Fund) Regulations, 1996. In term of the SEBI (Mutual Fund) Regulat .....

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Trustees do not directly manage the portfolio of securities and instead, the same is done by an Asset Management Company in terms of SEBI (Mutual Fund) Regulations, 1996. The Asset Management Company thus manages the Fund s schemes and also its corpus. The Fund management includes buying and selling of securities in large volumes and in order to keep a track of such transactions, there is a Custodian. The aforesaid briefly brings out the schematic position of the assessee-company in the context .....

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e assessee, it has a direct interest in the business of the QAMC, who in turn manages the assets of Quantum Mutual Fund. The aforesaid factual matrix is not in dispute and is also emerging from record. Having regard to the same, the moot question is as to whether the assessee was driven by considerations of commercial expediency or not while incurring the impugned expenditure on advertisement? No doubt, the expression commercial expediency is not amenable to a straightjacketed definition, but it .....

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expenditure was incurred on the ground of commercial expediency. If we examine the impugned advertisement expenditure incurred by the assessee as a sponsor of the Mutual Fund and as a holding company for the Asset Management Company of the Mutual Fund, it could not be said that assessee was devoid of any locus standi. In fact, there can be no denying the fact that the purport of the expenditure was to increase assessee s own earnings inasmuch as the Management fee which the assessee is entitled .....

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tand of the lower authorities that there is no nexus between the expenditure and the business of the assessee is quite fallacious and contrary to the fact-situation. At this stage, we may also refer to a concurrent stand of the Revenue that as the advertisements relate to securing investors to invest in the schemes of Quantum Mutual Fund, the expenditure, at best, could be said to be for the benefit of Quantum Mutual Fund, which is a separate taxable entity. Thus, as per the Revenue, such expend .....

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1) of the Act due to the presence of the expression for the purposes of business in both the sections. The Hon'ble Supreme Court emphasized that even in the context of Sec. 37(1) of the Act, the expression for the purposes of business would include an expenditure voluntarily incurred for commercial expediency and it would be immaterial if a third party also benefitted from the same. The following extract from the judgment of the Hon'ble Supreme Court is notable:- ……… .....

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rities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their view point but that of a prudent businessman. In view of the aforesaid, we therefore do not find any merit in the stand of the income-tax authorities that the expenditure in question is not laid out for the purposes of assessee s business, merely because it could benefit another entity also. 15. We may also refer to the reliance placed by CIT .....

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before the Hon'ble Supreme Court stood on an entirely different footing. The assessee before the Hon'ble Supreme Court was a bulk shareholder in several companies and it was rendering services to its subsidiaries in various areas of finance, liaisoning, export promotion etc. The Directors of the subsidiary companies were earning remuneration from the respective companies in terms of the limits fixed under the Companies Act, 1956. The assessee-company paid remuneration to Directors of the .....

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and it was noticed that such income could be earned by the assessee without incurring the disputed expenditure. It is for the said reason the claim of the assessee was negated by the Hon'ble Supreme Court. So however, in the present case, the complexion of the factual matrix is quite different. Herein, it is the assessee-company which has set-up the Mutual Fund as a sponsor and is also the holding company for the Asset Management Company, which in turn is managing the assets of the Mutual F .....

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efit to a third party. On this aspect of the matter, the learned representative for the assessee relied upon the judgment of the Hon'ble Bombay High Court in the case of Tata Sons (P) Ltd., 18 ITR 460 which has also been referred to by the Hon'ble Supreme Court in the case of Amalgamations (P) Ltd. (supra). In the case of Tata Sons (P) Ltd. (supra) assessee was managing agent of an another company and it was earning agency commission computed with reference to the net profits of the mana .....

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;ble Supreme Court in the case of Amalgamations (P) Ltd. (supra) considered the judgment of Hon'ble Bombay High Court and observed that there was a direct nexus between the increased profits of the managed company and the managerial commission payable to the assessee since such agency commission was calculated as a prescribed percentage of the net profits of the managed company. In our considered opinion, the parity of reasoning in the case of Tata Sons (P) Ltd. (supra) is clearly attracted .....

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e, based on the provisions of Sec. 14A of the Act, in our view, is also quite untenable. The said plea is based on the premise that the only possible earnings of the assessee as a sponsor of the Mutual Fund, and as a holding company of the Asset Management Company, by way of dividends or Long Term Capital Gain would be exempt from tax and, therefore, the impugned expenditure would constitute an expenditure incurred for earning of exempt income, which is hit by the provisions of Sec. 14A of the A .....

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be produced before him as an additional evidence which hitherto was not before the Assessing Officer during the assessment proceedings. In our considered opinion, the said evidence has been unjustly disregarded by the CIT(A). A copy of the said agreement is placed in the Paper Book at pages 223 to 226 and it is averred therein that the same is governed by the terms and conditions approved by the Regional Director, Western Region, Mumbai under the proviso to Sec. 297(1) of the Companies Act, 1956 .....

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ar and is in terms of conditions approved by a statutory authority. Be that as it may, in our view, the aforesaid material was only in support of assessee s primary assertion that the expenditure was incurred on considerations of commercial expediency . In our considered opinion, the aforesaid piece of evidence was quite germane for the purposes of appreciating the entire transaction in its proper perspective, and the CIT(A) erred in not considering such material to decide the controversy before .....

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