TMI Blog2016 (5) TMI 1310X X X X Extracts X X X X X X X X Extracts X X X X ..... he claim of the assessee and the orders of the lower authorities on this issue are reversed. This issue of assessee’s appeal is allowed. Disallowance of claim of assessee in respect to redemption of units on forced redemption request in the case of TIFPL - Held that:- We find that the assessee kept the demand alive for the claim of the provision on account of this embezzlement in the AY 2005-06 also. The assessee in the financial year relevant to this assessment year paid to TIFPL an amount of ₹ 4,42,73,539 vide cheque No.112500 dated 28/7/2006 as full and final settlement for the pending dispute. This payment was made against the opening provision of ₹ 3.92 corers provided in the FY 2004-05. The assessee accordingly claimed ₹ 3,92,15,599 on payment basis and also ₹ 50,57,940 which was paid to TIFPL on account of the interest accrued on such liability. The AO has allowed the claim of ₹ 3.92 crores, however, did not allow the claim of ₹ 50,57,940 on the ground that the assessee has filed suit against the various parties and therefore, the claim has not reached its finality. We find that the assessee has been pursuing his claim with the Banking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business loss and allowable under section. 37 of the Income Tax Act; (iii)The Appellant prays the disallowance of compensation paid to investors of ₹ 50,86,434/- be allowed as deduction under section.37(1). Revenue has raised the following ground against the order of CIT(A) deleting disallowance claimed by the assessee on account of embezzlement:- 1. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance made by the AO of ₹ 50,57,940/- being deduction claimed by the assessee in respect of interest on the embezzled amount, without appreciating the facts of the case. 3. Briefly stated, the facts are that assessee company is engaged in the business of asset management, portfolio management and advisory services. The assessee field complete books of accounts and audited accounts during the course of assessment proceedings. The Assessing Officer noticed from the return of income that the assessee has claimed the following expenses in its profit and loss account and the details are given in the assessment order para -4 as under:- Investor Name Date Amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investor, that cannot be the liability of the assessee and, therefore, he disallowed the claim of compensation in respect to Smt. Ramadevi Sood amounting to ₹ 15,98,083/-, Smt. V. Meenakshi amounting to ₹ 6,96,257/-, Smt. V. Meenakshi amounting to ₹ 6,54,959/- and Naresh Kumar Trehas amounting to ₹ 8,83,000/- and authorized other small investors mounting to ₹ 12,54,135/-. Aggrieved, assessee preferred appeal before CIT(A) against the disallowance. 4. The CIT(A) after considering the submissions of the assessee in respect to payments made to certain investors aggregating to ₹ 50.86 lacs, pertaining to legacy of the earlier period, the CIT(A) noted that this amount is in the nature of compensation and the claim was verified and approved for payments. According to him, this is evident from the statement documenting the management decision, a copy of which is furnished before him but CIT(A) was of the view that once the account is settled with the mutual fund after taking into consideration the deficit and surplus existing in the accounts of the Registrar and Transfer Agent i.e Karvy Consultants the entire responsibility of taking care of the liab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claimed these expenses as deduction, which was incurred, according to the Ld. Counsel for the assessee in the course of business on account of business expediency. The Ld. Counsel for the assessee explained that the assessee has to incur such expenses to safeguard its business interest against complaint made by investors on SEBI, which may lead to violation of SEBI regulations and also it is duty bound to make the loss good of the investors. He explained that the assessee and Trustees of the mutual fund entered into an investment management agreement, which was guiding factor for rights and obligation of Asset Management Company. Ld. Counsel for the assessee also explained that this issue of reconciliation came up during the assessment year 2002- 03, wherein the reconciliation difference amounting to ₹ 16.00 crores was deficit against the mutual fund and ₹ 6.00 crores being surplus in favour of the mutual fund. But there was a net deficit of ₹ 10.00 crores against mutual fund. The assessee appointed a firm of Chartered Accountant to carry out this reconciliation and after prolonged exercise the difference largely remain unrealized and the matter was taken-up with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n this process the assessee company has settled claim towards compensation to various investors on account of business expediency and as per regulations of SEBI amounting to ₹ 50,86,431/-. The complete details are given in the assessment order. The assessee has claimed these expenses as deduction, which was incurred, in the course of business on account of business expediency. As claimed by the assessee, we are of the opinion that in such nature of business, the assessee has to incur such expenses to safeguard its business interest against complaint made by investors on SEBI, which may lead to violation of SEBI regulations and also it is duty bound to make the loss good of the investors. We also find from the facts of the case that the assessee and Trustees of the mutual fund entered into an investment management agreement, which was guiding factor for rights and obligation of Asset Management Company. We also find that the assessee has raised this issue and filed reconciliation during the assessment year 2002-03, wherein the reconciliation difference amounting to ₹ 16.00 crores was deficit against the mutual fund and ₹ 6.00 crores being surplus in favour of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is indirectly for facilitation of carrying on of the business of the assessee. In view of this reasoning, we allow the claim of the assessee and the orders of the lower authorities on this issue are reversed. This issue of assessee s appeal is allowed. 8. The issue in Revenue s appeal as regards to disallowance of claim of assessee in respect to redemption of units on forced redemption request in the case of TIFPL. Briefly stated, the facts are that TIFPL made an investment on 30/07/2002 by appointing an investment portfolio. There were four transactions of subscriptions and redemptions for all units in its investment account from August 2002 to February, 2003. TIFPL applied for redemption of all outstanding investments as on 28/03/2003 and ₹ 4.85 crores being value of outstanding units to the credit of TIFPL were paid on 31/03/2003. TIFPL informed the assessee that total amount expected from final redemption is ₹ 7.50 crores as against receipt of ₹ 4.85 crores, but assessee informed TIFPL that the balance units of ₹ 3.65 crores were already redeemed by it on 28/02/2003. TIFPL informed that they have not redeemed the same and there is some mistake on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e request received on February 2003 was fraudulent and the appellant's agent processed such request and a redemption cheque of 3.65 crores was handed over to a person on March 3,2003. The appellant lodged a FIR on April 7, 2003 in MRA Marg Police Station. The appellant created a provision for embezzlement in the FY 2003-04 amounting to ₹ 3.92 crores and accordingly vide a letter dated October 31st 2006 and claimed the provision as a loss in the AY 2004-05 which was denied. The matter travelled to the Hon'ble ITAT and vide order ITA No.4990/Mum/2007 dated 11/8/2009, the Hon'ble Tribunal decided the allowability of embezzlement of loss. However, it observed that since the appellant had only created a provision in its, books of accounts, the contingent liability to fulfil in future cannot be allowed to the appellant in the year of creation of the provision and will thus, be allowed in the year of actual payment. 2.3.2 The appellant kept the demand alive for the claim of the provision on account of this embezzlement in the AY 2005-06 also. My Ld. Predecessor did not allow the claim on the same reasoning as indicated by the Hon'ble IT AT as referred supra. The appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 3.92 crores and accordingly claimed the provision as a loss in the AY 2004-05 which was denied. The matter travelled to the ITAT and vide order ITA No.4990/Mum/2007 dated 11/8/2009, the Tribunal decided the claim of embezzlement of loss against assessee by observing that the assessee had only created a provision in its, books of accounts, the contingent liability to fulfil in future cannot be allowed in the year of creation of the provision and will thus, be allowed in the year of actual payment. We find that the assessee kept the demand alive for the claim of the provision on account of this embezzlement in the AY 2005-06 also. The assessee in the financial year relevant to this assessment year paid to TIFPL an amount of ₹ 4,42,73,539 vide cheque No.112500 dated 28/7/2006 as full and final settlement for the pending dispute. This payment was made against the opening provision of ₹ 3.92 corers provided in the FY 2004-05. The assessee accordingly claimed ₹ 3,92,15,599 on payment basis and also ₹ 50,57,940 which was paid to TIFPL on account of the interest accrued on such liability. The AO has allowed the claim of ₹ 3.92 crores, however, did not ..... X X X X Extracts X X X X X X X X Extracts X X X X
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