TMI Blog2019 (6) TMI 1642X X X X Extracts X X X X X X X X Extracts X X X X ..... ed shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. Hon ble Karnataka High court in the case of CIT v. Canara Bank Ltd. [ 2014 (1) TMI 1586 - KARNATAKA HIGH COURT] allowed the claim of the assessee. Hence, we are of the view that the CIT(A) has rightly allowed the claim of the assessee after discussion in detail as reproduced above. We, accordingly, affirmed the order of the CIT(A) on this issue. - Decided against revenue. Disallowance of elated expenses holding the same as penal in nature and also not incurred for the purpose of the business - HELD THAT:- Money went out of scheme to the investors by excess allowance or otherwise by excess withdrawals by the investors carried out by concerned scheme. The above narrated expenses/ deductions in no way can be said that these are in the nature of penal expenses as described in explanation 1 to section 37(1) of the Act. We have gone through the agreement entered into between LIC Mutual Fund Trust Co. Ltd. and Jeevan Bima Sahyog Asst. Management Company Ltd.. We noted that the expenditure claimed by assessee on account of fraudulent encashment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 19567.68 lakhs comparing last year due to contribution towards deficiency arising out of sale of securities to meet redemption application and violation deficiency arising out of revision in the violation policy of debt securities. The AO noted that the assessee company manages the following open ended scheme of mutual funds i.e. a) LIC MF Liquid Fund, b) LIC MF Income Fund, c) LIC MF savings Plus Fund, d) LIC MF Floating Rate Fund. The AO admitted that these funds created by assessee were performing really well and investors were having confidence in these funds. He also noted that over the times, due to very tight liquidity and high interest rates, the above funds faced heavy redemption pressure and in such situation the schemes have to be sold at a loss and the investors started loose confidence in their schemes. It was observed by the AO that to maintain the sustainability of the schemes and to bring back the confidence of the investors in the schemes paid a sum of ₹ 112,79,19,622/- to the mutual fund schemes during the relevant assessment year. But AO finally noted that the claim of assessee is not acceptable as Revenue in nature as the assessee company has paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition and higher interest rates available in the market. Accordingly, securities were sold at loss which resulted in aggregate loss of ₹ 60,82,36,469.82 and further Securities Exchange Board of India circulars dated 02.02.2010 and 21.06.2010 stipulated though money market securities with a residual maturity exceeding 91 days that were held by above schemes were directed to be marked to market (MTM) with effect from 1st August 2010 and thus process also scheme incurred loss of ₹ 51,96,83,152.38 and put together the total loss come to ₹ 112,79,19,622/-. I have also gone through management fees received from LIC Mutual fund for the following AYs as asset management company by the appellant. The details are as under: Management fees from LIC Mutual Fund as a % of total income Particulars 2011-12 2O10-11 2009-10 2008-09 * Management fees from Mutual fund 337,642,393 878,864,965 1,831,764,079 728,330,531 Total Income 367,191,005 1,006,144,038 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e asset manager and to instill confidence among the investors of the scheme and hence, this expenditure could be allowed as revenue expenditure and not capital expenditure as held by the Learned AO. The AO is directed to delete the addition of Rs.ll2,V9.19.622/- 7Appeaon this ground is allowed. Aggrieved, now Revenue is in appeal before Tribunal. 5. Before us, the learned Sr. Departmental Representative relied on the assessment order and the learned Counsel for the assessee relied on the order of CIT(A). 6. We have heard the rival contentions and gone through the facts and circumstances of the case. We noted that the facts narrated by CIT(A) in its order regarding the claim of expenditure being contribution of deficiencies of the mutual fund scheme managed by the assessee at ₹ 112,79,19,922/- are not disputed. It is also a fact the loss is supposed to be booked in the books of the assessee as a matter of commercial expediency and to maintain the net asset value of the scheme and not to effect the source of income etc. This fact is not doubted by the AO in his assessment order but admitted this. But the AO disallowed the claim of expenses / loss only on the basis th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under section 10(2)(xv) of the Act even though there was no compelling necessity to incur such expenditure. It is relevant to refer at this stage to the legislative history of section 37 of the Income-tax Act, 1961 which corresponds to section 10(2)(xv) of the Act. An attempt was made in the Income-tax Bill of 1961 to lay down the necessity of the expenditure as a condition for claiming deduction under section 37. Section 37(1) in the Bill read any expenditure. . . . laid out or expended wholly, necessarily and exclusively for the purposes of the business or profession shall be allowed The introduction of the word necessarily in the above section resulted in public protest. Consequently when section 37 was finally enacted into law, the word necessarily came to be dropped. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. Double interest on security due to improper accounting 1,64,365 3. Incorrect accounting for security 13,46,129 4. Shortfall in Systematic Withdrawal plan in bond fund 2,11,392 5. Write off of long outstanding balance appearing in ULLS as per audit observation 4,65,800 6. Write off of long outstanding balance appearing in ULIS as per audit observation 86,50,000 7. Provision made on account of fraudulent encashment of warrant 10,00,000 11. Finally, the AO held that these expenses are not incurred wholly and exclusively for the purpose of business and moreover these are penal in nature. For this he observed in Para 7.3 as under: - 7.3 From the above table, it is clear that the assessee expenses on account of many alleged errors committed by the Mutual Fund and claimed such expenditure as revenue expenditure and deducted the same as well from the taxable profit. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Duties of AMC (6) be solely responsible for selection of investments of the Trust fund and in the event of an investment other than in an Approved investment or in a manner that infringes any restriction or limit imposed in that behalf by the (10) take all necessary steps to ensure that investment of the Trust are duly protected and that all the documents and evidences of title relating to the Approved investments, shall be deposited with the Custodian to be appointed by the Trustee Company. (11) issue and administer instructions to the custodian, the Stock brokers and agents bankers, registrars and advertising and other agencies of the LCI Mutual Fund. (12) be responsible for the acts of commission or omissions by its employees or the persons whose serviced have been procured by the AMC. (13) disclose the basis of calculating the repurchase price and Net Asset Value of the various schemes of the fund in the scheme particulars and disclose the same to the Unit Holders at such intervals as may be specified byte LI Mutual Fund and SEBI. I have gone also gone through the original agreement entered between LIC and Jeevan Bima Sahayog Asset Manag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned counsel for the assessee relied on the order of CIT(A). On the other hand, the learned CIT DR relied on the order of the AO. 14. After hearing both the sides and going through the facts, we noted that the money went out of scheme to the investors by excess allowance or otherwise by excess withdrawals by the investors carried out by concerned scheme. The above narrated expenses/ deductions in no way can be said that these are in the nature of penal expenses as described in explanation 1 to section 37(1) of the Act. We have gone through the agreement entered into between LIC Mutual Fund Trust Co. Ltd. and Jeevan Bima Sahyog Asst. Management Company Ltd. dtd 06.10.2003 and as per clause 3, the investments are supposed to be made in approved investment only and for this purpose AMC has been appointed by LIC Mutual Fund as manager for the same and duties of AMC are also prescribed. It is noted that AMC is maintained all the records and overall supervision and administration and also advising the assessee to invest in the right scheme. We noted that the expenditure claimed by assessee of ₹ 10 lakhs on account of fraudulent encashment of warrant ₹ 13,46,129 on account ..... X X X X Extracts X X X X X X X X Extracts X X X X
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