2007 (5) TMI 369 - AT - Income Tax

Revenue's Appeal Dismissed: Initial Expenses on Mutual Funds Treated as Revenue, Not Capital

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to treat initial issue expenses on mutual funds and professional/legal fee ... Business expenditure Issues involved:1. Disallowance of initial issue expenses on mutual funds.2. Disallowance of professional and legal fee charges as capital expenditure.Issue 1: Disallowance of initial issue expenses on mutual fundsThe appeal was filed by the Revenue against the order of the CIT(A) regarding the disallowance of Rs. 20,15,85,238 made as capital expenditure on initial issue expenses on mutual funds for the assessment year 1998-99. The assessee-company, registered as an Asset Management Company under SEBI Regulations, launched three Schemes during the relevant year. The Assessing Officer disallowed the expenses as capital expenditure, but the CIT(A) held them as revenue expenditure. The Tribunal agreed with the CIT(A) citing commercial principles and the nature of the assessee's business as reasons for upholding the decision. The Tribunal found that the expenses were directly related to the profit-making process of the assessee and were necessary for conducting its asset management business. The expenses were incurred for the mutual funds, which are independent entities, and did not result in any creation of capital assets for the assessee. Therefore, the disallowance was deleted based on the commercial necessity and business expediency principles.Issue 2: Disallowance of professional and legal fee charges as capital expenditureThe second issue pertained to the disallowance of Rs. 8,12,450 as capital expenditure towards professional and legal fee charges. The Assessing Officer disallowed these charges based on the same reasoning used for the initial issue expenses disallowance, which was later deleted by the CIT(A) and upheld by the Tribunal. The Tribunal found that since the initial issue expenses were considered revenue expenditure, the professional and legal fee charges should also be treated similarly. Therefore, the disallowance of these charges as capital expenditure was not justified, and the deletion made by the CIT(A) was upheld by the Tribunal.In conclusion, the Tribunal dismissed the appeal filed by the Revenue, upholding the decisions of the CIT(A) regarding the disallowance of initial issue expenses on mutual funds and professional and legal fee charges as revenue expenditure.