2019 (6) TMI 1642 - AT - Income Tax

Tribunal affirms CIT(A)'s decisions on revenue vs. capital expenses, scheme-related costs

The Dy. Commissioner of Income Tax, Versus LIC Nomura Mutual Fund Asset Management Co. Ltd

The Tribunal upheld the CIT(A)'s decision to delete the addition of expenses treated as capital in nature by the AO, stating they were revenue expenditure ... Nature of expenses - expenses of contribution for scheme deficiencies - revenue or capital expenditure - AO disallowed the claim of expenses / loss only on the basis that the assessee has treated it as to have goodwill among the investors and therefore, he treated this expense as capital in nature - CIT-A deleted the addition - HELD THAT:- As noted that this issue is squarely covered by the decision of Empire Jute Co. Ltd. Vs. CIT [1980 (5) TMI 1 - SUPREME COURT], L.H Sugar Factory & Oil Mills Pvt. Ltd. [1980 (8) TMI 1 - SUPREME COURT], CIT vs. Malayalam Plantations Ltd. [1964 (4) TMI 9 - SUPREME COURT], and Sassoon J. David & Co. Pvt. Ltd[1979 (5) TMI 3 - SUPREME COURT] as held that payment of statutory dues and taxes imposed as a pre-condition to commence or for carrying on of a business ; it may comprehend many other acts incidental to the carrying on of a business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred 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 of warrant, on account of incorrect accounting made for security, shortfall in systematic withdrawal of plan, double interest booked and difference in unit creation has already been disallowed by CIT(A) and for this assessee is not in appeal. We noted that for the balance amount of ₹ 91,15,800/- there is no application of explanation 1 to section 37(1) - Decided against revenue. Issues Involved:1. Deletion of addition by CIT(A) treating expenses as capital in nature.2. Deletion of disallowance of scheme-related expenses by CIT(A) treating them as penal in nature.Issue 1: Deletion of Addition by CIT(A) Treating Expenses as Capital in NatureThe first issue in this appeal concerns the CIT(A)'s decision to delete the addition made by the AO, who treated the expenses of Rs. 1,12,79,19,622/- as capital in nature. The assessee had debited this amount in its profit and loss account under administrative and other expenses, claiming it as an allowable deduction. The AO argued that this amount should be treated as a provision for future expenses/loss and disallowed the claim, stating that the payment aimed to maintain the Net Asset Value (NAV) of mutual fund schemes, thereby enhancing the company's goodwill, and should be capitalized. The CIT(A) disagreed, noting that the expenses were incurred to preserve the income-generating machinery and maintain investor confidence, thus qualifying as revenue expenditure. The Tribunal upheld the CIT(A)'s decision, referencing several Supreme Court judgments, including Empire Jute Co. Ltd. vs. CIT and Sassoon J. David & Co. Pvt. Ltd. vs. CIT, which support the treatment of such expenses as revenue in nature when incurred for business purposes.Issue 2: Deletion of Disallowance of Scheme-Related Expenses by CIT(A) Treating Them as Penal in NatureThe second issue involves the CIT(A)'s deletion of the AO's disallowance of scheme-related expenses amounting to Rs. 91,15,800/-. The AO had disallowed these expenses, arguing they were penal in nature and not incurred for business purposes. The CIT(A) reviewed the agreement between LIC Mutual Fund Trust Co. Ltd. and Jeevan Bima Sahyog Asset Management Company Ltd., which outlined the responsibilities of the AMC, including investment management and maintaining records. The CIT(A) allowed the expenses, noting they were incurred due to errors in accounting and excess withdrawals by investors, and thus were necessary for business operations. The Tribunal agreed with the CIT(A), stating that the expenses were not penal in nature and were incurred in the course of business, thereby confirming the CIT(A)'s decision.ConclusionThe Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on both issues. The expenses were deemed necessary for maintaining the business operations and investor confidence, qualifying as revenue expenditure rather than capital or penal in nature. The order was pronounced in the open court on 12-06-2019.