TaxTMI 
TaxTMI 
2008 (8) TMI 429
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....ng to Rs. 2,74,798. 3. During assessment proceeding, it was noticed by the AO that under the head repairs and maintenance, the assessee had claimed expenses of Rs. 4,99,696 as under: -------------------------------------------- Particulars Date Amount -------------------------------------------- Antivirus software 24-7-2002 19,798 -------------------------------------------- Antivirus software 22-11-2002 7,250 -------------------------------------------- Laptop AMC charges 9-12-2002 85,000 -------------------------------------------- Data Cons AMC charges 13-1-2002 2,20,250 -------------------------------------------- Funds logistics 13-11-2002 27,500 -------------------------------------------- Advance adjusted 31-3-2002 1,....
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....count of mutual fund promotion expenses. 4. That the learned CIT(A) has failed to appreciate that there are several instances where initial issue expenses for launch of a new scheme were borne by asset management company e.g. UTI Thematic Fund launched in 2004. 8. During the assessment proceeding. it was noticed by the AO that the assessee had claimed expenses aggregating to Rs. 1,87,99,864 as under: --------------------------------------------------- S.No. Particulars Amount --------------------------------------------------- 1. Mutual fund launch expenses 26,38,776 --------------------------------------------------- 2. Mutual fund promotion expenses 1,61,61,088 --------------------------------------------------- 9. The AO disallowed the above expenses and his order was confirmed by the CIT(A). The assessee has challenged the order of CIT(A) in the present appeal. 10. Shri P.J. Pardiwala, the learned Authorised R....
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....s involved, the legal framework, rights, duties and liabilities of the parties, the control and regulation of SEBI. 13. The business of a mutual fund, generally, involves three parties-a settlor company, a group of trustees, and a company acting as asset management company (AMC). There is a trust deed between the settlor company and the trustees. The settlor company sets up a mutual fund under the trust deed by contributing a sum as the initial contribution, so as to constitute the mutual fund. A board of trustees is appointed of the said mutual fund pursuant to the said trust deed. The trustees appoint, under the trust deed, a company to act as asset management company of the investments. The settlor company, the trustees, and the asset management company enter into a tripartite agreement which inter alia, deals with issues as under: - Appointment of AMC - Duties and responsibilities of AMC - Control and review of activities of the AMC by the trustees - Fees payable to AMC - Reimbursement of expenses, incurred by the AMC, out of the assets of the mutual fund, (Sch. 2) - Liability of the AMC 13.1 The trustees form different schemes and offer units in each su....
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....9 of the paper book filed on behalf of the assessee. The details of mutual fund promotion expenses aggregating to Rs. 1,61,61,087, given at p. 80 of the paper book, are as under: ----------------------------------------------- S.No. Particulars Amount ----------------------------------------------- 1 Advertisement and publicity 42,92,664 ----------------------------------------------- 2 Brokerage expenses 49,43,811 ----------------------------------------------- 3 Business development expenses 3,61,191 ----------------------------------------------- 4 Conferences expenses 3,05,803 ----------------------------------------------- 5 Distribution advertisement 11,58,223 ------------------....
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....er: "6.5. -------- The business of the appellant company is to manage the assets of the mutual fund and not for the launching and promoting various mutual fund schemes. Perusal of the facts reveals that the appellant was charging only fixed advisory fees from the mutual fund. There was no statutory or contractual obligation on the appellant to incur the said expenses. Furthermore, the said expenses cannot be stated to be incurred wholly and exclusively for the business of the appellant company. On the basis of the above facts, I am of the clear view that the expenses under reference have been incurred by the appellant purely for the purpose of business activities of the other persons, i.e., the First Leasing Company and the mutual fund. Therefore, such expenses cannot be allowed as deduction while computing taxable income of the appellant company. The entire addition made by the AO is therefore confirmed." 19. We find that the fees for the investment management services payable to the AMC and the expenses incurred on issue of mutual fund schemes are regulated by the SEBI. The Regulation No. 52 of the SEBI (Mutual Fund) Regulation, 1996 reads as under: "Limitation on fees a....
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....mutual fund or by the asset management company, but including the investment management and advisory fee shall be subject to the following limits: (i) On the first Rs. 100 crores of the average weekly net assets-2.5 per cent; (ii) On the next Rs. 300 crores of the average weekly net assets-2.25 per cent; (iii) On the next Rs. 300 crores of the average weekly net assets-2 per cent; (iv) On the balance of the assets-1.75 per cent: Provided that such recurring expenses shall be lesser by at least 0.25 per cent of the weekly average net assets outstanding in each financial year in respect of a scheme investing in bonds: Provided further that in case of a fund of funds scheme, the total expenses of the scheme including the management fees shall not exceed 0.75 per cent of the daily or weekly average net assets, depending upon whether the NAV of the scheme is calculated on daily or weekly basis. (7) Any expenditure in excess of the limits specified in sub-regulation (6) shall be borne by the asset management company or by the trustee or sponsors, (8) The provisions of sub-regulations (3), (4), (5) and (6) will come into effect from 1st April, 1997 for those scheme....
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....hall be charged to the mutual fund. (6) The fees payable to the Registrar and transfer agency services provided and related matters shall be charged to the mutual fund. (7) The initial issue expenses shall not exceed 6 per cent of the funds raised under each scheme. (8) In any case, the total of all the expenses charged to the mutual fund except the initial issue expenses shall not exceed 3 per cent of the weekly average net assets outstanding during the current financial year and the same shall be disclosed through advertisements, accounts, etc. (9) All expenses shall be clearly identified as far as possible and appropriately attributed or apportioned to individual schemes. (10) All the fees and expenses mentioned hereinabove shall be limited by and subject to the regulations prescribed by SEBI from time to time including the SEBI (Mutual Funds) Regulations, 1993, including regulation 50(2) thereof." 21. The CIT(A) has confirmed the AO's action saying that there was no statutory or contractual obligation on the assessee company to incur the said expenses. A perusal of the tripartite agreement dt. 18th July, 1996 shows that the assessee was under a contractual obl....
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.... 22.1 The legislative history of s. 37 of the IT Act, 1961 was mentioned by the Supreme Court in its order in the case of Sassoon J. David & Co. (P) Ltd. as under: "........... It is relevant to refer at this stage to the legislative history of s. 37 of the IT Act, 1961, which corresponds to s. 10 (2)(xv) of the Act. An attempt was made in the IT Bill of 1961 to lay down the 'necessity' of the expenditure as a condition for claiming deduction under s. 37. Sec. 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 s. 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 s. 10(2)(xv) of the Act if it satisfies otherwise the tests laid down by law." 23. The crucial expression used in s. 37(1) was 'purpose of business', and in this connection, the discussion at p....