TaxTMI 
TaxTMI 
2025 (6) TMI 1145
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....tial public offer expenditure. The Assessing Officer held that the assessee company is a fund manager for the mutual fund company and the assessee company need not have incurred mutual fund launch expenses and mutual fund promotion expenses. The Assessing Officer, consequently, disallowed the expenses incurred by the assessee and added the same to the total income. 3. Aggrieved by the assessment order, the assessee filed an appeal before the Commissioner of Income-tax (Appeals) [in short 'CIT-A']. The CIT (A) allowed the appeal following the decision of the Income Tax Appellate Tribunal dated 29.08.2008 in assessee's own case in ITA No. 987/Mds/2007. Aggrieved by the order of CIT (A), Revenue preferred an appeal before the Income Tax Appellate Tribunal (ITAT). The ITAT, by the impugned order dated 10.02.2010, relying upon its earlier decision dated 29.08.2008, dismissed the Revenue's appeal. It is against that order, this appeal under Section 260A of the Income Tax Act, 1961, has been filed. 4. To answer the substantial question of law, we have to consider why the ITAT, in its order dated 29.08.2008 for the Assessment Year 2003- 04 allowed the appeal of the as....
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....SOT 639 (Mumbai) (ii) Birla Sunlife (AMC) Ltd. v. ACIT, Central Cir.I, Mumbai i ITA No.5980/Mum/2000, AY 1995-96 dated 04.06.2004. (ii) JCIT, Special Range -5, Mumbai v. M/s.Alliance Capita Asset Management (I) Pvt.Ltd. in ITA Nos.4180 & 4181/Mum/1999, AY 1996-97 and 1995-96 dated 12.04.2004 (iv) M/s.GIC Asset Management Company Limited, Mumbai v. ne 2(1) Mumbai in ITA No ACIT, Range 2(1), Mumbai in ITA No.479/Mum/2002, AY 1998-99 dated 29.09. (v) SBI Funds Management P.Ltd. v. ACIT, Range 3(3), Mumbai in ITA No.4001/Mum/2002, AY 1997-98 dated 27.06.2007. 11. Shri Sunil Babu, the Id.DR supported the orders of the AO and the CIT(A). He vehemently argued saying that the order of the CIT(A) needed to be upheld. He placed reliance on the decision of the Madras High Court in the case of T. N. Power Finance and Infrastructure Development Corporation Ltd. v. Jt. CIT [2006] 280 ITR 491(Mad) 12. We have considered the rival submissions in the light of material on record and the precedents cited. Before proceeding further we like to look at the manner in which the business of a mutual fund is carried on - its business model, the parties i....
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....s and Regulations." 16. It is seen that the Mutual Fund Launch Expenses aggregating to Rs. 26,38,776 were incurred on postage, travel and conveyance, meetings and conference, advertisement, and printing and stationery. The details are given at page 79 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 page 80 of the paper book, are as under. S.No. Particulars Amount (Rs.) 1 Advertisement & 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 6 Distributors Expenses 40,29,856 7 Entertainment Expenses 6,83,509 8 Franchisee Fees 3,86,030 Total 1,61,61,087 17. The AO disallowed the assessee's claim for the reasons given in his order as under. 5) The assessee has claimed a sum of Rs.26,38,776 us mutual fund launch expenses and a sum of Rs.1,61,61,088 as mutual fund promotion expenses. The assessee was requested to explain why the above expenses should not be capitalize....
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.... No.52 of the SEBI (Mutual Fund) Regulation, 1996 reads as under. "Limitation on fees and expenses on issue of schemes 52. (1) All expenses should be clearly identified and appropriated in the individual schemes. (2) The Asset Management Company may charge the mutual fund with investment and advisory fees which are fully disclosed in the offer document subject to the following namely :- (i) One and a quarter of one per cent of the weekly average net assets outstanding in each accounting year for the scheme concerned, as long as the net assets do not exceed Rs. 100 crores, and (ii) One per cent of the excess amount over Rs.100 crores, where net assets so calculated exceed Rs. 100 crores. (3) For schemes launched on a no load basis, the asset management company shall be entitled to collect an additional management fee not exceeding 1% of the weekly average net assets outstanding in each financial year. (4) In addition to the fees mentioned in sub-regulation (2), the asset management company may charge the mutual fund with the following expenses, namely :- (a) initial expenses of launching schemes; (b) re....
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....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 15 April, 1997] for those schemes of mutual funds which have been launched prior to notification of these regulations." 20. The expenses, that are to be paid by the Trustees on behalf of the Mutual Fund to the assessee -AMC, as given in Schedule 2 of the aforesaid tri-partite agreement dated 18.07.1996, are as under. "The following expenses are to be paid by the Trustees on behalf of the Mutual Fund :- (1) The Asset Management Company may charge the Mutual Fund with Investment Management Fees for a scheme of the Mutual Fund disclosed fully in the Placement Memorandum for the scheme subject to the following ceiling: (a) The annual rate of 1.25% of the weekly average net assets for the scheme concerned, as long as such net asset value does not exceed Rs. 100 crores, and (b) The annual rate of 1% of the excess amount over Rs. 100 crores, where such net asset value so calculated exceeds Rs. 100 crores, Suc....
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....d 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 tri-partite agreement dated 18.07.1996 shows that the assessee was under a contractual obligation to incur these expenses. The Schedule 2 to the tri-partite agreement as reproduced above makes this point abundantly clear. The SEBI (Mutual Fund) Regulation, 1996 says that the initial issue expenses, in excess of 6% will be borne by the AMC. The Regulation No.25 is reproduced in the above paragraph. 21.1 The AO disallowed the assessee's claim on the ground that the assessee- company was the fund manager for the Mutual Fund and did not need to incur the Mutual Fund Launch Expenses and the Mutual Fund Promotion Expenses. In our considered opinion the reason given by the AO, on the facts of the case, is devoid of any merit and his decision is unsustainable. The AO cannot claim to put himself in the arm-chair of the assessee and assume the role to decide whether to incur an e....
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....d "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 section 37(1) was 'purpose of business', and in this connection, the discussion at page 624 of The Law and Practice of Income Tax (Eighth Edition) by N. A. Palkhivala, is relevant, and it reads as under: "Purpose of business. - Before the corresponding section in the 1922 Act was amended in 1939, allowance was given in respect of any non-capital expenditure "incurred solely for the purpose of earning such profits or gains". Under the present law the expenditure should be laid out "wholly and exclusively for the purposes of the business". The two expressions are not synonymous; the latter is wider than the former. Expenditure may be for the purpose of the business although it may not be incurred for the purpose of earnin....
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....put himself in the arm chair of the assessee and assume the role to decide whether to incur the expenses and how much is a reasonable expenditure, having regard to the circumstances of the case. 7. For this view, we are also supported by the view expressed by a Division Bench of the Bombay High Court in Mahindra and Mahindra Ltd. vs. Commissioner of Income Tax [2023] 151 taxmann.com332 (Bombay), which was authored by one of us (Chief Justice). 8. In that case, Mahindra was a promoter holding more than 27% of the equity shares of its group company called Machinery Manufacturers Corporation Ltd ("MMC"). It had to incur certain miscellaneous expenses amounting to Rs. 42,89,185/- on behalf of MMC. It also had to recover a sum of Rs. 6,22,01,000/- which was not allowed to be written-off. Mahindra had also provided guarantee of Rs. 200 lakhs to IDBI for the rehabilitation assistance disbursed by IDBI to MMC. Mahindra, to preserve and protect the value of good-will attached to it, decided to bear the unavoidable expenditure of Rs. 42.89 lakh of MMC and included the same in miscellaneous expenses. The Assessing Officer disallowed the same as also the amount of Rs. 6,22,01,000/- that ....
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....td. V/s. Atherton [1926] AC 205. 26 In Commissioner of Income Tax, Delhi V/s. Delhi Safe Deposit Co. Ltd.8 the Apex Court was examining whether the amount in question can be treated as an expenditure laid out or expended wholly and exclusively for the purposes of the business of the assessee which is admissible as a deduction under Section 37 of the Act when the assessee was claiming deductions on the ground that the expenditure was incurred due to commercial expediency. In that case also the assessee had incurred the expenditure in question to avoid any adverse effect on its reputation like the case at hand. The Apex Court held that the expenditure incurred was a deductible expenditure. In fact that was the case where three persons A, B and the assessing company, which had also other businesses, were partners in a managing agency firm with 50%, 25% and 25% shares, respectively. At the instance of A, a large sum of money was advanced by the managed company to another firm at Calcutta. When the demand for repayment was made, the Calculta firm repudiated the claim and, out of the loss of Rs. 1,90,092/- to the managed company, the sum of Rs. 95,092/- was agreed to be borne by....
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....id out or expended wholly and exclusively for the purposes of the business of the assessee which is admissible as a deduction under s. 37 of the Act. It is no doubt true that the solution to a question of this nature sometimes is difficult to arrive at. But, however difficult the task may be, a decision on that question should be given having regard to the decisions bearing on the question and ordinary principles of commercial trading and of commercial expediency. The facts found in the present case are that the assessee was carrying on business as a partner of the managing agency firm and it also had other businesses, the managing agency agreement with the managed company was a profitable source of income and that the assessee had continuously earned income from that source. But on account of the negligence on the part of one of its partners, there arose a serious dispute which could have ordinarily resulted in a long drawn out litigation between the managing agency firm and the managed company affecting seriously the reputation of the assessee in addition to any pecuniary loss which the assessee as a partner was liable to bear on account of the joint and several liability arising....
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....(1927) 1 KB 719; 1 1 TC 372, held that the money spent on getting rid of a director and saving the company from scandal was deductible. Affirming the above view, the Court of Appeal (whose judgment appears at p. 731) held that as the payment was not made to secure an actual asset so as effectually to increase the capital of the company but was made in order to enable the directors to carry on the business of the company as they had done in the past unfettered by the presence of the retiring director, which might have had a bad effect on the credit of the company, it must be treated as revenue and not as capital expenditure and was deductible as such for income-tax purposes. The true test of an expenditure laid out wholly and exclusively for the purposes of trade or business is that it is incurred by the assessee as incidental to his trade for the purpose of keeping the trade going and of making it pay and not in any other capacity than that of a trader. In CIT v. Malayalam Plantations Ltd. [1964] 7 SCR 693; 53 ITR 140, 180, Subba Rao J. (as he then was) summarised the legal position, at p. 705, thus: The aforesaid discussion leads to the following result: The expr....