TaxTMI 
TaxTMI 
2025 (6) TMI 1145
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....see 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 assessee. For that, it will be useful to reproduce the relevant portions of th....
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....a 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 involved, the legal frame work, 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 ....
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....s 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 capitalized. The assessee in his letter dated 28.02.2006 has stated that the expenses are incurred by the company, since the company is an Asset Management company involved in managing mutual funds scheme and the expenses under the relevant heads are incurred in the normal course of business. The company is acting as fund managers and the income earned by the assessee is in the advisory capacity as the fund manager of the mutual fund sc....
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....verage 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) recurring expenses including :- (i) marketing and selling expenses including agents' commission, if any; (ii) brokerage and transaction cost; (iii) registrar services of transfer of units sold or redeemed; (iv) fees and expenses of trustees; (v) audit fees; (vi) custodian fees; ([vii) costs related to investor communication; (viii) costs of fund transfer from location to location; (xi) costs of providing account statements and dividend/ redemption cheques and warrants; (x) insurance prem....
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....e 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, Such fee to accrue daily and be payable in arrears on the last working day of a month. (2) In addition, the Asset Management Company may charge the Mutual Fund with the following expenses up to the limits mentioned hereinafter. (a) Initial issue costs of sponsoring Mutual Fund and its schemes, including the preparation and distribution of the scheme's prospectus and other offer documents and fees and expenses of accountants, attorneys and other third party service providers. (b) Recurring expenses including: (i) Marketing and selling expenses including Agent's Commission, if any; (ii) Brokerage and transaction costs; and (iii) Registrar services for transfer of shares sold or redeemed (3) The Asset Mana....
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....ual 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 expenditure and how much is reasonable expenditure having regard to the circumstances of the case. The expression "wholly and exclusively" used in section 37(1) of the I.T.Act 1961, does not mean 'necessarily'. Even an expenditure incurred 'voluntarily' without any 'necessity', would be permissible for deduction u/s. 37(1) if it was incurred for promoting the assessee's business. We have seen in the above paragraphs that in the present case the assessee was ander a contractual obligation to incur these expenses. 22. The expression 'wholly and exclusively' used in section 37(1) of the I.T.Act 1961 was the subject matter of discussion by the Supreme Court in the case of Sassoon J. David and Co. P. Ltd. v. CIT [1979] 118 ITR 261 (S.C). In that case, the court held that the expression "wholly and exclusively" used in section 10(2)(xv....
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....ent 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 earning the profits of the business. This is established by the decision of the Supreme Court. Subba Rao J, speaking for the Supreme Court, observed in CIT v. Malayalam Plantations Ltd, "The expression 'for the purpose of the business' is wider in scope than the expression 'for the purpose of earning profits. ------- The law directs attention to the purpose for which, and not to the motive with which, the expenditure is incurred." 24. In the case of Indian Aluminium Co. Ltd. v. CIT [1972] 84 ITR 735, it was held by the Supreme court that if the expenditure laid out by the assessee was 'incidental' to the carrying on of his business, it should be allowed. 25. In the case of S.A. Builders Ltd. v. CIT(A) [2007] 288 ITR 1(SC), the Supreme Court held that once it was established that there was nexus between the expenditure and the purpose of the business (which need not necessarily b....
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....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 it had written-off. The Court held that since the expenditure was wholly incurred for the purpose of commercial expediency because MMC was a group company of Mahindra and the nexus between Mahindra and MMC was not disputed, the AO failed to appreciate the claim in its proper perspective. The expenditure/debts should be treated as having been incurred for the purpose of business and directly relatable to the business of the assessee and thus eligible for deduction as business expenditure/loss in Mahindra's return of business income. 9. It will be apposite to reproduce paragraphs 25 to 27 of Mahindra and Mahindra (supra). "25. One can understand the Assessing Officer had disallowed these amounts after arriving at a conclusion that the decision to incur the expenses mentioned above or the debts mentioned above was not bonafide. That is not the case. Whether to treat the debt as bad debt or as business loss/deduction under Section 28 of th....
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....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 B, the assessee company and D, who was the brother of A, who was inducted into the managing agency firm as partner in place of A. The assessee's claim to have the sum of Rs. 9,500/- which was paid by it to the managed company during the previous year relevant to the assessment year 1962-1963 in partial discharge of its liability of Rs. 47,500/- deducted as business expenditure, was disallowed by the Income Tax Officer and the AAC confirmed the order of the Income Tax Officer on the ground that the amount was actually the loss of a firm which was no longer in existence, that the loss had been borne by the assessee on personal considerations and that the managing agency firm had not claimed the loss in its return. The Appellate Tribunal reversed the order of the AAC and allowed the assessee's claim on the ground that though there was a change in the constitution of the firm, the assessee's liability had not ceased, that since the assessee was a co....
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....cy 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 under the law of partnership. The settlement arrived at between the parties prevented effectively the hazards involved in any litigation and also helped the assessee in continuing to enjoy the benefit of the managing agency which was a sound business proposition. It also assisted the assessee in retaining the business, reputation unsullied which it had built up over a number of years. It is also material to notice here that it was not shown that the settlement was a gratuitous arrangement entered. into by the assessee to benefit the defaulting partner, exclusively even though he might have been benefited to some extent. It is no doubt true that it was voluntary in character but on the facts and in the circumstances of the case, whether it would make any difference at all is the point for consideration. Dealing with the question whether an expenditure incurred by a brewery in aid of their tenants of tied houses as a necessary incident of the profitable working of....
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....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 expression for the purpose of the business' is wider in scope than the expression for the purpose of earning profits. Its range is wide: it may take in not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend 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 per- son carrying on the business. In the instant case, the assessee incurre....