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Bombay High Court
The Commissioner Of Income … vs M/S. Templeton Asset Management … on 12 September, 2011
Bench: J.P. Devadhar, K. K. Tated
                                           1                        43 ITXA 1043-10.doc

                IN THE HIGH COURT OF JUDICATURE AT BOMBAY
                    ORDINARY ORIGINAL CIVIL JURISDICTION
K




                                                                              
                     INCOME TAX APPEAL NO. 1043 OF 2010




                                                      
    The Commissioner of Income Tax-Central-III                    .. Appellant
    R.No.109, Aayakar Bhavan,




                                                     
    M.K.Road, Mumbai 400 020.

          Vs.




                                         
    M/s. Templeton Asset Management (India)
    Pvt. Ltd.             
    First Floor, Sahakar Bhavan,
    Nariman Point,
    Mumbai - 400 021                                              .. Respondent.
                         
    Mr. Suresh Kumar a/w Ms. Padma Divakar for the Appellant.
    Mr. F.V. Irani a/w Mr. A.K. Jasani for the Respondent.
      
   



                              CORAM        : J.P. DEVADHAR & K.K. TATED, JJ.
                              DATE         : 12TH SEPTEMBER, 2011.





    JUDGMENT:(Per J.P. Devadhar, J.)


    1     The Appeal is admitted on the following questions of law and taken 





    up for hearing by consent of the parties:  



    a)    Whether, on the facts and in the circumstances of the case, the Hon'ble  

Tribunal, in law, was justified in upholding the order of the learned CIT (A) in

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not sustaining the addition made by the Assessing Officer being the difference
between the amount of investment advisory fees computed at the maximum

rates specified in Regulation 52(2) of the Securities and Exchange Board of
India (Mutual Fund) Regulation, 1996 (SEBI Regulations) and actually

charged by the Assessee?

b) Whether, on the facts and in the circumstances of the case, the Hon’ble

Tribunal, in law, was justified in upholding the order of the learned CIT (A) in
not sustaining the addition made by the Assessing Officer relating to the

recurring and marketing expenses without appreciating the fact that this
amount of expenditure the AMC was empowered to charge under SEBI

Regulations to the Mutual Fund, but it has charged the same to its own
accounts, thereby reducing its taxable income, and hence not be allowable as

deduction in view of the provisions of section 37(1) of the Income Tax Act,
1961?

c) Whether, on the facts and in the circumstances of the case, the Hon’ble

Tribunal, in law, was justified in upholding the order of the learned CIT (A) in
not sustaining the addition made by the Assessing Officer being towards 2/3 rd
share of recurring expenses in excess of the limits specified in Regulation 52

(7) of SEBI Regulation which was borne by the Assessee without appreciating
the fact that the amount of expenditure, which becomes the liability either of
the sponsor or the trustee of the Mutual Fund, is not deductible under section

37(1) of the Income Tax Act in the hands of the Assessee Company”

d) Whether, on the facts and in the circumstances of the case, the Hon’ble
Tribunal, in law, was justified in upholding the order of the learned CIT (A) in
not sustaining the disallowance made by the Assessing Officer of initial issue

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expenses of the Mutual Fund Scheme incurred by the Assessee which pertain to
the business of the Mutual Fund, without appreciating the fact that these are

the expenses incurred by the Assessee Company on behalf of Mutual Fund and
are pertaining to Schemes which are of Mutual Fund which the Assessee

Company was empowered by the SEBI Regulations to charge to the Mutual
Fund Scheme?

2 The Assessment Year involved herein is A.Y. 2003-2004.

3 The Assessee is a private limited company engaged in the business of

Asset Management of Mutual Funds. In the Assessment Year in question, the

Assessing Officer on noticing that the Assessee has claimed investment

advisory fees, less than the ceiling prescribed under Regulation 52 of the

Securities and Exchange Board of India (Mutual Funds) Regulations, 1996

added the differential amount to the income of the Assessee.

4 The CIT (A) as also the ITAT have held that the SEBI Regulation 52

provides for the maximum limit towards the fees that could be charged by

an Asset Management Company from the Mutual Funds. Due to the

business exigencies if the Assessee an Asset Management Company collects

lesser amount of fees than the ceiling prescribed, it is not open to the

Assessing Officer to make additions on notional basis merely because the

amount of fees actually claimed is less than the maximum ceiling prescribed

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under the SEBI Regulation. It is not the case of the Revenue that the

Assessee has recovered investment advisory fees more than what is said to

have been claimed by the Assessee. Therefore, the fact that the SEBI

Regulation provides for the maximum limit on the investment advisory fees

that could be claimed, it cannot be said that the Asset Management

Companies are liable to be assessed at the maximum limit prescribed under

the SEBI Regulations, irrespective of the amount actually recovered by the

Asset Management Companies. In these circumstances, the decision of the

ITAT in deleting the additions made by the Assessing Officer on notional

basis namely, the difference between the amount claimed and recovered by

the Assessee and the maximum ceiling prescribed under the SEBI

Regulation cannot be faulted. Thus, the first question is answered in the

affirmative, that is in favour of the Assessee and against the Revenue.

5 The second question relates to the recovery of the marketing expenses

incurred by the Assessee on behalf of the Mutual Funds. In the present case,

the Assessee had recovered part of the marketing expenses from the Mutual

Funds and the balance of the marketing expenses were borne by the

Assessee itself. The Assessing Officer was of the opinion that when

Regulation 52 (6) of the SEBI Regulation empowers the Assessee to recover

the marketing expenses up to the ceiling prescribed therein, the Assessee

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was not justified in charging part of the marketing expenses to its own

account, thereby reducing its taxable income. Accordingly, the Assessing

Officer added the differential amount to the income of the Assessee. The

CIT (A) as also the ITAT have deleted the addition

6 In the present case, it is not in dispute that though the Assessee was

entitled to recover entire marketing expenses incurred on behalf of the

Mutual Funds, the Assessee has in fact claimed part of the expenses from

the Mutual Funds and absorbed the balance expenditure as a matter of

commercial prudence. The Assessing Officer has not disbelieved the case of

the Assessee that only a part of the expenses incurred has been recovered

from the Mutual Funds on account of commercial prudence. In these

circumstances, the fact that the Assessee could have collected the entire

amount of expenses from the Mutual Fund as per Regulation 52(6) of the

SEBI Regulation cannot be a ground to make addition in the hands of the

Assessee, especially when the bonafide decision of the Assessee to claim

part of the expenses from the Mutual Funds is not doubted and the

expenditure claimed to have been incurred by the Assessee is also not

doubted.

7 In the result, in our opinion, the ITAT was justified in holding that

Regulation 52 (6) of the SEBI Regulation merely provides for a ceiling on

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expenses that could be charged to the Mutual Funds and where an Asset

Management Company does not charge the Mutual Funds part of the

expenses actually incurred due to bonafide commercial decision, then, no

part of the expenditure can be disallowed and consequently the addition

made on account of disallowance cannot be sustained. In the result, the

second question is answered in the affirmative, that is, in favour of the

Assessee and against the Revenue.

8

Similarly, the third and fourth questions relate to deleting the

disallowances made by the Assessing Officer. Regulation 52 (7) provides

that any recurring expenditure in excess of the limit specified in sub-

regulation (6) may be borne by the Asset Management Company or by the

Trustee or by the Sponsors. As the Assessee claimed deduction of the entire

expenditure incurred on behalf of the mutual funds instead of recovering

2/3rd of the expenditure from the Trustee/Sponsors, the Assessing Officer

disallowed 2/3rd of the expenses and added the same to the income of the

Assessee. Similarly, initial issue expenses incurred on behalf of the Mutual

Funds were disallowed on the ground that the Assessee was entitled to

recover the same from the Mutual Funds. The ITAT deleted additions on the

ground that merely because, the SEBI Regulation empowers the Assessee to

recover the above expenditure, disallowance of the expenditure cannot be

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made if the Assessee decides not to recover part of said expenditure from

the Mutual Funds/Trustees/Sponsors. The restrictions under the SEBI

Regulations are imposed with a view to ensure that the Mutual Funds are

not overcharged and the said Regulations are not intended to mandatorily

saddle the Mutual Funds with the liability set out in the Regulations.

9 In the present case, genuineness of the expenditure incurred by the

Assessee on behalf of the Mutual Funds is not in dispute. If the assessee, an

Asset Management Company, due to business exigencies claims and

recovers from the Mutual Funds lesser amount than the amount of

expenditure actually incurred during the course of its business, then, unless

it is established that there were no business exigencies or the claim was not

genuine, the expenditure incurred cannot be disallowed and added to the

income of the Assessee. Accordingly, the third and fourth questions are

answered in the affirmative, that is in favour of the Assessee and against the

Revenue.

10 The Appeal is disposed of in the above terms with no order as to

costs.

(J.P. DEVADHAR, J.)

(K.K. TATED, J.)

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