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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