2016 (5) TMI 1310 - AT - Income Tax

Allowing the claim of expenses i.e. compensation on account of redemption of units - Held that - We are of the view that in the present case the unit holders, who made claim with the transfer agent, are entitled for return of their money invested in assessee s mutual fund. Even the SEBI Regulation states so and if there is violation of the same, SEBI can prosecute the assessee. It means that the liability paid by assessee is in the nature of statutory as well as contractual. The assessee has paid the legitimate claim of the unit holders, who have lodged the claim with the Registrar and Transfer Agent of the issue. We are of the view that this expenditure is incidental to trade itself and Assessing Officer cannot ignore the same. We are of the view that even this comes within the ambit of commercial expediency for the reason that this is indirectly for facilitation of carrying on of the business of the assessee. In view of this reasoning, we allow the claim of the assessee and the orders of the lower authorities on this issue are reversed. This issue of assessee s appeal is allowed. Disallowance of claim of assessee in respect to redemption of units on forced redemption request in the case of TIFPL - Held that - We find that the assessee kept the demand alive for the claim of the provision on account of this embezzlement in the AY 2005-06 also. The assessee in the financial year relevant to this assessment year paid to TIFPL an amount of ₹ 4,42,73,539 vide cheque No.112500 dated 28/7/2006 as full and final settlement for the pending dispute. This payment was made against the opening provision of ₹ 3.92 corers provided in the FY 2004-05. The assessee accordingly claimed ₹ 3,92,15,599 on payment basis and also ₹ 50,57,940 which was paid to TIFPL on account of the interest accrued on such liability. The AO has allowed the claim of ₹ 3.92 crores, however, did not allow the claim of ₹ 50,57,940 on the ground that the assessee has filed suit against the various parties and therefore, the claim has not reached its finality. We find that the assessee has been pursuing his claim with the Banking Ombudsman as well as filing of an FIR with the Police but no result was coming out of the same. The fact that the assessee had paid a sum of ₹ 4,42,73,539 has not been denied by the AO. The assessee has reached the settlement after waiting so long and paid the final amount to TIFPL and finally settled the issue with TIFPL. In the present case before us the assessee had pursued the matter and side by side made payment to TIFPL on account of redemption of debentures, which has rightly been paid to the legitimate party and claimed the same as deduction. In the given facts and circumstances, we are of the view that the CIT(A) has rightly allowed the claim of the assessee and we confirm the same.

Summary

Issues Involved:
1. Disallowance of compensation paid to investors.
2. Deletion of disallowance claimed by the assessee on account of embezzlement.

Issue-wise Analysis:

1. Disallowance of Compensation Paid to Investors:

The primary issue raised by the assessee was the disallowance of compensation amounting to ?50,86,434/- paid to investors. The assessee argued that this compensation was paid as per statutory regulations of SEBI and Mutual Fund guidelines, and thus should be considered a business loss allowable under section 37 of the Income Tax Act.

The Assessing Officer (AO) disallowed the claim, stating that the assessee, being an Asset Management Company, was not liable for the compensation as the responsibility lay with the mutual fund. The CIT(A) upheld this view, noting that once the account is settled with the mutual fund, any subsequent liability rests with the mutual fund and not the assessee.

Upon appeal, the Tribunal found that the assessee, as an Asset Management Company, was responsible for day-to-day activities including fund raising, issuance of units, and management of funds. The Tribunal noted that the compensation paid was in accordance with SEBI regulations and was necessary to safeguard the business interest against complaints which could lead to SEBI violations. The Tribunal concluded that the expenditure was incidental to the trade and allowed the claim of the assessee, reversing the orders of the lower authorities.

2. Deletion of Disallowance Claimed by the Assessee on Account of Embezzlement:

The Revenue contested the deletion of disallowance of ?50,57,940/- claimed by the assessee as interest on the embezzled amount. The embezzlement involved fraudulent redemption of units amounting to ?3.65 crores, which was discovered and for which an FIR was lodged. The assessee had created a provision for this loss in FY 2003-04, which was initially disallowed by the AO and upheld by CIT(A) and ITAT as premature.

In the year under consideration, the assessee made a full and final settlement payment of ?4,42,73,539/- to TIFPL, which included the previously provisioned amount and an additional ?50,57,940/- as interest. The AO allowed the provisioned amount but disallowed the additional interest, arguing that the claim had not reached finality due to ongoing suits against various parties.

The CIT(A) allowed the claim, stating that the payment to TIFPL was a legitimate settlement and the pursuit of recovery from fraudulent parties did not affect the legitimacy of the settlement payment. The Tribunal upheld this view, noting that the payment was necessary and legitimate, and confirmed the CIT(A)'s decision to allow the claim.

Conclusion:

In conclusion, the Tribunal allowed the appeal of the assessee regarding the disallowance of compensation paid to investors, recognizing it as a legitimate business expenditure. On the issue of embezzlement, the Tribunal upheld the CIT(A)'s decision to allow the additional interest claimed by the assessee, dismissing the Revenue's appeal. The judgment emphasized the importance of business expediency and statutory obligations in determining the allowability of such expenses.