2008 (12) TMI 781 - HC - Income Tax

Summary

Issues involved:
1. Whether the ITAT was justified in upholding the deletion of disallowance of capital expenditure on initial issue expenditure on mutual funds.
2. Whether the ITAT was justified in upholding the deletion of disallowance of capital expenditure on professional and legal charges.
3. Whether the ITAT was justified in ignoring the decision of the Supreme Court in M/s. Brook Bond India Ltd. Vs. CIT regarding disallowance of expenditure to increase share capital.

Issue 1: Capital Expenditure on Mutual Funds
The Tribunal found that the initial expenses incurred for raising capital were in nature and could not be allowed as revenue expenditure. However, it noted that the capital raised was not for the assessee but for the mutual funds, which are independent entities. As the capital structure of the assessee did not increase by the capital raised for mutual funds, the expenses were considered to be part of the profit-making activity of the assessee's asset management business. The Tribunal concluded that the expenses were not capital in character as they did not result in the creation of any capital asset and did not provide any long-lasting benefit. Therefore, the expenses incurred by the assessee for its own business of asset management could not be disallowed as capital expenses by linking them with the raising of funds for the mutual fund schemes.

Issue 2: Professional and Legal Charges
The Tribunal also upheld the deletion of disallowance of capital expenditure on professional and legal charges. It was argued that this expenditure was incurred towards the issue of capital and should be disallowable in computing the total income of the assessee. However, the Tribunal found that there was no valid basis to treat these expenses as capital in nature. The expenses were considered to have a direct nexus with the assessee's asset management business and were part of its profit-making activity. It was emphasized that no enduring benefit had been derived from incurring these expenses, and they were deemed to be independent activities of the assessee's business, not linked to the mutual fund schemes.

Issue 3: Ignoring Supreme Court Decision
Regarding the decision of the Supreme Court in M/s. Brook Bond India Ltd. Vs. CIT, which held that expenditure incurred to increase share capital is disallowable, the ITAT was found to have ignored this precedent. However, the Tribunal's reasoning in the present case was based on the specific circumstances and nature of the expenses incurred by the assessee for its asset management business, which were deemed to be revenue in nature rather than capital.

In conclusion, the High Court dismissed the appeal as it did not find any substantial question of law involved based on the Tribunal's findings and the specific details of the case.