2012 (6) TMI 629 - AT - Income Tax

Validity of revisionary order passed u/s 263 - Asset Management Company - initial issue/launch expenses - revenue expenditure or capital expenditure - Held that - It is found that SCN u/s 263 was specific and related to the question as to whether the expenditure was capital or revenue. However, while passing the order u/s.263, the CIT proceeded on a totally different directions by treating the expenditure as revenue expenditure and further examined the question as to whether the they can be claimed in one year or have to be amortized as contemplated by the SEBI Regulations and decision in case of Madras Industrial Investment Corporation. No opportunity being given to assessee to explain its stand on amortization of initiation expenses. The action of the CIT in revising the order of the AO on this basis cannot be sustained. Further, as to whether the decision in case of Madras Industrial Investment Corporation (1997 (4) TMI 5 (SC)) will be relevant in the context of an AMC which manage funds on behalf of mutual fund companies and derives income from managing a fund in the form of fee for managing the fund, is again debatable. On such debatable issues where two views are possible jurisdiction u/s.263 is not to be exercised. We accordingly hold that exercise of jurisdiction u/s.263 could not have been made. In the result the order u/s. 263 of the Act, in so far as it relates to the initial issue expenses, are hereby quashed - Decided in favor of assessee.

Summary

Issues Involved:

1. Disallowance of Initial Issue Expenses
2. Nature of Initial Issue Expenses (Capital or Revenue)
3. Amortization of Initial Issue Expenses
4. Jurisdiction under Section 263 of the Income Tax Act
5. Merger Doctrine and its Applicability

Detailed Analysis:

1. Disallowance of Initial Issue Expenses:
The assessee, an Asset Management Company (AMC), incurred initial issue expenses for launching new mutual fund schemes. The AO disallowed Rs. 82,000 of these expenses, arguing that the expenses should have been borne by the mutual fund and not the AMC, as per SEBI Regulations. The CIT(A) deleted this disallowance, following the precedent set in the assessee's own case for AY 2000-01, where it was held that such expenses are integral to the business of the AMC and allowable under section 37(1) of the Income Tax Act.

2. Nature of Initial Issue Expenses (Capital or Revenue):
The CIT, exercising powers under section 263, considered the initial issue expenses as capital in nature, arguing that they provided an enduring benefit. However, the ITAT noted that the CIT had deviated from the show-cause notice, which only questioned whether the expenses were capital or revenue. The ITAT referenced its own earlier decisions and the Supreme Court's ruling in CIT v. Mahendra Mills, emphasizing that an option (to charge expenses to the mutual fund) cannot be treated as an obligation.

3. Amortization of Initial Issue Expenses:
The CIT argued that even if the expenses were revenue in nature, they should be amortized over five years as per SEBI Regulations and the Supreme Court's decision in Madras Industrial Investment Corporation Ltd. The ITAT, however, found that the CIT had not provided specific SEBI regulations mandating such amortization and that the SEBI guidelines were not necessarily relevant for tax computation under the Income Tax Act.

4. Jurisdiction under Section 263 of the Income Tax Act:
The ITAT held that the CIT's revision under section 263 was not justified because the CIT had introduced a new basis (amortization) not covered in the original show-cause notice. The CIT's action was deemed unsustainable as it did not provide the assessee an opportunity to explain its stand on amortization during the revision proceedings.

5. Merger Doctrine and its Applicability:
The ITAT considered whether the order of the AO, which was revised by the CIT, had merged with the order of the CIT(A). The ITAT concluded that the CIT(A) had only considered the disallowance of Rs. 82,000 and not the entire Rs. 13.52 crores claimed by the assessee. Therefore, the CIT(A)'s order did not cover the broader issue of initial issue expenses, and the CIT's revision was not barred by the doctrine of merger.

Conclusion:
The ITAT quashed the CIT's order under section 263 regarding the initial issue expenses. The appeal by the assessee was allowed, emphasizing that the CIT had overstepped by addressing issues not covered in the show-cause notice and that the SEBI regulations were not binding for tax computations under the Income Tax Act. The ITAT also highlighted that on debatable issues where two views are possible, jurisdiction under section 263 should not be exercised.