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TMI Blog2012 (6) TMI 629X X X X Extracts X X X X X X X X Extracts X X X X ..... m 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. - ITA No.3858/Mum/2010 - - - Dated:- 27-1-2012 - N V Vasudevan, R K Panda, JJ. For Appellant: Shri F V Irani For Respondent: Shri Pavan Ved ORDER Per: N V Vasudevan: This is an appeal by the assessee against the order dated 31/3/2010 of CIT, Central-3, Mumbai relating to the assessment year2005-06 passed under section 263 of the Act. 2. The facts and circumstances under which the order under section 263 was passed are as follows: The assessee is an Asset Management Company (hereinafter referred to as AMC ) managing various funds of Franklin Templeton Mutual Funds established by M/s. Templeton Worldwide Incorporated. During the previous year the assessee launched new schemes of mutual funds and that connection incurred expenditure which will hereinaf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the new schemes 50s Plus Floating Rate Plus in FT India Life Stage FOF and TGSF, the total launch expenses were 25.93 lacs and Rs.25,000 respectively. As per the offer document approved by SEBI it had permitted 6% of the amount collected by the fund through new issue to be borne by the Fund. The amount collected by the fund through new issue in the case of 50s Plus Floating Rate Plus in FT India Life Stage FOF was Rs.5,073 lacs and TGSF Rs.10,745 lacs. 6% of the amount collected would be more than the total launch expenses actually incurred for launching these schemes. The Assessee as AMC did not charge the entire launch issue expenses to the fund but charged a sum of Rs.57,000 and Rs.25,000/- to itself in respect of the new schemes launched viz., 50s Plus Floating Rate Plus in FT India Life Stage FOF and TGSF respectively. According to the AO 6% of the total amount raised by the issue of the new scheme that would have taken care of the entire launch expenses and the assessee need not have spent a sum of Rs.82,000/-(see Annexure-1 given to this order for the calculation of Rs.82,000). On this basis the AO completed the assessment making the addition of Rs. 82,000/-. The relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gard were as follows: I have carefully considered the contentions put forth by the Counsel for the appellant. On going through the relevant clauses of the SEBI Regulations, it is clear that the launching of the schemes of the fund is an integral part of the business of the asset management company. Any expense incurred in course of that business are allowable under section 37(1) of the Income Tax Act, 1961 (the Act) if these expenditure satisfy the tests laid down therein. The expenses incurred by the Appellant for 1aunchtig schemes of TMF are no doubt expenses incurred in connection with the appellant s business. Further, these expenses have to be incurred by the appellant as a part of its normal business activity. I find considerable force in the submissions made by the learned Counsel for the appellant on this account Sub-Regulation (4) of Regulation 52 has used the term may thereby conferring an option To the appellant to charge these expenses to TMF. The language of the investment management agreement between the appellant and the trustee of TMF is similar to the language in the Regulations. Also, the offer document of the schemes launched by TMF during the year under co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a deduction. The relevant observation of the CIT in the show cause notice under section 263 is as under: You have claimed launch expenses of Rs. 13.53 crores which has been allowed in the assessment or to the extent of Rs. 13.52 crores. The said expenses is incurred for launching of scheme of mutual fund and accordingly is an expense giving enduring benefit and on capital account. In view of the same, the said expense cannot be allowed as a revenue expenditure. We have already seen that during the previous year the Assessee launched 4 new Schemes viz., 1. 50s Plus Floating Rate Plus in FT India Life Stage FOF 2. TGSF 3. Franklin India SIP 4. Flexi Cap Fund (FIFCF) From Annexure-1 to this order it can also be seen that in respect of the initial expenses or launch expenses of these funds an expenditure of Rs.56.66 crores had been incurred. Out of the aforesaid expenses, the Assessee had borne on its own Rs.13.53 crores and it had charged the fund expenses to the tune of Rs.43.13 crores. Out of the sum of Rs.13.53 crores a sum of Rs.87,000 was only disallowed and the circumstances under which the said disallowance was made has already been set out in the earlier ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... portionate initial issue expenses or part thereof remaining unamortized, from the repurchase proceeds. Regulation 49(3B) of the regulations gives the conditions referred to Regulation 49(3A) and it says that the initial issue expense in respect of Schemes launched after 22.5.2006 should have charged the initial issue expenses in accordance with the tenth schedule to the Regulations. Even these regulations may not apply to the case of the Assessee because the Schemes launched by the Assessee were before 22.5.2006. Be that as it may, we will proceed to examine the contentions before us in the light of submissions made by the parties before us. 11. Thereafter the CIT held that the assessee ought to have claimed the expenditure of Rs. 13.53 crores being initial launch expenses of the scheme over a period of 5 years as specified in the SEBI Regulations. The CIT, thereafter made a reference to the decision of the Hon ble Supreme Court in the case of CIT vs. Madras Industrial Investment Corporation Ltd. 225 ITR 802 (SC) , wherein the Hon ble Supreme Court held that revenue expenses which would result in benefit over a number of years should be amortized and spread over and claimed as d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not a subject matter of the show cause notice under section 263 of the Act, but the same was considered by the CIT in the order under section 263 of the Act. 14. The ld. D.R on the other hand, submitted that the question whether an item of expenditure is capital or revenue will also cover the question if the expenditure is revenue expenditure can the same can be fully allowed in one assessment year? It was his submission that the show cause notice should not be interpreted as in the manner in which legislation is interpreted. 15. The ld. counsel for the assessee in his rejoinder submitted that a notice makes a reference only to the issue as to whether initial issue expenses have to be regarded as capital or revenue and there is no indication to invoke the SEBI Regulation in the show cause notice under section 263 of the Act. It was further submitted by him that the question of amortization of revenue expenses will arise for consideration only if an expenditure is accepted as revenue expenditure and, therefore, it is not correct to say that the question whether an expenditure is capital or revenue will also include the question as to whether revenue expenditure has to be am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the order of the CIT(A). In this regard our attention was drawn to Expln. (c) to Sec.263 of the Act, which is as under. Explanation.--For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,-- (a) . (b) . (c) where any order referred to in this sub-section and passed by the Assessing Officer had been the subject matter of any appeal, filed on or before or after the 1st day of June, 1988 the powers of the Commissioner under this sub-section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal. According to the learned counsel for the Assessee the order of the AO on the issue of allowability of initial issue expenses was already considered and decided by the CIT(A) and therefore the power of revision cannot be issued on the same issue by CIT in exercise of powers u/s.263 of the Act in view of Expln.-3 to Sec.263(1) of the Act. In this regard it was also highlighted that the show cause notice under section 263 of the Act had been issued after the order of the CIT(A). According to the ld. counsel for the assessee it cannot be said that the AO considered o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see had borne on its own Rs.13.53 crores and it had charged the fund expenses to the tune of Rs.43.13 crores. Out of the sum of Rs.13.53 crores a sum of Rs.87,000 was only disallowed and the circumstances under which the said disallowance was made has already been set out in the earlier part of this order. Thus to the extent of a sum of Rs.13.52 crores claimed as deduction in the profit and loss account the same was allowed by the AO in the assessment u/s.143(3) of the Act. The allowance of Rs.13.52 crores was never an issue raised by the AO and therefore there was no occasion for the CIT(A) to consider the allowability of the same. In fact the CIT(A) did not consider the allowability of the same at all. It cannot be said that the basis of disallowance of Rs.87,000 made in the assessment u/s.143(3) of the Act and the basis on which the disallowance of Rs.13.52 crores was sought to be made in proceedings u/s.263 were one and the same matter. The case laws referred to by the learned D.R. are distinguishable in as much as the decision in the case of Sonal Garments (supra)Marico Industries (supra) and Smt.Sujatha Grover (supra) were cases of deduction u/s.80-HHC/80-IB of the Act where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt, but as already observed in the absence of any specific regulation having been referred to we desist from giving any decision on this argument. For the very same reason we also desist from giving any decision on the argument that the regulations are directory and not mandatory. 22. Lastly it was submitted by the learned counsel for the Assesseee that in any event there were two views possible on the issue and in such circumstances exercise of jurisdiction under section 263 of the Act should not be resorted. In this regard reference was made to the decision of the Hon ble Supreme Court in the case of CIT vs. Max India Ltd., 295 ITR 282(SC) and Malabar Industrial Company Ltd. vs. CIT 243 ITR 83(SC) . 23. According to the learned D.R. in the light of the decision of the Hon ble Supreme Court in the case of Madras Industrial Investment (supra) two views are not possible on the issue and revenue expenditure which gives benefit over a period of time have to be amortized and claimed as deduction over the period for which the benefit of such revenue expenditure is likely to last. 24. We have considered the rival submissions. We are of the view that in the absence of any specifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of the debentures. (Underlining by us for emphasis) 25. As to whether the ratio laid down in the aforesaid decision is to the effect that in all cases revenue expenses have to be spread over for the period for which the benefits of such expenditure are likely to be derived or the said decision has to be confined to the facts of the case before the Hon ble Supreme Court is again debatable. As to whether the said decision 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. 26. In the r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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