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TMI Blog2017 (11) TMI 1539X X X X Extracts X X X X X X X X Extracts X X X X ..... legal firm were related to drafting of mutual fund schemes etc., which are connected with the routine business activities, we are of the view that the learned Commissioner of Income-tax (Appeals) has rightly held the same to be revenue in nature. Accordingly, we uphold the order passed by the Commissioner of Income-tax (Appeals) on this issue also. Appeal filed by the Revenue is dismissed. - I.T.A. No. 10/Mum/2016 - - - Dated:- 25-10-2017 - B. R. Baskaran (Accountant Member) And Amarjit Singh (Judicial Member) For the Appellant : V. Vidhyadhar For the Respondent : Madhur Agrawal ORDER B. R. Baskaran (Accountant Member) 1. The appeal filed by the Revenue is directed against the order dated October 30, 2015 passed by the learned Commissioner of Income-tax (Appeals)-13, Mumbai and it relates to the assessment year 2009-10. 2. The Revenue is aggrieved by the decision of the learned Commissioner of Income-tax (Appeals) in deleting the disallowance relating to the pre- operative expenses and legal and professional fees paid. 3. The assessee is engaged in the business of undertaking asset management services and investment advisory services. The year u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... application documents. Further, assistance in relation to the compliance required for anti-money laundering. Drafting and review of agreements for appointment of the fund accountant, registrar and transfer agent and the banker for the mutual fund schemes. Providing legal opinion on risks associated with the launch of a new mutual funds scheme, research on various mutual fund regulations and other legal advices. Providing advice on various policies and procedures for all asset management company and preparation of the compliance manual. Further legal and professional charges paid to Fried, Frank, Harris Shriver and Jacobson (London) LLP is in relation to assistance in drafting offer documents such as statement of additional information and scheme, information document and drafting and reviewing of the scheme distribution agreements of Goldman and Sachs Mutual Fund Schemes. 5. The Assessing Officer took the view that the abovesaid legal firms have provided services in respect of mutual fund schemes which are yet to be launched. Accordingly he took the view that these expenses cannot be allowed as revenue expenditure but it should be capitalised. Accordingly th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e dispute is hence about the expenditure of ₹ 3.26 crores incurred between September 1, 2008 and December 10, 2008. The Assessing Officer has taken a very simplistic interpretation of the date of commencement of business stating that the date of grant of approval by the regulator i.e., the SEBI was of no consequence and that the date of actual commencement of business was important. On receipt of the SEBI's approval on September 1, 2008, the appellant had immediately moved a specific application before the SEBI on September 4, 2008 for launching a mutual fund scheme as part of its AMS activities. The said mutual fund scheme was to be known as Goldman Sachs India Equity Fund (hereinafter referred to as 'GSIEF'). However, before the receipt of the SEBI's approval for launching GSIEF, the financial world was rocked on a global level with the collapse of the financial services giant Lehman Brothers. This crisis started around the middle of September 2008 and pushed the global financial markets in turmoil. On this background, the appellant felt that the environment was not conducive for launching a mutual fund scheme. Accordingly, it was after a very long time in A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also underlined the voluntary disallowance of ₹ 7.86 crores of pre-operative expenses, as opposed to the further disallowance of ₹ 3.26 crores made by the Assessing Officer. He then pleaded for reversal of the entire disallowance made by the Assessing Officer on this count. 3.2. Decision-I have carefully gone through the submissions of the appellant and the order of the Assessing Officer. Apart from the case law already cited in the previous sub-paragraphs, the authorised representative has also filed the application made for GSIEF, its approval as also the general regulatory approvals for ASM and AS. Before going further, it would be instructive to know the background of the appellant-company. The appellant is a wholly owned subsidiary of Goldman Sachs Asset Management India Holding Limited and had applied for approval for commencing business in India during the previous year relevant to the assessment year under consideration. The two principal lines of its activities are AMS and AS. Under AMS, the appellant would typically launch and run mutual funds schemes, while under AS it would offer non-binding investment advisory services. While AMS envisages actual cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tting up of the business. 3.2.2 At this stage, it would be instructive to see the nature of expenses claimed as revenue expenses which had been disallowed by the Assessing Officer as pre-operative expenses. While the overall expenses of the appellant as per the extract of the trial balance as on December 9, 2008 totalled ₹ 11.13 crores, the figure for the expenses as on August 31, 2008 was ₹ 7.86 crores. The differential amount of ₹ 3.26 crores had been added back by the Assessing Officer. Out of the expenses of ₹ 11.13 crores as on December 9, 2008, the lion's share of ₹ 9.35 crores had been taken up by employee costs. The next large component of ₹ 0.33 crore was taken up by communication, followed by legal and professional expenses of ₹ 0.30 crore and lease rent of ₹ 0.22 crore. In other words, there is merit in the argument of the authorised representative that the business of the appellant had been effectively set up with hiring of qualified personnel, leasing of rented premises etc. In the context of businesses which provide services such as those provided by the appellant, generally the majority of costs pertain to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e an interregnum between a business which is set up and a business which is commenced and all expenses incurred after the setting up of the business and before the commencement of the business, all expense during the interregnum would be permissible deduction. . .' The hon'ble Bombay High Court had very lucidly put forth the proposition that the expenditure incurred during the interregnum-after setting up of the business and prior to commencement thereof-shall be entitled to all permissible business deductions. 3.2.5 Admittedly, the above case decisions deal with the issues of regulatory approval in the context of businesses other than AMS or AS. However, there is immense clarity in the above cited decisions in so far as the issues of setting up of a business and the commencement thereof is concerned, all superior judicial authorities having held that the expenditure incurred during such period has to be on the revenue account. Respectfully following the ratios contained in the decisions of the aforesaid superior judicial authorities. I have no hesitation in deciding that the expenses of ₹ 3,26,51,038 disallowed by the Assessing Officer as pre-operative expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly been incurred in the context of AMS and not AS. As the Assessing Officer had already disallowed the expenditure incurred by way of AMS as being preoperative in nature, he appears to have extended the same logic and disallowed impugned addition has been made were in the context of AMS. The Assessing Officer inferred that the benefit that accrued on account of such advice and services stretched across several years. However, he has lost sight of the fact that he had himself concluded that there was no benefit which accrued to the appellant in the year under consideration. Accordingly, the more appropriate response would have been either to allow or to disallow the expenditure claimed but there is certainly no scope for capitalising it. In any case, as has been held by me while deciding ground Nos. 1 and 2 earlier in this order, the AMS business had actually been set up as on September 1, 2008. As such all the legal and professional expenses incurred by way of payment to AZB and FFSH J too have to be allowed. As such, these expenses are allowable as deduction. However, it is also clear from the reply of the appellant to the notice of enhancement that the appellant had deposited tax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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