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TMI Blog2018 (2) TMI 1592X X X X Extracts X X X X X X X X Extracts X X X X ..... bility to conduct the affairs of the mutual fund rested with the Trustee Assessee. As per the terms of the directions, the Trustees of the mutual fund were required to set up an investigation committee to examine all the transactions / dealings by Mr. Nilesh Kapadia. The Trustees were required to submit a plan to overhaul the internal control systems and the internal preventive measures of HDFC AMC to avoid recurrence of such instances in future. Hence, upon conjoint reading of Trust Deed and SEBI directions as above, we conclude that the said expenditure was incurred by the assessee to safeguard / protect its business interest and therefore, allowable to the assessee in terms of Section 37. CIT(A) clinched the issue in the right perspective but had no justification to restrict the impugned expenditure to 50%. We find that genuineness of the expenditure was not in dispute. If the expenditure was restricted to 50% then as a logical consequence, the remaining expenditure was to be allowed to HDFC AMC since as per the logic of Ld. first appellate authority, the said expenditure was to be shared equally between the two entities. Even in that eventuality, the whole exercise would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rust Deed and SEBI regulation. The Assessee was entitled to receive Trusteeship Fees from HDFC Mutual Fund as per rate prescribed in Article-12 of the Trust Deed. The assessee also entered into an agreement dated 08/06/2000 with HDFC AMC for investment and management of mutual funds and deployment of funds raised by the mutual fund. The assessee during the impugned AY received Trusteeship Fees from HDFC MF amounting to ₹ 11.99 Crores. 2.2 During assessment proceedings, it was noted that the assessee booked major expenses of ₹ 11.90 crores under the head Marketing Distribution Expenses which has been paid to HDFC AMC. The assessee contended that said sum was in accordance with SEBI (Mutual Fund] Regulation, 1996 according to which the expenses in excess of respective schemes limits of the Mutual Funds were to be borne by the AMC / Trustee Co. etc. and therefore, the said sum represented share of Trustee Assessee towards expenses incurred by HDFC AMC which could not be absorbed by respective schemes. The attention was also drawn to internal memo of the assessee dated 31/03/2010 which contained Board Resolution dated 26/10/2005 permitting such apportionment. It was fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s within the framework of SEBI Regulation and duly approved by respective Board of Directors. The Ld. AR further drew our attention to the fact that whole exercise was tax neutral since if the expenditure was not allowed to the assessee, the same was certainly allowable to the HDFC AMC and both entities fell in the same tax bracket. Our attention is also drawn to statutory provision of Section 40A(2) to contend that the said transaction, at the relevant point of time, was not covered by those provisions since both the assessee and HDFC AMC were 100% of subsidiary of a third entity namely HDFC Ltd. and had no inter-se shareholding between them. Reliance was been placed on several judicial pronouncement as placed in the paper-book for various contentions. 5. We have carefully heard the rival contentions and perused relevant material on record including cited judicial pronouncements and duly appreciated the applicable legal provisions. So far as the applicability of the provisions of Section 40A(2) is concerned, we concur with the submissions of Ld. AR that the same could not be applied to issue under appeal for more than one reason. Firstly, both the assessee and the payee, being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d increase the price payable by HDFC mutual fund schemes for purchases of scrips and alternatively, would reduce the net realization of scrips sold by HDFC mutual fund. In other words, the outsiders, acting on tips given by the said employee, gained at the cost of Mutual Fund Schemes by carrying out intra-day transactions. Upon receipt of information from BSE / NSE, SEBI vide its letter dated 17/06/2010 directed, inter-alia, certain investigation into the matter in terms of SEBI Act, 1992. Pursuant to those directions, the assessee constituted an investigation committee and appointed M/s KPMG at the behest of the audit committee to conduct the investigation in a scientific manner. The expenses so incurred to carry out the said investigation amounted to ₹ 1,26,43,213/- which were claimed by the assessee by way of debit to Profit Loss Account during impugned AY. The Ld. AO denied the same on the premise that it was for HDFC AMC to institute the internal inquiry pursuant to the said directions and therefore, the payment thereof was the responsibility of HDFC AMC and not that of assessee and therefore, the same could not be allowed to the assessee. 8.2 Aggrieved, the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in accordance with SEBI regulation. Lastly, the Trustees were accountable for and be the custodian of the funds and property of the Scheme and hold the same in Trust for the benefits of unit holders in accordance with the SEBI regulations. In nutshell, we find that vide said Deed of Trust, the Trustee assessee was entrusted with overall conduct of the mutual fund schemes and to act as custodian / trustee in the best possible interest of the unit holders and was to ensure compliance of overall statutory formalities / regulations. 11. Upon perusal of SEBI order / directions under Sections 11(1), 11(4) and 11B of SEBI Act, 1992 dated 17/06/2010 as placed on Page Nos. 20-29 of the paper book we find that the said order, inter-alia, contains following directions:- (i) HDFC Asset Management Company Limited shall not utilize the services of Mr. Nilesh Kapadia for the trading activities done on behalf of HDFC Asset Management Company Limited and shall institute an internal inquiry to be conducted by the trustees of HDFC Mutual Fund in the matter. (ii) Mr. Nilesh Kapadia and HDFC Asset Management Company Limited shall jointly deposit the estimated losses identified so far as pe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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