Case: Commissioner of Income Tax Central-Iii Vs. Templeton Asset Management (India) Private Limited

J.P. Devadhar, J.The Appeal is admitted on the following questions of law and taken up for hearing by consent of the parties:a) Whether, on the facts and in the circumstances of the case, the Honble Tribunal, in law, was justified in upholding the order of the learned CIT (A) in not sustaining the addition made by the Assessing Officer being the difference between the amount of investment advisory fees computed at the maximum rates specified in Regulation 52(2) of the Securities and Exchange Board of India (Mutual Fund) Regulation, 1996 (SEBI Regulations) and actually charged by the Assesseeb) Whether, on the facts and in the circumstances of the case, the Honble Tribunal, in law, was justified in upholding the order of the learned CIT (A) in not sustaining the addition made by the Assessing Officer relating to the recurring and marketing expenses without appreciating the fact that this amount of expenditure the AMC was empowered to charge under SEBI Regulations to the Mutual Fund, but it has charged the same to its own accounts, thereby reducing its taxable income, and hence not be allowable as deduction in view of the provisions of section 37(1) of the Income Tax Act, 1961c) Whether, on the facts and in the circumstances of the case, the Honble Tribunal, in law, was justified in upholding the order of the learned CIT (A) in not sustaining the addition made by the Assessing Officer being towards 2/3rd share of recurring expenses in excess of the limits specified in Regulation 52(7) of SEBI Regulation which was borne by the Assessee without appreciating the fact that the amount of expenditure, which becomes the liability either of the sponsor or the trustee of the Mutual Fund, is not deductible under section 37(1) of the Income Tax Act in the hands of the Assessee Company"d) Whether, on the facts and in the circumstances of the case, the Honble Tribunal, in law, was justified in upholding the order of the learned CIT (A) in not sustaining the disallowance made by the Assessing Officer of initial issue expenses of the Mutual Fund Scheme incurred by the Assessee which pertain to the business of the Mutual Fund, without appreciating the fact that these are the expenses incurred by the Assessee Company on behalf of Mutual Fund and are pertaining to Schemes which are of Mutual Fund which the Assessee Company was empowered by the SEBI Regulations to charge to the Mutual Fund Scheme2. The Assessment Year involved herein is A.Y. 2003-2004.3. The Assessee is a private limited company engaged in the business of Asset Management of Mutual Funds. In the Assessment Year in question, the Assessing Officer on noticing that the Assessee has claimed investment advisory fees, less than the ceiling prescribed under Regulation 52 of the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 added the differential amount to the income of the Assessee.4. The CIT (A) as also the ITAT have held that the SEBI Regulation 52 provides for the maximum limit towards the fees that could be charged by an Asset Management Company from the Mutual Funds. Due to the business exigencies if the Assessee an Asset Management Company collects lesser amount of fees than the ceiling prescribed, it is not open to the Assessing Officer to make additions on notional basis merely because the amount of fees actually claimed is less than the maximum ceiling prescribed under the SEBI Regulation. It is not the case of the Revenue that the Assessee has recovered investment advisory fees more than what is said to have been claimed by the Assessee. Therefore, the fact that the SEBI Regulation provides for the maximum limit on the investment advisory fees that could be claimed, it cannot be said that the Asset Management Companies are liable to be assessed at the maximum limit prescribed under the SEBI Regulations, irrespective of the amount actually recovered by the Asset Management Companies.

Decision reasoning: 1[ds]4. The CIT (A) as also the ITAT have held that the SEBI Regulation 52 provides for the maximum limit towards the fees that could be charged by an Asset Management Company from the Mutual Funds. Due to the business exigencies if the Assessee an Asset Management Company collects lesser amount of fees than the ceiling prescribed, it is not open to the Assessing Officer to make additions on notional basis merely because the amount of fees actually claimed is less than the maximum ceiling prescribed under the SEBI Regulation. It is not the case of the Revenue that the Assessee has recovered investment advisory fees more than what is said to have been claimed by the Assessee. Therefore, the fact that the SEBI Regulation provides for the maximum limit on the investment advisory fees that could be claimed, it cannot be said that the Asset Management Companies are liable to be assessed at the maximum limit prescribed under the SEBI Regulations, irrespective of the amount actually recovered by the Asset Management Companies.The second question relates to the recovery of the marketing expenses incurred by the Assessee on behalf of the Mutual Funds. In the present case, the Assessee had recovered part of the marketing expenses from the Mutual Funds and the balance of the marketing expenses were borne by the Assessee itself. The Assessing Officer was of the opinion that when Regulation 52(6) of the SEBI Regulation empowers the Assessee to recover the marketing expenses up to the ceiling prescribed therein, the Assessee was not justified in charging part of the marketing expenses to its own account, thereby reducing its taxable income. Accordingly, the Assessing Officer added the differential amount to the income of the Assessee. The CIT (A) as also the ITAT have deleted the addition6. In the present case, it is not in dispute that though the Assessee was entitled to recover entire marketing expenses incurred on behalf of the Mutual Funds, the Assessee has in fact claimed part of the expenses from the Mutual Funds and absorbed the balance expenditure as a matter of commercial prudence. The Assessing Officer has not disbelieved the case of the Assessee that only a part of the expenses incurred has been recovered from the Mutual Funds on account of commercial prudence. In these circumstances, the fact that the Assessee could have collected the entire amount of expenses from the Mutual Fund as per Regulation 52(6) of the SEBI Regulation cannot be a ground to make addition in the hands of the Assessee, especially when the bonafide decision of the Assessee to claim part of the expenses from the Mutual Funds is not doubted and the expenditure claimed to have been incurred by the Assessee is also not doubted.Similarly, the third and fourth questions relate to deleting the disallowances made by the Assessing Officer. Regulation 52(7) provides that any recurring expenditure in excess of the limit specified in(6) may be borne by the Asset Management Company or by the Trustee or by the Sponsors. As the Assessee claimed deduction of the entire expenditure incurred on behalf of the mutual funds instead of recovering 2/3rd of the expenditure from the Trustee/Sponsors, the Assessing Officer disallowed 2/3rd of the expenses and added the same to the income of the Assessee. Similarly, initial issue expenses incurred on behalf of the Mutual Funds were disallowed on the ground that the Assessee was entitled to recover the same from the Mutual Funds. The ITAT deleted additions on the ground that merely because, the SEBI Regulation empowers the Assessee to recover the above expenditure, disallowance of the expenditure cannot be made if the Assessee decides not to recover part of said expenditure from the Mutual Funds/Trustees/Sponsors. The restrictions under the SEBI Regulations are imposed with a view to ensure that the Mutual Funds are not overcharged and the said Regulations are not intended to mandatorily saddle the Mutual Funds with the liability set out in the Regulations.9. In the present case, genuineness of the expenditure incurred by the Assessee on behalf of the Mutual Funds is not in dispute. If the assessee, an Asset Management Company, due to business exigencies claims and recovers from the Mutual Funds lesser amount than the amount of expenditure actually incurred during the course of its business, then, unless it is established that there were no business exigencies or the claim was not genuine, the expenditure incurred cannot be disallowed and added to the income of the Assessee.