ADDL CIT RG 8(1), MUMBAI V. BIRLA SUNLIFE ASSET MANAGEMENT CO. LTD, MUMBAI

ITA 2698/MUM/2011

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 3461 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 1 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-05-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 10-02-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 07-04-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PREMAND J
• Assessee Lawyers: YOGESH A THAR
• Keywords: Commercial expediency
• Section: 143(3); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH B, MUMBAI BEFORE SHRI MAHAVIR SINGH, JUDICIAL MEMBER AND SHRI RAJESH KUMAR, ACCOUNTANT MEMBER ITA NO. 2716/MUM/2011 (ASSESSMENT YEAR : 2007-08) BIRLA SUNLIFE ASSET MANAGEMENT CO. LTD. ONE INIDA BULLS CENTRE, 17 TH FLOOR, JUPITER MILL COMPOUND, 841, SENAPATI BAPAT MARG, ELPHINSTONE ROAD, MUMBAI 400013 PAN: AAACB 6134D ... APPELLANT VS. THE ADDL. CIT, RANGE 8(1), AAYKAR BHAVAN, MK ROAD, MUMBAI 400 020 .... RESPONDENT ITA NO. 2698/MUM/2011 (ASSESSMENT YEAR : 2007-08) THE DCIT, RANGE 8(1), AAYKAR BHAVAN, MK ROAD, MUMBAI 400 020 ... APPELLANT VS. BIRLA SUNLIFE ASSET MANAGEMENT CO. LTD. ONE INIDA BULLS CENTRE, 17 TH FLOOR, JUPITER MILL COMPOUND, 841, SENAPATI BAPAT MARG, ELPHINSTONE ROAD, MUMBAI 400013 ... RESPONDENT REVENUE BY : SHRI PREMAND J. ASSESSEE BY : SHRI YOGES H A. THAR DATE OF HEARING : 10/05/2016 DATE OF PRONOUNCEMENT : 18/05/2016 2 ITA NO. 2716& 2698/MUM/2011 (ASSESSMENT YEAR : 2007-08) ORDER PER MAHAVIR SINGH, J.M: THESE CROSS APPEALS ARE ARISING OUT OF ORDER OF C IT(A)-16, MUMBAI IN APPEAL NO.CIT(A)-16/IT-410/2009-10 ORDER DATED 12/01/2011. ASSESSMENT WAS FRAMED BY THE ADDL. CIT, RANGE8(1), MUMBAI UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961 (HEREINA FTER REFERRED AS THE ACT) VIDE HIS ORDER DATED 30/12/2009 FOR THE ASSES SMENT YEAR 2007-08. 2. THE INTER-CONNECTED ISSUES RAISED BY BOTH THE PA RTIES IS WITH REGARD TO THE ORDER OF CIT(A) PARTLY ALLOWING THE C LAIM OF EXPENSES I.E. COMPENSATION ON ACCOUNT OF REDEMPTION OF UNITS AN D ALSO CLAIM ARISING OUT OF EMBEZZLEMENT. FOR THIS ASSESSEE HAS RAISED THE ISSUE REGARDING DISALLOWANCE OF COMPENSATION PAID TO INVESTORS OF R S.50,86,434/- BY THE FOLLOWING THREE GROUNDS: (I) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) (HEREINAFTER RE FERRED AS CIT(A)) ERRED IN CONFIRMING THE ACTION OF ADDITIONAL COMMISSIONER OF INCOME TAX (HEREINAFTER REFERRED AS ASSESSING OFFICER) OF DISA LLOWING COMPENSATION PAID TO INVESTORS OF RS.50,86,434/- IN THE COURSE OF BUS INESS. II. THE LEARNED CIT(A) & ASSESSING OFFICER FAILED T O APPRECIATE AND OUGHT TO HAVE HELD THAT: THE COMPENSATION PAID TO INVESTORS AS PER THE STATU TORY REGULATION OF SEBI AND MUTUAL FUND GUIDELINES PRESCRIBED BY THEM, WHICH HAS TO BE BORNE BY ASSET MANAGEMENT COMPANY. THE APPELLANTS CLAIM THAT COMPENSATION PAID TO INV ESTORS ARE BUSINESS LOSS AND ALLOWABLE UNDER SECTION. 37 OF TH E INCOME TAX ACT; (III)THE APPELLANT PRAYS THE DISALLOWANCE OF COMPEN SATION PAID TO INVESTORS OF RS.50,86,434/- BE ALLOWED AS DEDUCTION UNDER SEC TION.37(1). 3 ITA NO. 2716& 2698/MUM/2011 (ASSESSMENT YEAR : 2007-08) REVENUE HAS RAISED THE FOLLOWING GROUND AGAINST TH E ORDER OF CIT(A) DELETING DISALLOWANCE CLAIMED BY THE ASSESS EE ON ACCOUNT OF EMBEZZLEMENT:- 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE MADE BY THE AO OF RS.50,57,940/- BEING DEDUCTION CLAIMED BY THE ASSESSEE IN RESPECT OF INT EREST ON THE EMBEZZLED AMOUNT, WITHOUT APPRECIATING THE FACTS OF THE CASE. 3. BRIEFLY STATED, THE FACTS ARE THAT ASSESSEE COMP ANY IS ENGAGED IN THE BUSINESS OF ASSET MANAGEMENT, PORTFOLIO MANAGEM ENT AND ADVISORY SERVICES. THE ASSESSEE FIELD COMPLETE BOOKS OF ACC OUNTS AND AUDITED ACCOUNTS DURING THE COURSE OF ASSESSMENT PROCEEDING S. THE ASSESSING OFFICER NOTICED FROM THE RETURN OF INCOME THAT THE ASSESSEE HAS CLAIMED THE FOLLOWING EXPENSES IN ITS PROFIT AND LOSS ACCOU NT AND THE DETAILS ARE GIVEN IN THE ASSESSMENT ORDER PARA -4 AS UNDER:- INVESTOR NAME DATE AMOUNT DESCRIPTION RAMADEVI SOOD 5/3/2006 1598083 UNITS ERRONEOUSLY NOT ALLOTTED TO THE INVESTOR IN JAN. 2000 TURQUOIUSE LTD. 7/5/2006 5057940 REDEMPTION OF UNITS ON FORGED REDEMPTION REQUEST V. MEENAKSHI 7/13/2006 696257 NON RECEIPT OF DIVIDEND WARRANT V. MEENAKSHI 8/22/2006 654959 INTEREST ON DELAYED DIVIDEND PAYMENT NARESH KUMAR TREHAS 3/31/2007 883000 COMPENSATION TO INVESTOR FOR REDEMPTION PROCEEDS VARIOUS INVESTORS 1254135 COMPENSATION EXPENSES VARIOUS INVESTORS OF AMOUNT BELOW RS.5 LACS 4 ITA NO. 2716& 2698/MUM/2011 (ASSESSMENT YEAR : 2007-08) TOTAL 10144374 THE ASSESSING OFFICER NOTED THAT THE CLAIM OF EMBEZ ZLEMENT AMOUNTING TO RS.3,92,15,599/- WAS DISALLOWED BY THE ASSESSING OFFICER IN ASSESSMENT YEAR 2004-05, WHICH WAS UPHELD BY CIT(A) AS WELL AS ITAT. HE NOTED THAT THE ASSESSEE BEING ASSET MANAGEMENT COMPANY FOR BIRLA SUNLIFE MUTUAL FUND, WAS ASKED TO SUBMIT AGREEMENT BETWEEN THE REGISTRAR AND THE TRANSFER AGENT AND THE ASSESSEE C OMPANY. THE ASSESSEE APPOINTED THE CITI BANK AS REGISTRAR AND T HE TRANSFER AGENT. ACCORDING TO ASSESSING OFFICER THE REGISTRAR AND TR ANSFER AGENT WAS DIRECTLY RESPONSIBLE ON REDEMPTION MADE FROM THE MU TUAL FUND BUT THE ASSESSEES CHOICE TO PAY INVESTOR BY MAKING THE INV ESTOR TO SUBROGATE ALL AND ANY RIGHTS/INTEREST, TITLE IN RESPECT OF AN Y PROCEEDS RECOVERED OR RECOVERABLE FROM ANY OTHER SOURCE INCLUDING FROM TH E FRAUDSTER ON ACCOUNT OF UNITS UNAUTHORIZEDLY REDEEMED FROM THE F AMILY MEMBERS. ACCORDING TO ASSESSING OFFICER THE AMOUNT PAID TO T HE UNIT HOLDERS IS NOT LIABILITY OF THE ASSESSEE AND HENCE HE DISALLOW ED THE CLAIM MADE IN RESPECT TO THE AMOUNT OF RS.50,57,940/- IN RESPECT TO TORQUOISE INVESTMENTS FINANCE PRIVATE LIMITED(TIFPL) FOR REDEMPTION OF UNITS OF FORGED REDEMPTION REQUESTED FOR THE BALANCE SUM OF RS.50,86,434/-, THE ASSESSING OFFICER NOTED THAT THE ASSESSEE IS ON LY A FUND MANAGER OF BIRLA MUTUAL FUND AND, IF ANY, UNIT IS NOT ALLOTTED TO ANY INVESTOR, THAT CANNOT BE THE LIABILITY OF THE ASSESSEE AND, THEREF ORE, HE DISALLOWED THE CLAIM OF COMPENSATION IN RESPECT TO SMT. RAMADEVI S OOD AMOUNTING TO RS.15,98,083/-, SMT. V. MEENAKSHI AMOUNTING TO RS.6 ,96,257/-, SMT. V. MEENAKSHI AMOUNTING TO RS.6,54,959/- AND NARESH KUM AR TREHAS 5 ITA NO. 2716& 2698/MUM/2011 (ASSESSMENT YEAR : 2007-08) AMOUNTING TO RS.8,83,000/- AND AUTHORIZED OTHER SMA LL INVESTORS MOUNTING TO RS.12,54,135/-. AGGRIEVED, ASSESSEE PR EFERRED APPEAL BEFORE CIT(A) AGAINST THE DISALLOWANCE. 4. THE CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE IN RESPECT TO PAYMENTS MADE TO CERTAIN INVESTORS AGGR EGATING TO RS.50.86 LACS, PERTAINING TO LEGACY OF THE EARLIER PERIOD, T HE CIT(A) NOTED THAT THIS AMOUNT IS IN THE NATURE OF COMPENSATION AND THE CLA IM WAS VERIFIED AND APPROVED FOR PAYMENTS. ACCORDING TO HIM, THIS IS EVIDENT FROM THE STATEMENT DOCUMENTING THE MANAGEMENT DECISION, A CO PY OF WHICH IS FURNISHED BEFORE HIM BUT CIT(A) WAS OF THE VIEW THA T ONCE THE ACCOUNT IS SETTLED WITH THE MUTUAL FUND AFTER TAKING INTO C ONSIDERATION THE DEFICIT AND SURPLUS EXISTING IN THE ACCOUNTS OF THE REGISTRAR AND TRANSFER AGENT I.E KARVY CONSULTANTS THE ENTIRE RESPONSIBIL ITY OF TAKING CARE OF THE LIABILITY ARISING OR ACCRUING THEREAFTER REST S WITH THE MUTUAL FUND AND NOT WITH THE ASSESSEE. ACCORDINGLY HE CONFIRME D THE ACTION OF THE ASSESSING OFFICER BY OBSERVING AS UNDER:- (ONLY REL EVANT PORTION OF PARA 3.3.1) ..... I FIND THAT THERE IS NO MERIT IN THE ARGUMEN T OF THE APPELLANT. ONCE, THE ACCOUNT IS SETTLED WITH THE MUTUAL FUND AFTER TAKIN G INTO CONSIDERATION THE DEFICIT AND SURPLUS EXISTING IN THE ACCOUNT OF THE REGISTRATION AND TRANSFER AGENT VIZ. KARVY CONSULTANT, THE ENTIRE RESPONSIBIL ITY OF TAKING CARE OF ANY LIABILITY ARISING OR ACCRUING THEREAFTER RESTS WITH THE MUTUAL FUND AND NOT WITH THE APPELLANT. THEREFORE, THE LIABILITY TO CO MPENSATE OR TO MAKE PAYMENT TO THE PARTIES IN QUESTION RESTS WITH THE M UTUAL FUND AND NOT WITH THE APPELLANT. THEREFORE, I AM IN AGREEMENT WITH F INDING OF THE LD. A.O THAT THE AMOUNT IS QUESTION IS NOT THE LIABILITY OF THE APPELLANT. FURTHER, I ALSO FIND THAT THERE IS NO MATERIAL PLACED EITHER BEFORE THE LD. A.O OR BEFORE ME TO PROVE THE FACTUM OF THE TRANSACTION. IN VIEW OF TH IS, THE ADDITION MADE BY THE LD. A.O IS CONFIRMED AND THIS GROUND OF APPEAL IS DISMISSED. 6 ITA NO. 2716& 2698/MUM/2011 (ASSESSMENT YEAR : 2007-08) AGGRIEVED AGAINST ACTION OF CIT(A) CONFIRMING THE O RDER OF THE ASSESSING OFFICER, ASSESSEE PREFERRED SECOND APPEAL BEFORE T HE TRIBUNAL. 5. BEFORE US, LD. COUNSEL FOR THE ASSESSEE ARGUED T HAT THE ASSESSEE IS AN ASSESSMENT MANAGEMENT COMPANY OF BIRLA SUNLIF E MUTUAL FUND LTD. AND AS MUTUAL FUND REGULATIONS ISSUED BY SEBI FOR CARRYING OUT MUTUAL FUND BUSINESS A TRUST IS REQUIRED TO BE CREA TED WITH THE BOARD OF TRUSTEES AND THE UNIT HOLDERS. THE UNIT HOLDERS AR E BENEFICIAL OWNERS OF THE TRUST. THE TRUSTEES OF THE TRUST APPOINT THE A SSET MANAGEMENT COMPANY, THE ASSESSEE, FOR CARRYING DAY TO DAY ACTI VITIES LIKE FUND RAISING FROM INVESTORS, ISSUANCE OF UNIT TO INVESTO RS, MANAGEMENT OF FUNDS, ISSUING AND ACCOUNTING OF REDEMPTION PROCEED S, ISSUING AND ACCOUNTING DIVIDEND WARRANTS, ETC. HE EXPLAINED TH AT THE ASSET MANAGEMENT COMPANY DOES NECESSARY ACTIVITY FOR THE BENEFICIAL OWNERS AND FOR THE SAME CHARGING ASSET MANAGEMENT F EE FROM THE VARIOUS SCHEMES AS PER SEBI REGULATIONS. IN THIS P ROCESS THE ASSESSEE COMPANY HAS SETTLED CLAIM TOWARDS COMPENSATION TO V ARIOUS INVESTORS ON ACCOUNT OF BUSINESS EXPEDIENCY AND AS PER REGULA TIONS OF SEBI AMOUNTING TO RS.50,86,431/-( THE DETAILS ARE GIVEN ABOVE, WHICH ARE REPRODUCED FROM THE ASSESSMENT ORDER). THE ASSESSEE HAS CLAIMED THESE EXPENSES AS DEDUCTION, WHICH WAS INCURRED, AC CORDING TO THE LD. COUNSEL FOR THE ASSESSEE IN THE COURSE OF BUSINESS ON ACCOUNT OF BUSINESS EXPEDIENCY. THE LD. COUNSEL FOR THE ASSES SEE EXPLAINED THAT THE ASSESSEE HAS TO INCUR SUCH EXPENSES TO SAFEGUAR D ITS BUSINESS INTEREST AGAINST COMPLAINT MADE BY INVESTORS ON SEB I, WHICH MAY LEAD TO VIOLATION OF SEBI REGULATIONS AND ALSO IT IS DUT Y BOUND TO MAKE THE 7 ITA NO. 2716& 2698/MUM/2011 (ASSESSMENT YEAR : 2007-08) LOSS GOOD OF THE INVESTORS. HE EXPLAINED THAT THE ASSESSEE AND TRUSTEES OF THE MUTUAL FUND ENTERED INTO AN INVESTMENT MANAG EMENT AGREEMENT, WHICH WAS GUIDING FACTOR FOR RIGHTS AND OBLIGATION OF ASSET MANAGEMENT COMPANY. LD. COUNSEL FOR THE ASSESSEE AL SO EXPLAINED THAT THIS ISSUE OF RECONCILIATION CAME UP DURING THE ASS ESSMENT YEAR 2002- 03, WHEREIN THE RECONCILIATION DIFFERENCE AMOUNTING TO RS.16.00 CRORES WAS DEFICIT AGAINST THE MUTUAL FUND AND RS.6.00 CR ORES BEING SURPLUS IN FAVOUR OF THE MUTUAL FUND. BUT THERE WAS A NET DEF ICIT OF RS.10.00 CRORES AGAINST MUTUAL FUND. THE ASSESSEE APPOINTED A FIRM OF CHARTERED ACCOUNTANT TO CARRY OUT THIS RECONCILIATION AND AFT ER PROLONGED EXERCISE THE DIFFERENCE LARGELY REMAIN UNREALIZED AND THE MA TTER WAS TAKEN-UP WITH SEBI AND IN CONSULTATION WITH SEBI IT WAS DECI DED THAT THE DEFICIT OF RS.16.00 CRORES SHOULD BE MADE OVER BY ASSET MANAGE MENT COMPANY AND REPLENISHED TO THE MUTUAL FUNDS. LD. COUNSEL F OR THE ASSESSEE EXPLAINED THAT OUT THERE ARE UNKNOWN CREDITS LYING IN THE BANK ACCOUNT TO THE EXTENT OF RS.6.00 CRORES WAS ADJUSTED AND BA LANCE RS.10.00 CRORES WERE PAID TO MUTUAL FUNDS. HE EXPLAINED THA T IN ASSESSMENT YEAR 2002-03 THE TRIBUNAL TAKING NOTE OF THE PROVISIONS OF THE ACT AND SEBI REGULATIONS, CONTRACTUAL AGREEMENT BETWEEN ASSESSEE AND THE PROSPECTS OF MUTUAL FUND HELD THAT THE ASSESSEE WAS CONTRACTUALLY AND STATUTORILY BOUND TO MAKE THE PAYMENT SO AS TO KEEP ASSESSEES BUSINESS INTEREST AND, THEREFORE, HELD THAT MAKING GOOD OF DEFICIT OF RS.16.00 CRORES, AFTER ADJUSTING CREDITS OF UNKNOWN BANK BALANCE OF RS.6.00 CRORES, BALANCE AMOUNT OF RS.10.00 CRORES I S ALLOWABLE AS DEDUCTION. THE ENTIRE LEGACY PERTAIN TO EARLIER PER IOD, WHICH WAS CLAIMED AMOUNTING TO RS.50.86 LACS IN RESPECT TO AB OVE NOTED FIVE 8 ITA NO. 2716& 2698/MUM/2011 (ASSESSMENT YEAR : 2007-08) PERSONS. THE ASSESSEE STATED THAT ABOVE PAYMENTS QU ALIFY FOR ALLOWANCE FOR THE REASON THAT THESE ARE COMMERCIAL EXPEDIENCY , CONTRACTUAL OBLIGATIONS AND STATUTORY OBLIGATIONS. HENCE, LD. COUNSEL FOR THE ASSESSEE REQUESTED FOR ALLOWANCE OF THIS DEDUCTION. 6. ON THE OTHER HAND, THE SR. D.R SUPPORTED THE ORD ER OF THE CIT(A) ON THIS ISSUE AND STATED THAT ONCE THE ACCOUNTS ARE SETTLED WITH THE MUTUAL FUNDS, AFTER TAKING INTO CONSIDERATION THE D EFICIT AND SURPLUS EXISTING IN THE ACCOUNTS OF TRANSFER AGENT, THE ENT IRE RESPONSIBILITY, ANY LIABILITY ARISING OR ACCRUING THEREAFTER, OF SETTLE MENT, RESTS WITH THE ASSESSEE. ACCORDING TO HIM, THIS CANNOT BE ALLOWED AS DEDUCTION AND CIT(A) HAS RIGHTLY UPHELD THE SAME. 7. WE HAVE HEARD THE RIVAL CONTENTIONS ON THIS ISSU E AND GONE THROUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. WE FIND FROM THE FACTS OF THE CASE THAT THE TRUSTEES OF THE TRUST APPOINTE D THE ASSESSEE FOR CARRYING DAY TO DAY ACTIVITIES LIKE FUND RAISING FR OM INVESTORS, ISSUANCE OF UNIT TO INVESTORS, MANAGEMENT OF FUNDS, ISSUING AND ACCOUNTING OF REDEMPTION PROCEEDS, ISSUING AND ACCOUNTING DIVIDEN D WARRANTS, ETC. WE FIND FROM THE FACTS OF THE CASE THAT THAT THE AS SESSEE DOES NECESSARY ACTIVITY FOR THE BENEFICIAL OWNERS AND FOR THE SAME CHARGING ASSET MANAGEMENT FEE FROM THE VARIOUS SCHEMES AS PER SEBI REGULATIONS. WE ALSO FIND THAT IN THIS PROCESS THE ASSESSEE COMPANY HAS SETTLED CLAIM TOWARDS COMPENSATION TO VARIOUS INVESTORS ON ACCOUN T OF BUSINESS EXPEDIENCY AND AS PER REGULATIONS OF SEBI AMOUNTING TO RS.50,86,431/-. THE COMPLETE DETAILS ARE GIVEN IN THE ASSESSMENT OR DER. THE ASSESSEE 9 ITA NO. 2716& 2698/MUM/2011 (ASSESSMENT YEAR : 2007-08) HAS CLAIMED THESE EXPENSES AS DEDUCTION, WHICH WAS INCURRED, IN THE COURSE OF BUSINESS ON ACCOUNT OF BUSINESS EXPEDIENC Y. AS CLAIMED BY THE ASSESSEE, WE ARE OF THE OPINION THAT IN SUCH NA TURE OF BUSINESS, THE ASSESSEE HAS TO INCUR SUCH EXPENSES TO SAFEGUARD I TS BUSINESS INTEREST AGAINST COMPLAINT MADE BY INVESTORS ON SEBI, WHICH MAY LEAD TO VIOLATION OF SEBI REGULATIONS AND ALSO IT IS DUTY B OUND TO MAKE THE LOSS GOOD OF THE INVESTORS. WE ALSO FIND FROM THE FACTS OF THE CASE THAT THE ASSESSEE AND TRUSTEES OF THE MUTUAL FUND ENTERED IN TO AN INVESTMENT MANAGEMENT AGREEMENT, WHICH WAS GUIDING FACTOR FOR RIGHTS AND OBLIGATION OF ASSET MANAGEMENT COMPANY. WE ALSO FIN D THAT THE ASSESSEE HAS RAISED THIS ISSUE AND FILED RECONCILI ATION DURING THE ASSESSMENT YEAR 2002-03, WHEREIN THE RECONCILIATION DIFFERENCE AMOUNTING TO RS.16.00 CRORES WAS DEFICIT AGAINST THE MUTUAL FUND AND RS.6.00 CRORES BEING SURPLUS IN FAVOUR OF THE MUTUA L FUND. BUT THERE WAS A NET DEFICIT OF RS.10.00 CRORES AGAINST MUTUAL FUND. THE ASSESSEE APPOINTED A FIRM OF CHARTERED ACCOUNTANT TO CARRY O UT THIS RECONCILIATION AND AFTER PROLONGED EXERCISE THE DIF FERENCE LARGELY REMAIN UNREALIZED AND THE MATTER WAS TAKEN-UP WITH SEBI AND IN CONSULTATION WITH SEBI IT WAS DECIDED THAT THE DEFI CIT OF RS.16.00 CRORES SHOULD BE MADE OVER BY ASSET MANAGEMENT COMPANY AND REPLENISHED TO THE MUTUAL FUNDS. IT IS ALSO A FACT THAT OUT T HERE ARE UNKNOWN CREDITS LYING IN THE BANK ACCOUNT TO THE EXTENT OF RS.6.00 CRORES, WHICH WAS ADJUSTED AND BALANCE RS.10.00 CRORES WERE PAID TO M UTUAL FUNDS. AS EXPLAINED BY THE LD. COUNSEL FOR THE ASSESSEE BEFOR E US NOW AND HE RELIED ON TRIBUNAL DECISION ASSESSEES OWN CASE WH EREIN, IN ASSESSMENT YEAR 2002-03 THE TRIBUNAL TAKING NOTE OF THE PROVIS IONS OF THE ACT AND 10 ITA NO. 2716& 2698/MUM/2011 (ASSESSMENT YEAR : 2007-08) SEBI REGULATIONS, CONTRACTUAL AGREEMENT BETWEEN ASS ESSEE AND THE PROSPECTS OF MUTUAL FUND, HELD THAT THE ASSESSEE W AS CONTRACTUALLY AND STATUTORILY BOUND TO MAKE THE PAYMENT SO AS TO KEEP ASSESSEES BUSINESS INTEREST AND, THEREFORE, HELD THAT MAKING GOOD OF DEFICIT OF RS.16.00 CRORES, AFTER ADJUSTING CREDITS OF UNKNOWN BANK BALANCE OF RS.6.00 CRORES, BALANCE AMOUNT OF RS.10.00 CRORES I S ALLOWABLE AS DEDUCTION. WE FIND THAT THE ASSESSEE IS CARRYING OV ER THE ENTIRE LEGACY PERTAIN TO EARLIER PERIOD, FOR WHICH, IT CLAIMED AM OUNTING TO RS.50.86 LACS IN RESPECT TO ABOVE NOTED FIVE PERSONS. NOW TH E QUESTION ARISES, WHETHER THE ABOVE PAYMENTS QUALIFY FOR ALLOWANCE FO R THE REASON THAT THESE ARE COMMERCIAL EXPEDIENCY, CONTRACTUAL OBLIGA TIONS AND STATUTORY OBLIGATIONS. WE ARE OF THE VIEW THAT IN THE PRESEN T CASE THE UNIT HOLDERS, WHO MADE CLAIM WITH THE TRANSFER AGENT, AR E ENTITLED FOR RETURN OF THEIR MONEY INVESTED IN ASSESSEES MUTUAL FUND. EVEN THE SEBI REGULATION STATES SO AND IF THERE IS VIOLATION OF THE SAME, SEBI CAN PROSECUTE THE ASSESSEE. IT MEANS THAT THE LIABILIT Y PAID BY ASSESSEE IS IN THE NATURE OF STATUTORY AS WELL AS CONTRACTUAL. TH E ASSESSEE HAS PAID THE LEGITIMATE CLAIM OF THE UNIT HOLDERS, WHO HAVE LODGED THE CLAIM WITH THE REGISTRAR AND TRANSFER AGENT OF THE ISSUE. WE ARE OF THE VIEW THAT THIS EXPENDITURE IS INCIDENTAL TO TRADE ITSELF AND ASSESSING OFFICER CANNOT IGNORE THE SAME. WE ARE OF THE VIEW THAT EVEN THIS COMES WITHIN THE AMBIT OF COMMERCIAL EXPEDIENCY FOR THE REASON THAT THIS IS INDIRECTLY FOR FACILITATION OF CARRYING ON OF THE BUSINESS OF THE ASSESSEE. IN VIEW OF THIS REASONING, WE ALLOW THE CLAIM OF THE ASSESSEE AND T HE ORDERS OF THE LOWER AUTHORITIES ON THIS ISSUE ARE REVERSED. THIS ISSUE OF ASSESSEES APPEAL IS ALLOWED. 11 ITA NO. 2716& 2698/MUM/2011 (ASSESSMENT YEAR : 2007-08) 8. THE ISSUE IN REVENUES APPEAL AS REGARDS TO DISA LLOWANCE OF CLAIM OF ASSESSEE IN RESPECT TO REDEMPTION OF UNITS ON F ORCED REDEMPTION REQUEST IN THE CASE OF TIFPL. BRIEFLY STATED, THE FACTS ARE THAT TIFPL MADE AN INVESTMENT ON 30/07/2002 BY APPOINTING AN I NVESTMENT PORTFOLIO. THERE WERE FOUR TRANSACTIONS OF SUBSCRI PTIONS AND REDEMPTIONS FOR ALL UNITS IN ITS INVESTMENT ACCOUNT FROM AUGUST 2002 TO FEBRUARY, 2003. TIFPL APPLIED FOR REDEMPTION OF ALL OUTSTANDING INVESTMENTS AS ON 28/03/2003 AND RS.4.85 CRORES BEI NG VALUE OF OUTSTANDING UNITS TO THE CREDIT OF TIFPL WERE PAID ON 31/03/2003. TIFPL INFORMED THE ASSESSEE THAT TOTAL AMOUNT EXPEC TED FROM FINAL REDEMPTION IS RS.7.50 CRORES AS AGAINST RECEIPT OF RS.4.85 CRORES, BUT ASSESSEE INFORMED TIFPL THAT THE BALANCE UNITS OF R S.3.65 CRORES WERE ALREADY REDEEMED BY IT ON 28/02/2003. TIFPL INFOR MED THAT THEY HAVE NOT REDEEMED THE SAME AND THERE IS SOME MISTAKE ON THE PART OF THE ASSESSEE. ON INVESTIGATION, IT WAS FOUND THAT A FR AUDULENT REQUEST FOR REDEMPTION WAS SUBMITTED ON 28/02/2003 WITH ASSESSE ES REGISTRAR I.E. TURNER MORRISON BRANCH, CITI BANK BEING REGISTRAR A ND TRANSFER AGENT PROCESSED SUCH REQUEST AND FORWARDED THE SAME TO AS SESSEES TURNOR MORRISON BRANCH. ACCORDINGLY, A REDEMPTION CHEQUE OF RS.3.65 CRORES WAS HANDED OVER TO FRAUDULENT PERSON ON 03/03/2003. TO ENCASH THIS AMOUNT OF MUTUAL FUND REDEMPTION, A FRAUDULENT BANK ACCOUNT WAS OPENED WITH IDBI BANK ON 7/3/2003 AND THIS REDEMPT ION CHEQUE OF RS.3.65 CRORES WAS DEPOSITED IN THE HIGH VALUE CLEA RING ON 10/03/2003 AND WAS CLEARED ON THE SAME DAY. QUA THIS FIR WAS REGISTERED ON 7/4/2003 IN MRA MARG POLICE STATION AND A COMPLAINT WITH BANKING 12 ITA NO. 2716& 2698/MUM/2011 (ASSESSMENT YEAR : 2007-08) OMBUDSMEN WAS ALSO FILED ON 29/09/2003. THE ASSESS EE DURING THE ASSESSMENT YEAR 2004-05 MADE A PROVISION IN ITS BOO KS OF ACCOUNT AMOUNTING TO RS.3,92,15,599/-. THE ASSESSEE CLAIMED THIS AMOUNT AS EXPENDITURE DURING THE COURSE OF ASSESSMENT PROCEED INGS FOR THE ASSESSMENT YEAR 2004-05 BUT ASSESSING OFFICER HAS D ISALLOWED THE SAME FOR THE REASON THAT EXPENDITURE IS NOT CRYSTALLIZED . THE CIT(A) AS WELL AS ITAT CONFIRMED THE ACTION OF THE ASSESSING OFFICER BY STATING THAT THE CLAIM OF DEDUCTION ON ACCOUNT OF EXPENDITURE IS PR EMATURE AND NOT CRYSTALLIZED AS YET. DURING THE YEAR UNDER CONSIDE RATION THE ASSESSEE HAS MADE PAYMENT OF RS.4,42,73,539/- ON 28/07/2006 VIDE CHEQUE NO.112500 AS FULL AND FINAL SETTLEMENT TO TIFPL. THIS PAYMENT WAS AGAINST THE OPENING PROVISION MADE DURING THE FINAN CIAL YEAR 2004-05 RELEVANT TO ASSESSMENT YEAR 2005-06 AMOUNTING TO RS .3,92,15,599/-. THE ASSESSEE ALSO DEBITED THE BALANCE AMOUNT OF RS. 50,57,940/- TO THE PROFIT AND LOSS ACCOUNT AND CLAIMED UNDER THE HEAD COMPENSATION, WHICH WAS DISALLOWED BY THE ASSESSING OFFICER. AGG RIEVED, ASSESSEE PREFERRED AN APPEAL BEFORE CIT(APPEALS) WHO ALLOWED THE CLAIM OF THE ASSESSEE VIDE PARA 2.3.1 OF HIS APPELLATE ORDER, W HICH READS AS UNDER:- 2.3.1 I HAVE CAREFULLY CONSIDERED THE CONTENTION O F THE APPELLANT COMPANY AS WELL AS CAREFULLY GONE THROUGH THE AVAILABLE DOC UMENTS ON RECORD. I FIND THAT THE INALIENABLE FACT OF THE APPELLANT'S CASE I S THAT THE TIFPL MADE AN INVESTMENT WITH THE APPELLANT ON JULY 30, 2002. THE REDEMPTION WAS DUE ON FEBRUARY 5, 2003. THE APPELLANT ON RECEIPT OF REQUE ST FOR REDEMPTION BY TIFPL FOUND THAT THE REQUEST RECEIVED ON FEBRUARY 2 003 WAS FRAUDULENT AND THE APPELLANT'S AGENT PROCESSED SUCH REQUEST AND A REDEMPTION CHEQUE OF 3.65 CRORES WAS HANDED OVER TO A PERSON ON MARCH 3, 2003. THE APPELLANT LODGED A FIR ON APRIL 7, 2003 IN MRA MARG POLICE ST ATION. THE APPELLANT CREATED A PROVISION FOR EMBEZZLEMENT IN THE FY 2003 -04 AMOUNTING TO RS.3.92 CRORES AND ACCORDINGLY VIDE A LETTER DATED OCTOBER 31ST 2006 AND CLAIMED THE PROVISION AS A LOSS IN THE AY 2004-05 W HICH WAS DENIED. THE 13 ITA NO. 2716& 2698/MUM/2011 (ASSESSMENT YEAR : 2007-08) MATTER TRAVELLED TO THE HON'BLE ITAT AND VIDE ORDER ITA NO.4990/MUM/2007 DATED 11/8/2009, THE HON'BLE TRIBUNAL DECIDED THE A LLOWABILITY OF EMBEZZLEMENT OF LOSS. HOWEVER, IT OBSERVED THAT SIN CE THE APPELLANT HAD ONLY CREATED A PROVISION IN ITS, BOOKS OF ACCOUNTS, THE CONTINGENT LIABILITY TO FULFIL IN FUTURE CANNOT BE ALLOWED TO THE APPELLANT IN THE YEAR OF CREATION OF THE PROVISION AND WILL THUS, BE ALLOWED IN THE YEAR OF ACTUAL PAYMENT. 2.3.2 THE APPELLANT KEPT THE DEMAND ALIVE FOR THE CLAIM OF THE PROVISION ON ACCOUNT OF THIS EMBEZZLEMENT IN THE AY 2005-06 ALSO . MY LD. PREDECESSOR DID NOT ALLOW THE CLAIM ON THE SAME REASONING AS INDICA TED BY THE HON'BLE IT AT AS REFERRED SUPRA. THE APPELLANT IN THE CURRENT YEA R HAD PAID TO TIFPL AN AMOUNT OF RS.4,42,73,539 VIDE CHEQUE NO.112500 DATE D 28/7/2006 AS FULL AND FINAL SETTLEMENT FOR THE PENDING DISPUTE. THIS PAYMENT WAS MADE AGAINST THE OPENING PROVISION OF RS.3.92 CORERS IN. PROVIDED IN THE FY 2004- 05. THE APPELLANT IN FACT PAID AN EXTRA AMOUNT OF R S.50,57,940 BY DEBITING TO THE P&L ACCOUNT. THE APPELLANT ACCORDINGLY CLAIMED RS.3,92,15,599 ON PAYMENT BASIS AND ALSO RS.50,57,940 WHICH WAS PAID TO TIFPL ON ACCOUNT OF THE INTEREST ACCRUED ON SUCH LIABILITY. THE LD. AO HAS ALLOWED THE CLAIM OF RS.3.92 CRORES, HOWEVER, DID NOT ALLOW THE CLAIM OF RS.50,57,940 ON THE GROUND THAT THE APPELLANT HAS FILED SUIT AGAINST TH E VARIOUS PARTIES AND THEREFORE, THE CLAIM HAS NOT REACHED ITS FINALITY. IN MY OPINION, THE LD. AO HAS NOT PROPERLY APPRECIATED THE FACTS OF THE CASE. THE FACT THAT THE APPELLANT IS PURSUING FOR RECOVERY FROM THE FRAUDULENT PARTY IS A SUBJECT MATTER BETWEEN THE APPELLANT IN CONJUNCTION WITH THE STATE I.E. TH E GOVT. AND THE FRAUDULENT PARTY, IT HAS NOTHING TO DO WITH THE SETTLEMENT OF DISPUTE WITH THE PARTIES WHOSE PAYMENT WAS DUE SINCE LONG. THE FACT THAT THE APPELLANT HAD PAID A SUM OF RS.4,42,73,539 HAS NOT BEEN DENIED BY THE LD . AO. THE APPELLANT HAS REACHED THE SETTLEMENT AFTER WAITING SO LONG AND PA ID THE FINAL AMOUNT TO M/S. TIFPL AND FINALLY SETTLED THE ISSUE WITH TIFPL . HOWEVER, IT'S PURSUING THE MATTER WITH THE FRAUDULENT PARTIES AND IN CASE, THE RE IS RECOVERY, IT HAS TO BE TREATED AS INCOME IN CASE IF THE SAME IS OVER THE A BOVE OF THE SETTLEMENT AMOUNT PAID TO TIFPL. THEREFORE, THE ADDITION MADE BY THE LD. AO CANNOT BE SUSTAINED BOTH IN LAW AND ON FACTS AND IS ACCORDING LY DELETED. AGGRIEVED, NOW THE REVENUE IS IN SECOND APPEAL BEFO RE THE TRIBUNAL. 9. WE HAVE HEARD RIVAL CONTENTIONS AND GONE THROUGH FACTS AND CIRCUMSTANCES OF THE CASE. WE FIND THAT TIFPL MADE AN INVESTMENT WITH THE ASSESSEE ON 30/07/2002 AND REDEMPTION WAS DUE O N 05/02/2003. IT WAS FOUND ON RECEIPT OF REQUEST FOR REDEMPTION BY T IFPL THAT THE REQUEST RECEIVED ON FEBRUARY 2003 WAS FRAUDULENT, B UT ASSESSEES 14 ITA NO. 2716& 2698/MUM/2011 (ASSESSMENT YEAR : 2007-08) TRANSFER AGENT PROCESSED SUCH REQUEST AND A REDEMPT ION CHEQUE OF 3.65 CRORES WAS HANDED OVER TO A PERSON ON 03/03/2003. T HE ASSESSSEE LODGED A FIR ON 07/04/2003 IN MRA MARG POLICE STATI ON AND ALSO CREATED A PROVISION FOR EMBEZZLEMENT IN THE FY 2003 -04 AMOUNTING TO RS.3.92 CRORES AND ACCORDINGLY CLAIMED THE PROVISIO N AS A LOSS IN THE AY 2004-05 WHICH WAS DENIED. THE MATTER TRAVELLED TO T HE ITAT AND VIDE ORDER ITA NO.4990/MUM/2007 DATED 11/8/2009, THE TRI BUNAL DECIDED THE CLAIM OF EMBEZZLEMENT OF LOSS AGAINST ASSESSEE BY OBSERVING THAT THE ASSESSEE HAD ONLY CREATED A PROVISION IN ITS, B OOKS OF ACCOUNTS, THE CONTINGENT LIABILITY TO FULFIL IN FUTURE CANNOT BE ALLOWED IN THE YEAR OF CREATION OF THE PROVISION AND WILL THUS, BE ALLOWED IN THE YEAR OF ACTUAL PAYMENT. WE FIND THAT THE ASSESSEE KEPT THE DEMAND ALIVE FOR THE CLAIM OF THE PROVISION ON ACCOUNT OF THIS EMBEZZLEMENT IN THE AY 2005-06 ALSO. THE ASSESSEE IN THE FINANCIAL YEAR RELEVANT TO THIS ASSESSMENT YEAR PAID TO TIFPL AN AMOUNT OF RS.4,42,73,539 VIDE CHEQ UE NO.112500 DATED 28/7/2006 AS FULL AND FINAL SETTLEMENT FOR TH E PENDING DISPUTE. THIS PAYMENT WAS MADE AGAINST THE OPENING PROVISION OF RS.3.92 CORERS PROVIDED IN THE FY 2004-05. THE ASSESSEE ACCORDINGL Y CLAIMED RS.3,92,15,599 ON PAYMENT BASIS AND ALSO RS.50,57,9 40 WHICH WAS PAID TO TIFPL ON ACCOUNT OF THE INTEREST ACCRUED ON SUCH LIABILITY. THE AO HAS ALLOWED THE CLAIM OF RS.3.92 CRORES, HOWEVER, DID N OT ALLOW THE CLAIM OF RS.50,57,940 ON THE GROUND THAT THE ASSESSEE HAS F ILED SUIT AGAINST THE VARIOUS PARTIES AND THEREFORE, THE CLAIM HAS NOT RE ACHED ITS FINALITY. WE FIND THAT THE ASSESSEE HAS BEEN PURSUING HIS CLAIM WITH THE BANKING OMBUDSMAN AS WELL AS FILING OF AN FIR WITH THE POLI CE BUT NO RESULT WAS COMING OUT OF THE SAME. THE FACT THAT THE ASSESSE E HAD PAID A SUM OF 15 ITA NO. 2716& 2698/MUM/2011 (ASSESSMENT YEAR : 2007-08) RS.4,42,73,539 HAS NOT BEEN DENIED BY THE AO. THE A SSESSEE HAS REACHED THE SETTLEMENT AFTER WAITING SO LONG AND PA ID THE FINAL AMOUNT TO TIFPL AND FINALLY SETTLED THE ISSUE WITH TIFPL. IN THE PRESENT CASE BEFORE US THE ASSESSEE HAD PURSUED THE MATTER AND S IDE BY SIDE MADE PAYMENT TO TIFPL ON ACCOUNT OF REDEMPTION OF DEBENT URES, WHICH HAS RIGHTLY BEEN PAID TO THE LEGITIMATE PARTY AND CLAIM ED THE SAME AS DEDUCTION. IN THE GIVEN FACTS AND CIRCUMSTANCES, WE ARE OF THE VIEW THAT THE CIT(A) HAS RIGHTLY ALLOWED THE CLAIM OF TH E ASSESSEE AND WE CONFIRM THE SAME. THIS ISSUE OF REVENUES APPEAL I S DISMISSED. 10. IN THE RESULT, APPEAL OF ASSESSEE IS ALLOWED AN D THAT OF REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 18/05/201 6 SD/- SD/- (RAJESH KUMAR) (MAHAVIR SINGH) ACCOUNTNAT MEMBER JUDICIAL M EMBER MUMBAI, DATED 18/05/2016 VM , SR. PS COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT , 2. THE RESPONDENT. 3. THE CIT(A)- 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. BY ORDER, //TRUE COPY// (DY./ASSTT. REGISTRAR) ITAT, MUMBAI