QUANTUM ADVISORS P.LTD, MUMBAI V. ITO WD 1(3)(1), MUMBAI

ITA 6797/MUM/2016

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 9797 (ITAT-MUMBAI)
• Duration Of Justice: 8 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-07-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: SMC
• Assessment Year: 2006-2007
• Appeal Filed On: 18-11-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: BHARTI SINGH
• Keywords: Depreciation; Rule of consistency; Revenue expenditure; Capital expenditure
• Section: 14A

Judgement Text

THE INCOME TAX APPELLATE TRIBUNAL SMC BENCH, MUMBAI BEFORE SHRI B.R. BASKARAN (AM) I.T.A. NO. 6797 /MUM/ 2 016 (ASSESSMENT YEAR 20 06 - 07 ) QUANTUM ADVISORS PVT. LTD. 503, REGENT CHAMBER NARIMAN POINT MUMBAI - 400 021. PAN : AAACQ0281C VS. ITO WARD 1(3)(( 1) AAYAKAR BHAVAN M.K. ROAD MUMBAI - 400 020. ( APPELLANT ) ( RESPONDENT ) ASSESSEE BY SHRI NIRAJ D. SHETH DEPARTMENT BY MISS BHARTI SINGH DATE OF HEARING 4.5 . 201 7 DATE OF PRONOUNCEMENT 24 .7 . 201 7 O R D E R THE APPEAL FILED BY THE ASSESS EE IS DIRECTED AGAINST THE ORDER DATED 31 - 03 - 2016 PASSED BY LD CIT(A) - 3, MUMBAI AND IT RELATES TO THE ASSESSMENT YEAR 2006 - 07. THE ASSESSEE IS CHALLENGING THE DECISION TAKEN BY LD CIT(A) ON THE FOLLOWING TWO ISSUES: - (A) DISALLOWANCE OF REGISTRATION FEE PAID TO SEBI. (B) DISALLOWANCE U/S 14A OF THE ACT. 2. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF PROVIDING PORTFOLIO MANAGEMENT AND ADVISORY SERVICES. DURING THE YEAR UNDER CONSIDERATION, IT DECIDED TO SET UP A MUTUAL FUND ARM BY NAME M/S QUANTUM MU TUAL FUND AND ACCORDINGLY APPLIED TO SEBI FOR OBTAINING REGISTRATION CERTIFICATE FOR THE SAME. FOR THAT PURPOSE, IT PAID A SUM OF RS.25.00 LAKHS TO SEBI AND CLAIMED THE SAME AS REVENUE EXPENDITURE. THE AO CONSIDERED THE SAME AS CAPITAL EXPENDITURE AND DI SALLOWED THE SAME. IN THE ALTERNATIVE, THE ASSESSEE SOUGHT DEPRECIATION BENEFITS ON THE ABOVE SAID PAYMENT WITH THE PLEA THAT IT WAS A COMMERCIAL RIGHT OBTAINED BY IT. THE AO REJECTED THE SAID CONTENTION ALSO. THE LD CIT(A) QUANTUM ADVISORS PVT. LTD. 2 CONFIRMED THE SAME. WHEN THE MATTER REACHED THE TRIBUNAL, THE ITAT RESTORED BACK THE MATTER TO THE FILE OF THE AO. IN THE SET ASIDE PROCEEDINGS ALSO, THE AO TOOK THE VERY SAME VIEW ON BOTH THE ISSUES AND THEY WERE CONFIRMED BY LD CIT(A). HENCE THIS APPEAL CAME TO BE FILED BEFORE TH E TRIBUNAL BY THE ASSESSEE. 3. THE LD A.R SUBMITTED THAT THE MUTUAL FUND BUSINESS STARTED BY THE ASSESSEE IS EXPANSION OF THE EXISTING BUSINESS LINE OF THE ASSESSEE AND HENCE THE REGISTRATION FEE SHOULD BE ALLOWED AS DEDUCTION. HE SUBMITTED THAT THE REGISTRATION FEE PAID TO SEBI HAS BEEN CONSIDERED TO BE REVENUE EXPENDITURE BY HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. JOINT VENTURE OF MCL AND MMCL (2015)(229 TAXMAN 527). HE FURTHER SUBMITTED THAT THE HONBLE BOMBAY HIGH COURT HAS CONSIDERED TH E ISSUE OF ELIGIBILITY OF CLAIMING DEPRECIATION ON THE ABOVE SAID PAYMENT IN THE CASE OF DIT VS. HSBC ASSET MANAGEMENT (I) (P) LTD (2014)(47 TAXMANN.COM 286) AND HELD THAT THE DEPRECIATION IS ALLOWABLE ON THE ABOVE SAID PAYMENT, SINCE THE AO HAD ALLOWED DE PRECIATION IN THE EARLIER YEARS. HE SUBMITTED THAT THE HSBC ASSET MANAGEMENT (I) (P) LTD HAD CAPITALIZED THE REGISTRATION CHARGES PAID TO SEBI AND HAD CLAIMED DEPRECIATION, WHICH WAS DISALLOWED BY THE AO. HE SUBMITTED THAT THE ASSESSEE IS CLAIMING THE PA YMENT AS REVENUE EXPENDITURE, SINCE IT IS PAID IN THE COURSE OF EXPANSION OF EXISTING BUSINESS. 4. THE LD D.R, ON THE CONTRARY, SUBMITTED THAT THE REGISTRATION FEE OF RS.25.00 LAKHS IS PAID ONLY ONCE AND FURTHER IT IS NOT REFUNDABLE. HENCE THE ASSESS EE WOULD BE GETTING ENDURING BENEFIT AND FURTHER IT HAS BEEN INCURRED PRIOR TO THE COMMENCEMENT OF BUSINESS. HENCE IT CANNOT BE ALLOWED AS REVENUE EXPENDITURE. HOWEVER, THE SAID PAYMENT DOES NOT GIVE ANY COMMERCIAL RIGHT AND HENCE THE SAID PAYMENT WILL N OT GIVE RISE TO ANY INTANGIBLE ASSET ELIGIBLE FOR DEPRECIATION. ACCORDINGLY THE LD D.R SUBMITTED THAT THE ALTERNATIVE CLAIM OF THE ASSESSEE IS ALSO LIABLE TO BE DISMISSED. QUANTUM ADVISORS PVT. LTD. 3 5. I HEARD THE PARTIES ON THIS ISSUE AND PERUSED THE RECORD. I NOTICE THAT TH E ASSESSEE IS ENGAGED IN THE BUSINESS OF PROVIDING ADVISORY SERVICES AND PORTFOLIO MANAGEMENT SERVICES. THE ASSESSEE HAS DECIDED TO SET UP A MUTUAL FUND BY NAME QUANTUM MUTUAL FUND AND AS A SPONSOR OF THE MUTUAL FUND, IT HAS PAID THE REGISTRATION FEE OF RS.25.00 LAKHS. IN MY VIEW, THE ASSESSEE WAS UNDERTAKING A NEW LINE OF BUSINESS ACTIVITY, WHICH SHALL BE CARRIED ON BY OTHER ARM OF THE ASSESSEE. IN THIS VIEW OF THE MATTER, I AM OF THE OPINION THAT THE REGISTRATION FEE OF RS.25.00 LAKHS CANNOT BE CONSI DERED TO HAVE BEEN INCURRED TOWARDS EXPANSION OF EXISTING BUSINESS OF THE ASSESSEE, SINCE EXISTING LINE OF BUSINESS WAS UNDERTAKING PORTFOLIO MANAGEMENT AND PROVIDING ADVISORY SERVICES AND NOT MUTUAL FUND ACTIVITY. I FIND SUPPORT FOR MY VIEW FROM THE DECI SION TAKEN BY HSBC ASSET MANAGEMENT (I)(P) LTD, ANOTHER PLAYER IN MUTUAL FUND INDUSTRY, WHICH HAD CAPITALIZED THE IDENTICAL PAYMENT MADE BY IT. THE DECISION RENDERED BY HONBLE GUJARAT HIGH COURT IN THE CASE CITED ABOVE, WHICH WAS RELIED UPON BY THE ASSES SEE, IN TURN, PLACES RELIANCE ON THE DECISION RENDERED BY HONBLE KERALA HIGH COURT IN THE CASE OF VYSYA BANK LTD. I HAVE GONE THROUGH THE SAME AND I FIND THAT THERE IS NO PARITY OF FACTS WITH THAT OF THE ASSESSEE AND HENCE SAID DECISIONS WOULD NOT COME T O THE HELP OF THE ASSESSEE. ACCORDINGLY I HOLD THAT THE IMPUGNED PAYMENT CANNOT BE CONSIDERED AS REVENUE EXPENDITURE. 6. I SHALL NOW CONSIDER THE ALTERNATIVE CLAIM OF THE ASSESSEE. THE TAX AUTHORITIES HAVE TAKEN THE VIEW THAT THE IMPUGNED PAYMENT SHALL NOT FALL IN THE CATEGORY OF INTANGIBLE ASSETS MENTIONED IN SEC. 32(1)(II) OF THE ACT. FROM THE DECISION RENDERED BY HONBLE BOMBAY HIGH COURT IN THE CASE OF HSBC ASSET MANAGEMENT (I)(P)LTD (SUPRA), I FIND THAT THE AO HAD ALLOWED DEPRECIATION CLAIMED BY THE ASSESSEE IN EARLIER YEARS AND HAS REJECTED THE CLAIM IN THE YEAR BEFORE THE HIGH COURT. SINCE THE SAID PAYMENT HAS ALREADY ENTERED THE BLOCK OF QUANTUM ADVISORS PVT. LTD. 4 ASSETS, THE HONBLE BOMBAY HIGH COURT UPHELD THE ORDER OF THE TRIBUNAL IN HOLDING THAT THE CLAIM IS ALL OWABLE UNDER THE PRINCIPLE OF CONSISTENCY. THUS THE HONBLE BOMBAY HIGH COURT HAS NOT DECIDED THE ISSUE FROM THE ANGLE OF SEC. 32(1)(II) OF THE ACT. I NOTICE THAT THE HONBLE DELHI HIGH COURT HAS HELD IN THE CASE OF SHARP BUSINESS SYSTEM VS. ITO (211 TAX MAN 576) THAT THE DEPRECIATION U/S 32(1)(II) IS NOT ALLOWABLE ON THE FEES AND REGISTRATION CHARGES. ACCORDINGLY I AM OF THE VIEW THAT THE LD CIT(A) WAS JUSTIFIED IN REJECTING THE CLAIM OF DEPRECIATION. 7. THE NEXT ISSUE RELATES TO THE DISALLOWANCE MA DE U/S 14A OF THE ACT. THIS ISSUE WAS ALSO SET ASIDE TO THE FILE OF THE AO BY THE TRIBUNAL IN THE EARLIER ROUND. THE ASSESSEE HAS RECEIVED DIVIDEND INCOME OF RS.2,18,855/ - . THE AO COMPUTED THE DISALLOWANCE AT RS.3,99,765/ - BY ADOPTING THE METHODOLOGY PR ESCRIBED IN RULE 8D(2)(III), I.E., AT 0.5% OF THE AVERAGE VALUE OF INVESTMENTS. BEFORE LD CIT(A), THE ASSESSEE SUBMITTED THAT THE AVERAGE VALUE OF INVESTMENTS COMPUTED BY THE ASSESSEE INCLUDES INVESTMENTS, WHOSE INCOME IS TAXABLE. ACCORDINGLY THE LD CIT( A) REDUCED THE AMOUNT OF DISALLOWANCE TO RS.3,92,014/ - BY EXCLUDING VALUE OF INVESTMENTS, INCOME FROM WHICH IS TAXABLE. 8. THE LD A.R SUBMITTED THAT THE TAX AUTHORITIES HAVE ADOPTED THE METHODOLOGY PRESCRIBED IN RULE 8D, EVEN THOUGH THE HONBLE BOMB AY HIGH COURT HAS HELD IN THE CASE OF GODREJ BOYCE MANUFACTURING CO LTD (328 ITR 81) HAS HELD THAT THE PROVISIONS OF RULE 8D SHALL NOT APPLY TO AY 2007 - 08 EARLIER YEARS. ACCORDINGLY HE SUBMITTED THAT THE DISALLOWANCE MAY BE MADE ON A REASONABLE BASIS. 9. ON THE CONTRARY, THE LD D.R SUBMITTED THAT THE LD CIT(A) HAS SUSTAINED THE ADDITION ON THE BASIS OF WORKINGS GIVEN BY THE ASSESSEE. QUANTUM ADVISORS PVT. LTD. 5 10. I HAVE HEARD THE PARTIES ON THIS ISSUE. THE PROVISIONS OF RULE 8D SHALL NOT APPLY TO THE YEAR UNDER CONSIDERAT ION AS PER THE DECISION RENDERED BY HONBLE BOMBAY HIGH COURT, REFERRED SUPRA. THE LD A.R SUBMITTED THAT THE DIVIDEND HAS BEEN RECEIVED MOSTLY FROM MUTUAL FUNDS. HE SUBMITTED THAT THE ASSESSEE IS ALREADY IN THE BUSINESS OF PORTFOLIO MANAGEMENT AND HENCE NO SEPARATE DIVISION IS REQUIRED FOR MAKING INVESTMENTS. I FIND MERIT IN THE SAID SUBMISSIONS. SINCE THE YEAR UNDER CONSIDERATION IS AY 2006 - 07, THE DISALLOWANCE IS REQUIRED TO BE MADE ON A REASONABLE BASIS. ACCORDINGLY I HOLD THAT THE DISALLOWANCE TO T HE EXTENT OF 10% OF DIVIDEND INCOME SHALL MEET THE REQUIREMENTS OF PROVISIONS OF SEC. 14A. ACCORDINGLY I SET ASIDE THE ORDER PASSED BY LD CIT(A) AND DIRECT THE AO TO RESTRICT THE DISALLOWANCE U/S 14A TO 10% OF THE DIVIDEND INCOME. 11. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER HAS BE EN PRONOUNCED IN THE COURT ON 24 .7 . 201 7. SD/ - (B.R.BASKARAN) ACCOUNTANT MEMBER MUMBAI ; DATED : 24 / 7 / 20 1 7 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) PS ITAT, MUMBAI