The Commissioner Of Income Tax-3 v. M/S. Dsp Merrill Lynch

IN THE HIGH COURT OF JUDICATURE AT BOMBAY VPH ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL No. 1286 OF 2008 The Commissioner of Income Tax-3 Appellant Vs M/s. DSP Merrill Lynch ... Respondent Investment Managers Ltd. Mr. Vimal Gupta, for the appellant. Mr. P.J. Pardiwalla, Sr. counsel with BN. D. Damodar i/b Kanga & Co., for the respondent. CORAM: Dr. S. RADHAKRISHNAN, & V. C. DAGA, JJ. DATED: DECEMBER 10, 2008. P.C.: ---- . Heard the learned counsel for the appellant and the learned counsel for the respondent. The appellant has raised following questions of law- (i) Whether the facts and circumstances of the case and in law the ITAT was justified in upholding the order of CIT (A) in deleting the disallowance of Rs.20,15,85,238/- made by way of capital expenditure on the initial issue expenditure on the mutual funds? (ii) Whether on the facts and circumstances of the - 2 - case and in law the ITAT was justified in upholding the order of CIT (A) in deleting the disallowance of Rs.8,12,450/- by way of capital expenditure on the professional and legal charges without appreciating the fact that this expenditure is incurred towards issue of capital and therefore is disallowable in computing the total income of the asessee? (iii) Whether on the facts and circumstances of the case and in law the ITAT was justified in ignoring the decision of the Supreme Court in the case of M/s. Brook Bond India Ltd. Vs. CIT reported in 224 ITR wherein it is held that the expenditure incurred by the company with a view to increase its share capital is disallowable? 2. Perused the judgment and order of the Tribunal dated 3rd May, 2007. The Tribunal gave its finding as under- "2.4 The intial expenses directly incurred for raising capital are in nature and cannot be allowed by way of deduction as revenue expenditure. But the proposition would apply in a case where the expenditure incurred and - 3 - the capital raised is by one and the same assessee. In the assessee’s case, the expenses have been incurred by the assessee himself but the capital raised was not for the assessee but for the mutual funds, which are independent entities. As far as the assessee is concerned, its capital structure does not get increased by the capital, as the same was raised for the mutual funds. "2.5 The nature of the expenses is to be seen in the context of the business of the assessee. The assessee is the business of asset management. The asset management business, inter alia, governed by the Securities & Exchange Board of India (in short SEBI). There is nothing on record to suggest out that the assessee had in any manner violated the Rules and Regulations set out by the said Regulatory Authority. For the purposes of conducting its business, there was no bar on the assessee to incur expenses, otherwise than the expenses incurred were not in dispute. The expenses incurred were the assessee’s own expenditure and it was a part and parcel of the profit-making activity of the assessee. The expenditure had a direct - 4 - nexus with the assessee’s own business of asset management. There was no valid basis to treat the expenses in question as capital in character, as incurring of such expenditure did not result in any creation of any capital asset. No benefit of long and enduring nature had been derived by incurring the said expenditure. The Schemes under reference, and the business of the assessee is independent activities of each other. The expenses incurred by the assessee was an independent entity for conducting its own business of asset management could not be disallowed as capital expenses by linking them with the raising of funds for the Schemes of Mutual the assessee. The expenditure had a direct - 4 - nexus with the assessee’s own business of asset management. There was no valid basis to treat the expenses in question as capital in character, as incurring of such expenditure did not result in any creation of any capital asset. No benefit of long and enduring nature had been derived by incurring the said expenditure. The Schemes under reference, and the business of the assessee is independent activities of each other. The expenses incurred by the assessee was an independent entity for conducting its own business of asset management could not be disallowed as capital expenses by linking them with the raising of funds for the Schemes of Mutual Funds, which are again independent entities." 3. In view of the above findings and fact, wse do not find any substantial question of law involved in the appeal, which is accordingly dismissed. Sd/- Sd/- [ V.C. DAGA, J.] [ Dr. S. RADHAKRISHNAN, J.]