DCIT 1(2)(1), MUMBAI vs. LIC NOMURA MUTUAL FUND ASSET MANAGEMENT CO. LTD, MUMBAI

LIC Mutual Fund Liquified found [can be withdrawn within 2 days]

LIC Mutual fund Income fund [can be withdrawn in short time]

LIC Mutual fund Saving Plus Fund [can be withdrawn in 72 hours]

LIC Mutual Fund Floating Rate Fund [can be withdrawn in short time] Further in July, 2010, schemes faced redemption pressure from the investors on account of tight 5 liquidity condition and higher interest rates available in the market. Accordingly, securities were sold at loss which resulted in aggregate loss of Rs. 60,82,36,469.82 and further Securities Exchange Board of India circulars dated 02.02.2010 and 21.06.2010 stipulated though money market securities with a residual maturity exceeding 91 days that were held by above schemes were directed to be marked to market (MTM) with effect from 1st August 2010 and thus process also scheme incurred loss of Rs. 51,96,83,152.38 and put together the total loss come to Rs. 112,79,19,622/-.

Before us, the learned Sr. Departmental Representative relied on the assessment order and the learned Counsel for the assessee relied on the order of CIT(A).

We have heard the rival contentions and gone through the facts and circumstances of the case. We noted that the facts narrated by CIT(A) in its order regarding the claim of expenditure being contribution of deficiencies of the mutual fund scheme managed by the assessee at ₹ 112,79,19,922/- are not disputed. It is also a fact the loss is supposed to 8 be booked in the books of the assessee as a matter of commercial expediency and to maintain the net asset value of the scheme and not to effect the source of income etc. This fact is not doubted by the AO in his assessment order but admitted this. But the AO disallowed the claim of expenses / loss only on the basis that the assessee has treated it as to have goodwill among the investors and therefore, he treated this expense as capital in nature. We noted that this issue is squarely covered by the decision of Hon’ble Supreme Court in the case of Empire Jute Co. Ltd. Vs. CIT (124 ITR 1), L.H Sugar Factory & Oil Mills Pvt. Ltd. vs. CIT (125 ITR 293), CIT vs. Malayalam Plantations Ltd. (53 ITR 140), Sassoon J. David & Co. Pvt. Ltd. Vs. CIT (118 ITR 261). From the above judgments of Hon’ble Supreme Court, we will reproduce the findings of one of the judgments of Hon’ble Supreme Court in the case of Malayalam Plantations Ltd. (supra), wherein Hon’ble Court was concerned whether Estate Duty paid by the company on the death of shareholders can be said to be, “laid out or expended wholly or exclusively for the purpose of business.” Hon’ble Supreme Court while disallowing the claim, laid down certain principles as under:-

Further, Hon’ble Supreme Court in the case of Sassoon J. David & Co. Pvt. Ltd. (supra) has laid down the following tests for treating an expenditure as wholly and exclusively for the business purposes: - “It has to be observed here that the expression "wholly and exclusively" used in section 10(2)(xv) of the Act does not mean "necessarily". Ordinarily it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under section 10(2)(xv) of the Act even though there was no compelling necessity to incur such expenditure. It is relevant to refer at this stage to the legislative history of section 37 of the Income-tax Act, 1961 which corresponds to section 10(2)(xv) of the Act. An attempt was made in the Income-tax Bill of 1961 to lay down the "necessity" of the expenditure as a condition for claiming deduction under section 37. Section 37(1) in the Bill read "any expenditure. . . .

We also noted from the arguments of the learned Counsel relied on by him of Hon’ble Karnataka High court in the case of CIT v. Canara Bank Ltd. in wherein identical set of facts were considered. The facts were that the bank had set up in Mutual fund which had floated a scheme under which an assured return of income @ 12.5% was granted to the investors. But, at the time of redemption, the scheme did not have adequate assets nor funds to honor its commitment and consequently, in order to maintain the banks goodwill and reputation, the bank decided to repurchase of units of the scheme at a price at which mutual fund had committed to the investors. The bank claimed the said amount paid towards repurchase of the units as an expenditure. The AO disallowed and finally, Hon’ble Karnataka High Court allowed the claim of the assessee. Hence, we are of the view that the CIT(A) has rightly allowed the claim of the assessee after discussion in detail as reproduced above. We, accordingly, affirmed the order of the CIT(A) on this issue.

The second issue in this appeal of Revenue is against the order of CIT(A) deleting the disallowance of elated expenses holding the same as 11 penal in nature and also not incurred for the purpose of the business. For this Revenue has raised the following ground No. 2 : -

Briefly stated facts are that the AO during the course of assessment proceedings noted that the assessee company has debited an amount of ₹ 4,62,20,860/- in the P & L Account on account of scheme related expenses under the head of administrative and other expenses. The assessee was required by the AO to explain as to why the expenses are not be disallowed. The assessee vide letter dated 06.05.2014 filed particulars of expenses which reads as under: - Sr. Particulars Amount No. 1. Difference in Unit 2,19,305 creation 2. Double interest on 1,64,365 security due to improper accounting 3. Incorrect accounting for 13,46,129 security 4. Shortfall in Systematic 2,11,392 Withdrawal plan in bond fund 5. Write off of long 4,65,800 outstanding balance appearing in ULLS as per audit observation 6. Write off of long 86,50,000 outstanding balance appearing in ULIS as per audit observation 12 7. Provision made on 10,00,000 account of fraudulent encashment of warrant

Finally, the AO held that these expenses are not incurred wholly and exclusively for the purpose of business and moreover these are penal in nature. For this he observed in Para 7.3 as under: - "7.3 From the above table, it is clear that the assessee expenses on account of many alleged errors committed by the Mutual Fund and claimed such expenditure as revenue expenditure and deducted the same as well from the taxable profit. Since, these expenses are penal in nature and are no way connected with the business of the assessee company, the contention of the assessee company is totally wrong that the expenses have been incurred wholly and exclusively for the purpose of the business. Therefore, the same are disallowed as not having been incurred for the purpose of the business of the assessee company and accordingly an amount of Rs. 1,20,57,921/- as per the table above is hereby disallowed and added back to the total income of the assessee.”

Aggrieved, assessee preferred the appeal before CIT(A). The CIT(A) allowed the claim of the assessee by observing as under: - “I have gone through the modified agreement entered between LIC Mutual fund Trust Co. Ltd. and Jeevan Bima Sahyog Asst Management Company Ltd. dtd. 06.10.2003 wherein as per clause no. 3 13 investments are supposed to be invested in approved investments only such as - Laws means the laws of India including any rules, regulations or directives and orders made thereunder whether generally or otherwise and shall be deemed also to include the Securities and exchange Board of India Ct, 1992 (15 of 1992), the Securities and Exchange Board of India, Rules, 1992 and Securities and Exchange Board of India (Mutual Fund) Regulations, 1996, the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and the Depositories Act, 1996 (22 of 1996) and such other laws as may be enacted from time to time and other rules or regulations or guidelines issued or made thereunder and any modifications thereto or substitutions thereof.