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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: SHRI R. C. SHARMA, AM & SHRI MAHAVIR SINGH, JM
Per Mahavir Singh, JM: These are cross appeals, by Revenue and the assessee, are arising out of order of CIT(A), Mumbai in Appeal No. CIT(A)-14/IT.39/Rg.6(1)/11-12 dated 31.01.2013. 2 ITA Nos. 3218 & 3099/M/13 (A.Y.2009-10) Indiareit Fund Advisors Pvt. Ltd. Assessment was framed by ACIT, Range 6(1), Mumbai u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) for AY 2009-10. 2. At the outset, the ld. Counsel for the assessee stated that he is not interested in prosecuting the first three grounds of assessee’s appeal, which reads as under: ‘1. On facts and in law the Commissioner of Income-tax (Appeals)-XIV, Mumbai (“learned CIT(A)”) erred in upholding the order passed by the Additional Commissioner of Income-tax, Range 6(1)-3, Mumbai (“learned AO”) which were bad in law to the extent of additions confirmed by the learned CIT(A).
On facts and in circumstances of the case and in law, the learned CIT(A) has erred in confirming the actions of the learned AO in applying provisions of Rule 8D of the Income Tax Rules, 1962 ("the Rules") while making disallowance of Rs.6,967 under section 14A of the Income-tax Act, 1961 ("the Act").
On facts and in circumstances of the case and in law, the learned CIT(A) has erred in not adjudicating on the disallowance of Rs.2,50,00,000 being fees paid by Appellant to Piramal Enterprises Limited (''PEL'').
On query from the Bench, the ld. Sr. DR has not objected for the same. Hence, these grounds are dismissed as not pressed.
First we take up ITA No.3099/Mum/2013 of assessee’s appeal. The only effective issue remains for our adjudication in this appeal of the assessee is as regards to the order of the CIT(A) confirming the action of the AO in disallowing the expenditure incurred in connection with the Offshore Fund II of Rs.1,07,48,723/-, treating the same expenses as capital in nature. For this assessee has raised the following ground:
“4. On facts and in circumstances of the case and in law, the Ld. CIT(A) has erred in confirming the actions of the Ld. AO disallowing expenditure incurred in connection with Offshore Fund II of Rs.1,07,48,723/- on the alleged ground that the said expenses are capital in nature.”
Briefly stated facts are that the assessee is engaged in the business of providing investment advisory services in the real estate. The assessee company during the year under consideration has disclosed management fees from Indiareit Fund Scheme I and Scheme III and also disclosed monetary fees and advisory fees from Indiareit Investment Management Co. The Assessing Officer (AO) during the course of 3 ITA Nos. 3218 & 3099/M/13 (A.Y.2009-10) Indiareit Fund Advisors Pvt. Ltd. assessment proceedings noticed from the profit and loss account and details submitted that the assessee has incurred expenses on travelling, which is not related to assessee’s existing business. According to the A.O., the assessee company is in the business of providing investment advisory service whereas this expenditure is toward promotion of Offshore Fund II, which was launched during the year under consideration. According to the AO, this Offshore Fund which was proposed to be launched during the year under consideration of which desired funds could not be raised, hence the assessee company could not receive advisory fees as well as reimbursement of expenses, but claimed the same against the assessee. The nature of these expenses incurred was foreign air travelling expenses and foreign lodging and boarding expenses in connection with the offshore fund tour, as under: Foreign Air Travelling Expenses Rs.55,99,987/- Foreign Lodging and Boarding Expenses Rs.51,48,736/- Rs.1,07,48,723/-
The assessee explained before the A.O. that the assessee company was to associate Offshore Fund II to raise desire level of funds from overseas investor and for such services the fee that the assessee was to get was calculated at a percentage of the amount of total corpus of the management and once the offshore funds raised in respect to fund to, i.e., the desire funds. Accordingly, the assessee in addition to fees, the assessee company also received reimbursement of expenses incurred by it but since the Offshore Fund II was not launched, no corpus was received and in the absence of such launch, the assessee company could not claim reimbursement of any such expenses and these were met out of the income of the assessee and claimed the same as deduction. But the AO disallowed the claim of expenses by stating that the assessee is engaged in the business of advising and existing fund as an investment advisory and the said expenses are not for the purpose of existing business or profession rather this is expended for new business, i.e., the set up of a new offshore fund called Offshore Fund II. Aggrieved, the assessee preferred an appeal before the 4 ITA Nos. 3218 & 3099/M/13 (A.Y.2009-10)
CIT(A), who confirmed the action of the A.O. by observing in paras 8.7 and 8.8 as under: ‘8.7 Thus the facts are that the appellant established a trust called Ïndiareit Fund which was approved by SEBI and which was to carry on the activity of a venture capital fund under its different Schemes by pooling together resources and finances from institutional and high net worth investors. The said "Indiareit Fund" floated 'Offshore Fund-II' and the appellant assigned itself the responsibility of organising funds for the 'Offshore Fund-II' for which the expenses incurred by the appellant were to be reimbursed. The expenses were not reimbursed because the appellant could not raise the capital for the said 'Offshore Fund-II'. The appellant, as admitted, has been in the business of 'investment advisory services and not in the activity of establishing a venture capital fund trust' and earning income there-from by raising capital for the trust'. Hence, this activity of establishing the 'venture capital fund trust' and earning the income there-from was a new activity and a new source of income for the appellant. Thus the appellant incurred expenses in respect of searching and exploring a new source of income, which could not fructify. Unless, a new business or source of income is set up and the same results in generation of revenue, the expenditure incurred cannot be termed as revenue expenditure. The same has to be held to be in the capital field. The summary of these facts is that the appellant explored the possibility of a new source of income which did not succeed.
8 Thus, it is evident that the appellant, who was earlier in the business of providing investment advisory services, had established a new venture capital fund in terms of the said "Indiareit Fund trust" and therefore it is also evident that the appellant was searching new sources and avenues of earning income. The existing business of the appellant was as an investment adviser and that too as a part of the Piramal group. Since the appellant was searching new avenues and new sources of income by establishing the said "Indiareit Fund trust" and working for raising the capital in respect of 'offshore fund-II' launched by the said trust, the expenditure incurred is nothing but the expenditure incurred in connection with exploring the feasibility of new sources of income or setting up new business venture. Hence, in my opinion, the AD has rightly held the same to be a capital expenditure. The case laws cited by the AO, support this view. In the case of Hyderabad Allwyn Metal Works Ltd (supra) cited by the AO, it has been held that the travelling expenses incurred in connection with the setting up of a new industry, is capital expenditure. In the said case, the director of the company travelled to Japan in connection with a new business which was to be set up with the Japanese collaboration. The High Court held that "it is not enough if the articles sought to be manufactured are similar to what are already being made in the sense that the firm is engaged in making goods out of steel, like refrigerator, cabinets, furniture, bus bodybuilding etc and scooters, motorcycles, two and three wheelers sought to be manufactured are also of steel. From such slender similarities it cannot be contended that the expenditure incurred is in connection with the expansion of the old business".
We find that ld. CIT(A) also relied on the decision of Andhra Pradesh High Court decision in the case of Hyderabad Allwyn Metal Works Ltd. v. CIT [1975] 98 ITR 555 and also one Juri ictional High Court decision in the case of Trade Wings
5 ITA Nos. 3218 & 3099/M/13 (A.Y.2009-10) Indiareit Fund Advisors Pvt. Ltd. Ltd. vs. CIT [1990] 185 ITR 267 (Bom.). Aggrieved against the action of the CIT(A), the assessee preferred the appeal before the tribunal.
Before us, the ld. Counsel for the assessee stated that the above stated expenditure on foreign travel, loading and boarding is in connection with the assistance it provided in relation to the Offshore Fund II to raise the desired level of funds from overseas investors. The assessee in order to generate interest among international investors, the employees of the assessee has to travel overseas for its business meetings and promotional events. In view of these facts, the ld. Counsel for the assessee stated that the expenses incurred by the assessee are necessarily in the course of regular business activity of the assessee since the assessee is engaged in the business of providing investment advisory services in the real estate sector. According to him, as a part of its role, it is required to assists the other Funds in launching the new scheme which was explained by him in view of the Investment Management Agreement dated 30.6.2006 and the trustees of the funds have been appointed by the assessee to prefer the following activities:
• advice the Trustees in floating new Schemes under the Fund, • assist in launching new Schemes by disseminating information, knowledge, data, publications like Private Placement Memorandum ("PPM"), proposed investment regime, etc. • assist in raising and collecting Capital contributions for new Fund investments; • monitor the quality and performance of the investments, etc.
Ld. Counsel for the assessee also drew our attention to relevant portion of the terms of the agreement, which is reproduced in the assessment order as well as CIT(A) order and the same reads as under: ‘Contribution agreement: Fund expenses: The fund shall be and be charged with all the following expenses: (a) Advisory Fee
6 ITA Nos. 3218 & 3099/M/13 (A.Y.2009-10) Indiareit Fund Advisors Pvt. Ltd. (b) Trusteeship Fee (c) Organizational expenses incurred in the establishment of the fund and raising the commitments (including any selling commission payable to intermediaries) for an amount up to 2 (two) % of the aggregate Capital Commitment of all investors. Any expenses in excess of the above limit will be borne by the investment Adviser.’
In view of the above, ld. Counsel for the assessee stated that this expenditure is incurred for the regular business activity of the assessee and it is not for the new business activity as alleged by the lower authorities. He also explained that by incurring these expenditure, the assessee’s business had benefited a lot, reason being it is already engaged in the business of providing services to the funds and it has shown income from management fees from Indiareit Fund Scheme I and Scheme III and also shown monetary fees and advisory fee from Indiareit Investment Management Co. In view of these arguments, the ld. Counsel for the assessee relied on the decision of the Hon’ble Bombay High Court in the case of CIT vs. National Rayon Corporation ltd. [1985] 155 ITR 413 (Bom).
On the other hand, the ld. Sr. DR relied on the orders of the lower authorities.
We have heard the rival contentions and gone through the facts and circumstances of the case. We find that the assessee-company is in the business of providing investment advisory services. During the year under consideration it has shown management fees from Indiareit Fund Scheme I and Scheme III and also shown monetary fees and advisory fees from Indiareit Investment Management Co. The assessee also claimed expenditure towards promotion of its Offshore Fund II, which was proposed to be launched by trust credit by the name Indiareit Fund, i.e., the assessee. We find from the assessee’s own arguments that if the desired funds had been raised by the assessee in regard to the said Offshore Fund II launched by the said trust, the assessee would have received advisory fees as well as reimbursement of expenses but this could not happen and therefore these expenses were claimed in the hands of the assessee. From the facts it is clearly established that the Trust called Indiareit Fund was approved by SEBI which was to carry out activity on venture
7 ITA Nos. 3218 & 3099/M/13 (A.Y.2009-10) Indiareit Fund Advisors Pvt. Ltd. capital to the funds under its different schemes by pulling resources and any finances from institution investors as well as higher network individuals. But that could not happen and the assessee claimed these expenses in the hands of the assessee. In such circumstances, whether the expenses of other entity that also a new entity is allowable in the hands of the assessee, we have raised a query from the bench but the assessee could not answer. The gain or benefit accrual to the assessee for incurring these expenditure in the assessee’s own business. We find that the assessee in addition to fees, also received reimbursement of expenses incurred by Offshore Fund-II. Since the Offshore Fund II was not launched, no corpus was received and in the absence of such launch, the assessee company could not claim reimbursement of any such expenses and these were met out of the income of the assessee and claimed the same as deduction. We also find that assessee is engaged in the business of Offshore Fund-I & III and existing fund as an investment advisory and the said expenses are not for the purpose of existing business or profession rather this is expended for new business i.e. setting up of a new offshore fund called Offshore Fund II. In such circumstances, we find that the issue is clearly covered by the decision of Hon’ble Bombay High Court in the case of Trade Wings Ltd. (supra). Accordingly, this issue of assessee’s appeal is dismissed.
The only issue in this appeal of the Revenue is as regards to the order of the CIT(A) directing the A.O. to allow the expenditure after verifying the documents and evidences, which were not produced during the course of assessment proceedings. For this, the Revenue has raised following two grounds:
"On the facts and circumstances of case and in law, the Ld. CIT(A) erred in directing the A.O. to allow the expenditure of Rs. 2.5 crores, if the assessee produces evidence for rendering advisory services to the assessee, knowing fully well that these documents/evidences were not produced during the course of assessment proceedings and that CIT(A) has no power to set aside the assessment, this direction of verifying the facts post assessment tantamount to indirect setting aside, which is not within the powers of the CIT(A) as per the Act."
"On the facts and circumstances of case and the law, the Ld. CIT(A) erred in directing the A.O. to allow the expenditure of Rs. 2.5 crores, if the assessee produces
8 ITA Nos. 3218 & 3099/M/13 (A.Y.2009-10) Indiareit Fund Advisors Pvt. Ltd. evidence for rendering advisory services to the assessee, failing to note that A.O. has made disallowance also on the premise that payment to 'related party' was excessive, unreasonable and not commensurate with the benefits received by the assessee company to the payment made. The CIT(A) erred in giving this direction of verifying the facts post assessment, which is not permissible under the law, means impliedly giving relief in respect of disallowance u/s 40A(2)( a) without bringing on record any evidence in support of the contention and assuming even if there was any evidence then relief has been given without giving reasonable opportunity of being heard to the A.O. as required under Rule 46A of the IT. Rules".
We have heard the rival contentions and gone through the facts and circumstances of the case. We find that the AO has disallowed the expenditure of Rs.2.50 crores incurred on services procured from Parimal Enterprises Limited (PEL), who was engaged for providing and giving advisory and support services. During the course of the assessment proceedings, the assessee provided to the AO the detailed list of various services for which PEL was appointed along with the copy of agreement and invoices from PEL. The assessing authority made a disallowance only on the reason that the assessee has not furnished evidences of the actual services rendered by PEL and moreover the assessee does not derived any tangible direct benefit from the services rendered by the PEL. He also noted that the expenditure is unreasonable having regard to the legitimate need of the business of the assessee. The CIT(A) merely directed the AO to verify the documents furnished by the assessee and then decide the allowability of the claim of the assessee by observing in para 7.3 to 7.5 as under: ‘7.3 I have considered the above submissions of the appellant as well as the facts of the case. The AO has disallowed the above expenditure of Rs.2,50,00,000/- mainly on the ground that the Appellant had failed to furnish evidences for actual services rendered by PEL and the Appellant did not derive any tangible direct benefit from the services rendered by PEL. On the other hand, the appellant's claim is that it has actually received the advisory and support services from Piramal Enterprises Ltd.
4 Therefore, here the question is that of the fact. It is nobody’s case that these expenses are not revenue in nature and hence as such, allowable expenses, if actually incurred and if the advisory services in terms of advice and assistance have actually been provided by Piramal Enterprises Ltd. If it is a fact that advisory and support services have actually been received by the appellant from Piramal Enterprises Ltd., then the expenses would be allowable. Otherwise, as held by the AO, the documentation furnished by the appellant (who is also a part of the Piramal group), is of no consequence and the case laws cited by the AO would be squarely applicable.
9 ITA Nos. 3218 & 3099/M/13 (A.Y.2009-10)
5 During the appellate proceedings, the appellant desired to produce certain documents to prove that such services have actually been rendered by Piramal Enterprises Ltd. In view of my observations made above, therefore, the AO is directed to examine the documents which may be furnished in support of the claim of the appellant that advisory services in terms of advice and assistance have actually been provided by Piramal Enterprises Ltd, and thereafter allow the expenditure of Rs.2,50,00,000/-, if the appellant is able to establish its claim.’
We find no infirmity in the above directions of the CIT(A) who has merely directed the AO to verify the evidences and documents and then decide the claim. Accordingly, this issue of the revenue’s appeal is dismissed. In the result, both the appeals of assessee and that of the revenue are dismissed.
Order pronounced in the open court on 15th April, 2016 (R. C. Sharma) (Mahavir Singh) लेखा सद"य / Accountant Member "या"यक सद"य / Judicial Member मुंबई Mumbai; "दनांक Dated : 15.04.2016 व."न.स./Roshani, Sr. PS
आदेश क" ""त"ल"प अ"े"षत/Copy of the Order forwarded to : 1. अपीलाथ" / The Appellant
""यथ" / The Respondent 3. आयकर आयु"त(अपील) / The CIT(A) 4. आयकर आयु"त / CIT - concerned
"वभागीय ""त"न"ध, आयकर अपील"य अ"धकरण, मुंबई / DR, ITAT, Mumbai 6. गाड" फाईल / Guard File आदेशानुसार/ BY ORDER,
उप/सहायक पंजीकार (Dy./Asstt.