MAHARASHTRA URBAN INFRASTRUCTURE FUND (HUF),MUMBAI vs. ADDL CIT RG 19(3), MUMBAI

In this appeal, the assessee is aggrieved for disallowance of various expenses.

Rival contentions have been heard and record perused. Facts in brief are that the assessee Trust has been set up the by the Govt. of Maharashtra and Mumbai Metropolitan Region Development Authority (MMRDA) vide indenture of Trust dtd. 21.05.2004 and the operation of the assessee trust, i.e. MUIF, in short is being supervised by Maharashtra Urban Infrastructure Fund Trustee Co. Ltd. (MUIFTCL). The objectives of the trust are being executed/routed through the Maharashtra Urban 2 Infrastructure Fund Development Company Limited (MUIDCL). The envisaged functions of the assessee trust are Project Development, Capacity Building, Facilitating Finance and Partial Direct Lending. In order to manage the trust fund, the trustee of the fund has entered into a Fund Management Agreement with Maharashtra Urban Infrastructure Development Co. Ltd. (MUIDCL) on June 2nd, 2010 effective from 21.05.2004. The said Agreement empowers the Fund Manager for management and administration of the trust, including managing investments of the trust, evolving, formulating and adopting from time to time such policies and procedures, as may be conducive for the effective administration and management of the trust, and, as per the terms of the agreement, the assessee fund is liable to pay management fees as per clause 14 of the Fund Management Agreement (FMA) to the fund manager, i.e. MUIDCL. The AO has given the finding in para 4.7 of his order, and disallowed the above expenses. The AO has disallowed the above expenses on the ground that since no business activity has taken place during the year, therefore, issue of payment of expenses does not arise as the said expenses have not accrued to the assessee. The AO has also stated that since the assessee is following mercantile system of accounting, the above expenses were not accrued and hence the same cannot be allowed. As per the agreement between the assessee and MUIDCL, these charges are payable to them w.e.f 21-5-2004 for providing treasury management services to the assessee. The deductions of all these expenses claimed by the assessee are declared by the MUIDCL in 3 their Profit & Loss Account. Regarding the objection of the AO that these expenses have not accrued during the year, even though the assessee is following mercantile system of accounting, we found that as per the agreement, these amounts are clearly payable to MUIDCL w.e.f 21-5- 2004, but since the same was not paid or provided for in earlier years as the assessee was following cash system of accounting, however, since in this asst year, the assessee is following mercantile system of account, therefore, the expenses payable as per the agreement even for earlier asst. years 2005-06 to 2009-2010 and for the asst. year 2010-11 are provided in the books of accounts. The year-wise calculation of these charges payable was also provided to the AO. During the year, the assessee has claimed various charges payable to MUIDCL w. e.f. 21-5- 2004 and therefore, claimed these expenses relating to assessment year 2005-06 to 2009- 10 together with expenses for the year i. e. asst. year 2010- 11. The assessee fund followed cash system of accounting till A. Y 2009-10. During the year the assessee has changed the system of accounting to mercantile and hence the provision for the expenses payable is made during the year. Even though the part of expenses are payable for earlier assessment years i. e. 2004-05 to 2009-10, since in the earlier years no payments were made these expenses were not claimed. Further as per Government of Maharashtra resolution dt 19-07- 2002 it is specifically provided that an Asset Management Company, namely, Maharashtra Urban Infrastructure Development Company Limited (MUIDCL) will be formed for managing the fund of the assessee. Further 4 in the trust deed dt 21-05-2004, it is clearly mentioned in para 1.1.10 that fund of the assessee will be managed by MUIDCL. The Fund Management Agreement (FMA) was entered on 02-6-2010 which is effective from 21-5-2004 and it contains all the terms as per the Trust Deed of the assessee and the Government GR. Regarding the objection of the AO that these expenses have not accrued during the year, even though the assessee is following mercantile system of accounting, we found that as per the agreement, these amounts are clearly payable to MUIDCL w.e.f 21-5-2004, but since the same were not paid or provided for in earlier years as the assessee was following cash system of accounting, however, since in this asst year, the assessee is following mercantile system of account, therefore, the expenses payable as per the agreement even for earlier asst. years 2005-06 to 2009-10 and for the asst. year 2010-11 are provided in the books of accounts. The year-wise calculation of these charges payable was also provided to the AO. Further, all these expenses are shown in the Profit & Loss A/c. by MUIDCL which is clear from the audited statement of accounts for the year ended 31s1 March, 2010. Hence, the assessee is entitled to deduction of these expenses after due verification by the AO.

In view of the above discussion, we do not find any merit in the action of the lower authorities for disallowing the expenses ignoring the changed method of accounting during the year under consideration. In the interest of justice and fair-play, we restore the matter back to the file of AO for considering bonafide in the change in the method of accounting 5 ITA No.2010/14 during the year under consideration and for deciding afresh the allowability of above expenses, in terms of mercantile system of accounting being followed by the assessee during the year under consideration. We direct accordingly.

In the result, appeal of the assessee is allowed for statistical purposes. Order pronounced in the open court on this 09/12/2015.