In the case of HDFC Trustee Company Ltd, Mumbai bench of Income Tax Appellate Tribunal (ITAT) recently held that expenses incurred according to the scheme of trust deed and Securities and Exchange Board of India (SEBI) directions are eligible for deduction as it was to protect business interest.
Assessee in the instant case is a Trustee Company for HDFC mutual fund and set up by a trust deed between HDFC Ltd and the Assessee. During the year the Assessee had appointed HDFC Asset Management Company (AMC) to act as an AMC with prior approval of the Securities & Exchange Board of India for the purpose of managing the affairs of the mutual fund and managing the trust funds mobilized under various schemes as approved by the Trustee Assessee and SEBI in accordance with Trust Deed and SEBI regulation.
During the financial year it was found that one of the employee of HDFC AMC involved in certain front running activities in connivance with few outsiders. The outsiders, acting on tips given by the said employee, gained at the cost of Mutual Fund Schemes by carrying out intra-day transactions. Therafter, SEBI directed the Assessee to conduct an investigation on the matter in terms of SEBI Act 1992. Accordingly the Assessee Company constituted an investigation committee to conduct the investigation in a scientific manner and certain expenses incurred by the Assessee to carry out such investigation amounted to Rs.1,26,43,213 were claimed by the assessee by way of debit to Profit & Loss Account.
During the assessment period the Assessing Officer (AO) denied the claim of the Assessee by holding that it was for HDFC AMC to institute the internal inquiry pursuant to the said directions and therefore, the payment thereof was the responsibility of HDFC AMC and not that of the Assessee Company, hence the AO disallowed the Assessee’s claim on expenditure.
On appeal, the CIT(A) partly allowed the appeal of the Assessee and restricted the disallowance to 50%. Thereafter the Assessee approached the Tribunal on further appeal.
Before the bench, the counsel for the Assessee advocate Nitesh Joshi & Milin Thakare, submitted that the overall responsibility of supervision & control of mutual fund rested with Assessee and therefore, the expenditure has rightly been claimed by the assessee particularly when the genuineness of the expenditure was not in dispute.
After considering the rival submissions of both the parties, the Tribunal bench comprising of Judicial Member Mahavir Singh and Accountant Member Manoj Kumar Aggarwal observed that “while perusing the material facts it is clear that complete responsibility to conduct the affairs of the mutual fund rested with the Trustee Assessee. As per the terms of the directions, the Trustees of the mutual fund were required to set up an investigation committee to examine all the transactions of the said employee”.
The division bench further held that “the said expenditure was incurred by the assessee to safeguard / protect its business interest and therefore, allowable to the assessee in terms of Section 37 of the Act and the lower authority had no justification to restrict the impugned expenditure to 50%”.
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