Case Law Details

Case Name : Income-Tax Officer Vs HDFC Trustee Company Ltd (ITAT Mumbai)
Appeal Number : I.T.A. Nos. 5669 & 5670/Mum/2015
Date of Judgement/Order : 21/02/2018
Related Assessment Year : 2010-11 & 2011-12
Courts : All ITAT (4867) ITAT Mumbai (1575)

Income-Tax Officer Vs HDFC Trustee Company Ltd (ITAT Mumbai)

Upon conjoint reading of Trust Deed and SEBI directions as above, we conclude 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.

1.  The sole ground raised in assessee’s appeal pertains to disallowance of certain legal & professional fees amounting to Rs.63,21,606/-, being reimbursed by the Assessee to HDFC AMC to carry out investigations pursuant to certain SEBI directions.

2.1  The brief facts qua the issue are that one employee of HDFC AMC namely Mr. Nilesh Kapadia-Asst. Vice President entrusted with executing orders on behalf of mutual fund, was found to be involved in certain front running activities in connivance with few outsiders. It was alleged that Mr. Nilesh Kapadia provided tips to few outsiders for purchases / sale of certain scrips based on which these outsiders placed their orders in respect of such scrips ahead of the orders of HDFC mutual fund schemes. The said activity would increase the price payable by HDFC mutual fund schemes for purchases of scrips and alternatively, would reduce the net realization of scrips sold by HDFC mutual fund. In other words, the outsiders, acting on tips given by the said employee, gained at the cost of Mutual Fund Schemes by carrying out intra-day transactions. Upon receipt of information from BSE / NSE, SEBI vide its letter dated 17/06/2010 directed, inter-alia, certain investigation into the matter in terms of SEBI Act, 1992. Pursuant to those directions, the assessee constituted an investigation committee and appointed M/s KPMG at the behest of the audit committee to conduct the investigation in a scientific manner. The expenses so incurred to carry out the said investigation amounted to Rs.1,26,43,213/- which were claimed by the assessee by way of debit to Profit & Loss Account during impugned AY. The Ld. AO denied the same on the premise 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 assessee and therefore, the same could not be allowed to the assessee.

2.2 Aggrieved, the assessee contested the same with partial success before Ld. CIT(A) vide impugned order dated 04/09/2015 where Ld. CIT(A), after considering the factual matrix concluded that the whole expenditure was to be shared equally by HDFC AMC and the assessee and therefore, he restricted the disallowance to 50%. Aggrieved, the assessee is in further appeal before us.

3. The Ld. AR reiterated the stand as taken before first appellate authority and by drawing attention to Deed of Trust and SEBI order contended that overall responsibility of supervision & control of mutual fund rested with Trustee Assessee and therefore, the expenditure has rightly been claimed by the assessee particularly when the genuineness of the expenditure was not in dispute. Our attention is further drawn to the fact that the revenue is not appeal against the order of the first appellate authority. Per Contra, DR contended that the said employee in question was employed with HDFC AMC and therefore, the expenses were to be shared equally between the assessee and the HDFC AMC and therefore, the stand of Ld. CIT(A) was quite logical and justified.

4. We have carefully heard the rival contentions and pursued the documents referred to by the respective representatives and appreciated the applicable legal position. At the outset, we find that admittedly, the genuineness of the expenditure is not in dispute and the dispute relates only with the apportionment of expenditure. A perusal of various clauses of Article-7 & Article-8 of Deed of Trust dated 08/06/2000 entered into between HDFC Ltd. and the assessee and as extracted by Ld. CIT(A) on Page Numbers 16 & 17 of the appellate order and as kept in the paper-book, reveals that Trustee had overall responsibility of managing the affairs of the mutual fund and were required to ensure that overall activities of the mutual fund were carried in accordance with applicable law, SEBI regulations and in the best interest of the unit holders. The Trustees were also required to ensure compliance of overall statutory formalities and put in place adequate system and manpower and strong internal control system to act in the best interest of the unit holders and ensure that AMC did not take up any activity in contravention of SEBI Regulation. The directors, vide clause 7.6, were required to undertake remedial steps, if the conduct of business of mutual fund was not in accordance with SEBI regulation. Lastly, the Trustees were accountable for and be the custodian of the funds and property of the Scheme and hold the same in Trust for the benefits of unit holders in accordance with the SEBI regulations. In nutshell, we find that vide said Deed of Trust, the Trustee assessee was entrusted with overall conduct of the mutual fund schemes and to act as custodian / trustee in the best possible interest of the unit holders and was to ensure compliance of overall statutory formalities / regulations.

5. Upon perusal of SEBI order / directions under Sections 11(1), 11(4) and 11B of SEBI Act, 1992 dated 17/06/2010 as placed on Page Nos. 20-29 of the paper book we find that the said order, inter-alia, contains following directions:-

(i)  HDFC Asset Management Company Limited shall not utilize the services of Mr. Nilesh Kapadia for the trading activities done on behalf of HDFC Asset Management Company Limited and shall institute an internal inquiry to be conducted by the trustees of HDFC Mutual Fund in the matter.

(ii) Nilesh Kapadia and HDFC Asset Management Company Limited shall jointly deposit the estimated losses identified so far as per Annexure-A of this order, to the Trustees of HDFC Mutual Fund. This amount shall be held by the Trustees in an account segregated for this purpose, till further orders by Securities and Exchange Board of India in this matter.

(iii) The Trustees of HDFC Mutual Fund shall also set up an investigation committee to examine all transactions/dealings by Mr. Nilesh Kapadia, in his position as the dealer of HDFC Asset Management Company Limited to identify whether he had indulged in similar front running activities on other occasions. The committee shall submit the final report to the Securities and Exchange Board of India within six months of this order explaining any such instances.

(iv) The Trustees of HDFC Mutual Fund shall, within a period of one month from the date of this order, submit a plan to overhaul the internal control systems and the internal preventive measures of HDFC Asset Management Company Limited, to avoid such instance in future

A perusal of the above give strength to our findings 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 / dealings by Mr. Nilesh Kapadia. Further, the Trustees were required to submit a plan to overhaul the internal control systems and the internal preventive measures of HDFC AMC to avoid recurrence of such instances in future.

6. Hence, upon conjoint reading of Trust Deed and SEBI directions as above, we conclude 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. The Ld.CIT(A) clinched the issue in the right perspective but had no justification to restrict the impugned expenditure to 50%.

7. Viewing the matter from another angle, we find that genuineness of the expenditure was not in dispute. If the expenditure was restricted to 50% then as a logical consequence, the remaining expenditure was to be allowed to HDFC AMC since as per the logic of Ld. first appellate authority, the said expenditure was to be shared equally between the two entities. Even in that eventuality, the whole exercise would remain revenue neutral as both entities fall in the same tax bracket and we see no fruitful reason to disturb the already concluded assessments.

8. Therefore, on the facts and circumstances, we uphold that the impugned disallowance of Rs.63.21 Lacs was not justified and therefore, by deleting the same, we allow assessee’s appeal. Resultantly, the assessee’s appeal stands allowed.

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