ASSISTANT COMMISSIONER OF INCOME TAX v. GIC ASSET MANAGEMENT CO. LTD
[Citation -2005-LL-0721-6]

Citation 2005-LL-0721-6
Appellant Name ASSISTANT COMMISSIONER OF INCOME TAX
Respondent Name GIC ASSET MANAGEMENT CO. LTD.
Court ITAT
Relevant Act Income-tax
Date of Order 21/07/2005
Assessment Year 1998-99
Judgment View Judgment
Keyword Tags mercantile system of accounting • commercial expediency • legal obligation • notional income • management fee • accrual basis • mutual fund
Bot Summary: The Department in this appeal objecting to deletion of addition of Rs. 37,49,715 being the fees receivable by the assessee under the GIC Big Value Scheme. During the assessment proceedings the AO noticed that the assessee has waived fees receivable under GIC Big Value Scheme. As per the agreement fees was chargeable and the waiver of the fees was not benefited. The CIT(A) deleted the addition by placing reliance on the jurisdictional High Court s order in the case of H.M. Kashiparekh Co. Ltd. vs. CIT 39 ITR 706 wherein it was held that it is only real income of the assessee that is liable to tax and the real income cannot be arrived at without taking into account the amount foregone by the assessee. The waiver of fees at the hands of the assessee should not be taken into consideration and the income should be assessed on the accrual basis and the same has been accrued during the year under consideration. The scheme under which fee was chargeable from mutual fund is for the purpose of business only. The fee which never charged by the assessee, cannot be held as income of the assessee for the year under consideration and the CIT(A) was justified in deleting the same.


This is appeal by Department against order of CIT(A) relating to asst. yr. 1998-99. Department in this appeal objecting to deletion of addition of Rs. 37,49,715 being fees receivable by assessee under GIC Big Value Scheme. During assessment proceedings AO noticed that assessee has waived fees receivable under GIC Big Value Scheme. assessee was required to explain why fees receivable should not be added to income of assessee. It was explained that only real income, i.e., income accrued and received can be brought to tax and notional income cannot be charged to tax. It was further stated that assessee has taken conscious view that management fee receivable by assessee from mutual fund will be beneficiary as overall result of fee charge and expenses to be borne by assessee-company were almost equal. It was also explained that NAV (Net Asset Value) of scheme had fallen below assured repurchase price and also charging of fees would have resulted in correspondingly larger shortfall which eventually would have to be made good by GIC Asset Management Co. Ltd., i.e., assessee. However, AO was not satisfied with reply. As per agreement fees was chargeable and waiver of fees was not benefited. Accordingly, he disallowed claim of assessee and added to income of assessee. CIT(A) deleted addition by placing reliance on jurisdictional High Court s order in case of H.M. Kashiparekh & Co. Ltd. vs. CIT (1960) 39 ITR 706 (Bom) wherein it was held that it is only real income of assessee that is liable to tax and real income cannot be arrived at without taking into account amount foregone by assessee. It was further held by High Court that in ascertaining real income fact that assessee follows mercantile system of accounting does not have any bearing. It cannot be said that by not charging fees appellant has connived with Mutual Fund or its sponsors to render undue benefit to them or to help them evade IT. In circumstances addition of Rs. 37,49,717 was deleted. Now Department is in appeal before Tribunal. learned Departmental Representative firstly placed reliance on order of AO. It was further submitted that similar disallowance was made for asst. yr. 1997-98. CIT(A) has also deleted same and appeal of Department is pending before Tribunal. However, it was submitted that issue can be decided independently also. It was further submitted by Departmental Representative that CIT(A) has not given correct finding as, as per agreement, fee was payable by Mutual Fund. Therefore, waiver of fees at hands of assessee should not be taken into consideration and income should be assessed on accrual basis and same has been accrued during year under consideration. Therefore, order of AO should be restored on this issue. On other hand, learned Authorised Representative of assessee placed reliance on order of CIT(A). It was further submitted that fee was chargeable under one of schemes and scheme was as per objects of assessee-company. It w s further submitted that on similar issue CIT(A) has confirmed one addition. appeal of assessee has already been decided wherein other scheme was held as under various objects of assessee-company. Therefore, scheme under which fee was chargeable from mutual fund is for purpose of business only. Hence for commercial expediency fee was waived by Board of Directors in month of January, 1997 which falls during year under consideration. Attention of Bench was drawn on relevant papers placed in paper book. It was further stated that as per CBDT s circular reported in (1996) 218 ITR 219, (sic) also fees waived by assessee-company cannot be assessed to income of assessee. It was further submitted that decision of jurisdictional High Court relied on by learned CIT(A) is squarely applicable on facts of present case. We have heard rival submissions and considered them carefully. After considering and perusal of material on record we find that CIT(A) was justified in deleting notional income assessed by AO in hands of assessee-company. It was explained by AO that to make good shortfall it was decided by Board of Directors that no fees be charged to scheme for quarter ending 30th June, 1997. Board s resolution was passed in month of January, 1997. It was further explained that no fee was charged by GIC Asset Management Committee Ltd. as during period it was in-charge of management scheme performance which lagged behind promise. It was also explained that net asset value of scheme had fallen below repurchase price. It was also submitted that charging any fees would have resulted in correspondingly larger shortfall which eventually would have been to be made good for GIC Asset Management Committee Ltd. In light of above facts Board of Directors thought it prudent not to charge fee. resolution as discussed above was passed by Board of Directors on 20th Jan., 1997. certificate was filed before AO. This is not case that assessee has waived fees after close of year. This decision was on commercial expediency and was not afterthought to avoid any tax effect. There was no relationship with Mutual Fund company, as assessee-company is independent entity. In case of H.M. Kashiparekh & Co. Ltd. vs. CIT (1960) 39 ITR 706 (Bom) Hon ble Bombay High Court has held that it was real income of assessee-company for accounting year that was liable to tax and that real income could not be arrived at without taking into account amount foregone by assessee. In ascertaining real income fact that assessee was followed mercantile system of accounting did not have any bearing. accrual of commission making of accounts, legal obligation to give up part of commission, and foregoing of commission at time of making of accounts were not disjointed facts; there was dovetailing about them which cannot be ignored. Accordingly, addition made by AO, which was confirmed by Tribunal was deleted by Hon ble Bombay High Court. facts in present case are similar to above-mentioned case. Board of Directors have taken conscious decision that fee chargeable from AMC should be waived. Otherwise expenses could have been incurred more. Therefore, fee which never charged by assessee, cannot be held as income of assessee for year under consideration and CIT(A) was justified in deleting same .We further note that similar addition has been deleted by CIT(A) for asst. yr. 1997-98. CIT(A) also relied on Board s Circular No. 26(XLVII-5), dt. 26th Oct., 1953, which permits such surrender in specified circumstances and facts were quite similar to present case. Therefore, in view of Circular considered by CIT(A) for asst. yr. 1997-98 and in view of reasoning given by CIT(A) and above reasoning of ours, we confirm order of CIT(A). In result, appeal filed by Department is dismissed. *** ASSISTANT COMMISSIONER OF INCOME TAX v. GIC ASSET MANAGEMENT CO. LTD.
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