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The Income Tax Appellate Tribunal (ITAT) Mumbai has held that signing the investment management agreement by an asset management company (AMC) is enough to claim deduction for revenue expenses even if the scheme is yet to commence.
“What is relevant under the Income Tax Act, 1961, is the setting up of the business and not the commencement of business. Accordingly, it is ‘setting up’ of the business and not the ‘commencement’ of business that is to be considered.
“A business is commenced as soon as an essential activity of the business is started,” said an ITAT Bench of RC Sharma and Amarjit Singh. The case pertains to Pinebridge India (earlier known as AIG Global Asset Management) and the Income Tax Department for the assessment year 2007-08.
I-T Department’s stance
The Income Tax Department had disallowed expenditure by the AMC on the ground that it had not started its business activity in the previous year although the company said it had started its business from the date of incorporation, which was September 30, 2006. However, the ITAT bench noted that the AMC entered into the investment management agreement with the trustee company on December 15, 2006, and had also undertaken a number of activities for its business. These included complying with SEBI requirements and preparing the final application for registration of the fund, preparing and finalising the agreement and trust deed, looking for office location and hiring employees.
Preparatory work
The Bench said it has also found that the AMC had undertaken a series of preparatory work to launch a mutual fund scheme of the fund. “We hold that the Assessing Officer (AO) was not justified in not accepting the claim of the assessee that its business activities are commenced from the date of its incorporation. Accordingly, we direct the AO to verify the expenses alleged to incur wholly and exclusively for the purpose of the business to allow the same as per law,” ruled the Bench, adding that the appeal of the assessee is allowed for statistical purposes.
Tax experts said the ruling is in favour of AMCs of mutual funds. “It holds that just the signing of the investment management agreement is good enough to suggest that commercial operations have started, to claim expenses, without there being any actual commencement of schemes,” said an expert.
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