Court breather to MFs on tax claims

Last Updated: Wed, Mar 14, 2012 19:50 hrs

In a major relief to fund houses, the Bombay High Court today asked the Income Tax (I-T) department not to take any coercive action against the former till disposing of their pleas on the demand notices on income generated via pass-through certificates (PTCs).

The bench of judges D Y Chandrachud and M S Sanklecha said fund houses’ bank account attachments should stand vacated. The court disposed of nine of 93 petitions by 16 fund houses on the matter. Sources say more petitions were filed during the day.

Last November, the tax authorities had sent notices to individual fund houses to pay taxes worth a total of Rs 500 crore on income generated through PTCs. When their pleas were rejected, the fund houses moved court yesterday. Fund officials said they were not given enough time by the tax department and the process followed by the latter’s officials was not fair.

PTCs are loans issued by banks and bundled as securities and sold to financial institutions like mutual fund (MF) houses. The interest paid to the issuer on these securities comes to the investor as fixed income. Long-term and medium-term bond funds of MF houses invest in these certificates.

"The ball is once again in the court of the tax department. They now have to hear our pleas on the matter,” says a fund official who did not wish to be named. Those against which the notices were sent include HDFC MF, Reliance MF, Birla Sun Life MF, SBI MF, UTI, Kotak, Franklin Templeton and HSBC.

"Today's observation is a big relief for the industry. We would have faced problems in normal operations such as redemptions," said officials. The court’s observations came on a plea filed by UTI and since the other petitions were similar, what the judges said would be a reference for thecoming hearings.

Industry sources said after the I-T department disposed their pleas, there would be a six-week period available to take the matter further. "I believe it's now a long-drawn process, which will at least extend up to a month," added an executive.

MF executives said they were not liable to pay the taxes, as any income generated from PTCs was exempt under Section 10 (23D) of the I-T Act. "Technically, we should not be taxed for the alleged income," said chief executive officer of a large-sized fund house.

In December last year, chief executives of MF houses had discussed the notices with U K Sinha, chairman of the Securities and Exchange Board of India. They had requested the regulator to take up this matter with the government.

After the collapse of US investment bank Lehman Brothers in September 2008, several MF houses faced redemptions from corporate clients due to their exposure to illiquid PTCs. Since then, MFs exposure to these instruments had sharply reduced.

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