2005 (10) TMI 426 - AT - Income Tax

Tribunal ruling on tax, depreciation, expenses, and deductions in recent case

Essar Investments Ltd. Versus Deputy Commissioner of Income-tax, Special Range - I, Chennai

Essar Investments Ltd. Versus Deputy Commissioner of Income-tax, Special Range - I, Chennai - [2006] 7 SOT 378 (MUM.) Issues Involved:1. Taxability of dividend received on cumulative preference shares.2. Claim for depreciation on certain properties.3. Disallowance of advertisement expenses.4. Disallowance of consultation charges for exploring power generation unit.5. Deduction under section 80M of the Income-tax Act.Issue-wise Detailed Analysis:1. Taxability of Dividend Received on Cumulative Preference Shares:The first dispute concerns the taxability of a dividend of Rs. 26,63,863 received by the assessee on 11% cumulative preference shares. The assessee argued that the dividend pertains to earlier financial years (1978-79 to 1982-83 and 1984) before the acquisition of the shares and should be treated as a capital receipt to reduce the cost of acquisition. The Tribunal referred to Section 85 and Section 205 of the Companies Act, 1956, and Section 8 of the Income-tax Act, 1961, which state that dividend income is taxable when declared, distributed, or paid. The Tribunal upheld the CIT(A)'s decision, confirming that the dividend declared after the assessee became the owner is taxable.2. Claim for Depreciation on Certain Properties:The second issue relates to the assessee's claim for depreciation on properties used for business purposes but not registered in the assessee's name. The Tribunal referenced the Supreme Court's decision in Mysore Minerals Ltd. v. CIT [1999] 239 ITR 775, which supports the assessee's claim. Consequently, the Tribunal accepted the assessee's claim for depreciation.3. Disallowance of Advertisement Expenses:The third dispute involves the disallowance of Rs. 7,51,666 in advertisement expenses incurred by the assessee for its subsidiary company's business. The Tribunal found that these expenses were incurred in the normal course of business to enhance the assessee's business potentials and brand image. Therefore, the Tribunal reversed the CIT(A)'s order and directed the Assessing Officer to delete the disallowance.4. Disallowance of Consultation Charges for Exploring Power Generation Unit:The fourth issue concerns the disallowance of Rs. 11,046 in consultation charges for exploring the viability of setting up a power generation unit. The Tribunal upheld the CIT(A)'s decision, agreeing that the expenditure was capital in nature and not related to the existing business. The CIT(A) had noted that the expenditure was covered by Section 35D(1)(ii) and was not allowable under Section 37 of the Income-tax Act, 1961.5. Deduction Under Section 80M of the Income-tax Act:The fifth dispute pertains to the deduction under Section 80M of the Act. The Assessing Officer deducted proportionate expenses from the gross dividend income, which was challenged by the assessee. The CIT(A) directed the Assessing Officer to allocate the expenditure incurred for earning the dividend income. The Tribunal referred to the Bombay High Court's decision in CIT v. General Insurance Corpn. of India (No. 1) [2002] 254 ITR 203, which states that only actual expenses incurred for earning the dividend should be deducted. The Tribunal modified the CIT(A)'s order, directing the Assessing Officer to determine the actual expenses incurred for earning the dividend income in line with the jurisdictional High Court's decision.Conclusion:The appeal was partly allowed, with the Tribunal providing specific directions on each disputed issue, ensuring compliance with relevant legal provisions and judicial precedents.