2013 (8) TMI 361 - AT - Income Tax

Tribunal Upholds CIT(A) Decision on Demutualization Expenses

Vadodara Stock Exchange Limited Versus ACIT Circle-4, Baroda

Vadodara Stock Exchange Limited Versus ACIT Circle-4, Baroda - TMI Issues Involved:1. Treatment of Demutualization Expenses as Capital Expenditure2. Disallowance of Expenses under Section 14A of the Income Tax ActIssue-wise Detailed Analysis:1. Treatment of Demutualization Expenses as Capital Expenditure:The primary issue is whether the demutualization expenses amounting to Rs. 13,80,837/- should be treated as capital or revenue in nature. The assessee argued that these expenses were incurred to comply with SEBI guidelines for demutualization, which did not result in the creation of any new asset and should therefore be considered revenue expenses. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] treated these expenses as capital in nature, asserting that demutualization leads to a change in the management setup, which is enduring in nature.The CIT(A) noted that these expenses were incurred for restructuring the capital structure and resulted in the transformation of the entity from an Association of Persons (AOP) to a company eligible for distributing dividends. The CIT(A) relied on the judgment of the Calcutta High Court in Brooke Bond India Ltd. and the Supreme Court in Punjab State Industrial Development Corporation Ltd., which held that expenses directly related to the expansion of the capital base are capital in nature.The Tribunal upheld the CIT(A)'s decision, emphasizing that the increase in paid-up share capital from Rs. 29 lakhs to Rs. 145 lakhs indicated that the expenses were directly related to the expansion of the capital base. The Tribunal distinguished the present case from the Supreme Court judgments cited by the assessee (Bikaner Gypsums Ltd. and Empire Jute Co. Ltd.), noting that those cases did not involve the creation of a capital asset.2. Disallowance of Expenses under Section 14A of the Income Tax Act:The second issue pertains to the disallowance of Rs. 9,26,795/- under Section 14A of the Income Tax Act concerning exempt dividend income of Rs. 18,48,712/- earned from mutual fund investments. The assessee contended that no expenditure was incurred for earning the exempt income, as no amount was borrowed nor any interest paid for the investments.The AO applied Rule 8D to compute the disallowance, stating that it was not possible for the assessee to have incurred no expenses related to the exempt income. The AO explicitly recorded his dissatisfaction with the assessee's claim regarding the expenditure.The Tribunal noted that the AO had satisfied the requirement of Rule 8D(1) by recording his dissatisfaction with the assessee's claim. The Tribunal also observed that the assessee's management actively monitored the investments, as evidenced by the sale and purchase of mutual fund investments, indicating that administrative expenses were indeed incurred.The Tribunal distinguished the present case from the Tribunal decisions cited by the assessee (DCIT vs. Ashish Jhunjhunwala and Kamal Madmohan Mangaldas vs. ITO), noting that in those cases, the AO had not recorded any dissatisfaction with the assessee's claim. In contrast, in the present case, the AO had explicitly recorded such dissatisfaction.The Tribunal concluded that the AO was justified in applying Rule 8D and upheld the CIT(A)'s decision to disallow the expenses under Section 14A.Conclusion:The Tribunal dismissed the appeal of the assessee, upholding the CIT(A)'s decisions on both issues. The demutualization expenses were rightly treated as capital expenditure, and the disallowance under Section 14A was justified due to the active monitoring of investments by the assessee's management.