AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2011 (9) TMI 635
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....n the business of generation, transmission and distribution of electricity. The Assessee earned interest income of Rs.52,32,021/- which does not form part of the total income under the Income Tax Act, 1961 (the Act). The Assessee also earned Dividend income of Rs.76,02,80,216/- which does not form part of the total income under the Act u/s10(33) of the Act. In view of the provisions of Sec.14-A of the Act, which provides that any expenditure incurred in earning income which does not form part of the total income under the Act, shall not be allowed as deduction while computing total income, the AO called upon the Assessee to furnish details of expenditure incurred for earning income which does not form part of the total income under the Act. The Assessee submitted that the investments which yielded the income which does not form part of the total income under the Act were made out of own funds and therefore there was no interest expenditure incurred in earning the same. Apart from the above direct expenses, the Assessee submitted that it did not incur any other general or administrative expenses in earning the said income. The Assessee pointed out that under erstwhile Section 80-M o....
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....ts existence and management. Investment decisions are very complex in nature and they require substantial market research, day to day analysis of market trends and decision with regard to acquisition, retention and sale of shares at the most appropriate time. They require huge investment in shares and consequent blocking of funds. It is well known that capital has cost and that element of cost is represented by interest. Besides the above, investment decisions are taken in meeting of Board of Directors for which administrative expenses are incurred. It is, therefore, not correct to say that dividend income can be earned by incurring no or nominal expenditure. This aspect of the matter has also received careful attention of the Chennai Bench of ITAT in the case of Southern Petroleum Industries Vs. DCIT 2005 93 TTJ 161(Chennai). After comprehensive consideration of all relevant aspects of the case, including provisions of law, Chennai Bench has held that investment decisions are very strategic decisions in which top management is involved and therefore, proportionate management expenses are required to be deducted whilst computing exempt income from dividends. Similarly, in the cas....
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.... of Income Tax,Range 10(2), Mumbai & Anr. 328 ITR 81 (Bom) the earlier decision of the ITAT in Assessee's own case would hold good, he submitted that on the facts of the Assessee's case where the investments were held only in group companies and they were strategic investments, there cannot be any disallowance u/s.14-A of the Act. 6. The learned D.R. relied on the decision of the Hon'ble Bombay High Court in the case of Godrej & Boyce (supra) and submitted that the disallowance sustained by the CIT(A) is reasonable and the same should be sustained. 7. We have considered the rival submissions. The provisions of Sec.14-A of the Act as it existed from to time is as follows: 14A. Expenditure incurred in relation to income not includible in total income.-(1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. ( Inserted by FA 2001, wref. 1- 4-1962) (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this A....
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....st included in clause (i) incurred during the previous year ; B = the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balancesheet of the assessee, on the first day and the last day of the previous year ; C = the average of total assets as appearing in the balance-sheet of the assessee, on the first day and the last day of the previous year ; (iii) an amount equal to one-half per cent. of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance-sheet of the assessee, on the first day and the last day of the previous year. 3. For the purposes of this rule, the "total assets" shall mean, total assets as appearing in the balance-sheet excluding the increase on account of revaluation of assets but including the decrease on account of revaluation of assets.". 8. The Hon'ble Bombay High Court had to consider several issues in the case of Godrej and Boyce (supra) on Sec.14-A of the Act and Rule-8D of the Rules, and it laid down the following propositions: "Rule 8D r.w. S. 14A (2) is not arbitrary or unreasonable but can b....
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....8D and its method is "fair & reasonable". It cannot be said that there is "madness" in the method of Rule 8D so as to render it unconstitutional; (5) Rule 8D, inserted w.e.f 24.3.2008 cannot be regarded as retrospective because it enacts an artificial method of estimating expenditure relatable to tax-free income. It applies w.e.f AY 2008-09; (6) For the AYs where Rule 8D does not apply, the AO will have to determine the quantum of disallowable expenditure by a reasonable method having regard to all facts and circumstances; (7) On facts, though in the earlier years, the Tribunal had held that the tax-free investments had been made out of the assessee's own funds, this did not mean that there was no expenditure incurred to earn taxfree income. Even though Rule 8D did not apply to AY 02-03, the AO had to consider whether disallowance could be made u/s 14A (1). Also, the principle of consistency would not apply as s. 14A had introduced a material change in the law." 9. We are of the view that the decision of the Tribunal in Assessee's own case and the other decisions rendered by the Tribunal on which reliance was placed by the learned Counsel for the Assessee no longer holds good in....
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....ssee that where dividend is declared but before it is paid, by operation of law, the declaration of dividend becomes illegal, inoperative or invalid during the previous year itself, it is possible to conceive of a situation in which an assessee would be entitled to say that no income by way of dividend accrued to him during the previous year. What is important is that something factual or legal should have happened during the previous year in which the dividend was declared. For the above proposition the Assessee relied on the decision of the Hon'ble Bombay High Court in the case of Mafatlal Gagalbhai & Co. Pvt.Ltd. Vs. CIT 193 ITR 188 (Bom) and New Shorrock Spg.&Mfg.Co.Ltd. 208 ITR 765 (Bom). 14. Extending the analogy laid down in the aforesaid decision, the Assessee claimed before the AO that the dividend distribution-tax to the extent it relates to dividend payable to Andhar Valley Power Supply Co. Ltd., but not paid because of Amalgamation, should be treated as not payable and to that extent the dividend distribution tax paid should be refunded to the Assessee. The sum in this regard was quantified by the Assessee at Rs.28,97,392/-. In other words the claim of the Assessee was....
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.... to extent the analogy laid down by the Hon'ble Bombay High Court in a case of taxability of dividend in the hands of the shareholder to a case of refund of dividend distribution tax already paid by the company declaring dividend. 19. We have considered the rival submissions. The admitted facts are that the Amalgamation was sanctioned by the Hon'ble High Court on 18.10.2000. The appointed date was 1.4.2000. As on the date of sanction the dividend had already been paid by the Assessee. The incidence of tax u/s.115-O of the Act is on the distribution of dividend. Any subsequent act by which the dividend itself does not become taxable in the hands of the recipient of the dividend will not be relevant. In other words the payment of dividend distribution tax is not dependent on the ultimate chargeability to tax in the hands of the recipient of the dividend. Therefore the extension of the analogy laid down by the Hon'ble Bombay High Court in the case of Mafatlal Gagalbhai & co. (supra) to Sec.115-O of the Act, sought to be canvassed on behalf of the Assessee, in our view was rightly rejected by the revenue authorities. We therefore confirm the order of the Revenue authorities and dismis....
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....nt of Rs. 23,98,364/- being community welfare expenses on maintenance of gardens on the ground that the expenditure has not been incurred wholly, necessarily and exclusively for the purpose of assessee's business. The assessee submitted that with the present emphasis of the Government on pollution control, the expenditure is necessary as part of the assessee company's community welfare activities. It was further claimed that the expenditure was also incidental to the assessee's main business of generation, transmission and distribution of electricity. The assessee furnished a detailed note to explain why maintenance of garden is necessary, considering the assessee's line of business. The main reasons highlighted was dust control, correct operation of protective relays, elimination of encroachment along the right way and to counter the objections raised by Mumbai Grahak Panchayat and Environment Protection Cell of Hindustani Andolan alleging that the Company's thermal plants are polluting the environment of Bombay and its surrounding areas. 26. The CIT(A) found that in AY 1995-96, to 97-98 and 2000-01, the Tribunal had allowed similar claim of the Assessee and following the said de....
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....n closed, on the basis of which, the above expenditure has been charged off. The assessee had clarified vide its letter dated 27th Nov. 2007 that the major amount (Rs. 2,74,73,477) in the above list pertains to POWERGEN. This expenditure was in connection with acquisition of 655 MW combined Cycle Power Plant belonging to POWERGEN in Gujrat. This project was put up for sale of POWERGEN, for which bids had been invited. The assessee was one of the bidders, for which detailed studies were carried out mainly by Arthur Anderson and Little & Co. The project was finally awarded to China Light Power (CLP) and hence, the expenditure incurred in connection with the bidding process was written off as expenditure on shelved project. The other amounts pertain to power projects at the locations indicated there against, which have finally not materialized. The assessee submitted that all the above projects are connected with the existing business of the assessee i.e. generation, transmission and distribution of electricity. The expenses are mainly in the nature of pre-bid engineering services. These expenses have been claimed as revenue expenditure based on the decision of the Madras High C....
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....as in connection with the existing line of business of the Assessee and had to be allowed as a deduction. Aggrieved by the order of the CIT(A), the Revenue has raised ground No.3 before the Tribunal. 33. We have heard the rival submissions. It is not in dispute before us that Mumbai ITAT in Assessee's own case for A.Y's 1997-98,1999-2000 and 2000-01 had held that identical expenses on shelved project report was not for starting any new business but it was closely connected with existing electricity generating business of the assessee. Similarly the feasibility report expenses were also held to be not for starting a new business but closely connected with the existing electricity generating business of the Assessee by the Mumbai ITAT in its own case for A.Y's 1997-98, 1999-2000 and 2000-01. Copies of these orders have been placed in the paper book. In view of the above Gr.No.3 of the Revenue is dismissed. 34. Ground No.4 & 5 raised by the Revenue reads as follows: "4. The learned CIT(A) erred in deleting the taxation of a sum of Rs. 45,84,92,096/- being the foreign exchange gain on repatriation of certificates of deposits, without appreciating that the subsequent utilization of t....
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....treated the profit on repatriation of certificates of deposit as taxable income. As per the AO, though the foreign exchange brought to India through Euro Notes was no doubt capital receipts, but whilst these were remitted to India, the amount of ERFG(Exchange Rate Fluctuation Gain) received as a result of devaluation of the rupee is to be treated as a trading receipt. According to the AO, it was required to be taxed as a trading receipt by the AO for the following reasons: i. Though the euro Notes were floated for the purpose of raising the capital fund to but the capital assets, however, the ERFG received as a result of devaluation of rupee could not be said to have been utilized for the same purpose. ii. The amount of foreign exchange fluctuation gain was put into the common pool by the assessee company and the assessee company was not able to prove the nexus of having used the foreign exchange gain for purchase of capital assets or for development or upgradation. iii. The foreign exchange fluctuation gain changed its character from capital to revenue as it was put in he common pool and the assessee was not able to satisfactorily reply as to for what purpose the gain has....
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....t is a well settled principle in law that treatment in books of account is not determinative of its taxability. The assessee has distinguished the decision in T.V.Sundaram Iyengar's case (222 ITR 344) (SC), which has been relied upon by the AO on the grounds that in that case the issue involved was taxability of unclaimed deposits that were received from customers in the course of trading transactions, whilst in the instant case the amounts cannot be attributed to the trading transactions of the assessee. In view of the foregoing, the assessee claimed that the gain arising from repatriation of proceeds of certificates of deposit is capital in nature and not exigible to tax. 38. The CIT(A) held as follows: "........... where profit or loss arises on account of appreciation or depreciation in the value of foreign currency, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss as a trading asset or as part of circulating capital embarked in the business. But if, on the other hand, the foreign currency was held as a capital asset or as fixed capital, such profit or loss will be of capital nature. Considering that the Euro N....
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....n treated as part of revenue receipt by crediting the same in the profit and loss account was sufficient to bring to tax the gain in question. In this regard, he pointed out the failure of the Assessee to prove the ultimate utilisation of the borrowed amounts after repatriation as the same entered the common pool of funds utilised by the Assessee both for capital as well as revenue purposes. Reliance was also placed by him on the decision of the Hon'ble Delhi High Court in the case of Logitronics Pvt.Ltd. 197 Taxman 394 (Del) and MGF Lltd. Vs. CIT 199 Taxman 51 (Del) to highlight the fact that utilisation of funds would also be necessary to claim deduction on account of interest paid on borrowed funds. 40. The learned counsel for the Assessee reiterated submissions as made before the CIT(A) and relied on the order of the CIT(A). He also submitted that entries in the books of accounts are not conclusive. 41. We have considered the rival submissions. We are of the view that the order of CIT(A) does not call for any interference. The law is very clear that where profit or loss arises on account of appreciation or depreciation in the value of foreign currency, on conversion into anot....