TaxTMI 
TaxTMI 
2011 (11) TMI 479
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....he assessment orders on record as under. The assessee had claimed the deduction u/s.35D in all the four years are as under:- Assessment Year Amount of deduction u/s.35D 1998-1999 Rs.2,10,94,580 1999-2000 Rs.2,10,95,328 2000-2001 Rs.2,21,06,248 2001-2002 Rs.1,19,86,670 4. The assessee company had made a public issue in the years 1992 and 1995. The total expenditure pertaining to the public issue and right issue was at Rs.23,14,71,569/-. The assessee exercised option as provided in sub-sec. (2B) of Sec. 35D by restricting the amount allowable to 1/10th of 2.5% of the capital employed. The assessee filed the details of the preliminary expenses which are reproduced by the A.O. in the A.Y. 1998-99. The assessee-company had leasing activity and commenced its business in the A.Y. 1991-92. The assessee contended that the major portion of income arising from leasing and other activity and assessee's undertaking constitute industrial undertaking. The A.O. relying on the assessment orders for preceding years i.e. A.Ys. 1994-95, 1995-96, 1996-97 and 1997-98 disallowed the claim of the assessee save Rs.1,19,578/- that was towards preliminary expenses. Sam....
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....d with the explanation of the assessee. The A.O. referred to the decision of the Hon'ble Supreme Court in the case of Rajasthan Warehousing Corporation Ltd. vs. CIT 242 ITR 450. The A.O. also referred to section 14A of the Income-tax Act, 1961. The A.O. examined the balance sheet of the assessee and made the following observations:- "Total investment in shares held as stock in trade is Rs.117.39 crore. Further, certain shares were held as long term investment of Rs.16.97 crore. Assessee is also holding shares of subsidiary companies of Rs.35.05 crore. Total investment in shares is Rs.169.41 crore. Balance sheet of the assessee reveals that the total shareholders' fund as on 31.3.97 to Rs.1049.85 crore and the loans are of Rs.453.52 crore. Examination of the profit and loss account reveals that in FY 96-97, interest and finance charges of Rs.31.37 crore were claimed as expenditure in AY 98-99. The interest on fixed loans, debentures etc has increased to Rs.41.26 crore. Assessee company is engaged in the business of purchase and sale of shares and also leasing activity. The shares have been acquired in the past. Direct linkage of the borrowed funds with the investment in th....
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....lso explained that the assessee generated Rs.80.84 crore by selling the shares and those were utilized for making the investment. The A.O. was not impressed with the explanation of the assessee. He examined the balance sheet of the assessee as on 31.03.1997 and on 31.3.1998 and made the following observations:- "Examination of balance sheet as on 31.3.97 and 31.3.98 reveals that except for the investment of Rs.7.65 crore in 17% MTNL bond, balance investment of Rs.14.80 crore in 15% MTNL bond has been made during the year. Investment of Rs.11.20 crore in RTL debentures has been made in December 97 and January 98. Investment in RUPL debentures of Rs.80.95 crore has been made on 27.9.97. Examination of the balance sheet reveals that the share capital as on 31.3.98 is Rs.123.97 crore, same as share capital as on 31.3.97. Shareholders' fund inclusive of reserve and surplus are Rs.1113.08 crore, whereas these were Rs.1049.85 crore last year. Total loan funds have increased from Rs.453 crore to Rs.998 crore during the year. This increase is primarily on account of issue of redeemable discount bonds of Rs.470 crore and redeemable nonconvertible debentures of Rs.209 crore. Examina....
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....e dividend income of Rs.4,20,01,686 and claimed as exempt u/s 10(33) of the Income-tax Act, 1961. Assessee also declared interest income of Rs.17,65,46,216 which was claimed as exempt u/s 10(23G) of the Act. The A.O. sought explanation of the assessee in respect of the source of investments. The assessee explained that the net worth of the assessee-company as on 31.3.1999 was Rs.1135.78 crore. It was contended that the dividend is earned out of the shares held in stock in trade of the company and there was no intention earn dividend income. So far as the investment in the infrastructure undertaking is concerned, the assessee contended that the investment is made by generating funds on sale of securities held in stock in trade. The A.O. was not impressed with the explanation of the assessee. He examined the balance sheet for the preceding years as well as the assessment year 1999-2000 and after considering the disallowance made in the assessment years 1996-97, 1997-98 and 1998-99, he estimated the interest expenditure of Rs.3 crore as attributable to the dividend income which was claimed exempt in the assessment year 1999-2000. So far as the interest income claimed exempt u/s 10(23G....
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....t the total shareholder's funds as on 31.03.2000 is Rs.1197.96 crore and the loans are of Rs.2315.44 crore." 12. It is further observed by the A.O. that interest and finance charges of Rs..31.37 crore were claimed as expenditure in AY 97-98 which increased to Rs.41.26 crore in A.Y. 1998-99. This further increased to Rs.75.57 crore in A.Y. 1999-2000 and Rs.159.90 crores in A.Y. 2000-01. The interest on bonds which was Nil in A.Y. 97-98 increased to Rs.37.13 crore in A.Y. 1998-99 and further increased to Rs.79.37 crore in A.Y. 1999-2000 and Rs.93.48 crore in A.Y. 2000-01. Assessee company is engaged in the business of purchase and sale of shares, lending and also leasing activity. The lease income has increased from Rs.129.86 crore in A.Y. 98-99 to Rs.165.27 crore in A.Y. 99-00. It has then decreased to Rs.128.95 crore in A.Y. 2000-01. The interest income increased from Rs.142.89 crore in A.Y. 98-99 to Rs.195.64 crore in A.Y. 99-00. It further increased to Rs.295.38 crore in A.Y. 2000-01. The shares have been mainly acquired in the past. Direct linkage of the borrowed funds with the investment in the shares is not possible to establish in view of a large number of transacti....
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....rest income on the bonds of Rs.39,55,92,661 as exempt u/s.10(23G) of the Act. The A.O. asked the assessee to prove that the investment in the said shares and bonds/debentures was not made out of the borrowed funds. The assessee filed a detail reply explaining the source of funds which is reproduced in assessment orders for A. Ys. 1998-99, 1999-2000 and 2000-2001. The A.O. has reproduced the entire explanation of the assessee at page 2 of the assessment order. The A.O. has referred to the decisions of the Hon'ble Supreme Court in the case of Distributors (Baroda) Pvt. Ltd. 155 ITR 120 and Hon'ble Madras High Court in the case of Magganlal Chagganlal Pvt. Ltd. 236 ITR 456. The A.O. has observed that inspite of opportunities given to the assessee, the assessee has not brought anything on record to prove the source of investments in stocks and shares because of which the assessee-company had received interest and dividend which has been claimed as exempt from tax. The A.O. also observed on perusal of the balance sheet and Pand L account that the assessee-company had utilized borrowed funds to the tune of Rs.2316 crore during the current year. The A.O. also observed that most of the sto....
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....much below the paid up capital and reserves available with the assessee-company. He submits that the tax free investment in assessment years 1998-99, 1999-2000 and 2000-2001 is much less than the income before depreciation and element of depreciation must be considered for correct working of the funds generation. In the assessment year 2001-2002 the funds were generated by issuing preference shares to the extent of Rs.800 crore but increase in tax free investments in the same year i.e. assessment year 2001-2002 is marginally higher than the profit before tax and preference share capital raised during the year. He further submits that in assessment years 1997-98, 1998-99 the investment in shares and securities was much below the total share capital, reserves and surplus. He submits that the tax free securities were also held as stock in trade and only the dividend is exempt and profit on the sale of stock in trade of shares and securities is taxable as the business income and hence section 14A is not attracted at all. He further submits that the ad hoc disallowance cannot be made as in fact all the details were filed before the A.O. in respect of the generation of funds but the same....
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....he consideration before the Tribunal in assessee's own case for the assessment year 1995-96 in context of deduction under sec. 80M of the Act (ITA No.3073/Mum/1996 and other appeals). In that year also the assessee had received the dividend of Rs.11,57,98,227. The A.O. worked out the interest expenditure attributable for earning dividend income at Rs.1 crore. When the matter reached before the Tribunal, vide order dated 12.1.2007 the Tribunal held that ad hoc disallowance of interest expenditure cannot be justified at any cost. 19. In the case of CIT vs. Reliance Utility and Power Limited 313 ITR 340 (Bom.) the controversy was diversion of the interest bearing funds for making the investment. In the said case the A.O. recorded finding that the sum of Rs.313 crore was invested out of their own funds and Rs.147 crore were invested out of borrowed funds. The A.O. accordingly worked out the disallowance by taking interest rate at 12% per annum for three months. The assessee pleaded before the Hon'ble High Court that the assessee had sufficient interest free funds as under:- (i) Share capital Rs.180.00 crore (ii) Reserves and Surplus Rs.120.80 crore (iii)....
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....disallowance. With due respect, in our considered opinion, in the present appeals, there is no need to restore the matter to the file of the A.O. as the facts are distinguishable. Here we find that the assessee had sufficient own as well as interest free funds to make the investment in the shares, bonds and debentures. Moreover nothing has been controverted on said findings of the Ld. CIT(A) by the Revenue. So far as the finding of the learned CIT(A) is concerned, after giving anxious consideration the totality of the facts and figures placed before us, we find no reason to sustain any disallowance made by the Assessing Officer in respect of the dividend income claimed exempt u/s 10(33) as well as the interest income on the bonds and debentures claimed exempt u/s 10(23G) of the Act. Moreover it is clear from the orders of the A.O. that all the disallowances are made on ad hoc basis. We, therefore, delete the entire disallowances sustained by the learned CIT(A) in respect interest and other expenditure attributable for earning the dividend exempt u/s 10(33) and also of the interest income exempt u/s 10(23G) of the Act. In the result, the respective grounds of the assessee are allowe....
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....rence of Rs.25.50 per share was booked by the assessee as a loss in the A.Y. 1996-97. The assessee further made valuation of the said shares on 31st March, 1997 by adopting value at Rs.218.50 per share. That also resulted in the loss of Rs.39/- per shares which was booked in the A.Y. 1997-98. The said shares were sold @ Rs..186.6 per share and A.O. booked the loss at Rs.31.94 per share (i.e. Rs.218.50 value as on 1.4.1997 - Rs.186.56 sale price received). The assessee has further booked loss of Rs.1,81,95,214/- in the A.Y. 1998-99 and the said loss has been claimed on account of price difference of the cost price of Rs.283/- per share and valuation on conversion i.e. Rs.340/- per share in the A.Y. 1996-97. The A.O. has noted that the assessee has not shown the fair market value of the said shares on the date of conversion at Rs..340/- per share in the books of account, but while making valuation of the stock as on 31.3.1996, the market price was adopted at Rs.257.50 per share and as the assessee has not shown the fair market value on the date of conversion of the said shares as a stock-in-trade, no loss was booked in the A.Y. 1996-97. The assessee-company followed the method for va....
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....ion would be that the gain or loss is determined on the date of conversion of the capital asset into stock-in-trade but the taxability of the same is differ till the date of sale or transfer of the said asset. So far as the second limb is concerned, the profit or loss is to be computed in respect of the stock in trade of the converted capital asset, as business income as per the relevant provisions adopting the fair market value (FMV) on the date of conversion as its cost of acquisition. In the present case the cost of acquisition of the shares being stock in trade on the date of conversion was Rs.340 which was reduced to Rs.257.50 as on 31.3.1996. It had thus suffered a loss of Rs.82.50 per share for the previous year relevant to the assessment year 1996-97. However, loss to the extent of Rs.25.50 per share was only claimed by the assessee. The balance loss of Rs.57 per share has been claimed in the assessment year 1998-99 which in our opinion cannot be allowed being pursuant to the assessment year 1996-97. We, therefore, set aside the order of the learned CIT (A) on this issue and restore that of the A.O. The relevant ground taken by the Revenue in assessment year 1998-99 is acco....
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....d payable with the assessee for the period 3 to 5 years should be treated as income u/s.41(1) of the Act. The assessee claimed that an amount of Rs.12,06,018/- had been disallowed in the A.Y. 1997-98. The A.O., therefore, restricted an addition of Rs.10,05,089/- u/s.41(1). The Ld. CIT (A) deleted the same. The Ld. CIT (A) deleted the same. 32. The identical issue has been considered by the Tribunal in assessee's own case for the A.Y. 1997-98. Relevant part of the order is as under:- "82. The next ground pertains to deduction of Rs.12,06,018 on account of other liabilities. The brief facts are that this amount represents income received in respect of units sold in the earlier year. Since the purchaser did not get the units registered in their own name the dividend thereon has been received by us and is payable to the purchaser. Since some bad delivery claims were outstanding from the broker to/through whom scrips are sold, these interest and dividend have been withheld. However, it was the case of the assessing officer that nobody has claimed the dividend from the assessee so far. Nothing has been paid till date and therefore, the liability was not an enforceable....
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..... The dispute is with reference to lease equalization amount of Rs.37,85,98,608 added to the net profit as per P and L Account. During the assessment proceedings the assessee submitted that lease equalization has been provided in terms of the guidance note issued by Chartered Accountants of India. The guidance note requires statutory depreciation to be provided and to work out true profitability of the company it is necessary that the depreciation be provided at a rate which is sufficient to write off the leased assets over the primary period of lease. This means that in the initial years of lease, additional charge on account of depreciation is reduced from the lease rent and the gross block of fixed assets, in order to reflect the true lease rentals and the true net value of fixed assets. The assessee further submitted that in the computation of income the above amount has been added as the same represents the depreciation provision while the allowable u/s 32 is separately worked out. It was further submitted that u/s 115JA the depreciation is to be computed on the same method and rates as adopted in the profit and loss account laid before the AGM. In this way, it was contended t....