TaxTMI 
TaxTMI 
2014 (1) TMI 1586
X X X X Extracts X X X X
X X X X Extracts X X X X
.... to as 'the Act']. Notices were issued under sections 143[2] and 143[1] on 26.11.2001 which was received by the assessee on the same day. The assessee had claimed disallowance under section 14A of the Act in a sum of Rs.16,50,00,000/-. The assessee had claimed the following income as exempt under section 10 of the Act. [a] Dividends u/s. 10[33] : Rs. 52,00,27,446/- [b] Interest on tax free bonds u/s. 10[15][h] of the Act : Rs.156,66,73,929/- [c] Interest on long term finance to infrastructure companies u/s. 10[23G] : Rs. 95,82,88,460/- TOTAL : Rs.304,49,89,835/- 3. The assessee contended that "since they have not incurred any expenditure for earning aforesaid income, the question of expenditure relating to these income being added back to the taxable income would not arise". 4. The assessing authority did not accept the said contention of the assessee and disallowed Rs.16.5 crores. On calculation, the assessing authority came to the conclusion that 5.4% of the total exempted income is the expenditure incurred for earning the said income. 5. The assessee preferred an appeal before the Commissioner of Income Tax....
X X X X Extracts X X X X
X X X X Extracts X X X X
....istration and modernization of its machinery, it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title: it may also comprehend payment of statutory dues and taxes imposed as a precondition to commence or for carrying on of a business: it may comprehend many other acts incidental to the carrying on of a business. The limitation is that the purpose should be for the purpose of the business, that is to say, the expenditure incurred should be for the carrying of the business and the assessee should incur it in his capacity as a person carrying on the business. It is submitted that the deduction claimed which was the amount expended by the appellant to preserve the goodwill of its customers being an intangible asset of its business is a legitimate deduction allowable under section 37(1) of the Act. This deduction is also allowable since it was incurred from the point of view of commercial expediency to facilitate carrying on of its business. It is also submitted that the deduction claimed is also allowable under section 28(i) as a loss incidental to th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....anstar units have been redeemed by the Canbank Mutual Fund at NAV. As a result, we incurred a loss of Rs.95,21,84,983/- which has been claimed under Part V of the Return. Though the above loss has not been reckoned for computation of taxable income, the above claim has been submitted for favourable consideration" 8. In fact, the Assessing Authority did not consider the said claim at all and he also did not allow the expenditure. Therefore, the assessee preferred an appeal challenging the disallowance of the expenditure before the Commissioner of Income Tax (Appeals), Bangalore. The Appellate Authority following the judgment rendered by it in assessee's case for the assessment year 1998-99, confirmed the order of assessment. The reasons given in the appellate order for 1998-99 are as under: "2.9.8. The above have been carefully considered. In my view the appellant is not entitled for deduction towards diminution in the value of units for the following reasons. a) As per clause 20 of the trust deed, the appellant as principal trustee was not liable to purchase Canstar units as a rescue measure  ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....for the assessment year in entirety. It is payable on completion of six years, meaning that, interest of Rs.13/- is accumulated over a period of six years, but not at one stroke and it got added from one year to the other years. Roughly speaking, 1/6th of Rs.13/- could be stated to be the loss suffered in the year on the principle as stated with regard to reserve created for redemption of debentures. Under no circumstances, the capital of Rs.10/- which was received earlier, can be said to be a loss in the hands of the assessee. This is on the basis that Canbank Mutual Fund is part of it. The claim of the assessee could at best be considered only to the element of interest, that too, 1/6th only and not beyond and therefore, it declined to entertain the appeal and accordingly, the appeal was dismissed, affirming the orders passed by the Assessing Authority. Aggrieved by the said order, the present appeals are filed. 10. The substantial questions of law that arise for our consideration in these appeals are: (1) 'Whether the Tribunal was justified in upholding the estimation of expenditure at 2% on the gross dividends to arrive at net dividends for granting exemption....
X X X X Extracts X X X X
X X X X Extracts X X X X
....id income. The discussion by the assessing authority clearly demonstrates these aspects has not been taken note of and the notional expenditure is calculated pre modernization. Therefore, in the light of the aforesaid Judgment, when the assessee has not incurred any expenditure for realizing this income, the question of holding that 2% of the gross total income is an expenditure and that has to be added back to the income is unsustainable in law. Accordingly, the substantial question of law is answered in favour of the assessee and against the revenue. Substantial question of Law No.2 and 3 13. Sri. Sarangan, learned Senior Counsel appearing for the assessee contended that the material on record discloses that though Canbank Mutual Fund is a distinct legal entity from Canara Bank, the Canbank Mutual Fund is a creation of the assessee. In order to carry on mutual fund business, they created a Trust. The assessee is a Trustee of the said Trust. Of course, there are other Trustees also. Though there is no financial dealing between these two entities, when the mutual fund business suffered loss and the amounts promised to the public were not returned, there was a hue and cry. The....
X X X X Extracts X X X X
X X X X Extracts X X X X
....re, the assessee would be entitled to the benefit of 1/6th of Rs.13/- and nothing more and therefore, he submits that no case for interference is made out. 15. We have gone through the entire material on record. We find from the assessment orders that the Assessing Authority has not referred to the claim at all, but he has disallowed the same. In appeal, an additional ground was urged. The assessee has claimed the benefit in one breath as depreciation on the basis of diminution of value of the asset, in another breath, the assessee is claiming the benefit as a loss incurred in the business and in another breath, the claim is on the basis of expenditure incurred in carrying on the capital expenditure laid out or expended wholly and exclusively for the purposes of the business and a commercial expediency. That probably may have led the authorities to reject the claim. In fact, the Tribunal proceeds on the assumption that the units are in the nature of debenture and entire loss to debenture is discussed. 16. It is in this background, it is necessary to find out what exactly is the nature of the transaction, what is the benefit that the assessee is claiming and what does law say ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....in water tight compartments. Thus, no consolidated fund was being operated for all the schemes. Diversion of funds thus from one scheme to another was not possible to be made. The bad investment in a particular Scheme could not be made good by other schemes. All the schemes were giving very poor yields including CANSTAR scheme. The result was the Mutual Fund could not bring resources to redeem the units by making the payments as promised. The investors wanted to withdraw but the Mutual Fund was unable to purchase back the units. Investors including ONGC made complaints to various authorities. The Reserve Bank of India, Central Government and SEBI intervened in the matter. They impressed upon the assessee that the name "CANSTAR" having been associated with the Bank in the minds of the public, the silence on the part of the assessee would not be in the interest of the Bank. In these circumstances, the Board of Directors of the Bank held a meting on 8.9.1997 and decided to purchase CANSTAR units at Rs.23/- per unit to mitigate the hardship to the investors, as a gesture of goodwill and by way of one time offer. Then they made a public announcement as under: "OFFER FOR ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o bail out the scheme. The scheme was to run for the balance period of 4 years. That being so, it cannot be treated as capital investments much less permanent investment. The said investment was in the nature of current investment. For the assessment year 1998-99, Rs.232.42 crores was claimed as depreciation. For subsequent years also, additional depreciation was claimed. For assessment year 2001-02, the entire CANSTAR units were redeemed. A loss of Rs.95.22 crores was incurred. After taking note of depreciation / appreciation for the earlier years, the said amount was claimed as business loss in the year 2001-02. Therefore, the said sum was claimed as business expenditure or as loss incidental to the business of the bank. In the alternative, they have also made a claim to treat the loss on redemption of Rs.499.05 crores being the difference between the purchase price and redemption value of Rs.10/-, which has to be allowed as loss arising out of the redemption of CANSTAR units. 19. It is in this background, we have to decide whether the assessee is entitled to exemption from payment of tax either on the ground of depreciation for diminution in value of capital asset or as a los....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ll read "any expenditure..... laid out or expended wholly, necessarily and exclusively for the purposes of the business or profession shall be allowed....". The introduction of the word "necessarily" in the above section resulted in public protest. Consequently, when s.37 was finally enacted into law, the word "necessarily" came to dropped." 22. The Apex Court in the case of Commissioner of Income-Tax -vs- Chandulal Keshavlal & Co. reported in (1960) 38 ITR page 601 (SC) at page 610 has observed as under: "Another fact that emerges from these cases is that if the expense is incurred for fostering the business of another only or was made by way of distribution of profits or was wholly gratuitous or for some improper or oblique purpose outside the course of business then the expense is not deductible. Another test is whether the transaction is properly entered into as a part of the assessee's legitimate commercial undertaking in order to facilitate the carrying on of its business; and it is immaterial that a third party also benefits thereby. But in every case it is a question of fact whether the expenditure was expended wholly and exclusively for the purpose of tr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....diency and the principles of ordinary commercial trading If the payment of expenditure is incurred for the purpose of the trade of the assessee it does not matter that the payment may inure to the benefit of a third party". The only limitation is found in Explanation, which was inserted by Finance (No.2) Act, 1998, No.2, w.e.f. 1.4.1962 i.e., any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. Therefore, the word "for the purpose of business" takes in its sweep, the expenditure incurred for the preservation of the business and for the protection of its assets including the name and any other acts incidental thereto and necessary to carry on a business. If somebody other than the assessee is also benefited by that expenditure, that should not come in the way of an expenditure being allowed by way of deduction under Section 37 of the Act, if it satisfies otherwise the tests laid down by law. If the expense is incurred for fostering the business of another only or was mad....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ore, the trade name finds a place even in that Company. The Scheme, which they formulated, was given the name CANSTAR. Again the name of the assessee is predominantly mentioned in the scheme also. The assessee except contributing a sum of Rs.1,00,000/- at the stage of formation of the Trust, did not contribute any further amount. In other words, there is no financial implication on the part of the assessee in the mutual fund business. Both are distinct legal entities. One is a Corporation and another is a Trust. After formation of the said Trust, an advertisement was issued calling upon the public to invest their money in mutual fund. It is because of the name and its association with Canara Bank, public liberally subscribed to the said mutual fund scheme. As aforesaid, CANSTAR scheme was floated by the mutual fund on 16.8.1990. The term of the scheme was 10 years. The unit cost was Rs.10/-. They promised a return of not less than 12.5% in a year. The scheme did not do well as expected. When the public wanted their money back, they were unable to repay the amount subscribed with interest @ 12.5%. One of the subscriber was ONGC, which invested Rs.54 crores. When the moneys were not ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o purchase the shares with the sole object of mitigating the hardship caused to the public investors in their mutual fund company. The object was not to evade payment of tax nor was there any other oblique motive behind this purchase. They had to protect the Goodwill in the name "CAN Bank" Therefore, in the facts of the case, it is obvious that the aforesaid expenditure was incurred wholly and exclusively for the purpose of the business thereby to maintain the fair name and goodwill, which they have acquired over the years. Therefore, the finding of the authorities that the assessee was not liable to purchase CANSTAR units in terms of Clause 20 of the Trust Deed as a rescue measure, is without any substance. It is a voluntary act under compelling circumstances thereby they have not contravened any clause in the Trust Deed. A mere fact that in the public notice, the assessee mentioned that though they were not legally liable to CANSTAR unit holders, it was only a gesture of goodwill, they decided to purchase the units at Rs.23/- per unit, though it had fallen to Rs.10/- would indicate the fairness of the assessee and their bonafides. Therefore, the said honest statement cannot be he....
X X X X Extracts X X X X
X X X X Extracts X X X X
....2001-02 Sales 499.05 Total 500.11 Loss 499.05 27. In view of what is stated above, it would be appropriate to look at all transactions in a comprehensive manner. The whole object of purchasing the units is to gain public confidence and to mitigate the hardship that is caused to the public. In the process, the assessee has invested Rs.999.16 crores for purchase of units and only Rs.500.11 crores was realized on its redemption after maturity, thus, incurring a loss of Rs.499.05 crores. It is in the nature of an expenditure and assessee is entitled to the benefit of Section 37(1) of the Act. Therefore, we are of the view that the claim of the assessee for depreciation on the basis of diminution of value of the capital asset or even loss sustained in the business would not be appropriate and the assessee would be entitled to the claim as expenditure incurred in the business because the entire amount was invested as commercial expediency with the intention of preserving their goodwill in the business. 28. In that view of the matter, the proper course would be to set aside the findings of the authorities on this aspect and remit the matter back....