TMI Blog2004 (10) TMI 308X X X X Extracts X X X X X X X X Extracts X X X X ..... dividend income aggregating to Rs. 8,87,37,583. In regard to the query of the AO regarding the expenditure attributable to the earning of this dividend income, the assessee contended that no direct expenditure was incurred in relation to the dividend income. The AO observed that as per the provisions of s. 14A (inserted by the Finance Act, 2001, with retrospective effect from 1st April, 1962), no deduction was allowable in respect of expenditure incurred by the assessee in relation to the income which did not form part of the total income under the Act. The AO taking into consideration the fact that all these investments had been made by the assessee-company in the course of carrying on of its business activities and due to the multifarious activities of the assessee-company, it was difficult to identify the expenditure towards each item of income, attributed 10 per cent of the dividend income on estimate basis being attributable towards expenditure for earning dividend income and disallowed a sum of Rs. 88,73,758 and added the same to the assessee s total income. He relied on the decision of the Hon ble Supreme Court in the case of CIT vs. United General Trust Ltd. (1994) 116 CTR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT vs. United General Trust Ltd. (1979) 119 ITR 664 (Bom) was reversed by the Hon ble Supreme Court and thus proportionate management expenses attributable to the earning of the dividend income had to be deducted from the dividend income. In the written submissions filed by the Department, it is submitted that the matter can be remitted to the AO to verify the quantum of deduction claimed by the assessee in earlier years under s. 57(i) from the dividend income (when it was taxable), and to make a pro rata adjustment on the basis of subsequent investment made, inflation, etc. 6. We have considered the rival submissions and perused the records of the case. Admittedly, these investments in shares were made during the course of the carrying on of business and as is evident from the records, substantial investments had been made by the assessee in earlier years, and during the current year as well the assessee made an investment of Rs. 19 crores. Whether to invest or not to invest and whether to retain the investments or to liquidate the same are very strategic decisions which the management is called upon to take. These are mind-boggling decisions and top management is involved in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e course of the business and, therefore, the same was allowable. The AO disallowed this expenditure on the ground that this could not be held to be incurred for the purposes of assessee s business. Before the learned CIT(A) it was submitted that the AO erred in disallowing the guest-house expenditure and during the course of hearing it was informed that the provisions of s. 37(4) were not applicable for the asst. yr. 2000-01. The learned CIT(A) has observed that the assessee was unable to furnish any details regarding the claim before the AO. Mr. Dastur, the learned counsel for the assessee, submitted that since s. 37(4) was omitted w.e.f. 1st April, 1998, by the Finance Act, 1997, no disallowance was called for. The learned Departmental Representative in her written submissions has stated that since the assessee had not proved that the expenses incurred for the guest-house were in connection with its business, the AO has rightly disallowed the same. 8. We have considered the submissions of both the parties. As is evident from the assessment order, the AO has merely disallowed the guest-house expenses without examining the nature of the expenses incurred by the assessee. After th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court in the case of Indian Commerce Industries (P) Ltd. vs. CIT (1995) 127 CTR (Mad) 318 : (1995) 213 ITR 533 (Mad). The learned CIT(A) after considering the facts before the Madras High Court pointed out that in this case the assessee was promoting various group concerns which were having independent businesses and there was no nexus with the assessee s business as pointed out by the AO. Before the learned CIT(A), the assessee had also taken an alternative plea that the expenditure could be allowed under the head Other sources which was also rejected by the learned CIT(A) on the ground that the expenditure was not for the purpose of earning income but for the purpose of promoting various group concerns which had independent businesses and the assessee had acquired controlling interest. 12. Mr. Dastur, the learned counsel for the assessee, submitted that in any case the investment had not been made from borrowed fund; that the investment was made with a view to get raw material which it required and in any event the acquisition of shares was for business purpose and not with a view to earning dividend. He submitted that without prejudice to assessee s claim that no borr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er referred to the decisions in the following cases: 1. State of Madras vs. G.J. Coelho (1964) 53 ITR 186 (SC) 2. Sivakami Mills Ltd. vs. CIT (1980) 14 CTR (Mad) 277 : (1979) 120 ITR 211 (Mad) 3. CIT vs. Sivakami Mills Ltd. (1998) 144 CTR (SC) 172 : (1997) 227 ITR 465 (SC) to contend that even if the borrowing is made for capital purposes, still it is allowable if used for business purpose. 14. The learned Departmental Representative in her written submissions has stated as under: "The fact that the income from these companies in which the moneys have been invested would only be in the form of dividends and not business profits of the appellant is not to be lost sight of. The Supreme Court has held in the case of CIT vs. P.K. Jhaveri (1990) 181 ITR 79 (SC) that interest on borrowed capital for investment in shares is deductible only from dividends. This has been followed by the Bombay High Court in CIT vs. Maganlal Chhaganlal (P) Ltd. (1999) 153 CTR (Bom) 447 : (1999) 236 ITR 456 (Bom) and the Madras High Court in CIT vs. Chemical Holdings Ltd. (2001) 169 CTR (Mad) 339 : (2001) 249 ITR 540 (Mad). During the relevant assessment years, dividend income from domestic compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the AO, the matter be restored back to the file of the AO to find out whether any borrowed funds at all were used by the assessee for being invested in the shares of the investee company or not. Therefore, we admit the documents at pp. 5 to 64 of the paper book II, filed before us, and remit the same to the AO for examining the issue in the light of utilization of funds being invested in the investee company. In case the AO comes to the conclusion that no borrowed funds were used for the purpose of investment in the shares of the investee company, then no disallowance is called for. 18. Now, coming to the second contention of the assessee, we find considerable force in the argument of the learned counsel for the assessee and the decision of the Hon ble Madras High Court in the case of Indian Commerce Industries Co. (P) Ltd. vs. CIT squarely covers this issue. In that case, as noted by the learned CIT(A), it was held "that the shares were purchased because of coercion by the company and also with a view to increase the assessee s business with the company. Hence, there was a nexus between the business of the assessee and the purchase of shares." In the present case also, we f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that under the miscellaneous expenses, the assessee had claimed that a sum of Rs. 1,36,144 towards club expenses. He disallowed treating the same as an expenditure not related to the business as the same were in the nature of personal benefits of the employees of the company. The learned CIT(A) relying on the decision of the Hon ble Madras High Court in the case of CIT vs. Sundaram Industries Ltd. (2000) 158 CTR (Mad) 437 : (1999) 240 ITR 335 (Mad) directed the AO to allow the entrance fee/subscription fee and disallowed the other expenditure. 20. The learned counsel for the assessee referred to the decision of the Gujarat High Court in the case of Sayaji Iron Engg. Co. vs. CIT (2002) 172 CTR (Guj) 339 : (2002) 253 ITR 749 (Guj) to submit that in case of company no expenditure could be disallowed on the ground of personal expenses. The learned Departmental Representative has submitted that the assessee has not brought any material on record to show that the amounts expended on clubs were business expenditure. 21. Having heard both the parties, we find that in the case before the Hon ble Gujarat High Court, relied upon by the learned counsel for the assessee, it has been obser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Lamp Works Ltd. (2003) 183 CTR (Ker) 182 : (2003) 261 ITR 721 (Ker), wherein also similar view was taken. He further referred to various Tribunal decisions wherein this issue has specifically been considered which are as under: 1. ITA No. 4542/Mum/1999 in the case of M/s Plastiblends India Ltd. 2. ITA Nos. 516 517/Pn/1996 in the case of CTR Manufacturing Ltd., Pune. 24. Having heard both the parties, we find that this issue is covered by the decision of the Hon ble jurisdictional High Court, supra, because Expln. 5 to s. 32(1) which thrust, the depreciation on assessee has been held to be prospective. Accordingly, this ground stands allowed. 25. The nest ground of appeal is that the learned CIT(A) erred in disallowing depreciation on let out buildings and technical know-how. At the time of hearing, Mr. Dastur, the learned counsel for the assessee, did not press the issue regarding depreciation on technical know-how. Accordingly, this part of the ground is dismissed as not pressed. 26. The first limb of the ground is regarding depreciation of let out buildings. The learned counsel in the written submissions submitted that a portion of the building has been let to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld have been excluded in computing the book profits under s. 115JA, under Expln. (i) to that section. 7.3 The CIT(A) ought to have applied the ratio of the decision of the Supreme Court in the case of Apollo Tyres Ltd. vs. CIT (2002) 174 CTR (SC) 521 : (2002) 255 ITR 273 (SC) and ought to have held that the accounts as prepared in accordance with Sch. VI to the Companies Act as adjusted by the Explanation thereto." 30. The AO found that the total income, as computed under the normal provisions, was less than 30 per cent of its book profit being loss. He accordingly computed the total income of the assessee under s. 115JA of the IT Act. The main issue involved in the present appeal is regarding deduction claimed by the assessee, while computing book profits, in respect of the drawal from revaluation reserve in accordance with Expln. (i) to s. 115JA(2). Brief facts apropos this issue are that the assessee had revalued its fixed assets as on 31st March, 1996, 1st April, 1998, 31st March, 1999 and 31st March, 2000, and the resultant surplus had been added to the cost of the assets. As per the written submissions of the assessee, the depreciation charged to the P L a/c was Rs. 9,434 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crores but only Rs. 29.01 crores which represented the reserve created upto 31st March, 1996. The learned counsel referred to page No. 215 of the paper book wherein the calculation of tax payable as per MAT is furnished. The learned counsel further submitted that in view of the unambiguous language of the proviso below item (i) of Explanation to s. 115JA of the Act, the AO should have deducted the amounts drawn from the revaluation reserve and credited to the P L a/c. The learned counsel submitted that depreciation had to be provided in accounts on revalued figure and to the extent there was extra depreciation provided in the accounts amounting to Rs. 3,817.81 lakhs, the same amount was withdrawn from the revaluation reserve account and credited to the P L a/c. In this regard the learned counsel for the assessee referred to the Notes on Accounts to annual report for financial year 1999-2000 at p. 44, which read as under: "4(d): The depreciation charge for the year shown in the P L a/c is after deducting an amount of Rs. 3,817.81 lacs (Previous year Rs. 4,344.40 lacs) representing the extra depreciation arising on revaluation of fixed assets withdrawn from revaluation reserve." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his issue has also been clarified by the Company Law Board in its circular. He pointed out that for payment of dividend, separate computation will be required. He further referred to para 4A of Sch. VI, Part II, and pointed out that the P L a/c has to contain or give by way of a note a statement showing the computation of net profits in accordance with s. 349 of the Act with relevant details of the calculation of the commissions payable by way of percentage of such profits to the directors. Thereafter, the learned counsel referred to s. 205(2A) of the Companies Act to submit that after the Companies (Amendment) Act, 1974, no dividend can be declared or paid by the company for any financial year out of the profits of the company for that year unless depreciation has been provided in accordance with the provisions of sub-s. (2). The learned counsel pointed out that s. 115JA(2) has nothing to do with s. 205. He pointed out that Parts II and III to Sch. VI have been brought in with reference to s. 211(2) and s. 211(3A). By referring to these provisions, the learned counsel, Mr. Dastur, in sum and substance, submitted that reliance on the decision of the Mumbai Bench of the Tribunal by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1st day of April, 1997, and which is credited to the P L a/c shall not be reduced from the book profits, unless the book profits in the year of creation of such reserves or provisions were increased by the amount transferred to such reserves or provisions at that time." The learned counsel for the assessee relied on the decision in the case of UCO Bank vs. CIT (1999) 154 CTR (SC) 88 : (1999) 237 ITR 889 (SC) to submit that the circulars are binding. In this case it was, inter alia, held that circulars providing for uniform application of law in consonance with concept of income are not to be treated as inconsistent with provisions of statute and are binding on authorities. The learned counsel for the assessee has also filed written submissions which are placed on record. 32. The learned Departmental Representative submitted that there is no dispute regarding withdrawal of reserve from revaluation reserve account and the same being credited to the P L a/c. However, the real dispute is that where reserve is created without being earlier debited to P L a/c, can it be reduced or not ? The learned Departmental Representative referred to the proviso to s. 115J and pointed out that as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch, 1997, does not come within the purview of the scheme of this chapter. 34. We have considered the rival submissions and have carefully gone through the records of the case. The object of introduction of MAT scheme was brought in the IT Act by insertion to Chapter XII-B by the Finance Act, 1987, w.e.f. 1st April, 1988. The AO has reproduced from the Budget Speech of the then Hon ble Finance Minister as under: "It is only fair and proper that the prosperous should pay at least some tax. The phenomenon of so-called zero tax highly profitable companies deserves attention. In 1983, a new s. 80VVA was inserted in the Act so that all profitable companies pay some tax. This does not seem to have helped and is being withdrawn. I now propose to introduce a provision whereby every company will have to pay a minimum corporate tax on the profits declared by it in its own accounts. Under this new provision, a company will pay tax on atleast 30 per cent of its book profit." The intention, as is evident from the above speech, is to make every company pay a minimum corporate tax on the profits declared by it in its own accounts. Sec. 115JA is a code by itself which creates the charge a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertained liabilities. (d) the amount by way of provision for losses of subsidiary companies; or The losses of subsidiary companies if debited to P L a/c have the effect of depressing the profit of the company and thereby affecting the correct working results of the company. Therefore, the losses as shown in the P L a/c are required to be increased by those losses of subsidiary companies which had been debited to the P L a/c. (e) the amount or amounts of dividends paid or proposed; or As is evident from the Budget Speech of the Hon ble Finance Minister, noted earlier, the main object of introduction of s. 115JA was to tax those companies which had paid dividend and accordingly, a provision has been made to increase the book profit by the amount or amounts of dividends paid or proposed. (f) the amount or amounts of expenditure relatable to any income to which any of the provisions of Chapter III applies; This clause has been inserted to take care of those incomes which do not form part of total income. If any expenditure relatable to such income has been debited to P L a/c, then the same is required to be increased so as to avoid any distortion in the taxable income of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the book profit unless the book profit of such year has been increased by those reserves or provisions out of which the said amount was withdrawn under this Explanation," This proviso has to be interpreted taking into consideration cl. (b) of the Explanation because as per this proviso that reserve (which is credited to P L a/c) is not required to be reduced by which in earlier year book profit had been increased as per cl. (b). Therefore, if the assessee after 1st April, 1997, but before 1st day of April, 2001, has carried to any reserve any amount by way of debit to the P L a/c and the book profit of that particular year was increased by that amount, then only the assessee will be entitled to reduce the same (if it is credited during current financial year) from the net profit as shown in the P L a/c. As this condition was not complied with, the assessee has not reduced the reserve created after 1st April, 1997. The learned Departmental Representative has submitted that in view of the proviso contained under s. 115J also, the reserves which have not been created through debit to P L a/c cannot be reduced. In our opinion, this contention cannot be accepted because firstly, s. 11 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n as per the Accounting Standard-6 issued by the Institute of Chartered Accountants of India (in short ICAI). This adjustment was made as per the guidelines prescribed by the ICAI for treatment of reserves created on revaluation of fixed assets, the relevant paras from which are reproduced hereunder: "1. In the preparation of the financial statements of a company, various fixed assets are stated on the basis of their historical cost. Sometimes, in order to bring into the balance sheet their replacement cost, a company revalues its fixed assets on the basis of a valuation made by competent valuers. When the value of fixed assets is written up in the books of account of a company on revaluation, a corresponding credit is given to the revaluation reserve. Such reserve represents the difference between the estimated present market values and the book values of fixed assets. When such reserve is created, a question arises about its nature and the manner in which it can be utilised. This guidance note deals with accounting treatment of the reserve created on revaluation of fixed assets (herein referred to as "revaluation reserve"). 9. A question may arise, as to whether the additiona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e adjustment made in the P L a/c was as per Accounting Standard-6 read with guidance note issued by ICAI. This adjustment was in conformity with the prescription of s. 211 of the Companies Act, 1956. This was done in order to bring the accounts on historical cost basis. This was primarily in the nature of contra adjustment in P L a/c and not a case of effective credit in the P L a/c [as contemplated in cl. (i) of Explanation]. The Courts cannot go by the literal meaning of the word but have to consider the substance of the adjustment. Literally, it may be a credit to the P L a/c but not in substance. The credit in the P L a/c implies that the P L a/c per se has been effectively credited by the said amount. Thus, in effect, affected the net profit as shown in the P L a/c. However, as per accounting principles, the contra adjustment does not at all affect any particular account to which it has been carried out. Unless an adjustment has the effect of increasing the net profit as shown in the P L a/c, that entry cannot be said to be a credit to the P L a/c and, therefore, though the amount has been literally credited to the P L a/c but in substance there is no credit to the P L a/c. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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