TMI Blog2011 (9) TMI 635X X X X Extracts X X X X X X X X Extracts X X X X ..... was on the Assessee and the Assessee failed to discharge its onus. On the facts of this case, however, we do not see any reason to justify disallowance on this ground only, when at the point of time when the gain in question arose the funds were admittedly raised for meeting capital expenditure. We are also of the view that a mere credit to profit and loss account, on the facts of the present case, cannot be the reason to hold that the gain in question is revenue receipt chargeable to tax. - Decided in favor of assessee. - ITA NO.4497/M/2008 & 4572/MUM/2008 - - - Dated:- 9-9-2011 - SHRI N.V.VASUDEVAN SHRI R.K.PANDA JJ. Assessee by : Shri Dinesh Vyas Revenue by : Shri B.Jay Kumar ORDER PER N.V.VASUDEVAN, J.M, ITA No.4497/M/08 is an appeal by the Assessee and ITA No.4572/M/08 is an appeal by the Revenue. Both these appeals are directed against the order dated 25.04.2008 of CIT(A)-II, Mumbai, relating to A.Y.01-02. 2. First we shall take for consideration ITA No.4497/M/08, appeal by the Assessee. Ground No.1 raised by the Assessee reads as follows: 1. The CIT(A) erred in merely reducing the disallowance u/s. 14A and not deleting the total disall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... denied that administrative and general expenses would have been incurred for earning the exempt income also. He resorted to an estimation of such expenses and held that it was reasonable to hold that 5% of the exempt income would be expenditure incurred in earning exempt dividend income. Accordingly the AO disallowed a sum of Rs.3,82,75,612/- (5% of Rs.76,55,12,237) u/s.14-A of the Act and added the same to the total income of the Assessee. 4. Before CIT(A), the Assessee reiterated submission as was made before AO. In the alternative, the Assessee submitted that disallowance of 5% of the exempt income was high and submitted that the disallowance at best can be made only on the ratio of exempt income to the total income which was worked out by the Assessee at 2.096% and on that basis a sum of Rs.44,07,768/- was arrived at by the Assessee as expenditure which could be disallowed u/s.14-A of the Act. The CIT(A) held as follows: I have considered the submissions made by the appellant. However, in the case of CIT vs. M/s. Citicorp Finance (I) Ltd. (ITA 5832/M/2003 dt. 21/11/06 for A.Y 2000-01), it has been held that it is difficult to accept the hypothesis that one can earn substa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een calculated by AR of appellant on following premises and reasons: Since the ratio of the exempt income (Rs.76,55,12,237) to the total income(Rs.36.50,80,463) is 2.0969%, the appellant has submitted that if any amount is to be disallowed u/s. 14A, it should be 2.0969% of Rs.21,02,02,454 (total of Other Operation and Other Administrative expenses) i.e. Rs.44,07,768/- and not Rs. 3,82,75,612/- disallowed by the AO. Therefore, after appreciating the calculation made by AR of appellant, I find it is just and proper to disallow Rs.44,07,768/- and on this issue, I am supported the orders of the previous CIT(Appeals). As such, the AO is directed to modify the disallowance as per my above directions. 5. Aggrieved by the order of the CIT(A), the Assessee has raised Ground No.1 before the Tribunal. The learned counsel for the Assessee submitted before us a list of companies in which investments have been made and pointed out that all of them were group companies and that the investments were strategic investments. He reiterated the plea that there were no general or administrative expenses incurred in earning these dividend incomes. He also relied on decisions in Assesse s own case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001. (Proviso was inserted by F.A. 2002, w.e.f. 3-2-2001) Rule 8-D was enacted by the I.T. (5th Amend.) Rules, 2008, wef. 24-3-2008, pursuant to the provisions of Sub-Section (2) and it reads as follows: 8D. Method for determining amount of expenditure in relation to income not includible in total income. (1) Where the Assessing Officer having regard to the accounts of the assessee of the previous year, is not satisfied with (a) the correctness of the claim of expenditure made by the assessee ; or (b) the claim made by the assessee that no expenditure has been incurred in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2). (2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely : (i) the amount of expenditure directly relating to income which does n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal. HELD: (1) The argument that dividend on shares / units is not tax-free in view of the dividend-distribution tax paid by the payer u/s 115-O is not acceptable because such tax is not paid on behalf of the shareholder but is paid in respect of the payer s own liability; (2) S. 14A supersedes the principle of law that in the case of a composite business expenditure incurred towards tax-free income could not be disallowed and incorporates an implicit theory of apportionment of expenditure between taxable and non-taxable income. Once a proximate cause for disallowance is established which is the relationship of the expenditure with income which does not form part of the total income a disallowance u/s 14A has to be effected; (3) The argument that a literal interpretation of s. 14A leads to absurd consequences is not acceptable. S 14A is founded on a valid rationale that the basic principle of taxation is to tax net income i.e gross income minus expenditure; (4) The argument that the method in Rule 8D r.w.s 14A (2) for determining expenditure relating to the tax-free income is arbitrary and violative of Article 14 is not acceptable because there is an adequate safeguar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1st April, 2000. b. The CIT(A) erred in not appreciating that as the shares ceased to exist on 1st April 2000, the question of taxability of dividend on the shares did not arise. 11. Under Section 115-O of the Act, every domestic company has to pay tax at prescribed percentage on any amount declared, distributed or paid by such company by way of dividends (whether interim or otherwise) on or after the 1st day of June, 1997 but on or before the 31st day of March, 2002, whether out of current or accumulated profits. The Assessee declared interim dividend at the Board meeting held on 23.3.200 of 37% and the same was paid on 10.5.2000. Dividend Distribution Tax in terms of Sec.115-O was paid by the Assessee on 6.4.2000. The Assessee declared final dividned in its AGM on 10.8.2000. Dividend Distribution Tax in terms of Sec.115-O was paid on 23.8.2000. 12.The Assessee amalgamated with Andhra Valley Power Supply Co. Ltd. W.e.f 1.4.2000. The Hon ble Bombay High Court sanctioned the scheme of Amalgamation by its order dated 18.10.2000 and the amalgamation was to take effect from the appointed day viz., 1-4-2000. Consequent to the amalgamation, 48,04,040 shares held by Andhra Valley ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5-O. The contention of the assessee is rejected. 16. On appeal by the Assessee, the CIT(A) concurred with the view of the AO. Hence, the Assessee has raised ground No.2 before the Tribunal. 17. We have heard the submission of the learned Counsel for the Assessee who reiterated the same plea as was put forth before the Revenue authorities. It was submitted by him that by virtue of provisions of Sec.8(b) of the Act, any interim dividend shall be deemed to be the income of the previous year in which the amount of such dividend is unconditionally made available by the company to the member who is entitled to it. It was his submission that the interim dividend though declared on 23.3.2000 was ultimately paid only on 10.5.2000 and therefore the same should be treated as declared during the previous year. His further submission was that the interim dividend also became not payable by operation of law during the previous year. With regard to the final dividend, it was submitted by him that the declaration of dividend as well as the factum of its becoming not payable by operation of law occurred during the previous year and there is no dispute about it. 18. The learned D.R. submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntingent liability and disallowed the same. The Assessee pointed out before AO that 60% of the sales value is treated as material and labour cost and a provision @7.5% on this amount is made towards warranty repairs. The assessee had also clarified that the warranty provision is a negligible percentage of the total profits (0.01% for the year under reference) and the method of determining the warranty provision has been consistently followed. This was not accepted by the AO. 22. On appeal by the Assessee, the CIT(A) found that in AY 1992-93 and 2000-01, the Tribunal had allowed similar claim of the Assessee and following the said decision, the CIT(A) allowed the claim of the Assessee for deduction. 23. Before us, it is not in dispute that the facts and the basis on which liability by way of provision for warrant claims was made in AY 92-93 and AY 00-01(copies of Tribunal s order placed in Assessee s paper book) and the basis of provision of warranty liability in the present A.Y. was made are identical. In such circumstances, we do not find any reason to take a different view. Respectfully, following the decision of the Tribunal in Assessee s own case, we uphold order of CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g that these expenses are capital expenses. 29. The ground of appeal is wrongly worded. The ground should read that CIT(A) erred in deleting the expenses on shelved project and expenses of feasibility report. We proceed to decide the appeal on the basis that it challenges the CIT(A) s order allowing relief to the Assessee. 30. The assessee has claimed expenditure incurred in respect of certain projects which were subsequently shelved on grounds of commercial expediency, as revenue expenditure. The assessee has submitted that when it was found that the projects were not likely to be profitable, they were given up in order that the Companies could concentrate on other more profitable projects to facilitate the carrying on of the business of the companies. The assessee furnished the following list of projects which were shelved during the year ended 31st March, 2001. Shelved Projects Amount (Rs.) ACC-Kymore Power Project 4,58,113 INDAL- Hirakud Power Projects 2,20,281 Haryana Vidyut Prasaran 5,00,000 MSEB Power Project 14,66,566 POWERGEN 2,74,73,477 Bidding regarding RVPNL Po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed box culvert in Trombay main drainage 18,972 Electro-chlorination plant 35,153 Mini Hydro Scheme at Bhira 2,56,187 Mini Hydro Scheme at Mulshi 2,56,646 Study for evaluation of 2 hydro projects at Zambia 17,767 Mini Hydro power plant scheme on tailrace of Khopoli Power Plant 1,73,318 Total 26,18,393 The assessee also furnished statements indicating the break up of the above expenditure under cover of its letter dated 27th November, 2007 and has provided copies of some of the invoices under cover of its letter dated 18th Feb.2008. The above payments have been made to Tata Consulting Engineers (TCE) for various feasibility reports. The assessee has submitted that the above projects are connected with the existing business of the assessee i.e. generation, transmission and distribution of electricity. The expenses have been claimed as revenue expenditure based on the following decisions: 1. Karnataka High Court in the case of CIT vs. Karnataka State Industrial Investment Development Corpn. (163 ITR 657) 2. Kerala High Court in the case of CIT vs. Kerala State Industrial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of the Tata Hydro Electric Power Supply Co. Ltd., The Andhra Valley Power Supply Co. Ltd. and The Tata Power Co. Ltd. had issued Euro Notes in 1997 for raising funds for financing the Companies ongoing and future capital expenditure programmes and for general corporate purposes. The Companies intended to expand their generating capacity to meet the growing demand of their existing customers as well as to add new direct customers in the License area. The capital expenditure programs for which the funds were raised were as under: 1. Multi fuel combined cycle 450 MW thermal power plant at Bhivpuri. 2. Construction of fuel jetty at Trombay 3. Replacing four 12 MW units at Bhivpuri Hydro Station and two 12 MW units at Khopoli Hydro Station with 24 MW units, thereby increasing generation by raising turbine efficiency by 12 to 14%. 4. Establishing tail race units at Bhivpuri Hydro station. 5. Upgrading transmission and distribution net work by constructing 220 KV substation with gas insulated switch gear in South Mumbai. 6. Increasing capacity at Jojobera CPP to add a 240 MW plant to the existing 67.5 MW plant. 7. Developing 76.8 MW IPP at Belgaum in Karnataka State ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate fluctuation gain received as a result of devaluation of the rupee, at that point of time, changed its character from capital to revenue and after changing the character, it could be considered as a trading receipt. The reason given by the AO for change of the character from capital to revenue was that the amount was put in a common pool. Moreover, another reason given by the AO for treating the gain as a revenue receipt was that the assessee was not able to prove the nexus of having incurred the amount of gain on a capital asset or for development or upgradation. It was submitted by the Assessee that the mere fact of putting the funds from certificates of deposit in a common pool of funds of the business, a fact subsequent to the actual arising of the gain, does not change the character of the gain arising from the certificates of deposit from a capital receipt to a revenue receipt. To highlight this point, the Assessee submitted that if, for example, a capital asset is sold and the consideration received for the same is invested in the trading activities of the business, it cannot by any stretch of imagination be said that the character of the consideration has been changed f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the foreign exchange gain. As correctly pointed out by the appellant, if, for example, a capital asset is sold and the consideration received for the same is invested in the trading activities of the business, it cannot by any stretch of imagination be said that the character of the consideration has changed from capital to revenue. The AO s reliance on the fact that the gain has been credited to the Profit and Loss account, to come to the conclusion that the gain is, therefore, taxable income, seems to be misplaced. It is a well established principle that the treatment in the books of account does not determine the taxability or otherwise of a particular amount. In the course of the hearing, the appellant has correctly drawn an analogy between the foreign exchange gains credited to the Profit and Loss Account and profit on sale of investments, which also would be credited to the Profit Loss Account. Despite this fact, profit on sale of investments would be treated as capital gains and taxed accordingly. I agree with the appellant s submission in this regard and hold that the fact that the gain on foreign exchange has been credited to the Profit and Loss account is not dete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he nature of income. Further, the gain has arisen at the point of time when the funds were repatriated to India. Admittedly the Euro Notes were issued for meeting capital expenditure and remained outside India. When they were repatriated to India at the point of time of repatriation, the purpose for which the funds were raised admittedly remained one for meeting capital expenditure. As rightly held by the CIT(A), the taxability has to be determined at the point of time when the profit arose. The subsequent utilisation, in our view was irrelevant, on the facts of the present case. With regard to allegation of the AO that there was a failure on the part of the Assessee to explain the utilisation of the funds repatriated for meeting capital expenditure, we are of the view that the fact that the repatriated funds went into a common pool from which both capital and revenue expenditure were met cannot lead to the conclusion that the utilisation of funds was for revenue purposes and not capital expenses. It is no doubt true that the onus in this regard was on the Assessee and the Assessee failed to discharge its onus. On the facts of this case, however, we do not see any reason to justify ..... X X X X Extracts X X X X X X X X Extracts X X X X
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