TMI Blog2012 (5) TMI 482X X X X Extracts X X X X X X X X Extracts X X X X ..... belief and the sufficiency of material cannot be questioned. There was material available before AO clearly showed that no expenses in relation to exempt income had been disallowed by the assessee under section 14A which in our view was relevant material for formation of reasonable belief that some income had escaped assessment as it was not possible to earn such huge dividend without incurring any expenses. - Decided against the assessee Speculation loss - setting off - section 73 - held that:- profit from purchase and sale of shares are not to be excluded from the deeming provisions of Explanation to section 73. It was accordingly held that the assessee was entitled to set off brought forward speculation loss against profit from sale and purchase of shares in the current year. - Decided in favor of assessee. - ITA No. 5568/Mum/2005, ITA No. 878/Mum/2008, ITA No. 4181/Mum/2008, ITA No. 520/Mum/2007 - - - Dated:- 14-10-2011 - D. Manmohan, Rajendra Singh, JJ. P.K.B. Menon for the Appellant F.V. Irani for the Respondent ORDER Per: Rajendra Singh: 1. These appeals by the assessee and revenue are directed against different orders of CIT(A) dated 28.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al. 2.1 Before us the ld. AR for the assessee argued that there was no dispute that no borrowed funds were used for making investments and once investments were made there were hardly any expenses for earning dividend income. He referred to the judgment of Hon'ble High Court of Bombay in the case of CIT vs. General Insurance Company (254 ITR 203)in which it was held, in the context of section 80M that the salary paid to staff were not relatable to earning of dividend income. Similarly the payment of stamp duty, transfer charges and safe custody charges were not relatable to earning of dividend income. The Hon'ble High Court held that these expenses amount be relatable to acquisition of shares but not to earning of dividend income. It was also submitted that the assessee in assessment years 2004-05 and 2005-06 had made some suo-moto disallowance but that was without prejudice to the claim that no disallowance was called for. It was further submitted that disallowance made by AO was very excessive. In this context he referred to the decision of the Tribunal in case of Grindwel Norton Ltd. vs. Addl. CIT (in ITA No.3447/M/2010 in which disallowance had been retracted by the Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as in the context of deduction under section 80M which was allowable in respect of dividend income included in the gross total income. Since only the dividend income computed under the provisions of the Act could be included in the gross total income Hon'ble Supreme Court in the case of Distributor (Baroda) Ltd. held that expenses incurred for earning dividend income had to be excluded and only net dividend income be considered for deduction under section 80M. The Hon'ble High Court of Bombay in case of general Insurance Corporation of India (supra), therefore, held that salary to staff which was not directly related to earning of dividend income could not be deducted from dividend while allowing deduction under section 80M. The provisions of section 14A are different from those of section 80M. In section 80M, as pointed out earlier only the expenses having direct nexus with earning of dividend income could be deducted but as per section 14A all expenditure which is relatable to exempt income has to be disallowed which will include both direct and indirect expenditure. This view is supported by the judgment of Hon'ble High Court of Bombay in the case of Godrej Boyce Ltd. (328 ITR 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ides that in case the instalments of advance tax is not paid by the assessee or payment is less than the specified percentage of tax payable on the basis of returned income, the assessee is liable to pay interest on the shortfall at a specified rate. The AO noted that the assessee had paid lesser amount of tax in the instalments. He therefore, levied interest of Rs.40,73,766/- in assessment year 2001-02 and Rs.22,06,782/- in assessment year 2002-03. 3.1 The assessee disputed the decision of AO and submitted before CIT(A) that in assessment year 2001-02, major portion of income from PD was earned by the assessee in the last three months of the financial year which could not be anticipated. The installment had been paid on the basis of estimate of income on the date of payment of installment, therefore, interest was not leviable. In relation to assessment year 2002-03 it was submitted that lower estimate of income from PD Division was on account of uncertainties created in the financial market by 9/11 (September 11, 2001) terrorist attack which resulted in much lower payment of September installment. It was also submitted that the sentiments turned positive only towards end of Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evy of interest under section 234C of the Income tax Act. Under the provisions of section 211, the assessee is required to pay advance tax on estimated current income in quarterly installments on or before 15th June, 15th September, 15th December and 15th March of financial year. In case the assessee has failed to pay advance or payment of installment on the specified dates is less than the installment payable on the basis of returned income, the assessee is required to pay interest on the shortfall at a specified rate. The section provides relaxation such as in the cases where shortfall is on account of under estimation or failure to estimate capital gains or income of the nature referred to in section 2(24)(ix) in which cases no interest will be payable if the shortfall in tax is made up by the assessee in the remaining installments. There is further relaxation in case shortfall is on account of increase in rate of surcharge under section 2 of the Finance Act 2000 and the assessee has made up shortfall by 15th March of the financial year. In all other cases interest is payable in case of shortfall. There is no dispute in this case that there was shortfall in payment of installmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ime Securities vs. ACIT (supra) which in our view is distinguishable. Firstly, the case related to section 234B and not 234C which is under consideration in this appeal. Secondly, in that case, shortfall was because of exemption of capital gain on sale of capital assets to 100% holding company under section 47(v) and the assessee, therefore, had not included capital gain in the estimated income. Only after filing of return of income, for assessment year 1991-92, the share holding of the holding company fell below 43% in March 1992, due to further shares issued by assessee to various other companies and, therefore, in the assessment order, AO assessed the capital gain to tax as a result of which there was shortfall in payment of advance tax and interest was levied under section 234B. The Hon'ble High Court observed that the assessee at the time of payment of advance tax had correctly computed income subject to advance tax, and therefore there was no default by the assessee and accordingly it was held that interest under section 234B was not leviable. In case, certain income is not taxable at all, the assessee could not be said to be in default in not paying tax in respect of said in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment year 2002-03 had been filed by the assessee on 29.10.2002 declaring total income of Rs.74,32,38,137/- which had been processed under section 143(1) on 19.2.2003. Subsequently the AO noted that the assessee had earned huge dividend income and interest income from bonds which were exempt from tax but the assessee had not disallowed any expenses relating to such income. He, therefore, reopened the assessment after recording reasons for escapement of income and issued notice under section 148 on 26.10.2004. The reasons records by AO were as under:- "In the case of the assessee M/s. Kotak Mahindra Co. Ltd., the return of income for A.Y. 2002-03 was filed on 29.10.2002 declaring total income of Rs.74,32,38,137/-. This return has been processed u/s.143(1) on 19.02.2003 accepting the income returned. On verification of the record it is found that in computation of income the assessee has claimed dividend income of Rs.2,28,48,157/- as exempt u/s.10(33) of the Act. However, the expenditure related to earn this exempted income has not been considered for disallowance as provided in section 14A of the Act. In the case of United General Trust reported at 200 ITR 488 the Hon' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ief that there was escapement of income on account of claim of expenses relating to exempt income. CIT(A) accordingly upheld the legal validity of reopening of assessment, aggrieved by which the assessee is in appeal before the Tribunal. 4.2 Before us the ld. AR for the assessee reiterated the submissions made before the CIT(A) that there was no material evidence before the AO for formation of belief for the escapement of income. It was submitted that the AO had reopened the assessment on the basis of the judgment of Hon'ble Supreme Court in case of United General Trust (supra), which related to deduction under section 80M. In that case there was no dispute about nexus between management expenses and dividend income. The disallowance of proportionate expenses had therefore been upheld. In the present case there was no material showing nexus between exempt income and the expenses incurred. It was also argued that the reasons as recorded by the AO have to be considered and cannot be supported by affidavit or oral submissions as held by Hon'ble High Court of Bombay in the case of HUL vs. ACIT and Others (268 ITR 332). It was pointed out that on the basis of reasons recorded there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses and the dividend income and therefore, proportionate expenses were held deductible from gross dividend following the earlier judgment of Hon'ble Apex Court in the case of Distributor (Baroda) Pvt. Ltd. (155 ITR 120). 4.4 On careful consideration of all aspects of the matter we do not see any merit in the arguments advanced. No doubt it is true that while considering the legal validity of the re-opening of an assessment, the reason as recorded by AO have to be seen. But on the basis of reasons recorded, in our view, reasonable belief can be formed regarding escapement of income. The AO in the reason, recorded clearly mentioned that the assessee had received dividend income of Rs.2.28 crores which was exempt from tax and the assessee had not disallowed any expenses relating to exempt income under section 14A of the Act. Though the AO referred to the judgment of Hon'ble Supreme Court in the case of United General Trust (supra) which related to deduction under section 80M but the same cannot be said to be totally irrelevant. The deduction under section 80M is allowable in respect of dividend income received from domestic companies and included gross total income. Therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arding disallowance of expenses under section 14A, himself admitted that some reasonable disallowance could be made under section 14A out of general expenses relating to PD division which was managing the investments from which tax free dividend income had been earned. We are, therefore, convinced that reopening by AO was based on relevant material and same is therefore, held legally valid and order of CIT(A) is accordingly upheld. 5. The fourth dispute is regarding set off of brought forward speculation loss against profits from dealing in shares earned by the assessee during the relevant year. This ground is relevant to the appeal of the assessee for assessment year 2002-03 and Departmental appeals in assessment years 2004-05 and 2005-06. In assessment year 2002-03, the assessee had earned income of Rs.35,35,112/- from trading in equity and indexed shares which were treated by it as speculation profit under provision of Explanation to section 73 which had been set off against the brought forward speculation loss of assessment year 2001-02. The AO however took the view that Explanation to section 73 was applicable only in the case of losses and not in the case of profit. He ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of shares in the current year. Following the said judgment, the claim of the assessee has to be allowed. We, therefore, set aside the order of CIT(A) for the assessment year 2002-03 and allow the claim of assessee. However, orders of CIT(A) in assessment years 2004-05 and 2005-06 in which claim of the assessee had been allowed are upheld. 6. The fifth dispute is regarding disallowance of bad debts. This is relevant to Departmental appeal for the assessment year 2004-05. The AO during the assessment proceedings noted that the assessee had written off a sum of Rs.56,98,589/- as bad debt which included a sum of Rs.22,934/- on account of IDBI and Rs.2,50,000/- on account of Kevin Care Pvt. Ltd. The AO observed that the claim of bad debt could be allowed only if there was material to show that the debt had become irrecoverable. He further observed that the assessee had not brought any material to prove that the debts were irrecoverable during the year. Accordingly he disallowed the claim aggregating to Rs.2,72,934/-. The assessee disputed the decision of the AO and submitted before CIT(A) that the assessee was acting as agent of IDBI for issue of their bonds on which commission wa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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