2011 (7) TMI 1197 - HC - Income Tax

Quantum of Deduction u/s 80M r/w 80AA - Revenue submitted that while determining the quantum of deduction admissible to the assessee u/s 80M, the expenditure incurred relating to the earning of dividend income has to be excluded therefrom - Reliance was placed on Section 14A which was incorporated by Finance Act 2001 retrospectively w.e.f. 1.4.1962 - HELD THAT - Finance Act 2001 had inserted Section 14A with effect from 1.4.1962. According to the said Section, any expenditure incurred by the assessee for earning income which did not form part of the total income under the Act was not to be allowed as expenses. The Court in the case of PUNJAB STATE CO-OPERATIVE MILK PRODUCER'S FEDERATION LTD. VERSUS COMMISSIONER OF INCOME-TAX-II 2011 (3) TMI 615 - PUNJAB AND HARYANA HIGH COURT , while defining the scope of Section 14A, incorporated retrospectively w.e.f. 1.4.1962, the apex Court had specifically recorded that the theory of apportionment of amount of expense between taxable and non taxable income stood widened by incorporation of Section 14A. It was further noticed that the expression expenses incurred occurring in Section 14A referred to tax, salary, interest etc. in respect of which allowances are provided for under Sections 30 to 37. In all fairness to assessee, section 14A as incorporated by Finance Act 2001, with effect from 1.4.1962, was not under consideration and, therefore, the same do not come to the rescue of the assessee - Decision against Assessee.

Summary

Issues involved:
1. Treatment of Project Survey Expenses as Revenue Expenditure or Capital Expenditure.
2. Deduction under Section 80M for dividend income.
3. Classification of profit from the sale of shares as Capital Gains or Business Income.
4. Deduction under Section 36(1)(viii) and creation of reserves.

Issue 1: Treatment of Project Survey Expenses
The High Court addressed whether Project Survey Expenses should be treated as Revenue Expenditure or Capital Expenditure. The Revenue claimed that the expenses should be considered as Capital Expenditure, while the assessee argued for them to be treated as Revenue Expenditure. The Court examined the nature of the expenses and previous Tribunal decisions related to the same assessee for different assessment years. The Court ultimately ruled in favor of the assessee, considering the expenses as Revenue Expenditure.

Issue 2: Deduction under Section 80M for dividend income
The Court analyzed whether the deduction under Section 80M for dividend income should consider all expenses incurred for earning the dividend income. The Revenue argued for a proportional deduction of expenses, citing Section 14A of the Act. The assessee contended that only actual expenses directly related to earning the dividend income should be deducted. The Court referred to Section 14A inserted by the Finance Act 2001 and previous case laws to support its decision. The Court ruled in favor of the Revenue, stating that expenses must be deducted on a proportional basis for earning the dividend income.

Issue 3: Classification of profit from sale of shares
The Court examined whether the profit from the sale of shares should be classified as Capital Gains or Business Income. The assessee claimed it as Capital Gains, while the Revenue argued for it to be considered as Business Income. The Court considered the nature of the assessee's main business activities and previous Tribunal decisions. The Court ruled in favor of the assessee, categorizing the profit from the sale of shares as Capital Gains.

Issue 4: Deduction under Section 36(1)(viii) and creation of reserves
The Court addressed the deduction under Section 36(1)(viii) and the opportunity given to the assessee to create further reserves. The Revenue challenged the Tribunal's decision on this issue. However, the Court referred to a previous judgment against the Revenue in a similar case and ruled in favor of the assessee. The Court upheld the Tribunal's decision regarding the deduction under Section 36(1)(viii) and creation of reserves.