2015 (12) TMI 1676 - AT - Income Tax

Valuation of the stock - Held that - Admittedly, the assessee valued the closing stock in the earlier assessment years at the cost price. During the year under consideration the assessee valued the same at market price. Due to change of the method, the Assessing Officer disallowed the diminution in the value of shares to the extent of ₹ 75.90 lakhs. This Tribunal is of the considered opinion that as rightly submitted by the assessee, the assessee has option to value the shares either at cost price or at market price, therefore, the assessee opted to value the shares at market price. Since the market price is less than the cost price, the assessee cannot be faulted with and the CIT(A) has rightly allowed the claim of the assessee. This Tribunal do not find any reason to interfere with the order of the CIT(A) and accordingly the same is confirmed. Computation of indexed cost for capital gain - Held that - The Pune Bench of this Tribunal in the case of Kalyani Exports & Investments (P) Ltd. (2001 (1) TMI 240 - ITAT PUNE ) by majority view found that an asset cannot be acquired first as non-capital asset at one point of time and again as a capital asset at a different point of time. The Tribunal found that there can be one acquisition of asset for the first time irrespective of the character at that point of time. Therefore, by majority opinion it was found that what is relevant for the purpose of capital is the cost of acquisition and not the date at which it became the capital asset. Since by majority opinion, the Pune Bench of this Tribunal found that the cost of original acquisition has to be taken into consideration for calculating the cost inflation index and the CIT(A) has apparently followed the above order, we do not find any reason to interfere with the order of the CIT(A). Accordingly, the same is confirmed. Disallowance of 2% of the dividend income earned - Held that - Admittedly, Rule 8D of the Income-tax Rules is not applicable for the assessment year under consideration. Therefore, the expenditure for earning the exempted income has to be estimated on a reasonable basis. The CIT(A), after taking into consideration all the circumstances and facts available on record, estimated the expenditure at 2% of the dividend income. In those circumstances, this Tribunal do not find any reason to interfere with the order of the CIT(A). Accordingly the same is confirmed. Disallowance of advertisement expenses - Held that - The entire cost of publication is borne by the assessee s client, therefore, the Assessing Officer found that there is no question of making any further payment towards publicity. The fact remains that the assessee made wide publicity by using additional pages in the magazine The Integrated Share News which would have been otherwise used by M/s Alpha Systems Ltd for earning revenue. Since the assessee made use of the additional pages, it has to necessarily compensate M/s Alpha Systems Ltd. After wide publication, there was hike in the income of the assessee from ₹ 5,52,66,000/- to ₹ 12,18,65,000/- during the year under consideration. Therefore, as rightly found by the CIT(A), there was a nexus between the payment of advertisement charges and the business of the assessee. Hence, this Tribunal do not find any reason to interfere with the order of the CIT(A). Accordingly, the same is confirmed.

Summary

Issues:
1. Valuation of closing stock for assessment years 2002-03 and 2007-08.
2. Computation of indexed cost for capital gain for assessment year 2002-03.
3. Disallowance of 2% of dividend income earned by the assessee for assessment year 2007-08.
4. Advertisement expenses paid to M/s Alpha Systems Ltd for assessment year 2007-08.

Valuation of Closing Stock (2002-03):
The primary issue revolved around the valuation of the closing stock. The Assessing Officer disallowed diminution in value of closing stock amounting to &8377; 75.90 lakhs as the assessee changed the valuation method from cost price to market price due to a market scam. The Tribunal upheld the assessee's right to choose the valuation method, concluding that as the market price was lower than the cost price, the assessee's decision was justified. The change in valuation method did not warrant disallowance, and the CIT(A)'s decision was confirmed.

Computation of Indexed Cost for Capital Gain (2002-03):
The dispute centered on the indexed cost for capital gain arising from the conversion of stock-in-trade to investment. The Assessing Officer contended that the cost inflation index should be based on the year of conversion, while the assessee argued for the year of initial acquisition. Citing a precedent, the Tribunal supported the assessee's stance, emphasizing that the original acquisition cost should determine the cost inflation index. Relying on relevant provisions and judicial decisions, the Tribunal upheld the CIT(A)'s decision, confirming the use of the year of initial acquisition for calculating the indexed cost.

Disallowance of Dividend Income (2007-08):
Regarding the disallowance of 2% of dividend income, the Tribunal noted that Rule 8D was not applicable for the assessment year. The CIT(A) estimated the expenditure at 2% of the dividend income, a decision upheld by the Tribunal. Considering the absence of Rule 8D applicability, the Tribunal found the estimation reasonable and declined to interfere with the CIT(A)'s order.

Advertisement Expenses (2007-08):
The issue involved the payment of &8377; 72,30,000 to M/s Alpha Systems Ltd for advertisement expenses. The Assessing Officer questioned the legitimacy of the payment, suspecting it was not incurred wholly and exclusively for business purposes. In defense, the assessee argued that the payment led to increased income, indicating a direct business benefit. The Tribunal agreed with the assessee, recognizing a clear nexus between the advertisement expenses and business growth. The CIT(A)'s decision to allow the claim under section 37 of the Act was upheld, emphasizing the beneficial impact on the business due to the advertisement.

In conclusion, the Tribunal dismissed both appeals of the Revenue, affirming the decisions made by the CIT(A) in each case. The judgments provided clarity on valuation methods, indexed cost computation, expenditure estimation, and advertisement expenses, ensuring adherence to relevant legal provisions and precedents.