2011 (9) TMI 344 - SC - Income Tax

Admissibility of expenditure to earn dividend income while computing book profits and also under the normal provisions of the Income-Tax Act. - Sales tax Incentive and Subsidy- Capital recipt or Revenue Receipt. - Held that - High Court ought not to have dismissed the appeals without considering the questions - matter remitted back to high court.

Summary

Issues Involved:
1. Whether estimated expenditure for earning dividend income can be allowed while computing book profits and under the Income Tax Act.
2. Whether unpaid custom duty and excise duty included in closing stock can be disallowed under section 43B of the Income Tax Act.
3. Whether sales tax incentive is considered a Capital Receipt.

Analysis:

Issue 1: Estimated Expenditure for Dividend Income
The Supreme Court addressed the question of whether estimated expenditure for earning dividend income can be allowed while computing book profits and under the Income Tax Act. The Court noted that the Income Tax Appellate Tribunal had deleted the disallowance of expenses for earning dividend income, stating that the disallowance was misconceived as no expenditure had been incurred for earning the dividend income. The Court considered this a factual finding and concluded that the question as framed did not arise.

Issue 2: Unpaid Custom Duty and Excise Duty
Regarding the disallowance of unpaid custom duty and excise duty included in closing stock under section 43B of the Income Tax Act, the Supreme Court referred to a previous judgment in the case of Berger Paints India Ltd. v. Commissioner of Income-Tax. The Court held that this question did not arise based on the precedent set in the mentioned case.

Issue 3: Sales Tax Incentive as Capital Receipt
The Court analyzed whether sales tax incentive should be considered a Capital Receipt. The Court referred to a Special Bench decision regarding the purpose of the subsidy, which was to encourage setting up industries in a backward area to generate employment. Applying the purpose test, the Court concluded that the subsidy was on capital account, as its objective was to set up a new unit. Therefore, the Court determined that the question framed regarding sales tax incentive as a Capital Receipt did not arise.

In light of the above analysis, the Supreme Court admitted the appeal only on the questions related to the disallowance of payments made towards provident fund and superannuation fund, the computation of Book Profits under section 115JA of the Income Tax Act, and the classification of pre-operative expenses and trial run expenses as revenue expenditure.

This detailed analysis of the Supreme Court judgment highlights the key issues addressed and the Court's reasoning behind its decisions on each issue.