2011 (9) TMI 635 - AT - Income Tax

Expenditure in relation to exempt income - Section 14A - AO disallowed 5% - Assessee contended ratio of exempt income/ total income (2.09%) - Held Tat - In view of Godrej and Boyce ( 2010 -TMI - 78448 - BOMBAY HIGH COURT ) case remanded back. Corporate Dividend Tax - Amalgamation sanctioned by High Court -Dividend already paid - Incidence of tax u/s.115-O on the distribution of dividend - Held That - The payment of dividend distribution tax is not dependent on the ultimate chargeability to tax in the hands of the recipient of the dividend. Deduction of Warranty provison without appreciating same as contigent liability - Held That - Facts are not in dispute, on the basis of assessee own case,order of CIT(A) was upheld. Taxability of foreign exchange gain - Capital or reveune - held that - 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. - 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 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.

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Refund of excess tax paid under Section 115-O due to amalgamation.
3. Deduction of warranty provision.
4. Deduction of expenditure on maintenance of garden.
5. Deduction of expenses on shelved projects and feasibility reports.
6. Taxability of foreign exchange gain on repatriation of certificates of deposits.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The Assessee challenged the disallowance of expenses under Section 14A related to income not forming part of total income. The Assessee argued that investments were made from own funds and no general or administrative expenses were incurred. The AO estimated 5% of the exempt income as related expenses, which was reduced by CIT(A) to 2.096% based on the ratio of exempt income to total income. The Tribunal, referencing the Bombay High Court's decision in Godrej & Boyce, remanded the issue to the AO for fresh consideration, emphasizing the need for a reasonable method to determine disallowable expenditure.

2. Refund of excess tax paid under Section 115-O due to amalgamation:
The Assessee sought a refund of dividend distribution tax paid on shares that ceased to exist due to amalgamation. The AO and CIT(A) rejected this claim, stating that the liability to pay the tax arises when the dividend is distributed, and subsequent events do not affect this liability. The Tribunal upheld this view, confirming that the payment of dividend distribution tax is independent of the ultimate taxability of the dividend in the recipient's hands.

3. Deduction of warranty provision:
The Assessee claimed a deduction for warranty provisions, which the AO disallowed as a contingent liability. The CIT(A) allowed the claim, referencing the Tribunal's earlier decisions in the Assessee's favor for AY 1992-93 and 2000-01. The Tribunal upheld the CIT(A)'s decision, noting that the facts and basis for the provision were consistent with previous years.

4. Deduction of expenditure on maintenance of garden:
The AO disallowed expenses on garden maintenance, considering them not wholly and exclusively for business purposes. The CIT(A) allowed the deduction, citing the Tribunal's decisions for AY 1995-96 to 1997-98 and 2000-01, which recognized such expenses as necessary for the Assessee's business. The Tribunal upheld this view, finding no reason to deviate from the established precedent.

5. Deduction of expenses on shelved projects and feasibility reports:
The Assessee claimed expenses on shelved projects and feasibility reports as revenue expenditure. The AO disallowed these, treating them as capital expenses. The CIT(A) allowed the claims, referencing Tribunal decisions for AY 1997-98, 1999-2000, and 2000-01, which held that such expenses were connected to the existing business. The Tribunal upheld the CIT(A)'s decision, confirming that the expenses were not for starting a new business but were closely related to the existing business.

6. Taxability of foreign exchange gain on repatriation of certificates of deposits:
The AO treated the foreign exchange gain on repatriation of Euro Notes as taxable income, arguing that the funds were put into a common pool and their capital nature was not maintained. The CIT(A) disagreed, holding that the gain was capital in nature as the Euro Notes were raised for capital purposes and the gain arose from currency conversion. The Tribunal upheld the CIT(A)'s decision, emphasizing that the taxability is determined at the point when the gain arises, not based on subsequent utilization, and that the treatment in the books of accounts does not determine taxability.

Conclusion:
The Tribunal's decisions provided clarity on the application of Section 14A, the treatment of dividend distribution tax under Section 115-O, and the nature of various business expenses. The Assessee's appeal was partly allowed for statistical purposes, while the Revenue's appeal was dismissed.

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