2012 (9) TMI 159 - HC - Income Tax

Allocation of interest to be allocated to dividend income for deduction u/s 80-M - Held that - As it had been found that no part of interest was attributable to earning income from dividend, as the respondent had sufficient funds for making the said investments, thus Tribunal was justified in law in not allowing interest to be allocated to dividend - in favour of assessee. Disallowance of financial advisory and due diligent services - Held that - As the payments had been made for financial advice and for due diligence services with regard to utilization of resources / raw material for the respondent s plant and therefore, had to be allowed as an allowable business expenditure - in favour of assessee. Exemption of interest on a gross basis - Held that - The Party had paid interest to the assessee in respect of the loans advanced to it and the assessee paid interest to party in respect of the outstanding bills issued by party. There was no connection between the two transactions. The section does not require or permit the netting of payments under two independent contracts albeit between the same parties - in favour of assessee. Disallowance of expenditure on Depository Services and Dematerialisation of share certificates - Held that - The dematerialisation of shares did not result in either a quantitative or qualitative enhancement or improvement in the respondent s assets viz. the said shares. It resulted in the assessee s complying with the SEBI regulations and indeed facilitated the assessee s receiving dividends in respect of the investments. It did not however, affect the value of the shares to any extent whatsoever - the expenditure was allowable as normal business expenditure - in favour of assessee.

Summary

Issues:
1. Appeal under section 260(A) of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal.
2. Questions of law related to deduction under section 80HHC(3) of the Income Tax Act.
3. Exclusion of turnover attributable to local sales for the purpose of deduction.
4. Allocation of interest to dividend income for deduction under Section 80-M.
5. Payment for financial advisory services and due diligence considered as business expenditure.
6. Claim of exemption of interest received from DHIL under Section 10(23G) of the Act.
7. Allowance of charges incurred for depository services and dematerialization of share certificates as business expenditure.

Analysis:

1. The appeal was admitted on substantial questions of law related to deduction under section 80HHC(3) of the Income Tax Act for the assessment year 2003-2004. The Court dismissed the appeal concerning certain questions while admitting others for consideration. The judgment was based on a previous order in a related case.

2. The Court considered the issue of excluding turnover attributable to local sales for the purpose of deduction under section 80HHC(3) of the Income Tax Act. The appeal was dismissed in part, and the Court reframed one of the questions for further consideration.

3. The Court addressed the allocation of interest to dividend income for deduction under Section 80-M. The appellate authorities found no substantial question of law in this regard, as there was no connection between the interest earned from dividends and the funds used for investments.

4. Regarding the payment for financial advisory services and due diligence, the Court found that the expenses were closely related to the business activities of the respondent and thus allowed as a business expenditure. The decision was based on the facts of the case.

5. The Court analyzed the claim of exemption of interest received from DHIL under Section 10(23G) of the Act. The respondent had received interest from a subsidiary and paid interest for a different transaction. The Court upheld the exemption without adjusting the interest paid by the respondent.

6. The Court examined the allowance of charges incurred for depository services and dematerialization of share certificates as business expenditure. The expenses were considered allowable as normal business expenditure, as they did not result in a qualitative or quantitative enhancement of the respondent's assets but facilitated compliance with regulations and dividend earnings.

This comprehensive analysis covers the various issues addressed in the legal judgment delivered by the Bombay High Court.