2014 (1) TMI 1586 - HC - Income Tax

Estimation of expenditure for disallowance u/s 14A - Held that - The assessee has received the dividend income direct credit in bank account through NEFT, RTGS and also DEMAT Accounts - No human agency is involved in collecting these dividends and interest for which the assessee has to incur any expenditure - These aspects has not been taken note of and the notional expenditure is calculated pre modernization - When the assessee has not incurred any expenditure for realizing this income, the question of holding that 2% of the gross total income is an expenditure is unsustainable - Decided in favour of assessee. Depreciation on the loss incurred units of CANSTAR or revenue expenditure - Held that - The object of purchasing the units is to gain public confidence and to mitigate the hardship that is caused to the public - The assessee has invested Rs.999.16 crores for purchase of units and only Rs.500.11 crores was realized on its redemption after maturity, thus, incurring a loss of Rs.499.05 crores - It is in the nature of an expenditure and assessee is entitled to the benefit of Section 37(1) of the Act - The claim of the assessee for depreciation on the basis of diminution of value of the capital asset or even loss sustained in the business would not be appropriate - The assessee would be entitled to the claim as expenditure incurred in the business because the entire amount was invested as commercial expediency with the intention of preserving their goodwill in the business - Decided in favour of assessee.

Issues Involved:
1. Estimation of expenditure at 2% on gross dividends for exemption under Section 10(33) of the Income Tax Act.
2. Deduction on account of depreciation on CANSTAR units as business expenditure or business loss.
3. Loss incurred on the purchase of CANSTAR units as commercial expediency under Section 37(1) of the Income Tax Act.
4. Restriction of allowance under Section 36(1)(viia) of the Income Tax Act to the extent of the provision made by the appellant.

Detailed Analysis:

Issue 1: Estimation of Expenditure at 2% on Gross Dividends for Exemption under Section 10(33) of the Income Tax Act
The court referenced the case of Maharashtra Apex Corporation Limited vs. CIT, which established that when no expenditure is incurred by an assessee in earning dividend income, no notional expenditure should be deducted from the said income. The court noted that the assessee derived income from dividends and interest through computerized, online transactions without incurring any expenditure. The court concluded that the assessing authority's decision to add back 2% of the gross total income as expenditure was unsustainable in law. The substantial question of law was answered in favor of the assessee.

Issue 2: Deduction on Account of Depreciation on CANSTAR Units as Business Expenditure or Business Loss
The court examined the nature of the transaction involving the purchase of CANSTAR units by the assessee. The bank purchased these units to mitigate hardships faced by investors and to preserve its goodwill, despite not being legally liable. The court noted that the expenditure was incurred wholly and exclusively for the purpose of the business, thereby maintaining the bank's goodwill. The court found that the authorities' reasons for disallowing the claim, such as treating the investment as permanent and not considering the scheme worked out with CANBANK Investment Management Services Limited, were incorrect.

Issue 3: Loss Incurred on the Purchase of CANSTAR Units as Commercial Expediency under Section 37(1) of the Income Tax Act
The court highlighted that the expenditure incurred by the bank to purchase CANSTAR units was a commercial expediency to preserve the bank's goodwill. The court referenced several Supreme Court judgments to support the interpretation of Section 37 of the Act, emphasizing that expenditures incurred for the preservation of business and its goodwill are allowable. The court concluded that the loss incurred by the bank in purchasing the units was an expenditure wholly and exclusively for the purpose of the business. The substantial question of law was answered in favor of the assessee.

Issue 4: Restriction of Allowance under Section 36(1)(viia) of the Income Tax Act
The court noted that the appellant's counsel conceded that the Tribunal correctly held the issue regarding the restriction of allowance under Section 36(1)(viia). Therefore, the substantial question of law was held against the assessee and in favor of the Revenue.

Conclusion:
The court allowed the appeals in part, setting aside the impugned orders and remanding the matter back to the Assessing Authority to grant the exemption treating the loss as a business expenditure under Section 37(1) of the Act. The court directed the Assessing Authority to redo the calculations for the relevant assessment years. The court held that the issue regarding the restriction of allowance under Section 36(1)(viia) was correctly decided by the Tribunal. Each party was ordered to bear its own costs.

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