2005 (5) TMI 280 - AT - Income Tax

Chargeable As capital nature - Share brokerage receipt - Nature and character of the receipt - Exigible to tax - tax treatment of incentive received from the under writer on the purchase of TNPL shares - deduction towards construction of noon-meal center and school building. HELD THAT - The receipt bears clear nexus with the investment. Income was not earned on investment, but on account of investment. Funds were deployed through a particular broker and the broker agreed to part with brokerage in consideration of deployment of such funds through him. In a way assessee acquired the shares at a lesser value. The cost to the assessee was the amount paid for the shares minus brokerage received in the form of incentive. Such incentive cannot be construed to be revenue receipt. It was adjusted towards the cost of shares. It is of capital nature. In CIT v. UP State Industrial Development Corpn. 1997 (4) TMI 2 - SUPREME COURT , the Supreme Court held that in order to determine the question of taxability, well settled legal principles as well as principles of accountancy have to be taken into account. It is a well accepted proposition that for the purpose of ascertaining profits and gains, the ordinary principles of commercial accounting should be applied, as long as they do not conflict with any express provision of the relevant statutes. Underwriting commission not taken to P L account but adjusted to reduce cost of shares is not exigible to tax. The facts of the present case are different. Here the assessee is not under writer. It received a part of the commission given to the under writers. The amount of commission was adjusted to reduce cost or shares. This was in accordance with the principles of account. As such the amount is not exigible to tax. We, therefore, decide this issue in favour of the assessee and against the Revenue. Construction of noon-meal center and school building - In the case of Trichy Distilleries Chemicals Ltd. v. ITO 1990 (2) TMI 144 - ITAT MADRAS-D the expenditure was incurred out of commercial consideration. The assessee was carrying on business in industrial alcohol. It had to depend upon Government for supply of its raw materials to its factory. To gain favour of the officials the assessee incurred expenditure. In the present case the assessee in a State Government undertaking. It is not expected that to gain favour of the officials expenses are required to be made. There is absolutely nothing on record to indicate that the assessee did acquire any business advantage out of such expenses. It transpires from the perusal of letters submitted that assessee was required to contribute to renovate noon-meal centres before the Chief Minister's birthday, besides the Hon'ble Chief Minister had ordered to take up the question of exemption of this expenditure under the Income-tax Act to those who made the contribution. There is absolutely no business nexus with these expenses. As such, it cannot be allowed u/s 37(1). In the result, the appeal of the assessee stands partly allowed.

Summary

Issues:
1. Tax treatment of incentive received by the assessee from the underwriter on the purchase of TNPL shares.
2. Claim for deduction towards construction of noon-meal center and school building.
3. Allowability of expenditure incurred towards contribution to Tamil Nadu Basket Ball Association.
4. Claim for deduction under section 80HHC of the Act.

Issue 1: Tax treatment of incentive received from underwriter on TNPL shares:
The appeal concerned the tax treatment of an incentive received by the assessee from the underwriter on purchasing TNPL shares. The underwriter and broker shared the brokerage received, parting a sum to the assessee. The Assessing Officer treated this as the assessee's income. However, the Tribunal held that the incentive was of capital nature, not a revenue receipt, as it was adjusted towards the cost of shares. Referring to legal principles and accountancy standards, the Tribunal ruled in favor of the assessee, stating that the amount was not exigible to tax.

Issue 2: Claim for deduction towards construction of noon-meal center and school building:
The appeal also involved a claim for deduction related to the construction of a noon-meal center and school building. The assessee cited a letter indicating a contribution towards this construction. However, the Tribunal noted that there was no business nexus established for the expenditure, and it did not result in any business advantage. Citing legal precedents, including the requirement for a direct connection to business activities for deductions, the Tribunal upheld the disallowance of the claim under section 37(1) of the Act.

Issue 3: Allowability of expenditure towards Tamil Nadu Basket Ball Association:
Regarding the expenditure incurred towards the Tamil Nadu Basket Ball Association in connection with SAF Games, the Tribunal found that the assessee failed to demonstrate any business advantage gained from this expenditure. Following the same reasoning as in the previous issue, the Tribunal upheld the disallowance of this expenditure, as there was no established business nexus for the claim.

Issue 4: Claim for deduction under section 80HHC of the Act:
The final issue related to the claim for deduction under section 80HHC of the Act. The assessee did not make this claim in the return, and no evidence was presented to show fulfillment of the required conditions for availing the benefit. The Tribunal noted that the Assessing Officer cannot allow a claim under section 80HHC without the necessary details. Consequently, the Tribunal upheld the decision to not grant the deduction under section 80HHC, finding no fault in the impugned order on this count.

In conclusion, the Tribunal partly allowed the appeal of the assessee, ruling in favor of the assessee on the tax treatment of the incentive received from the underwriter on TNPL shares. However, the claims for deduction towards construction projects and contributions to associations were disallowed due to the lack of a clear business nexus and benefit to the assessee's business. Additionally, the claim under section 80HHC was not granted as the required details were not provided.