2012 (8) TMI 776 - HC - Income Tax

Disallowance of deduction u/s. 80M - addition of gross dividend without deducting estimated expenses there from - Held that - Section 20 refers to deduction from interest on securities in the case of banking company whereas Section 80M comes under Chapter VI-A of the Income Tax Act referring to special deduction in respect of inter corporate dividends - deductions contemplated by section 80M referred to actual expenditure whereas, deductions contemplated by section 20(1) are estimated proportionate expenses and interest, therefore, one cannot import deductions from interest on securities in the case of a banking company under section 20(1) into the deductions contemplated by section 80M - as decided CIT Vs. United Collieries ltd. 1992 (4) TMI 18 - CALCUTTA HIGH COURT the special deduction u/s 80M is allowable on the net dividend which is arrived at after taking into account actual expenditure incurred by the assessee in earning the dividend income and that there was no scope for any estimate of expenditure being made and there was no scope for allocation of notional expenditure unless the facts of a particular case so warranted - in favour of assessee. Unaccounted expenses under the head making up charges - Held that - As payments were made by account payee cheque on bills raised by the contractor/job workers and tax at source had also been deducted in respect of the aforesaid payments made for making up charges to the contractor/job workers, it is not necessary that in every case expenses are to be allowed only upon confirmation letters being filed from the recipients of the amounts - as the expenditure is backed by considerable evidence, including the registers maintained as per the requirement of the Central Excise Authorities the claim is to allowed - in favour of assessee. Change in the method of valuing closing stock - Held that - Any change in the method of valuing closing stock was not done to undervalue profit and there was no mala-fide intention on the part of the respondent-assessee and the Accounting standard issued by the Institution of Chartered Accountants of India made it mandatory that the inventories should be valued at the lower of costs or the net realizable value - there is no need to change the valuation of the opening stock for the year when there is change in value of the closing stock due to a change in the method - the valuation of closing stock on the basis of cost or net realizable value which is lower, done by the assessee which is mandatory requirement of law cannot be faulted - in favour of assessee.

Issues Involved: Deduction under Section 80M, Allowance of making up charges, Change in method of valuation of stock.

Re Question (a): Deduction under Section 80M

The respondent-assessee claimed a deduction of Rs.4.16 crores for the assessment year 1997-98 as dividend income under Section 80M of the Income Tax Act, 1961. The Assessing Officer (A.O.) restricted this deduction to Rs.3.74 crores, estimating that 10% of the gross dividend income was expended for earning the income, as per Section 80AA of the Act. The Commissioner of Income Tax (Appeals) overturned this decision, directing the A.O. to allow the full deduction, as no actual expenses were incurred for earning the dividend income. The Tribunal upheld this decision, emphasizing that only the actual expenses incurred for earning the dividend income should be deducted, not estimated expenses.

The revenue's counsel argued that Section 80AA mandates deduction on net dividend income, citing the Kerala High Court's decision in Commissioner of Income Tax Vs. South Indian Bank. The respondent's counsel countered with precedents from the Bombay High Court, asserting that only actual expenses should be considered. The Court found the respondent's reliance on these precedents well-founded, noting that Section 80M deductions should be based on actual expenses, not estimated ones. Consequently, the Court dismissed question (a) as it raised no substantial question of law.

Re Question (b): Allowance of making up charges

The respondent-assessee claimed Rs.1.16 crores as expenses for making up charges. The A.O. disallowed Rs.88.97 lacs of this amount due to a lack of confirmatory letters from the recipients. On appeal, the Commissioner of Income Tax (Appeals) reduced this disallowance to Rs.49.76 lacs after additional confirmatory letters were provided. The Tribunal further allowed the entire expenditure, noting that payments were made via account payee cheques, tax was deducted at source, and the expenses were supported by evidence, including registers maintained for Central Excise Authorities.

The Court upheld the Tribunal's decision, stating that the finding was based on evidence and was not perverse or arbitrary. Thus, question (b) was dismissed as it did not raise a substantial question of law.

Re Question (c): Change in method of valuation of stock

The respondent-assessee changed its method of valuing closing stock from net realizable value to the lower of cost or market price, resulting in a valuation decrease of Rs.6.17 crores. The A.O. added this amount back to the income, suspecting tax evasion. However, the Commissioner of Income Tax (Appeals) and the Tribunal upheld the change, noting it was in compliance with Accounting Standard AS-2 and was not done with mala fide intent. The Tribunal also dismissed concerns about profit distortion, emphasizing the bona fide nature of the change.

The Court cited the precedent in Melmould Corporation v. CIT, which supports changes in valuation methods if they align with accepted accounting practices and are bona fide. The Court concluded that the change was mandatory and lawful, dismissing question (c) as it raised no substantial question of law.

Conclusion

The appeal was dismissed in its entirety, with no substantial questions of law raised on any of the issues. No order as to costs was made.

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