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TMI Blog2011 (11) TMI 479X X X X Extracts X X X X X X X X Extracts X X X X ..... ttributable for earning the exempt income or income which does not form part of the total income is to be added ? - Held that:- In all the assessment years the expenditure attributable to the dividend as well as interest income claimed exempt u/s 10(33) and 10(23G) respectively was added while computing the book profit. The said issue is decided in favour of the assessee and no expenditure is treated as attributable for earning the exempt income i.e. dividend or interest claimed u/s.10(23G). This issue does not survive - in favour of assessee. Loss on conversion of the shares - whether the same pertains to the A.Y. 1996-97 or 1998-99 - shares/securities converted as stock-in-trade on 6.10.1995 - Held that:- In the present case the cost of acquisition of the shares being stock in trade on the date of conversion was Rs.340 which was reduced to Rs.257.50 as on 31.3.1996. Loss suffered of Rs.82.50 per share for the previous year relevant to the AY 1996-97. However, loss to the extent of Rs.25.50 per share was only claimed by the assessee. The balance loss of Rs.57 per share has been claimed in the AY 1998-99 which cannot be allowed being pursuant to the AY 1996-97. Therefore, rest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the accounts of the assessee - in favour of the assessee - ITA No. 3303/Mum/2003, ITA No. 3304/Mum/2003, ITA No.5535/Mum/2003, and ITA No.5413/Mum/2004, - - - Dated:- 18-11-2011 - P.M. Jagtap, R.S. Padvekar, JJ. Goli Srinivas Rao for the Appellant Jitendra Sanghavi for the Respondent ORDER 1. This is a batch of eight appeals comprise of four appeals by assessee and four cross appeals by the revenue are filed challenging respective impugned orders of the Ld. CIT (A) Mumbai for the A.Ys. 1998-99, 1999-2000, 2000-01 and 2001-02. Most of the issues are common in all the appeals so also about the facts and hence, this batch of appeals are disposed off by this consolidated order for the sake of convenience. We would prefer to go issue-wise as there is multiplicity of grounds in all the appeals. 2. The first issue is disallowance of expenditure claimed u/s.35D of the Act and this issue arises in the assessee's all appeals, i.e. A.Ys. 1998-99, 1999-00, 2000-01 and 2001-02. 3. The facts pertaining to the issue which are revealed from the assessment orders on record as under. The assessee had claimed the deduction u/s.35D in all the four years are as under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls filed by the assessee as well as Revenue. The assessee has challenged the order of the learned CIT(A) for partly sustaining the addition and the Revenue is in appeal against giving relief to the assessee. This issue revolves around section 14A of the Income-tax Act, 1961. 7. So far as assessment year 1998-99 is concerned, the assessee has declared dividend income of Rs.2,76,17,268 which was claimed exempt u/s 10(33) of the Act. The Assessing Officer asked the assessee the source of investment in these shares and explain whether borrowed funds have been invested for making investment of the said share. The assessee filed reply stating that the net worth of the company as on 31.03.1998 was Rs.1113.08 crore. The assessee further submitted that it is dealing in purchase and sale of share and the same are held as stock in trade. The basic object of the assessee's business is not to earn dividend but trading in shares. The quantum of funds utilized in the acquisition of stock in trade is very minimum and therefore no expenditure is attributable to the earning of dividend. The A.O. was not satisfied with the explanation of the assessee. The A.O. referred to the decision of the Hon'bl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs.6,80,70,059 M.T.N.L . 15% Bonds Rs.89,38,356 M.T.N.L. 17% bonds Rs.1,38,70,980 Total Rs.9,42,78,518 9. The A.O. sought explanation of the assesse on the source of investment in above bonds and debentures. The assessee filed details of investments with dates which are given in the assessment order on page nos. 10 and 11. So far as Reliance Telecom Limited bonds, Reliance Utility Power Limited bonds and MTNL bonds (17%) are concerned those investments were made in the preceding years. In respect of 17% MTNL bonds the current year investment was Rs.5,64,80,590. The same way 15% MTNL bonds were purchased during the year i.e. the financial year 1997-98 of Rs.14,79,89,616. The assessee explained that the investment is made out of the sale proceeds of stock- in- trade of the shares/securities and majority of the investments were made in the preceding years. Investment in RTL debentures of Rs.9.20 crore and Rs.2 crores had been made out of the income generated during the year. So far as RUPL's debentures were concerned, those were made out of the assessee's own funds. The assessee also explained that the assessee g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... source of investment in these bonds and debentures. However, examination of balance sheet and profit and loss account reveals that the assessee company has raised Rs.679 crore of funds on investment rate of about 16% on which claim of discount on bonds of Rs.37.13 crore and the interest on debentures of Rs.29 crore has been made. Total expenditure on interest and finance charges has increased to Rs.87.32 crore during the year compared to Rs.31.37 crore last year. Therefore, keeping in view all facts and circumstances of the case, it is held that part of the borrowed funds have been diverted towards these bonds on which interest income has been claimed as exempt. In absence of proper details, an amount of Rs.5 crore is held to be attributable to the investment in these bonds. Accordingly, disallowance of Rs.5 crore is made on this account". The A.O. finally worked out Rs.5 crore as an expenditure attributable for earning of interest income from the bonds and debentures and he worked out the net exempt income of the interest on Bonds/Debentures. 10 So far as assessment year 1999-2000 is concerned the assessee has declared the dividend income of Rs.4,20,01,686 and claimed as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment in the shares and whether the borrowed funds had been utilized for making the investment. The assessee filed reply stating that it had sufficient funds and out of the said funds the investment is made. As done in the preceding years, the A.O. examined the balance sheet of the assessee and made the following observations:- "The assessee company has contended that no expenditure can be held to be attributable to earning of dividend. From the examination of balance sheet, it is seen that the shares on which dividend income has been earned were purchased in the past. However, fresh investment of Rs.38.85 crore has been made in Reliance Industries Ltd. shown under investments and investments of Rs.10 crore in BSES and Rs.2.18 lakh in Forbes Gokak Ltd. on which dividends have been received in the current year. Total investment in shares held as stock in trade is Rs.280.72 crore. Further, certain shares were held as long term investment of Rs.129.87 crore. Assessee is also holding shares of subsidiary companies of Rs.13.07 crore. Total investment in shares is Rs.423.66 crore. Balance sheet of the assessee reveals that the total shareholder's funds as on 31.03.2000 is Rs.1197.96 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure of Rs.4 crore is attributable to dividend income which is claimed exempt for A.Y. 2000-2001. 13. The A.O. finally worked out interest expenditure of Rs.4 crore as attributable to earn the dividend income which was claimed exempt. On the same way the assessee had claimed exemption of the interest of Rs.19,28,63,025 which was received on Reliance Telecom Limited (10.5% bonds) and Reliance Utility and Power Limited i.e. nonconvertible debentures at Rs.1,17,92,219 and Rs.18,10,70,806 respectively. The A.O. also sought explanation of the assessee on the source of investment. The A.O. referred the preceding years disallowances and considering the disallowance made in the assessment year 1999-2000 on the same reasoning he worked out the interest expenditure attributable for earning the exempt income of Rs.19,28,63,025 at Rs.9 crore. Accordingly reducing the same from the exempt income and in consequence the total income was enhanced. 14. In assessment year 2001-2002 it was noticed by the A.O. that the assessee-company has claimed dividend income of Rs.7,13,51,096 as exempt u/s 10(33) and interest income on the bonds of Rs.39,55,92,661 as exempt u/s.10(23G) of the Act. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me i.e. dividend and interest in the final computation. 15. The assessee challenged the disallowance made by the A.O. in all the assessment years before the learned CIT(A). Raising serious grievance against the action of the A.O., the learned CIT(A) gave partial relief to the assessee and sustained disallowance made by the A.O. as under:- Asst. Year Expenditure attributable to dividend (u/s 10(33) Expenditure attributable to interest u/s 10(23G) 1998-99 Rs.60,00,000 Nil 1999-00 Rs.60,00,000 Nil 2000-01 Rs.1,00,00,000 Nil 2001-02 Rs.69,25,000 Nil Now the assessee as well as the Revenue both are in appeal, against partial sustenance of addition and partial disallowance of addition made by the Assessing Officer respectively. 16. We have heard the Parties and perused the records. The learned CIT(A) has given a categorical finding that the assessee has its own surplus funds which were utilized for making investments in the shares, bonds and debentures. The learned Counsel argued that the total tax free investment in all the years is much below the paid up capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of funds, we find that the assessee is having sufficient own funds generated from the share capital and reserves and surplus. 18. In assessment year 2001-2002 the assessee received the funds by issuing 'preference shares' to the extent of Rs.800 crore. So far as the dividend income is concerned, nowhere it is controverted by the Revenue that the basic object of the assessee was not to earn the dividend by holding the shares as an investment and shares were also held as stock-in-trade as part of the business of the assesseecompany. So far as the interest on bonds and debentures are concerned, we find that as admitted by the A.O., most of the investments had been made in the preceding years prior to assessment year 1998-99 and said fact is clear from his observations in assessment year 1998-99. The assessee made some investment in the assessment years 1999-2000, 2000-2001 and 2001-2002 but we find that the assessee has generated funds from the sale of shares and securities held as stock-in-trade or as the investments. We find that identical issue of disallowance on the dividend income had come for the consideration before the Tribunal in assessee's own case for the assessment yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ient to meet the advance tax liability and the profits were deposited in the over draft account of the assessee and in such a case it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for the running of the business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the contention before the High Court. The principle, therefore, would be that if there are funds available both interest-free and over draft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption is established considering the finding of fact both by the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal." 20. The argument of the learned Departmental Representative that the Hon'ble jurisdictional High Court in the case of Godrej and Boyce Ltd. Mfg. Co. VS. DCIT (2010) 328 ITR 81 (Bom) held that the A.O. should work out the reasonable disallowance. With due respect, in our considered opinion, in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . This issue arises only in A.Y. 1998-99. It was noticed by the A.O. that the assessee had claimed the loss on the sale of the stock-in-trade of the securities/shares amounting to Rs.1,82,54,054/-. The assessee has converted the shares/securities as a stock-in-trade on 6.10.1995. In the financial year relevant to A.Y. 1998-99 the assessee sold 319200 shares of M/s. Rallies India Ltd., out of the shares held as stock-intrade. At the time of conversion of the said shares as stock-in-trade as on 6.10.1995, the fair market value was taken at Rs..340/- per share and the cost price as per books of a/c was Rs.283/-. The A.O. has noted that on the date of conversion, there was capital gain of Rs.1,81,95,214/-. That was worked out by multiplying 319000 shares by Rs.57/- (difference between Rs.340 and Rs.283). The assessee offered the capital gain in the A.Y. 1998-99. In the financial year 1995-96 in which the shares were converted into stock-in-trade, assessee valued said shares at Rs.257.50 per share adopting the market price as on 31.03.1996. The cost price as per the books was Rs.283/- per share. The difference of Rs.25.50 per share was booked by the assessee as a loss in the A.Y. 1996-9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which such stock-in-trade is sold or otherwise transferred. In the present case, there is no dispute about the fact that the assessee offered capital gain by adopting the market value on the date of conversion as a sale consideration but also claimed the loss by adopting the value of the opening stock - the value of closing stock or otherwise. As per sec.45(2) on conversion the capital asset either independently becomes stock-in-trade or forms the part of the existing stock-intrade. In the present case, as per the chart filed by the assessee, we find that the assessee has valued stock of the shares of M/s. Rallies India Ltd. on 31st March, 1996 and 31st March,1997 by adopting the market price and taken the said value as opening-stock also. As per the scheme of the said provision there are two limbs: (i) gain or loss on the date of conversion of capital asset in to stock-in-trade and (ii) the profit or loss on date of sale or otherwise transfer of said capital asset. 26. So far as the first limb is concerned as per the language used in the said provision, the correct interpretation would be that the gain or loss is determined on the date of conversion of the capital asset into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directions using our powers. Accordingly respective grounds i.e. ground no.3 for the A.Y. 1999-2000 is dismissed. 30. The Next issue is addition made u/s.41(1) and this issue arises in revenue's appeal for the A.Ys. 1999-2000 and 2000-01. 31. In the assessment proceedings relating to the A.Y. 1999-00, it was noticed by the A.O. that Rs.43,01,267/- was shown as dividend received but payable to others. The A.O. had noted that the assessee trades in shares and securities in several cases even after the shares are sold, shareholders does not get the shares registered in their name before the record date or there are instances of bad deliveries and in such a situation the assessee receives the dividend on the said shares. In the opinion of the A.O., in the reasonable time, the assessee should pass over the dividend received on the shares sold to the purchases of the shares. The A.O. made the break-up of the outstanding dividend payable as per period i.e. less than one year, 1 to 3 years and 3 to 5 years. In the opinion of the A.O. the accumulated and payable with the assessee for the period 3 to 5 years should be treated as income u/s.41(1) of the Act. The assessee claimed that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the normal provisions of the Act and also book profit as per sec.115JA of the Act. While computing the book profit the A.O. made certain adjustments by way of increase or decrease of net profit and one of the additions made in respect of 'Lease Equalisation Reserve' as under:- Assessment Year Amount of deduction u/s.35D 1998-1999 Rs.2,10,94,580 1999-2000 Rs.2,10,95,328 2000-2001 Rs.2,21,06,248 2001-2002 Rs.1,19,86,670 36. There is no discussion on this issue in the assessment order. The Ld. CIT (A) accepted the plea of the assessee that book profit cannot be increased by making the addition of the 'Lease Equalisation Reserves'. 37. Identical issue has been considered by the Tribunal in the assessee's own case for the A.Y. 1993-94 to 1997-98, copy of the order dated 12.01.2007 is placed on record. Operative part of the Tribunal's Order on this issue is as under: "83. The last ground in this appeal relates to the working of Rs.book profits' u/s 115JA of the Act. The dispute is with reference to lease equalization amount of Rs.37,85,98,608 added to the net profit as per P and L Accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t/fair value of the leased assets over the lease term. It further provides that the method of income measurement is in consonance with the inherent nature of finance lease. Considering the purpose behind creating lease equalization account, it cannot be said that the same represents a reserve or an appropriation of profits. The lease equalization amount of Rs.37,85,98,608 was therefore held as a proper charge on the profits by way of recoupment of the assets leased and represented additional depreciation. The learned CIT(A) accordingly directed the assessing officer not to make adjustment in respect of the lease equalization amount while computing the book profits. Aggrieved the revenue is in appeal before us. 85. We have heard both the sides. In our view the decision of the CIT(A) does not require any interference. The decision taken by the CIT(A) now is in accordance with the ratio laid down by the Hon'ble Supreme Court in the case of Apollo Tyres Ltd. vs. CIT (2002) 255 ITR 273 (SC) and also having regard to the decision to the Tribunal in the case of Reliance Industrial Infrastructure Ltd. vs. ACIT, ITA No.3476/M/02 dated 26.5.2003 for the assessment year 1998-99 which is p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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