DCIT-2(1), MUMBAI V. M/S. THE TATA POWER CO.LTD., MUMBAI

ITA 4572/MUM/2008

• Counselvise Citation: 457219914 RSA 2008
• Duration Of Justice: 3 year(s) 2 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-09-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Next Hearing Date: 29-08-2011
• Assessment Year: 2001-2002
• Appeal Filed On: 04-07-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B JAY KUMAR
• Assessee Lawyers: DINESH VYAS
• Keywords: Capital asset; Depreciation; Business expenditure; Opportunity of being heard; Rule of consistency; Earning of tax free income; Retrospective amendment; Scheme of amalgamation; Capital receipt; Commercial expediency; Revenue expenditure; Capital expenditure
• Section: 14A; 147

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH E, MUMBAI BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI R.K.PANDA (A .M) ITA NO.4497/M/2008(A.Y. 2001-02) THE TATA POWER CO. LTD., CORPORATE CENTER, BLOCK B, 5 TH FLR. 34, SANT TUKARAM ROAD, CARNAC BUNDER, MUMBAI 09. PAN:AAACT0054A (APPELLANT) VS. THE ADDL.CIT, RANGE 2(1), AAYKAR BHAVAN, MK ROAD, MUMBAI 20. (RESPONDENT) ITA NO.4572/MUM/2008(A.Y. 2001-02) THE DCIT, RANGE 2(1), AAYKAR BHAVAN, MK ROAD, MUMBAI 20. (APPELLANT) VS. THE TATA POWER CO. LTD., CORPORATE CENTER, BLOCK B, 5 TH FLR. 34, SANT TUKARAM ROAD, CARNAC BUNDER, MUMBAI 09. PAN:AAACT0054A (RESPONDENT) ASSESSEE BY : SHRI DINESH VYAS REVENUE BY : SHRI B.JAY KUMAR ORDER PER N.V.VASUDEVAN, J.M, ITA NO.4497/M/08 IS AN APPEAL BY THE ASSESSEE AND I TA NO.4572/M/08 IS AN APPEAL BY THE REVENUE. BOTH THE SE APPEALS ARE DIRECTED AGAINST THE ORDER DATED 25.04.2008 OF CIT( A)-II, MUMBAI, RELATING TO A.Y.01-02. ITA NO.4497&4572/MUM/08(A.Y. 2001-02) 2 2. FIRST WE SHALL TAKE FOR CONSIDERATION ITA NO.449 7/M/08, APPEAL BY THE ASSESSEE. GROUND NO.1 RAISED BY THE ASSESSEE READS AS FOLLOWS: 1. THE CIT(A) ERRED IN MERELY REDUCING THE DISALLO WANCE U/S. 14A AND NOT DELETING THE TOTAL DISALLOWANCE UNDER THAT SECT ION IN RESPECT OF EXPENDITURE ESTIMATED TO HAVE BEEN INCURRED BY THE APPELLANT IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE AT. THE CIT(A) ERRED IN NOT APPRECIATING THAT NO EXPEN DITURE HAS BEEN INCURRED BY THE APPELLANT IN RELATION TO SUCH INCOM E. 3. THE ASSESSEE IS A COMPANY. IT IS ENGAGED IN THE BUSINESS OF GENERATION, TRANSMISSION AND DISTRIBUTION OF ELECTR ICITY. THE ASSESSEE EARNED INTEREST INCOME OF RS.52,32,021/- WHICH DOES NOT FO RM PART OF THE TOTAL INCOME UNDER THE INCOME TAX ACT, 1961 (THE ACT). T HE ASSESSEE ALSO EARNED DIVIDEND INCOME OF RS.76,02,80,216/- WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT U/S10(33) OF THE ACT. IN VIEW OF THE PROVISIONS OF SEC.14-A OF THE ACT, WHICH PROVIDES THAT ANY EXPEND ITURE INCURRED IN EARNING INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT, SHALL NOT BE ALLOWED AS DEDUCTION WHILE COMPUTING TOTAL INCOM E, THE AO CALLED UPON THE ASSESSEE TO FURNISH DETAILS OF EXPENDITURE INCU RRED FOR EARNING INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE ASSESSEE SUBMITTED THAT THE INVESTMENTS WHICH YIELDED THE IN COME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT WERE MA DE OUT OF OWN FUNDS AND THEREFORE THERE WAS NO INTEREST EXPENDITURE INCURRE D IN EARNING THE SAME. APART FROM THE ABOVE DIRECT EXPENSES, THE ASSESSEE SUBMITTED THAT IT DID NOT INCUR ANY OTHER GENERAL OR ADMINISTRATIVE EXPENSES IN EARNING THE SAID INCOME. THE ASSESSEE POINTED OUT THAT UNDER ERSTWH ILE SECTION 80-M OF THE ACT, DEDUCTION ON DIVIDEND RECEIVED WAS ALLOWED. T HE QUESTION WHETHER THE GROSS DIVIDEND OR NET- DIVIDEND I.E., GROSS DIVIDEN D AFTER DEDUCTING EXPENSES INCURRED IN EARNING INCOME WAS TO BE ALLOWED AS DED UCTION CAME UP BEFORE COURTS FOR CONSIDERATION AND IT WAS HELD THAT ONLY THE NET DIVIDEND WAS TO BE ALLOWED AS DEDUCTION U/S.80-M OF THE ACT. IT WAS SUBMITTED THAT THE HONBLE BOMBAY HIGH COURT IN CIT VS. GENERAL INSURA NCE CORPORATION LTD. ITA NO.4497&4572/MUM/08(A.Y. 2001-02) 3 254 ITR 204 (BOM) IN THE CONTEXT OF SEC.80-M OF THE ACT HAS TAKEN A VIEW THAT EXPENDITURE INCURRED IN EARNING DIVIDEND CANNO T BE ESTIMATED AND IT HAS TO BE ACTUALLY PROVED THAT EXPENSES WERE INCURR ED TO EARN THE EXEMPT DIVIDEND INCOME. ON THE SAME ANALOGY THE ASSESSEE SUBMITTED THAT DISALLOWANCE OF EXPENSES U/S.14-A OF THE ACT CANNOT BE MADE ON ESTIMATE BASIS. THE AO HOWEVER HELD THAT IT CANNOT BE DENIED THAT ADMINISTRATIVE AND GENERAL EXPENSES WOULD HAVE BEEN INCURRED FOR EARNI NG THE EXEMPT INCOME ALSO. HE RESORTED TO AN ESTIMATION OF SUCH EXPENSE S AND HELD THAT IT WAS REASONABLE TO HOLD THAT 5% OF THE EXEMPT INCOME WOU LD BE EXPENDITURE INCURRED IN EARNING EXEMPT DIVIDEND INCOME. ACCORD INGLY THE AO DISALLOWED A SUM OF RS.3,82,75,612/- (5% OF RS.76,55,12,237) U /S.14-A OF THE ACT AND ADDED THE SAME TO THE TOTAL INCOME OF THE ASSESSEE. 4. BEFORE CIT(A), THE ASSESSEE REITERATED SUBMISSIO N AS WAS MADE BEFORE AO. IN THE ALTERNATIVE, THE ASSESSEE SUBMITTED THA T DISALLOWANCE OF 5% OF THE EXEMPT INCOME WAS HIGH AND SUBMITTED THAT THE D ISALLOWANCE AT BEST CAN BE MADE ONLY ON THE RATIO OF EXEMPT INCOME TO T HE TOTAL INCOME WHICH WAS WORKED OUT BY THE ASSESSEE AT 2.096% AND ON THA T BASIS A SUM OF RS.44,07,768/- WAS ARRIVED AT BY THE ASSESSEE AS EX PENDITURE WHICH COULD BE DISALLOWED U/S.14-A OF THE ACT. THE CIT(A) HELD AS FOLLOWS: I HAVE CONSIDERED THE SUBMISSIONS MADE BY THE APPE LLANT. HOWEVER, IN THE CASE OF CIT VS. M/S. CITICORP FINANCE (I) LT D. (ITA 5832/M/2003 DT. 21/11/06 FOR A.Y 2000-01), IT HAS BEEN HELD THA T IT IS DIFFICULT TO ACCEPT THE HYPOTHESIS THAT ONE CAN EARN SUBSTANTIAL DIVIDEND INCOME WITHOUT INCURRING ANY EXPENDITURE WHATSOEVER, INCLU DING MANAGEMENT AND ADMINISTRATIVE EXPENSES. BY THE SAME LOGIC, IT IS EQUALLY DIFFICULT TO ACCEPT THAT THE ONLY EXPENSES INVOLVED IN EARNIN G DIVIDEND INCOME ARE THOSE INCURRED ON COLLECTION OF DIVIDEND OR ENC ASHING FEW DIVIDEND WARRANTS. THE COMPANY CANNOT EARN DIVIDEND WITHOUT ITS EXISTENCE AND MANAGEMENT. INVESTMENT DECISIONS ARE VERY CO MPLEX IN NATURE AND THEY REQUIRE SUBSTANTIAL MARKET RESEARCH, DAY T O DAY ANALYSIS OF MARKET TRENDS AND DECISION WITH REGARD TO ACQUISITI ON, RETENTION AND SALE OF SHARES AT THE MOST APPROPRIATE TIME. THEY REQUIRE HUGE INVESTMENT IN SHARES AND CONSEQUENT BLOCKING OF FUN DS. IT IS WELL KNOWN THAT CAPITAL HAS COST AND THAT ELEMENT OF COS T IS REPRESENTED BY INTEREST. BESIDES THE ABOVE, INVESTMENT DECISIONS ARE TAKEN IN MEETING ITA NO.4497&4572/MUM/08(A.Y. 2001-02) 4 OF BOARD OF DIRECTORS FOR WHICH ADMINISTRATIVE EXPE NSES ARE INCURRED. IT IS, THEREFORE, NOT CORRECT TO SAY THAT DIVIDEND INCOME CAN BE EARNED BY INCURRING NO OR NOMINAL EXPENDITURE. THIS ASPECT OF THE MATTER HAS ALSO RECEIVED CAREFUL ATTENTION OF THE CHENNAI BENCH OF ITAT IN THE CASE OF SOUTHERN PETR OLEUM INDUSTRIES VS. DCIT 2005 93 TTJ 161(CHENNAI). AFTER COMPREHEN SIVE CONSIDERATION OF ALL RELEVANT ASPECTS OF THE CASE, INCLUDING PROVISIONS OF LAW, CHENNAI BENCH HAS HELD THAT INVESTMENT DECI SIONS ARE VERY STRATEGIC DECISIONS IN WHICH TOP MANAGEMENT IS INVO LVED AND THEREFORE, PROPORTIONATE MANAGEMENT EXPENSES ARE REQUIRED TO B E DEDUCTED WHILST COMPUTING EXEMPT INCOME FROM DIVIDENDS. SIMILARLY, IN THE CASE OF HARISH K. BHAT V/S. ITO ( 91 ITD 311) THE AHMEDABAD BENCHG OF THE ITAT HELD THAT DIVIDEND INC OME BEING EXEMPT U/S. 10(33), INTEREST ON CAPITAL BORROWED FO R ACQUIRING SHARES YIELDING SUCH DIVIDENDS CANNOT BE ALLOWED AS DEDUCT ION BECAUSE OF OPERATION OF SECTION 14A INSERTED WITH RETROSPECTI VE EFFECT FROM 1/4/1962. THERE ARE ALSO SEVERAL OTHER DECISIONS WHICH MADE T HE ISSUE DEBATABLE AND VARIOUS JUDICIAL FORA HAVE ALSO CONFIRMED DISAL LOWANCE OF SOME PROPORTIONATE EXPENDITURE AGAINST DIVIDEND INCOME W HICH IS EXEMPT UNDER IT ACT DUE TO AFORESAID LOGIC. AS SUCH, I FIND IN THE INSTANT CASE, A DISALLOWANCE IS NECESSARY AND THE AR OF THE APPELLANT HAS PLEADED THAT ALTERNATIVELY, IF ANY DISALLOWANCE IS REQUIRED TO BE MADE, THEN IT SHOULD HAVE BEEN RS . 44,07,768/- AND NOT RS. 3,82,75,612/- AS HAS BEEN DISALLOWED BY AO. THIS AMOUNT HAS BEEN CALCULATED BY AR OF APPELLANT ON FOLLOWING PREMISES AND REASONS: SINCE THE RATIO OF THE EXEMPT INCOME (RS.76,55,12,2 37) TO THE TOTAL INCOME(RS.36.50,80,463) IS 2.0969%, THE APPELLANT H AS SUBMITTED THAT IF ANY AMOUNT IS TO BE DISALLOWED U/S. 14A, IT SHOU LD BE 2.0969% OF RS.21,02,02,454 (TOTAL OF OTHER OPERATION AND OTHER ADMINISTRATIVE EXPENSES) I.E. RS.44,07,768/- AND NOT RS. 3,82,75,6 12/- DISALLOWED BY THE AO. THEREFORE, AFTER APPRECIATING THE CALCULATION MADE BY AR OF APPELLANT, I FIND IT IS JUST AND PROPER TO DISALLOW RS.44,07,768 /- AND ON THIS ISSUE, I AM SUPPORTED THE ORDERS OF THE PREVIOUS CIT(APPEA LS). AS SUCH, THE AO IS DIRECTED TO MODIFY THE DISALLOWANCE AS PER MY ABOVE DIRECTIONS. ITA NO.4497&4572/MUM/08(A.Y. 2001-02) 5 5. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSESS EE HAS RAISED GROUND NO.1 BEFORE THE TRIBUNAL. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED BEFORE US A LIST OF COMPANIES IN WHICH INVESTMENTS HAVE BEEN MADE AND POINTED OUT THAT ALL OF THEM WERE GROUP COMPANIES A ND THAT THE INVESTMENTS WERE STRATEGIC INVESTMENTS. HE REITERATED THE PLEA THAT THERE WERE NO GENERAL OR ADMINISTRATIVE EXPENSES INCURRED IN EARNING THES E DIVIDEND INCOMES. HE ALSO RELIED ON DECISIONS IN ASSESSES OWN CASE BY T HE ITAT ON IDENTICAL ISSUE IN AY 2000-01 IN ITA NO.5366/MUM/2003 ORDER DATED 20.10.2006 AND CERTAIN OTHER DECISIONS OF THE TRIBUNAL. TO A QUER Y FROM THE BENCH AS TO WHETHER IN THE LIGHT OF THE SUBSEQUENT EXPOSITION O F LAW ON DISALLOWANCE U/S.14-A OF THE ACT, BY THE HONBLE BOMBAY HIGH IN THE CASE OF GODREJ & BOYCE MFG.CO.LTD. MUMBAI. VS. DY. COMMISSIONER OF I NCOME TAX,RANGE 10(2), MUMBAI & ANR. 328 ITR 81 (BOM) THE EARLIER DECISION OF THE ITAT IN ASSESSEES OWN CASE WOULD HOLD GOOD, HE SUBMITTED T HAT ON THE FACTS OF THE ASSESSEES CASE WHERE THE INVESTMENTS WERE HELD ONL Y IN GROUP COMPANIES AND THEY WERE STRATEGIC INVESTMENTS, THERE CANNOT B E ANY DISALLOWANCE U/S.14-A OF THE ACT. 6. THE LEARNED D.R. RELIED ON THE DECISION OF THE H ONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE (SUPRA) AND SUB MITTED THAT THE DISALLOWANCE SUSTAINED BY THE CIT(A) IS REASONABLE AND THE SAME SHOULD BE SUSTAINED. 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE P ROVISIONS OF SEC.14-A OF THE ACT AS IT EXISTED FROM TO TIME IS AS FOLLOWS : 14A. EXPENDITURE INCURRED IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME.(1) FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THIS CHAPTER, NO DEDUCTION SHALL BE ALLOWED IN RESP ECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHIC H DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. ( INSERTED BY FA 2001, WREF. 1- 4-1962) (2) THE ASSESSING OFFICER SHALL DETERMINE THE AMOUN T OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT IN ACCORDANCE WITH SUCH METHOD AS MAY ITA NO.4497&4572/MUM/08(A.Y. 2001-02) 6 BE PRESCRIBED, IF THE ASSESSING OFFICER, HAVING REG ARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS A CT. (3) THE PROVISIONS OF SUB-SECTION (2) SHALL ALSO AP PLY IN RELATION TO A CASE WHERE AN ASSESSEE CLAIMS THAT NO EXPENDITURE H AS BEEN INCURRED BY HIM IN RELATION TO INCOME WHICH DOES NOT FORM PA RT OF THE TOTAL INCOME UNDER THIS ACT.(SUB-SECTION 2 AND 3 WERE INS ERTED BY FA 2006 W.E.F 1-4-2007 AND ORIGINAL SECTION 14A WAS NUMBER ED AS SUB- SECTION (1)) PROVIDED THAT NOTHING CONTAINED IN THIS SECTION SHA LL EMPOWER THE ASSESSING OFFICER EITHER TO REASSESS UNDER SECT ION 147 OR PASS AN ORDER ENHANCING THE ASSESSMENT OR REDUCING A REFUND ALREADY MADE OR OTHERWISE INCREASING THE LIABILITY OF THE ASSESSEE UNDER SECTION 154, FOR ANY ASSESSMENT YEAR BEGINNING ON OR BEFORE THE 1ST DAY OF APRIL, 2001. (PROVISO WAS INSERTED BY F.A. 2002, W.E.F. 3-2-2001 ) RULE 8-D WAS ENACTED BY THE I.T. (5TH AMEND.) RULES , 2008, WEF. 24-3-2008, PURSUANT TO THE PROVISIONS OF SUB-SECTION (2) AND I T READS AS FOLLOWS: 8D. METHOD FOR DETERMINING AMOUNT OF EXPENDITURE I N RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME.(1) WHERE TH E ASSESSING OFFICER HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE OF TH E PREVIOUS YEAR, IS NOT SATISFIED WITH (A) THE CORRECTNESS OF THE CLAIM OF EXPENDITURE MAD E BY THE ASSESSEE ; OR (B) THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDIT URE HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF T HE TOTAL INCOME UNDER THE ACT FOR SUCH PREVIOUS YEAR, HE SHALL DETE RMINE THE AMOUNT OF EXPENDITURE IN RELATION TO SUCH INCOME IN ACCORD ANCE WITH THE PROVISIONS OF SUB-RULE (2). (2) THE EXPENDITURE IN RELATION TO INCOME WHICH DOE S NOT FORM PART OF THE TOTAL INCOME SHALL BE THE AGGREGATE OF FOLLOWIN G AMOUNTS, NAMELY : (I) THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME ; (II) IN A CASE WHERE THE ASSESSEE HAS INCURRED EXPE NDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR IS NOT DIRECTLY A TTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, AN AMOUNT COMPUTED IN ACCORDANCE WITH THE FOLLOWING FORMULA, NAMELY : B A X--- C WHERE A = AMOUNT OF EXPENDITURE BY WAY OF INTEREST OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN CLAUSE (I) INCURRED DURING THE PREVIOUS YEAR ; ITA NO.4497&4572/MUM/08(A.Y. 2001-02) 7 B = THE AVERAGE OF VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPE ARING IN THE BALANCE- SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAS T DAY OF THE PREVIOUS YEAR ; C = THE AVERAGE OF TOTAL ASSETS AS APPEARING IN THE BALANCE-SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR ; (III) AN AMOUNT EQUAL TO ONE-HALF PER CENT. OF THE AVERAGE OF THE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE-SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. 3. FOR THE PURPOSES OF THIS RULE, THE TOTAL ASSETS SHALL MEAN, TOTAL ASSETS AS APPEARING IN THE BALANCE-SHEET EXCLUDING THE INCREASE ON ACCOUNT OF REVALUATION OF ASSETS BUT INCLUDING THE DECREASE ON ACCOUNT OF REVALUATION OF ASSETS.. 8. THE HONBLE BOMBAY HIGH COURT HAD TO CONSIDER S EVERAL ISSUES IN THE CASE OF GODREJ AND BOYCE (SUPRA) ON SEC.14-A OF THE ACT AND RULE-8D OF THE RULES, AND IT LAID DOWN THE FOLLOWING PROPOSITIONS: RULE 8D R.W. S. 14A (2) IS NOT ARBITRARY OR UNREAS ONABLE BUT CAN BE APPLIED ONLY IF ASSESSEES METHOD NOT SATISFACTORY. RULE 8D IS NOT RETROSPECTIVE AND APPLIES FROM AY 2008-09. FOR EARL IER YEARS, DISALLOWANCE HAS TO BE WORKED OUT ON REASONABLE BA SIS U/S 14A (1) IN AY 2002-03, THE ASSESSEE CLAIMED THAT NO DISALLO WANCE U/S 14A IN RESPECT OF THE TAX-FREE DIVIDEND EARNED BY IT COULD BE MADE AS IT HAD NOT INCURRED ANY EXPENDITURE TO EARN THE DIVIDEND. THE AO REJECTED THE CLAIM AND MADE A DISALLOWANCE U/S 14A. THIS WAS DEL ETED BY THE CIT (A). ON APPEAL BY THE DEPARTMENT, THE TRIBUNAL FOLL OWED THE JUDGEMENT OF THE SPECIAL BENCH IN DAGA CAPITAL 117 ITD 169 (MUM) (WHERE IT HAD BEEN HELD THAT S. 14A(2) & (3) & RULE 8D ARE PROCED URAL IN NATURE AND HAVE RETROSPECTIVE EFFECT) AND REMANDED THE MATTER TO THE AO FOR RE- COMPUTING THE DISALLOWANCE. THE ASSESSEE CHALLENGED THE DECISION OF THE TRIBUNAL. HELD: (1) THE ARGUMENT THAT DIVIDEND ON SHARES / UNITS IS NOT TAX-FREE IN VIEW OF THE DIVIDEND-DISTRIBUTION TAX PAID BY THE P AYER U/S 115-O IS NOT ACCEPTABLE BECAUSE SUCH TAX IS NOT PAID ON BEHA LF OF THE SHAREHOLDER BUT IS PAID IN RESPECT OF THE PAYERS O WN LIABILITY; (2) S. 14A SUPERSEDES THE PRINCIPLE OF LAW THAT IN THE CASE OF A COMPOSITE BUSINESS EXPENDITURE INCURRED TOWARDS TAX -FREE INCOME COULD NOT BE DISALLOWED AND INCORPORATES AN IMPLICI T THEORY OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXABLE AND NO N-TAXABLE ITA NO.4497&4572/MUM/08(A.Y. 2001-02) 8 INCOME. ONCE A PROXIMATE CAUSE FOR DISALLOWANCE IS ESTABLISHED WHICH IS THE RELATIONSHIP OF THE EXPENDITURE WITH I NCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME A DISALLOWANCE U/S 14A HAS TO BE EFFECTED ; (3) THE ARGUMENT THAT A LITERAL INTERPRETATION OF S . 14A LEADS TO ABSURD CONSEQUENCES IS NOT ACCEPTABLE. S 14A IS FOUNDED ON A VALID RATIONALE THAT THE BASIC PRINCIPLE OF TAXATION IS T O TAX NET INCOME I.E GROSS INCOME MINUS EXPENDITURE; (4) THE ARGUMENT THAT THE METHOD IN RULE 8D R.W.S 1 4A (2) FOR DETERMINING EXPENDITURE RELATING TO THE TAX-FREE IN COME IS ARBITRARY AND VIOLATIVE OF ARTICLE 14 IS NOT ACCEPTABLE BECAU SE THERE IS AN ADEQUATE SAFEGUARD BEFORE RULE 8D CAN BE INVOKED. T HE AO CANNOT IPSO FACTO APPLY RULE 8D BUT CAN DO SO ONLY WHERE H E RECORDS SATISFACTION ON AN OBJECTIVE BASIS THAT THE ASSESSE E IS UNABLE TO ESTABLISH THE CORRECTNESS OF ITS CLAIM . ALSO A UNIFORM METHOD PRESCRIBED TO RESOLVE DISPUTES BETWEEN ASSESSEES AN D THE DEPARTMENT CANNOT BE SAID TO BE ARBITRARY OR OPPRESSIVE. THERE IS A RATIONALE IN RULE 8D AND ITS METHOD IS FAIR & REASONABLE. IT C ANNOT BE SAID THAT THERE IS MADNESS IN THE METHOD OF RULE 8D SO AS T O RENDER IT UNCONSTITUTIONAL; (5) RULE 8D, INSERTED W.E.F 24.3.2008 CANNOT BE REG ARDED AS RETROSPECTIVE BECAUSE IT ENACTS AN ARTIFICIAL METHOD OF ESTIMATIN G EXPENDITURE RELATABLE TO TAX-FREE INCOME. IT APPLIE S W.E.F AY 2008-09 ; (6) FOR THE AYS WHERE RULE 8D DOES NOT APPLY, THE A O WILL HAVE TO DETERMINE THE QUANTUM OF DISALLOWABLE EXPENDITURE B Y A REASONABLE METHOD HAVING REGARD TO ALL FACTS AND CIRCUMSTANCES; (7) ON FACTS, THOUGH IN THE EARLIER YEARS, THE TRIB UNAL HAD HELD THAT THE TAX-FREE INVESTMENTS HAD BEEN MADE OUT OF THE ASSES SEES OWN FUNDS, THIS DID NOT MEAN THAT THERE WAS NO EXPENDITURE INC URRED TO EARN TAX- FREE INCOME. EVEN THOUGH RULE 8D DID NOT APPLY TO A Y 02-03, THE AO HAD TO CONSIDER WHETHER DISALLOWANCE COULD BE MADE U/S 14A (1) . ALSO, THE PRINCIPLE OF CONSISTENCY WOULD NOT APPLY AS S. 14A HAD INTRODUCED A MATERIAL CHANGE IN THE LAW. 9. WE ARE OF THE VIEW THAT THE DECISION OF THE TRIB UNAL IN ASSESSEES OWN CASE AND THE OTHER DECISIONS RENDERED BY THE TRIBUN AL ON WHICH RELIANCE WAS PLACED BY THE LEARNED COUNSEL FOR THE ASSESSEE NO L ONGER HOLDS GOOD IN VIEW OF THE LATER EXPOSITION OF THE LAW ON THE ISSUE AS LAID DOWN BY THE HONBLE ITA NO.4497&4572/MUM/08(A.Y. 2001-02) 9 BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE (SU PRA). WE ARE OF THE VIEW THAT IT WOULD BE JUST AND PROPER TO REMAND THE ISSUE OF DISALLOWANCE U/S.14-A OF THE ACT TO THE AO FOR FRESH CONSIDERATI ON IN THE LIGHT OF THE LAW AS LAID DOWN BY THE HONBLE BOMBAY HIGH COURT. THE AO WILL AFFORD OPPORTUNITY OF BEING HEARD TO THE ASSESSEE AND DECI DE THE ISSUE IN ACCORDANCE WITH THE LAW AS LAID DOWN BY THE HONBLE BOMBAY HIGH COURT. 10. GROUND NO.2 RAISED BY THE ASSESSEE READS AS FO LLOWS: 2.A THE CIT(A) ERRED IN NOT GRANTING REFUND OF EX CESS TAX PAID U/S. 115-O RE. SHARES CANCELLED BY VIRTUE OF THE AMALGAM ATION ORDER OF THE HIGH COURT OF JUDICATURE, BOMBAY DATED 18 TH OCTOBER, 2000 WHEREIN THE APPOINTED ATE FOR THE AMALGAMATION WAS 1 ST APRIL, 2000. B. THE CIT(A) ERRED IN NOT APPRECIATING THAT AS THE SHARES CEASED TO EXIST ON 1 ST APRIL 2000, THE QUESTION OF TAXABILITY OF DIVIDEND ON THE SHARES DID NOT ARISE. 11. UNDER SECTION 115-O OF THE ACT, EVERY DOMESTIC COMPANY HAS TO PAY TAX AT PRESCRIBED PERCENTAGE ON ANY AMOUNT DECLARED , DISTRIBUTED OR PAID BY SUCH COMPANY BY WAY OF DIVIDENDS (WHETHER INTERIM O R OTHERWISE) ON OR AFTER THE 1ST DAY OF JUNE, 1997 BUT ON OR BEFORE THE 31ST DAY OF MARCH, 2002, WHETHER OUT OF CURRENT OR ACCUMULATED PROFITS. THE ASSESSEE DECLARED INTERIM DIVIDEND AT THE BOARD MEETING HELD ON 23.3. 200 OF 37% AND THE SAME WAS PAID ON 10.5.2000. DIVIDEND DISTRIBUTION TAX IN TERMS OF SEC.115-O WAS PAID BY THE ASSESSEE ON 6.4.2000. TH E ASSESSEE DECLARED FINAL DIVIDNED IN ITS AGM ON 10.8.2000. DIVIDEND D ISTRIBUTION TAX IN TERMS OF SEC.115-O WAS PAID ON 23.8.2000. 12.THE ASSESSEE AMALGAMATED WITH ANDHRA VALLEY POWE R SUPPLY CO. LTD. W.E.F 1.4.2000. THE HONBLE BOMBAY HIGH COURT SANC TIONED THE SCHEME OF AMALGAMATION BY ITS ORDER DATED 18.10.2000 AND THE AMALGAMATION WAS TO TAKE EFFECT FROM THE APPOINTED DAY VIZ., 1-4-2000. CONSEQUENT TO THE ITA NO.4497&4572/MUM/08(A.Y. 2001-02) 10 AMALGAMATION, 48,04,040 SHARES HELD BY ANDHRA VALLE Y POWER SUPPLY CO. LTD. OF THE ASSESSEE WERE CANCELLED. CONSEQUENTLY THE INTERIM AND FINAL DIVIDEND DECLARED BY THE ASSESSEE TO THE EXTENT OF SHARES HELD BY ANDHRA VALLEY POWER SUPPLY CO. LTD., NEED NOT BE PAID BECA USE THE EFFECTIVE DATE OF AMALGAMATION WAS 1.4.2000. 13. THE ASSESSEE HAD PAID DIVIDEND DISTRIBUTION TAX ON THE DIVIDEND DECLARED AND PAID. IT WAS THE CLAIM OF THE ASSESSE E THAT WHERE DIVIDEND IS DECLARED BUT BEFORE IT IS PAID, BY OPERATION OF LAW , THE DECLARATION OF DIVIDEND BECOMES ILLEGAL, INOPERATIVE OR INVALID DURING THE PREVIOUS YEAR ITSELF, IT IS POSSIBLE TO CONCEIVE OF A SITUATION IN WHICH AN ASS ESSEE WOULD BE ENTITLED TO SAY THAT NO INCOME BY WAY OF DIVIDEND ACCRUED TO HI M DURING THE PREVIOUS YEAR. WHAT IS IMPORTANT IS THAT SOMETHING FACTUAL O R LEGAL SHOULD HAVE HAPPENED DURING THE PREVIOUS YEAR IN WHICH THE DIVI DEND WAS DECLARED. FOR THE ABOVE PROPOSITION THE ASSESSEE RELIED ON THE DE CISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF MAFATLAL GAGALBHAI & CO. PVT.LTD. VS. CIT 193 ITR 188 (BOM) AND NEW SHORROCK SPG.&MFG.CO.LTD. 208 ITR 765 (BOM). 14. EXTENDING THE ANALOGY LAID DOWN IN THE AFORESAI D DECISION, THE ASSESSEE CLAIMED BEFORE THE AO THAT THE DIVIDEND DI STRIBUTION-TAX TO THE EXTENT IT RELATES TO DIVIDEND PAYABLE TO ANDHAR VAL LEY POWER SUPPLY CO. LTD., BUT NOT PAID BECAUSE OF AMALGAMATION, SHOULD BE TRE ATED AS NOT PAYABLE AND TO THAT EXTENT THE DIVIDEND DISTRIBUTION TAX PAID S HOULD BE REFUNDED TO THE ASSESSEE. THE SUM IN THIS REGARD WAS QUANTIFIED BY THE ASSESSEE AT RS.28,97,392/-. IN OTHER WORDS THE CLAIM OF THE AS SESSEE WAS THAT SINCE DIVIDEND WAS NOT DISTRIBUTED, THE QUESTION OF PAYME NT OF DIVIDEND DISTRIBUTION TAX DOES NOT ARISE AT ALL. 15. THE AO HOWEVER REJECTED THE CLAIM OF THE ASSESS EE FOR THE FOLLOWING REASON. ITA NO.4497&4572/MUM/08(A.Y. 2001-02) 11 10.2 THE SUBMISSION OF THE ASSESSEE HAS BEEN CONS IDERED AND THEY ARE NOT TENABLE IN VIEW OF THE FACT THAT ONCE DIVID END ARE DECLARED AND DISTRIBUTED, HOW THE COMPANY IS NOT LIABLE TO TAX U /S. 115-O. FROM THE DETAILS IT CAN BEEN SEEN THAT DIVIDEND WERE DIS TRIBUTED FOR EARLIER YEAR PROFITS AND NOT FOR THE CURRENT YEAR. THEREFO RE, EVEN FOR THE SAKE OF ARGUMENTS IT IS ASSUMED THAT AMALGAMATION WAS MA DE EFFECTIVE FROM 1//4/2000, HOW THIS HAS ANY IMPACT ON EARLIER YEAR DISTRIBUTION OF PROFIT AND DECLARATION OF INTERIM DIVIDEND. HEN CE, THE ASSESSEE COMPANY IS NOT LIABLE ANY REFUND OF DIVIDEND TAX PA ID U/S. 115-O. THE CONTENTION OF THE ASSESSEE IS REJECTED. 16. ON APPEAL BY THE ASSESSEE, THE CIT(A) CONCURRED WITH THE VIEW OF THE AO. HENCE, THE ASSESSEE HAS RAISED GROUND NO.2 BEF ORE THE TRIBUNAL. 17. WE HAVE HEARD THE SUBMISSION OF THE LEARNED COU NSEL FOR THE ASSESSEE WHO REITERATED THE SAME PLEA AS WAS PUT FORTH BEFOR E THE REVENUE AUTHORITIES. IT WAS SUBMITTED BY HIM THAT BY VIRTU E OF PROVISIONS OF SEC.8(B) OF THE ACT, ANY INTERIM DIVIDEND SHALL BE DEEMED T O BE THE INCOME OF THE PREVIOUS YEAR IN WHICH THE AMOUNT OF SUCH DIVIDEND IS UNCONDITIONALLY MADE AVAILABLE BY THE COMPANY TO THE MEMBER WHO IS ENTIT LED TO IT. IT WAS HIS SUBMISSION THAT THE INTERIM DIVIDEND THOUGH DECLARE D ON 23.3.2000 WAS ULTIMATELY PAID ONLY ON 10.5.2000 AND THEREFORE THE SAME SHOULD BE TREATED AS DECLARED DURING THE PREVIOUS YEAR. HIS FURTHER SUBMISSION WAS THAT THE INTERIM DIVIDEND ALSO BECAME NOT PAYABLE BY OPERATI ON OF LAW DURING THE PREVIOUS YEAR. WITH REGARD TO THE FINAL DIVIDEND, IT WAS SUBMITTED BY HIM THAT THE DECLARATION OF DIVIDEND AS WELL AS THE FAC TUM OF ITS BECOMING NOT PAYABLE BY OPERATION OF LAW OCCURRED DURING THE PRE VIOUS YEAR AND THERE IS NO DISPUTE ABOUT IT. 18. THE LEARNED D.R. SUBMITTED THAT DIVIDEND DISTRI BUTION TAX WAS A MEASURE TO COLLECT DIVIDEND FROM THE COMPANY AS THE REVENUE FOUND IT DIFFICULT TO COLLECT TAX FROM THE INDIVIDUAL SHARE- HOLDERS. ACCORDING TO HIM THE INCIDENCE OF LIABILITY TO DIVIDEND DISTRIBUTION TAX ARISES THE MOMENT DIVIDEND IS DISTRIBUTED AND SUBSEQUENT EVENTS CAN H AVE NO BEARING ON SUCH LIABILITY. ACCORDING TO HIM IT WAS NOT POSSIBLE TO EXTENT THE ANALOGY LAID ITA NO.4497&4572/MUM/08(A.Y. 2001-02) 12 DOWN BY THE HONBLE BOMBAY HIGH COURT IN A CASE OF TAXABILITY OF DIVIDEND IN THE HANDS OF THE SHAREHOLDER TO A CASE OF REFUND OF DIVIDEND DISTRIBUTION TAX ALREADY PAID BY THE COMPANY DECLARING DIVIDEND. 19. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE A DMITTED FACTS ARE THAT THE AMALGAMATION WAS SANCTIONED BY THE HONBLE HIGH COURT ON 18.10.2000. THE APPOINTED DATE WAS 1.4.2000. AS ON THE DATE OF SANCTION THE DIVIDEND HAD ALREADY BEEN PAID BY THE ASSESSEE. THE INCIDEN CE OF TAX U/S.115-O OF THE ACT IS ON THE DISTRIBUTION OF DIVIDEND. ANY SU BSEQUENT ACT BY WHICH THE DIVIDEND ITSELF DOES NOT BECOME TAXABLE IN THE HAND S OF THE RECIPIENT OF THE DIVIDEND WILL NOT BE RELEVANT. IN OTHER WORDS THE PAYMENT OF DIVIDEND DISTRIBUTION TAX IS NOT DEPENDENT ON THE ULTIMATE C HARGEABILITY TO TAX IN THE HANDS OF THE RECIPIENT OF THE DIVIDEND. THEREFORE T HE EXTENSION OF THE ANALOGY LAID DOWN BY THE HONBLE BOMBAY HIGH COURT IN THE C ASE OF MAFATLAL GAGALBHAI & CO. (SUPRA) TO SEC.115-O OF THE ACT, SO UGHT TO BE CANVASSED ON BEHALF OF THE ASSESSEE, IN OUR VIEW WAS RIGHTLY REJ ECTED BY THE REVENUE AUTHORITIES. WE THEREFORE CONFIRM THE ORDER OF THE REVENUE AUTHORITIES AND DISMISS GROUND NO.2 RAISED BY THE ASSESSEE. ITA NO.4572/M/08: REVENUES APPEAL: 20. GR.NO.1 RAISED BY THE REVENUE READS AS FOLLOWS: 1. THE LEARNED CIT(A) HAS ERRED IN DELETING THE DE DUCTION OF WARRANTY PROVISION AMOUNTED TO RS. 8,38,717/- WITHOUT APPREC IATING THAT THE SAME IS A CONTINGENT LIABILITY. 21. THE ASSESSEE CLAIMED DEDUCTION OF RS.8,38,717/- ON ACCOUNT OF PROVISION FOR WARRANTIES IN RESPECT OF THE SALES MA DE BY THEIR TATA ELECTRONICS DEVELOPMENT SERVICES (TEDS) DIVISION. THE WARRANTY IN QUESTION IS A KIND OF GUARANTEE GIVEN BY THE ASSESSEE ON THE GOODS SOLD. THE AO DISALLOWED THE ASSESSEES CLAIM ON THE GROUND THAT THE LIABILITY IS A CONTINGENT LIABILITY. AS PER THE AO, THE PROVISION IS NOT A WELL DEFINED AND QUANTIFIED LIABILITY. HENCE, THE AO HAS TREATED TH E PROVISION AS A PROVISION ITA NO.4497&4572/MUM/08(A.Y. 2001-02) 13 FOR CONTINGENT LIABILITY AND DISALLOWED THE SAME. THE ASSESSEE POINTED OUT BEFORE AO THAT 60% OF THE SALES VALUE IS TREATED AS MATERIAL AND LABOUR COST AND A PROVISION @7.5% ON THIS AMOUNT IS MADE TOWARD S WARRANTY REPAIRS. THE ASSESSEE HAD ALSO CLARIFIED THAT THE WARRANTY P ROVISION IS A NEGLIGIBLE PERCENTAGE OF THE TOTAL PROFITS (0.01% FOR THE YEAR UNDER REFERENCE) AND THE METHOD OF DETERMINING THE WARRANTY PROVISION HAS BE EN CONSISTENTLY FOLLOWED. THIS WAS NOT ACCEPTED BY THE AO. 22. ON APPEAL BY THE ASSESSEE, THE CIT(A) FOUND THA T IN AY 1992-93 AND 2000-01, THE TRIBUNAL HAD ALLOWED SIMILAR CLAIM OF THE ASSESSEE AND FOLLOWING THE SAID DECISION, THE CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE FOR DEDUCTION. 23. BEFORE US, IT IS NOT IN DISPUTE THAT THE FACTS AND THE BASIS ON WHICH LIABILITY BY WAY OF PROVISION FOR WARRANT CLAIMS WA S MADE IN AY 92-93 AND AY 00-01(COPIES OF TRIBUNALS ORDER PLACED IN ASSESSEE S PAPER BOOK) AND THE BASIS OF PROVISION OF WARRANTY LIABILITY IN THE PRE SENT A.Y. WAS MADE ARE IDENTICAL. IN SUCH CIRCUMSTANCES, WE DO NOT FIND A NY REASON TO TAKE A DIFFERENT VIEW. RESPECTFULLY, FOLLOWING THE DECISI ON OF THE TRIBUNAL IN ASSESSEES OWN CASE, WE UPHOLD ORDER OF CIT(A) AND DISMISS GR.NO.1 RAISED BY THE REVENUE. 24. GROUND NO.2 RAISED BY THE REVENUE READS AS FOLL OWS: 2.THE LEARNED CIT(A) ERRED IN DELETING THE DISALLO WANCE OF EXPENDITURE ON MAINTENANCE OF GARDEN AMOUNTED TO RS.23,98,364/- WITHOUT APPRECIATING THAT THE EXPENDITURE HAS NOT BEEN INCU RRED WHOLLY , NECESSARILY AND EXCLUSIVELY FOR THE PURPOSE OF BUSI NESS. 25. THE AO HAS DISALLOWED AN AMOUNT OF RS. 23,98,36 4/- BEING COMMUNITY WELFARE EXPENSES ON MAINTENANCE OF GARDEN S ON THE GROUND THAT THE EXPENDITURE HAS NOT BEEN INCURRED WHOLLY, NECES SARILY AND EXCLUSIVELY FOR THE PURPOSE OF ASSESSEES BUSINESS. THE ASSESSEE S UBMITTED THAT WITH THE PRESENT EMPHASIS OF THE GOVERNMENT ON POLLUTION CON TROL, THE EXPENDITURE IS ITA NO.4497&4572/MUM/08(A.Y. 2001-02) 14 NECESSARY AS PART OF THE ASSESSEE COMPANYS COMMUNI TY WELFARE ACTIVITIES. IT WAS FURTHER CLAIMED THAT THE EXPENDITURE WAS ALSO I NCIDENTAL TO THE ASSESSEES MAIN BUSINESS OF GENERATION, TRANSMISSIO N AND DISTRIBUTION OF ELECTRICITY. THE ASSESSEE FURNISHED A DETAILED NOT E TO EXPLAIN WHY MAINTENANCE OF GARDEN IS NECESSARY, CONSIDERING THE ASSESSEES LINE OF BUSINESS. THE MAIN REASONS HIGHLIGHTED WAS DUST CO NTROL, CORRECT OPERATION OF PROTECTIVE RELAYS, ELIMINATION OF ENCROACHMENT A LONG THE RIGHT WAY AND TO COUNTER THE OBJECTIONS RAISED BY MUMBAI GRAHAK PANC HAYAT AND ENVIRONMENT PROTECTION CELL OF HINDUSTANI ANDOLAN ALLEGING THAT THE COMPANYS THERMAL PLANTS ARE POLLUTING THE ENVIRONM ENT OF BOMBAY AND ITS SURROUNDING AREAS. 26. THE CIT(A) FOUND THAT IN AY 1995-96, TO 97-98 A ND 2000-01, THE TRIBUNAL HAD ALLOWED SIMILAR CLAIM OF THE ASSESSEE AND FOLLOWING THE SAID DECISION, THE CIT(A) ALLOWED THE CLAIM OF THE ASSES SEE FOR DEDUCTION. 27. BEFORE US, IT IS NOT IN DISPUTE THAT THE FACTS AND CIRCUMSTANCES UNDER WHICH THE DISALLOWANCE WAS MADE IS IDENTICAL IN THE PRESENT A.Y. AS THE FACTS AS IT PREVAILED IN AY 95-96 TO 97-98 AND 2000-01(CO PIES OF TRIBUNALS ORDER PLACED IN ASSESSEES PAPER BOOK). IN SUCH CIRCUMST ANCES, WE DO NOT FIND ANY REASON TO TAKE A DIFFERENT VIEW. RESPECTFULLY, FOL LOWING THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE, WE UPHOLD ORDER OF CIT(A) AND DISMISS GR.NO.2 RAISED BY THE REVENUE. 28. GROUND NO.3 RAISED BY THE REVENUE READS AS FOLL OWS: 3. THE LEARNED CIT(A) ERRED IN DISALLOWING THE EXP ENSES ON SHELVED PROJECT AMOUNTING TO RS. 3,14,58,402/- AND EXPENSE S ON FEASIBILITY REPORTS AMOUNTED TO RS. 26,18,393/- WITHOUT APPRECI ATING THAT THESE EXPENSES ARE CAPITAL EXPENSES. 29. THE GROUND OF APPEAL IS WRONGLY WORDED. THE GR OUND SHOULD READ THAT CIT(A) ERRED IN DELETING THE EXPENSES ON SHELVED PR OJECT AND EXPENSES OF ITA NO.4497&4572/MUM/08(A.Y. 2001-02) 15 FEASIBILITY REPORT. WE PROCEED TO DECIDE THE APPEA L ON THE BASIS THAT IT CHALLENGES THE CIT(A)S ORDER ALLOWING RELIEF TO TH E ASSESSEE. 30. THE ASSESSEE HAS CLAIMED EXPENDITURE INCURRED I N RESPECT OF CERTAIN PROJECTS WHICH WERE SUBSEQUENTLY SHELVED ON GROUNDS OF COMMERCIAL EXPEDIENCY, AS REVENUE EXPENDITURE. THE ASSESSEE H AS SUBMITTED THAT WHEN IT WAS FOUND THAT THE PROJECTS WERE NOT LIKELY TO B E PROFITABLE, THEY WERE GIVEN UP IN ORDER THAT THE COMPANIES COULD CONCENTRATE ON OTHER MORE PROFITABLE PROJECTS TO FACILITATE THE CARRYING ON OF THE BUSIN ESS OF THE COMPANIES. THE ASSESSEE FURNISHED THE FOLLOWING LIST OF PROJECTS W HICH WERE SHELVED DURING THE YEAR ENDED 31 ST MARCH, 2001. SHELVED PROJECTS AMOUNT (RS.) ACC-KYMORE POWER PROJECT 4,58,113 INDAL- HIRAKUD POWER PROJECTS HARYANA VIDYUT PRASARAN 2,20,281 5,00,000 MSEB POWER PROJECT POWERGEN 14,66,566 2,74,73,477 BIDDING REGARDING RVPNL POWER PROJECT-JAIPUR 8,33,333 BATHINDA POWER PROJECT OMAN POWER PROJECT 1,49,773 67,130 HAZIRA POWER PROJECTS STUDY FOR EVALUATION OF 2 HYDRO PROJECTS AT ZAMBIA 10,078 86,546 100MW CCPP AT THAKURLI MINI HYDRO PLANT AT KHOPOLI TOTAL 1,50,889 42,216 3,14,58,402 FURTHER THE ASSESSEE, UNDER COVER OF ITS LETTER DAT ED 27 TH NOVEMBER, 2007 HAD ALSO FURNISHED A MEMO FROM SENIOR GENERAL MANA GER, PROJECTS DATED 18 TH APRIL, 2001 INDICATING THE JOBS WHICH HAVE BEEN CL OSED, ON THE BASIS OF WHICH, THE ABOVE EXPENDITURE HAS BEEN CHARGED OFF. THE ASSESSEE HAD ITA NO.4497&4572/MUM/08(A.Y. 2001-02) 16 CLARIFIED VIDE ITS LETTER DATED 27 TH NOV. 2007 THAT THE MAJOR AMOUNT (RS. 2,74,73,477) IN THE ABOVE LIST PERTAINS TO POWERGE N. THIS EXPENDITURE WAS IN CONNECTION WITH ACQUISITION OF 655 MW COMBIN ED CYCLE POWER PLANT BELONGING TO POWERGEN IN GUJRAT. THIS PROJECT WAS PUT UP FOR SALE OF POWERGEN, FOR WHICH BIDS HAD BEEN INVITED. THE ASS ESSEE WAS ONE OF THE BIDDERS, FOR WHICH DETAILED STUDIES WERE CARRIED OU T MAINLY BY ARTHUR ANDERSON AND LITTLE & CO. THE PROJECT WAS FINALLY AWARDED TO CHINA LIGHT POWER (CLP) AND HENCE, THE EXPENDITURE INCURRED IN CONNECTION WITH THE BIDDING PROCESS WAS WRITTEN OFF AS EXPENDITURE ON S HELVED PROJECT. THE OTHER AMOUNTS PERTAIN TO POWER PROJECTS AT THE LOCATIONS INDICATED THERE AGAINST, WHICH HAVE FINALLY NOT MATERIALIZED. THE ASSESSEE SUBMITTED THAT ALL THE ABOVE PROJECTS ARE CONNECTED WITH THE EXISTING BUSI NESS OF THE ASSESSEE I.E. GENERATION, TRANSMISSION AND DISTRIBUTION OF ELECTR ICITY. THE EXPENSES ARE MAINLY IN THE NATURE OF PRE-BID ENGINEERING SERVICE S. THESE EXPENSES HAVE BEEN CLAIMED AS REVENUE EXPENDITURE BASED ON THE DE CISION OF THE MADRAS HIGH COURT IN THE CASE OF B.NAGI REDDY VS. CIT (199 ITR 451) WHICH ACCORDING TO THE ASSESSEE WAS DIRECTLY ON THE ISSUE . 31. THE ASSESSEE HAS CLAIMED EXPENDITURE INCURRED O N FEASIBILITY REPORTS AS REVENUE EXPENDITURE. THE ASSESSEE FURNISHED TH E FOLLOWING DETAILS OF EXPENDITURE ON FEASIBILITY REPORTS AND PRELIMINARY STUDIES INCURRED DURING THE YEAR ENDED 31 ST MARCH, 2001. PROJECTS AMOUNT (RS.) AUGMENTATION OF AIR CONDITIONING LSHS TANK AUGMENTATION FLUE GAS DESULPHYURIZATION- 3 RD STREAM LNG TERMINAL 6,46,990 7,00,344 3,13,473 2,30,543 PROPOSED BOX CULVERT IN TROMBAY MAIN DRAINAGE ELECTRO-CHLORINATION PLANT 18,972 35,153 ITA NO.4497&4572/MUM/08(A.Y. 2001-02) 17 MINI HYDRO SCHEME AT BHIRA 2,56,187 MINI HYDRO SCHEME AT MULSHI STUDY FOR EVALUATION OF 2 HYDRO PROJECTS AT ZAMBIA MINI HYDRO POWER PLANT SCHEME ON TAILRACE OF KHOPOLI POWER PLANT 2,56,646 17,767 1,73,318 TOTAL 26,18,393 THE ASSESSEE ALSO FURNISHED STATEMENTS INDICATING T HE BREAK UP OF THE ABOVE EXPENDITURE UNDER COVER OF ITS LETTER DATED 27 TH NOVEMBER, 2007 AND HAS PROVIDED COPIES OF SOME OF THE INVOICES UNDER COVER OF ITS LETTER DATED 18 TH FEB.2008. THE ABOVE PAYMENTS HAVE BEEN MADE TO TA TA CONSULTING ENGINEERS (TCE) FOR VARIOUS FEASIBILITY REPORTS. T HE ASSESSEE HAS SUBMITTED THAT THE ABOVE PROJECTS ARE CONNECTED WITH THE EXIS TING BUSINESS OF THE ASSESSEE I.E. GENERATION, TRANSMISSION AND DISTRIBU TION OF ELECTRICITY. THE EXPENSES HAVE BEEN CLAIMED AS REVENUE EXPENDITURE B ASED ON THE FOLLOWING DECISIONS: 1. KARNATAKA HIGH COURT IN THE CASE OF CIT VS. KARNATA KA STATE INDUSTRIAL & INVESTMENT DEVELOPMENT CORPN. (163 ITR 657) 2. KERALA HIGH COURT IN THE CASE OF CIT VS. KERALA STA TE INDUSTRIAL AND INVESTMENT DEVELOPMENT CORPORATION. (182 ITR 62) 3. CALCUTTA HIGH COURT IN THE CASE OF KESHORAM INDUSTR IES AND COTTON MILLS LTD. VS. CIT (196 ITR 845) 4. GAUHATI HIGH COURT IN THE CASE OF DY. CIT VS. ASSAM ASBESTOS LTD. (263 ITR 357) 5. CALCUTTA HIGH COURT IN THE CASE OF ASIATIC OXYGEN L TD. (190 ITR 328) 32. THE AO DID NOT ALLOW THE CLAIM OF THE ASSESSEE FOR DEDUCTION AS IN HIS VIEW THE EXPENDITURE WAS IN CONNECTION WITH EXPLORI NG A DIFFERENT LINE OF BUSINESS AND THEREFORE NOT INCURRED WHOLLY AND EXCL USIVELY IN CONNECTION ITA NO.4497&4572/MUM/08(A.Y. 2001-02) 18 WITH THE ASSESSEES BUSINESS. THE CIT(A) HOWEVER A LLOWED THE CLAIM OF THE ASSESSEE AS HE FOUND THAT ON IDENTICAL ISSUE THE TR IBUNAL HAS ALREADY HELD IN ASSESSEES CASE THAT THE EXPENDITURE WAS IN CONNECT ION WITH THE EXISTING LINE OF BUSINESS OF THE ASSESSEE AND HAD TO BE ALLOWED A S A DEDUCTION. AGGRIEVED BY THE ORDER OF THE CIT(A), THE REVENUE HAS RAISED GROUND NO.3 BEFORE THE TRIBUNAL. 33. WE HAVE HEARD THE RIVAL SUBMISSIONS. IT IS NO T IN DISPUTE BEFORE US THAT MUMBAI ITAT IN ASSESSEES OWN CASE FOR A.YS 1997-9 8,1999-2000 AND 2000-01 HAD HELD THAT IDENTICAL EXPENSES ON SHELVED PROJECT REPORT WAS NOT FOR STARTING ANY NEW BUSINESS BUT IT WAS CLOSELY CO NNECTED WITH EXISTING ELECTRICITY GENERATING BUSINESS OF THE ASSESSEE. S IMILARLY THE FEASIBILITY REPORT EXPENSES WERE ALSO HELD TO BE NOT FOR STARTI NG A NEW BUSINESS BUT CLOSELY CONNECTED WITH THE EXISTING ELECTRICITY GEN ERATING BUSINESS OF THE ASSESSEE BY THE MUMBAI ITAT IN ITS OWN CASE FOR A.Y S 1997-98, 1999-2000 AND 2000-01. COPIES OF THESE ORDERS HAVE BEEN PLAC ED IN THE PAPER BOOK. IN VIEW OF THE ABOVE GR.NO.3 OF THE REVENUE IS DISMISS ED. 34. GROUND NO.4 & 5 RAISED BY THE REVENUE READS AS FOLLOWS: 4. THE LEARNED CIT(A) ERRED IN DELETING THE TAXAT ION OF A SUM OF RS. 45,84,92,096/- BEING THE FOREIGN EXCHANGE GAIN ON R EPATRIATION OF CERTIFICATES OF DEPOSITS, WITHOUT APPRECIATING THAT THE SUBSEQUENT UTILIZATION OF THE PROFIT EARNED ON REPATRIATION CO ULD NOT BE DIRECTLY LEAD TO THE CAPITAL ACQUISITION, BY THE ASSESSEE. 5. THE LD. CIT(A) ERRED IN DELETING THE TAXATION O F A SUM OF RS.45,84,92,096/- BEING THE FOREIGN EXCHANGE GAIN O N REPATRIATION OF CERTIFICATES OF DEPOSITS, WITHOUT APPRECIATING THAT THE ASSESSEE ITSELF IS FOLLOWING A DUAL POLICY IN RESPECT OF FOREIGN EXCHA NGE FLUCTUATION GAIN/LOSS IN VARIOUS YEARS. 35. THE ERSTWHILE TATA ELECTRIC COMPANIES COMPRISIN G OF THE TATA HYDRO ELECTRIC POWER SUPPLY CO. LTD., THE ANDHRA VALLEY P OWER SUPPLY CO. LTD. AND THE TATA POWER CO. LTD. HAD ISSUED EURO NOTES IN 1997 FOR RAISING FUNDS FOR FINANCING THE COMPANIES ONGOING AND FUTU RE CAPITAL EXPENDITURE ITA NO.4497&4572/MUM/08(A.Y. 2001-02) 19 PROGRAMMES AND FOR GENERAL CORPORATE PURPOSES. THE COMPANIES INTENDED TO EXPAND THEIR GENERATING CAPACITY TO MEET THE GRO WING DEMAND OF THEIR EXISTING CUSTOMERS AS WELL AS TO ADD NEW DIRECT CUS TOMERS IN THE LICENSE AREA. THE CAPITAL EXPENDITURE PROGRAMS FOR WHICH T HE FUNDS WERE RAISED WERE AS UNDER: 1. MULTI FUEL COMBINED CYCLE 450 MW THERMAL POWER PLANT AT BHIVPURI. 2. CONSTRUCTION OF FUEL JETTY AT TROMBAY 3. REPLACING FOUR 12 MW UNITS AT BHIVPURI HYDRO ST ATION AND TWO 12 MW UNITS AT KHOPOLI HYDRO STATION WITH 24 MW UNITS, THEREBY INCREASING GENERATION BY RAISING TURBINE EFFICIENCY BY 12 TO 14%. 4. ESTABLISHING TAIL RACE UNITS AT BHIVPURI HYDRO STATION. 5. UPGRADING TRANSMISSION AND DISTRIBUTION NET WOR K BY CONSTRUCTING 220 KV SUBSTATION WITH GAS INSULATED SWITCH GEAR IN SOUTH MUMBAI. 6. INCREASING CAPACITY AT JOJOBERA CPP TO ADD A 24 0 MW PLANT TO THE EXISTING 67.5 MW PLANT. 7. DEVELOPING 76.8 MW IPP AT BELGAUM IN KARNATAKA STATE. THE ENTIRE PROCEEDS RAISED ABROAD WERE HELD IN INTE REST BEARING SECURITIES FOR A PERIOD OF THREE YEARS PENDING DEPLOYMENT AND UTIL IZATION. DURING THE YEAR ENDED 31 ST MARCH, 2001, THE FUNDS WERE REPATRIATED TO INDIA A S PER THE REQUIREMENTS OF RESERVE BANK OF INDIA. AS A RESULT OF THE INTERVENING FALL IN THE VALUE OF THE INDIAN RUPEE, A GAIN IN TERMS OF I NDIAN RUPEES HAS ARISEN TO THE COMPANY ON THE REPATRIATION OF FUNDS. THE ABOV E GAIN WAS CREDITED TO PROFIT AND LOSS ACCOUNT. IN THE COMPUTATION OF BU SINESS INCOME SUBMITTED ALONG WITH THE RETURN OF INCOME, THE ASSESSEE HAD C LAIMED THE ABOVE AMOUNT AS DEDUCTION MEANING THEREBY THAT THE PROFIT ON REP ATRIATION OF CERTIFICATES OF DEPOSITS WAS NOT OFFERED FOR TAX. THE AO HAS TREAT ED THE PROFIT ON REPATRIATION OF CERTIFICATES OF DEPOSIT AS TAXABLE INCOME. AS PER THE AO, THOUGH THE FOREIGN EXCHANGE BROUGHT TO INDIA THROUG H EURO NOTES WAS NO ITA NO.4497&4572/MUM/08(A.Y. 2001-02) 20 DOUBT CAPITAL RECEIPTS, BUT WHILST THESE WERE REMIT TED TO INDIA, THE AMOUNT OF ERFG(EXCHANGE RATE FLUCTUATION GAIN) RECEIVED AS A RESULT OF DEVALUATION OF THE RUPEE IS TO BE TREATED AS A TRADING RECEIPT. ACCORDING TO THE AO, IT WAS REQUIRED TO BE TAXED AS A TRADING RECEIPT BY THE AO FOR THE FOLLOWING REASONS: I. THOUGH THE EURO NOTES WERE FLOATED FOR THE PURPOSE OF RAISING THE CAPITAL FUND TO BUT THE CAPITAL ASSETS, HOWEVER, TH E ERFG RECEIVED AS A RESULT OF DEVALUATION OF RUPEE COULD NOT BE SA ID TO HAVE BEEN UTILIZED FOR THE SAME PURPOSE. II. THE AMOUNT OF FOREIGN EXCHANGE FLUCTUATION GAIN WAS PUT INTO THE COMMON POOL BY THE ASSESSEE COMPANY AND THE ASSESSE E COMPANY WAS NOT ABLE TO PROVE THE NEXUS OF HAVING USED THE FOREIGN EXCHANGE GAIN FOR PURCHASE OF CAPITAL ASSETS OR FOR DEVELOPMENT OR UPGRADATION. III. THE FOREIGN EXCHANGE FLUCTUATION GAIN CHANGED ITS C HARACTER FROM CAPITAL TO REVENUE AS IT WAS PUT IN HE COMMON POOL AND THE ASSESSEE WAS NOT ABLE TO SATISFACTORILY REPLY AS TO FOR WHAT PURPOSE THE GAIN HAS BEEN UTILIZED. THE AO HAS CONCLUDED T HAT IN THE ABSENCE OF ANY DETAIL, AND THE FOREIGN EXCHANGE FLU CTUATION GAIN BEING FIRST RIGHTLY PUT INTO THE P&L A/C. SHOWS TH AT CLAIM MADE IN THE COMPUTATION IS AN AFTER THOUGH. 36. BEFORE CIT(A), THE ASSESSEE SUBMITTED THE AO W AS IN AGREEMENT WITH THE FACT THAT THE FOREIGN EXCHANGE BROUGHT TO INDI A WAS A CAPITAL RECEIPT. HOWEVER, THE AO HAS HELD THAT WHILST THE FOREIGN EX CHANGE WAS REMITTED TO INDIA, THE AMOUNT OF EXCHANGE RATE FLUCTUATION GAIN RECEIVED AS A RESULT OF DEVALUATION OF THE RUPEE, AT THAT POINT OF TIME, CH ANGED ITS CHARACTER FROM CAPITAL TO REVENUE AND AFTER CHANGING THE CHARACTER , IT COULD BE CONSIDERED AS A TRADING RECEIPT. THE REASON GIVEN BY THE AO F OR CHANGE OF THE CHARACTER FROM CAPITAL TO REVENUE WAS THAT THE AMOUNT WAS PUT IN A COMMON POOL. MOREOVER, ANOTHER REASON GIVEN BY THE AO FOR TREATI NG THE GAIN AS A REVENUE ITA NO.4497&4572/MUM/08(A.Y. 2001-02) 21 RECEIPT WAS THAT THE ASSESSEE WAS NOT ABLE TO PROVE THE NEXUS OF HAVING INCURRED THE AMOUNT OF GAIN ON A CAPITAL ASSET OR F OR DEVELOPMENT OR UPGRADATION. IT WAS SUBMITTED BY THE ASSESSEE THAT THE MERE FACT OF PUTTING THE FUNDS FROM CERTIFICATES OF DEPOSIT IN A COMMON POOL OF FUNDS OF THE BUSINESS, A FACT SUBSEQUENT TO THE ACTUAL ARISING O F THE GAIN, DOES NOT CHANGE THE CHARACTER OF THE GAIN ARISING FROM THE C ERTIFICATES OF DEPOSIT FROM A CAPITAL RECEIPT TO A REVENUE RECEIPT. TO HIGHLIG HT THIS POINT, THE ASSESSEE SUBMITTED THAT IF, FOR EXAMPLE, A CAPITAL ASSET IS SOLD AND THE CONSIDERATION RECEIVED FOR THE SAME IS INVESTED IN THE TRADING AC TIVITIES OF THE BUSINESS, IT CANNOT BY ANY STRETCH OF IMAGINATION BE SAID THAT T HE CHARACTER OF THE CONSIDERATION HAS BEEN CHANGED FROM CAPITAL TO REVE NUE. THE ASSESSEE SUBMITTED THAT THE ENTIRE ARGUMENT OF THE AO CENTER S ONLY AROUND ONE FACT THAT THE AMOUNTS HAVE BEEN PUT IN A COMMON POOL AN D THAT THE ASSESSEE WAS NOT IN A POSITION TO ESTABLISH NEXUS WITH INVES TMENT IN CAPITAL ASSETS. 37. WITHOUT PREJUDICE TO THE ABOVE SUBMISSION, THE ASSESSEE SUBMITTED THAT THE PROCEEDS OF THE EURO NOTES WERE BROADLY UT ILISED FOR THE SEVEN PURPOSES INDICATED ABOVE AND IT IS NOT PRACTICALLY POSSIBLE TO IDENTIFY ONE-TO- ONE THE INVESTMENT OF THE PROCEEDS OF CERTIFICATES OF DEPOSITS. IT WAS ALSO SUBMITTED THAT THE AO HAS WRONGLY PROCEEDED TO TAX THE AMOUNT ON THE BASIS THAT THE SAME HAD BEEN CREDITED IN THE PROFIT & LOSS ACCOUNT WITHOUT APPRECIATING THE FACT THAT IT IS A WELL SETTLED PRI NCIPLE IN LAW THAT TREATMENT IN BOOKS OF ACCOUNT IS NOT DETERMINATIVE OF ITS TAXABI LITY. THE ASSESSEE HAS DISTINGUISHED THE DECISION IN T.V.SUNDARAM IYENGAR S CASE (222 ITR 344) (SC), WHICH HAS BEEN RELIED UPON BY THE AO ON THE G ROUNDS THAT IN THAT CASE THE ISSUE INVOLVED WAS TAXABILITY OF UNCLAIMED DEPO SITS THAT WERE RECEIVED FROM CUSTOMERS IN THE COURSE OF TRADING TRANSACTION S, WHILST IN THE INSTANT CASE THE AMOUNTS CANNOT BE ATTRIBUTED TO THE TRADIN G TRANSACTIONS OF THE ASSESSEE. IN VIEW OF THE FOREGOING, THE ASSESSEE C LAIMED THAT THE GAIN ARISING FROM REPATRIATION OF PROCEEDS OF CERTIFICATES OF DE POSIT IS CAPITAL IN NATURE AND NOT EXIGIBLE TO TAX. ITA NO.4497&4572/MUM/08(A.Y. 2001-02) 22 38. THE CIT(A) HELD AS FOLLOWS: .. WHERE PROFIT OR LOSS ARISES ON ACCOUNT OF AP PRECIATION OR DEPRECIATION IN THE VALUE OF FOREIGN CURRENCY, ON C ONVERSION INTO ANOTHER CURRENCY, SUCH PROFIT OR LOSS WOULD ORDINAR ILY BE TRADING PROFIT OR LOSS AS A TRADING ASSET OR AS PART OF CIRCULATIN G CAPITAL EMBARKED IN THE BUSINESS. BUT IF, ON THE OTHER HAND, THE FOREI GN CURRENCY WAS HELD AS A CAPITAL ASSET OR AS FIXED CAPITAL, SUCH PROFIT OR LOSS WILL BE OF CAPITAL NATURE. CONSIDERING THAT THE EURO NOTES WERE RAISED FOR CAP ITAL PURPOSE AND THE GAIN AROSE, NOT IN THE COURSE OF TRADING ACTIVI TIES BUT MERELY DUE TO CONVERSION OF THE CURRENCY OF ONE COUNTRY INTO THE CURRENCY OF ANOTHER COUNTRY, THE SAID GAIN IS ON CAPITAL ACCOUNT AND NO T IN THE NATURE OF INCOME. FURTHER, THE TAXABILITY HAS TO BE DETERMINED AT THE POINT OF TIME WHEN THE PROFIT AROSE AND NOT ON THE BASIS OF ITS SUBSEQ UENT UTILIZATION. THE AO APPEARS TO HAVE PLACED UNDUE SIGNIFICANCE ON THE SUBSEQUENT UTILIZATION OF THE FOREIGN EXCHANGE GAIN. AS CORRE CTLY POINTED OUT BY THE APPELLANT, IF, FOR EXAMPLE, A CAPITAL ASSET IS SOLD AND THE CONSIDERATION RECEIVED FOR THE SAME IS INVESTED IN THE TRADING ACTIVITIES OF THE BUSINESS, IT CANNOT BY ANY STRETCH OF IMAGIN ATION BE SAID THAT THE CHARACTER OF THE CONSIDERATION HAS CHANGED FROM CAPITAL TO REVENUE. THE AOS RELIANCE ON THE FACT THAT THE GAIN HAS BEE N CREDITED TO THE PROFIT AND LOSS ACCOUNT, TO COME TO THE CONCLUSION THAT THE GAIN IS, THEREFORE, TAXABLE INCOME, SEEMS TO BE MISPLACED. IT IS A WELL ESTABLISHED PRINCIPLE THAT THE TREATMENT IN THE BOO KS OF ACCOUNT DOES NOT DETERMINE THE TAXABILITY OR OTHERWISE OF A PART ICULAR AMOUNT. IN THE COURSE OF THE HEARING, THE APPELLANT HAS CORREC TLY DRAWN AN ANALOGY BETWEEN THE FOREIGN EXCHANGE GAINS CREDITED TO THE PROFIT AND LOSS ACCOUNT AND PROFIT ON SALE OF INVESTMENTS, WHI CH ALSO WOULD BE CREDITED TO THE PROFIT & LOSS ACCOUNT. DESPITE THI S FACT, PROFIT ON SALE OF INVESTMENTS WOULD BE TREATED AS CAPITAL GAINS AN D TAXED ACCORDINGLY. I AGREE WITH THE APPELLANTS SUBMISSI ON IN THIS REGARD AND HOLD THAT THE FACT THAT THE GAIN ON FOREIGN EXCHANG E HAS BEEN CREDITED TO THE PROFIT AND LOSS ACCOUNT IS NOT DETERMINATI VE OF THE FACT THAT THE GAIN IS TAXABLE INCOME. THE DISTINCTION DRAWN BY THE APPELLANT REGARDING TH E DECISION IN T.V.SUNDARAM IYENGARS CASE (222 ITR 344)(SC) , WHI CH HAS BEEN RELIED UPON BY THE AO, APPEARS TO BE VALID SINCE IN THAT CASE, THE ISSUE INVOLVED WAS TAXABILITY OF UNCLAIMED DEPOSITS THAT WERE RECEIVED FROM CUSTOMERS IN THE COURSE OF TRADING TRANSACTION S, WHILST IN THE ITA NO.4497&4572/MUM/08(A.Y. 2001-02) 23 INSTANT CASE THE AMOUNTS CANNOT BE ATTRIBUTED TO T HE TRADING TRANSACTIONS OF THE APPELLANT. IN VIEW OF THE ABOVE, THIS GROUND IS DECIDED IN FAV OUR OF THE APPELLANT. 39. THE LEARNED D.R. SUBMITTED BEFORE US THAT THE E ND OF THE FUNDS NOT HAVING BEEN PROVED COUPLED WITH THE FACT THAT THE I NCOME IN QUESTION HAS BEEN TREATED AS PART OF REVENUE RECEIPT BY CREDITIN G THE SAME IN THE PROFIT AND LOSS ACCOUNT WAS SUFFICIENT TO BRING TO TAX THE GAIN IN QUESTION. IN THIS REGARD, HE POINTED OUT THE FAILURE OF THE ASSESSEE TO PROVE THE ULTIMATE UTILISATION OF THE BORROWED AMOUNTS AFTER REPATRIAT ION AS THE SAME ENTERED THE COMMON POOL OF FUNDS UTILISED BY THE ASSESSEE B OTH FOR CAPITAL AS WELL AS REVENUE PURPOSES. RELIANCE WAS ALSO PLACED BY HIM ON THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF LOGITRONICS PVT.LTD. 197 TAXMAN 394 (DEL) AND MGF LLTD. VS. CIT 199 TAXMAN 51 (DEL) TO HIGHLIGHT THE FACT THAT UTILISATION OF FUNDS WOULD ALSO BE NECESSARY TO CLA IM DEDUCTION ON ACCOUNT OF INTEREST PAID ON BORROWED FUNDS. 40. THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED SUBMISSIONS AS MADE BEFORE THE CIT(A) AND RELIED ON THE ORDER OF THE CI T(A). HE ALSO SUBMITTED THAT ENTRIES IN THE BOOKS OF ACCOUNTS ARE NOT CONCL USIVE. 41. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE A RE OF THE VIEW THAT THE ORDER OF CIT(A) DOES NOT CALL FOR ANY INTERFERENCE. THE LAW IS VERY CLEAR THAT WHERE PROFIT OR LOSS ARISES ON ACCOUNT OF APPRECIAT ION OR DEPRECIATION IN THE VALUE OF FOREIGN CURRENCY, ON CONVERSION INTO ANOTH ER CURRENCY, SUCH PROFIT OR LOSS WOULD ORDINARILY BE TRADING PROFIT OR LOSS DEP ENDING ON THE PURPOSE FOR WHICH THE FOREIGN EXCHANGE WAS TO BE USED WHETHER F OR INCURRING CAPITAL EXPENDITURE OR FOR MEETING REVENUE EXPENDITURE. AD MITTEDLY THE EURO NOTES WERE RAISED FOR CAPITAL PURPOSE AND THE GAIN AROSE, NOT IN THE COURSE OF TRADING ACTIVITIES BUT MERELY DUE TO CONVERSION OF THE CURRENCY OF ONE COUNTRY INTO THE CURRENCY OF ANOTHER COUNTRY, THE SAID GAIN IS ON CAPITAL ACCOUNT AND NOT IN THE NATURE OF INCOME. FURTHER, THE GAIN HAS ARISEN AT THE POINT OF TIME ITA NO.4497&4572/MUM/08(A.Y. 2001-02) 24 WHEN THE FUNDS WERE REPATRIATED TO INDIA. ADMITTED LY THE EURO NOTES WERE ISSUED FOR MEETING CAPITAL EXPENDITURE AND REMAINED OUTSIDE INDIA. WHEN THEY WERE REPATRIATED TO INDIA AT THE POINT OF TIME OF REPATRIATION, THE PURPOSE FOR WHICH THE FUNDS WERE RAISED ADMITTEDLY REMAINED ONE FOR MEETING CAPITAL EXPENDITURE. AS RIGHTLY HELD BY TH E CIT(A), THE TAXABILITY HAS TO BE DETERMINED AT THE POINT OF TIME WHEN THE PROF IT AROSE. THE SUBSEQUENT UTILISATION, IN OUR VIEW WAS IRRELEVANT, ON THE FAC TS OF THE PRESENT CASE. WITH REGARD TO ALLEGATION OF THE AO THAT THERE WAS A FAI LURE ON THE PART OF THE ASSESSEE TO EXPLAIN THE UTILISATION OF THE FUNDS RE PATRIATED FOR MEETING CAPITAL EXPENDITURE, WE ARE OF THE VIEW THAT THE FA CT THAT THE REPATRIATED FUNDS WENT INTO A COMMON POOL FROM WHICH BOTH CAPIT AL AND REVENUE EXPENDITURE WERE MET CANNOT LEAD TO THE CONCLUSION THAT THE UTILISATION OF FUNDS WAS FOR REVENUE PURPOSES AND NOT CAPITAL EXPE NSES. IT IS NO DOUBT TRUE THAT THE ONUS IN THIS REGARD WAS ON THE ASSESS EE AND THE ASSESSEE FAILED TO DISCHARGE ITS ONUS. ON THE FACTS OF THIS CASE, HOWEVER, WE DO NOT SEE ANY REASON TO JUSTIFY DISALLOWANCE ON THIS GROUND ONLY, WHEN AT THE POINT OF TIME WHEN THE GAIN IN QUESTION AROSE THE FUNDS WERE ADMI TTEDLY RAISED FOR MEETING CAPITAL EXPENDITURE. WE ARE ALSO OF THE VI EW THAT A MERE CREDIT TO PROFIT AND LOSS ACCOUNT, ON THE FACTS OF THE PRESEN T CASE, CANNOT BE THE REASON TO HOLD THAT THE GAIN IN QUESTION IS REVENUE RECEIPT CHARGEABLE TO TAX. WE THEREFORE AGREE WITH THE ORDER OF THE CIT(A) ON THIS ISSUE. GR.NO.4 AND 5 ARE ACCORDINGLY DISMISSED. 42. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS PA RTLY ALLOWED FOR STATISTICAL PURPOSES. THE APPEAL BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON TH E 9 TH DAY OF SEPT., 2011. SD/- SD/- (R.K.PANDA ) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED. 9 TH SEPT.2011 ITA NO.4497&4572/MUM/08(A.Y. 2001-02) 25 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3 . THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RE BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR, I TAT, MUMBAI BENCHES MUMBAI. VM. ITA NO.4497&4572/MUM/08(A.Y. 2001-02) 26 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 5/9/11 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 6/9/11 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER