2006 (2) TMI 578 - AT - Income Tax

Tax Tribunal Partially Allows Appeal, Remands Case to Determine Allowable Interest Expenses Excluding Dividend Income.

The ITAT partially allowed the appeal, remanding the case to the AO to quantify allowable interest expenses related to stock-in-trade, excluding exempt ... Disallowance u/s 14A - interest on borrowed funds - used for acquiring shares as investment - Capital gains - Cost Of Acquisition - HELD THAT:- It is now settled position that income from investment i.e., dividend is exempt and hence as per the provisions of section 14A, no interest expenses on this account is allowable. The judgment of Hon’ble Jurisdictional High Court rendered in the case of Tata Chemicals Ltd.[2002 (4) TMI 42 - BOMBAY HIGH COURT] does not help the case of the assessee because in this case, it is held by Hon’ble High Court that a positive finding is given by the Tribunal that investment in tax-free bonds has been in the course of business and since it is a finding of fact, no substantial question of law arises. The Tribunal order in this case was passed on 14-1-1999 whereas section 14A was inserted with retrospective effect by Finance Act, 2001 and hence section 14A was not available before the Tribunal. Thus, we set aside the order of learned CIT(A) on this issue and restore this issue to the file of the Assessing Officer with a direction to quantify the amount of interest expenses allowable with regard to investment in stock-in-trade out of borrowed funds and dividend received on shares held as stock-in-trade. The Assessing Officer should allow the interest as per above discussion after providing adequate opportunity of being heard to the assessee. This ground is partly allowed for statistical purposes. It is settled position that such interest is allowable under the head ‘Income from other sources’ and in this year, the same is not so allowable because of section 14A as per which, no expenses is allowable, which are incurred for earning an exempt income and since dividend has been made exempt u/s 10(33) from 1-6-1997 being the date from which section 115-O was inserted by the Finance Act, 1997. Once we find that interest expenses is an allowable expenditure under the head ‘Income from other sources’, it cannot be allowed to be added to the cost of investment only because in this year, no deduction is allowable because the dividend income has been made exempt. The issue in the present case is squarely covered against the assessee by the judgment of Hon’ble Calcutta High Court rendered in the case of L.N. Dalmia [1993 (3) TMI 15 - CALCUTTA HIGH COURT]. In this case also, the judgment of Hon’ble Delhi High Court rendered in the case of Mithlesh Kumari [1973 (2) TMI 11 - DELHI HIGH COURT] was considered by Their Lordships and the same was distinguished because in this case, the investment was in shares whereas in the case of Mithlesh Kumari (supra) the investment was in plots of land. Thus, this issue is decided against the assessee and this ground is rejected - In the result, this appeal of the assessee is partly allowed for statistical purposes. Issues Involved:1. Disallowance of interest paid on borrowings used for acquiring shares of group companies.2. Addition of interest expenses incurred for holding shares as investment to the cost of investment.Detailed Analysis:Issue 1: Disallowance of Interest Paid on Borrowings Used for Acquiring Shares of Group Companies1. Facts and Initial Findings:- The assessee-company filed a return showing a net loss of Rs. 40,85,260.- The Assessing Officer (AO) found that the company had significant borrowings and investments in shares, with interest expenses of Rs. 44.21 lakhs claimed against minimal income.- The AO disallowed the interest expenses, reasoning that the borrowed funds were used to acquire shares of group companies, which did not constitute a business activity, thus not allowable under sections 36(1)(iii), 37, or 57 of the Income-tax Act.- The CIT(A) upheld the AO's decision, citing section 14A, which disallows expenses incurred to earn exempt income.2. Assessee's Arguments:- The assessee argued that it is a Non-Banking Financial Company (NBFC) and relied on the Tribunal's decision in Tedco Investment & Financial Services (P.) Ltd. v. Dy. CIT.- It was contended that shares worth Rs. 326.98 lakhs were held as stock-in-trade, and only Rs. 322.13 lakhs as investment.- The assessee cited the judgment in CIT v. Tata Chemicals Ltd., arguing that interest on borrowings for business investments is allowable even if the income is tax-free.- Past assessments were referenced where similar claims were allowed.3. Revenue's Arguments:- The revenue supported the CIT(A)'s order and cited Tribunal decisions in Dy. CIT v. S.G. Investments & Industries Ltd. and Gagan Trading Co. Ltd. v. Asstt. CIT, which held that interest expenses attributable to earning dividend income are not allowable as business expenses.- The revenue also argued that shares were acquired for controlling interest, referencing CIT v. Amritaben R. Shah.4. Tribunal's Findings:- The Tribunal noted that the AO's disallowance was based on the assumption that all shares were investments, but the balance sheet showed a significant portion held as stock-in-trade.- It was held that interest on borrowings used for stock-in-trade is allowable as business expenses, but the dividend received on such shares should be deducted from the interest.- The Tribunal remanded the matter back to the AO to quantify allowable interest expenses, excluding the portion related to exempt dividend income.- The Tribunal distinguished the case from Amritaben R. Shah, noting no evidence of controlling interest acquisition.Issue 2: Addition of Interest Expenses to the Cost of Investment1. Assessee's Arguments:- The assessee sought to add interest expenses to the cost of investment, citing judgments in CIT v. Maithreyi Pai, CIT v. Mithlesh Kumari, and Addl. CIT v. K.S. Gupta.2. Revenue's Arguments:- The revenue argued that interest is not part of the cost of acquisition or improvement, referencing CIT v. L.N. Dalmia, CIT v. Octavious Steel & Co. Ltd., and Addl. CIT v. K.S. Gupta.3. Tribunal's Findings:- The Tribunal noted that the assessee had not raised this contention before the CIT(A).- On merit, the Tribunal found no substance in the assessee's contention, as interest expenses are allowable under 'Income from other sources,' and adding them to the cost of investment would result in double deduction.- The Tribunal referenced the judgment in Maithreyi Pai, which disallowed double deduction.- The Tribunal distinguished the present case from Mithlesh Kumari, where no income was generated from the asset.- The Tribunal upheld the revenue's stance, referencing the judgment in L.N. Dalmia, which held that interest on borrowings for shares cannot be added to the cost of acquisition.Conclusion:- Issue 1: The Tribunal partially allowed the appeal, remanding the matter to the AO to quantify allowable interest expenses related to stock-in-trade, excluding the portion related to exempt dividend income.- Issue 2: The Tribunal rejected the assessee's contention to add interest expenses to the cost of investment, upholding the revenue's position.Result:The appeal was partly allowed for statistical purposes.