Disallowance of interest upheld, AO to verify actual expenditure for assessment years 2005-06 to 2008-09. Treatment of software sale income dismissed.

The Tribunal confirmed the disallowance of interest on various grounds but directed the Assessing Officer to verify the actual interest expenditure and restrict the disallowance accordingly for assessment years 2005-06, 2006-07, 2007-08, and 2008-09. The treatment of income from the sale of TV/Film software as capital gains was dismissed for assessment year 2007-08. The appeals for the respective assessment years were partly allowed for statistical purposes.

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Issues Involved:
1. Disallowance of interest attributable to share application money.
2. Disallowance of interest on investments in landed property.
3. Disallowance of interest on withdrawals for personal purposes.
4. Disallowance of interest on investment in residential building.
5. Disallowance of interest on investment in fixed assets for tourism not put to use.
6. Treatment of income from sale of TV/Film software as capital gains.

Issue-wise Detailed Analysis:

1. Disallowance of Interest Attributable to Share Application Money:
The Revenue challenged the CIT(A)'s decision that Section 14A is not applicable to disallowance of interest on investment in share application money, relying on the Punjab & Haryana High Court decision in Haryana Land Reclamation and Development Vs. CIT (2008) 302 ITR 218. The Assessing Officer (AO) had disallowed interest on borrowed funds used for share application money, arguing it did not generate income. The CIT(A) upheld the disallowance but on different grounds, stating it was not a business activity. The Tribunal agreed with CIT(A) that Section 14A was not applicable but confirmed the disallowance of interest, directing the AO to verify the actual interest expenditure and restrict the disallowance accordingly. This issue was consistently decided similarly for assessment years 2005-06, 2006-07, 2007-08, and 2008-09.

2. Disallowance of Interest on Investments in Landed Property:
The AO disallowed interest on borrowed funds used for investments in landed property, arguing it was not used for business purposes and should be capitalized. The CIT(A) held that Section 14A was not applicable as the investment did not yield exempt income and allowed the interest as business expenditure. The Tribunal restored the issue to the AO for verification and fresh decision, following the same approach for assessment years 2005-06, 2006-07, 2007-08, and 2008-09.

3. Disallowance of Interest on Withdrawals for Personal Purposes:
The AO disallowed interest on borrowed funds used for personal withdrawals, calculated on a compounding basis. The CIT(A) deleted the disallowance, accepting the assessee's claim that withdrawals were made from profits, not borrowed funds. The Tribunal found merit in the Revenue's contention that the CIT(A) accepted the claim without sufficient evidence and restored the issue to the AO for verification and fresh decision. This issue was similarly handled for assessment years 2006-07, 2007-08, and 2008-09.

4. Disallowance of Interest on Investment in Residential Building:
The AO disallowed interest on borrowed funds used for constructing a residential building for the assessee's own use, not for business purposes. The CIT(A) directed the AO to verify the exact amount of interest claimed and disallow it accordingly. The Tribunal upheld this approach for assessment years 2006-07, 2007-08, and 2008-09, directing the AO to verify and disallow the actual interest expenditure.

5. Disallowance of Interest on Investment in Fixed Assets for Tourism Not Put to Use:
The AO disallowed interest on borrowed funds used for constructing fixed assets for tourism, not put to use during the year. The CIT(A) confirmed the disallowance. The Tribunal agreed with the principle but directed the AO to work out the actual interest expenditure and restrict the disallowance accordingly. This issue was similarly decided for assessment years 2006-07, 2007-08, and 2008-09.

6. Treatment of Income from Sale of TV/Film Software as Capital Gains:
The assessee did not press this ground during the hearing for assessment year 2007-08, and it was accordingly dismissed.

Summary of Judgments:
- Revenue's appeal for assessment year 2005-06 (ITA No.1087/Hyd/2010) is partly allowed for statistical purposes.
- Cross appeals for assessment year 2006-07 (ITA No.1460/Hyd/2010 and ITA No.1506/Hyd/2010) are partly allowed for statistical purposes.
- Cross appeals for assessment year 2007-08 (ITA No.1461/Hyd/2010 and ITA No.1507/Hyd/2010) are partly allowed for statistical purposes.
- Cross appeals for assessment year 2008-09 (ITA No.1451/Hyd/2011 and ITA No.1536/Hyd/2011) are partly allowed for statistical purposes.

Order pronounced in the court on 20th February, 2015.

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