2015 (5) TMI 612 - HC - Income Tax

High Court affirms Tribunal's decision on Income Tax Act, 1961. Loan interest not deductible; processing fees are.

COMMISSIONER OF INCOME TAX, KOIKATA-III, KOLKATA Versus M/s. CELLICE DEVELOPERS PRIVATE LIMITED

The High Court upheld the Tribunal's decision regarding relief under Section 14A of the Income Tax Act, 1961, emphasizing that factual findings could not ... Disallowance u/s 14A - ITAT allowed the claim - Held that:- There is substantial strength in the argument of assessee that out of the total investment of ₹ 109,32,88,180/-, major part was of shares in M/s. Magma Shrachi Finance Ltd. It is not disputed by the Revenue that these shares came to the assessee by virtue of a merger of one M/s. Stratus Developers (P) Ltd. with assessee. Such shares were thus not a direct acquisition done by assessee. Therefore, for making such investment and for holding such shares, it cannot be said that assessee would have incurred substantial expenditure. Assessee had not purchased or sold any of the shares of M/s. Magma Shrachi Finance Ltd. during the relevant previous year. We also find that Assessing Officer had not made any disallownace for interest. While applying Rule 8D(2) Assessing Officer had only made a disallowance under Clause [iii] thereof. Thus, he has accepted that no loan funds were used by assessee for the purpose of making the investments. Investments made by assessee during the relevant previous year was ₹ 1,96,69,793/- only. When viewed from this angle, we cannot say that the suo motu disallowance of ₹ 88,390/- made by assessee was incorrect or unbelievable - Decided in favour of assessee Disallowance of interest as non allowable expenditure - ITAT deleted the addition - Held that:- claim of interest on capital borrowed for the purpose of business can be disallowed only where the borrowing is for acquisition of an asset intended for extension of an existing business. In the case of the assessee here, we cannot say that the loan raised by assessee from ICICI Bank, which was utilized for paying advances for acquiring built up spaces, was in relation to extension of an existing business. Business of assessee was real estate and the assessee’s intention was to trade in constructed spaces. It never contemplated to use such constructed spaces for its own use. As long as the payment of advance was not for acquisition of fixed assets but only for acquiring stock-in-trade, assessee was entitled for deduction under Section 36(1)[iii] of the Act. - Decided in favour of assessee Disallowance of processing fees for loan - ITAT deleted the addition - Held that:- . Since loan raised from State Bank of India was used by the assessee for financing its stock, we are of the opinion that processing charges incurred for raising such loan was an allowable expenditure - Decided in favour of assessee Issues:1. Relief under Section 14A of the Income Tax Act, 19612. Deletion of additions under Section 36 for interest as non-allowable expenditure3. Deletion of additions under Section 37 for processing fees for loan as non-allowable expenditureIssue 1: Relief under Section 14A of the Income Tax Act, 1961The Tribunal concurred with the C.I.T.(A) and held that the substantial part of the investment was in shares of a specific company due to a merger, and no substantial expenditure was incurred for holding these shares. The Assessing Officer did not disallow any interest, and the Tribunal found no loan funds were used for investments. The Tribunal upheld the suo motu disallowance made by the assessee, stating that it was not incorrect or unbelievable. The High Court agreed that this issue pertained to factual findings that could not be disturbed.Issue 2: Deletion of additions under Section 36 for interest as non-allowable expenditureThe Tribunal ruled that interest on capital borrowed for business purposes could only be disallowed if the borrowing was for acquiring assets for extending an existing business. In this case, the loan was used for paying advances for acquiring built-up spaces for trading purposes, not for extending the existing business. The Tribunal referred to a judgment of the Mumbai High Court to support the assessee's position. As the payment was for acquiring stock-in-trade and not fixed assets, the deduction under Section 36(1)(iii) was allowed. The High Court concurred with the Tribunal's reasoning and upheld the deletion of the addition made by the Assessing Officer.Issue 3: Deletion of additions under Section 37 for processing fees for loan as non-allowable expenditureThe Tribunal found that the loan raised from a bank was used for financing the assessee's stock, and therefore, the processing charges for raising the loan were considered an allowable expenditure. The Tribunal dismissed the revenue's ground on this matter. The High Court noted that the Tribunal had applied the same reasoning for both issues 2 and 3, and as these issues were based on factual findings, no substantial question of law arose. Consequently, the High Court dismissed the application and the appeal.