2020 (3) TMI 1252 - AT - Income Tax

ITAT grants relief on interest expenditure disallowance, upholding CIT(A) decision under Section 14A

The Income Tax Appellate Tribunal (ITAT) allowed the appeals filed by the assessee, granting relief on the disallowance of interest expenditure to the ... Interest expenditure claimed u/s 57 - Addition of interest earned by the assessee out of the deposits made as per the instruction of Special Court - plea of the assessee is that there is oral contract between the parties to pay 12% per annum and whatever the interest income earned by the assessee are out of the surplus of the liquidation of certain investment - HELD THAT:- Assessee has earned interest income from the deposits in bank. These deposits are out of the balance of liquidating certain investments. From the facts on record, prima facie, it appears that there is a nexus between the borrowed funds on which assessee has paid interest and the investment on which it has earned interest income. Therefore, the assessee should get deduction of interest expenditure to the extent of interest income earned of ₹ 3,52,622/-. It is relevant to observe, in assessee’s own case in AY 2017-18, the AO himself has allowed claim of deduction of interest expenditure to the extent of interest income earned during that year. In view of the aforesaid, the ground is allowed as indicated above. Disallowance of interest u/s 14A - HELD THAT:- We find that the identical ground raised in the present appeal has already been decided by the Coordinate Bench of ITAT in for AY 2009-10 in Shri Sudhir S. Mehta case [2017 (12) TMI 1668 - ITAT MUMBAI] wherein the Hon’ble ITAT has allowed the ground on merit in favour of assessee. Additional ground raised with respect to capitalization of interest - HELD THAT:- We are of the view that to the extent the interest relate to the investment, i.e. being disallowable under Section 57 will become part of cost of acquisition of shares and therefore the AO is directed to take it as part of the cost of shares for determining profit on sale of the shares. Thus, the additional ground stands allowed to that extent. Issues Involved:1. Disallowance of interest expenditure claimed by the assessee under Section 57 of the Income Tax Act.2. Computation of interest expenditure attributable to term deposits and other investments.3. Capitalization of disallowance of interest under Section 14A of the Income Tax Act.Detailed Analysis:Disallowance of Interest Expenditure Claimed by the Assessee under Section 57 of the Income Tax Act:The assessee sought relief on the addition of Rs. 3,52,622, which is the interest earned from deposits made as per the instruction of the Special Court. The Assessing Officer (AO) disallowed the interest expenditure claimed by the assessee under Section 57 of the Act amounting to Rs. 7,02,00,848. The AO noted that the assessee had shown interest receipts of Rs. 3,53,672 on term deposits and offered it under the head 'Income from other sources.' The AO disallowed the claim of interest expenditure under Section 57 and brought the interest income under the head 'income from other sources' to the extent of Rs. 3,53,672.Upon appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] partially allowed the relief, observing that the oral contract between the assessee and the notified broker entities was valid and the interest expenditure was not contingent. The CIT(A) also noted that the interest expenditure had a direct nexus with the interest income from term deposits and should be allowed as a deduction.Computation of Interest Expenditure Attributable to Term Deposits and Other Investments:The CIT(A) examined the balance sheets and observed that the interest expenditure of Rs. 9,86,14,668 pertained to amounts payable to three notified broker entities. The CIT(A) directed the AO to compute the interest attributable to term deposits and other investments using a formula prescribed in Rule 8D(2)(ii) for computing interest attributable to exempt investments. The AO was instructed to allow only the computed interest attributable to term deposits as a deduction under Section 57 against the interest receipts of Rs. 3,53,672.Capitalization of Disallowance of Interest under Section 14A of the Income Tax Act:The revenue filed appeals against the CIT(A)'s decision to capitalize the disallowance of interest of Rs. 2,86,67,490 under Section 14A of the Act. The CIT(A) had relied on the decision of the ITAT in the case of Sudhir S. Mehta, where the ITAT allowed the capitalization of interest related to investments. The ITAT in the present case also upheld the CIT(A)'s decision, stating that the interest related to investments should be part of the cost of acquisition of shares for determining the profit on sale of shares.Conclusion:The ITAT allowed the appeals filed by the assessee, granting relief on the disallowance of interest expenditure to the extent of interest income earned. The ITAT upheld the CIT(A)'s decision to capitalize the disallowance of interest under Section 14A, following the precedent set in the case of Sudhir S. Mehta. Consequently, the appeals filed by the revenue were dismissed. The order was pronounced in the open court on 16th March 2020.