TMI Blog2008 (6) TMI 606X X X X Extracts X X X X X X X X Extracts X X X X ..... est free loan to the sister concern, M/s. Anand Transport. As the interest bearing funds were utilised for investment in shares which will yield dividend income which is exempt, the Assessee was requested to show cause as to why the interest expenditure should not be disallowed under sec.l4A and alternately, under sec.36(1)(iii) of the Act. In response to the show cause notice, the Assessee submitted the following explanation:- 1. The investment made by us in the Equity shares of M/s Southern Agrifurane Industries Ltd. (SAFL) was to acquire and promote a new business venture. Our two group companies and our Directors have jointly invested in the Equity Capital of SAFL whereby 100% ownership has been acquired by them. 2. The investment in SAFL was not merely an investment of surplus funds with a view to earning dividend income or for the purpose of trading for earning profits. 3. The investment was made out of borrowed capital on which interest had been paid. The interest expenditure has been wholly incurred for business purposes and hence it is an allowable expenditure under the head business . The borrowing and investment are directly related to company's busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o a query in this regard, it was stated by the Assessee as under:- The funds borrowed have utilised solely for business purposes. Disallowance will arise only if the expenditure is laid out for the purposes other than business. You will kindly observe that the overdraft from GTB has been availed in company main bank account in which all receipt and payments transaction relating to companies business are put through. The assessee further stated that, Interest expenditure during the F.Y. ended 31/3/2001 amounting to ₹ 7,64,884/- was incurred. Similarly for business purposes and the same had been considered and allowed in A.Y. 2001-02. Only the amount is more in the current year. Therefore the entire amount is fully allowable as it has been incurred only for business purposes. Ultimately, the Assessing Officer vide para 3.2 of his order observed as under:- 3.2 The interest relatable to funds advanced to the sister concern from the OD facility is determined as discussed below. All the receipts and payment transaction are through the same OD account. The OD balance as on 31.3.2002 is ₹ 1,91,607 (Previous year balance is ₹ 29,96,099) and si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, there was no logic in the statement of the Assessee that it had interest free funds. He was also of the view that the decision of the Hon'ble Madras High Court was distinguishable and in this back ground, addition was confirmed. The addition regarding interest on account of Over Draft limit with Global Trust Bank was also confirmed on the basis that interest borrowed funds have been utilised for the purpose of giving interest free advance. 6. We have considered the rival submissions carefully in the light of the material on record. The submission of the learned Counsel for the Assessee, firstly, was that sec.l4A of the IT. Act is not applicable to this case because this provision can be attracted where the Assessee got some income which was exempt. This provision cannot be applied where no exempt income has been earned during the year. Sec.14A reads as under:- 14A. 5a[(1)] For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act:] The above provision clearly shows that no expenditure which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c.14A was not on Statute Book which we have already noticed, was introduced by Finance Act 2001 with retrospective effect. Similarly, the decision of the Hon'ble Madras High Court in the case of CIT v. N. Ethurajan (273 ITR 95) is of no assistance to the Assessee because firstly sec.HA has not been considered and secondly the issue raised before the High Court was whether the interest was allowable under sec.57(iii) even if no income was earned. The Hon'ble Madras High Court has upheld the decision of the Hon'ble Supreme Court in the case of CIT v. Rajendra Prasad Moody (supra). 7. The second submissions of the learned Counsel for the Assessee that the shares were purchased as business exigency and, therefore, applying the ratio of the Hon'ble Supreme Court in the case of SA Builders Ltd. v. CIT (288 ITR 1), wherein it was held that if the interest bearing funds were given as interest free loan for sister concern for business purposes, then such interest is allowable. This argument cannot also be accepted because even if shares were purchased as business proposition, the income from the same would remain exempt because the same would be received only in the form ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ows that borrowed funds only were diverted for the purpose of making investment in the shares and the Department has clearly proved the nexus. As far as the availability of interest free funds are concerned this issue was also examined in sub para (iv) to (viii) of para 5.6 of the order of the CIT(Appeals) which are as under:- (iv) An analysis of the Blance Sheet (as on 31.3.2002) shows the position as under:- Source of Funds Application (Rs. in Crores) Capital ₹ 15.00 Fixed Assets ₹ 18.78 Share Application Money ₹ 0.10 Capital work in progress ₹ 040 Reserves Surplus ₹ 3.85 Investments in SAFL ₹ 3.60 Secured Loans ₹ 5.00 Loans and Advances ₹ 7.86 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee has paid interest on borrowings and claimed deduction. It was found by the Tribunal that the assessee had retained earnings and these with borrowings formed a common fund for investment in shares. On these facts, the High Court has held that no part of borrowings should be specifically attributable to the investment in shares. Further, as the Ob facility was availed by pledging of shares and the amounts borrowed against the security of shares were utilised for business, it was held that entire payment of interest on borrowings are deductible. In the appellant's case, the investment in shares is only for promoting the new business and has no connection with the appellant's business carried on by it during the previous year. The investment is directly from the borrowed funds and hence interest paid on the borrowed funds cannot be allowed as deduction. (viii) The decision of Madras High Court in the case of CIT v. Hotel Savera 239 ITR 795 (Mad) is also not applicable in the appellant's case. In that case, it was held that the firm had its own fund as well as borrowed funds. It was not clear that the firm had not advanced money out of its own funds and in t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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