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2009 (2) TMI 498 - HC - Income TaxWhether on the facts and in the circumstance of the case and in law the Hon ble Tribunal was right in deleting the disallowance made by the Assessing Officer of interest paid by the Assessee Company on borrowed funds amounting to Rs.241.10 lakhs overlooking the fact that the borrowed funds were used by the Assessee Company to invest in the Capital of another Partnership Firm and since profits derived by the Assessee Company from a Partnership firm were exempt from tax u/s.10(2A) of the Income-tax Act, the interest expense related to such tax free profits is to be disallowed u/s.14A of the Income Tax Act?
Issues:
1. Disallowance of interest paid by the Assessee Company on borrowed funds 2. Consideration of notional interest on deposit received by the Assessee Company for fair market value calculation Issue 1: Disallowance of interest on borrowed funds The appeal raised the question of whether the Tribunal was correct in deleting the disallowance of interest paid by the Assessee Company on borrowed funds used to invest in the capital of another Partnership Firm. The appellant argued that since the profits derived from the Partnership Firm were exempt from tax under section 10(2A) of the Income-tax Act, the interest expense related to such tax-free profits should be disallowed under section 14A of the Income Tax Act. However, the court found that for the relevant assessment year, there was no profit, rendering the question irrelevant. Therefore, the court dismissed the appeal on this issue. Issue 2: Notional interest on deposit for fair market value calculation Regarding the consideration of notional interest on a deposit received by the Assessee Company for arriving at the fair market value under section 23(1)(a) of the Income-tax Act, the Tribunal relied on the judgment of the High Court in J.K. Investors (Bom) Ltd. The court noted that nothing was presented to suggest that the ratio of the mentioned judgment was inapplicable. Consequently, the court held that the question raised in this regard did not arise and dismissed the appeal on this issue as well. In conclusion, the High Court of Bombay dismissed the appeal by the Revenue on both issues. The court found that the questions raised were not applicable based on the facts and circumstances of the case and the relevant legal provisions.
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