2008 (7) TMI 609 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of interest expenses u/s 14A of the Income-tax Act, 1961.
2. Nexus between borrowed funds and investment in shares yielding exempt dividend income.
3. Applicability of section 14A to business income and income from other sources.

Summary:

Issue 1: Disallowance of Interest Expenses u/s 14A
The assessee, a Private Limited company engaged in trading, investment, and finance, appealed against the order of CIT(A) confirming the disallowance of interest expenses amounting to Rs. 16,23,24,000 by the Assessing Officer (AO). The AO attributed these expenses to the earning of dividend income, which is exempt u/s 10(33) of the Income-tax Act, 1961, and thus disallowed them u/s 14A. The AO computed the disallowance by proportionately allocating the total interest expenses to the dividend income.

Issue 2: Nexus Between Borrowed Funds and Investment in Shares Yielding Exempt Dividend Income
The CIT(A) found a clear nexus between the borrowed funds and the investment in shares of RIL, which yielded the exempt dividend income. The investment was made using loans from Reliance Capital Ltd., and the interest debited in the profit and loss account was paid on these borrowings. The CIT(A) upheld the AO's action, stating that the conditions for disallowance u/s 14A were satisfied.

Issue 3: Applicability of Section 14A to Business Income and Income from Other Sources
The Tribunal considered whether disallowance u/s 14A could be made even if the dividend income is considered business income or income from other sources. The Tribunal referred to the Kolkata Bench of ITAT in the case of S.G. Investments & Industries Ltd., which held that interest on borrowings for purchasing shares, whether held as investments or stock-in-trade, should be disallowed to the extent it relates to exempt dividend income. The Tribunal also noted that the assessee's plea of being in the business of holding investments was not raised before lower authorities and thus could not be considered at this stage.

Conclusion:
The Tribunal upheld the order of the CIT(A), confirming the disallowance of interest expenses u/s 14A, and dismissed the appeal by the assessee. The Tribunal emphasized that the disallowance was made after proper appropriation and that section 14A does not restrict disallowance to the extent of exempt income.