2007 (10) TMI 446 - AT - Income Tax

Disallowance of interest expenditure - incurred loss - Not received any dividend income during the year under consideration - provisions of section 14A did not apply - Expenditure incurred in relation to income not includible in total income - stand of the revenue is that whether there is actual exempted income or not during the year under consideration since the assessee had incurred expenditure for making investment in that exempted income this expenditure cannot be allowed. HELD THAT - In the instant case assessee had made certain investment in shares though no dividend has been received. By virtue of section 10( 33 ) dividend income referred to in section 115-O does not form part of the total income. Section 115-O is a special provision related to tax on distributed profit of domestic companies. Section 115-O is not in tandum with section 10( 33 ). The additional tax under section 115-O become leviable in the hands of the company if such dividend is exempted in the hands of the shareholders. If the assessee earned income which is not includible in the total income in that case the expenditure could be disallowed u/s14A because it speaks of expenditure incurred by the assessee in relation to income which does not form part of the total income. In other words assessee has earned income which forms part of the total income. Reading of section 14A makes it clear that while computing the income under Chapter IV deduction will not be allowed with regard to expenditure incurred by the assessee in relation to an income which does not form part of the total income under the Income-tax Act. The decision relied by the learned DR in the case of Everplus Securities Finance Ltd. 2006 (3) TMI 229 - ITAT DELHI-H the case does not support the view canvassed by the learned DR. This was the case wherein actually dividend income was earned. The question was in such a situation if the interest bearing fund invested in shares which yielded dividend income Assessing Officer can disallow interest paid on such loans by invoking section 14A. In the instant case of the assessee the admitted position is that there is no dividend income earned. Thus this ground by the assessee is allowed. Interest expenses treated as capital expenditure incurred towards acquiring controlling interest in subsidiary company - It is the case of the assessee that recently the Tribunal in the case of Birla Group of Holdings Ltd. 2006 (10) TMI 250 - ITAT MUMBAI held that the interest expenses cannot be added to the costs of investments of which the direction to that effect was made in the assessment order. Assessee has produced a copy of the order of the Tribunal referred to above. Assessing Officer while giving effect to the order of the Tribunal may keep this decision in mind and the additional ground may be dealt with accordingly in the light of the decision referred to above. In the result appeal by the assessee is allowed in part for statistical purpose.

Summary

Issues Involved:
1. Disallowance of interest expenditure under Section 14A of the Income-tax Act.
2. Treatment of interest expenses as capital expenditure for acquiring controlling interest in a subsidiary company.

Issue-wise Detailed Analysis:

1. Disallowance of Interest Expenditure under Section 14A:

The main contention of the assessee was against the disallowance of interest expenditure amounting to Rs. 16,35,493 under Section 14A of the Income-tax Act. The assessee argued that since no dividend income was earned during the assessment year 2002-03, the provisions of Section 14A should not apply. The Assessing Officer (AO) observed that the interest was paid on unsecured loans taken to invest in shares of the subsidiary company, IFCCPL. The AO concluded that the interest expenditure was related to income that does not form part of the total income, thus invoking Section 14A.

The AO's rationale was based on the fact that the investment was shown separately under 'Investments' and not under 'Current Assets' or 'Inventories', indicating they were not stock-in-trade. The AO argued that Section 14A is unambiguous and disallows any expenditure related to income that does not form part of the total income, even if no such income (dividend) was earned during the year. The AO also rejected the argument that interest paid should be allowed as it was for capital appreciation, stating that there is no provision under the 'Capital Gains' head for such deduction.

The CIT(A) upheld the AO's decision, rejecting the assessee's reliance on the Tribunal's decisions in Jt. CIT v. Holland Equipment Co. B.V. and V.C. Nannapaneni v. Asstt. CIT, which stated that Section 14A applies only when there is income not included in the total income. The CIT(A) also noted that the investment was for acquiring controlling interest, and thus, interest expenses are not allowable under Section 14A.

Upon appeal, the Tribunal considered the assessee's argument that Section 14A should not apply as there was no dividend income. The Tribunal referred to its previous decisions, emphasizing that Section 14A disallows expenditure only if there is income not includible in the total income. The Tribunal concluded that since no exempt income was earned, the disallowance under Section 14A was not justified.

2. Treatment of Interest Expenses as Capital Expenditure:

The assessee raised an additional ground regarding the treatment of interest expenses as capital expenditure incurred towards acquiring controlling interest in the subsidiary company. The Tribunal noted the recent decision in the case of Birla Group of Holdings Ltd., which held that interest expenses cannot be added to the cost of investments. The Tribunal directed the AO to consider this decision while giving effect to the order and deal with the additional ground accordingly.

Conclusion:

The Tribunal allowed the appeal in part, ruling that the disallowance of interest expenditure under Section 14A was not justified as no exempt income was earned during the year. It also directed the AO to reconsider the treatment of interest expenses as capital expenditure in light of the Tribunal's decision in Birla Group of Holdings Ltd. The appeal was allowed for statistical purposes.