2013 (2) TMI 728 - AT - Income Tax

Disallowance of interest payment in respect of loans utilized for acquiring shares - Held that - held that the investments made on the ground of commercial expediency has to be treated as a business investment irrespective of the fact that the income arising out of such investment will be exempted from taxation - Hon ble Supreme Court in the case of SA Builders Ltd. vs. CIT - Decided in favor of assessee Disallowance of ₹ 22,98,746/- being 2% of the dividend income earned by the assessee - as expenditure attributable to dividend income - Held that - top management of the company are required to decide about the investments - some management expenditure has to be attributed towards earning of tax-free dividend income - Here the investments were so old - the scope of expenditure also would be little lessor - A lumpsum amount of ₹ 10 lakhs is disallowed - Partly in favor of assessee Disallowance being interest paid on borrowings as relating to interest free advances - Held that - Funds are utilized for the assessee s own business - These are reflected in the books of account of the assessee - Decided in favor of assessee Applicability os Sec 14A - Payment of intrest - Held that - When the shares are sold, the assessee will be liable for capital gains taxation and, therefore, the expenditure incurred in respect of borrowings cannot be classified purely in relation to income which does not form part of the total income - expenditure was incurred essentially for the purpose of the business - Decided in favor of assessee Disallowance of interest payment on loans utilized for acquiring shares of the assesse s subsidiary - Held that - As discussed above disallowance is not justified - Decided in favor of assessee Disallowance of general and administrative expenses pertaining to dividend income - Held that -As per the reasons stated in order in ITA No.638/Mds/2012 the disallowance and is confirmed Addition in the computation of income under sec.115JB Held that - The disallowance cannot change the frame of profit and loss account prepared by the assessee under the provisions of the Companies Act, 1956 - addition made by the AO for the purpose of book profit under sec.115JB is deleted.

Summary

Issues:
1. Disallowance of interest payment for loans utilized for acquiring shares.
2. Disallowance of expenditure attributable to dividend income.
3. Disallowance of interest paid on borrowings related to interest-free advances.

Analysis:

Issue 1 - Disallowance of Interest Payment for Loans Utilized for Acquiring Shares:
The assessee contested the disallowance of interest payment amounting to Rs. 1,72,02,624, arguing that the investments in Shriram Investments Limited and Shriram Transport Finance Company Limited were not solely for earning dividend income but as part of their business proposition. The Tribunal referred to a previous order in a similar case and emphasized that the purpose of the investments was to strengthen the capital and liquidity base of the group companies, thereby enhancing turnover and profits. The Tribunal held that the disallowance was unjustified as the investments were made as a business proposition, not solely for tax-free dividend income. Consequently, the disallowance was deleted.

Issue 2 - Disallowance of Expenditure Attributable to Dividend Income:
The assessing authority disallowed Rs. 22,98,746 as expenditure attributable to dividend income earned by the assessee. The Tribunal acknowledged that while there were no direct mechanical expenses in earning the dividend income, management expenditure was necessary. However, considering the age of investments and consistent holding, the disallowance was reduced to a lump sum of Rs. 10 lakhs, partially allowing this ground.

Issue 3 - Disallowance of Interest Paid on Borrowings Related to Interest-Free Advances:
The assessee challenged the disallowance of Rs. 71,164 as interest paid on borrowings related to interest-free advances to another company. The Tribunal accepted the explanation provided by the assessee, noting that the interest was for the assessee's own business funds, leading to the deletion of the disallowance.

Outcome:
The appeal for the assessment year 2005-06 was partly successful, with the disallowances being deleted or reduced. Similarly, for the assessment year 2007-08, the disallowances related to interest payments were deleted, resulting in the appeal being allowed. Lastly, for the assessment year 2008-09, the disallowance of interest payment was deleted, while the disallowance of general and administrative expenses was upheld. The addition in the computation of income under sec.115JB was also deleted. As a result, the appeals for the assessment years 2005-06 and 2008-09 were partly allowed, while the appeal for the assessment year 2007-08 was fully allowed.