2008 (6) TMI 606 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of interest u/s 36(1)(ii) read with sec.14A of the IT Act.
2. Disallowance of interest u/s 36(1)(iii) of the IT Act.

Summary:

1. Disallowance of interest u/s 36(1)(ii) read with sec.14A of the IT Act:
The Assessee borrowed Rs. 5 crores from State Bank of Mauritius, investing Rs. 3.60 crores in shares of M/s. Southern Agrifurance Industries Limited (SAFL) and giving Rs. 1.7 crores as an interest-free loan to a sister concern, M/s. Anand Transport. The Assessing Officer disallowed the interest expenditure, citing sec.14A and sec.36(1)(iii) of the IT Act, arguing that investments in shares yield exempt dividend income. The Assessee contended that the investment was for business purposes, not merely for earning dividend income, and cited case law to support the claim that interest on borrowed capital for investment in shares is a business expenditure. However, the Assessing Officer, referencing the Supreme Court decision in CIT v. Rajendra Prasad Moody, held that even if no dividend was earned, sec.14A was applicable. The CIT(Appeals) confirmed the disallowance, noting the clear nexus between the borrowed funds and the investment in shares, and the lack of interest-free funds available for such investments. The Tribunal upheld the CIT(Appeals) decision, stating that sec.14A applies even if no exempt income is earned during the year.

2. Disallowance of interest u/s 36(1)(iii) of the IT Act:
The Assessee also faced disallowance of interest on overdraft facilities from Global Trust Bank, used for interest-free advances to sister concerns. The Assessing Officer determined the interest relatable to these advances and disallowed it. The CIT(Appeals) confirmed this disallowance, noting that the borrowed funds were clearly diverted for non-business purposes. The Tribunal, however, remitted this issue back to the Assessing Officer for re-examination in light of the Supreme Court decision in SA Builders Ltd. v. CIT, which allows interest on borrowed funds if the advances were made for business expediency.

Conclusion:
The appeal was partly allowed for statistical purposes, with the Tribunal confirming the disallowance of interest u/s 14A but remitting the issue of disallowance u/s 36(1)(iii) for re-examination.