2013 (4) TMI 828 - AT - Income Tax

Disallowance u/s 14A - nexus between the borrowed funds on which the interest was paid and the mutual funds purchased by the appellant - Held that - As per the facts brought on record, if there is availability of interest free funds to make investment in mutual fund and there is no question of disallowance of interest. On the other hand, if the assessee used the interest bearing funds to make investment in mutual funds then proportionate interest has to be disallowed. The assessee is duty bound to establish the nexus between availability of interest free funds to make investment in mutual funds at the time of making such investment. In other words at the point of time of making investment there should be sufficient interest free funds available with the assessee. Being so, we remit the issue to the file of the Assessing Officer for such consideration in the light of above observations. Addition being the expenses for issue of shares to Qualified Institutional Buyers claimed in accordance with the provisions of Sec. 35D - Held that - Admittedly, the assessee s claim u/s. 35D was in the A.Y. 2006-07 held that it would not be proper to debit the entire amount in one year as it would violate the matching principle. On the other hand, it is clear that the benefits of the expense will accrue to the appellant over many financial years. But. it cannot be quantified accurately as to how much would be the benefit in a particular financial year. unlike in bonds, where quantifications are simple and accurate, in this case, it is ultimately the judgement of the business head based on realities of the industry and economy which will determine the amount by which or the percentage of benefit available in a particular year. In the present case, the management has decided that the benefits of the expense will accrue to the company over a period of 12 years. The Assessing Officer does not have any contrary information to indicate a shorter or longer period. Thus the expense in question is to be treated as deferred revenue expenditure and allowed as claimed by the appellant. This issue is decided in favour of assessee.

Issues Involved:
1. Nexus between borrowed funds and mutual fund investments.
2. Disallowance of interest under Section 14A of the IT Act.
3. Deduction of expenses for issue of shares to Qualified Institutional Buyers under Section 35D.
4. Treatment of deferred revenue expenditure.
5. Double deduction claim under Section 35D.

Detailed Analysis:

1. Nexus between Borrowed Funds and Mutual Fund Investments:
The assessee argued that the CIT(A) erroneously held a nexus between borrowed funds and mutual fund investments. The Assessing Officer (AO) noted that the assessee received Rs. 2.19 crores as interest from investments in mutual funds, incurring Rs. 19.3 crores in interest payments. The AO invoked Section 14A, disallowing Rs. 12 crores as notional interest. The CIT(A) agreed but directed the AO to disallow interest only for the period during which borrowed funds were used for earning exempted income. The Tribunal remitted the issue back to the AO to verify if interest-free funds were available at the time of investment, emphasizing the need to establish a clear nexus.

2. Disallowance of Interest under Section 14A:
The Tribunal examined the balance sheet and noted the receipt of foreign currency convertible bonds (FCCB) used for temporary investments in mutual funds. Since FCCBs bore no interest, the Tribunal instructed the AO to determine if interest-free funds were available at the time of investment. If interest-bearing funds were used, proportionate interest should be disallowed. The issue was remitted back to the AO for reconsideration.

3. Deduction of Expenses for Issue of Shares to Qualified Institutional Buyers under Section 35D:
The assessee claimed expenses under Section 35D for issuing shares to Qualified Institutional Buyers, which the AO disallowed. The CIT(A) had previously allowed a similar claim for A.Y. 2006-07. The Tribunal noted that the Department did not appeal against the CIT(A)'s decision for A.Y. 2006-07. Consequently, the Tribunal remitted the issue back to the CIT(A) for fresh consideration, instructing consistency with the earlier decision.

4. Treatment of Deferred Revenue Expenditure:
The assessee treated the acquisition cost of the "Asian Age" brand and editorial content as deferred revenue expenditure, amortized over ten years. The AO disallowed this claim, but the CIT(A) allowed it, recognizing the expenditure as revenue in nature, spread over multiple years. The Tribunal upheld the CIT(A)'s decision, emphasizing that the benefits of the expense would accrue over several years and should be treated as deferred revenue expenditure.

5. Double Deduction Claim under Section 35D:
The Revenue contended that the CIT(A) erred in concluding that the AO did not state the disallowance of Rs. 2,09,95,804 under Section 35D and only mentioned a double deduction. The Tribunal, referring to its decision on the assessee's appeal for A.Y. 2008-09, remitted this issue back to the CIT(A) for both assessment years 2007-08 and 2008-09, instructing consistency with the earlier directions.

Conclusion:
All four appeals by the Revenue and the assessee were allowed for statistical purposes, with issues remitted back to the AO and CIT(A) for reconsideration based on the Tribunal's observations and directions. The Tribunal emphasized the need for consistency and proper verification of facts, particularly regarding the availability of interest-free funds and the treatment of deferred revenue expenditure. The order was pronounced on 29th April 2013.

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