2016 (5) TMI 1302 - AT - Income Tax

Disallowance of total interest paid on term loan taken from Canara Bank for investment made in acquiring 100% shares of a subsidiary - assessee claimed that this investment was made out of commercial expediency and therefore the learned CIT(A) ought to have allowed the interest paid under section 36(1)(iii) or 37(1) - Held that - As in the assessee s own case for A.Y. 2005-06 interest paid for borrowings used for purpose of acquiring shares which has resulted in earning of dividend, and all other expenses in relating to the earning of dividend income will not be allowed as deduction under any other provisions of the IT Act. - Decided against assessee Disallowance of proportionate interest attributable to capital work-in-progress out of the total interest paid - interest free funds were utilized for purchase of capital assets - Held that - We concur with the findings of the learned CIT(A) in the impugned orders that an examination of the financial statements for the year under consideration evidence that funds (i.e. own interest free funds and borrowed interest bearing funds for business) are mixed and the share capital and reserves which is claimed to be interest free funds is much less than the fixed assets and current assets and therefore no interest free funds were available to the assessee for being utilized in capital work-in-progress. In this factual matrix of the case, we find no reason for interference in the impugned orders of the learned CIT(A) on this issue of proportionate disallowance of interest attributable to capital work-in-progress and therefore uphold the impugned orders for assessment years 2006-07 to 2010-11. Consequently, the assessee s grounds 2(a) to (c) for assessment years 2006-07 to 2010-11 are dismissed. Disallowance under section 14A r.w. Rule 8D - Held that - In the case on hand admittedly, the factual position was that the assessee had not earned or received any exempt income in the previous years relevant to assessment years 2009-10 and 2010-11. In these circumstances, in our considered view, the ratio of the decision of the Hon ble Delhi High Court in the case of Cheminvest Ltd. (2015 (9) TMI 238 - DELHI HIGH COURT) would apply squarely in the case on hand wherein held that no disallowance under section 14A of the Act could be made in a year in which no exempt income had been earned or received by the assessee. It was held that the expression does not form part of the total income in section 14A of the Act envisages that there should be an actual receipt of income which is not includible in the total income during the relevant previous years for the purpose of disallowing any expenditure incurred in relation to the said exempt income - Decided in favour of assessee

Issues Involved:
1. Disallowance of interest paid on term loan for investment in subsidiary shares.
2. Disallowance of interest attributable to capital work-in-progress.
3. Disallowance under section 14A read with Rule 8D.

Detailed Analysis:

1. Disallowance of Interest Paid on Term Loan for Investment in Subsidiary Shares:
The assessee challenged the disallowance of interest paid on a term loan taken from Canara Bank for acquiring 100% shares of Amroon Foods Pvt. Ltd. The assessee argued that the investment was made out of commercial expediency, and therefore, the interest paid should be allowed under section 36(1)(iii) or 37(1) of the Income Tax Act, 1961. The Tribunal noted that this issue had already been decided against the assessee in its own case for A.Y. 2005-06, where it was held that the interest expenditure incurred in connection with earning dividend income, which is exempt under section 10(33), could not be allowed in view of section 14A. The Tribunal upheld the CIT(A)'s order, confirming the disallowance of interest for assessment years 2006-07 to 2010-11.

2. Disallowance of Interest Attributable to Capital Work-in-Progress:
The assessee contended that it had utilized its own interest-free funds for investment in capital work-in-progress, and therefore, the disallowance of proportionate interest was not justified. However, the Tribunal observed that the assessee's funds were a mixture of own funds and borrowed capital. The assessee failed to establish that it utilized borrowed interest-bearing funds solely for business purposes. The CIT(A) found that no interest-free funds were available for capital work-in-progress, as the share capital and reserves were less than the fixed and current assets. Consequently, the Tribunal upheld the CIT(A)'s order, confirming the disallowance of proportionate interest for assessment years 2006-07 to 2010-11.

3. Disallowance Under Section 14A Read with Rule 8D:
For assessment years 2009-10 and 2010-11, the assessee argued that no disallowance under section 14A could be made as it had not received any exempt income in these years. The Tribunal referred to the Hon'ble Delhi High Court's decision in Cheminvest Ltd. vs. CIT, which held that section 14A would not apply if no exempt income is received or receivable during the relevant previous year. Since the assessee had not earned any exempt income in the years under consideration, the Tribunal directed the AO to delete the disallowances made under section 14A for these years.

General Grounds:
The general grounds raised by the assessee for assessment years 2006-07 to 2008-09 and 2009-10 to 2010-11 were dismissed as infructuous, as no specific adjudication was required.

Conclusion:
The Tribunal upheld the CIT(A)'s orders on the disallowance of interest paid on term loans for investment in subsidiary shares and interest attributable to capital work-in-progress for assessment years 2006-07 to 2010-11. However, it directed the AO to delete the disallowance under section 14A for assessment years 2009-10 and 2010-11, as no exempt income was received in these years. The general grounds were dismissed as infructuous.

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