2015 (2) TMI 1227 - AT - Income Tax

Disallowance of interest attributable to the share application money - addition u/s 14A - Held that - As rightly contended by the assessee, investment made in the share application money till its conversion into shares being not capable of earning any income, which is exempt from tax, expenditure incurred by the assessee in relation to the making of such investments including interest paid on the borrowed funds to the extent invested in shares application money cannot be disallowed by invoking the provisions of S.14A. CIT(A), in our opinion, therefore, was correct in holding that the provisions of S.14A were not applicable for making disallowance on account of interest attributable to the investments made by the assessee in share application money, but finally confirming the disallowance made by the AO on account of such interest by holding that the same did not represent the expenditure wholly and exclusively incurred by the assessee for the purpose of its business. As regards quantum of interest disallowed by the Assessing Officer, we find that the disallowance of interest computed by the Assessing Officer on compounding basis was not sustainable, as the same resulted in notional disallowance, which is not permissible in law, and the learned CIT(A) therefore, was fully justified in directing the Assessing Officer to verify the actual expenditure incurred by the assessee on account of interest on the borrowed funds utilised for making payment of share application money and to restrict the disallowance to that extent. Disallowance on account of interest attributable to the investment made by the assessee in landed property - Held that - Learned Departmental Representative has contended that since this submission made by the learned counsel for the assessee now before the Tribunal was not made specifically in that manner before the authorities below, the Assessing Officer may be allowed an opportunity to verify the same. Since the learned counsel for the assessee has no objection in this regard, we restore this issue to the file of the Assessing Officer for deciding the same afresh, after verifying the specific submissions made by the learned counsel for the assessee before us, in accordance with law and after giving sufficient opportunity of hearing to the assessee. Disallowance of interest attributable to the withdrawals made by the assessee out of borrowed funds - Held that - No case was made out by the assessee before the Assessing Officer to show that the withdrawals for household purposes were made by the assessee out of the profits generated in M/s. Ushodaya News Agency and this claim apparently made by the assessee for the first time before him was accepted by the learned CIT(A) without discussing the relevant facts and figures and without referring to any documentary evidence, which supported the claim of the assessee. As contended by the learned counsel for the assessee, the assessee, however, is in a position to establish his claim by producing the relevant evidence as well as by furnishing the relevant facts and figures. Hew has requested that one more opportunity may, therefore, be given to the assessee to make out its case before the Assessing Officer. Since the Learned Departmental Representative also has no objection in this regard, we set aside the order of learned CIT(A) on this issue and restore this same to the file of the Assessing Officer for deciding it afresh. Addition on account of interest attributable to the investment made by the assessee out of borrowed funds in fixed assets created for the purpose of tourism, but not put to business use - Held that - a similar exercise has been done by the Assessing Officer in assessment year 2005-06, as per the direction of the learned CIT(A), and a similar direction may be given to the Assessing Officer to do such exercise even for the year under consideration. Since the Learned Departmental Representative has no objection in this regard, we set aside the impugned orders of the lower authorities on this issue, and restore the matter to the file of the Assessing Officer for the limited purpose of working out, as done in the preceding year as per the directions of the learned CIT(A) for that year, the actual quantum of interest actually paid by the assessee on the borrowed funds utilised for the construction of the relevant assets which were not put to use in the year under consideration and restrict the disallowance to that extent.

Summary

Issues Involved:
1. Disallowance of interest attributable to share application money.
2. Disallowance of interest on investments in landed property.
3. Disallowance of interest on withdrawals for personal purposes.
4. Disallowance of interest on investment in residential building.
5. Disallowance of interest on investment in fixed assets for tourism not put to use.
6. Treatment of income from sale of TV/Film software as capital gains.

Issue-wise Detailed Analysis:

1. Disallowance of Interest Attributable to Share Application Money:
The Revenue challenged the CIT(A)'s decision that Section 14A is not applicable to disallowance of interest on investment in share application money, relying on the Punjab & Haryana High Court decision in Haryana Land Reclamation and Development Vs. CIT (2008) 302 ITR 218. The Assessing Officer (AO) had disallowed interest on borrowed funds used for share application money, arguing it did not generate income. The CIT(A) upheld the disallowance but on different grounds, stating it was not a business activity. The Tribunal agreed with CIT(A) that Section 14A was not applicable but confirmed the disallowance of interest, directing the AO to verify the actual interest expenditure and restrict the disallowance accordingly. This issue was consistently decided similarly for assessment years 2005-06, 2006-07, 2007-08, and 2008-09.

2. Disallowance of Interest on Investments in Landed Property:
The AO disallowed interest on borrowed funds used for investments in landed property, arguing it was not used for business purposes and should be capitalized. The CIT(A) held that Section 14A was not applicable as the investment did not yield exempt income and allowed the interest as business expenditure. The Tribunal restored the issue to the AO for verification and fresh decision, following the same approach for assessment years 2005-06, 2006-07, 2007-08, and 2008-09.

3. Disallowance of Interest on Withdrawals for Personal Purposes:
The AO disallowed interest on borrowed funds used for personal withdrawals, calculated on a compounding basis. The CIT(A) deleted the disallowance, accepting the assessee's claim that withdrawals were made from profits, not borrowed funds. The Tribunal found merit in the Revenue's contention that the CIT(A) accepted the claim without sufficient evidence and restored the issue to the AO for verification and fresh decision. This issue was similarly handled for assessment years 2006-07, 2007-08, and 2008-09.

4. Disallowance of Interest on Investment in Residential Building:
The AO disallowed interest on borrowed funds used for constructing a residential building for the assessee's own use, not for business purposes. The CIT(A) directed the AO to verify the exact amount of interest claimed and disallow it accordingly. The Tribunal upheld this approach for assessment years 2006-07, 2007-08, and 2008-09, directing the AO to verify and disallow the actual interest expenditure.

5. Disallowance of Interest on Investment in Fixed Assets for Tourism Not Put to Use:
The AO disallowed interest on borrowed funds used for constructing fixed assets for tourism, not put to use during the year. The CIT(A) confirmed the disallowance. The Tribunal agreed with the principle but directed the AO to work out the actual interest expenditure and restrict the disallowance accordingly. This issue was similarly decided for assessment years 2006-07, 2007-08, and 2008-09.

6. Treatment of Income from Sale of TV/Film Software as Capital Gains:
The assessee did not press this ground during the hearing for assessment year 2007-08, and it was accordingly dismissed.

Summary of Judgments:
- Revenue's appeal for assessment year 2005-06 (ITA No.1087/Hyd/2010) is partly allowed for statistical purposes.
- Cross appeals for assessment year 2006-07 (ITA No.1460/Hyd/2010 and ITA No.1506/Hyd/2010) are partly allowed for statistical purposes.
- Cross appeals for assessment year 2007-08 (ITA No.1461/Hyd/2010 and ITA No.1507/Hyd/2010) are partly allowed for statistical purposes.
- Cross appeals for assessment year 2008-09 (ITA No.1451/Hyd/2011 and ITA No.1536/Hyd/2011) are partly allowed for statistical purposes.

Order pronounced in the court on 20th February, 2015.