2016 (5) TMI 1411 - AT - Income Tax

Addition u/s 14A - disallowance the interest expenditure - Held that - In the instant case investment made in subsidiary company for strategic investment i.e. for commercial expediency or investment or stock in trade is in question. Assessing Officer disallowed the interest expenditure to the tune of ₹ 84,20,803/- for A.Y. of 2004-05 and an amount of ₹ 7,70,012/- for the A.Y.2005-06. But in connection with the strategic investment in the subsidiary company the law is not quite clear that if any company made an investment in subsidiary company for commercial expediency or investment or stock in trade for any purpose of controlling interest in other companies then interest paid to such parties would not be taxable u/s.36(1)(iii) of the Act. In view of the above mentioned law appeal of the appellant are hereby allowed and Assessing Officer is hereby directed to re-calculate the expenditure incurred towards the dividend income by excluding the investment made for controlling interest in the other companies while computing average value of investment. Appeal of the assessee are hereby allowed for statistical purpose.

Summary

Issues Involved:
1. Disallowance of interest expenditure under section 14A of the Income Tax Act, 1961 for the assessment years 2004-05 and 2005-06.

Analysis:
The Appellate Tribunal ITAT Mumbai dealt with the appeals filed by the assessee against the orders passed by the Commissioner of Income Tax (Appeals) relevant to the assessment years 2004-05 and 2005-06. The assessee, a company engaged in investing and dealing in shares and securities, had invested in a subsidiary company and earned exempt income. The main contention was whether the expenditure incurred on strategic investment was liable to be added to the income of the assessee. The Assessing Officer treated the expenditure as income, which was confirmed by the CIT(A), leading to the appeals before the Tribunal.

The primary issue raised by the assessee was related to section 14A of the Income Tax Act, 1961, specifically concerning the disallowance of interest expenditure amounting to ?8,42,08,035 for A.Y. 2004-05 and ?9,70,012 for A.Y. 2005-06. The assessee argued that the expenditure was made for strategic investment to control the stake in a group concern, not for earning income. Citing relevant case laws, the assessee contended that no disallowance should be made regarding the expenditure incurred for such investments. The departmental representative opposed this argument. The Tribunal noted that the law was not entirely clear on whether interest paid on investments made for controlling interest in other companies would be taxable under section 36(1)(iii) of the Act.

Considering the arguments and precedents cited, the Tribunal allowed the appeals of the appellant. It directed the Assessing Officer to re-calculate the expenditure incurred towards dividend income by excluding the investment made for controlling interest in other companies while computing the average value of investment. The Tribunal relied on established legal principles from various cases to support its decision. Consequently, both appeals of the assessee were allowed for statistical purposes.

In conclusion, the judgment by the Appellate Tribunal ITAT Mumbai addressed the issue of disallowance of interest expenditure under section 14A of the Income Tax Act, 1961, for the assessment years 2004-05 and 2005-06. The decision provided clarity on the treatment of expenditure incurred on strategic investments and highlighted the importance of considering the purpose of investments in determining tax liabilities.