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2010 (12) TMI 976 - AT - Income TaxDeductibility of interest - disallowance u/s 14A - Held that - Remit the matter back to the file of the Assessing Officer, firstly, for recording a categorical finding as to whether or not the assessee is engaged in investment in shares for the purpose of holding and controlling interest, and thereafter, for deciding the claim for admissibility of deduction in accordance with law, inter alia, including the law laid down by the hon ble jurisdictional High Court in the case of Srishti Securities (P.) Ltd. (2009 (1) TMI 408 - BOMBAY HIGH COURT). As regards disallowance under section 14A - Held that - AO s powers to make disallowance under section 14A are not fettered on that count, and except for this variation, the observations made by us while dealing with the assessment year 2001-02 will apply mutatis mutandis for these years as well. We may add that while deciding the issue regarding disallowance under section 14A, the Assessing Officer will, inter alia, bear in mind the principles laid down in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT 2010 (8) TMI 77 - BOMBAY HIGH COURT . With these directions, the matters for the assessment years 2002-03 to 2004-05 are also remitted to the file of the Assessing Officer for fresh adjudication, and the appeals are, accordingly, allowed for statistical purposes.
Issues:
1. Deductibility of interest paid on amounts borrowed for the purpose of holding shares as investment. 2. Applicability of section 36(1)(iii) or section 57(iii) of the Income-tax Act in computing taxable income. 3. Disallowance under section 14A for the assessment years 2001-02, 2002-03, 2003-04, and 2004-05. Issue 1: Deductibility of interest paid on amounts borrowed for holding shares as investment: The appellant, an investment company holding shares in various companies, contested the disallowance of Rs. 1,44,57,738 claimed as a deduction for interest paid on shares held as investment. The appellant relied on a judgment stating that interest paid on borrowed funds for holding shares for controlling interest is deductible under section 36(1)(iii) of the Income-tax Act. The Tribunal directed the matter to be sent back to the Assessing Officer to determine if the appellant was indeed holding shares for controlling interest and decide the deduction claim accordingly. The Tribunal emphasized the need for a categorical finding on the purpose of holding shares before allowing the deduction. Issue 2: Applicability of section 36(1)(iii) or section 57(iii) in computing taxable income: The appellant argued that the interest payment should be deductible either under section 36(1)(iii) or section 57(iii) of the Income-tax Act. The Tribunal, while acknowledging the arguments presented, decided to remit the matter back to the Assessing Officer for a fresh examination based on the judgment referred to by the appellant. The Tribunal clarified that all aspects related to the deductibility of interest payment would remain open for further consideration during the reassessment by the Assessing Officer. Issue 3: Disallowance under section 14A for the assessment years 2001-02, 2002-03, 2003-04, and 2004-05: Regarding the disallowance under section 14A, the Tribunal noted that no specific disallowance was made in the initial assessment. The Tribunal referred to a judgment stating that if no disallowance was made during the initial assessment, it cannot be revisited during the remanded proceedings. The Tribunal directed the Assessing Officer to decide the matter afresh without considering the disallowance under section 14A for the relevant assessment years. The Tribunal emphasized that the Assessing Officer's powers to make disallowance under section 14A were not restricted due to the absence of disallowance in the previous assessments. In conclusion, the Tribunal allowed all the appeals for statistical purposes, remitting the matters back to the Assessing Officer for fresh adjudication while providing specific directions on the issues of interest deductibility and disallowance under section 14A for the respective assessment years.
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