2012 (6) TMI 131 - AT - Income Tax

Revision u/s 263 - Disallowance u/s 14A - expenditure towards interest paid/payable to ICICI Bank on the loan taken and utilised for the purpose of investment in shares in Andhra Pradesh Gas Power Co. Ltd. (APGPCL in short). - held that - nce it established that there was nexus between the expenditure and the purpose of the business, the Revenue cannot justifiably claim to put itself in the armchair of the business man or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No business man can be compelled to maximise his profit. What is relevant is whether the amount was advanced as a measure of commercial expediency and not from the point of view of whether the amount was advanced for earning profit. The money which was borrowed by the assessee from ICICI Bank was utilised for the purpose of acquisition of shares of APGPCL for the purpose of business advantage and it cannot be considered as investment in relation to earning of income exempted from tax. The benefit derived by the assessee by this investment is more than interest incurred by the assessee towards loan from ICICI Bank. The investment in the shares by the assessee by borrowing money from ICICI Bank to be seen with saving of power cost. The assessee derived exorbitant benefit on the cost of power. Had the assessee not investment in the shares of APGPCL, the assessee should have incurred additional expenditure towards supply of power. - Decided in favor of the assessee

Issues Involved:
1. Whether the order of assessment made under section 143(3) read with section 153A of the Income Tax Act is prejudicial to the interests of the Revenue.
2. Whether the interest paid on borrowed funds for the purchase of units of Andhra Pradesh Gas Power Corporation Ltd. (APGPCL) is allowable as a deduction.
3. Whether the investment in units of APGPCL was for the purpose of business and if the interest on the borrowed amount for such investment is allowable as a business deduction.
4. Whether the CIT was justified in setting aside the order passed under section 143(3) read with section 153A of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Prejudicial to the Interests of the Revenue:
The assessee argued that the order of assessment made under section 143(3) read with section 153A of the Act is not prejudicial to the interests of the Revenue. The CIT observed that the assessee had purchased shares in APGPCL using a loan from ICICI Bank and claimed the resultant capital gains as exempt under section 10(23G) of the Act. The CIT held that the interest paid on the loan, which was used to purchase shares that generated exempt income, should be disallowed under section 14A of the Act. The CIT concluded that the assessing officer failed to disallow this expenditure, rendering the assessment orders erroneous and prejudicial to the interest of the Revenue.

2. Allowability of Interest on Borrowed Funds:
The CIT disallowed the interest paid on borrowed funds, arguing that the expenditure was incurred in relation to income exempt from tax under section 10(23G). The assessee contended that the investment in APGPCL was for business purposes, specifically to secure power at a concessional rate, which resulted in substantial savings. The assessee cited several judgments, including ACIT vs. Choice Trading Corporation Ltd. and S A Builders Ltd. vs. CIT, to support the claim that interest on money borrowed for commercial purposes is allowable as a deduction under section 36(1)(iii) of the Act.

3. Investment for Business Purpose:
The assessee argued that the investment in APGPCL was made to obtain power at a concessional rate, which was essential for its business operations. The investment resulted in significant savings in power costs compared to purchasing power from APSEB. The Tribunal examined the background of the investment and concluded that the borrowed funds were used for a business advantage, not merely to earn exempt income. The Tribunal noted that the savings in power costs due to the investment far exceeded the interest paid on the loan, establishing a direct nexus between the expenditure and the business purpose.

4. Justification for Setting Aside the Order:
The Tribunal found that the CIT's conclusion that the borrowed funds were used to earn exempt income was not justified. The investment in APGPCL shares was directly linked to the business objective of reducing power costs. The Tribunal held that the interest on the loan was allowable as a deduction under section 36(1)(iii) of the Act. Consequently, the Tribunal set aside the CIT's order passed under section 263 of the Act, allowing the appeals of the assessee.

Conclusion:
The Tribunal allowed the appeals of the assessee, concluding that the interest on the loan taken from ICICI Bank for the purchase of APGPCL shares was allowable as a business deduction under section 36(1)(iii) of the Act. The Tribunal found no merit in the CIT's order passed under section 263 of the Act, which was set aside. The order was pronounced in the open court on 12.10.2011.

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