2012 (7) TMI 434 - AT - Income Tax

Dis allowance of interest as business expenditure - Held that - CIT(A) had rightly deleted the addition on account of interest paid as interest free loans and advances to sister concern given by the assessee before taking borrowings cannot come in the way of allowing interest paid on borrowings taken by the company as in the present case, there was fresh borrowings of Rs. 6,00,00,000/- whereas loans and advances are continuing from the previous year. Disallowance of administrative & other expenses - assessee is earning income from business, from short term capital gain, long term capital gain and from interest income - Held that - Long term investments of the assessee constitute a significant portion of total investments, the income from which is exempt either as dividend or long term capital gain. As the portfolio of assessee consists mere of long term, investments than short term investments and therefore 5% disallowance of expenditure upheld by Ld CIT(A) does not seem to be justified - remit the case to the file of the AO to consider to the expenses which could be related to earning of exempt income i.e. long term capital gain and dividend income and recompute the disallowance - partly in favour of revenue.

Summary

Issues:
1. Disallowance of expenses on administrative & other expenses, depreciation, interest, and financial charges.
2. Disallowance of interest on borrowed funds used for interest-free loans.
3. Disallowance of expenses related to earning exempt income.

Analysis:
Issue 1: Disallowance of expenses on administrative & other expenses, depreciation, interest, and financial charges:
The Assessing Officer disallowed expenses claimed by the assessee, treating it as an investment company with income from capital gains. The Ld CIT(A) deleted most additions, except for a 5% disallowance under section 14A. The Tribunal remitted the case to recompute disallowance considering the significant long-term investments and the expertise required for managing them.

Issue 2: Disallowance of interest on borrowed funds used for interest-free loans:
The Assessing Officer disallowed interest paid on borrowed funds used for interest-free loans. The Ld CIT(A) deleted this addition, citing a precedent where interest-free loans did not affect the allowance of interest paid on borrowings. The Tribunal upheld this decision based on the same precedent, emphasizing that interest on borrowings was an allowable business expenditure.

Issue 3: Disallowance of expenses related to earning exempt income:
The Ld CIT(A) disallowed 5% of administrative & other expenses under section 14A, considering the exempt income from long-term investments. The Tribunal found the 5% disallowance unjustified due to the significant long-term investments constituting a major portion of the assets. The case was remitted to the Assessing Officer for a reevaluation based on the expenses related to earning exempt income.

In conclusion, the Tribunal partly allowed the revenue's appeal, emphasizing the need for a thorough assessment of expenses related to exempt income. The judgment provides clarity on the treatment of expenses in cases involving diverse income sources and significant long-term investments.