2012 (8) TMI 481 - AT - Income Tax

Disallownace of Interest incurred on borrowed funds - assessee invested in its fully owned subsidiary in Switzerland - show cause to assessee why the said amount should not be allowed u/s.36(1)(iii) read with section 14A - Held that - The Dividend if any received in India from foreign company is not exempt from tax as it will not be a Dividend covered u/s.115-O which alone is exempt u/s.10(34). Further the Long Term profit on sale of shares is also not exempt since it is not covered u/s.10(38). Hence there is no application of section 14A in the present case. Except for making arguments the funds borrowed are for commercial expediency and incurred for the purpose of business of the assessee, no evidence whatsoever was produced by the assessee before the lower authorities - remit the issue of allowance of expenses back to the file of the AO to decide the matter afresh in accordance with law - in favour of assessee for statistical purposes.

Summary

Issues:
Challenge to interest disallowance for two respective years.

Analysis:
The appellant, engaged in contract manufacture of industrial chemicals, challenged the disallowance of interest amounting to Rs.22,48,961/- and Rs.36,17,810/- for the respective years. The Assessing Officer questioned the pro-rata interest on borrowed funds used for investments in wholly owned subsidiary companies. The appellant argued that these investments were part of expanding business activity to foreign soil. However, the Assessing Officer disallowed the claim, stating the investments were not directly related to the appellant's business purpose. The CIT(A) upheld this decision, emphasizing the need to establish commercial expediency for allowing interest paid on borrowed funds.

On appeal, the appellant contended that the investments in wholly owned subsidiaries were a commercial expedient decision for business expansion. The appellant relied on legal precedents to support their claim. The Departmental Representative, however, supported the lower authorities' decisions, stating the appellant failed to prove commercial expediency. The Tribunal noted that the appellant's investments did not result in taxable income in India, as the subsidiary companies were registered abroad. The Tribunal found that the Assessing Officer needed to reevaluate whether the investments were made for business purposes and based on commercial expediency. The Tribunal set aside the lower authorities' orders and remanded the matter to the Assessing Officer for a fresh decision.

In conclusion, the Tribunal allowed both appeals of the appellant for statistical purposes, directing the Assessing Officer to reexamine the allowance of expenses in accordance with the law.