2013 (12) TMI 3 - AT - Income Tax

Investment in shares - Claim for interest paid on loan taken for investments - Held that - The shares were kept by the assessee as investment and not as stock-in-trade - The assessee borrowed the money not for the purpose of business but for the purpose of investment in the shares of another company - The funds borrowed were invested in the shares of M/s Den Networks Ltd. The investment in the shares of M/s Den Networks Ltd., is in the form of long term non-trade investment/capital investment - The assessee is not entitled to the deduction of interest paid on the money borrowed - Decided against assessee. Interst income setoff against interest expense - Held that - The CIT(A) allowed the relief on the basis of consequence of certain presumptive events. That income is to be computed on the basis of facts as they existed and not on the basis of some hypothesis that had the assessee not advanced the money to other company it would have been required to borrow less money - The assessee has borrowed the money from UFPL which was evidently not borrowed for the purpose of business. The interest paid on such borrowing cannot be allowed as a deduction under Section 36(1)(iii) - The assessee may have interest income on its capital or on its non-interest bearing funds received from somebody else but the said interest cannot be set off against the interest payment on the basis of some hypothesis or presumption - Decided in favour of Revenue. Office and administrative expenses - Held that - The were the expenses of general nature - Even when the assessee has not carried on the business, the certain expenses which were required to be incurred for maintaining the corporate status of the assessee is allowable deduction - In fact the assessee carried on the business during the accounting year relevant to the assessment year under consideration, whatever small scale may be of the business - Decided against Revenue.

Summary

Issues Involved:
1. Allowability of interest income as income from other sources.
2. Allowability of expenses without business activity.
3. Set off of interest paid against interest received.
4. Disallowance of expenses.

Issue 1: Allowability of Interest Income:
The Revenue contended that the interest income of Rs.1,13,50,138/- should be considered as income from other sources and set off against the interest paid. The Assessing Officer disallowed the interest paid to UFPL under Section 36(1)(iii) as the borrowed money was not used for business purposes. The CIT(A) upheld this finding. The Tribunal agreed that the borrowed amount was invested, not for business but as a capital investment, making the interest expenditure non-allowable under Section 36(1)(iii). The Tribunal concurred with the CIT(A) on this issue.

Issue 2: Allowability of Expenses without Business Activity:
The Revenue challenged the allowance of expenses of Rs.61,191/- by the CIT(A) without business activity. The Tribunal held that even in the absence of active business, certain expenses necessary to maintain corporate status are allowable deductions. The Tribunal found that the assessee conducted business on a small scale during the relevant period. The Tribunal concluded that disallowance of the expenses was not justified, rejecting the Revenue's appeal on this ground.

Issue 3: Set off of Interest Paid against Interest Received:
Regarding the set off of interest paid to UFPL against interest received from City Guide Yellow Pages Pvt.Ltd., the CIT(A) allowed the set off based on hypothetical events. However, the Tribunal disagreed, stating that the interest paid on non-business borrowing cannot be set off against interest income. The Tribunal reversed the CIT(A)'s decision and upheld the Assessing Officer's stance, rejecting the set off.

Issue 4: Disallowance of Expenses:
The Revenue's appeal included the disallowance of expenses of Rs.61,191/-, which the CIT(A) had allowed. The Tribunal upheld the CIT(A)'s decision, stating that the expenses were of a general nature and necessary for maintaining corporate status, even in the absence of significant business activity. The Tribunal found the disallowance unjustified and rejected the Revenue's appeal on this ground.

In conclusion, the Tribunal partly allowed the Revenue's appeal and dismissed the assessee's cross-objection, holding that the interest paid to UFPL was non-allowable under Section 36(1)(iii) and rejecting the set off of interest paid against interest received. The Tribunal also upheld the allowance of expenses and deductions related to maintaining the corporate status, even in the absence of substantial business activity.