2015 (11) TMI 419 - AT - Income Tax

Disallowance u/s. 14A - CIT(A) deleted the addition - Held that - We have observed that assessee company has its own funds amounting to ₹ 41.64 crores and the investment are to the tune of ₹ 20.41 crores. We have also observed that assessee company has duly demonstrated that the interest bearing funds to the tune of ₹ 12.20 crores on which the assessee company has paid interest have been raised from the banks towards the acquisition of fixed assets, car loan, book debts and stocks .The assessee company has also raised during the financial year , fresh equity capital of ₹ 9.86 crores and free reserve of ₹ 2.07 crores were utilised to make fresh investments of ₹ 11.93 crores during the assessment year. Thus , we hold that assessee has sufficient own funds to make investment and the assessee has also proved by cogent evidences that no interest bearing funds are utilized for making investments as the assesee company has demonstrated that the interest bearing funds are bank loans raised by the assessee company for specific purposes and also utilised for the said purposes from which diversion of fund is not permitted and hence the disallowance of the interest expenditure of ₹ 35,21,564/- under Ruled 8D2(ii) by the revenue is hereby deleted and order of the CIT(A) is upheld. - Decided in favour of assessee. Disallowance towards administrative and indirect expenses @0.5% of the average investments held by the assessee company - disallowance u/s 14A of the Act read with Rule 8D(2)(iii) - Submission of assessee that these are strategic investments and no disallowance made towards the administrative expenses - Held that - In these type of strategic investments, the investor has to normally devote significant time to plan, execute and monitor these investments regularly and periodically to ensure that these strategic investments are turned viable and profitable. These Investment decisions are very complex in nature. They require substantial market research, day-to-day analysis of market trends and decisions with regard to acquisition, retention and sale of shares at the most appropriate time. They require huge investment in shares and consequential blocking of funds. Besides, investment decisions are generally taken in the meetings of the Board of Directors / Shareholders for which administrative and management expenses are incurred and in some businesses regulatory approvals are required before setting up the same. There will be regular monitoring of these investments which also may require participation in the meetings of committees, Board of Director and Shareholder meetings. There will definitely be an expenditure incurred towards administrative and management cost etc. towards planning, executing and maintaining these investments AO has rightly invoked the provisions of section 14A of the Act read with Rule 8D(2)(iii) of Income Tax Rules, 1962 for disallowing the expenditure of ₹ 7,22,027/- towards administrative and other indirect expenses which was affirmed by the CIT(A ) and the same is also hereby affirm by us as we have found no infirmity in the orders of the authorities below. - Decided against assessee.

Summary

Issues Involved:

1. Disallowance under Section 14A of the Income Tax Act, 1961, read with Rule 8D(2)(ii) and (iii) of the Income Tax Rules, 1962.
2. Justification for the deletion of disallowance of interest expenditure.
3. Justification for sustaining disallowance of administrative and other indirect expenses.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act, 1961, read with Rule 8D(2)(ii) and (iii) of the Income Tax Rules, 1962:

The primary issue pertains to whether the CIT(A) was justified in deleting the disallowance of Rs. 35,21,564/- under Rule 8D(2)(ii) without appreciating that the assessee failed to prove it had not invested borrowed funds in shares held as investments for exempt income. The Revenue argued that the assessee had made substantial investments in shares, significantly increasing its equity holdings, while also incurring substantial interest expenditure on borrowings. The Assessing Officer (AO) thus disallowed Rs. 42,43,553/- (Rs. 32,21,526/- towards interest expenditure and Rs. 7,22,027/- towards administrative expense at 0.5% of average investments).

2. Justification for the Deletion of Disallowance of Interest Expenditure:

The CIT(A) deleted the interest expenditure disallowance of Rs. 35,21,526/- after considering the assessee's submission that it had sufficient own funds (Rs. 41.64 crores) to make the investments (Rs. 20.41 crores). The assessee demonstrated that interest-bearing loans were raised for specific purposes such as acquiring fixed assets, book debts, stocks, and car, and were utilized accordingly. The CIT(A) found no defect in the assessee's submissions and noted that the AO failed to bring any cogent material to prove the utilization of interest-bearing funds for making investments.

3. Justification for Sustaining Disallowance of Administrative and Other Indirect Expenses:

The assessee contested the disallowance of Rs. 7,21,989/- towards administrative and other indirect expenses under Rule 8D(2)(iii), arguing it had not incurred any such expenses for making or maintaining investments. However, the Tribunal upheld the disallowance, reasoning that strategic investments, even in 100% subsidiary companies, require significant management and administrative efforts. The Tribunal cited several precedents to support the view that strategic investments necessitate substantial market research, monitoring, and administrative efforts, justifying the disallowance of related expenses.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s deletion of the interest expenditure disallowance. However, it sustained the disallowance of administrative and other indirect expenses, affirming the AO's and CIT(A)'s orders on this aspect. The appeal of the Revenue was dismissed, and the cross-objection of the assessee was partly allowed.