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2016 (5) TMI 1248 - AT - Income TaxDisallowance made under section 14A r.w.r 8D - Held that - The assessee borrowed money from its group Companies and Firms and given loans to its own group companies and firms and the investments also in its group companies only. In the balance sheet, the firm shown ₹ 69,39,16,000/- as share application money. Till 31.03.2010 no shares were allotted to the firm. In the profit and loss account, the firm has shown ₹ 95,41,875/- as interest paid to others. Similar pattern of investment in share application money and incurred huge expenditure on interest, but no shares were allotted and the firm had not taken any effort to get the shares or to take back the money given as share application money. Therefore, the Assessing Officer was of the opinion that it is a clear diversion of interest bearing funds to other group companies. The assessee would be entitled to claim deduction of interest under section 36(1)(iii) of the Act on the borrowed funds utilized for the acquisition of shares only if shares were held as stock-in-trade and that would arise only if the assessee was engaged in trading in shares. So far as the acquisition of shares was in the form of investment and the only benefit the assessee derived was the dividend income which was not assessable under the Act, we are of the opinion that the disallowance under section 14A of the Act was squarely attracted and the Assessing Officer has rightly disallowed the claim - Decided against assessee
Issues Involved:
1. Deletion of disallowance made under section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules. Issue-Wise Detailed Analysis: 1. Deletion of Disallowance under Section 14A: Background: The Revenue's appeal is against the order of the Commissioner of Income Tax (Appeals) [CIT(A)], which deleted the disallowance made by the Assessing Officer (AO) under section 14A of the Income Tax Act, 1961, read with Rule 8D of the Income Tax Rules. The assessee, engaged in finance and investments, filed a return declaring a total loss. The AO observed that the assessee borrowed money from its group companies and firms, invested in share application money, and incurred significant interest expenditure without receiving any shares. The AO considered this as a diversion of interest-bearing funds to group companies and disallowed the interest expenditure under section 14A. CIT(A) Decision: The CIT(A), following the Tribunal's decision in the assessee's own case for the assessment year 2009-10, deleted the disallowance made by the AO. Revenue's Argument: The Revenue contended that the CIT(A) wrongly followed the Tribunal's decision, which the department had appealed against in the High Court, and argued for the reversal of the CIT(A)'s order. Assessee's Argument: The assessee's counsel argued that the issue was covered in favor of the assessee by the Tribunal's previous orders and supported the CIT(A)'s decision. Tribunal's Analysis: The Tribunal examined the materials on record and the orders of the authorities below. It noted that the assessee borrowed funds, invested in share application money, and incurred interest expenses without receiving shares. The Tribunal cited several judicial precedents to support the AO's disallowance under section 14A, emphasizing that expenditure incurred for earning exempt income, such as dividend income, is not allowable as a deduction. Key Judicial Precedents Cited: - Pradeep Kar v. ACIT: The Karnataka High Court upheld the disallowance of interest on borrowed funds used for purchasing shares, as dividend income is exempt under section 10(33) and expenditure related to exempt income is not allowable under section 14A. - CIT v. Smt. Leena Ramachandran: The Kerala High Court held that interest on borrowed funds used for acquiring shares is disallowed under section 14A if the shares are held as investments. - Lakshmi Ring Travellers v. ACIT: The Tribunal emphasized that even if no expenditure is claimed, Rule 8D prescribes a presumptive expenditure for disallowance under section 14A. - Coal India Ltd. v. Addl. CIT: The Kolkata Bench of the Tribunal upheld the AO's satisfaction and application of Rule 8D for disallowance under section 14A, emphasizing the need for strategic management and administrative expenses in investment decisions. Conclusion: The Tribunal concluded that the CIT(A)'s reliance on the earlier Tribunal decision did not reflect the correct position of law. It reversed the CIT(A)'s findings and restored the AO's order, disallowing the interest expenditure under section 14A. The appeal filed by the Revenue was allowed. Final Order: The appeal by the Revenue was allowed, and the Tribunal's order was pronounced on March 10, 2016, at Chennai.
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