2022 (2) TMI 115 - AT - Income Tax

Deduction u/s 80M - As noted by Ld. AO that the assessee earned dividend income and claimed deduction u/s 80M i.e. to the extent of dividend paid by the assessee - CIT(A) opined that in case of mixed funds it could not be taken that the investments were out of interest free funds. The assessee was not able to link the share capital and reserves available with the investment - HELD THAT - Undisputed facts that emerges are that the assessee had own funds by way of share capital and reserves as on 31.03.1990 for 600 Lacs. Therefore the investments made on 28.01.1991 for 564.60 Lacs would bear direct nexus with the same. As on 31.03.1991 the assessee had share capital and reserves of more than 636.35 Lacs which have been invested in fixed assets and others and therefore the same could not have been used for the purpose of making investment. However the assessee had cash accumulations during first quarter of 1991 for 328.60 Lacs and therefore the investment made on 02.05.1991 to that extent may be presumed to be made out of cash accumulations. The total investments made by the assessee stood at 1311.28 Lacs. Hence the balance 418.08 Lacs of investment alone could be considered to be sourced out of borrowed funds. AR in the written submissions has stated that average cost of borrowing was 14% and considering the profits earned 50% of cost of funds may be considered as proportionate to earning of income from dividend out of borrowed funds. Accordingly 7% of 418.08 Lacs may be considered as proportionate interest expenditure which would roughly translate into 29.26 Lacs of proportionate interest expenditure. We find these submissions to be reasonable and acceptable and therefore we direct Ld. AO to compute exact disallowance and restrict the interest disallowance to that extent. No disallowance of management expenses shall be made. No other material arguments have been adduced during hearing before us. Appeal partly allowed in favour of assessee.

Summary

Issues:
Computation of deduction u/s 80M for Assessment Year (AY) 1992-93.

Analysis:
1. The appeal by the assessee for AY 1992-93 challenged the computation of deduction u/s 80M concerning dividend income. The provisions of Section 80M were crucial, allowing a deduction for domestic companies receiving dividends from another domestic company. The primary concern revolved around the correct calculation of this deduction.

2. The assessee, engaged in financial and merchant banking services, had a complex history of assessment and revisions dating back to 1995. Various orders, revisions, and directions from authorities led to a dispute over the deduction u/s 80M, necessitating a detailed examination of the financial transactions and investments made by the assessee.

3. In the subsequent proceedings, the Assessing Officer (AO) scrutinized the financials of the assessee, particularly focusing on the increase in investments and loans taken during the relevant period. The AO emphasized the need for the assessee to establish a direct nexus between its own funds and the investments made, especially concerning the dividend income claimed for deduction u/s 80M.

4. During the appellate proceedings, the assessee contended that specific investments were funded from share capital, reserves, and cash accumulations, while a portion was sourced from borrowed funds. The argument centered on the allocation of interest expenditure and the proportionate disallowance to be made against the dividend income for the purpose of claiming the deduction u/s 80M.

5. The Commissioner of Income Tax (Appeals) upheld the AO's decision, emphasizing the need for a clear link between the source of funds and investments. The absence of a direct correlation led to the conclusion that proportionate expenditure disallowance was justified, thereby supporting the AO's approach in computing the deduction u/s 80M.

6. Upon careful consideration of the facts and submissions, the Tribunal analyzed the source of funds for investments made by the assessee. By establishing a direct nexus between specific funds and investments, the Tribunal directed the AO to compute the exact disallowance of interest expenditure based on reasonable and acceptable submissions, thereby partially allowing the appeal and providing clarity on the computation of deduction u/s 80M.

7. The Tribunal's decision, pronounced on 31st January 2022, highlighted the importance of establishing a clear connection between funds utilized and investments made to determine the eligibility for deduction u/s 80M, ultimately resolving the dispute in favor of the assessee based on the specific source of funds for investments.