2004 (1) TMI 316 - AT - Income Tax

Deduction of claim u/s 80M - Intercorporate Dividends - Nexus between borrowed funds and investments in shares - HELD THAT - In view of the pleas the clear and categorical stand of the assessee was that it had huge funds for making investment in the purchase of shares and bonds. This stand has not been properly examined nor rejected. The learned CIT(A) has gone to the extent of observing that assuming that the assessee had surplus which was used for investment in shares the same would have been available to the assessee for its business purposes and to that extent it may not have been necessary to borrow funds from bank and pay heavy interest on the amount. On perusal of the order of the Assessing Officer and that of learned CIT(A) it is found that these authorities have placed reliance on the decision in the case of H.R. Sugar Factory (P.) Ltd. 1990 (7) TMI 72 - ALLAHABAD HIGH COURT without considering the facts of this case. The application of the ratio of that decision to the facts of this case shall be discussed later. However it may be pointed out that it was not a case where it was established that borrowed funds or any part of borrowed funds was diverted for non-business purposes and claim was made for deduction of interest u/s 36. We are unable to uphold the stand taken by the ld. CIT(A) for rejecting the claim of the assessee for deduction u/s 80M of I.T. Act. (i) The assessee had a mixed account of over-draft and other deposits wherein it deposited the profits and other accruals and out of which it also made investments for purchasing shares and bonds on which dividend was shown. The specific claim of the assessee was that the investment in shares or bonds was made out of huge funds available to it in the shape of profits of earlier years and profits of current year before depreciation and reserve etc. and not out of borrowed funds. To demonstrate it assessee even filed charts before CIT(A) which contained details of year-wise profits and details of reserve as well as details of funds invested in securities. Thus the assessee had discharged the burden which was cast upon it. (ii) The Assessing Officer as well as learned CIT(A) were not justified in presuming that investment in shares and bonds was made out of borrowed funds merely on the ground that the assessee had not bifurcated interest paid on the borrowed amount used for business purposes and the amount invested in shares etc. (iii) Neither the Assessing Officer nor the learned CIT(A) disputed the facts and figures given in the chart by the assessee nor found such figures to be incorrect nor asked the assessee to furnish further details to substantiate the claim for deduction u/s 80M. Thus the assertion of the assessee remained unrebutted and undisputed. (iv) The department has not established any nexus between the borrowed funds and the funds invested in shares and bonds etc. Neither the Assessing Officer nor the learned CIT(A) recorded a positive and categorical finding that borrowed funds or any part thereof was used or invested by the assessee in the purchase of shares and bonds on which dividend was claimed. (v) The learned CIT(A) has recorded self contradictory and inconsistent findings. On one hand he observes that it is not disputed that the assessee had surplus and also net profits and then observes that the surplus funds cannot be said to have been used for financing investment . He also makes observation that even if there was no nexus between the borrowed funds and investments in shares but to the extent funds covered in the investments would have been available and therefore proportionate interest has to be considered u/s 57(iii) and not u/s 36(10)(iii). Such approach is neither justified on facts of the case nor in law. (vi) The learned CIT(A) has ignored the relevant facts and details and did not examine the issue properly in the context of the chart submitted by the assessee before him and wrongly supported the action of the Assessing Officer without rejecting the specific version of the assessee and without establishing nexus between borrowed funds and funds invested in shares and bonds. Such approach cannot be justified. Thus the order of learned CIT(A) cannot be supported. We therefore set aside the same. Since the department has not investigated and examined the issue properly with reference to the specific claim of the assessee and the material supplied by it in support of the same in the interest of justice we therefore consider it proper to restore the matter to the Assessing Officer for proper adjudication. Ground No. 3 is therefore allowed for statistical purposes and the appeal is decided accordingly.

Summary

Issues Involved:
1. Disallowance of the claim u/s 80M.
2. Nexus between borrowed funds and investments in shares.

Summary:

Disallowance of the claim u/s 80M:
The assessee claimed a deduction u/s 80M for dividend income received amounting to Rs. 87,43,921. The Assessing Officer (AO) disallowed this claim on the grounds that the assessee had not bifurcated the interest portion on the borrowed funds used for investment in shares. Consequently, the AO computed the interest attributable to these investments at Rs. 88,07,103 and disallowed it u/s 36(1)(iii), resulting in no positive income left under the head 'Income from other sources'. The CIT(A) upheld the AO's decision, stating that the assessee had borrowed funds amounting to Rs. 1,26,17,56,422 and there was no clear dichotomy between borrowed funds and their utilization for business or investment purposes.

Nexus between borrowed funds and investments in shares:
The assessee contended that the investments in shares were made out of surplus and internal accruals, not borrowed funds. The CIT(A) sent the assessee's detailed chart to the AO for examination, who maintained that there was no need to establish a direct nexus between borrowed funds and investments in shares. The CIT(A) upheld this view, stating that even if there was no direct nexus, the funds used for investments would have been available for business purposes, thus justifying the disallowance of interest u/s 36(1)(iii).

Tribunal's Findings:
The Tribunal found that the AO and CIT(A) did not establish a positive and categorical finding that borrowed funds were used for investments in shares. The Tribunal noted that the assessee had substantial profits, reserves, and surplus funds far exceeding the amount invested in shares, as demonstrated by detailed charts. The Tribunal held that the disallowance of interest u/s 36(1)(iii) was not justified without establishing a direct nexus between borrowed funds and investments. The Tribunal set aside the CIT(A)'s order and remanded the matter to the AO for proper adjudication, directing the AO to verify the facts and figures provided by the assessee and allow the claim u/s 80M if the assessee's contentions were found to be correct.

Conclusion:
The Tribunal allowed the assessee's appeal for statistical purposes, directing the AO to re-examine the issue in light of the observations made and provide the assessee an opportunity to substantiate its claim.