2013 (2) TMI 479 - HC - Income Tax

Applicability of section 14A - Expenditure earning exempted income - Assessee company had invested Rs.1 crore from borrowed funds in equity of one M/s.Pankaj Extrusion Ltd. which was for the purpose of earning dividend income - Neither investment was made in the assessment year under consideration nor dividend received in the earlier year on such investment Held that - assessee had not received any dividend income in the previous year as also the fact that there was no investment made by the assessee during the year under consideration - Investment had been made prior to the impugned assessment year as well as the fact that interest bearing fund invested in the shares yielded no dividend income - As decided in Shree Shyamkamal Finance & Leasing Co. (P) Ltd v. ITO 2007 (10) TMI 446 - ITAT MUMBAI , when interest bearing funds are invested in shares which yielded no dividend income, interest paid on such loan cannot be disallowed by invoking section 14A. Disallowance towards interest expenses applying the provisions of section 36(1)(iii) - Assessee had established a new unit where it invested a sum of Rs.11.09 lacs Disallowed by CIT on the ground that the same should have been capitalized as per the amendment by the Finance Act 2003 holding that the said amendment was retrospective Held that - Interest on the borrowed fund was allowable deduction if the same was for the purpose of business. It is immaterial whether the assessee had utilized the money for capital or revenue purpose - Issue is covered by the decision in the case of Core Healthcare Ltd 2008 (2) TMI 8 - SUPREME COURT OF INDIA , wherein it was held that there is no difference between money borrowed to acquire capital asset or revenue asset - Amended provisions were applicable from the assessment year 2003-04 and they were not retrospective in operation.

Summary

Issues:
1. Disallowance of Rs.15 lacs under section 14A of the Income Tax Act.
2. Disallowance of interest expenses amounting to Rs.11,09,000/- under section 36(1)(iii) of the Act.

Analysis:
1. The first issue revolves around the disallowance of Rs.15 lacs under section 14A of the Income Tax Act. The Tribunal held that interest paid on funds invested in shares yielding no dividend income cannot be disallowed under section 14A. The Tribunal relied on precedents like Shree Shyamkamal Finance & Leasing Co. (P) Ltd v. ITO and ACIT v. Lafarge India Holding (P) Ltd. The Tribunal considered that no dividend income was received by the assessee in the previous year, and no investment was made during the relevant assessment year. Therefore, the disallowance of Rs.15 lacs was deleted by the Tribunal as it was not part of the total income, and there was no infirmity in the Tribunal's decision.

2. The second issue pertains to the disallowance of interest expenses amounting to Rs.11,09,000/- under section 36(1)(iii) of the Act. The CIT disallowed the expenses, stating they should have been capitalized as per the Finance Act 2003. However, the Tribunal held that the amendment in section 36(1)(iii) was not retrospective, citing the decision in Deputy CIT v. Core Health Care Ltd. The Tribunal emphasized that interest on borrowed funds is an allowable deduction if used for business purposes, regardless of whether the funds were utilized for capital or revenue purposes. As the Tribunal's decision was in line with the Apex Court's ruling in Core Healthcare Ltd, the disallowance was deleted. No substantial question of law was identified, leading to the dismissal of the appeal.

In conclusion, the High Court upheld the Tribunal's decisions on both issues, dismissing the appeal as no infirmity was found in the Tribunal's reasoning.