2013 (7) TMI 814 - HC - Income Tax

Disallowance of interest - Diversion of interest bearing funds to sister concern company - Tribunal deleted disallowance - Held that - share of sister concerns of the assessee were held in the name of partners and not in the name of the assessee firm, because the shares cannot be registered in the name of the firm. No portion of interest debited in profit and loss account relates to investment in shares and entire payment of interest was for business purposes. The Assessing Officer has not brought out any evidence to show that borrowed money was used by the assessee in share business - Following decision of CIT vs. Prem Heavy Engineering Works P. Ltd. 2005 (4) TMI 32 - ALLAHABAD High Court - Decided against Revenue.

Summary

Issues:
1. Disallowance of interest paid by the assessee for investment in shares of sister concerns.
2. Justification of deleting disallowances of interest by the Income Tax Appellate Tribunal.
3. Applicability of Section 14-A of the Income Tax Act.
4. Interpretation of decisions of Hon'ble Jurisdictional High Court in similar cases.

Analysis:

Issue 1: Disallowance of Interest for Investment in Shares
The department contended that the interest paid by the assessee for purchasing shares in sister concerns, where no income was earned, should be disallowed. It was argued that since the shares were not part of the regular business activity, the interest on borrowed funds for such purchases was not allowable. Additionally, reference was made to Section 14-A of the Income Tax Act, stating that expenses related to income not included in total income should not be deductible. The department highlighted that since dividend income is tax-exempt, any interest paid to earn such income should not be allowed as a deduction.

Issue 2: Justification of Tribunal's Decision
The respondent-assessee argued that in the relevant financial years, no shares were purchased or acquired, contradicting the grounds for disallowing the interest. It was explained that the shares held were in settlement of trade debts, and no funds were allocated for acquiring shares during those years. The Tribunal reviewed the submissions and found that the interest paid was for business purposes and not related to share investments. It was concluded that the borrowed money was not used for share business, leading to the decision that the interest on unsecured loans had no connection with the acquisition of shares in previous years.

Issue 3: Application of Section 14-A
The Tribunal's decision was supported by the fact that no evidence was presented to prove that the borrowed funds were utilized for share business. Citing a similar case, the Tribunal emphasized that interest-free advances and reserves covered the investments adequately, justifying the deletion of interest disallowance. The Tribunal found no evidence of diverting interest-bearing funds to sister concerns without charging interest, affirming the decision of the ld. C.I.T. (A) and rejecting the department's grounds of appeal.

Issue 4: Interpretation of High Court Decisions
The Tribunal dismissed the substantial questions of law raised by the department, concluding that the appeal was based on findings of fact and therefore dismissed. The decision was based on the lack of evidence showing a connection between the interest paid and the share acquisitions, aligning with previous judgments confirming the deletion of interest disallowances in similar situations.

In summary, the High Court upheld the Tribunal's decision, emphasizing the lack of nexus between the interest paid and the share acquisitions, leading to the dismissal of the appeal based on factual findings and legal interpretations.