2014 (4) TMI 313 - AT - Income Tax

Disallowance of interest on investment Investment made in borrowed funds Held that - The assessee has not received any interest from Tellicherry Medical Foundation & Infrastructure Ltd. -The assessee is entitled only for the dividend on the investment made in preferential shares - the question arises for consideration is whether the dividend income received by the assessee is liable to be included in the total income of the assessee or not? If the dividend income received / receivable by the assessee would form part of the total income of the assessee, then the interest on the borrowed funds for making the investment would be an allowable expenditure - In case, if the dividend income received by the assessee from Tellicherry Medical Foundation & Infrastructure Ltd would not form part of the total income of the assessee then the interest on the borrowed funds for making such investment cannot be allowed as expenditure - the factual aspect needs to be verified thus, the order of the AO is set aside and the matter is remitted back to the AO for fresh adjudication as per the law laid down in Commissioner of Income Tax Versus Popular Vehicles and Services Ltd. 2010 (1) TMI 730 - Kerala High Court decided in favour of Revenue.

Summary

Issues: Disallowance of interest on investment made by cooperative society in a private limited company for business purpose.

Analysis:
1. The appeal was filed by the revenue against the order of the CIT(A) regarding the disallowance of interest on the investment made by a cooperative society in a private limited company for the assessment year 2008-09.
2. The ld.DR argued that the investment made by the cooperative society in the shares of the private limited company was not for business expediency and, therefore, the expenditure incurred for earning income exempt from taxation cannot be allowed as an expenditure under section 14A of the Act.
3. On the contrary, the ld.senior counsel for the assessee contended that the investment in the private limited company was for business purposes, and any dividend earned on the investment would be taxable under the Income-tax Act. The counsel also highlighted that for the previous assessment year, the dividend income was offered for taxation.
4. The Tribunal considered the submissions and the material on record. The main issue was the disallowance of interest of Rs. 36,58,000 on the investment made by the cooperative society in the private limited company using borrowed funds. The Tribunal noted that if borrowed funds were diverted for non-business purposes, the interest payable on such funds cannot be claimed as expenditure.
5. The Tribunal referred to a judgment of the Kerala High Court in a similar case and emphasized that the dividend income received by the cooperative society from the private limited company would determine the allowability of the interest on borrowed funds. If the dividend income formed part of the total income, the interest could be allowed as expenditure. However, if the dividend income did not form part of the total income, the interest on borrowed funds could not be claimed as expenditure.
6. Consequently, the Tribunal set aside the assessing officer's order and remitted the matter for fresh consideration in light of the factual aspects and the legal principles discussed, providing the assessee with a reasonable opportunity to present their case.
7. The appeal of the revenue was allowed for statistical purposes, and the order was pronounced on April 4, 2014.

This detailed analysis of the judgment highlights the arguments presented by both parties, the Tribunal's considerations, and the legal principles applied in determining the allowability of interest on the investment made by the cooperative society in the private limited company.