2015 (6) TMI 413 - AT - Income Tax

Disallowance of Interest Expenses u/s. 36(1)(iii) - Held that - As decided in assessee s own case for previous AY s 2012 (2) TMI 476 - ITAT MUMBAI held unless there is a finding that assessee s investment is not business activity and the funds are not utilized for the purpose of business, disallowance under section 36(1)(iii) does not arise. There is no disallowance under section 14A in this year as the dividend income was taxable. Therefore, the interest disallowance has to be considered under section 36(1)(iii). If there is income or loss under the head capital gains , the interest disallowance under section 36(1)(iii) pertaining to the investment activity is also to be considered as deduction, while working out the capital gain. Accordingly, the assessing Officer is directed to examine the nexus with borrowed funds on which interests was claimed to the utilization of funds either in investment activity or in business activity and disallow amount accordingly under section 36(1)(iii) and consider whether it is allowable while working our capital gain etc. Thus issue in this ground is restored to the file of the Assessing Officer for fresh consideration after examining the facts and to decide according to law. Assessee should be given an opportunity to make submissions and furnishing the necessary details in this regard. - Decided in favour of assessee for statistical purposes

Summary

Issues Involved:
1. Disallowance of Interest Expenses under section 36(1)(iii) for Assessment Years 2005-06 and 2007-08.
2. Disallowance under section 14A of the Income Tax Act for Assessment Years 2005-06 and 2007-08.
3. Treatment of Loss on Sale of Equity Shares as Speculation Loss instead of Business Loss for Assessment Year 2005-06.
4. Disallowance of Interest under section 201(1A) and section 36(1)(iii) for Assessment Year 2005-06.
5. Disallowance under section 14A of the Act for Assessment Year 2005-06.
6. Disallowance under section 40(a)(ia) for Assessment Year 2007-08.
7. Applicability of Rule 8D for computation of disallowance under section 14A for Assessment Year 2007-08.

Analysis:
1. Disallowance of Interest Expenses under section 36(1)(iii) for Assessment Years 2005-06 and 2007-08:
The Tribunal referred to past decisions and directed the Assessing Officer to reexamine the issue based on the utilization of funds for business purposes. The interest disallowance was to be considered under section 36(1)(iii) and nexus with borrowed funds was to be examined. The Tribunal upheld the order of the CIT(A) and directed fresh consideration by the AO.

2. Disallowance under section 14A of the Income Tax Act for Assessment Years 2005-06 and 2007-08:
The Tribunal confirmed the disallowance restricted to 10% of the dividend income earned based on past decisions. The disallowance was considered reasonable, and the Tribunal endorsed the view taken by the coordinate Bench. The disallowance was upheld for both assessment years.

3. Treatment of Loss on Sale of Equity Shares as Speculation Loss for Assessment Year 2005-06:
The Tribunal affirmed the order of the CIT(A) treating the loss on sale of equity shares and notional interest as speculation loss instead of business loss under Section 73 of the Act. The decision was based on past Tribunal orders and the treatment of interest expenses in relation to trading of shares.

4. Disallowance under section 201(1A) and section 36(1)(iii) for Assessment Year 2005-06:
The grounds regarding disallowance of interest under section 201(1A) and section 36(1)(iii) were not pressed by the AR due to the smallness of the amount of addition. These grounds were dismissed as not pressed.

5. Disallowance under section 14A of the Act for Assessment Year 2005-06:
Similar to the earlier disallowance under section 14A, the grounds related to this issue were dismissed as not pressed by the AR due to the smallness of the amount of addition.

6. Disallowance under section 40(a)(ia) for Assessment Year 2007-08:
The ground related to disallowance under section 40(a)(ia) was dismissed as not pressed by the AR due to the smallness of the amount of addition.

7. Applicability of Rule 8D for computation of disallowance under section 14A for Assessment Year 2007-08:
The Tribunal found this ground of the revenue to be infructuous based on the findings in the assessee's appeal for the same assessment year. The ground was dismissed as infructuous.

In conclusion, the appeals of the assessee for both assessment years were partly allowed for statistical purposes, while the revenue's appeal was dismissed. The Tribunal provided detailed reasoning based on past decisions and directed the Assessing Officer to reexamine certain issues in light of the law and facts presented.