2015 (10) TMI 2041 - AT - Income Tax

Disallowance u/s 14A of interest expenses - Held that - Undisputedly, the investments made by the assessee are in its subsidiary companies and associated companies which are special purpose vehicle formed to execute specific projects. Undoubtedly, the investments in subsidiary/associate companies are done on account of business expediency in order to carry on the business of the assessee. Accordingly, the investments can be seen in the light of strategic in nature and inextricably linked with the main business operation of the assessee. The Tribunal in the case of J.M. Financial Ltd. (2014 (4) TMI 752 - ITAT MUMBAI ) had considered similar facts and finally decided the issue in favour of the assessee - Thus direct the AO to delete the disallowance on account of interest expenses - Decided against revenue. Disallowance of other expenses - Held that - The assessee has also received income from business auxiliary services amounting to ₹ 1.15 lakhs. In our considered opinion, the balance expenditure of ₹ 29,62,421/- may be considered for earning the income from auxiliary services. However, at the same time we find that some reasonable disallowance ought to be attributed for which 2% of the dividend income should meet the ends of justice. We, accordingly direct the AO to restrict the disallowance to 2% of dividend income. Decided partly in favour of assessee. Disallowance in interest expenses u/s. 37 - Held that - The assessee has made investments in subsidiary companies and associate companies which are special purpose vehicles formed to execute specific projects. Thus, the allegation of the AO that assessee has diverted and applied borrowed funds in non-business activities do not hold any water. The Hon ble High Court of Madras in the case of CIT Vs Spencer & Co. Ltd. 2014 (2) TMI 237 - MADRAS HIGH COURT have held that the interest on borrowed capital were investments in shares utilizing borrowed capital for strategic business purposes in companies promoted as special purpose to strengthen and promote assessee s existing business interest was allowable. A similar view was taken by the Hon ble High Court of Madras in the case of RPG Transmissions Ltd in 2014 (2) TMI 238 - MADRAS HIGH COURT . Respectfully following the decisions of the Hon ble High Court (supra), in the light of identical facts of the case in hand, we do not find any reason for the disallowance - Decided against revenue. Non-granting of tax credit for TDS - Held that - The credit for the tax has been denied only because the same is not reflected in Form No. 26AS. However, in our considered opinion, the Revenue is obliged to grant the assessee the credit for the TDS for which it is able to satisfactorily proves to the AO, the factum of deduction of tax at source and its deposit to the credit of the Central Government. We restore this issue to the file of the AO. The AO is accordingly directed to allow the assessee credit for the TDS after verifying the TDS certificate. - Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Disallowance of interest expenses under Section 14A.
2. Disallowance of other expenses.
3. Disallowance of interest expenses under Section 37.
4. Non-granting of tax credit for TDS.

Issue-wise Detailed Analysis:

1. Disallowance of Interest Expenses under Section 14A:
The first grievance pertains to the disallowance of interest expenses amounting to Rs. 1,94,94,645/- under Section 14A. The Assessing Officer (AO) noted that the assessee had earned dividend income of Rs. 1,66,44,074/- and incurred interest expenses of Rs. 3,58,66,882/-. The AO computed the disallowance under Rule 8D at Rs. 2,14,44,109/-. The assessee argued that the investments were made out of own funds and were strategic, not for earning exempt income. The Tribunal found that the investments were indeed strategic and linked to the business operations. Citing previous Tribunal decisions, it was held that no disallowance should be made under Section 14A if the investments are strategic and no direct expenditure was incurred for earning exempt income. The Tribunal directed the AO to delete the disallowance of Rs. 1,94,94,645/-.

2. Disallowance of Other Expenses:
The second issue involves the disallowance of other expenses amounting to Rs. 19,49,464/-. The assessee had already disallowed Rs. 50,85,541/- out of the total expenditure of Rs. 87,04,079/-. The Tribunal noted that some of the expenses were covered by previous Tribunal decisions in favor of the assessee. It was directed that the AO restrict the disallowance to 2% of the dividend income, thereby partly allowing the assessee's appeal.

3. Disallowance of Interest Expenses under Section 37:
The third issue concerns the disallowance of interest expenses amounting to Rs. 1,10,83,572/- under Section 37. The AO had disallowed this amount, believing that borrowed funds were diverted towards non-business activities. The Tribunal found that the investments were made in subsidiary and associate companies for business expediency and strategic purposes. Citing High Court decisions, it was held that interest on borrowed capital for strategic business purposes is allowable. The Tribunal directed the AO to delete the disallowance of Rs. 1,10,83,572/-.

4. Non-granting of Tax Credit for TDS:
The final issue involves the non-granting of tax credit for TDS amounting to Rs. 13,30,533/-. The credit was denied as it was not reflected in Form 26AS. The Tribunal held that the Revenue must grant credit for TDS if the assessee satisfactorily proves the deduction and deposit of tax. The issue was restored to the AO for verification and granting of the TDS credit.

Conclusion:
For A.Y. 2009-10, the appeal was partly allowed for statistical purposes, directing the AO to delete certain disallowances and verify TDS credits. For A.Y. 2010-11, following the same rationale, the impugned additions were directed to be deleted, and the appeal was allowed. The Tribunal's decisions emphasized the strategic nature of investments and the necessity for the Revenue to substantiate any disallowances with concrete evidence.