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2016 (8) TMI 643 - AT - Income TaxAddition made on account of claiming of interest expense u/s 57(iii) - CIT(A) deleted the addition - whether there was no direct nexus between the loan borrowed by the assessee and the interest bearing loan advanced by the assessee? - Held that - . We find that the assessee has advanced money out of the funds borrowed from the bank and therefore there is direct nexus between money raised and money lent. We are in agreement with findings of the ld.CIT(A) that the interest to bank is admissible deduction against the interest earned by the assessee from lending such money. The fact has been admitted by the AO while recording the finding of facts that those interests have been earned on the money borrowed from the banks but the same was not allowed as deduction as the purpose of borrowing was different. Since there is direct nexus between the lending out of borrowed funds and thus the interest paid on borrowings from banks is allowable deduction u/s 57(iii) of the Act against the interest income liable to be assessed u/s 56 of the Act. In our opinion the CIT(A) has passed a very reasoned order which requires no interference on our part. - Decided in favour of assessee. Nature of expenses - revenue or capital - Held that - On perusal of the records including the orders of authorities below, we find that the expenses incurred by the assessee under various heads as has been mentioned herein above are more of revenue in nature than the capital ones. The AO without going into the real nature of the expenses, described the same as capital in nature whereas as a matter of fact, the ld. CIT(A) has gone into the nature of expenses purpose of expenses and business expediency and accordingly treated the same as revenue expenditure. We, therefore finding no fault with the findings of ld.CIT(A) on this issue, dismiss the ground taken by the revenue by upholding the order of CIT(A) on this issue and direct the AO accordingly. Repairs and maintenance of plant and machinery for purchase of software - allowable revenue expenditure. Addition made by the AO towards Stamp Duty and Registration Fee - Held that - We find that the ld. CIT(A) after going into the matter and facts of the case came to the conclusion that these expenses were of revenue nature which were incurred for the purpose of lease transactions and not for the purchase of capital assets . The ld. CIT(A), decided the issue in favor of the assessee by following the decision rendered in the case of Richardson Hindustan Ltd (1987 (3) TMI 44 - BOMBAY High Court ) and CIT vs. Cinecia P. Ltd.(1982 (2) TMI 58 - BOMBAY High Court ) and rightly followed the ratio laid down in the said decisions. The ld. CIT(A) further observed that the AO has not disputed the fact that the lease is Long term lease/licence and is not of recurring in nature. In view of these facts and the ratio laid down in the above said decision, we find no infirmity in the order of ld. CIT(A) and accordingly upheld the same by dismissing the appeal of the revenue. Addition u/s 14A - Held that - From the record before us, we find that the assessee has made huge investments as stated above on which it has not received any exempt income by way of dividend during the year. Similarly from the record, we observe that the investments were made in the subsidiary companies with a motive to gain control over these subsidiaries companies and not for the purposes of earning tax free income or dividend. Having regard to the above facts and circumstances of the case, we find merit in the arguments of the ld.AR that the provisions of section 14A r.w.r 8D are not applicable to the present case of the assessee, where no exempt income is earned during the year and also where the investment are strategic in nature and not made with the motive of earning the tax free dividend.
Issues Involved:
1. Deletion of addition made by AO on account of claiming of interest expense under section 57(iii). 2. Deletion of addition of various expenses treated as capital expenditure by AO. 3. Deletion of addition of software expenses treated as capital expenditure by AO. 4. Deletion of addition of stamp duty and registration fee treated as capital expenditure by AO. 5. Confirmation of addition/disallowance under section 14A read with Rule 8D of the Income Tax Rules, 1962. Issue-wise Detailed Analysis: 1. Deletion of Addition Made by AO on Account of Claiming of Interest Expense under Section 57(iii): The only issue in this appeal is whether the first appellate authority (FAA) was justified in deleting the addition made by the AO on account of claiming of interest expense u/s 57(iii). The AO disallowed the deduction claimed u/s 57 on the ground that the purpose of taking a loan from the bank was not connected with the loan advanced. The ld. CIT(A) directed the AO to verify the linkage between the loans borrowed and the interest-bearing loans advanced. The Tribunal agreed with the CIT(A) that there was a direct nexus between the borrowed funds and the money lent, allowing the deduction of interest paid to the bank under section 57(iii) against the interest income. The appeal of the revenue was dismissed. 2. Deletion of Addition of Various Expenses Treated as Capital Expenditure by AO: The AO treated brand building, marketing expenses, market research expenses, and visual display and signage expenses as capital in nature, adding them to the total income of the assessee. The ld. CIT(A) allowed the appeal of the assessee, holding that these expenses were revenue in nature as they were incurred for day-to-day promotion and giving impetus to the existing business. The Tribunal upheld the order of the CIT(A), finding no fault with the findings that these expenses were more of revenue in nature than capital ones. The appeal of the revenue was dismissed. 3. Deletion of Addition of Software Expenses Treated as Capital Expenditure by AO: The AO treated the expenditure on the purchase of various computer software as capital in nature, allowing depreciation and adding the remaining amount to the total income. The ld. CIT(A) deleted the addition, holding that the expenses were for running the business efficiently and were revenue in nature. The Tribunal upheld the order of the CIT(A), referencing decisions in similar cases that treated such software expenses as revenue expenditure. The appeal of the revenue was dismissed. 4. Deletion of Addition of Stamp Duty and Registration Fee Treated as Capital Expenditure by AO: The AO treated the stamp duty and license fee as capital expenditure. The ld. CIT(A) allowed the claim of the assessee, following decisions that held such expenses for lease transactions as revenue in nature. The Tribunal upheld the order of the CIT(A), finding no infirmity in the decision that these expenses were of revenue nature. The appeal of the revenue was dismissed. 5. Confirmation of Addition/Disallowance under Section 14A Read with Rule 8D of the Income Tax Rules, 1962: The AO disallowed expenses under section 14A r.w.r. 8D, even though no exempt income was earned during the year. The ld. CIT(A) upheld the disallowance, relying on the Delhi Tribunal's decision in Cheminvest Ltd. The Tribunal noted that the Delhi High Court reversed this decision, holding that section 14A does not apply if no exempt income is received or receivable during the relevant year. The Tribunal found merit in the assessee's argument that the investments were strategic and not made for earning tax-free income. The order of the CIT(A) was set aside, and the AO was directed to delete the addition. The appeal of the assessee was allowed. Conclusion: The Tribunal dismissed the appeals of the revenue and allowed the appeal of the assessee, upholding the findings of the CIT(A) that various expenses were revenue in nature and deleting the disallowance under section 14A. The judgments were based on the existence of a direct nexus between borrowed funds and their use, the nature of expenses incurred, and the strategic nature of investments.
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