2019 (1) TMI 300 - HC - Income Tax

Disallowance of interests on debentures under Section 14A - interest expenditure was incurred on debentures issued in the financial year 2008-09 for the specific purpose of acquiring a company in the past and not for investing in mutual funds - directions issued by the DRP under Section 144C - Held that - As perused the financials for the year ended 31.03.2012, more particularly, the note to financial statement for the year ended 31.03.2012 and in column 14, it deals with the current investments and we find that the investment is ₹ 45.27 Crores as against the investment of ₹ 38.24 Crores for the year ending 31.03.2011. This when compared to cash flow statement for the year ended 31.03.2007 would show that the investment has gone up by about ₹ 6.99 Crores. There is a factual error crept in in this regard. This in our considered view the proper authority to examine the contentions would be the Assessing Officer. The Court is fully conscious of the fact that the Assessing Officer is bound by the directions issued by the DRP under Section 144C of the Act. Nevertheless after the order passed by the DRP, the order has been tested before the Tribunal and it is before us and therefore we will be well within our jurisdiction to remand the matter to the Assessing to take an independent decision on the issues raised before us as pointed out in the preceding paragraphs. AO is required to decide as to whether it was correct for disallowing the interest on debenture under Section 14A when the assessee s case is that the interest expenditure was incurred on debenture issued in the financial year 2008-09 for the specific purpose of acquiring the Company in the past and not for investment in future. AO has to consider the submission of the assessee that the interest incurred by the assessee is specifically towards acquisition of shares in M/s.Glamouroom Taps Pvt. Ltd. which Company subsequently stood amalgamated with the assessee Company and such amalgamation has been approved by the Court with effect from 01.04.2008. AO shall take an independent decision in the matter without being any manner influenced with the observations made or the directions issued by the DRP on 31.08.2016 or by the Tribunal in its order dated 15.03.2017.

Summary

Issues Involved:
1. Disallowance of interest on debentures under Section 14A of the Income-tax Act, 1961.
2. Nexus between borrowed capital and investment made by the company.

Detailed Analysis:

Issue 1: Disallowance of Interest on Debentures under Section 14A of the Income-tax Act, 1961
The appellant challenged the disallowance of interest on debentures under Section 14A of the Act by the Tribunal. The primary contention was that the interest expenditure was incurred on debentures issued in the financial year 2008-09 for acquiring a company, not for investing in mutual funds. The Tribunal upheld the disallowance, leading to the present appeal.

The court noted that the Assessing Officer, in the draft assessment order, disallowed ?56,63,018 under Section 14A read with Rule 8D of the Income Tax Rules, 1962. The appellant's claim that the interest expenditure did not pertain to capital borrowed for investing in mutual funds but was for acquiring shares of a company was rejected. The Dispute Resolution Panel (DRP) upheld this disallowance, and the Tribunal dismissed the appeal.

The appellant argued that the interest incurred was specifically for the acquisition of shares in M/s. Glamouroom Taps Pvt. Ltd., which later merged with the assessee. The court observed that the Tribunal failed to consider the appellant's explanation regarding the non-applicability of Section 14A read with Rule 8D(2)(ii).

Issue 2: Nexus Between Borrowed Capital and Investment Made by the Company
The appellant contended that there was no nexus between the borrowed funds and the investments made, asserting that investments were made from the company's own funds. The DRP and the Tribunal did not adequately address this contention.

The court examined the financials for the year ended 31.03.2012 and noted a factual error in the Tribunal's observation regarding the increase in income. The court emphasized that the Assessing Officer should independently verify whether the interest on debentures disallowed under Section 14A was correct, considering the appellant's assertion that the interest expenditure was for acquiring a company and not for future investments.

Conclusion
The court remanded the matter to the Assessing Officer to independently decide on the issues raised, particularly:
1. Whether disallowing the interest on debentures under Section 14A was justified when the interest expenditure was for acquiring a company.
2. Whether there was a nexus between the borrowed capital and the investments made by the company.

The Assessing Officer was directed to take an independent decision without being influenced by the DRP's directions or the Tribunal's order. The appeal was disposed of with these directions, and no costs were imposed.