2019 (7) TMI 424 - AT - Income Tax

Disallowance of interest u/s. 36(1)(iii) - no nexus between the interest payment and the investment made which is non-current investment - as per assessee even if there is to be any disallowance AO should have disallowed the same u/s. 14A and not u/s. 36(1)(iii) - HELD THAT - Assessee in its balance sheet clearly indicates that it has made long term investment and has not demonstrated it has involved in any trading activities in shares, therefore, we decline to entertain the ground raised by the assessee. Expenditure claimed by the assessee is allowed to carry forward and can be adjusted out of income generated in the investment activities. Assessee has raised ground claiming the investment activities as business. We are in agreement with the assessee but can only be treated as income from activities which are exempt from tax. With regard to interest expenditure, it is not an expenditure from the activities which is taxable under Income-tax Act. Assessee has not declared any exempt income but made investment, which can only earn exempt income. In such situation, the expenditure relating to that part of activities cannot be claimed. Section 14A is applicable only when assessee declares exempt income. In the given case, there is a clear distinction in the activities itself. Hence, ground raised by the assessee is dismissed.

Summary

Issues:
1. Disallowance of interest expenditure claimed by the assessee under section 36(1)(iii) of the Income Tax Act.
2. Classification of investment in shares as non-current assets and its treatment for tax purposes.
3. Applicability of section 14A in disallowing interest expenditure.
4. Determination of business income from investment activities.

Detailed Analysis:
Issue 1: The Assessing Officer disallowed the interest claimed by the assessee, stating no nexus between interest payment and non-current investments. The CIT(A) upheld the disallowance under section 36(1)(iii) as the investment did not yield taxable income. The ITAT noted the company's object to deal in shares but classified investments as non-current, agreeing that income from such investments would be exempt. The interest expenditure was disallowed as it related to activities not generating taxable income.

Issue 2: The ITAT observed that the company's object included dealing in shares, but as a new entity, it classified investments as non-current without disclosing accounting policies. While agreeing that dealing in shares could be business income, the ITAT noted the absence of trading activities. The investment activities were considered exempt income, and related expenditure was not allowed against taxable income.

Issue 3: The assessee argued that if any disallowance was warranted, it should be under section 14A, not section 36(1)(iii). The ITAT dismissed this argument, stating section 14A applies when exempt income is declared, which was not the case here. The interest expenditure was related to activities generating exempt income, hence not allowed under section 36(1)(iii).

Issue 4: The ITAT concluded that the investment activities were not business income but exempt income. The company's balance sheet indicated long-term investments without trading activities. The interest expenditure was allowed to carry forward and adjust against income generated from investment activities. The ITAT dismissed the appeal, emphasizing the distinction between taxable and exempt income from investment activities.

In summary, the ITAT upheld the disallowance of interest expenditure under section 36(1)(iii) due to the nature of investments yielding exempt income. The classification of investments as non-current assets impacted the treatment for tax purposes, leading to the disallowance of related expenditure. The applicability of section 14A was dismissed as the activities did not generate taxable income. The determination of business income from investment activities highlighted the need to differentiate between taxable and exempt income for appropriate tax treatment.