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2020 (6) TMI 240 - AT - Income TaxDisallowing the interest cost incurred in connection with the acquisition of shares to be capitalized - whether interest incurred for the acquisition of shares is not the part of cost of capital asset? - AO in his order held that the impugned interest expenses can be allowed as revenue in nature - CIT (A) held that such interest expenses cannot be capitalized and further directed the AO not to allow such expenses as revenue in nature - HELD THAT - Once the assessee has been held as Investment Company, then the interest expenses directly attributable to such investments required to be capitalized. In this regard we find support and guidance from the judgement of CIT versus Trishul Investments Ltd 2007 (7) TMI 252 - MADRAS HIGH COURT held interest paid for acquisition of shares would partake character of cost of share and, therefore, the same was rightly capitalized along with the cost of acquisition of shares. Thus we are of the view that the impugned interest expenses needs to be capitalized. - Decided in favour of assessee Deduction u/s 35D - deduction of 1/5 of such expenditure - expenses incurred on the increase of authorized capital /stamp duty for allotment of shares - HELD THAT - It is a fact on records that the expenditure in connection with the increase in authorized share capital was incurred before the commencement of the business. Therefore we hold that the assessee is eligible for deduction of the impugned expenditure under the provisions of section 35D of the Act. In view of the above, we set aside the finding of the learned CIT (A) and direct the AO to allow the claim of the assessee. Hence the ground of appeal of the assessee is allowed. Disallowance u/s 14A - Whether expenses relatable to earning exempt income cannot be allowed - HELD THAT - Amount of disallowance of the expenditure cannot exceed the amount of exempted income in the case of CIT vs. Vision Finstock Stock Ltd. 2017 (7) TMI 1277 - GUJARAT HIGH COURT - we hold that the disallowance of the expenses under section 14A read with rule 8D cannot exceed the amount of exempted income. Hence we do not find any reason to interfere in the order of the learned CIT (A). Accordingly, we direct the AO to delete the addition made by him. Hence the ground of appeal of the Revenue is dismissed. Order being pronounced after ninety (90) days of hearing - COVID-19 pandemic and lockdown - HELD THAT - Taking note of the extraordinary situation in the light of the COVID-19 pandemic and lockdown, the period of lockdown days need to be excluded. See case of DCIT vs. JSW Limited 2020 (5) TMI 359 - ITAT MUMBAI
Issues Involved:
1. Capitalization of interest expenses incurred for the acquisition of shares. 2. Applicability of Section 35D for amortization of preliminary expenses. 3. Disallowance under Section 14A related to exempt income. Issue-wise Detailed Analysis: 1. Capitalization of Interest Expenses Incurred for the Acquisition of Shares: The primary issue raised by the assessee was the capitalization of interest expenses amounting to ?1,61,81,506 incurred in connection with the acquisition of shares. The assessee, a private limited company engaged in investment business, acquired shares of Sterling Addlife India Limited using its funds and a bank loan from Kotak Mahindra Bank. The AO allowed capitalization of interest expenses only for two days (13th and 14th February 2014) amounting to ?7,19,178, and treated the remaining interest as revenue in nature, subject to disallowance under Section 14A. The CIT(A) agreed with the AO that the interest expenses could not be capitalized, citing Accounting Standard 13, and also did not allow the interest as revenue expenditure under Section 36(1)(iii). The Tribunal, however, disagreed with the CIT(A), holding that as an Investment Company, the interest expenses directly attributable to investments should be capitalized. The Tribunal referred to the Hon’ble Madras High Court judgment in CIT vs. Trishul Investments Ltd, which held that interest paid for the acquisition of shares should be capitalized along with the cost of shares. Consequently, the Tribunal allowed the assessee's appeal on this ground. 2. Applicability of Section 35D for Amortization of Preliminary Expenses: The second issue involved the disallowance of preliminary expenses under Section 35D. The assessee incurred expenses for registering the company and increasing its authorized share capital, claiming a deduction of 1/5th of such expenses amounting to ?26,42,282. The AO allowed only the initial registration expenses of ?4,12,908 and disallowed the remaining amount, contending that expenses for increasing authorized share capital incurred after incorporation were not eligible under Section 35D. The CIT(A) upheld the AO's decision, stating that acquiring shares did not constitute a new business activity. The Tribunal, however, observed that the business of the assessee commenced only upon acquiring shares, and thus, expenses incurred before the commencement of business were eligible for deduction under Section 35D. The Tribunal directed the AO to allow the claim, setting aside the CIT(A)'s order. 3. Disallowance under Section 14A Related to Exempt Income: The revenue's appeal involved the deletion of disallowance of ?1,63,29,319 under Section 14A. The AO made the disallowance on the ground that the assessee had not disallowed any expenses related to exempt income, despite incurring interest expenses on borrowed funds for acquiring shares. The CIT(A) deleted the disallowance, noting that the assessee received nil exempt income during the year. The Tribunal upheld the CIT(A)'s decision, emphasizing that disallowance under Section 14A cannot exceed the exempt income earned, citing the Delhi High Court judgment in Joint Investments Pvt Ltd vs. CIT and the jurisdictional High Court decision in CIT vs. Vision Finstock Ltd. The Tribunal concluded that disallowance should not exceed the exempt income and directed the AO to delete the addition. Conclusion: - The Tribunal allowed the assessee's appeal regarding the capitalization of interest expenses and the applicability of Section 35D for amortization of preliminary expenses. - The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s deletion of disallowance under Section 14A, as it exceeded the exempt income earned by the assessee.
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