2020 (11) TMI 326 - AT - Income Tax

Deduction of interest expenditure - nexus between the borrowed funds on which assessee has paid interest - HELD THAT - We notice from the records that the assessee has earned interest income from the deposits in bank. These deposits are out of the balance of liquidating certain investments. Since the assessee is under the direct control of Hon'ble Spl. Court and all the issues are pending before the Hon'ble Spl. Court. The plea of the assessee is that there is oral contract between the parties to pay 12% per annum and whatever the interest income earned by the assessee are out of the surplus of the liquidation of certain investment. The investment as well as the fund management are under the supervision of the Hon'ble Spl. Court, assessee has no role to play. From the facts on record, prima facie, it appears that there is a nexus between the borrowed funds on which assessee has paid interest and the investment on which it has earned interest income. Therefore, the assessee should get deduction of interest expenditure to the extent of interest income earned. It is relevant to observe, in assessee's own case in AY 2017-18, the AO himself has allowed claim of deduction of interest expenditure to the extent of interest income earned during that year, In view of the aforesaid, the ground is allowed as indicated above. Levy of collection of interest under section 234A, 234B 234C and charging of interest excluding the income which is subject to TDS - HELD THAT - Interest levied under section 234A, 234B 234C be recomputed after excluding the income which is subject to TDS. Considering the decision in 2017 (12) TMI 1668 - ITAT MUMBAI the Assessing Officer is directed to re-compute the interest accordingly, In the result, these grounds of appeal are allowed for statistical purpose. Capitalization of interest - HELD THAT - We are of the view that to the extent the interest relate to the investment, i.e. being disallowable under Section 57 will become part of cost of acquisition of shares and therefore the AO is directed to take it as part of the cost of shares for determining profit on sale of the shares. Thus, the additional ground stands allowed to that extent.

Summary

Issues Involved:

1. Deduction of interest expenditure.
2. Levy of interest under sections 234A, 234B, and 234C.
3. Capitalization of disallowed interest under section 14A.

Issue-wise Detailed Analysis:

1. Deduction of Interest Expenditure:

The assessee claimed a deduction of interest expenses amounting to ?2,33,38,930/-. The Tribunal noted that similar issues had been examined in the assessee's group cases for various years. The Tribunal referred to the decision in the case of Sudhir S. Mehta, where it was established that the liability towards interest had accrued and was deductible under the mercantile system of accounting. The Tribunal observed that the assessee had consistently followed this accounting method, and the interest expenses were allowed in previous assessments, including the assessment year 1990-91, even after the enactment of the Special Court Act. The Tribunal emphasized that there was an oral agreement for the payment of interest, supported by the actions and intentions of the parties, and no material evidence was presented to contradict this. Consequently, the Tribunal directed the Assessing Officer to allow the interest expenses to the assessee.

2. Levy of Interest under Sections 234A, 234B, and 234C:

The assessee contested the levy of interest under sections 234A, 234B, and 234C, arguing that the income assessed was subject to TDS provisions, and thus, no interest should be computed under these sections. The Tribunal referred to its decision in the case of Aatur Holdings Pvt. Ltd., where it was held that interest under these sections should be recomputed after excluding the income subject to TDS. Following this precedent, the Tribunal directed the Assessing Officer to recompute the interest accordingly, allowing the grounds of appeal for statistical purposes.

3. Capitalization of Disallowed Interest under Section 14A:

The revenue appealed against the capitalization of disallowed interest under section 14A, arguing that the CIT(A) had erred in relying on the Tribunal's decision in the case of Sudhir S. Mehta, which was under challenge before the Bombay High Court. The Tribunal noted that in similar cases within the assessee's group, it had consistently held that the proportionate interest expenses disallowed should be treated as part of the cost of acquisition of shares and securities. The Tribunal cited its decision in the case of Cascade Holdings Pvt. Ltd., where it directed the Assessing Officer to treat the disallowed interest as part of the cost of acquisition. Consequently, the Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decision.

Conclusion:

In summary, the Tribunal allowed the assessee's appeals regarding the deduction of interest expenditure and the recomputation of interest under sections 234A, 234B, and 234C. It dismissed the revenue's appeals concerning the capitalization of disallowed interest under section 14A, following its consistent decisions in similar cases within the assessee's group. The Tribunal's order emphasizes the principles of consistency and adherence to established precedents in deciding these issues.