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TMI Blog2015 (10) TMI 2041X X X X Extracts X X X X X X X X Extracts X X X X ..... the income from auxiliary services. However, at the same time we find that some reasonable disallowance ought to be attributed for which 2% of the dividend income should meet the ends of justice. We, accordingly direct the AO to restrict the disallowance to 2% of dividend income. Decided partly in favour of assessee. Disallowance in interest expenses u/s. 37 - Held that:- The assessee has made investments in subsidiary companies and associate companies which are special purpose vehicles formed to execute specific projects. Thus, the allegation of the AO that assessee has diverted and applied borrowed funds in non-business activities do not hold any water. The Hon’ble High Court of Madras in the case of CIT Vs Spencer & Co. Ltd. [2014 (2) TMI 237 - MADRAS HIGH COURT] have held that the interest on borrowed capital were investments in shares utilizing borrowed capital for strategic business purposes in companies promoted as special purpose to strengthen and promote assessee’s existing business interest was allowable. A similar view was taken by the Hon’ble High Court of Madras in the case of RPG Transmissions Ltd in [2014 (2) TMI 238 - MADRAS HIGH COURT]. Respectfully following th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of income, the Assessing Officer noticed that the assessee has earned dividend amounting to ₹ 1,66,44,074/-. The AO further noticed that the assessee has incurred interest expenses amounting to ₹ 3,58,66,882/- and has also earned interest amounting to ₹ 52,88,665/-.The AO was of the firm belief that disallowance u/s. 14A in respect of the exempt income is required to be made in the instant case. The AO proceeded by computing the disallowance u/s. 14A as prescribed under Rule 8D and computed the disallowance at ₹ 2,14,44,109/- and added to the income declared. The AO further noticed that the assessee has claimed net interest of ₹ 3,05,78,217/- being interest paid ₹ 3,58,66,882/- less interest earned ₹ 52,88,665/-. The AO was of the opinion that the assessee has diverted borrowed funds towards share application money and investment in equity shares of subsidiary and associate companies. The AO observed that the interest of ₹ 1,94,94,645/- is already disallowed u/s. 14A. He accordingly disallowed the balance amount of ₹ 1,10,83,572/- and completed the assessment. 6. Aggrieved by this, the assessee carried the matter before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10. We have given thoughtful consideration to the orders of the authorities below. Undisputedly, the investments made by the assessee are in its subsidiary companies and associated companies which are special purpose vehicle formed to execute specific projects. Undoubtedly, the investments in subsidiary/associate companies are done on account of business expediency in order to carry on the business of the assessee. Accordingly, the investments can be seen in the light of strategic in nature and inextricably linked with the main business operation of the assessee. The Tribunal in the case of J.M. Financial Ltd. (supra) had considered similar facts and finally decided the issue in favour of the assessee and against the Revenue. While deciding the issue in favour of the assessee, the Tribunal has considered the decision in the case of Garware Wall Ropes Ltd. Vs ACIT in ITA No. 5408/M/12 wherein the relevant findings read as under: We have considered the rival submission and carefully perused the relevant records. So far as the issue regarding disallowance u/s 14A in the case where no dividend has been received, the same is covered against the assessee by the order of Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between the expenditure and the income which does not form part of the total income. In the case in hand the assessee has claimed that no expenditure has been incurred for earning the exempt income, therefore, it was incumbent on the AO to find out as to whether the assessee has incurred any expenditure in relation to income which does not form part of the total income and if so to quantify the expenditure of disallowance. The AO has not brought on record any fact or material to show that any expenditure has been incurred on the activity which has resulted into both taxable and non taxable income. Therefore, in our view when the assessee has prima facie brought out a case that no expenditure M/s JM Financial Limited 10 has been incurred for earning the income which does not form part of the total income then in the absence of any finding that expenditure has been incurred for earning the exempt income the provisions of section 14A cannot be applied. Accordingly we delete the addition/disallowance made by AO u/s 14A r.w. Rule 8D. 11. A similar view was taken by the Delhi Bench of this Tribunal in the case of M/s Oriental Structural Engineers (P) Ltd (supra) which has been conf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.1. We find that the assessee has also received income from business auxiliary services amounting to ₹ 1.15 lakhs. In our considered opinion, the balance expenditure of ₹ 29,62,421/- may be considered for earning the income from auxiliary services. However, at the same time we find that some reasonable disallowance ought to be attributed for which 2% of the dividend income should meet the ends of justice. We, accordingly direct the AO to restrict the disallowance to 2% of dividend income. Ground No. 1 with its sub-ground is partly allowed. 14. Ground No. 2 relates to the disallowance in interest expenses amounting to ₹ 1,10,83,572/- u/s. 37 of the Act. 14.1. As mentioned elsewhere, the investments made by the assessee have to be seen in the light of strategic investment inextricably linked with the main business operations of the assessee and the main object of the assessee company reads as under: To undertake, design, manufacture and supply of pollution control equipment as well as complete plants and their operation and detailed design and engineering relating to environmental protection projects, to set up and/or operate facilities for common efflue ..... X X X X Extracts X X X X X X X X Extracts X X X X
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