2008 (2) TMI 455 - ITAT DELHI-D

Disallowance of interest - Expenditure Incurred - composite activity of subletting, inter-corporate deposits and investment in shares - earned dividend from investment in shares - scope and applicability of retrospective amendment and section 14A - Powers of Assessing Officer - HELD THAT:- We have examined the issue regarding applicability of section 14A by the appellate authorities and have held in earlier part of this order that CIT(A) and the Tribunal are empowered to apply the provisions of section 14A in the appeals pending before them for the assessment year 2001-02 and earlier years even if section 14A had not been invoked by the Assessing Officer or the said provision was not available at the time of assessment.

In this case, though the assessment for the assessment year 1998-99 had been completed by the Assessing Officer before section 14A was inserted on the statute, but the appeal for the said year is still pending before the Tribunal. The perusal of the balance sheet shows that in the beginning of the year i.e., on 1-4-1997, the funds available with the assessee were to the tune of Rs. 145 lakhs, which consisted of own funds of Rs. 22.60 lakhs and borrowings of Rs. 122.40 lakhs. As against that, the investments were Rs. 16.42 lakhs in fixed assets; Rs. 88.82 lakhs in shares and balance in loans and advances. The investment in shares remained for the entire year as the closing balance of share was Rs. 98.70 lakhs.

The borrowings also continued with a closing balance of Rs. 115.70 lakhs. These figures clearly show that substantial borrowings were utilized for investment in shares as own funds were only to the tune of Rs. 22.60 lakhs out of which investment in fixed assets alone was Rs. 16.42 lakhs. The investments in shares of the subsidiary company are long-term investments and are not held as trading stock. The dividend income received/receivable from the investment in shares is not taxable with effect from 1-6-1997.

In this year since the dividend was received on 9-5-1997 for earlier year, it was taxable and had rightly been offered for tax. But after the record date in may 1997 any dividend that may be received after 1-6-1997 is not taxable. Therefore, the borrowings utilized in investment of shares are not going to yield any taxable income after 31-5-1997. Thus, the interest on borrowings utilized in investment in shares for the period 1-6-1997 to 31-3-1998, is not allowable as deduction while computing the taxable income of the assessee in view of section 14A.

In fact, the assessee, before the lower authorities had made an alternate submission that disallowance of interest if any could be made only for the period 1-6-1997 to 31-3-1998. There is a prima facie case as pointed out earlier that substantial borrowings have been utilized for investment in shares. However, exact computation of interest on borrowings utilized for investment in shares will require detailed scrutiny.

We, therefore, restore this issue to the file of the Assessing Officer for quantification of interest for the period1-6-1997 to 31-3-1998 in respect of borrowings utilized for investment in shares and the same will be disallowed. The balance interest will be allowed as deduction as no other tax-free income has been brought to our notice. We order accordingly.

Consequently, the ground taken by the assessee is allowed for statistical purposes.