TMI Blog2006 (10) TMI 250X X X X Extracts X X X X X X X X Extracts X X X X ..... wance u/s 57(iii) of the I.T. Act and the same shall be considered by the Assessing Officer as per the provisions of the Act. The assessee has also utilized part of the borrowings raised during the year for investment made in units of growth fund. The claim being of investment in growth plan, no income from which is received from year-to-year and the annual accretions are added to the NAV of the growth fund without any distribution of income which is taxable in the hands of the assessee-company for the year under consideration. In view of the facts that the income from such investments is not amenable to tax, the interest on such borrowings utilized for making investments in the units of the growth fund is not allowable as an expenditure in view of the provisions of section 14A of the I.T. Act. The issue at length was also considered by Co-ordinate Bench of Mumbai Tribunal in Macintosh Finance Estate Ltd. s case [ 2006 (2) TMI 578 - ITAT MUMBAI] and it was held that interest expenses cannot allowed to be added to the cost of investment. Therefore, this ground of appeal raised by the assessee is partly allowed for statistical purpose. Disallowance on total administrative and other e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest on borrowings attributable to investment made in Units of Growth Fund should not be subjected to disallowance because Growth Fund does not pay any dividend - leave aside exempt dividend. 3. Without prejudice to (1) (2): Interest on borrowings attributable to acquisition of shares, if not allowed as revenue expenditure, should be allowed to be capitalized as part of Cost of Acquisition. 4. The brief facts of the case are that in the original Return of Income filed by the assessee, it had disallowed net interest of Rs. 4,12,57,221/-. However, in the revised Return the said interest was claimed as a deduction under section 36(1)( iii ) of the I.T. Act. During the course of the assessment proceedings, the assessee was asked to show cause why the expenses including interest incurred for earning dividend income should not be disallowed. In reply the assessee-company contended that as per the Memorandum Articles of Association, it was in the nature of business of the assessee-company, to carry on the business of the investment company and to hold investment in shares, stocks, debentures etc. by way of investment. It was also claimed by the assessee that the dividend income received w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the I.T. Act being tax levied on the company, who is the distributing company and the shareholder only earns net dividend after such taxes are paid. Reliance was placed on the decision of the Mumbai Tribunal in Mafatlal Holdings Ltd. v. Addl. CIT [2004] 85 TTJ (Mum.) 821. The assessee further submitted that the assessee-company has also made investments in foreign companies, wherefrom the assessee has received dividend which is not governed by the provisions of section 115-O of the I.T. Act and the same is also not exempt in the hands of the assessee under section 10( 33 ) of the I.T. Act. It was pointed out by the Learned AR for the assessee that during the year under consideration, the total borrowings being loans received from companies is Rs. 56,83,50,000/- as against Rs. 40,67,00,000/- shown as on 31-3-2000. The incremental borrowings during the year under consideration are Rs. 16,16,50,000. It was further pointed that the assessee has increased its investment to Rs. 113,15,68,805/- as on 31-3-2000 as against Rs. 98,19,92,479/- as on 31-3-2000 i.e., the total incremental investment during the year being Rs. 14,95,76,326/- which comprises of incremental investment in two for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Chapter IV of the Income-tax Act, heads of income are provided as enumerated in section 14 of the Income-tax Act. Section 14 of the Income-tax Act provides the heads of income, which are chargeable to tax while computing the income of the assessee. Separate heads of income have been provided for computing the income under each head independently and separately and the heads of income are as under : A-Salaries B-[* * *] C-Income from house property D-Profits and gains of business or profession E-Capital gains F-Income from other sources Section 14A of the Income-tax Act was inserted by the Finance Act, 2001 with retrospective effect from 1-4-1962, which provided as under : Section 14A . For the purpose of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act : Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the interest payment in the instant case, was an expenditure incurred for making or earning income from dividend. In view of the provisions of section 10( 33 ), there was also no dispute that dividend received by the assessee did not form part of its total income. That being so, the provisions of section 14A providing for disallowance of expenditure incurred by the assessee in relation to income which does not form part of total income under the Act, would come into play. Apparently, therefore, the expenses incurred by the assessee in relation to such dividend income could not be allowed as a deduction in computing the income of the assessee under Chapter IV of the Act, namely, under the five heads stated therein for Computation of total income ; Regarding the claim of deduction of interest paid on borrowed funds utilized for investment in shares, it was held by Ahmedabad Tribunal as under : . . . It was, thus, clear that when the dividend is not taxable at all, the interest pertaining to that would also not be allowable because there is no taxable income of the assessee against which such interest can be allowed. The another way to consider the issue might be that if interest is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made out by the assessee was that when the shares were purchased and the assessee incurred liability to pay interest, the dividend was forming part of assessee s total income chargeable to tax. It became non-includible only with effect from the assessment year 1998-99 and since the expenditure was incurred for earning taxable income at that time, it would not change its character by subsequent event. There was no force in this contention of the assessee as well because the interest liability is recurring liability of the expenditure of revenue nature from year-to-year starting from the date of acquisition of shares onwards. 10. The learned AR for the assessee had also relied upon the decision of Mumbai Bench in Mafatlal Holdings Ltd. v. Addl. CIT [2004] 85 TTJ (Mum.) 821, which has been considered by the Ahmedabad Bench of Tribunal. In the facts of the case before us, it is an admitted position that part of the borrowed money was utilized for the purpose of investment in shares, from which dividend income is received, which is exempt from tax. In view of the decision of Ahmedabad Bench in the case of Harish Krishnakant Bhatt ( supra ), the expenditure being interest paid on such bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of purchase of shares could at best be said to be capital expenditure and could be allowed as a deduction while computing the income from capital gains in the year of the sale but once the shares had been acquired, the interest pertaining to the period after acquisition would be revenue expenditure and allowable under section 57 of the I.T. Act, while computing the income of the assessee from dividend in view of the decision of Hon ble Supreme Court in the case of Rajendra Prasad Mody [1978] 115 ITR 519. In these circumstances, the expenditure would not be allowable at all to the assessee even while computing the income under the head Capital gains and on the theory of indivisibility of source of income as contended by the assessee. 12. The learned AR had relied on the decision of Mithlesh Kumari s case ( supra ). The facts are different and thus the judgment does not help the case of the assessee. Similarly the decision in K.S. Gupta s case ( supra ) relied upon by the assessee is on different set of facts. The issue at length was also considered by Co-ordinate Bench of Mumbai Tribunal in Macintosh Finance Estate Ltd. s case ( supra ) and it was held that interest expenses cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X
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