TMI Blog2006 (2) TMI 578X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal. Thus, we set aside the order of learned CIT(A) on this issue and restore this issue to the file of the Assessing Officer with a direction to quantify the amount of interest expenses allowable with regard to investment in stock-in-trade out of borrowed funds and dividend received on shares held as stock-in-trade. The Assessing Officer should allow the interest as per above discussion after providing adequate opportunity of being heard to the assessee. This ground is partly allowed for statistical purposes. It is settled position that such interest is allowable under the head Income from other sources and in this year, the same is not so allowable because of section 14A as per which, no expenses is allowable, which are incurred for earning an exempt income and since dividend has been made exempt u/s 10(33) from 1-6-1997 being the date from which section 115-O was inserted by the Finance Act, 1997. Once we find that interest expenses is an allowable expenditure under the head Income from other sources , it cannot be allowed to be added to the cost of investment only because in this year, no deduction is allowable because the dividend income has been made exempt. The issue in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eing carried on by the assessee and hence the interest is not allowable under section 36(1)( iii ) or under section 37 of Income-tax Act. It is also held by him that since the dividend income is exempt, the interest is not allowable under section 57 also. For these reasons, the Assessing Officer disallowed the interest expenses of Rs. 44.19 lakhs. On appeal, Learned CIT(A) upheld the disallowance made by the Assessing Officer by holding that in view of section 14A, interest paid on borrowed money utilized for earning exempt income is not allowable as an expense. Now, the assessee is in further appeal before us. 3. It was submitted by Learned AR of the assessee that the assessee is a Non-Banking Financial Company (NBFC) and hence the provisions of RBI Act is applicable to the assessee and reliance was placed on the Tribunal order rendered in the case of Tedco Investment Financial Services (P.) Ltd. v. Dy. CIT [2003] 87 ITD 298 (Delhi). Our attention was drawn to the Balance Sheet of the assessee-company as appearing on page 9 of the Paper Book and it was submitted that Shares of Rs. 326.98 lakhs were held as stock-in-trade and shares of only Rs. 322.13 lakhs were held as investment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 96 and also to pages 108 to 112 of Paper Book-I. It was contended that interest should be allowed to the extent the borrowed funds are used for acquiring stock-in-trade. 5. As against this, Learned DR the revenue strongly supported the order of Learned CIT(A). Reliance was placed on the Tribunal order rendered in the case of Dy. CIT v. S.G. Investments Industries Ltd. [2004] 89 ITD 44 (Kol.), wherein it was held that interest expenses attributable to earning of dividend income is not allowable as business expenses and only net dividend after deducting that portion of interest expenses is exempt under section 10( 33 ). Reliance was also placed on another Tribunal order rendered in the case of Gagan Trading Co. Ltd. v. Asstt. CIT [2005] 93 ITD 426/94 TTJ (Mum.) 343 in support of this contention. It was also submitted that the shares of group company were acquired by the assessee-company for acquiring controlling interest and hence interest expenses is not allowable and in support of this contention, reliance was placed on the judgment of Hon ble Jurisdictional High Court rendered in the case of CIT v. Amritaben R. Shah [1999] 238 ITR 777 1 (Bom.). 6. In the rejoinder, it was submitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e judgment of Hon ble Jurisdictional High Court rendered in the case of Tata Chemicals Ltd. ( supra ) does not help the case of the assessee because in this case, it is held by Hon ble High Court that a positive finding is given by the Tribunal that investment in tax-free bonds has been in the course of business and since it is a finding of fact, no substantial question of law arises. The Tribunal order in this case was passed on 14-1-1999 whereas section 14A was inserted with retrospective effect by Finance Act, 2001 and hence section 14A was not available before the Tribunal. In view of above discussion, we set aside the order of learned CIT(A) on this issue and restore this issue to the file of the Assessing Officer with a direction to quantify the amount of interest expenses allowable with regard to investment in stock-in-trade out of borrowed funds and dividend received on shares held as stock-in-trade. The Assessing Officer should allow the interest as per above discussion after providing adequate opportunity of being heard to the assessee. This ground is partly allowed for statistical purposes. 8. As per ground No. 2, it is contended that the interest expenses incurred for h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om 1-6-1997 being the date from which section 115-O was inserted by the Finance Act, 1997. Once we find that interest expenses is an allowable expenditure under the head Income from other sources , it cannot be allowed to be added to the cost of investment only because in this year, no deduction is allowable because the dividend income has been made exempt. It will result into allowing of double deduction. This was the view of Hon ble Karnataka High Court in the case of Maithreyi Pai ( supra ) and we reproduce the penultimate Para of this judgment, being relevant : Mr. Bhatt however submitted that section 48 should be examined independently without reference to section 57. Section 48 provides for deducting from the full value of consideration received the cost of acquisition of the capital asset and the cost of improvement, if any. The interest paid on borrowings for the acquisition of a capital asset must fall for deduction under section 48. But if the same sum is already the subject-matter of deduction under section 57, we cannot understand how it could find a place again for the purpose of computation under section 48. No assessee under the scheme of the Income-tax Act, could be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re different. 13. The judgment of Hon ble Apex Court rendered in the case of Saharanpur Electric Supply Co. Ltd. ( supra ) is not applicable in the present case because in this case, the issue involved was that the figure of actual cost of asset can be altered in view of subsequent factual or legal information. In the present case, there is no such issue of altering the cost in the light of subsequent factual or legal information and hence this judgment also does not help the assessee in this case. 14. The issue in the present case is squarely covered against the assessee by the judgment of Hon ble Calcutta High Court rendered in the case of L.N. Dalmia ( supra ). In this case also, the judgment of Hon ble Delhi High Court rendered in the case of Mithlesh Kumari ( supra ) was considered by Their Lordships and the same was distinguished because in this case, the investment was in shares whereas in the case of Mithlesh Kumari ( supra ) the investment was in plots of land. The relevant Para on pages 103 and 104 of the report is reproduced below: The last issue that arose in the case is whether the interest paid on the borrowed money for acquisition of the said shares could be added to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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