TMI Blog2008 (2) TMI 652X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,57,500 2.1 The Assessing Officer during the assessment proceedings noted that the assessee during the relevant year had paid interest of Rs. 1,12,38,446 on borrowings of Rs. 29,34,57,500, which had been utilized for purchase of shares in the following companies : ( i )Tata Finance Ltd. ( ii )Sibar Software Ltd. ( iii )Avanti Softec Tech Ltd. ( iv )Global Telesystems Ltd. 2.2 The assessee had claimed the aforesaid interest payment as business expenditure. The assessee explained before the Assessing Officer that though the shares were not held as stock-in-trade these were long-term business investments and therefore, interest was allowable as deduction. The assessee placed reliance on the judgment of Hon ble Supreme Court in the case of India Cements Ltd. v. CIT [1966] 60 ITR 52 and several other judgments of Hon ble High Courts to emphasize that the interest on money borrowed for the purpose of business has to be allowed as deduction under section 36(1)( iii ). The Assessing Officer was however not satisfied with the explanation given. It was observed by him that the investments in shares were long-term investments which could either yield income from d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... serted by the Finance Act, 2001 with retrospective effect from 1-4-1962 as per which the expenditure relating to exempt income was not allowable as deduction, the assessee submitted that, under the said provision, only the expenses incurred in relation to tax-free income could be disallowed. In this case, the borrowings were for the purpose of carrying on the business activity and not for earning of the dividend income, which was only incidental. It was pointed out that if at all any expenditure could be disallowed it could be only Rs. 5,76,986 being the interest on borrowings invested in shares from which dividend income had been received during the year. The remaining interest, it was submitted had to be allowed under section 36(1)( iii ). Reliance was placed on the judgment of Hon ble High Court of Gujarat in case of Addl. CIT v. Laxmi Agents (P.) Ltd. [1980] 125 ITR 227 in which it was held that interest on borrowings utilized for purchasing shares in investment portfolio would be allowed under section 36(1)( iii ). 2.5 Alternatively, it was also argued that the interest could be allowed as a deduction under section 57 which was allowable even if no dividend income was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of CIT v. Kanoria Investments (P.) Ltd. [1998] 232 ITR 7 (Cal.); ( v )in case of Mafatlal Holdings Ltd. v. Addl. CIT [2004] 85 TTJ (Mum.) 821. 2.8 The Ld. Sr. DR appearing for the revenue strongly supported the order of CIT(A) and placed reliance on the findings given in the appellate order. 3. We have perused the records and considered the rival contentions carefully. The assessee is an investment company. The assessee had made investment in shares of four different companies as mentioned in para 2.1 of this order out of borrowed funds on which interest of Rs. 1,12,38,446 had been paid during the year. There is no dispute that the interest related to the borrowings utilized in investment in the shares of the companies under reference. The case of the assessee is that the investments in shares are business investments and therefore, borrowings utilized in investment in the shares were borrowings made for the purpose of business and the interest, therefore, should be allowed as deduction. The case of the revenue is that the assessee was not trading in stock and therefore, the interest could not be allowed as a deduction. The investments were long-term investments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ween a simple investment to earn income from dividend or interest or a business investment made with a commercial motive, has to be considered carefully. The assessee may make investment in shares of a company only with a view to earn dividend, which will not be a case of business investment but there may be cases where a person may make investment in the shares of the company for taking a stake with a view to managing the said company with the help of these investments. Taking a controlling stake in different companies with a view to managing those companies may be business of the assessee. In case of CIT v. Rajeeva Lochan Kanoria [1994] 208 ITR 616 Hon ble High Court of Calcutta have held that interest paid on borrowed capital utilized for purchase of shares of different companies in order to acquire controlling interest for managing, administering, financing and rehabilitating the companies would be allowable as business expenditure under section 36(1)( iii ). In case of Mafatlal Holdings Ltd. ( supra ) on which case the assessee has particularly relied, the investment in shares of subsidiary companies of the group had been considered as that for acquiring controlling i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er from reopening any assessment or modifying any assessment under section 154 for assessment year 2001-02 and earlier years. The said proviso is also reproduced below as a ready reference : "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 any assessment year beginning on or before 1-4-2001." 3.5 In this case, though the assessment year involved is 2001-02 but this is not a case of reopened assessment or a case of rectification. The assessment in this case had been made under section 143(3) under the normal provisions of law and therefore, the proviso to section 14A as reproduced above will be applicable and the interest paid on money borrowed for the purpose of making investment in shares will not be allowable as deduction while computing the income of the assessee even if the investments in shares are considered as business investments. The ld. AR for the assessee heavily relied on the decision of the Mumbai Bench of the Tribunal in case of Mafatlal H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 14A is not limited to only the cases where some income has actually been received. It will also apply to the cases, where income cannot be included in the total income whether received or not. This view is supported by the decision of Special Bench of the Tribunal in case of Aquarius Travels (P.) Ltd. ( supra ) in which case also no dividend income had been received during the period for which the interest payment in respect of borrowings used for investment in shares had been claimed as deduction but disallowance of such interest was upheld. Therefore, merely because, no income was received during the year from investments, cannot be a ground for claiming exclusion from the provisions of section 14A when the income even if received is not taxable at all. 3.7 Further, the provisions of section 14A will apply to all income which is exempt whether the income is assessed under the head Other sources or under the head Business because, there is nothing in section 14A which restricts the operation of section to income of a particular nature only. The judgment of Hon ble Supreme Court in case of Rajendra Prasad Moody ( supra ) relied upon by the assessee, is distinguis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . This view is supported by the judgment of Hon ble Supreme Court in case of CIT v. Express Newspapers Ltd. [1964] 53 ITR 250. The relevant portion of the judgment in the said case is reproduced below as a ready reference : "It (the deeming clause in section 12B) only introduces a limited fiction, namely, that capital gains accrued will be deemed to be income of the previous year in which the sale was effected. The fiction does not make them the profits and gains of the business. It is well settled that a legal fiction is limited to the purpose for which it is created and should not be extended beyond its legitimate field........The profit and gains of business and capital gains are two distinct concepts in the Income-tax Act : the former arises from the activity which is called business and the later accrues because capital assets are disposed off at a value higher than what they cost to the assessee. They are placed under different head; they are derived from different source; and the income is computed under different method. The fact that the capital gains are connected with the capital asset of the business cannot make them the profit of the business. They are only deem ..... X X X X Extracts X X X X X X X X Extracts X X X X
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