2011 (12) TMI 615

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....making Investments income from which is exempt from tax. 2. The Assessing Officer on a perusal of the balance sheet found that the assessee has invested a sum of ₹ 21.49 lakhs in the share capital of a company with the intention to earn dividend income which is exempt from tax. As the assessee is borrowing funds on interest for business purposes, he disallowed pro rata interest of ₹ 3,21,900/- as the interest attributable to the investment made for earning dividend income is not allowable from business profits. Considering an average interest rate of 15% the notional interest on the assessee's investment of ₹ 21.46 lakhs works out to ₹ 3,21,000/- which was disallowed. 3. On appeal before the CIT(A), with regard to ....

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....ent in shares for the purpose of earning exempted dividend income had not been made out of borrowed funds, in the light of the decision of Hon'ble Kerala High Court in the case of CIT vs VI Baby & Co., (supra) it can be said that had the appellant not used its business funds to that extent in making investment in shares, it would not have been required to make borrowings to that extent. Hon'ble Kerala High Court have opined that in such cases, the borrowals are to be considered as made for supplementing the funds which have been diverted for non business purpose. Hon'ble Madras Bench of the ITAT also in the case of MGM Diamond Beach Resorts P. Ltd vs DCIT (2008 TIOL 463 ITAT Mad) have opined that interest expenses would not be allowable, if....