Interest on borrowings made for acquiring shares in Malaysian company alongwith controlling interest is allowable

Ultramarine & Pigments Ltd. V/s ACIT (ITAT Mumbai)- The undisputed fact is that there are no fresh loans or investments during the year. The Hon’ble Jurisdictional High Court in K. Raheja Corporation Pvt. Ltd. (supra) laid down that when the Revenue cannot point out as to how interest on borrowed funds was attributable to the earning of dividend income which was exempt under section 10(33) of the Act (as it then stood)’ no dis allowance can be made. It laid down that in the absence of any material or basis to hold that the interest expenditure directly or indirectly is attributable for earning the dividend income’ no dis allowance of interest can be made under section 14A. The assessee has filed before us a table showing capital’ reserves of the company and the investment in TCL shares. A perusal of the same demonstrates that there is no incremental investment in shares during the year. Under these circumstances’ we agree with the contention of the assessee. As certain expenditures can reasonably be estimated and disallowed under section 14A’ as agreed to by both the parties’ we set aside the impugned order passed by the Commissioner (Appeals) and restore the matter to the file of the Assessing Officer for determining the same. This ground is’ thus’ allowed for statistical purposes.

Tribunal held that arguments of the tax department that the amounts were invested for controlling interest and that there was no dividend income which was earned, were devoid of merit. Section 90(2) of the Act makes it compulsory for the AO to apply the provisions of the Act to the extent they are more beneficial to the taxpayer.  Accordingly, under the provisions of the Act net income would be a negative figure and since the provisions of the Act are more beneficial to the taxpayer they would be applicable. Accordingly, the Tribunal allowed the interest paid on borrowed funds utilised for purchase of shares in TCLIM.

INCOME TAX APPELLATE TRIBUNAL, MUMBAI

ITA no. 2775/Mum./2005 -(Assessment Year: 2001-02)

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