ARCHWAY INVESTMENT COMPANY LTD,MUMBAI vs. ITO 2(1)(1), MUMBAI

During hearing, the ld. counsel for the assessee, Shri Yogesh Thar, the impugned issue is covered by the order of the earlier years vide order dated 10/02/2017 (ITA No.8461/Mum/2010 and 5598/Mum/2011, etc) for Assessment Year 2007-08 and 2008-09. This factual assertion of the assessee was not controverted by Ld. DR, Shri Rajesh Kumar Yadav, except saying that each year is independent.

2.1. We have considered the rival submissions and perused the material available on record. We find that so far as, the disallowance of Rs.1,16,76,976/- by treating the same as expenses incurs towards earning exempt income u/s 14A of the Act read with Rule-8D of the rules is concerned, the Tribunal in the case of assessee vide aforesaid order dated 10/02/2017 held as under:-

As discussed above, the assessee is an investment and finance company. It had made strategic investments. The Ld. A.R. has stated that more than 90% of the investments of the assessee were strategic investments made in subsidiaries and associated companies. He, in this respect, has invited our attention to page 6 of the paper book which is an audit report of the chartered accountant regarding the investments made and in para 5 of the said document it has been stated that the aggregate cost of investments made in group/holding/subsidiary companies was not less than 90% of the cost of the total assets of the company at any point of time throughout the relevant accounting period/year.

As discussed above in the light of the decision of the Hon’ble Bombay High Court “CIT vs. Srishti Securities (P.) Ltd.” (supra) the Hon’ble Bombay High Court has held that if the capital has been borrowed for the purpose of business or profession of the assessee company then the interest paid on the borrowed funds is an allowable expenditure. It has been further held that in case of an investment company the amount borrowed may be utilised for the purpose of acquisition of stock in trade or for the purpose of acquisition of capital assets. The ratio of the above decision of the Hon’ble Bombay High Court squarely applies in the case of the assessee.

Further, the Ld. Counsel for the assessee has brought our attention to the decision of the Hon’ble Bombay High Court in the case of “CIT, Panaji, Goa vs. Phil Corpn. Ltd.” (2011) 202 Taxman 368 wherein the Hon’ble Bombay High Court has held that where the investment in shares of sister/subsidiary company is made to have control over that company and further that such an investment was accordingly part of the business of the assessee, in that event the assessee is entitled to deduction of interest paid on the borrowed amount under section 36(1)(iii) of the Act. We, further find that recently the Hon’ble Delhi High Court in the case of “Eicher Goodearth Ltd. vs. CIT” (2015) 60 taxman.com 268 (Del.) has held that if the expenditure is incurred for the purpose of promotion of business-more specifically to retain control or as part of his strategic investment of the assessee company, such expenses by way of interest out go would have to be treated as allowable under section 36(1)(iii) of the Act.

In view of the various case laws as discussed above, the interest expenditure incurred by the assessee for the purpose of strategic investment as the investment being the business of the assessee is an allowable expenditure under section 36(1)(iii) of the Income Tax Act.

So the proposition laid down by the Hon’ble Bombay High Court in the case of “India Advantage Securities Ltd.” (supra) is that any expenditure which is held to be relating to the business activities of the assessee and not for the purpose of earning of exempt income and the exempt dividend income, if any, is incidental to such business activity of the assessee, then no disallowance under section 14A in relation to such investment is attracted. Therefore, in the light of above case laws, in our view, no interest disallowance even under section 14A read with rule 8D2(ii) in relation to the investments made by the assessee being relating to its business activity is attracted. Our above decision is in line with the order of the Co-ordinate Bench of the Tribunal in the case of “DCIT vs. M/s. Jayneer Capital Pvt. Ltd.” vide order dated 13.07.2016 wherein the Tribunal has further relied upon the judgment of Hon’ble Delhi High Court in the case of “Oriental Structural Engineers (P) Ltd., 35 Taxmann.com 201; order of Chennai Bench of Tribunal in the case of EIH Associated Hotels Ltd. (ITA No.1503/Mds/2012 dated 17.7.2013); order of Mumbai Bench of Tribunal in the case of “M/s. JM Financial Ltd.” (ITA No.4521/Mum/2012 dated 26.3.2014); and, order of Delhi Bench of Tribunal in the case of “Interglobe Enterprises Ltd. (ITA Nos.1362 & 1032/Del/2013 dated 4.4.2014). Similar proposition can be applied in case of disallowance of administrative expenditure under Rule 8D2(iii) also. We accordingly direct the AO to exclude the strategic investments made in group/associate companies for the purpose of computation of disallowance under section 14A read with Rule 8D.”

Briefly stated the facts of the case are that the assessee is in the business of Insurance broking. The return for the year was electronically filed on 29.9.2009 which was taken up for scrutiny assessment. While going through the return of income, the Assessing Officer noticed that the assessee has declared dividend income at Rs. Nil on its investment of shares and mutual fund. On further perusal of the balance sheet, the AO found that the total investment was at Rs. 13,90,15,862/-. The assessee was asked to explain as to why the disallowance u/s. 14A was not made.

Aggrieved by this, the Revenue is before us.

The Ld. Departmental Representative supported the assessment order.

Per contra, the Ld. Counsel for the assessee relied upon the order of the First Appellate Authority. The Ld. Counsel further brought to our notice decision of the Tribunal Mumbai Benches which are placed on record in the form of Paper Book.

We have considered the rival submissions and carefully perused the orders of the authorities below and the judicial decisions brought to our notice. In our considered opinion, the investments made by the assessee are in Growth Oriented Funds where no dividend is declared. However, we find that whenever there is maturity of these funds, the amount is subject to tax under the head ‘Capital Gain’. Considering all these facts in totality and drawing support from the decision of the Tribunal, Mumbai Bench, we decline to interfere with the findings of the Ld. CIT(A).”

The last ground raised by the assessee pertains to Rs.1,16,76,976/- being the disallowance u/s 14A of the Act r.w.r 8D of the rules to the book profit u/s 115JB of the Act. This ground was argued to be consequential in nature. The ld. DR, had no objection to the submission of the Ld. AR. Thus, we held since, we have deliberated the impugned amount in preceding paras of this order, therefore, it is consequential in nature.