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Income Tax Appellate Tribunal, “J”, BENCH MUMBAI
Before: SHRI R.C.SHARMA, AM & SHRI SANJAY GARG, JM
O R D E R PER R.C.SHARMA (A.M): This is an appeal filed by the revenue against the order of CIT(A)- Mumbai, for the assessment year 2008-09.
Ground (A) relates to disallowance of Rs.52,56,410/- u/s.14A.
We have considered rival contentions and found that in the return of income assessee has offered disallowance of Rs.40,000/- in respect of expenditure incurred for earning tax free income. However, as an alternative on AO’s asking assessee has also filed working of disallowance as per rule 8D. It was contended by ld. AR that AO has not rejected the disallowance offered by the assessee. He further contended that assessee has claimed investment of Rs.46,86,46,983/- in the group 2 concern, which is a strategic investment because the said concerns are the subsidiaries or group concerns of the assessee company. However, while computing disallowance the AO has not excluded such strategic investment.
On the other hand, it was contended by ld. DR that the AO has correctly made disallowance as per rule 8D, which is applicable for the relevant assessment year 2008-09 under consideration.
We have considered rival contentions and found that while computing disallowance under rule 8D, the AO has not excluded amount of strategic investment while computing average investment as per rule 8D. As per the decision of Delhi Bench of the Tribunal in the case of Interglobe Enterprises Ltd., ITA Nos.1362&1032/Del/2013, order dated 4- 4-2014 and the decision of Mumbai Bench of the Tribunal in the case of Garware Wall Ropes Ltd, strategic investment is not to be taken into account. Respectfully following the above decision of the Tribunal, we restore the matter to the file of AO and direct the AO to recompute the disallowance under rule 8D after excluding strategic investment out of average investment so made by the assessee.
Ground (B) is not pressed by ld. AR with regard to diminution in value of investment not reduced while computing disallowance u/s.14A, the same is, therefore, dismissed in limine as not pressed.
Ground (C) pertains to disallowing interest expenditure while computing short term capital gains. We have considered rival contentions and found that while computing short term capital gains on sale of shares 3 the AO has declined claim of deduction of interest which was capitalized till the date of sale and has not claimed as revenue expenditure.
It was contended by ld. AR that assessee made an application for allotment of shares of Caren India Ltd. and use the money out of the borrowings from DSP Mutual Fund and assessee paid interest of Rs.2,57,97,463/- on this borrowing which is utilized for application for allotment of shares of Caren India Ltd. and subsequently after allotment these shares were sold resulting into short term capital gain and, therefore, the assessee claimed the said interest as part of the cost of shares of Caren India Ltd. and, therefore, reduced it from sale consideration to arrive at the short term capital gain. The interest expenditure has been classified as capital expenditure by the auditor in the Tax Audit Report in Form 3CD and assessee had not claimed the interest either as business expenditure or u/s. 57 from the income from other sources and claimed it as part of the cost of the shares of Caren India Ltd. Assessee also claimed that it has no surety at the time of making application for allotment of shares that it will be allotted shares of Caren India Ltd. Whereas the A.O. has rejected the claim of the assessee holding that the said expenditure can be claimed u/s. 57 only but it is disallowable because the dividend income is exempt and, therefore, the interest paid by the assessee is not allowed to be reduced for calculating the short term capital gain at the time of sale of shares by Caren India Ltd. of the assessee.
By the impugned order, CIT(A) has confirmed the disallowance by observing as under :- “11. I have considered the facts of the case and submissions of the assessee. The issue to be decided is whether the interest paid by the assessee on the money utilized for purchase of shares is to be allowed as deduction u/s. 57 or it is to be capitalized as cost of the shares in case shares are held as investment. Prior to the amendment of the Act vide section 10(33) when the dividend income was made exempt, any such interest was allowed as expenditure u/s. 57 even when there was no dividend income and the same was the decision of Hon'ble Supreme Court in the case of Rajender Prasad Moody 115 ITR519 (SC). The assessee also faced no problem because either it is allowed as deduction u/s. 57 or allowed as cost of the share resulting in short term capital gain. Finally the net taxable income used to be same. But now the dividend income is exempt from income-tax and, therefore, any corresponding claim of expenditure in the form of interest is disallowable u/s. 14A of I.T. Act and, therefore, the issue arises whether in such a situation where assessee claims short term capital gain on account of sale of shares then should it be allowed any deduction out of the sale consideration on account of interest paid on such borrowed funds which might have been utilized for purchase of these shares. In my opinion, the issue has already been settled by Hon'ble Supreme Court by its decision in the case of Rajinder Prasad Moody (supra) that such interest can be claimed against dividend income, whether dividends are received or not, under the head 'other sources' and, therefore, the claim of the assessee is misplaced because it cannot be claimed as part of the cost of such shares. Of course, it can be claimed u/s. 57 but the same is to be disallowed in view of the fact that dividend income is exempt from income-tax and such interest will be covered by section 14A.
Against the above order of CIT(A), assessee is in further appeal before us. 11. It was contended by ld. AR that interest has been paid for acquisition of shares, which has yielded no dividend income, interest should be considered as cost of acquisition of shares/cost of improvement and allowed u/s. 48. Reliance in this regard is placed on the following decisions :