By TIOL News Service

MUMBAI, JUNE 26, 2018: THE ISSUE IS - Whether when the assessee fails to furnish details in respect of investments which earned income and investments which did not earn dividend income then finance charges on proportionate basis in respect of investments which earned dividend income is to be disallowed. AND THE ANSWER IS YES.

Facts of the case:

The assessee company engaged in the business of investment in group companies, had filed return of income for the relevant AY. The assessment was completed u/s 143(3) after making additions on account of disallowance of miscellaneous and staff welfare expenses amounting to Rs.91,453/- and finance charges amounting to Rs.4,89,55,754/-. The CIT(A) partly allowed appeal filed by the assessee wherein he had given relief of Rs.8,511/- towards miscellaneous and staff welfare expenses. However, confirmed additions made by the AO towards disallowance of finance charges. On further appeal, Tribunal confirmed the disallowance of miscellaneous and staff welfare expenses as the same was not pressed by the assessee, however, set aside the issue of disallowance of finance charges to the file of the AO to decide the issue afresh. The AO, noted that since the assessee had failed to furnish breakup of investments which earned dividend income and also breakup of funds borrowed, opined that interest expenses of Rs. Rs.4,89,55,754/- was not expended wholly and exclusively for the purpose of making or earning such income. Accordingly, the claim of finance charges amounting to Rs.4,89,55,754/- was disallowed and added back to the total income of the assessee. Aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A) who directed to allow deduction by making pro-rata disallowance of financial charges.

Tribunal held that,

++ AO disallowed finance charges on the ground that the expenditure incurred under the head "Finance Charges" is not incurred wholly and exclusively for the purpose of business of the assessee, which is evident from the fact that the assessee did not carry out any business activity during the year under consideration, except holding investments in shares of group companies for acquiring controlling interest. According to the AO, investments in shares of group companies for acquiring controlling interest cannot be formed part of business activity of the assessee. The assessee itself has admitted that it is in the activity of investment in group companies for acquiring controlling interest and such investment has been treated as long term investment in its financial statements. It is also an admitted fact that the statutory auditors of the company have reported that the company is not engaged in carrying on any business or as part of its business activity of acquisition of shares except making long term investments. The main objects clause in Memorandum of Association does not encompass any of the activities carried on by the assessee and even the objects incidental or ancillary for the attainment main objects do not specifically encompass the activity of the acquisition of shares for controlling interest. Therefore, the AO and the CIT(A) were right in treating the activity carried out by the assessee as investment activity and accordingly finance charges is not deductable u/s 36(1)(iii);

++ the assessee has made an alternate plea in as much as finance charge incurred shall be deductable u/s 57(iii), as its dividend income is taxable under the head "Income from other sources". Their is merits in the arguments of the assessee for the reason that dividend income earned by the assessee for the year under consideration is taxable under the head "Income from other sources" and accordingly any expenditure incurred to earn dividend income including finance charges needs to be deducted u/s 57(iii). However, the facts remain that the assessee has failed to furnish any details in respect of investments which earned income and investments which do not earn dividend income for the year under consideration. In fact, the assessee itself had admitted that all its investments are not earned dividend income. The CIT(A), after considering relevant facts, has directed the AO to allow finance charges on proportionate basis in respect of investments which earned dividend income after verifying the facts. The CIT(A) has given factual finding, after considering the relevant facts of the case. No error or infirmity in the order of the CIT(A), was found.

(See 2018-TIOL-945-ITAT-MUM)