Rave Entertainment Private Ltd., Kanpur V. Joint.Commissioner of Income Tax, Kanpur

ITA 107/LKW/2012

• Counselvise Citation: 10723714 RSA 2012
• Duration Of Justice: 2 year(s) 8 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-11-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 23-09-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 07-03-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: ALOK MITRA
• Keywords: Depreciation; Business expenditure; Opportunity of being heard; Principle of natural justice; Source of fund; Deemed to accrue or arise in india; Proportionate interest; Bad and doubtful debts; Validity of assessment; Block assessment; Notional interest; Commercial expediency
• Section: 143(3); 14A; 154

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL LUCKNOW BENCH A, LUCKNOW BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI A.K. GARODIA, ACCOUNTANT MEMBER ITA NO.107/LKW/2012 ASSESSMENT YEAR:2007 - 08 JT.C.I.T., RANGE - 6, KANPUR. VS M/S RAVE ENTERTAINMENT PVT. LTD., JAGRAN BUILDING, 2, SARVODYA NAGAR, KANPUR. PAN:AABCR5768A (RESPONDENT) (APPELLANT) SHRI P. K. KAPOOR, C.A. APPELLANT BY SHRI ALOK MITRA, D. R. RESPONDENT BY 24/09/2014 DATE OF HEARING 28 /11/2014 DATE OF PRONOUNCEMENT O R D E R PER A. K. GARODIA, A.M. THIS IS AN ASSESSEES APPEAL DIRECTED AGAINST THE ORDER PASSED BY LEARNED CIT(A) - I, KANPUR DATED 27/12/2011 FOR THE ASSESSMENT YEAR 2007 - 2008. 2. THE GROUNDS RAISED BY THE ASSESSEE ARE AS UNDER: 1. BECAUSE THE APPELLANT ALREADY STOOD ASSESSED WITH THE PROCESSING OF 'RETURN' UNDER SECTION 143(1) AND THE SELECTION OF THE 'RETURN' FOR 'SCRUTINY ASSESSMENT' BEING NOT IN ACCORDANCE WITH THE PROVISIONS CONTAINED IN CLAUSE (II) OF SUB - SECTION (2) OF SECTION 143, THE 'ENTIRE' VARIATION AS IS SUBJECT MATTER OF THIS APPEAL AND AS MADE UP OF; 2 (A) RS.6,00,000 INTEREST ATTRIBUTABLE TO ADVANCE GIVEN TO M/S. RAVE MOTI INTERNATIONAL (P) LTD.; (B) RS.13,26,780 INTEREST ATTRIBUTABLE TO THE INVESTMENT MADE IN SHARE APPLICATION MONEY WITH 'RAVE MOTI ENTERTAINMENT PVT. LTD.' (C) RS.10,99,620 DISALLOWANCE OF PROPORTIONATE EXPENSES BY INVOKING THE PROVISIONS OF SECTION 14A (D) RS.18,40,086 INTEREST SAID TO BE ATTRIBUTABLE TO THE INVESTMENT IN NEW PROJECTS. (E) RS.5,00,000 REPRESENTING THE BALANCES WRITTEN OFF, IN THE FORM OF LOSSES INCIDENTAL TO THE CARRYING ON OF ITS BUSINESS. IS WHOLLY ILLEGAL AND UNJUSTIFIED. 2. BECAUSE OTHERWISE ALSO, NOTICE UNDER SECTION 143(2) CANNOT BE SAID TO HAVE BEEN ISSUED AND SERVED IN ACCORDANCE WITH THE PROVISIONS OF LAW AND ACCORDINGLY THE ABOVE REFERRED DISALLOWANCES ARE WHOLLY ILLEGAL AS THE APPELLANT ALREADY STOOD ASSESSED WITH THE PROCESSING OF THE RETURN UNDER SECTION 143(1). WITHOUT PRE JUDICE TO THE AFORESAID 3. BECAUSE IN ANY CASE INITIATION OF PROCEEDINGS FOR MAKING ASSESSMENT UNDER SECTION 143(3), HAVING BEEN MADE BY DY. CIT, HE ALONE CONTINUED TO HOLD JURISDICTION OF ASSESSING OFFICER IN THE CASE OF THE APPELLANT, TILL LAST AND ASSESSMENT ORDER DATED 23.12.2009 PASSED BY JT. CIT IS VOID AB - INITIO AND THE 'VARIATION' AS REFERRED TO IN GROUND NO.1 DESERVES TO BE VACATED. 4. BECAUSE OUTGOINGS UNDER THE HEAD INTEREST WAS ATTRIBUTABLE TO THE CAPITAL BORROWED FOR THE PURPOSES OF BUSINESS AS ENVISAGED IN SECTION 36(1)(III) OF THE ACT AND NO PART OF THE SAME COULD HAVE BEEN DISALLOWED. 5. BECAUSE IN ANY CASE, ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE INVESTMENT AS REFERRED TO BY THE AUTHORITIES BELOW COULD NOT HAVE BEEN SAID TO HAVE BEEN MADE OUT OF BORROWED FUNDS AND DISALLOWANCE OF INTEREST AGGREGATING RS.19,26,780 3 (RS.6,00,000 + RS.13,26,780) IS WHOLLY ILLEGAL, UNJUSTIFIED AND CONTRARY TO THE FACTS. 6. BECAUSE THE APPELLANT HAS NOT INCURRED ANY EXPENDITURE IN RELATION TO T HE 'INCOME NOT EXEGIBLE TO TAX' AND DISALLOWANCE OF RS.10,99,622 (OUT OF EXPENSES BY INVOKING THE PROVISIONS OF SECTION 14A IS WHOLLY ILLEGAL AND UNJUSTIFIED. 7. BECAUSE IN ANY CASE THE PROVISIONS OF SECTION 14A WAS NOT APPLICABLE IN THE ASSESSMENT YEARS 2007 - 08 AND DISALLOWANCE AS MADE / SUSTAINED BY THE AUTHORITIES BELOW IS WHOLLY ILLEGAL AND UNJUSTIFIED. 8. BECAUSE INVESTMENT MADE IN NEW PROJECTS AT RAVE AGRA, RAVE JALANDAR, RAVE MEERUT & RAVE NOIDA, REPRESENTED INVESTMENT MADE FOR THE PURPOSES OF BUSI NESS OF THE APPELLANT AND DISALLOWANCE OF RS.18,40,086 (OUT OF INTEREST PAID BY THE APPELLANT) IS WHOLLY ILLEGAL AND UNJUSTIFIED. 9. BECAUSE INVESTMENT MADE BY THE APPELLANT IN THE SAID PROJECT REPRESENTED THE EXPANSION OF THE EXISTING BUSINESS CARRIED ON BY THE APPELLANT AND NO PART OF INTEREST ATTRIBUTABLE TO SUCH INVESTMENT COULD HAVE BEEN DISALLOWED, INTER ALIA, ON THE GROUND THAT SUCH AN INVESTMENT HAD BEEN REALIZED (BY WAY OF DISPOSAL) IN THE SUBSEQUENT YEAR. 10. BECAUSE REALIZATION OF INVESTMENT (B Y WAY OF DISPOSAL OF THE PROJECT) ITSELF AMOUNTED TO CARRYING ON OF BUSINESS BY THE APPELLANT AND DISALLOWANCE OF INTEREST AMOUNTING TO RS.18,40,086/ - AS MADE/SUSTAINED BY THE AUTHORITIES BELOW IS WHOLLY ILLEGAL AND UNJUSTIFIED. 11. BECAUSE DISALLOWANCE O F RS.5 LAKHS OUT OF BALANCES IN THE ACCOUNT OF SUNDRY ADVANCES IS BASED ON A WRONG PREMISE AND THE SAME IS NOT SUSTAINABLE. 12. BECAUSE ADVANCES AS REFERRED TO BY THE AUTHORITIES BELOW, WERE LIABLE TO BE TREATED AS 'LOSSES INCIDENTAL TO THE CARRYING ON OF BUSINESS', AND NO PART OF THE SAME COULD HAVE BEEN DISALLOWED, EITHER ON FACTS OR IN LAW. 13. BECAUSE THE ORDER APPEALED AGAINST IS CONTRARY TO THE FACTS, LAW AND PRINCIPLES OF NATURAL JUSTICE. 4 3. IN THIS CASE, THE HEARING WAS ADJOURNED ON NUMEROUS OCCASIONS AT THE REQUEST OF THE ASSESSEE AND ON THE LAST OCCASION , THE CASE WAS FIXED FOR HEARING ON 24/09/2014. ON THIS DATE ALSO, LEARNED A.R. OF THE ASSESSEE REQUESTED FOR ADJOURNMENT AND UNDER THESE FACTS, IT WAS POINTED OUT BY THE BENCH THAT NO ADJOU RNMENT CAN BE GRANTED IN VIEW OF THIS FACT THAT LAST OPPORTUNITY WAS PROVIDED ON VARIOUS OCCASIONS. HOWEVER, LEARNED A.R. OF THE ASSESSEE WAS GIVEN AN OPTION TO FILE WRITTEN SUBMISSIONS WITHIN A WEEK AND ACCORDINGLY LEARNED A.R. OF THE ASSESSEE HAS SUBMIT TED WRITTEN SUBMISSIONS, WHICH ARE REPRODUCED BELOW FOR THE SAKE OF READY REFERENCE AND THE SAME WILL BE CONSIDERED WHILE DECIDING THE APPEAL OF THE ASSESSEE. 4. LEARNED D.R. OF THE REVENUE SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. THE WRITTEN SUBMISSIONS OF THE ASSESSEE ARE AS UNDER: MAY IT PLEASE YOUR HONOURS THE ISSUE INVOLVED IN THE ABOVE MENTIONED APPEAL, CAN BE CLASSIFIED, FOR THE SAKE OF CONVENIENCE ONLY IN TWO CATEGORIES VIZ. I VALIDITY OF ASSESSMENT ORDER DATED 23.12.2009, ON THE GROUND THAT THERE WAS NO VALID ISSUANCE/SERVICE OF NOTICE UNDER SECTION 143(2) II - DISALLOWANCE OF VARIOUS EXPENSES AS PER PARTICULARS GIVEN BELOW: - (A) RS.6,00,000 INTEREST ATTRIBUTABLE TO ADVANCE GIVEN TO M/S. RAVE MOTI INTERNATIONAL (P) LTD.; (B) RS.13,26,780 INTEREST ATTRIBUTABLE TO THE INVESTMENT MADE IN SHARE APPLICATION MONEY WITH ' RAVE@MOTI ENTERTAINMENT PVT. LTD.' (C) RS.10,99,622 DISALLOWANCE OF PROPORTIONATE INTEREST BY INVOKING THE PROVISIONS OF SECTION 14A; (D) RS.18,40,086 INTEREST SAID TO BE ATTRIBUTABLE TO THE INVESTMENT IN NEW PROJECTS; AND (E) RS.5,00,000 REPRESENTING THE BALANCES WRITTEN OFF, IN THE FORM OF LOSSES INCIDENTAL TO THE CARRYING ON OF ITS BUSINESS. 5 2. AS FAR AS LEGAL ISSUE WHICH HAS BEEN TAKEN IN THE AFORESAID APPEAL, VIDE GROUNDS NO.1 & 2 IS CONCERNED, IT IS VERY CANDIDLY ADMITTED THAT THE SAID ISSUE HAD NOT BEEN RAISED BEFORE THE FIRST APPELLATE AUTHORITY, AND HAS BEEN TAKEN FOR THE FIRST TIME BEFORE THE HONBLE TRIBUNAL. HOWEVER, THE SAID GROUNDS OF APPEAL HAVE DULY BEEN SET FORTH IN THE MEMO OF APPEAL ITSELF AND, THEREFORE, KEEPING IN VIEW THE PROVISIONS CONTAINED IN RULE 11 OF THE INCOME TAX (APPELLATE) TRIBUNAL RULES 1963 THE SAID ISSUE CA NNOT BE TREATED AS ADDITIONAL GROUND. 3. IT IS ALSO RELEVANT TO MENTION HERE THAT THE ONUS LIES ON THE ASSESSING OFFICER TO SHOW, AT LEAST AT THE TIME OF PASSING AN ASSESSMENT ORDER UNDER SECTION 143(3) THAT MANDATORY NOTICE UNDER SECTION 143(2) HAD NOT ONLY BEEN ISSUED, BUT THE SAME HAD BEEN SERVED ALSO IN ACCORDANCE WITH THE LAW I.E. THE SPECIFIC PROVISION AS CONTAINED IN SECTION 282 OF THE ACT, READ WITH THE RELEVANT PROVISIONS OF CIVIL PROCEDURE CODE AS REFERRED TO THEREIN. RELIANCE IN THIS REGARD IS PLACED ON THE DECISION OF THE HONBLE ITAT, ALLAHABAD BENCH, ALLAHABAD IN THE CASE OF DR. Y.D. SINGH VS. DY.CIT REPORTED IN (2011) 10 DTR 698 . A COPY OF THE SAID JUDGMENT IS ENCLOSED AND THE SAME HAS BEEN MARKED AS ANNEXURE - I HERETO. (PAGES 25 TO 36) 4. THE NARRATION APPEARING IN THE ASSESSMENT ORDER DATED 23.12.2009 , READING AS UNDER: - RETURN OF INCOME SHOWING INCOME OF RS.2,36,87,859/ - WAS E - FILED ON 30.10.2007 VIDE RECEIPT NO.5761970301007. PAPER RETURN WAS ALSO SUBMITTED DULY ON 31.10.2007. RETU RN WAS PROCESSED U/S.143(1). THE ASSESSEE ENJOYS INCOME FROM RUNNING OF MULTIPLEX. IT ALSO ENJOYS INCOME FROM RENT RECEIVED FROM VARIOUS PARTIES WHO ARE HOUSED IN THE PREMISES WHERE MULTIPLEX IS BEING RUN. IT IS ALSO RUNNING ONE CLUB NAMELY FELIX CLUB W HERE ADMISSION IS RESTRICTED FOR MEMBERS ONLY FROM WHOM LUMSUM ENTRY FEE (NON REFUNDABLE) IS CHARGED AND PORTION OF THIS FEE PERTAINING TO RELEVANT ASSTT. YEAR IS SHOWN IN GROSS RECEIPT. IN THE COMPUTATION OF TOTAL INCOME CHART THE ASSESSEE HAS DECLARED INCOME AS UNDER: - PROFIT BEFORE DEPRECIATION AND TAX 24427914 ADD: PROVISION FOR CONTINGENCIES 10695863 ADD: PROVISION FOR HOUSE TAX 967062 ADD:INTEREST ON INCOME TAX & HOUSE TAX 1633951 LESS: DEPRECIATION AS PER INCOME TAX 14036932 23687859 6 2. THEREAFTER, NOTICE U/S.143(2) WAS ISSUED ON 30.07.2008 FIXING DATE OF COMPLIANCE FOR 30.08.2008. A DETAILED NOTICE U/S.142(1) WAS ALSO ISSUED ON 19.02.2009 FIXING DA TE OF COMPLIANCE FOR 02.03.2009. FRESH NOTICE U/S.143(2) WAS ISSUED ON 14.7.2009 WHICH WAS SERVED ON 28.07.2009 ALONGWITH NOTICE UNDER SECTION 142(1). FRESH NOTICE UNDER SECTION 143(2) WAS ISSUED WHEN UNDERSIGNED TOOK OVER AS THE ASSESSING OFFICER. INC OMPLIANCE TO THE NOTICE SRI K.K. VISHNOI, A.R. ALONGWITH SHRI INTEZAR ALI A.R. ATTENDED FROM TIME TO TIME. DETAILED SUBMISSIONS WERE FILED. THE CASE WAS DISCUSSED AT LENGTH. (OPENING PARA - EMPHASIS ADDED) GOES TO SHOW THAT THE ASSESSING OFFICER HAS MISERABLY FAILED TO MEET THE ESSENTIAL REQUIREMENT OF LAW, AS DISCUSSED IN PARA 3 ABOVE. 5. TO ELABORATE THIS CONTENTION THE APPELLANT BEGS TO CONTEND THAT, ALTHOUGH VARIOUS NOTICES ARE STATED TO HAVE BEEN IS SUED UNDER SECTION 143(2), BUT LOOKING TO THE TIME LIMIT FOR ISSUANCE OF SUCH NOTICE, THE NOTICE STATED TO HAVE BEEN ISSUED ON 30.07.2008 FIXING DATE OF COMPLIANCE FOR 30.08.2008 ALONE IS RELEVANT. THE ASSESSMENT ORDER IS CONSPICUOUS BY THE ABSENCE OF ANY INFORMATION AS TO THE MANNER IN WHICH THE NOTICE HAD BEEN DRAWN, THE MODE OF SERVICE THEREOF AS ALSO THE PERSON ON WHOM, THE NOTICE IN QUESTION HAD BEEN SERVED . AS PER THE INFORMATION AVAILABLE WITH THE APPELLANT, THE NOTICE UNDER SECTION 143(2) DATED 30. 07.2008 HAD BEEN ADDRESSED TO M/S RAVE ENTERTAINMENT PVT. LTD. (COPY APPEARING AT PAGE 1 OF THE PB) AND THE SAME WAS SENT THROUGH PROCESS SERVER (NOT BY POST OR THROUGH AN APPROVED COURIER). THE SAID NOTICE IS NO NOTICE IN THE EYES OF LAW, FOR THE REA SONS THAT IN THE CASE OF A COMPANY, AS THE APPELLANT IS, NOTICE WAS REQUIRED TO BE ADDRESSED TO THE PRINCIPAL OFFICER OF THE COMPANY WHICH UNDISPUTEDLY HAS NOT BEEN DONE . 6. IN ANY CASE, THE SAID NOTICE CEASES TO BE VALID AND ENFORCEABLE IN LAW, OWING TO LACK OF VALID SERVICE. IT IS A LAW WELL LAID THAT WHERE NOTICE HAS NOT BEEN SENT THROUGH POST, AS IS THE CASE HERE, THE NOTICE IN ORDER TO BE VALID AND ENFORCEABLE IN THE EYES OF LAW, HAD TO BE NECESSARILY SERVED EITHER ON THE PRINCIPAL OFFICER HIMSELF OR ANYONE AUTHORIZED BY HIM (TO RECEIVE THE NOTICE) ACTING AS HIS AGENT. 7. THE RULE OF SERVICE THROUGH PROCESS SERVER HAS BEEN DISCUSSED AT LENGTH BY THE HONBLE ALLAHABAD HIGH COURT IN THE CASE OF HARSINGAR GUTKHA PVT. LTD VS. CIT REPORTED IN (2011) 336 I TR 90 (ALLD) WHEREIN THEIR LORDSHIPS HAVE OBSERVED AND HELD AS UNDER: - 7 PERUSAL OF THE PROVISIONS OF SECTION 143(2) OF THE ACT SHOWS THAT THE SERVICE OF THE NOTICE ON THE ASSESSEE WITHIN THE PERIOD PROVIDED UNDER THE PROVISO IS MANDATORY. IN THE ABSENCE OF THE NOTICE BEING SERVED WITHIN THE STIPULATED PERIOD UNDER SECTION 1 43(2) OF THE ACT, ASSESSMENT PROCEEDING COMES TO AN END AND DEEMED TO HAVE BECOME FINAL. RELIANCE IS BEING PLACE ON THE DECISIONS IN THE CASE OF COMMISSIONER OF INCOME TAX VERSUS M. CHELLAPPAN (SUPRA), VIPAN KHANNA VERSUS COMMISSIONER OF INCOME TAX & OTHE RS (SUPRA) COMMISSIONER OF INCOME TAX VERSUS PALANIAPPAN (SUPRA) COMMISSIONER OF INCOME TAX VERSUS BHAN TEXTILES PVT. LTD. (SUPRA), COMMISSIONER OF INCOME TAX VERSUS LUNAR DIAMONDS LTD. (SUPRA) AND DEPUTY COMMISSIONER OF INCOME TAX VERSUS MAHI VALLY HOTELS & RESORTS (SUPRA). XXXX XXXX XXXXX SECTION 282 OF THE ACT PROVIDES AS TO HOW THE NOTICE UNDER THE ACT IS TO BE SERVED. THE RELEVANT PROVISION OF THIS SECTION READS AS UNDER: 282. SERVICE OF NOTICE GENERALLY: - (1) A NOTICE OR REQUISITION UNDER T HIS ACT MAY BE SERVED ON THE PERSON THEREIN NAMED EITHER BY POST OR AS IF IT WERE A SUMMONS ISSUED BY A COURT UNDER THE CODE OF CIVIL PROCEDURE, 1905 (5 OF 1908) SO, ACCORDING TO IT, ANY NOTICE UNDER THE INCOME - TAX ACT HAS TO BE SERVED ON THE PERSON NAMED THEREIN EITHER BY POST OR AS IF IT WERE A SUMMON ISSUED BY THE COURT UNDER THE CODE OF CIVIL PROCEDURE. ORDER V, RULE 12 OF THE CODE OF CIVIL PROCEDURE 1908 PROVIDES THAT WHEREVER IT IS PRACTICABLE, SERVICE SHALL BE MADE ON THE DEFENDANT IN PERSON O R ON HIS AGENT. THE RELEVANT PROVISION READS AS UNDER: - RULE 12. SERVICE TO BE ON DEFENDANT IN PERSON WHEN PRACTICABLE, OR ON HIS AGENT. WHEREVER IT IS PRACTICABLE, SERVICE SHALL BE MADE ON THE DEFENDANT IN PERSON, UNLESS HE HAS AN AGENT EMPOWERED TO ACCEPT SERVICE, IN WHICH CASE SERVICE ON SUCH AGENT SHALL BE SUFFICIENT. ORDER V, RULE 17 O THE CODE OF CIVIL PROCEDURE LAYS DOWN THE PROCEDURE WHEN THE DEFENDANT REFUSES TO ACCEPT SERVICE, OR CANNOT BE FOUND AND IT READS AS UNDER: - RULE 17. PROCEDURE WHEN DEFENDANT REFUSES TO ACCEPT SERVICE, OR CANNOT BE FOUND. WHERE THE DEFENDANT OR 8 HIS AGENT OR SUCH OTHER PERSON AS AFORESAID REFUSES TO SIGN THE ACKNOWLEDGEMENT, OR WHERE THE SERVING OFFICER, AFTER USING ALL DUE AND REASONABLE DILIGENCE, CANNOT FIND THE DEFENDANT (WHO IS ABSENT FROM HIS RESIDENCE AT THE TIME WHEN SERVICE IS SOUGHT TO BE EFFECTED ON HIM AT HIS RESIDENCE AND THERE IS NO LIKELIHOOD OF HIS BEING FOUND AT THE RESIDENCE WITHIN A REASONABLE TIME), AND THERE IS NO AGENT EMPOWERED TO ACCEPT SE RVICE OF THE SUMMONS ON HIS BEHALF, NOR ANY OTHER PERSON ON WHOM SERVICE CAN BE MADE, THE SERVING OFFICER SHALL AFFIX A COPY OF THE SUMMONS ON THE OUTER DOOR OR SOME OTHER CONSPICUOUS PART OF THE HOUSE IN WHICH THE DEFENDANT ORDINARILY RESIDES OR CARRIES O N BUSINESS OR PERSONALLY WORKS FOR GAIN, AND SHALL THEN RETURN THE ORIGINAL TO THE COURT FROM WHICH IT WAS ISSUED, WITH A REPORT ENDORSED THEREON OR ANNEXED THERETO STATING THAT HE HAS SO AFFIXED THE COPY, THE CIRCUMSTANCES UNDER WHICH HE DID SO, AND THE N AME AND ADDRESS OF THE PERSON (IF ANY) BY WHOM THE HOUSE WAS IDENTIFIED AND IN WHOSE PRESENCE THE COPY WAS AFFIXED. ORDER V RULE 19A PROVIDES FOR SIMULTANEOUS ISSUE OF SUMMONS FOR SERVICE BY POST IN ADDITION TO PERSONAL SERVICE. IT READS AS UNDER: - RULE 19A. SIMULTANEOUS ISSUE OF SUMMONS FOR SERVICE BY POST IN ADDITION TO PERSONAL SERVICE. (1) THE COURT SHALL, IN ADDITION TO, AND SIMULTANEOUSLY WITH THE ISSUE OF SUMMONS FOR SERVICE IN THE MANNER PROVIDED IN RULES 9 TO 19 (BOTH INCLUSIVE ), ALSO DIRECT THE SUMMONS TO BE SERVED BY REGISTERED POST, ACKNOWLEDGEMENT DUE, ADDRESSED TO THE DEFENDANT, OR HIS AGENT EMPOWERED TO ACCEPT THE SERVICE, AT THE PLACE WHERE THE DEFENDANT, OR HIS AGENT, ACTUALLY AND VOLUNT ARILY RESIDES OR CARRIES ON BUSINESS OR PERSONALLY WORKS FOR GAIN; PROVIDE THAT NOTHING IN THIS SUB - RULE SHALL REQUIRE THE COURT TO ISSUE A SUMMONS FOR SERVICE BY REGISTERED POST, WHERE, IN THE CIRCUMSTANCES OF THE CASE, THE COURT CONSIDERS IT NECESSARY. (2) WHEN AN ACKNOWLEDGEMENT PURPORTING TO BE SIGNED BY THE DEFENDANT OR HIS AGENT IS RECEIVED BY THE COURT WITH AN ENDORSEMENT PURPORTING TO HAVE BEEN MADE BY A POSTAL EMPLOYEE TO THE EFFECT THAT THE DEFENDANT OR HIS AGENT HAD REFUSED TO TAKE DELIVERY OF 9 THE POSTAL ARTICLE CONTAINING THE SUMMONS, WHEN TENDERED TO HIM, THE COURT ISSUING THE SUMMONS SHALL DECLARE THAT THE SUMMONS HAD BEEN DULY SERVED ON THE DEFENDANT; PROVIDED THAT WHERE THE SUMMONS WAS PROPERLY ADDRESSED, PREPAID AND DULY SENT BY REGISTERE D POST, ACKNOWLEDGEMENT DUE, THE DECLARATION REFERRED TO IN THIS SUB - RULE BE MADE NOTWITHSTANDING THE FACT THAT THE ACKNOWLEDGEMENT HAVING BEEN LOST OR MISLAID, OR FOR ANY OTHER REASON, HAS NOT BEEN RECEIVED BY THE COURT WITHIN THIRTY DAYS FROM THE DATE OF THE ISSUE OF SUMMONS. NOW, WHO ARE THE RECOGNIZED AGENTS OF THE PARTIES, THE SAME HAS BEEN DEFINED IN ORDER 3 RULE 2 OF THE CODE OF CIVIL PROCEDURE, WHICH READS AS UNDER: RULE 2. RECOGNIZED AGENTS. THE RECOGNIZED AGENTS OF PARTIES BY WHOM SUCH APPE ARANCES, APPLICATIONS AND ACTS MAY BE MADE OR DONE, ( A ) PERSONS HOLDING POWER - OF - ATTORNEY, AUTHORIZING THEM TO MAKE AND DO SUCH APPEARANCES, APPLICATIONS AND ACTS ON BEHALF OF SUCH PARTIES, (B) PERSONS CARRYING ON TRADE OR BUSINESS FOR AND IN THE NAMES OF PARTIES NOT RESIDENT WITHIN THE LOCAL LIMITS OF THE JURISDICTION OF THE COURT WITHIN WHICH LIMITS THE APPEARANCES, APPLICATION OR ACT IS MADE THE APPEARANCES, APPLICATION OR ACT IS MADE OR DONE, IN MATTERS CONNECTED WITH SUCH TRADE OR BUSINESS ONLY, WHER E NO OTHER AGENT IS EXPRESSLY AUTHORISED TO MAKE AND DO SUCH APPEARANCES, APPLICATIONS AND ACTS. LEARNED STANDING COUNSEL PROVIDED THE REPORT OF THE PROCESS SERVER, WHICH READS AS FOLLOWS: , - VI 10 23 / 11 / 2001 FROM THE PERUSAL OF THE ORDER OF THE TRIBUNAL IT IS NOT CLEAR THAT ON WHICH BASIS THE TRIBUNAL HAS RECORDED THE FINDING THAT SRI G.K. LATH POSSESSED REQUISITE AUTHORITY. IN THIS VIEW OF THE MATTER, WE ARE OF THE VIEW THAT THE MATTER REQUIRES RECONSIDERATION BY THE TRIBUNAL. TRIBUNAL BEING THE FACT FINDING AUTHORITY SHOULD EXAMINE THE MATERIAL ON RECORD AND GIVE BASIS FOR COMING TO A CONCLUSION THAT SRI G.K. LATH POSSESSED REQUISITE AUTHORITY TO RECEIVE THE NOTICE. TRIBUNAL HAS NOT CONSIDERED THE ORDER V RULE 12 OF THE CODE OF CIVIL PROCEDURE, WHICH CONTEMPLATES THE SERVICE OF THE SUMMONS REFERRED HEREINA BOVE. A COPY OF THE SAID JUDGMENT IS ENCLOSED AS ANNEXURE - II (PAGES 7 TO 43) HERETO. 8. BY APPLYING THE SAID PRINCIPLE, AS LAID DOWN BY THE JURISDICTIONAL HIGH COURT AND FOLLOWED BY ALLAHABAD BENCH OF THE HONBLE ITAT, IT IS SUBMITTED THAT YOUR HONOURS BE PLEASED TO HOLD THAT DEFICIENCIES IN THE MATTER OF ISSUANCE OF NOTICE (OWING TO THE REASONS THAT THE SAME HAD NOT BEEN ADDRESSED TO THE PRINCIPAL OFFICER) AND SERVICE THEREOF (FOR THE REASON THAT IT HAD NOT BEEN SERVED AS PER THE WE LL LAID RULE OF SERVICE OF NOTICE) THE NOTICE DATED 30.07.2008 (COPY APPEARING AT PAGE 1 OF THE COMPILATION) WAS NO NOTICE IN THE EYES OF LAW. THEREFORE VARIOUS DISALLOWANCES, AS PER PARTICULARS GIVEN IN THE OPENING PARAGRAPH, AS HAD BEEN MADE IN THE ASSESSMENT MADE UNDER SECTION 143(3) AND SUSTAINED BY THE LD. APPELLATE AUTHORITY ALSO ARE NOT VALID AND ACCORDINGLY DESERVE TO BE QUASHED . 9. BY TAKING COGNIZANCE OF THE INFORMATION AVAILABLE ON RECORD ABOUT NON - SERVICE OF NOTICE UNDER SECTION 143(2) , THE APPELLANT CAN PLEAD THIS LEGAL GROUND EVEN WITHOUT TAKING A FORMAL GROUND IN VIEW OF THE PRINCIPAL AID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF NATIONAL THERMAL POWER CO. LTD. VS. CIT REPORTED IN (1998) 229 ITR 383 . FOLLOWING THE SAID DECISION, THE HONBLE GAUHATI HIGH COURT IN THE CASE OF ASSAM CO. (INDIA) LTD VS. CIT REPORTED IN (2002)256 ITR 423 HAS HELD AS UNDER: - 11 WE ARE THEREFORE NOT IN FAVOUR OF GRANTING SUCH A PRIMACY TO THE RULES OF PROCEDURES SO AS TO WIPE OFF A SUBST ANTIAL RIGHT OTHERWISE AVAILABLE TO THE ASSESSEE IN LAW. WE FIND THIS VIEW OF OURS ALSO REINFORCED BY THE LANGUAGE OF RULE 11 WHICH DOES NOT REQUIRE THE TRIBUNAL TO BE CONFINED TO THE GROUNDS SET FORTH IN THE MEMORANDUM OF APPEAL OR TAKEN BY LEAVE OF THE T RIBUNAL PROVIDED THE PARTY WHO MAY BE AFFECTED THEREBY HAD SUFFICIENT OPPORTUNITY OF BEING HEARD ON THE GROUND. IN TAKING THIS VIEW, WE ARE CONSCIOUS ABOUT THE OBSERVATIONS OF THE MADRAS HIGH COURT AND THE CALCUTTA HIGH COURT MADE IN THE DECISIONS RELIED U PON BY LEARNED COUNSEL FOR THE REVENUE BUT WE ARE, IN THE FACTS AND CIRCUMSTANCES OF THE CASE, PERSUADED TO ACCEPT THE OBSERVATIONS OF THE APEX COURT MADE IN THIS REGARD IN THE CASE OF NATIONAL THERMAL POWER CO. LTD. (1998) 229 ITR 283. WE ARE THEREFORE OF THE VIEW THAT IT IS PERMISSIBLE ON THE PART OF THE TRIBUNAL TO ENTERTAIN A GROUND BEYOND THOSE INCORPORATED IN THE MEMORANDUM OF APPEAL THOUGH THE PARTY URGING THE SAID GROUND HAD NEITHER APPEALED BEFORE IT NOR HAD FILED A CROSS - OBJECTION IN THE APPEAL FI LED BY THE OTHER PARTY. WE MUST HOWEVER HASTEN TO ADD THAT IN ORDER TO ENABLE EITHER THE ASSESSEE OR THE DEPARTMENT TO URGE A GROUND IN THE APPEAL FILED BY THE OTHER SIDE, THE RELEVANT FACTS ON WHICH SUCH GROUND IS TO BE FOUNDED SHOULD BE AVAILABLE ON RECO RD. IN THE ABSENCE OF SUCH PRIMARY FACTS, IN OUR OPINION, NEITHER THE ASSESSEE NOR THE DEPARTMENT CAN BE PERMITTED TO URGE ANY GROUND OTHER THAN THOSE WHICH ARE INCORPORATED IN THE MEMORANDUM OF APPEAL FILED BY THE OTHER PARTY. IN OTHER WORDS, IF THE ASSES SEE OF THE DEPARTMENT, WITHOUT FILING ANY APPEAL OR A CROSS OBJECTION SEEKS TO URGE A GROUND OTHER THAN THE GROUNDS INCORPORATED IN THE MEMORANDUM OF APPEAL FILED BY THE OTHER SIDE, THE EVIDENTIARY FACTS IN SUPPORT OF NEW GROUND MUST BE AVAILABLE ON RECORD . (PAGES 439 440 ) THE APPELLANTS CASE IS EVEN ON A BETTER FOOTING AS IT HAS TAKEN A SPECIFIC GROUND TO THE EFFECT IN THE MEMO OF APPEAL AND BY VIRTUE OF APPLICABILITY OF RULE 11 OF INCOME TAX (APPELLATE) TRIBUNAL RULES 1963, SUCH GROUND IS NOT EVEN AN ADDITIONAL GROUND. 10. THERE IS YET ANOTHER ANGLE ALSO. THE SAID LEGAL GROUNDS DEAL WITH ANOTHER ASPECT OF THE ISSUE REFERABLE TO THE DISALLOWANCES OUT OF EXPENSES UNDER VARIOUS HEADS (AS PER PARTICUL ARS GIVEN AT II IN PARA 1 ABOVE) AS HAD BEEN MADE/SUSTAINED BY THE AUTHORITIES BELOW. IN OTHER WORDS, THE LEGAL ISSUE AS HAS BEEN RAISED BY THE APPELLANT THROUGH GROUNDS NO.1 & 2, HAVING A DIRECT BEARING ON THE MAINTAINABILITY OF THE DISALLOWANCES OF EXPENSES (AS HAS BEEN AGITATED THROUGH GROUNDS NO.3, 4, 5 & 6 OF THE MEMO OF APPEAL THE SAME DESERVES TO BE CONSIDERED BY YOUR HONOUR, NOTWITHSTANDING THE SUBMISSIONS MADE IN PARA 2 HEREINFORE. 12 11. ON THE STRENGTH OF THE SUBMISSIONS MADE HEREINFORE THE APPELLANT BEGS TO SUBMIT THAT THE ASSESSING OFFICER WAS NOT COMPETENT TO VARY THE RETURNED INCOME BY MAKING FOLLOWING DISALLOWANCES: - (A) RS.6,00,000 INTEREST ATTRIBUTABLE TO ADVANCE GIVEN TO M/S. RAVE @ MOTI INTERNATIONAL (P) LTD.; (B) RS.13,26,780 INTEREST ATTRIBUTABLE TO THE INVESTMENT MADE IN SHARE APPLICATION MONEY WITH RAVE @ MOTI ENTERTAINMENT PVT. LTD. (C) RS.10,99,620 DISALLOWANCE OF PROPORTIONATE EXPENSES BY INVOKING THE PROVISIONS OF SECTION 14A (D) RS.18,40,086 INTEREST SAID TO BE ATTRIBUTABLE TO THE INVESTMENT IN NEW PROJECTS. (E) RS.5,00,000 REPRESENTING THE BALANCES WRITTEN OFF, IN THE FORM OF LOSSES INCIDENTAL TO THE CARRYING ON OF ITS BUSINESS. AND ACCORDINGLY THE SAME DESERVE TO BE DELETED. 12. IT ALSO DESERVES TO BE APPRECIATED THAT THE ASSESSMENT YEAR BEING 2007 - 08 , THE EMBARGO PLACED ON THE RIGHT OF AN ASSESSEE TO PLEAD INVALIDITY IN THE SERVICE OF NOTICE BEFORE THE HONBLE TRIBUNAL IS NOT AFFECTED BY SECTION 292BB OF THE ACT ( AS HAS BEEN INSERTED BY THE FINANCE ACT 2008 W.E.F. 1.4.2008). THIS HAS BEEN SO HELD IN LARGE NUMBER OF JUDICIAL PRONOUNCEMENTS, WHEREIN IT HAS BEEN HELD THAT THE SAID SECTION 292BB IS APPLICABLE FROM THE ASSESSMENT YEAR 2008 - 09 ONLY. 13. IN TERMS OF GROUND NO.3 THE APPELLANT HAS ALSO CONTENDED THAT ASSESSMENT RELATED PROCEEDINGS BY IS SUE OF NOTICE UNDER SECTION 143(2) DATED 30.07.2008, VALIDITY ITSELF OF WHICH IS IN DISPUTE HERE, HAVING BEEN INITIATED BY THE INCOME TAX AUTHORITY OF THE RANK OF DY. CIT, THE ASSESSMENT ORDER PASSED BY JT. CIT, WHICH IS AN ALL TOGETHER DIFFERENT INCOME TAX AUTHORITY AS PER PROVISIONS CONTAINED IN SECTION 116 OF THE ACT, IS NOT VALID. THE RESULT OF SUCH AN INVALIDITY IS THAT VARIOUS DISALLOWANCES AS STAND COMPRISED IN THE ASSESSMENT ORDER (AS PER PARTICULARS GIVEN IN PARA 11 ABOVE) HAVE BECOME UNTENABLE I N LAW. THE POINT AT ISSUE IS COVERED BY THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF VALVOLINE CUMMINS LTD. VS. DY. CIT REPORTED IN (2008) 307 ITR 103 , COPY APPEARING AT PAGES 15 TO 22 OF THE PAPER BOOK, RELEVANT PASSAGES APPEARING AT PAGES 18 TO 20 THEREOF. II MERITS OF DISALLOWANCES OF EXPENSES 14. AFTER HAVING DEALT WITH THE LEGAL ISSUES WHICH GO TO IMPINGE UPON THE MAINTAINABILITY OF VARIOUS DISALLOWANCES, THE 13 APPELLANT BEGS TO MAKE ITEM WISE SUBMISSIONS IN THE PARAGRAPHS THAT FOLLOW. (A) DISALLOWANCE OF INTEREST ATTRIBUTABLE TO ADVANCES GIVEN TO SISTER CONCERN : 15. THE LD. CIT(A) HAS DEALT WITH THE ISSUE IN PARAS 3 , 3.1 , 3.2 AND 3.3 OF THE APPELLATE ORDER, THAT HAS BEEN IMPUGNED IN THIS APPEAL. FROM A PERUSAL OF THE SAID PARAGRAPHS, WHICH ARE REPRODUCED HEREUNDER: - 3. GROUND NO.1 OF APPEAL RELATES TO DISALLOWANCE OF RS.6,00,000/ - OUT OF INTEREST TOWARDS INTEREST FREE ADVANCE TO RAVE@MOTI ENTERTAINMENT PVT. LTD; 3.1. IN THIS REGARD, THE A.O. HAS OBSERVED IN THE ASSTT . ORDER. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS FOUND THAT THERE WAS A SQUARED UP ACCOUNT IN THE NAME OF RAVE@MOTI INTERNATIONAL PVT. LTD. FOR RS.50,00,000/ - . COPY OF ACCOUNT WAS TAKEN ON ACCOUNT. IN FACT, THIS RS.50,00,000/ - WAS ADVANCE D DURING A.Y. 2006 - 07. HOWEVER COPY OF ACCOUNT REVEALED THAT ON THIS ADVANCE NO INTEREST WAS CHARGED WHILE SUBSTANTIAL AMOUNT WAS DEBITED AS INTEREST ON SECURED LOAN WITH CENTRAL BANK OF INDIA AND O.D. ACCOUNT WITH ORIENTAL BANK OF COMMERCE. ON THE ISSUE OF NON CHARGING INTEREST ON THIS ADVANCE, IT WAS STATED THAT THE SAID AMOUNT HAD BEEN ADVANCED OUT OF INTEREST FREE FUND AND THEREFORE THERE WAS NO NEED FOR MAKING ANY DISALLOWANCE OUT OF DEBIT OF INTEREST OR FOR NON CHARGING OF INTEREST. I HAVE CONSID ERED THE REPLY. MY FINDINGS ARE AS UNDER: - FIRSTLY, THE NEXUS THAT AMOUNT WAS EXCLUSIVELY ADVANCED FROM INTEREST FREE FUNDS, IS NOT PROVED BY ANY EVIDENCE BECAUSE THE AMOUNT, HAS DIRECTLY FLOWN FROM THE O.D. ACCOUNT AND SECONDLY THE DIRECT NEXUS O F FUND BETWEEN BORROWINGS AND DIVERSION THEREOF FOR NON BUSINESS PURPOSES IS NOT AT ALL RELEVANT AS HAS BEEN HELD BY HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. ABHISHEK INDUSTRIES LTD. 286 ITR 1. BESIDES, IN A.Y.2006 - 07, A DISALLOWANCE OF RS.3,75,000/ - ON ACCOUNT OF INTEREST @12% HAS ALREADY BEEN MADE AND ADDED TO THE INCOME. AS SUCH, IN THIS YEAR ALSO INTEREST ON ABOVE SUM OF RS.50,00,000/ - @12% IS DETERMINED AT RS.6,00,000/ - AND PROPORTIONATE DISALLOWANCE OUT OF TOTAL DEBIT IS ACCORD INGLY MADE, WHICH IS ADDED TO THE INCOME. (ADDITION RS.6,00,000/ - ) 14 3.2 THE APPELLANT HAS SUBMITTED THAT: THAT THE FIRST GROUND OF APPEAL PERTAINS TO DISALLOWANCE OF AN AMOUNT OF RS.600000/ - ON ACCOUNT OF INTEREST FREE ADVANCE MADE BY THE APPELLANT COMPANY TO RAVE@MOTI ENTERTAINMENT PVT. LTD. WHEREIN THE APPELLANT COMPANY OWN 50% OF THE EQUITY SHARES AS EVIDENCED BY A COPY OF THE AUDITED BALANCE SHEET SCHEDULE 1 OF THE INVESTEE COMPANY FOR YEAR ENDING 31.3.2007 IS ENCLOSED. HOWEVER, WHILE ADJUDICATIN G THE APPEAL PERTAINING TO SAME/SIMILAR MATTER FOR A.Y.2005 - 07, YOUR HONOUR HAD BEEN KIND TO RESTRICT SUCH DISALLOWANCE ON RS.25 LAKHS OUT OF TOTAL ADVANCE OF RS.50 LAKHS. IT IS RESPECTFULLY SUBMITTED THAT THE MATTER BEING THAT OF INVESTOR COMPANY EXTENDI NG INTEREST FREE ADVANCE TO THE INVESTEE COMPANY FOR CONSIDERATIONS OF BUSINESS AND BUSINESS ALONE AND THERE BEING OWN, NON - BORROWED INTEREST FREE FUNDS DULY AVAILABLE WITH THE APPELLANT COMPANY, THAT THE DEEMED INCOME DUE TO PRESUMPTIVE NEED TO CHARGE INT EREST, MAY KINDLY BE ORDERED TO BE REVERSED. FOR ANY AND EVERY SUCH DISALLOWANCES OF INTEREST RELATING TO INTEREST FREE LOAN GIVEN TO SISTER CONCERNS, THE SOLE TEST AS HAS BEEN UPHELD BY THE HONBLE SUPREME COURT IN S.A. BUILDERS LTD. V. CIT (APPEALS) [20 07] 288 ITR 1 (SC) CLEARLY LAYS DOWN THAT NO BUSINESSMAN CAN BE COMPELLED TO MAXIMIZE HIS PROFIT. THE AUTHORITIES SHOULD PUT THEMSELVES IN THE SHOES OF THE ASSESSEE AND CONSIDER WHAT A PRUDENT BUSINESSMAN COULD DO.. WOULD INDICATE THAT THE AUTHOR ITIES HAD IGNORED THE SPECIAL RELATIONSHIP BETWEEN THE HOLDING AND A SUBSIDIARY COMPANY, BOTH IN BUSINESS, SO THAT SUCH ADVANCE SHOULD BE TAKEN AS PROMPTED BY COMMERCIAL EXPEDIENCY, SO AS TO BE DEDUCTIBLE UNDER SECTION 37, IF NOT UNDER SECTION 36(1)(HI) OF THE ACT THIS WAS A CASE OF INTEREST ON BORROWED CAPITAL. OUR CASE IS THAT OF PRESUMPTION OF DEEMED INCOME OF INTEREST, NOT CHARGED ON OWN/NOT BORROWED FUNDS, EXTENDED TO A SISTER CONCERN, PURELY ON CONSIDERATIONS OF BUSINESS AND BUSINESS ALONE. 3. 3 DECISION : AN INTEREST FREE ADVANCE OF RS.50 LACS WAS MADE BY THE APPELLANT TO AN ALTOGETHER DIFFERENT COMPANY I.E. RAVE @MOTI. SINCE THIS AMOUNT WAS ADMITTEDLY WITHDRAWN FROM AN O.D. ACCOUNT OF THE APPELLANT COMPANY, THESE FUNDS WERE NOT INTEREST - FREE FUNDS BUT INTEREST BEARING FUNDS, WHICH MEANS THAT THERE IS DIRECT NEXUS BETWEEN THE MONEY BORROWED AND SUCH ADVANCES GIVEN. THE RELIANCE PLACED BY THE APPELLANT ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF S.A BUILDERS IS TOTALLY MISPLACED FOR THE REASON THAT IN THAT CASE, THE APPELLANT, APART FROM MAKING A BALD STATEMENT, HAS NOT GIVEN ANY REASONS WHICH COULD JUSTIFY THE COMMERCIAL EXPEDIENCY OF GIVING SUCH LOANS. EVEN OTHERWISE, THE OTHER COMPANY, NAMELY M/S. RAVE MOTI ENTERTAINMENTS P VT. LTD. 15 WAS TO RUN AN ALTOGETHER DIFFERENT, SEPARATE AND INDEPENDENT MULTIPLEX - CUM - COMMERCIAL MALL. THERE WAS APPARENTLY NO BUSINESS EXPEDIENCY IN MAKING SUCH INTEREST FREE ADVANCES. IT MAY BE MENTIONED THAT AN ASSESSEE CANNOT GOT SCOT FREE BY JUST RA ISING THE BOGEY OF BUSINESS EXPEDIENCY. TO SEEK BENEFIT OF COMMERCIAL EXPEDIENCY, THERE HAS TO BE A REAL BUSINESS EXPEDIENCY, WHICH HAS TO BE DEMONSTRATED BY THE APPELLANT COMPANY. THE ADDITION MADE IS, THEREFORE CONFIRMED. IT IS SEEN THAT THE DISALLOWANCE IS FOUNDED ON THE GROUND THAT THE ASSESSEE COULD NOT LEAD ANY EVIDENCE TO SHOW THAT ADVANCES HAD BEEN MADE OUT OF INTEREST FREE FUNDS AVAILABLE WITH THE APPELLANT . 16. WITH GREAT RESPECT, THE APPELLANT BEGS TO SUBMIT T HAT THE OBSERVATIONS ARE FACTUALLY INCORRECT. AS PER THE SCHEDULE OF SOURCES OF FUNDS APPENDED TO THE ANNUAL STATEMENT OF ACCOUNT, IT WILL BE SEEN THAT THE APPELLANT HAD INTEREST FREE FUNDS TO THE TUNE OF RS. 22.14 CRORES AS ON 1.4.2006 (ADVANCE HAD BEEN MADE IN THE PRECEDING YEAR) AND EVEN AT THE END OF THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR 2007 - 08, THE CORRESPONDING FIGURE WAS RS. 19.51 CRORES. THE SAID SCHEDULE OF SOURCES OF FUNDS IS REPRODUCED HEREUNDER FOR THE SAKE OF READY REFERENCE: - 1 . SOURCE OF FUNDS: SCHEDULE NO. AS AT 31.03.2007 AMOUNT (RS.) AS AT 31.03.2006 AMOUNT (RS.) I . SHARE HOLDERS FUNDS A . CAPITAL B . RESERVES AND SURPLUS II. LOAN FUNDS A . SECURED B . UNSECURED III .DEFERRED TAX LIABILITY 1 2 3 4 30000000 111126220 86746159 67179021 0 30000000 59037151 93996730 35872317 2531604 195051400 221437802 (EXTRACTED FROM PAGE 28 OF THE PAPER BOOK) 17. THE SAID SCHEDULE ITSELF IS AN EVIDENCE OF AVAILABILITY OF INTEREST FREE FUNDS WITH THE APPELLANT, AND THAT TOO OF SUCH A HUGE VOLUME THAT THE SAME COVERS VARIOUS OTHER ADVANCES ALSO WITH REFERENCE TO WHICH THE DISALLOWANCES AS ARE LISTED HEREIN BELOW. (I) DISALLOWANCE OUT OF INTEREST, BY INVOKING THE PROVISIONS OF SECTION14A. : RS.10,99,622 (II) ADVANCES TO THE OTHER RAVE S : RS.18,40,086 (III) NON CHARGING OF INTEREST ON CONTRIBUTION MADE BY WAY OF SHARE APPLICATION MONEY TO M/S. RAVE @MOTI ENTERTAINMENT (P) LTD. HAD BEEN MADE IN THE ASSESSMENT. : RS.13,26,780 16 HAVE BEEN MADE /SUSTAINED. 18. THE FACTUAL MATRIX ABOUT AVAILABILITY OF INTEREST FREE FUNDS WITH VARIOUS ADVANCES AS GIVEN OUT OF SAME BY THE APPELLANT, DETAILED SUBMISSIONS HAD BEEN MADE BEFORE THE ASSESSING OFFICER HIMSELF VIDE LETTER DATED 21/23.12.2009 (COPY APPEARING AT PAGES 61 TO 64 OF THE PAPER BOOK) . RELEVANT PASSAGE FROM THE SAID SUBMISSION IS REPRODUCED HEREUNDER: - 3. IT IS MOST HUMBLY AND RESPECTFULLY SUBMITTED THAT THE ADVANCE OF RS.50,00,000.00 HAS BEEN MADE TO RAVE@MOTI ENTERTAINMENT PVT. LTD DURING THE FINANCIAL YEAR 2005 - 06 FROM INTEREST FREE DEPOSITS FROM SHAREHOLDERS. DETAILS OF INTEREST FREE DEPOSITS OF SHAREHOLDERS ARE AS UNDER: - PARTICULARS. SRI MAHENDRA MOHAN GUPTA SRI VIKRAM KOTHARI SMT. SADHNA KOTHARI TOTAL OP. BALANCE AS ON 01.04.2005 12500000 6275000 6275000 25050000 RECEIVED AND CHEQUES CREDITED BY BANK ON 24.08.2005 & 25.08.2005 1250000 625000 625000 2500000 13750000 6900000 6900000 27550000 WE HAVE GIVEN ADVANCE TO RAVE @MOTI ENTERTAINMENT (P) LTD. ON 17.08.2005 RS.2500000 (CHEQUE PASSED ON 24.08.2005) OUT OF INTEREST FREE DEPOSIT OF SHAREHOLDERS OPENING BALANCE AS ON 01.04.2005 AND RS.2500000 ON 18.08.2005 CHEQUES PASSED ON 29.08.2005. IT IS CLEAR THAT WE HAVE MADE ADVANCE RS.2500000 FROM INTEREST FREE OPENING BALANCE OF SHAREHOLDERS AND RS.2500000 RECEIVED F ROM SHAREHOLDERS ON 25.08.2005 (CHEQUE CREDITED BY BANK ON 24.08.2005 & 25.08.2005) AND CHEQUE OF RS.2500000 ISSUED TO RAVE @MOTI ENTERTAINMENT (P) LTD. PASSED ON 29.08.2005. IT IS ALSO BE NOTED THAT WE HAVE RECEIVED BACK ENTIRE LOAN AMOUNT FROM RAVE@MOTI ENTERTAINMENT (P) LTD. DURING THE ASSESSMENT AND BALANCE AS ON 31.03.2007 IS NIL. (PHOTO COPY OF SHARE HOLDERS ACCOUNT, BANK STATEMENT AND COPY OF RAVE @ MOTI ENTERTAINMENT ACCOUNT ARE BEING ENCLOSED FOR YOUR HONOURS PERUSAL) FROM THE ABOVE FACTS IT IS CRYSTAL CLEAR THAT INTEREST FREE LOAN HAS BEEN GIVEN FROM OUR OWN FUNDS AND FROM INTEREST FREE DEPOSITS FROM SHAREHOLDERS, NOT FROM INTEREST BEARING FUNDS. 17 IN VIEW OF THE ABOVE, WE REQUEST YOUR HONOUR THAT ANY AMOUNT OF INTEREST MAY NOT BE DISALLOWED. (EXTRACTED FROM PAGES 62 AND 63 OF THE PAPER BOOK) 19. FURTHER , THE ASSESSING OFFICER HAS MENTIONED THAT ADVANCES HAD BEEN MADE FROM OD ACCOUNT AND ON THAT BASIS HE HAS INFERRED THAT THE ADVANCES IN QUESTION HAD BEEN MADE OUT OF BORROWED FUNDS. SUCH A N INFERENCE IS WHOLLY UNTENABLE EVEN ON FACTS OF THE CASE. THE OD ACCOUNT IS SIMPLY A BANK ACCOUNT OF THE APPELLANT, THROUGH WHICH THE INCOMINGS AS WELL AS OUTGOINGS ARE ROUTED. IT IS UNUSUAL AND IMPRACTICABLE ALSO THAT A BUSINESSMAN SHALL MAINTAIN TW O BANK ACCOUNTS, ONE FOR PARKING INTEREST FREE FUNDS AND OTHER FOR PARKING BORROWED FUNDS. IT IS IMPRUDENT ALSO AS IT WOULD RESULT INTO KEEPING THE FUNDS IDLE. 20. IN THE PAPER BOOK SUBMITTED BY THE APPELLANT, IT HAS PLACED VARIOUS CASE LAWS, WHICH LAY D OWN A PROPOSITION OF LAW THAT WHEN INTEREST FREE FUNDS, THAT ARE AVAILABLE WITH AN ASSESSEE, AS IS THE CASE HERE AS HAS BEEN DEMONSTRATED VIDE PARA 15 AND 17 ABOVE, ARE SUFFICIENT TO COVER THE ADVANCES, THE PRESUMPTION IS THAT SUCH ADVANCES HAVE BEEN MADE OUT OF INTEREST FREE FUNDS . GIST OF SUCH CASE LAWS (COPIES OF WHICH ARE APPEARING IN THE PAPER BOOK) IS GIVEN HEREUNDER: - SL. NO. OF THE PAPER BOOK PARTICULARS OF THE CASE LAWS PAGE NO. OF THE PAPER BOOK 15. COMMISSIONER OF INCOME TAX VS. RELIANCE UTILITIES & POWER LTD. REPORTED IN (2009) 313 ITR 340 (BOMBAY) 10. IF THERE BE INTEREST FREE FUNDS AVAILABLE TO AN ASSESSEE SUFFICIENT TO MEET ITS INVESTMENTS AND AT THE SAME TIME THE ASSESSEE HAD RAISED A LOAN IT CAN BE PRESUMED THAT THE INVESTMENTS WERE FROM THE INTEREST FREE FUNDS AVAILABLE . IN OUR OPINION THE SUPREME COURT IN EAST INDIA PHARMACEUTICAL WORKS LTD. (SUPRA) HAD THE OCCASION TO CONSIDER THE DECISION OF THE CALCUTTA HIGH COURT IN WOOLCOMBERS OF INDIA LTD. (SUPRA) WHERE A SIMILAR ISSUE HAD A RISEN. BEFORE THE SUPREME COURT IT WAS ARGUED THAT IT SHOULD HAVE BEEN PRESUMED THAT IN ESSENCE AND TRUE CHARACTER 143 146 18 THE TAXES WERE PAID OUT OF THE PROFITS OF THE RELEVANT YEAR AD NOT OUT OF THE OVERDRAFT ACCOUNT FOR THE RUNNING OF THE BUSINESS AND IN THESE CIRCUMSTANCES THE APPELLANT WAS ENTITLED TO CLAIM THE DEDUCTIONS. THE SUPREME NOTED THAT THE ARGUMENT HAD CONSIDERABLE FORCE 16. COMMISSIONER OF INCOME TAX VS. PREM HEAVY ENGINEERING WORKS (P) LTD. REPORTED IN (2006) 285 ITR 554 (ALLD.) FROM A PERUSAL OF THE REPLY REPRODUCED ABOVE, WE FIND THAT THE RESPONDENT ASSESSEE HAD SUFFICIENT AMOUNT OF MONEY TOWARDS SHARE CAPITAL, SURPLUS AND RESERVE AS ALSO INTEREST FREE ADVANCES BY THE TWO COMPANIES WHICH WAS ABOUT RS.1,60,00,000. THUS, THE INTE REST FREE ADVANCES MADE TO SISTER CONCERN, NAMELY M/S PREM ENGINEERING WORKS WAS FULLY COVERED FROM THE INTEREST FREE ADVANCES WHICH WAS SHARE CAPITAL, SURPLUS AND RESERVE WHICH THE RESPONDENT ASSESSEE HAD. THIS COURT IN THE CASE OF CIT & ANR. VS. RADICO KHAITAN LTD. (2005) 194 CTR (ALL) 451 : 2005 UPTC 82 HAD CONSIDERED THIS ASPECT AND HAS HELD THAT WHERE THE AMOUNT OF ANY INTEREST FREE LOAN IS SUFFICIENTLY COVERED WITH THE NON - INTEREST BEARING FUND AVAILABLE WITH THE ASSESSEE, THE QUESTION OF DISALLOWANC E OF INTEREST ON BORROWED FUND DOES NOT ARISE. IT IS ALSO NOT THE CASE OF THE REVENUE THAT ANY AMOUNT BORROWED FROM THE BANK ON WHICH THE LIABILITY FOR PAYMENT OF INTEREST FREE ADVANCE WAS THERE WITH THE RESPONDENT ASSESSEE, HAD NOT UTILIZE FOR THE PURPOS ES OF BUSINESS. 147 149 13. COMMISSIONER OF INCOME TAX - 2 BOMBAY VS. HDFC BANK LTD. IN ITA NO.330 OF 2012 , WHEREIN BY REFERRING THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITIES & POWER LTD . (INFRA), IT HAS BEEN HELD THAT WHERE OWN FUNDS AND OTHER NON - INTEREST BEARING FUNDS WERE MORE THAN THE INVESTMENT IN THE TAX SECURITIES NO DISALLOWANCE CAN BE MADE. 130 136 14. PRANIK SHIPPING & SRVICES LTD. VS. ACIT REPORTED IN (2012) 135 ITD 233 ( MUM), WHEREIN AFTER REFERRING TO THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF EAST INDIA PHARMACEUTICAL WORKS LTD. VS. CIT REPORTED IN (1997) 224 ITR 62 (SC) IT HAS BEEN HELD THAT 6. FROM THE ABOVE JUDGMENT IT IS MANIFEST THAT 137 - 142 19 IF THE ASSESSEE HA S INTEREST FREE FUNDS AS WELL AS INTEREST BEARING FUNDS AT ITS DISPOSAL, THEN THE PRESUMPTION WOULD BE THAT INVESTMENTS WERE MADE FROM INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE. ADVERTING TO THE FACTS OF THE INSTANT CASE IT IS OBSERVE THAT THE INTER EST FREE FUNDS AVAILABLE AT THE DISPOSAL OF THE ASSESSEE ARE FAR IN EXCESS OF THE INTEREST FREE LOANS ADVANCED TO THE SISTER - CONCERNS. RESPECTFULLY FOLLOWING THE MANDATE OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF RELIANCE UTILITY AND POWER LI MITED (SUPRA), WE ORDER FOR THE DELETION OF THE ADDITION. THIS GROUND IS ALLOWED. 21. IN ADDITION, A REFERENCE CAN USEFULLY BE MADE TO THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF MUNJAL SALES CORPORATION VS. CIT REPORTED IN (2008) 298 ITR 298 RELEVANT PASSAGE OF WHICH READS AS UNDER: - ONE ASPECT NEEDS TO BE MENTIONED DURING THE ASSESSMENT YEAR 1995 - 96, APART FROM THE LOAN GIVEN IN AUGUST/SEPTEMBER, 1991, THE ASSESSEE ADVANCED INTEREST - FREE LOAN TO ITS SISTER CONCERN AMOUNTING TO RS. 5 LACS. ACCORDING TO THE TRIBUNAL, THERE WAS NOTHING ON RECORD TO SHOW THAT THE LOANS WERE GIVEN TO THE SISTER CONCERN BY THE ASSESSEE - FIRM OUT OF ITS OWN FUNDS AND, THEREFORE, IT WAS NOT ENTITLED T O CLAIM DEDUCTION UNDER SECTION 36(1)(III). THIS FINDING IS ERRONEOUS. THE OPENING BALANCE AS ON APRIL 1, 1994, WAS RS. 1.91 CRORES WHEREAS THE LOAN GIVEN TO THE SISTER CONCERN WAS A SMALL AMOUNT OF RS. 5 LACS. IN OUR VIEW, THE PROFITS EARNED BY THE ASSESS EE DURING THE RELEVANT YEAR WERE SUFFICIENT TO COVER THE IMPUGNED LOAN OF RS.5 LACS. 22. THE MATTER CAN BE EXAMINED FROM YET ANOTHER ANGLE ALSO. AS HAS BEEN OBSERVED BY THE LD. ASSESSING OFFICER IN THE OPENING PARAGRAPH OF THE ASSESSMENT ORDER ITSELF, THE ASSESSEE ENJOYS THE INCOME FROM RUNNING MULTIPLEX. IT ALSO ENJOYS INCOME FROM RENT RECEIPTS FROM VARIOUS PERSONS WHO ARE HOUSED IN THE PREMISES WHERE MULTIPLEX IS BEING RUN . IN ORDER TO EXPAND ITS BASE, IT HAD SET UP OTHER RAVES ALSO. THIS HAS BEEN SO STATED BY THE ASSESSING OFFICER HIMSELF IN PARA 8 OF THE ASSESSMENT ORDER [(IN THE CONTEXT OF MAKING ANOTHER DISALLOWANCE OF RS.18,40,086/ - , [LISTED AT SERIAL NO.(II) OF PARA 17 HEREINFORE OUT OF INTEREST] WHICH READS AS UNDER: - ADVANCES TO OTHER RAVE S 8. EXAMINATION OF ACCOUNTS REVEALED THAT IN THE BOOKS OF ACCOUNTS THAT THE ASSESSEE HAD STARTED ITS RAVE PROJECTS AT AGRA, MEERUT, JALANDHAR AND NOIDA. INVESTMENTS WERE MADE IN ALL THESE PROJECTS FROM THE BOOKS OF ACCOUNTS OF THE ASSESSEE AND NECESSARY 20 FUNDS HAD FLOWN FROM THE BANK ACCOUNT OF THE ASSESSEE. NO INCOME HAS GENERATED FROM SUCH PROJECTS BECAUSE THE PROJECTS HAD NOT STARTED FUNCTIONING IN THE YEAR UNDER CONSIDERATION. IT IS ALSO SEEN THAT IN AY 2008 - 09, ALL THESE PROJECTS HAD BEEN TRANSFERR ED TO M/S ADLABS FOR WHICH A COMBINED MOU WAS ALSO DRAWN. SINCE THESE PROJECTS WERE UNDER PROGRESS, AS SUCH, THE ELEMENT OF INTEREST ARISING FROM THE BANK TRANSACTION NEEDS TO BE CAPITALIZED AND CANNOT BE ALLOWED AS A DEDUCTION IN THIS YEAR. THE POSITION OF AMOUNT INVESTED AND ELEMENT OF INTEREST WHICH NEEDS TO BE CAPITALIZED FOR EACH OF THE PROJECTS ARE AS UNDER: - 1. RAVE, AGRA OPENING BALANCE RS. 13,93,290/ - CLOSING BALANCE RS. 1,33,29,668/ - INTEREST ELEMENT RS. 10,26,101/ - 2. RAVE JALANDHAR OPENING BALANCE RS. 12,25,000/ - CLOSING BALANCE RS. 12,25,000/ - INTEREST ELEMENT RS. 1,47,000/ - 3. RAVE MEERUT OPENING BALANCE RS. 2,51,000/ - CLOSING BALANCE RS. 8,11,710/ - INTEREST ELEMENT RS. 59,182/ - 4. RAVE NOIDA OPENING BALANCE RS. 49,43,110/ - CLOSING BALANCE RS. 44,44,352/ - INTEREST ELEMENT RS. 6,07,803/ - TOTAL INTEREST WORKS OUT TO RS.18,40,086/ - WHICH IS BEING CAPITALIZED AND DEBIT OF INTEREST IS BEING DISALLOWED TO THE ABOVE EXTENT AND ADDED TO THE INCOME (ADDITION RS.18,40,086/ - ) 23. THEREFORE, WITHOUT CAUSING IN ANY MANNER ANY PREJUDICE TO THE SUBMISSIONS THAT ADVANCES ETC. ARE FULLY COVERED BY INTEREST FREE FUNDS AVAILABLE WITH THE APPELLANT (WITH THE RESULT THAT NONE OF THE DISALLOWANCES AS SUMMARIZED IN PARA 17 HEREINFORE, ARE TENABLE) SUCH ADVANCES/INVESTMENTS ARE TO BE HELD TO BE THE ADVANCES MADE TO THE SISTER CONCERN, ON CONSIDERATION OF COMMERCIAL EXPEDIENCY. IN SUCH A SITUATION NO SUCH DISALLOWANCE AS HAS BEEN MADE/SUSTAINED BY THE AUTHORITIES BELOW IN THE CASE OF THE ASSESSEE/APPELLANT, CAN BE UPHELD. RELIANCE IN THIS REGARD IS PLACED ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF S.A. BUILDERS LTD. VS. CIT AND OTHERS REPORTED IN (2007) 288 ITR 1 (COPY APPEARING AT PAGES 110 TO 115 OF THE PAPER BOOK) WHEREIN THEIR LORDSHIPS HAVE OBSERVED AND HELD AS UNDER: - THE EXPRESSION COMMERCIAL EXPEDIENCY IS AN EXPRESSION OF WIDE IMPORT AND INCLUDES SUCH EXPENDITURE AS A PRUDENT BUSINESSMAN INCURS FOR THE PURPOSE OF BUSINESS. THE EXPENDITURE MAY NOT HAVE BEEN INCURRED UNDER ANY LEGAL OBLIGATION, BUT YET IT IS ALLOWABLE AS A BUSINESS EXPENDITURE IF IT WAS INCURRED ON GROUNDS OF COMMERCIAL 21 EXPEDIENCY. NO DOUBT, AS HELD IN MADHAV PRASAD JATIA V. CIT (1979) 118 ITR 200 (SC), IF THE BORROWED AMOUNT WAS DONATED FOR SOME SENTIMENTAL OR PERSONAL REASONS AND NOT ON THE GROUND OF COMMERCIAL EXPEDIENCY, THE INTEREST THEREON COULD NOT HAVE BEEN ALLOWED UNDER SECTION 36(1)(III) OF THE ACT. IN MADHAV PRASADS CASE (1979) 118 ITR 200 (SC), THE BORROWED AMOUNT WAS DONATED TO A COLLEGE WITH A VIEW TO COMMEMORATE THE MEMORY OF THE ASSE SSEE DECEASED HUSBAND AFTER WHOM THE COLLEGE WAS TO BE NAMED. IT WAS HELD BY THIS COURT THAT THE INTEREST ON THE BORROWED FUND IN SUCH A CASE COULD NOT BE ALLOWED, AS IT COULD NOT BE SAID THAT IT WAS FOR COMMERCIAL EXPEDIENCY. THUS, THE RATIO OF MADH AV PRASAD JATIAS CASE (1979) 118 ITR 200 (SC) IS THAT THE BORROWED FUND ADVANCED TO A THIRD PARTY SHOULD BE FOR COMMERCIAL EXPEDIENCY IF IT IS SOUGHT TO BE ALLOWED UNDER SECTION 36(1)(III) OF THE ACT. PAGE 8 XXXX XXXX XXXX WE AGREE WITH THE VIEW TAKEN BY THE DELHI HIGH COURT IN CIT V. DALMIA CEMENT (B.) LTD. (2002) 254 ITR 377 THAT ONCE IT IS ESTABLISHED THAT THERE WAS NEXUS BETWEEN THE EXPENDITURE AND THE PURPOSE OF THE BUSINESS (WHICH NEED NOT NECESSARILY BE THE BUSINESS OF THE ASSESSEE ITSELF) , THE REVENUE CANNOT JUSTIFIABLY CLAIM TO PUT ITSELF IN THE ARM - CHAIR OF THE BUSINESSMAN OR IN THE POSITION OF THE BOARD OF DIRECTORS AND ASSUME THE ROLE TO DECIDE HOW MUCH IS REASONABLE EXPENDITURE HAVING REGARD TO THE CIRCUMSTANCES OF THE CASE. NO BUSINE SSMAN CAN BE COMPELLED TO MAXIMIZE HIS PROFIT. THE INCOME - TAX AUTHORITIES MUST PUT THEMSELVES IN THE SHOES OF THE ASSESSEE AND SEE HOW A PRUDENT BUSINESSMAN WOULD ACT. THE AUTHORITIES MUST NOT LOOK AT THE MATTER FROM THEIR OWN VIEW POINT BUT THAT OF A PRUD ENT BUSINESSMAN. AS ALREADY STATED ABOVE, WE HAVE TO SEE THE TRANSFER OF THE BORROWED FUNDS TO A SISTER CONCERN FROM THE POINT OF VIEW OF COMMERCIAL EXPEDIENCY AND NOT FROM THE POINT OF VIEW WHETHER THE AMOUNT WAS ADVANCED FOR EARNING PROFITS. (PAGE 9) THIS ASPECT OF THE MATTER, COVERS ALL THE DISALLOWANCES AS HAVE BEEN LISTED IN PARA 17 HEREINFORE. 24. IT IS FURTHER STATED, PARTICULARLY WITH REFERENCE TO AN ADDITION OF RS.6,00,000 ON ACCOUNT OF INTEREST NOT BEING CHARGED, THAT IT IS NOT A CASE WHERE A NY SUM BY WAY OF INTEREST HAD ACCRUED TO THE ASSESSEE/APPELLANT HERE, WHICH WAS GIVEN UP. AT BEST (FOR THE REVENUE) IT COULD BE A CASE OF NON CHARGING OF INTEREST, AS HAS BEEN MENTIONED BY THE ASSESSING OFFICER IN THE CONTEXT OF DISALLOWANCE OF RS.6,00,000 . THE APPELLANT BEGS TO CONTEND THAT ANY SUCH ADDITION 22 (ON ACCOUNT OF NOTIONAL INTEREST) CANNOT BE MADE IN THE ASSESSMENT. IN THIS REGARD THE APPELLANT BEGS TO RELY ON THE JUDGMENT AND ORDER DATED 29.04.2005 PASSED BY THE HONBLE ITAT, LUCKNOW BENCH IN I TA NO. 552/ALLD/2000 IN THE CASE OF DY.CIT VS. SAHU INVESTMENT MUTUAL BENEFIT COMPANY LTD . RELATING TO ASSESSMENT YEAR 1993 - 94 AND OTHER CONNECTED APPEALS. RELEVANT PORTION FROM THE SAID JUDGMENT IS REPRODUCED HEREUNDER: - .WE OBSERVE THAT THE A.O. HAS ADDED THE SAID SUM OF RS.29,20,123/ - BY CALCULATING THE NOTIONAL INCOME OF THE ASSESSEE ON THE BASIS THAT THE COST OF FUND TO THE ASSESSEE WAS AT THE RATE OF 24.5% AND, THEREFORE, THE ASSESSEE COMPANY SHOULD HAVE CHARGED THE INTEREST AT THE SAID RATE FROM THE PERSONS TO WHOM IT HAD LENT MONEY. HONBLE SUPREME COURT OF INDIA HAS HELD THAT THE INCOME TAX IS LEVIED ON THE INCOME EARNED BY THE ASSESSEE AND NOT ON THE INCOME THAT COULD HAVE BEEN EARNED BY AN ASSESSEE. IT WAS FUR THER HELD BY THEIR LORDSHIPS IN THE CASE OF CALCUTTA DISCOUNT CO. LTD., 91 ITR 8 AND IN THE CASE OF A. RAMAN & CO., 67 ITR 11, THAT IF THE ASSESSEE HAD IN FACT, NOT EARNED ANY INCOME, THERE COULD NOT BE ANY LEVY OF INCOME AND FURTHER THE LAW CASTS NO OBLIG ATION UPON ANY ASSESSEE TO EARN INCOME. THE HONBLE CALCUTTA HIGH COURT HAS ALSO HELD IN THE CASE OF KEWALCHAND BAGDI VS. CIT, 183 ITR 207, THAT NO HYPOTHETICAL INCOME CAN BE ASSESSED, WHICH CANNOT BE REALIZED. THE HONBLE GAUHATI HIGH COURT HAS ALSO HEL D IN THE CASE OF B & A PLANATATIONS AND INDUSTRIES LIMITED V.S CIT, 242 ITR 22 THAT IF THE ASSESSEE HAD NOT BARGAINED FOR INTEREST OR HAD NOT COLLECTED INTEREST IT WAS NOT OPEN TO INCOME TAX AUTHORITIES TO FIX A NOTIONAL INTEREST AND ASSESSED IT. IN VIEW OF THE ABOVE, WE AGREE WITH THE LD. CIT(A) THAT THERE IS NO QUESTION OF DIVERSION OF BORROWINGS AND/OR DIVERSION OF PROFITS BY THE ASSESSEE. HENCE, NEITHER THERE WAS AN ACCRUAL OF INCOME, WHICH COULD BE ADDED ON A NOTIONAL BASIS TO THE INCOME OF THE ASSES SEE. THEREFORE, WE UPHOLD THE ORDER OF THE CIT(A) IN DELETING THE SAID ADDITION OF RS.29,20,123/ - MADE BY THE ASSESSING OFFICER. (PAGE 10/11) A COPY OF THE SAID JUDGMENT AS A WHOLE IS ENCLOSED AS ANNEXURE III (PAGES 44 TO 64 ) HERETO. 25. IN VIEW OF THE FACTUAL MATRIX AVAILABLE ON RECORD AND THE SETTLED POSITION OF LAW AS APPLICABLE THERETO, AS HAS BEEN REFERRED TO IN THE PRECEDING PARAGRAPHS FROM PARA 15 TO 24 HEREINFORE, IT IS SUBMITTED THAT ALL THE ISSUES LIKE NON - CHARGING OF INTEREST/DIS ALLOWANCES OF INTEREST OF VARIOUS SUMS AS HAVE BEEN LISTED AT II - DISALLOWANCE OF VARIOUS EXPENSES DESERVE TO BE DECIDED IN FAVOUR OF THE APPELLANT. 23 (B) RS.13,26,780/ - : INTEREST ATTRIBUTABLE TO THE INVESTMENT MADE IN SHARE APPLICATION MONEY. 26. THE APPELLANT HAD FORMED A SEPARATE COMPANY BY THE NAME OF RAVE@ MOTI ENTERTAINMENT PVT. LTD WHEREIN MOTILAL PADAMPAT UDYOG LTD. WAS A CO - PROMOTER WITH 50% EQUITY THEREIN, IN FURTHERANCE OF ITS BUSINESS ACTIVITIES. THIS HAS BEEN SO MENTIONED BY THE ASSESS ING OFFICER HIMSELF IN PARA 8 OF THE ASSESSMENT ORDER AND REPRODUCED IN PARA 22 HEREINFORE. ADVANCE TO OTHER RAVES . 8. EXAMINATION OF ACCOUNTS REVEALED THAT IN THE BOOKS OF ACCOUNTS THAT THE ASSESSEE HAD STARTED ITS RAVE PROJECTS AT AGRA, MEERUT, JALAN DHAR AND NOIDA. INVESTMENTS WERE MADE IN ALL THESE PROJECTS FROM THE BOOKS OF ACCOUNTS OF THE ASSESSEE AND NECESSARY FUNDS HAD FLOWN FROM THE BANK ACCOUNT OF THE ASSESSEE. NO INCOME HAS GENERATED FROM SUCH PROJECTS BECAUSE THE PROJECTS HAD NOT STARTED FU NCTIONING IN THE YEAR UNDER CONSIDERATION. IT IS ALSO SEEN THAT IN A.Y. 2008 - 09, ALL THESE PROJECTS HAD BEEN TRANSFERRED TO M/S. ADLABS FOR WHICH A COMBINED MOU WAS ALSO DRAWN. SINCE THESE PROJECTS WERE UNDER PROGRESS, AS SUCH, THE ELEMENT OF INTEREST AR ISING FROM THE BANK TRANSACTION NEEDS TO BE CAPITALIZED AND CANNOT BE ALLOWED AS A DEDUCTION IN THIS YEAR. THE POSITION OF AMOUNT INVESTED AND ELEMENT OF INTEREST WHICH NEEDS TO BE CAPITALIZED FOR EACH OF THE PROJECT ARE AS UNDER: - 1.RAVE, AGRA OPENING BALANCE RS.13,93,290/ - CLOSING BALANCE RS.1,33,29,668/ - INTEREST ELEMENT RS.10,26,101/ - 2.RAVE, JALANDHAR OPENING BALANCE RS.12,25,000/ - CLOSING BALANCE RS.12,25,000/ - INTEREST ELEMENT RS.1,47,000/ - 3.RAVE, MEERUT OPENING BALANCE RS.2,51,000/ - CLOSING BALANCE RS.8,11,710/ - INTEREST ELEMENT RS.59,182/ - 4.RAVE, NOIDA OPENING BALANCE RS.49,43,110/ - CLOSING BALANCE RS.44,44,352/ - INTEREST ELEMENT RS.6,07,803/ - TOTAL INTEREST WORKS OUT TO RS.18,40,086/ - WHICH IS BEING CAPITALIZED AND DEBIT OF INTEREST IS BEING DISALLOWED TO THE ABOVE EXTENT AND ADDED TO THE INCOME (ADDITION - RS.18,40,086) 27. THE LD. CIT(A) HAS DISCUSSED THIS ISSUE IN PARAS 4 , 4.1 , 4.2 AND 4.3 OF THE APPELLATE ORDER WHICH HAS BEEN IMPUGNED IN THE 24 PRESENT APPEAL. IT IS BORNE OUT FROM THE ABOVE REFERRED PARAGRAPHS OF THE APPELLATE ORDER THAT, BASICALLY, THE ASSESSING OFFICER HAS DISALLOWED INTEREST ON THE BORROWINGS MADE BY THE APPELLANT TO THE EXTENT THE SAME WAS ATTRIBUTABLE TO THE INVESTMENT MADE BY IT IN SHARE APPLICATION MONEY GIVEN TO M/S RAVE @ MOTI ENTERTAINMENT PVT. LTD. SUCH A DISALLOWANCE HAD BEEN MADE WITHOUT APPRECIATING THE FACTS OF THE CASE, PARTICULARLY THAT (A) THE APPELLANT HAD WITH IT AVAILABLE SUFFICIENT INTEREST FREE FUNDS WHICH FULLY COVER THE LOANS AND ADVANCES/SHARE APPLICATION MONEY GIVEN TO THE SISTER CONCERNS AS PER PARTICULARS GIVEN IN PARA 15 & 17 HEREINFORE; (B) IN ANY CASE, LOOKING TO THE BUSINESS OF THE APPELLANT AS HAS BEEN REFERRED TO IN THE ASSESSMENT ORDER ITSELF AND AS DISCUSSED HEREINFORE, IN THE CONTEXT OF DISALLOWANCE OF INTEREST AMOUNTING TO RS.6 LACS ON SHARE APPLICATION MONEY GIVEN TO M/S RAVE @ MOTI ENTERTAINMENT PVT. LTD WAS FOR EXPANSION OF ITS BUSINESS AND IT WAS GOVERNED BY CONSIDERATION OF COMMERCIAL EXPEDIENCY; (C) THE ADVANCE SO MADE HAD EVEN BEEN CLASSIFIED IN THE BALANCE SHEET UNDER THE HEAD CURRENT ASSETS (ADVANCE GIVEN FOR SHARE APPLICATION MONEY). 28. IN THE CONTEXT OF DISALLOWANCE OF INTEREST AMOUNTING TO RS.6 LACS THE APPELLANT HAD DEMONSTRATED THAT IT HAD AVAILABLE WITH IT SUBSTANTIAL INTEREST FREE FUNDS AND THE CONTRIBUTION TOWARDS THE SHARE CAPITAL OF M/S RAVE @ MOTI ENTERTAINMENT PVT. LTD. HAS TO BE HELD TO HAVE BEEN MADE OUT OF SUCH FUNDS. THE FACT THAT THE CHEQUES HAD BEEN ISSUED FROM THE OD ACCOUNT DOES NOT IN ANY MANNER DEFEAT OR DECIMATE THE SAID CONTENTION AS THE OD ACCOUNT IS A CONDUIT FOR CHANNELIZING OF THE FUNDS AVAILABLE WITH THE COMPANY WHETHER BORROWED OR ITS OWN FUND. FURTHER, BECAUSE OF AVAILABILITY OF NON - INTEREST BEARING FUNDS, THE PRESUMPTION IS THAT ADVANCES IN QUESTION HAD BEEN MADE OUT OF THE SAME AND NO BORROWED FUNDS HAD BEEN UTILIZED, AS PER THE CASE LAWS REFERRED TO IN PARA 20 ABOVE. 29. THE SAID COMPANY RAVE @ MOTI ENTERTAINMENT (P) LTD WAS INCORPORATED ON 08.12.2004 AND THEIR PROJECT WA S COMMISSIONED ON 07.04.2008 . IT IS A CASE WHERE THE APPELLANT HAS CONTRIBUTED BY WAY OF SHARE APPLICATION MONEY, TO THE SHARE CAPITAL OF A SISTER CONCERN, PROMOTED BY THE APPELLANT ITSELF AS A CO - PROMOTER, TO CARRY ON SIMILAR BUSINESS. THEREFORE, PAYMEN TS MADE TOWARDS SHARE APPLICATION MONEY WERE, IN THE NATURE OF INVESTMENT MADE ON BUSINESS CONSIDERATION AND BUSINESS EXIGENCIES. THE ISSUE OF ADMISSIBILITY OF INTEREST IN SUCH A SITUATION (EVEN IF BORROWED FUNDS ARE INVOLVED, ALTHOUGH, FACTUALLY SPEAKING , IT IS NOT SO) IS FULLY COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF HONBLE APEX COURT IN THE CASE OF S.A. BUILDERS LTD. VS. CIT AND OTHERS REPORTED IN (2007) 288 ITR 1 (SUPRA). 25 30. AS STATED EARLIER RAVE@ MOTI ENTERTAINMENT PVT. LTD. HAD UTI LIZED FUNDS RECEIVED BY IT BY WAY OF SHARE CAPITAL IN COMPLETION OF THE PROJECT (WHICH GOT COMMISSIONED ALSO ON 7.4.2008). THUS, EVEN IF IT IS HELD THAT SHARE APPLICATION MONEY HAD BEEN CONTRIBUTED OUT OF BORROWED FUNDS, NO DISALLOWANCE OUT OF INTEREST PA ID COULD BE MADE. (C) RS.10,99,622/ - , PROPORTIONATE EXPENSES BY INVOKING PROVISIONS OF SECTION 14A: 31. THE CIT(A) HAS DISCUSSED THE ISSUE IN PARAS 5 , 5.1 , 5.2 AND 5.3 WHEREIN HE HAS REPRODUCED THE OBSERVATIONS MADE BY THE ASSESSING OFFICER AND ALSO H IS DECISION THEREON. THE ASSESSING OFFICER HAD MADE DISALLOWANCE TO THE TUNE OF RS. 10,99,622 / - BY INVOKING SECTION 14A READ WITH THE RULE 8 - D, WHICH WAS MODIFIED BY HIM UNDER SECTION 154 AND RESTRICTED THE DISALLOWANCE TO RS.10,58,927/ - AS MAY VERY KINDLY BE SEEN FROM THE ORDER APPEARING AT PAGE 213 OF THE PAPER BOOK. IN APPEAL, THE LD. CIT(A) (IN PARA 5.3) HAS DIRECTED TO DISALLOW INTEREST PAYMENT UNDER SECTION 14A, TO THE EXTENT THE SAME IS ATTRIBUTABLE TO THE SUM OF RS.1.5 CRORES AS PER THE RATE OF IN TEREST CHARGED BY THE BANK AND NOT BY INVOKING RULE 8 - D . THE DIRECTION HAS BEEN GIVEN WITHIN THE PREMISE THAT INVESTMENT IN SHARE CAPITAL IN RAVE@ MOTI ENTERTAINMENT PVT. LTD. HAD BEEN MADE THROUGH CHEQUE DRAWN ON OD ACCOUNT. THE APPELLANT HAS MADE DETAI LED SUBMISSIONS ON THE ISSUE OF BORROWINGS WHILE DEALING WITH THE ISSUES OF ADDITION/DISALLOWANCE TO THE EXTENT OF RS. 6,00,000 AND RS.13,26,780/ - WHEREIN IT HAS BEEN DEMONSTRATED THAT NO BORROWED FUNDS HAD BEEN INVESTED IN MAKING ADVANCES/INVESTMENTS IN ANY FORM. RATHER, OWING TO AVAILABILITY OF HUGE VOLUME OF INTEREST FREE FUNDS THE PRESUMPTION IS THAT THE ADVANCES/ INVESTMENT ETC HAD BEEN MADE OUT OF INTEREST FROM FUNDS. 32. IN ANY CASE, IT WAS BROUGHT ON RECORD THAT NO DIVIDEND INCOME HAD BEEN EARNED BY THE APPELLANT DURING THE YEAR UNDER CONSIDERATION. KIND ATTENTION IS INVITED TO THE FOLLOWING: - (A) LETTER DATED 25.08.2009 READING AS IT IS FURTHER TO BE SUBMITTED THAT WE HAVE NOT MADE ANY INVESTMENT DURING THE YEAR UNDER ASSESSMENT. WE H AVE NOT EARNED ANY INCOME, DIVIDEND AND NOT CLAIMED ANY EXPENSES. (PAGE 52) ( B) LETTER DATED 08.12.2009 READING AS WE FURTHER LIKE TO DRAW YOUR HONOURS KIND ATTENTION TO THE FACT THE WE HAVE NOT RECEIVED ANY DIVIDEND INCOME DURING THE YEAR UNDER CON SIDERATION (PAGE 55) 33. THE AFORESAID CONTENTION IS AMPLY BORNE OUT FROM THE RELEVANT PROFIT AND LOSS ACCOUNT ALSO, COPY APPEARING AT PAGE 29 READ WITH SCHEDULE 14 APPEARING AT PAGE 34. ON THE AFORESAID FACTS NO 26 DISALLOWANCE OUT OF INTEREST CAN BE MA DE UNDER SECTION 14A AND IN SUPPORT OF THIS CONTENTION, THE APPELLANT BEGS TO REFER TO VARIOUS JUDGMENTS, ALREADY FORMING PART OF THE PAPER BOOK AS PER REFERENCE GIVEN HEREIN BELOW: - SL. NO. OF THE PAPER BOOK NAME OF THE CASE PAGE NO.OF THE PAPER BOOK 19 SIVA INDUSTRIES PVT. LTD. VS. ACIT REPORTED IN (2011) 59 DTR (CHENNAI) (TRIB.) 182. 170 177 20 UNREPORTED JUDGMENT AND ORDER DATED 05.05.2014 DELIVERED BY HONBLE ALLAHABAD HIGH COURT IN THE CASE OF CIT - II, KANPUR VS. SHIVAM MOTORS PVT. LTD. IN INCOME TAX APPEAL NO.88 OF 2014. 178 184 21 UNREPORTED JUDGMENT AND ORDER DATED 24.03.2014 RENDERED BY HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. CORRTECH ENERGY PVT. LTD IN ITA NO.239 OF 2014. 185 - 189 34. BESIDES, THE APPELLANT ALSO BEGS TO RELY ON THE DECISION OF HONBLE PUNJAB AND HARYANA HIGH COURT IN THE CASE OF CIT VS. DEEPAK MITTAL REPORTED IN (2014) 361 ITR 131 (COPY APPEARING AT PAGES 197 200 OF THE PAPER BOOK) WHEREIN IT HAS BEEN HELD THAT AFTER THE ASSESSEE HAS DENIED HAVING INCURRED ANY EXPENDITURE, ONUS SHIFTED ON THE DEPARTMENT TO REBUT THE SAME BY BRINGING ON RECORD COGENT MATERIAL. IN CASE THE SUBMISSION SO MADE BY AN ASSESSEE REMAINS UNREBUTTED (BY THE ASSESSING OFFICER) AS IS THE CASE HER E, NO DISALLOWANCE UNDER SECTION 14A COULD BE MADE, LOOKING TO THE PLAIN AND EXPRESS LANGUAGE OF THE SAID SECTION ITSELF. (D) RS.18,40,086/ - , INTEREST SAID TO BE ATTRIBUTABLE TO THE NEW PROJECT : 35. THE LD. CIT (A) HAS DEALT WITH THIS ISSUE IN PARAS 7, 7. 1, 7.2 AND 7.3 OF HIS ORDER WHICH CONTAIN THE REPRODUCTION OF THE RELEVANT PASSAGE FROM THE ASSESSMENT ORDER AS ALSO SUBMISSIONS MADE BY THE APPELLANT, BEFORE THE ASSESSING OFFICER AS WELL AS IN APPEAL. THE SAME ARE REPRODUCED HEREUNDER: - 7. GROUND NO.5 OF APPEAL RELATES TO DISALLOWANCE OF RS.18,40,086/ - TOWARDS INTEREST FREE ADVANCE GIVEN: 7.1 IN THIS REGARDS, THE A.O. HAS STATED THAT: EXAMINATION OF ACCOUNTS REVEALED THAT IN THE BOOKS OF ACCOUNTS THAT THE ASSESSEE HAD STARTED ITS RAVE PROJECTS AT AGR A, MEERUT, JALANDHAR AND NOIDA. INVESTMENTS WERE MADE IN ALL THESE PROJECTS FROM THE BOOKS OF ACCOUNTS OF THE ASSESSEE AND NECESSARY FUNDS HAD FLOWN 27 FROM THE BANK ACCOUNT OF THE ASSESSEE. NO INCOME HAS GENERATED FROM SUCH PROJECTS BECAUSE THE PROJECTS HA D NOT STARTED FUNCTIONING IN THE YEAR UNDER CONSIDERATION. IT IS ALSO SEEN THAT IN AY 2008 - 09, ALL THESE PROJECTS HAD BEEN TRANSFERRED TO M/S ADLABS FOR WHICH A COMBINED MOU WAS ALSO DRAWN. SINCE THESE PROJECTS WERE UNDER PROGRESS, AS SUCH, THE ELEMENT O F INTEREST ARISING FROM THE BANK TRANSACTION NEEDS TO BE CAPITALIZED AND CANNOT BE ALLOWED AS A DEDUCTION IN THIS YEAR. THE POSITION OF AMOUNT INVESTED AND ELEMENT OF INTEREST WHICH NEEDS TO BE CAPITALIZED FOR EACH OF THE PROJECTS ARE AS UNDER: - 1. RAVE, AGRA OPENING BALANCE RS. 13,93,290/ - CLOSING BALANCE RS. 1,33,29,668/ - INTEREST ELEMENT RS. 10,26,101/ - 2. RAVE JALANDHAR OPENING BALANCE RS. 12,25,000/ - CLOSING BALANCE RS. 12,25,000/ - INTEREST ELEMENT RS. 1,47,000/ - 3. RAVE MEERUT OPENING BALANCE RS. 2,51,000/ - CLOSING BALANCE RS. 8,11,710/ - INTEREST ELEMENT RS. 59,182/ - 4. RAVE NOIDA OPENING BALANCE RS. 49,43,110/ - CLOSING BALANCE RS. 44,44,352/ - INTEREST ELEMENT RS. 6,07,80 3/ - TOTAL INTEREST WORKS OUT TO RS.18,40,086/ - WHICH IS BEING CAPITALIZED AND DEBIT OF INTEREST IS BEING DISALLOWED TO THE ABOVE EXTENT AND ADDED TO THE INCOME (ADDITION RS.18,40,086/ - ) 7.2 THE APPELLANT HAS SUBMITTED THAT: SIMILARLY ON THE SAME BASIS, THE INTEREST PRESUMPTIVELY DEEMED TO BE ASSESSABLE AS INCOME OF THE APPELLANT COMPANY AMOUNTING TO RS.18,40,086/ - BEING INTEREST @ 1% ON SHARE APPLICATION MONEY (PAGE 3 PARA 4) AND RS.18,40,086/ - BEING INTEREST @ 12% ON INVESTMENTS AT AGRA, MEERUT, JALANDHAR AND NOIDA PROJECTS (PAGE 5 PARA 8), ARE ALSO LIABLE TO BE NOT CHARGED AND HENCE MAY KINDLY BE ORDERED TO BE DELETED. IN THIS REGARD, YOUR HONOURS KIND ATTENTION IS DRAWN TO RATIO DECIDENDI AS LAID DOWN BY HONBLE SUPREME COURT IN RE: INDIA CEME NTS LTD. V. CIT [1966] 60 ITR 52(SC), LATER ON DULY FOLLOWED BY HONBLE GUJARAT HIGH COURT IN THE CASE OF PATEL FILTERS LTD. V. CIT [2003] 264 ITR 21 (GUJ.) 28 7.3 DECISION : THE FACTS ARE IDENTICAL TO THE ISSUE HAVING BEEN DEALT AT PARA 3 OF THIS ORDER. IN VIEW OF THE DECISION AT PARAS 3.3 AND 4.3 OF THIS ORDER, THE DISALLOWANCE MADE IS CONFIRMED. 36. WITH GREAT RESPECT, IT IS SUBMITTED THAT ON THIS ISSUE ALSO, THE AUTHORITIES BELOW HAVE GONE OFF THE TANGENT AND DECIDED THE ISSUE ON A WHOLLY WRONG PREMISE. IN VIEW OF THE UNDISPUTABLE FACTS THAT SUCH INVESTMENTS ARE COVERED BY INTEREST FREE FUNDS AVAILABLE WITH THE APPELLANT NO DISALLOWANCE OUT OF INTEREST PAID ON BORROWINGS COULD HAVE BEEN MADE EITHER ON FACTS OR IN LAW. ON CONSIDERATION O F COMMERCIAL EXPEDIENCY ALSO, NO DISALLOWANCE OUT OF INTEREST COULD HAVE BEEN MADE. THE SUBMISSIONS MADE HEREINFORE WITH REGARD TO OTHER DISALLOWANCES OUT OF INTEREST, ARE APPLICABLE IPSO FACTO HERE ALSO. (E) RS.5,00,000/ - , DISALLOWANCE ON ACCOUNT OF BAL ANCES WRITTEN OFF : 37. THE ASSESSING OFFICER HAS DEALT WITH THE ISSUE IN PARA 13 ON PAGE 10 OF THE ASSESSMENT ORDER, SUM AND SUBSTANCE OF WHICH IS THAT THESE AMOUNTS WERE NEVER TAKEN INTO CONSIDERATION IN COMPUTING THE INCOME OF THE ASSESSEE OF THE PREVI OUS YEAR IN WHICH AMOUNT OF SUCH DEBT HAS BEEN WRITTEN OFF OR EVEN IN EARLIER ASSESSMENT YEAR . IT WAS EMPHASIZED DURING THE COURSE OF ASSESSMENT PROCEEDINGS THAT SUMS IN QUESTION HAD BEEN ADVANCED TO THE PERSONS ENGAGED FOR RUNNING FELIX CLUB, ACTIVITIES OF WHICH ARE INTEGRATED WITH THE BAR. AS SUCH ADVANCES HAD BEEN MADE DURING THE COURSE OF CARRYING ON OF BUSINESS, THE SAME REPRESENTED LOSSES INCIDENTAL TO CARRYING ON OF BUSINESS. IT IS NOT ON THE FOOTING OF CLAIMING DEDUCTION OF BAD DEBTS AS HAS BEEN UNDERSTOOD BY THE AUTHORITIES BELOW, BUT ON THE FOOTING OF LOSS INCIDENTAL TO CARRYING ON OF BUSINESS AND ACCORDINGLY THE SAME SHOULD HAVE BEEN ALLOWED. VIEW TO THE CONTRARY AS HAS BEEN TAKEN BY THE AUTHORITIES BELOW IS ERRONEOUS. RESPECTFULLY SUBMITTED . 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIO NS. REGARDING THE LEGAL ISSUE RAISED BY THE ASSESSEE AS PER GROUND NO. 1 TO 3, WE FIND THAT THE ASSESSEE HAS NOT BEEN ABLE TO ESTABLISH THAT NO NOTICE WAS SERVED ON THE ASSESSEE U/S 143(2) WITHIN THE PRESCRIBED TIME. IT IS NOTED BY THE ASSESSING OFFICER IN THE ASSESSMENT ORDER THAT NOTICE U/S 143(2) WAS ISSUED ON 30 TH JULY, 2008 FIXING 29 THE DATE OF COMPLIANCE ON 30 TH AUGUST 2008. REGARDING THIS NOTICE, IT IS THE CONTENTION RAISED IN THE WRITTEN SUBMI SSIONS THAT IT IS NOT STATED IN THE ASSESSMENT ORDER THAT HOW THIS NOTICE WAS SERVED ON THE ASSESSEE AND ON WHOM THE NOTICE WAS SERVED. LEARNED A.R. OF THE ASSESSEE IS RAISING VARIOUS CONTENTIONS ON THIS ASPECT THAT THIS IS NOT A VALID SERVICE OF NOTICE B UT NO CATEGORICAL STATEMENT HAS BEEN MADE BY LEARNED A.R. OF THE ASSESSEE THAT THIS NOTICE DATED 30 TH JULY, 2008 HAD NOT BEEN SERVED ON THE ASSESSEE. IN THE ABSENCE OF ANY SUCH CATEGORICAL STATEMENT BY THE ASSESSEE SUPPORTED BY THE AFFIDAVIT OF THE PRINCI PAL OFFICER OF THE ASSESSEE COMPANY TO THE EFFECT THAT THIS NOTICE WAS ACTUALLY NOT SERVED ON THE ASSESSEE WITHIN THE PRESCRIBED TIME , T HESE ARGUMENTS OF THE LEARNED A.R. OF THE ASSESSEE HAVE NO VALIDITY. RELIANCE HAS BEEN PLACED BY LEARNED A.R. OF THE ASS ESSEE ON THIS ISSUE ON A TRIBUNAL DECISION IN THE CASE OF DR Y. D. SINGH VS. DY. CIT [2011] 59 DTR (A.T.) 400. IN THIS CASE , IT WAS HELD BY THE TRIBUNAL THAT IN THE ABSENCE OF SERVICE OF NOTICE U/S 143(2), BLOCK ASSESSMENT IS NOT VALID. THERE IS NO QUAR REL ON THIS PROPOSITION BECAUSE IF NO NOTICE HAS BEEN SERVED WITHIN THE PRESCRIBED TIME U/S 143(2), BLOCK ASSESSMENT IS NOT VALID AS HAS BEEN HELD BY HON'BLE APEX COURT IN THE CASE OF ASSISTANT COMMISSIONER OF INCOME - TAX VS HOTEL BLUE MOON [2010] 321 ITR 3 62 (SC) BUT IN THE PRESENT CASE, EVEN THE ASSESSEE IS NOT MAKING A CATEGORICAL STATEMENT THAT NO NOTICE U/S 143(2) WAS SERVED ON THE ASSESSEE WITHIN THE PRESCRIBED TIME. THEREFORE, NEITHER THE TRIBUNAL DECISION NOR THE JUDGMENT OF HON'BLE APEX COURT IS RE NDERING ANY HELP TO THE ASSESSEE IN THE PRESENT CASE. IN FACT , THE COPY OF NOTICE DATED 30 TH JULY 2008 IS AVAILABLE ON PAGE NO. 1 OF THE PAPER BOOK AND ON THE SAME NOTICE , THERE IS MARKING ( R ) AND BELOW THAT , A DATE IS GIVEN 01/08/2008. IN OUR CONSIDER ED OPINION, THIS SHOWS THAT NOTICE WAS DULY SERVED ON THE ASSESSEE ON 01/08/2008 AND MOREOVER, IF THE NOTICE WAS NOT SERVED ON THE ASSESSEE, FROM WHERE THE ASSESSEE GOT COPY OF THIS NOTICE TO ENCLOSE THE 30 SAME ON PAGE NO. 1 OF THE PAPER BOOK. HENCE, THIS A RGUMENT OF LEARNED A.R. OF THE ASSESSEE IS REJECTED. 6. RELIANCE WAS ALSO PLACED BY THE ASSESSEE ON A JUDGMENT OF HON'BLE ALLAHABAD HIGH COURT IN THE CASE OF HARSINGAR GUTKHA P. LTD. VS COMMISSIONER OF INCOME - TAX [2011] 336 ITR 90 (ALL) . IN PARA 7 OF THE WRITTEN SUBMISSIONS, IT IS STATED BY LEARNED A.R. OF THE ASSESSEE THAT THE RULE OF SERVICE OF NOTICE THROUGH PROCESS SERVER HAS BEEN DISCUSSED AT LENGTH BY THE HON'BLE ALLAHABAD HIGH COURT IN THIS CASE. IN PARA 5 OF THE WRITTEN SUBMISSIONS, IT IS SUBMITTE D BY LEARNED A.R. OF THE ASSESSEE THAT THIS NOTICE DATED 30/07/2008 HAS BEEN SENT THROUGH PROCESS SERVER. WE DO NOT KNOW ON WHAT BASIS IT IS STATED BY LEARNED A.R. OF THE ASSESSEE THAT THE NOTICE HAS BEEN SENT THROUGH PROCESS SERVER. ALTHOUGH THE ASSESSEE HAS ENCLOSED THE COPY OF NOTICE ON PAGE 1 OF THE PAPER BOOK, NO EVIDENCE HAS BEEN FURNISHED BY LEARNED A.R. OF THE ASSESSEE IN SUPPORT OF THIS CONTENTION THAT THE NOTICE HAS BEEN SERVED THROUGH PROCESS SERVER. IN THE ABSENCE OF ANY EVIDENCE REGARDING THI S CONTENTION THAT THE NOTICE HAS BEEN SENT THROUGH PROCESS SERVER, THIS ARGUMENT OF LEARNED A.R. OF THE ASSESSEE IS WITHOUT ANY BASIS AND DO NOT REQUIRE ADJUDICATION. IN PARA 7 OF THE WRITTEN SUBMISSIONS WHERE LEARNED A.R. OF THE ASSESSEE HAS REPRODUCED THE RELEVANT PORTION OF THIS JUDGMENT OF HON'BLE ALLAHABAD HIGH COURT, IT IS NOTED THAT IN THAT CASE , THE REPORT OF THE PROCESS SERVER WAS FURNISHED. IN THE PRESENT CASE, NO SUCH REPORT HAS BEEN BROUGHT ON RECORD AND THEREFORE, THIS IS NOT ESTABLISHED BY THE LEARNED A.R. OF THE ASSESSEE THAT THE SAID NOTICE WAS SERVED BY THE ASSESSING OFFICER THROUGH PROCESS SERVER. 7. ONE MORE CONTENTION HAS BEEN RAISED BY LEARNED A.R. OF THE ASSESSEE THAT IF THE NOTICE U/S 143(2) WAS ISSUED BY DY. CIT, THE ASSESSMENT OR DER CANNOT BE PASSED BY JT. CIT AS IN THE PRESENT CASE. ON THIS ASPECT, WE FIND THAT THIS ISSUE IS COVERED AGAINST THE ASSESSEE BY THE TRIBUNAL DECISION OF 31 LUCKNOW BENCH HAVING SAME CONSTITUTION WHEREIN IT WAS HELD BY THE TRIBUNAL THAT IF THE NOTICE WAS IS SUED BY JUNIOR OFFICER, THE ASSESSMENT CAN BE FRAMED BY A SENIOR OFFICER. IN THE PRESENT CASE ALSO, THE JT. CIT HAS FRAMED THE ASSESSMENT WHO IS SENIOR TO DY. CIT AND THEREFORE, THIS ISSUE IS COVERED AGAINST THE ASSESSEE. HENCE, THIS ASPECT IS ALSO DECID ED AGAINST THE ASSESSEE. NOW WE DECIDE THE ISSUE ON MERIT. 8. THE FIRST ISSUE IS REGARDING DISALLOWANCE OF RS.6,00,000/ - OUT OF INTEREST TOWARDS INTEREST FREE ADVANCES TO SISTER CONCERN. REGARDING THIS ISSUE, RELIANCE HAS BEEN PLACED ON THE JUDGMENT OF HON'BLE APEX COURT IN THE CASE OF S. A. BUILDERS LTD. VS COMMISS IONER OF INCOME - TAX (APPEALS) [2007] 288 ITR 1 (SC) . IN THIS CASE, IT WAS HELD BY HON'BLE APEX COURT THAT IF THE ASSESSEE CAN ESTABLISH BUSINESS EXPEDIENCY FOR ADVANCING INTEREST FREE ADVANCE TO ITS SISTER CONCERN, NO DISALLOWANCE OF INTEREST IS JUSTIFIED BUT IN THE PRESENT CASE, THE ASSESSEE COULD NOT ESTABLISH ANY BUSINESS EXPEDIENCY FOR ADVANCING INTEREST FREE LOAN AND THEREFORE, THIS JUDGMENT IS NOT RENDERING ANY HELP TO THE ASSESSEE. 9. THE SECOND ARGUMENT ADVANCE BY LEARNED A.R. OF THE ASSESSEE IS THAT THE ASSESSEE WAS HAVING SUFFICIENT INTEREST FREE FUND IN THE FORM OF SHARE CAPITAL AND RESERVE AND THEREFORE, AS PER THE JUDGMENT OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF COMMISSIONER O F INCOME - TAX VS RELIANCE UTILITIES AND POWER LTD. [2009] 313 ITR 340 (BOM) , NO SUCH DISALLOWANCE IS JUSTIFIED. WE FIND FORCE IN THIS CONTENTION OF LEARNED A.R. OF THE ASSESSEE BECAUSE ADMITTEDLY , THE ASSESSEE COMPANY WAS HAVING A SHARE CAPITAL OF RS.300 L AC S AND RESERVE AND SURPLUS OF RS.1,111.26 LAC S AS AGAINST INTEREST FREE ADVANCE OF RS.50 LAC S AND THEREFORE, BY RESPECTFULLY FOLLOWING THIS JUDGMENT OF HON'BLE BOMBAY HIGH COURT AND ALSO THE JUDGMENT OF HON'BLE ALLAHABAD HIGH COURT IN THE CASE OF COMMISSI ONER OF INCOME - TAX VS PREM HEAVY ENGINEERING WORKS P. LTD. [2006] 285 ITR 554 (ALL) , THIS DISALLOWANCE IS DELETED. 32 10. THE NEXT ASPECT ON MERIT IS REGARDING DISALLOWANCE OF RS.13,26,780/ - BEING INTEREST ATTRIBUTABLE TO THE SHARE APPLICATION MONEY. REGARDING THIS DISALLOWANCE ALSO, LEARNED A.R. OF THE ASSESSEE HAS PLACED RELIANCE ON THE SAME JUDGMENT OF HON'BLE APEX COURT I.E. S. A. BUILDERS LTD. VS COMMISSIONER OF INCOME - TAX (APPEALS) [2007] 288 ITR 1 (SC) . THE CONTENTION RAISED IS THAT THE INVESTMENT IN SHARES IS ALSO BECAUSE OF BUSINESS CONSIDERATION/ BUSINESS EXIGENCY. WE DO NOT FIND ANY MERIT IN THIS CONTENTION OF LE ARNED A.R. OF THE ASSESSEE BECAUSE INVESTMENT IN SHARE BY WAY OF ADVANCING SHARE APPLICATION MONEY IN A LIMITED COMPANY HAVING SEPARATE ENTITY, CANNOT BE SAID TO BE INVESTMENT FOR BUSINESS CONSIDERATION AND BUSINESS EXIGENCY. IT IS SETTLED POSITION OF LAW BY NOW THAT INVESTMENT IN SHARE IS FOR EARNING DIVIDEND INCOME. DIVIDEND INCOME IS NOT TAXABLE SINCE ASSESSMENT YEAR 2004 - 05 AND THEREFORE, ANY EXPENDITURE INCURRED FOR EARNING DIVIDEND INCOME IS NOT ALLOWABLE UNDER ANY PROVISION OF THE INCOME TAX ACT BE CAUSE DEDUCTION U/S 57(III) IS ALLOWABLE IF IT IS INCURRED FOR EARNING AN INCOME WHICH IS TAXABLE UNDER THE HEAD INCOME FROM OTHER SOURCE. SINCE DIVIDEND INCOME IS NOT TAXABLE IN THE PRESENT YEAR AS INCOME FROM OTHER SOURCES, DEDUCTION IS NOT ALLOWABLE U/ S 57(III) OF THE ACT. NO DEDUCTION IS ALLOWABLE U/S 36(1)(III) OF THE ACT ALSO BECAUSE IT IS NOT THE CASE OF THE ASSESSEE THAT THE SHARES WERE PURCHASED FOR DEALING IN SHARES. HENCE, THIS CLAIM OF THE ASSESSEE IS NOT AS PER ANY PROVISION OF THE ACT PARTI CULARLY WHEN THE AMOUNT IN QUESTION WAS PAID FROM OD ACCOUNT AND THEREFORE, THERE IS DIRECT NEXUS THAT THE INVESTMENT IN SHARES IS OUT OF INTEREST BEARING BORROWED FUND AND NOT OUT OF INTEREST FREE FUNDS. ACCORDINGLY, THIS ISSUE IS DECIDED AGAINST THE ASS ESSEE. 11. ONE MORE CONTENTION WAS RAISED BY LEARNED A.R. OF THE ASSESSEE IN THIS REGARD THAT SINCE THERE IS NO DIVIDEND INCOME IN THE PRESENT YEAR, NO DISALLOWANCE IS JUSTIFIED. RELIANCE IS PLACED ON THE JUDGMENT OF HON'BLE 33 ALLAHABAD HIGH COURT IN THE CASE OF CIT VS. SHIVAM MOTORS (P) LTD. IN INCOME - TAX APPEAL NO. 88 OF 2014 DATED 05/05/2014. IN THIS REGARD, WE WOULD LIKE TO OBSERVE THAT EVEN AFTER CONSIDERING THIS JUDGMENT, SIMILAR ISSUE WAS DECIDED IN FAVOUR OF THE REVENUE AND AGAINST THE ASSESSEE IN THE CASE OF COMMERCIAL AUTO CENTRE IN I.T.A. NO.156/LKW/2010 DATED 11/11/2011 BY FOLLOWING THE JUDGMENT OF HON'BLE APEX COURT RENDERED IN THE CASE OF RAJENDRA PRASAD MOODY AS REPORTED IN 115 ITR 519 (SC). HENCE, THIS ARGUMENT OF LEARNED A.R. OF THE ASSES SEE ALSO HAS NO MERIT BECAUSE THIS ASPECT IS NOW COVERED AGAINST THE ASSESSEE BY THIS TRIBUNAL DECISION IN THE CASE OF COMMERCIAL AUTO CENTRE (SUPRA), WHICH HAS DULY CONSIDERED THE JUDGMENT OF HON'BLE ALLAHABAD HIGH COURT AND PREFERRED TO FOLLOW THE JUDGME NT OF HONBLE APEX COURT IN THE CASE OF RAJENDRA PRASAD MOODY AS REPORTED IN 115 ITR 519 (SC), WHICH WAS NOT POINTED OUT BEFORE HON'BLE ALLAHABAD HIGH COURT IN THE CASE OF SHIVAM MOTORS (P) LTD. (SUPRA). HENCE, THIS ISSUE IS DECIDED AGAINST THE ASSESSEE. 12. THE NEXT ISSUE ON MERIT IS REGARDING DISALLOWANCE OF RS.18,40,086/ - BEING INTEREST EXPENDITURE ATTRIBUTABLE TO THE NEW PROJECT. IN THIS REGARD, THE CONTENTION RAISED BY THE ASSESSEE IS THAT THE ASSESSEE WAS HAVING SUFFICIENT INTEREST FREE FUND AVAIL ABLE WITH THE ASSESSEE AND THEREFORE, NO DISALLOWANCE IS JUSTIFIED. IN THIS REGARD, WE WOULD LIKE TO POINT OUT THAT IN THE JUDGMENT S POINTED OUT BY THE LEARNED A.R. OF THE ASSESSEE BEING IN THE CASE OF COMMISSIONER OF INCOME - TAX VS RELIANCE UTILITIES AND POWER LTD. [2009] 313 ITR 340 (BOM) AND HON'BLE ALLAHABAD HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME - TAX VS PREM HEAVY ENGINEERING WORKS P. LTD. [2006] 285 ITR 554 (ALL) AND IN THE CASE OF CIT VS. RADICO KHAITAN LTD. [2005] 194 CTR 451 (ALL) ETC., TH E ISSUE WAS THAT IF THERE IS INTEREST FREE ADVANCE GIVEN BY THE ASSESSEE THEN PRESUMPTION SHOULD BE RAISED THAT THE SAME IS OUT OF OWN FUNDS, IF OWN INTEREST FREE FUNDS WERE SUFFICIENT TO COVER SUCH INTEREST FREE ADVANCE. IN RESPECT OF INTEREST FREE ADVAN CE, WE HAVE ALLOWED RELIEF TO THE ASSESSEE IN ONE 34 OF THE ABOVE PARAS BUT REGARDING INVESTMENT IN NEW PROJECTS, IT CANNOT BE SAID THAT THIS IS INTEREST FREE ADVANCE AND THEREFORE, THERE WOULD BE PRESUMPTION THAT THIS IS OUT OF INTEREST FREE FUND. THIS IS B USINESS INVESTMENT AND THEREFORE, IT HAS TO BE ACCEPTED THAT SUCH INVESTMENT IS OUT OF BORROWED FUND BECAUSE IF IT IS ACCEPTED THAT INVESTMENT IN NEW PROJECT IS ALSO OUT OF INTEREST FREE FUND AND NOT OUT OF BORROWED FUND, THEN WHAT IS THE PURPOSE OF BORROW ED FUND AND IF THE BORROWED FUND IS NOT FOR THE BUSINESS PURPOSES THEN NO INTEREST EXPENDITURE SHOULD BE ALLOWED AT ALL. AS PER THE PROVISO TO SECTION 36(1)(III), INTEREST EXPENDITURE IS ALLOWABLE ONLY AFTER THE ASSET IS PUT TO USE. THIS PROVISO HAS BEEN INSERTED BY FINANCE ACT 2005 WITH EFFECT FROM 01/04/2004. IT IS NOT THE CASE OF THE ASSESSEE THAT THE ASSET WAS PUT TO USE IN THE PRESENT YEAR. UNDER THESE FACTS, WE DO NOT FIND ANY REASON TO INTERFERE IN THE ORDER OF CIT(A) ON THIS ISSUE. THIS ISSUE IS DECIDED AGAINST THE ASSESSEE. 13. THE LAST ISSUE ON MERIT IS REGARDING DISALLOWANCE OF RS.5,00,000/ - ON ACCOUNT OF BALANCES WRITTEN OFF. IN THIS REGARD, WE FIND THAT THE DISALLOWANCE WAS MADE ON THE BASIS THAT THESE AMOUNTS WERE NEVER TAKEN INTO CONS IDERATION IN COMPUTING THE INCOME OF THE ASSESSEE WHICH MEANS THAT THE ASSESSEE IS NOT COMPLYING WITH THE REQUIREMENT OF SECTION 36(2) OF THE ACT. IN THIS REGARD, THIS IS THE ARGUMENT OF LEARNED A.R. OF THE ASSESSEE THAT THESE ADVANCES WERE GIVEN TO PERSO NS ENGAGED IN RUNNING FELIX CLUB, ACTIVITIES OF WHICH ARE INTEGRATED WITH THE BAR. T HIS IS THE CONTENTION THAT THESE ADVANCES ARE GIVEN IN COURSE OF CARRYING ON BUSINESS AND THEREFORE, WRITE OFF OF SUCH ADVANCES HAS TO BE ACCEPTED AND ALLOWED AS BUSINESS LOSS. IN THIS REGARD, WE WOULD LIKE TO OBSERVE THAT BUSINESS LOSS IS ALLOWABLE IN THE YEAR IN WHICH SUCH LOSS IS INCURRED AND IT CANNOT BE ALLOWED IN A YEAR IN WHICH THE ASSESSEE DECIDES TO WRITES OFF. THEREFORE, IT WAS REQUIRED ON THE PART OF THE ASSESS EE TO ESTABLISH THAT THIS LOSS HAS ACTUALLY INCURRED IN THE PRESENT YEAR. THE 35 ASSESSEE HAS FAILED TO DO SO AND THEREFORE, THE CLAIM OF THE ASSESSEE IS NOT ALLOWABLE IN THE FACTS OF THE PRESENT CASE. THIS ISSUE IS DECIDED AGAINST THE ASSESSEE. 14. IN THE RESULT, THE APPEAL OF THE ASSESSEE STANDS PARTLY ALLOWED. (ORDER WAS PRONOUNCED IN THE OPEN COURT ON THE DATE MENTIONED ON THE CAPTION PAGE) SD/. SD/. (SUNIL KUMAR YADAV) ( A. K. GARODIA ) JUDICIAL MEMBER ACCOUNTANT ME MBER DATED: 28 /11/2014. *C.L.SINGH COPY OF THE ORDER FORWARDED TO : 1.THE APPELLANT 2.THE RESPONDENT. 3.CONCERNED CIT 4.THE CIT(A) 5.D.R., I.T.A.T., LUCKNOW ASSTT. REGISTRAR