The ITO, V. Miraj Polymers Pvt. Ltd.,

ITA 1183/AHD/2003

• Counselvise Citation: [2009] 115 COUNSELVISE.COM (IT) 0524 (ITAT-AHMEDABAD)
• Duration Of Justice: 6 year(s) 7 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-11-2009
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 08-09-2009
• Assessment Year: 1996-1997
• Appeal Filed On: 24-03-2003
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: GOVIND SINGHAL
• Assessee Lawyers: D K PARIKH
• Keywords: Cost of acquisition; Capital receipt; Commercial expediency; Capital expenditure; Rule 8D
• Section: 14A; 201; 251

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH AHMEDABAD (BEFORE HON'BLE SHRI T. K. SHARMA, J.M. & HON'BLE S HRI D. C. AGARWAL, A.M.) ITA NO.1183/AHD/2003 ASSESSMENT YEAR : 1996-97 THE INCOME TAX OFFICER, WARD 4(4), AHMEDABAD VS MIRAJ POLYMERS PVT. LTD., C/0. SHRI NITINBHAI HARSHADBHAI MEHTA(DIRECTOR), BUNGALOW NO.25, NISHANT DIVISION- 2, B/H SOMESHWAR COMPLEX-1, SATELLITE ROAD, JODHPUR TEKRA, OPP. DEMART, AHMEDABAD-15 (APPELLANT) (RESPONDENT) APPELLANT BY SHRI GOVIND SINGHAL, DR RESPONDENT BY SHRI D.K. PARIKH, AR O R D E R PER T. K. SHARMA: THIS APPEAL BY THE REVENUE IS AGAINST THE ORDER O F THE CIT(A)-VIII, AHMEDABAD DATED 9-1-2003 RELATING TO THE ASSESSMENT YEAR 1996-97. 2. GROUND NO.1 IS AGAINST DELETION OF ADDITION OF R S.2000/- OUT OF PURCHASE OF SHARES. THE AO MADE THIS ADDITION FOR THE DETAILED REASON GIVEN IN PARA 3 OF THE ASSESSMENT WHICH ARE AS UNDER: IT IS SEEN THAT THE ASSESSEE HAS PURCHASED 500 SHA RES OF ASSOCIATE CONCERN AT RS.14/- PER SHARE AS AGAINST PRICE OF RS.10/- PER S HARE. THUS ASSESSEE HAS PAID RS.4/- MORE PER SHARE. THE EXCESS EXP. ON PURCHASE OF SHARES AT RS.2000/- IS DISALLOWED. 3. ON APPEAL, BEFORE THE LEARNED CIT(A) THE ASSESSE E CONTENDED THAT IT HAS PURCHASED SHARES AT MARKET VALUE, NO DOUBT THE FACE VALUE OF WHICH I S RS.10/- PER SHARE. THESE WERE SHOWN AS INVESTMENT AT COST. IN THIS VIEW OF THE MATTER IT W AS SUBMITTED THAT SINCE THE SHARES HAVE BEEN 2 PURCHASED AT MARKET RATE ONLY, THERE IS NO QUESTION OF DISALLOWANCE. IN THE IMPUGNED ORDER THE CIT(A) DELETED THIS DISALLOWANCE. 4. AT THE TIME OF HEARING BEFORE US, THE LEARNED DR RELYING ON THE REASONING GIVEN BY THE AO IN THE ASSESSMENT ORDER CONTENDED T HAT ADDITION OF RS.2000/- BE RESTORED. ON THE OTHER HAND, THE LEARNED AR OF THE ASSESSEE SUPPORTED THE ORDER OF THE CIT(A). 5. HAVING HEARD BOTH THE SIDES WE HAVE CAREFULLY GO NE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. THE ASSESSEE COMPANY HAS PURCHASED 500 SHARE S OF ASSOCIATE CONCERN @ RS.14/- .IT HAS PAID RS.4/- PER SHARE MORE THAN THE FACE VALUE. THE RE IS NO EVIDENCE THAT THE ASSESSEE COMPANY HAS PAID A PRICE WHICH IS MORE THAN MARKET VALUE AT THE RELEVANT TIME. THEREFORE, ADDITION MADE BY THE AO ON DOUBT AND SUSPICION IS RIGHTLY DELETED BY THE LEARNED CIT(A). WE THEREFORE, DECLINE TO INTERFERE. THIS GROUND OF APPEAL IS DISMISSED. 6. GROUND NOS. 2 AND 3 ARE AGAINST DELETING ADDITIO N OF RS.6,06,000/- AND RS.3,30,610/- ON ACCOUNT OF INTEREST EXPENSES. THE BRIEF FACTS RELAT ING TO THESE DISALLOWANCES ARE THAT THE ASSESSEE BORROWED FUNDS FROM ASSOCIATE CONCERN MEGNUS PLASTI CS LTD. AND PAID INTEREST THEREON @16% AMOUNTING TO RS.9,36,619/-. IN THE ASSESSMENT ORDER THE AO DISALLOWED THE PAYMENT OF INTEREST ON THE GROUND THAT BORROWED FUNDS WAS UTILIZED FOR ACQUIRING CONTROLLING SHARES IN ASSOCIATE CONCERN (DISALLOWANCE OF RS.6,06,000/-) AND THAT IN TEREST BEARING FUNDS HAD BEEN UTILIZED FOR MAKING INTEREST FREE ADVANCES, (DISALLOWANCE OF RS .3,30,610). 7. ON APPEAL, THE LEARNED CIT(A) DELETED THE DISALL OWANCE OF RS.6,06,000/- ON THE GROUND THAT BY PURCHASING THE SHARE OF MEGNUS PLASTICS LTD . , THE ASSESSEE DID NOT ACQUIRE CONTROLLING INTEREST AND, THEREFORE, THE INTEREST OF SUCH BORRO WINGS CANNOT BE TREATED AS CAPITAL EXPENDITURE. IN THE IMPUGNED ORDER THE LEARNED CIT(A) ALSO STATE D THAT JUDGMENT OF SARABHAI & SONS PVT. LT. 201 ITR 464 IS NOT APPLICABLE TO THE ISSUE INVOLVED . THE LEARNED CIT(A) ALSO STATED THAT THE INVESTMENT HAD BEEN MADE BY WAY OF TRADE INVESTMENT AND SHOWN AS STOCK IN TRADE. THEREFORE, ASSESSEE IS CARRYING ON BUSINESS OF HOLDING OF INVE STMENT AND THAT OF DEALING IN SHARE. 3 8. WITH REGARD TO DISALLOWANCE OF RS.3,30,610/- THE LEARNED CIT(A) OBSERVED THAT AS PER BALANCE SHEET, THE UNSECURED LOAN INCREASED BY RS. 82.39 LACS. THIS INCLUDED THE INTEREST OF RS. 9.37 LACS CHARGEABLE ON THE ICD. THUS BORROWING BY THE COMPANY DURING THE YEAR HAD BEEN ONLY RS.75.00 LACS WHICH IS REQUIRED TO BE CONSIDERED FO R THE PURPOSE OF ALLOWABILITY OF INTEREST U/S 36(1) (III) OF THE ACT. THE LEARNED CIT(A) FURTHER STATED THAT THE AO HAS HIMSELF OBSERVED THAT, OUT OF BORROWINGS OF RS.50.50 LACS UTILIZED FOR TH E PURPOSE OF SHARE OF ASSOCIATE CONCERN AND THAT OF RS.18.28 LACS WAS FOR PAYMENT TO CREDITORS. AGAI NST THIS FINDING, FROM THE BALANCE SHEET IT CAN BE SEEN THAT THE ASSESSEE HAS INVESTED RS.70.00 LAC S DURING THE YEAR FOR PURCHASE OF SHARES OF MAGNET RUBBER LTD. AND MAGNET PLASTICS LTD. AND NO T RS.50.50 LACS AS HELD BY THE AO. THEREFORE, WHAT WOULD BE CONSIDERED BY THE AO THAT DISALLOWANCE WAS ONLY THE BALANCE OF RS.4.86 LACS AFTER ESTABLISHING THE NEXUS THAT THE BORROWED FUNDS HAD BEEN UTILIZED FOR NON- BUSINESS PURPOSE. THE LEARNED CIT(A) ALSO OBSERVED THAT THE AO DID NOT ANALYZE THE BREAK UP OF LOANS AND ADVANCES AND THEREFORE, HE DID NOT GIVE A NY FINDING WHETHER THESE WERE FOR THE PURPOSE OF BUSINESS AND SIMPLY FRIENDLY LOAN. THE AO MERELY PROCEEDED TO DISALLOWANCE ON THE GROUND THAT ADVANCES WERE INTEREST FREE. THE LEARNED CIT(A ) FURTHER HELD THAT ONUS WAS ON THE AO TO ESTABLISH THAT LOANS AND ADVANCES WERE FOR NON-BUSI NESS PURPOSE AND THEREAFTER THAT THERE HAS BEEN DIRECT NEXUS ON THE INTEREST BEARING FUNDS TO THE LOANS AND ADVANCES MADE FOR NON-BUSINESS PURPOSES. NO SUCH FINDING HAS BEEN GIVEN. ON THE CO NTRARY, THE AO HAS GIVEN A CLEAR CUT FINDING THAT OUT OF BORROWED FUNDS OF RS.50.50 LACS WAS UTI LIZED FOR THE PURPOSE OF PURCHASE OF SHARE AND RS.18.28 LACS WAS UTILIZED TOWARDS PAYMENT TO CREDI TORS. FOR BALANCE, THE AO WAS TO GATHER FACTS TO ESTABLISH THAT ADVANCES WERE NOT IN THE NATURE O F TRADE ADVANCE FOR THE PURPOSE OF BUSINESS. 9. ULTIMATELY, AFTER CONSIDERING THE PROVISIONS C ONTAINED U/S 36(1) (III) OF THE ACT, IN PARA 7.2 OF IMPUGNED ORDER THE LEARNED CIT(A) DELETED TH E DISALLOWANCE HOLDING THAT THE AO DID NOT GIVE ANY FINDING THAT INTEREST BEARING FUNDS HAD BE EN UTILIZED FOR THE PURPOSE OF GIVING NON- BUSINESS LOANS AND ADVANCES, ON THE CONTRARY, THE A O HAS GIVEN A FINDING THAT OUT OF FUNDS BORROWED RS.68.75 LACS HAD BEEN UTILIZED FOR BUSINE SS PURPOSE. HE, THEREFORE, DELETED THE DISALLOWANCE MADE OUT OF INTEREST PAID. 10. AGGRIEVED BY THE ORDER OF THE LEARNED CIT(A) D ELETING BOTH THE AFORESAID DISALLOWANCES OUT OF INTEREST THE REVENUE IS IN APPEAL BEFORE US. 4 11. AT THE TIME OF HEARING, ON BEHALF OF THE REVENU E SHRI GOVIND SINGHAL, LEARNED DR APPEARED AND CONTENDED THAT THE ASSESSEE IS NOT ENG AGED IN THE BASENESS OF DEALING IN SHARES. THIS IS EVIDENT FROM PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED ON 31-1-1996 WHEREIN NET SALES ARE RS.1,62,33,604/-. IN THE PROFIT & LOSS ACCOUNT NO O PENING AND CLOSING STOCK OF SHARES ARE REFLECTED. THE LEARNED DR FURTHER SUBMITTED THAT AS PER PROVISIONS CONTAINED IN SECTION 14A OF THE ACT DISALLOWANCE OF INTEREST OUT OF FUNDS UTIL IZED FOR MAKING INVESTMENT IN SHARES, WHETHER HELD AS STOCK IN TRADE IN INVESTMENT IS REQUIRED TO BE MADE AS HELD BY BOMBAY SPECIAL BENCH IN THE CASE OF DAGA INVESTMENTS REPORTED IN 310 ITR ( AT) 111 (BOM.). RELIANCE WAS ALSO PLACED ON THE LATEST DECISION OF ITAT SPECIAL BENCH, DELHI BENCH B IN THE CASE OF CHEMINVEST LTD. VS ITO, WHEREIN THE SPECIAL BENCH DELHI HELD AS UNDER: (A) WHEN THE EXPENDITURE OF INTEREST IS INCURRED I N RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME, IT HAS TO SUFFER THE DISALLOWANCE, IRRESPECTIVE OF THE FACT WHETHER ANY INCOME IS EARN ED BY THE ASSESSEE OR NOT. S. 14A DOES NOT ENVISAGE ANY SUCH EXCEPTION; (B) WHEN PRIOR TO INTRODUCTION OF S. 14A, AN EXPEND ITURE BOTH U/S. 36 AND U/S. 57 WAS ALLOWABLE TO AN ASSESSEE WITHOUT SU CH REQUIREMENT OF EARNING OR RECEIPT OF INCOME, SUCH A CONDITION CANN OT BE IMPORTED WHEN IT COMES TO DISALLOWANCE OF THE SAME EXPENDITURE U/S. 14A OF THE ACT;. 12. WITH REGARD TO DISALLOWANCE OF REMAINING INTERE ST OF RS.3,30,610/- THE LEARNED DR SUBMITTED THAT POWER OF CIT(A) ARE CO-TERMINOUS WI TH THAT TO THE AO AS HELD BY HONBLE SUPREME COURT IN THE CASE OF CIT VS KANPUR COAL SYN DICATE 53 ITR 225(SC). THEREFORE, IN CASE NO FINDING WERE GIVEN BY A.O., IT WAS THE DUTY OF THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) TO GIVE THAT FINDING. SINCE IN THE IMP UGNED ORDER LEARNED CIT(A) MERELY NARRATED FACTS, DELETED THE DISALLOWANCE WITHOUT GIVING ANY FINDING, THIS MATTER MAY BE RESTORED TO THE FILE OF THE AO WITH THE DIRECTION THAT THE ASSESSEE SHOU LD FURNISH COMPLETE DETAILS WHICH WERE FURNISHED BEFORE THE LEARNED CIT(A), THE AO WILL EX AMINE THE SAME AND RE-ADJUDICATE THE DISALLOWANCE OF RS.3,30,610/- AFRESH IN ACCORDANCE WITH LAW. 13. ON THE OTHER HAND, SHRI D.K. PARIKH, LEARNED CO UNSEL OF THE ASSESSEE CONTENDED THAT THE ASSESSEE HAD BORROWED A SUM OF RS.75.00 LACS FROM M /S. MAGNET PLASTICS LTD. OUT OF WHICH A SUM OF RS.50.50 LACS HAD BEEN UTILIZED FOR PURCHASE OF SHARES OF THE LENDER COMPANY VIZ MAGNET 5 PLASTICS LTD. AS REGARDS BALANCE OF RS.25.00 LACS, RS.18.28 LACS WAS UTILIZED TOWARDS PAYMENT TO CREDITORS. IN OTHER WORDS, ONLY A SUM OF RS.6,21,40 0/- HAD BEEN UTILIZED FOR MAKING ADVANCES. SINCE THE ASSESSEE WAS HAVING ITS OWN FUNDS TO GIVE INTEREST FREE ADVANCES OF RS.6,21,400/-, NO DISALLOWANCE OF RS.3,30,610/- IS CALLED FOR. FOR TH IS, RELIANCE WAS PLACED ON THE JUDGMENT OF HONBLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE U TILITIES & POWER LTD. REPORTED IN 221 CTR 435 (2009). THE LEARNED COUNSEL OF THE ASSESSEE ALS O REFERRED TO THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF S. A. BUILDERS REPORTE D IN 298 ITR 1 (SC) AND CONTENDED THAT THE ADVANCES GIVEN BY THE ASSESSEE WAS KEEPING IN VIEW COMMERCIAL EXPEDIENCY AND LARGER INTEREST OF THE ASSESSEE COMPANY. THEREFORE, SUCH ADVANCES C ANNOT BE CONSIDERED FOR NON-BUSINESS PURPOSE. 14. AS REGARDS TO ARGUMENTS OF THE LEARNED DR FOR A PPLICABILITY OF SECTION 14A OF THE ACT, THE LEARNED COUNSEL OF THE ASSESSEE SUBMITTED THAT SHAR ES WERE PURCHASED AS STOCK IN TRADE. DURING THE YEAR DIVIDEND INCOME WAS NOT EXEMPT AND WAS CHA RGEABLE TO TAX. THEREFORE, PROVISIONS OF SECTION 14A HAVE NO APPLICATION TO THE FACTS AND CI RCUMSTANCES OF THE PRESENT CASE. THE LEARNED COUNSEL OF THE ASSESSEE FURTHER SUBMITTED THAT THER E IS NO CASE AT AL FOR REMITTING THIS OLD MATTER TO THE FILE OF THE AO. FOR THIS CONTENTION, RELIANC E WAS PLACED ON THE JUDGMENT OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF RAJESH BABUBHAI D AMANIA VS CIT 251 ITR 541 (GUJ) WHEREIN IT WAS HELD THAT THERE WAS NO QUESTION OF ONE MORE INNING TO THE AO. THE LEARNED COUNSEL OF THE ASSESSEE ACCORDINGLY CONCLUDED THAT THE ORDER O F THE LEARNED CIT(A) DELETING BOTH THE DISALLOWANCE BE UPHELD. 15. IN REPLY, THE LD. D.R. SUBMITTED THAT IN THE C ASE OF RAJESH BABUBHAI DAMANIA (SUPRA), BEFORE THE A.O. THE ASSESSEE PRODUCED ALL THE FIVE PARTIES WHEN THEY WERE PRODUCED FOR CROSS EXAMINATION. NO CROSS EXAMINATION WAS DONE BY A.O. IN THESE CIRCUMSTANCES, THE HON'BLE HIGH COURT HELD THAT ONE MORE INNINGS CANNOT BE GIVEN TO THE A.O. THE RATIO OF THAT DECISION HAS NO APPLICATION TO THE FACTS OF PRESENT CASE BECAUSE IN THIS CASE, THE A.O. DISALLOWED THE INTEREST EXPENSE OF RS.6,06,000/- ON THE GROUND THAT IT IS C APITAL IN NATURE. ON APPEAL, IN THE IMPUGNED ORDER THE LEARNED COMMISSIONER OF INCOME TAX(APPEAL S) HELD THAT THE SAME IS OF REVENUE NATURE. THE LEARNED COMMISSIONER OF INCOME TAX(APPE ALS) HAS NOT EXAMINED WHETHER THE ENTIRE EXPENDITURE IN QUESTION CAN BE ALLOWED AS REVENUE E XPENDITURE. SIMILARLY, HE DELETED THE DISALLOWANCE OF INTEREST OF RS.3,30,616/- ON THE GR OUND THAT ASSESSING OFFICER HAS NOT DISCHARGED 6 HIS ONUS, WHEREAS IT IS WELL SETTLED LAW THAT WHENE VER AN EXEMPTION OR DEDUCTION IS CLAIMED, THE BURDEN IS ON THE ASSESSEE TO PROVE HOW AND UNDER WH AT PROVISION OF LAW THE SAME IS ALLOWABLE. THE REQUISITE FACTS AND FIGURES WHICH ARE WITHIN TH E KNOWLEDGE OF THE ASSESSEE WERE NOT FURNISHED BEFORE THE A.O.. THEREFORE, IN THESE CIRC UMSTANCES, THIS ISSUE SHOULD ALSO BE RESTORED TO THE FILE OF A.O. WITH THE DIRECTION THAT ASSESSEE S HOULD FURNISH THE COMPLETE DETAILS, WHICH WERE FURNISHED BEFORE THE A.O., THE A.O. WILL EXAMINE TH E SAME AND RE-ADJUDICATE THE DISALLOWANCE OF RS.3,30,610/- AFRESH. 16. AFTER HEARING BOTH THE SIDES, WE HAVE CAREFULLY GONE THROUGH THE ORDERS OF AUTHORITIES BELOW AND PERUSED THE MATERIAL PLACED BEFORE US. TH IS APPEAL WAS FILED BY THE REVENUE ON 24.03.2003. THE NOTICE OF HEARING COULD NOT BE SERV ED ON THE ASSESSEE AND ULTIMATELY THIS WAS SERVED THROUGH DEPARTMENT. IN THESE CIRCUMSTANCES, THE APPEAL IN QUESTION COULD NOT BE DISPOSED OF EARLIER. IN THE ASSESSMENT ORDER, WITH REGARD TO DISALLOWANCE OF INTEREST TO THE EXTENT OF RS.6,06,000/-, THE A.O. HAS DISALLOWED THE SAME ON THE GROUND THAT THE ASSESSEE HAS ACQUIRED CONTROLLING INTEREST. THE LEARNED COMMISSIONER OF I NCOME TAX(APPEALS) ACCEPTED THE PLEA OF THE ASSESSEE THAT THE ASSESSEE DID NOT ACQUIRE THE CONTROLLING INTEREST WITHOUT CALLING THE DETAILS OF SHAREHOLDINGS OF THE ENTIRE GROUP. PRIMA FACIE, IT APPEARS THAT ACCORDING TO A.O., JUST BY ACQUIRING SHARES IN QUESTION, THE ASSESSEE (GROUP) HAS ACQUIRED CONTROLLING INTEREST. THEREFORE, INTEREST IS NOT ALLOWABLE AS PER THE JUDGMENT OF TH E HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF SARABHAI & SONS PVT. LTD. (SUPRA). 17. IN THE IMPUGNED ORDER, THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) HAS STATED THAT SHARES WERE HELD AS INVESTMENT MEANING THEREBY THAT THE ASSESSEE IS NOT TRADING IN SHARES. WHEN SHARES ARE HELD AS INVESTMENT, ON ITS SALE, AN ASSESSEE IS LIABLE TO CAPITAL GAIN AND ONLY CERTAIN EXPENDITURE IS ALLOWABLE AS DEDUCTION. SUCH EXPENDITURE SHOULD EITHER BE THE COST OF ACQUISITION, THE COST OF IMPROVEMENT OR AN EXPENSE IN CONNECTION WITH THE TRANSFER. NO OTHER EXPENDITURE QUALIFY FOR DEDUCTION. INTEREST ON LOAN TAKEN ON ACQUISITION OF SHARES IS CERTAINLY NOT AN EXPENSE IN CONNECTION WITH TRANSFER, NOR IT CAN BE SAID TO IMPROVE THE COST OF SHARES. THEREFORE, EVEN IF CAPITAL GAIN IS TAXABLE, INTERES T CAN ONLY BE CLAIMED AS A DEDUCTION IF IT CAN BE CONSIDERED AS A PART OF COST OF ACQUISITION OF SHAR ES. IN SUCH CIRCUMSTANCES, WHETHER INTEREST IS ALLOWABLE OR NOT WAS NOT EXAMINED BY ANY OF THE AUT HORITIES BELOW. 7 17.1. HOWEVER, WE NOTICE THAT THE ASSESSEE HAS HELD THE SHARES BASICALLY AS INVESTMENT AND NOT AS STOCK-IN-TRADE. IT IS A TRITE LAW THAT CHARACTER OF A RECEIPT CANNOT BE CHANGED MERELY BY MAKING ENTRIES IN THE BOOKS. IF BASIC CHARACTER OF A RECEI PT IS REVENUE NATURE THEN BY SHOWING IT HAS CAPITAL RECEIPT IN THE BOOKS OF ACCOUNTS, THE CHARA CTER WILL NOT CHANGE. SIMILARLY, BY SHOWING THE SHARES EVEN AS STOCK-IN-TRADE IN THE BOOKS OF ACCOU NTS, THE BASIC CHARACTER OF HOLDING WILL NOT CHANGE AS INVESTMENT IN AN ASSET IN WHICH THE ASSES SEE IS NOT DOING ANY BUSINESS. THERE IS NO EVIDENCE ON RECORD TO SHOW THAT THE ASSESSEE HAS BE EN DOING BUSINESS OF TRADING IN SHARES. THEREFORE, IT IS AS SUCH CANNOT BE ALLOWED AS BUSIN ESS EXPENDITURE. HOWEVER, THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS.- RAJE NDRA PRASAD MODY REPORTED IN (1978) 115 ITR 519 WOULD BE APPLICABLE, ACCORDING TO WHICH INT EREST PAID ON MONEY BORROWED FOR INVESTMENT IN SHARES WOULD BE AN ALLOWABLE DEDUCTIO N EVEN THERE NO DIVIDEND IS RECEIVED. SUCH DEDUCTION IS ALLOWABLE UNDER SECTION 57(III) OF THE INCOME TAX ACT. WHAT IS REQUIRED TO BE EXAMINED IS WHETHER SHARES PURCHASED BY THE ASSESSE E ARE DIVIDEND YIELDING SHARES OR OTHERWISE. THOUGH IT IS NOT MATERIAL THAT DIVIDEND IS ACTUALLY EARNED BUT THERE SHOULD BE A POTENTIAL OF EARNING DIVIDEND. IN SUCH ADDITION, PROVISIONS UNDE R SECTION 14A ARE ALSO REQUIRED TO BE CONSIDERED BECAUSE IT IS TO BE SEEN AS TO WHAT EXTE NT INCOME EARNED OR TO BE EARNED WOULD BE EXEMPT. IN THIS CONNECTION, PROVISIONS OF RULE 8D W OULD ALSO BE APPLICABLE. THE CALCULATION FOR DISALLOWING INTEREST EXPENDITURE IN CONNECTION WITH EXEMPTED INCOME HAS TO BE CARRIED OUT IN ACCORDANCE WITH RULE 8D. SINCE THESE ASPECTS HAVE N OT BEEN EXAMINED BY THE A.O., THE ISSUE IS REQUIRED TO BE CONSIDERED AFRESH AT HIS LEVEL. ACCO RDINGLY, WE RESTORE THIS ISSUE TO HIS FILE FOR FRESH CONSIDERATION. 18. WITH REGARD TO DISALLOWANCE OF INTEREST OF RS.3 ,30,610/-, WE FIND CONSIDERABLE FORCE IN THE SUBMISSION MADE BY THE LD. D.R. THE EXPLANATION, WH ICH IS SUBMITTED BEFORE THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS), WAS NOT FURNIS HED BEFORE THE A.O. IN THESE CIRCUMSTANCES, IN OUR OPINION, THE DECISION OF THE HON'BLE GUJARAT HIGH COURT IN THE CASE OF RAJESH BABUBHAI DAMANIA (SUPRA) WILL NOT HELP TO TH E ASSESSEE WHETHER THE ADVANCE WAS GIVEN FOR THE PURPOSE OF BUSINESS AND ALLOWABLE KEEPING I N VIEW THE RATIO OF THE HON'BLE SUPREME COURT IN THE CASE OF S.A. BUILDERS (SUPRA) RELIED B Y THE LD. COUNSEL OF THE ASSESSEE NEEDS VERIFICATION AT THE END OF A.O. WHETHER THE OWN FUN DS WERE AVAILABLE ALSO NEEDS VERIFICATION AT THE END OF A.O. 8 19. IN VIEW OF THE FOREGOING, IN OUR OPINION, IT WI LL MEET THE END OF JUSTICE IF THE ISSUE REGARDING DISALLOWANCE OF INTEREST OF RS.9,36,619/- IS RESTORED TO THE FILE OF A.O., WHO WILL RE- EXAMINE THE SAME AFTER CONSIDERING THE VARIOUS FRES H CONTENTIONS RAISED BEFORE THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) AND RE-ADJUDICA TE THE ADDITION OF RS.3,30,610/- AFRESH IN ACCORDANCE WITH LAW AFTER GIVING OPPORTUNITY OF BEI NG HEARD TO THE ASSESSEE. THE ASSESSEE IS ALSO DIRECTED TO FURNISH THE COMPLETE DETAILS OF SHAREHO LDING OF M/S. MEGNUS PLASTICS LTD., HOW THE LOAN OF RS.82.39 LAKHS OBTAINED FROM ITS SISTER CON CERN WAS UTILIZED, WHEN THE SHARES PURCHASED WERE SOLD, AND HOW THE PROFIT/ LOSS THEREON WAS DEC LARED IN THE RETURN OF INCOME IN THE SUBSEQUENT ASSESSMENT YEARS. 20. IN THE RESULT, THE APPEAL OF THE REVENUE IS TRE ATED AS PARTLY ALLOWED. ORDER PRONOUNCED IN THE COURT ON 06-11-2009. SD/- SD/- (D. C. AGARWAL) ACCOUNTANT MEMBER (T. K. SHARMA) JUDICIAL MEMBER DATED :06-11-2009 COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE CIT(A) CONCERNED 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE TRUE COPY BY ORDER DY. RE GISTRAR, ITAT, AHMEDABAD LAHA/SR.P.S.