Avadh Polytubes Private Limited, Kanpur V. DCIT, Kanpur

ITA 129/LKW/2010

• Counselvise Citation: 12923714 RSA 2010
• Duration Of Justice: 1 year(s) 1 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-04-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 04-04-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 18-02-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P K B AJAJ
• Keywords: Notional interest; Commercial expediency
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, B - BENCH, LUCKNOW. BEFORE SHRI H.L.KARWA, HON'BLE VICE PRESIDENT AND SHRI N.K.SAINI, ACCOUNTANT MEMBER I.T.A.NO.129(LKW.)/2010 A.Y. : 2006-07 AVADH POLYTUBES PRIVATE LIMITED, VS. THE DY.CIT- V I, 58/5, BIRHANA ROAD, KANPUR-208001. KANPUR. PAN AABCA1520H (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI RAKESH GARG, ADVOCATE RESPONDENT BY : SHRI P.K.BAJAJ, SR.D.R. O R D E R PER N.K.SAINI, ACCOUNTANT MEMBER THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE O RDER DATED 7.12.2009 OF THE LD.CIT(A)-II, KANPUR. 2. THE FOLLOWING GROUNDS HAVE BEEN RAISED IN THIS A PPEAL: 1. THAT THE LEARNED COMMISSIONER OF INCOME TAX(APP EALS)-II, KANPUR HAS ERRED IN LAW AND ON FACTS IN SUSTAINING THE DISALLOWANCE OF RS.1,84,444/- MADE BY THE LEARNED A SSESSING OFFICER OUT OF INTEREST PROPORTIONATE TO THE AMOUN T OF INVESTMENT IN MUTUAL FUND DURING THE YEAR. WHILE S USTAINING THE DISALLOWANCE, THE LEARNED COMMISSIONER OF INCOM E TAX(APPEALS)-II, KANPUR HAS FAILED TO CONSIDER AND APPRECIATE THAT THE LEARNED ASSESSING OFFICER FAILED TO ESTABL ISH ANY NEXUS BETWEEN THE BORROWED FUNDS AND THE INVESTMENT IN TH E UNITS OF MUTUAL FUNDS PARTICULARLY IN VIEW OF THE FACT THAT INVESTMENT IN UNITS OF MUTUAL FUNDS HAD BEEN MADE OUT OF CASH FLO W GENERATED DURING THE YEAR AS WELL AS OUT OF ACCUMUL ATED CASH 2 FLOWS AND NO LOAN HAD BEEN TAKEN BY THE APPELLANT FOR MAKING INVESTMENT IN THE MUTUAL FUNDS. 2. THAT THE LEARNED COMMISSIONER OF INCOME TAX (APP EALS)-II, KANPUR HAS ERRED IN LAW AND ON FACTS WHILE CONFIRMI NG AFORESAID DISALLOWANCE AND PLACING RELIANCE ON THE DECISIONS OF THE HONBLE ITAT(SB) IN THE CASES OF DAGA CAPITAL MANAGEMENT (P.) LTD. [26 SOT 603 (MUM)SB] AND CHEM INVEST LIMITED (DELHI SB) WHEREAS FACTS IN THE CASE OF THE APPELLANT ARE DISTINGUISHABLE AND RATIO LAID DOWN IN CITED DE CISIONS WERE NOT APPLICABLE. THE APPELLANT HAD OFFERED INCOME FR OM INVESTMENT IN MUTUAL FUND FOR TAXATION UNDER CAPITA L GAINS AND PAID DUE TAXES THEREON AND MOREOVER THE APPELLANT H AD NOT DERIVED ANY INCOME FROM SAID INVESTMENT WHICH IS NO T INCLUDIBLE IN TOTAL INCOME. 3. THAT THE LEARNED COMMISSIONER OF INCOME TAX(APPE ALS)-II, KANPUR HAS ERRED IN LAW AND ON FACTS WHILE SUSTAINI NG THE DISALLOWANCE BY NOT PLACING RELIANCE ON THE RATIO L AID DOWN BY THE HONBLE HIGH COURT OF ALLAHABAD IN CIT VS. PREM HEAVY ENGINEERING WORKS (P) LIMITED (2006) 150 TAXMAN 90 (ALL) AND HONBLE MUMBAI HIGH COURT IN CIT VS. RELIANCE U TILITIES & POWER LIMITED (2009) 313 ITR 340 (BOM), WHEREAS F ACTS OF THE CASE OF THE APPELLANT ARE SIMILAR TO THE ABOVE CITED CASES. 4. THAT THE ORDER OF LEARNED COMMISSIONER OF INCOME -TAX (APPEALS)-II TO THE EXTENT STATED IN GROUND NO. 1 T O 3 HEREINABOVE IS ERRONEOUS, UNJUST, BAD IN LAW AND ON FACTS AND IS LIABLE TO BE QUASHED. 5. THAT ANY OTHER RELIEF OR RELIEFS AS YOUR HONOUR MAY DEEM FIT IN THE FACTS AND CIRCUMSTANCES OF THE CASE, BE GRANTED . YOUR HUMBLE APPELLANT CRAVES LEAVE TO ADD, AMEND OR WITHDRAW ANY OF THE GROUND OF APPEAL GIVEN ABOVE AS AND WHEN IT IS CONSIDERED NECESSARY TO DO SO. 2.1 FROM THE ABOVE GROUNDS, IT IS NOTICED THAT THE ONLY GRIEVANCE OF THE ASSESSEE RELATES TO THE DISALLOWANCE OF RS.1,84,444 . 3 3. THE FACTS OF THE CASE, IN BRIEF, ARE THAT THE AS SESSEE IS A PRIVATE LIMITED COMPANY AND WAS ENGAGED IN THE BUSINESS OF MANUFA CTURING AND SELLING OF DOUBLE WALL CORRUGATED PLASTIC PIPES. THE ASSESSEE FILED THE RETURN THROUGH E-FILING ON 9.1.2006 DECLARING NET INCOME OF RS.58, 66,574, WHICH WAS PROCESSED UNDER SECTION 143(1) OF THE INCOME-TAX AC T, 1961. LATER ON, THE CASE WAS SELECTED FOR SCRUTINY. DURING THE ASSESSME NT PROCEEDINGS, THE AO NOTICED THAT THE TOTAL AMOUNT OF INVESTMENT BY THE ASSESSEE HAS INCREASED TO RS.1,74,40,989 AS AGAINST RS.1,10,32,489 IN THE IMM EDIATELY PREVIOUS YEAR. THE AO REQUIRED THE ASSESSEE TO FURNISH THE DETAILS OF THOSE INVESTMENTS AND ALSO JUSTIFY HOW THE SAME WAS REQUIRED FOR BUSINESS PURPOSES. FROM THE DETAILS FURNISHED BY THE ASSESSEE, THE AO NOTICED T HAT THE INVESTMENT HAS BEEN MADE IN SHARES AND MUTUAL FUNDS AND WHEN C OMPARED TO THE IMMEDIATE PREVIOUS YEAR, THE FRESH INVESTMENT IN TH E MUTUAL FUND AMOUNTED TO RS.64,08,000. AS REGARDS TO THE PURPOSE OF INVE STMENT, THE ASSESSEE SUBMITTED THAT CASH ACCRUAL OF THE ASSESSEE-COMPANY HAD BEEN INVESTED IN PURCHASE OF QUOTED AND LISTED SHARES AND UNITS O F MUTUAL FUNDS UNDER VARIOUS SCHEMES. IT WAS ALSO STATED THAT THE CASH ACCRUAL HAD BEEN INVESTED FOR FUTURE EXPANSION AND NO LOAN FUND HAD BEEN USED FOR THE PURPOSE OF INVESTMENT. IT WAS FURTHER STATED THAT THE ASSESSEE DID NOT TAKE ANY LOAN FOR THE PURPOSE OF INVESTMENT AND HENCE NO DISALLOWANCE OF ANY PRESUMPTIVE INTEREST SHOULD BE MADE. IT WAS STATED THAT IT WAS COMMERCIAL EXPEDIENCY AND PRUDENCE TO DEPLOY CASH PROFIT EARNED IN SUCH A MA NNER SO THAT IT COULD BE DEPLOYED PROFITABLY AND LIQUIDITY COULD BE ENSURED. IT WAS FURTHER CONTENDED THAT THE INVESTMENT OF CASH FLOW IN THE MUTUAL FUN DS COULD NOT BE SAID TO BE A NON-BUSINESS ACTIVITY AND THAT THE INCREMENTAL IN VESTMENT HAD BEEN MADE ALMOST AT THE END OF THE YEAR WHEN ALL PROFITS WER E ACCRUED AND MOREOVER 4 NO LOAN HAD BEEN TAKEN FOR MAKING AFORESAID INVEST MENTS FOR WHICH THERE IS NO NEXUS BETWEEN THE INVESTMENT AND THE LOANS TAKEN . 3.1 THE AO, AFTER CONSIDERING THE SUBMISSIONS OF T HE ASSESSEE, OBSERVED THAT DURING THE YEAR UNDER CONSIDERATION, THE UNSEC URED LOANS OF THE ASSESSEE HAVE GONE UPTO RS.84,99,174 AS AGAINST RS.70,69,510 IN THE IMMEDIATE PREVIOUS YEAR AND THAT ON SUCH LOAN/LOAN FROM BANK, THE ASSESSEE HAD MADE PAYMENT OF INTEREST AMOUNTING TO RS.11,45,460. ACCO RDING TO THE AO, NO PRUDENT BUSINESSMAN WOULD LIKE TO INCUR COST OF I NTEREST IN THE BUSINESS BY MAKING INVESTMENT IN MUTUAL FUNDS, WHICH IS NOT THE BUSINESS OF THE ASSESSEE AND THAT HAD THE ASSESSEE REPAID THE LOAN FROM TH E AMOUNT INVESTED IN MUTUAL FUND DURING THE YEAR UNDER CONSIDERATION, IN CIDENCE OF TAX MUST HAVE BEEN REDUCED SUBSTANTIALLY. THE AO WAS OF THE VIEW THAT BY NOT REPAYING THE LOANS, THE ASSESSEE HAD INCURRED EXPENDITURE ON ACCOUNT OF INTEREST ON SUCH AMOUNT WHICH HAD BEEN INVESTED ON MUTUAL FUND S DURING THE YEAR. HE WORKED OUT THE INTEREST ON INCREASE IN INVESTMENT IN MUTUAL FUND AT RS.1,84,444 BY APPLYING THE RATE OF INTEREST OF 11% AND WAS OF THE VIEW THAT HAD THE ASSESSEE MADE THE REPAYMENT OF LOANS INST EAD OF MAKING INVESTMENT IN MUTUAL FUND, THE COST OF INTEREST MUST HAVE BEEN REDUCED BY AN AMOUNT OF RS.1,84,444. HE ACCORDINGLY MADE THE DISALLOWANCE O F RS.1,84,444 AND ADDED THE SAME TO THE TOTAL INCOME OF THE ASSESSEE . 4. THE ASSESSEE CARRIED THE MATTER TO THE LD.CIT(A) AND THE SUBMISSIONS MADE BEFORE HIM AS MENTIONED IN PARA 4.1 OF THE IMP UGNED ORDER, ARE REPRODUCED VERBATIM AS UNDER: THE LEARNED ASSESSING OFFICER HAD DISALLOWED A SUM OF RS.1,84,444/- TOWARDS INTEREST @ 11% ON INCREASE IN INVESTMENT IN MUTUAL FUNDS, 5 TREATING IT AS NON BUSINESS, WHICH WAS DISCUSSED IN DETAIL BY THE LEARNED ASSESSING OFFICER IN PARA 5 OF THE ASSESSME NT ORDER. THE APPELLANT WAS REQUIRED TO FURNISH THE DETAIL OF INVESTMENT AND ALSO JUSTIFY HOW THE SAME WAS REQUIRED FOR BUSINESS PURPOSES. THE APPELLANT HAD FURNISHED THE DETAILS OF INVESTMENT A LONGWITH JUSTIFICATION VIDE PARA 1 OF WRITTEN SUBMISSION DAT ED 09.05.2008, WHICH IS PLACED AT PAGES 16 AND 17 OF PAPER BOOK. FROM THE PERUSAL, YOUR HONOUR WILL APPRECIATE THAT : A) THE APPELLANT HAD MADE INVESTMENTS FROM CASH FLOW G ENERATED DURING THE YEAR AS WELL AS OUT OF ACCUMULATED CASH FLOW, WITH THE INTENTION THIS FUND WILL BE USED FOR FUTURE EXPANSI ON/ GROWTH OF THE BUSINESS. THUS THIS CAN NOT BE INFERRED THAT INVEST MENT HAD BEEN MADE FOR NON BUSINESS PURPOSE. WHEN THE PURPOSE OF INVESTMENTS IS BUSINESS, HOW THE INVESTMENT CAN BE TREATED AS N ON BUSINESS ASSET. B) THE APPELLANT HAD NOT TAKEN ANY LOAN FOR MAKING SA ID INVESTMENT, THE FACT WHICH WAS ALSO ACCEPTED BY THE LEARNED ASS ESSING OFFICER. MOREOVER, HE COULD NOT ESTABLISH ANY CORRELATION AN D NEXUS BETWEEN THE INVESTMENT AND UNSECURED LOANS. C) THE LEARNED ASSESSING OFFICER HAD ALREADY ACCEPTED THE INVESTMENT AS BUSINESS ASSET IN THE EARLIER ASSESSMENTS, WHICH IS EVIDENT FROM THE FACT THAT HE HAD NOT MADE ANY DISALLOWANCE ON T HIS ACCOUNT WHILE MAKING ASSESSMENT IN EARLIER ASSESSMENT YEARS . MOREOVER, HE HAD CONSIDERED ONLY INCREMENTAL INVESTMENT AS NO N BUSINESS ASSET DURING THE YEAR UNDER QUESTION. HOW CAN A SIM ILAR ASSET BE PARTIALLY BE TREATED AS BUSINESS ASSET AND PARTIALL Y AS NON BUSINESS. D) THE APPELLANT HAD OFFERED THE TAX ON INCOME FROM T HESE INVESTMENT AND PAID THE DUE TAXES THEREON, WHICH HAD BEEN DISC LOSED BY WAY OF CAPITAL GAINS IN THE RETURN OF INCOME OF THE ASS ESSEE AND HAD ALSO BEEN CONSIDERED BY THE LEARNED ASSESSING OFFIC ER WHILE MAKING THE ASSESSMENT. THE LEARNED ASSESSING OFFICER HAD NOT CONSIDERED TH ESE FACTS AND MADE ADDITION @ 11% TOWARDS INTEREST ON INCREASE IN INVE STMENT ON THE 6 FLIMSY GROUND THAT IN CASE THERE HAD BEEN NO INCREA SE IN THE INVESTMENT, THE FUND WOULD HAVE BEEN USED FOR REPAY MENT OF LOANS RESULTING INTO DECREASE IN INTEREST PAYMENT ON UNSE CURED LOANS. WITHOUT PREJUDICE ALTERNATIVELY IF THE CONTENTION OF THE LEARNED ASSE SSING OFFICER BE ACCEPTED THAT THE SAID INVESTMENT IS NOT RELATED TO THE BUSINESS OF THE APPELLANT, EVEN THEN THE INTEREST ON SAID SUM HAD B EEN WRONGLY DISALLOWED BY THE LEARNED ASSESSING OFFICER SINCE T HE APPELLANT HAD ITS OWN CAPITAL AND FREE RESERVES (INTEREST FREE FUNDS) AS PER FOLLOWING DETAILS, WHICH WERE ADEQUATE ENOUGH TO COVER THE IN VESTMENT OF RS.1,74,40,989/- AS AT 31-03-2006, AND HENCE REASON ABLE PRESUMPTION CAN BE DRAWN THAT APPELLANT HAD UTILIZED THE SAME F OR NON BUSINESS PURPOSES. THIS VIEW IS SUPPORTED WITH THE RATIO LAI D BY THE HONBLE HIGH COURT ALLAHABAD IN CIT VS. PREM HEAVY ENGINEERING WORKS (P) LIMITED (2006) 150 TAXMAN 90 (ALL) . SIMILAR VIEW HAD ALSO BEEN TAKEN BY THE HONBLE MUMBAI HIGH COURT IN CIT VS. RELIANCE UTILITIES & POWER LIMITED (2009) 313 ITR 340 (BOM) . COPY OF RELEVANT ORDERS ARE PLACED AT PAGES 33 TO 45 OF PA PER BOOK. PARTICULARS AS AT 31-03-2006 (RS.) AS AT 31-03-2005 (RS.) SHARE CAPITAL 40,00,000.00 40,00,000.00 RESERVES & SURPLUS 1,61,13,680.09 1,29,23,799.77 TOTAL RUPEES (AS PER BALANCE SHEET - PAGE NO. 19) 2,01,13,680.09 1,69,23,799.77 IN THE LIGHT OF ABOVE FACTS, THE DISALLOWANCE MADE BY THE LEARNED ASSESSING OFFICER IS NOT SUSTAINABLE AND DESERVES T O BE DELETED. 5. THE LD.CIT(A), AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, CONFIRMED THE ACTION OF THE AO BY OBSERVING IN PAR A 4.2 OF THE IMPUGNED ORDER AS UNDER : 7 I HAVE GIVEN MY ANXIOUS THOUGHTS TO THE SUBMISSION S MADE. IN VIEW OF THE DECISIONS OF THE HON'BLE ITAT (SB) IN T HE CASES OF DAGA CAPITAL MANAGEMENT (P) LTD. [26 SOT 603(MUM)SB ] AND CHEMINVEST, I CONFIRM THE ADDITION/DISALLOWANCE MAD E BY THE AO. AS REGARDS THE SUBMISSION THAT INCOME ON ACCOUN T OF CAPITAL GAINS HAS BEEN OFFERED TO TAX, IT HAS NO RELEVANCE HERE SINCE LONG TERM CAPITAL GAINS TAX IS TAX ON THE DISPOSAL OF THE ASSET AND NOT TAX ON THE INCOME EARNED FROM THE ASSETS. 6. NOW, THE ASSESSEE IS IN APPEAL. 7. THE LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW AND FURTHER SUBMITTED THAT THE ASSESSEE FURNISHED A DETAILED REPLY TO THE LD.CIT(A),WHO DID NOT APPRECIATE THE SAME AND WITHOUT GOING INTO THE MERITS, CONFIRMED THE DI SALLOWANCE BY MERELY PLACING THE RELIANCE ON THE DECISION OF THE I.T.A.T ., SPECIAL BENCH, MUMBAI IN THE CASE OF DAGA CAPITAL MANAGEMENT (P.) LTD., 2 6 SOT 603(MUM.), WHICH IS DISTINGUISHABLE ON FACTS. IT WAS CONTENDED THAT THE TOTAL SHARE CAPITAL OF THE ASSESSEE AND ITS FREE RESERVES AS ON 31.3.2 006 ARE AT RS.2,01,13,680, WHEREAS THE TOTAL INVESTMENT MADE IN THE MUTUAL FU NDS IS RS.1,74,40,989 ONLY. THUS, THERE WERE MORE INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE AS COMPARED TO THE INVESTMENTS MADE IN THE MUTUAL F UNDS. IT WAS FURTHER CONTENDED THAT THE INVESTMENTS MADE IN MUTUAL FUND S ARE ALL IN GROWTH SCHEMES AND THE INCOME EARNED FROM THESE FUNDS WAS NOT EXEMPT AND WAS SUBJECT TO CAPITAL GAINS TAX AND THE ASSESSEE HAD P AID TAX IN THE YEAR UNDER CONSIDERATION. IT WAS FURTHER STATED THAT NO DIVID END INCOME HAD BEEN EARNED FROM THE INVESTMENT MADE IN MUTUAL FUNDS FOR THE RE ASON THAT THE ENTIRE INVESTMENT WAS IN THE GROWTH SCHEME PLAN, WHEREIN ONE DOES NOT GET THE DIVIDEND BUT THE INVESTMENT IS VALUED ON APPRECIATI ON BASIS, BASED ON THE 8 FUNDS EARNINGS, WHICH IS SUBJECT TO CAPITAL GAI NS TAX. IT WAS CONTENDED THAT THE ASSESSEE HAD NOT TAKEN ANY LOAN FOR MAKING INVE STMENT IN THE MUTUAL FUNDS AND THERE WAS NO NEXUS BETWEEN THE FUNDS BOR ROWED AND INVESTMENTS MADE IN THE MUTUAL FUNDS, THE SAID FACT WAS EXAMINE D BY THE AO ALSO, WHO HAD NOT REBUTTED THE SAME NOR ANY ADVERSE FINDINGS WERE GIVEN BY HIM IN THIS RESPECT. IT WAS STATED THAT THE TOTAL INTEREST PAID ON BORROWINGS FOR THE YEAR UNDER CONSIDERATION WAS AT RS.11,45,460 IN COMPARIS ON TO RS.11,12,502 PAID IN THE EARLIER YEAR. IT WAS FURTHER STATED THAT T HE ALLEGATION OF THE AO THAT THERE HAD BEEN INCREASE IN UNSECURED LOANS FROM RS. 75,69,510 TO RS.84,99,175 WAS NOT CORRECT BECAUSE THE SAID INCRE ASE WAS ON ACCOUNT OF ACCRUAL OF INTEREST AMOUNTING TO RS.11,45,460, WHIC H HAD BEEN CREDITED TO THE ACCOUNTS OF THE PARTIES. IT WAS CONTENDED THAT NO SUCH DISALLOWANCE HAD BEEN MADE IN THE PRECEDING YEARS AND THE FACTS IN T HE YEAR UNDER CONSIDERATION ARE THE SAME AS WERE IN THE EARLIER Y EAR. THEREFORE, NO DISALLOWANCE WAS CALLED. RELIANCE WAS PLACED ON THE FOLLOWING CASE LAWS: (I) CIT VS. PREM HEAVY ENGINEERING WORKS, 285 ITR 544(ALL.), (II) CIT VS. RELIANCE UTILITIES & POWER LTD., 313 ITR 40(BOM.), (III) VOLTAS LTD. VS. CIT, 125 TTJ 601(MUM.), (IV) THE DECISION OF THE HON'BLE PUNJAB AND HARYANA HIGH COURT IN THE CASE CIT VS. HERO CYCLES DATED 4.11.2009. 7.1 THE LD. COUNSEL FOR THE ASSESSEE FURTHER CONTEN DED THAT IN THE CASE OF DAGA CAPITAL MANAGEMENT (P.) LTD., 26 SOT 603(MUM.) RELIED UPON BY THE LD.CIT(A), THE FACTS WERE DIFFERENT BECAUSE IN THE SAID CASE THE ISSUE WAS RELATED TO APPLICABILITY OF SECTION 14A OF THE I.T. ACT AND RULE 8 D OF THE I.T.RULES, BUT IN THE ASSESSEES CASE, THE FACTS AR E ALTOGETHER DIFFERENT BECAUSE NONE OF THE INCOME WAS TAX FREE AND THE AS SESSEE HAD SHOWN 9 TAXABLE INCOME OF RS.1,19,625 FROM MUTUAL FUNDS INV ESTMENT. HE, THEREFORE, PRAYED TO DELETE THE ADDITION ARBITRARILY CONFIRMED BY THE LD.CIT(A). 8. IN HIS RIVAL SUBMISSIONS, THE LD.D.R. STRONGLY S UPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 9. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE ON THE RECORD. IN THE PRESENT CASE, IT APPEARS THAT THE AO MADE THE DISALLOWANCE BY PRESUM ING THAT THE ASSESSEE SHOULD HAVE REPAID THE EXISTING LOAN INSTEAD OF INV ESTING IN MUTUAL FUNDS. HOWEVER, NO NEXUS HAS BEEN ESTABLISHED BY THE AO T O SHOW THAT THE INTEREST BEARING LOANS TAKEN BY THE ASSESSEE FOR BUSINESS P UROSES WERE DIVERTED FOR MAKING THE INVESTMENT IN THE MUTUAL FUNDS. IT IS A LSO NOTICED THAT THE ASSESSEE MADE THE INVESTMENT IN MUTUAL FUNDS UNDER THE GROWN SCHEME. IN THE SAID SCHEME, THE DIVIDEND INCOME IS NOT EARNED BUT THE INVESTMENT IS VALUED ON APPRECIATION BASIS, BASED ON THE FUNDS EA RNINGS AND THE INCREASE IN VALUE DUE TO APPRECIATION IS SUBJECT TO CAPITAL GAI NS TAX. IN THE YEAR UNDER CONSIDERATION, THE ASSESSEE DECLARED THE INCOME OF RS.1,19,625 FROM MUTUAL FUNDS AS TAXABLE, SO IT CANNOT BE SAID THAT THE ASS ESSEE WAS HAVING INTEREST FREE DIVIDEND INCOME, AS SUCH, THE DECISION OF THE I.T.A.T., SPECIAL BENCH, MUMBAI IN THE CASE OF DAGA CAPITAL MANAGEMENT (P.) LTD., 26 SOT 603(MUM.)(SB) HAS WRONGLY BEEN APPLIED BY THE LD.CI T(A) WHILE CONFIRMING THE ACTION OF THE AO. IN THE INSTANT CAS E, AS THE AO DID NOT BRING ANY MATERIAL ON RECORD TO SUBSTANTIATE THAT THE IN TEREST BEARING LOANS WERE UTILIZED BY THE ASSESSEE FOR MAKING THE INVESTMENT IN MUTUAL FUNDS, THEREFORE, THE DISALLOWANCE ON ACCOUNT OF INTEREST MERELY ON PRESUMPTIVE BASIS WAS NOT JUSTIFIED. IN THE PRESENT CASE, THE C ONTENTION OF THE ASSESSEE THAT 10 THE SHARE CAPITAL AND FREE RESERVES AVAILABLE WERE AT RS.2,01,13,680, WHEREAS THE TOTAL INVESTMENT MADE IN THE MUTUAL FUNDS WAS A T RS.1,74,40,989 HAS NOT BEEN REBUTTED. THE ABOVE FACTS CLEARLY SHOW THAT TH E ASSESSEE WAS HAVING MORE SURPLUS FUNDS THAN THE INVESTMENTS MADE IN TH E MUTUAL FUNDS. FURTHERMORE, THE AO HAS NOT BROUGHT ANY MATERIAL O N RECORD TO SUBSTANTIATE THAT THE LOANS RAISED BY THE ASSESSEE FOR BUSINESS PURPOSES WERE DIVERTED FOR MAKING THE INVESTMENT. THIS EXPLANATION OF THE ASS ESSEE THAT THE INCREASE IN THE BORROWED FUNDS DURING THE YEAR WAS ONLY ON ACC OUNT OF ACCRUED INTEREST, WHICH WAS CREDITED TO THE ACCOUNTS OF THE PARTIES AND THERE WERE NO FRESH BORROWINGS, HAS ALSO NOT BEEN REBUTTED. WE, THEREF ORE, CONSIDERING THE TOTALITY OF THE FACTS AS DISCUSSED HEREINABOVE, ARE OF THE VIEW THAT THE DISALLOWANCE MADE BY THE AO AND CONFIRMED BY THE LD .CIT(A) ON ACCOUNT OF NOTIONAL INTEREST WAS NOT JUSTIFIED. IN THAT VIEW O F THE MATTER, WE DELETE THE ADDITION MADE BY THE AO AND CONFIRMED BY THE LD.CIT (A). 10. IN THE RESULT, THE APPEAL IS ALLOWED. THE ORDER PRONOUNCED IN THE OPEN COURT ON 7.4.11. SD. SD. (H.L.KARWA) (N.K.SAINI) VICE PRESIDENT ACCOUNTANT MEMBER APRIL 7TH ,2011. COPY TO THE : 1. APPELLANT 2. RESPONDENT 3. CIT(A) (4) CIT 5.DR. A.R.,ITAT, LUCKNOW. SRIVASTAVA. 11