Turkhia Agency Pvt. Ltd., V. The Income tax Officer, ward-8(2),

ITA 1290/AHD/2004

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 9165 (ITAT-AHMEDABAD)
• Duration Of Justice: 6 year(s) 7 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-12-2010
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 03-11-2010
• Assessment Year: 2001-2002
• Appeal Filed On: 21-04-2004
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SHELLEY JINDAL
• Assessee Lawyers: S N SOPARKAR
• Keywords: Business income; Speculation loss; Capital expenditure
• Section: 234B; 133(6); 37(1)

Judgement Text

- 1 - IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH C AHMEDABAD BEFORE S/SHRI MAHAVIR SINGH, JM & D.C. AGRAWAL, A.M . TURAKHIA AGENCY, (P) LTD., F-21, VIKRAM CHAMBERS, ASHRAM ROAD, AHMEDABAD. VS. INCOME-TAX OFFICER, WARD 8(2), AHMEDABAD. (APPELLANT) .. (RESPONDENT) TURAKHIA AGENCY, (P) LTD., F-21, VIKRAM CHAMBERS, ASHRAM ROAD, AHMEDABAD. VS. INCOME-TAX OFFICER, WARD 8(1), AHMEDABAD. (APPELLANT) .. (RESPONDENT) AND INCOME-TAX OFFICER, WARD 8(2), AHMEDABAD. VS. TURAKHIA AGENCY, (P) LTD., F-21, VIKRAM CHAMBERS, ASHRAM ROAD, AHMEDABAD. (APPELLANT) .. (RESPONDENT) ASSESSEE BY :- SHRI S. N. SOPARKAR, SR. ADVOCATE REVENUE BY:- SHRI RAJDEEP SINGH, SR. D.R. & SHRI SHELLEY JINDAL, CIT, DR ITA NO.1290/AHD/2004 ASST. YEAR :2001-02 ITA NO.2221/AHD/2005 ASST. YEAR :2001-02 ITA NO.2249/AHD/2005 ASST. YEAR :2001-02 ITA NO.1290/AHD/2004 & ITA NOS.2221 & 2249/AHD/2005 ASST. YEAR 2001-02 2 O R D E R PER D. C. AGRAWAL, ACCOUNTANT MEMBER. THESE ARE THREE APPEALS TWO FILED BY THE ASSESSEE AND ONE FILED BY THE REVENUE AGAINST DIFFERENT ORDERS OF THE LD. CIT (A) BUT INVOLVING COMMON ISSUES. ITA NO.1290/AHD/2004 AY 2001-02 (ASSESSEES APPEAL) 2. THIS APPEAL WAS DISPOSED OF BY THE TRIBUNAL IN I TA NO.1290/AHD/2004 VIDE ITS ORDER DATED 16.2.2005. FO LLOWING GROUNDS WERE RAISED BY THE ASSESSEE IN THE ORIGINAL APPEAL WHICH WERE DISPOSED OF AS REFERRED TO ABOVE :- (1) THE LD. CIT(A) XIV, AHMEDABAD HAS ERRED BOTH IN LAW AND ON FACTS OF THE CASE IN PASSING APPELLATE ORDER ON 31 ST MARCH, 2004 FOR AY 2001-02. (2) THE LD. CIT(A) HAS GRIEVOUSLY ERRED IN HOLDING THE ACTION OF THE AO IN TREATING THE FINANCING CHARGES OF RS.24,38,84 8/- AS EXCESSIVE AND THEREBY CONFIRMING THE DISALLOWANCE M ADE BY THE AO. (3) THE LD. CIT(A) HAS GRIEVOUSLY ERRED IN CONFIRMING T HE LOSS DERIVED BY THE AO OF RS.19,02,381/- AS FROM SPECULA TION BUSINESS UNDER THE PROVISION OF EXPLANATION TO SECT ION 73(1) OF THE IT ACT. (4) THE LD. CIT(A) HAS ERRED IN NOT DEALING WITH EACH O F THE AVERMENT AND SUBMISSION MADE BEFORE HIM AND HAS FUR THER ERRED IN DISMISSING THE APPEAL FILED BEFORE HIM. (5) THE LD. CIT(A) HAS ERRED IN CONSIDERING GROUNDS REL ATING TO INITIATION OF PENALTY U/S 271(1)(C) AS PREMATURED. (6) THE LD. CIT(A) HAS ERRED IN NOT DEALING WITH GROUND S RELATING TO CHARGING OF INTEREST U/S 234A, 234B & 234C OF THE I T ACT. ITA NO.1290/AHD/2004 & ITA NOS.2221 & 2249/AHD/2005 ASST. YEAR 2001-02 3 3. THE ASSESSEE FILED MISCELLANEOUS APPLICATION POI NTING OUT THAT WHILE DISPOSING OF THE APPEAL RELATING TO GROUND NO .3, THE TRIBUNAL HAS NOT TAKEN INTO ACCOUNT IMPORTANT FACTS. ACCEPTING T HE ABOVE CONTENTION THE TRIBUNAL PASSED THE ORDER IN M.A.129/AHD/2005 I N FEBRUARY, 2006 OBSERVING AS UNDER :- 3. AFTER HEARING BOTH SIDES, WE FIND THAT ONE OF T HE IMPORTANT FACT I.E. TAKEN OF DELIVERY OF SHARES HAS BEEN FOUND BY THE I TAT AS THE ASSESSEE HAS NOT TAKEN DELIVERY OF SHARES ON THE BASIS OF FI NDING OF THE CIT(A) OF WHICH RELEVANT PARA 4.4 HAS BEEN REPRODUCED IN THE ORDER OF ITAT. THE RELEVANT OBSERVATION OF THE CIT(A) IS REPRODUCED AS UNDER :- EVEN DURING THE APPELLATE PROCEEDINGS, THE APPELL ANT HAS NOT BEEN ABLE TO SUBSTANTIATE ITS CLAIM THAT THE SALE A ND PURCHASE OF THE SHARES HAS BEEN THE BUSINESS OF THE COMPANY BY PROD UCING EVIDENCE SUCH AS COPY OF DEMANT ACCOUNT, ORIGINAL C ONTRACT NOTE FOR PURCHASE AND SALE OF SHARES ON WHICH LOSS IS BO OKED AND, THEREFORE, I DO NOT HAVE ANY HESITATION TO HOLD THA T THE ACTION OF AO IN NOT ALLOWING SET OFF OF LOSS OF RS.19,02,381/- F ROM SPECULATION BUSINESS AGAINST ANY INCOME EXCEPT AGAINST INCOME O F ANOTHER SPECULATION BUSINESS AS PROVIDED IN SECTION 73(1) O F THE ACT IS FULLY JUSTIFIED, WHICH NEEDS NO MODIFICATION. 4. WE FIND THAT SOME CONTRADICTORY FACTS HAVE BEEN RECORDED WHICH REQUIRES HEARING FROM BOTH SIDES. UNDER THE CIRCUMS TANCES, THE ORDER OF ITAT IS RECALLED FOR DECIDING THE RELEVANT GROUND O F THE APPEAL OF THE ASSESSEE. 5. IN THE RESULT, MISC. APPLICATION IS ALLOWED. THE REGISTRY IS DIRECTED TO FIX THE CASE FOR DECIDING THE SAID GROUND IN DUE COURSE. 4. CONSEQUENTLY APPEAL IN ITA NO.1290/AHD/2004 HAS BEEN FIXED UP FOR DISPOSAL OF GROUND NO.3. 5. THE FACTS RELATING TO GROUND NO.3 ARE AS UNDER : - WHILE GOING THROUGH THE PROFITS AND LOSS ACCOUNT T HE AO NOTICED THAT ASSESSEE HAS CLAIMED A LOSS OF RS.15,40,881/- IN SHARE TRADING ITA NO.1290/AHD/2004 & ITA NOS.2221 & 2249/AHD/2005 ASST. YEAR 2001-02 4 ACTIVITIES AGAINST THE PROFITS OF ITS REGULAR BUSIN ESS. EXAMINING THE BROKERS NOTE THE AO FOUND THAT SHARES WHICH WERE I NCLUDED IN THE OPENING STOCK WERE PURCHASED MAINLY IN THE PRECEDIN G YEAR I.E. MARCH, 2000. IN RESPONSE TO ENQUIRY UNDER SECTION 133(6) I T WAS FOUND OUT THAT ALL THE SHARES WERE SETTLED WITHOUT TAKING DELIVERY. HO WEVER, REQUISITE DETAILS WERE NOT PROVIDED TO THE AO. THE AO ON THIS BASIS I NFERRED THAT LOSS SUFFERED BY THE ASSESSEE IS SPECULATIVE AS TRADING WAS DONE WITHOUT TAKING DELIVERY OF SHARES. THE EXPLANATION OF THE ASSESSEE THAT SHARES WERE PURCHASED IN BADLA MECHANISM AND THE DIFFERENCE BET WEEN PURCHASE AND SALE WERE SETTLED THROUGH VYAJ BADLA WAS NOT ACCEPT ED BY THE AO. THE DETAILS OF D/MAT ACCOUNTS WERE ALSO NOT FURNISHED. THE AO INFERRED THAT INTEREST IS EARNED IN VYAJ BADLA WHERE LOSS CANNOT TAKE PLACE. THE CLAIM OF THE ASSESSEE BEFORE THE AO THAT PROVISIONS OF SE CTION 73 WOULD NOT BE APPLICABLE TO IT AS ASSESSEE IS COVERED UNDER ONE O F THE EXCEPTIONS AND, THEREFORE, LOSS SUFFERED BY IT CANNOT BE TREATED AS SPECULATIVE LOSS WAS NOT ACCEPTED AS ACCORDING TO THE AO THE MAIN BUSINESS O F THE ASSESSEE WAS TRADING IN SANITARY WARES, PLY-WOOD AND VENEERS AND NOT IN SALE AND PURCHASE OF SHARES. AS IS EVIDENT FROM THE PROFIT A ND LOSS ACCOUNT, THE SALES OF MAIN PRODUCTS OF SANITARY WARES WAS RS.2,5 3,76,815/- WHEREAS SALES OF SHARES AND SECURITIES WAS OF RS.22,65,584/ - (COST PRICE WAS OF RS.38,06,465/- RESULTING IN LOSS OF RS.15,40,881/-) . THUS THE MAIN BUSINESS OF THE ASSESSEE WAS TRADING IN SANITARY WA RES, PLY WOOD AND VENEERS WHOSE TURNOVER IS TEN TIMES AS AGAINST SALE S OF SHARES AND SECURITIES AT RS.22,65,584/-. THEREFORE, ASSESSEE C OMPANY CANNOT BE TREATED AS THE ONE WHOSE GROSS TOTAL INCOME IS MAIN LY FROM INTEREST ON SECURITIES, HOUSE PROPERTY, CAPITAL GAINS AND INCOM E FROM OTHER SOURCES. THE ASSESSEE IS ALSO NOT A COMPANY WHOSE PRINCIPAL BUSINESS IS OF BANKING OR GRANTING OF LOAN/ADVANCES. THUS NONE OF THE EXCEPTIONS OF THE PROVISO TO SECTION 73 IS APPLICABLE. FURTHER FOR IN VESTING IN THE SHARES, THE ITA NO.1290/AHD/2004 & ITA NOS.2221 & 2249/AHD/2005 ASST. YEAR 2001-02 5 ASSESSEE HAD BORROWED MONEY ON WHICH INTEREST OF RS .3,61,500/- @ 19.16% WAS PAID RESULTING IN TOTAL LOSS OF RS.19,02 ,381/- (LOSS OF RS.15,40,881 + LOSS OF RS.3,61,500 AS INTEREST OUT GO). THE AO TREATED THIS LOSS AS SPECULATION LOSS AND DID NOT SET OFF T HE SAME AGAINST NORMAL BUSINESS INCOME. THE LD. CIT(A) ALSO CONFIRMED THE ORDER OF THE AO. HE OBSERVED THAT ASSESSEE DID NOT SUBSTANTIATE ITS CLA IM THAT SALE AND PURCHASE OF SHARES WAS THE MAIN BUSINESS OF THE ASS ESSEE COMPANY BY PRODUCING EVIDENCE SUCH AS D/MAT ACCOUNT, ORIGINAL CONTRACT NOTE THROUGH WHICH PURCHASES AND SALES OF SHARES WERE BOOKED. HE ALSO HELD THAT ONCE EXPLANATION -1 TO SECTION 73 IS APPLICABLE AND LOSS IN TRADING IN SHARES IS TREATED AS SPECULATION WITHIN THE MEANING OF THAT S ECTION, SECTION 43(5), WOULD FALL INTO OBLIVION AND THE QUESTION OF DELIVE RY OF SHARES WOULD NOT BE MATERIAL. 6. BEFORE US, THE LD. AR FOR THE ASSESSEE SUBMITTED THAT THE AO AND THE LD. CIT(A) HAS NOT CORRECTLY INTERPRETED THE PR OVISIONS OF SECTION 73. THIS SECTION READS AS UNDER :- 73. LOSSES IN SPECULATION BUSINESS.--(1) ANY LOSS, COMPUTED IN RESPECT OF A SPECULATION BUSINESS CARRIED ON BY THE ASSESSEE, SH ALL NOT BE SET OFF EXCEPT AGAINST PROFITS AND GAINS, IF ANY, OF ANOTHER SPECU LATION BUSINESS. (2) WHERE FOR ANY ASSESSMENT YEAR ANY LOSS COMPUTED IN RESPECT OF A SPECULATION BUSINESS HAS NOT BEEN WHOLLY SET OFF UN DER SUB-SECTION (1), SO MUCH OF THE LOSS AS IS NOT SO SET OFF OR THE WHOLE LOSS WHERE THE ASSESSEE HAD NO INCOME FROM ANY OTHER SPECULATION BUSINESS, SHAL L, SUBJECT TO THE OTHER PROVISIONS OF THIS CHAPTER, BE CARRIED FORWARD TO T HE FOLLOWING ASSESSMENT YEAR, AND-- (I) IT SHALL BE SET OFF AGAINST THE PROFITS AND GA INS, IF ANY, OF ANY SPECULATION BUSINESS CARRIED ON BY HIM ASSESSABLE F OR THAT ASSESSMENT YEAR; AND (II) IF THE LOSS CANNOT BE WHOLLY SO SET OFF, THE AMOUNT OF LOSS NOT SO SET OFF SHALL BE CARRIED FORWARD TO THE FOLLOWING ASSES SMENT YEAR AND SO ON. ITA NO.1290/AHD/2004 & ITA NOS.2221 & 2249/AHD/2005 ASST. YEAR 2001-02 6 (3) IN RESPECT OF ALLOWANCE ON ACCOUNT OF DEPRECIAT ION OR CAPITAL EXPENDITURE ON SCIENTIFIC RESEARCH, THE PROVISIONS OF SUB-SECTI ON (2) OF SECTION 72 SHALL APPLY IN RELATION TO SPECULATION BUSINESS AS THEY A PPLY IN RELATION TO ANY OTHER BUSINESS. (4) NO LOSS SHALL BE CARRIED FORWARD UNDER THIS SEC TION FOR MORE THAN EIGHT ASSESSMENT YEARS IMMEDIATELY SUCCEEDING THE ASSESSM ENT YEAR FOR WHICH THE LOSS WAS FIRST COMPUTED. EXPLANATION.--WHERE ANY PART OF THE BUSINESS OF A C OMPANY OTHER THAN A COMPANY WHOSE GROSS TOTAL INCOME CONSISTS MAINLY OF INCOME WHICH IS CHAREGEABLE UNDER THE HEADS 'INTEREST ON SECURITIES ', 'INCOME FROM HOUSE PROPERTY', 'CAPITAL GAINS' AND 'INCOME FROM OTHER S OURCES' OR A COMPANY THE PRINCIPAL BUSINESS OF WHICH IS THE BUSINESS OF BANK ING OR THE GRANTING OF LOANS AND ADVANCES CONSISTS IN THE PURCHASE AND SALE OF S HARES OF OTHER COMPANIES, SUCH COMPANY SHALL, FOR THE PURPOSES OF THIS SECTION, BE DEEMED TO BE CARRYING ON A SPECULATION BUSINESS TO THE EXT ENT TO WHICH THE BUSINESS CONSISTS OF THE PURCHASE AND SALE OF SUCH SHARES. ACCORDING TO THE LD. AR THE PROVISIONS OF SECTION 7 3 TREATING LOSS IN SHARE TRANSACTIONS AS SPECULATION LOSS WOULD NOT BE APPLI CABLE IN RESPECT OF FOLLOWING CLASSES OF ASSESSEES :- (1) THE COMPANY WHOSE GROSS TOTAL INCOME CONSISTS M AINLY OF INCOME WHICH IS CHARGEABLE UNDER THE HEAD INTEREST AND SE CURITIES, INCOME FROM HOUSE PROPERTY, CAPITAL GAINS AND INCOME FROM OTHER SOURCES. (2) THE COMPANY WHOSE PRINCIPAL BUSINESS IS OF BANK ING. (3) THE COMPANY WHOSE PRINCIPAL BUSINESS IS OF GRAN TING LOANS AND ADVANCES ACCORDING TO THE LD. AR EVEN IF THESE TYPES OF ASSE SSEE COMPANIES ARE DOING THE BUSINESS IN THE PURCHASE AND SALES OF SHA RES OF OTHER COMPANIES THEN LOSS SUFFERED IN SUCH SALE AND PURCHASE OF SHA RES CANNOT BE DEEMED AS SPECULATION LOSS. ACCORDING TO THE LD. AR, THE C ASE OF THE ASSESSEE IS COVERED UNDER THE THIRD EXCEPTION. THE PRINCIPAL BU SINESS OF THE PRESENT ASSESSEE COMPANY IS THAT OF GRANTING OF ADVANCES. H E SUBMITTED THAT ADMITTEDLY ASSESSEE HAS ADVANCED A SUM OF RS.3 CROR ES WHEREAS TURNOVER ITA NO.1290/AHD/2004 & ITA NOS.2221 & 2249/AHD/2005 ASST. YEAR 2001-02 7 IN OTHER BUSINESS IS ONLY RS.2,53,76,815/-. SINCE T URNOVER IN GRANTING LOANS AND ADVANCES IS HIGHER, THAN PRINCIPAL BUSINE SS OF THE ASSESSEE COMPANY WOULD BE THAT OF GRANTING LOANS AND ADVANCE S AND, THEREFORE, LOSS SUFFERED BY IT IN SALE AND PURCHASE OF SHARES CANNOT BE TREATED AS SPECULATIVE WITHIN THE MEANING OF EXPLANATION TO SE CTION 73. IN RESPECT OF HIS ARGUMENT LD. AR REFERRED TO PAGES 21 TO 27 OF T HE PAPER BOOK, WHICH IS THE COPY OF ACCOUNT OF TURAKHIA AGENCY (P) LTD.. IN THE MADHAVPURA MER. CO-OP. BANK LTD., AND OF TURAKHIA AGENCY (P) L TD. AND TURAKHIA ENTERPRISES IN THE BOOKS OF THE ASSESSEE SHOWING NU MBER OF TRANSACTIONS CARRIED OUT BY THE ASSESSEE WITH THOSE COMPANIES SH OWING RECEIPTS AND PAYMENTS OF MONEY. HE SUBMITTED THAT FOR THE PURPOS ES OF FINDING OUT WHAT SHOULD BE PRINCIPAL BUSINESS, ONE SHOULD ONLY SEE FIRSTLY WHETHER TOTAL AMOUNT ADVANCED IS MORE THAN TOTAL SALES, (2) WHETHER BORROWINGS ARE MORE THAN PURCHASES AND (3) THE EXTENT OF CREDI TORS IN THE BUSINESS. IN THE CASE OF THE ASSESSEE ADVANCES ARE DEFINITELY MO RE THAN SALES AS POINTED OUT ABOVE. SIMILARLY, PURCHASES ARE MORE THAN BORRO WINGS AND CREDITORS IN THE TRADING BUSINESS ARE ONLY RS.16 LACS WHEREAS LO AN BORROWING IS OF RS.3 CRORES. ACCORDING TO THE LD. AR, IT IS THE VOL UME OF BUSINESS WHICH IS RELEVANT FACTOR TO DECIDE WHAT IS PRINCIPAL BUSINES S. IN THE ALTERNATIVE THE LD. AR ARGUED THAT ACTUAL LOSS IN TRADING OF SHARES IS ONLY RS/15,48,881/-. INTEREST COMPONENT HAS TO BE CONSIDERED SEPARATELY WHICH HAS ACTUALLY BEEN CONSIDERED BY THE AO. THEREFORE, THE SAME CANN OT BE DISALLOWED AGAIN HERE. 7. AGAINST THIS, THE LD. DR SUBMITTED THAT PRINCIPA L BUSINESS OF THE ASSESSEE IS TRADING IN SANITARY-WARES, PLY-WOOD, VE NEERS ETC. WHERE THERE ARE LARGE NUMBER OF PURCHASE AND SALE OF ITEMS; ON THE OTHER HAND THE ASSESSEE HAS BORROWED FUNDS AND IMMEDIATELY TRANSFE RRED TO SISTER CONCERNS. THERE ARE ONLY TWO SISTER CONCERNS TO WHO M THE FUNDS WERE ITA NO.1290/AHD/2004 & ITA NOS.2221 & 2249/AHD/2005 ASST. YEAR 2001-02 8 TRANSFERRED ONE IS TARUKHIA OVERSEAS (P) LTD. TO W HICH RS.2.81 LACS IS TRANSFERRED AND RS.19 LACS WAS TRANSFERRED TO TARU KHIA ENTERPRISES. THEREFORE, THE AMOUNTS, EFFORTS, ENERGY AND APPLICA TION OF RESOURCES ARE MUCH LESS IN BORROWINGS AND TRANSFERRING OF FUNDS T O SISTER CONCERNS AS COMPARED TO TRADING IN SANITARY WARES, PLY WOOD VEN EERS ETC. WHERE THE ASSESSEE IS LARGELY AND MAINLY ENGAGED. IT HAS BEEN DOING THIS BUSINESS FOR LONG AND THIS BORROWING AND ADVANCING FUNDS HAS BEEN DONE ONLY THIS YEAR. THE ASSESSEE HAS EARNED GOODWILL ON ACCOUNT O F TRADING IN SANITARY WARES WHEREAS THERE IS NO GOOD WILL AS IT IS NON-BA NKING BORROWING AND ADVANCING. THE ASSESSEE DOES NOT HAVE ANY CERTIFICA TE FROM R.B.I. FOR CARRYING OUT SUCH BORROWING AND ADVANCING OF FUNDS. ONE HAS TO SEE THE INTENTION OF THE ASSESSEE AS TO WHAT IT HAS BEEN DO ING AND WHAT HE IS DOING NOW IN THE BUSINESS. ENTIRE RESOURCES OF ASSESSEE A RE APPLIED IN TRADING ACTIVITIES IN SANITARY WARES, THEREFORE, PRINCIPAL BUSINESS IS ONLY TRADING ACTIVITIES IN SANITARY WARES. 8. THE LD. AR IN REJOINDER, REFERRED TO A DECISION IN 192 ITR 365 FOR THE PROPOSITION THAT LOSS RELATING TO ACTIVITIES CO NSISTING OF PURCHASE AND SALES OF SHARES WILL ONLY BE TREATED AS FROM SPECUL ATION BUSINESS WHICH MEANS THAT IF ASSESSEE HAS OTHER BUSINESS ACTIVITIE S THEN THOSE OTHER ACTIVITIES, WILL NOT BE TREATED AS SPECULATION BUSI NESS. THEREFORE, INTEREST PORTION RELATING TO OTHER ACTIVITIES CANNOT BE ASSO CIATED WITH TRADING IN SALE AND PURCHASE OF SHARES. 9. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PER USED THE MATERIAL PLACED ON RECORD. IN OUR CONSIDERED VIEW THERE IS N O CASE FOR INTERFERENCE IN THE ORDER OF LD. CIT(A). THE SORT QUESTION IS WH AT ARE THE CRITERIA TO DECIDE AS TO WHAT SHOULD BE THE PRINCIPAL BUSINESS OF AN ASSESSEE, IF IN ADDITION TO SALE AND PURCHASE IN SHARES, IN WHICH I T HAS SUFFERED LOSS, THE ITA NO.1290/AHD/2004 & ITA NOS.2221 & 2249/AHD/2005 ASST. YEAR 2001-02 9 ASSESSEE IS ALSO DOING SEVERAL OTHER ACTIVITIES AND ONE OF WHICH APPARENTLY FALLS IN THE EXCEPTION TO EXPLANATION TO SECTION 73 . IN THE PRESENT CASE CLAIM OF THE ASSESSEE IS THAT IT IS ENGAGED IN THE ACTIVITIES OF GRANTING LOANS AND ADVANCES IN WHICH IT HAS BORROWED RS.3 CR ORES AND GIVEN ADVANCES OF RS.3 CRORES WHEREAS TURNOVER IN TRADING ACTIVITIES IN SANITARY WARDS IS ONLY RS.2.53 CRORES. IN OUR CONSIDERED VIE W VOLUME OF LOAN ALONE CANNOT BE THE CRITERIA FOR DECIDING AS TO WHA T SHOULD BE THE PRINCIPAL BUSINESS. SOME MORE CRITERIA ARE RELEVANT AND CAN B E APPLIED DEPENDING UPON THE FACTS AND CIRCUMSTANCES OF THE CASE. FOLLO WING ARE SOME AUTHORITIES ON THE SUBJECT:- (1) IN CIT VS. (2006) 285 ITR 536 (M.P.) IT IS H ELD THAT IN ORDER TO EXCLUDE THE APPLICABILITY OF SECTION 73 ASSESSEE MU ST PROVE THAT GROSS TOTAL INCOME OF COMPANY IS MAINLY FROM THIS O R ANY OF THESE SOURCES (MENTIONED UNDER EXCEPTION). IT IS ONLY ON THIS PROOF THAT THE ASSESSEE CAN COME OUT OF REGOURS OF SECTION 73. (2) AS HELD BY THE SPECIAL BENCH OF THE TRIBUNAL IN DCIT VS. INVESTMENT AND FINANCE (P) LTD. (2005) 277 ITR (AT) 20 (CALCUTTA) (SB) WHAT CONSTITUTE PRINCIPAL BUSINESS WOULD DEPEND ON THE FACTS AND CIRCUMSTANCES OF EACH CASE. THE MEMOR ANDUM OF ARTICLES OF ASSOCIATION OF THE COMPANY, PAST HISTOR Y OF THE COMPANY, CURRENT DEPLOYMENT OF THE FUNDS, BREAK UP OF THE INCOME EARNED DURING THE RELEVANT YEAR WOULD HELP IN DETER MINING THE PRINCIPAL BUSINESS OF THE COMPANY. FURTHER MERELY E NGAGING IN GRANTING OF LOAN AND ADVANCES WOULD NOT BE THE ONLY DECIDING FACTOR, NATURE OF OTHER ACTIVITIES OF THE ASSESSEE AND NOT THE ACTUAL INCOME FROM SUCH ACTIVITIES DURING A PARTICULAR YEA R ARE ALSO RELEVANT. ITA NO.1290/AHD/2004 & ITA NOS.2221 & 2249/AHD/2005 ASST. YEAR 2001-02 10 (3) IN ADDITION TO ABOVE THE DEPLOYMENT OF RESOURCE S OF THE COMPANY SUCH AS TIME, MONEY, MAN POWER, MANAGEMENT, THE EXT ENT OF ACTIVITIES AND ENGAGEMENT OF MAN POWER ARE REQUIRED TO BE CONSIDERED. (4) FURTHER THE VOLUME OF THE BUSINESS, THE FREQUEN CY OF THE TRANSACTIONS AND HISTORY OF THE ASSESSEE AS TO WHAT HE HAS BEEN DOING ALL THROUGH IN THE PAST, WHAT HAS BEEN THE MA IN SOURCE OF INCOME OF THE ASSESSEE AND FINALLY HOW THE GOOD WIL L OF THE ASSESSEE HAS BEEN FORMED IN THE BUSINESS WORLD. WHEN WE CONSIDER THE TWO ACTIVITIES OF THE ASSESSEE FIRSTLY TRADING IN SANITARY WARES, PLY-WOOD, VENEERS ETC. AND SECONDLY GRANTING OF LOANS/ADVANCES, WE NOTICE THAT ASSESSEE HAS BEEN IN THE PAST ENGAGED IN THE BUSINESS OF TRADING IN SANITARY WARES, PLY WOOD , VENEERS. IN THE AUDIT REPORT ANNEXURE-A THE ASSESSEE HAS GIVEN PRIORITY O F THE BUSINESS AS UNDER :- ANNXURE A : NOTES FORMING PART OF FORM NO. 3 CD FOR THE FINANCIAL YEAR 2000-01 NQTE 1 :- THE ASSESSES IS ENGAGED IN THE BUSINESS OF 1. TRADING OF PLYWOOD & VENEERS, ON SEMI WHOLESALE BASIS 2. TRADING IN SHARES SC SECURITIES 3. FINANCING ACTIVITIES 4. TRADING OF SANITARY WARES ON SEMI-WHOLE SALE BAS IS. NOTE 2 :- DURING THE CURRENT YEAR, THE COMPANY HAS STARTED TRADING IN SANITARY WARES IN THE STATE OF GUJARAT, NOTE 3 :- THE BOOKS OF ACCOUNTS STATED IN PARA 9 (B) HAVE BEE N VERIFIED ON TEST CHECK BASIS, ITA NO.1290/AHD/2004 & ITA NOS.2221 & 2249/AHD/2005 ASST. YEAR 2001-02 11 NOTE 4 :- INVENTORIES HAVE BEEN VALUED AS UNDER. TRADING GOODS : - CLOSING STOCK OF TRADING GOODS HAVE BEEN VALUED AT COST OR MARKET PRICE WHICHEVER IS LOWER. SHARES & SECURITIES : CLOSING STOCK OF SHARES & SECURITIES QUOTED IN THE RECOGNIZED STOCK EXCHANGES HAVE BEEN VALUED AT COST OR MARKET PRICE WHICHEVER IS LOWER AND IN CASE OF SHARES & SECURITI ES PURCHASED ALLOTTED FROM PRIMARY MARKET WHICH WERE N OT QUOTED IN THE RECOGNIZED STOCK EXCHANGES UP TO THE LAST DA TE OF THE ACCOUNTING YEAR, IT HAS VALUED AT COST. NOTE 5 :- AS PER THE INFORMATION AND EXPLANATION PROVIDED TO US, AL1 THE EXPENSES DEBITED TO PROFIT AND LOSS ACCOUNT ARE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND NO PERSONAL AS WELL AS CAPITAL EXPENDITURE HAVE BEEN D EBITED TO PROFIT & LOSS ACCOUNT NOTE 6 :- IN RESPECT OF PAYMENT IN EXCESS OF RS. 20,000/~ MAD E OTHERWISE THROUGH AN ACCOUNT PAYEE CHEQUE OR BANK DRAFTS FOR THE EXPENSES INCURRED, WE STATE THAT WE ARE UNABLE TO O PINE ON THE SAME AS E NECESSARY EVIDENCES ARE NOT IN THE POSSES SION OF THE ASSESSEE. NOTE 7 :- IN RESPECT OF REPAYMENT OF LOAN/DEPOSIT IN AN AMOUN T EXCEEDING THE LIMIT SPECIFIED IN SECTION 269T , WE ARE UNABLE TO OPINE AS THE NECESSARY EVIDENCES ARE NOT IN THE POSSESSION OF THE ASSESSEE. NOTE 8 :- SINCE THE ASSESSES IS ENGAGED IN THE BUSINESS OF TR ADING IN SHARES AND SECURITIES AND FINANCING ACTIVITIES IN ADDITION TO TRADING IN GOODS OR MERCHANDISE, CALCULATION OF ACCOUNTING RATIOS AS STATED IN PARA 32 OF FORM NO. 3CD FOR SHARES & SECURITIES AND FINANCING ACTIVITIES WOULD THE PURPOSE IT IS MEANT FOR AND THEREFORE ALL THOSE ACC OUNTINGS HAVE BEEN CALCULATED AFTER CONSIDERING FOLLOWING RE MARKS - (1) GROSS PROFIT RATIO :- IT HAS BEEN CALCULATED FOR TRADING OF GOODS ONLY, 2) NET PROFIT RATIO :- ITA NO.1290/AHD/2004 & ITA NOS.2221 & 2249/AHD/2005 ASST. YEAR 2001-02 12 CALCULATION OF THIS ACCOUNTING RATIO WOULD NOT SERV E ANY PURPOSE IT IS MEANT FOR, BECAUSE IT INCLUDES ALL BU SINESS ACTIVITIES OF THE ASSESSEE. THEREFORE THE SAME HAS NOT BEEN FURNISHED IN CLAUSE 32 OF FORM 3CD, (3) STACK IN TRADE/TURNOVER RATIO :- THIS RATIO HAS BEEN CALCULATED FOR TRADING GOODS ON LY. IT SHOWS TRADING IN TWO BUSINESS NAMELY SANITARY WA RES, PLY WOOD AND VENEERS. THERE IS NO DESCRIPTION ABOUT GRANTING LOA N/ADVANCES EXCEPT MENTIONING FINANCE ACTIVITIES. IN ENTIRE ANNEXURE-A WHICH CONTAINS 8 NOTES THERE IS NO DETAIL OF AS TO WHAT FINANCE ACTI VITIES ASSESSEE IS CARRYING OUT. FOR THE SAKE OF CLARITY, WE HAVE REPRODUCED AL L THE NOTES OF ANNEXURE AS ABOVE. 10. WE HAVE NOT BEEN SHOWN AT WHAT PRIORITY ADVANCI NG LOAN HAS BEEN KEPT IN THE MEMORANDUM OF ARTICLE OF ASSOCIATION. T HEREFORE, THIS CRITERIA COULD NOT BE CONSIDERED ON THE FACTS OF TH E ASSESSEE. 11. AS REFERRED ABOVE, ASSESSEE HAS BEEN DEALING IN TRADING IN PLY- WOOD, VENEERS, SANITARY-WARES FOR SEVERAL YEARS IN THE PAST. THERE IS NO INFORMATION AS TO WHEN THE ACTIVITY RELATING TO FIN ANCE/GRANTING LOAN/ADVANCES WAS FIRST TAKEN UP. 12. THE ASSESSEES SHARE CAPITAL IS RS.1 LAKH AND I T HAS RAISED UNSECURED LOAN ON OFCPN FOR RS.3 CRORES AS ON 13.12.1999 WHIC H HAS BEEN TRANSFERRED TO SISTER CONCERNS AS MENTIONED ABOVE. IN TRADING ACTIVITIES INVENTORY IS OF RS.65,68,349/- WHEREAS IN THE PRECE DING YEAR IT WAS 44,86,028/-. THE CAPITAL DEPLOYED IN TRADING IS ABO UT RS.95,52,523/-, (EXCLUDING LOAN GIVEN TO SISTER CONCERNS). THIS CAP ITAL ALSO INCLUDES CURRENT LIABILITIES WHICH IN TURN ALSO INCLUDES TRA DING LIABILITY. OTHER THAN ITA NO.1290/AHD/2004 & ITA NOS.2221 & 2249/AHD/2005 ASST. YEAR 2001-02 13 LOAN MONEY TAKEN ON OFCPN AND TRANSFERRED TO SISTER CONCERNS, THE MAJOR AREA OF ACTIVITIES WHICH SURVIVES IS TRADING IN SAN ITARY ITEMS. 13. WHEN WE CONSIDER TURNOVER AND FREQUENCY OF TRAN SACTIONS, WE NOTICE THAT FIGURE OF TURNOVER ALONE WILL NOT GIVE TRUE PICTURE AS TO WHAT IS THE MAJOR BUSINESS. IT HAS ALSO TO BE SEEN HOW THE MAN-POWER, MANAGEMENT AND TIME OF THE ASSESSEE IS ENGAGED. EVE N IF DUE TO A SOLITARY OR COUPLE OF TRANSACTIONS, VOLUME OF A BUSINESS APP EARS TO BE LARGE STILL IT CANNOT BE SAID THAT IT IS A MAJOR BUSINESS OF THE A SSESSEE WHEN ASSESSEE IS WHOLE TIME ENGAGED IN SOME OTHER ACTIVITIES LIKE TR ADING AS IN THE PRESENT CASE WHERE TRANSACTIONS IN THE TRADING ARE VERY LAR GE IN NUMBER. TOTAL TURNOVER IS ALSO NOT LESS. IT IS ABOUT 2.53 CRORES. PURCHASES ARE ALSO TO THE EXTENT OF RS.2,26,28,487/-. THE ASSESSEE IS DOING BUSINESS ON SEMI- WHOLE-SALE BASIS. IT IS NOT A CASE THAT ENTIRE LOT OF SANITARY-WARES IS PURCHASED IN ONE GO AND SOLD IN ONE GO. IT HAS INVO LVED LARGE NUMBER OF TRANSACTIONS OF PURCHASE AND SALES SHOWING MUCH GRE ATER FREQUENCY OR TRANSACTIONS. THUS THE VOLUME COUPLED WITH FREQUENC IES WOULD BECOME MAJOR FACTOR TO DECIDE WHAT SHOULD BE THE MAJOR BUS INESS OF THE ASSESSEE. IF THE TURNOVER IS ALMOST EQUAL AND FREQUENCY ARE M INIMAL BUT IN OTHER BUSINESS WITH THE SAME TURNOVER THERE IS LARGE FREQ UENCY OF TRANSACTIONS OF SALES AND PURCHASE, PAYMENTS AND RECEIPTS, THEN IT SHOWS MUCH GREATER INVOLVEMENTS OF THE ASSESSEE IN SUCH BUSINESS, GREA TER DEPLOYMENT OF MAN POWER AND ENTREPRENEUR SKILL. MERELY RAISING LOAN O N OFCPN AND TRANSFERRING THE SAME TO SISTER CONCERNS WILL NOT I NVOLVE THE ENTREPRENEUR SKILL OR MAN POWER TO THE EXTENT INVOLVED IN TRADIN G BUSINESS. IN GRANTING LOAN/ADVANCES THERE ARE ONLY TWO PARTIES INVOLVED T O WHOM FUNDS ARE GIVEN. THEY ARE SISTER CONCERNS AND ASSESSEE. IT IS ALSO NOT SHOWN AS REGISTERED NBFC WHICH COULD SHOW THAT ASSESSEE WAS IN FACT AN IMPORTANT PLAYER IN THE FIELD OF FINANCE. HERE FUNDS ARE RAIS ED FROM THE MARKET ITA NO.1290/AHD/2004 & ITA NOS.2221 & 2249/AHD/2005 ASST. YEAR 2001-02 14 AGAINST OWN GOOD WILL AND TRANSFERRED TO TWO SISTER CONCERNS TO BAIL OUT THE SISTER CONCERNS FROM FINANCIAL DIFFICULTIES. RA ISING LOANS WERE NOT TO CARRY A BUSINESS OF GRANTING LOAN AND ADVANCES. THU S THE INTENTION OF THE ASSESSEE ALSO PLAYS A CRUCIAL ROLE IN DECIDING WHAT IS A MAJOR BUSINESS. FROM THE DEPLOYMENT OF MANPOWER, MANAGEMENT SKILL, LARGE FREQUENCY OF TRANSACTION IN TRADING, THE INTENTION IS CLEAR THAT ASSESSEE INTENDS TO DO TRADING BUSINESS WHICH IS REALLY HIS MAJOR BUSINESS . 14. ACCORDINGLY, WE HOLD THAT TRADING IN SANITARY-W ARES, PLY-WOOD, VENEERS IS THE MAJOR BUSINESS OF THE ASSESSEE AND N OT THAT OF GRANTING LOANS/ADVANCES. 15. WE ACCEPT THE ALTERNATIVE ARGUMENT OF THE LD. A R THAT IN CASE THE DECISION GOES AGAINST THE ASSESSEE, ONLY THE ACTUAL AMOUNT OF RS.1,54,841/- SHOULD BE CONSIDERED AS SPECULATION L OSS AND THE OTHER SUM I.E. RS.3,61,500/- BEING INTEREST ON AMOUNT OF CAPI TAL INVESTED IN SHARES SHOULD NOT BE CONSIDERED AS SPECULATION LOSS AS IT IS CONSIDERED SEPARATELY WHILE DISCUSSING THE DISALLOWANCE OF INTEREST. 16. AS A RESULT, WE HOLD THAT ASSESSEE DOES NOT GET BENEFIT OF ANY EXEMPTION MENTIONED IN EXPLANATION TO SECTION 73 AN D, THEREFORE, THE LOSS BY IT IN TRADING IN SHARES HAS TO BE TREATED AS SPE CULATIVE AND ACCORDINGLY CANNOT BE SET OFF ACCORDINGLY OTHER BUSINESS INCOME CAN ONLY BE SET OFF AGAINST SPECULATION INCOME. THUS GROUND NO.3 ON WHI CH THE TRIBUNAL HAD RECALLED THE ORDER IS DECIDED AGAINST THE ASSESSEE. CUMULATIVE EFFECT OF DECISION ON ALL THE GROUNDS IS THAT APPEAL IS PARTL Y ALLOWED FOR STATISTICAL PURPOSES WHICH IS THE SAME AS MENTIONED IN THE TRIB UNALS ORDER DATED 16.2.2005. APPEAL OF THE ASSESSEE IS ALLOWED PARTLY BUT FOR STATISTICAL PURPOSES. ITA NO.1290/AHD/2004 & ITA NOS.2221 & 2249/AHD/2005 ASST. YEAR 2001-02 15 17. ITA NO.2221/AHD/2005 ASST. YEAR 2005 AND ITA NO.2249/AHD/2005 ASST. YEAR 2001-02 ARE CROSS APPEA LS ONE FILED BY THE ASSESSEE AND THE OTHER BY THE REVENUE, AGAINST THE ORDER OF LD. CIT(A) DATED 22.8.2005. THE TRIBUNAL IN ITA NO.1290/AHD/20 04 VIDE ITS ORDER DATED 16.2.2005 HAD SET ASIDE THE MATTER TO THE FIL E OF LD. CIT(A). IT IS IN RESPONSE TO THIS ORDER THE LD. CIT(A) HAS PASSED TH IS IMPUGNED ORDER. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS:- ITA NO.2221/AHD/2005 AY 2005 (ASSESSEES APPEAL) 18. THE ASSESSEE HAS RAISED FOLLOWING GROUNDS IN TH IS APPEAL:- (1) IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF THE AP PELLANTS CASE THE LD. CIT(A) HAS GROSSLY ERRED IN POINTS OF LAW A ND FACTS. (2) IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF THE AP PELLANTS CASE, THE LD. CIT(A) HAS GROSSLY ERRED IN CONFIRMIN G, IN PART, DISALLOWANCE OF INTEREST EXPENSES FOR RS.14,04,582/ - (3) IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF THE AP PELLANTS CASE THE LD. CIT(A) HAS GROSSLY ERRED IN HOLDING THAT EF FECTIVE RATE OF INTEREST ON OFCPN IS 19.16% (4) IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF THE AP PELLANTS CASE, THE LD. CIT(A) HAS GROSSLY ERRED IN HOLDING I N ALTERNATE, THAT DISALLOWANCE OF INTEREST EXPENSES SHOULD BE MA DE FOR RS.10,77,440/-. ITA NO.2249/AHD/2005 AY 2001-02 (REVENUES APPEAL) WHEREAS THE REVENUE HAS RAISED THE FOLLOWING GROUND S IN THIS APPEAL :- (1) THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN RES TRICTING DISALLOWANCE OF INTEREST TO RS.14,04,458/- INSTEAD OF RS.24,38,848/- MADE BY THE A.O. (2) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) OUGHT TO HAVE UPHELD THE ORDER OF THE AO. ITA NO.1290/AHD/2004 & ITA NOS.2221 & 2249/AHD/2005 ASST. YEAR 2001-02 16 19. GROUND NO.1 IN REVENUES APPEAL AND GROUND NO.2 OF ASSESSEES APPEAL ARE COMMON. THE FACTS RELATING TO THIS ISSUE ARE AS UNDER. 20. THE ASSESSEE IS TRADING IN PLY-WOOD, VENEERS AN D SANITARY-WARES AND IN ADDITION TO THIS ASSESSEE HAS RAISED MONEY O N OPTIONAL FULLY CONVERTIBLE PREMIUM NOTES (OFCPN IN SHORT) FOR THE SUM OF RS.3 CRORES AND WAS IMMEDIATELY TRANSFERRED TO TWO SISTER CONCE RNS NAMELY TARUKHIA ENTERPRISE RS.19,99,000/- AND TARUKHIA OVERSEAS (P ) LTD. RS.2,81,00,000/- I.E. RS.3,00,00,000/- (RS.19,99.00 0 + RS.2,81,00,000/-). IN THIS PROCESS THE ASSESSEE CLAIMED FINANCIAL EXPE NSES OF RS.24,38,838/- WHICH WAS WORKED OUT BY IT AS UNDER :- PREMIUM ON OFCPN RS.57,48,367 OTHER INTEREST RS.9,41,314 RS.66,89,681 LESS: INTEREST EARNED RS.42,50,853 BALANCE LOSS RS.24,38,848 THIS LOSS WAS CLAIMED UNDER SECTION 37(1) BEING THE FINANCE EXPENSES, BUT THE AO DISALLOWED THE CLAIM ON THE GROUND THAT ENTI RE AMOUNT RECEIVED FROM OFCPN WAS ADVANCED TO THE SISTER CONCERNS ON T HE SAME DAY. THE HIGH INTEREST BEARING FUNDS WERE ADVANCED TO SISTER CONCERNS ON LOW RATE OF INTEREST. THESE FUNDS WERE NOT UTILIZED BY THE A SSESSEE FOR ITS BUSINESS BUT WERE UTILIZED FOR GRANTING ADVANCES TO SISTER C ONCERNS. THE SISTER CONCERNS ARE PERSONS FALLING UNDER THE PROVISIONS O F SECTION 40A(2)(B). THE RELATIONSHIP WAS DESCRIBED BY THE AO IN A CHART AS UNDER :- NAME OF THE PARTY RELATION AMOUNT (RS.) AMOUNT OF PREMIUM RAJESH J. TURAKHIA RELATIVE OF DIRECTOR 1500000 287 418 NAYANA R. TURAKHIA RELATIVE OF DIRECTOR 2800000 536 514 ITA NO.1290/AHD/2004 & ITA NOS.2221 & 2249/AHD/2005 ASST. YEAR 2001-02 17 RAJESH J. TURAKHIA (HUF) MEMBERS ARE RELATIVE OF DIRECTOR 500000 95000 SAMKIT R. TURAKHIA RELATIVE OF DIRECTOR 100000 1916 1 APEXA R. TURAKHIA RELATIVE OF DIRECTOR 900000 17245 1 JIGNESH J. TURAKHIA DIRECTOR 5400000 1034706 PARUL J. TURAKHIA WIFE OF DIRECTOR 800000 153290 JIGNESH J. TURAKHIA (HUF) KARTA IS DIRECTOR 1000000 191612 JIGNESH TRUST DIRECTOR IS BENEFICIARY 1000000 19161 2 CHAMPAKLAL M. TURAKHIA RELATIVE OF DIRECTOR 3500000 670643 MANJULABEN C. TURAKHIA RELATIVE OF DIRECTOR 2500000 479031 C.M.TURAKHIA (HUF) RELATIVE OF DIRECTOR 1400000 26 8257 MOHANLAL L. TURAKHIA (DFL) DIRECTOR IS BENEFICIARY 700000 134129 BHADRESH C. TURAKHIA DIRECTOR 2500000 479031 ROOPAL B. TURAKHIA WIFE OF DIRECTOR 1000000 191612 B.C. TURAKHIA (HUF) KARTA IS DIRECTOR 2500000 47903 1 BHADRESH TRUST DIRECTOR IS BENEFICIARY 1000000 1341 29 HITRATH B. TURAKHIA SON OF DIRECTOR 700000 38322 JAINI TURAKHIA DAUGHTER OF DIRECTOR 200000 191612 TOTAL 30000000 5748367 THE AO ALSO POINTED OUT THAT MONEY WAS TRANSFERRED TO TWO SISTER CONCERNS ON THE SAME DAY WHEN IT WAS RECEIVED AS UN DER :- TARUKHIA ENTERPRISE RS. 19,99,000/- AND TARUKHIA OVERSEAS (P) LTD. RS.2,81,00,000/- ------- -------------- RS.3,00,00,000/- ------- -------------- THE DETAILED TRANSACTIONS AS NOTED BY THE AO ARE AS UNDER :- DATE PARTICULARS DEBIT CREDIT 01.12.1999 TO OPENING BALANCE 102000 17.12.1999 BY BANK COMMISSION 100 30.12.1999 TO OPTIONALLY FULLY CONVERTIBLE PREMIUM NOTES 5800000 TO OPTIONALLY FULLY CONVERTIBLE PREMIUM NOTES 8200000 TO OPTIONALLY FULLY CONVERTIBLE PREMIUM NOTES 8100000 TO OPTIONALLY FULLY CONVERTIBLE PREMIUM NOTES 7900000 BY TURAKHIA ENTERPRISE 1900000 BY TURAKHIA OVERSEAS (P) LTD. 28100000 ITA NO.1290/AHD/2004 & ITA NOS.2221 & 2249/AHD/2005 ASST. YEAR 2001-02 18 BY PRELIMINARY & PRE-OPERATIVE EXP. 10920 30102000 30102000 ON THE BASIS OF ABOVE REASONING THE AO DISALLOWED S UM OF RS.24,38,838/-. THE LD. CIT(A) CONFIRMED THE ORDER OF THE AO AS UNDER :- 3.3 I HAVE CAREFULLY CONSIDERED THE DETAILED OBSER VATIONS MADE BY THE AO IN THE ASST. ORDER AND THE SUBMISSIONS AS ADVANC ED BY THE COUNSEL OF THE APPELLANT ALONG WITH THE SUPPORTING DOCUMENTS A ND CASE LAWS. I AM INCLINED TO AGREE WITH THE OBSERVATIONS MADE BY THE AO THAT THE INTEREST COST INCURRED BY IT IS NOT AT ALL JUSTIFIED, AS IT IS NOT INCURRED BY THE ASSESSEE FOR ITS OWN BUSINESS AND ONLY THOSE EXPENS ES ARE ALLOWABLE TO THE ASSESSEE WHICH ARE WHOLLY AND EXCLUSIVELY INCUR RED FOR THE BUSINESS OF THE ASSESSEE, BECAUSE THE CONTENTION OF THE APPELLA NT THAT SUCH A LARGE SUM OF MONEY THAT TOO UNSECURED COULD BE MOBILIZED ONLY FROM PERSONS ENTITIES, WHO HAVE REASONABLE TRUST AND CONFIDENCE ON THE MANAGEMENT AND THERE IS NO WONDER WHY THEY ARE COVERED UNDER S ECTION 40A(2)(B), AS THEY NATURALLY WOULD BE CLOSE RELATIVES ONLY, CAN I N NO WAY BE ACCEPTED ON THE GROUND THAT NO PRUDENT BUSINESS MAN WILL NEV ER BORROW FUNDS ON HIGHER RATE OF INTEREST AND LEND THE SAME TO OTHERS , THOUGH RELATIVES, AT A LOWER RATE OF INTEREST OR WITHOUT CHARGING INTEREST . I ALSO DO NOT AGREE WITH THE EXPLANATION GIVEN BY THE APPELLANT THAT TH E FUND ADVANCED TO TARUKHIA AGENCY IS A TRADE DEBTOR AND NOT FINANCIAL TRANSACTION, BECAUSE THE AO AFTER A DETAILED DISCUSSION HAS BEEN ABLE TO ESTABLISH THAT THE AMOUNT BORROWED WERE GIVEN TO SISTER CONCERNS O N THE SAME DAY WITHOUT USING THE SAME EVEN FOR A SINGLE DAY FOR IT S OWN BUSINESS AND THE INTEREST ON SUCH TRANSACTION HAS BEEN CHARGED AT MU CH A LESSER RATE. NOW COMING TO THE RISK FACTOR, AS EXPLAINED BY THE APPE LLANT IN ITS SUBMISSION, THOUGH I AGREE WITH THE APPELLANT THAT WHEN THE BUS INESS IS AT INITIAL PROCESS STAGE, ONE HAS TO TAKE RISK, BUT AT THE SAM E TIME, I AM OF THE OPINION THAT SUCH TYPE OF RISK ADOPTED BY THE APPEL LANT IN DEALING ITS FINANCES, WOULD BE OF NO HELP TO ANY TYPE OF BUSINE SS. THE AO HAS RIGHTLY OBSERVED THAT THE ENTIRE FUNDS ARE DIVERTED TO THE SISTER CONCERNS, ON WHICH THE APPELLANT IS CHARGING INTEREST AT LOWER R ATE THAN WHAT IT HAS TO PAY, THOUGH ALL OF THEM ARE FULLY UNDER THE PROVISI ONS OF SECTION 40A(2)(B) OF THE ACT. THE CASE LAWS RELIED UPON BY THE COUNSE L OF THE APPELLANT ARE NOT APPLICABLE TO THE APPELLANTS CASE, AS THE FACT S IN THOSE CASES ARE QUITE DISTINGUISHABLE. I HAVE, THEREFORE, NO HESITATION T O HOLD THAT THE ACTION OF THE AO IN TREATING THE FINANCIAL CHARGES OF RS.24,3 8,848/- AS EXCESSIVE. THE DISALLOWANCE IS, THEREFORE, CONFIRMED. ITA NO.1290/AHD/2004 & ITA NOS.2221 & 2249/AHD/2005 ASST. YEAR 2001-02 19 21. THE LD. CIT(A), AFTER THE MATTER HAVING BEEN RE MITTED BACK BY THE TRIBUNAL, GAVE OPPORTUNITY TO BOTH THE PARTIES. THE LD. CIT(A) NOTED THAT ASSESSEE HAD RAISED OFCPN AMOUNTING TO RS.300 LACS TO BE REDEEMED AFTER SOME YEARS. AS THIS MONEY WAS GIVEN TO TURAKH IA OVERSEAS (P) LTD. AND TURAKHIA ENTERPRISES @ 18% WHICH IS NOW REDUCED TO 15% THIS YEAR. THE EFFECTIVE RATE OF INTEREST ON TOTAL INTEREST AM OUNTING TO RS.57,48,367/- ON OFCPN WAS WORKED OUT AT 18.35% AND ON OTHERS AT 19.16% AS NOTED BY THE AO. OUT OF THE MONEY ADVANCED TO TURAKHIA OV ERSEAS (P) LTD. A SUM ON RS.145.95 LACS WAS RECEIVED BACK AND USED IN THE BUSINESS, THEREFORE, NO AMOUNT OF INTEREST ON THIS AMOUNT WAS CONSIDERED FOR DISALLOWANCE UNDER SECTION 40A(2)(B). IT WAS FURTHE R OBSERVED BY LD. CIT(A) AS UNDER :- I) THE APPELLANT HAS RAISED THE FUNDS IN THE FORM OF OFCPN FROM THE PERSONS WHO ARE COVERED U/S 40A(2)(B) AND INCURRED EXPENSES OF RS.57,48,367/- AND ALSO THE COMPANY HAS RAISED LOAN OF RS.44,70,807/- FROM THE DIRECTORS AND OTHER RELATED CONCERNS, WHO ARE COVERED U/S 40A(2)(B) TO WHOM THE APPELLANT IS PAYING INTEREST @ 18%. THE FACT THAT THESE PERSONS RELATED IS EVEN ACCEPTED BY THE APPEL LANT, AS THE SAME HAS NOT BEEN CHALLENGED IN THE APPELLATE PROCEEDINGS. II) THE EFFECTIVE RATE OF INTEREST ON THE OFCPN COM ES TO 19.16% AS THE AMOUNT INCURRED IS RS.57,48,367/- ON THE OPENIN G BALANCE OF RS.300 LAKHS. THE APPELLANT HAS SUBMITTED THAT THE RATE SH OULD BE TAKEN AT 18.35% AS THE CUMULATIVE INTEREST RATE, BUT THIS IS NOT CORRECT AS THE AMOUNT WAS TAKEN IN DECEMBER, 1999 AND IN THE BEGIN NING OF THIS PREVIOUS YEAR THE OPENING BALANCE WAS RS.3 CRORES A ND THE INTEREST IS ACCOUNTED FOR ON THE CLOSE OF THE PREVIOUS YEAR. HE NCE THE EFFECTIVE RATE OF INTEREST IS ONLY 19.16%. III) THIS YEAR, THE APPELLANT IS RECEIVING INTEREST @ 15% ON THE AMOUNT GIVEN TO TURAKHIA OVERSEAS (P) LTD. IN WHICH THE OP ENING BALANCE WAS RS.344.45 LAKHS AND THE CLOSING BALANCE WAS RS.247. 53 LAKHS. IN THIS A/C THE AVERAGE DAILY BALANCE WORKS OUT ON PRODUCT METH OD COMES TO RS.259.90 LAKHS. THUS, IT IS SEEN THAT THE APPELLAN T HAD RECEIVED INTEREST @ 15% ON THIS AMOUNT AS WELL AS ON OTHER ADVANCES M ADE AND THE INTEREST RECEIVED @ 15% WHICH HAS BEEN CURRENT MARK ET RATE AND HENCE ITA NO.1290/AHD/2004 & ITA NOS.2221 & 2249/AHD/2005 ASST. YEAR 2001-02 20 WHEN THE APPELLANT IS PAYING INTEREST @ 19.16% AND 18% TO THE RELATED PERSONS THE EXCESS PAYMENT IS CLEARLY DISALLOWABLE UNDER THE PROVISIONS OF SEC.40A(2)(B) OF THE ACT. THE EXCESS INTEREST EX PENSES INCURRED @ 4.16% ON RS.300 LAKHS COMES TO RS.12,48,000/-. APAR T FROM OFCPN THERE IS ALSO UNSECURED LOAN FROM SHAREHOLDERS APPE ARING IN BALANCE SHEET (SCHEDULE B) AT RS.44,70,807/-. IN FACT, THI S IS A LOAN TAKEN FROM TURAKHIA ENTERPRISE, WHERE OPENING BALANCE WAS RS.7 4,23,993/- AND CLOSING BALANCE WAS RS.44,70,887/-. THE AVERAGE BAL ANCE PER DAY ON THE PRODUCT METHOD IS WORKED OUT AT RS.52,19,418/-. THE RATE OF INTEREST PAID IS @ 18%. THEREFORE, THE ASSESSEE HAS PAID EXCESS I NTEREST @ 3% OVER AND ABOVE THE MARKET RATE @ 15%. THUS EXCESS INTERE ST PAID DISALLOWABLE U/S 40A(2)(B) ON IT COMES TO RS.1,56,582/- (3% OF R S.52,19,418). THUS, THE TOTAL DISALLOWANCE OF INTEREST EXPENSE U/S 40A( 2)(B) COMES TO RS.12,48,000/- (-) RS.1,56,582/- = RS.14,04,582/-. ACCORDING TO THE LD. CIT(A), AVERAGE BALANCE PER DA Y ON PRODUCT METHOD IS RS.52,19,418/-. THE MARKET RATE IS 15% WHEREAS I T IS PAID AT 18% THIS YEAR. THEREFORE, ASSESSEE HAS PAID EXCESS ONLY @ 3% WHICH COMES TO RS.1,56,582/-. SECONDLY WHEN EXCESS @ 4.16% ON RS.3 CRORES IS WORKED OUT, IT WILL GIVE A FIGURE OF RS.12.48 LACS. THUS T OTAL DISALLOWABLE COULD BE ONLY OF RS.14,04,582/- (RS.12,48,000 + RS.1,56,582) . 22. WE HAVE HEARD THE PARTIES. THE CASE OF LD. AR I S THAT FUNDS ARE RAISED FOR BUSINESS PURPOSES AND GIVEN TO SISTER CO NCERNS FOR BUSINESS PURPOSES AND, THEREFORE, NO PART OF INTEREST SHOULD BE DISALLOWED IN VIEW OF THE DECISION OF HON. SUPREME COURT IN S.A. BUILD ERS VS. CIT (2007) 288 ITR 1 (SC). SINCE INTEREST INCOME IS ASSESSED U NDER THE HEAD BUSINESS, THEREFORE, BUSINESS PURPOSE ON BORROWIN GS OF FUNDS IS UNDISPUTED. 23. ON THE OTHER HAND THE LD. DR SUBMITTED THAT THE RE IS NO BUSINESS PURPOSE IN TRANSFERRING FUNDS TO SISTER CONCERNS WH O ARE NOT IN THE LINE OF BUSINESS OF THE ASSESSEE. ITA NO.1290/AHD/2004 & ITA NOS.2221 & 2249/AHD/2005 ASST. YEAR 2001-02 21 24. WE DO NOT AGREE WITH THE LD. DR. ONCE ASSESSEE HAS BORROWED FUNDS ON OFCPN AND ADVANCING OF LOAN HAS BEEN TREAT ED AS BUSINESS, AND INTEREST INCOME THEREFROM HAS ALSO BEEN CONSIDERED UNDER THE HEAD BUSINESS BY THE AO, THEN QUESTION OF HOLDING THAT THERE WAS NO BUSINESS PURPOSE DOES NOT ARISE. THE UNDISPUTED FACT IS THAT GRANTING LOAN/ADVANCE HAS BEEN TREATED AS BUSINESS OF THE ASSESSEE BY THE AO AND, THEREFORE, RECEIPT OF INTEREST OR PAYMENT OF INTEREST IS PART OF BUSINESS ACTIVITIES. THE RATE OF INTEREST ON OFCPN IS FIXED AT THE TIME OF I SSUE, THEREFORE, ASSESSEE IS LIABLE TO PAY INTEREST AT THAT RATE WHEREAS RECO VERY OF INTEREST FROM SISTER CONCERN MAY VARY DEPENDING UPON AGREEMENT BETWEEN T HEM AND ALSO FROM YEAR TO YEAR. ACCORDINGLY FOLLOWING THE DECISI ON OF HONBLE APEX COURT IN S.A. BUILDERS CASE (SUPRA) LOSS SUFFERED IN EARNING OF INTEREST CANNOT BE WHOLLY OR PARTLY DISALLOWED UNDER SECTION 40A(2)(B) AS THERE IS A CLEAR BUSINESS PURPOSE AND IT IS NOT PROVED THAT REDUCTION OF INTEREST IS SHAM. ACCORDINGLY, RELATED GROUND IN THE APPEAL OF ASSESSEE IS ALLOWED WHEREAS THE GROUND OF REVENUES APPEAL IS DISMISSED . 25. THE NEXT EFFECTIVE GROUND IN ASSESSEES APPEAL IS ABOUT RS.10,77,440/- BEING THE INTEREST EXPENSES CONSIDER ED AS DISALLOWABLE. THE VIEW OF THE AO WAS THAT FUNDS IN THE FORM OF OF CPN HAS BEEN RAISED FROM RELATED PERSONS AND DIVERTED TO THE SISTER CON CERNS ON THE SAME DAY ON WHICH ASSESSEE HAS EARNED INTEREST @ 15%. THE AS SESSEE IS NOT USING THE FUNDS OF RS.3 CRORES RAISED FROM OFCPN IN ITS T RADING BUSINESS. THE AO WORKED OUT AVERAGE DAILY BALANCE ON PRODUCT METH OD IN TURAKHIA OVERSEAS (P) LTD. AT RS.259.90 LACS AND EXCESS INTE REST WAS WORKED OUT @ 4.16%. THE DISALLOWANCE WAS WORKED OUT AT RS.10,77, 440/- UNDER SECTION 40A(2)(B). 26. WE HAVE HEARD THE PARTIES. ITA NO.1290/AHD/2004 & ITA NOS.2221 & 2249/AHD/2005 ASST. YEAR 2001-02 22 27. THE CASE OF THE ASSESSEE IS THAT THERE IS NO CA SE OF ANY DISALLOWANCE OF INTEREST ONCE BORROWINGS ON OFCPN AND GRANTING L OAN/ADVANCE TO SISTER CONCERNS IS HELD FOR BUSINESS PURPOSES. THIS GROUND IS EFFECTIVELY RELATED TO GROUND NO.2 IN ASSESSEES APPEAL AND GRO UND NO.1 IN REVENUES APPEAL WHICH RELATES TO DISALLOWANCE TO RS.24,38,84 8/- BEING EXCESS INTEREST PAID BY THE ASSESSEE ON OFCPN. 28. WE HAVE HELD WHILE DISPOSING OF THESE TWO GROUN DS THAT BORROWINGS OF FUNDS FROM OFCPN AND ADVANCING LOAN I S BUSINESS OF THE ASSESSEE AS ACCEPTED BY THE DEPARTMENT, THEREFORE, PAYMENT OF INTEREST IS A BUSINESS NECESSITY. WHEREAS RECOVERY OF INTEREST FR OM THE PARTIES TO WHOM LOANS ARE ADVANCED MAY VARY FROM YEAR TO YEAR AND IN THE PROCESS ASSESSEE MAY SUFFER LOSS. FOLLOWING THE DECISION OF HON. SUPREME COURT IN THE CASE OF S.A. BUILDERS VS. CIT (SUPRA) THAT O NCE BUSINESS PURPOSE IN TAKING LOAN AND GRANTING ADVANCES IS ACCEPTED, NO D ISALLOWANCE OF INTEREST CAN BE MADE. AS A RESULT, APPEAL FILED BY THE ASSES SEE IS ALLOWED WHEREAS THE APPEAL FILED BY THE REVENUE IS DISMISSED. 29. IN THE RESULT, ITA NO.1290/AHD/2004 (ASSESSEES APPEAL) IS PARTLY ALLOWED BUT FOR STATISTICAL PURPOSES, ITA NO.2221/A HD/2005 (ASSESSEES APPEAL) IS ALLOWED AND ITA NO.2249/AHD/2005 (REVENU ES APPEAL) IS DISMISSED ORDER WAS PRONOUNCED IN OPEN COURT ON 10..12.10. SD/- SD/- (MAHAVIR SINGH) (D.C. AGRAWAL) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD, DATED : 10.12.10. MAHATA/- ITA NO.1290/AHD/2004 & ITA NOS.2221 & 2249/AHD/2005 ASST. YEAR 2001-02 23 COPY OF THE ORDER FORWARDED TO :- 1. THE ASSESSEE. 2. THE REVENUE. 3. THE CIT(APPEALS)- 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD 1.DATE OF DICTATION 25/11/2010. 2.DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE TH E DICTATING 6/12/2010 MEMBER.OTHER MEMBER. 3.DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. P.S./P.S. 4.DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT.. 5.DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR .P.S./P.S 6.DATE ON WHICH THE FILE GOES TO THE BENCH CLERK .. 7.DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 8.THE DATE ON WHICH THE FILE GOES TO THE ASSTT. REG ISTRAR FOR SIGNATURE ON THE ORDER 9.DATE OF DESPATCH OF THE ORDER..