M/s Tarquoise Investment & Finance P Ltd, Nagda V. The C I T,

ITA 132/IND/2009

• Counselvise Citation: 13222714 RSA 2009
• Duration Of Justice: 2 year(s) 1 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-04-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB
• Next Hearing Date: 17-03-2011
• Assessment Year: 2003-2004
• Appeal Filed On: 13-03-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: KESHAVE SAXENA
• Assessee Lawyers: A L JAIN; YOGESH A DHAR
• Keywords: Business income; Business expenditure; Period of limitation; Time period of passing order; Revenue expenditure; Reassessment proceedings
• Section: 143(3); 14A; 147; 148; 56; 263; 11

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, INDORE BENCH, INDORE BEFORE SHRI JOGINDER SINGH AND SHRI R.C. SHARMA ITA NO. 132/IND/2009 A.Y. 2003-04 TURQUISE INVESTMENTS AND FINANCE PRIVATE LIMITED NAGDA PAN AABCT 5911H APPELLANT VS COMMISSIONER OF INCOME TAX UJJAIN RESPONDENT APPELLANT BY S/SHRI YOGESH A. DHAR AND A.L. JAIN RESPONDENT BY SHRI KESHAVE SAXENA O R D E R PER SHRI R.C. SHARMA, ACCOUNTANT MEMBER THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST TH E ORDER OF CIT (ADMN.) DATED 12.1.2009 FOR THE ASSESSMENT Y EAR 2003- 04 U/S 263 OF THE ACT ON THE FOLLOWING EFFECTIVE GR OUNDS 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LEARNED CIT-UJJAIN, (THE CIT) ERRED I N REVISING THE ORDER PASSED BY THE ASSISTANT -: 2: - 2 COMMISSIONER OF INCOME TAX, RANGE 2(1), UJJAIN (TH E A.O.) UNDER SECTION 147 OF THE ACT. 2. THE APPELLANT PRAYS THAT THE REVISION ORDER PASSED BY THE CIT BE HELD AS AB INITIO OR OTHERWISE VOID AND/ OR BAD IN LAW. WITHOUT PREJUDICE TO GROUND 1 ABOVE GROUND II 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LEARNED CIT ERRED IN PASSING THE ORDER BEYOND THE TIME LIMIT PRESCRIBED UNDER SECTION 263 OF THE ACT. 2. THE APPELLANT PRAYS THAT THE REVISION ORDER BE QUAS HED AS BEING TIME BARRED. WITHOUT PREJUDICE TO GROUND I AND II ABOVE GROUND III : CLAIM OF TDS 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE CIT ERRED IN DIRECTING THE A.O. NOT TO GRANT THE TDS CREDIT ALREADY ALLOWED TO HIM IN THE ORDER PASSED UNDER SECTION 147 OF THE ACT. -: 3: - 3 2. HE FAILED TO APPRECIATE AND OUGHT TO HAVE HELD THAT THE A.O. HAD AFTER CONSIDERATION OF THE FACTS AND THE PROVISIONS OF THE LAW GRANTED CREDIT OF THE TAX DED UCTED AT SOURCE AND THE ORDER WAS NEITHER ERRONEOUS NOR PREJUDICIAL TO THE INTEREST OF THE REVENUE. 3. THE APPELLANT PRAYS THAT THE AFORESAID DIRECTION GI VEN BY THE CIT BE DELETED. WITHOUT PREJUDICE TO GROUND I, II AND III ABOVE GROUND IV 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LEARNED CIT ERRED IN NOT DIRECTING TO T HE A.O. TO GRANT THE CREDIT OF TDS IN THE YEAR IN WHIC H THE INCOME IS OFFERED FOR TAX. 2. THE APPELLANT PRAYS THAT IF GROUNDS I, II AND III A RE REJECTED, THEN THE A.O. BE DIRECTED TO ALLOW CREDIT OF TDS IN THE YEAR IN WHICH THE INCOME IS OFFERED FOR TAX. WITHOUT PREJUDICE TO GROUND I AND II ABOVE GROUND V : DIRECTION TO MAKE DISALLOWANCE U/S 14A O F THE ACT -: 4: - 4 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LEARNED CIT ERRED IN DIRECTING THE A.O. TO DISALLOW A PORTION OF THE INTEREST UNDER SECTION 14 A OF THE ACT ON THE ALLEGED GROUND THAT THE ORDER OF THE A.O. WAS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE REVENUE. 2. THE APPELLANT PRAYS THAT THE AFORESAID DIRECTION GI VEN BY THE LEARNED CIT BE DELETED. WITHOUT PREJUDICE TO GROUND I AND II ABOVE GROUND VI 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LEARNED CIT ERRED IN DIRECTING THE A.O. TO EXAMINE THE TAXABILITY OF THE UNITS TO BE SOLD ON T HE ALLEGED GROUND THAT THE ORDER OF THE A.O. WAS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE REVENUE. 2. THE APPELLANT PRAYS THAT THE AFORESAID DIRECTION GI VEN BY THE LEARNED CIT BE DELETED. WITHOUT PREJUDICE TO GROUND I AND II ABOVE GROUND VII : DIRECTION TO MAKE DISALLOWANCE OF INTE REST -: 5: - 5 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LEARNED CIT ERRED IN DIRECTING THE A.O. TO DISALLOW INTEREST EXPENDITURE AMOUNTING TO RS.10.5 CRORES AND RS. 7,95,704 INCURRED BY THE APPELLANT O N THE ALLEGED GROUND THAT SUCH EXPENDITURE WAS NOT ALLOWABLE UNDER SECTION 36(1)(III) OR SECTION 57(II I) OF THE ACT. 2. HE FAILED TO APPRECIATE AND OUGHT TO HAVE HELD THAT THE ORDER OF THE A.O. WAS NEITHER ERRONEOUS NOR PREJUDI CIAL TO THE INTEREST OF THE REVENUE AND THE SAID INTERES T EXPENDITURE WAS ALLOWABLE UNDER THE PROVISIONS OF T HE ACT. 3. THE APPELLANT PRAYS THAT THE AFORESAID DIRECTION GI VEN BY THE LEARNED CIT BE DELETED. GROUND VIII THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND OR DELETE THE ABOVE GROUNDS OF APPEAL EITHER BEFORE OR AT THE TIM E OF HEARING. 2. RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PERUSED. AT THE FIRST INSTANCE, THE LEARNED COUNSEL FOR THE ASSESSEE -: 6: - 6 ARGUED THAT THE ORDER PASSED U/S 263 OF THE ACT WAS BEYOND THE PRESCRIBED TIME LIMIT. THE SAME, THEREFORE, SH OULD BE HELD AS AB INITIO VOID/BAD IN LAW. THE LEARNED COUNSEL FOR THE ASSESSEE FURTHER DREW OUR ATTENTION TO THE CHART SH OWING CHRONOLOGY OF EVENTS ACCORDING TO WHICH THE RETURN FILED BY THE ASSESSEE WAS PROCESSED U/S 143(1) ON 20.5.2004. TH E NOTICE U/S 148 WAS ISSUED ON 20.10.2005 AND THE ORDER OF REASSESSMENT WAS FRAMED ON 22.8.2006. AS PER THE L EARNED COUNSEL FOR THE ASSESSEE, AS THE LIMIT FOR ACTION U /S 263 AGAINST 143(1) ORDER EXPIRED ON 31 ST MARCH, 2007 WHEREAS ACTION U/S 263 WAS INITIATED BY THE CIT ON 16.1.200 8. ACCORDINGLY, THE PROCEEDINGS INITIATED U/S 263 OF T HE ACT WERE BARRED BY LIMITATION. FOR COMPUTING THE LIMITATION PERIOD, THE CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE WAS THAT IN VIEW OF THE DECISION OF THE HONBLE SUPREME COURT I N THE CASE OF ELAGENDRAN FINANCE LIMITED; 293 ITR 1 AND IN VIE W OF THE DECISION OF THE DELHI HIGH COURT IN THE CASE OF ASH OKA BUILDCON LIMITED; 325 ITR 574, THE LIMITATION PERIO D SHOULD BE COUNTED WITH REFERENCE TO THE ORIGINAL ORDER PASSED BY THE ASSESSING OFFICER AND NOT WITH REFERENCE TO THE REA SSESSMENT -: 7: - 7 PASSED U/S 147. OUR ATTENTION WAS ALSO DRAWN TO TH E REASONS RECORDED BY THE ASSESSING OFFICER FOR REOPENING THE ASSESSMENT AND ALSO ON THE GROUNDS RAISED BY THE CI T U/S 263 NOTICE. HE CONTENDED THAT REASSESSMENT NOTICE W AS ISSUED WITH REASONS THAT BUSINESS LOSS CANNOT BE SET OFF A GAINST OTHER SOURCE AND THE TAXABILITY OF DIVIDEND RECEIVED FROM MALASIA. HOWEVER, 263 PROCEEDINGS WERE INITIATED ON ENTIRELY DIFFERENT GROUNDS WHICH RELATED TO DISALLOWANCE OF INTEREST U /S 14A, WRONG GIVING OF TDS CREDIT AND WITH REGARD TO CAPIT AL GAINS ON MUTUAL FUNDS. AS PER THE LEARNED COUNSEL FOR THE A SSESSEE, NO ERROR WAS FOUND BY THE CIT WITH REFERENCE TO THE AC TION UNDER 147 ORDER. THEREFORE, THERE WAS NO REASON FOR INITI ATING ANY PROCEEDINGS U/S 263. 3. ON THE OTHER HAND, IT WAS CONTENDED BY THE LEARNED CIT DR THAT THE CASE LAWS RELIED ON BY THE LEARNED COUNSEL FOR THE ASSESSEE FOR COMPUTATION OF LIMITATION PERIOD F OR ISSUING NOTICE U/S 263 ARE QUITE DISTINGUISHABLE INSOFAR AS ORIGINALLY THE RETURN OF THE ASSESSEE WAS PROCESSED U/S 143(1) AND NO ASSESSMENT ORDER WAS FRAMED U/S 143(3) OF THE ACT A ND IT WAS FOR THE FIRST TIME THAT AFTER INITIATING REASSESSME NT PROCEEDINGS -: 8: - 8 U/S 147 THAT THE ASSESSING OFFICER SOUGHT TO BRING TO NET OF TAX THE BUSINESS LOSS WRONGLY SET OFF AGAINST OTHER SOU RCES AND THE DIVIDEND INCOME OF MALASIA. AS PER THE LD. CIT DR THE ASSESSING OFFICER HAS MADE NO INQUIRY WITH REGARD T O DISALLOWANCE OF INTEREST REQUIRED TO BE MADE U/S 14 A AND ALSO WRONG CREDIT OF TDS GIVEN BY THE ASSESSING OFFICER. THE ASSESSING OFFICER HAS ALSO FAILED TO BRING TO TAX N ET CAPITAL GAINS ON UNITS OF MUTUAL FUND AND ALSO DISALLOWANCE REQUIRED TO BE MADE U/S 57(III), THEREFORE, THE CIT WAS PERF ECTLY JUSTIFIED IN HOLDING THAT THE ORDER OF THE ASSESSING OFFICER WAS ERRONEOUS INSOFAR AS IT WAS PREJUDICIAL TO THE INTE REST OF THE REVENUE IN NOT MAKING ANY INQUIRY WITH REGARD TO TH ESE MATTERS AND THEREBY CAUSING LOSS TO THE REVENUE IN RESPECT OF TAX ATTRIBUTABLE TO SUCH INCOME. HE EMPHASIZED THA T IN BOTH THE ORDERS CITED BY THE LEARNED COUNSEL FOR THE ASS ESSEE, ORIGINAL ASSESSMENT WAS FRAMED U/S 143(3) AND THERE AFTER REASSESSMENT PROCEEDINGS WERE INITIATED U/S 147 OF THE ACT AND FAULT WAS FOUND BY THE CIT IN RESPECT OF THINGS OMITTED BY THE ASSESSING OFFICER IN THE ORIGINAL ASSESSMENT, T HEREFORE, IT WAS HELD THAT PERIOD OF LIMITATION U/S 263 SHOULD B E COUNTED -: 9: - 9 FROM THE DATE OF ORIGINAL ASSESSMENT AND NOT FROM T HE DATE OF REASSESSMENT. 4. THE LEARNED COUNSEL FOR THE ASSESSEE ALSO RELIED ON THE DECISION OF THE COORDINATE BENCH IN THE CASE OF SAM RAT RICE MILLS PRIVATE LIMITED; 26 ITAT(INDIA) 388 (DEL) ORD ER DATED 28.3.2008 WHEREIN THE ORDER OF CIT U/S 263 WAS HELD TO BE BAD IN LAW. 5. WE HAVE CONSIDERED THE RIVAL CONTENTIONS, CAREFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AN D DELIBERATED ON THE CASE LAWS CITED BY THE LD. AUTHO RIZED REPRESENTATIVE AND LD. SENIOR D.R. DURING THE COURS E OF HEARING BEFORE US. FROM THE RECORD, WE FIND THAT OR IGINAL RETURN OF THE ASSESSEE WAS PROCESSED U/S 143(1) OF THE ACT AND NO SCRUTINY ASSESSMENT ORDER WAS FRAMED. IN VIEW O F THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F RAJESH JHAVERI; 291 ITR 500, THE PROCESSING OF RETURN U/S 143(1) DOES NOT AMOUNT TO ASSESSMENT ORDER. EVEN AS PER THE P ROVISIONS OF SECTION 143(1) INTIMATION IS ISSUED TO THE ASSES SEE AND NOWHERE IT HAS BEEN WRITTEN THAT THE ORDER PASSED U /S 143(1) IS AN ASSESSMENT ORDER. THE DECISION IN THE CASE OF -: 10: - 10 ELAGENDRAN FINANCE LIMITED (SUPRA) WAS WITH RESPECT TO THE ORDER PASSED U/S 143(3) WHICH WAS REOPENED U/S 147 AND SUBSEQUENTLY 263 PROCEEDINGS WERE INITIATED. SINCE THE ORIGINAL ASSESSMENT ORDER WAS PASSED U/S 143(3), H ONBLE SUPREME COURT HELD THAT SINCE THE ITEMS SOUGHT TO B E REVISED U/S 263 WERE THE ITEMS REQUIRED TO BE DEALT IN ORIG INAL ASSESSMENT FRAMED U/S 143(3) AND NOT WITH RESPECT T O ITEMS DEALT IN REASSESSMENT PROCEEDINGS, THEREFORE, LIMIT ATION PERIOD U/S 263 IS TO BE RECKONED FROM THE DATE OF ORIGINAL ASSESSMENT U/S 143(3) AND NOT WITH RESPECT TO REASSESSMENT ORD ER FRAMED U/S 147. ACCORDINGLY, THE PERIOD OF LIMITATION BEGI NS FROM THE ORIGINAL ASSESSMENT ORDER AND NOT FROM THE REASSESS MENT IN WHICH THE ITEMS WERE NOT DEALT WITH. AS THE ASSESS ING OFFICER HAS FRAMED THE ORIGINAL ASSESSMENT U/S 143(3) WITH RESPECT TO WHICH THE REVISION WAS SOUGHT U/S 263, PERIOD OF LI MITATION WAS HELD TO BE COMPUTABLE WITH REFERENCE TO THE DAT E OF ORIGINAL ASSESSMENT ORDER PASSED U/S 143(3) AND NO T WITH REFERENCE TO THE DATE OF REASSESSMENT PASSED U/S 14 7. SIMILARLY, IN THE CASE OF ASHOKA BUILDCON LIMITED ( SUPRA) THE BOMBAY HIGH COURT HELD THAT WHERE ORIGINAL ASSESSME NT WAS -: 11: - 11 FRAMED U/S 143(3) AND REASSESSMENT NOTICE SO ISSUE D WAS UNRELATED TO THE GROUNDS ON WHICH ORIGINAL ASSESSME NT REOPENED AND REASSESSED, LIMITATION STARTS FROM THE ORIGINAL ASSESSMENT. IT WAS ALSO OBSERVED THAT DOCTRINE OF MERGER OF REASSESSMENT ORDER WITH ORIGINAL ASSESSMENT ORDER APPLIES ONLY WITH RESPECT TO THE ISSUES CONSIDERED IN ORIGI NAL ORDER. IT IS QUITE CLEAR FROM BOTH THE DECISIONS CITED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT ORIGINAL ORDER IN BOT H THE CASES WAS PASSED U/S 143(3) WHEREAS IN THE INSTANT CASE B EFORE US NO ORDER OF ASSESSMENT WAS PASSED U/S 143(3) AND TH E RETURN WAS JUST PROCESSED U/S 143(1) WHICH IS NOT AN ORDER OF ASSESSMENT AND WAS MERELY AN INTIMATION, THEREFORE, THE PROPOSITION LAID DOWN BY THE DECISIONS CITED BY THE LEARNED COUNSEL FOR THE ASSESSEE IS NOT APPLICABLE TO THE F ACTS OF THE INSTANT CASE. ACCORDINGLY, GROUND RAISED BY THE LE ARNED COUNSEL FOR THE ASSESSEE WITH REFERENCE TO THE LIMI TATION PERIOD FOR ISSUE OF 263 NOTICE DOES NOT SURVIVE. ACCORDING LY, THIS GROUND IS DECIDED IN FAVOUR OF REVENUE. 6. NOW WE SHALL DEALT WITH THE MERITS OF THE ADDITION PROPOSED BY THE LEARNED CIT IN HIS ORDER U/S 263 OF THE ACT. -: 12: - 12 7. THE FIRST ISSUE ON WHICH THE ORDER OF THE A.O. WAS CONSIDERED ERRONEOUS AND PREJUDICIAL TO THE INTERES T OF REVENUE WAS WITH REFERENCE TO CREDIT FOR TDS GIVEN BY THE A SSESSING OFFICER. AS PER THE TDS CERTIFICATES PLACED ON FILE , THE INTEREST ON SECURITIES WAS CREDITED BY BIRLA GLOBAL FINANCE LIMITED TO THE AMOUNT OF RS. 8,40,877/- ON 31.03.2002 FOR THE PERIOD 1.10.2001 TO 31.3.2002 AND RS. 6,64,175/- ON 31.5.2 002 FOR THE PERIOD 1.12.2001 TO 31.5.2002 AND TDS CERTIFICA TES HAVE BEEN ISSUED ON 8.4.2002 AND 10.6.02 RESPECTIVELY. THE TDS HAS BEEN DEDUCTED TO THE AMOUNT OF RS.1,71,539/- AN D RS. 1,39,477/- RESPECTIVELY. THE CIT OBSERVED THAT THOU GH THE A.O. HAS GIVEN CREDIT FOR THE TDS DEDUCTED, THE ASS ESSEE HAD NOT SHOWN THE INTEREST INCOME TOTALING TO RS. 15,05 ,052/- (RS.8,40,877/- + RS.6,64,175/-). AS THE ABOVE INTE REST INCOME WAS NOT OFFERED TO TAX BY THE APPELLANT COMPANY, TH E CREDIT GIVEN BY THE A.O. OF TAX DEDUCTED AT SOURCE TO THE EXTENT OF RS. 3,11,060/- WAS CONSIDERED TO BE ERRONEOUS AND PREJU DICIAL TO THE INTERESTS OF REVENUE. 8. WE HAVE CONSIDERED THE RIVAL CONTENTIONS, CAREFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AN D FIND FROM -: 13: - 13 RECORD THAT TDS WAS DEDUCTED BY M/S BIRLA GLOBAL FI NANCE LIMITED IN RESPECT OF INTEREST INCOME EARNED BY THE ASSESSEE. THE DETAILS OF TDS CERTIFICATE VIS--VIS THE AMOUNT OF INTEREST ACCRUED AND THE PERIOD TO WHICH IT PERTAINS ARE AS UNDER :- PARTICULARS TDS CERTIFICATES TOTAL NO.1 NO.2 INTEREST AMOUNT 8,40,877 6,64,175 15,05,052 PERIOD OF INTEREST 1,10,2001 TO 31.3.2002 1.12.2001 TO 31.5.2002 DATE OF TDS CERTIFICATES 8.4.2002 10.6.2002 TDS AMOUNT 1,71,539 1,39,477 3,11,016 9. WE ALSO FIND THAT THE INTEREST INCOME WAS OFFERED B Y THE ASSESSEE IN THE ASSESSMENT YEAR 2002-03 AND 200 3-04 AS UNDER :- PARTICULARS A.Y. 2002-03 A.Y. 2003-04 TOTAL -: 14: - 14 TDS CERTIFICATE NO.1 1.10.01 TO 31.3.02 8,40,877 -- 8,40,877 TDS CERTIFICATE NO.2 1.12.01 TO 31.3.02 4,41,567 -- -- 1.4.02 TO 31.5.02 --- 2,22,608 6,64,175 12,82,444 2,22,608 15,05,052 10. FROM THE RECORD, WE FIND THAT NO TDS WAS CLAIMED BY THE ASSESSEE IN THE ASSESSMENT YEAR 2002-03. TDS W AS CLAIMED ONLY DURING THE ASSESSMENT YEAR 2003-04 AMO UNTING TO RS. 3,11,016/-, THE INCOME PERTAINING TO WHICH H AS ALREADY BEEN OFFERED BY THE ASSESSEE IN THE EARLIER ASSESSM ENT YEAR. 11. THUS, NO PREJUDICE HAS BEEN CAUSED TO THE REVENUE BY CLAIMING TDS IN RESPECT OF INCOME WHICH HAVE ALREADY BEEN OFFERED IN EARLIER YEARS. FOR AN ORDER TO BE REVISED U/S 263, TWO CONDITIONS ARE REQUIRED TO BE FULFILLED -: 15: - 15 ,FIRSTLY, IT SHOULD BE ERRONEOUS AND SECONDLY PREJU DICIAL TO THE INTERESTS OF THE REVENUE. SINCE TDS CREDIT IS C LAIMED IN THE SUBSEQUENT YEAR, IT HAS RESULTED IN A BENEFIT T O THE REVENUE RATHER THAN CAUSING ANY PREJUDICE TO IT, HE NCE, THE LD. CIT HAS WRONGLY INVOKED HIS POWER U/S 263 W ITH REGARD TO CLAIM OF TDS DURING THE YEAR IN RESPECT O F INTEREST INCOME ALREADY OFFERED IN THE EARLIER YEAR S. 12. WITH REGARD TO DISALLOWANCE OF INTEREST U/S 14A THE OBSERVATION OF THE CIT WAS THAT THE ASSESSEE COMPAN Y HAD PAID INTEREST OF RS. 10.5 CRORES TO STANDARD CHARTE RED BANK ON THE DEBENTURES ISSUED IN THE EARLIER YEARS BUT T HE APPLICABILITY OF SEC. 14A WAS NOT EXAMINED BY THE A .O. THEREFORE, THE ORDER OF THE A.O. WAS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE AND A SHOW CAUSE WAS ISS UED ON THIS POINT. 13. IT WAS FOUND THAT LOAN FUND WAS UTILIZED INITIALLY FOR SHORT TERM PURCHASE OF BIRLA INCOME PLUS UNITS IN S EPT., 2001. THE ABOVE UNITS WERE KEPT ONLY FOR A SHORT PERIOD O F ABOUT 2 MONTHS AND WERE SOLD IN NOVEMBER, 2001. THEREAFTER , THE -: 16: - 16 SIGNIFICANT PORTION OF SALE PROCEEDS OF ABOVE AMOUN T WAS UTILIZED FOR GRANTING INTER CORPORATE LOANS AND PAR T AMOUNT IN PURCHASING THE OTHER SECURITIES AND IN REPAYING THE EARLIER LOANS. NO TAX FREE DIVIDEND INCOME WAS EARNED DURIN G THE YEAR ON ANY INVESTMENT IN MUTUAL FUNDS. NO DIVIDEND INC OME HAS BEEN RECEIVED ON PREFERENCE SHARES DURING THE YEAR UNDER CONSIDERATION. DIVIDEND INCOME FROM DOMESTIC COMPA NIES WAS TAXABLE IN THE ASSESSMENT YEAR 2003-04 AND THE SAME HAS BEEN OFFERED BY THE ASSESSEE FOR TAX UNDER THE HEAD INCOME FROM OTHER SOURCES. 14. THE LEARNED CIT ALSO OBSERVED THAT THE ASSESSEE HAS ENCLOSED UTILIZATION STATEMENT OF THE LOAN RAISED O F RS. 100 CRORES FROM STANDARD CHARTERED BANK WITH THE INCOME TAX RETURN FOR A.Y. 02-03 AND HAS ALSO ENCLOSED UTILIZA TION STATEMENT OF LOAN RAISED FROM G.E. CAPITALS OF RS. 69 CRORES WITH THE INCOME TAX RETURN OF A.Y. 01-02. AS PER A NNEXURE-1 ENCLOSED WITH THE INCOME TAX RETURN FOR A.Y. 2002-0 3 IT IS CLEARLY INDICATED THAT THE AMOUNT OF RS. 100 CRORES RAISED FROM SCB HAD BEEN SHOWN TO BE USED BY THE ASSESSEE AS UN DER :- UTILISATION -: 17: - 17 1. ADVANCE AGAINST SHARE CAPITAL RS.2980 LACS 2. REPAYMENT OF LOAN TO CE CAPITAL RS.6900 LACS 3. PAYMENT OF INTEREST AND BANK CHARGES RS.00.81 LACS TOTAL RS.9880.81 LACS AS PER THE STATEMENT ENCLOSED WITH THE RETURN FOR A .Y. 2001-02 THE LOAN TAKEN FROM G.E. CAPITAL OF RS.6900 LACS WHICH HAS BEEN PAID IN THE PREVIOUS YEAR RELEV ANT TO A.Y. 2002-03 HAS BEEN USED AS UNDER : 1. ADVANCE AGAINST SHARE CAPITAL 998.58 LACS 2. PURCHASE OF EQUITY SHARES OF INDIAN RAYON & INSUAREIWA LTD. & GRASIM INDIA LTD. 2128.56 LACS 3. THE INTER CORPORATE DEPOSITS CLOSING BALANCE (DURING THE PERIOD 25.10.00 TO 31.3.01 FUNDS WERE DEPOSITED/WITHDRAWN FOR PURCHASE OF SHARES AS PER ITEM NO. 2 ABOVE. 1576.75 LACS (INTEREST INCOME ON THESE DEPOSITS FROM 25.10.00 TO 31.3.2001 IS RS. 89.35 LACS) 4.UNITS OF BIRLA INCOME PLUS & CASH (+) CLOSING BAL. (DURING THE PERIOD 25.10.00 TO 31.3.01, FUNDS WERE DEPOSITED/WITHDRAWN FOR PURCHASE OF SHARES AS PER ITEM NO. 2 ABOVE 1955.19 LACS 5.PAYMENT OF INTEREST -: 18: - 18 GE CAPITALS 215 LACS 15. IN VIEW OF THE ABOVE, THE CIT HELD THAT THE ASSESSE E HAS NOT SHOWN IT HAD PURCHASED THE UNITS OF BIRLA I NCOME PLUS FROM THE LOAN RAISED OF RS. 100 CRORES FROM STANDAR D CHARTERED BANK AND THE UTILIZATION STATEMENT FILED ALONG WITH THE RETURN FOR A.Y. 02-03 IS INCORRECT. EVEN THE E XPLANATION GIVEN BY THE ASSESSEE WAS WITHOUT ANY EVIDENCE, AN D THE SAME WAS SUBSEQUENTLY FILED DURING THE COURSE OF P ROCEEDINGS U/S 263 THAT FIRST THE LOAN RAISED OF RS. 100 CRORE S FROM SCB WAS USED FOR A SHORT PERIOD OF TWO MONTHS FOR PURCH ASE OF BIRLA INCOME PLUS UNITS AND AFTER TWO MONTHS THE SI GNIFICANT PART OF SALE PROCEEDS OF THE SAME WAS USED FOR GIVI NG INTERCORPORATE LOAN AND ALSO PART AMOUNT HAS BEEN U SED FOR PURCHASE OF SHARES AND REPAYMENT OF LOAN IS FOUND T O BE INCORRECT. AS PER THE UTILIZATION STATEMENT ENCLOS ED WITH THE RETURN, THE LOAN RAISED OF RS.100 CRORES FROM SCB H AS BEEN SAID TO BE USED MAINLY FOR RETURNING OF THE LOAN OF RS. 69 CRORES TAKEN EARLIER OF G.E. CAPITAL AND RS. 29.80 CRORES HAS BEEN USED FOR GIVING ADVANCE FOR PURCHASE OF SHARE CAPITAL. AS PER THE UTILISATION STATEMENT OF A.Y. 02-03 NO PART HAS BEEN -: 19: - 19 SHOWN TO HAVE BEEN USED FOR GIVING INTERCORPORATE L OANS AS CLAIMED BY THE ASSESSEE DURING THE COURSE OF PROCEE DINGS U/S 263 AND NO EVIDENCE WAS FILED BY THE ASSESSEE TO SU BSTANTIATE THE CLAIM TILL 06.10.08, THE DATE OF ISSUE OF SHOW CAUSE NOTICE. THEREFORE, THE EXPLANATION GIVEN DURING THE COURSE OF PROCEEDINGS U/S 263 WAS FOUND TO BE INCORRECT. THE CIT FURTHER OBSERVED THAT FROM THE TWO UTILIZATION STAT EMENTS AS STATED ABOVE FOR A.Y. 01-02 AND 02-03 THE AMOUNT OF LOAN RAISED OF RS. 100 CRORES FROM SCB AND RS. 69 CRORES FROM G.E. CAPITAL AS PER THE ASSESSEE ITSELF HAD BEEN USED FO R EITHER GIVING OF ADVANCE FOR PURCHASE OF SHARES OR PURCHAS E OF SHARES/DEBENTURES IN THE COMPANIES UNDER THE SAME MANAGEMENT OR PURCHASE OF BIRLA INCOME AND CASH PLU S UNITS, ALL CATEGORIZED UNDER THE HEAD INVESTMENTI N SCHEDULE 4 OF THE BALANCE SHEET. ONLY A SMALL AMOUNT OF RS. 1576.75 LACS OUT OF THE LOAN RAISED FROM G.E. CAPITALS AS N OTED ABOVE HAS BEEN SAID TO BE THE BALANCE ON THE CLOSING DATE AS INTER CORPORATE DEPOSIT BUT IT HAS NOT BEEN EXPLAINED BY THE ASSESSEE WHETHER ACTUALLY THE AMOUNT OF SAID LOAN W AS USED FOR GIVING INTERCORPORATE DEPOSIT. THE ASSESSEE WAS ASKED TO -: 20: - 20 EXPLAIN WHAT IS THE MEANING OF THE NOTE GIVEN IN TH E BRACKET AT S. NO. (3) OF THE UTILISATION STATEMENT VIDE ORDER SHEET ENTRY DATED 25.8.08 BUT INSPITE OF VARIOUS OPPORTUNITIES PROVIDED, THE SAME HAS NOT BEEN CLARIFIED BY THE ASSESSEE. T HUS, AS PER THE UTILISATION STATEMENT OF A.Y. 02-03, EVEN THE S ALE PROCEEDS OF THE BIRLA INCOME PLUS UNITS SOLD, WHICH WERE PUR CHASED BY ISSUING DEBENTURES OF RS. 100 CRORES TO STANDARD CH ARTERED BANK HAS ALSO BEEN PARTLY USED FOR MAKING INVESTMEN T AS REFLECTED IN SCHEDULE 4 OF THE BALANCE SHEET OR FOR RETURNING THE LOAN OF G.E. CAPITALS AND NOT FOR GIVING INTER CORPORATE LOANS AS CLAIMED BY THE ASSESSEE. THEREFORE, THE E XPLANATION OF THE ASSESSEE GIVEN DURING THE COURSE OF PROCEEDI NGS U/S 263 IS INCORRECT THAT THE SIGNIFICANT PART OF SALE PROC EEDS OF BIRLA INCOME PLUS UNITS HAVE BEEN USED FOR GIVING INTER C ORPORATE LOANS AND ONLY PART AMOUNT HAS BEEN USED IN PURCHAS ING THE OTHER SECURITIES. IN VIEW OF THE ABOVE FACTS AND S ITUATION, IT IS CLEAR THAT THE ENTIRE LOAN OF RS. 100 CORES TAKEN F ROM STANDARD CHARTERED BANK HAS NOT BEEN USED FOR BUSINESS PURPO SES AND HAS ACTUALLY BEEN USED FOR EARNING DIVIDEND INCOME FROM BIRLA INCOME PLUS UNITS ASSESSABLE U/S 56 OF THE IT ACT W HICH WERE -: 21: - 21 EXEMPT U/S 10(33) IN A.Y. 2002-03. THE INTEREST ON THE LOAN RAISED OF RS. 100 CRORES FROM STANDARD CHARTERED BA NK RAISED IN EARLIER YEAR I.E. 02-03 HAD BEEN DIRECTLY USED I N INVESTING IN THE INVESTMENTS, THE EXPENDITURE ON ACCOUNT OF INTE REST COULD NOT BE ALLOWED AGAINST BUSINESS INCOME AS CLAIMED B Y THE ASSESSEE BUT ITS ALLOWABILITY WAS REQUIRED TO BE EX AMINED U./S 56 & 57(III) OF THE IT ACT. AS PER THE ASSESSEE IT SELF, AS DISCUSSED ABOVE, THE LOAN RAISED OF RS. 100 CRORES FROM STANDARD CHARTERED BANK IN A.Y.02-03 HAS BEEN DIREC TLY USED FOR PURCHASE OF BIRLA INCOME PLUS UNITS OR CASH PLU S, WHICH WERE SOLD IN A.Y. 02-03 ITSELF AND WHICH NO MORE EX ISTED DURING THE PREVIOUS YEAR RELEVANT TO A.Y. 2003-04. THEREFORE, THE INTEREST RELATING TO THE OUTSTANDING LOAN RAISE D OF RS.100 CRORES FROM SCB INVESTED IN PURCHASE OF BIRLA INCO ME PLUS UNITS COULD NOT BE EVEN ALLOWED AS AN EXPENDITURE U NDER SEC. 57(III) OF THE IT ACT IN A.Y. 03-04 AS THE ASSET FO R WHICH THE LOAN OF RS.100 CRORES WAS USED FROM SCB WAS NOT EXI STING IN THE PREVIOUS YEAR RELATING TO ASSESSMENT YEAR 2003- 04 UNDER CONSIDERATION. THE INTEREST ON THIS OUTSTANDING LO AN OF SCB WAS NOT ALLOWABLE U/S 57(III) OF THE IT ACT AGAINST THE DIVIDEND -: 22: - 22 INCOME SHOWN DURING THE YEAR AS THE SAME HAS NOT BE EN INCURRED FOR MAKING OR EARNING OF THE DIVIDEND INCO ME SHOWN IN A.Y. 2003-04. THEREFORE, THE ABOVE FACTS CLEARL Y SHOWS THE ORDER OF THE A.O. WAS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE REVENUE BECAUSE THE INTEREST OF RS. 10.5 CRO RES HAVE BEEN WRONGLY ALLOWED BY THE A.O. AS BUSINESS EXPEND ITURE AND AS THE SAME WAS NOT ALLOWABLE U/S 57 ALSO, IT WAS A LSO PREJUDICIAL TO THE INTEREST OF THE REVENUE. 16. REGARDING THE CLAIM OF INTEREST OF RS. 10.5 CRORES PAID TO SCB ON LOAN OF RS.100 CRORES, IT WAS OBSERVED BY THE LEARNED COMMISSIONER OF INCOMETAX THAT IN THE PREV IOUS YEAR RELEVANT TO THE A.Y. 2002-03 A LOAN OF RS.100 CRORE S HAD BEEN RAISED FROM STANDARD CHARTERED BANK (SCB) WHICH HAS BEEN DIRECTLY USED FOR PURCHASE OF UNITS OF BIRLA INCOME PLUS UNITS. THE BIRLA INCOME PLUS UNITS WERE SOLD IN THE A.Y. 0 2-03 ITSELF. THE BIRLA INCOME PLUS UNITS HAVE BEEN SHOWN IN THE BALANCE SHEET UNDER THE HEAD INVESTMENTS AND THE DIVIDEN D INCOME FROM THE SAME HAS ALSO NOT BEEN SHOWN AS BUSINESS I NCOME. THE GAINS OF THE SALE PROCEEDS FROM ABOVEMENTIONED BIRLA INCOME PLUS UNITS HAVE BEEN SHOWN UNDER THE HEAD C APITAL -: 23: - 23 GAINS THE RATIO LAID DOWN BY THE HONBLE SUPREME CO URT IN THE CASE OF BENGAL & ASSAM INVESTORS LTD. REPORTED IN 5 9 ITR 547. AS PER THE DECISION OF THE HONBLE SUPREME COURT, T HE DIVIDEND INCOME EARNED BY THE INVESTMENT COMPANY ON THE INVESTMENTS CANNOT BE CONSIDERED AS A BUSINESS INCO ME. THEREFORE, THE EXPENDITURE RELATING TO EARNING OF T HIS DIVIDEND INCOME CANNOT BE CLAIMED AS BUSINESS EXPENDITURE. THE EXPENDITURE, IF ANY, IN RELATION TO EARNING OF DIVI DEND INCOME ON ASSETS HELD AS INVESTMENTS, CAN BE CLAIMED AS PE R THE PROVISIONS OF SEC. 56 & 57 OF THE IT ACT FOR DETERM INATION OF THE INCOME TO BE ASSESSED UNDER THE HEAD OTHER SOURCES . THE ALLOWABLITY OF INTEREST EXPENDITURE PERTAINING TO T HE LOAN TAKEN OF RS. 100 CRORES IS TO BE EXAMINED IN REFERENCE TO THE PROVISIONS OF SEC. 57(III) OF THE IT ACT. AS PER T HE PROVISIONS OF SEC. 57(III) OF THE IT ACT, THE EXPENDITURE SHOULD BE LAID DOWN WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF MAKING OR EARNING SUCH INCOME. THE ABOVE LOAN RAISED OF RS. 100 CROR ES WAS UTILIZED FOR PURCHASE OF BIRLA INCOME PLUS UNITS IN THE PREVIOUS YEAR RELATED TO A.Y. 02-03 AND ARE NO MORE EXISTING IN THE PREVIOUS YEAR RELEVANT TO A.Y. 03-04 UNDER CONS IDERATION. -: 24: - 24 AS THE SOURCE ITSELF IS NOT EXISTING I.E. AS THE UN ITS HAVE BEEN SOLD IN A.Y. 02-03 ITSELF, THE INTEREST PERTAINING TO THE OUTSTANDING LOAN INVESTED IN PURCHASE OF THE ABOVE MENTIONED UNITS CANNOT BE ALLOWED U/S 57(III) OF THE IT ACT A S PER THE DECISION OF THE HONBLE ALLAHABAD HIGH COURT IN TH E CASE OF SETH SHIV PRASAD REPORTED IN 84 ITR 15. IN VIEW OF THE ABOVE FACTS AS THE SOURCE FOR EARNING OF INCOME IS NOT EX ISTING DURING THE YEAR RELEVANT TO 03-04, THE ABOVEMENTIONED INTE REST EXPENDITURE IS NOT ALLOWABLE U/S 57(III) OF THE IT ACT AGAINST THE DIVIDEND INCOME EARNED DURING THE YEAR IN 03-04 FROM THE INVESTMENTS WHICH HAS NOT BEEN PURCHASED FROM TAKIN G LOAN OF RS. 100 CRORES FROM SCB UNDER CONSIDERATION. IN VIEW OF THE ABOVE FACTS, THE EXPENDITURE OF RS. 10.5 CRORES ON ACCOUNT OF INTEREST ON THE OUTSTANDING LOAN OF SCB IS NEITHER ALLOWABLE AS BUSINESS EXPENDITURE AS PER THE DECISION OF THE HON BLE SUPREME COURT REFERRED TO ABOVE NOR IT CAN BE ALLOW ED U/S 57(III) AS PER THE DECISION OF HONBLE ALLAHABAD HI GH COURT REFERRED TO ABOVE. THEREFORE, THE ORDER OF THE A.O. IS ERRONEOUS AS IT HAD CONSIDERED THE CLAIM OF INTEREST EXPENDIT URE UNDER BUSINESS INCOME AND IS ALSO PREJUDICIAL TO THE IN TEREST OF THE -: 25: - 25 REVENUE AS THE SAME WAS NOT ALLOWABLE AT ALL U/S 57 (III) OF THE IT ACT. 17. IT WAS CONTENDED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE ASSESSEE IS AN INVESTMENT COMPANY REGISTERED WITH RBI AND BORROWED FUNDS ARE UTILISED FOR ACQUIRING SHARES BY WAY OF INVESTMENTS AS WELL AS G RANTING OF INTERCORPORATE LOAN TO VARIOUS COMPANIES. THE TOTA L INVESTMENTS AS ON 31.3.2003 WAS OF RS. 213.05 CRORE S OUT OF WHICH THE CURRENT INVESTMENTS AMOUNTED TO RS. 3.37 CRORES. THE TOTAL BORROWED AMOUNT IS THE AMOUNT OF RS. 143. 24 CRORES. ON THE BORROWED FUNDS THE ASSESSEE PAID TO TAL INTEREST OF RS. 15.47 CRORES AND CLAIMED THE SAME U/S 36(1)( III) OF THE IT ACT. IT ALSO EARNED INTEREST INCOME OF RS. 7.83 CRORES WHICH WAS OFFERED FOR TAX AS BUSINESS INCOME. THE ASSESSE E ALSO ACQUIRED SHARES BY WAY OF INVESTMENTS IN VARIOUS CO MPANIES WITH A VIEW TO ACQUIRE CONTROLLING RIGHTS IN CERTAI N COMPANIES. THE ASSESSEE HAD BORROWED THE FUNDS EITHER FOR THE PURPOSE OF BUSINESS OR FOR INVESTMENTS IN SHARES AND, THEREFOR E, THE INTEREST IS ALLOWABLE U/S 36(1)(III) OR U/S 57(III) OF THE IT ACT. THE SHARES /MUTUAL FUNDS UNITS/LOANS WERE ACQUIRED/ MADE -: 26: - 26 BY THE COMPANY WITH THE MIXED OBJECT OF MAKING INVE STMENTS, ACQUIRING CONTROLLING INTEREST IN OTHER COMPANIES A ND EARNING INTEREST AND DIVIDEND. 18. RELIANCE WAS PLACED ON THE DECISION OF THE COORDINA TE BENCH IN THE CASE OF SHASTRI SECURITIES PRIVATE LIM ITED; 152 TAXMAN 40 IN SUPPORT OF THE PROPOSITION THAT IF THE FUNDS ARE BORROWED; 243 ITR 83 FOR MAKING INVESTMENT IN SHARES/MUTUAL FUNDS/GRANTING OF LOANS, THE EXPENDIT URE IS ALLOWABLE U/S 36(1)(III) OF THE ACT. IT WAS CONTEN DED THAT PROVISIONS OF SECTION 14A CANNOT BE INVOKED AS THE DIVIDEND FROM SHARES/UNITS WAS TAXABLE IN THE RELEVANT ASSES SMENT YEAR UNDER CONSIDERATION. IT WAS VEHEMENTLY ARGUED THAT IN VIEW OF THE DECISION OF THE HONBLE SUPREME COURT IN THE CA SE OF MALABAR; 243 ITR 83 WHERE TWO VIEWS ARE POSSIBLE AN D THE ASSESSING OFFICER HAS TAKEN ONE LEGALLY TENABLE VIE W, THE ORDER CANNOT BE TREATED AS ERRONEOUS AND PREJUDICIAL TO T HE INTEREST OF THE REVENUE. IT WAS CONTENDED BY THE LEARNED CO UNSEL FOR THE ASSESSEE THAT THE DECISION RELIED ON BY THE CIT IN THE CASE OF SETH SHIVPRASAD; 84 ITR 15 IS NOT APPLICABLE TO THE FACTS OF THE CASE. HE CONTENDED THAT THE LOAN WAS TAKEN FOR GENERAL -: 27: - 27 CORPORATE FUNDS FOR THE ASSESSEES BUSINESS AND WHE N BIRLA INCOME PLUS UNITS WERE SOLD, THEREFORE, IT IS WRON G TO SAY THAT THE SOURCE OF INCOME FOR WHICH LOAN WAS TAKEN CEASE D TO EXIST. HE CONTENDED THAT UTILIZATION OF FUNDS INITIALLY FO R PURCHASE OF BIRLA INCOME PLUS UNITS WAS MERELY FIRST UTILIZATIO N OF LOAN FUNDS FOR THE ASSESSEES BUSINESS AND WHEN BIRLA IN COME PLUS UNITS WERE SOLD IT DOES NOT MEAN THAT THE SOURCE OF INCOME CEASED TO EXIST FROM THE BUSINESS AND THE LOAN REMA INED. HE CONTENDED THAT UNDER THESE CIRCUMSTANCES, MERELY ON E ITEM OF SOURCE OF INCOME IS EXCHANGED FOR ANOTHER ITEM OF S OURCE OF INCOME. 19. THE NEXT GROUND PERTAINS TO MAKING DISALLOWANCE BY INVOKING PROVISIONS OF SECTION 14A OF THE ACT. THE CASE OF THE ASSESSING OFFICER WAS THAT SINCE THE ASSESSEE WAS M AKING INVESTMENT FOR ACQUISITION OF SHARES WHICH IS NOT E ARNING ANY INCOME, THEREFORE, THE EXPENDITURE INCURRED FOR THE SAME CANNOT BE ALLOWED AS BUSINESS EXPENDITURE. ACCORDIN GLY, THE ASSESSING OFFICER COMPUTED DISALLOWABLE PORTION OF INTEREST KEEPING IN VIEW THE TOTAL FUNDS INVESTED AS DIVIDED BY THE FUND INVESTED FOR ACQUISITION OF SHARES. THE CONTENTION OF THE -: 28: - 28 ASSESSEE WAS THAT THE ENTIRE FUNDS BORROWED WERE NO T UTILIZED FOR ACQUISITION OF TAX FREE SECURITIES BUT WERE ACT UALLY USED FOR ADVANCING THE LOANS WHICH EARNED INTEREST INCOME. HE, THEREFORE, ARGUED THAT THE INTEREST INCOME RECEIVED ON SUCH INVESTMENT SHOULD BE REDUCED OUT OF THE INTEREST EX PENDITURE SO INCURRED AND THE NET INTEREST EXPENDITURE SHOULD BE APPORTIONED BETWEEN THE TOTAL FUNDS BORROWED AND TH E FUNDS INVESTED FOR ACQUISITION OF SHARES. THE LEARNED CO MMISSIONER OF INCOMETAX (APPEALS) ACCEPTED THE ASSESEES CONTE NTION AND MADE DISALLOWANCE OF NET INTEREST EXPENDITURE AGAIN ST WHICH THE REVENUE IS IN FURTHER APPEAL BEFORE US. 20. IT WAS ARGUED BY THE LEARNED CIT DR THAT THE ASSESSING OFFICER HAS ALREADY APPORTIONED THE INTER EST EXPENDITURE WHICH IS ATTRIBUTABLE TO INVESTMENT IN SHARES, THEREFORE, THE LEARNED COMMISSIONER OF INCOMETAX (A PPEALS) WAS NOT JUSTIFIED IN NETTING THE INTEREST EXPENDITU RE AND FURTHER REDUCING THE INTEREST EXPENDITURE WHICH WAS ATTRIBUTABLE TO SHARES AND SECURITIES. 21. ON THE OTHER HAND, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT EVEN IF THE FORMULA ADOPTED BY THE -: 29: - 29 LEARNED COMMISSIONER OF INCOMETAX (APPEALS) IS NOT ACCEPTED, THERE IS FALLACY IN THE COMPUTATION OF SUCH INCOME INSOFAR AS THERE ARE VARIOUS INVESTMENTS IN INCOME PLUS GROWTH SCHEME WHICH ACTUALLY YIELDED THE INCOME WHICH IS LIABLE T O TAX. THE SAME, THEREFORE, DOES NOT FORM PART OF THE INVESTME NT IN SHARES AND SECURITIES NOT YIELDING ANY INCOME. HE DREW OUR ATTENTION TO THE AUDITED BALANCE SHEET PLACED ON RE CORD (PAGE 37 OF THE PAPER BOOK) INDICATING CURRENT INVESTMENT IN UNQUOTED FULLY PAID UP UNITS OF BIRLA INCOME PLUS G ROWTH SCHEME WHICH, ACCORDING TO THE LEARNED COUNSEL FOR THE ASSESSEE DID NOT EARN ANY TAX FREE INCOME. HE DREW OUR ATTENTION TO THE COMPUTATION OF INTEREST PLACED BEF ORE THE ASSESSING OFFICER WHICH WAS TAKEN INTO ACCOUNT FOR COMPUTING DISALLOWABLE PORTION OF INTEREST EXPENDITURE U/S 14 A. IN THE INTEREST OF JUSTICE AND FAIR PLAY, WE RESTORE THIS GROUND BACK TO THE FILE OF THE ASSESSING OFFICER WITH THE DIRECTIO N TO RECOMPUTED THE TOTAL AMOUNT INVESTED IN TAX FREE SE CURITIES SO AS TO ARRIVE AT A CORRECT FIGURE OF DISALLOWABLE PO RTION OF INTEREST EXPENDITURE U/S 14A. WE DIRECT ACCORDINGLY . -: 30: - 30 22. WE HAVE CONSIDERED THE RIVAL CONTENTIONS, CAREFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AN D FOUND THAT THE ASSESSEE HAS EARNED INTEREST INCOME IN LAST TWO YEARS I.E. ASSESSMENT YEAR 2002-03 AND 2003-04. THE ASSESSEE HAD ALSO INCURRED INTEREST EXPENDITURE IN RESPECT OF LOAN TAKEN FROM THE STANDARD CHARTERED BANK (S.C .B.) IN SEPTEMBER, 2001, WHICH WAS USED FOR GIVING LOAN, INVESTMENT IN SHARES ETC. INITIALLY FUND, WAS INVES TED IN UNITS OF MUTUAL FUND, WHICH WAS DISPOSED OF LATER A ND THE SALE PROCEEDS WERE AGAIN UTILIZED FOR GIVING LOANS ETC. THE LD. CIT HAS INVOKED HIS POWERS U/S 263 AND DISALLOW ED INTEREST ON THE PLEA THAT UNITS WERE SOLD AND HENCE SOURCE OF INCOME FOR WHICH THE LOAN WAS TAKEN HAS BEEN EXTINGUISHED, THEREFORE, THE INTEREST CANNOT BE ALL OWED. FOR THIS PURPOSE, RELIANCE WAS PLACED BY HIM ON THE DECISION OF HON'BLE ALLAHABAD HIGH COURT, REPORTED IN 84 ITR 15. WE HAVE CAREFULLY GONE THROUGH THE ORDER OF ALLAHABAD HIGH COURT AND FOUND THAT IN THAT CASE, T HE -: 31: - 31 ASSESSEE HAD BORROWING ON WHICH INTEREST WAS PAID. SAME WAS DISALLOWED BY THE ASSESSING OFFICER. HON'BLE HI GH COURT FOUND THAT THE ASSESSEE BEING AN HUF HAD DISTRIBUTED ASSETS ON ITS PARTITION. HENCE, INCOME GENERATING ASSETS ACQUIRED FROM BORROWED FUNDS DID NOT REMAIN ANY MORE. ACCORDINGLY, THE DISALLOWANCE OF I NTEREST BY THE ASSESSING OFFICER WAS UPHELD BY THE HON'BLE HIGH COURT, WHEREAS IN THE INSTANT CASE, THE UNITS INITI ALLY PURCHASED FROM BORROWED FUNDS WERE SOLD, BUT THE PROCEEDS WERE AGAIN UTILIZED FOR ADVANCING LOAN AND FOR INVESTMENT IN SHARES ETC., WHICH GENERATED SOME INC OME. THUS, THE RATIO OF ALLAHABAD HIGH COURT DOES NOT AP PLY TO THE FACTS OF INSTANT CASE. FURTHERMORE, AFTER THE D ECISION OF ALLAHABAD HIGH COURT, THERE IS A JUDGMENT OF HON'BL E SUPREME COURT IN THE CASE OF B. R. LIMITED, 113 ITR 647 AND VEECUMSEES, 220 ITR 185, WHEREIN IT WAS HELD TH AT WHERE BORROWINGS WERE INITIALLY USED FOR SOME BUSIN ESS, WHICH WAS DISCONTINUED AND ASSETS OF WHICH WERE -: 32: - 32 DISPOSED OF, BUT THE BORROWINGS REMAINED AND ASSESS EE WAS REQUIRED TO PAY INTEREST THEREON, THE HON'BLE S UPREME COURT HELD THAT INTEREST OF OLD BORROWINGS WILL BE ALLOWED AS A DEDUCTION EVEN IF THE OLD BUSINESS FOR WHICH T HE BORROWINGS WAS OBTAINED HAS BEEN DISCONTINUED AND T HE ORIGINAL SOURCE OF INCOME WAS EXTINGUISHED. THUS, D ECLINE OF CLAIM OF THE LD. CIT BY OBSERVING THAT ORIGINAL SOURCE OF INVESTMENT OF BORROWED FUNDS IS EXTINGUISHED, IS NO T SUSTAINABLE AT ALL. WE ALSO FOUND THAT THE LD. CIT HAS JUSTIFIED HIS DISALLOWANCE OF INTEREST ALSO ON THE GROUND THAT BORROWED MONEY WERE UTILIZED IN ACQUIRING SHAR ES OF COMPANIES CONTROLLED BY THE ASSESSEE COMPANY AND FO R ACQUIRING CONTROLLING INTEREST THEREON, HENCE THE BORROWINGS CANNOT BE SAID TO HAVE BEEN TAKEN FOR TH E PURPOSE OF EARNING INCOME AND HENCE NOT ALLOWABLE U /S 57. IN THIS REGARD, IT IS PERTINENT TO MENTION THAT INTEREST IS ALLOWABLE U/S 36(1)(III) BEING TAKEN FOR THE PUR POSE OF BUSINESS. THE OBJECT CLAUSE OF THE MEMORANDUM OF -: 33: - 33 ASSOCIATION OF THE ASSESSEE COMPANY IS WIDE ENOUGH TO COVER HOLDING OF INVESTMENT AS ALSO DEALING INS HAR ES. THE RELEVANT OBJECT CLAUSE HAS BEEN REPRODUCED BY THE L D. CIT IN HIS ORDER AT PAGE NO.15 PARA 5.4. RECENTLY, THE HON'BLE BOMBAY HIGH COURT N THE CASE OF SARASWATI SECURITIE S PRIVATE LIMITED, 321 ITR 498 HAS HELD THAT OBJECT O F LOAN IS IRRELEVANT AND THE INTEREST, WHICH WAS DISALLOWE D TO THE EXTENT IT WAS UTILIZED FOR INVESTMENT IN SHARES WAS HELD TO BE ALLOWABLE. IN THIS CASE, THE HON'BLE BOMBAY HIGH COURT FOUND THAT THE ASSESSEE HAD BORROWED FUNDS, WHICH W ERE INVESTED INTO SHARES AND THE SHARES WERE HELD AS INVESTMENT AND ALSO AS STOCK IN TRADE. ASSESSEES CLAIM FOR DEDUCTION OF INTEREST WAS DISALLOWED BY THE ASS ESSING OFFICER ON THE GROUND THAT MAIN REASON FOR INVESTIN G IN SHARES WAS NOT TO EARN DIVIDEND BUT TO ACQUIRE CONT ROLLING INTEREST IN THE COMPANY. HON'BLE HIGH COURT HELD TH AT WHETHER THE BORROWED FUNDS WERE UTILIZED AS CAPITAL OR REVENUE EXPENDITURE, IT MAKES NO DIFFERENCE AS LONG AS THE -: 34: - 34 FUND WAS UTILIZED FOR BUSINESS PURPOSES AND THE ASS ESSEE IS ENTITLED FOR DEDUCTION OF INTEREST EXPENDITURE. 23. THE CONTENTION OF THE LD. AUTHORIZED REPRESENTATIVE TO THE EFFECT THAT THE ASSESSEE COMPANY BEING A N.B .F.C. WAS CARRYING ON BUSINESS OF ACQUIRING AND/OR HOLDIN G OF INVESTMENT ETC., IT WAS IN THE BUSINESS OF ACQUIRIN G AND HOLDING INVESTMENT AND FOR WHICH IT HAS TAKEN A LOA N ON WHICH IT WAS REQUIRED TO PAY INTEREST AND LEGISLATU RE CONSIDERS THAT THIS AS A BUSINESS, THERE IS NO SC OPE OF SAYING THAT HOLDING OF SHARES IS NOT A BUSINESS. WE FOUND SUFFICIENT FORCE IN THE ARGUMENT OF LD. AUTHORIZED REPRESENTATIVE THAT ALLOWABILITY OF INTEREST EXPEND ITURE IS TO BE CONSIDERED UNDER THE PROVISIONS OF SECTION 36 (1)(III) ITSELF, UNLESS THE SITUATION WARRANTS OTHERWISE. 24. IN VIEW OF THE ABOVE DISCUSSION, WE MODIFY THE DECISION OF THE LD. CIT WITH REGARD TO DISALLOWANCE OF INTEREST AND DIRECT THE AO TO DECIDE THE ISSUE AFR ESH IN TERMS OF OUR ABOVE OBSERVATION. WE DIRECT ACCORDING LY. -: 35: - 35 25. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWE D IN PART IN TERMS INDICATED HEREINABOVE. THIS ORDER HAS BEEN PRONOUNCED IN THE OPEN COURT ON 20 TH APRIL, 2011. SD/- SD/- (JOGINDER SINGH) ( R.C.SHARMA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 20 TH APRIL, 2011. CPU* 78204