Rave Entertainment (p)Ltd, Kanpur V. Addl C.I.T., Kanpur

ITA 240/LKW/2011

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 54802 (ITAT-LUCKNOW)
• Duration Of Justice: 3 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-08-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2006-2007
• Appeal Filed On: 05-05-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: JAGDISH
• Keywords: Opportunity of being heard; Principle of natural justice; Retrospective amendment; Condonation of delay; Rule 8D; Set aside
• Section: 143(3); 14A; 274; 147; 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL LUCKNOW BENCH A : LUCKNOW BEFORE SHRI H. L. KARWA, HONBLE VICE PRESIDENT AND SHRI N. K. SAINI, ACCOUNTANT MEMBER I.T.A. NO.240/LKW/11 ASSESSMENT YEAR:2006-2007 M/S RAVE ENTERTAINMENT PVT. LTD., VS. ADDL. C.I.T., JAGRAN BUILDING, RANGE-6, 2-SARVODYA NAGAR, KANPUR. KANPUR. PAN:AABCR5768A) (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI AMIT SHUKLA, ADVOCATE RESPONDENT BY : SHRI JAGDISH, CIT, D. R. DATE OF HEARING : 11/08/2011 DATE OF PRONOUNCEMENT : 17/08/2011 ORDER PER N. K. SAINI: THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER DATED 15/02/2010 OF CIT(A)-II, KANPUR RELEVANT TO ASSESSMENT YEAR 2006-2007. THIS APPEAL IS BARRED BY LIMITATION BY 365 DAYS AND THE ASSESSEE, VIDE APPLICATION DATED 05/05/2011, STATED AS UNDER: THE APPELLANT IS A COMPANY BY STATUS AND EVER SINCE ITS INCEPTION, IT HAS BEEN FILING ITS THE INCOME-TAX RETURN WITHIN 2 TERRITORIAL JURISDICTION AT KANPUR AND PROCEEDINGS AT THE ASSESSMENT/APPELLATE STAGE, KANPUR ARE BEING CONDUCTED BY ITS DULY AUTHORISED REPRESENTATIVES, WHO ARE 'IN-HOUSE' AND BASED AT KANPUR ITSELF. 2. AFTER THE APPELLATE ORDER DATED 15.2.2010 AS PASSED BY THE ID. CIT(A)II, KANPUR, WAS RECEIVED AT THE OFFICE OF THE APPELLANT ON 5.3.2010, THE MATTER WAS REFERRED TO M/S. S.K. GARG & COMPANY (ADVOCATES), BASED AT ALLAHABAD (HAVING THEIR OFFICE AT LUCKNOW ALSO) AND ALL THE REQUISITE DOCUMENTS WERE HANDED OVER TO SHRI ASHISH BANSAL, IN THEIR OFFICE ON 27.3.2010 FOR FURTHER ADVICE AND NEEDFUL. 3. THEREAFTER, THE MATTER WAS DISCUSSED BY OUR 'IN-HOUSE' REPRESENTATIVE SHRI K.K. BISHNOI (WHO HAS BEEN ATTENDING TO THE INCOME-TAX RELATED MATTERS OF THE COMPANY) WITH SHRI S.K. GARG, ADVOCATE ALSO AT ALLAHABAD ON 17.4.2010. AFTER DISCUSSION, IT WAS DECIDED THAT THERE ARE EVEN JURISDICTIONAL ERRORS IN THE ORDERS PASSED BY THE AUTHORITIES BELOW AND FOR CORRECTION OF THE SAME 2 ND APPEAL SHOULD BE FILED BEFORE THE TRIBUNAL AGAINST THE SAID ORDER DATED 15/02/2010 PASSED BY THE LEARNED CIT(A)-II, KANPUR. 4. WITH DUE DILIGENCE, THE REQUISITE DOCUMENTS WERE GOT PREPARED UNDER THE GUIDANCE OF SRI S.K. GARG, ADVOCATE, AND AS PER HIS INSTRUCTIONS, THE SAME WERE DULY HANDED OVER TO HIS ASSOCIATE SRI AMIT SHUKLA, ADVOCATE. AS WE OURSELVES HAD NO EXPOSE TO THE PROCEEDINGS BEFORE THE HON'BLE ITAT, SRI AMIT SHUKLA HIMSELF WAS REQUIRED TO COMPLY WITH OTHER FORMALITIES, LIKE DEPOSITING OF FILING FEE, SUBMITTING THE APPEAL PAPERS IN THE REGISTRY OF HON'BLE ITAT, LUCKNOW. 5. HOWEVER, AFTER IT WAS SERVED TO THE PENALTY ORDER DATED 30.3.2011 AND THE MATTER AGAIN CAME UP FOR DISCUSSION WITH SHRI S.K. GARG, ADVOCATE AT ALLAHABAD, IT TRANSPIRED THAT DUE TO INADVERTENCE, THE APPEAL PAPERS REMAINED LYING WITH SRI AMIT SHUKLA, ADVOCATE AN ASSOCIATE OF M/S. S.K. GARG & CO. (ADVOCATES) AND THE SAME COULD NOT BE FILED BEFORE THE HON'BLE ITAT WITHIN TIME. 3 6. AFTER COMING TO KNOW ABOUT NON-FILING OF APPEAL, INADVERTENT THE APPELLANT TOOK DILIGENT STEPS AND FILED THE APPEAL IN THE 'REGISTRY' ON ..... MAY 2011. THUS, DELAY OF NEARLY 365 DAYS IN FILING THE APPEAL. 7. AS THE DELAY WAS CAUSED DUE TO BONAFIDE REASONS AND THE REASONS BEYOND THE CONTROL OF THE APPELLANT, THE SAID DELAY DESERVES TO BE CONDONED. IN CASE THE DELAY IS NOT CONDONED, ON THE PECULIAR FACTS OF THE PRESENT CASE, THE APPELLANT WILL BE PUT TO SERIOUS JEOPARDY WITH NO FAULT AT ITS END, AND EVEN THOUGH ITS CONDUCT HAD BEEN BONAFIDE ALL THROUGH. 8. IN SUPPORT OF PARAS 4 & 5 ABOVE, THE APPELLANT BEGS TO SUBMIT AN AFFIDAVIT DULY SWORN IN BY SRI AMIT SHUKLA ADVOCATE. PRAYER 9. IN VIEW OF THE SUBMISSIONS AS AFORESAID, IT IS RESPECTFULLY PRAYED THAT YOUR HONOURS BE PLEASED TO CONDONE THE DELAY THAT HAS OCCURRED IN FILING THE APPEAL AND HEAR THE SAME ON MERITS THEREOF. RESPECTFULLY SUBMITTED. SD/. (VIKHRAM KOTHARI) DIRECTOR 2. THE LEARNED COUNSEL FOR THE ASSESSEE, VIDE AFFIDAVIT DATED 05/05/2011, CONTENDED AS UNDER: I, AMIT SHUKLA, THE ABOVE NAMED DEPONENT, SOLEMNLY AFFIRM AND STATE ON OATH AS UNDER: 1. THAT THE DEPONENT IS AN ADVOCATE BY PROFESSION AND IS ASSOCIATED WITH M/S. S.K. GARG & COMPANY (ADVOCATES) HAVING THEIR OFFICES AT ALLAHABAD & LUCKNOW. 4 2. THAT SO FAR AS THE PROFESSIONAL ACTIVITIES OF M/S. S.K. GARG & COMPANY (ADVOCATES) IN THE AREAS FALLING WITHIN THE JURISDICTION OF INCOME-TAX / APPELLATE AUTHORITIES AT LUCKNOW, THE SAME ARE BEING ORGANIZED AND LOOKED AFTER BY THE DEPONENT UNDER THE OVERALL SUPERVISION OF SHRI S.K. GARG, ADVOCATE. 3. THAT IN THE LAST WEEK OF APRIL 2010, I HAD DULY RECEIVED INSTRUCTIONS FOR FILING SECOND APPEAL BEFORE THE HON'BLE ITAT, AGAINST APPELLATE ORDER DATED 15.02.2010 PASSED BY THE ID. CIT(APPEALS)II, KANPUR IN THE CASE OF RAVE ENTERTAINMENT PVT. LTD., KANPUR, FOR THE ASSESSMENT YEAR 2006-07 AND ALL THE RELEVANT DOCUMENTS DULY VERIFIED BY SHRI VIKRAM KOTHARI, HAD ALSO BEEN RECEIVED. 4. THAT ALL OTHER FORMALITIES IN CONNECTION WITH FILING OF SECOND APPEAL, LIKE DEPOSITING THE FILING FEE AS WAS PAYABLE ON THE BASIS OF ASSESSED INCOME AND PRESENTING THE SAME BEFORE THE 'REGISTRY', WERE TO BE GOT COMPLIED WITH BY THE DEPONENT HIMSELF. 5. THAT BECAUSE OF INADVERTENCE, THE PAPER REMAINED LYING WITH MRS. PADMA AN OFFICE ASSISTANT DEALING WITH SUCH MATTERS AND THE NON-FILING OF THE APPEAL COULD NOT COME TO THE KNOWLEDGE OF THE DEPONENT AS SHE SUDDENLY TOOK LEAVE FROM THE OFFICE AND LEFT FOR HER DAUGHTER'S MARRIAGE AT KERALA. 6. THAT THE DEPONENT CAME TO KNOW ABOUT NON-FILING OF APPEAL JUST DURING THE COURSE OF PREPARATION OF APPEAL AGAINST THE PENALTY ORDER DATED 30.3.2011 FOR THE ASST. YEAR 2006-07 ITSELF, IN THE CASE OF THE SAID ASSESSEE. 7. THAT, A THOROUGH SEARCH WAS UNDERTAKEN THEREAFTER, THE PAPERS COULD BE TRACED FROM THE CUPBOARD WHICH WAS UNDER THE CONTROL OF MRS. PADMA, TOWARDS THE END OF APRIL 2011 AND AFTER TAKING ALL THE DILIGENT STEPS, THE APPEAL HAS BEEN FILED ON.., WHICH IS BELATED BY 365 DAYS. 5 VERIFICATION THE CONTENTS OF PARAS 1 TO 7 ARE BASED ON MY PERSONAL KNOWLEDGE AND BELIEF. NOTHING IS FALSE AND NOTHING MATERIAL HAS BEEN CONCEALED. SO HELP ME GOD. VERIFIED THIS 09 TH DAY OF MAY, 2011 AT LUCKNOW. SD/. (DEPONENT) 3. DURING THE COURSE OF HEARING THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE CONTENTS OF THE APPLICATION FOR CONDONATION OF DELAY MOVED BY THE ASSESSEE AS WELL AS OF THE AFFIDAVIT FILED BY THE LEARNED COUNSEL FOR THE ASSESSEE AND PRAYED TO CONDONE THE DELAY BY STATING THAT THE DELAY WAS BEYOND THE CONTROL OF THE ASSESSEE. 4. IN HIS RIVAL SUBMISSIONS THE LEARNED CIT, D.R. STATED THAT AN INORDINATE DELAY HAS OCCURRED IN FILING THIS APPEAL AND THE REASONS GIVEN BY THE ASSESSEE ARE NOT CONVINCING THEREFORE, THE DELAY SHOULD NOT BE CONDONED. 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND CAREFULLY GONE THROUGH THE MATERIALS AVAILABLE ON THE RECORD. IN THE PRESENT CASE, IT APPEARS THAT THE ASSESSEE HANDED OVER THE RELEVANT DOCUMENTS WELL IN TIME FOR FILING THE APPEAL TO HIS COUNSEL WHO INADVERTENTLY COULD NOT FILE THE APPEAL IN TIME SINCE THE RELEVANT PAPERS 6 REMAINED LYING WITH HIS EMPLOYEE WHO LEFT THE OFFICE AND THE PAPER COULD NOT BE TRACED. THE EXPLANATION OF THE ASSESSEE IS SUPPORTED BY THE AFFIDAVIT FILED BY THE LEARNED COUNSEL FOR THE ASSESSEE. WE, THEREFORE, CONSIDERING THE TOTALITY OF THE FACTS AND THE CIRCUMSTANCES INVOLVED IN THE PRESENT CASE AND BY TAKING A LIBERAL VIEW, CONDONE THE DELAY AND THE APPEAL IS ADMITTED. 5.1 IN THIS APPEAL THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS: 1. BECAUSE THE 'APPELLANT' STOOD ASSESSED UNDER SECTION 143(1), ON THE BASIS OF 'RETURN' E-FILED BY IT ON 29.11.2006 AT AN INCOME SHOWN AT ` 1,82,57,048/- THEREIN, IN THE ABSENCE OF THE SAID RETURN BEING VALIDLY SELECTED FOR SCRUTINY ASSESSMENT AS PER CLAUSE (II) OF SUB-SECTION (2) OF SECTION 143 OF THE 'ACT' AND ACCORDINGLY THE ASSESSMENT ORDER DATED 26.12.2008, CAPTIONED AS ASSESSMENT ORDER 'U/S.!43(3) OF THE INCOME-TAX ACT, 1961' IS VOID AB-INITIO. 2. BECAUSE OWING TO NON-EXISTENCE OF THE REQUISITE OPINION OF THE ASSESSING OFFICER HIMSELF AS PER MANDATORY PROVISIONS CONTAINED IN CLAUSE (II) OF SUB-SECTION (2) OF SECTION 143 OF THE 'ACT', THE NOTICE DATED 9.10.2007 CAPTIONED AS NOTICE 'U/S. 143(2)' OF CONFERRING JURISDICTION ON THE ASSESSING OFFICER TO MAKE SCRUTINY ASSESSMENT UNDER SECTION 143(3) WITH THE RESULT THAT THE ENTIRE 'VARIATION' BETWEEN THE RETURNED INCOME AND THE ASSESSED INCOME STOOD WHOLLY VITIATED. 3. BECAUSE IN ANY CASE AND WITHOUT PREJUDICE TO THE CONTENTION RAISED IN GROUNDS NO. 1 & 2 HEREINFORE, THE ADDITIONAL CIT, RANGE-6, KANPUR NEVER GOT VESTED LAWFULLY WITH THE JURISDICTION OF THE ASSESSING OFFICER IN THE CASE OF THE 'APPELLANT' AND ACCORDINGLY THE ASSESSMENT ORDER DATED 26.12.2008 PASSED BY THE SAID INCOME-TAX AUTHORITY, IS WHOLLY WITHOUT JURISDICTION AND THE SAME IS LIABLE TO BE DECLARED AS NULL AND VOID. 4. BECAUSE THE AUTHORITIES BELOW HAVE ERRED IN LAW AND ON FACTS IN HOLDING THAT PROVISIONS OF SECTION 14A READ WITH RULE 8D(III) 7 ARE APPLICABLE IN THE CASE OF THE APPELLANT AND ON THAT BASIS IN DISALLOWING/UPHOLDING DISALLOWANCES OF EXPENDITURE OF ` 3,81,231. 5. BECAUSE THE SAID PROVISIONS ARE NOT APPLICABLE IN THE YEAR UNDER APPEAL AND IN ANY CASE THE COMPUTATION OF DISALLOWANCE IS ERRONEOUS IN AS MUCH AS THE SAME IS EXCESSIVE. 6. BECAUSE THE 'CIT(A)' HAS ERRED IN LAW AND ON FACTS IN HOLDING, TO THE EFFECT THAT 'THERE IS DIRECT NEXUS BETWEEN THE INTEREST FREE LOAN TAKEN AND INTEREST FREE LOAN GIVEN UPTO ` 25 LAKHS', AND ON THAT BASIS, IN DIRECTING THE ASSESSING OFFICER TO RE-COMPUTE THE DISALLOWANCE OF INTEREST WITH REFERENCE TO THE SAID SUM OF ` 25 LAKHS. 7. BECAUSE THE ADVANCES IN QUESTION WERE OVERWHELMINGLY COVERED BY INTEREST FREE FUNDS AVAILABLE WITH THE 'APPELLANT' AND NO DISALLOWANCE OUT OF INTEREST PAID BY THE 'APPELLANT', WAS CALLED FOR EITHER ON FACTS OR IN LAW. 8. BECAUSE IN ANY CASE THE ADVANCES GIVEN BY THE APPELLANT WERE GOVERNED SOLELY BY THE CONSIDERATIONS OF COMMERCIAL EXPEDIENCE AND DISALLOWANCE OF INTEREST IN RELATION TO SUCH ADVANCES, AS HAS BEEN UPHELD BY THE CIT(A) IS WHOLLY ERRONEOUS AS BEING CONTRARY TO THE FACTS OF THE CASE AND LAW APPLICABLE THERETO. 9. BECAUSE THE ORDER APPEALED AGAINST IS CONTRARY TO THE FACTS, LAW AND PRINCIPLES OF NATURAL JUSTICE. 6. GROUND NO. 9 IS GENERAL IN NATURE SO DO NOT REQUIRE ANY COMMENT ON OUR PART. AS REGARDS GROUND NO. 1 TO 3, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THESE GROUNDS MAY BE TREATED AS ACADEMIC IN INTEREST. THEREFORE, NO FINDING IS GIVEN FOR THESE GROUNDS. 7. VIDE GROUND NO. 4 AND 5 OF THE APPEAL, THE GRIEVANCE OF THE ASSESSEE RELATES TO THE UPHOLDING OF DISALLOWANCE OF ` 3,81,231/-, WHICH WAS MADE BY THE 8 ASSESSING OFFICER BY INVOKING THE PROVISIONS OF SECTION 14A OF THE I.T. ACT, 1961 (IN SHORT, THE ACT) READ WITH RULE 8D(III) OF THE I.T. RULES 1962. 8. THE FACTS RELATED TO THIS ISSUE, IN BRIEF, ARE THAT THE ASSESSEE E-FILED THE RETURN OF INCOME ON 29/11/2006 DECLARING AN INCOME OF ` 1,82,57,048/-. LATER ON THE CASE WAS SELECTED FOR SCRUTINY. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER FOUND THAT THE ASSESSEE HAD PURCHASED 15 LACS UNQUOTED SHARES OF M/S RAVE @ MOTI ENTERTAINMENT PVT. LTD. THE ASSESSING OFFICER APPLIED THE PROVISIONS OF SECTION 14A OF THE I.T. ACT READ WITH RULE 8D OF THE I.T. RULES AND MADE A DISALLOWANCE OF ` 3,81,231/-. 9. THE ASSESSEE CARRIED THE MATTER TO THE LEARNED CIT(A) AND THE SUBMISSIONS MADE BEFORE HIM, AS MENTIONED IN PARA 2.2 OF THE IMPUGNED ORDER, READ AS UNDER: 'IT IS REITERATED THAT THESE SUB-SECTIONS (2) AND (3) TO SECTION 14A OF THE ACT, WERE INSERTED BY THE FINANCE ACT, 2006, WITH EFFECT FROM 1 ST APRIL, 2007 AND RULE 8D IS PRESCRIBED UNDER THE ABOVE REFERRED SUB-SECTION (2) TO SECTION 14A OF THE ACT AND THEREFORE CANNOT BE APPLIED TO FINANCIAL YEAR 2005-06 WHEN THE PROVISION OF LAW ITSELF UNDER WHICH RULE HAS BEEN PRESCRIBED WAS NOT IN EXISTENCE. IT IS ALSO RESPECTFULLY SUBMITTED THAT THE RELIANCE PROPOSED TO BE MADE BY YOUR HONOUR ON THE DECISION OF ITAT MUMBAI KINDLY NOT BE PLACE AS HERE THE QUESTION INVOLVED IS NOT THE RETROSPECTIVE APPLICATION OF RULE 8D BUT THE RETROSPECTIVE APPLICATION OF PROVISION OF LAW AS CONTAINED IN SUB-SECTION (2) 9 AND (3). THESE SUB-SECTIONS DO NOT SPEAK ABOUT RETROSPECTIVE APPLICATION AND AS SUCH AS PER WELL SETTLED LAW, ITS APPLICATION CAN NOT BE MADE RETROSPECTIVE. IN THIS CONNECTION, WE MOST RESPECTFULLY DRAW YOUR KIND ATTENTION TO SUB-SECTION (1) OF SECTION 14A ITSELF WHICH, THOUGH INTRODUCED IN 2001, WAS MADE APPLICABLE RETROSPECTIVELY. SIMILARLY, IF SUB-SECTIONS (2) AND (3) WERE INTENDED BY LEGISLATURE TO BE HAVING RETROSPECTIVE EFFECT, SUCH INTENTION OF LAW WOULD HAVE BEEN CLEARLY SPELT OUT IN THESE SUBSECTIONS. WITHOUT PREJUDICE TO ABOVE, WE ALSO SUBMIT THAT COMPANY HAS RECEIVED INTEREST FREE LOANS FROM ITS DIRECTORS WORTH ` 2.165 CRORES. OUT OF THIS COMPANY HAS INVESTED ` 1.50 CRORES IN THE SHARE OF M/S RAVE @ MOTI ENTERTAINMENT PVT. LTD. THUS NO EXPENDITURE WAS INCURRED BY US IN REGARD OF THE AFORESAID INVESTMENT. NO DIVIDEND INCOME HAS BEEN RECEIVED DURING THE YEAR UNDER CONSIDERATION.' 9.1 THE LEARNED CIT(A), AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, CONFIRMED THE ACTION OF THE ASSESSING OFFICER BY OBSERVING IN PARA 2.3 TO 2.5 AND PARA 3 OF THE IMPUGNED ORDER AS UNDER: 2.3 THE LAW ON THIS SUBJECT HAS BEEN CLARIFIED BY THE HON'BLE I.T.A.T.(SB) IN THE CASE OF CHEMINVEST LTD. VS. INCOME TAX OFFICER [121 ITD 318 (DEL)]. THE HON'BLE I.T.A.T. HAD OBSERVED: 'THE CONTROVERSY RAISED IN THE INSTANT CASE WAS THAT THE ASSESSEE HAD NOT EARNED OR RECEIVED ANY DIVIDEND IN THE YEAR UNDER CONSIDERATION AND, THEREFORE, NO DISALLOWANCE COULD BE MADE BY INVOKING THE PROVISIONS OF SECTION 14A. THERE WAS NO FORCE IN THE SAID CONTENTION OF THE ASSESSEE. WHEN THE EXPENDITURE OF INTEREST IS INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME, IT HAS TO SUFFER THE DISALLOWANCE, IRRESPECTIVE OF THE FACT WHETHER ANY 10 INCOME IS EARNED BY THE ASSESSEE OR NOT. SECTION 14A DOES NOT ENVISAGE ANY SUCH EXCEPTION. THIS IS SO EVEN IF THE INTEREST PAID ON BORROWINGS FOR THE PURCHASE OF SHARES IS ALLOWABLE UNDER SECTION 57 AS AN EXPENDITURE INCURRED FOR EARNING OR MAKING INCOME OR UNDER SECTION 36(L)(III) AS AN EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. WHEN PRIOR TO INTRODUCTION OF SECTION 14A, AN EXPENDITURE BOTH UNDER SECTIONS 36 AND 57 WAS ALLOWABLE TO AN ASSESSEE WITHOUT SUCH REQUIREMENT OF EARNING OR RECEIPT OF INCOME, NO SUCH CONDITION COULD BE IMPORTED WHEN IT CAME TO DISALLOWANCE OF THE SAME EXPENDITURE UNDER SECTION 14A. NOW SINCE DIVIDEND WAS EXEMPT, AS A CONSEQUENCE THEREOF EXPENDITURE HAD TO BE DISALLOWED.' 2.4 AS REGARDS, THE ARGUMENT IN RESPECT OF THE RETROSPECTIVE APPLICATION OF RULE 8D, THE SAME STANDS COVERED AGAINST THE APPELLANT ASSESSEE BY THE DECISION OF THE HON'BLE TRIBUNAL IN THE CASE OF ITO V/S DAGA CAPITAL MANAGEMENT PVT. LTD. 2.5 THERE IS YET ANOTHER ARGUMENT OF THE APPELLANT THAT 15 LACS SHARES (WORTH ` 1.5 CRORE) WERE PURCHASED THROUGH INTEREST FREE LOANS FROM ITS DIRECTORS WORTH ` 2.165 CRORES. THE APPELLANT ASSESSEE HAS NOT LEAD ANY EVIDENCE EITHER BEFORE THE AO OR BEFORE THE LD.CIT(A) THAT SUCH INVESTMENT WAS MADE DIRECTLY FROM INTEREST FREE FUNDS RECEIVED FROM DIRECTORS. INSTEAD THESE INTEREST FREE FUNDS HAVE ALL BEEN MERGED IN THE COMMON POOL FROM WHERE VARIOUS INVESTMENT ARE/OR EXPENDITURE WAS MADE. THUS, THE REPORTS OF HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF HERO CYCLES ( ) IS ALSO NOT APPLICABLE AS FACTS IN THE INSTANT CASE ARE ENTIRELY DIFFERENT. 3. UNDER THESE FACTS AND CIRCUMSTANCES OF THE CASE, THE AO'S ACTION OF MAKING AN ADDITION OF ` 3,81,231/- IS CONFIRMED. NOW THE ASSESSEE IS IN APPEAL. 10. THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW. IT WAS FURTHER SUBMITTED THAT THE 11 SUBJECT INVESTMENTS ARE OLD AND THE CAPITAL (NON BORROWED FUNDS) WERE MORE THAN INVESTMENTS, THERE IS NO NEXUS BETWEEN ANY EXPENDITURE OR INTEREST AND THE INCOME CLAIMED AS EXEMPT. IT WAS ALSO SUBMITTED THAT THE LD. C.I.T. (APPEALS) HAS NEITHER DISCUSSED THE FACTS NOR HAS GIVEN REASONS FOR CONFIRMING THE AD HOC DISALLOWANCE MADE BY THE ASSESSING OFFICER. IT WAS CONTENDED THAT RULE 8D OF INCOME TAX RULES 1962 WAS INSERTED BY THE I.T. (FIFTH AMDT.) RULES 2008 WITH EFFECT FROM 24.03.2008, HENCE THE SAME WAS APPLICABLE ONLY FROM ASSESSMENT YEAR 2008-2009 AND NOT THE EARLIER YEARS. THE RELIANCE WAS PLACED ON THE JUDGMENT OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ BOYACE MFG. CO. LTD. VS. DCIT & ANOTHER (2010) 328 ITR 81. 11. THE LD. D.R., IN HIS RIVAL SUBMISSIONS, SUPPORTED THE IMPUGNED ORDER PASSED BY THE LD.CIT(A). 12. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND CAREFULLY GONE THROUGH THE MATERIALS AVAILABLE ON THE RECORD. IT IS NOTICED THAT A SIMILAR ISSUE HAS ALREADY BEEN ADJUDICATED BY THIS BENCH OF THE TRIBUNAL IN THE CASE OF M/S ASHOK KUMAR PANKAJ KUMAR VS. DY. CIT IN I.T.A. NO.305/LUC/10 AND THE RELEVANT FINDINGS HAVE BEEN GIVEN VIDE PARA 9 TO 9.2 OF THE ORDER DATED 15/09/2010 AS UNDER: 12 9. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE ON THE RECORD. IN THE PRESENT CASE, THE AO INVOKED THE PROVISIONS OF SECTION 14A OF THE INCOME-TAX ACT, 1961. THE SAID PROVISION READS AS UNDER : 14A. (1) FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THIS CHAPTER, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. (2) THE ASSESSING OFFICER SHALL DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED, IF THE ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. (3) THE PROVISIONS OF SUB-SECTION (2) SHALL ALSO APPLY IN RELATION TO A CASE WHERE AN ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT : PROVIDED THAT NOTHING CONTAINED IN THIS SECTION SHALL EMPOWER THE ASSESSING OFFICER EITHER TO REASSESS UNDER SECTION 147 OR PASS AN ORDER ENHANCING THE ASSESSMENT OR REDUCING A REFUND ALREADY MADE OR OTHERWISE INCREASING THE LIABILITY OF THE ASSESSEE UNDER SECTION 154 , FOR ANY 13 ASSESSMENT YEAR BEGINNING ON OR BEFORE THE 1ST DAY OF APRIL, 2001. 9.1 FROM THE ABOVE PROVISIONS IT WOULD BE CLEAR THAT THE MANDATE OF SECTION 14A IS TO PREVENT CLAIMS FOR DEDUCTION OF EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME OF THE ASSESSEE. THIS SECTION IS ENACTED TO ENSURE THAT ONLY EXPENSES INCURRED IN RESPECT OF EARNING TAXABLE INCOME ARE ALLOWED. ALL EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE PROVISIONS OF THE I.T.ACT HAS TO BE DISALLOWED UNDER SECTION 14A. UNDER SUB-SECTION (2) OF SECTION 14, THE AO IS REQUIRED TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED BY AN ASSESSEE IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED. IN THE PRESENT CASE, ALTHOUGH THE AO HAS NOT ESTABLISHED THE NEXUS BETWEEN THE EXPENDITURE AND THE EXEMPTED INCOME (DIVIDEND) TO WORK OUT THE EXPENDITURE BUT FOR MAKING DISALLOWANCE INVOKED THE PROVISIONS OF RULE 8D OF THE INCOME-TAX RULES, 1962 WHICH ARE INSERTED BY THE INCOME-TAX (FIFTH AMENDMENT) RULES,2008, W.E.F. 24.3.2008. HOWEVER, AS PER THE RATIO LAID DOWN BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. (SUPRA), THE PROVISIONS OF RULE 8D ARE APPLICABLE PROSPECTIVELY AND NOT RETROSPECTIVELY. IN THE SAID CASE, THEIR LORDSHIPS OF THE HON'BLE BOMBAY HIGH COURT, WHILE INTERPRETING THE PROVISIONS OF SECTION 14A OF THE ACT AND RULE 8D OF THE INCOME-TAX RULES, 1962, OBSERVED AT PAAS 66 & 67 OF THE AFORESAID REFERRED TO ORDER (HEAD NOTE) AS UNDER : THE FIRST POINT TO BE NOTED ABOUT THE PROVISIONS OF S. 14A AND R. 8D IS THAT DIFFERENT DATES HAVE BEEN PROVIDED IN THESE PROVISIONS FOR THEIR ENFORCEMENT: (I) SUB-SEC. (1) OF S. 14A WAS INSERTED BY THE FINANCE ACT OF 2001 WITH RETROSPECTIVE EFFECT FROM 1ST APRIL, 1962; (II) SUB-SS. (2) AND (3) WERE INSERTED IN S. 14A BY THE FINANCE ACT OF 2006 W.E.F. 1ST APRIL, 2007; (III) THE 14 PROVISO WAS INSERTED BY THE FINANCE ACT OF 2002 WITH RETROSPECTIVE EFFECT FROM 11TH MAY, 2001; (IV) RULE 8D WAS INSERTED BY THE IT (FIFTH AMENDMENT) RULES, 2008 BY PUBLICATION IN THE GAZETTE DT. 24TH MARCH, 2008. SUB-R. (2) OF R.1 STIPULATES THAT THE RULES SHALL COME INTO FORCE FROM THE DATE OF THEIR PUBLICATION IN THE OFFICIAL GAZETTE. THIS BY ITSELF IS NOT CONCLUSIVE. SECONDLY, PRIOR TO THE INSERTION OF S. 14A BY THE FINANCE ACT OF 2001 THE SUPREME COURT HAD HELD IN ITS DECISIONS IN CIT VS. INDIAN BANK LTD. AIR 1965 SC 1473, CIT VS. MAHARASHTRA SUGAR MILLS LTD. 1973 CTR (SC) 489: (1971) 82 ITR 452 (SC):(1971) 3 SCC 543 AND RAJASTHAN STATE WAREHOUSING CORPORATION VS. CIT (2000) 159 CTR (SC) 132 : (2000) 242 ITR 450 (SC) THAT IN THE CASE OF A COMPOSITE AND INDIVISIBLE BUSINESS WHICH RESULTED IN TAXABLE AND NON-TAXABLE INCOME, IT WAS IMPERMISSIBLE FOR THE AO TO APPORTION THE EXPENDITURE INCURRED IN RELATION TO SUCH BUSINESS AS BETWEEN THE EARNING OF TAXABLE AND NON-TAXABLE INCOME. SUB-SEC (1) OF S. 14A WAS INSERTED WITH RETROSPECTIVE EFFECT FROM 1ST APRIL, 1962 TO OVERCOME THE DECISIONS OF THE SUPREME COURT. AT THE SAME TIME, AS HAS BEEN NOTICED BY THE SUPREME COURT IN ITS DECISION IN CIT VS. WALFORT SHARE & STOCK BROKERS (P) LTD. (2010) 233 CTR (SC) 42 : (2010) 41 DTR (SC) 233, THE THEORY OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXABLE AND NON-TAXABLE INCOME HAS, IN PRINCIPLE, BEEN NOW WIDENED UNDER S. 14A. READING S. 14 IN JUXTAPOSITION WITH SS. 15 TO 59, IT HAS BEEN OBSERVED THAT THE WORDS 'EXPENDITURE INCURRED' IN S. 14A REFER TO EXPENDITURE ON RENT, TAX, SALARY, INTEREST ETC. IN RESPECT OF WHICH ALLOWANCES ARE PROVIDED FOR. THIRDLY, SUB-SS. (2) AND (3) WERE INTRODUCED BY A LEGISLATIVE AMENDMENT BROUGHT ABOUT BY THE FINANCE ACT OF 2006. THE MEMORANDUM EXPLAINING THE PROVISIONS OF THE FINANCE BILL OF 2006 RECOGNIZES THAT THE EXISTING PROVISIONS OF S. 14A DID 15 NOT PROVIDE A METHOD OF COMPUTING THE EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. CONSEQUENTLY, THERE WAS A CONSIDERABLE AMOUNT OF DISPUTE BETWEEN THE TAXPAYERS AND THE DEPARTMENT ON THE METHOD OF DETERMINING SUCH EXPENDITURE. IT WAS IN VIEW OF THESE DISPUTES THAT PARLIAMENT INSERTED A NEW SUB-SEC. (2) TO PERMIT THE FRAMING OF SUBORDINATE LEGISLATION TO PROVIDE A MANDATORY METHOD FOR THE AO TO FOLLOW IN DETERMINING THE EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME, IF THE AO WAS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE. THE MEMORANDUM PROVIDED THAT 'THIS AMENDMENT WILL TAKE EFFECT FROM 1ST APRIL, 2007 AND WILL, ACCORDINGLY APPLY IN RELATION TO THE ASST. YR. 2007-08 AND SUBSEQUENT YEARS'. A CIRCULAR WAS ISSUED BY THE CBDT ON 28TH DEC., 2006 ONCE AGAIN CLARIFYING THE POSITION THAT THE AMENDMENT WOULD BE APPLICABLE 'FROM THE ASST. YR. 2007-08 ONWARDS'. AT ANY RATE THIS CONSTRUCTION WHICH HAS BEEN PLACED ON THE AMENDMENT BOTH IN THE MEMORANDUM EXPLAINING THE PROVISIONS OF THE FINANCE BILL OF 2006 AND IN THE CIRCULAR OF THE CBDT DT. 28TH DEC., 2006 CAN BE REGARDED AS A REASONABLE INTERPRETATION OF THE PROVISION. THE FOURTH ASPECT OF THE MATTER WHICH WOULD MERIT EMPHASIS, IS THE PRINCIPLE OF LAW THAT IN DETERMINING AS TO WHETHER A RULE IN A PIECE OF SUBORDINATE LEGISLATION IS TO BE REGARDED AS PROSPECTIVE OR RETROSPECTIVE, AN IMPORTANT ASPECT IS AS TO WHETHER THE RULE EMBODIES WHAT IS ESSENTIALLY A WELL KNOWN, A WELL SETTLED OR WELL ACCEPTED METHOD. AS A MATTER OF FACT IN THE PRESENT CASE THERE CAN BE NO DOUBT ABOUT THE POSITION THAT R. 8D HAS ESSENTIALLY PUT INTO PLACE AN ARTIFICIAL METHOD OF ESTIMATING THE EXPENDITURE THAT CAN BE REGARDED AS BEING RELATABLE TO INCOME THAT DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. BEFORE THE INSERTION OF S. 14A, THERE WAS NO SPECIFIC METHOD OF DETERMINING 16 THE EXPENDITURE INCURRED IN RELATION TO NONTAXABLE INCOME. LOOKING AT THE TOTALITY OF THE CIRCUMSTANCES, THE MEASURE OF 0.5 PER CENT PROVIDED IN R. 8D(2)(III) IS REASONABLE. HENCE, WHILE THE METHOD OF COMPUTATION PROVIDED IN R. 8D IS FAIR AND REASONABLE TO PASS MUSTER UNDER ART. 14, THE METHOD MUST TAKE EFFECT PROSPECTIVELY. FINALLY, SUB-SEC. (4) OF S. 295 EMPOWERS THE RULE-MAKING AUTHORITY TO GIVE RETROSPECTIVE EFFECT TO SUBORDINATE LEGISLATION. HOWEVER, UNLESS EXPRESSLY OR BY NECESSARY IMPLICATION, A CONTRARY PROVISION IS MADE, NO RETROSPECTIVE EFFECT IS TO BE GIVEN TO ANY RULE SO AS TO PREJUDICIALLY AFFECT THE INTERESTS OF THE ASSESSEE. EVEN IN THE ABSENCE OF SUB-SS. (2) AND (3) OF S. 14A AND OF R. 8D, THE AO WAS NOT PRECLUDED FROM MAKING APPORTIONMENT. SUCH AN APPORTIONMENT WOULD HAVE TO BE MADE IN ORDER TO GIVE EFFECT TO THE SUBSTANTIVE PROVISIONS OF SUB-S. (1) OF S. 14A WHICH PROVIDE THAT NO DEDUCTION WOULD BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE CHANGE WHICH IS BROUGHT ABOUT BY THE INSERTION OF SUB- SS (2) AND (3) INTO S. 14A BY THE FINANCE ACT OF 2006 W.E.F. 1ST APRIL, 2007 IS THAT IN A SITUATION WHERE THE AO IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN REGARD TO THE EXPENDITURE INCURRED BY IT IN RELATION TO THE NON-TAXABLE INCOME, THE AO WOULD HAVE TO FOLLOW THE METHOD WHICH IS PRESCRIBED BY THE RULES. THE AMENDMENT RULES WERE NOTIFIED TO COME INTO FORCE ON 24TH MARCH, 2008. IT IS A TRITE PRINCIPLE OF LAW THAT THE LAW WHICH WOULD APPLY TO AN ASSESSMENT YEAR IS THE LAW PREVAILING ON THE FIRST DAY OF APRIL. CONSEQUENTLY, R. 8D WHICH HAS BEEN NOTIFIED ON 24TH MARCH, 2008 WOULD APPLY WITH EFFECT FROM ASST. YR. 2008-09. THE RULE CONSEQUENTLY CANNOT HAVE APPLICATION IN RESPECT OF ASST. YR. 2002-03 WHICH IS THE YEAR UNDER CONSIDERATION IN THIS CASE. 17 9.2 IN THE PRESENT CASE, SINCE THE AO APPLIED THE PROVISIONS CONTAINED IN RULE 8D,WHICH ARE APPLICABLE WITH EFFECT FROM A.Y. 2008-09, WHILE THE ASSESSMENT YEAR INVOLVED IN THIS CASE IS 2006-07,THEREFORE, WE ARE OF THE VIEW THAT THE LD.CIT(A) WAS NOT JUSTIFIED IN CONFIRMING THE ACTION OF THE AO BY CONSIDERING THE RATIO LAID DOWN BY THE I.T.A.T., SPECIAL BENCH IN THE CASE OF M/S. DAGA CAPITAL MANAGEMENT PRIVATE LTD., 312 ITR 1 (S.B.) MUMBAI, WHICH IS NOT A GOOD LAW IN VIEW OF THE JUDGMENT OF THE HON'BLE BOMBAY HIGH COURT IN THE AFORESAID REFERRED TO CASE OF GODREJ & BOYCE MFG. CO. LTD. (SUPRA), WE, THEREFORE, SET ASIDE THE ORDER OF THE LD.CIT(A) AND REMAND THE ISSUE BACK TO THE FILE OF THE AO FOR FRESH ADJUDICATION BY KEEPING IN VIEW THE GUIDELINES LAID DOWN BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. (SUPRA) AND DIRECT THE AO TO COMPUTE THE DISALLOWANCE, IF ANY, BY APPLYING A REASONABLE METHOD HAVING REGARD TO THE FACTS AND CIRCUMSTANCES OF THE CASE. 12.1 SINCE THE FACTS OF THE PRESENT CASE ARE SIMILAR TO THE FACTS INVOLVED IN THE CASE OF M/S ASHOK KUMAR PANKAJ KUMAR (SUPRA) IN I.T.A. NO. 305/LUC/10 FOR THE ASSESSMENT YEAR 2006-2007, SO RESPECTFULLY FOLLOWING THE AFORESAID REFERRED TO ORDER DATED 15/09/2010, THIS ISSUE IS REMANDED BACK TO THE FILE OF THE ASSESSING OFFICER FOR FRESH ADJUDICATION IN ACCORDANCE WITH LAW AFTER PROVIDING DUE AND REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 13. THE NEXT ISSUE VIDE GROUND NO. 6 TO 8 RELATES TO THE DISALLOWANCE OF INTEREST WITH REFERENCE TO INTEREST FREE LOAN GIVEN BY THE ASSESSEE. 18 14. THE FACTS RELATED TO THIS ISSUE, IN BRIEF, ARE THAT THE ASSESSING OFFICER MADE A DISALLOWANCE OF ` 3,75,000/- BY OBSERVING IN PARA 7 OF THE ASSESSMENT ORDER DATED 26/12/2008 AS UNDER: 7. DURING THE COURSE OF ASSESSMENT PROCEEDINGS IT WAS FOUND THAT THE ASSESSEE HAS ADVANCED INTEREST FREE LOAN WORTH ` 50 LACS TO M/S RAVE @ MOTI ENTERTAINMENT PVT. LTD. ASSESSEE WAS REQUIRED TO SHOW CAUSE WHY PRO-RATA INTEREST @ 12% MAY NOT BE DISALLOWED OUT OF THE INTEREST PAID TO THE BANK TO THE EXTENT OF ` 94,87,000/-. IT WILL NOT BE OUT OF PLACE TO MENTION HERE THAT THE ASSESSEE IS PAYING HUGE INTEREST ON TERM LOAN TO THE BANK. THE ASSESSEE FILED A REPLY. THE RELEVANT EXTRACT OF THE REPLY IS AS UNDER: 'THE COMPANY HAS AN OUTSTANDING TERM LOAN OF ` 8.69 CRORES AS ON 31.03.2006. THE COMPANY HAS PAID AN INTEREST OF ` 94.87 LACS ON THE ABOVE TERM LOAN, THEREON DEDUCTION HAS BEEN CLAIMED UNDER SECTION 36(1)(III) OF THE INCOME-TAX ACT, 1961. THE COMPANY WAS SANCTIONED A TERM LOAN OF ` 13.50 CRORES FROM CENTRAL BANK OF INDIA, KANPUR ON 19 LH AUGUST, 2000 AND ` 3.42 CRORES FROM ORIENTAL BANK OF COMMERCE, KANPUR ON 13.08.2001 FOR THE PURPOSE OF SETTING-UP ENTERTAINMENT MULTIPLEX AT KANPUR. AS STATED IN SANCTION LETTERS ATTACHED HEREWITH. THE DISBURSEMENTS FOR BOTH THE LOANS WERE COMPLETED ON 08.08.2001 AND 4.11.2001 RESPECTIVELY. COMPANY HAS PURCHASED FIXED ASSETS WORTH ` 20.04 CRORES TILL THE FINANCIAL YEAR ENDING ON 31.03.2002. THUS, THE CAPITAL BORROWED IN THE FORM OF TERM LOANS WERE UTILIZED FOR THE PURPOSES OF THE BUSINESS AND THEREFORE INTEREST PAYABLE THEREON IS ELIGIBLE FOR EXEMPTION U/S 36(1)(III) OF THE ACT. FURTHER TO IT, THE COMPANY HAS RECEIVED INTEREST FREE LOANS FROM ITS DIRECTORS WORTH ` 2.165 CRORES OUT OF WHICH ` 25 LACS WAS RECEIVED DURING THE YEAR. THE COMPANY HAS USED THE 19 ABOVE FUNDS TO ADVANCE AN AMOUNT OF ` 50 LACS TO RAVE @ MOTI ENTERTAINMENT PVT LTD. THUS THE ADVANCE WAS GIVEN FROM THE FUNDS RECEIVED AS INTEREST FREE FROM DIRECTORS AND NO EXPENDITURE BY WAY OF INTERESTS HAS BEEN INCURRED BY THE COMPANY IN THIS REGARD. YOUR HONOUR MAY KINDLY CONSIDER THE FACTS AND DO NOT DISALLOW ANY INTEREST AS CLAIMED UNDER SECTION 36(1)(III) OF THE ACT. I DO NOT AGREE WITH THE CONTENTION OF THE ASSESSEE BECAUSE THE DIRECT NEXUS OF FUNDS BETWEEN BORROWINGS AND THE DIVERSION THEREOF FOR NON-BUSINESS PURPOSES IS NOT RELEVANT FOR MAKING SUCH DISALLOWANCE. MY VIEW IS SUPPORTED BY THE DECISION OF HON'BLE PUNJAB AND HARYANA HIGH COURT IN THE CASE OF CIT VS ABHISHEK INDUSTRIES LTD (2006) 286 ITR P-1 (PUNJAB & HARYANA) AND M/S MUNJAL SALES CORP VS CIT AND ANOTHER 298 ITR 288 (PUNJAB & HARYANA) 2008. THEREFORE THE ACCRUED INTEREST @ 12% ON AMOUNT OF INTEREST FREE ADVANCE WORTH ` 50,00,000/- COMES TO ` 3,75,000/- AS THE LOAN WAS ADVANCED ON 17-18 AUG.2005, WHICH IS BEING INCLUDED IN THE TOTAL INCOME OF THE ASSESSEE. 15. THE ASSESSEE CARRIED THE MATTER TO THE LEARNED CIT(A) AND THE SUBMISSIONS OF THE ASSESSEE, AS MENTIONED IN PARA 4.2 OF THE IMPUGNED ORDER, READ AS UNDER: 'THE COMPANY HAS AN OUTSTANDING TERM LOAN OF ` 8.69 CRORES AS ON 31.03.2006. THE COMPANY HAS PAID AN INTEREST OF ` 94.87 LACS ON THE ABOVE TERM LOAN, THEREON DEDUCTION HAS BEEN CLAIMED UNDER SECTION 36(L)(III) OF THE INCOME TAX ACT, 1961. THE COMPANY WAS SANCTIONED A TERM LOAN OF ` 13.50 CRORES FROM CENTRAL BANK OF INDIA, KANPUR ON 19 TH AUGUST, 2000 AND ` 3.42 CRORES FROM ORIENTAL BANK OF COMMERCE, KANPUR ON 13.8.2001 FOR THE PURPOSE OF SETTING-UP ENTERTAINMENT MULTIPLEX AT KANPUR. AS STATED IN SANCTION LETTERS ATTACHED HEREWITH. THE DISBURSEMENTS FOR BOTH THE 20 LOANS WERE COMPLETED ON 8.8.2001 AND 4.11.2001 RESPECTIVELY. COMPANY HAS PURCHASED FIXED ASSETS WORTH ` 20.4 CRORES TILL THE FINANCIAL YEAR ENDING ON 31.3.2002. THUS, THE CAPITAL BORROWED IN THE FORM OF TERM LOANS WERE UTILIZED FOR THE PURPOSES OF THE BUSINESS AND THEREFORE INTEREST PAYABLE THEREON IS ELIGIBLE FOR EXEMPTION UNDER SECTION 36(L)(III) OF THE ACT. FURTHER TO IT, THE COMPANY HAS RECEIVED INTEREST FREE LOANS FROM ITS DIRECTORS WORTH ` 2.165 CRORES OUT OF WHICH ` 25 LACS WAS RECEIVED DURING THE YEAR. THE COMPANY HAS USED THE ABOVE FUNDS TO ADVANCE AN AMOUNT OF ` 50 LACS TO RAVE @ MOTI ENTERTAINMENT PVT. LTD. THUS THE ADVANCE WAS GIVEN FROM THE FUNDS RECEIVED AS INTEREST FREE FROM DIRECTORS AND NO EXPENDITURE BY WAY OF INTERESTS HAS BEEN INCURRED BY THE COMPANY IN THIS REGARD. YOUR HONOUR MAY KINDLY CONSIDER THE FACTS AND DO NOT DISALLOW ANY INTEREST AS CLAIMED UNDER SECTION 36(1)(III) OF THE ACT. 15.1 THE LEARNED CIT(A), AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, DIRECTED THE ASSESSING OFFICER TO RECOMPUTE THE DISALLOWANCE OF INTEREST FOR ` 25 LACS ONLY BY OBSERVING IN PARA 4.3 AND 5 OF THE IMPUGNED ORDER AS UNDER: 4.3 THE APPELLANT HAS FURNISHED DETAILS WHICH SHOWS THAT THE ASSESSEE COMPANY HAD RECEIVED A TOTAL SUM OF ` 25,00,000/- AS INTEREST FREE LOAN FROM ITS SHARE HOLDERS ON THE DATES BETWEEN 24/08/2005 AND 25/08/2005. THE SAID INTEREST FREE LOAN OF ` 50,00,000/- ADVANCED BY THE APPELLANT COMPANY IS ALSO BETWEEN 24/08/2005 AND 29/08/2005. I HAVE VERIFIED THIS FACTS AND CIRCUMSTANCES FROM THE RELEVANT BANK ACCOUNT. THERE IS DIRECT NEXUS BETWEEN THE INTEREST FREE LOAN TAKEN AND INTEREST FREE LOAN GIVEN UPTO ` 25,00,000/-. 21 5. ACCORDINGLY, I DIRECT THE ASSESSING OFFICER TO RECOMPUTED THE DISALLOWANCE OF INTEREST FOR ` 25 LAKHS ONLY. NOW THE ASSESSEE IS IN APPEAL. 16. THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW AND FURTHER SUBMITTED THAT THE ASSESSEE RAISED THE TERM LOAN FROM THE BANK IN THE EARLIER YEARS AND UTILIZED THE SAME FOR ACQUIRING THE FIXED ASSETS SO THE TERM LOAN RAISED BY THE ASSESSEE WAS UTILIZED FOR THE BUSINESS PURPOSE, THEREFORE, THE INTEREST ON THE TERM LOAN WAS ALLOWABLE U/S 36(1)(III) OF THE ACT. IT WAS FURTHER STATED THAT THE ASSESSEE WAS HAVING INTEREST FREE LOANS FROM ITS DIRECTORS WORTH ` 2.165 CRORES OUT OF WHICH ` 25 LAKHS ONLY WAS RECEIVED DURING THIS YEAR. THE SAID INTEREST FREE LOANS WERE UTILIZED BY THE ASSESSEE TO ADVANCE AN AMOUNT OF ` 50,00,000/- TO M/S RAVE @ MOTI ENTERTAINMENT P. LTD., THEREFORE, THERE WAS NO NEXUS BETWEEN THE INTEREST BEARING LOAN AND INTEREST FREE ADVANCES. AS SUCH NO DISALLOWANCE WAS CALLED FOR. THE RELIANCE WAS PLACED ON THE FOLLOWING CASE LAWS: (I) COMMISSIONER OF INCOME-TAX VS PREM HEAVY ENGINEERING WORKS P. LTD. 285 ITR 554 (ALL) (II) COMMISSIONER OF INCOME-TAX VS JUPITER CONSTN. CO. 274 ITR 354 (GUJ) 22 17. IN HIS RIVAL SUBMISSIONS THE LEARNED CIT D.R. REITERATED THE OBSERVATIONS MADE BY THE ASSESSING OFFICER AND STRONGLY SUPPORTED THE ASSESSMENT ORDER DATED 26/12/2008. 18. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND THE MATERIALS AVAILABLE ON THE RECORD, IT APPEARS THAT NEITHER THE ASSESSING OFFICER NOR THE LEARNED CIT(A) ESTABLISHED A CLEAR NEXUS BETWEEN THE INTEREST BEARING LOANS WITH THE INTEREST FREE ADVANCES. IT IS ALSO NOT CLEAR AS TO WHETHER THE ASSESSEE WAS HAVING CLEAR SURPLUS INTEREST FREE LOANS TO BE GIVEN AS INTEREST FREE ADVANCES TO THE SISTER CONCERN. IN OUR OPINION, THE NEXUS SHOULD BE ESTABLISHED BETWEEN INTEREST BEARING LOANS AND INTEREST FREE ADVANCES FOR MAKING THE DISALLOWANCE OUT OF INTEREST CLAIMED. IN THE PRESENT CASE, SINCE THE FACTS ARE NOT CLEAR WE, THEREFORE, DEEM IT APPROPRIATE TO RESTORE THIS ISSUE ALSO BACK TO THE FILE OF THE ASSESSING OFFICER TO BE ADJUDICATED AFRESH IN ACCORDANCE WITH LAW AFTER PROVIDING DUE AND REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 19. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. (THE ORDER WAS PRONOUNCED IN THE OPEN COURT ON 17/08/2011) SD/. SD/. ( H. L. KARWA ) (N. K. SAINI) VICE PRESIDENT ACCOUNTANT MEMBER DATED: 17/08/2011 *SINGH 23 COPY FORWARDED TO THE: 1. APPELLANT. 2. RESPONDENT. 3. CIT (A) 4. CIT 5. DR. ASSISTANT REGISTRAR