M/s Valentinus Garments, New Delhi V. ACIT, New Delhi

ITA 2825/DEL/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 65971 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 6 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-12-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: H
• Next Hearing Date: 23-05-2012
• Assessment Year: 2003-2004
• Appeal Filed On: 01-06-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: B R R KUMAR
• Keywords: Business income; Depreciation; Business expenditure; Opportunity of being heard; Earning of tax free income; Source of fund; Commercial expediency; Onus to prove; Revenue expenditure
• Section: 14A; 32; 68; 37; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH `H NEW DELHI BEFORE SHRI A.N. PAHUJA, ACCOUNTANT MEMBER AND SHRI CHANDRA MOHAN GARG, JUDICIAL MEMBER I.T.A.NO.2825/DEL/2011 ASSESSMENT YEAR : 2003-04 VALENTINUS GARMENTS, VS ASSTT.CO MMISSIONER OF INCOME TAX, A-16, NARAINA INDUSTRIAL AREA, CIRCLE 2 7(1), PHASE-II, NEW DELHI. NEW DELHI. (PAN: AACFV3470H) (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI R.S. SINGHVI RESPONDENT BY : SHRI B.R.R. KUMAR, SR.DR O R D E R PER CHANDRA MOHAN GARG, JUDICIAL MEMBER THIS APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE ORDER OF COMMISSIONER OF INCOME TAX(A)-XXIV, NEW DELHI DATED 06.08.2010 FOR AY 2003-04. 2. THE GROUNDS OF APPEAL READ AS UNDER:- 1(I) THAT ON THE FACTS AND CIRCUMSTANCES OF THE CA SE, THE CIT(A) WAS NOT JUSTIFIED IN NOT ACCEPTING CLAIM OF LOSS ON SALE OF CAR AMOUNTING TO RS. 25,52,839/- EVEN THOUG H CLAIM OF LOSS IS IN ACCORDANCE WITH PROVISIONS OF SEC. 32 OF THE INCOME TAX ACT, 1961. (II). THAT THERE IS NO DISPUTE ABOUT GENUINENESS OF THE LOSS OR TO THE FACT THAT CAR IS A BUSINESS ASSET AND USE D FOR THE PURPOSE OF BUSINESS. ITA NO.2825/DEL/2011 ASSTT.YEAR: 2003-04 2 (III). THAT FINDING AND CONCLUSION OF CIT(A) IS WIT HOUT PROPER APPRECIATION OF FACTS AND LEGAL PROVISIONS. 2(I). THAT ON THE FACTS AND CIRCUMSTANCES OF THE CA SE, THE LOWER AUTHORITIES WERE NOT JUSTIFIED IN NOT ACCEPTI NG CLAIM OF INTEREST AMOUNTING TO RS. 29,34,984/- BY MAKING REFERENCE TO PROVISIONS OF SEC. 14A, 36(L)(III) AND 34B. (II). THAT CLAIM OF INTEREST IS PERMISSIBLE DEDUCTI ON UNDER THE LAW AND THERE IS NO VALID BASIS FOR DISALLOWANC E OF THE SAME. 3. BRIEF FACTS GIVING RISE TO THIS APPEAL ARE THAT THE ASSESSEES CASE WAS SELECTED FOR SCRUTINY AND A NOTICE U/S 143(2) OF TH E INCOME TAX ACT, 1961 (FOR BRIEF THE ACT) WAS ISSUED AND SERVED ON THE AS SESSEE. DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSEES REPRESENTATI VE CONTENDED THE PROCEEDINGS BUT DID NOT PRODUCE THE BOOKS OF ACCOUN T AND VOUCHERS, HENCE, IN ABSENCE OF BOOKS OF ACCOUNT AND VOUCHERS PERTAIN ING TO EXPENSES CLAIMED IN P&L ACCOUNT, THE ASSESSING OFFICER DISALLOWED TH E EXPENSES AND ADDED BACK TO THE INCOME OF THE ASSESSEE. THE ASSESSING OFFICER ALSO DISALLOWED THE CREDITS SHOWN IN THE BALANCE SHEET U/S 68 OF TH E ACT AND ADDED BACK TO THE INCOME OF THE ASSESSEE. THE ASSESSING OFFICER FINALIZED THE ASSESSMENT WITH THE TAXABLE INCOME OF RS.1,86,48,070 AS AGAINS T THE RETURNED NEGATIVE INCOME (LOSS) OF RS. 83,12,660/- . 4. THE AGGRIEVED ASSESSEE FILED AN APPEAL BEFORE TH E COMMISSIONER OF INCOME TAX(A)-XXIV WHICH WAS PARTLY ALLOWED. THE L D. COMMISSIONER OF ITA NO.2825/DEL/2011 ASSTT.YEAR: 2003-04 3 INCOME TAX(A) UPHELD THE ACTION OF THE ASSESSING OF FICER WITH REGARD TO DISALLOWANCE ON THE LOSS OF RS.25,52,839/- ON THE S ALE OF IMPORTED CAR AND ALSO UPHELD THE ASSESSMENT ORDER IN REGARD TO INTER EST OF RS.29,34,984/-. NOW, THE ASSESSEE IS IN SECOND APPEAL BEFORE THIS T RIBUNAL. GROUND NO.1 5. APROPOS GROUND NO.1, THE ASSESSEES REPRESENTATI VE SUBMITTED THAT THE COMMISSIONER OF INCOME TAX(A) WAS NOT JUSTIFIED ON SALE OF CAR, EVEN THOUGH THE CLAIM OF LOSS WAS IN ACCORDANCE WITH PRO VISIONS OF SECTION 32 OF THE ACT. THE AR FURTHER SUBMITTED THAT THERE WAS NO DISPUTE THAT THE CAR WAS THE BUSINESS ASSET AND USED FOR THE PURPOSE OF BUSI NESS AND THE LOSS ON SALE OF CAR WAS GENUINE. 6. THE DR SUBMITTED THAT THE ASSESSEE DID NOT SUBMI T THE BOOKS OF ACCOUNTS AND VOUCHERS PERTAINING TO THE CLAIMED LOS S ON SALE OF CAR, THEREFORE, THE ASSESSING OFFICER WAS JUSTIFIED IN M AKING THIS ADDITION U/S 32 OF THE ACT. THE DR ALSO SUBMITTED THAT THE LD.CIT( A) RIGHTLY HELD THAT THE IMPORTED CAR WAS A PLANT IN ACCORDANCE WITH SECTION 43(3) OF THE ACT BUT BLOCK OF ASSETS DEFINED U/S 2(11) DOES NOT INCLUDE THE SAME BECAUSE THE DEPRECIATION IS NOT ALLOWABLE AND PRESCRIBED, WHICH WAS THE PRIME CONDITION OF SECTION 2(11) OF THE ACT FOR CLAIM OF DEPRECIATI ON. THE DR ALSO SUBMITTED THAT AS THE WRITTEN DOWN VALUE OF THE BLACK ASSETS WAS NOT AFFECTED BY THE ITA NO.2825/DEL/2011 ASSTT.YEAR: 2003-04 4 SALE OF IMPORTED CAR, THEREFORE, THE GAIN OR LOSS A RISEN ON TRANSFER OF THE ASSET THAT WAS IMPORTED CAR, WAS NOT ASSESSABLE U/S 50 OF THE ACT. THEREFORE, THE COMMISSIONER OF INCOME TAX(A) RIGHTLY UPHELD THE DI SALLOWANCE AND ADDITION. 7. IN VIEW OF ABOVE SUBMISSIONS AND AFTER CAREFUL C ONSIDERATION OF THE FACTS AND CIRCUMSTANCES, IN THE LIGHT OF MATERIAL O N RECORD BEFORE US, WE OBSERVE THAT IT IS NOT IN DISPUTE THAT THE CLAIMED LOSS ON SALE OF CARS WAS RELATED TO THE SALE OF AN IMPORTED CAR USED AS BUSI NESS ASSET FOR THE BUSINESS PURPOSE BY THE ASSESSEE. IT IS ALSO NOT IN DISPUTE THAT THE ASSESSEE DID NOT CLAIM ANY DEPRECIATION ON THIS IMPORTED CAR AND HE WAS NOT ALLOWED ANY DEPRECIATION ON IT IN VIEW OF PRIME CONDITION ATTAC HED TO SECTION 2(11) OF THE ACT. 8. WE ALSO OBSERVE THAT THE LD. COMMISSIONER OF INC OME TAX(A) RIGHTLY HELD THAT THE LOSS INCURRED ON SALE OF IMPORTED CAR WAS OF CAPITAL LOSS. HENCE, THE SAME CANNOT BE CHARGED TO P&L ACCOUNT BE CAUSE THE IMPORTED CAR WAS NOT A PART OF BLOCK OF ASSET AND THE SAME C ANNOT BE ALLOWED AS REVENUE LOSS. ACCORDINGLY, WE ARE UNABLE TO SEE AN Y REASON TO INTERFERE WITH THE IMPUGNED ORDER IN THIS REGARD. IN THE RESULT, GROUND NO. 1 IS DISMISSED. ITA NO.2825/DEL/2011 ASSTT.YEAR: 2003-04 5 GROUND NO.2 9. APROPOS GROUND NO.2, THE ASSESSEES REPRESENTAT IVE SUBMITTED THAT THE AUTHORITIES BELOW WERE JUSTIFIED IN NOT ACCEPTING T HE CLAIM OF INTEREST AMOUNTING TO RS.29,34,984 BY MAKING REFERENCE TO PR OVISIONS OF SEC. 14A, 36(1)(III) AND 43B(D) OF THE ACT. THE ASSESSEES R EPRESENTATIVE SUBMITTED THAT THE CLAIM OF INTEREST WAS PERMISSIBLE DEDUCTIO N UNDER THE LAW AND THERE WAS NO VALID REASON OR BASIS FOR DISALLOWANCE OF TH E SAME BEFORE THE AUTHORITIES BELOW. THE AR ALSO SUBMITTED THAT THE COMMISSIONER OF INCOME TAX(A) WRONGLY APPLIED THE RATIO OF JUDGMENT IN THE CASE OF METRO EXPORTERS LTD. VS ITO (2009) 29 SOT 531 (MUMBAI). THE ASSESSEES REPRESENTATIVE VEHEMENTLY SUBMITTED THAT THE TOTAL INTEREST CLAIMED BY THE ASSESSEE WAS DEBITED TO PROFIT & LOSS ACCOUNT. THU S, IT SHOULD BE ALLOWED AS REVENUE EXPENDITURE FOR THE PURPOSES OF BUSINESS AN D ITS DISALLOWANCE IS NOT SUSTAINABLE. 10. LD. DR REPLYING TO THE ABOVE CONTENTION SUBMITT ED THAT IN THE CASE OF METRO EXPORTERS LTD., IT WAS HELD THAT SO LONG AS T HE AMOUNT BORROWED IS USED FOR BUSINESS, THE INTEREST ON SUCH BORROWING I S ELIGIBLE TO BE DEDUCTED WHILE COMPUTING THE TOTAL INCOME FROM BUSINESS AND THE OBJECT OF SECTION 36(1)(III) IS NOT TO ENABLE THE ASSESSEE TO MAKE LA RGE BORROWINGS AND CREATE INTEREST LIABILITY IN THE YEAR OF BORROWAL AND IN S UBSEQUENT YEARS AND DIVERT ITA NO.2825/DEL/2011 ASSTT.YEAR: 2003-04 6 THE BORROWED SUMS BY GIVING IT FREE OF INTEREST TO ITS GROUP CONCERNS, RELATIVES AND PERSONAL USE OF THE BORROWER. HE ALS O SUBMITTED THAT THE INTEREST PAYABLE ON LOAN TO THE EXTENT OF INVESTMEN T IN SHARES BEING INDIRECT EXPENDITURE IS NOT FULLY ALLOWABLE U/S 14A OF THE A CT AS IT HAS BEEN INDIRECTLY UTILIZED FOR EARNING NON-TAXABLE INCOME. THE DR FU RTHER SUBMITTED THAT THE INTEREST PAYABLE ON THE LOAN TO THE EXTENT OF INVES TMENT IN SHARES HAS CREATED INTEREST LIABILITY IN THE YEAR OF BORROWAL AND IN S UBSEQUENT YEAR WHICH WAS AGAINST THE OBJECT OF SECTION 36(1)(III) OF THE ACT . THEREFORE, THE LD. COMMISSIONER OF INCOME TAX(A) RIGHTLY APPLIED THE R ATIO OF JUDGMENT OF ITAT MUMBAI IN THE CASE OF METRO EXPORTERS LTD. V I TO (SUPRA). THE DR SUPPORTED THE ORDERS OF AUTHORITIES BELOW ALLEGING THE APPEAL TO BE DEVOID OF MERIT. 11. WE HAVE HEARD BOTH THE PARTIES AND ON PERUSAL O F RECORD, WE OBSERVE THAT THE ASSESSING OFFICER NOTED THAT IN RESPONSE T O NOTICE U/S 143(2) OF THE ACT, THE ASSESSEES REPRESENTATIVE ATTENDED THE OFF ICE OF THE ASSESSING OFFICER ON 21.3.2006 BUT DID NOT PRODUCE BOOKS OF A CCOUNTS AND VOUCHERS RELATED TO THE CLAIM OF EXPENSES AS PER P & L ACCOU NT FILED WITH THE RETURN. THE ASSESSING OFFICER FURTHER OBSERVED THAT IN ABSE NCE OF BOOKS OF ACCOUNTS AND VOUCHERS, EXPENSES CLAIMED ARE DISALLOWABLE AND ADDED BACK TO THE INCOME OF THE ASSESSEE AND CONSEQUENTLY, HE MADE CE RTAIN DISALLOWANCES OF ITA NO.2825/DEL/2011 ASSTT.YEAR: 2003-04 7 EXPENSES INCLUDING DISPUTED CLAIM OF FINANCIAL CHAR GES AMOUNTING TO RS. 29,34,984/- . 12. ON BARE READING OF THE IMPUGNED ORDER, WE OBSER VE THAT THE CIT(A) UPHELD THE OTHER DISALLOWANCE MADE BY THE ASSESSING OFFICER WITH THE FOLLOWING OBSERVATIONS AND FINDINGS:- 5. VIDE THIRD PART OF GROUND OF APPEAL NUMBERED 1 , THE APPELLANT CHALLENGES THE DISALLOWANCE OF FINANCIAL CHARGES OF RS.29,34,984/- ON ACCOUNT OF THE FACT THAT THE ASSE SSEE FAILED TO EXPLAIN IT THAT THE SAME HAVE BEEN INCURRED FOR BUS INESS PURPOSES. THE AR SUBMITTED THAT THE FINANCE CHARGES INCLUDE BANK CHARGES AND INTEREST ON LOAN TAKEN BY THE FIRM WHICH IT IS USING AND CLAIMING AS EXPENSE FROM THE DATE OF SANC TION. THE CONFIRMATION OF LOAN FROM THE BANK WAS ALSO FILED. IT HAS BEEN ADMITTED BY THE AR THAT THE APPELLANT HAS NOT PAID THE INTEREST PAYABLE THERE ON TILL NOW, SO THE BANK HAS PUT THIS ADVANCE AS NPA. NOW, THE MATTER IS PENDING IN THE RECOVERY TRI BUNAL. 5.1 THE BALANCE SHEET OF THE ASSESSEE REVEALS THAT THE ASSESSEE HAS INVESTED RS. 1,05,39,000/- IN SHARES AND ADVANC ED RS. 80,11,229/- TO ITS SISTER CONCERNS. THESE INVESTMEN TS AND ADVANCE DO NOT GENERATE ANY INCOME CHARGEABLE TO TA X. THE AR HAS SUBMITTED THE COPY OF THE ASSESSMENT ORDER FOR AY 1994-95 IN SUPPORT OF HIS CLAIM THAT THE INVESTMENTS IN SHA RES HAVE BEEN DONE OUT OF CAPITAL OF THE FIRM AND NOT FROM THE BA NK LOAN. THE LOAN AND 0D IN AGGREGATE RELEVANT FOR THIS YEAR IS RS. 1,63,36,132/-. ACCRUED INTEREST THEREON IS RS. 34,6 0,386/-. 5.2 I HAVE CAREFULLY CONSIDERED THE SUBMISSION OF T HE AR AND PERUSED THE CASE RECORD. IN THIS CASE, THIS DISALLO WANCE IS JUSTIFIED ON PRORATING OF THE DIRECT AND OR INDIREC T EXPENDITURE ALSO. THE WORDS USED IN SECTION 14A ARE IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME, WHICH DOES NOT FORM PART OF TOTAL INCOME UNDER THIS ACT. THESE WORDS ENCOMPASS WITHIN THEIR AMBIT DIRECT AS WELL A S INDIRECT EXPENSES. IN FACT, PROVISIONS OF LAW AS CONTAINED I N SECTION ITA NO.2825/DEL/2011 ASSTT.YEAR: 2003-04 8 14A(3) MAKE IT CLEAR THAT INDIRECT EXPENSES ALSO CO ME WITHIN THE PURVIEW OF SECTION 14A BECAUSE THE SITUATION DE ALT WITH BY THIS SUB-SECTION CAN ARISE ONLY IN RESPECT OF INDIR ECT EXPENSES. SECTION 14A DOES NOT SAY THAT INTEREST/EXPENDITURE RELATING TO CURRENT YEAR LOAN USED TO EARN INCOME NOT CHARGEABL E TO TAX/NIL INCOME IS ONLY DISALLOWABLE. IT TALKS ABOUT ALL DIRECT AND OR INDIRECT EXPENDITURE. THE PURPOSE OF INVESTM ENTS IS NOT THE CRITERION FOR THE DISALLOWANCE U/S 14A. THE ONE AND ONLY ONE PRINCIPLE IS REQUIRED TO BE LOOKED INTO IS THAT THE EXPENDITURE RELATING TO ANY INCOME THAT IS NOT INCL UDIBLE IN TOTAL INCOME CAN NOT BE ALLOWED AS DEDUCTION UNDER SECTIO N 14A: THE ASSESSEE'S PLEA IS THAT THERE IS NO FRESH INVESTMEN T IN SHARES AND OR INTEREST FREE ADVANCES OUT OF THE BORROWED FUNDS . EVEN THEN, THE DISALLOWANCE U/S 14A CAN BE MADE IS BASED ON TH E CORRECT UNDERSTANDING OF LAW. 5.3 SECTION 14A DOES NOT SAY THAT INTEREST/EXPENDIT URE RELATING TO LOAN USED TO EARN TAX FREE INCOME IS ONLY DISALL OWABLE. IT TALKS ABOUT ALL DIRECT AND OR INDIRECT EXPENDITURE. HERE, THE INVESTMENT IN SHARES AND ADVANCES TO SISTER CONCERN HAVE RESULTED INDIRECT EXPENDITURE IN THE FORM OF INTERE ST ON LOAN TAKEN BY THE APPELLANT. THE ONE AND ONLY ONE PRINCI PLE IS REQUIRED TO BE LOOKED INTO IS THAT THE EXPENDITURE RELATING TO ANY INCOME THAT IS NOT INCLUDIBLE IN TOTAL INCOME CANNO T BE ALLOWED AS DEDUCTION UNDER SECTION 14A. IN CASE, NO TAX FRE E INCOME HAS BEEN EARNED IN THE FORM OF DIVIDEND OR OTHER WISE, THEN ALSO DISALLOWANCE U/S 14A CAN BE MADE IS BASED ON THE CO RRECT APPRECIATION OF LAW. IF THE INTENTION OF THE LEGISL ATURE WAS TO CONFINE APPLICABILITY OF SECTION 14A LIMITED TO ACT UAL RECEIPT OF NON TAXABLE INCOME/INCOME EXEMPTED INCOME AS SPECIF IED IN CHAPTER III, THERE WAS NO NEED TO HAVE SUB-SECTION (3). THE DISPUTE IS LIKELY TO ARISE IN CASES WHERE AN EXPEND ITURE IS INCURRED IN RELATION TO INCOME WHICH IS NOT APPEARI NG IN THE P&L ACCOUNT OR ACTUALLY RECEIVED OR NOT ENUMERATED IN CHAPTER III BUT NOT INCLUDIBLE IN TOTAL INCOME. THEREFORE, THE VERY EXISTENCE OF SUB-SECTION (3) OF SECTION 14A SHOWS T HE LEGISLATIVE INTENTION TO DISALLOW EXPENDITURE IN RELATION TO IN COME NOT INCLUDIBLE IN TOTAL INCOME. THIS CAN BE WELL UNDERS TOOD BY AN EXAMPLE: A SITUATION MAY ARISE WHERE AN ASSESSEE EN GAGED IN VARIOUS BUSINESS ACTIVITIES INCLUDING INVESTMENT IN SHARES MAY ITA NO.2825/DEL/2011 ASSTT.YEAR: 2003-04 9 TAKE INTEREST BEARING LOAN FOR INVESTING IN SHARES OF ITS GROUP COMPANY, WHICH WOULD NEVER DECLARE DIVIDEND AND THE ASSESSEE CAN CLAIM INTEREST PAYABLE AGAINST THAT LOAN AGAINS T ITS OTHER BUSINESS RECEIPTS. BUT IT IS NOT JUSTIFIED AS IT IS NOT THE INTENTION OF THE LEGISLATURE. IF PROVISIONS OF LAW CONTAINED UNDER SECTION 14A AND DICTION OF SECTION 14A IS PERUSED, IT IS CL EAR THAT SECTION 14A CODIFIES THE WELL ACCEPTED PRINCIPLE OF TAXATION THAT IF INCOME IS NOT TAXABLE, NO EXPENDITURE EITHER DIR ECT AND OR INDIRECT WHAT SO EVER, IN RELATION TO SUCH INCOME C AN BE MED AGAINST TAXABLE INCOME. THE SECTION 14A CODIFIES TH E WELL RECOGNIZED PRINCIPLE OF TAXATION WHICH IS AS PER NO RMS OF ACCOUNTANCY AND LAW WHICH MAY BE CULLED OUT FROM VA RIOUS DECISIONS OF THE HON'BLE COURTS AND IT ENCOMPASSES ANY EXPENDITURE INCURRED IN RELATION TO INCOME WHICH IS NOT INCLUDIBLE IN TOTAL INCOME. SUCH INCOME NOT INCLUDI BLE IN TOTAL INCOME MAY BE SUBJECT MATTER OF EXEMPTION, DEDUCTIO N OR MAY BE OTHERWISE, NON-TAXABLE. 5.4 WHEN A PERSON BORROWS FUNDS HE EXPOSES HIMSELF TO CERTAIN RISKS BY WAY OF OBLIGATION TO REPAY CAPITAL, TO PAY INTEREST ON SUCH MONIES BORROWED. WHEN A PERSON BORROWS FUNDS O BVIOUSLY HE SEES HIMSELF AS A BUSINESSMAN BECAUSE HE ANTICIP ATES THAT WHAT BORROWED CAN BE UTILIZED MORE FRUITFULLY IN TH E SENSE THAT HE EXPECTS THIS MONEY TO YIELD URN WHICH IS MORE TH AN THE INTEREST THAT HE IS PAYING ON THE CAPITAL THAT HE H AS BORROWED. ULTIMATELY THE ESSENCE OF BUSINESS IS PROFIT MOTIVE . HE WOULD THEREFORE SEEK TO INVEST FUNDS WITH A VIEW NOT ONLY TO MAKE PROFITS BUT TO MAKE PROFITS IN THE TIME FRAME THAT HE HAS TO PAY INTEREST SO THAT THE PRINCIPAL SUM BORROWED IS SERV ICED THROUGH PAYMENT OF INTEREST AND THROUGH REPAYMENT OUT OF RE TURNS ON THE MONIES BORROWED IN ACCORDANCE WITH THE TERMS OF 'AGREEMENT OF BORROWING. ON THE OTHER HAND, WHEN A PERSON IS INVESTING HIS OWN CAPITAL HE IS AVERSE TO TAKE RISK S AND WOULD THEREFORE, ESSENTIALLY BE AN INVESTOR WHO WOULD SEE K TO MINIMIZE HIS LOSSES AND IN THE PROCESS PERHAPS ALSO MINIMIZE HIS GAINS. THESE ARE THE HALLMARKS OF INVESTMENT AS OPPOSED TO SAY SPECULATION. 5.5 IN METRO EXPORTERS LTD. V. ITO {2009} 29 SOT 53 1 {MUM.}, THE ASSESSEE BORROWED MONEY FROM A COMPANY BELONGIN G TO THE ITA NO.2825/DEL/2011 ASSTT.YEAR: 2003-04 10 SAME GROUP. INTEREST PAID ON SUCH BORROWING WAS DIS ALLOWED BY THE AO FOR THE REASON THAT THE ASSESSEE HAD GIVEN I NTEREST-FREE LOANS TO AN ALLIED CONCERN. IT WAS HELD THAT SO LON G AS THE AMOUNT BORROWED IS USED FOR BUSINESS, INTEREST ON S UCH BORROWING IS ELIGIBLE TO BE DEDUCTED WHILE COMPUTIN G THE INCOME FROM BUSINESS. IT WAS HELD THAT THE OBJECT O F SECTION 36(1)(III) IS NOT TO ENABLE THE ASSESSEE TO MAKE LA RGE BORROWINGS AND CREATE INTEREST LIABILITY IN THE YEA R OF BORROWAL AND IN SUBSEQUENT YEARS AND DIVERT THE BORROWED SUM S BY GIVING IT FREE OF INTEREST TO ITS GROUP CONCERNS, R ELATIVES AND PERSONAL USE OF THE BORROWER. THERE IS NO NECESSITY TO CORRELATE THE BORROWAL TO INVESTMENTS AS DISCUSSED ABOVE WHEN THE APPELLANT IS HAVING FLOWING FUNDS. 5.6 HENCE INTEREST PAYABLE ON THE LOAN TO THE EXTE NT OF INVESTMENT IN SHARES, BEING INDIRECT EXPENDITURE IS NOT FULLY ALLOWABLE U/S 14A OF THE ACT AS IT HAS BEEN UTILIZE D INDIRECTLY FOR EARNING NON-TAXABLE INCOME. FURTHER, INTEREST F REE ADVANCES TO SISTER CONCERNS AND INVESTMENTS IN SHARES HAS CREATED INTEREST LIABILITY IN THE YEAR OF BORROWAL AND IN S UBSEQUENT YEAR, WHICH IS AGAINST THE OBJECT OF SECTION 36(1)( III) . FOLLOWING THE DECISION, METRO EXPORTERS LTD. V. ITO (2009) 29 SOT 531 (MUM.), IT IS HEREBY HELD THAT THE INTEREST PAID ON BORROWAL TO THE EXTENT OF ADVANCES AND INVESTMENT I N SHARES IS NOT ALLOWABLE 36(1)(III) OF THE ACT. FURTHER, THIS INTEREST IS ALSO NOT ALLOWABLE U/S 43B(D) OF THE ACT. 5.7 THE TOTAL INTEREST DEBITED IN THE P&L ACCOUNT I S RS. 29,34,984/-. THUS, FOLLOWING THE JUDGMENTS IN THE C ASE OF DAGGA CAPITAL, SPECIAL BENCH, METRO EXPORTERS LTD ( SUPRA) AND PROVISIONS OF SECTIONS 14A, 36(1)(III) AND 43B, I H EREBY UPHELD THE DISALLOWANCE OF INTEREST OF RS 29,34,984/-. 13. THE ASSESSEES REPRESENTATIVE RELIED ON THE JUD GMENT OF ITAT, KOLKATA, THIRD MEMBER BENCH IN THE CASE OF S.P. JAI SWAL ESTATE P. LTD. VS COMMISSIONER OF INCOME TAX REPORTED AS (2012) 74 DT R (KOLKATA) T.M. ITA NO.2825/DEL/2011 ASSTT.YEAR: 2003-04 11 (TRIBUNAL) 294 WHEREIN IT WAS HELD THAT INTEREST ON BORROWED CAPITAL CLAIMED AS BUSINESS EXPENDITURE AND AT THE SAME TIME WHERE THE ASSESSEE HAS ADVANCED INTEREST FREE LOANS TO SISTER CONCERN, THE N IF THE PROFIT OF THE ASSESSEE COMPANY IN THE RELEVANT YEAR IS FAR MORE T HAN THE TOTAL INTEREST FREE ADVANCES, THEN IT IS TO BE PRESUMED THAT THE ENTIRE INTEREST FREE ADVANCES WERE GIVEN OUT OF INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE. THEREFORE, NO PART OF BORROWED FUNDS CAN BE SAID TO HAVE BEEN DIV ERTED AS NON-INTEREST BEARING ADVANCE TO THE SUBSIDIARY COMPANIES AND CON SEQUENTLY NO DISALLOWANCE CAN BE MADE OUT OF INTEREST PAID OF TH E BORROWINGS. 14. IN THIS REGARD, LD. DR SUBMITTED THAT THE RATIO OF THIS JUDGMENT IS NOT AVAILABLE TO THE ASSESSEE BECAUSE IN THE PRESENT CA SE, THE ASSESSEE FILED A RETURN OF NEGATIVE INCOME THAT WAS LOSS OF RS.83,12 ,660/- AND INTEREST PAID AND CLAIMED IN THE PROFIT AND LOSS ACCOUNT AS FINAN CIAL CHARGES CANNOT BE SAID TO HAVE BEEN INCURRED ON THE FUNDS DIVERTED AS NON- INTEREST BEARING ADVANCES TO THE SUBSIDIARY COMPANIES. 15. AFTER CAREFUL CONSIDERATION OF SUBMISSIONS AND RECORD BEFORE US, WE OBSERVE THAT AS PER SCHEDULE-II TO THE BALANCE SHEE T, BORROWINGS FROM THE CONCERN IN WHICH PARTNERS WERE INTERESTED WAS OF RS .81,82,262 AND AT THE SAME TIME AS PER SCHEDULE VIII WHERE PARTNERS WERE INTERESTED WAS RS. 80,11,229/-. FROM THE BALANCE SHEET, WE OBSERVE THA T THE ASSESSEE HAS SHOWN ITA NO.2825/DEL/2011 ASSTT.YEAR: 2003-04 12 INVESTMENT OF RS.10,539,000 IN VARIOUS SHARES IN F. Y. 2001-02 AND IT WAS BROUGHT FORWARD TO F.Y. 2002-03. WE ALSO OBSERVE T HAT THERE IS INTEREST BEARING LOAN OF RS.1,97,96,158 FROM BANK OF BARODA WHICH WAS CARRIED FORWARD FROM PRECEDING FINANCIAL YEAR I.E. 2001-02 AND AT THE SAME TIME THE ASSESSEE DEBITED P&L ACCOUNT BY FINANCIAL CHARGES O F RS.29,34,983 AND CLAIMED ALLOWANCE U/S 36(1)(III) OF THE ACT PERTAIN ING TO THE DISPUTED DISALLOWANCE. 16. IN VIEW OF ABOVE, WE FURTHER OBSERVE THAT THE ASSESSEE DID NOT MAKE ANY NEW INVESTMENTS DURING THE YEAR UNDER CONSIDERA TION BECAUSE THE INVESTMENT SHOWN IN FINANCIAL YEAR 2001-02 WAS BROU GHT FORWARD TO FINANCIAL YEAR 2002-03 AND AT THE END OF YEAR, THE AMOUNT REMAINS THE SAME AND INTEREST BEARING LOAN FROM BANK OF BARODA WAS A LSO CARRIED FORWARD FROM PRECEDING YEAR TO THE YEAR UNDER CONSIDERATION . WE ALSO OBSERVE THAT THE ASSESSEE BORROWED RS.81,82,262/- FROM THE CONCE RNS WHERE PARTNERS WERE INTERESTED AND THERE WAS AN AMOUNT OF RS.80,11 ,229 TO THE CONCERN WHERE THE PARTNERS WERE INTERESTED. BUT THERE IS NO DETAIL OF INTEREST FREE LOANS GIVEN AND TAKEN BY THE ASSESSEE AND ITS PURPO SE IS ALSO NOT DISCLOSED BY THE ASSESSEE EITHER BEFORE THE AUTHORITIES BELOW OR BEFORE US. 17. FROM THE CONCLUDING PART OF THE IMPUGNED ORDER PERTAINING TO THIS GROUND REVEALS THAT THE CIT(A) FOLLOWED THE JUDGMEN T OF METRO EXPORTERS ITA NO.2825/DEL/2011 ASSTT.YEAR: 2003-04 13 LTD. VS ITO (2009) 29 SOT 531 (MUMBAI). IN THE CAS E OF METRO EXPORTERS (SUPRA), THE ASSESSEE COMPANY BORROWED MONEY FROM A COMPANY BELONGING TO THE SAME GROUP AND INTEREST PAID ON SUCH BORROWI NG WAS DISALLOWED BY THE ASSESSING OFFICER FOR THE REASON THAT THE ASSESSEE HAD GIVEN INTEREST FREE LOANS TO ANOTHER ALLIED CONCERN. IN THIS JUDGMENT, IT WAS CLEARLY HELD THAT SO LONG AS THE AMOUNT BORROWED IS USED FOR BUSINESS, T HEN INTEREST PAID ON SUCH LOANS IS ELIGIBLE TO BE DEDUCTED WHILE COMPUTING TH E INCOME FROM BUSINESS. CLARIFYING THE OBJECT OF SECTION 36(1)(III) OF THE ACT, IT WAS ALSO HELD THAT THIS PROVISION IS NOT TO ENABLE THE ASSESSEE TO MAK E LARGE BORROWINGS AND CREATE INTEREST LIABILITY IN THE YEAR OF BORROWAL A ND SUBSEQUENT YEARS ON ONE SIDE AND TO DIVERT THE BORROWED FUNDS BY GIVING INT EREST FREE LOANS TO ITS GROUP CONCERN, RELATIVES AND PERSONAL USE OF THE AS SESSEE. IN THE CASE OF METRO EXPORTS LTD. (SUPRA), IT WAS FINALLY HELD THA T THE INTEREST PAID ON THE BORROWAL TO THE EXTENT OF ADVANCE AND INVESTMENT IN SHARES IS NOT ALLOWABLE U/S 36(1)(III) OF THE ACT. 18. THE ASSESSEES REPRESENTATIVE SUBMITTED THAT TH E FINANCIAL CHARGES CLAIMED BY THE ASSESSEE IN P&L ACCOUNT CANNO T BE DISALLOWED BECAUSE THE ASSESSEE HAS NOT MADE ANY NEW INVESTMENT DURING THE YEAR UNDER CONSIDERATION. REPLYING TO THE ABOVE SUBM ISSIONS, THE DR ADMITTED THAT AS PER BALANCE SHEET, THE INVESTMENT I N FINANCIAL YEAR 2001-02 ITA NO.2825/DEL/2011 ASSTT.YEAR: 2003-04 14 HAS BEEN CARRIED FORWARD TO THE FINANCIAL YEAR 2002 -03 AND THERE IS NO NEW INVESTMENT IN THE SHARES BUT HE FURTHER SUBMITTED T HAT AS PER BALANCE SHEET, THERE IS AN INTEREST BEARING LOAN OF RS.1,97,96,518 /- FROM BANK OF BARODA WHICH IS CONTINUED FROM THE PREVIOUS YEAR WITH A LI TTLE ENHANCEMENT. HE FURTHER SUBMITTED THAT THE ASSESSEE DID NOT SUBMIT BOOKS OF ACCOUNT AND VOUCHERS BEFORE THE AUTHORITIES BELOW WHICH COULD E NABLE THEM TO VERIFY THE EXPENSES OF FINANCIAL CHARGES PERTAINING TO THE BUS INESS INCOME OF THE ASSESSEE. 19. THE AR SUBMITTED A COPY OF ASSESSMENT ORDER FOR AY 1998-99 DATED 15.3.2001, PROFIT AND LOSS ACCOUNT AND STATEMENT OF ASSESSABLE INCOME FOR AY 1998-99. THE ASSESSEES REPRESENTATIVE ALSO SUB MITTED THAT DURING THE AY 1998-99, FINANCIAL CHARGES TO THE TUNE OF RS.24, 02,032/- WERE ALLOWED BY THE ASSESSEE, THEREFORE, THE SAME CHARGES CANNOT BE DISALLOWED. REPLYING TO THE ABOVE, THE DR SUBMITTED THAT THE PROCEEDINGS OF INCOME TAX ACT DO NOT FOLLOW THE RULE OF RES JUDICATA WHEN THE ASSESSEE HAS MADE CERTAIN INVESTMENTS IN SHARES EARNING TAX FREE INCOME IN PR ECEDING YEARS AND THE SAME HAS BEEN BROUGHT FORWARD TO THE YEAR UNDER CON SIDERATION AND AT THE SAME TIME AND MANNER WHEN THERE ARE INTEREST BEARIN G LOANS IN THE PRECEDING ITA NO.2825/DEL/2011 ASSTT.YEAR: 2003-04 15 YEARS CARRIED FORWARD TO THE YEAR UNDER CONSIDERATI ON, THEN IT INDICATES DIRECT NEXUS BETWEEN THE INVESTMENT MADE TOWARDS EARNING O F TAX FREE INCOME AND INTEREST PAID AS FINANCIAL CHARGES BY THE ASSESSEE. THE DR SUPPORTED THE IMPUGNED ORDER AND SUBMITTED THAT THERE IS NO MERIT IN THE APPEAL. 20. THE ASSESSEE HAS SUBMITTED ONLY COPIES OF ASSES SMENT ORDER AND TRADING AND PROFIT & LOSS ACCOUNT RELATED TO AY 199 8-99 BUT THERE IS NO MATERIAL BEFORE US TO SHOW THE DETAILS OF INTEREST BEARING LOAN AND INVESTMENT EARNING TAX FREE INCOME. WE ALSO OBSERVE THAT THE PRESENT APPEAL IS RELATED TO AY 2003-04 AND IN THE AYS 1999-2000 TO 2002-03, WHAT WAS THE POSITION OF CLAIMS AND THEIR ALLOWANCE IS ALSO NOT BEFORE US. THEREFORE, IT WOULD NOT BE APPROPRIATE TO TAKE AY 1997-98 AS A RU LE OF CONSISTENCY IN THE PRESENT APPEAL FOR AY 2003-04. 21. IN VIEW OF ABOVE, THE ASSESSEE HAS RELIED ON TH E JUDGMENT OF HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF COMMISSI ONER OF INCOME TAX VS HERO CYCLES LTD. REPORTED AS 323 ITR 518 (P& H) WHEREIN THEIR LORDSHIPS HAVE HELD THAT THE EXPENDITURE ON INTERES T WAS SET OFF AGAINST THE INCOME FROM INTEREST AND THE INVESTMENT IN THE SHAR ES AND FUNDS OUT OF DIVIDEND PROCEEDS, AND IN VIEW OF THIS FINDING OF F ACT, DISALLOWANCE U/S 14A WAS NOT SUSTAINABLE, THEREFORE, THIS JUDGEMENT WAS GIVEN IN A PECULIAR CIRCUMSTANCE AND FACT WHEN THE ASSESSEE SET OFF THE EXPENDITURE ON INTEREST ITA NO.2825/DEL/2011 ASSTT.YEAR: 2003-04 16 AGAINST THE INCOME AND DIVIDEND PROCEEDS, IT WAS HE LD THAT FURTHER DISALLOWANCE U/S 14A OF THE ACT WAS NOT SUSTAINABLE . BUT IN THE PRESENT CASE, WE ARE UNABLE TO SEE ANY FACTUAL SITUATION TH AT THE ASSESSEE HAS SET OFF INTEREST EXPENDITURE (FINANCIAL CHARGES) AGAINST TH E TAX FREE INCOME FROM INTEREST AND DIVIDEND PROCEEDS RAISED THROUGH INVES TMENT. THEREFORE, WE RESPECTFULLY HOLD THAT THE BENEFIT OF THE RATIO OF THIS JUDGEMENT IS NOT AVAILABLE TO THE ASSESSEE IN THE PRESENT CASE. 22. THE ASSESSEE HAS RELIED ON THE JUDGMENT OF HONBLE JURISDICTIONAL HIGH COURT OF DELHI IN THE CASE OF COMMISSIONER OF INCOME TAX VS BHARATI TELEVENTURE LTD. REPORTED AS (2011) 331 ITR 502(DELHI) WHEREIN IT WAS HELD AS UNDER:- HELD, DISMISSING THE APPEAL, THAT THE ORDER OF THE COMMISSIONER(APPEALS) AND THE TRIBUNAL SHOWED THAT THE ASSESSEE WAS MAINTAINING A BANK ACCOUNT WITH MIXED COMMON FUNDS IN WHICH ALL DEPOSITS AND WITHDRAWALS WERE MADE. THERE WAS NO SPECIFIC INSTANCE NOTED BY THE ASSESSING OFFICER OF DIRECT NEXUS BETWEEN THE BORRO WED FUNDS AND THE ADVANCES MADE TO THE SUBSIDIARIES. T HE ASSESSING OFFICER HAD MADE GENERAL OBSERVATIONS WIT HOUT POINTING OUT ANY SPECIFIC INSTANCE WHERE AN INTERES T BEARING BORROWING WAS ADVANCED TO THE SUBSIDIARIES OR ESTABLISHING THAT THE BORROWINGS MADE BY THE ASSESS EE WERE NOT FOR BUSINESS PURPOSES. BOTH APPELLATE AUT HORITIES WERE OF THE VIEW THAT THE ASSESSEE HAD EXPLAINED TH E SOURCES OF THE ADVANCES AND INVESTMENTS MADE TO THE SUBSIDIARIES, WHICH COULD NOT BE LINKED TO THE BORR OWED FUNDS AND THAT THE ADVANCES WERE MADE OUT OF THE ASSESSEES OWN CAPITAL. AT THE RELEVANT TIME THE A SSESSEE WAS FOUND TO HAVE ADEQUATE NON-INTEREST BEARING FUN DS BY ITA NO.2825/DEL/2011 ASSTT.YEAR: 2003-04 17 WAY OF SHARE CAPITAL AND RESERVES. EVEN OTHERWISE, THE ADVANCES WERE FOUND TO BE MADE TO THE SUBSIDIARIES FOR BUSINESS CONSIDERATIONS, I.E. OUT OF COMMERCIAL EXP EDIENCY OF THE ASSESSEE. THAT BEING THE FACTUAL POSITION R EFLECTED FROM THE RECORD OF THE ASSESSEE, THE ONUS THAT LAY ON IT STOOD DISCHARGED. THERE WAS NO GROUND TO INTERFERE WITH THOSE FINDINGS. 23. THE ASSESSEES REPRESENTATIVE ALSO RELIED ON TH E JUDGEMENT OF HONBLE SUPREME COURT IN THE CASE OF S.A. BUILDERS LTD. VS CIT(A) (2007) 288 ITR 1(SC) WHEREIN IT WAS HELD AS UNDER:- 'THE QUESTION INVOLVED IN THIS CASE IS ONLY ABOUT T HE ALLOWABILITY OF THE INTEREST ON BORROWED FUNDS AND HENCE WE ARE DEALING ONLY WITH THAT QUESTION. IN OUR OPIN ION, THE APPROACH OF THE HIGH COURT AS WELL AS THE AUTHORITI ES BELOW ON THE AFORESAID QUESTION WAS NOT CORRECT. IN THIS CONNECTION WE MAY REFER TO SECTION 36(1)(II I) OF THE INCOME-TAX ACT, 1961 (HEREINAFTER REFERRED T O AS THE 'ACT') WHICH STATES THAT THE AMOUNT OF THE INTERES T PAID IN RESPECT OF CAPITAL BORROWED FOR THE PURPOSES OF THE BUSINESS OR PROFESSION' HAS TO BE ALLOWED AS A DEDU CTION IN COMPUTING THE INCOME UNDER SECTION 28 OF THE ACT. IN MADHAV PRASAD JATIA V. CIT [1979] 118 I1R 200 (SC) ; AIR 1979 SC 1291, THIS COURT HELD THAT THE EXPRESSION 'FOR THE PURPOSE OF BUSINESS' OCCURRING UNDER THE PROVISION IS WIDER IN SCOPE THAN THE EXPRESSION 'FOR THE PURPOSE OF EARNING INCOME, PROFITS OR GAINS', AND T HIS HAS BEEN THE CONSISTENT VIEW OF THIS COURT. IN OUR OPINION, THE HIGH COURT IN THE IMPUGNED JUDGMENT, AS WELL AS THE TRIBUNAL AND THE INCOME-TA X AUTHORITIES HAVE APPROACHED THE MATTER FROM AN ERRO NEOUS ANGLE. IN THE PRESENT CASE, THE ASSESSEE BORROWED T HE FUND FROM THE BANK AND LENT SOME OF IT TO ITS SISTER CON -CERN (A ITA NO.2825/DEL/2011 ASSTT.YEAR: 2003-04 18 SUBSIDIARY) AS INTEREST-FREE LOAN. THE TEST, IN OUR OPINION, IN SUCH A CASE IS REALLY WHETHER THIS WAS DONE AS A MEASURE OF COMMERCIAL EXPEDIENCY. IN OUR OPINION, THE DECISIONS RELATING TO SECTION 3 7 OF THE ACT WILL ALSO BE APPLICABLE TO SECTION 36(1) (III) BECAUSE IN SECTION 37 ALSO THE EXPRESSION USED IS ' FOR THE PURPOSE OF BUSINESS' IT HAS BEEN CONSISTENTLY HELD IN THE DECISIONS RELATING TO SECTION 37 THAT THE EXPRESSIO N 'FOR THE PURPOSE OF BUSINESS' INCLUDES EXPENDITURE VOLUN-TAR ILY INCURRED FOR COMMERCIAL EXPEDIENCY, AND IT IS IMMAT ERIAL IF A THIRD PARTY ALSO BENEFITS THEREBY. THUS IN ATHERTON V. BRITISH INSULATED AND HELSBY CABLES LTD. [1925] 10 TC 155, IT WAS HELD BY THE HO USE OF LORDS THAT IN ORDER TO CLAIM A DEDUCTION, IT IS ENO UGH TO SHOW THAT THE MONEY IS EXPENDED, NOT OF NECESSITY A ND WITH A VIEW TO DIRECT AND IMMEDIATE BENEFIT, BUT VOLUNTA RILY AND ON GROUNDS OF COMMERCIAL EXPEDIENCY AND IN ORDER TO INDIRECTLY TO FACILITATE THE CARRYING ON THE BUSINE SS. THE ABOVE TEST IN ATHERTON'S CASE [1925] 10 TC 155 (HL) HAS BEEN APPROVED BY THIS COURT IN SEVERAL DECISIONS, E .G., EASTERN INVESTMENTS LTD. V. CIT [1951] 20 ITR I, CI T V. CHANDULAL KESHAVLAL AND CO. [1960] 38 ITR 601, ETC. IN OUR OPINION, THE HIGH COURT AS WELL AS THE TRIBUNAL AND OTHER INCOME-TAX AUTHORITIES SHOULD HA VE APPROACHED THE QUESTION OF ALLOWABILITY OF INTEREST ON THE BORROWED FUNDS FROM THE ABOVE ANGLE. IN OTHER WORDS , THE HIGH COURT AND OTHER AUTHORITIES SHOULD HAVE ENQUIR ED AS TO WHETHER THE INTEREST-FREE LOAN WAS GIVEN TO THE SISTER COMPANY (WHICH IS A SUBSIDIARY OF THE ASSESSEE) AS A MEASURE OF COMMERCIAL EXPEDIENCY, AND IF IT WAS, IT SHOULD HAVE BEEN ALLOWED. THE EXPRESSION 'COMMERCIAL EXPEDIENCY' IS AN EXPRESSION OF WIDE IMPORT AND INCLUDES SUCH EXPENDI TURE AS A PRUDENT BUSINESSMAN INCURS FOR THE PURPOSE OF BUSINESS. THE EXPENDITURE MAY NOT HAVE BEEN INCURRE D UNDER ANY LEGAL OBLIGATION, BUT YET IT IS ALLOWABLE AS ITA NO.2825/DEL/2011 ASSTT.YEAR: 2003-04 19 BUSINESS EXPENDITURE IF IT WAS INCURRED ON GROUNDS OF COMMERCIAL EXPEDIENCY. NO DOUBT, AS HELD IN MADHAV PRASAD JATIA V. CIT [1979] 118 200 (SC), IF THE BORROWED AMOUNT WAS DON ATED FOR SOME SENTIMENTAL OR PERSONAL REASONS AND NOT ON THE GROUND OF COMMERCIAL EXPEDIENCY, THE INTEREST THERE ON COULD NOT HAVE BEEN ALLOWED UNDER S 36(I)(III) OF T HE ACT. IN MADHAV PRASAD'S CASE [1979] 118 ITR 200 (SC), TH E BORROWED AMOUNT WAS DONATED TO A COLLEGE WITH A VIE W TO MEMORATE THE MEMORY OF THE ASSESSEE'S DECEASED HUSB AND WHOM THE COLLEGE WAS TO BE NAMED. IT WAS HELD BY TH IS COURT THAT INTEREST ON THE BORROWED FUND IN SUCH A CASE COULD NOT BE ALLOWED, AS IT COULD NOT BE SAID THAT IT WAS FOR COMMERCIAL EXPEDIENCY. THUS, THE RATIO OF MADHAV PRASAD JATIA'S CASE [1979] 118 ITR 200(SC) IS THAT THE BORROWED FUND ADVANCED TO A THIRD PARTY SHOULD BE FOR COMMERCIAL EXPEDIENCY IF IT IS SOUGHT TO BE ALLOWED UNDER SECT ION 36(1)(III) OF THE ACT.' 24. THE DR ALSO SUBMITTED THAT IN THE CASE OF BHARA TI TELEVENTURE (SUPRA), THE HONBLE DELHI HIGH COURT HELD THAT WHERE THE AS SESSEE WAS MAINTAINING A BANK ACCOUNT WITH MIXED COMMON FUNDS FROM WHICH A LL DEPOSITS AND WITHDRAWALS WERE MADE, THEN IF THERE WAS NO SPECIFI C INSTANCE OBSERVED BY THE AO SHOWING A DIRECT NEXUS BETWEEN THE BORROWED FUNDS AND THE ADVANCES MADE TO THE SUBSIDIARIES, THEN WHEN POINTI NG OUT ANY SPECIFIC INSTANCE ON THE BASIS OF GENERAL OBSERVATION AND WI THOUT ESTABLISHING THE FACT THAT THE BORROWINGS MADE BY THE ASSESSEE WAS NOT FO R THE BUSINESS PURPOSE, THE DISALLOWANCE IS NOT SUSTAINABLE. THE DR FURTHE R SUBMITTED THAT IN THE ITA NO.2825/DEL/2011 ASSTT.YEAR: 2003-04 20 PRESENT CASE, THE SITUATION IS DIFFERENT BECAUSE TH E ASSESSEE HAS TAKEN INTEREST BEARING LOANS AND AT THE SAME TIME HE HAS VOLUMINOU S INVESTMENT IN SHARES/SECURITIES WHICH ACCRUE IN TAX FREE INCOME I N THE HANDS OF THE ASSESSEE. 25. ON CAREFUL CONSIDERATION OF ABOVE SUBMISSIONS A ND CITATIONS BEFORE US, IN THE CASES OF S.A. BUILDERS (SUPRA) AND MADHAV PR ASAD JATIA (SUPRA), THE HONBLE APEX COURT HELD THAT THE AUTHORITIES SHOULD HAVE ENSURED AS TO WHETHER THE INTEREST FREE LOAN WAS GIVEN TO THE SIS TER CONCERN (WHICH IS A SUBSIDIARY OF THE ASSESSEE) AS A MEASURE OF COMMERC IAL EXPEDIENCY AND IF IT WAS, THEN IT SHOULD HAVE BEEN ALLOWED. BUT IN THE PRESENT CASE, THE ISSUE OF COMMERCIAL EXPEDIENCY IN ADVANCING INTEREST FREE LO AN TO THE SISTER CONCERN HAS NOT BEEN CONSIDERED BY THE AUTHORITIES BELOW. I N THE PRESENT CASE, ASSESSEE HAS NEITHER SUBMITTED ANY DETAILS PERTAINI NG TO THE FINANCIAL CHARGES AND INTEREST AS CLAIMED IN THE PROFIT & LOSS ACCOUN T AMOUNTING TO RS.29,34,984/- NOR EXPLAINED THE PURPOSE OF INTERES T BEARING LOAN AND ITS USE FOR COMMERCIAL EXPEDIENCY AND NEVER FURNISHED THE S OURCE OF FUNDS OF INVESTMENT YIELDING TAX FREE INTEREST AND DIVIDEND FOR THE ASSESSEE. 26. THE ONUS IS ON THE ASSESSEE TO PROVE THAT THE E XPENDITURE OR LOSS IS ADMISSIBLE. THE ASSESSEE HAS TO PROVE THAT THE EXPE NDITURE OR LOSS CLAIMED IS AN ADMISSIBLE DEDUCTION ( COMMISSIONER OF INCOME TAX V CALCUTTA ITA NO.2825/DEL/2011 ASSTT.YEAR: 2003-04 21 AGENCY LTD. (1951) 19 ITR 191 (SC). IF THE ASSESSEE DOES NOT PROVE OR FAILS TO PROVE THAT THE DEDUCTION IS ADMISSIBLE, TH EN THE INFERENCE GOES AGAINST HIM/HER (COMMISSIONER OF INCOME TAX V ASHWANI KUMAR LILADHAR (1997) 225 ITR 576 (ALL) . HOWEVER, ONCE THE ASSESSEE HAS DISCHARGED THE INITIAL ONUS TO PROVE THAT THE DEDUC TION IS ALLOWABLE, THE ONUS TO PROVE THAT THE DEDUCTION IS NOT ADMISSIBLE, SHIF TS TO THE TAX AUTHORITIES (JANYANTILAL KISHORILAL V CIT(1985) 154 ITR 821 (MP ) . 27. THIS IS WELL ACCEPTED PRINCIPLE THAT ASSESSEE I S UNDER OBLIGATION TO ESTABLISH ITS CLAIM OF EXPENDITURE INCURRED FOR BUS INESS PURPOSE. THE ONUS TO SHOW THAT THE INTEREST BEARING LOANS WERE TAKEN FOR BUSINESS EXPEDIENCY AND INDEED THE LOAN AMOUNT WAS USED FOR THE SAME WAS ON THE ASSESSEE TO ESTABLISH THE CLAIM OF FINANCIAL CHARGES AS CLAIMED U/S 36(1)(III) OF THE ACT. THE ASSESSMENT WAS FINALIZED IN THE ABSENCE OF BOOK S OF ACCOUNTS AND VOUCHERS PERTAINING TO EXPENSES CLAIMED. IN VIEW O F ABOVE, SINCE DOCUMENTS, DETAILS AND VOUCHERS PERTAINING TO THIS ISSUE OF DISALLOWANCE OF FINANCIAL CHARGES/INTEREST AMOUNTING TO RS. RS.29,3 4,984/- AS CLAIMED BY THE ASSESSEE U/S 36(1)(III) OF THE ACT HAVE NOT BEEN EX AMINED BY THE ASSESSING OFFICER, THEREFORE, WE FIND IT APPROPRIATE THAT THE SAME DESERVES TO BE RESTORED TO THE FILE OF THE ASSESSING OFFICER. ITA NO.2825/DEL/2011 ASSTT.YEAR: 2003-04 22 28. AT THIS STAGE, IT WOULD ALSO BE APPROPRIATE TO MENTION THAT THE HONBLE JURISDICTIONAL HIGH COURT OF DELHI IN THE CASE OF MAXOPP INVESTMENT LTD. VS COMMISSIONER OF INCOME TAX (2011) 203 TAXMA N 364 (DELHI) HELD THAT SUB-SECTION(1) OF SECTION 14A CLEARLY STI PULATES THAT FOR THE PURPOSES OF COMPUTING TOTAL INCOME UNDER CHAPTER-IV (COMPUTATION OF TOTAL INCOME), NO DEDUCTION SHALL BE ALLOWED IN RESPECT O F EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME UNDER THE SAID ACT. THEIR LORDSHIP LAID A L OT OF EMPHASIS ON THE EXPRESSION INCURRED AND IN RELATION TO. THEIR L ORDSHIPS ALSO MADE AN OBSERVATION THAT MOST OF THE ASSESSEES CONTEND THAT THE WORD INCURRED MUST BE TAKEN LITERALLY IN THE SENSE THAT EXPENDITURE HA VE ACTUALLY TAKEN PLACED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTA L INCOME. 29. HONBLE CALCUTTA HIGH COURT IN THE CASE OF DHANUKA & SONS VS COMMISSIONER OF INCOME TAX 12 TAXMANN.COM 227 (CAL. ) HELD THAT:- AFTER HEARING THE LEARNED COUNSEL APPEARING FOR TH E PARTIES AND AFTER GOING THROUGH THE MATERIALS ON RE CORD AND THE DECISIONS CITED BY MR. KHAITAN, WE FIND THAT TH E SUPREME COURT IN THE CASES OF CIT V. MAHARASTRA SUGAR MILLS LTD. [1971] 82 ITR 452 AND RAJASTHAN STATE WAREHOUSING CORPN. V. CIT [2000) 242 ITR 450/109 TAXMAN 145HAVI NG HELD THAT WHERE THERE IS ONE INDIVISIBLE BUSINESS G IVING RISE TO TAXABLE INCOME AS WELL AS EXEMPT INCOME, THE ENT IRE EXPENDITURE INCURRED IN RELATION TO THAT BUSINESS W OULD HAVE TO BE ALLOWED EVEN IF A PART OF THE INCOME EARNED F ROM THE BUSINESS IS EXEMPT FROM TAX, SECTION 14A OF THE ACT WAS ITA NO.2825/DEL/2011 ASSTT.YEAR: 2003-04 23 ENACTED TO OVERCOME THOSE JUDICIAL PRONOUNCEMENTS. THE OBJECT OF SECTION 14A OF THE ACT IS TO DISALLOW THE DIRECT AND INDIRECT EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. 8. IN THE CASE BEFORE US, THERE IS NO DISPUTE THAT PART OF THE INCOME OF THE ASSESSEE FROM ITS BUSINESS IS FROM DI VIDEND WHICH IS EXEMPT FROM TAX WHEREAS THE ASSESSEE WAS U NABLE' TO PRODUCE ANY MATERIAL BEFORE THE AUTHORITIES BELO W SHOWING THE SOURCE FROM WHICH SUCH SHARES WERE ACQU IRED. MR. KHAITAN STRENUOUSLY CONTENDED BEFORE US THAT FO R THE LAST FEW YEARS BEFORE THE RELEVANT PREVIOUS YEAR, N O NEW SHARE HAS BEEN ACQUIRED AND THUS, THE LOAN THAT WAS TAKEN AND FOR WHICH THE INTEREST IS PAYABLE BY THE ASSESS EE WAS NOT FOR ACQUISITION OF THOSE OLD SHARES AND, THEREFORE, THE AUTHORITIES BELOW ERRED IN LAW IN GIVING BENEFIT OF PROPORTIONATE DEDUCTION. 9. IN OUR OPINION, THE MERE FACT THAT THOSE SHARES WERE OLD ONES AND NOT ACQUIRED RECENTLY IS IMMATERIAL. IT IS FOR THE ASSESSEE TO SHOW THE SOURCE OF ACQUISITION OF THOSE SHARES BY PRODUCTION OF MATERIALS THAT THOSE WERE ACQUIRED FR OM THE FUNDS AVAILABLE IN THE HANDS OF THE ASSESSEE AT THE RELEVANT POINT OF TIME WITHOUT TAKING BENEFIT OF ANY LOAN. I F THOSE SHARES WERE PURCHASED FROM THE AMOUNT TAKEN IN LOAN , EVEN FOR INSTANCE, FIVE OR TEN YEARS AGO, IT IS FOR THE ASSESSEE TO SHOW BY THE PRODUCTION OF DOCUMENTARY EVIDENCE THAT SUCH LOANED AMOUNT HAD ALREADY BEEN PAID BACK AND FOR TH E RELEVANT ASSESSMENT YEAR, NO INTEREST IS PAYABLE BY THE ASSESSEE FOR ACQUIRING THOSE OLD SHARES. IN THE ABS ENCE OF ANY SUCH MATERIALS PLACED BY THE ASSESSEE, IN OUR O PINION, THE AUTHORITIES BELOW RIGHTLY HELD THAT PROPORTIONA TE AMOUNT SHOULD BE DISALLOWED HAVING REGARD TO THE TOTAL INC OME AND THE INCOME FROM THE EXEMPT SOURCE. IN THE ABSENCE O F ANY MATERIAL DISCLOSING THE SOURCE OF ACQUISITION OF SH ARES WHICH IS WITHIN THE SPECIAL KNOWLEDGE OF THE ASSESSEE, TH E ASSESSING AUTHORITY TOOK A MOST REASONABLE APPROACH IN ASSESS MENT. , ITA NO.2825/DEL/2011 ASSTT.YEAR: 2003-04 24 30. AS WE HAVE ALREADY OBSERVED, IN TERMS OF AFORES AID DECISIONS OF HONBLE JURISDICTIONAL HIGH COURT IN MAXOPP INVESTM ENT LTD. (SUPRA) EVEN WHEN ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN I NCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME, TH E ASSESSING OFFICER IS REQUIRED TO VERIFY THE CORRECTNESS OF SUCH CLAIM. WHERE ON THE BASIS OF OBJECTIVE CRITERIA AND AFTER GIVING THE ASSESSEE A REASONABLE OPPORTUNITY OF HEARING, THE ASSESSING OFFICER IS NOT SATISFIED WIT H CORRECTNESS OF THE CLAIM OF THE ASSESSEE, THEN HE SHALL HAVE TO REJECT THE C LAIM OF THE ASSESSEE BY RECORDING REASONS FOR DOING SO. IN THIS JUDGMENT O F MAXOPP (SUPRA), THE HONBLE HIGH COURT CONCLUDED THAT HAVING DONE SO, T HE ASSESSING OFFICER HAS TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. 31. HONBLE JURISDICTIONAL HIGH COURT OF DELHI IN THE C ASE OF CIT VS MACHINO PLASTICS LTD. IN ITA NO.92/2011 VIDE DATED 28.2.2012 HELD THAT BECAUSE OF FAILURE OF THE ASSESSEE TO FURNISH RELEV ANT DETAILS AND PARTICULARS, THE ASSESSING OFFICER BECAME HANDICAPPED AND THEN T HE MATTER WAS RESTORED TO THE FILE OF THE ASSESSING OFFICER. IN THE PRESE NT APPEAL, THERE IS NOTHING BEFORE US TO SUGGEST AS TO WHETHER OR NOT THE ASSES SEE FURNISHED THE RELEVANT DETAILS OF BOOKS OF ACCOUNTS BEFORE THE ASSESSING O FFICER WHILE MAKING THE DISALLOWANCE IN TERMS OF PROVISION OF SECTION 14A O F THE ACT. FROM THE ITA NO.2825/DEL/2011 ASSTT.YEAR: 2003-04 25 ASSESSMENT AND IMPUGNED ORDER, WE OBSERVE THAT NEIT HER THE ASSESSEE PLACED RELEVANT DETAILS, EVIDENCE AND BOOKS OF ACCOUNTS BE FORE THE ASSESSING OFFICER NOR THE COMMISSIONER OF INCOME TAX(A) SEEMS TO HAVE UNDERTAKEN ANY EXERCISE OR EFFORT TO ASCERTAIN THE DETAILS OF EXPENDITURE OBJECTIVELY IN MANAGING AND SUPERVISING HUGE INVESTMENT OF RS.1,05 ,39,000 IN VARIOUS SHARES IN EARLIER YEARS AND THE SAME WAS BROUGHT FO RWARD TO THE YEAR UNDER CONSIDERATION. 32. IN VIEW OF DISCUSSION HEREINABOVE, WE FINALLY O BSERVE THAT THE ONUS WAS ON THE ASSESSEE TO ESTABLISH HIS CLAIM OF FINAN CIAL CHARGES/INTEREST U/S 36(1)(III) OF THE ACT TO PROVE THE FACT THAT INTERE ST BEARING LOANS WERE TAKEN FOR BUSINESS AND INDEED USED FOR THE SAME PURPOSE A ND INTEREST FREE LOANS WERE ADVANCED FROM SURPLUS FUNDS OR UNDER BUSINESS EXPEDIENCY AND IF THE ASSESSEE DOES NOT PROVE OR FAILS TO PROVE THAT THE DEDUCTION IS ADMISSIBLE, THEN THE INFERENCE GOES AGAINST HIM/HER. ONCE THE ASSESSEE HAS DISCHARGED THE INITIAL ONUS TO PROVE THAT THE DEDUCTION IS ALL OWABLE, THE ONUS THAT DEDUCTION IS NOT ADMISSIBLE SHIFTS TO THE TAX AUTHO RITIES. 33. IN THE CASE IN HAND, SINCE THIS FACT IS NOT IN DISPUTE THAT THE ASSESSEE DID NOT SUBMIT BOOKS OF ACCOUNT AND VOUCHERS BEFORE AUTHORITIES BELOW TO SHOW THAT THE INTEREST BEARING LOANS WERE TAKEN FOR BUSINESS PURPOSE AND INDEED USED FOR THE SAME AND INVESTMENT WHICH ACCRU E TAX FREE INCOME WERE ITA NO.2825/DEL/2011 ASSTT.YEAR: 2003-04 26 MADE FROM DIFFERENCE SOURCE OF FUNDS AND WHICH HAS NO RELATION TO INTEREST BEARING LOANS. AT THE SAME TIME, WE ALSO OBSERVE T HAT THERE IS NO MATERIAL BEFORE US TO SHOW THAT THE ASSESSING OFFICER HAD AN OPPORTUNITY TO EXAMINE THE ISSUE OF CLAIM U/S 36(1)(III) AND TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME IN ACCORDANCE WITH SUCH METHOD PRESCRIBED IN SECTION 1 4A(2) OF THE ACT. 34. IN VIEW OF ABOVE DISCUSSION, WE ARE INCLINED TO HOLD THAT THE ISSUE OF DISALLOWANCE OF FINANCIAL CHARGES (INTEREST) REQUIR ES DE NOVO ADJUDICATION IN ACCORDANCE WITH LAW IN THE LIGHT OF OUR AFORESAID O BSERVATIONS AND VARIOUS JUDICIAL PRONOUNCEMENTS AT THE END OF ASSESSING OFF ICER AND WE RESTORE THE ISSUE TO HIS FILE. WE DIRECT THAT AFTER ALLOWING S UFFICIENT OPPORTUNITY OF BEING HEARD TO THE ASSESSEE, THE ASSESSING OFFICER SHALL PASS A SPEAKING ORDER BY GIVING REASONS FOR HIS SATISFACTION OR OTHERWISE AS POINTED OUT BY HONBLE DELHI HIGH COURT IN THE CASE OF MAXOPP INVESTMENT L TD. (SUPRA) TO DETERMINE THE AMOUNT OF EXPENDITURE ON FINANCIAL CH ARGES/INTEREST INCURRED IN RELATION TO EARNING BUSINESS INCOME AND COMMERCI AL EXPEDIENCY. THE ASSESSING OFFICER IS ALSO DIRECTED TO BRING OUT THE EXPENDITURE (FINANCIAL CHARGES/INTEREST) INCURRED IN MANAGING AND SUPERVIS ING HUGE INVESTMENTS RELATED TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT, IN TERMS OF PROVISIONS OF SECTION 14A(2) O F THE ACT. ITA NO.2825/DEL/2011 ASSTT.YEAR: 2003-04 27 35. THE ASSESSEE IS DIRECTED TO FURNISH ALL RELEVAN T DETAILS AND EVIDENCE OF EXPENDITURE ACTUALLY INCURRED IN CREATING, MANAGING AND SUPERVISING THE INVESTMENTS IN SHARES ALONG WITH RELEVANT BOOKS OF ACCOUNTS. THE ASSESSEE IS ALSO DIRECTED TO ESTABLISH HIS CLAIM OF FINANCIAL C HARGES/INTEREST U/S 36(1)(III) INCURRED FOR BUSINESS PURPOSE AND UNDER COMMERCIAL EXPEDIENCY WHICH IS NECESSARY TO DISCHARGE THE ONUS TO PROVE THAT THE D EDUCTION IS ALLOWABLE. THE APPEAL OF THE ASSESSEE MAY BE TREATED AS PARTLY ALLOWED APROPOS GROUND NO. 2 FOR STATISTICAL PURPOSES. 36. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS D ISMISSED ON GROUND NO. 1 AND PARTLY ALLOWED FOR GROUND NO. 2 AS INDICATED AB OVE. ORDER PRONOUNCED IN THE OPEN COURT ON 07.12.2012. SD/- SD/- (A.N. PAHUJA) (CHANDRAMOHAN GARG) ACCOUNTANT MEMBER JUDICIAL MEMBER DT. 7 TH DECEMBER, 2012 GS COPY FORWARDED TO:- 1. APPELLANT 2. RESPONDENT 3. C.I.T.(A) 4. C.I.T. 5. DR BY ORDER ASSTT.REGISTRAR