PORT INVESTMENT CO. P LTD ( NOW MERGED WITH ANDROMEDA INVESTMENT & FINANCE P. LTD )`, MUMBAI V. DCIT 7(1), MUMBAI

ITA 4145/MUM/2010

• Counselvise Citation: 414519914 RSA 2010
• Duration Of Justice: 1 year(s) 2 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-08-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 01-08-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 21-05-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PARTHA SARATHI NAIK
• Assessee Lawyers: DEVDATTA MAINKAR
• Keywords: Business income; Earning of tax free income; Wrong claim
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL 'C' BENCH, MUMBAI BEFORE SHRI R.V. EASWAR, PRESIDENT AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NOA. 4143, 4144 & 4145/MUM/2010 (ASSESSMENT YEARS: 1999-2000, 2004-05 & 2005-06) PORT INVESTMENT CO. PVT. LTD. D C I T - 7(1) (MERGED WITH ANDROMEDA INVEST. & FINANCE P. LTD.) AAYAKAR BHAVAN, M.K. ROAD MAHINDRA TOWERS, DR. G.M. BHOSALE MARG VS. MUMBAI 400020 P.K. KURNE CHOWK, WORLI, MUMBAI - 18 PAN - AAACP 2297D APPELLANT RESPONDENT APPELLANT BY: SHRI DEVDATTA MAINKAR RESPONDENT BY: SHRI PARTHASARATHI NAIK DATE OF HEARING: 01.08.2011 DATE OF PRONOUNCEMENT: 12.08.2011 O R D E R PER B. RAMAKOTAIAH, A.M. THESE THREE APPEALS ARE BY THE ASSESSEE AGAINST THE ORDERS OF THE CIT(A) XIII, MUMBAI DATED 05.01.2010, 07.01.2010, RESPECTI VELY. THE APPEALS IN ITA NO. 4144 & 4145/MUM/2010 ARE ON QUANTUM FOR A.Y . 2004-05 AND 2005-06 WHEREAS THE APPEAL IN ITA NO. 4143/MUM/2010 IS ON PENALTY UNDER SECTION 271(1)(C) FOR A.Y. 1999-2000. 2. APPEALS IN A.Y. 2004-05 AND 2005-06 ARE CONSIDERED FIRST. IN THESE TWO APPEALS THERE ARE COMMON GROUNDS ON ISSUE OF DI SALLOWANCE OF INTEREST CLAIM. FOR THE SAKE OF CLARITY GROUNDS RAISED IN A. Y. 2004-05 ARE EXTRACTED HERE UNDER: - 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LEARNED CIT(A) ERRED IN CONCLUDING THAT THE COMPAN Y HAD NOT COMMENCE AND FURTHER ERRED IN CONFIRMING DISALLOWAN CE OF INTEREST EXPENDITURE OF RS.73,90,221 AS NON-BUSINES S EXPENDITURE. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) FURTHER ERRED IN CONFIRMING DISALLOW ANCE OF ITA NOS. 4143, 4144 & 4145/MUM/2010 PORT INVESTMENT CO. PVT. LTD. 2 RS.73,90,221 U/S. 14A BY ATTRIBUTING IT TO EARNING OF EXEMPT INCOME. THE AMOUNT INVOLVED IN A.Y. 2005-06 WAS ` 69,62,000/-. 3. BRIEFLY STATED, ASSESSEE IS AN INVESTMENT COMPANY A ND CLAIMED INTEREST EXPENDITURE IN RESPECTIVE ASSESSMENT YEARS AS DEDUCTION IN THE P & L ACCOUNT. THE A.O. NOTICED THAT ASSESSEES INCOMES ARE FROM DIVIDEND, INTEREST ON SECURITIES AND DEBENTURES, WHICH ARE SH OWN AS INVESTMENTS IN THE BALANCE SHEET AND THEREFORE HELD THAT ASSESSEE IS NOT ENGAGED IN ANY BUSINESS ACTIVITY AND DEDUCTION UNDER SECTION 36(1) (III) ON ACCOUNT OF INTEREST PAID ON BORROWALS CAN ONLY BE ALLOWED WHIL E WORKING OUT BUSINESS INCOME AND NOT FOR EARNING CAPITAL GAIN/INCOME FROM OTHER SOURCES. THE A.O. INVOKED THE PRINCIPLES ESTABLISHED BY THE HON' BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. AMRITABEN 238 ITR 777 AND HO N'BLE GUJARAT HIGH COURT IN THE CASE OF SARABHAI SONS P. LTD. 201 ITR 464. HE HELD THAT THE COMPANY CARRYING ON INVESTMENT DOES NOT MEAN THAT I T WAS CARRYING ON A BUSINESS, THEREFORE HE DISALLOWED THE INTEREST UNDE R SECTION 36(1)(III). NOT ONLY THAT THE A.O. ALSO INVOKED SECTION 14A AS ASSE SSEE HAD DIVIDEND AND OTHER INCOMES, WHICH WERE EXEMPT AND A SIMILAR AMOU NT WAS ALSO DISALLOWED UNDER SECTION 14A BY DISCUSSING IT SEPAR ATELY. THEREFORE, THE DISALLOWANCE IS ONLY OF ONE AMOUNT BUT WAS DISALLOW ED UNDER TWO DIFFERENT SECTIONS, DISCUSSING THEM SEPARATELY. ASSESSEE IS C ONTESTING IT SEPARATELY IN THESE GROUNDS. 4. IT WAS THE SUBMISSION OF THE LEARNED COUNSEL THAT E VEN THOUGH ASSESSEE COMPANY IS INVESTING FUNDS ASSESSEE COMPAN Y HAS TO GET THE DEDUCTION UNDER SECTION 36(1)(III) AS IT WAS CONSID ERED AS BUSINESS ACTIVITY OF ASSESSEE. HE RELIED ON THE ORDERS OF THE ITAT FOR A .Y. 1985-86 AND 1986-87 IN ITA NO. 7065 & 7065/BOM/91 WHEREIN THE ITAT HELD THAT INTEREST ON BORROWED CAPITAL IS TO BE ALLOWED UNDER THE HEAD B USINESS. IT WAS HELD THAT HAVING REGARD TO THE OBJECTS OF THE ASSESSEE COMPA NY IT BELONG TO THE RARE BUT NOT UNKNOWN CATEGORY OF THE COMPANIES WHICH CAR RY ON BUSINESS OF HOLDING OF INVESTMENTS. RELYING ON THE ABOVE FINDI NGS, IT WAS THE SUBMISSION THAT ASSESSEE IS IN THE BUSINESS OF INVE STMENT, THEREFORE, DEDUCTION IS ALLOWABLE UNDER SECTION 36(1)(III). WI TH REFERENCE TO THE ITA NOS. 4143, 4144 & 4145/MUM/2010 PORT INVESTMENT CO. PVT. LTD. 3 DEDUCTION UNDER SECTION 14A IT WAS SUBMITTED THAT A SSESSEE HAD EXEMPT INCOME ON DIVIDENDS AND LONG TERM CAPITAL GAINS AND ONLY PROPORTIONATE EXPENDITURE ON THAT CAN BE DISALLOWED UNDER SECTION 14A, BUT NOT THE ENTIRE INTEREST INCOME. HE REFERRED TO THE JUDGEMENT OF TH E HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. V S. DCIT 328 ITR 81 WITH REFERENCE TO THE PRINCIPLES ESTABLISHED FOR DISALLO WING THE AMOUNT UNDER SECTION 14A FOR ASSESSMENT YEARS PRIOR TO 2008-09. THE LEARNED COUNSEL ALSO PLACED ON RECORD THE ORDERS OF THE ITAT IN ITA NO. 2237 & 2263/MUM/2006 FOR A.Y. 2003-04, WHERE CONSEQUENT TO THE FINDINGS IN A.Y. 1999-2000 BY THE CIT(A) WHICH WAS UPHELD BY THE ITAT IN THAT YEAR, T HE MATTER WAS RESTORED TO THE FILE OF THE A.O. IT WAS THE PRAYER THAT ASSESSE E HAS NO OBJECTION IF THE MATTERS ARE RESTORED BACK TO THE FILE OF THE A.O. 5. THE LEARNED D.R., HOWEVER, STATED THAT ASSESSEE CAN NOT BE CONSIDERED AS COMPANY DOING BUSINESS AS THE INVESTMENTS ARE HE LD FOR THE PURPOSE OF EARNING DIVIDEND INCOME AND CAPITAL GAINS ONLY AND REFERRED TO THE FINDINGS OF THE CIT(A) IN BOTH THE YEARS WITH REFERENCE TO T HE NATURE OF INCOME AND ALSO THE FACT THAT ASSESSEE IS OFFERING SALE OF SHA RES AS CAPITAL GAINS BUT NOT AS BUSINESS INCOME. THEREFORE, THE STOCKS ARE NOT T AKEN AS STOCK IN TRADE BUT ONLY AS INVESTMENTS. THE LEARNED D.R. FURTHER S UBMITTED THAT THE DISALLOWANCES WERE PROPERLY MADE UNDER SECTION 36(1 )(III) AND ALSO UNDER SECTION 14A. 6. WE HAVE CONSIDERED THE ISSUE. AS SEEN FROM THE ORDE R OF THE HON'BLE ITAT IN A.Y. 1985-86 WHEREIN SIMILAR ISSUE WAS CONT ESTED BY THE ASSESSEE THAT CLAIM OF INTEREST UNDER SECTION 36(1)(III) CAN BE ALLOWED AGAINST BUSINESS INCOME, THE ITAT CONSIDERED THE ISSUE AND HELD AS U NDER: - 6. TO OUR MIND, SIMPLY BECAUSE THE ASSESSEE DEALT -IN THE SHARES OF A PARTICULAR COMPANY, IT CANNOT BE CONCLUDED THAT T HE SHARES IN QUESTION WERE HELD ONLY AS INVESTMENTS. THERE IS NO EVIDENCE THAT THE MANAGEMENT OF THE ASSESSEE-COMPANY WAS IN ANY WAY R ELATED TO THAT OF M/S. MAHINDRA AND MAHINDRA LTD. THE OBJECTS OF THE APPELLANT-COMPANY AUTHORISE IT TO DEAL IN SHARES, E VENTHOUGH IT IS DESCRIBED AS CARRYING ON BUSINESS AS INVESTORS AND FINANCIERS. THE SHARE-CAPITAL OF THE APPELLANT-COMPANY IS A MEAGRE AMOUNT OF RS.12,000/-. IT ACQUIRED ALL THE INVESTMENTS WITH I NTEREST BEARING BORROWED FUNDS. IT IS NOT NORMAL FOR AN ASSESSEE TO ACQUIRE ITA NOS. 4143, 4144 & 4145/MUM/2010 PORT INVESTMENT CO. PVT. LTD. 4 INVESTMENTS OUT OF BORROWED FUNDS PARTICULARLY WHEN THE NET WORTH IS ONLY A NOMINAL AMOUNT OF RS.12,000/-. IN THE CASE O F SUTLEJ COTTON MILLS SUPPLY AGENCY LIMITED (100 ITR 706), THE APEX COURT HELD THAT, ONE OF THE INSIGNIA OF A TRADING TRANSACTION, IS TH EIR ACQUISITION OUT OF INTEREST BEARING BORROWED FUNDS. HAVING REGARD TO T HE OBJECTS OF THE APPELLANT-COMPANY, WE ARE OF THE VIE THAT IT BELONG S TO THE RARE BUT NOT UNKNOWN CATEGORY OF THE COMPANIES WHICH CARRY O N BUSINESS OF HOLDING OF INVESTMENTS REGARDING WHICH THE APEX C OURT IN THE CASE OF CIT VS. DISTRIBUTORS (BARODA) P. LTD. (83 ITR 37 7) OBSERVED AS FOLLOWS: - WE NEXT COME ACROSS ANOTHER EXPRESSION WHICH IS FA R MORE DIFFICULT TO COMPREHEND THAN THE ONE THAT WE WERE CONSIDERING TILL NOW. SEC . 23A SPEAKS OF THE BUSINESS OF HOLDING OF INVESTMENTS. HERE COMES THE ENIGMA. IT IS CLEAR TO UNDERSTAND WHEN THE SECTION SPEAKS OF A COMPANY HAVING THE BUSINESS OF DEALING IN INVESTMENTS THOUGH TO SAY THAT THE COMPANY IS DEALING IN INVEST MENTS MAY, AT FIRST SIGHT, LOOK SOMEWHAT INCONGRUOUS. WHEN THE LEGISLATURE SPOKE OF DEALINGS IN INVESTMENT, IT MEANT DEALING IN SHARES, STOCK AND SECURITIES, ETC. BUT WHEN A PERSON INVESTS IN THE SHARES OF SOME OF THE COMPANIES, IT IS DIFFICULT TO SAY THAT HIS BUSINESS IS ONE OF INVESTING. IN COMMERCIAL CIRCLES INVESTING IS NOT C ONSIDERED AS BUSINESS. AN INVESTOR MAY FEEL PERPLEXED IF HE IS CALLED A BUSINESSMAN. IT MAY BE OBSERVED FROM THE REMARKS OF THE APEX COU RT THAT THERE CAN BE A COMPANY, WHICH, PARADOXICALLY DEALS IN INVEST MENTS AND WE ARE OF THE VIEW THAT THE APPELLANT-COMPANY IS ONE S UCH COMPANY. AS ALREADY MENTIONED THAT THERE IS NO EVIDENCE THAT TH E MANAGEMENT OF THE APPELLANT-COMPANY IS IN ANY WAY RELATED TO OR I NTERESTED IN THE CONTROL AND MANAGEMENT OF M/S. MAHINDARA AND MAHIND ARA LTD. IN THESE CIRCUMSTANCES, WE ARE OF THE VIEW THAT THE SH ARES IN QUESTION ARE HELD ONLY AS STOCK-IN-TRADE. SO, THE EXPENDITUR E INCURRED BY THE APPELLANT-COMPANY WHICH CONSISTS MOSTLY OF INTEREST BEARING BORROWED FUNDS HAS TO BE CONSIDERED UNDER THE HEAD BUSINESS. THE LOSS SO COMPUTED HAS TO BE CARRIED FORWARD FOR THE PURPOSE OF SET OFF AGAINST THE BUSINESS INCOME OF THE SUBSEQUENT YEAR. WE MAY HOWEVER HASTEN TO ADD THAT THE DIVIDEND INCOME AS S UCH HAS TO BE COMPUTED ONLY UNDER THE HEAD OTHER SOURCES IN VIE W OF THE PROVISIONS OF SECTION 56(2)(I) OF INCOME-TAX ACT. I N THIS CONTEXT, WE MAY ALSO MENTION THAT THE INTEREST ON THE BORROWED FUND S HAS TO BE ALLOWED AS DEDUCTION UNDER SEC. 36(1)(III) EVENTHOU GH THE DIVIDEND INCOME IS SEPARATELY COMPUTED UNDER THE HEAD OTHER SOURCES. IN THIS CONTEXT, WE RELY UPON THE DECISION OF THE GUJARAT H IGH COURT IN THE CASE OF CIT VS. COTTON FABRICS LTD. (131 ITR 99) IN WHICH AS PER THE HEAD-NOTE OF THE DECISION IT WAS HELD AS FOLLOWS: - HELD, (I) THAT THOUGH THE TOTAL INCOME OF THE ASSE SSEE WAS IN THE COURSE OF ITS BUSINESS, IT DERIVED PART OF ITS INCOME FROM DIVIDE NDS AND COMPUTATION OF THAT INCOME FROM DIVIDENDS WAS TO BE DONE IN ACCORDANCE WITH THE PROVISIONS OF SS. 56 AND 57. BUT THE COMPUTATION HAVING BEEN SO DONE, UL TIMATELY IT STILL FORMED PART OF THE INCOME OF THE BUSINESS OF THE ASSESSEE AND IT W AS ASSESSABLE AS SUCH AS PROFITS AND GAINS OF BUSINESS CARRIED ON BY THE ASS ESSEE. UNDER S. 36, INTEREST PAID BY AN ASSESSEE FOR THE PURPOSE OF CARRYING ON ITS B USINESS WAS DEDUCTIBLE IN ITS ENTIRETY WHILE COMPUTING PROFITS AND GAINS OF THE B USINESS AND, THEREFORE, IT WAS NOT POSSIBLE TO ALLOCATE A PORTION OF THAT INTEREST AS AGAINST INCOME FROM DIVIDENDS. ITA NOS. 4143, 4144 & 4145/MUM/2010 PORT INVESTMENT CO. PVT. LTD. 5 IN THE LIGHT OF THE ABOVE REMARKS, WE HAVE TO HOLD THAT, FIRSTLY THAT INTEREST ON BORROWED CAPITAL IS TO BE ALLOWED UNDER THE HEAD BUSINESS ALONG WITH OTHER ALLOWABLE EXPENDITURE A ND SECONDLY THE DIVIDEND INCOME IS TO BE COMPUTED UNDER OTHER SOUR CES. WE HARDLY NEED TO MENTION THAT IN THE SAME YEAR, THE BUSINESS LOSS CAN BE SET OFF AGAINST THE INCOME ASSESSED UNDER THE HEAD OTH ER SOURCES IN THE LIGHT OF THE PROVISIONS OF SECTION 71(1) OF INCOME- TAX ACT. SUBJECT THESE REMARKS, THE GROUND TAKEN BY THE APPELLANT IS ALLOW ED. 7. AS CAN BE SEEN FROM THE ABOVE ORDER, THERE IS NO DO UBT THAT THE INVESTMENTS IN M/S. MAHINDRA AND MAHINDRA CONSIDERE D AS ACTIVITY OF BUSINESS. THERE IS ALSO A FINDING THAT THE SHARES I N QUESTION ARE HELD ONLY AS STOCK-IN-TRADE SO THE EXPENDITURE INCURRED BY ASSES SEE COMPANY, WHICH CONSISTS MOSTLY OF INTEREST BEARING BORROWED FUNDS, HAS TO BE CONSIDERED UNDER THE HEAD BUSINESS. HOWEVER, THE FACTS HAVE CHANGED IN THE LATTER YEARS. IN A.Y. 1999-2000 ON A SIMILAR ISSUE THE ITA T CONSIDERED THAT THE ASSESSEE MADE INVESTMENTS AND UPHELD PROPORTIONATE DISALLOWANCE OF THE AMOUNTS IN THAT YEAR VIDE PARA 4 OF THE ORDER IN IT A NO. 3662/MUM/2003 AND ITA 5023/MUM/2003 FOR A.Y. 1999-2000, WHICH IS AS UNDER: - 4. THIS ISSUE HAS BEEN CONSIDERED BY THE CIT(A) IN DETAILED MANNER IN PARAGRAPHS 2, 3 AND 4 OF HIS ORDER. IN PARAGRAPH -4 OF HIS ORDER, THE CIT(A) HAS ANALYSED THE AVAILABILITY OF INTEREST BE ARING FUNDS TO TOTAL FUNDS AVAILABLE AND HAS COME TO A FINDING THAT THE PERCENTAGE WORKS OUT TO 31.58%. THIS WAS APPLIED IN THE TOTAL INTERE ST PAID BY THE ASSESSEE AND APPLIED TO THE INTEREST EXPENDITURE IN PROPOSITION TO THE INVESTMENT, BUT EXCLUDING THOSE INVESTMENTS, WHICH ARE NOT EARNING DIVIDENDS LIKE GOVERNMENT SECURITIES. IT IS ON THE BASIS OF THE ABOVE CALCULATION THAT THE CIT(A) HAS MODIFIED THE DISALL OWANCE OF INTEREST TO RS.16.88 LAKHS. IT IS A FACT THAT THE ASSESSEE H AD INVESTED IN GOVERNMENT SECURITIES ALSO FOR WHICH SECTION 14A DO ES NOT APPLY. IT IS NOT PROPER TO ARGUE THAT THE ENTIRE INTEREST BEARIN G FUNDS WERE UTILISED FOR THE PURPOSE OF INVESTING IN DIVIDEND EARNING IN VESTMENTS. THEREFORE, THE CIT(A) WAS BOUND TO GIVE PROPORTIONA TE RELIEF FROM THE DISALLOWANCE. THE CIT(A) WORKED OUT THE PROPORTIONA TE RELIEF ON THE BASIS OF THE DETAILS OF FUNDS AVAILABLE ON RECORD. WE FIND THAT THE CIT(A) HAS FOLLOWED A REASONABLE METHOD IN ALLOCATI NG THE INTEREST BETWEEN INVESTMENTS EARNING DIVIDENDS AND NON-DIVID END EARNING INVESTMENTS. 8. FOLLOWING THE ABOVE ORDER THE ISSUE IN A.Y. 2002-03 WAS ALSO RESTORED TO THE FILE OF THE A.O. VIDE ITAT ORDER IN ITAT NOS . 2237 & 2263/MUM/2006 VIDE PARA 6 WHERE IT WAS HELD AS UNDER: - ITA NOS. 4143, 4144 & 4145/MUM/2010 PORT INVESTMENT CO. PVT. LTD. 6 6. WE HAVE HEARD THE RIVAL SUBMISSION OF THE PARTI ES. THE LD. COUNSEL FAIRLY CONCEDED THAT IDENTICAL ISSUE HAS BE EN DECIDED BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR AY 1999-2000. I N THE SAID CASE, THE CIT(A) HAS ANALYSED THE AVAILABILITY OF INTERES T BEARING FUNDS TO THE TOTAL FUNDS AVAILABLE AND ACCORDINGLY GAVE THE PRO-RATA RELIEF FROM THE DISALLOWANCE. IN SHORT, THE CIT(A) PARTLY HELD THAT DISALLOWANCE WAS CORRECT WHILE THE TRIBUNAL HELD TO SOME EXTENT THAT SECTION 14A IS APPLICABLE. THE LD. COUNSEL HAS FILED A COPY OF THE TRIBUNAL ORDER, WHICH IS PLACED ON RECORD. THE MAIN GRIEVANCE OF TH E ASSESSEE IS THAT WHILE COMPUTING THE INCOME UNDER THE NORMAL PROVISI ONS OF ACT, THE ENTIRE INTEREST EXPENDITURE WAS TREATED AS NOT ALLO WABLE U/S. 36(1)(III). THE LD. COUNSEL ALSO ARGUED THAT THE AS SESSEE HAD SUFFICIENT SURPLUS FUNDS, WHICH WERE INVESTED. WE ARE NOT APPR OVING THE DEVIATED APPROACH OF THE LOWER AUTHORITIES. WE, THE REFORE, RESTORE THIS ISSUE IN RESPECT OF COMPUTATION OF INCOME/LOSS UNDE R THE NORMAL PROVISIONS OF THE ACT TO THE FILE OF THE AO WITH TH E DIRECTION THAT HE SHOULD REWORK OUT THE DISALLOWABLE INTEREST AFTER C ONSIDERING THE TRIBUNALS ORDER IN ASSESSEES OWN CASE FOR AY 1999 -2000. 9. CONSEQUENTLY, WE ARE OF THE OPINION THAT THE MATTER REQUIRES RE- EXAMINATION BY THE A.O. IT IS TRUE THAT THE ITAT IN A.Y. 1985-86 AND 1986- 87 HELD THAT ASSESSEE IS IN THE BUSINESS OF HOLDING INVESTMENT AND THE SHARES INVESTED IN MAHINDRA AND MAHINDRA ARE HELD A S STOCK-IN-TRADE, BUT AS SEEN FROM ORDERS OF THE A.O. IN THE RESPECTIVE A SSESSMENT YEARS ASSESSEE HAS NOT ONLY SHOWN INCOME FROM BUSINESS BUT ALSO IN COME FROM HOUSE PROPERTY AND CAPITAL GAINS WHICH WAS CLAIMED AS EX EMPT AND INTEREST INCOME FROM OTHER SOURCES AND DIVIDEND CLAIMED AS E XEMPT UNDER SECTION 10(34). EVENTHOUGH THERE WAS INCOME FROM BUSINESS / LOSS ARRIVED AT IN THE RESPECTIVE ASSESSMENT YEARS, WE ARE UNABLE TO COME TO ANY FINDING WHETHER ASSESSEE IS HAVING BUSINESS ACTIVITY AS NO EXAMINAT ION WAS UNDERTAKEN BY THE REVENUE AUTHORITIES SO AS TO CONSIDER THE DEDUC TION UNDER SECTION 36(1)(III). AS FAR AS BORROWED FUNDS ARE CONSIDERED IN A.Y. 1999-2000 THE DEDUCTION WAS ALLOWED WITH REFERENCE TO THE BORROWE D FUNDS INVESTED IN TAXABLE INCOME EARNING INVESTMENTS VIS--VIS EXEMPT INCOME INVESTMENTS. THAT WORKING BY THE CIT(A) IN A.Y. 1999-2000 HAS RE ACHED FINALITY BY THE ORDER OF THE ITAT WHICH UPHELD THE SAME AS STATED A BOVE. CONSEQUENTLY IN A.Y. 2002-03 THE MATTER WAS RESTORED BACK TO THE FI LE OF THE A.O. TO EXAMINE THE PROPORTIONATE DISALLOWANCE. ITA NOS. 4143, 4144 & 4145/MUM/2010 PORT INVESTMENT CO. PVT. LTD. 7 10. KEEPING IN MIND THE ABOVE ORDERS, WE DIRECT THE A.O . TO EXAMINE THE NATURE OF BUSINESS ACTIVITY, THE NATURE OF INVESTME NTS AND WHETHER BORROWED FUNDS WERE USED FOR BUSINESS PURPOSES OR FOR INVEST MENT PURPOSES AND ALSO TO EXAMINE WHETHER THE CLAIM OF INTEREST CAN BE ALL OWED, IF NOT UNDER SECTION 36(1)(III) UNDER THE HEAD BUSINESS, UNDER THE HEAD CAPITAL GAINS OR INCOME FROM OTHER SOURCES, AS THE CASE MAY BE . THE DISALL OWANCE UNDER SECTION 36(1)(III) ON THE CLAIM OF INTEREST ON BORROWED FUN DS IS TO BE CONSIDERED SEPARATELY. THE DISALLOWANCE UNDER SEC. 14A HAS TO BE THEN CONSIDERED KEEPING IN MIND THE FACTS AND PRINCIPLES ESTABLISHE D BY THE JURISDICTIONAL HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. VS. DCIT 328 ITR 81(BOM) OR ANY OTHER HIGHER JUDICIAL FORUM ON THE I SSUE. WITH THESE DIRECTIONS THE ISSUE IN THESE APPEALS ARE RESTORED TO THE FILE OF THE A.O. FOR FRESH CONSIDERATION. NEEDLESS TO SAY THAT THE ASSES SEE HAS TO BE ALLOWED DUE OPPORTUNITY BEFORE FINALISING THE DISALLOWANCE(S). 11. BOTH THE APPEALS ARE CONSIDERED ALLOWED FOR STATIST ICAL PURPOSE. ITA NO. 4143/MUM/2010 12. THE ISSUE IN THIS APPEAL IS WITH REFERENCE TO THE P ENALTY UNDER SECTION 271(1)(C) OF ` 4,74,400/- WHICH WAS CONFIRMED BY THE CIT(A). 13. BRIEFLY STATED, ASSESSEE COMPANY CLAIMED INTEREST O F ` 22.23 LAKHS AS EXPENDITURE UNDER SECTION 36(1)(III). ASSESSEE COMP ANY RECEIVED DIVIDEND OF ` 22.41 LAKHS WHICH WAS CLAIMED AS EXEMPT UNDER SECTI ON 10(34). THE A.O. DISALLOWED THE ENTIRE AMOUNT INVOKING PROVISIONS OF SECTION 14A. THE CIT(A) IN THE APPELLATE PROCEEDINGS RESTRICTED THE DISALLO WANCE TO ` 16.88 LAKHS ON THE BASIS OF THE INVESTMENT MADE IN THE PROPORTION OF INVESTMENTS IN TAXABLE INCOME INVESTMENTS AND NON-TAXABLE INCOME INVESTMEN TS ADOPTING THE RATIO OF OWN FUNDS TO BORROWED FUNDS. THE COMPUTATION OF THE CIT(A) RESTRICTING THE DISALLOWANCE TO ` 16.88 LAKHS WAS CONFIRMED BY THE ITAT (DISCUSSED IN EARLIER APPEALS IN DETAIL). CONSEQUENT TO THE CONFI RMATION OF THE DISALLOWANCE THE A.O. FINALISED THE PENALTY PROCEEDINGS 271(1)(C ) AND LEVIED PENALTY OF ` 5,90,800/- AT 100% OF THE TAX SOUGHT TO BE EVADED. IT WAS CONTENDED BEFORE THE CIT(A) THAT THERE IS NEITHER CONCEALMENT OF INC OME NOR FURNISHING OF INACCURATE PARTICULARS AND THE DISALLOWANCE WAS ONL Y MADE BY INVOKING ITA NOS. 4143, 4144 & 4145/MUM/2010 PORT INVESTMENT CO. PVT. LTD. 8 SECTION 14A WHICH CANNOT BE CONSIDERED AS CONCEALME NT OF INCOME FOR THE PURPOSE OF LEVY OF PENALTY UNDER SECTION 271(1)(C). THE LEARNED CIT(A), HOWEVER, OBSERVED THAT IT WAS A DELIBERATE ATTEMPT ON THE PART OF THE ASSESSEE TO MAKE A WRONG CLAIM WHICH THE ASSESSEE W AS NOT ENTITLED AND RELYING ON THE PRINCIPLES ESTABLISHED BY THE HON'BL E SUPREME COURT IN THE CASE OF CIT VS. ATUL MOHAN BINDAL IN CIVIL APPEAL N O. 5767 OF 2009 DATED 24.08.2009, CONFIRMED THE PENALTY. 14. THE LEARNED COUNSEL SUBMITTED THAT ASSESSEE HAS INC OME FROM BUSINESS, FROM OTHER SOURCES AND OTHER INCOMES AND CLAIMED INTEREST UNDER SECTION 36(1)(III). HE REFERRED TO THE NOTES IN THE COMPUTATION OF INCOME WHEREIN IT WAS CLEARLY STATED THAT INTEREST EXPEND ITURE IS INCURRED FOR THE PURPOSE OF BUSINESS AND IS ALLOWABLE U/S. 36(1)(III ) AND NOT INCURRED FOR EARNING OF DIVIDEND INCOME. IT WAS SUBMITTED THAT THIS RETURN WAS FILED IN A.Y. 1999-2000 WHEN THE PROVISIONS OF SECTION 14A W ERE NOT ON STATUTE. IT WAS SUBMITTED THAT THE A.O. INVOKED PROVISIONS OF S ECTION 14A AS THEY WERE INTRODUCED BY THE TIME ASSESSMENTS WERE FINALISED O N 27.02.2007. IT WAS HIS SUBMISSION THAT DISALLOWANCE UNDER SECTION 14A WAS NOT CONTEMPLATED AT THE TIME OF FILING OF RETURN AND THE CLAIM WAS A BO NAFIDE CLAIM SUPPORTED BY THE NOTE GIVEN IN THE COMPUTATION OF INCOME. IT WAS FURTHER SUBMITTED THAT THE HON'BLE ITAT VIDE ORDER DATED 31.07.1998 FOR A. Y. 1985-86 AND 1986-87 HAS ALREADY ACCEPTED ASSESSEES CONTENTION THAT ASS ESSEE IS IN THE BUSINESS OF HOLDING INVESTMENTS AND THE CLAIM WAS ALLOWABLE UNDER SECTION 36(1)(III) UNDER THE HEAD BUSINESS. HE REFERRED TO THE ORDER S OF THE ITAT IN ITA NOS. 7064 & 7065/BOM/91 STATING THAT THE CLAIM MADE WAS A BONAFIDE CLAIM. IT WAS FURTHER SUBMITTED THAT THE HON'BLE SUPREME COUR T IN THE CASE OF RELIANCE PETROCHEMCIALS LTD. 322 ITR 158 HELD THAT A CLAIM WHICH IS NOT ACCEPTED BY THE A.O. DOES NOT LEAD TO PENALTY AND T HE PRINCIPLES ESTABLISHED THEREIN ARE EQUALLY APPLICABLE TO ASSESSEE CASE AS DISALLOWANCE WAS MADE ONLY UNDER SECTION 14A. HE PLEADED FOR CANCELLATION OF PENALTY. 15. THE LEARNED D.R., HOWEVER, RELIED ON THE ORDERS OF THE A.O. AND CIT(A) TO SUBMIT THAT ASSESSEE HAS CERTAINLY MADE WRONG CL AIMS AND, THEREFORE, PENALTY IS WARRANTED. ITA NOS. 4143, 4144 & 4145/MUM/2010 PORT INVESTMENT CO. PVT. LTD. 9 16. WE HAVE CONSIDERED THE ISSUE. ON EXAMINATION OF THE FACTS AND RECORD THERE IS NO DISPUTE WITH REFERENCE TO THE INTRODUCT ION OF PROVISIONS OF SECTION 14A SUBSEQUENT TO THE FILING OF THE RETURN. AS SEEN FROM THE ASSESSMENT ORDER, THE A.O. DISALLOWED THE AMOUNT INVOKING THE PROVISIONS OF SECTION 14A AS ASSESSEE HAS EXEMPT INCOME. AT THE TIME OF FILIN G RETURN ASSESSEE DID MAKE A NOTE THAT THE INTEREST CLAIM AS BUSINESS EXP ENDITURE MADE UNDER SECTION 36(1)(III) AND NOT APPLICABLE FOR EARNING D IVIDEND INCOME. BY THAT TIME THE ORDERS OF THE ITAT FOR A.Y. 1985-86 AND 19 86-87 WERE ALREADY ON RECORD SUPPORTING THE CONTENTION THAT CLAIM OF INTE REST WAS MADE AGAINST BUSINESS INCOME AS ASSESSEE WAS DOING BUSINESS OF H OLDING INVESTMENTS. IN VIEW OF THIS, IT CANNOT BE STATED THAT ASSESSEE HAS MADE A WRONG CLAIM. 17. THE ISSUE WAS DISALLOWANCE OF INTEREST EXPENDITURE ON BORROWED FUNDS WHICH WAS SUBJECT MATTER OF APPEAL AND AS DIS CUSSED ABOVE, THERE WERE MANY CONTENTIOUS ISSUES WITH REFERENCE TO DISA LLOWANCE UNDER SECTION 36(1)(III) AND 14A. THE CIT(A) DID EXAMINE THE FACT S WITH REFERENCE TO BORROWED FUNDS AND ITS INVESTMENTS IN TAXABLE INVES TMENTS AND NON-TAXABLE INVESTMENTS AND ONLY PROPORTIONATELY DISALLOWED THE AMOUNT. THEREFORE IT CANNOT BE STATED THAT THE ENTIRE CLAIM MADE BY THE ASSESSEE WAS NOT BONAFIDE. IN VIEW OF THIS, WE ARE OF THE OPINION TH AT JUST BECAUSE THE CLAIM MADE BY THE ASSESSEE WAS DISALLOWED BY THE A.O. IT DOES NOT LEAD TO CONCEALMENT OF INCOME OR FURNISHING OF INACCURATE P ARTICULARS FOR LEVY OF PENALTY UNDER SECTION 271(1)(C). THE HON'BLE SUPREM E COURT IN THE CASE OF RELIANCE PETROPRODUCTS P. LTD. (SUPRA) CONSIDERED T HE SCOPE OF PENALTY UNDER SECTION 271(1)(C) AND HELD THAT MERELY BECAUSE THE ASSESSEE CLAIMED DEDUCTION OF INTEREST EXPENDITURE WHICH WAS NOT BEI NG ACCEPTED BY THE REVENUE, PENALTY UNDER SECTION 271(1)(C) WAS NOT AT TRACTED; MERE MAKING OF THE CLAIM WHICH IS NOT SUSTAINABLE IN LAW, WILL NOT AMOUNT TO FURNISHING INACCURATE PARTICULARS REGARDING INCOME OF THE ASSE SSEE. RESPECTFULLY FOLLOWING THE ABOVE PRINCIPLES, WE ARE OF THE OPINI ON THAT THE FACTS OF THE PRESENT CASE DOES NOT WARRANT PENALTY UNDER SECTION 271(1)(C). ACCORDINGLY THE PENALTY LEVIED BY THE AO WAS CANCELLED. APPEAL ALLOWED. ITA NOS. 4143, 4144 & 4145/MUM/2010 PORT INVESTMENT CO. PVT. LTD. 10 18. IN THE RESULT, ITA NO. 4143/MUM/2010 IS ALLOWED AND ITA NOS. 4144 & 4145/MUM/2010 ARE ALLOWED FOR STATISTICAL PURPOSE S. ORDER PRONOUNCED IN THE OPEN COURT ON 12 TH AUGUST 2011. SD/- SD/- (R.V. EASWAR) (B. RAMAKOTAIAH) PRESIDENT ACCOUNTANT MEMBER MUMBAI, DATED: 12 TH AUGUST 2011 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) XIII, MUMBAI 4. THE CIT VII, MUMBAI CITY 5. THE DR, C BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P.