DCIT CIR 8(2), MUMBAI V. POWERSURFER INTERATIVE (I) P. LTD, MUMBAI

ITA 4152/MUM/2011

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 5002 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 3 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-09-2013
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 05-09-2013
• Assessment Year: 2006-2007
• Appeal Filed On: 19-05-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Business expenditure; Additional evidence
• Section: 14A

Judgement Text

POWERSURFER INTERACTIVE (I) P. LTD - 1 - VK;DJ VIHYH; VF/KDJ.K LH U;K;IHB EQACBZ ESAA IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, MUM BAI JH VKJ- DS- XQIRK] U;KF;D LNL; ,OA JH JKTSUNZ FLAG YS[KK LNL; DS LE{K BEFORE SHRI R.K. GUPTA JUDICIAL MEMBER AND SHRI RAJ ENDRA SINGH ACCOUNTANT MEMBER VK;DJ VIHY LA[;K /ITA NO. 4152/MUM/2011 FU/KKZJ.K O'KZ @ ASSESSMENT YEAR: - 2006-07 DCIT CIR 8(2) R. NO. 216A AAYAKAR BHAVAN, M.K. ROAD, MUMBAI CUKE@ VS. POWERSURFER INTERACTIVE (I) P. LTD. 3 RD FLOOR, RELIANCE ENERGY CENTRE, SANTACRUZ (EAST), MUMBAI -400 055. PAN:- AACCPO775E VIHYKFKHZ @ APPELLANT IZR;FKHZ @ RESPONDENT VIHYKFKHZ DH VKSJ LS @ APPELLANT BY MS. C. TRIPURA SUNDARI IZR;FKHZ DH VKSJ LS @ RESPONDENT BY SHRI JITENDRA SANGHVI VKNS'K@ VKNS'K@ VKNS'K@ VKNS'K@ ORDER PER RAJENDRA SINGH, AM THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER DATED 13.1.2011 OF CIT(A) FOR THE ASSESSMENT YEARS 2006-07. THE ONL Y DISPUTE RAISED BY THE REVENUE IN THIS APPEAL IS REGARDING DISALLOWANCE OF INTEREST U/S 36(1)(III) WHICH HAD BEEN DELETED BY CIT(A). 2. THE FACTS IN BRIEF ARE THAT THE ASSESSEE WHO WAS ENGAGED IN THE BUSINESS OF TRADING IN FABRICS/ INVESTMENTS IN SHARES HAD PA ID INTEREST OF RS 36,32,377/- ON INTER CORPORATE DEPOSITS WHICH HAD BEEN CLAIMED AS DEDUCTION. THE AO NOTED THAT THE ASSESSEE HAD TOTAL FUNDS AVAILABLE O F RS. 433.49 CRORES WHICH LQUOKBZ DH RKJH[K @ DATE OF HEARING 5-09-2013 ?KKS'K.KK DH RKJH[K @ DATE OF PRONOUNCEMENT 13-09-2013 POWERSURFER INTERACTIVE (I) P. LTD - 2 - CONSISTED CAPITAL OF RS. 1.90 CRORES, RESERVE AND S URPLUS OF RS. 8.14 CRORES AND UNSECURED LOAN OF RS. 423.49 CRORES. THE ASSESSEE H AD MADE INVESTMENT IN SHARES AMOUNTING TO RS. 115.01 CRORES AND THE BALAN CE AMOUNT HAD BEEN UTILIZED IN GIVING INTEREST FREE LOANS AND ADVANCES TO VARIOUS COMPANIES ON WHICH THE ASSESSEE HAD NOT RECEIVED ANY INTEREST IN COME. THE AO, THEREFORE, ASKED THE ASSESSEE TO EXPLAIN AS TO WHY THE ENTIRE INTEREST PAYMENT SHOULD NOT BE DISALLOWED U/S 36(1)(III). THE ASSESSEE EXPLAINE D THAT THE FUNDS HAD BEEN BORROWED FOR THE BUSINESS ACTIVITY OF TRADING IN FA BRICS BUT WHENEVER IMMEDIATE FUNDS WERE NOT REQUIRED FOR THE BUSINESS PURPOSE TH ESE WERE INVESTED IN SHARES IN ORDER TO TAKE ADVANTAGE OF THE MARKET TRENDS. TH E INCOME EARNED FROM PURCHASE WAS TAXED AS CAPITAL GAIN. IT WAS, THEREFO RE, SUBMITTED THAT THE BORROWED FUNDS HAD BEEN UTILIZED FOR INCOME EARNING ACTIVITIES. AO HOWEVER NOTED THAT THERE WAS NO DEBIT OR CREDIT IN THE ACCO UNT OF TRADING IN FABRICS. THEREFORE, THE PLEA THAT THE FUNDS HAD BEEN BORROWE D FOR THE PURPOSE OF BUSINESS WAS NOT CORRECT. AO, THEREFORE, CONCLUDED THAT THE FUND BORROWED HAD NOT BEEN UTILIZED FOR THE PURPOSE OF BUSINESS WHICH WAS TRADING IN FABRICS. ACCORDINGLY HE DISALLOWED THE ENTIRE CLAIM OF INTER EST. 3. THE ASSESSEE DISPUTED THE DECISION OF AO AND SUB MITTED BEFORE CIT(A) THAT THE ASSESSEE HAD BORROWED FUNDS FROM RELIANCE ENERGY LTD, SONATA INVESTMENT LTD AND RELIANCE INFRASTRUCTURE LTD WHI CH HAD BEEN UTILISED FOR PURCHASE OF SHARES, INCOME FROM WHICH HAD BEEN DECL ARED AS TAXABLE. THE ASSESSEE ALSO GAVE NEXUS OF BORROWED FUNDS WITH THE INVESTMENT IN SHARES AS PER DETAILS GIVEN BELOW:- 6% ICD FROM BSES INFRASTRUCTURE FINANCE LTD. (BIFL) DATE PARTICULARS AMOUNT (RS) DATE PARTICULARS AMOUNT (RS) 27.1.2004 OPENING BALANCE AS ON 01.4.2005 37,00,000 27.1.2004 INVESTMENT IN SHARES 37,00,000 23.2.2004 OPENING BALANCE AS ON 01.4.2005 41,60,000 23.2.2004 INVESTMENT IN SHARES 41,60,000 TOTAL 78,60,000 TOTAL 78,60,000 6% ICD FROM RELIANCE ENERGY LTD. DATE PARTICULARS AMOUNT (RS) DATE PARTICULARS AMOUNT (RS) 21.6.2005 6% ICD 60,75,00,000 16.10.2005 SUBSCRIPTI ON FOR IPO-PROVOGUE INDIA LTD 60,74,10,000 01.07.2005 REFUND OF SHARE 60,37,59,600 01.07.2005 REPAYMENT -6% 60,00,00,000 POWERSURFER INTERACTIVE (I) P. LTD - 3 - APPLICATION MONE- PROVOGUE INDIA LTD. ICD RELIANCE ENERGY LTD. 11.7.2005 SALE OF SHARES- PROVOGUE INDIA LTD. 66,21,096 11.7.2005 REPAYMENT-6% ICD 75,00,000 BY BALANCE 29,70,696 TOTAL 121,78,80,696 TOTAL 121,78,80,696 6% ICD FROM RELIANE ENERGY LTD. DATE PARTICULARS AMOUNT (RS) DATE PARTICULARS AMOUNT (RS) 20.8.2005 6% ICD RELIANCE ENERGY LTD. 117,00,00,000 24.8.2005 SUBSCRIPTION FOR IPO SASKEN 117,00,00,000 01.9.2005 REFUND OF SHARE APPLICATION MONEY- PROVOGUE INDIA LTD. 116,53,83,960 01.9.2005 REPAYMENT-6% ICD RELIANCE ENERGY LTD. 116,50,00,000 13.09.2005 SALES OF SHARES-SASKEN 88,94,837 13.9.20 05 REPAYMENT 6% ICD RELIANCE ENERGY LTD. 50,00,000 BY BALANCE 42,78,797 TOTAL 234,42,78,797, TOTAL 234,42,78,797, 6% ICD FROM RELIANE ENERGY LTD. DATE PARTICULARS AMOUNT (RS) DATE PARTICULARS AMOUNT (RS) 02.9.2005 6% ICD RELIANCE ENERGY LTD 8,75,00,000 02.9.2005 SUBSCRIPTION FOR IPO-FCS 8,75,00,000 23.9.2005 REFUND OF SHARE APPLICATION MONEY-FCS 8,68,51,450 13.09.2005 REPAYMENT - 6%ICD RELLIANCE ENERGY LTD. 50,00,000 23.9.2005 SALE OF SHARES - FCS 16,67,460 23.9.2005 REPAYMENT 6% ICD RELIANCE ENERGY LTD. 8,25,00,000 BY BALANCE TOTAL 17,60,18,910 TOTAL 17,60,18,910 6% ICD FROM SONATA INVESTMENT LTD. DATE PARTICULARS AMOUNT (RS) DATE PARTICULARS AMOUNT (RS) 30.1.2006 10% ICD SONATA INVESTMENTS 25,00,000 25.03.2005 REPAYMENT OF ICD-SONATA INVESTMENT 55,00,000 20.02.2006 10% ICD SONATA INVESTMENTS 20,00,000 23.03.2006 10% ICD SONATA INVESTMENTS 10,00,000 TOTAL 55,00,000 TOTAL 55,00,000 4. THE ASSESSEE ALSO SUBMITTED THAT IT HAD ALSO REC EIVED SUBSTANTIAL NON INTEREST BEARING FUNDS WHICH HAD BEEN USED FOR PURC HASE OF SHARES AND FOR MAKING LOANS AND ADVANCES DETAILS OF WHICH WERE GIV EN AS UNDER:- 0% OPTIONALLY CONVERTIBLE LOAN FROM BSES INFRASTRUC TURE FINANCE LTD. (BIFL) DATE PARTICULARS AMOUNT (RS) DATE PARTICULARS AMOUNT (RS) 29.32003 OPENING BALANCE AS ON 01.4.2005 98,99,63,384 29.3.2003 INVESTMENT IN SHARES 98,99,63,384 98,99,63,384 98,99,63,384 POWERSURFER INTERACTIVE (I) P. LTD - 4 - 0% ICD FROM SONATA INVESTMENT LTD. 23.6.2005 0% ICD 5,13,00,000 23.06.2005 0% LOAN TO RELIANCE ENERGY TRADING LTD. 5,13,00,000 24.03.2006 0% ICD 98,00,00,000 24.03.2005 REPAYMENT OF LOAN FROM BIFL 98,00,00,000 25.03.2006 0% ICD 2,30,00,000 25.03.2005 REPAYMENT OF LOAN FROM REL ALONG WITH INTEREST 99,63,384 REPAYMENT OF ICD FROM REL ALONG WITH INTEREST 82,33,706 OTHER UTILIZATION 48,02,910, 28.03.2006 0%ICD 318,06,00,000 28.03.2006 0% LOAN T O AAA GLOBAL VENTURE PVT. LTD. 318,06,00,000 423,49,00,000 423,49,00,000 5. THE ASSESSEE, THEREAFTER, GAVE BREAK UP OF INTER EST IN RELATION TO PURCHASE OF SHARES IN IPO INCOME FROM WHICH HAD BEEN SHOWN A S CAPITAL GAIN IN RELATION TO TRADING IN FABRIC AND IN RELATION TO INVESTMENTS IN SHARES, THE DETAILS OF WHICH WERE GIVEN AS UNDER:- SL NO. NAME OF THE COMPANY DATE OF ACCEPTANCE AMOUNT (RS.) REPAYMENT INTEREST UTILIZATION 01. 21 JUNE 2005 607,500,000 1-JUL-2005 1,098,493, SHARES OF PROVOGUE (I) LTD. 23 AUGUST 2005 1,165,000,000 31-AUG-2005 1,723,562 23 AUGUST 2005 5,000,000 13-SEP-2005 18,082 SHARE OF SASKEN COMMUNICATION S TECHNOLOGISTS. SHARES NOT SOLD DURING THE YEAR 02 SEPTEMBER 2005 5,000,000 13-SEP-2005 9,863 RELIANCE ENERGY LTD. 02 SEPTEMBER 2005 82,500,000 19-SEP-2005 244,110 FCS SOFTWARE SOLUTIONS 2. 30-JAN-2006 2,500,000 24-MAR-06 36,986 PAYMENT T O SUPPLIER OF CLOTH 20-FEB-2006 2,000,000 24-MAR-06 18,082 INVESTED IN SHARES SONATA INVESTME NTS LTD. 20-MAR-2006 1,000,000 24-MAR-06 1,370 PAYMENT TO SUPPLIER OF CLOTH 3. 31-MAR-05 7,860,000 24-MAR-06 481,829 INVESTED I N SHARES RELIANCE INFRASTRU CTURE LTD. 3,632,377 POWERSURFER INTERACTIVE (I) P. LTD - 5 - 6. THE ASSESSEE EXPLAINED THAT THE FUNDS BORROWED F ROM RELIANCE ENERGY LTD HAD BEEN UTILIZED FOR PURCHASE OF SHARES OF PROVOGU E INDIA LTD., SASKEN TECHNOLOGISTS LTD, AND FCL SOFTWARE SOLUTIONS. THE CAPITAL GAIN EARNED FROM PURCHASE AND SALE OF THESE SHARES WAS RS. 82,79,962 /-. THE BREAK UP OF INTEREST WAS GIVEN AS UNDER:- (I) IN RESPECT OF PROFIT ON SALE OF SHARES ALLOTTED IN IPO AND SOLD RS. 30,94,110 (II) IN RESPECT OF TRADING IN CLOTH RS. 38,365 (III) IN RESPECT OF INVESTMENT IN SHARES RS. 4,9 9,911 TOTAL:- RS. 36,32,377 7. THE ASSESSEE FURTHER SUBMITTED THAT THE INTEREST PAID IN RELATION TO INVESTMENT IN SHARES IN IPO WHICH WERE SOLD IMMEDIA TELY AFTER THE SHARES WERE ALLOTTED WAS ALLOWABLE AGAINST THE COMPUTATION OF C APITAL GAIN AS INTEREST PAID HAS TO BE ADDED TO THE COST OF SHARES PURCHASED IN VIEW OF THE JUDGMENT OF HONBLE HIGH COURT OF DELHI IN CASE MITHLESH KUMARI (92 ITR 9) AND JUDGMENT OF HONBLE HIGH COURT OF KARNATAKA IN CASE OF COMMISSIONER OF INCOME-TAX. VS. MAITHREYI PAI. (152 ITR 247). AS REGARDS THE IN VESTMENT IN SHARES INCOME FROM WHICH WAS EXEMPT, THE INTEREST AMOUNT W AS ONLY RS. 4,99,911/- WHICH COULD BE CONSIDERED FOR DISALLOWAN CE U/S 14A. CIT(A) FORWARDED THE SUBMISSION OF THE ASSESSEE TO THE AO FOR VERIFICATION AND REPORT. THE AO HOWEVER VIDE REPORT DATED 20.10.2010 OBJECTED TO THE ADMISSION OF ADDITIONAL EVIDENCE AND REQUESTED FOR ENHANCEMENT OF INCOME BY ADDITION U/S 14A. CIT(A) AFTER CONSIDERIN G THE SUBMISSION OF THE ASSESSEE HELD THAT THE CLAIM OF INTEREST CANNOT BE DISALLOWED U/S 36(1)(III). HE HOWEVER DIRECTED THE AO TO MAKE DISA LLOWANCE U/S 14A AT RS. 6,46,491/- CONSISTING OF INTEREST OF RS. 4,99,9 11/- AND OTHER EXPENSES OF RS. 1,46,580/-. AGGRIEVED BY THE DECISI ON OF CIT(A) THE REVENUE IS IN APPEAL BEFORE TRIBUNAL IN RELATION TO DISALLOWANCE U/S 36(1)(III). POWERSURFER INTERACTIVE (I) P. LTD - 6 - 8. BEFORE US THE LEARNED AR FOR THE ASSESSEE SUBMIT TED THAT THE ASSESSEE HAD GIVEN THE COMPLETE DETAILS OF BORROWIN GS AND ITS UTILIZATION FOR DIFFERENT PURPOSES BEFORE CIT(A) WHICH SHOWED T HAT INTEREST OF RS. 30,94,110/- RELATED TO BORROWINGS UTILIZED IN PURCH ASE OF SHARES IN IPO, INCOME FROM WHICH HAD BEEN DECLARED AS CAPITAL GAIN . OUT OF THE BALANCE INTEREST, A SUM OF RS. 38,356/- RELATED TO TRADING IN CLOTHES WHICH WAS ALLOWABLE AS BUSINESS EXPENDITURE AND RS. 4,99,911/ - IN RELATION TO INVESTMENT IN SHARES WHICH HAD BEEN DISALLOWED U/S 14A. IT WAS POINTED OUT THAT INTEREST PAID TOWARDS THE PURCHASE OF SHAR ES IS ALLOWABLE AS DEDUCTION WHILE COMPUTING THE INCOME FROM CAPITAL G AIN. THEREFORE, DISALLOWANCE MADE BY AO WAS NOT JUSTIFIED AND ORDER OF CIT(A) SHOULD BE UPHELD. LEARNED DR ON THE OTHER HAND STRONGLY SUPPO RTED THE ORDER OF AO AND PLACED RELIANCE ON THE FINDINGS GIVEN IN ASS ESSMENT ORDER. 9. WE HAVE PERUSED THE RECORDS AND CONSIDERED THE M ATTER CAREFULLY. THE DISPUTE IS REGARDING DISALLOWANCE OF INTEREST U /S 36(1)(III) AS PER WHICH ONLY THE INTEREST ON MONEY BORROWED FOR THE P URPOSE OF BUSINESS CAN BE ALLOWED AS DEDUCTION. THE BUSINESS OF THE AS SESSEE WAS TRADING IN FABRICS ON WHICH BORROWINGS HAD BEEN HARDLY USED AN D, THEREFORE, THE AO HAD DISALLOWED THE ENTIRE INTEREST OF RS. 36,32,377 /-. BEFORE CIT(A) THE ASSESSEE SUBMITTED COMPLETE DETAILS OF BORROWINGS A ND ITS UTILIZATION AND DETAILS OF NON BEARING INTEREST FUND AND ITS UTILI ZATION. THE ASSESSEE ALSO GAVE BREAK UP OF INTEREST ON BORROWINGS RELATING TO PURCHASE OF SHARES FROM WHICH CAPITAL GAIN HAD BEEN SHOWN AND FOR INVE STMENT IN SHARES AS WELL AS FOR TRADING IN CLOTH. THESE DETAILS HAD BEE N FORWARDED BY CIT(A) TO THE AO FOR VERIFICATION AND REPORT. THE ORDER OF CI T(A) HOWEVER SHOWS THAT THE AO HAD OBJECTED TO THE ADMISSION OF ADDITIONAL EVIDENCE. THERE IS NO FINDING OF CIT(A) THAT THE AO HAD VERIFIED THE DETA ILS GIVEN BY THE ASSESSEE AND FOUND TO BE CORRECT NOR HE HIMSELF HAS VERIFIED THE DETAILS AND HAS SIMPLY ACCEPTED THE DETAILS GIVEN BY THE ASSESSEE. THEREFORE, IN OUR VIEW, THE DETAILS GIVEN BY THE ASSESSEE REGARDING VARIOUS BORROWINGS AND THEIR POWERSURFER INTERACTIVE (I) P. LTD - 7 - UTILIZATION REQUIRES VERIFICATION AT THE LEVEL OF A O. IN CASE THE DETAILS GIVEN BY THE ASSESSEE ARE FOUND TO BE CORRECT THEN INTERE ST OF RS. 30,94,110/- RELATES TO PURCHASE OF SHARES IN IPO FROM WHICH CAP ITAL GAIN HAS BEEN DECLARED BY THE ASSESSEE. INTEREST ON BORROWINGS UT ILISED FOR PURCHASE OF SHARES HAS TO BE ADDED TO THE COST OF PURCHASE WHIL E COMPUTING THE CAPITAL GAIN IN VIEW OF THE JUDGMENT OF HONBLE HIG H COURT OF DELHI IN CASE OF MITHLESH KUMARI (92 ITR 9) AND JUDGMENT OF HONBLE HIGH COURT OF KARNATAKA IN CASE OF MAITHREYI PAI. (152 ITR 247 ). THE INTEREST OF RS. 30,94,110/- CAN, THEREFORE, BE ALLOWED ONLY WHILE C OMPUTING THE CAPITAL GAIN AND NOT U/S 36(1)(III). WE ALSO NOTE THAT AS P ER THE COMPUTATION FOR INCOME IN THE ASSESSMENT ORDER THE SHORT TERM CAPIT AL GAIN TAXABLE AT NORMAL RATE IS RS. 30,61,308/- AND THE SHORT TERM C APITAL GAIN TAXABLE AT THE RATE OF 10% IS RS. 53,09,267/-. IT IS THEREFORE , REQUIRED TO BE EXAMINED AS TO WHETHER INTEREST IS ATTRIBUTABLE TO NORMAL CAPITAL GAIN OR THE CAPITAL GAIN TAXABLE AT CONCESSIONAL RATE. WE, THEREFORE, SET ASIDE THE ORDER OF CIT(A) AND RESTORE THE MATTER TO THE FILE OF AO FOR PASSING AFRESH ORDER AFTER NECESSARY EXAMINATION IN THE LIGHT OF O BSERVATIONS MADE IN THIS ORDER AND AFTER ALLOWING OPPORTUNITY OF HEARIN G TO THE ASSESSEE. 7. IN THE RESULT APPEAL OF THE REVENUE IS ALLOWED F OR STATISTICAL PURPOSES. ORDER PRONOUNCED ON 13 -9-2013 SD/- SD/- (R.K. GUPTA) (RAJENDRA SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER SKS SR. P.S, MUMBAI DATED 13.9.2013 POWERSURFER INTERACTIVE (I) P. LTD - 8 - COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. THE DR, C BENCH, ITAT, MUMBAI BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCHES, MUMBAI