CHURU TRADING COMPANY P.LTD, MUMBAI V. DCIT CIR 6(2), MUMBAI

ITA 4768/MUM/2012

• Counselvise Citation: [2018] 118 COUNSELVISE.COM (IT) 9703 (ITAT-MUMBAI)
• Duration Of Justice: 6 year(s) 4 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 04-07-2017
• Assessment Year: 2008-2009
• Appeal Filed On: 18-07-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: H N SINGH
• Assessee Lawyers: VIJAY MEHTA SHRI B S SHARMA
• Keywords: Business income; Earning of tax free income; Proportionate interest; Question of law; Speculation loss; Notional interest
• Section: 143(3); 14A; 115JB; 40(a)(ia); 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C , BENCH MUMBAI BEFORE SHRI R.C.SHARMA, AM & SHRI SANDEEP GOSAIN , JM ITA NO. 4768 / MUM/20 12 & 4694/MUM/2013 ( ASSESSMENT YEAR : 2008 - 09 & 2009 - 10 ) M/S. CHARU TRADING COMPANY PVT. LTD., CONTINENTAL BUILDING 135 , DR.A.B.ROAD WORLI, MUMBAI 400 018 VS. DCIT, CIR 6(2) AAYAKAR BHAVAN MUMBAI 400 020 PAN/GIR NO. AAACC4853G ( APPELLANT ) .. ( RESPONDENT ) ITA NO. 4557/MUM/2013 ( ASSESSMENT YEAR : 2009 - 10 ) DCIT, CIR 6(2) AAYAKAR BHAVAN MUMBAI 400 020 VS. M/S. CHARU T RADING COMPANY PVT. LTD., CONTINENTAL BUILDING 135, DR.A.B.ROAD WORLI, MUMBAI 400 018 PAN/GIR NO. AAACC4853G ( APPELLANT ) .. ( RESPONDENT ) ASSESSEE BY SHRI VIJAY MEHTA / SHRI B.S. SHARMA REVENUE BY SHRI H.N. SINGH DATE OF HEARING 27 / 09 /201 8 D ATE OF PRONOUNCEMENT 30 / 11 /201 8 / O R D E R PER R.C.SHARMA (A.M) : THESE ARE THE CROSS APPEALS FILED BY THE ASSESSEE AND REVENUE AGAINST THE ORDER OF CIT(A) - 12, MUMBAI DATED 21/01/2011 FOR A.Y.2008 - 09 AND 2009 - 10 IN THE MATTER OF ORDER PASSED U/S.143(3) OF THE IT ACT. ITA NO. 4768/MUM/2012 AND OTHER APPEALS M/S. CHARU TRADING COMPANY PVT. LTD., 2 2. COMMON G ROUNDS HAVE BEEN TAKEN BY THE ASSESSEE IN BOTH THE YEARS. GROUNDS TAKEN BY THE ASSESSEE IN THE A.Y.2008 - 09 READS AS UNDER: - 1. THE LD COMMISSIONER OF INCOME TAX (APPEALS) - 12, MUMBAI (HEREINAFTER REFERRED TO AS 'LD CIT(A)) HAS ERRED ON FACTS, IN LAW A ND IN THE CIRCUMSTANCES OF THE CASE IN CONFIRMING ORDER OF THE ASSESSING OFFICER AND COMING TO THE CONCLUSION THAT THE APPELLANT IS NOT COVERED BY THE EXCEPTIONS TO EXPLANATION TO SECTION 73 OF THE INCOME TAX ACT 1961 (HEREINAFTER REFERRED TO AS 'THE ACT') AND IN TREATING INTEREST OF RS.4,75,26,913/ - AS 'SPECULATION LOSS' INSTEAD OF 'BUSINESS LOSS'. 2. THE LD CIT(A) ERRED IN LAW, ON FACTS AND IN THE CIRCUM STANCES OF THE CASE IN PARTLY FO LLOWING THE INTEREST EXPENSES U/S. 36(1) (III) OF THE ACT AND TO BE CALCULATED ON THE BASIS AND AS PER THE METHOD SPECIFIED IN THE APPELLATE ORDERS DT 30.03.2007 FOR ASSESSMENT YEAR 2003 - 04 AND BY THE ORDER DATED 28.12,2007 FOR ASSESSMENT YEAR 2004 - 05 PASSED BY THE HON'BLE COMMISSIONER OF INCOME TAX (APPEALS) - VI INSTEAD OF ALLOWING THE INTEREST AS CLAIMED BY THE APPELLATE. 3. THE LD CIT(A) ERRED IN LAW, ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE IN DISALLOWING V INTEREST OF RS.83,00,000 ( - UNDER SECTION 14A OF THE ACT (RESTRICTED AGAINST ACTUAL DIVIDEND RECEIVED O F RS.53,64,000/ ON INVESTMENTS IN EQUITY SHARES COSTING RS.7,88,906/ - AND RS.9,04340 ON STOCK IN TRADE OF EQUITY SHARES BOTH YIELDING DIVIDEND), ON NOTIONAL OR ASSUMED BASIS ON AMOUNT INVESTED IN EQUITY SHARES AND IS CONTRARY TO THE PROVISIONS CONTAINED IN SECTION 14A OF THE ACT. 4. THE APPELLANT CRAVES LEAVE TO ADD, AMEND, ALTER, MODIFY, DELETE AND/OR CHANGE ALL OR ANY OF THE ABOVE GROUNDS ON OR BEFORE THE DATE OF HEARING. 3. IN THE A.Y.2008 - 09 ASSESSEE HAS ALSO TAKEN FOLLOWING ADDITIONAL GROUNDS WHI CH READS AS UNDER: - 2. KINDLY REFER TO THE ABOVE MATTER WHICH HAS BEEN FIXED FOR HEARING ON 12.06.2018 AT SR.NO.2. THE SAID APPEAL THE ASSESSEE HAS CHALLENGED THE DISALLOWANCE CONFIRMED BY THE CIT(A) U/S.14A OF THE ACT BU T INADVERTENTLY THE ISSUE OF CO NSEQUENTIAL ADDI T ION MADE B Y THE ASSESSING OFFICER WHILE COMPUTING INCOME U/S 1I5JB OF THE ACT REMAINED TO BE CHALLENGED BEFORE YOUR HONOURS. ITA NO. 4768/MUM/2012 AND OTHER APPEALS M/S. CHARU TRADING COMPANY PVT. LTD., 3 4. IT WAS ARGUED BY LEARNED AR THAT THE ASSESSEE INTENDED TO RAISE AN ADDITIONAL GROUND AGAINST THE ADDITION OF A MOUNT DISALLOWED U/S 14A OF THE ACT WHILE COMPUTING BOOK PROFIT U/S 115JB OF THE ACT. IT IS SUBMITTED THAT THE ADDITIONAL GROUND OF APPEAL RAISE D PURELY QUESTION OF LAW AND NO NEW FACTS AR E REQUIRED TO BE BROUGHT ON RECORD. THIS GROUND IS CONSEQUENTIAL TO GRO UND NO. 3. IT WA S, THEREFORE, HUMBLY PRAYED THAT THE ADDITIONAL GROUND OF CROSS OBJECTION MAY KINDLY BE ADMITTE D. IN THIS REGARD, RELIANCE WAS PLACED UPON THE FOLLOWING DECISIONS RENDERED BY VARIOUS COURTS. I . NATIONAL THERMAL POWER CORPORATION V. CIT J229 !TR 383 FS II. JUTE CORPORATION OF INDIA LTD. V. CIT [787 JTR 688 (SC)J II I. AHMEDABAD ELECTRICITY CO. LTD. V. CIT [199 ITR 351 (BOM) 4. IN VIEW OF THE ABOVE, IT WAS HUMBLY SUBMITTED THAT THE ADDITIONAL GROUND MAY KINDLY BE ADMITTED, ADJUDI CATED AND DECIDED . 5. THE FOLLOWING GROUNDS HAVE BEEN TAKEN BY THE REVENUE IN THE A.Y.2009 - 10 : - 1. 'ON THE FACTS AND CIRCUMSTANCES OF CASE AND IN LAW, THE LD. C1T(A) ERRED IN DELETING THE DISALLOWANCE OF RS. 11,77,58,064/ - U/S. 1 4A R.W. RULE 8D OF THE IT. A CT, 1961 WITHOUT APPRECIATING THE FACT THAT THE DISALLOWANCE U/S 1 4 A OF THE IT ACT, 1961 WAS MADE BY THE AO BY RIGHTLY APPLYING THE METHOD PRESCRIBED UNDER RULE 8 D OF THE IT. RULES. 2. 'ON THE FACTS AND CIRCUMSTANCES OF CASE AND IN LAW, THE LD.CIT(A) ERRED IN DELETING THE DISALLOWA NCE OF' KS. 11,77,58,064/ - U/S.1 4A R.W. RULE 8 D OF THE IT. ACT, 1961 WITHOUT APPRECIATING THE FACT THAT AS PER RULE 8D(2)(II) OF IT. RULES, THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST, EXCLUDING ONLY THE AMOUNT OF INTEREST DIRECTLY RELATING TO EXEMPT INCOME, HAS TO BE CONSIDERED FOR THE PURPOSE OF WORKING THE DISALLOWANCE U/S 14A WHICH THE AO RIGHTLY DID.' ITA NO. 4768/MUM/2012 AND OTHER APPEALS M/S. CHARU TRADING COMPANY PVT. LTD., 4 3. 'ON THE FACTS AND CIRCUMSTANCES OF CASE AND IN LAW, THE LD.CIT(A) ERRED IN ALLOWING INTEREST OF RS. 40,06,91,913/ - 'U/S. 40( A) ( IA) WITHOUT APPRECIATING THE FACT THAT SPECIAL BENCH OF ITAT, MUMBAI IN THE CASE OF BHARTI SHIPYARDS HAS HELD THAT AMENDMENT TO SECTION 40(A)(IA) IS PROSPECTIVE IN NATURE. 4. 'THE APPELLANT PRAYS THAT THE ORDER OF LD. CIT(A) ON THE ABOVE GRO UNDS BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED.' 5. 'THE APPELLANT CRAVES LEAVE TO AMEND OR ALTER ANY GROUND OR ADD A NEW GROUND WHICH MAY BE NECESSARY 6. GROUNDS TAKEN BY ASSESSEE IN A.Y.2009 - 10 READS AS UNDER: - 1. TREATMENT OF BUSI NESS LOSS OF RS. 15,73,57,301 / - , ON VALUATION OF CLOSING STOCK AS SPECULATION LOSS: 1.1 THE LD. COMMISSIONER OF INCOME TAX (APPEALS) - 12,MUMBAI / ERRED IN LAW AND ON FACTS IN UPHOLDING THE ACTION OF THE LEARNED ADDL. C. I. T.RG. 6(2) / MUMBAI, IN DISALLOW ING BUSINESS LOSS OF RS.15,73,57,301/ - BEING THE DIMINUTION IN THE VALUE OF CLOSING INVENTORY OF EQUITY SHARES AS SPECULATION LOSS UNDER EXPLANATION TO SECTION 73 OF THE INCOME TAX ACT 1961 IGNORING THE FACT THAT THE APPELLANT IS A REGISTERED NON - BANKING F INANCE COMPANY (NBFC) ENGAGED IN THE BUSINESS OF FINANCING AND LENDING AND THEREFORE, EXPLANATION TO SEC 73 CAN NOT BE APPLIED TO THE APPELLANT. 1.2 THE SAID CIT(A) FAILED TO APPRECIATE THAT THERE WAS NO PURCHASE OR SALE OF SHARES DURING THE YEAR AND THER EFORE, THE LOSS AS A RESULT OF DIMINUTION IN VALUE OF CLOSING STOCK CAN NOT BE CONSIDERED AS A SPECULATION LOSS. 2. DISALLOWNACE OF NOTIONAL INTEREST EXPENDITURE OF RS. 4,02,08,4997 - , ON CLOSING STOCK AND TREATING THE SAME AS SPECULATION LOSS : THE CIT (A) ERRED IN LAW AND ON FACTS IN UPHOLDING THE ACTION OF THE A.O., IN MAKING A DISALLOWANCE OF NOTIONAL INTEREST COST OF RS.4,02,08,499/ - , ON THE VALUE OF INVENTORY OF EQUITY SHARES AND TREATING THE SAME AS SPECULATION LOSS UNDER EXPLANATION TO SECTION 73 OF THE ACT, IGNORING THE FACT THAT NO SUCH NOTIONAL ALLOCATION OF INTEREST CAN BE MADE WHEN APPELLANT HAS NOT PURCHASED OR SOLD ANY SHARES AND THERE WAS NO TRADING IN SHARES DURING THE YEAR. 3. DISALLOWNACE OF NOTIONAL INTEREST EXPENDITURE OF RS. 20 ,69,90,8367 - , U/S 36( L) ( II): THE CIT (A) ERRED IN LAW AND ON FACTS IN UPHOLDING THE ACTION OF THE A.O., IN MAKING A NOTIONAL DISALLOWANCE OF INTEREST COST OF ITA NO. 4768/MUM/2012 AND OTHER APPEALS M/S. CHARU TRADING COMPANY PVT. LTD., 5 RS.20,69,90,836/ - UNDER SECTION 36(L)(III) OF THE ACT, ON THE GROUND THAT INTEREST BEARING FU NDS MAY HAVE BEEN USED IN APPLICATION OF SHARES SUBSCRIPTION, INTEREST FREE LOANS ,ETC., .THE SAID CIT(A) ERRED IN NOT CONSIDERING THE FACT THAT THE SAID FUNDING WAS DONE FROM NET OWNED FUNDS OF 447,26,05,850 / - REPRESENTED BY SHARE CAPITAL AND RESERVES AND SURPLUS ONLY. THEREFORE, ANY NOTIONAL ALLOCATION OF INTEREST COST IS UNWARRANTED AND UNJUSTIFIED, 4. DISALLOWNACE U/S 14A OF RS.1,87,97,8357 - THE ID CIT(A) ERRED IN RESTRICTING THE DISALLOWANCE U/S 14A READ WITH RULE 8D TO THE TUNE OF RS 1,87,97,835/ - AS AGAINST RS.14,24,858/ - AS WORKED OUT BY THE APPELLANT, IGNORING THE FACT THAT NO DISALLOWANCE U/S 14A CAN BE MADE AGAINST INCOME RECEIVED FROM SHARES BOTH HELD AS STOCK - IN - TRADE AND INVESTMENTS, SINCE WERE FUNDED BY NET OWNED FUNDS OF RS.447,26,05,850/ - . 5. DISALLOWANCE OF INTEREST EXPENDITURE IN EXCESS OF NET PAYMENT OF RS.3,44,35,027/ - : THE CIT (A) ERRED IN LAW AND ON FACTS IN NOT CONSIDERING THE FACT THAT AGAINST THE TOTAL OF INTEREST PAID OF RS.50,37,27,177/ - (47,75,89,068/ - + FINANCIAL CHARGES OF RS. 2,60,04,884/ - ) ON BORROWED FUNDS, THE APPELLANT HAS EARNED INTEREST OF RS.46,92,92,150/ - FROM ITS FINANCING BUSINESS AND THEREBY TOTAL DISALLOWANCE OF INTEREST EXPENDITURE U/S 36(L)(III) , U/S 14A AND SEC 73 CANNOT EXCEED NET IN TEREST PAYMENT OF RS.3,44,35,027 WHICH IS DEBITED TO PROFIT &: LOSS ACCOUNT. 6. THE APPELLANT CRAVES LEAVE TO ADD, AMEND, ALTER, MODIFY, DELETE AND / OR CHANGE ALL OR ANY OF THE ABOVE GROUNDS ON OR BEFORE THE DATE OF HEARING 7. RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PERUSED. 8. FACTS IN BRIEF ARE THAT THE ASSESSEE IS A PRIVATE LIMITED COMPANY ENGAGED IN BUSINESS OF PROVIDING ADVANCES, TRADING AND MAKING INVESTMENTS IN SHARES. THE ASSESSEE IS ALSO REGISTERED AS NBFC (NON BANKING FINANCE COMPANY) WITH RBI. FOR A.Y.2008 - 09, THE ASSESSEE FILED ITS RETURN OF INCOME ON 30.09.2008 DECLARING TOTAL LOSS OF RS. ITA NO. 4768/MUM/2012 AND OTHER APPEALS M/S. CHARU TRADING COMPANY PVT. LTD., 6 102,94,65,859/ - . THE ASSESSMENT WAS COMPLETED BY THE ASSESSING OFFICER BY PASSING ORDER DATED 31.12.2010 U/S. 143(3) OF THE ACT AND DETERMINED THE INCOM E OF THE ASSESSEE AS UNDER: SR. NO. PARTICULARS AMOUNT (RS.) AMOUNT (RS.) 1. TOTAL BUSINESS INCOME (LOSS) AS PER RETURN OF INCOME (102,94,65,859) LESS : DISALLOWANCES 2. ADJUSTMENT IN RESPECT OF VALUATION OF STOCK IN TRADE EXPLANATION TO S.73 4,75,26,913 3. INTEREST U/S. 36(L)(III) 4,60,73,584 4. U/S.1 4A R.W. RULE 8D 83,00,000 9 . THE ASSESSING OFFICER COMPUTED BOOK PROFIT OF THE ASSESSEE U/S. 115JB OF THE ACT AS UNDER: SR. NO. PARTICULARS AMOUNT (RS.) AMOUNT (RS .) 1. BOOK PROFIT AS PER THE ASSESSEE 2,02,02,772 2. LESS : DIVIDEND INCOME ON ON EQUITY SHARES 62,68,340 ON MUTUAL FUNDS 11,04,508 73,72,848 3. SUB TOTAL 1,28,29,924 4. ADD : AS PER EXPLANATION L(F) TO S. 115JB OF THE AC T 83,00,000 ITA NO. 4768/MUM/2012 AND OTHER APPEALS M/S. CHARU TRADING COMPANY PVT. LTD., 7 5. BOOK PROFIT TO TAX U/S.115JB OF THE ACT 2,11,29,924 10. AGAINST THE ABOVE ORDER OF AO, ASSESSEE APPROACHED TO THE CIT(A) WHEREIN CIT(A) CONFIRMED THE ACTION OF THE AO, HENCE ASSESSEE IS IN FURTHER APPEAL BEFORE US. 11. WE HAVE CO NSIDERED RIVAL CONTENTIONS AND CAREFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. WE HAD ALSO DELIBERATED ON THE JUDICIAL PRONOUNCEMENTS REFERRED BY LOWER AUTHORITIES IN THEIR RESPECTIVE ORDERS AS WELL AS CITED BY LEARNED AR AND DR DURING THE COUR SE OF HEARING BEFORE US. 12. IN GR. NO. 1 , ASSESSEE IS AGGRIEVED FOR A LLOCATION OF INTEREST AMOUNTING TO RS. 4, 75 , 26,913 / - AND TREATING THE SAME AS SPECULATION LOSS. FROM THE RECORD WE FOUND THAT THE ASSESSING OFFICER HAS ALLOCATED INTEREST EXPENDITURE TO T HE SHARE TRADING BUSINESS BY ADOPTING RATE OF INTEREST @12.25% TO STOCK OF SHARES OF RS.38,79,74,797/ - AND HOLDING THAT THE CASE OF THE ASSESSEE IS COVERED BY THE EXPLANATION TO SECTION 73 OF THE ACT. IT IS SUBMITTED BY LEARNED AR THAT THE ASSESSING OFFICE R AND CIT(A) HAVE NOT TAKEN INTO CONSIDERATION THE FACTS OF THE YEAR UNDER CONSIDERATION AND ERRONEOUSLY CONCLUDED THAT THE CASE OF THE ASSESSEE IS COVERED BY THE EXPLANATION TO SECTION 73 OF THE ACT BY RELYING ON THE FACTS OF PROCEEDING YEARS . HE FURTHER CONTENDED THAT EXPLANATION TO SECTION 73 OF THE ACT PROVIDES FOR FEW EXCEPTIONS. ONE OF THE EXCEPTIONS IS IN RESPECT OF ITA NO. 4768/MUM/2012 AND OTHER APPEALS M/S. CHARU TRADING COMPANY PVT. LTD., 8 THOSE COMPANIES WHOSE PRINCIPAL BUSINESS IS OF GRANTING LOAN AND ADVANCES. IT WA S SUBMITTED THAT THE PRINCIPAL BUSINESS OF THE ASSESSEE IS THAT OF MAKING ADVANCES. FOR THIS PURPOSE OUR ATTENTION WAS INVITED TO THE PROFIT & LOSS ACCOUNT AND BALANCE SHEET OF THE ASSESSEE. THE SUMMARY OF BUSINESS INCOM E EARNED BY ASSESSEE DURING THE RELEVANT A.Y.2008 - 09 UNDER CONSIDERATION IS TABULATED HEREU NDER: PARTICULARS AMOUNT (RS. IN CRORES) REMARKS INTEREST ON ADVANCE 8.26 INTEREST INCOME EARNED BY THE ASSESSEE AS PER SCHEDULE 13 OF THE AUDITED FINANCIALS. SALES OF TRADING SHARES 6.80 THIS REPRESENT GROSS SALE PR OCEEDS OF SHARES HELD AS STOCK IN TRADE. 13. IN ADDITION TO THE ABOVE, WE OBSERVED THAT THE ASSESSEE HAS EARNED INCOME TAXABLE UNDER THE HEAD CAPITAL GAIN AND INCOME FROM OTHER SOURCES , WHICH IS NOT RELEVANT FOR DETERMINING PRINCIPAL BUSINESS ACTIVI TY BY ASSESSEE. 14. ON PERUSAL OF THE ABOVE, IT IS ABUNDANTLY CLEAR THAT THE INTEREST EARNED ON ADVANCES CONSTITUTES MAIN SOURCE OF INCOME DURING THE YEAR UNDER CONSIDERATION AND HENCE, ESTABLISHES THAT MAKING ADVANCES IS THE PRINCIPAL BUSINESS OF THE ASSESSEE. ACCORDINGLY, THE CASE OF THE ASSESSEE IS COVERED BY THE EXCEPTION STIPULATED IN THE EXPLANATION TO SECTION 73 OF THE ACT. ITA NO. 4768/MUM/2012 AND OTHER APPEALS M/S. CHARU TRADING COMPANY PVT. LTD., 9 15. WE HAVE ALSO PERUSED THE AUDITED BALANCE SHEET, IT IS EVIDENT FROM THE BALANCE SHEET THAT THE ASSESSEE HAD UTILIZED RS .546.57 CRORES IN MAKING ADVANCES WHEREAS SHARES HELD AS STOCK IN TRADE AMOUNTED TO RS. 38.79 CRORES ONLY. THUS, THE ASSESSEE HAS UTILIZED MAJORITY OF ITS FUNDS IN BUSINESS OF PROVIDING ADVANCES. AFTER GOING THROUGH THE AUDITED BALANCE SHEET, PROFIT AND L OSS ACCOUNT WE OBSERVE THAT THE DOMINANT BUSINESS OF THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION IS THAT OF PROVIDING ADVANCES AS THE INTEREST EARNED ON ADVANCES CONSTITUTES MAIN SOURCE OF INCOME AND MAJOR ASSET CONSISTS OF LOANS AND ADVANCES AND AS SUCH , THE CASE OF THE ASSESSEE IS COVERED BY THE EXCEPTION PROVIDED IN THE EXPLANATION TO SECTION 73 OF THE ACT. 16. IT IS VERY CLEAR FROM THE ORDER OF THE AO THAT THE DISALLOWANCE COMPUTED BY THE ASSESSING OFFICER U/S.73 OF THE ACT COMPRISES OF ONLY INTE REST ELEMENT. THE ASSESSING OFFICER HAS COMPUTED THE DISALLOWANCE U/S.73 OF THE ACT BY ALLOCATING INTEREST @12.25% ON THE VALUE OF THE CLOSING STOCK OF SHARES HELD BY THE ASSESSEE I.E 12.25% OF RS. 38.79 CRORES. IN THIS REGARD WE FOUND THAT THE ASSESSEE HAS SUFFICIENT OWN FUND TO COVER UP FUNDS DEPLOYED IN SHARES HELD AS STOCK IN TRADE. AS PER AUDITED BALANCE SHEET, THE ASSESSEE HAD OWN FUND OF RS. 392.17 CRORES WHICH IS SUFFICIENT TO TAKE CARE OF SHARES HELD AS STOCK - IN - TRADE AMOUNTING TO RS. 38.79 CRORE S. 17. WE FURTHER FOUND THAT THE OWN FUND OF THE ASSESSEE IS SUFFICIENT TO COVER UP NOT ONLY AMOUNT BLOCKED IN SHARES HELD AS STOCK - IN - TRADE BUT ITA NO. 4768/MUM/2012 AND OTHER APPEALS M/S. CHARU TRADING COMPANY PVT. LTD., 10 ALSO INVESTMENT IN SHARES AS WELL AS INTEREST - FREE LOANS AND ADVANCES/SHARE APPLICATION MONEY GIVEN BY THE ASSESSEE FOR WHICH SEPARATE ADDITIONS HAVE BEEN MADE BY THE ASSESSING OFFICER. KEEPING IN MIND, THE FACT THAT ASSESSEES OWN FUND IS SUFFICIENT TO COVER UP ALL THE DIVERSIONS POINTED OUT BY THE ASSESSING OFFICER, DISALLOWANCE OF INTEREST WAS NOT WARRANTED. AN OVERALL PICTURE OF DIVERSION OF FUND AND THE OWN FUND AVAILABLE WITH ASSESSEE ARE AS UNDER: - 18. THE FOLLOWING CHART DEPICTS SUCH UTILIZATION OF FUNDS AS PER THE AUDITED BALANCE SHEET OF ASSESSEE AS ON 31.03.2008. SR. NO. PARTICULARS RS. (IN CRORES ) 1. SHARES HELD AS STOCK IN TRADE 38.79 2. INVESTMENT IN SHARES 60,88 3. INTEREST FREE ADVANCES GIVEN 90.27 4. SHARE APPLICATION MONEY GIVEN 98.98 TOTAL 288.92 19. SINCE ASSESSEE HAD SUFFICIENT OWN FUNDS AMOUNTING TO RS.392.17 CROR ES WHICH IS MORE THAN INVESTMENT OF RS.288.92 CRORES , NO DISALLOWANCE OF INTEREST EXPENDITURE IS WARRANTED. OWN FUNDS OF ASSESSEE AS PER AUDITED BALANCE SHEET IS AS UNDER: - ITA NO. 4768/MUM/2012 AND OTHER APPEALS M/S. CHARU TRADING COMPANY PVT. LTD., 11 SR. NO. PARTICULARS RS. (IN CRORES) 1. SHARE CAPITAL 3.13 2. RESERVE AND SURPLUS 389.04 3. TOTAL 392.17 20. THUS, IT IS EVIDENT THAT THE ASSESSEE HAS ITS OWN FUND OF RS. 392.17 CRORES OUT OF WHICH IT HAD MADE INTEREST FREE ADVANCES AND OTHER INVESTMENTS OF RS.288.92 CRORES. IN OTHER WORDS, THE ASSESSEE HAS NOT UTILIZED INTEREST BEARING FUNDS IN MAKING INTEREST FREE ADVANCES AND INVESTMENT AS PRESUMED BY THE ASSESSING OFFICER. THEREFORE, THE DETERMINATION OF SPECULATIVE LOSS BY AO IS NOT SUSTAINABLE ON THIS GROUND ALSO. 21. NOW WE COME TO THE OBSERVATION OF CIT(A) WHEREI N HE PLACED RELIANCE ON THE ORDER PASSED BY HIS PREDECESSOR FOR A.Y.2006 - 07 WHICH IS MISPLACED AND UNWARRANTED. IN THIS REGARD, WE OBSERVE THAT IN THE ORDER OF TRIBUNAL FOR A.Y.2006 - 07 DATED 24/02/2015 IN ASSESSEES OWN CASE, WE FOUND THAT IN GROUND NO.2, THE TRIBUNAL HAVE DEALT WITH THE TREATMENT OF NOTIONAL INTEREST AS SPECULATION LOSS UNDER EXPLANATION TO SECTION 73 OF THE ACT. HOWEVER, THE TRIBUNAL HAD DEALT WITH THE ISSUE OF NOTIONAL INTEREST TREATED AS SPECULATION LOSS ON THE BASIS OF ORDER OF THE ITA T IN THE CASE OF SISTER CONCERN NAMELY, GANJAM TRADING CO. P. LTD. IN ITA NO. 3724/MUM/2006 FOR A.Y.2002 - 03 AND ITA NO. 1382/MUM/2007 FOR ITA NO. 4768/MUM/2012 AND OTHER APPEALS M/S. CHARU TRADING COMPANY PVT. LTD., 12 A.Y.2003 - 04 VIDE ORDER DATED 20.07.2012. ACCORDINGLY, THE HON'BLE TRIBUNAL HELD THAT THE ISSUE IS COVERED AGAINST THE ASSESSEE AND THUS, REJECTED THE GROUND. IT IS EVIDENT FROM THE ORDER PASSED IN THE CASE OF GANJAM TRADING CO. LTD., (SISTER CONCERN) IT CAN BE SEEN THAT NO ARGUMENTS IN RESPECT OF EXCEPTIONS PROVIDED IN EXPLANATION TO SECTION 73 OF THE ACT WERE MADE. IN OT HER WORDS, NO ARGUMENTS IN RESPECT OF DERIVING OF INCOME FROM THE MAIN BUSINESS OF PROVIDING ADVANCES WERE MADE AND THE HON'BLE TRIBUNAL HAS GAVE ITS DECISION ONLY ON THE ISSUES I) WHETHER PROVISIONS OF EXPLANATION TO SECTION 73 CAN BE APPLIED TO A COMPANY WHO CARRIES OUT BUSINESS OF SHARE TRADING AND II) WHETHER LOSS ARISING OUT OF VALUATION OF CLOSING STOCK AMOUNTS TO SPECULATION LOSS OR NOT, III) WHETHER NOTIONAL ALLOCATION OF INTEREST SHOULD BE CONSIDERED FOR ARRIVING AT SPECULATION LOSS AS PER EXPLANAT ION TO SECTION 73 OF THE ACT. THUS, NOWHERE THE FACTS PERTAINING TO EVALUATION WHETHER THE CASE FALLS WITHIN THE EXCEPTION PROVIDED IN EXPLANATION TO SECTION 73 OF THE ACT WERE DISCUSSED. THEREFORE, THE FACTS IN THE ORDER RELIED UPON BY THE CIT(A) ARE DIST INGUISHABLE AND AS SUCH, CANNOT BE APPLIED TO THE FACTS OF THE CASE OF THE ASSESSEE FOR THE ASSESSMENT YEAR 2008 - 09 UNDER CONSIDERATION. THERE IS NO DISPUTE TO THE WELL SETTLED LEGAL PROPOSITION THAT AN ORDER IS AN AUTHORITY ON THE POINT IT DECIDES AND HEN CE IF A PARTICULAR ISSUE DO NOT ARISE IN A PARTICULAR YEAR, IT CANNOT BE CONSIDERED AS DECIDED OR COVERED BY THE ORDER OF THAT YEAR. FURTHER, THE ORDER OF THE ITAT FOR A.Y.2005 - 06 ITA NO. 4768/MUM/2012 AND OTHER APPEALS M/S. CHARU TRADING COMPANY PVT. LTD., 13 AND A.Y.2007 - 08 DATED 24.12.2015 HAS BEEN PASSED BY MERELY RELYING UPON THE ABOVE REFERRED ORDER OF THE ITAT FOR A.Y.2006 - 07. 22. IN VIEW OF THE ABOVE DISCUSSION, WE DO NOT FIND ANY JUSTIFICATION IN THE ORDER PASSED BY LOWER AUTHORITIES FOR MAKING ADJUSTMENT IN THE VALUATION OF STOCK BY INVOKING EXPLANATION TO SECTION 73. 23. IN GROUND NO.2, ASSESSEE IS AGGRIEVED FOR DISALLOWANCE MADE U/S.36(1)(III) OF THE ACT. WE HAD GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AND FOUND THAT THE ASSESSING OFFICER HAS DISALLOWED RS. 4,60,73,584 / - ON PROPORTIONATE BASIS FOR REASONS THAT THE AS SESSEE HAD GIVEN INTEREST FREE ADVANCES OF RS. 90.27 CRORES AND UTILISED FUNDS IN SHARE APPLICATION OF RS.98.98 CRORES. THE CIT (A) CONFIRMED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER BY REFERRING TO ORDERS OF FIRST APPELLATE AUTHORITY FOR A.Y.2003 - 04 , 2004 - 05 AND 2006 - 07. 2 4 . IT IS CLEAR FROM THE ORDER OF LOWER AUTHORITIES THAT BOTH THE ASSESSING OFFICER AND CIT(A) HAVE FAILED TO APPRECIATE THAT IN THE YEAR UNDER CONSIDERATION THE ASSESSEE HAD ITS OWN FUNDS OF RS.392.17 CRORES AND THEREFORE, AS HELD B Y THE JURISDICTIONAL HON'BLE HIGH COURT IN THE CASE OF CIT V RELIANCE UTILITIES & POWER LTD. [313 ITR 340] AND IN THE CASE OF CIT V HDFC BANK LTD. [366 ITR 340], THE PRESUMPTION WOULD BE THAT THE ASSESSEE HAS UTILIZED ITS OWN FUND AND INTEREST FREE FUNDS F OR MAKING INTEREST FREE ADVANCES AND SHARE APPLICATION MONEY. THE PARTICULARS OF OWN FUND AND ITS UTILIZATION IN MAKING INTEREST FREE ADVANCES, INVESTMENTS ITA NO. 4768/MUM/2012 AND OTHER APPEALS M/S. CHARU TRADING COMPANY PVT. LTD., 14 HAVE BEEN ELABORATELY DISCUSSED BY US HEREIN ABOVE. ACCORDINGLY NO DISALLOWANCE CAN BE MADE U/S.36(1) (III) OF THE ACT. WE DIRECT ACCORDINGLY. 25 . AT THIS LEVEL, IT IS PERTINENT TO OBSERVE THE RELIANCE PLACED BY THE CIT(A) ON THE ORDERS OF THE TRIBUNAL IN THE CASE OF THE ASSESSEE FOR EARLIER YEARS IS MISPLACED. ON PERUSAL OF THE CONSOLIDATE BENCH ORDER DAT ED 24.02.2012 OF THE HON'BLE TRIBUNAL FOR A.Y. 2003 - 04 AND 2004 - 05 IT CAN BE SEEN THAT SINCE THE ASSESSEE HAD NO SUFFICIENT OWN FUNDS, THE MATTER WAS RESTORED TO THE ASSESSING OFFICER FOR THE PURPOSE OF ASCERTAINING THE NEXUS AND RATIO. HOWEVER, IN THE PRE SENT CASE FROM AUDITED BALANCE SHEET IT IS EVIDENT THAT THE ASSESSEE HAD SUFFICIENT OWN FUND AND - THEREFORE, IT CAN BE LEGALLY PRESUMED, IN VIEW AFORESAID DECISIONS IN THE CASE OF RELIANCE UTILITIES & POWER LTD. AND HDFC BANK LTD. (SUPRA), THAT THE ASSESSEE HAD UTILIZED ITS OWN FUNDS IN GIVING INTEREST FREE ADVANCES AND SHARE APPLICATION. HENCE, THE DISALLOWANCE MADE BY THE ASSESSING OFFICER U/S.36(L)(III) OF THE ACT IS NOT JUSTIFIED. 26 . IN GROUND NO.3, ASSESSEE IS AGGRIEVED FOR DISALLOWANCE MADE BY AO INVO KING PROVISIONS OF SECTION 14A R.W.R. 8D. IN THIS REGARD WE OBSERVE THAT ASSESSING OFFICER HAS INVOKED PROVISIONS OF SECTION 14A OF THE ACT READ WITH RULE 8D OF IT. RULES AND DISALLOWED RS.83,00,000/ - AFTER TAKING INTO ACCOUNT DISALLOWANCE MADE BY HIM U/S. 36(L)(III) AND EXPLANATION TO SECTION 73 IN RESPECT OF INTEREST. THE CIT(A) CONFIRMED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. SINCE THE ASSESSEE HAD SUFFICIENT OWN FUND TO MAKE INVESTMENT IN SHARES, NO DISALLOWANCE IN ITA NO. 4768/MUM/2012 AND OTHER APPEALS M/S. CHARU TRADING COMPANY PVT. LTD., 15 RESPECT OF INTEREST PAYMENT IS CALLED FOR. IN THIS RESPECT, RELIANCE IS PLACED ON THE DECISIONS IN THE CASE OF RELIANCE UTILITIES & POWER LTD. AND HDFC BANK LTD. (SUPRA). 2 7 . FROM THE RECORD WE ALSO OBSERVE THAT DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSEE HAD COMPUTED DISALLOWAN CE U/S.14A OF THE ACT AT RS.2.99,75,415/ - UNDER PROTEST. HOWEVER, WHILE COMPUTING THE DISALLOWANCE ON ACCOUNT OF INTEREST, INSTEAD OF NET INTEREST, THE GROSS AMOUNT OF INTEREST WAS INADVERTENTLY TAKEN BY ASSESSEE. ALTHOUGH THE ASSESSING OFFICER AND CIT(A) HAVE DISCUSSED ABOUT MAKING INTEREST DISALLOWANCE U/S.14A OF THE ACT ON 'NET INTEREST, BUT THE ACTUAL DISALLOWANCE IS COMPUTED ON GROSS INTEREST. IT IS WELL SETTLED THAT FOR THE PURPOSE OF MAKING DISALLOWANCE U/S.14A OF THE ACT ON ACCOUNT OF INTEREST ONLY 'NET INTEREST' SHOULD BE TAKEN INTO ACCOUNT. IN THIS RESPECT, RELIANCE IS PLACED ON THE FOLLOWING: A) DCIT V JUBILANT ENTERPRISES PVT. LTD. IN ITA NO.6364/MUM/2012 DATED 12.03.2014. B) CIT V. JUBILIANT ENTERPRISES P. LTD. IN ITA NO. 1512 OF 2014 DATED 28. 02.2017 BY HONBLE BOMBAY HIGH COURT UPHOLDING AFORESAID ORDER DATED 12.03.2014 OF THE HON'BLE TRIBUNAL. C) MORGAN STANLEY INDIA SECURITIES LTD V. ACIT ITA NO: 5072/MUM/2005 DATED 13.04.2011. D) DY. CIT V. M/S TRADE APARTMENTS LTD BEING ITA NO: 1277/KOL/ 2011 DATED 30.03.2012. ITA NO. 4768/MUM/2012 AND OTHER APPEALS M/S. CHARU TRADING COMPANY PVT. LTD., 16 E) BISHWANATH PASARI V. ASST.CIT BEING ITA NO: 1682/KOL/2011 DATED 06.03.2013. - F) PARESH K. SHAH V DY.CIT BEING ITA NOR 8214/MURN/2011 DATED 05.06.2013. 28 . SO FAR AS DISALLOWANCE OF OTHER EXPE NSES AS WARRANTED UNDER RULE 8D(2)(I I I) IS CONCERNED , THE SAME SHOULD BE RESTRICTED TO 0.5% OF AVERAGE INVESTMENTS AS PER FORMULA PRESCRIBED IN RULE 8D. HOWEVER, WE OBSERVE THAT ASSESSEE HAS ALSO INVESTMENT ON WHICH NO DIVIDEND INCOME IS RECEIVED DURING TH E YEAR UNDER CONSIDERATION, THEREFORE, IN VIEW OF THE FOLLOWING JUDICIAL PRONOUNCEMENTS, WE DIRECT THE AO TO RE - COMPUTE THE DISALLOWANCE BY TAKING INTO ACCOUNT ONLY THOSE INVESTMENTS ON WHICH ASSESSEE HAS RECEIVED DIVIDEND INCOME A) ACIT V. VIREET INV ESTMENT P. LTD. [165 ITD 27 (DEL) (SB)] B) ACB INDIA V ACIT [374 ITR 108 (DEL)] C) M/S SLYVEX CABLE CO. PVT. LTD. V DY.CIT BEING ITA NO: 8581/MUM/2011 FOR A.Y. 2008 - 09 DATED 24.02.2016 28. THE ADDITIONAL GROUND TAKEN BY THE ASSESSEE IS PURELY LEGAL IN NATURE, ACCORDINGLY, WE DIRECT THE ASSESSING OFFICER TO RECOMPUTED THE BOOK PROFIT U/S.115JB OF THE ACT BY TAKING THE SAME AMOUNT OF DISALLOWANCE AS CALCULATED UNDE R NORMAL COMPUTATION OF INCOME AS DISCUSSED ABOVE. 29. IN THE RESULT, APPEAL OF ASSESSEE IS ALLOWED IN PART. ITA NO. 4768/MUM/2012 AND OTHER APPEALS M/S. CHARU TRADING COMPANY PVT. LTD., 17 ITA NO.4694/MUM/2013 & 4557/MUM/2013 30. THESE ARE THE CROSS APPEALS FILED BY ASSESSEE AND REVENUE AGAINST THE ORDER OF CIT(A) FOR THE A.Y.2009 - 10 IN THE MATTER OF ORDER PASSED U/S.143(3) OF THE IT ACT. 31. FACTS OF THE CASE IN THE A.Y.2 009 - 10 ARE SAME AS DISCUSSED BY US HEREINABOVE IN THE A.Y.2008 - 09. THE ASSESSEE IS A PRIVATE LIMITED COMPANY ENGAGED IN BUSINESS OF PROVIDING ADVANCES, TRADING AND MAKING INVESTMENTS IN SHARES. THE ASSESSEE IS ALSO REGISTERED AS NBFC (NON BANKING FINANCE C OMPANY) WITH RBI. FOR A.Y.2009,10 THE ASSESSEE FILED ITS RETURN OF INCOME ON 30,09.2009 DECLARING TOTAL LOSS OF RS.13,20,11,78S/ - . THE ASSESSMENT WAS COMPLETED BY THE ASSESSING OFFICER BY PASSING ORDER DATED 22.11.2011 U/S. 143(3) OF THE ACT AND DETERMINED THE INCOME OF THE ASSESSEE AS UNDER: SR. NO. PARTICULARS AMOUNT (?) AMOUNT (?) 1. TOTAL BUSINESS INCOME (LOSS) AS PER RETURN OF INCOME (13,20,11783) LESS : DISALLOWANCES 2. ADJUSTMENT IN RESPECT OF VALUATION OF STOCK IN TRADE EXPLANATI ON TO S.73 15,73,57,301 3. INTEREST U/S. 36(L)(III) 20,69,90,836 4. U/S.14A R.W. RULE 8D 13,65,55,899 5. U/S.40(A)(IA) 40,06,91,913 90,15,95,949 TOTAL ASSESSED INCOME 76,95,84,166 ITA NO. 4768/MUM/2012 AND OTHER APPEALS M/S. CHARU TRADING COMPANY PVT. LTD., 18 32. THE ASSESSEE FILED APPEAL BEFORE THE CIT(A ) AGAINST THE DISALLOWANCES MADE BY THE ASSESSING OFFICER. HOWE VER, THE CIT(A) CONFIRMED ORDER OF THE ASSESSING OFFICER AFTER GRANTING PARTIAL RELIEF IN RESPECT OF INTEREST DISALLOWANCE U/S.14A & 40(A)(IA) . HENCE, THE ASSESSEE AS WELL AS THE REVENUE HA S FI LED FURTHER APPEAL BEFORE US. 33. IN GR. NO. 1 ASSESSEE HAS ALLEGED THAT BUSINESS LOSS OF RS. 15 , 73,57,301/ - WAS WRONGLY TREATED AS SPECULATION LOSS U/S. 73 OF THE ACT BY THE LOWER AUTHORITIES. FROM THE RECORD WE FOUND THAT THE ASSESSEE HAD CLAIMED LOSS O F RS. 15,73,57,301/ - ARISING OUT OF VALUATION OF SHARES HELD AS STOCK IN TRADE AS 'BUSINESS LOSS 1 . HOWEVER, THE ASSESSING OFFICER BY RELYING ON THE DECISION OF THE BOMBAY HIGH COURT IN THE CASE OF PRASAD AGENTS P. LTD. [226 CTR 13] TREATED THE SAID LOSS AS 'SPECULATION LOSS' U/S.73 OF THE ACT. 34. THE CIT(A) NOTED THAT THIS ISSUE HAD BEEN DECIDED BY HIS PREDECESSOR FOR A.Y.2006 - 07 AGAINST THE ASSESSEE. THE CIT(A) ALSO REFERRED TO THE ORDER OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF PRASAD AGENTS P. LT D. (SUPRA) AND ORDER DATED 20.7.2012 OF THE IT AT IN THE CASE OF GANJAM TRADING CO. P. LTD. WHEREIN SIMILAR DISALLOWANCE MADE BY THE ASSESSING OFFICER WAS UPHELD. THUS, THE CIT(A) UPHELD THE ACTION OF THE ASSESSING OFFICER. ITA NO. 4768/MUM/2012 AND OTHER APPEALS M/S. CHARU TRADING COMPANY PVT. LTD., 19 35. IT WAS SUBMITTED BY LEARNED AR THAT THE ASSESSING OFFICER AND CIT(A) HAVE NOT TAKEN INTO CONSIDERATION THE FACTS OF THE YEAR UNDER CONSIDERATION AND ERRONEOUSLY CONCLUDED THAT THE CASE OF THE ASSESSEE IS COVERED BY THE EXPLANATION TO SECTION 73 OF THE ACT. IT WAS FURTHER SUBMITTED BY LEARNED AR THAT EXPLANATION TO SECTION 73 OF THE ACT PROVIDES FOR FEW EXCEPTIONS. ONE OF THE EXCEPTIONS IS IN RESPECT OF THOSE COMPANIES WHOSE PRINCIPAL BUSINESS IS OF GRANTING LOAN AND ADVANCES. IT WA S SUBMITTED THAT THE PRINCIPAL BUSINESS OF THE ASSE SSEE DURING THE YEAR UNDER CONSIDERATION I.E. A.Y.2009 - 10 WAS THAT OF MAKING ADVANCES. THIS IS DULY SUPPORTED BY THE PROFIT & LOSS ACCOUNT OF THE ASSESSEE. ON ITS PERUSAL, IT CAN BE SEEN THAT DURING THE YEAR THERE ARE NO SALES OF SHARES AND THE ASSESSEE HA S INCOME OF RS.49,47,53,192/ - OUT OF WHICH THE ASSESSEE HAS EARNED INTEREST OF RS.46,92,92,150/ - ON ADVANCES AND BALANCE IS DIVIDEND INCOME. 36. WE OBSERVE THAT THE INTEREST EARNED ON ADVANCES CONSTITUTES THE ONLY SOURCE OF BUSINESS INCOME AND HENCE, ESTA BLISHES THAT MAKING ADVANCES IS THE PRINCIPAL BUSINESS OF THE ASSESSEE. ACCORDINGLY, THE CASE OF THE APPELLANT IS COVERED BY THE EXCEPTION STIPULATED IN THE EXPLANATION TO SECTION 73 OF THE ACT. 37. SINCE , IT IS CLEAR FROM THE AUDITED P & L ACCOUNT OF AS SESSEE THAT THE DOMINANT BUSINESS OF THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION IS ITA NO. 4768/MUM/2012 AND OTHER APPEALS M/S. CHARU TRADING COMPANY PVT. LTD., 20 THAT OF PROVIDING ADVANCES AS THE INTEREST EARNED ON ADVANCES CONSTITUTES MAIN SOURCE OF INCOME AND AS SUCH, THE CASE OF THE ASSESSEE IS COVERED BY THE EXCEPTION PROVIDED IN THE EXPLANATION TO SECTION 73 OF THE ACT. ACCORDINGLY, WE DO NOT FIND ANY JUSTIFICATION IN THE ORDERS OF THE LOWER AUTHORITIES INVOKING EXPLANATION TO SECTION 73 FOR THE A.Y.2009 - 10 UNDER CONSIDERATION. 38. IN GR. NO. 2 ASSESSEE IS AGGRIEVED FOR DISALL OWANCE OF NOTIONAL INTEREST OF RS. 4,02,08.499/ - ON CLOSING STOCK AND TREATING THE SAME AS 'SPECULATION LOSS'/ 39. WE HAVE GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AND FOUND TH AT T HE ASSESSING OFFICER HAS DISALLOWED RS.4,02,08,499/ - , BEING 'BUSINES S LOSS' CLAIMED BY THE ASSESSEE FOR INTEREST TAKEN ON PROPORTIONATE BASIS AS COST OF CARRYING INVENTORIES. THE ASSESSING OFFICER REFERRED TO THE ORDER OF THE CIT(A) FOR A.Y. 2006 - 07 WHEREIN SIMILAR DISALLOWANCE WAS UPHELD. THUS, THE ASSESSING OFFICER TREAT ED THE SAID AMOUNT OF RS.4,02,08,499/ - AS 'SPECULATION LOSS'. 40. THIS GROUND IS CONSEQUENTIAL TO THE GROUND NO. 1. THEREFORE, FOLLOWING THE REASONING GIVEN FOR GROUND NO.1, WE ALLOW THE GROUND NO.2 OF ASSESSEE. 41. IN GR. NO. 3, ASSESSEE IS AGGRIEVED F OR DISALLOWANCE OF RS.20.69.90,836/ - U/S36(L)(III) OF THE ACT. ITA NO. 4768/MUM/2012 AND OTHER APPEALS M/S. CHARU TRADING COMPANY PVT. LTD., 21 42. WE HAVE CONSIDERED RIVAL CONTENTIONS AND FOUND FORM RECORD THAT THE ASSESSING OFFICER IN HIS ORDER NOTED THAT THE ASSESSEE HAD GIVEN INTEREST FREE ADVANCE OF RS.90,78,51,740/ - I.E. NON - BU SINESS PURPOSE AND RS. 339,66,23,062/ - RELATES TO INTEREST FREE SHARE APPLICATION MONEY GIVEN. HENCE, THE ASSESSING OFFICER DISALLOWED RS.20,69,90,836/ - , BEING PROPORTIONATE INTEREST COMPUTED ON THE BASIS OF RATIOS OF INTEREST F REE BORROWED FUND AND INTEREST BEARING FUNDS AS COMPUTED ON PAGE 18 OF THE ASSESSMENT ORDER. 43. THE CIT(A) REFERRED TO THE ORDER OF HIS PREDECESSOR FOR A.Y.2003 - 04, 2004 - 05, 2006 - 07 AND 2008 - 09 AND NOTED THAT THE ASSESSING OFFICER HAD FOLLOWED THE DIRECTI ONS GIVEN BY THE CIT(A) IN HIS ORDER FOR A.Y.2004 - 05 AND THAT THE DISALLOWANCE HAD BEEN MADE AS PER THE WORKING GIVEN BY THE ASSESSEE. HENCE, THE CIT(A) CONCLUDED THAT THERE WAS NO INFIRMITY IN THE ORDER OF THE ASSESSING OFFICER AND ACCORDIN GLY SUSTAINED T HE DISALLOWANCE. AS ALREADY OBSERVED HEREINABOVE, THE ASSESSING OFFICER OUGHT TO HAVE TAKEN INTO CONSIDERATION 'NET INTEREST' EXPENDITURE FOR THE PURPOSE OF COMPUTING INTEREST DISALLOWANCE AS AGAINST GROSS INTEREST EXPENDITURE. AS PER RECORD, THE ASSESSEE HAS CLAIMED NET INTEREST EXPENDITURE AS UNDER: PARTICULARS AMOUNT (?) INTEREST PAID 50,37,27,177 LESS : INTEREST RECEIVED ON ADVANCES GIVEN 46,92,92,150 ITA NO. 4768/MUM/2012 AND OTHER APPEALS M/S. CHARU TRADING COMPANY PVT. LTD., 22 NET INTEREST EXPENDITURE CLAIMED 3,44,35,027 44. IT IS CLEAR FROM THE ABOVE THAT THE ASSE SSEE HAD ITS OWN FUND, BORROWED FUNDS AND INTEREST FREE ADVANCES ALSO. T HE ASSESSING OFFICER HIMSELF HAS GRANTED SIMILAR BENEFIT TO THE ASSESSEE AS IS EVIDENT FROM THE PAGE 18 OF THE ASSESSMENT ORDER WHEREIN THE ASSESSING OFFICER HAS GIVEN CREDIT FOR THE N OTIO NAL INTEREST OF RS. 10,44,75,673/ - ON THE INTEREST FREE ADVANCES RECEIVED BY THE ASSESSEE. IT IS WELL SETTLED THAT FOR THE PURPOSE OF CONSIDERING INTEREST DISALLOWANCE, NET INTEREST EXPENDITURE SHOULD BE TAKEN INTO ACCOUNT. IN THIS RESPECT, RELIANCE IS PLACED ON THE FOLLOWING JUDICIAL PRONOUNCEMENTS,WHEREIN IT HAS BEEN HELD THAT FOR THE PURPOSE OF MAKING DISALLOWANCE U/S.!4A OF THE ACT ONLY 'NET INTEREST' SHOULD BE TAKEN INTO ACCOUNT: A) DCIT V JUBLIANT ENTERPRISES PVT. LTD. IN ITA NO.6364/MUM/2012 DATE D 12.03.2014 B) CIT V. JUBILIANT ENTERPRISES P. LTD. IN ITA NO. 1512 OF 2014 DATED 28.02.2017 UPHOLDING AFORESAID ORDER DATED 12.03.2014 OF THE HON'BLE TRIBUNAL. C) MORGAN STANLEY INDIA SECURITIES LTD V. ACIT ITA NO: 5072/MUM/2005 DATED 13.04.2011 D) DY. CIT V. M/S TRADE APARTMENTS LTD BEING ITA NO: 1277/KOL/2011 DATED 30.03.2012 ITA NO. 4768/MUM/2012 AND OTHER APPEALS M/S. CHARU TRADING COMPANY PVT. LTD., 23 E) BISHWANATH PASARI V. ASST.CIT BEING ITA NO: 1682/KOL/2011 DATED 06.03.2013 F) PARESH K. SHAH V DY.CIT BEING ITA NO: 8214/MUM/2011 DATED 05.06.2013 45. EVEN THOUGH THE ABO VE DECISIONS PERTAIN TO DISALLOWANCE U/S.14A OF THE ACT, ITS RATIO SHOULD BE EQUALLY APPLIED WHILE CONSIDERING DISALLOWANCE U/S. 36(L)(III) OF THE ACT. 46. IN VIEW OF THE ABOVE, WE DIRECT THE ASSESSING OFFICER TO RE - COMPUTE INTEREST DISALLOWANCE AFTER TAKI NG INTO ACCOUNT NET EXPENDITURE CLAIMED BY THE ASSESSEE. 47. IN GROUND NO.4, ASSESSEE IS AGGRIEVED FOR DISALLOWANCE OF RS.1,87,97,835/ - U/S.14A OF THE ACT. THE ASSESSING OFFICER HAS INVOKED PROVISIONS OF SECTION 14A OF THE ACT READ WITH RULE 8D OF I.T. RU LES AND DISALLOWED RS. 13,65,55,899/ - WITHOUT TAKING INTO ACCOUNT DISALLOWANCE MADE BY HIM U/S. 36(L)(III) AND EXPLANATION TO SECTION 73 IN RESPECT OF INTEREST. 48. BY THE IMPUGNED ORDER, THE CIT(A) CONSIDERED THE WORKING OF DISALLOWANCE MADE BY THE ASSESS EE U/S.14A OF THE ACT OF RS.1,87,97,835/ - BY TAKING NET INTEREST EXPENDITURE AND AFTER TAKING INTO ACCOUNT THAT THE ASSESSEE HAD SUO MOTO DISALLOWED RS.1,75,60,657/ - DIRECTED THE ASSESSING OFFICER TO LIMIT THE DISALLOWANCE TO THE EXTENT OF DIFFERENCE BETWE EN THESE TWO FIGURES I.E. RS. 1,87,97,835 MINUS ITA NO. 4768/MUM/2012 AND OTHER APPEALS M/S. CHARU TRADING COMPANY PVT. LTD., 24 RS.1,75,60,657/ - . ACCORDINGLY WE DIRECT THE ASSESSING OFFICER TO CONSIDER THE DISALLOWANCE OF INTEREST BY TAKING INTO ACCOUNT 'NET INTEREST EXPENDITURE' CLAIMED BY THE ASSESSEE AS AGAINST GROSS INTEREST EXPEN DITURE. FOR THIS PURPOSE WE PLACE RELIANCE ON THE LIST OF ORDERS REFERRED HEREINABOVE. SO FAR AS DISALLOWANCE OF OTHER EXPENDITURE @0.5% OF AVERAGE INVESTMENTS AS PER FORMULA PRESCRIBED IN RULE 8D IS CONCERNED , WE DIRECT THE ASSESSING OFFICER TO RE - COMPUTE THE DISALLOWANCE BY TAKING INTO ACCOUNT ONLY THOSE INVESTMENTS ON WHICH THE ASSESSEE HAS RECEIVED THE DIVIDEND. IN THIS RESPECT, RELIANCE IS PLACED ON THE FOLLOWING DECISIONS: ACIT V. VIREET INVESTMENT P. LTD. [165 ITD 27 (DEL) (SB)] ACB INDIA V A CIT [374 ITR 108 (DEL)] M/S SLYVEX CABLE CO. PVT. LTD. V DY.CIT BEING ITA NO: 8581/MUM/2011 FOR A.Y. 2008 - 09 DATED 24.02.2016. , 49. IN GR. NO. 5 OF ASSESSEES APPEAL PERTAINS TO D ISALLOWANCE OF INTEREST IN EXCESS OF NET PAYMENT OF INTEREST OF RS. 3,44.35.027 / - . FROM THE RECORD WE FOUND THAT THE ASSESSEE HAS CLAIMED NET INTEREST EXPENDITURE OF RS. 3,44,35,027 / - AS DISCUSSED ABOVE. HOWEVER, THE ASSESSING OFFICER HAS MADE INTEREST DISALLOWANCE ON ACCOUNT OF INTEREST UNDER VARIOUS SEC TIONS AS UNDER: DISALLOWANCE OF INTEREST AMOUNT (RS ) U/S.73 4,02,08,499 U/S.36(L)(III) 20,69,90,836 ITA NO. 4768/MUM/2012 AND OTHER APPEALS M/S. CHARU TRADING COMPANY PVT. LTD., 25 U/S.L4A 12,63,98,742 TOTAL 37,35,98,077 50. SINCE THE ABOVE DISALLOWANCE IS IN EXCESS OF NET INTEREST EXPENDITURE OF RS. 3,44,35,027/ - CLAIM ED BY THE ASSESSEE, WE DIRECT THE ASSESSING OFFICER TO RESTRICT THE TOTAL DISALLOWANCE ON ACCOUNT OF INTEREST EXPENDITURE TO THE EXTENT OF ACTUAL NET INTEREST EXPENDITURE CLAIMED BY THE ASSESSEE. WE DIRECT ACCORDINGLY. 51. IN THE APPEAL FILED BY THE REVEN UE, REVENUE IS AGGRIEVED FOR DISALLOWANCE DELETED BY CIT(A) WHICH WAS MADE BY AO U/S.14A. IN THIS REGARD WE OBSERVE THAT GROUND NO.1 OF THE DEPARTMENT APPEAL IS COVERED BY THE GROUND NO.4 OF THE APPEAL FILED BY THE ASSESSEE. FOLLOWING THE SAME REASONING, W E DIRECT THE AO ACCORDINGLY. 52. IN GROUND NO. 2 REVENUE IS AGGRIEVED FOR DELETING DISALLOWANCE U/S.40(A)(IA) OF THE ACT. IN THIS RESPECT WE FOUND THAT THE ASSESSING OFFICER HAD DISALLOWED RS.40,06,91,913 / - U/S.40(A)(IA) OF THE ACT IN RESPECT OF BELATED TD S PAYMENTS MADE BY THE ASSESSEE. THE ASSESSING OFFICER RELIED ON THE ORDER PASSED BY THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF BHARTI SHIPYARDS IN ITA NO. 2400/MUM/2009 DATED 12.09.2011 WHEREIN IT WAS HELD THAT THE AMENDMENT MADE TO SECTION 40(A)(IA ) OF THE ACT IS PROSPECTIVE IN NATURE. ITA NO. 4768/MUM/2012 AND OTHER APPEALS M/S. CHARU TRADING COMPANY PVT. LTD., 26 53. BY THE IMPUGNED ORDER THE CIT(A) HELD THAT IN VIEW OF SETTLED POSITION LAW THAT THE AMENDMENT MADE TO SECTION 40(A)(IA) OF THE ACT IS RETROSPECTIVE IN NATURE AND THAT THE ASSESSEE HAD PAID TDS BEFORE DUE DATE OF FILING OF THE RETURN OF INCOME, DIRECTED THE ASSESSING OFFICER TO DELETE THE SAID DISALLOWANCE. 54. FURTHERMORE, RECENTLY THE HON'BLE SUPREME COURT VIDE ITS JUDGMENT DATED 24.04.2018 IN CIVIL APPEAL NOS.4339 - 4340 OF 2018 IN THE CASE OF CIT V CALCUTTA EXPO RTS [404 ITR 654] AND OTHERS HELD THAT AMENDED PROVISION OF SECTION 40(A)(IA) OF THE ACT SHOULD BE INTERPRETED LIBERALLY AND APPLIES RETROSPECTIVELY. RESPECTFULLY FOLLOWING THE SAID JUDGMENT OF HONBLE SUPREME COURT, WE DO NOT FIND ANY INFIRMITY IN THE ORD ER OF CIT(A) IN SO FAR AS THE ASSESSEE HAD PAID TDS BEFORE LAST DATE OF FILING OF RETURN OF INCOME. ACCORDINGLY WE UPHOLD THE ORDER OF CIT(A) ON THIS ISSUE. 55. IN THE RESULT APPEAL OF THE REVENUE IS DISMISSED WHEREAS APPEALS OF ASSESSEE ARE ALLOWED IN PAR T IN TERMS INDICATED HEREINABOVE. ORD ER PRONOUNCED IN THE OPEN COURT ON THIS 30 / 11 /201 8 SD/ - ( SANDEEP GOSAIN ) SD/ - (R.C.SHARMA) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED 30 / 11 /201 8 KARUNA SR. PS ITA NO. 4768/MUM/2012 AND OTHER APPEALS M/S. CHARU TRADING COMPANY PVT. LTD., 27 COPY OF THE ORDER FORWARDED TO : BY ORDER, ( ASSTT. REGISTRAR) ITAT, MUMBAI 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A), MUMBAI. 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY//