ACIT, Kanpur V. M/s. Kailash Motors, Kanpur

ITA 550/LKW/2009

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 83405 (ITAT-LUCKNOW)
• Duration Of Justice: 5 year(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-11-2014
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 29-09-2014
• Assessment Year: 2004-2005
• Appeal Filed On: 26-10-2009
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: ALOK MITRA
• Keywords: Capital asset; Depreciation; Business expenditure; Salary income; Source of fund; Cost of acquisition; Notional interest
• Section: 143(3); 14A; 37(1)

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL LUCKNOW BENCH A, LUCKNOW BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI A.K. GARODIA, ACCOUNTANT MEMBER ITA NO.550/LKW/2009 ASSESSMENT YEAR:2004 - 05 A.C.I.T. - II, KANPUR. VS. M/S KAILASH MOTORS, 84/105, G. T. ROAD, KANPUR. PAN:AACFK5659B (APPELLANT) (RESPONDENT) C.O. NOS.84/LKW/2009 (IN ITA NO.550/LKW/2009) ASSESSMENT YEAR:2004 - 05 M/S KAILASH MOTORS, 84/105, G. T. ROAD, KANPUR. PAN:AACFK5659B VS. A.C.I.T. - II, KANPUR. (OBJECTOR) (RESPONDENT) ITA NO.551/LKW/2009 ASSESSMENT YEAR:2005 - 06 A.C.I.T. - II, KANPUR. VS. M/S KAILASH MOTORS, 84/105, G. T. ROAD, KANPUR. PAN:AACFK5659B (APPELLANT) (RESPONDENT) C.O. NOS.85/LKW/2009 (IN ITA NO.551/LKW/2009) ASSESSMENT YEAR:2005 - 06 M/S KAILASH MOTORS, 84/105, G. T. ROAD, KANPUR. PAN:AACFK5659B VS. A.C.I.T. - II, KANPUR. (OBJECTOR) (RESPONDENT) 2 ITA NO.360/LKW/2012 ASSESSMENT YEAR:2006 - 07 DY.C.I.T. - II, KANPUR VS. M/S KAILASH AUTOMOBILES, 84/105, G. T. ROAD, KANPUR. PAN:AACFK1414A (APPELLANT) (RESPONDENT) C.O. NOS.66/LKW/2012 (IN ITA NO.360/LKW/2012) ASSESSMENT YEAR:2006 - 07 M/S KAILASH AUTOMOBILES, 84/105, G. T. ROAD, KANPUR. PAN:AACFK1414A VS. DY.C.I.T. - II, KANPUR (OBJECTOR) (RESPONDENT) REVENUE BY SHRI ALOK MITRA, D. R. ASSESSEE BY SHRI RAKESH GARG, ADVOCATE DATE OF HEARING 29 /09/2014 DATE OF PRONOUNCEMENT 1 9 /1 1 /2014 O R D E R PER A. K. GARODIA, A.M. THERE ARE THREE APPEALS BY THE REVENUE AND CORRESPONDING THREE CROSS OBJECTIONS FILED BY THE ASSESSEE, WHICH ARE DIRECTED AGAINST THREE SEPARATE ORDERS OF LEARNED CIT(A) - I, KANPUR DATED 31/07/2009 FOR ASSESSMENT YEAR 2004 - 05, DATED 31/07/2009 FOR ASSESSMEN T YEAR 2005 - 06 AND DATED 23/03/2012 FOR ASSESSMENT YEAR 2006 - 07. ALL THE APPEALS AND CROSS OBJECTIONS WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY WAY OF THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE. 3 2. FIRST WE TAKE UP THE APPEAL OF THE REVENUE FOR THE ASSESSMENT YEAR 2004 - 05 I.E. I.T.A. NO.550/LKW/2009. IN THIS APPEAL THE REVENUE HAS TAKEN THE FOLLOWING GROUNDS: 1. ON FACTS AND IN CIRCUMSTANCES OF THE CASE THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) - I , KANPUR HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION OF RS.15,55,525 / - MADE BY THE ASSESSING OFFICER OUT OF ADDITION ON ACCOUNT OF DISCOUNTING ON TERM LOAN LIABILITY CLAIMED BY THE ASSESSEE. 2. ON FACTS AND IN CIRCUMSTANCES OF THE CASE THE LEARNED COMMISSIONER OF INCOME TAX, (APPEALS) - I , KANPUR HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION OF RS.36,18,493 / - MADE BY THE ASSESSING OFFICER OUT OF INTEREST PAID ON BORROWED FUNDS CLAIMED BY THE ASSESSEE. 3. WHILE ALLOWING THE CLAIM OF THE ASSESSEE, THE CIT(A) - I, KANPUR HA S OVERLOOKED THE PROVISIONS OF SECTION 14A OF THE INCOME TAX ACT. SINCE THE INTEREST IN QUESTION REPRESENTS INTEREST ON FUNDS BORROWED FOR INVESTMENT IN SHARES OF SISTER CONCERN CANNOT BE ALLOWED AS DEDUCTION. 4. THAT THE ORDER OF BEING ERRONEOUS IN LAW AND ON FACTS BE VACATED AND THE ORDER DATED 29/12/2006 PASSED U/S 143(3) BY THE ASSESSING OFFICER BE RESTORED. 3. LEARNED D.R. OF THE REVENUE SUPPORTED THE ASSESSMENT ORDER WHEREAS LEARNED A.R. OF THE ASSESSEE SUPPORTED THE ORDER OF LEARNED CIT(A). LEARNED A.R. OF THE ASSESSEE ALSO FURNISHED WRITTEN SUBMISSIONS. THE WRITTEN SUBMISSIONS OF LEARNED A.R. OF THE ASSESSEE IN RESPECT OF GROUND NO. 1 ARE AS UNDER: GR OUND NO. 1 RELATES TO DELETING OF ADDITION, OF RS.75,55,525 / - MADE BY THE ASSESSING OFFICER OUT OF ADDITION ON ACCOUNT OF DISCOUNTING ON TERM LOAN LIABILITY CLAIMED BY THE ASSESSEE. THE FACTS ARE THAT THE ASSESSEE IS A DEALER OF TATA MOTORS. THE VEHICLES ARE SUPPLIED TO THE ASSESSEE ON FIFTEEN DAYS SITE. 4 FAILURE TO MAKE PAYMENT WITHIN F IFTEEN DAYS, THE ASSESSEE IS LIABLE FOR BILL DISCOUNTING CHARGES AS WELL AS DAMAGES THEREON. THE SUM OF RS.75,55,525 / - BEING DISCOUNTING CHARGES FOR THE YEAR WERE NOT CLAIMED BY THE ASSESSEE IN ITS BOOKS OF ACCOUNT BUT WERE CLAIMED IN THE COMPUTATION OF IN COME WHILE FILING THE RETURN OF INCOME. THE ASSESSING OFFICER DOES NOT DENY THE QUANTUM OF THE AMOUNT CLAIMED NOR DISPUTES THE NATURE OF THE LIABILITY. THE ASSESSING OFFICER HAS DENIED THE DEDUCTION FOR THE REASON THAT THE ASSESSEE HAS MADE THE PAYMENTS O UTSIDE BOOKS OF ACCOUNT. THE ASSESSING OFFICER IN PARA 4 HAS HELD AS UNDE R: IT HAS BEEN NOTICED THAT ASSESSEE HAS CLAIMED A SUM OF RS.75,55,525 / - AS INTEREST PAID TO TELCO NOT PROVIDED IN THE BOOKS. THE COUNSEL OF ASSESSEE VIDE QUESTIONNAIRE DATED 24.11.2 006 WAS ASKED TO SHOW - CAUSE AS TO WHY INTEREST OF RS.75,55,525 / - SHOULD NOT BE DISALLOWED, AS IT HAS BEEN PAID OUT OF BOOKS. ASSESSEE VIDE ITS REPLY DATED 24.12.2006 HAS SUBMITTED AS UNDER: 'WITH REGARDS TO YOUR HONOUR'S QUERY REGARDING CLAIM OF PAYMENT O F INTEREST OF RS.75,55,525 / - TO TELCO, IT IS SUBMITTED THAT WE HAVE TERM LOAN LIABILITY TO TELCO AMOUNTING TO RS.6,37,71,080 / - AS ON 31.03.2004 AS DULY REFLECTED IN OUR BALANCE SHEET. THIS TERM LOAN IS AGAINST BILL DISCOUNTING SCHEME. DURING THE YEAR BILL DISCOUNT CHARGES AMOUNTING TO RS.75,55,525 / - HAS NOT BEEN ACCOUNTED FOR. WITH THE RESULT , THE PROFIT BY THE AMOUNT OF RS.75,25,525 / - IS OVERSTATED AND THE LIABILITIES OF THE SAME AMOUNT ARE UNDERSTATED. YOUR HONOUR MAY KINDLY PURSUE IN AUDIT REPORT, POINT NO. 3FORM NO. '3CB' WHICH IS REPRODUCED AS UNDER: - 'THERE HAS BEEN A TERM LOAN FROM TELCO ON WHICH INTEREST OF RS.75,55,525 / - HAS NOT BEEN ACCOUNTED DURING THE YEAR. THUS THE PROFIT FOR THE YEAR IS OVER STATED BY RS.75,25,525 / - AND LIABILITIES ARE UNDER STATED BY SIMILAR AMOUNT.' THAT BEING SO, THE DISCOUNTING CHARGES AMOUNTING TO RS.75,25,525 / - HAS BEEN CLAIMED. AS SUCH THE CLAIM IS JUSTIFIED AND MAY KINDLY BE ALLOWED . 5 THE REPLY SUBMITTED BY THE ASSESSEE IS NOT CONVINCING, AS ASSESSEE HAS NOT FURNISHED ANY DOCUMENTARY EVIDENCE REGARDING TERM LOAN TAKEN BY IT FROM TE L CO AND ITS UTILIZATION. ON THE OTHER HAND, ASSESSEE HAS STATED THAT TERM LOAN WAS AGAINST BILL DISCOUNTING SCHEME, NO EVIDENCE WHATEVER, TI WAS AGAINST BILL DISCOUNTING SCHEME, HAS BEEN PRODUCED. APART FROM ABOVE, IT HAS NOT BEEN EXPLAINED PROPERLY, AS TO WHY PROFIT HAS BEEN OVER STATED AND LIABI LI TIES HAS BEEN UNDER STATED DURING THE YEAR UNDER CONSIDERATION AND ALSO WHY INTEREST OF RS.75,25,525 / - HAS BEEN PAID OUT OF BOOKS. SO IT I S DISALLOWED FROM THE COMPUTATION OF INCOME AS CLAIMED BY ASSESSEE. AS THE ASSESSEE HAS FURNISHED INACCURATE PARTICULARS OF INCOME THEREFORE, PENALTY PROCEEDINGS U/S 271( 1 )(C) OF I.T. ACT 1961 ARE INITIATED SEPARATELY. THE CIT(A) WHILE ADJUDICATING UPON THE SAID ISSUE HAS HELD AS UNDER: - THE APPELLANT HAS CONTESTED THE ADDITION OF RS.75,55,525 / - DISCOUNTING CHARGES ON TERM LOAN LIABILITY IS DISALLOWED BY THE AO. THE AO HAD CONSIDERED THIS ISSUE IN PARA - 4 OF THE ASSESSMENT ORDER. THE RELEVANT PORTION IS REPORTED AS FOLLOWS: FROM THE PERUSAL OF COMPUTATION CHART, IT HAS BEEN NOTICED THAT ASSESSEE HAS CLAIMED A OF RS.75,55 , 525 / - AS INTEREST PAID TO TELCO NOT PROVIDED IN THE BOOKS. THE COUNSEL OF ASSESSEE VIDE QUESTIONNAIRE DATED 24 /11/2006 WAS ASKED TO SHOW CAUSE AS TO WHY INTEREST OF RS.75,55,525/ - SHOULD NOT BE DISALLOWED, AS IT HAS BEEN PAID OUT OF BOOKS. ASSESSEE VIDE ITS REPLY DATED 24 /12/2006 HAS SUBMITTED AS UNDER: - 'WITH REGARD TO YOUR HONOUR'S QUERY REGARDING CLAIM OF PAYMENT OF INTEREST OF RS.75,55,525/ - TO TELCO, IT IS SUBMITTED THAT WE HAVE TERM LOAN LIABILITY TO TELCO AMOUNTING TO RS.6,37,71,080/ - AS ON 31.03 . 2004 AS DULY REFLECTED IN OUR BALANCE SHEET THIS TERM LOAN IS AGAINST BILL DISCOUNTING SCHEME. DURING THE YEAR BILL D ISCOUNT CHARGES AMOUNTING TO RS.75,55,525/ - HAS NOT BEEN ACCOUNTED FOR. WITH THE RESULT, THE PROFIT BY THE AMOUNT OF RS .7 5,55 , 525/ - IS OVERSTATED AND THE LIABILITIES OF THE SAME AMO UNT A RE UNDERSTATED. YOUR HONOUR MAY KINDLY PURSUE IN AUD IT REPORT, POINT NO.3 FORM NO.' 3 CB' WHICH IS REPRODUCED AS UNDER : - 6 THERE HAS BEEN A TERM LOAN FROM TELCO ON WHICH INTEREST OF RS.75,55,525/ - HAS NOT BEEN ACCOUNT ED DURING THE YEAR. THUS THE PROFIT FOR THE YEAR IS OVER STATED BY R S . 75,55,525/ - AND LIABILI TIES ARE UNDER STATED BY SIMILAR AMOUNT. ''THAT BEING SO , THE DISCOUNTING CHARGES AMOUNTING TO RS . 75,55,525/ - HAS BEEN CLAIMED. AS SUCH THE CLAIMED IS JUSTIFIED AND MAY KINDLY BE ALLOWED'. 'THE REPLY SUBMITTED BY THE ASSESSEE IS NOT CONVINCING, AS ASSESSEE HAS NOT FURNISHED ANY DOCUMENTARY EVIDENCES REGARDING TERM LOAN TAKEN BY IT FROM TELCO AND, ITS UTILIZATION, ON THE OTHER HAND, ASSESSEE HAS STATED THAT TERM LOAN WAS AGAINST BILL DISCOUNTING SCHEME WHATEVER, IT WAS AGAINST HILL DISCOUNTING SCHEME , HAS BEEN PRODUCED. APART FROM ABOVE, IT HAS NOT BEEN EXPLAINED PROPERLY, AS TO WHY PROFIT HAS BEEN OVER STATED AND LIABILITIES HAS BEEN UNDER STATED DURING THE YEAR UNDER CONSIDERATION, AND ALSO WHY INTEREST O F RS.75,55,525/ - HAS BEEN PAID OUT OF BOO KS . SO IT IS INACCURATE PARTICULARS OF INCOME, THEREFORE, PENALTY PROCEEDINGS U/S 271( 1 )(C) OF THE I. T. ACT, 1961 ARE INITIATED SEPARATELY . THE APPELLANT HAS SUBMITTED ON THIS I SSUE IN THE FOLLOWING MANNER : - 'THE APPELLANT FIRM HAD A LIABILITY OF RS.6 , 37 , 71, 080/ - TOWARDS TELCO WHICH WAS CONVERTED INTO A TERM LOAN. THE APPELLANT CLAIMED BILLS DISCOUNTING CHARGES OF RS.75,55,525 / - ON THE SAID (LIABILITY) OUTSTANDING BALANCE AS PER TERMS OF CONTRACT. IT MAY BE SUBMITTED THAT THE APPELLANT MAKES PURCHASES OF VEHICLES FROM TELCO, THE PRINCIPALS, FOR WHICH PAYMENTS ARE REQUIRED TO BE MADE WITHIN A SPECIFIED PERIOD . FOR DELAY IN PAYMENT(S) THE PRINCIPALS LEVY BILLS DISCOUNTING CHARGES. AS THERE WERE SOME DISPUTE WITH THE PRINCIPALS REGARDING THE' RATE AT WHICH B ILL DISCOUNTING CHARGES WERE LEVIED, THE APPELLANT FIRM DID NOT PROVIDE THE LIABILITY IN THE BOOKS OF ACCOUNT, BUT CLAIMED THE LIABILITY THROUGH COMPUTATION OF INCOME ATTACHED WITH THE RETURN OF INCOME. THE APPELLANT IS SUBMITTING A COPY OF STATEMENT ISSUE D BY TATA MOTORS LIMITED FOR THE PERIOD ENDED 31 / 03 / 2004 AS PER ANNEXURE FILED ALONG WITH REPLY DATED 12.12.2006. IT MAY BE ADDED IN THE I MMEDIATELY PRECEDING YEAR THE LIABILITY FOR DISCOUNTING CHARGES WAS PROVIDED IN THE BOOKS OF ACCOUNT AND WAS ALSO ALLO WED BY THE LD. AO. IT WAS EXPLAINED THAT THE BILL 7 DISCOUNTING C HARGES OF RS.75,55,525/ - IS TRADING LIABILITY AND IS ALLOWABLE U/S 37(1) OF THE I. T . ACT, 1 9 61. THE LD. AO HOWEVER, DID NOT CONSIDER THE FACT THAT BY NOT PROVIDING FOR THE LIABILITY, IN THE BOO KS OF ACCOUNTS , PROFIT HAS BEEN OVERSTATED BY RS.75,55 , 525/ - AND THE LIABILITY HAS BEEN UNDERSTATED. THIS F ACT WAS ALSO FULLY DISCLOSED IN THE TAX AUDIT REPORT (POINT NO.3 OF FORM NO.3 CB), WHICH IS REPRODUCED AS UNDER : - . THERE HAS BEEN A TERM LOAN FROM TELCO ON WHICH INTEREST OF RS . 75,55,52 5 / - HAS NOT BEEN ACCOUNTED FOR DURING THE YEAR. THUS, THE PROFIT FOR THE YEAR IS OVER STATED BY RS.75,55,525 / - AND LIABILITIES ARE UNDERSTATED BY SIMILAR AMOUNTS 'AS THE NATURE OF DISCOUNTING CHARGES IS INTERE ST CHARGED BY THE PRINCIPALS FOR PAYMENT, OR FOR LATE PAYMENT IT IS TRADING LIABILITY. YOUR HONOUR MAY, THEREFORE, BE PLEASED TO DELETE THE ADDITION MADE BY THE LD. AO'. 13. DURING THE COURSE OF HEARING ON THIS I SSUE, IT WAS FURTHER SUBMITTED AND ARGUED T HAT 'IN ADDITION TO OUR EARLIER SUBMISSION WE HAVE TO SUBMIT THAT RS . 75,55 , 525/ - ON ACCOUNT OF DISCOUNTING CHARGES / INTEREST LIABILITY TOWARDS TELCO ON TERM LOAN LIABILITY FOR THE YEAR 2003 - 04, IS AN ASCERTAINED, ACCRUED AND DEMANDED LIABILITY OF THE APPELLANT. BECAUSE OF AN UNILATERAL DECISION IN A CONTRACTUAL OBLIGATION THE ACCRUED AND ASCERTAINED LIABILITY THOUGH LEFT TO BE ACCOUNTED FOR IN THE RESPECTIVE FINANCIAL YEAR CANNOT TURN OUT THIS ASCERTAINED / ACCRUED/ DEMANDED EXPENSE INTO NON ALLOWABLE EXPENDITURE. THIS TERM LOAN AROSE THE BECAUSE THE APPELLANT COULD NOT PAY THE DEFERR ED PAYMENTS AGAINST PURCHASES OF VEHICLES TRAD E D BY THE APPELLANT IN EARLIER YEARS AND TELCO AGREED TO CONVERT TRADING LIABILITIES ALONG WITH CURRENT BMS OUTSTANDING INTO TERM LOAN OF RS. 701 LAC ON MAY, 2002 AND GAVE THE REPAYMENT SCHEDULE OF SAID TERM LOA N. THE APPELLANT FOLLOWED THIS TERM LOAN MOU AND RELIGIOUSLY PAID INSTAL L MENTS AS PER MO U FROM JUNE, 2002 TILL MARCH, 2003. THIS AMPLY DEMONSTRATE THAT EXPENSE IS UNDER CONTRACTUAL OBLIGATION BETWEEN TWO PARTIES FOR FINANCIAL YEAR 2003 - 04 AND THUS TO BE AL LOWED IN ASSESSMENT YEAR 2004 - 05 . WE PLACE RELIANCE ON FALLOWING JUDICIAL PRONOUNCEMENT IN THIS RESPECT : - 8 ( A ) KE DARNATH JUTE MFG. C. LTD VS. CIT (1971) 82 ITR 363 (SC) ( B ) CIT VS. SOUTHERN ESTATES (P) LTD. (CAL.) 136 ITR 846 ( C ) BALRAN VIRMANI VS. CIT, KA N PUR 97 ITR 69 (ALL) ( D ) L. J. PATEL & CO. VS. CIT KERALA 97 ITR 152 ( E ) POPE THE KING MATCH FACTORY VS. CIT, MADRAS 50 ITR 495 ( F ) GANESH LAL RAM KUMAR VS. CIT, U.P. LKW. 77 ITR 974 (ALL) ( G ) CIT, DELHI VS. NAV BKARAT NIRMAN (P) LTD. 141 ITR 723 (DEL.) ( H ) CIT VS . PADMAVATI RAJE COTTON MILLS LTD. (CA L ) 203 ITR 375 ( I ) CALCUTTA CO. LTD. VS. CIT, WEST BENGAL (SC) 37 ITR 1 ( J ) C IT, ASSAM VS . NATHUMAL TOLARAM (GAUHATI) 88 ITR 234. 14. I HAVE CONSIDERED THE FACTS AND CIRCUMSTANCES OF THE CASE AND ARGUMENT OF L D A.R. SHRI AJAY GUPTA AS NOTED ABOVE. THE REASONS FOR DISALLOWANCE OF INTEREST PAID TO TELCO AS NOTED BY THE AO IN THE ASSESSMENT ORDER DO NOT SHOW ANY REASON T O DISQUALIFY THE CLAIM U/S 37 OF THE I. T. ACT THE APPELLANT HAS FILED EXPLANATION AND DETAIL OF THE SAID AMOUNT VIDE LETTER DATED 12.12 . 2006 ADDRESSED TO THE DY. COMMISSIONER OF INCOME TAX, RANGE - II, KANPUR, A COPY OF THE SAME HAS BEEN FILED BEFORE ME. IT I S CLEAR FROM THE REPLY AND EXPLANATION OF THE APPELLANT THAT RS.75,55,525 / - W A S PRIMARILY INTER EST PAID TO TELCO ON THE TERM LOAN LIABILITY OF RS.6,37,71,080/ - . THE SAID TERM LOAN LIABILITY WAS VERIFIABLE FROM THE BALANCE SHEET, ACCOUNT BOOKS OF THE APPELLANT FROM YEAR TO YEAR. THE TERMS AND CONDITIONS OF THE SAID TERM LOAN INCLUDE BILL DISCOUNTING SCHEME FOR WHICH THE APPELLANT HAS INCURRED THE LIABILITY OF R S.75,55,525/ - , IT MAY BE TRUE THAT THIS LIABILITY IS NOT ACCOUNTED FOR IN THE BOOKS OF THE APPELLANT BUT SAME IS REQUIRED TO BE TAKEN IN CONSIDERATION FOR THE C OMPUTATION OF INCOME OF THE CURREN T YEAR BECAUSE APPELLANT IS FOLLOWING 'MERCANTILE METHOD OF ACCOUNTING AS ALSO ACCEPTED BY THE DEPARTMENT. IT IS FOR THIS REASON THAT THE AUDITORS HAVE ALSO MADE THIS DISCLOSURE IN FORM NO.3CB FILED WITH THE RETURN. THE AO HAS NOTED THAT APPELLANT HAS NOT FURNISHED ANY DOCUMENTARY EVIDENCE REGARDING TERM LOAN TAKEN FROM TELCO AND ITS UTILIZATION. THE APPELLANT'S CONTENTION IS THAT THE SAID TERM LOAN LIABILITY WAS APPEARING A N D VERIFIABLE I N THE BALANCE SHEET AS ON 31 . 03 . 2004 . IN SO FAR AS THE ASSESSING OFFI CER HAS NOT QUESTIONED AND DISALLOWED THE SAID TERM LOAN APPEARING IN THE BALANCE SHEET OF THE APPELLANT, AS UNEXPLAINED 9 CREDIT OR IN ANY OTHER MANNER, THE SAME STANDS ACCEPTED. MOREOVER, SINCE SUCH TERM LOAN LIABILITY IS APPEARING IN THE BOOKS; FROM YEAR TO YEAR, ITS EXISTENCE AND UTILIZATION FOR BUSINESS PURPOSE IS ACCEPTABLE IN ABSENCE OF ANY CONTRARY FINDING BY THE AO. THE SAID TERM LOAN IS FROM ESTABLISHED CONCERN LIKE TELCO AND BILL DISCOUNTING CHARGES OF RS.75,55,525/ - WHICH ORIGINATE FROM THE TERM LOAN ARE ALSO A PART OF CONTRACTUAL OBLIGATION ARISING FROM MOU B ETWEEN THE TWO PARTIES EFFECTIVE FROM JUNE, 2002, AS STATED AND SUBMITTED BY THE APPELLANT. FINALLY, IT IS ALSO SEEN THAT SIMILAR LIABILITY HAS BEEN ACCEPTED AND ALLOWED BY THE DEPARTMENT IN THE IMMEDIATELY PRECEDING YEAR. I DO N OT FIND ANY DOUBT AND QUESTION NOTED BY THE AO IN THE ASSESSMENT ORD ER ON THE QUANTUM OF LIABILITY OR ON THE SAID TERM LOAN. CONSIDERING THESE FACTS, IT SEEMS THAT AO REACHED THE CONCLUSI ON BY MISTAKE THAT AMOUNT OF RS.75,55,525/ - WAS PAID OUT OF THE BOOKS. FROM THE RECORDS, IT IS EVIDENT THAT SUCH TERM LOAN WAS EXISTING IN THE BOOKS OF THE APPELLANT AND DISCOUNTING CHARGES WERE RAISED BY TELCO AS INTEREST ON THE SAID TERM LOAN AS PER THE MOU AND BUSINESS PRACTICE OF THE APPELLANT FROM YEAR TO YEAR. I DO NOT FIND ANY MATERIAL SHOWING THAT THIS AMOUNT WAS FOR NON - BUSINESS PURPOSES AND / OR WAS NOT ASCERTAINED. CONSIDERING THAT APPELLANT HAS BEEN PRACTICING AND ALLOWED 'MERCANTILE METHOD OF A CCOUNTING', THE SAID AMOUNT IS LIABLE TO BE ALLOWED AS EXPENDITURE OF THE BUSINESS RELATING TO CURRENT YEAR AS CLAIMED IN THE COMPUTATION OF INCOME. THE CASE LAWS REFERRED AND RELIED UPON BY THE APPELLANT ON THIS ISSUE ARE RELEVANT AND APPLICABLE TO THE FA CTS AND CIRCUMSTANCES OF THE CASE. THE DECISION IN THE CASE OF DIPTI TEXTILE INDUSTRIES VS. CIT (BOMBAY) (HC), JUNE, 2009 UPHELD THE DEDUCTION OF BILL DISCOUNTING CHARGES. THE ASSESSEE WAS IN THE BUSINESS OF HIRING OF MACHINERY AND SALE PURCHASE OF YARN, W HO CLAIMED DEDUCTION FOR INTEREST PAID FOR DISCOUNTING OF BILLS. IT WAS HELD 'THAT SINCE THE TRIBUNAL HELD THAT TRANSACTION RELATING TO BILL DISCOUNTING WAS GENUINE INVOLVING LARGER BUSINESS INTEREST AND BUSINESS EXPEDIENCY, SIMILAR EXPENDITURE WAS ALLOWED IN OTHER YEARS, THE BENCH HAS NO CHOICE BUT TO ALLOW THE APPEAL. IT IS SUBMITTED THAT WITHOUT PREJUDICE TO THE SUBMISSIONS OF THE D.R., THIS BEING THE DEPARTMENTAL APPEAL, THE SUBMISSIONS TO BE MADE BY THE D.R. BEING NOT KNOWN, IT IS SUBMITTED THAT THE ASSESSEE IS FOLLOWING MERCANTILE SYSTE M OF ACCOUNTING, THE LIABILITY TO PAY THE AFORESAID AMOUNT THOUGH CONTRACTUAL IN 10 NATURE, HAS NOT BEEN DISPUTED. REFERENCE IN THIS CONNECTION BE MADE TO PAGE 30 TO 34 OF THE PAPER BOOK, WHICH ARE STATEMENT OF ACCOUNT AS PROVIDED BY TATA MOTORS PAGE 30, PAGE 31 IS THE COPY OF ACCOUNT OF TERM LOAN ACCOUNT WITH TELCO RELEVANT FOR THE PERIOD 01.04.2002 TO 31.03.2003, PAGE 32,33 AND 34 ARE MINUTES OF THE MEETING DATED 11.05.2002 HELD WITH TATA MOTORS. PAGE. NO. 35 ONWARDS TO PAGE 39 IS WRITTEN SUBMISSIONS FILED BEFORE THE CIT(A). THUS, THE FACT REMAINS THAT THE BILL DISCOUNTING CHARGES ARE BUSINESS EXPENDITURE INCURRED FOR THE PURPOSE OF BUSINESS. SECONDLY, SINCE THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING, THE LIABILITY Y TO PAY THE AMOUNT ARISES DURING THE YEAR UNDER CONSIDERATION ITSELF AND LASTLY, SIMPLY BECAUSE THE ASSESSEE HAS NOT PROVIDED FOR THE' LIABILITY IN THE BOOKS OF ACCOUNT, IT DOES NOT NECESSARY MEAN THAT THE LIABILITY, THOUGH ASCERTAINED, IS NOT ALLOWABLE. FOR THE LAST PROPOSITION, RELIANCE IS PLACED ON THE FOLLOWING DECISIONS: - ( A ) KEDARNATH JUTE MFG. C. LTD VS. CIT (1971) 82 ITR 363 (SC) ( B ) CIT VS. SOUTHERN ESTATES (P) LTD. (CAL.) 136 ITR 846 ( C ) BALRAN VIRMANI VS. CIT, KANPUR 97 ITR 69 (ALL) ( D ) L. J. PATEL & CO. VS. CIT KERALA 97 ITR 152 ( E ) POPE THE KING MATCH FACTORY VS. CIT, MADRAS 50 ITR 495 ( F ) GANESH LAL RAM KUMAR VS. CIT, U.P. LKW. 77 ITR 974 (ALL) ( G ) CIT, DELHI VS. NAV BKARAT NIRMAN (P) LTD. 141 ITR 723 (DEL.) ( H ) CIT VS. PADMAVATI RAJE COTTON MILLS LTD. (CAL) 203 ITR 375 ( I ) CALCUTTA CO. LTD. VS. CIT, WEST BENGAL (SC) 37 ITR 1 ( J ) CIT, ASSAM VS. NATHUMAL TOLARAM (GAUHATI) 88 ITR 234 ( K ) DIPTI TEXTILE INDUSTRIES VS. CIT (BOMBAY) HC [2009] 323 ITR 638 THERE MAY BE ANOTHER ISSUE REGARDING TAX DEDUCTION AT SOURCE. IT IS SUBMITTED THAT THE PROVISIONS OF TDS WOULD NOT BE APPLICABLE. THE LIABILITY TO DEDUCT TDS ARISES WHEN THE AMOUNT IS PAID OR CREDITED, SO IS NOT THE CASE OF THE ASSESSEE. PROVISIONS OF SECTION 40(A)(IA) WOULD NOT BE APPLICABLE FOR THE YEAR UNDER CONS IDERATION. SINCE THE PROVISIONS WERE INTRODUCED IN THE STATUTE FOR THE FIRST TIME RELEVANT TO A.Y. 2005 - 06. IN VIEW OF 11 THE ABOVE FACTS AND CIRCUMSTANCES, IT IS SUBMITTED THAT THE DISALLOWANCE MADE BY THE ASSESSING OFFICER AND DELETED BY THE CIT(A) BE UPHEL D AND THE GROUNDS RAISED BY THE REVENUE BE REJECTED. IN CASE IF THE DEPARTMENT MAKES ANY FURTHER SUBMISSION, OPPORTUNITY MAY KINDLY BE ALLOWED TO US TO REBUT THE SAME. 4. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE FIND THAT THE DISALLOWANCE WAS MADE BY THE ASSESSING OFFICER ON THE BASIS THAT THE ASSESSEE HAS NOT FURNISHED ANY DOCUMENTARY EVIDENCE REGARDING TERM LOAN TAKEN BY IT FROM TELCO AND ITS UTILIZATION. THIS DISAL LOWANCE WAS DELETED BY CIT(A) AS PER PARA 14 OF HIS ORDER, WHICH IS ALREADY REPRODUCED BY LEARNED A.R. OF THE ASSESSEE IN HIS WRITTEN SUBMISSIONS AS REPRODUCED ABOVE. IN THIS PARA, OF THE ORDER OF CIT(A), WE FIND THAT IT IS OBSERVED BY CIT(A) THAT THIS AM OUNT OF RS.75,55,525/ - WAS PRIMARILY INTEREST PAID TO TELCO ON THE TERM LOAN LIABILITY OF RS.6,37,71,080/ - AND THIS TERM LOAN LIABILITY WAS VERIFIABLE FROM THE BALANCE SHEET, ACCOUNT BOOKS OF THE ASSESSEE FROM YEAR TO YEAR. AT THIS JUNCTURE, WE EXAMINED T HE BALANCE SHEET OF THE ASSESSEE FIRM AS APPEARING ON PAGE NO. 5 OF THE PAPER BOOK SUBMITTED BEFORE US. WE DO NOT FIND ANY SUCH ENTRY REGARDING THE SAID TERM LOAN LIABILITY OF TELCO IN THIS BALANCE SHEET. SINCE THIS IS VERY CRUCIAL FOR DECIDING THE DISPU TE, WE ATTACH THE COPY OF THIS BALANCE SHEET ALONG WITH THIS ORDER AND MAR K E D AS ANNEXURE - A. SINCE THE BALANCE SHEET OF THE ASSESSEE FORM DOES NOT SHOW ANY LIABILITY PAYABLE TO TELCO TOWARDS TERM LOAN, THE BASIS OF THE CIT(A) FOR DELETING THIS DISALLOWANCE D OES NOT EXIST. WE FIND FORCE IN THE STAND OF THE ASSESSING OFFICER THAT THE ASSESSEE HAS NOT BEEN ABLE TO ESTABLISH THE FACTUAL OF AVAILING TERM LOAN BECAUSE THE ASSESSEE HAS NOT FURNISHED ANY DOCUMENTARY EVIDENCE REGARDING TERM LOAN TAKEN BY IT FROM TEL CO AND ITS UTILIZATION. BEFORE US ALSO, NO SUCH EVIDENCE HAS BEEN BROUGHT ON RECORD TO ESTABLISH THAT ANY TERM LOAN WAS TAKEN BY THE ASSESSEE FROM TELCO AND HOW THE SAME WAS UTILIZED FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE. MERELY BECAUSE THE TEL CO HAS RAISED 12 A DEMAND ON THE ASSESSEE FOR PAYMENT OF SOME AMOUNT, IT CANNOT BE ACCEPTED THAT THE SAID AMOUNT IS ALLOWABLE AS DEDUCTION FOR COM PUTTING THE INCOME OF THE ASSESSEE UNLESS THE ASSESSEE IS ABLE TO ESTABLISH THAT THIS EXPENDITURE WAS INCURRED B Y THE ASSESSEE FOR BUSINESS PURPOSES. MOREOVER, NEITHER THIS TERM LOAN LIABILITY IS APPEARING IN THE BALANCE SHEET NOR THIS EXPENDITURE IS APPEARING IN THE PROFIT & LOSS ACCOUNT OF THE ASSESSEE FIRM. WE AGREE THAT AS PER THE JUDGMENT OF HON'BLE APEX COUR T IN THE CASE OF KEDARNATH JUTE MFG. C. LTD. VS. CIT [1971] 82 ITR 363 (SC), BOOK ENTRY IS NOT DECISIVE BUT WHEN THE ASSESSEE HAS NOT BROUGHT ANY EVIDENCE ON RECORD TO ESTABLISH AVAILING OF THE TERM LOAN FROM TELCO AND ITS UTILIZATION FOR BUSINESS PURPOSE, THE DEDUCTION IS NOT ALLOWABLE TO THE ASSESSEE IN RESPECT OF ANY EXPENDITURE ON SUCH IMAGINARY LOAN EVEN IF IT IS APPEARING IN THE BALANCE SHEET AND PROFIT & LOSS ACCOUNT. SINCE THE ASSESSEE COULD NOT ESTABLISH THE BORROWING OF TERM LOAN FROM TELCO AND I TS UTILIZATION, DEDUCTION OF THE INTEREST CLAIM IS NOT ALLOWABLE AND IN THIS FACTUAL POSITION, NONE OF THE JUDGMENTS, CITED BY LEARNED A.R. OF THE ASSESSEE, IS APPLICABLE IN THE PRESENT CASE. 5. UNDER THESE FACTS AND AS PER ABOVE DISCUSSION, WE FIND THAT THE ORDER OF CIT(A) ON THIS ISSUE IS NOT SUSTAINABLE AND THEREFORE, WE REVERSE THE SAME AND RESTORE THAT OF THE ASSESSING OFFICER. GROUND NO. 1 IS ALLOWED. 6. REGARDING GROUND NO. 2 AND 3, THE WRITTEN SUBMISSIONS OF LEARNED A.R. OF THE ASSESSEE ARE AS UNDER: GROUNDS NO. 2 & 3 RELATE TO DISALLOWANCE OF RS.36,18,493 / - , WHEN READ TOGETHER RELATE TO DELETION OF THE ADDITION OF RS.36 , 18 , 493 / - MADE BY THE ASSESSING OF FI CER OUT OF INTEREST HOLDING IT FOR NOT BUSINESS PURPOSES AS ALSO BY APPLYING THE PROVISIONS OF SECTION 14A OF THE ACT. THIS ISSUE HAS BEEN DEALT BY THE ASSESSING OFFICER IN THE ASSESSMENT ORDER IN PARA 15 ONWARDS TO PARA 19. THE CASE OF THE ASSESSING OFFICER I S TWO FOLD: (I)THE ASSESSEE HAS BORROWED FUNDS ON INTEREST AND HAS 13 ADVANCED THE SAME TO ITS SISTER CONCERN FREE OF INTEREST AND (II) THE BORROWED FUNDS HAVE BEEN INVESTED IN SHARES OF SISTER CONCERNS THEREBY 'APPLYING THE PROVISIONS OF SECTION 14A. THE CIT(A) HAS DEALT THIS ISSUE IN PARA 24 ONWARDS OF THE APPELLATE ORDER CONCLUDING THE SAME IN PARA 27 ON PAGE 19. THE CIT(A) HAS HELD THAT THE ASSESSING OFFICER HAS NOT ESTABLISHED THE NEXUS BETWEEN THE FUNDS BORRO WING AND FUNDS ADVANCED. IN ABSENCE OF ANY NEXUS BETWEEN THE FUNDS BORROWED AND FUNDS ADVANCED, THE DISALLOWANCE CANNOT BE CALLED FOR. THE ASSESSEE HAS SUFFICIENT OWN FUNDS AS CAN BE DEMONSTRATED FROM THE BALANCE SHEET ITSELF . REFERENCE IN THIS CONNECTION BE MADE TO PAGE NO. 1 OF THE PAPER BOOK 2' THE ABOVE POSITION OF AVAILABILITY OF FUNDS HAS BEEN DULY ACCEPTED IN A.Y. 2007 - 08 WHERE NO ADDITION HAS BEEN MADE BY THE ASSESSING OFFICER HIMSELF. COPY OF THE ASSESSMENT ORDER AS PASSED BY THE ASSESSING OFFICER IS PLACED ON PAGE 52 TO PAGE 57 OF THE PAP ER BOOK. FROM THE PERUSAL OF THE ABOVE CHART YOUR GOODSELF WILL FIND: (I)THAT THE TOTAL INVESTMENTS IN SHARES ARE TO THE EXTENT OF RS.3,41,47,810.90 / - AS DETAILED BELOW: - REFERENCE IN THIS CONNECTION BE MADE TO PAGE NO. 2 OF THE PAPER BOOK 2 . A PERUSAL OF THE SAME WOULD REVEAL THAT THE INVESTMENTS IN SHARES OF SISTER CONCERNS HAVE BEEN MADE ONLY UPTIL FINANCIAL YEAR 2000 - 01. NO INVESTMENTS OF SHARES IN SISTER CONCERNS AFTER FINANCIAL YEAR 2000 - 01. INVESTMENT IN SHARES AF T ER FINANCIAL YEAR 2000 - 01 HAS BEE N MADE ONLY IN CASE OF LISTED COMPANIES OTHER THAN SISTER CONCERNS. THE DETAILS OF THE SAME HAVE BEEN HIGHLIGHTED. MOREOVER, DURING THE YEAR UNDER CONSIDERATION, INVESTMENT TO THE EXTENT OF RS. 11,722/ - HAS BEEN MADE IN PURCHASE OF 365 SHARES OF CEAT LTD. T HUS, ONLY FRESH INVESTMENT OF RS. 11, 722 / - HAS BEEN MADE IN SHARES DURING THE YEAR UNDER CONSIDERATION, (II) INVESTMENT IN SHARES OF SISTER CONCERNS HAS BEEN MADE OUT OF PROFITS AND RETAINED DEPRECIATION OF THE RELEVANT YEARS. ( II I) NO FRESH INVESTMENT HAS BEEN MADE IN SHARES OF SISTER CONCERNS DURING THE YEAR UNDER CONSIDERATION; (IV) NO DISALLOWANCE HAS BEEN MADE OUT OF INTEREST ACCOUNT IN THE EARLIER YEARS. ASSESSMENTS FOR A.YS. 1998 - 99, 2001 - 02 AND 2003 - 04 HAVE ALL BEEN MADE U/S 143(3). THE FACTS HAVE CONTINUED TO REMAIN THE SAME. 14 THE ALLEGATION BY THE ASSESSING OFFICER THAT THE INVESTMENTS ARE IN THE NAME OF THE PARTNERS, WHEREAS THE INVESTMENTS APPEAR IN THE BALANCE SHEET UNDER THE HEAD INVESTMENT. THUS, ACCORDING TO THE ASSESSING OFFICER MEANS THAT THE FUNDS HAVE BEEN GIVEN TO THE PARTNERS FROM WHOM INTEREST HAS NOT BEEN CHARGED. IT WAS EXPLAINED THAT A PARTNERSHIP FIRM CANNOT HOLD SHARES IN ITS NAME UNDER THE COMPANIES ACT, 1956. SHARES HELD BY THE PARTNERSHIP FIRM ARE TO BE IN THE NAME OF ANY PARTI CULAR PARTNER OR THROUGH PARTNER. THE FACT REMAINS THAT THE SHARES ARE APPEARING UNDER THE HEAD INVESTMENTS, IN THE BALANCE SHEET OF THE FIRM BELONGED TO THE FIRM. THE SHARES ARE HELD BY THE PARTNERSHIP FIRM THROUGH PARTNERS. THE REFERENCE MADE BY THE ASSE SSING OFFICER TO THE PARTNERSHIP DEED HAS NO RELEVANCE. THE PARTNERSHIP FIRM IS AT LIBERTY TO CARRY ON ANY BUSINESS AS THE PARTNERS MAY MUTUALLY AGREE. LIKEWISE, THE PARTNERSHIP FIRM CAN DEPLOY FUNDS IN THE MANNERS IT DEEMS FIT OR AS MUTUALLY AGREED UPON B Y THE PARTNERS AS IS EVIDENT FROM THE PARTNERSHIP DEED FILED. THE LIST OF CASE LAWS AS RELIED UPON IS AS UNDER : REFERENCE IN THIS CONNECTION BE MADE TO SL.NO. 1 TO 15 OF THE PAPER BOOK OF CASE LAWS. 7. AS AGAINST THIS, LEARNED D.R. OF THE REVENUE SUPPOR TED THE ASSESSMENT ORDER ON THIS ISSUE ALSO. 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. FIRST OF ALL WE WOULD LIKE TO APPRECIATE THE FACTS. WE FIND THAT AS PER BALANCE SHEET APPEARING ON PAGE NO. 5 OF THE PAPER BOOK, WHICH IS ALSO ENCLOSED WITH THIS ORDER AS PER ANNEXURE - A, IT CAN BE SEEN THAT THE ASSESSEE FIRM HAS MADE INVESTMENT OF RS.341.47 LAC AS ON 31/03/2004 AND SUCH INVESTMENT WAS TO THE TUNE OF RS.399.34 LAC AS ON 31/03/2003. REGARDING THE SOURCE OF FUND, WE FIND THAT ALTHOUGH THE ASSESSEE FI RM IS HAVING CAPITAL BALANCE OF RS.116.94 LAC AS ON 31/03/2004 AND RS. 65.95 LAC AS ON 31/03/2003, THIS FUND IS ALSO NOT INTEREST FREE FUND BECAUSE THE ASSESSEE IS PAYING INTEREST TO PARTNER ALSO. APART FROM THIS, THE ASSESSEE FIRM IS HAVING SECURED LOAN A ND UNSECURED LOAN ON WHICH 15 THE ASSESSEE IS PAYING INTEREST. HENCE, IT IS SEEN THAT THE ASSESSEE FIRM IS NOT HAVING ANY INTEREST FREE FUND FOR MAKING SUCH HUGE INVESTMENT IN SHARE. 9. IN THE LIGHT OF ABOVE NOTE FACTS, WE EXAMINE THE VERACITY OF VARIOUS S UBMISSIONS OF LEARNED A.R. OF THE ASSESSEE IN HIS WRITTEN SUBMISSIONS, AS REPRODUCED ABOVE. IT IS SUBMITTED THAT THE INVESTMENT IS OLD INVESTMENT AND ONLY VERY SMALL AMOUNT WAS INVESTED DURING THIS YEAR. IN OUR CONSIDERED OPINION, THIS CONTENTION IS NOT RELEVANT BECAUSE WHETHER THE INVESTMENT IS MADE IN PRESENT YEAR OR IN EARLIER YEAR , IT HAS TO BE SEEN AS TO WHETHER THE ASSESSEE WAS HAVING INTEREST FREE FUND OR NOT FOR MAKING INVESTMENT. REGARDING THIS ARGUMENT THAT NO DISALLOWANCE WAS MADE OUT OF INTER EST EXPENDITURE IN THE PERIOD FROM ASSESSMENT YEAR 1998 - 99 TO 2003 - 04, WE WOULD LIKE TO OBSERVE THAT TILL ASSESSMENT YEAR 2003 - 04, DIVIDEND WAS TAXABLE AND THEREFORE, EVEN IF INTEREST BEARING BORROWED FUND WAS USED FOR MAKING INVESTMENT, NO DISALLOWANCE WA S CALLED FOR BECAUSE DEDUCTION WAS ALLOWABLE IN RESPECT OF SUCH EXPENDITURE U/S 57(III) OF THE ACT. THEREFORE, THIS ARGUMENT IS NOT RELEVANT. REGARDING OTHER ARGUMENTS, SUCH AS NON RECEIPT OF DIVIDEND INCOME IN THE PRESENT YEAR AND THE TRIBUNAL DECISION AS WELL AS THE JUDGMENT OF HON'BLE ALLAHABAD HIGH COURT IN THE CASE OF SHIVA M MOTORS, WE WOULD LIKE TO OBSERVE THAT THE SIMILAR ISSUE WAS DECIDED BY THE TRIBUNAL IN THE CASE OF COMMERCIAL AUTO IN I.T.A. NO .156/LKW/2010 ETC. DATED 11/11/2014 AND IN THIS DEC ISION ALL THESE ASPECTS AND THESE JUDGMENTS WERE CONSIDERED AND THEREAFTER THE ISSUE WAS DECIDED AGAINST THE ASSESSEE AND IN FAVOUR OF THE REVENUE BY FOLLOWING THE JUDGMENT OF HON'BLE APEX COURT RENDERED IN THE CASE OF RAJENDRA PRASAD MOODY AS REPORTED IN 115 ITR 519 (SC) . THE RELEVANT PARA OF THE TRIBUNAL ORDER IS REPRODUCED BELOW: 40. THERE WAS AN ARGUMENT THAT SINCE NO DIVIDEND INCOME WAS EARNED DURING A.Y. 2004 05, NO DISALLOWANCE CAN BE MADE U/S 14A. RELIANCE WAS PLACED ON A TRIBUNAL DECISION RENDE RED IN THE CASE OF SHIVAM AUTO, WHICH IS UPHELD BY HONBLE ALLAHABAD HIGH 16 COURT IN ITA NO.88 OF 2014 DATED 5.5.2014. RELIANCE WAS ALSO PLACED ON A JUDGMENT OF HONBLE GUJARAT HIGH COURT RENDERED IN THE CASE OF CIT VS. CORRTECH ENERGY (P) LTD. 145 TAXMAN 116. BUT THIS IS TO BE NOTED THAT IN THE PRESENT CASE, DISALLOWANCE IS NOT MADE BY THE A.O. U/S 14A OF THE I. T. ACT ALONE. THE DISALLOWANCE IS MADE ON THIS BASIS THAT IT IS NOT ALLOWABLE U/S 36 (1) (III) BECAUSE INVESTMENT IN SHARES IS NOT A BUSINESS OF T HE ASSESSEE. THEREAFTER IT IS STATED BY THE A.O. THAT SUCH DISALLOWANCE IS ALSO TO BE MADE KEEPING IN VIEW THE PROVISIONS OF SECTION 14A. HERE, WE WOULD LIKE TO OBSERVE THAT WHETHER ANY DISALLOWANCE U/S 14A IS CALLED FOR OR NOT IS REQUIRED TO BE SEEN ONLY IF EXPENDITURE IS OTHERWISE ALLOWABLE UNDER A PROVISION OF THE ACT MINUS SECTION 14A. IN FACT, SECTION 14A IS A DISALLOWING SECTION, AS PER WHICH, EVEN IF DEDUCTION IS ALLOWABLE IN RESPECT OF ANY EXPENDITURE AS PER SOME PROVISION OF THE ACT THEN IN VIEW OF THE PROVISION OF SECTION 14A OF THE ACT, DEDUCTION CANNOT BE ALLOWED OF SUCH EXPENDITURE IF IT IS FOUND THAT SUCH EXPENDITURE IS INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. HENCE, IT HAS TO BE FIRST ESTABLI SHED BY THE ASSESSEE THAT DEDUCTION ON ACCOUNT OF INTEREST IS ALLOWABLE UNDER SOME PROVISIONS OF THE ACT. IN OUR CONSIDERED OPINION, IN THE FACTS OF THE PRESENT CASE, INTEREST IS NOT AN ALLOWABLE EXPENDITURE UNDER ANY PROVISION OF THE ACT. IT IS DEFINITELY NOT ALLOWABLE FOR COMPUTING SALARY INCOME OR INCOME FROM HOUSE PROPERTY. IT CANNOT BE SAID THAT DEDUCTION ON ACCOUNT OF INTEREST EXPENDITURE IS TO BE ALLOWED FOR COMPUTING INCOME FROM CAPITAL GAIN SINCE INCOME ON ACCOUNT OF CAPITAL GAIN IS TAXABLE BECAUSE DEDUCTION ON ACCOUNT OF INTEREST EXPENDITURE IS NOT ALLOWABLE FOR COMPUTING CAPITAL GAIN. FOR COMPUTING CAPITAL GAIN, DEDUCTION IS ALLOWABLE IN RESPECT OF COST OF ACQUISITION, COST OF IMPROVEMENT AND COST OF TRANSFER ONLY AND INTEREST DOES NOT FALL IN ANY OF THESE THREE CATEGORIES. FROM A.Y. 2004 05, IT IS NOT AN ALLOWABLE DEDUCTION U/S 57 (III) I.E. FOR COMPUTING INCOME FROM OTHER SOURCES ALSO BECAUSE, DEDUCTION IS ALLOWABLE UNDER THIS SECTION FOR THOSE EXPENSES WHICH ARE INCURRED FOR EARNING AN INCOME TAXABLE UNDER THE HEAD INCOME FROM OTHER SOURCES. SINCE NOW DIVIDEND INCOME IS NOT TAXABLE UNDER THIS HEAD, DEDUCTION IS NOT ALLOWABLE U/S 57 (III). NOW, THE ONLY REMAINING SECTION IS SECTION 36 (1) (III) FOR ALLOWABILITY OF INTEREST EXPENDITURE. THIS IS A DMITTED POSITION THAT THE ASSESSEE IS NOT DEALING IN SHARES AS THE ASSESSEE ITSELF HAS SHOWN IT AS INVESTMENT IN THE BALANCE SHEET. OTHERWISE ALSO, THE ASSESSEE HAS NOT BROUGHT ANYTHING ON RECORD TO ESTABLISH THAT THIS INVESTMENT IN SHARES IS A BUSINESS OF 17 THE ASSESSEE. ONLY CONTENTION OF THE ASSESSEE BEFORE LOWER AUTHORITIES AND BEFORE US IS THAT SINCE THE INVESTMENT IS IN SHARES OF SISTER CONCERNS ENGAGED IN CONNECTED BUSINESS, IT IS FOR BUSINESS EXPEDIENCY BUT WE FIND NO MERIT IN THIS CONTENTION. THE DEC ISION OF LEARNED CIT (A) IS ON THIS BASIS THAT IT CANNOT BE SAID THAT THE AMOUNTS INVESTED BY APPELLANT ARE FOR NON BUSINESS PURPOSE, THOUGH SAME MAY BE INDIRECT BUSINESS CONNECTION. IN OUR CONSIDERED OPINION, THE ORDER OF LEARNED CIT (A) IS NOT SUSTAINA BLE BECAUSE DEDUCTION U/S 36 (1) (III) IS NOT ALLOWABLE ON THE BASIS OF A BUSINESS CONNECTION. DEDUCTION FOR INTEREST U/S 36 (1) (III) IS ALLOWABLE IN RESPECT OF MONEY BORROWED FOR THE PURPOSES OF THE BUSINESS. IN THE FACTS OF THE PRESENT CASE, THE ASSESSE E HAS FAILED TO ESTABLISH THAT INTEREST IS INCURRED FOR BORROWINGS FOR BUSINESS PURPOSES. HENCE, WE HAVE NO HESITATION IN HOLDING THAT IN THE FACTS OF THE PRESENT CASE, DEDUCTION ON ACCOUNT OF INTEREST IS NOT ALLOWABLE UNDER ANY PROVISION OF INCOME TAX ACT AND THERE IS NO NEED TO TAKE HELP OF SECTION 14A TO DISALLOW THE INTEREST EXPENDITURE. 41. STILL, WE DEAL WITH THIS CONTENTION THAT NO SUCH DISALLOWANCE U/S 14A IS JUSTIFIED BECAUSE THERE IS NO ACTUAL EARNING OF THE DIVIDEND IN THE PRESENT YEAR. WE FIND THAT IN THIS REGARD, THE JUDGMENT OF HON'BLE APEX COURT IN THE CASE OF RAJENDRA PRASAD MOODY (SUPRA) SUPPORTS THE CASE OF THE REVENUE BECAUSE WHILE DECIDING THE ISSUE IN RESPECT OF ALLOWABILITY OF INTEREST EXPENDITURE U/S 57(III), IT WAS HELD BY HON'BLE AP EX COURT THAT SECTION 57(III) DOES NOT SUGGEST THAT THE PURPOSE FOR WHICH THE EXPENDITURE IS MADE SHOULD FRUCTIFY INTO ANY BENEFIT BY WAY OF RETURN IN THE SHAPE OF INCOME. AS PER THE SAME LOGIC, WHEN THE INTEREST EXPENDITURE IS INCURRED FOR EARNING DIVIDE ND INCOME, IT HAS TO BE ACCEPTED THAT THIS INTEREST EXPENDITURE WAS INCURRED IN RELATION TO EARNING EXEMPT DIVIDEND INCOME AND HENCE, IT IS NOT RELEVANT AS TO WHETHER THERE WAS ACTUAL DIVIDEND INCOME IN THE PRESENT YEAR OR NOT. IN THIS REGARD, WE ARE AWAR E THAT THERE ARE TRIBUNAL DECISIONS AS WELL AS THE JUDGMENT OF HON'BLE ALLAHABAD HIGH COURT ALSO THAT IF THERE IS NO DIVIDEND INCOME ACTUALLY EARNED THEN NO DISALLOWANCE CAN BE MADE U/S 14A BUT IN THESE JUDGMENTS, THE JUDGMENT OF HON'BLE APEX COURT RENDERE D IN THE CASE OF RAJENDRA PRASAD MOODY (SUPRA) WAS NOT BROUGHT TO THE NOTICE OF THE TRIBUNAL AND HONBLE HIGH COURT AND HENCE, IT WAS NOT TAKEN NOTE OF. IT WAS ALSO NOT TAKEN NOTE OF THAT EVEN IF IT IS HELD THAT NO DISALLOWANCE IS TO BE MADE U/S 14A OF TH E ACT, THEN ALSO, THERE HAS TO BE A POSITIVE FINDING THAT UNDER WHICH SECTION, 18 THIS INTEREST EXPENDITURE IS ALLOWABLE. SINCE DIVIDEND INCOME IS NOT SUBJECT TO TAX AS INCOME FROM OTHER SOURCES FROM ASSESSMENT YEAR 2004 - 05, IT CANNOT BE SAID THAT INTEREST E XPENDITURE HAS TO BE ALLOWED U/S 57(III) OF THE ACT. THIS IS ALSO NOT A CASE OF THE ASSESSEE THAT INVESTMENT IN SHARES WAS MADE OUT OF BORROWED FUNDS IN COURSE OF DEALING IN SHARES AND THEREFORE, INTEREST EXPENDITURE IS ALLOWABLE U/S 36 (1) (III) OF THE A CT. WE HAVE ALREADY SEEN THAT INTEREST INCOME IS NOT ALLOWABLE WHILE COMPUTING CAPITAL GAIN. HENCE, EVEN IF IT IS HELD THAT SECTION 14A IS NOT TO BE INVOKED FOR MAKING DISALLOWANCE IN A YEAR IN WHICH THERE IS NO ACTUAL DIVIDEND INCOME AS WAS HELD BY HON BLE JURISDICTIONAL HIGH COURT AND HONBLE GUJARAT HIGH COURT, THEN ALSO, IT HAS TO BE SEEN AS TO WHETHER DEDUCTION ON ACCOUNT OF INTEREST EXPENDITURE IS ALLOWABLE UNDER ANY PROVISION OF THE ACT. SINCE IN THE PRESENT CASE, SUCH DEDUCTION ON ACCOUNT OF INTER EST EXPENDITURE IS NOT ALLOWABLE U/S 36 (1) (III) OR 57(III) OF THE ACT, THERE IS NO NEED TO INVOKE THE PROVISIONS OF SECTION 14A OF THE ACT FOR MAKING DISALLOWANCE BECAUSE INVOKING THE PROVISION OF THIS SECTION IS REQUIRED WHERE THE DEDUCTION IS OTHERWISE ALLOWABLE. 42. AS PER ABOVE DISCUSSION, WE FIND THAT THE ORDER OF CIT (A) ON THIS ISSUE IS NOT SUSTAINABLE BECAUSE IT IS NOT AS PER LAW AND FACTS OF THE PRESENT CASE BECAUSE THE DECISION OF CIT (A) IS ON THE BASIS THAT IN HIS OPINION, THE INVESTMENT MADE BY THE ASSESSEE IN SISTER CONCERN IS IN COURSE OF BUSINESS AS PER BUSINESS EXPEDIENCY BUT WE HAVE ALREADY SEEN THAT MAKING INVESTMENT IN SHARES AS A CAPITAL ASSET CANNOT BE SAID TO BE IN COURSE OF BUSINESS OR FOR BUSINESS EXPEDIENCY. THE SECOND REASONING OF CIT (A) IS TH AT THE INVESTMENT HAS BEEN MADE IN THE EARLIER YEAR AT THE TIME WHEN INTEREST FREE FUNDS WERE AVAILABLE IN THE HANDS OF THE ASSESSEE. THIS FINDING OF CIT (A) IS WITHOUT ANY BASIS BECAUSE AS PER THE COPY OF FUND FLOW STATEMENT AVAILABLE ON PAGE NO. 11 OF T HE PAPER BOOK AND AS PER COPY OF BALANCE SHEET AVAILABLE ON PAGE NO. 12, WE FIND THAT EVEN AT THE END OF THE YEAR ON 31/03/2003 ALSO, THERE WAS DEBIT BALANCE IN THE CAPITAL ACCOUNTS OF THE PARTNERS. HENCE, EVEN IF THERE WAS PROFIT AT ANY POINT OF TIME, TH E SAME WAS WITHDRAWN BY THE PARTNERS AND IN FACT THE WITHDRAWAL WAS MORE THAN THE CONTRIBUTION OF CAPITAL AND PROFIT OF THE FIRM RESULTING INTO DEBIT BALANCE IN PARTNERS CAPITAL ACCOUNTS AND THEREFORE, IT CANNOT BE SAID THAT AT ANY POINT OF TIME, OWN FUND WAS AVAILABLE WITH THE ASSESSEE FIRM FOR MAKING 19 INVESTMENT IN SHARES. THE FUND IS AVAILABLE WITH THE ASSESSEE OUT OF UNSECURED LOANS AND SUNDRY CREDITORS. THE ASSESSEE IS PAYING INTEREST ON UNSECURED LOAN AND FOR SUNDRY CREDITORS, THE ASSESSEE IS GETTIN G SUPPLY OF MATERIALS WITHOUT PAYMENT AND THE ASSESSEE DOES NOT GET CASH FROM SUNDRY CREDITORS FOR MAKING INVESTMENT IN SHARES AND THEREFORE, IT CANNOT BE ACCEPTED THAT THE INVESTMENT WAS MADE OUT OF FUND AVAILABLE IN THE FORM OF SUNDRY CREDITORS. 43. AS PER ABOVE DISCUSSION, WE HAVE SEEN THAT INTEREST EXPENDITURE INCURRED BY THE ASSESSEE BY BORROWING FUNDS FOR MAKING INVESTMENT IN SHARES IS NOT ALLOWABLE FROM ASSESSMENT YEAR 2004 - 05 BECAUSE THE DIVIDEND INCOME IS NOT TAXABLE INCOME UNDER THE HEAD INCOME F ROM OTHER SOURCES AND THEREFORE, DEDUCTION IS NOT ALLOWABLE U/S 57(III) OF THE ACT. WE HAVE ALSO SEEN THAT NO DEDUCTION IS ALLOWABLE U/S 36 (1) (III) ALSO. HENCE WE REVERSE THE ORDER OF LEARNED CIT (A) AND RESTORE THAT OF THE A.O. REGARDING VARIOUS JUDGMEN TS CITED BY THE LEARNED AR OF THE ASSESSEE INCLUDING THE JUDGMENT OF HONBLE APEX COURT RENDERED IN THE CASE OF S. A. BUILDERS (SUPRA), WE WOULD LIKE TO OBSERVE THAT NO JUDGMENT IS RENDERING ANY HELP TO THE ASSESSEE BECAUSE WE HAVE SEEN THAT DEDUCTION IS N OT ALLOWABLE UNDER ANY PROVISIONS OF ANY SECTION OF INCOME TAX ACT. HENCE, THERE IS NO NEED TO DISALLOW ANY EXPENSES WHICH IS NOT ALLOWABLE. IN FACT, THE ASSESSEE HAS FAILED TO MAKE OUT A CASE THAT DEDUCTION OF INTEREST EXPENDITURE IS ALLOWABLE UNDER THE PROVISIONS OF ANY SECTION OF INCOME TAX ACT, 1961. 10. FROM THE ABOVE PARA FROM THE ORDER OF THE TRIBUNAL RENDERED IN THE CASE OF COMMERCIAL AUTO, WE FIND THAT THE PRESENT ISSUE IS COVERED AGAINST THE ASSESSEE BY THIS TRIBUNAL DECISION. HENCE, RESPECTFU LLY FOLLOWING THIS DECISION, WHICH IN TURN FOLLOWED THE JUDGMENT OF HON'BLE APEX COURT COMMISSIONER OF INCOME - TAX VS RAGHUNANDAN PRASAD MOODY [1978] 115 ITR 519 (SC) , WE DECIDE THE ISSUE AGAINST THE ASSESSEE AND IN FAVOUR OF THE REVENUE. THESE GROUNDS OF THE REVENUE ARE ALLOWED. 11. NOW WE TAKE UP THE CROSS OBJECTION OF THE ASSESSEE FOR ASSESSMENT YEAR 2004 - 05 I.E. C.O. NO.84/LKW/09. IN THIS CROSS OBJECTION, THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS: 20 1. BECAUSE THE CIT APPEALS HAS ERRED ON FACTS AND IN LAW IN NOT ALLOWING RS.3,39,057/ - DISALLOWED BY THE A.O. BEING NOTIONAL INTEREST ON INVESTMENT ON FLAT AT ORIENT RESORT AND ARADHANA SABHAGAR. 2. BECAUSE FLAT AT ORIENT RESORT AND ARADHANA SABHAGAR BEING BUSINESS ASSETS APPEAR IN THE FIXED ASSETS SCHEDULE IN THE BALANCE - SHEET AND ON ARADHANA SABHAGAR DEPRECIATION IS BEING ALLOWED. THE AUTHORITIES BEIOW WERE NOT JUSTIFIED IN DISALLOWING INTEREST ON THE INVESTMENT MADE IN THE SAME. 3. BECAUSE THE CIT APPEALS HAS ERRED ON FACTS AND IN LAW IN NOT GIVI NG ANY FINDING ON THE SAME. 12. LEARNED A.R. OF THE ASSESSEE REITERATED THE SAME ARGUMENTS WHICH WERE RAISED BEFORE THE CIT(A) WHEREAS LEARNED D.R. OF THE REVENUE SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 13. WE HAVE CONSIDERED THE RIVAL SUBMISSION S. WE FIND THAT THIS ISSUE WAS DECIDED BY CIT(A) AS PER PARA 29 OF HIS ORDER, WHICH IS REPRODUCED BELOW FOR THE SAKE OF READY REFERENCE: - 29. THE SUBMISSIONS OF THE APPELLANT ON THE INVESTMENT IN ORIENT RESORT IS ALSO CONSIDERED. IT CAN BE SEEN THAT BO TH THE INVESTMENTS IN ORIENT RESORT AND ARADHANA SABHAGAR ARE MADE AS A NON - BUSINESS INVESTMENT, HAVING NO RELATION WITH THE BUSINESS OF THE APPELLANT. IN THAT CASE, IT IS ALSO IMPORTANT THAT EVEN IF THESE ARE SURPLUS FUNDS, THE SAME ARE UTILISED FOR NON - B USINESS PURPOSE OF THE FIRM. THESE INVESTMENTS ARE ALSO BEYOND OBJECTIVE OF THE FIRM AND SUCH INVESTMENT TAKES THE NATURE OF 'DIVERSION OF FUNDS'. THEREFORE, FOR THIS REASON ALONE, IT HAS TO BE CONSIDERED IN A DIFFERENT CONTEXT WHERE DIVERSION OF FUNDS IS PROVED IN TERMS OF OBJECTIVE OF THE FIRM. SUCH INVESTMENT IS ALSO AGAINST THE CONTRACTUAL OBLIGATION OF THE PARTNERSHIP DEED. THEREFORE, INTEREST ON THE SAME IS LIABLE TO BE DISALLOWED AS DONE BY THE AO BECAUSE SUCH FUNDS ARE NOT AVAILABLE TO ASSESSEE RESULTING IN OVERALL BURDEN ON THE BUSINESS IN THE FORM OF INTEREST IN TOTALITY. THE REQUIREMENT OF NEXUS IS 21 NOT WARRANTED FOR 'DIVERSION OF FUNDS OUT SIDE THE BUSINESS', AND TO OTHER HANDS. IN THIS CONTEXT, THUS, THE ADDITION OF RS.3,39,097/ - MADE BY AO IS CONFIRMED FOR THE REASONS DISCUSSED ABOVE. 14. WE FIND THAT CIT(A) HAS DECIDED THE ISSUE IN AN OBJECTIVE MANNER AND LEARNED A.R. OF THE ASSESSEE CO ULD NOT POINT OUT ANY DEFECT IN THE ORDER OF CIT(A) ON THIS ISSUE. WE, THEREFORE, DECLINE TO INTERFERE IN THE ORDER OF CIT(A) ON THIS ISSUE. 15. IN THE RESULT, THE CROSS OBJECTION OF THE ASSESSEE STANDS DISMISSED. 16. NOW WE TAKE UP THE APPEAL OF THE R EVENUE FOR THE ASSESSMENT YEAR 2005 - 06 I.E. I.T.A. NO.551/LKW/2009. IN THIS APPEAL THE REVENUE HAS RAISED THE FOLLOWING GROUNDS: 1. ON FACTS AND IN CIRCUMSTANCES OF THE CASE THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) - I, KANPUR HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION OF RS.33,36,466/ - MADE BY THE ASSESSING OFFICER OUT OF INTEREST PAID TO THE OTHERS AND BANKS CLAIMED BY THE ASSESSEE. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. COMMISSIONER OF INCOME TAX (APPEALS) - I, KANPUR HAS FAILED TO APPRECIATE THAT INTEREST PAID ON FUNDS BORROWED FOR INVESTMENT IN SHARES CANNOT BE ALLOWED UNDER SECTION 14A OF THE INCOME TAX ACT, 1961. 3. THAT THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPCALS)I, KANPUR BEING ERRONEOUS IN LAW AND O N FACTS BE VACATED AND THE ORDER DATED 31.12.2007 PASSED U/S 143(3) OF THE I.T. ACT 1961 BY THE ASSESSING OFFICER BE RESTORED. 17. IT WAS AGREED BY BOTH THE SIDES THAT THE PRESENT ISSUE IS SIMILAR AND IDENTICAL TO GROUND NO. 2 RAISED BY THE REVENUE IN A SSESSMENT YEAR 2004 - 05 AND SAME MAY BE DECIDED ON SIMILAR LINE. 22 18. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE FIND THAT IT IS NOTED BY CIT(A) ALSO IN PARA 23 THAT THE ASSESSING OFFICER HAS MADE THE DISALLOWANCE BASED ON SIMILAR FACTS AND CIRCUMSTANCES OF THE CASE AND FOR THE SAME REASONS AS MADE IN THE ASSESSMENT ORDER FOR THE ASSESSMENT YEAR 2004 - 05. THIS DISALLOWANCE WAS DELETED BY CIT(A) ON THE BASIS THAT WHILE MAKING THE DISALLOWANCE OF RS.33,36,466/ - , THE ASSESSING OFFICER HAS NOT ESTABLISHED NEX US BETWEEN THE FUNDS ADVANCED AND BORROWED FUNDS ON INTEREST. AT THIS JUNCTURE, WE EXAMINED THE BALANCE SHEET OF THE ASSESSEE FIRM, WHICH IS AVAILABLE ON PAGE NO. 19 OF THE PAPER BOOK. WE FIND THAT AS PER THIS BALANCE SHEET, THERE IS INVESTMENT OF RS.333 .64 LAC AS ON 31/03/2005 AS AGAINST SUCH INVESTMENT OF RS.341.47 LAC AS ON 31/03/2004. FOR MAKING SUCH HUGE INVESTMENT, THE ASSESSEE FIRM WAS NOT HAVING ANY INTEREST FREE FUND BECAUSE THE PARTNERS CAPITAL IS ALSO INTEREST BEARING. ADMITTEDLY, THE FACTS I N THE PRESENT YEAR ARE IDENTICAL TO FACTS IN ASSESSMENT YEAR 2004 - 05 AND WE HAVE DECIDED THE ISSUE AGAINST THE ASSESSEE AND THEREFORE, ON SIMILAR LINE IN THE PRESENT YEAR ALSO, THIS ISSUE IS DECIDED AGAINST THE ASSESSEE. 19. IN THE RESULT, THE APPEAL OF T HE REVENUE IS ALLOWED. 20. NOW WE TAKE UP THE CROSS OBJECTION OF THE ASSESSEE FOR ASSESSMENT YEAR 2005 - 06 I.E. C.O. NO.85/LKW/09. IN THIS CROSS OBJECTION, THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS: 1. BECAUSE THE CIT APPEALS HAS ERRED ON FACTS AND IN LAW IN DISALLOWING NOTIONAL INTEREST OF RS.1,34,674/ - ON INVESTMENT MADE ON FLAT IN ORIENT RESORT U/S 36(I)(III). 2. BECAUSE CIT APPEALS HAS ERRED ON FACTS AND IN LAW IN NOT ALLOWING RS.1,47,252/ - BEING NOTIONAL INTEREST ON INTERESTMENT OF RS.14,79,029/ - AT ARADHANA SABHAGAR. 23 3. BECAUSE FLAT AT ORIENT RESORT AND ARADHANA SABHAGAR BEING BUSINESS ASSETS APPEAR IN THE FIXED ASSETS SCHEDULE IN THE BALANCE - SHEET AND ON ARADHANA SABHAGAR DEPRECIATION IS BEING ALLOWED. THE AUTHORITIES BELOW WERE N OT JUSTIFIED IN DISALLOWING INTEREST ON THE INVESTMENT MADE IN THE SAME. 4. BECAUSE THE CIT APPEALS HAS ERRED ON FACTS AND IN LAW IS NOT GIVING ANY FINDING ON THE SAME. 21. LEARNED A.R. OF THE ASSESSEE SUBMITTED THAT THE ISSUE RAISED BY THE ASSESSEE IS IDENTICAL TO THE GROUNDS OF THE ASSESSEE IN CROSS OBJECTION FOR ASSESSMENT YEAR 2004 - 05 AND SAME CAN BE DECIDED ON SIMILAR LINE. WHILE DECIDING THE CROSS OBJECTION OF THE ASSESSEE FOR ASSESSMENT YEAR 2004 - 05, WE HAVE DECIDED AGAINST THE ASSESSEE AND ACCOR DINGLY IN THE PRESENT YEAR ALSO, THE GROUNDS OF THE CROSS OBJECTION ARE DECIDED AGAINST THE ASSESSEE. 22. IN THE RESULT, THE CROSS OBJECTION OF THE ASSESSEE STANDS DISMISSED. 23. NOW WE TAKE UP THE APPEAL OF THE REVENUE FOR THE ASSESSMENT YEAR 2006 - 07 I.E. I.T.A. NO.360/LKW/2012. IN THIS APPEAL THE REVENUE HAS RAISED THE FOLLOWING GROUNDS: 1. THE LD. COMMISSIONER OF INCOME TAX (APPEAL) - II, KANPUR HAS ERRED IN LAW AND ON FACTS IN DELETING THE DISALLOWANCE OF RS.14,70,660/ - OUT OF INTEREST PAID TO OTHERS, ON BORROWINGS OF RS.1,47,06,598/ - CORRESPONDING TO ITS INVESTMENT IN SHARES OF SISTER CONCERNS FROM WHICH IT WAS EARNING NO DIVIDENDS, WITHOUT APPRECIATING THE FACTS BROUGHT ON RECORD BY THE ASSESSING OFFICER DURING THE COURSE OF ASSESSMENT PROCEED INGS. 2. THE LD. COMMISSIONER OF INCOME TAX (APPEALS) - II, KANPUR HAS ERRED IN LAW AND ON FACTS IN NOT APPRECIATING THE FACT THAT EVEN OTHERWISE, UNDER THE PROVISIONS OF SEC 14A OF THE I.T. ACT, 1961 EXPENSES INCURRED IN RELATION TO DIVIDEND INCOME, WHICH IS NOT INCLUDIBLE IN TOTAL INCOME, WOULD NOT BE ALLOWABLE THE INCOME TAX ACT, 1961. 24 3. THAT THE ORDER OF THE LD. CIT (A) - II, KANPUR DATED 23.03.2012 NEEDS TO BE QUASHED AND THE ORDER PASSED BY THE ASSESSING OFFICER DATED 08.12.2008 TO BE RESTORED. 24. I T WAS AGREED BY BOTH THE SIDES THAT THE PRESENT ISSUE AND FACTS ARE SIMILAR AND IDENTICAL TO GROUND RAISED BY THE REVENUE IN ASSESSMENT YEAR 2005 - 06 AND SAME MAY BE DECIDED ON SIMILAR LINE. HE ALSO SUBMI9TTED THAT THIS ISSUE IS COVERED IN FAVOUR OF THE AS SESSEE IN ASSESSEES OWN CASE IN I.T.A. NO.197/LKW/2009 DATED 19/05/2009. HE SUBMITTED COPY OF THE TRIBUNAL ORDER. 25. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE FIND THAT ADMITTEDLY THE FACTS IN THE PRESENT YEAR ARE IDENTICAL TO THE FACTS OF ASSESSME NT YEAR 2004 - 05 AND REGARDING THE TRIBUNAL DECISION IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2005 - 06 CITED BY LEARNED A.R. OF THE ASSESSEE, WE FIND THAT IN THIS CASE THE TRIBUNAL HAS FOLLOWED THE JUDGMENT OF HON'BLE JURISDICTIONAL HIGH COURT RENDERED IN THE CASE OF COMMISSIONER OF INCOME - TAX VS PREM HEAVY ENGINEERING WORKS P. LTD. [2006] 285 ITR 554 (ALL) . WE FIND THAT IN THIS CASE BEFORE HON'BLE ALLAHABAD HIGH COURT, THE ASSESSMENT YEAR INVOLVED WAS 84 - 85 THEREFORE, SECTION 14A WAS NOT APPLICABLE BECAUSE THE SAME WAS NOT BROUGHT ON STATUTE BOOK BY THAT TIME. MOREOVER, IN THAT CASE IT IS FOUND BY HON'BLE ALLAHABAD HIGH COURT THAT THE ASSESSEE WAS HAVING INTEREST FREE FUND IN THE FORM OF SHARE CAPITAL AND RESERVE AND SURPLUS. IN THE PRESENT CASE, SECTION 14A IS APPLICABLE AND MOREOVER IN THE PRESENT CASE EVEN THE PARTNERS CAPITAL IS ALSO INTEREST BEARING A ND NOT INTEREST FREE AND THEREFORE, NO INTEREST FREE FUND IS AVAILABLE WITH THE ASSESSEE FIRM. BECAUSE OF THESE DIFFERENCES IN THE FACTS, THIS JUDGMENT OF HON'BLE ALLAHABAD HIGH COURT IS NOT APPLICABLE IN THE PRESENT CASE. REGARDING THE TRIBUNAL DECISION IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2005 - 06, WE ARE OF THE CONSIDERED OPINION THAT IN ASSESSMENT YEAR 2005 - 06, THE TRIBUNAL HAS FOLLOWED THE JUDGMENT OF HON'BLE 25 ALLAHABAD HIGH COURT RENDERED IN THE CASE OF PREM HEAVY ENGINEERING WORKS P. LTD. (SUPR A) ON THE BASIS THAT THE FACTS ARE IDENTICAL. BUT WE HAVE SEEN THAT IN THE PRESENT YEAR THE FACTS ARE NOT IDENTICAL WITH THE FACTS IN THE CASE OF PREM HEAVY ENGINEERING WORKS P. LTD. (SUPRA) AND THEREFORE, THIS TRIBUNAL DECISION IS ALSO NOT APPLICABLE IN THE PRESENT YEAR. SINCE THE JUDGMENTS CITED BY LEARNED A.R. OF THE ASSESSEE ARE NOT RENDERING ANY HELP TO THE ASSESSEE AND THE ISSUE IN DISPUTE HAS BEEN DECIDED BY US IN FAVOUR OF THE REVENUE AND AGAINST THE ASSESSEE IN ASSESSMENT YEAR 2004 - 05 AND 2005 - 0 6 AND ON THE SAME LINE IN THIS ALSO THE ISSUE IS DECIDED AGAINST THE ASSESSEE AND IN FAVOUR OF THE REVENUE. 26. IN THE RESULT, THE APPEAL OF THE REVENUE STANDS ALLOWED. 27. NOW WE TAKE UP THE CROSS OBJECTION OF THE ASSESSEE FOR ASSESSMENT YEAR 2006 - 07 I .E. C.O. NO.66/LKW/12. IN THIS CROSS OBJECTION, THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS: 1. THE GROUND TAKEN BY THE APPELLANT (DY.CIT - II, KANPUR) IN I.T.APPENL NO.360/LKW/2012 IN GROUND NO. 1 OF HIS GROUNDS OF APPEAL THAT THE DELETION OF DISALLOWANCE OF RS.14,70,660/ - OUT OF INTEREST PAID TO OTHERS ON BORROWINGS OF RS.1,47,06,598/ - CORRESPONDING TO ITS INVESTMENT IN SHARES OF SISTER CONCERNS FROM WHICH NO DIVIDEND WAS EARNED IS BEYOND THE LAW AND FACTS, IS UNJUSTIFIED AND FAR FROM THE FACTS IN AS - MUCH - AS THERE HAS BEEN NO NEXUS BETWEEN THE BORROWED FUNDS AND THE INVESTMENTS MADE IN SHARES. MORE SO, ON THE IDENTICAL ISSUE IN THE ASSESSEE'S CASE IN THE ASSESSMENT YEAR 2005 - 2006, THE DECISION WAS MADE IN FAVOUR OF ASSESSEE BY THE LEARNED CIT(AP PEALS), KANPUR AND HON'BLE ITAT. 2. THE APPELLANT (DY.GT - M, KANPUR) ERRED IN LAW AND ON FACTS IN INVOKING SECTION 14A OF THE INCOME - TAX ACT IN GROUND NO.2 OF HIS GROUNDS OF APPEAL, IN AS - MUCH - AS, THE SAID ISSUE I.E. SECTION 14A SECTION 14A DOES NOT ARISE OUT OF THE ORDERS OF THE ASSESSING OFFICER & CIT(APPEALS). 26 3. THE GROUNDS TAKEN BY THE APPELLANT (DY.CIT - II, KANPUR) ARE BEYOND THE LAW AND FACTS AND DESERVE TO BE QUASHED. 28. FROM THE ABOVE GROUNDS RAISED BY THE ASSESSEE, WE FIND THAT THESE GROUNDS AR E MERELY IN SUPPORT OF THE ORDER OF CIT(A) AND THIS ISSUE IS ALREADY DECIDED BY US WHILE DECIDING THE APPEAL OF THE REVENUE AND THEREFORE, CROSS OBJECTION OF THE ASSESSEE HAS BECOME INFRUCTUOUS AND IS DISMISSED ACCORDINGLY. 29. IN THE RESULT, THE CROSS OB JECTION OF THE ASSESSEE STANDS DISMISSED. 30. IN THE COMBINED RESULT, ALL THE APPEALS OF THE REVENUE ARE ALLOWED AND ALL THE CROSS OBJECTIONS OF THE ASSESSEE ARE DISMISSED. (ORDER WAS PRONOUNCED IN THE OPEN COURT ON THE DATE MENTIONED ON THE CAPTION PA GE) SD/. SD/. (SUNIL KUMAR YADAV) ( A. K. GARODIA ) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 1 9 / 1 1 /2014 *C.L.SINGH COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT. 3. CONCERNED CIT 4. THE CIT(A) 5. D.R., I.T.A.T., LUCKNOW ASSTT. REGISTRAR