DOUBLEDOT FINANCE LTD, MUMBAI V. DCIT RG 4(1), MUMBAI

ITA 552/MUM/2011

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 7702 (ITAT-MUMBAI)
• Duration Of Justice: 6 year(s) 2 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-03-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 16-02-2015
• Assessment Year: 2006-2007
• Appeal Filed On: 20-01-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Business expenditure; Earning of tax free income; Bad and doubtful debts
• Section: 143(3); 14A; 37(1); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES D MUMBAI BEFORE SHRI SAKTIJIT DEY (JUDICIAL MEMBER) AND SHRI N.K. PRADHAN (ACCOUNTANT MEMBER) ITA NO. 552/MUM/2011 ASSESSMENT YEAR: 2006-07 M/S. DOUBLEDOT FINANCE LTD. VS. DCIT RG 4(1) R. NO. 642, 1 ST FLOOR, KANTA TERRACE ROOM NO. 640 533, KALBADEVI ROAD, M.K. ROAD, AAYAKAR BHAVAN MUMBAI 400002 MUMBAI - 400020 PAN NO. AABCD5429J (APPELLANT) (RESPONDENT) ITA NO. 1079/MUM/2011 ASSESSMENT YEAR: 2006-07 DCIT RG 4(1) VS. M/S. DOUBLEDOT FINANCE LTD. R. NO. ROOM NO. 640 R. NO. 642, 1 ST FLOOR, KANTA TERRACE M.K. ROAD, AAYAKAR BHAVAN 533, KALBADEVI ROAD, MUMBAI 400020 MUMBAI - 400002 PAN NO. AAACD5429J ITA NO. 156/MUM/2011 ASSESSMENT YEAR: 2007-08 M/S. DOUBLEDOT FINANCE LTD. VS. DCIT RG 4(1) R. NO. 642, 1 ST FLOOR, KANTA TERRACE ROOM NO. 640 533, KALBADEVI ROAD, M.K. ROAD, AAYAKAR BHAVAN MUMBAI 400002 MUMBAI - 400020 PAN NO. AABCD5429J (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI DHARMESH SHAH, AR REVENUE BY: SHRI PURUSHOTTAM KUMAR, DR DATE OF HEARING : 16/0 1/2017 DATE OF PRONOUNCEMENT: 29/03/2017 ITA NO. 552,1079 &156/MUM/2011 2 ORDER PER N.K. PRADHAN, AM THESE TWO CROSS APPEALS- ONE BY THE ASSESSEE AND T HE OTHER BY THE REVENUE- FOR THE ASSESSMENT YEAR 2006-07 AND TH E ONLY APPEAL BY THE ASSESSEE FOR THE ASSESSMENT YEAR 2007-08 INVOLV E SOME COMMON ISSUES. AS SUCH WE ARE PROCEEDING TO DISPOSE THEM O FF BY THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. THE SE APPEALS ARE DIRECTED AGAINST THE ORDER OF THE LEARNED COMMISSIO NER (APPEALS) 10, MUMBAI AND ARISE OUT OF ORDER U/S 143(3) OF THE INCOME TAX ACT 1961, (THE ACT). 2. THE GROUNDS OF APPEAL FILED BY THE ASSESSEE FOR THE A.Y. 2006-07 ( ITA NO. 552/M/2011) READ AS UNDER: I. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) 10, MUMBAI ERRED IN HOLDING THAT AN AMOUNT OF RS. 51,00,214/- CLAIME D BY THE APPELLANT COMPANY DURING THE ASSESSMENT YEAR 2006-07 PAID TOWAR DS LEASE RENT AND CESS TO THE GOVERNMENT OF TAMIL NADU FOR THE SAL T WORKS AT VEDARANYAM PURSUANT TO THE DIRECTIVE OF THE HON'BLE S UPREME COURT, ON THE GROUND THAT THEY DO NOT RELATE TO THE BUSINESS CA RRIED ON BY THE APPELLANT DURING THE RELEVANT ASSESSMENT YEAR. II. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) 10, MUMBAI ERRED IN HOLDING THAT THE ABOVE MENTIONED SUM OF RS. 51,00, 214/- WAS NOT WHOLLY AND EXCLUSIVELY INCURRED FOR THE PURPOSE OF TR ADING IN SECURITIES AND FUNDING OPERATIONS WHICH WAS THE ONLY EXISTING LI NE OF BUSINESS DURING THE ASSESSMENT YEAR IGNORING THE FACT, THE MA NUFACTURING BUSINESS WAS CARRIED ON BY THE SAME COMPANY. III. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS ) 10, MUMBAI ERRED IN HOLDING THAT THE EXPENDITURE CANNOT BE ALLOWED U/S 176(3A) FROM THE INCOME EARNED AFTER DISCONTINUANCE OF ERSTWHILE BUSIN ESS EITHER AS NO INCOME HAS BEEN EARNED BY THE APPELLANT FROM THE ERS TWHILE BUSINESS AND OFFERED TO TAX DURING THE RELEVANT ASSESSMENT YEAR. IV. THE LEARNED COMMISSIONER OF INCOME TAX (APPEAL S) 10, MUMBAI ERRED IN INVOKING RULE 8D, THOUGH RELEVANT RULES ARE NOT APPLICABLE FOR THE ASSESSED YEAR, IGNORING THE ACTUAL DISALLOWANCES BASE D ON CASH FLOW SUBMITTED BY THE ASSESSEE DURING THE COURSE OF HEARIN G. ITA NO. 552,1079 &156/MUM/2011 3 3. THE GROUNDS OF APPEAL FILED BY THE REVENUE FOR T HE A.Y. 2006-07 ( ITA NO. 1079/M/2011) READ AS UNDER: I. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS. 58,37,594 /- MADE U/S 14A R.W. RULE 8D OF THE INCOME TAX ACT BY ASSESSING OFF ICER. II. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE IMPUGNED ORDER OF THE LD. CIT(A) IS CONTRARY TO LAW AND CONSEQU ENTLY MERITS TO BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTOR ED. 4. THE GROUNDS OF APPEAL FILED BY THE ASSESSEE FOR A.Y. 2007-08 (ITA NO. 156/M/2011) READ AS UNDER: I. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) 10, MUMBAI ERRED IN HOLDING THAT AN AMOUNT OF RS. 5,03,208/- PAID BY THE APPELLANT COMPANY DURING THE ASSESSMENT YEAR 2007-08 PAID TOWAR DS LEASE RENT AND CESS TO THE GOVERNMENT OF TAMIL NADU FOR THE SAL T WORKS AT VEDARANYAM PURSUANT TO THE DIRECTIVE OF THE HON'BLE S UPREME COURT, ON THE GROUND THAT THEY DO NOT RELATE TO THE BUSINESS CA RRIED ON BY THE APPELLANT DURING THE RELEVANT ASSESSMENT YEAR. II. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) 10, MUMBAI ERRED IN INVOKING RULE 8D, THOUGH RELEVANT RULES ARE NOT APPLICABLE FOR THE ASSESSMENT YEAR IGNORING THE ACTUAL DISALLOWANCES B ASED ON CASH FLOW SUBMITTED BY THE ASSESSEE DURING THE COURSE OF HEARIN G. 5. WE BEGIN WITH THE GROUND OF APPEAL RAISED BY THE ASSESSEE IN RESPECT OF RS. 51,00,214/- FOR THE A.Y. 2006-07 AND RS. 5,03,208/- FOR THE A.Y. 2007-08 PAID TOWARDS LEASE RENT AND CESS T O THE GOVERNMENT OF TAMILNADU FOR THE SALT WORKS AT VEDARANYAM PURSU ANT TO THE DIRECTIVE OF THE HON'BLE SUPREME COURT. 6. IN A NUTSHELL, THE FACTS ARE THAT IN THE COMPUTA TION OF INCOME FILED ALONG WITH THE RETURN OF INCOME, THE ASSESSEE COMPANY HAD REDUCED ITS INCOME BY RS. 51,00,514/- FOR THE A.Y. 2006-7 AND RS. 5,03,208/- FOR THE A.Y. 2007-08 BEING EXTRAORDINARY ITEMS RELATING TO PAYMENT OF VDEARANYAM CESS PAYMENT. THE ASSESSEE AP PENDED A NOTE ITS RETURN OF INCOME WHICH READS AS UNDER: ITA NO. 552,1079 &156/MUM/2011 4 IN FEBRUARY 1999, THE COMPANY HAD TRANSFERRED THE SA LT WORKS AT VEDARANYAM AS A GOING CONCERN FOR A SUM OF RS. 450 L ACS SUBJECT TO THE CONDITION THAT THE GOVERNMENT OF TAMIL NADU APPROVED THE TRANSFER OF LEASE OF LAND WHERE THE SALT WORKS IS LOCATED. THE SAID CONSID ERATION WAS SECURED BY BANK GUARANTEE BY THE COMPANY. THE GOVERNMENT HAS N OT YET APPROVED THE TRANSFER OF LEASE EXPIRED ON 31.03.2003. THE RIGHT OF AUTOMATIC RENEWAL OF LEASE IS PENDING FOR ADJUDICATION BEFORE MADRAS HIGH COURT. GHCL HAS ENCASHED THE BANK GUARANTEE IN MARCH 2005, BUT HAS N OT RETURNED THE SALT WORKS TO THE COMPANY AS PER THE TERMS OF THE AGREEM ENT. PROVISION FOR THE SAID LOSS HAS BEEN MADE IN THE EARLIER YEARS. THE SUP REME COURT HAS DIRECTED THE COMPANY TO PAY RS. 75/- PER ACRE PER ANNUM AS DE POSIT TILL THE HIGH COURT HAS DECIDED TO ENTITLEMENT OF EXTENSION OR RENEWAL OF LEASE. THE CLAIM PERTAINING TO THE PERIOD FROM JULY 2003 TO MARCH 200 6 HAS BEEN PROVIDED IN THE PROFIT & LOSS ACCOUNT FOR THE YEAR. THE DISPUTE BETWEEN THE COMPANY AND GHCL HAS BEEN REFERRED TO THE SOLE ARBITRATION PROCE EDINGS ARE GOING ON. 7. THE AO NOTED THAT THE EXPENDITURE INCURRED BY TH E ASSESSEE IS NOT RELATED TO THE BUSINESS IN EXISTENCE DURING F.Y . 2005-06 AS THE ASSESSEE IS ENGAGED THIS YEAR IN THE BUSINESS OF SH ARE TRADING. IT WAS PART OF THE MANUFACTURING BUSINESS OF THE CASE WHIC H WAS DISCONTINUED IN THE YEAR 1999-2000. SINCE THE EXPEN DITURE WAS NOT RELATED TO ITS BUSINESS CARRIED ON IN THE PREVIOUS YEAR 2005-06, THE AO DISALLOWED THE SAME IN COMPUTATION OF INCOME FOR THE A.Y. 2006- 07. ON THE SAME REASONING HE DISALLOWED THE CLAIM A LSO IN THE A.Y. 2007-08. THE AO RELIED ON THE JUDGEMENT OF THE HON' BLE BOMBAY HIGH COURT IN JAI KISHAN NARANG VS. CIT 50 ITR 700 (BOM) STATING THAT LOSS OF A DEAD, SEPARATE AND DISTINCT BUSINESS CANNOT BE SET OFF AGAINST INCOME OF ANOTHER CONTINUING BUSINESS. THE AO ALSO RELIED ON THE DECISION IN THE CASE OF I.S. & C. MACHADO VS. CIT 75 ITR 38 (MAD.) WHEREIN IT HAS BEEN HELD THAT AS THE LEASE RENT AND CESS DO NOT RELATE TO THE CURRENT YEARS BUSINESS OF THE ASSESSEE, THEY ARE NOT ALLOWABLE. 8. THE ASSESSEE PREFERRED AN APPEAL AGAINST THE OR DER OF THE AO BEFORE THE LEARNED CIT(A). THE LEARNED CIT(A) NOTED THAT THE SALT WORKS MANUFACTURING BUSINESS WAS BEING RUN BY THE A SSESSEE IN THE NAME OF DCW LTD. WHICH WAS SOLD AS A GOING CONCERN IN THE A.Y. 1999- ITA NO. 552,1079 &156/MUM/2011 5 2000 FOR A CONSIDERATION OF RS. 4.50 CRORE. THE RES ULTANT INCOME FROM THE SAID SALE PROCEEDS HAS ALSO BEEN OFFERED AND TA XED IN THE SAID ASSESSMENT YEAR. THEREAFTER, THE ASSESSEE HAD SWITC HED OVER TO A NEW BUSINESS OF NON-BANKING COMPANY AND SHARE TRADING U NDER THE PRESENT NAME I.E. DOUBLEDOT FINANCE LTD. THUS THE E XPENDITURE OF RS. 51,00,514/- FOR THE A.Y. 2006-07 AND RS. 5,03,208/- FOR A.Y. 2007-08 CLAIMED BY THE ASSESSEE RELATED TO LEASE RENT OF LA ND FOR MANUFACTURING OF SALT WORKS IN THE NAME OF DCW LTD. WHICH NO LONGER EXISTED AS IT STOOD SOLD TO GHCL. THEREFORE, ANY LI ABILITY OF EXPENDITURE INCURRED IN RELATION TO NON-EXISTENT BU SINESS AND SOLD OUT BUSINESS CANNOT BE SET OFF OUT OF CURRENT YEAR S INCOME DERIVED FROM SHARE TRADING WHICH IS SEPARATE AND DISTINCT B USINESS. IN VIEW OF THE ABOVE, THE LEARNED CIT(A) UPHELD THE DISALLOWAN CES MADE BY THE AO. 9. BEFORE US, THE LEARNED COUNSEL OF THE ASSESSEE F ILED A COPY OF (I) RELEVANT PAGES OF THE BALANCE SHEET AND PROFIT & LO SS ACCOUNT OF THE APPELLANT FOR A.Y. 1998-99, (II) COPY OF THE ITR AC KNOWLEDGEMENT FOR A.Y. 1999-2000 ALONG WITH COMPUTATION OF TOTAL INCO ME, (III) RELEVANT PAGES OF THE BALANCE SHEET AND PROFIT & LOSS ACCOUN T OF THE APPELLANT FOR A.Y. 1999-20000, (IV) RELEVANT PAGES OF TAX AUD IT REPORT OF THE APPELLANT FOR A.Y. 1999-2000, (V) COPY OF THE ITR A CKNOWLEDGEMENT FOR A.Y. 2000-01 ALONG WITH COMPUTATION OF TOTAL IN COME, (VI) RELEVANT PAGES OF THE BALANCE SHEET AND PROFIT & LOSS ACCOUN T OF THE APPELLANT FOR A.Y. 2000-01, (VII) RELEVANT PAGES OF TAX AUDIT REPORT OF THE APPELLANT FOR A.Y. 2000-01 & (VIII) COMPUTATION OF TOTAL INCOME OF THE APPELLANT FOR A.Y. 2006-07. HE ALSO RELIED ON THE D ECISION IN THE CASE OF TATA CHEMICALS LTD. VS. DCIT (2000) 72 ITD 1 (MUM), BANSIDHAR PVT. LTD. VS. CIT (1981) 127 ITR 65 (GUJ), CIT VS. WESTERN BENGAL COALFIELDS ITA NO. 552,1079 &156/MUM/2011 6 LTD. (1998) 233 ITR 139 (CAL) AND VEECUMSEES VS. CIT (1996) 187 ITR 185 (SC). 10. ON THE OTHER HAND, THE LEARNED DR SUPPORTS THE ORDER PASSES BY THE LEARNED CIT(A). 11. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. WE BEGIN WITH THE DECISIONS REL IED ON BY THE LEARNED COUNSEL OF THE ASSESSEE. IN TATA CHEMICALS LTD. (SUPRA) , THE ASSESSEE COMPANY CLAIMED A DEDUCTION OF RS. 86.42 CRORES TOWARDS INTEREST PA ID BY IT AGAINST RS. 5.18 CRORE RECEIVED AS INTEREST. THE AO CONSIDERED RS. 55.12 CRORES FOR ALLOWANCE UNDER THE HEAD BUSINESS. THE AO HEL D THAT OUT OF THE ABOVE SUM, RS. 35.13 CRORES REPRESENTED INTEREST ON CAPITAL BORROWED AND UTILISED FOR THE PURPOSE OF THE BUSINESS OPERAT IONS OF THE FERTILIZER DIVISION WHICH HAD NOT STARTED FUNCTIONI NG DURING THE YEAR AND WAS ONLY IN THE PROCESS OF BEING PUT UP. HE, TH EREFORE, DISALLOWED ITS DEDUCTION U/S 36(1)(III). THE ASSESSEE CONTENDE D THAT THE FERTILIZER DIVISION WAS A PART OF THE ASSESSEES EXISTING CHEM ICAL BUSINESS AND WAS NOT DISTINCT OR SEPARATE BUSINESS AND, THEREFOR E, THE INTEREST ON CAPITAL BORROWED FOR FERTILIZER PLANT CONSTITUTED A VALID BUSINESS DEDUCTION. HOWEVER, THE AO HELD THAT THE FERTILIZER UNIT WAS A SEPARATE AND DISTINCT BUSINESS AND DID NOT CONSTITU TE PART OF THE BUSINESS CARRIED ON BY THE ASSESSEE DURING THE YEAR . ON APPEAL, THE COMMISSIONER (APPEALS) AFFIRMED THE ORDER OF THE AO . ON APPEAL BY THE ASSESSEE, THE TRIBUNAL HELD THAT WHERE THE ASSE SSEES NEW FERTILIZER BUSINESS WAS UNDER PROCESS OF CONSTRUCTI ON, IT WAS FOUND TO BE INTERLACING, INTER DEPENDENT AND INTER CONNECTED WITH OLD CHEMICAL BUSINESS AND TWO BUSINESSES SHOULD BE HELD AS SINGL E AND INTEREST ON ITA NO. 552,1079 &156/MUM/2011 7 BORROWED CAPITAL ATTRIBUTABLE TO FERTILIZER BUSINES SES SHOULD BE ALLOWED EVEN THOUGH IT HAD NOT STARTED FUNCTIONING. IN BANSIDHAR PVT. LTD. (SUPRA) , THE ASSESSEE A PRIVATE LIMITED COMPANY WAS CARRYING ON DIFFERENT BUSINESS ACTIVITI ES AT DIFFERENT POINTS OF TIME VIZ., (I) PURCHASE AND SALE CLOTH (B USINESS CONTINUED UP TO THE RELEVANT YEAR OF ACCOUNT AND EVEN THEREAFTER ), (II)PROCESSING OF CLOTH AND MANUFACTURING OF CHEMICALS AND DYES (BUSI NESS CLOSED IN THE RELEVANT YEAR OF ACCOUNT 1966-67), (III) MANUFA CTURE OF MACHINERY (BUSINESS CLOSED ON AUGUST 1, 1961) AND (IV) STEEL PLANT AND ROLLING MILL (BUSINESS CLOSED ON SEPTEMBER 30, 1961). UPON THE CLOSURE OF THE BUSINESS IN THE RELEVANT YEAR OF ACCOUNT, THE TOTAL SUM PAID BY WAY OF RETRENCHMENT COMPENSATION WAS RS. 9,603/-. FURTHER, IN RESPECT OF THE TWO OTHER BUSINESSES, NAMELY MANUFACTURE OF MAC HINERY AND STEEL PLANT AND ROLLING MILL, WHICH WERE CLOSED EARLIER, THE ASSESSEE COULD NOT RECOVER OUTSTANDING DUES IN THE TOTAL SUM OF RS . 34,617/- AND THE AMOUNTS WERE WRITTEN OFF AS BAD DEBT IN THE RELEVAN T YEAR OF ACCOUNT. THE ASSESSEE CLAIMED DEDUCTION U/S 37 OF THE ACT OF A SUM OF RS. 9,603/- PAID AS RETRENCHMENT COMPENSATION AND ALSO CLAIMED DEDUCTION U/S 36(1)(VII) OF AN AMOUNT OF RS. 34,617 /- BY WAY OF DEBTS. THE ITO AND, ON APPEAL, THE AAC, REJECTED BO TH THE CLAIMS. ON FURTHER APPEAL, THE TRIBUNAL HELD THAT SINCE RETREN CHMENT COMPENSATION WAS PAID AND BAD DEBTS WERE INCURRED I N BUSINESS TOTALLY DISTINCT FROM THE BUSINESS CARRIED ON BY TH E ASSESSEE, THE DEDUCTION COULD NOT BE ALLOWED IN THE ASSESSMENT OF THE ASSESSEE. THE HON'BLE HIGH COURT HELD THAT THERE WAS COMPLETE IN TERCONNECTION, INTERLACING, INTERDEPENDENCE AND DOVETAILING OF THE DIFFERENT BUSINESS ACTIVITIES CARRIED ON BY THE ASSESSEE AND ALL THE A CTIVITIES CONSTITUTED ONE AND THE SAME BUSINESS AND THE DEDUCTION ON ACCO UNT OF ITA NO. 552,1079 &156/MUM/2011 8 RETRENCHMENT COMPENSATION PAID BY THE ASSESSEE UPON THE CLOSURE OF ONE OF ITS BUSINESSES AND THE WRITE OFF OF ITS OUTS TANDING DUES AS BAD DEBTS IN THE OTHER WERE ALLOWABLE DEDUCTIONS UNDER SECTION 37 AND SECTION 36(1)(VII) RESPECTIVELY. IN WESTERN BENGAL COALFIELDS LTD. (SUPRA) , THE ASSESSEE CARRIED ON MINING BUSINESS TILL THE NATIONALISATION OF COAL MINES UNDER THE COAL MINES (NATIONALISATION) ACT, 1973. DURING THE ASSESSMENT YEARS 1975-76, 1977-78 AND 1978-79, THE ASSESSEE CLAIMED BEFORE THE AO THAT IT HAD INCURRED EXPENDITURE BY WAY OF INTEREST TO THE BANK AMOUNTING TO RS. 2,91,980, RS. 7,71,851 AND RS. 7,7 1,851 RESPECTIVELY. THE ASSESSEE ALSO BROUGHT TO THE NOTICE OF THE AO T HAT IT WAS NOT ONLY CARRYING ON THE ACTIVITY OF COAL MINING BUT ALSO CA RRIED ON BORING BUSINESS AND BOTH CONSTITUTED ONE AND THE SAME BUSI NESS AND THAT, THEREFORE, WHATEVER LOAN HAD BEEN OBTAINED THOUGH F OR ONE LINE OF BUSINESS AND IF THAT WAS CLOSED, EVEN AFTER THE CLO SURE OF THAT BUSINESS, THE ASSESSEES BUSINESS CONTINUED AND IT CARRIED ON SOME OTHER ACTIVITIES, THE ASSESSEE WAS ENTITLED TO DEDU CTION OF INTEREST ON THE LOANS OBTAINED FOR THE PURPOSE OF CARRYING ON T HE BUSINESS. THE AO REJECTED THE CLAIM OF THE ASSESSEE. THE HON'BLE HIGH COURT HELD THAT THE COAL MINING BUSINESS AND THE BORING BUSINE SS CONSTITUTED THE SAME BUSINESS AND THAT THE ASSESSEE WAS ENTITLED TO DEDUCTION OF INTEREST ON THE LOAN OBTAINED FROM THE BANK. IN VEECUMSEES (SUPRA) , THE ASSESSEE RAN A JEWELLERY BUSINESS. IT THEN COMMENCED BUSINESS ALSO IN THE EXHIBITION OF C INEMATOGRAPHIC FILMS. IN 1961, IT OBTAINED LOANS FOR BUILDING A CI NEMA THEATRE. THE SAID THEATRE WAS BUILT IN 1962 AND WAS RUN BY THE A SSESSEE UNTIL JULY 31, 1965, WHEN IT WAS TRANSFERRED TO ANOTHER FIRM. FOR THE YEARS DURING WHICH THE ASSESSEE EXHIBITED FILMS IN THE SA ID THEATRE THE ITA NO. 552,1079 &156/MUM/2011 9 INTEREST PAID ON THE LOANS OBTAINED FOR CONSTRUCTIN G IT WERE ALLOWED BY THE REVENUE AS A DEDUCTION UNDER THE PROVISIONS OF SECTION 36(1)(III) OF THE ACT. THE INCOME TAX OFFICER DECLI NED THE DEDUCTION FOR THE ASSESSMENT YEARS 1967-68, 1968-69 AND 1969- 70, ON THE GROUND THAT THE BUSINESS OF EXHIBITION OF FILMS IN THE SAID THEATRE WAS NO LONGER IN EXISTENCE. THE HON'BLE HIGH COURT HELD THAT TRIBUNAL WAS RIGHT IN CONCLUDING THAT SUCH INTEREST HAD TO B E TREATED AS A DEDUCTION UNDER SECTION 36(1)(III) OF THE ACT. THE LOANS HAD BEEN OBTAINED FOR THE PURPOSES OF THE ASSESSEES BUSINES S. THE FACT THAT THE PARTICULAR PART OF THE BUSINESS FOR WHICH THE LOANS HAD BEEN OBTAINED HAD BEEN TRANSFERRED OR CLOSED DOWN DID NOT ALTER T HE FACT THAT THE LOANS HAD, WHEN OBTAINED, BEEN FOR THE PURPOSE OF T HE ASSESSEES BUSINESS. APART FROM THIS, THE TRIBUNAL FOUND AS A FACT THAT THE BUSINESS CARRIED ON BY THE ASSESSEE AS JEWELLER AND IN RUNNING THE CINEMA THEATRE, ETC., WAS COMPOSITE. IN VIEW OF THI S FINDING ALSO, THE ASSESSEE WAS ENTITLED TO THE DEDUCTION OF THE INTER EST PAID ON THE LOANS IN QUESTION U/S 36(1)(III) OF THE ACT. 11.1 NOW WE TURN TO THE DECISIONS RELIED ON BY T HE AO AND THE LEARNED CIT(A). IN JAI KISHAN NARANG(SUPRA) , THE HEAD NOTE IS AS UNDER : SECTION 37(1) OF THE INCOME-TAX ACT, 1961 (CORRESPO NDING TO SECTION 10(2)(XV) OF THE INDIAN INCOME-TAX ACT, 1922) - BUS INESS EXPENDITURE - ALLOWABILITY OF - ASSESSMENT YEARS 1956-57 AND 1957 -58 - ASSESSEE WAS KARTA OF HUF WHICH CARRIED ON GUARANTEE BROKING BUSINESS FOR CERTAIN BANK AND WAS ALSO PARTNER IN A CERTAIN FIRM WHICH CARRIED ON MONEY LENDING BUSINESS BUT HUF DISCONTINUED GUARANT EE BROKING BUSINESS IN 1947 AS WELL AS IN MONEY LENDING BUSINE SS AFTER PARTIAL PARTITION - ASSESSEE WHO CONTINUED MONEY LENDING BU SINESS IN HIS INDIVIDUAL CAPACITY CLAIMED DEDUCTION OF HALF OF DE CRETAL AMOUNT WHICH LIABILITY AROSE IN GUARANTEE BROKING BUSINESS IN 19 55 AND LEGAL EXPENSES INCURRED IN CONNECTION WITH IT IN COMPUTAT ION OF HIS INCOME ON GROUND THAT GUARANTEE BROKING BUSINESS WAS NEVER DISCONTINUED ITA NO. 552,1079 &156/MUM/2011 10 AND SHARE OF SECURITY DEPOSIT MADE WITH BANK RECEIV ED BY HIM CONSTITUTED HIS STOCK-IN-TRADE AND THAT BUSINESS OF GUARANTEE BROKERS FORMED PART AND PARCEL OF HIS MONEY LENDING BUSINES S - WHETHER GUARANTEE BROKING BUSINESS CONSISTED OF INTRODUCING CLIENTS TO BANK AND AS THIS ACTIVITY WAS STOPPED IN 1947, BUSINESS COULD NOT BE SAID TO CONTINUE MERELY BECAUSE COMMISSION AND INTEREST IN RESPECT OF TRANSACTIONS GUARANTEED BEFORE 1947 CONTINUED TO BE RECEIVED - HELD, YES - WHETHER MONEY-LENDING BUSINESS AND GUARANTEE BROKING BUSINESS WERE NOT IDENTICAL AND IN ABSENCE OF PROOF LOSS SUFFERED IN GUARANTEE BROKING BUSINESS COULD NOT BE SAID TO BE LOSS SUFFERED IN MONEY-LENDING BUSINESS, PARTICULARLY WHEN TWO BUSIN ESS VESTED IN TWO DIFFERENT ENTITIES AND IT COULD NOT BE SAID THAT TH EY WERE BRANCHES OF SAME BUSINESS AND THEREFORE LOSS OF DEAD, SEPARATE AND DISTINCT BUSINESS COULD NOT BE CLAIMED AS SET OFF AGAINST IN COME OF ANOTHER BUSINESS WHICH ASSESSEE WAS CARRYING ON IN RELEVANT ACCOUNTING YEAR - HELD, YES - WHETHER, FURTHER, WHEN GUARANTEES BROKI NG BUSINESS WAS DISCONTINUED, ITS ASSETS AND LIABILITIES BECAME CAP ITAL IN NATURE AS THERE WAS EVIDENCE TO SHOW THAT THEY WERE TAKEN OVER AS S TOCK-IN-TRADE IN MONEY LENDING BUSINESS, LOSS ARISING IN GUARANTEE B ROKING BUSINESS WAS CAPITAL IN NATURE AND NOT ALLOWABLE - HELD, YES - WHETHER LEGAL EXPENSES TO GET RID OF LIABILITY WHICH WAS CAPITAL IN NATURE COULD NOT BE ALLOWED AS BUSINESS EXPENDITURE UNDER SECTION 10(2) (XV) - HELD, YES. IN I.S. & C. MACHADO (SUPRA) , THE HEAD NOTE RUNS AS UNDER: SECTION 28(1) OF THE INCOME-TAX ACT, 1961 [CORRESPO NDING TO SECTION 10(1) OF INDIAN INCOME-TAX ACT, 1922] BUSINESS LO SS/DEDUCTION ALLOWABLE AS ASSESSMENT YEAR 1953-54 ASSESSEE-F IRM WAS CARRYING ON COUNTRY CRAFT ROUTE AGENCY BUSINESS WHICH HAD BE EN DISCONTINUED AND A PETROLEUM AGENCY BUSINESS WHICH WAS NOT DISCO NTINUED WHETHER ASSESSEES CLAIM FOR SET OFF OF A SUM PAID IN DISCH ARGE OF DECREE IN RESPECT OF ITS COUNTRY CRAFT ROUTE AGENCY BUSINESS COULD NOT BE ALLOWED AGAINST PROFITS OF ITS PETROLEUM AGENCY BUSINESS UN DER SECTION 10(1) OF 1922 ACT HELD, YES. 11.2 THE ASSESSEE BY VIRTUE OF AN ARRANGEMENT WITH DCW LTD. (THE LEASE HOLDER) WAS MANUFACTURING SALT AT VEDARANYAM (TAMIL NADU) BETWEEN 1990 DECEMBER1998. THE ASSESSEE WAS KNOWN B Y THE NAME DCW HOME PRODUCTS LTD. THE ASSESSEE-COMPANY DISPOSE D OFF ITS SALT UNDERTAKING AT VEDARANYAM (TAMIL NADU) TO GHCL FOR A SUM OF RS. ITA NO. 552,1079 &156/MUM/2011 11 450 LACS DURING A.Y. 1999-2000 AND THE RESPONSIBILI TY FOR TRANSFER OF THE LEASE IN FAVOUR OF THE BUYER, I.E. GHCL RESTED WITH THE ASSESSEE. THE HON'BLE SUPREME COURT VIDE ITS ORDER DATED 8 TH APRIL, 2005 RULED AS UNDER: THE DIRECTIONS OF THE LEARNED SINGLE JUDGE FOR DEPOSIT OF RS. 75/- PER ACRE (BY ORDER DATED 8.11.2004) SHALL BE COMPLIED WITH WITHIN SI X WEEKS AS UNDERTAKEN. THIS DEPOSIT SHALL NOT, HOWEVER, BE CONST RUED AS PAYMENT FOR THE PURPOSE OF RENEWAL OR EXTENSION. 11.3 DURING THE COURSE OF PROCEEDINGS BEFORE US THE LEARNED COUNSEL OF THE ASSESSEE FILED A CHART INDICATING THAT THE A SSESSEE-COMPANY HAD EARNED INCOME FROM MANUFACTURING ACTIVITIES OF RS. 1,12,04,47,776/- (A.Y. 1997-98), RS. 1,01,35,79,302/- (A.Y. 1998-99) , RS. 56,41,92,495/- (A.Y. 1999-00) AND RS. 31,58,205/- ( A.Y. 2000-01). ALSO IT IS SUBMITTED BY HIM THAT THE ASSESSEE-COMPA NY HAD EARNED INCOME FROM TRADING IN SHARES AND SECURITIES AND FI NANCIAL ACTIVITIES OF RS. 50,83,839/- (A.Y. 1997-98), RS. 17,89,800/- (A. Y. 1998-99), RS. 53,54,723/- (A.Y. 1999-00), RS. 34,66,46,566/- (A.Y . 2000-01), RS. 27,17,77,249/- (A.Y. 2001-02), RS. 16,92,26,716/- ( A.Y. 2002-03), RS. 76,07,56,032/- (A.Y. 2003-04), RS. 82,41,36,993/- ( A.Y. 2004-05), RS. 67,03,76,351/- (A.Y. 2005-06) AND RS. 1,65,74,13,30 0/- (A.Y. 2006- 07). IT IS ALSO SUBMITTED THAT THE ASSESSEE-COMPANY HAD EARNED OTHER INCOME OF RS. 1,51,80,393/- (A.Y. 1997-98), RS. 1,7 3,00,148/- (A.Y. 1998-99), RS. 79,59,421/- (A.Y. 1999-00), RS. 44,98 ,972/- (A.Y. 2000- 01), RS. 29,80,440/- (A.Y. 2001-02), RS. 54,90,912/ - (A.Y. 2002-03), RS. 31,81,966/- (A.Y. 2003-04), RS. 30,41,317/- (A. Y. 2004-05), RS. 2,29,904/- (A.Y. 2005-06) AND RS. 17,35,700/- (A.Y. 2006-07). 11.4 NOW WE TURN TO THE SUBJECT MATTER IN THE INSTA NT APPEAL OF COMPLETE INTERCONNECTION, INTERLACING, INTERDEPENDE NCE AND DOVETAILING OF THE DIFFERENT BUSINESS ACTIVITIES CA RRIED ON BY THE ITA NO. 552,1079 &156/MUM/2011 12 ASSESSEE AS DISTILLED FROM THE DECISIONS CITED BY BOTH THE PARTIES. THE SAME HAS NOT BEEN VERIFIED BY THE AO OR THE LEARNED CIT(A). THE ORDER OF THE CIT(A) ON THE ABOVE ISSUE IS SET ASIDE AND T HE ISSUE IS RESTORED TO THE FILE OF THE AO WITH A DIRECTION TO VERIFY WH ETHER THERE WAS COMPLETE INTERCONNECTION, INTERLACING, INTERDEPENDE NCE AND DOVETAILING OF THE DIFFERENT BUSINESS ACTIVITIES CA RRIED ON BY THE ASSESSEE AND ALL THE ACTIVITIES CONSTITUTED ONE AND THE SAME BUSINESS . IF THE ANSWER IS YES, THEN THE AO IS DIRECTED TO AL LOW THE CLAIM OF RS. 51,00,214/- FOR THE A.Y. 2006-07 AND RS. 5,03,208/- FOR THE A.Y. 2007- 08. OTHERWISE, THE AO WOULD DISALLOW THE ABOVE CLAI M. THE ASSESSEE IS DIRECTED TO FILE BEFORE THE AO THE RELEVANT DETAILS . THE AO WOULD PASS AN ORDER AFTER GIVING A REASONABLE OPPORTUNITY OF B EING HEARD TO THE ASSESSEE. THUS THE ABOVE GROUNDS OF APPEAL ARE ALLO WED FOR STATISTICAL PURPOSES. 12. NOW WE TURN TO THE APPEAL FILED BY THE REVENUE FOR THE A.Y. 2006-07 (ITA NO. 1079/MUM/2011). IT RELATES TO THE DELETION BY THE LEARNED CIT(A) OF DISALLOWANCE OF RS. 58,37,594/- M ADE BY THE AO U/S 14A R.W. RULE 8D. THE LEARNED CIT(A) HAS RESTRICTE D THE DISALLOWANCE. SIMILAR IS THE ISSUE IN GROUND NO 4 OF THE APPEAL F ILED BY THE ASSESSEE FOR THE A.Y. 2006-07 (ITA NO. 552/MUM/2011). BRIEFL Y STATED THE FACTS ARE THAT DURING THE A.Y. 2006-07, THE ASSESSE E HAS SHOWN DIVIDEND INCOME OF RS. 60,72,683/- WHICH IT CLAIMED AS EXEMPT U/S 10(34) OF THE ACT. THE A.O. APPLIED RULE 8D R.W.S. 14A OF THE ACT AND MADE A DISALLOWANCE OF RS. 58,37,594/-. SIMILARLY FOR THE A.Y. 2007- 08, THE ASSESSEE-COMPANY HAD EARNED DIVIDEND OF INC OME OF RS. 49,08,211/- WHICH IT CLAIMED AS EXEMPT UNDER THE PR OVISIONS OF THE ACT. THE AO APPLIED RULE 8D R.W.S. 14A AND MADE A D ISALLOWANCE OF RS. ITA NO. 552,1079 &156/MUM/2011 13 10,37,647/-. IN APPEAL FILED BY THE ASSESSEE, THE L EARNED CIT(A) DIRECTED THE AO TO MAKE THE DISALLOWANCE AS UNDER: I. DIRECT INTEREST II. INDIRECT INTEREST AVERAGE INVESTMENT/AVERAGE ASSET INDIRECT INTEREST ATTRIBUTABLE 0.5% OF AVERAGE INVESTMENT TOTAL DISALLOWANCE U/S 14A=I+II+V 12.1 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE RELEVANT MATERIAL ON RECORD. WE FIND THAT THE AO HA S WORKED OUT THE DISALLOWANCE U/S 14A R.W.R. 8D. THE SAME RULE IS NO T RETROSPECTIVE AS IT WAS NOTIFIED ON 24/03/2008 AND WOULD BE APPLICAB LE ONLY FROM AY 2008-09. IN GODREJ & BOYCE MFG. CO. LTD. VS. DCIT (2010) 328 ITR 81(BOM), IT HAS BEEN HELD THAT RULE 8 D IS NOT R ETROSPECTIVE. THE HONBLE BOMBAY HIGH COURT IN CIT VS. M/S. GODREJ AGROVET LTD VIDE INCOME TAX APPEAL NO. 934 OF 2011, DATED 8.1 .2013, HAS HELD THAT PERCENTAGE OF THE EXEMPT INCOME CAN CON STITUTE A REASONABLE ESTIMATE FOR MAKING DISALLOWANCE IN THE YEARS EARLIER TO THE ASSESSMENT YEAR 2008-09. IN THE ABOVE CASE IT UPHEL D THE DIS ALLOWANCE TO THE EXTENT TO 2% OF THE TOTAL EXE MPT INCOME. RESPECTFULLY FOLLOWING THE ABOVE DECISION, WE DIRECT THE AO TO RESTRICT THE DISALLOWANCE TO 2% OF THE TOTAL EXEMPT INCOME. WE ORDER ACCORDINGLY. 13. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 29/03/2017 SD/- SD/- (SAKTIJIT DEY) (N.K. PRADHAN) JUDICIAL MEMBER ACCOUNTANT MEMBE R ITA NO. 552,1079 &156/MUM/2011 14 MUMBAI; DATED: 29/03/2017 BISWAJIT, SR. P.S. COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A) - 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE . BY ORDER, //TRUE COPY// (DY./ASSTT. REGISTRAR) ITAT, MUMBAI