THE ACIT RG 8(3), MUMBAI V. M/S. ZIRCON FINANCE & LEASING P. LTD, MUMBAI

ITA 5782/MUM/2007

• Counselvise Citation: [2010] 119 COUNSELVISE.COM (IT) 6236 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 2 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: G
• Next Hearing Date: 11-11-2010
• Assessment Year: 2003-2004
• Appeal Filed On: 07-09-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: G GURUSMAY
• Keywords: Business income
• Section: 2; 11

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH G MUMBAI BEFORE SHRI S.V. MEHROTRA (AM) AND SMT. ASHA VIJAYARA GHAVAN (JM) ITA NO. 5782/MUM/2007 ASSESSMENT YEAR-2003-04 THE ACIT, RANGE 8(3), AAYAKAR BHAVAN, MUMBAI-400 020 M/S. ZIRCON FINANCE & LEASING PVT. LTD., GUFIC BLDG., SUBHASH ROAD A, VILE PARLE (E), MUMBAI-400 057 PAN-AAACZ 1682 (APPELLANT) VS. (RESPONDENT) APPELLANT BY: SHRI G. GURUSMAY RESPONDENT BY: SHRI PORUS KAKA O R D E R PER ASHA VIJAYARAGHAVAN (JM) THIS APPEAL PREFERRED BY THE REVENUE IS DIRECTED AG AINST THE ORDER DATED 6.6.2007 PASSED BY THE LD. CIT(A)-XXIX , MUMB AI FOR THE ASSESSMENT YEAR 2003-04 2. THE FIRST GROUND RAISED BY THE REVENUE RELATES T O DELETING THE DISALLOWANCE OF CLAIM OF DEDUCTION U/S. 80M OF RS. 19,25,000/-. 2.1. DURING THE COURSE OF ASSESSMENT PROCEEDINGS T HE ASSESSING OFFICER HAD OBSERVED THAT THE ASSESSEE HAD CLAIMED A DEDUCTION U/S 80M OF RS. 19,25,000/- AND WAS SET OFF AGAINST THE DI VIDEND INCOME OF RS 41,20,674/- WHICH WAS RECEIVED DURING THE YEAR. THE ASSESSEE HAD ALSO PAID DIVIDEND TAX U/S 115-O ON DISTRIBUTION OF DIVI DEND WHICH WAS REPORTED IN THE TAX AUDIT REPORT. THE A.O. HAD MEN TIONED THAT AS PER THE PROVISIONS OF SECTION 115-O(5), THE DIVIDEND TAX PA ID ON DISTRIBUTION OF DIVIDEND CANNOT BE CLAIMED AS DEDUCTION IN ANY OTHE R PROVISION OF THE ACT. SINCE THE ASSESSEE HAD FAILED TO FULFILL THE CONDITION LAID DOWN IN ITA NO.5782/M/2007 2 SECTION 115-O(5), THE A.O. HAD DISALLOWED THE CLAIM OF DEDUCTION U/S 80M OF THE ACT. 3. AGGRIEVED THE ASSESSEE FILED AN APPEAL BEFORE TH E LD.CIT(A). DURING THE COURSE OF APPELLATE PROCEEDINGS THE ASSESSEE HA D FILED ITS SUBMISSIONS DATED 27.7.2006 AS UNDER: IT PROVIDES THAT GROSS TOTAL INCOME OF A DOMESTIC COMPANY INCLUDES ANY INCOME BY WAY OF DIVIDENDS FROM ANOTHER DOMEST IC COMPANY THERE SHALL BE ALLOWED A DEDUCTION ON AN AMOUNT EQU AL TO SO MUCH OF THE AMOUNT OF INCOME BY WAY OF DIVIDENDS FROM ANOTH ER DOMESTIC COMPANY AS IT DOES NOT EXCEED THE AMOUNT DISTRIBUTE D BY THE FIRST MENTIONED DOMESTIC COMPANY ON OR BEFORE THE DUE DAT E. THIS SECTION APPLIES ONLY TO INTER CORPORATE DIVIDE NDS. THUS WHEN INTER-CORPORATE DIVIDEND DISTRIBUTED IS EQUAL TO DI VIDEND RECEIVED, THE ENTIRE DIVIDEND INCOME IS DEDUCTIBLE UNDER SECT ION 80M(1). THUS, IF THE DIVIDEND INCOME RECEIVED BY A FIRST DOMESTIC COMPANY IS NOT DISTRIBUTED OR DISTRIBUTED LESS THAN INTER-CORPORAT E DIVIDEND RECEIVED, THE SAME IS TAXABLE UNDER THE PROVISIONS OF SECTION 115 O. SEC. 115 O DOES NOT TALK OF INTER-CORPORATE DIVIDEN DS. IT PROVIDES SPECIFICALLY FOR TAXING BY WAY OF ADDITIONAL INCOME TAX AT THE SPECIFIED RATE ON DIVIDEND DECLARED OUT OF CURRENT OR ACCUMULATED PROFITS. APPELLANT HAS RECEIVED INTER-CORPORATE DI VIDEND INCOME OF RS. 41,25,674/- AND IT HAS DISTRIBUTED DIVIDEND OF RS 19,25,000/- OUT OF INTER-CORPORATE DIVIDEND WHICH IS LESS THAN DIVIDEND OF RS 41,25,674/- HENCE DIVIDEND INCOME TO THE EXTENT OF RS. 19,25,000/- IS NOT TAXABLE IN THE HANDS OF THE APPELLANT COMPAN Y. FURTHER WHERE DEDUCTION UNDER SECTION 80M (1) IS ALLOWED IN ANY P REVIOUS YEAR NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF SUCH AMOUN T IN ANY OTHER YEAR. HENCE, THE ASSESSING OFFICER IS NOT JUSTIFIE D IN DISALLOWING THE DEDUCTION CLAIMED OF RS 19,25,000/- UNDER SECTION 8 0M(1) OF THE ACT. INTER-CORPORATE DIVIDEND IS A SPECIAL DEDUCTI ON U/S 80M WHERE SECTION 115 O IS NOT APPLICABLE TO THE EXTENT OF DI STRIBUTION OF DIVIDEND RECEIVED FROM ANOTHER DOMESTIC COMPANY NOT EXCEEDING THE AMOUNT OF SUCH DIVIDEND RECEIVED. 4. THE CIT(A) ALLOWED THE ASSESSEES APPEAL OBSERVI NG AS UNDER: I HAVE CONSIDERED THE FACTS OF THE CASE AND SUBMIS SION MADE BY AR OF APPELLANT. THE A.O. HAS DISALLOWED THE CLAIM OF THE APPELLANT BY STATING THAT THE CLAIM IS SUBJECT TO THE CONDITIONS LAID DOWN IN SECTION 115 O AND SINCE THE APPELLANT HAS FAILED TO FULFILL THOSE ITA NO.5782/M/2007 3 CONDITIONS, DEDUCTION CLAIMED U/S 80M IS NOT ALLOWA BLE. THE DISPUTE HAS ARISEN MAINLY BECAUSE IN A.Y 2003-04, B OTH SECTION 80M AND SECTION 115 O WERE IN THE STATUTE BOOK AND SEEMED CONTRADICTORY TO EACH OTHER IF VIEWED SUPERFICIALLY . THE AO HAS HELD, BY INVOKING THE PROVISIONS OF SUB SECTION (5) OF SECTION 115 O THAT THE ASSESSEE WAS NOT ENTITLED TO DEDUCTION CLAIMED U/S 80M OF THE I.T. ACT, 1961. THE APPELLA NT ON THE OTHER HAND HAS CONTENDED THAT IT CANNOT BE DEPRIVED OF TH E BENEFITS OF SECTION 80M. THE LEGISLATURE HISTORY REGARDING THE TAXATION OF D IVIDEND INCOME, CLEARLY POINTS OUT THAT THE LEGISLATURE HAS CHOOSES TO EXEMPT DIVIDEND INCOME FROM TAXATION IN THE HANDS OF THE R ECIPIENT WHEN TAX HAD ALREADY BEEN PAID BY WAY OF ADDITIONAL TAX ON T HE DIVIDEND AT THE TIME OF DISTRIBUTION OF THE DIVIDEND BY THE DIS TRIBUTING COMPANY. SINCE, DIVIDEND IS TAX-EXEMPT IN THE HANDS OF THE R ECIPIENT, THEN LOGICALLY NO DEDUCTION WAS ALLOWED EITHER UNDER SE CTION 80L OR UNDER SECTION 80M . AND TILL, 31 ST MARCH 2002, THIS REMAINED THE POSITION. HOWEVER, CORRESPONDINGLY, WHEN SECTION 115-O WAS MA DE INOPERATIVE FOR THE PERIOD 1.4.2002 TO 31.3.2003, N O EXEMPTION WAS MADE AVAILABLE U/S 10(33) TO THE ASSESSEE WHO WAS T HEN ALLOWED DEDUCTIONS U/S 80L AND U/S 80M. THIS POSITION HAS BEEN EXPLAINED IN THE BOARDS CIRCULAR NO. 8 OF 2002 DATED 27.8.200 2 AT PARAGRAPHS 52.1 TO 52.3 WHICH ARE EXTRACTED AS UNDER: 52.1. UNDER THE EXISTING PROVISIONS CONTAINED IN SECTION 115- O IN ADDITION TO THE INCOME TAX CHARGEABLE IN RESPE CT OF THE TOTAL INCOME OF A DOMESTIC COMPANY, ANY AMOUNT DECL ARED, DISTRIBUTED OR PAID BY WAY OF DIVIDENDS IS CHARGED TO ADDITIONAL INCOME TAX AT THE RATE OF 10 PERCENT. T HE TAX SO PAID BY THE COMPANY IS TREATED AS THE FINAL PAYMENT OF TAX IN RESPECT OF THE AMOUNT DECLARED, DISTRIBUTED OR PAID BY WAY OF DIVIDEND. SUCH DIVIDEND REFERRED TO IN SECTION 115 -O IS EXEMPT IN THE HANDS OF THE SHAREHOLDERS UNDER SUB C LAUSE (I) OF CLAUSE (33) OF THE SECTION 10. THE INCIDENCE OF TAX IS, THUS ON THE PAYER COMPANY AND NOT ON THE RECIPIENT. 52.2. THROUGH THE FINANCE ACT 2002, THE EARLIER SY STEM OF TAXING DIVIDEND HAS BEEN REVERTED TO AND THE INCIDE NCE OF TAX HAS BEEN SHIFTED ON TO THE SHAREHOLDER RECEIVING TH E DIVIDENDS, BY OMITTING SUB CLAUSE (I) OF CLAUSE 33 OF SECTION 10 AND AMENDING SECTION 115-O SO AS TO MAKE THE PRO VISIONS OF THIS SECTION APPLICABLE ONLY IN RESPECT OF THE P ROFITS ITA NO.5782/M/2007 4 DISTRIBUTED BY THE DOMESTIC COMPANIES BEFORE THE 31 ST DAY OF MARCH 2002. 52.3. TO PREVENT CASCADING EFFECT IN THE CASE OF A COMPANY, SECTION 80M HAS BEEN REINTRODUCED IN A REVISED FORM . A DEDUCTION UNDER THIS SECTION WOULD BE AVAILABLE TO A DOMESTIC COMPANY, WHICH RECEIVES DIVIDEND FROM ANOTHER DOMES TIC COMPANY, AND AGAIN DISTRIBUTES DIVIDENDS, SO RECEIV ED BY A DOMESTIC COMPANY FROM ANOTHER DOMESTIC COMPANY, IS LIMITED TO THE EXTENT OF DIVIDENDS DISTRIBUTED BY THE RECIP IENT COMPANY ON OR BEFORE THE DUE DATE OF FILING OF RETURN. THUS, IN THE PERIOD PERTAINING TO ASST. YEAR 2003 -04 WHEN TAX WAS NOT PAYABLE BY THE DIVIDEND DISTRIBUTING COMPANY U/ S 115-O (1) DIVIDEND RECEIVED WAS NOT EXEMPT U/S 10 AND HENCE T HE DEDUCTIONS UNDER SECTIONS 80L AND 80M WERE AVAILABLE TO THE RE CIPIENTS OF THE DIVIDEND. TO PUT IT IN OTHER WORDS, IF NO TAX WAS P AID ON THE DIVIDEND U/S 115 O AT THE TIME OF DECLARATION BY THE DIVIDEN D PAYING COMPANY. IF UNDER SECTION 115 O TAX HAS BEEN PAID, THEN NO DEDUCTION SHALL BE ALLOWED AS PER THE PROVISION OF SECTION 115 O (5), SINCE THE DIVIDEND RECEIVED BECOMES AN EXEMPTED IN COME. HOWEVER, ONCE IT IS TAXABLE THEN THE DEDUCTION IS ALLOWABLE U/S 80M IN THE HANDS OF THE RECIPIENT TO THE EXTENT OF THE DIVIDEN D DISTRIBUTED BY THE RECIPIENT COMPANY OUT OF ITS OWN PROFITS. THE HONBLE MUMBAI TRIBUNAL IN THE CASE OF ITO VS B EHRAM DUBASH PROPERTIES P. LTD IN ITA NO. 405/MUM/03 DATED 30 TH MARCH 2006 HAD HELD AS FOLLOWS: FACTS IN BRIEF ARE THAT ASSESSEE EARNED INCOME FRO M TRANSPORTATION CHARGES DIVIDEND AND CAPITAL GAIN INCOME. RETURN O F INCOME DECLARING INCOME OF RS. 4,52,505/- WAS FILED ON 30. 11.1997 ALONG WITH BALANCE SHEET AND PROFIT AND LOSS ACCOUNT AND THE RETURN WAS PROCESSED UNDER SECTION 14(1)(A). A NOTICE WAS SERV ED UNDER SECTION 142(1)/143(2) TO FURNISH DETAILS AND EXPLANATIONS. IT WAS OBSERVED BY THE ASSESSING OFFICER THAT ASSESSEE HAD CLAIMED DEDUCTION OF RS. 5,89,283/- UNDER SECTION 80-M AND ASSESSEE WAS ASKE D ON WHICH DATE THE DIVIDEND WAS DISTRIBUTED. IN REPLY ASSESSE E SUBMITTED THAT THE DIVIDEND WAS DISTRIBUTED TO THE SHAREHOLDERS ON 27.9.1997 AND TAX WAS PAID UNDER SECTION 115O OF THE INCOME TAX A CT. IT WAS HELD BY THE ASSESSING OFFICER THAT THE ASSESSEE IS NOT ELIGIBLE FOR DEDUCTION UNDER SECTION 80M SINCE THE INSERTION OF SECTION 115 O WITH EFFECT FROM 1.6.1997 NO SUCH DEDUCTION IS ALLO WABLE. ACCORDINGLY, ASSESSING OFFICER HAD COMPUTED THE TOT AL INCOME AT RS. 10,41,790/- DISALLOWING THE CLAIM FOR DEDUCTION MAD E UNDER SECTION 80M. ITA NO.5782/M/2007 5 CIT(A) OBSERVED THAT THE ASSESSEE HAD RECEIVED DIVI DEND AMOUNTING TO RS 5.89 LAKHS IN THE PREVIOUS YEAR EX PIRING ON 31.3.1997 AND THE SAME HAD BEEN DISTRIBUTED BEFORE THE DUE DATE FOR FILING THE RETURN OF INCOME. HE ALSO OBSERVED THAT SECTION 115 O IS OPERATIVE WITH EFFECT FROM 1.6.1997 AND THE ASS ESSEE HAD RECEIVED THE DIVIDEND PRIOR TO 31.3.1997. CIT(A) OBSERVED THAT THE PROVISIONS OF SECTION 115 O RESORTED BY THE ASSESSING OFFICER FOR DISALLOWING ASSESSEES CLAIM ARE APPLICABLE FROM 1.6.1997 BUT NOT FOR THE EARLIER PERIOD. CIT( A) ALSO OBSERVED THAT CONSEQUENT TO THE INTRODUCTION SECTION 115 O T HE DIVIDEND INCOME IS NOT TAXABLE AND EXEMPT AS PER THE PROVISI ONS OF SECTION 10(33) WITH EFFECT FROM 1.4.1998 AND THAT THE DEDUC TION ALLOWABLE UNDER SECTION 80M IS ALLOWABLE TILL THE DIVIDEND RE CEIVED IN THE HANDS OF A COMPANYS IS TAXABLE IN ITS HANDS. DR RELIED ON THE ORDER OF ASSESSING OFFICER, A.R. S UBMITTED THAT THE ORDER OF CIT(A) IN ALLOWING THE CLAIM BEING IN ACCO RDANCE WITH LAW, THAT THE SAME BE UPHELD. WE HAVE HEARD THE ARGUMENTS OF BOTH SIDES AND GONE THROUGH THE MATERIAL ON RECORD. WE OBSERVE THAT SECTION 115 O IS INSERTED WITH EFFECT FROM 1.6.1997 AND THAT THE ASSESSEE RECEIVED DIVIDEND PRIOR TO 31.3.1997 AND THE SAME HAD BEEN DISTRIBUTED TO SHAR EHOLDERS BEFORE THE DATE OF FILING OF RETURN. UNDER THESE C IRCUMSTANCES ASSESSEE IS ELIGIBLE FOR DEDUCTION UNDER SECTION 8 0M AS THE NEWLY INSERTED SECTION 115 O WAS OPERATIVE ONLY WITH EFFE CT FROM 1.6.1997. IN FACT, THE PURPOSE OF INTRODUCTION OF SECTION 11 5 O IS ONLY TO TAX THE DIVIDEND RECEIVED IN THE HANDS OF THE DISTRIBUT ING COMPANY ITSELF AND NOT THE SHAREHOLDER. ACCORDINGLY, UP TO THE PE RIOD WHEN DIVIDEND IS TAXABLE IN THE HANDS OF A COMPANY SHARE HOLDER EXEMPTION IS ALLOWABLE UNDER SECTION 80M. WE FIND N O INFIRMITY IN THE ORDER CIT(A) AND DECLINE TO INTERFERE WITH THE SAME. THE APPELLANT HAS ALSO RELIED UPON THE HONBLE MUMB AI ITAT DECISION IN THE CASE OF M/S KAIKABOD BYRAMJEE & SON S AGENCY PVT. LTD IN ITA NO. 4102/MUM/2001 WHICH IN TURN RELIED U PON THE DECISION OF MUMBAI ITAT IN ITA NO. 462/MUM/2002 DAT ED 10.5.2002. THUS FROM THE ABOVE DISCUSSION, AND FOLLOWING THE A BOVE DECISION, I AM OF THE VIEW THAT THE ASSESSEE IS ENTITLED TO DED UCTION U/S 80M. ITA NO.5782/M/2007 6 5. AGGRIEVED THE REVENUE IS ON APPEAL BEFORE US. TH E FACT OF THE MATTER IS THAT DIVIDEND IS TAXABLE DURING THE AY 2003-04. HENCE THE PROVISIONS OF SEC 115O ARE NOT APPLICABLE. PROVISIONS OF SEC 1 15O ARE APPLICABLE TO DIVIDENDS DISTRIBUTED PRIOR TO 31.3.2002 AND AFTER 1.4.2003. THEREFORE THE DIVIDEND DISTRIBUTED FROM 1.4.2002 TO 31.3. 200 3 I.E RELEVANT TO THE A.Y 2003-04 IS NOT EXEMPT FROM TAX AND HENCE IS TAX ABLE IN THE HANDS OF THE RECIPIENT. IN THE INSTANT CASE ALSO THE DIVIDEN D RECEIVED BY THE ASSESSEE HAS BEEN BROUGHT TO TAX. AS THE DIVIDEND I S NOT EXEMPT FROM THE TOTAL INCOME U/S 10(33) READ WITH SEC 115O, THE ASS ESSEE IS ENTITLED TO DEDUCTION U/S 80M IN RESPECT OF THE DIVIDEND INCOME TAXABLE IN THEIR HANDS. AS PER SEC 80M, A DEDUCTION IS ALLOWED TO A DOMESTIC COMPANY SO MUCH OF THE DIVIDEND INCOME RECEIVED FROM A DOMESTI C COMPANY AS DOES NOT EXCEED THE AMOUNT OF DIVIDEND DISTRIBUTED BY TH EM. IN THE INSTANT CASE THE ASSESSEE HAS RECEIVED INTER-CORPORATE DIVI DEND INCOME OF RS. 41,25,674/- AND IT HAS DISTRIBUTED DIVIDEND OF RS 19,25,000/- OUT OF INTER-CORPORATE DIVIDEND. HENCE DIVIDEND INCOME TO THE EXTENT OF RS. 19,25,000/- IS NOT TAXABLE IN THE HANDS OF THE APPE LLANT COMPANY UNDER SEC 80M. THE DECISION OF THE CO-ORDINATE BENCH IN T HE CASE OF ITO VS BEHRAM DUBASH PROPERTIES P. LTD IN ITA NO. 405/MUM/ 03 DATED 30 TH MARCH 2006, REFERRED TO IN THE ORDER OF THE CIT(A) IS DIRECTLY ON THE ISSUE AND HAS DECIDED IN FAVOUR OF THE ASSESSEE. IN THIS VIEW OF THE MATTER WE UPHOLD THE ORDER OF THE CIT(A) AND DISMISS THE DEPA RTMENTAL APPEAL ON THIS ISSUE. 6. THE NEXT GROUND OF APPEAL BY THE REVENUE IS AGAI NST THE LD CIT(A) DELETING THE DISALLOWANCE OF INTEREST OF RS. 24,70, 504/- MADE BY THE A.O. AND IN ADMITTING FRESH EVIDENCE IN CONTRAVENTION O F RULE 46A WITHOUT ALLOWING OPPORTUNITY TO THE A.O. 7. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE A.O. HAD DISALLOWED THE INTEREST OF RS 24,70,504/- BY HOLDI NG THAT THE ASSESSEE ITA NO.5782/M/2007 7 WAS NOT HAVING SUFFICIENT INTEREST FREE FUND TO ADV ANCE THE LOANS TO ITS SISTER CONCERNS WITHOUT CHARGING INTEREST. THE A.O . ALSO HELD THAT SINCE THE INTEREST EXPENDITURE WAS NOT INCURRED FOR THE P URPOSE OF BUSINESS ACTIVITIES, THE SAID AMOUNT WAS DISALLOWED BY THE A .O. 8. AGGRIEVED THE ORDER OF THE AO, ASSESSEE PREFERRE D AN APPEAL BEFORE THE LD.CIT(A). THE ASSESSEE SUBMITTED BEFORE THE L D. CIT(A) THAT THE A.O. HAD COMPLETELY IGNORED THE INCOME OF RS. 9,34,903/- RECEIVED BY THE APPELLANT WHICH INDICATED THAT THE APPELLANT HAD IN VESTED IN INTEREST BEARING FUNDS IN ADVANCING LOANS AND EARNING INTERE ST THEREON. THE APPELLANT HAD ALSO STATED THAT HE HAD GOT THE INTER EST FREE FUNDS AVAILABLE BEFORE ADVANCING INTEREST FREE LOANS. HE HAD ALSO STATED BEFORE CIT(A) THAT SINCE THE APPELLANT HAS INCURRED THE INTEREST EXPENDITURE FOR THE PURPOSE OF BUSINESS, DISALLOWANCE OF INTEREST PAID OF RS 24,70,504/- WAS UNWARRANTED AND UNJUSTIFIED AND CONTRARY TO THE PRO VISIONS OF LAW. THE APPELLANT DURING THE COURSE OF APPELLATE PROCEEDING S HAD FILED WRITTEN SUBMISSION DATED 27.7.2006 WHICH IS REPRODUCED BELO W: THE A.O. HAS DISALLOWED INTEREST EXPENDITURE OF R S 24,70,504/- ON THE GROUND THAT THE APPELLANT COMPANY DO NOT HAV E SUFFICIENT INTEREST FREE FUNDS AND HENCE HE HAS ADDED BACK TO THE TOTAL INCOME OF THE APPELLANT. THE APPELLANT HAVE ALSO RECEIVED INTEREST BEARING FUNDS AMOUNTING TO RS 2,01,02,984/- AND ON WHICH IN TEREST HAS BEEN PAID AMOUNTING TO RS. 24,70,504/- THE APPELLAN T SUBMITS THAT THE A.O. HAS FAILED TO PROVE THAT HE DID NOT HAVE S UFFICIENT INTEREST FREE FUNDS HENCE THE DISALLOWANCES ARE UNWARRANTED AND UNJUSTIFIED. THE COMPANY HAD INTEREST FREE FUNDS MUCH MORE THA N THE INTEREST BEARING LOANS AND ADVANCES AND THEREFORE, THERE IS NO JUSTIFICATION OF DISALLOWANCE OF INTEREST PAID OF RS 24,70,504/-. YOUR ATTENTION IS INVITED TO THE DECISION OF DEL HI HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME TAX VS TIN BOX CO. 2 60 ITR PG. 637 WHEREIN HONBLE DELHI HIGH COURT HAS HELD THAT THE CAPITAL OF THE FIRM AND INTEREST FREE UNSECURED LOANS WITH THE APP ELLANT FOR EXCEEDED THE AMOUNTS ADVANCED TO THE SISTER CONCERN IN ALL THE YEARS UNDER APPEAL. ADDITIONALLY THE TRIBUNAL HAS A LSO NOTED THAT ITA NO.5782/M/2007 8 THE DEPARTMENT COULD NOT POINT OUT ANY SPECIFIC INT EREST BEARING FUNDS WHICH HAVE BEEN DIVERTED BY THE ASSESSEE TO I TS SISTER CONCERN.. HENCE THE APPEAL OF THE DEPARTMENT WAS DI SMISSED.. THUS THE ALLEGATIONS THAT THE APPELLANT COMPANY DID NOT HAVE SUFFICIENT INTEREST FREE FUNDS ARE FACTUALLY INCORRECT. THE I NTEREST EXPENDITURE IS INCURRED FOR THE PURPOSE OF BUSINESS ACTIVITIES OF THE APPELLANT COMPANY, HENCE THE DISALLOWANCE IS UNWARRANTED AND UNJUSTIFIED. THE APPELLANT COMPANY IS ENGAGED IN THE FINANCE AND INVESTMENT BUSINESS. THE BOMBAY HIGH COURT HAS HELD IN THE BOM BAY SAMACHAR LTD CASE 74 ITR PAGE 723 THAT THE ASSESSEE WHILE CLAIMING DEDUCTION AS TO SATISFYING THE CONDITIONS THAT THE MONEY HAS BEEN BORROWED BY THE ASSESSEE, SECONDLY IT SHOU LD BE FOR THE PURPOSE OF THE BUSINESS AND THIRDLY INTEREST HAS BE EN PAID AND CLAIMED AS A DEDUCTION. ALL THE CONDITIONS OF THE SAID SECTION HAS BEEN COMPLIED WITH THE THEREFORE THERE IS NOT REAS ONS FOR DISALLOWANCE OF THE INTEREST EXPENDITURE. THE APPE LLANT SUBMITS THAT THE ASSESSING OFFICER HAS FAILED TO ESTABLISH THE N EXUS BETWEEN THE BORROWED FUNDS AND THE FUNDS ADVANCED FREE OF INTER EST OR FUNDS INVESTED FOR NON BUSINESS PURPOSE, HENCE THE DISALL OWANCE IS NOT JUSTIFIED. IT IS ALSO SUBMITTED THAT DISALLOWANCE O UT OF INTEREST EXPENDITURE CANNOT BE SUSTAINED IN RELATION TO INT EREST FREE FUND ADVANCED IF ANY GIVEN IN THE EARLIER YEARS. FURTHER, DURING THE HEARING ON 28.7.2006 THE APP ELLANT WAS ASKED TO PROVE NEXUS BETWEEN AMOUNTS ADVANCED AND FUNDS R ECEIVED. ACCORDINGLY, THE CASE WAS REFIXED FOR HEARING ON 22 .8.2006. ON 22.8.2006, THE APPELLANT HAD FILED FURTHER SUBMISSI ONS WHICH ARE REPRODUCED AS UNDER: WE ATTENDED BEFORE YOU ON 28 TH JULY 2006 IN THE ABOVE SAID APPEAL AND YOU REQUESTED US TO FILE THE CASH FLOW STATEMENT SUPPORTED BY RELEVANT STATEMENTS OF TWO YEARS A.Y. 2002-03 AND A.Y. 2003-04. ACCORDINGLY WE ARE FILING THE SECOND PAPER BOOK CONTAINING THE CAS H FLOW STATEMENT SUPPORTED BY THE RELEVANT STATEMENT FOR THE A.Y. 2002-03 AND A.Y. 2003-04. FROM THE CASH STATEMENT FOR THE A.Y. 2003-04, IT C AN BE OBSERVED THAT THE ASSESSEE COMPANY HAD INTEREST FREE FUNDS TO THE TUNE OF RS. 17,075,612/- OUT OF T HE SAID FUNDS THE ASSESSEE COMPANY MADE THE PAYMENT IN RESPECT OF INTEREST FREE LOANS AND ADVANCES OF R S. 8,934,610/- HENCE IT HAD THE BALANCE INTEREST FREE FUNDS TO THE TUNE OF RS 8,141,002/- THE AMOUNT OF R S. 91,71,160/- WAS PAID FOR DISCHARGING THE OVERDRAFT S IN GLOBAL TRUST BANK, DENA BANK AND REPAYMENT OF OTHER ITA NO.5782/M/2007 9 LIABILITIES ETC. THEREFORE THE ASSESSEE COMPANY HA D BORROWED THE AMOUNT OF RS. 1,170,000/- TO DISCHARGE THE AFORESAID LIABILITIES. THUS THE ASSESSEE COMPA NY HAD INTEREST FREE FUNDS OF RS 8,141,002 AND HAVE BORROWED INTEREST BEARING FUNDS OF RS 1,170,000/- AGGREGATING TO RS 9,311,002/- OF WHICH IT MADE THE AFORESAID PAYMENTS OF RS 9,117,160/- HENCE THE COMPANY HAD CASH AND BANK BALANCE OF RS 193,843/-. FROM THE CASH FLOW STATEMENT IT CAN BE NOTICED THAT THE COMPANY HAD SUFFICIENT INTEREST FREE FUNDS AVAILABLE WITH IT FOR GIVING INTEREST FREE ADVANCES AND THE COMPANY HAS ALSO DISCHARGED PARTLY THE OLD LIABILITIES AND INCOME TAX PAYMENTS. HOWEVER, RS 1,170,000/- WAS BORROWED FOR PAYING BANKS ONLY FOR THE PURPOSE OF BUSINESS. REFER BANARASIDAS GUPTA V CIT 106 ITR 559 (ALL). THE ASSESSEE HAS AMPLE FUND S OF THEIR OWN AND HENCE THE DEPARTMENT HAS NOT RIGHT TO DISALLOW ANY INTEREST ON THE SAME. REFER 74 ITR 723 CIT VS BOMBAY SAMACHAR. IT IS SUBMITTED THAT WHEN THERE ARE INTEREST FREE FUNDS AVAILABLE AND THE MONEY HAS BEEN ADVANCED AS INTEREST FREE THEN THE QUESTION OF DISALLOWANCE OF INTEREST DOES NOT ARISE. REFER CIT V TIN BOX CO. 26 0 ITR 637. WE SHOULD BE GIVEN THE OPPORTUNITY OF BEING H EARD IN THE MATTER. I HAVE CONSIDERED THE FACTS OF THE CASE AND SUBM ISSION MADE BY AR OF APPELLANT. THE AO HAS DISALLOWED AN AMOUNT OF RS 24,70,504/- ON THE GROUND THAT THE APPELLANT IS NOT HAVING SUFFICIENT INTEREST FREE FUNDS TO ADVANCE TO ITS SISTER CONCER NS WITHOUT CHARGING ANY INTEREST. ACCORDING TO HIM PAYMENT OF EXPENDIT URE IS THEREFORE, DEEMED TO BE FOR NON BUSINESS PURPOSES AND THEREFOR E NOT ALLOWABLE. THE APPELLANT ON THE OTHER HAND HAS CON TESTED BY SAYING THAT IT HAD SUFFICIENT INTEREST FREE FUNDS TO ADVAN CE TO ITS SISTER CONCERNS. THE APPELLANT HAS FILED DETAILS STATING THAT IT HAD ADVANCED INTEREST FREE LOAN AMOUNTING TO RS 89,34,6 09/- DURING THE YEAR. FROM THE DETAILS FILED, IT IS NOTICED THAT DU RING THE YEAR, THE APPELLANT HAD OPENING BALANCE OF INTEREST FREE LOAN S AND ADVANCES OF RS 31,46,75,035/- AND CLOSING BALANCE OF RS. 32, 36,09,645/- ACCORDING TO THE APPELLANT DURING THE YEAR AN AMOUN T OF RS.89,34,609/- WAS GIVEN AS INTEREST FREE FUNDS. AS AGAINST THIS, THE APPELLANT HAS GIVEN DETAILS WHICH SHOWS THAT IT HAD OPENING BALANCE OF INTEREST FREE UNSECURED LOAN AMOUNTING T O RS 32,66,59,118 AS AGAINST CLOSING BALANCE OF RS 34,05 ,13,813/- AND ITA NO.5782/M/2007 10 THERE WAS A NET ADDITION OF INTEREST FREE LOAN DURI NG THE YEAR AMOUNTING TO RS.1,38,54,695/- IT IS THEREFORE APPAR ENT THAT THE APPELLANT HAD MORE INTEREST FREE FUND AVAILABLE TH AN INTEREST FREE LOAN GIVEN DURING THE YEAR. IT HAS BEEN STATED THA T EVEN AFTER GIVING INTEREST FREE ADVANCE, IT HAD SURPLUS INTEREST FREE UNSECURED LOAN OF RS.81,41,000/- FROM THE FACTS OF THE CASE, I FIND M ERIT IN THE SUBMISSION OF THE APPELLANT IT CANNOT BE FORCED TO EARN HYPOTHETICAL INCOME WHERE THERE IS NONE. FROM THE FACTS, IT CANN OT BE SAID THAT INTEREST EXPENDITURE INCURRED IS NOT FOR THE PURPOS E OF BUSINESS AND THEREFORE, DISALLOWANCE OF THE SAME IS NOT JUSTIFIE D IN VIEW OF THE PROVISIONS OF SECTION 36. IN VIEW OF THE ABOVE, TH IS GROUND IS ALSO ALLOWED. IN THE RESULT, APPEAL IS ALLOWED. 9. AGGRIEVED BY THE ORDER OF THE LD. CIT(A), THE RE VENUE IS ON APPEAL BEFORE US. 10. WE HEARD BOTH THE PARTIES. WE FIND THAT THE LD. CIT(A) HAS FOUND IT AS A FACT, FROM THE FINANCIAL STATEMENTS FURNISHED BY THE ASSESSEE THAT INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE WAS MORE THAN THE INTEREST FREE LOANS GIVEN BY THE ASSESSEE. HENCE NO INTEREST BEARING FUNDS WERE DIVERTED AS INTEREST FREE LOANS WHICH WOULD MEAN TH AT ALL THE INTEREST BEARING FUNDS HAVE BEEN UTILISED FOR THE PURPOSE OF BUSINESS AND HENCE THE ENTIRE INTEREST PAYABLE ON SUCH BORROWINGS ARE ALLOWABLE AS A DEDUCTION IN COMPUTING THE TAXABLE BUSINESS INCOME OF THE ASSESSEE. THIS BEING A FINDING OF FACT AND NOTHING TO THE CON TRARY HAS BEEN BROUGHT ON RECORD, WE UPHOLD THE DECISION OF THE LD. CIT(A) IN DELETING THE DISALLOWANCE OF INTEREST OF RS. 24,70,504/- PAYABLE BY THE ASSESSEE ON ITS BORROWED FUNDS. 11. THE REVENUE RAISED AN ISSUE THAT CIT(A) ERRED I N ADMITTING FRESH EVIDENCE IN CONTRAVENTION OF RULE 46A WITHOUT ALLOW ING OPPORTUNITY TO THE A.O. AS POINTED OUT BY THE LEARNED AR AT THE TI ME OF HEARING, ALL THE BASIC MATERIALS/ FINANCIALS WERE AVAILABLE WITH THE AO. THE CIT(A) HAD ONLY ASKED THE ASSESSEE TO PREPARE A CASHFLOW STATE MENT FROM OUT OF THE ITA NO.5782/M/2007 11 DETAILS ALREADY FURNISHED. IN THE CIRCUMSTANCES WE ARE OF THE OPINION THAT THE CIT(A) HAD NOT ADMITTED ANY NEW EVIDENCE BUT HA D ONLY REGROUPED AND ELICITED INFORMATION FROM THE DOCUMENTS AND DET AILS ALREADY FURNISHED BEFORE THE CIT(A). IN THE CIRCUMSTANCES W E ARE OF THE OPINION THAT THERE WAS NO NECESSITY FOR THE CIT(A) TO CALL FOR THE OPINION OF EVERY CONCLUSION HE DRAWS FROM THE EXISTING MATERIALS. TH EREFORE THERE HAS BEEN NO VIOLATION OF THE RULE 46A OF THE ITAT RULES . 12. IN THE RESULT THE APPEAL FILED BY THE REVENUE I S DISMISSED. ORDER PRONOUNCED ON THIS 30 TH DAY OF NOVEMBER, 2010 SD/- SD/- (S.V. MEHROTRA) (ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED 30 TH NOVEMBER, 2010 RJ COPY TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT-CONCERNED 4. THE CIT(A)-CONCERNED 5. THE DR G BENCH TRUE COPY BY ORDER ASSTT. REGISTRAR, I.T.A.T, MUMBAI ITA NO.5782/M/2007 12 DATE INITIALS 1 DRAFT DICTATED ON: 24.11.2010 SR. PS/PS 2. DRAFT PLACED BEFORE AUTHOR: 25.11.2010 ______ SR. PS/PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER: _________ ______ JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER: _________ ______ JM/AM 5. APPROVED DRAFT COMES TO THE SR. PS/PS: _________ ______ SR. PS/PS 6. KEPT FOR PRONOUNCEMENT ON: _________ ______ SR. PS/PS 7. FILE SENT TO THE BENCH CLERK: _________ ______ SR. PS/PS 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK: _________ ______ 9. DATE OF DISPATCH OF ORDER: _________ ______