CHURU TRADING COMPANY P.LTD, MUMBAI V. ITO CIR 6(2)(1), MUMBAI

ITA 5867/MUM/2010

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 3842 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 9 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-05-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 06-03-2013
• Assessment Year: 2002-2003
• Appeal Filed On: 22-07-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Earning of tax free income
• Section: 143(3); 14A; 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNALMUMBAI BENCHES C , MUMBAI BEFORE SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER ITA NO. : 5867/MUM/2010 ASSESSMENT YEAR: 2002-03 ASSESSEE BY : MR. B. S. SHARMA, MS HEE NA DAGRIYA & DALPAT SHAH REVENUE B Y : MR. PAVAN VED / DATE OF HEARING 16.05.2013 / DATE OF ORDER 16.05.2013 O R D E R PER AMIT SHUKLA, J.M. THIS APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST ORDER DATED 27.12.2006 PASSED BY CIT(APPEALS), MUMBAI FOR QUANT UM OF ASSESSMENT PASSED UNDER SECTION 143(3) FOR THE ASSESSMENT YEAR 2002-03. 2. THE AFORESAID APPEAL OF THE ASSESSEE IS BARRED B Y LIMITATION BY 1239 DAYS. IN SUPPORT OF THE CONDONATION OF APPEAL, THE ASSESSEE HAS FILED THE AFFIDAVIT OF THE DIRECTOR AND ALSO THE AFFIDAVIT OF THE CHARTERED ACCOUNTANT. THE MAIN CONTENTIONS RAISED IN THE AFFIDAVIT ARE TH AT ASSESSEE HAS FILED A RECTIFICATION APPLICATION UNDER SECTION 154 ON 08.0 6. 2007 AGAINST ORDER OF THE CHURU TRADING COMPANY PVT. LTD. 135, CONTINENTAL BLDG., DR. A.B. ROAD, WORLI, MUMBAI-400018 PAN NO: AAACC4853G ITO, CIR.6(2)(1), AAYAKR BHAVAN, MUMBAI-400020 (APPELLANT) VS. (RESPONDENT) ITA NO. : 5867/MUM/2010 ASSESSMENT YEAR : 2002-03 CHURU TRADING COMPANY PVT. LTD. 2 CIT(A) DATED 27.12.2006. THE CIT(A) REJECTED THE AS SESSEE PETITION UNDER SECTION 154 ON 10.12.2007. AGAINST THE SAID ORDER, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE TRIBUNAL, BEING ITA NUMBER 998/M/ 2008 ON 11.2.2008. THE TRIBUNAL VIDE ORDER DATED 25.6.2010 DISMISSED THE A SSESSEES APPEAL ON THE GROUND THAT THERE WAS NO MISTAKE APPARENT FROM RECO RD IN THE ORDER OF CIT(A) AND HE WAS JUSTIFIED IN REFUSING TO RECTIFY HIS ORD ER 27.12.2006. THEREAFTER THE ASSESSEE REALIZED THAT APPEAL SHOULD HAVE BEEN FILE D AGAINST THE MAIN ORDER OF THE CIT(A) DATED 27.12.2006 AND IMMEDIATELY THEREAF TER, HE FILED THE APPEAL BEFORE THE TRIBUNAL ON 22.7.2010 WHICH IS WITHIN TH E MONTH OF PASSING OF THE TRIBUNAL ORDER. THUS, THE DELAY WAS AN ACCOUNT OF T HE FACT THAT ASSESSEE WAS PURSUING ALTERNATE REMEDY AND IT HAD NO INTENTION OF NOT PURSUING THE MATTER BEFORE THE TRIBUNAL OR THERE WAS ANY LATCHES ON THE PART OF THE ASSESSEE. 3. IN VIEW OF THE AVERMENT MADE IN THE AFFIDAVIT AN D ALSO FOR THE REASONS GIVEN FOR CONDONATION OF DELAY, WE FIND THAT THE AS SESSEE HAD GENUINE REASONS FOR NOT FILING THE APPEAL IN STATUTORY PERIOD AS IT WAS PURSUING A LEGAL REMEDY BEFORE THE CIT(A) AS WELL AS THE TRIBUNAL IN RELATION TO PROCEEDINGS UNDER SECTION 154. THERE APPEARS TO BE NO LATCHES O N THE PART OF THE ASSESSEE FOR NOT PURSUING THE MATTER. THUS IN THE INTEREST O F SUBSTANTIAL JUSTICE WE CONDONE THE DELAY AND HEAR THE APPEAL ON MERITS. 4. IN THE GROUNDS OF APPEAL THE MAIN ISSUES RAISED BY THE ASSESSEE ARE AS UNDER:- THE COMMISSIONER OF INCOME TAX (APPEALS) -VI, MUMBA I, (HEREINAFTER REFERRED TO AS THE HONBLE CIT(A) HAS ERRED IN LAW, ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE IN CO NFIRMING DISALLOWANCE OF INTEREST OF RS. 5,09,66,585 BY THE ASSESSING OFFICER AND RESTRICTING EXPENSES TO 2% OF THE EXPEN SES DEBITED TO P&L ACCOUNT EXCLUDING DONATION UNDER SECTION 14A OF THE INCOME TAX ACT 1961 (HEREINAFTER REFERRED TO THE AC T). ITA NO. : 5867/MUM/2010 ASSESSMENT YEAR : 2002-03 CHURU TRADING COMPANY PVT. LTD. 3 THE HONBLE CIT(A), ERRED IN LAW, ON FACTS AND IN T HE CIRCUMSTANCES OF THE CASE IN EXCEEDING NET INTEREST OF RS. 9,27,64,608/- BY RS. 5,09,66,585/- WHILE CONFIRMING DISALLOWANCES ETC., UNDER EXPL TO SECTION 73, SECTI ON 36(1)(III) AND SECTION 14A OF THE ACT. 5. BEFORE US THE LD. COUNSEL SUBMITTED THAT THE SIM ILAR ISSUE HAS BEEN DECIDED BY THE TRIBUNAL IN ASSESSEES OWN CASE BY T HE TRIBUNAL IN ASSESSMENT YEAR 2001-02 AND THE COPY OF THE SAID ORDER WAS SUB MITTED BEFORE US. HE SUBMITTED THAT THE TRIBUNAL HAS SET ASIDE THE ENTIR E MATTER TO THE FILE OF THE ASSESSING OFFICER TO DECIDE AS PER THE DIRECTION GI VEN THEREIN. REGARDING RESTRICTION OF DISALLOWANCE OF THE EXPENSES AT THE RATE OF 2% OF TOTAL EXPENDITURE, HE SUBMITTED THAT THE ASSESSEE DID NOT WISH TO PRESS THE GROUND CONSIDERING THE SMALL QUANTUM OF DISALLOWANCE. 6. THE LD. DR ADMITTED THAT, THIS ISSUE STANDS COVE RED BY THE DECISION OF THE TRIBUNAL FOR THE A.Y 2001-02. 7. THE ASSESSING OFFICER HAS MADE THE DISALLOWANCE UNDER SECTION 14A FOR SUMS AGGREGATING RS. 5,11,93,044 WHICH CONSTITU TED INTEREST EXPENSES OF RS. 5,09,66,585 AND RS. 2,26,455 BEING 5% OF THE EX PENSES DEBITED TO THE PROFIT AND LOSS ACCOUNT. THE LD. CIT(A) HAS CONFIRM ED THE DISALLOWANCE OF INTEREST MADE UNDER SECTION 14A AT RS. 5,09,66,585, HOWEVER REDUCED THE DISALLOWANCE OF EXPENSES DEBITED IN THE PROFIT AND LOSS ACCOUNT TO 2% FROM 5%. THIS RESTRICTION OF DISALLOWANCE OF 2% OF THE E XPENSES HAS NOT BEEN PRESSED, THEREFORE, SAME IS TREATED AS CONFIRMED. I N THE SECOND GROUND OF APPEAL THE ASSESSEE HAS CHALLENGED THAT DISALLOWANC E OF INTEREST EXPENDITURE OF RS. 5,11,93,044 AND FURTHER INTEREST DISALLOWANC E MADE BY THE AO UNDER SECTION 36(1)(III) AT RS.7,72,23,986 EXCEEDED THE N ET INTEREST EXPENDITURE CLAIMED WHICH IS AT RS. 9,27,64,608. ITA NO. : 5867/MUM/2010 ASSESSMENT YEAR : 2002-03 CHURU TRADING COMPANY PVT. LTD. 4 8. NOW ON THE ISSUE OF DISALLOWANCE OF INTEREST, AF TER GOING THROUGH THE FINDINGS OF THE AO AS WELL AS CIT(A) AND ALSO THE E ARLIER YEAR TRIBUNAL ORDER WE FIND THAT EXACTLY SIMILAR ISSUE WAS INVOLVED IN THE ASSESSMENT YEAR 2001- 02 ALSO. THE TRIBUNAL AFTER DISCUSSING THE ENTIRE F ACTS OF THE CASE, HAS RESTORED BACK BOTH THE ISSUES TO THE FILE OF THE ASSESSING O FFICER WITH CERTAIN DIRECTIONS. THE RELEVANT FACTS AND ISSUE DISCUSSED BY THE TRIBUNAL AND ALSO THE FINDINGS ARE REPRODUCED HERE UNDER:- 7.1 GROUND NO.1 PERTAINS TO THE ISSUE OF DISALLOWAN CE UNDER SECTION 14A. THE ASSESSING OFFICER NOTICED THAT ASSESSEE HA S EARNED A DIVIDEND OF RS.42,18,500/- ON AN INVESTMENT OF RS.1 ,08,39,473/- IN ZEE TELE FILMS LTD. AFTER CONSIDERING ASSESSEES AR GUMENTS AND CONSIDERING THE FACTS THAT ASSESSEES SHARE CAPITAL AND OWN FUNDS HAVING BEEN WIPED OUT DUE TO LOSSES, INVOKED THE PR OVISIONS OF SECTION 14A FOR DISALLOWANCE OF INTEREST ON THE ABOVE INVES TMENT AMOUNT AT 15% (RS.16,25,921/-) AND ALSO 5% OF DIVIDEND OF RS. 42,18,500/- I.E. RS.2,10,925/- AS ADMINISTRATIVE EXPENSES UNDER SECT ION 14A. ASSESSEE CONTESTED THE SAME. THE CIT (A) WHILE CONSIDERING T HE ISSUE OF SECTION 14A ALONG WITH OTHER ISSUES UNDER SECTION 36(1)(III ) ENHANCED THE DISALLOWANCE UNDER SECTION 14A TO RS.153.05 LAKHS A S AGAINST RS.16,25,921/- MADE BY THE ASSESSING OFFICER. THERE IS NO DISPUTE ABOUT DISALLOWANCE WITH REFERENCE TO 2% OF ADMINIST RATIVE EXPENSES ON THE DIVIDEND EARNED AS IT IS NOT CONTESTED EITHE R BY ASSESSEE OR BY THE REVENUE. ASSESSEE IN THE GROUNDS CONTESTS ONLY THE DISALLOWANCE OF INTEREST UNDER SECTION 14A ON THE INVESTMENTS MA DE. 7.2 THE ISSUE IN GROUND NO.2 IS WITH REFERENCE TO THE DISALLOWANCE UNDER SECTION 36(1)(III) ON VARIOUS ADVANCES GIVEN FOR INVESTMENTS IN SHARE APPLICATION MONEY ETC., THE ASSESSING OFFICER ITA NOS 933 1494 4682 AND 1912 CHURU TRADING CO. P LTD MUMBAI P AGE 12 OF 20 CONSIDERED THE DISALLOWANCE ON TWO DIFFERENT AMOUNT S; ONE ON ADVANCES GIVEN INTEREST FREE TO SHRI RISHI KUMAR CH AKRAPANI (RS.4 LAKHS), MAHARASHTRA PRADESH CONGRESS COMMITTEE (RS. 1 CRORE) AND MR. DEEPAK SHOURIE (RS.3,75,000/-). THE INTEREST AT 15% ON THE ABOVE AMOUNTS WAS DISALLOWED BY THE ASSESSING OFFICER UND ER SECTION 36(1)(III). OUT OF THIS, THE CIT (A) CONFIRMED THE DISALLOWANCE OF INTEREST ON AMOUNT ADVANCED TO SHRI R.K. CHAKRAPANI (RS.60,000) AND THE AMOUNT OF RS.15 LAKHS ADVANCED TO MPCC CONS IDERING THAT ITA NO. : 5867/MUM/2010 ASSESSMENT YEAR : 2002-03 CHURU TRADING COMPANY PVT. LTD. 5 THEY HAVE BEEN GIVEN FOR NON BUSINESS PURPOSES. HE DELETED THE AMOUNT WITH REFERENCE TO ADVANCE TO MR. DEEPAK SHOU RIE WHICH WAS HELD TO BE FOR BUSINESS PURPOSES. IN ADDITION TO TH E ABOVE, THE ASSESSING OFFICER ALSO CONSIDERED INVESTMENTS AND D ISALLOWED INTEREST UNDER SECTION 36(1)(III) OUT OF THE SHARE APPLICATI ON MONEY GIVEN AND ADVANCES FOR PURCHASE OF SHARES TOTALING TO RS.3,45 ,80,955/-. THE DETAILS OF THE AMOUNTS ADVANCED ARE STATED IN PARA 3.1 AND THE DISALLOWANCES WERE WORKED OUT IN PARA 3.6 OF THE OR DER. IN APPEAL, THE CIT (A) EXAMINED THE ISSUE AND CAME TO THE FOLL OWING CONCLUSIONS WHILE CONFIRMING THE AMOUNT AT PARA 2.8 WHICH ARE A S UNDER: 2.8 I HAVE CONSIDERED THE SUBMISSION OF THE APPELL ANT, HOWEVER, I DO NOT AGREE WITH THE CONTENTION OF THE APPELLANT AS ASSESSEES OWN FUND HAS BEEN EXHAUSTED IN VIEW OF SUBSTANTIAL LOSSES IN THE BUSINESS AND THE MAJORITY OF THE INVESTMENT IN THE SHARES HAVE BEEN MADE DURING THE YEAR AND ACCORDINGLY, THE DISA LLOWANCE IS REQUIRED TO BE REWORKED OUT. THE APPELLANT WAS ASKE D TO GIVE ACTUAL INTEREST PERTAINING TO ALL THE ACTIVITY OF T HE APPELLANT COMPANY CONSIDERING THE PERIOD OF UTILIZATION OF TH E BORROWED FUND. THE APPELLANT HAS GIVEN THE WORKING AND HE HA S AGREED DURING THE COURSE OF HEARING THAT THE MONEY INVESTE D INTO THE SHARES AND THE AMOUNT ADVANCED FOR ACQUISITION OF S HARES WHICH HAS BEEN CONSIDERED BY THE ASSESSING OFFICER IN PAR A 2 & 3 OF HIS ORDER IS OUT OF BORROWED INTEREST BEARING FUND. AS PER THE WORKING GIVEN BY THE APPELLANT, THE INTERESTS ALLOC ABLE TO THE VARIOUS ACTIVITIES ARE AS UNDER: S.NO PARTICULARS AMOUNT 1 INTEREST ON FUNDS UTILIZED FOR TRADING OPERATIONS 697.23 LAKHS 2 INTEREST ON FUNDS IN EQUITY SHARES HELD AS INVESTMENT 200.54 LAKHS 3 INTEREST IN RESPECT OF AMOUNT ADVANCED FOR ACQUISITION OF SHARES 345.80 LAKHS 4 INTEREST REQUIRED TO BE DISALLOWED ON INTEREST FREE ADVANCE TO MPCC & MR.RISHIKUMAR CHAKRAPANI 15.60 LAKHS ITA NO. : 5867/MUM/2010 ASSESSMENT YEAR : 2002-03 CHURU TRADING COMPANY PVT. LTD. 6 2.9 AGAINST THE ABOVE WORKING, THE APPELLANT HAS DE BITED GROSS INTEREST IN ITS BOOKS OF ACCOUNT AT 14.49 CRORE AND HAS ALSO RECEIVED INTEREST ON LOAN WHICH WAS CREDITED TO PRO FIT & LOSS A/C AT 4.89 CRORE AND ACCORDINGLY, NET INTEREST PAID WH ICH IS REQUIRED TO BE CONSIDERED AS COST OF BORROWING IS 9.60 CRORE . TAKING THE SAME RATIO OF 12.59 CRORE AS ACTUAL UTILIZATION WOR KED OUT BY THE APPELLANT WITH THE NET INTEREST DEBIT OF 9.60 CRORE AS WORKED OUT ABOVE, THE VARIOUS DISALLOWANCE COMES AS UNDER:- DISALLOWANCE ON ACCOUNT OF EQUITY SHARES HELD AS INVESTMENT 153.01 LAKHS INTEREST IN RESPECT OF INTEREST FREE ADVANCE GIVEN 11.90 LAKHS AMOUNT ADVANCED FOR NON BUSINESS PURPOSES AS PER PARA-3 OF THE ASSESSING OFFICERS ORDER 263.86 LAKHS 2.10 ACCORDINGLY, THE TOTAL DISALLOWANCE UNDER 14A IS ENHANCED TO 153.01 LAKHS AGAINST 16.25 LAKHS WORKED OUT BY T HE ASSESSING OFFICER. SIMILARLY, DISALLOWANCE UNDER SECTION 36(1 )(III) IN RESPECT OF ADVANCE GIVEN TO RISHIKUMAR CHAKRAPANI & MPCC COMMITTEE IS SCALED DOWN TO 11.90 AGAINST 15.60 WOR KED OUT BY THE ASSESSING OFFICER. SIMILARLY, DISALLOWANCE UNDE R SECTION 36(1)(III) IN RESPECT OF ADVANCE GIVEN ON ACQUISITI ON OF SHARES IS COMPUTED AT RS.263.86 AGAINST 324.58 LAKHS WORKED O UT BY THE ASSESSING OFFICER. ACCORDINGLY, ASSESSING OFFICER I S DIRECTED TO ADOPT THE ABOVE DISALLOWANCE APART FROM 2% IN RESPE CT OF PROPORTIONATE MANAGEMENT EXPENSES AS DISCUSSED ABOV E. IN THE RESULT, THE LOSS DETERMINED BY THE ASSESSING OFFICE R IS REDUCED AND THE INCOME IS CONSIDERED AS ENHANCED. THUS HE ENHANCED THE DISALLOWANCE UNDER SECTION 14A ON THE AMOUNT OF INTEREST PERTAINING TO EQUITY SHARES HELD AS INVEST MENT AND RESTRICTED THE INTEREST ON ADVANCES GIVEN FROM RS.15.60 LAKHS TO RS.11.90 LAKHS. ASSESSEE IS CONTESTING THE ABOVE ACTION OF THE CIT (A) IN THE GROUNDS RAISED. 7.3 IT WAS THE CONTENTION OF THE LEARNED COUNSEL TH AT THE CIT (A) HAS NO POWERS TO ENHANCE THE AMOUNT AS WAS DONE BY HIM UND ER SECTION 14A ITA NO. : 5867/MUM/2010 ASSESSMENT YEAR : 2002-03 CHURU TRADING COMPANY PVT. LTD. 7 AS THE PROVISIONS SPEAK OF SATISFACTION OF THE ASSE SSING OFFICER FOR DISALLOWANCE OF THE AMOUNT. IT WAS FURTHER SUBMITTE D THAT AS PER THE DECISION OF THE HON'BLE ITAT IN THE CASE OF BLUE ST AR INDIA LTD IN ITA NOS.1838 & 1840/MUM/2007 DATED 30.09.09, THE DISALL OWANCES CAN BE RESTRICTED TO THE ACTUAL AMOUNT ORIGINALLY ALLOWED BY THE ASSESSING OFFICER. THEREFORE, THE CIT (A)S ACTION IN ENHANCI NG THE AMOUNT IS NOT CORRECT. FURTHER IT WAS SUBMITTED THAT THE RATIO AD OPTED BY THE CIT (A) IN ALLOCATING THE AMOUNT IS ARTIFICIAL, NOTIONAL AN D RATE OF INTEREST IS ALSO NOT CORRECT. FURTHER IT WAS SUBMITTED THAT ASS ESSEE IS IN THE BUSINESS AND WAS APPROVED BY THE RBI AS NBFC AND TH EREFORE THE AMOUNTS ADVANCED AND LOANS CONSIDERED ARE TO BE CON SIDERED AS FOR THE PURPOSE OF BUSINESS. THEREFORE, DISALLOWANCE UNDER SECTION 36(1)(III) DOES NOT ARISE. 7.4 THE LEARNED DEPARTMENTAL REPRESENTATIVE HOWEVER , IN HIS REPLY SUBMITTED THAT THE CIT (A) HAS EQUAL POWERS WITH TH AT OF ASSESSING OFFICER AND WHATEVER ASSESSING OFFICER CAN DO THE C IT (A) CAN ALSO DO. THEREFORE, THERE ARE NO RESTRICTIONS ON CIT (A) TO CONSIDER THE ENHANCEMENT OF THE AMOUNT, IF THE ASSESSING OFFICER HAS DONE SOMETHING WRONG IN THE ASSESSMENT. WITH REFERENCE T O THE DISALLOWANCE OF AMOUNT, HE SUPPORTED THE ORDER OF THE CIT (A) TO SUBMIT THAT HE HAS EXAMINED THE NATURE OF THE AMOUNT AND RESTRICTED TH E AMOUNTS ACCORDINGLY. 7.5 WE HAVE CONSIDERED THE ISSUE AND PERUSED THE RE CORD. THERE IS NO DISPUTE WITH REFERENCE TO THE FACT THAT THE AMOUNTS ARE TO BE DISALLOWED UNDER SECTION 14A, IF THEY ARE UTILIZED FOR THE PUR POSE OF EARNING EXEMPT INCOME. FURTHER, THERE IS NO DISPUTE THAT IF THE AMOUNTS ARE DIVERTED FOR NON BUSINESS PURPOSES, THE DISALLOWANC E UNDER SECTION 36(1)(III) IS ALSO REQUIRED TO BE MADE. THEREFORE, WITH REFERENCE TO THE DISALLOWANCE PER SE THE LEGAL PROVISIONS DO ATTRACT ABOUT THE DISALLOWANCE ON WHICH THERE IS NO DISPUTE. HOWEVER, THE ISSUE IS WITH REFERENCE TO THE QUANTUM OF THE DISALLOWANCE AND AM OUNTS TO BE CONSIDERED. THE ASSESSING OFFICER ORIGINALLY HAS CO NSIDERED ONLY THE INVESTMENT IN ZEE TELE FILMS LTD ALONE FOR CONSIDER ATION OF DISALLOWANCE UNDER SECTION 14A AS THAT INVESTMENT O NLY YIELDED DIVIDEND INCOME WHICH WAS EXEMPT, WHEREAS THE CIT ( A) CONSIDERED THE ENTIRE AMOUNT INVESTED IN SHARES FOR DISALLOWAN CE. HOWEVER, IN OUR VIEW, NEITHER THE ASSESSING OFFICER NOR THE CIT (A) EXAMINED WHETHER THE INVESTMENT IN SHARES IS ALSO ASSESSEES BUSINES S ACTIVITY OR NOT. AS SEEN FROM THE ORDER IN EARLIER APPEAL FOR AY 1999-2 000, WE HAVE ITA NO. : 5867/MUM/2010 ASSESSMENT YEAR : 2002-03 CHURU TRADING COMPANY PVT. LTD. 8 NOTICED THAT DISALLOWANCE UNDER SECTION 36(1)(III) WAS RESTRICTED TO THE AMOUNTS ADVANCED AS SHARE APPLICATION MONEY, WHEREA S DISALLOWANCE ON OTHER AMOUNTS WAS NOT DONE. ASSESSEE ALSO CONTES TED THAT INVESTMENT IN OWN TRADING IN SHARES IS ITS BUSINESS ACTIVITY. THIS ASPECT REQUIRES EXAMINATION BY THE ASSESSING OFFICER. NOT ONLY THAT ASSESSEE HAD ITS OWN FUNDS IN EARLIER YEARS AND THE NATURE O F INVESTMENT MADE THEREIN IN THOSE YEARS IF CARRIED OVER CANNOT BE CO NSIDERED AS INVESTMENTS OUT OF THE BORROWED FUNDS. UNLESS THE A MOUNTS ON WHICH THE INTEREST WAS PAID WAS RELATED TO EITHER SHARE I NVESTMENT ACTIVITY OR SHARE TRADING ACTIVITY AND NECESSITY FOR BORROWING FUNDS WAS EXAMINED BY THE ASSESSING OFFICER AND THE NEXUS ESTABLISHED, IT IS VERY DIFFICULT TO ARRIVE AT THE DISALLOWANCE ON PROPORTIONATE BASIS O UT OF THE TOTAL FUNDS AVAILABLE TO THE RESPECTIVE INVESTMENTS AS WAS DONE BY THE CIT (A). IT WAS THE OBSERVATION OF THE ASSESSING OFFICER THAT A SSESSEES CAPITAL HAS BEEN WIPED OUT AS ASSESSEE HAS SUFFERED LOSSES. THE ISSUE OF BORROWING FUNDS IN THE YEAR AND UTILIZATION OF THE FUNDS, WHE THER THEY ARE FOR THE PURPOSE OF BUSINESS OR NOT, HAVE TO BE EXAMINED AFR ESH. THEREFORE, WITHOUT GIVING ANY FINDING ON THE AMOUNT OF QUANTUM TO BE CONSIDERED, WE RESTORE THE ISSUES COVERED IN GROUND NO.1 WITH R EFERENCE TO DISALLOWANCE UNDER SECTION 14A AND ALSO DISALLOWANC E OF INTEREST TO THE EXTENT OF RS.324.58 LAKHS MADE BY THE ASSESSING OFF ICER (RESTRICTED BY THE CIT (A) TO RS.263.83 LAKHS) TO THE FILE OF THE ASSESSING OFFICER TO EXAMINE THE CONTENTION OF ASSESSEE THAT FUNDS ARE U TILIZED FOR THE PURPOSE OF BUSINESS AND TO ESTABLISH THE NEXUS, IF ANY OF BORROWED FUNDS DIVERTED TO NON-BUSINESS PURPOSE AND ACCORDIN GLY DISALLOW THE AMOUNT. WE MAKE IT CLEAR THAT THE DISALLOWANCE, IF ANY, MADE SHOULD NOT EXCEED THE AMOUNTS CONTESTED BY ASSESSEE IN THE GROUNDS OF APPEAL AS THE REVENUE HAS ACCEPTED THE RESTRICTION OF DISA LLOWANCE UNDER SECTION 36(1)(III). 7.6 WITH REFERENCE TO THE DISALLOWANCE IN RESPECT O F ADVANCE TO SHRI RISHIKUMAR CHAKRAPANI AND TO THE MPCC, ON FACTS WE ARE OF THE OPINION THAT THE AMOUNTS WERE ADVANCED FOR NON BUSI NESS PURPOSE AND THERE IS NOTHING ON RECORD TO INDICATE THAT THESE A DVANCES ARE FOR THE PURPOSE OF BUSINESS. CONSISTENT WITH THE VIEW TAKEN IN AY 1999-2000 IN APPEAL NO.ITA NO.933/MUM/2006, THE DISALLOWANCE OF INTEREST IN RESPECT OF ADVANCES TO SHRI CHAKRAPANI STANDS CONFI RMED. FURTHER THE DISALLOWANCE CONFIRMED BY THE CIT (A) TO THE EXTENT OF ADVANCE GIVEN TO THE MPCC ALSO STANDS CONFIRMED AS THERE IS NO EVIDE NCE ON RECORD THAT THE AMOUNT WAS ADVANCED FOR BUSINESS PURPOSE. ACCOR DINGLY THE SUB- ITA NO. : 5867/MUM/2010 ASSESSMENT YEAR : 2002-03 CHURU TRADING COMPANY PVT. LTD. 9 GROUND IN GROUND NO.2 WITH REFERENCE TO DISALLOWANC E TO THE EXTENT OF RS.11.90 LAKHS STANDS CONFIRMED AND THAT PART OF TH E GROUND IS REJECTED. 7.7 THE ASSESSING OFFICER IS DIRECTED TO EXAMINE TH E FACTS AND ARRIVE AT THE DISALLOWANCE UNDER SECTION 14A/36(1)(III) ON FA CTS AND APPLICABLE LAW WHILE RE-DETERMINING THE DISALLOWANCE IN CONSEQ UENTIAL PROCEEDINGS. IT IS ALSO NOTICED THAT THE ISSUE OF D ISALLOWANCE UNDER SECTION 14A IN 2000-01 WAS RESTORED TO THE FILE OF THE ASSESSING OFFICER BY THE ORDER OF THE ITAT IN ITA NO.7238/MUM/2003 DA TED 6.3.2009. THE FINDINGS IF ANY IN THAT YEAR MAY ALSO BE KEPT I N MIND WHILE TREATING THE DISALLOWANCES IN THIS YEAR. ASSESSEE SHOULD BE GIVEN AN OPPORTUNITY AND ITS SUBMISSIONS SHOULD BE EXAMINED PROPERLY. TH E ASSESSING OFFICER IS ALSO DIRECTED TO EXAMINE WHETHER THE AMO UNTS DISALLOWED CAN ALSO BE SET OFF AGAINST THE CAPITAL GAIN INCOME, IF THERE WAS INCOME FROM CAPITAL GAIN ON THE INVESTMENT ACTIVITY. WITH THESE DIRECTIONS, THE ISSUE IN GROUND NO.1 AND PARTLY IN GROUND NO.2 PERT AINING TO THE INTEREST DISALLOWANCE TO AN EXTENT OF RS.263.83 LAK HS IS RESTORED TO THE FILE OF THE ASSESSING OFFICER. THE ORDERS OF THE AS SESSING OFFICER AND THE CIT (A) ARE SET ASIDE TO THAT EXTENT FOR REDOIN G IT ACCORDING TO LAW AND FACTS. 9. IN VIEW OF THE ABOVE, WE ALSO SET ASIDE THIS ISS UE AND RESTORE THE MATTER BACK TO THE FILE OF THE ASSESSING OFFICER TO DECIDE THE APPEAL IN VIEW OF THE OBSERVATIONS AND DIRECTIONS GIVEN IN THE AFORESAID TRIBUNAL ORDER. IN THE RESULT APPEAL FILED BY THE ASSESSEE IS TREATED AS ALLOWED FOR STATISTICAL PURPOSE. 10. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON 16 TH MAY, 2013. SD/ (RAJENDRA SINGH) ACCOUNTANT MEMBER SD/ AMIT SHUKLA) JUDICIAL MEMBER MUMBAI, DATED :16.05.2013 ITA NO. : 5867/MUM/2010 ASSESSMENT YEAR : 2002-03 CHURU TRADING COMPANY PVT. LTD. 10 / COPY OF THE ORDER FORWARDED (1) !'#$ / THE ASSESSEE; (2) %& / THE REVENUE; (3) ' '( ( $ ) / THE CIT(A)-8, MUMBAI (4) ' '( / THE CIT, MUMBAI CITY CONCERNED; (5) )*$' +! , ' $ ' +! , / THE DR, ITAT, MUMBAI; (6) *,' - / GUARD FILE. (7) .' / TRUE COPY / BY ORDER SUBODH KUMAR PRIVATE SECRETARY / / 0' %$ / (DY./ASSTT. REGISTRAR) ' $ ' +! , / ITAT, MUMBAI ITA NO. : 5867/MUM/2010 ASSESSMENT YEAR : 2002-03 CHURU TRADING COMPANY PVT. LTD. 11 DATE INITIAL ORIGINAL DICTATION PAID IS ENCLOSED AT THE END OF T HE FILE 1. DRAFT DICTATED ON 17.5.2013 SR.PS/P.S 2. DRAFT PLACED BEFORE AUTHOR 20.5.2013 SR.PS/P.S 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 6. DATE OF PRONOUNCEMENT 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