M/S. MONCON INVESTMENTS LTD., MUMBAI V. THE DY.C.I.T. CIRCLE 3(3), MUMBAI

ITA 6172/MUM/2008

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 2020 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 7 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-05-2010
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 07-01-2010
• Assessment Year: 1997-1998
• Appeal Filed On: 15-10-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S S RANA; JAGDISH
• Assessee Lawyers: SANJAY R PARIKH
• Keywords: Speculation loss; Notional interest; Set aside
• Section: 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH B, MUMBAI. BEFORE SHRI D. MANMOHAN, VICE PRESIDENT AND SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER I.T.A. NO. 6172/MUM/2008. ASSESSMENT YEAR : 1997-98 MONCON INVESTMENTS LTD., DY. COMMISSIONER OF OXFORD CENTRE, 10 SHROFF LANE, VS. INCOME TAX, COLABA CAUSEWAY, CIRCLE-3(3), MUMBAI 400 005. MUMBAI. PAN : AAACM3770 A APPELLANT RESPONDENT APPELLANT BY : SHRI SANJAY R. PARIKH. RESPONDENT BY : S/ SHRI JAGDISH AND S.S. RANA. O R D E R PER J. SUDHAKAR REDDY, A.M. THIS IS AN APPEAL FILED BY THE ASSESSEE DIRECTED AGAINST THE ORDER OF THE CIT(APPEALS)-III, MUMBAI DATED 25-08-2 008 FOR THE ASSESSMENT YEAR 1997-98. 2. THE ASSESSEE IS A COMPANY AND HAS INCOME FROM S ERVICE CHARGES AND IS ALSO ENGAGED IN THE BUSINESS OF TRAD ING OF SHARES. THE ADDITIONS MADE BY THE AO AND CONFIRMED BY THE FIRST APPELLATE AUTHORITY, WHICH ARE UNDER DISPUTE BEFORE US, BY THE ASSESSEE ARE AS FOLLOWS : A) DISALLOWANCE OF INTEREST OF RS.7,05,721/-. B) DISALLOWANCE OF BROKERAGE OF RS.1,77,849/-. C) TREATMENT OF BUSINESS LOSS AS SPECULATION LOSS BY APPLYING EXPLANATION TO SECTION 73. 2 3. WE HAVE HEARD MR. SANJAY PARIKH, LEARNED COUNSE L FOR THE ASSESSEE AND MR. JAGDISH, THE LEARNED DR. 4. ON A CAREFUL CONSIDERATION OF THE FACTS AND CIR CUMSTANCES OF THE CASE AND A PERUSAL OF THE PAPERS ON RECORD AND THE ORDERS OF THE AUTHORITIES BELOW AS WELL AS THE CASE LAWS CITED, W E HOLD AS FOLLOWS. 5. THE FIRST ISSUE OF DISALLOWANCE OF INTEREST HAS BEEN DEALT BY THE CIT(APPEALS) AT PARA 2.3 PAGES 4 AND 5 OF HIS O RDER. THE ASSESSEE HAD GIVEN ADVANCES TO M/S MARG SECURITIES LTD. ON INTER EST. M/S MARG SECURITIES INFORMED THE ASSESSEE THAT IT IS FACING FINANCIAL PROBLEMS AND HENCE SHALL BE ABLE TO PAY THE PRINCIPAL AMOUNTS IN INSTALMENTS. IT REQUESTED THAT INTEREST SHOULD NOT BE CHARGED ON TH E LOAN. THE ASSESSEE COMPANY CONSIDERED ITS REQUEST AT ITS BOARD OF DIRE CTORS MEETING ON 26- 12-1996 AND WAIVED THE INTEREST. THE AO ADDED THE A MOUNT OF INTEREST ON THE GROUND THAT THE SAME ACCRUED TO THE ASSESSEE. T HE CIT(APPEALS) DELETED THIS ADDITION ON THE GROUND THAT THE WAIVER HAS BEEN DONE IN THE COMMERCIAL DECISION AND BEFORE ACCRUAL OF INTEREST . IN SUCH A SITUATION, HE HELD THAT NOTIONAL INTEREST INCOME IN THE FORM O F ACCRUED INTEREST CANNOT BE CHARGED TO TAX. THIS DECISION OF THE FIRS T APPELLATE AUTHORITY HAS NOT BEEN CHALLENGED BY THE REVENUE BY WAY OF AN APP EAL. HENCE IT ATTAINED THE FINALITY. WHILE HOLDING SO, THE FIRST APPELLATE AUTHORITY HELD THAT CONSEQUENTLY INTEREST PAID ON AMOUNTS BORROWED , WHICH IN TURN REMAINED INVESTED IN NON INTEREST BEARING FUNDS, I. E. AN ADVANCE TO MARG SECURITIES LTD., HAS TO BE DISALLOWED. THIS, IN OUR CONSIDERED OPINION, IS AGAINST THE SETTLED POSITION OF LAW. THE AMOUNT IN QUESTION HAS BEEN BORROWED FOR THE PURPOSE OF BUSINESS. THERE IS NO D ISPUTE IN THE EARLIER YEARS THAT THE AMOUNT OF INTEREST WAS ALLOWABLE. SI MPLY BECAUSE THE ASSESSEE FAILED TO EARN INCOME ON CERTAIN LOANS GIV EN FROM OUT OF THE 3 BORROWED FUNDS, IT IS NOT LAWFUL TO CONCLUDE, THAT THE INTEREST EXPENDITURE ON THE BORROWED FUNDS CANNOT BE ALLOWED AS AN EXPEN DITURE. IN THE CASE OF CITY MOTOR SERVICES LTD. VS. CIT, MADRAS, 41 ITR 42 6, RELIED UPON BY THE LEARNED COUNSEL FOR THE ASSESSEE, THE HONBLE COURT HELD THAT WHEN THE LOANS HAVE BEEN BORROWED BY THE ASSESSEE FOR ITS BU SINESS PURPOSE, AND WHEN THEY WERE TREATED SO ALL ALONG EVEN BY THE DEP ARTMENT UPTO THE ASSESSMENT YEAR, AND AS THE ASSESSEE ONLY DISCHARGE D ITS CONTRACTUAL LIABILITY TO PAY INTEREST ON THESE LOANS, THE REQUI REMENTS OF THE SECTION ARE SATISFIED AND THE ASSESSEE IS ENTITLED TO DEDUCT TH E WHOLE OF THE AMOUNT FROM ITS ASSESSABLE INCOME. 6. IN THE CASE ON HAND, IT IS NOT THE CASE OF THE REVENUE THAT THE BORROWING WAS NOT MADE FOR THE PURPOSE OF BUSINESS NOR IS IT THE CASE OF REVENUE THAT THE BORROWED FUNDS HAVE BEEN DIVERTED FOR NON BUSINESS PURPOSES OR THAT IT HAS BEEN UTILISED FOR EARNING I NCOME WHICH IS NOT TAXABLE. UNDER THESE CIRCUMSTANCES, WE UPHOLD THE C ONTENTIONS OF THE ASSESSEE AND DIRECT THE ASSESSING OFFICER TO ALLOW INTEREST OF RS.7,05,721/-. 7. IN THE RESULT, GROUND NO. 1 OF THE ASSESSEE IS ALLOWED. 8. COMING TO THE DISALLOWANCE OF BROKERAGE, WE FIN D THAT THE ASSESSEE HAD BORROWED FUNDS FROM ITS SISTER CONCERN WHICH IS ALSO LOCATED IN THE SAME OFFICE PREMISES AS THAT OF THE ASSESSEE AND THAT FOR THE TRANSACTION OF LOAN BETWEEN THE SISTER CONCERNS, BR OKERAGE IS CLAIMED TO HAVE BEEN PAID TO A THIRD PARTY. PRIMA FACIE SUCH T RANSACTION DOES NOT APPEAR TO BE AS GENUINE. BE IT AS MAY, THE FIRST AP PELLATE AUTHORITY AT PARA 3.1 PAGE 7 OF HIS ORDER HELD THAT NO EVIDENCE HAS B EEN PRODUCED BEFORE THE REVENUE AUTHORITIES WITH REGARD TO THIS EXPENDI TURE. IN VIEW OF THE ABOVE DISCUSSION, AS THE ASSESSEE HAS NOT DISCHARGE D THE ONUS THAT LAY ON 4 IT, TO PROVE THE EXPENDITURE, WE UPHOLD THE ORDER O F THE FIRST APPELLATE AUTHORITY AND DISMISS GROUND NO. 2 OF THE ASSESSEE. 9. COMING TO GROUND NO. 3 I.E. THE ISSUE OF SPECUL ATION LOSS, WE SET ASIDE THE MATTER TO THE FILE OF THE AO FOR FRES H ADJUDICATION AFTER GIVING EFFECT TO APPELLATE ORDER AS THE ASSESSEE CL AIMS THAT IT WOULD FALL WITHIN THE EXCEPTIONS PROVIDED TO EXPLANATION TO SE CTION 73 OF THE ACT. 10. IN THE RESULT, GROUND NO. 3 IS ALLOWED FOR STA TISTICAL PURPOSES. 11. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS A LLOWED IN PART. ORDER PRONOUNCED ON THIS 21 ST DAY OF MAY, 2010. SD/- SD/- (D. MANMOHAN) (J. SUDHAKAR REDDY) VICE PRESIDENT. ACCOUNTANT MEMBER. MUMBAI, DATED : 21 ST MAY, 2010. WAKODE COPY FORWARDED TO : 1. APPELLANT. 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, B-BENCH. (TRUE COP Y) BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI BENCHES, MUMBAI.