PLEASURE TRADING P. LTD, MUMBAI V. DCIT CIR 2(2), MUMBAI

ITA 6233/MUM/2010

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 8232 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 11 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-08-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 16-07-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 17-08-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: N SATHYA MOORTHY
• Keywords: Business expenditure; Question of law
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH C , MUMBAI BEFORE SHRI D. MANMOHAN, VICE PRESIDENT AND SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER ITA NO.6233/MUM/2010 ASSESSMENT YEAR : 2007-08 PLEASURE TRADING PRIVATE LIMITED BOMBAY DYEING COMPOUND ADMN. OFFICE BUILDING, FIRST FLOOR, PANDURANG MARG, WORLI MUMBAI-400 025. PAN NO. AABCP 8897 N DY. COMMISSIONER OF INCOME TAX , CIRCLE -2(2) (OSD) AAYAKAR BHAVAN MUMBAI. (APPELLANT) VS. (RESPONDENT) APPELLANT BY : SHRI TARUN ROHTAGI RESPONDENT BY : SHRI N. SATHYA MOORTHY DATE OF HEARING : 16.7.2012 DATE OF PRONOUNCEMENT : 3.8.2012 O R D E R PER RAJENDRA SINGH, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER D ATED 2.6.2010 OF CIT(A) FOR THE ASSESSMENT YEAR 2007-08. THE ASSESSEE IN THIS APPEAL HAS RAISED DISPUTES ON TWO DIFFERENT GROU NDS WHICH RELATE TO DISALLOWANCE OF EXPENSES UNDER SECTION 14A OF THE INCO ME TAX ACT AND DISALLOWANCE OF INTEREST. 2. THE FIRST DISPUTE IS REGARDING DISALLOWANCE OF EXPEN SES UNDER SECTION 14A OF THE INCOME TAX ACT. THE AO DURING THE ASSE SSMENT PROCEEDINGS NOTED THAT THE ASSESSEE HAD MADE INVESTMENT O F ITA NO.6233/M/10 A.Y. 07-08 2 RS.1,19,000/- IN UNITS OF MUTUAL FUND FROM WHICH INCOME WAS EXEMPT. HE, THEREFORE, DISALLOWED EXPENSES RELATING TO SAID INCOM E WHICH WAS COMPUTED BY HIM UNDER PROVISIONS OF RULE 8D AT RS.17,03 2/-. THE ASSESSEE DISPUTED THE DECISION OF AO AND SUBMITTED BEFORE C IT(A) THAT THE ASSESSEE HAD NOT EARNED INCOME FROM INVESTMENT AND, T HEREFORE, EXPENSES COULD NOT BE DISALLOWED. IT WAS ALSO SUBMITTED TH AT THERE WERE NO EXPENSES INCURRED FOR EARNING OF ANY INCOME WH ICH WAS EXEMPT. THE CIT(A) HOWEVER, DID NOT ACCEPT THE CONTENT IONS RAISED. IT WAS HELD BY HIM THAT EXPENSES HAD TO BE DISALLOWED AS PE R RULE 8D FOLLOWING THE DECISION OF THE MUMBAI SPECIAL BENCH OF T HE TRIBUNAL IN CASE OF DAGA CAPITAL MANAGEMENT LTD. (26 SOT 603). HE , THEREFORE, CONFIRMED THE DISALLOWANCE AGGRIEVED BY WHICH THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 3. BEFORE US, THE LD. AR FOR THE ASSESSEE REITERATED TH E SUBMISSIONS MADE BEFORE LOWER AUTHORITIES THAT THE ASSESSEE HAD NOT RECEIVED ANY DIVIDEND INCOME WHICH WAS EXEMPT FROM TAX AND, THEREFO RE, NO EXPENSES COULD BE DISALLOWED UNDER SECTION 14A. HE PLACED R ELIANCE ON THE DECISION OF MUMBAI BENCH OF THE TRIBUNAL IN THE CAS E OF ASCENT TRADECOM PRIVATE LIMITED VS. DCIT IN ITA NO.6194/M/2 006 IN SUPPORT OF THE PROPOSITION. IT WAS POINTED OUT THAT THE DECISI ON OF THE TRIBUNAL WAS BASED ON THE JUDGMENT OF HON'BLE HIGH COURT OF BOMB AY IN THE CASE OF CIT VS. DELITE ENTERPRISES IN INCOME TAX APPEAL N O.110/2009 ITA NO.6233/M/10 A.Y. 07-08 3 DATED 26.2.2009. THE LD. AR ALSO ARGUED THAT EVEN I F DISALLOWANCE HAD TO BE MADE, RULE 8D COULD NOT BE APPLIED AS THE SAME W AS APPLICABLE FROM ASSESSMENT YEAR 2008-09. THE LD. DR ON THE OTHER H AND SUPPORTED THE ORDERS OF AUTHORITIES BELOW AND PLACED RE LIANCE ON THE FINDINGS GIVEN IN THE RESPECTIVE ORDERS. 4. WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING DISALLOW ANCE OF EXPENSES UNDER SECTION 14A IN RELATION INVESTMENT IN THE UNITS OF MUTUAL FUND INCOME FROM WHICH WAS EXEMPT. THE AO HAD M ADE DISALLOWANCE OF RS.17,032/- UNDER THE PROVISIONS OF RULE 8D WHICH HAS BEEN CONFIRMED BY CIT(A). THE CASE OF THE ASSESSEE IS THAT THE ASSESSEE HAD NOT EARNED ANY INCOME FROM THE UNITS OF MUTU AL FUND, AND, THEREFORE, NO DISALLOWANCE COULD BE MADE UNDER SECT ION 14A. FOR THIS PURPOSE, ASSESSEE HAS PLACED RELIANCE ON THE DECISION OF THE TRIBUNAL IN THE CASE OF ASCENT TRADECOM PRIVATE LIMITE D VS. DCIT IN ITA NO.6194/M/2006. IN THE SAID CASE, THE TRIBUNAL HEL D THAT WHEN THERE IS NO INCOME RECEIVED FROM THE INVESTMENT, NO DISA LLOWANCE OF EXPENSES COULD BE MADE UNDER SECTION 14A. THE TRIBUNAL P LACED RELIANCE ON THE JUDGMENT OF HON'BLE HIGH COURT OF BOMB AY IN THE CASE OF CIT VS. DELITE ENTERPRISES IN INCOME TAX APPEAL NO.1 10/2009 DATED 26.2.2009. IN THE SAID CASE, THE ASSESSEE HAD BORROWED F UNDS WHICH HAD BEEN INTRODUCED IN THE PARTNERSHIP FIRM. SINCE IN COME FROM ITA NO.6233/M/10 A.Y. 07-08 4 PARTNERSHIP FIRM WAS EXEMPT, THE CLAIM OF DEDUCTION ON ACCOUNT OF INTEREST HAD BEEN DISALLOWED. THE TRIBUNAL HAD ALLOWE D THE CLAIM OF THE ASSESSEE. IN APPEAL THE HON'BLE HIGH COURT OF BOMBAY OBSERVED THAT SINCE THERE WAS NO PROFIT IN THE RELEVANT ASSESSMENT YEAR THE QUESTION RAISED DID NOT ARISE. THE TRIBUNAL IN CASE OF A SCENT TRADECOM PRIVATE LIMITED (SUPRA), OBSERVED THAT THOUGH THE HON BLE COURT HAD NOT DECIDED THE ISSUE, THE REVENUE HAD FAILED ON THE ISSUE WHICH HAD BEEN DISMISSED BY THE HONBLE COURT AND, THEREFORE, IT BECAME THE DECISION OF HONBLE COURT ON THE ISSUE WHICH HAS TO BE FOL LOWED AS A BINDING PRECEDENT. THE TRIBUNAL REFERRED TO THE JUDG MENT OF HON'BLE HIGH COURT OF GUJARAT IN THE CASE OF NIRMA INDUSTRIES LT D. VS DCIT (283 ITR 402) IN WHICH IT WAS HELD THAT WHEN THE HONB LE COURT CAME TO CONCLUSION THAT THERE WAS NO SUBSTANTIAL QUESTION OF LA W ARISING IN A PARTICULAR CASE, IT CAN NOT BE SAID THAT THE SUBJECT MAT TER OF CONTROVERSY BETWEEN PARTIES HAD NOT BEEN DEALT WITH BY THE HONBLE COURT. IT WAS ALSO HELD THAT WHEN THE DECISION OF THE T RIBUNAL IS AFFIRMED ON THE ISSUE BROUGHT BEFORE HONBLE COURT, IT IS THE DECISION OF THE HONBLE COURT WHICH BECOMES OPERATIVE. THE TRIBUNAL ACCORDINGLY HELD FOLLOWING THE JUDGMENT OF HON'BLE HIGH COURT OF BOMBAY IN CASE OF CIT VS. DELITE ENTERPRISES (SUPRA) THAT DISALLOWANCE O F EXPENSES COULD NOT BE MADE UNDER SECTION 14A. ITA NO.6233/M/10 A.Y. 07-08 5 4.1 WE HAVE CAREFULLY CONSIDERED THE VARIOUS ASPECTS OF TH EMATTER INCLUDING THE DECISION OF THE TRIBUNAL IN THE CASE OF A SCENT TRADECOM PRIVATE LIMITED (SUPRA), AND THE JUDGMENT OF HON'BLE HIGH COURT OF GUJARAT IN THE CASE OF NIRMA INDUSTRIES LTD. (SUPRA),. I N CASE OF NIRMA INDUSTRIES LTD.(SUPRA), THE HONBLE COURT WAS CONCERNED WI TH EFFECT OF DISMISSAL OF TAX APPEAL BY THE HONBLE COURT HOLDING TH AT NO SUBSTANTIAL QUESTION OF LAW HAD ARISEN. THE HONBLE COUR T HELD THAT ONCE APPEAL AGAINST DECISION OF THE TRIBUNAL IS DISMISSED BY THE HIGH COURT HOLDING THAT THERE IS NO SUBSTANTIAL QUESTION OF LAW INVOLVED, THERE IS MERGER OF ORDER OF THE TRIBUNAL WITH THAT O F THE HONBLE COURT AND IT BECOMES THE DECISION OF THE HONBLE COURT ON THE SUBJECT. THUS, THE ISSUE BEFORE THE HIGH COURT WAS REGARDING MERGER OF THE ORDER. THE ISSUE WAS NOT WHETHER SUCH AN ORDER OF THE HIGH COURT CAN ACT AS A BINDING PRECEDENT IN OTHER CASES. NO DOUBT THE DECISIO N OF THE HONBLE COURT WOULD BE BINDING ON ALL AUTHORITIES IN THAT PARTICULAR CASE. BUT FOR A BINDING PRECEDENT, THERE HAS TO BE A DE CISION OF THE HIGH COURT ON THIS ISSUE. THE DECISION OF HON'BLE HIGH COUR T /HON'BLE SUPREME COURT CAN BE CONSIDERED AS A PRECEDENT ONLY IF IT DECIDES THE QUESTION OF LAW AS HELD BY HON'BLE SUPREME COURT IN T HE CASE OF STATE OF PUNJAB VS SURINDER KUMAR (194 ITR 434). SIM ILARLY, HON'BLE SUPREME COURT IN THE CASE OF GOODYEAR INDIA LTD.(188 ITR 402) HAVE HELD THE PRECEDENT IS AN AUTHORITY FOR WHAT IT ACTUAL LY DECIDES AND NOT ITA NO.6233/M/10 A.Y. 07-08 6 WHAT MAY BE REMOTELY OR EVEN LOGICALLY FOLLOW FROM I T AND THAT A DECISION ON THE QUESTION WHICH HAS NOT BEEN ARGUED CAN NO T BE TREATED AS A PRECEDENT. THESE JUDGMENTS HAD NOT BEEN BROUGHT T O THE NOTICE OF THE TRIBUNAL IN CASE OF ASCENT TRADECOM PRIVATE LIMI TED (SUPRA). IN VIEW OF THESE JUDGMENTS, THE DECISION OF THE TRIBUNAL CA N NOT BE FOLLOWED. IN CASE OF CIT VS. DELITE ENTERPRISES (SUPRA), THE HONBLE COURT HAD NOT DECIDED THE ISSUE AS TO WHETHER EXPENSES CO ULD BE DISALLOWED UNDER SECTION 14A WHEN NO INCOME HAS BEEN EAR NED AND, THEREFORE, THE SAID JUDGMENT CAN NOT BE CONSIDERED AS BI NDING PRECEDENT IN OTHER CASES. 4.2 IN THE PRESENT CASE, THE ASSESSEE HAD MADE INVESTMENT I N THE UNITS OF MUTUAL FUND INCOME FROM WHICH IF RECEIVED WAS EXEMPT FROM TAX. THEREFORE, WHETHER ANY INCOME HAS BEEN EARNED OR NOT EXPENSES INCURRED IN RELATION TO THE SAID INVESTMENT WHICH IS NOT GOING TO RESULT INTO ANY TAXABLE INCOME HAS TO BE DISALLOWED UNDER SECT ION 14A. THE HON'BLE SUPREME COURT IN CASE OF RAJENDRA PRASAD MOODY (115 ITR 519) HAVE HELD THAT EVEN IF THERE IS NO INCOME RECEIVE D FROM INVESTMENT, INTEREST ON BORROWED FUNDS UTILIZED FROM I NVESTMENT HAS TO BE ALLOWED AS DEDUCTION. BY THE SAME ANALOGY, IF TH E INCOME FROM INVESTMENT IS EXEMPT THE EXPENSES INCURRED HAVE TO BE DI SALLOWED EVEN IF NO INCOME IS EARNED. WE ARE, THEREFORE, OF TH E VIEW THAT EXPENSES HAVE TO BE CONSIDERED FOR DISALLOWANCE UNDER SECTI ON 14A. ITA NO.6233/M/10 A.Y. 07-08 7 HOWEVER, THE AUTHORITIES BELOW HAVE FOLLOWED RULE 8D WHICH IS APPLICABLE ONLY FROM ASSESSMENT YEAR 2008-09 AS HELD BY HO N'BLE HIGH COURT OF BOMBAY IN CASE OF GODREJ AND BOYCE MFG. CO. V S. DCIT (328 ITR 81). IT HAS ALSO BEEN HELD IN THE SAID CASE THAT IN RESPECT OF PRIOR YEARS, DISALLOWANCE OF EXPENSES RELATING TO EXEMPT INCOM E BOTH DIRECT AND INDIRECT EXPENSES HAS TO BE MADE ON A REASONABLE BA SIS AFTER ALLOWING OPPORTUNITY OF HEARING TO THE ASSESSEE. WE, TH EREFORE, SET ASIDE THE ORDER OF CIT(A) AND RESTORE THE ISSUE TO THE FILE OF AO FOR PASSING A FRESH ORDER AFTER NECESSARY EXAMINATION IN THE LIGHT OF JUDGMENT OF HON'BLE HIGH COURT OF BOMBAY (SUPRA) AND A FTER ALLOWING OPPORTUNITY OF HEARING TO THE ASSESSEE. 5. THE SECOND DISPUTE IS REGARDING DISALLOWANCE OF INTERE ST EXPENDITURE OF RS.59,51,911/-. THE AO NOTED THAT THE ASSESSEE HAD CLAIMED INTEREST EXPENDITURE OF RS.59,51,911/-. THE AO , THEREFORE ASKED THE ASSESSEE TO EXPLAIN THE NEXUS BETWEEN INTEREST E XPENDITURE AND INCOME EARNED BY THE ASSESSEE. THE ASSESSEE EXPLAINED TH AT IT WAS ENGAGED IN SYNDICATION ACTIVITIES AND WAS ALSO ENJOYI NG COMMISSION FROM INSURANCE BUSINESS. SINCE THE ASSESSEE HAD SMALL CAPITAL BASE, IT HAD OBTAINED LOAN FROM M/S. ALL GROW FINANCE & INVESTMENT PVT. LTD. IN THE PRECEDING YEARS. THE OPEN ING BALANCE OF LOAN WAS RS.3.70 CRORES AND DURING THE YEAR HAD RECEIVE D FRESH LOAN OF RS.62.00 LACS AND ALSO HAD REPAID LOAN TO THE TUNE OF R S.20.00 LACS. ITA NO.6233/M/10 A.Y. 07-08 8 THE NET LOAN DURING THE YEAR WAS THUS RS.42 LAKHS. IT WAS ALSO SUBMITTED THAT THE LOAN HAD BEEN USED FOR THE PURPOSE OF BUSINESS FOR WHICH CONFIRMATION HAD BEEN FILED AND, THEREFORE, CLAI M SHOULD BE ALLOWED. THE AO NOTED THAT THE ASSESSEE HAD RECEIVED SYND ICATION INCOME OF RS.48.00 LACS FROM ESCORTS SECURITIES LTD. WHICH WA S ENGAGED IN THE BUSINESS OF STOCK BROKING, MERCHANT BANKIN G, PORTFOLIO MANAGEMENT SERVICES, MUTUAL FUND ADVISORY AND OTHER FIN ANCIAL SERVICES. AS PER MOU WITH THE PARTY, ASSESSEE WAS REQUIRED TO PROVIDE CLIENTS TO ESCORTS SECURITIES LTD. FOR PROCURING BUSINESS TO THE SAID PARTY. THE AO ALSO NOTED THAT SYNDICATION ACTIVITY WAS MORE OR LESS IN THE NATURE OF LIAISONING MONEY OR COMMISSION. THE INCOM E EARNED BY THE ASSESSEE WAS MISCELLANEOUS INCOME OF RS.10,451/- AND INSUR ANCE INCOME OF RS.1,23,000/-. THE AO FURTHER NOTED THAT TH E ASSESSEE HAD UNSECURED LOANS OF RS.4,59,03,660/- AND A SUM OF RS.3,87 ,54,482/- WAS SHOWN UNDER THE HEAD CURRENT ASSETS, LOANS AND ADVAN CES IN THE BALANCE SHEET AS ON 31.3.2007. THE ASSESSEE HAD HOWEVE R HAD NOT SHOWN ANY INTEREST INCOME IN THE P&L ACCOUNT. THE AO OBT AINED DETAILS OF CURRENT ASSETS AND ADVANCES FROM WHICH IT WAS NOTED THAT THE ASSESSEE HAD GIVEN ADVANCES OF RS.1,13,13,641/- ON WHICH N O INTEREST INCOME HAD BEEN EARNED. THE AO ALSO OBSERVED THAT THE ASSESSEE HAD NOWHERE MENTIONED THAT THESE ADVANCES HAD BEEN GIVEN F OR THE PURPOSE OF BUSINESS. CONSIDERING THE NATURE OF INCOME A ND LACK OF ANY ITA NO.6233/M/10 A.Y. 07-08 9 NEXUS BETWEEN BORROWED FUNDS AND BUSINESS OF THE ASSESSEE, THE AO CONCLUDED THAT THE BORROWINGS HAD NOT BEEN USED FOR THE PURPOSE OF BUSINESS. THE AO, THEREFORE DISALLOWED THE CLAIM OF INT EREST OF RS.59,51,911/-. THE AO FURTHER OBSERVED THAT THE ASSESSEE HAD GIVEN ADVANCE OF RS.1,13,13,641/- TO VARIOUS PARTIES ON WHICH NO INTEREST WAS RECEIVED NOR THERE WAS ANY MATERIAL TO LINK ADVANC ES WITH ANY BUSINESS OF THE ASSESSEE. THEREFORE, INTEREST PERTAINING T O THOSE ADVANCES WAS NOT ALLOWABLE. HOWEVER, SINCE THE AO HAD DI SALLOWED THE ENTIRE INTEREST, NO FURTHER DISALLOWANCE WAS MADE. 5.1 THE ASSESSEE DISPUTED THE DECISION OF AO AND SUBMITTED BEFORE CIT(A) THAT THE ASSESSEE WAS ENGAGED IN SYNDICATION ACTIV ITIES AND WAS ALSO HAVING INCOME FROM INSURANCE COMMISSION. THE ASSESSE E HAD TAKEN LOAN FROM M/S. ALL GROW FINANCE & INVESTMENT PVT . LTD. HAVING OPENING BALANCE OF RS.370 CRORES AND NET LOAN DURING TH E YEAR WAS RS.42.00 LACS OUT OF WHICH RS.24,70,500/- HAD BEEN USED F OR PAYMENT OF INTEREST ON THE OLD LOAN AND REMAINING LOAN WAS USE D FOR OPERATING EXPENSES OF THE BUSINESS AND SOME FRESH INTEREST FREE ADVAN CES WERE ALSO GIVEN. MAJOR PORTION OF THE LOAN WAS CARRIED FORW ARD FROM THE EARLIER YEAR IN WHICH IT HAD BEEN UTILIZED FOR THE BUSINESS AND INTEREST HAD BEEN ALLOWED IN ASSESSMENT YEAR 2006-07. IN ASSESSMENT YEAR 1996-97, INTEREST OF RS.9.86 LACS HAD BEEN DISALLOWED ON THE GROUND THAT NO INTEREST HAD BEEN CHARGED ON ADVANCES. THUS, THE DISALLOWANCE ITA NO.6233/M/10 A.Y. 07-08 10 IF ANY, HAS TO BE RESTRICTED TO THE INTEREST FREE ADVAN CES OF RS.1.13 CRORES @ 14.5% WHICH CAME TO RS.13,83,880/-. CIT(A) AFT ER CONSIDERING SUBMISSIONS OF THE ASSESSEE OBSERVED THAT SIMILAR DISALLOWANCE HAD BEEN MADE BY AO IN ASSESSMENT YEAR 2006- 07. THE DISALLOWANCE HAD BEEN RESTRICTED BY AO TO 14.5% OF THE TOTAL INTEREST. THE ASSESSEE HAD NOT DISPUTED THE DISALLOWANCE FURTHER AN D, THEREFORE, ASSESSEE ACCEPTED THE FINDING OF AO THAT THE INTEREST WAS N OT BUSINESS EXPENDITURE. IN THE CURRENT YEAR THE AO HAD DISALLOWE D INTEREST AS ASSESSEE COULD NOT PROVE BUSINESS EXPEDIENCY. CIT(A) AGREED WITH THE, AO THAT THERE WAS NOTHING TO PROVE THAT ANY PAR T OF THE LOAN HAD BEEN USED FOR THE PURPOSE OF BUSINESS. HE, THEREFORE, CON FIRMED THE, DISALLOWANCE AGGRIEVED BY WHICH THE ASSESSEE IS IN APPEAL B EFORE THE TRIBUNAL. 5.2 BEFORE US, THE LD. AR SUBMITTED THAT OUT OF THE L OAN TAKEN A SUM OF RS.3.70 CRORES WAS GIVEN IN EARLIER YEAR IN RESPECT O F WHICH INTEREST HAD BEEN ALLOWED IN ASSESSMENT YEAR 2006-07 IN ASSESSMENT M ADE UNDER SECTION 143(3). THE INTEREST DISALLOWED WAS RS.9.86 LACS IN RELATION TO INTEREST FREE ADVANCES OUT OF TOTAL INTERE ST CLAIMED OF RS.23.41 LACS. THEREFORE, DISALLOWANCE OF TOTAL INTEREST WHEN BULK OF THE LOAN WAS BEING CARRIED FORWARD FROM THE EARLIER YEAR WAS NOT JUSTIFIED. THE LD. DR ON THE OTHER HAND SUPPORTED THE ORDERS OF ITA NO.6233/M/10 A.Y. 07-08 11 AUTHORITIES BELOW AND PLACED RELIANCE ON THE FINDINGS G IVEN IN THE RESPECTIVE ORDERS. 5.3 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING DISALLOW ANCE OF INTEREST UNDER SECTION 36(1)(III). THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF SYNDICATION ACTIVITIES AND WAS ALSO ENJOYING INCOME FROM INSURANCE BUSINESS. THE ASSESSEE CLAIMED DEDUCTION OF INTEREST EXPEND ITURE OF RS.59,51,911/-. THE AO HELD THAT SYNDICATION ACTIVITIES WERE OF THE NATURE OF LIAISON ACTIVITY RESULTING INTO COMMISSION INCO ME. THE ASSESSEE HAD ONLY RECEIVED MISCELLANEOUS INCOME OF RS.10,451/ - AND COMMISSION ON INSURANCE OF RS .123,000/-. THEREFORE, THERE WAS NO NEXUS BETWEEN HUGE BORROWINGS MADE BY THE ASSESSEE TO THE TUNE OF RS.4.59 CRORES WITH THE BUSINESS OF THE ASSESSEE. ASSESSEE HAD A LSO GIVEN INTEREST FREE ADVANCES OF RS.1,13,13,641/- ON WHI CH NO INTEREST INCOME HAD BEEN EARNED. THE AO HAD, THEREFORE, DISALL OWED THE ENTIRE INTEREST. CIT(A) CONFIRMED THE DISALLOWANCE. THE CASE OF THE ASSESSEE IS THAT NET NEW LOAN TAKEN BY THE ASSESSEE DURING THE YE AR WAS ONLY RS .42.00 LACS AND BALANCE LOAN OF RS.3.70 CRORES WAS COMING FROM EARLIER YEAR IN WHICH AO IN THE ASSESSMENT ORDER PASSED UNDER SECTION 143(3) HAD NOT MADE ANY DISALLOWANCE. THE AO IN THAT YEAR MADE A DISALLOWANCE OF ONLY RS.9.86 LACS OUT OF TOTAL INTEREST CL AIM OF RS.23.41 LACS ONLY IN RELATION TO INTEREST FREE ADVANCES GIVEN. T HIS YEAR INTEREST ITA NO.6233/M/10 A.Y. 07-08 12 FREE ADVANCES GIVEN WERE RS.1,13,13,641/- AND THEREFOR E, DISALLOWANCE OF INTEREST IF ANY CAN BE RESTRICTED TO THAT EXTENT ONLY. WE FIND THE ARGUMENT OF THE LD. AR CONVINCING. IN THE I MMEDIATE PRECEDING YEAR I.E. 2006-07, ASSESSEE HAD THE SAME ACTIVIT IES AND INTEREST ON BORROWINGS OF RS.3.70CRORES HAD BEEN ALLOWED BY THE AO WHICH MEANS THAT AO ACCEPTED THE NEXUS OF BORROWINGS WITH THE BUSINESS ACTIVITIES. THEREFORE, IN THE CURRENT YEAR, NO DISALLOWANCE OF EXPENSES CAN BE MADE IN RELATION TO OPENING BALANCE OF RS.3.70 CRORES. THE DISALLOWANCE CAN ONLY BE MADE IN RELATION TO INTEREST FREE ADVANCES GIVEN BY THE ASSESSEE. LAST YEAR DISALLOWANCE IN RE LATION TO INTEREST FREE ADVANCES WAS RS.9.86 LACS. THIS YEAR TOTAL IN TEREST FREE ADVANCES AS PER FINDING OF AO ARE RS.1,13,13,641/-. THE REFORE, DISALLOWANCE HAS TO BE MADE ONLY IN RELATION TO SUCH IN TEREST FREE ADVANCES @ 14.5% AS DONE IN EARLIER YEAR. THE AO WILL COMPUTE THE DISALLOWANCE ACCORDINGLY. WE, THEREFORE, ALLOW THE GROU ND RAISED BY THE ASSESSEE PARTLY. 6. IN THE RESULT APPEAL OF THE ASSESSEE IS PARTLY ALLOWED . ORDER PRONOUNCED IN THE OPEN COURT ON 3.8.2012. SD/- SD/- (D. MANMOHAN ) VICE PRESIDENT (RAJENDRA SINGH) ACCOUNTANT MEMBER MUMBAI, DATED: 3.8.2012. JV. ITA NO.6233/M/10 A.Y. 07-08 13 COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR BENCH TRUE COPY BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.