Amrita Marketing Pvt. Ltd., Ahmedabad V. The ACIT.,(OSD), Range-1, Ahmedabad

ITA 774/AHD/2007

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 57046 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 11 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-01-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 05-01-2012
• Assessment Year: 2001-2002
• Appeal Filed On: 19-02-2007
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: S N DIVATIA
• Section: 143(3)

Judgement Text

, , , , , , . .. .' ' ' ' ' ' ' ' , # # # # $ $ $ $ IN THE INCOME TAX APPELLATE TRIBUNAL : C BENCH : AHMEDABAD BEFORE SHRI BHAVNESH SAINI, HONBLE J.M. & SHRI A.M OHAN ALANKAMONY, HONBLE A.M.) . ITA NO. 774/AHD./2007 : %& - 2001-2002 AMRITA MARKETING PVT. LTD., ABAD VS- ACIT(OSD) , RANGE-1, ABAD (PAN : AABCA 8504B) ( '( /APPELLANT) ( )*'( /RESPONDENT ) '( + , / APPELLANT BY : SHRI S.N.DIVATIA, A.R. )*'( + , / RESPONDENT BY : SHRI VINOD TANWANI, SR.D.R. -. + /0# / DATE OF HEARING : 05/01/2012 1'% + /0# / DATE OF PRONOUNCEMENT : 20/01/2012 / ORDER PER SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER : THIS APPEAL IS FILED BY THE ASSESSEE AGGRIEVED BY THE ORDER OF THE LD. CIT (A)-V, AHMEDABAD IN APPEAL NO. CIT(A)-V/ACI T(OSD) R- 1/76/2004-05 AND APPEAL NO.CIT(A)-V/WD.1(1)/28/2006 -07 DATED 15.11.2006 FOR THE ASSESSMENT YEAR 2001-2002 PASSED UNDER SECT ION 250 R.W.S. 143(3) OF THE I.T. ACT . 2. THE ASSESSEE HAS RAISED THREE GROUNDS IN ITS APP EAL, WHEREIN GROUND NO.3 IS GENERAL IN NATURE AND THEREFORE, DOE S NOT SURVIVE FOR ADJUDICATION. GROUND NOS. 1 AND 2 ARE REPRODUCED HE REINBELOW: 1. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING THE ADDITIONS AND /OR DISALLOWANCES OF RS.80,77,500/- BEING THE LOSS IN RESPECT OF SHAR ES AND SECURITIES WITHOUT CONSIDERING FULLY THE EVIDENCE PRODUCED BY THE APPELLANT. ITA NO.774-AHD-2007 2 2. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS ) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING THE ADDITIONS AND /OR DISALLOWANCES OF RS.17,32,449/-/- BEING THE INTEREST ON LOANS ADV ANCED BY THE APPELLANT WITHOUT ANY COGENT REASONS WHATSOEVER. 3. THE ASSESSEE IS A PRIVATE LIMITED COMPANY ENGAGE D IN THE BUSINESS OF TRADING CNSL OIL, YARN, PAPER AND SHARE S FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2001-02 SHOWING A LO SS OF RS. 16,74,893/-/- ON 29.10.2001 ALONG WITH AUDIT REPORT . THE CASE WAS TAKEN UP FOR SCRUTINY AND THE ASSESSMENT WAS COMPLETED ON 25.02.2004 UNDER SECTION 143(3) OF THE ACT. 3.1 DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS , THE LD. AO OBSERVED THAT THE ASSESSEE HAD FURNISHED FUNDS TO T HE DIRECTORS WHO, IN TURN, PURCHASED CERTAIN INVESTMENTS IN THE FORM OF MUTUAL FUNDS IN THEIR INDIVIDUAL NAMES. DURING THE PREVIOUS YEAR, THE DIR ECTORS SOLD THE MUTUAL FUNDS INCURRING LOSS OF RS.80,77,500/- AND THE ASSE SSEE COMPANY CLAIMED THIS LOSS IN ITS RETURN OF INCOME AS ITS LO SS. THE LD. AO DISALLOWED THIS LOSS IN THE HANDS OF THE ASSESSEE FOR THE FOLL OWING REASONS: A) THE COMPANY IS A SEPARATE LEGAL ENTITY AND CAPAB LE OF MAKING INVESTMENT IN ITS NAME. HOWEVER, THE DIRECTO RS OF THE COMPANY HAD PURCHASED AND SOLD THE UNITS IN THEIR I NDIVIDUAL NAMES. THE COPY OF THE RESOLUTION DATED 24.02.2000 GRANTING SUCH PERMISSION WAS SIGNED BY A SINGLE DIRECTOR AND IT W AS NOT ANNEXED WITH THE RETURN OF INCOME. B) THE ASSESSEE HAD NOT DISCLOSED IN ITS RETURN OF INCOME OR IN THE DIRECTORS REPORT OR IN THE AUDITORS REPORT AB OUT THE FACT THAT THE COMPANY HAD MADE ITS INVESTMENTS IN MUTUAL FUND IN THE NAME OF THE DIRECTORS. ITA NO.774-AHD-2007 3 C) THE ASSESSEES MAIN BUSINESS WAS TRADING IN E-OI L, COTTON YARN, CSNL PAPER AND WHITE PAPER. TRADING OF UNITS WAS NOT THE PRIMARY BUSINESS OF THE ASSESSEE. D) THE DIRECTORS HAD OPTED TO DISCLOSE THE LOSS IN THE NAME OF THE COMPANY AS PER THEIR CONVENIENCE. E) THE DIRECTORS ARE THE EMPLOYEES OF THE COMPANY AND SUCH HUGE INVESTMENT IS NOT PERMISSIBLE IN THE NAME OF T HE INDIVIDUAL DIRECTORS FROM THE FUNDS OF THE COMPANY. F) THE DIRECTORS ARE NOT PERMANENT IN THE COMPANY A ND ARE CHANGED BY ROTATION AT ANY POINT OF TIME OR THEY CA N LEAVE THE COMPANY BY TENDERING RESIGNATION. HENCE, INVESTMENT MADE BY THE COMPANY IN THEIR NAME IS NOT JUSTIFIABLE. G) ALL THE BENEFITS DERIVED FROM THE MUTUAL FUNDS W ILL FLOW ONLY TO THE INVESTORS OF THE MUTUAL FUNDS. THE ASSESSEE COM PANY WILL NOT BE BENEFITED IN ANY MANNER ON SUCH TRANSACTIONS. TH EREFORE, THE ARGUMENT THAT THE COMPANY HAD INVESTED IN THE NAME OF THE DIRECTORS CANNOT BE ACCEPTED. WITH THE ABOVE OBSERVATIONS, THE LD. AO DISALLOWED THE LOSS CLAIMED BY THE COMPANY TO THE TUNE OF RS.80,77,500/-. 3.2 REGARDING THE NEXT ISSUE, THE LD. AO OBSERVED T HAT THE ASSESSEE HAD DEBITED INTEREST AMOUNT OF RS.17,32,449/- IN IT S P&L ACCOUNT. ON VERIFICATION OF THE FACTS, IT WAS OBSERVED BY THE L D. AO THAT THE ASSESSEE DID NOT HAVE ITS OWN FUND TO ADVANCE TO THE DIRECTO RS FOR INVESTING IN THE MUTUAL FUNDS. THE AMOUNT ADVANCED TO THE DIRECTORS FOR INVESTING IN THE MUTUAL FUNDS AND CERTAIN OTHER ADVANCES NOT RELATED TO THE BUSINESS OF ITA NO.774-AHD-2007 4 THE ASSESSEE WERE FROM INTEREST-BEARING FUNDS. THER EFORE, THE AMOUNT OF INTEREST ATTRIBUTABLE TO SUCH ADVANCES AND INVESTME NT IN MUTUAL FUNDS ROUTED THROUGH THE DIRECTORS TO THE EXTENT OF RS.17 ,32,449/- WAS DISALLOWED BY THE LD. AO BY FOLLOWING VARIOUS DECIS IONS OF THE HIGHER JUDICIARY. 4. THE MATTER TRAVELLED BEFORE THE LD. CIT(A) WHERE IN THE LD. CIT(A) CONFIRMED THE ORDER OF THE LD. AO WITH THE FOLLOWIN G OBSERVATIONS: 4.2. I HAVE CAREFULLY CONSIDERED THE SUBMISSION MA DE AND DETAILS FURNISHED BY THE ASSESSEE, BOTH AT THE TIME OF ASSE SSMENT PROCEEDINGS AND AT THE APPELLATE PROCEEDINGS. I FIN D THAT THE UNITS WERE PURCHASED IN THE NAMES OF THE DIRECTORS OF THE COMPANY OUT OF WHICH ONE OF THE DIRECTOR SHRI C. K. PANDYA HAD RESIGNED FROM THE COMPANY. ASSESSING OFFICER HAD SPECIFICALLY ASK ED ASSESSEE TO FILE DETAILS IN CONNECTION WITH THE PURCHASE AND SA LES OF MUTUAL FUND UNITS ALONG WITH COPIES OF APPLICATIONS MADE. THE CLAIM OF THE ASSESSEE THAT INVESTMENT WAS MADE IN THE NAME OF TH E DIRECTORS TO AVOID LENGTHY AND COMPLICATED PROCEDURE DOES NOT AP PEAR TO REASON BECAUSE DIRECTORS ARE BASICALLY EMPLOYEES OF THE COMPANY AND KEEP ON ROTATING. THIS IS EVIDENT FROM THE FACT THAT ONE OF THE DIRECTOR HAVE RESIGNED FROM THE COMPANY. IT IS ALSO NOTICED THAT ALLEGED COPY OF BOARD'S RESOLUTION AUTHORIZING INVES TMENT IN THE NAMES OF VARIOUS DIRECTORS IS SIGNED BY A SINGLE DI RECTOR AND NO SUCH RESOLUTION WAS ENCLOSED WITH THE RETURN OF INC OME NEITHER THERE WAS ANY MENTION ABOUT THE PURCHASE AND INVEST MENT IN UNITS OF MUTUAL FUNDS IN THE NAMES OF DIRECTORS, IN ANY O F THE RECORDS. IT IS ALSO NOTICED THAT NO COPY OF APPLICATION MADE IN TH E NAME OF SHRI C.K.PANDYA, THE DIRECTOR WHO HAD LATER ON RESIGNED, WAS EVER FILED EITHER AT THE TIME OF ASSESSMENT PROCEEDINGS OR AT THE TIME OF APPELLATE PROCEEDINGS. IT IS APPARENT THAT WITH A V IEW TO EARN HUGE PROFITS AND DIVIDEND IN THE BOOMING MARKET, THE DIR ECTORS HAD KEPT THEIR OPTION OPEN TO KEEP THE BENEFIT OF MUTUAL FUN DS, IN CASE PRICES APPRECIATED, BUT, THE CIRCUMSTANCES WENT ADVERSE AN D DIRECTORS CONVENIENTLY DECIDED TO SHOW IT AS BURDEN OF THE CO MPANY SO THAT THE PROFIT OF THE COMPANY IS REDUCED AND THEY ARE N OT INDIVIDUALLY BURDENED BY THE LOSSES INCURRED ON THE REDEMPTION O F UNITS. THE COMPANY LAW HAS MADE SEVERAL PROVISIONS IN COMPANIE S ACT TO PROTECT INTEREST OF SHARE-HOLDERS SO THAT OF SUCH I NVESTMENT IN MUTUAL FUND CANNOT BE MADE IN THE NAME OF DIRECTORS WHO HAPPENS ITA NO.774-AHD-2007 5 TO BE EMPLOYEES OF THE COMPANY. AS DISCUSSED EARLIE R, COPY OF APPLICATION MADE IN THE NAME OF ALL THE DIRECTORS W AS NOT AT ALL FURNISHED. COPY OF APPLICATION OF OTHER DIRECTORS S HOW THAT THERE IS NO MENTION AT ALL ABOUT THE NAME OF THE COMPANY AND INVESTMENT HAS BEEN CATEGORICALLY MADE IN INDIVIDUAL HANDS, CH EQUES HAVE BEEN ISSUED FROM DIRECTOR'S PERSONAL ACCOUNTS AND EV EN THE ADDRESS GIVEN IN THE APPLICATION FORM IS THAT OF TH EIR OWN AND NOT THAT OF THE COMPANY. HERE A VERY IMPORTANT POINT TO BE NOTED IS THAT ACTUALLY FOR INVESTMENT IN THESE UNITS IN THE NAME OF DIRECTORS NO CHEQUES WERE ISSUED BY THE COMPANY IN THE NAME OF S UN F&C MUTUAL FUND, BUT THE MONEY WAS FIRST TRANSFERRED TO THE INDIVIDUAL ACCOUNTS OF DIRECTORS WITH MADHAVPURA MERCANTILE CO -OP. BANK AND THESE DIRECTORS HAD ISSUED CHEQUES FROM THEIR A CCOUNTS IN THEIR OWN NAMES FOR INVESTMENT IN THESE UNITS. THIS FACT HAS ALL ALONG BEEN TRIED TO BE CONCEALED BUT THE SAME IS APPARENT FROM THE CHEQUE NUMBERS WHICH HAVE BEEN ISSUED FOR INVESTMEN T IN THESE UNITS. WHEN THE UNITS WERE REDEEMED AND LOSSES WERE INCURRED, FINAL ACCOUNTS OF THE COMPANY FOR THE EARLIER YEARS WERE YET TO BE FINALIZED AND HENCE TO AVOID LOSS IN THE HANDS OF T HE DIRECTORS AND TO REDUCE TAX INCIDENCE IN THE HANDS OF THE COMPANY , THE TRANSACTIONS WERE CONVENIENTLY TRANSFERRED IN THE A CCOUNT OF THE COMPANY. THIS SHOWS A BLATANT ATTEMPT TO COVER THE ACTUAL NATURE OF THE TRANSACTIONS. THIS CLEARLY ESTABLISHES THAT THE DIRECTORS HAVE PURCHASED UNITS IN THEIR INDIVIDUAL CAPACITY BY WIT HDRAWING FUNDS OF THE COMPANY AND WHEN THERE WAS A HUGE LOSS, THE ENT IRE TRANSACTIONS WERE TRANSFERRED IN THE NAME OF THE CO MPANY STATING THAT INVESTMENT WAS MADE IN THEIR OWN NAME ON BEHAL F OF THE COMPANY. I N VIEW OF THE ABOVE DISCUSSION, THE CLAIM CANNOT BE ACCEPTED AND ACTION OF THE ASSESSING OFFICER IN DIS ALLOWING THE LOSS IS UPHELD. 5.2 I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS MA DE. AS DISCUSSED IN RESPECT OF INVESTMENT IN UNITS OF MUTU AL FUNDS, INTEREST BEARING FUNDS WERE DIVERTED TO THE DIRECTORS ACCOUN TS FOR PURCHASE OF UNITS OF MUTUAL FUNDS. APART FROM THAT ASSESSEE COMPANY HAD ADVANCED RS.1.16 CRORES TO OMKAR FINSTOCK LTD. IN R ESPECT OF THIS ADVANCES, IT WAS CLAIMED THAT THE AMOUNT WAS ADVANC ED FOR TRADING IN SHARES. HOWEVER, NO BILLS, CORRESPONDENCE ETC. C OULD BE PRODUCED BY THE ASSESSEE EITHER AT THE TIME OF ASSE SSMENT PROCEEDINGS OR AT THE TIME OF APPELLATE PROCEEDINGS . THEREFORE, THERE IS NOTHING TO SHOW THAT THIS AMOUNT WAS ADVAN CED FOR ANY GENUINE PURPOSE OR ANY BUSINESS EXPEDIENCY. THE ACTUAL NATURE OF TRANSACTIONS HAVE NEVER BEEN EXPLAINED BY THE AS SESSEE. IN ITA NO.774-AHD-2007 6 THESE CIRCUMSTANCES, I FULLY AGREE WITH THE ASSESSI NG OFFICER THAT THE DISALLOWANCE HAS TO BE MADE AND ACCORDINGLY, DI SALLOWANCE IS CONFIRMED. 5. THE LD. A.R. SUBMITTED THAT THE INVESTMENTS WERE MADE OUT OF THE FUNDS OF THE COMPANY THROUGH THE DIRECTORS AND THE SAME WAS DISCLOSED IN THE BALANCE-SHEET OF THE COMPANY. THE LD. A.R. R EFERRED TO PAGE NO.34 OF THE PAPER BOOK SUBMITTED BY THE ASSESSEE WHEREIN THE BALANCE-SHEET OF THE ASSESSEE SHOWS INVESTMENTS OF RS.2,31,31,000 /-, BREAK-UP OF THE SAME IS MENTIONED IN SCHEDULE-V OF THE BALANCE-SHEE T (PAGE NO.37 OF THE PAPER BOOK), WHEREIN IT WAS DISCLOSED THAT THE COMPANY HAD INVESTED IN THE FOLLOWING SECURITIES AND MUTUAL FUNDS:- SR.NO.PARTICULARS CURRENT YEAR (RS.) QUOTED SECURITIES 1. ELDER PHARMA LTD. 231,000.00 2. TELEVISION 18 LTD. 225,000.00 3. SUN F & C EMERGING TECH FUND 22,500,000.00 UNQUOTED SECURITIES 1. M.M.C. BANK LTD. 175,000.00 23,131,000.00 5.1 LD. AR SUBMITTED THAT THE COMPANY HAD DECIDED T O INVEST IN THE MUTUAL FUND IN THE NAME OF THE DIRECTORS AND FOR TH AT PURPOSE, THE BOARD HAD PASSED RESOLUTION. HE FURTHER SUBMITTED THAT SE CTION 139(9) OF THE ACT DOES NOT REQUIRE THE BOARDS RESOLUTION TO BE A TTACHED WITH THE RETURN OF INCOME AND THEREFORE, FAILURE TO ATTACH SUCH RES OLUTION CAN NOT CHANGE THE OWNERSHIP OF THE INVESTMENT. HE FURTHER ARGUED THAT THE COMPANIES ACT DOES NOT REQUIRE ANY SUCH MENTION IN THE DIRECT ORS REPORT OR AUDITORS REPORT. HOWEVER, THESE FACTS WERE DISCLOSED IN THE NOTES TO ACCOUNTS FOR THE FINANCIAL YEAR 1999-2000. THE LD. AR FURTHE R SUBMITTED THAT AFFIDAVITS WERE FILED TO SUBSTANTIATE THE CLAIM THA T THE DIRECTORS HAD NO PERSONAL INTEREST IN THESE INVESTMENTS. IT WAS ALSO POINTED OUT THAT THE DIRECTORS HAD ALSO MADE CERTAIN INVESTMENTS IN THES E MUTUAL FUNDS IN THEIR INDIVIDUAL CAPACITY WHICH CLEARLY ESTABLISH T HAT BOTH THE DIRECTORS ITA NO.774-AHD-2007 7 AND THE COMPANY HAD MADE INVESTMENTS DISTINCTLY. TH E REDEMPTION OF ALL UNITS WAS MADE DURING THE YEAR AND THE AMOUNT WAS D EPOSITED IN THE COMPANIES BANK ACCOUNT. THIS DECISION WAS TAKEN DUE TO CERTAIN SCAM WHICH RESULTED IN MARKET CRASH. THE LD. A.R. CONTIN UOUSLY ARGUED THAT THERE IS NO VIOLATION OF ANY PROVISIONS OF THE ACT AND FOR A CLOSELY-HELD PRIVATE LIMITED COMPANY TO MAKE CERTAIN INVESTMENTS IN THE NAME OF THE DIRECTORS FOR CERTAIN STRATEGIC REASONS IS A NORMAL PHENOMENON. THERE WAS NO MALA FIDE INTENTION TO CHANGE STANDS ACCORDING TO CONVENIENC E BECAUSE AS AND WHEN INVESTMENTS WERE MADE, THEY WER E DULY DISCLOSED IN THE BALANCE-SHEET AND STATEMENT OF AFFAIRS OF TH E COMPANY. 6. THE LD. D.R. STOUTLY REFUTED TO THE SUBMISSIONS OF THE LD. A.R. HE RELIED UPON THE ORDERS OF THE LD. AO AND THE LD. CI T(A). HE SUBMITTED THAT THE COMPANY HAD ADVANCED INTEREST BEARING FUNDS TO THE DIRECTORS OF THE COMPANY, WHO, IN TURN, INVESTED IN MUTUAL FUNDS IN THEIR INDIVIDUAL NAMES. ON KNOWING THAT LOSSES HAVE BEEN OCCURRED ON SUCH INVESTMENTS, THEY CONVENIENTLY DESIRED IT TO SHOW T HE LOSS IN THE HANDS OF THE COMPANY. HE THEREFORE, PRAYED THAT THE ORDERS O F THE REVENUE MAY BE CONFIRMED. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS ON RECORD. ON EXAMINING THE BALANCE-SHEET OF THE ASSES SEE FOR THE YEAR ENDING 31.03.2000 AT PAGE 34 AND 37 OF THE PAPER BO OK, IT IS EVIDENT THAT THE ASSESSEE HAS SHOWN THE MUTUAL FUNDS AS ITS INVE STMENT. THEREFORE, THERE WAS NO SUPPRESSION OF THE FACT WITH RESPECT T O INVESTMENT AS DOUBTED BY THE LD. A.O. FURTHER, THERE IS NO BAR FO R THE ASSESSEE COMPANY TO MAKE INVESTMENTS IN THE NAME OF THE DIRE CTORS DUE TO CERTAIN STRATEGIC REASONS. THE ASSESSEE HAS SUBMITTED THE B OARDS RESOLUTION DULY CERTIFIED BY ONE OF THE DIRECTORS OF THE COMPA NY GRANTING SUCH ITA NO.774-AHD-2007 8 PERMISSION FOR INVESTING IN MUTUAL FUNDS IN THE NAM ES OF THE DIRECTORS OF THE COMPANY WHICH CANNOT BE SIMPLY BRUSHED ASIDE. T HEREFORE, THE ADDITION MADE BY THE LD. A.O. ON ACCOUNT OF LOSS CL AIMED BY THE ASSESSEE FOR RS.80,77,500/- IS NOT JUSTIFIABLE AND THEREFORE WE HEREBY DELETE THE SAME. GROUND NO.1 IS ALLOWED. 8. ON THE ISSUE OF INTEREST BEARING FUNDS, THE LD. AO HAD DISALLOWED INTEREST TO THE EXTENT OF RS.17,32,449/- WITH THE C ONTENTION THAT THE BORROWED FUNDS WERE DIVERTED TO THE DIRECTORS FOR M AKING INVESTMENTS IN MUTUAL FUNDS IN THE DIRECTORS INDIVIDUAL NAMES AND OTHER COMPANIES NOT FOR THE PURPOSE OF THE BUSINESS OF THE COMPANY BUT FOR PURCHASE OF SECURITIES AND SHARES. THE ASSESSEE HAD RESPONDED B EFORE THE LD. AO WITH THE FOLLOWING ARGUMENTS: SINCE THE COMPANY CARRY OUT DIFFERENT ACTIVITIES, I T CAN NOT BE SAID THAT THE FUND UTILISED BY THE COMPANY IS SAFETY FOR INVESTMENT IN UNITS OF MUTUAL FUND. OUT OF THE TOTAL FUND DEPLOYE D BY THE COMPANY AT THE BEGINNING OF THE YEAR, ONLY 67.54% FUND IS B LOCKED IN INVESTMENT AND RESIDUAL FUND IS BLOCKED IN CURRENT ASSETS OF THE COMPANY. SIMILARLY, OUT OF THE TOTAL FUND AVAILABLE WITH THE COMPANY, ONLY 77% OF THE FUND IS BANK BORROWING WHE REAS OTHER FUND IS FROM SHARE CAPITAL AND INTEREST FREE LOANS. FURTHER, THE BENEFICIARY OF THE INVESTMENTS IS THE COMPANY, THE INTEREST PAID TO THE BANK IS ALLOWABLE BEING BUSINE SS EXPENDITURE. THE ARGUMENT REGARDING DIVERSION OF FUNDS TO THE DI RECTORS IS NOT TENABLE SINCE THE INVESTMENT IS FOR THE COMPANY AND NOT FOR THE BENEFIT OF DIRECTORS AS EXPLAINED IN DETAIL AS MENT IONED IN PARA 1 ABOVE. ON THE CONTRARY, DIRECTORS AND THEIR RELATIV ES HAVE BROUGHT IN INTEREST FREE DEPOSITS WORTH RS. 92.96 LACS IN T HE COMPANY. AS REGARDS, DISALLOWANCE OF INTEREST ON THE GROUND OF INTEREST BEARING FUND TO NON-INTEREST BEARING ADVANCES, IT I S NOT TENABLE SINCE THE ADVANCES ARE FOR BUSINESS TRANSACTIONS AN D COMPANY IS GOING TO BENEFIT OUT OF IT. FARTHER, THERE IS ALSO INTEREST FREE LOANS WITH THE COMPANY TO ADVANCE TO THE EXTENT OF RS.92. 86 LACS . ITA NO.774-AHD-2007 9 8.1 AFTER EXAMINING THE CONTENTION OF THE ASSESSEE, THE LD. AO HAD ARRIVED AT THE FOLLOWING CONCLUSION: THE ASSESSEE WAS SPECIFICALLY ASKED TO GIVE THE DE TAILS OF SHARES/SECURITIES BOOKED WITH ABOVE PARTY HOWEVER N OTHING IS FURNISHED BY THE ASSESSEE IN THIS REGARD. THE ASSES SEE HAS STATED THAT THE PARTY IS PRESENTLY ABSCONDING. THE ASSESSE E HAS NOT EXPLAINED THE NATURE OF TRANSACTIONS. IN THE LIGHT OF THE ABOVE FACTS, IT IS CRYSTAL CLEAR THAT THE ASSESSEE HAS DIVERTED THE INTEREST BEARING LOANS TO THE DIRECTORS AND OTHERS. THE FACTS OF THE CASE SHOWED THAT THERE WAS NO BUSINESS NEED AND EXPEDIENCY IN ADVANC ING MONEY TO THE DIRECTORS AND TO OMKAR FINSTOCK LTD. TO SUCH HUGE EXTENT. THE FACTS AND CIRCUMSTANCES OF THE CASE NARRATED AB OVE ESTABLISHED BEYOND ANY AMBIGUITY THAT THE FUNDS BOR ROWED FROM BANK HAS NOT BEEN UTILIZED FOR BUSINESS PURPOSE BUT IT WAS DIVERTED TOWARDS INTEREST FREE ADVANCES. THE INTEREST EXPENS ES ARE THEREFORE NOT ALLOWABLE. 8.2 THE LD. CIT(A) CONFIRMED THE LD. AO. 9. THE LD. A.R. SUBMITTED BEFORE US THAT THE INVEST MENT IN MUTUAL FUNDS WAS NOT MADE DURING THE YEAR UNDER APPEAL BUT IN THE MONTH OF MARCH, 2000 I.E. ASSESSMENT YEAR 2000-01 AND THE RE DEMPTION OF THE SAID UNITS WAS MADE ON 08.06.2000, 05.07.2000 AND 2 3.03.2000. THE CORRECT AMOUNT OF 1.44 CRORES BEING THE AMOUNT REDE EMED HAS BEEN REDEPOSITED IN THE BANK ACCOUNT. THEREFORE, THERE C ANNOT BE ANY DISALLOWANCE FOR THE ENTIRE YEAR. FURTHER TRADING I N DIFFERENT COMMODITIES AMOUNTED TO RS.2.14 CRORES, AS AGAINST REDEMPTION V ALUE OF RS.1.44 CRORES AND THE BANK BORROWINGS HAD REDUCED FROM RS. 2.60 CRORES TO RS.1.8 CRORES WHICH INDICATES THAT THE ENTIRE BANK BORROWING HAS NOT BEEN UTILIZED FOR THE PURPOSE OF SAID INVESTMENT. F URTHER BANK INTEREST HAD REDUCED FROM RS.22.22 LAKHS TO RS.17.32 LAKHS W HICH SHOWS THAT THE ITA NO.774-AHD-2007 10 BANK BORROWINGS WERE NOT UTILIZED AS PRESUMED BY TH E LD. AO. ADVANCE MADE TO M/S. OMKAR FINSTOCK LTD. PERTAINS TO DEALIN GS IN SHARES AND SECURITIES MADE THROUGH IT AND IN ABSENCE OF BILLS AND OTHER DETAILS, IT CANNOT BE CONSTRUED TO BE ADVANCE MADE FOR NON-BUSI NESS PURPOSE. 9.1 THE LD. A.R. FURTHER SUBMITTED THAT EVEN IT IS PRESUMED THAT INVESTMENT IN MUTUAL FUND IS MADE OUT OF BORROWED F UND, YET THE ASSESSEE WOULD BE ENTITLED TO DEDUCTION UNDER SECTI ON 57(3) OF THE ACT. 10. THE LD. D.R. STOUTLY ARGUED IN SUPPORT OF THE R EVENUE AND CONTENDED THAT PROPER CASH FLOW STATEMENTS ARE NOT PRODUCED BY THE ASSESSEE IN ORDER TO ESTABLISH THAT INTEREST BEARIN G FUNDS HAVE NOT BEEN DIVERTED TO OTHER COMPANIES AND THE DIRECTORS OF TH E COMPANY FOR MAKING INVESTMENTS IN MUTUAL FUNDS. 11. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFUL LY PERUSED THE MATERIALS ON RECORD. IN ORDER TO ESTABLISH THAT INT EREST BEARING FUNDS ARE NOT DIVERTED FOR MAKING INVESTMENTS IN MUTUAL FUNDS , PROPER CASH FLOW STATEMENTS HAVE TO BE PREPARED BEFORE SUCH DIVERSIO N OF FUNDS AND EXAMINED. THE ASSESSEE HAS NOT PROVIDED THE SAME BE FORE THE LD. AO, THE LD. CIT(A) OR EVEN BEFORE US AT THIS STAGE. FUR THER FROM EXAMINATION OF THE BALANCE-SHEET, IT IS EVIDENT THAT THE ASSESS EE DOES NOT HAVE OWN FUNDS TO MAKE SUCH INVESTMENTS BECAUSE THE SHARE CA PITAL AND RESERVES OF THE ASSESSEE AS SHOWN ON 31.03.2000 IN THE BALAN CE-SHEET OF THE COMPANY IS ONLY RS.1,35,000/- AND RS.97,185/- RESPE CTIVELY. THEREFORE, IT IS EVIDENT THAT THE ASSESSEE HAS DIVERTED THE INTER EST BEARING FUNDS FOR MAKING SUCH INVESTMENTS. FURTHER THE WORKING OF THE LD. AO THAT INTEREST TO THE EXTENT OF RS.17,32,449/- IS ATTRIBUTABLE TO INTEREST ON FUNDS DIVERTED IS NOT DISPUTED BY THE ASSESSEES A.R. IN THE ABSEN CE OF ANY EVIDENCE, LD. CIT(A) IS JUSTIFIED IN CONFIRMING THE ADDITION. DUE TO OUR ABOVE ITA NO.774-AHD-2007 11 OBSERVATIONS, WE CONFIRM THE ORDER OF THE LD. AO AN D LD. CIT(A) ON THIS ISSUE. GROUND NO.2 IS DISMISSED. 12. 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