ITO, Kanpur v. M/s. Commercial Auto Centre, Kanpur

ITA 156/LKW/2010 | 2003-2004
Pronouncement Date: 11-11-2014 | Result: Dismissed

Appeal Details

RSA Number 15623714 RSA 2010
Assessee PAN AABFC3003C
Bench Lucknow
Appeal Number ITA 156/LKW/2010
Duration Of Justice 4 year(s) 8 month(s) 6 day(s)
Appellant ITO, Kanpur
Respondent M/s. Commercial Auto Centre, Kanpur
Appeal Type Income Tax Appeal
Pronouncement Date 11-11-2014
Appeal Filed By Department
Order Result Dismissed
Bench Allotted B
Tribunal Order Date 11-11-2014
Date Of Final Hearing 03-11-2014
Next Hearing Date 03-11-2014
Assessment Year 2003-2004
Appeal Filed On 05-03-2010
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL LUCKNOW BENCH B LUCKNOW BEFORE SHRI SUNIL KUMAR YADAV JUDICIAL MEMBER AND SHRI. A. K. GARODIA ACCOUNTANT MEMBER ITA NOS.156 180 315 & 157/LKW/2010 ASSESSMENT YEARS:2003 - 04 TO 2006 - 0 7 INCOME TAX OFFICER 2(1) KANPUR VS. M/S COMMERCIAL AUTO CENTRE 84/105 G.T. ROAD KANPUR PAN:AABFC3003C (APPELLANT) (RESPONDENT) ITA NO.12/LKW/2011 & 181/LKW/2010 ASSESSMENT YEARS:2003 - 04 & 2006 - 07 M/S COMMERCIAL AUTO CENTRE 84/105 G.T. ROAD KANPUR VS. INCOME TAX OFFICER 2(1) KANPUR (APPELLANT) (RESPONDENT) DEPARTMENT BY: SHRI. R. K. RAM D.R. ASSESSEE BY: SHRI. RAKESH GARG ADVOCATE DATE OF HEARING: 03 11 2014 DATE OF PRONOUNCEMENT: 11 11 2014 O R D E R PER A. K. GAROD IA: OUT OF THIS BUNCH OF SIX APPEALS THERE ARE FOUR APPEALS OF THE REVENUE FOR ASSESSMENT YEARS 2003 - 04 TO 2006 - 07 AND TWO APPEALS OF THE ASSESSEE FOR ASSESSMENT YEAR 2003 - 04 & 2006 - 07. ALL THESE APPEALS WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY WAY OF THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE. : - 2 - : 2 . FIRST WE TAKE UP THE APPEAL OF THE REVENUE FOR ASSESSMENT YEAR 2003 - 04 I.E. I.T.A. NO.156/LKW/2010. THE GROUNDS RAISED BY THE REVENUE ARE AS UNDER: - 1 (A) THE LD. COMMISSIONER OF INCOME TAX (APPEALS) - I KANPUR HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION OF RS.84.93 418/ - MADE BY THE ASSESSING OFFICER ON ACCOUNT OF DISALLOWANCE OF INTEREST PAID BY THE ASSESSEE FIRM TO OTHERS AND BANKS WITHOUT APPRECIATING THE FACTS OF THE CASE AND MATERIAL B ROUGHT ON RECORD BY THE ASSESSING OFFICER THAT THE FUNDS ADVANCED TO THE SISTER CONCERNS WERE FOR BUSINESS PURPOSES IS NOT TRUE AS ALL THE FIRMS/COMPANIES (IT WHOM ADVANCES WERE GIVEN BY ASSESSEE) WERE INDEPENDENT ENTITIES AND THE ASSESSEE FIRM DOES NOT HA VE ANY CONTROL OVER THEIR AFFAIRS. HENCE THE PURPOSE OF UTILIZATION OF FUNDS EITHER FOR BUSINESS OR NON - BUSINESS PURPOSES CANNOT BE CERTIFIED BY THE ASSESSEE. 1 (B) IN DOING SO THE LD. COMMISSIONER OF INCOME TAX (APPEALS) - I KANPUR HAD ERRED IN LAW AND ON FACTS IN NOT APPRECIATING THE FACT THAT THE ARGUMENT OF THE ASSESSEE THAT IT HAS CHARGED INTEREST @12% IS NOT CORRECT PARTICULARLY BECAUSE IN THE AFORESAID TWO CASES OF SISTER CONCERNS VIZ. (1) M/S KAILASH AUTO FINANCE LTD. (2) M/S KAILASH MOTORS (INDIA) LTD. NO INTEREST HAS BEEN CHARGED BY THE ASSESSEE DESPITE HUGE DEBIT BALANCE WERE STANDING AGAINST THEM. 1(C) THE VIEW OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS) IS NOT ACCEPTABLE AS IN THE RECENT JUDGMENT OF HON'BLE HIGH COURT KERALA IN THE CASE OF CIT VS M.M. NAGALINGA NADAR SONS REPORTED IN (2009) 222 CTR518 (KER) WHEREIN THE HON'BLE HIGH COURT HAS HELD THAT 'THE ASSESSEE WHICH ADVANCED ITS FUNDS AS INTEREST FREE LOANS TO THE PARTNERS HAS NO JUSTIFICATION TO CLAIM INTEREST ON BORROWALS ON SO M UCH AMOUNT. IT CANNOT BE DENIED BY THE ASSESSEE THAT THE FUNDS REACHING ITS HANDS ON MATURITY OF DEPOSITS COULD NOT BE UTILIZED FOR ITS OWN BUSINESS PURPOSES. THIS COULD HAVE REDUCED THE INTEREST BURDEN. IN THIS VIEW OF THE MATTER WE FEEL PROPORTIONATE D ISALLOWANCE OF INTEREST ON BORROWALS IS PERFECTLY JUSTIFIED.' 2. THE LD. COMMISSIONER OF INCOME - TAX (APPEALS) - I KANPUR HAS IGNORED THE FACT THAT THE BORROWED FUND WERE ALSO USED : - 3 - : TO PURCHASE SHARES AND HENCE THE INTEREST PAID ON SUCH BORROWINGS IS NOT ALL OWABLE EXPENDITURE U/S 14A OF THE INCOME TAX ACT. 1961. 3. IN DOING SO THE LD. COMMISSIONER OF INCOME - TAX (APPEALS) - I. KANPUR HAS ERRED IN LAW AND ON FACTS IN OBSERVING THAT THE INVESTMENTS WERE MADE OUT OF PROFIT OF EARLIER YEARS AND THERE IS NO EVIDENC E FOR THE SAME. 4. THAT THE LD. COMMISSIONER OF INCOME TAX (APPEALS) - I KANPUR BEING ERRONEOUS IN LAW AND ON FACTS BE VACATED AND THE ORDER DATED 31.03.2006 PASSED BY THE ASSESSING OFFICER UNDER SECTION 143(3) BE RESTORED. 3 . ALTHOUGH THE REVENUE HAS RAISED VARIOUS GROUNDS BUT ONLY GRIEVANCE OF THE REVENUE IS REGARDING DELETION OF DISALLOWANCE MADE BY THE ASSESSING OFFICER OF RS.84 93 418/ - OUT OF INTEREST PAID BY THE ASSESSEE. 4 . THE FACTS TILL ASSESSMENT STAGE AS NOTED BY THE LD. COMMISSIONER OF INCOME - TAX ( APPEALS) IN PARA 5 OF HIS ORDER ARE REPRODUCED BELOW FOR THE SAKE OF READY REFERENCE: - 5. THE APPELLANT HAS CONTESTED THE DISALLOWANCE MADE BY AO TO THE EXTENT OF RS.84 93 418/ - AS PER GROUNDS NO. 1 AND 2 OF APPEAL. THE FACTS AND REASONS FOR DISALLOWANCE ARE NOTED IN THE ASSESSMENT ORDER IN THE FOLLOWING MANNER : - (A) DURING THE YEAR THE ASSESSEE HAS TAKEN FRESH DEPOSITS FROM PUBLIC. IN THE PRECEDING YEAR THE DEPOSITS FROM THE PUBLIC WERE RS. 7 79 37 485/ - AND THE SAME HAS INCREASED TO RS.12 03 25 237/ - . IT MAY THUS BE SEEN THAT THERE IS AN INCREASE OF 4 23 87 752/ - FORM PUBLIC DEPOSIT AS PER THE DETAILS AND SCHEDULES OF THE BALANCE SHEET FILED. SIMILARLY AS PER THE DETAILS OF BALANCE SHEET THERE HAS BEEN AN INCREASE OF RS.2 73 67 261/ - FROM SISTER CONC ERNS' LOANS. THUS THERE IS AN INCREASE OF ALMOST RS. 7 CRORES AS PER THE SCHEDULE - 2 OF THE BALANCE SHEET UNDER THE HEAD 'UNSECURED LOANS AND DEPOSITS'. AS PER THE LIST OF FRESH PUBLIC DEPOSITORS PROVIDED VIDE REPLY DATED 27.6.2005 THERE ARE 1551 DEPOSITO RS DURING THE YEAR. AS PER THE DETAILS FILED AND : - 4 - : PARTICULARS OF BALANCE SHEET OF THE YEAR THE ASSESSEE HAS MADE FOLLOWING INVESTMENTS : - S. NO. NATURE OF INVESTMENT TOTAL INVESTMENT INVESTMENT DURING THE YEAR (A) INVESTMENT IN SHARES OF SISTER CONCE RNS RS.4 58 75 850/ - RS.3 50 60 700/ - (B) ADVANCES RECOVERABLE IN CASH/KIND (FROM SISTER CONCERNS) RS.8 85 20 483/ - RS.3 00 99 839/ - (B) FROM THE CLAUSE OF PARTNERSHIP DEED IT MAY BE SEEN THAT THE ASSESSEE DOES NOT HAVE ANY BUSINESS OF SALE AND PURCHASE OF SHARES. NEITHER THE PARTNERSHIP DEED AUTHORIZES BORROWING OF FUNDS FOR THE PURPOSE OF MAKING LOANS/ADVANCES NOR MAKING INVESTMENTS IN EQUITY SHARES OF COMPANIES. (C) ASSESSEE VIDE HIS REPLY DATED 06.03.2006 HAS SUBMITTED AS UNDER: - 'WITH RE GARDS TO YOUR HONOUR'S REQUIREMENT TO EXPLAIN THE REVENUE REALIZED OUT OF INVESTMENT MADE IN THE SHARES OF SISTER CONCERNS IT IS SUBMITTED THAT NO DIVIDEND WAS DECLARED BY THEM DURING THE YEAR'. (D) ASSESSEE VIDE REPLY DATED 6.3.2006 HAS SUBMITTED REGARD ING THE CONFIRMATIONS OF THE DEPOSITORS AS UNDER : - 'BALANCE CONFIRMATIONS FROM THE DEPOSITORS ABOVE RS.1 LAC ARE BEING ENCLOSED HEREWITH. FOR BELOW 1 LAC WE HAVE ALREADY FILED SOME AND SHALL FILE THE REST ON SUBSEQUENT DATE '. (E) THE ASSESSEE HAS DEBIT ED A SUM OF RS.9 76 182.43 IN HIS P & L A/C SHOWN AS BROKERAGE AND COMMISSION ON FD. HENCE THE ASSESSEE WAS ASKED TO SUBMIT THE DETAILS OF FD COMMISSION. ASSESSEE WAS ALSO ASKED TO EXPLAIN THE NATURE OF INVESTMENTS MADE .IN THE SHARES. THE CASE WAS ADJOUR NED TO 6.2.2006. (F) DURING THE YEAR THE ASSESSEE HAS PAID THE TOTAL INTEREST OF RS.1 88 55 812/ - ON THE PUBLIC DEPOSIT AND ON LOANS AND ADVANCES FROM SISTER CONCERNS. AS ON 31.3.2003 THE BALANCE OF PUBLIC DEPOSIT IS RS.12 03 25 237/ - AND THE : - 5 - : BALANCE OF SISTER CONCERNS IS RS.2 94 71 511/ - . AS PER BREAK - UP GIVEN IN SCHEDULE - 11 THE INTEREST PAID ON PUBLIC DEPOSIT IS RS.1 34 31 951/ - WHICH COMES 1 34 31 951/12 03 25 237 X 100 = 11.16% WHERE ON ADVANCES OF SISTER CONCERNS THE SAME COMES 54 19 600/2 94 71 5 11 X 100 = 18.38%. HOWEVER ON THE INVESTMENT SIDE THE FOLLOWING INVESTMENTS ARE SHOWN BY THE ASSESSEE OUT OF INTEREST BEARING FUNDS IN THE SISTER CONCERNS AS ON 31.3.2003 : - (A) INVESTMENT IN SISTER CONCERN'S SHARE RS. 4 59 68 350/ - (B) A DVANCES TO SISTER CONCERNS & PARTNERS RS. 8 85 20 483/ - RS.13 44 88 833/ - (G) THE WORKING OF INTEREST PAID BY THE ASSESSEEFOR NON BUSINESS PURPOSE IS WORKED OUT AS UNDER : - TOTAL INTEREST PAID - RS. 1 97 85 030/ - (INCLUDING RS. 45 24 341/ - PAID TO PARTNERS) TOTAL FUNDS AVAILABLE WITH THE FIRM DEPOSITS - 14 97 96 748/ - - RS.14 97 96 1481 - AVERAGE RATE OF INTEREST PAID - 13.21% OUT OF THIS THE FIRM HAS INVESTED IN ASSETS WHICH ARE NOT FOR THE PURPOSE OF BUSINESS AS UNDER : - INV ESTMENT IN SHARES OF SISTER CONCERNS (SCHEDULE 10) RS. 4 58 75 850/ - LOANS & ADVANCES (AS PER SCHEDULE 6) - RS.8 96 41 370/ - LESS: ADVANCES FOR BUSINESS - RS.11 20 887/ - ADD: DEBIT BALANCE IN PARTNER - RS.14 46 555/ - - RS.8 99 67 038/ - RS.13 58 42 888/ - ON THE BASIS OF AVERAGE INTEREST/AVERAGE COST OF FUNDS WORKED ABOVE OUT OF TOTAL INTEREST DEBITED BY THE FIRM IN P & L A/C. FOLLOWING AMOUNT WILL WORK OUT AS INTEREST PAID FOR THE PURPOSE OTHER THAN BUSINESS : - RS. 13 58 42 888/ - X 13.21% = R S.1 79 44 845.50 : - 6 - : HOWEVER AS PER SCHEDULE - 8 OF P & L A/C. THE ASSESSEE HAS SHOWN INTEREST INCOME OF RS.94 40 177.27 (INCLUDING INTEREST FROM PARTNERS AMOUNTING TO RS.17 05 585/ - ) FROM LAM AND ADVANCES TO SISTER CONCERNS AND PARTNERS COMPRISING LOANS AND ADVANCES FOR THE PURPOSE OTHER THAN THE BUSINESS AND DIVIDEND OF RS.11 250/ - . THE TOTAL YIELD THEREFORE COMES RS. 94 51 427.27. IN VIEW OF THE FACTS DISCUSSED ABOVE THE EXCESS CLAIM OF INTEREST BY THE ASSESSEE BECOMES AS UNDER : RS.1 79 44 845.50 - RS.94 51 427.27 = RS.84 93 418.23 (G) IT IS WORTH TO MENTION THAT THE PROVISIONS OF SECTION 36(1) (IN) OF I. TAX ACT 1961 MENTIONS 'THE AMOUNT OF INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR THE PURPOSE OF 'THE' BUSINESS OR PROFESSION'. ARTICLE 'THE' USED BEFORE BUSINESS HAS EMPHASIZING EFFECT. IT CLEARLY SPEAKS OF FOR THE PARTICULARS BUSINESS FOR WHICH THE CAPITAL HAS BEEN BORROWED. IN VIEW OF ABOVE FINDINGS AND LEGAL STANDINGS AND AS PER OBSERVATIONS MADE IN PAR - 12 THE INTEREST WHICH IS NOT FOR THE BUSINESS PURPOSE COMES TO RS.84 93 418/ - WILL BE DISALLOWED AND ADDED IN THE INCOME OF THE ASSESSEE. RELIANCE IS MADE ON 187 ITR 363 (ALLD) IN THE CASE OF CIT VS. H.R. SUGAR FACTORIES PVT. LTD. AND CIT VS SARAYA SUGAR MILLS PVT. LTD. 193 ITR 575 (A LLD) '. 5 . BEING AGGRIEVED THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LD. CIT ( A) WHO HAS DELETED THE DISALLOWANCE AND NOW THE REVENUE IS IN APPEAL BEFORE US. 6 . IT IS SUBMITTED BY THE LD. D.R. OF THE REVENUE THAT INTEREST BEARING BORROWED FUNDS WER E USED FOR MAKING INVESTMENT IN SHARES OF SISTER CONCERNS AND ALSO FOR GIVING INTEREST FREE ADVANCES TO SISTER CONCERNS AS HAS BEEN NOTED BY THE ASSESSING OFFICER IN PARA 3 OF THE ASSESSMENT ORDER AND THEREFORE THE ORDER OF THE LD. CIT ( A) SHOULD BE REVE RSED AND THAT OF THE ASSESSING OFFICER BE RESTORED. RELIANCE WAS PLACED BY HIM ON THE FOLLOWING JUDICIAL PRONOUNCEMENTS: - ( I ) CHEMINVEST LTD. VS. INCOME TAX OFFICER [2009] 317 ITR (AT) 86 (DELHI)(SB) : - 7 - : ( II ) PRADEEP KAR VS. ACIT [2009] 319 ITR 416 (KARN) 7 . AS AGAINST T HIS THE LD. A.R. OF THE ASSESSEE SUPPORTED THE ORDER OF THE LD. CIT ( A). HE ALSO SUBMITTED THAT TILL ASSESSMENT YEAR 2003 - 04 DIVIDEND INCOME WAS TAXABLE AND THEREFORE IN RESPECT OF INVESTMENT IN SHARES NO DISALLOWANCE IS JUSTIFIED OUT OF INTEREST EXPE NDITURE. HE PLACED RELIANCE UPON THE JUDGMENT RENDERED IN THE CASE OF S. A. BUILDERS LTD. VS. CIT [2007] 288 ITR 1 (SC). 8 . WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS ON RECORD GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AND THE JUDGMENTS CITED BY BOTH THE SIDES. WE FIND THAT THIS ISSUE WAS DECIDED BY THE LD. CIT(A) VIDE PARAS 8 9 10 AND 11 OF HIS ORDER AND THE SAME ARE REPRODUCED HEREIN BELOW FOR THE SAKE OF REFERENCE: - 8. I HAVE CONSIDERED THE FACTS AND CIRCUMSTANCES OF THE C ASE THE REASONS NOTED BY AO FOR DISALLOWANCE AND THE ARGUMENTS OF THE APPELLANT. IT IS SEEN FROM THE FACTS THAT THE APPELLANT HAS PAID AND CHARGED INTEREST ONLY AT THE RATE OF 12% CONTRARY TO THE FINDING OF AO WHO HAS NOT CONSIDERED DATE - WISE CALCULATIO N BUT THE AO HAS TAKEN ONLY OPENING AND CLOSING BALANCES FOR ARRIVING AT RATE OF 13.21%. IT ALSO IS SEEN FROM THE FACTS THAT THE APPELLANT HAS INVESTED IN THE SHARES OF THE SISTER CONCERNS COMPANIES TO THE EXTENT OF RS.1 09 07 650/ - IN TOTAL OVER PAST YEAR S AND RS.3 50 60 700/ - IN THE CURRENT YEAR. THE AO HAS NOTED THAT THIS INVESTMENT CANNOT BE SAID TO HAVE BEEN MADE FOR THE BUSINESS PURPOSE. THE AO HAS ALSO NOTED THAT THE INVESTMENT IN SHARES IS NOT THE BUSINESS ACTIVITY OF THE APPELLANT AS PER ITS OBJECT IVES. DURING THE YEAR THE APPELLANT HAS PAID INTEREST ON THE PUBLIC DEPOSITS AND BORROWINGS WHICH SHOWS THAT SUBSTANTIAL AMOUNTS OF FUNDS HAVE BEEN BORROWED FOR BUSINESS PURPOSE. THE APPELLANT HAS STATED THAT DURING THE CURRENT YEAR OUT OF INVESTMENT OF RS .3 50 60 700/ - RS.3 50 00 000/ - WAS MADE AGAINST SETTLEMENT OF OLD DUES AND NO FRESH FUND WAS INVOLVED IN THESE INVESTMENTS. FINALLY THE AO HAS HELD THAT SINCE INVESTMENT IS NOT THE BUSINESS ACTIVITIES OF THE APPELLANT THEREFORE THESE INVESTMENTS IN S HARES ARE TREATED AS ADVANCE IN THE NATURE OF DIVERSION OF FUNDS TO SISTER : - 8 - : CONCERNS WITHOUT CHARGING ANY INTEREST. NO DIVIDEND HAS BEEN RECEIVED DURING THE YEAR ON THESE SHARES IS ALSO A TACT WHICH HAS BEEN RELIED UPON BY AO. IT IS NOTICED THAT THE AO HAS NOT APPRECIATED THE 'BUSINESS CONNECTION' WITH THE SISTER CONCERNS AND 'COMMERCIAL EXPEDIENCY' AS ARGUED BY THE APPELLANT IN RESPECT OF THESE TRANSACTIONS OF INVESTMENT. THIS ASPECT IS IMPORTANT IN THE CONTEXT OF SECTION 36 OF THE I.T. ACT UNDER WHICH TH E CLAIM OF (INDUCTION OF INTEREST IS MADE BY THE APPELLANT. THE RATIO AND DECISION IN THE CASE OF CIT VS. DALMIA 254 ITR CLARIFIES THE POSITION ON THIS ISSUE WHERE IT WAS HELD THAT 'IF THERE IS AN INTER CONNECTION BETWEEN THE ASSESSEE'S BUSINESS AND THAT O F THE PERSON TO WHOM SUCH ADVANCE IS MADE THEN SUCH ADVANCE IS TO BE REGARDED AS BEING FOR BUSINESS PURPOSES AND THE INTEREST ON BORROWINGS IS DEDUCTIBLE'. SIMILARLY THE BUSINESS INTEREST AND BUSINESS EXPEDIENCY HAS BEEN DEFINED IN MORE WIDER TERMS IN T HE CONTEXT OF SECTION 36 IN THE DECISION IN THE CASES OF CIT VS. RAJEEV 208 ITR CIT VS. JARDINE 210 ITR AND KEJARIWAL VS. CIT 260 ITR WHERE IT WAS HELD THAT 'IF BORROWED MONEY IS USED FOR ACQUIRING CONTROLLING INTEREST IN OTHER COMPANIES AND THE SAME IS IN THE ASSESSEE'S BUSINESS INTERESTS INTEREST ON SUCH BORROWAL IS DEDUCTIBLE'. THUS IT CAN BE SEEN THAT THE BUSINESS PURPOSE AND INTEREST IS DEFINED IN MUCH WIDER WAY THAN THE AO HAS PERCEIVED IN THIS CASE. IT IS SEEN FROM THE FACTS OF THE CASE THAT ALL THE CONCERNS WHERE THE INVESTMENT HAS BEEN MADE ARE IN THE BUSINESS OF DEALER/HIRE - PURCHASE BODY BUILDING AND FABRICATION OF MOTOR VEHICLE AND ITS SPARE PARTS. THE APPELLANT ITSELF IS IN THE SAME BUSINESS SINCE LAST MANY YEARS. 9. UNDER THE CIRCUMSTANCES AND IN THE LIGHT OF DECISIONS NOTED ABOVE IT CANNOT BE SAID THAT THE AMOUNTS INVESTED BY APPELLANT ARE FOR NON BUSINESS PURPOSE THOUGH SAME MAY BE OF INDIRECT BUSINESS CONNECTION. THE FACTS SHOW THAT THE PART OF INVESTMENT IS MADE IN THE SHARES OF THE S ISTER CONCERNS WHICH ARE IN THE SAME LINE OF BUSINESS; IN THE EARLIER YEARS WHEN THE APPELLANT HAD SUFFICIENT PROFITS. THE COPIES OF THE BALANCE SHEET AND PROFIT & LOSS ACCOUNT FILED FOR THE RELEVANT YEARS SHOWS THAT THE APPELLANT HAD A NET PROFIT OF RS.34 14 292.31 IN THE YEAR ENDED 31ST MARCH 1995 RS.45 23 870.87 IN THE YEAR ENDED 31ST MARCH 1996 RS.11 73 112.84 IN THE YEAR ENDED 31ST MARCH 1997 AND RS.43 05 224.11 IN THE YEAR ENDED 31ST MARCH 2003. THEREBY THE APPELLANT HAS STATED THAT THERE IS N O NEXUS : - 9 - : BETWEEN THE BORROWINGS AND INVESTED FUNDS. CONTRARILY IT HAS BEEN REITERATED THAT THE INVESTMENT HAD BEEN MADE OUT OF PROFIT OF EARLIER YEARS AND INVESTMENT OF RS.3 50 00 000/ - MADE DURING THE YEAR IS AGAINST SETTLEMENT OF OLD DUES AND NOT OUT OF FRESH FUNDS. THE AO HAS ALSO NOTED ONLY RS.3 50 60 700/ - INVESTED DURING THE CURRENT YEAR WHERE AS THE BALANCE AMOUNT OF RS. 1 09 07 650/ - RELATES TO EARLIER YEARS. CONSIDERING THE FACTS THAT THE APPELLANT HAD BUSINESS PROFIT IN THE EARLIER YEARS AND IN CU RRENT YEAR MAJOR PART OF THE INVESTMENT IS MADE AGAINST SETTLEMENT OF OLD DUES I AM UNABLE TO FIND A NEXUS BETWEEN THE BORROWED CAPITAL AND AMOUNT INVESTED IN THE EARLIER YEARS AND CURRENT YEAR ALSO IN THE SHARE OF SISTER CONCERNS. ACCORDINGLY THE FINDIN G OF THE AO THAT THE INTEREST BEARING FUND WAS DIRECTED FOR INVESTMENT IS NOT PROVED. THE DECISION IN THE CASE OF CIT VS. GOPI KRISHNA 47 ITR HAD LAID THE CORRECT RATIO WHERE IT WAS HELD THAT 'DEPARTMENT IS NOT ENTITLED TO DISALLOW INTEREST PAID UNLESS THE RE IS A EVIDENCE TO SHOW THAT A PARTICULAR AMOUNT BORROWED WAS UTILIZED FOR PRIVATE PURPOSES'. 10. FINALLY IT IS ALSO SEEN THAT THE AO HAS CONSIDERED THE INVESTMENT IN SHARES OF THE SISTER CONCERNS AS ADVANCE BY LOOKING INTO THE SUBSTANCE OF THE TRANSACTI ONS. THE ONLY BASIS FOR REACHING THIS CONCLUSION IS THAT THE APPELLANT IS NOT AN INVESTMENT CONCERN AND NO DIVIDENDS HAVE BEEN RECEIVED DURING THE YEAR. I WOULD OBSERVE THAT IT WAS A HASTY AND GENERAL CONCLUSION REACHED BY AO BECAUSE THE DISTINCTION BETWEE N 'INVESTMENT' AND 'ADVANCE' IS VERY WIDE AND BOTH ARE TWO DIFFERENT TRANSACTIONS. THE TRANSACTING PARTIES HAVE ENTERED THE TRANSACTION AS INVESTMENT WHICH IS PROPERLY EVIDENCED AND DOCUMENTED WITHOUT ANY DEFECT AND HENCE REASON FOR SUSPICION. UNDER THE CI RCUMSTANCES THE NATURE OF TRANSACTION CANNOT BE DOUBTED AND ANY CHANGE EFFECTING TO THE ACTUAL NATURE OF TRANSACTION IS NOT JUSTIFIED AS PER FACTS AND LAW. ACCORDINGLY THE SUBSEQUENT TAXATION ON THE BASIS OF TELESCOPING IS ALSO NOT JUSTIFIED. THE APPELLA NT HAS POINTED OUT THAT THE INVESTMENT AND ITS ACCRUALS ARE TAXABLE AS AND WHEN THE DIVIDENDS/PROFITS ARISE. THEREFORE AO HAS IRRELEVANT GROUNDS FOR DISALLOWANCE OF INTEREST ON THE SAID INVESTMENT. 11. I WOULD CONCLUDE THAT THE INVESTMENT MADE BY APPELLAN T IN THE SISTER CONCERNS PRIMA - FACIE SEEM TO BE IN THE COURSE OF BUSINESS AS PER BUSINESS EXPEDIENCY AND ALSO THAT THE : - 10 - : INVESTMENT HAVE BEEN MADE IN THE EARLIER YEARS AT THE TIME OF AVAILABLE FUNDS/PROFITS IN THE HANDS OF THE APPELLANT AND ALSO AS A MEASUR E OF SETTLEMENT OF OLD DUES IN CURRENT YEAR. THAT IS TO SAY THE NEXUS BETWEEN INTEREST BEARING BORROWED FUNDS AND INVESTMENT MADE IN THE SHARES OF THE SISTER CONCERNS IS NOT ESTABLISHED AS PER THE FACTS OF THE CASE. I WOULD ALSO REFER TO THE DECISION IN TH E CASE OF MINAKSHI SYNTHETICS PVT. LTD. VS CIT (2003) 84 ITD 563 (LUCKNOW) OF THE JURISDICTIONAL HON'BLE TRIBUNAL BENCH LUCKNOW HOLDING THAT 'NON CHARGING OF INTEREST ON LOANS GIVEN BY AN ASSESSEE CANNOT ITSELF BE A SUFFICIENT GROUND FOR DISALLOWING INTER EST PAID BY AN ASSESSEE ON LOANS TAKEN BY IT IN THE ABSENCE OF ANY NEXUS BETWEEN BORROWED CAPITAL AND INTEREST FEE ADVANCES OR IN THE ABSENCE OF ANY FINDING THAT BORROWED FUNDS OR PART THEREOF WAS DIVERTED TOWARDS INTEREST FREE ADVANCES' . THERE IS NO MATER IAL BROUGHT ON RECORD BY AO TO ESTABLISH NEXUS BETWEEN THE INVESTMENT MADE BY APPELLANT IN THE SHARES OF A SISTER CONCERNS AND THE INTEREST BEARING FUNDS BORROWED BY THE APPELLANT. THEREFORE THE DISALLOWANCE MADE BY AO TO THE EXTENT OF RS.84 93 418/ - IS N OT JUSTIFIED. ACCORDINGLY GROUNDS NO. 1 AND 2 OF APPEAL ARE ALLOWED. 9 . WE FIND THAT AS PER NOTING OF THE ASSESSING OFFICER IN PARA 3 OF THE ASSESSMENT ORDER THERE IS INVESTMENT IN SHARES OF SISTER CONCERNS TO THE EXTENT OF RS.4 58 75 850/ - INCLUDING FRESH INVESTMENT IN PRESENT YEAR OF RS.3 50 60 700/ - . IN ADDITION TO THAT THERE ARE ADVANCES RECOVERABLE IN CASH OR IN KIND FROM SISTER CONCERNS OF RS.8 85 20 483/ - INCLUDING FRESH ADVANCES IN PRESENT YEAR OF RS.3 00 99 839/ - . 10 . SO FAR AS INVESTMENT IN SHARES IS CONCERNED DIVIDEND INCOME IS TAXABLE TILL THIS YEAR I.E. ASSESSMENT YEAR 2003 - 04 AND THEREFORE EVEN IF ANY INTEREST EXPENDITURE IS INCURRED ON BORROWING UTILIZED FOR MAKING INVESTMENT IN SHARES THE SAME IS ALLOWABLE EITHER UNDER SECTION 36(1)(III) OF T HE ACT IF MAKING INVESTMENT IN SHARES IS A BUSINESS ACTIVITY OF THE ASSESSEE AND OTHERWISE THE SAME IS ALLOWABLE AS DEDUCTION UNDER SECTION 57(III) OF THE ACT BECAUSE IN THAT SITUATION THE DIVIDEND INCOME IS TAXABLE AS INCOME FROM OTHER SOURCES AND ACC ORDINGLY EXPENDITURE IS ALLOWABLE UNDER SECTION 57(III) OF THE : - 11 - : ACT. IT IS IMMATERIAL WHETHER ANY DIVIDEND INCOME WAS EARNED IN THIS YEAR OR NOT IN VIEW OF THE JUDGMENT OF HONBLE APEX COURT RENDERED IN THE CASE OF RAJENDRA PRASAD MOODY AS REPORTED IN 115 ITR 519 (SC). 11 . REGARDING ADVANCES TO SISTER CONCERNS AND PARTNERS WE FIND THAT IT IS NOTED BY THE ASSESSING OFFICER IN THE ASSESSMENT ORDER AT PAGE 6 THAT ON ADVANCES TO SISTER CONCERNS INTEREST HAS BEEN CHARGED BY THE ASSESSEE EXCEPT ADVANCES TO TWO SI STER CONCERNS I.E. KAILASH AUTO FINANCE LTD. AND KAILASH MOSER INDUSTRIES PVT. LTD. THE AMOUNT OF ADVANCES TO KAILASH AUTO FINANCE LTD. WAS ONLY RS.43.21 LAKHS AS NOTED BY THE ASSESSING OFFICER ON PAGES 6 & 7 OF THE ASSESSMENT ORDER AND OUTSTANDING AMOUNT WITH OTHER COMPANY I.E. KAILASH MOSER INDUSTRIES PVT. LTD. WAS NOT INDICATED IN THE ASSESSMENT ORDER. IT IS THE SUBMISSION OF THE ASSESSEE THAT SUCH ADVANCES SHOULD BE SEEN IN THE LIGHT OF COMMERCIAL EXPEDIENCY AS PER THE JUDGMENT OF THE HON'BLE APEX COUR T RENDERED IN THE CASE OF S. A. BUILDERS LTD. VS. CIT (SUPRA). IT WAS SUBMITTED THAT BUSINESS OF THE ASSESSEE FIRM WAS CARRYING ON OF TRANSPORTATION BUSINESS MAINLY AND BUSINESS OF THE SISTER CONCERNS WAS HIRE PURCHASE AND LEASING OF COMMERCIAL VEHICLES A ND FOR THAT SUCH ADVANCES TO SISTER CONCERNS WITHOUT CHARGING INTEREST WAS GIVEN FOR COMMERCIAL EXPEDIENCY. 12 . NOW IN THE LIGHT OF THESE FACTS WE EXAMINE THE APPLICABILITY OF VARIOUS JUDGMENTS CITED BY BOTH THE SIDES. 13 . FIRST JUDGMENT CITED BY THE LD. D.R. OF THE REVENUE IS THE TRIBUNAL DECISION RENDERED IN THE CASE OF CHEMINVEST LTD. VS. INCOME TAX OFFICER (SUPRA). IN THIS CASE IT WAS HELD BY THE SPECIAL BENCH OF THE TRIBUNAL THAT EVEN IF NO DIVIDEND INCOME WAS EARNED IN A PARTICULAR PREVIOUS YEAR IT WIL L NOT AFFECT DISALLOWABILITY OF INTEREST UNDER SECTION 14A OF THE ACT. THIS JUDGMENT IS NOT APPLICABLE IN THE PRESENT YEAR BECAUSE DIVIDEND INCOME WAS TAXABLE IN THE PRESENT YEAR AND THEREFORE NO DISALLOWANCE CAN BE MADE UNDER SECTION 14A OF THE ACT. IN FACT THIS DECISION SUPPORTS THE CASE OF THE ASSESSEE IN THE : - 12 - : PRESENT YEAR. MOREOVER WE HAVE SEEN THAT THE JUDGMENT OF HONBLE APEX COURT RENDERED IN THE CASE OF RAJENDRA PRASAD MOODY (SUPRA) ALSO SUPPORTS THE CASE OF THE ASSESSEE IN THIS YEAR. 14 . HENCE IN THE PRESENT YEAR INTEREST EXPENDITURE FOR EARNING TAXABLE DIVIDEND INCOME HAS TO BE ALLOWED IRRESPECTIVE OF THE FACT THAT THERE WAS NO DIVIDEND INCOME EARNED DURING THIS YEAR. 15 . SECOND JUDGMENT CITED BY THE LD. D.R. OF THE REVENUE IS THE JUDGMENT OF HON'BLE KARNATAKA HIGH COURT RENDERED IN THE CASE OF PRADEEP KAR VS. ACIT (SUPRA). THIS JUDGMENT IS ALSO NOT APPLICABLE IN THE PRESENT YEAR BECAUSE THIS JUDGMENT IS ALSO IN RESPECT OF DISALLOWANCE TO BE MADE UNDER SECTION 14A OF THE ACT IN RESPECT OF EXPENDITURE INCURRED FOR EARNING DIVIDEND INCOME. SINCE DIVIDEND INCOME WAS NOT EXEMPT DURING THIS YEAR THIS JUDGMENT IS NOT APPLICABLE IN THE PRESENT YEAR. 16 . NOW WE EXAMINE THE APPLICABILITY OF JUDGMENT CITED BY THE LD. A.R. OF THE ASSESSEE RENDERED IN THE CASE OF S . A. BUILDERS LTD. VS. CIT (SUPRA). FOR THE SAKE OF READY REFERENCE WE REPRODUCE THE RELEVANT PARAS OF THIS JUDGMENT OF THE HON'BLE APEX COURT VIZ. PAR A S 32 TO 38 WHICH READ AS UNDER: - IT IS TRUE THAT THE BORROWED AMOUNT IN QUESTION WAS NOT UTILIZED B Y THE ASSESSEE IN ITS OWN BUSINESS BUT HAD BEEN ADVANCED AS INTEREST FREE LOAN TO ITS SISTER CONCERN. HOWEVER IN OUR OPINION THAT FACT IS NOT REALLY RELEVANT. WHAT IS RELEVANT IS WHETHER THE ASSESSEE ADVANCED SUCH AMOUNT TO ITS SISTER CONCERN AS A ME ASURE OF COMMERCIAL EXPEDIENCY. LEARNED COUNSEL FOR THE REVENUE RELIED ON A BOMBAY HIGH COURT DECISION IN PHALTAN SUGAR WORKS LTD. V. CWT [1994] 208 ITR 989 IN WHICH IT WAS HELD THAT DEDUCTION UNDER SECTION 36(1)(III) CAN ONLY BE ALLOWED ON THE INTEREST IF THE ASSESSEE BORROWS CAPITAL FOR ITS OWN BUSINESS. HENCE IT WAS HELD THAT INTEREST ON THE BORROWED AMOUNT COULD NOT BE ALLOWED IF SUCH AMOUNT HAD BEEN ADVANCED TO A SUBSIDIARY COMPANY OF THE ASSESSEE. WITH RESPECT WE ARE OF THE OPINION THAT THE VIE W : - 13 - : TAKEN BY THE BOMBAY HIGH COURT WAS NOT CORRECT. THE CORRECT VIEW IN OUR OPINION WAS WHETHER THE AMOUNT ADVANCED TO THE SUBSIDIARY OR ASSOCIATED COMPANY OR ANY OTHER PARTY WAS ADVANCED AS A MEASURE OF COMMERCIAL EXPEDIENCY. WE ARE OF THE OPINION THAT THE VIEW TAKEN BY THE TRIBUNAL IN PHALTAN SUGAR WORKS LTD. [1994] 208 ITR 989 (BOM) THAT THE INTEREST WAS DEDUCTIBLE AS THE AMOUNT WAS ADVANCED TO THE SUBSIDIARY COMPANY AS A MEASURE OF COMMERCIAL EXPEDIENCY IS THE CORRECT VIEW AND THE VIEW TAKEN BY THE BOMB AY HIGH COURT WHICH SET ASIDE THE AFORESAID DECISION IS NOT CORRECT. SIMILARLY THE VIEW TAKEN BY THE BOMBAY HIGH COURT IN PHALTAN SUGAR WORKS LTD. V. CIT [1995] 215 ITR 582 ALSO DOES NOT APPEAR TO BE CORRECT. WE AGREE WITH THE VIEW TAKEN BY THE DELHI H IGH COURT IN CIT V. DALMIA CEMENT (B.) LTD. [2002] 254 ITR 377 THAT ONCE IT IS ESTABLISHED THAT THERE WAS NEXUS BETWEEN THE EXPENDITURE AND THE PURPOSE OF THE BUSINESS (WHICH NEED NOT NECESSARILY BE THE BUSINESS OF THE ASSESSEE ITSELF) THE REVENUE CANNOT JUSTIFIABLY CLAIM TO PUT ITSELF IN THE ARM - CHAIR OF THE BUSINESSMAN OR IN THE POSITION OF THE BOARD OF DIRECTORS AND ASSUME THE ROLE TO DECIDE HOW MUCH IS REASONABLE EXPENDITURE HAVING REGARD TO THE CIRCUMSTANCES OF THE CASE. NO BUSINESSMAN CAN BE COMPELL ED TO MAXIMIZE HIS PROFIT. THE INCOME - TAX AUTHORITIES MUST PUT THEMSELVES IN THE SHOES OF THE ASSESSEE AND SEE HOW A PRUDENT BUSINESSMAN WOULD ACT. THE AUTHORITIES MUST NOT LOOK AT THE MATTER FROM THEIR OWN VIEW POINT BUT THAT OF A PRUDENT BUSINESSMAN. AS ALREADY STATED ABOVE WE HAVE TO SEE THE TRANSFER OF THE BORROWED FUNDS TO A SISTER CONCERN FROM THE POINT OF VIEW OF COMMERCIAL EXPEDIENCY AND NOT FROM THE POINT OF VIEW WHETHER THE AMOUNT WAS ADVANCED FOR EARNING PROFITS. WE WISH TO MAKE IT CLEAR THAT I T IS NOT OUR OPINION THAT IN EVERY CASE INTEREST ON BORROWED LOAN HAS TO BE ALLOWED IF THE ASSESSEE ADVANCES IT TO A SISTER CONCERN. IT ALL DEPENDS ON THE FACTS AND CIRCUMSTANCES OF THE RESPECTIVE CASE. FOR INSTANCE IF THE DIRECTORS OF THE SISTER CONCERN UTILIZE THE AMOUNT ADVANCED TO IT BY THE ASSESSEE FOR THEIR PERSONAL BENEFIT OBVIOUSLY IT CANNOT BE SAID THAT SUCH MONEY WAS ADVANCED AS A MEASURE OF COMMERCIAL EXPEDIENCY. HOWEVER MONEY CAN BE SAID TO BE ADVANCED TO A SISTER CONCERN FOR COMMERCIAL EXPED IENCY IN : - 14 - : MANY OTHER CIRCUMSTANCES (WHICH NEED NOT BE ENUMERATED HERE). HOWEVER WHERE IT IS OBVIOUS THAT A HOLDING COMPANY HAS A DEEP INTEREST IN ITS SUBSIDIARY AND HENCE IF THE HOLDING COMPANY ADVANCES BORROWED MONEY TO A SUBSIDIARY AND THE SAME IS USED BY THE SUBSIDIARY FOR SOME BUSINESS PURPOSES THE ASSESSEE WOULD IN OUR OPINION ORDINARILY BE ENTITLED TO DEDUCTION OF INTEREST ON ITS BORROWED LOANS. IN VIEW OF THE ABOVE WE ALLOW THESE APPEALS AND SET ASIDE THE IMPUGNED JUDGMENTS OF THE HIGH COURT THE TRIBUNALS AND OTHER AUTHORITIES AND REMAND THE MATTER TO THE TRIBUNAL FOR A FRESH DECISION IN ACCORDANCE WITH LAW AND IN THE LIGHT OF THE OBSERVATIONS MADE ABOVE. WE ALSO MAKE IT CLEAR THAT WE ARE NOT SETTING ASIDE THE ORDER OF THE TRIBUNAL OR OTHER INCOME - TAX AUTHORITIES IN RELATION TO THE OTHER POINTS DEALT WITH BY THESE AUTHORITIES EXCEPT THE POINT OF DEDUCTION OF INTEREST ON THE BORROWED FUNDS. 17 . IN THE ABOVE PARAS OF THE JUDGMENT OF THE HON'BLE APEX COURT IT IS SEEN THAT IT IS NOTED BY THE HON' BLE APEX COURT IN THAT CASE THAT IN FACT BORROWED AMOUNT IN QUESTION WAS NOT UTILIZED BY THE ASSESSEE IN ITS OWN BUSINESS BUT HAS BEEN ADVANCED AS INTEREST FREE LOAN TO SISTER CONCERN. IT WAS HELD THAT THIS FACT IS NOT RELEVANT AND IT WAS HELD THAT WHAT IS RELEVANT IS WHETHER THE ASSESSEE ADVANCED SUCH AMOUNT TO ITS SISTER CONCERN AS A MEASURE OF COMMERCIAL EXPEDIENCY. REGARDING COMMERCIAL EXPEDIENCY IT WAS OBSERVED BY THE HON'BLE COURT IN PARA 36 THAT IF THE DIRECTORS OF THE SISTER CONCERN UTILIZE THE AMOUNT ADVANCED TO IT BY THE ASSESSEE FOR THEIR PERSONAL BENEFIT OBVIOUSLY IT CANNOT BE SAID THAT SUCH MONEY WAS ADVANCED AS A MEASURE OF COMMERCIAL EXPEDIENCY. BUT IT WAS ALSO HELD THAT MONEY CAN BE SAID TO BE ADVANCED TO A SISTER CONCERN FOR COMMERCIAL EXPEDIENCY IN MANY OTHER CIRCUMSTANCES (WHICH NEED NOT BE ENUMERATED HERE). 18 . ONE EXAMPLE IS NOTED BY THE HON'BLE APEX COURT ABOUT COMMERCIAL EXPEDIENCY. IT IS OBSERVED THAT IT IS OBVIOUS THAT A HOLDING COMPANY HAS A : - 15 - : DEEP INTEREST IN ITS SUBSIDIARY AND HE NCE IF THE HOLDING COMPANY ADVANCES BORROWED MONEY TO A SUBSIDIARY AND THE SAME IS USED BY THE SUBSIDIARY FOR SOME BUSINESS PURPOSES THE ASSESSEE WOULD ORDINARILY BE ENTITLED TO DEDUCTION OF INTEREST ON ITS BORROWED LOANS. 19 . IN THE PRESENT CASE ALSO MONEY WAS ADVANCED BY THE ASSESSEE FIRM TO ITS SISTER CONCERNS AND IT IS NOT A CASE OF THE ASSESSING OFFICER THAT SUCH MONEY ADVANCED BY THE ASSESSEE FIRM TO THE SISTER CONCERNS WERE USED BY THE DIRECTORS OF THESE TWO COMPANIES FOR THEIR PERSONAL PURPOSES. IT IS THE CLAIM OF THE ASSESSEE THAT MONEY ADVANCED BY THE ASSESSEE FIRM TO THESE TWO SISTER CONCERNS WERE USED BY THESE TWO COMPANIES FOR BUSINESS PURPOSES AND THIS ASSERTION OF THE LD. A.R. OF THE ASSESSEE COULD NOT BE CONTROVERTED BY THE ASSESSING OFFICER OR LD. D.R. OF THE REVENUE. HENCE IN OUR CONSIDERED OPINION THIS JUDGMENT OF THE HON'BLE APEX COURT IS SQUARELY APPLICABLE IN THE FACTS OF THE PRESENT CASE AND RESPECTFULLY FOLLOWING THE SAME WE HOLD THAT NO DISALLOWANCE OF INTEREST CAN BE MADE FOR MAK ING SUCH INTEREST FREE ADVANCES TO THESE TWO SISTER CONCERNS. 20 . WE WOULD ALSO LIKE TO OBSERVE THAT INTEREST FREE ADVANCES TO THESE TWO SISTER CONCERNS IS VERY NEGLIGIBLE IN COMPARISON TO TOTAL ADVANCES TO SISTER CONCERNS OF RS.8 85 20 483/ - . FOR THE BALANCE ADVANCES TO OTHER SISTER CONCERNS INTEREST HAS BEEN CHARGED BY THE ASSESSEE FIRM THOUGH IT IS THE VERSION OF THE ASSESSING OFFICER THAT SUCH INTEREST WAS CHARGED AT LOWER RATE. IN THIS REGARD NO FINDING HAS BEEN GIVEN BY THE LD. CIT ( A) BUT WHILE WORKI NG OUT INTEREST PAID BY THE ASSESSEE FIRM ON BORROWINGS THE ASSESSING OFFICER HAS WORKED OUT THE SAME ON AVERAGE BASIS WITHOUT CONSIDERING THE ACTUAL PERIOD OF BORROWING AND GIVING ADVANCES. IT IS THE ASSERTION OF THE ASSESSEE THAT BORROWING AS WELL AS G IVING ADVANCES TO SISTER CONCERNS WAS AT SAME INTEREST RATE OF 12%. THIS ASSERTION OF THE ASSESSEE AND FINDING OF THE LD. CIT ( A) COULD NOT BE CONTROVERTED BY THE LD. D.R. OF THE REVENUE AND HENCE CONSIDERING ALL THESE FACTS WE DECLINE TO INTERFERE IN T HE ORDER OF THE LD. CIT : - 16 - : ( A) IN THIS YEAR BY RESPECTFULLY FOLLOWING THIS JUDGMENT OF THE HON'BLE APEX COURT RENDERED IN THE CASE OF S. A. BUILDERS LTD. VS. CIT (SUPRA). 21 . IN THE RESULT THIS APPEAL OF THE REVENUE IS DISMISSED. 22 . NOW WE TAKE UP THE APPEAL OF T HE ASSESSEE FOR ASSESSMENT YEAR 2003 - 04 I.E. I.T.A. NO.12/LKW/2011. 23 . GROUNDS RAISED BY THE ASSESSEE ARE AS UNDER: - 1. BECAUSE THE CIT(A) HAS ERRED IN LAW AND ON FACTS IN NOT CONSIDERING THE WRITTEN SUBMISSIONS AND EVIDENCES FILED DURING THE COURSE OF HEARING AND HAS THEREBY ERRED IN UPHOLDING AN ADDITION OF RS.2 50 000/ - AS UNEXPLAINED DEPOSITS U/S. 68 OF THE ACT 1961. 2. BECAUSE THE AUTHORITIES BELOW HAVE ERRED IN LAW AND ON FACTS IN MAKING ADDITION OF RS.2 50 000/ - ON ACCOUNT; OF 'UNEXPLAINED DEPOSITS IN THE CASE OF FOLLOWING DEPOSITORS: - NAME AMOUNT A) MR. ANAND STHAPAK RS.1 10 000.00 B) MRS. ASHA AGARWAL RS. 50 000.00 C) SMT. SATYAWATI SANGHI RS. 70 000.00 D) SMT. SMITA AGARWAL RS. 20 000.00 TOTAL R S.2 50 000.00 3. BECAUSE THE CIT ( A) HAS ERRED IN LAW AND ON FACTS IN NOT ISSUING A COPY OF THE NOTICE TO THE ASSESSEE CALLING FOR THE REMAND REPORT AND THE AO SUBMITTING THE REMAND REPORT HAS NOT GIVING OPPORTUNITY TO THE ASSESSEE THEREBY RELIANCE PLACED BY THE CIT(A) ON THE REMAND REPORT IS CONTRARY TO THE PROVISIONS OF LAW MAKING THE ENTIRE ADDITION WITHOUT JURISDICTION. 4. BECAUSE THE CIT ( A) HAS ERRED IN LAW AND ON FACTS IN HOLDING THAT THE ASSESSEE HAS MADE NO COMPLIANCE BEFORE THE AO DUR ING THE COURSE OF REMAND PROCEEDINGS THEREBY THE REMAND REPORT FORWARDED BY THE AO TO CIT(A) HAS TO BE IGNORED. 5. BECAUSE THE CIT ( A) HAS ERRED IN LAW AND ON FACTS IN NOT MAKING A PROPER APPRAISAL OF THE EVIDENCES INDEPENDENTLY AS FILED BY THE APPE LLANT DURING THE COURSE OF HEARING AND HAS : - 17 - : SUMMARILY REJECTED THE SAME WITHOUT GIVING THE APPELLANT AN OPPORTUNITY. THE APPELLANT BEING PREVENTED BY SUFFICIENT AND REASONABLE CAUSE THE CIT ( A) SHOULD OUGHT TO HAVE CONSIDERED THE EVIDENCES FILED BEFORE HIM . 6. BECAUSE THE ADDITION OF RS.2 50 000/ - UPHELD BY THE CITA) U/S.68 IS CONTRARY TO FACTS BAD IN LAW AGAINST THE PRINCIPLES OF NATURAL JUSTICE AND THEREFORE BE DELETED. 24 . IT WAS SUBMITTED BY THE LD. A.R. OF THE ASSESSEE THAT INTEREST PAID BY THE ASS ESSEE FIRM ON ALL THESE FOUR LOANS HAVE BEEN ALLOWED BY THE ASSESSING OFFICER AND HAVING ALLOWED INTEREST EXPENDITURE ON THESE LOANS IT CANNOT BE SAID THAT THE LOANS ARE BOGUS. HE ALSO SUBMITTED THAT CONFIRMATION OF ALL THE DEPOSITORS WAS FURNISHED AND A S THE DEPOSITORS WERE RES IDING OUT OF KANPUR THEY COULD NOT BE PRODUCED BEFORE THE ASSESSING OFFICER. IT IS SUBMITTED THAT UNDER THESE FACTS THE ADDITION MADE BY THE ASSESSING OFFICER UNDER SECTION 68 OF THE ACT AND CONFIRMED BY THE LD. CIT ( A) IS NOT J USTIFIED. HE ALSO DRAWN OUR ATTENTION TO PAGE 1 OF THE PAPER BOOK AND SUBMITTED THAT RECEIPT OF RS.1.10 LAKHS FROM MR. ANAND SAPTAK IS ON ACCOUNT OF RENEWAL OF OLD FDRS AND THEREFORE ADDITION OF THIS AMOUNT IS NOT AT ALL JUSTIFIED IN THE PRESENT YEAR. 25 . AS AGAINST THIS THE LD. D.R. OF THE REVENUE SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 26 . AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERUSAL OF THE MATERIALS ON RECORD AND GOING THROUGH THE ORDERS OF THE AUTHORITIES BELOW WE FIND THAT OUT OF TOTAL FOUR DEPOSITS ONE DEPOSIT OF RS.1.10 LAKHS OF MR. ANAND SAPTAK IS ON ACCOUNT OF RENEWAL OF OLD FDRS AND THEREFORE ADDITION ON ACCOUNT OF THIS DEPOSIT IS NOT JUSTIFIED AT ALL. 27 . REGARDING OTHER THREE DEPOSITS ALSO WE FIND THAT THE ASSESSEE HAS FILED CONFIRMATI ON OF THESE THREE PERSONS ALSO AND THE ASSESSING OFFICER HAS ALLOWED INTEREST EXPENDITURE INCURRED IN RESPECT OF THESE FOUR DEPOSITORS. WE : - 18 - : FAIL TO UNDERSTAND THAT WHEN INTEREST EXPENDITURE INCURRED ON THESE DEPOSITS IS ALLOWED BY THE ASSESSING OFFICER HO W IT CAN BE SAID THAT DEPOSIT ITSELF IS BOGUS. WE ALSO FIND THAT IT IS NOTED BY THE ASSESSING OFFICER AT PAGE 12 OF THE ASSESSMENT ORDER THAT AS PER LIST OF FRESH DEPOSITS THERE ARE 1551 DEPOSITS DURING THE YEAR AMOUNTING TO RS.4.37 CRORES. IT IS ALSO N OTED BY THE ASSESSING OFFICER THAT ASSESSEE WAS REQUIRED TO FILE CONFIRMATION FROM THE DEPOSITORS. THIS IS ALSO NOTED BY THE ASSESSING OFFICER THAT RANDOM ENQUIRY WAS ALSO MADE IN CERTAIN CASES OF DEPOSITORS AND CERTAIN DISCREPANCIES WERE NOTICED WHICH W ERE BROUGHT TO THE KNOWLEDGE OF THE ASSESSEE AND ASSESSEE WAS ASKED TO CLARIFY THE DISCREPANCIES AND TO PRODUCE THE DEPOSITORS. THEREAFTER HE NOTED THAT ASSESSEE HAD NOT BEEN ABLE TO PRODUCE THEM. THEREAFTER HE HAS MADE ADDITION IN RESPECT OF FOUR DEPOSI TORS I.E. MR. ANAND SAPTAK OF RS.1.10 LAKHS; MRS. ASHA AGARWAL OF RS.1 LAKH SMT. SATYAWATI SANGHI OF RS.1.31 LAKHS AND SMT. SMITA AGARWAL OF RS.20 000/ - . 28 . REGARDING MR. ANAND STHAPAK WE HAVE ALREADY NOTED THAT THIS DEPOSIT IS NOT NEW DEPOSIT BECAUSE IT IS RENEWAL OF OLD FDRS AND NO ADDITION CAN BE MADE UNDER SECTION 68 OF THE ACT IN RESPECT OF THIS DEPOSIT IN THE PRESENT YEAR . 29 . REGARDING DEPOSIT OF RS.1 LAKH BY MRS. ASHA AGARWAL WE FIND THAT ON ENQUIRY CONFIRMATION OF RS.50 000/ - WAS RECEIVED BY THE ASS ESSING OFFICER FROM MRS. ASHA AGARWAL BUT THE CLAIM OF THE ASSESSEE IS THAT IT RECEIVED DEPOSIT OF RS.1 LAKH FROM THIS PERSON. REGARDING THIS DEPOSIT OF RS.50 000/ - FROM MRS. ASHA AGARWAL IT IS NOTED THAT SINCE REPLY RECEIVED FROM MRS. ASHA AGARWAL IS F OR CONFIRMATION OF RS.50 000/ - ONLY EXCESS CLAIM OF DEPOSIT OF RS.50 000/ - HAS TO BE HELD AS NOT EXPLAINED. IN RESPECT OF THIS DEPOSIT WE ARE OF THE CONSIDERED OPINION THAT ADDITION MADE BY THE ASSESSING OFFICER IS JUSTIFIED BECAUSE WHEN THE DEPOSITOR I S CONFIRMING ONLY RS. 50 000/ - OUT OF RS. 100 000/ - SHOWN BY THE ASSESSEE IT HAS TO BE ACCEPTED THAT BALANCE DEPOSIT WAS NOT EXPLAINED. : - 19 - : 30 . REGARDING THIRD DEPOSIT OF RS.1.01 LAKHS FROM SMT. SATYAWATI SANGHI WE FIND THAT IT IS NOTED BY THE ASSESSING OFFICE R THAT NO REPLY WAS RECEIVED FROM THIS PERSON AND THEREFORE THE ASSESSING OFFICER ASKED THE ASSESSEE TO PRODUCE THIS PERSON. THEREAFTER ASSESSEE HAD SUBMITTED REPLY FROM THIS PERSON AND CONFIRMATION IN WHICH IT HAS BEEN STATED BY THE DEPOSITOR THAT ONLY RS.31 000/ - HAS BEEN DEPOSITED BY HER. ON THIS BASIS THE ASSESSING OFFICER MADE ADDITION OF BALANCE AMOUNT OF RS.70 000/ - . IN RESPECT OF THIS DEPOSIT ALSO WE ARE OF THE CONSIDERED OPINION THAT ADDITION MADE BY THE ASSESSING OFFICER IS JUSTIFIED BECAUSE WHEN THE DEPOSITOR IS CONFIRMING ONLY RS. 31 000/ - OUT OF RS. 101 000/ - SHOWN BY THE ASSESSEE IT HAS TO BE ACCEPTED THAT BALANCE DEPOSIT WAS NOT EXPLAINED. 31 . IN RESPECT OF SMT. SMITA AGARWAL OF RS.20 000/ - IT IS NOTED BY THE ASSESSING OFFICER THAT ASSES SEE HAS SUBMITTED BANK CERTIFICATE DATED 21.3.2006 FROM THE BANKER OF THE ASSESSEE REGARDING REPAYMENT MADE TO SMITA AGRAWAL. THE ASSESSING OFFICER FURTHER NOTED THAT THIS BANK CERTIFICATE SHOWS THE REPAYMENT OF RS.11 090/ - AGAINST THE DEPOSIT OF RS.20 00 0/ - CLAIMED BY THE ASSESSEE. ON THIS BASIS HE NOTED THAT NO NEXUS IS PROVED BETWEEN THE TWO TRANSACTIONS. CONSIDERING THIS WE ARE OF THE CONSIDERED OPINION THAT ADDITION MADE BY THE ASSESSING OFFICER IS JUSTIFIED. 32 . HENCE OUT OF THIS TOTAL ADDITION OF RS.2.50 LAKHS WE DELETE THE ADDITION OF RS.1.10 LAKHS OF MR. ANAND SAPTAK AND CONFIRM THE BALANCE DEPOSIT OF RS.1.40 LAKHS. 33 . IN THE RESULT APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. 34 . NOW WE TAKE UP THE APPEAL OF THE REVENUE FOR ASSESSMENT YEAR 2004 - 05 IN I .T.A. NO.180/LKW/2010. GROUNDS RAISED BY THE REVENUE ARE AS UNDER: - 1 (A) THE LD. COMMISSIONER OF INCOME TAX (APPEALS) - I KANPUR HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION OF RS.56.64 137/ - MADE BY THE ASSESSING OFFICER ON ACCOUNT : - 20 - : OF DISALLOW ANCE OF INTEREST PAID BY THE ASSESSEE FIRM TO OTHERS AND BANKS WITHOUT APPRECIATING THE FACTS OF THE CASE AND MATERIAL BROUGHT ON RECORD BY THE ASSESSING OFFICER THAT THE FUNDS ADVANCED TO THE SISTER CONCERNS WERE FOR BUSINESS PURPOSES IS NOT TRUE AS ALL T HE FIRMS/COMPANIES (IT WHOM ADVANCES WERE GIVEN BY ASSESSEE) WERE INDEPENDENT ENTITIES AND THE ASSESSEE FIRM DOES NOT HAVE ANY CONTROL OVER THEIR AFFAIRS. HENCE THE PURPOSE OF UTILIZATION OF FUNDS EITHER FOR BUSINESS OR NON - BUSINESS PURPOSES CANNOT BE CERT IFIED BY THE ASSESSEE 1 (B) IN DOING SO THE LD COMMISSIONER OF INCOME TAX (APPEALS) - I KANPUR HAS ERRED IN LAW AND ON FACTS IN NOT APPRECIATING THE FACT THAT THE INTENTION OF THE ASSESSEE WAS TO INVEST THE INTEREST BEARING BORROWED MONEY FOR NON YIELDING P URPOSE WHAT WAS THE INTENTION OF BORROWING FUNDS ON INTEREST AND CLAIMING LIABILITY/EXPENDITURE ON IT. HON'BLE HIGH COURT HAS 'HELD THAT 'THE ASSESSEE WHICH ADVANCED ITS FUNDS AS INTEREST FREE LOANS TO THE PARTNERS HAS NO JUSTIFICATION TO CLAIM INTEREST ON BORROWALS ON SO MUCH AMOUNT IT CANNOT BE DENIED BY THE ASSESSEE THAT THE FUNDS REACHING ITS HANDS ON MATURITY OF DEPOSITS COULD NOT BE UTILIZED FOR ITS OWN BUSINESS PURPOSES. THIS COULD HAVE REDUCED THE INTEREST BURDEN. IN THIS VIEW OF THE MATTER WE FEE L PROPORTIONATE DISALLOWANCE OF INTEREST ON BORROWALS IS PERFECTLY JUSTIFIED. 2. THE LD. COMMISSIONER OF INCOME - TAX (APPEALS) - I KANPUR HAS IGNORED THE FACT THAT THE BORROWED FUND WERE ALSO USED TO PURCHASE SHARES AND HENCE THE INTEREST PAID ON SUCH BORRO WINGS IS NOT ALLOWABLE EXPENDITURE U/S 14A OF THE INCOME TAX ACT 1961. 3. THAT THE LD. COMMISSIONER OF INCOME TAX (APPEALS) - I KANPUR BEING ERRONEOUS IN LAW AND ON FACTS BE VACATED AND THE ORDER DATED 24.03.2006 PASSED BY THE ASSESSING OFFICER U/S .143(3 ) BE RESTORED. 35 . THE LD. D.R. SUBMITTED THAT THE FACTS ARE IDENTICAL IN THIS YEAR ALSO. HE ALSO SUBMITTED THAT THERE IS O NLY ONE DIFFERENCE IN THIS YEAR I .E. THAT THE : - 21 - : DIVIDEND INCOME WAS MADE EXEMPTED AND THEREFORE SECTION 14A OF THE ACT IS APPLICABLE IN THIS YEAR. 36 . THE LD. A.R. OF THE ASSESSEE SUPPORTED THE ORDER OF THE LD. CIT ( A). RELIANCE WAS PLACED BY BOTH SIDES ON THE SAME JUDGMENTS CITED BY THEM FOR ASSESSMENT YEAR 2003 - 04. RELIANCE WAS ALSO PLACED ON A JUDGMENT OF HONBLE ALLAHABAD HIGH COURT JUDG MENT RENDERED IN THE CASE OF CIT VS. COMMERCIAL MOTORS FINANCE LTD. IN INCOME TAX APPEAL NO. 367 OF 2012 & 14 OTHERS DATED 13.12.2013. A COPY OF THIS UNREPORTED DECISION WAS FILED. 37 . WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE FIND THAT IN THIS YEAR THE I SSUE WAS DECIDED BY THE LD. CIT(A) AS PER PARAS 13 TO 17 OF HIS ORDER AND FOR THE SAKE OF READY REFERENCE THE SAME ARE REPRODUCED HEREIN BELOW: - 13. I HAVE CONSIDERED THE FACTS AND CIRCUMSTANCES OF THE CASE THE REASONS NOTED BY AO FOR DISALLOWANCE AND THE ARGUMENTS OF THE APPELLANT. IT IS SEEN FROM THE FACTS THAT THE APPELLANT HAS INVESTED IN THE SHARES OF THE SISTER CONCERNS COMPANIES TO THE EXTENT OF RS.7 97 64 380/ - IN TOTAL OVER PAST YEARS AND RS.3 38 88 530/ - IN THE CURRENT YEAR. THE AO HAS NOT ED THAT THIS INVESTMENT CANNOT BE SAID TO HAVE BEEN MADE FOR THE BUSINESS PURPOSE. THE AO HAS ALSO NOTED THAT THE INVESTMENT IN SHARES IS NOT THE BUSINESS ACTIVITY OF THE APPELLANT AS PER ITS OBJECTIVES. DURING THE YEAR THE APPELLANT HAS PAID INTEREST ON T HE PUBLIC DEPOSITS AND BORROWINGS WHICH SHOWS THAT SUBSTANTIAL AMOUNTS OF FUNDS HAVE BEEN BORROWED FOR BUSINESS PURPOSE. FINALLY THE AO HAS HELD THAT SINCE; INVESTMENT IS NOT THE BUSINESS ACTIVITIES OF THE APPELLANT THEREFORE THESE INVESTMENTS IN SHARE S ARE TREATED AS ADVANCE IN THE NATURE OF DIVERSION OF FUNDS TO SISTER CONCERNS WITHOUT CHARGING ANY INTEREST. NO DIVIDEND HAS BEEN RECEIVED DURING THE YEAR ON THESE SHARES IS ALSO A FACT WHICH HAS BEEN RELIED UPON BY AO. IT IS NOTICED THAT THE AO HAS NOT APPRECIATED THE 'BUSINESS CONNECTION' WITH THE SISTER CONCERNS AND 'COMMERCIAL EXPEDIENCY' AS ARGUED BY THE APPELLANT IN RESPECT OF THESE TRANSACTIONS OF INVESTMENT. THIS ASPECT IS IMPORTANT IN THE CONTEXT OF SECTION 36 OF THE I.T. ACT UNDER WHICH THE CL AIM OF DEDUCTION OF INTEREST IS MADE BY THE APPELLANT. THE RATIO : - 22 - : AND DECISION IN THE CASE OF CIT VS. DALIUIA 254 ITR CLARIFIES THE POSITION ON THIS ISSUE WHERE IT WAS HELD THAT. ''IF THERE IS AN ANOTHER CONNECTION BETWEEN THE ASSESSEE'S BUSINESS AND THAT O F THE PERSON TO WHOM SUCH ADVANCE IS MADE THEN SUCH ADVANCE IS TO BE REGARDED AS BEING FOR BUSINESS PURPOSES AND THE INTEREST ON BORROWINGS IS DEDUCTIBLE': SIMILARLY THE BUSINESS INTEREST AND BUSINESS EXPEDIENCY HAS BEEN DEFINED IN MORE WIDER TERMS IN TH E CONTEXT OF SECTION 36 IN THE DECISION IN THE CASES OF CIT VS. RAJEEV 208 ITR CIT VS. JARDINE 210 ITR AND KEJARIWAL VS. CIT 260 1TR WHERE IT WAS HELD THAT 'IF BORROWED MONEY IS USED FOR ACQUIRING CONTROLLING INTEREST IN OTHER COMPANIES AND THE SAME IS I N THE ASSESSEE'S BUSINESS INTERESTS INTEREST ON SUCH BORROWAL IS DEDUCTIBLE'''. THUS IT CAN BE SEEN THAT THE BUSINESS PURPOSE AND INTEREST IS DEFINED IN MUCH WIDER WAY THAN THE AO HAS PERCEIVED IN THIS CASE. IT IS SEEN FROM THE FACTS OF THE CASE THAT ALL THE CONCERNS WHERE THE INVESTMENT HAS BEEN MADE ARE IN THE BUSINESS OF DEALER/HIRE - PURCHASE BODY BUILDING AND FABRICATION OF MOTOR VEHICLE AND ITS SPARE PARTS. THE APPELLANT ITSELF IS IN THE SAME BUSINESS SINCE LAST MANY YEARS. 14. UNDER THE CIRCUMST ANCES AND IN THE LIGHT OF DECISIONS NOTED ABOVE IT CANNOT BE SAID THAT THE AMOUNTS INVESTED BY APPELLANT ARE FOR NON BUSINESS PURPOSE THOUGH SAME MAY BE INDIRECT BUSINESS CONNECTION. THE FACTS SHOW THAT THE INVESTMENT MADE IN THE SHARES OF THE SISTER CON CERNS WHICH ARE IN THE SAME LINE OF BUSINESS; IN THE EARLIER YEARS WHEN THE APPELLANT HAD SUFFICIENT PROFITS. THE COPIES OF THE BALANCE SHEET AND PROFIT & LOSS ACCOUNT FILED FOR THE RELEVANT YEARS SHOWS THAT THE APPELLANT HAD A NET PROFIT OF RS.34 14 292.3 1 IN THE YEAR ENDED 31ST MARCH 1995 RS.45 23 870.87 IN THE YEAR ENDED 31ST MARCH 1996 RS.11 73 112.84 IN THE YEAR ENDED 31ST MARCH 1997 RS.79 47 875.0IN THE YEAR ENDED 31ST MARCH 2000 AND RS.43 05 224.11 IN THE YEAR ENDED 31 ST MARCH 2003. THEREBY THE APPELLANT HAS STATED THAT THERE IS NO NEXUS BETWEEN THE BORROWINGS AND INVESTED FUNDS. CONTRARILY IT HAS BEEN REITERATED THAT THE INVESTMENT HAD BEEN MADE OUT OF PROFIT OF EARLIER YEARS. THE AO HAS ALSO NOTED ONLY RS.3 38 88 5 30/ - INVESTED DURING THE CURRENT YEAR WHERE AS THE BALANCE AMOUNT OF RS.4 58 75 850/ - RELATES TO EARLIER YEARS. CONSIDERING THE FACTS THAT THE APPELLANT HAD BUSINESS PROFIT IN THE EARLIER YEARS AND A PART OF THE INVESTMENT IS : - 23 - : MADE IN THE EARLIER YEARS I A M UNABLE TO FIND A NEXUS BETWEEN THE BORROWED CAPITAL AND AMOUNT INVESTED IN THE EARLIER YEARS. ACCORDINGLY THE FINDING OF THE AO THAT THE INTEREST BEARING FUND WAS DIRECTED FOR INVESTMENT IS NOT PROVED. THE DECISION IN THE CASE OF CIT VS. GOPI KRISHNA 47 ITR HAD LAID THE CORRECT RATIO WHERE IT WAS HELD THAT 'DEPARTMENT IS NOT ENTITLED TO DISALLOW INTEREST PAID UNLESS THERE IS A EVIDENCE TO SHOW THAT A PARTICULAR AMOUNT BORROWED WAS UTILIZED FOR PRIVATE PURPOSES'. 15. FINALLY IT IS ALSO SEEN THAT THE AO H AS CONSIDERED THE INVESTMENT IN SHARES OF THE SISTER CONCERNS AS ADVANCE BY LOOKING INTO THE SUBSTANCE OF THE TRANSACTIONS. THE ONLY BASIS FOR REACHING THIS CONCLUSION IS THAT THE APPELLANT IS NOT AN INVESTMENT CONCERN AND NO DIVIDENDS HAVE BEEN RECEIVED D URING THE YEAR. I WOULD OBSERVE THAT IT WAS A HASTY AND GENERAL CONCLUSION REACHED BY AO BECAUSE THE DISTINCTION BETWEEN 'INVESTMENT' AND 'ADVANCE' IS VERY WIDE AND BOTH ARE TWO DIFFERENT TRANSACTIONS. THE TRANSACTING PARTIES HAVE ENTERED THE TRANSACTION A S INVESTMENT WHICH IS PROPERLY EVIDENCED AND DOCUMENTED WITHOUT ANY DEFECT AND HENCE REASON FOR SUSPICION. UNDER THE CIRCUMSTANCES THE NATURE OF TRANSACTION CANNOT BE DOUBTED AND ANY CHANGE EFFECTING TO THE ACTUAL NATURE OF TRANSACTION IS NOT JUSTIFIED A S PER FACTS AND LAW. ACCORDINGLY THE SUBSEQUENT TAXATION ON THE BASIS OF TELESCOPING IS ALSO NOT JUSTIFIED. THE APPELLANT HAS POINTED OUT THAT THE INVESTMENT AND ITS ACCRUALS ARE TAXABLE AS AND WHEN THE DIVIDENDS/PROFITS ARISE. THEREFORE ASSESSING OFFICE R HAS IRRELEVANT GROUNDS FOR DISALLOWANCE OF INTEREST ON THE SAID INVESTMENT. 16. I WOULD CONCLUDE THAT THE! INVESTMENT MADE BY APPELLANT IN THE SISTER CONCERNS PRIMA - FACIE SEEM TO BE IN THE COURSE OF BUSINESS AS PER BUSINESS EXPEDIENCY AND ALS O THAT THE INVESTMENT HAVE BEEN MADE IN THE EARLIER YEARS AT THE TIME OF AVAILABLE FUNDS/PROFITS IN THE HANDS OF THE APPELLANT. THAT IS TO SAY THE NEXUS BETWEEN INTEREST BEARING BORROWED FUNDS AND INVESTMENT MADE IN THE SHARES OF THE SISTER CONCERNS IS NO T ESTABLISHED AS PER THE FACTS OF THE CASE. I WOULD ALSO REFER TO THE DECISION IN THE CASE OF MINAKSHI SYNTHETICS PVT. LTD. VS CIT (2003) 84 ITD 563 (LUCKNOW) OF THE JURISDICTIONAL HON'BLE TRIBUNAL BENCH LUCKNOW HOLDING THAT NON CHARGING OF INTEREST ON LO ANS : - 24 - : GIVEN BY AN ASSESSEE CANNOT ITSELF BE A SUFFICIENT GROUND FOR DISALLOWING INTEREST PAID BY AN ASSESSEE ON LOANS TAKEN BY IT IN THE ABSENCE OF ANY NEXUS BETWEEN BORROWED CAPITAL AND INTEREST FEE ADVANCES OR IN THE ABSENCE OF ANY FINDING 'THAT BORROWED F UNDS OR PART THEREOF WAS DIVERTED TOWARDS INTEREST FREE ADVANCES'. THERE IS NO MATERIAL BROUGHT ON RECORD BY AO TO ESTABLISH NEXUS BETWEEN THE INVESTMENT MADE BY APPELLANT IN THE SHARES OF A SISTER CONCERNS AND THE INTEREST BEARING FUNDS BORROWED BY THE AP PELLANT. THEREFORE THE DISALLOWANCE MADE BY AO TO THE EXTENT OF RS.56 64 137/ - IS NOT JUSTIFIED. ACCORDINGLY GROUND NO. 1(X) OF APPEAL IS ALLOWED. 17. GROUNDS NO. 2 AND 3 OF APPEAL ARE GENERAL AND VAGUE. NO SPECIFIC SUBMISSIONS AND ARGUMENTS HAVE BEEN M ADE ON THESE GROUNDS. HENCE SAME ARE TREATED AS DISMISSED. 38 . FROM THE ABOVE PARAS FROM THE ORDER OF CIT(A) WE FIND THAT THE ADDITION WAS DELETED BY HIM ON THE BASIS THAT THE ASSESSING OFFICER HAS NOT APPRECIATED THE BUSINESS CONNECTION WITH THE SISTER CON CERN AND COMMERCIAL EXPEDIENCY AS ARGUED BY THE ASSESSEE IN RESPECT OF THESE TRANSACTIONS OF INVESTMENT. HE HAS NOTED IN PARA 13 OF HIS ORDER THAT DEDUCTION WAS CLAIMED BY THE ASSESSEE U/S 36 (1) (III) OF THE I. T. ACT. THEREAFTER IT IS NOTED BY CIT(A) IN PARA 14 OF HIS ORDER THAT IT CANNOT BE SAID THAT THE AMOUNTS INVESTED BY ASSESSEE ARE FOR NON BUSINESS PURPOSE THOUGH SAME MAY BE INDIRECT BUSINESS CONNECTION. WE ARE OF THE CONSIDERED OPINION THAT HAVING BUSINESS CONNECTION IS DIFFERENT THING AND MAKING INVESTMENT FOR BUSINESS EXPEDIENCY IS DIFFERENT THING ALTOGETHER. IN THE PRESENT CASE THIS IS THE ONLY CLAIM OF THE ASSESSEE BEFORE THE ASSESSING OFFICER AND BEFORE US ALSO THAT THE INVESTMENTS MADE BY THE ASSESSEE IN SISTER CONCERN S WHO ARE ENGAGED IN A CONNECTED OR SIMILAR BUSINESS. EVEN IF THIS IS CORRECT THEN ALSO IT CANNOT BE SAID THAT THIS INVESTMENT IN SISTER CONCERN IS FOR BUSINESS PURPOSE OR FOR B USINESS EXPEDIENCY. HENCE THE JUDGMENT OF HONBLE APEX COURT RENDERED IN THE CASE OF S. A. BUILD ERS (SUPRA) IS NOT RENDERING ANY HELP TO THE ASSESSEE. INVESTMENT IN SHARES IS MADE ONLY TO EARN DIVIDEND INCOME AND AS IN CASE OF : - 25 - : ANY OTHER INVESTMENT THERE MAY BE CAPITAL GAIN OR LOSS ALSO AT THE TIME OF SALE OF CAPITAL ASSET. TILL THE ASSESSMENT YEAR 2003 - 04 DIVIDEND INCOME WAS TAXABLE AND THEREFORE DEDUCTION ON ACCOUNT OF INTEREST ON BORROWED FUND FOR MAKING INVESTMENT IN SHARE HA D TO BE ALLOWED U/S 57( III ) OF THE ACT AS HAS BEEN HELD BY US WHILE DECIDING THE APPEAL OF THE REVENUE FOR ASSESSMENT YEA R 2003 - 04 BY FOLLOWING THE JUDGMENT OF HONBLE APEX COURT RENDERED IN THE CASE OF RAJENDRA PRASAD MOODY (SUPRA) . IN T HIS CASE IT WAS HELD BY HON'BLE APEX COURT THAT IF BORROWED FUNDS HAVE BEEN USED FOR MAKING INVESTMENT IN SHARE S THEN INTEREST EXPENDIT URE INCURRED ON SUCH BORROWED FUND HAS TO BE ALLOWED AS DEDUCTION U/S 57( III ) OF THE ACT EVEN IF THERE WAS NO DIVIDEND INCOME EARNED DURING THE YEAR UNDER CONSIDERATION. THE RELEVANT PARA OF THIS JUDGMENT OF HON'BLE APEX COURT IN THE CASE OF RAJENDRA PRAS AD MOODY VS. CIT AS REPORTED IN [1978] 115 ITR 519 IS REPRODUCED BELOW: WHAT S. 57(III) REQUIRES IS THAT THE EXPENDITURE MUST BE LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF MAKING OR EARNING INCOME. IT IS THE PURPOSE OF THE EXPENDITURE THAT IS RELEVANT IN DETERMINING THE APPLICABILITY OF S. 57(III) AND THAT PURPOSE MUST BE MAKING OR EARNING OF INCOME. S. 57(III) DOES NOT REQUIRE THAT THIS PURPOSE MUST BE FULFILLED IN ORDER TO QUALIFY THE EXPENDITURE FOR DEDUCTION. IT DOES NOT SAY THAT T HE EXPENDITURE SHALL BE DEDUCTIBLE ONLY IF ANY INCOME IS MADE OR EARNED. THERE IS IN FACT NOTHING IN THE LANGUAGE OF S. 57(III) TO SUGGEST THAT THE PURPOSE FOR WHICH THE EXPENDITURE IS MADE SHOULD FRUCTIFY INTO ANY BENEFIT BY WAY OF RETURN IN THE SHAPE OF INCOME. THE PLAIN NATURAL CONSTRUCTION OF THE LANGUAGE OF S. 57(III) IRRESISTIBLY LEADS TO THE CONCLUSION THAT TO BRING A CASE WITHIN THE SECTION IT IS NOT NECESSARY THAT ANY INCOME SHOULD IN FACT HAVE BEEN EARNED AS A RESULT OF THE EXPENDITURE. IT MAY BE POINTED OUT THAT AN IDENTICAL VIEW WAS TAKEN BY THIS COURT IN EASTERN INVESTMENTS LTD. V. CIT [1951] 20 ITR 1 4 (SC) WHERE INTERPRETING THE CORRESPONDING PROVISION IN S. 12(2) OF THE INDIAN I.T. ACT 1922 WHICH WAS IPSISSIMA VERBA IN THE SAME TERMS AS S. 57(III). BOSE J. SPEAKING ON BEHALF OF THE COURT OBSERVED : 'IT IS NOT NECESSARY TO SHOW THAT THE EXPENDITURE WAS A PROFITABLE ONE OR THAT IN FACT ANY PROFIT WAS EARNED.' : - 26 - : IT IS INDEED DIFFICULT TO SEE HOW AFTER THIS OBSERVATION OF THE COURT THERE CAN BE ANY SCOPE FOR CONTROVERSY IN REGARD TO THE INTERPRETATION OF S. 57(III). IT IS ALSO INTERESTING TO NOTE THAT ACCORDING TO THE REVENUE THE EXPENDITURE WOULD DISQUALIFY FOR DEDUCTION ONLY IF NO INCOME RESULTS FROM SUCH EXPENDITURE IN A PARTICULAR A SSESSMENT YEAR BUT IF THERE IS SOME INCOME HOWSOEVER SMALL OR MEAGRE THE EXPENDITURE WOULD BE ELIGIBLE FOR DEDUCTION. THIS MEANS THAT IN A CASE WHERE THE EXPENDITURE IS RS. 1 000 IF THERE IS INCOME OF EVEN RE. 1 THE EXPENDITURE WOULD BE DEDUCTIBLE AND THERE WOULD BE RESULTING LOSS OF RS. 999 UNDER THE HEAD ' INCOME FROM OTHER SOURCES '. BUT IF THERE IS NO INCOME THEN ON THE ARGUMENT OF THE REVENUE THE EXPENDITURE WOULD HAVE TO BE IGNORED AS IT WOULD NOT BE LIABLE TO BE DEDUCTED. THIS WOULD INDEED BE A STRANGE AND HIGHLY ANOMALOUS RESULT AND IT IS DIFFICULT TO BELIEVE THAT THE LEGISLATURE COULD HAVE EVER INTENDED TO PRODUCE SUCH ILLOGICALITY. MOREOVER IT MUST BE REMEMBERED THAT WHEN A PROFIT AND LOSS ACCOUNT IS CAST IN RESPECT OF ANY SOURCE OF INCOME WHAT IS ALLOWED BY THE STATUTE AS PROPER EXPENDITURE WOULD BE DEBITED AS AN OUTGOING AND INCOME WOULD BE CREDITED AS A RECEIPT AND THE RESULTING INCOME OR LOSS WOULD BE DETERMINED. IT WOULD MAKE NO DIFFERENCE TO THIS PROCESS WHETHER THE EXPENDITURE IS X OR Y OR NIL; WHATEVER IS THE PROPER EXPENDITURE ALLOWED BY THE STATUTE WOULD BE DEBITED. EQUALLY IT WOULD MAKE NO DIFFERENCE WHETHER THERE IS ANY INCOME AND IF SO WHAT SINCE WHATEVER IT BE X OR Y OR NIL WOULD BE CREDITED. AND THE ULTIMATE INCOME OR LO SS WOULD BE FOUND. WE FAIL TO APPRECIATE HOW EXPENDITURE WHICH IS OTHERWISE A PROPER EXPENDITURE CAN CEASE TO BE SUCH MERELY BECAUSE THERE IS NO RECEIPT OF INCOME. WHATEVER IS A PROPER OUTGOING BY WAY OF EXPENDITURE MUST BE DEBITED IRRESPECTIVE OF WHETHER THERE IS RECEIPT OF INCOME OR NOT. THAT IS THE PLAIN REQUIREMENT OF PROPER ACCOUNTING AND THE INTERPRETATION OF S. 57(III) CANNOT BE DIFFERENT. THE DEDUCTION OF THE EXPENDITURE CANNOT IN THE CIRCUMSTANCES BE HELD TO BE CONDITIONAL UPON THE MAKING OR EARN ING OF THE INCOME. 40. THERE WAS AN ARGUMENT THAT SINCE NO DIVIDEND INCOME WAS EARNED DURING A.Y. 2004 05 NO DISALLOWANCE CAN BE MADE U/S 14A. RELIANCE WAS PLACED ON A TRIBUNAL DECISION RENDERED IN THE CASE OF SHIVAM AUTO WHICH IS : - 27 - : UPHELD BY HONBLE ALLAHABAD HIGH COURT IN ITA NO. 88 OF 2014 DATED 5.5.2014 . RELIANCE WAS ALSO PLACED ON A JUDGMENT OF HONBLE GUJARAT HIGH COURT RENDERED IN THE CASE OF CIT VS. CORRTECH ENERGY (P) LTD. 145 TAXMAN 116. BUT THIS IS TO BE NOTED THAT IN THE PRESENT CASE DISAL LOWANCE IS NOT MADE BY THE A.O. U/S 14A OF THE I. T. ACT ALONE . THE DISALLOWANCE IS MADE ON THIS BASIS THAT IT IS NOT ALLOWABLE U/S 36 (1) (III) BECAUSE INVESTMENT IN SHARES IS NOT A BUSINESS OF THE ASSESSEE. THEREAFTER IT IS STATED BY THE A.O. THAT SUCH D ISALLOWANCE IS ALSO TO BE MADE KEEPING IN VIEW THE PROVISIONS OF SECTION 14A. HERE WE WOULD LIKE TO OBSERVE THAT WHETHER ANY DISALLOWANCE U/S 14A IS CALLED FOR OR NOT IS REQUIRED TO BE SEEN ONLY IF EXPENDITURE IS OTHERWISE ALLOWABLE UNDER A PROVISION OF T HE ACT MINUS SECTION 14A. IN FACT SECTION 14A IS A DISALLOWING SECTION AS PER WHICH EVEN IF DEDUCTION IS ALLOWABLE IN RESPECT OF ANY EXPENDITURE AS PER S O ME PROVISION OF THE ACT THEN IN VIEW OF THE PROVISION OF SECTION 14A OF THE ACT DEDUCTION CANNOT B E ALLOWED OF SUCH EXPENDITURE IF IT IS FOUND THAT SUCH EXPENDITURE IS INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. HENCE IT HAS TO BE FIRST ESTABLISHED BY THE ASSESSEE THAT DEDUCTION ON ACCOUNT OF INTEREST I S ALLOWABLE UNDER SOME PROVISIONS OF THE ACT. IN OUR CONSIDERED OPINION IN THE FACTS OF THE PRESENT CASE INTEREST IS NOT AN ALLOWABLE EXPENDITURE UNDER ANY PROVISION OF THE ACT. IT IS DEFINITELY NOT ALLOWABLE FOR COMPUTING SALARY INCOME OR INCOME FROM HO USE PROPERTY. IT CANNOT BE SAID THAT DEDUCTION ON ACCOUNT OF INTEREST EXPENDITURE IS TO BE ALLOWED FOR COMPUTING INCOME FROM CAPITAL GAIN SINCE INCOME ON ACCOUNT OF CAPITAL GAIN IS TAXABLE BECAUSE DEDUCTION ON ACCOUNT OF INTEREST EXPENDITURE IS NOT ALLOW AB LE FOR COMPUTING CAPITAL GAIN. F OR COMPUTING CAPITAL GAIN DEDUCTION IS ALLOWABLE IN RESPECT OF COST OF ACQUISITION COST OF IMPROVEMENT AND COST OF TRANSFER ONLY AND INTEREST DOES NOT FALL IN ANY OF THESE THREE CATEGORIES. FROM A.Y. 2004 05 IT IS NOT A N ALLOWABLE DEDUCTION U/S 57 (III) I.E. FOR COMPUTING INCOME FROM OTHER SOURCES ALSO BECAUSE DEDUCTION IS ALLOWABLE UNDER THIS SECTION FOR : - 28 - : THOSE EXPENSES WHICH ARE INCURRED FOR EARNING AN INCOME TAXABLE UNDER THE HEAD INCOME FROM OTHER SOURCES. SINCE NOW DIVIDEND INCOME IS NOT TAXABLE UNDER THIS HEAD DEDUCTION IS NOT ALLOWABLE U/S 57 (III). NOW THE ONLY REMAINING SECTION IS SECTION 36 (1) (III) FOR ALLOWABILITY OF INTEREST EXPENDITURE. THIS IS ADMITTED POSITION THAT THE ASSESSEE IS NOT DEALING IN SHARES AS THE ASSESSEE ITSELF HAS SHOWN IT AS INVESTMENT IN THE BALANCE SHEET. OTHERWISE ALSO THE ASSESSEE HAS NOT BROUGHT ANYTHING ON RECORD TO ESTABLISH THAT THIS INVESTMENT IN SHARES IS A BUSINESS OF THE ASSESSEE. ONLY CONTENTION OF THE ASSESSEE BEFORE LOWER AUTHORITIES AND BEFORE US IS THAT SINCE THE INVESTMENT IS IN SHARES OF SISTER CONCERNS ENGAGED IN CONNECTED BUSINESS IT IS FOR BUSINESS EXPEDIENCY BUT WE FIND NO MERIT IN THIS CONTENTION. THE DECISION OF LEARNED CIT (A) IS ON THIS BASIS THAT IT CANNOT BE SAID THAT THE AMOUNTS INVESTED BY APPELLANT ARE FOR NON BUSINESS PURPOSE THOUGH SAME MAY BE INDIRECT BUSINESS CONNECTION. IN OUR CONSIDERED OPINION THE ORDER OF LEARNED CIT (A) IS NOT SUSTAINABLE BECAUSE DEDUCTION U/S 36 (1) (III) IS NOT ALLOWABLE ON T HE BASIS OF A BUSINESS CONNECTION. DEDUCTION FOR INTEREST U/S 36 (1) (III) IS ALLOWABLE IN RESPECT OF MONEY BORROWED FOR THE PURPOSES OF THE BUSINESS. IN THE FACTS OF THE PRESENT CASE THE ASSESSEE HAS FAILED TO ESTABLISH THAT INTEREST IS INCURRED FOR BORR OWINGS FOR BUSINESS PURPOSES. HENCE WE HAVE NO HESITATION IN HOLDING THAT IN THE FACTS OF THE PRESENT CASE DEDUCTION ON ACCOUNT OF INTEREST IS NOT ALLOWABLE UNDER ANY PROVISION OF INCOME TAX ACT AND THERE IS NO NEED TO TAKE HELP OF SECTION 14A TO DISALLO W THE INTEREST EXPENDITURE. 41. STILL WE DEAL WITH THIS CONTENTION THAT NO SUCH DISALLOWANCE U/S 14A IS JUSTIFIED BECAUSE THERE IS NO ACTUAL EARNING OF THE DIVIDEND IN THE PRESENT YEAR . W E FIND THAT I N THIS REGARD THE JUDGMENT OF HON'BLE APEX COURT IN THE CASE OF RAJENDRA PRASAD MOODY (SUPRA) SUPPORTS THE CASE OF THE REVENUE BECAUSE WHILE DECIDING THE ISSUE IN RESPECT OF ALLOWABILITY OF INTEREST : - 29 - : EXPENDITURE U/S 57(III) IT WAS HELD BY HON'BLE APEX COURT THAT SECTION 57(III) DOES NOT SUGGEST THAT THE PUR POSE FOR WHICH THE EXPENDITURE IS MADE SHOULD FRUCTIFY INTO ANY BENEFIT BY WAY OF RETURN IN THE SHAPE OF INCOME. AS PER THE SAME LOGIC WHEN THE INTEREST EXPENDITURE IS INCURRED FOR EARNING DIVIDEND INCOME IT HAS TO BE ACCEPTED THAT THIS INTEREST EXPENDI TURE WAS INCURRED IN RELATION TO EARNING EXEMPT DIVIDEND INCOME AND HENCE IT IS NOT RELEVANT AS TO WHETHER THERE WAS ACTUAL DIVIDEND INCOME IN THE PRESENT YEAR OR NOT. IN THIS REGARD WE ARE AWARE THAT THERE ARE TRIBUNAL DECISIONS AS WELL AS THE JUDGMENT OF HON'BLE A LLAHABAD HIGH COURT ALSO THAT IF THERE IS NO DIVIDEND INCOME ACTUALLY EARNED THEN NO DISALLOWANCE CAN BE MADE U/S 14A BUT IN THESE JUDGMENTS THE JUDGMENT OF HON'BLE APEX COURT RENDERED IN THE CASE OF RAJENDRA PRASAD MOODY (SUPRA) WAS NOT BROU GHT TO THE NOTICE OF THE TRIBUNAL AND HONBLE HIGH COURT AND HENCE IT WAS NOT TAKEN NOTE OF. IT WAS ALSO NOT TAKEN NOTE OF THAT EVEN IF IT IS HELD THAT NO DISALLOWANCE IS TO BE MADE U/S 14A OF THE ACT THEN ALSO THERE HAS TO BE A POSITIVE FINDING THAT U NDER WHICH SECTION THIS INTEREST EXPENDITURE IS ALLOWABLE. SINCE DIVIDEND INCOME IS NOT SUBJECT TO TAX AS INCOME FROM OTHER SOURCES FROM ASSESSMENT YEAR 2004 - 05 IT CANNOT BE SAID THAT INTEREST EXPENDITURE HAS TO BE ALLOWED U/S 57(III) OF THE ACT. THIS IS ALSO NOT A CASE OF THE ASSESSEE THAT INVESTMENT IN SHARES WAS MADE OUT OF BORROWED FUNDS IN COURSE OF DEALING IN SHARES AND THEREFORE INTEREST EXPENDITURE IS ALLOWABLE U/S 36 (1) (III) OF THE ACT. WE HAVE ALREADY SEEN THAT INTEREST INCOME IS NOT ALLOW ABLE WHILE COMPUTING CAPITAL GAIN. HENCE EVEN IF IT IS HELD THAT SECTION 14A IS NOT TO BE INVOKED FOR MAKING DISALLOWANCE IN A YEAR IN WHICH THERE IS NO ACTUAL DIVIDEND INCOME AS WAS HELD BY HONBLE JURISDICTIONAL HIGH COURT AND HONBLE GUJARAT HIGH COUR T THEN ALSO IT HAS TO BE SEEN AS TO WHETHER DEDUCTION ON ACCOUNT OF INTEREST EXPENDITURE IS ALLOWABLE UNDER ANY PROVISION OF THE ACT. SINCE IN THE PRESENT CASE SUCH DEDUCTION ON ACCOUNT OF INTEREST EXPENDITURE IS NOT ALLOWABLE U/S 36 (1) (III) OR 57(III ) OF THE ACT THERE IS NO NEED TO INVOKE THE PROVISION S OF SECTION 14A OF : - 30 - : THE ACT FOR MAKING DISALLOWANCE BECAUSE INVOKING THE PROVISION OF THIS SECTION IS REQUIRED WHERE THE DEDUCTION IS OTHERWISE ALLOWABLE. 42. AS PER ABOVE DISCUSSION WE FIND THAT THE ORDER OF CIT ( A) ON THIS ISSUE IS NOT SUSTAINABLE BECAUSE IT IS NOT AS PER LAW AND FACTS OF THE PRESENT CASE BECAUSE THE DECISION OF CIT ( A) IS ON THE BASIS THAT IN HIS OPINION THE INVESTMENT MADE BY THE ASSESSEE IN SISTER CONCERN IS IN COURSE OF BUSINES S AS PER BUSINESS EXPEDIENCY BUT WE HAVE ALREADY SEEN THAT MAKING INVESTMENT IN SHARES AS A CAPITAL ASSET CANNOT BE SAID TO BE IN COURSE OF BUSINESS OR FOR BUSINESS EXPEDIENCY. THE SECOND REASONING OF CIT ( A) IS THAT THE INVESTMENT HAS BEEN MADE IN THE EA RLIER YEAR AT THE TIME WHEN INTEREST FREE FUNDS WERE AVAILABLE IN THE HANDS OF THE ASSESSEE. THIS FINDING OF CIT ( A) IS WITHOUT ANY BASIS BECAUSE AS PER THE COPY OF FUND FLOW STATEMENT AVAILABLE ON PAGE NO. 11 OF THE PAPER BOOK AND AS PER COPY OF BALANCE SHEET AVAILABLE ON PAGE NO. 12 WE FIND THAT EVEN AT THE END OF THE YEAR ON 31/03/2003 ALSO THERE WAS DEBIT BALANCE IN THE CAPITAL ACCOUNTS OF THE PARTNERS. HENCE EVEN IF THERE WAS PROFIT AT ANY POINT OF TIME THE SAME WAS WITHDRAWN BY THE PARTNERS AND IN FACT THE WITHDRAWAL WAS MORE THAN THE CONTRIBUTION OF CAPITAL AND PROFIT OF THE FIRM RESULTING INTO DEBIT BALANCE IN PARTNERS CAPITAL ACCOUNTS AND THEREFORE IT CANNOT BE SAID THAT AT ANY POINT OF TIME OWN FUND WAS AVAILABLE WITH THE ASSESSEE FIRM FOR MAKING INVESTMENT IN SHARE S . THE FUND IS AVAILABLE WITH THE ASSESSEE OUT OF UNSECURED LOANS AND SUNDRY CREDITORS. THE ASSESSEE IS PAYING INTEREST ON UNSECURED LOAN AND FOR SUNDRY CREDITORS T HE ASSESSEE IS GETTING SUPPLY OF MATERIALS WITHOUT PAYMENT AND THE ASSESSEE DOES NOT GET CASH FROM SUNDRY CREDITORS FOR MAKING INVESTMENT IN SHARES AND THEREFORE IT CANNOT BE ACCEPTED THAT THE INVESTMENT WAS MADE OUT OF FUND AVAILABLE IN THE FORM OF SUNDRY CREDITORS. 43. AS PER ABOVE DISCUSSION WE HAVE SEEN THAT IN TEREST EXPENDITURE INCURRED BY THE ASSESSEE BY BORROWING FUNDS FOR MAKING INVESTMENT IN SHARES : - 31 - : IS NOT ALLOWABLE FROM ASSESSMENT YEAR 2004 - 05 BECAUSE THE DIVIDEND INCOME IS NOT TAXABLE INCOME UNDER THE HEAD INCOME FROM OTHER SOURCES AND THEREFORE DEDUCTION IS NOT ALLOWABLE U/S 57(III) OF THE ACT. WE HAVE ALSO SEEN THAT NO DEDUCTION IS ALLOWABLE U/S 36 (1) (III) ALSO. HENCE WE REVERSE THE ORDER OF LEARNED CIT (A) AND RESTORE THAT OF THE A.O. R EGARDING VARIOUS JUDGMENTS CITED BY THE LEARNED AR OF THE ASSESSEE INCLUDING THE JUDGMENT OF HONBLE APEX COURT RENDERED IN THE CASE OF S. A. BUILDERS (SUPRA) WE WOULD LIKE TO OBSERVE THAT NO JUDGMENT IS RENDERING ANY HELP TO THE ASSESSEE BECAUSE WE HAVE SEEN THAT DEDUCTION IS NOT ALLOWABLE UNDER ANY PROVISIONS OF ANY S ECTION OF INCOME TAX ACT. HENCE THERE IS NO NEED TO DISALLOW ANY EXPENSES WHICH IS NOT ALLOWABLE. IN FACT THE ASSESSEE HAS FAILED TO MAKE OUT A CASE THAT DEDUCTION OF INTEREST EXPENDITURE IS ALLOWABLE UNDER THE PROVISIONS OF ANY SECTION OF INCOME TAX AC T 1961. 44. IN THE RESULT THE APPEAL OF THE REVENUE STANDS ALLOWED. 45. NOW WE TAKE UP THE APPEAL FOR ASSESSMENT YEAR 2005 - 06 I.E. I.T.A. NO.315/LKW/2010. IN THIS APPEAL THE REVENUE HAS RAISED THE FOLLOWING GROUNDS: 1(A) THE LD. COMMISSIONER OF INCOM E TAX (APPEALS) - I KANPUR HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION OF RS.79 87 298/ - MADE BY THE ASSESSING OFFICER ON ACCOUNT OF DISALLOWANCE OF INTEREST PAID BY THE ASSESSEE FIRM TO OTHERS AND BANKS WITHOUT APPRECIATING THE FACTS OF THE CASE AND MATERIAL BROUGHT ON RECORD BY THE ASSESSING OFFICER THAT THE FUNDS ADVANCED TO THE SISTER CONCERNS WERE FOR BUSINESS PURPOSES IS NOT TRUE AS ALL THE FIRMS/COMPANIES (IT WHOM ADVANCES WERE GIVEN BY ASSESSEE) WERE INDEPENDENT ENTITIES AND THE ASSESSEE F IRM DOES NOT HAVE ANY CONTROL OVER THEIR AFFAIRS. HENCE THE PURPOSE OF UTILIZATION OF FUNDS EITHER FOR BUSINESS OR NON - BUSINESS PURPOSES CANNOT BE CERTIFIED BY THE ASSESSEE . 1(B) THE VIEW OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS) IS NOT ACCEPTABLE A S IN THE RECENT JUDGMENT OF HON'BLE HIGH COURT KERALA IN THE CASE OF CIT VS M.M. NAGALINGA NADAR SONS REPORTED IN (2009) 222 CTR518 : - 32 - : (KER) WHEREIN THE HON'BLE HIGH COURT HAS HELD THAT 'THE ASSESSEE WHICH ADVANCED ITS FUNDS AS INTEREST FREE LOANS TO THE PAR TNERS HAS NO JUSTIFICATION TO CLAIM INTEREST ON BORROWALS ON SO MUCH AMOUNT. IT CANNOT BE DENIED BY THE ASSESSEE THAT THE FUNDS REACHING ITS HANDS ON MATURITY OF DEPOSITS COULD NOT BE UTILIZED FOR ITS OWN BUSINESS PURPOSES. THIS COULD HAVE REDUCED THE INTE REST BURDEN. IN THIS VIEW OF THE MATTER WE FEEL PROPORTIONATE DISALLOWANCE OF INTEREST ON BORROWALS IS PERFECTLY JUSTIFIED. 2. THE LD. COMMISSIONER OF INCOME TAX (APPEALS) - I KANPUR HAS IGNORED THE FACT THAT THE BORROWED FUND WERE ALSO USED TO PURCHASE SHARES AND HENCE THE INTEREST PAID ON SUCH BORROWINGS IS NOT ALLOWABLE EXPENDITURE U/S 14A OF THE INCOME TAX ACT 1961. 3. THAT THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) - I KANPUR HAS ERRED IN LAW AND ON FACTS IN NOT APPRECIATING THE FACT THAT THE ASSESSEE FIRM WAS HAVING AMPLE FUNDS TO CARRY ON ITS BUSINESS AND HAD IT NOT PURCHASED THE SHARES OF SISTER CONCERNS IT WOULD HAVE NOT REQUIRED TO TAKE DEPOSITS FROM PUBLIC ON WHICH IT HAD PAID HUGE AMOUNT OF INTEREST TO THE PUBLIC. 4. THAT THE LD. COM MISSIONER OF INCOME TAX (APPEALS) - I KANPUR BEING ERRONEOUS IN LAW AND ON FACTS BE VACATED AND THE ORDER DATED 28.12.2007 PASSED BY THE ASSESSING OFFICER UNDER SECTION 143(3) BE RESTORED. 5. THAT THE APPELLANT CRAVES TO MODIFY ANY OF THE GROUND OF APPEAL MENTIONED ABOVE AND/OR TO ADD ANY FRESH GROUNDS AS AND WHEN IT IS REQUIRED TO DO SO. 46. BOTH THE SIDES AGREED THAT THE FACTS AND THE ISSUE INVOLVED IN THE PRESENT YEAR IS IDENTICAL TO THE FACTS AND ISSUE INVOLVED IN THE ASSESSMENT YEAR 2004 - 05 AND THE SAME CAN BE DECIDED ON SIMILAR LINE. IN ASSESSMENT YEAR 2004 - 05 THIS ISSUE HAS BEEN DECIDED BY US IN FAVOUR OF REVENUE. ACCORDINGLY IN THE PRESENT YEAR ALSO WE REVERSE THE ORDER OF CIT ( A) AND RESTORE THAT OF THE ASSESSING OFFICER. : - 33 - : 47. IN THE RESULT THE APPEAL OF THE REVENUE STANDS ALLOWED. 48. NOW WE TAKE UP THE APPEAL OF THE REVENUE FOR ASSESSMENT YEAR 2006 - 07 I.E. I.T.A. NO.157/LKW/2010. 49. IT WAS AGREED BY BOTH THE SIDES THAT GROUND NO. 1 TO 3 ARE SAME AS PER REVENUES APPEAL IN ASSESSMENT YEAR 2 004 - 05 AND 2005 - 06 AND THE SAME CAN BE DECIDED ON SIMILAR LINE. IN ASSESSMENT YEAR 2004 - 05 AND 2005 - 06 THESE ISSUES HAVE BEEN DECIDED IN FAVOUR OF THE REVENUE. ACCORDINGLY IN THE PRESENT YEAR ALSO THESE GROUNDS OF THE REVENUE ARE ALLOWED. 50. REGARDIN G GROUND NO. 4 LEARNED D.R. OF THE REVENUE SUPPORTED THE ASSESSMENT ORDER WHEREAS LEARNED A.R. OF THE ASSESSEE SUPPORTED THE ORDER OF CIT ( A). 51. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE FIND THAT THE CIT ( A) HAS DECIDED THE ISSUE AS PER PARA 3.3 OF HIS ORDER WHICH IS REPRODUCED BELOW FOR THE SAKE OF READY REFERENCE: 3.3 RS.4 24 106/ - DISALLOWANCE OF BALANCE WRITTEN OFF 3.3.1 THE A.O. HAS OBSERVED IN HIS ASSESSMENT ORDER - 'IN THIS CASE THE ASSESSEE HAS FURNISHED A LIST OF DETAILS OF BALANCE WRIT TEN OFF AMOUNTING TO RS.4 24 106.68/ - AND HAS STATED THAT VARIOUS SMALL ENTRIES OF BAD DEBTS CLAIMED ARE OUT OF TRADE DEBTORS AND THESE DEBTORS HAVE NOT PAID THEIR DEBTS FOR THE LAST 4 - 5 YEARS. DURING THE COURSE OF HEARING ASSESSEE COULD NOT PRODUCE ANY BI LLS/SALE INVOICES OR ANY KIND OF DOCUMENTARY EVIDENCE WHICH COULD SHOW THAT THESE DEBTS WERE ACTUALLY TAKEN INTO ACCOUNTS IN COMPUTING THE INCOME OF THE ASSESSEE OF THE RELEVANT PREVIOUS YEAR WHEN IT WAS SPECIFICALLY ASKED FOR VIDE ORDER SHEET ENTRY DATED 10.12.2008 TO ESTABLISH THAT THESE DEBTS WERE ACTUALLY INCLUDED IN THE SALES GROSS RECEIPT ETC WHILE COMPUTING THE INCOME OF THE ASSESSEE BY FURNISHING DOCUMENTING EVIDENCES IN SHAPE OF SATE BILLS ETC. RAISED IN RESPECT OF ALL THESE PARTIES - ONLY FILING O F LIST OF DETAILS OF BALANCE DEBTS WRITTEN OFF IS NOT ITSELF SUFFICIENT EVIDENCE WHICH COULD PROVE THESE ARE ACTUALLY THE SAME DEBTS WHICH WERE ALREADY INCLUDED IN SALES/RECEIPTS IN RELEVANT PREVIOUS YEAR OR YEARS. THUS ASSESSEE COULD NOT BY ANY PIECE OF EVIDENCE SHOW THAT ALL : - 34 - : ARE PROPER DEBTS AND ARE INCIDENTAL TO THE BUSINESS OF THE ASSESSEE FOR RELEVANT YEAR.' 3.3.2 THE APPELLANT SUBMITS THAT IT HAD PROVIDED DETAILS OF BALANCES WRITTEN OFF. BEFORE ME IT HAS SUBMITTED COPIES OF ACCOUNTS OF VARIOUS PAR TIES (WITH WHOM REGULAR BUSINESS HAD BEEN CARRIED ON) TO PROVE THAT THE AMOUNTS WRITTEN OFF WERE PART OF THE BUSINESS TRANSACTIONS. 3.3.3 ACCORDING I DELETE THE DISALLOWANCE OF RS.4 24 106/ - MADE BY THE A.O. 52. FROM THE ABOVE PARA FROM THE ORDER OF CIT (A) WE FIND THAT HE HAS GIVEN A CLEAR FINDING THAT THE BALANCES WRITTEN OFF WERE PART OF THE BUSINESS TRANSACTIONS. HENCE ON THIS ISSUE WE DO NOT FIND ANY REASON TO INTERFERE IN THE ORDER OF CIT(A). GROUND NO. 4 IS REJECTED. 53. IN THE RESULT THE APP EAL OF THE REVENUE STANDS PARTLY ALLOWED. 54. NOW WE TAKE UP THE APPEAL OF THE ASSESSEE FOR ASSESSMENT YEAR 2006 - 07 I.E. I.T.A. NO.181/LKW/2010. IN THIS APPEAL THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS: 1. BECAUSE THE CIT(A) HAS ERRED ON FACTS AND I N LAW IN CONFIRMING THE ADDITION OF RS.1 45 560/ - MADE @2% OF THE TOTAL SALES ON ACCOUNT OF LOW GROSS PROFIT. 1.1 BECAUSE THERE BEING NO DEFECTS OR DISCREPANCIES IN THE BOOKS OF ACCOUNTS PURCHASE AND SALES HAVING BEEN ACCEPTED THE AUTHORITIES BELOW WERE NOT JUSTIFIED IN MAKING THE ADDITION OF RS.1 45 560/ - BY APPLYING A PERCENTAGE OF PROFIT ON THE SALES. 1.2 BECAUSE THE AUTHORITIES BELOW HAVE FAILED TO APPRECIATE THE EXPLANATION FURNISHED BY THE ASSESSEE AND HAVE ARBITRARILY MADE THE ADDITION OF RS.1 45 560/ - . 1.3 BECAUSE THE ACCOUNTS BEING TAX AUDITED AND THERE BEING NO CHANGE IN THE SYSTEM OF ACCOUNTING REGULARLY FOLLOWED AS WELL AS THE EXPLANATION FOR THE DECLINE OF SLIGHT GROSS PROFIT RATE HAVING NOT BEEN FOUND FALSE THE AUTHORITIES BELOW WERE NOT J USTIFIED IN REJECTING THE TRADING RESULTS AND MAKING THE ADDITION OF RS.1 45 560/ - . 2 . BECAUSE THE CIT(A) HAS ERRED ON FACTS AND IN LAW IN CONFIRMING THE ADDITION OF RS.93 89 908/ - BEING DISALLOWANCE OF INTEREST VIS - A - VIS INVESTMENT BY APPLYING : - 35 - : THE PROVISI ONS OF SECTION 14A READ WITH RULE 8D OF THE I.T. RULES. 2.1 BECAUSE ON A PROPER APPRECIATION OF FACTS AND CIRCUMSTANCES OF THE CASE THE PROVISIONS OF SECTION 14A OF THE ACT READ WITH RULE 8D OF THE I.T. RULES IS NOT APPLICABLE TO THE ASSESSEE'S CASE AN D AS SUCH THE ADDITION OF RS.93 89 908/ - BEING BAD IN LAW BE DELETED. 2.2 BECAUSE THE CIT(A) HAS FAILED TO APPRECIATE THAT THE INVESTMENT IN SHARES OF UNQUOTED COMPANIES BEING ALL OLD SUBJECT TO CAPITAL GAIN WHICH IS NOT EXEMPT FROM TAX. THE PROVISIONS OF SECTION 14A ARE NOT APPLICABLE AT THE VERY OUTSET. 2.3 BECAUSE THE CIT(A) HAS FAILED TO APPRECIATE THAT THE ENTIRE INVESTMENTS MADE IN TAX EXEMPT INSTRUMENTS ARE ALL OLD AND OUT OF THE INTEREST FREE FUNDS AVAILABLE THE PROVISIONS OF SECTION 14A READ WITH RULE 8D OF THE I.T. RULES IS NOT APPLICABLE AND HAS THEREBY ERRED IN MAKING THE SAID ADDITION. 3. BECAUSE THE CIT(A) HAS ERRED ON FACTS AND IN LAW IN CONFIRMING THE ADDITIONS MADE UNDER THE FOLLOWING HEADS BY THE ASSESSING OFFICER: (I) RS.26 393/ - UNDER THE HEAD JOB WORK CHARGES. (II) RS.2 959/ - UNDER THE HEAD STAFF WELFARE. (III) RS.4 945/ - UNDER THE HEAD GENERAL EXPENSES. (IV) RS.16 033/ - UNDER THE HEAD HIRE CHARGES/TYRE COLLECTION CHARGES WHICH EXPENSES HAVING BEEN INCURRED FOR THE PURPOSE OF BU SINESS SHOULD OUGHT TO HAVE BEEN ALLOWED. 4. BECAUSE THE CIT(A) HAS ERRED ON FACTS AND IN LAW IN CONFIRMING THE DISALLOWANCE OF RS.33 933/ - BEING COMMISSION/BROKERAGE PAID FOR PROCURING THE FIXED DEPOSITS WHICH EXPENSES HAVING BEEN INCURRED FOR THE PURPOS E OF BUSINESS SHOULD OUGHT TO HAVE BEEN ALLOWED. 55. REGARDING GROUND NO. 1 & 2 OF THE APPEAL IT WAS AGREED BY BOTH THE SIDES THAT THIS ISSUE IS INTER - CONNECTED WITH THE REVENUES APPEAL FOR ASSESSMENT YEAR 2006 - 07 AS PER WHICH THIS ISSUE HAS BEEN RAISED BY THE REVENUE BY WAY OF GROUND NO. 1 2 & 3 OF ITS APPEAL. BOTH SIDES ALSO AGREED THAT THIS ISSUE IS SAME AS IN EARLIER YEARS APPEALS OF THE REVENUE. : - 36 - : 56. WE ARE OF THE CONSIDERED OPINION THAT WHILE DECIDING THE APPEAL S OF THE REVENUE IN THE EARLIER YEAR S I.E. ASSESSMENT YEAR 2004 - 05 AND 2005 - 06 IT WAS HELD BY US THAT FOR INVOKING THE PROVISIONS OF SECTION 14A IT IS NECESSARY THAT THE DEDUCTION ON ACCOUNT OF EXPENDITURE INVOLVED IS ALLOWABLE UNDER SOME PROVISION OF THE ACT AND THEN DISALLOWANCE HAS TO B E MADE BY INVOKING RULE 8D AND PROVISION OF SECTION 14A OF THE ACT IF THE RELATED INCOME IS NOT TAXABLE . WE HAVE ALREADY HELD THAT DEDUCTION ON ACCOUNT OF INTEREST EXPENDITURE IN RESPECT OF BORROWING FOR MAKING INVESTMENT IN SHARE IS NOT ALLOWABLE UNDER A NY PROVISIONS OF THE ACT IN THE FACTS OF THE PRESENT CASE . WE HAVE GIVEN A FINDING THAT THIS EXPENDITURE IS NOT ALLOWABLE U/S 57(III) OF THE ACT BECAUSE NOW DIVIDEND INCOME IS NOT TAXABLE AS INCOME FROM OTHER SOURCES. WE HAVE ALREADY GIVEN A FINDING THAT THE DEDUCTION FOR MAKING INVESTMENT IN SHARES IS NOT ALLOWABLE FOR COMPUTING CAPITAL GAIN. WE HAVE ALSO GIVEN A FINDING THAT SINCE THE ASSESSEE IS NOT DEALING IN SHARES THE DEDUCTION ON ACCOUNT OF INTEREST IS NOT ALLOWABLE U/S 36(1)(III) OF THE AC T . HE NCE WE HOLD THAT I N THE FACTS OF THE PRESENT CASE THE DISALLOWANCE HAS TO BE MADE IN FULL BECAUSE THE SAME IS NOT ALLOWABLE UNDER ANY PROVISIONS OF THE ACT. HENCE WE UPHOLD THE DISALLOWANCE CONFIRMED BY CIT(A) AND THE PART RELIEF ALLOWED BY CIT (A) IS ALREADY REVERSED WHILE DECIDING THE APPEAL OF THE REVENUE FOR THIS YEAR . GROUND NO. 1 & 2 OF THE ASSESSEE ARE REJECTED. 57. REGARDING GROUND NO. 3 OF THE ASSESSEES APPEAL LEARNED A.R. OF THE ASSESSEE REITERATED THE SAME CONTENTIONS MADE BEFORE CIT(A) AN D LEARNED D.R. OF THE REVENUE SUPPORTED THE ORDER OF CIT(A). 58. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE FIND THAT CIT(A) HAS DECIDED THE ISSUE AGAINST THE ASSESSEE BY FOLLOWING I.T.A.T. ORDER IN THE CASE OF E. HILL & CO. LTD. VS. ACIT [2009] (14) MT C 251 (TRIB.). LEARNED A.R. OF THE ASSESSEE COULD NOT POINT OUT AS TO HOW THIS ISSUE IS NOT COVERED AGAINST THE ASSESSEE BY THIS TRIBUNAL ORDER . HENCE WE DECLINE TO INTERFERE IN THE ORDER OF CIT(A) ON THIS ISSUE . GROUND NO. 3 IS REJECTED. : - 37 - : 59. REGARDING GROUND NO. 4 OF THE ASSESSEES APPEAL LEARNED A.R. OF THE ASSESSEE REITERATED THE SAME CONTENTIONS MADE BEFORE THE CIT(A) WHEREAS LEARNED D.R. OF THE REVENUE SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 60. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. W E FIND THAT DISALLOWANCE WAS MADE BY ASSESSING OFFICER TO THE EXTENT OF 10% OF RS.3 39 330/ - ON THE BASIS THAT ALL THE PAYMENTS WERE MADE IN CASH WHICH WERE NOT OPEN FOR VERIFICATION. SINCE THIS COULD NOT BE CONTROVERTED BY LEARNED A.R. OF THE ASSESSEE W E DO NOT FIND ANY REASON TO INTERFERE IN THE ORDER OF CIT(A) ON THIS ISSUE. THIS GROUND IS ALSO REJECTED. 61. IN THE RESULT THE APPEAL OF THE ASSESSEE STANDS DISMISSED. 62. IN THE COMBINED RESULT THE APPEAL OF THE REVENUE FOR ASSESSMENT YEAR 2003 - 04 IS DISMISSED WHEREAS APPEALS OF THE REVENUE FOR ASSESSMENT YEARS 2004 - 05 AND 2005 - 06 ARE ALLOWED AND FOR ASSESSMENT YEAR 2006 - 07 IS PARTLY ALLOWED. THE APPEAL OF THE ASSESSEE FOR ASSESSMENT YEAR 2003 - 04 IS PARTLY ALLOWED AND FOR ASSESSMENT YEAR 2006 - 07 IS D ISMISSED. (ORDER WAS PRONOUNCED IN THE OPEN COURT ON THE DATE MENTIONED ON THE CAPTION PAGE) SD/. SD/. ( SUNIL KUMAR YADAV ) ( A. K. GARODIA ) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 11 / 11 /2014 JJ: 0807 CLS COPY FORWARDED TO: 1 . APPELLANT 2 . RESPONDENT 3 . CIT(A) 4 . CIT 5 . DR ASSISTANT REGISTRAR