The DCIT, Central Circle-1(3),, Ahmedabad v. Shri Hashmukh N.Vora,(Ind), Ahmedabad

ITA 1592/AHD/2009 | 2001-2002
Pronouncement Date: 31-03-2011 | Result: Dismissed

Appeal Details

RSA Number 159220514 RSA 2009
Assessee PAN ACFPV5649F
Bench Ahmedabad
Appeal Number ITA 1592/AHD/2009
Duration Of Justice 1 year(s) 10 month(s) 12 day(s)
Appellant The DCIT, Central Circle-1(3),, Ahmedabad
Respondent Shri Hashmukh N.Vora,(Ind), Ahmedabad
Appeal Type Income Tax Appeal
Pronouncement Date 31-03-2011
Appeal Filed By Department
Order Result Dismissed
Bench Allotted B
Tribunal Order Date 31-03-2011
Date Of Final Hearing 23-03-2011
Next Hearing Date 23-03-2011
Assessment Year 2001-2002
Appeal Filed On 18-05-2009
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH B AHMEDABAD BEFORE SHRI BHAVNESH SAINI JUDICIAL MEMBER AND SHRI D.C. AGRAWAL ACCOUNTANT MEMBER ITA NO.1592/AHD/2009 & C.O. NO.122/AHD/2009 ASSESSMENT YEAR :2001-02 DATE OF HEARING:23.3.11 DRAFTED: 25.3.11 DCIT CENTRAL CIRCLE- 1(3) AAYKAR BHAVAN ASHRAM ROAD AHMEDABAD SHRI HASHMUKH N VORA (IND) 302 ANAND CHAMBER NR. OLD HIGH COURT NAVRANGPURA AHMEDABAD V/S . V/S . SHRI HASHMUKH N VORA (IND) 302 ANAND CHAMBER NR. HIGH COURT RLY CROSSING NAVRANGPURA AHMEDABAD PAN NO.ACFPV5649F DCIT CENTRAL CIRCLE- 1(3) AHMEDABAD (APPELLANT) .. (RESPONDENT) ASSESSEE BY :- SHRI P.M.MEHTA AR REVENUE BY:- SHRI S.K. JHA SR-DR O R D E R PER D.C. AGRAWAL ACCOUNTANT MEMBER:- THIS IS APPEAL FILED BY REVENUE RAISING FOLLOWING GROUNDS:- 1) THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE DISALLOWANCE OF LOSS OF RS.1 07 91 366/- MADE ON ACCOUNT OF EXPE NDITURE PERTAINING TO EXEMPTS INCOME OF DIVIDEND U/S. 14A WITHOUT CONSID ERING THE FACTS BROUGHT ON RECORD BY THE A.O THAT THE ASSESSEE HAD PURCHASE D THE UNITS OF MUTUAL FUND WITH A CLEAR-CUT INTENTION TO AVOID TAX. 2) THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE DISALLOWANCE OF LOSS OF RS.1 07 91 366/- MADE ON ACCOUNT OF EXPENDI TURE PERTAINING TO EXEMPTS INCOME OF DIVIDEND U/S.14A WITHOUT CONSIDE RING THE FACTS THAT THE ASSESSEE HAD PURCHASED THE UNITS OF MUTUAL FUND BY BORROWING HUGE AMOUNT OF RS.4.75 CRORES WITH A CLEAR CUT INTENTION TO AVO ID TAX AS IT WAS NOT HIS REGULAR BUSINESS ACTIVITY AND HENCE THE TRANSACTION WAS A COLOURABLE DEVICE. ITA NO.1592/AHD/09 & CO 122/AHD/09 A.Y.2001-02 DCIT CC-1(3) ABD V. SH HASHMUKH N VORA (IND) PAGE 2 3) THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN NOT APPRECIATING THE CORRECT FACT THAT THE PURCHASE COST OF MUTUAL FUND BEING AN EXPENDITURE HAS BEEN CLAIMED BY THE ASSESSEE IN THE RESULTANT LOSS TO BE SET OFF AGAINST THE TAXABLE INCOME AND HENCE THE PROVISIONS OF SECTION14A ARE C LEARLY APPLICABLE. MOREOVER THE EXPENDITURE INCLUDES LOSS AS HELD IN THE CASE OF MADRAS INDUSTRIAL INVESTMENT CORPORATE LTD VS. CIT 225 IT R 802 (SC) (PARA-6) 4) THE LD. CIT(A) HAS ERRED IN LAW IN DELETING THE DISALLOWANCE OF RS.1 07 91 366/- PERTAINING TO PURCHASE AND SALE MU TUAL FUNDS FOLLOWING THE ORDER OF HOBLE ITAT AND IGNORING THE ORDER OF HON BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF VANEET JAIN VS. CIT 294 ITR 43 2 (P&H) WHEREIN IT IS HELD THAT PURCHASE AND SALE OF MUTUAL FUND UNITS WITHIN A SHORT PERIOD CANNOT BE REGARDED AS GENUINE BUSINESS TRANSACTION AS OBVIOUS INTENT WAS TO ENJOY TAX FREE DIVIDEND. ALTHOUGH THE SAID ORDER HAS BEEN SE T ASIDE IN THE CASE OF ANIL JAIN VS. CIT 294 ITR 435 (SC) TO THE FILE OF ITAT T O EXAMINE AS TO WHETHER THE TRANSACTION WAS BUSINESS TRANSACTION KEEPING IN VIE W THE CONTINUITY OF SAME IN THE SUBSEQUENT YEARS BUT THE RATIO LAID DOWN IS ST ILL APPLICABLE IN THE ASSESSEES CASE. 5) THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DIRECTING DELETION OF THE ADDITION OF RS.3 92 989/- MADE ON ACCOUNT OF DISALL OWANCE OF INTEREST FOR USE OF BORROWED FUNDS FOR NON-BUSINESS PURPOSES IF INTE REST FREE FUNDS EXCEED THE INTEREST FREE ADVANCE WITHOUT CONSIDERING THE FACT S BROUGHT ON RECORD BY THE A.O THAT THE ASSESSEE HAD FAILED TO PROVE NEXUS BET WEEN THE BORROWED FUNDS AND THEIR BUSINESS USE AS SUCH ONUS IS ON THE ASSES SEE & NOT ON REVENUE AND ALSO THE ASSESSEE CAN NOT CREATE ARTIFICIAL NEED FO R BORROWING BY DIVERTING HIS OWN FUNDS AND INTEREST FREE FUNDS AVAILABLE WITH HI M FOR NON-BUSINESS PURPOSES. UNDER SUCH SITUATION BORROWING ITSELF IS NOT FOR THE PURPOSE OF BUSINESS CIT VS. ABHISHEK INDUSTRIES LTD. 286 ITR 1 (P&H) AND CIT VS. V.I.BABY & CO. 254 ITR 248 (KER). 3. THE FACTS OF THE CASE ARE THAT ASSESSEE HAS DISC LOSED INCOME FROM SALARY HOUSE PROPERTY PROFIT FROM SHARE TRADING BUSINESS & INCOME FROM OTHER SOURCES.SEARCH US.132(1) OF THE I.T. ACT 1961 WAS CARRIED OUT AGAINST ASSESSEE. AS A RESULT PROCEEDINGS U/SS.153A WAS INITIATED AGAIN ST HIM. IN THE ASSESSMENT ASSESSING OFFICER PROPOSED AN ADDITION OF RS.1 07 91 366/- BEING THE TRADING LOSS OF UNITS OF MUTUAL FUNDS DISALLOWED BY HIM AND INTERES T OF RS.3 92 989/- DISALLOWED U/S 36(1)(III). THESE ARE TWO ISSUES WHICH ARE IN APPE AL BEFORE US. 4. IN RESPECT OF FIRST GROUND THE FACTS ARE THAT D URING THE ASSESSMENT YEAR 2001- 02 ASSESSEE PURCHASED UNITS IN SUN F & C VALUE FUND ON 22-02-2001 FOR RS.5 CRORES. AGAINST THIS SUM MUTUAL FUND ALLOTTED UNITS OF 3 97 122.302 UNITS @ RS.13.90 PER UNIT FOR AGGREGATE VALUE OF RS.5 CRORES. A DIVI DEND OF RS.1 07 91 366/- WAS PAID ON THE ABOVE UNITS ON 22-02-2001 @ RS.3 PER UNIT. O N THE SAME DAY I.E. 22-02-2001 ITA NO.1592/AHD/09 & CO 122/AHD/09 A.Y.2001-02 DCIT CC-1(3) ABD V. SH HASHMUKH N VORA (IND) PAGE 3 THE ABOVE DIVIDEND AMOUNT WAS FURTHER INVESTED IN T HE UNITS OF THE SAME FUND. AS A RESULT OF WHICH FURTHER UNITS OF 10 22 878.380 AT A RATE OF RS.10.55 PER UNIT WERE ALLOTTED TO THE ASSESSEE. ON 23-02-2001 ALL THE UNI TS AGGREGATE TO 46 20 682/- WERE REDEEMED AT A RATE OF RS.10.54 PER UNIT AND THE RE DEMPTION MONEY OF RS.4 86 94 807/- WAS PAID BY MUTUAL FUND TO THE ASS ESSEE. THE DIVIDEND INCOME OF RS.1 07 91 366/- WAS CREDITED BY THE ASSESSEE TO TH E DIVIDEND ACCOUNT IN HIS BOOKS. THUS ACCORDING TO ASSESSEE A LOSS OF RS.1 20 96 559 /- ACCRUED AS UNDER:- THE AMOUNT INVESTED IN UNITS RS. 5 CRORE. + DIVIDEND INCOME R S.1 07 91 366/- TOTAL RS. 6 07 91 366/- LESS AMOUNT RECEIVED ON REDEMPTION RS.4 86 94 807/-. LOSS ------ -- RS.1 20 96 559/- IT ALSO CLAIMED FURTHER EXPENSES OF RS.70 274/- BEI NG INTEREST ON MONEY BORROWED FOR THE PURPOSE OF INVESTMENT IN MUTUAL FUNDS AND STAMP DUTY ON THE DOCUMENTS. THE ASSESSING OFFICER SOUGHT TO DISALLOW THE LOSS CLAIM ED BY ASSESSEE. IT WAS EXPLAINED TO THE ASSESSING OFFICER THAT PROVISION U/S.94(7) A RE NOT APPLICABLE IN THE ASSESSMENT YEAR 2001-02 AS THEY WERE INSERTED WITH EFFECT FROM 01-04-2002. THE AO DID NOT ACCEPT ABOVE SUBMISSION AND INVOKE THE PROVISION OF SECTION14A. ACCORDING TO HIM DIVIDEND INCOME RECEIVED BY THE ASSESSEE IS EXEMPT U/S.10(33) OF THE I.T ACT. THE ASSESSEE HAD MADE SUBSCRIPTION FOR THE PURCHASE OF UNITS KNOWING WELL THAT UNIT PRICE WILL FALL EX-DIVIDEND. THE AMOUNT OF DIVIDEND RECEIVED BY THE ASSESSEE IS IN FACT EXPENDITURE INCURRED IN EARNING SUCH DIVIDEND AS IT IS RELATABLE TO SUCH EXEMPTED INCOME. THEREFORE THE LOSS OF RS.1 20 96 559/- WAS DIRECTLY ATTRIBUTABLE TO THE EXPENDITURE INCURRED FOR PURCHASE OF TAX FREE DIVID END. THEREFORE THE PURCHASE COST OF UNIT IS REQUIRED TO BE REDUCED BY THE AMOUNT OF DIVIDEND RECEIVED BY ASSESSEE FOR CALCULATING ACTUAL LOSS INCURRED BY THE ASSESSEE. I T HAS DEPLOYED INTEREST BEARING BORROWED FUNDS AND NO PRUDENT BUSINESSMAN WOULD PUR CHASE ANYTHING WITH AN INTENTION TO SELL THEM AT LOSS. THE AO ACCORDINGLY TREATING THE DIVIDEND AS REIMBURSEMENT OF THE LOSS AND ALSO AN OUTGO IN EARN ING DIVIDEND DISALLOWED THE LOSS TO THE EXTENT OF RS.1 07 91 366/-. 5. THE LD. CIT(A) RELYING ON THE DECISION IN THE CA SE OF CIT V. WALFORT SHARE AND STOCK BROKERS P. LTD. (2010) 326 ITR 1 (SC) IN THE CASE OF VIKRAM ADITYA & ASSOCIATED PVT. LTD. (SUPRA) AND IN THE CASE OF VIMGI INVESTMENT PVT. L TD. (SUPRA) ITA NO.1592/AHD/09 & CO 122/AHD/09 A.Y.2001-02 DCIT CC-1(3) ABD V. SH HASHMUKH N VORA (IND) PAGE 4 HELD THAT SUCH DISALLOWANCE U/S.14A IS NOT CALLED F OR. THE DISALLOWANCE U/S.94(7) CAN ALSO NOT BE DONE SINCE SAID PROVISION BECAME EFFECT IVE FROM ASSESSMENT YEAR 2002- 03. 6. WE HAVE HEARD THE PARTIES AND PERUSED THE MATERI ALS ON RECORD. LD. DR BASICALLY RELIED ON THE ORDER OF ASSESSING OFFICER. HE SUBMITTED THAT IT IS CLEARLY A TAX EVADING TRANSACTION EQUIVALENT TO DIVIDEND STRIPPIN G CASE COVERED BY SEC. 94(7). ON THE SAME DAY ASSESSEE IS INVESTING IN MUTUAL FUND A ND ON THE SAME DAY HE RECEIVING BACK DIVIDEND. IN FACT THE COST IN MUTUAL FUND ARE REIMBURSED TO THE EXTENT DIVIDEND IS RECEIVED BY ASSESSEE THEREFORE LOSS CREATED IS ARTIFICIAL AND NOTIONAL. THERE WAS CLEAR INTENTION TO CREATE A BUSINESS LOSS BY SUCH T RANSACTIONS AND THEREFORE THEY BEING NOT REAL LOSS SHOULD NOT BE ALLOWED. 7. ON THE OTHER HAND LD. AUTHORIZED REPRESENTATIVE SUBMITTED THAT HIS CASE IS SQUARELY COVERED BY THE DECISION OF ITAT AHMEDABAD BENCH IN THE CASE OF ITO V. SHRI JYOTIPRASAD D AGRAWAL IN ITA NO.2275/AHD/2004 PRONOUNCED ON 11-07-2007 AND DECISION OF HONBLE APEX COURT IN THE CASE OF WALFORT SHARE AND STOCK BROKERS P. LTD. (SUPRA) WHEREIN IT IS HELD THAT UNDER SUCH CASES PROVISIONS OF SECTION 14A OF THE ACT CANNOT BE INVOKED. LD. AR DREW OUR ATTENTIO N TO HEAD-NOTES FROM THE ABOVE JUDGEMENT AS UNDER:- SECTION 14A OF THE INCOME-TAX ACT 1961 CLARIFIES THAT EXPENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THEY ARE RELATABLE TO THE EARNING OF TAXABLE INCOME. IN MANY CASES THE NATURE OF EXPENSES INCURR ED BY THE ASSESSEE MAY BE RELATABLE PARTLY TO EXEMPT INCOME AND PARTLY TO TAXABLE INCOME. IN THE ABSENCE OF SECTION 14A THE EXPENDITURE INCURRED IN RESPECT OF EXEMPT INCOME WAS BEING CLAIMED AGAINST TAXABLE INCOME. THE MANDA TE OF SECTION 14A IS CLEAR: IT DESIRES TO CURB THE PRACTICE OF CLAIMING DEDUCTION OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME AGAINST TAXAB LE INCOME AND AT THE SAME TIME AVAIL OF THE TAX INCENTIVE BY WAY OF EXEMPT IN COME WITHOUT MAKING ANY APPORTIONMENT OF EXPENSES INCURRED IN RELATION TO E XEMPT INCOME. THE BASIC REASON FOR INSERTION OF SECTION 14A IS THAT CERTAIN INCOMES ARE NOT INCLUDIBLE WHILE COMPUTING THE TOTAL INCOME BECAUSE THESE ARE EXEMPT UNDER CERTAIN PROVISIONS OF THE ACT. THE BASIC PRINCIPLE OF TAXATION IS TO TAX THE NET I NCOME I.E. GROSS INCOME MINUS EXPENDITURE. ON THE SAME ANALOGY EXEMPTION I S ALSO IN RESPECT OF NET INCOME. THE THEORY OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXABLE AND NON-TAXABLE HAS IN PRINCIPLE BEEN NOW WIDENED UND ER SECTION 14A. A PAY BACK IS NOT AN EXPENDITURE IN THE SCHEME OF SECTION 14A ; FOR ATTRACTING SECTION 14A THERE HAS TO BE A PROXIMATE CAUSE FOR D ISALLOWANCE WHICH IS IN ITA NO.1592/AHD/09 & CO 122/AHD/09 A.Y.2001-02 DCIT CC-1(3) ABD V. SH HASHMUKH N VORA (IND) PAGE 5 RELATIONSHIP WITH THE TAX EXEMPT INCOME. PAY BACK O R RETURN OF INVESTMENT IS NOT SUCH PROXIMATE CAUSE. A MERE RECEIPT OF DIVIDEN D SUBSEQUENT TO THE PURCHASE OF UNITS ON THE BASIS OF A PERSON HOLDING UNITS AT THE TIME OF DECLARATION OF DIVIDEND ON THE RECORD DATE CANNOT G O TO SET OFF THE COST OF ACQUISITION OF THE UNITS. THE ASSESSEE EARNED INCOM E MAINLY FROM SHARE TRADING AND BROKERAGE. THE CFT MUTUAL FUND CAME OUT WITH AN ADVERTISEMENT STATING THAT TAX FREE DIVIDEND INCOME OF 40 PER CEN T. COULD BE EARNED IF INVESTMENTS WERE MADE BEFORE THE RECORD DATE MARCH 24 2000. THE ASSESSEE BY VIRTUE OF ITS PURCHASE ON MARCH 24 200 0 BECAME ENTITLED TO DIVIDEND ON THE UNITS AT RS. 4 PER UNIT AND EARNED A DIVIDEND OF RS. 1 82 12 862.80. AS A RESULT OF THE DIVIDEND PAY OUT THE VALUE OF THE UNIT STOOD REDUCED FROM RS. 17.23 TO RS. 13.23 PER UNIT ON MAR CH 27 2000. ON MARCH 27 2000 THE ASSESSEE SOLD ALL THE UNITS AT RS.13. 23 PER UNIT AND COLLECTED AN AMOUNT OF RS.5 90 55 207.75 AS WELL AS AN INCENTIV E OF RS.23 76 778 IN RESPECT OF THE TRANSACTION. IN ALL THE ASSESSEE REC EIVED BACK RS.7 96 44 847 AS AGAINST THE INITIAL PAYMENT OF RS.8 00 00 000. I N ITS RETURN THE ASSESSEE CLAIMED THE DIVIDEND RECEIVED OF RS.1 82 12 862.80 AS EXEMPT FROM TAX UNDER SECTION 10(33) OF THE ACT AND ALSO CLAIMED A SET-O FF OF RS.2 09 44 793 AS LOSS INCURRED ON THE SALE OF THE UNITS. THE DEPARTMENT D ISALLOWED THE SET-OFF CLAIMED. HOWEVER THE APPELLATE TRIBUNAL ON APPEAL DELETED THE DISALLOWANCE BY HOLDING THAT THE ASSESSEE WAS ENTIT LED TO SET OFF THE LOSS FROM THE TRANSACTIONS IN QUESTION AGAINST ITS OTHER INCO ME CHARGEABLE TO TAX. THIS VIEW WAS AFFIRMED BY THE HIGH COURT. THE DEPARTMENT APPEALED TO THE SUPREME COURT : HELD AFFIRMING THE DECISION OF THE HIGH COURT (I) THAT IT WAS ESTABLISHED THAT THERE WAS A SALE THE ASSESSEE RECEIVED A DIVIDEND AND THAT DIVIDEND WAS TAX-FREE. THE ASSES SEE HAD MADE USE OF THE PROVISIONS OF SECTION 10(33) AND SUCH USE COULD NOT BE SAID TO BE ' ABUSE OF LAW '. EVEN ASSUMING THAT THE TRANSACTION WAS PRE-PLANN ED THERE WAS NOTHING TO IMPEACH THE GENUINENESS OF THE TRANSACTION. IN T HE CASE OF ASSESSMENTS BEFORE APRIL 1 2002-I.E. BEFORE THE INSERTION OF SECTION 94(7) LOSSES PERTAINING TO EXEMPTED INCOME COULD NOT BE DISALLOWED. HOWEVER AFTER APRIL 1 2002 SUCH LOSSES TO THE EXTENT OF THE DIVIDEND RECEIVED BY THE ASSESSEE COULD BE IGNORED BY THE ASSESSING OFFICER IN VIEW OF SECTION 94(7). APPLYING SECTION 94(7) TO CASES FOR ASSESSMENT YEARS FALLING AFTER A PRIL 1 2002 THE LOSS TO BE IGNORED WOULD BE ONLY TO THE EXTENT OF THE DIVIDEND RECEIVED AND NOT THE ENTIRE LOSS. IN OTHER WORDS LOSSES OVER AND ABOVE THE AMO UNT OF RECEIVED WOULD STILL BE ALLOWED FROM WHICH IT FOLLOWED THAT PARLIAMENT H AD NOT TREATED THE DIVIDEND STRIPPING TRANSACTION AS SHAM OR BOGUS. AFTER APRIL 1 2002 LOSSES OVER AND ABOVE THE DIVIDEND RECEIVED WOULD NOT BE IGNORED UN DER SECTION 94(7). (II) THAT SECTIONS 14A AND 94(7) OPERATED IN DIFFER ENT FIELDS. SECTION 14A DEALT WITH DISALLOWANCE OF EXPENDITURE INCURRED IN EARNIN G TAX-FREE INCOME AGAINST THE PROFITS ; ON THE OTHER HAND SECTION 94(7) DEAL T WITH DIS-ALLOWANCE OF THE LOSS ON THE ACQUISITION OF AN ASSET. (III) THAT A MERE RECEIPT OF DIVIDEND SUBSEQUENT TO PURCHASE OF UNITS ON THE BASIS OF A PERSON HOLDING UNITS AT THE TIME OF DECL ARATION OF DIVIDEND ON THE RECORD DATE COULD NOT OFFSET THE COST OF ACQUISITI ON OF THE UNITS. ITA NO.1592/AHD/09 & CO 122/AHD/09 A.Y.2001-02 DCIT CC-1(3) ABD V. SH HASHMUKH N VORA (IND) PAGE 6 8. WE HAVE CONSIDERED RIVAL SUBMISSION AND PERUSED THE RECORD. IN OUR CONSIDERED VIEW THE ISSUE IS NOW FULLY COVERED BY T HE DECISION OF HONBLE APEX COURT IN THE CASE OF WALFORT SHARE AND STOCK BROKERS P. LTD. (SUPRA). IT HAS BEEN HELD BY THE HONBLE APEX COURT THAT BASIC PRINCIPLE OF TAXA TION IS TO TAX THE NET INCOME .EXPENSE CAN BE ALLOWED ONLY IN RESPECT OF EARNING OF TAXABLE INCOME. WHEN SEC. 14A IS INVOKED IT HAS TO BE SHOWN THAT THERE IS AN EXPENDITURE INCURRED IN EARNING EXEMPTED INCOME. THE PHRASE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME UNDER THIS ACT MEANS THAT IF AN INCOME DOES NOT FOR PART OF TOTAL INCOME THEN THE RELATED EXPENDITURE IS OUTSIDE THE SCOPE OF SEC TION 14A. THE EXPENSES ARE REDUCTION OF INCOME IN REAL SENSE. IF PAYBACK IN ST RICT SENSE DOES NOT AFFECT PROFIT AND LOSS ACCOUNT AS IT IS NOT AN EXPENDITURE IT WILL NO T AFFECT INCOME LIKE A PAYBACK WHICH AFFECTS THE BALANCE-SHEET ONLY WHEN INVESTMENT IS W RITTEN OFF. THUS THERE IS DIFFERENCE BETWEEN AN EXPENDITURE AND WRITING OFF O F AN INVESTMENT. A DEDUCTION FOR EXPENDITURE OR LOSS WHICH IS NOT STRICTLY WITHIN TH E PROVISION MUST BE ALLOWED IF ON THE FACTS OF THE CASE IT CAN BE PROPERLY DEBITED AGAINS T THE INCOME OF THE BUSINESS IN ASCERTAINING THE TRUE PROFITS. A RETURN OF INVESTME NT OR PAYBACK IS NOT SUCH A DEBIT ITEM AND HENCE IT IS NOT AN EXPENDITURE INCURRED IN TERMS OF SEC. 14. EXPENDITURE IS A PAYOUT IT RELATES TO DISBURSEMENT. FOR ATTRACTING SEC. 14A THERE HAS TO BE A PAYOUT AND THERE HAS TO BE PROXIMATE RELATIONSHIP WITH THE EXEMPTED INCOME. IN OTHER WORDS IF INCOME IS EXEMPT AND IT IS CREDITED IN TH E PROFIT AND LOSS ACCOUNT THEN IT HAS TO BE SEEN WHAT IS THE OUTGO OR PAY OFF IN RELATION TO SUCH INCOME WHICH IS DEBITED IN THE PROFIT AND LOSS ACCOUNT. SINCE INCOME IS NOT TA XABLE THEN RELATED EXPENDITURE WHICH IS DEBITED OR DEBITABLE IN THE PROFIT AND LOS S ACCOUNT HAS ALSO TO GO OUT FOR RECKONING IN THE PROFIT AND LOSS ACCOUNT. THEREFORE THERE HAVING NO DEBITABLE ITEM IN THE PROFIT AND LOSS ACCOUNT AGAINST EXEMPT INCOME I .E. DIVIDEND THEN SECTION 14A CANNOT BE INVOKED. FURTHER THERE IS NO DISPUTE ON THE PROPOSITION THAT PROVISION OF SEC. 94(7) INTRODUCED BY FINANCE ACT 2001 WOULD BE EFFECTIVE FROM 01-04-2002 AND THEREFORE APPLICABLE FOR AND FROM ASSESSMENT YEAR 2 002-03 AND CONSEQUENTLY NOT APPLICABLE TO PRESENT ASSESSMENT YEAR I.E. 2001-02. ACCORDINGLY LD. CIT(A) WAS JUSTIFIED IN ALLOWING THE CLAIM LOSS OF RS.1 07 91 366/- DISALLOWED BY LD. ASSESSING OFFICER. THIS GROUND OF REVENUES APPEAL IS REJECTE D. 9. THE NEXT ISSUE INVOLVED IS THE DISALLOWANCE OF I NTEREST PAYMENT OF RS.3 92 989/-. THE FACT RELATES TO THIS ISSUE ARE T HAT ON EXAMINATION OF THE DETAILS ITA NO.1592/AHD/09 & CO 122/AHD/09 A.Y.2001-02 DCIT CC-1(3) ABD V. SH HASHMUKH N VORA (IND) PAGE 7 THE ASSESSING OFFICER FOUND THAT THE ASSESSEE HAS GIVEN INTEREST FREE ADVANCE TO THE SISTER CONCERN IN THE GROUP TO THE EXTENT OF RS.25 90 136/-. ON THE OTHER HAND IT HAS CLAIMED AN INTEREST EXPENDITURE OF RS.3 92 989/-. S INCE NO EXPLANATION SEEMS TO HAVE BEEN FURNISHED BEFORE THE ASSESSING OFFICER H E DISALLOWED THE CLAIM OF INTEREST MADE ON INTEREST BEARING BORROWED FUNDS PRESUMING T HEM TO BE INVESTED OR ADVANCED TO SISTER CONCERN FREE OF INTEREST. 10. THE LD. COMMISSIONER OF INCOME-TAX (APPEALS) AL LOWED THE CLAIM OF ASSESSEE BY HOLDING THAT ASSESSEE HAD SUFFICIENT INTEREST FR EE FUNDS TO THE EXTENT OF RS.2 35 21 978/- AS UNDER:- INTEREST FREE FUNDS I) R.K PATEL 72 89 000/- II) UDAY ASSOCIATES 1 56 56 700/- III) DEEPIKABEN DAHELIWALA 2 84 199/- IV) MEENA VORA 1 19 068/- V) KIRITKUMAR DAHELIWALA 38 011/- VI) KIRTIBEN R PATEL 1 35 000/- 2 35 21 978/- HE RELIED ON THE FOLLOWING JUDGMENTS AND ALLOWED TH E CLAIM OF ASSESSEE HOLDING THAT ONCE ASSESSEE HAD SUFFICIENT INTEREST FREE FUNDS TH EN ONUS IS ON THE ASSESSING OFFICER TO ESTABLISH NEXUS BETWEEN INTEREST BEARING FUNDS AND INTEREST FREE ADVANCES GIVEN TO SISTER CONCERN. I) M/S. TORRENT FINANCIERS 73 TTJ 624 (AHD) II) RADICO KHAAITAN LTD. 142 TAXMANA 681 (ALL) III) SOUTH INDIA CORPORATION 293 ITR 237 (MAD) IV) MUNJAL SALES CORPORATION V CIT (2008) 298 ITR 2 98 (SC) 11. WE HAVE HEARD THE PARTIES AND PERUSED THE MATER IALS ON RECORD. LD. DEPARTMENTAL REPRESENTATIVE BASICALLY RELIED ON THE ORDER OF LD. ASSESSING OFFICER AND SUBMITTED THAT ONUS IS ON THE ASSESSEE TO SHOW THAT IT HAD GIVEN ADVANCES OUT OF INTEREST FREE FUNDS. LD. AR ON THE OTHER HAND SU BMITTED THAT CASE IS SQUARELY COVERED BY THE DECISION OF HONBLE APEX COURT IN TH E CASE OF MUNJAL SALES CORPORATION (SUPRA). ITA NO.1592/AHD/09 & CO 122/AHD/09 A.Y.2001-02 DCIT CC-1(3) ABD V. SH HASHMUKH N VORA (IND) PAGE 8 12. IN OUR CONSIDERED VIEW CASE IS SQUARELY COVERED BY THE DECISION OF HONBLE APEX COURT IN THE CASE OF MUNJAL SALES CORPORATION (SUPRA) WHEREIN HONBLE APEX COURT HELD AS UNDER:- UNDER THE INCOME-TAX ACT 1961 AFTER AMENDMENT OF THE ACT BY THE FINANCE ACT 1992 IN ORDER THAT INTEREST PAID ON BORROWINGS CAN BE ALLOWED AS A DEDUCTION IN COMPUTING THE BUSINESS PROFITS EVERY ASSESSEE INC LUDING A FIRM HAS TO ESTABLISH IN THE FIRST INSTANCE THAT IT WAS ALLOWABLE UNDER SEC TION 36(1)(III) ; AND IN THE CASE OF A FIRM FURTHER THAT THE AMOUNT DOES NOT EXCEED THE L IMIT FIXED BY SECTION 40(B)(IV). HELD HOWEVER ON THE FACTS IN THIS CASE THAT SIN CE THE ASSESSEE HAD BORROWED THE MONEYS FROM ITS PARTNERS AS EARLY AS 1991 AND THE APPELLATE TRIBUNAL HAD HELD THAT THE LOANS WERE GIVEN BY THE PARTNERS FOR BUSINESS P URPOSES AND THE INTEREST DID NOT EXCEED 18 PER CENT. PER ANNUM SIMPLE INTEREST THE ASSESSEE-FIRM WAS ENTITLED TO DEDUCTION OF INTEREST ON THE BORROWINGS FOR THE ASS ESSMENT YEARS 1993-94 TO 1997- 98. HELD ALSO THAT SINCE THE OPENING BALANCE OF THE P ROFITS OF THE ASSESSEE-FIRM AS ON APRIL 1 1994 WAS RS. 1.91 CRORES AND THE PROFITS WERE SUFFICIENT TO COVER THE LOAN GIVEN TO A SISTER CONCERN OF RS. 5 LAKHS ONLY THE APPELLATE TRIBUNAL OUGHT TO HAVE HELD THAT THE LOAN GIVEN WAS FROM THE ASSESSEES OW N FUNDS. AS A RESULT THIS ISSUE ALSO DECIDED IN FAVOUR OF A SSESSEE. THIS GROUND OF REVENUES APPEAL IS DISMISSED. COMING TO ASSESSEES CO NO.122/AHD/2009. 13. CO FILED BY ASSESSEE IS IN SUPPORT OF THE ORDER OF LD. CIT(A). DURING THE COURSE OF HEARING IT WAS NOT PRESSED. ACCORDINGLY THE CO OF ASSESSEE IS DISMISSED. 14. IN THE RESULT REVENUES APPEAL IS DISMISSED AND TH AT OF ASSESSEES CO IS DISMISSED AS NOT PRESSED. ORDER PRONOUNCED IN OPEN COURT ON 31/03/2011 SD/- SD/- (BHAVNESH SAINI) (D.C. AG RAWAL) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) AHMEDABAD DATED : 31/03/2011 *DKP COPY OF THE ORDER FORWARDED TO :- 1. THE APPELLANT. 4. THE CIT CONCERNS. 2. THE RESPONDENT. 5. THE DR ITAT AHMEDABAD 3. THE CIT(APPEALS)-I AHMEDABAD 6. GUARD FI LE. BY ORDER DEPUTY / ASSTT.REGISTRAR ITAT AHMEDABAD