ITO,Ward-6(3), Kolkata, Kolkata v. M/s. Off Shore India Ltd., Kolkata

ITA 263/KOL/2010 | 2005-2006
Pronouncement Date: 21-05-2010

Appeal Details

RSA Number 26323514 RSA 2010
Assessee PAN AAACO6223E
Bench Kolkata
Appeal Number ITA 263/KOL/2010
Duration Of Justice 3 month(s) 12 day(s)
Appellant ITO,Ward-6(3), Kolkata, Kolkata
Respondent M/s. Off Shore India Ltd., Kolkata
Appeal Type Income Tax Appeal
Pronouncement Date 21-05-2010
Appeal Filed By Department
Bench Allotted B
Tribunal Order Date 21-05-2010
Date Of Final Hearing 03-05-2010
Next Hearing Date 03-05-2010
Assessment Year 2005-2006
Appeal Filed On 09-02-2010
Judgment Text
1 IN THE INCOME TAX APPELLATE TRIBUNAL 'B BENCH : KOLKATA (BEFORE HONBLE SRI D.K.TYAGI J.M. AND HONB LE SRI B.C.MEENA A.M.) I.T.A. NO. 263 /KOL/2010 ASSESSM ENT YEAR : 2005-06 ITO WARD 6(3) KOLKATA VS M/S OFF-SHORE INDIA LTD. (PAN NO. AAACO 6223 E) (APPELLANT) (RESPONDENT) APPELLANT BY : SRI PIYUSH KOLHE. RESPONDENT BY : SRI D.S.DAML E. O R D E R PER SHRI B.C.MEENA A.M. THIS IS AN APPEAL FILED BY THE REVENUE AGAINST TH E ORDER OF THE CIT(A)-VI DATED 11.11.2009 FOR THE ASSESSMENT YEAR 2005-06. 2. GROUNDS OF APPEAL READ AS UNDER : 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LD. CIT(A) HAS ERRED IN LAW IN ALLOWING THE DEDUCTION OF RS.94 70 151/- CLAIMED AS PROVISIONS FOR NPA WITHOUT CONSIDERING THE PROVI SIONS OF THE EXPLANATION BELOW SEC. 36(1)(VII). 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE C ASE THE LD. CIT(A) HAS ERRED IN LAW IN ALLOWING THE DEDUCTION OF RS.94 70 151/- CLAIED AS PROVISION FOR NPA WITHOUT CONSIDERING THE DECISI ON OF THE ITAT DELHI SPECIAL BENCH GIVEN IN THE CASE OF NEW INDIA I NDUSTRIES LTD. (ITA NO. 3958/DEL/2003 DATED 26.10.2007) WHERE IT IS HELD THAT ANY PROVISION MADE FOR SUSPECTED FUTURE LOSS CANNOT BE ALLOWED A S AN EXPENDITURE. 3. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS.45 00 000/ - CLAIMED AS INTEREST PAID WITHOUT CONSIDERING THAT SUCH CLAIM IS PERT AINING TO A PRIOR PERIOD AND IS INADMISSIBLE AS PER THE PROVISIONS OF SEC . 4 READ WITH SEC. 145. 4. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LD. CIT(A) HAS ERRED IN LAW IN DELETING THE ADDITION OF RS.1 86 05 767/- CLAIMED AS INTEREST PAID WITHOUT CONSIDERING THAT ENTIRE BOR ROWED MONEY WAS UTILIZED FOR MAKING INVESTMENTS IN SHARES OF COMPANIES SO INTEREST PAID ON SUCH BORROWED MONEY IS AN INADMISSIBLE EXPENSE AS PER PROVISION OF SEC. 36(1)(III). 2 3. GROUND NOS. 1 & 2 ARE FOR ALLOWING THE DEDUCTION FOR RS.94 70 151 WHICH IS A PROVISION FOR NON-PERFORMING ASSETS. 4. WHILE PLEADING ON BEHALF OF THE REVENUE THE LE ARNED D.R. SUBMITTED THAT THE ISSUE REGARDING THE ALLOWABILITY FOR PROVISION OF NON-PERFORMING ASSETS HAS BEEN SETTLED BY THE DECISION OF THE HONBLE SUPR EME COURT IN THE CASE OF SOUTHERN TECHNOLOGIES LTD. VS JOINT COMMISSIONER OF INCOME TAX (320 ITR 577) (SC) WHERE THE HONBLE SUPREME COURT HELD A S UNDER : WHILE COMPUTING THE PROFITS AND GAINS UNDER SE CTIONS 28 TO 43D OF THE INCOME TAX ACT 1961 OF A NON-BANKING FINANCIAL COMPANY THE DEPARTMENT IS ENTITLED TO TREAT THE PROVISION FOR NON-PERF ORMING ASSETS WHICH IN TERMS OF THE NON-BANKING FINANC IAL COMPANIES PRUDENTIAL NORMS (RESERVE BANK) DIRECTIONS 1998 IS DEBITED TO THE PROFIT AND LOSS ACCOUNT AS INCOME U/S 2(24) OF THE ACT. THE NON-BANKING FINANCIAL COMPANIES PRUDENTIAL NORM S (RESERVE BANK) DIRECTIONS 1998 ARE ONLY DISCLOSURE NORMS THEY HAVE NOTHING TO DO WITH THE COMPUTATION OF TOTAL TAXABLE INCOME UNDER THE INCOME-TAX ACT 1961 OR WITH ACCOUNTING TREATMENT. THE DIRECTIONS ONLY LAY DOWN THE MANNER OF PRESENTATION OF NPA (NON-PERFORMING ASSETS) IN THE BALANCE SHEET OF A NON- BANKING FINANCIAL COMPANY. THE OBJECT OF THE DIRECTIONS THAT NON-BANKING FINAN CIAL COMPANIES HAVE TO ACCEPT THE CONCEPT OF INCOM E EVOLVED BY THE RESERVE BANK OF INDIA AFTER DEDUCTIN G PROVISION AGAINST NON-PERFORMING ASSETS IS ONLY DISCLOSURE AND PROVISIONING AND SUCH TREATMENT IS C ONFINED TO PRESENTATION/DISCLOSURE AND HAS NOTHING TO DO WITH COMPUTATION OF TAXABLE INCOME UNDER THE INCOME -TAX ACT. PROVISION FOR NON-PERFORMING ASSETS IN TERMS OF THE DIRECTIONS OF THE RESERVE BANK OF INDI A DOES NOT CONSTITUTE EXPENSE ON THE BASIS OF WHI CH DEDUCTION CAN BE CLAIMED BY THE NON-BANKING FINANCI AL COMPANIES UNDER SECTION 36(1)(VII) OF THE ACT. THE BASIS OF EVERY BUSINESS IS THAT ANTICIPAT ED LOSSES MUST BE TAKEN INTO ACCOUNT BUT EXPECTED INCOME NEED NOT BE TAKEN NOTE OF . THIS IS THE BAS IS OF THE NON-BANKING FINANCIAL COMPANIES PRUDENTIA L NORMS (RESERVE BANK) DIRECTIONS 1998 AS IT IS CLOSER TO THE REALITY OF CASH LIQUIDITY THAT PREVENTS NON-BANKING FINANCIAL COMPANIES FROM COLLAPSE. IN 1989 BY THE INSERTION OF A NEW EXPLANATION IN SE CTION 36(1)(VII) OF THE INCOME-TAX ACT 1962 A DICHOTOMY WAS BROUGHT IN AND IT HAS BEEN CLARIFIED THAT ANY BAD DEBT WRITTEN OFF AS IRRECOVERABLE IN T HE ACCOUNTS OF THE ASSESSEE WILL NOT INCLUDE ANY PROVI SION FOR BAD AND DOUBTFUL DEBTS MADE IN THE ACCOUNT S OF THE ASSESSEE. IF AN ASSESSEE DEBITS AN AMOUNT OF DO UBTFUL DEBT TO THE PROFIT AND LOSS ACCOUNT AND CRED ITS THE ASSET ACCOUNT LIKE THE SUNDRY DEBTORS ACCOUNT IT W OULD CONSTITUTE A WRITE-OFF OF AN ACTUAL DEBT. HOWE VER F AN ASSESSEE DEBITS PROVISION FOR DOUBTFUL DEBTS T O THE PROFIT AND LOSS ACCOUNT AND MAKES A CORRESPON DING CREDIT TO THE CURRENT LIABILITIES AND PROVISIONS ON THE LIABILITIES SIDE OF THE BALANCE SHEET THEN IT WOULD CONSTITUTE A PROVISION FOR DOUBTFUL DEBT. IN THE LA TTER CASE THE ASSESSEE WOULD NOT BE ENTITLED TO DED UCTION AFTER APRIL 1 1989. THE INCOME-TAX IS A TAX ON REAL INCOME I.E. THE PROFITS ARRIVED AT ON COMMERCIAL PRINCIPLES SUBJECT TO THE PROVISIONS OF THE ACT. THEREFORE IF BY THE EXPLANATION TO SECTION 36(1)(VII) A PROVISI ON FOR DOUBTFUL DEBT IS KEPT OUT OF THE AMBIT OF BAD DEBT WHICH IS WRITTEN OFF THEN ONE HAS TO TAKE INTO ACC OUNT THE EXPLANATION IN COMPUTING THE TOTAL INCOME UNDER THE INCOME-TAX ACT FAILING WHICH ONE CANNOT ASCERTAIN THE REAL PROFITS. THE PROVISION FOR NON-PERFORMING ASSE TS DEBITED IN THE PROFIT AND LOSS ACCOUNT UNDER THE RESERVE BANK DIRECTIONS OF 1998 IS ONLY A NOTIONAL EXPENSE AND THEREFORE THERE WOULD BE ADD BACK TO THAT EXTENT IN THE COMPUTATION OF TOTAL INCOME UNDER T HE INCOME TAX ACT. SECTION 37 APPLIES ONLY TO ITEMS WHICH DO NOT FALL IN SECTIONS 30 TO 36. IF A PROVISION FOR DOUBTFUL DEBTS IS EXPRESSLY EXCLUDED FROM SECTION 36(1)(VII) THEN SUCH A PROVISION CANNOT COME UNDER SECTION 37 EVEN ON THE BASIS OF THE REAL INCOME THEORY. 3 IT IS TRUE THAT UNDER PART L OF SCHEDULE VI TO THE COMPANIES ACT 1956 AN AMOUNT COULD BE FIRST INCLUDED IN THE LIST OF SUNDRY DEBTORS/LOANS AND TH EN DEDUCTED FROM THE LIST AS PROVISION FOR DOUBTFU L DEBTS. HOWEVER THESE ARE MATTERS OF PRESENTATI ON OF PROVISIONS FOR DOUBTFUL DEBTS EVEN UNDER THE COMPANIES ACT AND HAVE NOTHING TO DO WITH TAXABILIT Y UNDER THE INCOME-TAX ACT. BROADLY THERE ARE THREE DEVIATIONS BETWEEN THE DIR ECTIONS OF THE RESERVE BANK OF INDIA OF 1998 AND THE COMPANIES ACT: (I) IN THE MATTER OF PRESENT ATION OF FINANCIAL STATEMENTS UNDER SCHEDULE VI TO THE COMPANIES ACT; (II) IN NOT RECOGNIZING THE INCOME UNDER THE MERCANTILE SYSTEM OF ACCOUNTING AND INSISTING ON FOLLOWING THE CASH SYSTEM WITH RESPECT TO ASSETS CLASSIFIED AS NON PERFORMING ASSETS AS PER ITS NORMS ; AND (III) IN CREATING A PROVISION FOR ALL N ON-PERFORMING ASSETS SUMMARILY AS AGAINST CREATING A PROVISION ONLY WHEN THE DEBT IS DOUBTFUL OF RECOVER Y UNDER THE NORMS OF ACCOUNTING STANDARDS ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA. THE COMPANIES ACT ALLOWS A NON-BANKING FINANCIAL CO MPANY TO ADJUST A PROVISION FOR POSSIBLE DIMINUTION IN THE VALUE OF AN ASSET OR PROVISION FO R DOUBTFUL DEBTS AGAINST THE ASSETS AND ONLY THE NE T FIGURE IS ALLOWED TO BE SHOWN IN THE BALANCE SHEET AS A MA TTER OF DISCLOSURE. HOWEVER THE DIRECTIONS OF 1998 MANDATE ALL NON-BANKING FINANCIAL COMPANIES TO SHOW THE SAID PROVISIONS SEPARATELY ON THE LIABILITIES SIDE OF THE BALANCE SHEET UNDER THE HEAD CURRENT LIABIL ITIES AND PROVISIONS. THE PURPOSE OF THIS DEVIATIO N IS TO INFORM THE USER OF THE BALANCE SHEET OF PARTICULARS CONCERNING THE QUANTUM AND QUALITY OF THE DIMINUTI ON IN THE VALUE OF INVESTMENT AND PARTICULARS OF DOUBTFUL AND SUB-STANDARD ASSETS. SIMILARLY THE 1998 DIRECT IONS DO NOT RECOGNIZE INCOME UNDER THE MERCANTILE SYST EM AND INSIST THAT NON-BANKING FINANCIAL COMPANIES SHOULD FOLLOW THE CASH SYSTEM IN REGARD TO SUCH INC OMES. THE NATURE OF EXPENDITURE UNDER THE INCOME-TAX ACT CANNOT BE CONCLUSIVELY DETERMINED BY THE MANNER IN WHICH ACCOUNTS ARE PRESENTED IN TERMS OF THE 1998 DIRECTIONS. THOUGH THEY DEVIATE FROM ACCOUNTING PRACTICE AS PROVIDED IN THE COMPANIES AC T THEY DO NOT OVERRIDE THE PROVISIONS OF THE INCOM E- TAX ACT. PROVISION FOR NON-PERFORMING ASSETS IN TERMS OF THE DIRECTIONS OF 1998 DOES NOT CONSTITUTE EXPENSE ON THE BASIS OF WHICH DEDUCTION CAN BE CLAIMED UNDE R SECTION 36(1)(VII) OF THE INCOME-TAX ACT. IT IS VERY CLEAR THAT THE RESERVE BANK OF INDIA DIR ECTIONS OF 1998 ARE MERELY PRUDENTIAL NORMS REGARDING PRESENTATION OF THE NON-PERFORMING ASSETS PROVISION IN THE BALANCE SHEET : THEY DO NOT TOUCH UPON THE NATURE OF THE EXPENSE TO BE DECIDED BY THE ASSE SSING OFFICER IN THE ASSESSMENT PROCEEDINGS UNDER T HE INCOME-TAX ACT. RISK IS ONE OF THE MAIN CONCERNS WHICH THE RESERVE BANK OF INDIA HAS TO ADDRESS WHEN IT COMES TO NON-BANKING FINANCIAL COMPANIES. NON-BANKING FIN ANCIAL COMPANIES ACCEPT DEPOSITS FROM THE PUBLIC FO R WHICH TRANSPARENCY IS THE KEY. HENCE WE HAVE THE R ESERVE BANK OF INDIA DIRECTIONS/NORMS. ON THE OTHER HAND AS FAR AS BANKING GOES THE WEIGHTAGE ONE MUST PLACE ON IS LIQUIDITY. THESE TWO CONCEPTS VIZ. RISK AND LIQUIDITY BRING THE BASIC DIFFERENCE B ETWEEN NON-BANKING FINANCIAL COMPANIES AND BANKS. IN A CHALLENGE TO THE VALIDITY OF A TAXING ENACTMEN T THE COURT SHOULD GIVE SOME LATITUDE TO THE LAW- MAKERS IN ENACTING LAWS WHICH IMPOSE REASONABLE RES TRICTIONS UNDER ARTICLE 19(6) OF THE CONSTITUTION O F INDIA. THE RESTRICTIONS F ANY PLACED ON NON-BANKING FINANCIAL COMPANIES UNDER SECTION 36(1)(VIIA) OR U NDER SECTION 43D SATISFY THE PRINCIPLE OF REASONABLE JU STIFICATION. DECISION OF THE MADRAS HIGH COURT IN SOUTHERN TECHN OLOGIES LTD. V. JOINT CIT [2008] 296 1TR 514 AFFIRMED. 5. THE LEARNED A.R. WAS ALSO HAVING ANY CONTRARY V IEW IN THIS REGARD. 6. AFTER HEARING BOTH THE SIDES AND KEEPING IN VI EW THE DECISION OF THE HONBLE SUPREME COURT WHICH IS CLEARLY APPLICABLE TO THE ISSUE WE SET ASIDE THE ORDER OF THE CIT(A) ON THIS ISSUE AND RESTORE T HE ORDER OF THE A.O. FOR DISALLOWING THE PROVISION FOR NON-PERFORMING AS SETS. IN THE RESULT GROUND NOS. 1 & 2 OF THE REVENUES APPEAL ARE ALLOWED. 4 7. GROUND NOS. 3 IS RELATING TO THE DELETION OF A DDITION OF RS.45 LAKHS ON ACCOUNT OF INTEREST PAID BY THE ASSESSEE. THE A. O. HELD THAT THIS PERTAINS TO THE PRIOR PERIOD AND NOT ALLOWABLE. THE CIT(A) HAS AL LOWED THE SAME. 8. GROUND NO. 4 RELATES TO THE DISALLOWING INTE REST OF RS.1 86 05 767 TREATING THE SAME THAT THE ASSESSEE HAD MADE INVE STMENTS IN SHARES FROM THE BORROWED FUNDS AND THE EXPENSES ARE INADMISSIBLE AS PER THE PROVISIONS OF SECTION 36(1)(III). THE CIT(A) DELETED THE ADDIT ION BY HOLDING AS UNDER : I HAVE GONE THROUGH THE SUBMISSIONS OF THE APPEL LANT AND ALSO THE ORDER OF THE A.O. THE A.O. IN PARA-2 OF HIS ASSES SMENT ORDER OBSERVED THAT SECTION 36 OF INCOME TAX ACT ALLOWS DEDUCTIO NS FOR ALLOWANCE IN RESPECT OF THE MATTERS DEALT WITH THEREIN IN CO MPUTING INCOME REFERRED TO SECTION 28. THE ASSESSEE CLAIMED A INCOME U/S 4 5 AND SINCE THE INCOME WAS NOT OFFERED U/S 28 THUS THE ENTIRE INTEREST EXPENDITURE OF RS.2 31 05 767/- IS DISALLOWED AS NOT COVERED U/S 36(1)(III). THE APPELLANT SUBMITTED THAT THE ENTIRE INVESTMENTS HELD BY TH E APPELLANT AS ON 31.03.2005 WERE MADE DURING THE PREVIOUS YEAR. AS SEEN FROM THE AUDITED ACCOUNTS OF THE APPELLANT FOR YEAR ENDED 31.3.20 04 AND 31.3.2005 THERE WAS A NET DECREASE IN THE INVESTMENTS DURING THE PREVIOUS YEAR ENDED 31.3.2005. THERE WAS ALSO A NET DECREASE IN THE IN TEREST BEARING BORROWED FUNDS DURING THE PREVIOUS YEAR ENDED 3 1.3.2005. THEREFORE THE ARGUMENT OF THE A.O. THAT THE ENTIRE BORROWED F UNDS WERE USED FOR MAKING INVESTMENTS IN SHARES AND THEREFORE INT EREST CANNOT BE ALLOWED DOES NOT HOLD GOOD [BASED ON FACTS]. SIMILARLY THE DISALLOWANCE OF RS.45 LACS ON THE GROUNDS THAT THE SAID AMOUNT REPRESENTED INTEREST RELATING TO THE PRI OR PERIOD HAS BEEN CONTESTED BY THE LD. A.R. THE APPELLANT SUBMITTED THAT THE FACTS RELATING TO THIS ISSUE WERE THE SAME AS IN THE EARLIER ASSESSME NT YEAR AND THE IDENTICAL ISSUE OF ALLOWABILITY OF INTEREST WAS DECIDED BY T HE [INTEREST ON LOAN TAKEN FROM M/S EVERADY INDUSTRIES LIMITED] HONBLE ITAT KOLKATA IN IT ORDER DATED 20.12.2007 IN ITA NO.2165/KOL/2007 IN FAVOUR OF THE APPELLANT. I AM CONVINCED WITH THE SUBMISSIONS OF THE APPELLANT AND ALSO FOLLOWING THE DECISION OF THE ITAT IN APPELLANTS OWN CASE IN ITA NO. 2165 AND ALSO MY PREDECESSORS ORDER FOR THE ASSESSMENT YEAR 2004-0 5 IN APPEAL NO. 127/CIT(A)-VI/06-07/CIR.-6 DATED 12.06.2008 THE AD DITION OF RS.2 31 05 767/- IS DELETED. THESE GROUNDS OF APP EAL ARE ALLOWED. 9. THE LEARNED D.R. RELIED ON THE ORDER OF THE A.O. 10. ON THE OTHER HAND THE LEARNED A.R. SUBMITTED THAT THE ISSUE REGARDING THE PRIOR PERIOD EXPENSES UNDER THE HEAD INTEREST IS COVERED IN THE ASSESSEES OWN CASE BY THE DECISION OF THE HONBLE I.T.A.T. FOR THE ASSESSMENT YEAR 2003- 5 04 IN ITA NO. 2165(KOL)/07 DATED 20 TH DECEMBER 2007 WHERE THE HONBLE I.T.A.T. HAS HELD AS UNDER : HEARD THE PARTIES PERUSED THE RECORDS AND CONSIDE RED THE CASE LAWS CITED BY THE LD. AUTHORISED REPRESENTATIVE OF THE A SSESSEE. WE FIND THAT THE REVENUE HAS NOT DISPUTED THE ALLOWABILITY OF THE E XPENSES INCURRED BY THE ASSESSEE. DURING THE EARLIER YEAR THE ASSESSEE N EITHER PROVIDED NOR CLAIMED THESE EXPENSES AS IT WAS NEGOTIATING WITH THE LOAN CREDITORS TO REDUCE THE INTEREST LIABILITY. THIS FACT WAS NOT DISPUTED BY THE REVENUE AUTHORITIES AT ANY STAGE. THIS FACT IS ALSO BORNE OUT FROM THE RECORDS LIKE AUDIT REPORT P & L ACCOUNT ETC. WE FIND THAT THE HONBLE BOMBAY HIGH COURT HAD HELD THAT WHERE A LIABILITY ARISING OUT O F A CONTRACTUAL OBLIGATION IS DISPUTED THE ASSESSEE IS ENTITLED IN THE ASSES SMENT YEAR RELEVANT TO THE PREVIOUS YEAR IN WHICH THE DISPUTE IS FINALLY ADJU DICATED UPON OR SETTLED TO CLAIM A DEDUCTION IN THAT BEHALF. IN VIEW OF TH E ABOVE WE ARE OF THE CONSIDERED OPINION THAT THE DISALLOWANCE OF RS.63 00 000/- MADE BY THE ASSESSING OFFICER AND CONFIRMED BY THE LD. CIT(A ) IS HEREBY DELETED. THEREFORE THE APPEAL OF THE ASSESSEE IS ALLOWED. IN THE RESULT THE APPEAL OF THE ASSESSEE IS ALLOWE D. HE FURTHER PLEADED THAT THIS ORDER HAD ALSO BEEN CONFIRMED BY THE HONBLE KOLKATA HIGH COURT IN THE ORDER DATED 13 TH MARCH 2009 WHERE THE HONBLE HIGH COURT HAS HELD AS UNDER : THE COURT :- THIS APPLICATION HAS BEEN FILED FOR CONDONATION OF DELAY OF 273 DAYS. NO EXPLANATION HAS BEEN GIVEN IN THE P ETITION WHICH COULD BE TREATED AS SUFFICIENT CAUSE TO CONDONE THIS DELAY . HENCE WE DO NOT FIND ANY REASON THAN TO DISMISS THIS APPLICATION FOR CONDONATION OF DELAY. PERUSED THE ORDER PASSED BY THE LD. TRIBUNAL AS ALSO THE PETITION FOR ADMISSION OF APPEAL. IN OUR CONSIDERED OPINION NO SUBSTANTIAL QUESTION OF LAW IS INVOLVED TO ADMIT THIS APPEAL. HENCE T HE APPEAL IS ALSO DISMISSED. ALL PARTIES CONCERNED ARE TO ACT ON A XEROX SIGNE D COPY OF THIS ORDER ON THE USUAL UNDERTAKINGS. URGENT XEROX CERTIFIED COPY OF THIS ORDER IF A PPLIED FOR BE SUPPLIED TO THE PARTIES SUBJECT TO COMPLIANCE WITH ALL REQU ISITE FORMALITIES. THUS THE ISSUE INVOLVED IN GROUND NO. 3 IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE HONBLE HIGH COURT. HENCE WE DI SMISS THIS GROUND OF REVENUES APPEAL. 6 11. IN RESPECT OF THE DISALLOWANCES ON ACCOUNT OF INTEREST RELATING TO INVESTMENT IN THE SHARES THE D.R. PLEADED THAT TH IS ISSUE IS COVERED AGAINST THE ASSESSEE IN THE ASSESSEES OWN CASE BY THE DECISION OF THE HONBLE I.T.A.T. IN ITA NO. 1609(KOL)/2008 DATED 29 TH MAY 2009. HE PLEADED THAT THE DISALLOWANCES OF RS.1 86 05 767 IS FACTUALLY AND LEGALLY JUSTIFIE D. THE A.O. HAS MADE THE ADDITION BY HOLDING THAT THE ASSESSEE COMPANY HA S TAKEN LOAN FROM THE COMPANIES AND HAS INVESTED THE SAME IN THE SHARES OF THE COMPANY AND MUTUAL FUNDS. THE INCOME IS OFFERED U/S 45 OF THE I.T.ACT AND NOT U/S 28 OF THE I.T.ACT OR SAY AS BUSINESS INCOME. THEREFORE INTEREST CAN NOT BE ALLOWED U/S 36(1)(III) . THE LEARNED A.R. PLEADED THAT THE ASSESSEE IS A N ON-BANKING FINANCIAL COMPANY CARRYING ON THE BUSINESS OF INVESTMENT ON SHARES AN D SECURITIES SINCE ITS INCEPTION AND IN ALL THE YEARS INTEREST IS BEING ALLOWED . T HE INVESTMENTS HELD BY THE ASSESSEE AS ON 31.3.05 WERE MADE IN THE EARLIER Y EARS. THUS THE BORROWINGS WERE NOT MADE DURING THE PREVIOUS YEAR RELEVANT TO T HE ASSESSMENT YEAR UNDER CONSIDERATION. BY COMPARING THE BALANCE SHEETS AS ON 31.3.05 WITH THE BALANCE SHEET AS ON 31.3.04 IT CAN BE SEEN THAT THERE IS A DECREASE IN THE INVESTMENT DURING THE YEAR. SIMILARLY THERE WAS A DECREASE IN THE N ET INTEREST PAID ON THE BORROWINGS. THUS THERE WAS A NET DEDUCTION IN T HE INVESTMENTS AND ALSO REDUCTION IN THE INTEREST PAID . THE ASSESSEE HAS BEEN ALLOWED THE INTEREST IN EARLIER YEARS ALSO. THUS THE A.O. SHOULD NOT HAVE DEVIATED FROM THE SAME. HE ALSO RELIED ON THE DECISION OF THE HONBLE SUPREM E COURT IN THE CASE OF RADHASOAMI SATSANG VS CIT 193 ITR 321 (SC) W HERE THE HONBLE SUPREME COURT HAS HELD AS UNDER : WHERE A FUNDAMENTAL ASPECT PERMEATING THROUGH T HE DIFFERENT ASSESSMENT YEARS HAS BEEN FOUND AS A FACT ONE WA Y OR THE OTHER AND THE PARTIES HAVE ALLOWED THAT POSITION TO BE SUSTAINE D BY NOT CHALLENGING THE ORDER IT WOULD NOT BE AT ALL APPROPRIATE TO ALL OW THE POSITION TO BE CHANGED IN A SUBSEQUENT YEAR. HE PLEADED THAT THE I.T.A.T. DECISION IN THE AS SESSEES OWN CASE FOR THE A.Y. 2004-05 SHOULD NOT BE MADE APPLICABLE. HE PLEADED TO DISMISS THE REVENUES APPEAL ON THIS ISSUE. 7 12. AFTER HEARING BOTH THE SIDES AND AFTER CAREFUL PERUSAL OF MATERIALS PLACED BEFORE US ON THIS ISSUE WE HOLD THAT THE ISSUE IS COVERED BY THE DECISION OF THE I.T.A.T. IN THE ASSESSEES OWN CASE IN THE ASSESSME NT YEAR 2004-05 WHERE THE ITAT HELD AS UNDER : IN RESPECT OF GROUND NO. 2 BRIEF FACTS OF THE CAS E ARE THAT THE A.O. MADE A DISALLOWANCE OF RS. 12 11 200/- OUT OF THE INTEREST CLAIMED AS A DEDUCT ION ON THE GROUND THAT THERE HAS BEEN AN INCREASE I N THE BORROWED FUNDS AND THAT THE SAME WAS UTILIZED FOR A CQUIRING SHARES AND SECURITIES HELD AS INVESTMENTS AND AS SUCI THE CLAIM OF INTEREST WAS NOT ALLOWABLE U/S 36(1)(III) AS REVENUE EXPENSES FOR THE PURPOSE OF BUSINESS. AGGRIEVED BY THIS ORDER THE ASSESSEE PRE FERRED APPEAL BEFORE THE LD. CIT(A). THE LD. CIT(A) IN APPEAL OBSERVED THAT THE DISALLOWANCE MADE BY THE A.O ALLEGING THAT THE BORROWED FUNDS WERE USED FOR NON-BUSINESS PURPOSES WAS NOT CORRECT AND THE ESTIM ATED DISALLOWANCE MADE BY THE A.O OUT OF INTEREST O F RS.12 1 1 200/- MADE IN THE ASSESSMENT BE DELETED. AGGRIEVED BY THE SAID ORDER THE REVENUE IS NOW IN APPEAL BEFORE US. AT THE TIME OF HEARING BEFORE US THE LD. D.R. REL IED ON THE ORDER OF THE A.O. AND SUBMITTED THAT THE AO WAS RIGHT IN DISALLOWING A SUM OF RS.12 1 1 200/- OUT OF THE INTEREST CLAIMED AS A DEDUCTION OF THE GROUND THAT THERE HAS BEEN AN INCREASE IN THE BORRO WED FUNDS AND THAT THE SAME WAS UTILIZED FOR ACQUIR ING SHARES AND SECURITIES HELD AS INVESTMENTS AND AS SU CH THE CLAIM OF INTEREST WAS NOT ALLOWABLE U/S. 36( 1)(II) AS REVENUE EXPENSES FOR THE PURPOSE OF BUSINESS. HE THEREFORE URGED BEFORE THE BENCH TO CONFIRM THE ACTION OF THE A.O. ON THE OTHER HAND THE LD. COUNSEL FOR THE ASSESSE E RELIED ON THE ORDER OF THE LD. CIT(A) AND SUBMITTED THAT IN THE IMMEDIATE PRECEDING AY I.E. 2 003-04 THERE WAS AN INCREASE IN UNSECURED LOANS TA KEN AND THERE WAS ALSO AN INCREASE IN INVESTMENTS IN SH ARES AND SECURITIES AND LOANS AND ADVANCES AND THE SAME POSITION WAS ACCEPTED AND NO DISALLOWANCE OUT OF IN TEREST PAID WAS MADE. HE ALSO SUBMITTED THAT THE ESTIMATED DISALLOWANCE OUT OF THE TOTAL INTEREST MA DE BY THE A.O. INCLUDED THE PRIOR PERIOD INTEREST W HICH WAS SEPARATELY DISALLOWED IN THE ASSESSMENT. HE ALS O POINTED OUT THAT THE AO HAS ACCEPTED THAT THE ASS ESSEE IS A NBFC AND BEING A NBFC THE ASSESSEE CARRIES ON THE BUSINESS OF INVESTMENTS IN SHARES AND SECURITIE S AS WELL AS GRANTING OF LOANS AND ADVANCES. HE THEREFO RE JUSTIFIED THE ACTION OF THE LD. CIT(A) AND PRAY ED BEFORE THE BENCH TO CONFIRM THE SAME. AFTER HEARING THE RIVAL SUBMISSIONS AND PERUSING T HE MATERIAL AVAILABLE ON RECORD WE FIND THAT THE LD. CIT(A) HAS GIVEN RELIEF TO THE ASSESSEE BY SIMP LY ACCEPTING THE SUBMISSIONS OF THE ASSESSEE MADE BEFORE HIM. THE ASSESSEE IN HIS SUBMISSIONS HAS NOT BEEN ABLE TO REBUT THE FINDING OF THE A.O. THAT INCREASED BORROWED FUND DURING THE YEAR WAS UTILIZE D BY THE ASSESSEE IN THE INVESTMENT OF SHARES WHICH WERE NOT HELD BY THE ASSESSEE AS ITS STOCK IN TRADE BUT WERE HELD AS LONG TERM OR SHORT TERM CAPITAL A SSETS. HENCE THE INTEREST PAID ON THE BORROWED FUNDS FOR MAKING INVESTMENT IN THE SHARES CANNOT BE SAID TO B E EXPENSES INCURRED BY THE ASSESSEE FOR BUSINESS PURP OSES AS PER THE PROVISIONS OF SECTION 36(I)(III) OF THE ACT. WE FURTHER FIND THAT THE A.O. WHILE MAKING THI S ADDITION HAS OBSERVED THE FOLLOWING IN HIS ASSESS MENT ORDER WHICH REMAINED UNCONTROVERTED BEFORE THE LD. CIT(A) AS WELL AS BEFORE US.: 0UT OF THE INCREASE IN ICDS BY 2.95 CRORES EVEN W E TAKE THAT 1.29 CRORES WAS UTILIZED TOWARDS LOANS AND ADVANCES THE BALANCE RS. 1.66 CRORES WAS DIVERTED TOWARDS INVESTMENTS. THIS IS SUPPORTED BY THE OPENING COMMENTS OF THE AUDITOR IN PARA 17 TO THE AUDITED ACCOUNTS OF THE COMPANY WHEN THE AUDITOR REMARKED THAT FUNDS RAISE D ON SHORT TERMS BASIS WAS UTILIZED FOR LONG TERM INVESTMENTS. DURING THE YEAR THE ASSESSEE PAI D RS. 5.73 CRORES AS INTEREST AT AN AVERAGE RATE OF 7.3% ON ITS ICDS. THUS APPLYING THE SAME RATE ON RS..1.66 CRORES INTEREST OF RS.12 11 200/- IS ASSESSED AS USED FOR THE PURPOSE OF LONG TERM INVES TMENTS AND DISALLOWED NOT BEING ALLOWABLE U/S. 36(1) (III) AS REVENUE EXPENSES FOR THE PURPOSE OF BUSINESS. IN VIEW OF THE ABOVE WE SET ASIDE THE ORDER PASSED BY THE LD. CIT(A) AND RESTORE THE ORDER OF THE A. O. THEREFORE THIS GROUND OF APPEAL OF THE REVENUE IS ALLOWED. THE FACT REMAINS THAT THE BORROWED FUNDS ON WHIC H INTEREST PAID DURING THE YEAR WAS CONTINUED TO BE INVESTED IN SHARES AND MUTU AL FUNDS WHICH ARE HELD BY THE ASSESSEE AS INVESTMENTS. THE ASSESSEES PLEA THAT NO NEW BORROWINGS MADE 8 DURING THE YEAR AND THERE IS FALL IN THE BORROW INGS AND INVESTMENTS SHALL NOT CHANGE THE BASIC ISSUE THAT INTEREST HAD BEEN PA ID ON BORROWED FUND WHICH CONTINUES TO BE INVESTED IN SHARES AND MUTUAL FUND S AS INVESTMENTS . THUS WE HOLD THAT THE CIT(A) IS NOT JUSTIFIED IN DELETIN G THE ADDITION . WE SET ASIDE THE ORDER OF THE CIT(A) AND RESTORE THE ORDER OF THE A .O. ON THIS ISSUE. 13. IN THE RESULT THE REVENUES APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 21.05.2010 SD/- SD/- (D.K.TYAGI ) (B.C.MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 21.05.2010 COPY FORWARDED TO :- 1) ITO WARD 6(3) KOLKATA. 2) M/S OFF SHORE INDIA LTD. 31 N.S.ROAD 4 TH FLOOR KOLKATA. 3) CIT(A) KOLKATA. 4) CIT KOLKATA. 5) D.R. ITAT KOLKATA. BY ORDER TRUE COPY ASSISTANT REGISTRAR I.T.AT. KOLKATA. BCD