The ACIT, 2 (1), UJJAIN v. M/s Trapti Trading & Investment Pvt Ltd, Nagda

ITA 288/IND/2008 | misc
Pronouncement Date: 16-09-2011 | Result: Partly Allowed

Appeal Details

RSA Number 28822714 RSA 2008
Assessee PAN AABCT6006B
Bench Indore
Appeal Number ITA 288/IND/2008
Duration Of Justice 110 year(s) 8 month(s) 15 day(s)
Appellant The ACIT, 2 (1), UJJAIN
Respondent M/s Trapti Trading & Investment Pvt Ltd, Nagda
Appeal Type Income Tax Appeal
Pronouncement Date 16-09-2011
Appeal Filed By Department
Order Result Partly Allowed
Bench Allotted DB
Tribunal Order Date 16-09-2011
Assessment Year misc
Appeal Filed On 01-01-1901
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL INDORE BENCH INDORE BEFORE SHRI JOGINDER SINGH J.M. AND SHRI R.C.SHARM A A.M. PAN NO. : AABCT6006B I.T.A.NO. 287/IND/2008 514/IND/2009 288/IND/2008 & 157/IND/2009 A.YS. : 2001-02 2002-03 2004-05 & 2005-06 ASSISTANT COMMISSIONER OF INCOME-TAX M/S. TRAPTI TRADING & INVESTMENT PVT.LTD. 2(1) VS BIRLAGRAM APEX BANK BHAWAN BHARATPURI UJJAIN NAGDA JUNCTION DISTRICT UJJAIN. APPELLANT RESPONDENT APPELLANT BY : SHRI ARUN DEWAN SR. DR RESPONDENT BY : SHRI YOGESH A. THAR AND SHRI AMRITLAL JAIN CAS DATE OF HEARING : 20.07.2011 DATE OF PRONOUNCEMENT : 16.09.2011 -: 2: - 2 O R D E R PER R. C. SHARMA A.M. THESE ARE THE APPEALS FILED BY THE REVENUE AGAINST THE ORDER OF CIT(A) FOR THE ASSESSMENT YEARS 2001-02 2 002-03 2004-05 AND 2005-06. 2. AS COMMON GROUNDS ARE INVOLVED ALL THE APPEALS WER E HEARD TOGETHER AND ARE NOW BEING DECIDED BY THIS CO NSOLIDATED ORDER. 3. FIRST COMMON ISSUE RELATES TO DELETING ADDITION OF RS. 14 94 000/- IN THE ASSESSMENT YEAR 2001-02 IN RESPE CT OF LOSS CLAIMED ON FORFEITURE OF SHARES BY THE ISSUING COMP ANY. THIS LOSS WAS NOT ALLOWED BY AO AND ADDED IN ASSESSEES INCOME. 4. BY THE IMPUGNED ORDER THE LD. CIT(A) DELETED THE ADDITION AFTER HAVING THE FOLLOWING OBSERVATIONS :- 1.2 I HAVE GONE THROUGH THE FINDINGS OF THE AO AS WELL AS THE CONTENTIONS MADE BY THE A/R FOR THE APPELLANT. NO DOUBT THE APPLICATION OF EXPLANATION TO SECTION 73 IS WHEN THERE IS PURCHASE AND SALE OF -: 3: - 3 SHARES. IN THE INSTANT CASE THE LOSS OF RS. 14 94 000/- IS CLAIMED TO BE ON ACCOUNT OF FORFEITU RE OF SHARES BY THE ISSUING COMPANY ITSELF I.E. M/S. EASTERN SHIPPING MILLS & INDUSTRIES LIMITED. THE APPELLANT WAS ASKED TO FURNISH COMPLETE DETAILS OF TRANSACTION ALONGWITH THE CORRESPONDENCES REGARDING NOTICE FOR CALL MONEY AND FORFEITURE OF T HE SHARES. THE APPELLANT FILED COPIES OF NOTICE FOR CA LL MONEY DATED 15 TH OCTOBER 1999 FIRST REMINDER DATED 25.11.99 SECOND REMINDER DATED 14.02.00 FORFEITURE NOTICE FOR NON PAYMENT OF CALL MONEY DATED 7.3.00 AND FINAL FORFEITURE NOTICE DATED 5.4. 00 AND FINALLY FORFEITURE OF SHARES VIDE LETTER DATED 26.4.00. ON CONSIDERATION OF THESE EVIDENCES IT IS PROVED BEYOND DOUBT THAT THE APPELLANT FAILED TO PA Y THE CALL MONEY THEREFORE THE PURCHASE OF SHARES WAS NOT MATERIALIZED. THE REASON FOR NON PAYMENT OF CALL MONEY WAS DECLINE IN MARKET VALUE OF THE SHARE. THEREFORE IT WAS IN THE INTEREST OF THE APPELLANT COMPANY NOT TO PAY CALL MONEY AND BEAR -: 4: - 4 THE LOSS ON ACCOUNT OF PAYMENTS ALREADY MADE. ALL THESE FACTS INDICATE THAT THE TRANSACTION IS NOT IN THE NATURE OF SPECULATION BECAUSE IN THAT CASE THER E IS NO INTENTION EITHER TO PURCHASE OR SALE THE COMMODITY BUT TO EARN PROFIT/LOSS ONLY. MOREOVER THE MAIN INCOME OF THE COMPANY IS FROM DIVIDEND INTEREST ON LONG TERM INVESTMENTS INTEREST ON LOAN S AND ADVANCES ETC. AS GIVEN IN PARA -1(B) ABOVE. O N CONSIDERATION OF ALL THESE FACTS THE ADDITION MADE BY THE ASSESSING OFFICER IS NOT JUSTIFIED THEREFORE THE ADDITION OF RS. 14 94 000/- IS DELETED. 5. WE HAVE CONSIDERED THE RIVAL CONTENTIONS CAREFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. T HE AO HAS DISALLOWED LOSS ON FORFEITURE OF SHARES BY TREATING THE SAME AS SPECULATION LOSS. WE HAD GONE THROUGH THE COMPOSITI ON OF INCOME OF THE ASSESSEE AND FOUND THAT THE ASSESSEE IS NOT FALLING UNDER EXPLANATION TO SECTION 73 OF THE INCO ME-TAX ACT 1961. THEREFORE THERE IS NO REASON TO TREAT SUCH L OSS AS SPECULATION LOSS. SIMILAR ISSUE HAS BEEN DECIDED BY THE TRIBUNAL IN THE CASE OF M/S. TURKISH INVESTMENT AND FINANCE -: 5: - 5 PRIVATE LIMITED VIDE ORDER DATED 21 ST MARCH 2011 IN I.T.A.NO. 362/IND/2008 WHEREIN LOSS ON FORFEITURE OF SHARES HAD BEEN ALLOWED. FOLLOWING WAS THE PRECISE OBSERVATION OF T HE BENCH :- 4. IF THE TOTALITY OF FACTS IS ANALYSED SINCE THE LOSS SO OCCASIONED WAS NOT ARISING OUT OF PURCHASE AND SALE OF SHARES BUT WAS ON ACCOUNT OF FORFEITURE OF APPLICATION MONEY THEREFORE EXPLANATION TO SECTION 73 IS NOT ATTRACTED AT ALL. THUS THE AO WA S NOT JUSTIFIED IN DISALLOWING THE LOSS ON FORFEITURE OF SHARES UNDER EXPLANATION 73. THE ASSESSEE COMPANY WAS PURCHASING SHARES AS AN INVESTMENT THEREFORE THE LOSS OCCASIONED DUE TO FORFEITURE OF SHARES WAS IN THE NATURE OF CAPITAL LOSS AND THE SHARES WERE APPLIED FOR MAKING INVESTMENT AND NOT KEEPING THE SAME AS STOCK IN TRADE. THUS THE LOSS SO OCCASIONED TO THE ASSESSEE CAN BE ALLOWED AS A CAPITAL LOSS. WE ACCORDINGLY DIRECT THE AO TO ALL OW THE SAME AS CAPITAL LOSS. -: 6: - 6 6. IN VIEW OF THE ABOVE DISCUSSION WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD. CIT(A)S ACTION I N DELETING ADDITION ON ACCOUNT OF FORFEITURE OF SHARES. 7. NEXT COMMON ISSUE RELATES TO DISALLOWANCE OF PROFESSIONAL FEE PAID TO SHRI S.K. MITRA ON THE PLE A THAT THE EXPENDITURE WAS INCURRED ON EXEMPT INCOME U/S 10(33 ) READ WITH SECTION 14A OF THE INCOME-TAX ACT 1961. 8. THE FACTS IN BRIEF ARE THAT DURING THE ASSESSMENT YEAR 2001-02 THE ASSESSEE COMPANY HAS PAID PROFESSIONAL FEE OF RS.40 LAKHS TO SHRI S.K. MITRA WHO WAS APPOINTED T O RENDER PROFESSIONAL ADVICE ON THE INVESTMENT ACTIVITIES OF THE ASSESSEE COMPANY. THE AO HAS DECLINED CLAIM OF DEDUCTION ON THE PLEA THAT THERE WAS NO BUSINESS REQUIREMENT OR COMMERCIA L EXPEDIENCY TO ENGAGE SERVICES OF SHRI MITRA. THE AO ALSO HELD THAT IN VIEW OF THE PROVISIONS OF SECTION 14A SINC E THE EXPENDITURE ON PROFESSIONAL FEE WAS FOR EARNING EXE MPT INCOME THE SAME CANNOT BE ALLOWED AS A DEDUCTION. 9. BY THE IMPUGNED ORDER THE LD. CIT(A) ALLOWED CLAIM BY OBSERVING AS UNDER :- -: 7: - 7 2.2 ON CAREFUL CONSIDERATION OF THE OBSERVATIONS OF AO AS WELL AS REPLY OF THE APPELLANT ON THAT IT IS FOUND THAT THE SERVICES OF SRI S.K. MITRA WERE HIRE D BY THE COMPANY FOR VARIOUS ACTIVITIES VIDE LETTER DATED 12.4.2000 WHICH INCLUDED TO A) INFORM THE COMPANY ABOUT SHORT TERM AND MEDIUM TERM INVESTMENT OPPORTUNITIES. B) GUIDE THE COMPANY IN INVESTMENT OF ITS FUNDS FOR OPTIMUM INVESTMENT EARNINGS. C) REGULARLY ADVISE THE COMPANY IN INVESTMENTS/DIS-INVESTMENTS IN PRIMARY AND SECONDARY MARKET BOTH EQUITY AND DEBT. D) ADVISE THE COMPANY IN TAKING SUITABLE PROTECTION FROM FORESEEN VOLATILE MARKET FLUCTUATIONS. E) ADVISE THE COMPANY IN CRYSTALLIZING A SHORT TO MEDIUM TERM STRATEGIC INVESTMENT PLANS IN EQUITY DEBT MUTUAL FUND AS WELL AS OTHER MARKET OPPORTUNITIES FOR MAXIMIZING THE EARNINGS. -: 8: - 8 SRI S.K. MITRA IS HAVING PAN NO. ACPPM8147D AND IS ASSESSED TO DCIT CENTRAL CIRCLE-1 OLD CGO BUILDING 9 TH FLOOR M.K. MARG MUMBAI. THERE IS NO CASE OF EVASION OF TAX ALSO BECAUSE SRI S.K. MITRA WAS ALSO LIABLE TO SAME RATES OF TAXES AS THAT OF APPELLANT. THE APPELLANT HAS MADE TDS ON THE PAYMENTS TO SR. S.K. MITRA. I ALSO FOUND SUBSTANCE IN THE ARGUMENTS OF THE APPELLANT THAT SO FAR AS THE ASSESSMENT YEAR UNDER CONSIDERATION THE PAYMENTS ARE MADE TO SRI S.K. MITRA DO NOT RELATE WITH THE DIVIDEND INCOME ONLY. HIS SERVICES WERE MULTIFARIOUS AND RELATE TO VARIOUS ACTIVITIES OF COMPANY. THE INVESTMENT IN DEBENTURES ALSO FETCH TAXABLE INCOME. SECONDLY SHARES ALSO FETCH PROFIT ON SALE WHICH IS TAXABLE. THE ARGUMENT OF THE APPELLANT THAT THE DISALLOWANCE OF THIS PAYMENT WILL RESULT IN DOUBLE TAXATION ONCE IN THE HANDS OF APPELLANT AND SECONDLY IN THE -: 9: - 9 HANDS OF SRI S.K. MITRA IS ALSO VALID. MOREOVER IT IS FOR THE APPELLANT TO DECIDE WHOSE SERVICES ARE REQUIRED FOR THE BUSINESS AND WHAT IS THE REASONABLE PRICE FOR THAT SERVICE. LOOKING TO THE ABOVE FACTS AND CIRCUMSTANCES THE ADDITION MADE BY AO IN THIS REGARD IS NOT SUSTAINABLE THEREFORE IT IS DELETED. 10. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS AND FOUND THAT SHRI S.K. MITRA IS A PROFESSIONALLY QUALIFIED PERSON WHO WAS APPOINTED TO INFORM THE COMPANY ABO UT SHORT TERM AND MEDIUM TERM INVESTMENT OPPORTUNITY. HE ALS O ADVISED THE COMPANY TO CRYSTALLIZE SHORT TERM TO ME DIUM TERM STRATEGY INVESTMENT PLAN IN EQUITY DEBT MUTUAL FU ND ETC. THE ASSESSEE HAS PROPERLY DEDUCTED TAX AT SOURCE ON THE PROFESSIONAL FEE SO PAID. IN TERMS OF THE FINDING R ECORDED BY THE LD. CIT(A) THE GENUINENESS OF THE PAYMENT AND BUSINESS NECESSITY OF SUCH PAYMENTS IS NOT IN DOUBT. THE ONL Y QUESTION REMAINS FOR CONSIDERATION IS WITH REGARD TO DISALLO WANCE U/S 14A IN VIEW OF THE FACT THAT PART OF THE INCOME EAR NED OUT OF HIS ADVISE WAS EXEMPT FROM TAXATION. WE FOUND THAT IN THE -: 10: - 10 ASSESSMENT YEAR 2002-03 AMOUNT PAID TO SHRI S.K. MITRA WAS DISALLOWED AND BY CONSIDERING THE EXEMPT INCOME EAR NED RELATING TO THE ADVISE RENDERED BY SHRI S.K. MITRA THE LD. CIT(A) HAS RESTRICTED THE DISALLOWANCE TO THE EXTEN T OF 10 % AND THE DEPARTMENT HAS NOT FILED FURTHER APPEAL AGA INST THE ORDER OF CIT(A). THUS THE DEPARTMENT HAS DULY ACCE PTED THE ORDER OF CIT(A) FOR RESTRICTING THE DISALLOWANCE T O THE EXTENT OF 10 % IN THE ASSESSMENT YEAR 2002-03. IN VIEW OF THE SE FACTS WE MODIFY THE ORDER OF CIT(A) FOR THE ASSESSMENT YE AR 2001-02 AND DIRECT THE AO TO RESTRICT THE DISALLOWANCE TO T HE EXTENT OF 10 % OF THE PAYMENTS MADE TO SHRI S.K. MITRA U/S 1 4A OF THE INCOME-TAX ACT 1961. 11. NEXT GRIEVANCE OF REVENUE RELATES TO LEVY OF TAX ON LONG TERM CAPITAL GAIN AT 20 % INSTEAD OF 35 % LEVIED BY THE ASSESSING OFFICER. 12. THE LD. SENIOR D.R. FAIRLY CONCEDED THAT THE AO HAS NOT GIVEN ANY REASONING FOR TAXING LONG TERM CAPITAL GA INS AT 35 %. WE FOUND THAT SHARES WERE HELD BY THE ASSESSEE AS ITS INVESTMENT AND SINCE THESE WERE LONG TERM INVESTMEN T THE GAIN ARISING OUT OF THEIR SALE WAS LONG TERM CAPITA L GAIN. -: 11: - 11 THEREFORE THE LD. CIT(A) WAS JUSTIFIED IN DIRECTIN G THE AO TO TAX THE SAME AT 20 % BY TREATING THE SAME AS LONG TERM CAPITAL GAIN. 13. IN THE RESULT THE APPEAL FOR THE ASSESSMENT YEAR 2 001- 02 IS ALLOWED IN PART. 14. IN THE ASSESSMENT YEAR 2002-03 THE ONLY GRIEVANCE OF THE REVENUE RELATES TO TREATING AMOUNT OF RS. 11 06 271/- AS SHORT TERM CAPITAL GAIN INSTEAD OF BUSINESS INCOME. 15. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS AND FOUND THAT THE GAIN HAS BEEN ARISEN ON ACCOUNT OF R EDEMPTION OF MUTUAL FUND UNITS WHICH WERE HELD BY THE ASSESS EE AS INVESTMENT. PART OF THE GAIN WAS ON REDEMPTION OF B IRLA CASH PLUS RETAIL GROWTH TO 2001-2 AND PART WAS ON ACCOUN T OF REDEMPTION OF GRINDLAY CASH FUND. SINCE THESE WERE HELD BY THE ASSESSEE AS INVESTMENT THERE IS NO REASON TO T REAT THE GAIN SO AROSE AS BUSINESS PROFIT. IN VIEW OF THE FINDING GIVEN BY THE LD. CIT(A) WE DO NOT FIND ANY REASON TO INTERFERE IN THE ORDER OF THE LD. CIT(A) FOR TREATING THE SAME AS CAPITAL GAI NS IN PLACE OF BUSINESS INCOME AS HELD BY THE ASSESSING OFFICER. -: 12: - 12 16. IN THE RESULT THE APPEAL FOR THE ASSESSMENT YEAR 2 002- 03 IS DISMISSED. 17. IN THE ASSESSMENT YEAR 2004-05 THE GRIEVANCE OF TH E REVENUE IN ALL THE TREE GROUNDS RELATES TO ADDITION /DELETION OF INTEREST OF RS. 4.79 CRORES WHICH WAS MADE BY THE A SSESSING OFFICER AFTER OBSERVING THAT INTEREST WAS PAID ON L OAN ON HIGH RATE OF INTEREST OF 10.5 % AS AGAINST THE INTEREST CHARGED AT A LOW RATE OF 7 % FROM THE SISTER CONCERNS. 18. THE FACTS IN BRIEF ARE THAT DURING THE YEAR THE ASSESSEE HAS RECEIVED SECURED LOAN FROM STANDARD CH ARTERED BANK @ 10.5% G. E. CAPITAL SERVICES INDIA @ 10.5 % . AS AGAINST THIS THE ASSESSEE HAS ADVANCED LOAN TO ITS SISTER CONCERN AT 7 %. THE DIFFERENCE IN RATE OF INTEREST CHARGED BY THE ASSESSEE VIS--VIS PAID BY THE ASSESSEE ON THE BORROWINGS WAS DISALLOWED BY THE ASSESSING OFFICER. 19. FOLLOWING WAS THE PRECISE OBSERVATIONS OF THE AO :- IT IS SEEN FROM ANNEXURE 3 ATTACHED TO ASSESSEES SUBMISSION THAT DURING THE YEAR ASSESSEE HAS RECEIVED SECURED LOAN FROM STANDARD CHARTED BANK AT THE RATE OF 10.50 % GE CAPITAL SERVICE IND IA -: 13: - 13 ALSO AT THE RATE OF 10.50 % AND INFRASTRUCTURE & LEASING AND FINANCIAL SERVICE LIMITED THE EFFECTIV E RATE OF INTEREST PAID COMES TO 10.50 %. AS AGAINST THIS ASSESSEE HAS ADVANCED LOANS TO ITS SISTER CONCERNS BGH EXIM LIMITED BGHPL AND BIRLA TMT HOLDING PVT. LTD. AT THE RATE OF 7% ONLY AND CHARG E INTEREST THERE FROM AS UNDER :- BGH EXIM LTD @ 7 % RS. 17 350/- BGHPL @ 7% 16 34 222/- BIRLA TMT HOLDING P.LTD. @ 7% 9 24 56 558/- TOTAL : 9 41 08 130/- FROM THE ABOVE IT IS SEEN THAT ASSESSEE HAS OBTAINE D SECURED LOAN AND UNSECURED LOAN @ 10.50 % AND HAVE PAID INTEREST THEREON AT RS. 12.06 CRORES AND RS. 1.04 CRORES TOTALING TO RS. 13.10 CRORES. AS AGAINST THIS IT HAS CHARGED INTEREST AT THE RATE O F 7 % FOR THE INTER CORPORATE LOAN GIVEN TO GROUP CONCERN S AND HAVE CHARGED INTEREST FROM THEM AT RS. 9 41 08 130/-. AS A PRUDENT BUSINESSMAN ASSESSEE WAS REQUIRED TO CHARGE INTEREST AT LEAST @ 10.50% -: 14: - 14 THE RATE AT WHICH IT HAS PAID ON BORROWINGS WHICH ASSESSEE HAS FAILED TO DO SO. IT HAS RESULTED INTO SHORT CHARGING OF INTEREST FROM SISTER CONCERNS AT RS. 4 70 54 065/-. 20. A.O. ALSO OBSERVED AS UNDER :- CONTENTION OF THE ASSESSEE THAT THERE WAS FALL IN INTEREST RATE IS NOT ACCEPTABLE. IT IS SEEN FROM TH E DETAILS OF INTEREST EARNED BY THE ASSESSEE DURING THE YEAR AT RS. 10 28 55 761/- THAT INTEREST FROM BIRLA GLOBAL ASSE T FINANCE CO. LTD. AND BIRLA GLOBAL FINANCE LIMITED I S RECEIVED AT THE RATE OF 12 % WHEREAS INTEREST FRO M BIRLA TMT HOLDINGS PRIVATE LTD. IS SHOWN @ 7% WHEREAS INTEREST IN EARLIER YEAR WAS CHARGED AT HIGHER RATE S. SO FAR AS LOAN OBTAINED FORM INFRASTRUCTURE LEASING & FINA NCIAL SERVICES LTD. IS CONCERNED THE LOAN IS OBTAINED AT PREVAILING INTEREST RATE AND ALSO GIVEN TO SISTER C ONCERN AT PREVAILING INTEREST RATES WHEREAS LOANS OBTAINED FROM GE CAPITAL SERVICES INDIA AND STANDARD CHARTERED BANK WERE OBTAINED AT THE INTEREST RATE OF 10.50 % AND PART O F IT WAS -: 15: - 15 ADVANCED TO BIRLA GLOBAL FINANCE LTD. AT THE RATE O F 12 %. IN SUCH CIRCUMSTANCES WHAT WAS THE BUSINESS NEED OR COMMERCIAL EXPEDIENCY TO ADVANCE LOAN TO BIRLA TMT HOLDINGS PVT.LTD. AT THE RATE OF 7 %. IN VIEW OF TH IS FACT ASSESSEES CONTENTION THAT THERE WAS DECLINE IN INT EREST RATES AND THEREFORE ADVANCES TO SISTER CONCERN WE RE MADE AT LOWER RATE IS NOT ACCEPTABLE. 21. AS DISCUSSED ABOVE ASSESSEE HAS OBTAINED LOANS AT THE RATE OF 10.50 % AND ADVANCE THE SAME TO ITS GRO UP COMPANIES/SISTER CONCERNS AT THE RATE OF 7 % AND IN ATTEMPT IT HAS TRIED TO REDUCE ITS INCOME TO THE EXTENT OF RS. 4 79 54 065/- AND THEREFORE THE SAME IS ADDED TO TOTAL INCOME OF THE ASSESSEE. 22. BY THE IMPUGNED ORDER CIT(A) DELETED THE ADDITION AFTER HAVING FOLLOWING :- 2.5 ON CAREFUL CONSIDERATION OF FACTS AND CIRCUMSTANCES OF THE CASE AS GIVEN IN ASSESSMENT ORDER AS WELL AS IN CONTENTIONS OF THE A/R FOR THE APPELLANT IT IS FOUND THAT THE AO FAILED TO NOTICE -: 16: - 16 FOLLOWING MATERIAL FACTS WHICH WERE PERTINENT TO TH E DECISION ON THE ISSUE :- (A) THE APPELLANT BORROWED MONEY @ 10.50 % BY ISSUANCE OF DEBENTURES WHICH WAS FOR THE FIXED PERIOD OF THREE YEARS AND THERE WAS NO PUT/CALL OPTIONS I.E. REPAYMENT WAS NOT ALLOWED. THEREFORE IT WAS ALSO NOT POSSIBLE FOR THE APPELLANT TO REPAY THE SAME AT ITS WILL. (B) THE AO IGNORED THE FACT THAT APPELLANT HAS BORROWED RS. 50 CRORES FROM IL&FS ALSO AT AN AVERAGE INTEREST RATE OF 6.088 % PER ANNUM. THEREFORE IT CANNOT BE SAID THAT THE APPELLANT PAID INTEREST ON ALL BORROWINGS @ 10.50 %. (C) THE AO HAS NOT TAKEN INTO CONSIDERATION THE FACT THAT THERE WAS DECLINE IN INTEREST RATE DURING THE ACCOUNTING YEAR RELEVANT TO ASSESSMENT YEAR UNDER CONSIDERATION. WHEN MARKET RATE OF INTEREST WAS ABOUT 6 0 7 % IT IS VERY DIFFICULT TO LEND MONEY AT HIGHER RATES. -: 17: - 17 (D) IT HAS BEEN DECIDED BY SUPREME COURT THAT INCOME WHICH ACCRUES TO THE ASSESSEE AS TAXABLE IN HIS HANDS. INCOME WHICH HE COULD HAVE BUT HAS NOT EARNED IS NOT TAXABLE. THE LAW CANNOT COMPEL THE ASSESSEE TO EARN MAXIMUM PROFIT. MOREOVER THE M.P. HIGH CURT WHICH IS A TERRITORIAL HIGH COURT FOR THIS REGION IN CASE OF D & H SECHERON ELECTRODES (P) LTD. VS. CIT (1984) 40 CTR 366 ALSO HELD THAT WHERE THE ASSESSEE BORROWED CAPITAL FOR BUSINESS PURPOSES NO PORTION OF INTEREST COULD BE DISALLOWED EVEN IF THE ASSESSEE AT DISSIPATED THE FUNDS BY GIVING INTEREST FREE LOANS. CONSIDERING ALL THE ABOVE FACTS AND FINDINGS OF THE AO THAT THE APPELLANT HAS REDUCED ITS INCOME IS NOT SUBSTANTIATED. ON THE OTHER HAND THE APPELLANT WOULD HAVE TO SUFFER MORE LOSSES IF IT HAS NOT GIVEN THE SPARE MONEY -: 18: - 18 @ 7% OF INTEREST TO ITS THEIR CONCERNS. IN A NUTSHELL THE ADDITION MADE BY THE ASSESSING OFFICER AMOUNTING TO RS. 4 79 54 065/- IS NOT SUSTAINABLE ON FACTS AS WELL AS IN LAW. THE ADDITION MADE BY THE ASSESSING OFFICER IS DELETED. 23. IN THE RESULT THE APPEAL OF THE REVENUE IS DISMISS ED. 24. AGAINST THE ABOVE ORDER OF CIT(A) THE CONTENTIONS OF THE LD CIT DR WAS AS UNDER :- ASSESSEE HAS TAKEN A LOAN OF RS. 100 CRORES FROM STANDARD CHARTERED BANK AND G. E. CAPITAL SERVICE I NDIA IN TERMS OF DEBENTURES ISSUED AT THE RATE OF 10.50 % OF INTEREST AND PAID A INTEREST OF RS. 13.10 CRORES IN ASSESSMENT YEAR 2004-05 TO BOTH OF THEM. THE DEBENT URES WERE ISSUED IN SEPTEMBER 2001 AND CONTINUED TILL SEPTEMBER 2004. THESE FUNDS WERE ADVANCED MOSTLY TO A SISTER CONCERN NAMELY M/S. BIRLA TMT HOLDING PVT.LT D. AT THE INTEREST RATE OF 7 % FROM WHOM INTEREST OF RS. 9.24 CRORE ONLY WAS CHARGED IN ASSESSMENT YEAR 2004-05 -: 19: - 19 ALTHOUGH AMOUNT WAS OUTSTANDING FROM THEM WAS RS. 136.37 CRORES AS ON 31.3.03. THE ARGUMENT OF ASSESS EE THAT SUBSEQUENTLY A LOAN OF RS. 50 CRORES WAS TAKEN FROM 1L & FS AT THE RATE OF 6.088 % IN SEPTEMBER 2003 IS OF NO CONSEQUENCE. SINCE SUCH LOAN FROM IL & FS WAS MEANT FOR DIFFERENT PURPOSE AND IT NEVER REPLACED THE LOAN TA KEN FROM STANDARD CHARTERED BANK & G. E. CAPITAL SERVICE IND IA AT 10.50 % INTEREST WHICH CONTINUED UP TO SEPTEMBER 2 004. BESIDES NO AMOUNT OF INTEREST ON LOAN TAKEN FROM IL & FS WAS DISALLOWED BY THE ASSESSING OFFICER AND AO ONLY DISALLOWED INTEREST OF ONLY RS. 4 70 54 965/- OUT O F INTEREST AT RATE OF 10.50 % PAID TO AFORESTATED TWO FINANCIAL INSTITUTIONS SINCE SUCH LOAN BORROWED BY ASSESSEE IS EXTENDED AT LOWER RATE OF INTEREST OF 7 % TO SISTER CONCERN OF ASSESSEE NAMELY M/S. BIRLA TMT H OLDING P. LTD. ON THE AFORESTATED FACTS FOLLOWING CASE LAWS ARE RELIED ON TO STRENGTHEN THE CASE OF REVENUE :- (I) S.A. BUILDERS VS. CIT (2007) 288 ITR 1 ( S. C. ) -: 20: - 20 THIS IS LEADING JUDGMENT OF APEX COURT ON THIS ISSUE WHERE AMOUNT WAS ADVANCED TO SISTER CONCERN BY UTILIZING OVERDRAFT ACCOUNT. THE HON'BLE SUPREME COURT HOLD AS FOLLOWS :- IT WAS REQUIRED TO BE ENQUIRED AS TO WHETHER THE INTEREST FREE LOAN WAS GIVEN TO THE SISTER CONC ERN AS A MEASURE OF COMMERCIAL EXPEDIENCY IF IT IS SO INTEREST ON BORROWED FUNDS IS TO BE ALLOWED. THE HI GH COURT AND OTHER AUTHORITIES SHOULD HAVE EXAMINED THE PURPOSE FOR WHICH THE ASSESSEE ADVANCED THE MONEY TO ITS SISTER CONCERN AND WHAT THE SISTER CONCERN DID WITH THE MONEY IN ORDER TO DECIDE WHETHER IT WAS FOR COMMERCIAL EXPEDIENCY BUT THAT HAS NOT BEEN DONE THE MATTER IS REMANDED TO THE TRIBUNAL FOR A FRESH DECISION IN THE LIGHT OF THE AFORESAID OBSERVATION. IN THE PRESENT CASE ASSESSEE HAS NOT EXPLAINED TILL DATE ANY REASON FOR EXTENDING THE FUNDS BORROW ED BY IT AT THE RATE OF 10.50 % TO ITS SISTER CONCERN AT LOWER RATE OF INTEREST OF 7 %. NO PURPOSE OR -: 21: - 21 COMMERCIAL EXPEDIENCY COULD BE EXPLAINED BY ASSESSEE FOR BORROWING FUND AT SUCH HIGH RATE MEREL Y FOR DIVERTING IT TO A SISTER CONCERN AT MUCH LOWER RATE OF INTEREST. ASSESSEE ALSO FAILED TO EXPLAIN AS TO WHAT THE SISTER CONCERN DID WITH THIS MONEY. IF ASSESSEE BEING A BIRLA GROUP CONCERN HAS EXTENDED SUCH LOAN AT LOWER RATE OF INTEREST TO ANOTHER BIRLA GROUP COMPANY FOR ACQUIRING CONTROLLING STAKE IN ANOTHER BIRLA GROUP COMPANY THEN SUCH INTEREST EXPENSE BORNE BY ASSESSEE ON BORROWED FUNDS COULD NOT BE SAID TO BE FOR THE BUSINESS PURPOSE OF ASSESSEE AND THEREFORE THE SAME IS NOT ALLOWABLE AS HELD IN FOLLOWING CASES :- (E) SHREE SYNTHETICS LIMITED [2008] 303 ITR 451 (MP). (F) CIT VS. ABHISHEK INDUSTRIES LIMITED (2006) 286 ITR 1 ( P & H) (G) CIT VS. ROKHAM CYCLE IND. PVT. LTD. (2010) 326 ITR 291 ( P & H) -: 22: - 22 (H) TRIVENI ENGG. WORKS LIMITED (1987) 167 ITR 742 (ALL). 25. ON THE OTHER HAND IT WAS ARGUED BY THE LD. AUTHORI ZED REPRESENTATIVE THAT THE ASSESSEE COMPANY WAS ALREAD Y HAVING FUNDS THROUGH 10.5 % DEBENTURES WHICH WAS PROCURED FOR A PERIOD OF THREE YEARS FOR WHICH THERE WAS NOT OPTIO N FOR PRE PAYMENT. THIS FUND WAS UTILIZED BY THE ASSESSEE FOR ADVANCEMENT OF LOAN TO SISTER CONCERN AT 7 %. HE FU RTHER CONTENDED THAT THE SISTER CONCERN OF THE ASSESSEE A RE THE INDEPENDENT COMPANIES THE RATES OF TAX IN ALL THE CASES WERE SAME THEREFORE ANY ATTEMPT TO REDUCE INCOME OF ON E COMPANY THROUGH ANOTHER COMPANY HAVING NO EFFECT ON THE OVE R ALL TAX LIABILITY OF THE ENTIRE GROUP. HE FURTHER SUBMITTED THAT DURING THE YEAR UNDER CONSIDERATION THERE WAS DECLINE IN THE RATE OF INTEREST TO 6 7 % WHICH THE AO HAS NOT TAKEN INTO ACCOUNT WHILE COMPARING THE RATE OF INTEREST AT WHICH LOAN WAS TAKEN BY THE ASSESSEE AND WAS GIVEN TO THE SISTER CONCERN . AS PER THE LD. AUTHORIZED REPRESENTATIVE THE ASSESSEE HAS ALR EADY BORROWED RS. 50 CRORES FROM INFRASTRUCTURE LEASING & FINANCE COMPANY AT INTEREST RATE OF 6.088 % PER ANNUM WHIC H WAS -: 23: - 23 ALSO UTILIZED FOR ADVANCING THE SAME AT 7 % RATE OF INTEREST TO THE SISTER CONCERN. IN THE LAST HE RELIED ON THE O RDER OF CIT(A) AND HIS RELIANCE ON D & H SECHERON ELECTRODES PVT. LIMITED (SUPRA). 26. WE HAVE CONSIDERED THE RIVAL CONTENTIONS CAREFULL Y GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AN D FOUND THAT ADDITION/DISALLOWANCE OF INTEREST WAS MADE BY THE ASSESSING OFFICER BY OBSERVING THAT DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE HAS BORROWED LOAN AT HI GHER RATE OF INTEREST AT 10.5 % WHEREAS WITHOUT SHOWING ANY BUSINESS NEED OR COMMERCIAL EXPEDIENCY ADVANCED LOAN TO SIS TER CONCERN AT A LOWER RATE OF INTEREST AT 7 %. ACCORDI NGLY DISALLOWANCE OF INTEREST WAS MADE FOR HIGHER INTERE ST BEARING LOAN GIVEN TO SISTER CONCERN AT LOWER RATE OF INTER EST. THIS ISSUE HAS BEEN EXAMINED IN DETAIL BY HON'BLE SUPREME COUR T IN THE CASE OF S.A. BUILDERS 288 ITR 1 WHEREIN HON'BLE S UPREME COURT OBSERVED THAT WHERE ASSESSEE BORROWED FUNDS F ROM BANK AND LENT SOME OF IT TO ITS SISTER CONCERNS INT EREST FREE PROPER TEST TO BE APPLIED IS WHETHER THIS WAS DONE AS A MEASURE OF COMMERCIAL EXPEDIENCY. HON'BLE SUPREME C OURT -: 24: - 24 FURTHER OBSERVED THAT THE DECISION RELATING TO SECT ION 37 WILL ALSO BE APPLICABLE TO SECTION 36(1)(IV) BECAUSE IN SECTION 37 ALSO EXPRESSION USED IS FOR THE PURPOSE OF BUSINE SS. THE EXPRESSION FOR THE PURPOSE OF BUSINESS INCLUDES E XPENDITURE VOLUNTARILY INCURRED FOR COMMERCIAL EXPEDIENCY AND IT IS IMMATERIAL IF A THIRD PARTY ALSO BENEFITS THEREBY. THROUGH THIS PROPOSITION HON'BLE SUPREME COURT LAID DOWN TEST WH ILE CONSIDERING DISALLOWANCE OF INTEREST WHERE THE ASSE SSEE HAS DIVERTED INTEREST BEARING FUND TO ITS SISTER CONCER N WITHOUT CHARGING ANY INTEREST OR AT A LOWER RATE OF INTERES T. IN THE INSTANT CASE UNDISPUTED FACTS ARE THAT DURING THE YEAR ITSELF THE ASSESSEE HAS TAKEN LOAN AT A HIGHER RATE OF INT EREST AT 10.5 % WHEREAS LOAN WAS GIVEN TO THE SISTER CONCERN AT A LOWER RATE OF INTEREST AT 7 %. SO FAR AS CONTENTION OF THE LD. AUTHORIZED REPRESENTATIVE TO THE EFFECT THAT THE ASSESSEE HAS ALREADY BORROWED FUNDS FROM LONG TERM DEBENTURES WHICH WER E REPAYABLE IN THREE YEARS ACCORDINGLY FUNDS WERE A VAILABLE WITH THE ASSESSEE FOR SOME DISPOSAL IS OF NO RELEV ANCE IN SO FAR AS THE ASSESSEE HAS TAKEN NEW LOAN DURING THE Y EAR UNDER CONSIDERATION WHICH WAS ALLEGED TO BE USED FOR ADV ANCING LOAN -: 25: - 25 TO SISTER CONCERN. NOW COMING TO THE TEST LAID DOWN BY HON'BLE SUPREME COURT THAT WHILE EXAMINING ALLOWABILITY OF INTEREST U/S 36(1)(III) COMMERCIAL EXPEDIENCY OF ADVANCE GIV EN TO THE SISTER CONCERN IS REQUIRED TO BE EXAMINED. PRECISE OBSERVATION OF THE AO IN THE INSTANT CASE WAS THAT BUSINESS NEE DS OR COMMERCIAL EXPEDIENCY TO ADVANCE LOAN TO THE SISTER CONCERN AT LOWER RATE OF INTEREST OF 7 % WAS NOT EXPLAINED. HOWEVER WHILE DELETING THE DISALLOWANCE OF INTEREST THE LD . CIT(A) HAS NOT CONTROVERTED THIS FINDING OF AO NOR EXAMINED TH IS ASPECT OF THE MATTER WHICH GOES TO THE ROOT OF THE ISSUE IN VIEW OF THE DECISION OF HON'BLE SUPREME COURT IN CASE OF S. A. BUILDERS (SUPRA) ON WHICH RELIANCE WAS PLACED BY THE LD. CIT DR DURING THE COURSE OF HEARING. HON'BLE SUPREME COURT HAS AL SO OBSERVED IN THIS CASE THAT HIGH COURT AND OTHER AUT HORITIES SHOULD HAVE ENQUIRED AS TO WHETHER LOAN WAS GIVEN T O THE SISTER CONCERN ( WHICH IS A SUBSIDIARY OF THE ASSES SEE ) AS A MEASURE OF COMMERCIAL EXPEDIENCY. IT WAS OBSERVED T HAT NEITHER THE HIGH COURT NOR THE TRIBUNAL NOR OTHER A UTHORITIES HAVE EXAMINED WHETHER THE AMOUNT ADVANCED TO THE SI STER CONCERN WAS BY WAY OF COMMERCIAL EXPEDIENCY. THE HI GH COURT -: 26: - 26 AND OTHER AUTHORITIES SHOULD HAVE EXAMINED THE PURP OSE FOR WHICH THE ASSESSEE ADVANCED THE MONEY TO ITS SISTER CONCERN AND ALSO SHOULD HAVE EXAMINED WHETHER IT WAS GIVEN BY WAY OF COMMERCIAL EXPEDIENCY BUT THAT HAS NOT BEEN DONE. UNDER THESE CIRCUMSTANCES THE DECISION OF THE HON'BLE HI GH COURT WAS SET-ASIDE BY HON'BLE SUPREME COURT AND THE MATT ER WAS REMANDED TO THE TRIBUNAL FOR AFRESH DECISION IN ACC ORDANCE WITH LAW AND IN THE LIGHT OF THESE OBSERVATIONS. 27. IN THE INSTANT CASE BEFORE US THE AO HAS CLEARLY ALLEGED THAT THERE WAS NO BUSINESS NEED OR COMMERCI AL EXPEDIENCY TO ADVANCE LOAN TO THE SISTER CONCERN AT A LOWER RATE OF INTEREST OF 7 %. THIS FINDING AND OBSERVATI ON OF THE AO HAS NOT BEEN CONTROVERTED BY THE LD. CIT(A) WHILE D ELETING THE DISALLOWANCE OF INTEREST EXPENDITURE. WE THEREFORE SET-ASIDE THE ORDER OF THE CIT(A) ON THIS ISSUE AND MATTER IS RESTORED BACK TO THE FILE OF THE AO FOR DECIDING AFRESH IN T HE LIGHT OF PROPOSITION OF LAW LAID DOWN BY HON'BLE SUPREME COU RT IN THE CASE OF S. A. BUILDERS (SUPRA). WE DIRECT ACCORDING LY. 28. GROUND TAKEN BY THE REVENUE IN THE ASSESSMENT YEA R 2005-06 WITH REGARD TO DELETING THE ADDITION/DISALL OWANCE OF -: 27: - 27 INTEREST OF RS. 4.62 CRORES IS EXACTLY SAME AS TAKE N BY THE REVENUE IN ASSESSMENT YEAR 2004-05. AS THE FACTS AN D CIRCUMSTANCES ARE THE SAME FOLLOWING THE SAME REAS ONING AS GIVEN IN THE ASSESSMENT YEAR 2004-05 WE RESTORE TH E MATTER BACK TO AO WITH SIMILAR DIRECTIONS. 29. IN THE RESULT THE APPEAL OF THE REVENUE IN ASSESSM ENT YEAR 2002-03 IS DISMISSED WHEREAS APPEALS FOR ASSE SSMENT YEARS 2001-02 2004-05 & 2005-06 ARE ALLOWED IN PAR T FOR STATISTICAL PURPOSES. THIS ORDER HAS BEEN PRONOUNCED IN THE OPEN COURT ON 16 TH SEPTEMBER 2011. SD/- SD/- (JOGINDER SINGH) ( R.C.SHARMA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 16 TH SEPTEMBER 2011. CPU* 20