M/s. RELIANCE CAPITAL LTD., MUMBAI v. DCIT CIR. 3(3), MUMBAI

ITA 3304/MUM/2003 | 1999-2000
Pronouncement Date: 18-11-2011 | Result: Partly Allowed

Appeal Details

RSA Number 330419914 RSA 2003
Assessee PAN AAACR5054J
Bench Mumbai
Appeal Number ITA 3304/MUM/2003
Duration Of Justice 8 year(s) 6 month(s) 20 day(s)
Appellant M/s. RELIANCE CAPITAL LTD., MUMBAI
Respondent DCIT CIR. 3(3), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 18-11-2011
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted H
Tribunal Order Date 18-11-2011
Date Of Final Hearing 04-07-2011
Next Hearing Date 04-07-2011
Assessment Year 1999-2000
Appeal Filed On 28-04-2003
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL H BENCH: MUMBAI BEFORE SHRI P.M. JAGTAP ACCOUNTANT MEMBER AND SHRI R.S. PADVEKAR JUDICIAL MEMBER ITA NO.3303/MUM/2003 (ASSESSMENT YEAR: 1998-99) ITA NO.3304/MUM/2003 (ASSESSMENT YEAR: 1999-00) ITA NO.5535/MUM/2003 (ASSESSMENT YEAR: 2000-01) ITA NO.5413/MUM/2004 (ASSESSMENT YEAR: 2001-02) RELIANCE CAPITAL LTD. (FORMERLY KNOWN AS RELIANCE CAPITAL & FINANCE LTD.) MITTAL CHAMBERS GROUND FLOOR 222 NARIMAN POINT MUMBAI -400 021 ....... APPELLANT VS DY. COMMISSIONER OF INCOME TAX RANGE-3(3) AAYAKAR BHAVAN M.K. ROAD MUMBAI -400 020 ..... RESPONDENT ITA NO.3973/MUM/2003 (ASSESSMENT YEAR: 1998-99) ITA NO. 3988/MUM/2003 (ASSESSMENT YEAR: 1999-00) ITA NO.6115 /MUM/2003 (ASSESSMENT YEAR: 2000-01) ITA NO.5737/MUM/2004 (ASSESSMENT YEAR: 2001-02) DY. COMMISSIONER OF INCOME TAX RANGE-3(3) AAYAKAR BHAVAN M.K. ROAD MUMBAI -400 021 ....... APPELLANT VS ITA 3303/MUM/2003 & OTHER 7 GROUP-APPEALS M/S. RELIANCE CAPITAL LTD. 2 RELIANCE CAPITAL LTD. (FORMERLY KNOWN AS RELIANCE CAPITAL & FINANCE LTD.) MITTAL CHAMBERS GROUND FLOOR 222 NARIMAN POINT MUMBAI -400 021 ....... RESPONDENT PAN: AAACR 5054 J APPELLANT BY: SHRI GOLI SRINIVAS RAO RESPONDENT BY: SHRI JITENDRA SANGHAVI DATE OF HEARING: 23.09.2011 DATE OF PRONOUNCEMENT: 18.11.2011 O R D E R PER BENCH THIS IS A BATCH OF EIGHT APPEALS COMPRISE OF FOUR A PPEALS BY ASSESSEE AND FOUR CROSS APPEALS BY THE REVENUE ARE FILED CHALLENGING RESPECTIVE IMPUGNED ORDERS OF THE LD. CIT (A) MUMBA I FOR THE A.YS. 1998-99 1999-2000 2000-01 & 2001-02. MOST OF THE ISSUES ARE COMMON IN ALL THE APPEALS SO ALSO ABOUT THE FACTS A ND HENCE THIS BATCH OF APPEALS ARE DISPOSED OFF BY THIS CONSOLIDA TED ORDER FOR THE SAKE OF CONVENIENCE. WE WOULD PREFER TO GO ISSUE-W ISE AS THERE IS MULTIPLICITY OF GROUNDS IN ALL THE APPEALS. 2. THE FIRST ISSUE IS DISALLOWANCE OF EXPENDITURE C LAIMED U/S.35D OF THE ACT AND THIS ISSUE ARISES IN THE ASSESSEES ALL APPEALS I.E. A.YS. 1998-99 1999-00 2000-01 & 2001-02. 3. THE FACTS PERTAINING TO THE ISSUE WHICH ARE REVE ALED FROM THE ASSESSMENT ORDERS ON RECORD AS UNDER. THE ASSESSEE HAD CLAIMED THE DEDUCTION U/S.35D IN ALL THE FOUR YEARS ARE AS UNDE R:- ITA 3303/MUM/2003 & OTHER 7 GROUP-APPEALS M/S. RELIANCE CAPITAL LTD. 3 ASSESSMENT YEAR AMOUNT OF DEDUCTION U/S.35D 1998-1999 ` 2 10 94 580 1999-2000 ` 2 10 95 328 2000-2001 ` 2 21 06 248 2001-2002 ` 1 19 86 670 4. THE ASSESSEE COMPANY HAD MADE A PUBLIC ISSUE IN THE YEARS 1992 AND 1995. THE TOTAL EXPENDITURE PERTAINING TO THE PUBLIC ISSUE AND RIGHT ISSUE WAS AT ` 23 14 71 569/-. THE ASSESSEE EXERCISED OPTION AS PROVIDED IN SUB-SEC. (2B) OF SEC. 35D BY RESTRICTING THE AMOUNT ALLOWABLE TO 1/10TH OF 2.5% OF THE CAPITAL E MPLOYED. THE ASSESSEE FILED THE DETAILS OF THE PRELIMINARY EXPEN SES WHICH ARE RE- PRODUCED BY THE A.O. IN THE A.Y. 1998-99. THE ASSE SSEE-COMPANY HAD LEASING ACTIVITY AND COMMENCED ITS BUSINESS IN THE A.Y. 1991-92. THE ASSESSEE CONTENDED THAT THE MAJOR PORTION OF INCOME ARISING FROM LEASING AND OTHER ACTIVITY AND ASSESSEES UNDERTAKI NG CONSTITUTE INDUSTRIAL UNDERTAKING. THE A.O. RELYING ON THE AS SESSMENT ORDERS FOR PRECEDING YEARS I.E. A.YS. 1994-95 1995-96 1996-9 7 & 1997-98 DISALLOWED THE CLAIM OF THE ASSESSEE SAVE ` 1 19 578/- THAT WAS TOWARDS PRELIMINARY EXPENSES. SAME WAY THE A.O. D ISALLOWED THE CLAIM OF THE ASSESSEE U/S.35D SAVE SMALL QUANTUM OF THE PRELIMINARY EXPENDITURE AND SO ON. THE ASSESSEE CARRIED THE IS SUE BEFORE THE LD. CIT (A) BUT WITHOUT SUCCESS. 5. WE HAVE HEARD THE PARTIES. THE LD. COUNSEL SUBM ITS THAT THE IDENTICAL ISSUE HAS BEEN CONSIDERED BY THE HONBLE TRIBUNAL IN ASSESSEES OWN CASE FOR THE A.YS. 1993-94 TO 1997-9 8 ( COPY OF THE ORDER IS PLACED ON RECORD) AND ISSUE WAS RESTORED T O THE FILE OF THE A.O. FOLLOWING THE ORDER OF THE TRIBUNAL FOR THE A.Y. 19 91-92. WE FIND THAT ON THE IDENTICAL SET OF FACTS THE ISSUE HAD BEEN RE STORED BY THE TRIBUNAL TO THE FILE OF THE A.O. BY FOLLOWING THE D IRECTIONS OF THE TRIBUNAL FOR THE A.Y. 1991-92. WE ACCORDINGLY FOL LOWING THE RULE OF CONSISTENCY RESTORE THIS ISSUE ON THE ALLOWABILITY OF DEDUCTION U/S.35D TO THE FILE OF THE A.O. ON SIMILAR DIRECTIONS WHICH ARE GIVEN BY THE ITA 3303/MUM/2003 & OTHER 7 GROUP-APPEALS M/S. RELIANCE CAPITAL LTD. 4 TRIBUNAL IN ASSESSEES OWN CASE FOR THE A.Y. 1991-9 2 WHICH ORDER HAS BEEN FOLLOWED IN SUBSEQUENT YEARS. ACCORDINGLY RE SPECTIVE GROUNDS TAKEN BY THE ASSESSEE ARE ALLOWED FOR STATISTICAL P URPOSE. 6. THE NEXT COMMON ISSUE IS DISALLOWANCE OF THE EXP ENDITURE ATTRIBUTABLE FOR EARNING EXEMPT INCOME I.E. DIVIDEN D AND INTEREST ON BONDS AND DEBENTURES AND THIS ISSUE IS ARISING IN A LL THE APPEALS FILED BY THE ASSESSEE AS WELL AS REVENUE. THE ASSESSEE HA S CHALLENGED THE ORDER OF THE LEARNED CIT(A) FOR PARTLY SUSTAINING T HE ADDITION AND THE REVENUE IS IN APPEAL AGAINST GIVING RELIEF TO THE A SSESSEE. THIS ISSUE REVOLVES AROUND SECTION 14A OF THE INCOME-TAX ACT 1961. 7. SO FAR AS ASSESSMENT YEAR 1998-99 IS CONCERNED THE ASSESSEE HAS DECLARED DIVIDEND INCOME OF ` 2 76 17 268 WHICH WAS CLAIMED EXEMPT U/S 10(33) OF THE ACT. THE ASSESSING OFFICER ASKED THE ASSESSEE THE SOURCE OF INVESTMENT IN THESE SHARES A ND EXPLAIN WHETHER BORROWED FUNDS HAVE BEEN INVESTED FOR MAKIN G INVESTMENT OF THE SAID SHARE. THE ASSESSEE FILED REPLY STATING TH AT THE NET WORTH OF THE COMPANY AS ON 31.03.1998 WAS ` 1113.08 CRORE. THE ASSESSEE FURTHER SUBMITTED THAT IT IS DEALING IN PURCHASE AN D SALE OF SHARE AND THE SAME ARE HELD AS STOCK IN TRADE. THE BASIC OBJE CT OF THE ASSESSEES BUSINESS IS NOT TO EARN DIVIDEND BUT TRADING IN SHA RES. THE QUANTUM OF FUNDS UTILIZED IN THE ACQUISITION OF STOCK IN TR ADE IS VERY MINIMUM AND THEREFORE NO EXPENDITURE IS ATTRIBUTABLE TO THE EARNING OF DIVIDEND. THE A.O. WAS NOT SATISFIED WITH THE EXPLANATION OF THE ASSESSEE. THE A.O. REFERRED TO THE DECISION OF THE HONBLE SUPREM E COURT IN THE CASE OF RAJASTHAN WAREHOUSING CORPORATION LTD. VS. CIT 2 42 ITR 450. THE A.O. ALSO REFERRED TO SECTION 14A OF THE INCOME-TAX ACT 1961. THE A.O. EXAMINED THE BALANCE SHEET OF THE ASSESSEE AND MADE THE FOLLOWING OBSERVATIONS:- TOTAL INVESTMENT IN SHARES HELD AS STOCK IN TRADE IS ` 117.39 CRORE. FURTHER CERTAIN SHARES WERE HELD AS LONG TE RM INVESTMENT OF ` 16.97 CRORE. ASSESSEE IS ALSO HOLDING SHARES OF SU BSIDIARY COMPANIES ITA 3303/MUM/2003 & OTHER 7 GROUP-APPEALS M/S. RELIANCE CAPITAL LTD. 5 OF ` 35.05 CRORE. TOTAL INVESTMENT IN SHARES IS ` 169.41 CRORE. BALANCE SHEET OF THE ASSESSEE REVEALS THAT THE TOTAL SHAREH OLDERS FUND AS ON 31.3.97 TO ` 1049.85 CRORE AND THE LOANS ARE OF ` 453.52 CRORE. EXAMINATION OF THE PROFIT & LOSS ACCOUNT REVEALS TH AT IN FY 96-97 INTEREST AND FINANCE CHARGES OF ` 31.37 CRORE WERE CLAIMED AS EXPENDITURE IN AY 98-99. THE INTEREST ON FIXED LOAN S DEBENTURES ETC HAS INCREASED TO ` 41.26 CRORE. ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF PURCHASE AND SALE OF SHARES AND ALSO LE ASING ACTIVITY. THE SHARES HAVE BEEN ACQUIRED IN THE PAST. DIRECT LINKA GE OF THE BORROWED FUNDS WITH THE INVESTMENT IN THE SHARES IS NOT POSS IBLE TO ESTABLISH IN VIEW OF A LARGE NUMBER OF TRANSACTIONS AND THE INVE STMENT BEING OLD. FURTHER IN AY 96-97 & 97-98 CLAIM OF THE ASSESSEE OF DEDUCTION U/S.80M WAS EXAMINED. IT WAS HELD IN AY 96-97 THAT AN EXPENDITURE OF ` 3 CRORE OUT OF INTEREST PAYMENT OF ` 31.71 CRORE IS RELATABLE TO EARNING OF DIVIDEND INCOME. IN AY 97-98 ALSO IT WAS HELD T HAT INTEREST EXPENDITURE OF ` 3 CRORE IS RELATABLE TO THE FUNDS INVESTED IN SHARE S YIELDING DIVIDEND. IN VIEW OF THE FINDINGS RECORDED IN PREVIOUS ASSESSMENT YEARS AND INVESTMENT BEING OLD AND NO FR ESH SHARES HAVING BEEN ACQUIRED OF SUBSTANTIAL AMOUNT AND INTE REST EXPENDITURE HAVING INCREASED FROM ` 31.37 CRORE TO ` 41.26 CRORE CASE OF AY 98-99 IS DECIDED. ON THE ABOVE REASONING THE A.O. HELD THAT INTEREST EXPENDITURE OF ` 3 CRORE IS ATTRIBUTABLE TO THE DIVIDEND INCOME WHICH IS CLAIMED EXEMPT BY THE ASSESSEE. 8. ON FURTHER EXAMINATION IT WAS NOTICED BY THE A.O . THAT THE ASSESSEE HAS CLAIMED THE INTEREST ON THE FOLLOWING BONDS AND DEBENTURES WHICH WAS CLAIMED EXEMPT U/S.10(23G) OF THE ACT. NAME OF THE COMPA NY PARTICULARS BOND INTEREST AMT RELIANCE TELECOM LIMITED 10.5% BONDS ` 33 99 123 RELIANCE UTILITY POWER LTD DEBENTURES ` 6 80 70 059 M.T.N.L. 15% BONDS ` 89 38 356 M.T.N.L. 17% BONDS ` 1 38 70 980 T OTAL `. 9 42 78 518 ITA 3303/MUM/2003 & OTHER 7 GROUP-APPEALS M/S. RELIANCE CAPITAL LTD. 6 9. THE A.O. SOUGHT EXPLANATION OF THE ASSESSE ON TH E SOURCE OF INVESTMENT IN ABOVE BONDS AND DEBENTURES. THE ASSES SEE FILED DETAILS OF INVESTMENTS WITH DATES WHICH ARE GIVEN IN THE AS SESSMENT ORDER ON PAGE NOS. 10 AND 11. SO FAR AS RELIANCE TELECOM LIM ITED BONDS RELIANCE UTILITY POWER LIMITED BONDS AND MTNL BONDS (17%) ARE CONCERNED THOSE INVESTMENTS WERE MADE IN THE PRECED ING YEARS. IN RESPECT OF 17% MTNL BONDS THE CURRENT YEAR INVESTME NT WAS ` 5 64 80 590. THE SAME WAY 15% MTNL BONDS WERE PURCH ASED DURING THE YEAR I.E. THE FINANCIAL YEAR 1997-98 OF ` 14 79 89 616. THE ASSESSEE EXPLAINED THAT THE INVESTMENT IS MADE OUT OF THE SALE PROCEEDS OF STOCK- IN- TRADE OF THE SHARES/SECURITI ES AND MAJORITY OF THE INVESTMENTS WERE MADE IN THE PRECEDING YEARS. I NVESTMENT IN RTL DEBENTURES OF ` 9.20 CRORE AND ` 2 CRORES HAD BEEN MADE OUT OF THE INCOME GENERATED DURING THE YEAR. SO FAR AS RUPLS DEBENTURES WERE CONCERNED THOSE WERE MADE OUT OF THE ASSESSEES OW N FUNDS. THE ASSESSEE ALSO EXPLAINED THAT THE ASSESSEE GENERATED ` 80.84 CRORE BY SELLING THE SHARES AND THOSE WERE UTILIZED FOR MAKI NG THE INVESTMENT. THE A.O. WAS NOT IMPRESSED WITH THE EXPLANATION OF THE ASSESSEE. HE EXAMINED THE BALANCE SHEET OF THE ASSESSEE AS ON 31 .03.1997 AND ON 31.3.1998 AND MADE THE FOLLOWING OBSERVATIONS:- EXAMINATION OF BALANCE SHEET AS ON 31.3.97 & 31.3. 98 REVEALS THAT EXCEPT FOR THE INVESTMENT OF ` 7.65 CRORE IN 17% MTNL BOND BALANCE INVESTMENT OF ` ` 14.80 CRORE IN 15% MTNL BOND HAS BEEN MADE DURING THE YEAR. INVESTMENT OF ` 11.20 CRORE IN RTL DEBENTURES HAS BEEN MADE IN DECEMBER 97 AND JANUARY 98. INVESTMENT IN RUPL DEBENTURES OF ` 80.95 CRORE HAS BEEN MADE ON 27.9.97. EXAMINATION O F THE BALANCE SHEET REVEALS THAT THE SHARE CAPITAL AS ON 31.3.98 IS ` 123.97 CRORE SAME AS SHARE CAPITAL AS ON 31.3.97. SHAREHOLDERS FUND INCLUSIVE OF RESERVE AND SURPLUS ARE ` 1113.08 CRORE WHEREAS THESE WERE ` 1049.85 CRORE LAST YEAR. TOTAL LOAN FUNDS HAVE INCR EASED FROM ` 453 CRORE TO ` 998 CRORE DURING THE YEAR. THIS INCREASE IS PRIMARI LY ON ACCOUNT OF ISSUE OF REDEEMABLE DISCOUNT BONDS OF ` 470 CRORE AND ITA 3303/MUM/2003 & OTHER 7 GROUP-APPEALS M/S. RELIANCE CAPITAL LTD. 7 REDEEMABLE NONCONVERTIBLE DEBENTURES OF ` 209 CRORE. EXAMINATION OF ASSETS SIDE OF THE BALANCE SHEET REVEALS THAT THE F IXED ASSETS ARE ` 576.63 CRORE COMPARED TO ` 537.87 LAST YEAR. CURRENT ASSETS ARE ` 749 CRORE COMPARED TO ` 744 CRORE LAST YEAR. NET CURRENT ASSETS ARE ` 652 CRORE COMPARED TO ` 670 CRORE LAST YEAR. INVESTMENTS HAVE INCREASED FROM ` 295 CRORE TO ` 882 CRORE. EXAMINATION OF THE BALANCE SHEET THEREFORE REVEALS THAT THE YEARS PROFIT AFTER TAX IS OF ` 106 CRORE. THE PROFITS AS WELL AS THE FRESH BORROWED FUNDS HAVE BE EN INVESTED MOSTLY IN INVESTMENTS. IN ABSENCE OF DATE-WISE DETAILS OF INVESTMENT AND THE CORRESPONDING SOURCE OF INVESTMENT ONE TO ONE NEXU S OF BORROWED FUNDS WITH THE INVESTMENT IS NOT POSSIBLE TO ESTABLISH. A SSESSEE ALSO FAILED TO FURNISH INFORMATION IN THIS REGARD. ON THE OTHER HA ND IT IS CLEAR THAT THE ASSESSEE COMPANY HAS RAISED FUNDS OF ` 679 CRORE DURING THE YEAR BY WAY OF DISCOUNT BONDS AND DEBENTURES. INTEREST ON T HESE IS PAYABLE @ 16%. INVESTMENT IN RUPL BONDS HAS BEEN MADE ON 27.9 .97 AND THEREFORE IT IS FOR SIX MONTHS ONLY. SIMILARLY IN VESTMENT IN RTL BONDS HAS BEEN MADE FOR A PERIOD OF 3 MONTHS. ON ACCOUNT OF ASSESSEES FAILURE TO FURNISH DATE-WISE DETAILS OF CASH RECEIP T AND PAYMENT IT IS NOT POSSIBLE TO ESTABLISH THE DIRECT SOURCE OF INVESTME NT IN THESE BONDS AND DEBENTURES. HOWEVER EXAMINATION OF BALANCE SHEET A ND PROFIT & LOSS ACCOUNT REVEALS THAT THE ASSESSEE COMPANY HAS RAISE D ` 679 CRORE OF FUNDS ON INVESTMENT RATE OF ABOUT 16% ON WHICH CLAI M OF DISCOUNT ON BONDS OF ` 37.13 CRORE AND THE INTEREST ON DEBENTURES OF ` 29 CRORE HAS BEEN MADE. TOTAL EXPENDITURE ON INTEREST AND FINANC E CHARGES HAS INCREASED TO ` 87.32 CRORE DURING THE YEAR COMPARED TO ` 31.37 CRORE LAST YEAR. THEREFORE KEEPING IN VIEW ALL FACTS AND CIRC UMSTANCES OF THE CASE IT IS HELD THAT PART OF THE BORROWED FUNDS HAVE BEE N DIVERTED TOWARDS THESE BONDS ON WHICH INTEREST INCOME HAS BEEN CLAIM ED AS EXEMPT. IN ABSENCE OF PROPER DETAILS AN AMOUNT OF ` 5 CRORE IS HELD TO BE ATTRIBUTABLE TO THE INVESTMENT IN THESE BONDS. ACCO RDINGLY DISALLOWANCE OF ` 5 CRORE IS MADE ON THIS ACCOUNT. ITA 3303/MUM/2003 & OTHER 7 GROUP-APPEALS M/S. RELIANCE CAPITAL LTD. 8 THE A.O. FINALLY WORKED OUT ` 5 CRORE AS AN EXPENDITURE ATTRIBUTABLE FOR EARNING OF INTEREST INCOME FROM THE BONDS AND D EBENTURES AND HE WORKED OUT THE NET EXEMPT INCOME OF THE INTEREST ON BONDS/DEBENTURES. 10 SO FAR AS ASSESSMENT YEAR 1999-2000 IS CONCERNED THE ASSESSEE HAS DECLARED THE DIVIDEND INCOME OF ` 4 20 01 686 AND CLAIMED AS EXEMPT U/S 10(33) OF THE INCOME-TAX ACT 1961. ASSE SSEE ALSO DECLARED INTEREST INCOME OF ` 17 65 46 216 WHICH WAS CLAIMED AS EXEMPT U/S 10(23G) OF THE ACT. THE A.O. SOUGHT EXPLANATION OF THE ASSESSEE IN RESPECT OF THE SOURCE OF INVESTMENTS. THE ASSESSEE EXPLAINED THAT THE NET WORTH OF THE ASSESSEE-COMPANY AS ON 31.3.1999 W AS ` 1135.78 CRORE. IT WAS CONTENDED THAT THE DIVIDEND IS EARNED OUT OF THE SHARES HELD IN STOCK IN TRADE OF THE COMPANY AND THERE WAS NO INTENTION EARN DIVIDEND INCOME. SO FAR AS THE INVESTMENT IN THE IN FRASTRUCTURE UNDERTAKING IS CONCERNED THE ASSESSEE CONTENDED TH AT THE INVESTMENT IS MADE BY GENERATING FUNDS ON SALE OF SECURITIES H ELD IN STOCK IN TRADE. THE A.O. WAS NOT IMPRESSED WITH THE EXPLANAT ION OF THE ASSESSEE. HE EXAMINED THE BALANCE SHEET FOR THE PRE CEDING YEARS AS WELL AS THE ASSESSMENT YEAR 1999-2000 AND AFTER CON SIDERING THE DISALLOWANCE MADE IN THE ASSESSMENT YEARS 1996-97 1997-98 AND 1998-99 HE ESTIMATED THE INTEREST EXPENDITURE OF ` 3 CRORE AS ATTRIBUTABLE TO THE DIVIDEND INCOME WHICH WAS CLAIM ED EXEMPT IN THE ASSESSMENT YEAR 1999-2000. SO FAR AS THE INTEREST I NCOME CLAIMED EXEMPT U/S 10(23G) IS CONCERNED WHICH WAS TO THE E XTENT OF ` 17 65 46 216 RECEIVED FROM THE SAME BONDS AND DEBEN TURES WHICH DETAILS ARE GIVEN WHILE DISCUSSING THE FACTS IN ASS ESSMENT YEAR 1998- 99. THE A.O. SOUGHT THE ASSESSEES EXPLANATION REGA RDING THE SOURCE OF INVESTMENT IN THOSE BONDS AND ALSO ASKED WHETHER TH E BORROWED FUNDS HAD BEEN INVESTED FOR MAKING THE INVESTMENT. AFTER CONSIDERING THE DISALLOWANCE MADE IN THE PRECEDING YEARS AS WEL L AS THE REVENUE GENERATED BY SELLING THE MTNL BONDS (15%) AND MTNL BONDS (17%) HE ESTIMATED ` 9 CRORE AS THE INTEREST ATTRIBUTABLE TO INVESTMENT IN ITA 3303/MUM/2003 & OTHER 7 GROUP-APPEALS M/S. RELIANCE CAPITAL LTD. 9 THOSE BONDS. HE ACCORDINGLY MADE DISALLOWANCE ` 9 CRORE AND WORKED OUT THE NET INTEREST EXEMPT U/S 10(23G) OF THE ACT. IT IS PERTINENT TO NOTE HERE THAT INSTEAD OF SEPARATELY MAKING THE DIS ALLOWANCE IN THE FINAL WORKING THE A.O. HAS MADE THE ADJUSTMENT IN THE EXEMPT DIVIDEND U/S 10(33) OF THE ACT AND EXEMPT INTEREST U/S.10(23G) OF THE ACT BY TAKING THE NET FIGURES AFTER REDUCING THE ES TIMATED ATTRIBUTABLE INTEREST EXPENDITURE FOR EARNING THOSE INCOMES. 11. IN ASSESSMENT YEAR 2000-2001 THE ASSESSEE HAS C LAIMED THE DIVIDEND INCOME OF ` 4 72 12 039 CLAIMED EXEMPT U/S 10(33) OF THE ACT. IN THIS YEAR ALSO THE A.O. ASKED THE ASSESSEE ABOUT THE SOURCE OF INVESTMENT IN THE SHARES AND WHETHER THE BORROWED F UNDS HAD BEEN UTILIZED FOR MAKING THE INVESTMENT. THE ASSESSEE FI LED REPLY STATING THAT IT HAD SUFFICIENT FUNDS AND OUT OF THE SAID FU NDS THE INVESTMENT IS MADE. AS DONE IN THE PRECEDING YEARS THE A.O. EXAM INED THE BALANCE SHEET OF THE ASSESSEE AND MADE THE FOLLOWING OBSERV ATIONS:- THE ASSESSEE COMPANY HAS CONTENDED THAT NO EXPENDI TURE CAN BE HELD TO BE ATTRIBUTABLE TO EARNING OF DIVIDEND. FROM THE EXAMINATION OF BALANCE SHEET IT IS SEEN THAT THE SHARES ON WHI CH DIVIDEND INCOME HAS BEEN EARNED WERE PURCHASED IN THE PAST. HOWEVER FRESH INVESTMENT OF ` 38.85 CRORE HAS BEEN MADE IN RELIANCE INDUSTRIES LT D. SHOWN UNDER INVESTMENTS AND INVESTMENTS OF ` 10 CRORE IN BSES AND ` 2.18 LAKH IN FORBES GOKAK LTD. ON WHICH DIVIDENDS H AVE BEEN RECEIVED IN THE CURRENT YEAR. TOTAL INVESTMENT IN SHARES HEL D AS STOCK IN TRADE IS ` 280.72 CRORE. FURTHER CERTAIN SHARES WERE HELD AS LONG TERM INVESTMENT OF ` 129.87 CRORE. ASSESSEE IS ALSO HOLDING SHARES OF SUBSIDIARY COMPANIES OF ` 13.07 CRORE. TOTAL INVESTMENT IN SHARES IS ` 423.66 CRORE. BALANCE SHEET OF THE ASSESSEE REVEALS THAT THE TOTAL SHAREHOLDERS FUNDS AS ON 31.03.2000 IS ` 1197.96 CRORE AND THE LOANS ARE OF ` 2315.44 CRORE. ITA 3303/MUM/2003 & OTHER 7 GROUP-APPEALS M/S. RELIANCE CAPITAL LTD. 10 12. IT IS FURTHER OBSERVED BY THE A.O. THAT INTERES T AND FINANCE CHARGES OF ` .31.37 CRORE WERE CLAIMED AS EXPENDITURE IN AY 97-9 8 WHICH INCREASED TO ` 41.26 CRORE IN A.Y. 1998-99. THIS FURTHER INCREASED TO ` 75.57 CRORE IN A.Y. 1999-2000 AND ` 159.90 CRORES IN A.Y. 2000-01. THE INTEREST ON BONDS WHICH WAS NIL I N A.Y. 97-98 INCREASED TO ` ` 37.13 CRORE IN A.Y. 1998-99 AND FURTHER INCREASED T O ` 79.37 CRORE IN A.Y. 1999-2000 AND ` 93.48 CRORE IN A.Y. 2000-01. ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF PURC HASE AND SALE OF SHARES LENDING AND ALSO LEASING ACTIVITY. THE LEAS E INCOME HAS INCREASED FROM ` 129.86 CRORE IN A.Y. 98-99 TO ` 165.27 CRORE IN A.Y. 99-00. IT HAS THEN DECREASED TO ` 128.95 CRORE IN A.Y. 2000-01. THE INTEREST INCOME INCREASED FROM ` 142.89 CRORE IN A.Y. 98-99 TO ` 195.64 CRORE IN A.Y. 99-00. IT FURTHER INCREASED TO ` 295.38 CRORE IN A.Y. 2000-01. THE SHARES HAVE BEEN MAINLY ACQUIRED IN THE PAST. DIRECT LINKAGE OF THE BORROWED FUNDS WITH THE INVES TMENT IN THE SHARES IS NOT POSSIBLE TO ESTABLISH IN VIEW OF A LARGE NUM BER OF TRANSACTIONS AND THE INVESTMENT BEING OLD. FURTHER IN A.Y.96-97 & A.Y. 97-98 CLAIM OF THE ASSESSEE OF DEDUCTION U/S 80M WAS EXAM INED. IT WAS HELD IN A.Y. 97-98 THAT AN EXPENDITURE OF ` 3 CRORE OUT OF INTEREST PAYMENT OF ` 31.71 CRORE IS ATTRIBUTABLE FOR EARNING OF DIVIDEND INCOME. IN A.Y. 97-98 ` 3 CRORE WERE HELD AS RELATABLE TO EARNING DIVIDEND. IN A.Y. 98- 99 ` 3 CRORE WERE HELD TO BE ATTRIBUTABLE TO DIVIDEND IN COME WHICH IS CLAIMED EXEMPT. FOR A.Y. 99-00 ALSO ` 3 CRORE WERE HELD AS RELATABLE TO EARNING DIVIDEND. FROM THE LIST OF DIVIDEND RECEIPT SUBMITTED BY THE ASSESSE IT IS SEEN THAT THE DIVIDENDS HAVE BEEN EA RNED ON INVESTMENT OF ` 56.58 CRORE (LAST YEAR ` .18 CRORE) AND STOCK IN TRADE 178.94 CRORE (LAST YEAR ` 111.53 CRORE). THE MAIN INVESTMENT OF ` .38.58 CRORE IN RIL SHOWN IS UNDER INVESTMENT AND ` 10.01 CRORE IN BSES LTD. AND ` 62.63 CRORE IN L & T LTD. ARE SHOWN AS STOCK-IN-TRADE. IN RESPECT OF RIL ASSESSEE HAS SUBMITTED THAT SHARES WERE PURCHASED A T THE END OF MARCH 2000 AS EX-DIVIDEND AND NO DIVIDEND ON THESE SHARES WERE RECEIVED. SIMILAR EXPLANATION IS GIVEN FOR INVESTME NT IN L & T LTD. CONSIDERING ALL FACTS AND CIRCUMSTANCES AND FINDING S IN A.Y. 1996-97 ITA 3303/MUM/2003 & OTHER 7 GROUP-APPEALS M/S. RELIANCE CAPITAL LTD. 11 97-98 98-99 & 99-2000 IT IS HELD BY THE A.O. THAT THE INTEREST EXPENDITURE OF ` 4 CRORE IS ATTRIBUTABLE TO DIVIDEND INCOME WHICH IS CLAIMED EXEMPT FOR A.Y. 2000-2001. 13. THE A.O. FINALLY WORKED OUT INTEREST EXPENDITUR E OF ` 4 CRORE AS ATTRIBUTABLE TO EARN THE DIVIDEND INCOME WHICH WAS CLAIMED EXEMPT. ON THE SAME WAY THE ASSESSEE HAD CLAIMED EXEMPTION OF THE INTEREST OF ` 19 28 63 025 WHICH WAS RECEIVED ON RELIANCE TELECOM LIMITED (10.5% BONDS) AND RELIANCE UTILITY & POWER LIMITED I.E. NON- CONVERTIBLE DEBENTURES AT ` 1 17 92 219 AND ` 18 10 70 806 RESPECTIVELY. THE A.O. ALSO SOUGHT EXPLANATION OF T HE ASSESSEE ON THE SOURCE OF INVESTMENT. THE A.O. REFERRED THE PRECEDI NG YEARS DISALLOWANCES AND CONSIDERING THE DISALLOWANCE MADE IN THE ASSESSMENT YEAR 1999-2000 ON THE SAME REASONING HE WORKED OUT THE INTEREST EXPENDITURE ATTRIBUTABLE FOR EARNING THE E XEMPT INCOME OF ` 19 28 63 025 AT ` 9 CRORE. ACCORDINGLY REDUCING THE SAME FROM THE EXEMPT INCOME AND IN CONSEQUENCE THE TOTAL INCOME W AS ENHANCED. 14 IN ASSESSMENT YEAR 2001-2002 IT WAS NOTICED BY T HE A.O. THAT THE ASSESSEE-COMPANY HAS CLAIMED DIVIDEND INCOME OF ` 7 13 51 096 AS EXEMPT U/S 10(33) AND INTEREST INCOME ON THE BON DS OF ` 39 55 92 661 AS EXEMPT U/S.10(23G) OF THE ACT. THE A.O. ASKED THE ASSESSEE TO PROVE THAT THE INVESTMENT IN THE SAID S HARES AND BONDS / DEBENTURES WAS NOT MADE OUT OF THE BORROWED FUNDS. THE ASSESSEE FILED A DETAIL REPLY EXPLAINING THE SOURCE OF FUNDS WHICH IS REPRODUCED IN ASSESSMENT ORDERS FOR A. YS. 1998-99 1999-2000 AND 2000-2001. THE A.O. HAS REPRODUCED THE ENTIRE EXPLANATION OF T HE ASSESSEE AT PAGE 2 OF THE ASSESSMENT ORDER. THE A.O. HAS REFERR ED TO THE DECISIONS OF THE HONBLE SUPREME COURT IN THE CASE OF DISTRIB UTORS (BARODA) PVT. LTD. 155 ITR 120 AND HONBLE MADRAS HIGH COURT IN T HE CASE OF MAGGANLAL CHAGGANLAL PVT. LTD. 236 ITR 456. THE A.O . HAS OBSERVED THAT INSPITE OF OPPORTUNITIES GIVEN TO THE ASSESSEE THE ASSESSEE HAS NOT BROUGHT ANYTHING ON RECORD TO PROVE THE SOURCE OF INVESTMENTS IN ITA 3303/MUM/2003 & OTHER 7 GROUP-APPEALS M/S. RELIANCE CAPITAL LTD. 12 STOCKS AND SHARES BECAUSE OF WHICH THE ASSESSEE-COM PANY HAD RECEIVED INTEREST AND DIVIDEND WHICH HAS BEEN CLAIM ED AS EXEMPT FROM TAX. THE A.O. ALSO OBSERVED ON PERUSAL OF THE BALAN CE SHEET AND P& L ACCOUNT THAT THE ASSESSEE-COMPANY HAD UTILIZED BORR OWED FUNDS TO THE TUNE OF ` 2316 CRORE DURING THE CURRENT YEAR. THE A.O. ALSO OBSERVED THAT MOST OF THE STOCK AND SHARES ON WHICH THE DIVIDEND AND INTEREST HAD BEEN CLAIMED AS EXEMPT WERE PURCHASED IN EARLIER YEARS DURING WHICH ALSO THE ASSESSEE-COMPANY HAD UTILIZED BORROWED FUNDS. THE A.O. FURTHER NOTED THAT THE ASSESSEE-COMPANY HA S INCREASED THEIR INVESTMENTS IN RELIANCE UTILITIES AND POWER TO ` 265 CRORE DURING THE CURRENT YEAR AND HAS ALSO INVESTED IN RELIANCE INFO COM TO THE TUNE OF ` 800 CRORE. THE A.O. ALSO NOTED THAT THE ASSESSEE-CO MPANY HAD DEBITED AN AMOUNT OF ` 182.60 CRORE AS INTEREST AND FINANCE CHARGES AND AN AMOUNT OF ` 17.14 CRORE AS ADMINISTRATIVE AND OTHER EXPENSES. T HE A.O. FURTHER OBSERVED THAT THE ASSESSEE HAD NOT BRO UGHT ON RECORD ANYTHING TO PROVE THE NEXUS ON THEIR OWN FUNDS TO M AKE INVESTMENT. THE A.O. HAS NOTED THAT THE TOTAL RECEIPTS OF THE A SSESSEE-COMPANY FOR ASSESSMENT YEAR 2001-2002 WERE ` 492.20 CRORE OUT OF WHICH DIVIDEND AND INTEREST INCOME IS ` 46.69 CRORE WHICH IS 9.48%. OUT OF THE INTEREST AND FINANCE CHARGES ADMINISTRATIVE AND OT HER EXPENSES INCURRED DURING THE YEAR OF ` 191.60 CRORE THE A.O. WORKED OUT THE DISALLOWANCE OF ` 18.16 CRORE AND ACCORDINGLY MADE ADJUSTMENT. IN THIS YEAR THE A.O. HAS MADE SEPARATE ADDITION IN RE SPECT OF THE DISALLOWANCE OF INTEREST AND OTHER EXPENSES ATTRIBU TABLE FOR EARNING THE EXEMPT INCOME I.E. DIVIDEND AND INTEREST IN THE FINAL COMPUTATION. 15. THE ASSESSEE CHALLENGED THE DISALLOWANCE MADE B Y THE A.O. IN ALL THE ASSESSMENT YEARS BEFORE THE LEARNED CIT(A). RAISING SERIOUS GRIEVANCE AGAINST THE ACTION OF THE A.O. THE LEARN ED CIT(A) GAVE PARTIAL RELIEF TO THE ASSESSEE AND SUSTAINED DISALL OWANCE MADE BY THE A.O. AS UNDER:- ITA 3303/MUM/2003 & OTHER 7 GROUP-APPEALS M/S. RELIANCE CAPITAL LTD. 13 ASST. YEAR EXPENDITURE ATTRIBUTABLE TO DIVIDEND (U/S 10(33) EXPENDITURE ATTRIBUTABLE TO INTEREST U/S 10(23G) 1998-99 ` 60 00 000 NIL 1999-00 ` 60 00 000 NIL 2000-01 ` 1 00 00 000 NIL 2001-02 ` 69 25 000 NIL NOW THE ASSESSEE AS WELL AS THE REVENUE BOTH ARE IN APPEAL AGAINST PARTIAL SUSTENANCE OF ADDITION AND PARTIAL DISALLOW ANCE OF ADDITION MADE BY THE ASSESSING OFFICER RESPECTIVELY. 16. WE HAVE HEARD THE PARTIES AND PERUSED THE RECOR DS. THE LEARNED CIT(A) HAS GIVEN A CATEGORICAL FINDING THAT THE ASS ESSEE HAS ITS OWN SURPLUS FUNDS WHICH WERE UTILIZED FOR MAKING INVEST MENTS IN THE SHARES BONDS AND DEBENTURES. THE LEARNED COUNSEL A RGUED THAT THE TOTAL TAX FREE INVESTMENT IN ALL THE YEARS IS MUCH BELOW THE PAID UP CAPITAL AND RESERVES AVAILABLE WITH THE ASSESSEE-CO MPANY. HE SUBMITS THAT THE TAX FREE INVESTMENT IN ASSESSMENT YEARS 19 98-99 1999-2000 AND 2000-2001 IS MUCH LESS THAN THE INCOME BEFORE D EPRECIATION AND ELEMENT OF DEPRECIATION MUST BE CONSIDERED FOR CORR ECT WORKING OF THE FUNDS GENERATION. IN THE ASSESSMENT YEAR 2001-2002 THE FUNDS WERE GENERATED BY ISSUING PREFERENCE SHARES TO THE EXTEN T OF ` 800 CRORE BUT INCREASE IN TAX FREE INVESTMENTS IN THE SAME YE AR I.E. ASSESSMENT YEAR 2001-2002 IS MARGINALLY HIGHER THAN THE PROFIT BEFORE TAX AND PREFERENCE SHARE CAPITAL RAISED DURING THE YEAR. HE FURTHER SUBMITS THAT IN ASSESSMENT YEARS 1997-98 1998-99 THE INVES TMENT IN SHARES AND SECURITIES WAS MUCH BELOW THE TOTAL SHARE CAPIT AL RESERVES AND SURPLUS. HE SUBMITS THAT THE TAX FREE SECURITIES WE RE ALSO HELD AS STOCK IN TRADE AND ONLY THE DIVIDEND IS EXEMPT AND PROFIT ON THE SALE OF STOCK IN TRADE OF SHARES AND SECURITIES IS TAXAB LE AS THE BUSINESS INCOME AND HENCE SECTION 14A IS NOT ATTRACTED AT AL L. HE FURTHER SUBMITS THAT THE AD HOC DISALLOWANCE CANNOT BE MADE AS IN FACT ALL THE DETAILS WERE FILED BEFORE THE A.O. IN RESPECT OF TH E GENERATION OF FUNDS ITA 3303/MUM/2003 & OTHER 7 GROUP-APPEALS M/S. RELIANCE CAPITAL LTD. 14 BUT THE SAME WERE DISCARDED. THE LEARNED COUNSEL RE LIED ON THE FOLLOWING DECISIONS :- (I) PUNJAB STATE INDUSTRIAL DEV. CORP. LTD. VS. DCI T 102 ITD 1 (SB) (II) MARUTI UDYOG LTD. VS. DCIT 92 TTJ (DEL) 987 (III) ACIT VS. EICHER LTD. 101 TTJ (DEL) 369 (IV) WIMCO SEEDINGS LTD. VS. DCIT 107 ITD 267 (DELH I) (TM) (V) TATA FINANCE LTD. 20 SOT 47 (MUM) (VI) MUKAND GLOBAL FINANCE LTD. 20 SOT 82 (MUM) WE HAVE ALSO HEARD THE LEARNED DEPARTMENTAL REPRESE NTATIVE WHO SUPPORTED THE ASSESSMENT ORDERS PASSED BY THE ASSES SING OFFICER. 17. WE FIND THAT THERE IS NO DISPUTE IN THIS CASE THAT THE ASSESSEE IS ALSO HOLDING SECURITIES I.E. SHARES DEBENTURES BO NDS ETC. AS STOCK- IN- TRADE. AS RIGHTLY ARGUED BY THE LEARNED COUNSEL THO UGH THE DIVIDEND IS EXEMPT BUT SO FAR AS THE PROFIT ON SALE OF THE SHA RES AND SECURITIES IS CONCERNED THE SAME IS TAXABLE. LET US DEAL WITH THE CASE OF THE A.O.. THE MAIN THRUSH OF THE A.O. FOR MAKING THE DISALLOW ANCE INVOKING SECTION 14A IS THAT AS PER ANALYSIS OF THE BALANCE SHEET MADE BY HIM THE ASSESSEE HAS UTILISED BORROWED FUNDS FOR MAKING THE INVESTMENT BUT AS PER THE FACTS AND FIGURES PLACED BEFORE US B Y WAY OF A CONSOLIDATED CHART FOR ALL YEARS SHOWING THE INFLO W AND OUTFLOW OF FUNDS WE FIND THAT THE ASSESSEE IS HAVING SUFFICIE NT OWN FUNDS GENERATED FROM THE SHARE CAPITAL AND RESERVES AND S URPLUS. 18. IN ASSESSMENT YEAR 2001-2002 THE ASSESSEE RECEI VED THE FUNDS BY ISSUING PREFERENCE SHARES TO THE EXTENT OF ` 800 CRORE. SO FAR AS THE DIVIDEND INCOME IS CONCERNED NOWHERE IT IS CON TROVERTED BY THE REVENUE THAT THE BASIC OBJECT OF THE ASSESSEE WAS N OT TO EARN THE DIVIDEND BY HOLDING THE SHARES AS AN INVESTMENT AND SHARES WERE ALSO HELD AS STOCK-IN-TRADE AS PART OF THE BUSINESS OF T HE ASSESSEE- COMPANY. SO FAR AS THE INTEREST ON BONDS AND DEBENT URES ARE CONCERNED WE FIND THAT AS ADMITTED BY THE A.O. MO ST OF THE INVESTMENTS HAD BEEN MADE IN THE PRECEDING YEARS PR IOR TO ITA 3303/MUM/2003 & OTHER 7 GROUP-APPEALS M/S. RELIANCE CAPITAL LTD. 15 ASSESSMENT YEAR 1998-99 AND SAID FACT IS CLEAR FROM HIS OBSERVATIONS IN ASSESSMENT YEAR 1998-99. THE ASSESSEE MADE SOME INVESTMENT IN THE ASSESSMENT YEARS 1999-2000 2000-2001 AND 2001- 2002 BUT WE FIND THAT THE ASSESSEE HAS GENERATED FUNDS FROM THE SALE OF SHARES AND SECURITIES HELD AS STOCK-IN-TRADE OR AS THE INVESTM ENTS. WE FIND THAT IDENTICAL ISSUE OF DISALLOWANCE ON THE DIVIDEND INC OME HAD COME FOR THE CONSIDERATION BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 1995-96 IN CONTEXT OF DEDUCTION UND ER SEC. 80M OF THE ACT (ITA NO.3073/MUM/1996 & OTHER APPEALS). IN THAT YEAR ALSO THE ASSESSEE HAD RECEIVED THE DIVIDEND OF ` 11 57 98 227. THE A.O. WORKED OUT THE INTEREST EXPENDITURE ATTRIBUTABLE FO R EARNING DIVIDEND INCOME AT ` 1 CRORE. WHEN THE MATTER REACHED BEFORE THE TRIBUN AL VIDE ORDER DATED 12.1.2007 THE TRIBUNAL HELD THAT AD HOC DIS- ALLOWANCE OF INTEREST EXPENDITURE CANNOT BE JUSTIFI ED AT ANY COST. 19. IN THE CASE OF CIT VS. RELIANCE UTILITY AND POW ER LIMITED 313 ITR 340 (BOM.) THE CONTROVERSY WAS DIVERSION OF THE INTEREST BEARING FUNDS FOR MAKING THE INVESTMENT. IN THE SAID CASE T HE A.O. RECORDED FINDING THAT THE SUM OF ` 313 CRORE WAS INVESTED OUT OF THEIR OWN FUNDS AND ` 147 CRORE WERE INVESTED OUT OF BORROWED FUNDS. THE A.O. ACCORDINGLY WORKED OUT THE DISALLOWANCE BY TAKING I NTEREST RATE AT 12% PER ANNUM FOR THREE MONTHS. THE ASSESSEE PLEADE D BEFORE THE HONBLE HIGH COURT THAT THE ASSESSEE HAD SUFFICIENT INTEREST FREE FUNDS AS UNDER:- (I) SHARE CAPITAL ` 180.00 CRORE (II) RESERVES AND SURPLUS ` 120.80 CRORE (III) DEPRECIATION RESERVES ` 95.39 CRORE ----------------- TOTAL INTEREST FREE FUNDS ` 398.19 CRORE ========== THEIR LORDSHIP HELD AS UNDER:- IF THERE BE INTEREST-FREE FUNDS AVAILABLE TO AN AS SESSEE SUFFICIENT TO MEET ITS INVESTMENTS AND AT THE SAME TIME THE ASSESSEE HAD RAISED A LOAN IT CAN BE PRESUMED THAT THE ITA 3303/MUM/2003 & OTHER 7 GROUP-APPEALS M/S. RELIANCE CAPITAL LTD. 16 INVESTMENTS WERE FROM THE INTEREST-FREE FUNDS AVAIL ABLE. IN OUR OPINION THE SUPREME COURT IN EAST INDIA PHARMACEUT ICAL WORKS LTD. V. CIT [1997] 224 ITR 627 HAD THE OCCASION TO CONSIDER THE DECISION OF THE CALCUTTA HIGH COURT IN WOOLCOMBERS OF INDIA LTD. [1982] 134 ITR 219 WHERE A SIMILAR ISSUE HAD ARISEN . BEFORE THE SUPREME COURT IT WAS ARGUED THAT IT SHOULD HAVE BEE N PRESUMED THAT IN ESSENCE AND TRUE CHARACTER THE TAXES WERE P AID OUT OF THE PROFITS OF THE RELEVANT YEAR AND NOT OUT OF THE OVE RDRAFT ACCOUNT FOR THE RUNNING OF THE BUSINESS AND IN THESE CIRCUM STANCES THE APPELLANT WAS ENTITLED TO CLAIM THE DEDUCTIONS. THE SUPREME COURT NOTED THAT THE ARGUMENT HAD CONSIDERABLE FORC E BUT CONSIDERING THE FACT THAT THE CONTENTION HAD NOT BE EN ADVANCED EARLIER IT DID NOT REQUIRE TO BE ANSWERED. IT THEN NOTED THAT IN WOOLCOMBERS OF INDIA LTD.S CASE [1982] 134 ITR 219 THE CALCUTTA HIGH COURT HAD COME TO THE CONCLUSION THAT THE PROF ITS WERE SUFFICIENT TO MEET THE ADVANCE TAX LIABILITY AND TH E PROFITS WERE DEPOSITED IN THE OVER DRAFT ACCOUNT OF THE ASSESSEE AND IN SUCH A CASE IT SHOULD BE PRESUMED THAT THE TAXES WERE PAID OUT OF THE PROFITS OF THE YEAR AND NOT OUT OF THE OVERDRAFT AC COUNT FOR THE RUNNING OF THE BUSINESS. IT NOTED THAT TO RAISE THE PRESUMPTION THERE WAS SUFFICIENT MATERIAL AND THE ASSESSEE HAD URGED THE CONTENTION BEFORE THE HIGH COURT. THE PRINCIPLE TH EREFORE WOULD BE THAT IF THERE ARE FUNDS AVAILABLE BOTH INTEREST- FREE AND OVER DRAFT AND / OR LOANS TAKEN THEN A PRESUMPTION WOUL D ARISE THAT INVESTMENTS WOULD BE OUT OF THE INTEREST-FREE FUND GENERATED OR AVAILABLE WITH THE COMPANY IF THE INTEREST-FREE FU NDS WERE SUFFICIENT TO MEET THE INVESTMENTS. IN THIS CASE TH IS PRESUMPTION IS ESTABLISHED CONSIDERING THE FINDING OF FACT BOTH BY THE COMMISSIONER OF INCOME-TAX (APPEALS) AND THE INCOME -TAX APPELLATE TRIBUNAL. 20. THE ARGUMENT OF THE LEARNED DEPARTMENTAL REPRES ENTATIVE THAT THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE O F GODREJ & BOYCE ITA 3303/MUM/2003 & OTHER 7 GROUP-APPEALS M/S. RELIANCE CAPITAL LTD. 17 LTD. MFG. CO. VS. DCIT (2010) 328 ITR 81 (BOM) HELD THAT THE A.O. SHOULD WORK OUT THE REASONABLE DISALLOWANCE. WITH D UE RESPECT IN OUR CONSIDERED OPINION IN THE PRESENT APPEALS THERE I S NO NEED TO RESTORE THE MATTER TO THE FILE OF THE A.O. AS THE FACTS ARE DISTINGUISHABLE. HERE WE FIND THAT THE ASSESSEE HAD SUFFICIENT OWN AS WEL L AS INTEREST FREE FUNDS TO MAKE THE INVESTMENT IN THE SHARES BONDS A ND DEBENTURES. MOREOVER NOTHING HAS BEEN CONTROVERTED ON SAID FIND INGS OF THE LD. CIT(A) BY THE REVENUE. SO FAR AS THE FINDING OF THE LEARNED CIT(A) IS CONCERNED AFTER GIVING ANXIOUS CONSIDERATION THE T OTALITY OF THE FACTS AND FIGURES PLACED BEFORE US WE FIND NO REASON TO SUSTAIN ANY DISALLOWANCE MADE BY THE ASSESSING OFFICER IN RESPE CT OF THE DIVIDEND INCOME CLAIMED EXEMPT U/S 10(33) AS WELL AS THE INT EREST INCOME ON THE BONDS AND DEBENTURES CLAIMED EXEMPT U/S 10(23G) OF THE ACT. MOREOVER IT IS CLEAR FROM THE ORDERS OF THE A.O. TH AT ALL THE DISALLOWANCES ARE MADE ON AD HOC BASIS. WE THEREFORE DELETE THE ENTIRE DISALLOWANCES SUSTAINED BY THE LEARNED CIT(A ) IN RESPECT INTEREST AND OTHER EXPENDITURE ATTRIBUTABLE FOR EA RNING THE DIVIDEND EXEMPT U/S 10(33) AND ALSO OF THE INTEREST INCOME E XEMPT U/S 10(23G) OF THE ACT. IN THE RESULT THE RESPECTIVE G ROUNDS OF THE ASSESSEE ARE ALLOWED AND THE RESPECTIVE GROUNDS TAK EN BY THE REVENUE ARE DISMISSED IN ALL THESE APPEALS. 21. THE NEXT ISSUE IS COMPUTATION OF BOOK PROFIT U/ S 115JA AND THIS ISSUE ARISES IN THE ASSESSEES APPEAL FOR ASSESSMEN T YEARS 1998-99 1999-2000 AND 2000-2001. THE SHORT CONTROVERSY BEFO RE US IS WHETHER WHILE COMPUTING THE BOOK PROFIT U/S 115JA THE EXPENDITURE ATTRIBUTABLE FOR EARNING THE EXEMPT INCOME OR INCOM E WHICH DOES NOT FORM PART OF THE TOTAL INCOME IS TO BE ADDED. IN AL L THE ASSESSMENT YEARS THE EXPENDITURE ATTRIBUTABLE TO THE DIVIDEND AS WELL AS INTEREST INCOME CLAIMED EXEMPT U/S 10(33) AND 10(23G) RESPEC TIVELY WAS ADDED WHILE COMPUTING THE BOOK PROFIT. THE SAID ISS UE IS DECIDED IN FAVOUR OF THE ASSESSEE AND NO EXPENDITURE IS TREATE D AS ATTRIBUTABLE FOR EARNING THE EXEMPT INCOME I.E. DIVIDEND OR INTE REST CLAIMED ITA 3303/MUM/2003 & OTHER 7 GROUP-APPEALS M/S. RELIANCE CAPITAL LTD. 18 U/S.10(23G). THIS ISSUE DOES NOT SURVIVE. HENCE TH E RESPECTIVE GROUNDS TAKEN BY THE ASSESSEE ARE ALLOWED FOR TECHN ICAL PURPOSES AND THE GROUND RAISED BY THE REVENUE IN A.Y. 1998-99 IS DISMISSED. 22. THE NEXT ISSUE IS LOSS ON CONVERSION OF THE SHA RES WHETHER THE SAME PERTAINS TO THE A.Y. 1996-97 OR 1998-99 AND TH IS ISSUE ARISES IN THE REVENUES APPAL FOR THE A.Y. 1998-99 BEING GROU ND NO.1 23. BRIEFLY STATED THE FACTS ARE AS UNDER. THIS IS SUE ARISES ONLY IN A.Y. 1998-99. IT WAS NOTICED BY THE A.O. THAT THE ASSESSEE HAD CLAIMED THE LOSS ON THE SALE OF THE STOCK-IN-TRADE OF THE SECURITIES/SHARES AMOUNTING TO ` 1 82 54 054/-. THE ASSESSEE HAS CONVERTED THE SHARES/SECURITIES AS A STOCK-IN-TRADE ON 6.10.1995. IN THE FINANCIAL YEAR RELEVANT TO A.Y. 1998-99 THE ASS ESSEE SOLD 319200 SHARES OF M/S. RALLIES INDIA LTD. OUT OF THE SHARE S HELD AS STOCK-IN- TRADE. AT THE TIME OF CONVERSION OF THE SAID SHARE S AS STOCK-IN-TRADE AS ON 6.10.1995 THE FAIR MARKET VALUE WAS TAKEN AT ` . 340/- PER SHARE AND THE COST PRICE AS PER BOOKS OF A/C WAS ` 283/-. THE A.O. HAS NOTED THAT ON THE DATE OF CONVERSION THERE WAS CAP ITAL GAIN OF ` 1 81 95 214/-. THAT WAS WORKED OUT BY MULTIPLYING 319000 SHARES BY ` 57/- (DIFFERENCE BETWEEN ` 340 AND ` 283). THE ASSESSEE OFFERED THE CAPITAL GAIN IN THE A.Y. 1998-99. IN THE FINANCIAL YEAR 1995-96 IN WHICH THE SHARES WERE CONVERTED INTO STOCK-IN-TRADE ASSESSEE VALUED SAID SHARES AT ` 257.50 PER SHARE ADOPTING THE MARKET PRICE AS ON 31.03.1996. THE COST PRICE AS PER THE BOOKS WAS ` 283/- PER SHARE. THE DIFFERENCE OF ` 25.50 PER SHARE WAS BOOKED BY THE ASSESSEE AS A LOSS IN THE A.Y. 1996-97. THE ASSESSEE FURTHER MAD E VALUATION OF THE SAID SHARES ON 31ST MARCH 1997 BY ADOPTING VALUE A T ` 218.50 PER SHARE. THAT ALSO RESULTED IN THE LOSS OF ` 39/- PER SHARES WHICH WAS BOOKED IN THE A.Y. 1997-98. THE SAID SHARES WERE S OLD @ `. 186.6 PER SHARE AND A.O. BOOKED THE LOSS AT ` 31.94 PER SHARE (I.E. ` 218.50 VALUE AS ON 1.4.1997 ` 186.56 SALE PRICE RECEIVED). THE ASSESSEE HAS FURTHER BOOKED LOSS OF ` 1 81 95 214/- IN THE A.Y. 1998-99 AND THE ITA 3303/MUM/2003 & OTHER 7 GROUP-APPEALS M/S. RELIANCE CAPITAL LTD. 19 SAID LOSS HAS BEEN CLAIMED ON ACCOUNT OF PRICE DIFF ERENCE OF THE COST PRICE OF ` 283/- PER SHARE AND VALUATION ON CONVERSION I.E. ` 340/- PER SHARE IN THE A.Y. 1996-97. THE A.O. HAS NOTED THAT THE ASSESSEE HAS NOT SHOWN THE FAIR MARKET VALUE OF THE SAID SHARES ON THE DATE OF CONVERSION AT `. 340/- PER SHARE IN THE BOOKS OF ACCOUNT BUT WHILE MAKING VALUATION OF THE STOCK AS ON 31.3.1996 THE MARKET PRICE WAS ADOPTED AT ` 257.50 PER SHARE AND AS THE ASSESSEE HAS NOT SHOWN THE FAIR MARKET VALUE ON THE DATE OF CONVERSION OF THE SAID SHARES AS A STOCK-IN-TRADE NO LOSS WAS BOOKED IN THE A.Y. 1996 -97. THE ASSESSEE- COMPANY FOLLOWED THE METHOD FOR VALUATION OF STOCK BY ADOPTING COST OR MARKET PRICE WHICHEVER WAS LOWER. IN THE OPINIO N OF THE A.O. THE ADDITIONAL LOSS CLAIMED BY THE ASSESSEE WAS NOT ADM ISSIBLE IN THE A.Y. 1998-99. THE A.O. THEREFORE DISALLOWED THE ADDITI ONAL CLAIM OF LOSS OF ` 1 81 95 214/-. THE A.O. ACCORDINGLY DISALLOWED THE LOSS BY INTERPRETING SEC.45(2) OF THE ACT. THE LD. CIT (A) DELETED THE ADDITION MADE BY THE A.O. BY HOLDING THAT SEC.45(2) IS A DEE MING PROVISION AND IS MEANT TO BRING TO TAX GAINS/LOSS ARISING FROM TH E CONVERSION OF INVESTMENT INTO STOCK-IN-TRADE AT A PARTICULAR POIN T OF TIME SO THAT THE GAINS ARE TAXABLE OR ASSESSABLE AT LEAST AT ONE POI NT OF TIME. NOW THE REVENUE IS IN APPEAL BEFORE US. 24. WE HAVE HEARD THE PARTIES. THE FACTS ARE NARRA TED HEREINABOVE. THE ASSESSEE HAS ALSO FILED THE CHART SHOWING THAT HOW THE SHARES WERE VALUED ON THE DATE OF CONVERSION AND ONCE THER E WAS A CONVERSION AND IT BECAME THE STOCK-IN-TRADE HOW TH E VALUATION OF THE CLOSING-STOCK WAS DONE. IN OUR OPINION THE SHORT CONTROVERSY REVOLVE AROUND THE INTERPRETATION OF SEC.45(2) OF THE ACT. 25. AS PER SUB-SEC.(2) TO SEC.45 IF ANY CAPITAL A SSET IS CONVERTED INTO STOCK-IN-TRADE OF THE BUSINESS THEN THE PROFIT OR GAIN AS WORKED OUT ON THE DATE OF CONVERSION SHALL BE TAXABLE IN T HE YEAR IN WHICH SUCH STOCK-IN-TRADE IS SOLD OR OTHERWISE TRANSFERRE D. IN THE PRESENT CASE THERE IS NO DISPUTE ABOUT THE FACT THAT THE A SSESSEE OFFERED ITA 3303/MUM/2003 & OTHER 7 GROUP-APPEALS M/S. RELIANCE CAPITAL LTD. 20 CAPITAL GAIN BY ADOPTING THE MARKET VALUE ON THE DA TE OF CONVERSION AS A SALE CONSIDERATION BUT ALSO CLAIMED THE LOSS BY A DOPTING THE VALUE OF THE OPENING STOCK THE VALUE OF CLOSING STOCK OR O THERWISE. AS PER SEC.45(2) ON CONVERSION THE CAPITAL ASSET EITHER IN DEPENDENTLY BECOMES STOCK-IN-TRADE OR FORMS THE PART OF THE EXI STING STOCK-IN- TRADE. IN THE PRESENT CASE AS PER THE CHART FILED BY THE ASSESSEE WE FIND THAT THE ASSESSEE HAS VALUED STOCK OF THE SHAR ES OF M/S. RALLIES INDIA LTD. ON 31ST MARCH 1996 AND 31 ST MARCH 1997 BY ADOPTING THE MARKET PRICE AND TAKEN THE SAID VALUE AS OPENING-ST OCK ALSO. AS PER THE SCHEME OF THE SAID PROVISION THERE ARE TWO LIMB S: (I) GAIN OR LOSS ON THE DATE OF CONVERSION OF CAPITAL ASSET IN TO STOCK -IN-TRADE AND (II) THE PROFIT OR LOSS ON DATE OF SALE OR OTHERWISE TRANSFE R OF SAID CAPITAL ASSET. 26. SO FAR AS THE FIRST LIMB IS CONCERNED AS PER TH E LANGUAGE USED IN THE SAID PROVISION THE CORRECT INTERPRETATION WOUL D BE THAT THE GAIN OR LOSS IS DETERMINED ON THE DATE OF CONVERSION OF THE CAPITAL ASSET INTO STOCK-IN-TRADE BUT THE TAXABILITY OF THE SAME IS DI FFER TILL THE DATE OF SALE OR TRANSFER OF THE SAID ASSET. SO FAR AS THE S ECOND LIMB IS CONCERNED THE PROFIT OR LOSS IS TO BE COMPUTED IN RESPECT OF THE STOCK IN TRADE OF THE CONVERTED CAPITAL ASSET AS BUSINES S INCOME AS PER THE RELEVANT PROVISIONS ADOPTING THE FAIR MARKET VALUE (FMV) ON THE DATE OF CONVERSION AS ITS COST OF ACQUISITION. IN THE PR ESENT CASE THE COST OF ACQUISITION OF THE SHARES BEING STOCK IN TRADE ON T HE DATE OF CONVERSION WAS ` ` 340 WHICH WAS REDUCED TO ` 257.50 AS ON 31.3.1996. IT HAD THUS SUFFERED A LOSS OF ` 82.50 PER SHARE FOR THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR 1996- 97. HOWEVER LOSS TO THE EXTENT OF ` 25.50 PER SHARE WAS ONLY CLAIMED BY THE ASSESSEE. THE BALANCE LOSS OF ` 57 PER SHARE HAS BEEN CLAIMED IN THE ASSESSMENT YEAR 1998-99 WHICH IN OUR OPINION CANNOT BE ALLOWED BEING PURSUANT TO THE ASSESSMENT YEAR 1996-97. WE THEREFORE SET ASIDE THE ORDER OF THE LEARNED CIT (A) ON THIS ISSU E AND RESTORE THAT OF THE A.O. THE RELEVANT GROUND TAKEN BY THE REVENUE I N ASSESSMENT YEAR 1998-99 IS ACCORDINGLY ALLOWED. ITA 3303/MUM/2003 & OTHER 7 GROUP-APPEALS M/S. RELIANCE CAPITAL LTD. 21 27. THE NEXT ISSUE IS THE INTEREST INCOME CLAIM OF EXEMPTION U/S.10(15) IN RESPECT OF INTEREST ON GOLD BONDS AND THIS ISSUE ARISES IN THE REVENUES APPEAL FOR THE A.Y. 1999-2000. 28. DURING THE ASSESSMENT PROCEEDINGS THE ASSESSEE MADE A CLAIM OF EXEMPTION IN RESPECT OF INTEREST ON GOLD BONDS OF ` 24 38 958/- STATING THAT THE SAME IS EXEMPT U/S.10(15) OF THE I .T. ACT. THE A.O. REJECTED THE CLAIM OF THE ASSESSEE ON THE REASON TH AT THE ASSESSEE SHOULD HAVE CLAIMED THE SAME BY FILING THE REVISED RETURN AS PER THE PROVISIONS OF SEC.139(5) OF THE ACT. THE ASSESSEE CARRIED THE ISSUE BEFORE THE LD. CIT (A) AND LD. CIT (A) DIRECTED THE A.O. TO ALLOW THE CLAIM. 29. WE HAVE HEARD THE PARTIES. IN VIEW OF THE DECI SION OF THE HONBLE SUPREME COURT IN THE CASE OF GOETZE (INDIA) LTD. VS. CIT 284 ITR 323 CLAIM FOR DEDUCTION NOT MADE IN THE RETURN CANNOT BE ENTERTAINED BY THE A.O. OTHERWISE THAN BY FILING A REVISE RETURN AND HENCE THE VIEW TAKEN BY THE A.O. IS CORRECT. AT T HE SAME TIME THE TRIBUNAL HAS POWER TO ADMIT ANY NEW CLAIM AS PER TH E PRINCIPLES LAID DOWN IN THE CASE OF NATIONAL THERMAL POWER CO. LTD. 229 ITR 383 AND THE SAME HAS BEEN CLARIFIED IN THE CASE OF GOETZE ( INDIA) LTD. (SUPRA). WE THEREFORE UPHOLD THE ORDER OF THE LD. CIT (A) AND CONFIRMED THE DIRECTIONS USING OUR POWERS. ACCORDINGLY RESPECTIV E GROUNDS I.E. GROUND NO.3 FOR THE A.Y. 1999-2000 IS DISMISSED. 30. THE NEXT ISSUE IS ADDITION MADE U/S.41(1) AND T HIS ISSUE ARISES IN REVENUES APPEAL FOR THE A.YS. 1999-2000 AND 200 0-01. 31. IN THE ASSESSMENT PROCEEDINGS RELATING TO THE A .Y. 1999-00 IT WAS NOTICED BY THE A.O. THAT ` 43 01 267/- WAS SHOWN AS DIVIDEND RECEIVED BUT PAYABLE TO OTHERS. THE A.O. HAD NOTED THAT THE ASSESSEE TRADES IN SHARES AND SECURITIES IN SEVERAL CASES EV EN AFTER THE SHARES ARE SOLD SHAREHOLDERS DOES NOT GET THE SHARES REGI STERED IN THEIR NAME ITA 3303/MUM/2003 & OTHER 7 GROUP-APPEALS M/S. RELIANCE CAPITAL LTD. 22 BEFORE THE RECORD DATE OR THERE ARE INSTANCES OF BA D DELIVERIES AND IN SUCH A SITUATION THE ASSESSEE RECEIVES THE DIVIDEND ON THE SAID SHARES. IN THE OPINION OF THE A.O. IN THE REASONABLE TIME THE ASSESSEE SHOULD PASS OVER THE DIVIDEND RECEIVED ON THE SHARES SOLD TO THE PURCHASES OF THE SHARES. THE A.O. MADE THE BREAK-UP OF THE OUTS TANDING DIVIDEND PAYABLE AS PER PERIOD I.E. LESS THAN ONE YEAR 1 TO 3 YEARS AND 3 TO 5 YEARS. IN THE OPINION OF THE A.O. THE ACCUMULATED AND PAYABLE WITH THE ASSESSEE FOR THE PERIOD 3 TO 5 YEARS SHOULD BE TREATED AS INCOME U/S.41(1) OF THE ACT. THE ASSESSEE CLAIMED THAT AN AMOUNT OF ` 12 06 018/- HAD BEEN DISALLOWED IN THE A.Y. 1997-98 . THE A.O. THEREFORE RESTRICTED AN ADDITION OF ` 10 05 089/- U/S.41(1). THE LD. CIT (A) DELETED THE SAME. THE LD. CIT (A) DELETED THE SAME. 32. THE IDENTICAL ISSUE HAS BEEN CONSIDERED BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE A.Y. 1997-98. RELEVANT PART OF THE ORDER IS AS UNDER:- 82. THE NEXT GROUND PERTAINS TO DEDUCTION OF ` 12 06 018 ON ACCOUNT OF OTHER LIABILITIES. THE BRIEF FACTS ARE THAT THIS AMOUNT REPRESENTS INCOME RECEIVED IN RESPECT OF UNITS SOLD IN THE EAR LIER YEAR. SINCE THE PURCHASER DID NOT GET THE UNITS REGISTERED IN THEIR OWN NAME THE DIVIDEND THEREON HAS BEEN RECEIVED BY US AND IS PAY ABLE TO THE PURCHASER. SINCE SOME BAD DELIVERY CLAIMS WERE OUTS TANDING FROM THE BROKER TO / THROUGH WHOM SCRIPS ARE SOLD THESE INT EREST AND DIVIDEND HAVE BEEN WITHHELD. HOWEVER IT WAS THE CASE OF THE ASSESSING OFFICER THAT NOBODY HAS CLAIMED THE DIVIDEND FROM THE ASSES SEE SO FAR. NOTHING HAS BEEN PAID TILL DATE AND THEREFORE THE LIABILIT Y WAS NOT AN ENFORCEABLE LIABILITY. THE LEARNED CIT(A) HOWEVER F OUND THAT THIS LIABILITY WAS OUTSTANDING FOR THE LAST THREE YEARS AND IS AN AMOUNT PAYABLE TO THIRD PARTIES ON ACCOUNT OF THEIR INCOME HAVING BEE N RECEIVED BY THE ASSESSEE. THE LIABILITY WAS NO CREATED ON ACCOUNT O F ANY EXPENDITURE DEBITED BY THE ASSESSEE IN ANY OF THE PREVIOUS ACCO UNTING YEARS. AS PER THE PROVISIONS OF SECTION 41(1) OF THE ACT ADDITION TO THE INCOME CAN ONLY ITA 3303/MUM/2003 & OTHER 7 GROUP-APPEALS M/S. RELIANCE CAPITAL LTD. 23 BE MADE IF THE EXTINGUISHMENT IS OF THE LIABILITY W HICH WAS CREATED DUE TO ANY EXPENDITURE CLAIMED AS DEDUCTIBLE TO ARRIVE AT THE TAXABLE INCOME OF THE ASSESSEE. THE LEARNED CIT(A) THEREFORE DELE TED THE ADDITION MADE U/S 41(1). WE HAVE HEARD THE RIVAL SUBMISSIONS AND FIND NO INFIRMITY IN THE ORDER OF THE LEARNED CIT(A). THIS GROUND IS REJ ECTED. 33. AS THE FACTS ARE IDENTICAL IN THESE IMPUGNED YE ARS WE RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE CONFIRMED THE ORDER OF THE LD. CIT (A) FOR BOT H THE ASSESSMENT YEARS VIZ.1999-2000 AND 2000-01. 34. THE NEXT ISSUE IS TREATMENT OF LEASE EQUALISATI ON RESERVES WHILE COMPUTING THE BOOK PROFIT U/S.115JA OF THE ACT AND THIS ISSUE ARISES IN THE REVENUES APPEAL FOR THE A.Y. 99-2000 AND 20 00-01. 35. AS THE PROVISIONS OF SEC.115JA ARE APPLICABLE T O THE ASSESSEE COMPANY IN THE A.Y. 99-2000 AND 2000-01 THE A.O. CO MPUTED TOTAL INCOME UNDER THE NORMAL PROVISIONS OF THE ACT AND A LSO BOOK PROFIT AS PER SEC.115JA OF THE ACT. WHILE COMPUTING THE BOOK PROFIT THE A.O. MADE CERTAIN ADJUSTMENTS BY WAY OF INCREASE OR DECR EASE OF NET PROFIT AND ONE OF THE ADDITIONS MADE IN RESPECT OF LEASE EQUALISATION RESERVE AS UNDER:- ASSESSMENT YEAR ADDITION MADE ON A/C. OF LEASE EQUALISATION RESERVE 1999-2000 ` 10 74 56 255 2000-2001 ` 10 54 02 034 36. THERE IS NO DISCUSSION ON THIS ISSUE IN THE ASS ESSMENT ORDER. THE LD. CIT (A) ACCEPTED THE PLEA OF THE ASSESSEE T HAT BOOK PROFIT CANNOT BE INCREASED BY MAKING THE ADDITION OF THE LEASE EQUALISATION RESERVES. 37. IDENTICAL ISSUE HAS BEEN CONSIDERED BY THE TRIB UNAL IN THE ASSESSEES OWN CASE FOR THE A.Y. 1993-94 TO 1997-98 COPY OF THE ORDER ITA 3303/MUM/2003 & OTHER 7 GROUP-APPEALS M/S. RELIANCE CAPITAL LTD. 24 DATED 12.01.2007 IS PLACED ON RECORD. OPERATIVE PAR T OF THE TRIBUNALS ORDER ON THIS ISSUE IS AS UNDER: 83. THE LAST GROUND IN THIS APPEAL RELATES TO THE WORKING OF `BOOK PROFITS U/S 115JA OF THE ACT. THE DISPUTE IS WITH REFERENCE TO LEASE EQUALIZATION AMOUNT OF ` 37 85 98 608 ADDED TO THE NET PROFIT AS PER P & L ACCOUNT. DURING THE ASSESSMENT PROCEEDINGS THE AS SESSEE SUBMITTED THAT LEASE EQUALIZATION HAS BEEN PROVIDED IN TERMS OF THE GUIDANCE NOTE ISSUED BY CHARTERED ACCOUNTANTS OF INDIA. THE GUIDA NCE NOTE REQUIRES STATUTORY DEPRECIATION TO BE PROVIDED AND TO WORK O UT TRUE PROFITABILITY OF THE COMPANY IT IS NECESSARY THAT THE DEPRECIATIO N BE PROVIDED AT A RATE WHICH IS SUFFICIENT TO WRITE OFF THE LEASED AS SETS OVER THE PRIMARY PERIOD OF LEASE. THIS MEANS THAT IN THE INITIAL YEA RS OF LEASE ADDITIONAL CHARGE ON ACCOUNT OF DEPRECIATION IS REDUCED FROM T HE LEASE RENT AND THE GROSS BLOCK OF FIXED ASSETS IN ORDER TO REFLECT TH E TRUE LEASE RENTALS AND THE TRUE NET VALUE OF FIXED ASSETS. THE ASSESSEE FU RTHER SUBMITTED THAT IN THE COMPUTATION OF INCOME THE ABOVE AMOUNT HAS B EEN ADDED AS THE SAME REPRESENTS THE DEPRECIATION PROVISION WHILE TH E ALLOWABLE U/S 32 IS SEPARATELY WORKED OUT. IT WAS FURTHER SUBMITTED THAT U/S 115JA THE DEPRECIATION IS TO BE COMPUTED ON THE SAME METHOD A ND RATES AS ADOPTED IN THE PROFIT AND LOSS ACCOUNT LAID BEFORE THE AGM. IN THIS WAY IT WAS CONTENDED THAT THE LEASE EQUALIZATION IS NOT A RESERVE. THE ASSESSING OFFICER DID NOT ACCEPT THE ABOVE ARGUMENT S OF THE ASSESSEE. ACCORDING TO THE SCHEDULE XIV OF THE COMPANIES ACT PROVIDES RATES OF DEPRECIATION. THE COMPANY IS NOT DEBARRED FROM PROV IDING HIGHER DEPRECIATION. AS PER AO LEASE EQUALIZATION REPRESEN TS A RESERVE CREATED TO MEET THE CAPITAL LOSS. THE ASSESSING OFFICER DIS CUSSED THEREAFTER VARIOUS CASE LAWS TO ANALYZE WHAT CONSTITUTES RESER VES OR PROVISIONS. AS PER HIM EXCESS DEPRECIATION NOT REQUIRED UNDER T HE COMPANIES ACT IS A RESERVE. HE THEREFORE ADDED BACK ` 37 85 98 608 CARRIED TO LEASE EQUALIZATION TREATING THE SAME AS RESERVE. ITA 3303/MUM/2003 & OTHER 7 GROUP-APPEALS M/S. RELIANCE CAPITAL LTD. 25 84. ON APPEAL THE LEARNED CIT(A) OBSERVED THAT THE CARDINAL PRINCIPLE BEHIND INTRODUCTION OF SECTION 115JA IS TAXABILITY OF BOOK PROFITS AS OPPOSED TO TAXABLE PROFITS. BOOK PROFITS ARE REQUIR ED TO BE DETERMINED CONSIDERING PART II AND PART III OF SCHEDULE VI OF THE COMPANIES ACT. THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA HAS ISS UED GUIDANCE NOTES ON ACCOUNTING FOR LEASES WITH A VIEW TO ESTABLISH S OUND ACCOUNTING PRINCIPLES AND PRACTICES IN THE LEASING INDUSTRY. T HE GUIDANCE NOTES REQUIRED THAT AGAINST THE LEASE RENTAL A MATCHING L EASE ANNUAL CHARGE IS MADE TO THE PROFIT AND LOSS ACCOUNT. THIS ANNUAL LE ASE CHARGE SHOULD REPRESENT RECOVERY OF THE NET INVESTMENT / FAIR VAL UE OF THE LEASED ASSETS OVER THE LEASE TERM. IT FURTHER PROVIDES THA T THE METHOD OF INCOME MEASUREMENT IS IN CONSONANCE WITH THE INHERENT NATU RE OF FINANCE LEASE. CONSIDERING THE PURPOSE BEHIND CREATING LEAS E EQUALIZATION ACCOUNT IT CANNOT BE SAID THAT THE SAME REPRESENTS A RESERVE OR AN APPROPRIATION OF PROFITS. THE LEASE EQUALIZATION AM OUNT OF ` 37 85 98 608 WAS THEREFORE HELD AS A PROPER CHARGE ON THE PROFITS BY WAY OF RECOUPMENT OF THE ASSETS LEASED AND REPRESEN TED ADDITIONAL DEPRECIATION. THE LEARNED CIT(A) ACCORDINGLY DIRECT ED THE ASSESSING OFFICER NOT TO MAKE ADJUSTMENT IN RESPECT OF THE LE ASE EQUALIZATION AMOUNT WHILE COMPUTING THE BOOK PROFITS. AGGRIEVED THE REVENUE IS IN APPEAL BEFORE US. 85. WE HAVE HEARD BOTH THE SIDES. IN OUR VIEW THE D ECISION OF THE CIT(A) DOES NOT REQUIRE ANY INTERFERENCE. THE DECIS ION TAKEN BY THE CIT(A) NOW IS IN ACCORDANCE WITH THE RATIO LAID DOW N BY THE HONBLE SUPREME COURT IN THE CASE OF APOLLO TYRES LTD. VS. CIT (2002) 255 ITR 273 (SC) AND ALSO HAVING REGARD TO THE DECISION TO THE TRIBUNAL IN THE CASE OF RELIANCE INDUSTRIAL INFRASTRUCTURE LTD. VS. ACIT ITA NO.3476/M/02 DATED 26.5.2003 FOR THE ASSESSMENT YEA R 1998-99 WHICH IS PLACED AT PAGE 38 OF THE PAPER BOOK. RESPE CTFULLY FOLLOWING THE ABOVE DECISIONS THE ORDER OF THE CIT(A) IS ACCORDI NGLY CONFIRMED. ITA 3303/MUM/2003 & OTHER 7 GROUP-APPEALS M/S. RELIANCE CAPITAL LTD. 26 38. WE THEREFORE RESPECTFULLY FOLLOWING THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE ON A RULE OF CONSISTENCY CONF IRMED THE ORDER OF THE LD. CIT (A) ON THIS ISSUE IN BOTH THE A.YRS. AN D DISMISS RELEVANT GROUNDS TAKE BY THE REVENUE IN THE A.Y. 1999-2000 A ND 2000-01. 39. THE NEXT ISSUE IS DISALLOWANCE OF CLAIM OF BAD DEBT AND THIS ISSUE ARISES IN REVENUES APPEAL FOR THE A.Y. 2001- 02. 40. THE ASSESSEE CLAIMED THE AMOUNT OF ` 23.54 CRORE AS BAD DEBT. THE A.O. ASKED THE ASSESSEE-COMPANY TO SUBSTANTIATE THEIR CLAIM. THE ASSESSEE FILED THE REPLY WHICH IS REPRODUCED IN THE ASSESSMENT ORDER. THE A.O. WAS OF THE OPINION THAT THE ASSESS EE HAS FAILED TO ESTABLISH THAT THE DEBT WHICH HAS BEEN WRITTEN OFF HAS BECOME BAD. THE A.O. THEREFORE DISALLOWED THE CLAIM OF THE ASSE SSEE. THE ASSESSEE CHALLENGED THE DISALLOWANCE BEFORE THE LD. CIT (A) AND LD. CIT (A) DELETED THE ADDITION MADE BY THE A.O. TOWARDS BAD DEBT CLAIM. NOW THIS ISSUE STANDS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF TRF LTD. V S. CIT 323 ITR 397 AS WELL AS BY THE JUDGMENTS OF THE JURISDICTION AL HIGH COURT IN THE CASE OF CIT VS. STAR CHEMICAL (BOM) PVT. LTD. 313 I TR 126 (BOM) AND DIT (INTERNATIONAL TAXATION) VS. OMAN INTERNATIONAL BANK (SAOG) 313 ITR 128 (BOM). WE FIND NO INFIRMITY IN THE ORDER O F THE LD. CIT (A) ON THIS ISSUE ACCORDINGLY THE SAME IS CONFIRMED AND RE LEVANT GROUND TAKEN BY THE REVENUE IN THE A.Y. 2001-02 STANDS DIS MISSED. 41. IN THE RESULT ALL APPEALS OF THE ASSESSE AS W ELL AS ALL APPEALS OF THE REVENUE ARE PARTLY ALLOWED FOR STATISTICAL PURP OSES. ORDER PRONOUNCED IN THE OPEN COURT ON THIS DAY OF 1 1TH NOVEMBER 2011. SD/- SD/- ( P.M. JAGTAP ) ACCOUNTANT MEMBER ( R.S. PADVEKAR ) JUDICIAL MEMBER MUMBAI DATE : 11TH NOVEMBER 2011 ITA 3303/MUM/2003 & OTHER 7 GROUP-APPEALS M/S. RELIANCE CAPITAL LTD. 27 COPY TO:- 1) THE APPELLANT. 2) THE RESPONDENT. 3) THE CIT (A)- III MUMBAI. 4) THE CIT-3 MUMBAI. 5) THE D.R. H BENCH MUMBAI. BY ORDER / / TRUE COPY / / ASSTT. REGISTRAR I.T.A.T. MUMBAI *CHAVAN ITA 3303/MUM/2003 & OTHER 7 GROUP-APPEALS M/S. RELIANCE CAPITAL LTD. 28 SR.NO. EPISODE OF AN ORDER DATE INITIALS CONCERNED 1 DRAFT DICTATED ON 27.10.2011 SR.PS 2 DRAFT PLACED BEFORE AUTHOR 09.11.2011 SR.PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5 APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6 KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7 FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER