M/S. VIRTUOUS FINANCE LTD, MUMBAI v. THE DCIT CC-32, MUMBAI

ITA 4482/MUM/2007 | 2000-2001
Pronouncement Date: 31-03-2011 | Result: Allowed

Appeal Details

RSA Number 448219914 RSA 2007
Assessee PAN AABCV1887A
Bench Mumbai
Appeal Number ITA 4482/MUM/2007
Duration Of Justice 3 year(s) 9 month(s) 19 day(s)
Appellant M/S. VIRTUOUS FINANCE LTD, MUMBAI
Respondent THE DCIT CC-32, MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 31-03-2011
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted F
Tribunal Order Date 31-03-2011
Date Of Final Hearing 19-10-2010
Next Hearing Date 19-10-2010
Assessment Year 2000-2001
Appeal Filed On 11-06-2007
Judgment Text
1 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH F MUMBAI BEFORE SHRI D.K. AGARWAL JUDICIAL MEMBER AND SHRI J. SUDHAKAR REDDY ACCOUNTANT MEMBER I.T.A. NOS. 4482 4483 & 4484/MUM /2007 ASSESSMENT YEARS : 20 00-01 2001-02 & 2002-03. I.T.A. NOS. 7349 7350/MUM/2007 ASSESSMENT YEARS : 2 003-04 & 2004-05 I.T.A. NOS. 4956 & 6330/MUM/2008 ASSESSMENT YEARS : 20 05-06 & 2006-07. VIRTUOUS FINANCE LTD. DY. COMMISSIONER OF 3 NARAYAN BUILDING VS. INCOME-TAX CENTRAL CIRCLE-32 23 L.N. ROAD DADAR(E) MUMBAI. MUMBAI 400 014. PAN AABCV1887A. APPELLANT RESPONDENT. I.T.A. NOS. 4307 4308 & 4309/MUM/2007 ASSESSMENT YEARS : 20 00-01 2001-02 & 2002-03. I.T.A. NOS. 6837 & 6838/MUM/2007 ASSESSMENT YEARS : 2 003-04 & 2004-05. DY. COMMISSIONER OF VIRTUOUS FINANCE LTD. INCOME-TAX CENTRAL CIRCLE-32 VS. MUMBAI. MUMBAI. APPELLANT. RESPONDENT. ASSESSEE BY : S/SHRI RAJAN VORA & NIMESH VORA. DEPARTMENT BY : SH RI AMOL KAMAL. 2 O R D E R PER J. SUDHAKAR REDDY A.M. : ALL THESE APPEALS HAVE BEEN FILED BY THE ASSESSEE A ND THE DEPARTMENT AGAINST THE ORDER OF CIT(A) IN THE RESPE CTIVE ASSESSMENT YEARS. SINCE THE ISSUES ARE COMMON ALL THESE APPE ALS WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS CONSOLIDATED ORDE R FOR THE SAKE OF CONVENIENCE. ITA NO 4482/M/07 (ASSESSEES APPEAL A.Y. 2000-01) ITA NO 4307/M/07 (DEPARTMENTS APPEAL 2000-01) 2. THESE CROSS APPEALS FILED BY THE ASSESSEE AND TH E DEPARTMENT ARE AGAINST THE ORDER OF COMMISSIONER OF INCOME-TAX (AP PEALS) VIII MUMBAI DATED 23 MARCH 2007 FOR THE AY 2000-01. 3. THE FACTS IN BRIEF ARE THAT THE ASSESSEE IS ENGA GED IN THE BUSINESS OF INVESTMENT FINANCE TRADING IN SHARES HIRE PURCHA SE LEASING ACTIVITIES APART FROM THE TRADING OF MATERIALS. IT IS REGISTER ED AS NON-BANKING FINANCE COMPANY WITH RBI. THE ASSESSEE FILED THE RE TURN OF INCOME FOR AY 2000-01 ON 30.11.2000 SHOWING RETURNED INCOME OF RS. 3 55 520/- AS COMPUTED U/S 115JA OF THE INCOME-TAX ACT 1961 (TH E ACT). THE AO PASSED AN ORDER U/S 143(3) ON 31 MARCH 2003 ASSESSI NG AN INCOME OF RS. 2 14 18 452/-. WHILE DOING SO THE AO INTER ALIA MA DE THE FOLLOWING DISALLOWANCES / ADDITIONS: - I. DEEMED DIVIDEND U/S 2(22)(E) OF RS. 8 86 812 II. DISALLOWANCE OF INTEREST EXPENSES OF RS. 1 02 17 28 7 III. ACCRUAL OF INTEREST INCOME OF RS. 28 54 368 3 IV. BROKERAGE DISALLOWED RS. 2 50 000 V. EXPENSES INCURRED FOR BUSINESS OF OTHER GROUP COMPA NIES OF RS. 2 00 000 VI. DISALLOWANCE ON ACCOUNT OF SECTION 14A OF RS. 83 81 774 VII. SPECULATION LOSS OF RS. 21 408 4. AGGRIEVED BY THE SAME THE ASSESSEE CARRIED THE MATTER IN APPEAL. THE FIRST APPELLATE AUTHORITY GRANTED PART RELIEF. ON THE ISSUES WHERE THE FIRST APPELLATE AUTHORITY HAS NOT GRANTED RELIEF T HE ASSESSEE FILED APPEAL IN ITA NO. 4482/M/07 AND ON ISSUES WHERE THE FIRST APP ELLATE AUTHORITY HAS GRANTED RELIEF THE REVENUE HAS FILED APPEAL IN ITA NO. 4307/M/07. 5. PAPER BOOK CONTAINING 215 PAGES WAS FILED BY THE ASSESSEE. DETAILED CHARTS FACTSHEETS AND DECISIONS WERE ALSO FILED. 6. WE HAVE HEARD MR. AMOL KAMAT AND MS. ASHIMA GUPT A THE LEARNED SR. ARS ON BEHALF OF THE REVENUE AND RAJAN VORA ON BEHALF OF THE ASSESSEE. ON A CAREFUL CONSIDERATION OF RIVAL C ONTENTIONS AND ON A PERUSAL OF THE PAPERS ON RECORD WE PROCEED TO DISP OSE OF THE APPEALS AS FOLLOWS: - ITA NO. 4307/M/07 (DEPARTMENTAL APPEAL):- 7. WE FIRST TAKE UP THE DEPARTMENT APPEAL IN ITA NO . 4307/M/07. GROUND NO. 1 IS ON THE ISSUE OF DEEMED DIVIDEND OF RS. 8 86 812. THE ASSESSEE HAS TAKEN LOANS IN THE CURRENT YEAR FROM T HE FOLLOWING COMPANIES. 4 I. TEJASKIRAN PHARMACHEM INDUSTRIES PVT. LTD. II. QUALITY INVESTMENT PVT. LTD. III. VIDITI INVESTMENT PVT. LTD. IV. FAMILY INVESTMENT PVT. LTD. 7.1. THE AO EXAMINED THE SHAREHOLDING PATTERN OF TH E ASSESSEE AS WELL AS THAT OF THESE COMPANIES FROM WHOM THE ASSESSEE H AS ACCEPTED THE LOANS IN CURRENT YEAR. THE AO OBSERVED THAT ALL COMPANIES ARE CLOSELY HELD COMPANIES AND SOME OF THE BENEFICIAL SHAREHOLDERS I N THESE COMPANIES HOLDING NOT LESS THAN 10% OF THE VOTING POWER ARE SHAREHOLDERS OF THE ASSESSEE COMPANY HOLDING NOT LESS THAN 20% VOTING R IGHTS IN THE ASSESSEE COMPANY. THESE FACTS ARE NOT IN DISPUTE. 7.2 THE AO ALSO NOTED THAT THE AMOUNT RECEIVED BY T HE ASSESSEE HAS NOT BEEN RECEIVED IN THE ORDINARY COURSE OF THE BUS INESS OF THESE COMPANIES. ACCORDING TO THE AO THE ASSESSEES CASE SATISFIED ALL THE CONDITIONS SPECIFIED IN THE SECTION 2(22)(E) OF THE ACT AND THEREFORE TREATED THE ADVANCES RECEIVED BY THE ASSESSEE FROM THESE FOUR COMPANIES TO THE EXTENT OF ACCUMULATED RESERVES AS DEEMED DIV IDEND INCOME IN THE HANDS OF THE ASSESEE. 7.3 THE CIT(A) HELD THAT DEEMED DIVIDEND IS NOT TAX ABLE IN THE HANDS OF ASSESSEE AS IT IS NOT HOLDING MORE THAN 10% IN A NY OF THE LENDER COMPANIES AND HELD THAT DEEMED DIVIDEND CAN BE TAXE D ONLY IN THE HANDS OF THE SHAREHOLDERS RELYING ON THE DECISION OF MUMB AI TRIBUNAL IN THE CASE OF SEAMIST PROPERTIES (P) LTD. (95 TTJ 201). THE LEARNED CIT(A) HOWEVER DID NOT ADJUDICATE THE PLEA THAT THE PROVI SIONS OF SEC 2(22)(E) SHALL NOT APPLY TO THE TRANSACTIONS BETWEEN ASSESSE E AND FOUR LENDING 5 COMPANIES SINCE IT FALLS UNDER THE EXCEPTION WHERE SUBSTANTIAL PART OF THE BUSINESS IS OF LENDING OF MONEY FOR WHICH THE ASSE ESSEE IS IN APPEAL (GROUND NO. 1) AND HAS ALSO HAS FILED AN ADDITIONAL GROUND ON THIS ISSUE. 7.4 OUR ATTENTION WAS ALSO INVITED AND RELIANCE WAS PLACED ON THE DECISION OF THE SPECIAL BENCH OF THE MUMBAI TRIBUNA L IN THE CASE OF BHAUMIK COLOUR PVT. LTD. (118 ITD 1)(MUM SB) WHEREI N THE TRIBUNAL HAS HELD AS FOLLOWS: IN THE EVENT OF THE PAYMENT OF LOAN OR ADVANCE BY A COMPANY TO A CONCERN BEING TREATED AS DIVIDEND AND TAXED IN TH E HANDS OF THE CONCERN THEN THE BENEFIT OF SET OFF CANNOT BE ALLOW ED TO THE CONCERN BECAUSE THE CONCERN CAN NEVER RECEIVE DIVI DEND FROM THE COMPANY WHICH IS ONLY PAID TO THE SHAREHOLDER WHO HAS SUBSTANTIAL INTEREST IN THE CONCERN. THE ABOVE PROV ISIONS ALSO THEREFORE CONTEMPLATE DEEMED DIVIDEND BEING TAXED I N THE HANDS OF A SHAREHOLDER ONLY. FOR THE REASONS STATED ABOVE WE ARE OF THE VIEW THAT THE LAW LAID DOWN IN THE CASE OF NIKKO TE CHNOLOGIES (I) (P) LTD. (SUPRA) IS NOT CORRECT. WE THEREFORE HOLD THAT DEEMED DIVIDEND UNDER S. 2(22)(E) OF THE IT ACT 1961 CAN BE ASSESSED ONLY IN THE HANDS OF A SHAREHOLDER OF THE LENDER CO MPANY AND NOT IN THE HANDS OF ANY OTHER PERSON. 7.5 IT WAS ALSO INFORMED THAT THE JURISDICTIONAL HI GH COURT IN THE CASE OF UNIVERSAL MEDICARE (324 ITR 263) AFFIRMING THE D ECISION OF THE SPECIAL BENCH HAS HELD THAT EVEN ASSUMING THAT THE ADVANCES AMOUNT TO DIVIDEND THE DEEMED DIVIDEND WOULD HAVE TO BE TAXE D NOT IN THE HANDS OF THE ASSESSEE BUT IN THE HANDS OF THE SHAREHOLDER. 7.6 THE ISSUE IN QUESTION IS COVERED IN FAVO UR OF THE ASSESSEE AND AGAINST THE REVENUE BY THE ORDER OF THE SPECIAL BEN CH OF THE TRIBUNAL IN 6 THE CASE OF BHAUMIK COLOUR PVT. LTD. 118 ITD 1 (MUM ) (SB) (SUPRA) AND BY THE JUDGMENT OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF UNIVERSAL MEDICARE (SUPRA). RESPECTFULLY FOLLOWING THE SAME WE UPHOLD THE ORDER OF THE CIT(APPEALS) AND DISMISS GROUND NO. 1 OF THE REVENUE. 7.7 THE ASSESSEE IN ITS APPEAL RAISED ADDITIONAL G ROUND NOS. 1 AND 2 ON THE VERY SAME ISSUE OF ADDITION MADE U/S 2(22)(E). AS WE UPHELD THE ORDER OF THE FIRST APPELLATE AUTHORITY ON THIS VERY ISSUE ADJUDICATING THESE ADDITIONAL GROUNDS RAISED BY THE ASSESSEE WOULD BE AN ACADEMIC EXERCISE. THUS WE DISMISS THE SAME. 8. GROUND NO. 2 IN DEPARTMENT APPEAL IN ITA NO. 430 7/M/07 IS AGAINST THE DELETION OF DISALLOWANCE OF INTEREST OF RS. 1 02 17 287/- ADDED BY THE AO ON THE GROUND THAT THE ADVANCES WERE GIVE N TO SOME OF THE PARTIES OUT OF BORROWED FUNDS AND THAT NO INTEREST HAS CHARGED. GROUND NO. 2(A) TO (B) IN ASSESSEES APPEAL IN ITA NO. 448 2/M/07 IS AGAINST THE ADDITION MADE ON ACCOUNT OF ACCRUAL OF INTEREST INC OME ON THE ADVANCES GIVEN BY THE ASSESSEE. AS THE ISSUES IN DEPARTMENT APPEAL AND ASSEESSE APPEAL ARE INTER-CONNECTED THE SAME ARE DISPOSED T OGETHER. 8.1 THE ASSESEE HAS PAID INTEREST ON BORROWINGS OF RS. 6 11 72 834 DURING THE YEAR UNDER CONSIDERATION. THE MAJORITY O F THE INTEREST WAS PAID TO RELATED CONCERNS OF THE ASSESSEE. AO MADE DISALL OWANCE OF INTEREST AS THE ASSESSEE HAD MADE CERTAIN LOANS / ADVANCES ALLE GEDLY OUT OF BORROWED FUNDS ON WHICH NO INTEREST HAS BEEN CHARGED. FURTH ER THE AO ALSO HELD IN RESPECT OF ADVANCES GIVEN TO SOME OF THE PARTIES THAT INTEREST SHOULD 7 HAVE ACCRUED TO THE ASSESSEE AND MADE ADDITION TO T HE TOTAL INCOME. THE PARTIES ARE AS FOLLOWS. SR. NO. PARTY NAME 1. ACME STHAPATI LTD. 2. AMITY INTERLINK STEELS PVT. LTD. 3. GUJARAT LYKA ORGANICS LTD. 4. JEEVANREKHA INVESTRADE PVT. LTD. 5. PACKAGE INVESTRADE PVT. LTD. 6. M J EXPORTS LTD. 7. OXFORD 21 ST CENTURY SERVICES PVT. LTD. 8. SUN FASTFIN SERVICES 9. SHOLAPUR ORGANICS PVT. LTD. 10. B B PAREKH 11. BHARAT KANAKIA 12. DOLPHIN LABORATORIES 13. JAYKUMAR MAHAJAN 14. KANAKIA ENTERPRISES 15. RAJ INVESTMENTS 16. SAGAR ENTERPRISES 17. SAI SHIV DEVELOPERS 18. SHASTRIJI CONSTRUCTIONS 19. YOGESH B PAREKH 20. AKRUTI NIRMAN PVT. LTD. 21. MEHERCHAND DADHA 22. MONARCH LAND DEVELOPERS 23. MONT BLANC BUILDERS 24. THAKUR ESTATE DEVELOPMENT PVT. LTD. 8 25. AZZILFI FINLEASE & INVESTMENT PVT. LTD. 26. JOSHUHA INVESTMENT PVT. LTD. 27. LAKSHADEEP INVESTMENT PVT. LTD. 28. SUN PHARMA EXPORTS 29. SUNAHMI FINLEASE & INVESTMENT PVT. LTD. 30. TEJASKIRAN PHARMACHEM IND. PVT. LTD. 8.2 OUT OF THE ABOVE PARTIES EXCEPT THOSE AT SR. N O. 18 23 AND 24 THE AO DISALLOWED INTEREST PAID AS ON THE GROUND THAT I NTEREST FREE ADVANCES WERE MADE OUT OF INTEREST BEARING BORROWINGS. IN TH E CASE OF REMAINING THREE PARTIES AT SR. NO. 18 23 AND 24 ADDITION WA S MADE ON THE GROUND THAT INTEREST DID ACCRUE ON ADVANCES GIVEN BY THE A SSESSEE. THE REASONS FOR DOING SO ARE EXTRACTED BELOW FROM THE ASSESSMEN T ORDER: I HAVE CONSIDERED THE ABOVE SUBMISSION OF THE ASSE SSEE BUT THE SAME CANNOT BE ACCEPTED. THE PARTIES AT SR. NO. 2 6 7 10 11 12 15 19 25 26 27 AND 29 ARE THE SAME AS IN AY 1999-00. ISSUES RELATED TO ALL THESE PARTIES HAVE B EEN SUITABLY ADDRESSED IN THE BLOCK ASSESSMENT ORDER AN D ALSO IN THE AY 1999-00. AFTER CONSIDERING THE SIMILAR SUBMI SSIONS AT THAT TIME THE INTEREST PAID EQUIVALENT TO THESE ADV ANCES WAS DISALLOWED. AS THERE IS NO MATERIAL CHANGE IN FACTS FOLLOWING THE SAME DISCUSSION IN BLOCK ASSESSMENT O RDER THE INTEREST @ 14% IS DISALLOWED ON THE INTEREST FREE L OANS / ADVANCES MADE TO THESE PARTIES. FURTHER AS REGARDS THE PARTY AT SR. NO. 1 IT IS SE EN THAT THE ASSESSEE HAS PROVIDED FOR THE INTEREST TILL LAST FI NANCIAL YEAR. THE ASSESSEE HAS NOT GIVEN ANY PROOF OF CONVERSION OF THIS ADVANCE AGAINST BOOKING OF PREMISES. IT MAY BE MENT IONED OVER HERE THAT THE ASSESSEE IS ENTERING INTO SUCH T YPE OF 9 TRANSACTIONS AS DISCUSSED IN THE SUCCEEDING PARAGRA PH WHEREIN THE PROPERTIES THE PROPERTIES ARE KEPT AS S ECURITY FOR ADVANCING THE AMOUNTS AND IN CASE OF FAILURE TO PAY BY THE PARTIES THE PROPERTIES ARE ACQUIRED. THE ASSESSEE HAS NOT TAKEN POSSESSION OF THESE PROPERTIES. FURTHER THE ASSESSEE HAS NOT GIVEN THE DETAILS OF PRICE AT WHICH THE BOO KING HAS BEEN VIS--VIS THE MARKET PRICE OF THESE PROPERTIES . THE GAIN OF INTEREST IN TERMS OF BOOKING AT A LESSER PRICE O F THESE PROPERTIES COMPARED TO THE MARKET PRICE CANNOT BE R ULED OUT. IN THESE CIRCUMSTANCES THE INTEREST @ 14% ON THE AM OUNT OUTSTANDING TO THIS PARTY IS DISALLOWED OUT OF THE TOTAL INTEREST PAID AND ADDED BACK TO THE TOTAL INCOME OF THE ASSESSEE. THE ASSESSEE HAS NOT GIVEN ANY REASONS FOR THE ADVA NCES AT SR. NO. 3 4 5 21 AND 30. AS FAR AS THE EXPLANATI ON FOR LOAN TO PARTY AT SR. NO. 13 IS CONCERNED IT IS SEEN THA T THE ASSESSEE HAS PROVIDED FOR INTEREST UPTO 31.03.1998. IN THE ABSENCE OF ANY LEGAL PROCEEDINGS AGAINST THE ABOVE SAID PARTY FOR RECOVERY THE POSSIBILITY OF CHARGING THE INTEREST IN CASH OR RECEIVING SOME OTHER BENEFIT IN LIEU OF INT EREST CANNOT BE RULED OUT. IN THESE CIRCUMSTANCES INTERE ST @ 14 % ON THIS AMOUNT IS DISALLOWED OUT OF THE INTEREST PA ID BY THE ASSESSEE CONSIDERING THIS LOAN TO BE FOR NON BUSINE SS PURPOSES. AS FAR AS THE PARTY AT SR. NO. 14 IS CONCERNED IT IS SEEN THAT THE ASSESSEE HAS RECOVERED SUMS INCLUDING INTEREST FROM OTHER TWO MEMBERS OF THE GROUP I.E. SHRI ASHOK KANA KIA AND SMT. MINA KANAKIA. THIS PARTY IS RELATED TO ONE OF THE DIRECTORS OF THE COMPANY ALSO. THE ASSESSEE COMPANY HAS PROVIDED INTEREST UPTO 31.03.1999. THE MARKET REPO RT INDICATES THAT THE FINANCIAL POSITION OF KANAKIA GR OUP IS NOT BAD THAT IT COULD NOT HONOUR ITS FINANCIAL COMMITM ENTS AND THE ASSESSEE HAS NOT PUT ANY PROOF FOR THE SAME. IN THESE 10 CIRCUMSTANCES INTEREST @ 14 % ON THIS AMOUNT IS DI SALLOWED OUT OF THE INTEREST PAID BY THE ASSESSEE CONSIDERIN G THIS LOAN TO BE FOR NON BUSINESS PURPOSES. AS FAR AS THE PARTIES AT SR. NO. 11 16 AND 28 ARE CONCERNED THE ASSESSEES PLEA THAT THESE ARE THE INTERESTS OU TSTANDING AND HENCE NO INTEREST HAS BEEN CHARGED ON THESE INT ERESTS CANNOT BE ACCEPTED AS CERTAIN REPAYMENTS OF LOAN HA VE TAKEN PLACE DURING THE YEAR AND IN A COMMERCIAL BUSINESS TRANSACTION THE LOAN AMOUNT IS RECOVERED BEFORE THE PRINCIPAL AMOUNT. FURTHER THERE IS NO BAR ON CHARG ING OF INTEREST ON OUTSTANDING BALANCE EITHER ON ACCOUNT O F PRINCIPLE OR ON ACCOUNT OF INTEREST. IN THESE CIRCU MSTANCES INTEREST @ 14% ON THIS AMOUNT IS DISALLOWED OUT OF THE INTEREST PAID BY THE ASSESSEE CONSIDERING THIS OUTS TANDING AMOUNT TO BE FOR NON BUSINESS PURPOSES. AS FAR AS THE PARTIES AT SR. NO. 17 20 AND 22 ARE CONCERNED THE ASSESSEE HAS TAKEN THE PLEA THAT THESE ADVANCES WERE ADVANCES FOR PROPERTY. THE ASSESSEE HAS HIMSELF CON TENDED W.R.T. PARTY AT SR. 17 THAT SINCE THE PROPERTY COUL D NOT BE DELIVERED THE PARTY HAS STARTED PAYING INTEREST FRO M 01.04.2000. IT IS PERTINENT TO MENTION OVER HERE TH AT THE ASSESSEE HAS BEEN INVESTING IN PROPERTIES WITH THE TERMS & CONDITIONS OF RETURNS @ 24% P.A. OR 50% OF PROFITS WHICHEVER IS HIGHER. THESE TRANSACTIONS ARE BASICAL LY FINANCE TRANSACTIONS WHICH ARE FULLY SECURED AGAINST MARKET RISKS. IN FACT THE ASSESSEE HAS ITSELF EXPOSED THE NATURE OF TRANSACTION BY EXPLANATION TO THE LOAN FOR PARTY AT SR. NO. 17. THEREFORE THE PLEA OF THE ASSESSEE THAT THESE ARE ADVANCES F ROM PROPERTY CANNOT BE ACCEPTED AND THESE ARE ADVANCES FROM PROPERTY CANNOT BE ACCEPTED AND THESE ARE CONSIDERE D COMMERCIAL TRANSACTIONS ON WHICH INTEREST NEED TO B E CHARGED / PROVIDED. IN THESE CIRCUMSTANCES INTERES T @ 14 % ON THIS AMOUNT IS DISALLOWED OUT OF THE INTEREST PA ID BY THE 11 ASSESSEE CONSIDERING THIS LOAN TO BE FOR NON BUSINE SS PURPOSES. ACCORDINGLY A SUM OF RS. 1 02 17 287 BEING INTERES T AT THE RATE OF 14% IS DISALLOWED AND ADDED BACK TO THE TOT AL INCOME OF THE ASSESSEE. INTEREST ACCRUED BUT NOT ACCOUNTED IN THE BOOKS OF ACCOUNTS PARTIES AT SR. NO. 18 23 AND 24 ARE THE SAME AS IN AY 1999- 00 AND CONSIDERED IN BLOCK ASSESSMENT ON THE BASIS OF SEIZED MATERIAL. ISSUES RELATED TO ALL THESE PARTIES HAVE BEEN SUITABLY ADDRESSED TO IN THE BLOCK ASSESSMENT ORDER AND ALSO IN THE ASSESSMENT YEAR 1999-00. AS THERE IS NO MATE RIAL CHANGE IN THE FACTS SINCE BLOCK ASSESSMENT FOLLOWI NG THE SAME DISCUSSION IN BLOCK ASSESSMENT ORDER THE INTE REST ACCRUED TO THE ASSESSEE FOR THE FY 1999-00 BUT NOT ACCOUNTED IN THE BOOKS OF ACCOUNTS ON ACCOUNT OF SU CH ADVANCES IS ADDED BACK TO THE TOTAL INCOME OF THE A SSESSEE. ACCORDINGLY INTEREST ACCRUED @ 24% ON THESE ADVANC ES AMOUNTING TO RS. 28 54 368 IS ADDED TO THE TOTAL IN COME OF THE ASSESSEE. 8.3 THE CIT(A) DELETED THE ADDITION MADE BY THE AO ON DISALLOWANCE OF INTEREST PAID ON BORROWED FUNDS FOR THE USE OF I NTEREST-FREE ADVANCES GIVEN TO THE ABOVE PARTIES. THE RELEVANT EXTRACT IS AS FOLLOWS:- 2.23 I HAVE CONSIDERED THE SUBMISSIONS OF THE APP ELLANT. THE APPELLANT IS BASICALLY AN INVESTMENT AND FINANC E COMPANY HAVING MAJOR SOURCE OF INCOME BY WAY OF INT EREST ON ADVANCING LOANS. THE APPELLANT HAS ADVANCED ALL THE LOANS DURING THE COURSE OF ITS BUSINESS. THE QUESTI ON 12 INVOLVED IN THE PRESENT GROUND OF APPEAL IS WHETHER ANY PART OF THE INTEREST EXPENSE OF THE APPELLANT CAN BE DIS ALLOWED ON THE GROUND THAT THE APPELLANT HAS NOT USED THE BORR OWED CAPITAL FOR ITS OWN BUSINESS. THE ISSUE OF ACCRUAL OF INTEREST INCOME IS ALSO INVOLVED. AS PER THE PROVISIONS OF S ECTION 36(1)(III) OF THE INCOME-TAX ACT 1961 THE INTEREST EXPENSE CAN BE DISALLOWED ONLY IF IT IS FOUND THAT THE APPE LLANT HAS DIVERTED BORROWED FUNDS FOR NON-BUSINESS PURPOSE AN D IT HAS NOT USED FOR THE PURPOSE OF ITS OWN BUSINESS. IN TH E PRESENT CASE THE ASSESSING OFFICER HAS NOT ESTABLISHED ANY LINK BETWEEN THE INTEREST BEARING FUNDS OF THE APPELLANT AND THE LOANS AND ADVANCES GIVEN BY THE APPELLANT. THE TOTA L AMOUNT OF FUNDS ADVANCED BY THE APPELLANT ARE RS. 14.86 CR ORES WHEREAS THE INTEREST-FREE FUNDS AVAILABLE WITH THE APPELLANT AS ON THE LAST DATE OF THE PREVIOUS YEAR ARE TO THE TUNE OF RS. 49.28 CRORES. THUS IT IS SEEN THAT INTEREST-FREE F UNDS AVAILABLE WITH THE APPELLANT ARE MUCH MORE THAN THE AMOUNTS ADVANCED AND THEREFORE UNLESS NEXUS IS ESTABLISHED BETWEEN THE LOANS ADVANCED WITH THE INT EREST- BEARING FUNDS NO PART OF THE INTEREST EXPENSES OF THE APPELLANT CAN BE DISALLOWED. 2.24 HOWEVER WHETHER INTEREST INCOME HAS ACCRUED O R NOT TO THE APPELLANT AS PER ORAL/WRITTEN AGREEMENT BETWEEN THE APPELLANT AND THE PARTIES IS ALSO INVOLVED IN THE P RESENT CASE. THIS QUESTION HAS TO BE DECIDED BY TAKING INTO CONS IDERATION ALL THE RELEVANT FACTS OF EACH LOAN AND ADVANCE GIV EN BY THE APPELLANT. IF IT IS FOUND AFTER CONSIDERING ALL THE RELEVANT FACT THAT INCOME HAS ACCRUED TO THE APPELLANT IT IS TAXA BLE IN THE HANDS OF THE APPELLANT EVEN IF THE APPELLANT HAS NO T SHOWN THE SAME IN THE BOOKS OF ACCOUNTS. 8.4 THE CIT(A) DELETING THE DISALLOWANCE OF THE IN TEREST EXPENSE HOWEVER HELD THAT THE INTEREST HAS ACCRUED TO THE ASSESSEE IN RESPECT OF 13 10 PARTIES AS THESE WERE BUSINESS ADVANCES. THE REL EVANT EXTRACT IS AS FOLLOWS: 2.27 BASED ON THESE DECISIONS INCOME WHICH HAS A CCRUED TO THE APPELLANT IS TAXABLE IN THE HAND OF THE APP ELLANT REGARDLESS OF THE FACT THAT THE APPELLANT HAS NOT A CCOUNTED FOR THE SAME IN ITS BOOKS OF ACCOUNTS. THE APPELLAN T IS A FINANCE AND INVESTMENT COMPANY. THE APPELLANT HAS I TSELF ADMITTED THAT ALL THE ADVANCES ARE MADE IN THE COUR SE OF ITS BUSINESS OF FINANCE AND INITIALLY MOST OF THE ADVAN CES GIVEN ARE WITH A VIEW TO CHARGE INTEREST. THE APPELLANT H OWEVER CLAIMED THAT LATER ON DUE TO FINANCIAL DIFFICULTIES IN SOME CASES INTEREST IS NO RECOVERED. THEREFORE IT IS T O BE EXAMINED IN EACH AND EVERY CASE WHETHER ON THE BAS IS OF LEGAL PRINCIPLES LAID DOWN BY THE AFORESAID DECISIO NS IT CAN BE SAID THAT INTEREST INCOME IN REALITY HAS ACCRUED TO THE APPELLANT OR NOT. A. ACME STHAPATI LIMITED :- THE APPELLANT HAS ADVANCED A LOAN OF RS. 1 CRORE TO ACME STHAPATI LIMITED IN AY 1999- 00. INTEREST OF RS. 12 40 750 WAS CHARGED BY THE APPELLANT ON THIS LOAN IN THE AY 1999-00. IN THIS Y EAR THE APPELLANT IS CLAIMING THAT THIS PARTY IS IN THE BUS INESS OF REAL-ESTATE DEVELOPMENT AND SINCE THIS INDUSTRY WAS UNDERGOING TREMENDOUS RECESSION AND LIQUIDITY PRESS URE THE PARTY INDICATED ITS DIFFICULTY TO REPAY THE LOA N. THE APPELLANT CLAIMED THAT THE AMOUNT ADVANCED WAS TREA TED AS ADVANCE GIVEN FOR BOOKING OF PREMISES. THE APPEL LANT CLAIMED THAT THEREFORE THERE WAS NO QUESTION OF CHARGING OF INTEREST ON THIS AMOUNT IN THE CURRENT YEAR. IT WAS CLAIMED THAT DECISION TO CONVERT LOAN GIVEN TO ADVANCE FOR BOOKING OF PREMISES WAS TAKNE ON ACCOUN T OF COMMERCIAL EXPEDIENCY AND FOR BOOKING OF PREMISES WAS TAKEN ON ACCOUNT OF COMMERCIAL EXPEDIENCY AND THEREFORE NO INTEREST INCOME HAS ACCRUED TO THE APPELLANT IN THE CURRENT YEAR. THESE CONTENTIONS OF THE APPELLANT ARE NOT ACCEPTABLE AND RIGHTLY REJECTED B Y THE AO. THOUGH THE APPELLANT HAS FILED LETTER DATED 31.3.1999 WRITTEN BY ACME STHAPATI LIMITED DURING THE 14 COURSE OF APPELLATE PROCEEDINGS BUT ON GOING THROU GH THE SAME IT WAS NOTICED THAT PREMISES OFFERED BY A CME STHAPATI LIMITED WAS IN REALITY A SECURITY FOR THE AMOUNT OF THE APPELLANT LYING WITH THAT PARTY. EVEN AS PER THIS LETTER ACME STHAPATI LIMITED WAS BOUND TO PAY TO T HE APPELLANT INTEREST @ 10% IF THE APPELLANT DOES NOT EXERCISE OPTION TO CONVERT THE MONEY GIVNE INTO ADV ANCE FOR PURCHASE OF PROPERTY. THE APPELLANT HAS FILED N O EVIDENCE THAT IT HAS EXERCISED THE OPTION. THIS LET TER PRODUCED BY THE APPELLANT IN APPELLATE PROCEEDINGS WAS NOT FILED BEFORE THE ASSESSING OFFICER AND NO REASO N WAS GIVEN FOR NOT PRODUCING THE SAME BEFORE THE AO. THI S PIECE OF ADDITIONAL EVIDENCE THUS IS NOT ADMISSIBLE AS PER PROVISION OF RULE 46A(3) OF THE INCOME-TAX RULES. T HE APPELLANT HAS FILED COPY OF THE ACCOUNT OF THIS CON CERN AS APPEARING IN ITS BOOKS OF ACCOUNT UPTO FY 2004-05. IT IS NOTICED THAT IN THE AY 2004-05 THE APPELLANT HAS S HOWN RECEIPT OF RS. 74 22 033/- ON ACCOUNT OF COMPENSATI ON. THE APPELLANT HAS CHARGED THE COMPENSATION AT THE R ATE OF 18% ON THE AMOUNT DUE FROM THIS PARTY. THESE FAC TS SHOW THAT THE AMOUNT ADVANCED BY THE APPELLANT CONTINUED TO BE INTEREST-BEARING AND THEREFORE INTE REST @ 18% WHICH COMES TO RS. 20 23 335/- HAS ACCRUED TO T HE APPELLANT IN THE CURRENT YEAR. B. AMITY INTERLINK STEELS PVT. LTD. :- THE APPELLANT HAS GIVEN MONEY OF RS. 1 CRORE IN THE EARLIER FINANCIAL YEAR AND RS. 20 LAKHS HAS BEEN ADVANCED DURING THE YEAR UNDER CONSIDERATION. THE APPELLANT IS CLAIMING THAT THE AMOUNT HAS BEEN GIVEN TO THIS PARTY AS SHARE APPLIC ATION MONEY. ON GOING THROUGH THE COPY OF THIS PARTY AS APPEARING IN THE BOOKS OF ACCOUNT OF THE APPELLANT IT IS FOUND THAT THE APPELLANT HAS RECEIVED INTEREST OF R S. 11 29 970/- IN THE FINANCIAL YEAR 2000-01 AND AN IN TEREST OF RS. 7 89 028/- IN THE FINANCIAL YEAR 2002-03. SI MILARLY THE APPELLANT HAS RECEIVED INTEREST OF RS. 6 23 331 /- IN THE FY 2003-04. IN THE APPELLATE PROCEEDINGS THE APPELLANT HAS FILED A LETTER DATED 12.8.1998 ISSUED BY AMITY INTERLINK STEELS PVT. LIMITED TO PROVE THAT T HE AMOUNT ADVANCED TO THIS PARTY IS TOWARDS SHARE APPLICATION MONEY. BUT THE APPELLANT COULD NOT EXPL AIN WHY THE PAYMENT TO THIRD PARTY WAS MADE ON FOUR 15 OCCASIONS WHEN IT IS CLAIMING THAT AMOUNT PAID TO T HIS PARTY IS ON ACCOUNT OF SHARE APPLICATION. NO DETAIL S HAVE BEEN FILED AS TO WHEN THE SHARES WERE APPLIEF FOR. THE APPELLANT HAS FILED ANOTHER LETTER DATED 25.3.2000. ON GOING THROUGH THIS LETTER IT APPEARS THAT APPELLAN T HAS MADE A REQUEST TO THIS COMPANY FOR CONVERSION OF SH ARE APPLICATION MONEY INTO LOAN. THE COPY OF THIS LETTE R WAS NEITHER FILED BEFORE THE AO. IF MONEY PAID TO THIS PARTY IS FOR PURCHASE OF SHARES AND THAT PARTY WAS NOT ALLOT TING SHARES IT IS NO UNDERSTOOD WHY THE APPELLANT ADVAN CED A FURTHER AMOUNT OF RS. 20 LAKHS TO THE PARTY IN THE CURRENT YEAR. THEREFORE THE CLAIM OF THE APPELLANT THAT MO NEY ADVANCED TO THIS PARTY WAS SHARE APPLICATION MONEY IS NOT ACCEPTABLE. THE APPELLANT HAS CHARGED INTEREST IN THE SUBSEQUENT YEARS. THESE FACTS SHOW THAT AT THE TIME OF ADVANCING OF MONEY THERE WAS AGREEMENT BETWEEN THE APPELLANT AND THE PARTY TO CHARGE INTEREST AND THE REFORE THE RIGHT TO CHARGE INTEREST WAS AVAILABLE WITH THE APPELLANT. THE APPELLANT HAS CHARGED INTEREST @ 12 % FROM THIS PARTY IN THE AY 2000-01 AND ON THIS BASIS ADDITION OF RS. 14 20 000/- IS REQUIRED TO BE MADE TO THE INCOME OF THE APPELLANT IN THE CURRENT YEAR. THE AC TION OF THE ASSESSING OFFICER ON THIS GROUND IS UPHELD. C. GUJARAT LYKA ORGANICS LIMITED: - THE PAYMENT HAS BEEN MADE TO GUJARAT LYKA ORGANICS LIMITED ON THE LAST D AY OF PREVIOUS YEAR AND THEREFORE NO ADDITION CAN BE MADE ON ACCOUNT OF ACCRUAL OF INTEREST IN THIS YEAR. D. JEEVAN REKHA INVESTRADE PVT. LIMITED AND PACKAGE INVESTRADE PVT. LIMITED:- THE AMOUNT ADVANCED TO JEEVAN REKHA INVESTRADE PVT. LTD. AND TO PACKAGE INVESTRADE PVT. LIMITED ARE SMALL AMOUNTS. MOREOVER THERE IS NO EVIDENCE THAT THERE WAS ANY AGREEMENT BETWEEN THE APPELLANT AND THESE PARTIES TO CHARGE INTEREST. THEREFORE NO ADDITION ON ACCOUNT OF ACCR UAL OF INTEREST CAN BE MADE IN THESE CASES. E. M J EXPORTS LIMITED: - THE AMOUNT DUE FROM THIS PARTY IS OUTSTANDING BALANCE OF THE EARLIER YEARS. THERE IS NO NEW TRANSACTION CARRIED OUT BY THIS PARTY IN THE CURREN T YEAR. 16 THE ADDITION MADE BY THE AO ON THIS ACCOUNT IN THE AY 1999-00 WAS DELETED BY THE CIT(A) IN ITS ORDER DT. 31.12.2003 IN APPEAL NO. IT-73/02-03. THEREFORE FOLLOWING THE DECISION OF CIT(A) IN THE CAE OF THE APPELLANT IN THE AY 1999-00 NO ADDITION CAN BE MAD E TO THE INCOME OF THE APPELLANT. F. OXFORD 21 ST CENTURY SERVICES PVT. LTD. :- A SUM OF RS. 3 24 483/- IS DUE FROM OXFOR 21 ST CENTURY. THE AMOUNT HAS BEEN ADVANCED IN THE EARLIER YEAR. THERE IS NO TRANSACTION WITH THIS PARTY IN THE CURRENT YEAR. CO PY OF ACCOUNT FILED BY THE APPELLANT SHOWS THAT THE APPEL LANT HAS WRITTEN OFF THIS AMOUNT IN THE AY 2004-05. THE APPELLANT IS CLAIMING THAT THE FUNDS WERE LENT TO T HIS PARTY DURING 1997-98 AND 1998-99 AT INTEREST OF 26% - 27%. THIS COMPANY BELONGS TO THE KETAN PAREKH GROUP (STOCK BORKER) OF COMPANIES. LATER THIS PARTY TURNE D OUT TO BE DEFAULTER. THE APPELLANT SUBMITTED THAT IT MA NAGED TO RECOVER MOST OF THE PRINCIPAL BUT THE OUTSTANDI NG INTEREST ALREADY CHARGED EARLIER COULD NOT BE RECOV ERED. IT ALSO SUBMITTED THAT THIS PARTY IS NOT IN ANY WAY RELATED OR ASSOCIATED WITH THE ASSESSEE. IT STATED THAT THE RE WAS NO UNDERSTANDING TO CHARGE INTEREST ON INTEREST. IN VIEW OF THESE FACTS INTEREST INCOME CANNOT BE TAXED IN THE HANDS OF THE APPELLANT ON ACCRUAL BASIS. G. SUN FASTFIN SERVICES PVT. LIMITED AND SHOLAPUR ORGA NIC PVT. LTD. :- THE AMOUNTS ADVANCED TO THESE PARTIES ARE SMALL AMOUNTS. THE AO IS NOT JUSTIFIED IN MAKING AN Y DISALLOWANCE ON ACCOUNT OF THESE ADVANCE DMADE IN V IEW OF THE FACT THAT THE APPELLANT HAS HUGE OWN INTERES T FREE FUNDS. SIMILAR DISALLOWANCE MADE IN EARLIER YEAR WA S NOT UPHELD. H. MR. B. B. PAREKH :- THE AMOUNT GIVEN TO MR. B B PAREKH IS FOR LOOKING AFTER THE LEGAL MATTERS RELATED TO T HE COMPANYFOR THE ACQUISITION OF SHARES OF AMBALAL SARABHAI ENTERPRISES. THE AMOUNT WAS ADVANCED IN TH E EARLIER YEARS. NO NEW TRANSACTION WAS CARRIED OUT I N THE CURRENT YEAR. THE DISALLOWANCE MADE IN THE AY 1999- 00 AND EARLIER YEARS WAS NOT UPHELD BY THE CIT(A). 17 THEREFORE NO DISALLOWANCE OF THE INTEREST CAN BE M ADE IN THIS YEAR ALSO. I. SHRI BHARAT KANAKIA:- A SUM OF RS. 5 74 565/- WAS DUE TO THE APPELLANT FROM SHRI BHARAT KANAKIA. THE APPE LLANT HAS RECEIVED BACK RS. 5 LAKHS ON 16.4.1999 AND THE BALANCE AMOUNT HAS BEEN WRITTEN OFF IN THE AY 2004- 05. THE ADDITION MADE ON THIS ACCOUNT WAS NOT UPHELD IN THE AY 1999-00 BY THE CIT(A). FOLLOWING THE DECISION OF MY PREDECESSOR NO DISALLOWANCE OF INTEREST CAN BE MAD E IN THIS YEAR ALSO. J. DOLPHIN LABORATORIES :- THE MONEY WAS ADVANCED TO THIS PARTY IN THE EARLIER YEARS. THE APPELLANT CARRIED N O NEW TRANSACTION WITH THIS PARTY IN THE CURRENT YEAR. DISALLOWANCE OF INTEREST MADE WAS NOT UPHELD BY THE CIT(A) IN THE CASE OF THE APPELLANT IN AY 1999-00. IN VIEW OF THIS NO DISALLOWANCE IS REQUIRED TO BE MAD E ON ACCOUNT OF MONEY ADVANCED TO THIS PARTY. K. JAY KUMAR MAHAJAN :- NO NEW TRANSACTION WAS CARRIED OUT WITH THIS PARTY IN THE CURRENT YEAR. THE APPELL ANT IS CLAIMING THAT THIS PARTY IS NOT PAYING ANY INTEREST FROM 31.3.1998. THE AMOUNT DUE FROM THIS PARTY IS ONLY R S. 94 826/-. THE APPELLANT HAS WRITTEN OFF THIS AMOUNT IN THE AY 2004-05. IN VIEW OF THESE FACTS IT CANNOT BE SA ID THAT ANY INTEREST INCOME HAS ACCRUED TO THE APPELLANT. T HE AMOUNT IS TOO SMALL TO CONSIDER FOR THE SAME FOR AN Y DISALLOWANCE OF INTEREST. THEREFORE NO ADJUSTMENT TO TAXABLE INCOME OF THE APPELLANT ON ACCOUNT OF THIS ADVANCE MADE BY THE APPELLANT IS CALLED FOR. L. KANAKIA ENTERPRISES :- THE AMOUNT DUE FROM THIS PARTY AS ON 1.4.1999 WAS RS. 1 21 37 671/-. NO FRESH AMOU NT WAS ADVANCED. THE APPELLANT HAS CLAIMED THAT THE LO AN WAS GIVEN TO THIS PARTY FOR A SHORT PERIOD OF TIME. THE APPELLANT CLAIMED THAT THE LOAN WAS GIVEN TO THIS P ARTY FOR A SHORT PERIOD OF TIME. THE APPELLANT CLAIMED T HAT DUE TO RECESSION IN THE REAL ESTATE MARKET AND THEIR IN TERNAL LIQUIDITY PROBLEMS THE PARTY REFUSED TO HONOUR THE IR 18 COMMITMENTS. THE LOANS WERE GIVEN TO THE PARTY IN JANUARY 1999. INTEREST FOR THE BROKEN PERIOD UPTO 31.3.1999 WAS CHARGED AND OFFERED AS INCOME. HOWEVE R EVEN BEFORE THE INTEREST WAS DUE THE PARTY EXPRESS ED THEIR INABILITY TO HONOUR THEIR COMMITMENTS. FEARIN G COMPLETE DEFAULT THE APPELLANT WAS CONSTRAINED TO AGREE IN THE MONTH OF MARCH 1999 THAT NO INTEREST WILL B E CHARGED TO ENSURE THAT THE PRINCIPAL IS RECOVERED. ULTIMATELY THE PRINCIPAL AMOUNT WAS RECOVERED AFTE R AN INTERVAL OF MORE THAN 15 MONTHS. SINCE EVEN THE PRINCIPAL AMOUNT WAS NOT SURE OF RECOVERY THE ASSE SSEE WAS COMPELLED TO AGREE TO THESE TERMS. THE APPELLAN T FURTHER SUBMITTED THAT THIS PARTY IS NOT IN ANY WAY RELATED OR ASSOCIATED WITH THE ASSESSEE. THE DECISION NOT T O CHARGE INTEREST WAS PURELY OUT OF COMMERCIAL EXPEDI ENCY AND IN THE LARGER INTEREST OF PROTECTING THE ASSETS OF THE COMPANY. THESE CONTENTIONS OF THE APPELLANT ARE NOT ACCEPTAB LE. THE APPELLANT HAS FILED NO EVIDENCE TO SHOW THAT TH E FINANCIAL CONDITION OF THIS CONCERN HAS GONE SO BAD THAT IT CAN BE HELD THAT IN REALTY NO INTEREST INCOME HA S ACCRUED. ON GOING THROUGH THE COPY OF ACCOUNT OF TH E PARTY IT IS FOUND THAT THIS PARTY HAS BEEN RETURNI NG REGULARLY MONEY TO THE APPELLANT AND AT THE END OF THE YEAR THE AMOUNT DUE IS ONLY RS. 36 27 171/- AS AGA INST THE AMOUNT DUE OF RS. 1 21 37 671/- AS ON 1.4.1999. THUS THE APPELLANT HAS BEEN ABLE TO RECOVER A LARGE PART OF MONEY. THE APPELLANT HAS ALSO CHARGED INTEREST OF R S. 73 829/- ON 28.7.2000. THESE FACTS SHOW THAT THE APPELLANT HAS NOT FORGONE ITS RIGHT TO CHARGE INTER EST. IN VIEW OF THESE FACTS INTEREST INCOME HAS ACCRUED TO THE APPELLANT WHICH THE APPELLANT HAS NOT ACCOUNTED FOR . INTEREST INCOME AT THE RATE OF 14% ON THIS AMOUNT I S REQUIRED TO BE TAKEN IN THE HANDS OF THE APPELLANT. THEREFORE INTEREST INCOME IS REQUIRED TO BE INCLUD ED IN THE TAXABLE INCOME OF THE APPELLANT ON ACCRUAL BASI S. THE AO WILL COMPUTE THE INTEREST THAT IS TAXABLE IN THE HANDS OF THE APPELLANT. 19 M. RAJ INVESTMENTS :- THE AMOUNT DUE FROM THIS PARTY IS RS. 7 04 186/- WHICH IS AMOUNT DUE IN THE EARLIER YEARS . THE APPELLANT HAS CHARGED INTEREST FROM THIS PARTY IN T HE EARLIER YEAR BUT NO INTEREST IS CHARGED IN THE CUR RENT YEAR ON THE GROUND THAT IT IS UNABLE TO RECOVER THE AMOUNT DUE FROM THIS PARTY. THE APPELLANT IN THE AY 2002-03 HAS RECOVERED THE AMOUNT DUE. THE APPELLANT HAS FILED NO EVIDENCE THAT FINANCIAL CONDITION OF T HIS PARTY IS BAD AND THERE IS NO HOPE OF RECOVERY OF IN TEREST. THEREFORE INTEREST INCOME HAS ACCRUED TO THE APPEL LANT ON ADVANCES GIVEN TO THIS PARTY. THE AMOUNT OF INTE REST INCOME @ 14% COMES TO RS. 98 586/- THIS AMOUNTS IS TAXABLE AS INCOME IN THE HANDS OF THE APPELLANT ON ACCRUAL BASIS. N. SAGAR ENTERPRISES :- THE AMOUNT DUE FROM THIS PARTY WAS RS. 2 LAKHS AS ON 1.4.1999. THE AMOUNT HAS BEEN RECEIVED BACK BY THE APPELLANT IN THE MONTH OF APRI L MAY 1999. THE FACTS SHOWS THAT THE APPELLANT HAS RECEIVED INTEREST OF RS. 2 21 721/- IN THE MONTH OF APRIL 1999. THESE FACTS SHOW THAT INTEREST IS REQUIRED TO BE CHARGED BY THE APPELLANT TILL THE DATE OF PAYMENT. THEREFORE ON THIS ISSUE THE ACTION OF THE AO IS U PHELD. O. SAI SHIV DEVELOPERS :- THE APPELLANT HAS ADVANCED RS. 50 LAKHS TO THIS PARTY IN THE CURRENT YEAR. THE APP ELLANT IS CLAIMING THAT THE MONEY WAS PAID FOR THE PURCHAS E OF PROPERTY. THE APPELLANT IS CLAIMING THAT SINCE THIS PARTY COULD NOT DELIVER THE PROPERTY INTEREST WAS CHARGE D IN THE NEXT FINANCIAL YEAR. THIS CONTENTION OF THE APP ELLANT IS NOT ACCEPTABLE. THE APPELLANT HAS NEITHER GIVEN DESCRIPTION OF THE PROPERTY WHICH THE APPELLANT INT ENDED TO PURCHASE NOR THE APPELLANT HAS FILED ANY OTHER EVIDENCE IN THE FORM OF AGREEMENT OF PURCHASE TO PR OVE THAT THE MONEY GIVEN TO THIS PARTY IS REALLY FOR PU RCHASE OF PROPERTY. THE APPELLANT HAS FILED COPY OF ACCOUN TS OF THIS PARTY AS APPEARING IN THE BOOKS OF ACCOUNT OF THE APPELLANT WHICH SHOW THAT THE APPELLANT HAS CHARGED INTEREST AT THE RATE OF 18% IN THE ASSESSMENT YEAR 2001- 02. THESE FACTS SHOW THAT THERE WAS AN AGREEMENT BETWEEN THE APPELLANT HAS CHARGED INTEREST AT THE R ATE OF 20 18% IN THE AY 2001-02. THESE FACTS SHOW THAT THERE WAS AN AGREEMENT BETWEEN THE APPELLANT AND THIS PARTY T O CHARGE INTEREST. THEREFORE INTEREST INCOME AT THE RATE OF 18% HAS ACCRUED TO THE APPELLANT IN THE CURRENT YEA R. THE AO IS DIRECTED TO COMPUTE THE INTEREST ACCRUED TO THE APPELLANT AND TREAT THE SAME AS INCOME OF THE APPEL LANT FOR THIS YEAR. P. SHASTRIJI CONSTRUCTIONS :- THE AMOUNT WAS GIVEN TO THIS PARTY IN THE EARLIER YEARS. THE APPELLANT IS CLAIMI NG THAT THE AMOUNT WAS GIVEN FOR THE PURCHASE OF PROPERTY A T PRAMUKH PLAZA CHAKALA ANDHERI. THE APPELLANT IS CLAIMING THAT IT HAS ALSO FILED A SUIT FOR RECOVERY . ADDITIONS WAS ALSO MADE IN THE CASE OF THE APPELLAN T ON THE SAME ISSUE IN THE AY 1999-00 AND THE SAME WAS N OT UPHELD BY CIT(A) IN THAT YEAR. FOLLOWING THE SAME IT IS HELD THAT NO ADDITION IS CALLED FOR IN THE CURRENT YEAR. Q. JOGESH PAREKH :- THE AMOUNT DUE AS ON 1.4.1999 IS ONLY RS. 75 491/-. THE APPELLANT HAS ADVANCED A SUM OF R S. 3 LAKHS ON 3.1.2000. THE APPELLANT HAS RECEIVED INTER EST OF RS. 4509/- ON 6.9.2000. THE FACTS SHOW THAT THE MON EY WAS ADVANCED TO THIS PARTY WITH UNDERSTANDING TO CH ARGE INTEREST. THEREFORE INTEREST AT THE RATE OF 12% IS REQUIRED TO BE CHARGED. ADDITION OF RS. 18 058/- IS REQUIRED TO BE MADE TO THE INCOME OF THE APPELLANT. R. AKRUTI NIRMAN PVT. LTD. :- THE OUTSTANDING AMOUNT OF RS. 20 LAKHS WAS RECEIVED BY THE APPELLANT ON 7.5.1999. THE APPELLANT IS CLAIMING THAT THE AMOUNT WAS ADVANCED FOR THE PURCHASE OF PROPERTY. THERE IS NO EVIDENCE THAT AMOUNT WAS ADVANCED FOR THE PURCHASE OF PROPERTY. N O AGREEMENT TO PURCHASE OR ANY OTHER EVIDENCE WAS FIL ED. IN VIEW OF THIS IT IS HELD THAT INTEREST INCOME @ 14% HAS ACCRUED TO THE APPELLANT. THE AO WILL COMPUTE THE AMOUNT OF INTEREST TAXABLE IN THE HANDS OF THE APPE LLANT. S. MEHER SINGH DADA :- THE APPELLANT HAS ADVANCED A SUM OF RS. 35 00 000/- IN THE MONTH OF JANUARY AND FEBR UARY 2000 AND THE SAME HAS BEEN RECEIVED BACK BY THE 21 APPELLANT IN THE MONTH OF MARCH 2000. THE APPELLAN T IS CLAIMING THAT THE AMOUNT GIVEN TO THIS PARTY IS ADV ANCE FOR PURCHASE OF PROPERTY BUT NO EVIDENCE FOR THE SA ME WAS FILED. THEREFORE IT IS HELD THAT THE AMOUNT GI VEN TO THIS PARTY IS ON INTEREST AND INTEREST INCOME @ 14% IS INCLUDIBLE IN THE INCOME OF THE APPELLANT ON ACCOUN T OF ACCRUAL OF INTEREST. THE AO WILL COMPUTE THE AMOUNT OF INTEREST TAXABLE IN THE HANDS OF THE APPELLANT. T. MONARCH LAND DEVELOPERS :- THE AMOUNT DUE FROM THIS PARTY IS THE DEBIT BALANCE OF THE EARLIER YEARS. TH E APPELLANT HAS RECEIVED THE ENTIRE AMOUNT IN THE CUR RENT YEAR. DISALLOWANCE MADE BY THE AO IN THE EARLIER YE ARS WAS NOT UPHELD BY THE CIT(A). IN VIEW OF THIS NO DISALLOWANCE IS REQUIRED TO BE MADE. U. MONT BLANC BUILDERS :- THE ENTIRE AMOUNT DUE IS OUTSTANDING BALANCE OF THE EARLIER YEARS. THE APPEL LANT HAS RECEIVED NO AMOUNT IN THE CURRENT YEAR. THE APPELLANT IS CLAIMING THAT THIS AMOUNT IS AN ADVANC E FOR THE PURCHASE OF PROPERTY. THE ADDITION MADE ON THIS ACCOUNT WAS DELETED BY THE CIT(A) IN THE AY 1999-00 . FOLLOWING THE SAME IT IS HELD THAT NO DISALLOWANCE OF INTEREST IS CALLED FOR IN THE CURRENT YEAR. V. THAKUR ESTATE DEVELOPMENTS PVT. LTD. :- THE ENTIRE AMOUNT DUE IS OUTSTANDING BALANCE OF THE EARLIER YE ARS. THE APPELLANT HAS RECEIVED NO AMOUNT IN THE CURRENT YEAR. THE APPELLANT IS CLAIMING THAT THIS AMOUNT IS AN ADVANCE FOR THE PURCHASE OF PROPERTY. THE ADDITION MADE ON THIS ACCOUNT WAS DELETED BY THE CIT(A) IN THE AY 1999-00. FOLLOWING THE SAME IT IS HELD THAT NO DISALLOWANCE OF INTEREST IS CALLED FOR IN THE CURRE NT YEAR. W. (I) AZZILFI FINLEASE & INVESTMENTS: (II) JOSHUA INVESTMENT PVT. LTD: (III) LAKSHADEP INVESTMENT & FIN. LTD.: 22 IN THESE CASES THE APPELLANT HAS RECEIVED BACK MO NEY OUTSTANDING IN THE EARLIER YEARS. THERE IS NO NEW TRANSACTIONS WITH THESE PARTIES. THE APPELLANT IN T HE YEAR HAD CLAIMED THAT IT HAS GIVEN MONEY TO THESE PARTIE S FOR THE PURCHASE OF SHARES OF AMBALAL SARABHAI ENTERPRI SE LTD. FOR THE PURPOSE OF BUSINESS. THE ADDITIONS MAD E BY THE AO IN THE AY 1999-00 WERE DELETED BY THE CIT(A) IN APPEAL. THE AO HAS MADE THE ADDITION ON THE BASIS T HAT DISALLOWANCE OF INTEREST WAS MADE IN THESE CASES IN THE EARLIER YEARS. FOLLOWING THE DECISIONS OF MY PREDEC ESSOR IN THE CASE OF THE APPELLANT FOR THE EARLIER YEAR IT IS HELD THAT NO DISALLOWANCE OF INTEREST IS CALLED FOR. ADD ITION MADE IS DELETED. X. SUN PHARMA EXPORTS:- THE AMOUNT DUE FROM THIS PARTY IS RS. 43 30 046/- A S ON 1.4.1999. THE AMOUNT HAS BEEN RECEIVED BY THE APPEL LANT ON 31.8.1999. THE APPELLANT IS CLAIMING THAT THE AM OUNT DUE IS ON ACCOUNT OF INTEREST FOR THE PERIOD 1998-9 9. THE APPELLANT HAS FILED NO EVIDENCE THAT NO INTEREST IS CHARGABLE ON AMOUNT DUE ON ACCOUNT OF INTEREST. THE AMOUNT DUE IS NOT A SMALL AMOUNT. THEREFORE THE AC TION OF THE AO IN MAKING ADDITION ON THIS ISSUE IS UPHEL D. Y. SUNAHMI FINLEASE & INVESTMENT PVT. LTD. :- THE AMOUNT DUE FROM THIS PARTY IS RS. 2 24 72 000/- . THE AMOUNT HAS BEEN RECEIVED BY THE APPELLANT IN THE CU RRENT YEAR. THE APPELLANT HAS STATED THAT NO INTEREST WAS CHARGED AS THE ADVANCE WAS GIVEN FOR THE PURPOSE OF SHARES OF AMBALAL SARABHAI ENTERPRISES LTD. ADDITIO N ON THIS ISSUE MADE BY THE AO WAS DELETED BY THE CIT(A) IN THE AY 1999-00. NO FRESH TRANSACTION EXCEPT RETURN OF MONEY TOOK PLACE IN THIS YEAR. THEREFORE FOLLOWING THE DECISION OF MY PREDECESSOR FOR THE AY 1999-00 THE ADDITION MADE IS DELETED. 23 Z. TEJASKIRAN PHARMACEUTICAL PVT. LTD.:- THE AMOUNT DUE FROM THIS PARTY AS ON 1.4.1999 IS RS . 4 29 270/-. THE SAME HAS BEEN RECEIVED BY THE APPEL LANT IN THE MONTH OF JULY 1999. THE DISALLOWANCE OF INT EREST MADE BY THE AO ON THIS LOAN WAS NOT UPHELD BY THE CIT(A) IN THE AY 1999-00. FOLLOWING THE DECISION OF MY PREDECESSOR THE ADDITION MADE IS DELETED. 2.28 IT MAY BE CLARIFIED HERE THAT THE ADDITION IS UPHELD NOT ON THE ISSUE OF DISALLOWANCE OF INTEREST BUT ON TH E ISSUE THAT INTEREST INCOME HAS ACCRUED TO THE APPELLANT. BASED ON ABOVE DISCUSSION THE AO IS DIRECTED TO COMPUTE THE TOTAL AMOUNT OF INTEREST THAT IS REQUIRED TO BE TAXED AS INCOME IN THE HANDS OF THE APPELLANT ON ACCRUAL BASIS. THE BA LANCE ADDITION MADE BY THE AO IS DELETED. 8.5 THUS CIT(A) DELETED INTEREST DISALLOWANCE IN RE SPECT OF 20 PARTIES AND HELD THAT INTEREST SHALL BE TAXED ON ACCRUAL BA SIS IN RESPECT OF 10 PARTIES. 8.6 THE AO AND CIT(A) WHILE PASSING THE ORDER REL IED ON THE ORDERS OF AO AND CIT(A) FOR BLOCK ASSESSMENT YEARS AND AY 1996-97 TO 1999- 00. THE LEARNED AR AT THE OUTSET MENTIONED THAT ITA T HAS PASSED A CONSOLIDATED ORDER FOR THE SAID BLOCK PERIOD AND AY 1996-97 TO 1999-00 WHEREBY CIT(A)S ORDERS GIVING RELIEF IN EARLIER YE ARS WERE CONFIRMED BY ITAT. 9. THE LEARNED AR ARGUED THAT THE ABOVE ADVANCES GR ANTED BY THE ASSESSEE WERE FOR THE PURPOSE OF BUSINESS WHICH CAN BE BROADLY CLASSIFIED INTO THREE CATEGORIES AS UNDER: 24 - PURE ADVANCES ON WHICH INTEREST WERE EARNED (WHICH ARE NOT IN DISPUTE BEFORE US) - ADVANCES TO BUILDERS / FOR INVESTMENT IN PROPERTIES ADVANCES TOWARDS SHARE APPLICATION MONEY WHICH WERE RETURNED OR SHARES ALLOTTED AFTER SOME TIME. 9.1 AS REGARD ACME STHAPATI LTD. ( SR.NO.1) IT WAS SUBMITTED THAT ON ACCOUNT OF SLUMP IN THE REAL ESTATE MARKET IT WAS NOT CERTAIN WHETHER THE ASSESSEE WOULD GET BACK EVEN THE MINIMUM GUARANTEED AMOUNT. THOUGH INTEREST WAS CHARGED UP TO A.Y.1999-00 IN MARCH 19 99 WHEN THE PARTY INDICATED ITS INABILITY TO REPAY THE LOAN IT GAVE OPTION TO BUY A PROPERTY IN LIEU OF THE ADVANCE. IF THE OPTION WAS NOT EXERCIS ED THE PARTY WAS READY TO PAY COMPENSATION. IN THIS CONNECTION A LETTER DT.31.3.1999 WRITTEN BY THE BORROWER IS PLACED ON RECORD AS ADDITIONAL EVID ENCE. ULTIMATELY THE BORROWER PAID COMPENSATION OF RS.74.20 LAKHS THE E NTIRE AMOUNT OF WHICH WAS OFFERED FOR TAX IN A.Y.2004-05. IT WAS TH EREFORE CONTENDED THAT THE ADDITION BE DELETED. ALTERNATIVELY IT WA S CONTENDED THAT IF AT ALL ADDITION AS TO BE SUSTAINED. SINCE ALL YEARS ARE BE FORE HONBLE TRIBUNAL THE AO MAY BE DIRECTED TO SPREAD THE AMOUNT OF COMP ENSATION OVER A PERIOD OF FIVE YEARS AND RELIEF SHOULD BE GRANTED I N AY 2004-05 WHEREBY ENTIRE INTEREST BY WAY OF COMPENSATION IS OFFERED T O TAX. THE LEARNED AR FILED THE DETAILS OF THE INTEREST ADDITION MADE BY THE CIT(A) WHICH ARE AS FOLLOWS: AY AMT (RS.) 2000-01 20 23 335 25 2001-02 14 05 094 2002-03 13 34 708 2003-04 9 95 510 2004-05. 8 98 296 TOTAL 66 60 943/- 9.2 AS REGARDS TO PARTY AT SR. NO. 14 KANAKIA ENTER PRISES THE LEARNED AR SUBMITTED THAT THE ADVANCES WERE GIVEN IN EARLIE R YEAR AND INTEREST WAS CHARGED FOR YEAR ENDING 31 MARCH 1999 (I.E. AY 1999-00). THEREAFTER IN MARCH 1999 THE PARTY INDICATED THEIR INABILITY TO CLEAR THE LOAN DUE TO LIQUIDITY PRESSURES. TO PROTECT THE REC OVERY OF THE PRINCIPAL THE APPELLANT WAS COMPELLED TO FORGO THE INTEREST. OUT OF OPENING BALANCE OF RS. 121.37 LAKHS AS ON 1 APRIL 1999 THE ASSESSE E COULD RECOVER RS. 85.10 LAKHS DURING AY 2000-01 LEAVING BALANCE RECOV ERABLE 36.27 LAKHS AS ON 31 MARCH 2000. THIS BALANCE WAS RECOVERED IN JULY 2000 (I.E. AY 2001-02) ALONG WITH INTEREST CHARGED OF RS. 73 829 ON 28 JULY 2000. THUS WHEN ACTUAL INTEREST LEVIED IS ONLY RS. 73 82 9 NO INTEREST INCOME CAN BE SAID TO HAVE ACCRUED SPECIALLY WHEN THERE IS NO ALLEGATION OF RECEIPT OF INTEREST OUTSIDE BOOKS OF ACCOUNTS. WIT HOUT PREJUDICE IT WAS SUBMITTED THAT IF ITAT IS OF THE VIEW THAT INTEREST HAS ACCRUED TO THE APPELLANT WHICH IS ACTUALLY NOT RECEIVED SAME SHO ULD BE ALLOWED AS BUSINESS LOSS U/S 28 R.W.S. 37(1) OF THE ACT IN TH E YEAR WHEN THE ACCOUNT WAS SETTLED I.E. IN AY 2001-02 IN THIS CASE. 9.3 AS REGARDS PARTY AT SR. NO. 20 AKRUTI NIRMAN PV T LTD THE LEARNED AR SUBMITTED THAT THE ADVANCE OF RS. 20 LAKHS WAS G IVEN FOR PURCHASE OF PROPERTY IN DECEMBER 1998. INTEREST WAS CHARGED AND RECOVERED ON 31 MARCH 1999 (I.E. AY 1999-00). THE OPENING OUTSTANDI NG OF RS. 20 LAKHS 26 WAS RECEIVED ON 7 MAY 1999 AND THUS NO INTEREST WAS CHARGED FOR 5 WEEKS OF AY 2000-01. WITHOUT PREJUDICE IT WAS SUB MITTED THAT IF ITAT IS OF THE VIEW THAT INTEREST HAS ACCRUED TO THE APP ELLANT WHICH IS ACTUALLY NOT RECEIVED SAME SHOULD BE ALLOWED AS BUSINESS LO SS U/S 28 R.W.S. 37(1) OF THE ACT IN THE YEAR WHEN THE ACCOUNT WAS SETTLE D I.E. IN AY 2000-01 IN THIS CASE. 9.4 AS REGARDS PARTY AT SR. NO. 17 SAI SHIV DEVELOP ERS THE LEARNED AR SUBMITTED THAT ADVANCE WAS GIVEN FOR PURCHASE OF PR OPERTY IN AUGUST AND SEPTEMBER 1999. SUBSEQUENTLY WHEN THE DEAL DID NOT MATERIALIZE THE INTEREST WAS CHARGED FOR AY 2001-02 ONWARDS. THUS IT WAS A BUSINESS DECISION TO START CHARGING INTEREST WHEN PROPERTY C OULD NOT BE GIVEN BY THE BUILDER. THIS FACT CANNOT BE MADE AS A BASE TO TAKE A VIEW THAT INTEREST SHOULD HAVE BEEN CHARGED FOR EARLIER PERIOD ALSO. W ITHOUT PREJUDICE IT WAS SUBMITTED THAT IF ITAT IS OF THE VIEW THAT INTE REST HAS ACCRUED TO THE APPELLANT WHICH IS ACTUALLY NOT RECEIVED SAME SHO ULD BE ALLOWED AS BUSINESS LOSS U/S 28 R.W.S. 37(1) OF THE ACT IN TH E YEAR WHEN THE ACCOUNT WAS SETTLED I.E. IN AY 2005-06 IN THIS CASE. 9.5 AS REGARDS PARTY AT SR. NO. 21 MEHERCHAND DADHA THE LEARNED AR SUBMITTED THAT THE ADVANCE OF RS. 35 LAKHS WAS GIVE N FOR PURCHASE OF PROPERTY IN JANUARY 2000 AND WAS RECEIVED BACK IN M ARCH 2000 AND NO INTEREST WAS CHARGED FOR THIS 2 MONTHS. WITHOUT PRE JUDICE IT WAS SUBMITTED THAT IF ITAT IS OF THE VIEW THAT INTEREST HAS ACCRUED TO THE APPELLANT WHICH IS ACTUALLY NOT RECEIVED SAME SHO ULD BE ALLOWED AS BUSINESS LOSS U/S 28 R.W.S. 37(1) OF THE ACT IN TH E YEAR WHEN THE ACCOUNT IS SETTLED I.E. IN AY 2000-01 IN THIS CASE. 10. THE ARGUMENTS OF THE LEARNED AR WITH RESPECT TO THE DEPARTMENTS APPEAL FOR THE DISALLOWANCE OF INTEREST ARE AS FOLL OWS: 10.1 AS REGARDS PARTY AT SR. NO. 18 SHASTRIJI CONST RUCTION THE LEARNED AR SUBMITTED THAT DUE TO BAD FINANCIAL POSITION OF THE BUILDERS RECOVERY 27 OF PRINCIPAL ITSELF WAS DOUBTFUL. THERE IS NO QUEST ION OF TAXING ANY INTEREST AT ALL. A SUIT WAS FILED FOR THE RECOVERY OF THE SAME. OUT OF THE OUTSTANDING AMOUNT OF 57.75 LAKHS THE PARTY HAS PA ID MAJOR PORTION AMOUNTING TO RS. 51 LAKHS IN AY 2006-07 AND NO ADDI TION WAS MADE BY THE DEPARTMENT IN AY 2006-07. FURTHER AFTER FILING THE SUIT THE COURT HAS PASSED AN ORDER AWARDING THE COMPENSATION OF RS . 19 25 000 WHICH IS OFFERED TO TAX IN AY 2008-09. 10.2 AS REGARDS PARTY AT SR. NO. 22 MONARCH LAND DE VELOPERS THE LEARNED AR SUBMITTED THAT THE AMOUNT DUE WAS OF EAR LIER YEARS AND THE ENTIRE AMOUNT WAS RECEIVED DURING THE CURRENT YEAR. HENCE THERE SHOULD BE NO DISALLOWANCE. FURTHER CIT(A) DELETED THE DIS ALLOWANCE IN AY 1999-00. 10.3 AS REGARDS PARTY AT SR. NO. 23 MONT BLANC BUIL DERS THE LEARNED AR SUBMITTED THAT THE TRIBUNAL HAS DELETED THE DISA LLOWANCE OF NOTIONAL INTEREST SINCE THE ASSESSEE HAS ITS OWN FUNDS. FURT HER THE AMOUNT IS AN ADVANCE FOR THE PURCHASE OF PROPERTY WHICH IS FOR BUSINESS PURPOSE. 10.4 AS REGARDS PARTY AT SR. NO. 24 THAKUR ESTATE D EVELOPMENTS PVT LTD THE LEARNED AR SUBMITTED THAT THE AMOUNT WAS G IVEN TO PURCHASE PROPERTY FOR THE PURPOSE OF BUSINESS AND THE TRIBUN AL IN EARLIER YEARS HAS DELETED THE DISALLOWANCE OF INTEREST ON THE GROUND THAT THE APPELLANT HAS SUFFICIENT OWN FUNDS AND ADVANCES ARE GIVEN FOR BUS INESS PURPOSES. 11. THE LEARNED AR ALSO POINTED OUT THAT THE ABOVE ADVANCES ARE FOR THE PURPOSE OF BUSINESS AND WHERE THE ASSESSEE HAS SUFFICIENT OWN FUNDS THE GROUND OF THE DEPARTMENT FOR THE DISALLOWANCE O F INTEREST PAID SHOULD BE DISMISSED. IT WAS ALSO POINTED OUT THAT AGAINST SUCH FINDING OF CIT(A) THAT ADVANCES ARE FOR BUSINESS PURPOSE THE DEPARTM ENT IS NOT IN APPEAL. 11.1 THE LEARNED AR FOR THE ABOVE ADVANCES I.E SR. NO. 1 14 18 20 21 22 23 24 RELIED ON THE FOLLOWING DECISIONS W HEREIN IT WAS HELD THAT THE IF INCOME DOES NOT RESULT AT ALL IRRESPECTIVE OF METHOD OF ACCOUNTING 28 WHETHER MERCANTILE OR CASH THEN INCOME CANNOT BE T AXED ON ACCRUAL BASIS. IT WAS ALSO HELD THAT THE CONTRACTING PARTIES CAN L AWFULLY CHANGE THEIR STIPULATION BY MUTUAL AGREEMENT WHEREBY NO INCOME C AN ACCRUE WHEN TERMS OF CONTRACT IS MODIFIED. E.D. SASSOON & CO. LTD. VS. CIT (1954) 26 ITR 27 (S C) SRI KEVAL CHAND BAGRI VS CIT (180 ITR 207)(CAL HC) CIT V SHOORJI VALLABHDAS & CO. (46 ITR 144) (SC) GODHRA ELECTRICITY CO. LTD V CIT (225 ITR 746) (SC) CIT V BOKARO STEEL LTD. (236 ITR 315)(SC) CIT V SARABHAI HOLDINGS PVT. LTD. (307 ITR 89)(SC) ACIT VS TRAVANCORE TITANIUM PRODUCTS LTD. (121 ITD 513)(COCHIN)(TM) INDIA FINANCE AND CONSTRUCTION CO. PVT. (200 ITR 710)(BOM) 11.2 THE LEARNED AR ALSO RELIED ON THE DECISION IN THE ASSESSEES OWN CASE FOR THE BLOCK PERIOD AY 1996-97 TO 1999-00 WH EREIN THE ADDITION ON ACCOUNT OF DISALLOWANCE OF INTEREST AND ACCRUAL OF INTEREST WAS DELETED BY THE TRIBUNAL IN CASE OF VARIOUS BUILDERS AND PAR TIES FOR THE PURCHASE OF PROPERTY. THE RELEVANT EXTRACT OF THE ITAT ORDER FOR BLOCK AS SESSMENT YEAR AND AY 1996-97 TO 1999-00 IS AS FOLLOWS: 6. IN GR.NO.6 THE REVENUE CHALLENGES THE ACTION O F THE CIT (A) IN DELETING THE NOTIONAL ACCRUAL OF INTEREST BY THE AO AND TREATING IT AS PART OF THE UNDISCLOSED INCOME. THE BRIEF FACTS ARE THE APPELLANT HAS BEEN INVESTING IN REAL ESTAT E. FOR THIS PURPOSE ADVANCES HAVE BEEN GIVEN TO VARIOUS BUILDE RS ON CERTAIN TERMS AND CONDITIONS. ON THE BASIS OF SEIZED PAPERS SHOWING INVESTMENT THE AO HELD THAT THE INTEREST OF RS.28. 25 LAKHS THOUGH ACCRUED ON THESE ADVANCES HAS NOT BEEN ACCOUNTED B Y THE 29 APPELLANT AND THEREFORE THE SAME IS UNDISCLOSED IN COME. IT WAS SUBMITTED BEFORE CIT (A) AS UNDER: THE APPELLANT COMPANY USED TO INVEST IN REAL ESTAT ES. IT WAS ADVANCING FUNDS TO BUILDERS AT TIME OF COMMENCEMENT OF PROJECTS. DUE TO ENTRY IN INITIAL PHASE IT WAS ABL E TO BARGAIN THE PRICES IN ITS FAVOR. THE ARRANGEMENTS WITH THE BUILDERS NORMALLY WERE IN THE FORM OF MINIMUM GUARANTEED RET URN PLUS PROFIT EITHER TO BE SHARED WITH BUILDERS OR FOR THE APPELLANT EXCLUSIVELY. AGAINST THIS INVESTMENT IT WOULD TAKE LETTER OF ALLOTMENTS OR ENTER INTO AGREEMENTS WHEREIN THE UNDERSTANDINGS WERE SPELT OUT AND PROPERTIES WERE I DENTIFIED. REAL ESTATE MARKET SUFFERED A BIG SETBACK. DUE TO T HIS IT WAS NOT POSSIBLE TO ASCERTAIN WHETHER MINIMUM GUARANTEED RE TURN CAN BE RECEIVED OR NOT. SALE PRICE CAME DOWN CONSIDERAB LY. IT WAS NOT POSSIBLE TO DECIDE ON THE PROFITABILITY. IN VIE W OF THESE FACTORS NO RETURN WAS PROVIDED FOR IN THE BOOKS. TH ERE IS NO ALLEGATION THAT THE AMOUNT OF REWARD IS RECEIVED IN CASH. HENCE THERE CANNOT BE ANY UNDISCLOSED INCOME ON ACCOUNT O F THIS ITEM OF ADVANCES / INVESTMENTS. MOREOVER THIS TYPE OF DI SALLOWANCES WAS CONSIDERED IN A. Y. 1997-98 & 1996-97 IN REGULA R ASSESSMENT. THE BLOCK ASSESSMENT IS RELATED TO UNAC COUNTED TRANSACTIONS. AS PER EXPLANATION TO SECTION 158BA THE B LOCK ASSESSMENT IS IN ADDITION TO REGULAR ASSESSMENT AND IT IS NOT IN PLACE OF REGULAR ASSESSMENT. IF AN OFFICER STARTS D ISALLOWING FROM REGULAR BOOKS (IF THEY ARE FOUND IN THE SEARCH ) THERE WILL BE NO NEED FOR REGULAR ASSESSMENTS. THIS IS NOT SO LEGAL DISALLOWANCES AND MATTERS ARISING FROM REGULAR BOOK S SHOULD BE DEALT WITH IN THE REGULAR ASSESSMENTS ONLY. THE WORD UNDISCLOSED BY ITSELF SUGGEST SOMETHING WHICH IS NOT DISCLOSED. IF ONE HAS TO DISCUSS ABOUT REASONS FOR CHARGING OR NOT CHARGING OF INTEREST ON AMOUNTS ENTERED IN REGU LAR BOOKS THE REAL PLATFORM IS THE REGULAR ASSESSMENT & NOT T HE BLOCK ASSESSMENT. AS AGAINST THIS IF INTEREST IS RECEIVED OUT OF BOOKS 30 AND NOTING FOR SUCH RECEIPT IS FOUND IN THE SEARCH THEN THE ROLE OF THE BLOCK ASSESSMENT STARTS SINCE THAT INCOME IS UNDISCLOSED IN REGULAR BOOKS. THIS ASPECT OF INVE STMENTS WAS HANDLED BY SHRI SUDHIR VALIA AND THIS PAPER WA S PREPARED BEFORE HE WAS CONSULTED. HE WAS AWARE ABOUT THE CAS E OF THE LEARNED ASSESSING OFFICER THAT THE OTHER PARTIES HA VE PROVIDED FOR INTEREST LIABILITY BUT THE APPELLANT HAS NOT PR OVIDED FOR INCOME FROM INTEREST. HENCE THE DISALLOWANCE OF RS.28.25 LAKHS SHOULD BE CANCELLED. THE ASSESSEE ALSO SUBMITTED THE DETAILS OF EACH OF THE ADVANCES GIVEN TO THE FOLLOWING CONCERNS AND HOW IT WAS FOR THE PU RPOSE OF BUSINESS: NAME ADVANCE GIVEN INTEREST TREATED AS ACCRUED SHASTRIJI CON STRU CTIO N RS.65 LAKHS RS.13.70 LAKHS ELEGANT BUILDERS RS.11 22 500 RS.1.84 LAKHS RASHESH KANAKIA RS. 32 01 698 RS.5.76 LAKHS ELEGANT INVE STM ENTS RS.2.68 LAKHS NEELA MEHTA RS. 25.67 LAKHS RS.4.27 LAKHS ADV. FOR RS.28.25 LAKHS 31 PRO PERT IES JITENDRA SHETH RS. 4.62 LAKHS RAJ INVESTMENTS RS.3.25 LAKHS TOTAL RS.36.13 LAKHS IT WAS SUBMITTED THAT ADVANCES FOR PROPERTIES WERE WITH THE SPECIFIC UNDERSTANDING AND ACTUAL OF INCOME WAS ON THE SPECI FIC UNDERSTANDING AND ACCRUAL OF INCOME WAS ON THE HAPP ENING OF CERTAIN EVENTS. UNLESS SUCH EVENT HAPPENED INCOME COULD NO T BE SAID TO HAVE ACCRUED TO THE ASSESSEE. AS REGARDS ADVANCES TO JIT ENDRA SHETH IT WAS POINTED OUT THAT IN VIEW OF THE BAD FINANCIAL POSIT ION OF THE PARTY THERE WAS NO HOPE OF THE PRINCIPAL BEING RECEIVED T HEREFORE THERE WAS NO QUESTION OF INTEREST BEING RECEIVED. AS REGARDS RAJ INVESTMENTS IT WAS SUBMITTED THAT IT WAS ONLY BROUGHT FORWARD FIGU RE AND NO INTEREST CAN BE PRESUMED ON THE SAME. IT WAS ALSO SUBMITTED THAT ALL THESE TRANSACTIONS WERE REFLECTED IN THE BOOKS THEREFORE THERE IS NO QUESTION OF TREATING THE SAME AS UNDISCLOSED TRANSA CTIONS TREATING IT AS PART OF BLOCK ASSESSMENT. AFTER CONSIDERING THE DETAILED SUBMISSION ON THE FACTS AS WELL AS ON LEGAL GROUND S THE CIT(A) HAS DELETED THE ADDITION MADE AS UNDISCLOSED INCOME. 6.1 THE REVENUE IS IN APPEAL AGAINST SUCH DELETION MADE BY THE CIT (A). THE LEARNED DEPARTMENTAL REPRESENTATIVE STRONG LY SUPPORTED THE ORDER OF THE ASSESSING OFFICER AND RELIED ON THE FI NDINGS IN THE BLOCK ASSESSMENT. ON THE OTHER HAND THE LEARNED AUTHORIZ ED REPRESENTATIVE OF THE ASSESSEE RELIED ON THE VARIOUS SUBMISSIONS M ADE BEFORE THE CIT (A) AS WELL AS THE DETAILS SUBMITTED IN THE PAPER B OOK TO SUPPORT HIS CONTENTION. IT WAS REITERATED THAT NO INCOME CAN BE DEEMED TO HAVE ACCRUED UNLESS THE TERMS OF THE ADVANCE SO DESIRES. IN ANY CASE IF THE TRANSACTIONS ARE RECORDED IN THE BOOKS THE SAME CA NNOT BE TREATED AS UNDISCLOSED INCOME. IT WAS THEREFORE SUBMITTED THA T THE CIT (A)S 32 ORDER MAY KINDLY BE UPHELD AND THE REVENUES APPEAL ON THIS GROUND MAY KINDLY BE REJECTED. 7. AFTER GOING THROUGH RIVAL SUBMISSIONS AND AFTER PERUSING THE MATERIAL AVAILABLE ON RECORD WE FIND THAT THE AUTH ORITIES BELOW HAVE EXTENSIVELY DEALT WITH EACH OF THE ADVANCE GIVEN BY THE ASSESSEE AND HOW THE INCOME CANNOT BE NOTIONALLY ASSESSED IN HAN DS OF THE ASSESSEE. THE LEARNED DEPARTMENTAL REPRESENTATIVE H AS RELIED HEAVILY ON THE ORDER OF THE ASSESSING OFFICER AND SUBMITTED THAT THE ORDER OF CIT (A) ON THIS GROUND MAY KINDLY BE VACATED. HE HA S HOWEVER NOT BEEN ABLE TO POINT OUT ANY SPECIFIC MISTAKE IN THE ORDER OF THE CIT (A) OR ON FACTUAL SUBMISSIONS MADE BY THE ASSESSEE BEFO RE THE CIT (A) . WE ARE THEREFORE OF THE OPINION THAT INCOME CANNO T BE NOTIONALLY TAXED IN THE HANDS OF ASSESSEE ON VARIOUS ADVANCES REFERRED ABOVE. THE ASSESSEE CANNOT BE TAXED ON NOTIONAL INCOME WHI CH HE HAS NOT ACTUALLY EARNED. IF THE ADVANCES ARE GIVEN FOR THE PURPOSE OF BUSINESS OR IF THERE IS PRECONDITION FOR ACCRUAL INCOME UNL ESS SUCH CONDITIONS ARE SATISFIED OR SUCH CONTINGENCY ARISES INCOME CA NNOT BE TREATED AS ACCRUED TO THE ASSESSEE. WE ARE THEREFORE OF THE V IEW THAT THE CIT (A) WAS CORRECT IN DELETING THE ADDITION OF RS.28.2 5 LAKHS ON THIS POINT. WE ACCORDINGLY REJECT GR.NO.6 OF THE REVENU E. 11.3 FURTHER THE RELEVANT PARA 35 OF THE ITAT ORDE R FOR BLOCK ASSESSMENT YEAR AND AY 1996-07 TO 1999-00 -00 IS AS FOLLOWS: 35. THE NEXT ISSUE IS AGAINST THE DECISION MADE ON ACCOUNT OF THE INTEREST OF RS.36 09 535/- ALLEGING THAT INTEREST H AD ACCRUED TO THE ASSESSEE ON ADVANCES GIVEN TO THE BUILDERS. THE ASS ESSING OFFICER MADE ADDITION OF RS.36 09 535/- AS INTEREST RATE OF 24% PER ANNUM IN RESPECT OF THE ADVANCES MADE TO THE FOLLOWING PA RTIES: A) M/S SHASTRIJI CONSTRUCTION B) M/S MONT BLANC BUILDERS C) M/S THAKUR ESTATE DEVELOPERS PVT. LTD. 33 THE ASSESSEE HAS SUBMITTED THAT WITH REGARD TO FIRS T PARTY THE MATTER HAS ALREADY BEEN CONSIDERED BY THE CIT (A) W HILE DEALING WITH APPEAL RELATED TO BLOCK ASSESSMENT. THE CIT (A ) HAS DELETED THE ADDITIONS MADE IN THE BLOCK ASSESSMENTS. SINCE THE MATTER WAS CONSIDERED BY CIT (A) IN THE BLOCK ASSESSMENT IS SI MILAR AS THAT RAISED BY THE ASSESSING OFFICER THE ALLEGED ADDITI ON INTEREST MADE IN RESPECT OF M/S SHASTRIJI CONSTRUCTION NEEDS TO B E DELETED. IN ADDITION THE ASSESSEE SUBMITTED THAT AS THE PRINCI PAL AMOUNT WAS NOT COMING UP THE ASSESSEE THOUGHT IT FIT TO PRESSU RIZE THE PARTY THROUGH FILING A SUIT IN THE COURT. AS IT HAPPENS I N ALL CASES THE PRESSURE IS FURTHER BUILT-UP BY CLAIMING INTEREST O N THE OUTSTANDING. MERE CLAIM OF INTEREST IN THE SUIT DOES NOT LEAD TO ACCRUAL OF INTEREST. DUE TO FINANCIAL POSITION OF PARTY IT WA S DECIDED LONG BACK TO RECOVER ONLY THE PRINCIPAL AMOUNT. IN FACT AMOUNT NOT TO BE RECOVERED TILL LONG PERIOD THE ASSESSEE AHS EVE N DEBITED COURT CHARGES TO THEIR ACCOUNT. IN VIEW OF THIS IT IS CO RRECT TO STATE THAT THE INTEREST STILL ACCRUES. THE ASSESSEE ALSO SUBMI TTED THAT THE INVESTMENT WAS THE INVESTMENT IN PROPERTY AND THE R ATE OF INTEREST WAS NOT THE MAIN PURPOSE. THIS HAS BEEN ALREADY CON SIDERED IN EARLIER APPEALS I.E. IN BLOCK ASSESSMENT OF THE ASS ESSMENT 1997-98. AS REGARDS THE OTHER TWO PARTIES THE ASSESSING OFF ICER HAS PRESUMED THAT THE TRANSACTION IS THE SAME AS THAT I N RESPECT OF M/S SHASTRIJI CONSTRUCTION LTD. CONSIDERING THE EXPLAN ATION GIVEN ABOVE THE ADDITION MADE TO THE ALLEGED INTEREST IN RESPECT OF OTHER TWO PARTIES NEEDS ALSO TO BE DELETED. 35.2 AFTER GOING THROUGH THE RIVAL SUBMISSIONS AND PERUSING THE MATERIAL AVAILABLE ON RECORD WE ARE OF CONSIDERED OPINION THAT THE ASSESSEE HAS ITS OWN FUNDS AS WELL AS NON-INTEREST BEARING FUNDS THE NOTIONAL INTEREST CANNOT BE DEEMED TO HAVE BEEN RECEIVED ON THE BUSINESS ADVANCES. IT HAS BEEN ESTABLISHED THAT INCOME RESPECTFULLY FOLLOWING THE RATIO LAID DOWN IN THE S AID DECISIONS WE UPHOLD THE ORDER OF THE CIT (A) IN DELETING THE NOT IONAL INCOME DEEMED TO HAVE BEEN ACCRUED OF RS.36 09 535/-. 34 11.4 SECONDLY THE LEARNED AR DEALT WITH THE PARTI ES FOR WHOM ADVANCES WERE GIVEN FOR THE PURPOSE OF SHARE APPLIC ATION MONEY FOR WHICH THE ASSESSEE IS IN APPEAL I.E. SR. NO. 2 AMIT Y INTERLINK STEELS PVT LTD. IN THIS RESPECT THE LEARNED AR SUBMITTED THAT THE AMOUNT WAS PAID TOWARDS SHARE APPLICATION MONEY. BUT NO SHARES WERE ALLOTTED AND INTEREST AT 12% P. A. WAS RECEIVED IN AY 2001-02 TO 03-04. S IMILAR DISALLOWANCE FROM THIS PARTY IS DELETED BY THE ITAT AT PARA 34 I N ITAT ORDER FOR BLOCK PERIOD AY 1996-07 TO 1999-00 AT PAGE 137 OF PB. THE RELEVANT EXTRACT OF THE SAME IS AS FOLLOWS: 34.1 THE CIT (A) FOLLOWING HIS ORDER IN BLOCK ASSESSMEN T FOR THE ASSESSMENT YEARS 1996-97 AND 1997-98 HELD THAT THE ADVANCES WERE GIVEN OUT OF OWN FUNDS OF THE ASSESSEE. THE CA PITAL RESERVES AND SURPLUS AND OTHER INTEREST-FREE FUNDS AVAILABLE WITH THE ASSESSEE AMOUNTED TO RS.6020 LAKHS WHICH IS MORE TH AN INTEREST FREE ADVANCES OF RS.1486 LAKHS. IT WAS ALSO SUBMITT ED BEFORE CIT (A) THAT THE ADVANCES GRANTED ARE FOR THE PURPOSE O F BUSINESS OF THE ASSESSEE AND HENCE NO DISALLOWANCE OF INTEREST CA N BE MADE. IT IS ALSO SUBMITTED THAT IN RESPECT OF THE NEW LOANS GIV EN TO M/S. AMITY INTERLINK STEELS PVT. LTD. OF RS. 100 LAKHS THE SA ME WAS TOWARDS SHARE APPLICATION-MONEY AND THEREBY NO DISALLOWANCE OF INTEREST ON THIS POINT CAN BE MADE. IN ANY CASE WHEN THE CO MPANY DECIDED THAT IT COULD NOT ISSUE THE SHARES TO THE ASSESSEE THE ASSESSEE COMPANY HAS CHARGED AND RECEIVED INTEREST AT THE RA TE OF 12% PER ANNUM ON OUTSTANDING AMOUNT FROM THE ASSESSMENT YEA RS 2001-02 TO 2003-04. IN RESPECT OF ADVANCES GIVEN TO UNIMED TECHNOLOGIES LTD. IT WAS SUBMITTED THAT THE SAME WAS ADVANCED O N 29.3.1999 30.3.1999 AND 31.3.1999 AND THUS NO INTEREST COULD HAVE BEEN SAID TO HAVE ACCRUE TO ASSESSEE FOR THIS PERIOD. IN VIEW OF THE ABOVE FACTS IT WAS SUBMITTED THAT THE ORDER OF THE CIT ( A) IN DELETING THE DISALLOWANCE IS CORRECT AND NEEDS TO BE UPHELD. THE LEARNED DEPARTMENTAL REPRESENTATIVE RELIED ON THE ORDER OF ASSESSING OFFICER AND SUBMISSIONS MADE FOR EARLIER YEARS WHI LE THE LEARNED ASSESSING REPRESENTATIVE OF THE ASSESSEE RELIED ON THE SUBMISSIONS FOR THE ASSESSMENT YEARS 1996-997 TO 1998-99. 35 34.2 AFTER GOING THROUGH THE RIVAL SUBMISSIONS AND PERUS ING THE MATERIAL AVAILABLE ON RECORD INCLUDING THE VARIOUS SUBMISSIONS MADE BY THE ASSESSEE. AS THE FACTS OF THE YEAR UNDE R CONSIDERATION ARE THE SAME AS IN THE EARLIER YEARS I.E. IN THE AS SESSMENT YEARS 1996-97 TO 1998-99 AND BLOCK ASSESSMENT YEARS WE H OLD THAT THE APPELLANT HAS NOT DIVERTED ANY FUNDS FOR NON BUSINE SS PURPOSES. THEREFORE DISALLOWANCE OF INTEREST MADE OF RS.90 3 0 464/- MADE BY THE CIT (A) IS HEREBY CONFIRMED. 11.5 WITH RESPECT TO THE DEPARTMENTS APPEAL FOR TH E DISALLOWANCE OF INTEREST THE LEARNED AR SUBMITTED THAT THE ADVANCE TO THE PARTIES AT SR. NO. 25 26 27 AND 29 ARE MADE FOR THE PURCHASE OF SHARES OF AMBALAL SARABHAI ENTERPRISE LTD. FOR THE PURPOSE OF BUSINES S. THE LEARNED AR ALSO SUBMITTED THAT THE DISALLOWANCE IN RESPECT OF THESE PARTIES WERE DELETED BY THE ITAT FOR BLOCK PERIOD AND AY 1996-97 TO 1999-00 . THE RELEVANT EXTRACT OF THE SAME IS AS FOLLOWS: 15.1 THE LEARNED AUTHORIZED REPRESENTATIVE OF THE ASSESS EE HAS SUBMITTED BY THAT ALL THE ADVANCES ON WHICH INT EREST IS NOT CHARGED ARE THE BUSINESS ADVANCES AND IN ANY CASE IT HAD SUFFICIENT CAPITAL PLUS RESERVES PLUS INTEREST FREE ADVANCES. THEREFORE THERE WAS NO JUSTIFICATION FOR MAKING NOTIONAL DISALLOWANCE. THE ASSESSEE ALSO SUBMITTED THE EXPLANATION FOR EACH AND EVERY ADVANCE AND POINTED OUT THAT THESE ADVANCES WERE FOR THE PURPOSE OF BUSINESS. TH E ASSESSING OFFICER DID NOT ACCEPT THE CONTENTION OF THE ASSESSEE WAS THAT GRANTING OF INTEREST-FREE ADVANCE CANNOT BE TREATED AS FOR THE PURPOSE OF BUSINESS AND APPLY ING THE RATIO OF PHALTON SUGAR WORKS LTD. 208 ITR 909 (BOM) DOCTOR & CO. 180 ITR 627 (BOM) AND M/S VENKATESHWAR AN 222 ITR 163 (MAD). ACCORDINGLY THE ASSESSING OFFIC ER HELD THAT PAYMENT OF INTEREST BY THE ASSESSEE TO THE EXT ENT IT RELATES TO INTEREST-FREE ADVANCES IS NOT FOR THE PU RPOSE OF THE 36 ASSESSEES BUSINESS AND THEREFORE DISALLOWED SUM O F RS.1 56 92 000/- AT AN AVERAGE RATE OF 21% OUT OF B ORROWED FUNDS IN RESPECT OF SUCH ADVANCES. IN APPEAL IT WA S SUBMITTED BY THE ASSESSEE THAT THE EXPLANATION FOR PARTY-WISE ADVANCES GIVEN AND HOW IT WAS FOR THE PURPOSE OF BU SINESS. THE CIT (A) HAS REPRODUCED THE EXPLANATION GIVEN BY ASSESSEE IN THE BODY OF ORDER AT PARA-12. HE HAS AL SO REFERRED TO THE FUND FLOW PROVIDED BY THE ASSESSEE TO SLOW THAT IT HAS SUFFICIENT FUNDS OF ITS OWN TO GIVE THE ADVANCES. THE DETAILS OF WHICH AS UNDER SR. NO. NAME OF THE COMPANY BALANCE AS ON 31.3.97 (RS IN LAKHS) REASONS FOR SUCH ADVANCES A) MJPL 335.47 MGPL WAS COMPANY HAVING US FDA APPROVAL FOR MANUFACTURING BULK DRUGS ETC. THE APPELLANT COMPANY HAD PURCHASED THE SHARES WORTH 2.29 CR. I.E. 20.27% OF THE VOTING RIGHTS. FOR FURTHER ACQUIRING SHARES JOINTLY WITH SPIL IT HAD MADE PUBLIC OFFER. IN THE MEANTIME IN THE ORDER TO IMPROVE LIQUIDITY AS PER THE UNDERSTANDING SOME INTEREST-FREE ADVANCES WERE GIVEN TO THE COMPANY AND THEREFORE THIS ADVANCE WAS FOR THE PURPOSE OF BUSINESS OF THE COMPANY AND NO PART COULD HAVE BEEN DISALLOWED. B) JOSHUA 47.83 THIS IS A COMPANY WITH WHICH THE APPELLANT COMPANY HAS REGULAR TRANSACTIONS AND THE SHARES ARE PURCHASED AND SOLD TO THIS COMPANY. 37 THIS ACCOUNT IS IN THE NATURE OF CURRENT ACCOUNT. THEREFORE THERE IS NO QUESTION OF CHARGING OF INTEREST. IN ANY CASE THE COMPANY HAD SUFFICIENT INTEREST FREE ADVANCES AVAILABLE AND THEREFORE NO INTEREST COULD HAVE BEEN DISALLOWED. C) LAKSHADEEP 47.80 THIS IS A COMPANY WITH WHICH TH E APPELLANT COMPANY HAS REGULAR TRANSACTIONS AND THE SHARES ARE PURCHASED AND SOLD OF THIS COMPANY. THIS ACCOUNT IS IN THE NATURE OF CURRENT ACCOUNT. THEREFORE THERE IS NO QUESTION OF CHARGING OF INTEREST. IN ANY CASE THE COMPANY HAD SUFFICIENT INTEREST FREE ADVANCES AVAILABLE AND THEREFORE NO INTEREST COULD HAVE BEEN DISALLOWED. D) TEJASKIRAN 24.49 INTEREST OF RS.19.85 LAKHS WAS CHARGED AND THEREFORE IT WAS NOT CORRECT THAT ON INTEREST WAS CHARGED ON ADVANCE TO THIS COMPANY. DETAILS OF ACCOUNTS AND INTEREST CHARGED WERE FILED WITH THE AO AND BEFORE THE CIT (A). E) VSIPL 10.89 INTEREST OF RS.0.53 LAKHS WAS CHARGED AND THEREFORE IT WAS NOT CORRECT THAT ON INTEREST WAS CHARGED ON ADVANCE TO THIS COMPANY. DETAILS OF ACCOUNTS AND INTEREST CHARGED WERE FILED. F) QUALITY 3.41 INTEREST OF RS.17.22 LAKHS WAS CHARGED AND THEREFORE IT WAS NOT CORRECT THAT ON INTEREST WAS CHARGED ON ADVANCE TO THIS COMPANY. DETAILS 38 OF ACCOUNTS AND INTEREST CHARGED WERE FILED. G) ALLIED 280.39 THIS WAS ADVANCE GIVEN TO ALLIED SHARES AND SECURITIES SHARE BROKING COMPANY FOR PURCHASE OF SHARES OF AMBALAL SARABHAI ENTERPRISES. THESE SHARES WERE PURCHASED WITH THE BUSINESS PURPOSE OF ACQUIRING THE SAID COMPANY OUT OF THE BUSINESS CONSIDERATION THEREFORE; ADVANCE GIVEN TO ALLIED FOR THE PURCHASE OF SHARES CANNOT BE TREATED AS INTEREST FREE ADVANCE GIVEN. H) B. PARIKH 20.00 THIS WAS ADVANCE GIVEN TO THE ADVOCATE WHO WAS ARGUING THE LEGAL MATTERS OF THE APPELLANT RELATED TO ASE DISPUTE. THEREFORE IT CANNOT BE TREATED AS NON BUSINESS ADVANCES. DETAILS OF EXPENSES INCURRED BY HIM FOR LEGAL MATTER ETC. WERE RECEIVED IN THE SUBSEQUENT YEAR. I) M. J. EXPORTS 100.00 J. M. SHAH WAS HOLDING SHAR ES IN M. J. PHARMA AND M. J. EXPORTS. THE APPELLANT WAS INTERESTED IN PURCHASING THE SHARES OF MGPL FROM J. M. SHAH. AS PER THE UNDERSTANDING BETWEEN J. M. SHAH M. J. EXPORTS AND THE APPELLANT ADVANCE WAS TO BE GIVEN TO M. J. EXPORTS. THEREFORE THIS ADVANCED WAS FOR THE PURPOSE OF BUSINESS. SINCE THERE WAS DELAY IN RECEIPT OF APPROVAL FROM SEBI THE AMOUNT PAID CONTINUED AS ADVANCE. HOWEVER IT COULD NOT BE TREATED AS 39 NON BUSINESS ADVANCE. 15.6 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE HAVE ALSO PERUSED THE SUBMISSIONS MADE BY THE ASSESSEE AS WEL L AS THE SUBMISSIONS OF AUTHORITY BELOW. THE CIT (A) HAS DEA LT WITH EACH OF THE ADVANCES GIVEN BY THE ASSESSEE-COMPANY AND HAS ALSO CONSIDERED THE FUND FLOW STATEMENT. THE CIT (A) HAS ACCEPTED THAT VARIOUS FUNDS ADVANCED BY THE APPELLANT WERE FOR TH E PURPOSE OF BUSINESS AND THAT REMAINING FUNDS WERE OUT OF INTER EST FREE FUNDS AVAILABLE WITH THE APPELLANT. OUR ATTENTION WAS ALS O DRAWN SPECIALLY TO THE ORDER OF AHMADABAD BENCH OF THE TRIBUNAL IN THE CASE OF ADITYA MEDISALES WHEREIN THE ADVANCE GIVEN BY ADITY A MEDISALES AND SUN PHARMA AS WELL AS CHARGING LESSER RATE OF I NTEREST BY THEM TO APPELLANT COMPANY WAS HELD TO BE FOR BUSINESS PU RPOSE. CONSIDERING THE OVERALL FACTS AS WELL AS FINDING OF THE CIT (A) AND KEEPING IN MIND THE RATIO LAID DOWN BY THE SUPREME COURT IN S. A. BUILDERS CASE WE ARE OF THE CONSIDERED OPINION THA T THE DELETION OF DISALLOWANCE OF RS.1 57 92 000/- MADE BY THE CIT (A ) IS FACTUALLY AND LEGALLY CORRECT. FOR COMING TO THIS CONCLUSION WE ALSO REFER TO THE OBSERVATION MADE WHILE PASSING THE BLOCK ASSESS MENT ORDER. ACCORDINGLY THE REVENUES GROUND NOS.1 & 2 IS HERE BY REJECTED. 11.6 FOR THE BALANCE ADVANCES THE LEARNED AR HAS SUBMIT TED AS FOLLOWS: 11.7 THE ADVANCES OUTSTANDING AGAINST THE PARTIES A T SR. NO. 16 11 28 AND 30 ARE ONLY THE OUTSTANDING INTEREST CHARGED EA RLIER. THE SAME HAS BEEN RECEIVED IN LATER YEARS EXCEPT IN CASE OF SR. NO. 11 WHICH HAS BEEN WRITTEN OFF AS IRRECOVERABLE IN AY 2004-05. 11.8 THE LEARNED AR ALSO POINTED OUT THAT IN CASE O F PARTIES AT SR. NO. 15 6 10 12 THERE IS NO FRESH ADVANCE DURING THE YEAR. THE ITAT HAS DELETED THE DISALLOWANCE IN RESPECT OF THESE PARTIE S IN THE BLOCK ASSESSMENT AND THE FACTS UNDER CONSIDERATION ARE TH E SAME AS IN BLOCK 40 ASSESSMENT. THE RELEVANT EXTRACT OF THE ITAT ORDER FOR BLOCK ASSESSMENT YEAR AND AY 1996-07 TO 1999-00 IS AS UNDER: 4 . GROUNDS NOS. 3 4 &5 RAISED BY THE REVENUE CHALLE NGES THE ACTION OF THE CIT (A) IN DELETING THE DISALLOWANCE OF INTEREST OF RS. 1 36 59 481/-. IN THE BLOCK ASSESSMENT ORDER THE A SSESSING OFFICER HAS REFERRED TO PG. NOS.20 TO 23 OF ANNEXURE A 3 OF THE PANCHNAMA DATED 22.12.1998 WHEREIN DETAILS OF THE P ARTIES TO WHOM INTEREST HAS NOT BEEN CHARGED HAS BEEN MENTION ED. HE ALSO REFERRED TO ANNEXURE A/6 OF THE PANCHNAMA WHICH SHO WED PAYMENT OF SUBSTANTIAL AMOUNTS ON WHICH NO INTEREST WAS CHA RGED. ON THE BASIS OF THESE PAPERS THE ASSESSING OFFICER ARRIVE D AT THE CONCLUSION THAT THE APPELLANT IS DIVERTING INTEREST BEARING FUNDS FOR NON INTEREST BEARING PURPOSES. THE ASSESSING OFFICE R ALSO OBSERVED THAT THE ASSESSEE-GROUP IS INDULGING IN PASSING OF ENTRIES IN THE BOOKS IN THE MANNER THAT THE TRUE PROFITS EARNED BY A PARTICULAR APPELLANT IN THE GROUP ARE INFLATED OR DEFLATED BY MAKING ADJUSTMENT SO THAT ACTUAL TAX LIABILITY OF THE GROU P AS WHOLE IS EVADED. ACCORDINGLY THE ASSESSING OFFICER DISALLOW ED THE INTEREST EXPENDITURE AGGREGATING TO RS. 1 36 59 481/- HOLD ING THAT THE INTEREST BEARING FUNDS ARE DIVERTED FOR NON BUSINES S PURPOSES AND HELD THAT THIS IS INCORRECT CLAIM. THEREFORE ACCOR DING TO HIM SUCH DISALLOWANCE REPRESENTED UNDISCLOSED INCOME OF THE ASSESSEE UNDER CH.XIVB OF THE IT ACT. DETAILS OF PARTY-WISE DISALL OWANCE OF INTEREST WORKED OUT BY THE AO ARE AS UNDER. COMPANY AMOUNT OF DISALLOWANCE(RS. ) TPDL MERGER 79 77 446 AMBALAL SARABHAI 19 50 194 M. J. EXPORTS 18 00 000 OTHER PARTIES DOILPHIN LAN 41 ASHOK KANAKIA B. B. PAREKH SUN PETROCHEMICALS PVT. LTD. VIRTOUS SHARE INVESTMENT PVT. LTD. - 2000 (BROKEN PERIOD) 72 197 4 10 547 3 59 901 78 141 2 61 668 7 51 387 TOTAL DISALLOWANCE 1 36 59 481 11.9 THE RELEVANT EXTRACT OF THE CONCLUSION OF THE ITAT IN BLOCK ASSESSMENT YEAR AND AY 1996-07 TO 1999-00 AT PARA 5 .4 IS AS FOLLOWS: 5.4 WE HAVE GONE THROUGH THE RIVAL SUBMISSIONS AND PERU SED THE MATERIAL AVAILABLE ON THE RECORD. WE FIND THAT ORDE RS OF THE AO CIT (A) AS WELL AS THE REMAND REPORT BY ASSESSING O FFICER AND THE ASSESSEES REPLY ON THE SAME. FROM THE FACTS IT IS CLEAR THAT EVEN AFTER EXCLUDING REVALUATION RESERVE THE ASSESSEE H AS OWNED SUFFICIENT FUNDS FOR GIVING ADVANCES. THE FUND FLOW CHART FILED BY THE APPELLANT CLEARLY BRINGS OUT OF WHICH ADVANCES WERE GIVEN. THIS FACT HAS BEEN CAREFULLY AND IN DETAIL DISCUSSE D BY THE CIT (A). THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS NOT BEE N ABLE TO PINPOINT ANY MISTAKE IN CALCULATION OR HE HAS NOT B EEN ABLE TO ESTABLISH HOW THE FINDINGS GIVEN BY THE CIT (A) ON THE FACTS ARE NOT CORRECT. WE ARE THEREFORE OF THE OPINION THAT THE DISALLOWANCE OF INTEREST MADE BY THE ASSESSING OFFICER OF RS. 1 36 00 000/- IS NOT JUSTIFIED. THE CIT (A) HAS ALSO DEALT WITH EACH OF THE ADVANCE GIVEN AND HOW IT WAS FOR THE PURPOSE OF BUSINESS. HE HAS ALSO REFERRED TO ADVANCES GIVEN FOR OBTAINING CONTROLLING INTEREST O F TAKING OVER BUSINESSES. THEREFORE ONCE IT IS ESTABLISHED THAT T HE ADVANCES WERE FOR THE PURPOSE OF BUSINESS THERE IS NO QUESTION O F DISALLOWANCE OF INTEREST. THE LEARNED DEPARTMENTAL REPRESENTATIVE H AS MAINLY PLACED HIS RELIANCE ON THE OBSERVATION OF ASSESSING OFFICER IN THE ASSESSMENT ORDER AND HAS RELIED ON THE DECISIONS IN THE CASE OF PHALTAN SUGASR H. R. SUGAR VENKATARESHWARN WHICH ARE REFERRED 42 IN PARA 24 ABOVE. HOWEVER AS HAS BEEN RIGHTLY POIN TED OUT THE RATIO LAID DOWN IN THESE DECISIONS HAS TO BE NOW CO NSIDERED KEEPING IN MIND THE RATIO LAID DOWN BY SUPREME COUR T IN S. A. BUILDERS CASE 288 ITR 1. THE HONBLE SUPREME COURT HAS DEALT IN DETAIL WHEN THE ADVANCES COULD BE TREATED FOR THE P URPOSE OF BUSINESS. THE SUPREME COURT HAS CATEGORICALLY RESER VED THE DECISION OF PHALTAN SUGAR AND OTHER CASES. THEREFOR E WE ARE OF THE VIEW THAT ON THE FACTS AS WELL AS ON THE LEGAL PREP OSITIONS IT CANNOT BE SAID THAT THE ASSESSEE HAS DIVERTED INTEREST BEA RING FUNDS FOR NON BUSINESS ADVANCES OR FOR GIVING INTEREST FREE A DVANCES. ACCORDINGLY WE UPHOLD THE ORDER OF THE CIT (A) DELE TING THE DISALLOWANCES OF RS. 1 36 59 481/- AND REJECT GR.NO S.3 TO 5 OF THE REVENUE. 11.10 THE LEARNED AR WITH RESPECT TO THE PARTIES A T SR. NO. 7 AND 13 SUBMITS THAT NO NEW ADVANCES WERE GIVEN TO THESE PA RTIES DURING THE YEAR. THE ASSESSEE HAS NOT BEEN ABLE TO RECOVER THE AMOUN T FROM THE PARTIES AND THE SAME HAS BEEN WRITTEN OFF AS IRRECOVERABLE IN A Y 2004-05. THE LEARNED AR ALSO POINTED OUT THAT THE PARTY AT SR. N O. 7 BELONGS TO KETAN PAREKH GROUP OF COMPANIES. THE ASSESSEE MANAGED TO RECOVER MOST OF THE PRINCIPAL AMOUNT BUT THE OUTSTANDING INTEREST CHARGED EARLIER COULD NOT BE RECOVERED. 11.11 WITH RESPECT TO PARTY AT SR. NO. 3 THE LEARN ED AR SUBMITTED THAT THE ADVANCE WAS GIVEN ON THE LAST DAY OF THE YEAR S O THE QUESTION OF DISALLOWING THE INTEREST DOES NOT ARISE. FURTHER T HE AR POINTED OUT THAT THE COMPANY WAS MERGED WITH SUN PHARMACEUTICALS LTD . W.E.F. 1.4.2000 AND FROM WHOM THE ASSESSEE HAS TAKEN LOANS AND THE ASSESSEE IS PAYING THE INTEREST. 11.12 THE BALANCE PARTY AT SR. NO. 19 4 5 8 9 A RE THE SMALL ADVANCES GIVEN FOR BUSINESS PURPOSES AND HENCE NO DISALLOWAN CE OF INTEREST SHOULD BE MADE ON THE SAME. 43 THE BENCH PUT A SPECIFIC QUERY TO THE LEARNED AR TH AT WHETHER THE ASSESSEE BEING NBFC HAS BEEN FOLLOWING THE PRUDEN TIAL NORMS SPECIFIED BY THE RBI FOR THE RECOGNITION OF INCOME OR NOT AND HOW THE DECISION OF SUPREME COURT IN THE CASE OF SOUTHERN TECHNOLOGIES LTD V JCIT 320 ITR 577 IS NOT APPLICABLE TO THE FACTS OF THE ASSESSEE. THE LEARNED AR REPLIED THAT THE REQUIREMENTS OF RECOGNITION OF INCOME AND PROVISIONS FOR NPA UNDER RBI DIRECTIONS (PRUDENTIAL NORMS) 1998 ARE A PPLICABLE TO THE NBFC ACCEPTING PUBLIC DEPOSITS. THE AR FURTHER R EPLIED THAT THE ASSESSEE HAS NOT ACCEPTED ANY PUBLIC DEPOSITS AND H ENCE THE RBI DIRECTIONS (PRUDENTIAL NORMS) 1998 REGARDING INCOM E RECOGNITION AND PROVISION FOR NPA ARE NOT APPLICABLE TO THE ASSESSE E. THE AR ALSO FILED A COPY OF THE PRUDENTIAL NORMS PUBLISHED BY THE RBI. THE AR ALSO SUBMITTED THAT THE DECISION OF SUPREME COURT IN THE CASE OF SOUTHERN TECHNOLOGIES LTD V JCIT 320 ITR 577 IS NOT APPLICAB LE TO THE FACTS OF THE CASE AS THE ISSUE BEFORE THE SUPREME COURT WAS WHET HER THE PROVISION MADE AGAINST NON PERFORMING ASSETS (NPA) AND DEBITE D TO PROFIT AND LOSS A/C IS ALLOWABLE AS DEDUCTION U/S 36(1)(VII)/ 37(1) OF THE ACT. IN THAT CASE THE APPELLANT WAS A NBFC AND WAS REQUIRED TO F OLLOW RBI DIRECTIONS 1998 (PRUDENTIAL NORMS). HENCE THERE I S NO ISSUE OF CLAIM OF DEDUCTION OF NPA U/S 36(1)(III) IN APPEAL AND HENCE SAID SUPREME COURT DECISION IS NOT APPLICABLE. 12. THE LEARNED DR ON THE OTHER HAND SUBMITTED TH AT AS FAR AS ACCRUAL OF INCOME IS CONCERNED THE CIT(APPEALS) HA D DEALT AT LENGTH PARTY-WISE IN ITS ORDER AND ONLY IN CASES WHERE TH E ASSESSEE HAS FAILED TO SUBSTANTIATE ITS CLAIM THAT WHAT WAS GIVEN WAS ONL Y FOR ACQUISITION OF PROPERTY/INVESTMENT IN SHARES ETC. AND NOT A LOAN IT WAS HELD THAT WHAT WAS GIVEN WAS NOTHING BUT A LOAN BY NBFC AND INCOME ACCRUES ON TIME BASIS UNLESS PROVED TO THE CONTRARY. HE SUBMITTED THAT THE INTEREST SHOULD 44 BE TAKEN AS INCOME AND IN CASE THERE IS DIFFICULTY IN RECOVERY THE SAME MAY BE WRITTEN OFF BY WAY OF BAD DEBTS. THE LEARNED DR TOOK THIS BENCH THROUGH THE ANALYSIS GIVEN BY THE CIT(APPEALS) FROM PAGES 14 TO 21 OF THE ORDER. IN THE CASE OF ACME STHAPATI LTD. HE PO INTED OUT THAT THE ASSESSEE CLAIMED THAT THE AMOUNT WAS TREATED AS ADV ANCE GIVEN FOR BOOKING OF PREMISES AND HENCE THE QUESTION OF CHAR GING INTEREST DOES NOT ARISE. HE POINTED OUT THAT THE ASSESSEE HAS ADVANCE D AN AMOUNT OF RS.1 CRORE DURING THE ASSESSMENT YEAR 1999-2000 AND INTE REST CHARGED WAS AMOUNTING TO RS.12 40 750/- WHILE SO THIS YEAR TH E ASSESSEE CLAIMS THAT THIS LOAN FOR WHICH INTEREST WAS ALREADY COLLECTED IN THE EARLIER YEAR WAS NOTHING BUT AN AMOUNT GIVEN AS AN ADVANCE FOR BOOKI NG OF PREMISES. IT WAS ALSO CLAIMED THAT THE DECISION TO CONVERT LOAN GIVEN TO ADVANCE FOR BOOKING OF PREMISES WAS TAKEN ON ACCOUNT OF COMMERC IAL EXPEDIENCY AS REAL ESTATE SECTOR WAS UNDERGOING TREMENDOUS RECESS ION AND LIQUIDITY PRESSURES. THE EVIDENCE FILED BY THE ASSESSEE TO PR OVE THE CONVERSION WAS NOTHING BUT AN OFFER OF SECURITY BY M/S ACME ST HAPATI LTD. EVEN IN THIS LETTER THE ACME STHAPATI LTD. WAS BOUND TO PAY TO THE APPELLANT INTEREST AT THE RATE OF 10% IF THE ASSESSEE DOES NO T EXERCISE OPTION TO CONVERT THE MONEY GIVEN INTO ADVANCE FOR PURCHASE OF PROPERTY. THE CIT(APPEALS) HE POINTED OUT HAS NOT ADMITTED THE ADDITIONAL EVIDENCE AS PER RULE 46A(3). ON THESE FACTS HE ARGUED THAT THE CIT(APPEALS) WAS RIGHT IN HOLDING THAT THERE WAS ACCRUAL OF INCOME I N THE CURRENT YEAR. 12.1 SIMILARLY IN THE CASE OF AMITY INTERLINK STEEL S PVT. LTD. THE LEARNED DR REFERRED TO PAGE 15 OF CLAUSE (B) OF CIT(APPEALS ) ORDER AND POINTED OUT THAT AN AMOUNT OF RS.1 CRORE WAS GIVEN IN THE E ARLIER FINANCIAL YEAR AND RS.20 LAKHS ADVANCED THIS YEAR AND THE ASSESSEE HAD RECEIVED INTEREST OF RS.11 29 970/- FOR FINANCIAL YEAR 2000-01 AND IN TEREST OF RS.7 89 020/- IN THE FINANCIAL YEAR 2002-03 AND RS.6 23 331/- IN FINANCIAL YEAR 2003-04. 45 HE POINTED OUT THAT IN BETWEEN IN THIS YEAR THE AS SESSEE ATTEMPTED TO EXPLAIN THE PAYMENT AS THAT WHICH IS MADE TOWARDS S HARE APPLICATION MONEY. THE LEARNED DR REFERRED TO THE FACTS OF EACH LOAN AND JUSTIFIED THE DECISION OF THE CIT(APPEALS) ; HE TOOK THIS BENCH T HROUGH THE FINDING OF THE CIT(APPEALS) IN THE CASE OF: KANAKIA ENTERPRISES AT PAGE 17 PARA I' RAJ INVE STMENT INVESTMENTS IN PARA M AND SAGAR ENTERPRISES PARA N AND SAI SHIV DEVELOPERS JOGESH PAREKH PARA---- AKRU TI NIRMAN P. LTD.PARA ------- SUN PHARMA EXPORTS TEJASKIRAN PHARMACEUTICAL PVT. LTD.PARA---- THE THRUST OF THE ENTIRE ARGUMENT AS IN THE EARLIE R CASES IS THAT THE ASSESSEE HAS NOT PRODUCED ANY EVIDENCE TO SUBSTANTI ATE ITS CLAIM THAT INCOME HAS NOT ACCRUED. COMING TO THE REVENUE APPE AL ON THE ISSUE OF DELETION OF DISALLOWANCE OF INTEREST THE LEARNED D R THOUGH NOT LEAVING HIS GROUND ADMITTED THAT THE TRIBUNAL IN THE EARLI ER YEARS HAS TAKEN A VIEW AGAINST THE REVENUE. HE PRAYED THAT THE ORDER OF THE FIRST APPELLATE AUTHORITY BE UPHELD ON THE ISSUE OF ACCRUAL INTERES T. 12.2 RIVAL CONTENTIONS HEARD. ON A CAREFUL CONSIDER ATION OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND A PERUSAL OF THE PAP ERS ON RECORD AND THE ORDERS OF THE AUTHORITIES BELOW AS WELL AS THE CASE LAWS CITED WE HOLD AS FOLLOWS. 13. WE FIRST TAKE UP THE ISSUE OF DISALLOWANCE OF I NTEREST U/S 36(1)(III). THE TRIBUNAL IN THE ASSESSEES OWN CASE IN THE BLOC K ASSESSMENT YEAR HAD HELD THAT THE ASSESSEE HAS NOT DIVERTED ANY FUNDS F OR NON BUSINESS PURPOSES. IT HELD THAT THE ADVANCES WERE MADE BY TH E ASSESSEE FOR THE PURPOSE OF BUSINESS. IT FURTHER HELD THAT THE REMAI NING FUNDS WERE ADVANCED BY THE ASSESSEE OUT OF INTEREST FREE FUNDS AVAILABLE WITH IT. THE 46 TRIBUNAL APPLIED THE DECISION OF THE HONBLE SUPREM E COURT IN THE CASE OF S.A. BUILDERS AND UPHELD THE DELETION OF DISALLOWAN CE OF INTEREST MADE BY THE CIT(APPEALS). RESPECTFULLY FOLLOWING THE SAME CONSISTENT WITH THE VIEW TAKEN BY THE COORDINATE BENCH OF THE TRIBUNAL WE UPHOLD THE ORDER OF THE CIT(APPEALS) AND UPHOLD THE DELETION OF DISA LLOWANCE OF INTEREST. 13.1 THE OTHER ISSUE THAT ARISES IN THE ASSESSEES APPEAL IS THE QUESTION WHETHER INCOME ACCRUED TO THE ASSESSEE OR NOT IN EA CH OF THESE ADVANCES. THE ASSESSEE CLAIMS THAT THE ADVANCES WERE MADE AS INVESTMENTS OR FOR THE PURCHASE OF PROPERTY OR TO THE PURCHASE OF SHAR ES. THE CIT(APPEALS) HAS TAKEN THE RELEVANT FACTS OF EACH LOAN AND ADVAN CE GIVEN BY THE ASSESSEE AND ARRIVED AT A CONCLUSION AS TO WHETHER INTEREST INCOME CAN BE SAID TO HAVE ACCRUED OR NOT. AT PARA 2.24 PAGE 12 A ND 13 THE CIT(APPEALS) HELD AS FOLLOWS : 2.24 HOWEVER WHETHER INTEREST INCOME HAS ACCRUED OR NOT TO THE APPELLANT AS PER ORAL/WRITTEN AGREEMENT BETWEEN THE APPELLANT AND THE PARTIES IS ALSO INVOLVED IN THE PRESENT CASE. T HIS QUESTION HAS TO BE DECIDED BY TAKING INTO CONSIDERATION ALL THE REL EVANT FACTS OF EACH LOAN AND ADVANCE GIVEN BY THE APPELLANT. IF IT IS FOUND AFTER CONSIDERING ALL THE RELEVANT FACTS THAT INCOME HAS ACCRUED TO THE APPELLANT IT IS TAXABLE IN THE HAND OF THE APPELLAN T EVEN IF THE APPELLANT HAS NOT SHOWN THE SAME IN THE BOOKS OF AC COUNTS. 13.2 AFTER CONSIDERING THE DECISION OF THE HONBLE SUPREME COURT IN THE CASES OF CIT VS. SHOORJI VALLABHDAS AND CO. 46 ITR 144 H.M. KASHIPAREKH AND CO. LTD. VS. CIT 39 ITR 706 CIT V S. BIRLA GWALLOR (P) LTD. 89 ITR 266 MORVI INDUSTRIES LTD. VS. CIT 82 ITR 835 (SC) AND THE CASE OF POONA ELECTRIC SUPPLY CO. LTD. VS. CIT 57 I TR 521 THE CIT(APPEALS) AT PARA 2.27 HELD AS FOLLOWS: BASED ON THESE DECISIONS INCOME WHICH HAS ACCRUE D TO THE APPELLANT IS TAXABLE IN THE HAND OF THE APPELLANT REGARDLESS OF THE 47 FACT THAT THE APPELLANT HAS NOT ACCOUNTED FOR THE S AME IN ITS BOOKS OF ACCOUNTS. THE APPELLANT IS A FINANCE AND INVESTM ENT COMPANY. THE APPELLANT HAS ITSELF ADMITTED THAT ALL THE ADVA NCES ARE MADE IN THE COURSE OF ITS BUSINESS OF FINANCE AND INITIALLY MOST OF THE ADVANCES GIVEN ARE WITH A VIEW TO CHARGE INTEREST. THE APPELLANT HOWEVER CLAIMED THAT LATER ON DUE TO FINANCIAL DIFF ICULTIES IN SOME CASES INTEREST IS NOT RECEIVED. THEREFORE IT IS T O BE EXAMINED IN EACH AND EVERY CASE WHETHER ON THE BASIS OF LEGAL PRINCIPLES LAID DOWN BY THE ABOVESAID DECISIONS IT CAN BE SAID THA T INTEREST INCOME IN REALITY HAS ACCRUED TO THE APPELLANT OR NOT. 13.3 THE ASSESSEES CONTENTION IS THAT INCOME DOES NOT RESULT AT ALL IRRESPECTIVE OF THE METHOD OF ACCOUNTING FOLLOWED B Y THE ASSESSEE ON THE FACTS AND CIRCUMSTANCES OF THE CASE. RELIANCE WAS P LACED ON THE JUDGMENT OF THE SUPREME COURT IN THE CASES OF E.D. SASSON & CO. VS. CIT 26 ITR 27(SC) GODHRA ELECTRICITY CO. LTD. VS. CIT 225 IT R 746 CIT VS. BOKARO STEEL LTD. 236 ITR 315 AND OTHER CASE LAWS. RELIANCE IS ALSO PLACED ON THE DECISION OF THE TRIBUNAL ON THESE ISS UES IN THE BLOCK ASSESSMENT. IT IS ALSO SUBMITTED THAT THE INCOME AS AND WHEN ACCRUED HAS BEEN OFFERED TO TAX IN THE SUBSEQUENT ASSESSMENT YE ARS. 13.4 IN OUR CONSIDERED OPINION THE SOLE ISSUE TO B E DECIDED IS THE YEAR OF TAXABILITY. IN OTHER WORDS THE DISPUTE BOILS DO WN TO THE POINT AS TO WHETHER THE INCOME IN QUESTION HAS ACCRUED IN THE C URRENT YEAR OR AT A LATER YEAR WHEN THE ASSESSEE HAS SETTLED THE ISSUE WITH THE PARTY AND OFFERED THE AMOUNT RECEIVED AS COMPENSATION TO TAX. THE HONBLE SUPREME COURT IN THE CASE OF BERGER PAINTS INDIA L TD. VS. CIT 266 ITR 99 APPROVED THE FINDING OF THE SPECIAL BENCH OF THE ITAT IN THE CASE OF INDIAN COMMUNICATION NET WORK P. LTD. AND HELD AS FOLLOWS : IN ADDITION TO THESE THREE HIGH COURT JUDGMENTS IT APPEARS THAT NOTICING THE CONFLICTING VIEWS TAKEN BY THE TRIBUNA LS A SPECIAL BENCH OF THE INCOME-TAX APPELLATE TRIBUNAL WAS CONS TITUTED TO RESOLVE THE ISSUE. IN INDIAN COMMUNICATION NETWORK PVT. LTD. V. 48 IAC OF I.T..994] 206 ITR (AT) 96 (DELHI) THE SPECI AL BENCH OF THE TRIBUNAL CONSIDERED ALL THE CONFLICTING JUDGMEN TS AND THE JUDGMENT IN LAKHANPAL NATIONAL LTD.S CASE [1986] 162 ITR 240 (GUJ) AS ALSO ITS OWN ORDER IN THE CASE OF THE APPE LLANT-ASSESSEE REPORTED IN BERGER PAINTS INDIA LTD. V. CIT [1993] 44 ITD 573 (ITAT) (CAL.). AFTER NOTICING ALL THE CONFLICTING V IEW AND THE ATTEMPT MADE BY THE TRIBUNAL IN HINDUSTAN COMPUTERS LTD. V. ITO [1987] 21 ITD 524 (ITAT) (DELHI) TO DISTINGUISH TH E OBSERVATIONS MADE IN LAKHANPAL NATIONAL LTD.S CASE [1986] 162 ITR 240 (GUJ) THE SPECIAL BENCH OF THE TRIBUNAL MADE THE F OLLOWING OBSERVATIONS AT [1994] 206 ITR (AT) 96 AT PAGE 114 : WE WOULD LIKE TO MAKE IT ABSOLUTELY CLEAR THAT THE REMOVAL OF THE AMOUNT IN QUESTION FROM THE FIGURE OF CLOSIN G STOCK IS NOT TANTAMOUNT TO A TINKERING OF THE CLOSING STO CK BUT ALLOWING TO THE ASSESSEE THE EFFECTIVE DEDUCTION TO WHICH IT IS ENTITLED UNDER SECTION 43B. WE WOULD ALSO LIKE TO E MPHASISE THAT IN THE SUBSEQUENT ASSESSMENT YEAR THE ASSESSE ES OPENING STOCK WOULD STAND REDUCED BY A CORRESPONDIN G FIGURE SINCE IT CANNOT AVAIL OF A DOUBLE DEDUCTION . IT WAS FURTHER OBSERVED BY THE SPECIAL BENCH AT PAG E 114 THAT: BEFORE WE PART WITH THIS GROUND WE CANNOT HELP FE ELING THAT THE LITIGATION BETWEEN THE PARTIES COULD HAVE BEEN AVOIDED SINCE IT WAS QUITE IMMATERIAL WHETHER FULL DEDUCTI ON WAS ALLOWED IN ONE YEAR OR PARTLY IN ONE YEAR AND PARTL Y IN THE NEXT SINCE THE ASSESSEE IS A COMPANY AND RATE OF T AX IS UNIFORM. THE GAIN TO ONE AND THE LOSS TO THE OTHER IS ILLUSORY SINCE WHAT IS DEFERRED IN ONE YEAR WOULD HAVE TO B E DISCHARGED IN THE NEXT. IN THAT SENSE NOBODY HAS W ON AND NOBODY HAS LOST. (EMPHASIS OURS) IT IS SPECIFICALLY ASSERTED IN THE WRITTEN SUBMISSI ONS OF THE APPELLANT-ASSESSEE THAT THIS DECISION OF THE SPECIA L BENCH OF THE INCOME-TAX APPELLATE TRIBUNAL IN INDIAN COMMUNICAT ION NETWORK PVT. LTD.S CASE [1994] 206 ITR (AT) 96 (DELHI) HAS ALSO NOT BEEN CHALLENGED THIS FACT IS ALSO NOT DISPUTED BY THE REVENUE. 49 APPLYING THE PROPOSITIONS LAID DOWN TO THE FACTS OF THE CASE WE EXAMINE EACH OF THE ADVANCES MADE . I) IN THE CASE OF ACME STHAPATI LTD. THE ASSESSEE HAS OFFERED TO TAX COMPENSATION OF RS.74.20 LAKHS DURING THE ASSESSMEN T YEAR 2004-05 AND THE ASSESSEE BROUGHT THE SAME TO TAX. THE CIT(APPEA LS) REFUSED TO ADMIT THE ADDITIONAL EVIDENCE IN THE FORM OF A LETTER FRO M A PARTY THAT THE ASSESSEE HAD AN OPTION TO CONVERT THE LOAN INTO AN ADVANCE FOR BOOKING OF PREMISES. NEVERTHELESS THE CIT(APPEALS) DISCUSSED THE NATURE OF THE EVIDENCE. THE ORDER OF THE CIT(APPEALS) IS CORRECT ON THE PRINCIPLE THAT INCOME ACCRUES WHEN WHAT IS ADVANCED IS A LOAN. BU T AT THE SAME TIME WHEN THE PERSON TAKING THE LOAN IS NOT IN A POSITIO N TO REPAY THE PRINCIPAL THE QUESTION OF CHARGING INTEREST AND SHOWING THE S AME AS INCOME DOES NOT ARISE. WHEN THE REDUCTION OF THE PRINCIPAL IS IN DOUBT REAL INCOME THEORY APPLIES AND INTEREST INCOME CAN NOT BE BROUG HT TO TAX ON ACCRUAL BASIS. EVEN OTHERWISE AS THE ASSESSEE HAD DISCLOSE D THE ENTIRE INCOME IN THE YEAR OF SETTLEMENT OF THE CASE I.E. ASSESSMENT YEAR 2004-05 WE UPHOLD THE CONTENTIONS OF THE ASSESSEE THAT NO REAL INCOME ACCRUED TO IT IN THE EARLIER YEAR AND THAT IT ACCRUED ONLY IN THE YE AR OF RECEIPT AND DELETE THE ADDITION AS CONFIRMED BY THE CIT(APPEALS). UPHO LDING THE ADDITION WOULD TANTAMOUNT THE DOUBLE TAXATION. THE REVENUE S HOULD NOT HAVE ASSESSED THIS INCOME TO TAX IN THE ASSESSMENT YEAR 2004-05 IF IT WANTED TO TAX THE SAME INCOME IN THE EARLIER YEAR. WE FIND TH AT THE INCOME WAS ASSESSED AS SUBSTANTIVE BASIS AND NOT PROTECTIVELY. IN THE RESULT THIS ADDITION IS DELETED. II) COMING TO THE CASE OF KANAKIA ENTERPRISES THE FACTS SHOW THAT THE ASSESSEE WAS FORCED TO FOREGO ACCRUED INTEREST DUE TO INABILITY OF THE PARTY TO PAY THE AMOUNT. THE HONBLE MADRAS HIGH CO URT IN THE CASE OF CIT VS. INDIA EQUIPMENT LEASING LTD. 293 ITR 350 HE LD AS FOLLOWS : 50 HELD DISMISSING THE APPEALS THAT INTEREST ON ST ICKY LOANS NOT BEING BROUGHT INTO THE PROFIT AND LOSS ACCOUNT BUT BEING TAKEN TO THE SUSPENSE ACCOUNT WAS AN ACCEPTED MODE OF TRE ATMENT OF NOTIONAL INCOME IN ACCOUNTING PRACTICE. THE FACT TH AT THE ASSESSEE ALTHOUGH GENERALLY USING A MERCANTILE SYSTEM OF ACC OUNTING KEPT SUCH INTEREST AMOUNT IN A SUSPENSE ACCOUNT AND DID NOT BRING THOSE AMOUNTS TO THE PROFIT AND LOSS ACCOUNT SHOWED THAT THE ASSESSEE WAS FOLLOWING A MIXED SYSTEM OF ACCOUNTING BY WHICH SUCH INTEREST WAS INCLUDED IN ITS INCOME ONLY WHEN IT WA S ACTUALLY RECEIVED. THE CBDT CIRCULAR PERMITTED SUCH INTERES T TO BE EXCLUDED FROM INCOME IF FOR THREE YEARS SUCH INTERE ST WAS NOT ACTUALLY RECEIVED. THEREAFTER INTEREST WOULD BE ADD ED AS INCOME ONLY WHEN ACTUALLY RECEIVED. THE FACTS SHOW THAT THE ACCOUNT WAS SETTLED IN THE YEAR 2001-02 AND THE INTEREST ULTIMATELY RECEIVED IS LESS THAN WHAT IS SOUGHT TO BE BROUGHT TO TAX AS ACCRUED INTEREST INCOME. THE ASSESSEE PLEADS THAT IN CASE THE AMOUNT IS BROUGHT TO TAX ON ACCRUAL BASIS DEDUCTIO N SHOULD BE ALLOWED IN THE ASSESSMENT YEAR 2001-02 WHEN. ON SETTLEMENT IN TEREST WAS NOT RECEIVED AND THE ASSESSEE HAD TO FORGO IT. WE FIND JUSTIFICATION IN THIS ARGUMENT. APPLYING THE RATIO LAID DOWN BY THE HONB LE MADRAS HIGH COURT IN THE CASE OF CIT VS. INDIA EQUIPMENT LEASIN G LTD. (SUPRA) WE UPHOLD THE CONTENTION OF THE ASSESSEE THAT NO INTER EST ACCRUED TO IT AS REAL INCOME THEORY AND DELETE THE ADDITION MADE ON ACCOU NT OF INTEREST ACCRUED. II) SIMILARLY IN THE CASE OF AKRUTI NIRMAN PVT. LT D. THOUGH ON THE FIRST LOOK IT APPEARS THAT THE ASSESSEE SHOULD HAVE CHARGED INTEREST FOR FIVE WEEKS IN 2000-01 ON FINAL SETTLEMENT IT IS CLEAR T HAT NO INTEREST WAS ACTUALLY RECEIVED. THERE IS NO POINT IN BRINGING TO TAX THE INTEREST ON ACCRUAL BASIS IN THE YEAR 2000-01 AND THEREAFTER AL LOWING THE SAME AS BUSINESS LOSS.. 51 III) SIMILAR ARE THE FACTS IN THE CASE OF SAI SHIV DEVELOPERS AND MEHER SINGH DADA. IN THESE CASES ALSO IF INTEREST IS HELD TO BE ACCRUED THEN ON SETTLEMENT OF ACCOUNT AS ON FACTS THIS INTEREST HA S NOT BEEN RECEIVED AT ALL IT SHOULD BE ALLOWED AS AN EXPENDITURE. AS FAR AS T HE OTHER PARTIES ARE CONCERNED TAXING THEM ON ACCRUAL WOULD AMOUNT TO D OUBLE TAXATION AS IN THE EARLIER CASES. THE REVENUE HAS NOT BROUGHT TO T AX THE INCOME IN LATER YEARS ON A PROTECTIVE BASIS. THE SAME INCOME CANNO T BE BROUGHT TO TAX TWICE ON SUBSTANTIVE BASIS. THUS THE ADDITION HAS T O BE DELETED. 13.5 THE TRIBUNAL IN THE BLOCK ASSESSMENT ORDER FOR THE ASSESSMENT YEARS 1996-97 TO 1999-2000 DELETED THE ADDITIONS M ADE ON THE GROUND THAT THERE IS ACCRUAL OF INTEREST IN THE CASES OF SHASTRIJI CONSTRUCTION ELEGANT BUILDERS RASHESH KANKIA ELEGANT INVESTMEN TS NEELA MEHTA JITENDRA SHETH AND RAJ INVESTMENTS. THE TRIBUNAL D ELETED THE ADDITIONS OF ACCRUED INCOME ON THE GROUND THAT INCOME CANNOT BE BROUGHT TO TAX NOTIONALLY. THE FACTS ARE IDENTICAL AND IN FACT THE PARTIES ARE THE SAME IN SOME CASES.WE RESPECTFULLY FOLLOW THE COORDINATE BE NCH DECISION ON THE VERY SAME ISSUE IN THE BLOCK ASSESSMENT AND ALLOW GROUND NO. 2 OF THE ASSESSEE AND DISMISS GROUND NO. 2 OF THE REVENUE. 14. GROUND NO. 3 IN ASSESSEES APPEAL ITA NO. 4482 /M/07 RELATES TO DISALLOWANCE OF BROKERAGE OF RS. 2 50 000/- PAID BY THE ASSESSEE AND CLAIMED AS DEDUCTION FROM THE ANNUAL LETTING VALUE. THE AO HELD THAT SINCE THE BROKERAGE PAID IS FOR LETTING OUT OF THE PROPERTY AND THE INCOME IS ASSESSED AS INCOME FROM HOUSE PROPERTY THESE EX PENSES CANNOT BE ALLOWED AS BUSINESS EXPENSES U/S 37. THE CIT(A) UPH ELD THE DISALLOWANCE ON THE GROUND THAT THE ALV IS NOT TO BE DISTURBED W HICH IS COMING OUT AS A RESULT OF COMPUTATION AS PER FORMULA U/S 23. 52 15. THE LEARNED AR BEFORE US HAS RELIED ON VARIOU S DECISIONS INCLUDING THE DECISION OF MUMBAI ITAT IN THE CASE O F GOVIND S SINGHANIA VS ITO (ITA NO.4581/M/06 DT. 3.4.2008) (M UM TRIB) FILED AT PG NO. 211 TO 216 OF THE PAPERBOOK. THE RELEVANT EX TRACT OF THE SAME IS AS UNDER: WE HAVE CONSIDERED THE SUBMISSIONS MADE BY BOTH TH E SIDES AS WELL AS THE ORDERS OF THE AUTHORITIES BELOW. AS FAR AS INCURRING ALL THESE EXPENSES IS NOT IN DISPUTE. IT IS ALSO NOTED THAT WITHOUT INCURRING THESE EXPENSES THE ASSESSEE WOULD NOT HA VE EARNED THE RENTAL INCOME. IT IS FURTHER NOTED THAT THE ANNUAL LETTING VALUE IN THIS CASE HAS BEEN ARRIVED AT U/S 23(1)(B) OF THE A CT. HENCE RENTAL INCOME SO RECEIVED OR RECEIVABLE BY THE OWNER HAS T O BE TAKEN INTO CONSIDERATION AND IN OUR VIEW SUCH RENT HAS TO BE N ET OF THESE EXPENSES AND THESE EXPENSES HAVE TO BE DEDUCTED FRO M THE VERY BEGINNING BECAUSE WHATEVER COMES IN THE HANDS OF TH E ASSESSEE IS THE NET AMOUNT. WE ALSO FIND SUBSTANTIAL FORCE IN T HE ARGUMENT OF THE ASSESSEE THAT HAD THESE EXPENSES BEEN BORNE BY THE TENANT AND ONLY RENT WOULD HAVE BEEN PAID BY THE TENANT THEN O NLY THE AMOUNT OF NET NO RENT WOULD HAVE BEEN THE ANNUAL LETTING V ALUE WITHIN THE MEANING OF THE PROVISIONS OF SECTION 23(1)(B) OF TH E ACT. FURTHER THE CASE LAWS RELIED ON BY THE ASSESSEE ALSO SUPPOR T THIS VIEW. IN THIS VIEW OF THE MATTER WE HOLD THAT THE ANNUAL LE TTING VALUE SHOULD BE TAKEN NET ON STAMP DUTY AND BROKERAGE PAID BY TH E ASSESSEE. ACCORDINGLY WE ACCEPT THIS GROUND OF THE ASSESSEE. 16. THE LEARNED DR ARGUED THAT THE ALV CANNOT BE DI STURBED EXCEPT BY STANDARD DEDUCTIONS AVAILABLE U/S 24 OF THE ACT. NO EXPENSES SHOULD BE ALLOWED FOR DEDUCTION WHILE COMPUTING THE ALV. 17. AFTER CONSIDERING THE RIVAL SUBMISSIONS WE FIN D THAT THE FIRST APPELLATE AUTHORITY HAS NOT ACCEPTED THE CLAIM OF T HE ASSESSEE THAT THE PAYMENT OF BROKERAGE IS IN THE NATURE OF DEDUCTION OF RENT AT SOURCE. AT PAGES 22-23 PARA 3.3 THE CIT(APPEALS) HELD AS FOL LOWS : 53 3.3 I HAVE CONSIDERED THE SUBMISSION OF THE APPELL ANT. THE ISSUE TO BE DECIDE IN THE PRESENT CASE WHETHER IN COMPUTA TION OF INCOME FROM HOUSE PROPERTY ANNUAL VALUE SHOULD BE REDUCED BY THE AMOUNT OF BROKERAGE PAID. FOR FACILITY OF REFERENC E I REPRODUCE HEREUNDER THE RELEVANT PORTION OF CLAUSE 23(1):- 23(1) FOR THE PURPOSES OF SECTION 22 THE ANNUAL V ALUE OF ANY PROPERTY SHALL BE DEEMED TO BE- (A)THE SUM FOR WHICH THE PROPERTY MIGHT REASONABLY BE EXPECTED TO LET FROM YEAR TO YEAR; OR (B) WHERE THE PROPERTY OR ANY PART OF THE PROPERTY IS LET AND THE ACTUAL RENT RECEIVED OR RECEIVABLE BY THE OWNER IN RESPECT THEREOF IS IN EXCESS OF THE SUM REFERRED TO IN CLAU SE (A) THE AMOUNT SO RECEIVED OR RECEIVABLE. FROM PLAIN READING OF THE ABOVE I DO NOT FIND ANY EXPRESS PROVISION REGARDING ALLOWANCE OF ANY EXPENDITURE B ROKERAGE AND COMMISSION OR BY ANY OTHER NAME FOR DETERMINING AL V OF THE PROPERTY. RENTAL INCOME FROM PROPERTY IS ASSESSED U NDER THE HEAD INCOME FROM HOUSE PROPERTY. IT WILL BE PERTINENT TO MENTION HERE THAT COMPUTATION OF INCOME FROM DIFFERENT SOURCES I S DONE AND TAXED UNDER FIVE HEADS I.E. (I) INCOME FROM SALARY ; (II) INCOME FROM BUSINESS; (III) CAPITAL GAINS; (IV) INCOME FRO M HOUSE PROPERTY; AND (V) INCOME FROM ANY OTHER SOURCES. THERE ARE EX PRESS PROVISIONS IN EACH HEAD FOR COMPUTATION OF INCOME. UNDER THE BUSINESS HEAD ACTUAL EXPENDITURE IS ALLOWED AS CAS H OR MERCANTILE BASIS AS PER SECTIONS 28 TO 43 WHILE UNDER THE HE AD SALARY ONLY STANDARD DEDUCTION IS ALLOWED. LIKEWISE UNDER HOU SE PROPERTY ONLY STANDARD DEDUCTION IS ALLOWED UNDER SECTION 24 . UNDER THE HEAD INCOME FROM HOUSE PROPERTY ALV IS COMPUTED ON THE BASIS OF DEEMED RENT AS PER SET FORMULA ENSHRINED IN SEC TION 23 AND THEREAFTER STANDARD DEDUCTION IS ALLOWED UNDER SECT ION 24 AS SPECIFICALLY PROVIDED UNDER THE ACT. FOR COMPUTATIO N OF ALV A FORMULA HAS BEEN ENSHRINED IN SECTION 23. COMBINED READING OF CLAUSES (A) AND (B) LEAD TO THE INFERENCE ABOUT TH E WORDS USED ACTUAL RENT RECEIVED OR RECEIVABLE. TO DISTINGUISH EXPECTED RENT WHICH IS DEEMED IN CLAUSE (A) WORDS ACTUAL RENT R ECEIVED OR RECEIVABLE HAVE BEEN PUT IN CLAUSE (B) AND TO INFE R THAT ACTUAL RENT MEANS NET RENT MEANS NET RENT AFTER ALLOWANCE OF EX PENDITURE IN CONNECTION WITH RENT WILL LEAD TO ONLY ABSURD CONCL USION CONTRARY TO THE OBJECT OF THE LEGISLATURE. WHAT IS NOT EXPRE SSLY PROVIDED IN THE STATUTE SHOULD NOT BE THRUST IN OWN INFERENCE. MORE SO THE 54 STATUTE DOES NOT EMPOWER THE ASSESSING AUTHORITY OR THE ASSESSEE EITHER TO ADD OR SUBTRACT ANYTHING FROM THE ALV. IN THE CASE OF CIT V. GWALIOR COMMERCIAL CO. LTD. [1983] 141 ITR 930 ( CAL.) IT WAS HELD THAT NO ACCOUNT SHOULD BE TAKEN OF THE EXPENDI TURE INCURRED IN CONNECTION WITH AIR-CONDITIONER FURNITURE ETC. CO NVERSELY IT CAN BE INFERRED THAT ALV IS NOT TO BE DISTURBED WHICH I S COMING OUT AS A RESULT OF COMPUTATION AS PER FORMULA UNDER SECTI ON 23. IT IS UP TO THE ASSESSEE WHETHER HE NEEDS THE SERVICES OF A BRO KER OR NOT. THERE IS A DIFFERENCE BETWEEN AN AMOUNT WHICH A PERSON I S OBLIGED TO PAY OUT OF HIS INCOME AND AN AMOUNT WHICH BY THE N ATURE OF THE OBLIGATION CANNOT BE SAID TO BE A PART OF THE INCOM E OF THE ASSESSEE. HENCE THE PLEA OF THE APPELLANT FAILS AND FOR THIS RELIANCE IS ALSO PLACED ON THE DECISION OF THE ITAT CHANDIGARH BENCH IN THE CASE OF PICCADILY HOTELS PRIVATE LIMITED 97 ITD 564 WHER EIN THE ITAT HAS NOT ALLOWED THE SIMILAR EXPENDITURE. ACCORDINGL Y I HOLD THAT THE APPELLANT IS NOT ENTITLED TO ANY DEDUCTION FROM THE ALV ON ACCOUNT OF BROKERAGE PAID BY THE APPELLANT. THE GROUND OF A PPEAL STANDS NOT ALLOWED. WE FULLY AGREE WITH THESE FINDINGS. RELIANCE PLACED BY THE LEARNED COUNSEL FOR THE ASSESSEE ON THE DECISION IN THE CAS E OF GOVIND S. SINGHANIA IN ITA NO. 4581/M/06 ORDER DATED 3-4-200 8 IN OUR CONSIDERED OPINION DOES NOT APPLY AS ALV WAS HELD TO BE DETERMINED AFTER TAKING INTO CONSIDERATION THE STAMP DUTY AND BROKERAGE. IN THIS CASE THERE IS NO STAMP DUTY. ON THE OTHER HAND THE CHAN DIGARH BENCH OF THE TRIBUNAL IN THE CASE OF PICCADILY HOTELS PRIVATE L IMITED 97 ITD 564 HELD THAT INCOME WHILE COMPUTING INCOME FROM HOUSE PROP ERTY ANNUAL LETTING VALUE SHOULD NOT BE REDUCED BY AN AMOUNT OF BROKERA GE PAID. IT HELD THAT THE STATUTE DOES NOT EMPOWER THE ASSESSING AUTHORIT Y OR THE ASSESSEE EITHER TO ADD OR SUBTRACT ANYTHING FROM THE ALV. WE RESPEC TFULLY FOLLOW THIS DECISION AND DISMISS GROUND NO. 3 OF THE ASSESSEES APPEAL. 18. GROUND NO. 4 IN ASSESSEES APPEAL ITA NO. 4482 /M/07 RELATES TO DISALLOWANCE U/S 14A OF THE ACT. THE ASSESSEE HAS R ECEIVED DIVIDEND OF RS. 2.04 CRORE DURING THE YEAR. THE AO HELD THAT TH E ASSESSEE HAS MIXED 55 ACCOUNT WHERE IN INTEREST BEARING FUNDS AND THE NON INTEREST BEARING FUNDS CANNOT BE BIFURCATED TOWARDS A PARTICULAR ASSET. TH E AO FOR WORKING OUT THE COST INCURRED FOR EARNING DIVIDEND ALLOCATED T HE EXPENSES ON THE BASIS OF FUNDS EMPLOYED IN THE INVESTMENTS TO TOTAL FUNDS EMPLOYED AND DISALLOWED RS. 83 81 774/-. THE CIT(A) HAS UPHELD T HE DISALLOWANCE OF THE EXPENSE U/S 14A OF THE ACT. 19. THE LEARNED AR AGREED THAT THE ISSUE MAY BE SET ASIDE TO THE FILE OF AO THAT WITH A SPECIFIC DIRECTION TO KEEP IN VIEW O F THE DECISION OF THE BOMBAY HIGH COURT IN THE CASE OF GODREJ AND BOYCE M FG CO LTD 328 ITR 81. 20. THE LEARNED DR ALSO AGREED TO THE SAME. 21. IN VIEW OF THE DECISION OF THE HONBLE BOMBAY H IGH COURT IN THE CASE OF GODREJ BOYCE MFG. CO. LTD. (SUPRA) WE SET ASIDE THE ISSUE TO THE FILE OF THE AO FOR FRESH ADJUDICATION IN ACCORDANCE WITH LAW. 21.1 THUS GROUND NO. 4 OF THE ASSESSEES APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. 21.2 IN THE RESULT THE REVENUES APPEAL IS DISMISS ED AND THE ASSESSEES APPEAL IS ALLOWED IN PART. ITA NO 4483/M/07 (ASSESSEES APPEAL 2001-02) ITA NO 4308/M/07 (DEPARTMENTS APPEAL 2001-02) 22. THESE CROSS APPEALS ARE FOR THE AY 2001-02. TH E AO MADE DISALLOWANCE OF INTEREST ON THE GROUND THAT ASSESSE E HAD MADE INTEREST- FREE ADVANCES OUT OF INTEREST-BEARING BORROWINGS. T HE DISALLOWANCE ARE ON THE SAME LINES AS IN AY 2000-01. THE PARTIES FOR TH E AY 2001-02 ARE AS FOLLOWS: 56 SR. NO. PARTY NAME 1. ACME STHAPATI LTD. 2. M J EXPORTS LTD. 3. OXFORD 21 ST CENTURY SERVICES PVT. LTD. 4. SUN FASTFIN SERVICES 5. B B PAREKH 6. BHARAT KANAKIA 7. JAYKUMAR MAHAJAN 8. RAJ INVESTMENTS 9. SHASTRIJI CONSTRUCTIONS 10. SUN SPECIALITY CHEMICALS PVT. LTD. 11. NARESH GARODIA 12. AMAL FINANCE PVT. LIMITED 13. VIRTUOUS SECURITIES & BROKING PVT. LTD. 14. VIRTUOUS SHARE INVESTMENTS PVT. LTD. 15. DOLPHIN LABORATORIES 16. SAGAR ENTERPRISES 17. SHOLAPUR ORGANICS PVT. LIMITED 23. THE PARTIES AT SR. NO. 1 TO 9 AND 15 TO 17 ARE THE PARTIES COVERED BY AY 2000-01 AND THE SAME HAS BEEN DISCUSSED ABOVE WH ILE DECIDING FOR AY 2000-01. THE AO DISALLOWED THE INTEREST PAID WIT H RESPECT OF THE PARTIES AT SR. NO. 10 TO 14.THE RELEVANT EXTRACT I S AS FOLLOWS: I HAVE CONSIDERED THE ABOVE SUBMISSION OF THE ASSE SSEE BUT THE SAME CANNOT BE ACCEPTED EXCEPTING FOR SUN SPECIALIT Y CHEMICALS PVT. LTD. (SR. NO. 10) AND SAGAR ENTERPRISES (SR. N O. 16). PARTIES AT SR. NO. 1 2 3 4 5 6 7 8 15 AND 17 ARE TH E SAME AS IN AY 2000-01. ISSUES RELATED TO ALL THESE PARTIES HAVE B EEN SUITABLY 57 DISCUSSED AND ADDRESSED TO IN THE BLOCK ASSESSMENT ORDER / ASSESSMENT YEAR 1999-00 ASSESSMENT ORDER / ASSESSME NT YEAR 2000- 01 ASSESSMENT ORDER. DURING THOSE ASSESSMENTS AFTE R CONSIDERING THE SIMILAR SUBMISSIONS THE INTEREST PAID BY THE A SSESSEE EQUIVALENT TO THE INTEREST CALCULATED ON THESE INTE REST FREE LOANS & ADVANCES GIVE WAS DISALLOWED AND ADDED BACK TO THE INCOME OF THE ASSESSEE. SINCE THERE IS NO MATERIAL CHANGE IN THE FACTS DURING THE YEAR UNDER CONSIDERATION FOLLOWING THE SAME DISCUS SION AS IN THE ABOVE MENTIONED ASSESSMENT ORDERS THE INTEREST PAID BY THE ASSESSEE EQUIVALENT TO THE INTEREST CALCULATED @ 1 2.50% ON THE INTEREST FREE LOANS / ADVANCES MADE TO THESE PARTIE S IS DISALLOWED AND ADDED BACK TO THE INCOME OF THE ASSESSEE. AS REGARDS INTEREST FREE ADVANCES GIVEN TO NARESH G ORADIA (SR. NO. 11) THE ASSESSEE HAS REPLIED THAT THE ADVANCES WER E PAID FOR PURCHASE OF PROPERTY. DURING THE BLOCK AND EARLIER ASSESSMENTS IT WAS OBSERVED THAT THE ASSESSEE ENTERS IN TO FINANCI NG TRANSACTIONS WHEREIN THE PROPERTIES ARE KEPT AS SECURITY FOR ADV ANCING THE AMOUNTS AND IN CASE OF PARTIES TO WHOM LOANS ARE GI VEN FAILS TO REPAY THEN THE PROPERTIES ARE ACQUIRED BY THE ASSE SSEE. IN THIS CASE ALSO THE ASSESSEE HAS NOT TAKEN POSSESSION OF THE P ROPERTY AND THE ENTIRE AMOUNT IS REFUNDED BACK TO THE ASSESSEE IN T HE NEXT ASSESSMENT YEAR. IN THIS CIRCUMSTANCES THE PLEA OF THE ASSESSEE CANNOT BE ACCEPTED AND INTEREST PAID BY THE ASSESSE E EQUIVALENT TO THE INTEREST CALCULATED @ 12% ON THE INTEREST FREE ADVANCES MADE TO THIS PARTY IS DISALLOWED AND ADDED BACK TO THE INCOME OF THE ASSESSEE. 24. THE CIT(A) DELETED THE DISALLOWANCE OF INTEREST PAID HOWEVER MADE ADDITION ON ACCOUNT OF ACCRUAL OF INCOME BY FO LLOWING HIS EARLIER YEAR ORDER IN AY 2000-01. FOR THE ADVANCES TO PARTI ES AT SR. NO. 10 TO 14 HELD AS FOLLOWS: 2.20 THE PARTY AT SR. NO. 11 IS SHRI NARESH GARODI A. THE APPELLANT HAS CLAIMED THAT INTEREST IS GIVEN TO THI S PARTY FOR PURCHASE OF PROPERTY. THE APPELLANT HAS ITSELF ADMI TTED THAT INTEREST WAS CHARGED FROM THIS PARTY IN THE AY 2002-03. THE APPELLANT HAS 58 FILED NO EVIDENCE IN THE FORM OF AGREEMENT TO PURCH ASE OR ANY OTHER EVIDENCE TO SHOW THAT THE MONEY ADVANCED TO THIS PA RTY IS FOR THE PURCHASE OF PROPERTY. THESE FACTS SHOW THAT AMOUNT WAS GIVEN WITH THE UNDERSTANDING THAT INTEREST WILL BE CHARGED. IN VIEW OF THESE FACTS THE ACTION OF THE AO IN MAKING ADDITION ON AC COUNT OF ACCRUED INTEREST ON ADVANCES GIVEN TO THIS PARTY IS UPHELD. 2.21. THE APPELLANT HAS ALSO ADVANCED MONEY TO THE PARTY AT SR. NO. 12 13 AND 14 IN THE CURRENT YEAR. THE MONEY ADVANC ED TO PARTY AT SR. NO. 12 IS ONLY RS. 600/-. THE MONEY ADVANCED TO OTHER PARTY IS RS. 43 000/- TO VIRTUOUS SECURITIES AND BROKING PVT . LTD. AND RS. 25 000/- TO VIRTUOUS SHARE INVESTMENT PVT. LTD. THE APPELLANT HAS NOT GIVE ANY REASONS FOR GIVING MONEY TO THIS PARTY WITHOUT CHARGING INTEREST EXCEPT STATING THAT THESE ARE WHO LLY OWNED SUBSIDIARIES OF THE APPELLANT. NO COMMERCIAL EXPEDI ENCY HAS BEEN SHOWN AND THEREFORE IN VIEW OF THE DECISION OF SC IN THE CASE OF S A BUILDERS LTD. (288 ITR 1) THE AMOUNT OF INTEREST RELATING TO THESE ADVANCES MADE TO THESE PARTIES CAN BE DISALLOWED. I N VIEW OF THESE FACTS THE ACTION OF THE AO IS UPHELD 25. THE LEARNED AR PRAYED FOR CONSIDERING THE SUBMI SSIONS MADE FOR AY 2000-01 WITH REGARD TO THE COMMON PARTIES. THE L EARNED AR AS REGARDS TO PARTY AT SR. NO. 10 SUBMITTED THAT THE ADVANCE TOTALING TO RS. 23.70 LAKHS WAS GIVEN AS SHARE APPLICATION MONEY IN FEBRUARY AND MARCH 2001. THE PARTY HAS ALLOTTED SHARES WORTH OF RS. 16 .20 LAKHS DURING THE YEAR IN MARCH 2001 AND BALANCE SHARES ALLOTTED IN N EXT YEAR IN MARCH 2002 I.E. IN AY 2002-03. THE LEARNED AR ALSO POINTE D OUT THAT NO ADDITION HAS BEEN MADE BY THE DEPARTMENT IN RESPECT TO THIS PARTY IN AY 2002-03. THE LEARNED AR ALSO POINTED OUT THAT SIMIL AR DISALLOWANCE WAS DELETED BY THE ITAT IN THE BLOCK ASSESSMENT. 59 25.1 THE LEARNED AR AS REGARDS TO PARTY AT SR. NO. 11 SUBMITTED THAT THE ADVANCE WAS GIVEN FOR PURCHASE OF PROPERTY. THE TRA NSACTION DID NOT MATERIALIZE AND HENCE INTEREST CHARGED SUBSEQUENTL Y WAS OFFERED TO TAX FOR AY 2002-03 AND ADVANCES WERE RECOVERED. 25.2 THE LEARNED AR AS REGARDS TO PARTY AT SR. NO. 13 AND 14 SUBMITTED THAT THE ADVANCES WERE GIVEN FOR THE PURPOSE OF BUS INESS AND THE SAME ARE IN THE NATURE OF CURRENT ACCOUNT TRANSACTIONS. ALSO IT WAS POINTED OUT THAT THESE PARTIES ARE THE WHOLLY OWNED SUBSIDIARIES OF THE ASSESSEE AND FOR THE SAME REASON NO ADDITION IS CALLED FOR. AS REGARDS TO PARTY AT SR. NO. 12 THE AMOUNT OF ADVANCE IS ONLY RS. 600. 25.3 IN ADDITION THE LEARNED AR RELIED ON THE LEG AL SUBMISSIONS SUBMITTED FOR AY 2000-01. 25.4 CONSISTENT WITH THE VIEW TAKEN BY US WHILE DIS POSING OF BOTH THE ASSESSEES APPEAL AS WELL AS THE REVENUES APPEAL F OR THE ASSESSMENT YEAR 2000-01 WE UPHOLD THE CONTENTIONS OF THE ASSESSEE AND ALLOW THE GROUND RAISED BY IT AND DISMISS THE GROUND RAISED BY THE REVENUE. 26. GROUND NO. 2 IN ASSESSEES APPEAL ITA NO. 4483 /M/07 RELATES TO DISALLOWANCE U/S 14A OF THE ACT. THE ASSESSEE HAS R ECEIVED DIVIDEND OF RS. 34.32 LAKHS DURING THE YEAR. THE AO MADE DISALL OWANCE OF RS. 20 67 369/-. THE CIT(A) HAS UPHELD THE DISALLOWANCE OF THE EXPENSE U/S 14A OF THE ACT FOLLOWING HIS EARLIER YEAR ORDER FOR AY 2000-01. THE LEARNED AR AGREED THAT THE ISSUE MAY BE SET ASIDE T O THE FILE OF AO WITH A SPECIFIC DIRECTION TO KEEP IN VIEW THE BOMBAY HIGH COURT DECISION IN THE CASE OF GODREJ AND BOYCE MFG CO LTD 328 ITR 81.THE LEARNED DR ALSO AGREED TO THE SAME. 60 27. WE SET ASIDE THE ISSUE TO THE FILE OF THE AO FO R FRESH ADJUDICATION IN VIEW OF THE DECISION OF THE HONBLE BOMBAY HIGH COU RT IN THE CASE OF GODREJ BOYCE MFG. CO. LTD. (SUPRA) 28. GROUND NO. 3 OF THE ASSESSEES APPEAL ITA NO. 4483/M/2007 DEALS WITH CHARGING OF INTEREST U/S 234D. THE ASSES SEE WAS GRANTED INTEREST U/S 244A OF RS. 6 90 217/- ON THE AMOUNT O F REFUND OF RS. 39 21 686/-. THE REFUND WAS GRANTED IN THE MONTH O F MARCH 2003. AO CHARGED INTEREST FOR THE PERIOD OF NINE MONTHS. THE CIT(A) HELD THAT THE INTEREST U/S 234D SHOULD BE CHARGED ON THE REFUND G RANTED. 28.1 THE LEARNED AR BEFORE US HAS POINTED OUT THA T THE REFUND WAS GRANTED PRIOR TO THE INSERTION OF THE SECTION 234D I.E. IN THE MONTH OF MARCH 2003. THE LEARNED AR ARGUED THAT THE INTEREST U/S 234D CANNOT BE MADE APPLICABLE TO ASSESSMENT YEAR PRIOR TO AY 2004 -05. THIS PROPOSITION HAS BEEN UPHELD BY THE DELHI SPECIAL BE NCH IN THE CASE OF EKTA PROMOTERS (113 ITD 719)(DEL SB) WHICH IS RECEN TLY APPROVED BY THE DELHI HIGH COURT IN THE CASE OF DIT VS JACABS CIVIL INCORPORATED MITSUBISHI CORPN. AND ORS. (330 ITR 578) (DEL HC). THE DR RELIED ON THE ORDER OF THE CIT(A). 28.2 IN VIEW OF THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF EKTA PRAMOTORS 113 ITD 719 (DEL)(SB) WE AL LOW THIS GROUND OF THE ASSESSEE. 28.3 IN THE RESULT THE REVENUES APPEAL IS DISMISS ED AND THE ASSESSEES APPEAL IS ALLOWED IN PART. 61 ITA NO 4484/M/07 (ASSESSEES APPEAL - A.Y. 2002-03) ITA NO 4309/M/07 (DEPARTMENTS APPEAL A.Y. 2002-0 3) 29. THESE CROSS APPEALS ARE FOR AY 2002-03. THE AO MADE DISALLOWANCE FOR THE REASON THAT THE ASSESSEE HAD A LLEGEDLY MADE INTEREST- FREE LOANS / ADVANCES OUT OF BORROWED FUNDS ON WHIC H INTEREST HAD BEEN PAID BY THE ASSEESSEE. THE DISALLOWANCE WAS ON THE SAME LINES AS IN AY 2000-01 THE PARTIES FOR THE AY 2002-03 ARE AS FOLLO WS: SR. NO. PARTY NAME 1. ACME STHAPATI LTD. 2. M J EXPORTS LTD. 3. OXFORD 21 ST CENTURY SERVICES PVT. LTD. 4. ACENT ASSOCIATES 5. B B PAREKH 6. BHARAT KANAKIA 7. JAYKUMAR MAHAJAN 8. SHASTRIJI CONSTRUCTIONS 9. AMAL FINANCE PVT. LIMITED 10. JEEVANREKHA INVESTRADE PVT. LTD. 11. JOSHUHA INVESTMENTS PVT. LTD. 12. SUNHAMI FINLEASE & INVESTMENT PVT. LTD. 13. VIRTUOUS SECURITIES & BROKING PVT. LTD. 14. VIRTUOUS SHARE INVESTMENTS PVT. LTD. 30. THE PARTIES AT SR. NO. 1 TO 14 ARE THE PARTIES COVERED BY AY 2000- 01 AND AY 2001-02 AND THE SAME HAVE BEEN DISCUSSED ABOVE WHILE DECIDING THE APPEALS FOR AY 2000-01 AND AY 2001-02. FOR ALL THE PARTIES 62 AT SR. NO. 1 TO 14 THE AO AND CIT(A) MADE THE ADDI TION TO THE TOTAL INCOME BASED ON THE EARLIER YEAR ORDERS RESPECTIVEL Y. 30.1 THE SUBMISSIONS OF BOTH THE PARTIES ARE SIMILA R TO THE SUBMISSIONS MADE WHILE ARGUING THE APPEALS IN THE EARLIER ASSES SMENT YEARS. CONSISTENT WITH THE VIEW TAKEN THEREIN WE ALLOW TH E GROUNDS RAISED BY THE ASSESSEE AND DISMISS THE GROUNDS RAISED BY THE REVENUE. 31. GROUND NO. 2 IN ASSESSEES APPEAL ITA NO. 4483 /M/07 RELATES TO DISALLOWANCE U/S 14A OF THE ACT. THE ASSESSEE HAS R ECEIVED DIVIDEND OF RS. 1.27 CRORE DURING THE YEAR. THE AO MADE DISALLO WANCE OF RS. 51 60 654/-. THE CIT(A) HAS UPHELD THE DISALLOWANCE OF THE EXPENSE U/S 14A OF THE ACT FOLLOWING HIS EARLIER YEAR ORDER FOR AY 2000-01. THE LEARNED AR AGREED THAT THE ISSUE MAY BE SET ASIDE T O THE FILE OF AO WITH A SPECIFIC DIRECTION TO KEEP IN VIEW OF THE BOMBAY HI GH COURT DECISION IN THE CASE OF GODREJ AND BOYCE MFG CO LTD 328 ITR 81. THE LEARNED DR ALSO AGREED TO THE SAME. 31.1 IN VIEW OF THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ AND BOYCE MFG. CO. (SUPRA) WE SET A SIDE THE ISSUE TO THE FILE OF THE AO FOR FRESH ADJUDICATION. 31.2 IN THE RESULT THE REVENUES APPEAL IS DISMISS ED AND THE ASSESSEES APPEAL IS ALLOWED IN PART. ITA NO 7349/M/07 (ASSESSEES APPEAL - A.Y.2003-04) ITA NO 6837/M/07 (DEPARTMENTS APPEAL A.Y.2003-04 ) 32. THESE CROSS APPEALS RELATE TO AY 2003-04. AO M ADE DISALLOWANCE OF INTEREST ALLEGING THAT THE ASSESSEE HAD MADE INT ERES-FREE ADVANCES OUT OF INTEREST-BEARING BORROWINGS. THE DISALLOWANCE WA S ON THE SAME LINES AS IN AY 2000-01. THE PARTIES FOR THE AY 2003-04 AR E AS FOLLOWS: 63 SR. NO. PARTY NAME 1. B B PAREKH 2. M J EXPORTS LTD. 3. ACME STHAPATI LTD. 4. ACENT ASSOCIATES 5. SHASTRIJI CONSTRUCTIONS 6. RAKESH CAIJLA 7. JAYKUMAR MAHAJAN 8. OXFORD 21 ST CENTURY SERVICES PVT. LTD. 9. VIRTUOUS SECURITIES & BROKING PVT. LTD. 10. VIRTUOUS SHARE INVESTMENTS PVT. LTD. 33. THE PARTIES AT SR. NO. 1 TO 10 ARE THE PARTIES COVERED BY AY 2000- 01 2001-02 AND 2002-03 AND THE SAME HAVE BEEN DISC USSED ABOVE WHILE DECIDING THE APPEAL FOR AY 2000-01 AND AY 2001-02. FOR ALL THE PARTIES THE AO AND CIT(A) MADE THE ADDITION TO THE TOTAL IN COME BASED ON THEIR RESPECTIVE ORDERS FOR EARLIER YEARS. 33.1 THE LEARNED DR AT THE OUTSET REITERATED THE SUBMISSIONS MADE FOR THESE PARTIES IN EARLIER YEARS. FOR PARTY AT SR. NO . 6 THE LEARNED AR SUBMITTED THAT THE OUTSTANDING AMOUNT IS ONLY RS. 7 500. THE AMOUNT IS PAYABLE ON ACCOUNT OF PROFESSIONAL FEES FOR SALES T AX ASSESSMENT AND NOT IN THE NATURE OF LOANS AND ADVANCES AND NO DISALLOW ANCE WAS MADE BY THE DEPARTMENT FOR SUBSEQUENT YEARS. 33.2 CONSISTENT WITH THE VIEW TAKEN WHILE DISPOSING OF THE APPEALS FOR ASSESSMENT YEAR 2000-01 WE ALLOW ALL THE GROUNDS R AISED BY THE ASSESSEE AND DISMISS THE GROUNDS RAISED BY THE REVENUE. 64 34. GROUND NO. 2 OF THE ASSESSEES APPEAL ITA NO. 7349/M/2007 IS AGAINST THE DISALLOWANCE OF BAD DEBTS WRITTEN OFF C LAIMED AS A DEDUCTION. THE ASSESSEE HAS WRITTEN OFF THE AMOUNT RECEIVABLE FROM BHARAT KANAKIA TO THE EXTENT OF RS. 74 565 WHICH WAS FOUND IRRECOV ERABLE AND SAID AMOUNT REPRESENTS INTEREST AND PROCESSING CHARGES. THE CIT(A) HAS UPHELD THE DISALLOWANCE ONLY ON THE REASON THAT THE CONFIRMATION OF THE PARTY WAS NOT FILED BEFORE THE AO. 35.1 BEFORE US THE LEARNED AR SUBMITTED THE INCOME WAS OFFERED TO TAX IN AY 2000-01 WHICH COULD NOT BE RECOVERED AND HENC E WRITTEN OFF DURING THE YEAR. THE LEARNED AR HAS RELIED ON THE D ECISION OF SUPREME COURT IN THE CASE OF TRF LTD. (323 ITR 397)(SC) AND THE DECISION OF BOMBAY HIGH COURT IN THE CASE OF OMAN INTERNATIONAL BANK (313 ITR 128)(BOM). THE LEARNED DR SUPPORTED THE ORDER OF TH E CIT(A). 35.2 IN VIEW OF THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF TRF LIMITED (SUPRA) THE AMOUNT WRITTEN OFF HAS TO BE ALLOWED DURING THE YEAR. THUS GROUND NO. 2 IS HEREBY ALLOWED. 36. GROUND NO. 3 OF THE ASSESSEES APPEAL ITA NO. 7349/M/2007 IS AGAINST THE DISALLOWANCE OF DEDUCTION U/S 80M OF TH E ACT. THE ASSESSEE HAD CLAIMED DEDUCTION U/S 80M OF RS. 1 21 95 220. T HE SAME WAS ACCEPTED BY THE AO. THE CIT(A) AFTER ISSUING ENHAN CEMENT NOTICE ALLOCATED PROPORTIONATE INTEREST EXPENDITURE AND AD MINISTRATIVE EXPENSES TOWARDS EARNING OF DIVIDEND INCOME WHICH WORKED OUT TO RS. 1.74 CRORE AND THEREBY DISALLOWED THE ENTIRE CLAIM OF DEDUCTIO N U/S 80M OF THE ACT. 36.1 THE LEARNED AR FURNISHED FUND FLOW STATEMENT F OR THE YEAR UNDER CONSIDERATION. IT IS SUBMITTED THAT AFTER REDUCING REVALUATION RESERVE FROM RESERVES AND INVESTMENTS TOTAL SHARE INVESTMENT OF THE ASSESSEE IS RS. 65 25.50 CRORE AS AGAINST OWN FUNDS OF RS. 25 CRORE. T HUS WHEN OWN FUNDS ARE ALMOST EQUAL TO INVESTMENT MADE IN VIEW OF THE FOLLOWING DECISIONS IT IS TO BE PRESUMED THAT INVESTMENTS ARE OUT OF OW N FUNDS AND HENCE NO DISALLOWANCE OF INTEREST SHOULD BE MADE. FOR THIS P ROPOSITION THE LEARNED AR RELIED ON THE FOLLOWING DECISIONS: RELIANCE UTILITIES AND POWER LIMITED (313 ITR 340) (BOM) THE RELEVANT EXTRACT OF THE SAME IS AS UNDER: 10. IF THERE BE INTEREST FREE FUNDS AVAILABLE TO A N ASSESSEE SUFFICIENT TO MEET ITS INVESTMENTS AND AT THE SAME TIME THE ASSESSEE HAD RAISED A LOAN IT CAN BE PRESUMED THAT THE INVESTMENTS WERE FROM THE INTEREST FREE FUNDS AVAIL ABLE. IN OUR OPINION THE SUPREME COURT IN EAST INDIA PHARMACEUTI CAL WORKS LTD. (SUPRA) HAD THE OCCASION TO CONSIDER THE DECISION OF THE CALCUTTA HIGH COURT IN WOOLCOMBERS OF INDIA LTD. (SUPRA) WHERE A SIMILAR ISSUE HAD ARISEN.. BEFORE T HE SUPREME COURT IT WAS ARGUED THAT IT SHOULD HAVE BEEN PRESUM ED THAT IN ESSENCE AND TRUE CHARACTER THE TAXES WERE PAID OUT OF THE PROFITS OF THE RELEVANT YEAR AND NOT OUT OF THE OVE RDRAFT ACCOUNT FOR THE RUNNING OF THE BUSINESS AND IN THES E CIRCUMSTANCES THE APPELLANT WAS ENTITLED TO CLAIM T HE DEDUCTIONS. THE SUPREME COURT NOTED THAT THE ARGUME NT HAD CONSIDERABLE FORCE BUT CONSIDERING THE FACT THAT T HE CONTENTION HAD NOT BEEN ADVANCED EARLIER IT DID NOT REQUIRE TO BE ANSWERED. IT THEN NOTED THAT IN WOOLCOMBER'S CAS E (SUPRA) THE CALCUTTA HIGH COURT HAD COME TO THE CONCLUSION THAT THE PROFITS WERE SUFFICIENT TO MEET THE ADVANCE TAX LIA BILITY AND THE PROFITS WERE DEPOSITED IN THE OVER DRAFT ACCOUNT OF THE ASSESSEE AND IN SUCH A CASE IT SHOULD BE PRESUMED T HAT THE TAXES WERE PAID OUT OF THE PROFITS OF THE YEAR AND NOT OUT OF THE OVERDRAFT ACCOUNT FOR THE RUNNING OF THE BUSINESS. IT NOTED THAT TO RAISE THE PRESUMPTION THERE WAS SUFFICIENT MATE RIAL AND THE ASSESSEE HAD URGED THE CONTENTION BEFORE THE HIGH C OURT. THE PRINCIPLE THEREFORE WOULD BE THAT IF THERE ARE FUND S AVAILABLE BOTH INTEREST FREE AND OVER DRAFT AND/OR LOANS TAKE N THEN A PRESUMPTION WOULD ARISE THAT INVESTMENTS WOULD BE O UT OF THE INTEREST FREE FUND GENERATED OR AVAILABLE WITH THE COMPANY IF THE INTEREST FREE FUNDS WERE SUFFICIENT TO MEET THE INVESTMENTS. 66 IN THIS CASE THIS PRESUMPTION IS ESTABLISHED CONSID ERING THE FINDING OF FACT BOTH BY THE C.I.T. (APPEALS) AND I. T.A.T. ASHOK COMMERCIAL ENTERPRISES [ITA NO. 2985 OF 2009 (BOM)] 37. THE LEARNED AR ALSO SUBMITTED THAT WHAT IS TO B E DEDUCTED FROM THE GROSS DIVIDEND IS ONLY THE ACTUAL EXPENDITURE INCUR RED FOR THE PURPOSE OF EARNING OF THE DIVIDEND INCOME. FOR THIS PURPOSE T HE AR RELIED ON THE FOLLOWING DECISIONS. PUNJAB STATE INDUSTRIAL DEVELOPMENT CORPORATION LTD . VS DCIT (102 ITD 1)(CHD)(SB). THE RELEVANT EXTRACT OF THE S AME IS AS UNDER: THEREFORE THE FOLLOWING PROPOSITIONS WOULD EMERGE : (IV) THE ACTUAL EXPENDITURE INCURRED IS TO BE TAKEN INTO CONSIDERATION. THERE IS NO QUESTION OF TAKING EXPEN DITURE ON ESTIMATE OR PRESUMPTION BASIS WHILE COMPUTING DIVID END INCOME OR WHILE ALLOWING DEDUCTION U/S 80M; CIT VS CENTRAL BANK OF INDIA (264 ITR 522)(BOM HC) 37.1 THE LEARNED AR WITHOUT PREJUDICE SUBMITTED T HAT DISALLOWANCE OF INTEREST IF ANY SHALL BE RESTRICTED ONLY ON DIFFER ENCE BETWEEN OWN FUNDS AND INVESTMENT I.E. RS. 50 LAKHS. THE LEARNED DR AR GUED THAT CIT(A) HAS CORRECTLY MADE THE DISALLOWANCE AND HENCE SHOULD BE UPHELD. HE ALSO RELIED ON THE DECISION OF UNITED GENERAL TRUST LTD. (201 ITR 488). 37.2 THE ASSESSEE HAS FURNISHED A FUND FLOW STATEME NT TO DEMONSTRATE THAT NON INTEREST BEARING FUNDS OR OWN FUNDS ARE AV AILABLE FOR INVESTMENT IN SHARES. IT WAS ARGUED THAT AS NO INTEREST BEARIN G FUNDS HAVE BEEN DIVERTED FOR INVESTMENT IN SHARES EXPENDITURE CANN OT BE PROPORTIONATE INTEREST EXPENDITURE CANNOT BE REDUCED FROM THE CL AIM MADE FOR DEDUCTION U/S 80M. 67 37.3 THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF PUNJAB INDUSTRIAL DEVELOPMENT CORPORATION (SUPRA) HAS HELD THAT ONLY ACTUAL EXPENDITURE INCURRED IS TO BE TAKEN INTO CONSIDERATION WHILE C OMPUTING DEDUCTION U/S 80M. SIMILAR IS THE VIEW OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF CENTRAL BANK OF INDIA (SUPRA). ADMITTEDLY THE CIT(A PPEALS) HAS NOT MADE A DISALLOWANCE BASED ON ACTUAL EXPENDITURE. THE DIS ALLOWANCE WAS MADE BASED ON ALLOCATION OF PROPORTIONATE EXPENDITURE. T HIS IN OUR CONSIDERED VIEW CANNOT BE UPHELD AS IT IS AGAINST THE PROPOSI TION LAID DOWN BY THE JURISDICTIONAL HIGH COURT. 37.4 THUS GROUND NO. 3 OF THE ASSESSEES APPEAL IS ALLOWED. 37.5 IN THE RESULT THE REVENUES APPEAL IS DISMIS SED AND ASSESSEES APPEAL IS ALLOWED. ITA NO 7350/M/07 (ASSESSEES APPEAL A.Y. 2004-05) ITA NO 6838/M/07 (DEPARTMENTS APPEAL - A.Y. 2004- 05) 38. THESE ARE THE CROSS APPEALS FOR AY 2004-05. TH E AO MADE DISALLOWANCE OF INTEREST ON THE GROUND THAT ASSESSE E HAD UTILIZED INTREST- BEARING BORROWINGS TO MAKE INTEREST-FREE ADVANCES. THE DISALLOWANCE WAS ON THE SAME LINES AS IN AY 2000-01. THE PARTIES FOR THE AY 2004-05 ARE AS FOLLOWS: SR. NO. PARTY NAME 1. B B PAREKH 2. M J EXPORTS LTD. 3. SHANU DEEP PVT. LTD. 4. ACME STHAPATI LTD. 5. SHASTRIJI CONSTRUCTIONS 68 THE PARTIES AT SR. NO. 1 TO 5 (EXCEPT PARTY AT SR. NO. 3) ARE THE PARTIES COVERED BY AY 2000-01 2001-02 AND 2002-03 AND THE SAME HAVE BEEN DISCUSSED ABOVE WHILE DECIDING THE APPEALS FOR AY 2 000-01 AND AY 2001-02. FOR THE PARTIES AT SR. NO. 1 2 AND 5 THE AO AND CIT(A) MADE THE ADDITION TO THE TOTAL INCOME BASED THEIR RESPEC TIVE ORDERS FOR EARLIER YEARS. AS REGARDS PARTY NO. 4 ACME STHAPATI LTD. T HE OUTSTANDING AMOUNT AS ON 31 MARCH 2004 IS ONLY THE COMPENSATION OFFERE D TO TAX IN AY 2004- 05 WHICH WAS RECEIVED SUBSEQUENTLY IN AUGUST 2004. THE AO CHARGED INTEREST AT 12 % ON OUTSTANDING BALANCE ON DAILY BA SIS WHILE CIT(A) ENHANCED IT AT 18%. THE LEARNED AR REITERATED THE S UBMISSION IN RESPECT OF THIS PARTY IN EARLIER YEARS AND ALSO POINTED OUT THAT THE ADDITION UPHELD BY THE CIT(A) WAS WITHOUT APPRECIATING THE FACT THA T THE ONLY AMOUNT OUTSTANDING ON 31 MARCH WAS THE INTEREST CHARGED BY WAY OF COMPENSATION. AS REGARDS FOR THE PARTY AT SR. NO. 3 THE AO OBSER VED THAT THE AMOUNT OF RS. 1.33 CRORES WAS ADVANCED TO SHANUDEEP PVT. LTD. ON 9 MARCH 2004 AND WAS RECEIVED BACK IN THE MONTH OF MAY 2004. THE CIT(A) HELD AS FOLLOWS: AS REGARDS INTEREST PAID TO MS/ SHANUDEEP PVT. LTD . THE APPELLANT IS CLAIMING THAT IT HAS ISSUED THREE PAY ORDERS TO THAT PARTY WHICH WERE NEVER ENCASHED. THIS EXPLANATION OF THE APPELL ANT IS CONTRARY TO THE EXPLANATION FILED BY THE APPELLANT BEFORE TH E AO. BEFORE THE ASSESSING OFFICER THE APPELLANT HAD CLAIMED THAT T HE AMOUNT WAS ADVANCED ON 9 MARCH 2004 AND RECEIVED BACK IN THE M ONTH OF MAY 2004. HOWEVER THE FILED NECESSARY EVIDENCE TO SUPP ORT THIS CLAIM. SINCE THE APPELLANT HAS PREPARED THE PAY ORDERS TH E SAME WERE ALSO GIVEN TO M/S SHANUDEEP PVT. LTD. MERELY BECAUSE THE PAY ORDERS WERE NOT ENCASHED BY M/S SHANUDEEP PVT. LTD. IT CA NNOT BE SAID THAT NO INTEREST HAS ACCRUED TO THE APPELLANT. THE APPEL LANT HAS NOT CLAIMED THAT AMOUNT GIVEN WAS WITHOUT ANY CONDITION OF CHARGING OF INTEREST. IN VIEW OF THIS THE INTEREST INCOME IS R EQUIRED TO BE 69 COMPUTED AND TAXED IN THE HANDS OF THE APPELLANT AT THE RATE OF 12% ON ACCRUAL BASIS. ADDITION OF RS. 1 09 047/- MADE B Y THE AO IS UPHELD. 38.1 THE LEARNED DR AT THE OUTSET REITERATED THE SUBMISSIONS MADE FOR THESE PARTIES IN EARLIER YEARS. FOR THE PARTY AT SR . NO. 3 I.E. SHANU DEEP PVT. LTD. THE LEARNED AR SUBMITTED THAT SINCE PAY ORDERS WERE NOT ENCASHED THE PARTY HAS NOT RECEIVED ANY FUNDS AND HENCE THERE IS NO QUESTION OF CHARGING OF ANY INTEREST TO THEM. THE C OPY OF CORRESPONDENCE WITH BANK FOR CANCELLATION OF DRAFT AND BANK STATEM ENT SHOWING THE SAME WERE FILED AT THE TIME OF HEARING. 38.2 AS FAR AS ACCRUAL OF INCOME TO M/S B.B. PAREKH M.J. EXPORTS LTD. ACME STHAPATI LTD. AND SHASTRIJI CONSTRUCTIONS ARE CONCERNED IN VIEW OF THE DISCUSSION IN THE EARLIER YEAR WE UPHOLD THE C ONTENTIONS OF THE ASSESSEE. COMING TO THE CASE OF SHANU DEEP PVT. LTD . IT IS PECULIAR THAT THE ASSESSEE HAD ISSUED THREE PAY ORDERS BUT THE SA ME WERE NEVER ENCASHED. BUT AT THE SAME TIME WE FIND THAT THE RE VENUE HAS NOT MADE ANY ENQUIRY TO ARRIVE AT A CONCLUSION THAT THE ASSE SSEE HAS IN FACT EARNED INCOME FROM M/S SHANU DEEP PVT. LTD. THE CLAIM OF T HE ASSESSEE CANNOT BE DISMISSED WITHOUT COLLECTING EVIDENCE. THUS FOR THE REASON THAT NO INVESTIGATION IS DONE OR EVIDENCE COLLECTED THE AD DITION MADE ON ACCOUNT OF ACCRUAL OF INCOME FROM SHANU DEEP PVT. LTD. IS H EREBY DELETED. 39. GROUND NO. 2 IN ASSESSEES APPEAL ITA NO. 7350 /M/07 RELATES TO DISALLOWANCE U/S 14A OF THE ACT. THE ASSESSEE HAS R ECEIVED DIVIDEND OF RS. 2.65 CRORE DURING THE YEAR. THE CIT(A) HAS MADE AN ADDITION OF RS. 75 86 405/- AFTER SENDING ENHANCEMENT NOTICE. THE L EARNED AR AGREED THAT THE ISSUE MAY BE SET ASIDE TO THE FILE OF AO W ITH A SPECIFIC DIRECTION TO KEEP IN VIEW THE BOMBAY HIGH COURT DECISION IN T HE CASE OF GODREJ 70 AND BOYCE MFG CO LTD 328 ITR 81. THE LEARNED DR ALS O AGREED TO THE SAME. 39.1 THE ISSUE IS SET ASIDE TO THE FILE OF THE AO F OR FRESH ADJUDICATION IN THE LINE OF THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ BOYCE MANUFACTURING CO. LTD. 234 ITA (BOM) 1 . 39.2 IN THE RESULT THE APPEAL OF THE ASSESSEE IS A LLOWED IN PART AND THE APPEAL OF THE REVENUE IS DISMISSED. ITA NO 4956/M/08 (ASSESSEES APPEAL A.Y. 2005-06) 40. THE APPEAL IS FILED BY THE ASSESSEE FOR THE AY 2005-06. THE AO MADE DISALLOWANCE OF INTEREST FOR THE REASON THAT T HE ASSESSEE HAD MADE INTEREST-FREE ADVANCES OUT OF INTEREST-BEARING BORR OWINGS. THE DISALLOWANCE IS ON THE SAME LINES AS IN AY 2000-01. THE PARTIES FOR THE AY 2005-06 ARE AS FOLLOWS: SR. NO. PARTY NAME 1. B B PAREKH 2. M J EXPORTS LTD. 3. SHANU DEEP PVT. LTD. 4. ACME STHAPATI LTD. 5. SHASTRIJI CONSTRUCTIONS THE PARTIES AT SR. NO. 1 TO 5 ARE THE PARTIES COVER ED BY AY 2000-01 2001- 02 2002-03 AND AY 2004-05 AND THE SAME HAVE BEEN D ISCUSSED ABOVE WHILE DECIDING FOR AY 2000-01 TO AY 2004-05. FURTHE R AS REGARDS PARTY NO. 4 ACME STHAPATI LTD. THE ONLY OUTSTANDING AMOU NT IS THE COMPENSATION OFFERED TO TAX IN AY 2004-05 WHICH WAS RECEIVED DURING THE YEAR IN AUGUST 2004. THE AO CHARGED INTEREST AT 12 % ON OUTSTANDING 71 BALANCE ON DAILY BASIS TILL DATE OF RECEIPT WHICH I S CONFIRMED BY CIT(A). THE LEARNED AR REITERATED THE SUBMISSION IN RESPECT OF THIS PARTY IN EARLIER YEARS AND ALSO POINTED OUT THAT THE ADDITION UPHELD BY THE CIT(A) WAS WITHOUT APPRECIATING THE FACT THAT THE ONLY AMOUNT OUTSTANDING ON 1 APRIL WAS THE INTEREST CHARGED BY WAY OF COMPENSATION. 40.1 CONSISTENT WITH THE VIEW TAKEN BY US IN THE EA RLIER ASSESSMENT YEARS WE DELETE THE ADDITION IN QUESTION AND ALLOW THIS GROUND OF THE ASSESSEE. 41. GROUND NO. 2 IN ASSESSEES APPEAL ITA NO. 4956 /M/08 RELATES TO DISALLOWANCE U/S 14A OF THE ACT. THE ASSESSEE HAS R ECEIVED DIVIDEND OF RS. 2.30 CRORE DURING THE YEAR. THE AO MADE DISALLO WANCE OF RS. 11 80 013/-. THE CIT(A) APPLYING RULE 8D HAS MADE A DISALLOWANCE OF RS. 19 70 950/-. THE LEARNED AR AGREED THAT THE ISS UE MAY BE SET ASIDE TO THE FILE OF AO THAT WITH A SPECIFIC DIRECTION IN VI EW OF THE BOMBAY HIGH COURT DECISION IN THE CASE OF GODREJ AND BOYCE MFG CO LTD 328 ITR 81. THE LEARNED DR ALSO AGREED TO THE SAME. 41.1 WE SET ASIDE THIS ISSUE TO THE FILE OF THE AO FOR FRESH ADJUDICATION IN THE LINE OF THE DECISION OF THE HONBLE BOMBAY H IGH COURT IN THE CASE OF GODREJ BOYCE MANUFACTURING CO. LTD. (SUPRA) ITA NO 6330/M/08 (ASSESSEES APPEAL A.Y. 2006-07) 42. THE APPEAL IS FILED BY THE ASSESSEE FOR THE AY 2006-07. THE ONLY ISSUE IN APPEAL RELATES TO DISALLOWANCE U/S 14A OF THE ACT. THE ASSESSEE HAS RECEIVED DIVIDEND OF RS. 3.69 CRORE DURING THE YEAR. THE AO MADE DISALLOWANCE OF RS. 13 92 343/- APPLYING RULE 8D. T HE CIT(A) HAS UPHELD THE DISALLOWANCE AND GIVEN A DIRECTION TO W ORK OUT THE DISALLOWANCE AS PER RULE 8D. THE LEARNED AR AGREED THAT THE ISSUE MAY BE SET ASIDE TO THE FILE OF AO THAT WITH A SPECIFIC DIRECTION TO KEEP IN VIEW 72 THE BOMBAY HIGH COURT DECISION IN THE CASE OF GODRE J AND BOYCE MFG CO LTD 328 ITR 81. THE LEARNED DR ALSO AGREED TO TH E SAME. 42.1 AFTER HEARING THE PARTIES WE SET ASIDE THIS I SSUE TO THE FILE OF THE AO FOR FRESH ADJUDICATION IN THE LINE OF THE DECISI ON OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ BOYCE MANUF ACTURING CO. LTD. (SUPRA) 42.2 IN THE RESULT THE APPEAL IS ALLOWED FOR STATI STICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST MARCH 2011. SD/- SD/- (D.K. AGARWAL) (J. SUDHAKA R REDDY) JUDICIAL MEMBER. ACCOUNTAN T MEMBER MUMBAI DATED: 31 ST MARCH 2011. COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR F-BENCH (TRUE COPY) BY ORDER ASSTT. REGISTRA R ITAT MUMBAI. WAKODE.