M/S. CHURU TRADING COMPANY PVT. LTD, MUMBAI v. THE DCIT CIR 6(2), MUMBAI

ITA 4682/MUM/2007 | 2003-2004
Pronouncement Date: 24-02-2012 | Result: Partly Allowed

Appeal Details

RSA Number 468219914 RSA 2007
Assessee PAN AAACC4853G
Bench Mumbai
Appeal Number ITA 4682/MUM/2007
Duration Of Justice 4 year(s) 7 month(s) 29 day(s)
Appellant M/S. CHURU TRADING COMPANY PVT. LTD, MUMBAI
Respondent THE DCIT CIR 6(2), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 24-02-2012
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted F
Tribunal Order Date 24-02-2012
Date Of Final Hearing 07-11-2013
Next Hearing Date 07-11-2013
Assessment Year 2003-2004
Appeal Filed On 25-06-2007
Judgment Text
ITA NOS 933 1494 4682 AND 1912 CHURU TRADING CO. P LTD MUMBAI PAGE 1 OF 20 IN THE INCOME TAX APPELLATE TRIBUNAL 'G' BENCH MUMBAI BEFORE SHRI B. RAMAKOTAIAH ACCOUNTANT MEMBER AND SHRI V. DURGA RAO JUDICIAL MEMBER ITA NO. 933/MUM/2006 & ITA NO.1912/MUM/2008 (ASSESSMENT YEARS: 1999-2000 & 2004-05) CHURU TRADING CO. (P) LTD INCOME TAX OFFICER 135 CONTINENTAL BUILDING WARD 6(2)-1 DR.A.B. ROAD WORLI AAYAKAR BHAVAN MUMBAI 400 018 VS MUMBAI 400020 PAN AAACC 4853 G APPELLANT RESPONDENT ITA NO. 1494/MUM/2005 & ITA NO.4682/MUM/2007 (ASSESSMENT YEARS: 2001-02 & 2003-04) CHURU TRADING CO. (P) LTD DY.CIT CIR 6(2) 135 CONTINENTAL BUILDING AAYAKAR BHAVAN DR.A.B. ROAD WORLI MUMBAI 400020 MUMBAI 400 018 VS PAN AAACC 4853 G APPELLANT RESPONDENT APPELLANT BY: SHRI FIROZE B ANDHYARUJINA & SHRI B.S. SHARMA RESPONDENT BY: SHRI A.K. NAYAK DR DATE OF HEARING: 31/01/2012 DATE OF PRONOUNCEMENT: 24/02/2012 O R D E R PER BENCH: THESE ARE APPEALS BY ASSESSEE AGAINST THE ORDERS OF THE CIT (A) IN RESPECT OF VARIOUS ASSESSMENT YEARS. WE WERE INF ORMED THAT THERE ARE NO CROSS APPEALS BY REVENUE AND ACCORDINGLY WE PROCEED TO DECIDE THESE APPEALS BY THIS COMMON ORDER FOR THE S AKE OF CONVENIENCE. WE HAVE HEARD THE LEARNED COUNSEL SHRI FIROZE B ANDHYARUJINA AND THE LEARNED DEPARTMENTAL REPRESENT ATIVE SHRI A.K. NAYAK. ITA NOS 933 1494 4682 AND 1912 CHURU TRADING CO. P LTD MUMBAI PAGE 2 OF 20 2. WE SHALL FIRST TAKE UP THE APPEAL BY ASSESSEE IN I TA NO.933/MUM/2006. ITA NO.933/MUM/2006 AY 1999-2000. IN THIS APPEAL ASSESSEE HAS RAISED THREE GROUNDS T HE FIRST BEING THE REOPENING OF ASSESSMENT UNDER SECTION 147 AND SECOND AND THIRD ON VARIOUS DISALLOWANCES. 3. GROUND NO.1 REOPENING OF ASSESSMENT UNDER SECTION 147: ON THIS ISSUE ASSESSEE CONTENDED IN THE GROUND THAT THE ASSESSING OFFICER HAS ERRED IN REOPENING THE ASSESSMENT MAINL Y TO DISALLOW UNDER SECTION 14A OF THE INCOME TAX ACT AND TOOK SH ELTER UNDER SECTION 36(1)(III) TO AVOID PROVISIONS OF SECTION 1 4A WHICH ARE NOT APPLICABLE FOR REOPENING ASSESSMENTS PRIOR TO 1.4. 2001. IT WAS NOTED THAT THE RETURN OF INCOME WAS FILED ON 29.12. 2000 WHICH WAS PROCESSED UNDER SECTION 143(1) ON 3.11.1998. THERE WAS NO SCRUTINY UNDER SECTION 143(3) AND THE PROCESSING HA S BECOME FINAL. CONSEQUENT TO THE ASSESSING OFFICERS EXAMINATION O F RETURN FOR THE AY 2001-02 THE ASSESSMENT IN THIS YEAR WAS REOPENE D. THE REASONS RECORDED BY THE ASSESSING OFFICER WAS THAT ASSESSEE COMPANY DIVERTED ITS INTEREST BEARING FUNDS TO ITS GROUP CO NCERNS AND OTHER SEVERAL INDIVIDUALS ON WHICH NO INTEREST WAS CLAIME D NOR INCOME DERIVED WHEREAS INTEREST WAS PAID ON BORROWED FUND S. AO HAS ALSO STATED THE TOTAL FIGURE OF INVESTMENT AT ` .1284.2 CRORES AND THE DISALLOWANCE TO BE WORKED OUT AT 18% AT ` .231.15LAKHS. IT WAS ALSO RECORDED THAT SOME OF THE ITEMS PERTAINS TO SHARE A PPLICATION MONEY AS WELL AS INTEREST ON ADVANCES FOR THE PURPOSES OF SHARES WHICH REQUIRE EXAMINATION. AFTER THE REASSESSMENT ASSESS EE TOOK UP THE GROUND BEFORE THE CIT (A) WHICH THE CIT (A) CONSIDE RED AND REJECTED AS STATED IN PARA 3.3 AS UNDER: 3.3 THEREFORE AFTER GOING THROUGH THE REASONS RECO RDED IT MAY BE NOTED THAT AS PER BALANCE SHEET VARIOUS L OANS AND ADVANCES OCCURRING IN THE BALANCE SHEET OF THE APPELLANT COMPANY IS 12.84 CRORES. THE DETAILS OF A BOVE ARE ON THE RECORD WHICH ALSO INCLUDED ADVANCE SHAR E ITA NOS 933 1494 4682 AND 1912 CHURU TRADING CO. P LTD MUMBAI PAGE 3 OF 20 APPLICATION OF ` .6.57 CRORES ADVANCED DURING THE YEAR. THE ASSESSING OFFICER HAS ALSO PASSED THE ORDER FOR AY 2001-02 UNDER 143(3) WHEREIN THE ABOVE ADVANCE OF MONEY AS SHARE APPLICATION HAS BEEN CONSIDERED BY H IM AS AN AMOUNT DIVERTED FOR NON-BUSINESS PURPOSES AND INTEREST IN RESPECT OF ABOVE ADVANCE HAS BEEN DISALLOWED UNDER SECTION 36(1)(III) OF THE I.T. ACT . THUS IT CAN BE CLEARLY SEEN THAT IN VIEW OF SPECIFIC FINDIN GS GIVEN BY THE ASSESSING OFFICER FOR AY 2001-02 WHEREIN TH E AMOUNT ADVANCED AS SHARE APPLICATION TO ASC ENTERPRISES LTD HAS BEEN CONSIDERED AS DIVERSION OF INTEREST BEARING FUNDS WHICH REQUIRES DISALLOWANCE OUT OF INTEREST ADMISSIBLE UNDER SECTION 36(1)(III) TH E ACTION OF THE ASSESSING OFFICER IN TAKING RECOURSE TO SECT ION 147 FOR AY 1999-2000 CANNOT BE DISTURBED AS HE IS OF TH E OPINION BASED ON THE ENQUIRY MADE DURING THE AY 200 1- 02 THAT EXCESS ALLOWANCE OF INTEREST HAS BEEN CLAIM ED AND GIVEN IN SECTION 36(1)(III) AND AS SUCH THERE I S ESCAPEMENT OF INCOME WITHIN THE MEANING OF SECTION 147 OF THE I.T. ACT. SO FAR AS APPELLANTS CONTENTION T HAT THIS IS CHANGE OF OPINION IT MAY BE NOTED THAT WHILE PROCESSING THE RETURN UNDER SECTION 143(1) NO OPINI ON HAS BEEN FORMED BY THE ASSESSING OFFICER AND AS SUC H IT CANNOT BE SAID THAT THERE IS CHANGE OF OPINION IN REOPENING THE ASSESSMENT. ALTHOUGH THE ASSESSING OFFICER HAS MENTIONED THAT FIGURE OF INVESTMENT IS ` .12.84 CRORES IN FACT THE ABOVE IS LOANS AND ADVAN CE AND INVESTMENT IS 3.13 CRORES ONLY. IN VIEW OF THE ABOVE FACTUAL POSITION AND FINDINGS GIVEN BY THE ASSESSIN G OFFICER IN AY 2001-02 I AM OF THE OPINION THAT APPELLANTS CASE FOR AY 1999-2000 HAS BEEN VALIDLY REOPENED UNDER SECTION 147 BY ISSUE OF NOTICE UNDER SECTION 148 AND IT CANNOT BE SAID THAT SAME HAS BEE N DONE ON THE GROUND OF DISALLOWANCE OF SECTION 14A. IN FACT IT MAY BE NOTED THAT ASSESSING OFFICER HAS AL SO DISALLOWED AN AMOUNT OF ` .42 44 729/- AS DISALLOWANCE UNDER SECTION 14A IN RESPECT OF WHICH THE APPELLANT IS ALSO IN APPEAL AND ACCORDINGLY I AM OF THE VIEW TH AT THERE IS NO MATERIAL IN SUPPORT OF THE APPELLANT TH AT REOPENING HAS BEEN UNDERTAKEN TO DISALLOW EXPENDITU RE UNDER SECTION 14A IN THE GARB OF ALLEGED DISALLOWAN CE STATED ON ACCOUNT OF DIVERSION OF INTEREST BEARING FUND. THIS GROUND OF APPEAL IS DISMISSED. 3.1 IT WAS THE LEARNED COUNSELS SUBMISSION THAT TH E ASSESSING OFFICER HAS TAKEN THE AMOUNT OF INVESTMENTS WRONGLY AND REFERRED TO THE CORRECT AMOUNT. AS PER THE BALANCE SHEET TH ERE WAS ONLY AN ITA NOS 933 1494 4682 AND 1912 CHURU TRADING CO. P LTD MUMBAI PAGE 4 OF 20 INVESTMENT OF ` .313.85 LAKHS WHEREAS THE LOANS AND ADVANCES WERE TO THE ABOVE AMOUNT. IT WAS FURTHER SUBMITTED THAT THE ASSESSING OFFICER CANNOT REOPEN THE ASSESSMENT IN THE CASE OF DISALLOWANCES UNDER SECTION 14A AS IT PROHIBITS THE ASSESSING OFF ICER IN REOPENING YEARS PRIOR TO 01-042001 AND THIS ACTION OF THE ASS ESSING OFFICER IS CLEARLY IN VIOLATION OF PROVISIONS OF SECTION 14A. IT WAS FURTHER SUBMITTED THAT RELYING ON THE WRONG FACTS INDICATE THAT THERE IS NO APPLICATION OF MIND AND THEREFORE REOPENING IS BAD IN LAW. THE LEARNED COUNSEL RELIED ON VARIOUS DECISIONS INCLUDI NG THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF PRA SHANT JOSHI VS. ITO (320 ITR 154) APPLYING THE ANALOGY TO THE FACT S OF THE CASE. 3.2 IT WAS THE SUBMISSION OF THE LEARNED DEPARTMENT AL REPRESENTATIVE THAT THE ASSESSMENT WAS COMPLETED UN DER SECTION 143 (1) AND THERE IS NO PRIMA FACIE BELIEF TO FORM THAT NO DISALLOWANCE UNDER SECTION 36(1)(III) WAS REQUIRED . MOREOVER AS THE FACTS HAVE CAME TO THE NOTICE OF THE ASSESSING OFFI CER IN AY 2001- 02 THE APPEAL OF WHICH WAS ALSO PENDING THE ASSES SING OFFICER HAS REASON TO BELIEVE THAT ASSESSEE CLAIMED EXCESS DE DUCTION OF INTEREST WHEN BORROWED FUNDS WERE DIVERTED FOR NON- BUSINESS PURPOSES. INCIDENTALLY THE DISALLOWANCE MADE UNDER SECTION 14A BY THE ASSESSING OFFICER WHILE COMPLETING THE ASSESSME NT WAS DELETED BY THE CIT (A) AND IT SEEMS THE REVENUE HAS ACCEPT ED. THEREFORE THE ISSUE IS ONLY WITH REFERENCE TO THE DISALLOWANC E UNDER SECTION 36(1)(III) AND ACCORDINGLY THE CASE LAW RELIED BY T HE LEARNED COUNSEL DOES NOT APPLY TO THE FACTS OF THE CASE. HE RELIED ON THE SUPREME COURT JUDGMENT IN THE CASE OF ACIT VS RAJESH JHAVER I STOCK BROKERS (P) LTD. (SC) 291 ITR 500 FOR REOPENING OF THE ASSESSMENT WHICH WERE ACCEPTED UNDER SECTION 143(1). 3.3 WE HAVE CONSIDERED THE ISSUE. AS RIGHTLY CONSID ERED BY THE CIT (A) THE ISSUE FOR REOPENING WAS ON THE BASIS O F SPECIFIC FINDINGS GIVEN BY THE ASSESSING OFFICER IN AY 2001-02 WHEREI N THE AMOUNT OF ADVANCES AS SHARE APPLICATION MONEY WERE CONSIDERED AS DIVERSION ITA NOS 933 1494 4682 AND 1912 CHURU TRADING CO. P LTD MUMBAI PAGE 5 OF 20 OF THE INTEREST BEARING FUNDS. SINCE THE ACTION OF THE ASSESSING OFFICER IS CONSEQUENT TO THE FINDING IN AY 2001-02 WE CAN ASSUME THAT THE ASSESSING OFFICER HAS PRIMA FACIE BELIEF T HAT THE FUNDS HAVE BEEN DIVERTED AND THE EXCESS INTEREST CLAIM WAS MAD E. EVEN THOUGH WHILE NOTING THE FIGURES HE HAS TAKEN THE AMOUNT O F LOANS AND ADVANCES IN OUR VIEW THAT DOES NOT AFFECT PRIMA FA CIE BELIEF THAT EXCESS CLAIM WAS MADE. BE THAT AS IT MAY THERE IS NO CHANGE OF OPINION AS THE PROVISIONS UNDER SECTION 147 DO NOT PREVENT THE ASSESSING OFFICER IN REOPENING THE ASSESSMENT UNDER SECTION 147 AS IT WAS ONLY PROCESSING THAT WAS DONE UNDER SECTION 143(1). THIS PRINCIPLE WAS ALREADY UPHELD BY THE HON'BLE SUPREME COURT IN THE CASE OF ACIT VS RAJESH JHAVERI STOCK BROKERS (P) LT D. (SC) 291 ITR 500. THEREFORE SINCE NO SCRUTINY ASSESSMENT WAS DO NE UNDER SECTION 143(3) EARLIER IN THIS CASE REOPENING UNDE R SECTION 147 IS VALID. ASSESSEE HAS RAISED THE CONTENTION MAINLY TH AT THE ASSESSING OFFICER TOOK RECOURSE TO SECTION 36(1)(III) SO AS T O DISALLOW THE AMOUNTS UNDER SECTION 14A WHICH BARS REOPENING OF T HE ASSESSMENT PRIOR TO 1.4.2001. THIS GROUND PER SE SH OULD FAIL AS THE MAIN DISALLOWANCE WAS MADE BY THE ASSESSING OFFICER UNDER SECTION 36(1)(III) ON DIVERSION OF BORROWED FUNDS AND CLAIM ING INTEREST ON THEM. INCIDENTALLY DISALLOWANCE UNDER SECTION 14A WAS NOT UPHELD BY THE CIT (A) AND THERE IS NO CROSS APPEAL BY THE REVENUE ON THAT ISSUE. MOREOVER THE HON'BLE SUPREME COURT IN THE C ASE OF HONDA SEIL POWER PRODUCTS LIMITED VS. DCIT IN SLP 19085/2 011 HAS UPHELD THE HON'BLE DELHI HIGH COURT JUDGMENT IN THE SAME CASE (197 TM 415) WHEREIN IT WAS HELD THAT THE PROVISIO NS OF SECTION 14A BARS REASSESSMENT BUT NOT ORIGINAL ASSESSMENT. IT W AS FURTHER HELD THAT THE OBJECT AND PURPOSE OF PROVISIONS IS TO ENS URE THAT THE RETROSPECTIVE AMENDMENT IS NOT MADE AS A TOOL TO RE OPEN THE PAST CASES WHICH HAVE ATTAINED FINALITY. THIS PRINCIPLE ESTABLISHED BY THE HON'BLE DELHI HIGH COURT WAS UPHELD BY THE HON'BLE SUPREME COURT WHICH DISMISSED THE SLP. IT IS FURTHER NOTICE D THAT IN THE ITA NOS 933 1494 4682 AND 1912 CHURU TRADING CO. P LTD MUMBAI PAGE 6 OF 20 ABOVE REFERRED CASE THE ASSESSING OFFICER HAD MADE AN ASSESSMENT FOR AY 2000-01 UNDER SECTION 143(3) AND AFTER EXPIR Y OF 4 YEARS REOPENED THE ASSESSMENT TO MAKE DISALLOWANCES UNDER SECTION 14A. UNDER THOSE FACTS THE HON'BLE HIGH COURT AS WELL A S SUPREME COURT UPHELD THE REOPENING. IN THE PRESENT CASE IT IS ONLY A PROCESSING UNDER SECTION 143(1) WHICH WAS DONE EARL IER AND THE REOPENING WAS MADE WITHIN 4 YEARS FROM THE END OF T HE ASSESSMENT YEAR. THEREFORE THE ASSESSING OFFICERS CASE IS ON A STRONGER FOOTING. CONSIDERING THE ABOVE PRINCIPLES LAID DOWN IN VARIO US CASES WE UPHOLD THE ACTION OF THE ASSESSING OFFICER IN REOPE NING THE ASSESSMENT UNDER SECTION 147. THE GROUND IS ACCORDI NGLY DISMISSED. 4. GROUND NO.2. THIS GROUND PERTAINS TO THE DISALLOWAN CE OF ` .72 000/- BEING INTEREST FREE LOAN GIVEN TO SHRI RI SHI KUMAR CHAKRAPANI WHICH WAS GIVEN OUT OF INTEREST BEARING FUNDS. THE ASSESSING OFFICER NOTICED THAT ASSESSEE HAS GIVEN F UNDS TO ONE MR.RISHI KUMAR CHAKRAPANI OUT OF THE BORROWED FUNDS AND DISALLOWED AN AMOUNT OF ` .72 000/- UNDER SECTION 36(1)(III). THE CIT (A) FOLLOWING HIS ORDER FOR THE AY 2001-02 WHEREIN HE EXAMINED AND UPHELD THE CONTENTION THAT THE AMOUNT ADVANCED IS N OT ON ACCOUNT OF ANY BUSINESS CONSIDERATION HAS UPHELD THE DISALL OWANCE. IT WAS SUBMITTED BY THE LEARNED COUNSEL THAT THIS ISSUE WA S REMANDED TO THE ASSESSING OFFICER BY THE ITAT IN 2000-01 WHEREA S THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE MATT ER WAS RESTORED TO THE ASSESSING OFFICER IN THAT YEAR ON T HE REASON THAT THERE IS NO FINDING WHETHER THERE WAS ANY DIVERSION OF FUNDS. HE REFERRED TO THE FINDINGS OF THE ASSESSING OFFICER A ND THE CIT (A) THAT THE AMOUNTS WERE ADVANCED FOR NON-BUSINESS PURPOSES AND REFERRED THE ORDERS IN THIS ASSESSMENT YEAR AS WELL AS IN AY 2001-02. 4.1 WE HAVE CONSIDERED THE ISSUE. THERE WAS A FINDI NG ON RECORD IN THESE YEARS THAT THE AMOUNTS ADVANCED ARE FOR TH E PURPOSE OF NON BUSINESS CONSIDERATION THEREFORE PRIMA FACIE THE AMOUNT ITA NOS 933 1494 4682 AND 1912 CHURU TRADING CO. P LTD MUMBAI PAGE 7 OF 20 REQUIRES TO BE DISALLOWED. THIS YEAR BEING THE FIRS T YEAR OF DISALLOWANCE ON THIS ISSUE THERE IS A FINDING BY T HE ASSESSING OFFICER THAT THE LOAN GIVEN TO SHRI RISHI KUMAR CHA KRAPANI WAS NOT A BUSINESS LOAN OR CREDIT LOAN HAVING NEXUS WITH TH E BUSINESS OF ASSESSEE COMPANY BUT ARE PURELY IN THE FORM OF OBL IGATIONS TO THE INDIVIDUAL. IT WAS FURTHER GIVEN AS A FINDING IN PA RA 6.3 THAT ASSESSEE COMPANY HAS NOT BEEN ABLE TO GIVE PROOF OF ANY BUSINESS DEALINGS IN THE PAST PRESENT OR FUTURE WITH SHRI C HAKRAPANI. THEREFORE THE ASSESSING OFFICER CONSIDERED THAT TH E ADVANCES GIVEN TO SHRI RISHI KUMAR CHAKRAPANI HAVE TO BE TREATED A S LOAN/ADVANCE GIVEN FOR NON BUSINESS PURPOSE. BEFORE US NO EVIDENCE WAS FILED TO COUNTER THE FINDINGS OF THE A SSESSING OFFICER. THE LEARNED CIT (A) ALSO UPHELD THE ABOVE FINDINGS. IN VIEW OF THIS WE ARE OF THE OPINION THAT THE DISALLOWANCE OF INTE REST OF ` .72 000/- REQUIRES TO BE UPHELD. GROUND NO.2 IS ACCORDINGLY R EJECTED. 5. IN GROUND NO.3 IT WAS CONTENDED THAT CIT(A) ERRED I N UPHOLDING THE DISALLOWANCE OF INTEREST OF ` 43 70 388/- RELATABLE TO SHARE APPLICATION MONEY UNDER SECTION 36(1)(III) A LTHOUGH THIS WOULD BE COVERED UNDER SECTION 14A OF THE INCOME TA X ACT BEING THE INTEREST ON INVESTMENT IN SHARES. THIS ISSUE WAS DI SCUSSED BY THE ASSESSING OFFICER VIDE PARA 7 OF THE ASSESSMENT ORD ER. HE HAS EXAMINED THE PURCHASE OF SHARES/ CONTROLLING INTERE ST IN M/S ASC ENTERPRISES WHILE ADVANCING FUNDS AND NOTED THAT AS SESSEE MADE INVESTMENT IN SHARE APPLICATION MONEY TO M/S ASC EN TERPRISES OUT OF LOANS TAKEN ON WHICH INTEREST WAS PAID. THE ASSE SSING OFFICERS OPINION WAS THAT GIVING ADVANCES OR MAKING THE INVE STMENTS IN EQUITY SHARES OF OTHER CONCERNS FOR HAVING CONTROLL ING INTEREST OR OTHERWISE IS NOT BUSINESS ACTIVITY OF ASSESSEE COMP ANY. THEREFORE AMOUNT OF INTEREST PAID ON DIVERSION OF INTEREST BE ARING FUNDS FOR NON BUSINESS PURPOSE WAS NOT TO BE ALLOWED. ACCORDI NGLY HE ARRIVED AT THE DISALLOWANCES CALCULATED AS PER TABL E IN PARA 7.1 OF THE ORDER AT ` 43 70 388/-. ITA NOS 933 1494 4682 AND 1912 CHURU TRADING CO. P LTD MUMBAI PAGE 8 OF 20 5.1 IT WAS THE SUBMISSION OF THE LEARNED COUNSEL T HAT ASSESSEE WAS IN THE BUSINESS OF MAKING INVESTMENTS IN EQUITIES W ITH INTENTION AND PURPOSE OF GAINING CAPITAL APPRECIATION AND ALS O ASSESSEE TRADES IN STOCK OF EQUITY SHARES TO EARN PROFIT TH OUGH BY VIRTUE OF HOLDING OF SUCH EQUITY SHARES IT MAY INCIDENTALLY M AY EARN DIVIDEND. THE LEARNED COUNSEL EXPLAINED WHAT IT CON STITUTE BUSINESS UNDER SECTION 2(13) OF THE INCOME TAX AC T AND SUBMITTED THAT ASSESSEE IS AN INVESTOR AND A DEALER IN SHARES CAN ALSO ADVANCE INTEREST BEARING LOANS THE INCOMES OF WHICH WERE S HOWN IN THE PROFIT & LOSS A/C. IT WAS FURTHER SUBMITTED THAT AS ASSESSEE BUSINESS MAINLY CONSISTS OF ADVANCING LOANS AND ADV ANCES TRADE AND INVESTMENT IN EQUITY SHARES THE RBI HAS REGIST ERED THE COMPANY AS NON-BANKING FINANCE COMPANY W.E.F. 8.3.2 001. IT WAS SUBMITTED THAT THE INVESTMENTS ARE TO THE TUNE OF ` .3.12 CRORES WHICH IS ABOUT 15% OF THE ASSETS OF ASSESSEE WHEREA S LOANS AND ADVANCES ARE TO THE TUNE OF 60% OF ASSESSEES APPLI CATION OF FUNDS AND INVESTMENTS IN EQUITY SHARES ARE ALSO TO THE EX TENT OF 47%. IT WAS SUBMITTED THAT BY WAY OF ANNEXURE-I TO THE SUBM ISSIONS THAT BORROWED FUNDS ARE UTILIZED IN THE BUSINESS AND THA T ASSESSEE HAS NOT DIVERTED THE FUNDS AND SO THE ENTIRE AMOUNT IS ALLOWABLE AS DEDUCTION. THE LEARNED COUNSEL RELIED ON THE PRINCI PLES LAID DOWN BY THE FOLLOWING CASES TO SUBMIT THAT THE AMOUNT IS ALLOWABLE: I) CORE HEALTH CARE LTD. [2008] 298 ITR 194 (SC). II) PHIL CORPORATION LTD 244 CTR 226 (BOM.) III) SA BUILDERS LTD 288 ITR 1 (SC) IT WAS FURTHER SUBMITTED THAT THE ENTIRE BORROWINGS ON INVESTMENTS ARE FOR THE PURPOSE OF BUSINESS ONLY AND ACCORDINGL Y THE AMOUNTS ARE TO BE ALLOWED. FURTHER IT WAS SUBMITTED THAT IF THE INVESTMENT IS MADE THE DISALLOWANCE OF INTEREST WOULD COME UNDER SECTION 14A ON WHICH THE CIT (A) DELETED THE AMOUNT AND REVENUE HAS NOT COME ITA NOS 933 1494 4682 AND 1912 CHURU TRADING CO. P LTD MUMBAI PAGE 9 OF 20 IN APPEAL. THEREFORE THIS AMOUNT SHOULD BE ALLOWED AS FOR INVESTMENT IN SHARES. 5.2 THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORT ED THE ORDER OF THE ASSESSING OFFICER AND THE CIT (A) ON FACTS. 5.3 WE HAVE CONSIDERED THE ISSUE AND EXAMINED THE F ACTS ON RECORD. IN THE YEAR UNDER CONSIDERATION ASSESSEE HA S BOTH INVESTMENTS AND SHARE TRADING AND AS SEEN FROM THE BALANCE SHEET AND PROFIT & LOSS A/C THE INVESTMENT AT THE END OF THE YEAR AS PER THE SCHEDULE-VI WAS TO THE TUNE OF ` .3.13 CRORES WHEREAS THE STOCK IN TRADE WAS TO THE TUNE OF ` .10.05 CRORES. ASSESSEE HAD PROFIT ON SALE OF EQUITY SHARES AT ` .2.37 CRORES AND ALSO PROFIT ON TRADING SHARES AT ` .1.64 CRORES VIDE SCHEDULE-12 OF THE ACCOUNTS. IT H AS SHOWN PROFIT ON SALE OF INVESTMENTS AT ` .2.87 CRORES IN PROFIT & LOSS A/C WHICH WERE EXCLUDED FROM THE INCOME FROM BUSIN ESS AND SHOWN UNDER THE HEAD INCOME FROM CAPITAL GAIN. WH ILE WORKING OUT THE DISALLOWANCE UNDER SECTION 14A AT THE TIME OF FILING THE REVISED RETURN ASSESSEE HAS GIVEN A WORKING OF INT EREST APPLICABLE TO PROFIT ON SALE OF INVESTMENT IN THE RATIO OF 0.7 % AT ` .2 69 98 200/- AND INTEREST APPLICABLE TO DIVIDEND INCOME AT ` .1.03 CRORES ADMITTEDLY THERE ARE AMOUNTS DIVERTED FOR INVESTMENT WHICH SHOULD HAVE BEEN SET OFF IN THE COMPUTATION O F LONG TERM CAPITAL GAIN. AS SEEN FROM THE ORDER OF THE ASSESS ING OFFICER AND THE CIT (A) THE AMOUNTS CONSIDERED FOR DISALLOWANC E UNDER SECTION 36(1)(III) ONLY THE AMOUNT ADVANCED AS SHARE APPLIC ATION MONEY TO ASC ENTERPRISES AT ` .6.57 CRORES. THIS AMOUNT IS NOT FIGURING EITHER IN INVESTMENT ACCOUNT OR IN TRADING ACCOUNT BUT SHOWN SEPARATELY UNDER THE HEAD LOANS AND ADVANCES IN S CHEDULE-9. THEREFORE THE CONTENTION THAT ADVANCING/ INVESTING MONIES IN SHARES EITHER FOR INVESTMENT OR FOR TRADING SHOULD FAIL AS IT WAS NOT SUPPORTED BY FACTS. AS THE AMOUNT ADVANCED WAS NOT FOR EITHER OF THE ABOVE PURPOSES DISALLOWANCE OF INTEREST PER SE IS TO BE UPHELD. WITH REFERENCE TO THE AMOUNT OF DISALLOWANCE THE AS SESSING OFFICER ITA NOS 933 1494 4682 AND 1912 CHURU TRADING CO. P LTD MUMBAI PAGE 10 OF 20 HAD EXAMINED THE SOURCE OF FUNDS ELABORATELY IN PAR A 7.1 AND CALCULATED THE INTEREST ONLY ON THE AMOUNTS DIVERTE D FROM INTEREST BEARING FUNDS. THIS INDICATES THAT DISALLOWANCES AT ` 43 70 388/-IS BASED ON A NEXUS BETWEEN DIVERTED FUNDS AND BORROW ED AMOUNTS. THERE WAS FURTHER FINDING BY THE CIT (A) THAT AMOU NTS ADVANCED TO ASC ENTERPRISES FROM THE YEAR 1989 ONWARDS HAS INCR EASED TO ` .6.57 CRORES AS ON 31.3.2000 TO ` .7.90 CRORES TILL 31.3.2001 AND THE ENTIRE AMOUNT WAS RECEIVED BACK BY 21.5.2001WIT H OUT ANY PURCHASE OR ALLOTMENT OF SHARES. THE ASSESSING OFFI CER ELABORATELY EXAMINED AND EXTRACTED THE TABLE ON THE BASIS OF TH E STATEMENT GIVEN BY ASSESSEE COMPANY ABOUT THE OPENING BALANCE OF ` .1.92 CRORES AND THE SOURCES OF ADVANCES GIVEN TO M/S ASC ENTERPRISES AND DISALLOWED THE AMOUNT ONLY ON THE BASIS OF THE FINDING THAT THE BORROWED FUNDS WERE ADVANCED INTEREST FREE IN THE GUISE OF SHARE APPLICATION MONEY TO M/S ASC ENTERPRISES WHICH WAS RECOVERED BACK WITHOUT ANY ALLOTMENT OF SHARES OR RECEIPT OF INTEREST. THEREFORE WE ARE OF THE OPINION THAT THE INTEREST DISALLOWED UNDER SECTION 36(1)(III) ON SPECIFIC AMOUNT OF DIVERSION OF FUNDS TO M/S ASC ENTERPRISES WHICH DOES NOT FALL IN EITHER CATE GORY OF SHARES PURCHASED FOR INVESTMENT OR SHARES PURCHASED FOR TR ADING IS TO BE UPHELD. ACCORDINGLY THE GROUND IS REJECTED. 6. IN THE RESULT THE APPEAL NO. ITA NO.933/MUM/2006 IS DISMISSED. ITA NO. 1494/MUM/2005- AY 2001-02. 7. THIS IS ASSESSEE APPEAL AGAINST THE ORDER OF THE CI T (A)-VI MUMBAI DATED 04.01.2005. ASSESSEE IN THIS APPEAL HA S RAISED TWO GROUNDS WITH REFERENCE TO THREE ISSUES. THE GROUNDS OF WHICH ARE AS UNDER: 1. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS ) VI MUMBAI HAS ERRED IN ENHANCING THE DISALLOWANCE OF INTEREST UNDER SECTION 14A TO ` .153.01 LAKHS AS AGAINST DISALLOWANCE OF ` .16 25 921/- MADE BY THE ASSESSING OFFICER. THE APPELLANT SUBMITS THAT THE CIT (A) SHO ULD ITA NOS 933 1494 4682 AND 1912 CHURU TRADING CO. P LTD MUMBAI PAGE 11 OF 20 HAVE DELETED THE WHOLE OF ADDITION MADE BY THE ASSESSING OFFICER INSTEAD OF ENHANCING THE ADDITION MADE BY THE ASSESSING OFFICER. 2. THE LEARNED CIT (A) ALSO ERRED IN CONFIRMING THE DISALLOWANCE OF INTEREST PAID UNDER SECTION 36(1)(I II) TO THE EXTENT OF ` .263.83 LAKHS AS AGAINST THE DISALLOWANCE MADE BY THE ASSESSING OFFICER TO ` .324.58 LAKHS AS NON- BUSINESS EXPENSE. THE APPELLANT SUBMITS THAT THERE WAS NO JUSTIFICATION FOR MAKING ANY DISALLOWANCE ON THE ABOVE GROUND. THE LEARNED CIT (A) ALSO ERRED IN CONFIRMING THE DISALLOWANCE OF INTEREST IN RESPECT OF ADVANCE GIVEN TO ` .11.90 LAKHS AGAINST ` .15.60 LAKHS DISALLOWED BY THE ASSESSING OFFICER . 7.1 GROUND NO.1 PERTAINS TO THE ISSUE OF DISALLOWAN CE UNDER SECTION 14A. THE ASSESSING OFFICER NOTICED THAT ASS ESSEE HAS EARNED A DIVIDEND OF ` .42 18 500/- ON AN INVESTMENT OF ` .1 08 39 473/- IN ZEE TELE FILMS LTD. AFTER CONSIDERING ASSESSEES AR GUMENTS AND CONSIDERING THE FACTS THAT ASSESSEES SHARE CAPITAL AND OWN FUNDS HAVING BEEN WIPED OUT DUE TO LOSSES INVOKED THE PR OVISIONS OF SECTION 14A FOR DISALLOWANCE OF INTEREST ON THE ABO VE INVESTMENT AMOUNT AT 15% ( ` .16 25 921/-) AND ALSO 5% OF DIVIDEND OF ` .42 18 500/- I.E. ` .2 10 925/- AS ADMINISTRATIVE EXPENSES UNDER SECTION 14A. ASSESSEE CONTESTED THE SAME. THE CIT ( A) WHILE CONSIDERING THE ISSUE OF SECTION 14A ALONG WITH OTH ER ISSUES UNDER SECTION 36(1)(III) ENHANCED THE DISALLOWANCE UNDER SECTION 14A TO ` .153.05 LAKHS AS AGAINST ` .16 25 921/- MADE BY THE ASSESSING OFFICER. THERE IS NO DISPUTE ABOUT DISALLOWANCE WIT H REFERENCE TO 2% OF ADMINISTRATIVE EXPENSES ON THE DIVIDEND EARNED A S IT IS NOT CONTESTED EITHER BY ASSESSEE OR BY THE REVENUE. ASS ESSEE IN THE GROUNDS CONTESTS ONLY THE DISALLOWANCE OF INTEREST UNDER SECTION 14A ON THE INVESTMENTS MADE. 7.2 THE ISSUE IN GROUND NO.2 IS WITH REFERENCE TO T HE DISALLOWANCE UNDER SECTION 36(1)(III) ON VARIOUS AD VANCES GIVEN FOR INVESTMENTS IN SHARE APPLICATION MONEY ETC. THE AS SESSING OFFICER ITA NOS 933 1494 4682 AND 1912 CHURU TRADING CO. P LTD MUMBAI PAGE 12 OF 20 CONSIDERED THE DISALLOWANCE ON TWO DIFFERENT AMOUNT S; ONE ON ADVANCES GIVEN INTEREST FREE TO SHRI RISHI KUMAR C HAKRAPANI ( ` .4 LAKHS) MAHARASHTRA PRADESH CONGRESS COMMITTEE ( ` .1 CRORE) AND MR. DEEPAK SHOURIE ( ` .3 75 000/-). THE INTEREST AT 15% ON THE ABOVE AMOUNTS WAS DISALLOWED BY THE ASSESSING OFFIC ER UNDER SECTION 36(1)(III). OUT OF THIS THE CIT (A) CONFIR MED THE DISALLOWANCE OF INTEREST ON AMOUNT ADVANCED TO SHRI R.K. CHAKRAP ANI ( ` .60 000) AND THE AMOUNT OF ` 15 LAKHS ADVANCED TO MPCC CONSIDERING THAT THEY HAVE BEEN GIVEN FOR NON BUSINESS PURPOSES. HE DELETED THE AMOUNT WITH REFERENCE TO ADVANCE TO MR. DEEPAK SHOU RIE WHICH WAS HELD TO BE FOR BUSINESS PURPOSES. IN ADDITION T O THE ABOVE THE ASSESSING OFFICER ALSO CONSIDERED INVESTMENTS AND D ISALLOWED INTEREST UNDER SECTION 36(1)(III) OUT OF THE SHARE APPLICATION MONEY GIVEN AND ADVANCES FOR PURCHASE OF SHARES TOTALING TO ` .3 45 80 955/-. THE DETAILS OF THE AMOUNTS ADVANCED ARE STATED IN PARA 3.1 AND THE DISALLOWANCES WERE WORKED OUT IN P ARA 3.6 OF THE ORDER. IN APPEAL THE CIT (A) EXAMINED THE ISSUE AN D CAME TO THE FOLLOWING CONCLUSIONS WHILE CONFIRMING THE AMOUNT A T PARA 2.8 WHICH ARE AS UNDER: 2.8 I HAVE CONSIDERED THE SUBMISSION OF THE APPELL ANT HOWEVER I DO NOT AGREE WITH THE CONTENTION OF THE APPELLANT AS ASSESSEES OWN FUND HAS BEEN EXHAUSTED IN VIEW OF SUBSTANTIAL LOSSES IN THE BUSINESS AND T HE MAJORITY OF THE INVESTMENT IN THE SHARES HAVE BEEN MADE DURING THE YEAR AND ACCORDINGLY THE DISALLOWANCE I S REQUIRED TO BE REWORKED OUT. THE APPELLANT WAS ASKE D TO GIVE ACTUAL INTEREST PERTAINING TO ALL THE ACTIVITY OF THE APPELLANT COMPANY CONSIDERING THE PERIOD OF UTILIZA TION OF THE BORROWED FUND. THE APPELLANT HAS GIVEN THE WORKING AND HE HAS AGREED DURING THE COURSE OF HEAR ING THAT THE MONEY INVESTED INTO THE SHARES AND THE AMO UNT ADVANCED FOR ACQUISITION OF SHARES WHICH HAS BEEN CONSIDERED BY THE ASSESSING OFFICER IN PARA 2 & 3 O F HIS ORDER IS OUT OF BORROWED INTEREST BEARING FUND. AS PER THE WORKING GIVEN BY THE APPELLANT THE INTERESTS ALLOC ABLE TO THE VARIOUS ACTIVITIES ARE AS UNDER: ITA NOS 933 1494 4682 AND 1912 CHURU TRADING CO. P LTD MUMBAI PAGE 13 OF 20 S.NO PARTICULARS AMOUNT 1 INTEREST ON FUNDS UTILIZED FOR TRADING OPERATIONS 697.23 LAKHS 2 INTEREST ON FUNDS IN EQUITY SHARES HELD AS INVESTMENT 200.54 LAKHS 3 INTEREST IN RESPECT OF AMOUNT ADVANCED FOR ACQUISITION OF SHARES 345.80 LAKHS 4 INTEREST REQUIRED TO BE DISALLOWED ON INTEREST FREE ADVANCE TO MPCC & MR.RISHIKUMAR CHAKRAPANI 15.60 LAKHS 2.9 AGAINST THE ABOVE WORKING THE APPELLANT HAS DEBITED GROSS INTEREST IN ITS BOOKS OF ACCOUNT AT 1 4.49 CRORE AND HAS ALSO RECEIVED INTEREST ON LOAN WHICH WAS CREDITED TO PROFIT & LOSS A/C AT 4.89 CRORE AND ACCORDINGLY NET INTEREST PAID WHICH IS REQUIRED TO BE CONSIDERED AS COST OF BORROWING IS 9.60 CRORE. TAKI NG THE SAME RATIO OF 12.59 CRORE AS ACTUAL UTILIZATION WORKED OUT BY THE APPELLANT WITH THE NET INTEREST D EBIT OF 9.60 CRORE AS WORKED OUT ABOVE THE VARIOUS DISALLOWANCE COMES AS UNDER:- DISALLOWANCE ON ACCOUNT OF EQUITY SHARES HELD AS INVESTMENT 153.01 LAKHS INTEREST IN RESPECT OF INTEREST FREE ADVANCE GIVEN 11.90 LAKHS AMOUNT ADVANCED FOR NON BUSINESS PURPOSES AS PER PARA-3 OF THE ASSESSING OFFICERS ORDER 263.86 LAKHS 2.10 ACCORDINGLY THE TOTAL DISALLOWANCE UNDER 14A IS ENHANCED TO 153.01 LAKHS AGAINST 16.25 LAKHS WORKED OUT BY THE ASSESSING OFFICER. SIMILARLY DISALLOWAN CE UNDER SECTION 36(1)(III) IN RESPECT OF ADVANCE GIVE N TO RISHIKUMAR CHAKRAPANI & MPCC COMMITTEE IS SCALED DOWN TO 11.90 AGAINST 15.60 WORKED OUT BY THE ASSESSING OFFICER. SIMILARLY DISALLOWANCE UNDER SE CTION 36(1)(III) IN RESPECT OF ADVANCE GIVEN ON ACQUISITI ON OF SHARES IS COMPUTED AT ` .263.86 AGAINST 324.58 LAKHS WORKED OUT BY THE ASSESSING OFFICER. ACCORDINGLY ASSESSING OFFICER IS DIRECTED TO ADOPT THE ABOVE ITA NOS 933 1494 4682 AND 1912 CHURU TRADING CO. P LTD MUMBAI PAGE 14 OF 20 DISALLOWANCE APART FROM 2% IN RESPECT OF PROPORTION ATE MANAGEMENT EXPENSES AS DISCUSSED ABOVE. IN THE RESULT THE LOSS DETERMINED BY THE ASSESSING OFFICE R IS REDUCED AND THE INCOME IS CONSIDERED AS ENHANCED . THUS HE ENHANCED THE DISALLOWANCE UNDER SECTION 14A ON THE AMOUNT OF INTEREST PERTAINING TO EQUITY SHARES HELD AS INVESTMENT AND RESTRICTED THE INTEREST ON ADVANCES GIVEN FROM ` .15.60 LAKHS TO ` .11.90 LAKHS. ASSESSEE IS CONTESTING THE ABOVE ACT ION OF THE CIT (A) IN THE GROUNDS RAISED. 7.3 IT WAS THE CONTENTION OF THE LEARNED COUNSEL TH AT THE CIT (A) HAS NO POWERS TO ENHANCE THE AMOUNT AS WAS DONE BY HIM UNDER SECTION 14A AS THE PROVISIONS SPEAK OF SATISFACTION OF THE ASSESSING OFFICER FOR DISALLOWANCE OF THE AMOUNT. IT WAS FURT HER SUBMITTED THAT AS PER THE DECISION OF THE HON'BLE ITAT IN THE CASE OF BLUE STAR INDIA LTD IN ITA NOS.1838 & 1840/MUM/2007 DATED 30. 09.09 THE DISALLOWANCES CAN BE RESTRICTED TO THE ACTUAL AMOUN T ORIGINALLY ALLOWED BY THE ASSESSING OFFICER. THEREFORE THE CI T (A)S ACTION IN ENHANCING THE AMOUNT IS NOT CORRECT. FURTHER IT WAS SUBMITTED THAT THE RATIO ADOPTED BY THE CIT (A) IN ALLOCATING THE AMOUNT IS ARTIFICIAL NOTIONAL AND RATE OF INTEREST IS ALSO N OT CORRECT. FURTHER IT WAS SUBMITTED THAT ASSESSEE IS IN THE BUSINESS AND WAS APPROVED BY THE RBI AS NBFC AND THEREFORE THE AMOUNTS ADVANC ED AND LOANS CONSIDERED ARE TO BE CONSIDERED AS FOR THE PURPOSE OF BUSINESS. THEREFORE DISALLOWANCE UNDER SECTION 36(1)(III) DO ES NOT ARISE. 7.4 THE LEARNED DEPARTMENTAL REPRESENTATIVE HOWEVER IN HIS REPLY SUBMITTED THAT THE CIT (A) HAS EQUAL POWERS W ITH THAT OF ASSESSING OFFICER AND WHATEVER ASSESSING OFFICER CA N DO THE CIT (A) CAN ALSO DO. THEREFORE THERE ARE NO RESTRICTIONS O N CIT (A) TO CONSIDER THE ENHANCEMENT OF THE AMOUNT IF THE ASSE SSING OFFICER HAS DONE SOMETHING WRONG IN THE ASSESSMENT. WITH R EFERENCE TO THE DISALLOWANCE OF AMOUNT HE SUPPORTED THE ORDER OF THE CIT (A) TO SUBMIT THAT HE HAS EXAMINED THE NATURE OF THE AMOUN T AND RESTRICTED THE AMOUNTS ACCORDINGLY. ITA NOS 933 1494 4682 AND 1912 CHURU TRADING CO. P LTD MUMBAI PAGE 15 OF 20 7.5 WE HAVE CONSIDERED THE ISSUE AND PERUSED THE RE CORD. THERE IS NO DISPUTE WITH REFERENCE TO THE FACT THAT THE A MOUNTS ARE TO BE DISALLOWED UNDER SECTION 14A IF THEY ARE UTILIZED FOR THE PURPOSE OF EARNING EXEMPT INCOME. FURTHER THERE IS NO DISPUTE THAT IF THE AMOUNTS ARE DIVERTED FOR NON BUSINESS PURPOSES THE DISALLOWANCE UNDER SECTION 36(1)(III) IS ALSO REQUIRED TO BE MAD E. THEREFORE WITH REFERENCE TO THE DISALLOWANCE PER SE THE LEGAL PROV ISIONS DO ATTRACT ABOUT THE DISALLOWANCE ON WHICH THERE IS NO DISPUTE . HOWEVER THE ISSUE IS WITH REFERENCE TO THE QUANTUM OF THE DISAL LOWANCE AND AMOUNTS TO BE CONSIDERED. THE ASSESSING OFFICER ORI GINALLY HAS CONSIDERED ONLY THE INVESTMENT IN ZEE TELE FILMS LT D ALONE FOR CONSIDERATION OF DISALLOWANCE UNDER SECTION 14A AS THAT INVESTMENT ONLY YIELDED DIVIDEND INCOME WHICH WAS EXEMPT WHER EAS THE CIT (A) CONSIDERED THE ENTIRE AMOUNT INVESTED IN SHARES FOR DISALLOWANCE. HOWEVER IN OUR VIEW NEITHER THE ASS ESSING OFFICER NOR THE CIT (A) EXAMINED WHETHER THE INVESTMENT IN SHARES IS ALSO ASSESSEES BUSINESS ACTIVITY OR NOT. AS SEEN FROM T HE ORDER IN EARLIER APPEAL FOR AY 1999-2000 WE HAVE NOTICED THAT DISAL LOWANCE UNDER SECTION 36(1)(III) WAS RESTRICTED TO THE AMOUNTS AD VANCED AS SHARE APPLICATION MONEY WHEREAS DISALLOWANCE ON OTHER AM OUNTS WAS NOT DONE. ASSESSEE ALSO CONTESTED THAT INVESTMENT IN OW N TRADING IN SHARES IS ITS BUSINESS ACTIVITY. THIS ASPECT REQUIR ES EXAMINATION BY THE ASSESSING OFFICER. NOT ONLY THAT ASSESSEE HAD I TS OWN FUNDS IN EARLIER YEARS AND THE NATURE OF INVESTMENT MADE THE REIN IN THOSE YEARS IF CARRIED OVER CANNOT BE CONSIDERED AS INVES TMENTS OUT OF THE BORROWED FUNDS. UNLESS THE AMOUNTS ON WHICH THE INT EREST WAS PAID WAS RELATED TO EITHER SHARE INVESTMENT ACTIVIT Y OR SHARE TRADING ACTIVITY AND NECESSITY FOR BORROWING FUNDS WAS EXAM INED BY THE ASSESSING OFFICER AND THE NEXUS ESTABLISHED IT IS VERY DIFFICULT TO ARRIVE AT THE DISALLOWANCE ON PROPORTIONATE BASIS O UT OF THE TOTAL FUNDS AVAILABLE TO THE RESPECTIVE INVESTMENTS AS WA S DONE BY THE CIT (A). IT WAS THE OBSERVATION OF THE ASSESSING OF FICER THAT ITA NOS 933 1494 4682 AND 1912 CHURU TRADING CO. P LTD MUMBAI PAGE 16 OF 20 ASSESSEES CAPITAL HAS BEEN WIPED OUT AS ASSESSEE H AS SUFFERED LOSSES. THE ISSUE OF BORROWING FUNDS IN THE YEAR AN D UTILIZATION OF THE FUNDS WHETHER THEY ARE FOR THE PURPOSE OF BUSI NESS OR NOT HAVE TO BE EXAMINED AFRESH. THEREFORE WITHOUT GIVING AN Y FINDING ON THE AMOUNT OF QUANTUM TO BE CONSIDERED WE RESTORE THE ISSUES COVERED IN GROUND NO.1 WITH REFERENCE TO DISALLOWANCE UNDER SECTION 14A AND ALSO DISALLOWANCE OF INTEREST TO THE EXTENT OF ` .324.58 LAKHS MADE BY THE ASSESSING OFFICER (RESTRICTED BY THE CI T (A) TO ` .263.83 LAKHS) TO THE FILE OF THE ASSESSING OFFICER TO EXAM INE THE CONTENTION OF ASSESSEE THAT FUNDS ARE UTILIZED FOR THE PURPOSE OF BUSINESS AND TO ESTABLISH THE NEXUS IF ANY OF BORROWED FUNDS DI VERTED TO NON- BUSINESS PURPOSE AND ACCORDINGLY DISALLOW THE AMOUN T. WE MAKE IT CLEAR THAT THE DISALLOWANCE IF ANY MADE SHOULD NO T EXCEED THE AMOUNTS CONTESTED BY ASSESSEE IN THE GROUNDS OF APP EAL AS THE REVENUE HAS ACCEPTED THE RESTRICTION OF DISALLOWANC E UNDER SECTION 36(1)(III). 7.6 WITH REFERENCE TO THE DISALLOWANCE IN RESPECT O F ADVANCE TO SHRI RISHIKUMAR CHAKRAPANI AND TO THE MPCC ON FACT S WE ARE OF THE OPINION THAT THE AMOUNTS WERE ADVANCED FOR NON BUSINESS PURPOSE AND THERE IS NOTHING ON RECORD TO INDICATE THAT THESE ADVANCES ARE FOR THE PURPOSE OF BUSINESS. CONSISTEN T WITH THE VIEW TAKEN IN AY 1999-2000 IN APPEAL NO.ITA NO.933/MUM/2 006 THE DISALLOWANCE OF INTEREST IN RESPECT OF ADVANCES TO SHRI CHAKRAPANI STANDS CONFIRMED. FURTHER THE DISALLOWANCE CONFIRME D BY THE CIT (A) TO THE EXTENT OF ADVANCE GIVEN TO THE MPCC ALSO STANDS CONFIRMED AS THERE IS NO EVIDENCE ON RECORD THAT TH E AMOUNT WAS ADVANCED FOR BUSINESS PURPOSE. ACCORDINGLY THE SUB- GROUND IN GROUND NO.2 WITH REFERENCE TO DISALLOWANCE TO THE E XTENT OF ` .11.90 LAKHS STANDS CONFIRMED AND THAT PART OF THE GROUND IS REJECTED. 7.7 THE ASSESSING OFFICER IS DIRECTED TO EXAMINE TH E FACTS AND ARRIVE AT THE DISALLOWANCE UNDER SECTION 14A/36(1)( III) ON FACTS AND APPLICABLE LAW WHILE RE-DETERMINING THE DISALLOWANC E IN ITA NOS 933 1494 4682 AND 1912 CHURU TRADING CO. P LTD MUMBAI PAGE 17 OF 20 CONSEQUENTIAL PROCEEDINGS. IT IS ALSO NOTICED THAT THE ISSUE OF DISALLOWANCE UNDER SECTION 14A IN 2000-01 WAS RESTO RED TO THE FILE OF THE ASSESSING OFFICER BY THE ORDER OF THE ITAT I N ITA NO.7238/MUM/2003 DATED 6.3.2009. THE FINDINGS IF AN Y IN THAT YEAR MAY ALSO BE KEPT IN MIND WHILE TREATING THE DI SALLOWANCES IN THIS YEAR. ASSESSEE SHOULD BE GIVEN AN OPPORTUNITY AND ITS SUBMISSIONS SHOULD BE EXAMINED PROPERLY. THE ASSESS ING OFFICER IS ALSO DIRECTED TO EXAMINE WHETHER THE AMOUNTS DISALL OWED CAN ALSO BE SET OFF AGAINST THE CAPITAL GAIN INCOME IF THER E WAS INCOME FROM CAPITAL GAIN ON THE INVESTMENT ACTIVITY. WITH THESE DIRECTIONS THE ISSUE IN GROUND NO.1 AND PARTLY IN GROUND NO.2 PERT AINING TO THE INTEREST DISALLOWANCE TO AN EXTENT OF ` .263.83 LAKHS IS RESTORED TO THE FILE OF THE ASSESSING OFFICER. THE ORDERS OF TH E ASSESSING OFFICER AND THE CIT (A) ARE SET ASIDE TO THAT EXTENT FOR RE DOING IT ACCORDING TO LAW AND FACTS. 7.8 IN THE RESULT THE APPEAL IN ITA NO. 1494/MUM/20 05 IS PARTLY ALLOWED. ITA NO.4682/MUM/2007 AY 2003-04. 8. IN THIS YEAR ASSESSEE HAS RAISED ONLY ONE GROUND ON DISALLOWANCE OF INTEREST OF ` .7 28 32 759/- OUT OF ` .19 31 06 072/- DISALLOWED BY THE ASSESSING OFFICER. IT WAS THE CON TENTION THAT ASSESSEE PAID INTEREST ON BORROWINGS WHICH HAVE BEE N APPLIED IN THE BUSINESS WHICH CONSTITUTE INVESTMENT ON SHARE TRADI NG AND INVESTMENTS FOR THE PURPOSE OF BUSINESS. THE ASSESS ING OFFICER ON EXAMINATION OF THE VARIOUS INVESTMENTS AND ADVANCES GIVEN BY ASSESSEE TOWARDS SHARE APPLICATION MONEY INTEREST FREE ADVANCES RESTRICTED INTERESTS CLAIMED AND MADE A DISALLOWANC E OF ` .19.31 CRORES WHICH THE CIT (A) BASED ON THE SUBMISSIONS OF ASSESSEE RESTRICTED IT TO PROPORTIONATE AMOUNT AND DISALLOWE D THE AMOUNT OF ` .7.28 CRORES AS CONSIDERED IN PARA 3.6 OF THE CIT (A)S ORDER. ITA NOS 933 1494 4682 AND 1912 CHURU TRADING CO. P LTD MUMBAI PAGE 18 OF 20 8.1 CONSIDERING THE ARGUMENTS OF THE LEARNED COUNSE L AND THE LEARNED DEPARTMENTAL REPRESENTATIVE WE ARE OF THE OPINION THAT THE ISSUE IS TO BE RE-EXAMINED BY THE ASSESSING OFFICER IN THE LIGHT OF THE DECISIONS TAKEN IN AY 2001-02 ABOVE. UNLESS THE RE IS A FINDING THAT ASSESSEES INVESTMENT IS NOT BUSINESS ACTIVITY AND THE FUNDS ARE NOT UTILIZED FOR THE PURPOSE OF BUSINESS DISAL LOWANCE UNDER SECTION 36(1)(III) DOES NOT ARISE. THERE IS NO DISA LLOWANCE UNDER SECTION 14A IN THIS YEAR AS THE DIVIDEND INCOME WAS TAXABLE. THEREFORE THE INTEREST DISALLOWANCE HAS TO BE CONS IDERED UNDER SECTION 36(1)(III). IF THERE IS INCOME OR LOSS UNDE R THE HEAD CAPITAL GAINS THE INTEREST DISALLOWANCE UNDER SECTION 36( 1)(III) PERTAINING TO THE INVESTMENT ACTIVITY IS ALSO TO BE CONSIDERED AS DEDUCTION WHILE WORKING OUT THE CAPITAL GAIN. ACCORDINGLY TH E ASSESSING OFFICER IS DIRECTED TO EXAMINE THE NEXUS WITH BORRO WED FUNDS ON WHICH INTERESTS WAS CLAIMED TO THE UTILIZATION OF F UNDS EITHER IN INVESTMENT ACTIVITY OR IN BUSINESS ACTIVITY AND DIS ALLOW AMOUNT ACCORDINGLY UNDER SECTION 36(1)(III) AND CONSIDER W HETHER IT IS ALLOWABLE WHILE WORKING OUT CAPITAL GAIN ETC. IN TH E CASE OF ADVANCES TO MR.RISHIKUMAR CHAKRAPANI AND ALSO TO MPCC CONSI STENT WITH THE STAND TAKEN IN THE EARLIER YEARS THE INTEREST DISALLOWANCE ON THE ABOVE AMOUNT HAS TO BE DISALLOWED AS THERE ARE ALREADY FINDINGS THAT THE AMOUNTS ARE ADVANCED FOR NON BUSINESS PURP OSES. TO THAT EXTENT THE DISALLOWANCE OF INTEREST STANDS CONFIRM ED. WITH THESE DIRECTIONS THE ISSUE IN THIS GROUND IS RESTORED TO THE FILE OF THE ASSESSING OFFICER FOR FRESH CONSIDERATION AFTER EXA MINING THE FACTS AND TO DECIDE ACCORDING TO LAW. ASSESSEE SHOULD BE GIVEN AN OPPORTUNITY TO MAKE SUBMISSIONS AND FURNISHING THE NECESSARY DETAILS IN THIS REGARD. WITH THESE DIRECTIONS THE A PPEAL IS CONSIDERED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ITA NOS 933 1494 4682 AND 1912 CHURU TRADING CO. P LTD MUMBAI PAGE 19 OF 20 ITA NO.1912/MUM/2008 AY 2004-05 9. IN THIS YEAR ASSESSEE RAISED ONLY ONE GROUND ON DIS ALLOWANCE OF INTEREST OF ` .9 78 48 670/- OUT OF ` .15 26 40 065/- DISALLOWED BY THE ASSESSING OFFICER. 9.1 CONSIDERING THE ARGUMENTS OF THE LEARNED COUNSE L AND THE LEARNED DEPARTMENTAL REPRESENTATIVE WE ARE OF THE OPINION THAT THE ISSUE IN THIS APPEAL IS ALSO TO BE RE-EXAMINED BY T HE ASSESSING OFFICER IN THE LIGHT OF THE DECISIONS TAKEN IN AY 2 003-04 ABOVE. UNLESS THERE IS A FINDINGS THAT ASSESSEES INVESTME NTS IS NOT BUSINESS ACTIVITY AND THE FUNDS ARE NOT UTILIZED FO R THE PURPOSE OF BUSINESS DISALLOWANCE UNDER SECTION 36(1)(III) DOE S NOT ARISE. THERE IS NO DISALLOWANCE UNDER SECTION 14A FOR THIS YEAR AS THE DIVIDEND INCOME WAS TAXABLE. THEREFORE THE INTEREST DISALLO WANCE HAS TO BE CONSIDERED UNDER SECTION 36(1)(III). IF THERE IS IN COME OR LOSS UNDER THE HEAD CAPITAL GAINS THE INTEREST DISALLOWANCE UNDER SECTION 36(1)(III) PERTAINING TO THE INVESTMENT ACTIVITY IS ALSO TO BE CONSIDERED AS DEDUCTION WHILE WORKING OUT THE CAPI TAL GAIN. ACCORDINGLY THE ASSESSING OFFICER IS DIRECTED TO E XAMINE THE NEXUS THAT BORROWED FUNDS ON WHICH INTERESTS WAS CLAIMED TO THE UTILIZATION OF FUNDS EITHER IN INVESTMENT ACTIVITY OR IN BUSINESS ACTIVITY AND DISALLOW AMOUNT ACCORDINGLY UNDER SECT ION 36(1)(III) AND CONSIDER WHETHER IT IS ALLOWABLE WHILE WORKING OUT CAPITAL GAIN ETC. IN CASE ADVANCES TO MR.RISHIKUMAR CHAKRAPANI A ND ALSO TO MPCC CONSISTENT WITH THE STAND TAKEN IN THE EARLIER YEARS THE INTEREST DISALLOWANCE ON THE ABOVE AMOUNT HAS TO BE DISALLOWED AS THERE ARE ALREADY FINDINGS THAT THE AMOUNTS ARE ADV ANCED FOR NON BUSINESS PURPOSES. TO THAT EXTENT THE DISALLOWANCE OF INTEREST STANDS CONFIRMED. WITH THESE DIRECTIONS THE ISSUE I N THIS GROUND IS ALSO RESTORED TO THE FILE OF THE ASSESSING OFFICER FOR FRESH CONSIDERATION AFTER EXAMINING THE FACTS AND ACCORDI NG TO THE LAW. ASSESSEE SHOULD BE GIVEN AN OPPORTUNITY TO MAKE SUB MISSIONS AND FURNISHING THE NECESSARY DETAILS IN THIS REGARD. WI TH THESE ITA NOS 933 1494 4682 AND 1912 CHURU TRADING CO. P LTD MUMBAI PAGE 20 OF 20 DIRECTIONS THE APPEAL IS CONSIDERED AS PARTLY ALLOW ED FOR STATISTICAL PURPOSES. 10. IN THE RESULT ASSESSEES APPEAL IN ITA NO. 933/MUM /2006 IS DISMISSED AND OTHER APPEALS ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 24 TH FEBRUARY 2012. SD/- SD/- (V.DURGA RAO) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI DATED 24 TH FEBRUARY 2012. VNODAN/SPS COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. THE DR G BENCH ITAT MUMBAI BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES MUMBAI