DCIT 4(1), MUMBAI v. DARASAW & CO. P. LTD, MUMBAI

I.T.A NOS. 135 & 733/ MUM/2009: ASSESSMENT YEAR: 2005-06 PAGE 1 OF 17 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI D BENCH MUMBAI. BEFORE SHRI PRAMOD KUMAR (ACCOUNTANT MEMBER) AND SMT. ASHA VIJAYARAGHAVAN (JUDICIAL MEMBER). I.T.A NO. 135/ MUM/2009 ASSESSMENT YEAR: 2005-06 DARASHAW & CO. PVT.LTD. ..APPELLANT CENTRAL BANK BUILDING M.G.ROAD FORT MUMBAI-400 023 PAN NO.AAACB 2306 F VS ASST.COMMISSIONER OF INCOME TAX RANGE 4(1) MUMBAI ..RESPONDENT I.T.A NO. 733/ MUM/2009 ASSESSMENT YEAR: 2005-06 DY..COMMISSIONER OF INCOME TAX RANGE 4(1) MUMBAI ..APPELLANT VS DARASHAW & CO. PVT.LTD. .RESPONDENT CENTRAL BANK BUILDING M.G.ROAD FORT MUMBAI-400 023 PAN NO.AAACB 2306 F APPEARANCES : S.E.DASTUR NITESH JOSHI AND SANJAY SANGHVI FOR THE ASSESSEE. S.K.PAHWA FOR THE REVENUE I.T.A NOS. 135 & 733/ MUM/2009: ASSESSMENT YEAR: 2005-06 PAGE 2 OF 17 O R D E R PER PRAMOD KUMAR: 1. THESE CROSS APPEALS ARE DIRECTED AGAINST THE ORD ER DATED 12 TH NOVEMBER 2008 PASSED BY THE CIT(A) IN THE MATTER OF ASSESSMENT UNDER SECTION 143(3) OF THE INCOME TAX ACT 1961 FOR THE ASSESSMENT YEAR 2005- 06. AS THESE APPEALS CALL INTO QUESTION SAME ORDER PASSED BY THE CIT(A) AND AS THESE APPEALS WERE HEARD TOGETHER WE DEEM I T FIT AND PROPER TO DISPOSE OF BOTH THE APPEALS BY WAY OF THIS CONSOLID ATED ORDER. 2. WE WILL TAKE UP ASSESSEES APPEAL FIRST. 3. IN GROUND NO. 1 THE ASSESSEE HAS RAISED THE FOL LOWING GRIEVANCE : THE LEARNED CIT (A) ERRED IN LAW IN CONFIRMING THE DISALLOWANCE OF RS 3 40 360 AS BAD DEBTS U/S.36(1)(VII) OF THE I NCOME TAX ACT WITHOUT PROPERLY APPRECIATING THE FACTS OF THE CASE AND LEGAL POSITION ON THE SUBJECT. 4. THE SHORT REASON FOR WHICH THE ABOVE DISALLOWANC E WAS CONFIRMED BY THE CIT(A) WAS THAT AS THE APPELLANT HAS NOT PR OVED THAT THE DEBTS HAVE BECOME BAD THE CONDITIONS OF SECTION 36(1)(V II) ARE NOT SATISFIED. HOWEVER IN VIEW OF THE HONBLE SUPREME COURT JUDGM ENT IN THE CASE OF TRF LTD VS CIT (323 ITR 397) IT IS NOW WELL SETTLE D IN LAW THAT THE AMOUNT IS ALLOWABLE AS DEDUCTION IN THE YEAR IN WHI CH IT IS WRITTEN OFF AND DOES NOT REQUIRE THE ASSESSEE TO ESTABLISH THAT THE AMOUNT HAS ACTUALLY BECOME BAD. LEARNED DEPARTMENTAL REPRESENTATIVE DOE S NOT DISPUTE THE FACT THAT IT IS A COVERED ISSUE AS SUCH THOUGH RA THER DUTIFULLY HE RELIES UPON THE ORDERS OF THE AUTHORITIES BELOW. I.T.A NOS. 135 & 733/ MUM/2009: ASSESSMENT YEAR: 2005-06 PAGE 3 OF 17 5. RESPECTFULLY FOLLOWING THE ESTEEMED VIEWS OF HON BLE SUPREME COURT IN THE CASE OF TRF (SUPRA) WE UPHOLD THE GRIEVANCE OF THE ASSESSEE. THERE IS NO DISPUTE THAT THE DEBT IS ACTU ALLY WRITTEN OFF AND THE ONLY REASON FOR DECLINING THE DEDUCTION IS THAT THE ASSESSEE HAS NOT BROUGHT ON RECORD EVIDENCE TO ESTABLISH THAT THE DE BT HAS ACTUALLY BECOME BAD. AS IS THE SETTLED POSITION OF LAW NOW IN ORDER TO CLAIM DEDUCTION UNDER SECTION 36(I)(VII) A MERE WRITE OF F OF DEBT IS SUFFICIENT AND THERE IS NO ONUS ON THE ASSESSEE TO DEMONSTRATE THAT THE DEBT SO WRITTEN OFF HAS ACTUALLY BECOME BAD. THE AUTHORITIE S BELOW WERE THEREFORE NOT JUSTIFIED IN DECLINING THE DEDUCTION TO THE ASSESSEE. WE ACCORDINGLY DIRECT THE ASSESSING OFFICER TO DELETE THE IMPUGNED DISALLOWANCE OF RS 3 40 360 IN RESPECT OF BAD DEBT S. THE ASSESSEE GETS THE RELIEF ACCORDINGLY. 6. GROUND NO. 1 IS THUS ALLOWED. 7. IN GROUND NOS. 2 AND 3 WHICH ARE INTERCONNECTED AND WHICH WE WILL TAKE UP TOGETHER THE ASSESSEE HAS RAISED THE FOLLO WING GRIEVANCES: THE LEARNED CIT (A) ERRED IN LAW IN CONFIRMING THE DISALLOWANCE OF INTEREST ON BORROWINGS FOR THE PURCHASE OF INVES TMENT AMOUNTING TO RS 5 06 44 796. THE LEARNED CIT (A) ERRED IN FURTHER ENHANCING THE DISALLOWANCE IN RESPECT OF INTEREST OF RS 3 55 352. 8. THE RELEVANT MATERIAL FACTS ARE LIKE THIS. THE A SSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF SHARE BROKER AT THE BOMB AY STOCK EXCHANGE AND IS ALSO TRADING AND INVESTING IN SHARES AND SEC URITIES. ON 31 ST I.T.A NOS. 135 & 733/ MUM/2009: ASSESSMENT YEAR: 2005-06 PAGE 4 OF 17 DECEMBER 2003 THE ASSESSEE PURCHASED 3 588 DEEP DI SCOUNT BONDS AT THE RATE OF RS 2 09 005 PER BOND FOR A FACE VALUE O F RS 10 00 000 PAYABLE AFTER 15 YEARS ISSUED BY MAHARASHTRA STATE ROAD T RANSPORT BOARD. AN AMOUNT OF RS 74 99 09 940 WAS THUS INVESTED IN MAKI NG THIS INVESTMENT AND THE ASSESSEE HAD TO BORROW MONIES FOR MAKING TH IS INVESTMENT IN THESE BONDS. THE INTEREST PAID FOR MAKING THESE INV ESTMENTS WAS CLAIMED AS A DEDUCTION UNDER SECTION 57(3) I.E. UNDER THE HEAD INCOME FROM OTHER SOURCES FOR THE ASSESSMENT YEAR 2004-05 AND EVEN THOUGH THIS CLAIM WAS DECLINED BY THE ASSESSING OFFICER IT WAS LATER ALLOWED IN APPEAL AND THE TRIBUNAL ALSO CONFIRMED THE RELIEF S O GIVEN BY THE CIT(A). DURING THE RELEVANT PREVIOUS YEAR AND MORE PARTICU LARLY DURING THE PERIOD OF 5 TH JANUARY 2005 TO 31 ST MARCH 2005 THE ASSESSEE SOLD 3 563 BONDS (OUT OF WHICH 3 588 BONDS HELD BY THE ASSESSE E) AND GAINS ON THE SALE OF THESE BONDS WAS OFFERED TO TAX AS LONG TERM CAPITAL GAIN. IT WAS IN THIS BACKDROP THAT DURING THE COURSE OF THE ASSESS MENT PROCEEDINGS THE ASSESSING OFFICER TOOK NOTE OF ASSESSEES CLAIM FOR DEDUCTION OF RS 5 10 00 148 ON ACCOUNT OF INTEREST PAID ON BORROWI NGS FOR MAKING THE INVESTMENTS IN MSRTC BONDS AND REQUIRED THE ASSESS EE TO SHOW CAUSE WHY THE SAME SHOULD NOT BE DISALLOWED. THE ASSESSIN G OFFICER WAS OF THE VIEW THAT THERE IS NO PROVISION FOR ALLOWABILITY O F INTEREST ON BORROWED FUNDS IN COMPUTATION OF INCOME UNDER THE HEAD CAPI TAL GAINS AND THAT IT COULD BE ALLOWED DEDUCTION UNDER SECTION 57(III) ON LY IF THERE WAS A POSSIBILITY OF RELEVANT INCOME BEING BROUGHT TO TAX UNDER THE HEAD INCOME FROM OTHER SOURCES. IT WAS ON THIS BASIS AN D ON THE BASIS OF HIS REASONING REPRODUCED BELOW THAT HE CAME TO THE CONC LUSION THAT WHILE INTEREST IN RESPECT OF 25 BONDS (WHICH REMAINED UNS OLD AT THE END OF THE RELEVANT PREVIOUS YEAR) WAS TO BE ALLOWED AS A DEDU CTION UNDER SECTION 57(III) THE INTEREST IN RESPECT OF 3 563 BONDS ( W HICH WERE SOLD BY THE I.T.A NOS. 135 & 733/ MUM/2009: ASSESSMENT YEAR: 2005-06 PAGE 5 OF 17 ASSESSEE DURING THE YEAR) COULD NOT BE ALLOWED AS D EDUCTION. WHILE DOING SO THE ASSESSING OFFICER OBSERVED AS FOLLOWS : 4.2 THE ALLOWABILITY OF THIS INTEREST EXPENDITURE I S ALSO TO BE ADJUDICATED AS PER THE GUIDELINES LAID DOWN BY THE CIRCULAR NO.2 OF 2002. AS PER THIS CIRCULAR IF THE ASSESSEE HOL DS A ZERO COUPON BOND TILL THE END OF THE FINANCIAL YEAR THEN THE DIFFERENCE BETWEEN ITS VALUE DETERMINED AS PER THE GUIDELINES OF RBI AND FIMMDA AS ON THE END OF THE YEAR AND ITS VALUE AT THE BEGINNING OF THE YEAR OR COST OF ACQUISITION IF THE BOND HAS BEEN ACQUIRED DURING THE YEAR WOULD BE TAXED AS INTEREST INCOME. THUS THIS INTEREST INCOME WOULD ACCRUE ONLY AT THE END OF THE YEAR AND ONLY IF THE ASSESSEE IS HOLDING THE SHARE AS ON THA T DATE. BUT IN CASE OF TRANSFER OF BONDS BEFORE THE YEAR END THE ONLY INCOME WHICH CAN ACCRUE TO THE ASSESSEE IN RESPECT OF THES E BONDS IS SHORT TERM CAPITAL GAIN. THERE IS NO PROVISION FOR ALLOWABILITY OF INTEREST ON BORROWED FUNDS IN COMPUTATION OF INCOME UNDER THE HEAD CAPITAL GAIN. HENCE THE INTEREST PAID CANNO T BE ALLOWED AS A DEDUCTION IN COMPUTATION OF CAPITAL GAIN. A LSO THERE BEING ZERO POSSIBILITY OF ANY OTHER INCOME FROM THESE BON DS WHICH HAVE BEEN TRANSFERRED BEFORE THE END OF THE YEAR I NTEREST CANNOT BE ALLOWED AS A DEDUCTION U/S.57(III). THIS IS DUE TO THE FACT THAT DEDUCTION U/S.57 (III) IS ALLOWED IN RESPECT OF AN EXPENDITURE (NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE) LA ID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF MAKING OR EARNING AN INCOME CHARGEABLE UNDER THE HEAD INCOME FROM OTHER SOURCES. THUS WHERE THERE IS NO POSSIBILITY OF ANY INCOME CHARGEABLE AS INCOME FROM OTHER SOURCES NO EXPENDI TURE CAN BE ALLOWED U/S.57(III). ALSO SINCE THERE IS NO INCOME FORMING PART I.T.A NOS. 135 & 733/ MUM/2009: ASSESSMENT YEAR: 2005-06 PAGE 6 OF 17 OF TOTAL INCOME FOR THE PURPOSES FOR WHICH THIS INT EREST CAN BE SAID TO HAVE BEEN INCURRED HENCE THE INTEREST CANNO T BE ALLOWED AS A DEDUCTION AGAINST ANY OTHER INCOME AS PER THE PROVISIONS OF SECTION 14(A). 4.3 ACCORDINGLY THE INTEREST OF RS 5 06 44 796/- I NCURRED IN RELATION TO 3563 NUMBERS OF ZERO % MSRDC 2018 BONDS SOLD DURING THE YEAR IS DISALLOWED IN THE COMPUTATION OF TOTAL INCOME OF THE ASSESSEE. BALANCE INTEREST OF RS 3 55 352/- INCURRED IN RELATION TO 25 NOS. OF BONDS HELD BY THE ASSESSEE A T THE YEAR END IS ALLOWED AS DEDUCTION U/S.57(III). 9. AGGRIEVED ASSESSEE CARRIED THE MATTER IN APPEAL BUT WITHOUT ANY SUCCESS. THE CIT(A) WAS OF THE VIEW THAT SINCE THE ASSESSEE HAD SHOWN IN COME ON SALE OF THESE BONDS UNDER THE HEAD CAPITAL GAINS THE RATIO OF HONBLE SUPREME COURTS JUDGMENT IN THE CASE OF CIT VS. R P MODY (115 ITR 519) BASED ON WHICH RELIEF WAS GIVEN TO THE AS SESSEE IN PRECEDING YEARS WILL NO LONGER BE APPLICABLE. THE CIT(A) WE NT A STEP FURTHER AND HELD THAT EVEN WITH RESPECT TO BONDS HELD BY THE AS SESSEE AS INVESTMENTS THE DEDUCTION IN RESPECT OF INTEREST UNDER SECTION 57(III) WILL NOT BE ADMISSIBLE AS THE RELEVANT INCOME IS NOT LIABLE TO BE TAXED UNDER THE HEAD INCOME FROM OTHER SOURCES. HE THUS ENHANCED THE D ISALLOWANCE BY RS 3 55 352 AND REVERSED WHATEVER DEDUCTION WAS ALLOWE D BY THE ASSESSING OFFICER. THE REASONING ADOPTED BY THE CIT(A) AS SE T OUT IN THE IMPUGNED APPELLATE ORDER IS AS FOLLOWS : IT MAY BE SEEN THAT THE FACTS OF THE PRESENT YEAR I S DIFFERENT FROM THE FACTS OF A.Y. 2003-04 AND 2004-05. THEREFORE THE DECISION OF MY PREDECESSORS ARE NOT APPLICABLE IN THE PRESE NT CASE. IN AY I.T.A NOS. 135 & 733/ MUM/2009: ASSESSMENT YEAR: 2005-06 PAGE 7 OF 17 2003-04 AND 2004-05 THE ASSESSEE THOUGH HAS NOT DER IVED ANY INCOME FROM THE BONDS BUT IT WAS CONFIRMED THAT THE INVESTMENT IN RESPECT OF WHICH THE INTEREST PAYMENT WAS MADE W ILL DERIVE INTEREST INCOME WHICH WILL BE OFFERED FOR TAXATION IN THE YEAR OF REDEMPTION AND THAT WILL BE TAXABLE AS INCOME FROM OTHER SOURCES. HENCE DEDUCTION IN RESPECT OF INTEREST PAID HAS BEEN ALLOWED U/S.57(III) FOLLOWING THE DECISION OF SUPRE ME COURT IN CIT VS. RAJENDRA PRASAD MODY 115 ITR 519. HOWEVER IN THE CURRENT YEAR THE ENTIRE INCOME FROM THE BONDS HAVE BEEN SHOWN AS CAPITAL GAIN AND INTEREST EXPENDITURE IS NOT ALL OWABLE UNDER THE HEAD INCOME FROM CAPITAL GAIN. EVEN OTHERWISE THE INCOME HAS NOT BEEN OFFERED UND ER THE HEAD INCOME FROM OTHER SOURCES THEREFORE THE QUESTIO N OF DEDUCTION U/S.57(III) DOES NOT ARISE. FURTHER THE APPELLANT HAS NEVER OFFERED INTEREST F ROM BOND AS INCOME FOR ANY YEAR. THE AO HAS DISALLOWED THE SUM OF RS 5 06 44 796/- INCURRED IN RELATION TO 3563 NUMBERS OF ZERO COUPON MSRDC 2018 BONDS SOLD DURING THE YEAR BUT HA S ALLOWED THE BALANCE INTEREST OF RS 3 55 352/- INCURRED IN R ELATION TO 25 NUMBERS OF BONDS HELD BY ASSESSEE AT THE YEAR END A S DEDUCTION U/S.57(III). AS THE ZERO COUPON MSRDC 2018 BONDS W ERE HELD AS INVESTMENT AND THE SALE OF THE SAME IS TO ADD CAPIT AL GAIN THE INTEREST PAID WITH RESPECT TO INVESTMENT IN 0% MSRD C 2018 BONDS ARE NOT ALLOWABLE AT ALL. VIDE NOTE SHEET ENTRY DATED 16.1.2008 MR RAJESH AG ARWAL AR WAS GIVEN AN OPPORTUNITY TO EXPLAIN WHY NOT THE ASS ESSMENT BE I.T.A NOS. 135 & 733/ MUM/2009: ASSESSMENT YEAR: 2005-06 PAGE 8 OF 17 ENHANCED BY RS 3 55 352/- OF CLAIM OF INTEREST 57(I II) HE MERELY STATED THAT THE AMOUNT IS ALLOWABLE. THE DEDUCTION U/S.57(III) IS TO BE ALLOWED ONLY WITH RESPECT TO INCOME ASSESSED UNDER THE HEAD INCOME FROM OTHER SOURCES AND IS NOT ALLOWAB LE AGAINST THE INCOME FALLING UNDER THE HEAD INCOME FROM CAPI TAL GAINS. THE INTEREST OF RS 3 55 352/- IS THEREFORE IS NOT ALLOWABLE. THE INCOME OF THE APPELLANT IS THEREFORE ENHANCED BY A SUM OF RS 3 55 352/-.. THUS ADDITION OF RS 5 06 44 796/- IS CONFIRMED AND FURTHER ENHANCED BY RS 3 55 352/-. 10. THE ASSESSEE IS NOT SATISFIED AND IS IN APPEAL BEFORE US. 11. WE HAVE HEARD THE RIVAL CONTENTIONS PERUSED TH E MATERIAL ON RECORD AND DULY CONSIDERED FACTUAL MATRIX OF THE CA SE AS ALSO THE APPLICABLE LEGAL POSITION. 12. WE SEE MERITS IN LEARNED COUNSELS SUBMISSION I S ALL THAT IS NECESSARY FOR THE PURPOSE OF DEDUCTION OF AN EXPENS E UNDER SECTION 57(III) IS THAT THE EXPENDITURE SHOULD NOT BE CAPIT AL EXPENDITURE IN NATURE AND THAT IT SHOULD BE LAID OUT WHOLLY AND EXCLUSIV ELY FOR THE PURPOSES OF MAKING OR EARNING SUCH INCOME (AS IS CHARGEABLE UNDER THE HEAD INCOME FROM OTHER SOURCES) THAT IT IS NOT REALLY DECISIVE FOR ELIGIBILITY OF SUCH DEDUCTION AS TO WHETHER OR NOT SUCH INCOME IS ACTUA LLY CHARGEABLE TO TAX IN THE YEAR IN WHICH DEDUCTION IS GRANTED. SECTION 57(III) AS LEARNED COUNSEL RIGHTLY POINTS OUT REFERS TO THE PURPOSE O F EXPENDITURE AND NOT THE YEAR IN WHICH INCOME MUST BE TAXED. IN OTHER WO RDS AS LONG AS EXPENDITURE IS INCURRED TO EARN AN INCOME WHICH IS TAXABLE UNDER THE HEAD INCOME FROM OTHER SOURCES IT IS NOT REALLY MATERIAL WHETHER SUCH I.T.A NOS. 135 & 733/ MUM/2009: ASSESSMENT YEAR: 2005-06 PAGE 9 OF 17 AN INCOME WAS ACTUALLY TAXED IN THE RELEVANT PREVIO US YEAR OR NOT. THE TRUE TEST REALLY IS WHETHER OR NOT THE BORROWINGS FOR WHICH THE INTEREST IS PAID WERE FOR THE PURPOSES OF EARNING AN INCOME FR OM OTHER SOURCES OR NOT. IN THE CASE OF VEECUMSEES VS CIT (220 ITR 185) HONBLE SUPREME COURT WERE IN SEISIN OF A SITUATION IN WHICH BORROWINGS WERE MADE FOR T HE PURPOSE OF CONSTRUCTING A CINEMA THEATRE WHICH WAS LATER SOLD BUT EVEN AFTER THE SALE OF CINEMA THEATRE THE DEDUCTION FOR INTEREST IN RESPECT OF SUCH BORROWINGS WAS ALLOWED IN APPEAL. THEIR LORDSH IPS SAW NO INFIRMITY IN THIS AND INTER ALIA OBSERVED AS FOLLOWS: THE FACT THAT THE REVENUE HAD DURING THE YEARS WHEN THE ASSESSEE CARRIED ON THE BUSINESS OF CINEMATOGRAPHIC FILMS PERMITTED AS A DEDUCTION UNDER SECTION 36(1)(III) T HE INTEREST ON LOANS OBTAINED BY THE ASSESSEE FOR THE PURPOSE OF C ONSTRUCTING THE SAID THEATRE SHOWS THAT AT THE TIME WHEN THE LO ANS WERE OBTAINED THE SAID THEATRE WAS A PART OF THE BUSINES S OF THE ASSESSEE. IT WAS INTEREST ON THESE LOANS BORROWED FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE WHICH WAS BEING PAID IN THE YEARS IN QUESTION AND THE TRIBUNAL WAS IN OUR VIEW RIGHT IN CONCLUDING THAT SUCH INTEREST HAD TO BE TREATED AS A DEDUCTION UNDER SECTION 36(1)(III). THE LOANS HAD BEEN OBTAIN ED FOR THE PURPOSES OF THE ASSESSEE'S BUSINESS. THE FACT THAT THE PARTICULAR PART OF THE BUSINESS FOR WHICH THE LOANS HAD BEEN O BTAINED HAD BEEN TRANSFERRED OR CLOSED DOWN DID NOT ALTER THE F ACT THAT THE LOANS HAD WHEN OBTAINED BEEN FOR THE PURPOSE OF T HE ASSESSEE'S BUSINESS. 13. IT WAS ALSO A CASE IN WHICH DEDUCTION FOR INTEREST WAS ALLOWED IN THE EARLIER YEARS BUT THE SAME WAS DECLINED LATER INTER ALIA ON THE I.T.A NOS. 135 & 733/ MUM/2009: ASSESSMENT YEAR: 2005-06 PAGE 10 OF 17 GROUND THAT THE ASSET FOR THE PURCHASE OF WHICH BO RROWINGS WERE RESORTED ITSELF WAS SOLD AND AS SUCH THERE WAS NO POSSIBILITY OF EARNING ANY INCOME FROM THE SAME. UNDOUBTEDLY THERE A DIFF ERENCE IN THE WORDINGS OF SECTION 36(1)(III) AND SECTION 57(III) BUT THAT DIFFERENCE HAS NO IMPACT SO FAR AS THE RATIO OF THIS DECISION IS C ONCERNED. 14. IN THE CASE OF CIT VS M ETHURAJAN ( 273 ITR 95) HONBLE MADRAS HIGH COURT HAS OBSERVED THAT THE PLAIN AND NATURA L CONSTRUCTION OF THE LANGUAGE OF SECTION 57( III ) OF THE ACT IRRESISTIBLY LEADS TO THE CONCLUSION THAT TO BRING A CASE WITHIN THAT SECTION IT IS NOT NECESSARY THAT ANY INCOME SHOULD IN FACT HAVE BEEN EARNED AS A RESUL T OF THE EXPENDITURE AND THAT WHAT SECTION 57( III ) OF THE ACT REQUIRES IS THAT THE EXPENDITURE MUST BE LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF MAKING OR EARNING INCOME. THEIR LORDSHIPS HAVE FU RTHER OBSERVED THAT THIS SECTION DOES NOT REQUIRE THAT THIS PURPOSE MU ST BE FULFILLED IN ORDER TO QUALIFY THE EXPENDITURE FOR DEDUCTION : IT DOES NOT SAY THAT THE EXPENDITURE SHALL BE DEDUCTIBLE ONLY IF ANY INCOME IS MADE OR EARNED VIDE RAJENDRA PRASAD MOODYS CASE ( SUPRA ). WHEN BORROWINGS WERE RESORTED TO THE OBJECT OF THE EXPENDITURE WAS TO E ARN INTEREST INCOME WHICH IS TAXABLE AS INCOME FROM OTHER SOURCES AN D IT IS ONLY BECAUSE OF THE SUBSEQUENT SALE OF THE BONDS THAT DEDUCTION HAS BEEN DECLINED. THAT GROUND AS WE HAVE SEEN ABOVE IS NOT A GOOD GROUND FOR DECLINING THE DEDUCTION. 15. WE HAVE ALSO NOTED THAT COORDINATE BENCHES OF T HIS TRIBUNAL HAVE UPHELD ADMISSIBILITY OF DEDUCTION IN RESPECT OF INT EREST ON BORROWINGS FOR INVESTMENTS IN THE SAME BONDS IN THE ASSESSMEN T YEAR 2003-04 AND 2004-05 AS WELL. I.T.A NOS. 135 & 733/ MUM/2009: ASSESSMENT YEAR: 2005-06 PAGE 11 OF 17 16. IN VIEW OF THE ABOVE DISCUSSIONS WE ARE OF THE CONSIDERED VIEW THAT INTEREST ON BORROWINGS FOR INVESTMENTS IN THE BONDS CONSTITUTES ADMISSIBLE DEDUCTION. THE DISALLOWANCE UPHELD AND ENHANCED BY THE CIT(A) IS ACCORDINGLY DELETED. 17. GROUND NOS. 2 AND 3 ARE THUS ALLOWED. 18. IN GROUND NO. 4 THE ASSESSEE IS AGGRIEVED OF CIT(A)S UPHOLDING THE DISALLOWANCE OF RS 1 55 60 599 UNDER SECTION 40 (A)(IA) OF THE ACT. 19. THERE IS NO DISPUTE THAT THE ASSESSEE HAS NOT D EDUCTED TAX AT SOURCE AS REQUIRED UNDER SECTION 194C FROM PAYMEN T OF RS 1 55 60 599 ON ACCOUNT OF SUPPLY OF MANPOWER BY DARSHAW SECURI TIES PVT LTD. IT IS FOR THIS REASON IMPUGNED DISALLOWANCE HAS BEEN MADE BY THE ASSESSING OFFICER WHICH HAS ALSO BEEN SUSTAINED IN APPEAL BY THE CIT(A). EVEN AS ASSESSEE IS IN APPEAL BEFORE US AND CLAIMS THAT SUC H A NON DEDUCTION WAS NOT MALAFIDE THERE ARE NO SPECIFIC FURTHER ARGUMEN TS AGAINST THE DISALLOWANCE. ALL THAT THE ASSESSEE SUBMITS IS THAT THE DEDUCTION SHOULD BE GRANTED IN THE YEAR IN WHICH THE TAXES ARE ACTUA LLY PAID. THAT ISSUE AS CIT(A) RIGHTLY NOTES WILL ARISE ONLY IN THE YEAR I N WHICH PAYMENT IS MADE AND NOT IN THIS YEAR. THERE IS THUS NO NEED TO INTE RFERE IN THE MATTER. WE CONFIRM THE ACTION OF THE AUTHORITIES BELOW AND DEC LINE TO INTERFERE IN THE MATTER. 20. GROUND NO. 4 IS THUS DISMISSED. I.T.A NOS. 135 & 733/ MUM/2009: ASSESSMENT YEAR: 2005-06 PAGE 12 OF 17 21. IN THE RESULT ASSESSEES APPEAL IS PARTLY ALLO WED IN THE TERMS INDICATED ABOVE. 22. THAT TAKES US TO THE APPEAL FILED BY THE ASSESS ING OFFICER. 23. IN THE FIRST GROUND OF APPEAL THE ASSESSING OF FICER HAS RAISED THE FOLLOWING GRIEVANCE : 1. (I) ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW THE LEARNED CIT (A) ERRED IN DIRECTING THE AO TO TREAT THE LOSS INCURRED ON ACCOUNT OF DERIVATIVE TRANSACTIO N AS NON SPECULATIVE WITHOUT APPRECIATING THE FACT THAT SUC H TRANSACTIONS ARE NON DELIVERY BASED WITHIN THE PROV ISIONS OF THE SECTION 43(5) OF THE I.T.ACT. (II) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW THE LEARNED CIT (A) ERRED IN NOT CONSIDERING T HAT THE PROVISO TO 43(5) ARE MAINLY TO COVER THE LOSSES THA T MAY ARISE BY WAY OF HOLDING THE STOCKS AND NOT TO COVER CASES OF SIMULTANEOUS PURCHASE AND SALE OF SHARES/DERIVATIVE S WITH A VIEW TO EARNING PROFITS OUT OF PRICE DIFFERENTIALS IN DIFFERENT SEGMENTS. (III) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CIT (A) ERRED IN HOLDING THE TRANS ACTION IN DERIVATIVES TO BE NON SPECULATION LOSS WHEN ADMITTE DLY THE TRANSACTIONS WERE SETTLED OTHERWISE THEN BY ACTUAL DELIVERY OR TRANSFER. I.T.A NOS. 135 & 733/ MUM/2009: ASSESSMENT YEAR: 2005-06 PAGE 13 OF 17 24. THE SHORT QUESTION INVOLVED IN THIS GROUND OF A PPEAL IS WHETHER THE LOSS ON SALE OF DERIVATIVES CAN BE TREATED AS SPECU LATION LOSS. THE ASSESSMENT YEAR INVOLVED IS 2005-06. THE ASSESSING OFFICER WAS OF THE VIEW LOSS ON SALE OF DERIVATIVES IS IN THE NATURE O F SPECULATION LOSS BUT THE CIT(A) RELYING UPON DECISION OF A COORDINATE B ENCH IN THE CASE OF DCIT VS SSKI INVESTORS SERVICES PVT LTD (113 TTJ 51 1) HELD THAT DEALING IN DERIVATIVES BEING A SEPARATE KIND OF TRANSACTI ON WHICH DOES NOT INVOLVE ANY SALE OR PURCHASE LOSS ON SALE OF DERIV ATIVES CANNOT BE TREATED AS SPECULATION LOSS. THE ASSESSING OFFICER IS AGGRI EVED AND IS IN APPEAL BEFORE US. 25. LEARNED REPRESENTATIVES FAIRLY AGREE THAT THIS ISSUE IS NOW COVERED AGAINST THE ASSESSEE BY SPECIAL BENCH DECISION OF T HIS TRIBUNAL IN THE CASE OF SHREE CAPITAL SERVICES LTD. V. ACIT 124 TTJ 74 0. THE DECISION RELIED UPON BY THE CIT(A) HAS BEEN REVERSED IN THE SAID DE CISION AND IT IS HELD THAT CLAUSE ( D ) OF THE PROVISO TO SECTION 43(5) CANNOT BE SAID TO BE CLARIFICATORY IN NATURE. IT WAS HELD THAT IT IS PRO SPECTIVE IN NATURE WITH EFFECT FROM APRIL 1 2006 I.E. THE ASSESSMENT YEAR 2006-07 ONWARDS. AFTER HOLDING THIS IT WAS ALSO HELD THAT LOSS ON A CCOUNT OF FUTURE OPTION WAS RIGHTLY TREATED AS SPECULATIVE LOSS FOR THE ASS ESSMENT YEAR 2004-05 WHICH WAS UNDER CONSIDERATION BEFORE THE SPECIAL BE NCH OF THE TRIBUNAL. IN THE PRESENT CASE THE ASSESSMENT YEAR INVOLVED I S 2005-06 AND HENCE AS PER THIS DECISION OF THE SPECIAL BENCH OF THE TR IBUNAL CLAUSE ( D ) OF THE PROVISO TO SECTION 43(5) INSERTED BY THE FINANCE AC T 2005 WITH EFFECT FROM APRIL 1 2006 IS NOT APPLICABLE TO THE PRESENT CASE ALSO AND HENCE BY RESPECTFULLY FOLLOWING THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE PRESENT CASE ALSO WE DECIDE THIS ISSUE AGAI NST THE ASSESSEE. RELIEF GRANTED BY THE CIT(A) ON THIS ISSUE IS THUS VACATED . I.T.A NOS. 135 & 733/ MUM/2009: ASSESSMENT YEAR: 2005-06 PAGE 14 OF 17 26. GROUND NO. 1 IS THUS ALLOWED. 27. GROUND NOS. 2 3 AND 4 WHICH ARE SOMEWHAT INTE RCONNECTED ARE AS FOLLOWS: 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW THE LEARNED CIT (A) ERRED IN IGNORING THE FACT THAT ZER O COUPON BONDS HAS BEEN TRANSFERRED BY THE ASSESSEE BEFORE T HE EXPIRY OF THE PERIOD OF 36 MONTHS FROM THE DATE OF ACQUISI TION OF THE SAID ASSET. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW THE LEARNED CIT (A) IGNORED THE FACT THAT ZERO COUPON B OND HAS BEEN INCORPORATED IN SECTION 2(42A) W.E.F. 1.4.2006 I.E. AY 2006-07 AND NOT FOR AY 2005-06 WHEREIN THE ASSESSEE HAS TO HOLD THE ZERO COUPON BOND FOR A PERIOD OF AT LEAST 36 MONTHS FOR TREATING THE SAME AS LONG TERM CAPITAL ASSET. 4. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW THE LEARNED CIT (A) ERRED IN HOLDING THAT THE ASSESSEE NEITHER OFFERED THE ACCRUAL OF INTEREST ON MSRDC=2018 ZERO COUPON BONDS FOR AY 2004-05 NOR THIS INCOME WAS TAXED BY T HE AO DESPITE THE FACT THAT AS PER THE VALUATION MADE BY THE ASSESSEE ITSELF THE VALUE OF THE BONDS AS ON 31.3.2004 WAS THE SAME AS THE COST OF ACQUISITION AND HENCE NO INTEREST ACCRU ED FOR AY 2004-05. I.T.A NOS. 135 & 733/ MUM/2009: ASSESSMENT YEAR: 2005-06 PAGE 15 OF 17 28. THE RELEVANT MATERIAL FACTS ARE LIKE THIS. DURI NG THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTIC ED THAT THE ASSESSEE HAS DISCLOSED LONG TERM CAPITAL GAINS OF RS 32 17 0 4 601 ON SALE OF ZERO % MSRDC BONDS 2018. THE CLAIM OF THE ASSESSEE WAS THA T SINCE THESE BONDS WERE HELD FOR A PERIOD OF MORE THAN ONE YEAR THE G AINS ON SALE OF THESE BONDS WERE REQUIRED TO BE TREATED AS LONG TERM CAPI TAL GAINS. HOWEVER THE ASSESSING OFFICER BASED ON HIS ANALYSIS OF CB DT CIRCULAR DATED 15 TH FEBRUARY 2002 HELD THAT THE GAINS ON SALE OF THES E BONDS ARE TAXABLE AS CAPITAL GAINS. AGGRIEVED ASSESSEE CARRIED THE MATT ER IN APPEAL BEFORE THE CIT(A). THE CIT(A) NOTED THAT BONDS SOLD BY THE A SSESSEE WERE COVERED BY THE DEFINITION OF SECURITIES UNDER SECTION 2(H ) OF THE SECURITIES CONTRACTS REGULATIONS ACT 1956 AND THAT THESE BO NDS WERE DULY LISTED ON THE NATIONAL STOCK EXCHANGE OF INDIA. ACCORDINGL Y IN TERMS OF PROVISO TO SECTION 2(42A) OF THE INCOME TAX ACT WHERE THES E BONDS WERE HELD BY THE ASSESSEE FOR TWELVE MONTHS THE SAME QUALIFIED TO BE TERMED AS LONG TERM CAPITAL ASSETS. AS REGARDS THE QUESTION OF T AXABILITY OF INTEREST ON BONDS THE CIT(A) ALSO NOTED THAT HONBLE DELHI HIG H COURT IN THE CASE OF CIT VS MGF LIMITED (272 ITR 191) HAS HELD THAT INT EREST ACCRUAL ON ZERO COUPON BONDS IS NOT TAXABLE ON ACCRUAL BASIS. WITH THESE OBSERVATIONS THE CIT(A) UPHELD THE CLAIM OF THE ASSESSEE AND DIR ECTED THE ASSESSING OFFICER TO TREAT THE CAPITAL GAIN ON SALE OF BONDS AS LONG TERM CAPITAL GAIN. THE ASSESSING OFFICER IS AGGRIEVED AND IS IN APPEAL BEFORE US 29. HAVING HEARD THE RIVAL CONTENTIONS AND HAVING P ERUSED THE MATERIAL ON RECORD WE ARE NOT INCLINED TO INTERFERE IN CONC LUSIONS ARRIVED AT BY THE LEARNED CIT(A). THE REASON IS SIMPLE. THERE IS NO DISPUTE THAT IN TERMS OF THE PROVISO TO SECTION 2 (42A) A LISTED S ECURITY QUALIFIES TO BE A LONG TERM CAPITAL ASSET WHEN HELD FOR TWELVE MONTH S OR MORE. THERE IS I.T.A NOS. 135 & 733/ MUM/2009: ASSESSMENT YEAR: 2005-06 PAGE 16 OF 17 ALSO NO DISPUTE THAT THE BONDS HELD BY THE ASSESSEE ARE COVERED BY THE DEFINITION OF SECURITY UNDER THE RELEVANT PROVISION S OF THE STATUE I.E. SECTION 2 (H) OF THE SECURITIES CONTRACTS (REGULATI ON ) ACT AND THAT THESE ARE LISTED IN THE NATIONAL STOCK EXCHANGE OF INDIA. HOWEVER THE ASSESSING OFFICER HAS HELD THAT THE BONDS ARE REQUIRED TO BE TREATED AS SHORT TERM CAPITAL ASSET BUT THEN IT IS ONLY ELEMENTARY THA T CIRCULARS ISSUED BY THE CENTRAL BOARD OF DIRECT TAXES DONOT OVERRIDE THE LE GAL PROVISIONS OF THE STATUE EXCEPT TO THE EXTENT THESE CIRCULARS ARE M ORE BENEFICIAL TO THE ASSESSEE. IN OTHER WORDS THESE CIRCULARS CAN ONLY RELAX THE RIGOUR OF LAW. AS OBSERVED BY HONBLE SUPREME COURT IN THE CASE O F UCO BANK VS CIT (239 ITR 889) SUCH (CBDT) CIRCULARS HOWEVER ARE NOT MEANT FOR CONTRADICTING OR NULLIFYING ANY PROVISION OF THE ST ATUTE AND THAT THESE CIRCULARS ARE MEANT FOR ENSURING PROPER ADMINISTRA TION OF THE STATUTE THEY ARE DESIGNED TO MITIGATE THE RIGOURS OF THE AP PLICATION OF A PARTICULAR PROVISION OF THE STATUTE IN CERTAIN SITUATIONS BY A PPLYING A BENEFICIAL INTERPRETATION TO THE PROVISION... THE ASSESSING OFFICER THUS CANNOT DERIVE ANY SUPPORT FROM THE CBDT CIRCULARS TO PUT A SSESSEE TO ANY DISADVANTAGE VIS--VIS THE LEGAL POSITION UNDER THE PROVISIONS OF THE INCOME TAX ACT. THE CIT(A) WAS QUITE JUSTIFIED IN REVERSING THE STAND TAKEN BY THE ASSESSING OFFICER TO PROCEED TO DECIDE TAXABILITY OF GAINS ON SALE OF BONDS AS PER THE UNAMBIGUOUS PROVISIONS OF THE INCOME TAX ACT. IN VIEW OF THESE DISCUSSIONS WE UPHOLD THE STAND O F THE CIT(A) AND DECLINE TO INTERFERE IN THE MATTER. 30. GROUND NO. 2 3 AND 4 ARE THUS DISMISSED. I.T.A NOS. 135 & 733/ MUM/2009: ASSESSMENT YEAR: 2005-06 PAGE 17 OF 17 31. IN THE RESULT APPEAL OF THE ASSESSING OFFICER IS THUS PARTLY ALLOWED IN THE TERMS INDICATED ABOVE. TO SUM UP BOTH THE A PPEALS ARE PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON 23 RD FEBRUARY 2010 SD/- (ASHA VIJAYARAGHAVAN) (JUDICIAL MEMBER) SD/- (PRAMOD KUMAR) (ACCOUNTANT MEMBER) MUMBAI DATED 23 RD FEBRUARY 2010 PARIDA COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER OF INCOME TAX (APPEALS)- MUMBAI 4. COMMISSIONER OF INCOME TAX MUMBAI 5. DEPARTMENTAL REPRESENTATIVE BENCH D MUMBAI //TRUE COPY// BY ORDER ASSTT. REGISTRAR ITAT MUMBAI