Income Tax Appellate Tribunal - Ahmedabad
Megh Mahar Finstock Pvt Ltd, Ahmedabad vs Department Of Income Tax on 3 November, 2009
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "B" AHMEDABAD
Before Shri H.L. KARWA, JUDICIAL MEMBER and
Shri N.S. SAINI, ACCOUNTANT MEMBER
Date of hearing:3.11.2009 Drafted on: 3.11.2009
ITA No.1924/AHD/2002, ITA No.1428/AHD/2000
& ITA No.2381/AHD/2002
Assessment Year : 1997-1998, 1995-1996, 1996-
1997
ACIT/JCIT, Vs. M/s. Megh Malhar Finstock
Cir.-4, (P) Ltd., Ambuja Tower, Opp.
Ahmedabad. Memnagar Fire Station,
Ahmedabad.
PAN/GIR No. : 31-108-CQ-7229
(APPELLANT) .. (RESPONDENT)
Appellant by : Shri D.S.Benupani CIT D.R.
Respondent by: Shri S.N.Soparkar, Sr. Adv. with
Shri M.K.Kaji
ORDER
PER BENCH:-
These appeals are filed by the Revenue against the separate orders of the ld.CIT(Appeals)-VIII, Ahmedabad, dated 13.03.2002, 1.03.2000 and
2.04.2002.
ITA No.1924/AHD/20021. The Ld.CIT(A) has erred in law and as well as on facts in directing the A.O. to treat dividend income as income from speculation business and to give set off of speculation loss amounting to Rs.4,28,100/- against the dividend income amounting to Rs.3,90,015/-.
2. The Ld.CIT(A) has erred in law and as well as on facts in deleting addition of Rs.80,89,754/- treating it as revenue expenditure whereas from the detailed discussion in assessee's own case for A.Y. 1995-96 and 1996-97, it was proved that the amount was borrowed for the purpose of increasing stake of the assessee in Gujarat Ambuja Cotspin Ltd. and not for the purpose of business.
ITA No..19 2 4/ AH D/ 20 0 2, 14 28 /A HD / 20 00& I TA N o .2 38 1/ AH D/ 2 00 2 M/s.Megh Malhar Finstcok P. Ltd.
A Y : 1 99 7 -9 8, 19 95 - 96, 19 96 - 97 -2-
3. On the facts and circumstances of the case, the Learned CIT(A) ought to have upheld the order of Assessing Officer.
4. It is therefore, prayed that the order of the Ld. CIT(A) be set aside and that of the Assessing Officer be restored to the above extent. "
ITA No.1428/AHD/20001. The Ld. CIT(A), Dy. CIT(A) has erred in law and on fact in deleting the following addition:-
i) Interest on funds borrowed from SFC Rs.2,00,89,053/-
ii) Interest on allotment money paid to GACL Rs. 81,37,701/-
iii) Interest on share application money to GACL Rs. 20,02,192/-
iv) Allowing to set off speculation loss against dividend Rs. 43,750/-
2. On the facts and in circumstances of the case, the ld. CIT(A) Dy.CIT(A) caught to have upheld the order of the Assessing Officer.
3. It is therefore, prayed that the order of the Ld. CIT(A) Dy. CIT(A) may be set aside and that of the order of the Assessing Officer be restored to the above extent.
ITA No.2381/AHD/20021. The Ld.CIT(A) has erred in law as well as on facts in deleting disallowance of interest of Rs.4,53,10,429/- made by the A.O.
2. The Ld.CIT(A) has erred in law as well as on facts in directing the A.O. to allow set off of speculation loss amounting to Rs.23,000/- against dividend income.
3. On the facts and circumstances of the case, the Learned CIT(A) ought to have upheld the order of Assessing Officer.
4. It is therefore, prayed that the order of the Ld.CIT(A) be set aside and that of the Assessing Officer be restored to the above extend.
2. Ground no.1 of the appeal in Assessment Year 1997-1998, ground no.1(iv) of the appeal in Assessment Year 1995-1996 and Ground no.2 of the appeal in Assessment Year 1996-97 are directed against the order of the Learned Commissioner of Income Tax(Appeals) in directing the Learned Assessing Officer to treat the dividend income amounting to Rs.3,90,015/- in Assessment Year 1997-98, Rs.40,750/- in Assessment Year 1995-96 and Rs.8,35,051/- Assessment Year 1996-97 as income from speculation business and to give set off of speculation loss amounting to Rs.4,28,100/- in Assessment Year 1997-98, Rs.3,55,73,144/- in Assessment Year 1995-96 and Rs.23,000/- in Assessment Year 1996-97.
ITA No..19 2 4/ AH D/ 20 0 2, 14 28 /A HD / 20 00& I TA N o .2 38 1/ AH D/ 2 00 2 M/s.Megh Malhar Finstcok P. Ltd.
A Y : 1 99 7 -9 8, 19 95 - 96, 19 96 - 97 -3-
3. The brief facts of the case are that the assessee is engaged in purchase and sale of shares and loss derived has been considered in the return of income as speculation transaction of shares and securities. The assessee earned dividend income of Rs.43,750/- in Assessment Year 1995-96 and showed the same as other income in the profit and loss account. The assessee company has also shown business loss of Rs.3,55,73,144/- in the share transactions. This loss was treated as speculation business loss as per the explanation to Section 73 Of the Income Tax Act 1961 and dividend income of Rs.43,750/- was reduced from the aforesaid speculation business loss and net loss was computed. The Learned Assessing Officer was of the view that the treatment given by the assessee is not in accordance with the provisions of section 73 of the Act and the speculation business loss can be set off only against the speculation business profit. Since, there was no speculation business income, the speculation business loss could not be set off against the income from other sources. In view of the above facts, the Learned Assessing Officer taxed the dividend income of Rs.43,750/- under the head income from other sources and did not allow set off against the speculation loss. Except for the change in figures similar are the facts in the Assessment Years 1996-97 and 1997-98. In appeal, the Learned Commissioner of Income Tax(Appeals) held that dividend income arising out of shares held as stock in trade for the purpose of set off of loss was business income allowed the claim of the assessee.
4. The Learned Authorised Representative of the Assessee filed consolidated order of the Tribunal in assessee's own case in the cross appeals filed by the Revenue and the Assessee for Assessment Year 1992-93 in ITA Nos. 5303/Ahd/1996 and ITA No.4599/Ahd/1996 dated 30th July 2002 and ITA No..19 2 4/ AH D/ 20 0 2, 14 28 /A HD / 20 00& I TA N o .2 38 1/ AH D/ 2 00 2 M/s.Megh Malhar Finstcok P. Ltd.
A Y : 1 99 7 -9 8, 19 95 - 96, 19 96 - 97 -4- submitted that the issue has been decided in favour of the assessee by the said order of the Tribunal. Following the same, the appeal of the assessee should be allowed in the present years of appeal also.
5. The Learned Departmental Representative supported the order of the Learned Assessing Officer.
6. We have heard the rival submissions and perused the orders of the lower authorities and the materials available on record. In the instant case, the assessee has claimed set off of dividend income earned from shares held as stock in trade against the business loss suffered in the purchase and sale of shares which was treated as deemed speculation loss under proviso to section 73 of Income Tax Act, 1961. The same was disallowed by the Learned Assessing Officer as according to him speculative business loss can be set off against speculative business income and as dividend income was taxed under the head income from other sources, the same cannot be set off against the speculative business loss of the assessee. In appeal, the Learned Commissioner of Income Tax (Appeals) allowed the set off as claimed by the assessee holding that dividend income arising out of shares held as stock in trade for the purposes of set off of loss was business income. Being aggrieved by the said order of the Learned Commissioner of Income Tax (Appeals), the revenue is in appeal before us. We find that a similar issue came before the Tribunal in the assessee's own case in Assessment Year 1992-93, wherein vide order passed in ITA No.5303/Ahd1996 and ITA No.4599/Ahd/1996 on 30th July, 2002, the Tribunal has held as under:
"2. The Learned DR relied upon the detailed reasons mentioned in the assessment order. It was pointed out by him that the loss of Rs.3, 10,900/- claimed by the assessee on sale and purchase of 2000 shares of ITA No..19 2 4/ AH D/ 20 0 2, 14 28 /A HD / 20 00& I TA N o .2 38 1/ AH D/ 2 00 2 M/s.Megh Malhar Finstcok P. Ltd.
A Y : 1 99 7 -9 8, 19 95 - 96, 19 96 - 97 -5- Reliance Limited was clearly a speculation loss which could not be set off against profits of regular business carried out by the assessee. HE thus strongly urged that the order of the Learned Commissioner of Income Tax (Appeals) on this point should be reversed and that of the Learned Assessing Officer should be restored . The ld. Counsel appearing on behalf of the assessee submitted that the loss of Rs.3, 10,900/- claimed by the assessee on sale and purchase of 2000 shares of Reliance Limited is undoubtedly as speculation loss but the entire profits derived by the assessee in other transactions of dealing in shares is also deemed to be speculative profits by virtue of a clear interpretation of plain language used in Explanation to section 73. He drew out attention to the audited statements and the note mentioned below the computation of total income and the audited balance sheet submitted at pages 63 and 69 of the compilation to show that the assessee company is an Investment Company solely engaged in the business of purchasing and selling of shares of companies. The explanation to section 73 is reproduced below.
Explanation:-Where any part of the business of a company [other than a company whose gross total income consists mainly of income which is chargeable under the head "interest on securities", "Income from house property", "Capital gains" and "income from other sources"] or a company the principal business of which is the business of banking or the granting of loans and advances) consists in the purchases and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.] 2.1 The audited Profit & Loss account shows that out of total income of Rs.12,11,808/-, the other income was only Rs.71,060/-. The remaining amount represents profit/loss on purchase/sale of shares. It is also not a company whose principal business is business of banking or granting loans and advances. Therefore, the purchase and sale of shares of other companies made by the appellant company shall, for the purpose of section 73, be deemed to be carrying on a speculative business. Therefore, the loss in speculative business has rightly been set off against profits which are deemed to be profits of speculation business. 2.2 After considering the aforesaid submissions made by the learned representatives of the parties, we are of the view that the order passed by the CIT (A), in respect of the aforesaid point is perfectly valid and justified. The view so taken by the CIT (A) is supported by clear ITA No..19 2 4/ AH D/ 20 0 2, 14 28 /A HD / 20 00& I TA N o .2 38 1/ AH D/ 2 00 2 M/s.Megh Malhar Finstcok P. Ltd.
A Y : 1 99 7 -9 8, 19 95 - 96, 19 96 - 97 -6- interpretation of plain language used in Explanation to section 73. The order passed by the CIT (A) in relation to this ground is therefore, held to be valid and justified. The Revenue's appeal has therefore, no merit.
7. The Learned Departmental Representative could not show any good reasons to not to follow to the above quoted order of the Tribunal. Facts being identical, respectfully following the precedent, we dismiss this ground of appeal of the Revenue in all the years of appeal.
8. Ground no.2 of the Appeal in Assessment Year 1997-98, Ground no.2 and Ground no.3 of the appeal in Assessment Year 1995-96 and ground no.1 of the appeal in Assessment Year 1996-97 are directed against the order of the Learned Commissioner of Income Tax(Appeals) deleting the addition of Rs.80,89,754/- in Assessment Year 1997-98, Rs.81,37,701/- and Rs.20,02,192/- in Assessment Year 1995-96 and Rs.4,53,10,429/- in Assessment Year 1996-97 treating it as revenue expenditure when from the discussion in the assessment order, it is shown that amount was borrowed for the purpose of increasing the stake of assessee in Gujarat Ambuja Cotspin Ltd. and not for a purpose of business.
9. The brief facts of the case are that In the Assessment Years 1995-96; the assessee had advances a sum of 7 Crores out of borrowed funds to M/s. GACL. This money was given on 1.2.1995 towards share application money for the proposed public issue of the company to finance the Denim project. M/s. GACL projected the need of total finance of Rs.85 Crores for the said project. As a promoter of the company, the assessee was also asked to finance the project by investing the funds in the nature of shares application money to be subsequently converted into shares. M/s. GACL, thereafter, in the last week of ITA No..19 2 4/ AH D/ 20 0 2, 14 28 /A HD / 20 00& I TA N o .2 38 1/ AH D/ 2 00 2 M/s.Megh Malhar Finstcok P. Ltd.
A Y : 1 99 7 -9 8, 19 95 - 96, 19 96 - 97 -7- March, 1995, decided to set up the project from internal accruals and loans from the financial institutions instead of equity and therefore, it refunded the total application money to the assessee. On this investment of Rs.7 Crores, the assessee was saddled with the interest burden of Rs.20, 02,192/-. The finding of the Learned Assessing Officer was that this expenditure on interest was not for the purpose of business and therefore, the interest payment of Rs.20, 02,192/- was disallowed. Further, assessee claimed interest paid to M/s. GACL on delayed payment of allotment money at Rs.81, 37,702/-. The Learned Assessing Officer observed that action of the assessee in purchase/subscription of the shares of M/s.GACL is not at all that of a normal trader and investor and hence, disallowed the interest expenditure claimed by the assessee.
10. In the Assessment Year 1996-97, the brief facts are that the Learned Assessing Officer observed that so far as disallowance of interest of opening balance is concerned, it has been made on the basis of findings recorded by the Learned Assessing Officer for Assessment Year 1995-96. Even for interest on fresh loans taken during the year it was held by Learned Assessing Officer that as discussed for Assessment Year 1995-96, the sole purpose of acquiring shares of Gujarat Ambuja Cotspin Ltd. was to acquire control and hence the reasoning given in Assessment Year 1995-96 were applicable even to this transaction.
11. In Assessment Year 1997-98, interest expenditure of RS.80, 89,759/- was disallowed following the order of the Learned Assessing Officer passed in Assessment Year 1995-96 and 1996-97. The Learned Assessing Officer disallowed the interest expenditure in Assessment Year 1995-96 for the reason that interest expenditure was not for the purpose of business as it was incurred on loans borrowed for the purpose of increasing the share holding of the ITA No..19 2 4/ AH D/ 20 0 2, 14 28 /A HD / 20 00& I TA N o .2 38 1/ AH D/ 2 00 2 M/s.Megh Malhar Finstcok P. Ltd.
A Y : 1 99 7 -9 8, 19 95 - 96, 19 96 - 97 -8- assessee in Gujarat Ambuja Cotspin Ltd and not for the purpose of business. During the year under consideration, no fresh loan was borrowed and interest expenditure related to the outstanding borrowing as reduced by repayments made.
12. In appeal, the Learned Commissioner of Income Tax (Appeals) deleted the disallowance of interest expenditure made in Assessment Year 1995-96 by observing as under:
"It is noticed that the facts and circumstances and the basis of this disallowance is exactly similar as it was in the case of Smt. Sulochana V. Gupta appeal No.CIT(A)XIT/CC.1(2)/110/98-99 for A.Y. 95-96. This appeal has since been decided by me with regard to this issue on 1.03.2000. The reasoning of the AO for making this disallowance is exactly similar as it was in the case of Smt. Sulochana V. Gupta. The arguments of the appellant against the disallowance are again exactly similar as these were in the case of Smt. Sulochana V. Gupta. Naturally, the same finding has to follow with regard to this disallowance. Following my own order as referred above in the case of Smt. Sulochana V. Gupta, for the same reasoning and logic, the Learned Assessing Officer is directed to allow the claim of interest as made by the appellant. This ground of appeal is accordingly decided in favour of the assessee.
13. For the very same reasons for which the disallowance of interest expenditure was deleted in Assessment Year 1995-96, the Learned Commissioner of Income Tax(Appeals) deleted the disallowance of interest expenditure in the Assessment Years 1996-97 and 1997-98.
14. Learned Authorised Representative of the Assessee during the course of the hearing filed copy of the consolidated order of the Tribunal dated 25.04.2008 passed in the case of Shri Vijaykumar D. Gupta and Smt. Sulochana V. Gupta in ITA Nos. 1430/Ahd/2000, 1359/Ahd/2003, 1431/Ahd/2000 with ITA No..19 2 4/ AH D/ 20 0 2, 14 28 /A HD / 20 00& I TA N o .2 38 1/ AH D/ 2 00 2 M/s.Megh Malhar Finstcok P. Ltd.
A Y : 1 99 7 -9 8, 19 95 - 96, 19 96 - 97 -9- C.O.No.225/Ahd/2002 in the Assessment Years 1995-96 and 1997-98 and submitted that this ground of appeal of the revenue has to be allowed in view of the above decision of the Tribunal.
15. We have heard the rival submissions and perused the orders of the lower authorities and the materials available on record. In the instant case, the assessee has utilised the borrowed funds for increasing its share holding in the company M/s.Gujarat Ambuja Cotspin Ltd. and claimed deduction for interest on borrowed funds which was disallowed by the Learned Assessing Officer and was allowed by the Learned Commissioner of Income Tax(Appeals) following the order dated 1.03.2000 of the Learned Commissioner of Income Tax(Appeals) in the case of Smt. Sulochana V. Gupta appeal No.CIT(A)XIT/CC.1(2)/110/98-99 for A.Y. 95-96. On further appeal to the Tribunal in the case of Smt.Sulochana Gupta, the appeal of the revenue was allowed and order of the Learned Assessing Officer was restored. We find that the Tribunal while doing so held as under:
"We have carefully considered the rival submissions and, perused the material on record. This is an undisputed fact that when the assessee has applied for allotment of shares and paid the share application money, GACL was having authorised capital of Rs.95 Crores, the company could not have issued the shares without increasing the authorised capital. The share application money was returned to the assessee subsequently without allotting the shares. The assessee is one of the promoters of GACL. The funds have been advanced by GACL to SFC whose proprietor was one of the employees of GACL and in turn the assessee has received the funds from SFC and ultimately given the share application money to GACL. The money was advanced in respect of shares which were never allotted to the assessee. The assessee although claims that he derived income from the business and has claimed the deduction u/s. 36(1)(iii). We have also gone through the company of the balance sheet as filed by the assessee and we noted that the assessee has shown some of the shares in Gujarat Alkalies Group Company as investment while the other ITA No..19 2 4/ AH D/ 20 0 2, 14 28 /A HD / 20 00& I TA N o .2 38 1/ AH D/ 2 00 2 M/s.Megh Malhar Finstcok P. Ltd.
A Y : 1 99 7 -9 8, 19 95 - 96, 19 96 - 97
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shares were shown as stack in trade. Therefore, we do not agree with the plea of the Learned Authorised Representative that the shares were held as stock in trade and the assessee paid the share application money for acquiring the business assets. We have also gone through the decision as relied upon by the learned DR in the case of DCIT V. Pramukh Oxygen Pvt. Ltd. [ITA Nos.3939/Ahd/2002, 1935 and 1936/Ahd/2001, for AYs 1996-97 to 1998-99] and we find that the facts involved in that case are similar to the facts in the case of the assessee. In that case also the assessee had made payment of Rs.43, 30,000/- as share application money to one M/s. Akshar Pvt. Ltd. a sister concern of the assessee out of the funds borrowed by taking loan from Baroda Peoples Co-op. Bank for which the assessee has deposited a sum of Rs.12,40,000/- as margin money with the bank for this purpose which was taken from Ashokjyot Oxygen Pvt. Ltd. another concern of the assessee. In the case before us there is a clear cut finding given by the AO that the funds had been rotated from GACL to SFC, from SFC to the assessee and against went back to GACL. No material or evidence was brought before us by the Learned AR which may prove that the finding given by the AO is not correct. This finding, in our opinion, remains uncontroverted and due to this finding the fact involved in this case are also similar to the facts in the case of DCIT V. Pramukh Oxygen Ltd. in which this Tribunal has vide order dated 31.10.2005 restored the order of the Learned Assessing Officer disallowing the interest by observing as under:-
"4. We have heard the parties and considered their rival submissions. When the assessee has applied for allotment of shares on 8-5-1995 and paid the full value of the shares and when the project for which the share capital was being raised could not be completed because of recession in the market and another unfavorable market conditions, the question of retaining the assessee's money did not arise. This may amount to be utilization of assessee's money by them received in the garb of application money. Be that as it may, even if it is considered to be application money, the interest would not be an allowable deduction to the assessee because the shares have never comes on the surface. It is true that in view of the Calcutta High Court decision in the case of Rajiv Lochan Kanoria (Supra), an interest on borrowed capital utilised for purchase of shares of different companies in order to acquire controlling interest may be an allowable deduction but the as had not acquired any controlling interest and, therefore, the said decision would not be of any held to the assessee. Similarly, the decision of the Gujarat High Court in the case of Laxmi Agents Pvt. Ltd. (supra), the interest paid was for acquiring shares of its managed ITA No..19 2 4/ AH D/ 20 0 2, 14 28 /A HD / 20 00& I TA N o .2 38 1/ AH D/ 2 00 2 M/s.Megh Malhar Finstcok P. Ltd.
A Y : 1 99 7 -9 8, 19 95 - 96, 19 96 - 97
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company and it was held to be an allowable deduction under section 36(1)(iii) of the Act. This decision would also not be of any help to the assessee in the absence of purchase of shares. The decision of Chandigarh Bench of the Tribunal in the case of Shivalik Agro Polyproducts (Supra) referred to by the Learned Commissioner of Income Tax(Appeals) is also of no help to the assessee because in that case, the diversification of business by the sister concern out of borrowed funds was held to be for the purpose of business. Here, the project was abandoned by the company of whose shares. The assessee thought of purchasing and in spite of the abandonment of the project the assessee's money was retained by them.
5. The Ld. Counsel of the assessee submitted that even otherwise the money given for the purchase of shares as application money would be for making and earning income from dividend of that company and therefore, would be an allowable deduction u/s. of the Act. Here also we do not find any merit in the claim of the assessee. The shares have never come into existence. The interest payment with relation to the amount attributable to share application money without the allotment of shares would not entitle the assessee to claim any deduction for the interest paid on such borrowings and could not be said to be an expenditure incurred wholly and exclusively for the purpose of making and earning income from other sources. The orders of the Learned Commissioner of Income Tax(Appeals), in our opinion, are not in accordance with law and the same are reversed and those of the AO are restored."
Respectfully following the decision of the coordinate bench of this Tribunal, we set aside the order of the CIT (A) and restore the order of the AO disallowing the claim of interest. Thus, Ground no.1 stands allowed.
16. The Learned Authorised Representative of the Assessee has submitted that the appeal of the Revenue has to be allowed in view of the above quoted decision of the Tribunal, therefore, respectfully following the above decision of Tribunal, we allow this ground of appeal in all the years of appeal.
17. Ground no.1 of the appeal in Assessment Year 1995-96 is directed against the order of Learned Commissioner of Income Tax(Appeals) deleting ITA No..19 2 4/ AH D/ 20 0 2, 14 28 /A HD / 20 00& I TA N o .2 38 1/ AH D/ 2 00 2 M/s.Megh Malhar Finstcok P. Ltd.
A Y : 1 99 7 -9 8, 19 95 - 96, 19 96 - 97
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the addition made on account of disallowance of interest on funds borrowed from SFC Rs.2,00,89,053/- .
18 The brief facts of the case are that the assessee had claimed an amount of Rs.3,02,28,947/- as interest paid. Out of this amount, a sum of Rs. 2,20,91,245/- stood paid to M/s. Sharma Finance Co. (SFC for short). The case of the assessee was that during the year under consideration it had received loans from M/s. SFC who was providing short term finance at the rate of 18% per annum to the assessee on need basis. During the year under consideration, the assessee had borrowed substantial funds from M/s. SFC for the purpose of business of the assessee. In support, statement of utilization of loans received from M/s. SFC was provided to the Learned Assessing Officer. As per assessee, it could be verified from the statement that the borrowed finance was utilised either in stock in trade or investment or funds were utilised to repay the creditors or to meet temporary bank over drafts or to meet working capital gap. It was the case of the assessee before the Learned Assessing Officer that it could be verified that none of the application of funds was made out of business and therefore, the interest on borrowed loans has to be allowed in full. The Learned Assessing Officer pointed out that claim of interest on funds utilised for purchase/subscription of shares of group company was liable to be disallowed in view of the decision of I'ble Gujarat High Court in the case of Virmali Ramkrishna Vs. CIT (131 ITR 659) and Sarabhai & Sons Vs. CIT (201 ITR
464).
19. In appeal, the Learned Commissioner of Income Tax(Appeals) deleted the disallowance by observing to quote as under:
ITA No..19 2 4/ AH D/ 20 0 2, 14 28 /A HD / 20 00& I TA N o .2 38 1/ AH D/ 2 00 2 M/s.Megh Malhar Finstcok P. Ltd.
A Y : 1 99 7 -9 8, 19 95 - 96, 19 96 - 97
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"After carefully considering the issue involved, it is felt that the action of the Learned Assessing Officer in this regard is unjustified. The facts of the issue are so clear that no adverse inference could possibly be drawn. There is no dispute with regard to the basic fact that the appellant company was carrying on business as a dealer in shares and therefore shares acquired by it were an item of stock in trade. It is also undisputed fact that during the year, the assessee had borrowed substantial funds from M/s. SFC for the purpose of business of the assessee. Perusal of profit and loss account and balance sheet reveals substantial increase in the stocks acquired, since against opening stock of Rs.19,54,175/- closing stock shot up to Rs.19,00,15,930/-. Statement of utilization of loans received from M/s. SFC and has produced before the Learned Assessing Officer clarified the position with regard to utilization of the loans. It was verified and found correct by the Learned Assessing Officer that none of the application of funds was made for non-business purposes. For this very simple reason alone the claim of interest was liable to be allowed in full. In Para 5 above, it has been reproduced as how the borrowed funds were utilised for acquisition of shares of different group as well as outside companies and the version of the assessee is not found to be contrary to the claim made. Shares of group companies as well as other companies were also soled during the year and the balance stock remained with the assessee at the end of the year. None of these facts are disputed by the Learned Assessing Officer. In this view of the factual situation, the claim of interest on borrowings was clearly allowable 36(1)(iii). There is a clear nexus established in the facts of the case that the appellant had made borrowings for the purpose of business and shares acquisitions were part of the trading activity of the assessee. Once it is established that the appellant had made borrowings for the purpose of business. There is no way to disallow the claim of interest made. The case law as cited by the assessee above fully supports the claim of the assessee. It seems, perhaps the Learned Assessing Officer got influenced by the fact that earning of income did not result in the instant case. But the legal position is that earning of income is not sine qua non for allowing this claim. The claim is clearly allowable I 36(1)(iii) of the Income Tax Act. In view of the clear factual as well as legal position above, the impugned disallowance as made by the Learned Assessing Officer is directed to be deleted since the same is contrary to the facts as well as law. It is also noticed that the Learned Assessing Officer has referred to the facts from other connected cases ITA No..19 2 4/ AH D/ 20 0 2, 14 28 /A HD / 20 00& I TA N o .2 38 1/ AH D/ 2 00 2 M/s.Megh Malhar Finstcok P. Ltd.
A Y : 1 99 7 -9 8, 19 95 - 96, 19 96 - 97
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which have also been since adjudicated by me. In the connected case of Smt. Sulochana V. Gupta in appeal No.CIT(A)XII/CC.1(2).110/98-99, I have held that there was actual borrowing leading of funds involved and M/.s SFC was an accepted tax paying identity. Similarly, assessments of M/s. GACL and M/s.SFC were completed by the Department without any adverse inference. In this background, there was nothing to hold anything against the present assessee. Learned Assessing Officer has not been able to prove that the transactions involved were sham and loans were not actually taken. It is also not proved that the shares of different companies were not acquired. Once these facts remain undisputed, the claim of the assessee for payment of interest has to succeed irrespective of the fact of non-earning of income. The assessee was already having controlling stake in M/s. GACL and therefore, it could not be held that purchase/subscription of shares was made with the motive of acquisition of controlling stake. To conclude, the Learned Assessing Officer is directed to allow the claim of interest as made. This ground of appeal is accordingly decided in favour of the assessee."
20. The Learned Authorised Representative of the Assessee submitted that the issue is squarely covered by the decision of Ahmedabad Bench of Tribunal in the case of Additional Commissioner of Income Tax V. Ataku Holdings (P) Ltd. (2005) 87 TTJ 293 AHD where it was held that interest on amount borrowed for purchase of shares by assessee, an investment company, was allowable as deduction. He further submitted that this decision was followed by the Ahmedabad Bench of the Tribunal in the case of Income Tax Officer V. Vikalpo Financial & Management Services, in ITA No.965/Ahd/2000 Assessment Year 1996-97 order dated 16.12.2005. Hence, it was his submission that the appeal of the assessee should be allowed.
21. The Learned Departmental Representative supported the order of the Learned Assessing Officer.
ITA No..19 2 4/ AH D/ 20 0 2, 14 28 /A HD / 20 00& I TA N o .2 38 1/ AH D/ 2 00 2 M/s.Megh Malhar Finstcok P. Ltd.
A Y : 1 99 7 -9 8, 19 95 - 96, 19 96 - 97
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22. We have heard the rival submissions and perused the orders of the lower authorities and the materials available on record. In the instant case, the assessee claimed deduction for interest expenditure of Rs.3,02,28,947/- out of which sum of Rs.2,20,91,245/- was paid to M/s. Sharma Finance Company. The Assessee claimed that it had received loans from M/s. SFC @ 18% per annum which was utilised for its business purposes and hence, was allowable deduction to the assessee. The Learned Assessing Officer pointed out that the claim of interest on funds utilised for purchase/subscription of shares of group company was liable to be disallowed in view of decision of Gujarat High Court in the case of Virmati Ramkrishna V.s. CIT (131 ITR 659). In view of the above, the Learned Commissioner of Income Tax (Appeals) disallowed the interest expenditure of Rs.2,00,89,053/-. The Learned Commissioner of Income Tax(Appeals) observed that the assessee company was carrying on business as a dealer in shares and the shares were acquired by it as stock in trade. Further, during the year assessee borrowed funds from M/s. SFC for the business. From the Profit & Loss account and balance sheet, it is found that there is substantial increase in the stocks acquired since against opening stock of Rs.19,54,175/- closing stock was Rs.19,00,15,930/-. The assessee filed statement of utilization of loan received before the Learned Assessing Officer which clarified the position with regard to the utilization of loan and the same was verified and found to be correct. The Learned Assessing Officer has not found that any of the funds was utilised for non business purposes. The assessee has acquired shares of different groups which were sold during the year and balance stock remained with the assessee at the end of the year. These facts are not disputed by the Learned Assessing Officer. Thus, there is a clear nexus established between the borrowed funds and their utilizations for purpose of business and ITA No..19 2 4/ AH D/ 20 0 2, 14 28 /A HD / 20 00& I TA N o .2 38 1/ AH D/ 2 00 2 M/s.Megh Malhar Finstcok P. Ltd.
A Y : 1 99 7 -9 8, 19 95 - 96, 19 96 - 97
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share acquisition were part of trading activity of the assessee. Therefore, we held that the interest was allowable deduction under section 36(1) (iii) of the Act. The Learned Commissioner of Income Tax (Appeals) also observed that the Learned Assessing Officer relied on the facts from other connected cases which have since been adjudicated by him. In the connected case of Smt. Sulochana V. Gupta in appeal no. CIT (A)XII/CC.1(2)/110/98-99, it was held by him that there was actual borrowing/lending of funds involved and M/s. SFC was an accepted tax paying entity. Similarly, assessments of M/s.GACL and M/s.SFC were completed by the department without any adverse inference. Therefore there was nothing to hold anything against the assessee. The Learned Assessing Officer has not been able to prove that the transaction involved was sham and loans were not actually taken and that shares of different company were not acquired. We thus find that in the instant case, the undisputed facts are that the assessee is engaged in the trading of shares, the shares forms part of the business assets of the assessee, borrowed funds were utilized for the purpose of acquisition of shares and interest was actually paid by the assessee in respect of such borrowings. Only contention raised by the revenue was that as the assessee has also acquired shares of group companies with borrowed funds, interest thereon is not allowable in view of the decision of the Hon'ble Gujarat High Court in the case of Virmati Ramkrishna -vs.- CIT (supra) and Sarabhai & Sons -vs.- CIT (supra). We have gone through both the above decisions and find that both are distinguishable on facts and are not applicable in the instant case. In both the above decisions, it was found that borrowed funds were utilized not for the purpose of earning income but were utilized either for acquiring controlling interest or were incurred for the purpose of saving tax liabilities. Thus in those cases, it was found that interest expenditure ITA No..19 2 4/ AH D/ 20 0 2, 14 28 /A HD / 20 00& I TA N o .2 38 1/ AH D/ 2 00 2 M/s.Megh Malhar Finstcok P. Ltd.
A Y : 1 99 7 -9 8, 19 95 - 96, 19 96 - 97
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was incurred not for the purpose of earning income and in both the cases deduction was claimed by the assessee under section 57 of the Act. In the instant case, deduction was claimed under section 36(1)(iii) and no material was brought on record to controvert the above submission of the assessee that the interest expenditure was incurred for the purpose of acquiring of stock-in- trade of business with a view to earn business income. In our considered opinion, the above decisions are therefore, not applicable in the instant case. Further, we find that the assessment years involved in the present appeals are assessment years 1995-96, 1996-97 and 1997-98 in which dividend income was taxable. We, therefore, do not find any good reason to interfere with the order of the Learned Commissioner of Income Tax(Appeals). It is confirmed and the ground of appeal of the revenue is dismissed.
23. Ground no.3 and 4 of the appeal in Assessment Year 1997-98, Ground no.2 and 3 of the Appeal in Assessment Year 1995-96 and 3 and 4 of the Appeal in Assessment Year 1996-97 are general in nature and requires no adjudication by us.
24. In the result, all the appeals of the revenue are partly allowed as above.
Order signed, dated and pronounced in the Court on 6/11/2009.
Sd/- Sd/- ( H.L. KARWA ) ( N.S. SAINI ) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad; Dated 6/11/ 2009 Prepared and compared by : Paras
ITA No..19 2 4/ AH D/ 20 0 2, 14 28 /A HD / 20 00& I TA N o .2 38 1/ AH D/ 2 00 2 M/s.Megh Malhar Finstcok P. Ltd.
A Y : 1 99 7 -9 8, 19 95 - 96, 19 96 - 97
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Copy of the Order forwarded to :
1. The Appellant
2. The Respondent
3. The CIT Concerned
4. The ld. CIT(Appeals)-
5. The DR, Ahmedabad Bench
6. The Guard File.
BY ORDER, स×याǒपत ूित //True Copy// (Dy./Asstt.Registrar), ITAT, Ahmedabad