TMI Blog2012 (10) TMI 667X X X X Extracts X X X X X X X X Extracts X X X X ..... enses have to be considered. Dis-allowance of interest and treating the same as part of speculation loss in all the years under consideration is upheld. Dis-allowance u/s 14A of interest expenditure in relation to dividend income - Held that:- Assessee had made huge borrowings on which interest of Rs. 12.68 crores had been paid. Net capital of company was negative to the tune of Rs. 20.57 crores and there were no reserves nor any other interest free funds available in AY 2001-02. The conclusion of the AO that the borrowed funds had been utilized for investment in shares is, therefore, reasonable and dis-allowance of interest in relation to such investment is required to be made u/s 14A. However, interest relating to the borrowings used in the purchase of trading shares from which dividend had been received is required to be excluded from such dis-allowance. Dis-allowance of interest u/s 36(1)(iii) - huge borrowings on one side - amount advanced on other side towards application money for purchase of shares of group companies which had been pending for a long time - assessee has argued that trading and investment in shares was business of the assessee - Held that:- Assessee h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loss, disallowance of interest under section 36(1)(iii) and disallowance of interest under section 14A of the Act. 3. We first take up the issue relating to treatment of losses form trading in shares as speculation loss under the provisions of Explanation to section 73. The assessee, in all the years, had declared losses from trading in shares which was Rs. 15,30,05,394 in the assessment year 2001-02; Rs. 1,09,67,140 in assessment year 2002-03 and Rs. 49,25,300 in assessment year 2003-04 which had been treated by AO as speculation loss under provisions of Explanation to section 73. The Assessing Officer had also disallowed interest on borrowings used for trading in shares and treated the same as speculation loss. The interest disallowed in relation to trading in shares were Rs. 3,79,87,928 in assessment year 2001-02; Rs. 3,99,66,788 in assessment year 2002-03 and Rs. 3,83,21,891 in assessment year 2003-04. The CIT(A) has confirmed the order of the Assessing Officer treating the trading loss as speculation loss and has also confirmed the disallowance of interest in relation to trading in shares and treating the same as part of speculation loss. The assessee, in assessment year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 Learned Departmental Representative, on the other hand, strongly supported the orders of the authorities below. It was submitted that the provisions of Explanation to section 73, were applicable even when the assessee had only one business i.e., trading in shares as "part" also include whole", as held by the Hon'ble Calcutta High Court in CIT v. Arvind Investments Ltd. [1991] 192 ITR 365/58 taxman 216. It was also submitted that loss attributable to valuation of closing stock while computing the loss from trading in shares has also to be considered as part of speculation loss as the Explanation only deems the business of purchase and sale of shares in certain circumstances as speculation business and, therefore, profit/loss from a business has to be computed as per the accepted method of accounting which includes valuation of closing stock. Learned Departmental Representative further submitted that the principal business of the assessee was trading and investment in shares and not the granting of loans and advances and, therefore, the provisions of Explanation to section 73, were applicable in the case of assessee. 3.3 We have perused the records and considered the rival ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any substance in the argument of the learned Counsel for the assessee that the provisions of Explanation to section 73, will apply only to the loss arising from sale and purchase of shares and not from valuation of closing stock. The Explanation to section 73, only deems the business of purchase and sale of shares as speculation business and, therefore, the profit from such speculation business has to be computed as per the accepted accounting principles which includes valuation of shares as per method followed by the assessee in the closing stock. Therefore, any loss arising from diminution in the value of shares in closing stock will be part of trading loss. Further, it is not necessary that for application of provisions of Explanation to section 73, there should necessarily be purchases and/or sales during the year. The provisions will also apply even if there are no purchases or sales during the year. This view is supported by the judgment of Hon'ble Jurisdictional High Court in Prasad Agents (P.) Ltd. v. ITO [2011] 333 ITR 275/[2009] 180 Taxman 178 (Bom.). Therefore, considering the facts and circumstances of the case, we see no infirmity in the conclusion drawn by the au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cordingly, urged that the entire interest paid was allowable as deduction under section 36(1)(iii). The assessee also placed reliance on the judgment of Hon'ble Supreme Court in Rajasthan State Warehousing Corpn. v. CIT [2000] 242 ITR 450/109 Taxman 145, in which it was held that when the assessee had one composite business part of which had taxable income and part of which gererated non-taxable income, the entire expenditure has to be allowed. The Assessing Officer, however, did not accept the contentions raised. It was observed by him that the judgment was not applicable in view of the provisions of section 14A inserted with retrospective effect. He, accordingly, disallowed the interest under section 14A as proposed earlier. In appeal, the learned CIT(A) confirmed the order of the Assessing Officer, aggrieved by which the assessee is in further appeal before the Tribunal. 4.1 Before us, the learned Counsel for the assessee argued that the dividend income was only incidental to the business income and, therefore, the assessee had not incurred any expenditure for earning of dividend income and accordingly, no expenditure should be disallowed. Reliance for the said propositi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reserves nor any other interest free funds available has been brought to our notice in assessment year 2001-02. The conclusion of the AO that the borrowed funds had been utilized for investment in shares is, therefore, reasonable and proper and since the dividend income from the investment was not taxable, disallowance of interest in relation to such investment is required to be made under section 14A of the Income tax Act. The ld. AR for the assessee has argued that in many cases the Tribunal has upheld the disallowance only at the rate of 2% of the dividend income. These cases are different in which only indirect expenses such as establishment expenses have been disallowed on estimate. In case, there are direct expenses in the form of interest incurred for making investment from which dividend has been received, such expenses have to be disallowed on actual basis. 4.4 However, we find substance in the alternate contention of the ld. AR that dividend had also arisen from trading shares and in respect of such shares which were meant for trading, dividend was only incidental and purchases had not been made for earning dividend income but for trading profit and therefore, in rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee. 5. The third dispute which is relevant in all the appeals, is regarding disallowance of interest under section 36(1)(iii) of the Act. The Assessing Officer, during the course of assessment proceedings, noted that the assessee had made huge borrowings on which substantial interest running into crores had been paid in all the years under consideration. The own funds of the assessee had been completely eroded and became negative due to loss. The assessee had advanced the borrowed funds for allotment of shares of group companies which has been pending for an unreasonably long time. The assessee had also advanced Rs. 25 crores to Panther Invest-trade Ltd. for acquisition of equity shares of companies in Information Communication and Technologies through the said company. The shares were neither delivered nor the money was refunded and the matter was pending in Court. The Assessing Officer, therefore, asked the assessee to explain, as to why the interest on borrowings to that extent should not be disallowed as not incurred for the purpose of business. The assessee submitted that the assessee was in the business of trading, investment in equities capital of companies in diffe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rores., which constituted 83.47% of the total funds and interest bearing funds constituted only Rs. 33.49 crores i.e., 16.53% of total funds. The CIT(A) observed that neither the Assessing Officer had given direct nexus between interest bearing funds and payments for share application money, interest free advance and loans nor the assessee had been able to establish that interest free funds had been used to finance the above investments/loans. Since both the funds were mixed up, CIT(A) took the view that disallowance of interest has to be worked out on proportionate basis after taking into account the total interest free funds and interest bearing funds and investments made. The assessee had filed computation of disallowance of interest at Rs. 75,76,314. The CIT(A), however, observed that the same could not be accepted and required fresh examination. It was noted by him that loss this year had gone up from Rs. 65.06 crores in assessment year 2002-03 to Rs. 87.44 crores in assessment year 2003-04, whereas the assessee's own funds had gone down to Rs. 115.15 crores in assessment year 2003-04 compared to Rs. 117.53 crores for assessment year 2002-03. Further, this year investments had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stantial interest running into crores had been paid. The assessee had however advanced substantial funds towards application money for purchase of shares of group companies which had been pending for a long time and no interest was paid to the assessee. It had also advanced a sum of Rs. 25.00 crores to Panther Invest -trade Ltd. for acquisition of shares of certain companies but, neither the shares were purchased, nor money was refunded and matter was pending in dispute. The AO has computed the interest in relation to the above advance @ of 15% and disallowed the same in all the years. He has also disallowed interest in relation to interest free advances given to Asian Satellite Boradcast P. Ltd. The details of these disallowances are given in para-5 of this order earlier. CIT(A) has confirmed the disallowance in assessment years 2001-02 and 2002-03 but in 2003-04, CIT(A), noted that the assessee had own interest free funds amounting to Rs. 169.09 crores. It has also been noted by him that both interest free funds and interest bearing funds are mixed up. He had therefore directed the AO to compute disallowance of interest on proportionate basis after taking into account the interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her the borrowed fund has been used for acquisition of capital assets or for revenue assets. The said judgment is not applicable as advancing interest free fund to the group companies is not the business of the assessee. The judgment of the Hon'ble High Court of Bombay in the case of Phil Corpn. Ltd. ( supra ), is also not applicable as in that case there was no dispute that the amount had been paid to the sister concern as an integral part of business, which is not so in the present case. 5.6 Therefore, the interest expenses incurred by the assessee towards such interest free advances made for share application in group companies or for acquisition of other companies from the group has to be considered for disallowance. However, in case there are some interest free funds available, the benefit has to be given to the assessee to that extent. On careful perusal of the records, we note that the share capital of the assessee was only Rs. 1.04 crores in 2001-02. There was negative balance of Rs. 21.64 crores in P L Account which was shown on the asset side of the balance sheet and, therefore, own funds of the assessee were negative to the tune of about Rs. 20.00 crores in assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X
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