TMI Blog2012 (11) TMI 748X X X X Extracts X X X X X X X X Extracts X X X X ..... ds and examined. Further, from examination of the balance-sheet, it is evident that the assessee does not have own funds to make such investments because the share capital and reserves of the assessee as shown on 31.03.2000 in the balance-sheet of the company is only Rs.1,35,000/- and Rs.97,185/- respectively. Therefore, it is evident that the assessee has diverted the interest bearing funds for making such investments. Further the working of. AO that interest to the extent of Rs.17,32,449/- is attributable to interest on funds diverted is not disputed by the assessee’s A.R - CIT(A) is justified in confirming the addition. Order of AO and CIT(A) on this issue is confirmed - Ground of appeal is dismissed - In the result, appeal of the assessee is partly allowed. - ITA No. 774/Ahd./2007 - - - Dated:- 20-1-2012 - Shri Bhavnesh Saini Shri A.Mohan Alankamony, JJ. Appellant By : Shri S.N.Divatia, A.R. Respondent By : Shri Vinod Tanwani, Sr.D.R. Order Per Shri A.Mohan Alankamony, Accountant Member : This appeal is filed by the Assessee aggrieved by the order of the ld. CIT (A)-V, Ahmedabad in Appeal No. CIT(A)-V/ACIT(OSD) R- 1/76/2004-05 and Appeal No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness of the assessee. d) The directors had opted to disclose the loss in the name of the company as per their convenience. e) The directors are the employees of the company and such huge investment is not permissible in the name of the individual directors from the funds of the company. f) The directors are not permanent in the company and are changed by rotation at any point of time or they can leave the company by tendering resignation. Hence, investment made by the company in their name is not justifiable. g) All the benefits derived from the mutual funds will flow only to the investors of the mutual funds. The assessee company will not be benefited in any manner on such transactions. Therefore, the argument that the company had invested in the name of the directors cannot be accepted. With the above observations, the ld. AO disallowed the loss claimed by the company to the tune of Rs.80,77,500/-. 3.2 Regarding the next issue, the ld. AO observed that the assessee had debited interest amount of Rs.17,32,449/- in its P L account. On verification of the facts, it was observed by the ld. AO that the assessee did not have its own fund to advance to the directors for i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of units. The Company Law has made several provisions in Companies Act to protect interest of share-holders so that of such investment in mutual fund cannot be made in the name of directors who happens to be employees of the company. As discussed earlier, copy of application made in the name of all the directors was not at all furnished. Copy of application of other directors show that there is no mention at all about the name of the company and investment has been categorically made in individual hands, cheques have been issued from director's personal accounts and even the address given in the application form is that of their own and not that of the company. Here a very important point to be noted is that actually for investment in these units in the name of directors no cheques were issued by the company in the name of Sun F C Mutual Fund, but the money was first transferred to the individual accounts of Directors with Madhavpura Mercantile Co-op. Bank and these directors had issued cheques from their accounts in their own names for investment in these units. This fact has all along been tried to be concealed but the same is apparent from the cheque numbers which have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies 1. Elder Pharma Ltd. 231,000.00 2. Television 18 Ltd. 225,000.00 3. Sun F C Emerging Tech Fund 22,500,000.00 Unquoted Securities 1. M.M.C. Bank Ltd. 175,000.00 23,131,000.00 5.1 Ld. AR submitted that the company had decided to invest in the mutual fund in the name of the directors and for that purpose, the Board had passed resolution. He further submitted that section 139(9) of the Act does not require the Board s resolution to be attached with the return of income and therefore, failure to attach such resolution can not change the ownership of the investment. He further argued that the Companies Act does not require any such mention in the director s report or auditor s report. However, these facts were disclosed in the Notes to Accounts for the financial year 1999-2000. The ld. AR further submitted that affidavits were filed to substantiate the claim that the directors had no personal interest in these investments. It was also pointed out that the directors had also made certain investments in these mutual funds in their individual capacity which clearly establish that both the directors and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies not for the purpose of the business of the company but for purchase of securities and shares. The assessee had responded before the ld. AO with the following arguments: Since the company carry out different activities, it can not be said that the fund utilised by the company is safety for investment in units of mutual fund. Out of the total fund deployed by the company at the beginning of the year, only 67.54% fund is blocked in investment and residual fund is blocked in current assets of the company. Similarly, out of the total fund available with the company, only 77% of the fund is bank borrowing whereas other fund is from share capital and interest free loans. Further, the beneficiary of the investments is the company, the interest paid to the bank is allowable being business expenditure. The argument regarding diversion of funds to the directors is not tenable since the investment is for the company and not for the benefit of directors as explained in detail as mentioned in para 1 above. On the contrary, directors and their relatives have brought in interest free deposits worth Rs. 92.96 lacs in the company. As regards, disallowance of interest on the ground of inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that even it is presumed that investment in mutual fund is made out of borrowed fund, yet the assessee would be entitled to deduction under section 57(3) of the Act. 10. The ld. D.R. stoutly argued in support of the Revenue and contended that proper cash flow statements are not produced by the assessee in order to establish that interest bearing funds have not been diverted to other companies and the directors of the company for making investments in mutual funds. 11. We have heard the rival submissions and carefully perused the materials on record. In order to establish that interest bearing funds are not diverted for making investments in mutual funds, proper cash flow statements have to be prepared before such diversion of funds and examined. The assessee has not provided the same before the ld. AO, the ld. CIT(A) or even before us at this stage. Further from examination of the balance-sheet, it is evident that the assessee does not have own funds to make such investments because the share capital and reserves of the assessee as shown on 31.03.2000 in the balance-sheet of the company is only Rs.1,35,000/- and Rs.97,185/- respectively. Therefore, it is evident that the as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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