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2016 (5) TMI 1218 - ITAT MUMBAI

2016 (5) TMI 1218 - ITAT MUMBAI - TMI - Disallowance u/s 36 (1) (iii) - interest on loan - Held that:- Assessee had advanced the loans during the normal course of business and therefore interest expenditure was allowable as per the provisions of section 36 (1) (iii)of the Act. The AO has not brought on record anything to prove that expenditure incurred under the head interest was not wholly and exclusively for carrying out the business of the assessee for the year under consideration. Therefore, .....

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assessee

Valuation loss treated as speculation loss - Held that:- We find that the assessee had shown interest income of ₹ 23. 78 crores. That in the MOA the main object of the company has been mentioned as financing. As per the settled principle of taxation jurisprudence section 73 is not applicable if the assessee is engaged in Finance business. Thus provisions of section 73 r. w. explanation was not applicable. Therefore reversing the order of the FAA, we decide the effectiv .....

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appeals for the above mentioned assessment years (AY. s. ). Assessee-company, engaged in the business of finance, investing and trading in shares and securities. A summary of the details of filing of returns, returned incomes, assessed incomes etc. are as under: A. Y. ROI filed on Returned Income(Rs. ) Assessment dt. Assessed Income(Rs. ) Dt. of orders of CIT(A) 2008-09 29. 09. 2008 (Revised return filed on)31. 03. 2010 (-)1, 95, 96, 440/- (-)5, 88, 94, 130/- 24. 12. 2010 7390 17. 12. 2012 2009 .....

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free investment, that it did not result in any income. He asked the assessee to explain as to why the excess interest paid over interest received should not be disallowed. In response, the assessee stated that it was a NBFC, that it had to follow the directions of RBI, that it had made provisions for Non-Performing Assets (NPA), that out of total loss of ₹ 160. 30 crores loan of ₹ 31. 97 crores was classified as NPA, that it had given advance of ₹ 2. 82 crores against the shar .....

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at similar issue had been dealt with by his predecessor in detail while computing the assessment for the AY. 2007-08 where in assessee s reply was not found acceptable. Following the order for the AY. 2007-08, the AO worked out the interest disallowance at ₹ 92. 57 lakhs. He found that sums of ₹ 25 lakhs and ₹ 17. 57 lakhs were already disallowed by the assessee in the revised computation of income u/s. 36 (1) (iii) of the Act. He restricted the disallowance at ₹ 50 lakhs .....

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issue was dealt by his predecessor while computing the assessment for the AY. 2007-08, that the AO had failed to appreciate that no assessment was completed u/s. 143(3)of the Act for that year, that the AO had made the disallowance without any basis, that the assessee had sufficient interest free funds in form of reserves and surplus, advance share application money received and interest-free loan received totalling to ₹ 239 crores, that the advance share application money was made out of .....

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07-08, that in the assessment order for the AY. 2006-07 there was no scrutiny, that the AO had made the disallowance without any basis. He further held that the assessee had made investment which would yield income in form of dividend, that the investment had been made for purpose of earning income, that interest expenditure incurred for earning income had to be allowed u/s. 36 (1) (iii) of the Act. Finally, he deleted the disallowance made by the AO. 4. During the course of hearing before us, t .....

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und that the- then-AO had not made any disallowance under the head interest attributable to share application money of the sister concern. Thus, the whole base of making the addition goes. Therefore, confirming the order of the FAA first ground of appeal is decided is the AO. 5. Next ground is about deleting the disallowance of ₹ 3. 05 crores made u/s. 37 (1) of the Act, being notional interest. During the assessment proceedings, the AO found that the assessee had advanced number of loans .....

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rovisions of section 14A of the Act, that the further disallowance of ₹ 92. 57 lakhs was made u/s. 36(1)(iii) of the Act. So, he disallowed balance interest i. e. ₹ 3. 05 crores u/s. 37 (1) of the Act. 6. Challenging the order of the AO, the assessee preferred an appeal before the FAA. Before him, it was argued that the assessee had given loans and advances in earlier years, that some of which had turned bad, that as the recovery was doubtful so it had classified them as NPAs as per .....

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) and argued that hypothetical income could not be brought to tax even though the assessee company was following mercantile system of accounting, that notional interest on doubtful advances could neither be accounted for nor could be assessed as income of the assessee, that it was in the business of finance and had given the loan in its normal course of business. After considering the submission of the assessee and the assessment order, the FAA held that as per the balance sheet of the assessee .....

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dvances in the capcity of a NBFC, that the interest expenses on the borrowed funds was required to be allowed u/s. 36 (1) (iii) of the Act, that the AO had made the disallowance is u/s. 37 (1) of the Act, that the provisions of section 37(1)would apply to any expenditure which was not covered by the provisions of section 30-36 of the Act, that the interest expenditure incurred by the assessee was allowable u/s. 36(1)(iii), that the provisions of section 37 of the Act were not applicable. He furt .....

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otional income. Finally, he allowed the appeal filed by the assessee. 7. Before us, the DR contended that assessee was following mercantile system of accounting, that the interest had accrued to it, that the AO were justified in taxing the same. The AR argued that assessee had advanced the loans in the normal course of business, that some of the loans became NPAs, that the assessee did not provide interest for such loans, that the interest expenditure was allowable u/s. 36/37 of the Act, that th .....

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1516 dtd. 24/04/2001. In our opinion, NBFCs are not required to credit interest income on accrual basis. In the case of Bobcards Ltd. (29 taxmann. com 234) the Tribunal has held as under: Since as per RBI guidelines wide vide Non-Banking Financial Companies Prudential Norms (Reserve Bank) Directions, interest income on NPA was required to be credited on actual receipt basis and not on accrual basis, that the assessee being a NBFC, was bound to follow said guidelines . The Tribunal further held t .....

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ear under consideration. Therefore, confirming the order of the FAA, we dismiss the second ground, raised by the AO. ITA No. 2862/M/2013, AY. 2008-09 9. The effective ground of appeal, raised by the assessee, is about disallowance made u/s. 14A of the Act, amounting to ₹ 2. 21 crores under the head interest expenditure and ₹ 12. 15 lakhs out of the administrative and other expenses. During the assessment proceedings, the AO found that assessee had made invest -ment in equity shares o .....

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ethod prescribed by rule 8D of the Income Tax Rules, 1962 (Rules), that it had made investment in earlier years, that there was no direct nexus of loan taken with the investment made, that out of total expenditure ₹ 42. 57 lakhs was related to share application money given to Digital Media and one more entity, that the said amount had already been disallowed u/s. 36 (1)on its own in the computation of total income, that share application money given to New Media was considered doubtful, th .....

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er considering the submission of the assessee, the AO held that disallowance was to be made u/s. 14 A r. w. r. 8D of the Rules and he disallowed ₹ 2. 3 crores. 10. Before the FAA the assessee made elaborate submissions. It was argued that it had made strategic investments in its sister concern, that it had sufficient interest funds available for making investment in Indian subsidiary/associated companies, that interest expenditure should not be considered for disallowance u/s. 14 A of the .....

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the assessee was having opening balance of investment of ₹ 56. 43 crores, that the closing balance was at 48. 43 crores, that as per schedule VI of the balance sheet there was no movement in the share of different companies held by it, that the difference in opening and closing balances was on account of provision of diminution in value of investment, that as per the balance sheet there were secured and unsecured loans of ₹ 78. 29 crores, that the own fund of share capital reserve an .....

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d investments made, that the possibility of utilisation of borrowed funds for making investment could not be ruled out, that some expenditure was attributable to investment activity and consequently earning of exempt income, that the assessee had not offered any disallowance u/s. 14A in the return of income, that the provisions of section 14A(2) were applicable, that the assessee itself had offered disallowance of ₹ 2. 33 crores during the assessment proceedings, that argument made by the .....

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trative and managerial expenses had to be worked out as per the formula provided in sub-clause (iii) of Rule 8D. Finally, the FAA upheld the order of the AO. 11. During the course of hearing before us, the AR argued that the total investment made by the assessee stood at ₹ 48. 43 crores, that no dividend out of any of investments was received by the assessee during the year under consideration, that dividend of ₹ 92. 64 lakhs pertained to the shares which were held as stock in trade, .....

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had made alternative submissions during the course of assessment proceedings, that without prejudice it was submitted that disallowance could be made for the said amount, that it was specifically mentioned that the assessee had incurred expenditure of ₹ 44, 840/- as administrative charges, that disallowance had to be restricted to the said amount only, that the assessee had argued that no disallowance in respect of stock-in-trade-interest could be made, that the assessee had not made the i .....

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ind that assessee was holding shares as stock in trade as well as investments, that it had earned dividend income for the shares held as stock in trade only, that assessee had not earned any dividend from the investments made for the year under appeal, that the investment was made in the shares of unquoted companies, that it had made strategic investment in group companies. A perusal of the balance sheet of the assessee revealed that the funds available to it was far more than the investment mad .....

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re sufficient own funds there was a presumption that investment in tax-free securities was made out of own funds. In the case of Pan India network infravest Pvt. Ltd. (ITA/3378/Mum/2013-AY. 2009-10, dated11/05/016), we have held as under : 5. We have heard the rival submissions and perused the material before us. There is no doubt that the assessee had not earned exempt income during the year under consideration, so, in our considered opinion, no disallowance can be made u/s. 14A of the Act. We .....

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of facts and the arguments from both sides, we find that the Hon ble Delhi High Court in the aforesaid order dated 02/09/2015 held that where no exempt income was earned by the assessee in the relevant assessment years and since the genuineness of expenditure is not in doubt, there is no question of disallowance u/s 14A of the Act. While coming to this conclusion, the Hon ble High Court relied upon following decisions:- i. Cheminvest Ltd. v. CIT [2009] 317 ITR (AT) 86 (Delhi) [SB] (para 15) ii. .....

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para 10) ix. CIT v. Shivam Motors (P. ) Ltd. (ITA No. 88 of 2014 decided on 5-5-2014) (para 15) x. IT v. Winsome Textile Industries Ltd. [2009] 319 ITR 204 (P&H) (para 15) , xi. Eicher Goodearth Ltd. vs. CIT [2015] 378 ITR 28 (Delhi) (para 14) xii. Harish Krishnakant Bhatt v. ITA [2005] 278 ITR (AT) 1 (Ahd) (para 10) " xiii. Maxopp Investment Ltd. v. CIT [2012] 347 ITR 272 (Delhi) (para 12) 3. 1. In view of the factual matrix and following the aforesaid decision from Hon ble Delhi High .....

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lity of sufficient own funds, non-receipt of exempt income during the year, and strategic investment in the sister concerns-we hold that the FAA was not justified in upholding the disallowance. Reversing his order we decide effective ground of appeal in favour of the assessee. ITA No. 4416/M/2014-AY. 2009-10: 13. The effective Ground of appeal is about deleting the addition of ₹ 7. 74 crores made by the AO under section 36(1)(iii) of the Act. We find that the issue is identical to the issu .....

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ution in the value of closing stock of ₹ 4. 12 crores(OB-Rs. 29. 60 cr-CB-Rs. 25. 48cr. ). He directed the assessee to explain the reason of the loss reported in the P&L account. The assessee stated that stock was valued at cost of market price which ever was low, that the stock was part of the trading stock, that loss due to diminution in value was allowable. However, the AO did not agree with the assessee and held that diminution in stock value had to be treated as speculation loss. .....

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y it, that the P&L A/c. for the year reflected a loss of ₹ 4. 12 crores on valuation of shares, that it carried forward the valuation loss as business loss, that the explanation to section 73 could not be applied. He referred to the case of Karnataka Bank Ltd. (34taxmann. com150) wherein the Hon ble Court had held that loss on valuation of shares held as stock in trade was allowable as deduction. He further argued that the AO had wrongly placed reliance on Explanation to section 73, th .....

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diminution were furnished during the assessment proceedings, that the details of such diminution was arrived by valuing 22 scrips. After considering the submission of the assessee and the assessment order the FAA held that provisions of section 73 were not applicable in case of certain assessee s only, that the assessee had suffered loss on account of valuation of closing stock of shares, that the assessee was trading in shares, that the assessee had made purchase during the year, that the busi .....

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