TMI Blog2018 (3) TMI 810X X X X Extracts X X X X X X X X Extracts X X X X ..... Disallowance made by AO under Rule 8D(2)(iii) - Held that:- Restore the matter back to the file of AO and direct the AO to recompute the disallowance after excluding the investment on which no exempt income has been earned as well as investment in subsidiary companies. Reopening of assessment - allowing setting of speculation loss from trading in shares out of income from trading in commodities - Held that:- Since assessee was trading at un-recognised stock exchange, therefore, income arising out of trading of commodities at such unrecognized stock exchange also amounts to speculation income, therefore, there is nothing wrong for allowing set off speculation loss against speculation income and for carry forward of unabsorbed speculative loss to be set off against the future speculation income. The AO has not disproved that the commodity trading income was not out of unrecognized commodity exchange market and as long as when the assessee earned out of unrecognized commodity exchange, the income or loss out of transaction on such unrecognized exchange will remain speculative in nature- the amendment in Sec 43(5)(d) was only to provide benefit to the assessees to treat their los ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w, it emerges that the loan received from M / s . Lehman Brothers has been utilized for making loans to subsidiary companies . Admittedly, the rate of interest charged is lower than the rate of interest paid to M / s . Lehman Brothers . The assessee is engaged in the business of merchant banking and advisory services . The assessee has given large loans to such subsidiary companies . Therefore, it is evident that the main purpose of the loan taken from M / s . Lehman Brothers was to provide fund to subsidiary companies, which are operating in different fields, such as NBFCs, Insurance business etc . In the case of ascessee company, there was no reason other than to provide funds to its subsidiary companies for taking loan from,M / s . Lehman Brothers . Therefore, by this transaction, the assessee company has incurred loss on account of difference in rate of interest charged and rate of interest paid, Such loss cannot be treated as allowable considering that the transaction is a non - commercial transaction . In view of the above discussion, the loss arising on account of difference between the rate of interest paid to M / s . Lehman ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /- is deleted . Thus, the appellant this ground of appeal is allowed . 8. During the course of hearing before us, the learned AR has relied on the following judicial pronouncements in support of contention that no disallowance of interest is warranted in case of advance to subsidiary at concessional rate of interest or without interest Hero Cycle Pvt . Ltd vs CIT [ 379 ITR 347 SCI S - A . Builders Pvt . Ltd . Vs CIT [ 288 ITR 0001 SC ] CIT vs Reliance Communication Infrastructure Limited [ 260 CTR 0159 ] ACIT vs Reliance Communication Infrastructure Limited [ 2009 - TIOL - 313 ITAT - Mum ] CIT vs Dalmia Cement ( Bharat ) Limited [ 330 ITR 0595 ] ACIT vs Edicon Mining Equipment Pvt . Limited RTA 77S8 / Mum / 20101 ApnalQaa . com India Private Limited [ 2011 - TIQL - 295 - ITAT - Mmnl Trigyn Technologies Limited [ TTA 4855 / Mum / 20091 Bhogilal Laherchand and Sons [ ITA 66 / Mum / 2010 ] 9. Learned DR relied on the order of the AO. 10. We have considered rival contentions and carefully gone through the orders of the authorities belo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter observing as under:- 8 . 11 Before considering whether the AO has correctly computed the disallowance under Rule 8D, it would be worthwhile to consider the findings of the A . O . and the submissions made by the AR's . The AO, after recording his reasons for working out the disallowance under Rule 8D ( 2 ) , has not determined any direct expenditure incurred in relation to the income which does not form part of the total income as per Rule 8D ( 2 )( i ). As regards Rule 8D ( 2 )( ii ) , the AO has worked out the disallowance on account of gross interest debited to the Profit Loss Account . From the findings recorded in the assessment order, it is seen that the AO has arrived at the satisfaction since the appellant did not furnish any documentary evidence or fund flow statement to prove the contention that the shares / mutual funds were not made out of borrowed funds . The AO in the circumstances held that it would be reasonable to conclude that the investments in tax free securities / shares have gone out from a common pool in proportion to the borrowed funds and own funds . In coming to this conclusion, the AO has held tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid on secured / unsecured loans . 8 . 13 On the basis of the aforesaid data / facts from the appellants balance sheet, it is evident that the appellant company had source of own funds ( share capital, share premium profits ) and borrowed funds ( unsecured loans repayable on demand and short term deposits ). The own funds are in excess of the investments made in shares securities . Further, in the facts of appellant's case, the additional funds by way of demand loans and short term deposits were fo .* short term duration . Hence they cannot be said to have been deployed for the purposes of making investments during the year unless and until proximate relation / nexus is established by the A . O . that such investments have been sourced from the borrowings . Thus, it can be concluded that the borrowed funds have not been used for the purposes of investments in shares securities . Besides this, the appellant company is engaged in the business of investment banking and financing . Hence, on the basis of the Jurisdictional High Court decision in the case of CIT v Reliance Utilities and Power Ltd . [ supra ] it is held t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me has to be allowed and hence I find that the A . O . was incorrect in his action to disallow the expenditure which otherwise is allowable u / s . 36 ( 1 )( iii ) of the Act as business expenditure . 8 . 15 Further, to the aforesaid position of appellants own funds and also having regard to the Jurisdictional High Court decision in the case of CIT v Reliance Utilities and Power Ltd . [ supra ] , the appellants AR further argued that the onus is on the AO to establish that the investments in shares and securities are sourced from the appellants borrowed fund and in the absence of such determination of such nexus, it would be incorrect to draw a presumption that the investments in tax free securities / shares have been made out of a common pool of funds in proportion to the borrowed funds and the own funds . I find that the Hon'ble Delhi ITAT have held in the case of Maharashtra Seamless Ltd . ( supra ) and Jindal Photo Ltd . ( supra ) , that it is the duty on the part of the A . O . to prove that the specific claim of the interest expenditure of the appellant company is not related to business expenditure and after this decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Merely, an ad hoc disallowance was made . The onus was on the AO to establish any such expenditure . This onus has not been discharged . In CIT v Hero Cycles ( P H ) 323 ITR 518, under similar circumstances, it was held that the disallowance u / s . 14A of the Act requires a clear finding of incurring of expenditure and that no disallowance can be made on the basis of presumptions . In ACIT v Eicher Ltd . 101 TTJ ( Del ) 369, that it was held that the burden is on the AO to establish nexus of I' expenses incurred with the earning of exempt income, before making any disallowance u / s . 14A of the Act In Maruti Udyog v DCIT 92 ITD 119 ( Del ) , it has been held that before making any disallowance u / s . 14A of the Act, the onus to establish the nexus of the same with exempt income, is on the revenue . In Wimco Seedlings Limited v DCIT 107 ITD 267 ( Del )( TM ) it has been held that there can be no presumption that the assessee must have incurred expenditure to earn tax free income . Similar are the decisions in i . Punjab National Bank v DCIT 1'03 TTJ 908 ( Del ) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investment in the tax free bonds has been made out of the funds of the shareholders of the AO . Having regard to the aforesaid judicial pronouncements, it is he ! d that the onus is on the A . O . to establish that the investments in shares securities are sourced from the appellants borrowed fund and in the absence of determination of such nexus, it would be incorrect to draw a presumption that the investments in tax free securities / shares have been made out of a common pool of funds in proportion to the borrowed funds and the own funds . 8 . 16 Alternatively, in case the ratio laid down by the Hon'ble Bench of Mumbai ITAT in the case of Morgan Stanley India Securities Pvt . Ltd . Vs . ACIT ( Mum ) reported in ITA No . 5072 / M / 2005 6774 / M / 2008 for A . Y . 2001 - 02 2004 - 05 is applied in the facts of the appellant's case, it is seen that the net interest paid is in the negative ( i . e . the gross interest received is in excess of interest paid ). Once the netting of interest is done, there would be no disallowance u / r . 8D ( 2 )( ii ) of the IT rules . While coming to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igh Court in the case of Reliance Utilities Ltd . 313 ITR 340 has laid down the principle that where the own funds are in excess of investments made, there would be a presumption that the investments have been made out of the own funds . The natural corollary of this principle would be that the borrowed funds would be presumed to have been utilized for the purposes of business carried on by an assessee, in case the own funds are sufficient to cover the value of investments . This principle, according to me, establishes a direct attribution of own funds to the value of investments made by an assessee . Further, as per provisions of section 36 ( 1 )( iii ) , interest expenditure on amounts borrowed and used for purposes of business is allowable as deduction while computing the total income under the head 'income from business or profession' Hence in case the borrowed funds have been used for the purposes of business, the entire interest expenditure is allowable u / s . 36 ( 1 )( iii ) of the Act, as the interest expenditure is directly attributable to the incomes or receipts assessable under the head Income from Business or Profession' . In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e) is to be considered. For this purpose reliance was placed on the following judicial pronouncements:- DCIT vs Better Value Leasing Finance Limited [ ITA 2288 / Mum / 2014 ] ITO vs Kamavati Petrochem Pvt Ltd [ TTA 2228 / Ahd / 20121 18. We have considered rival contentions and carefully gone through the orders of the authorities below. We had also deliberated on the judicial pronouncements referred by lower authorities in their respective orders as well as cited by learned AR and DR during the course of hearing before us in the context of factual matrix of the case. From the record we found that own funds of the assessee i.e., share capital and reserves at the end of the year is ₹ 13,49,75,79,368/- however, against this own fund assessee made investment of ₹ 10,59,23,39,574/-. Thus, there was extra own funds of ₹ 2,90,52,39,794/-. With regard to the interest expenditure, we found that interest expenses during the year was ₹ 77,23,08,554/- where as interest income was ₹ 93,48,14,787/-. Thus, there was net income of ₹ 16,25,06,233/- on account of interest. A clear finding has been recorded by CIT(A) both with re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was received, the disallowance works out to be ₹ 49,63,387/-, however, assessee himself has offered disallowance at ₹ 51,46,120/-. Keeping in view the judicial pronouncements referred above, we restore the matter back to the file of AO and direct the AO to recompute the disallowance under Rule 8D(2)(iii) after excluding the investment on which no exempt income has been earned as well as investment in subsidiary companies. We direct accordingly. Assessment Year 2009 - 10 23. In this year also AO has made disallowance u/s.14A r.w.R. 8D(2)(iii). In the return of income assessee has offered disallowance of ₹ 34,85,813/-. 24. From the record, we found that after excluding investment on which no exempt income was received by the assessee, disallowance works out to be ₹ 11,934/- against which assessee has already offered disallowance of ₹ 34,85,813/-, thus, there is an excess offer of disallowance to the tune of ₹ 34,73,879/-. 25. Following the reasoning given in the A.Y.2008-09, we restore the matter back to the file of AO and direct the AO to recompute the disallowance after excluding the investment on which no exempt incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances during the year under consideration are same, respectfully following the reasoning given by us in the A.Y.2007-08 vis- -vis, detailed finding recorded by CIT(A), we do not find any reason to interfere in the order of CIT(A) for deleting disallowance of interest u/s.36(1)(iii). Assessment Year 2010 - 11 ( ITA No . 4329 / Mum / 2014 ): 33. Grounds taken by Revenue are pertaining to disallowance of interest u/s.36(1)(iii). Following the reasoning given by us in the A.Y.2007-08 hereinabove, we do not find any infirmity in the order of CIT(A) for deleting disallowance of interest u/s.36(1)(iii). 34. With regard to the deletion of disallowance made by AO under Rule 8D(2)(ii) and deleted by CIT(A), we found that assessee was having own funds in the form of share capital and reserves amounting to ₹ 13,082,410,000/-. However, investment made by assessee was amounting to ₹ 11,536,050,000/- thus there was an excess own funds of ₹ 1,546,360,000/-. Clear finding to this effect has been given by CIT(A). As the own funds were more than the investment. Following the reasoning given hereinabove, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... my opinion, the Act provides enough power to the AO to reopen the case . Therefore, this part of the issue ( 1 ) is decided in favour of the AO . As regards the second issue involved in this ground is concerned, it forms the question of fact where it is seen that despite reopening of the case the AO has not been able to appreciate the question of facts put up before him by the appellant and has incorrectly relied upon the ratio of judgment in the case of Prasad Agents ( P ) Ltd vs ITO ( 2009 ) 180 taxmann ( Bom ). In case of Prasad Agents the Hon'ble High Court of Bombay upheld the disallowance of AO because in that case loss on diminution of value of shares and its claim as normal loss by the appellant was rejected by High Court since, the appellant did not claim that there was any loss because of trading in shares rather the claim was with regard to loss in diminution of shares . As against this in the present case the appellant has incurred speculation loss on account of trading in equity segment which appellant itself has treated as speculation loss hence the judgment of Hon'ble High Court in the case of Prasad Agents ( supra ) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares is deemed to be speculation business . However, certain companies are excluded from this Explanation, which are : ( i ) a company whose gross total income consists mainly of income which is chargeable under the heads 'Interest on securities', 'Income from house property', 'Capital gains' and 'Income from other sources' . ( ii ) a company, the principal business of which is the business of banking or the granting of loans and advances . [ Para 7 ] Section 43 defines for the purpose of sections 28 to 41 certain terms . These latter provisions fall in Chapter IV - D, which deal with computation of business income . The said provisions provide for matters relating to computation of such income, rent taxes, insurance of buildings, repairs of plant and machinery, depreciation, reserves for shipping business, rehabilitation fund, expenditure on certain eligible objects or schemes, deductions, amounts not deductible, profits chargeable to tax, etc . The assessee is no doubt correct in contending that the only definition of' derivatives' is to be found in section 43 ( 5 ) , yet the Court cannot ig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s upheld . However, the later part of the action of the AO with regard to disallowance of adjustment of speculation loss with speculation income of the appellant to the extent of amount discussed above / is concerned, cannot be held to be justified because of the reasons / analysis of facts given above as well as judicial pronouncements in the case of Bharat Ruia ( supra ) and DLF Commercials ( supra ). In the result, this ground of appeal is to be treated as Partly Allowed . 7 . 1 Ground No . 3 ( a ) and ( b ) relates to action of AO in treating the income of Rs . 16,10,90,3477 - from commodity trading as non - speculative by not allowing set off of speculative loss against thereof . 7 . 2 . The Appellant filed the written submission during the appellate proceeding which is reproduced as under : 3 . 1 The Appellant submits that in the preceding paragraphs ( i . e . 2 . 2 . 3 to 2 . 2 . 6 ) it has duly explained that it has incurred the speculation loss of Rs . 22,52,57,483 /- which has been adjusted against the speculative income of Rs . 16,10,90,347 /- and the remaining ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents referred by lower authorities in their respective orders. From the record, we found that assessee was carrying out business of commodity trading on un-recognised exchange and also business of trading in shares. Assessee has claimed set off of loss arising out of trading in shares against the income arising out of trading in commodities. The AO declined set off on the plea that assessee has suffered speculative loss from trading in shares where as assessee was having non-speculative income from trading in commodities. Since, the assessee was doing trading in commodities at unrecognized exchange, the CIT(A) held that income so accrued by trading of commodities at unrecognized exchange is also speculation in nature, therefore, the speculation loss so arose out of trading in share is liable to be set off against the speculative income from trading in commodities. The CIT(A) also discussed the amendment of Section 43(5)(d) which came into force subsequently i.e. 22/05/2009 and which was to provide benefit to the assessee to treat their losses as non-speculative only when such losses were incurred while trading in recognized stock only and not otherwise. In the instant case before u ..... 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