TMI Blog2020 (3) TMI 1252X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as indicated above. Disallowance of interest u/s 14A - HELD THAT:- We find that the identical ground raised in the present appeal has already been decided by the Coordinate Bench of ITAT in for AY 2009-10 in Shri Sudhir S. Mehta case [ 2017 (12) TMI 1668 - ITAT MUMBAI ] wherein the Hon ble ITAT has allowed the ground on merit in favour of assessee. Additional ground raised with respect to capitalization of interest - HELD THAT:- We are of the view that to the extent the interest relate to the investment, i.e. being disallowable under Section 57 will become part of cost of acquisition of shares and therefore the AO is directed to take it as part of the cost of shares for determining profit on sale of the shares. Thus, the additional ground stands allowed to that extent. - I.T.A. No. 6965, 6966 & 6968/Mum/2018, I.T.A. No. 6768, 6769 & 6771/Mum/2018 - - - Dated:- 16-3-2020 - Shri Saktijit Dey, JM And Shri S. Rifaur Rahman, AM Appellant by : Shri Dharmesh Shah, Shri Nilesh Mehta Ms. Mitali Gopani, ARs Respondentby : Dr. P. Daniel, DR ORDER PER BENCH: The present six (6) Appeals have been filed by the assessee and revenue against the order o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2018, 21.08.2018 and 24.08.2018 which have been duly considered. In the submissions, the assessee has broadly submitted that the action of the AO of disallowing the said interest expenditure is not correct considering that (i) an oral contract existed between the assessee and the said notified broking entities as observed by the Hon'ble ITAT in the case of the assessee for A.Y. 2006-07 and also a number of other cases of Harshad Mehta Group, (ii) as per the bye-laws and regulations of Stock Exchange, she is required to compensate the broker for delay in the payment for purchase of shares by way of payment of interest, (Hi) the Hon'ble Special court has directed the other clients of the notified broker entities to pay interest on the amounts outstanding, (iv) the Hon'ble Special Court has also been awarding/levying interest @12% p.a. on the funds used inter-se between notified entities, (v) the Custodian is the only authority as per Sec. 4(i) of the Special Courts Act, to seek cancellation of any contract on the ground that they are fraudulent or entered into with a view to defeat the provisions of the said Act, however, the Custodian has not sought cancellation of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee. 7.2 I have considered the various submissions of the assessee as well as the order of the AO. It is observed that out of the total interest expenditure of ₹ 9,86,14,668/-, the assessee has considered an amount of ₹ 2,84,13,820/- for disallowance u/s 14A and the balance amount of ₹ 7,02,00,848/- has been claimed as a deduction u/s 57 against the interest receipts of ₹ 3,53,672/- on Term deposits while computing the income under the head, Income from Other Sources . However, the AO has held that the entire interest expenditure claimed by the assessee of ₹ 7,02,00,848/- u/s. 57 cannot be allowed as a deduction against the interest income of ₹ 3,53,672/- on term deposits since, the said expenditure is provisional/contingent and without any basis, he assessee contends that the action of the AO is incorrect since the entire expenditure is payable as per oral contract of the assessee with the said notified broker entities and since there is a nexus between the said interest expenditure and the interest income from Term deposits, the entire amount of interest expenditure claimed by it of ₹ 7,02,00,848/- u/s 57 should be allowed as a dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares purchased by the assessee through them during the period prior to 1992. 7.5 On examination of the Balance Sheet of the assessee for A.Y. 1992-93, it is observed that the amounts payable to the said 3 notified broker entities are of ₹ 2578.74 lakhs. Interest has been charged @12% on the amounts payable to the said 3 notified broker entities. Against this total outstanding amount of ₹ 2578.74, the corresponding investments in shares, debentures etc. shown are of ₹ 2520.06 lakhs. 7.6 Similarly, on examination of the Balance Sheet of the assessee for the relevant year i.e. A.Y. 2012-13 it is observed that the amounts payable to the said notified broker entities are of ₹ 8201.10 lakhs. Interest has been charged of ₹ 9,86r41,668/- @12% on the amounts payable to the said notified broker entity. It has been submitted by the assessee that in the intervening period between the year ending 31.03.1992 and the year ending 31.03.2012 substantial portion of the said shares, debentures etc. purchased from the said notified broker entities and others have been sold off by the Custodian and the amounts realized have been utilized for payment of taxes etc. an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... years, the assessee is consistently booking expenditure whereas M/s. H.M. Mehta is not booking any income. 7.9 Further, in course of the appellate proceedings, it was also observed that the assessee has given loan of ₹ 6155.69 lakhs to Harshad Mehta as per the order of the Hon'ble Special Court which does not carry any interest. Moreover, in course of the appellate proceedings, it was also observed that Loans Advances included an amount of ₹ 49.9 lakhs on account of advance tax, wealth tax, IDS, income tax, etc. and therefore, the interest attributable to such amounts is to be disallowed. Therefore, the assessee was asked to explain as to why interest has riot been charged on the said amount advanced to Shri Harshad Mehta of ₹ 6155.69 lakhs and also as to why the interest attributable to the amount of ₹ 49.9 lakhs related to payment of income tax, etc should not be disallowed. In response, the assessee submitted that the said amount of ₹ 6155.69 lakhs was paid to Shri Harshad Mehta pursuant to order passed by the Hon'ble Special Court dated 25.02.2011 in connection with payment of the outstanding income tax dues and this order did not ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the said notified broker entity for purchase of shares way back in the year ending 31.03.1992 for which it is liable to pay interest @12% p.a. 7.11 From the above, it can be observed that the factual position as wed as the contentions of the assessee are full of contradictions. The assessee in course of the appellate proceedings, was specifically asked to furnish details of the interest expenditure attributable to the income tax, etc. of ₹ 49.9 lakhs, the interest expenditure attributable to exempt investments, the interest expenditure attributable to the interest income on Term deposits, etc. and also the details of the notional interest income arising to it on account of the loan advanced to Shri Harshad Mehta of ₹ 6155.69 lakhs. As regards, the interest expenditure related to exempt investments, it was claimed by the assessee to be of ₹ 2,84,13,820/- and the. / interest expenditure related to payments of income tax, etc was claimed to be of Rs. Nil. However, the details in respect of the interest attributable to Term deposits as | well as the notional interest income on the loan advanced to Harshad Mehta of ₹ 6155.69 lakhs were not submitted by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hs as on 31.03.1992 to ₹ 6205.59 lakhs as on 31.03.2012. As can be observed, on account of the surpluses arising on sale of investments, the loans, advances, taxes, etc have gone up by ₹ 6200.27 lakhs as against the decrease in investments on account of sale of ₹ 131.1 lakhs. Thus, the interest burden on the outstanding amounts to the said 3 notified broker entities has been spread over the increase in loans, advances, taxes, etc of ₹ 6200.27 lakhs in the intervening period from the year ending 31.03.1992 to the year ending 31.03.2012. Further, there is little doubt that the assessee maintains a common pool of funds for its investment in shares, debentures, etc as well as for its investments in Term deposits. 7.14 In view of the above factual position, the interest attributable to the income tax, etc of ₹ 49.9 lakhs and the interest free loan given to Shri Harshad Mehta of ₹ 6155.69 lakhs can be reasonably computed by adopting the formula which has been prescribed in Rule 8D(2)(ii) for computing the interest attributable to the exempt investments i.e. Interest expenditure x (Average of exempt investments/Average total assets) but in the said f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He also brought to our notice balance sheet of the assessee company and submitted that assessee has made investment of 39.9 lakhs as term deposit and assessee has earned interest income and assessee has not claimed interest expenditure which even Ld. CIT(A) has accepted the facts. Now since all the activities of the assessee company are controlled by Spl. Court. He submitted that investment of term deposit are only out of the liquidation of some investments and out of such sale proceeds after meeting the tax obligation and other statutory dues, the balance are deposited in bank and now assessee is seeking relief to the extent of interest earned only. However, drawing our attention to ground no. 1 raised by the assessee, Ld. AR submitted that the assessee should be allowed set off of interest expenditure to the extent of interest income earned of ₹ 3,52,622/-. In this context, he submitted that AO himself has allowed such benefit of set off in AY 201718 (he filed a copy of the assessment order). 8. On the other hand, Ld. DR agreed that all the entities are notifed entities and he relied on the findings of Ld. CIT(A) and submitted that Ld. CIT(A) appreciated the facts of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dhir S. Mehta case, wherein the Hon ble ITAT has allowed the ground of merit in favour of assessee. 13. On the other hand, Ld. DR supported the orders passed by AO and submitted that Ld. CIT(A) was not justified in capitalizing the disallowance of interest of ₹ 2,86,67,490/- u/s 14A of the Act only relying on the decision of ITAT in ITA No. 5799/Mum/2015 for AY 2009-10 to 2011-12 in the case of Sudhir S. Mehta. 14. We have heard counsels for both the parties and we have also perused the material placed on record as well as the orders passed by revenue authorities. We find that the identical ground raised in the present appeal has already been decided by the Coordinate Bench of ITAT in ITA No. 5799/Mum/2015 for AY 2009-10 in Shri Sudhir S. Mehta case, wherein the Hon ble ITAT has allowed the ground on merit in favour of assessee. For the sake of clarity, which is reproduced below:- 17. Now coming to the additional ground raised with respect to capitalization of interest we are of the view that to the extent the interest relate to the investment, i.e. being disallowable under Section 57 will become part of cost of acquisition of shares and therefore the AO is directed ..... X X X X Extracts X X X X X X X X Extracts X X X X
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