2011 (12) TMI 349 - AT - Income Tax

Addition of Rs.33,84,090/- on account of interest on investment made in shares of M/s Mitra Fidelity Ltd at Rs.2,25,60,603/- during the year - Assessing Officer found that assessee made an investment of Rs.3,61,83,093/- in a group company M/S Mitra Fidelity Ltd and as assessee claimed interest on borrowed funds, he proportionately disallowed interest to the tune of Rs.54,77,464/- calculated at 15% on the entire investment - the transaction is of trading nature, there is no need to disallow any interest as the purchases were made in the course of business activity of assessee - Decided in favor of the assessee by way of direction to AO to allow the interest Regarding disallowance of interest at 18% in respect of premium on debentures - The ground raised by the Revenue is also misleading in the sense that the contention is to restrict the amount on the reason that the debentures were not redeemed in the later year and the debenture premium was not offered for taxation by the other company - As rightly held by the CIT (A) the NCDs were issued in the financial year 2001- 02 @ 18%. Interests are being allowed in the earlier 2 years. This being 3rd year there is no reason for disallowing part of amount - Ground is rejected Regarding disallowance of loss invoking the provisions of Explanation to section 73 - CIT (A) considered the facts of the claim and gave finding that the Assessing Officer lacks basic knowledge of accounting in considering the diminution in value of stock as speculation loss and further considered that there is profit in transactions, therefore, provisions of speculation loss does not arise under section 73 - As seen from the paper book placed on record, assessee has not claimed any diminution value in the year, whereas it is a negative debit to the expenditure a/c thereby increasing the profit in the Profit and Loss A/c. As seen from the details on record, there was a diminution of value in earlier year to the extent of Rs.3,57,53,239/- out of the gross value in the balance sheet - Decided in favor of the assessee

Issues Involved:

1. Disallowance of interest on investment in shares.
2. Disallowance of interest on debentures.
3. Deletion of interest disallowance on fixed deposits.
4. Disallowance of interest on debentures due to non-receipt of interest.
5. Allowability of liquidated damages.
6. Disallowance of loss invoking Explanation to Section 73 of the Income Tax Act.

Detailed Analysis:

1. Disallowance of Interest on Investment in Shares:

The assessee contested the confirmation of an addition of Rs. 33,84,090/- on account of interest related to an investment in shares of M/s Mitra Fidelity Ltd. The Assessing Officer (AO) disallowed interest proportionately, arguing that the investment was for controlling interest in a group company, thus not allowable. The CIT (A) restricted the disallowance to the investment made during the assessment year (AY). The Tribunal found no need for disallowance, noting that the assessee had sufficient own funds and the shares were part of trading activity. The Tribunal directed the AO to allow the interest as claimed, thus allowing the assessee's ground.

2. Disallowance of Interest on Debentures:

The Revenue challenged the CIT (A)'s decision to allow interest at 18% on non-convertible debentures (NCDs), which the AO had partially disallowed, considering the rate excessive. The CIT (A) held that the interest rate was as per market conditions when issued. The Tribunal upheld the CIT (A)'s order, noting that the interest had been allowed in earlier years and no new grounds were presented to justify disallowance. The Revenue's ground was rejected.

3. Deletion of Interest Disallowance on Fixed Deposits:

The AO added Rs. 2,05,854/- as the assessee received interest at 11.5% on fixed deposits while paying interest at 15% on borrowed funds. The CIT (A) deleted the addition, reasoning that the fixed deposits were made in an earlier year at an agreed rate and the AO had no legal mandate to charge interest based on market rates. The Tribunal agreed with the CIT (A), rejecting the Revenue's ground.

4. Disallowance of Interest on Debentures Due to Non-Receipt of Interest:

The AO disallowed Rs. 16,50,000/- interest on debentures, arguing that interest-bearing funds were diverted for non-business purposes as no interest was received. The CIT (A) found that the investment was made by an amalgamated company and not the assessee. The Tribunal upheld the CIT (A)'s findings, noting that the investment was for business purposes and income was offered in later years. The Revenue's ground was rejected.

5. Allowability of Liquidated Damages:

The issue of liquidated damages amounting to Rs. 31,20,928/- paid to M/s Weizmann Homes Ltd was contested. The Tribunal noted that the issue was covered by an earlier ITAT order, which allowed liquidated damages subject to verification of business purpose utilization. The Tribunal set aside the CIT (A) and AO's orders and restored the matter to the AO for fresh examination, thus partly allowing the ground for statistical purposes.

6. Disallowance of Loss Invoking Explanation to Section 73:

The AO disallowed Rs. 3,24,09,894/- as speculation loss under Explanation to Section 73. The CIT (A) found that the AO misunderstood accounting principles, as the diminution in stock value was a brought forward figure and there was actually a profit in transactions. The Tribunal agreed, noting that the assessee had not claimed any diminution in value for the year and the AO's disallowance was unfounded. The Tribunal rejected the Revenue's ground.

Conclusion:

The Tribunal allowed the assessee's appeal and partly allowed the Revenue's appeal for statistical purposes, directing the AO to re-examine certain issues as per the Tribunal's instructions. The order was pronounced in the open court on 30.12.2011.

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