2012 (11) TMI 748 - AT - Income Tax

Addition due to Loss on Investment purchase of mutual funds / units in the name of director - Board s Resolution authorizing investment in the names of various directors - held that - Assessee has shown the mutual funds as its investment. Therefore, there was no suppression of the fact with respect to investment as doubted by A.O. Further, there is no bar for the assessee company to make investments in the name of the directors due to certain strategic reasons. The assessee has submitted the Board s resolution duly certified by one of the directors of the company granting such permission for investing in mutual funds in the names of the directors of the company which cannot be simply brushed aside - addition made by. A.O. on account of loss claimed by the assessee for Rs.80,77,500/- is not justifiable and therefore same is deleted - Ground of appeal is allowed. Diversion of Interest bearing funds held 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. 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.

Summary

Issues Involved:
1. Confirmation of additions/disallowances of Rs. 80,77,500/- being the loss in respect of shares and securities.
2. Confirmation of additions/disallowances of Rs. 17,32,449/- being the interest on loans advanced by the appellant.

Issue 1: Confirmation of Additions/Disallowances of Rs. 80,77,500/-
The assessee, a private limited company engaged in trading CNSL Oil, yarn, paper, and shares, filed its return of income for the assessment year 2001-02 showing a loss of Rs. 16,74,893/-. During the assessment proceedings, the Assessing Officer (AO) observed that the company had furnished funds to its directors, who invested in mutual funds in their individual names, and later sold these mutual funds at a loss of Rs. 80,77,500/-, which the company claimed as its loss. The AO disallowed this loss for several reasons, including the separate legal identity of the company, the lack of disclosure in the company's financial reports, and the primary business of the company not being trading in units. The AO also noted that the directors could not justify the investment in their names and that the company would not benefit from such transactions.

Upon appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, noting that the investments were made in the directors' names without proper documentation and that the directors had kept their options open to benefit from the mutual funds personally. The CIT(A) emphasized that such investments violated the Companies Act provisions meant to protect shareholders' interests.

The assessee argued that the investments were made out of the company's funds, disclosed in the balance sheet, and approved by a Board resolution. The assessee contended that the directors had no personal interest in these investments and that the transactions were duly recorded in the company's financial statements.

The Tribunal examined the balance sheet and found that the mutual funds were indeed shown as the company's investment. It noted that there was no suppression of facts and that the company had the right to make strategic investments in the directors' names. The Tribunal accepted the Board's resolution authorizing such investments and concluded that the addition made by the AO was not justifiable. Therefore, the Tribunal allowed Ground No. 1, deleting the disallowance of Rs. 80,77,500/-.

Issue 2: Confirmation of Additions/Disallowances of Rs. 17,32,449/-
The AO observed that the company had debited an interest amount of Rs. 17,32,449/- in its Profit & Loss account. The AO found that the company did not have its own funds to advance to the directors for investing in mutual funds and that these advances were made from interest-bearing funds. Consequently, the AO disallowed the interest attributable to such advances, citing various judicial decisions.

The CIT(A) upheld the AO's decision, noting that the advances to directors and other companies were not for genuine business purposes. The CIT(A) emphasized that the company could not produce any evidence to justify these advances as business transactions.

The assessee argued that the investment in mutual funds was disclosed in the balance sheet and that the funds were utilized for the company's benefit. The assessee also claimed that the directors had brought in interest-free deposits into the company and that the advances were for business transactions.

The Tribunal found that the assessee did not provide proper cash flow statements to establish that interest-bearing funds were not diverted for non-business purposes. The Tribunal noted that the company's share capital and reserves were insufficient to make such investments, indicating that interest-bearing funds were indeed diverted. The Tribunal confirmed the AO's calculation of the disallowed interest and upheld the CIT(A)'s decision. Therefore, the Tribunal dismissed Ground No. 2, confirming the disallowance of Rs. 17,32,449/-.

Conclusion:
The appeal of the assessee was partly allowed. The Tribunal deleted the disallowance of Rs. 80,77,500/- related to the loss on shares and securities but upheld the disallowance of Rs. 17,32,449/- related to the interest on loans advanced.