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TMI Blog2011 (12) TMI 349X X X X Extracts X X X X X X X X Extracts X X X X ..... essee 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 reason for disallowance was that assessee obtained controlling interest in group company and the purchase is for investment. Before the CIT (A) it was submitted that assessee has its own funds and there is no nexus between borrowed funds and the purchase of shares and further that the shares are in the trading account and not an investment. Alternately it was further submitted that part of shares were purchased in the earlier years and therefore when the interest was not disallowed in the earlier years the same cannot be made in this year also. The CIT (A) partly accepted assessee's contention and restricted disallowance to the extent of investment made in this AY for Rs.2,25,60,603/- and restricted the disallowance to Rs.33,84,090/. Assessee is contesting the above disallowance. 4. Drawing our attention to the paper book at Page 50, it was the submission that assessee had own capital of Rs.14.24 crores and investment made in the group company was only Rs.2.25 crores during the year. Further it was submitted that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to allow the interest as claimed. Assessee's ground is therefore, allowed. ITA No.4808/Mum/2008 6. In the Revenue appeal the Revenue has raised 9 grounds. Ground No.1 pertains to the issue of disallowance of interest at 18% in respect of premium on debentures. The Assessing Officer noticed that assessee acquired non convertible debentures of face value of Rs.1000/- per NCD of 41,800. These were to be redeemed on 1.4.2004. However, this year being the 3rd year after issuance on 1.4.2001 assessee paid an amount of interest at Rs.49,09,935/- @ 18% p.a. as premium on debentures. The Assessing Officer noticed that the rate of interest paid was very high considering the market rate and further the said interest was not offered as income by the company Mitra Fidelity Ltd in its books of account. However, he restricted disallowance to an amount at 3% of the amount paid i.e. difference between 18% to 15%. The CIT (A) considering the fact that these NCDs were issued in financial year 2001-02 as per the market rate then prevailing held that there is no case for restricting disallowance to15% on the basis of the market rate available in this year. 7. After considering t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... um per debentures in a company known as Kotta Enterprises Ltd on 14.02.2002. Since no interest was received and no premium on debentures were offered to tax, the Assessing Officer disallowed the interest claim of 16,50,000 on the reason that the interest bearing funds have been diverted for investment on which no return was received by assessee. After considering the facts of the investment of funds, income offered in later years, CIT (A) allowed the same by giving the following findings. "6.4 I have carefully considered the arguments given by the rival parties vis-à-vis the facts of the case. In first place, it is to be mentioned that the entire investment in NCDs in the company namely Kotta Enterprises Ltd was made by ALFL during the previous year relevant to AY 2002-03. The appellant got the said investment in NCD only by virtue of amalgamation of the company, ALFL with the appellant company. This shows that original investments in NCDs could not be funded by the appellant company for a very obvious reason. Therefore, the whole foundation of the finding of the Assessing Officer that interest bearing fund has been diverted for non-business purpose in NCDs got demol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rn of assessee i.e. ALFL had earlier entered into an agreement with WHL for selling office premises in the property being constructed by it at Bandra Kurla Complex as per the agreement dated 14.2.2002. The agreement provided for payment of Rs.2 crore by WHL to the ALFL at the time of agreement and balance amount of Rs.3.5 crores was to be paid later in installments. In terms of the clause 14 of the agreement, in case ALFL was not able to handover the possession of the premises on or before 31.7.2002, it was required to refund the amount received in advance forth with the liquidated damages @ 1.4% per month from the date of advance till the date of refund. After the agreement, ALFL was merged with assessee w.e.f.1.4.2002 and therefore it became liability of assessee to handover the business premises to WHL as per terms and conditions of the agreement. Assessee could not honour the commitment as per the agreement to provide the office premises to WHL and therefore the latter vide letter dated 31.3.2003 cancelled the agreement and in terms of the clause 14 of the agreement assessee had to pay liquidated damages amounting to Rs.59,58,458/-. The Assessing Officer did not accept the genu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted out earlier, the payment was nothing but interest at the market rate which could only termed as compensatory in nature. It is not a case that assessee had received lump sum amount unrelated to the advance received for cancellation of agreement in which case probably there would have been dispute whether the amount could be allowed as deduction. In the present case it is a case of compensation at the market rate of interest. However, the damages which were of the nature of compensatory interest can be allowed as deduction only if the advance received by assessee was used in the business. The case of assessee is similar to the case of New Central Jute Mills Ltd. vs CIT (supra). In that case, assessee had agreed to obtain release of the land from UP Government and convey it by a specific time failing which it had agreed to refund the same and pay damages of Rs.1 lac and interest on the sum of Rs.40 lacs received as advance from the concerned party. Assessee was unable to obtain release of the land and refunded the sum of Rs.40 lacs and paid Rs.1 lac as damages and Rs.1,85,123/- as interest on the sum of Rs.40 lacs. The Hon'ble High Court held that damages of Rs.1 lac payable by as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igures, I find that the cumulative diminution in stock has come down by Rs.33.44 lacs as on 31.3.2004 in comparison to cumulative diminution as on 31.3.2003 and the appellant, in fact, offered income to the extent of 33.44 lacs on this account. It may also be noted that the opening and closing stock as such each other nullify the effect on gross profit in the trading account. Any attempt to take only into account of closing stock without taking into account of opening stock in isolation will have distorting effect on the gross profit. The Assessing Officer, prima-facie, appears to have gone on his short-sighted approach only to take into account in cumulative diminution in stock of share as on 31.3.2004, ignoring the fact that there was higher figure of cumulative diminution of stock also as on 31.3.2003. It is total misunderstanding of account by the Assessing Officer to take alone of diminution of stock in share at Rs.3,24,09,894/- as on 31.3.2004 to assign as 'speculation loss' ignoring the diminution of stock as on 31.3.2003. It appears that the Assessing Officer lacks the basic knowledge of accounts. 8.6. Further, from the Profit and Loss A/c I find that the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e diminution of stock from the preceding AY. This so called 'speculation loss' arrived by the Assessing Officer cannot be a 'speculation loss' for the AY 2040-05 by any stretch of accounting logic. The Assessing Officer has tried to create a speculation loss which is not in fact there in the accounts. The Assessing Officer appears to have pickup a particular figure from the valuation of closing stock as on 31.3.2004 independently and segregated the same by his imagination as a 'speculation loss' which is not tenable in law. Even for the sake of argument, if we take the Explanation to Section 73 is applicable in the present case, it will be 'speculation profit' only to the extent of Rs.85,23,218/- only which will not have any material effect on the computation of income for the AY 2040-05. Hence the disallowance made by the Assessing Officer on account of 'speculation loss' at Rs.3,24,09,895/- is totally unfounded and not matching with the profit derived on purchase and sale of share in the audited account. Hence, the speculation loss disallowed by the Assessing Officer at Rs.3,24,09,895/- is deleted." 14. We have examined the record and pursued the arguments of rival Counse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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