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TMI Blog2013 (5) TMI 174X X X X Extracts X X X X X X X X Extracts X X X X ..... essary for the assessee to establish that the debt, in fact, has become irrecoverable: it is enough if the bad debt is written off as irrecoverable in the accounts of the assessee - remit the issue to the file of A.O. with a direction to him to verify the facts in the light of the decision. Disallowance of interest expenditure under Sec. 36(1)(iii) - Held that:- From the audited Balance Sheet as on 31.3.2004 as compared to immediately preceding financial year interest free funds in the form of share capital, reserves and surplus and unsecured loans as on 31.3.2004 was to the extent of ₹ 22.92 crore as against ₹ 2.79 crore as on 31.3.2003 meaning thereby that there was an increase of ₹ 20.13 crore in interest free funds. Thus it is seen that the interest free funds as on the date of Balance Sheet were far in excess of investments as on 31st Mar, 2004. Thus relying on Reliance Utilities (2009 (1) TMI 4 - HIGH COURT BOMBAY) wherein held that if there were funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free funds generated or available with the company, if the interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bank except security transaction tax & deleted the addition. As D.R. could not bring any material on record to controvert the findings of the CIT (A) decided against revenue. Penalty u/s 271(1)(C) - CIT(A) deleted the levy - Held that:- CIT(A) while deleting the penalty has held that the issue on which addition has been made a debatable issue and a contentious matter and therefore, no penalty can be levied. Ld. D.R. could not controvert the findings of the CIT (A) and therefore, we find no reason to interfere with the order of CIT (A) - ITA Nos. 685 & 3606-2008, ITA Nos.3191 & 3192-2010, I.T.A. No.685/AHD/2008, I.T.A. No.3606/AHD/2008 - - - Dated:- 1-5-2013 - Shri G. C. Gupta And Shri Anil Chaturvedi, A.M.,JJ. For the Appellant : Shri J. P. Shah For the Respondent : Shri D. S. Kalyan, CIT (DR) with Shri Y. P. Verma, Sr. D. R. ORDER Per Shri Anil Chaturvedi, A. M. Out of these four appeals, two appeals are filed by the assessee whereas the other two appeals are filed by the Revenue against the order of Ld. CIT (A)-I, Baroda dated 15-10-2007, 29-8-2008, 24-9-2010 24-9- 2010 for the aforementioned assessment years. 2. The facts as culled out from the ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e has raised on additional ground which reads as under:- Both the Lower Authorities erred in holding on one side that the assessee is doing the business of dealing in mutual fund units and shares but on the other side erred in not granting deduction of Rs. 38,17,194/- being the difference between the cost and market value of the mutual fund units held in the closing stock, as is evident from Schedule 6 on page 19 of the paper showing the investment. With respect to the additional ground. Before us the ld. A.R. submitted that the additional ground raised was based on settled principle of law and the necessary material is already on record and no new evidence is required for its adjudication and therefore, the same be admitted for adjudication. The ld. D.R. however objected its admission. We have heard the rival submissions and perused the material on record. After considering the submissions, we admit the additional ground filed by Assessee. The First ground and additional ground are considered together since they are interconnected. It is with respect to treating the profit on sale of mutual funds and shares as speculative profit instead of capital gains. 5. During the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... value whichever is lower. 9. Ld. D.R. on the other hand supported the order of A.O. and pointed out that in view of the Explanation to Sec.73 of the Act the A.O. has rightly treated the transactions as speculative transactions. He thus supported the order of A.O. and CIT (A). 10. We have heard the rival submissions and perused the material on record. From the order of the authorities below we find that A.O. has followed the orders for A.Y. 2002-03 and 2003-04 wherein the profit was treated as speculative profits. We further find that CIT (A) has not given any finding with respect to the applicability of Explanation to section 73 of the Act on the matter under dispute. Further the Assessee has raised an additional ground before us for the first time and it was not raised before the CIT (A). In view of these facts we are of the view that the matter be remitted back to the file of CIT (A) for deciding the matter de novo also decide the issue of profit earned on sale of shares and mutual funds in view of Explanation to Sec. 73 and for passing a speaking order to that effect. He is also directed to adjudicate the additional ground raised by Assessee before us after giving a reason ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s.1,49,76.106/- is confirmed." 13. Aggrieved by the order of CIT (A), assessee is now in appeal before us. Before us the Ld. A.R. at the outset submitted that the issue of bad debts has now been decided in favour of the assessee in view of the decision of Apex Court in the case of TRF Ltd. (2010)323 ITR 397(SC) He thus, submitted that in view of the aforesaid decision the claim of the assessee be allowed. 14. The Ld. D.R. on the other hand submitted that since the decision of Apex Court in the case of TRF Ltd., (supra) was not before the CIT (A) when he decided the appeal, it needs to be examined as to whether the assessee has fulfilled all the conditions stipulated for claiming the bad debts. 15. We have heard the rival submissions and perused the material on record. 16. Assessing Officer while disallowing the Assessee's claim has noted that Assessee has not demonstrated that the amount was written off in respective parties account and, therefore, not fulfilled the conditions of Section 36(1)(Vii) of the Act. We find that the Hon. Apex Court in the case of TRF Ltd., (supra) has held as under: " After the amendment of section 36(1)(vii) of the Income Tax Act, 1961, with e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which was more than the interest expense of Rs. 16,02,493/- that was debited by Assessee in its P L account, he considered the entire expenses of Rs. 16,02,493/- as being utilized for non business purposes and disallowed the same. 19. Aggrieved by the order of A.O. assessee carried the matter before the CIT (A). CIT (A) dismissed the assessee's appeal by holding as under:- "13. I have considered the rival submissions. It is observed that the main reason for disallowing the interest by the A.O. was that the appellant had failed to establish that investments in mutual funds had been made out of own interest free funds since it did not furnish a cash flow statement to show that the investments had been made from out of interest free funds; and also, that interest free advance of Rs15 lakhs had been given to Ameya Developers from out of interest bearing borrowed funds. It is observed that no cash flow statement has been filed before me either. Thus, it remains to be established that the interest bearing funds were actually utilized for the business purposes. The reliance by the A.O. on a number of decisions mentioned on top of page-6 of the assessment order have a clear bearing o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t extent". In fact, the Hon'ble P H High Court further went on to hold "In our view, even the plea of nexus of loans raised by the assessee with the funds advanced on interest free basis, may be it is pleaded to be out of sale proceeds or share capital or different account, cannot be accepted..... We do not subscribe to the theory of direct nexus of the funds between borrowings of the fund and diversion thereof for non-business purposes. Rather, there should be nexus of use of borrowed funds for the purpose of business to claim deduction u/s./ 36(1)(iii) of the Act". It is further observed that the Hon'ble P H High Court respectfully disagreed with the views expressed by the Delhi High Court in the case of CIT vs. Tin Box Co. and CIT vs. Orissa Cement Ltd. Allahabad High Court in the case of CIT vs. Radico Khaitan Ltd., and CIT vs. Prem Heavy Engineering Works P. Ltd., Calcutta High Court in the case of CIT vs. Britannia Industries Ltd. and Madhya Pradesh High Court in the case of R.D. Joshi Co. vs. CIT by stating that "we do not subscribe to the observation in the judgments to the effect that if the amount is advanced from a mixed account or share capital or sale proceeds or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 the investments of the Assessee are to the tune of Rs. 5.82 crore as compared to Rs. 46,000/- in the immediately preceding financial year meaning thereby that the investments to the extent of Rs. 5,82,28,953/- have been made during the year. It is also seen from the Balance Sheet that the interest free funds in the form of share capital, reserves and surplus and unsecured loans as on 31.3.2004 was to the extent of Rs. 22.92 crore as against Rs. 2.79 crore as on 31.3.2003 meaning thereby that there was an increase of Rs. 20.13 crore in interest free funds. Thus it is seen that the interest free funds as on the date of Balance Sheet were far in excess of investments as on 31st Mar, 2004. In the case of Reliance Utilities (Supra) the Hon. Bombay H. C. has held as under:- "Held that if there were funds available both interest-free and overdraft and/or loands taken, then a presumption would arise that investments would be out of the interest-free funds generated or available with the company, if the interest-free funds were sufficient to meet the investments". Considering the facts of the case and seen in the light of the decision of Hon. Bombay H.C. (supra) and respectfully follo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted that the CIT (A) has given a finding while disallowing the claim of the assessee that the electrical installations as per prescribed Income tax Rules are eligible for depreciation @ 15% He thus supported the order of the A.O. and the CIT (A). 28. We have heard the rival submissions and perused the material on record. Before us the assessee has not brought any material on record except making an oral statement statement that the electrical installations were attached to the Plant and Machinery. Further, Ld. A.R. could not controvert the finding of the CIT (A) and therefore we find no reason to interfere with the order of the CIT (A). Thus this ground of the assessee is dismissed. Ground No.6 is with respect to the provisions made for leave encashment, gratuity and bad and doubtful debts claimed u/s. 115JB. 29. A.O. noticed that while computing the book profit u/s. 115JB of the Act, assessee has not added the provisions for bad and doubtful debts, gratuity and leave encashment. The assessee was asked to show cause as to why the aforesaid provisions not be added for computing the book profit. Assessee in its reply submitted that even after the additions of the expenses aga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aised by Assessee reads as under:- [i] That the learned Commissioner of Income Tax (Appeals)-1, erred in law and on fact in upholding the addition made in respect of interest payment of Rs. 24,20,016/- u/s. 36 (1) (iii) (After calculating interest @ 12% instead of 13% calculated by learned ACIT at Rs. 26,21,684/-) though the appellants has made investment in Mutual Fund out of his own interest free fund as well as out of switch in and switch out option. [ii] That the learned Commissioner of Income Tax erred in law and on fact in upholding the disallowing of Rs. 2,54,850/- paid towards directors foreign travel Exp. And Rs. 12,970/- paid towards credit card and Membership Fees Exp. [iii] Being consequential the appellant reserve the right of claiming deduction u/s. 80IA on Income revised due to addition made by the learned ACIT. [iv] Your appellant most humbly reserves the right to add, amend, alter or substitute any of the grounds in this appeal on or before the time of hearing. 34. Before us both the parties submitted that 1st ground is identical to ground no. 4 of A.Y. 04-05 and the submissions made by them are equally applicable in present case. 35. We have heard the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. A.R. submitted that the expenses were incurred for the purpose of business and therefore the same was allowable. He further placed reliance on the decision in the case of Guj. State Export Corp. Ltd. vs CIT(1994)209 ITR 649. He thus urged that the addition made by the A.O. be deleted. 40. On the other hand the Ld. D.R. submitted that the assessee did not produce any evidence in support of its claim of expenditure neither before the A.O. nor before the CIT (A). In view of these facts, he submitted that the A.O. was justified in disallowing the expenditure. 41. We have heard the rival contentions and perused the material on record. A.O. disallowed the expenses for the reason that the assessee could not discharge the onus of proving the expenditure was for the purpose of business. Further no evidence was placed before the A.O. or before the CIT (A). Even before us Ld. A.R. has not brought any material on record in support of its contention. In view of these facts, we find no reason to interfere with the order of CIT (A) and thus uphold the order of CIT (A) on this count. Thus this ground of Assessee is dismissed. 42. Thus this appeal of the assessee is partly allowed. ITA N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 04-05 when the net investment was Rs.2.27 crores against the receipt of interest free unsecured loans of Rs.11.1 Crores. During A.Y. 05-06 the investment as on 31-3-05 was Rs.2.01 crores and there was profit of Rs.85 lakhs from the business and repayment of interest free unsecured loans of Rs.4.7 crores. Further in the current year, there was profit of Rs.11.82 crores and increase in interest free unsecured loan of Rs.1.2 crores and the investment in mutual fund is at Rs.2.33 crores as on 31-3-06.Furthermore all the mutual fund transactions were carried out through Citi Bank account and there are redemption and dividend receipts and investments during the year. No interest charges are debited in the bank account except for security transaction tax of Rs.64.909/-.Inview of the above and decision in the case of CIT vs. Reliance Utilities Power Ltd. (Ref.2009) 178 Taxman 135 (Bom.), the disallowance is restricted to Rs64,909/- which is direct expenditure in relation to interest free income,. Ground No.2 is partly allowed." 45. Aggrieved by the order of CIT (A), Revenue is now in appeal before us. 46. Before us Ld. D.R. relied on the order of A.O. On the other hand Ld. A. R. sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ank account and the balance sheet it is noticed that major investments in mutual funds was in the A.Y. 04-05 when the net investment was Rs.2.27 crores against the receipt of interest free unsecured loans of Rs.11.1 crores. During A.Y. 05-06 the investment as on 31-3-05 was Rs.2.01 crores and there was profit of Rs.85 lakhs from the business and repayment of interest free unsecured loans of Rs.4.7 crores. Further in the current year, there was profit of Rs.11.82 crores and increase in interest free unsecured loan of Rs.1.2 crores and the investment in mutual fund is at Rs.2.33 crores as on 31-3-06.Furthermore all the mutual fund transactions were carried out through Citi Bank account and there are redemption and dividend receipts and investments during the year. No interest charges are debited in the bank account except for security transaction tax of Rs.64.909/-.In view of the above and decision in the case of CIT vs. Reliance Utilities Power Ltd. (Ref.2009) 178 Taxman 135 (Bom.), the disallowance is restricted to Rs64,909/- which is direct expenditure in relation to interest free income,. Ground No.2 is partly allowed." 49. Before us the Ld. D.R. relied on the decision of A.O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relief to the assessee. Thus on the additions which have been confirmed by the CIT (A), A.O. levied penalty u/s. 271(1)(c ) of the Act, as he was of the view that had no scrutiny taken up in the case the real facts in respect of the additions which were confirmed by the CIT (A) would have remained unnoticed. He thus concluded that the assessee not only concealed the particulars of its income but also furnished inaccurate particulars of income deliberately. He thus vide order dated 16-3-2009 levied penalty of Rs.73,22,000/-. Aggrieved by the penalty order of A.O. assessee carried the matter before the CIT (A). CIT (A) after considering the submissions of the assessee, deleted the penalty on most of the additions including the penalty with respect to the disallowance of interest u/s. 36(1)(iii) by holding as under:- "4.5. In relation to penalty on disallowance of interest of Rs.16,02,493/-, the assessee had urged before the A.O. that the interest free advances were out of the adequate interest free funds available whereas the A.O. made disallowance on the ground that direct nexus in this regard could not be established by the assessee. The CIT (A) in quantum matter concurred with t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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