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TMI Blog2012 (2) TMI 476X X X X Extracts X X X X X X X X Extracts X X X X ..... the ground that the Assessing Officer has erred in reopening the assessment mainly to disallow under section 14A of the Income Tax Act and took shelter under section 36(1)(iii) to avoid provisions of Section 14A which are not applicable for reopening assessments prior to 1.4.2001. It was noted that the return of income was filed on 29.12.2000 which was processed under section 143(1) on 3.11.1998. There was no scrutiny under section 143(3) and the processing has become final. Consequent to the Assessing Officer s examination of return for the AY 2001-02, the assessment in this year was reopened. The reasons recorded by the Assessing Officer was that assessee company diverted its interest bearing funds to its group concerns and other several individuals on which no interest was claimed, nor income derived, whereas interest was paid on borrowed funds. AO has also stated the total figure of investment at ₹ 1284.2 crores and the disallowance to be worked out at 18% at ₹ 231.15lakhs. It was also recorded that some of the items pertains to share application money as well as interest on advances for the purposes of shares which require examination. After the reassessment, asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal and accordingly, I am of the view that there is no material in support of the appellant that reopening has been undertaken to disallow expenditure under section 14A in the garb of alleged disallowance stated on account of diversion of interest bearing fund. This ground of appeal is dismissed . 3.1 It was the learned Counsel s submission that the Assessing Officer has taken the amount of investments wrongly and referred to the correct amount. As per the balance sheet, there was only an investment of ₹ 313.85 lakhs, whereas the loans and advances were to the above amount. It was further submitted that the Assessing Officer cannot reopen the assessment in the case of disallowances under section 14A as it prohibits the Assessing Officer in reopening years prior to 01-042001 and this action of the Assessing Officer is clearly in violation of provisions of section 14A. It was further submitted that relying on the wrong facts indicate that there is no application of mind and therefore, reopening is bad in law. The learned Counsel relied on various decisions including the decision of the Hon'ble Bombay High Court in the case of Prashant Joshi vs. ITO (320 ITR 154) appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 36(1)(iii) so as to disallow the amounts under section 14A which bars reopening of the assessment prior to 1.4.2001. This ground per se should fail as the main disallowance was made by the Assessing Officer under section 36(1)(iii) on diversion of borrowed funds and claiming interest on them. Incidentally, disallowance under section 14A was not upheld by the CIT (A) and there is no cross appeal by the Revenue on that issue. Moreover, the Hon'ble Supreme Court in the case of Honda Seil Power Products Limited vs. DCIT in SLP 19085/2011 has upheld the Hon'ble Delhi High Court judgment in the same case (197 TM 415), wherein it was held that the provisions of section 14A bars reassessment but not original assessment. It was further held that the object and purpose of provisions is to ensure that the retrospective amendment is not made as a tool to reopen the past cases which have attained finality. This principle established by the Hon'ble Delhi High Court was upheld by the Hon'ble Supreme Court which dismissed the SLP. It is further noticed that in the above referred case the Assessing Officer had made an assessment for AY 2000-01 under section 143(3) and after exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apani. Therefore, the Assessing Officer considered that the advances given to Shri Rishi Kumar Chakrapani have to be treated as loan/advance given for non business purpose. Before us, no evidence was filed to counter the findings of the Assessing Officer. The learned CIT (A) also upheld the above findings. In view of this we are of the opinion that the disallowance of interest of ₹ 72,000/- requires to be upheld. Ground No.2 is accordingly rejected. 5. In Ground No.3 it was contended that CIT(A) erred in upholding the disallowance of interest of `43,70,388/- relatable to share application money under section 36(1)(iii), although this would be covered under section 14A of the Income Tax Act being the interest on investment in shares. This issue was discussed by the Assessing Officer vide Para 7 of the assessment order. He has examined the purchase of shares/ controlling interest in M/s ASC Enterprises while advancing funds and noted that assessee made investment in share application money to M/s ASC Enterprises out of loans taken on which interest was paid. The Assessing Officer s opinion was that giving advances or making the investments in equity shares of other concerns ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e CIT (A) on facts. 5.3 We have considered the issue and examined the facts on record. In the year under consideration assessee has both investments and share trading and as seen from the balance sheet and Profit Loss A/c the investment at the end of the year as per the Schedule-VI was to the tune of ₹ 3.13 crores, whereas the stock in trade was to the tune of ₹ 10.05 crores. Assessee had profit on sale of equity shares at ₹ 2.37 crores and also profit on trading shares at ₹ 1.64 crores vide schedule-12 of the accounts. It has shown profit on sale of investments at ₹ 2.87 crores in Profit Loss A/c which were excluded from the income from business and shown under the head Income from Capital Gain . While working out the disallowance under section 14A at the time of filing the revised return, assessee has given a working of interest applicable to profit on sale of investment in the ratio of 0.7% at ₹ 2,69,98,200/- and interest applicable to dividend income at ₹ 1.03 crores, admittedly there are amounts diverted for investment which should have been set off in the computation of long term capital gain. As seen from the order of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eals) VI, Mumbai has erred in enhancing the disallowance of interest under section 14A to ₹ 153.01 lakhs as against disallowance of ₹ 16,25,921/- made by the Assessing Officer. The appellant submits that the CIT (A) should have deleted the whole of addition made by the Assessing Officer instead of enhancing the addition made by the Assessing Officer. 2. The learned CIT (A) also erred in confirming the disallowance of interest paid under section 36(1)(iii) to the extent of ₹ 263.83 lakhs as against the disallowance made by the Assessing Officer to ₹ 324.58 lakhs as nonbusiness expense. The appellant submits that there was no justification for making any disallowance on the above ground. The learned CIT (A) also erred in confirming the disallowance of interest in respect of advance given to ₹ 11.90 lakhs against ₹ 15.60 lakhs disallowed by the Assessing Officer . 7.1 Ground No.1 pertains to the issue of disallowance under section 14A. The Assessing Officer noticed that assessee has earned a dividend of ₹ 42,18,500/- on an investment of ₹ 1,08,39,473/- in Zee Tele Films Ltd. After considering assessee s arguments and considering th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hausted in view of substantial losses in the business and the majority of the investment in the shares have been made during the year and accordingly, the disallowance is required to be reworked out. The appellant was asked to give actual interest pertaining to all the activity of the appellant company considering the period of utilization of the borrowed fund. The appellant has given the working and he has agreed during the course of hearing that the money invested into the shares and the amount advanced for acquisition of shares which has been considered by the Assessing Officer in Para 2 3 of his order is out of borrowed interest bearing fund. As per the working given by the appellant, the interests allocable to the various activities are as under: S. No Particulars Amount 1 Interest on funds utilized for trading operations 697.23 lakhs 2 Interest on funds in equity shares held as investment 200.54 lakhs 3 Interest in respect of amount advanced for acquisition of shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amount. It was further submitted that as per the decision of the Hon'ble ITAT in the case of Blue Star India Ltd in ITA Nos.1838 1840/Mum/2007 dated 30.09.09, the disallowances can be restricted to the actual amount originally allowed by the Assessing Officer. Therefore, the CIT (A) s action in enhancing the amount is not correct. Further it was submitted that the ratio adopted by the CIT (A) in allocating the amount is artificial, notional and rate of interest is also not correct. Further it was submitted that assessee is in the business and was approved by the RBI as NBFC and therefore the amounts advanced and loans considered are to be considered as for the purpose of business. Therefore, disallowance under section 36(1)(iii) does not arise. 7.4 The learned Departmental Representative however, in his reply submitted that the CIT (A) has equal powers with that of Assessing Officer and whatever Assessing Officer can do the CIT (A) can also do. Therefore, there are no restrictions on CIT (A) to consider the enhancement of the amount, if the Assessing Officer has done something wrong in the assessment. With reference to the disallowance of amount, he supported the orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess or not, have to be examined afresh. Therefore, without giving any finding on the amount of quantum to be considered, we restore the issues covered in Ground No.1 with reference to disallowance under section 14A and also disallowance of interest to the extent of ₹ 324.58 lakhs made by the Assessing Officer (restricted by the CIT (A) to ₹ 263.83 lakhs) to the file of the Assessing Officer to examine the contention of assessee that funds are utilized for the purpose of business and to establish the nexus, if any of borrowed funds diverted to nonbusiness purpose and accordingly disallow the amount. We make it clear that the disallowance, if any, made should not exceed the amounts contested by assessee in the grounds of appeal as the Revenue has accepted the restriction of disallowance under section 36(1)(iii). 7.6 With reference to the disallowance in respect of advance to Shri Rishikumar Chakrapani and to the MPCC, on facts we are of the opinion that the amounts were advanced for non business purpose and there is nothing on record to indicate that these advances are for the purpose of business. Consistent with the view taken in AY 1999-2000 in appeal No.ITA No.933/M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount and disallowed the amount of ₹ 7.28 crores, as considered in Para 3.6 of the CIT (A) s order. 8.1 Considering the arguments of the learned Counsel and the learned Departmental Representative, we are of the opinion that the issue is to be re-examined by the Assessing Officer in the light of the decisions taken in AY 2001-02 above. Unless there is a finding that assessee s investment is not business activity and the funds are not utilized for the purpose of business, disallowance under section 36(1)(iii) does not arise. There is no disallowance under section 14A in this year as the dividend income was taxable. Therefore, the interest disallowance has to be considered under section 36(1)(iii). If there is income or loss under the head capital gains , the interest disallowance under section 36(1)(iii) pertaining to the investment activity is also to be considered as deduction, while working out the capital gain. Accordingly, the Assessing Officer is directed to examine the nexus with borrowed funds on which interests was claimed to the utilization of funds either in investment activity or in business activity and disallow amount accordingly under section 36(1)(iii) and c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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