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TMI Blog2016 (5) TMI 1218X X X X Extracts X X X X X X X X Extracts X X X X ..... f ₹ 23. 78 crores. That in the MOA the main object of the company has been mentioned as financing. As per the settled principle of taxation jurisprudence section 73 is not applicable if the assessee is engaged in Finance business. Thus provisions of section 73 r. w. explanation was not applicable. Therefore reversing the order of the FAA, we decide the effective Ground of appeal in favour of the assessee. - I. T. A. 1655/Mum/2013, I. T. A. 2862/Mum/2013, I. T. A. 4416/Mum/2014, I. T. A. 4216/Mum/2014 - - - Dated:- 25-5-2016 - Sh. Joginder Singh, Judicial Member And Rajendra, Accountant Member For the Revenue : Shri Sanjay Bare-DR For the Assessee : Shri Sandeep Jhanwar and Hitendra Bhandari AR. s ORDER Per Rajendra, AM Challenging the order dt. 17. 12. 2012 11. 4. 2014 of CIT(A)-13, Mumbai the Assessing Officer (AO)and the assessee have filed cross appeals for the above mentioned assessment years (AY. s. ). Assessee-company, engaged in the business of finance, investing and trading in shares and securities. A summary of the details of filing of returns, returned incomes, assessed incomes etc. are as under: A. Y. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vised computation of income u/s. 36 (1) (iii) of the Act. He restricted the disallowance at ₹ 50 lakhs on account of interest attribu -table to share application money in shares of Sun City projects Ltd. 3. Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority(FAA). Before him, it was argued that the assessee had not made any disallowance of interest on share application money to its sister concern i. e. Sun City projects private Ltd. where the assessee had deep business interest, that the AO had made the disallowance on the ground that the same issue was dealt by his predecessor while computing the assessment for the AY. 2007-08, that the AO had failed to appreciate that no assessment was completed u/s. 143(3)of the Act for that year, that the AO had made the disallowance without any basis, that the assessee had sufficient interest free funds in form of reserves and surplus, advance share application money received and interest-free loan received totalling to ₹ 239 crores, that the advance share application money was made out of own funds, that no interest expenditure was required to be disallowed on that account. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowed invoking the provisions of section 14A of the Act, that the further disallowance of ₹ 92. 57 lakhs was made u/s. 36(1)(iii) of the Act. So, he disallowed balance interest i. e. ₹ 3. 05 crores u/s. 37 (1) of the Act. 6. Challenging the order of the AO, the assessee preferred an appeal before the FAA. Before him, it was argued that the assessee had given loans and advances in earlier years, that some of which had turned bad, that as the recovery was doubtful so it had classified them as NPAs as per the RBI guidelines, that the assessee was a NBFC, that interest expenses attributable to NPA loans was incurred wholly and exclusively for the finance business of the assessee, that same was allowable u/s. 37 (1) of the Act, that the AO had not discussed the interest on doubtful advance in the assessment order, that when the principle itself was doubtful of recovery the question of realisation of interest could not arise. The assessee relied upon the case of Godhara Electricity Ltd. (225 ITR 746) and argued that hypothetical income could not be brought to tax even though the assessee company was following mercantile system of accounting, that notional interest on doubt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l business of financing, that it was incurred wholly and exclusively for the business of the assessee. 8. We have heard the rival submissions and perused the material before us. We find that as per the Memorandum of Association of the company the main object was to carry on the business of financers (page 44 of the paper book), that it is a non-banking finance company registered with the RBI vital registration number B- 13. 01516 dtd. 24/04/2001. In our opinion, NBFCs are not required to credit interest income on accrual basis. In the case of Bobcards Ltd. (29 taxmann. com 234) the Tribunal has held as under: Since as per RBI guidelines wide vide Non-Banking Financial Companies Prudential Norms (Reserve Bank) Directions, interest income on NPA was required to be credited on actual receipt basis and not on accrual basis, that the assessee being a NBFC, was bound to follow said guidelines . The Tribunal further held that there was no error or infirmity in the order of the FAA deleting the addition made by the officer on notional basis. We find that the assessee had advanced the loans during the normal course of business and therefore interest expenditure was allowable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #8377; 2. 3 crores. 10. Before the FAA the assessee made elaborate submissions. It was argued that it had made strategic investments in its sister concern, that it had sufficient interest funds available for making investment in Indian subsidiary/associated companies, that interest expenditure should not be considered for disallowance u/s. 14 A of the Act, that major investment in shares was of unquoted companies, that income from such companies were taxable under the head capital gains, that the dividend received by it was on shares held as stock in trade, that interest should not be disallowed u/s. 14 A of the Act, that it had incurred expenditure of ₹ 44, 084/-as D-Mat charges, that balance expenses should not be considered for disallowance. After considering the submission of the assessee and the assessment order, the FAA held that the assessee was having opening balance of investment of ₹ 56. 43 crores, that the closing balance was at 48. 43 crores, that as per schedule VI of the balance sheet there was no movement in the share of different companies held by it, that the difference in opening and closing balances was on account of provision of diminution in v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of section 14A he had strongly confused the amount of dividend received with the amount of investments, that the FAA had mentioned that the assessee had offered disallowance of ₹ 2. 33 crores during the course of assessment proceedings, that the assessee had made alternative submissions during the course of assessment proceedings, that without prejudice it was submitted that disallowance could be made for the said amount, that it was specifically mentioned that the assessee had incurred expenditure of ₹ 44, 840/- as administrative charges, that disallowance had to be restricted to the said amount only, that the assessee had argued that no disallowance in respect of stock-in-trade-interest could be made, that the assessee had not made the investment for purpose of earning dividend income, that all the investments had been made in unquoted companies where there was no exemption even on long-term capital gains, that the investments were made in the equity shares of the sister concerns for strategic investments only, that it was incorrect to say that investments had been made for earning tax-free income. The DR supported the order of the AO and the F AA. 12. We have he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act. While coming to this conclusion, the Hon ble High Court relied upon following decisions:- i. Cheminvest Ltd. v. CIT [2009] 317 ITR (AT) 86 (Delhi) [SB] (para 15) ii. CIT v. Chugandas and Co. [1964] 55 ITR 17 (SC) (para 14) iii. CIT v. Cocanada Radhaswami Bank Ltd. [1965] 57 ITR 306 (SC) (para 14) iv. CIT v. Corrtech Energy (P. ) Ltd. [2015] 372 ITR 97 (Guj) (para 15) v. CIT v. Holcim India (P. ) Ltd. (I. T. A. No. 486 of 2014 decided on 5- 9-2014) (para 15) vi. CIT v. Hero Cycles Ltd. [2010] 323 ITR 518 (P H) (para 15) vii. CIT v. Lakhani Marketing Incl. [2015] 4 ITR-OL 246 (P H) (para 15) viii. CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC) (para 10) ix. CIT v. Shivam Motors (P. ) Ltd. (ITA No. 88 of 2014 decided on 5-5-2014) (para 15) x. IT v. Winsome Textile Industries Ltd. [2009] 319 ITR 204 (P H) (para 15) , xi. Eicher Goodearth Ltd. vs. CIT [2015] 378 ITR 28 (Delhi) (para 14) xii. Harish Krishnakant Bhatt v. ITA [2005] 278 ITR (AT) 1 (Ahd) (para 10) xiii. Maxopp Investment Ltd. v. CIT [2012] 347 ITR 272 (Delhi) (para 12) 3. 1. In view of the factual matrix and following the af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s dealing in shares, that shares were valued at cost or market price whichever was lower on close of the year as per the accounting policy consistently followed by it, that the P L A/c. for the year reflected a loss of ₹ 4. 12 crores on valuation of shares, that it carried forward the valuation loss as business loss, that the explanation to section 73 could not be applied. He referred to the case of Karnataka Bank Ltd. (34taxmann. com150) wherein the Hon ble Court had held that loss on valuation of shares held as stock in trade was allowable as deduction. He further argued that the AO had wrongly placed reliance on Explanation to section 73, the amendment was brought to curb the device sometime resorted to by business houses to manipulate and reduce the taxable income of the companies under their control, that in the case under consideration the stock valuation loss was mostly in the shares of listed companies, that by no stretch of imagination it could be argued that loss was due to device used by the assessee to reduce taxable income, that the assessee had not made any purchase/sale of the shares during the year, that the details of diminution were furnished during the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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