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TMI Blog2011 (2) TMI 1541X X X X Extracts X X X X X X X X Extracts X X X X ..... the circumstances of the case and in law, the ld. CIT(A) erred in directing the AO to consider interest of ₹ 35,83,074/- as cost of acquisition of mutual fund without appreciating the fact of the case. 2. The assessee is a company. It is engaged in the business of providing Internet based consumer finance services. During the year the assessee had issued 7% Convertible Debenture to the tune of ₹ 15.65 crores to 4 investors. The same were convertible in to equity shares of the company as per the debenture subscription cum share-holders agreement dated 7/4/2003. The Assessee company had paid an amount of ₹ 1,15,96,229/- to the debenture holders as interest. As the company did not need entire money immediately the surplus funds were invested in units of Treasury portfolio scheme of ING Vysya Mutual Fund. The amount of such surplus invested initially were ₹ 8 crores on 10.6.2003. These units were later redeemed as and when the need of the business arose. The redemption till March 31, 2004 amounted to ₹ 4,96,19,950/-. All the units were completely redeemed by Oct.7,2004. 3. The Assessee advanced monies to its wholly owned subsidiaries from time to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of units at ₹ 12,94,979/- will be converted into short term capital loss of ₹ 22,88,095/-. 7. The AO however held that as per the provisions of section 36(1)(iii) of the Act, interest paid on capital borrowed for the purpose of business or profession is allowable as deduction. In order to avail the interest as deduction, the assessee must satisfy the condition that the money has been borrowed and the money so borrowed has been utilized for the purpose of business. During the year under consideration, the assessee has subscribed the debenture of ₹ 15.65 crores and has paid interest on this debenture amounting to ₹ 1,15,96,229/-. As per the Debentures subscription-cum-Share holder s agreement dated 7th April, 2003, the proceeds by issue of debentures had be placed in an earmarked capital account and used for the sole purpose of business. The assessee has used ₹ 8 cores out of ₹ 15.65 crores, for the acquisition of ING Vysya Mutual Fund. The income received from transfer of mutual fund units was shown by the assessee as short term capital gain. Therefore, the assessee cannot take the plea that debenture fund was used for the purpose of business. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for acquisition of mutual fund and the gain from sale of unit has been shown under the head capital gain. Therefore, the AO has correctly disallowed the interest u/s. 36(1)(iii) of the Act. Accordingly the assessee s ground that the interest paid be allowed as deduction u/s. 36(1)(iii) of the Act is rejected. The appellant alternatively contended that if the interest paid is not allowable u/s. 36(10(iii) of the Act the same should be considered as cost of acquisition of mutual fund. In this regard the appellant has invited my attention on para No.4.3 of the assessment order when the AO has viewed that the interest paid would form part of cost of acquisition. I have carefully gone through the plea of the assessee. As per the provisions of section 48 the capital gain shall be computed by deducting the expenditure incurred wholly and exclusively in connection with such transfer and the cost of acquisition of the asset and the cost of the improvement from the full value of the consideration. In assessment, the AO admits that the interest paid should form part of cost of acquisition. Therefore, the AO is directed to consider the interest of ₹ 35,83,074/- as cost of acquisitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egard to the circumstances of the case. No businessman can be compelled to maximize his profits. The decision of the Hon ble Bombay High Court in the case of Phalton Sugars (supra) on which the AO relied while making the impugned disallowance had been specifically overruled by the Hon ble Supreme Court in the case of S.A.Builders (supra). It is not disputed by the Assessing Officer that the subsidiaries are wholly owned subsidiaries of the assessee and for all practical purposes they were business units of the assessee. In these circumstance, we uphold the order of the CIT(A) and dismiss Gr.No.1 raised by the Revenue. 14. As far as the disallowance of interest of ₹ 35,83,074/- is concerned the CIT(A) has upheld the disallowance of interest claimed as deduction by the assessee. He has only directed the Assessing Officer to consider the interest expenses as part of the cost of acquisition of the units of mutual funds. The units of mutual funds were capital assets in the hands of the assessee and, therefore, under section 48 of the Act this would go to form part of the cost of acquisition. The CIT(A) has only allowed the alternative claim of the assessee. In fact the Asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of their sanctioned loans for various reasons. This necessitated write off of the income accrued in earlier years, on the basis of earlier accounting policy. It is not in dispute that due to the change in the accounting policy, Income from operation in the current year, as compared to the previous year, is lower by ₹ 2,53,30,692/-. 17. The Assessee claimed as a deduction a sum of ₹ 84,27,944/- on account of bad debts written off. The assessee submitted before the AO that it had offered income on the basis of sanction of loans prior to disbursement of loan. However, the clients did not avail the sanctioned loans and therefore the Assessee was compelled to write-it off as bad debts. According to the Assessee it has fulfilled the condition specified in section 36(2) and, the amount written of is deductible u/s. 36(1)(vii) of the Act. 18. The assesse submitted before the AO that under section 145(1), the Assessee should follow a particular method of accounting regularly. That the Assessee was entitled to change its method of accounting as well. The Assessee relied on the decision of the Hon ble Calcutta High Court in the case of CIT vs. National Grindlyas Bank Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amount of ₹ 83,27,944/- being income accrued in earlier years claimed as deduction during the year was also disallowed. Thus the two aforesaid two additions totaled a sum of ₹ 3,37,58,636/-. 21. On appeal by the assessee the CIT(A) deleted the addition of ₹ 2,53,30,692/- made by the Assessing Officer for the following reasons. (i) The Assessee was showing income on accrual basis at two stages i.e. one at the time of sanction of loan and the other at the time of sanctioning loan to the customers. (ii) The Assessee used to show accrual of income at the first stage itself on an estimated basis after providing for contingencies to recognize the possibility that an applicant may not go for the disbursement of sanctioned loan. (iii) This system was found not reflecting the true income as the customers some time opted not to avail the sanctioned loan. (iv) This compelled the Assessee to change its accounting system of receipt of service charges. (v) As per the provisions of section 145(1) of the Act income chargeable under the head Profits and gains of business or profession or Income from other sources has to be computed in accordance with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 before the Tribunal. 24. We have heard the rival submissions. As far as Ground No.3 raised by the Revenue is concerned, we notice that the assessee follows mercantile system of accounting. Under this method of accounting, profit is computed by bringing into credit what is due immediately it becomes legally due and before it is actually received. Likewise expenditure is debited when a legal liability has been incurred even before it is actually paid. The question as to when the legal right of the assessee to claim its service charges from the client would arise would depend on the terms of the agreement between the assessee and its client. The fact that the client does not utilize the disbursement of the loan will not prevent the assessee from not recognizing a part of the service charges that it has to receive from the client, if the legal right to receive the service charges from the client as per the agreement is not dependent on the client getting disbursement of the loan. In fact the assessee in the past has been following the method of accounting whereby on loans sanctioned services charges receivable were being treated as income. The assessee has attempted to justify ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tistical purposes. ITA NO.2940/MUM/2009: 27. We have already seen that while completing the assessment of the assessee for A.Y 2004-05 the Assessing Officer made an addition of ₹ 3,37,58,636/- being the addition in respect of change of method of accounting of service charges income of ₹ 2,53,30,692/- and disallowance of deduction on account of bad debts of ₹ 84,27,944/-. 28. In AY 05-06, the assessee revised its return and claimed the same in assessment year 2005-06 as deduction on the ground that the service charges could not be recovered as the loans were not ultimately disbursed. This was not allowed by the AO and CIT(A). We also seen that in AY 04-05, the claim of Assessee for deduction of ₹ 3,37,58,636/- was allowed by the CIT(A). Since the revenue has filed an appeal against the said order of CIT(A) for 2004-05, the as a protective measure the assessee has filed this appeal for assessment year 2005-06 in case the same is not allowed by the Tribunal for assessment year 2004-05. 29. We have already remanded the issue with regard to the addition of ₹ 2,53,30,692/- on account of change in the method of accounting of income from service ..... X X X X Extracts X X X X X X X X Extracts X X X X
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