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TMI Blog2011 (9) TMI 1189X X X X Extracts X X X X X X X X Extracts X X X X ..... gh the findings of the AO as well as the contentions made by the A/R for the appellant. No doubt the application of Explanation to Section 73 is when there is purchase and sale of shares. In the instant case the loss of ₹ 14,94,000/- is claimed to be on account of forfeiture of shares by the issuing company itself i.e., M/s. Eastern Shipping Mills Industries Limited. The appellant was asked to furnish complete details of transaction alongwith the correspondences regarding notice for Call money and forfeiture of the shares. The appellant filed copies of notice for Call Money dated 15th October, 1999, first reminder dated 25.11.99, second reminder dated 14.02.00, forfeiture notice for non payment of Call Money dated 7.3.00 and final forfeiture notice dated 5.4.00 and finally forfeiture of shares vide letter dated 26.4.00. On consideration of these evidences it is proved beyond doubt that the appellant failed to pay the Call Money, therefore, the purchase of shares was not materialized. The reason for non payment of Call Money was decline in market value of the share. Therefore, it was in the interest of the appellant company not to pay Call Money and bear the loss on account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax Act, 1961. 8. The facts, in brief, are that during the assessment year 2001-02, the assessee company has paid professional fee of ₹ 40 lakhs to Shri S.K. Mitra, who was appointed to render professional advice on the investment activities of the assessee company. The AO has declined claim of deduction on the plea that there was no business requirement or commercial expediency to engage services of Shri Mitra. The AO also held that in view of the provisions of Section 14A, since the expenditure on professional fee was for earning exempt income, the same cannot be allowed as a deduction. 9. By the impugned order, the ld. CIT(A) allowed claim by observing as under :- 2.2 On careful consideration of the observations of AO as well as reply of the appellant on that, it is found that the services of Sri S.K. Mitra were hired by the company for various activities vide letter dated 12.4.2000 which included to a) Inform the company about short term and medium term investment opportunities. b) Guide the company in investment of its funds for optimum investment earnings. c) Regularly advise the company in investments/dis-i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed and by considering the exempt income earned, relating to the advise rendered by Shri S.K. Mitra, the ld. CIT(A) has restricted the disallowance to the extent of 10 % and the Department has not filed further appeal against the order of CIT(A). Thus, the Department has duly accepted the order of CIT(A) for restricting the disallowance to the extent of 10 % in the assessment year 2002-03. In view of these facts, we modify the order of CIT(A) for the assessment year 2001-02 and direct the AO to restrict the disallowance to the extent of 10 % of the payments made to Shri S.K. Mitra u/s 14A of the Income-tax Act, 1961. 11. Next grievance of Revenue relates to levy of tax on long term capital gain at 20 % instead of 35 % levied by the Assessing Officer. 12. The ld. Senior D.R. fairly conceded that the AO has not given any reasoning for taxing long term capital gains at 35 %. We found that shares were held by the assessee as its investment and since these were long term investment, the gain arising out of their sale was long term capital gain. Therefore, the ld. CIT(A) was justified in directing the AO to tax the same at 20 % by treating the same as long term ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st there from as under :- BGH Exim Ltd @ 7 % Rs. 17,350/- BGHPL @ 7% 16,34,222/- Birla TMT Holding P.Ltd. @ 7% 9,24,56,558/- Total : 9,41,08,130/- From the above it is seen that assessee has obtained secured loan and unsecured loan @ 10.50 % and have paid interest thereon at ₹ 12.06 crores and ₹ 1.04 crores totaling to ₹ 13.10 crores. As against this, it has charged interest at the rate of 7 % for the inter corporate loan given to group concerns and have charged interest from them at ₹ 9,41,08,130/-. As a prudent businessman assessee was required to charge interest at least @ 10.50%, the rate at which it has paid on borrowings, which assessee has failed to do so. It has resulted into short charging of interest from sister concerns at ₹ 4,70,54,065/-. 20. A.O. also observed as under :- Contention of the assessee that there was fall in interest rate is not acceptable. It is seen from the details of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vant to assessment year under consideration. When market rate of interest was about 6 0 7 % it is very difficult to lend money at higher rates. (d) It has been decided by Supreme Court that income which accrues to the assessee as taxable in his hands. Income which he could have, but has not earned is not taxable. The law cannot compel the assessee to earn maximum profit. Moreover, the M.P. High Curt which is a territorial High Court for this region, in case of D H Secheron Electrodes (P) Ltd. vs. CIT, (1984) 40 CTR 366 also held that where the assessee borrowed capital for business purposes, no portion of interest could be disallowed even if the assessee at dissipated the funds by giving interest free loans. Considering all the above facts and findings of the AO that the appellant has reduced its income is not substantiated. On the other hand, the appellant would have to suffer more losses if it has not given the spare money @ 7% of interest to its their concerns. In a nutshell the addition made by the Assessing Officer amounting to ₹ 4,79,54,065/- is not sustainable on facts as well as in law. The addition made by the Assessing Officer is deleted. 23 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n done the matter is remanded to the Tribunal for a fresh decision in the light of the aforesaid observation. In the present case assessee has not explained till date any reason for extending the funds borrowed by it at the rate of 10.50 % to its sister concern at lower rate of interest of 7 %. No purpose or commercial expediency could be explained by assessee for borrowing fund at such high rate merely for diverting it to a sister concern at much lower rate of interest. Assessee also failed to explain as to what the sister concern did with this money. If assessee being a Birla Group concern, has extended such loan at lower rate of interest to another Birla Group company for acquiring controlling stake in another Birla Group Company then such interest expense borne by assessee on borrowed funds could not be said to be for the business purpose of assessee and, therefore, the same is not allowable, as held in following cases :- (e) Shree Synthetics Limited [2008] 303 ITR 451 (MP). (f) CIT vs. Abhishek Industries Limited, (2006) 286 ITR 1 ( P H) (g) CIT vs. Rokham Cycle Ind. Pvt. Ltd., (2010) 326 ITR 291 ( P H) (h) Triveni Eng ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cause in Section 37 also expression used, is for the purpose of business . The expression for the purpose of business includes expenditure voluntarily incurred for commercial expediency and it is immaterial if a third party also benefits thereby. Through this proposition Hon'ble Supreme Court laid down test while considering disallowance of interest where the assessee has diverted interest bearing fund to its sister concern without charging any interest or at a lower rate of interest. In the instant case, undisputed facts are that during the year itself, the assessee has taken loan at a higher rate of interest at 10.5 % whereas loan was given to the sister concern at a lower rate of interest at 7 %. So far as contention of the ld. Authorized Representative to the effect that the assessee has already borrowed funds from long term debentures, which were repayable in three years, accordingly, funds were available with the assessee for some disposal, is of no relevance, in so far as the assessee has taken new loan during the year under consideration, which was alleged to be used for advancing loan to sister concern. Now coming to the test laid down by Hon'ble Supreme Court t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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