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TMI Blog2011 (2) TMI 1580X X X X Extracts X X X X X X X X Extracts X X X X ..... was paying interest expenses of ₹ 1635493/- against unsecured loan of ₹ 17544902/-. The entire loan was taken from two directors of the assessee company and interest amount of ₹ 14,28,063/- and ₹ 2,07,490/- were paid to Shri Anil Kumar Agarwal and Smt. Arati Agarwal respectively @ 12% per annum. This unsecured loan had been invested in acquiring the unquoted shares of subsidiary company M/s India Finance and Construction Co. Pvt. Ltd. (IFCCPL). The assessee invested ₹ 1,60,00,000/- [P.Y ₹ 1,10,00,000/-] in acquiring 20,000 shares of IFCCPL of ₹ 1000/- each ₹ 800/- paid up [face value of ₹ 1000 per equity shares]. The shares were declared as investment in the balance sheet. The borrowed fund had not been used for any business activities but for investment in shares. Dividend income, if any, is tax free u/s.10(33) of the I.T.Act. Therefore, interest claimed was disallowed u/s.14A of the I.T.Act after providing transaction wise nexus between the borrowed fund and investment. Alternatively, it was also held that interest expenses are capital expenditure to control interest in a subsidiary Group Company. The ld. CIT(A) dismissed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e argued that since the material on the basis of which assessment has been re-opened, is in turn based on the assessment for A.Y 2002-2003, therefore, AO could have very well selected the return for this year under scrutiny and issued notice u/s.143[2] whereas AO has ignored this provision and went on to reopen the assessment. 5. He then referred to the decision of the Hon ble Bombay High Court in the case of Balkrishna Hiralal Wani 321 ITR 519 wherein it was clearly held that assessment could not be reopened if there was no tangible material before the AO. He particularly referred to the observations of the court at page 523 wherein it was clearly observed that even if there is no assessment order passed u/s.143[3], unless AO has a tangible material, the assessment could not be reopened. 6. On merits, he submitted that in assessee s own case the issue has already been decided in favour of the assessee in I.T.A.No.15/Mum/2006 for A.Y 2002-03. In that case an addition u/s.14A was deleted mainly because assessee did not have any income which was exempt, however, he admitted that this decision was rendered before the decision of the Special Bench of the Tribunal in the case of D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orrowed fund and investment. Alternatively, it was also held that interest expenses are capital expenditure to control interest in a subsidiary Group Company. The ld. CIT(A) dismissed the appeal against the additions. In A.Y 2004-2005, there was unsecured loan of ₹ 1,58,81,352/- and ₹ 152,77,108/- as on 31-03-2003 respectively. Investment of ₹ 1,60,00,000/- was also there. Therefore, this year also, the borrowed fund had not been used for any business activities but for investment in shares. The issue involved is same as that of issue for A.Y 2002-2003. Claimed interest expenses of ₹ 12,24,308/- should be disallowed u/s.14A. On this ground, income chargeable to tax of ₹ 12,34,308/- has escaped assessment as per section 147 of the Act. For previous year ending on 31-03-2004, the assessee has shown income of ₹ 12,30,720/- from share trading without showing any details of trade share. The assessee did not have any opening stock or closing stock. Therefore, share trading income is nothing but speculation profit. Business loss cannot be adjusted against speculation profit. On this ground, income chargeable to tax of ₹ 12,30,720/- has escap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. Thus, in above case, it is clear the reopening was quashed on the basis that clause 35 had no application. We further find that the Hon ble High Court has also made the following observations at page 523 which are as under: Though in the present case, notice under section 148 has been issued within a period of four years of the expiry of the relevant assessment year and there is no order of assessment under section 143(3), nonetheless, in view of the well settled position of law, it is urged that the Assessing Officer must have tangible material on the basis of which he can have a reason to believe that income has escaped assessment. In the present case, it is submitted that there was a total absence of any tangible material to form a belief. The existence of belief must be tested on the basis of the reasons recorded. Thus, above observations clearly shows that the assessment cannot be reopened unless and until tangible material is available with the AO. In the case before us, this material came to the knowledge of the AO in the form of assessment order passed u/s.143[3] for A.Y 2002-03 on 23-3-2005. Even the Ld.counsel of the assessee accepted that this was tangible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of business-Term in relation to is wide enough to include in its sweep the expenditure both for making or earning income and incurred wholly and exclusively for the purposes of business carried on by the assessee -What one has to see is whether any expenditure were incurred by an assessee in relation to an income that does not form part of total income of the assessee under the Act, and if the answer is in affirmative then that expenditure cannot be allowed irrespective of the fact that it was allowable under different provisions of the Act-Further, disallowance has to be of the entire amount of the expenditure so related and cannot be reduced by the receipt of interest which has no relation to such expenditure. 10. The above clearly shows that even if there is no exempt income, still, provisions of sec.14A are applicable. However, at the same time Rule 8D has been held to be not of retrospective nature by the Hon ble Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd. vs. DCIT [43 DTR 171] . Therefore, in the interests of justice, we set aside the issue in the light of the decision of the Hon ble Bombay High Court in the case of of Godrej Boyce Mfg. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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