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TMI Blog2020 (3) TMI 1252X X X X Extracts X X X X X X X X Extracts X X X X ..... of deduction of interest expenditure to the extent of interest income earned during that year. In view of the aforesaid, the ground is allowed as indicated above. Disallowance of interest u/s 14A - HELD THAT:- We find that the identical ground raised in the present appeal has already been decided by the Coordinate Bench of ITAT in for AY 2009-10 in Shri Sudhir S. Mehta case [ 2017 (12) TMI 1668 - ITAT MUMBAI ] wherein the Hon ble ITAT has allowed the ground on merit in favour of assessee. Additional ground raised with respect to capitalization of interest - HELD THAT:- We are of the view that to the extent the interest relate to the investment, i.e. being disallowable under Section 57 will become part of cost of acquisition of shares and therefore the AO is directed to take it as part of the cost of shares for determining profit on sale of the shares. Thus, the additional ground stands allowed to that extent. X X X X Extracts X X X X X X X X Extracts X X X X ..... 21.08.2018 and 24.08.2018 which have been duly considered. In the submissions, the assessee has broadly submitted that the action of the AO of disallowing the said interest expenditure is not correct considering that (i) an oral contract existed between the assessee and the said notified broking entities as observed by the Hon'ble ITAT in the case of the assessee for A.Y. 2006-07 and also a number of other cases of Harshad Mehta Group, (ii) as per the bye-laws and regulations of Stock Exchange, she is required to compensate the broker for delay in the payment for purchase of shares by way of payment of interest, (Hi) the Hon'ble Special court has directed the other clients of the notified broker entities to pay interest on the amounts outstanding, (iv) the Hon'ble Special Court has also been awarding/levying interest @12% p.a. on the funds used inter-se between notified entities, (v) the Custodian is the only authority as per Sec. 4(i) of the Special Courts Act, to seek cancellation of any contract on the ground that they are fraudulent or entered into with a view to defeat the provisions of the said Act, however, the Custodian has not sought cancellation of the contra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 7.2 I have considered the various submissions of the assessee as well as the order of the AO. It is observed that out of the total interest expenditure of ₹ 9,86,14,668/-, the assessee has considered an amount of ₹ 2,84,13,820/- for disallowance u/s 14A and the balance amount of ₹ 7,02,00,848/- has been claimed as a deduction u/s 57 against the interest receipts of ₹ 3,53,672/- on Term deposits while computing the income under the head, "Income from Other Sources". However, the AO has held that the entire interest expenditure claimed by the assessee of ₹ 7,02,00,848/- u/s. 57 cannot be allowed as a deduction against the interest income of ₹ 3,53,672/- on term deposits since, the said expenditure is provisional/contingent and without any basis, he assessee contends that the action of the AO is incorrect since the entire expenditure is payable as per oral contract of the assessee with the said notified broker entities and since there is a nexus between the said interest expenditure and the interest income from Term deposits, the entire amount of interest expenditure claimed by it of ₹ 7,02,00,848/- u/s 57 should be allowed as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the shares purchased by the assessee through them during the period prior to 1992. 7.5 On examination of the Balance Sheet of the assessee for A.Y. 1992-93, it is observed that the amounts payable to the said 3 notified broker entities are of ₹ 2578.74 lakhs. Interest has been charged @12% on the amounts payable to the said 3 notified broker entities. Against this total outstanding amount of ₹ 2578.74, the corresponding investments in shares, debentures etc. shown are of ₹ 2520.06 lakhs. 7.6 Similarly, on examination of the Balance Sheet of the assessee for the relevant year i.e. A.Y. 2012-13 it is observed that the amounts payable to the said notified broker entities are of ₹ 8201.10 lakhs. Interest has been charged of ₹ 9,86r41,668/- @12% on the amounts payable to the said notified broker entity. It has been submitted by the assessee that in the intervening period between the year ending 31.03.1992 and the year ending 31.03.2012 substantial portion of the said shares, debentures etc. purchased from the said notified broker entities and others have been sold off by the Custodian and the amounts realized have been utilized for payment of taxes et ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest attributable to such amounts is to be disallowed. Therefore, the assessee was asked to explain as to why interest has riot been charged on the said amount advanced to Shri Harshad Mehta of ₹ 6155.69 lakhs and also as to why the interest attributable to the amount of ₹ 49.9 lakhs related to payment of income tax, etc should not be disallowed. In response, the assessee submitted that the said amount of ₹ 6155.69 lakhs was paid to Shri Harshad Mehta pursuant to order passed by the Hon'ble Special Court dated 25.02.2011 in connection with payment of the outstanding income tax dues and this order did not have any stipulation for payment of interest. It was further contended that as per the Law laid down by the Hon'ble Supreme Court, the Hon'ble Special Court enjoys exclusive Civil jurisdiction and imposing of any tax liability on presumed interest income will be a violation of the said exclusive Civil jurisdiction of the Hon'ble Special Court thereby resulting into contempt of Court. As regards disallowance of interest attributable to the loans & advances given in the form of advance tax, wealth tax, income tax. IDS etc of ₹ 49.9 lakhs it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the interest income on Term deposits, etc. and also the details of the notional interest income arising to it on account of the loan advanced to Shri Harshad Mehta of ₹ 6155.69 lakhs. As regards, the interest expenditure related to exempt investments, it was claimed by the assessee to be of ₹ 2,84,13,820/- and the. / interest expenditure related to payments of income tax, etc was claimed to be of Rs. Nil. However, the details in respect of the interest attributable to Term deposits as | well as the notional interest income on the loan advanced to Harshad Mehta of ₹ 6155.69 lakhs were not submitted by the assessee. 7.12 It can be observed from the comparative figures of the Balance Sheet for the year ending 31.03.1992 and 31.03.2012 in para 7.7 above, that the investments in shares, debentures, etc as oh 31.03.1992 were of ₹ 2520.06 lakhs and in the intervening period, substantial portion of the said investments of ₹ 131.1 lakhs were sold and the unsold investments as on 31.03.2012 are of ₹ 2388.96 lakhs. It is pertinent to note that the entire investments of ₹ 2520.06 lakhs were purchased through the said 3 notified broker entities In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther, there is little doubt that the assessee maintains a common pool of funds for its investment in shares, debentures, etc as well as for its investments in Term deposits. 7.14 In view of the above factual position, the interest attributable to the income tax, etc of ₹ 49.9 lakhs and the interest free loan given to Shri Harshad Mehta of ₹ 6155.69 lakhs can be reasonably computed by adopting the formula which has been prescribed in Rule 8D(2)(ii) for computing the interest attributable to the exempt investments i.e. Interest expenditure x (Average of exempt investments/Average total assets) but in the said formula, the 'Average exempt investments" will be replaced by 'Average of Payments of Income tax etc and the interest free loans given to Harshad Mehta etc. Moreover, the interest to be considered, in this formula, will be the net interest of ₹ 6,99,47,178/- after excluding the interest of ₹ 2,86,67,490/- directly attributable to the exempt investments. The AO is accordingly directed to compute the interest attributable to the income tax, etc and the interest free loan given to Shri Harshad Mehta etc and disallow the same. 7.15 Similarly, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry dues, the balance are deposited in bank and now assessee is seeking relief to the extent of interest earned only. However, drawing our attention to ground no. 1 raised by the assessee, Ld. AR submitted that the assessee should be allowed set off of interest expenditure to the extent of interest income earned of ₹ 3,52,622/-. In this context, he submitted that AO himself has allowed such benefit of set off in AY 201718 (he filed a copy of the assessment order). 8. On the other hand, Ld. DR agreed that all the entities are notifed entities and he relied on the findings of Ld. CIT(A) and submitted that Ld. CIT(A) appreciated the facts of the case and gave a proper relief to the assessee. 9. Considered the rival submission and material placed on record, we notice from the records that the assessee has earned interest income from the deposits in bank. These deposits are out of the balance of liquidating certain investments. Since the assessee is under the direct control of Hon'ble Spl. Court and all the issues are pending before the Hon'ble Spl. Court. The plea of the assessee is that there is oral contract between the parties to pay 12% per annum and whatever the interest in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enue authorities. We find that the identical ground raised in the present appeal has already been decided by the Coordinate Bench of ITAT in ITA No. 5799/Mum/2015 for AY 2009-10 in Shri Sudhir S. Mehta case, wherein the Hon'ble ITAT has allowed the ground on merit in favour of assessee. For the sake of clarity, which is reproduced below:- 17. Now coming to the additional ground raised with respect to capitalization of interest we are of the view that to the extent the interest relate to the investment, i.e. being disallowable under Section 57 will become part of cost of acquisition of shares and therefore the AO is directed to take it as part of the cost of shares for determining profit on sale of the shares. Thus, the additional ground stands allowed to that extent. 15. Therefore, respectfully following the decision of Coordinate Bench of ITAT, which is applicable mutatis mutandis in the present cases, we are inclined to accept the findings of Ld. CIT(A) and dismiss the ground raised by the revenue in all these appeals. 16. In the net result, all the appeals filed by the assessee are allowed and all the appeals filed by the revenue are dismissed. Order pronounced in the open c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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