GULITA SECURITIES LTD,MUMBAI vs. DCIT 4(1), MUMBAI

Date of hearing 14 -05-2018 Date of pronouncement 03-08-2018 O R D E R

Per G Manjunatha, AM :

1. This appeal filed by the assessee is directed against order of the CIT(A)-9, Mumbai dated 26-11-2015 and it pertains to AY 2011-12. The assessee has raised the following grounds of appeal:- Ground No. 1: On the facts and in the circumstances of the case and in law, the Ld. CIT(A), Mumbai, erred in confirming the disallowance made by the assessing officer amounting to Rs. 2,14,27,061/- u/s 36(l)(iii) of the Act, treating the same as not incurred for the purpose of the business of the appellant. The appellant prays that the disallowance of Rs. 2,14,27,0617- under section 36(l)(iii) of the Act may kindly be deleted. ** Ground No.2: On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not adjudicating on merit the A.O.'s contention that interest expenditure amounting to Rs.2,14,27,0617- is hit by the provisions of section 14A r.w.r. 8D of t the I.T.Rules. The facts of the issue speak for itself that the appellant was not in the possession of the shares of MIRC Electronics Ltd and therefore not eligible for earning any exempt income from the same. In fact, no investment was made in the shares of MIRC Electronics Ltd. The A.O.'s contention is therefore without any substance. The Ld. CIT(A) ought to have 2 ITA 91/Mum/2016

considered this issue on merit. The appellant prays that the issue may be considered in the light of the facts and accordingly, it may be held that the interest expenditure of Rs.2,14,27,6617- is not hit by the provisions of section 14A r.w.rule 8D of the I.T.Rules. 2. The brief facts of the case are that the assessee company is engaged in the business of stock and share brokers, filed its return of income for AY 2011-12 on 29-09-2011 declaring total loss of Rs.1,82,32,695. The case was selected for scrutiny and notices u/s 143(2) and 142(1) of the Act were issued. In response to notices, the authorized representative of the assessee appeared from time to time and filed various details, as called for. The assessment has been completed u/s 143(3) r.w.s. 90(1)(c) of the Income-tax Act, 1961 determining the total income at Rs.40,58,43,960 by making addition towards disallowance of interest expenses u/s 36(1)(iii) and addition towards unexplained cash credit u/s 68 of the Income-tax Act, 1961.

The assessee carried the matter in appeal before the CIT(A). The Ld.CIT(A), for the detailed discussion in his appellate order dated 26-11- 2015 partly allowed appeal filed by the assessee wherein he has deleted addition made towards unexplained cash credit u/s 68 of the Act, and confirmed addition made towards disallowance of interest expenditure u/s 36(1)(iii) and u/s 14A r.w.r.8D of I.T. Rules, 1962. Aggrieved by the order of CIT(A), the assessee is in appeal before us.

3. The only issue that came up for our consideration from assessee’s appeal is disallowance of interest u/s 36(1)(iii) of the Income-tax Act,

3 ITA 91/Mum/2016 1961. The fact with regard to the impugned dispute are that during the year under consideration, the assessee has debited interest on loan to the P&L Account of Rs.2,14,27,061. During the course of assessment proceedings, AO observed that the assessee has borrowed loan of Rs.35,38,83,555 from M/s Shyam Equity Pvt Ltd. The AO further noticed that the assessee has shown advances against shares of Rs.26,69,92,586, therefore, called upon the assessee to explain as to why interest paid on loans shall not be disallowed u/s 36(1)(iii) for diversion of interest bearing funds for non business purposes. In response to show cause notice, the assessee submitted that the company is in the business of purchase and sale of shares and in the process, it has borrowed loan from M/s Shyam Equity Pvt Ltd and advanced the same to the director of the company, Shri Gulu Mirchandani to acquire shares of Mirc Electronics Ltd. The assessee further submitted that the director of the company has acquired the shares of Mirc Electronics Ltd at a price of Rs.33 per equity share, whereas the prevailing market price of the share as on the date of acquisition was Rs.17 per share which is much lesser than the price at which the director has purchased shares. Therefore, owing to difference in price of shares, the company has not accepted the offer to buy shares and accordingly, whatever amount was given to the director for purchase

4 ITA 91/Mum/2016 of shares has been shown under the head advance for shares’ in the balance-sheet. The assessee further claimed that since its main object is trading in shares, the assessee has borrowed funds for its business purpose and utilised the said amount for the purpose of its business activity, therefore, interest paid on such loans cannot be disallowed u/s 36(1)(iii) of the Income-tax Act, 1961.

4. The AO, after considering relevant submissions of the assessee held that although the assessee has claimed to have given loans for acquisition of shares, failed to prove that the said advance has been used for genuine business purpose. The AO further observed that the assessee has borrowed huge funds from Shyam Equity Pvt Ltd and advanced the same to the director of the company without any nexus between loan borrowed and advance given to the director. Although it claims to have paid loans for purchase of shares, the said transaction was not materialised, therefore, opined that the assessee has diverted interest bearing funds for non business purpose and accordingly, disallowed, interest expenses u/s 36(1)(iii) of the Income-tax Act, 1961.

The AO also invoked the provisions of section 14A r.w.r. 8D(2)(i) to argue that the assessee has invested in shares, which is capable of earning exempt income and hence, any expenditure incurred in relation to exempt income needs to be disallowed whereas the assessee has 5 ITA 91/Mum/2016 failed to disallow such expenses and accordingly opined that even u/s 14A r.w.r. 8D(2)(ii), the interest expenditure claimed by the assessee is not allowable as deduction.

5. The Ld.AR for the assessee submitted that the AO was erred in disallowing interest paid on loans borrowed from Shyam Equities Pvt Ltd without appreciating the fact that loan has been borrowed for the purpose of business of the assessee and the same has been advanced to director of the company for purchase of shares. The Ld.AR further submitted that since the assessee is in the business of purchase and sale of shares, any advance given for purchase of shares is in the nature of normal business advance and hence, any interest paid on loans borrowed for genuine purposes cannot be disallowed u/s 36(1)(iii) of the Income-tax Act, 1961. The AO further referring to various judicial precedents including the decision of Hon’ble Karnataka High Court in the case of CIT vs SridevEnterprises 192 ITR 165 (Kar) submitted that the assessee has paid interest on such loans in the earlier year and the department has accepted, therefore, without there being any change in facts, there is no reason for the AO to disallow interest paid on loan during the impugned assessment year. Once interest is allowed in previous year and if there is no change in the circumstances, then, it cannot be disallowed in the current assessment years. In this regard

6 ITA 91/Mum/2016 relied upon the following case laws:-

6. The Ld.DR, on the other hand, strongly supporting the order of the Ld.CIT(A) submitted that there is no res judicata in income-tax proceedings and hence, the question of following consistency in assessment proceedings is not relevant and what is relevant is whether the impugned expenditure is allowable as per the provisions of the Act or not. In this case, the AO has brought out clear facts to the effect that interest paid on loans is hit by the provisions of section 36(1)(iii) of the Act and hence, rightly disallowed interest paid on loans and his order should be upheld.

7. We have heard both the parties and perused the material available on record. The AO has disallowed interest paid on loans u/s 36(1)(iii) and u/s 14A r.w.r. 8D(2)(i) of Income-tax Rules, 1962. According to the 7 ITA 91/Mum/2016 AO, the assessee has availed loans from Shaym Equities Pvt Ltd and diverted the same for non business purposes. It is the contention of the assessee that loan borrowed from Shaym Equities Pvt Ltd has been given to director of the company for acquisition of shares of Mirc Electronics Ltd. The assessee further contended that the director of the company has acquired shares of Mirc Electronics Ltd at a higher price than at the prevailing market price of the shares and hence, the company has not accepted the offer to buy shares. Consequently, amount given to director of the company has been treated as advance given for shares. Since, the main object of the assessee is to buy and sell shares, whatever advances given for acquisition of shares is in the nature of normal business advances and, therefore, whatever interest paid on such loans cannot be disallowed u/s 36(1)(iii) of the Income-tax Act, 1961. There is no dispute with regard to the fact that the assessee is involved in the business of shares and stock broking. The borrowed loan from Shyam Equities Pvt Ltd and advanced such loan to director of the company is for the purpose of business and there is a direct nexus between loan borrowed from Shyam Equities Pvt Ltd and advanced the same against purchase of shares. Therefore, we are of the considered view that once there is a direct nexus between loan and advance given for purchase of shares, then no interest can be disallowed u/s 36(1)(iii)

8 ITA 91/Mum/2016 on the ground that the assessee has diverted interest bearing funds for non business purposes.

The relevant part of the order is extracted below:- “6. We have neard learned advocates for the parties and perused the material on record. In our view, the decision of the Karnataka High Court in the case of Sridev Enterprises(supra) is directly on the issue posed in this appeal. It is necessary

9 ITA 91/Mum/2016 to reproduce relevant paragraph of the above decision, which reads as under:- "We are in agreement with the view expressed by the Appellate Tribunal. The status of b the amount outstanding from Nalanda on the first day of the accounting year is the amount that stood outstanding on the last day of the previous accounting year and, therefore, its nature and status cannot be different on the first day of the current accounting year from its nature and status as on the last day of the previous accounting year. Regarding the past years, the assessee's claims for deduction were allowed in respect of the sums advanced during those years; this could be only on the assumption that those advances were not out of borrowed funds of the assessee. This finding during the previous years is the very basis of the deductions permitted during the past years, whether a specific finding was recorded or not. A departure from that finding in respect of the said amounts advanced during the previous year would result in a contradictory finding; it will not be equitable to permit the Revenue to take a different stand now in respect of the amounts which were the subject matter of previous years' assessments; consistency and definiteness of approach by the Revenue is necessary in the matter of recognising the nature of an account maintained by the ^assessee so that the basis of a concluded assessment would not be ignored without actually reopening the assessment. The * principle is similar to the case where it has been held that a debt which had been treated by the Revenue as a good debt in a particular year cannot be subsequently be held by it to have become bad prior to that year.”

categorically held that it would not be equitable to permit the revenue to take a different stand subsequently in respect of the amounts which were the subject matter of previous years' assessment. In our view, once the interest is allowed in the previous year and if there is no change in the condition then it can be disallowed in the current years' assessment. Accordingly, the question which is posed in this appeal requires to be answered in favour of the assessee and against the department. Therefore, the present appeal deserves to be allowed.”

10. The assessee has taken ground No.2 challenging action of the Ld.CIT(A) in not adjudicating disallowance of interest u/s 14A r.w.r.8D(2)(i) of the I.T. Rules, 1962. The CIT(A) has upheld addition made by the AO on both sections by holding that the impugned disallowance is hit by provisions of section 36(1)(iii) as well as section 14A of the Income-tax Act, 1961. Since, we have already deleted addition made by the AO u/s 36(1)(iii), the ground taken by the assessee

11 ITA 91/Mum/2016 u/s 14A r.w.r 8D(2)(i) becomes academic in nature and it does not require any adjudication. Hence, the second ground raised by the assessee is dismissed, as infructuous.