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Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा लेखा सद�य लेखा लेखा सद�य सद�य राजे�� सद�य राजे�� राजे�� केकेकेके अनुसार राजे�� अनुसार अनुसार PER RAJENDRA, AM- अनुसार Challenging the order dt.17.12.2012 & 11.4.2014 of CIT(A)-13,Mumbai the Assessing Officer (AO)and the assessee have filed cross appeals for the above mentioned assessment years (AY.s.).Assessee-company,engaged in the business of finance, investing and trading in shares and securities.A summary of the details of filing of returns,returned incomes, assessed incomes etc. are as under: A.Y. ROI filed on Returned Assessment Assessed Dt. of orders Income(Rs.) dt. Income(Rs.) of CIT(A) 2008-09 29.09.2008 (-)1,95,96,440/- 24.12.2010 7390 17.12.2012 (Revised return (-)5,88,94,130/- filed on)31.03.2010 2009-10 30.09.2009 (-)12,11,16,396/- 30.12.2012 (-)4,36,39,929/- 11.04.2014
1655/M/13 7orsPremier Finance & Trdg.
2.First ground of appeal is about the deleting the addition of Rs. 50 lakhs made by the AO u/s.36(1)(iii) of the Act. During the assessment proceedings,the AO found that the assessee had shown interest expenditure of Rs. 15.10 crores and interest receipt of Rs. 8.90 crores,that it had made investment shares of companies.He held that the assessee had deployed huge interest free funds in interest free investment, that it did not result in any income. He asked the assessee to explain as to why the excess interest paid over interest received should not be disallowed. In response, the assessee stated that it was a NBFC, that it had to follow the directions of RBI, that it had made provisions for Non-Performing Assets (NPA), that out of total loss of Rs.160.30 crores loan of Rs.31.97 crores was classified as NPA, that it had given advance of Rs. 2.82 crores against the share application money to New India Broadcasting Private Ltd.(NIBPL), that the project of that company had not taken off,that it had become doubtful of recovery, that when the principal had gone bad interest did not accrue,that there was no chance of recovery of interest, that the interest attributable to NPA loan given was incurred wholly and exclusively for finance business of the assessee and was allowable u/s.37(1) of the Act. After considering the submission of the assessee,the AO held that similar issue had been dealt with by his predecessor in detail while computing the assessment for the AY.2007-08 where in assessee’s reply was not found acceptable. Following the order for the AY.2007-08,the AO worked out the interest disallowance at Rs. 92.57 lakhs.He found that sums of Rs.25 lakhs and Rs.17.57 lakhs were already disallowed by the assessee in the revised computation of income u/s.36 (1) (iii) of the Act.He restricted the disallowance at Rs.50 lakhs on account of interest attribu -table to share application money in shares of Sun City projects Ltd. 3.Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority(FAA).Before him, it was argued that the assessee had not made any disallowance of interest on share application money to its sister concern i.e. Sun City projects private Ltd. where the assessee had deep business interest, that the AO had made the disallowance on the ground that the same issue was dealt by his predecessor while computing the assessment for the AY.2007-08, that the AO had failed to appreciate that no assessment was completed u/s.143(3)of the Act for that year, that the AO had made the disallowance without any basis, that the assessee had sufficient interest free funds in form of reserves and surplus,advance share application money received and interest-free loan received totalling to Rs. 239 crores,that the advance share
1655/M/13 7orsPremier Finance & Trdg. application money was made out of own funds, that no interest expenditure was required to be disallowed on that account. After considering the submission of the assessee and the assessment order, the FAA held that the AO had made disallowance of interest of Rs. 50 lakhs on account of advance share application money made to its sister concern, that AO had made the disallowance by following the findings of AY.2007-08, that the examination of the assessment records revealed that no scrutiny assessment took place for the AY.2007-08,that in the assessment order for the AY.2006-07 there was no scrutiny,that the AO had made the disallowance without any basis. He further held that the assessee had made investment which would yield income in form of dividend,that the investment had been made for purpose of earning income,that interest expenditure incurred for earning income had to be allowed u/s.36 (1) (iii) of the Act. Finally, he deleted the disallowance made by the AO.
4.During the course of hearing before us, the Departmental Representative (DR) stated that issue could be decided on merits. The Authorised Representative (AR) supported the order of the FAA.After considering the rival submissions we are of the opinion that the order of the FAA does not suffer from any legal or factual infirmity.The AO had made the disallowance on the basis that in the earlier assessment year his predecessor had made the identical disallowance. The FAA had examined the assessment records of the earlier years and had found that the- then-AO had not made any disallowance under the head interest attributable to share application money of the sister concern. Thus, the whole base of making the addition goes.Therefore, confirming the order of the FAA first ground of appeal is decided is the AO.
5.Next ground is about deleting the disallowance of Rs. 3.05 crores made u/s.37 (1) of the Act,being notional interest.During the assessment proceedings, the AO found that the assessee had advanced number of loans to related concerns without charging and interest.He held that the assessee had failed to prove the business expediency for these advances.The amount of interest attributable to such loans and advances at the rate of 12.5% was worked out Rs. 4.18 crores. He noticed that the assessee had paid interest of Rs. 15.10 crores as against the interest receipt of Rs. 8.90 crores during the year under consideration, that interest of Rs. 2.21 crores had been disallowed invoking the provisions of section 14A of the Act, that the further disallowance of 1655/M/13 7orsPremier Finance & Trdg.
Rs.92.57 lakhs was made u/s.36(1)(iii) of the Act.So,he disallowed balance interest i.e.Rs. 3.05 crores u/s.37 (1) of the Act.
6.Challenging the order of the AO,the assessee preferred an appeal before the FAA.Before him,it was argued that the assessee had given loans and advances in earlier years,that some of which had turned bad,that as the recovery was doubtful so it had classified them as NPAs as per the RBI guidelines,that the assessee was a NBFC,that interest expenses attributable to NPA loans was incurred wholly and exclusively for the finance business of the assessee, that same was allowable u/s.37 (1) of the Act,that the AO had not discussed the interest on doubtful advance in the assessment order,that when the principle itself was doubtful of recovery the question of realisation of interest could not arise.The assessee relied upon the case of Godhara Electricity Ltd.(225 ITR 746) and argued that hypothetical income could not be brought to tax even though the assessee company was following mercantile system of accounting,that notional interest on doubtful advances could neither be accounted for nor could be assessed as income of the assessee, that it was in the business of finance and had given the loan in its normal course of business. After considering the submission of the assessee and the assessment order, the FAA held that as per the balance sheet of the assessee the opening and closing balances of secured loans was same at Rs. 50 crores, that the opening balance of unsecured loan was at Rs. 134.36 crores whereas the closing balance was at Rs. 28.29 crores,that as per the balance sheet no fresh secured or unsecured loan was taken by the assessee during the year under consideration, that the loans were taken in the earlier years,that the borrowed funds were utilised by the assessee for the purpose of business i.e. it had given loans and advances in the capcity of a NBFC, that the interest expenses on the borrowed funds was required to be allowed u/s.36 (1) (iii) of the Act, that the AO had made the disallowance is u/s.37 (1) of the Act, that the provisions of section 37(1)would apply to any expenditure which was not covered by the provisions of section 30-36 of the Act, that the interest expenditure incurred by the assessee was allowable u/s.36(1)(iii), that the provisions of section 37 of the Act were not applicable. He further held that even u/s.37 the expenditure was allowable because the expenditure was incurred wholly and exclusively for the purpose of business,that loans and advances were given in the regular course of business,that the loans had become NPAs, that the assessee did not provide interest thereon,that this was normal
1655/M/13 7orsPremier Finance & Trdg. practice as per the RBI guidelines,that the disallow -ance made by the AO amounted to addition of notional interest income, that the provisions of Act did not allow taxing such notional income.Finally, he allowed the appeal filed by the assessee.
7.Before us,the DR contended that assessee was following mercantile system of accounting,that the interest had accrued to it, that the AO were justified in taxing the same.The AR argued that assessee had advanced the loans in the normal course of business, that some of the loans became NPAs, that the assessee did not provide interest for such loans,that the interest expenditure was allowable u/s.36/37 of the Act, that the interest expenditure was directly related with carrying out the normal business of financing,that it was incurred wholly and exclusively for the business of the assessee.
8.We have heard the rival submissions and perused the material before us. We find that as per the Memorandum of Association of the company the main object was to carry on the business of financers (page 44 of the paper book),that it is a non-banking finance company registered with the RBI vital registration number B- 13. 01516 dtd.24/04/2001.In our opinion, NBFCs are not required to credit interest income on accrual basis.In the case of Bobcards Ltd. (29 taxmann.com 234) the Tribunal has held as under: “Since as per RBI guidelines wide vide Non-Banking Financial Companies Prudential Norms (Reserve Bank) Directions, interest income on NPA was required to be credited on actual receipt basis and not on accrual basis, that the assessee being a NBFC, was bound to follow said guidelines”. The Tribunal further held that there was no error or infirmity in the order of the FAA deleting the addition made by the officer on notional basis. We find that the assessee had advanced the loans during the normal course of business and therefore interest expenditure was allowable as per the provisions of section 36 (1) (iii)of the Act.The AO has not brought on record anything to prove that expenditure incurred under the head interest was not wholly and exclusively for carrying out the business of the assessee for the year under consideration. Therefore,confirming the order of the FAA,we dismiss the second ground, raised by the AO.
ITA No.2862/M/2013,AY.2008-09
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9.The effective ground of appeal,raised by the assessee,is about disallowance made u/s.14A of the Act,amounting to Rs.2.21 crores under the head interest expenditure and Rs.12.15 lakhs out of the administrative and other expenses. During the assessment proceedings,the AO found that assessee had made invest -ment in equity shares of Rs. 48.43 crores, that it had received dividend of Rs. 92.64 lakhs, it had claimed exemption for the said incoem,that it had incurred interest and financial expenses of Rs.15.10 crores.He directed the assessee to explain as to why proportionate expenses should not be disallowed u/s.14 A of the Act. n its reply, the assessee stated that only direct expenses incurred for earning exempt income could be disallowed u/s.14A of the Act,that disallowance could be made as per the method prescribed by rule 8D of the Income Tax Rules, 1962 (Rules), that it had made investment in earlier years,that there was no direct nexus of loan taken with the investment made,that out of total expenditure Rs. 42.57 lakhs was related to share application money given to Digital Media and one more entity, that the said amount had already been disallowed u/s.36 (1)on its own in the computation of total income,that share application money given to New Media was considered doubtful,that disallowance u/s.36(1) was not considered,that it had also given share application money to its sister concern namely Sun City Projects Ltd.,that the assessee had deep interest in the business of its sister concern, that it had made strategic investment in its sister concern,that measure investment were in unquoted shares of the companies,that the income of such companies was taxable under the head capital gains,that income from those investments could not be held as exempt income.After considering the submission of the assessee,the AO held that disallowance was to be made u/s.14 A r.w.r.8D of the Rules and he disallowed Rs. 2.3 crores.
10.Before the FAA the assessee made elaborate submissions. It was argued that it had made strategic investments in its sister concern, that it had sufficient interest funds available for making investment in Indian subsidiary/associated companies, that interest expenditure should not be considered for disallowance u/s.14 A of the Act,that major investment in shares was of unquoted companies,that income from such companies were taxable under the head capital gains,that the dividend received by it was on shares held as stock in trade, that interest should not be disallowed u/s.14 A of the Act,that it had incurred expenditure of Rs. 44,084/-as D-Mat charges, that balance expenses should not be considered for disallowance.
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After considering the submission of the assessee and the assessment order, the FAA held that the assessee was having opening balance of investment of Rs. 56.43 crores,that the closing balance was at 48.43 crores, that as per schedule VI of the balance sheet there was no movement in the share of different companies held by it, that the difference in opening and closing balances was on account of provision of diminution in value of investment, that as per the balance sheet there were secured and unsecured loans of Rs.78.29 crores, that the own fund of share capital reserve and surplus were of Rs.123.96 crores,that share application money received by it was of Rs. 114.23 crores,that in the current assets the appellant was having inventory of 29.60 crores,that it could not be exclusively held that assessee own funds were sufficient for the purpose of making investment,that during the year the assessee had incurred interest expenditure of Rs. 15.10 crores, that it had not filed documentary evidences to prove the exact nexus between the own funds and investments made,that the possibility of utilisation of borrowed funds for making investment could not be ruled out,that some expenditure was attributable to investment activity and consequently earning of exempt income, that the assessee had not offered any disallowance u/s.14A in the return of income,that the provisions of section 14A(2) were applicable,that the assessee itself had offered disallowance of Rs. 2.33 crores during the assessment proceedings, that argument made by the assessee about investment made in associate concern and non-applica -bility of section 14A in the case under consideration was not acceptable, that the assessee had made investment in shares of unquoted companies, that on sale of shares of such companies the assessee would be earning exempt dividend, that those investments were required to be considered for disallowance u/s.14A of the Act,that holding of shares as stock in trade was not a material fact for deciding the disallowance,that administrative and managerial expenses had to be worked out as per the formula provided in sub-clause (iii) of Rule 8D.Finally, the FAA upheld the order of the AO.
11.During the course of hearing before us,the AR argued that the total investment made by the assessee stood at Rs.48.43 crores,that no dividend out of any of investments was received by the assessee during the year under consideration, that dividend of Rs. 92.64 lakhs pertained to the shares which were held as stock in trade,that the dividend was received from the Zee Entertainment Enterprises Ltd. and Jayprakash Associates Ltd.,that the AO had made disallowance of interest in proportion to the amount of investments only,that while invoking the 1655/M/13 7orsPremier Finance & Trdg. provisions of section 14A he had strongly confused the amount of dividend received with the amount of investments,that the FAA had mentioned that the assessee had offered disallowance of Rs. 2.33 crores during the course of assessment proceedings, that the assessee had made alternative submissions during the course of assessment proceedings,that without prejudice it was submitted that disallowance could be made for the said amount,that it was specifically mentioned that the assessee had incurred expenditure of Rs. 44,840/- as administrative charges,that disallowance had to be restricted to the said amount only,that the assessee had argued that no disallowance in respect of stock-in-trade-interest could be made, that the assessee had not made the investment for purpose of earning dividend income, that all the investments had been made in unquoted companies where there was no exemption even on long-term capital gains,that the investments were made in the equity shares of the sister concerns for strategic investments only, that it was incorrect to say that investments had been made for earning tax-free income. The DR supported the order of the AO and the F AA.
12.We have heard the rival submissions and careers the material before us.We find that assessee was holding shares as stock in trade as well as investments, that it had earned dividend income for the shares held as stock in trade only, that assessee had not earned any dividend from the investments made for the year under appeal, that the investment was made in the shares of unquoted companies, that it had made strategic investment in group companies.A perusal of the balance sheet of the assessee revealed that the funds available to it was far more than the investment made during the year under consideration.The assessee had made investment of Rs. 48.43 crores,that the funds available to it in form of share capital, reserves & surplus,share application money and unsecured loans and others was Rs.1,14,44, 54,709/-.Therefore it has to be presumed that investments were made out of the own fund and not from the borrowed funds.We find that in the case of HDFC Bank Ltd.(67taxmann.com 42) the Hon’ble Bombay High Court has held that when there were sufficient own funds there was a presumption that investment in tax-free securities was made out of own funds. In the case of Pan India network infravest Pvt.Ltd.(ITA/3378/Mum/2013-AY.2009-10,dated11/05/016),we have held as under : “5.We have heard the rival submissions and perused the material before us.There is no doubt that the assessee had not earned exempt income during the year under consideration,so,in our considered opinion, no disallowance can be made u/s.14A of the Act.We find that in the case of M/s Gateway Distriparks Ltd.(supra),identical issue was adjudicated by us,as under:
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“3.The next ground pertains to deleting the disallowance made u/s 14A of the Act ignoring the ratio of the Tribunal in Cheminvest Ltd. (121 ITD 318)(Del.). The crux of argument on behalf of the assessee is that no income was earned by the assessee and merely hypothetical disallowance has been made. Reliance was placed 378 ITR 33 (Del.) order dated 02/09/2015. Considering the totality of facts and the arguments from both sides, we find that the Hon’ble Delhi High Court in the aforesaid order dated 02/09/2015 held that where no exempt income was earned by the assessee in the relevant assessment years and since the genuineness of expenditure is not in doubt, there is no question of disallowance u/s 14A of the Act. While coming to this conclusion, the Hon’ble High Court relied upon following decisions:- i. Cheminvest Ltd. v. CIT [2009] 317 ITR (AT) 86 (Delhi) [SB] (para 15) ii. CIT v. Chugandas and Co. [1964] 55 ITR 17 (SC) (para 14) iii. CIT v. Cocanada Radhaswami Bank Ltd. [1965] 57 ITR 306 (SC) (para 14) iv. CIT v. Corrtech Energy (P.) Ltd. [2015] 372 ITR 97 (Guj) (para 15) v. CIT v.Holcim India (P.) Ltd.(I.T.A.No.486 of 2014 decided on 5- 9-2014) (para 15) vi. CIT v. Hero Cycles Ltd. [2010] 323 ITR 518 (P&H) (para 15) vii. CIT v. Lakhani Marketing Incl. [2015] 4 ITR-OL 246 (P&H) (para 15) viii. CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC) (para 10) ix.CIT v.Shivam Motors (P.) Ltd. (ITA No. 88 of 2014 decided on 5-5-2014) (para 15) x. IT v. Winsome Textile Industries Ltd. [2009] 319 ITR 204 (P&H) (para 15) , xi. Eicher Goodearth Ltd. vs. CIT [2015] 378 ITR 28 (Delhi) (para 14) xii. Harish Krishnakant Bhatt v. ITA [2005] 278 ITR (AT) 1 (Ahd) (para 10) " xiii. Maxopp Investment Ltd. v. CIT [2012] 347 ITR 272 (Delhi) (para 12) 3.1. In view of the factual matrix and following the aforesaid decision from Hon’ble Delhi High Court and in the absence of any contrary decision brought to our notice by either side, we find no infirmity in the conclusion of the Commissioner of Income Tax (Appeal) and affirmed the same, thus, this ground of the Revenue is also having no merit, consequently, dismissed.”” Respectfully,following the same we decide the effective ground of appeal against the AO.” In our opinion,in absence of any exempt income no disallowance could be made u/s.14A of the Act.Considering the facts-like availability of sufficient own funds, non-receipt of exempt income during the year, and strategic investment in the sister concerns-we hold that the FAA was not justified in upholding the disallowance. Reversing his order we decide effective ground of appeal in favour of the assessee.
-AY.2009-10: 13.The effective Ground of appeal is about deleting the addition of Rs.7.74 crores made by the AO under section 36(1)(iii) of the Act.We find that the issue is identical to the issue raised by the AO in the earlier year. Following our order for the previous year,we dismiss the effective ground raised by the AO. -AY.,2009-10: 14.The solitary Ground of appeal is about valuation loss treated as speculation loss. During the assessment proceedings,the AO directed the assessee to furnish details of opening and closing 9
1655/M/13 7orsPremier Finance & Trdg. stock of equity shares, loans and advances received and given interest payment.After considering the details he heldd that there was diminution in the value of closing stock of Rs.4.12 crores(OB-Rs.29.60 cr-CB-Rs.25.48cr.).He directed the assessee to explain the reason of the loss reported in the P&L account.The assessee stated that stock was valued at cost of market price which ever was low, that the stock was part of the trading stock, that loss due to diminution in value was allowable.However, the AO did not agree with the assessee and held that diminution in stock value had to be treated as speculation loss.Referring to the provisions of section 73 read with explanation he held that loss of Rs.4,12,62,104/- was speculation loss and same was to be carried forward as speculation business loss only.
15.Aggrieved by the order of the AO assessee preferred an appeal before the FAA. It was argued that the main business of the assessee was dealing in shares, that shares were valued at cost or market price whichever was lower on close of the year as per the accounting policy consistently followed by it, that the P&L A/c. for the year reflected a loss of Rs.4.12 crores on valuation of shares, that it carried forward the valuation loss as business loss, that the explanation to section 73 could not be applied.He referred to the case of Karnataka Bank Ltd.(34taxmann. com150) wherein the Hon’ble Court had held that loss on valuation of shares held as stock in trade was allowable as deduction.He further argued that the AO had wrongly placed reliance on Explanation to section 73, the amendment was brought to curb the device sometime resorted to by business houses to manipulate and reduce the taxable income of the companies under their control, that in the case under consideration the stock valuation loss was mostly in the shares of listed companies, that by no stretch of imagination it could be argued that loss was due to device used by the assessee to reduce taxable income, that the assessee had not made any purchase/sale of the shares during the year, that the details of diminution were furnished during the assessment proceedings,that the details of such diminution was arrived by valuing 22 scrips. After considering the submission of the assessee and the assessment order the FAA held that provisions of section 73 were not applicable in case of certain assessee’s only,that the assessee had suffered loss on account of valuation of closing stock of shares, that the assessee was trading in shares, that the assessee had made purchase during the year, that the business of the assessee was trading in shares, that the loss was on account of valuation of stock, that the AO had rightly treated the loss as speculation loss.
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16.Before us,the AR argued that the assessee was in the business of advancing loans, that it had earned interest during the year under consideration, that the explanation to sction 73 of the Act was not applicable as the assessee was in the business of financing.He referred to the cases Momaya Investments(P.)Ltd.(14 tax mann.Com81),Snowtext Investment Ltd.(64taxmann.com. 157), Savi Commercial Pvt. Ltd (60 taxmann.com295).
17.We have heard the rival submissions and perused the material before us. We find that the assessee had shown interest income of Rs.23.78 crores. That in the MOA the main object of the company has been mentioned as financing.As per the settled principle of taxation jurisprudence section 73 is not applicable if the assessee is engaged in Finance business.We would like to refer to the case of Ashley Service Ltd.(44taxmann.com44) of the Hon’ble Madras High Court.It was held by the Hon’ble Court that a company, whose principal business is that of banking or financing is excluded from provisions of section 73. The Court further observed as under :- “Where from memorandum of articles of association of a company it was clear that business of assessee was finance and granting of loans and advances, income from share-dealing more than income from investment in some years was not a ground for treating loss as speculation loss.” Respectfully following the above judgment of the Hon'ble Madras High Court and other cases cited by the AR, we are of the opinion that provisions of section 73 r.w. explanation was not applicable.Therefore reversing the order of the FAA,we decide the effective Ground of appeal in favour of the assessee.
As a result appeals filed by the AO for both the assessment years are dismissed and appeals of the assessee for both assessment years stand allowed. फलतःिनधा�"रती अिधकारी $ारा दािखल क� गई दोन' िन.वष) क� अपील* नामंजूर क� जाती है और िनधा�"रती क� दोन' िन.वष) क� अपील* मंजूर क� जाती ह0। Order pronounced in the open court on 25th May,2016. आदेश क� घोषणा खुले �यायालय म* 1दनांक 25 मई,2016 को क� गई । Sd/- Sd/- जोिग�दर जोिग�दर �सह �सह /Joginder Singh) (राजे�� / RAJENDRA) जोिग�दर जोिग�दर �सह �सह �याियक सद�य / JUDICIAL MEMBER लेखा लेखा सद�य सद�य / ACCOUNTANT MEMBER लेखा लेखा सद�य सद�य मुंबई Mumbai; 1दनांकDated : 25.05.2016. Jv.Sr.PS. आदेश क� क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order forwarded to : आदेश आदेश आदेश क� क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत 11
1655/M/13 7orsPremier Finance & Trdg.