Appeal partially allowed: Interest on Inter Company Deposit permitted, capital enhancement expense approved, penalty issue deferred.

The Tribunal partly allowed the appeal, overturning the disallowance of interest on Inter Company Deposit due to the company's mix of funds and permitting a portion of the capital enhancement expense. The penalty issue was deferred pending the Assessing Officer's decision.

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Issues:
1. Disallowance of interest on Inter Company Deposit under section 36(2)(iii) of the Income Tax Act, 1961.
2. Disallowance of expenses paid to Registrar of Companies for increasing authorized share capital.
3. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act, 1961.

Issue 1: Disallowance of Interest on Inter Company Deposit:
The Assessing Officer disallowed Rs.14,22,219 as interest on inter corporate deposit taken by the assessee, reasoning that the company, being a Non Banking Finance Company (NBFC), should earn interest on such deposits. The company's explanation that it was mainly dealing in shares and incurred losses was deemed vague. The CIT(A) upheld the disallowance, emphasizing the failure to prove commercial expediency for interest-free loans. Citing precedents, the Tribunal affirmed the disallowance, emphasizing the need to prove funds' utilization for business. However, the Tribunal allowed the appeal, noting the company's mix of interest-bearing and non-interest-bearing funds, concluding that the interest-free ICDs were made from interest-free funds.

Issue 2: Disallowance of Expenses for Increasing Authorized Share Capital:
The Assessing Officer disallowed Rs.94,900 spent on enhancing the company's capital base, following Supreme Court decisions. The CIT(A) upheld the disallowance, considering the expense capital in nature. However, the Tribunal partially allowed the appeal, citing a High Court ruling allowing such expenses under section 35D, permitting 10% of the expenditure for that year.

Issue 3: Initiation of Penalty Proceedings:
The appellant contended that penalty proceedings under section 271(1)(c) were unwarranted, as there was no concealment or inaccurate particulars in income reporting. The Tribunal noted that the penalty issue was premature as the Assessing Officer had not yet passed the penalty order, hence not adjudicating on it.

In conclusion, the Tribunal partly allowed the appeal, overturning the disallowance of interest on ICD due to the company's mix of funds and permitting a portion of the capital enhancement expense. The penalty issue was deferred pending the Assessing Officer's decision.

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