TaxTMI 
TaxTMI 
2012 (10) TMI 667
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.... assessee had declared huge losses from trading in shares which were treated by the Assessing Officer as speculation loss under the provisions of Explanation to section 73 of the Act. These losses were, therefore, not adjusted by the Assessing Officer against other income declared by the assessee. The assessee had also paid huge interest on borrowings. The Assessing Officer disallowed the interest relating to the investment made in shares under section 14A of the Income Tax Act, 1961 (for short "the Act") and also disallowed interest on borrowings under section 36(1)(iii) of the Act holding that borrowings to that extent had not been utilised for the purpose of business. The disputes raised in these appeals, therefore, relate to treatment of losses from trading of shares as speculation loss, disallowance of interest under section 36(1)(iii) and disallowance of interest under section 14A of the Act. 3. We first take up the issue relating to treatment of losses form trading in shares as speculation loss under the provisions of Explanation to section 73. The assessee, in all the years, had declared losses from trading in shares which was Rs. 15,30,05,394 in the assessment year 2001....
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....ommended by Wanchoo Committe. In this case, the loss had not arisen from purchase and sale of shares of group companies and, therefore, provisions could not be applied. The learned Counsel for the assessee also submitted that the assessee had also received substantial income from interest. It was pointed out that the assessee was registered as a Non Banking Finance Company (NBFC). It was pointed out that the provisions of Explanation to section 73, were not applicable to companies, the principal business of which is the business of banking or granting of loans and advances. It has, accordingly, been argued that the provisions of Explanation to section 73, cannot be applied in the case of assessee and the loss from trading in shares should be treated as normal business loss. 3.2 Learned Departmental Representative, on the other hand, strongly supported the orders of the authorities below. It was submitted that the provisions of Explanation to section 73, were applicable even when the assessee had only one business i.e., trading in shares as "part" also include whole", as held by the Hon'ble Calcutta High Court in CIT v. Arvind Investments Ltd. [1991] 192 ITR 365/58 taxman 216. It....
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....t page-3 of the appellate order for assessment year 2002-03. Therefore, the arguments of the learned Counsel for the assessee that principal business of the assessee was granting loans and advances cannot be accepted. 3.4 Further, the provisions of Explanation to section 73, are not applicable only to purchase and sale of shares from group companies as it is clear from the provisions that it applies to purchase and sale of shares of any company. This view is also supported by Ahmedabad Special Bench of the Tribunal in AMP Spg. & Wvg. Mills (P) Ltd. v. ITO [2006] 100 ITD 142. The Explanation will also apply when there is only one business of trading in shares as held by the Hon'ble Calcutta High Court in case of Arvind Investments Ltd. (supra). We also do not find any substance in the argument of the learned Counsel for the assessee that the provisions of Explanation to section 73, will apply only to the loss arising from sale and purchase of shares and not from valuation of closing stock. The Explanation to section 73, only deems the business of purchase and sale of shares as speculation business and, therefore, the profit from such speculation business has to be computed as per....
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....concluded that investment in shares had been made from borrowed funds. He computed the interest attributable to investment in shares @ 15% per annum and, thus, computed the interest @ Rs. 66,78,163, and asked the assessee to explain as to why the same should not be disallowed. The assessee submitted that opening balance of investment in shares during the year was 1,83,58,300, and the shares acquired during the year were to the tune of Rs. 6,91,18,002. The assessee had also the closing stock of shares of Rs. 26.64 crores which were part of trading stock. It was pointed out that investment in trading stock were also meant for earning profit by way of capital gain and trading profit. The earning of dividend was only incidental to holding of investments. It was, accordingly, urged that the entire interest paid was allowable as deduction under section 36(1)(iii). The assessee also placed reliance on the judgment of Hon'ble Supreme Court in Rajasthan State Warehousing Corpn. v. CIT [2000] 242 ITR 450/109 Taxman 145, in which it was held that when the assessee had one composite business part of which had taxable income and part of which gererated non-taxable income, the entire expenditure....
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.... and considered the rival contentions carefully. The dispute is regarding disallowance of interest expenditure in relation to dividend income which was exempt from tax, under section 14A of the Act in assessment year 2001-02. The assessee had made investment in equity shares of companies from which dividend of Rs. 75,45,066/- had been received which was exempt from tax. The assessee had made huge borrowings on which interest of Rs. 12,68,21,302/- had been paid. The assessee company had equity capital of Rs. 1.04 crores and in P&L Account, there was debit balance of Rs. 21.61 crores shown on asset side of the balance sheet for the assessment year 2001-02. Therefore, net capital of company was negative to the tune of Rs. 20.57 crores. There were no reserves nor any other interest free funds available has been brought to our notice in assessment year 2001-02. The conclusion of the AO that the borrowed funds had been utilized for investment in shares is, therefore, reasonable and proper and since the dividend income from the investment was not taxable, disallowance of interest in relation to such investment is required to be made under section 14A of the Income tax Act. The ld. AR for ....
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....he assessee had been making only long term strategic investment in group companies the income from which either in the form of long term capital gain or in the form of dividend is exempt from tax. Therefore, the expenditure incurred in relation to such investment is required to be disallowed under section 14A of the Act. However, interest relating to the borrowings used in the purchase of trading shares from which dividend had been received is required to be excluded from such disallowance. We, therefore, restore the issue of computation of disallowance of interest to the file of AO for making fresh computation after necessary examination in the light of observations made above and after allowing opportunity of hearing to the assessee. 5. The third dispute which is relevant in all the appeals, is regarding disallowance of interest under section 36(1)(iii) of the Act. The Assessing Officer, during the course of assessment proceedings, noted that the assessee had made huge borrowings on which substantial interest running into crores had been paid in all the years under consideration. The own funds of the assessee had been completely eroded and became negative due to loss. The asse....
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....ion 36(1)(iii) to Rs. 6,31,90,417 [Rs. 10,15,12,308 (-) Rs. 3,83,21,891] 5.2 In appeal, the learned CIT(A) confirmed the disallowance of interest under section 36(1)(iii) for assessment years 2001-02 and 2002-03. In assessment year 2003-04, the successor CIT(A) also agreed with the Assessing Officer that advancement of interest free funds for share application in the group concerns and payment of Rs. 25.00 crores to Panther Invest-trade Ltd., etc. were not for the purpose of business of the assessee. However, he noted that during this assessment year (assessment year 2003-04), the assessee had substantial interest free funds amounting to Rs. 169.09 crores., which constituted 83.47% of the total funds and interest bearing funds constituted only Rs. 33.49 crores i.e., 16.53% of total funds. The CIT(A) observed that neither the Assessing Officer had given direct nexus between interest bearing funds and payments for share application money, interest free advance and loans nor the assessee had been able to establish that interest free funds had been used to finance the above investments/loans. Since both the funds were mixed up, CIT(A) took the view that disallowance of interest has ....
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....CIT v. Core Health Care Ltd. [2008] 298 ITR 194/167 Taxman 206 (SC) (iii) in case of CIT v. Phil Corpn. Ltd. [2011] 202 Taxman 368/14 taxmann.com 58 (Bom.) 5.4 We have perused the records and considered the rival contentions carefully. The dispute is regarding disallowance of interest under section 36(1)(iii) of the Act. Under the provisions of said section, interest on capital borrowed for the purpose of business is required to be allowed as deduction and, therefore, in case, any borrowed capital had been raised not for the purpose of business, the corresponding interest is to be disallowed. The assessee had made huge borrowings on which substantial interest running into crores had been paid. The assessee had however advanced substantial funds towards application money for purchase of shares of group companies which had been pending for a long time and no interest was paid to the assessee. It had also advanced a sum of Rs. 25.00 crores to Panther Invest -trade Ltd. for acquisition of shares of certain companies but, neither the shares were purchased, nor money was refunded and matter was pending in dispute. The AO has computed the interest in relation to the above adva....
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.... Hon'ble Supreme Court in the case of S.A. Builders Ltd. (supra) to argue that advances had been made on commercial expediency and therefore interest on borrowings should be allowed. It has not been shown to us as to how business of those companies promotes the business interests of the assessee so that interest free advances to them could be justified on commercial expediency. Reliance has also been placed on the judgment of the Hon'ble Supreme Court in the case of Core Health Care Ltd. (supra), in which it has been held that once the capital has been borrowed for the purpose of business, interest has to be allowed irrespective of the fact whether the borrowed fund has been used for acquisition of capital assets or for revenue assets. The said judgment is not applicable as advancing interest free fund to the group companies is not the business of the assessee. The judgment of the Hon'ble High Court of Bombay in the case of Phil Corpn. Ltd. (supra), is also not applicable as in that case there was no dispute that the amount had been paid to the sister concern as an integral part of business, which is not so in the present case. 5.6 Therefore, the interest expenses incurred by th....