TaxTMI 
TaxTMI 
2011 (2) TMI 1419
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....T(A) erred in deleting the disallowance of interest of ₹ 63,03,433/- without appreciating the fact that the immediate source of investment are borrowed funds and balance sheet position is deceptive in this regard." Grounds of appeal of assessee are as follows: "1. The CIT(A) erred in upholding the disallowance of interest of ₹ 21,79,536/- made by AO on investment in shares of ₹ 23,42,55,539/- out of business income without appreciating the fact that the appellant had surplus interest free funds available with it and hence no interest is attributable towards investment in shares." "2. The CIT(A) erred in not considering the additional ground raised by the appellant without assigning any reasons. The additional ground raised was as under:- The AO erred in disallowing the claim of differed tax liability of ₹ 2,51,74,574/- while computing book profit u/s. 115JB ignoring the fact that the company was compulsorily required to provide for deferred tax liability as per Accounting Standard 22. The AO further made addition in respect of Wealth-tax provision of ₹ 28,282/- even though as per provisions of section 115JB adjustment is can be made only in resp....
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....ssing Officer by observing that the addition has been made by Assessing Officer by following the orders of assessment in assessee's own case for the earlier years. He found that there was no change in the facts as it prevailed in the earlier years and the present assessment year. Since the issue was already decided in favour of the assessee by ITAT in the earlier assessment years, the CIT(A) deleted the addition made by Assessing Officer. 5. Against the order of the CIT(A) the revenue has preferred ground No.(a) before the Tribunal. 6. The Assessing Officer also noticed that the assessee had invested a sum of ₹ 39,19,47,398/- in the shares of various companies quoted and unquoted. On these shares dividend of ₹ 67,389/- was received and offered to tax under the head income from other sources. The Assessing Officer noticed that the assessee was paying interest on its borrowings and in these circumstances was of the view that borrowed funds on which interest was paid have been utilized for making investment in share which was not the business of the assessee. He, therefore, proposed to make disallowance of interest expenses proportionate to the investment in shares. The ....
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....uction under section 36(1)(iii) of the Act and added the same to the business income of the Assessee. The AO however, accepted the alternative plea by the assessee, to treat the interest expense of ₹ 84,82,979/- as expenditure incurred in earning dividend u/s.57 of the Act. 8. Before CIT(A) the assessee submitted that it was engaged in the business of running hotels and real estate development. It has made investments in shares of other group companies which were held as investment. These investments existed and are being made every year right from assessment year 1990-91 onwards. The Assessee borrowed funds for business, interest on which has all along been claimed as business expenditure u/s. 36(1)(iii) of the Act. The claim of interest on such borrowed funds was allowed in all assessment years upto assessment year 1995-96. However, in assessment year 1996-97, the AO held that interest on borrowed funds for investment in shares was eligible for deduction u/s. 57 and not u/s. 36(1)(iii) as claimed by the Assessee. Starting from assessment year 1996-97 every year claim of interest on borrowed funds to the extent investment in shares was being disallowed u/s. 36(1)(iii) on th....
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....e in this Assessment year has not been able to establish that no amount of borrowed fund has been used for making investment in shares. Therefore, the presumption of the AO that borrowed funds have been used for making investment in shares is not unfounded. In the circumstances, the addition made by the AO was upheld in principle. However, the CIT(A) found that the AO has made the disallowance both in respect of investment made in earlier years as well as investment made during the year. As investment made in earlier years has already been held to be out of own/interest free funds, no disallowance on account of such investment was called for. However, in respect of investment made during the year, he held that proportionate amount of interest is not allowable as deduction u/s. 36(1)(iii). The CIT(A) found that out of total disallowance of ₹ 84,82,979/-, ₹ 63,03,433/- relates to investment made in earlier years whereas ₹ 21,79,536/- relates to investment made during the year. Accordingly, the addition made by the AO was restricted to ₹ 21,79,536/- subject to verification by the AO of calculation of interest filed during the course of appeal by the Assessee. ....
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....ction were disallowed in any of the years under consideration. The total investment in shares as on 31.3.1996 is ₹ 5,87,43,389/- with opening balance of ₹ 5,76,21,087/-. In effect the assesee company has invested ₹ 11,22,302/- in shares of sister/group companies during the year under consideration. The year wise details of summary of sources of investments and its applications (in each year) is as under:- A.Y 1992-93 1993-94 1994-95 1995-96 1996-97 SOURCES Interest bearing fund (1,54,83,948) 1,16,18,064 12,06,57,613 (11,82,85,718) 5,64,66,568 Non interest bearing funds 6,66,65,522 14,50,39,965 19,58,41,249 28,78,99,129 24,31,86,629 Total 5,11,77,574 15,66,58,029 31,64,98,862 16,96,13,411 29,96,53,197 APPLICATION Assets 5,73,42,238 16,30,21,836 21,64,89,814 32,63,15,857 29,88,01,450 Investment in shares 1,19,24,744 (1,29,49,205) 1,69,74,762 (97,44,066) 11,22,302 Interest bearing loans (2,70,23,908) 58,59,898 8,35,09,786 (14,65,83,380) (2,70,555) Interest free loans 89,34,500 7,25,500 (4,75,500) (3,75,000) - Total 5,11,77,574 15,66,58,029 31,64,98,862 16,96,13,411 29,96,53,197 9. The above data shows the y....
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....allowed." 13. This order of the Tribunal has been followed in Assessment Year 97-98 in ITA No.4976&4760/M/01 order dated 24/7/2006, in assessment year 1998-99 in ITA No.1322/M/03 order dated 7/5/2008 and ITA No.1915/M/03 order dated 29/10/06, in A.Y 1999-2000 in ITA No.1661/M/03 order dated 7/5/2008, in A.Y 2000-01 and 2001-02 in ITA Nos. 3187& 3188/M/05 order dated 14/10/2004 and ITA Nos. 3237& 3238/M/05 order dated 5/6/07, for A.Y.2002-03 in ITA 4001/M/06 order dated 19/11/2008. Copies of the said orders were filed and are placed on record. 14. In this assessment year, the CIT(A) has accepted that the amount of investment made in shares during the previous year was ₹ 23,42,55,539/- and the interest free funds available with the assessee was ₹ 33,90,26,543/-. The objection of the CIT(A) for sustaining interest disallowance in part was that the interest free funds in the earlier assessment years was substantial, whereas in the present assessment year they were not substantial. In this regard ld. Counsel for the assessee had submitted before us that the moment it is found that there are sufficient interest free funds available for making investment in shares no disallo....
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.... in shares. We, therefore, do not find any merits in the submission made by the ld. D.R. Respectfully following the orders of the Tribunal in the earlier assessment years, we uphold disallowance deleted by the CIT(A) and further hold that the additions sustained by the CIT(A) should be deleted. Thus Ground No.(b) raised by the revenue is dismissed while Ground No.1 raised by the assessee is allowed. 17. As far as Ground No.(a) raised by the revenue in its appeal is concerned the theory of availability of funds would hold good for this ground also. Admittedly, the above said interest free advances were outstanding since year ending 31/3/1996 and continued to be outstanding as on 31/3/2002. The Tribunal in ITA No.4050/Mum/2000 relating to assessment Year 1996-97 in the case of the Assessee (earlier known as M/s. Paramount Hotels Ltd.) vide order dated 29/12/2005 had considered the availability of interest free funds and the interest bearing funds and the deployment of the said funds in interest free advances and others. The matter was deliberated upon at length and it was found that the assessee had sufficient non-interest bearing funds to make non interest bearing advances. It was ....
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....e the disallowance of interest as was done in the earlier assessment year but also made reference to section 14A of the Act. The CIT(A) sustained a part of the disallowance for the following reasons: "I have considered the submission of the A.R, the facts on record and have carefully perused the decisions relied upon by the appellant. In order to examine the availability of interest free fund vis-à-vis investment made, the appellant was asked to produce date-wise availability of interest free fund and the investments made during the year. The details furnished by the appellant are as under:- S. No. Date of Investments Total investment as on date Collection from flat holder as on date(interest free fund) 1. 03/04/2003 39447 62950 2. 10/05/2003 1039447 3349290 3. 01/06/2003 1949557 48007001 4. 05/08/2003 3949447 243321425 5. 27/10/2003 4199447 243321425 6. 27/10/2003 5149447 243321425 7. 16/01/2004 5149447 1014802995 8. 16/01/2004 5249447 1014802995 9. 12/02/2004 5249697 326463050 10. 12/02/2004 5249947 326463050 11. 26/03/2004 47803072 395448862 12. 31/03/2004 47803072 437666159 It is very clear f....
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....he year, the addition of ₹ 95,61,006/- is restricted to ₹ 45,29,625/- and the appellant gets relief of ₹ 50,31,741/- which is in respect of addition upto assessment year 2002-03 and addition made during the year. The AO is further directed to verify the calculation of interest which has been filed in course of appeal and suitably modify the quantum of relief in terms of the direction given above if the calculation furnished by the appellant is found to be not correct." 22. It can be seen that the disallowance of interest expenses sustained by the CIT(A) is in relation to A.Y.2003-04. Otherwise the disallowance of interest has been deleted by the CIT(A) on the finding that there were enough interest free funds available with the assessee. While deciding the issue in A.Y 2003-04 we have already held that in respect of the investment made in the previous year relevant to A.Y.2003-04, there was enough interest free funds and, therefore, disallowance of proportionate interest pertaining to investment made in that year was also deleted. We have also held that the order of CIT(A) in so far as it relates to deleting the disallowance made AO was correct. Respectfully foll....