GLOBAL CAPITAL LIMITED Vs. DCIT
INCOME TAX APPELLATE TRIBUNAL
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R.V. Easwar, Vice President -
(1.) THE assessee, who is the appellant, is a public limited company engaged in the business of purchase and sale of share, securities, consultancy business, corporate financing, leasing etc. We are concerned with the assessment year 1999-2000 for which the previous year ended on 31-3-1999. THE appeal arises out of the assessment made under Section 143(3) of the Income Tax Act by order dated 27-3-2002.
(2.) The first ground is against the disallowance of interest of Rs. 3,26,027 made in the following circumstances. The assessee issued debentures of Rs. 10 crores to another company by name Apollo International Ltd. on 2-12.1998, carrying interest of 13%. On the very next day, i.e., on 3-12-1998 the assessee advanced the entire amount to a company by name Strong Investments & Finance Pvt. Ltd. (hereinafter referred to as "Strong"). The primary question is whether this amount was an advance or loan to Strong, and according to the Assessing Officer it was and he therefore held that the assessee cannot justifiably take a loan by issuing debentures carrying interest of 13% and advance the same monies the very next day to another company, which is not a listed company, at 12% thereby suffering a loss of 1% which made no business sense. He therefore calculated the differential rate of interest of 1% for the period 3-12-1998 to 31-3-1999 at Rs. 3,26,027 and disallowed the said amount out of the interest claimed as a deduction.
It was represented by the assessee before the Assessing Officer that the amount of Rs. 10 crores was advanced to Strong not as a loan or advance carrying interest, that it was invested in Strong as application monies for allotment of shares in Strong with the understanding that if shares are ultimately not allotted the amount should be returned with interest at the rate of 12%, that for some reason the shares could not be allotted and the amount came to be returned, that since it was part of the business of the assessee to buy and sell shares and securities the giving of the monies as share application monies must be considered as part of the normal business activities of the assessee and therefore the entire interest paid must be allowed under Section 36(1)(iii) of the Act. It was further stated before the Assessing Officer that one of the directors of the assessee-company knew some directors in Strong and it was through him that the application monies were given. In support of the contentions taken by the assessee. it filed a letter dated 20-2-2002 (page 9 of the paper book) before the Assessing Officer attaching thereto the copy of the ledger account of Union Bank of India for the period 1-12-1998 to 31-3-1998 showing the entries made by the assessee in the said account contemporaneously. According to the said account, a copy of which is at page 10 of the paper book, the following entry was made on 3 rd December 1998:
The aforesaid submissions of the assessee were however not accepted by the Assessing Officer who held that the advancing of the monies, whether termed as share application money or otherwise is not for the purposes wholly and exclusively for the business and that the assessee had channelised its funds in a manner so as to incur a loss deliberately which cannot be permitted while computing the profits of the business.
(3.) ON appeal, the CIT (Appeals) observed that no reasons were given by the assessee as to why the shares were not allotted by Strong or as to why the amounts were advanced at 12% interest which is lesser than the interest at which the amounts were borrowed by issue of debentures. He, therefore, agreed with the decision of the Assessing Officer and sustained the disallowance.;
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