Per Shri M. A. A. Khan, Judicial Member - This appeal by assessee is directed against the order of the CTT (A)-II, Ahmedabad dated June 5, 1986 and arises under the following circumstances : - (1.)
(2.)The appellant is a Private Ltd. Company (the company) engaged in the business of holding investments and financing industrial enterprises. The assessment year involved is 1982-83 for which the accounting period ended on March 31, 1982. In the year under consideration the appellant stated to have earned income by way of dividend and interest. The company therefore filed its return of income on 18-8-1982 declaring loss of Rs. 50,811.
On going through the accounts submitted by the company the ITO noted that on the debit side of the profit & loss a/c. The assessee had debited a sum of Rs. 1,69,770 being donations given to certain charitable institutions. The ITO noted that the company had also claimed interest of Rs. 1,64,024, stated to have been paid as under to the following parties : judgement_783_tlit0_19890.htm On further scrutiny the ITO came to know that the company had obtained huge amounts of loan from certain companies. Out of its holdings the company had donated 1212 bonds valued at Rs. 1,21,200 during the year under consideration. In the opinion of the ITO the claim of the company for interest expenditure was not justified in the facts and circumstances of the case. Therefore, by his letter dated 4-12-1984 which is reproduced below in extenso, the ITO called upon the company to explain the things appearing against it : "You are aware the I. T. assessment proceedings for A. Y. 1982-83 are pending before me. During the course of hearing before me, various details have been submitted regarding the expenses claimed by your company for the accounting year relevant to A. Y. 1982-83. On going through the details filed before me it is found that your company had claimed interest of Rs. 1,64,024 the break up of which is as under : judgement_783_tlit0_19891.htm On going through the details of loans taken by your company from Ambernath Investments P. Ltd. and Ofisade Pvt. Ltd., it is seen that the loans of Rs. 59,72,000 taken by your company from Ambernath Inv. P. Ltd. on 13-2-1982 and another loan of Rs. 61,56,500 from Ofisade Pvt. Ltd. taken on 13-2-1982, have been utilised by your company in purchasing 1,21,285 A. S. E. Ltd. 11% Bonds of Rs. 100 each on the same day i. e. 13-2-1982. As regards the loans taken from Dhaulgiri Investments P. Ltd. and Coromandal Investments P. Ltd. amounting to Rs. 5,97,200 and Rs. 6,15,650 respectively, the same have been utilised by your company in repaying a part of the to M/s. Ambernath Investments P. Ltd., and Ofisade Pvt. Ltd. respectively on the same date 13-2-1982 on which the loans from Ambernath & Ofisade were taken by your company. It is further found on examination of your profit and loss account, that no income from investment made by you in purchasing ASE Ltd. 11% Bonds has been declared by your company, although you are claiming interest on the loans utilised in purchasing the said Bonds. Besides, it is also seen that in the immediately succeeding year you have sold on 3-4-1982 the said Bonds to M/s. Alkapuri Investments P. Ltd, for an amount of Rs. 1,20,07,300. Out of the total Bonds, you have donated 1212 Bonds valued at Rs. 1,21,200 during the year, but, the name and address of the party to whom the donation has been made, has not been furnished. The same may please be furnished now. As no income out of the investment made by you in consideration, has been declared by you, the purchase and sale of bonds is sustainable at all. I, therefore, request you to show cause why your claim of Rs. 1,64,024 is not sustainable at all. I, therefore, request you to show cause why your claim of interest of Rs. 1,64,024 should not be disallowed and added back to your income u/s. 57(iii) of the I. T. Act. In the profit and loss account, you have shown dividend income of Rs. 2,87,759 and interest income earned from M/s. Alkapuri Investments P. Ltd. to the extent of Rs. 1,482. No income from any other sources has been declared. In view of this the income of your company for the year under consideration has to be assessed of Rs. 1,511 debited to profit & loss account are also account are also proposed to be disallowed, as has been done in the u/s. 57(iii) of the I. T. Act. Your reply should be furnished in writing on the next date of hearing, which is fixed on 10-12-1984 at 11.30 A. M. This letter may please be treated as notice u/s. 142 (1) of the I. T. Act."

(3.)TO the above letter of the ITO the company submitted its reply dated 20-12-1984 on the following line : "We are in receipt of your letter No. CC. III/Misc/84-85/CY-6053(1) dated 4th January, 1984 being notice u/s. 142(1) of the I. T. Act asking us to submit our objections to the proposed disallowance of four claim for interest and preliminary expenses. In this connection we have to state as under : 1. At the outset we may clarify that the company did not borrow any loans from Alkapuri Investments P. Ltd, and Ofisade P. Ltd. as had been assumed by you for the purchase of 11% redeemable bonds of Ambalal Sarabhai Enterprises Ltd. 2. The company purchased 59,720 11% redeemable bonds of Rs. 100 each of Ambalal Sarabhai Enterprises Ltd. from Ambernath Investments P. Ltd. at per value. The terms of payments provided for payment of 10% of the purchase price against delivery of duly executed transfer deeds together with bonds certificated and the balance 90% carried interest at 10% per annum and was payable in instlaments as under : 10% on 1st April, 1983 and the balance 90% was payable in four equal annual instalments commencing from 1st April, 1984, with a view to completing this transaction of purchasing of bonds the company borrowed a sum of Rs. 5,97,200 from Dhaulgiri Investments Pvt. Ltd. to enable the company to make initial down payment against delivery of the said bonds. The company also purchased 61,565, 11% redeemanble bonds of Rs. 100 each of Ambalal Sarabhai Enterprises Ltd. from Ofisade Pvt. Ltd. at par value. The terms of payment provided for payment of 10% of the purchase price against delivery of duly executed transfer deeds together with bonds certificated and the balance 90% carried interest at 10 1/2% per annum and was payable in instalments as under : 10% on 1st April, 1983 and the balance 80% of Rs. 6,15,650 was borrowed from Coromandal Investments Pvt. Ltd. to enable the company to make initial down payable against delivery of the said bonds. 3. The company had also borrowed a sum of Rs. 8,59,800 from Aljaopuri Investments Pvt. Ltd. in March 1982 to pay application money for 13 1/2% right convertible secured debentures issued by Ambalal Sarabhai Enterprise Ltd. The debentures were allotted in June 1982 and the company received interest on the application money so paid from the date of its application to the date of allotment at 14 1/2% per annum. 4. TOtal borrowing made by the company for the purchase of 11% bonds of Ambalal Sarabhai Enterprise Ltd. and for paying application money for 13 1/2% convertible debentures of Ambalal Sarabhai Enterprises Ltd. is as under : judgement_783_tlit0_19892.htm It will be observe that the borrowings from Dhaulgiri Investments P. Ltd., Coromandal Inv. Pvt. Ltd. and Almapure Inv. Pvt. Ltd. were utilised for acquiring income yielding assets. The company was under an obligation to pay interest to Ambernath Investments P. Ltd. and Offsade P. Ltd. on balance of the unpaid purchase price as stated in paragraphs 2 and 3 above for acquiring 11% redeemable bonds of Ambalal Sarabhai Enterprises Ltd. which is admittedly an income yielding asset : "(a) Thus at the end of the year i. e. 31-3-1982 the company held 1,20,073 11% secured non-convertible redeemable bonds, 1212 bonds of the aggregate face value of Rs. 1,21,200 having been donated to the two public charitable trusts - 750 bonds to Lata Nidhi and 456 bonds to Bakul Nidhi. The company was also entitled to the right convertible debentures for which application money was paid and this entitlement was represented by the application money paid as shown in the balance sheet as an asset. Interest on 11% bonds would become due from year to year till the date of maturity on 2nd July every year. In the circumstances, the company could not have taken credit for interest income on the bonds as no interest has become due till 31-3-1982." You have in your letter made a reference to the sale of the bonds to Alkapuri Invest. Pvt. Ltd. in the subsequent year for a consideration of Rs. 1,20,07,300 and relying on that sale as a ground to have proposed to disallow our claim for interest. The facts in this connection are as under : A sum of Rs. 1,21,20,500 was borrowed from Alkapuri Investments Pvt. Ltd. on 1-4-1982. The said sum was utilised for repayment of loans obtained from Dhaulgiri Investments Pvt. Ltd. and Coromandal Investments Pvt. Ltd. and a sum of Rs. 1,09,15,650 was utilised for satisfying the unpaid purchase price payable by the company to Ambernath Investments Pvt. Ltd. and Ofisade Pvt. Ltd. in respect of the said bonds. The amount so borrowed carried interest at 10 1/2% per annum. It will thus be observed that the sale proceeds of the bonds were utilised for reducing the liability on which the company was required to pay interest. You have in your letter under reference stated that the assessee company has not earned any interest on 11% redeemable bonds of Ambalal Sarabhai Enterprises Ltd. during the year and hence claim of Rs. 1,64,024 being interest payable on the said borrowings is not sustainable. It may be noted that the assessee company acquired income earning assets out of the said borrowings and it is not necessary that the company should earn income of such investments immediately or in the year in which such assets were acquired. Your proposal to disallow interest on Rs. 1,64,024 is thus unjustified. In respect of the application money paid by the company by borrowing an amount of Rs. 8,59,800 from Alkapuri Investments Pvt. Ltd., the convertible debentures were allotted to the company on 2-6-1982 and a sum of Rs. 23,568 was paid by Ambalal Sarabhai Enterprises by way of interest from the date of the application to the date of allotment, which amount has been credited in the year 1982-83 corresponding to the assessment year 1983-84. In view of the aforesaid facts, the sale of bonds does not alter the character of the borrowings made by the company for acquiring an income yielding asset. On the contrary the sale has resulted in reducing the liability of the company for payment of interest in the assessment year 1983-84. We submit that what happened in the succeeding year is not relevant does not have any bearing on the nature of the assets acquired or cost of finance raised for acquiring such income yielding assets. The transaction for purchase of the 11% bonds was bona fide and was acted upon by both the vendor and the purchases and the bonds were transferred from the name of the vendors to the name of the assessee, the purchase company. In these circumstances and on the facts stated above, we submit that the proposal to disallow interest on borrowings for acquiring an income yielding asset and also interest on the unpaid purchase price for the purchase of the said income yielding asset is unjustified and unwarranted and, therefore, deserves to be dropped. The assessee company is engaged in the business of holding investments and financing industrial and business enterprises and, therefore, preliminary expenses of Rs. 1,511 should be allowed as deduction while computing total income for the year. We hope the above clarification will be treated as sufficient compliance of your letter under reference."