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Assistant Commissioner of Assistant Commissioner of Income Tax, Income Tax, Circle- Circle---17(1) New Delhi.Vs.. M/s Verve Engineering Pvt.Ltd., M/s Verve Engineering Pvt.Ltd.Delhi Delhi 110 064.
November, 27th 2013
               IN THE INCOME TAX APPELLATE TRIBUNAL
                                `H' : NEW DELHI
                    DELHI BENCH `H

                       G.D.AGRAWAL, VICE PRESIDENT AND
           BEFORE SHRI G.D.AGRAWAL,
                                GARG, JUDICIAL MEMBER
            SHRI CHANDRA MOHAN GARG,

                              No.3358/Del/2012
                          ITA No.
                                          2009-10
                        Assessment Year : 2009-


Assistant Commissioner of       Vs.    M/s Verve Engineering Pvt.Ltd.,
Income Tax,                            C-148, Mayapuri Industrial Area,
Circle-17(1),
Circle-                                Delhi ­ 110 064.
New Delhi.                             PAN : AACCV7364H.
     (Appellant)                           (Respondent)

                                   No.378/Del/2012
                   Cross Objection No.378/Del/2012
                                        2009-10
                      Assessment Year : 2009-


M/s Verve Engineering           Vs.    Assistant Commissioner of
Pvt.Ltd.,                              Income Tax,
C/o Shri Kapil Goel,                   Circle-17(1),
                                       Circle-
Advocate,                              New Delhi.
          Sector-7,
F-26/124, Sector-
Rohini,
Near Deepali Chowk,
Delhi ­ 110 085.
PAN : AACCV7364H.
     (Appellant)                          (Respondent)

            Revenue by           :    Shri Sameer Sharma, Sr.DR.
            Assessee by          :    Shri Kapil Goel, Advocate.

                                 ORDER

    G.D.AGRAWAL, VP :
PER G.D.AGRAWAL,
     The appeal by the Revenue is directed against the order of
learned CIT(A)-XIX, New Delhi dated 9th April, 2012 for the AY 2009-10.


2.   The Revenue has raised the following grounds of appeal:-


     "1.    Ld.CIT(A) erred in law and on the facts in holding that
     the   interest income of Rs.1,13,50,138/- cannot be
                                   2                       ITA-3358/D/2012 &
                                                              C.O.378/D/2012

      considered as income from other sources and directing the
      AO to set off the interest income with the interest paid.

      2.    Ld.CIT(A) erred in law and on the facts of the case in
      allowing the expenses of Rs.61,191/- without appreciating
      that the assessee did not carry out any business activity
      during the year.

      3.   The appellant craves for reserving the right to
      amend, modify, alter, add or forego any ground (s) of
      appeal at any time before or during the bearing of appeal."

3.    In the cross-objection, the assessee has raised the following
grounds:-


      "1. That on the facts and in the circumstances of case
      and in law, the ld.CIT-A erred in giving a finding at Para
      7/Page 6 that "The AO has clearly established that the
      funds borrowed were invested in the shares of M/s Den
      Networks Limited" which as per ld.CIT-A is "long term non
      trade/capital investment".

      2.    That on the facts and in the circumstances of case
      and in law, the ld.CIT-A erred in not holding that full
      interest of Rs.194,03,219 is allowable u/s 36(1)(iii) without
      being restricted to Rs.113,50,138.

      That the cross objector craves the leave to add, amend,
      modify, delete any of the ground(s) of cross objection
      before or at the time of hearing."

4.    At the time of hearing before us, it is stated by the learned DR
that during the accounting year relevant to the assessment year under
consideration, the assessee borrowed the sum of `22.50 crores from
M/s Unicon Fincap Pvt.Ltd. (hereinafter referred to as `UFPL') as loan.
The above amount was utilized on the same day for purchasing the
equity shares of M/s Den Networks Ltd. (hereinafter referred to as
`DNL'). That admittedly, the shares were purchased as an investment
and not as stock-in-trade. Since the borrowed money was not utilized
for the purpose of business, the Assessing Officer, rightly applying the
provisions of Section 36(1)(iii) of the Income-tax Act, 1961, disallowed
                                   3                      ITA-3358/D/2012 &
                                                             C.O.378/D/2012

the interest paid to UFPL amounting to `1,94,03,219/-. That learned
CIT(A) also upheld the finding of the Assessing Officer and held that
the interest expenditure is not allowable.    However, thereafter, the
Assessing Officer set off the interest received by the assessee
amounting to `1,13,50,138/- from City Guide Yellow Pages Pvt.Ltd.
against the interest paid to UFPL and sustained the disallowance.
From the facts of the assessee's case, it is evident that the money
borrowed from UFPL was not for the purpose of business and,
therefore, the entire disallowance of interest was to be sustained.
There is no provision under the Income-tax Act for setting off the
interest received against the interest paid on the money which was not
borrowed for the purpose of business. He, therefore, requested that
the order of learned CIT(A) should be reversed and that of the
Assessing Officer may be restored.     With regard to disallowance of
interest amounting to `61,191/-, he relied upon the order of the
Assessing Officer.


5.    The learned counsel for the assessee, on the other hand, so far
as Revenue's appeal is concerned, relied upon the order of learned
CIT(A) and he stated that the money borrowed from UFPL and the
interest received from City Guide Yellow Pages Pvt.Ltd. are inextricably
connected. In support of this argument, he filed a note on the entire
transactions and we reproduce the same below for ready reference:-


      "Note on Transaction

      1.     Mr. Sameer Manchanda wanted to acquire shares of
      Den Networks Ltd. from RRB Financial who invested into
      the shares of den networks ltd in 2007. These shares were
      required to be acquired through a company Verv
      Engineering Pvt.Ltd. whose 90% shares were held with
      Sameer.




      2.    To acquire these shares at a total agreed value of
      Rs.22.50 Cr., the company took a loan from Unicon Fincap.
      Mr. Sameer Manchanda stood guarantor to this loan and
                                  4                      ITA-3358/D/2012 &
                                                            C.O.378/D/2012

     also part funded the loan through city guide yellow pages
     pvt.ltd.

     3.   Verve Engineering received a loan of Rs.22.50 cr on
     17/09/2008 from Unicon.

     4.    Verve Engineering paid the consideration of Rs.22.50
     Cr on 17/09/2008 to RRB Investments.

     5.    City Guide received a Loan from Sameer Manchanda
     for Rs.13 Cr. (5 cr on 12/09/2008 and 8 cr on 15/09/2008).

     6.    {{As a part of preface these shares were first
     planned to be acquired though City guide and city guide
     received a sum of Rs.9.50 Cr. From Unicon on 10/09/2008,
     as loan to execute the transaction. But later it was decided
     to acquire these shares through Verv and transaction was
     routed to Verv.}}.

     7.   City Guide paid an amount of Rs.22.50 Cr on
     16/09/2008 to Unicon :

     a.   Rs.9.50 Cr paid back, received from Unicon on
     10/09/2008.

     b.   Rs.13 Cr. Paid to Unicon, received from Sameer on
     12/09/2008.

     8.    In nut shell City Guide forwarded a loan of Rs.13 Cr.
     to Unicon, to part fund the loan of Rs.22.50 Cr. by Unicon
     to Verv.

     9.    Unicon charged interest on Rs.22.50 Cr. from Verv ­
     Rs.1.94 Cr.

     10. Unicon paid interest on Rs.13 Cr. to City Guide ­
     Rs.1.13 Cr.

     11.   City Guide paid interest on Rs.13 Cr to Verv ­ Rs.1.13
     Cr.

     12. Verve Engineering paid back Rs.22.50 Cr. loan to
     Unicon.

a.     27/10/08 ­ 0.75 cr directly by Sameer ­ recd. Loan from
     Sameer on same date.
b.     05/01/09 ­ 2.00 Cr. Rtgs from HSBC ­ recd. Loan from
     Sameer on same date.
                                        5                      ITA-3358/D/2012 &
                                                                  C.O.378/D/2012

c.       09/03/09 ­ 6.75 Cr. Rtgs from HSBC ­ recd. Loan          from
       Sameer on same date.
d.       13/03/09 ­ 5 Cr. Rtgs frm HSBC ­ recd. Loan              from
       Sameer on same date.
e.       16/03/09 ­ 5 Cr. Rtgs. From HSBC ­ recd. Loan            from
       Sameer on same date.
f.       18/03/09 ­ 3 Cr. Rtgs from HSBC ­ recd. Loan             from
       Sameer on same date.

       13.       Unicon Paid back 13 Cr. to City Guide

a.            12/03/09 ­ 5 Cr. Rtgs Syndicate Bank
b.            16/03/09 ­ 5 Cr Rtgs Syndicate Bank
c.            17/03/09 ­ 3 Cr. Rtgs Syndicate Bank

       14.       City Guide paid back 13 Cr. to Sameer

     a. 12/03/09 ­ 5 Cr. Rtgs Syndicate Bank
     b. 16/03/09 ­ 5 Cr Rtgs Syndicate Bank
     c. 17/03/09 ­ 3 Cr. Rtgs Syndicate Bank"

6.     The learned counsel further submitted that the disallowance
sustained by the learned CIT(A) out of interest paid is not justified. The
same should be allowed in view of the cross-objection furnished by the
assessee.


7.     We have carefully considered the submissions of both the sides
and perused the material placed before us.           Section 36(1)(iii) of the
Income-tax Act, 1961 reads as under:-

        36. (1) The deductions provided for in the following
       "36.
       clauses shall be allowed in respect of the matters dealt
       with therein, in computing the income referred to in
       section 28--

       (i) ..............

       (ii)     ..............

       (iii) the amount of the interest paid in respect of capital
       borrowed for the purposes of the business or profession :

        Provided that any amount of the interest paid, in respect
       [Provided
       of capital borrowed for acquisition of an asset for extension
                                   6                     ITA-3358/D/2012 &
                                                            C.O.378/D/2012

     of existing business or profession (whether capitalised in
     the books of account or not); for any period beginning from
     the date on which the capital was borrowed for acquisition
     of the asset till the date on which such asset was first put
     to use, shall not be allowed as deduction.]

     Explanation.--Recurring subscriptions paid periodically by
     shareholders, or subscribers in Mutual Benefit Societies
     which fulfil such conditions as may be prescribed, shall be
     deemed to be capital borrowed within the meaning of this
     clause;"





8.   From the above, it is evident that Section 36 provides the
deductions which are to be allowed while computing the income under
the head `profit and gains of business'.     Under Section 36(1)(iii),
deduction is allowable for interest paid in respect of money borrowed
for the purpose of business or profession. In the appeal before us, the
assessee paid interest of `1,94,03,219/- to UFPL. The sum of `22.50
crores was borrowed from UFPL on 17.09.2008 and, on the same day,
the amount was invested for purchase of shares of DNL.          It is an
admitted position that the shares of DNL were kept by the assessee as
investment and not as stock-in-trade.     Therefore, the money was
borrowed by the assessee from UFPL not for the purpose of business
but for the purpose of investment in the shares of another company.
On the above facts, in our opinion, as per Section 36(1)(iii), the
assessee is not entitled to the deduction of interest paid on the money
borrowed from UFPL. The learned CIT(A) has also recorded the similar
finding at page No.6 paragraph No.7 of his order, the relevant portion
of which reads as under:-


     "The AO has clearly established that the funds borrowed
     were invested in the shares of M/s Den Networks Ltd. The
     investment in the shares of M/s Den Networks Ltd., is in the
     form of long term non-trade investment/capital investment.
     In such a case, the interest expenditure is not allowable. I
     am in agreement with the contentions of the AO and the
     action of the AO is upheld."
                                   7                      ITA-3358/D/2012 &
                                                             C.O.378/D/2012

9.    After considering the arguments of both the sides and the facts
of the case, we entirely agree with the above finding of the learned
CIT(A).


10.   Now, the next question arises whether the interest paid to UFPL
is to be set off against the interest of `1,13,50,138/- received by the
assessee from City Guide Yellow Pages Pvt.Ltd.           That Sameer
Manchanda paid from his bank account `13 crores to City Guide Yellow
Pages Pvt.Ltd. However, later on, the loan account was transferred to
the assessee company by passing journal entries. The assessee has
not paid any interest to Sameer Manchanda but received the interest
of `1,13,50,138/- from City Guide Yellow Pages Pvt.Ltd. However, on
the above facts, in our opinion, there is no case for set off of the
interest paid to UFPL with the interest received from City Guide Yellow
Pages Pvt.Ltd. The CIT(A) has allowed the set off with the following
finding:-


      "The other contention of the AR is that the interest receipt
      should be reduced from the interest expenditure incurred
      for disallowance if any on the ground that, had the funds
      not given to M/s City Guide Yellow Pages Pvt.Ltd., the same
      would have been available for making the investment and
      also there would be lesser borrowal of funds for making
      investment with lesser interest burden. The contentions of
      the AR are tenable. The AO is hereby directed to allow set
      off of interest received against the interest paid and
      disallowed."

11.   The CIT(A) allowed the set off on the ground that had the funds
not been given to City Guide Yellow Pages Pvt.Ltd., the same should
have been available for making the investment for the purchase of
shares and there would be lesser borrowing of funds with lesser
interest burden.   Thus, the CIT(A) allowed the relief on the basis of
consequence of certain presumptive events.       That income is to be
computed on the basis of facts as they existed and not on the basis of
some hypothesis that had the assessee not advanced to City Guide
                                        8                          ITA-3358/D/2012 &
                                                                      C.O.378/D/2012

Yellow Pages Pvt.Ltd., it would have been required to borrow less
money. The fact remains that the assessee has borrowed the money
from UFPL which was evidently not borrowed for the purpose of
business. The interest paid on such borrowing cannot be allowed as a
deduction under Section 36(1)(iii).         The assessee may have interest
income on its capital or on its non-interest bearing funds received from
somebody else but the said interest cannot be set off against the
interest payment on the basis of some hypothesis or presumption. We,
therefore, reverse the finding of the learned CIT(A) in this regard and
restore that of the Assessing Officer.


12.   The only ground that remains in the Revenue's appeal is with
regard to disallowance of expenses of `61,191/- which were disallowed
by the Assessing Officer and allowed by the learned CIT(A).


13.   After considering the arguments of both the sides and the facts
of the case, we are of the opinion that the learned CIT(A) was fully
justified in deleting the disallowance of the expenses amounting to
`61,191/- on the ground that these were the expenses of general
nature. It is a settled law now that even when the assessee has not
carried on the business, the certain expenses which were required to
be incurred for maintaining the corporate status of the assessee is
allowable deduction. Moreover, on the facts of the assessee's case, we
are of the opinion that the assessee carried on the business during the
accounting year relevant to the assessment year under consideration,
whatever small scale may be of the business. Moreover, the Assessing
Officer   himself   applied   Section       36(1)(iii)   while   considering   the
allowability of the interest paid to UFPL. Section 36(1)(iii) is applicable
while computing the business income.             The Assessing Officer cannot
take the double stand once while considering the allowability of
interest and another while considering the allowability of the office and
administrative expenses. In view of the above, we are of the opinion
                                      9                            ITA-3358/D/2012 &
                                                                      C.O.378/D/2012

that the disallowance of the expenses amounting to `61,191/- was not
justified. Accordingly, ground No.2 of the Revenue's appeal is rejected.


14.    In   the   cross-objection,   the   assessee   has    challenged        the
disallowance sustained by the CIT(A) out of the interest payment.
However, while considering the Revenue's appeal, we have held that
the entire interest paid by the assessee to UFPL is disallowable.
Therefore, the assessee's cross-objection has no merit. The same is
rejected.


15.    In the result, the appeal of the Revenue is partly allowed while
the cross-objection of the assessee is dismissed.
       Decision pronounced in the open Court on 22nd November, 2013.


                    Sd/-                                    Sd/-
                      GARG)
      (CHANDRA MOHAN GARG)                       (G.D.AGRAWAL)
         JUDICIAL MEMBER                         VICE PRESIDENT

Dated : 22.11.2013
VK.

Copy forwarded to: -

1.     Revenue      : Assistant Commissioner of Income Tax,
                          -17(1), New Delhi.
                    Circle-
                    Circle
2.     Assessee     : M/s Verve Engineering Pvt.Ltd.,
                    C/o Shri Kapil Goel, Advocate,
                               Sector-7, Rohini,
                    F-26/124, Sector-
                    Near Deepali Chowk, Delhi ­ 110 085.

3.     CIT
4.     CIT(A)
5.     DR, ITAT

                                Assistant Registrar

 
 
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