ORDER
K.C. Singhal, Judicial Member
1. Since common issues are involved in all these appeals, the same are being disposed off by the common order for the sake of convenience.
2. The main issue arising from these appeals is whether lower authorities were justified in disallowing deduction Under Section 36(1)(iii) of the I.T. Act, 1961 (the Act) in respect of interest paid on borrowings which were utilized for acquiring shares as Long Term Investments.
3. Since the facts are similar in all the appeals, the detailed facts in the case of Nikhil Investment Co. Pvt. Ltd. are being narrated for the sake of convenience. The assessee borrowed the sum of Rs. 2548 lakhs from Reliance Capital Ltd. on 11.01.1997 out of which the sum of Rs. 2494.24 lakhs were utilized for acquiring 11,98,000 shares of L & T Ltd. The interest payable on such borrowing for the Assessment Year 1998-99 amounted to Rs. 3,74,13,520/- vis-a-vis, the investment in above shares. The same was claimed as deduction Under Section 36(1)(iii) of the Act. Para 8 of the assessment order shows that the assessee had given a note to the effect that interest paid on borrowed funds utilized for acquiring shares had been added to the cost of purchases of shares and duly reflected in the balance sheet. However, the claim Under Section 36(1)(iii) was made since borrowed funds were utilized for business purpose. In the course of assessment proceedings, it was found by the Assessing Officer that shares were not purchased as stock-in-trade but as Long Term Investment and the income arising from sale of shares was being offered under the head ‘Capital Gains’. Thus, the contention of the assessee that borrowed funds were utilized for business purposes was rejected.
Further, it was noticed by the Assessing Officer that the assessee had earned dividend income of Rs. 3,60,86,902/- which was exempt from tax Under Section 10(33) of the Act. According to the Assessing Officer the money was borrowed for the purpose of earning dividend income as there was direct nexus between borrowed funds and investment in shares. Hence, interest payment related to dividend income. Consequently, the claim of the assessee Under Section 36(1)(iii) of the act could not be allowed. Further, no such claim was allowable under the other heads as dividend income was exempt Under Section 10(3) of the Act. Therefore, the claim of the assessee was disallowed while computing the total income of the assessee for the Assessment Years 1998-99 as well as 1999-2000.
Facts in the case of Kankhal Investments & Trading Co. Pvt. Ltd. are similar to the facts mentioned above and therefore, need not be narrated in detail. The borrowing on 31.03.1997 from Reliance Capital Ltd. was of Rs. 5,08,00,800/- which was utilized for acquiring 2,44,000 shares of L & T Ltd. The interest on borrowing was of Rs. 76,20,116/- which was claimed as deductions Under Section 36(1)(iii) of the Act but the same was disallowed for both the years for the reasons given in the preceding para of this order.
4. The matter was carried in appeal before the Id. CIT(A) before whom it was contended that the assessee was engaged in the business of investment in shares and therefore interest on borrowed funds was allowable on deduction Under Section 36(1)(iii) of the Act. It was further submitted that investment was not made for earning of dividend income. Merely because investment in shares resulted into dividend income would not render the interest paid on borrowing as having been incurred for earning of dividend income, which was exempt from tax Under Section 10(33) of the Act.
5. The contention of the assessee was rejected by the Id. CIT(A) by holding the assessee could not be said to be engaged in the business of investments as shares were acquired not as stock-in-trade but as investments. It was further held that interest related to earning of dividend income which was exempt from tax Under Section 10(33) of the Act and consequently, the same was disallow Under Section 14A of the Act. Aggrieved by the same, both the assessees are in appeal before the Tribunal.
6. The Id. Counsel for the assessee, Mr. Mistri, has vehemently assailed the orders of Id. CIT(A) and the Assessing Officer by contending that the activity of holding of investments can constitute business of an assessee and per se it cannot be said that such activity would never constitute business of an assessee. He drew our attention to the provisions of Section 23A of Indian Income Tax Act of 1922 (Act of 1922). He contended that the legislature was well aware of the expression “Business of holding of Investments”. Therefore, it would be incorrect to say that one cannot engage itself in business of holding of investments. In support of the same, he also relied on the judgment of the Apex Court in the case of Distributors (Baroda) P. Ltd. 83 ITR 377. Particular attention was drawn to page 383 where the apex court distinguished the earlier decision in the case of Bengal & Assam Investors Ltd 59 ITR 547 SC. Further reliance was placed on the other decision of the Apex Court in the case of Amalgamation Pvt. Ltd. 226 ITR 188 at Page 207 to buttress his argument that a company can be said to be engaged in the business of holding investments. Further reliance was placed on the following Tribunal decisions:
1 Golak Investments Ltd. in ITA No. 4050/M/98 – order dated 10.06.2004;
2 Meghraj Financial Services (I) Pvt. Ltd. in ITA NL6563/M/97 – order dated 09.02.2004; and
3 Velocity Trading (P) Ltd. in I.T.A. No. 7719/M/04 – order dated 08.02.2005.
7. Proceeding further, it was submitted that the assessee has carried out this activity in a systematic and organized manner by investing the money in shares of various companies from time to time. He drew our attention to page 47 of the paper book to point out that investment is not restricted to shares of L & T Ltd., but investment has been made in shares of more than 25 companies. It was also pointed out by him that dividend income from shares of L & T Ltd was only Rs. 71,88,000/-out of the total dividend income of Rs. 3.6 crores and therefore, the Assessing Officer has wrongly assumed that the entire interest related to the entire dividends. It was further submitted that investments was not made to earn dividend income but to have controlling interest in Larsen & Turbo Ltd. so that it may have its say in the policies of that company. The dividend declared by L & T Ltd. was always meager one and therefore there was no question of investing the money for earning dividend income. He placed on record the chart showing dividends received from various companies to point out that the dividend income in the case of L & T Ltd. was much less than 3% of the investment. According to him, no prudent man would invest the borrowed funds at higher rate of interest for earning nominal rate of dividend. Infact, the investment was only made to earn profits in future by investing money as a prudent business man and therefore, lower authorities were not justified in holding that interest paid related to earning of dividend income alone.
8. In the course of hearing, a query was raised from the bench as to how the deduction could be allowed under the head ‘Profits & Gains from Business/Profession’ particularly when neither of the receipts from such business was assessable under such head. It was clarified to him that in the business of holding of investments in shares, the receipts were either by way of dividends or sale proceeds of shares. Both the receipts were not assessable under the head ‘Profits & Gains from Business/Profession” but were assessable either under the head ‘Income from other sources1 or under the head ‘Capital Gains’. Thus, computation of income under the head ‘ Profits & gains of business or profession’ did not arise.
9. Faced with such query, it was submitted that the assessee cannot lose the statutory deduction which is otherwise allowable Under Section 36(1)(iii) merely because receipts from such business are not assessable under the head ‘Profits & Gains from Business/Profession’. Reliance was placed on the judgment of Hon’ble Supreme Court in the case of Rajendra Prasad Moody 115 ITR 519 wherein it was held that deduction Under Section 57 was allowable even where there was no dividend income. Proceeding further, it was submitted that the assessee had other incomes like interest on debentures and interest on loans and therefore such deduction could be allowed against such receipts. Reference was made to Schedule ‘J’ to point out that interest on debentures was Rs. 239 lakhs for the A.Y. 1998-99 and Rs. 787 lakhs for the A.Y. 1999-2000. Proceeding further, it was also pointed out that the Assessing Officer had made mistake in observing that interest was added to the cost of purchase of shares. He drew our attention to Page 56 of the paper book to show that such interest was not added to the cost of purchases. He also pointed out that in the A.Y. 1999-2000, the Assessing Officer had disallowed the same amount of interest even though interest paid on borrowing was much lesser on account of re-payment of loan. Hence, the disallowance in A.Y. 1999-2000 be rectified accordingly. Finally, it was prayed by him that deduction Under Section 36(1)(iii) may be allowed in respect of interest paid on borrowed funds. Alternatively, it is pleaded that the interest paid should be allowed to increase the cost of purchase.
10. On the other hand, the Id. D.R., Mr. Ravindra Kumar, vehemently supported the order of Id. CIT(A) by contending that the assessee cannot be said to carry on the business of holding of investments in view of the Supreme Court judgment in the case of Bengal Assam Investors Ltd. (supra) wherein, it was held that no one could make a business of investing. According to him, but for Section 23 A of the Act of 1922, there cannot be any business of holding investments. Under the Act of 1961, there is no such provision and therefore, the concept of business of holding investment is no more available under the Act. The object clause of Memorandum of Association by itself is not relevant. Proceeding further, it was submitted that merely because the earning of dividend was lower than the interest paid, it cannot be said that the provisions of Section 28 of the Act would apply. The investment is not made only for earning dividend income but also is made with the object of earning income on sale of shares in future. He tried to convince us by giving an example of investment in immovable property where return by way of rent is always lesser than interest rate prevailing in the market. The object of an investor is to make profits when the prices of the property increase by lapse of time. He also relied on the decision of the Apex court in the case of Rajendra Prasad Moody (supra) wherein the court held that deduction in respect of interest paid was allowable under the head ‘Income from Other Sources’ even where no dividend was declared. It was emphasized by him that quantum of dividend was immaterial. Proceeding further, it was submitted that expenditure connected with a source of income can be considered while computing the income from that source if permitted by law but the same cannot be adopted against the receipts from another source of income. Further, no deduction is allowable where investment is made to have controlling interest in other company. Reliance was placed on the decision of the Tribunal in the case of Everplus Securitis Ltd. 101 ITD 151(Del.). Proceeding further, it was submitted that interest paid cannot be allowed to be added to the cost of shares as there is no such provisions to support the alternate plea of assesses counsel. Reliance was also placed on the decision of the Tribunal in the case of Karriu Metals Pvt. Ltd. in ITA No 7211/M/03, copy of which has been placed on record for the proposition that in such cases no deduction under sections 30 to 43D can be allowed as the receipts are chargeable to tax either under the head ‘Capital Gains’ or under the head ‘Income from Other Sources’. Proceeding further, it was submitted that even assuming that the assessee was in the business of holding of investment then dividend income arising from such business is exempt Under Section 10(33) of the Act and therefore, expenditure related to such income cannot be allowed Under Section 14A of the Act.
11. In reply, it was submitted by Mr. Mistri that in the case of Bengal & Assam Investors Ltd. (supra), the question before the court was whether the dividend income was assessable Under Section 10 or 12 of the Act of 1922 and the court was never concerned with the issue whether the assessee was carrying on the business of holding of investment. Such question, on the contrary, was directly answered by the Supreme Court in the case of Distributors (Baroda) Ltd., in the favour of the assessee. Further, in the case of Amalgamations Ltd., the provisions of section 23A of 1922 Act were not considered and yet it was held that assessee was engaged in the business of holding of investments. Regarding Section 14A, it was submitted that onus is on the department to prove that expenditure related to exempted income. No such onus has been discharged. Regarding the decisions of Tribunal in the case of Everplus Securities Ltd. (supra), it was submitted that the decision of Supreme Court relied on by him were not cited before the Bench. Regarding the decision of the Tribunal in the case of Kamu Metal (supra), it was submitted that no finding was given regarding the business of holding investments.
12. Rival submissions of the parties have been considered carefully. At the outset, we are in agreement with the legal contention that in appropriate case, a company can be said to be engaged in the business of holding investments in as much as the legislature itself recognized such legal position by enacting Section 23 A of the Act of 1922. This aspect got judicial recognition from the Apex Court in the case of Distributors (Baroda)| Ltd. (supra). In that case, the following question was referred for the opinion of the Hon’ble high Court:
Whether, on the facts and circumstances of the case, the Tribunal was justified in holding that the assessee-company is a company hose business consists mainly in dealing in or holding of investments within the meaning of Clause (i) of the second Explanation to Section 23A of the Income-tax Act, 1922?
The High court considering the facts of the case held that assessee was not engaged in the business of holding investments. On appeal to the Hon’ble Supreme Court by the CIT, the Apex Court held that a company can be said to be engaged in the business of holding investment if such activity refers to real, substantial and systematic or organized course of activity carried on for a set purpose such as earning profits. Reference can be made to the following observations of their lordships at page 383 of 83 ITR:
This court in Bengal and Assam Investors Ltd. v. Commissioner of Income-tax came to the conclusion that an individual who merely invests in shares for the purpose of earning dividend, does not carry on a business and that the only way he can come under section 10 of the Act is by converting the shares acquired by him into stock-in-trade, i.e., by carrying on the business of dealing in stocks and shares. In that case this court was considering whether the dividend income of the assessee-company therein could be considered as business income under section 10 of the Act. Therein this court was not considering the scope of section 23A. But all the same, in that case this court proceeded on the basis that no one can make a business of investing. But then section 23A speaks of the business of holding of investments’. We were told by the Counsel for the assessee that that expression is an incongruous one and that we should following the decision of this court in Bengal and Assam Investors Ltd. hold that there is nothing like a business of holding of investments’ We feel unable to accede to that contention. We cannot say that the legislature did not know its own mind when it used that expression in Section 23A. We must give some reasonable meaning to that expression. No part of a provision of a statute can be just ignored by saying that the legislature enacted the same not knowing what it was saying. We must assume that the legislature deliberately used tat expression and it intended to convey some meaning thereby. The expression ‘business’ is well-known expression in income-tax law. It means, as observed by this court in Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax : ‘some real, substantial and systematic or organized course of activity or conduct with a set purpose’. This is also the meaning given to that expression in the earlier decisions of the High Courts and the Judicial Committee. We must, therefore, proceed on the basis that the legislature was aware of the meaning given by courts to that expression when it incorporated Section 23A into the Act in 1957. Hence, we must hold that when the legislature speaks of the business of ‘holding of investments’, it refers to real, substantial and systematic or organized course of activity of investment carried on by an assessee for a set purpose such as earning profits.
However, on facts it was held that assessee was not engaged in the business of holding of investments. It is also clear from the above observations that earlier decision in the case of Bengal & Assam Investors Ltd (supra) relied on by the Id. D.R. was duly distinguished.
13. In the case of Amalgamation Pvt. Ltd. (supra), the High Court held that assessee was in the business of holding investments and consequently, the remuneration paid to the Directors of subsidiary companies were allowable on deduction Under Section 37 of the Act. On appeal, the Apex Court (at page 208 of226 ITR) observed that the High Court was right in pointing out that the business of Assessee Company was the holding of investments. However, on facts, it was held that deduction was not allowable since there was no nexus between the expenditure incurred and the activity carried on by assessee.
14. The Tribunal, Mumbai Benches, in the case of Meghraj Financial Services (I) Pvt. Ltd. (supra) has also held that a company can be said to be engaged in the business of holding investments. This view was taken after considering the ratio of the judgments of the Apex Court in the case of Distributors (Baroda) Ltd. (supra) and Amalgamation Pvt. Ltd. (supra).
15. In view of the above discussions, it is held that in law, a company can be said to be engaged in the business of holding investments if the test laid down by the Apex Court in the case of Narain Swadeshi Weaving Mills vs. Coram. Of Excess Profits Tax 26 ITR 765 is satisfied.
16. Having held as above, the next question for consideration is whether the assessee can be said to be engaged in the business of holding investments. The test laid down by the Apex Court in the case of Narain Swadeshi Weaving Mills (supra) is whether some real, substantial and systematic or organized course of activity or conduct was carried on with a set purpose. To satisfy such test, facts of each case would have to be seen. The mere fact that assessee is authorized to invest in shares or securities by the Memorandum of Association and in pursuance thereof, investment has been made, in our opinion, would not be sufficient to satisfy the said test. Something more is required. The conduct of prudent businessmen must exist. In the present case, this aspect was not examined either by the AO or by the CIT(A). The claim of the assessee was rejected merely on the ground that shares were purchased as long-term investment out of borrowed funds. Even the assessee nowhere raised such plea before the Assessing Officer. It simply explained before the AO that borrowed funds were utilized for the purpose of business. Further, neither the statement of Facts nor the grounds of appeal before CIT(A) suggest that such plea was raised by the shows that assessee merely submitted that assessee was in the business of investments. However, no material was filed before the CIT(A) to record such finding. Even before us, there is no material to prove that assessee was engaged in the business of holding investment on the touchstone of the test laid down by the Apex Court. The only information filed in the paper book at Page 47 is that assessee had invested in shares of around 25 companies. But this fact alone does not establish the fact that assessee was engaged in the business of holding investments. The only arguments advanced by the Id. Counsel for the assessee is that the dividend declared by L & T Ltd. was insignificant which itself shows that assessee did not invest the money for earning dividend income and therefore it should be presumed that investment was on account of business consideration. We are unable to accept this contention. An investor normally does not invest merely for dividend. It takes into consideration the rise in prices of shares in future and that is why such investments are called long term investments. All good shares are quoted in Stock Exchange at very high prices as compared to the Face Value and dividends declared in the past are most of the time insignificant. Still the investor invests the money considering the facts that (i) Prices may rise and (ii) bonus shares may be issued in future in addition to the dividends received. So mere investment in shares by a company would not tantamount in business of holding investments. Assessee must prove the business considerations for making investment before claiming any deduction Under Section 36(1)(iii). Even the Apex Court in the case of Distributors (Baroda) Ltd. (supra) has clearly held that assessee must satisfy the test laid down by the apex court in the case of Narain Swadeshi Weaving Mills (supra). Faced with the factual situation of the present case, two courses are open to us – either to hold that assessee was not engaged in the business of investment in the absence of any material on record or to restore the matter, in the interest of justice, to the file of Assessing Officer for recording a finding in this regard. However, we need not take either of the above course since, in our humble opinion, assessee is not entitled to deductions Under Section 36(1)(iii) of the Act even presuming for the sake of argument that assessee was engaged in the business of holding investments in shares or securities for the reasons given hereafter.
17. In our humble opinion, for claiming any deduction under Sections 30 to 43D of the Act in computing the income ,of the assessee, the condition precedent is that the income from the connected receipts, is computed under the head ‘Profits & Gains from Business or Profession’. According to the Scheme of the Act, all incomes of the assessee are to be classified under various heads described Under Section 14 of the Act and then income is to be computed under these very heads in accordance with the provisions contained under these very heads. If the receipt falls under a particular head then, in our opinion, the income from such receipt must be computed in accordance with the provisions under that very head irrespective of the nature of receipts. It would be incongruous to contend that income from a receipt is computed under one head and the connected expenditure is considered under some other head. In our view, the receipts and the expenditure having nexus with each other must be considered under one head only. If the expenditure incurred by the assessee is not allowable under that head then it cannot be allowed even if incurred by the assessee. Normally, income from the business receipt is computed under the head ‘Profits & Gains from Business/Profession’ but where a particular receipt, even though business receipt, falls under any of the other heads described in section 14 of the Act then, in our humble opinion, the receipts and the connected expenditure must be taken out from the purview of the head ‘Profits & Gains from Business or Profession’ and compute the income under the relevant head.
18. The view expressed by us is fortified by the decision of the Apex Court in the case of United Commercial Bank Ltd. v. CIT 32 ITR 688. The relevant observations of Their Lordships are being reproduced as under:
Under the Indian Income-tax Act, 1922, the income of an assessee is one and Sections 7 to 12 of the Act direct the modes in which income-tax is to be levied. No one of those sections can be treated to be general or specific for the purpose of any one particular source of income ; they are all specific and deal with the various head in which an item of income, profits and gains of an assessee falls. These sections are mutually exclusive and where an item of income falls specifically under one head it has to be charged under that head and no other.
Income from ‘interest on securities’ falls under section 8 of the Act and not under Section 10 ; it cannot be brought under a different head of income, viz., ‘profits and pains of business’ under section 10, even though the securities are held by a banker as part o his trading assets in the course of his business.
The above view was reiterated by the Hon’ble Supreme Court is in the case of East India Housing and Land Development Trust Ltd. 42 ITR 49 by observing as under:
Income-tax is undoubtedly levied on the total taxable income of the taxpayer and the lax levied is a single tax on the aggregate taxable receipts from all the sources ; it is not a collection of taxes separately levied on distinct heads of income. – But the distinct heads specified in section 6 of the Income-tax Act indicating the sources are mutually exclusive and income derived from different sources falling under specific heads has to be computed for the purpose of taxation in the manner provided by the appropriate section. If the income from a source falls within a specific head set out in section 6, the fact that it may indirectly be covered by another head will not make the income taxable under the latter head.
19. In view of the above legal position, we are of the view that where a specific head is provided in respect of a particular income, then such income must be computed under that very head irrespective of the nature of income. In the case of a company in the business of holding shares, if investment in shares is disposed off then income therefrom has to be computed only under the specific head ‘Capital Gains’ and this legal position is not even disputed by the assessee’s Counsel and the assessee itself has also declared the income under the head ‘Capital Gains’. Further dividend income is also to be computed under the specific head ‘Income from other Sources’ if such income is taxable. Since dividend income is exempt Under Section 10(33) of the Act, the question of computing such income does not arise. There is no other receipt arising or accruing to the assessee from the business of holding investment in shares. Therefore, the entire receipts from such business has to be excluded from the head ‘Profits and gains from business or profession’ since such receipts falls under the specific heads. Income can be computed only after allowing deductions as provided under the head under which income is to be computed. No other deduction is permissible except provided under that head. The interest paid on the borrowed funds, at the most, could be allowed against the dividend income if investment is made to earn the dividend income. The contention of The assessee is that investment was not made to earn dividend income. Therefore, such deduction could not be allowed even against the dividend income. Even otherwise, such income being exempt the question of deduction against dividend income becomes academic. The interest paid as per the contention of the Id. Counsel for the assessee, could relate to the profits arising from sale of investments since the main object was to hold the investments. Since income arising from sale of investment has to be computed under the head ‘Capital Gains’, the deduction has to be allowed only in accordance with the provisions specified under the head ‘Capital Gains’. The legislature was aware of the aspect of inflation of price and therefore, it made provisions to determine the indexed cost of acquisition, which would take care of interest cost also. No separate deduction is allowable under this head in respect of interest paid on borrowed funds. Thus, in our opinion, no deduction is allowable to the assessee in respect of interest paid on borrowed funds.
20. It has been contended by the Id. Counsel for the assessee that the assessee should not lose the statutory deductions Under Section 36(1)(iii) merely because its income is to be computed under other heads. We are unable to accept such contention. What is to be computed Under Section 28 is the profits & gains of business or profession, which also includes losses. As per the commercial or accounting principles, neither the profits nor the losses from a business can be computed unless the receipts and the expenditures having nexus with each other are taken into consideration. Further, the income Under Section 28 is to be computed in accordance with the provisions of Sections 30 to 431) as provided in Section 29. All the provisions contained in Sections 30 to 43D provide that deduction shall be allowed in respect of he expenditure or allowance mentioned therein. The deduction pre-supposes the existence of receipts chargeable under this head. If the receipts are to be considered under other heads then, question of deduction under the head ‘Profits & gains from business or profession’ would not arise. As already pointed out, receipts and expenditure must go together. We may clarify that the receipt may be actual or to be received in future. The receipt may be on accrual basis. There may be cases that there is no receipt in one year and it may be received in next year. In such cases, the loss may be computed because receipts may be expected in next year. The crux of the matter is that there must be receipts either actual or on accrual basis before a deduction can be allowed therefrom. Consequently, if receipts, in respect of which expenditure are incurred, are considered under other heads, then question of determining any income under the head ‘Profits or gains from business or profession’ does not arise. Hence, the contention of the assessee is rejected.
21. Another contention of the Id. Counsel for the assessee is that interest paid should be allowed as deduction against the income by way of interest on debentures, which has been assessed on business income. We are unable to accept this contention too. One may carry on various businesses but under the scheme of the Act, the income from each source has to be computed independently though assessable under the same head. It is only for convenience that consolidated accounts are maintained. Reference can be made to the provisions of Section 70 of the Act, which reads as under:
70. Set off of loss from one source against income from another source under the same head of income-Save as otherwise provided in this Act, where the net result for any assessment year in respect of any source falling under any head of income under any head of income s a loss, the assessee shall be entitled to have the amount of such loss set off against his income from any other source under the same head.
22. A bare look at the above provisions make it clear that the income must be “computed in respect of each source assessable under the same head. If there is loss from one source, the same can be set off against the income from the other source assessable under the same head. Let us explain it through an example. A company may carry on business of dealing in shares as a*broker as well as on its own account. In the yes of law, dealing in shares as a broker is one source of income while dealing in shares on its own account is another source of income. In such cases, assessee may earn gross profit of Rs. 50,000/- from purchase and sale of shares on its own account with the assistance of borrowed fund on which interest of Rs. 1,20,000/- is paid. Thus there would be net loss of Rs. 70,000/-. On the other hand, income from the brokerage business may be computed at Rs. 1,00,000/, After setting off the Joss, the net income for business would be Rs. 30,000/, However, such set off is not permissible as per the provisions of Section 73 as loss on sale of shares will have to be considered as speculation loss, which can only be carried forward to next year. To avoid such situation, the assessee cannot plead that income from dealing in shares be taken at Rs. 50,000/- and deduction on account of interest on borrowed funds be set off against brokerage income. Thus, it cannot declare loss from brokerage at Rs. 20,000/- and income from dealing in shares at Rs. 50,000/- and net income from business at Rs. 30.000A. In the eye of law, it will have to compute in respect of each source of income and thus there will be loss of Rs. 70,000/- from dealing in shares and profit of Rs. 1,00,000/- from brokerage business. Under Section 70, the assessee can set off such loss but such provision is subject to other provisions of the Act and therefore such loss cannot be set off as per the provisions of Explanation to Section 73. In view of the above discussions, it has to be held hat assessee is not entitled to deduct the interest payment from interest income from holding of debentures as there is no nexus between the borrowed funds and investment in debentures. Admittedly, the borrowed funds were utilized for the purchase of shares of L & T Ltd. and therefore interest paid cannot be set off against income, by way of interest on debentures.
23. It has also been submitted by the Id. Counsel for the assessee that in the case of Nikhil Investment Co., the Assessing Officer has disallowed the interest at the same amount in both the years which is factually incorrect. This may be by way of inadvertent mistake and therefore need verification.
24. In view of the above discussion, the orders of Id. CIT(A) in all the cases are ‘ upheld on this issue subject to the rider that Assessing Officer shall rectify the mistake if Assessee’s contention is found to be correct after verification.
25. The next issue relates to the ad-hoc disallowance of expenses being attributable to exempted income by way of dividend. After hearing both the parties, we find that this issue is covered in favour of the assessee by the decision of Special Bench in the case of Punjab State Industrial Development Corporation Ltd. 102 ITD 1 wherein it has been held no ad hoc disallowance can be made in such cases. Respectfully, following the same, the orders of CIT(A) are set aside on this issue and consequently, the disallowance sustained by him are hereby deleted.
26. The next and last issue arising from the appeals of both the parties pertaining to A.Y. 1999-2000 relates to the computation of book profit Under Section 115JA. This issue has not bee pressed before us by the Id. Counsel for the assessee and consequently, the ground raised by the assessee in this regard is dismissed.
27. In the result, the appeals of the assessee are partly allowed.
Pronounced on 23rd August, 2007.