Ganjam Trading Co. (P.) Ltd. v DCIT ITA No: 3724 (MUM.) OF 2005, 932 (MUM.) OF 2006 and 1384 & 289 (MUM.) OF 2007] (Mum ITAT) Background: The assessee, in the business of trading and investment in goods, securities, etc., had declared income from interest, dividend and profit/loss from trading of shares. In the years under consideration, the assessee had declared huge losses from trading in shares which were treated by the Assessing Officer as speculation loss under the provisions of Explanation to section 73 of the Act. The assessee had also paid huge interest on borrowings. The Assessing Officer disallowed the interest relating to the investment made in shares under section 14A of the Income Tax Act, 1961 (for short “the Act”) and also disallowed interest on borrowings under section 36(1)(iii) of the Act holding that borrowings to that extent had not been utilised for the purpose of business. AO observed that the assessee had made huge borrowings on which substantial interest running into crores had been paid in all the years under consideration. The assessee had advanced the borrowed funds for allotment of shares of group companies. The assessee had also advanced Rs. 25 crores to Panther Invest-trade Ltd. for acquisition of equity shares of companies. The AO made disallowance u/s 36(1)(iii) by computing interest @ 15%. CIT(A) confirmed the disallowance of interest under section 36(1)(iii) for assessment years 2001-02 and 2002-03. In assessment year 2003-04, the CIT(A) observed that the assessee had substantial interest free funds amounting to Rs. 169.09 crores. He held that the disallowance of interest has to be worked out on proportionate basis after taking into account the total interest free funds and interest bearing funds and investments made.