TaxTMI 
TaxTMI 
2008 (5) TMI 450
X X X X Extracts X X X X
X X X X Extracts X X X X
....ounsel for the assessee has opted not to press ground No.3. We, accordingly, dismiss ground No. 3 being not pressed. 3. With regard to ground No. 1, it is noticed that on 28-3-2001 i.e., three days before closing of the accounting year, the assessee acquired a factory building from Roplas (India) Ltd., a Mahendra Group Company for a consideration of Rs. 1,39,28,767 (excluding the price of land) and claimed depreciation at Rs. 6,96,438 on this building. The Assessing Officer disallowed the claim of depreciation on the ground that the building was not used for the purpose of business carried on by the assessee. 4. The assessee preferred an appeal before the CIT(A) with the submissions that assessee is a finance company and is in the business, among other things, holding investments, providing finance and lending money. The main object of the company is to carry on business as financiers and investment and for that purpose to lend, invest money and negotiate loans in any form etc. It was further contended that one of the main objects incidental to the main object is to purchase, take on lease or in exchange or otherwise acquire land and building. The Roplas (India) Ltd. which had su....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s building acquired by the assessee were ever used for the purpose of business. In these circumstances, we are of the considered opinion that the CIT(A) is justified in disallowing the claim of depreciation of the assessee. We, accordingly, confirm the same. 6. With regard to ground No. 2, it is noticed that assessee has obtained inter-corporate deposits of Rs. 860 lakhs from M/s. Mahindra & Mahindra Ltd. a group company and paid interest at Rs. 37,36,986 to the said company. Out of these borrowings Rs. 473.20 lakhs was given as inter-corporate deposits at free of interest to Roplas (India) Ltd. another group concern. The Assessing Officer held that no prudent businessman will invest such huge funds in a manner that does not give any benefit. He, therefore, disallowed proportionate interest of Rs. 20,56,211. 7. The assessee preferred an appeal before the CIT(A) with the submissions that due to critical financial positions, Roplas (India) Ltd. required financial resources largely to meet the expenditure on VRS. Since they were not in a position to pay any interest, the interest on advances was not charged. It was further contended that assessee as a part of its business to form, p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....wed funds, the assessee did not get any benefit or a business profit. He invited our attention to the judgment of the Apex Court in the case of S.A. Builders Ltd. (supra) with the submissions that, no doubt the interest bearing funds can be given as interest-free advances to the group concerns as inter-corporate deposits, but, it should be done for business exigencies of the assessee. The important factor which is to be seen in these type of cases is, the business exigencies of the assessee for which the interest-free advances were given to the subsidiaries or the group concerns. The onus is upon the assessee to establish that interest-free advances were given to the subsidiary or a group concern for the business exigencies of the assessee. If he fails to establish it, the corresponding interest paid on the borrowed funds deserves to be disallowed. 13. The learned DR further contended that in the instant case undisputedly the assessee has borrowed a substantial amount from Mahendra & Mahendra and has given the same as interest-free advances to Roplas (India) Ltd. who was on the verge of collapse or winding up and even the recovery of the principal amount was not sure. Nothing had ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s benefit, the assessee acquire on giving interest-free advances to Roplas (India) Ltd., out of borrowed funds, on which, substantial interest was paid. It is also not clear from the record that assessee was in regular terms of business with the Roplas (India) Ltd. If the assessee is a financier and doing the business of finance, it could finance the Roplas (India) Ltd. and could have charged the interest thereon and offered it to tax. But, instead of doing business transactions with the Roplas (India) Ltd., it had given the interest-free advances, out of the borrowed funds. During the course of hearing, a specific query was raised to explain as to on what business exigencies the interest-free advances were given to Roplas (India) Ltd. In response thereto, it was admitted by the learned counsel for the assessee, that he did not get any direct business benefit by giving such an advance, but, he did it, to protect the image of the Mahendra group. This explanation of the assessee cannot be considered, to be a valid justification for giving interest-free advances to Roplas (India) Ltd., because, if it is considered to be a valid explanation, then the fund may flow from one group concer....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the alternate action of the Assessing Officer in quantifying share of loss from AOP at the rate of 1.54 per cent as against 7.69 per cent claimed by the appellant." 17. During the course of hearing, the learned counsel for the assessee has opted not to press ground No. 2 and accordingly the same is dismissed being not pressed. 18. With regard to ground No. 1, it is noticed from the orders of the lower authorities that in the accounting year relevant to the assessment year 1998-99 the assessee-company sold certain shares in a company called International Instrument Ltd. to Amassmen Video, Germany. The said International Instrument Ltd. owned certain landed property at Bangalore. One of the Terms of Understanding of the sale of shares was that the transferring the shareholders would ensure that title of International Instrument Ltd. to the landed property at Bangalore was perfected. In the year under consideration, the transferring shareholders incurred certain expenses to perfect the title of International Instrument Ltd. to the said landed property. The said expenses of Rs. 3,00,250 represents the assessee's share of the said expenses and assessee claimed these expenses as reven....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the assessee. With regard to the allowability as a business expenditure, the said expenditure cannot be allowed as it was not expanded for earning any business income. 22. We have heard the rival submissions and carefully gone through the orders of the lower authorities and material available on record and we find that while computing the capital gain, the assessee is entitled to debit the expenses which are allowed as a cost of improvement or cost of acquisition within the meaning of section 55 of the Income-tax Act. The expenditure claimed by the assessee does not fall in any of the category enshrined in section 55 of the Income-tax Act. Moreover, the expenses incurred do not relate to the shares. The capital asset which was transferred and for which the capital gain was computed, were the shares and not the immovable property. We have also find force in the argument of the learned DR that the expenditure has nothing to do with the transfer of shares by the assessee and as such it cannot be allowed as an expenditure, relating to earning of the capital gain by the assessee. This expenditure also cannot be allowed as a business expenditure as the business of the assessee is financ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... exclusion clause refers the AOP or the body of individuals where the shares of members are determinate and known. Since the assessee's case falls within the purview of section 67A, its provisions are applicable to the assessee's case and the proportionate share of loss in AOP is to be adjusted against the income earned under different heads of the assessee. With regard to quantum of proportionate share of loss, the learned counsel for the assessee has submitted that up to 30-3-2000, the assessee's shareholding in AOP was 7.69 per cent and it was reduced to 1.54 per cent only for one day i.e., 31-3-2000 when the major portion of the units were sold. Moreover, in the books of AOP, the proportionate share of loss was allocated to the assessee's account at 7.69 per cent. If the revenue is so meticulous in computation of proportionate share of loss in the assessee's hands it can only be reduced for a day in the ratio of 7.69 per cent to 1.54 per cent, but, it cannot be computed at 1.54 per cent only for the reason that on 31-3-2000, the shareholdings came down to 1.54 per cent. 26. The learned DR on the other hand has submitted that the language of provisions of section 67A quite unam....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d from the total income of the association or body and the balance ascertained and apportioned among the members in the proportions in which they are entitled to share in the income of the association or body; (b)where the amount apportioned to a member under clause (a) is a profit, any interest, salary, bonus, commission or remuneration aforesaid paid to the member by the association or body in respect of the previous year shall be added to that amount, and the result shall be treated as the member's share in the income of the association or body; (c )where the amount apportioned to a member under clause (a) is a loss, any interest, salary, bonus, commission or remuneration aforesaid paid to the member by the association or body in respect of the previous year shall be adjusted against that amount, and the result shall be treated as the member's share in the income of the association or body" 28. We have also examined the arguments of the learned counsel for the assessee that the words "other than company or a co-operative society or a society registered under the Societies Registration Act" relate to the association of persons or body of individuals and not with the assessee. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he rest of the argument of the revenue is based on hypothecation and we do not endorse it. We, accordingly, find no merit in reduction of loss from Rs. 12,89,911 to Rs. 2,58,318. But, in any case, this loss cannot be adjusted against the profits under the different heads of the assessee inasmuch as the provisions of section 67A cannot be applied in the assessee's case. We, accordingly, reject the claim of the assessee. 30. In the result, both the appeals of the assessee are dismissed. Per V.K. Gupta, Accountant Member. - I have gone through the proposed order of the Respected Judicial Member and have also discussed the issue with him. I am in full agreement with his views on all issues except ground No. 3 in ITA No. 5319/M/2004 wherein he has held that the provisions of section 67A were not applicable to the assessee being a company. Hence, it is with this considerable regret that I feel constrained to right a separate dissenting note expressing the reasons for not being able to agree with him in spite of my profound respect for his views. 2. As far as the facts and contentions of both the parties are concerned, the same have been elaborately narrated by the ld. Brother, hence, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the maximum marginal rate, tax shall be charged on that portion or portions of the total income of the association or body which is or are relatable to the share or shares of such member or members at such higher rate or rates, as the case may be, and the balance of the total income of the association or body shall be taxed at the maximum marginal rate. Explanation.-For the purposes of this section, the individual shares of the members of an association of persons or body of individuals in the whole or any part of the income of such association or body shall be deemed to be indeterminate or unknown if such shares (in relation to the whole or any part of such income) are indeterminate or unknown on the date of formation of such association or body or at any time thereafter." From the perusal of sub-section (1) above, it is clear that the company or co-operative society or a society registered under the Societies Registration Act, 1860 have been used with regard to an association of persons or body of individuals which means that where any person is a member of such type of association of persons or body of individuals, then, provisions of section 167B will not be applicable. Simi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ese entities have been excluded from association of persons or Body of Individuals for the purpose of section 67A of the Act. 5. I would further like to add that though the provisions of sections 167B and 2(31)(v) and aforesaid decision of Hon'ble Supreme Court were not brought to our notice during the course of hearing, but, in my humble view, the Tribunal has to decide the issue in accordance with the law and it should not decide the matter merely on the basis of what has been contended and, in such situations, the only requirement can be to give an opportunity to the party going to be effected to advance its views. However, since I am writing a dissent note, the effected party would get an opportunity of presenting it's view before the Third Member, therefore, there is no need to fix the case for hearing as part heard merely for this reason at this stage. Having held so, I further do not find any merit in the alternative view of the revenue for reduction of losses from Rs. 12,89,911 to Rs. 2,58,318 and I hold that, at the most, proportionate loss for one day i.e. 31-3-2000 can be attributed in the ratio of 1.54 per cent whereon the assessee's share got reduced to 1.54 per cent ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he claim of the assessee was rejected by the Assessing Officer on the ground that the provisions of section 67A of the Act were not applicable in the case of the assessee. According to the Assessing Officer, the words "Other than a company or a co-operative society or a society registered under the Societies Registration Act, 1860 (21 of 1860) or under any law corresponding to that Act in force in any part of India" in the parenthesis in section 67A(1) of the Act would relate to a member of an AOP or Body of Individuals (BOI) and not to AOP or BOI. Therefore, the Assessing Officer refused to set off the said loss against the other income of the assessee. On appeal, the order of the Assessing Officer was upheld by the CIT(A). 3. On further appeal, the Members constituting the Bench differed on the interpretation of the provisions of section 67A(1) of the Act. According to the learned Judicial Member, the words in the parenthesis in section 67A(1) of the Act relate to the member of AOP or BOI and not to the AOP/BOI. According to him, if the contention of the assessee is accepted it would give an absurd interpretation because BOI or AOP cannot be a company or a co-operative society o....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... so as to mean that a company or a co-operative society or society have been used with reference to the AOP or BOI. Accordingly, it was held by him that share of loss from the AOP should be set off in the hands of the assessee against other income computed under various heads. 5. In view of such difference of opinion, the Bench referred the question set out by me in para 1 of this order to the hon'ble President, Income-tax Appellate Tribunal under section 255(4) of the Act for nominating the Third Member. It is in this context that the hon'ble President, Income-tax Appellate Tribunal has nominated me to express my opinion on the question set out in para 1. 6. Both the parties have been heard at length. The learned counsel for the assessee has extensively argued in support of the contention that the words in parenthesis in section 67A(1) relate to AOP or BOI and not to member of an AOP or BOI. In brief, his submissions as set out in the written submissions are these : "(a)If the words in parenthesis were to regulate the word 'member' the positioning thereof would have been something like this: In computing the total income of an assessee, [other than a company or a co-operative s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....agreed with the legal submissions advanced by the learned counsel for the assessee but it was submitted by him that the share of the assessee in the AOP has not been found to be determinate and known and, therefore, the profit or loss can be considered in the hands of AOP itself and question of computing the loss of assessee in the said AOP does not arise and consequently, the setting off of the same would not arise. At this stage of hearing, it was brought to his notice that this aspect of the issue is not before me and consequently, there cannot be any adjudication on such issue. Further, it was observed that there was no dispute between the Members regarding the issue whether the shares of members of the AOP are determinate or known or not. Both the Members have proceeded on the basis that the AOP was such that shares of members were determinate and known. This is also apparent from the question itself set out in para 1. Accordingly, the learned DR was not permitted to advance his arguments in this behalf. However, it has been requested by him that his submissions may be placed on record. He has also given the written submissions. In the written submissions, he has agreed with t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....located to the assessee-company M/s. Mahindra Holdings & Finance Ltd. in either of the situations : (i )If the India Auto Ancillary Trust is a company (because Mahindra Holding has held shares of this entity) then as per the provisions of section 67A, the share of loss/profit cannot be passed on to the members. (ii)If the India Auto Ancillary Trust is actually a trust (and hence to be assessed as an AOP), then there is no determined or known share of profit or loss. Again as per the provisions of section 167B, the share of loss/profit cannot be passed on to the members. Share holding is not the share of profit or loss." 8. Rival submissions of the parties have been considered carefully. In view of the written submissions filed by the learned DR on behalf of the revenue, the controversy before me has become academic only. Still I feel that in the interest of justice, I should express my view without having influenced by the concession made on behalf of the revenue. 9. The issue before me relates to the interpretation of the provisions of section 67A of the Act. According to the learned Judicial Member, the words in the parenthesis qualify the words "the member of the AOP/BOI" wh....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... such association or body are indeterminate or unknown, tax shall be charged on the total income of the association or body at the maximum marginal rate : Provided that, where the total income of any member of such association or body is chargeable to tax at a rate which is higher than the maximum marginal rate, tax shall be charged on the total income of the association or body at such higher rate." All the above provisions are relevant in determining the income/loss of either AOP/BOI or of members of such AOP/BOI. The words in the parenthesis in all these provisions are identical and, therefore, in my view, the meaning given to the words in parenthesis in all these provisions must be the same unless the context indicates otherwise. Section 40(ba) provides certain disallowances in computing the income of AOP/BOI. However, such AOP/BOI excludes a company or a co-operative society or a society or other entities specified in the parenthesis. Section 167B(1) provides the rate of tax at which tax on the income of AOP/BOI is to be charged where shares of members of such AOP/BOI are undeterminate or unknown. However, the Legislature has excluded the company or a co-operative society or....
X X X X Extracts X X X X
X X X X Extracts X X X X
....or special order of the Board to be a company : Provided that such institution, association or body shall be deemed to be a company only for such assessment year or assessment years (whether commencing before the 1st day of April, 1971, or on or after that date) as may be specified in the declaration :]" The perusal of the above shows that, an association of persons whether incorporated or not can be declared by the Board as a company. Similarly an association or body as specified in sub-clause (iii) above is also treated as a company. This clearly shows that an association of persons can also be a company by virtue of the provisions contained in sub-clauses (ii) and (iii) of section 2(17) of the Act. Thus, the first question is to be answered in the affirmative by holding that the expression 'AOP' includes a company or a co-operative society or a society mentioned in the parenthesis. 11. Coming to the second question, it is seen that the purpose of section 67A is to determine the share of income/loss in the profits/losses of the AOP since such share is to be included in the income of the member of AOP for rate purposes as per the provisions of section 86 of the Act. However, in....