TaxTMI 
TaxTMI 
2007 (11) TMI 453
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....essee issued debentures (3rd and 4th series) in assessment years 1997-98 and 1998-99. As per the details on record, the assessee issued 13,30,382 zero per cent interest debentures on 30-6-1996, which were redeemed on 28-2-1998 by paying the redemption money of Rs. 40,01,460. The assessee has also issued 10 lakh zero interest debentures on 1-4-1997 out of which 5 lakh debentures were redeemed on 31-3-1998 by paying the redemption money of Rs. 75 lakhs. Thus, the total amount of Rs. 1,15,01,460 paid by the assessee on redemption of debentures was claimed as business expenditure. At this stage, it is mentioned that the debentures which were redeemed had been issued by the assessee to M/s. Ashburn Investments and Finance Ltd., which is an associated company of Essar Group. In the course of the assessment proceedings, it was found by the Assessing Officer that the amount raised on the issue of debentures was utilised to purchase 2,71,255 optionally convertible debentures of Rs. 100 each of Dwarka Holdings Pvt. Ltd. as well as 10 lakh fully convertible debentures of Rs. 100 each of Indsec Investments Ltd. The claim of the assessee for deduction as business expenditure was disallowed by t....
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....e." Aggrieved by the said order, the assessee as well as the revenue are in appeal before the Tribunal. The revenue has challenged the allowability of the deduction under section 37 of the Act while the assessee has challenged the direction given by the CIT(A). 4. The learned counsel for the assessee, Mr. Mehta, has submitted before us that the issue is covered by the decision of the Tribunal dated 4-6-2007 in assessee's own case for the assessment year 1997-98 wherein the order of the CIT(A) holding that the assessee was engaged in the business of holding long-term investment in shares, securities, etc., and consequently assessee was entitled to deduction in respect of redemption amount has been upheld. At this stage, the learned counsel for the assessee was informed by the Bench that recently the Tribunal has taken a view that even assuming that the assessee is engaged in the business of holding of investment in shares and securities, the deduction under section 36(1)(iii) on account of interest on borrowed funds would not be allowed since income from such business activity is either required to be computed under the head 'Capital gains' or under the head 'Income from other sou....
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.... by the Tribunal in the case of Kankhal Investment & Trading Co. (P.) Ltd., are distinguishable since in those cases, the Supreme Court was concerned with the issue whether a particular income was assessable under the head 'Profits and gains from business or profession' or under other heads and the question whether an expenditure is deductible under section 36 or 37 was not before the Court. (iii)That Legislature has provided statutory deduction even where there is no receipt. For example, under section 24 statutory deduction is allowable under the head 'Income from house property' even where house is self-occupied. Similarly deduction is allowable under section 35AC in respect of expenditure incurred in carrying out any eligible project even though there is no receipt from such project. Finally, it was concluded by submitting that deduction under section 37 be allowed for the entire amount of redemption money paid by the assessee and the directions given by the CIT(A) be vacated. 6. On the other hand, the learned DR has reiterated the stand of the Assessing Officer by submitting that no business activity was carried on by the assessee inasmuch as the investments in long-term as....
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....ng Officer at page 11 of his order. The computation of income prepared by the assessee has also been placed before us. Though the assessee has stated the head 'Income from business' yet income from sale of debentures has been shown as 'capital gains'. Therefore, the question is whether deduction under section 37 can be allowed even where income from business receipts is considered in computing the income under the head 'Capital gains' or under the head 'Income from other sources' and not under the head 'Profits and gains from business or profession'. 8. This very issue arose before the Tribunal in the case of Kankhal Investment & Trading Co. (P.) Ltd. (supra ) wherein it has been held that if the income from the business receipt is to be computed under a specific head and not under the head 'Profits and gains from business or profession', then deduction under sections 30 to 43D cannot be claimed. Instead thereof, only those deductions would be allowable as are prescribed under the specific head under which the receipts are to be considered. The relevant portion of the order of the Tribunal in the above case is extracted for the benefit of this order. "16. ... in our humble opinio....
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....rious heads 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 gains of business' under section 10, even though the securities are held by a banker as part of 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. [1961] 42 ITR 49 by observing as under : "Income-tax is undoubtedly levied on the total taxable income of the taxpayer and the tax 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....
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....he 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." In view of the above decision, the issue has to be decided against the assessee. The issue considered in the above case was not before the Tribunal in other cases relied upon by the assessee. The only question before the Tribunal in the cases relied upon by the assessee was whether the assessee was engaged in the business of holding investment or not. The question whether deduction under section 36 or 37 of the Act could be allowed even where income from such business was not computable under the head 'profits and gains from business or profession' was not before the Tribunal in the cases relied upon by the assessee. Therefore, the said decisions cannot be applied in the present case. 9. Now, we come to the submissions of the assessee's counsel challenging the correctness of the legal finding given by the Tribunal in th....
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.... is rejected." 10. The learned counsel for the assessee has challenged the above observations of the Tribunal by submitting that commercial or account- ing principles cannot be applied in computing the profits and gains of business while computing the income under the head 'Profits and gains from business or profession'. According to him, the existence of receipt may be necessary for computing the profits and gains of business as per the commercial or accounting principles but while computing the income under a statute, the existence of receipts is not the condition precedent. It is sufficient if there is nexus between the incurring of expenditure and the activities of the business carried on by the assessee. We are unable to accept such contention of the learned counsel for the assessee. The commercial principles have always been applied by the courts whenever a difficulty has arisen in computing the profits and gains of business under section 28 of the Act. There is long list of cases to support this proposition but we would refer to only a few of them. In the case of Chainrup Sampathram v. CIT [1953] 24 ITR 481 (SC), the question was whether opening and closing stock of the bus....
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....ere is no specific provision in law, whether it is admissible or not will depend on whether, having regard to the accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and be incidental to it. The loss for which the deduction is claimed must be one that springs directly from the carrying on the business, and not any loss sustained by the assessee even if it has some connection with his business. The approach essentially means the approach of a prudent businessman." In the case of Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 (SC), the Apex Court at page 173 held as under : "As the expression 'actual cost' has not been defined, it should, in our opinion, be construed in the sense which no commercial man would misunderstand. For this purpose it would be necessary to ascertain the connotation of the above expression in accordance with the normal rules of accountancy prevailing in commerce and industry." In view of the above decisions, it is clear that in the absence of statutory provisions, commercial principles have to be applied in determining the profits and losses of the business. Accordingly, we do not find merit....
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....he expenditure and the business carried on by the assessee. Hence, deduction was held not allowable. Consequently, this decision cannot be applied where receipts are not to be computed under the head 'Profits and gains from business or profession'. In view of the above discussion, it is held that reliance placed by the assessee's counsel on the above decision is misplaced. 12. The next submission of the learned counsel for the assessee is that judgments of the Supreme Court in the case of United Commercial Bank Ltd. (supra) as well as in the case of East India Housing & Land Development Trust Ltd. (supra), are authority only for the proposition that if a particular income is assessable under a particular head then such income must be assessed under that very head but such judgments do not decide as to under which section deduction is to be claimed. We are unable to accept this submision. In our opinion, computation of income includes consideration of receipt as well as expenditure under that head. It would be absurd to contend that receipts are to be considered under the head 'Capital gains' and the expenditure incurred would be considered under the head 'Profits and gains from bu....
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....n the earlier part of the order. 15. Before parting with this order it would also be appropriate to refer para 21 of the order in the case of Kankhal Investments & Trading Co. (P.) Ltd. (supra) so as to avoid any other dispute on this issue : "21. Another contention of the ld. 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 as a loss, the assessee shall be entitled to have the amount of such loss set off against his income from any other source u....