TaxTMI 
TaxTMI 
2016 (6) TMI 1292
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....ear 2007-08, the Hon. Income Tax Appellate Tribunal held that such lease rent received is to be assessed under the head "Income from other sources". Further, the Hon. Bench directed the Assessing Officer to allow expenses as per section 57 of the I.T. Act. The order of the Hon. Bench of ITAT is being contested in the Hon'ble High Court of Kerala. 2. The learned CIT(Appeals) erred in not allowing expenditure towards professional charges amounting to Rs. 18,21,609/-. It is submitted that the expenditure is incurred during the normal course of business and hence is to be treated as allowable business expenditure. It is further submitted that if the lease rent income is treated as "income from other sources" the above expenditure is allowable as per section 57 of the I.T. Act. 3. The learned CIT(Appeals) erred in disallowing interest expenditure of Rs. 6,46,25,550/- by holding the same to have been incurred for loans taken for investment in subsidiary company doing hospital business for earning income and hence the expenses incurred in the nature of interest was on account of business expediency and is to be treated as an allowable business expenditure It is further submitted tha....
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....) Apollo will operate plant on an irrecoverable lease of eight years in consideration of lease rental of Rs. 45.50 crores for 8 years; b) Entire production to be sold in brand name of Apollo; c) Apollo to invest for modernization and expansion of plant d) No retrenchment of employees of plant; e) VRS for employees of sale office and head office. 5. Pursuant to the above, according to the appellant for the period 1/4/1995 to 31/3/2003, the plant was under joint operation of Apollo and appellant. Under the arrangement, appellant received a sum of Rs. 5.65 crores annually; and apart from above, all expenses incurred for operating the plant were reimbursed by Apollo. It has been stated that after the expiry of 8 years the aforesaid arrangement had been renewed under various agreements, as stated hereinunder: i) Agreement dated 30/06/2006 Period 1.4.2003 to 31/03/2004 Lease rent per year Rs. 5.75 crores. ii) Agreement dated 20.7.2004 Period 1.4.2004 to 31.3.2005 Lease rent per year Rs. 7.50 crores; iii) Agreement dated 1.5.2006 Period 1.4.2005 to 31.3.2006 Lease rent per year Rs. 10 crores; iv) Agreement dated 22/05/2006 Period 1.4.2006 to 31.3.2010 Lease rent per ....
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.... the income as income from other sources is based on factually incorrect, legally misconceived assumptions apart from being based on contradictory findings and conclusions. 7.1 As regards the factually incorrect findings, it was contended that, Assessing Officer has erred in holding that there were no joint operations in running the plant. It was submitted that preamble to the agreement read with clause 6 clearly establishes that there were joint operations carried out by the appellant company and Apollo. It was stated that in the instant year appellant in the course of joint operation incurred expenditure aggregating to Rs. 35.14 crores under the following heads which has been reimbursed by the Apollo: Sr. No. Particulars Amount (Rs. In lacs) I EMPLOYEES i) Salaries, wages and bonus 2,345.76 ii) Contribution to Provident and other funds 183.5 iii) Welfare Expenses 17.98 iv) Gratuity 138.93 v) Leave Encashment Provision Nil II MANUFACTURING ADMINISTRATIVE AND SELLING vi) Power and fuel consumption 807.20 vii) St....
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....eciation of Rs. 9,05,673/-, rates and taxes of Rs. 7,37,564/-, insurance of Rs. 9,31,398/- and rend paid of Rs. 7,06,750/- under section 57(iii) of the Act though total expenditure incurred was of Rs. 212.62 lacs (apart from depreciation of Rs. 9.464 lacs). 7.4 The next submission of the appellant was that arrangement to operate the plant in a joint manner and not merely enjoy the fruits of ownership of assets and therefore such income was business income. It was submitted that risks relating to the appellant's part of the arrangement belong to the appellant. The appellant has to ensure compliance of all the laws relating to the labour employed , such as labour protection, PF etc. it was emphasized that in case a workmen is injured in the plant, the responsibility towards the same would be that of the appellant and not Apollo. Similarly, the risk of operating the plant also belongs to the appellant. Reference was made to the fact that the plant has been insured in the name of the appellant. Accordingly, it was stated that the activity carried out by the appellant is in the nature of business activity and not mere letting of an asset. 7.5 It was submitted that it is not a case of....
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....vs. Mysore Wine Products Ltd. 370 ITR 102 (Kar) ii) PHF Mall 86 Retail Management Ltd. v. ITO 110 ITD 337 (Kol) iii) Gesco Corporation Ltd. v. AcIT 31 SOT 132 (Mi) iv) CIT v. Goel Builders 331 ITR 344 (All) v) Bhagyanagar Construction (P) Ltd. v. ITO 99 ITD 18 (Hyd) vi) ITO v. Sheetal Khurana Food (P) Ltd. 115 ITD 47 (Asr) vii) CIT v. Allahabad Milling Co. (P) Ltd. 195 ITR 325 (All) 7.6 Our attention was also drawn to concept of wet lease v. dry lease in rte context of leasing of ships. It was submitted that in case of a dry lease, the lessor only leases the equipment to the lessee without any additional facility. As against this, a wet lease is a lease in which apart from the equipment, the lessor also provides the staff for operation of the equipment; and is responsible for its repair and maintenance, insurance, etc. It was submitted that Internationally, in the former case, the payment made to the lessor is generally regarded as payment for "use of equipment" and hence, treated as royalty, whereas in the latter case, the income is generally regarded as a profit from shipping activity and hence, covered under Article 8 of the DTAA, which deals with business inc....
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....s that the company's operations predominantly comprises of only one segment - income from lease of plant of Apollo. It was contended that the requirements of the Companies Act are not to be applied as such while computing the income under the I.T. Act. It was stated that disclosure in the financial statement as "other income" or there is one segment of the assessee is an irrelevant consideration. Reliance was placed on the following judgments: i) CIT v. Arvind Kumar jain 205 Taxman 44 (Del) (Mag) ii) Kedarnath Jute Mfg. co. Ltd. 82 ITR 363 (SC) iii) Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT 227 ITR 172 (SC) iv) CIT vs. Idhayam Publications Ltd. 285 ITR 221 (Mad) 7.11 It was submitted that the authorities below had relied on the order of Tribunal for AY 2004-05 which was based upon the order of Tribunal in I.T.A. No.659/coch/2010 for AY 2007-08. It was submitted that in order u/s. 254(2) of the Act dated 20/07/2012 in M.P. No. 48/Coch/2010, the Tribunal has clarified that "the ld. DR pointed out that the Tribunal did not consider other facts such as expenses, sales tax registration etc. while addressing the question and has taken the decision by considerin....
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....ium with other capitalized cost is amortized over a period of 90 years. Monthly lease rental, lighting expenses, water charges etc. are debited as revenue expenditure." 7.12 The Ld. Counsel further submitted that appellant had vide postal resolution dated 17/05/2005 amended object clause of its Memorandum of Association to, inter alia, include the activity of running of hospitals, diagnostic centres, pathological laboratories, medical research, medical education, drug manufacture and setting up facilities for providing all kinds of medical and health services in its objects. In pursuance of the said object, it was submitted that the appellant had inter-alia set up two wholly owned subsidiaries for development of health care business as under: i) Artemis Health Services Limited; and ii) Artemis Medicare Services Limited 7.13 It was submitted that for said purpose, the appellant had taken loan of Rs. 49.80 crores in respect of which during the year it has incurred interest expense of Rs. 646.26 Lacs, which was claimed as deduction by the appellant while computing its income. It was submitted that appellant has incorporated the said two wholly owned subsidiary companies with ....
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....siness income as opposed to "income from other sources". 7.17 The Ld. CIT DR however submitted that the issue is squarely covered by the orders of Tribunal for earlier years and therefore the contention raised by the ld. Counsel are not maintainable. 7.18 As regards the factual submission it was stated that the matter requires verification. The ld. Counsel for the appellant opposed the aforesaid prayer and highlighted from the order of assessment that during the proceedings complete books of account and records had been produced and examined on random and test-check basis. Further it was submitted that details of all expenses were also furnished as has been admitted by the Assessing Officer when he held as under: "On verification of the profit and loss of the assessee, it was seen that assessee has incurred expenses for manufacturing, depreciation and bank charges. Further verification of manufacturing and other expenses, it was seen that major costs on account of manufacturing, administration and selling were reimbursed by Apollo Tyres Ltd. only Rs. 1,66,02,355/- was claimed by the assessee as its expenditure. The breakup of these expenditure were collected and verified." 8.....
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....as income from business. The cases relied upon by the assessee such as 20 ITR 451, 169 ITR 597, 195 ITR 3525, 138 ITR 18, 116 ITR 781, 266 ITR 106, 166 ITR 211, 211 ITR 370, 164 ITR 288 and 237 ITR 454 (mentioned in para 16 of this order) support the case of the assessee. In all these cases, the Hon'ble Supreme Court and various High Courts held that rental income received for a limited period by way of letting out plant and machinery because the assessee was unable to operate on account of some difficulties either obtaining the new materials or financial difficulties, etc., then that income has to be treated as income from business. The only limitation is that the assessee should have the present intention to revive the industry/activity in a future date when the difficulties ceased to exist or the assessee is in a position to overcome the difficulties. 21. From the facts stated as above, there is nothing on record to show that the assessee had no present intention to revive its business at an appropriate time. Therefore, this issue is decided against the revenue and in favour of the assessee." 8.3 From the aforesaid it is apparent that income under the arrangement with Apoll....
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....is taxable as business income and for A.Ys 2004-05 to 2009-10, it is taxable as income from other sources. 8.5 The Assessing Officer has also relied upon the order of the Tribunal for AY 2004-05 to arrive at the conclusion that in the instant year income of Rs. 25 crores is taxable as income from other sources. The order of the Tribunal dated 21.12.2012 for AY 2004-05 holds as under: "5. Admittedly the original lease period had expired by the year ending 31.3.2003 and for the year under consideration, a new lease rent agreement has been entered. The issue whether the lease rent is assessable under the head income from business or income from other sources was considered by this bench in the assessee's own case in I.T.A. No.659/coch/2010 relating to the assessment year 2007-08, and this Bench has taken a view that the assessee has not proved its claim that it is taking steps to revive the business. The observations made by this Tribunal are extracted below for the sake of convenience: "6. We have heard the rival contentions and carefully perused the material on record. There cannot be any dispute that the question whether the assessee is having an intention to revive its busin....
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....ing the fact of time gap only, which is not correct. Since this Tribunal is dealing with the miscellaneous petition u/s. 254(2) of the Act, we are of the view that such new factors cannot be considered at this stage. Accordingly, we do not find any merit in the contentions of the assessee on this issue." 8.8 In the light of the above, the Ld. AR submitted that the precedent relied upon by the authorities below to negate the claim of the appellant did not consider the other facts such as expenses, sales tax registration etc. while determining the head for taxability of income received from Apollo and, has taken the decision by considering the fact of time gap, only. It was also highlighted that even the fact of time gap cannot be seen in isolation and, Tribunal itself in order for AY 2007-08 has held that intention to revive business activity is a question of fact and is required to be considered every year on the basis of facts and circumstances prevailing in that year. 8.9. To examine the above contentions, we take note that, for the instant year, assessee received lease rent of Rs. 25,00,00,000/- and incurred expenditure aggregating to Rs. 35.14 crores under the following head....
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....TL to enhance the lease rental and security deposit with effect from 1st October, 2007 which ATL has agreed." 8.11 The obligation of the appellant under the arrangement had been provided in clause 6 of the agreement which stipulates as under: "6 In addition to payment of lease rental as aforesaid, ATL will reimburse to PTL actual expenses on account of the following also: a) Power of fuel b) Store and spares c) Repair and maintenance d) Personnel cost e) Expenses under any other head relatable to production manufacture of tyres/tubes." 8.12 It was specifically also agreed that appellant was responsible for compliance of all other statutory rules/regulations including labor, welfare, legislations pertaining to the employees/workmen employed by it and engaged in the manufacturing activities at the plant of PTL. It is a matter of record and undisputed that risk relating to operation of plant is also with appellant. 8.13 Thus having regard to the aforesaid factual position we are of the considered opinion that appellant is engaged in commercial exploitation of assets of the plant by way of operating the plant for manufacture of tyres for Apollo. There is no sale of....
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....the heads bad debts, advertisements, salaries, etc. incurred in the course of business of the appellant company. However, the Assessing Officer in the preceding year namely assessment year 2009-10, has allowed only expenditure incurred under the head depreciation of Rs. 9,05,673/-, rates and taxes of Rs. 7,37,564/-, insurance of Rs. 9,31,398/- and rent paid of Rs. 7,06,750/- u/s. 57(iii) of the Act. Thus, Assessing Officer himself has made a departure by allowing expenditure in the instant year which has been incurred wholly and exclusively for business of the appellant company. 8.15 Furthermore, even judicially speaking the Apex Court vide judgment rendered on 11.8.2016 in the case of Rayala Corporation (P) Ltd. vs. ACIT 386 ITR 500 held where a company had only one business i.e. leasing of property and earning rent therefrom that even if letting of property is not main business as per Memorandum of Association such income should be assessed as business income and not house property. In arriving at the above conclusion, the Hon'ble Apex Court followed the judgment dated 9.4.2015 of Chennai Properties and Investments Ltd. vs. CIT 373 ITR 673 (SC) wherein it was held that if an ass....
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....refore, submitted that the impugned judgment is just legal and proper and therefore, these appeals should be dismissed. 9. Upon hearing the learned counsel and going through the judgments cited by the ld. Counsel, we are of the view that the law laid down by this Court in the case of Chennai Properties (supra) shows the correct position of law and looking at the facts of the case in question, the case on hand is squarely covered by the said judgment. 10. Submissions made by the learned counsel appearing for the Revenue is to the effect that the rent should be the main source of income or the purpose for which the company is incorporated should be to earn income from rent, so as to make the rental income to be the income taxable under the head "Profits and Gains of Business or Profession". It is an admitted fact in the instant case that the assessee company has only one business and that is of leasing its property and earning rent therefrom. Thus, even on the factual aspect, we do not find any substance in what has been submitted by the learned counsel appearing for the Revenue. 11. the judgment relied upon by the learned counsel appearing for the as squarely covers the fac....
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....(P) Ltd. (supra) and Chennai Properties and Investments Ltd. (supra) which are subsequent to the decisions of Tribunal holding income to be income from other sources, the income from arrangement with Apollo is business income. 8.21 Moreover it is also seen that the Assessing Officer has invoked section 56(2)(ii) of the Act and not section 22 of the Act which reads as under: "56(2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head "Income from other sources", namely: - (ii) income from machinery, plant or furniture belonging to the assessee and let on hire, if the income is not chargeable to income-tax under the head "Profits and gains of business or profession". 8.22 Section 56 of the Act being the residuary head of income under the frame work of the Act, can be resorted to only if an income is not chargeable under any other specific head of income. Section 56 of the Act which comes into play only if all other heads of income are excluded specifically. 8.23 The Apex Court has delved upon the issue in series of judgments. In the case of CEPT v. Shri Lakshmi ....
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....to part with the assets, but to lease it out for a temporary period as a part of exploitation, it could not be said that no business was carried on and the income derived by the Company from letting out the machinery was only rental income. There was never any act indicating that the company never intended to carry on the business in the future. Also in the case of CIT v. Mysore Wine Products Ltd. 370 ITR 102 (Kar), it was concluded as under: "In such circumstances, the income derived by way of lease rent from the letting out of its assets was assessable to tax under the head "Profit and gains of business". Whether a particular income is income from business or from investment must be decided according to the general commonsense view of those who deal with those matters in the particular circumstances and the conduct of the parties concerned." In the above judgment it was noted that the Apex Court in the case of S.G. Mercantile Corpn. (P) Ltd. v. CIT has held that, the residuary head of income can be resorted to only if none of the specific heads is applicable to the income in question; it comes into operation only after the preceding heads are excluded. 8.25 In light of the a....
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....ch a case. That in fact, is the effect of the decision of this court in the Amalgamated Coalfields Ltd. and Anr. V. the Janapada Sabha, Chhindwara (1963) supp. 1 SCR 172. In our opinion, the said general observations must be read in the light of the import fact that the order which was challenged in the second writ petition was in relation to a different period and not for the same period as was covered by the earlier petition." But as far as a challenge to the same assessment order is concerned, it was held:- "that if constructive res judicata is not applied to such proceedings a party can file as many writ petitions as he likes and take one or two points every time. That clearly is opposed to considerations of public policy on which res judicata is based and would mean harassment and hardship to the opponent. Besides, if such a course is allowed to be adopted, the doctrine of finality of judgments pronounced by this Court would also be materially effected. We are, therefore, satisfied that the second writ petition filed by the appellant in the present case is barred by constructive res judicata." 8.28 sIt was finally concluded as under: "15. The decisions cited above have....
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....aspect of the matter. Though the appellant had relied on the Memorandum in support of its contention that it was carrying out business by letting out the property, however, neither the Assessing Officer nor the Tribunal, which had recorded the submission of the appellant in paragraph 2 of its order had considered the issue at all from that angle. Since the CIT(A) while allowing the appeal of the appellant had referred to the Memorandum, it was incumbent on the part of the Tribunal to deal with the said Memorandum instead of denying deduction on the ground that the assessee in the preceding years throughout had declared the rental income under the head "Income from house property". Though in Bharat Sanchar Nigam Ltd. (supra) it was held that "the courts will generally adopt an earlier pronouncement of the law or a conclusion of fact unless there is a new ground urged or a material change in the factual position" (paragraph 20) and though as evident from the "order" in Shambhu Investments (P) Ltd. 9supra) wherein it was held that "what has to be seen in what was the primary object of the assessee while exploiting the property", however neither the Assessing Officer nor the Tribunal h....
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....cy. The learned Assessing Officer denied the same on the ground that expenditure has not been incurred to earn any income and related to subsidiary company. The CIT(A) sustained the same by holding as under: "1.3 It has been held by the Assessing Officer that expenses are related to subsidiary companies, the claim for business expenditure in the assessee's hands is not allowable. It seems that Assessing Officer has quite appropriately appreciated the facts that the subsidiary company is a separate taxable entity having its own Permanent Account Number; any expenditure incurred on behalf of the subsidiary company cannot be treated as a business expenditure in the hands of the holding company. Otherwise also, the appellant company has no income under the head Business and profession as their only source of income has been the rental income from leasing out the Plant and Machinery, which has been held as 'Income from Other Sources'. In such a case, expenses relating to business would not be allowable." 11. Before us the ld. Counsel for assessee has contended that both the agreements in the case of M/s. Vrinda Software Pvt. Ltd. and in the case of M/s. Mednet Asia Ltd. provide for....
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....hd) x) CIT vs. Orient Beverages Ltd. 203 ITR 559 (Cal) xi) Richardson Hindustan Ltd. vs. CIT 169 ITR 516 (Bom) xii) DCIT vs. Sir Sobha Singh & Sons (P) Ltd. 41 taxmann com 378 (Del) 11.1 It was therefore prayed that disallowance made of Rs. 18.22 lacs may kindly be deleted. 12. We have considered the rival submissions and perused the material on record and orders passed by the authorities below. As regards Vrinda Software (P) Ltd. is concerned, expenditure has been incurred for providing Information Technology (IT) services to the company and is thus business expenditure of the appellant company allowable u/s. 37(1) of the Act. So far as for providing consultancy by Mednet Asia is concerned it is noted that Assessing Officer has allowed expenditure of Rs. 1,19,846/- which was incurred towards reimbursement of expenditure incurred by Mednet Asia. No doubt, the services of Mednet Asia had been engaged by appellant in respect of business of the subsidiary, yet the same is allowable on account of commercial expediency. In the case of CIT vs. M/s. Holeim India (P) Ltd. 272 CTR 282 facts were that assessee was a subsidiary of Holderind Investments Ltd., Mauritius formed as a ....
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....he investment made. The genuineness of the said expenditure and the fact that it was incurred for business activities was not doubted by the Assessing Officer and has also not been doubted by the CIT(A)". 13. Having regard to the above disallowance made and sustained is deleted. Ground raised is allowed. 14. Ground No. 3 relates to disallowance of expenditure of Rs. 6,46,25,550/- incurred towards interest paid on loans raised for investment in subsidiary company. 15. The Assessing Officer held that verification of the balance sheet revealed that assessee has investment amounting to Rs. 80,84,64,000/- as on 31/03/2010 and assessee loan liability is only Rs. 49,80,05,000/- which indicates that the entire interest liability was on account of its investment in subsidiary companies. He therefore concluded that interest expenditure amounting to Rs. 6,46,25,550/- cannot be allowed u/s. 57 of the Act. The disallowance was also held to be in order as per section 14A of the Act. The disallowance was also held to be in order as per section 14a of the Act. The CIT(A) however sustained the disallowance by invoking section 14A of the Act on the following basis: "2.2 During the course of ap....
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....s under: "Section 14A provides for disallowance of expenditure in relating to income not 'includible' in total income. A controversy has arisen in certain cases as to whether disallowance can be made by invoking section 14A even in those cases where no income has been earned by an assessee which has been claimed as exempt during the financial year. It is clarified that rule 6D read with section 14A provides for disallowance of the expenditure even where taxpayer in a particular year has not earned any exempt income." In view of this, it is held that the Assessing Officer has rightly invoked the provisions of section 14A and worked out the difference. Accordingly, the addition made by the Assessing Officer is upheld and appeal on this ground is dismissed." 16. Before us the learned counsel contended that no disallowance under section 14A is valid as there is no income earned during the instant year and therefore, disallowance made is absolutely untenable. Reliance was also placed on the following judgments: i) CIT vs. Holcim India (P) Ltd. 272 CTR 282 (Del) ii) Cheminvest Ltd. vs. CIT 378 ITR 33 (Del) iii) CIT vs. Corretch Energy (P) Ltd. 111 DTR 146 (Guj) iv) CIT....
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....e business expenditure it is sufficient if nexus between expenditure and purpose of business is established, even though it is not the assessee's own business. It was further submitted that Assessing Officer was further not justified to deny the claim of deduction u/s. 57(iii) of the Act on the ground that appellant does not have any income from shares, which is also contrary to the judgment of Apex Court in the case of CIT vs. Rajendra Prasad Moody 115 ITR 519. Reliance was also placed on the following judgments: i) S.A. Builders Ltd. vs. CiT 288 ITR 1 (SC) ii) Hero Cycles (P) Ltd. vs. CIT 379 ITR 347 (SC)) 16.3 It was therefore prayed that the disallowance made may kindly be deleted. 17. We have considered the rival submissions and perused the material on record and orders passed by the authorities below. It is undisputed that there is no income declared and claimed as exempt by the appellant. The investments held are sums invested in wholly owned subsidiary company, as part of controlling interest of appellant company. The Delhi High Court in the case of Joint Investment Pvt. Ltd. vs. CIT (supra), has held that disallowance u/s. 14A cannot exceed the amount of exempt inc....
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.... the present case, admittedly the assessee did not make assessment year claim for exemption. In such a situation section 14A could have no application." dismiss iii) CIT vs. M/s. Shivam Motors (P) Ltd. 111 DTR 153 (All) "10 As regards the second question, s. 14A of the Act provides that for the purpose of computing the total income under the chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. Hence, what s. 14A provides is that if there is any expenditure which is incurred for earning the income is not an allowable deduction. For the year in question, the finding of fact is that the assessee had not earned any tax-free income. Hence, in the absence of any tax-free income, the corresponding expenditure could not be worked out for disallowance. The view of the CIT(A), which has been affirmed by the Tribunal, hence does not give rise to any substantial question of law. Hence, the deletion of the disallowance of R.2,03,752 made by the Assessing Officer was in order" iv) CIT vs. Delite Enterprises ITA No. 110/2009 (Bom) Revenue is in appeal on the following ....
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.... no application." 17.1 The issue as to allowability of business expenditure as interest free loan is also well settled. In the case of S.A. Builders vs. CIT(A) 288 ITR 1 (SC) facet were that the assessee had advanced huge amounts as interest free loans out of its cash credit account in which there was a huge debit balance. The Assessing Officer disallowed the proportionate interest relating to said amount out of total income paid to bank, holding that the assessee had diverted its borrowed funds to its sister concern without charging any interest. The CIT(A) accepted partial claim of the assessee on ground that out of total amount advanced by the assessee only certain sum had a clear nexus with borrowed funds, as balance amount had been paid out of receipts from other parties to whom no interest had been paid. However, on cross appeals, the Tribunal allowed the revenue's appeal. On the assessee's appeal , the High Court held that order of the Tribunal did not suffer from any factual or legal infirmity, as the amount in question had been advanced by the assessee to it sister concern out of overdraft account in which there was already a huge debit balance. The Hon'ble Supreme Court....
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.... 286 ITR 1/156 Taxman 257 (Punj. & Har.). On that basis, it has held that when loans were taken from the banks at which interest was paid for the purposes of business, the interest thereon could not be claimed as business expenditure. 11. We are of the opinion that such an approach is clearly faulty in law and cannot be countenanced. 12. Insofar as loans to the sister concern/subsidiary company are concerned, law in this behalf is recapitulated by this Court in the case of S.A. Builders Ltd. vs. CIT(Appeals) (2007) 288 ITR 1/158 Taxman 74. After taking note of and discussing on the scope of commercial expediency, the Court summed up the legal position in the following manner: "26 The expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency. 27 No doubt, as held in Madhav Prasad Jatia v. CIT (1979) (118 ITR 200) (SC), if the borrowed amount was donated for some sentimental or personal reasons and no....
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....diency in view of the undertaking given to the financial institutions by the assessee to the effect that it would provide additional margin to M/s. Hero Fibres Limited to meet the working capital for meeting any cash losses". 17.3 Further in case of CIT vs. Srishti Securities Ltd. 321 ITR 498 (Bom) facts were that assessee company had borrowed funds which were utilized in its business of acquiring shares by way of investment as well as by way of stock-in-trade. It paid interest on borrowed funds and claimed deduction thereof u/s. 36(1)(iii). The Assessing Officer disallowed the entire amount of interest paid on the ground that the object of acquiring shares was not to earn dividend but to acquire a controlling interest in the company. The CIT(A) divided the interest between investment and stock-in-trade on a pro rata basis and held that the assessee was entitled to deduction of interest to the extent borrowed funds were used for acquiring shares by way of stock-in-trade. The Tribunal deleted the disallowance made by the Commisioner(Appeals). The Hon'ble High Court held that interest, which was disallowed to the extent of investment would have to be allowed. It was held therein as....
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....of this Court in CIT vs. Lokhandawala (supra) had addressed itself to this issue. Reliance was placed on India Cements Ltd. vs. CIT (1966) 60 ITR 52 (SC) which was u/s. 10(2)(3) of the Income Tax Act, 1922 which corresponds to section 36(1)(3) of the present Act. This court answered the issue in the following manner: "That, while adjudicating the claim for deduction u/s. 36(1)(iii) of the Act, the nature of the expense - whether the expense was on capital account or revenue account - was irrelevant as the section itself says that interest paid by the assessee on the capital borrowed by the assessee was an item of deduction. That the utilization of the capita was irrelevant for the purpose of adjudicating the claim for deduction u/s. 36(1)(iii) of the Act. (see the judgment of the Bombay High Court in the case of Calico Dying and Printing Works vs. CIT (1958) 34 ITR 265). In that judgment, it has been laid down that where an assessee's claims deduction of interest paid on capital borrowed , all that the assessee had to show was that the capital which was borrowed was used for business purpose in the relevant year of account and it did not matter whether the capital was borrowed i....
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....respect of capital borrowed which has been explained by the Supreme Court in the cases of india Cements Ltd. vs. CIT (1966) 60 ITR 52 and State of Madras vs. GJ. Coelhi (1964) 53 ITR 186." 9. Considering these judgments and the test that the object of the loan is irrelevant, the interest which was disallowed to the extent of investment will have to be allowed as held by the Tribunal." 17.4 Following the aforesaid judicial precedents, it is held that expenditure claimed is eligible business expenditure u/s. 36(1)(iii) of the Act. Therefore, disallowance made and sustained is deleted. Ground raised by the assessee is allowed. 18. Ground No. 4 relate to disallowance of Rs. 9,45,69,750/- incurred by way of gift of equity shares of Artemis Health Sciences ltd. ('AHSL), a wholly owned subsidiary company to CEO of AhSl. 19. The facts in brief are that in the assessment year 2010-11, 15,75,500 shares of the wholly owned subsidiary company viz. Artemis Health Sciences Ltd. (AHSL) were gifted to Dr. Kushagra Katariya for his contribution in setting up a super specialty hospital under its subsidiary Artemis Medicare Services Ltd. (AMSL). The shares have been gifted by the assessee to D....
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....nditure incurred was incidental to business and had been incurred by the trader in his capacity as a trader Commercial expediency is the basic pre requisite for deduction of any expenditure, assessee claims that the impugned amount was spent on account of the business interest of the large business group of companies -Apollo group. Assessee cites the decision of the S.A. Builders vs. CIT 288 ITR 1 in support of the argument. The matter was already discussed. The question decided by the court is that whether the expenses were out of commercial expediency. Here the question is entirely different, the issue is allowabililty of expenditure in the hands of the assessee. The question of the commercial expediency or not arise only when the expenditure has incurred by the assessee. There is nothing on record to prove that there was a commercial expediency for the assessee The expenses were requirement of third party. If assessee argument is accepted, the distinction between companies will be lost. It will have far reaching impact in the tax avoidance schemes. Any company can incur any expenses of any of the subsidiaries or parent company and claim that it is out of commercial expediency. T....
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....ofession, and only income is the income from 'Other Sources'. Till date, the appellant's income has been treated as income from other sources'; there is no question of allowing any business expenditure u/s. 37 of the IT Act. As a matter of fact, there is no income from business or profession, and only income is the income from 'Other Sources', then, in such a case, no question of deductibility of business expenditure u/s. 37 arises, because, the income has not been computed under chapter IVD of the Act." 22. Before us the learned Counsel for assessee has contended that once the lease income is held to be "income from business" then the basis adopted by the learned CIT(A) ceases to exist and therefore expenditure incurred is an allowable expenditure. He emphasized that Assessing Officer accepted commercial expediency of subsidiary and CIT(A) accepted commercial expediency of assessee but did not allow on the ground that there is no income from business. It was submitted that once income is held as business income it is allowable as business expenditure. It was further submitted that even assuming income is from other sources then too the CIT(A) was not justified to deny claim o....
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....hat AHSL does not have its own business premises, in fact has no physical presence; and appellant is the parent company and is the alter ego of AHSL. It was submitted that, AHSL is a mere instrumentality of its parent company. Reference was drawn information annexed with the annual report for the instant year. It was further submitted that AMSL is 100% owned subsidiary of AHSL and has been incorporated on 18/05/2004 as a private limited company and has been subsequently converted into a public limited company on 05/10/2009. It was submitted that AMSL is a step down subsidiary of appellant is running a super specialty hospital with 216 beds in Gurgaon by name of "Artemis Health institute" and has been accredited by NABH (National Accreditation Board of Hospitals 85 Healthcare). Reference was drawn to information regarding the assets, liabilities as well as turnover and profits of the hospital company has been annexed to the Annual Report of the assessee as required u/s. 212(8) of the companies Act, 1956. It was submitted that Dr. Katariya has been associated with the appellant company for development of the health care business and setting up of the super specialty hospital which de....
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....e and means practically anything which is an occupation as distinguished from a pleasure". It was submitted that the systematic and organized activity of the assessee in promotion and running of AHSL and AMSL constitutes business of the assessee company. In support of this proposition, reliance was placed on the following precedents: i) 6 ITR 765 (SC) Narain Swadeshi Weaving Mills v CEPT ii) ) 34 ITR 368 (SC) Mazagaon Dock Ltd. vs. CIT iii) Mazagaon Dock Ltd. v. CIT iv) Addl. CIT vs. Ram Kripal Tripathi (1980) 125 ITR 408 (10 (All.) v) 101 ITR 234 (SC) Lok Shikshana Trust vs. CIT vi) 308 ITR 251 (Raj.) Cit vs. Hycon India Ltd. 22.3 It was submitted that so far as the nature of the expenditure in question is concerned, it was submitted that the expenditure in question is revenue in nature in as much as it is connected with the conduct of healthcare business. It was submitted that Dr. Katariya has been rendering services to the hospital company and the shares in question have been gifted to him in lieu of his services by way of addition to the wages/salary. It was submitted that expenditure cannot be construed as personal expenses of the parent company or any of th....
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....he above discussion it was submitted that appellant company has been carrying out a regular business activity of promoting, controlling, managing, and operating the AHSL project and the amount of INR 945.69 lacs is the trading loss under section 28(i) of the Act incurred in this business. 22.6 Alternatively, without prejudice to the aforesaid submissions, it was submitted that the issue of deduction of the impugned amount of INR 945.69 lacs from another angle, namely deduction u/s. 37(1) of the Act. The expression "for the purpose of the business" is wider in scope than the expression "for the purposes of earning profits" as used in section 57(iii) of the Act. It may take in not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery. It was submitted that it may comprehend in a wide variety of measures to enhance the profitability of the business and enable to run it more efficiently and effectively; but expenditure incurred must be incidental to business and should have incurred by the trader in his capacity as a trader. It was submitted that commercial expediency is the basic pre requisite for deduction of ....
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.... (Chennai-Trib.) ACIt vs. Murgappa Management Services Ltd. 22.8 It was submitted that facet of issue involving the relationship of parent company and wholly owned subsidiary can be considered from two different angles. First, whether in the facts and circumstances of the present case it can e said that business of the wholly owned subsidiary being run under the control of the parent company can be treated as business of the parent company for the purposes of the section 37(1) and, second, without prejudice to the stand taken by the assessee on the first question, whether in the facts and the circumstances of the case as elucidated hereinbefore, it can be said that the expenditure in question is covered under the phraseology "for the purpose of the business" used in section 37(1) and whether the expenditure is governed by consideration of commercial expediency. 22.9 It was submitted that Dr. katariya is on deputation with hospital company as Chief Executive Officer of AMSL. It was submitted that AMSL is the 100% owned subsidiary of AHSL; and thus, AMSL is the step-down subsidiary of appellant company. It was submitted that the question whether the health care business of AHSL ca....
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....eil on corporate personality even though not lifted sometimes is becoming more and more transparent in modern company jurisprudence. Theghost of Salomon's case (1897 AC 22) still visits frequently the hounds of Company Law but the veil has been pierced in many cases. Some of these have been noted by Justice P.B. Mukharji in the New Jurisprudence. (Tagore law Lecture 183) 22.11 It was submitted that the aforesaid decision rendered by the Apex Court of India lends direct support to the case of the assessee. The power plant of Renusagar which is wholly owned subsidiary of Hindalco has been held by the Supreme Court as belonging to Hindalco the parent company mainly on the ground that the instant case of appellant are on much stronger ground inas much as appellant the parent company is the directing mind and head of the subsidiary which has no physical presence of its own. It was submitted that Supreme Court has referred to various decisions of the House of Lords and observed that overriding consideration of justice and reason would justify piercing of the corporate veil and the Salomon reported in 86 Co Ltd. 1897 AC 22 taking a rigid view on the issue of distinctive and separate iden....
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....nal in view of previous cases, felt it necessary to decide as he did. But now that the matter has been fully discussed in this court, we must decide differently from him. These companies as a group are entitled to compensation not only for the value of the land but also compensation for disturbance. I would allow the appeal accordingly." Lord Justice Goff proceeded with caution and observed as follows at pages 468 and 469 of the report: "Secondly on the footing that that is not in itself sufficient, still, in my judgment, this is a case in which one is entitled to look at the realities of the situation and to pierce the corporate veil. I wish to safeguard myself by saying that so far as this ground is concerned, I am relying on the facts of this particular case. I would not at this juncture accept that in every case where one has a group of companies one is entitled to pierce the veil, but in this case, the two subsidiaries were both wholly owned; further, they had no separate business operations whatsoever; thirdly, in my judgment, the nature of the question involved is highly relevant namely whether the owners of this business have been disturbed in their possession and enjoy....
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....l go behind the mere status of the company as a legal entity, I will consider who are the persons as shareholders or even as agents who direct and control the activities of a company which is incapable of doing anything without human assistance." The third ground, which I place last because it is longest, but perhaps ought to come first is that in my judgment, in truth, DHN were the equitable owners of the property. In order to resolve this matter, it will be necessary for me to refer in some detail to the facts." Shaw L.J. also observed at page 473 as follows: Even if this were not right, there is further argument advanced on behalf of the claimants that there was so complete an identity of the different companies comprised in the so-called group that they ought to be regarded for this purpose as a single entity. The completeness of that identity manifested itself in various ways. The Directors of the DHN were the same as the Directors of Bronze, the shareholders of the Bronze were the same as in DHN, the parent company, and they had a common interest in maintaining on the property concerned of the group. If anything were necessary to reinforce the complete identity of commerc....
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....arate legal entities, each under the control of its own Board of Directors, that in law the board of the appellant company could not assign any duties to anyone in relation to the management of the subsidiary companies, and that, therefore, the agreement cannot be construed as entitling them to assign any such duties to the respondent. My Lords in my judgment, this is too technical an argument. This is an agreement in re mercataria, and it must be construed in the light of the facts and realities of the situation. The appellant company owned the whole share capital of British Textile Mfg. Co., and, under the agreement of 1947, the directors of the company were to be nominees of the appellant company. So in fact, the appellant company could control the internal management of their subsidiary companies, and, in the unlikely event, of their being any difficulty, it was only necessary to go through formal procedure in order to make the decision of the appellant company's Board fully effective." 22.13 It was submitted that admittedly there is no general principle that every company in a group of companies are to be regarded as one; on the contrary the fundamental principle is unque....
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....was submitted that it shall be violative of the basic principles of construction of statutes to read any such limitation in the section. It was also submitted that theory of single economic unit, as endorsed and approved by the various courts of the UK, USA and India is in fact rooted in the business realities of the situation which have been recognized by the legislature while enacting section 212 of the Companies Act which makes it obligatory for the holding company to include the balance sheet, profit and loss account, as well as auditor's report and Board of Directors report of each subsidiary with its balance sheet. It was submitted that assessee company has filed consolidated balance sheet of the group comprising the subsidiaries and the holding company after seeking exemption from the Central Government under section 212(8) of the Companies Act. It was further submitted that the theory of single economic group is also manifested in the accounting principles and policies formulated by the professional accounting bodies in various countries of the world. Accounting Standard21isued by the Institute of Chartered Accountants of India deals with the consolidated financial statemen....
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....ion of deductibility of business expenditure u/s. 37 arises, because, the income has not been computed under chapter IVD of the Act." 23.1 Thus the edifice of the disallowance of Rs. 9.46 crores is no income from business and therefore expenditure incurred is not eligible for deduction u/s. 37(1) of the Act. We have however while adjudicating Ground 1 held that income from lease rent of Rs. 25 crores is assessable as business income; and thus exconsequenti the foundation of disallowance ceases to exist and, therefore expenditure is eligible for deduction u/s. 37(1) of the Act. However, we would have ended the matter at that, but, we cannot resist but to state that absence of income alone is not a relevant test for allowability of claim of expenditure either u/s. 37(1) of the Act or even section 57(iii) of the Act. In the case of CIT vs. Rajendra Prasad Moody 115 ITR 519 (SC), the facts were that assessee were brothers and borrowed monies for making investment in shares of certain companies. Interest paid was claimed as deduction. The Assessing Officer disallowed the deduction. AAC held that share did not yield any dividend, interest on borrowed money but expenditure, per say allo....
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.... not see how that can make any difference in the true interpretation of section 57(iii). The language of section 57(iii) is clear and unambiguous and it has to be construed according to its plain natural meaning and merely because a slightly wider phraseology is employed in another section which may take in something more, it does not mean that section 57(iii) should be given a narrow and constricted meaning not warranted by the language of the section and in fact, contrary to such language. This view which we are taking is clearly supported by the observations of Lord Thankerton in Hughes vs. Bank of New Zealand where the learned Law Lord said: "Expenditure in the course of the trade which is unremunerative is none the less a proper deduction, if wholly and exclusively made for the purposes of the trade. It does not require the presence of a receipt on the credit side to justify the deduction of an expense." 23.2 Also in the case of CIT vs. Amalgamation (P) rtd. facts were that Co. "SSM" executed promissory note in favour of the assessee. "SSM" went into liquidation, assessee as guarantor was required to clear Od. After liquidation, some amount was due to assessee from liq....
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....re and the character of the assessee as a trader, and not as owner of assets, even if they are assets of the business." (p. 277) 19. In Indian Aluminium Co. Ltd. vs. Co. Ltd. vs. CIT (1972) 84 ITR 735 decided by a Constitution Bench of this Court, the aforementioned test laid down in Travancore Titanium case (196t6) 60 ITR 277 that 'to be a permissible deduction, there must be a direct and intimate connection between the expenditure and the business, i.e., between the expenditure and the character of the assessee as a trader and not as owner of assets, even if they are assets of the business needs to be qualified by stating that if the expenditure is laid out by the assessee as owner-cum-trader, and the expenditure is really incidental to the carrying on of his business, it must be treated to have been laid out by him as a trader and as incidental to his business." (p. 747). The High Court, in our opinion, has rightly proceeded on the basis of that there must be a nexus between expenditure and business of the assessee." 23.3 Applying the foregoing principle to the facts, it is noted that during the previous year relevant to the assessment year 2010-11, 1575500 shares of the....