TaxTMI 
TaxTMI 
2016 (6) TMI 1292
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....come from business". However, for the assessment year 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....
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....bing to equity shares of appellant company. It was further provided that; a) 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 3....
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....come from Other Sources" u/s. 56(2)(ii) of the IT Act." 7. Before us the ld. Counsel for assessee has contended that the conclusion to treat 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....
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....stated that aforesaid expenditure of Rs. 2.59 crores claimed could not held to be linked to expenditure incurred for earning lease income. It was submitted that in the preceding year namely assessment year 2009-10, the learned Assessing Officer 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 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 ....
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....nufacture or any adventure or concern in the nature of trade, commerce or manufacture. It was submitted that business comprises an activity which is carried out continuously in an organized manner with a set purpose and with a view to earn profits. Reliance was placed on the following judgments:- i) CIT 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, ....
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.... falls within the specific head of "Profits and Gains from business or profession", section 56 cannot be applied to the present case. 7.10 It was further submitted that it is not correct to state that the entire activity of the company is only leasing, since as per the Accounting Standard 17 issued by the Institute of Chartered Accountants of India, the assessee has stated in its accounts 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 Tribuna....
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.... that the said decision of the ITAR cannot apply to the issue in hand, more particularly in the Assessing Officer himself allowed as business expenditure. Moreover, it was also highlighted that in notes on accounts to the financial statements of instant year it was specifically stated that: "4. The company had taken 20.78 acres of land on 90 years lease w.e.f. 24.5.2007 at a premium of Rs. 519.50 lacs and the premium 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) Artemi....
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....um) iii) CIT vs. Allahabad Milling Co. (P) Ltd. 195 ITR 325 (All) Proposition 3: That once there is a new ground or a material change in the factual and legal position, the courts will not adopt an earlier pronouncement i) CIT vs. J.K. Charitable Trust 308 ITR 161 (SC) ii) Bharat Sanchar Nigam Ltd. vs. UOI in Writ Petition (Civil) 183/2003 (SC) iii) ACIT vs. M/s. Citi Financial Consumer Finance I.T.A. No. 4617/Del/2006. 7.16 In view of the above it was prayed that income of Rs. 25 crores regarded as business 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 ....
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....Government has supplied the electricity to PTL as per order dated 29/8/1995. The agreement by KSEB is with PTL. All these indicates that the existence of PTL as contended by the revenue does not ceased to exist." 20. If there is no intention to continue the business and it is let out, then of course it cannot be treated as income from business. If the assessee because of certain difficulties, i.e. either by financially or for some other reasons is let out the land, plant and machinery to a third party for a limited period and receiving rent, such rent is to be treated 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....
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....t we are unable to accept his contention for want of supporting materials. Accordingly, in our view, the Ld. CIT(A) was not correct in placing reliance on the decision of the Tribunal without appreciating the facts prevailing in the year under consideration. Accordingly, we reverse the order of the Ld. CIT(A) and restore the view of the Assessing Officer." Similar view has been expressed for A.Y. 2004-05 to 2006-07 and 2008-09 to 2009-10. 8.4 Thus the background to this appeal is that various coordinate benches of the Tribunal have held for A.Ys 1996-97 to 2003-04 that income from Apollo 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....
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....uing in the assessee's own name, it has not proved the claim of the assessee that it had an intention to revive the business." 8.6 From the aforesaid it is apparent that order for AY 2004-05 relies upon the order for A.Y. 2007-08 to hold that income is taxable as income from other sources. 8.7 Before us the ld. AR has pointed out that for AY 2007-08 by an order dated 20.07.2012 u/s. 254(2) of the Act, it has been held as under: "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 considering 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 taxa....
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....evant portion of the agreement dated 14.11.2007 is extracted hereunder: "Whereas both ATL and PTL carried out the joint operations as above for the period of eight years from 1.4.195 to 31.3.2003 and subsequently extended the same upto 31st March 2006 from time to time. Whereas by an agreement dated 22nd May, 2006 the parties had agreed to execute the lease of the premises for a period of four years for Rs. 15 crores per annum w.e.f. 1st April, 2006. Whereas ATL has approached PTL that it has plans to make further investments in the plant of PTL and is desirous to extend the period of lease and have a firm eight years lease. Whereas both the parties are desirous of continuing the lease operations arrangement for the present Whereas PTL has requested ATL 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....
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....ent to statutory auditors 1.47 1.47 Xii) Legal and professional charges 25.39 7.17 xiii) Printing, stationery, postage, telegram & telephone etc. 4.69 4.69 xiv) Re-imbursement towards utilization of computer and other ATL facilities 34.45 34.45 xv) Lease premium of lease hold land written off - - xvi) Miscellaneous expenses 0.72 0.72 xx) Total(A) = (I+II 105.25 87.03 xxi) Depreciation 8.24 - xxii) Interest and bank charges 646.26 - xxiii) Expenditure incurred in connection with gift of shares to the CEO of its subsidiary towards his contribution in developing health care constribution 945.69 - Total (B) = xxi+xxii+xxiii) 1600.19 - Additional item claimed in computation of income xxiv) Bad debts written off 139.79 139.79 xxv) Doubtful advances written off....
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....except leasing the company was not having any other business. 8.18 On the aforesaid factual matrix, it was concluded as under: "As has been already pointed out in connection with the other two cases where there is a letting out of premises and collection of rents the assessment on property basis may be correct but not so, where the letting or sub-letting is part of trading operation. The dividing line is difficult to find; but in the case of a company with its professed objects and the manner of its activities and the nature of its dealings with its property, it is possible to say on which side the operations fall and to what head the income is to be assigned." "8. On the other hand, the learned counsel appearing for the respondent - Revenue made an effort to justify the reasons given by the High Court in the impugned judgment. The learned counsel also relied upon the judgment delivered by this Court in the case of M/s. S.G. Mercantile Corpn. (P) Ltd. v. CIT, Calcutta (1972) 1 SCC 465. According to him, the important question which would arise in all such cases is whether the acquisition of property for leasing and letting out all the shops and stalls would be ....
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....rayon, hessian, stone materials, tools, appliances, apparatus, products, substance and articles of all kinds (whether referred to in this memorandum or not) which may seem to the company capable of being used or required for the purpose of any of the business which the company is expressly or by implication authorized to carry on or which are usually supplied or dealt in by persons engaged in any such businesses or which may seem to the company capable of being conveniently on in connection with the above or otherwise calculated directly or indirectly to enhance the value of any of the property and rights of the company for the time being. 17. To amalgamate, enter into partnership, or into any arrangement for sharing profits union of interest, co-operation, joint adventures, or reciprocal concessions or for limiting competition with any person or company carrying on or engaged in or about to carry on or engage in any business or transaction which the company is authorized to carry on or engage in or which can be carried on in conjunction therewith or which is capable of being conducted so as to directly or indirectly benefit the company. 20. To sell lease mortgage....
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....l activities of the assessee's business to earn money by making use of its machinery by either employing it in its own manufacturing concern or temporarily letting it to others for making profit for that business when for the time being it could not itself run it and that the dyeing plant had not ceased to be a commercial asset of the business and the sum representing the rent for five months received from the lessee by the assessee was, therefore, income from business and was chargeable to excess profits tax. It was thereafter concluded as under: "If a commercial assest was not capable of being used as such, then its being let out to others did not result in an income which was the income of the business, but it could not be said that an asset which was acquired and used for the purpose of the business ceased to be a commercial asset of that business as soon as it was temporarily put out of use or let out to another person for use in his business or trade. The yield of income by a commercial asset was the profit of the business irrespective of the manner in which that asset was exploited by the owner of the business. He was entitled to exploit it to the best advantage and....
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....vity undertaken by the appellant. Accordingly, it is submitted that the activity undertaken by the appellant is that of a business activity and accordingly, any income arising therefrom ought to be treated as business income. 8.26 We are also of the opinion that disclosure in the financial statement as "other income" or there is one segment of the assessee is an irrelevant consideration. It is well settled principle that treatment in books of accounts is not determinative of the nature and taxability of income as held in the case of Tuticorin alkali Chemicals and Fertilizers Ltd. v. CIT 227 ITR 172 (SC) and Kedarnath Jute Mfg. Co. Ltd. v CIT 82 ITR 363 (SC). 8.27 For the sake of completeness, it is stated that it is well settled law that if there is a new ground or a material change in the factual and legal position precedents do not have binding character. In the case of Bharat Sanchar Nigam Ltd. v UOI WP (Civil) 183/2003 (SC), it was noted as under: "Even if the said orders are passed under the same provisions of law, it may theoretically be open to the part to contend that the liability being recurring from year to year, the cause of action is not the same; and so....
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....ncement. Where facts and law in a subsequent assessment year are the same, no authority whether quasi-judicial or judicial can generally be permitted to take a different view. This mandate is subject only to the usual gateways of distinguishing the earlier decision or where the earlier decision is per incuriam. However, these are fetters only on a coordinate Bench which failing the possibility of availing of either of these gateways, may yet differ with the view expressed and refer the matter to a Bench of superior strength or in some cases to a Bench of superior jurisdiction." 8.29 In the instant case we have already highlighted the change in factual position and also the subsequent Apex Court judgments which have persuaded has to make an departure apart from the fact that a legal plea crucially determinative of the claim of the appellant had not been considered in the orders for AY 2004-05 and 2007-08. 8.30 We would like here to make a gainful reference to the case of Shyam Burlap Company Ltd. v. CIT 380 ITR 151 (Cal), where the assessee in the past history consistently shown rental income under the head "Income from House Property" which stood accepted as such. However for....
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.... for carrying on the business. Further, when appellant entered the arrangement with Apollo, the intention was not to lease. The intention was to exploit the commercial assets through its expertise and derive income. There is no sale of assets or retrenchment of employees or even surrender of any licenses, registration etc. As per the agreement, it was the responsibility of the assessee to recruit labour for running the plant and meet all the labour law requirement in respect thereof, to purchase fuel and power required for running the plant, ensure the plant is properly insured, maintain the plant in working condition, undertake its repair and maintenance etc. The express so incurred by the appellant for the said responsibilities, were reimbursed by Apollo to it on actual basis. The production now by the appellant is in the name of Apollo and that too, to retain commercial viability in the operations and augment the financial position and at the same time bring about modernization and expansion in the plant. 8.32 Therefore, in view of section 56(2)(ii) coupled with the judgments of the Apex Court as aforesaid, the income should fall under the head 'profits and gains of business'....
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....ase rent is business income, or even investment by way of controlling interest is subsidiaries is held to be business such expenditure is business expenditure. It was further submitted that if the lease rent income is treated as "Income from other sources", the above expenditure is allowable as per Section 57(iii) of the Income Tax Act, on the same basis as expenditure of reimbursement has been allowed as deduction. Also, mere fact that there is no income from investment in shares of subsidiary can be no ground to deny expenditure u/s. 57(iii) of the Act as held in the case of CIT v. Rajendra Prasad Moody 115 ITR 519 (SC). Reliance was also placed on the following proposition: Proposition I: That software expenditure was allowable as revenue expenditure i) CIT vs. Raychem RPG Ltd. 346 ITR 138 (Bom) ii) CIT v ACL Wireless Ltd. 361 ITR 210 (Del) iii) CIT vs. Renuga Textile Mills Ltd. 366 ITR 649 (Mad) iv) CIT vs. IBM India Ltd. 357 ITR 88 (Kar) v) CIT v Varinder Agro Chemicals Ltd. 309 ITR 272 (P&H) vi) CIT v N.J. India Invest (P) Ltd. 215 Taxman 78 (Guj) Proposition II : Expenditure incurred for obtaining consul....
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....disallowed the entire expenditure for both the years. The CIT(A) confirmed the disallowance made by the Assessing Officer. He held that the business of the assessee was exclusively to act as a holding company for downstream investment in older companies and the expenditure incurred was on salaries of employees of the assessee company and other operating expenses of the company. The CIT(A) did not agree and held that as no exempt income was claimed, no disallowance u/s. 14A was warranted. Tribunal reversed the findings of the CIT(A); and held that assessee had acquired controlling interest in the respective companies and this was their line of business. The Hon'ble High Court dismissed the appeal of revenue, held that the respondent assessee, therefore, had to incur expenditure for the business in the form of investment in shares of cement companies and to further expand and consolidate their business. it was held that expenditure had to be also incurred to protect the 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). In these circums....
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....apital and reserves as well as the interest-bearing loans was called for alongwith the profit and loss account showing the amount of interest paid. The balance sheet shows that there is share capital of Rs. 13.23 crores and reserves on surplus of Rs. 27.03 crores, i.e., total of Rs. 40.27 core is available as 'capital and free reserves as on 31.3.2010. The amount of secured loan is Rs. 49.74 crores. On the other hand, the cost of loan as per P&L account in the form of 'interest and bank charges is Rs. 6,46,00,000/-. Hence, from the facts, it is clear that the appellant does not have enough share capital and free reserves to have made investment of Rs. 80.84 crores. Out of the total liability of Rs. 86.87 crores, taken together with the capital and reserve of Rs. 40.27 crore, and secured loan of Rs. 49.74 crore, almost 57% of the fund comes as secured loans, on which the appellant is liable to pay interest. The provision of section 14A is applicable when interest bearing funds are invested to earn the exempt income. It has been held by the Hon'ble Supreme Court in the case of CIT vs. Walfort Share and Stock Brokers (P) Ltd. (2010) 326 ITR 1, that: "The mandate of section 14....
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.... Assessing Officer cannot exceed the exempt income, and since there is no income, no disallowance can be made. Reliance was also placed on the following judgments: i) Joint Investments Pvt. Ltd. vs. CIT 372 ITR 694 (Del) ii) Chudgar Ranchodlal Jethalal vs. DCIT I.T.A. No. 245/AHD/2013 dated 27.03.2015. iii) I.T.A. No.5592/MUM/2012 dated 01.01.2015 M/s. Daga Global Chemicals Pvt. Ltd. vs. ACIT iv) I.T.A. No. 986/Del/2012 dated 18.03.2015 HT Media Ltd. vs. ACIT v) 148 ITD 336 (Del) Sahara India Financial Corpn. Ltd. vs. DCIT vi) ITA No. 548/Chd/2011 dated 30/09/2011 ACIT vs. Punjab State Coop & Marketing Fed. Ltd. vii) ITA No. 4320/Del/2014 dated 21.10.2015 ACIT vs. M/s. Kajaria Ceramics Limited. viii) ITA no. 1027/Del/2013 dated 23/10/21015 Hema Engineering Industries ltd. vs. ACIT ix) ITA No. 3763/Del/2013 dated 29/04/2015 Indus Valley Investment & Finance Pvt. Ltd. vs. DCIT 16.2 it was next submitted that investment is made in the 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....
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....context of the facts enumerated hereinbefore the Court answers the question framed by holding that the expression 'does not form part of the total income' in Section 14A of the envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, Section 14A will not apply if no exempt income is received or receivable during the relevant previous year." ii) CIT vs. Corretch Energy (P) Ltd. 111 DTR 146 (Guj) "Counsel for the Revenue submitted that the Assessing Officer as well as CIT(Appeals) had applied formula of rule 8D of the Income Tax Rules, since this case arose after the assessment year 2009-10. Since in the present case, we are concerned with the assessment year 2009-10, such formula was correctly applied by the Revenue. We however, notice that sub-Section (1) of section 14a provides that for the purpose of computing total income under Chapter IV of the Act, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of....
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....n the Capital of another Partnership Firm and since profit derived by the Assessee Company from a Partnership Firm were exempt from tax u/s. 10(2A) of the Income-tax Act the interest expense related to such tax free profits is to be disallowed u/s. 14A of the Income Tax Act. (B) Whether on the facts and circumstances of the case and in law the Hon'ble Tribunal was right in holding that the Assessing Officer cannot consider notional interest on deposit received by the Assessee Company while arriving at the fair market value u/s. 23(1)(a) of the Income Tax Act?" 2. In so far as Question (A) is concerned, on facts we find that there is no profit for the relevant assessment year. Hence the question framed would not arise. 3. In so far as Question (B) is concerned, the Tribunal followed the judgment of this Court in J.K. Investors (Bom) Ltd. 248 ITR 723 (Bom), Nothing has been brought to our notice that the ratio of this judgment would not be applicable. in the light of that the said question would not arise. Consequently Appeal is dismissed." v) CIT vs. Winsome Textile Industries Ltd. 319 ITR 204 (P&H) "5. We have heard learned counsel for t....
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....to deduction of interest on its borrowed loans. It was held as under: "In our opinion, the High Court in the impugned judgment as well as the Tribunal and the income-tax authorities have approached the matter from an erroneous angle. In the present case, the assessee borrowed the fund from the bank and lent some of it to its sister concern (a subsidiary) as interest free loan. The test, in our opinion, in such a case is really whether this was done as a measure of commercial expediency. In our opinion, the decisions relating to section 37 of the Act will also be applicable to section 36(1)(iii) because in section 37 also the expression used is "for the purpose of business". It has been consistently held in the decisions relating to section 37 that the expression 'for the purpose of business" includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby. Thus in Atherton v. British Insulated and Helsby Cables Ltd. (1925) 10 TC 155, it was held by the House of Lords that in order to claim a deduction, it is enough to show that the money is expended, not of necessity and with a view to direct and immediate ben....
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....ee's deceased husband after whom the college was to be named, it was held by this court that the interest on the borrowed fund in such a case could not be allowed as it could not be said that it borrowed fund in such a case could not be allowed., as it could not be said that it was for commercial expediency. 28. Thus, the ratio of Madhav Prasad Jatia's case (1979) 118 ITR 200 (SC) is that the borrowed fund advanced to a third party should be for commercial expediency if it is sought to be allowed u/s. 36(1)9vii0 of the Act. 29. In the present case, neither the High Court nor the Tribunal nor other authorities have examined whether the amount advanced to the sister concern was by way of commercial expediency. 30. It has been repeatedly held by this court that the expression "for the purpose of business" is wider in scope than the expression 'for the purpose of earning profits" vide CIT vs. Malayalam Plantations Ltd. (1964) 53 ITR 140 (SC), CIT vs. Birla Cotton Spinning and Weaving Mills Ltd. (1971)82 ITR 166 (SC), etc.' 13. In the process, the Court also agreed that the view taken by the Delhi high Court in Cit vs. Dalmia Cement (P) Ltd. (20020 25....
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....7(3) of the Income Tax Act. Reliance was placed on the judgment of this court in the case of Commissioner of Income Tax vs. Lokhandawala Construction Industries Ltd. 260 ITR 579 (Bom) for the proposition that when the assessee claims deduction of interest paid on capital borrowed, all that the assessee has to show is that the capital which was borrowed was used for the business purpose in the relevant year of account and it does not matter whether the capital was borrowed or not to acquire revenue asset or capital asset. The learned tribunal also relied on the judgment of the Calcutta High Court in the case of CIT vs. Rajeeva Lochan Kanoria 208 ITR 616 (Cal) where the Calcutta High Court took a view that under the provisions of section 36(1)(3) of the Income Tax Act, the only enquiry to be made is whether the payment of interest was in respect of capital borrowed for the purpose of assessee's business or profession. Such amount borrowed, if for the purpose of assessee's business of profession may be utilized for the purpose of acquisition of stock in trade or for the purpose of acquisition of capital asset. The learned court took a view that u/s. 36(1)(3) there is no bar for allowa....
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....relevant consideration. In the State of Madras vs. GJ. Coelhi (1964) 53 ITR 186 the Supreme Court was dealing with the deduction claimed u/s. 5(e) of the Madras Plantations Agricultural Income Tax Act, 1955. While considering the issue the court was pleased to observe that in principle there is no distinction between interest paid on capita borrowed for the acquisition of a plantation and interest paid on capital borrowed for the acquisition of a plantation and interest paid on capital borrowed for the purpose of an existing plantation. Both are for the purpose of the plantation. The court further observed that the payment of interest on the amount borrowed for the purpose of plantations when the whole transaction of purchase and the working of the plantations was viewed as an integrated whole was so closely related to the plantations that the expenditure could be said to be laid out or expended wholly and exclusively for the purpose of the plantations. 8. We may also gainfully refer to the judgment of the Calcutta High Court in Commissioner of Income Tax vs. Rajeeva Lochana Kanoria, 208 ITR 616. The learned Court was considering section 36(1)(iii) and was pleased to obser....
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.... as such expenditure of Rs. 9,45,69,750/- was on account of commercial expediency is allowable as business expenditure u/s. 37(1) of the Act. The assessee has pleaded that it is also engaged in health care business and, therefore it was submitted that such expenditure is allowable as such. It was submitted that if for any reason the lease rent income is held as assessable under the head "Income from other sources", the expenditure be allowed u/s. 57(iii) of the Act. 20. The Assessing Officer though accepted the commercial expediency of the expenditure vis-à-vis the subsidiary, he denied the claim on the ground that expenditure pertained to subsidiary and not to appellant. In arriving at the above conclusion, business of healthcare was not accepted. He has held as under: "25. Assessee claims that section 37(1) does not enact any restrictive condition for deduction that assessee should be legal owner of the business for eligibility of deduction of expenditure. But more important question is that, whether it is expended wholly and exclusively for the purpose of the business or profession of the assessee. The answer is no, as the requirement was that of a third compa....
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....rectly the sister concern. The court was unequivocal in that, an indirect benefit to a third party was not a reason for disallowance of the expenses. In the given case, the benefit is not indirect, the direct expenses of a step-down subsidiary was passed through profit and loss account as an extraordinary item, first as an application of the income and then as a debt to Profit and Loss Account. Thus, there is no question of commercial expediency. Assessee lists out three reasons to prove the commercial expediency. 1. AHSPL is a wholly owned subsidiary controlled, managed and financed by the assessee . 2. The parent company is mandated by its memorandum to carry on health care business. 3. Thirdly, the subsidiary has no physical presence of its own and the parent company is admittedly is alter-ego." 21. The CIT(A) confirmed the disallowance only on the ground that there is no business income: "The paramount question in the entire issue is that once, it has been upheld by the ld. Bench ITAT, Kochi for assessment year 2008-09 & 2009-10 vide their order dated 3-1-2014 that the appellant's income from lease rent received from M/s. Apollo Tyres Ltd.....
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.... Court in the case of CIT v. Rajendra Prasad Moody 115 ITR 519. It was submitted that the assessee has incorporated the said two wholly owned subsidiary companies with the purpose of expanding its own business object of providing services in health care business. The assessee has controlling interest over these companies as well as its Board of directors. It was submitted that investment in companies representing controlling interest amounts to carry on business: i) 162 ITR 373 (sc) Brooke Bond Co. Ltd. vs. CIT ii) 197 CTR 187 (Del Excellant Commercial Enterprises & Investments) iv) 226 ITR 188 (SC) CIT vs. amalgamations (P) Ltd affirming the judgment in the case of CIT vs. Amalgamations (P) Ltd., reported in 108 ITR 895 (Mad.) v) 83 ITR 377 (SC) CIT vs. Distributors (Barod) Pvt. Ltd. vi) 35 ITR 594 (SC) Venkataswami Naidu vs. CIT vii) 100 ITR 706 (SC) CIT vs. Sutlej CCotton Mills Supply Agency. viii) 77 ITR 253 (SC) Raja Bahadur Kamakhya Narain vs. CIT 22. It was submitted that constitution of the Board of Directors as well as share holding pattern of two subsidiaries AHSL and AMSL manifestly demonstrate th....
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....as submitted that Dr. Katariya an alumnus of Maulana Azad Medical College, Delhi has worked with various hospitals in the United States and has been the associate professor of cardiothoracic surgery at the University of Miami) and has to his credit numerous books, monographs and journals. It was submitted that he has made presentations at many national and international meetings and is also a part of various researches and has been awarded with many laurels; and is also a world renowned surgeon. It was also submitted that a committee of directors of PTL Enterprises Ltd. approved a resolution on 05/08/2009 to reward Dr. Katariya for his services with transfer of 15,75,500 shares of AHSL held by the company by way of irrevocable gift. On 06/08/2009 a tripartite agreement titled as "Share Holders" Agreement" was entered into by PTL Enterprises Ltd. along with AHSL and Dr. Katariya whereby the terms and conditions for making the gift of shares have been recorded. On the same date i.e. 06.08.2009 another agreement titled as "Employment Agreement" has also been entered into including therein terms and conditions under which Dr. Katariay has been deputed by AHSL to AMSL and remuneration t....
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....SL and AMSL. It was submitted that the expenditure has been incurred by assessee on grounds of commercial expediency; and Dr. Kushagra Katariya had been allotted 7,50,000 shares of AHSL as Sweat Equity Shares by AHSL in March 2007. It was submitted that the services rendered by Dr. Katariya have been evaluated and appraised in the Sweat Equity Valuation Report of Artemis Health Sciences prepared by Sekhri Valuers pvt. Ltd., Mumbai which report brings out in clear terms that valuable contribution made by Dr. Katariya for development of the hospital. It was also submitted that interest paid on loan raised for controlling interest is eligible for deduction in view of the following judgments: i) 131 ITR 99 (Guj) CIT vs. Cotton Fabric Ltd. ii) 208 ITR 616 (Cal) CIT vs. Rajeeva Lochan kanoria iii) 210 ITR 981 (Cal) CIT vs. Jardine Hendarators iv) 244 CTR 226 (Bom) CIT vs. Phil Corporation Ltd. v) 125 ITR 227 (Guj) CIT vs. Lakshmi Agents Pvt.Ltd. vi) 321 ITR 498 (Bom) CIT vs. Srishti Securities Ltd. vii) 272 CTR 282 (Del) CIT vs. Holcim India (P) Ltd. viii) 378 ITR 33 (Del) Cheminvest Ltd. v. CIT reversing the order o....
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....asic pre requisite for deduction of any expenditure as business expenditure. It was submitted that the assessee had deep interest in the affairs of AHSL and for all intents and purposes AHSL is a sister company of the appellant company which belongs to a larger group of companies of Apollo Group. It was submitted that assessee company proposed to embark on diversification of its business activities to new areas of industry and strategize its business model so as to create synergy in diversified fields of activity. It was submitted that loans had been advanced to AHSL and corporate guarantees given to banks and financial institutions on ground of commercial expediency so as to help a sister concern in which the assessee company is substantially interested. It was submitted that shares have been gifted by the assessee to Doctor Katariya, a key employee of AHSL, for commercial consideration since the assessee is deeply interested in the wholly owned subsidiary and such an expenditure is in the interest of business of the assessee. Reliance was placed on the following judgments: i) S.A. Builders v CIT(A) 288 ITR 1 (SC) ii) CIT vs. Dalmia Cement (B.) Ltd. 254 ITR 377 ....
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....diary 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 can be treated as the business of the assessee company has to be considered in the context of doctrine of independent corporate entity distinct from its shareholder and the limited liability of the shareholder as a consequence of incorporation of the company, and, reliance was placed on the judgment of Mysore High Court in CIT vs. United Breweries 89 ITR 17. It was submitted that Atkinson J. in the aforesaid judgment reviewed all the authorities and concluded that it was a question of fact in each case whether the subsidiary company was carrying on the present company's business or its own. He considered that six points were relevant for determining that question: 1) Were the profits treated as those of the parent company? 2) Were the persons conducting the business appointed by the parent company? 3) Was the parent company the head and brain of the trading venture? 4) Did the parent company govern the adventure and decide what should be done and what capital should be embarked on it? ....
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....t 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 identities of the company and the shareholder needs fresh look in the context of emerging jurisprudential trends. It was submitted that the Supreme Court has heavily relied on the English decision Of Court of Appeal in DHN Food Distribution Ltd. vs. London Borough of Tower Hamlets reported in (1976) 3 ALL ER 462 and extensively reproduced the observations of Lord Denning and Lord Justice Goff who observed as follows: "It is not necessary to take into account the facts of the case. We may however note that in that case the corporate veil was lifted to confer benefit upon a group of companies under the provisions of the Land Compensation Act, 1961 of England. Lord Denning at page 467 of the report has made certain interesting observations which are worth repeating in the context of the instant case. The Master of the Rolls said at page 467 as follows: "Third, lifting the corporate veil. A further very interesting point was raised by counsel for the claimants on com....
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....her, 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 enjoyment of it. I find support for this view in a number of cases, from which I would make a few brief citations, first from Harold Holdsworth and Co. (Wakefield) Ltd. v. Caddies where Lord raid said: It was argued that the subsidiary companies were separate 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 mercatoria, 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 this company were to be the nominees of the appellant company.....
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.... 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 commercial interest and personality, CL.6, to which I have referred already, demonstrates it, for DHN undertook the obligation to procure their subsidiary company to make the payments which the bank required to be made. If each member of the group is regarded as a company in isolation, nobody at all could have claimed compensation in a case which plainly calls for it. Bronze would have had the land but no business to disturb; DHN would have had the business but no interest in the land. 22.12 Reference was placed on the Harold Holdsworth and Co. (Wakefield), Ltd. v. Caddies (1955) 1 All ER 725, where Lord Norton of Henryton in England at pg. 734 of the report observed as follows: "My Lords, this clause refers to a group of companies consisting of the appellant company and their existing subsidiary companies. I cannot read the clause as compelling the Board to assign duties to the respondent in relation to the business of e....
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....ormal 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 unquestionable that "each company in a group of companies is a separate legal entity possessed of separate rights and liabilities. It was submitted that the facts may justify the court to ignore the distinction between them and treating them and treating them as one. It was submitted that even if the doctrine of single economic unit has not been specifically mentioned yet corporate law cannot be divorced from facts and realities and business realities and legalistic view taken. 22.14 It was submitted that corporate veil doctrine has been enacted by the legislature of different countries of the world for the purpose of promoting adventure and enterprise limiting the liability of the entrepreneur. It was submitted that the circumstances in which corporate veil can be pierced or lifted have been laid down in a string of judicial pronouncements by courts in India, the USA and the UK etc. It was submitted....
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....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 statements of the holding company and its subsidiaries. It was submitted that in the context of section 212 of the Companies Act and Accounting Standard 21 it would be erroneous to say that a subsidiary company in the world of commerce has in reality no nexus or connection with the holding company and that eye of equity cannot peep behind the corporate veil of the subsidiary; and such a legalistic view, ignoring the business realities of the situation, cannot be accepted. It was thus prayed that disallowance be deleted 23. We have carefully considered the rival submission, perused the material on record and order of tehauthorities below. The CIT(A) while sustaining the disallowance has held as under: "The paramount question in the entire issue is that once, it has been upheld by the ld. Bench ITAT, Kochi for assessment year 2008-09 & 2009-10 vide their order dated 3-1-2014 that the appellant'....
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....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 allowable u/s. 57(iii) of the Act. The Tribunal upheld the claim of assessee for deduction u/s. 57(iii) of the Act. The Hon'ble Supreme Court held that the interest on money borrowed for investment in shares, which had not yielded any dividend was admissible u/s. 57(iii) of the Act. It was held as under: "it is also interesting to note that, according to the Revenue, the expenditure would disqualify or deduction only if no income results from such expenditure in a particular assessment year, but if there is some income, howsoever small or meager, the expenditure would be eligible for deduction. This means that in a case where the expenditure is Rs. 1000/-, if there is income of even Re. 1/-, the expenditure would be deductible and there would be resulting loss of Rs. 999/- under the head "Income from other Sources". But if there is no income, then, on the argument....
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....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 liquidating co. on account of Od. The assessee claimed the same amount as loss, which arose in course of & incidental to business in AY 1958-59. The assessee received receipt in course of liquidation of SSM over AY 1959-1962-63. The Assessing Officer held loss not incidental to business of assessee; capital loss not covered u/s. 12B. Held liquidation receipts as income for AY 1959-60 to 1962-63 allowed. In cross appeal, Tribunal held: assessee had guaranteed loan on its own business and loss admissible as deduction. Allowable for A.Y. 1962-63. Assessee could have ascertained loss in transaction of guarantee of loan in final state of payment received in PY 1961-62, order of Tribunal allowed. It was held as under: "17. The amounts paid by the assessee company to the directors of its subsidiary companies can be admissible as a deduction u/s....
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....aid 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 wholly owned subsidiary company viz., Artemis Health Sciences Ltd. (AHSL) were gifted to Dr. Kushagra Katariya for his valuable contribution in setting up a super specialty hospital under its subsidiary Artemis Mdicare Services Ltd. (AMSL). The Memorandum of Association of the company was amended vide postal resolution dated 17/05/2005 for changing the name of the company from Premier Tyres Ltd. to PTL Enterprises Ltd. and five new clauses as serial number 43 to 47 were inserted in the object clause of the company which reads as under: "43 To buy sell manage, improve, maintain, take on lease, promote, administer, own or run hospitals, clinics, nursing homes, dispensaries, maternity homes, health resorts and health clubs, polyclinics, medical centres, child welfare and family welfare/plannin....