TaxTMI 
TaxTMI 
1987 (9) TMI 428
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....t. The assessee charged a concessional rent of 6 % to the HUF while it paid a higher interest to the bank. The assessee actually advanced a sum of ₹ 8,50,000 to the HUF by borrowing it from the bank. The ITO therefore disallowed the interest difference on this extra amount of ₹ 2,50,000 which the assessee had lent to the HUF, on the ground that there was no agreement in respect of this extra amount of loan. 3. The CIT (A) has allowed this interest amount. He has observed that "due to cost escalation, the HUF had to invest more money for completing the construction and hence, the larger amount of loan had to be given by the assessee to the HUF". 3.1 It is important to note that the ITO has not disallowed the interest difference on the sum of ₹ 6 lacs. He has disallowed it on the excess amount over ₹ 6 lacs. Therefore the case of the Revenue is not that the excess interest is disallowable. Its case is based on the absence of an agreement regarding the excess amount given as loan over and above ₹ 6 lacs for which there was an agreement. The CIT (A) has rightly allowed that amount because absence of a written agreement cannot be a ground for di....
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....IT [1972] 83 ITR 700 and pointed out the various steps taken by the assessee in order to earn this rental income. He also pointed out that the assessee's business in chemicals was continued in the relevant period. 8. The assessee had given the details of activities in respect of this income before the Commissioner which are as follows :- (i) The assessee negotiated with the bank and ascertained requirements and agreed to make a suitable adjustment in the building for giving it on rent to the bank. (ii) It entered into arrangement with the owner of the building i.e. the HUF and agreed to advance a large sum of ₹ 6 lacs to the owner so that the owner could make further construction and make available to the assessee additional floors which could be exploited by the development, alterations etc. to earn better income in future. (iii) The assessee procured and arranged for the funds from the bank which involved considerable discussion with the bank. It gave necessary guarantees and obtained personal guarantee from the Directors. (iv) It incurred travelling expenses which the IAC has recognised as being for the business needs of the assessee. (v) The assessee incurred substa....
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....activities should not be regarded as business activities. In the case of S.G. Mercantile Corpn. (P.) Ltd. (supra) one of the objects specified in its memorandum of association was to take on lease or otherwise acquire and to hold, improve, lease or otherwise dispose of land, houses and other real and personal property and to deal with the same commercially. Within less than two weeks of its incorporation the company took on lease a market place for an initial term of 50 years, undertaking to spend ₹ 5 lakhs for the purpose of remodelling and repairing the structure on the site. It was also given the right to sublet the different portions. The assessee's activity during the period covered by the asstt. years 1956-57 to 1958-59 consisted of developing the property and letting out portions thereof as shops, stalls and ground spaces to shopkeepers, stall holders and daily casual market vendors. The question was whether the assessee's income from subletting was assessable as business income or as income from other sources. It was held that the income from subletting stores was business income. The Court observed that the definition of the word "business" as given in sec....
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....ng to assessment year 1979-80 the company entered into an agreement on 1-7-1978 with L.M. Patel & B.M. Patel, HUF, whereby it took on lease a portion of the building known as "Suraj Plaza" for a monthly rental of ₹ 9,970. The members of the aforesaid HUF have a substantial and controlling interest in the assessee company. The company thereafter undertook certain work of erecting partitions in the aforesaid premises as well as interior decoration work and subsequently let it out to the Bank of Baroda at a rent substantially higher than what was payable to the HUF. 2.2 At this stage it would be necessary to state that there is no appreciable discussion regarding this aspect either in the draft assessment orders framed by the ITO or in the final orders. This could also be said of the directions issued by the IAC u/s. 144B as well as the objections raised by the assessee before the IAC. It seems that no serious challenge came from the side of the assessee to the action of the ITO in taxing the income under the head "Other sources". As an example a reference is made to the order of the ITO for asst. year 1979-80 which deals with the issue by the following obse....
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....here is no mention of this either in the appellate orders. 3. The learned CIT(A) has dealt with the issue in the following manner : "On my request, the appellant has given a detailed note in six sheets dated 12-12-84. The factual position given therein clearly supports the appellant's plea that it should be treated as business activity. For the sake of brevity, I am not incorporating herein all those facts and contentions, but I must reproduce the conclusion contained in first part of para 10 of that note. This runs as follows : '10. In view of the aforesaid facts namely object of the company, the magnitude of the transactions of taking property on lease, scheme of taking further such premises on lease at a future date, generating finances from banks etc. to carry out this activity, to give advances to the owner for undertaking future constructions for business needs of the assessee, the type of development expenditure of alterations, colouring, repairs, maintenance, employment of staff for maintenance security and other purposes, it will be clear that the activity was a business activity and nothing else.' 9. A copy of that note is being forwarded to the ITO along with th....
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....de the same in the objects of the Company are in process." This is also the fact stated in the order of the Tribunal in ITA Nos. 557 to 559/Ahd/85 dated 13-10-86 in respect of the assessee's appeals before the Tribunal for the same years. The Tribunal observes- "We also find from the order passed by the Commissioner (Appeals) that activity of leasing the premises taken on lease has been taken as business activity. As against this scanning the accounts of the limited company, we find in the notes to the accounts on page 124 of the paper book that business done in acquiring property on lease and letting it on sub-leasing is not covered by the object clause of the assessee and the process of altering the memorandum is continuing." (2) The assessee has stressed on the aspect of "negotiations with customers" which in this case happens to be only one namely the Bank of Baroda. The very fact that the premises were taken on lease vide agreement dated 1-7-78 and immediately thereafter given on rent to the Bank gives an impression that the discussions were more or less finalised prior to entering into the agreement on 1-7-78. The assessee has also admitted that th....
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....e expenditure of which the travelling for purposes of the bank loan was only a part and not the entire whole. It is important to note that the assessee has sought to misquote at the CIT(A) stage. (5) The assessee has thereafter sought to impress upon the CIT(A) that incurring of expenditure on constructing partitions, interior decorations and electrical fittings was also a part of the "business activity". It has also been urged that the assessee had to engage extra staff on account of undertaking on lease the aforesaid property and thereafter letting it out on rent. The discussion in the preceding paras is only to highlight the fact that the submissions before the CIT(A) by means of the letter dated 12-12-84 were purely of a general nature ; unsupported by any evidence. As pointed out, some of the facts had also been misquoted and the assessee did not care to point out to the CIT(A) that the approval of the proposed amendment to the Objects Clause came in well after the expiry of the previous years under consideration. All these submissions lose their importance when viewed from the point of view that the lessors and the lessees are the same set of persons. The order of....
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....conclusion that the taking of the property on lease and subletting portions of the same was part of the business and trading activity of the appellant. The conclusion of the Tribunal that the activities of the appellant in taking lease and subletting the demised premises were undertaken with the object of doing business was warranted on the facts of the case. Likewise, the conclusion of the Tribunal that the appellant-company in letting out the leasehold property was not acting as owner but as trader was borne out by the material on record." It is apparent that the decision was given on the facts of the case and one of which was that the objects clause of the Memorandum provided for such an activity. This is not so in the case of the assessee company. (2) The assessee's case to the effect that taking of the property on lease, carrying out certain modifications, giving it on further rent, etc. was part of a concerted business activity falls to the ground since it is an established fact that the lessors and lessees are the same set of persons. As mentioned earlier if any such activity was there, the assessee has not been able to prove it by placing any facts or evidence on re....
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....8377; 1,65,000 from 11-8-78 to 31-3-79 6,312 On ₹ 2,40,000 from 12-9-78 to 31-3-79 7,890 On ₹ 2,50,000 from 17-3-79 to 31-3-79 625 From the above particulars, it will be noticed that the assessee has received interest at the rate of 6 % in respect of periods prior to the date of agreement. Interest has also been charged @ 6% on the amounts advanced in excess of ₹ 6,00,000 agreed to be advanced at 6 %interest for and from 1-7-78 only. Therefore, the interest charged for the period 1-4-78 to 30-6-78 at the lower rate of 6 % was not covered by the agreement. Similarly, the interest at 6 % on ₹ 2,50,000 which is in excess of the amount of ₹ 6,00,000 is according to me, not the correct rate of interest. In respect of ₹ 2,50,000, the assessee ought to have charged interest at the rate of 15 %,-the rate at which it borrowed money from the Bank of Baroda for making an advance to the lessor HUF. On the aforesaid facts, proportionate interest as worked out below is considered as assessee's income and added to the total income: Rs. On ₹ 1,00,000 from 1-4-78 to 30-6-78 1,500 On ₹ 95,000 from 17-4-78 to 30-6-78 1,250 On ₹ 2,50,0....
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....l agreement whereby a sum of ₹ 6 lacs was to be advanced at an interest rate of 6 % was sought to be altered either as a matter of policy or agreement. According to me, the company was to provide only to the extent of ₹ 6 lacs at the concessional rate of interest and nothing over and above. It would not be a prudent businessmanship to advance a loan at a rate of 6 % whereas the same funds have been obtained from the bank by paying interest @ 15 %. I would further hold that the written agreement between the parties cannot be changed orally and that the conduct of the parties can help in interpreting an agreement when doubtful but not when it is absolutely clear. The Tribunal at the moment is not concerned with the amount up to ₹ 6 lacs, but only the amount over and above. There is no doubt that the department has accepted the sanctity of the agreement up to the extent of ₹ 6 lacs, but that does not mean that any amount advanced over and above ₹ 6 lakhs and that also at a concessional rate of interest should not bear scrutiny. According to the facts available on record all that the company was required to do was to provide to the HUF the funds and even p....
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....ainst the disallowance of ₹ 9,644 shown as paid by the appellant company to the HUF for scooter parking. This item also relates to the activity of taking the building on lease from the HUF and then after getting certain things done, its being given on rent to the Bank of Baroda. The reasoning given in para 4 above in regard to the disallowance of interest would apply mutatis mutandis to this item. This is an outgoing of business and there cannot be any allegation of attempt at saving tax in the hands of the appellant and that HUF taken together. This addition of ₹ 9,644 is also deleted." 11.2 He deleted the additions for the subsequent two years as well following the same reasoning. 12. According to me the CIT(A) has clubbed this transaction as well with the other activity of leasing the property. He has also applied the reasoning adopted by him in respect of the disallowance on account of interest which I have discussed in an earlier ground. In view of my decision in holding the leasing activity as "income from other sources" and confirming the disallowance on account of interest, I proceed to confirm the addition in respect of scooter and cycle stand ....
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....as constructed up to the 8th floor. It was further provided in the agreement that the rent shall be payable by the company at the said rate for the further floors to be constructed by the HUF. The assessee-company agreed to advance a loan of ₹ 6 lakhs carrying interest of 6% per annum. However, the assessee-company granted a loan of ₹ 8,50,000 to the HUF and charged interest at the rate of 6 %. 3. The assessee-company arranged with the Bank of Baroda, on oral agreement, for leasing out the said property on higher rent and also got overdraft facility carrying interest of 15 % per annum. The rent received and paid for the assessment years 1979-80, 1980-81 and 1981-82 are as follows :- Assessment year Rent received Rent repaid Rs. Rs. 1979-80 4,29,427 1,36,463 1980-81 8,49,672 2,99,852 1981-82 8,49,351 3,23,029 The assessee-company was of the opinion that by virtue of clause 8 of the Memorandum of Association the assessee-company was authorised to take property on lease and give it out on lease. However, the doubt was spelled by the auditors and a note to this effect was appended to the final accounts. The assessee-company passed a resolution on 15-1-1979 i....
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....the object clause of the assessee to take property on lease. The change for the alteration in the objective of the memorandum was only approved by the Company Law Board on 29-8-1981 after the close of the previous year relevant to the assessment year 1931-82. There were no business activities of the assessee and alteration and decoration made by the assessee did not constitute an activity of business. Consequently the point of difference was referred to the Hon'ble President and the case has come up before the Third Member. 7. The departmental representative Mr. A.K. Hajela, very strongly supported the order of the Accountant Member and stated each of the facts and stated that the company was not authorised by the object clause, the amendment was made after the close of the previous year relevant to the assessment year 1981-82, the assessee was not having any business activities and, therefore, the finding given by the Accountant Member should be confirmed. He particularly referred to the decision in CIT v. Motilal Hirabhai Spg & Wvg. Co. Ltd. [1978] 113 ITR 173 (Guj.) to show what activities of the assessee would constitute 'business'. Shri Raval, assisted by Shri V. Dey illustra....
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.... appears to be correct. The assessee has taken the partly constructed building on lease from L.M. Patel and B.M. Patel, HUF on lease. It is correct that the HUF was interested in the assessee-company. However, nothing has been said by the department on the fairness of the lease rent paid by the assessee or the fund granted by it for the construction of the other floors. Therefore, it will not be fair to comment on these facts while deciding the points of difference. The assessee-company, had on the one hand taken the property on lease. On the other hand it was able to get the Bank of Baroda for taking the property on lease on a much higher rent. It is correct that the assessee was not having the surplus fund to invest with a view to earn money by way of rent. The assessee took a great adventure. It took the property on lease and thereafter it took steps to get a good tenant. Much had been said on the object clause of the assessee. The clause 8 of the object clause runs as follows :- "(8) To purchase, take on lease or in exchange, hire purchase on hire purchase basis or otherwise acquire any property and any rights and privileges therein which the Company may think necessary o....