TaxTMI 
TaxTMI 
2025 (8) TMI 1285
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....s, premises, etc. and to let on lease the same, in addition to the business of financing. In respect of Assessment Year 1992-93, the Assessee filed return of income declaring income of Rs. 5,966/- under the head "business". Return was accompanied by profit and loss account which showed interest receipt of Rs. 14,66,825/-, against which deduction of interest of Rs. 13,37,225/- on fixed loan, guarantee commission of Rs. 1,21,759/- and other sundry expenses were claimed and net profit of Rs. 5,966/- was shown. The Assessee had borrowed money on interest from Citibank during the period from 18 February 1992 to 21 March 1992. It was the case of the Assessee before the Assessment Officer that loan from Citibank was not only for expenses for furnishing the building, but the loan agreement provided for disbursal of loan for the purpose of business of the borrower. According to the Assessee, while the main object of the incorporation of the Company was to let out premises on rent, Clause 65 of the Memorandum of Association (MoA) provided for other objects like business of financiers. The Assessee had utilized part of loan secured from Citibank for lending advances to its sister concerns. Th....
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....terest received by it and only balance could be capitalized. 5) The Revenue challenged the order of CIT(A) by filing Appeal being ITA No. 9380/M/95 before the Income Tax Appellate Tribunal (ITAT). By impugned order dated 28 January 2003, the ITAT has allowed the appeal of the Revenue and has reversed the decision of CIT(A). The ITAT has held that the business of the Assessee had not commenced during the relevant Assessment Year. Additionally, it is held that letting monies on interest was not a part of main business of the Assessee. ITAT has therefore held that interest expenditure cannot be adjusted against the interest receipt in the present case. Order passed by the Assessing Officer is accordingly restored by the ITAT. Aggrieved by the order of ITAT, the Assessee has filed the present Appeal. 6) By order dated 26 October 2004 the Appeal has been admitted on following substantial question of law :- Whether the Tribunal erred on facts and in law in reversing the order of the CIT(A) by not allowing the set off of interest expenditure against interest income without appreciating that the business of the appellant had commenced in the previous year relevant to AY 1992....
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.... 1992-93. However, for Assessment Year 1993-94 same issue has been decided by the ITAT in favour of the Assessee and the appeal filed by the Revenue has been dismissed by the ITAT. That for Assessment Year 1993-94 the Tribunal referred to the objects of the Company under Clause 65 of the MoA as well as Board Resolution dated 18 February 1992 for the purpose of holding that the business of lending money on interest also formed part of main business of the Assessee. That even for subsequent Assessment Year 1994-95 the Assessing Officer held that the work of establishing business centres was completed before the end of financial year corresponding to Assessment Year 1993-94. Hence, there is no doubt that the financier business had actually started in Financial Year corresponding to Assessment Year 1992-93. Mr. Raichandani would rely upon judgment of the Apex Court in M/s. Radhasoami Satsang, Saomi Bagh, Agra Versus. Commissioner of Income Tax (1992) 1 SCC 659 in support of his contention that principle of res-judicata is applicable to assessment proceedings and the findings recorded for Assessment Years 1993-94 and 1994-95 would continue to govern the assessment even for Assessment Ye....
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....aken for business purposes. That since loan was without any specified objective, it cannot be regarded as having been secured for business purposes. That the term 'business' denotes strategical, purposeful and mindful trade with a view to earn profit, which is completely absent in the present case. That the amount secured through loan is disbursed among sister companies and the same cannot be treated as business activity. He would rely upon judgment of Kerala High Court in Mathew Joseph Versus. Assistant Commissioner of Income-tax, Circle-1 [2017] 87 taxmann.com 317 (Kerala) in which claim of Assessee under Section 57(iii) of the Act was negatived when it was found that loan was secured for business of fiber and yarn and actually utilised by the Assessee for investment in the sister concern. He would rely upon judgment of this Court in Commissioner of Income-tax Versus. Mimraj Manmal Ruia (1972) 84 ITR 673 (Bombay) in which the overdraft facility was actually used for speculation in shares. He would also rely upon judgment of this Court in Commissioner of Income-tax Versus. Jagmohandas J. Kapadia (1966) 61 ITR 663 (Bombay) in which it is held that if the Assessee was engaged ....
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....pect of non-commencement of the business of the Assessee-Company is concerned, the CIT(A) had relied upon various judgments for the purpose of arriving at the conclusion that the interest spent on loan during construction period can be adjusted against interest earned by lending monies. The CIT(A) thus held that mere non-completion of construction of premises and non-commencement of actual business was not the relevant factor and he took into consideration views expressed in various judgments that the financial transactions during construction period can also be taken into consideration. The relevant findings recorded by the CIT(A) in this regard read thus :- I have carefully gone through the judgment relied on by the Ld. Officer and the judgments relied on by the Ld. C.A. To begin with, it must be stated that in 189 ITR 670, the detailed facts of the case are not stated in the report. Be that as it may, the decision at 124 CTR 117 clearly applies to the facts of the present case. In the said case, the assessee had earned interest during the construction period. The assessee was in the process of construction of its plant and it had taken huge loan and was paying interest ....
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....ss center (Telecom Business Center) to Citibank for monthly rental of Rs. 8,52,240/-. Under Clause-22 of the Lease Agreement, Citibank agreed to give line of credit to the Business Center (Assessee) for an amount of Rs. 10.25 crores at the interest rate of 20.60% p.a. The ITAT further held that the loan given by Citibank was not utilised by the Assessee for the purpose of developing or putting up facilities/services in the business center, but the Assessee utilised the same to give interest bearing advances to the companies under the same management. The Assessee's Balance Sheet showed loans aggregating to Rs. 7,14,83,827/- given to five companies under the same Management and accrued interest of Rs. 11,29,455/-. The ITAT observed that out of the loan disbursed by Citibank, amount of Rs.1.76 crores was used as a deposit with Telycom Industries Pvt. Ltd. which was the owner of the premises. The ITAT also observed that the companies under the same management were existing tenants of the premises and they had agreed to sublet the premises to the Assessee, which in turn was to be leased out to Citibank. In the light of the above position, ITAT took up following issues for consideration....
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....reement. Those companies had been permitted by Telycom Industries Pvt. Ltd., the owner of the premises, to sub-let or assign the premises occupied by them to any third party, in the agreements of lease entered into with them. The preamble further records that Telycom Industries Pvt. Ltd. had been approached by the companies for permission to sub-let the respective portions occupied by them to the assessee-company and that in letters addressed to those companies Telycom had agreed to the proposal. However, formal agreements between the assessee-company and the tenant-companies were entered into only on 29-2-92. In this situation, it is difficult to accept the claim that the business was "set-up". All these steps carried out during the accounting period were only preliminary steps towards the setting up of the business of developing and leasing out business centres and by themselves do not have the effect of "setting up" the business. As already noted, there is nothing to show that the assessee-company had obtained possession of the business centre during the year. In Ramaraju Surgical Cotton Mills Ltd. (63 ITR 478), the Supreme Court held, after referring to the Bombay High Court ju....
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.... judgment has been held to be non-applicable to the issue of commencement of business under the Income Tax Act by the Gujarat High Court in CIT Versus. Ramaraju Surgical Cotton Mills Ltd. (supra), which is discussed in the latter part of the judgment. 19) The issue of adjustment of interest expenditure against income receipt during construction period appears to be squarely covered by judgment of the Apex Court in CIT Versus. Sarabhai Management Corporation Ltd. (supra). The case before the Apex Court involved challenge to the judgment of the Gujarat High Court in Sarabhai Management Corporation Ltd. Versus. Commissioner of Income-tax, Gujarat (1976) 102 ITR 25. In case before the Gujarat High Court, the Assessee had purchased a property and it was at lookout for person to whom it could be let. The Assessee had started carrying out repairs, rewiring, installation of lift and other steps in the process of getting the premises converted from residential house into business and storage accommodation. The Gujarat High Court held in paragraph 16 of the judgment as under :- 16. Applying the same reasoning to the facts of the case before us, the business activities of the asse....
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....hape for use of the licensee or lessee, as the case may be. Under these circumstances, following the principle laid down by the Division Bench of this court in Commissioner of Income-tax v. Saurashtra Cement & Chemical Industries Ltd. [1973] 91 ITR 170, 175 (Guj), it must be held that it is only in a loose sense that the business of the company can be said to be to give out on leave and license basis residential or office accommodation together with the appurtenant services. The business of the company was of a three-fold category as mentioned above after a proper analysis and once that analysis is made, it is clear that from October 1, 1964, the company was carrying on the second category of its business, namely, the business activity of making the residential accommodation with all the appurtenant services available to the intended lessees or licensees. We find from the order of the Tribunal that though the decision of this High Court in Commissioner of Income-tax v. Saurashtra Cement & Chemical Industries was cited, the Tribunal did not think that it had any application to the facts of the case. We are unable to see how the principles laid down in Saurashtra Cement & Chemical In....
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....ng on of the assessee's business. It would not be correct, as rightly pointed out by the High Court, to treat the assessee as having commenced its business only when the licensee or lessee occupied the premises or started paying rent. In these circumstances, we are of the opinion that the High Court was right in interfering with the finding of the Appellate Tribunal which was based on a misdirection in law. (emphasis added) 21) Thus the Apex Court in CIT Versus. Sarabhai Management Corporation Ltd. held that even if the first stage of acquisition of property cannot be treated as commencement of business, atleast the second stage of making the property ready for being rented out constitutes the activity of commencement of business. The judgment, in our view, squarely covers the issue at hand. 22) We proceed to examine few more decisions on the issue. In Commissioner of Income-tax Versus. Dhoomketu Builders and Development P. Ltd. 2013 SCC OnLine Del 1561, the issue before the Delhi High Court was whether mere act of depositing earnest money while participating in tender floated by the Official Liquidator and the act of borrowing monies for that purpose could be constr....
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....ing the course of setting up of business but before actual commencement thereof. The Delhi High Court took into consideration use of the term 'set up' in Section 3 of the Act and held that the act contemplates two different dates of setting up of business and commencing the business and that the two dates need not necessarily overlap. 26) In CIT Gujarat I Versus. Saurashtra Cement and Chemical Industries Ltd. (supra) the issue before the Gujarat High Court was as to whether the expenditure, depreciation and development rebate in respect of extraction of limestone from mines could be allowed as business expenditure. The said expenditure was allowable as permissible deduction only if it could be shown that the Assessee had commenced its business when it had started extraction of limestone. The issue before the Gujarat High Court was whether extraction of limestone marked the commencement of business of the Assessee. In the light of the position that extraction of limestone did not constitute a distinct or independent business of the Assessee, the Gujarat High Court took into consideration the judgment of the Apex Court in CIT Versus. Ramaraju Surgical Cotton Mills Ltd. (supra). Th....
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....er it. The Commissioner will pay the costs of the reference to the assessee. (emphasis added) 27) We are also not impressed by the submission made by Mr. Gupta that the company was incorporated on 17 February 1992 and that it was impossible for it to commence the business of lending monies prior to 31 March 1992. This submission is misplaced considering the factual background of the case where the transactions of lending monies and receipt of interest thereon took place prior to 31 March 1992 as the Balance Sheet as on 31 March 1992 indicated advances of Rs. 7,14,83,827/- given to five companies and payment of interest by them of Rs. 11,29,455/-. 28) Coming to the second aspect of the Assessee's act of lending of monies to its sister concerns forming part of its business activity, the ITAT found that grant of advances by the Assessee in the same year of disbursement of loan by Citibank was a mere fortuitous circumstance and the same did not make lending money as business activity of the Assessee. The MoA indicates financiering as one of the business activities of the Assessee. Furthermore, in the subsequent Assessment Year 1993-94, the Tribunal has made a detailed an....
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....rm deposits with bank and earned interest thereon before commencement of manufacturing activities. Investment of funds and earning income therefrom was not a part of business of the Assessee before the Apex Court. Also, the case involved admitted eventuality of non-commencement of business. In the present case, the funds were borrowed by the Assessee for business purposes and financiering was one of its business activity. We have held that both the businesses of the Assessee viz. leasing out premises and lending monies had commenced in the relevant Assessment Year. If financiering was not the business activity of the Assessee, and the borrowed funds were temporarily parked in interest bearing deposits or lent on interest, the ratio of the judgment in Tuticorin Alkali would have squarely applied to the present case. Since the facts of the present case are different, the judgment of the Apex Court has no application to the facts of the present case. Same is the position in respect of the judgments relied on by Mr. Gupta in CIT Versus. Mimraj Manmal Ruia (supra), CIT Versus. Jagmohandas J. Kapadia (supra), Commissioner of Income-tax Versus. Tamil Nadu Industrial Development Corporatio....
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.... sister concerns continued and adjustment of expenses earned on payment of interest to Citibank against interest earned by lending funds to sister concerns has been allowed. During the course of arguments, Mr. Raichandani has taken us through the figures of interest earned on loans to sister concerns and interest paid on loans secured by the Assessee during Assessment Years 1994-95 and 1995-96. If the adjustment of interest paid to Citibank is allowed as deduction from income earned by lending funds to sister concerns during Assessment Years 1993-94, 1994-95 and 1995-96, we do not see any reason why different view needs to be taken in respect of the Assessment Year 1992-93. The Revenue has not challenged the orders passed by the ITAT in the subsequent Assessment Years. We are therefore not inclined to accept the contention raised on behalf of the Revenue, selectively for Assessment Year 1992-93, that the purpose of obtaining loan from Citibank and disbursing the loan to sister concerns being different, deduction is not allowable under Section 57(iii) of the Act. It is therefore not necessary to discuss the ratio of each of the judgments cited by Mr. Gupta. 34) Mr. Raichandani ha....