GOODS AND SERVICE TAX REPORTS (GSTR) HIGHLIGHTS
F Where assessee had neither contended nor established inherent lack of jurisdiction or violation of principles of natural justice by adjudicating authority, writ petition not maintainable at stage of show-cause notice : Binani Cement Ltd. v. Union of India . . . 383
F For failure to pay differential duty on ground of permanent closure of unit, penalty not leviable : Commissioner of Customs and Central Excise v. Corrufab P. Ltd. . . . 388
F Where sufficient explanation given for delay in filing appeal, delay condoned : Saraya Sugar Mills Ltd. v. Commissioner of Central Excise . . . 392
F Where Tribunal's finding recorded that Department aware of marketing pattern of assessee was finding of fact, demand of duty beyond normal period barred by limitation : Commissioner of Central Excise v. Polar Industries Ltd. . . . 395
F Where there was no material on record to show that CBEC had taken decision to direct Commissioner to file appeal before Tribunal within one year from date of adjudication, appeal filed by Department before Tribunal barred by limitation : Commissioner of Central Excise v. Millipore (I) P. Ltd. . . . 398
F Opinion of chemical testing laboratories only as to chemical composition of product and not regarding classification of product : Paswara Impex Ltd. v. Commissioner of Customs . . . 329
F Assessees having knowledge that goods were good quality petroleum oil classifiable under Customs Tariff Heading 2710 19 90 but misdeclaring as crude oil condensate, confiscation and imposition of penalty proper : Paswara Impex Ltd. v. Commissioner of Customs . . . 329
F Where no evidence that assessees had repatriated more value in addition to transaction value paid to supplier of goods and chemical test reports not made available to assessees, it could not be held that imports relied on were contemporary imports and sufficient to reject transaction value : Paswara Impex Ltd. v. Commissioner of Customs . . 329
F Where no reason had been recorded or finding given to hold that rebate claims filed could not be considered as application for refund, those applications are to be treated as applications for refund and assessee eligible for interest as claimed : Janson Textile Processors v. Commissioner of Central Excise . . . 345
F Where goods removed against invoice of previous year without depositing duty before detection by investigation, demand of duty and imposition of penalty proper : Sukalp Agencies v. Commissioner of Central Excise . . . 350
F Where goods cleared without being entered in statutory record and without excise invoice deliberately, demand of duty and imposition of penalty confirmed : Sukalp Agencies v. Commissioner of Central Excise . . . 350
F Where no proof to controvert allegation of overlapping of demand of duty as baseless, assessee not exonerated from payment of interest and penal consequences : Sukalp Agencies v. Commissioner of Central Excise . . . 350
F Installation and testing charges to form part of assessable value : Sukalp Agencies v. Commissioner of Central Excise . . 350
F Where no proof of exemption claimed deliberately to cause prejudice to Department and difficulty in interpretation of exemption notification, imposition of penalty not sustainable : Sukalp Agencies v. Commissioner of Central Excise . . . 350
F Contumacious conduct and oblique motive of representative of assessee established of mass-scale evasion of duty on different counts, imposition of penalty proper but reduced to Rs. 1 lakh : Sukalp Agencies v. Commissioner of Central Excise . . . 350
F Service tax being destination based consumption tax it is necessary to see destination of service so consumed applying relevant tests to consider admissibility of Cenvat credit claimed : Hero Motocorp Ltd. v. Commissioner of Central Excise . . . 360
F Reasoned and speaking order warranted a break-up of different inputs for each year to meet the scrutiny of higher courts : Satyam Industries v. Commissioner of Central Excise . . . 364
F For failure by importers to re-export goods within six months action taken against CHA without sufficient cause despite not acting mala fide, order forfeituring security amount set aside : Natvar Parikh and Co. P. Ltd. v. Commissioner of Customs . . . 367
F Absence of evidence establishing involvement of company in smuggling of red sanders and neither show-cause notice nor order alleging omission and commission on its part, responsibility cannot be passed on company for misuse of its import-export code by actual exporter : Marvelous Engineers P. Ltd. v. Commissioner of Customs (Export). . . 370
F Where CHA having no knowledge about goods under export and not actively participating in facilitating illegal transaction, nominal and reasonable penalty to be imposed : Marvelous Engineers P. Ltd. v. Commissioner of Customs (Export) . . . 370
F Export documents received from fictitious company in respect of seven transactions and container provided by it misused for smuggling prohibited goods amounts to omission by freight forwarder and liable to penalty : Marvelous Engineers P. Ltd. v. Commissioner of Customs (Export) . . . 370
F C. B. E. C. Circulars :
Circular No. 971/5/2013-Customs, dated 29th May, 2013-Writing off of arrears of Central excise duty, Customs duty and service tax-Constitution of committees to advise the authority for writing off of arrears-Regarding . . . 71
F Notifications :
F Customs Act, 1962 :
Notification under section 14(2) :
Rates of basic customs duty on specified goods : Amendments . . . 73
Notification under section 25(1) :
Duty free tariff preference for least developed countries : Amendments . . . 72
F Customs Tariff Act, 1975 :
Notification under section 9A(1) and (5) :
Anti-dumping duty on acetone imported from Korea RP . . . 77
Anti-dumping duty on pentaerythritol imported from Chinese Taipei . . . 78
Anti-dumping duty on rubber chemicals exported from European Union, South Africa and Singapore . . . 74
Anti-dumping duty on rubber chemicals exported from Korea RP . . . 80
Anti-dumping duty on rubber chemicals imported from China PR . . . 79
| COMPANY LAW INSTITUTE OF INDIA PVT. LTD. No. 2, Vaithyaram Street, T.Nagar, Chennai - 600017. Phone: (044) 24350752 - 55 Fax: (044) 24322015 info@cliofindia.com |
IT : Reassessment to disallow capital loss allowed earlier not justified
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[2013] 35 taxmann.com 294 (Karnataka)
HIGH COURT OF KARNATAKA
Commissioner of Income-tax, Central Circle
v.
Mysore Cements Ltd.*
N. KUMAR AND B. MANOHAR, JJ.
IT APPEAL NO. 53 OF 2007†
APRIL 9, 2013
Section 147, read with section 48, of the Income-tax Act, 1961 - Income escaping assessment - Non-disclosure of primary facts [To disallow capital loss] - Assessment year 1996-97 – Before passing order in a scrutiny assessment, Assessing Authority called for assessee to explain its claim for long term capital loss - On being convinced about explanation offered, capital loss was allowed - Assessment was reopened after expiry of four years and capital loss allowed earlier was disallowed in reassessment - Whether, since it was not a case of assessee's failure to disclose fully and truly all material facts necessary for assessment, instant case did not fall under second part of proviso - Held, yes - Whether reassessment initiated after four years of assessment, was barred by law of limitation - Held, yes [Para 7] [In favour of revenue]
FACTS
| ■ | The assessee is a company engaged in the business of manufacturing cements. The assessment under section 143(3) was completed on 28-3-1997 on the basis of return of income filed by the assessee declaring a sum being long term capital loss. The assessee's case was that the capital loss was incurred on extinguishment of rights on warrants of one company. | |
| ■ | The said capital loss was accepted by the Assessing Authority in the scrutiny assessment, but subsequently a notice under section 148 was issued on 28-3-2002. The assessee appeared and contested the claim, but the Assessing Authority passed an order disallowing the said loss. | |
| ■ | On appeal, the Commissioner (Appeals) held that as there was no new material warranting reopening of assessment beyond four years and therefore, the reassessment was barred by law of limitation. | |
| ■ | On second appeal, the Tribunal which upheld the order of the Appellate Authority. | |
| ■ | On appeal: |
HELD
| ■ | The assessment order came to be passed under section 143(3) on 28-3-1997. Before passing the assessment order, Assessing Authority had called for assessee to explain its claim for disallowance of the long term capital loss. The assessee had given its written explanation. On being convinced about the explanation offered, the disallowance had been allowed. Therefore, it is not a case of the assessee's failure to disclose fully and truly all material facts necessary for the assessment. Therefore, the case does not fall under Part II of the proviso in order to escape from the limitation. If conditions stipulated in Part II of the proviso do not exist, then, when an assessment order is passed under sub-section 3 of section 143, no action can be taken under section 147 after the expiry of 4 years from the end of relevant assessment year. End of the relevant assessment year is 31-3-1997 and four years there from expires on 31-1-2001. The reassessment proceedings were initiated on 28-3-2002 clearly beyond 4 years period. Therefore, the lower appellate authority as well the Tribunal were justified in passing the orders. [Para 7] |
K.V. Aravind for the Appellant. S. Parthasarathi for the Respondent.
JUDGMENT
N. Kumar, J. - The Revenue has preferred this appeal against the order dated 09-06-2006 passed by the Income Tax Appellate Tribunal (hereinafter referred to as 'the Tribunal') which has upheld the order of the First Appellate Authority which in turn has set aside the reassessment order on the ground of limitation.
2. The assessee is a Company engaged in the business of manufacturing of cements. The assessment under Section 143(3) of the Income Tax Act, 1961 (for short, hereinafter referred to as 'the Act') was completed on 28-3-1997 on basis of return of income filed on 28-11-1996 declaring the loss of Rs.34,60,75,700/- which included a sum of Rs.5,98,50,000/- being long term capital loss. The assessee's case is that this capital loss is incurred on extinguishment of rights on warrants of M/s.Birla VXL Ind. The said capital loss was accepted in the scrutiny assessment and accordingly the assessment order was passed. Subsequently, the loss claimed as 'long term capital loss' was found to be incorrect and not in accordance with law, as there was no transfer of any capital asset as defined under the Income Tax Act, 1961. The loss incurred is in respect of the subscription money paid and not on account of capital asset that was acquired and the same having been transferred during the previous year. Therefore, a notice under Section 148 of the Act was issued on 28-3-2002 which was duly served on the assessee.
3. On receipt of the notice, the assessee appeared and contested the claim reiterating its stand which was earlier accepted by the Assessing Authority. Thereafter, the Assessing Authority was of the view that the money forfeited only represents loss of advance paid by the assessee. There was no case of holding any asset not to speak of a 'long term capital asset' under the Act. The so-called long term capital loss was wrongly claimed and wrongly allowed in the original assessment proceedings. Therefore, it requires to be withdrawn. Accordingly proceeded to pass an order disallowing the said long term capital loss. Aggrieved by the said order the assessee preferred an appeal before the Commissioner of Income Tax (Appeals). The Appellate Authority was of the view that no new material or evidence came to the notice of the Assessing Officer warranting reopening of the assessment beyond 4 years from the end of the relevant assessment order. There was no failure on the part of the assessee to disclose any material facts during the original assessment proceedings and therefore, it was of the view that the reassessment proceedings were clearly barred by law of limitation. Aggrieved by the said order, the Revenue preferred an appeal to the Tribunal which has up held the order of the Appellate Authority. It is against these two orders, the Revenue is in appeal.
4. Learned counsel for the Revenue assailing the impugned order contends that the amount claiming as long term capital loss is the amount paid by the assessee for purchase of shares. Only share warrant has been issued and no asset in law had been acquired and therefore, any loss sustained in the transaction would not constitute a long term capital loss. Though in the original proceedings, this amount was mentioned and claimed as particulars had not been furnished, the Revenue was unable to apply its mind and record its finding. It is the case of the assessee that there was no failure on their part to disclose fully and truly all material facts necessary for assessment and therefore limitation of 4 years period is applicable. The case falls under the First part of the proviso to Section 147 of the Act. Therefore, he submits that the case for interference is made out.
5. Per contra, learned counsel appearing for the assessee supported the impugned order.
6. This appeal had been admitted to consider the following substantial questions of law on 23-08-2007:
| (i) | Whether the Appellate Authorities were right in holding that issuance of notice on 28-03-2003 under Section 148 of the I.T. Act was clearly barred by limitation, as the same is beyond the period of four years instead of taking extended period of six years as per Sec. 149(1)(b) of the Act? | |
| (ii) | Whether the Appellate Authorities were right in holding that excess loss allowed to be carried away cannot be disallowed in the assessment proceedings as it would amount to change of opinion? |
7. The facts are not in dispute. The assessment order came to be passed under Section 143(3) of the Act on 28-3-1997. Before passing the assessment order, Assessing Authority had called for assessee to explain its claim for disallowance of the long term capital loss. The assessee had given its written explanation on being convinced about the explanation offered, the disallowance had been allowed. Therefore, it is not a case of the assessee's failure to disclose fully and truly all material facts necessary for the assessment. Therefore, the case do not fall under. Part II of the proviso in order to escape from the limitation. If conditions stipulated in Part II of the proviso do not exist, then, when an assessment order is passed under sub-Section 3 of Section 143, no action can be taken under Section 147 of the Act after the expiry of 4 years from the end of relevant assessment year. End of the relevant assessment year is 31-3-1997 and four years therefrom expires on 31-01-2001. The reassessment proceedings were initiated on 28-3-2002 clearly beyond 4 years period. Therefore, the lower Appellate Authority as well the Tribunal were justified in passing the orders.
8. When the reassessment order was barred by law of limitation, the order passed by the authorities are in accordance with law. Therefore, the substantial questions of law are answered in favour of the assessee and against the Revenue.
No merits. Dismissed.
IT: Where assessee was not engaged in business of investment in shares, interest bearing funds invested in shares of related company to extend financial support, could not be said to be utilization for business purposes, and proportionate interest was liable to be disallowed
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[2013] 35 taxmann.com 293 (Allahabad)
HIGH COURT OF ALLAHABAD
Commissioner of Income-tax
v.
Deepak Agarwal*
PRAKASH KRISHNA AND MANOJ KUMAR GUPTA, JJ.
IT APPEAL NO. 357 OF 2005†
MAY 30, 2013
Section 36(1)(iii) of the Income-tax Act, 1961 - Interest on borrowed capital [Interest free loans to sister concern] - Assessment year 2001-02 - Assessee, engaged in business of financing, invested interest bearing funds in shares of company in which assessee had substantial interest - Assessing Officer, on observing that no income had been derived in respect of such investment, disallowed proportionate interest under section 36(1)(iii) on ground that interest bearing funds had been diverted to extend financial support to related company - Whether, where assessee was not engaged in business of investment in shares, interest bearing funds invested in shares of related company could not be said to have been utilized for purposes of business, and therefore, proportionate interest was liable to be disallowed under section 36(1)(iii) - Held, yes [Para 19] [In favour of assessee]
FACTS
| ■ | The assessee, an individual engaged in the business of financing, borrowed funds from the market and advanced it on interest to other parties. During the assessment year, the assessee had invested an amount of Rs. 2 crores in shares of 'A' Ltd., in which the assessee had a substantial interest. The Assessing Officer noticed that no benefit or income had been derived in respect of the investment in 'A' Ltd. and therefore, disallowed proportionate interest under section 36(1)(iii) on ground that interest bearing funds had been diverted to extend financial support to related company. The disallowance was confirmed by the Commissioner (Appeals). | |
| ■ | On appeal, the Tribunal deleted the disallowance on ground that the assessee was in business of investment in shares and the purchase of shares in 'A' Ltd. was for purpose of its business. | |
| ■ | On revenue's appeal: |
HELD
| ■ | It is abundantly clear that in order to avail the allowance under section 36(1)(iii), the borrowed sum should be spent for the business purpose and if on the other hand, it has been utilized for private purpose or for purposes not connected with the business of the assessee, then the interest paid on the said borrowing cannot be allowed under section 36(1)(iii). [Para 13] | |
| ■ | Applying the aforesaid principle to the facts of the present case, the Assessing Officer and the Commissioner (Appeals) recorded a specific finding that the investment of Rs. 2 crores by the assessee in the shares of 'A' Ltd. was not for business purpose but in order to extend financial support to the company 'A' Ltd. [Para 13] | |
| ■ | A perusal of the entire order of the Tribunal demonstrates that it had proceeded on wrong assumption of fact that the assessee was in the business of investment in shares and there is no dispute that the purchase of shares of Rs. 2 crore of 'A' Ltd. was for the purpose of its business. On the aforesaid wrong assumption of facts, the Tribunal had proceeded to place reliance on certain judgments of the Apex Court and of this Court and had thereafter jumped to the conclusion that even if the investment in shares had not yielded any income, the interest payable on the borrowed amount was to be allowed as business expenditure under section 36(1)(iii). [Para 15] | |
| ■ | It is clear that the entire approach of the Tribunal is manifestly illegal. It had wrongly assumed that the assessee is in the business of investment in shares. It had not referred to any material in this regard. There is no finding that in the previous years, the assessee had even made investments in shares of any company, or had earned profit or loss therefrom. The Tribunal totally glossed over the main controversy between the parties, namely, that investment in shares was not the business of the assessee. Business of financing is not the same as business of investing in shares and at least not in the instant case where there was no such history. The Tribunal failed to notice the reasonings and various factors taken into consideration by the Assessing Officer and the Commissioner (Appeals) in holding that in the circumstances of the instant case, the investment by the assessee in the shares of 'A' Ltd. was not in connection with its own business but to extend financial support to another company, namely, 'A' Ltd. in which the assessee himself was the managing director. [Para 16] | |
| ■ | Since the Tribunal had proceeded to decide the controversy on wrong assumption of facts and had glossed over the findings recorded by the Assessing Officer and Commissioner (Appeals), and had brushed aside the relevant factors, the order of the Tribunal deleting the addition cannot be sustained. Accordingly, the question of law is answered in favour of the revenue and against the assessee. [Para 18] | |
| ■ | Since the Tribunal is the last fact finding body, it was its duty to take into considartion the entire facts and circumstances and findings recorded by the Assessing Officer and Commissioner (Appeals), and more so when it was reversing their orders. The Tribunal had not at all set aside the findings recorded by the Assessing Officer and the Commissioner (Appeals) regarding investment of shares in 'A' Ltd. not being in connection with the business of the assessee. In view of the above, the matter is remitted back to the Tribunal for deciding the controversy afresh in the light of the observations made. [Para 19] | |
| ■ | Appeal allowed accordingly. [Para 20] |
CASE REVIEW
Deepak Agarwal v. CIT [IT Appeal No. 118/Luck./2005, dated 14-6-2005] reversed.
CASES REFERRED TO
CIT v Gorawara Plastics & General Industries (P) Ltd. [2007] 289 ITR 224/[2008] 167 Taxman 174 (All.) (para 7), CIT v. Rajeeva Lochan Kanoria [1994] 208 ITR 616/[1995] 80 Taxman 572 (Cal.) (para 7), Sarabhai Sons (P) Ltd. v. CIT [1993] 201 ITR 464 (Guj.) (para 7), CIT v.Rajendra Prasad Moody [1978] 115 ITR 519 (SC) (para 7), CIT v. Radico Khaitan Ltd. [2005] 274 ITR 354/142 Taxman 681 (All.) (para 7),Madhav Prasad Jatia v. CIT [1979] 118 ITR 200/1 Taxman 477 (SC) (para 8), CIT v. H.R Sugar Factory (P.) Ltd. [1991] 187 ITR 363/[1990] 53 Taxman 63 (All.) (para 10), Govan Bros. v. CIT [1963] 48 ITR 930 (All) (para 11) and Triveni Engg. Works Ltd. v. CIT [1987] 167 ITR 742 (All). (para 12).
R.K. Upadhyaya, A. Kumar, A.N. Mahajan, B.J. Agarwal, D. Awasthi, G. Krishna and S. Chopra for the Appellant. S.D. Singh for the Respondent.
ORDER
Manoj Kumar Gupta, J. - The present appeal under section 260A of the Income Tax Act has been filed against order dated 14-6-2005 passed by the Income Tax Appellate Tribunal (Bench Lucknow) in ITA No. 118/Luc/2005 for the assessment year 2001-02. The appeal was admitted on the following substantial question of law :-
"Whether the Income Tax Appellate Tribunal is justified in law in deleting the addition of Rs.18,32,000/- sustained by the CIT (A) without appreciating the facts of the case"
2. The facts giving rise to the instant appeal are as follows :-
The assessee is an Individual by status carrying on business of financing and investments. The modus operandi of the assessee's business is borrowing funds from the market and advancing it on interest to other parties. During the assessment year under consideration, the assessee has shown gross interest receipts from his business of financing to the extent of Rs.56,49,614/- against which he had paid interest on borrowed funds amounting to Rs.53,31,137/-. The Assessing Officer found that the assessee had invested an amount of Rs.2,01,33,605/- in shares including an investment of Rs.2 crores in the shares of Agmo Tex Ltd. He also noticed that the assessee has substantial interest in the above concern and no benefit or income has been derived or accrued in respect of investment of Rs.2 crores in the shares of Agmo Tex Ltd. The Assessing Officer after considering that the assessee had non interest bearing funds of Rs.85.5 lakhs and that the assessee was paying the interest on the borrowed fund ranging from 12% to 21%, considered the rate of interest of 18% and disallowed the proportionate interest on the remaining amount of Rs.1,14,50,000/- which comes to Rs.20.61 lakhs out of the interest expenses debited by the assessee. The assessment was completed u/s. 143(3) of the Income Tax Act, 1961 on 31.03.2004 on an income of Rs.24,12,6000/-.
3. Being aggrieved, the assessee filed an appeal before CIT(A), Kanpur who vide his order dated 02.02.2005 has allowed a relief of Rs.2,29,000/- out of total addition of Rs.20,61,000/- in respect of interest disallowed on account of investment in shares.
4. Being aggrieved by the above order, the assessee preferred an appeal before ITAT, who vide its impugned order dated 14-6-2005 has allowed the assessee's appeal and deleted the addition of Rs.18,32,000/-. The tribunal found that the investment of Rs. 2 crores in purchase of shares of Agmo Tex Ltd. is for business purposes and is allowable expenses u/s. 36 (I) (iii) of the Income Tax Act, 1961. The tribunal held that it is wholly immaterial that the assessee himself was controlling the company M/s. Agmo Tex Ltd. or that the investment in shares had not yielded any dividends. It further held that the department has not disputed the fact that the assessee has used the borrowed fund for the purpose of its business and on which interest is payable. Consequently, the tribunal allowed the appeal filed by the assessee. Aggrieved, department has come up in appeal.
5. We have heard Sri R.K. Upadhyay, advocate for the department and Sri S.D. Singh, advocate for the assessee.
6. Sri R.K. Upadhyay, counsel for the department vehemently contended that the order of Income Tax Appellate Tribunal is wholly cryptic and has been rendered in a slipshod manner. The tribunal has not taken into consideration the relevant factors and on the basis of which the Assessing Officer has recorded a finding of fact that an amount of Rs.2 crore was diverted for purposes not connected with the business of the assessee by giving the shape and colour of investment in shares of M/s. Agmo Tex Ltd. It was not an investment made for business purposes but to save M/s. Agmo Tex Ltd. from recurring losses and also in order to increase the equity of promoters in the said company and thereby facilitate borrowing for the said company from banks etc. He further submitted that the tribunal had proceeded on wrong assumption of fact. It was very much in dispute that the assessee has used the borrowed fund for the purpose of its business. To the contrary, the tribunal has wrongly observed that there is no dispute that borrowed funds have been used for business purposes.
7. On the other hand, Sri S.D. Singh, learned counsel for the assessee - respondents tried to support the order of the Tribunal. He urged that admittedly, the assessee is carrying on business of financing and therefore investing borrowed funds in the shares of M/s. Agmo Tex Ltd. was in due course of business dealing and that it is not essential that there should be reasonable expectancy of receiving dividends in order to get benefit of section 36(1)(iii) of the Income Tax Ac, 1961. In this regard, he placed reliance on the judgements in CIT v Gorawara Plastics & General Industries (P.) Ltd. [2007] 289 ITR 224/[2008] 167 Taxman 174 (All.), CIT v. Rajeeva Lochan Kanoria [1994] 208 ITR 616/[1995] 80 Taxman 572 (Cal.), Sarabhai Sons (P.) Ltd. v. CIT [1993] 201 ITR 464 (Guj.), CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC) and CIT v. Radico Khaitan Ltd. [2005] 274 ITR 354/142 Taxman 681 (All.).
8. Section 36 (1)(iii) of the Income Tax Act, 1961 is a follows :-
36.(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28 -
| (iii) | The amount of the interest paid in respect of capital borrowed for the purposes of the business or profession : |
This court after considering the aforesaid provision and the Apex Court's decisions in the case of Madhav Prasad Jatia v. CIT [1979] 118 ITR 200/1 Taxman 477, in its judgement Radico Khaitan Ltd.'s case (supra) has held as under :-
"From the aforementioned cases, the principle which emerges for allowing the amount of interest paid in respect of capital borrowed is that the following three conditions should be fulfilled :
| (i) | the capital must have been borrowed or taken for the purpose of the business or profession; | |
| (ii) | the interest should have been payable; and | |
| (iii) | if the borrowing is not for the business purpose and is for private purpose or is not connected with the business, interest paid on such borrowings cannot be allowed as a deduction under section 36 (1)(iii) of the Act." |
9. The aforesaid proposition of law also emerges out from various decisions cited both on behalf of the department and the assessee.
In Rajendra Prasad Moody's case (supra), the Apex Court was considering the scope of section 57(iii) of the Income Tax Act, 1961 which uses the phrase "any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income." In that case, there was no dispute that the assessees have borrowed moneys for making investment in the shares of certain companies. The Apex Court repelled the contention of the department that since the investment in the shares had not yielded any dividend and therefore the expenditure is not allowable. This case is not of any help to the assessee as there was no dispute therein that the borrowed funds were utilised for business purposes.
In Sarabhai Sons (P.) Ltd.'s case (supra), the assessee was a company which was deriving income from investments, profits from systronics division, and from its marketing division dealing in purchasing and selling of products of sister concerns. The assessee company was a shareholder of Swastik Oil Mills Limited (SOML). It decided to takeover SOML and for the said purpose it acquired 100% shares in SOML. A question arose whether the investment made in the shares of SOML to gain control over the said company was a allowable deduction under Section 57(iii). It was found that the shares were purchased by the assessee company with the object of getting 100% control over the company SOML and therefore, it was held that it was not an expenditure incurred for business purposes and is thus outside the purview of section 57(iii) of the Income Tax Act, 1961.
In Rajeev Lochan Kanoria's case (supra), the assessee was found to be engaged in the business of rehabilitating and financing various companies. It was further found that the acquisition of shares by the assessee to gain control over such companies, were the activities relating to the business of the assessee. It was held that since the assessee was carrying on business of promoting, monitoring, financing and controlling the companies and therefore, the investment in shares was in connection with the business of the assessee and was held to be allowable expenditure under section 36(1)(iii).
In Gorawara Plastics & General Industries (P.) Ltd.'s case (supra), the assessee was a company. It was found that its memorandum and article of association provides for investment in shares. The assessee company had taken term loan from Hongkong and Sanghai Banking Corporation but the project could not take off during the substantial part of the previous year therefore, the assessee company as a prudent businessman invested the amount of term loan of Rs.30,00,000/- in equity shares of M/s. Samtel India Ltd. And M/s. Teletube Electronics Ltd. The Assessing Officer disallowed the claim of interest on the ground that the amount of term loan was not utlised for the purpose for which it was sanctioned. Repelling the said contention, it was held that the investment in the shares in the circumstances aforesaid, was for business purposes and is allowable expenditure u/s. 36(1)(iii).
10. On the other hand, the department, apart from placing reliance on the judgment in the case of Radico Khaitan Ltd. (supra), Rajendra Prasad Moody (supra), and Sarabhai Sons (P.) Ltd (supra), has also placed reliance upon the judgement CIT v. H.R Sugar Factory (P.) Ltd. [1991] 187 ITR 363/[1990] 53 Taxman 63 (All.). In that case, H.R. Sugar Factory Pvt. Ltd was the assessee company engaged in manufacture of sugar. The company had borrowed a huge amount from various banks and other financial institutions and it lend the same to its directors on a meagre rate of interest of 5% p.a. Subsequently, under a compromise decree passed by the civil court, the amount of interest was reduced to 2.5% . The assessing officer disallowed the proportionate interest paid by the company on the borrowed sum holding that the said lending was not for the purpose of its business. Aggrieved by the order of the assessing officer, the company preferred an appeal and remained unsuccessful and thereafter it took the matter in further appeal before the tribunal which allowed the appeal filed by the assessee. A division bench of this court, after considering the entire facts found the order of the Tribunal to be not sustainable in law. It was held that the assessee is not a finance company and it is engaged in manufacture of sugar and no business purposes is served by lending the borrowed money to its directors/shareholders. It was further held that if the company has not advanced money to the directors, the same would have been available to it for its own business and to that extent it was not found necessary to borrow from the bank. Consequently, it was held that the interest paid to the bank on the sum borrowed by the company to its directors, is not an allowable expense u/s. 36(1)(iii).
11. Payment of interest on purchase of shares with a view to retain the managing agency to the company was not found to be allowable expenditure (videGovan Bros. v. CIT [1963] 48 ITR 930 (All).
12. Similarly, interest paid on the money borrowed to the extent such borrowings were given to the sister concern was held not allowable under section 36(1)(iii) [vide Triveni Engg. Works Ltd. v. CIT [1987] 167 ITR 742 (All).]
13. From perusal of the aforesaid judgements, cited by both the sides, it is abundantly clear that in order to avail the allowance under section 36(1)(iii), the borrowed sum should be spent for the business purpose and if on the other hand, it has been utlised for private purpose or for purposes not connected with the business of the assessee , then the interest paid on the said borrowing cannot be allowed u/s. 36(1)(iii).
Applying the aforesaid principle to the facts of the present case, we find that the assessing officer and CIT(A) after taking into consideration various factors, have recorded a specific finding that the investment of Rs.2 crores by the assessee in the shares of Agmo Tex Ltd. is not for business purpose but in order to extend financial support to the company Agmo Tex Ltd. While recording the said findings, the authorities have taken the following factors into consideration :-
| (a) | The business of the appellant is of taking loans and advancing loans, in short known as financing. In the business of financing, investment in shares is not a part of the business. | |
| (b) | The company Agmotex Limited is a family owned company of the assessee in which he himself was the managing director at the relevant time. | |
| (c) | The company Agmotex Limited was running in the heavy losses and was under financial difficulties. In order to avail of bank loans etc., equity part of the promoters were to be increased. This prompted the assessee to divert borrowed money into equity shares of the said company and thus enable the company to get loans and finances from banks and other institutions. | |
| (d) | The aforesaid amount of Rs. 2 crore was earlier advanced to the same company on interest of 24%. The said amount was diverted in purchasing shares of Agmo Tex Ltd., so that the said company is saved from interest liability. It was a deliberate exercise of colouring the funds which were already available with the company into different shape viz, shares, knowing fully well that the company is running in losses and there is no likelihood of getting any dividend in near future. | |
| (e) | The assessee had borrowed the money by paying a huge amount of interest upto 21% and it was required to be consciously and prudently managed to offset atleast the interest liability. In such scenario, investment in the shares of M/s Agmo Tex Ltd. was not for purposes of the business of the assessee. |
14. However, the order of the Tribunal proceeds on wrong assumption of fact viz. that there is no dispute that the investment in shares has been made by the assessee for the purpose of its business. In this regard, the tribunal has observed as under :-
"Thus, the amount of interest disallowed by the authorities below on account of investment in shares of A.L. is not justifiable as the Department has not disputed the fact that the assessee has used the borrowed fund for the purpose of its business and on which the interest is payable."
At another place, the Tribunal has again proceeded on the assumption that the assessee is in the business of financing and investment of borrowed amount in shares of other company when it observed as under :-
"We are of the considered view that if the assessee is in the business of financing and investment and uses the borrowed amount, inter alia, for investment in the shares of other companies, for business purposes, the interest payable on the borrowed amount is to be allowed as business expenditure u/s. 36(i)(iii) of the Income Tax Act, 1961."
15. A perusal of the entire order of the tribunal demonstrates that it had proceeded on wrong assumption of fact that the assessee is in the business of investment in shares and there is no dispute that the purchase of shares of Rs.2 crores of Agmo Tex Ltd. was for the purpose of its business. On the aforesaid wrong assumption of facts, the Tribunal had proceeded to place reliance on certain judgements of the Apex Court and of this court and had thereafter jumped to the conclusion that even if the investment in shares had not yielded any income, the interest payable on the borrowed amount is to be allowed as business expenditure u/s. 36(1)(iii).
16. It is clear that the entire approach of the tribunal is manifestly illegal. It had wrongly assumed that the assessee is in the business of investment in shares. It had not referred to any material in this regard. There is no finding that in the previous years, the assessee has ever made investments in shares of any company, or had earned profit or loss therefrom. It also wrongly proceeded on the premises that there is no dispute between the department and the assessee that the borrowed fund has been used for the purpose of its business. The tribunal had totally glossed over the main controversy between the parties, namely, that investment in shares is not the business of the assessee. Business of financing is not the same as business of investing in shares and at least not in the instant case where there is no such history. The tribunal had failed to notice the reasonings and various factors taken into consideration by the assessing officer and Commissioner of Income Tax (Appeals) in holding that in the circumstances of the instant case, the investment by the assessee in the shares of M/s. Agmo Tex Ltd. is not in connection with its own business but to extend financial support to another company, namely, M/s. Agmo Tex Ltd. in which the assessee himself is the Managing Director.
17. Thus, the tribunal had completely lost sight of the main controversy i.e. whether the borrowings on which interest was paid was utilised for the purpose of the business of the assessee. It has already been noticed that the primary condition for allowing deduction of interest while computing business income is that interest was paid on capital borrowed for the purposes of business or profession. If the borrowed capital is utilised not in the business which was subject matter of assessment but for some non-assessable income (in the instant case that of M/s. Agmo Tex Ltd.), interest paid thereon, is not allowable deduction under this provision.
18. Since the tribunal has proceeded to decide the controversy on wrong assumption of facts and has glossed over the findings recorded by the assessing officer and CIT(A) and had brushed aside the relevant factors and therefore, the order of the tribunal deleting the addition of Rs.18,32,000/- cannot be sustained. Accordingly, the question of law is answered in favour of the revenue and against the assessee.
19. Since the tribunal is the last fact finding body and therefore it was its duty to take into consideration the entire facts and circumstances and findings recorded by the assessing officer and CIT (A) and more so when it was reversing their orders. We find that the tribunal had not at all set aside the findings recorded by the assessing officer and the CIT (A) regarding investment of shares in M/s. Agmo Tex Ltd. not being in connection with the business of the assessee. In view of the above, the matter is remitted back to the Tribunal for deciding the controversy afresh in the light of the observations made.
20. Appeal allowed accordingly.
Regards,
Pawan Singla
BA (Hon's), LLB
Audit Officer
[2012] 28 taxmann.com 254 (Mum.)
IN THE ITAT MUMBAI BENCH 'I'
Hindustan Colas Ltd.
v.
Assistant Commissioner of Income-tax, Circle 6(3)*
RAJENDRA SINGH, ACCOUNTANT MEMBER AND VIVEK VARMA, JUDICIAL MEMBER
IT APPEAL NOS. 3981 & 5498 (MUM) OF 2008 AND 6829 (MUM.) OF 2010
[ASSESSMENT YEARS 2002-03 TO 2004-05]
OCTOBER 19, 2012
I. Section 264, read with section 35AB, of the Income-tax Act, 1961 - Revision - Of other orders - Scope of order - Assessment years 2002-03 to 2004-05 - Whether Commissioner in exercise of power under section 264, cannot pass any order prejudicial to interest of assessee - Held, yes - Whether, therefore, where Commissioner passed an order under section 264, wherein he disallowed assessee's claim for deduction under section 35AB already allowed by Assessing Officer, said order of Commissioner was not sustainable - Held, yes [Para 2.2.4] [In favour of assessee]
II. Section 80-IB of the Income-tax Act, 1961 - Deductions - Profit and gains from industrial undertakings other than infrastructure development undertakings - Mineral oil - Assessment years 2002-03 to 2004-05 - Assessee was a joint venture created for manufacture of various products such as bitument emulsions, cutback bitumen and modified bitumen - Assessee purchased bitumen and used same as raw material for production of said items after applying certain processes - Assessee claimed deduction under section 80-IB(9) contending that it was engaged in manufacture/production of mineral oil or refining of mineral oil - Assessing Officer was of view that bitumen was already manufactured from crude oil and, thus, further processing of it into modified bitument was not eligible for deduction - On appeal, it was noted that IIT, Chennai had given its opinion that products manufactured by assessee were mixture of hydrocarbons but it remained silent on question as to whether these could be characterised as mineral oil - Further, it was also required to be examined whether process employed by assessee amounted to refining of bitumen or manufacture/production of new products using bitumen as raw material - Whether in view of above, matter was to be remanded back to Commissioner (Appeals) for passing fresh order after obtaining expert opinion - Held, yes [Para 2.1.13] [Matter remanded]
Circulars and Notifications : Circular No. 57 dated 23-3-1971
III. Section 80-IB, read with section 80A of the Income-tax Act, 1961 - Deductions - Profits and gains from industrial undertakings other than infrastructure undertakings - Claim for deduction - Assessment years 2003-04 and 2004-05 - For relevant assessment years, assessee did not claim deduction under section 80-IB in return of income or during assessment proceedings - Said claim was raised before Commissioner (Appeals) by filing an additional ground - Whether in view of provisions of section 80A(5) inserted by Finance Act, 2009 which are applicable retrospectively from assessment year 2003-04, claim raised by assessee for first time before Commissioner (Appeals) could not be allowed - Held, yes [Para 3.1.5] [In favour of revenue]
IV. Section 35AB, rea
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