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TMI Blog2014 (4) TMI 659X X X X Extracts X X X X X X X X Extracts X X X X ..... on, it returned a net loss for the year at Rs.74.95 lacs. 3. The first issue concerns the allowability of the gross loss of Rs.27,97,676/- (i.e., Rs.8,84,21,510 - Rs.8,56,23,834) incurred in the financing activity. While no details stood furnished during the assessment proceedings, so that the loss, i.e., the excess of the interest expenditure over interest income, came to be disallowed thereat, in the remand proceedings, as directed by the first appellate authority, the assessee furnished statements listing the rates at which interest stood charged by it to various borrowers (PB pg.20), as well as that charged to it by different banker/lenders (PB pg.21). The rates exhibited a wide variation, even from or qua the same lender, viz. at 8.50% to 12.45% p.a. (from Bank of America) and 8.75% to 12.35% p.a. (from Mozaki Finance and Investment Pvt. Ltd.). Likewise for the lending rates charged by the assessee, varying from as low as 3% to 13% p.a.. However, no comparative data, i.e., to match the borrowing and lending rates at any given point of time stood furnished, so as to be able to draw any meaningful comparison. So, however, it was clear that the lending rate/s were lower than or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the A.O. finds reproduction, as also the findings by the first appellate authority, at paras 2.3 and 2.4 of the impugned order respectively. It is these findings which the assessee as an appellant was required to address. The A.O. has given a definite finding that no business was carried out at any time during the relevant year. The interest income, therefore, was liable to be assessed as 'income from other sources' (i.e., u/s.56) and, as such, only interest expended wholly and exclusively for the purpose of making or earning the said income, exigible to deduction there-against (i.e., u/s.57(iii)). This finding stands endorsed by the ld. CIT(A) in the appellate proceedings. Their concurrent finding remains un-repudiated and, in fact, unanswered. Merely adverting to the statement of the assessee's business (at para 3 of the assessment order) would be of no consequence, when the same is itself a subject matter of dispute. In fact, as would be apparent from the reading of the assessment order, the A.O. considered or, rather, treated the assessee to be engaged in financing business and, accordingly, effected the impugned disallowance u/s.37(1) of the Act while framing the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the same obtains, at nominal amounts though, even upto financial year 2004-05, i.e., over six years after the discontinuation of its manufacturing activity, the company is yet to decide on and, in any case, embark on a new product or line of business by that time (31.03.2005). This also puts the non-response by the assessee to the A.O.'s remand report (dated 16.11.2010), on being confronted thereto by the ld. CIT(A), in perspective. 5.3 The first question that arises is: Whether the assessee borrowed the funds for its business? The assessee refers to Clauses 29 & 30 of its MOA to impress of the same being so. The said clauses read as under: "29. To invest any monies of the Company not immediately required for the purpose of its business in such investments or securities as may be thought expedient. 30. To lend and advance money or give credit on such terms as may seem expedient to customers and others having dealings with the Company and to give guarantees or become sureties for any such persons." The same fall under Part III-B of the MOA, titled 'The objects inciden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit and loss account at a debit of Rs.15.61 lacs and Rs.90.56 lacs respectively. The company, thus, has a negative capital at all times during the relevant year and, therefore, leave aside liquid funds, even its fixed assets are financed by borrowed capital. Further, it being trite that the objects specified in the MOA cannot be determinative of the matter, in the sense that every act of the company covered by the memorandum is not necessarily done in the course of its business, what is to be seen is both the object/s as well as to whether they are actually being pursued. We have done exactly that, to find that the financing activity stands in fact precluded and, in fact, being not pursued. To say, therefore, that the company is formed for and actually engaged in financing business is fallacious. The lending of the company is only of its surplus funds (assuming its' borrowings to be a part of the company's funds), i.e., till the time it finds suitable avenue/s for their user. We, accordingly, have no hesitation in upholding the interest income as being assessable as income from other sources. 5.5 Continuing further, the company has nowhere been able to establish that the inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o, i.e., as on 31.03.2003. This, thus, itself becomes a source of loss, as the interest rates, which are stated in per annum terms, would stand to work to effectively higher rates where recovered periodically vis-a-vis where it is not so. 5.6 Coming next to the assessee's reliance on the decision in the case of Sahni Silk Mills (P.) Ltd. (supra), the same is again completely misplaced. In the facts of that case, the assessee, a manufacturer of knitted fabrics, charged interest @ 12% p.a. to three parties to whom advance was made by it. The assessee having borrowed funds at 16% p.a., the Revenue sought to disallow the deficit of 4% p.a. The tribunal found that the capital had been borrowed and used for the purpose of business. In that event, it held that there was no occasion for the Revenue to contend that the rate charged was not reasonable. The hon'ble court, in view of the clear findings by the tribunal, declined to admit the reference inasmuch as no question of law arose. Firstly, a decision or ruling is an authority only for what it actually decides, and not that may remotely or even logically flow from it (refer: Goodyear India Ltd. vs. State of Haryana [1991] 188 ITR 402). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowance of stamp duty, incurred at Rs.10 lacs. The same stood incurred qua the loan from Bank of America. The same stood disallowed by the Revenue as the assessee had not carried out any business activity during the relevant year; the relevant part of the impugned order reading as under: "3.2 A.O. during the assessment proceedings noted that assessee had incurred stamp duty expenses of Rs.10 lacs, on account of loan transactions with sister concerns which were given on unfavourable terms. The same was disallowed by the A.O. being not wholly and fully expended for the purpose of business. During the course of appellate proceedings, it was submitted that the loan was obtained from Bank of Amercia is utilized for the business of the company on which Rs.10 lacs was incurred as stamp duty. In the remand report the A.O. has observed that as per Memorandum of Association, lending of money was not the business of the appellant and hence the amount borrowed is not incurred wholly and exclusively for the purpose of business. Appellant has not offered any comments on observations of A.O. In view of this, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gly, confirm the impugned disallowance. We decide accordingly. 7. This leaves us with the assessee's Ground III, upholding the disallowance of the staff expenses to the extent of 50%. The assessee's stand was of the same being toward the company's processing unit, which did not pass muster. The assessee has during the year disposed off almost its entire machinery, besides other fixed assets, save immoveable property. Even the rent arrangement, as it appears, stands discontinued inasmuch as there is no rent expense for the year as against Rs.58,500/- for the immediately preceding year (Schedule 15 to the balance-sheet). No wonder it did not generate any business by way of processing, which would presumably require plant and machinery, nor any explanation toward the same stands furnished at any stage. In fact, the expenditure under reference being incurred for the current year at almost the same level as for the immediately preceding year, whereat the processing work undertaken was at Rs.22.28 lacs, the same appear to be independent thereof. In any case of the matter, the disallowance is effected at 50%, and not for the total expense claimed. We, accordingly, find no reason for inte ..... X X X X Extracts X X X X X X X X Extracts X X X X
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