TMI Blog2002 (11) TMI 778X X X X Extracts X X X X X X X X Extracts X X X X ..... red in not computing the receipts under the head income from business or profession . iv.The authorities below ought to have allowed the expenditure in the form of payment of interest to banks and on debenture and other expenditure such as guarantee commission etc., in computing the income of the appellant. v.The appellant denies the liabilities for interest under section 234B. Further prays that the interest should be levied only on returned income. 3.1 The facts of the case are as follows : The appellant was incorporated as Public Ltd. Company on 15-3-1994 as per the Certificate of Incorporation issued by the Registrar of Companies, Karnataka. The main objects of the Company is to set up iron and steel making facilities and continuous casting and hot and cold rolling mill plants for producing of all kinds of metals both ferrous and non-ferrous including steel, etc. The objects incidental or ancillary covers a wide spectrum like import/export of all kinds of merchandise and services, acting as consulting engineers, property development, lending and advancing monies, buying and selling of shares and securities, carrying on business of offering guarantees, investment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 (ii)Loan Funds (a)Secured Loans B 17,471.50 (b)Unsecured Loans C 16,655.64 Total 75,227.15 II.Application of Funds (1)Fixed Assets (a)Gross Block D 721.78 (b)Less - depreciation 19.42 (c)Net Block 702.36 (d)Capital Work-in-progress and Pre-operative expenditure during construction period pending allocation E 30,553.72 31,256.08 (2)Investments F 21,796.08 (3)Current Assets, Loans and Advances: (a)Cash and Bank Balances G 1,43,843.66 (b)Other Current Assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bills of exchange 1,276.99 Loans to: (1)Bodies Corporate 11,410.22 (2)Others 243.00 Total 14,740.62 SCHEDULE I - CURRENT LIABILITIES (Rs. in Lakhs) Debenture Application Money 1,35,882.66 Sundry Creditors 224.72 Other Liabilities 3,109.40 Interest Accrued but not due 215.37 T 1,39,432.15 SCHEDULE K - MISCELLANEOUS EXPENDITURE (Rs. in Lakhs) (To the extent not written off or adjusted) Preliminary Expenses 0.95 Share/Debenture Issue Expenses (net of interest of ₹ 1021.85 lakhs) 2,040.02 Total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receivable on loans and advances ₹ 203.21 2. Discounting charges ₹ 64.81 3. Profit on sale of treasury bills and NHPL bonds ₹ 20.22 4. Other interest and charges received ₹ 0.72 5. Interest receivable on share/debenture issue deposit ₹ 779.31 6. Interest received on intercorporate deposit ₹ 17.30 7. Interest received on a/c of fixed deposit towards NRI allotment ₹ 21.79 Total ₹ 1107.36 3.5 To carry on its activities, the appellant company had a central treasury division at Mumbai, it also had its project office at Tornagallu, Bellary district and registered office at Bangalore. The expenses incurred by each of these offices in the form of salary, rent, administration and other establishment overheads, payment of interest and fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as business income and accordingly, treated the entire receipts under the head income from other sources . The Assessing Officer further refused to allow the expenditure by holding that the expenses had no nexus with the earning of income and such expenditure could not be allowed even under the head other sources and the claim being considered under the head business would not arise as according to him the appellant had not commenced the business. In support of his findings he relied on the decision of the Karnataka High Court in CIT v. Cap Steel Ltd. [1986] 162 ITR 533 2 and Karnataka Forest Plantations Corpn. Ltd. v. CIT [1985] 156 ITR 275 1. Reliance was also placed on CIT v. Mangalam Cement Ltd. [1996] 217 ITR 369 2 (Raj.). 3.7 The CIT(A) held that the main object of the assessee as mentioned in the Memorandum of Association is to carry on the business of production of steel and allied products. The Company after incorporation, went for public issue and the funds obtained were deposited for earning interest till the said funds were put for completion of the project. The company has not even commenced the trial production of steel. It was therefore, held that the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r utilisation during the year. Further short-term borrowings were utilised for earning of income. The central treasury located at Mumbai was a common treasury where in the funds received from various sources was pooled and intermixed and were utilised for business purposes. It was submitted that similar activity was continued to be carried on by the company even in the subsequent years. In view of this, it was submitted that the entire income should be assessed under the head business as envisaged under section 28 of the IT Act. Sri K.R. Pradeep, submitted that the view taken by the authorities below were a factual mistake inasmuch the authorities below had not properly appreciated the authorisation for such activity in the Memorandum of Association and the regularity with which it was carried out. The case law relied on by the Assessing Officer pertains to income earned prior to commencement of business where as the issue on hand was computation of income after commencement of business accordingly, he submitted that the decisions relied on by the Assessing Officer would be of no help in deciding the issue on hand. In support of his contention he relied on decision of Supreme Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7] 63 ITR 207 (SC) the relevant portion relied on is extracted hereunder: Under section 10(2)(xv) of the Indian IT Act, as amended by Act 7 of 1939, expenditure even though not directly related to the earning of income may still be admissible as a deduction.....Expenditure incurred not with a view to the direct and immediate benefit for purposes of commercial expediency and in order indirectly to facilitate the carrying on of the business is therefore expenditure laid out wholly and exclusively for the purposes of the trade.... 4.4 To claim that the expenditure should be allowed, he further submitted that expenditure incurred for raising debentures though meant for the purposes mentioned in the prospectus, should be allowed as held by the Supreme Court in India Cements Ltd. v. CIT [1966] 60 ITR 52 , the relevant portion relied on is extracted hereunder: The act of borrowing money was incidental to the carrying on of business, the loan obtained was not an asset or an advantage of enduring nature, the expenditure was made for securing the use of money for a certain period, and it was irrelevant to consider the object with which the loan was obtained. Mr. Pradeep also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e relied on the decisions of Supreme Court, the relevant portion relied on is extracted hereunder : Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC) Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights; nor can the existence or absence of entries in his books of account be decisive or conclusive in the matter. Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 (SC) It is now well-settled that the way in which entries are made by an assessee in his books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. The assessee may, by making entries which are not in conformity with the proper principles of accountancy, conceal profit or show loss and the entries made by him cannot, therefore, be regarded as conclusive one way or the other. What is necessary to be considered is the true nature of the transaction and whether in fact it has resulted in profit or loss to the assessee. CIT v. Central Provinces Manganese Ore Co. Ltd. [1978] 112 ITR 734 (Bom.) If a statutory liabi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is first in point of time and which must necessarily precede all other activities is started.... The Learned AR submitted that the business of the appellant involved continuous course of several activities and even if any one of the activity has been undertaken that would be sufficient to claim the expenditure as allowable in computing the income from business. 6.1 We have carefully considered the relevant facts, arguments advanced and cases cited. We have also perused the paper book filed by learned AR. On going through the Memorandum of association particularly main objects and incidental to main objects, we find that the company was incorporated to undertake multi farious activities including establishing steel plant, power plant, etc. The main objects are narrated in memorandum to be pursued on its incorporation. The objects incidental to attainment of main objects can be pursued independently for which no further approval is required and can be commenced at any point of time. Only in respect of those objects mentioned under the head other objects in the memorandum the company need to obtain approval of shareholders in general meeting by passing special resolution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upation or duty requiring attention as distinguished from sport or pleasure and is used in the sense of an occupation continuously carried on for the purpose of profit. Thus the word business is a wider term than and not synonymous with trade and means practically anything which is an occupation as distinguished from pleasure. It denotes continuous and systematic exercise of an occupation or profession with the object of making income or profit. Thus ordinarily business imply continuous activity in carrying on a particular trade or a vocation. The frequency or repetition of the activity, though at times a decisive factor is by no means an infallible test. The word business connotes some real substantial and systematic or organized course of activity or conduct with a set purpose. Hon ble Supreme Court in the case of CIT v. Calcutta National Bank Ltd. [1959] 37 ITR 171 at page 178 observed as under : The term business is a word of very wide, though by no means determinate, scope. It has rightly been observed in judicial decisions of high authority that it is neither practicable nor desirable to make any attempt at de-limiting the ambit of its connotation. Each case has to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... funds from various sources and lending of the same would all amounts to carrying of systematic activity as envisaged under section 28 of the Income-tax Act. Hence, we hold that the company has carried on the business during the year and the income therefrom should be computed under the head business. There are number of decisions where it is held that even a single transaction could be construed as adventure in the nature of trade and when a systematic and series of transactions such as the one carried on by the appellant could not but be regarded as business in nature. There is ample evidence of the intention of the appellant to carry on these activities as business activities. Income under the head other sources can be computed only when income or receipt cannot be brought under any other head under the Income Tax Act. Hence, we do not approve the action of the Assessing Officer in computing the income under the head other sources and we direct the income should be computed under the head profits and gains of business . 6.4 Adverting to allowability of expenditure, learned AR is correct in contending that not preparing the profit and loss account would not come in the wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the deposit, which was safe keeping and not earning of profits. Therefore, the interest earned cannot be said to be received in the course of business so as to make it part of the profits and gains of the assessee s business.... Even this case relied on by the department will be of no assistance as admittedly the shipping company had deposited the money with the bank for only safe keeping whereas in the case before us the appellant had carried on systematic business activity with an intention to earn profits. Western India Vegetable Products Ltd. s case (supra) : The distinction is this that when a business is established and is ready to commence business then it can be said of that business that it is set up. But before it is ready to commence business it is not set up. But there may be an interregnum, there may be interval between a business which is set up and a business which is commenced and all expenses incurred after the setting up of the business and before the commencement of the business, all expenses during the interregnum, would be permissible deductions under section 10(2).... This decision is not relevant for the issue on hand. 6.6 We are not inclin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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