TMI Blog2016 (6) TMI 1292X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee to recruit labour for running the plant and meet all the labour law requirement in respect thereof, to purchase fuel and power required for running the plant, ensure the plant is properly insured, maintain the plant in working condition, undertake its repair and maintenance etc. The express so incurred by the appellant for the said responsibilities, were reimbursed by Apollo to it on actual basis. The production now by the appellant is in the name of Apollo and that too, to retain commercial viability in the operations and augment the financial position and at the same time bring about modernization and expansion in the plant. We are also of the opinion that disclosure in the financial statement as “other income” or there is one segment of the assessee is an irrelevant consideration. It is well settled principle that treatment in books of accounts is not determinative of the nature and taxability of income as held in the case of Tuticorin alkali Chemicals and Fertilizers Ltd. v. CIT (1997 (7) TMI 4 - SUPREME Court) Thus the income should fall under the head ‘profits and gains of business’ and not from ‘income from other sources’. Accordingly, the ground raise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Respondent: Shri Shantam Bose, CIT(DR) ORDER PER B.P. JAIN, AM: This appeal of the assessee arises from the order of the Ld. CIT(A)-I, Kochi dated 29/01/2015 for the assessment year 2010-11. 2. The assessee has raised the following grounds of appeal: 1. The order of the Commissioner of Income Tax(Appeals)-I, Cochin to the extent appealed is against law, equity and justice. The learned CIT(Appeals) ered in confirming the decision of the Assessing Officer in treating lease rent received by the assessee company from Apollo Tyres Ltd. as Income from Other Sources as against Income from Business treated by the assessee company. On identical facts, the Hon ble Income Tax Appellate Tribunal, Cochin Bench, has held in assessee s own case for the prior years that such receipt is to be assessed under the head Income from business . However, for the assessment year 2007-08, the Hon. Income Tax Appellate Tribunal held that such lease rent received is to be assessed under the head Income from other sources . Further, the Hon. Bench directed the Assessing Officer to allow expenses as per section 57 of the I.T. Act. The order of the Hon. Bench of ITAT is being con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellant company and M/s. Apollo Tyres Ltd. ( Apollo ). According to the appellant the aforesaid income is business income, whereas the authorities below have held same to be income from other sources u/s. 562)(ii) of the Act. 4. the relevant facts are that the appellant company was incorporated on 29/10/1999 under the Companies Act 1956 1956 to engage in the business of manufacturing of tyres. However, on account of poor financial viability the appellant company incurred losses and, eroded the entire net worth and was thus declared as a sick company under the Sick Industrial Companies Act, 1956 ( SICA ). Further on 17/04/1995 a rehabilitation scheme was prepared and sanctioned by Board for Industrial and Financial Reconstruction ( BIFR ) and under the scheme it was provided that Apollo would take over the appellant company by subscribing to equity shares of appellant company. It was further provided that; a) Apollo will operate plant on an irrecoverable lease of eight years in consideration of lease rental of ₹ 45.50 crores for 8 years; b) Entire production to be sold in brand name of Apollo; c) Apollo to invest for modernization and expansion of plant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the assessee. Point No. 4 of the same agreement, states clearly that Apollo Tyres Ltd. shall use the Plant of PTL for manufacture of automobile tyres and tubes and other products as it may deem fit in its own brand name using its own raw material. Thus, it is clear that Apollo Tyres Ltd. is merely using the plant and machinery of the assessee company for producing its products. Thus, it is purely a deal for leasing and the plant and machinery owned by the assessee, there is no scope for joint operations. Assessee s audited account classified the income received as Other Income , not as Income from Business . Thus, assessee received argument that the income received by leasing out its plant and machinery should be assessed under the head Profit and Gains from Business is not acceptable. The correct heads of income to be taxed is under Income from Other Sources u/s. 56(2)(ii) of the IT Act. 7. Before us the ld. Counsel for assessee has contended that the conclusion to treat the income as income from other sources is based on factually incorrect, legally misconceived assumptions apart from being based on contradictory findings and conclusions. 7.1 As regards the factu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not only of plant and machinery. It was submitted that plant does not comprise only of plant and machinery. It was stated that scope of agreement extends to operation of plant and, not only of plant and machinery but also of the following assets:- Sr. No. Particulars Value as on 1.4.2009 i) Land 15.31 ii) Buildings 309.98 iii) Plant and Machinery 1337.31 iv) Furniture, fixture and appliances 62.69 Total 1725.29 7.3 It was next submitted that the learned Assessing Officer has allowed expenditure of ₹ 259.35 lacs incurred by the appellant in the course of business for the instant year and having done so there was no basis for the authorities below to suggest that income of ₹ 25 crores was assessable under the head Income from other Sources . It was stated that aforesaid expenditure of ₹ 2.59 crores claime ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TL on behalf of Apollo. It was thus submitted that even if it is held that the appellant is not itself carrying out any manufacturing act as it was infact undertaking manufacturing of tyres through its labour on its plant using the raw material provided by Apollo. It was submitted that the only difference is that the said manufacturing activity is being carried out by the appellant in the brand name of Apollo and not in its own brand name. Hence, the said activity can be regarded as being in the nature of contract manufacturing by PTL on behalf of Apollo. It was thus submitted that even if is held that the appellant is not itself carrying out any manufacturing activity for an activity to be regarded as business activity , it is not necessary that it must entail manufacturing by PTL on behalf of Apollo. It was thus submitted that even if it is held that the appellant is not itself carrying out any manufacturing activity for an activity to be regarded as business activity , it is not necessary that it must entail manufacturing activity. The term business is defined u/s. 2(13) of the Act in an inclusive manner to include any trade, commerce or manufacture or any adventure or conce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pliance with labour law, etc. the same is akin to a wet lease and accordingly, any income arising therefrom should be regarded as business income. 7.8 Further it was submitted that income from letting itself is business income. Reliance was placed on the judgment of Apex Court in the case of Chennai Properties Investments Ltd. v. CIT 373 ITR 673 . It was submitted that in the said case, it has been held that when object of assessee company was inter-alia to earn income from letting, the said income was to be brought to tax as business income. Reliance was also placed on the following judgments: i) Rayala Corporation (P) Ltd. vs. ACIT 386 ITR 500 (SC) ii) Shyam Burlap company Ltd. v. CIT 380 ITR 151 (Cal) iii) Heritage Hospitality Ltd. v. DCIT 158 ITD 179 (Hyd) iv) Shreeji Exhibitgors vs. ACIT 42 ITR 596 (Mum) 7.9 It was next contended that section 56 of the Act, being the residuary head of income under the frame work of the Act, can be resorted to only if an income is not chargeable under any other specific head of income, It was submitted that since the income earned by the appellant company falls within the specific head of Profits and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al for the same is that the income from leasing should be regarded as income from other sources. It was submitted that the Tribunal has considered only one aspect of the matter while rendering its decision. It was submitted that the leasing arrangement between the appellant and Apollo had initially started as a result of the appellant turning into a sick company due to which it could not continue its manufacturing operations in its own name. Accordingly, at the start, this was an arrangement between the two companies for a period of 8 years, so as to help the appellant to revive its financial position. It was in that context that in the earlier years, the Tribunal had upheld the income as business income. In the year 2004-05, the Tribunal has diverted from its earlier decision, by stating that there does not appear any intention of the appellant to revive its own business and therefore, the earlier decision does not hold good. It was submitted that the issue as to whether the current activity itself can, by its own, be regarded as a business or not was not at all put for consideration before the Tribunal. Accordingly, it was submitted that the said decision of the ITAR cannot apply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SC) 7.14 Furthermore, reference was made to the judgment of Mysore High Court in the case of CIT vs. United Breweries 89 ITR 17 wherein has been held that if the parent company did exercise functional control over its subsidiary, the existence of such subsidiary company as a legal entity would not prevent the business of the subsidiary being treated as that of the parent company. It was also submitted that applying this ratio, it was submitted that investment by the appellant in the subsidiary companies for its own business purpose should be regarded as business of the appellant. 7.15 Reliance was also placed on the following propositions: Proposition 1: lease out of the premises by a company, declared as sick industrial unit is business income. i) CIT vs. Vallabh Glass Works Ltd. 218 Taxman 152 (Guj) ii) ACIT vs. S S Industries Enterprises Ltd. 14 ITR (T) 574 (Chennai) Proposition 2: Income would be business income if dominant purpose was commercial activity. i) Nutan Warehousing company Pvt. Ltd. vs. DCIT 326 ITR 94 (Bom) ii) Vora Warehousing Pvt. Ltd. vs. ACIT 70 ITD 518 (Mum) iii) CIT vs. Allahabad Milling Co. (P) Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iod of 8 years. As rightly contended by the learned authorized representative of the assessee, the assessee as an corporate entity, it continues to exist. The share value of the assessee has gone up. Merely additional account of ₹ 110 crores has been invested by way of shares by ATL does not mean that the existence of the PTL has been diluted. The ATL has acquired share in PTL. Coming to the investment of ₹ 70 crores in the plant and machinery, the assessee s representative submitted that the investments are reflected in the books of accounts of ATL. Mere change of administrative level officers/directors, as rightly contend by the representative of the assessee, does not mean that the corporate existence itself is disappeared. The stand of the revenue that the word used take over does not support the revenue s case. It is for a limited period of 8 years. The direction of BIFR is to the effect that the production is by PTL and the entire production shall be lifted by ATL. The payment to the staff is made by PTL. The welfare schemes are also containing and operated by PTL. All these indicate that PTL is existing. The Kerala Government has supplied the electricity to PTL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of fact and the same is required to be considered every year on the basis of the facts and circumstances prevailing in that year. Accordingly, we are of the view that the decision rendered by the Tribunal in the earlier years cannot have binding effect in subsequent years. The undisputed facts are that the assessee has leased out its plant and machinery in the year 1995. Hence, while considering the claim of the assessee for the years ending 31.3.1996 and 31.3.1997, the Tribunal held that there is nothing on record to show that the assessee had to present intention to revive its business at appropriate time, as the gap between the year of closure and the years under consideration at that point of time was very narrow. However, we are concerned with the assessment year 207-08 and we have to consider the facts and circumstances prevailing as on 31.3.2007. By that date, about 12 years have passed and hence we are in agreement with ld. DR that the assessee has not brought on record any material to show that it has intention to revive the business activities. Though the ld. AR submitted that steps are being taken to revive the business yet we are unable to accept his contention for wan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate time, as the gap between the year of closure and the years under consideration at that point of time was very narrow. However, we are concerned with the assessment year 2007-08 and we have to consider the facts and circumstances prevailing as on 31.3.2007. By that date, about 12 years have passed and hence we are in agreement with ld. DR that the assessee has not brought o record any material to show that it has intention to revive the business activities. Though the ld. AR submitted that steps are being taken to revive the business yet we are unable to accept his contention for want of supporting materials. Accordingly, in our view the ld. CIT(A) was not correct in placing reliance on the decision of the Tribunal without appreciating the facts prevailing in the year under consideration. Accordingly, we reverse the order of the ld. CIT(A) and restore the view of the Assessing Officer. 7. The question whether the assessee is having an intention to revive its business activity is a question of fact and the same is required to be considered every year. Though the ld. AR claimed that the Government licences are still continuing in the assessee s own name, it has not proved th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Leave Encashment Provision Nil II MANUFACTURING ADMINISTRATIVE AND SELLING vi) Power and fuel consumption 807.20 vii) Stores consumed 11.18 viii) Rent 0.19 ix) Rates and taxes 0.31 x) Travelling and conveyance expenses 1.85 xi) Legal and professional charges 3.43 xii) Printing, stationery, postage, telegram 2.17 telephone etc. xiv Miscellaneous expenses 1.07 Total 3514.00 8.10. Thus, undeniably substantial expenditure under various heads including i.e. salaries of ₹ 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e plant. The intention of the appellant is to be also gauged by the fact that in the instant year it had taken 20.78 acres of land on 90 years lease w.e.f. 24.5.2007 at a premium of ₹ 519.50 lacs. Thus in our opinion there is no intention to exit the business carried on by the appellant company. Our above conclusion is also fortified from the approach adopted by the Assessing Officer whereby out of expenditure claimed of ₹ 18.77 crores, he has allowed expenditure of ₹ 2.59 crores under the following heads: Sl. No. Particulars Amount claimed as per of Computation income (Rs.) Allowed by Assessing Officer (Rs. In lacs) I EMPLOYEES i) Salaries, wages and bonus 9.42 9.42 ii) Contribution to Provident and other funds 0.36 0.36 iii) Gratuity - - iv) Leave ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 139.79 xxv) Doubtful advances written off 23.23 23.23 xxvi Profit on sale of assets 8.60 8.60 Total (C) = (xxiv + xxv + xxvi) 171.62 171.62 Total (D) = (A+B+C) s1877.06 259.35 8.14. Having regard to the above, it is evident that, Assessing Officer has allowed expenditure under the heads bad debts, advertisements, salaries, etc. incurred in the course of business of the appellant company. However, the Assessing Officer in the preceding year namely assessment year 2009-10, has allowed only expenditure incurred under the head depreciation of ₹ 9,05,673/-, rates and taxes of ₹ 7,37,564/-, insurance of ₹ 9,31,398/- and rent paid of ₹ 7,06,750/- u/s. 57(iii) of the Act. Thus, Assessing Officer himself has made a departure by allowing expenditure in the instant year which has been incurred wholly and exclusively for business of the appellant company. 8.15 Furthermore, even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... G. Mercantile Corpn. (P) Ltd. v. CIT, Calcutta (1972) 1 SCC 465 . According to him, the important question which would arise in all such cases is whether the acquisition of property for leasing and letting out all the shops and stalls would be essentially a part of business and trading operations of the assessee. According to the learned counsel appearing for the Revenue, leasing and letting out of shops and properties is not the main business of the assessee as per Memorandum of Association and therefore, the income earned by the assessee should be treated as income earned from House Property. He, therefore, submitted that the impugned judgment is just legal and proper and therefore, these appeals should be dismissed. 9. Upon hearing the learned counsel and going through the judgments cited by the ld. Counsel, we are of the view that the law laid down by this Court in the case of Chennai Properties (supra) shows the correct position of law and looking at the facts of the case in question, the case on hand is squarely covered by the said judgment. 10. Submissions made by the learned counsel appearing for the Revenue is to the effect that the rent should be the main sour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he company is authorized to carry on or engage in or which can be carried on in conjunction therewith or which is capable of being conducted so as to directly or indirectly benefit the company. 20. To sell lease mortgage or otherwise dispose off the property, assets or undertaking of the company or any part thereof for such consideration as the company may think fit, and in particular shares stock debentures or other securities of any other company whether or not having objects altogether or in part similar to those of the company. 8.20 Thus even as per the judgment of Apex Court in the case of Rayala Corporation (P) Ltd. (supra) and Chennai Properties and Investments Ltd. (supra) which are subsequent to the decisions of Tribunal holding income to be income from other sources, the income from arrangement with Apollo is business income. 8.21 Moreover it is also seen that the Assessing Officer has invoked section 56(2)(ii) of the Act and not section 22 of the Act which reads as under: 56(2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yield of income by a commercial asset was the profit of the business irrespective of the manner in which that asset was exploited by the owner of the business. He was entitled to exploit it to the best advantage and he might do so either, by using it himself personally or by letting it out to somebody else. The view that in order to constitute business income, the commercial asset must at the time it was let out be in a condition to be used as a commercial asset by the assessee himself was not correct. 8.24 Following the above, in the above case of Cit v. Vikram Cotton Mills :td. 169 ITR 597 (SC ) it was held that when the intention was not to part with the assets, but to lease it out for a temporary period as a part of exploitation, it could not be said that no business was carried on and the income derived by the Company from letting out the machinery was only rental income. There was never any act indicating that the company never intended to carry on the business in the future. Also in the case of CIT v. Mysore Wine Products Ltd . 370 ITR 102 (Kar) , it was concluded as under: In such circumstances, the income derived by way of lease rent from the letting out of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Even if the said orders are passed under the same provisions of law, it may theoretically be open to the part to contend that the liability being recurring from year to year, the cause of action is not the same; and so even if a citizen s petition challenging the order of assessment passed against him for one year is rejected, it may be open to him to challenge a similar assessment order passed for the next year. In that case, the court may ultimately adopt the same view which had been adopted on the earlier occasion; but if a new ground is urged, the court may have to consider it on merits, because, strictly speaking the principle of res judicata may not apply to such a case. That in fact, is the effect of the decision of this court in the Amalgamated Coalfields Ltd. and Anr. V. the Janapada Sabha, Chhindwara (1963) supp. 1 SCR 172. In our opinion, the said general observations must be read in the light of the import fact that the order which was challenged in the second writ petition was in relation to a different period and not for the same period as was covered by the earlier petition. But as far as a challenge to the same assessment order is concerned, it was hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Shyam Burlap Company Ltd. v. CIT 380 ITR 151 (Cal), where the assessee in the past history consistently shown rental income under the head Income from House Property which stood accepted as such. However for the first time in AY 199697 it claimed the income to be income from business which was negated by Tribunal, having regard to the past history of the appellant and applying to the principle of consistency. The Hon ble Court following the judgment of Chennai Properties and Investments Ltd. (supra) and the fact that Memorandum of Association of appellant was not considered held that income is taxable as business income. It was held therein as under: 15. There is another aspect of the matter. Though the appellant had relied on the Memorandum in support of its contention that it was carrying out business by letting out the property, however, neither the Assessing Officer nor the Tribunal, which had recorded the submission of the appellant in paragraph 2 of its order had considered the issue at all from that angle. Since the CIT(A) while allowing the appeal of the appellant had referred to the Memorandum, it was incumbent on the part of the Tribunal to deal with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut modernization and expansion in the plant. 8.32 Therefore, in view of section 56(2)(ii) coupled with the judgments of the Apex Court as aforesaid, the income should fall under the head profits and gains of business and not from income from other sources . Accordingly, the ground raised by the assessee is allowed. 9. Ground No. 2 relates to disallowance of ₹ 18,21,609/- representing the expenditure incurred and claimed by the appellant company under section 37(1) of the Act. 10. During the instant year the appellant claimed an expenditure of ₹ 15,71,609/- payable to M/s. Mednet Asia and of ₹ 3,00,000/- payable to M/s. Vrinda Software (P) Ltd. of ₹ 3,00,000/- for providing consultancy. The learned Assessing Officer denied the same on the ground that expenditure has not been incurred to earn any income and related to subsidiary company. The CIT(A) sustained the same by holding as under: 1.3 It has been held by the Assessing Officer that expenses are related to subsidiary companies, the claim for business expenditure in the assessee s hands is not allowable. It seems that Assessing Officer has quite appropriately appreciated the facts that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT vs. IBM India Ltd. 357 ITR 88 (Kar) v) CIT v Varinder Agro Chemicals Ltd. 309 ITR 272 (P H) vi) CIT v N.J. India Invest (P) Ltd. 215 Taxman 78 (Guj) Proposition II : Expenditure incurred for obtaining consultancy is revenue expenditure: i) Shriram Pistons and Rings Ltd. v CIT 307 ITR 363 (Del) ii) CIT v Coromandal Fertilizers 247 ITR 417 (AP) iii) CIT vs. Crompton Engineering Co. Ltd. 242 ITR 317 (Mad) iv) Empire Jute Company Limited vs. CIT 124 ITR 1 (SC) v) Alembic Chemical Works Co. Ltd. vs. CIT 177 ITR 377 (SC) vi) CIT vs. J.K. Synthetics 309 ITR 371 (Del) vii) Ciba of India Ltd. v. CIT 69 ITR 692 (SC) viii) Kesoram Industries and Cotton Mills Ltd. v CIT 196 ITR 845 (SC) ix) J.B. Patel co. vs. DCIT 120 TTJ 1127 (Ahd) x) CIT vs. Orient Beverages Ltd. 203 ITR 559 (Cal) xi) Richardson Hindustan Ltd. vs. CIT 169 ITR 516 (Bom) xii) DCIT vs. Sir Sobha Singh Sons (P) Ltd. 41 taxmann com 378 (Del) 11.1 It was therefore prayed that disallowance made of ₹ 18.22 lacs may kindly be deleted. 12. We have considered the rival submissions and perused the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incurred to protect the investment made. The genuineness of the said expenditure and the fact that it was incurred for business activities was not doubted by the Assessing Officer and has also not been doubted by the CIT(A). In these circumstances, expenditure was allowed and appeal of the revenue dismissed. It was concluded as under:- 16. What is also noticeable is that the entire or whole expenditure has been disallowed as if there was no expenditure incurred by the respondentassessee for conducting business. The CIT(A) has positively held that the business was set up and had commenced. The said finding is accepted. The respondent-assessee, therefore, had to incur expenditure for the business in the form of investment in shares of cement companies and to further expand and consolidate their business. Expenditure had to be also incurred to protect the investment made. The genuineness of the said expenditure and the fact that it was incurred for business activities was not doubted by the Assessing Officer and has also not been doubted by the CIT(A) . 13. Having regard to the above disallowance made and sustained is deleted. Ground raised is allowed. 14. Ground No. 3 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest. The provision of section 14A is applicable when interest bearing funds are invested to earn the exempt income. It has been held by the Hon ble Supreme Court in the case of CIT vs. Walfort Share and Stock Brokers (P) Ltd. (2010) 326 ITR 1, that: The mandate of section 14A is to curb the practice of claiming deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail of the tax incentive by way of exempt income without making any apportionment of expenses incurred in relation to exempt income. The basic reason for insertion of section 14A is that certain comes are not includible while computing the total income because these are exempt under certain provision of the Act ( CIT vs. Walfort Share and Stock Brokers (P) Ltd. (2010) 326 ITR 1 (SC) The CBDT vide Circ. No. 5/2014 dated 11.2.2014 has gone a step ahead in clarifying the applicability u/s. 14A of the Act as under: Section 14A provides for disallowance of expenditure in relating to income not includible in total income. A controversy has arisen in certain cases as to whether disallowance can be made by invoking section 14A even in those cases wher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment Finance Pvt. Ltd. vs. DCIT 16.2 it was next submitted that investment is made in the subsidiary company doing hospital business for earning income and hence the expenses incurred in the nature of interest was on account of business expediency and is to be treated as an allowable business expenditure. It is further submitted that if the lease rent income is treated as Income from other sources , the above expenditure is allowable as per Section 57 of the IT Act. It was next submitted that the Supreme Court in the case of S.A. Builders vs. CIT(A) and another reported in 288 ITR 1 supports this view and further explain the expression Commercial Expediency . It is held that the expression is one of wide import and includes such expenditure as a prudent businessman incurs for the purpose of the business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency. It is further held that for an expenditure to be business expenditure it is sufficient if nexus between expenditure and purpose of business is established, even though it is not the assessee s own ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , notice that sub-Section (1) of section 14a provides that for the purpose of computing total income under Chapter IV of the Act, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. In the present case, the Tribunal has recorded the finding of fact that the assessee did not make any claim for exemption of any income from payment of tax. It was on this basis that the tribunal held that disallowance u/s. 14A of the Act could not be made. In the process, the Tribunal relied on the decision of Division Bench of Punjab Haryana High Court in case of CIT vs. Winsome Textile Industries Ltd. (2009) 319 ITR 204 in which also the Court had observed as under: 7. We do not find any merit in this submission. The judgment of this court in Abhishek Industries Ltd. (2006) 286 ITR 1 was on the issue of allowabiliy of interest paid on loans given in sister concern, without having nexus with the business. The observations made therein have to be read in that context. In the present case, admittedly the assessee did not make assessment year claim for exemption. In such a situation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is judgment would not be applicable. in the light of that the said question would not arise. Consequently Appeal is dismissed. v) CIT vs. Winsome Textile Industries Ltd. 319 ITR 204 (P H) 5. We have heard learned counsel for the parties. 6. The contention raised on behalf of the Revenue is that even if the assessee had made investment in shares out of its own funds, the assessee had made investment in shares out of its own funds, the assessee had taken loans on which interest was paid and all the money available with the assessee was in common kitty, as held by this court in CIT vs. Abhishek Industries Ltd. (2006) 286 ITR 1 was on the issue of allowability of interest paid on loans given to sister concerns, without interest. It was held that deduction for interest was permissible when loan was taken for business purpose and not for diverting the same to sister concern without having nexus with the business. The observations made therein have to be read in that context. In the present case, admittedly, the assessee did not make any claim for exemption. In such a situation, section 14A could have no application. 17.1 The issue as to allowability of busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . British Insulated and Helsby Cables Ltd. (1925) 10 TC 155, it was held by the House of Lords that in order to claim a deduction, it is enough to show that the money is expended, not of necessity and with a view to direct and immediate benefit, but voluntarily and on grounds of commercial expediency and in order to indirectly to facilitate the carrying on the business. The above test in Atherton s case (1925) 10 TC 155 (HL) has been approved by this court in several decisions, e.g. Eastern investments Ltd. vs. CIT (1951) 20 ITR 1 , CIT v. Chandulal Keshavlal and Co. (1960) 38 ITR 601 . 17.2 Also in the case of Hero Cycles (P) ltd. vs. CIT 379 ITR 347 (SC ), it was held as under: 9. A perusal of the order passed by the High Court would reveal that the High Court has not at all discussed the aforesaid facts which were established on record pertaining to the interest free advance given to M/s. Hero Fibres Limited as well as loans given to its own Directors at interest at the rate of 10 per cent. 10. On the other hand, the High Court has simply quoted from its own judgment in the case of CIT vs. Abhishek Industries (2006) 286 ITR 1/156 Taxman 257 (Punj. Har.) . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 140 (SC), CIT vs. Birla Cotton Spinning and Weaving Mills Ltd. (1971)82 ITR 166 (SC), etc. 13. In the process, the Court also agreed that the view taken by the Delhi high Court in Cit vs. Dalmia Cement (P) Ltd. (20020 254 ITR 377/121 Taxman 706 wherein the High Court had held that once it is established that there is nexus between the expenditure and the purpose of business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the Board of Directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. It further held that no businessman can be compelled to maximize his profit and that the income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. 14. Applying the aforesaid ratio to the facts of this case as already noted above, it is manifest that the advance to M/s. Hero Fibres Limited became imperative as a business exped ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of assessee s business of profession may be utilized for the purpose of acquisition of stock in trade or for the purpose of acquisition of capital asset. The learned court took a view that u/s. 36(1)(3) there is no bar for allowance of interest paid in respect of capital borrowed which has been utilized for the purpose of acquisition of capital assets. Considering this the learned ITAT held that if the funds are borrowed by an investment company for making investment in shares which may be held as investment or as stock in trade or for the purpose of controlling interest in other companies, interest paid on such borrowed funds will be deductible u/s. 36(1)(iii) of the Income Tax Act. After recording this finding, it held that the interest expenditure is allowable u/s. 36(1)(3) and therefore, disallowance to the extent sustained by the CIT(A) was directed to be deleted . . 7. We may kindly consider the first three questions as to whether the interest of borrowed capital which was utilized in the business of purchase of shares both by way of investment and stock in trade is allowable deduction. In so far as first three questions are concerned, in our opinion a Coordinate B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay also gainfully refer to the judgment of the Calcutta High Court in Commissioner of Income Tax vs. Rajeeva Lochana Kanoria, 208 ITR 616 . The learned Court was considering section 36(1)(iii) and was pleased to observe as under: The only enquiry that is to be made is whether the payment of interest was in respect of capital borrowed for the purpose of the assessee s business or profession. There is no dispute that the capital was borrowed in the instant case and interest was paid on the borrowed capital. It is to be established that the amount was borrowed for the purpose of business or profession. The amount borrowed may be utilized for the purpose of acquisition of stock in trade or for the purpose of acquisition of capital assets. But so long as the money is utilized for business purposes the interest will have to be allowed as deduction. It is well settled that business expenditure is not confirmed to expenses incurred on revenue account. Capital expenditure may not be allowed as a deduction u/s. 37 because the section specifically bars any deduction of expenditure of capital nature. But section 36 is differently worded. There is no bar in section 36(1)(iii) to allowan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture. But more important question is that, whether it is expended wholly and exclusively for the purpose of the business or profession of the assessee. The answer is no, as the requirement was that of a third company, a totally separate taxable unit and legal person. Assessee takes the help of employment agreement to support his case, but assessee company never entered into any agreement with Dr. Kushang Kataria. AHSPL, which entered into agreement with Dr. Kushang Kataria, hence as argument that the expenses on Dr. Kushagra Kataria. Is assessee s expenses as per the provisions of section 37 of the Act does not stand the test of law. Assessee claims that Dr. Kataria was associated with PTL Limited, but nothing on record shows that he is ever associated with PTEL Enterprises Ltd., his association was only with the hospital companies, one as employee and to other he went on deputation. 26. Alternatively assessee submits that the deduction of the impugned amount of IN 945.69 lakhs from another angle, namely deduction under section 37(1) of the Act. The assessee claims that the expenses should be seen in the angle of enhancing the profitability of the business and enable to run ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, it has been upheld by the ld. Bench ITAT, Kochi for assessment year 2008-09 2009-10 vide their order dated 3-1-2014 that the appellant s income from lease rent received from M/s. Apollo Tyres Ltd., is assessable under the head Income from other Sources , how the appellant could claim business expenditure on account of gift, as a holding company making gift of shares to the extent of 15,75,500 of AHSL which is 100% subsidiary company of the appellant under sec. 37 of the I.T. Act. This query was raised during the course of appeal proceedings and noted in the Order sheet on 21/01/2015. The appellant, however, has submitted by reiterating their stand that they have not accepted the decision of the Ld. ITAT, Cochin Bench, for holding the lease rental income as Income from other sources and,, they have challenged the same before the Hon ble High Court of Kerala. Since have been treating the income from Leas rents as business income, they have made their claim for expenditure under section 37, on account of the gift of shares made to the CEO of the subsidiary company. The amount of expenditure have been quantified based on the value of the gifted shares numbering 15,75,500/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Kamakhya Narain vs. CIT 22. It was submitted that constitution of the Board of Directors as well as share holding pattern of two subsidiaries AHSL and AMSL manifestly demonstrate that these wholly owned subsidiaries are under the direct control of the assessee company. It was submitted that Dr. Kushagra Katariya to whom shares of AHSL have been gifted by the assessee company has been employed by AHSL w.e.f. 01/03/2007 and has been sent on deputation to AMSL as chief executive officer of the hospital company namely AMSL. It was submitted that AHSL has been incorporated on 28/12/2005 as a Private Limited Company and has been converted into a Public Limited company in August, 2009. It was submitted that MOA of the company spells out the objects of the company in the Object Clause embracing the broad spectrum of activities like running of hospital, laboratories, medical, research, medical education, manufacture of drugs and providing all kinds of medical and health services. It was submitted that AHSL is a subsidiary of appellant in terms of the provision of section 4 of the Companies Act in as much as the control and composition of the Board of Directors vest with PTL and the en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r agreement titled as Employment Agreement has also been entered into including therein terms and conditions under which Dr. Katariay has been deputed by AHSL to AMSL and remuneration to be paid to him for his services by the hospital company. 22.2 It was submitted that in order to ascertain whether the activity of the assessee running the business of AHSL bears the character of business, it should be seen that the activity must be continuous, systematic and organized and carried out with a set purpose. It was submitted that motive is not an essential ingredient for the purpose of business. It was submitted that an unintended activity can turn out to be a business activity which may be without any profit motive. It was submitted that business as defined in section 2(13), of the Income Tax Act, includes any trade, commerce, or manufacturing or any adventure or concern in the nature of trade, commerce, or manufacture . It was submitted that these words are of wide and indefinite import, the under lying idea being continuous exercise of activity. It was submitted that the word business has been defined in Halisbury s Laws of England, Third Edition, Vol 38, page 10 (as quoted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om) CIT vs. Srishti Securities Ltd. vii) 272 CTR 282 (Del) CIT vs. Holcim India (P) Ltd. viii) 378 ITR 33 (Del) Cheminvest Ltd. v. CIT reversing the order of Tribunal in the case of Cheminvest Ltd. vs. ITO reported in 121 ITD 318 (Del) ix) 378 ITR 28 (Del) Eicher Goodearth Ltd. v. CIT 22.4 It was submitted that expenditure incurred for subsidiary company has to be allowable, when even the expenditure incurred for joint venture is allowed as expenditure in the case of ACIT vs. Apollo Tyres Ltd. vide I.T.A. No. 298/Coch/2009 (Coch ) has stated as under: Ground No. 4: After hearing both the parties, we find that during assessment proceedings Assessing Officer noticed that the assessee company had advanced a sum of ₹ 32.70 crores to Gujarat Petro Electrical Ltd. (for short GPEL) a company promoted by the assessee and had written off this amount by transfer from the general reserve account as per the Board s resolution passed in the board meeting held on 26/06/2002. Though this amount was not charged to the profit loss account, but the same was deducted while computing total income as per the return. GPEL was jointly promoted company by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business of the assessee. Reliance was placed on the following judgments: i) S.A. Builders v CIT(A) 288 ITR 1 (SC) ii) CIT vs. Dalmia Cement (B.) Ltd. 254 ITR 377 iii) Hero Cycles (P) Ltd. vs. CIT 379 ITR 347 (SC) iv) 260 ITR 341 (Cal) Kejriwal Enterprises vs. CIY v) 253 ITR 788 (P H) Cit vs. Punjab Agro Industries Ltd. vi) 125 ITR 462 (Bom) Vassanji Sons Co. P Ltd. vii) 74 ITR 780 (Bom) CIT vs. F.M. Chinoy and Co (P) Ltd. viii) 119 ITR 380 (Bom) Cit vs. Investa Industrial Corporation Ltd. ix) 65 ITR 625 (SC) Essen P Ltd vs. CIT x) 226 ITR 188 (SC) CIT vs. Amalgamations Pvt. Ltd. xi) I38 ITR 763 (Cal) CIT vs. Gillanders Arbuthnot 86 Co. Ltd. xii) 245 ITR 724 (Cal) Turner Morrison and Co. Ltd. vs. CIT xiii) 297 ITR 167 (SC) CIT vs. Infosys Technologies Ltd. 22.7 It was submitted that when share are given in the nature of incentive and retention plan, these can be treated Employee Stock option plan. It is also submitted that discount on ESOP is an allowable deduction u/s. 37(1) of the Act. Reliance was placed on following judgments: i) 23 taxmann.com 286 (Mad) CIT vs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he trading venture? 4) Did the parent company govern the adventure and decide what should be done and what capital should be embarked on it? 5) Were the profits made by its skill and direction? And 6) Was the parent-company in effectual and constant control? 22.10 Reference was made to decision by Supreme Court in State of U.P. vs. Renusagar Co. AIR 1988 SC 1737. It was submitted that it has been held therein that business of the wholly owned subsidiary which is inextricably connected with the parent company belongs to the parent company. It was stated that Renusagar is a 100% subsidiary of Hindalco, and wholly owned and controlled by Hindalco established the power plant for generation of electricity which was supplied to the parent company. The Supreme Court held that the power plant can be constructed as covered by the expression own source of generation of Hindalco for the purpose of levy of excise duty by the Uttar Pradesh Government. It was submitted that Supreme Court held as follows (page 1758): In the aforesaid view of the matter we are of the opinion that the corporate veil should be lifted and Hindalco and Renusagar be treated as one concern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as follows: Third, lifting the corporate veil. A further very interesting point was raised by counsel for the claimants on company law. We all know that in many respects a group of companies is treated together for the purpose of general accounts, balance sheet and profit and loss account. They are treated as one concern. Professor Gower in his book on company law says; there is evidence of a general tendency to ignore the separate legal entities of various companies within a group, and to look instead as the economic entity of the whole group. This is especially the case when a parent company owns all the shares of the subsidiaries, so much so that it can control every movement of the subsidiaries. These subsidiaries are bound hand and foot to the parent company and must do just what the parent company says. A striking instance is the decision of the House of Lords in Harold Holdsworth 85 Co. (Wakefield) Ltd. v. Caddies (1955) (1) All ER 725). So here, This group is virtually the same as a partnership in which all the three companies are partners. They should not be treated separately so as to be defeated on a technical point. They should not be deprived of the compensati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... extile Mfg. Co. and under the agreement of 1947, the Directors of this company were to be the nominees of the appellant company. So, in fact the appellant company could control the internal management of the subsidiary companies and, in unlikely event of their being any difficulty, it was only necessary to go through the formal procedure in order to make the decision of the appellant company s Board fully effective. That particular passage is, I think, especially a cogent having regard to the fact that the counsel for the local authority was constrained to admit in this case, if they had thought of it soon enough, DHN could, as it were, by moving the pieces on their chessboard, have put themselves in a position in which the question would have been wholly unarguable. I also refer to Scottish Co-operative Wholesale Society Ltd. v. Meyer (1958 (3) All ER 66). That was a case under S.210 of the Companies Act, 1948 and Viscount Simonds said: I do not think that my own views could be stated better than the late Lord President Cooper s words on the first hearing of this case. He said: In my view, this section warrants the court in looking at the business realities of a situat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I cannot read the clause as compelling the Board to assign duties to the respondent in relation to the business of every company in the group. Nor can I read it as compelling the Board to assign him duties in relation to the business of the appellant company. That business is not treated as being on a different footing from the business of British Textile or of another subsidiary of the appellant company, Whalley and Appleyard, Ltd. which is mentioned in the respondent s condescendence As I read the clause, it leaves the board of the appellant company free to assign to the respondent duties in relation to the business of one only, or two only or all of the companies in the group, and to vary the assignment and the duties from time to time. Further, I think the clause leaves the Board free to appoint another person to be a managing director , and to divide the duties and powers referred to in the clause between the respondent and the other managing director in such manner as they think fit. It is true that each company in this group is, in law, a separate entity, the business whereof is to be carried on by its own directors and managing director, if any, but there is no doubt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laid down in a string of judicial pronouncements by courts in India, the USA and the UK etc. It was submitted that the expression for the purpose of the business used in section 37(1) has to be interpreted in the context of facts and business realities of the situation. It was submitted that AHSL is a wholly owned and controlled by the holding company and is bound hand and foot with the holding company, that the holding company in such eventuality is the de facto owner of the enterprise If not the de jure. Reliance was placed on concept of beneficial ownership, by the Supreme Court in Renusagar (supra) and following judgment. It was submitted that if AHSL is a distinct corporate entity holding the de jure ownership of health care business yet it cannot be denied that the assessee has beneficial interest in the health care business; which cannot be disregarded while considering business expediency of expenditure. It was submitted that expenditure incurred by the appellant for the purpose of business in which it has been beneficial interest and beneficial interest ownership would qualify the test of commercial expediency. It was submitted that concept of commercial expediency is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch ITAT, Kochi for assessment year 2008-09 2009-10 vide their order dated 3-1-2014 that the appellant s income from lease rent received from M/s. Apollo Tyres Ltd., is assessable under the head Income from other Sources , how the appellant could claim business expenditure on account of gift, as a holding company making gift of shares to the extent of 15,75,500 of AHSL which is 100% subsidiary company of the appellant under sec. 37 of the I.T. Act. This query was raised during the course of appeal proceedings and noted in the Order sheet on 21/01/2015. The appellant, however, has submitted by reiterating their stand that they have not accepted the decision of the Ld. ITAT, Cochin Bench, for holding the lease rental income as Income from other sources and,, they have challenged the same before the Hon ble High Court of Kerala. Since have been treating the income from Leas rents as business income, they have made their claim for expenditure under section 37, on account of the gift of shares made to the CEO of the subsidiary company. The amount of expenditure have been quantified based on the value of the gifted shares numbering 15,75,500/-. As a matter of fact, there i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 999/- under the head Income from other Sources . But if there is no income, then, on the argument of the Revenue, the expenditure would have to be ignored as it would not be liable to be deducted. This would indeed be a strange and highly anomalous result and it is difficult to believe that the Legislature could have ever intended to produce such illogicality. Moreover, it must be remembered that when a profit and loss account is cast in respect of any source of income, what is allowed by the statute as proper expenditure would be debited as an outgoing and income would be credited as a receipt and the resulting income or loss would be determined. It would make no difference to this process whether the expenditure is X or Y or nil.; whatever is the proper expenditure allowed by the statute would be debited. Equally, it would make no difference whether there is any income and if so, what, since whatever it be X or Y or nil, would be credited. And the ultimate profit or loss would be found. We fail to appreciate how expenditure which is otherwise a proper expenditure can cease to be such merely because there is no receipt of income. Whatever is a proper outgoing by way o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee company to the directors of its subsidiary companies can be admissible as a deduction u/s. 10(2)9xv) of the 1922 Act or section 37(1) of the 1961 Act only if they can be regarded as expenditure laid out or expended wholly and exclusively for the purposes of the business of the assessee company. This expression was aslso used in the Income-tax Act, 1918 in U.K. In Atherton vs. British Insulated Helsby Cables Ltd. (1925) 10 TC 155 (HL), Viscount Cave, LC, has thus explained the said expression: . A sum of of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of the commercial expediency, and in order indirectly to facilitate the carrying on of the business, may yet be expended wholly or exclusively for the purposes of the trade. (p.91) These observations have been referred to with approval by this Court while construing section 10(2)9xv) (See: Eastern Investments Ltd. v. CIT (1951) 20 ITR 1 and CIT v. Chandulal Keshavelal Co. (1960) 38 ITR 601). 18. In Travancore Titanium Products Ltd. vs. CIT (1966) 60 ITR 277, this Court, while construing the expression for the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h clubs, polyclinics, medical centres, child welfare and family welfare/planning centres, diagnostic centres, research centres, laboratories for carrying out clinical, pathological, biological and diagnostic, investigations, such as X-ray, CT/CAT Scan, ultra sound, ECG, MRI blood tests and provide all kinds of medical and health services. 44 To undertake, promoite, assist or engage in all kinds of research and development work in connection with health care, biotechnological and other related facilities including molecule development etc. 45 To set up laboratories and undertake clinical research on patients for helping manufacturing and development of new drugs. 46 To design, manufacture, import, export buy sell, install, maintain and deal in all kinds of pharmaceuticals, chemicals, medicines and drugs and all kinds of medical equipments, instruments, apparatus and the like. 47. To establish and run medical colleges or institutions to educate and train medical students, nurses, midwives and hospitals administrators and to grant such degree, diplomas or recognition as the company may prescribe or deem fit from time to time and to grant stipends, scholarships ..... X X X X Extracts X X X X X X X X Extracts X X X X
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