TMI Blog2011 (8) TMI 1334X X X X Extracts X X X X X X X X Extracts X X X X ..... the view that the High court ought to have answered the questions of law framed by it which arose for determination after having framed them. Therefore it set aside the order passed by this court remanding the matter to the assessing authority and remitted the appeal to this Court to answer the said questions in accordance with law by its order dated 29.09.2009 passed in Civil Appeal No. 6555/2009. That is how this appeal is listed before us. 3. The relevant assessment year is 1995-96. The assessee was incorporated as a Public Limited Company on 15.3.1994 under the provisions of the Companies Act, 1956. The main object of the company is to set up an 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 service, 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 surplus funds, to draw, accept and discount bills an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sues of ₹ 174.71 crores. The assessing authority on consideration of the aforesaid material held the amount of interest earned was form the utilisation of public money received from subscription by public through share issue and debenture issue kept idle till the date of allotment in the form of short term deposits this has nothing to do with the operation or business of the company. The expenses which the assessee is claiming were incurred in the form of liability arising to pay interest on debentures is entirely different and income earned from other sources i.e. short-term deposit interest. As per the prospectus the debentures were issues for the purpose of setting up an integrated steel plant at Toranagallu Bellary District with a capacity of 1.25 million tonnes per annum of hot rolled coils. This was also made to part finance the cost of the integrated steel plant including expenses of the public issue. During the year under consideration. on such business activities were carried on by the assessee. Hence, there is on debenture incurred for business purpose of setting up an integrated steel plant. The interest earned from a different source shall not be allowed to set of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmencement is still at an initial stage of implementation. Therefore, the assessee was not justified in claiming the aforesaid amount as business income. The main investment in NHPL bonds, bill discounting in the facts and circumstances of the Company was not the main object but was to manufacture steel and allied products. Therefore, it cannot be said it has carried on the said business. Further, it was held the temporary parking of funds collected from the public pending allotment of shares will not amount to carrying on business as the company's main objective. The funds collected from the above source cannot be utilised for purpose of carrying on the business till the allotment of shares which is governed by the rules framed by SEBI in this regard. 6. Lastly, whether the claim of the expenditure incurred on the bridge loan etc. can be allowed under Section 57(iii) alternatively, under section 36 of the Act. From the material on record it is not proved that the bridge loan and the term loan etc. are sources of funds for making the Fixed Deposit which earn interest. Since, the assessee is not carrying on any business, the question of treating the said income as business in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion which is not allowable. The expenditure incurred on issue of non-convertible portion of debentures of ₹ 10.77.53.775/-was allowed as revenue expenditure in computing the income of the assessee. Therefore, it directed that the assessing authority shall regard the entire receipts of ₹ 11.07 crores as business income and allow therefrom expenditure incurred by the corporate Treasury Division of ₹ 15.43.40.694 and the debenture issue expenditure of ₹ 10,77,53,775/-. Aggrieved by the said findings of the Tribunal, the revenue is in appeal. 8. Learned counsel appearing for the revenue assailing the impugned order contended firstly that as admitted the assessee has not commenced its main business of manufacturing steel and no income is derived from the said business. The tribunal was in total error in treating the interest income from bank deposits and other income as income under the heading of profits and Gains of business . It ought to be treated under the heading from other sources . Secondly, he contended that when the assessee has not commenced any business at all, the question of the assessee claiming any expenditure under Section 28 to 43 would not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mentioned supra for ₹ 3,300 crores shows that the company was entitled to borrow in excess of the required funds for the long terms projects. 12. The company to carry on the activities of advances, bill discounting deposits etc., had time and again borrowed funds on short term basis from Hong Kong Shanghai Banking corporation vide its sanctioned letter dated 20.10.1994 for ₹ 44.50 crores, from American Express bank For ₹ 75 crores, from Society General, France in excess of ₹ 100 crores and from Intercorporate borrowings several hundred crores. The company earned a total income of ₹ 1107.36 lakhs as under:- 1 Interest on receivable on loans and advances Rs. 203.21 2 Discounting charges Rs. 64.81 3 Profit on sale of treasury bills and NHPL bonds Rs. 20.22 4 Other interest and charges received Rs. 0.72 5 Interest receivables on share/debenture issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aimed that out of the said income, the expenditure incurred in earning the said income should be deducted and only balance amount is to be taxed under the head of business income. 15. The balance sheet discloses that the amount received as share/debenture application money is not utilized in any activity of the company but is lying separately in bank accounts. The total of such application money is ₹ 1,39,932 lakhs whereas amount under bank balances (including stock invest) is ₹ 1,43,512 lakhs. The share capital raised prior to public issue is ₹ 37,050/- lakhs which has financed fixed assets (including capital work in progress but excluding interest on debenture) of ₹ 31,041 lakhs is utilized for making certain investments and giving loan/advances of ₹ 36,536 lakhs. The investments /lending activity has been carried on in a systematic approach. The assessee has earned ₹ 328 lakhs by way of interest and profit on leading/investment other than ₹ 779.31 lakhs on public issue application money. The assessee has also paid ₹ 64,693 lakhs as interest charges and ₹ 49,170 lakhs as finance charges for raising various loans. These are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of mechanical engineers and to design, construct, fabricate and manufacture all kinds of machines, tools and implements, iron and brass founders, metal workers, machinists, iron and steel workers, smiths, metallurgist, producers of electric energy, appliances; to carry our research and development for any activity; operations process of system; to act as consultants for any metallurgical, chemical or engineering work; to produce, purchase, refine, prepare, process, alter; import, export sell and generally deal in ferro-alloys and in machinery and connected therewith; to acquire, erect, construct, establish operate and maintain factories, quarries, workshops; to construct maintain improve manage work control and superintend any rods underground tunnels tramways and railway line and siding mills crushing work hydraulic works electric work factories warehouses shops levels shafts coaling stations. xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx 12. To lend and advance money either with or without security and give credit to such persons (including government) and upon such terms and conditions as the company may think fit provided that the company shall not carry o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dgment, the supreme court has made the position clear at para 4, which reads as under:- 4. The basic proposition that has to be borne in mind in this case is that it is possible for a company to have six different sources of income each one of which will be chargeable to income tax. Profits and gains of business or profession is only one of the heads under which the companys income is liable to be assessed to tax. If a company has not commenced business there cannot be any question of assessment of its profits and gains of business. That does not mean that until and unless the company commences its business. its income from any other source will not be taxed. If the company even before it commences business invests the surplus fund in its hand for purchase of land or house property and later sells it at profit the gain made by the company will be assessable under the head Capital gains. Similarly, if a company purchases a rented house and get rent such rent will be assessable to tax under s. 22 as income from house property Likewise, a company may have income from other sources, It may buy shares and get dividends. Such dividends will be taxable under s. 56 of the Act. The comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shock in trade and has been doing the business of buying and selling the same. The assessee also contends that its income from this business of investment in the units of the UTI and its business of manufacture and sale of tyres are pooled together in a common account of funds which is managed by one common management. It is also the submission of the assessee that these two business namely the business of buying and selling units of the UTI and the manufacture and sale of tyres are so intertwined and interlaced that the same cannot be separated and treated independently therefore this income from the UTI being part of its business income it is entitled to claim the benefit of section 32AB. A perusal of section 32AB as it stood at the relevant time shows that if an assessee has a total income including income chargeable to tax under the head profits and gains of business or profession and if the income from such business is derived from an eligible business and if the assessee has out of such income utilised any amount during the previous year for the purchase of new plant or machinery then it is entitled to a set off a sum equal to 20 percent. Of the profit of such eligible busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of principles of commercial trading. The question must be viewed in the larger context of business necessity or expediency. If the outgoing or expediency. if the outgoing or expenditure is so related to the carrying on or conduct of the business that it may be regarded as an integral part of the profit earning process and not for acquisition of an asset or a right of a permanent character the possession of which is a condition of the carrying on of the business the expenditure may be regarded as revenue expenditure. 26. The Apex Court in the case of COMMISSIONER OF INCOME TAX vs. LAKSHMI MACHINE WORKS reported in 2007 290 ITR 667 SC, held as under:- It is important to note that tax under the act is upon income profits and gains. It is not a tax on gross receipts. Under section 2(24) of the act the word income includes profits and gains. The charge is not on gross receipts but on profits but and gains. The charge is not on gross receipts but on profits and gains properly so called. Gross receipts or sale proceeds, however include profits. According to the law and practice of income tax by kanga and palkhwala the word profits in section 28 should be understood in normal and pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... When the assessee has received money as debenture loans the assessee has to pay the interest on the said loans raised. similarly when bridge loans are taken and inverted in the business the assessee is liable to pay interest on the said loans. It is from the said loans he is carrying on the business and earning profit and therefore there is a direct nexus between the profit earned and the expenditure incurred in this regard. 29.when a shareholder subscribes to the share capital or when they advance money for purchase debentures, if the assessee has multiple business activities as it is clear from the memorandum of association, the money so advanced by the shareholders and persons who wants to purchase debentures is for the businesses to be carried by the assessee/company. The said amount is not advanced in respect of any particular business. If the business to be set up is only one, as in the aforesaid case, then till such business is commenced, income is earned, any interest by way of such deposits is to be treated as an income chargeable under section 56 of the Act. But once the business commences then it practically takes the character of the business income. 30. No disti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is a steel industry which in the normal course would take couple of years for being set up and production commenced so as to earn income. The ancillary business which are carried on may be carried on the day the company is being set up. Infect that is what precisely they have done within a month from the date of issuing of certificate of commencement of business. They are into the business of leading money and discounting and they have earned profits in the said business as the said business is also one of the business to be carried on by the company to which it was incorporated in law. 33. In fact the Tribunal has not allowed any deduction as claimed by the assessee in respect of expenses of ₹ 19 crores as it is held to be in the nature of capital expenditure. They also have not allowed deduction in respect of office expenditure at thorangal village where steel plant has to come up and also the expenses incurred in respect of office at Bangalore. The reason being that business of lending money discounting of bills etc. are exclusively carried on in the corporate office at Bombay. Therefore the expense with reference to the said office has been given deduction to while c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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