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TMI Blog2011 (8) TMI 1334X X X X Extracts X X X X X X X X Extracts X X X X ..... r hearing both the parties the Supreme Court was of 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 sur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 11.07 crores by raising debenture issues 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ental business does not arise. The project commencement 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g ₹ 6.96,701/ It represents a donation 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 assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion by the share holders in favour of the Board of Directors 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 deposit Rs. 779.31 6 Interest received on inter corporate deposit Rs. 17.30 7 Interest received on a/c of fixed deposits towards NRI allotment Rs. 21.79 Total Rs. 1107.36 13. To carry on its activities, the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tain 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 the undisputed facts, which emerge from the material on record. 16. It is in this back ground, we have to see whether when the assessee has not commenced its main business of manufacturing of steel and earned any income out of the said business and admittedly when it has earned income by carrying on the business of bill discounting facilities, lending money etc. whether the aforesaid income of the company could be considered as a business income or income from other sources. 17.In order to answer the aforesaid questions, we have to see the Memorandum of Association to find out what is the abject with which the company was established. Clause 3 deals with objects for which the company is established. It reads as under- 'III. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 on banking business as defined in banking regulations act, 1949. xxxx xxxx xxxx xxxx 17. To draw make accept endorge discount negotiate execute and issue bills of exchange hundies promissory notes bills of lading warrants debenture and other negotiable or transferable instruments or securities. 18. In order to ascertain the business of the company, its memorandum has to be looked into. the memorandum provides the key to what the business objects of the company are and it has to be further ascertained whether those objects are still being pursued, It may be that a particular business activity which is carried on by the company may not be the main part of its business but, if the business carried on by the company is one such business for which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 company may also as in this case keep the surplus fund in short term deposits in order to earn interest. Such interests will be chargeable under s. 56 of the Act. The company has chosen not to keep its surplus capital idle but has decided to invest it fruitfully. The fruits of such investment will clearly be of revenue nature. 23. Therefore, from the aforesaid judgment, it is clear that till the company commences its business and earns income if they have kept their surplus funds in short deposits in order to earn interest that interest income is chargeable under section 56 of the Act. However once the assessee commences business and earns income and in addition to the income so earned, the company also earns interest by way of such deposits then the said income cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 business as computed in the accounts of the assessee which account has been audited in accordance with sub section (5) of section 32AB. The dispute in the present case is in regard to the question whether the assessee investment in the UTI is business and if so is it a business under section 32AB? In regard to the first aspect we must note that the Tribunal as a question of fact based on material on record has come to the conclusion that the investment in the UTI by the assessee company is in the course of its business and its business of manufacture and sale of tyres and sale and purchase of units of the UTI are common in nature and both the businesses are intervened and interlaced. This finding is accepted by the high court also. We also find that this business of the assessee c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 proper sense. However subject to special requirements of the income tax profits have got to be assessed provided they are real profits. Such Profits have got to be assessed provided they are real profits. Such profits have got to be ascertained on ordinary principles of commercial trading and accounting. However, the income tax act has laid down certain rules to be applied in deciding how the tax should be assessed and even if the result is to tax as profits what cannot be construed as profits still the requirements of the income tax act must be complied with. Where a deduction is necessary in order to ascertain the profits and gains such deductions should be allowed. Profits should be computed after deducting the expenses incurred for business though such expenses may not be admissible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 distinction can be made between the main business and the existing business. When the shareholders and the debenture holders advanced money to the company they advanced money by looking into the business to be carried on by the assessee as set out in the memorandum of association. The money which they have advanced and used for short business, cannot be treated as money solely given for the purpose of setting up of steel industry as contended by the Revenue and as held by the lower authorities. Once the assessee commenced one of the business which are mentioned in the memorandum of association the company. And if it is earning any income, it is an income earned under the head of profits and gains of business it profession and the interest income which is derived from the deposits made by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X
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