TMI Blog1992 (2) TMI 120X X X X Extracts X X X X X X X X Extracts X X X X ..... he correct perspective the whole of the order is reproduced below:-- "On going, though the income-tax records of the assessee it was noticed that the assessment for assessment year 1982-83 was made on 31-3-1983 determining the total income at Rs.7,14,790. The income was revised to Rs.3,02,064 vide order dated 12-4-1983 giving effect to CIT(A)'s order. The assessee company had income from business of purchase and sale of shares and also income from dividend. The income from business was determined after giving deduction for interest payments made on borrowals. The assessee company being a trading company provisions of section 40A(8) were applicable and hence 15% of the interest payments made to various individuals was liable to be disallowed and added to the total income. Since the Income-tax Officer failed to do so the assessment order made by him was considered erroneous insofar as it was prejudicial to the interests of revenue. A notice under section 263 was, therefore, issued to the assessee asking it to show cause as to why the assessment order of the Income-tax Officer be not set aside/suitably modified under section 263 of the I.T. Act, 1961. 2. In response to the sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y and has been registered as such with them. 4. The assessee has also drawn my attention to sections of section 109(ib)(ii) of the I.T. Act which defines an investment company m follows: "Investment company means, a company whose gross total income consists mainly of income which is char@ under IM head 'Interest on Securities' income from house properties, capital gain, and income from other source". Out of the gross total income of Rs.23,60 lacs, by the assessee income from other sources was Rs.23.48 lacs. In view of this it is claimed that in terms of the definition of investment company provided under section 109(ib)(ii) the assessee company would fall under the head 'investment company'. 5.The definition of investment company given under section 40A(8)(c)(ii) is as under: "An investment company, that is to say a company which carries on, as its principal business, the acquisition of shares, stock, bonds, debentures, debenture stock, or securities issued by the Government or a Local authority, or other marketable securities of a like nature." In terms of this definition a company which carries on, as its principal business, acquisition of shares would be an invest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the learned representative of the assessee also moved for the admission of the additional ground on following basis as stated in the covering letter dated 29th July, 1987:-- "263 notice dated 16-3-1985 and Order of the Commissioner of Income-tax dated 27-3-1985 are without jurisdiction and therefore ab initio invalid in law in view of the fact that the assessment order had already merged in the Appellate Order of Commissioner of Income Tax (Appeals) dated 19-8-1983." The petitioner submits that the above ground raises a neat point of law which goes to the root of the matter and does not require any further evidence for adjudication thereof. Apart from going to the root of the matter, it raises a more fundamental question of jurisdiction of the Commissioner under section 263 and as is well established the jurisdiction cannot be vested by acquiescence of the party. The point in the additional ground was pointed out to us by Advocate Shri J.P. Shah when the undersigned went to entrust the brief to him for arguing before the Tribunal. That such a ground could be taken was not within our knowledge at the time of filing of the appeal. In the circumstances aforesaid we humbly reque ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the order passed by the Commissioner (Appeals), we find that the issue under consideration was not at all the subject matter of appeal before him. Besides, the decision of the Special Bench in the case of Shree Arbuda Mills Ltd. is not being followed by various Benches of the Tribunal in Ahmedabad because it appeared to them that the said decision was contrary to the ratio laid down by Hon'ble High Court of Gujarat in Karsandas Bhagwandas Patel v. G.V. Shah, ITO [1975] 98 ITR 255. That is why an elaborate, order was passed by C-Bench of the Ahmedabad Tribunal in the case of Shri Ramanbhai B. Patel in WT Appeal No. 232 Ahd. of 1985, dated 25-7-1986 wherein the basis for not following the decision of the Special Bench was explained. For the same reasons, therefore, we reject the ground regarding challenge to jurisdiction under section 263 of the Act on the aspect of merger. 5.2 Coming to the merits of the case, we have to state as follows. Section 40A opens in following language:-- "(1) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head "Prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consultation with Government of India. Hence the view taken by us gains the added strength. Besides the ITO had followed the view of earlier assessments which became final. 6. In the result, the appeal succeeds. Per Shri M.A.A. Khan, Judicial Member - I have had the benefit of going through the order proposed by my learned brother but I regret my inability to subscribe to the findings recorded and conclusions arrived at by my learned brother in respect to the merits of the main issue relating to the applicability of section 40A(8) of the I.T. Act, 1961 (the Act) to appellant company (henceforth the 'company'). The relevant facts have been set out in the proposed order but I would like to point out at a few facts more in order to appreciate the real controversy in its right perspective. 2. The company was incorporated on Dec. 10, 1973 under the Companies Act, 1956 under the name of 'Prabhat Fabrics Pvt Ltd.'. The main objects of the company, as are disclosed by clause III of its Memorandum of Association, were to buy, sell, distribute, export and/or otherwise deal in textile fabrics, art silk and other synthetic fabrics as also to carry on business of spinning, weaving, m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties issued by the Government or a local authority, or other marketable securities of a like nature; or". 6. It may be pointed out that in the above definition of 'financial company' fall only such investment companies which (i) carry on the business of acquisition of shares, stocks, bonds, debentures etc. and (ii) such business is their 'Principal business'. To my mind in the above definition of 'financial company' which is to mean 'an investment company' for the of sub-section (8) of section 40A, stress has been laid on the nature and extend of business being carried on by such a company. The expressions 'acquisition' and 'principal business' used in the language of clause (e)(ii) are of much significance and need to be given their true meaning. The first, to my mind, should suggest an act or state of more than mere 'dealing' or 'trading' and the other should carry a meaning synonym to the expression 'mainly'. In other words, the expression 'acquisition' should embrace the element of 'holding' within its meaning and the expression "principal business" should mean the main business which brings the major part of income to the company. 7. The term 'acquisition' has quite a wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g in investments and (2) a company whose business consists wholly or mainly in holding of investments and proceeded to examine the true meaning of the latter part of the above expression. At the time of arguments the see company urged that the said expression should be given the same technical meaning as borne by the expression 'investment companies' used in section 87(f) of the Indian Companies Act, 1913 or as used in section 372(11) of the Companies Act 1956 and therefore, should be confined to such companies whose principal business was the acquisiton and holding of shares, debentures, stocks or other securities. As against it revenue had contended that the said expression should relate to a company whose income was derived from investments in contradistinction to the income received from manufacturing, or processing or trading operations and the word 'investment' in the contest in which it occurs should be understood in its ordinary popular sense and be not given technical meaning. Accepting the stand of revenue their Lordships examined the construction and true meaning of the term 'investment' and quoted the following words of Lord Normand in IRC v. Tootal Broadhurst Lee Co. L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not partake the character of 'earned' business income. That characteristic of the nature of its income, which should make the major part of its income, would then represent its business activity of acquiring shares, stocks, debentures etc. in contradistinction of a business activity of dealing or trading in shares, stocks and debentures so as to entitle an investment company to claim exemption from the mischief of section 40A of the Act. It thus necessarily follows that income coming to such a company by its carrying on, as its principal business, acquisition of shares, debentures, stocks etc. would be dividend or interest income which would not fall within the ambit of section 40A(1). But if income coming to a company, (may be it is called as an investment company elsewhere in the Act or in the Companies Act, 1956 or has even been declared so by Reserve Bank of India), is the result of its carrying on, as its principal or main business, dealing or trading in shares, debentures or stocks etc. such a company would not and could not be a 'financial company' meaning 'investment company' for clause (c)(ii) of Explanation to sub-section (8) of section 40A and its income being business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5,97,25,583 from shareholders 2. Unsecured sundry 4,22,330 and others debtors 5. Current Liabilities 3. Cash Bank balan- Provisions. 96,52,906 ces. 4,24,851 4. Loans Advances (Unsecured) 1. To employees 2,000 2. To others 3,60,64,610 3. Tax deducted at source 22,43,029 5. Misc. Erpenses 4,275 ---------------- ------------------- 7,26,99,345 7,26,99,345 ---------------- ------------------- ------------------------------------------------------------------------------------------ 13. The details of particulars given; in the Balance Sheet evidentl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deducting of Rs.) ------------------------------------------------------------------------------------------ 15. The above picture of P L account clearly shows that major put of its income had come to the company by its trading activities of purchases and sales of shares and debentures. The funds of the company were not "invested" in accordance with the object enshrined in clause 66 of the Memorandum of; n. Its business consisted wholly or mainly in she dealing in investment and not in holding of investment. Its principal business brought business, income to it which made the major part of its total income. The business income amounted to Rs.30,44.572 as against dividend income of Rs.23,48,159. As no interest income was shown in P L account the dividend income seems to be inclusive of interest income for the obvious reason that investments in unquoted fully paid up shares of various co-operative banks totalled Rs.65,150 and the quoted equity shares of Reliance. Textile Industries Ltd., utilised as stock in trade could not have yielded that much of dividend income. The debentures, loans and advances and current accounts in Bank were also there to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r:-- "Whether the Commissioner of Income-tax erred sitting aside the assessment for the asst. year 1982-83 on the ground that the Income-tax Officer failed to make the disallowance in accordance with section 40A(8) of the Income-tax Act, 1961?" The Hon'ble President is requested to do the needful in the matter. THIRD MEMBER ORDER Per Ch. G. Krishnamurthy, President - The assessee in this case is a private limited company deriving income from and sale of shares. It had filed a return declaring an income of Rs.4,92,850 and the Income-tax Officer completed the assessment by making certain adjustments on a total income of Rs.7,14,790. In para 2 of the assessment order, the Income-tax Officer made the following observation: "Provisions of section 40A(8) are not applied as the assessee company is a financial company (Investment company) as defined in clause (c) of section 40A(8)." It may also be mentioned here that while filing the return of income, the assessee filed a computation sheet adding at the end a note stating: "The company is an Investment Company and hence financial company with the meaning of section 40A(i)(c)(ii) of the Income-tax Act, 1961. Therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re mainly consisted of income chargable under the head 'income from other sources' and, therefore, the company must be regarded to be an investment company. 3. The Commissioner of Income-tax dealt with all these points in his order and ultimately came to the conclusion that the assessee was only a treading company and am a financial company and the provisions of section 40A(8) clearly applied and directed the Income-tax Officer to disallow the interest in accordance with section 40A(8) of the Income-tax Act by setting aside the assessment. 4. Aggrieved by this order, the assessee appealed to the Tribunal and repeated the same arguments as were urged before the Commissioner. 5. The leaned Accountant Member, on an interpretation of section 40A of the Income-tax Act came to the, conclusion that this section was applicable to the persons i.e., companies which are having income under the head "business" also and there could not be business unless there was trading in shares and, therefore, a financial company or an investment company must necessarily carry on the business of purchase and sale of shares also in addition to holding shares for investment. According to him, the inve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts, then it could not be said that the acquisition was for the purpose of holding and, therefore, it could not be said to be a financial company. In this context he made a reference to a decision by the Supreme Court in the case of Nawin Estates (P.)Ltd. to draw support for his view that there ought to be investment in shares by way of holding. The Judicial Member drew it distinction between dealings in investments and holding of investments and held that dealing in investments was not what was contemplated by section 40A(8) for a company to fall within the meaning of a financial company, investments must be held by the company. 7. Then he referred to the balance sheet of the assessee company and held that what was shown in the current assets in the balance sheet was termed as stock in trade of the closing stock of shares which according to him did not support the view that those shares were held by the as company as investments. He also noted that the shares account yielded a profit of Rs.30,44,572 while the income from dividends was only Rs.23,48,159 and since the income from dealing in shares was more than the dividends income, the assessee company by any standard could not b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c or organised course of activity of investment carried on by an assessee for a set purpose such as the earning of profits. The Supreme Court pointed out in this case at page 382 of the report that "It is easier to understand when the section speaks of a company having the business of dealing in investments though to say that the company is dealing in investments may, at first sight, look somewhat incongruous. When the Legislature spoke of dealings in investments, it meant dealing in shares, stocks and securities etc. But when a person invests in the shares of some of the companies, it is difficult to say that his business is one of investing. In commercial circles investing is not considered as business. An investor may feel perplexed if he is called a businessman." 10. Then the Supreme Court pointed out that in Bengal Assam Investors Ltd. v. CIT [1966] 59 ITR 547, it was held that an individual who merely invests in shares for the purpose of earning dividend, does not carry on a business and that the only way he can come under section 10 of the Act is by converting the shares acquired by him into stock in trade, i.e., by carrying on the business of dealing in stocks and shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s totally different. That analogy given in a different context should not have been imported in dealing with the present situation like the one where section 40A(8) was concerned with so many other ramifications. In sum, his argument was that the assessee company was a financial company although in the process of holding investments by way of acquisition, it was dealing also in shares and primacy should not have been given to the dealings in shares and should have been construed only as an ancillary or incidental act in the process of acquisition of shares. 11. The learned Departmental Representative on the other hind relying very heavily on the various observations made by the Judicial Member and also the copies of the accounts particularly the shares account extracted by the Judicial Member in his order, submitted that the main purpose of the assessee was only to deal in shares and not to hold shares as investments in the sense of acquiring shares for being held as investments. The assessee is only a trading company and not an investment company. Tracing the history of section 40A(8), he submitted that the assessee was only trying to take advantage of the exceptions provided i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he cut imposed by the section. The purpose is very clear to understand. A trend has developed in the country, particularly in the corporate sector to receive deposits by offering very high rates of interest sometimes bordering on usuriousness. This tendency had not only deprived the public financial institutions like Banks etc. from securing deposits but the public are being cheated into making deposits with those companies lured by the offer of high rates of interest without any proper security of refunding of the amounts. Instances where the depositors were cheated for refunds were not uncommon. The legislature stepped in to put an end to this unethical and deceptive practices. It has, therefore, imposed a curb by disallowing the Interest on the payments of interest offered to achieve at win objective. One is to regulate the flow of funds into the companies which are not banking and financial companies and secondly, to ensure the repayment of the refunds by weeding out the unstable companies. Since banking and financial companies are excluded from the operation of this limitation, it became necessary for the legislature to define what is a financial company. Therefore, Explanatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the memorandum of association and then said that if there are more than one object and dealing in or holding of invesunents is one of the several objects, it could not be said that the primary object of the company is to carry on the business of the dealing or holding of investments, because the objects of the company are manifold. The same view was taken by the Calcutta High Court in the case of Great Pyramid Insurance Co. Ltd. v. CIT [1976] 102 ITR 394 which was also relied upon by the learned counsel for the assessee. Here again the meaning of the "investment company" as used in section 109(ii) of the Income-tax Act, 1961 came for interpretation and the meaning given to that expression in the 1922 Act by the Supreme Court in Distributors (Baroda) (P.) Ltd.'s case was applied. This being the law of the land on the subject, on which reliance also hat been very heavily placed by the learned counsel for the assessee, applying these principles to the facts of the case before me, I have to discern as to what is the primary activity of the company. Whether the business consisted of wholly or mainly in acquisition of shafts which expression of wholly or, mainly is in my opinion equal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction of tax. The receipt of dividends may disclose a situation that the shares were held as investments and the dividend was received on the shares held as investments but this may also disclose that the dividends received on shares purchased-cum-dividends or sales made ex-dividend. No one has gone into this aspect. Therefore, simply because there is a dividend income of Rs.28 lacs, it does not mean that that was the main activity of the assessee company. 16. Again reverting to the observation made by the Supreme Court in Distributors (Baroda) (P.) Ltd.'s case, if a company engages itself in two or more equally or nearly equally important business activities, then it cannot be said that the company's business consists wholly or mainly in dealing in a particular thing. Here even if I hold that the dividend income is from shares held as investments, the income from those two activities was equally or nearly equal so that it cannot be said that the assessee company's principal business was acquiring shares for investment. It is also not known on what shares the assessee received dividend of Rs.28 lacs unless it is on purchase of shares-cum-dividends and sale of ex-dividend. T ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
