Income Tax Appellate Tribunal - Mumbai
Piramal Sons (P.) Ltd. vs Income-Tax Officer on 20 December, 1985
Equivalent citations: [1986]19ITD219(MUM)
ORDER
I.S. Nigam, Accountant Member
1. Against the order of the Commissioner (Appeals), Bombay, both the assessee-company and the revenue have come up in appeal before us. Both the appeals are, therefore, disposed of by a consolidated order.
2. The assessee is a private limited company and the appeal relates to the assessment year 1978-79. The ITO applied the provisions of Section 40A(8) of the Income-tax Act, 1961 ('the Act') and out of the claim of deduction of interest to various persons (other than banks) disallowed 15 per cent. Before the Commissioner (Appeals) the assessee-company claimed, firstly, that it was an 'investment company' with in the meaning assigned to it under Sub-clause (if) of Clause (c) of the Explanation to Section 40A(8) and, consequently, Section 40A(8) will not be applicable in the assessee's case. Alternatively, it was claimed that the accounts of the two directors, Mrs. Vijaya M. Piramal and Miss Archana M. Piramal, were current accounts and the interest paid on these current accounts of the directors did not attract the provisions of Section 40A(8). The Commissioner (Appeals) held that the principal business of the assessee-company was export of cloth, etc., and, therefore, the assessee is not an 'investment company' within the meaning assigned to it under Sub-clause (») of Clause (c) of the Explanation to Section 40A(8). The Commissioner (Appeals), however, accepted the alternative contention of the assessee-company that the accounts of the directors, Mrs. Vijaya M. Piramal and Miss Archana M. Piramal, were current accounts and, therefore, the interest paid on these current accounts did not attract the provisions of Section 40A(8). The Commissioner (Appeals), therefore, deleted the disallowance of 15 per cent of the interest of Rs. 1,11,758 paid on these two accounts.
3. The assessee-company is aggrieved with the finding of the Commissioner (Appeals) that the assessee-company is not an 'investment company' within the meaning assigned to it under Sub-clause (ii) of Clause (c) of Explanation to Section 40A(8) and, therefore, the interest paid to various persons (other than bank) will attract the provisions of Section 40A(8). On the other hand, the revenue is aggrieved by the finding of the Commissioner (Appeals) that since the accounts of the directors, Mrs. Vijaya M. Piramal and Miss Archana M. Piramal, were in the nature of current accounts, the interest paid on these accounts will not attract the provisions of Section 40A(8) and, therefore, the disallowance out of interest paid on these two accounts amounting to Rs. 1,11,758 was not justified.
4. The assessee's learned counsel, Shri Doshi, submitted to us that the assessee-company had only income from dividends, while it incurred a loss in the business of exports, the net result being a very small income, which was offset by the deduction under Section 80M of the Act. Proceeding further he submitted that the total investments of the assessee-company, according to the audited balance sheet of the company, at the end of the previous year amounted to Rs. 19,21,362 out of the total assets of the company, which again, according to the balance sheet, amounted to Rs. 28,01,353. Shri Doshi also referred to the investments in the sister concerns, which were also investments and submitted to us that these investments were far in excess of the total share capital of Rs. 10 lakhs and reserves and surplus of Rs. 1,17,437. In these circumstances, according to Shri Doshi, the principal business of the assessee-company was investments and the assessee-company was an 'investment company' within the meaning assigned to it by Sub-clause (ii) of Clause (c) of the Explanation to Section 40A(8). He, therefore, vehemently argued before us that the provisions of Section 40A(8) were not applicable to the case of the assessee-company and the entire disallowance on this account made by the ITO was unjustified.
5. On the other hand, the learned departmental representative, Shri Subramaniam, pointed out to us that the investments in shares were in companies, which were either under the same management, i.e., a subsidiary company, e.g., Alpana Investments (P.) Ltd. or other companies, e.g., Maheshwari Mills Ltd. and Piramal Spg. & Wvg. Mills Ltd. where the directors of the assessee-company were also directors ' and these investments in sister concerns or subsidiary companies could not be said to be an activity of the nature of business. In this connection it was pointed out by him that all the shares held by the assessee-company in the three companies of the same group were brought forward from the earlier years and there was no purchase or sale of any share during the previous year. Similar was the position, according to Shri Subramaniam, of advances, which were again to sister concerns and where again they were either under the same management or where the directors of the assessee-company were also directors or had substantial interest. According to Shri Subramaniam, the carrying on of business in investments connotes some systematic or organised course of activity, which is not there so far as investments in shares or advances to associated concerns are concerned. On the other hand, Shri Subramaniam pointed out that in the business of exports the turnover was Rs. 1,32,83,573 and in these circumstances the principal business of the assessee-company was exports. Shri Subramaniam, therefore, vehemently argued before us that the principal business of the assessee-company was not investment in shares, etc., and, on the other hand, the principal business of the assessee-company was export of cloth. In these circumstances, according to Shri Subramaniam, the assessee-company could not be treated as an 'investment company' within the meaning assigned to it under Sub-clause (if) of Clause (c) of the Explanation to Section 40A(8) and the claim of the assessee-company that the provisions of Section 40A(8) will not be applicable was incorrect.
6. Coming to the appeal filed by the revenue, Shri Subramaniam relied on the decision of the Special Bench of the Tribunal in the case of Kaloomal Shorimal Sachdev Rangwala (P.) Ltd. v. ITO [IT Appeal Nos. 3020-3021 (Bom.) of 1981] wherein the Tribunal held that even the current accounts of the directors will attract the provisions of Section 40A(8) and, consequently, the disallowance of 15 per cent out of the interest paid in these accounts under Section 40A(8) was justified.
7. The assessee's learned counsel, Shri Doshi, in reply submitted that there is no requirement under the law that there should be acquisition of shares during the previous year also in the case of an investment company. He further submitted that as mentioned in the commentary on The Companies Act, 1956 by A. Ramaiya and other authors the director of a company is not a servant but agent of the company. Reference in this connection was also made by him to the decision of the Hon'ble Supreme Court in the case of R.K. Dalmid V. Delhi Administration [1962] 32 Comp. Cas. 699, wherein their Lordships laid down that the word 'agent' in Section 405 of the Penal Code also applies to persons who occupy the position of an agent under the law like directors of companies. Our attention was also invited to the ruling of the Hon'ble Supreme Court in the case of Ram Prashad v. CIT [1972] 86 ITR 122 wherein their Lordships laid down that a person who is engaged to manage a business may be a servant or an agent according to the nature of his service and the authority of his employment. He, therefore, vehemently argued before us that since the two directors of the company under consideration here were agents of the company the interest paid on their current accounts will be exempt from the provisions of Section 40A(8) in view of Sub-clause (vii) of Clause (b) of the Explanation to Section 40A(8). He, therefore, supported the order of the Commissioner (Appeals) that on the interest paid to the two directors on their current accounts the provisions of Section 40A(8) will not be applicable and, therefore, the disallowance under Section 40A(8) out of interest on these two accounts was not justified.
8. We have carefully considered the rival submissions, The Hon'ble Supreme Court in a number of judicial pronouncements has laid down that even though the words used in the definition of 'business' under Section 2(73) of the Act are wide, underlying each of them is the fundamental idea of continuous exercise of an activity, i.e., some real, substantive and systematic or organised course of activity or conduct with the set purpose of earning income or making profits. In this context, it is not under dispute that the shares held by the assessee-company were in Alpana Investments (P.) Ltd., which is a subsidiary of the assessee-company and in Maheshwari Mills Ltd. and Piramal Spg. & Wvg. Mills Ltd. in which the directors of the assessee-company were also directors. Besides the shares in these companies were purchased prior to the beginning of the previous year, in some cases as long back as in 1970 and there has been no continuous, substantive, systematic or organised course of activity or conduct in making investment in shares. On the other hand, the assessee's business of export of cloth showed a turnover of Rs. 1,32,83,573 during the previous year and this business was the result of continuous exercise of real, substantive and systematic or organised course of activity. Considering all this and looking to the totality of the facts and circumstances, we cannot accept the contention of the assessee-company that the principal business of the assessee-company was acquisition of shares and not business of exports. The claim of the assessee-company, therefore, that the provisions of Section 40A(8) are not applicable to the assessee-company at all in these circumstances does not appear to be correct.
9. Sub-clause (vii) of Clause (b) of the Explanation to Section 40A(8) reads as follows :
(vii) by way of security or as an advance from any purchasing agent, selling agent or other agent in the course of, or for the purpose of, the business of the company or as advance against orders for the supply of goods or for the rendering of any service ;
A plain reading of this sub-clause shows that this refers to security or an advance from a purchasing agent, selling agent or other agent in the course of or for the purpose of the business of the company or as advance against orders for supply of goods or for rendering of any services. In spite of a specific query by the Bench, the assessee's learned counsel, Shri Doshi, has not been able to show to us that the so-called current accounts of the two directors, Mrs. Vijaya M. Piramal and Miss Archana M. Piramal, were by way of security or advance for services, etc., undertaken to be rendered by them. Nothing, therefore, turns on the fact that the assessee-company being an impersonal entity, it has to act through the agency of its directors. The provisions of Sub-clause (vii) of Clause (b) of the Explanation to Section 40A(8) will, therefore, not be applicable to the so-called current accounts of the two directors, Mrs. Vijaya M. Piramal and Miss Archana M. Piramal. Considering all this, looking to the totality of the facts and circumstances and following, with respect, the Special Bench decision in the case of Kaloomal Shorimal Sachdev Rangwala (P.) Ltd. (supra) we have no hesitation in holding that even the interest paid in the so-called current accounts of the two directors, Mrs. Vijaya M. Piramal and Miss Archana M. Piramal, attracts the provisions of Section 40A(8). Out of the interest paid in these two accounts, therefore, the disallowance of 15 per cent as laid down under Section 40A(8) made by the ITO was justified and this disallowance made by the ITO was wrongly deleted in appeal by the Commissioner (Appeals). On this issue, therefore, the order of the Commissioner (Appeals) is reversed, while the disallowance made by the ITO is restored.
10. The appeal filed by the assessee-company fails and is hereby dismissed while the appeal by the revenue succeeds and is hereby allowed.