Madras High Court
Ace Investments (P.) Ltd. vs Commissioner Of Income-Tax on 26 March, 1998
Equivalent citations: [2000]244ITR166(MAD)
JUDGMENT N. V. Balasubramanian, J.
1. The following common question of law has been referred to us at the instance of the assessee relating to the assessment of its income for the assessment years 1977-78 to 1981-82 for our consideration :
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the interest income arising to the assessee should be assessed under the head 'Other sources' and not under the head 'Business' ?"
2. The assessee is a company and the main objects of the company, as set out in its memorandum of association, inter alia, are :
"(1) To carry on business as capitalists, financiers, concessionaries and merchants and to undertake and carry on and execute all kinds of financial, commercial, trading" and other operations.
(2) To advance, deposit, or lend money on securities and properties to or with such persons and on such terms as may deem expedient to discount, buy, sell, exchange and deal in bills, notes, warrants, coupons and other negotiable or transferable securities or documents.
(3) To issue on commission, subscribe for, take, acquire or hold, sell, exchange and deal in shares, stock, bonds, obligations or securities of any Government, local authority or company.
(4) To guarantee or become liable for the payment of money or investments or for performance of any obligations and to transfer all kinds of trusts and agency business.
(5) To borrow or take deposits of money at interest or otherwise from any person or persons, local authority or Government and advance, lend or deposit any such money or other moneys on such security or otherwise as the company may deem expedient without doing banking business as defined in the Banking Companies Act, 1949."
3. The assessee filed its returns of income for the assessment years 1977-78 to 1981-82 and admitted the income under the head "Business". The claim of the assessee was that its income under the head "Business" should be set off against the business loss brought and carried forward from the earlier assessment years. The income admitted by the assessee in the various returns filed for the said assessment years consisted of interest receipts from fourteen private trusts, the beneficiaries of which are members of the family of Sri T. V. Sundaram Iyengar. The Income-tax Officer examined the question in detail and found that the characteristics of money-lending business were absent in the advances made by the assessee to the fourteen private trusts and found that the advances were short term advances, the rate of interest was low, there was no risk at all and frequency of transactions was absent and that there was no change of parties in the loan transactions. The Income-tax Officer thus came to the conclusion that the transactions in question were only in the nature of investments made by the assessee and the interest income received by the assessee for the various assessment years cannot be regarded as income from money-lending business. Accordingly, he held that the income from the transactions should be assessed under the head "Other sources" and not under the head "Business" as claimed by the assessee.
4. The assessee preferred appeals against the orders of assessment before the Commissioner of Income-tax (Appeals) and the Commissioner of Income-tax (Appeals) confirmed the orders of the Income-tax Officer.
5. The assessee carried the matter further in appeal before the Income-tax Appellate Tribunal and it was the case of the assessee that the loan advance came out of the assessee's own capital and not out of any borrowing on which the assessee was liable to pay interest. It was also submitted that the public financial institutions advance loans for longer period, but, still their income is considered under the head "Business" and when banks lend loan to weaker sections of the society or to some priority sectors, interest income on such loans is considered under the head "Business". The assessee also submitted before the Tribunal that the transactions were entered into pursuant to the objects of the company, i.e., to carry on business as financiers and, therefore, the interest income should be assessed under the head "Business". The Tribunal considered the matter and found that surplus funds invested in the fourteen trusts were invested on a low rate of interest was a single instance and the income arising" on the said deposits cannot be considered as income from money-lending business. The assessee has challenged the finding" of the Appellate Tribunal and the question of law set out earlier has been referred under Section 256(1) of the Income-tax Act.
6. Mr. V. S. Jayakumar, learned counsel appearing for the assessee submitted that right from the assessment year 1973-74, the assessee had been claiming that the interest income on the money lent to the fourteen private trusts should be assessed under the head "Business". He also brought to our attention the finding of the Appellate Tribunal for the assessment year 1976-77 wherein the Appellate Tribunal accepted the case of the assessee and recorded a finding that the assessee was carrying on business in share dealing" and in money-lending business. For the assessment years 1977-78 and 1978-79, the matter was reagitated and when the matter reached the Appellate Tribunal, the Appellate Tribunal set aside the assessment for the three assessment years and directed the Income-tax Officer to redo the assessment. Learned counsel submitted that the Appellate Tribunal has accepted the case of the assessee for the assessment year 1976-77 that the assessee was carrying on money-lending business and, according to him, the only conclusion that would flow from the said order is that the assessee was carrying on money-lending business since there is no change in the factual situation and only with reference to fourteen transactions, the Tribunal has recorded a finding that the assessee was carrying on money-lending business. Learned counsel for the assessee also submitted that the Tribunal was not correct in holding that from April 1975-82, the assessee did not make any advance to any other party and he referred to the order of the Income-tax Officer for the assessment year 1977-78 wherein a sum of Rs. 3,585 was admitted as income from Express Traders and the said sum was the interest income and the money was advanced to Express Traders as a part of money-lending business. He also submitted that the object of the assessee-company was to advance, deposit or lend money and when there is an object clause in the memorandum of assoelation to lend money and in pursuance of that object, the assessee had lent money, it must be taken that the money was advanced in the course of its money-lending business and the income from money-lending business should be regarded as income from business. He also submitted that mere absence of frequency in the transaction would not take the transaction out of the business net and convert the same as if the money was deposited in fourteen trusts. He, therefore, submitted that the Tribunal erred in law in holding that the interest income arising on the said deposits cannot be considered as income from money-lending business. In support of his submission, learned counsel for the assessee placed reliance oh the decision of the Supreme Court in Investment Ltd. v. CIT [1970] 77 ITR 533, wherein the Supreme Court held that the order of the Tribunal holding that the shares and securities were the stock-in-trade of the asses-see-company for an earlier assessment year would constitute good and cogent evidence to determine the nature of the transaction in shares and securities; for the subsequent assessment year. Learned counsel submitted that since the Appellate Tribunal has rendered a finding that for the earlier assessment year the asses see-company was carrying on money-lending business, it would constitute good evidence to show that the assessee was carrying on the money-lending business and there are no changes in the factual position.
7. Learned counsel for the assessee also relied on a decision of the Supreme Court in CIT v. Calcutta National Bank Ltd. [1959] 37 ITR 171, wherein the Supreme Court considered the provisions of the Excess Profits Tax Act, 1940, and in that context, the Supreme Court held that the term "business" is a word of very wide import and though ordinarily, "business" implies a continuous activity in carrying on a particular trade or avocation, it may also include an activity which may be called "quiescent" and submitted that there was continuous activity and the activity carried on by the assessee should be regarded as business activity. Learned counsel for the assessee also brought to our notice the decision of this court in CIT v. R. M. Meenakshisundaram [1995] 212 ITR 220 and submitted that a question as to whether a particular source of income was from a business or not should be decided according to ordinary notions and whether the income was derived from an activity which has a set purpose and the motive for the activity was profit, and even a single or isolated transaction would constitute business. He, therefore, submitted that the decision of this court in CIT v. R. M. Meenakshisundaram [1995] 212 ITR 220, would apply to the facts of this case. The next decision that was relied on by learned counsel is the decision of the Delhi High Court in CIT v. Bkarat Insurance Co. Ltd. [1983] 142 ITR 342, wherein the Delhi High Court held as under (headnote) :
" 'Business' is a term of wide amplitude which includes any trade, commerce or manufacture, or any adventure or concern in the nature of trade, commerce or manufacture. Ordinarily, business implies continuous activity in carrying on a particular trade or vocation but it may also include an activity which may be called quiescent."
8. Learned counsel then placed reliance on the decision of the Calcutta High Court in Lakshmi Narayan Board Mills P. Ltd. v. CIT [19941 205 ITR 88, wherein the Calcutta High Court held that the question whether the business was being carried on or was discontinued depends on the facts of each case and that it is not necessary that a business should be worked all the time and there may be long intervals of inactivity and a concern may still be a going concern though, it may for some time be quiet and dormant. Learned counsel further placed reliance on the decision of the Supreme Court in CIT v. Nainital Bank Ltd. [1965] 55 ITR 707, and submitted that cash is the stock-in-trade of a banking business and the degree of the risk or its frequency is not of much relevance but its nexus to the nature of the business is material. He, therefore, submitted that the asses-see lent loan to fourteen trusts in one year and though there was no subsequent lending, what is relevant is the nature of the business and not the degree of risk or its frequency. He also submitted that had the assessee advanced money to fourteen trusts spread over a period of fourteen years, the income arising from such lending would be regarded as money-lending business and the mere fact that the transactions were carried out in one year would not make any difference and, therefore, the income from the advance should be regarded as income from the money-lending business.
9. Learned counsel for the Revenue, on the other hand, submitted that the Tribunal on the basis of the material placed before it came to the conclusion that the assessee was not carrying on any money-lending business and the inference drawn by the Tribunal was on the basis of the facts before the Tribunal and, therefore, the finding should be regarded as a finding of fact. Learned counsel for the Revenue placed reliance on the decision in Ghanshyamdas Gangadhar v. CIT [1954] 25 ITR 318, wherein the Patna High Court held that the question whether the assessee was or was not carrying on the business is a mixed question of fact and law and it is not purely a matter of legal inference and it is open to the Tribunal on the facts' to, hold that the assessee was not carrying on any business. He, therefore, submitted that in all the cases what is relevant is the nature of the activity carried on by the assessee and when the Tribunal as the final fact-finding authority on the basis of the materials came to the conclusion that the assessee was not carrying on money-lending business, the finding arrived at by the Appellate Tribunal is a pure finding of fact and it cannot be interfered with. Learned counsel also placed reliance on the decision of the Supreme Court in Amarchand Sobhachand v. CIT [1971] 82 ITR 591 and submitted that the finding of the Appellate Tribunal that the assessee carried on money-lending business is a finding of fact and when that finding is supported by evidence on record, that would be binding on the court. Learned counsel for the Revenue also brought to our attention the decision of the Supreme Court in Kai Cilda Wallang v. U. Lokendra Suiam, AIR 1987 SC 2047, wherein the Supreme Court considered the provisions of the Assam Money Lenders' Act, 1934, to hold that isolated transactions would not make the plaintiff a person engaged regularly in money-lending business and the mere object clause would not be sufficient. Learned counsel for the Revenue also submitted that the finding of the Appellate Tribunal for the earlier assessment year, viz., 1976-77 cannot be regarded as conclusive and hence it cannot be described as good evidence. According to him, the Tribunal had considered and found that it did not go into the matter deeply whether the assessee was really carrying on money-lending business and after considering the earlier order, the Tribunal has come to the conclusion that the assessee was not carrying on money-lending business. He also submitted that in so far as the interest amount received from Express Traders is concerned, the money was advanced to Express Traders only as deposit and it was not money lent in the course of money-lending business. Learned counsel for the Revenue submitted that the mere presence of the object clause would not be sufficient and other ingredients of money-lending business are absent and, therefore, the Tribunal was correct in holding that the assessee was not carrying on money-lending business.
10. We have carefully considered the submissions of learned counsel on either side. It is no doubt true that right from the assessment year 1973-74, the assessee had been claiming that it was carrying on money-lending business. For the assessment year 1973-74, the assessee went on appeal before the Appellate Tribunal and the Tribunal confirmed the finding of the Income-tax Officer that the assessee was not carrying on money-lending business up to and including the assessment year 1973-74. For the next two assessment years 1974-75 and 1975-76, the Tribunal also recorded a finding that the assessee was not carrying on money-lending business, though it found that the assessee was carrying on business in share dealings. For the assessment year 1976-77, the assessee claimed that it was carrying on business both in share dealings as well as in money-lending business. When the matter reached the Appellate Tribunal, the Tribunal, no doubt, recorded a finding that the assessee was carrying on business both in shares as well as in money-lending business. The Tribunal had considered the matter for the present assessment year and found that the earlier Tribunal has not considered the question in detail as the amount involved for the assessment year 1976-77 was a paltry amount of Rs. 1,046. Therefore, the finding recorded by the Appellate Tribunal for the assessment year 1976-77 cannot be regarded in any way as conclusive of the fact that the assessee was carrying on money-lending' business from the assessment year 1976-77 onwards. The Tribunal, as a final fact-finding" authority examined its own order for the assessment year 1976-77 and found the because of the amount involved in the year, the Tribunal had not deeply gone into the matter which it should have done and, therefore, the finding recorded by the Appellate Tribunal for the said earlier assessment years could not be conclusive of the matter. The decision of the Supreme Court on, which learned counsel for the assessee placed strong reliance is the case of Investment Ltd. v. CIT[1970] 77 ITR 533, does not help the assessee. The Supreme Court in the said case held that the finding recorded by the Appellate Tribunal for an earlier assessment year as regards the nature of the transaction would not be conclusive and binding on the income-tax authorities, or the Appellate Tribunal for the subsequent assessment years, but the earlier order of the Appellate Tribunal would constitute only a good and cogent evidence as regards the nature of the transaction. Therefore, when the earlier order of the Tribunal is to be regarded only as a piece of evidence, and it is no doubt true that great weight should be attached to the finding of the Appellate Tribunal, still, the order can be regarded only as a piece of evidence and cannot be regarded as conclusive of the matter in one way or the other and once and for all, for all future assessments and once the earlier order of the Appellate Tribunal is regarded as a piece of evidence and the Appellate Tribunal has considered the evidence and come to the conclusion that the finding recorded by the Appellate Tribunal was rendered on the facts of that case and because of the meagre amount involved, the Tribunal in the earlier order did not go into the matter deeply, the finding cannot be lightly disturbed. That apart, it is well-settled that under the provisions of the Income-tax Act each year of assessment is a self-contained year and there is no question of any res judicata in proceedings under the Income-tax Act. Therefore, the submission of learned counsel for the assessee that because of the earlier order of the Appellate Tribunal for the assessment year 1976-77, the assessee should be regarded as carrying on money-lending business for the present assessment years also is not acceptable.
11. The second circumstance that was relied on by learned counsel for the assessee was that the monies advanced to the fourteen trusts were not isolated transactions, and according to him, the Tribunal was not correct in holding that the assessee did not make any other advance to any other party.
12. The Income-tax Officer, for the assessment year 1977-78, no doubt, found that the assessee had admitted a sum of Rs. 3,585 as the income from Express Traders. The Commissioner of Income-tax (Appeals) in the common order passed for the assessment years 1977-78 to 1979-80 and 1981-82 found that the money advanced by the assessee to Express Traders was only a deposit and it was not money lent to the said concern in the course of its money-lending business. It is only because of the finding recorded by the Commissioner of Income-tax (Appeals) that the money was given as deposit, the Tribunal has recorded a finding that the assessee did not make any advance to any other party. Therefore, the decision relied on by learned counsel for the assessee is of no avail to the assessee.
13. Learned counsel for the assessee referred to the object clause. Under the object clause, the assessee is empowered to lend money on securities and properties to certain persons in the prescribed terms. We are of the opinion that the mere presence of the objects clause would not be sufficient to hold that the assessee was carrying on money-lending business. Learned counsel mainly relied on the decision of the Supreme Court in CIT v. Nainital Bank Ltd. [1965] 55 ITR 707, wherein the Supreme Court laid down certain tests to find out whether a person is carrying on business or not. The apex court held that it would depend upon the volume of the business, frequency of the transaction, continuity, and the need under which the transaction was entered into. If the decision of the Supreme Court in Nainital Bank Ltd.'s case [1965] 55 ITR 707 is applied, it is clear that on the facts of this case, the amounts advanced were short-term advances and they were advanced only to the fourteen trusts. The assessee had not advanced money to any other person. The rate of interest charged was six per cent. which the Appellate Tribunal considered to be low, when compared to the market rate of interest prevalent at that time. There is also one other fact. It is seen that the interest was collected only after the payment of the principal sum. The Appellate Tribunal also found that the persons to whom the advances were made were closely connected with the assessee and, therefore, the mere presence of the object clause in the memorandum of association that the assessee can carry on money-lending business would not be sufficient and conclusive in the light of the other factual matters pointing out the nature of the transactions. Learned counsel cited the decision of the Supreme Court in the case of Calcutta National Bank Ltd. [1959] 37 ITR 171 and it is a case arising under the Excess Profits Tax Act, 1940, and in that Act, the term "business" has a wider meaning. The Supreme Court held that though the expression, "business" implies a continuous activity in carrying on a particular trade or avocation, it may also include an activity which may be called "quiescent". Applying the tests laid down in the decision of the Supreme Court in the case of Calcutta National Bank Ltd. [1959] 37 ITR 171 to the facts of the case, it is essential for the assessee to prove that the activity was carried on continuously and systematically by the application of its labour and skill to earn income. In other words, there must be proof of continuous activity in carrying on a particular trade and on the facts of this case, it was clearly found that the activity indulged in by the assessee was a one-time transaction and there was no continuous activity of dealing in money by the assessee in the course of its activity of the business. Therefore, the decision of the Supreme Court in the case of Calcutta National Bank Ltd. [1959] 37 ITR 171 has no application to the facts of this case,
14. The next decision that was relied on by the assessee is the decision of this court in R. M. Meenakshisundaram's case [1995] 212 ITR 220 wherein this court considered the question when a particular receipt can be regarded as business income and this court held that the question must be decided according to ordinary notions of what a business is and the activity from which the income is derived must have a set purpose. It is seen in the instant case that there were no business dealings with any other person except the fourteen trusts and there was an absence of motive for the interest charged at the abysmally low rate of six per cent. which was comparatively lower than the prevalent market rate of interest. This court, no doubt, held that even a single or isolated transaction can be regarded as business if there are indicia of trading activity, but we have seen that there was no systematic or organised activity carried on by the assessee in dealing with the money. There was only an isolated transaction and there was no continuous activity in dealing with the money and the only transaction entered into by the assessee was the lending of the money to the fourteen priyate trusts and the assessee had received the principal sum even before it received the interest. Therefore, applying the principle laid down by this court, in our opinion, the assessee cannot be said to be carrying on money-lending business.
15. The decision of the Delhi High Court in Bharat Insurance Co. Ltd. 's case [1983] 142 ITR 342, on which reliance has been placed, does not lay down any new, or different tests and, therefore, it is unnecessary to consider the said decision in detail. The court, therein held that the business activity implies continuous activity in carrying on a particular trade or vocation which is absent in the instant case. The decision of the Calcutta High Court in Lakshmi Narayan Board Mills Pvt. Ltd.'s case [1994] 205 ITR 88 on which reliance is placed by the assessee does not advance the case of the assessee and is distinguishable from the present case. In that case, the business had actually commenced and there was a lull in carrying on that particular activity of the business and in that factual situation the court held that even though there was long absence in the business activity, the concern should be regarded as carrying on business activity. The decision of the Calcutta High court has no application to the facts of this case as the assessee has to establish that it had commenced its money-lending business and in the absence of any finding that it had commenced the money-lending business in pursuance of the object clause, the decision of the Calcutta High Court has no application to the facts of this case. The decision in Nainital Bank Ltd.'s case is also not applicable to the facts of this case. The assessee in the instant case is not carrying" on business in banking and, therefore, the money lent by it cannot be regarded as its stock-in-trade. In the context of banking business, the Supreme Court held that the degree of the risk or its frequency is not of much relevance but its nexus to the nature of the business is material. The decision of the Supreme Court relating to the banking business has no application as the assessee who claims to be a money lender, it has fairly submitted by learned counsel for the assessee that it was not even registered under the provisions of the Tamil Nadu Money Lenders Act.
16. We are of the view that the finding arrived at by the Appellate Tribunal that the assessee was not carrying on money-lending business is a finding arrived at on the basis of the materials on record and as held by the Supreme Court in Ka Icilda Wallang v. U. Lokendra Suiam, AIR 1987 SC 2047, the' isolated transaction would not render the assessee to be regularly 'engaged in money-lending business. The decision of the Supreme Court in Amarchand Sobhachand v. CIT [1971] 82 ITR 591 is to the effect that the finding arrived at by the Tribunal on the evidence on record is a finding of fact and would be binding on the court. The Tribunal, in our opinion, on the basis of the materials has come to the right conclusion that the assessee had merely invested its surplus fund in the fourteen trusts and the interest charged was at a low rate of interest and it was an isolated transaction and the assessee had not advanced money in the course of its business in pursuance of the object clause in the memorandum of association. The Tribunal, in our opinion, has come to the correct conclusion in holding that the income of the assessee cannot be regarded as income derived from money-lending business, and it was derived from the deposits or investments made. In our view, the finding arrived at by the Appellate Tribunal on the basis of the materials is a pure finding of fact and no interference is called for in the tax case reference.
17. Accordingly, we answer the common question of law referred at the instance of the assessee, for various assessment years in the affirmative and against the assessee. The Revenue is entitled to costs of Rs. 1,500 one set.