Income Tax Appellate Tribunal - Ahmedabad
Income-Tax Officer vs Amora Checmicals (P.) Ltd. on 23 September, 1987
Equivalent citations: [1987]23ITD51(AHD)
ORDER
Per Shri K. R. Dixit, Judicial Member - In all these appeals the grounds are the same arising out of the same facts except for difference in figures which are not material. Therefore, they are dealt with by this common order.
2. The first ground is that the CIT (A) has erred in allowing the interest paid by the assessee to a bank. The assessee had taken on lease substantial portion of the building from a HUF whose members had controlling interest in and management of the assessee company. There was an agreement by the assessee with that HUF to advance a sum of Rs. 6 lacs to the HUF for the purposes of erection of partitions in the building and completion of other work such as interior decoration etc. so that, that building could be given to the bank on a rent. The assessee charged a concessional rent of 6 % to the HUF while it paid a higher interest to the bank. The assessee actually advanced a sum of Rs. 8,50,000 to the HUF by borrowing it from the bank. The ITO therefore disallowed the interest difference on this extra aamou nt of Rs. 2,50,000 which the assessee had lent to the HUF, on the ground that there was no agreement in respect of this extra amount of loan.
3. The CIT (A) has allowed this interest amount. He has observed that "due to cost escalation, the HUF had to invest more money for completing the construction and hence, the larger amount of loan had to be given by the assessee to the HUF".
3.1 It is important to note that the ITO has not disallowed the interest difference on the sum of Rs. 6 lacs. He has disallowed it on the excess amount over Rs. 6 lacs. Therefore, the case of the Revenue is not that the excess interest is regarding the excess amount given as loan over and above Rs. 6 lacs for which there was an agreement. The CIT (A) has rightly allowed that amount because absence of a written agreement cannot be a ground for disallowance. It could be allowed on the basis of business expediency and it is not necessary that there should be a formal written agreement for that purpose. An oral understating between the assessee and the HUF would be sufficient for the purpose. Therefore we see no reason to interfere with the decision of the CIT (A). For reasons stated above and the reasons stated in respect of the last ground in this appeals also, we uphold his order on this point.
4. The next ground is that the CIT (A) has erred in holding that the remuneration to Directors was not excessive. An amount of Rs. 18,250 has been paid to the Directors out of which the ITO disallowed the amount of Rs. 12,000 under sec. 40C (1). The CIT (A) has observed as follows :
"It is important to note that the Directors remuneration is well within the monetary limits laid down u/s 40C. Actually, the remuneration claimed is only Rs. 2,000 per month and there are some meeting fees paid. I would agree with the appellant that the remuneration claimed is reasonable and does not call for any disallowance. On behalf of the appellant, I am specifically told that the director concerned is assessed on a substantially high income and there cannot be any allegation of attempt at saving income-tax by giving higher remuneration by the appellant company to the director. This addition of Rs. 18,250 is deleted ".
This reasoning is also quite correct and we therefore reject the appeal on this point.
5. The next ground is in respect of head of income under which the rent received from the bank was to be considered. As stated above, the assessee had taken on lease a part of the building and rented it out on a higher rent to the bank after erection of partitions, and interior decoration was done. The ITO regarded the rent as income from the sources and therefore rejected the assessees claim setting off of the unabsorbed losses of the past years against this income. The CIT (A) considering the activities of the assessee held that the rent income was income from business and allowed the claim of the assessee.
6. The learned D. R. relied upon the decision of the Supreme Court in the case of Karnani Properties Ltd. v. CIT [1971] 82 ITR 547.
7. On the other hand, the learned counsel for the assessee relied upon the decision of the Supreme Court in the case of S. G. Mercantile Corpn. (P.) Ltd. v. CIT [1972] 83 ITR 700 and pointed out the various steps taken by the assessee in order to earn this rental income. He also pointed out that the assessees business in chemicals was continued in the relevant period.
8. The assessee had given the details of activities in respect of this income before the Commissioner which are as follows :-
(i) The assessee negotiated with the bank and ascertained requirements and agreed to make a suitable adjustment in the building for giving it on rent to the bank.
(ii) It entered into arrangement with the owner of the building i.e. the HUF and agreed to advance a large sum of Rs. 6 lacs to the owner so that the owner could make further construction and make available to the assessee additional floors which could be exploited by the development, alterations etc. to earn better income in future.
(iii) The assessee procured and arranged for the funds from the bank which involved considerable discussion with the bank. It gave necessary guarantees and obtained personal guarantee from the Directors.
(iv) It incurred travailing expenses which the IAC has recognised as being for the business needs of the assessee.
(v) The assessee incurred substantial expenditure in changing colour scheme etc. of the premises and erecting partitions for making it suitable for the use by the bank which took it on rent. It also incurred an expenditure on electrical fittings and installing fans.
(vi) It employed many persons for maintenance, watch and ward.
Finally the assessee submitted as follows which has been quoted and relied upon by the CIT (Appeals) :
"In view of the aforesaid facts namely the object of the company, the magnitude of the transactions of taking property on lease, scheme of taking further such premises on lease at a future date, generating finances from banks etc. to carry out this activity to give advance to the owner for undertaking future construction for business needs of the assessee, the type of development expenditure of alterations, clouring, repairs, maintenance, employment of staff for maintenance, security and other purposes, it will be clear that the activity was a business activity and nothing else".
9. In the case of Karnani Properties Ltd. (supra) the Supreme Court observed that "from the facts found by the Tribunal it follows that the services rendered by the assessee to its tenants were the result of its activities carried on continuously in an organised manner, with a set purpose and with a view to earn profits. Hence, those activities have to be considered as business activities. In that case the assessee company owner the Karnani Mansion consisting of numerous residential flats and over a dozen shops. All these were let out to tenants who made monthly payments which included charges for electric current, for the use of lifts, for the supply for hot and cold water, for the arrangement for scavenging, for providing watch and ward facilities as well as other amenities. It purchased high voltage current in bulk, converted the same into low voltage current in its own power house within the premises and supplied the power to the tenants. It also maintained a separate water to the tenants. The company provided electric lifts for the benefit of the tenants. For all these purposes the assessee maintained a large number of permanent staff.
The learned D. R. argued that the activities in the case of Karnani Properties Ltd. (supra) were far were far more extensive than in this case and that therefore the assessees activities should not be regarded as business activities.
In the case of S. G. Mercantile Corpn. (P.) Ltd. (supra) one of the objects specified in its memorandum of association was to take on lease or otherwise acquire and to hold, improve, lease or other-wise dispose of land, houses and other real and personal property and to deal with the same commercially. Within less than two weeks of its incorporation the company took on lease a market weeks of its incorporation the company took on lease a market place for an initial terms of 50 years, undertaking to spend Rs. 5 lakhs for the purpose of remodeling and repairing the structure on the site. It was also given the right to sublet the different portions. The assessees activity during the period covered by the asstt. years 1956-57 to 1958-59 consisted of developing the property and letting out portions thereof as shops, stalls and ground spaces to shopkeepers, stallholders and daily casual market vendors. The question was whether the assessees income from subletting was assessable as business income or as income from other sources. It was held that the income from subletting stores was business income. The Court observed that the definition of the word " business" as given in section 2(4) showed its amplitude and it could embrace within itself dealing in real property as also the activity of taking a property on lease, setting up a market thereon and letting out shops and stalls in the market.
10 The activities listed above carried out by the assessee for the purpose of giving the property on rent to the bank appear to be a continuous series of activities with a plan ultimately to give the property on a higher rent and earn the income by way of difference in the rent which the assessee paid to the lessor and which the assessee earned from the bank. Therefore applying the above two observations of the Supreme Court we hold that the activities of the assessee were business activities and the income earned by way of rent falls under the head "Income from business". Accordingly the assessee is entitled to set off claimed by it. The CIT (A)s order is confirmed.
11. The last ground is regarding the assessees claim for amounts paid to the HUF as scooter and cycle parking charges. From the ITOs order it is seen that they are far in excess of what the assessee has actually received. Now it must be presumed that what the assessee received is reasonable because that must be from outsiders. Therefore what he has paid in excess is unreasonable. The ITO has rightly disallowed the excess. We, therefore, reverse the CIT (A)s order and restore that of the ITO for all the years. On this point the appeals are allowed. On reading the order of may brother, I found that the last ground was left out. I have therefore dealt with it and incorporated it is the above order.
12. In the result the appeals are partly allowed.
Per Shri R. M. Mehta, Accountant Member - I have perused the order of my learned brother but regret that I have not been able to persuade myself to agree with the same in respect of some of the grounds. Before I proceed further I would like to state certain accepted facts which are necessary to bring out the nature of the controversy.
2. The assessee company till and up to asst. year 1978-79 was engaged in the activity of manufacture and sale of chemicals. During assessment years 1979- 80 to 1981-82 which are presently in appeal this activity was reduced to the bare minimum so much so that the company did not consider it necessary to even draw up a separator Manufacturing & Trading A/c.
2.1 During the previous year pertaining to assessment year 1979-80 the company entered into an agreement on 1-7-1978 with L. M. Patel & B. M. Patel, HUF, whereby it took on lease a portion of the building known as "Suraj Plaza" for a monthly rental of Rs. 9,970. The members of the aforesaid HUF have a substantial and controlling interest in the assessee company. The company thereafter undertook certain work of erecting partitions in the aforesaid premises as well as interior decoration work and subsequently let it out to the Bank of Baroda at a rent substantially higher than what was payable to the HUF.
2.2 At this stage it would be necessary to state that there is no appreciable discussion regarding this aspect either in the draft assessment orders framed by the ITO or in the final orders. This could also be said of the directions issued by the IAC u/s. 144B as well as the objections raised by the assessee before the IAC. It seems that no serious challenge came from the said of the assessee to the action of the ITO in taxing the income under the head "Other sources". As an example a reference is made to the order of the ITO for asst. year 1979-80 which deals with the issue by the following observations :
"11. Since the income from sub-lease of property cannot be considered as income from business, it is assessed as income from other sources."
2.3 There is no whisper of any objection having been taken on this issue to the draft assessment order in the letter dated 3-4-82 filed with the ITO (page 74 of the paper book) as also the detailed letter dated 31-8-82 (page 15) filed with the IAC.
2.4 In the course of the hearing before the CIT (A) the assessee in fact took up the following ground of appeal :
"9. The learned Income-tax Officer was not justified in taxing the income on account of property leasing arrangement etc., made with Bank of Baroda, in view of the fact that in. he assessment of M/s. L. M. Patel and B. M. Patel (HUF) for this very assessment year, the 1d. ITO the learned IAC had held that (HUF) had actually let the premises to the Bank of Baroda and M/s. Amora Chemicals Pvt. Ltd. (i.e. the assessee) were mere name lenders. The assessee (i.e. HUF) would, therefore, be liable to pay tax on the income realised from rental of this premises. The same income (para 7.2 of IACs direction u/s 144B in HUF case) cannot belong to two entities and as the income has been taxed considering it as that of HUF, it cannot be taxed in the assessees asst. and required to be deleted."
2.5 This ground by itself is self-explanatory as it shown that the revenue itself has taxed the entire rental income from the Bank of Baroda in the hands of the HUF treating the company as a mere name lender. It was only later on that an additional grounds was moved to urge that rental income was "income from business". (page 17) 2.6 It may however be stated that in the other two years under appeals, namely, assessment years 1980-81 and 1981-82, the matter was taken up at the ITO stage as well as in proceedings before the IAC u/s 144B. As unlike 1979-80 the assessee took up the issue in the original grounds of appeal. The company however took up the grounds regarding the taxability of the income in the hands of the company when it had been already taxed in the hands of the HUF for both these years (same as ground No. 9 for 1979-80). A perusal of the orders of the CIT (A) for all the years, however, shown that there is no adjudication in respect of this common ground of appeal and it is also not clear whether the company withdrew the ground as there is no mention of this either in the appellate orders.
3. The learned CIT (A) has dealt with the issue in the following manner :
"On my request, the appellant has given a detailed note in six sheets dated 12-12-84. The factual position given therein clearly supports the appellants plea that it should be treated as business activity. For the sake of brevity, I am not incorporation herein all those facts and contained in first part of para 10 of that note. This runs as follows :
10. In view of the aforesaid facts namely object of the company, the magnitude of the transactions of taking property on lease, scheme of taking further such premises on lease at a future date, generating finances from banks etc. to carry out this activity, to give advances to the owner for undertaking future constructions for business needs of the assessee, the type of development expenditure of alterations, clouring, repairs, maintenance, employment of staff for maintenance security and the purposes, it will be clear that the activity was a business activity and nothing else.
9. A copy of that note is being forwarded to the ITO along with this appellate order for information and record. I would uphold the appellants plea and direct the ITO to allow the set off of brought forward unabsorbed losses and depreciation; while the benefit of unabsorbed losses and depreciation; while the benefit of unabsorbed development rebate would be allowable subject to the satisfaction of other conditions like creation of statutory reserve ect."
3.1 A perusal of the letter dated 12-12-84 addressed to the CIT (A) (pages 83 to 88) brings out the following facts :
(1) An attempt has been made to show that the company diversified its activities and undertook the work of procuring commercial premises on leases and after carrying out certain changes etc. in them gave them to the Bank to earn income.
(2) The assessee has also tried to show that it has undertaken a detailed activity of procuring premises, negotiating with customers, ascertaining their requirements and making suitable changes in the premises.
(3) It has also tried to explain that it has its own business organisation to carry out such an activity. It has also stressed on the aspect that it has carried out detailed negotiations with the Bank for procuring funds and has also given necessary guarantees and undertaking to the Bank.
(4) It has also been urged that expenses under certain heads such as salary have gone up. It has also been contended that travelling expenses within India have been primarily for purposes of negotiating the Bank loan.
3.2 As regards these the following contradictions stand out :
(1) In para - 2 it has been stated that necessary amendments in the Object Clause of the Memorandum were undertaken and were approved by the authorities. The facts is that we are here involved with the assessment years 1979-80-to 1981-82 with the previous year ending 31-3-79, 31-3-80 and 31-3-81. The petition to the Company Law Board under section 17 of the Companies Act, 1956 was moved in 1981 only and decided vide order dated 29-8- 81. In other word the company was not empowered to carry out the aforesaid activities at the point of time No. 1 in the "Notes to the Accounts" forming a part of the Audited Accounts (page 68) is relevant.
"1. The Company has done business is acquiring property on lease and letting it on sublease which is not covered under its object clauses. The process of alerting the memorandum so as to include the same in the object of the Company are in process."
This is also the fact stated in the order of the Tribunal in ITA Nos. 557 to 559 /Ahd/85 date 13-10-86 in respect of the assessees appeals before the Tribunal for the same years. The Tribunal observes-
"We also find from the order passed by the Commissioner (Appeals) that activity of leasing the premises taken on lease has been taken as business activity. As against this scanning the accounts of the limited company, we find in the notes to the accounts on page 124 of the paper book that business done in acquiring property on lease and letting it on sub-leasing is not covered by the object clause of the assessee and the process of altering the memorandum is continuing."
(2) The assessee has stressed on the aspect of "negotiations with customers" which in this case happens to be only one namely the Bank of Baroda. The very fact that the premises were taken on lease vide agreement dated 1-7-78 and immediately thereafter given on rent to the Bank gives an impression that the discussions were more or less finalised prior to entering into the agreement on 1-7-78. The assessee has also admitted that there is no lease agreement with the Bank.
(3) The stress laid on the procurement of funds and furnishing of guarantees and undertakings to the Bank also does not assume much importance keeping in mind the fact that the premises itself have been leased to the Bank . The funds in fact have been provided to the lessor HUF which is comprised of the same set of people as those who constitute the assessee company itself.
(4) It has also been explained in the letter dated 12-12-84 that travelling expenses were incurred for undertaking the activity connected with the bank loan. In the draft assessment order on the other had (page 3) the ITO observes that "it has not been proved that the tours were connected with the purpose of the business of the assessee company". The ITO in fact allowed only Rs. 700 out of travelling within India and disallowed the entire amount spent on foreign tour. The assessee did not even raise an objection to the proposed disallowance in its letter dated 3-4-82 (page 74) addressed to the ITO. The matter was only taken up for the first time in the letter date 31- 8-82 (page 75) sent to the IAC when it was sought to explain as follows :-
"Regarding the other travelling expenses, it may be stated that for negotiating with high officials of Bank of Baroda and for other incidental work of the company, the directors and other employees incurred travelling expenses."
The assessee in para-5 of the aforesaid letter (page 85) has explained that the travelling expenses in India were only for negotiations with the bank officials and have reproduced the following extract purported to be a part of the directions issued by the IAC u/s 144B (4) of the Act :
"After considering the contention of the assessee that travelling expenses in India were only for negotiations with high officials of Bank of Baroda that the expenses are for business needs of the assessee and they are of the revenue in nature."
A perusal on the directions (page 7) in para 5 does not reveal any such directions. The relevant observations of the IAC are-
"However, regarding the other travelling expenses of Rs. 4,261, I feel that the expenses are for the business needs of the assessee and they are of the revenue in nature."
It appears that the IAC issued his directions taking into account the totality of the circumstances governing the expenditure of which the travelling for purposes of the bank loan was only a part and not the entire whole. Itis important to note that the assessee has sought to misquote at the CIT (A) stage.
(5) The assessee has thereafter sought to impress upon the CIT (A) that incurring of expenditure on constructing partitions, interior decorations and electrical fittings was also a part of the "business activity". It has also been urged that the assessee has to engage extra staff on account of undertaking on lease the aforesaid property and thereafter letting it out on rent.
The discussion in the preceding paras in only to highlight the fact that the submissions before the CIT (A) by means of the letters dated 12-12-84 were purely of a general nature; unsupported by any evidence. As pointed out, some of the facts had also been misquoted and the assessee did not care to point out to the CIT (A) that the approval of the proposed amendment to the Objects Clause came in well after the expiry of the previous years under consideration. All these submissions lose their importance when viewed form the point of view that the lessors and the lessees are the same set of persons. The order of the CIT (A) also suffers from the infirmity that he did not give an opportunity to the ITO to meet the points raised in the letter.
4.1 It is in the light of the facts stated above that the Tribunal its to consider whether income from letting out the property under consideration is to be treated as "income from business ", or "income from other sources", According to me the income has to be taxed as "income from other sources" on the basis that -
(1) the company was not authorised to carry on the business of acquiring property on lease and letting it on sub-lease as pointed out by its Auditors. The reliance placed on the decision of the Supreme Court in the case of S. G. Mercantile Corpn. (P.) Ltd. (supra) is to no avail since this fact itself is distinguishable. The following observation of their Lordships is relevant :
"The paramount consideration which would sigh is whether the acquisition of the property was by way of investment and whether the property was let out because of the assessee having a title in party constituted the business and trading activity out of the assessee. The question as to whether the above activity is being carried on by an individual or a company, and in t he leteer case, the further question as to whether the carrying on of the said activity was the object of the incorporation of the company as given in the memorandum of association would also have some relevance."
Again it is observed on page 708 as follows :
"The appellant-company, as stated earlier, was incorporated on January 25, 1955. The object for which the company was formed, inter alia, was to take on lease or otherwise acquire and to hold, improve, lease or otherwise dispose of, land, houses and other real and personal property and to deal with the same commercially. Within less than two weeks of its incorporation the appellant-company took on lease the property in question and undertook to spend Rs. 5 lakhs for the purpose of remodeling and repairing the structure on the site. The appellant was also given the right to sublet the different portions. The appellants activity during the period of three years in question consisted of developing the demised property and letting out portions of the same as shops, stalls and ground spaces. All these facts point to the conclusion that the taking of the property on lease and subletting portions of the same was part of the business and trading activity of the appellant. The conclusion of the Tribunal that the activities of the appellant in taking lease and subletting the demised premises were undertaken with the object of doing business was warranted on the facts of the case. Likewise, the conclusion of the Tribunal that the appellant-company in letting out the leasehold property was not acting as owner but as trader was borne out by the material on record."
It is apparent that the decision was given on the facts of the case and one of which was that the objects clause of the Memorandum provided for such an activity. This is not so in the case of the assessee company.
(2) The assessees case to the effect that taking of the property on lease, carrying out certain modifications, giving it on further rent, ect. was part of a concerted business activity falls to the ground since it is an established fact that the lessors and lessees are the same set of persons.
As mentioned earlier if any such activity was there, the assessee has not been able to prove it by placing any facts or evidence on record. As admitted by the company there is no lease agreement with the Bank of Baroda. It is also an admitted fact that the partitions etc. were constructed to suit the requirements of the bank. As mentioned earlier the assessee did not have much to do since under the terms of the agreement dated 1-7-78 it obtained various floors of the building which were ready in all respect. It only undertook lighting and other internal partition work and thereafter handed it over to the Bank which had already been decided upon as a tenant.
(3) As observed from the records the very transaction of taking the property on lease on then again letting it out to the bank is in dispute on account of the fact that the same income has been taxed in the hands of the HUF as well by treating the assessee as a benamidar. This fact was not brought to our knowledge at the time of the hearing but has been extracted from the order of the CIT (A) and the grounds of appeal before him.
(4) The assessee company has not brought anything on record to show that it undertook such activities in respect of other properties as well.
5. I would accordingly reverse the order of the CIT (A) and hold that the income under consideration is to be treated as "income from of other sources" and not "income from business".
6. I would however like to mention that this decision is given on the facts of the case and is without prejudice to the litigation which may be pending regarding the taxability of the rental income in the hands of the HUF as well.
7. The next issue which arises for consideration is the disallowance/addition on account of interest which has been worked out by the ITO at a figure of Rs. 3687 for assessment year 1979-80 and Rs. 24,863 for asst. years 1980-81 and 1981-82 respectively. The basis of the addition is outlined in the order of the ITO for A. Y. 1979-80 as under :
"8. The details of interest received show that the assessee received a total amount of Rs. 26,262 being interest @6% on a total amount of Rs. 8,50,000 from L. M. Patel & B. M. Patel, HUF. According to the agreement, the assessee was to advance a sum of Rs. 6,00,000 only at 6% interest from 1-7-1978. The details of Rs. 26,262 (at 6%) are as under :-
Rs.
On Rs. 1,00,000 from 1-4-78 to 31-3-79 6,000 On Rs. 95,000 from 17-4-78 to 31-3-79 5,434 On Rs. 1,65,000 from 11-8-78 to 31-3-79 6,312 On Rs. 2,40,000 from 12-9-78 to 31-3-79 7,890 On Rs. 2,50,000 from 17-3-79 to 31-3-79 625 From the above particulars, it will the noticed that the assessee has received interest at the rate of 6% in respect of periods prior to the date of agreement. Interest has also been charged @6% on the amounts advanced in excess of Rs. 6,00,000 agreed to be advanced at 6% interest for and from 1-7- 78 only. Therefore, the interest charged for the period 1-4-78 to 30-6-78 at the lower rate of 6% was not covered by the agreement. Similarly, the interest at 6% on Rs. 2,50,000 which is in excess of the amount of Rs. 6,00,000 is according to me, not the correct rate of interest. In respect of Rs. 2,50,000, the assessee ought to have charged interest at the rate of 15%,-the rate at which it borrowed money from the Bank of Baroda for making an advance to the lessor HUF. On the aforesaid facts, proportionate interest as worked out below is considered as assessees income and added to the total income :
Rs.
On Rs. 1,00,000 from 1-4-78 to 30-6-78 1,500 On Rs. 95,000 from 17-4-78 to 30-6-78 1,250 On Rs. 2,50,000 from 17-3-79 to 31-3-79 937 3,687 In para 6 of his directions, the IAC, BR-I, Baroda has agreed to with the contention of the ITO."
7.1 The basis on which the learned CIT (A) has deleted the additions in all the 3 years is as follows :
"..... this addition of interest cannot be made firstly because, the terms of written agreements can be varied within limits orally and further such variation might be inferred even from the conduct of the parties. In this particular case, such an inference is certainly warranted. Due to cost escalation, the HUF had to invest more money for completing the construction and hence, the bigger amount of loan is given by the appellant to the HUF. Last but not the least is the circumstance that in the context of another ground of appeal infra, I am going to hold that the appellants activity of taking the lease of the building from the HUF and then after erection of partitions and completion of other works of interior decoration etc., it is being given on rent to the Bank of Baroda, constituted an activity of business which warranted quantification of income from that activity under the head Income from business. In this view of the matter, the loan given to the HUF would be for the purpose of business and no addition can be made for any part of interest attributable to it. The said addition of Rs. 3,687 is deleted and this ground of appeal is allowed."
8. It was on a similar reasoning that the additions on this account were deleted for the subsequent two years. It seems that the CIT (A) while deleting the addition has been influenced by the decision taken by him to the effect that the activity of taking the building on lease from the HUF and thereafter giving it on rent to the bank constitutes a "business activity". However, as this aspect of the matter has been reversed, the same cannot be relied upon so strongly at present. I am not in agreement with the observations of the learned CIT (A) to the effect that there terms of a written agreement can be varied orally and further that such variation can be inferred even from the conduct of the parties. According to me if an agree agreement is sought to be varied or modified then it should be done either by means of resolutions, writings or clear conduct on the part of the parties. In this case there is is no evidence on record to show that the original agreement whereby a sum of Rs. 6 lacs at the concessional rate of interest and nothing over and above. It would not be prudent businesmanship to advance a loan at a rate of 6% whereas the same funds have been obtained from the bank by paying interest @15%. I would further hold that the written agreement between the parties cannot be charged orally and that the conduct of the parties can help in interpreting an agreement when doubtful but not when it is absolutely clear. The Tribunal at the moment is not concerned withe the amount up to Rs. 6 lacs, but only the amount over and above. There is no doubt that the department has accepted the sanctity of the agreement up to the extent of Rs. 6 lacs, but that does not mean that any amount advanced over and above Rs. 6 lakhs a and that also at a concessional rate of interest should not bear scrutiny. According to the facts available on record all that the company was required to do was to provide to the HUF the funds and even presuming that on account of cost escalation a larger amount had to be advanced this does not man that the company should be put to a loss by obtaining the fund at rate of 15% interest and advancing them at 6%. I would accordingly proceed to confirm the action of the ITO for all the 3 years under appeal and as there is no dispute at this stage regarding the calculation, the additions are confirmed. The order of the Commissioner (Appeals) is accordingly reversed.
9. I would, however, like to state at this stage that the learned counsel for the assessee in the course of his arguments tried to make out a case that part of the funds advanced to the HUF came out of the cash balance lying with the company other than the loan taken from the bank. This according to me is a new line of argument which is being urged at this late stage and cannot be considered. A perusal of the entire record shows that this matter was never raised at any of the lower stages and it would require examination of fresh facts which have not been brought on record. I proceed to reject the same.
10. As regards the net ground which pertains to the disallowance on account of remuneration to the director, I would only like to state that I am agreement with the conclusions reached by my learned brother in his order.
11. The last issue arising for determination is the disallowance made by the ITO in all the 3 years on account of Scooter Cycle Parking Charges. The ITO in the course of the proceedings observed that the assessee had made payments on account on scooter and cycle stand to the HUF in all the 3 years under consideration. According to the ITO there was no agreement for the payment of such charges to the HUF. It was also observed by the ITO that the payment was unreasonable keeping in view the amount actually earned by the assessee in respect of the scooter and cycle stand. Before I proceed further I would like to state that the amounts received and paid and account of the scooter and cycle stand as extracted from the assessment orders are as under :
Asst. year Amt. received Amt. paid to the HUF Amount disallowed Rs.
Rs.
Rs.
1979-80 3,856 13,500 9,644 1980-81 9,442 18,000 8,558 1981-82 9,114 36,000 26,886 11.1 The learned CIT (A) disposed of the matter in the appeal pertaining to the assessment year 1979-80 as under :-
"Next ground of appeal is directed against the disallowance of Rs. 9,644 shown as paid by the appellant company to the HUF for scooter parking. This item also relates to the activity of taking the building on lease from the HUF and then after getting certain things done, its being given on rent to the Bank of Baroda. The reasoning given in para 4 above in regard to the disallowance of interest would apply mutatis mutandis to this item. This is an outgoing of business and there cannot be any allegation of attempt at saving tax in the hands of the appellant and that HUF taken together. This addition of Rs. 9,644 is also deleted."
11.2 He deleted the additions for the subsequent two years as well following the same reasoning.
12. According to me the CIT (A) has clubbed this transaction as well with the other activity of leasing the property. He has also applied the reasoning adopted by him in respect of the disallowance on account of interest which I have discussed in an earlier ground. In view of my decision in holding the leasing activity as "income from other sources" and confirming the disallowance on account of interest, I proceed to confirm the addition in respect of scooter and cycle stand charges as well. I do so on the ground that firstly the payments are not part of the agreement dated 1-7-1978 nor is it paid by means of any other agreement. According to me the payments are not warranted by the factor of reasonableness. According to me the aforesaid payment is extraneous in nature and not warranted by any business consideration.
13.1 Further the language of section 37(1) and section 57(iii) are not identical. The scope of section 37(1) is much wider then sec. 57(iii). For purposes of a claim u/s. 57(iii) an assessee has to prove that the expenditure has been laid out or expended wholly and exclusively for the purposes of making or earning income under the head "income from other sources". The assessee in this case has not been able to bring any material on record to justify the payments to the HUF on account of scooter and cycle stand charges. The decision of the ITO to disallow the amount after adjusting the receipts is absolutely in order and the same is confirmed. The orders of the CIT (A) to this extent are reversed for all the three years.
14. As a result, the appeals filed by the Revenue for all the three years are partly allowed.
REFERENCE UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 As we have differed on the following two questions, we refer them to the Honble President for the opinion of a Third Member u/s. 255(4) of the Act :
"1. Whether the rent received by the assessee from the bank was business income ?
2. Whether the interest difference on the extra amount of Rs. 2,50,000 can be allowed as deduction ?"
THIRD MEMBER ORDER Per Shri Y. Upadhyaya, Vice President - TheHonble President has assigned the following two questions for the decision of the Third Member u/s. 255(4) of the IT Act, 1961 :
"1. Whether the rent received by the assessee from the bank was business income ?
2. Whether the interest difference on the extra amount of Rs. 2,50,000 can be allowed as deduction ?"
2. Both the points of dispute are inter-related. The assessee is a limited company dealing in manufacture and sale of chemicals. The assessee during the year under appeal entered into an agreement dated 1-7-1978 with L. M. Patel and B. M. Patel, HUF and it took on lease a partly of Rs. 9,970 per floor. The building at the time of agreement was constructed up to the 8th floor. It was further provided in the agreement that the rent shall be payable by the company at the said rate for the further floors to be constructed by the HUF. The assessee-company agreed to advance a loan of Rs. 6 lakhs carrying interest of 6% per annum. However, the assessee-company granted a loan of Rs. 8,50,000 to the HUF and charged interest at the rate of 6%.
3. The assessee-company arranged with the Bank of Baroda, on oral agreement, for leasing out the said property on higher rent and also got overdraft, facility carrying interest 15% per annum. The rent received and paid for the assessment years 1979-80, 1980-81 and 1981-82 are as follows :-
Assessment year Rent received Rent repaid Rs.
Rs.
1979-80 4,29,427 1,36,463 1980-81 8,49,672 2,99,852 1981-82 8,49,351 3,23,029 The assessee-company was of the opinion that by virtue of clause 8 of the Memorandum of Association the assessee-company was authorised to take property on lease and give it out on lease. However, the doubt was spelled by the auditors and a note to this effect was appended to the final accounts. The assessee-company passed a resolution on 15-1-1979 in the Ordinary Annual General Meeting effecting the various changes subject to the approval of the Company Law Board (Western Region, Branch Bombay). The Company Law Board approved the amendment by its order dated 29th August, 1981.
4. The assessee claimed that the income from rent received by the assessee should be assessed as income from business. The assessee further claimed the interest paid on the fund borrowed from Bank of Baroda as a deduction. The ITO found that the assessee was not authorised by its object clause to take property on less and, therefore, it was only the income from other sources and it was not its business income. Further the ITO found that there was an agreement for advancing of Rs. 6 lakhs carrying interest of 6% per annum. There was no agreement between the assessee-company and the HUF for the further sum. He found that the assessee-company paid interest of 15% to the bank. He, therefore, charged additional interest of 9% on the loan advanced to the HUF and added the same to the total income of the assessee.
5. The CIT (A), after considering the facts, the activities of the assessee, came to the conclusion that the assessee took out the lease from the HUF and further gave it only to the Bank of Baroda which constituted the business activities of the assessee. He was also of the opinion that the assessee paid the additional interest on commercial expendiency. He, therefore, treated the income from rent as income from business and allowed interest paid by the assessee.
6. The department came in appeal before the Tribunal and the learned Accountant Member and the Judicial Member could not come to a common conclusion on the assessability of rent and on interest which was paid by the assessee on the excess amount. The Judicial Member, after considering the decision in S. G. Mercantile Corpn. (P.) Ltd.s case (supra) and the facts of the case, alteration and decoration made by the assessee in the premises, came to the conclusion that the assessee was earning income from rent as income from business. He also found that the additional interest was paid by the assessee on commercial expendiency and the same cannot be disallowed merely on the ground that there was no agreement for the additional amount. The Accountant Member, on the other hand, did not agree with the above conclusion. He was of the opinion that there was a restriction in the object clause of the assessee to take property on lease. The change for the alteration in the objective of the memorandum was only approved by the Company Law Board on 29-8-1981 after the close of the previous year relevant to the assessment year 1981-82. There were no business activities of the assessee and alteration and decoration made by the assessee did not constitute an activity of business. Consequently the point of difference was referred to the Honble President and the case has come up before the Third Member.
7. The departmental representative Mr. A. K. Hajela, very strongly supported the order of the Accountant Member and stated each of the facts and stated that the company was not authorised by the object clause, the amendment was made after the close of the previous year relevant to the assessment year 1981-82, the assessee was not having any business activities and, therefore, the finding given by the Accountant Member should be confirmed. He particularly referred to the decision in CIT v. Motilal Hirabhai Spg. & Wvg. Co. Ltd. [1978] 113 ITR 173 (Guj.) to show what activities of the assessee would constitute business. Shri Raval, assisted by Shri V. Dey illustrated the facts and stated that it is not correct that the assessee-company was not having a clause 8 of the object clause of the memorandum of association. He said that when the matter was disputed by the auditor it was immediately taken up by the assessee-company to remove the doubts and a resolution was passed on 15-9-1979 and the approval was sought of the Company Law Board which was received on 29-8-81. He further stated that the object clause is not conclusive for the determination of the head of the income. The actual activities of the assessee must be taken into consideration. He relied on CIT v. Himalayan Tiles & Marble (P.) Ltd. [1975] 100 ITR 177 (Bom.) and 37 ITR 49 (SC). He stated the steps taken by the assessee for earning the income from the property. He indicated that the assessee was not having surplus fund which was invested in the property for earning rent. It was a venture by the assessee. The assessee-company took on lease a partly constructed building, advanced loan by borrowing money from a bank and it was a great venture of the assessee whether the assessee will be able to get a good tenant so that the assessee may get higher rent then what was paid by it and the assessee not only took this risk but the assessee also made various alterations and decorations so that the bank was attracted to offer gainful rent to the assessee. Therefore, the activity of the assessee was not of an investor but it was the activity of a businessman. Therefore, the Judicial Member rightly held that the income from rent should be assessed as income from business. He also supported the order of the Judicial Member on the allowance of interest. He indicated that the fund was given to the HUF for constructing other floors of the building which were to be taken by the assessee-company on the monthly rent as decided earlier and the same was in the interest, of the assessee. Consequently the assessee advanced some more fund in the business interest and, therefore, it should be allowed.
8. The short point for decision for the Third Member in view of the questions referred are : whether the amount received by the assessee is the income from business and whether the additional interest could be allowed during these years. The plea taken by the assessee and the conclusion of the Judicial Member appears to be correct. The assessee had taken the partly constructed building on lease from L. M. Patel and B. M. Patel, HUF on lease. It is correct that the HUF was interested in the assessee-company. However, nothing has been said by the department on the fairness of the lease rent paid by the assessee or the fund granted by it for the construction of the other floors. Therefore, it will not be fair to comment on these facts while deciding the points of difference. The assessee-company, had on the one hand taken the property on lease. On the other hand it was able to get the Bank of Baroda for taking the property on lease on a much higher rent. It is correct that the assessee was not having the surplus fund to invest with a view to earn money by way of rent. The assessee took a great adventure. It took the property on lease and thereafter it took steps to get a good tenant. Much had been said on the object clause of the assessee. The clause 8 of the object clause runs as follows :-
"(8) To purchase, take on lease or in exchange, hire purchase on hire purchase basis or otherwise acquire any property and any rights and privileges therein which the Company may think necessary or convenient for the purposes of its business and in particular any land, buildings, easements, machinery, plant and stock-in-trade; and either to retain any property to be acquired for the purposes of the Companys business or to turn the same to account as may seem expedient."
It is not very clear whether the clause includes the power to take property on lease or does not include. However, when the dispute was raised by the auditors, the assessee immediately took steps and the resolution was passed on 15-1-1979 subject to the approval of the Company Law Board and the Company Law Board accorded its sanction by its letter dated 29-8-1981. It is correct that the object clause itself could not be conclusive. One must see the cumulative activities of the assessee - whether the activity constituted an adventure in the nature of business or the efforts of the assessee was only to earn rent from the property. The assessee had taken the property on lease. It had appointed a Director to look after the building. When doubt was expressed by the auditor it took steps to amend the object clause. It made efforts to get a good client. It got the overdraft facility from the bank. It sanctioned loan at cheaper rate to the HUF so that it can have the benefit of other floors. If all these activities of the assessee are taken into consideration along withe the decided cases it is clear that the activities of the assessee was the activities of a businessman and, therefore, the income earned by the assessee from the leasehold property was the assessees income from business.
9. The second point is well related to the first one. The assessee advanced a sum of Rs. 8,50,000 to the HUF for the construction of other floors. The loan carried an interest 6% p. a. The assessee did not have surplus fund. The fund was arranged from Bank of Baroda. the Bank of Baroda charged interest on the fund granted by it at 15% p. a. The agreement between the assessee-company and the HUF was for the advance of Rs. 6 lakhs. The assessee-company, during the year under appeal, advanced Rs. 8,50,000 and charged interest at 6%. The additional interest paid by the assessee to the bank on Rs. 2,50,000 was disallowed by the ITO which had been allowed by the CIT (A).
10. The payment of interest should be considered from the angle of a businessman. The loan was granted in the business interest of the assessee. The assessee wanted that some more floors should be constructed by the HUF and those floors should be available on the same monthly rent as agreed between the assessee-company and the HUF. This was the object of granting loan on cheaper interest. The HUF could not manage the construction of the floors within the fund granted by the assessee-company and accordingly the assessee-company granted the additional fund of Rs. 2,50,000 on the same interest. As the funds were granted in the business interest of the assessee even though there were no agreements for the additional funds or the assessee-company paid higher interest, the interest could not be disallowed.
11. The answers to the questions referred to the Third Member are, therefore, as follows :-
(1) The rent received by the assessee on the facts and circumstances of the case from the bank was business income.
(2) The interest on the extra amount of Rs. 2,50,000 should be allowed as a deduction.
The matter is referred to the Bench to pass the order so that a final order can be passed after taking the view of the majority decision.