Income Tax Appellate Tribunal - Ahmedabad
Aquasoil Canadian Feeds Ltd.,, Baroda vs Department Of Income Tax on 30 August, 2007
IN THE INCOME TAX APPELLATE TRIBUNAL : A' BENCH : AHMEDABAD
(Before Hon'ble Shri G.D. Agrawal, Vice-President(AZ) & Hon'ble Shri T.K. Sharma, J.M.)
I.T.A. No. 4051/AHD./2007
Assessment Year : 1997-1998
Income Tax Officer, Ward-1(1), Baroda -vs.- Aquasoil Canadian Feeds Ltd., Baroda
(PAN : AABCA 9328 B)
(Appellant) (Respondent)
Appellant by : Shri Govind Singhal, Sr. D.R.
Respondent by : Shri Bandesh Soparkar, C.A.
ORDER
Per Shri T.K. Sharma, Judicial Member :
This appeal filed by the Revenue is against the order dated 30.08.2007 of Learned Commissioner of Income Tax(Appeals)-I, Baroda for the assessment year 1997-98.
2. Briefly stated the facts are that the assessee is a Company. For the assessment year under appeal, it filed the return of income on 30.11.1997 declaring loss of Rs.5,56,340/-. The Assessing Officer completed the assessment under section 143(30 of the Income Tax Act on total income of Rs.2,43,930/- treating the interest income earned by the Company during the financial year 1996-97 as income from other sources as provided under section 56 of the Income Tax Act, 1961. Being aggrieved, the assessee preferred appeal before the Learned Commissioner of Income Tax(Appeals)-III, Baroda, who dismissed the appeal of the assessee. Against the said decision, the assessee preferred an appeal before the Tribunal. ITAT, 'C' Bench vide order dated 24.01.2005 in ITA No. 390/A/2001 restored the matter to the file of Assessing Officer for the detailed reasons given in para 4 of the said order, which reads as under :-
"4. We have heard the rival contentions and looking to the facts and circumstances of the case, we find that the assessee-company has incorporated on 06.09.1994 with main objects of manufacturing, growing, processing, etc. or otherwise dealing in all or any types of feeds as well as the raw materials etc. The company started manufacturing activities and did not start business because of unfavourable market conditions. In the meantime, the company has advanced the aforesaid 2 ITA No. 4051/AHD/2007 amount to another company, i.e. Jagruti Securities Ltd. and earned interest. On 17.01.1996, the company has passed a Special Resolution in Extraordinary General Meeting for change of business. The assessee company's main business was transferred to finance company. Therefore, the assessee company has claimed that interest income earned by the company must be treated as income from the business. We are of the view that if the company changed its object and if the manufacturing company was converted into a finance company, then interest income would be assessed as business income and expenses claimed by the assessee would be allowed as business expenditure for the assessment year under appeal. But we are of the view that it is the duty on the part of the assessee to prove that the assessee company has started its business as finance company and the fund was utilized by the company for the financing business. During the course of hearing, only evidence produced before us was that the company has passed a Resolution dated 17.01.1996 for change of business. There is no evidence in respect of permission for change to show that the assessee company has actually started its financial activities with the permission of the Government. Therefore, we restore this issue to the file of the A.O. for verification whether the company has started its business of financing from the date of Resolution onwards. If the assessee produces sufficient evidence, then the interest income should be treated as business income. The A.O. is directed to decide this issue as per the law after providing reasonable opportunity to the assessee in the matter".
3. In pursuance of aforesaid decision dated 24.01.2005 of Tribunal, the Assessing Officer reframed the assessment under section 143(3) read with section 254 of the Income Tax Act and again recomputed the income as originally assessed at Rs.2,43,930/-. The detailed reasons given by Assessing Officer as contained in paras 3 to 9 of the order dated 17.03.2006 under section 143(3) read with section 254 of the Income Tax Act, 1961 are reproduced hereunder :-
"3. In response to the above S/Shri Venugopal Shastri, CA, along with Deepak Jani, duly authorized attended ihe proceedings and submitted details such as copy of Director's Report, copy of special resolution passed on 17th January 1996. copy of Form No. 20-A, under the Companies Act, 1956, copy of Form No. 5, prescribed under the Companies Act, regarding increase in share capital and copy of letter dated 15.02.1996. addressed to The Registrar of Companies, Ahemedabad. It has further submitted that as per section 149(2A) assessee is required to pass a special resolution at Its extra ordinary general meeting, held on 17.01.1996 and filed the required Form No, 20A with the Registrar of Companies, Gujarat It has further obtained a certified true copy from ROC in support of having filed the copy of resolution at the relevant time with the ROC. it has further contended that beyond filing a copy of the resolution to take up any other object, a limited company has to do nothing else. Therefore, the assessee was of the view that 11 has compiled to the 3 ITA No. 4051/AHD/2007 legal requirement to take up the new business of investment company and requested for allowance of the expenses by the company as claimed. It has further submitted a certificate from M/s Dinesh Mehta & Co., practicing Company Secretaries to the effect that the following are the legal procedures to be followed by a company to commence a new business:-
\ "(1) To pass a special resolution to commence the new business as mentioned in the other Object Clause of the Memorandum at Association of the company at general meeting of the company.
(2) To file Form No. 23 along with a certified true copy of special resolution along with explanatory statement duly certified by any one of the directors of the company and Form No. 20A with the Registrar of Companies, within 30 days from the date of passing the special resolution, (3) The company can commence new business offer passing the special resolution, (4) The Registrar of Companies is not required to issue any certificate or letter regarding acceptance of the specie! resolution. Further the Registrar of Companies has no power to reject special resolution passed by the company."
4. The above ingredients cannot overshadow facts of the case which are more relevant In deciding this case. The facts remain same even throughout its journey to the ITAT as well as during its return to the A.O. The company was incorporated on 06.09.1994 with the main object of manufacturing, growing and processing various types of feeds. During the year under consideration the assesses has earned interest of Rs.2,41,885/- against which assesses has debited various expenses such as foreign travel to the tune of Rs.4,31,250/-, salary and remuneration of Rs.84,000/- etc, and declared loss of Rs.5,56,340/-. The intention of starting the business was to carry on in India or elsewhere, with or without collaboration, the business of manufacturing, growing, processing, reprocessing, formulating, refining, preparing, preserving, curing, freezing, packing, trading, exporting, importing, indenting, marketing or otherwise dealing in all or any types of Feeds as well as the raw materials used and needed in the manufacturing and processing of feeds such as aquatic feed, cattle feed, poultry feed, bird teed, dog feed, cat feed, grass feed, bone meal and undertake all processing work to manufacture such feeds.
5. The company had collected Rs.2,81,000/- through share capita! and Rs.14,36,561/- as unsecured loans from directors and shareholders for the abovementioned project Since it could not start its project, it has advanced this amount to another company I.e. Jagruti Securities Ltd. and earned Interest of Rs.2,41,885/- in the F.Y. 1996-97. This was the subject matter of dispute. The reason for dispute was based on the plea that it has passed a special resolution fn the extra ordinary general meeting on 17.01.1996 for change of business, After this change financing has become its main business, hence interest income, earned during the relevant previous year is on account of finance activity only, according to assessee. Thus assessee wanted to assess its Income under the head Business Income. The resolution passed by the assessee company mentions about business of investment, lending, investment In shares, debentures, bonds, etc. etc., as per resolution dated 17.01.1996 on one side assessee is 4 ITA No. 4051/AHD/2007 claiming that financing should be considered as its business activity and interest income should be assessed under the head Income from Business on the other hand assessee is debiting Rs.4,31,250/- as foreign travel which is related to its abandoned business. Even according to assessee vide letter dated 22.12.1999 the purpose of foreign trip was to raise funds for the project from NRIs end OCBs and there were several meetings with them to attract Investment at various places In Canada where the director had visited. Even the annual report of the the Director states that the company has not commenced its manufacturing activities during the period under review. The company is considering various alternative projects for implementation toting in to account its viability and future projections. Directors, it is stated, are working hard In deciding the modalities of Implementation of the project. The annual report also mentions further that till one project is decided and implemented to make proper use of the funds. They have taken up business of financial activities as listed in other objects of the company.
6. From the above actions and activities it is obvious that there is no concluding evidence to show that the original project has been stopped. Also It Is pertinent to note that assessee has advanced money to only one company i.e. Jagruti Securities and earned interest. This only shows that it is an isolated case of advancing surplus funds to a company and not its regular business of engaging in financial activities. Therefore, it can be considered that the interest earned on deposits of surplus funds during the recommencement period of business. Assessee has not produced any evidence to prove its contention that foreign trip was undertaken to inquire about the possibility of investment in some other project.
7. The assessee was askea1 to give details during the assessment proceedings but instead of giving details to show evidence regarding commencement of business it has only filed copy of resolution. There is no evidence on the actual conduct of money lending activity, In fact from the Directors report it will appear that company is considering alternatives for manufacturing business and financing only an intermediate act of parking its available funds. During the year company has advanced money only to one single party which can hardly be conceived as business activity. Further assessee has claimed foreign travel expense of Rs.4,31,250/- which can hardly be considered as having spent for earning business income from single loan. No further clarification has been put forth during the course of fresh assessment proceedings. This too was the position during its appellate journey upto the Income Tax Appellate Tribunal which turned out to be futile attempt on the part of the assessee, as it could not establish or satisfy with sufficient evidence that the company has carried out business activity of financing and thereby earned interest Income.
8. It is not out of place to mention that the assessee has made all out efforts to establish that it has started a new business activity of finance but failed miserably to establish beyond doubt to justify the income earned is under the head business. I have gone through the plea that the assessee has complied to the legal requirements but at the same time legal formalities is not adequate to establish the real nature of business carried out unless It is established satisfactorily.
9. In view of the above the income earned by way of interest from the only advance during the year is considered as income from other source and taxed accordingly.
Total income as per original order
u/s. 143(3) dated 27.12.1999 Rs. 2,43,930/-".
5
ITA No. 4051/AHD/2007
4. Aggrieved by the order of Learned Commissioner of Income Tax(Appeals), the Revenue is in appeal before us on the following grounds :-
1. On the facts and in the circumstances of the case and in law, the Id.
CIT(A) erred in allowing the expenses of Rs. 7,75,567/-, including travelling expenses of Rs.4,31,250/- admittedly incurred on raising of funds for the business of manufacturing feeds ( which was never undertaken), against the interest income of Rs 2,43,930/- earned on the surplus funds deposited with a single concern in the financial year 1995-96 when the said business was not yet set up, by treating this income as business income merely on the basis of a resolution passed on 17-01-1996 for carrying on financing business.
2. The CIT(A) failed to appreciate the mandate of the Tribunal's order dated 24-01-2005 setting aside the earlier orders of the Assessing Officer and the Addl. CIT, with a specific finding that there was no evidence of the assessee having actually started financing activities, and directing to verify whether the business of financing had actually started from the dale of resolution onwards, when he inferred in favour of starting of such business just on the basis of the money deposited with one concern prior to the date of the said resolution.
3 Without prejudice, the CIT(A) failed to appreciate that the impugned expenses had not been incurred wholly and exclusively for carrying on financing business (if any) and contravened the principle of law that the expenses incurred for setting up a business, which is abandoned, cannot be allowed as revenue expenditure against the income of some other business, as settled in the case of CIT-vs.- Shri Digvijay Cement Ltd. 159 ITR 253 (Guj) and CIT -vs.- Ambika Mills Ltd. 236 ITR 929 (Guj).
4 The appellant craves leave to add to amend or alter the above grounds as may be deemed necessary.
5. At the time of hearing before us, on behalf of Revenue, Shri Govind Singhal, DR appeared and contended that the mandate of Tribunal in order dated 24/01/2005 setting aside the earlier order for assessment year was to verify whether the business of financing had actually started from the date of Regulation. He pointed out that the date of the Resolution is 17/01/1996. The Assessing Officer in the assessment order u/s.143(3) of the Act, r.w.s. 254 of the IT Act, 1961, in paragraph No.7 has clearly mentioned that there is no evidence that assessee has started actual business on money lending activity. The money collected as share capital of Rs.2,81,000/- and unsecured loans form share-holder amounting to Rs.14,36,561/- were advanced to only one company, namely Jagruti Securities Ltd. This money was advanced 6 ITA No. 4051/AHD/2007 in the earlier assessment year. No investment in share has been made in the previous year relevant to assessment year under appeal is made. As on 31/03/1996, the assessee was holding share in four companies as investment - non-trade(quoted) and there is no change in holding of shares as on 31/03/1997. The Assessing Officer has also pointed out that as per Resolution passed by the assessee-company on 17/01/1996 on the one side, assessee claiming finance should be considered as its business activity and interest income should be assessed under the head "Income form Business" on the other hand assessee has debited Rs.4,31,250/- as foreign travel which is related to its abandoned business. The ld.DR pointed out that even in the claim of arguments it is considered that assessee has started new business in that event of foreign travelling which is incurred for its abandoned business cannot be allowed. The DR finally concluded that order of the Learned Commissioner of Income Tax(Appeals) be revered and view taken by the Learned Commissioner of Income Tax(Appeals) that assessee-company has not actually started any financing business as per Resolution dated 17/01/1996 in the previous year relevant to assessment year be upheld.
6. On the other hand, Shri Bandesh Soparkar, C.A. appeared on behalf of the assessee vehemently supported the order of the CIT(Appeals). The counsel for the assessee produced the copy of balance-sheet and Profit and Loss account of the subsequent assessment year and contended that even in subsequent assessment year, the investment in shares were made, actual business of financing and share is done, therefore, it may be held that assessee-company has actually started the business of money lending, investment in shares, debentures, bonds, etc. etc. as per Resolution dated 17/01/1996 in the previous year relevant to assessment year under appeal.
7. We have heard both the parties and carefully gone through the orders of the lower authorities as well as the direction of the Tribunal contained in earlier order in ITA No.390/Ahd/2001 dated 24/01/2005. It is pertinent to note that during the course of assessment proceedings, assessee has fairly admitted that its original business has not commenced. Whatever money shown as advances, it was given in earlier years to only one company, i.e. 7 ITA No. 4051/AHD/2007 Jagruti Securities Ltd. and assess has earned interest. No investment whatsoever has been made in share in the previous year relevant to assessment year under appeal which is evident from the holding of share shown by the assessee in Schedule-E to the balance-sheet. Neither before the Assessing Officer nor before the Learned Commissioner of Income Tax(Appeals) or even before us, the assessee has produced an iota of evidence in support of the claim that assessee has actually stated the business of money lending, investment in shares, debentures, bonds, etc. etc. as per Resolution dated 17/01/1996. The assessee, in erlier year parked the surplus money to only one company, i.e. Jagruti Securities Ltd. and earned interest. All facts are same as were in the last year except passing of Resolution on 17/01/1996 Therefore, in our opinion, the Learned Commissioner of Income Tax(Appeals) clearly erred in holding that the assessee- company has actually started its business of money lending, investment in shares, debentures, bonds, etc. etc. in terms of Resolution dated 17/01/1996. We also found considerable force in the submissions of the ld.DR that foreign travelling expenses incurred Rs.4,31,250/- was for the purpose of raising fund for projects from NRI and OCB. This was submitted by the assessee in written submissions dated 22/12/1999 during the course of original assessment proceedings and the same reads as under:-
"The purpose of the trip was to raise funds for the projects form NRI's & OCB's and there were several meetings with them to attract them for investment at various places in Canada, where the director had visited."
8. In view of above, we are of the opinion that in the previous year relevant to assessment year under appeal, the assessee-company has not started its business of money lending, investment in shares, debentures, bonds, etc. etc. in terms of Resolution dated 17/01/1996. We, therefore, reverse the order of the Learned Commissioner of Income Tax(Appeals) and hold that interest income is rightly assessed u/s.57 of the IT Act, 1961 under the head "Income from other Sources".
9. Before parting with we may observe that our aforesaid finding is based on finding of fact recorded by the Assessing Officer in the order dated 17/03/2006 u/s.143(3) r.w.s. 254 of the 8 ITA No. 4051/AHD/2007 IT Act, 1961. In subsequent assessment year, in case, the assessee has actually started its business of money lending, investment in shares, debentures, bonds, etc. etc. as per Resolution dated 17/01/1996, the Departmental Authorities below are at liberty to take a different view than the view taken by us hereinabove.
10. Resultantly, the appeal of the Revenue is allowed.
The Order was pronounced in the Court on 31.03.2010
Sd/- Sd/-
(G.D. Agrawal) (T.K. Sharma)
Vice-President (AZ) Judicial Member
DATED : 31/ 03 / 2010
Copy of the order is forwarded to :
1) The Assessee
(2) The Department.
(3) CIT(A) concerned,
(4) CIT concerned,
(5) D.R., ITAT, Ahmedabad.
True Copy
By Order
Deputy Registrar, ITAT, Ahmedabad
Laha/Sr.P.S./TC Nair