Income Tax Appellate Tribunal - Ahmedabad
Cedan Vinmay (P) Ltd. vs Asstt. Cit on 10 December, 2001
Equivalent citations: (2004)90TTJ(AHD)174
ORDER
M.A. Bakshi, Vice President:
The appeal of the assessee for assessment year 1997-98 is directed against the order dated 19-9-2000, of Commissioner (Appeals)-III, Baroda. The rival contentions have been heard and record perused.
2. For assessment year 1997-98, the assessee had filed a return of income declaring loss of Rs. 23,208 which had been processed under section 143(1)(a) on 16-8-1998. The case having been selected for scrutiny, a notice under section 143(2) had been issued and thereafter, the assessing officer had completed the assessment at an income of Rs. 2,10,230. The assessee had shown income of Rs. 2,10,285.09 against which expenses of Rs. 2,32,888.14 were claimed. During the course of assessment proceedings, the assessing officer asked the assessee as to why the receipt from interest, commission, etc. may not be treated as income from other sources as the interest had been received from bank on FDR and two sister concerns only. It was also pointed out to the assessee that the commission receipt from the sister concern is also to be treated as income from other sources as the assessee-company had not done the business of consignment agent for any outside parties. The assessing officer had also pointed out that the assessee could not have acted as an agent without a specific resolution as per provisions of section 149(2A). The assessee furnished a reply which according to the assessing officer was not satisfactory. He, accordingly, treated the receipts of Rs. 2,10,285.09 as income of the assessee from other sources. Deduction under section 57 was allowed of Rs. 50 only. The assessing officer had relied upon the decision of Madras High Court in the case of South India Shipping Corporation v. CIT (1999) 240 ITR 24 (Mad) in support of the finding that the income from the activities carried on by the assessee is assessable under the head income from other sources.
3. The assessee appealed to the Commissioner (Appeals) pleading that the income from interest, etc. may be assessed under the head "business income" and the expenses of Rs. 2,32,888 relating to business be allowed. Reference was made to the special resolution passed in the meeting of the shareholders authorising the company to carry on the business of financing and investment. The Commissioner (Appeals) has confirmed the decision of the assessing officer. Hence, this appeal.
4. The learned counsel for the assessee contended that the company had been incorporated in the year 1984 with the main object of carrying on the business of the dealers, traders of chemicals, etc. Since the company could not start the business as per the main objects, a special resolution was passed by the shareholders at the extraordinary meeting held on 28-11-1984, authorising the company to do business of financing and for that purpose advance deposit or lend money from time to time. Thereafter, the company, according to the learned counsel, had carried on the financing business and has also done trading of chemicals. In the year under appeal, the assessee has derived income from commission also, contended the learned counsel. It was, accordingly, pleaded that the finding of the assessing officer that the assessee has not carried on any business is contrary to the facts on record. The learned counsel, accordingly, urged that the findings of the revenue authorities in this regard may be reversed and the claim of the assessee that it carried on the business of financing, trading and acting as agent, etc. may be accepted. It was also contended that since the assessee has carried on the business during the year under appeal, the expenses incurred for business are allowable as a deduction. The assessing officer, according to the learned counsel, was not justified in disallowing the entire expenses, barring Rs. 55 on account of bank commission. The learned counsel for the assessee contended that the assessee had been assessed in the past on the basis of the returns filed and the entire expenditure had been allowed. The assessing officer has, for the first time, treated the receipts of the assessee as income from other sources. The expenses have also wrongly been disallowed, it was contended.
5. In the alternative, the learned counsel contended that the assessing officer was wrong in not considering the expenses claimed by the assessee under section 57 against the income assessed under the head "income from other sources". The learned counsel filed a copy of the order of the Tribunal in the case of Dinman Vinimay (P) Ltd. ITA No. 1756/Ahd/2000, dated 28-11-2000, and it is claimed that under similar facts, the Tribunal had allowed the appeal of the assessee and treated the interest income derived by the assessee as "income from business".
6. The learned Departmental Representative, on the other hand, contended that the assessee has not carried on any activity resulting in the activity of business. The assessee has invested surplus funds with bank and with sister concerns and derived interest therefrom. Such income is assessable to tax under the head "Income from other sources" as held by their Lordships of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilisers Ltd. v. CIT (1997) 227 ITR 172 (SC). Reliance was placed on the findings of the assessing officer as well as the Commissioner (Appeals) in support of the contention. The learned Departmental Representative further contended that the commission was shown to have been received from a sister concern and the assessee has not carried on any activity as commission agent. It was also contended that the expenses claimed by the assessee are unrelated to the activities of earning income and, therefore, are neither allowable under the head "Income from business" nor under the head "Income from other sources". It was pointed out that the main income of the assessee is from the bank interest and interest from sister 'concerns against which substantial deduction is claimed by the assessee on account of salaries, etc. It was accordingly, contended that the appeal of the assessee may be dismissed.
7. I have given my careful consideration to the rival contentions. The issue involved in this appeal is as to whether the assessee had carried on any business of financing, etc. during the year under appeal and if so, whether the assessing officer was justified in disallowing the entire claim of expenditure of Rs. 2,32,888. Both the issues are questions of fact.
8. The company was incorporated on 29-10-1984, with the main object of trading of chemicals, etc. The company, it is claimed, has passed a resolution in the meeting of the shareholders held on 28-11-1984, in terms of section 149(2A) of the Companies Act, 1956, by which approval had been granted to the company for commencing the business of financing as per para 69 of clause (c)(III) of memorandum of association of the company and for commencing the business of lending the money as per para 60 of clause (b)(III) of memorandum of association of the company and also to commence the business of investing the surplus funds of the company as per para 55 of clause (b)(III) of the memorandum of association of the company. The assessee claimed to have filed the return for various assessment years and also claimed to have carried on the trading of chemicals during the financial years 1986-87, 1992-93, 1993-94, 1994-95 and 1995-96. The business of financing is claimed to have been carried on from assessment year 1986-87 onwards and continued till date. Income from commission has also been shown from assessment year 1992-93 onwards. The learned counsel for the assessee admitted that all the returns filed had been accepted under section 143(1)(a) and the assessment of the company under section 143(3) has been made for the first time in the year under appeal. It is thus evident that the issue as to whether the assessee has carried on any business or not has come up for consideration of the assessing officer for the first time in the year under appeal. There is thus no finding of the revenue authorities relating to the claim of the assessee that it carried on the business in various years. The mere fact that the returns under section 143(l)(a) had been accepted in the past by the income tax department without scrutiny, will not preclude the assessing officer from making enquiries and determine the question for the first time. The observations of their Lordships of the Hon'ble Supreme Court in the case of Karnani Properties Ltd. v. CIT (1971) 82 ITR 547 (SC) at p. 554 reproduced hereunder are relevant :
"It was next urged by Mr. Manchanda that our decision in this case may preclude the department from reconsidering the correctness of the findings reached by the income tax officer, the Appellate Assistant Commissioner and the Tribunal in the assessee's case in the subsequent years. This apprehension may again be not well founded. Generally speaking, the rule of res judicata does not apply to taxation proceedings. We have not gone into the correctness of the findings of fact reached by the Tribunal. Therefore, whether those facts and circumstances were correctly found or not may still be a matter for consideration in any future assessment. We do not wish to say anything more on this aspect as we do not want to pronounce on question which are not before us."
Similar view has been taken by their Lordships of the Hon'ble Supreme Court in the case of M.M. Ipoh v. CIT (1968) 67 ITR 106 (SC) at p. 118. The relevant portion is quoted as under :
"The doctrine of res judicata does not apply so as to make a decision on a question of fact or law in a proceeding for assessment in one year binding in another year. The assessment and the facts found are conclusive only in the year of assessment; the findings on questions of fact may be good and cogent evidence in subsequent years, when the same question falls to be determined in another year, but they are not binding and conclusive ......."
It is evident from the observations of their Lordships of the Hon'ble Supreme Court quoted above that it is open to the assessing officer in any future assessment to consider as to Whether the facts and circumstances were correctly found in earlier years. Therefore, the objection of the learned counsel for the assessee that the assessing officer was not justified in taking a view relating to the head under which the income is assessable, for the first time, is not well founded. It is also settled law that each year is an independent unit of assessment. The assessing officer is, therefore, at liberty to consider the facts and circumstances in any year and to record his conclusion on appreciation of the evidence in the light of facts and circumstances of each case. Moreover, his order is not the final order. There is appeal against his order to the Commissioner (Appeals) and an appeal to the Tribunal against the order of the Commissioner (Appeals). The appeal now lies even to the High Court against the order of the Tribunal. Therefore, no restriction can be placed upon the powers of the assessing officer to investigate the facts in assessment proceedings and to arrive at a fair conclusion on the basis of the evidence on record. The contention of the assessee in this regard is, accordingly, rejected.
8. Now, I proceed to consider as to whether the assessee has carried on the business of financing. In this connection, it is interesting to note that the company was incorporated on 29-10-1984. A copy of the resolution placed on record is in regard to a meeting held on 28-10-1984, i.e., one day before the incorporation of the company. Therefore, the authenticity as well as validity of the abovementioned resolution is highly doubtful. Even otherwise, the resolution does not by itself establish that the company has carried on the activities which are purported to have been authorised by the resolution. The issue to be considered is as to whether the company had acted upon the authorisation in the light of the resolution under section 149(2A) of the Companies Act. The question to be decided is admittedly a question of fact. Before I refer to the facts of this case, it would be relevant to consider as to what is meant by "business". In this connection, the decision of the jurisdictional High Court of Gujarat in the case of CIT v. Motilal Hirabhai Spinning & Weaving Co. Ltd. (1978) 113 ITR 173 (Guj) will be relevant where the word "business" has been defined. In this case, their Lordships held that the relevant tests to be applied are volume, frequency, continuity and regularity of the transactions in reaching to the conclusion that the activities of the assessee constituted business. The decision of the Hon'ble Supreme Court in the case of Dalhousie Investment Trust Co. Ltd. v. CIT (1967) 66 ITR 473 (SC) is also relevant. In that case, Their Lordships held that the mere fact that an investment company periodically varies its investment does not necessarily mean that the profit resulting from such variation is taxable under the Income Tax Act. Their Lordships further held that the variation of this investment must amount to dealing in investment before such profit can be taxed as income under the Income Tax Act. The sum and substance of the aforementioned decision is that mere fact that assessee. has earned income may not be decisive to hold that an assessee has carried on the business in dealing in investments.
9. Applying the aforementioned test to the facts of this case, I proceed to consider as to whether the assessee can be said to have carried on the business of financing, trading in chemicals or/and acting as an agent. It has been pointed out elsewhere in this order that the appellant-company had been incorporated with the main object of dealing in chemicals. The company was incorporated on 29-10-1984. Under section 149(2A) of the Companies Act, a special resolution was to be passed by the company for carrying on any business as per the other objects of the company. A resolution dated 28-10-1984, has been placed on record which is prior to the incorporation of the company. Such a resolution is of no legal consequence. Even if it is assumed that such a resolution was passed, it cannot be said to be in compliance to the provisions of section 149(2A) of the Companies Act as no other resolution was passed after the incorporation of the company within the meaning of section 149(2A). Therefore, the claim of the assessee that the business of financing and acting as an agent has been carried on in terms of the resolution passed under section 149(2A) of the Companies Act or articles of association is devoid of any merit. Another factor that is important to be considered in order to ascertain as to whether the assessee carried on the business of financing is as to the nature of activities carried on by the assessee. The assessee has deposited certain funds with the bank and derived interest therefrom. Besides, money has been lent to some sister concerns and interest derived therefrom. The aforementioned activities of the appellant-company could, at best, fall within the other objects No. 55 of the memorandum of association which is reproduced hereunder :
"55. To invest the moneys of the company, not for the time being required for the general purpose of the company in such investment (other than shares in the company) as may be thought proper; and to hold, sell or otherwise deal with such investments."
The company has deposited money with the bank as well as with sister concerns. The company has not done any activity which could be termed as an activity of business. As held by their Lordships of the Hon'ble Gujarat High Court in the case of Motilal Hirabhai Spinning & Weaving Co. Ltd. (supra), the volume, frequency, continuity and regularity of the transactions could be relevant for considering as to whether the assessee has carried on the activities as activities of business. In this case, the money has not been advanced to any outsider and the activity of advancing money has not been carried out in an organised manner nor is there frequency of transactions. In fact, it is a case of a company where no business has been started and the surplus funds have been invested before the commencement of the business. The decision of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilisers Ltd. (supra), in my view, directly applies to this case. The income derived from investment is assessable under the head "Income from other sources". Even otherwise, the facts and circumstances of this case clearly demonstrate that the assessee had not carried on the financing business. The Commissioner (Appeals) has pointed out that the permission of the Reserve bank of India is required for carrying on the business of financing. No such permission has been obtained. The company has also not made it known to outsiders that they are in financing business so as to develop the business. I am, therefore, of the considered view that the revenue authorities were justified in holding that the assessee was not engaged in the business of financing.
10. Now, another activity claimed by the assessee to have been carried on is the activity of trading in chemicals. It has been claimed before the Commissioner (Appeals) in assessee's letter dated 18-9-2000, that the business of chemicals was carried on by the assessee in financial years 1986-87, 1992-93, 1994-95 and 1995-96. The P&L a/c for assessment year 1987-88 is not on record. However, as per the return of income, the assessee had disclosed a loss of Rs. 2,279. In assessment year 1993-94, the assessee has reflected the sales of Rs. 8,996.34. In assessment year 1994-95, the sales of Rs. 3,571.68 have been reflected. Similarly, in assessment year 1995-96, round figure of sales had been shown at Rs. 10,000 and for assessment year 1996-97, round figure of sales had been shown at Rs. 10,000. It is evident from the figures pointed out above that the assessee, has in fact, not traded in chemicals. Nominal sales have been shown in order to give the colour to the activities of the company to be of trading company. In the year under appeal, there was scrutiny of assessment and assessee has not shown any sale on account of chemicals. Taking totality of facts and circumstances of this case into consideration, I am of the considered view that the assessee has not carried on any business of chemicals, etc. in an organised manner in any of the assessment years.
11. The only other source from which income has been disclosed by the assessee is relating to commission. It is the claim of the assessee that commission has been received by it in some of the assessment years from a sister concern. There is no evidence on record to establish that the assessee has in fact, acted as an agent for the sister concern. The assessing officer has pointed out that the company has not passed any resolution under section 149(2A) of the Companies Act for acting as an agent for any person.
12. Reference may be made to the decision of the Tribunal in the case of Dinman Vinimay (P) Ltd. (supra), a sister concern of the assessee, relied upon by the learned counsel for the assessee. A decision has been taken by the Tribunal on consideration of the facts and circumstances of that case that the income derived by that company was from business. There cannot be a precedent on facts. Moreover, the decision is inconsequential in this case as the expenses claimed by the assessee were not considered by the Tribunal in the preceding year.
13. Taking the totality of the facts and circumstances of this case into consideration, I have no doubt in my mind that the activities carried on by the company do not constitute the activities of business. The entire receipts are thus, accordingly, assessable under the head "Income from other sources".
14. Now, I proceed to consider the claim of the assessee relating to expenses. I may point out that the real issue involved in this appeal is as to whether the assessee is entitled to deduction of substantial expenses claimed. Whether the income is assessed under the head "Income from business" or "income from other sources", the assessing officer shall have to consider the claim relating to expenses in accordance with law. In case the income is assessed under the head "Income from business", the assessee would be entitled to deduction of the expenses incurred or laid out for purposes of business. Similarly, if the income is assessable under the head "Income from other sources", the assessee would be entitled to deduction of the expenses incurred for earning the income.
15. I would like to place on record that the learned counsel for the assessee suggested that it is not open to the Tribunal to consider the allowability of expenses as the limited issue involved in this appeal is as to whether the assessee has carried on the business or not. This contention on behalf of the assessee is not well founded. The assessing officer has disallowed the entire expenses on the ground that no business has been carried on. Even if one were to record a finding that the assessee was engaged in business, it would still be open to consider as to whether the assessee is entitled to the deduction of the entire expenses which have been disallowed by the assessing officer. The burden undoubtedly is upon the assessee to establish that the expenses claimed as a deduction have been laid out or incurred for purposes of business if the expenses are to be considered against the business income. In case the income is assessed under the head "Income from other sources", then the assessee has to establish that the expenditure has been incurred for earning such income. In both the cases, the burden is upon the assessee. Now, if the assessing officer has disallowed the expenditure on one ground which might not be a valid ground for disallowance, it does not automatically follow that the assessee is entitled to deduction for the entire expenses. In a criminal case when an alibi is taken as a defence which is proved to be wrong by the prosecution, the burden of proof which lies upon the prosecution does not get discharged. At best, the alibi taken by the defence would be rejected. Similarly, when the assessing officer denies the claim of the assessee on any ground, it is always open to the Tribunal to consider the allowability of the claim in accordance with law, notwithstanding the fact that the ground taken by the assessing officer for disallowance may not be sound. This principle may further be explained with reference to the following situation. In a case the assessing officer may consider the entertainment expenses claimed as bogus and disallows the same. On appeal, the Tribunal may come to the conclusion that the expenses are genuine. Should the Tribunal allow the claim of the expenses without considering as to whether the disallowance is warranted under section 37(2A). In my considered view, the Tribunal has the power to confirm the disallowance on a different ground than the ground taken by the income tax officer. In the case of CIT v. Mahalaxmi Textile Mills Ltd. (1967) 66 ITR 710 (SC), their Lordships of the Hon'ble Supreme Court held that the Tribunal has the power to grant relief on any ground not even raised before it. On the same analogy, the relief not due to the assessee is to be rejected on any ground not even raised by the assessing officer in the assessment order. This view is further supported by the decision of the Calcutta High Court in the case of Steel Containers Ltd. v. ClT (1978) 112 ITR 995 (Cal). I, therefore, reject the objection of the assessee in this regard.
16. In the light of the above finding, I proceed to consider the claim of the assessee relating to expenses irrespective of the head under which the income is assessed to tax. As pointed out earlier, the major source of income of the assessee is the interest income. Out of the total receipts of Rs. 2,10,285, the interest component is of Rs. 1,79,225. The interest on income-tax refund is Rs. 2,431. The assessee had deposited money with the bank from which interest is earned. Moreover, money had also been advanced to sister concerns and interest has accrued on those deposits. The assessee has not borrowed money on payment of interest. Therefore, no expenditure has been incurred for the deposit of money with the bank or advancing the money to the sister concerns. Thus, no expenditure is attributable to the earning of interest of about Rs. 1,80,000. The only other income disclosed by the assessee in the year under appeal is Rs. 28,682 from commission from a sister concern. The expenditure of Rs. 2,32,880 against the income of Rs. 28,628 is unimaginable. The expenditure cannot exceed the income unless the assessee establishes that the expenditure had been incurred for purposes of business. If the claim were to be considered against the income from business or the expenditure has been incurred for earning the income if the income were to be assessed under the head "income from other sources". I, therefore, consider it just and reasonable to restore the limited issue to the file of the assessing officer for the purpose of considering the claim of the assessee relating to expenses in the light of the findings and observations in this order.
17. For statistical purposes, the appeal of the assessee is partly allowed.