Income Tax Appellate Tribunal - Bangalore
Jindal Vijayanagar Steel Ltd. vs Assistant Commissioner Of Income-Tax on 12 November, 2002
Equivalent citations: [2003]87ITD630(BANG)
ORDER
Deepak R. Shah, Accountant Member
1. This appeal by the assessee is arising out of the order of Commissioner of Income Tax (Appeals) - X, Hubli dated 31-3-1997, pertaining to assessment year 1995-96.
2. The assessee though has raised as many as 17 grounds, yet the relevant controversy is challenged by way of raising following grounds:
i. The learned CIT(A) erred in confirming the addition of Rs. 1107.36 lakhs without allowing any expenditure incurred by the appellant in earning such income and thereby erred in not computing the total income as per the provisions of the IT Act, 1961.
ii. The authorities below erred in computing the entire receipts under the head 'income from other sources' and further erred in not allowing the expenditure incurred by the appellant.
iii. The authorities below erred in not computing the receipts under the head 'income from business or profession'.
iv. The authorities below ought to have allowed the expenditure in the form of payment of interest to banks and on debenture and other expenditure such as guarantee commission etc., in computing the income of the appellant.
v. The appellant denies the liabilities for interest under Section 234B. Further prays that the interest should be levied only on returned income.
3.1 The facts of the case are as follows :
The appellant was incorporated as Public Ltd. Company on 15-3-1994 as per the Certificate of Incorporation issued by the Registrar of Companies, Karnataka. The main objects of the Company is to set up iron and steel making facilities and continuous casting and hot and cold rolling mill plants for producing of all kinds of metals both ferrous and non-ferrous including steel, etc. The objects incidental or ancillary covers a wide spectrum like import/export of all kinds of merchandise and services, acting as consulting engineers, property development, lending and advancing monies, buying and selling of shares and securities, carrying on business of offering guarantees, investment of surplus funds, to draw, accept and discount bills and host of other activities. Suffice to say, it covers a broad spectrum of activity ranging from manufacturing to lending of loans and advances. The company after complying with the necessary statutory and operational formalities obtained Certificate of Commencement of Business under the Companies Act on 8-7-1994. The Company thereafter mobilised share capital, borrowings in the form of debentures on private placement, short term borrowings from the banks for working capital needs, also raised inter corporate loans from various companies. Before doing so the company in its Extraordinary General Meeting held on 15-9-1994 passed a resolution under Section 293(1)(a) of the Companies Act authorising the Board of directors to borrow amount aggregating Rs. 3300 crores. Thereafter the company in its Board of directors meeting held on 7-1-1995 authorised the Managing Director, to advance loans up to a maximum of Rs. 5 crores per each party (in certain specific cases up to specific limit below Rs. 114 lakhs) on such terms and conditions in the interest of the company. Accordingly, huge transactions were carried on totalling to several hundreds of crores of rupees during the previous year. The transactions involved bill discounting, structured financing on the basis of letter of credit, purchase and sale of bonds, Govt. securities and units of Unit Trust of India, equipment leasing, inter corporate and personal loans, deposits with the banks and companies advances to employees etc. 3.2 No Profit and Loss Account was prepared as the income earned was set off against capital issue expenses.
The summarized Balance Sheet disclosed figures as under:
BALANCE SHEET AS AT MARCH 31, 1995
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Description Schedules As at 31-3-1995
(Rs. in lakhs)
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I. Sources of Funds:
(i) Shareholders' Funds
(a) Share Capital A 37,050.01
(b) Share Application Money 4,050.00
(ii) Loan Funds
(a) Secured Loans B 17,471.50
(b) Unsecured Loans C 16,655.64
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Total 75,227.15
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II. Application of Funds
(1) Fixed Assets
(a) Gross Block D 721.78
(b) Less - depreciation 19.42
(c) Net Block 702.36
(d) Capital Work-in-
progress and E 30,553.72
Pre-operative expenditure
during construction period
pending allocation 31,256.08
(2) Investments F 21,796.08
(3) Current Assets, Loans and
Advances:
(a) Cash and Bank Balances G 1,43,843.66
(b) Other Current Assets 982.04
(c) Loans and Advances H 14,740.62
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1,59,566.32
Less: Current Liabilities and
Provisions:
(a) Liabilities I 1,39,432.15
(b) Provisions J 0.15
-----------
1,39,432.30
Net Current Assets: 20,134.02
(4) Miscellaneous Expenditure K 2,040.97
(to the extent not written
off or adjusted)
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Total 75,227.15
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Some of the important schedules to balance sheet are as under:
SCHEDULE 'C' - UNSECURED LOANS
----------------------------------------------------------
(Rs. in Lakhs)
Short Term Loans from Banks:
Documentary credits 2,793.24
Bridge Loans 10,436.80
Others 3,425.60
Total ----------
16,655.64
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SCHEDULE 'G' - CASH AND BANK BALANCES
----------------------------------------------------------
(Rs. in Lakhs)
Cash on hand 1.01
Stock-invest on hand 54,059.50
Balances with Scheduled Banks:
(i) In Current Accounts 329.88
(ii) In Term Deposit 89,453.27
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Total 1,43,843.66
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SCHEDULE 'H' - LOANS AND ADVANCES
-------------------------------------------------------------
(Rs. in Lakhs)
Unsecured - (Considered good)
Advance recoverable in cash or in kind or
for the value to be received611.29
Modvat receivable 485.00
Share/Security application money 710.00
Tax deducted at source 4.12
Bills of exchange 1,276.99
Loans to:
(1) Bodies Corporate 11,410.22
(2) Others 243.00
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Total 14,740.62
SCHEDULE I - CURRENT LIABILITIES
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(Rs. in Lakhs)
Debenture Application Money 1,35,882.66
Sundry Creditors 224.72
Other Liabilities 3,109.40
Interest Accrued but not due 215.37
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Total 1,39,432.15
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SCHEDULE 'K' - MISCELLANEOUS EXPENDITURE
-------------------------------------------------------------------
(Rs. in Lakhs)
(To the extent not written off or adjusted)
Preliminary Expenses 0.95
Share/Debenture Issue Expenses 2,040.02
(net of interest of Rs. 1021.85 lakhs)
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Total 2,040.97
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3.3 The company issued a prospectus to raise from the public equity share capital of Rs. 135 crores and redeemable convertible debenture of Rs. 1090 crores. The issue, subscription to which opened on 10-2-1995, was over subscribed by 30.226 times and by 7.156 times for shares and debentures respectively. At the year end, none of these proceeds was available for use to the company as these sums were held in a separate bank account pending allotment of shares and debentures or in form of stock investment account. The issue was meant to raise funds for multiple activities of the company such as establishing hot strip steel mill in multiple phases, power plant using gases generated in steel mill, integrated steel mill and also to part finance its regular business needs for buying and selling of units, bill discounting, Govt. securities etc. The perusal of the prospectus indicates that the long term resources needed for the projects were tied up, but no funds were made available to the company until the year end. The Balance Sheet also indicates that the actual borrowing made by the company were all short term in nature and were utilised generally for the purposes of lending and deposit etc., and current assets. The prospectus in paper book at page 51 mentions the sources and uses of funds. The sources include various types of borrowing and utilisation of profits generated from other business by the company towards investing in long term projects. The total borrowing envisaged for these activities were in the order of Rs. 2,125 crores and consequently the authorisation by the shareholders in favour of the Board of directors mentioned supra for Rs. 3,300 crores shows that the company was entitled to borrow in excess of the required funds for the long term projects.
3.4 The company to carry on the activity of advances, bill discounting, deposits etc., had time and again borrowed funds on short term basis from Hongkong Shanghai Banking Corporation videits sanctioned letter dated 20-10-1994 for Rs. 44.50 crores, from American Express Bank for Rs. 75 crores, from Society General, France in excess of Rs. 100 crores, and from Intercorporate borrowings several hundred crores. The company earned a total income of Rs. 1107.36 lakhs as under:
1. Interest receivable on loans and advances Rs. 203.21
2. Discounting charges Rs. 64.81
3. Profit on sale of treasury bills and NHPL bonds Rs. 20.22
4. Other interest and charges received Rs. 0.72
5. Interest receivable on share/debenture issue deposit Rs. 779.31
6. Interest received on intercorporate deposit Rs. 17.30
7. Interest received on a/c of fixed deposit towards NRI allotment Rs. 21.79
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Total Rs. 1107.36
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3.5 To carry on its activities, the appellant company had a central treasury division at Mumbai, it also had its project office at Tornagallu, Bellary district and registered office at Bangalore. The expenses incurred by each of these offices in the form of salary, rent, administration and other establishment overheads, payment of interest and finance charges, guarantee commission, letter of credit charges, consultancy charges, etc., are all separately listed in page Nos. 100 to 101 of the paper book. The expenses incurred in each of these offices are as under:
1. Corporate treasury Rs. 15,50,32,395
2. Project - Toranagallu, Bellary Rs. 5,62,63,415
3. Registered Office, Bangalore Rs. 1,80,33,245
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Total Rs. 22,93,29,055
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In the balance sheet the said expenditure was grouped under the head "pre-operative expenditure pending allocation" and certain income in form of discounting charges received of Rs. 64.81 lakhs and surplus on sale of investments of Rs 20.23 lakhs earned has been reduced from this expenditure. The appellant incurred a sum of Rs. 10,77,53,775 towards the public issue of debentures. (This expenditure is after excluding proportionate expenditure towards the convertible portion of the debenture). The expenditure incurred for issue of shares including towards the proportion of convertible portion of the debenture is Rs. 19,93,86,906 in all totalling to Rs. 30,71,40,681. This expenditure has been shown in the balance sheet under the head Misc. expenditure after reducing from the same, interest earned of Rs. 10.21 crores. The appellant had not prepared any profit and loss account for the reasons mentioned in the annual report that it had not commenced commercial production in its steel plant.
3.6 Before the authorities below, the appellant had claimed the entire receipts of Rs. 11.07 crores as not taxable relying on the decision of Orissa High Court in case of CIT v. Electrochem Orissa Ltd. and the decision of Bombay High Court in CIT v. Maharashtra Electrosmelt Ltd. [1995] 214 ITR 489 : 79 Taxman 264.As an alternative submission the appellant had claimed that the company has carried on the business during the year and the entire income after setting off expenditure should be computed under the head business. This plea of the appellant was not accepted by the Assessing Officer (AO) who held that the appellant having not commenced its production in the steel plant, the income earned could not be treated as business income and accordingly, treated the entire receipts under the head 'income from other sources'. The Assessing Officer further refused to allow the expenditure by holding that the expenses had no nexus with the earning of income and such expenditure could not be allowed even under the head 'other sources' and the claim being considered under the head 'business' would not arise as according to him the appellant had not commenced the business. In support of his findings he relied on the decision of the Karnataka High Court in CIT v. Cap Steel Ltd. [1986] 162 ITR 533 : 29 Taxman 125 and Karnataka Forest Plantations Corporation Ltd. v. CIT [1985] 156 ITR 275 : [1986] 27 Taxman 431 Reliance was also placed on CIT v. Mangalam Cement Ltd. [1996] 217 ITR 369 : [1995] 81 Taxman 397 (Raj.).
3.7 The CIT(A) held that the main object of the assessee as mentioned in the Memorandum of Association is to carry on the business of production of steel and allied products. The Company after incorporation, went for public issue and the funds obtained were deposited for earning interest till the said funds were put for completion of the project. The company has not even commenced the trial production of steel. It was therefore, held that the assessee has not commenced it was submitted that business. Since the temporary parking of funds collected from public pending allotment of share does not amount to carrying on company's main object, the income cannot be taxed as business income. The CIT(A) also held that since the project loan and term loan are not linked as source of fund for making fixed deposit to earn interest, the expenses on payment of interest cannot be allowed to be deducted either under Section 36 or under Section 57 of the Act. The CIT Appeals further observed in para 6 of his order, as under:
the appellant company claims that the depositing of the funds into the bank and also investing those funds in NHPL Bonds and encashing them and discounting the bills claim to be incidental to business is not tenable in law inasmuch as incidental business would arise only when the main business of the company has commenced. In the instant case the company has not even commenced trial run. As such the question of carrying on incidental to business does not arise.
The assessee is therefore further in appeal before us.
4.1 Before us, appearing for the appellant Sri K.R. Pradeep, Chartered Accountant, (AR) submitted that the authorities below had not appreciated the facts and the issues properly. He submitted that the appellant had commenced the business immediately after obtaining the Certificate of commencement of business on 8-7-1994. The activities during the year largely involved loans and advances, bill discounting, structured financing, hire purchasing, etc. The company had also embarked on establishing long term projects which were still at nascent stage and had not commenced operations and consequently did not yield any income, however, the financing activities outlined above was itself carried on in a systematic manner inasmuch as corporate treasury division were established consisting of board of directors, financing executives and other staff to carry on the business. Further the company had borrowed funds from banks, private placement of debentures, intercorporate borrowing, etc. which in turn was lent to earn the income.
4.2 The activity involved lending and borrowing of more than Rs. 1438 crores which could not be regarded as other sources or incidental activity by any stretch of imagination. The borrowings toward long term projects though tied up were not available for utilisation during the year. Further short-term borrowings were utilised for earning of income. The central treasury located at Mumbai was a common treasury where in the funds received from various sources was pooled and intermixed and were utilised for business purposes. It was submitted that similar activity was continued to be carried on by the company even in the subsequent years. In view of this, it was submitted that the entire income should be assessed under the head business as envisaged under Section 28 of the IT Act. Sri K.R. Pradeep, submitted that the view taken by the authorities below were a factual mistake inasmuch the authorities below had not properly appreciated the authorisation for such activity in the Memorandum of Association and the regularity with which it was carried out. The case law relied on by the Assessing Officer pertains to income earned prior to commencement of business where as the issue on hand was computation of income after commencement of business accordingly, he submitted that the decisions relied on by the Assessing Officer would be of no help in deciding the issue on hand. In support of his contention he relied on decision of Supreme Court in Tuticorin Alkali Chemicals & Fertilisers Ltd. v. CIT [1997] 227 ITR 172 : 93 Taxman 502 at page 180 the relevant portion relied on is extracted hereunder:
The question of adjustment of interest payable by the company against the interest earned by it will depend upon on the provisions of the Act. The expenditure would have been deductible as incurred for the purpose of business if the assessee's business had commenced-"
...Similarly, any income from a non-business source cannot be set off against the liability to pay interest on funds borrowed for the purpose of purchasing of plant and machinery even before commencement of the business of the assessee....
On the basis of this he argued that Hon'ble SC itself has made a categorical distinction about computation of income and allowing of expenditure prior to commencement of business and after commencement of business. Such a distinction was totally lost sight of by the authorities below.
4.3 The Learned AR further contended that the entire expenditure incurred by the corporate treasury division etc., of the company amounting to Rs. 15.50 crores and the expenditure incurred in public issue of shares and debentures amounting to Rs. 30.71 crores were all incurred in carrying of business and for the purpose of business should be allowed. It was submitted that only net income after the expenditure is liable for taxation and not the gross revenue as has been taxed by the Assessing Officer. The Learned AR relied on the decisions of Supreme Court in CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140 the relevant portion relied on is extracted hereunder :
The expression 'for the purpose of the business' is wider in scope than the expression 'for the purpose of earning profits'. Its range is wide: it may take in not only the day to day running of a business but also the rationalisation of its administration and modernisation of its machinery, it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title, it may also comprehend payment of statutory dues and takes imposed as a precondition to commence or for carrying on of a business: it may comprehend many other acts incidental to the carrying of a business....
Reliance has also placed in case of Sree Meenakshi Mills Ltd. v. CIT [1967] 63 ITR 207 (SC) the relevant portion relied on is extracted hereunder:
Under Section 10(2)(xv) of the Indian IT Act, as amended by Act 7 of 1939, expenditure even though not directly related to the earning of income may still be admissible as a deduction....Expenditure incurred not with a view to the direct and immediate benefit for purposes of commercial expediency and in order indirectly to facilitate the carrying on of the business is therefore expenditure laid out wholly and exclusively for the purposes of the trade....
4.4 To claim that the expenditure should be allowed, he further submitted that expenditure incurred for raising debentures though meant for the purposes mentioned in the prospectus, should be allowed as held by the Supreme Court in India Cements Ltd. v. CIT [1966] 60 ITR 52, the relevant portion relied on is extracted hereunder:
The act of borrowing money was incidental to the carrying on of business, the loan obtained was not an asset or an advantage of enduring nature, the expenditure was made for securing the use of money for a certain period, and it was irrelevant to consider the object with which the loan was obtained.
Mr. Pradeep also relied upon further the circular issued by the CBDT No. 56 of 19-3-1971 para 45, the relevant portion relied on is extracted hereunder:
45. It may be noted that the provision for amortisation is not intended to supersede any other provision in the income tax law under which the expenditure is allowable as deduction against profits. For instance, where a company which is already in business, incurs expenditure on issue of debentures, and such expenditure is admissible as a deduction against profits of the year in which it is incurred by virtue of the decision of the Supreme Court in the case of India Cements Ltd. v. CIT (SC) [1966] 60 ITR 52, Section 35D will not have the effect of bringing that expenditure within the scope of the expenditure amortised against profits over a 10 year period. As a corollary to this, where any expenditure has been included for the purpose of amortisation under Section 35D on a claim being made by the assessee in that behalf; Such expenditure will not qualify for deduction under any other provision of the Act for the same or any other assessment year vide Sub-section (6) of Section 35D.
4.5 Mr. Pradeep also argued that to the extent of expenses relatable to excess share application, should be treated not for issue of shares and hence should be allowed like other expenses. The learned AR also relied on the decisions of Bombay High Court in Premier Automobiles Ltd.v. CIT [1971] 80 ITR 415 and Grasim Industries Ltd. v. Dy. CIT [1999] 64 TTJ (Bom.) 357, Mumbai to show that the expenditure incurred in raising the debenture as well as interest on debenture must be allowed even if the debenture were issued for the purposes of incurring capital expenditure. It was contended that the assessee had a common management, common funds, interlacing and interdependent of different activities. Consequently all activities constituted one single business and hence the entire expenditure mentioned supra should be allowed. The Learned AR further contended that the expenditure was not debited to profit and loss account or the fact no profit and loss account was prepared should not be held against the appellant in considering the claim for expenditure as the allowability or otherwise of the expenditure should be decided having regard to the provisions of the Income-tax Act and not on the basis of entry passed in books of account. In support he relied on the decisions of Supreme Court, the relevant portion relied on is extracted hereunder :
Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC) Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights; nor can the existence or absence of entries in his books of account be decisive or conclusive in the matter.
Sutlej Cotton Mills Ltd. v. CIT[1979] 116 ITR 1 (SC) It is now well-settled that the way in which entries are made by an assessee in his books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. The assessee may, by making entries which are not in conformity with the proper principles of accountancy, conceal profit or show loss and the entries made by him cannot, therefore, be regarded as conclusive one way or the other. What is necessary to be considered is the true nature of the transaction and whether in fact it has resulted in profit or loss to the assessee.
CIT v. Central Provinces Manganese Ore Co. Ltd. [1978] 112 ITR 734 (Born.) If a statutory liability arises in a particular year, then, an assessee maintaining his books of account on the mercantile system of accounting is entitled to claim a deduction in the year in which the liability arises notwithstanding the fact that he is taking steps to dispute his liability and he fails or omits to make entries in his books of account. The mere fact that such a deduction was not claimed before the Income-tax Officer is not of much importance. If the liability arises then a claim can be made bone fide at any stage before any higher authority, who is competent to grant relief.
On these arguments he sought for allowance of expenses incurred.
5.1 The Learned Departmental Representative Sri Radhakrishna, appearing for the department relied on the orders of the authorities below and further contended that unless steel plant, which is the main activity of the company, commenced production, it cannot be held that the business of the appellant company has commenced. He further submitted that expenditure though revenue in nature were all incurred prior to commencement of business and hence, could not be allowed. He further relied on the decision of the Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. 's case (supra) to support the order of the authorities below. He also relied on the decisions in Collis Line (P.) Ltd. v. ITO [1982] 135 ITR 390 (Ker.), K. Sampath Kumar v. CIT [1986] 158 ITR 25 : 27 Taxman 534 (Mad.) and Western India Vegetable Products Ltd. v. CIT [1954] 26 ITR 151 (Bom.).
5.2 In reply Learned AR submitted that all the expenditure were incurred after commencement of business and even if the expenditure is incurred prior to commencement of business also should be allowed as held by Karnataka High Court in Gopal Films v. ITO [1983] 139 ITR 566 the relevant portion relied on is extracted hereunder:
....Expenditure incurred prior to the commencement of the business, which is clearly attributable to the business, is allowable as business expenditure...
and the decision in CIT v. Saurashtra Cement & Chemical Industries Ltd. [1973] 91 ITR 170 (Guj.) the relevant portion relied on is extracted hereunder :
...'Business' connotes a continuous course of activities. All the activities which go to make up the business need not be started simultaneously in order that the business may commence. The business would commence when the activity which is first in point of time and which must necessarily precede all other activities is started....
The Learned AR submitted that the business of the appellant involved continuous course of several activities and even if any one of the activity has been undertaken that would be sufficient to claim the expenditure as allowable in computing the income from business.
6.1 We have carefully considered the relevant facts, arguments advanced and cases cited. We have also perused the paper book filed by learned AR.
On going through the Memorandum of association particularly main objects and incidental to main objects, we find that the company was incorporated to undertake multi farious activities including establishing steel plant, power plant, etc. The main objects are narrated in memoran-dum to be pursued on its incorporation. The objects incidental to attainment of main objects can be pursued independently for which no further approval is required and can be commenced at any point of time. Only in respect of those objects mentioned under the head 'other objects' in the memorandum the company need to obtain approval of shareholders in general meeting by passing special resolution as required under Section 149(2A) of the Companies Act, 1956. The objects in relation to finance activity mentioned in objects under the head 'incidental objects' can be commenced without any further formalities. After obtaining the certificate of commencement of business, the company was legally entitled to carry on any business enshrined in the Memorandum of association, which it did so by a systematic activity of borrowing and lending of funds, bill discounting, leasing, etc. There is no provision either under law or by the shareholders as to which business or the activity should be commenced first, except as provided in the Memorandum of association. When a company is authorised to carry on several businesses, if it carries on any one of the business, it is sufficient to hold that it has commenced its business. Further it would be incorrect on part of the authorities below to say that unless steel plant commences operations all income earned by the company should be computed only under the head 'other sources'. Projects of power and steel plants inherently has a long gestation period running into 5 to 10 years and the proposition of the Assessing Officer that the assessee should be held to have not carried on business till such time would run contrary to the facts emerging on record.
This finding may be correct to extent of saying that steel manufacturing business is not commenced but cannot be extended to mean that no business is commenced. Further it is incorrect to draw such presumption.
6.2 The word "business" as defined in Section 2(13) includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. These words are of wide import, the underlying idea being of continuous exercise of an activity. The definition however is not exhaustive. Hon'ble Supreme Court in the case of Mazagaon Dock Ltd. v. CIT[1958] 34 ITR 368 on page 376 explained "business" as a word of "wide import and in fiscal statutes it must be construed in a broad rather than restricted sense." The definition being inclusive and not exhaustive is indicative of extension and expansion and not restriction. The word "business" is one of large and indefinite import and connotes something which occupies time, attention and labour of a person normally with the object of making profit. The word means almost anything which is an occupation or duty requiring attention as distinguished from sport or pleasure and is used in the sense of an occupation continuously carried on for the purpose of profit. Thus the word "business" is a wider term than and not synonymous with trade and means practically anything which is an occupation as distinguished from pleasure. It denotes continuous and systematic exercise of an occupation or profession with the object of making income or profit. Thus ordinarily business imply continuous activity in carrying on a particular trade or a vocation. The frequency or repetition of the activity, though at times a decisive factor is by no means an infallible test. The word "business" connotes some real substantial and systematic or organized course of activity or conduct with a set purpose. Hon'ble Supreme Court in the case of CIT v. Calcutta National Bank Ltd. [1959] 37 ITR 171 at page 178 observed as under :
The term "business" is a word of very wide, though by no means determinate, scope. It has rightly been observed in judicial decisions of high authority that it is neither practicable nor desirable to make any attempt at de-limiting the ambit of its connotation. Each case has to be determined with reference to the particular kind of activity and occupation of the person concerned. Though ordinarily "business" implies a continuous activity in carrying on a particular trade or avocation, it may also include an activity which may be called "quiescent".
In judging a question as to whether any business has been carried on by the appellant, what is to be seen is the actual activity carried on by the appellant rather than any presumption. In this case the appellant has engaged itself in systematic and continuous activity of lending, granting loans and advances, bills discounting, purchase and sale of securities, etc., all having turnover of several hundreds of crorcs could not be dismissed as an activity incidental or an activity not carried as the business of the company.
6.3 Perusal of the Balance Sheet and prospectus clearly indicates that the company wanted to earn substantial income, which it wanted to deploy towards establishing capital intensive projects. Mention of internal accruals as source of funds itself establishes the intention to carry on some other business before establishment of steel plants busines. Examining the balance sheet, it can be seen that, the amount received as share/ debenture application money is not utilised in any activity of company but is lying separately in bank accounts. The total of such application money is Rs. 1,39,932 lakhs whereas amount under bank balances (including stock invest) is Rs. 1,43,512 lakhs. The share capital raised prior to public issue is Rs. 37,050 lakhs which was financed fixed assets (including capital work-in-progress but excluding interest on debentures) of Rs. 31,041 lakhs. The secured/unsecured loans of Rs. 34,127 lakhs is utilised for making certain investments and giving loans/advances of Rs. 36,536 lakhs. Thus there is direct nexus between amount borrowed and investment/lending on which interest is earned. The investment/lending activity has been carried on in a systematic approach. The assessee has earned Rs. 328 lakhs by way of interest and profit on lending/investment other than Rs. 779.31 lakhs on public issue application money. Assessee has also paid Rs. 64,693 lakhs as interest charges and Rs. 49,170 lakhs as finance charges for raising various loans. Further maintaining a corporate treasury division, repeated borrowing of funds from various sources and lending of the same would all amounts to carrying of systematic activity as envisaged under Section 28 of the Income-tax Act. Hence, we hold that the company has carried on the business during the year and the income therefrom should be computed under the head business. There are number of decisions where it is held that even a single transaction could be construed as adventure in the nature of trade and when a systematic and series of transactions such as the one carried on by the appellant could not but be regarded as business in nature. There is ample evidence of the intention of the appellant to carry on these activities as business activities. Income under the head 'other sources' can be computed only when income or receipt cannot be brought under any other head under the Income Tax Act. Hence, we do not approve the action of the Assessing Officer in computing the income under the head 'other sources' and we direct the income should be computed under the head 'profits and gains of business'.
6.4 Adverting to allowability of expenditure, learned AR is correct in contending that not preparing the profit and loss account would not come in the way for deciding the question whether an item of expenditure could be allowed or not under the Income-tax Act. The treatment given by the asscssee in its books of account or the entry passed or the manner in which it is debited are all irrelevant in deciding the question of allowability of expenditure as held by the Supreme Court in Kedarnath Jute Mfg. Co. Ltd's case (supra). Accordingly, we need to judge the allowability of the expenditure incurred by the appellant. Perusal of the expenditure incurred by corporate treasury division, project and registered office, we find that the expenses incurred in corporate treasury has direct nexus with the activity carried on by the appellant whereas expenditure incurred in steel plant at Bellary and registered office at Bangalore are required to be capitalised as the same was incurred towards the project under implementation. It has been held in Malayalam Plantations Ltd's case (supra) and in Sree Meenakshi Mills Ltd.'s case (supra) that all expenses incurred for the purposes of business should be allowed.
6.5 We shall now discuss the cases relied on by the Learned DR, which are examined hereunder :
K. Sampath Kumar's case (supra) :
The assessee could be taken to have started the business only when his plant and machinery went into production and as in the instant case during the assessment year in question, except for the erection of plant and machinery nothing else had taken place, the business could not be said to have commenced. Consequently, no question of interest payment being charged to the profit and loss account could arise and hence no referable question of law arise for consideration.
In above case the facts indicate that apart from erection of plant and machinery nothing else had taken place hence the court came to the conclusion that the business had not commenced. This case law is not applicable on facts of the case before us as the appellant has carried on large number of transactions all of which would be categorized as carrying on of business. Consequently the income has to be computed under the head "business".
Collis Line (P.) Ltd. 's case (supra):
...Where money was invested in a bank by the assessee, a shipping company, because the money was lying idle and it was safer and wiser to put it in a bank, the interest earned on the deposit would be incidental to the main purpose of the deposit, which was safe keeping and not earning of profits. Therefore, the interest earned cannot be said to be received in the course of business so as to make it part of the profits and gains of the assessee's business....
Even this case relied on by the department will be of no assistance as admittedly the shipping company had deposited the money with the bank for only safe keeping whereas in the case before us the appellant had carried on systematic business activity with an intention to earn profits.
Western India Vegetable Products Ltd. 's case (supra) :
The distinction is this that when a business is established and. is ready to commence business then it can be said of that business that it is set up. But before it is ready to commence business it is not set up. But there may be an interregnum, there may be interval between a business which is set up and a business which is commenced and all expenses incurred after the setting up of the business and before the commencement of the business, all expenses during the interregnum, would be permissible deductions under Section 10(2)....
This decision is not relevant for the issue on hand.
6.6 We are not inclined to agree that expenses which can be attributed to excess share application money should be allowed as revenue expenses. So long as the expenses were incurred on issue of shares, whether shares are actually allotted or not against the share application, will retain its character as 'share issue expenses' only and will be consequently treated as 'capital expenditure. Thus no part of share issue expenses is allowable.
6.7 We are guided in our conclusion by the decision of the Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. 's case (supra) wherein the Apex Court has clearly explained the difference in treatment to be given on the expenses incurred prior to commencement of business and after commencement of business. In this case since the business has already commenced we have no hesitation in allowing the expenditure incurred. Accordingly, we hold that the expenditure of Rs. 15,43,40,694 incurred by the corporate treasury division as allowable expenditure after excluding Rs. 6,91,701 incurred towards donation, which is not allowable. Relying on the decision of SC in India Cements Ltd. scase (supra) and the circular of the CBDT extracted supra we hold that the expenditure incurred on issue of non-convertible portion of debentures of Rs. 10,77,53,775 is allowable as revenue expenditure in computing of income of the appellant. Accordingly the Assessing Officer shall regard the entire receipts of Rs. 11.07 crores as business income and allow therefrom expenditure incurred by the corporate treasury division of Rs. 15,43,40,694 (excluding donation) and the debenture issue expenditure of Rs. 10,77,53,775 mentioned supra. The Assessing Officer shall also allow consequential relief on the interest levied under Section 23 4B of the Act.
In the result the appeal of the assessee is partly allowed.