Income Tax Appellate Tribunal - Kolkata
Smithkline Beecham Consumer ... vs Deputy Commissioner Of Income Tax on 31 March, 1998
Equivalent citations: [1999]68ITD163(KOL)
ORDER
R.M. Mehta, Vice President
1. This appeal is filed by the assessee against the order passed by the CIT, Patiala under s. 263 of the IT Act, 1961, for asst. yr. 1991-92.
2. For asst. yr. 1991-92, the assessee-company disclosed income under the head "other sources" amounting to Rs. 5,59,79,586 on account of dividend from units of Unit Trust of India and claimed deduction of the entire sum under s. 80M of the Act. The AO while making the assessment added back an amount of Rs. 27,98,979 being 5 per cent of the total dividend income on account of expenditure incurred for earning dividend income. The relevant portion of the assessment order reads as under:
"It is seen that the assessee has not shown any expenditure for earning income under the head "income from other sources". It is impossible to believe that no expenditure was incurred by the assessee for earning this income. Therefore, expenditure so incurred is estimated at Rs. 27,98,979 i.e. 5 per cent of the dividend income. The dividend income being Rs. 5,59,79,586 the disallowance works out to Rs. 27,98,979."
On a perusal of the said assessment order, the CIT felt that the AO had erred in framing the assessment inasmuch as the expenditure on account of interest amounting to Rs. 3.56 crores should have been reduced from the gross dividend in order to arrive at the correct deduction under s. 80M. The CIT accordingly issued a show-cause notice on 19th July, 1995, under s. 263 of the IT Act proposing to revise the assessment and calling upon the assessee to show cause against such proposal. The assessee filed his representation on 4th August, 1995, stating that the AO had duly considered the matter and for the purposes of allowing deduction under s. 80M an amount of Rs. 27,98,979 had already been deducted from the total dividend income on account of expenditure incurred by the assessee for earning the dividend income. The assessee also gave a further reply dt. 5th February, 1996, stating that interest of Rs. 3.56 crores claimed during the year was not in any manner attributable to the purchase of units and, therefore, there was no ground for deducting the amount from the total dividend income for the purposes of relief under s. 80M. There was a further representation by the assessee to the CIT on 14th February, 1996, relying upon an array of Court rulings in support of the plea that the facts of the case do not justify the invocation of the revisionary jurisdiction by the CIT under s. 263. It was further stated that the proceedings under s. 263 could cover for consideration only a sum of Rs. 74,85,770 out of the total interest of Rs. 3.56 crores on the ground that the purchase of units on two dates, namely, 30th May, and 31st May, 1990, may be considered to be out of loans taken by the assessee-company. The CIT after considering the various representations made by the assessee overruled the same and held vide his order dt. 19th February, 1996, that the expenditure incurred by way of payment of interest amounting to Rs. 3.56 crores has been incurred for the purpose of earning dividend and was liable to be deducted under s. 57(iii) while computing the dividend income for the purposes of deduction under s. 80M. The assessment made by the AO vide order dt. 10th February, 1994, was accordingly cancelled by the CIT with the direction that a fresh order be passed under s. 143(3). Aggrieved with the order of the CIT, the assessee has filed the present appeal.
3. Assailing the impugned order of the learned CIT the learned counsel for the assessee contended that the order is based on a mere change of opinion on the issue of computation of dividend income since the AO duly applied his mind and took into consideration the detailed submissions made before the AO during the assessment proceedings vide letters dt. 12th October, 1993, and 20th October, 1993. The learned counsel further pointed out that the AO arrived at a conclusion on the basis of the facts on record as well as the submissions made during the assessment proceedings that expenditure incurred for earning the dividend income would be estimated @ 5 per cent of such income and accordingly an amount of Rs. 27,98,979 has been deducted for computing the net dividend income for purposes of s. 80M. Learned counsel further stated that the essential conditions for invoking the provisions of s. 263 were not fulfilled and, therefore, the order of the CIT was liable to be quashed. In support of his contentions, he placed reliance on the decisions of Madras High Court in the case of Venkatakrishna Rice Co. vs. CIT (1987) 163 ITR 129 (Mad) and Bombay High Court in the case of CIT vs. Gabriel India Ltd. (1993) 203 ITR 108 (Bom).
4. Learned counsel made strong grievance of the fact that the learned CIT has unjustifiably and unfairly proceeded to cancel the entire assessment on the sold ground of excessive deduction allowed by the AO under s. 80M. It is argued that the action of the CIT was contrary to the principles of natural justice and was vitiated on facts and law.
5. The learned counsel dealing with the factual merits of deduction under s. 80M argued that the interest aggregating Rs. 3.56 crores claimed under the head "expenses" during the year was not attributable to the purchase of units and, therefore, no portion of the said interest was liable to be deducted from the dividend income. Referring to p. 7 of the paper-book submitted at the time of hearing before us, the learned counsel submitted that no interest was deductible under s. 80AA for arriving at the net dividend in view of the following facts:
(a) as on 1st April, 1990, there were no loans which could have been utilised for any purchase of units in the earlier year.
(b) The assessee had an investment valued at Rs. 10,69,80,005 in 71,77,090 units as on 31st March, 1990, and also Rs. 1,95,25,000 in 17,75,000 capital gain units. Both these investments had been made out of our own resources. There were no outstanding loans as on 31st March, 1990, and as such none of these investments can be said to have been made out of borrowed funds. No amount of interest can, therefore, be adjusted under s. 80AA on these units held on 31st March, 1990.
(c) No fresh loan was taken by assessee in April, 1990, and, therefore, as on 30th April, 1990, there was no loan liability which could have been utilised towards fresh investment of Rs. 3,66,16,715 in units on 5th April, 1990, 9th April, 1990 and 30th April, 1990.
(d) The company in fact sold and realised in April, 1990, capital gain units for Rs. 1,97,91,250 and 1964 units for Rs. 5,12,75,000. Thus, the company realised Rs. 7,10,66,250 on sale of investments which was utilised by it for further purchase of units on 2nd May, 7th May and 21st May, 1990 of 48 lakhs units for Rs. 7,10,60,025. No interest can be adjusted under s. 80M on these units.
(e) Further investments of 165 lakhs units were made on 30th May, 1990, and 35,87,200 units on 31st May, 1990, making a total of 200.87 lakhs units for Rs. 2997.47 lakhs. The dividend realised on these 200.87 lakhs units at Rs. 1.80 was Rs. 3,61,56,960. Even considering that part of capital of Rs. 14.18 crore as on 31st March, 1990, had been invested in units of Rs. 12.65 crores, the company had sufficient reserve surplus of Rs. 27.98 crores to invest in these 200.87 lakhs units on 30th and 31st May, 1990.
6. With regard to liability of interest incurred by the company during the year, the learned counsel submitted that total interest paid to various banks and others was Rs. 3,56,53,489 as detailed below :
Particulars Amount (Rs.)
1. Interest on hundies 1,09,64,026.46
2. Interest on overdraft 37,77,844.83
3. Interest on demand loan 1,50,60,691.08
4. Interest on packing credit 6,19,150.68
5. Interest on ICICI 24,36,218.00
6. Interest on wholesalers deposits 27,75,568.00
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3,56,33,499.05
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Regarding item No. 1 it was submitted that the sum of Rs. 1,09,64,026.46 represents interest paid to various banks on hundies raised for payment to the suppliers for supply of various items of raw materials, packing materials, etc. It is stated that payment against hundies are made by the banks directly to the suppliers and in any case the same cannot be related to the investments made by the company for earning dividend from units. Regarding item No. 2 it is stated that the sum of Rs. 37,77,844 represents interest paid to various banks on day-to-day overdrafts for working capital requirement of the company. Regarding item No. 3, it is submitted that term loans have been taken from three banks, namely, American Express Bank, Bank of America and Grindlays Bank during the year by the company and the aggregate amount of interest paid on these loans works out to Rs. 1,50,60,691. With regard to packing credit, i.e., item No. 4, it is stated that the sum of Rs. 6,19,151 represents interest paid to Bank of America on export packing credit obtained from them on 10th January, 1991. This packing credit was utilised exclusively to finance the export commitments of contracts and as such no portion of interest on packing credit can be said to be related to the investment in the purchase of units. The next item i.e. item No. 5 represents interest paid to ICICI of Rs. 24,36,218 on loans of Rs. 10 crores taken for the purchase of specific capital assets and interest on this loan cannot be linked to dividend income. With regard to interest on wholesalers deposits at Sl. No. 6 above, the sum of Rs. 27,75,568 represents interest paid to various wholesalers on security deposits held by them with the company for supply of goods on credit. The learned counsel submitted that from the details of interest paid to various banks and others as indicated above, it clearly follows that no part of the interest is linked with the purchase of units and, therefore, the entire dividend income of Rs. 5,59,78,586 is liable to deduction under s. 80M.
7. The learned counsel further submitted that income received from all sources including sale proceeds of its products is collected in master collection account with Bank of America and the same account is utilised for outgoings and expenditure on purchases of any materials and services. He argued that payments made out of this common fund for the purchase of units should be considered to have been made out of its profits and not out of the borrowings made by the assessee since appropriation favourable to the assessee should be adopted. In support of this proposition, reliance has been placed on the following decisions:
(i) Indian Explosives Ltd. vs. CIT (1984) 147 ITR 392 (Cal);
(ii) Alkali & Chemical Corpn. of India vs. CIT (1987) 161 ITR 820 (Cal);
(iii) Reckitt & Colman of India Ltd. vs. CIT (1982) 135 ITR 698 (Cal) and
(iv) Woolcombers of India Ltd. vs. CIT (1981) 134 ITR 219 (Cal).
Relying on these decisions, it was submitted that purchases of units should be attributable to withdrawals out of own funds of the assessee and, therefore, no portion of the interest should be allocated towards the computation of dividend income. He further submitted that the dividend income arising from investment in shares partakes the nature of business income even though such income must necessarily be assessed under the head "other sources". Since payments have been made out of the same master collection account for purchase of units, no part of the expenditure on account of interest is to be deducted from the dividend income and the entire interest expenditure would be liable for deduction as business expenditure, argued the learned counsel. Reliance has been placed on the following decisions in support of the above contention:
(i) CIT vs. National & Grindlays Bank Ltd. (1993) 202 ITR 559 (Cal);
(ii) CIT vs. Cotton Fabrics Ltd. (1981) 131 ITR 99 (Guj);
(iii) CIT vs. Anniversary Investments Agencies Ltd. (1989) 175 ITR 199 (Cal); and
(iv) CIT vs. National & Grindlays Bank Ltd. (1984) 145 ITR 457 (Cal).
8. Without prejudice to his contentions aforesaid, the learned counsel took up the alternative plea before us that the purchases of units made on 30th May, 1990, and 31st May, 1990, for an aggregate sum of Rs. 29 crores may be attributed to the loans aggregating to Rs. 28.38 crores, taken from three banks as under :
Name of bank Date of disbursement Amount of loan
Rs.
Bank of America 30-5-1990 9,00,00,000
30-5-1990 5,00,00,000
American Express 30-5-1990 5,94,00,000
31-5-1990 4,00,00,000
Grindlays Bank 31-5-1990 4,44,00,000
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Total 28,38,00,000
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Thus, the alternative plea of the learned counsel is that out of the total claim of interest, a portion of the interest being an amount of Rs. 74,85,770 may be deducted from the total dividend income for the purposes of allowing deduction under s. 80M.
9. The learned Departmental Representative, on the other hand, supporting the order of the CIT argued that the essential conditions for invoking the provisions of s. 263 are clearly fulfilled in the instant case since the AO failed to apply his mind for the purposes of correct computation of deduction under s. 80M and the order of the AO is not in conformity with the facts and law. It was argued that the AO while estimating the expenditure of Rs. 27,98,979 for deduction from the dividend income failed to take note of the fact that substantial amount of interest amounting to Rs. 3.56 crores has been debited in the books on various loans and advances raised by the assessee. The assessee has purchased units for an aggregate sum of Rs. 40.75 crores during the year. Without applying his mind for determining the amount of interest attributable to purchase of units, the AO proceeded to adopt an ad hoc figure of Rs. 27,98,979. The learned Departmental Representative argued that order of the AO being prejudicial to the interest of Revenue has been rightly set aside by the CIT to be made afresh.
10. The learned Departmental Representative next argued that the mere fact that the AO has made an ad hoc disallowance without proper enquiry into the facts would not by itself oust the jurisdiction of the CIT under s. 263. He placed reliance on the decision of Madras High Court in the case of Indian Textiles vs. CIT (1986) 157 ITR 113 (Mad). In this case, the AO had given relief without any proper verification and it was held that such an order could properly form the subject-matter of revision.
11. The learned Departmental Representative tried to rebut the contention of the assessee that payments out of the master collection account for purchase of units should be deemed to have come out of own funds of the assessee deposited in the account. He pointed out that there is no question of disallowance of any interest is involved in the instant case and the issue involved is proportionate allocation of interest to be allowed as deduction under s. 36(1)(iii) and under s. 57(iii). According to the learned Departmental Representative units have been purchased as a short-term investment and dividend income derived therefrom is liable to be assessed under the head "other sources". He argued that rational allocation of interest for the purposes of deduction of income under the two heads, namely, "business income" and "other sources" is a valid proposition endorsed by the Gujarat High Court in the case of H. K. Investment Co. (P) Ltd. vs. CIT (1995) 211 ITR 511 (Guj).
Further reliance has been placed by the learned Departmental Representative on the following decisions:
(i) Rajinder Parshad Modi vs. CIT (1978) 115 ITR 519 (SC);
(ii) Phaltan Sugar Works Ltd. vs. CIT (1995) 216 ITR 479 (Bom);
(iii) Bagsu Devi Bafna vs. CIT (1966) 62 ITR 506 (Cal);
(iv) CIT vs. Panna Devi Saraogi (1970) 78 ITR 737 (Cal);
(v) Rampyari Devi Saraogi vs. CIT (1968) 67 ITR 84 (SC);
(vi) Addl. CIT vs. Mukur Corpn. (1978) 111 ITR 312 (Guj);
(vii) Swarup Vegetable Products India Ltd. vs. CIT (1991) 187 ITR 412 (All); and
(viii) VIP Industries Ltd. vs. IAC (1991) 187 ITR 639 (Bom).
Concluding his arguments, the learned Departmental Representative submitted that since the twin statutory requirements, namely, that the order of the AO is erroneous and prejudicial to the interest of Revenue has been fulfilled in the instant case, the revisionary order of the CIT deserves to be upheld.
12. We have carefully considered the rival submissions and also perused the orders of the tax authorities. We are not inclined to accept the argument of the learned counsel for the assessee that the impugned order of the CIT passed under s. 263 is based on a review of the assessment order and deserves to be quashed on that ground. We have reproduced hereinabove the relevant portion of the assessment order wherein the AO has made a disallowance of Rs. 27,98,979 being the expenditure incurred for earning dividend on the sole ground that "it is impossible to believe that no expenditure was incurred by the assessee for earning this income". Presumably this disallowance is made in relation to deduction claimed under s. 80M by the assessee. However, there is no reference to the claim under s. 80M in the assessment order. The non-application of mind by the AO on the issue of correct deduction under s. 80M is glaringly evident from the order of the AO. The AO failed to arrive at a correct computation of deduction under s. 80M after proper enquiry and proper verification. He has merely resorted to making a disallowance by making conjectural presumptions in the realm of probabilities and possibilities. During the first two months of the accounting year, i.e., April and May, 1990, the assessee purchased units worth Rs. 40.75 crores in addition to the units already held as on 1st April, 1990. Purchases amounting to Rs. 24.75 crores were made by the assessee on two consecutive days during the year i.e., 30th May, 1990 and 31st May, 1990. The AO failed to look into the source of funds utilised for purchase of units, particularly in the context of the important fact that the amount of interest paid during the year under reference increased from Rs. 98 lakhs in the preceding year to Rs. 3.56 crores. The CIT has relied upon ample material in his order to support the conclusion that the order of the AO passed in disregard of the vital facts and circumstances relating to deduction under s. 80M is erroneous and prejudicial to the interest of the Revenue. In our opinion, the assumption of jurisdiction under s. 263 in the instant case is fully justified.
13. The next contention of the learned counsel for the assessee against the action of the CIT in setting aside the whole of the assessment order on the isolated ground of erroneous deduction under s. 80M is however in our opinion, well-founded. The mere fact that the AO failed to compute deduction under s. 80M in accordance with facts and law would not by itself justify the action of the CIT in setting aside the whole of the assessment order. Such a wholesale cancellation of the assessment with the direction to make a fresh assessment is called for only in cases where there is something totally or basically wrong with the assessment which is not capable of being remedied by amendment to the assessment order itself. Where the CIT comes to the conclusion that there is a defect in the assessment order insofar as deduction under s. 80M has not been correctly arrived at, all that the CIT has to do is to direct the AO to consider the question on merits after giving the assessee an opportunity of being heard. It is not further necessary for him nor would the circumstances of the case justify that the whole assessment should be set aside. We would accordingly direct that the impugned order of the CIT would be modified and AO would merely consider the question of deduction under s. 80M while passing a fresh order.
14. We have further considered the contention of the learned counsel to the effect that the assessee is entitled to deduction under s. 80M on gross dividend without reducing the amount of interest paid by the assessee on loans for the purpose of purchase of units. In view of the provisions of s. 80AA inserted by the Finance (No. 2) Act, 1980, the contention is stated to be rejected. The reliance placed by the learned counsel on a string of decisions in support of the contention is entirely misplaced since in the various decisions, stocks and shares were held as "stock-in-trade" wherein in the instant case before us the assessee has made capital investments in the purchase of units and no business of dealing in these units is involved. In the case of Grindlays Bank Ltd. (supra), their Lordships of Hon'ble Calcutta High Court observed that the dividend income from shares has been derived from the business activity and the dividend is realised from the trading asset. Their Lordships further observed that even if such income was assessed under the head "other sources", the expenditure incurred for the purpose of business including interest paid for purchase of shares would be allowable as business expenditure. Various other decisions relied upon by the learned counsel, namely (1981) 131 ITR 99 (Guj), (1989) 175 ITR 199 (Cal) and (1984) 145 ITR 457 (Cal), (supra), have been considered in this decision. The facts are clearly distinguishable in the case of the assessee. These decisions, therefore, render no assistance to the case of the assessee before us. In assessee's case, loans raised for purchase of units, which are capital investments, do not partake the nature of business activity and therefore interest on these loans attributable to purchase of units is liable to be deducted under s. 57(iii) for arriving at the net dividend income assessable under the head "other sources". Deduction under s. 80M is therefore to be allowed with reference to the net dividend income as per the express provisions of s. 80AA. The contention of the learned counsel for the assessee for claiming deduction with reference to gross dividend is, therefore, rejected.
15. Now coming to the quantum of deduction on account of interest incurred on purchase of units, the facts regarding the purchase of units as well as details of interest amounting to Rs. 3.56 crores have already been indicated earlier. The learned counsel for the assessee urged that since a master collection account has been maintained incorporating therein all receipts, including profits as well as the borrowed funds, payments made from this fund for purchase of units should be treated as paid out of profits and not out of borrowings. We have given our thoughtful consideration to the rival submissions on this aspect of the matter. Insofar as the case made out on behalf of the Department is concerned, we are convinced that it is not correct to attribute the entire amount of interest of Rs. 3.56 crores as pertaining to the purchase of units by the assessee. On going through the details of interest at p. 12 of the paper-book, we find that interest attributable to loans raised for working capital requirements or for purchase of machinery are not connected with the purchase of units. Similarly, interest on packing credit as well as interest paid to wholesalers on security deposits held by them with the company are not related to the purchase of units. Out of six various items of interest enumerated at p. 12 of the paper-book, we find that only one item, namely, interest of demand loans raised from American Express Bank, Bank of America and Grindlays Bank is related to the purchase of units by the assessee. On corelating the purchase of units as well as term loans raised, we find that the term loans raised from the aforesaid three banks on 30th May and 31st May, 1990 have been utilised by the assessee for the purchase of units. The assessee had an investment valued at Rs. 12.65 crores in the units of UTI on the opening day, i.e., on 31st March, 1990. Since there were no outstanding loans as on 31st March, 1990, no part of the investment as on 31st March, 1990, can be said to have been made out of borrowed funds. No fresh loan was taken by the assessee in April, 1990, and, therefore, as on 30th April, 1990, there was no loan liability which could have been utilised towards the purchases made on 5th April, 1990, 9th April, 1990, and 30th April, 1990 aggregating to Rs. 3.66 crores. The company in fact sold units for an amount of Rs. 7.10 crores in April, 1990, which has been utilised for further purchases made on 2nd May, 20th May and 21st May, 1990 for similar amount of Rs. 7.10 crores.
16. The assessee made further purchases in May, 1990 as under :
Rs. in crore 30th May, 1990 24.60 31st May, 1990 5.36
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29.96
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These purchases are clearly linked with loans taken from the aforesaid three banks on these dates. Therefore, interest paid on the term loans taken on 30th May, 1990, and 31st May, 1990, from the three banks aforesaid is liable for deduction under s. 57(iii) for arriving at the net dividend income. The details of interest paid on the term loans have been given at p. 68 of the paper-book and interest liable for deduction aggregates to Rs. 74,85,770. The learned Departmental Representative did not raise any dispute with regard to actual working of interest on the term loans as contained at p. 68 of the paper-book being Rs. 74,85,770.
17. In fact the learned counsel for the assessee raised an alternative plea before us that for working out the relief under s. 80M, deduction of interest amounting to Rs. 74,85,770 may be allowed. We are inclined to accept this alternative contention of the learned counsel. We would accordingly direct the AO that while framing the fresh assessment he would allow deduction under s. 80M after deducting an amount of Rs. 74,85,770 from the gross amount of dividend.
18. Before parting with this case we may mention that the various decisions cited by the learned counsel for the assessee as well as the learned Departmental Representative have been duly considered by us even if the same do not find specific mention in this order.
19. In the result, the order of the CIT setting aside the assessment is modified with the direction that the AO would pass a fresh order confining himself to considering the deduction under s. 80M which would be worked out after reducing the interest amounting to Rs. 74,85,770 from the gross dividend.
20. We order accordingly. The appeal stands partly allowed.