Punjab-Haryana High Court
Batra Films (P.) Ltd. vs Commissioner Of Income-Tax on 19 December, 1988
Equivalent citations: [1989]179ITR134(P&H)
JUDGMENT Gokal Chand Mital, J.
1. Batra Films Pvt. Ltd., the assessee, at the time of its incorporation on December 7, 1976, had an authorised capital of Rs. 5 lakhs, divided into 5,000 equity shares of Rs. 100 each. The directors of the company took shares worth Rs. 2 lakhs. The entire authorised share capital was subscribed and paid-up. The assessee advanced by way of loan different amounts to Batra Finance Pvt. Ltd. in loan account by different transactions and the total amount was Rs. 2,01,445.
2. The assessee also advanced Rs. 3,09,950 by way of loan to Batra Finance Corporation through different transactions. The assessee received Rs. 18,349 from the aforesaid two debtors, as interest in the accounting year.
3. In the profit and loss account, the aforesaid amount of interest was shown as income and the expenditure was shown under the heads, "Salary, bank charges, interest paid, rent, audit fee", etc. In the return for the assessment year 1977-78, a net profit of Rs. 1,441.21 was shown, after adjusting the expenses incurred against the interest income.
4. The Income-tax Officer came to the conclusion that the assessee had not carried on its main object and the object of lending money was only an ancillary object, and, therefore, treated the income by way of interest under the head "Other sources" and not as business income, and thus disallowed the expenses and the entire interest income was brought to tax. The Appellate Assistant Commissioner agreed with the Income-tax Officer except that interest of Rs. 1,939 paid by the assessee to the bank on an overdraft was allowed as deduction.
5. On further appeal, the Income-tax Appellate Tribunal, Chandigarh, agreed with the authorities below. It further added that, under the ancillary object, if advance or lending was to be done and the surplus money had to be determined by the board of directors, there was no evidence that the board of directors met from time to time to decide the mode, amount and time of advance to the debtors. At the instance of the assessee, the following question has been referred for the opinion of this court:
"Whether, on the facts and in the circumstances of the case, the Tribunal erred in view of the articles and memorandum of association of the company in holding that the income from short-term loans as interest derived by the assessee-company was taxable as income from other sources and not as business income ?"
6. On behalf of the Revenue, reliance was placed on Traco Cable Co. Ltd. v. CIT [1969] 72 ITR 503 (Ker), in support of the decision of the Tribunal and to answer the referred question accordingly, whereas, on behalf of the assessee, reliance has been placed on CIT v. Motilal Hirabhai Spinning and Weaving Co. Ltd. [1978] 113 ITR 173 (Guj), for the proposition that even if the main object of the company is not carried out and only the ancillary object is carried out, that amounts to carrying on the business of the company and such expenses incurred in the running of the company should have been allowed. In the alternative, it was argued on behalf of the assessee that even if income from interest is considered as income from "Other sources", such income along with business income, if any, has to be added and the expenses incurred by the company have to be deducted therefrom under Section 71 of the Income-tax Act, 1961 (for short "the Act"), and if still there was loss, it could be carried forward under Section 72 of the Act, unless the loss was sustained in a speculation business which was not the case here.
7. On a consideration of the entire matter, we are of the view that it is not necessary to go into the applicability and correctness of the decision relied upon by counsel for the parties and the matter can be solved on the alternative argument raised on behalf of the assessee.
8. The Act takes note of the income from various heads and sources which have been detailed in Chapter IV and the last source of income is dealt with in Section 56 of the Act, namely, "Income from other sources". It is not disputed that the income from all sources has to be clubbed for finding out the gross income. It is also not disputed that for carrying on business, permissible expenses or deductions are allowable and after allowing such expenses or deductions, it has to be seen whether there is net profit or loss. If there is profit, it will be subject to tax, if any, but if there is loss, it can be carried forward under Section 72 of the Act, unless the loss is sustained in a speculation business. Section 71 of the Act specifically talks of setting off of loss under one head against profit under another head, and in respect of any assessment year, the computation has to be made under any head of income. In this manner, even if, for the sake of argument, interest income is treated as income from "other sources", still the assessee would be entitled to deduction of its business expenditure for maintaining and running it even if the main objects of the company are not being carried on.
9. It is not disputed that the assessee-company has been incorporated. It is also not disputed that the assessee-company collected share capital of Rs. five lakhs, and this can be done only after having staff and other office establishment. Even if the share money received by it had not been invested by way of loan, yet it was entitled to carry forward its office expenses by way of loss. Since the assessee has earned income from "other sources", the business loss can be adjusted against the income from other sources in view of Section 71 of the Act. In this case, the applicability of Section 72 would not arise as, after adjustment, there is a net profit, of Rs. 1,441.21. Viewing the case from this angle, we are of the opinion that the question whether the interest income was business income or not has become purely academic.
10. Accordingly, we answer the referred question in the negative to the effect that the Tribunal did not err in holding that the income from short-term loan as interest derived by the assessee-company was taxable as income from "other sources" and not as business income but the Tribunal is directed to decide the admissibility of business expenditure against the aforesaid interest income as income from "other sources" under Section 71 of the Act.
11. In view of our decision recorded above, Income-tax Case No. 47 of 1980 has become infructuous and is dismissed as such. Parties are left to bear their own costs in both the matters.