Madras High Court
Commissioner Of Income Tax vs Ashley Services Limited on 1 April, 2014
Equivalent citations: AIRONLINE 2014 MAD 56
Author: Chitra Venkataraman
Bench: Chitra Venkataraman, T.S.Sivagnanam
IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 01.04.2014 CORAM: THE HON'BLE MRS.JUSTICE CHITRA VENKATARAMAN AND THE HON'BLE MR.JUSTICE T.S.SIVAGNANAM TAX CASE (APPEAL) NOS.288 TO 290 OF 2007 Commissioner of Income Tax Chennai .... Appellant in all T.Cs Vs. Ashley Services Limited, No.1, Sardar Patel Road, Guindy, Chennai 32. .... Respondent in all T.Cs The name of respondent has been amended as above from "Ashok Leyland Project Services Limited" as per orders made in Memo dated 1.4.2014 filed by appellant. Prayer: Tax Case Appeal in T.C.(A) No.288 of 2007 has been filed under Section 260 of the Income Tax Act, 1961 against the Order dated 28.7.2006 made in I.T.A.No.333/Mds/2002 for the assessment year 1998-99. Tax Case Appeal in T.C.(A) No.289 of 2007 has been filed under Section 260 of the Income Tax Act, 1961 against the Order dated 28.7.2006 made in I.T.A.No.669/Mds/2002 for the assessment year 1998-99. Tax Case Appeal in T.C.(A) No.290 of 2007 has been filed under Section 260 of the Income Tax Act, 1961 against the Order dated 28.7.2006 made in I.T.A.No.1149/Mds/2002 for the assessment year 1997-98. For Appellant : Mrs.Hema Muralikrishnan in all T.Cs For Respondent : Mr.C.V.Rajan in all T.Cs and Mr.R.Venkat Narayanan for Mr.Subbaraya Aiyer -------------------- COMMON JUDGMENT
(Judgment of the Court was delivered by CHITRA VENKATARAMAN,J.) The Revenue is on appeal as against the common order dated 28.7.2006 made in I.T.A.Nos.333, 669 and 1149/Mds/2002 for the assessment years 1997-98 and 1998-99. The questions of law that arise for consideration in T.C.(A) Nos.288 and 289 of 2007 in respect of the assessment year 1998-99 are as follows:
"i. Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee company is not hit by the explanation to section 73 of the Income Tax Act?
ii. Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that interest on amounts borrowed for purchase of shares can be set off against other income, when the trading in shares resulted in a loss? and iii. Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the losses of the earlier years allowed to be carried forward, can be set off against the income of this year, when the losses arose in speculation business?
2. The questions of law arises for consideration in T.C.(A) No.290 of 2007 in respect of the assessment year 1997-98 are as follows:
"i. Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the reassessment proceedings were based on a change of opinion, when the provisions of Section 73 and the explanation thereto were not at all considered in the original assessment? and ii. Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee company is not hit by the explanation to Section 73 of the Income Tax Act?"
3. Except for the question on reopening of the assessment for the assessment year 1997-98, the questions that arise for consideration in T.C.(A) Nos.288 and 289 of 2007 are common in all the appeals. As is evident from the reading of the main object clause in the Memorandum, the assessee herein is a Company, which carried on the business of investment, to invest the capital and other monies of the Company, to deal in shares, debentures, debenture-stocks, bonds, units, obligations and securities issued by Indian or Foreign Governments, and Companies incorporated or established in India or elsewhere and carry on the business of finance, foreign exchange, investment company, finance and manage industrial enterprises and to promote and finance companies engaged in industrial, trading, finance, investment and/or other business, manage investment pools, unit trusts, mutual funds, canalize the savings of the community for productive purposes, syndicate in shares, stocks, securities, finance, etc., The memorandum also authorised the Company to invest in, buy, purchase, acquire, take on lease or be interested in any immovable property, such as, lands of any tenure, develop secondary markets in bills, discount and rediscount genuine trade bills, procure, obtain short term or long term finance or working capital finance, either alone or jointly with others. Thus, the business of the assessee is finance.
4. For the assessment year 1997-98, the assessment was originally completed under Section 143(3) of the Income Tax Act. At the time of finalising the assessment, the assessee was specifically asked to explain about the expenses attributable to investment and stock-in-trade, purchase, sales bills and payment details, the entire financial expenses debited to the profit and loss account as business expenses when investment was made out of borrowed funds, interest charged on loans and advances and the working of the carry forward/brought forward losses. After hearing the assessee and after examining the details furnished, the assessing officer completed the assessment for the assessment year 1997-98 and permitted business loss to be carried forward to subsequent years. The Assessing Officer treated the entire investment and purchase and sale of securities and shares as business activity of the Company by ordering business loss to be carried forward to subsequent years. The Assessing Officer initiated proceedings under Section 147 of the Income Tax Act by issuance of notice dated 25.11.2002. Referring to the Explanation to Section 73 of the Income-tax Act, the Assessing Officer pointed out that the Company had done trading in shares and securities which resulted in a loss of a sum of Rs.93,20,336/- and that the loss incurred by the Company from purchase and sale of shares was to be treated as speculative loss and could be set off only against speculative income. After hearing the assessee, the re-opened assessment was completed by passing an order of re-assessment that the loss suffered was to be treated as speculative loss, to be adjusted only as against speculative income. Aggrieved by this, the assessee went on appeal before the Commissioner of Income-tax (Appeals). Apart from the merits canvassed, the assessee questioned the reopening of the assessment as without any basis. The first Appellate Authority, however, dismissed the assessee's appeal. Aggrieved by this, the assessee went on appeal before the Income Tax Appellate Tribunal.
5. We may point out that the re-opening was made by the Assessing Officer in respect of the assessment year 1996-97 too, where the loss suffered by the assessee was stated to be of a tune of Rs.49,98,164/-. The re-assessment made for the assessment year 1996-97 was also a subject matter of appeal before the Commissioner of Income Tax (Appeals), who dismissed the appeal relating to this year too. Apart from these two years, for the assessment year 1998-99, in the original assessment made under Section 143(3), the Assessing Officer held that the assessee's principal business was not banking or granting loans and advances. The assessee had diversified from investment activity to project consultancy services and this was evident from the change of name from "Aasia Securities Holding Ltd." to "Ashok Leyland Project Services Limited". The Assessing Officer further held that during the year under consideration there was a considerable reduction as regards its investment activity. Consequently, the loss suffered on the sale of securities was to be treated only as a speculative loss falling under Explanation to Section 73 of the Income Tax Act.
6. On an appeal filed before the Commissioner of Income-tax (Appeals), the First Appellate authority pointed out that during the year under consideration, the advance of loan granted had fallen considerably from the one in the earlier year, i.e, from Rs.2,29,09,545/- to Rs.32,73,940/- and so too the investments from Rs.21,81,047,043/- to Rs.10,40,42,400/- and the interest received from finance business had also fallen drastically. On a comparison made on the business activity, the first Appellate Authority held that the "principal business" of the assessee was not granting loans and advances but only share dealings. Accordingly, he came to the conclusion that the amended Explanation would cover the case of the assessee that the loss suffered was in the nature of speculative business loss, which could be set off only against his profit on speculation business. Thus the appeal was rejected by the first Appellate Authority. While so holding, so as far as the reduction of interest on speculation business was concerned, the first Appellate Authority pointed out that the accounts did not reveal the true state of affairs as regards the interest paid for monies borrowed for advancing loans and the interest paid relating to monies invested in shares, securities as well as monies advanced as loans. In these circumstances, the Commissioner of Income Tax (Appeals) adopted the formula to grant partial relief to the assessee. Aggrieved by this, the assessee went on appeal before the Income-tax Appellate Tribunal.
7. The assessee preferred appeals on the re-opening of the assessment for the assessment years 1996-97 and 1997-98 apart from the merits of the assessment made based on Explanation to Section 73 of the Income Tax Act and for the assessment year 1998-99 on the assessment made based on Explanation to Section 73 of the Income Tax Act. Apart from this, there was also an appeal by the Revenue for the assessment year 1998-99 against the order of the Commissioner of Income Tax (Appeals) holding that the assessee was entitled to bring forward and set off of business loss of Rs.4,73,67,618/- determined in the earlier year, which were held by the Assessing Officer as speculative loss. The Commissioner of Income Tax (Appeals) held that the Assessing Officer could not revise the order of the predecessor holding the loss as business loss.
8. Thus, the appeals of the assessee for the assessment years 1996-97, 1997-98 and 1998-99 and the Revenue's appeal for the assessment year 1998-99 were considered under a common order of the Tribunal.
9. As far as re-opening of the assessment for the assessment year 1996-97 was concerned, the Tribunal held that the claim of the assessee as regards the loss suffered on the sales of shares and securities was considered by the Assessing Officer after considering the entire details furnished by the assessee. Considering the fact that the Assessing Officer had considered the entire gamut of the issue based on the materials and no fresh materials were available with the Officer to re-open the assessment and the proceedings taken under Section 148 was not legally sustainable, the Tribunal viewed that there was no failure on the part of the assessee to disclose all material facts necessary for the assessment and there was no new material available with the Officer justifying the reopening of assessment for the assessment year 1996-97. The Tribunal also took the same view as regards the assessment year 1997-98 too. Thus, the reopening of assessment for the assessment years 1996-97 and 1997-98 were held to be bad in law.
10. Even though learned Standing Counsel appearing for the Revenue strenuously contended that the claim itself could not be sustained by reason of Explanation to Section 73, yet, on going through the proceedings relating to the assessment years 1996-97 and 1997-98, we have no hesitation in confirming the order of the Tribunal on the aspect of re-opening of the assessment by following the decision of the Supreme Court in the case of CIT Vs. Kelvinator of India Limited, reported in (2010) 320 ITR 561. A reading of the reasons given for reopening of assessment shows that it was nothing but a review of the orders passed under Section 143(3) relating to the assessment years 1996-97 and 1997-98. Consequently, even though the assessment was reopened within the limitation period of four years, there being no fresh material to disturb the reasoning arrived at for the above said assessment years, we have no hesitation in rejecting the Revenue's plea. Hence the appeals filed in respect of the assessment years 1996-97 and 1997-98 are dismissed. Consequently, on the merits of the assessment, the question of considering the effect of Explanation to Section 73 of the Income Tax Act does not arise.
11. As far as the finding of the Tribunal for the assessment year 1998-99 is concerned, the Tribunal came to the conclusion that on going through the object clause, the business of the assessee was finance and granting of loans and advances, which fell under the excepted clause in Explanation to Section 73. The Tribunal rejected the contention of the Revenue that the financial results did not support the assessee's case that it was engaged in finance business. The Tribunal reasoned that merely because the loss is more than the income earned from the business of loans and advances, the Assessing Officer would not be justified in looking at these results alone for the purpose of invoking Explanation to Section 73 of the Income Tax Act. The Tribunal held that Explanation to Section 73 is in the nature of deeming provision and has to be strictly construed. It felt that the onus is on the Department to show that the assessee falls within the mischief of the provisions Section 73. Going by the objects clause and the facts, the principal business of the assessee was granting loans and advances and the provision of Section 73 was not attracted to the facts of the case. It pointed out that there is no definition of "principal business". Thus, what constituted "principal business" was to be seen from the facts and circumstances of each case. As far as the assessee company was concerned, the facts could be deduced from the memorandum of articles of association to find out what the principal business of the assessee could be. It felt that if in a particular year, the assessee had nominal business income and substantial interest income, it would not mean that the assessee's principal business was not financing or granting loans. Irrespective of the business results, the principal business of the assessee would remain as a financing company. Thus, extracting the object clause of the Company herein, the Tribunal ultimately came to a factual finding that the assessee was engaged in the business of financing and that there was no material on record to show that the dealing in shares was with a view to manipulate and to reduce the taxable income. The Tribunal further held that considering the finance business and investment business carried on by the assessee apart from the business in shares, it was difficult to bring the case of the assessee within the mischief of Explanation to Section 73 of the Income Tax Act. The Tribunal further pointed out that while finalising the assessment for the assessment year 1998-99, the business loss of the earlier years from 1993-94 to 1997-98 carried forward was denied of set off by taking a different view that the loss carried forward were speculative loss. Thus, by taking this view, the Assessing Officer seemed to disturb the assessments of the earlier years, which could not be legally done by the Assessing Officer. The Tribunal pointed out that when the order had reached finality, it was not open to the Assessing Officer to disturb those orders in the assessment year 1998-99 . Thus, the Tribunal rejected the Revenue's appeal for the assessment year 1998-99 and allowed assessee's appeals. Hence the present appeals by the Revenue.
12. Learned Standing counsel appearing for the Revenue placed heavy reliance on the Explanation to Section 73 and submitted that going by the decision of the Calcutta High Court reported in Paharpur Cooling Towers Ltd., Vs. CIT, ((2011) 338 ITR 295), the loss suffered by the assessee could only be termed as speculative loss and could not be adjusted as against other business income. Thus, Section 73 stood prior to the facts of the case.
13. Countering the claim of the revenue, learned counsel appearing for the assessee, however, pointed out to the factual finding of the Tribunal, which has not been challenged by the Revenue in the Tax Case (Appeal). He further relied on the reasoning of the Tribunal and submitted that when the "principal business" of the assessee remained as finance company alone, the mere increase in the income from Project Consultancy Services in a particular year will not make the company otherwise, as the company engaged in speculative business. He pointed out that the memorandum of objects and articles of the assessee remained the same as they were and from a particular year's financial results, the Revenue could not justify as inference is to be drawn against the assessee that it was doing speculative business. There was no material before the Revenue to stamp the activity of the assessee in dealing shares as speculative business. In this connection he also placed reliance on the decision of the Calcutta High Court in the case of PCBL Industrial Limited Vs. CIT and another, reported in (2011) 337 ITR 536.
14. As per Section 73, any loss computed in respect of speculation business carried on by an assessee shall not be set off except as against the profits and gains of another speculative business. The Explanation to Section 73 defines what speculative business is. Explanation appended to Section 73, on which heavy reliance was placed by the Revenue needs to be seen herein to decide the issue on hand. It reads as under:
"Where any part of the business of a company other than a company whose gross total income consists mainly of income which is chargeable under the heads "Interest on securities", "Income from house property", "Capital gains" and "Income from other sources", or a company the principal business of which is the business of banking or the granting of loans and advances consists in the purchase and sale of shares of other companies, such company shall, for the purpose of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares."
15. Section 43 which defines certain term relevant to income from profits and gains of business or profession contains the definition of speculative transaction. A reading of Explanation to Section 73, in contra distinction to the definition of speculative transaction in Section 43(3), shows that where any part of the income of the Company, other than the excluded categories, consists in the purchase and sale of shares of other companies than for the purpose of Section 73, the company would be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares. While creating such a fiction, the Explanation excludes certain companies, viz., a company whose gross total income consists mainly of income which is chargeable under the heads "interest on securities", "income from house property", "capital gains" and "income from other sources" or a company the principal business of which is the business of banking or the granting of loans and advances.
16. Thus, a company, whose principal business is that of banking or financing, is excluded from the provisions of Section 73. Thus, the question herein is, whether a particular company dealing in shares could be brought within the mischief of Explanation or saved by the excluded categories specified under the Explanation. Hence, the question needs to be answered from the memorandum of objects clause of the company and the nature of dealings of the company in terms of its memorandum of objects carried on.
17. It is a matter of record and hence not disputed by the Revenue that from the year 1993-94 and 1997-98, a sum of Rs.4,73,67,618, in total, was treated in the respective years as business loss. For the first time, when the question arose on the set off of a carried forward of the loss in the assessment for the assessment year 1998-99, with the assessment for the assessment years from 1993-94 to 1997-98 still intact, the Assessing Officer sought to give a different treatment to the claim as speculative loss. As rightly observed by the Tribunal, when the assessments for these years had become final, it is not open to the Assessing Officer to disturb those findings in a subsequent assessment proceedings and hence the same was binding on the Assessing Officer. Quite apart, even on merits, we agree with the Tribunal on the other reasoning given.
18. As rightly pointed by the Tribunal, there is no definition of the word "principal business", which is of relevance, particularly to a company carrying on the business of banking or granting loans and advances. The assessee herein is engaged in the business of financing or granting of loans and advances. This is clear from the memorandum, which is extracted in the order of the Tribunal. Thus, in the absence of a definite definition of what a "principal business" is, one has to go only by the memorandum of articles of association of a company and going by this reasoning, we are in entire agreement with the finding of the Tribunal, which is based on the reading of a memorandum of company that its principal business is finance and granting loans and advances. As rightly pointed out, the ground on which Section 73 was invoked against the assessee rested mainly on the business results of the Company. As pointed out in the preceding paragraphs, in the previous assessment year 1998-99, advance of loan granted was Rs.32,73,940/- and investments were to the tune of Rs.10,40,42,400/-. The interest received from finances were shown as Rs.7,08,933/- as against Rs.58,81,139/-, received as on 31.3.1997. The profits on sale of investments was negative as on 31.3.1998 as was in the earlier year too. The Assessing Officer compared the income received from investment and financing activity and ultimately held that the assessee's business was mainly in share dealing and it was a speculative business.
19. Learned Standing Counsel appearing for the Revenue pointed out that the assessee's business had a shift into Project Consultancy Services and secondly it could not be called as a investment company and that the income from Project Consultancy Services had been reported at Rs.633 lakhs during the year under consideration. Thus, based on this, learned Standing counsel argued that the assessee Company had ceased to be an investment Company. We do not subscribe to this line of submission. As pointed out by the Tribunal the stamping of a Company as an investment Company or a company engaged in speculation business cannot be drawn just by the financial results contained in the balance sheet in a particular year. The profit on the sale of loans may go high as compared to the earlier years or may even fall. Unless there are materials enough at the hands of the Revenue to substantiate the contention that the business of the assessee was speculation only and it had ceased to be an investment Company, it is difficult to go by the reasoning of the Revenue, which is based manly on the Explanation added to Section and anything beyond. Thus, when the findings of the Tribunal remains unchallenged and the earlier years' assessments remaining intact treating the loss as business loss, the Tribunal had rightly drawn the conclusion as to the nature of business on the basis of memorandum. In the circumstances, we have no hesitation in rejecting the case of Revenue.
20. As far as the reliance placed on the decision of Calcutta High Court reported in (2011) 338 ITR 295 (Paharpur Cooling Towers Ltd., Vs. CIT) is concerned, we are in agreement with the view of the Calcutta High Court. However, the decision therein would not apply to the facts of the case, since the Company therein was engaged in manufacture of cooling towers. As to the business in the sale and purchase of shares, on facts, the Calcutta High Court came to the conclusion that the loss suffered by the Company on account of selling and purchase of shares was to be brought within the ambit of Explanation to Section 73 to be held as a speculative loss. The decision of the Calcutta High Court is thus factually distinguishable from the case on hand. The memorandum of the Company clearly points out the nature of business as an investment and finance company; consequently, we have no hesitation to hold that the decision relied on by the Revenue is distinguishable on facts. Accordingly, all the above appeals are dismissed.
(C.V.,J.) (T.S.S.,J.) 01.03.2014 Index:Yes/No 2/2 Internet:Yes/No usk/sl To 1. The Income-tax Appellate Tribunal, Madras A Bench, Chennai 2. The Commissioner of Income-tax (Appeals) III, Chennai 600 034 3. The Deputy Commissioner of Income-tax, Company Cirlce I(1), Chennai. CHITRA VENKATARAMAN,J. AND T.S.SIVAGNANAM,J. Usk/sl T.C.(A) Nos.288 to 290 OF 2007 1.4.2014