M/s.PTL Enterprises Ltd, Cochin V. The DCIT, Cochin

ITA 200/COCH/2015

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 7696 (ITAT-COCHIN)
• Duration Of Justice: 1 year(s) 5 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-09-2016
• Appeal Filed By: Assessee
• Bench Allotted: DB
• Next Hearing Date: 05-09-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 30-03-2015
• Court: TRIBUNAL
• Department Lawyers: SHANTAM BOSE
• Keywords: Capital asset; Gift; Business income; Depreciation; Business expenditure; Search and seizure; Double taxation relief; Charitable institution; Rule of consistency; Earning of tax free income; Proportionate interest; Wholly owned subsidiary; Fair market value; Bad and doubtful debts; Valuation report; Notional interest; Commercial expediency; Revenue expenditure; Capital expenditure
• Section: 56(2); 14A; 37(1); 37; 56

Judgement Text

ITA NO.200/COCH/2015 1 , IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN . . , ., ! ! ! ! BEFORE S/SHRI B. P. JAIN, AM & GEORGE GEORGE K., JM ' ' ' ' ./ I.TA NO.200/COCH/2015 ( #$ % /ASSESSMENT YEAR : 2010-11) M/S. PTL ENTERPRISES LTD., 6 TH FLOOR, CHERUPUSHPAM BUILDING, SHANMUGHAM ROAD, KOCHI-682 031 VS THE DEPUTY COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE-4(1), ERNAKULAM, KOCHI ( &' &' &' &' /ASSESSEE APPELLANT) ( ( (( ( ) ) ) ) &' &'&' &' /REVENUE -RESPONDENT) & . . ' ./PAN NO. &' * + /ASSESSEE BY SHRI GAUTAM JAIN, ADV. ( ) &' * + /REVENUE BY SHRI SHANTAM BOSE, CIT(DR) ,- * ./ / DATE OF HEARING 05/09/2016 0 % * ./ /DATE OF PRONOUNCEMENT 29/09/2016 1 1 1 1 /ORDER PER B.P. JAIN, AM: THIS APPEAL OF THE ASSESSEE ARISES FROM THE ORD ER OF THE LD. CIT(A)-I, KOCHI DATED 29/01/2015 FOR THE ASSESSMENT YEAR 2010-11. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS O F APPEAL: 1. THE ORDER OF THE COMMISSIONER OF INCOME TAX(APPE ALS)-I, COCHIN TO THE EXTENT APPEALED IS AGAINST LAW, EQUITY AND JUSTICE. THE LEARNED CIT(APPEALS) ERED IN CONFIRMING THE DECISION OF THE ASSESSING O FFICER IN TREATING LEASE RENT RECEIVED BY THE ASSESSEE COMPANY FROM APOLLO TYRES LTD. AS INCOME FROM ITA NO.200/COCH/2015 2 OTHER SOURCES AS AGAINST INCOME FROM BUSINESS TR EATED BY THE ASSESSEE COMPANY. ON IDENTICAL FACTS, THE HONBLE INCOME TA X APPELLATE TRIBUNAL, COCHIN BENCH, HAS HELD IN ASSESSEES OWN CASE FOR T HE PRIOR YEARS THAT SUCH RECEIPT IS TO BE ASSESSED UNDER THE HEAD INCOME FR OM BUSINESS. HOWEVER, FOR THE ASSESSMENT YEAR 2007-08, THE HON. INCOME TA X APPELLATE TRIBUNAL HELD THAT SUCH LEASE RENT RECEIVED IS TO BE ASSESSED UND ER THE HEAD INCOME FROM OTHER SOURCES. FURTHER, THE HON. BENCH DIRECTED T HE ASSESSING OFFICER TO ALLOW EXPENSES AS PER SECTION 57 OF THE I.T. ACT. THE OR DER OF THE HON. BENCH OF ITAT IS BEING CONTESTED IN THE HONBLE HIGH COURT OF KERALA . 2. THE LEARNED CIT(APPEALS) ERRED IN NOT ALLOWING EXPENDITURE TOWARDS PROFESSIONAL CHARGES AMOUNTING TO RS.18,21,609/-. I T IS SUBMITTED THAT THE EXPENDITURE IS INCURRED DURING THE NORMAL COURSE OF BUSINESS AND HENCE IS TO BE TREATED AS ALLOWABLE BUSINESS EXPENDITURE. IT I S FURTHER SUBMITTED THAT IF THE LEASE RENT INCOME IS TREATED AS INCOME FROM OTHER SOURCES THE ABOVE EXPENDITURE IS ALLOWABLE AS PER SECTION 57 OF THE I .T. ACT. 3. THE LEARNED CIT(APPEALS) ERRED IN DISALLOWING I NTEREST EXPENDITURE OF RS.6,46,25,550/- BY HOLDING THE SAME TO HAVE BEEN I NCURRED FOR LOANS TAKEN FOR INVESTMENT IN SUBSIDIARY COMPANY DOING HOSPITAL BUS INESS FOR EARNING INCOME AND HENCE THE EXPENSES INCURRED IN THE NATURE OF IN TEREST WAS ON ACCOUNT OF BUSINESS EXPEDIENCY AND IS TO BE TREATED AS AN ALLO WABLE BUSINESS EXPENDITURE IT IS FURTHER SUBMITTED THAT IF THE LEASE RENT INCO ME IS TREATED AS INCOME FROM OTHER SOURCES, THE ABOVE EXPENDITURE IS ALLOWABLE AS PER SECTION 57 OF THE IT ACT. 4. THE LEARNED CIT(APPEALS) ERRED IN DISALLOWING E XPENDITURE OF RS.9,45,69,750/- INCURRED ON TRANSFER BY WAY OF GIFT OF SHARES TO TH E CEO OF ITS SUBSIDIARY COMPANY. IT IS SUBMITTED THAT, IN THE ASSESSMENT Y EAR 2010-11, 1575500 SHARES OF THE WHOLLY OWNED SUBSIDIARY COMPANY VIZ. ARTEMIS HEALTH SCIENCE LTD. (AHSL) WERE GIFTED TO DR. KUSHAGRA KATARIYA FOR HIS CONTRIBUTION IN SETTING UP A SUPER SPECIALTY HOSPITAL UNDER ITS SUBSIDIARY ARTEM IS MEDICARE SERVICES LTD. (AMSL). THE SHARES HAVE BEEN GIFTED BY THE ASSESSE E TO DR. KATARIYA, A KEY EMPLOYEE OF AHSL FOR COMMERCIAL CONSIDERATION SINCE THE ASSESSEE IS DEEPLY INTERESTED IN THE WHOLLY OWNED SUBSIDIARY AND SUCH AN EXEPENDITURE IS IN THE INTEREST OF BUSINESS OF THE ASSESSEE AND WAS ON ACC OUNT OF BUSINESS EXPEDIENCY AND HENCE IS ALLOWABLE AS BUSINESS EXPEN DITURE U/S. 37 OF THE INCOME TAX ACT. IT IS ALSO SUBMITTED THAT IF FOR AN Y REASON THE LEASE RENT INCOME IS HELD AS ASSESSABLE UNDER THE HEAD INCOME FROM OT HER SOURCES THE EXPENDITURE MAY BE ALLOWED U/S. 57 OF THE ACT. FOR THESE AND OTHER GROUNDS THAT MAY FURTHER BE ADD UCED AT THE TIME OF HEARING THE ORDER OF THE LEARNED ASSESSING OFFICER REQUIRES TO BE MODIFIED ACCORDINGLY. ITA NO.200/COCH/2015 3 3. GROUND NO. 1 RELATES TO TREATMENT OF INCOME OF RS. 25,00,00,000/- RECEIVED/ACCRUED UNDER AN AGREEMENT DATED 14/11/200 7 ENTERED BETWEEN APPELLANT COMPANY AND M/S. APOLLO TYRES LTD. (APOL LO). ACCORDING TO THE APPELLANT THE AFORESAID INCOME IS BUSINESS INCOME, WHEREAS THE AUTHORITIES BELOW HAVE HELD SAME TO BE INCOME FROM OTHER SOURCE S U/S. 562)(II) OF THE ACT. 4. THE RELEVANT FACTS ARE THAT THE APPELLANT COM PANY WAS INCORPORATED ON 29/10/1999 UNDER THE COMPANIES ACT 1956 1956 TO E NGAGE IN THE BUSINESS OF MANUFACTURING OF TYRES. HOWEVER ON ACCOUNT OF POOR FINANCIAL VIABILITY THE APPELLANT COMPANY INCURRED LOSSES AND, ERODED THE E NTIRE NET WORTH AND WAS THUS DECLARED AS A SICK COMPANY UNDER THE SICK INDU STRIAL COMPANIES ACT, 1956 (SICA). FURTHER ON 17/04/1995 A REHABILITATION S CHEME WAS PREPARED AND SANCTIONED BY BOARD FOR INDUSTRIAL AND FINANCIAL RE CONSTRUCTION (BIFR) AND UNDER THE SCHEME IT WAS PROVIDED THAT APOLLO WOULD TAKEOVER THE APPELLANT COMPANY BY SUBSCRIBING TO EQUITY SHARES OF APPELLAN T COMPANY. IT WAS FURTHER PROVIDED THAT; A) APOLLO WILL OPERATE PLANT ON AN IRRECOVERABLE LE ASE OF EIGHT YEARS IN CONSIDERATION OF LEASE RENTAL OF RS.45.50 CRORES FO R 8 YEARS; B) ENTIRE PRODUCTION TO BE SOLD IN BRAND NAME OF AP OLLO; C) APOLLO TO INVEST FOR MODERNIZATION AND EXPANSION OF PLANT D) NO RETRENCHMENT OF EMPLOYEES OF PLANT; E) VRS FOR EMPLOYEES OF SALE OFFICE AND HEAD OFFICE . ITA NO.200/COCH/2015 4 5. PURSUANT TO THE ABOVE, ACCORDING TO THE APPELLA NT FOR THE PERIOD 1/4/1995 TO 31/3/2003, THE PLANT WAS UNDER JOINT OPERATION OF A POLLO AND APPELLANT. UNDER THE ARRANGEMENT, APPELLANT RECEIVED A SUM OF RS.5.6 5 CRORES ANNUALLY; AND APART FROM ABOVE, ALL EXPENSES INCURRED FOR OPERATI NG THE PLANT WERE REIMBURSED BY APOLLO. IT HAS BEEN STATED THAT AFTE R THE EXPIRY OF 8 YEARS THE AFORESAID ARRANGEMENT HAD BEEN RENEWED UNDER VARIOU S AGREEMENTS, AS STATED HEREINUNDER: I) AGREEMENT DATED 30/06/2006 PERIOD 1.4.2003 TO 31/03 /2004 LEASE RENT PER YEAR RS. 5.75 CRORES. II) AGREEMENT DATED 20.7.2004 PERIOD 1.4.2004 TO 31.3. 2005 LEASE RENT PER YEAR RS.7.50 CRORES; III) AGREEMENT DATED 1.5.2006 PERIOD 1.4.2005 TO 31.3.2 006 LEASE RENT PER YEAR RS.10 CRORES; IV) AGREEMENT DATED 22/05/2006 PERIOD 1.4.2006 TO 31.3. 2010 LEASE RENT PER YEAR RS.15 CRORES V) AGREEMENT DATED 14/11/2007 PERIOD 1.10.2007 TO 31.3 .2014 LEASE RENT PER YEAR RS.25 CRORES. 6. THE AFORE SAID LEASE RENT OF RS.25 CRORES IN T HE INSTANT YEAR HAS BEEN RECEIVED UNDER THE AGREEMENT DATED 14/11/2007 AND SUCH LEASE RENT WAS DECLARED AS BUSINESS INCOME; WHICH CLAIM HAS NOT BEEN ACCEPTED BY THE ASSESSING OFFICER AND BROUGHT TO TAX AS INCOME FROM OTHER SOURCES U /S. 56(2)(II) OF THE ACT. THE ASSESSING OFFICER, IN ARRIVING AT THE ABOVE CONCLUS ION, HAS HELD AS UNDER: 4. AS ASSESSEE FAIRLY CONCEDED, THE HONBLE TITAT FROM ASSESSMENT YEAR 0-5 ONWARDS HAS NOT ACCEPTED ASSESSEES VIEW THAT ASSES SEES INCOME FROM LEASE HAS CLAIMED THAT THE AGREEMENT WITH APOLLO TYRES LT D. IS FOR JOINT OPERATIONS IN THE AREA OF AUTOMOBILE TYRE MANUFACTURING. BUT PER USAL OF AGREEMENT TO LEASE ENTERED BETWEEN ASSESSEE COMPANY AND APOLLO TYRES L TD. SHOWED THAT THERE WAS PURELY AN AGREEMENT FOR LEASE OF FACTORY PREMIS ES. POINT NO. 2 OF TERMS AND CONDITIONS CLEARLY STATES THAT APOLLO TYRES LTD . SHOWED THAT THERE WAS NO ITA NO.200/COCH/2015 5 CLAUSE FOR JOINT OPERATIONS AS CLAIMED BY THE ASSES SEE. THE AGREEMENT IS PURELY AN AGREEMENT FOR LEASE OF FACTORY PREMISES. POINT NO. 2 OF TERMS AND CONDITIONS, CLEARLY STATES THAT APOLLO TYRES LTD. W ILL CONTINUE TO OPERATE THE PLANT OF THE PTL ON LEASE FOR THE PERIOD AND LEASE RENTAL OF RS.25 CRORES PER ANNUM SHALL BE PAYABLE BY M/S. APOLLO TYRES LTD. TO THE ASSESSEE. POINT NO. 4 OF THE SAME AGREEMENT, STATES CLEARLY THAT APOLLO T YRES LTD. SHALL USE THE PLANT OF PTL FOR MANUFACTURE OF AUTOMOBILE TYRES AND TUBE S AND OTHER PRODUCTS AS IT MAY DEEM FIT IN ITS OWN BRAND NAME USING ITS OWN RA W MATERIAL. THUS IT IS CLEAR THAT APOLLO TYRES LTD. IS MERELY USING THE PLANT AN D MACHINERY OF THE ASSESSEE COMPANY FOR PRODUCING ITS PRODUCTS. THUS, IT IS PU RELY A DEAL FOR LEASING AND THE PLANT AND MACHINERY OWNED BY THE ASSESSEE, THER E IS NO SCOPE FOR JOINT OPERATIONS. ASSESSEES AUDITED ACCOUNT CLASSIFIED THE INCOME RECEIVED AS OTHER INCOME, NOT AS INCOME FROM BUSINESS. THU S, ASSESSEE RECEIVED ARGUMENT THAT THE INCOME RECEIVED BY LEASING OUT IT S PLANT AND MACHINERY SHOULD BE ASSESSED UNDER THE HEAD PROFIT AND GAINS FROM BUSINESS IS NOT ACCEPTABLE. THE CORRECT HEADS OF INCOME TO BE TAXE D IS UNDER INCOME FROM OTHER SOURCES U/S. 56(2)(II) OF THE IT ACT. 7. BEFORE US THE LD. COUNSEL FOR ASSESSEE HAS CONT ENDED THAT THE CONCLUSION TO TREAT THE INCOME AS INCOME FROM OTHER SOURCES IS BA SED ON FACTUALLY INCORRECT, LEGALLY MISCONCEIVED ASSUMPTIONS APART FROM BEING B ASED ON CONTRADICTORY FINDINGS AND CONCLUSIONS. 7.1 AS REGARDS THE FACTUALLY INCORRECT FINDINGS, I T WAS CONTENDED THAT, ASSESSING OFFICER HAS ERRED IN HOLDING THAT THERE WERE NO JOI NT OPERATIONS IN RUNNING THE PLANT. IT WAS SUBMITTED THAT PREAMBLE TO THE AGREE MENT READ WITH CLAUSE 6 CLEARLY ESTABLISHES THAT THERE WERE JOINT OPERATION S CARRIED OUT BY THE APPELLANT COMPANY AND APOLLO. IT WAS STATED THAT IN THE INST ANT YEAR APPELLANT IN THE COURSE OF JOINT OPERATION INCURRED EXPENDITURE AGGR EGATING TO RS.35.14 CRORES UNDER THE FOLLOWING HEADS WHICH HAS BEEN REIMBURSED BY THE APOLLO: ITA NO.200/COCH/2015 6 SR. NO. PARTICULARS AMOUNT (RS. IN LACS) I EMPLOYEES I) SALARIES, WAGES AND BONUS 2,345.76 II) CONTRIBUTION TO PROVIDENT AND OTHER FUNDS 183.5 III) WELFARE EXPENSES 17.98 IV) GRATUITY 138.93 V) LEAVE ENCASHMENT PROVISION NIL II MANUFACTURING ADMINISTRATIVE AND SELLING VI) POWER AND FUEL CONSUMPTION 807.20 VII) STORES CONSUMED 11.18 VIII) RENT 0.19 IX) RATES AND TAXES 0.31 X) TRAVELLING AND CONVEYANCE EXPENSES 1.85 XI) LEGAL AND PROFESSIONAL CHARGES 3.43 XII) PRINTING, STATIONERY, POSTAGE, TELEGRAM & TELEPHONE ETC. 2.17 XIV MISCELLANEOUS EXPENSES 1.07 TOTAL 3514.00 7.2 THE NEXT CONTENTION OF THE APPELLANT WAS THAT THE ASSESSING OFFICER HAD INCORRECTLY ASSUMED THAT IT IS A CASE OF LEASE OF P LANT AND MACHINERY. IT WAS STATED THAT SCOPE OF AGREEMENT EXTENDS TO OPERATION OF PLANT AND, NOT ONLY OF PLANT AND MACHINERY. IT WAS SUBMITTED THAT PLANT DO ES NOT COMPRISE ONLY OF PLANT AND MACHINERY . IT WAS STATED THAT SCOPE OF AGREEMENT EXTENDS TO OPERATION OF PLANT AND, NOT ONLY OF PLANT AND MACHI NERY BUT ALSO OF THE FOLLOWING ASSETS:- SR. NO. PARTICULARS VALUE AS ON 1.4.2009 I) LAND 15.31 II) BUILDINGS 309.98 III) PLANT AND MACHINERY 1337.31 IV) FURNITURE, FIXTURE AND APPLIANCES 62.69 TOTAL 1725.29 ITA NO.200/COCH/2015 7 7.3 IT WAS NEXT SUBMITTED THAT THE LEARNED ASSE SSING OFFICER HAS ALLOWED EXPENDITURE OF RS.259.35 LACS INCURRED BY THE APPEL LANT IN THE COURSE OF BUSINESS FOR THE INSTANT YEAR AND HAVING DONE SO THERE WAS N O BASIS FOR THE AUTHORITIES BELOW TO SUGGEST THAT INCOME OF RS.25 CRORES WAS AS SESSABLE UNDER THE HEAD INCOME FROM OTHER SOURCES. IT WAS STATED THAT AF ORESAID EXPENDITURE OF RS.2.59 CRORES CLAIMED COULD NOT HELD TO BE LINKED TO EXPEN DITURE INCURRED FOR EARNING LEASE INCOME. IT WAS SUBMITTED THAT IN THE PRECEDI NG YEAR NAMELY ASSESSMENT YEAR 2009-10, THE LEARNED ASSESSING OFFICER HAS ALL OWED ONLY EXPENDITURE INCURRED UNDER THE HEAD DEPRECIATION OF RS.9,05,673 /-, RATES AND TAXES OF RS.7,37,564/-, INSURANCE OF RS.9,31,398/- AND REND PAID OF RS.7,06,750/- UNDER SECTION 57(III) OF THE ACT THOUGH TOTAL EXPENDITURE INCURRED WAS OF RS.212.62 LACS (APART FROM DEPRECIATION OF RS.9.464 LACS). 7.4 THE NEXT SUBMISSION OF THE APPELLANT WAS THAT ARRANGEMENT TO OPERATE THE PLANT IN A JOINT MANNER AND NOT MERELY ENJOY THE FR UITS OF OWNERSHIP OF ASSETS AND THEREFORE SUCH INCOME WAS BUSINESS INCOME. IT WAS SUBMITTED THAT RISKS RELATING TO THE APPELLANTS PART OF THE ARRANGEMENT BELONG T O THE APPELLANT. THE APPELLANT HAS TO ENSURE COMPLIANCE OF ALL THE LAWS RELATING TO THE LABOUR EMPLOYED , SUCH AS LABOUR PROTECTION, PF ETC. IT WA S EMPHASIZED THAT IN CASE A WORKMEN IS INJURED IN THE PLANT, THE RESPONSIBILITY TOWARDS THE SAME WOULD BE THAT OF THE APPELLANT AND NOT APOLLO. SIMILARLY, T HE RISK OF OPERATING THE PLANT ALSO BELONGS TO THE APPELLANT. ITA NO.200/COCH/2015 8 REFERENCE WAS MADE TO THE FACT THAT THE PLANT HAS B EEN INSURED IN THE NAME OF THE APPELLANT. ACCORDINGLY, IT WAS STATED THAT THE ACTIVITY CARRIED OUT BY THE APPELLANT IS IN THE NATURE OF BUSINESS ACTIVITY AND NOT MERE LETTING OF AN ASSET. 7.5 IT WAS SUBMITTED THAT IT IS NOT A CASE OF SUSP ENSION OF BUSINESS MUCH LESS A CESSATION OF BUSINESS AND THEREFORE THERE WAS NO JU STIFICATION FACTUALLY OR LEGALLY TO HOLD THAT THERE IS REQUIREMENT OF REVIVAL OF BUS INESS. IT WAS SUBMITTED OTHER THAN OPERATING THE PLANT ON JOINT BASIS NOTHING ELS E HAS HAPPENED. THERE IS NO SALE OF ASSETS OR TERMINATION OF LICENSES OR RETREN CHMENT OF LABOUR EMPLOYED AT THE PLANT. FURTHER ELABORATING THE CLAIM OF LD. CO UNSEL SUBMITTED THAT ON THE FACTS IT CANNOT BE SAID THAT THE APPELLANT IS NOT C ARRYING OUT ANY MANUFACTURING ACTIVITY AS IT WAS INFACT UNDERTAKING MANUFACTURING OF TYRES THROUGH ITS LABOUR ON ITS PLANT USING THE RAW MATERIAL PROVIDED BY APOLLO . IT WAS SUBMITTED THAT THE ONLY DIFFERENCE IS THAT THE SAID MANUFACTURING ACTI VITY IS BEING CARRIED OUT BY TE APPELLANT IN THE BRAND NAME OF APOLLO AND NOT IN IT S OWN BRAND NAME. HENCE, THE SAID ACTIVITY CAN BE REGARDED AS BEING IN THE N ATURE OF CONTRACT MANUFACTURING BY PTL ON BEHALF OF APOLLO. IT WAS T HUS SUBMITTED THAT EVEN IF IT IS HELD THAT THE APPELLANT IS NOT ITSELF CARRYING OUT ANY MANUFACTURING ACT AS IT WAS INFACT UNDERTAKING MANUFACTURING OF TYRES THROUGH I TS LABOUR ON ITS PLANT USING THE RAW MATERIAL PROVIDED BY APOLLO. IT WAS SUBMIT TED THAT THE ONLY DIFFERENCE IS THAT THE SAID MANUFACTURING ACTIVITY IS BEING CARRI ED OUT BY THE APPELLANT IN THE ITA NO.200/COCH/2015 9 BRAND NAME OF APOLLO AND NOT IN ITS OWN BRAND NAME. HENCE, THE SAID ACTIVITY CAN BE REGARDED AS BEING IN THE NATURE OF CONTRACT MANUFACTURING BY PTL ON BEHALF OF APOLLO. IT WAS THUS SUBMITTED THAT EVEN IF IS HELD THAT THE APPELLANT IS NOT ITSELF CARRYING OUT ANY MANUFACTURING ACTIVITY FOR AN ACTIVITY TO BE REGARDED AS BUSINESS ACTIVITY, IT IS NOT NECESSARY THAT IT MUST ENTAIL MANUFACTURING BY PTL ON BEHALF OF APOLLO. IT WAS THUS SUBMITTED THAT EV EN IF IT IS HELD THAT THE APPELLANT IS NOT ITSELF CARRYING OUT ANY MANUFACTUR ING ACTIVITY FOR AN ACTIVITY TO BE REGARDED AS BUSINESS ACTIVITY, IT IS NOT NECES SARY THAT IT MUST ENTAIL MANUFACTURING ACTIVITY. THE TERM BUSINESS IS DEF INED U/S. 2(13) OF THE ACT IN AN INCLUSIVE MANNER TO INCLUDE ANY TRADE, COMMERCE OR MANUFACTURE OR ANY ADVENTURE OR CONCERN IN THE NATURE OF TRADE, COMMER CE OR MANUFACTURE. IT WAS SUBMITTED THAT BUSINESS COMPRISES AN ACTIVITY WHICH IS CARRIED OUT CONTINUOUSLY IN AN ORGANIZED MANNER WITH A SET PURPOSE AND WITH A V IEW TO EARN PROFITS. RELIANCE WAS PLACED ON THE FOLLOWING JUDGMENTS:- I) CIT VS. MYSORE WINE PRODUCTS LTD. 370 ITR 102 (K AR) II) PHF MALL 86 RETAIL MANAGEMENT LTD. V. ITO 110 I TD 337 (KOL) III) GESCO CORPORATION LTD. V. ACIT 31 SOT 132 (MI) IV) CIT V. GOEL BUILDERS 331 ITR 344 (ALL) V) BHAGYANAGAR CONSTRUCTION (P) LTD. V. ITO 99 ITD 18 (HYD) VI) ITO V. SHEETAL KHURANA FOOD (P) LTD. 115 ITD 47 (ASR) VII) CIT V. ALLAHABAD MILLING CO. (P) LTD. 195 ITR 325 (ALL) ITA NO.200/COCH/2015 10 7.6 OUR ATTENTION WAS ALSO DRAWN TO CONCEPT OF W ET LEASE V. DRY LEASE IN RTE CONTEXT OF LEASING OF SHIPS. IT WAS SUBMITTED THAT IN CASE OF A DRY LEASE, THE LESSOR ONLY LEASES THE EQUIPMENT TO THE LESSEE WITHOUT ANY ADDITIONAL FACILITY. AS AGAINST THIS, A WET LEASE IS A LEASE IN WHICH APART FROM THE EQUIPMENT, THE LESSOR ALSO PROVIDES THE STAFF FOR OPERATION OF THE EQUIPM ENT; AND IS RESPONSIBLE FOR ITS REPAIR AND MAINTENANCE, INSURANCE, ETC. IT WAS SUB MITTED THAT INTERNATIONALLY, IN THE FORMER CASE, THE PAYMENT MADE TO THE LESSOR IS GENERALLY REGARDED AS PAYMENT FOR USE OF EQUIPMENT AND HENCE, TREATED A S ROYALTY, WHEREAS IN THE LATTER CASE, THE INCOME IS GENERALLY REGARDED AS A PROFIT FROM SHIPPING ACTIVITY AND HENCE, COVERED UNDER ARTICLE 8 OF THE DTAA, WHI CH DEALS WITH BUSINESS INCOME OF SHIPPING CORPORATIONS. IN THIS REGARD, A TTENTION WAS INVITED TO THE OECD COMMENTARY ON ARTICLE 8, WHICH AT PARA 5 STAT ES AS UNDER: 5. PROFITS OBTAINED BY LEASING A SHIP OR AIRCRAFT ON CHARTER FULLY EQUIPPED, CRFEWED AND SUPPLIED MUST BE TREATED LIKE THE PROFI TS FROM THE CARRIAGE OF PASSENGERS OR CARGO. OTHERWISE, A GREAT DEAL OF BU SINESS OF SHIPPING OR AIR TRANSPORT WOULD NOT COME WITHIN THE SCOPE OF THE PR OVISION. HOWEVER, ARTICLE 7, AND NOT ARTICLE 8, APPLIES TO PROFITS FROM LEASI NG A SHIP OR AIRCRAFT ON A BARE BOAT CHARTER BASIS EXCEPT WHEN IT IS AN ANCILLARY A CTIVITY OF AN ENTERPRISE ENGAGED IN THE INTERNATIONAL OPERATION OF SHIPS OR AIRCRAFT. 7.7 APPLYING THE SAME ANALOGY HERE, IT WAS SUBMITT ED THAT SINCE IN THE PRESENT CASE, THE APPELLANT HAS LEASED THE PLANT AND MACHIN ERY ALONG WITH THE LABOUR, RESPONSIBILITY FOR REPAIR AND MAINTENANCE, INSURANC E, COMPLIANCE WITH LABOUR LAW, ETC. THE SAME IS AKIN TO A WET LEASE AND ACC ORDINGLY, ANY INCOME ARISING THEREFROM SHOULD BE REGARDED AS BUSINESS INCOME. ITA NO.200/COCH/2015 11 7.8 FURTHER IT WAS SUBMITTED THAT INCOME FROM LE TTING ITSELF IS BUSINESS INCOME. RELIANCE WAS PLACED ON THE JUDGMENT OF APEX COURT I N THE CASE OF CHENNAI PROPERTIES & INVESTMENTS LTD. V. CIT 373 ITR 673. IT WAS SUBMITTED THAT IN THE SAID CASE, IT HAS BEEN HELD THAT WHEN OBJECT OF ASSESSEE COMPANY WAS INTER-ALIA TO EARN INCOME FROM LETTING, THE SAID INCOME WAS TO BE BROUGHT TO TAX AS BUSINESS INCOME. RELIANCE WAS ALSO PLACED ON THE FOLLOWING JUDGMENTS: I) RAYALA CORPORATION (P) LTD. VS. ACIT 386 ITR 500 (SC) II) SHYAM BURLAP COMPANY LTD. V. CIT 380 ITR 151 (C AL) III) HERITAGE HOSPITALITY LTD. V. DCIT 158 ITD 179 (HYD) IV) SHREEJI EXHIBITGORS VS. ACIT 42 ITR 596 (MUM) 7.9 IT WAS NEXT CONTENDED THAT SECTION 56 OF THE AC T, BEING THE RESIDUARY HEAD OF INCOME UNDER THE FRAME WORK OF THE ACT, CAN BE R ESORTED TO ONLY IF AN INCOME IS NOT CHARGEABLE UNDER ANY OTHER SPECIFIC H EAD OF INCOME, IT WAS SUBMITTED THAT SINCE THE INCOME EARNED BY THE APPEL LANT COMPANY FALLS WITHIN THE SPECIFIC HEAD OF PROFITS AND GAINS FROM BUSINE SS OR PROFESSION, SECTION 56 CANNOT BE APPLIED TO THE PRESENT CASE. 7.10 IT WAS FURTHER SUBMITTED THAT IT IS NOT CORRE CT TO STATE THAT THE ENTIRE ACTIVITY OF THE COMPANY IS ONLY LEASING, SINCE AS PER THE AC COUNTING STANDARD 17 ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA, THE ASSESSEE HAS STATED IN ITS ITA NO.200/COCH/2015 12 ACCOUNTS THAT THE COMPANYS OPERATIONS PREDOMINANTL Y COMPRISES OF ONLY ONE SEGMENT INCOME FROM LEASE OF PLANT OF APOLLO. IT WAS CONTENDED THAT THE REQUIREMENTS OF THE COMPANIES ACT ARE NOT TO BE APP LIED AS SUCH WHILE COMPUTING THE INCOME UNDER THE I.T. ACT. IT WAS ST ATED THAT DISCLOSURE IN THE FINANCIAL STATEMENT AS OTHER INCOME OR THERE IS O NE SEGMENT OF THE ASSESSEE IS AN IRRELEVANT CONSIDERATION. RELIANCE WAS PLACED O N THE FOLLOWING JUDGMENTS: I) CIT V. ARVIND KUMAR JAIN 205 TAXMAN 44 (DEL) (MA G) II) KEDARNATH JUTE MFG. CO. LTD. 82 ITR 363 (SC) III) TUTICORIN ALKALI CHEMICALS AND FERTILIZERS LTD . VS. CIT 227 ITR 172 (SC) IV) CIT VS. IDHAYAM PUBLICATIONS LTD. 285 ITR 221 ( MAD) 7.11 IT WAS SUBMITTED THAT THE AUTHORITIES BELOW HAD RELIED ON THE ORDER OF TRIBUNAL FOR AY 2004-05 WHICH WAS BASED UPON THE OR DER OF TRIBUNAL IN I.T.A. NO.659/COCH/2010 FOR AY 2007-08. IT WAS SUBMITTED THAT IN ORDER U/S. 254(2) OF THE ACT DATED 20/07/2012 IN M.P. NO. 48/COCH/2010, THE TRIBUNAL HAS CLARIFIED THAT THE LD. DR POINTED OUT THAT THE TRIBUNAL DID NOT CONSIDER OTHER FACTS SUCH AS EXPENSES, SALES TAX REGISTRATION ETC. WHILE ADDRESS ING THE QUESTION AND HAS TAKEN THE DECISION BY CONSIDERING THE FACT OF TIME GAP ON LY, WHICH IS NOT CORRECT. SINCE THIS TRIBUNAL IS DEALING WITH THE MISCELLANEOUS PET ITION U/S. 254(2) OF THE ACT, WE ARE OF THE VIEW THAT SUCH NEW FACTORS CANNOT BE CON SIDERED AT THIS STAGE. ACCORDINGLY, WE DO NOT FIND ANY MERIT IN THE CONTEN TION OF THE ASSESSEE ON THIS ISSUE. IT WAS THUS SUBMITTED THAT HAVING REGARD T O THE AFORESAID FINDING OF THE ITA NO.200/COCH/2015 13 TRIBUNAL THE SAID ORDER CANNOT BE RELIED UPON. IT ALSO SUBMITTED THAT FOR THE ASSESSMENT YEARS 1996-97 TO ASSESSMENT YEAR 2003-04 , THE MATTER HAS BEEN HELD BY THE TRIBUNAL IN FAVOUR OF THE APPELLANT. HOWEVE R, FROM ASSESSMENT YEAR 2004- 05 ONWARDS, THE TRIBUNAL HAS REVERSED DECISION OF T HE EARLIER YEARS AND UPHELD THE ACTION OF THE ASSESSING OFFICER OF TREATING THE SAID INCOME AS INCOME FROM OTHER SOURCES. THE REASONING PROVIDED BY THE HON BLE TRIBUNAL FOR THE SAME IS THAT THE INCOME FROM LEASING SHOULD BE REGARDED AS INCOME FROM OTHER SOURCES. IT WAS SUBMITTED THAT THE TRIBUNAL HAS CONSIDERED O NLY ONE ASPECT OF THE MATTER WHILE RENDERING ITS DECISION. IT WAS SUBMITTED THA T THE LEASING ARRANGEMENT BETWEEN THE APPELLANT AND APOLLO HAD INITIALLY STAR TED AS A RESULT OF THE APPELLANT TURNING INTO A SICK COMPANY DUE TO WHICH IT COULD NOT CONTINUE ITS MANUFACTURING OPERATIONS IN ITS OWN NAME. ACCORDIN GLY, AT THE START, THIS WAS AN ARRANGEMENT BETWEEN THE TWO COMPANIES FOR A PERIOD OF 8 YEARS, SO AS TO HELP THE APPELLANT TO REVIVE ITS FINANCIAL POSITION. IT WAS IN THAT CONTEXT THAT IN THE EARLIER YEARS, THE TRIBUNAL HAD UPHELD THE INCOME A S BUSINESS INCOME. IN THE YEAR 2004-05, THE TRIBUNAL HAS DIVERTED FROM ITS EA RLIER DECISION, BY STATING THAT THERE DOES NOT APPEAR ANY INTENTION OF THE APPELLAN T TO REVIVE ITS OWN BUSINESS AND THEREFORE, THE EARLIER DECISION DOES NOT HOLD G OOD. IT WAS SUBMITTED THAT THE ISSUE AS TO WHETHER THE CURRENT ACTIVITY ITSELF CAN, BY ITS OWN, BE REGARDED AS A BUSINESS OR NOT WAS NOT AT ALL PUT FOR CONSIDERAT ION BEFORE THE TRIBUNAL. ACCORDINGLY, IT WAS SUBMITTED THAT THE SAID DECISIO N OF THE ITAR CANNOT APPLY TO THE ISSUE IN HAND, MORE PARTICULARLY IN THE ASSESSI NG OFFICER HIMSELF ALLOWED AS ITA NO.200/COCH/2015 14 BUSINESS EXPENDITURE. MOREOVER, IT WAS ALSO HIGHLI GHTED THAT IN NOTES ON ACCOUNTS TO THE FINANCIAL STATEMENTS OF INSTANT YEA R IT WAS SPECIFICALLY STATED THAT: 4. THE COMPANY HAD TAKEN 20.78 ACRES OF LAND ON 90 YEARS LEASE W.E.F. 24.5.2007 AT A PREMIUM OF RS.519.50 LACS AND THE PR EMIUM WITH OTHER CAPITALIZED COST IS AMORTIZED OVER A PERIOD OF 90 Y EARS. MONTHLY LEASE RENTAL, LIGHTING EXPENSES, WATER CHARGES ETC. ARE DEBITED A S REVENUE EXPENDITURE. 7.12 THE LD. COUNSEL FURTHER SUBMITTED THAT APPE LLANT HAD VIDE POSTAL RESOLUTION DATED 17/05/2005 AMENDED OBJECT CLAUSE O F ITS MEMORANDUM OF ASSOCIATION TO, INTER ALIA, INCLUDE THE ACTIVITY OF RUNNING OF HOSPITALS, DIAGNOSTIC CENTRES, PATHOLOGICAL LABORATORIES, MEDICAL RESEARC H, MEDICAL EDUCATION, DRUG MANUFACTURE AND SETTING UP FACILITIES FOR PROVIDING ALL KINDS OF MEDICAL AND HEALTH SERVICES IN ITS OBJECTS. IN PURSUANCE OF TH E SAID OBJECT, IT WAS SUBMITTED THAT THE APPELLANT HAD INTER-ALIA SET UP TWO WHOLLY OWNED SUBSIDIARIES FOR DEVELOPMENT OF HEALTH CARE BUSINESS AS UNDER: I) ARTEMIS HEALTH SERVICES LIMITED; AND II) ARTEMIS MEDICARE SERVICES LIMITED 7.13 IT WAS SUBMITTED THAT FOR SAID PURPOSE, THE A PPELLANT HAD TAKEN LOAN OF RS.49.80 CRORES IN RESPECT OF WHICH DURING THE YEAR IT HAS INCURRED INTEREST EXPENSE OF RS.646.26 LACS, WHICH WAS CLAIMED AS DED UCTION BY THE APPELLANT WHILE COMPUTING ITS INCOME. IT WAS SUBMITTED THAT APPELLANT HAS INCORPORATED THE SAID TWO WHOLLY OWNED SUBSIDIARY COMPANIES WITH THE PURPOSE OF EXPANDING ITA NO.200/COCH/2015 15 ITS OWN BUSINESS OBJECT OF PROVIDING SERVICES IN HE ALTH CARE BUSINESS. IT WAS SUBMITTED THAT INVESTMENT IN COMPANIES REPRESENTING CONTROLLING INTEREST AMOUNTS TO CARRY ON BUSINESS, AS HAS BEEN HELD BY T HE FOLLOWING JUDGMENTS: I) BROOKE BOND CO. LTD. VS. CIT 162 ITR 373 (SC) II) EXCELLENT COMMERCIAL ENTERPRISES & INVESTMENTS 197 CTR 187 (DEL) III) CIT VS. AMALGAMATIONS (P) LTD. 226 ITR 188 (SC ) AFFIRMING THE JUDGMENT IN THE CASE OF CIT VS. AMALGAMATIONS (P) LTD. REPORTED IN 108 ITR 895 (MAD) IV) CIT VS. DISTRIBUTORS (BAROD) PVT. LTD. 83 ITR 3 77 (SC) V)G. VENKATASWAMI NAIDU VS. CIT 35 ITR 594 (SC) VI)CIT VS. SUTLEJ COTTON MILLS SUPPLY AGENCY 100 IT R 706 (SC) VII)RAJA BAHADUR KAMAKHYA NARAIN VS. CIT 77 ITR 253 (SC) 7.14 FURTHERMORE, REFERENCE WAS MADE TO THE JUDGME NT OF MYSORE HIGH COURT IN THE CASE OF CIT VS. UNITED BREWERIES 89 ITR 17 WHER EIN HAS BEEN HELD THAT IF THE PARENT COMPANY DID EXERCISE FUNCTIONAL CONTROL OVER ITS SUBSIDIARY, THE EXISTENCE OF SUCH SUBSIDIARY COMPANY AS A LEGAL ENTITY WOULD NOT PREVENT THE BUSINESS OF THE SUBSIDIARY BEING TREATED AS THAT OF THE PARENT COMPANY. IT WAS ALSO SUBMITTED THAT APPLYING THIS RATIO, IT WAS SUBMITTE D THAT INVESTMENT BY THE APPELLANT IN THE SUBSIDIARY COMPANIES FOR ITS OWN B USINESS PURPOSE SHOULD BE REGARDED AS BUSINESS OF THE APPELLANT. 7.15 RELIANCE WAS ALSO PLACED ON THE FOLLOWING PRO POSITIONS: ITA NO.200/COCH/2015 16 PROPOSITION 1: LEASE OUT OF THE PREMISES BY A COMPA NY, DECLARED AS SICK INDUSTRIAL UNIT IS BUSINESS INCOME. I) CIT VS. VALLABH GLASS WORKS LTD. 218 TAXMAN 152 (GU J) II) ACIT VS. S&S INDUSTRIES ENTERPRISES LTD. 14 ITR (T) 574 (CHENNAI) PROPOSITION 2 : INCOME WOULD BE BUSINESS INCOME IF DOMINANT PURPOSE WAS COMMERCIAL ACTIVITY. I) NUTAN WAREHOUSING COMPANY PVT. LTD. VS. DCIT 326 IT R 94 (BOM) II) VORA WAREHOUSING PVT. LTD. VS. ACIT 70 ITD 518 (MUM ) III) CIT VS. ALLAHABAD MILLING CO. (P) LTD. 195 ITR 325 (ALL) PROPOSITION 3: THAT ONCE THERE IS A NEW GROUND OR A MATERIAL CHANGE IN THE FACTUAL AND LEGAL POSITION, THE COURTS WILL NOT ADO PT AN EARLIER PRONOUNCEMENT I) CIT VS. J.K. CHARITABLE TRUST 308 ITR 161 (SC) II) BHARAT SANCHAR NIGAM LTD. VS. UOI IN WRIT PETITION (CIVIL) 183/2003 (SC) III) ACIT VS. M/S. CITI FINANCIAL CONSUMER FINANCE I.T.A . NO. 4617/DEL/2006. 7.16 IN VIEW OF THE ABOVE IT WAS PRAYED THAT INCO ME OF RS.25 CRORES REGARDED AS BUSINESS INCOME AS OPPOSED TO INCOME FROM OTHER SOURCES. 7.17 THE LD. CIT DR HOWEVER SUBMITTED THAT THE IS SUE IS SQUARELY COVERED BY THE ORDERS OF TRIBUNAL FOR EARLIER YEARS AND THEREFORE THE CONTENTION RAISED BY THE LD. COUNSEL ARE NOT MAINTAINABLE. ITA NO.200/COCH/2015 17 7.18 AS REGARDS THE FACTUAL SUBMISSION IT WAS STAT ED THAT THE MATTER REQUIRES VERIFICATION. THE LD. COUNSEL FOR THE APPELLANT OP POSED THE AFORESAID PRAYER AND HIGHLIGHTED FROM THE ORDER OF ASSESSMENT THAT D URING THE PROCEEDINGS COMPLETE BOOKS OF ACCOUNT AND RECORDS HAD BEEN PROD UCED AND EXAMINED ON RANDOM AND TEST-CHECK BASIS. FURTHER IT WAS SUB MITTED THAT DETAILS OF ALL EXPENSES WERE ALSO FURNISHED AS HAS BEEN ADMITTED B Y THE ASSESSING OFFICER WHEN HE HELD AS UNDER: ON VERIFICATION OF THE PROFIT AND LOSS OF THE ASSE SSEE, IT WAS SEEN THAT ASSESSEE HAS INCURRED EXPENSES FOR MANUFACTURING, DEPRECIATI ON AND BANK CHARGES. FURTHER VERIFICATION OF MANUFACTURING AND OTHER EXP ENSES, IT WAS SEEN THAT MAJOR COSTS ON ACCOUNT OF MANUFACTURING, ADMINISTRA TION AND SELLING WERE REIMBURSED BY APOLLO TYRES LTD. ONLY RS.1,66,02,355 /- WAS CLAIMED BY THE ASSESSEE AS ITS EXPENDITURE. THE BREAKUP OF THESE EXPENDITURE WERE COLLECTED AND VERIFIED. 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND P ERUSED THE MATERIAL ON RECORD AND ORDERS PASSED BY THE AUTHORITIES BELOW. 8.1 THIS GROUND RELATES TO DETERMINATION OF HEAD OF INCOME FOR TAXABILITY OF SUM OF RS.25 CRORES RECEIVED FROM APOLLO BY THE APP ELLANT COMPANY IN THE INSTANT YEAR. 8.2 THIS ISSUE CAME UP FOR THE FIRST TIME BEFORE THE COORDINATE BENCH OF TRIBUNAL IN ASSESSMENT YEARS 1996-97 AND 10997-98 A ND BY A COMMON ORDER DATED 14/12/2004, IT WAS HELD AS UNDER: 19. NOW COMING TO THE MERIT ON THE BASIS OF THE FA CTS BROUGHT HEREINABOVE, WE ARE OF THE VIEW THAT THE ISSUE HAS TO GO IN ASSE SSEES FAVOUR. IT IS TO BE ITA NO.200/COCH/2015 18 SEEN THAT THE AGREEMENT IS IRREVOCABLE FOR PERIOD O F 8 YEARS. AS RIGHTLY CONTENDED BY THE LEARNED AUTHORIZED REPRESENTATIVE OF THE ASSESSEE, THE ASSESSEE AS AN CORPORATE ENTITY, IT CONTINUES TO EX IST. THE SHARE VALUE OF THE ASSESSEE HAS GONE UP. MERELY ADDITIONAL ACCOUNT OF RS.110 CRORES HAS BEEN INVESTED BY WAY OF SHARES BY ATL DOES NOT MEAN THAT THE EXISTENCE OF THE PTL HAS BEEN DILUTED. THE ATL HAS ACQUIRED SHARE IN PTL . COMING TO THE INVESTMENT OF RS.70 CRORES IN THE PLANT AND MACHINE RY, THE ASSESSEES REPRESENTATIVE SUBMITTED THAT THE INVESTMENTS ARE R EFLECTED IN THE BOOKS OF ACCOUNTS OF ATL. MERE CHANGE OF ADMINISTRATIVE LEVE L OFFICERS/DIRECTORS, AS RIGHTLY CONTEND BY THE REPRESENTATIVE OF THE ASSESS EE, DOES NOT MEAN THAT THE CORPORATE EXISTENCE ITSELF IS DISAPPEARED. THE STA ND OF THE REVENUE THAT THE WORD USED TAKE OVER DOES NOT SUPPORT THE REVENUES CASE. IT IS FOR A LIMITED PERIOD OF 8 YEARS. THE DIRECTION OF BIFR IS TO THE EFFECT THAT THE PRODUCTION IS BY PTL AND THE ENTIRE PRODUCTION SHALL BE LIFTED BY ATL. THE PAYMENT TO THE STAFF IS MADE BY PTL. THE WELFARE SCHEMES ARE ALSO CONTAINING AND OPERATED BY PTL. ALL THESE INDICATE THAT PTL IS EXISTING. THE KERALA GOVERNMENT HAS SUPPLIED THE ELECTRICITY TO PTL AS PER ORDER DATED 29/8/1995. THE AGREEMENT BY KSEB IS WITH PTL. ALL THESE INDICATES THAT THE E XISTENCE OF PTL AS CONTENDED BY THE REVENUE DOES NOT CEASED TO EXIST. 20. IF THERE IS NO INTENTION TO CONTINUE THE BUSIN ESS AND IT IS LET OUT, THEN OF COURSE IT CANNOT BE TREATED AS INCOME FROM BUSINESS . IF THE ASSESSEE BECAUSE OF CERTAIN DIFFICULTIES, I.E. EITHER BY FINANCIALLY OR FOR SOME OTHER REASONS IS LET OUT THE LAND, PLANT AND MACHINERY TO A THIRD PARTY FOR A LIMITED PERIOD AND RECEIVING RENT, SUCH RENT IS TO BE TREATED AS INCOM E FROM BUSINESS. THE CASES RELIED UPON BY THE ASSESSEE SUCH AS 20 ITR 451, 169 ITR 597, 195 ITR 3525, 138 ITR 18, 116 ITR 781, 266 ITR 106, 166 ITR 211, 211 ITR 370, 164 ITR 288 AND 237 ITR 454 (MENTIONED IN PARA 16 OF THIS ORDER) SUPPORT THE CA SE OF THE ASSESSEE. IN ALL THESE CASES, THE HONBLE SUPREME COURT AND VARIOUS HIGH COURTS HELD THAT RENTAL INCOME RECEIVED FOR A LIMITED PERIOD BY WAY OF LETTING OUT PLANT AND MACHINERY BECAUSE THE ASSESSEE WAS UNABLE TO OPERAT E ON ACCOUNT OF SOME DIFFICULTIES EITHER OBTAINING THE NEW MATERIALS OR FINANCIAL DIFFICULTIES, ETC., THEN THAT INCOME HAS TO BE TREATED AS INCOME FROM BUSINE SS. THE ONLY LIMITATION IS THAT THE ASSESSEE SHOULD HAVE THE PRESENT INTENTION TO REVIVE THE INDUSTRY/ACTIVITY IN A FUTURE DATE WHEN THE DIFFICU LTIES CEASED TO EXIST OR THE ASSESSEE IS IN A POSITION TO OVER COME THE DIFFICUL TIES. 21. FROM THE FACTS STATED AS ABOVE, THERE IS NOTH ING ON RECORD TO SHOW THAT THE ASSESSEE HAD NO PRESENT INTENTION TO REVIVE ITS BUSINESS AT AN APPROPRIATE TIME. THEREFORE, THIS ISSUE IS DECIDED AGAINST THE REVENUE AND IN FAVOUR OF THE ASSESSEE. ITA NO.200/COCH/2015 19 8.3 FROM THE AFORESAID IT IS APPARENT THAT INCOME UNDER THE ARRANGEMENT WITH APOLLO WAS HELD TO BE TAXABLE AS BUSINESS INCOME IN AY 1996-97 AND 1997-98. IT IS ALSO A MATTER OF RECORD THAT THE AFORESAID VIEW WAS FOLLOWED CONSISTENTLY IN ALL THE ASSESSMENT YEARS FROM 1998-99 TO 2003-04. IT W AS ONLY WHEN THE APPEAL FOR AY 2007-08 CAME UP THAT THE COORDINATE BENCH HELD THAT SUCH AN INCOME WAS HELD TO BE ASSESSABLE UNDER THE HEAD INCOME FROM OTHER SOURCES. IT WAS HELD BY AN ORDER DATED 3.4.2012 AS UNDER: 6. WE HAVE HEARD THE RIVAL CONTENTIONS AND CAREF ULLY PERUSED THE MATERIAL ON RECORD. THERE CANNOT BE ANY DISPUTE THAT THE QUESTI ON WHETHER THE ASSESSEE IS HAVING AN INTENTION TO REVIVE ITS BUSINESS ACTIVITY IS A QUESTION OF FACT AND THE SAME IS REQUIRED TO BE CONSIDERED EVERY YEAR ON THE BASIS OF THE FACTS AND CIRCUMSTANCES PREVAILING IN THAT YEAR. ACCORDINGLY , WE ARE OF THE VIEW THAT THE DECISION RENDERED BY THE TRIBUNAL IN THE EARLIER YE ARS CANNOT HAVE BINDING EFFECT IN SUBSEQUENT YEARS. THE UNDISPUTED FACTS ARE THAT THE ASSESSEE HAS LEA SED OUT ITS PLANT AND MACHINERY IN THE YEAR 1995. HENCE, W HILE CONSIDERING THE CLAIM OF THE ASSESSEE FOR THE YEARS ENDING 31.3.1996 AND 31 .3.1997, THE TRIBUNAL HELD THAT THERE IS NOTHING ON RECORD TO SHOW THAT THE ASSESSE E HAD TO PRESENT INTENTION TO REVIVE ITS BUSINESS AT APPROPRIATE TIME, AS THE GAP BETWEEN THE YEAR OF CLOSURE AND THE YEARS UNDER CONSIDERATION AT THAT POINT OF TIME WAS VERY NARROW. HOWEVER, WE ARE CONCERNED WITH THE ASSESSMENT YEAR 207-08 AND WE HAVE TO CONSIDER THE FACTS AND CIRCUMSTANCES PREVAILING AS ON 31.3.2007. BY THAT DATE, ABOUT 12 YEARS HAVE PASSED AND HENCE WE ARE IN AGRE EMENT WITH LD. DR THAT THE ASSESSEE HAS NOT BROUGHT ON RECORD ANY MATERIAL TO SHOW THAT IT HAS INTENTION TO REVIVE THE BUSINESS ACTIVITIES. THOUGH THE LD. AR SUBMITTED THAT STEPS ARE BEING TAKEN TO REVIVE THE BUSINESS YET WE ARE UNABLE TO A CCEPT HIS CONTENTION FOR WANT OF SUPPORTING MATERIALS. ACCORDINGLY, IN OUR VIEW, THE LD. CIT(A) WAS NOT CORRECT IN PLACING RELIANCE ON THE DECISION OF THE TRIBUNAL WITHOUT APPRECIATING THE FACTS PREVAILING IN THE YEAR UNDER CONSIDERATION. ACCORD INGLY, WE REVERSE THE ORDER OF THE LD. CIT(A) AND RESTORE THE VIEW OF THE ASSESSI NG OFFICER. SIMILAR VIEW HAS BEEN EXPRESSED FOR A .Y. 2004-05 TO 2006-07 AND 2008-09 TO 2009-10. ITA NO.200/COCH/2015 20 8.4 THUS THE BACKGROUND TO THIS APPEAL IS THAT VARIOUS COORDINATE BENCHES OF THE TRIBUNAL HAVE HELD FOR A.YS 1996-97 TO 2003-04 THAT INCOME FROM APOLLO IS TAXABLE AS BUSINESS INCOME AND FOR A.YS 2004-05 TO 2009-10, IT IS TAXABLE AS INCOME FROM OTHER SOURCES. 8.5 THE ASSESSING OFFICER HAS ALSO RELIED UPON TH E ORDER OF THE TRIBUNAL FOR AY 2004-05 TO ARRIVE AT THE CONCLUSION THAT IN THE INS TANT YEAR INCOME OF RS.25 CRORES IS TAXABLE AS INCOME FROM OTHER SOURCES. TH E ORDER OF THE TRIBUNAL DATED 21.12.2012 FOR AY 2004-05 HOLDS AS UNDER: 5. ADMITTEDLY THE ORIGINAL LEASE PERIOD HAD EXPIR ED BY THE YEAR ENDING 31.3.2003 AND FOR THE YEAR UNDER CONSIDERATION, A N EW LEASE RENT AGREEMENT HAS BEEN ENTERED. THE ISSUE WHETHER THE LEASE RENT IS ASSESSABLE UNDER THE HEAD INCOME FROM BUSINESS OR I NCOME FROM OTHER SOURCES WAS CONSIDERED BY THIS BENCH IN THE ASSESSE ES OWN CASE IN I.T.A. NO.659/COCH/2010 RELATING TO THE ASSESSMENT YEAR 20 07-08, AND THIS BENCH HAS TAKEN A VIEW THAT THE ASSESSEE HAS NOT PROVED I TS CLAIM THAT IT IS TAKING STEPS TO REVIVE THE BUSINESS. THE OBSERVATIONS MAD E BY THIS TRIBUNAL ARE EXTRACTED BELOW FOR THE SAKE OF CONVENIENCE: 6. WE HAVE HEARD THE RIVAL CONTENTIONS AND CAREFUL LY PERUSED THE MATERIAL ON RECORD. THERE CANNOT BE ANY DISPUTE THAT THE QU ESTION WHETHER THE ASSESSEE IS HAVING AN INTENTION TO REVIVE ITS BUSIN ESS ACTIVITY IS A QUESTION OF FACT THAT THE SAME IS REQUIRED TO BE CONSIDERED EVE RY YEAR ON THE BASIS OF THE FACTS AND CIRCUMSTANCES PREVAILING IN THAT YEAR . ACCORDINGLY, WE ARE OF THE VIEW THAT THE DECISION RENDERED BY THE TRIBUNAL IN THE EARLIER YEARS CANNOT HAVE BINDING EFFECT IN SUBSEQUENT YEARS. TH E UNDISPUTED FACTS ARE THAT THE ASSESSEE HAS LEASED OUT ITS PLANT AND MACH INERY IN THE YEAR 1995. HENCE, WHILE CONSIDERING THE CLAIM OF THE ASSESSEE FOR THE YEARS ENDING 31.3.1996 AND 31.3.1997, THE TRIBUNAL HELD THAT THE RE IS NOTHING ON RECORD TO SHOW THAT THE ASSESSEE HAD NO PRESENT INTENTION TO REVIVE ITS BUSINESS AT APPROPRIATE TIME, AS THE GAP BETWEEN THE YEAR OF CL OSURE AND THE YEARS UNDER CONSIDERATION AT THAT POINT OF TIME WAS VERY NARROW. HOWEVER, WE ARE CONCERNED WITH THE ASSESSMENT YEAR 2007-08 AND WE HAVE TO CONSIDER ITA NO.200/COCH/2015 21 THE FACTS AND CIRCUMSTANCES PREVAILING AS ON 31.3.2 007. BY THAT DATE, ABOUT 12 YEARS HAVE PASSED AND HENCE WE ARE IN AGRE EMENT WITH LD. DR THAT THE ASSESSEE HAS NOT BROUGHT O RECORD ANY MATE RIAL TO SHOW THAT IT HAS INTENTION TO REVIVE THE BUSINESS ACTIVITIES. THOUG H THE LD. AR SUBMITTED THAT STEPS ARE BEING TAKEN TO REVIVE THE BUSINESS YET WE ARE UNABLE TO ACCEPT HIS CONTENTION FOR WANT OF SUPPORTING MATERIALS. A CCORDINGLY, IN OUR VIEW THE LD. CIT(A) WAS NOT CORRECT IN PLACING RELIANCE ON T HE DECISION OF THE TRIBUNAL WITHOUT APPRECIATING THE FACTS PREVAILING IN THE YE AR UNDER CONSIDERATION. ACCORDINGLY, WE REVERSE THE ORDER OF THE LD. CIT(A) AND RESTORE THE VIEW OF THE ASSESSING OFFICER. 6. THE QUESTION WHETHER THE ASSESSEE IS HAVING AN INTENTION TO REVIVE ITS BUSINESS ACTIVITY IS A QUESTION OF FACT AND THE SAM E IS REQUIRED TO BE CONSIDERED EVERY YEAR. THOUGH THE LD. AR CLAIMED T HAT THE GOVERNMENT LICENCES ARE STILL CONTINUING IN THE ASSESSEES OWN NAME, IT HAS NOT PROVED THE CLAIM OF THE ASSESSEE THAT IT HAD AN INTENTION TO REVIVE THE BUSINESS. 8.6 FROM THE AFORESAID IT IS APPARENT THAT ORDER F OR AY 2004-05 RELIES UPON THE ORDER FOR A.Y. 2007-08 TO HOLD THAT INCOME IS TAXAB LE AS INCOME FROM OTHER SOURCES. 8.7 BEFORE US THE LD. AR HAS POINTED OUT THAT FOR A Y 2007-08 BY AN ORDER DATED 20.07.2012 U/S. 254(2) OF THE ACT, IT HAS BEEN HELD AS UNDER: THE LD. DR POINTED OUT THAT THE TRIBUNAL DID NOT C ONSIDER OTHER FACTS SUCH AS EXPENSES, SALES TAX REGISTRATION ETC. WHILE ADDRESS ING THE QUESTION AND HAS TAKEN THE DECISION BY CONSIDERING THE FACT OF TIME GAP ONLY, WHICH IS NOT CORRECT. SINCE THIS TRIBUNAL IS DEALING WITH THE MI SCELLANEOUS PETITION U/S. 254(2) OF THE ACT, WE ARE OF THE VIEW THAT SUCH NEW FACTOR S CANNOT BE CONSIDERED AT THIS STAGE. ACCORDINGLY, WE DO NOT FIND ANY MERIT IN THE CONTENTIONS OF THE ASSESSEE ON THIS ISSUE. 8.8 IN THE LIGHT OF THE ABOVE, THE LD. AR SUBMIT TED THAT THE PRECEDENT RELIED UPON BY THE AUTHORITIES BELOW TO NEGATE THE CLAIM O F THE APPELLANT DID NOT ITA NO.200/COCH/2015 22 CONSIDER THE OTHER FACTS SUCH AS EXPENSES, SALES TA X REGISTRATION ETC. WHILE DETERMINING THE HEAD FOR TAXABILITY OF INCOME RECEI VED FROM APOLLO AND, HAS TAKEN THE DECISION BY CONSIDERING THE FACT OF TIME GAP, ONLY. IT WAS ALSO HIGHLIGHTED THAT EVEN THE FACT OF TIME GAP CANNOT B E SEEN IN ISOLATION AND, TRIBUNAL ITSELF IN ORDER FOR AY 2007-08 HAS HELD TH AT INTENTION TO REVIVE BUSINESS ACTIVITY IS A QUESTION OF FACT AND IS REQUIRED TO B E CONSIDERED EVERY YEAR ON THE BASIS OF FACTS AND CIRCUMSTANCES PREVAILING IN THAT YEAR. 8.9. TO EXAMINE THE ABOVE CONTENTIONS, WE TAKE NO TE THAT, FOR THE INSTANT YEAR, ASSESSEE RECEIVED LEASE RENT OF RS.25,00,00,000/- A ND INCURRED EXPENDITURE AGGREGATING TO RS.35.14 CRORES UNDER THE FOLLOWING HEADS WHICH HAS BEEN REIMBURSED BY THE APOLLO: SR. NO. PARTICULARS AMOUNT (RS. IN LACS) I EMPLOYEES I) SALARIES, WAGES AND BONUS 2,345.76 II) CONTRIBUTION TO PROVIDENT AND OTHER FUNDS 183.5 III) WELFARE EXPENSES 17.98 IV) GRATUITY 138.93 V) LEAVE ENCASHMENT PROVISION NIL II MANUFACTURING ADMINISTRATIVE AND SELLING VI) POWER AND FUEL CONSUMPTION 807.20 VII) STORES CONSUMED 11.18 VIII) RENT 0.19 IX) RATES AND TAXES 0.31 X) TRAVELLING AND CONVEYANCE EXPENSES 1.85 XI) LEGAL AND PROFESSIONAL CHARGES 3.43 XII) PRINTING, STATIONERY, POSTAGE, TELEGRAM & 2.17 ITA NO.200/COCH/2015 23 TELEPHONE ETC. XIV MISCELLANEOUS EXPENSES 1.07 TOTAL 3514.00 8.10. THUS, UNDENIABLY SUBSTANTIAL EXPENDITURE UND ER VARIOUS HEADS INCLUDING I.E. SALARIES OF RS.23.46 CRORES; AND POWER AND FUEL OF RS.8.07 CRORES HAD BEEN INCURRED BY THE APPELLANT COMPANY WHICH SUM STANDS REIMBURSED BY APOLLO. MOREOVER UNDER THE AGREEMENT ITSELF THE AFORESAID E XPENDITURE IS TO BE INCURRED BY APPELLANT AND REIMBURSED BY APOLLO AS THE NATURE OF THE ARRANGEMENT IS OF JOINT OPERATION OF THE PLANT. THE RELEVANT PORTION OF THE AGREEMENT DATED 14.11.2007 IS EXTRACTED HEREUNDER: WHEREAS BOTH ATL AND PTL CARRIED OUT THE JOINT OPE RATIONS AS ABOVE FOR THE PERIOD OF EIGHT YEARS FROM 1.4.195 TO 31.3.2003 AND SUBSEQUENTLY EXTENDED THE SAME UPTO 31 ST MARCH 2006 FROM TIME TO TIME. WHEREAS BY AN AGREEMENT DATED 22 ND MAY, 2006 THE PARTIES HAD AGREED TO EXECUTE THE LEASE OF THE PREMISES FOR A PERIOD OF F OUR YEARS FOR RS.15 CRORES PER ANNUM W.E.F. 1 ST APRIL, 2006. WHEREAS ATL HAS APPROACHED PTL THAT ITS HAS PLANS T O MAKE FURTHER INVESTMENTS IN THE PLANT OF PTL AND IS DESIROUS TO EXTEND THE P ERIOD OF LEASE AND HAVE A FIRM EIGHT YEARS LEASE. WHEREAS BOTH THE PARTIES ARE DESIROUS OF CONTINUING THE LEASE OPERATIONS ARRANGEMENT FOR THE PRESENT WHEREAS PTL HAS REQUESTED ATL TO ENHANCE THE LEASE RENTAL AND SECURITY DEPOSIT WITH EFFECT FROM 1 ST OCTOBER, 2007 WHICH ATL HAS AGREED. 8.11 THE OBLIGATION OF THE APPELLANT UNDER THE AR RANGEMENT HAD BEEN PROVIDED IN CLAUSE 6 OF THE AGREEMENT WHICH STIPULATES AS UN DER: 6 IN ADDITION TO PAYMENT OF LEASE RENTAL AS AFORE SAID, ATL WILL REIMBURSE TO PTL ACTUAL EXPENSES ON ACCOUNT OF THE FOLLOWING ALSO: ITA NO.200/COCH/2015 24 A) POWER OF FUEL B) STORE AND SPARES C) REPAIR AND MAINTENANCE D) PERSONNEL COST E) EXPENSES UNDER ANY OTHER HEAD RELATABLE TO PRODUCTI ON MANUFACTURE OF TYRES/TUBES. 8.12 IT WAS SPECIFICALLY ALSO AGREED THAT APPELLAN T WAS RESPONSIBLE FOR COMPLIANCE OF ALL OTHER STATUTORY RULES/REGULATIONS INCLUDING LABOUR, WELFARE, LEGISLATIONS PERTAINING TO THE EMPLOYEES/WORKMEN EM PLOYED BY IT AND ENGAGED IN THE MANUFACTURING ACTIVITIES AT THE PLANT OF PTL . IT IS A MATTER OF RECORD AND UNDISPUTED THAT RISK RELATING TO OPERATION OF PLANT IS ALSO WITH APPELLANT. 8.13 THUS HAVING REGARD TO THE AFORESAID FACTUAL POSITION WE ARE OF THE CONSIDERED OPINION THAT APPELLANT IS ENGAGED IN COM MERCIAL EXPLOITATION OF ASSETS OF THE PLANT BY WAY OF OPERATING THE PLANT F OR MANUFACTURE OF TYRES FOR APOLLO. THERE IS NO SALE OF ASSETS OR TERMINATION OF LICENSE OR RETRENCHMENT OF LABOUR EMPLOYED AT THE PLANT. THE INTENTION OF THE APPELLANT IS TO BE ALSO GAUGED BY THE FACT THAT IN THE INSTANT YEAR IT HAD TAKEN 20.78 ACRES OF LAND ON 90 YEARS LEASE W.E.F. 24.5.2007 AT A PREMIUM OF RS.519 .50 LACS. THUS IN OUR OPINION THERE IS NO INTENTION TO EXIT THE BUSINESS CARRIED ON BY THE APPELLANT COMPANY. OUR ABOVE CONCLUSION IS ALSO FORTIFIED FROM THE APP ROACH ADOPTED BY THE ASSESSING OFFICER WHEREBY OUT OF EXPENDITURE CLAIME D OF RS.18.77 CRORES, HE HAS ALLOWED EXPENDITURE OF RS.2.59 CRORES UNDER THE FOL LOWING HEADS: ITA NO.200/COCH/2015 25 SL. NO. PARTICULARS AMOUNT CLAIMED AS PER COMPUTATION OF INCOME (RS.) ALLOWED BY ASSESSING OFFICER (RS. IN LACS) I EMPLOYEES I) SALARIES, WAGES AND BONUS 9.42 9.42 II) CONTRIBUTION TO PROVIDENT AND OTHER FUNDS 0.36 0.36 III) GRATUITY - - IV) LEAVE ENCASHMENT PROVISION - - II MANUFACTURING ADMINISTRATIVE AND SELLING V) ADVERTISEMENT 3.19 3.19 VI) RENT 6.72 6.72 VII) RATES AND TAXES 5.76 5.76 VIII) INSURANCE 7.72 7.72 IX) TRAVELLING AND CONVEYANCE EXPENSES 1.66 1.66 X) DIRECTORS FEE 3.70 3.70 XI) PAYMENT TO STATUTORY AUDITORS 1.47 1 .47 XII) LEGAL AND PROFESSIONAL CHARGES 25.39 7.17 XIII) PRINTING, STATIONERY, POSTAGE, TELEGRAM & TELEPHONE ETC. 4.69 4.69 XIV) RE-IMBURSEMENT TOWARDS UTILIZATION OF COMPUTER AND OTHER ATL FACILITIES 34.45 34.45 XV) LEASE PREMIUM OF LEASE HOLD LAND WRITTEN OFF - - XVI) MISCELLANEOUS EXPENSES 0.72 0.72 XX) TOTAL(A) = (I+II 1 05.25 87.03 XXI) DEPRECIATION 8.24 - XXII) INTEREST AND BANK CHARGES 646.26 - XXIII) EXPENDITURE INCURRED IN CONNECTION WITH GIFT OF SHARES TO THE CEO OF ITS SUBSIDIARY TOWARDS HIS CONTRIBUTION IN DEVELOPING HEALTH CARE CONSTRIBUTION 945.69 - TOTAL (B) = XXI+XXII+XXIII) 1600.19 - ADDITIONAL ITEM CLAIMED IN COMPUTATION OF INCOME XXIV) BAD DEBTS WRITTEN OFF 139.79 139.79 XXV) DOUBTFUL ADVANCES WRITTEN OFF 23.23 23 .23 ITA NO.200/COCH/2015 26 XXVI PROFIT ON SALE OF ASSETS 8.60 8.60 TOTAL (C) = (XXIV + XXV + XXVI) 171.62 171.62 TOTAL (D) = (A+B+C) S1877.06 259.35 8.14. HAVING REGARD TO THE ABOVE, IT IS EVIDENT TH AT, ASSESSING OFFICER HAS ALLOWED EXPENDITURE UNDER THE HEADS BAD DEBTS, ADVERTISEMEN TS, SALARIES, ETC. INCURRED IN THE COURSE OF BUSINESS OF THE APPELLANT COMPANY. HOWEVER, THE ASSESSING OFFICER IN THE PRECEDING YEAR NAMELY ASSESSMENT YEA R 2009-10, HAS ALLOWED ONLY EXPENDITURE INCURRED UNDER THE HEAD DEPRECIATION OF RS.9,05,673/-, RATES AND TAXES OF RS.7,37,564/-, INSURANCE OF RS.9,31,398/- AND RENT PAID OF RS.7,06,750/- U/S. 57(III) OF THE ACT. THUS, ASSESSING OFFICER HIMSEL F HAS MADE A DEPARTURE BY ALLOWING EXPENDITURE IN THE INSTANT YEAR WHICH HAS BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR BUSINESS OF THE APPELLANT COMPANY. 8.15 FURTHERMORE, EVEN JUDICIALLY SPEAKING THE A PEX COURT VIDE JUDGMENT RENDERED ON 11.8.2016 IN THE CASE OF RAYALA CORPORA TION (P) LTD. VS. ACIT 386 ITR 500 HELD WHERE A COMPANY HAD ONLY ONE BUSINESS I.E. LEASING OF PROPERTY AND EARNING RENT THEREFROM THAT EVEN IF LETTING OF PROP ERTY IS NOT MAIN BUSINESS AS PER MEMORANDUM OF ASSOCIATION SUCH INCOME SHOULD BE ASS ESSED AS BUSINESS INCOME AND NOT HOUSE PROPERTY. IN ARRIVING AT THE ABOVE CONCLUSION, THE HONBLE APEX COURT FOLLOWED THE JUDGMENT DATED 9.4.2015 OF CHENNAI PROPERTIES AND INVESTMENTS LTD. VS. CIT 373 ITR 673 (SC) WHEREIN I T WAS HELD THAT IF AN ASSESSEE IS HAVING A HOUSE PROPERTY AND BY WAY OF BUSINESS IT I S GIVING PROPERTY ON RENT AND ITA NO.200/COCH/2015 27 IF IT IS RECEIVING RENT FROM THE SAID PROPERTY AS I TS BUSINESS INCOME, THE SAID INCOME, EVEN IF IN THE NATURE OF RENT, SHOULD BE TR EATED AS BUSINESS INCOME BECAUSE THE ASSESSEE IS HAVING A BUSINESS OF RENTIN G HIS PROPERTY AND THE RENT WHICH HE RECEIVES IS IN THE NATURE OF HIS BUSINESS INCOME. 8.16. IN THE CASE OF CHENNAI PROPERTIES AND INVES TMENT LTD. (SUPRA), THE HONBLE COURT FOLLOWED THE JUDGMENT OF KARANPURA DEVELOPMEN T CO. LTD. V. CIT 44 ITR 362 (SC) WHEREIN IT HAS BEEN HELD AS UNDER: 8.17 IN FACT IN THE CASE OF RAYALA CORPORATION (P) LTD. (SUPRA), IT WAS UNDISPUTED POSITION THAT ASSESSEE COMPANY HAD STOPPED ITS OTHE R BUSINESS ACTIVITIES AND WAS HAVING ONLY AN ACTIVITY WITH REGARD TO THE LEASING ITS PROPERTIES AND EARNING RENT THEREFROM AND EXCEPT LEASING THE COMPANY WAS NOT HA VING ANY OTHER BUSINESS. 8.18 ON THE AFORESAID FACTUAL MATRIX, IT WAS CONCL UDED AS UNDER: AS HAS BEEN ALREADY POINTED OUT IN CONNECTION WITH THE OTHER TWO CASES WHERE THERE IS A LETTING OUT OF PREMISES AND COLLECTION O F RENTS THE ASSESSMENT ON PROPERTY BASIS MAY BE CORRECT BUT NOT SO, WHERE THE LETTING OR SUB-LETTING IS PART OF TRADING OPERATION. THE DIVIDING LINE IS DIFFICUL T TO FIND; BUT IN THE CASE OF A COMPANY WITH ITS PROFESSED OBJECTS AND THE MANNER O F ITS ACTIVITIES AND THE NATURE OF ITS DEALINGS WITH ITS PROPERTY, IT IS POS SIBLE TO SAY ON WHICH SIDE THE OPERATIONS FALL AND TO WHAT HEAD THE INCOME IS TO B E ASSIGNED. 8. ON THE OTHER HAND, THE LEARNED COUNSEL APPEARIN G FOR THE RESPONDENT REVENUE MADE AN EFFORT TO JUSTIFY THE REASONS GIVEN BY THE HIGH COURT IN THE IMPUGNED JUDGMENT. THE LEARNED COUNSEL ALSO RELIED UPON THE JUDGMENT DELIVERED BY THIS COURT IN THE CASE OF M/S. S.G. ME RCANTILE CORPN. (P) LTD. V. CIT, CALCUTTA (1972) 1 SCC 465. ACCORDING TO HIM, THE I MPORTANT QUESTION WHICH WOULD ARISE IN ALL SUCH CASES IS WHETHER THE ACQUIS ITION OF PROPERTY FOR LEASING ITA NO.200/COCH/2015 28 AND LETTING OUT ALL THE SHOPS AND STALLS WOULD BE E SSENTIALLY A PART OF BUSINESS AND TRADING OPERATIONS OF THE ASSESSEE. ACCORDING TO THE LEARNED COUNSEL APPEARING FOR THE REVENUE, LEASING AND LETTING OUT OF SHOPS AND PROPERTIES IS NOT THE MAIN BUSINESS OF THE ASSESSEE AS PER MEMORANDUM OF ASSOCIATION AND THEREFORE, THE INCOME EARNED BY THE ASSESSEE SHOULD BE TREATED AS INCOME EARNED FROM HOUSE PROPERTY. HE, THEREFORE, SUBMITT ED THAT THE IMPUGNED JUDGMENT IS JUST LEGAL AND PROPER AND THEREFORE, TH ESE APPEALS SHOULD BE DISMISSED. 9. UPON HEARING THE LEARNED COUNSEL AND GOING THROU GH THE JUDGMENTS CITED BY THE LD. COUNSEL, WE ARE OF THE VIEW THAT THE LAW LA ID DOWN BY THIS COURT IN THE CASE OF CHENNAI PROPERTIES (SUPRA) SHOWS THE CORREC T POSITION OF LAW AND LOOKING AT THE FACTS OF THE CASE IN QUESTION, THE CASE ON H AND IS SQUARELY COVERED BY THE SAID JUDGMENT. 10. SUBMISSIONS MADE BY THE LEARNED COUNSEL APPEAR ING FOR THE REVENUE IS TO THE EFFECT THAT THE RENT SHOULD BE THE MAIN SOURCE OF INCOME OR THE PURPOSE FOR WHICH THE COMPANY IS INCORPORATED SHOULD BE TO EARN INCOME FROM RENT, SO AS TO MAKE THE RENTAL INCOME TO BE THE INCOME TAXABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION. IT IS AN ADM ITTED FACT IN THE INSTANT CASE THAT THE ASSESSEE COMPANY HAS ONLY ONE BUSINESS AND THAT IS OF LEASING ITS PROPERTY AND EARNING RENT THEREFROM. THUS, EVEN ON THE FACTUAL ASPECT, WE DO NOT FIND ANY SUBSTANCE IN WHAT HAS BEEN SUBMITTED B Y THE LEARNED COUNSEL APPEARING FOR THE REVENUE. 11. THE JUDGMENT RELIED UPON BY THE LEARNED COUNSE L APPEARING FOR THE AS SQUARELY COVERS THE FACTS OF THE CASE INVOLVED IN T HE APPEALS. THE BUSINESS OF THE COMPANY IS TO LEASE ITS PROPERTY AND TO EARN RE NT AND THEREFORE, THE INCOME SO EARNED SHOULD BE TREATED AS ITS BUSINESS INCOME. 8.19 THUS THE RATIO-DESCENDI OF THE AFORESAID JUDG MENT IS THAT RENTAL INCOME IS ASSESSABLE AS BUSINESS INCOME IF THE ONLY INCOME IS FROM LEASING OF PROPERTY EVEN IF LEASING IS NOT THE MAIN BUSINESS OF ASSESSEE. TH E AGREEMENT WITH APOLLO IS INTRA- VIRES THE OBJECTS OF THE ASSESSEE AS PER MEMORANDUM OF ASSOCIATION, WHICH INTER- ALIA INCLUDES THE FOLLOWING: 9 TO BRING, BUY SELL, MANUFACTURE, PLANT, CULTIVA TE, PREPARE, REPAIR, CONVERT, HIRE, ALTER, TREAT, MANIPULATE, EXCHANGE, LET ON HI RE, IMPORT, EXPORT, DISPOSE OFF AND DEAL IN MACHINERY, IMPLEMENTS, ROLLING STOCK PL ANT, HARD-WARE, ORES, METALS, IRON, CARBON BLACK RAYON, HESSIAN, STONE MA TERIALS, TOOLS, APPLIANCES, APPARATUS, PRODUCTS, SUBSTANCE AND ARTICLES OF ALL KINDS (WHETHER REFERRED TO IN THIS MEMORANDUM OR NOT) WHICH MAY SEEM TO THE COMPA NY CAPABLE OF BEING ITA NO.200/COCH/2015 29 USED OR REQUIRED FOR THE PURPOSE OF ANY OF THE BUSI NESS WHICH THE COMPANY IS EXPRESSLY OR BY IMPLICATION AUTHORIZED TO CARRY ON OR WHICH ARE USUALLY SUPPLIED OR DEALT IN BY PERSONS ENGAGED IN ANY SUCH BUSINESS ES OR WHICH MAY SEEM TO THE COMPANY CAPABLE OF BEING CONVENIENTLY ON IN CON NECTION WITH THE ABOVE OR OTHERWISE CALCULATED DIRECTLY OR INDIRECTLY TO E NHANCE THE VALUE OF ANY OF THE PROPERTY AND RIGHTS OF THE COMPANY FOR THE TIME BEING. 17. TO AMALGAMATE, ENTER INTO PARTNERSHIP, OR INTO ANY ARRANGEMENT FOR SHARING PROFITS UNION OF INTEREST, CO-OPERATION, JOINT ADVE NTURES, OR RECIPROCAL CONCESSIONS OR FOR LIMITING COMPETITION WITH ANY PE RSON OR COMPANY CARRYING ON OR ENGAGED IN OR ABOUT TO CARRY ON OR ENGAGE IN ANY BUSINESS OR TRANSACTION WHICH THE COMPANY IS AUTHORIZED TO CAR RY ON OR ENGAGE IN OR WHICH CAN BE CARRIED ON IN CONJUNCTION THEREWITH OR WHICH IS CAPABLE OF BEING CONDUCTED SO AS TO DIRECTLY OR INDIRECTLY BENEFIT T HE COMPANY. 20. TO SELL LEASE MORTGAGE OR OTHERWISE DISPOSE OF F THE PROPERTY, ASSETS OR UNDERTAKING OF THE COMPANY OR ANY PART THEREOF FOR SUCH CONSIDERATION AS THE COMPANY MAY THINK FIT, AND IN PARTICULAR SHARES STO CK DEBENTURES OR OTHER SECURITIES OF ANY OTHER COMPANY WHETHER OR NOT HAVI NG OBJECTS ALTOGETHER OR IN PART SIMILAR TO THOSE OF THE COMPANY. 8.20 THUS EVEN AS PER THE JUDGMENT OF APEX COURT I N THE CASE OF RAYALA CORPORATION (P) LTD. (SUPRA) AND CHENNAI PROPERTIES AND INVESTMENTS LTD. (SUPRA) WHICH ARE SUBSEQUENT TO THE DECISIONS OF TR IBUNAL HOLDING INCOME TO BE INCOME FROM OTHER SOURCES, THE INCOME FROM ARRANGEM ENT WITH APOLLO IS BUSINESS INCOME. 8.21 MOREOVER IT IS ALSO SEEN THAT THE ASSESSING O FFICER HAS INVOKED SECTION 56(2)(II) OF THE ACT AND NOT SECTION 22 OF THE ACT WHICH READS AS UNDER: 56(2) IN PARTICULAR, AND WITHOUT PREJUDICE TO THE GENERALITY OF THE PROVISIONS OF SUB-SECTION (1), THE FOLLOWING INCOMES, SHALL BE CHARGEABLE TO INCOME-TAX UNDER THE HEAD INCOME FROM OTHER SOURCES, NAMELY: - (II) INCOME FROM MACHINERY, PLANT OR FURNITURE BELO NGING TO THE ASSESSEE AND LET ON HIRE, IF THE INCOME IS NOT CHARGEABLE TO INC OME-TAX UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION. ITA NO.200/COCH/2015 30 8.22 SECTION 56 OF THE ACT BEING THE RESIDUARY HE AD OF INCOME UNDER THE FRAME WORK OF THE ACT, CAN BE RESORTED TO ONLY IF A N INCOME IS NOT CHARGEABLE UNDER ANY OTHER SPECIFIC HEAD OF INCOME. SECTION 5 6 OF THE ACT WHICH COMES INTO PLAY ONLY IF ALL OTHER HEADS OF INCOME ARE EXC LUDED SPECIFICALLY. 8.23 THE APEX COURT HAS DELVED UPON THE ISSUE IN SERIES OF JUDGMENTS. IN THE CASE OF CEPT V. SHRI LAKSHMI SILK MILLS LTD. 20 ITR 451 (SC) THE FACTS WERE THAT ASSESSEE COMPANY WAS A MANUFACTURER OF SILK CLOTH A ND AS A PART OF ITS BUSINESS, IT INSTALLED A PLANT FOR DYEING SILK YARN . DURING THE CHARGEABLE ACCOUNTING PERIOD, JANUARY, 1, 1943, TO 31 ST DECEMBER, 1943, OWING TO DIFFICULTY IN OBTAINING SILK YARN ON ACCOUNT OF THE WAR, IT COULD NOT MAKE USE OF THIS PLANT AND IT REMAINED IDLE FOR SOME TIME. IN AUGUST, 1943, IT WAS LET OUT TO A PERSON ON A MONTHLY RENT. THE QUESTION WAS WHE THER SUCH SUM REPRESENTING THE RENT FOR FIVE MONTHS REALIZED BY T HE ASSESSEE WAS CHARGEABLE TO EXCESS PROFITS TAX AS PROFITS OF BUSINESS OR WAS INCOME FROM OTHER SOURCES AND WAS, THEREFORE, NOT CHARGEABLE TO EXCESS PROFITS TA X. IT WAS HELD BY THE APEX COURT THAT IT WAS A PART OF THE NORMAL ACTIVITIES O F THE ASSESSEES BUSINESS TO EARN MONEY BY MAKING USE OF ITS MACHINERY BY EITHE R EMPLOYING IT IN ITS OWN MANUFACTURING CONCERN OR TEMPORARILY LETTING IT TO OTHERS FOR MAKING PROFIT FOR THAT BUSINESS WHEN FOR THE TIME BEING IT COULD NOT ITSELF RUN IT AND THAT THE DYEING PLANT HAD NOT CEASED TO BE A COMMERCIAL ASSE T OF THE BUSINESS AND THE SUM REPRESENTING THE RENT FOR FIVE MONTHS RECEI VED FROM THE LESSEE BY THE ITA NO.200/COCH/2015 31 ASSESSEE WAS, THEREFORE, INCOME FROM BUSINESS AND W AS CHARGEABLE TO EXCESS PROFITS TAX. IT WAS THEREAFTER CONCLUDED AS UNDER: IF A COMMERCIAL ASSEST WAS NOT CAPABLE OF BEING U SED AS SUCH, THEN ITS BEING LET OUT TO OTHERS DID NOT RESULT IN AN INCOME WHICH WAS THE INCOME OF THE BUSINESS, BUT IT COULD NOT BE SAID THAT AN ASSE T WHICH WAS ACQUIRED AND USED FOR THE PURPOSE OF THE BUSINESS CEASED TO BE A COMMERCIAL ASSET OF THAT BUSINESS AS SOON AS IT WAS TEMPORARILY PUT OUT OF U SE OR LET OUT TO ANOTHER PERSON FOR USE IN HIS BUSINESS OR TRADE. THE YIELD OF INCOME BY A COMMERCIAL ASSET WAS THE PROFIT OF THE BUSINESS IRRESPECTIVE O F THE MANNER IN WHICH THAT ASSET WAS EXPLOITED BY THE OWNER OF THE BUSINESS. H E WAS ENTITLED TO EXPLOIT IT TO THE BEST ADVANTAGE AND HE MIGHT DO SO EITHER, BY USING IT HIMSELF PERSONALLY OR BY LETTING IT OUT TO SOMEBODY ELSE. THE VIEW THAT IN ORDER TO CONSTITUTE BUSINESS INCOME, THE COMMERCIAL ASSET MU ST AT THE TIME IT WAS LET OUT BE IN A CONDITION TO BE USED AS A COMMERCIAL AS SET BY THE ASSESSEE HIMSELF WAS NOT CORRECT. 8.24 FOLLOWING THE ABOVE, IN THE ABOVE CASE OF CIT V. VIKRAM COTTON MILLS :TD. 169 ITR 597 (SC) IT WAS HELD THAT WHEN THE INTENTIO N WAS NOT TO PART WITH THE ASSETS, BUT TO LEASE IT OUT FOR A TEMPORARY PERIOD AS A PART OF EXPLOITATION, IT COULD NOT BE SAID THAT NO BUSINESS WAS CARRIED ON A ND THE INCOME DERIVED BY THE COMPANY FROM LETTING OUT THE MACHINERY WAS ONLY RENTAL INCOME. THERE WAS NEVER ANY ACT INDICATING THAT THE COMPANY NEVER INTENDED TO CARRY ON THE BUSINESS IN THE FUTURE. ALSO IN THE CASE OF CI T V. MYSORE WINE PRODUCTS LTD. 370 ITR 102 (KAR), IT WAS CONCLUDED AS UNDER: IN SUCH CIRCUMSTANCES, THE INCOME DERIVED BY WAY O F LEASE RENT FROM THE LETTING OUT OF ITS ASSETS WAS ASSESSABLE TO TAX UND ER THE HEAD PROFIT AND GAINS OF BUSINESS. WHETHER A PARTICULAR INCOME IS INCOM E FROM BUSINESS OR FROM INVESTMENT MUST BE DECIDED ACCORDING TO THE GENERAL COMMONSENSE VIEW OF THOSE WHO DEAL WITH THOSE MATTERS IN THE PARTICU LAR CIRCUMSTANCES AND THE CONDUCT OF THE PARTIES CONCERNED. ITA NO.200/COCH/2015 32 IN THE ABOVE JUDGMENT IT WAS NOTED THAT THE AP EX COURT IN THE CASE OF S.G. MERCANTILE CORPN. (P) LTD. V. CIT HAS HELD THAT, TH E RESIDUARY HEAD OF INCOME CAN BE RESORTED TO ONLY IF NONE OF THE SPECIFIC HEA DS IS APPLICABLE TO THE INCOME IN QUESTION; IT COMES INTO OPERATION ONLY AF TER THE PRECEDING HEADS ARE EXCLUDED. 8.25 IN LIGHT OF THE ABOVE AND HAVING REGARD TO T HE VIEW CLAUSES OF THE ARRANGEMENT BETWEEN APOLLO AND APPELLANT IT IS APPA RENT THAT THE SAID, ARRANGEMENT BETWEEN THE PARTIES IS THAT OF CONTRACT MANUFACTURING WHEREBY THE BASIC RAW MATERIAL FOR MANUFACTURE OF THE TYRES IS SUPPLIED BY APOLLO, AND USING THE SAME THE APPELLANT MANUFACTURES THE TYRES FOR APOLLO USING ITS LABOUR, FUEL ETC. CLEARLY, IF THE APPELLANT FAILS TO PROVI DE THE LABOUR, ETC. THE ARRANGEMENT WOULD NOT BE WORKABLE, WHERE THERE IS A SIMPLE LEASE OF A PLANT TO ANOTHER PARTY. IT IS CASE WHERE THE APPELLANT A PART FROM LETTING APOLLO CONSTRUCTIVELY USE ITS PLANT AND MACHINERY, IS ALSO MANAGING THE ENTIRE PRODUCTION ACTIVITY IN THE PLANT BY USING ITS LABOU R ETC. AND ACCORDINGLY, THERE IS A SYSTEMATIC ACTIVITY UNDERTAKEN BY THE APPELLAN T. ACCORDINGLY, IT IS SUBMITTED THAT THE ACTIVITY UNDERTAKEN BY THE APPEL LANT IS THAT OF A BUSINESS ACTIVITY AND ACCORDINGLY, ANY INCOME ARISING THEREF ROM OUGHT TO BE TREATED AS BUSINESS INCOME. ITA NO.200/COCH/2015 33 8.26 WE ARE ALSO OF THE OPINION THAT DISCLOSURE IN THE FINANCIAL STATEMENT AS OTHER INCOME OR THERE IS ONE SEGMENT OF THE ASSES SEE IS AN IRRELEVANT CONSIDERATION. IT IS WELL SETTLED PRINCIPLE THAT T REATMENT IN BOOKS OF ACCOUNTS IS NOT DETERMINATIVE OF THE NATURE AND TAXABILITY OF I NCOME AS HELD IN THE CASE OF TUTICORIN ALKALI CHEMICALS AND FERTILIZERS LTD. V. CIT 227 ITR 172 (SC) AND KEDARNATH JUTE MFG. CO. LTD. V CIT 82 ITR 363 (SC). 8.27 FOR THE SAKE OF COMPLETENESS, IT IS STATED T HAT IT IS WELL SETTLED LAW THAT IF THERE IS A NEW GROUND OR A MATERIAL CHANGE IN THE FACTUAL AND LEGAL POSITION PRECEDENTS DO NOT HAVE BINDING CHARACTER. IN THE C ASE OF BHARAT SANCHAR NIGAM LTD. V UOI WP (CIVIL) 183/2003 (SC), IT WAS N OTED AS UNDER: EVEN IF THE SAID ORDERS ARE PASSED UNDER THE SAME PROVISIONS OF LAW, IT MAY THEORETICALLY BE OPEN TO THE PART TO CONTEND THAT T HE LIABILITY BEING RECURRING FROM YEAR TO YEAR, THE CAUSE OF ACTION IS NOT THE S AME; AND SO EVEN IF A CITIZENS PETITION CHALLENGING THE ORDER OF ASSESSM ENT PASSED AGAINST HIM FOR ONE YEAR IS REJECTED, IT MAY BE OPEN TO HIM TO CHAL LENGE A SIMILAR ASSESSMENT ORDER PASSED FOR THE NEXT YEAR. IN THAT CASE, THE COURT MAY ULTIMATELY ADOPT THE SAME VIEW WHICH HAD BEEN ADOPTED ON THE EARLIER OCCASION; BUT IF A NEW GROUND IS URGED, THE COURT MAY HAVE TO CONSIDER IT ON MERITS, BECAUSE, STRICTLY SPEAKING THE PRINCIPLE OF RES JUDICATA MAY NOT APPLY TO SUCH A CASE. THAT IN FACT, IS THE EFFECT OF THE DECISION OF THIS COURT I N THE AMALGAMATED COALFIELDS ITA NO.200/COCH/2015 34 LTD. AND ANR. V. THE JANAPADA SABHA, CHHINDWARA (19 63) SUPP. 1 SCR 172. IN OUR OPINION, THE SAID GENERAL OBSERVATIONS MUST BE READ IN THE LIGHT OF THE IMPORT FACT THAT THE ORDER WHICH WAS CHALLENGED IN THE SECOND WRIT PETITION WAS IN RELATION TO A DIFFERENT PERIOD AND NOT FOR T HE SAME PERIOD AS WAS COVERED BY THE EARLIER PETITION. BUT AS FAR AS A CHALLENGE TO THE SAME ASSESSMENT OR DER IS CONCERNED, IT WAS HELD:- THAT IF CONSTRUCTIVE RES JUDICATA IS NOT APPLIED T O SUCH PROCEEDINGS A PARTY CAN FILE AS MANY WRIT PETITIONS AS HE LIKES AND TAK E ONE OR TWO POINTS EVERY TIME. THAT CLEARLY IS OPPOSED TO CONSIDERATIONS OF PUBLIC POLICY ON WHICH RES JUDICATA IS BASED AND WOULD MEAN HARASSMENT AND HAR DSHIP TO THE OPPONENT. BESIDES, IF SUCH A COURSE IS ALLOWED TO BE ADOPTED, THE DOCTRINE OF FINALITY OF JUDGMENTS PRONOUNCED BY THIS COURT WOULD ALSO BE MA TERIALLY EFFECTED. WE ARE, THEREFORE, SATISFIED THAT THE SECOND WRIT PETI TION FILED BY THE APPELLANT IN THE PRESENT CASE IS BARRED BY CONSTRUCTIVE RES JUDI CATA. 8.28 SIT WAS FINALLY CONCLUDED AS UNDER: 15. THE DECISIONS CITED ABOVE HAVE UNIFORMLY HELD THAT RES JUDICATA DOES NOT APPLY IN MATTERS PERTAINING TO TAX FOR DIFFERENT AS SESSMENT YEARS BECAUSE RES JUDICATA APPLIES TO DEBAR COURTS FROM ENTERTAINING ISSUES ON THE SAME CAUSE OF ACTION WHEREAS THE CAUSE OF ACTION FOR EACH ASSESSM ENT YEAR IS DISTINCT. THE COURTS WILL GENERALLY ADOPT AN EARLIER PRONOUNCEMEN T OF THE LAW OR A ITA NO.200/COCH/2015 35 CONCLUSION OF FACT UNLESS THERE IS A NEW GROUND URG ED OR A MATERIAL CHANGE IN THE FACTUAL POSITION. THE REASON WHY THE COURTS HA VE HELD PARTIES TO THE OPINION EXPRESSED IN A DECISION IN ONE ASSESSMENT Y EAR TO THE SAME OPINION IN A SUBSEQUENT YEAR IS NOT BECAUSE OF ANY PRINCIPLE O F RES JUDICATA BUT BECAUSE OF THE THEORY OF PRECEDENT OR THE PRECEDENTIAL VALU E OF THE EARLIER PRONOUNCEMENT. WHERE FACTS AND LAW IN A SUBSEQUENT ASSESSMENT YEAR ARE THE SAME, NO AUTHORITY WHETHER QUASI-JUDICIAL OR JU DICIAL CAN GENERALLY BE PERMITTED TO TAKE A DIFFERENT VIEW. THIS MANDATE I S SUBJECT ONLY TO THE USUAL GATEWAYS OF DISTINGUISHING THE EARLIER DECISION OR WHERE THE EARLIER DECISION IS PER INCURIAM. HOWEVER, THESE ARE FETTERS ONLY ON A COORDINATE BENCH WHICH FAILING THE POSSIBILITY OF AVAILING OF EITHER OF TH ESE GATEWAYS, MAY YET DIFFER WITH THE VIEW EXPRESSED AND REFER THE MATTER TO A BENCH OF SUPERIOR STRENGTH OR IN SOME CASES TO A BENCH OF SUPERIOR JURISDICTION. 8.29 IN THE INSTANT CASE WE HAVE ALREADY HIGHLIGHT ED THE CHANGE IN FACTUAL POSITION AND ALSO THE SUBSEQUENT APEX COURT JUDGMEN TS WHICH HAVE PERSUADED HAS TO MAKE AN DEPARTURE APART FROM THE F ACT THAT A LEGAL PLEA CRUCIALLY DETERMINATIVE OF THE CLAIM OF THE APPELLA NT HAD NOT BEEN CONSIDERED IN THE ORDERS FOR AY 2004-05 AND 2007-08. 8.30 WE WOULD LIKE HERE TO MAKE A GAINFUL REFERENC E TO THE CASE OF SHYAM BURLAP COMPANY LTD. V. CIT 380 ITR 151 (CAL), WHERE THE ASSESSEE IN THE PAST ITA NO.200/COCH/2015 36 HISTORY CONSISTENTLY SHOWN RENTAL INCOME UNDER THE HEAD INCOME FROM HOUSE PROPERTY WHICH STOOD ACCEPTED AS SUCH. HOWEVER FO R THE FIRST TIME IN AY 1996- 97 IT CLAIMED THE INCOME TO BE INCOME FROM BUSINESS WHICH WAS NEGATED BY TRIBUNAL, HAVING REGARD TO THE PAST HISTORY OF THE APPELLANT AND APPLYING TO THE PRINCIPLE OF CONSISTENCY. THE HONBLE COURT FOLLOWI NG THE JUDGMENT OF CHENNAI PROPERTIES AND INVESTMENTS LTD. (SUPRA) AND THE FAC T THAT MEMORANDUM OF ASSOCIATION OF APPELLANT WAS NOT CONSIDERED HELD TH AT INCOME IS TAXABLE AS BUSINESS INCOME. IT WAS HELD THEREIN AS UNDER: 15. THERE IS ANOTHER ASPECT OF THE MATTER. THOUGH THE APPELLANT HAD RELIED ON THE MEMORANDUM IN SUPPORT OF ITS CONTENTION THAT IT WAS CARRYING OUT BUSINESS BY LETTING OUT THE PROPERTY, HOWEVER, NEITHER THE A SSESSING OFFICER NOR THE TRIBUNAL, WHICH HAD RECORDED THE SUBMISSION OF THE APPELLANT IN PARAGRAPH 2 OF ITS ORDER HAD CONSIDERED THE ISSUE AT ALL FROM T HAT ANGLE. SINCE THE CIT(A) WHILE ALLOWING THE APPEAL OF THE APPELLANT HAD REFE RRED TO THE MEMORANDUM, IT WAS INCUMBENT ON THE PART OF THE TRIBUNAL TO DEA L WITH THE SAID MEMORANDUM INSTEAD OF DENYING DEDUCTION ON THE GROU ND THAT THE ASSESSEE IN THE PRECEDING YEARS THROUGHOUT HAD DECLARED THE RENTAL INCOME UNDER THE HEAD INCOME FROM HOUSE PROPERTY. THOUGH IN BHARA T SANCHAR NIGAM LTD. (SUPRA) IT WAS HELD THAT THE COURTS WILL GENERALLY ADOPT AN EARLIER PRONOUNCEMENT OF THE LAW OR A CONCLUSION OF FACT UN LESS THERE IS A NEW GROUND URGED OR A MATERIAL CHANGE IN THE FACTUAL POSITION (PARAGRAPH 20) AND ITA NO.200/COCH/2015 37 THOUGH AS EVIDENT FROM THE ORDER IN SHAMBHU INVES TMENTS (P) LTD. 9SUPRA) WHEREIN IT WAS HELD THAT WHAT HAS TO BE SEEN IN WH AT WAS THE PRIMARY OBJECT OF THE ASSESSEE WHILE EXPLOITING THE PROPERTY, HOW EVER NEITHER THE ASSESSING OFFICER NOR THE TRIBUNAL HAD CONSIDERED THE FACTS I N THE LIGHT OF THE MEMORANDUM. 8.31 IN FINAL ANALYSIS WE HOLD THAT THE APPELLANT COMMENCED THE BUSINESS BUT ON ACCOUNT OF POOR FINANCIAL VIABILITY THE APPELLAN T COMPANY INCURRED LOSSES AND, ERODED THE ENTIRE NET WORTH AND WAS DECLARED S ICK COMPANY UNDER THE SICK INDUSTRIAL COMPANIES ACT, 1956. A REHABILITAT ION SCHEME WAS PREPARED AND SANCTIONED BY BOARD FOR INDUSTRIAL AND FINANCIA L RECONSTRUCTION. SCHEME ENVISAGED JOINT OPERATION OF THE PLANT ON AN IRRECO VERABLE LEASE OF EIGHT YEARS IN CONSIDERATION OF LEASE RENTALS; WHICH HAS BEEN E XTENDED FROM TIME TO TIME. THERE WAS THUS NO INTENTION OF LETTING OUT THE PLAN T, BUILDING, MACHINERY AND LICENCE TO ANYONE. THE SET UP OF THE BUSINESS FOR CARRYING ON THE BUSINESS. FURTHER, WHEN APPELLANT ENTERED THE ARRANGEMENT WIT H APOLLO, THE INTENTION WAS NOT TO LEASE. THE INTENTION WAS TO EXPLOIT THE COMMERCIAL ASSETS THROUGH ITS EXPERTISE AND DERIVE INCOME. THERE IS NO SALE OF A SSETS OR RETRENCHMENT OF EMPLOYEES OR EVEN SURRENDER OF ANY LICENSES, REGIST RATION ETC. AS PER THE AGREEMENT, IT WAS THE RESPONSIBILITY OF THE ASSESSE E TO RECRUIT LABOUR FOR RUNNING THE PLANT AND MEET ALL THE LABOUR LAW REQUIREMENT I N RESPECT THEREOF, TO PURCHASE FUEL AND POWER REQUIRED FOR RUNNING THE PL ANT, ENSURE THE PLANT IS ITA NO.200/COCH/2015 38 PROPERLY INSURED, MAINTAIN THE PLANT IN WORKING CON DITION, UNDERTAKE ITS REPAIR AND MAINTENANCE ETC. THE EXPRESS SO INCURRED BY TH E APPELLANT FOR THE SAID RESPONSIBILITIES, WERE REIMBURSED BY APOLLO TO IT O N ACTUAL BASIS. THE PRODUCTION NOW BY THE APPELLANT IS IN THE NAME OF APOLLO AND T HAT TOO, TO RETAIN COMMERCIAL VIABILITY IN THE OPERATIONS AND AUGMENT THE FINANCIAL POSITION AND AT THE SAME TIME BRING ABOUT MODERNIZATION AND EXPA NSION IN THE PLANT. 8.32 THEREFORE, IN VIEW OF SECTION 56(2)(II) COUP LED WITH THE JUDGMENTS OF THE APEX COURT AS AFORESAID, THE INCOME SHOULD FALL UND ER THE HEAD PROFITS AND GAINS OF BUSINESS AND NOT FROM INCOME FROM OTHER SOURCES. ACCORDINGLY, THE GROUND RAISED BY THE ASSESSEE IS ALLOWED. 9. GROUND NO. 2 RELATES TO DISALLOWANCE OF RS.18, 21,609/- REPRESENTING THE EXPENDITURE INCURRED AND CLAIMED BY THE APPELLANT C OMPANY UNDER SECTION 37(1) OF THE ACT. 10. DURING THE INSTANT YEAR THE APPELLANT CLAIMED AN EXPENDITURE OF RS.15,71,609/- PAYABLE TO M/S. MEDNET ASIA AND OF R S.3,00,000/- PAYABLE TO M/S. VRINDA SOFTWARE (P) LTD. OF RS.3,00,000/- FOR PROVIDING CONSULTANCY. THE LEARNED ASSESSING OFFICER DENIED THE SAME ON THE GR OUND THAT EXPENDITURE HAS NOT BEEN INCURRED TO EARN ANY INCOME AND RELATED TO SUBSIDIARY COMPANY. THE CIT(A) SUSTAINED THE SAME BY HOLDING AS UNDER: ITA NO.200/COCH/2015 39 1.3 IT HAS BEEN HELD BY THE ASSESSING OFFICER THAT EXPENSES ARE RELATED TO SUBSIDIARY COMPANIES, THE CLAIM FOR BUSINESS EXPEND ITURE IN THE ASSESSEES HANDS IS NOT ALLOWABLE. IT SEEMS THAT ASSESSING OF FICER HAS QUITE APPROPRIATELY APPRECIATED THE FACTS THAT THE SUBSIDIARY COMPANY I S A SEPARATE TAXABLE ENTITY HAVING ITS OWN PERMANENT ACCOUNT NUMBER; ANY EXPEND ITURE INCURRED ON BEHALF OF THE SUBSIDIARY COMPANY CANNOT BE TREATED AS A BUSINESS EXPENDITURE IN THE HANDS OF THE HOLDING COMPANY. OTHERWISE ALS O, THE APPELLANT COMPANY HAS NO INCOME UNDER THE HEAD BUSINESS AND PROFESSIO N AS THEIR ONLY SOURCE OF INCOME HAS BEEN THE RENTAL INCOME FROM LEASING OUT THE PLANT AND MACHINERY, WHICH HAS BEEN HELD AS INCOME FROM OTHER SOURCES. IN SUCH A CASE, EXPENSES RELATING TO BUSINESS WOULD NOT BE ALLOWABL E. 11. BEFORE US THE LD. COUNSEL FOR ASSESSEE HAS CON TENDED THAT BOTH THE AGREEMENTS IN THE CASE OF M/S. VRINDA SOFTWARE PVT. LTD. AND IN THE CASE OF M/S. MEDNET ASIA LTD. PROVIDE FOR REIMBURSEMENT OF EXPENDITURE, WHICH STANDS ALLOWED AND THEREFORE LOGICALLY AND LEGALLY DENIAL OF DEDUCTION IS CONTRADICTORY AND UNTENABLE. IT WAS SUBMITTED THAT THOUGHT THE EXPENSES INCURRED FOR MEDNET ASIA ARE FOR PROVIDING VARIOUS CONSULTANCY SERVICES FOR THE BUSINESS OF THE SUBSIDIARY; THE SERVICES OF VRINDA SOFTWARE ARE IN THE NATURE OF PROVIDING INFORMATION TECHNOLOGY (IT) SERVICES TO T HE COMPANY AND NOT TO SUBSIDIARY. IT WAS FURTHER SUBMITTED THAT THE CLAIM OF THE APPELLANT IS THAT LEGAL ITA NO.200/COCH/2015 40 AND PROFESSIONAL CHARGES OF RS.18.71 LAKHS (INCORRE CTLY DISALLOWED OF RS.18.22 LACS) ARE ALLOWABLE U/S. 37(1) OF THE ACT, SINCE TH E ENTIRE INCOME IS ASSESSABLE UNDER THE HEAD BUSINESS AND ONCE, LEASE RENT IS B USINESS INCOME, OR EVEN INVESTMENT BY WAY OF CONTROLLING INTEREST IS SUBSID IARIES IS HELD TO BE BUSINESS SUCH EXPENDITURE IS BUSINESS EXPENDITURE. IT WAS F URTHER SUBMITTED THAT IF THE LEASE RENT INCOME IS TREATED AS INCOME FROM OTHER SOURCES, THE ABOVE EXPENDITURE IS ALLOWABLE AS PER SECTION 57(III) OF THE INCOME TAX ACT, ON THE SAME BASIS AS EXPENDITURE OF REIMBURSEMENT HAS BEEN ALLOWED AS DEDUCTION. ALSO, MERE FACT THAT THERE IS NO INCOME FROM INVEST MENT IN SHARES OF SUBSIDIARY CAN BE NO GROUND TO DENY EXPENDITURE U/S. 57(III) O F THE ACT AS HELD IN THE CASE OF CIT V. RAJENDRA PRASAD MOODY 115 ITR 519 (S C). RELIANCE WAS ALSO PLACED ON THE FOLLOWING PROPOSITION: PROPOSITION I: THAT SOFTWARE EXPENDITURE WAS ALLOWA BLE AS REVENUE EXPENDITURE I) CIT VS. RAYCHEM RPG LTD. 346 ITR 138 (BOM) II) CIT V ACL WIRELESS LTD. 361 ITR 210 (DEL) III) CIT VS. RENUGA TEXTILE MILLS LTD. 366 ITR 649 (MAD) IV) CIT VS. IBM INDIA LTD. 357 ITR 88 (KAR) V) CIT V VARINDER AGRO CHEMICALS LTD. 309 ITR 272 (P&H ) VI) CIT V N.J. INDIA INVEST (P) LTD. 215 TAXMAN 78 (GUJ ) PROPOSITION II : EXPENDITURE INCURRED FOR OBTAINING CONSULTANCY IS REVENUE EXPENDITURE: ITA NO.200/COCH/2015 41 I) SHRIRAM PISTONS AND RINGS LTD. V CIT 307 ITR 363 (D EL) II) CIT V COROMANDAL FERTILIZERS 247 ITR 417 (AP) III) CIT VS. CROMPTON ENGINEERING CO. LTD. 242 ITR 317 ( MAD) IV) EMPIRE JUTE COMPANY LIMITED VS. CIT 124 ITR 1 (SC) V) ALEMBIC CHEMICAL WORKS CO. LTD. VS. CIT 177 ITR 377 (SC) VI) CIT VS. J.K. SYNTHETICS 309 ITR 371 (DEL) VII) CIBA OF INDIA LTD. V. CIT 69 ITR 692 (SC) VIII) KESORAM INDUSTRIES AND COTTON MILLS LTD. V CIT 196 ITR 845 (SC) IX) J.B. PATEL & CO. VS. DCIT 120 TTJ 1127 (AHD) X) CIT VS. ORIENT BEVERAGES LTD. 203 ITR 559 (CAL) XI) RICHARDSON HINDUSTAN LTD. VS. CIT 169 ITR 516 (BOM) XII) DCIT VS. SIR SOBHA SINGH & SONS (P) LTD. 41 TAXMANN COM 378 (DEL) 11.1 IT WAS THEREFORE PRAYED THAT DISALLOWANCE MADE OF RS. 18.22 LACS MAY KINDLY BE DELETED. 12. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND P ERUSED THE MATERIAL ON RECORD AND ORDERS PASSED BY THE AUTHORITIES BELOW. AS REGARDS VRINDA SOFTWARE (P) LTD. IS CONCERNED, EXPENDITURE HAS BEE N INCURRED FOR PROVIDING INFORMATION TECHNOLOGY (IT) SERVICES TO THE COMPANY AND IS THUS BUSINESS EXPENDITURE OF THE APPELLANT COMPANY ALLOWABLE U/S. 37(1) OF THE ACT. SO FAR AS FOR PROVIDING CONSULTANCY BY MEDNET ASIA IS CONC ERNED IT IS NOTED THAT ITA NO.200/COCH/2015 42 ASSESSING OFFICER HAS ALLOWED EXPENDITURE OF RS.1,1 9,846/- WHICH WAS INCURRED TOWARDS REIMBURSEMENT OF EXPENDITURE INCURRED BY ME DNET ASIA. NO DOUBT, THE SERVICES OF MEDNET ASIA HAD BEEN ENGAGED BY APP ELLANT IN RESPECT OF BUSINESS OF THE SUBSIDIARY, YET THE SAME IS ALLOWAB LE ON ACCOUNT OF COMMERCIAL EXPEDIENCY. IN THE CASE OF CIT VS. M/S. HOLEIM IND IA (P) LTD. 272 CTR 282 FACTS WERE THAT ASSESSEE WAS A SUBSIDIARY OF HOLDERIND IN VESTMENTS LTD., MAURITIUS FORMED AS A HOLDING COMPANY FOR MAKING DOWNSTREAM I NVESTMENTS IN CEMENT MANUFACTURING VENTURES IN INDIA. THE ASSESSEE CLAIM ED ADMINISTRATIVE AND MISCELLANEOUS EXPENSES EXPENDITURE WRITTEN OFF AMOU NTING TO RS.8.75 CRORES AND FOR THE ASSESSMENT YEAR 2008-09, THE ASSESSEE H AD CLAIMED EXPENSES AMOUNTING TO RS.7.02 CRORES AS PERSONAL EXPENSE, OP ERATING AND OTHER EXPENSES, DEPRECIATION AND FINANCIAL EXPENSES. THE ASSESSING OFFICER HELD THAT ASSESSEE HAD NOT COMMENCED BUSINESS ACTIVITIES AS THEY HAD NOT UNDERTAKEN ANY MANUFACTURING ACTIVITY OR MADE DOWNS TREAM INVESTMENT, HE ACCORDINGLY DISALLOWED THE ENTIRE EXPENDITURE FOR B OTH THE YEARS. THE CIT(A) CONFIRMED THE DISALLOWANCE MADE BY THE ASSESSING OF FICER. HE HELD THAT THE BUSINESS OF THE ASSESSEE WAS EXCLUSIVELY TO ACT AS A HOLDING COMPANY FOR DOWNSTREAM INVESTMENT IN OLDER COMPANIES AND THE EX PENDITURE INCURRED WAS ON SALARIES OF EMPLOYEES OF THE ASSESSEE COMPANY AN D OTHER OPERATING EXPENSES OF THE COMPANY. THE CIT(A) DID NOT AGREE AND HELD THAT AS NO EXEMPT INCOME WAS CLAIMED, NO DISALLOWANCE U/S. 14A WAS WARRANTED. TRIBUNAL REVERSED THE FINDINGS OF THE CIT(A); AND H ELD THAT ASSESSEE HAD ITA NO.200/COCH/2015 43 ACQUIRED CONTROLLING INTEREST IN THE RESPECTIVE COM PANIES AND THIS WAS THEIR LINE OF BUSINESS. THE HONBLE HIGH COURT DISMISSED THE A PPEAL OF REVENUE, HELD THAT THE RESPONDENT ASSESSEE, THEREFORE, HAD TO INCUR EX PENDITURE FOR THE BUSINESS IN THE FORM OF INVESTMENT IN SHARES OF CEMENT COMPANIE S AND TO FURTHER EXPAND AND CONSOLIDATE THEIR BUSINESS. IT WAS HELD THAT E XPENDITURE HAD TO BE ALSO INCURRED TO PROTECT THE INVESTMENT MADE. THE GENUI NENESS OF THE SAID EXPENDITURE AND THE FACT THAT IT WAS INCURRED FOR B USINESS ACTIVITIES WAS NOT DOUBTED BY THE ASSESSING OFFICER AND HAS ALSO NOT B EEN DOUBTED BY THE CIT(A). IN THESE CIRCUMSTANCES, EXPENDITURE WAS AL LOWED AND APPEAL OF THE REVENUE DISMISSED. IT WAS CONCLUDED AS UNDER:- 16. WHAT IS ALSO NOTICEABLE IS THAT THE ENTIRE OR WHOLE EXPENDITURE HAS BEEN DISALLOWED AS IF THERE WAS NO EXPENDITURE INCURRED BY THE RESPONDENT- ASSESSEE FOR CONDUCTING BUSINESS. THE CIT(A) HAS P OSITIVELY HELD THAT THE BUSINESS WAS SET UP AND HAD COMMENCED. THE SAID FI NDING IS ACCEPTED. THE RESPONDENT-ASSESSEE, THEREFORE, HAD TO INCUR EXPEND ITURE FOR THE BUSINESS IN THE FORM OF INVESTMENT IN SHARES OF CEMENT COMPANIE S AND TO FURTHER EXPAND AND CONSOLIDATE THEIR BUSINESS. EXPENDITURE HAD TO BE ALSO INCURRED TO PROTECT THE INVESTMENT MADE. THE GENUINENESS OF THE SAID E XPENDITURE AND THE FACT THAT IT WAS INCURRED FOR BUSINESS ACTIVITIES WAS NO T DOUBTED BY THE ASSESSING OFFICER AND HAS ALSO NOT BEEN DOUBTED BY THE CIT(A) . 13. HAVING REGARD TO THE ABOVE DISALLOWANCE MADE A ND SUSTAINED IS DELETED. GROUND RAISED IS ALLOWED. 14. GROUND NO. 3 RELATES TO DISALLOWANCE OF EXPEND ITURE OF RS.6,46,25,550/- INCURRED TOWARDS INTEREST PAID ON LOANS RAISED FOR INVESTMENT IN SUBSIDIARY COMPANY. ITA NO.200/COCH/2015 44 15. THE ASSESSING OFFICER HELD THAT VERIFICATION O F THE BALANCE SHEET REVEALED THAT ASSESSEE HAS INVESTMENT AMOUNTING TO RS.80,84, 64,000/- AS ON 31/03/2010 AND ASSESSEE LOAN LIABILITY IS ONLY RS.49,80,05,000 /- WHICH INDICATES THAT THE ENTIRE INTEREST LIABILITY WAS ON ACCOUNT OF ITS INV ESTMENT IN SUBSIDIARY COMPANIES. HE THEREFORE CONCLUDED THAT INTEREST EXP ENDITURE AMOUNTING TO RS. 6,46,25,550/- CANNOT BE ALLOWED U/S. 57 OF THE ACT. THE DISALLOWANCE WAS ALSO HELD TO BE IN ORDER AS PER SECTION 14A OF THE ACT. THE DISALLOWANCE WAS ALSO HELD TO BE IN ORDER AS PER SECTION 14A OF THE ACT. THE CIT(A) HOWEVER SUSTAINED THE DISALLOWANCE BY INVOKING SECTION 14A OF THE ACT ON THE FOLLOWING BASIS: 2.2 DURING THE COURSE OF APPEAL PROCEEDINGS, IT WA S EXPLAINED BY THE APPELLANT THAT THE PROVISION OF SECTION 14A WAS NOT APPLICABLE IN RESPECT OF INCOME FROM OTHER SOURCES. HOWEVER, IT IS SEEN THA T SECTION 14A IS APPLICABLE FOR COMPUTING THE TOTAL INCOME UNDER C HAPTER IN VIEW OF THE AFORESAID, WHICH INCLUDES INCOME FROM OTHER SOURCES THAT BY SOANGROUND NO. 3 RELATES TO DISALLOWANCE OF EXPENDITURE OF RS. 6,46,25,550/- INCURRED TOWARDS INTEREST PAID ON LOANS RAISED FOR INVESTMEN T IN SUBSIDIARY COMPANY. 2.3 CERTAIN INFORMATION SUCH AS COPY OF THE BALAN CE SHEET SHOWING CAPITAL AND RESERVES AS WELL AS THE INTEREST BEARING LOANS WAS CALLED FOR ALONGWITH THE PROFIT AND LOSS ACCOUNT SHOWING THE AMOUNT OF INTER EST PAID. THE BALANCE SHEET SHOWS THAT THERE IS SHARE CAPITAL OF RS.13.23 CRORES AND RESERVES ON SURPLUS OF RS.27.03 CRORES, I.E., TOTAL OF RS.40.27 CORE IS AVAILABLE AS CAPITAL AND FREE RESERVES AS ON 31.3.2010. THE AMOUNT OF SECUR ED LOAN IS RS.49.74 CRORES. ON THE OTHER HAND, THE COST OF LOAN AS PER P&L ACCO UNT IN THE FORM OF INTEREST AND BANK CHARGES IS RS.6,46,00,000/-. HE NCE, FROM THE FACTS, IT IS CLEAR THAT THE APPELLANT DOES NOT HAVE ENOUGH SHARE CAPIT AL AND FREE RESERVES TO ITA NO.200/COCH/2015 45 HAVE MADE INVESTMENT OF RS.80.84 CRORES. OUT OF TH E TOTAL LIABILITY OF RS.86.87 CRORES, TAKEN TOGETHER WITH THE CAPITAL AND RESERVE OF RS.40.27 CRORE, AND SECURED LOAN OF RS.49.74 CRORE, ALMOST 57% OF THE F UND COMES AS SECURED LOANS, ON WHICH THE APPELLANT IS LIABLE TO PAY INTE REST. THE PROVISION OF SECTION 14A IS APPLICABLE WHEN INTEREST BEARING FUNDS ARE I NVESTED TO EARN THE EXEMPT INCOME. IT HAS BEEN HELD BY THE HONBLE SUP REME COURT IN THE CASE OF CIT VS. WALFORT SHARE AND STOCK BROKERS (P) LTD. (2010) 326 ITR 1, THAT: THE MANDATE OF SECTION 14A IS TO CURB THE PRACTICE OF CLAIMING DEDUCTION OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME AGAI NST TAXABLE INCOME AND AT THE SAME TIME AVAIL OF THE TAX INCENTIVE BY WAY OF EXEMPT INCOME WITHOUT MAKING ANY APPORTIONMENT OF EXPENSES INCURRED IN RE LATION TO EXEMPT INCOME. THE BASIC REASON FOR INSERTION OF SECTION 14A IS THAT CERTAIN COMES ARE NOT INCLUDIBLE WHILE COMPUTING THE TOTAL INCOME BEC AUSE THESE ARE EXEMPT UNDER CERTAIN PROVISION F THE ACT (CIT VS. WALFORT SHARE AND STOCK BROKERS (P) LTD. (2010) 326 ITR 1 (SC) THE CBDT VIDE CIRC. NO. 5/2014 DATED 11.2.2014 HAS GONE A STEP AHEAD IN CLARIFYING THE APPLICABILITY U/S. 14A OF THE ACT AS UNDER: SECTION 14A PROVIDES FOR DISALLOWANCE OF EXPENDITU RE IN RELATING TO INCOME NOT INCLUDIBLE IN TOTAL INCOME. A CONTROVERSY HA S ARISEN IN CERTAIN CASES AS TO WHETHER DISALLOWANCE CAN BE MADE BY INVOKING SECTIO N 14A EVEN IN THOSE CASES WHERE NO INCOME HAS BEEN EARNED BY AN ASSESSE E WHICH HAS BEEN CLAIMED AS EXEMPT DURING THE FINANCIAL YEAR. IT IS CLARIFIED THAT RULE 6D READ WITH SECTION 14A PROVIDES FOR DISALLOWANCE OF THE E XPENDITURE EVEN WHERE TAXPAYER IN A PARTICULAR YEAR HAS NOT EARNED ANY EX EMPT INCOME. IN VIEW OF THIS, IT IS HELD THAT THE ASSESSING OFFI CER HAS RIGHTLY INVOKED THE PROVISIONS OF SECTION 14A AND WORKED OUT THE DIFFER ENCE. ACCORDINGLY, THE ADDITION MADE BY THE ASSESSING OFFICER IS UPHELD AN D APPEAL ON THIS GROUND IS DISMISSED. 16. BEFORE US THE LEARNED COUNSEL CONTENDED THAT N O DISALLOWANCE UNDER SECTION 14A IS VALID AS THERE IS NO INCOME EARNED D URING THE INSTANT YEAR AND ITA NO.200/COCH/2015 46 THEREFORE, DISALLOWANCE MADE IS ABSOLUTELY UNTENABL E. RELIANCE WAS ALSO PLACED ON THE FOLLOWING JUDGMENTS: I) CIT VS. HOLCIM INDIA (P) LTD. 272 CTR 282 (DEL) II) CHEMINVEST LTD. VS. CIT 378 ITR 33 (DEL) III) CIT VS. CORRETCH ENERGY (P) LTD. 111 DTR 146 ( GUJ) IV) CIT VS. SHIVAM MOTORS (P) LTD. 111 DTR 143 (ALL ) V) CIT VS. DELITE ENTERPRISES I.T.A. NO. 110/2009 ( BOM) VI) CIT VS. WINSOME TEXTILE INDUSTRIES LTD. 319 ITR 204 (P&H) VII) CIT VS. M/S. LAKHANI MARKETING INCL. 111 DTR 1 49 (P&H) VIII) M/S. REI AGRO LTD. VS. DCIT 60 TTJ 107 (CAL) M AFFIRMED BY THE JUDGMENT OF HONBLE CALCUTTA HIGH COURT IN THE CASE OF CIT V S. M/S. REI AGRO LTD. GA 3022/2013 DATED 23.12.2013. 16.1 IT WAS ALSO SUBMITTED THAT DISALLOWANCE MADE BY THE ASSESSING OFFICER CANNOT EXCEED THE EXEMPT INCOME, AND SINCE THERE IS NO INCOME, NO DISALLOWANCE CAN BE MADE. RELIANCE WAS ALSO PLACED ON THE FOLLOWING JUDGMENTS: I) JOINT INVESTMENTS PV. LTD. VS. CIT 372 ITR 694 ( DEL) II) CHUDGAR RANCHODLAL JETHALAL VS. DCIT I.T.A. NO. 245/AHD/2013 DATED 27.03.2015. III) I.T.A. NO.5592/MUM/2012 DATED 01.01.2015 M/S. DAGA GLOBAL CHEMICALS PVT. LTD. VS. ACIT IV) I.T.A. NO. 986/DEL/2012 DATED 18.03.2015 HT MED IA LTD. VS. ACIT V) 148 ITD 336 (DEL) SAHARA INDIA FINANCIAL CORPN. LTD. VS. DCIT VI) ITA NO. 548/CHD/2011 DATED 30/09/2011 ACIT VS. PUNJAB STATE COOP & MARKETING FED. LTD. ITA NO.200/COCH/2015 47 VII) ITA NO. 4320/DEL/2014 DATED 21.10.2015 ACIT VS . M/S. KAJARIA CERAMICS LIMITED. VIII) ITA NO. 1027/DEL/2013 DATED 23/10/21015 HEMA ENGINEERING INDUSTRIES LTD. VS. ACIT IX) ITA NO. 3763/DEL/2013 DATED 29/04/2015 INDUS VA LLEY INVESTMENT & FINANCE PVT. LTD. VS. DCIT 16.2 IT WAS NEXT SUBMITTED THAT INVESTMENT IS MADE IN THE SUBSIDIARY COMPANY DOING HOSPITAL BUSINESS FOR EARNING INCOME AND HENC E THE EXPENSES INCURRED IN THE NATURE OF INTEREST WAS ON ACCOUNT OF BUSINESS E XPEDIENCY AND IS TO BE TREATED AS AN ALLOWABLE BUSINESS EXPENDITURE. IT I S FURTHER SUBMITTED THAT IF THE LEASE RENT INCOME IS TREATED AS INCOME FROM OTHER SOURCES, THE ABOVE EXPENDITURE IS ALLOWABLE AS PER SECTION 57 OF THE I T ACT. IT WAS NEXT SUBMITTED THAT THE SUPREME COURT IN THE CASE OF S.A. BUILDERS VS. CIT(A) AND ANOTHER REPORTED IN 288 ITR 1 SUPPORTS THIS VIEW AND FURTHE R EXPLAIN THE EXPRESSION COMMERCIAL EXPEDIENCY. IT IS HELD THAT THE EXPRE SSION IS ONE OF WIDE IMPORT AND INCLUDES SUCH EXPENDITURE AS A PRUDENT BUSINESS MAN INCURS FOR THE PURPOSE OF THE BUSINESS. THE EXPENDITURE MAY NOT HAVE BEEN INCURRED UNDER ANY LEGAL OBLIGATION, BUT YET IT IS ALLOWABLE AS BUSINESS EXP ENDITURE IF IT WAS INCURRED ON GROUNDS OF COMMERCIAL EXPEDIENCY. IT IS FURTHER HE LD THAT FOR AN EXPENDITURE TO BE BUSINESS EXPENDITURE IT IS SUFFICIENT IF NEXUS B ETWEEN EXPENDITURE AND PURPOSE OF BUSINESS IS ESTABLISHED, EVEN THOUGH IT IS NOT THE ASSESSEES OWN BUSINESS. IT WAS FURTHER SUBMITTED THAT ASSESSING OFFICER WAS FURTHER NOT JUSTIFIED TO DENY THE CLAIM OF DEDUCTION U/S. 57(III) OF THE ACT ON THE GROUND THAT ITA NO.200/COCH/2015 48 APPELLANT DOES NOT HAVE ANY INCOME FROM SHARES, WHI CH IS ALSO CONTRARY TO THE JUDGMENT OF APEX COURT IN THE CASE OF CIT VS. RAJEN DRA PRASAD MOODY 115 ITR 519. RELIANCE WAS ALSO PLACED ON THE FOLLOWING JUDG MENTS: I) S.A. BUILDERS LTD. VS. CIT 288 ITR 1 (SC) II) HERO CYCLES (P) LTD. VS. CIT 379 ITR 347 (SC)) 16.3 IT WAS THEREFORE PRAYED THAT THE DISALLOWANCE MADE MAY KINDLY BE DELETED. 17. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND P ERUSED THE MATERIAL ON RECORD AND ORDERS PASSED BY THE AUTHORITIES BELOW. IT IS UNDISPUTED THAT THERE IS NO INCOME DECLARED AND CLAIMED AS EXEMPT BY THE APP ELLANT. THE INVESTMENTS HELD ARE SUMS INVESTED IN WHOLLY OWNED SUBSIDIARY C OMPANY, AS PART OF CONTROLLING INTEREST OF APPELLANT COMPANY. THE DELH I HIGH COURT IN THE CASE OF JOINT INVESTMENT PVT. LTD. VS. CIT (SUPRA), HAS HEL D THAT DISALLOWANCE U/S. 14A CANNOT EXCEED THE AMOUNT OF EXEMPT INCOME. THE DEL HI HIGH COURT IN THE CASE OF HOLCIM INDIA PVT. LTD. (SUPRA) HAS HELD THA T THERE CAN BE NO DISALLOWANCE U/S. 14A IN THE ABSENCE OF ANY EXEMPT INCOME. THE RATIONAL BEHIND THESE JUDGMENTS ARE THAT, THE AMOUNT OF DISA LLOWANCE SHOULD NOT EXCEED THE EXEMPT INCOME. SIMILAR VIEW HAS BEEN EX PRESSED IN THE FOLLOWING JUDGMENTS: I) CHEMINVEST LTD. VS. CIT 378 ITR 33 (DEL) ITA NO.200/COCH/2015 49 23 IN THE CONTEXT OF THE FACTS ENUMERATED HEREINBE FORE THE COURT ANSWERS THE QUESTION FRAMED BY HOLDING THAT THE EXP RESSION DOES NOT FORM PART OF THE TOTAL INCOME IN SECTION 14A OF TH E ENVISAGES THAT THERE SHOULD BE AN ACTUAL RECEIPT OF INCOME, WHICH IS NOT INCLUDIBLE IN THE TOTAL INCOME, DURING THE RELEVANT PREVIOUS YEAR FOR THE P URPOSE OF DISALLOWING ANY EXPENDITURE INCURRED IN RELATION TO THE SAID IN COME. IN OTHER WORDS, SECTION 14A WILL NOT APPLY IF NO EXEMPT INCOME IS R ECEIVED OR RECEIVABLE DURING THE RELEVANT PREVIOUS YEAR. II) CIT VS. CORRETCH ENERGY (P) LTD. 111 DTR 146 (G UJ) COUNSEL FOR THE REVENUE SUBMITTED THAT THE ASSESSI NG OFFICER AS WELL AS CIT(APPEALS) HAD APPLIED FORMULA OF RULE 8D OF THE INCOME TAX RULES, SINCE THIS CASE AROSE AFTER THE ASSESSMENT YEAR 200 9-10. SINCE IN THE PRESENT CASE, WE ARE CONCERNED WITH THE ASSESSMENT YEAR 2009-10, SUCH FORMULA WAS CORRECTLY APPLIED BY THE REVENUE. WE H OWEVER, NOTICE THAT SUB-SECTION (1) OF SECTION 14A PROVIDES THAT FOR TH E PURPOSE OF COMPUTING TOTAL INCOME UNDER CHAPTER IV OF THE ACT, NO DEDUCT ION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. IN THE PRESENT CASE, THE TRIBUNAL HAS RECORDED THE FINDING OF FACT THAT THE ASSESSEE DID NOT MAKE ANY CLAIM FOR EXEMPTION OF AN Y INCOME FROM PAYMENT OF TAX. IT WAS ON THIS BASIS THAT THE TRIB UNAL HELD THAT DISALLOWANCE U/S. 14A OF THE ACT COULD NOT BE MADE. IN THE PROCESS, THE TRIBUNAL RELIED ON THE DECISION OF DIVISION BENCH O F PUNJAB & HARYANA HIGH COURT IN CASE OF CIT VS. WINSOME TEXTILE INDUSTRIES LTD. (2009) 319 ITR 204 IN WHICH ALSO THE COURT HAD OBSERVED AS UNDER: 7. WE DO NOT FIND ANY MERIT IN THIS SUBMISSION. TH E JUDGMENT OF THIS COURT IN ABHISHEK INDUSTRIES LTD. (2006) 286 ITR 1 WAS ON THE ISSUE OF ALLOWABILIY OF INTEREST PAID ON LOANS GIVEN IN SISTER CONCERN, WIT HOUT HAVING NEXUS WITH THE BUSINESS. THE OBSERVATIONS MADE THEREIN HAVE T O BE READ IN THAT CONTEXT. IN THE PRESENT CASE, ADMITTEDLY THE ASSES SEE DID NOT MAKE ASSESSMENT YEAR CLAIM FOR EXEMPTION. IN SUCH A SITU ATION SECTION 14A COULD HAVE NO APPLICATION. DIS SM III) CIT VS. M/S. SHIVAM MOTORS (P) LTD. 111 DTR 15 3 (ALL) 10 AS REGARDS THE SECOND QUESTION, S. 14A OF THE ACT PROVIDES THAT FOR THE PURPOSE OF COMPUTING THE TOTAL INCOME UNDER THE CHA PTER, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. HENCE, WHAT S. 14A PROVIDES IS THAT IF THERE IS ANY EXPENDITURE WHICH ITA NO.200/COCH/2015 50 IS INCURRED FOR EARNING THE INCOME IS NOT AN ALLOWA BLE DEDUCTION. FOR THE YEAR IN QUESTION, THE FINDING OF FACT IS THAT THE A SSESSEE HAD NOT EARNED ANY TAX-FREE INCOME. HENCE, IN THE ABSENCE OF ANY TAX-FREE INCOME, THE CORRESPONDING EXPENDITURE COULD NOT BE WORKED OUT F OR DISALLOWANCE. THE VIEW OF THE CIT(A), WHICH HAS BEEN AFFIRMED BY THE TRIBUNAL, HENCE DOES NOT GIVE RISE TO ANY SUBSTANTIAL QUESTION OF L AW. HENCE, THE DELETION OF THE DISALLOWANCE OF R.2,03,752 MADE BY THE ASSES SING OFFICER WAS IN ORDER IV) CIT VS. DELITE ENTERPRISES ITA NO. 110/2009 (BO M) REVENUE IS IN APPEAL ON THE FOLLOWING QUESTIONS;- WHETHER ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE HONBLE TRIBUNAL WAS RIGHT IN DELETING THE DISALLOWANCE MAD E BY THE ASSESSING OFFICER OF INTEREST PAID TO THE ASSESSEE COMPANY ON BORROWED FUND AMOUNTING TO RS.241.10 LAKHS OVERLOOKING THE FACT T HAT THE BORROWED FUNDS WERE USED BY THE ASSESSEE COMPANY TO INVEST IN THE CAPITAL OF ANOTHER PARTNERSHIP FIRM AND SINCE PROFIT DERIVED BY THE AS SESSEE COMPANY FROM A PARTNERSHIP FIRM WERE EXEMPT FROM TAX U/S. 10(2A) O F THE INCOME-TAX ACT THE INTEREST EXPENSE RELATED TO SUCH TAX FREE PROFI TS IS TO BE DISALLOWED U/S. 14A OF THE INCOME TAX ACT. (B) WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE C ASE AND IN LAW THE HONBLE TRIBUNAL WAS RIGHT IN HOLDING THAT THE ASSE SSING OFFICER CANNOT CONSIDER NOTIONAL INTEREST ON DEPOSIT RECEIVED BY T HE ASSESSEE COMPANY WHILE ARRIVING AT THE FAIR MARKET VALUE U/S. 23(1)( A) OF THE INCOME TAX ACT? 2. IN SO FAR AS QUESTION (A) IS CONCERNED, ON FACT S WE FIND THAT THERE IS NO PROFIT FOR THE RELEVANT ASSESSMENT YEAR. HENCE THE QUESTION FRAMED WOULD NOT ARISE. 3. IN SO FAR AS QUESTION (B) IS CONCERNED, THE TRI BUNAL FOLLOWED THE JUDGMENT OF THIS COURT IN J.K. INVESTORS (BOM) LTD. 248 ITR 723 (BOM), NOTHING HAS BEEN BROUGHT TO OUR NOTICE THAT THE RAT IO OF THIS JUDGMENT WOULD NOT BE APPLICABLE. IN THE LIGHT OF THAT THE SAID QUESTION WOULD NOT ARISE. CONSEQUENTLY APPEAL IS DISMISSED. V) CIT VS. WINSOME TEXTILE INDUSTRIES LTD. 319 ITR 204 (P&H) ITA NO.200/COCH/2015 51 5. WE HAVE HEARD LEARNED COUNSEL FOR THE PARTIES. 6. THE CONTENTION RAISED ON BEHALF OF THE REVENUE I S THAT EVEN IF THE ASSESSEE HAD MADE INVESTMENT IN SHARES OUT OF ITS O WN FUNDS, THE ASSESSEE HAD MADE INVESTMENT IN SHARES OUT OF ITS OWN FUNDS, THE ASSESSEE HAD TAKEN LOANS ON WHICH INTEREST WAS PAID AND ALL THE MONEY AVAILABLE WITH THE ASSESSEE WAS IN COMMON KITTY, AS HELD BY THIS C OURT IN CIT VS. ABHISHEK INDUSTRIES LTD. (2006) 286 ITR 1 WAS ON THE ISSUE O F ALLOWABILITY OF INTEREST PAID ON LOANS GIVEN TO SISTER CONCERNS, WITHOUT INT EREST. IT WAS HELD THAT DEDUCTION FOR INTEREST WAS PERMISSIBLE WHEN LOAN WA S TAKEN FOR BUSINESS PURPOSE AND NOT FOR DIVERTING THE SAME TO SISTER CO NCERN WITHOUT HAVING NEXUS WITH THE BUSINESS. THE OBSERVATIONS MADE THER EIN HAVE TO BE READ IN THAT CONTEXT. IN THE PRESENT CASE, ADMITTEDLY, THE ASSESSEE DID NOT MAKE ANY CLAIM FOR EXEMPTION. IN SUCH A SITUATION, SECT ION 14A COULD HAVE NO APPLICATION. 17.1 THE ISSUE AS TO ALLOWABILITY OF BUSINESS EXPE NDITURE AS INTEREST FREE LOAN IS ALSO WELL SETTLED. IN THE CASE OF S.A. BUILDERS VS . CIT(A) 288 ITR 1 (SC) FACET WERE THAT THE ASSESSEE HAD ADVANCED HUGE AMOUNTS AS INTE REST FREE LOANS OUT OF ITS CASH CREDIT ACCOUNT IN WHICH THERE WAS A HUGE DEBIT BALANCE. THE ASSESSING OFFICER DISALLOWED THE PROPORTIONATE INTEREST RELAT ING TO SAID AMOUNT OUT OF TOTAL INCOME PAID TO BANK, HOLDING THAT THE ASSESSE E HAD DIVERTED ITS BORROWED FUNDS TO ITS SISTER CONCERN WITHOUT CHARGI NG ANY INTEREST. THE CIT(A) ACCEPTED PARTIAL CLAIM OF THE ASSESSEE ON GROUND TH AT OUT OF TOTAL AMOUNT ADVANCED BY THE ASSESSEE ONLY CERTAIN SUM HAD A CLE AR NEXUS WITH BORROWED FUNDS, AS BALANCE AMOUNT HAD BEEN PAID OUT OF RECEI PTS FROM OTHER PARTIES TO WHOM NO INTEREST HAD BEEN PAID. HOWEVER, ON CROSS APPEALS, THE TRIBUNAL ALLOWED THE REVENUES APPEAL. ON THE ASSESSEES APP EAL , THE HIGH COURT HELD THAT ORDER OF THE TRIBUNAL DID NOT SUFFER FROM ANY FACTUAL OR LEGAL INFIRMITY, AS THE AMOUNT IN QUESTION HAD BEEN ADVANCED BY THE ASSESSE E TO IT SISTER CONCERN ITA NO.200/COCH/2015 52 OUT OF OVERDRAFT ACCOUNT IN WHICH THERE WAS ALREADY A HUGE DEBIT BALANCE. THE HONBLE SUPREME COURT ALLOWED THE APPEAL OF ASS ESSEE AND REMAND BACK TO TRIBUNAL FOR A FRESH DECISION HOLDING THAT WHERE IT IS OBVIOUS THAT A HOLDING COMPANY HAS A DEEP INTEREST IN ITS SUBSIDIARY, AND HENCE IF THE HOLDING COMPANY MAKES ADVANCES FOR BUSINESS PURPOSES, THE A SSESSEE WOULD IN OUR OPINION, ORDINARILY BE ENTITLED TO DEDUCTION OF INT EREST ON ITS BORROWED LOANS. IT WAS HELD AS UNDER: IN OUR OPINION, THE HIGH COURT IN THE IMPUGNED JUD GMENT AS WELL AS THE TRIBUNAL AND THE INCOME-TAX AUTHORITIES HAVE APPROA CHED THE MATTER FROM AN ERRONEOUS ANGLE. IN THE PRESENT CASE, THE ASSESS EE BORROWED THE FUND FROM THE BANK AND LENT SOME OF IT TO ITS SISTER CON CERN (A SUBSIDIARY) AS INTEREST FREE LOAN. THE TEST, IN OUR OPINION, IN SUCH A CAS E IS REALLY WHETHER THIS WAS DONE AS A MEASURE OF COMMERCIAL EXPEDIENCY. IN OUR OPINION, THE DECISIONS RELATING TO SECTION 37 OF THE ACT WILL ALSO BE APPL ICABLE TO SECTION 36(1)(III) BECAUSE IN SECTION 37 ALSO THE EXPRESSION USED IS FOR THE PURPOSE OF BUSINESS. IT HAS BEEN CONSISTENTLY HELD IN THE DE CISIONS RELATING TO SECTION 37 THAT THE EXPRESSION FOR THE PURPOSE OF BUSINESS I NCLUDES EXPENDITURE VOLUNTARILY INCURRED FOR COMMERCIAL EXPEDIENCY, AND IT IS IMMATERIAL IF A THIRD PARTY ALSO BENEFITS THEREBY. THUS IN ATHERTON V. B RITISH INSULATED AND HELSBY CABLES LTD. (1925) 10 TC 155, IT WAS HELD BY THE HO USE OF LORDS THAT IN ORDER TO CLAIM A DEDUCTION, IT IS ENOUGH TO SHOW THAT THE MO NEY IS EXPENDED, NOT OF NECESSITY AND WITH A VIEW TO DIRECT AND IMMEDIATE B ENEFIT, BUT VOLUNTARILY AND ON GROUNDS OF COMMERCIAL EXPEDIENCY AND IN ORDE R TO INDIRECTLY TO FACILITATE THE CARRYING ON THE BUSINESS. THE ABOVE TEST IN ATHERTONS CASE (1925) 10 TC 155 (HL) HAS BEEN APPROVED BY THIS COU RT IN SEVERAL DECISIONS, E.G. EASTERN INVESTMENTS LTD. VS. CIT (1951) 20 ITR 1, CIT V. CHANDULAL KESHAVLAL AND CO. (1960) 38 ITR 601. 17.2 ALSO IN THE CASE OF HERO CYCLES (P) LTD. VS. CIT 379 ITR 347 (SC), IT WAS HELD AS UNDER: 9. A PERUSAL OF THE ORDER PASSED BY THE HIGH COURT WOULD REVEAL THAT THE HIGH COURT HAS NOT AT ALL DISCUSSED THE AFORESAID FACTS WHICH WERE ESTABLISHED ON RECORD PERTAINING TO THE INTEREST FREE ADVANCE GIVE N TO M/S. HERO FIBRES LIMITED AS WELL AS LOANS GIVEN TO ITS OWN DIRECTORS AT INTE REST AT THE RATE OF 10 PER CENT. ITA NO.200/COCH/2015 53 10. ON THE OTHER HAND, THE HIGH COURT HAS SIMPLY QU OTED FROM ITS OWN JUDGMENT IN THE CASE OF CIT VS. ABHISHEK INDUSTRIES (2006) 286 ITR 1/156 TAXMAN 257 (PUNJ. & HAR.). ON THAT BASIS, IT HAS HELD THA T WHEN LOANS WERE TAKEN FROM THE BANKS AT WHICH INTEREST WAS PAID FOR THE PURPOS ES OF BUSINESS, THE INTEREST THEREON COULD NOT BE CLAIMED AS BUSINESS EXPENDITUR E. 11. WE ARE OF THE OPINION THAT SUCH AN APPROACH IS CLEARLY FAULTY IN LAW AND CANNOT BE COUNTENANCED. 12. INSOFAR AS LOANS TO THE SISTER CONCERN/SUBSIDIA RY COMPANY ARE CONCERNED, LAW IN THIS BEHALF IS RECAPITULATED BY THIS COURT I N THE CASE OF S.A. BUILDERS LTD. VS. CIT(APPEALS) (2007) 288 ITR 1/158 TAXMAN 74. AF TER TAKING NOTE OF AND DISCUSSING ON THE SCOPE OF COMMERCIAL EXPEDIENCY, T HE COURT SUMMED UP THE LEGAL POSITION IN THE FOLLOWING MANNER: 26 THE EXPRESSION COMMERCIAL EXPEDIENCY IS AN EX PRESSION OF WIDE IMPORT AND INCLUDES SUCH EXPENDITURE AS A PRUDENT BUSINESS MAN INCURS FOR THE PURPOSE OF BUSINESS. THE EXPENDITURE MAY NOT HAVE B EEN INCURRED UNDER ANY LEGAL OBLIGATION, BUT YET IT IS ALLOWABLE AS A BUSI NESS EXPENDITURE IF IT WAS INCURRED ON GROUNDS OF COMMERCIAL EXPEDIENCY. 27 NO DOUBT, AS HELD IN MADHAV PRASAD JATIA V. CIT (1979) (118 ITR 200) (SC), IF THE BORROWED AMOUNT WAS DONATED FOR SOME SENTIMENTA L OR PERSONAL REASONS AND NOT ON GROUND OF COMMERCIAL EXPEDIENCY, THE INT EREST THEREON COULD NOT HAVE BEEN ALLOWED U/S. 36(1)(III) OF THE ACT. IN MA DHAV PRASADS CASE (19790 118 ITR 200 (SC), THE BORROWED AMOUNT WAS DONATED T O A COLLEGE WITH A VIEW TO COMMEMORATE THE MEMORY OF THE ASSESSEES DECEASE D HUSBAND AFTER WHOM THE COLLEGE WAS TO BE NAMED, IT WAS HELD BY TH IS COURT THAT THE INTEREST ON THE BORROWED FUND IN SUCH A CASE COULD NOT BE AL LOWED AS IT COULD NOT BE SAID THAT IT BORROWED FUND IN SUCH A CASE COULD NOT BE ALLOWED., AS IT COULD NOT BE SAID THAT IT WAS FOR COMMERCIAL EXPEDIENCY. 28. THUS, THE RATIO OF MADHAV PRASAD JATIAS CASE ( 1979) 118 ITR 200 (SC) IS THAT THE BORROWED FUND ADVANCED TO A THIRD PARTY SHOULD BE FOR COMMERCIAL EXPEDIENCY IF IT IS SOUGHT TO BE ALLOWED U/S. 36(1) 9VII0 OF THE ACT. 29. IN THE PRESENT CASE, NEITHER THE HIGH COURT NO R THE TRIBUNAL NOR OTHER AUTHORITIES HAVE EXAMINED WHETHER THE AMOUNT ADVANC ED TO THE SISTER CONCERN WAS BY WAY OF COMMERCIAL EXPEDIENCY. 30. IT HAS BEEN REPEATEDLY HELD BY THIS COURT THAT THE EXPRESSION FOR THE PURPOSE OF BUSINESS IS WIDER IN SCOPE THAN THE EXP RESSION FOR THE PURPOSE OF EARNING PROFITS VIDE CIT VS. MALAYALAM PLANTATIONS LTD. (1964) 53 ITR 140 (SC), CIT VS. BIRLA COTTON SPINNING AND WEAVING MILLS LTD . (1971)82 ITR 166 (SC), ETC. ITA NO.200/COCH/2015 54 13. IN THE PROCESS, THE COURT ALSO AGREED THAT THE VIEW TAKEN BY THE DELHI HIGH COURT IN CIT VS. DALMIA CEMENT (P) LTD. (20020 254 ITR 377/121 TAXMAN 706 WHEREIN THE HIGH COURT HAD HELD THAT ONCE IT IS EST ABLISHED THAT THERE IS NEXUS BETWEEN THE EXPENDITURE AND THE PURPOSE OF BUSINESS (WHICH NEED NOT NECESSARILY BE THE BUSINESS OF THE ASSESSEE ITSELF) , THE REVENUE CANNOT JUSTIFIABLY CLAIM TO PUT ITSELF IN THE ARM-CHAIR OF THE BUSINESSMAN OR IN THE POSITION OF THE BOARD OF DIRECTORS AND ASSUME THE R OLE TO DECIDE HOW MUCH IS REASONABLE EXPENDITURE HAVING REGARD TO THE CIRCUMS TANCES OF THE CASE. IT FURTHER HELD THAT NO BUSINESSMAN CAN BE COMPELLED T O MAXIMIZE HIS PROFIT AND THAT THE INCOME TAX AUTHORITIES MUST PUT THEMSELVES IN THE SHOES OF THE ASSESSEE AND SEE HOW A PRUDENT BUSINESSMAN WOULD AC T. THE AUTHORITIES MUST NOT LOOK AT THE MATTER FROM THEIR OWN VIEW POINT BU T THAT OF A PRUDENT BUSINESSMAN. 14. APPLYING THE AFORESAID RATIO TO THE FACTS OF TH IS CASE AS ALREADY NOTED ABOVE, IT IS MANIFEST THAT THE ADVANCE TO M/S. HERO FIBRES LIMITED BECAME IMPERATIVE AS A BUSINESS EXPEDIENCY IN VIEW OF THE UNDERTAKING GIVEN TO THE FINANCIAL INSTITUTIONS BY THE ASSESSEE TO THE EFFEC T THAT IT WOULD PROVIDE ADDITIONAL MARGIN TO M/S. HERO FIBRES LIMITED TO ME ET THE WORKING CAPITAL FOR MEETING ANY CASH LOSSES. 17.3 FURTHER IN CASE OF CIT VS. SRISHTI SECURITIES LTD. 321 ITR 498 (BOM0 FACTS WERE THAT ASSESSEE COMPANY HAD BORROWED FUNDS WHICH WERE UTILIZED IN ITS BUSINESS OF ACQUIRING SHARES BY WAY OF INVESTMENT AS WELL AS BY WAY OF STOCK-IN-TRADE. IT PAID INTEREST ON BORROWED FUNDS AND CLAIMED DEDUCTION TH EREOF U/S. 36(1)(III). THE ASSESSING OFFICER DISALLOWED THE ENTIRE AMOUNT OF I NTEREST PAID ON THE GROUND THAT THE OBJECT OF ACQUIRING SHARES WAS NOT TO EARN DIVIDEND BUT TO ACQUIRE A CONTROLLING INTEREST IN THE COMPANY. THE CIT(A) DI VIDED THE INTEREST BETWEEN INVESTMENT AND STOCK-IN-TRADE ON A PRO RATA BASIS A ND HELD THAT THE ASSESSEE WAS ENTITLED TO DEDUCTION OF INTEREST TO THE EXTENT BOR ROWED FUNDS WERE USED FOR ACQUIRING SHARES BY WAY OF STOCK-IN-TRADE. THE TRI BUNAL DELETED THE DISALLOWANCE MADE BY THE COMMISIONER(APPEALS). THE HONBLE HIGH COURT HELD THAT INTEREST, ITA NO.200/COCH/2015 55 WHICH WAS DISALLOWED TO THE EXTENT OF INVESTMENT WO ULD HAVE TO BE ALLOWED. IT WAS HELD THEREIN AS UNDER: 4. THIS ORDER WAS IN APPEAL BEFORE ITAT. THE LEAR NED TRIBUNAL ADDRESSED ITSELF TO THE QUESTION, AS TO WHETHER THE ASSESSEE IS ENTITLE D TO DEDUCTION IN RESPECT OF INTEREST LIABILITY EITHER U/S. 36(1)(3) OR U/S. 57( 3) OF THE INCOME TAX ACT. RELIANCE WAS PLACED ON THE JUDGMENT OF THIS COURT IN THE CAS E OF COMMISSIONER OF INCOME TAX VS. LOKHANDAWALA CONSTRUCTION INDUSTRIES LTD. 260 ITR 579 (BOM) FOR THE PROPOSITION THAT WHEN THE ASSESSEE CLAIMS DEDUC TION OF INTEREST PAID ON CAPITAL BORROWED, ALL THAT THE ASSESSEE HAS TO SHOW IS THAT THE CAPITAL WHICH WAS BORROWED WAS USED FOR THE BUSINESS PURPOSE IN THE RELEVANT YEAR OF ACCOUNT AND IT DOES NOT MATTER WHETHER THE CAPITAL WAS BORR OWED OR NOT TO ACQUIRE REVENUE ASSET OR CAPITAL ASSET. THE LEARNED TRIBUN AL ALSO RELIED ON THE JUDGMENT OF THE CALCUTTA HIGH COURT IN THE CASE OF CIT VS. RAJEEVA LOCHAN KANORIA 208 ITR 616 (CAL) WHERE THE CALCUTTA HIGH COURT TOOK A VIEW THAT UNDER THE PROVISIONS OF SECTION 36(1)(3) OF THE INCOME TAX ACT, THE ONLY EN QUIRY TO BE MADE IS WHETHER THE PAYMENT OF INTEREST WAS IN RESPECT OF CAPITAL B ORROWED FOR THE PURPOSE OF ASSESSEES BUSINESS OR PROFESSION. SUCH AMOUNT BOR ROWED, IF FOR THE PURPOSE OF ASSESSEES BUSINESS OF PROFESSION MAY BE UTILIZED F OR THE PURPOSE OF ACQUISITION OF STOCK IN TRADE OR FOR THE PURPOSE OF ACQUISITION OF CAPITAL ASSET. THE LEARNED COURT TOOK A VIEW THAT U/S. 36(1)(3) THERE IS NO BAR FOR ALLOWANCE OF INTEREST PAID IN RESPECT OF CAPITAL BORROWED WHICH HAS BEEN UTILIZED FOR THE PURPOSE OF ACQUISITION OF CAPITAL ASSETS. CONSIDERING THIS TH E LEARNED ITAT HELD THAT IF THE FUNDS ARE BORROWED BY AN INVESTMENT COMPANY FOR MAK ING INVESTMENT IN SHARES WHICH MAY BE HELD AS INVESTMENT OR AS STOCK IN TRAD E OR FOR THE PURPOSE OF CONTROLLING INTEREST IN OTHER COMPANIES, INTEREST P AID ON SUCH BORROWED FUNDS WILL BE DEDUCTIBLE U/S. 36(1)(III) OF THE INCOME TAX ACT . AFTER RECORDING THIS FINDING, IT HELD THAT THE INTEREST EXPENDITURE IS ALLOWABLE U/S . 36(1)(3) AND THEREFORE, DISALLOWANCE TO THE EXTENT SUSTAINED BY THE CIT(A) WAS DIRECTED TO BE DELETED. . 7. WE MAY KINDLY CONSIDER THE FIRST THREE QUESTION S AS TO WHETHER THE INTEREST OF BORROWED CAPITAL WHICH WAS UTILIZED IN THE BUSINESS OF PURCHASE OF SHARES BOTH BY WAY OF INVESTMENT AND STOCK IN TRADE IS ALLOWABL E DEDUCTION. IN SO FAR AS FIRST THREE QUESTIONS ARE CONCERNED, I N OUR OPINION A COORDINATE BENCH OF THIS COURT IN CIT VS. LOKHANDAWALA (SUPRA) HAD ADDRESSED ITSELF TO THIS ISSUE. RELIANCE WAS PLACED ON INDIA CEMENTS LTD. V S. CIT (1966) 60 ITR 52 (SC) WHICH WAS U/S. 10(2)(3) OF THE INCOME TAX ACT, 1922 WHICH CORRESPONDS TO SECTION 36(1)(3) OF THE PRESENT ACT. THIS COURT AN SWERED THE ISSUE IN THE FOLLOWING MANNER: ITA NO.200/COCH/2015 56 THAT, WHILE ADJUDICATING THE CLAIM FOR DEDUCTION U /S. 36(1)(III) OF THE ACT, THE NATURE OF THE EXPENSE WHETHER THE EXPENSE WAS ON CAPITAL ACCOUNT OR REVENUE ACCOUNT WAS IRRELEVANT AS THE SECTION ITS ELF SAYS THAT INTEREST PAID BY THE ASSESSEE ON THE CAPITAL BORROWED BY THE ASSESSE E WAS AN ITEM OF DEDUCTION. THAT THE UTILIZATION OF THE CAPITA WAS IRRELEVANT FOR THE PURPOSE OF ADJUDICATING THE CLAIM FOR DEDUCTION U/S. 36(1)(III ) OF THE ACT. (SEE THE JUDGMENT OF THE BOMBAY HIGH COURT IN THE CASE OF CALICO DYIN G AND PRINTING WORKS VS. CIT (1958) 34 ITR 265). IN THAT JUDGMENT, IT HAS BEEN LAID DOWN THAT WHERE AN ASSESSEES CLAIMS DEDUCTION OF INTEREST PAID ON CAP ITAL BORROWED , ALL THAT THE ASSESSEE HAD TO SHOW WAS THAT THE CAPITAL WHICH WAS BORROWED WAS USED FOR BUSINESS PURPOSE IN THE RELEVANT YEAR OF ACCOUNT AN D IT DID NOT MATTER WHETHER THE CAPITAL WAS BORROWED IN ORDER TO ACQUIRE A REVE NUE ASSET OR A CAPITAL ASSET.. IT MAY BE NOTED THAT IN INDIA CEMENTS LIMITED (SUPR A) THE APEX COURT WAS SPECIFICALLY PLEASED TO OBSERVE THAT THE OBJECT OF THE LOAN IS AN IRRELEVANT CONSIDERATION. IN THE STATE OF MADRAS VS. GJ. COEL HI (1964) 53 ITR 186 THE SUPREME COURT WAS DEALING WITH THE DEDUCTION CLAIME D U/S. 5(E) OF THE MADRAS PLANTATIONS AGRICULTURAL INCOME TAX ACT, 1955. WHI LE CONSIDERING THE ISSUE THE COURT WAS PLEASED TO OBSERVE THAT IN PRINCIPLE THER E IS NO DISTINCTION BETWEEN INTEREST PAID ON CAPITA BORROWED FOR THE ACQUISITIO N OF A PLANTATION AND INTEREST PAID ON CAPITAL BORROWED FOR THE ACQUISITION OF A P LANTATION AND INTEREST PAID ON CAPITAL BORROWED FOR THE PURPOSE OF AN EXISTING PLANTATION. BOTH ARE FOR THE PURPOSE OF THE PLANTATION. THE COURT FURTHER OBSERV ED THAT THE PAYMENT OF INTEREST ON THE AMOUNT BORROWED FOR THE PURPOSE OF PLANTATIONS WHEN THE WHOLE TRANSACTION OF PURCHASE AND THE WORKING OF THE PLAN TATIONS WAS VIEWED AS AN INTEGRATED WHOLE WAS SO CLOSELY RELATED TO THE PLAN TATIONS THAT THE EXPENDITURE COULD BE SAID TO BE LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE PLANTATIONS. 8. WE MAY ALSO GAINFULLY REFER TO THE JUDGMENT OF THE CALCUTTA HIGH COURT IN COMMISSIONER OF INCOME TAX VS. RAJEEVA LOCHANA KANO RIA, 208 ITR 616. THE LEARNED COURT WAS CONSIDERING SECTION 36(1)(III) AN D WAS PLEASED TO OBSERVE AS UNDER: THE ONLY ENQUIRY THAT IS TO BE MADE IS WHETHER THE PAYMENT OF INTEREST WAS IN RESPECT OF CAPITAL BORROWED FOR THE PURPOSE OF THE ASSESSEES BUSINESS OR PROFESSION. THERE IS NO DISPUTE THAT THE CAPITAL W AS BORROWED IN THE INSTANT CASE AND INTEREST WAS PAID ON THE BORROWED CAPITAL. IT IS TO BE ESTABLISHED THAT THE AMOUNT WAS BORROWED FOR THE PURPOSE OF BUSINESS OR PROFESSION. THE AMOUNT BORROWED MAY BE UTILIZED FOR THE PURPOSE OF ACQUISITION OF STOCK IN TRADE OR FOR THE PURPOSE OF ACQUISITION OF CAPITAL ASSETS. BUT SO LONG AS THE MONEY IS UTILIZED FOR BUSINESS PURPOSES THE INTERES T WILL HAVE TO BE ALLOWED AS ITA NO.200/COCH/2015 57 DEDUCTION. IT IS WELL SETTLED THAT BUSINESS EXPEND ITURE IS NOT CONFIRMED TO EXPENSES INCURRED ON REVENUE ACCOUNT. CAPITAL EXPEN DITURE MAY NOT BE ALLOWED AS A DEDUCTION U/S. 37 BECAUSE THE SECTION SPECIFICALLY BARS ANY DEDUCTION OF EXPENDITURE OF CAPITAL NATURE. BUT SE CTION 36 IS DIFFERENTLY WORDED. THERE IS NO BAR IN SECTION 36(1)(III) TO AL LOWANCE OF INTEREST PAID IN RESPECT OF CAPITAL BORROWED WHICH HAS BEEN EXPLAINE D BY THE SUPREME COURT IN THE CASES OF INDIA CEMENTS LTD. VS. CIT (1966) 6 0 ITR 52 AND STATE OF MADRAS VS. GJ. COELHI (1964) 53 ITR 186. 9. CONSIDERING THESE JUDGMENTS AND THE TEST THAT TH E OBJECT OF THE LOAN IS IRRELEVANT, THE INTEREST WHICH WAS DISALLOWED TO TH E EXTENT OF INVESTMENT WILL HAVE TO BE ALLOWED AS HELD BY THE TRIBUNAL. 17.4 FOLLOWING THE AFORESAID JUDICIAL PRECEDENTS, IT IS HELD THAT EXPENDITURE CLAIMED IS ELIGIBLE BUSINESS EXPENDITURE U/S. 36(1) (III) OF THE ACT. THEREFORE, DISALLOWANCE MADE AND SUSTAINED IS DELETED. GROUND RAISED BY THE ASSESSEE IS ALLOWED. 18. GROUND NO. 4 RELATE TO DISALLOWANCE OF RS.9,45 ,69,750/- INCURRED BY WAY OF GIFT OF EQUITY SHARES OF ARTEMIS HEALTH SCIENCES LT D. (AHSL), A WHOLLY OWNED SUBSIDIARY COMPANY TO CEO OF AHSL. 19. THE FACTS IN BRIEF ARE THAT IN THE ASSESSMENT YEAR 2010-11, 15,75,500 SHARES OF THE WHOLLY OWNED SUBSIDIARY COMPANY VIZ. ARTEMIS HE ALTH SCIENCES LTD. (AHSL) WERE GIFTED TO DR. KUSHAGRA KATARIYA FOR HIS CONTRI BUTION IN SETTING UP A SUPER SPECIALTY HOSPITAL UNDER ITS SUBSIDIARY ARTEMIS MED ICARE SERVICES LTD. (AMSL). THE SHARES HAVE BEEN GIFTED BY THE ASSESSEE TO DR. KATA RIYA, A KEY EMPLOYEE OF AHSL. ACCORDING TO APPELLANT, THE SAID GIFT IS FOR COMMERCIAL CONSIDERATION SINCE ITA NO.200/COCH/2015 58 THE ASSESSEE IS DEEPLY INTERESTED IN THE WHOLLY OWN ED SUBSIDIARY AND AS SUCH EXPENDITURE OF RS.9,45,69,750/- WAS ON ACCOUNT OF C OMMERCIAL EXPEDIENCY IS ALLOWABLE AS BUSINESS EXPENDITURE U/S. 37(1) OF THE ACT. THE ASSESSEE HAS PLEADED THAT IT IS ALSO ENGAGED IN HEALTH CARE BUSI NESS AND, THEREFORE IT WAS SUBMITTED THAT SUCH EXPENDITURE IS ALLOWABLE AS SUC H. IT WAS SUBMITTED THAT IF FOR ANY REASON THE LEASE RENT INCOME IS HELD AS ASSESSA BLE UNDER THE HEAD INCOME FROM OTHER SOURCES, THE EXPENDITURE BE ALLOWED U/S . 57(III) OF THE ACT. 20. THE ASSESSING OFFICER THOUGH ACCEPTED THE COM MERCIAL EXPEDIENCY OF THE EXPENDITURE VIS--VIS THE SUBSIDIARY, HE DENIED THE CLAIM ON THE GROUND THAT EXPENDITURE PERTAINED TO SUBSIDIARY AND NOT TO APPE LLANT. IN ARRIVING AT THE ABOVE CONCLUSION, BUSINESS OF HEALTHCARE WAS NOT AC CEPTED. HE HAS HELD AS UNDER: 25. ASSESSEE CLAIMS THAT SECTION 37(1) DOES NOT EN ACT ANY RESTRICTIVE CONDITION FOR DEDUCTION THAT ASSESSEE SHOULD BE LEG AL OWNER OF THE BUSINESS FOR ELIGIBILITY OF DEDUCTION OF EXPENDITUR E. BUT MORE IMPORTANT QUESTION IS THAT, WHETHER IT IS EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS OR PROFESSION OF THE ASSESS EE. THE ANSWER IS NO, AS THE REQUIREMENT WAS THAT OF A THIRD COMPANY, A TOTA LLY SEPARATE TAXABLE UNIT AND LEGAL PERSON. ASSESSEE TAKES THE HELP OF EMPLOYMENT AGREEMENT TO SUPPORT HIS CASE, BUT ASSESSEE COMPANY NEVER ENTERED INTO ANY AGREEMENT WITH DR. KUSHANG KATARIA. AHSPL, WHIC H ENTERED INTO AGREEMENT WITH DR. KUSHANG KATARIA, HENCE AS ARGUM ENT THAT THE EXPENSES ON DR. KUSHAGRA KATARIA. IS ASSESSEES EXP ENSES AS PER THE PROVISIONS OF SECTION 37 OF THE ACT DOES NOT STAND THE TEST OF LAW. ASSESSEE CLAIMS THAT DR. KATARIA WAS ASSOCIATED WITH PTL LIM ITED, BUT NOTHING ON ITA NO.200/COCH/2015 59 RECORD SHOWS THAT HE IS EVER ASSOCIATED WITH PTEL E NTERPRISES LTD., HIS ASSOCIATION WAS ONLY WITH THE HOSPITAL COMPANIES, O NE AS EMPLOYEE AND TO OTHER HE WENT ON DEPUTATION. 26. ALTERNATIVELY ASSESSEE SUBMITS THAT THE DEDUCT ION OF THE IMPUGNED AMOUNT OF IN 945.69 LAKHS FROM ANOTHER ANGLE, NAMEL Y DEDUCTION UNDER SECTION 37(1) OF THE ACT. THE ASSESSEE CLAIMS THAT THE EXPENSES SHOULD BE SEEN IN THE ANGLE OF ENHANCING THE PROFITABILITY OF THE BUSINESS AND ENABLE TO RUN IT MORE EFFICIENTLY AND EFFECTIVELY. THE EXP ENDITURE INCURRED WAS INCIDENTAL TO BUSINESS AND HAD BEEN INCURRED BY THE TRADER IN HIS CAPACITY AS A TRADER COMMERCIAL EXPEDIENCY IS THE BASIC PRE REQUISITE FOR DEDUCTION OF ANY EXPENDITURE, ASSESSEE CLAIMS THAT THE IMPUGNED AMOUNT WAS SPENT ON ACCOUNT OF THE BUSINESS INTERES T OF THE LARGE BUSINESS GROUP OF COMPANIES APOLLO GROUP. ASSESSE E CITES THE DECISION OF THE S.A. BUILDERS VS. CIT 288 ITR 1 IN SUPPORT O F THE ARGUMENT. THE MATTER WAS ALREADY DISCUSSED. THE QUESTION DECIDED BY THE COURT IS THAT WHETHER THE EXPENSES WERE OUT OF COMMERCIAL EXPEDIENCY. H ERE THE QUESTION IS ENTIRELY DIFFERENT, THE ISSUE IS ALLOWABILILTY OF E XPENDITURE IN THE HANDS OF THE ASSESSEE. THE QUESTION OF THE COMMERCIAL EXPEDIENC Y OR NOT ARISE ONLY WHEN THE EXPENDITURE HAS INCURRED BY THE ASSESSEE. THERE IS NOTHING ON RECORD TO PROVE THAT THERE WAS A COMMERCIAL EXPEDIE NCY FOR THE ASSESSEE THE EXPENSES WERE REQUIREMENT OF THIRD PARTY. IF A SSESSEE ARGUMENT IS ACCEPTED, THE DISTINCTION BETWEEN COMPANIES WILL BE LOST. IT WILL HAVE FAR REACHING IMPACT IN THE TAX AVOIDANCE SCHEMES. ANY COMPANY CAN INCUR ANY EXPENSES OF ANY OF THE SUBSIDIARIES OR PARENT C OMPANY AND CLAIM THAT IT IS OUT OF COMMERCIAL EXPEDIENCY. THE VARIOUS DE CISIONS QUOTED BY THE ASSESSEE IS DISTINGUISHABLE IN THE FACT THAT IN ALL OF THEM, IT WAS THE COMPANY ITSELF THAT INCURRED EXPENSES WHICH BENEFIT TED INDIRECTLY THE SISTER CONCERN. THE COURT WAS UNEQUIVOCAL IN THAT, AN INDIRECT BENEFIT TO A THIRD PARTY WAS NOT A REASON FOR DISALLOWANCE OF TH E EXPENSES. IN THE GIVEN CASE, THE BENEFIT IS NOT INDIRECT, THE DIRECT EXPENSES OF A STEP-DOWN SUBSIDIARY WAS PASSED THROUGH PROFIT AND LOSS ACCOU NT AS AN EXTRAORDINARY ITEM, FIRST AS AN APPLICATION OF THE INCOME AND THE N AS A DEBT TO PROFIT AND LOSS ACCOUNT. THUS THERE IS NO QUESTION OF COMMERCI AL EXPEDIENCY. ASSESSEE LISTS OUT THREE REASONS TO PROVE THE COMME RCIAL EXPEDIENCY. 1. AHSPL IS A WHOLLY OWNED SUBSIDIARY CONTROLLED, M ANAGED AND FINANCED BY THE ASSESSEE . 2. THE PARENT COMPANY IS MANDATED BY ITS MEMORANDUM TO CARRY ON HEALTH CARE BUSINESS. 3. THIRDLY, THE SUBSIDIARY HAS NO PHYSICAL PRESENC E OF ITS OWN AND THE PARENT COMPANY IS ADMITTEDLY IS ALTER-EGO. ITA NO.200/COCH/2015 60 21. THE CIT(A) CONFIRMED THE DISALLOWANCE ONLY ON THE GROUND THAT THERE IS NO BUSINESS INCOME: THE PARAMOUNT QUESTION IN THE ENTIRE ISSUE IS THAT ONCE, IT HAS BEEN UPHELD BY THE LD. BENCH ITAT, KOCHI FOR ASSESSMENT YEAR 20 08-09 & 2009-10 VIDE THEIR ORDER DATED 3-1-2014 THAT THE APPELLANTS INCOME FR OM LEASE RENT RECEIVED FROM M/S. APOLLO TYRES LTD., IS ASSESSABLE UNDER TH E HEAD INCOME FROM OTHER SOURCES, HOW THE APPELLANT COULD CLAIM BUSINESS EX PENDITURE ON ACCOUNT OF GIFT, AS A HOLDING COMPANY MAKING GIFT OF SHARES TO THE EXTENT OF 15,75,500 OF AHSL WHICH IS 100% SUBSIDIARY COMPANY OF THE APP ELLANT UNDER SEC. 37 OF THE I.T. ACT. THIS QUERY WAS RAISED DURING THE COURSE OF APPEAL P ROCEEDINGS AND NOTED IN THE ORDER SHEET ON 21/01/2015. THE APPELLANT, HOWE VER, HAS SUBMITTED BY REITERATING THEIR STAND THAT THEY HAVE NOT ACCEPTED THE DECISION OF THE LD. ITAT, COCHIN BENCH, FOR HOLDING THE LEASE RENTAL IN COME ASINCOME FROM OTHER SOURCES AND,, THEY HAVE CHALLENGED THE SAME BEFORE THE HONBLE HIGH COURT OF KERALA. SINCE HAVE BEEN TREATING THE INCOME FROM LEAS RENTS AS BUSINESS INCOME, THEY HAVE MADE THEIR CLAIM FOR EXPENDITURE UNDER SECTION 37, ON ACCOUNT OF THE GIFT OF SHARES MADE T O THE CEO OF THE SUBSIDIARY COMPANY. THE AMOUNT OF EXPENDITURE HAVE BEEN QUANTIFIED BASED ON THE VALUE OF THE GIFTED SHARES NUMBERING 1 5,75,500/-. AS A MATTER OF FACT, THERE IS NO INCOME FROM BUSINE SS OR PROFESSION, AND ONLY INCOME IS THE INCOME FROM OTHER SOURCES. TILL DA TE, THE APPELLANTS INCOME HAS BEEN TREATED AS INCOME FROM OTHER SOURCES; THE RE IS NO QUESTION OF ALLOWING ANY BUSINESS EXPENDITURE U/S. 37 OF THE IT ACT. AS A MATTER OF FACT, THERE IS NO INCOME FROM BUSINE SS OR PROFESSION, AND ONLY INCOME IS THE INCOME FROM OTHER SOURCES, THEN, IN SUCH A CASE, NO QUESTION OF DEDUCTIBILITY OF BUSINESS EXPENDITURE U /S. 37 ARISES, BECAUSE, THE INCOME HAS NOT BEEN COMPUTED UNDER CHAPTER IVD OF T HE ACT. 22. BEFORE US THE LEARNED COUNSEL FOR ASSESSEE HAS CONTENDED THAT ONCE THE LEASE INCOME IS HELD TO BE INCOME FROM BUSINESS T HEN THE BASIS ADOPTED BY THE LEARNED CIT(A) CEASES TO EXIST AND THEREFORE EX PENDITURE INCURRED IS AN ALLOWABLE EXPENDITURE. HE EMPHASIZED THAT ASSESSIN G OFFICER ACCEPTED ITA NO.200/COCH/2015 61 COMMERCIAL EXPEDIENCY OF SUBSIDIARY AND CIT(A) ACCE PTED COMMERCIAL EXPEDIENCY OF ASSESSEE BUT DID NOT ALLOW ON THE GRO UND THAT THERE IS NO INCOME FROM BUSINESS. IT WAS SUBMITTED THAT ONCE IN COME IS HELD AS BUSINESS INCOME IT IS ALLOWABLE AS BUSINESS EXPENDITURE. IT WAS FURTHER SUBMITTED THAT EVEN ASSUMING INCOME IS FROM OTHER SOURCES THEN TOO THE CIT(A) WAS NOT JUSTIFIED TO DENY CLAIM OF DEDUCTION ON THE GROUND THAT APPELLANT DOES NOT HAVE ANY INCOME, AS THE SAID STAND WAS CONTRARY TO THE JUDGMENT OF APEX COURT IN THE CASE OF CIT V. RAJENDRA PRASAD MOODY 1 15 ITR 519. IT WAS SUBMITTED THAT THE ASSESSEE HAS INCORPORATED THE SAID TWO WHO LLY OWNED SUBSIDIARY COMPANIES WITH THE PURPOSE OF EXPANDING ITS OWN BUS INESS OBJECT OF PROVIDING SERVICES IN HEALTH CARE BUSINESS. THE ASSESSEE HAS CONTROLLING INTEREST OVER THESE COMPANIES AS WELL AS ITS BOARD OF DIRECTORS. IT WAS SUBMITTED THAT INVESTMENT IN COMPANIES REPRESENTING CONTROLLING INTEREST AMOUNTS TO CARRY ON BUSINESS: I) 162 ITR 373 (SC) BROOKE BOND CO. LTD. VS. CIT II) 197 CRTR 187 (DEL EXCELLANT COMMERCIAL ENTERPRI SES & INVESTMENTS IV) 226 ITR 188 (SC) CIT VS. AMALGAMATIONS (P) LTDL AFF IRMING THE JUDGMENT IN THE CASE OF CIT VS. AMALGAMATIONS (P) LTD., REPO RTED IN 108 ITR 895 (MAD.) V) 83 ITR 377 (SC) CIT VS. DISTRIBUTORS (BAROD) PVT. L TD. VI) 35 ITR 594 (SC) VENKATASWAMI NAIDU VS. CIT VII) 100 ITR 706 (SC) CIT VS. SUTLEJ CCOTTON MILLS SUPPL Y AGENCY. ITA NO.200/COCH/2015 62 VIII) 77 ITR 253 (SC) RAJA BAHADUR KAMAKHYA NARAIN VS. CI T 22. IT WAS SUBMITTED THAT CONSTITUTION OF THE BOA RD OF DIRECTORS AS WELL AS SHARE HOLDING PATTERN OF TWO SUBSIDIARIES AHSL AND AMSL M ANIFESTLY DEMONSTRATE THAT THESE WHOLLY OWNED SUBSIDIARIES ARE UNDER THE DIREC T CONTROL OF THE ASSESSEE COMPANY. IT WAS SUBMITTED THAT DR. KUSHAGRA KATARIY A TO WHOM SHARES OF AHSL HAVE BEEN GIFTED BY THE ASSESSEE COMPANY HAS BEEN E MPLOYED BY AHSL W.E.F. 01/03/2007 AND HAS BEEN SENT ON DEPUTATION TO AMSL AS CHIEF EXECUTIVE OFFICER OF THE HOSPITAL COMPANY NAMELY AMSL. IT WAS SUBMITT ED THAT AHSL HAS BEEN INCORPORATED ON 28/12/2005 AS A PRIVATE LIMITED COM PANY AND HAS BEEN CONVERTED INTO A PUBLIC LIMITED COMPANY IN AUGUST, 2009. IT WAS SUBMITTED THAT MOA OF THE COMPANY SPELLS OUT THE OBJECTS OF THE CO MPANY IN THE OBJECT CLAUSE EMBRACING THE BROAD SPECTRUM OF ACTIVITIES L IKE RUNNING OF HOSPITAL, LABORATORIES, MEDICAL, RESEARCH, MEDICAL EDUCATION, MANUFACTURE OF DRUGS AND PROVIDING ALL KINDS OF MEDICAL AND HEALTH SERVICES. IT WAS SUBMITTED THAT AHSL IS A SUBSIDIARY OF APPELLANT IN TERMS OF THE PROVISION O F SECTION 4 OF THE COMPANIES ACT IN AS MUCH AS THE CONTROL AND COMPOSITION OF TH E BOARD OF DIRECTORS VEST WITH PTL AND THE ENTIRE SHAREHOLDING OF THE SUBSIDIARY I S HELD BY APPELLANT AND ITS DIRECTORS AND SENIOR OFFICIALS. IT WAS HIGHLIGHTED THAT AHSL DOES NOT HAVE ITS OWN BUSINESS PREMISES, IN FACT HAS NO PHYSICAL PRESENCE ; AND APPELLANT IS THE PARENT COMPANY AND IS THE ALTER EGO OF AHSL. IT WAS SUBMI TTED THAT, AHSL IS A MERE INSTRUMENTALITY OF ITS PARENT COMPANY. REFERENCE W AS DRAWN INFORMATION ANNEXED WITH THE ANNUAL REPORT FOR THE INSTANT YEAR . IT WAS FURTHER SUBMITTED THAT ITA NO.200/COCH/2015 63 AMSL IS 100% OWNED SUBSIDIARY OF AHSL AND HAS BEEN INCORPORATED ON 18/05/2004 AS A PRIVATE LIMITED COMPANY AND HAS BEE N SUBSEQUENTLY CONVERTED INTO A PUBLIC LIMITED COMPANY ON 05/10/2009. IT WAS SUBMITTED THAT AMSL IS A STEP DOWN SUBSIDIARY OF APPELLANT IS RUNNING A SUPE R SPECIALTY HOSPITAL WITH 216 BEDS IN GURGAON BY NAME OF ARTEMIS HEALTH INSTITUT E AND HAS BEEN ACCREDITED BY NABH (NATIONAL ACCREDITATION BOARD OF HOSPITALS 85 HEALTHCARE). REFERENCE WAS DRAWN TO INFORMATION REGARDING THE ASSETS, LIAB ILITIES AS WELL AS TURNOVER AND PROFITS OF THE HOSPITAL COMPANY HAS BEEN ANNEXED TO THE ANNUAL REPORT OF THE ASSESSEE AS REQUIRED U/S. 212(8) OF THE COMPANIES A CT, 1956. IT WAS SUBMITTED THAT DR. KATARIYA HAS BEEN ASSOCIATED WITH THE APPE LLANT COMPANY FOR DEVELOPMENT OF THE HEALTH CARE BUSINESS AND SETTING UP OF THE SUPER SPECIALTY HOSPITAL WHICH DELIVER CUTTING EDGE MEDICAL SERVICE S AND MEDICAL CARE TO PATIENTS. IT WAS SUBMITTED THAT DR. KATARIYA AN AL UMNUS OF MAULANA AZAD MEDICAL COLLEGE, DELHI HAS WORKED WITH VARIOUS HOSP ITALS IN THE UNITED STATES AND HAS BEEN THE ASSOCIATE PROFESSOR OF CARDIOTHORACIC SURGERY AT THE UNIVERSITY OF MIAMI) AND HAS TO HIS CREDIT NUMEROUS BOOKS, MONOGR APHS AND JOURNALS. IT WAS SUBMITTED THAT HE HAS MADE PRESENTATIONS AT MANY NA TIONAL AND INTERNATIONAL MEETINGS AND IS ALSO A PART OF VARIOUS RESEARCHES A ND HAS BEEN AWARDED WITH MANY LAURELS; AND IS ALSO A WORLD RENOWNED SURGEON. IT WAS ALSO SUBMITTED THAT A COMMITTEE OF DIRECTORS OF PTL ENTERPRISES LTD. APPR OVED A RESOLUTION ON 05/08/2009 TO REWARD DR. KATARIYA FOR HIS SERVICES WITH TRANSFER OF 15,75,500 SHARES OF AHSL HELD BY THE COMPANY BY WAY OF IRREVOCABLE G IFT. ON 06/08/2009 A ITA NO.200/COCH/2015 64 TRIPARTITE AGREEMENT TITLED AS SHARE HOLDERS AGRE EMENT WAS ENTERED INTO BY PTL ENTERPRISES LTD. ALONG WITH AHSL AND DR. KATARI YA WHEREBY THE TERMS AND CONDITIONS FOR MAKING THE GIFT OF SHARES HAVE BEEN RECORDED. ON THE SAME DATE I.E. 06.08.2009 ANOTHER AGREEMENT TITLED AS EMPLOY MENT AGREEMENT HAS ALSO BEEN ENTERED INTO INCLUDING THEREIN TERMS AND CONDI TIONS UNDER WHICH DR. KATARIAY HAS BEEN DEPUTED BY AHSL TO AMSL AND REMUN ERATION TO BE PAID TO HIM FOR HIS SERVICES BY THE HOSPITAL COMPANY. 22.2 IT WAS SUBMITTED THAT IN ORDER TO ASCERTAIN WH ETHER THE ACTIVITY OF THE ASSESSEE RUNNING THE BUSINESS OF AHSL BEARS THE CHA RACTER OF BUSINESS, IT SHOULD BE SEEN THAT THE ACTIVITY MUST BE CONTINUOUS, SYSTE MATIC AND ORGANIZED AND CARRIED OUT WITH A SET PURPOSE. IT WAS SUBMITTED T HAT MOTIVE IS NOT AN ESSENTIAL INGREDIENT FOR THE PURPOSE OF BUSINESS. IT WAS SUB MITTED THAT AN UNINTENDED ACTIVITY CAN TURN OUT TO BE A BUSINESS ACTIVITY WHI CH MAY BE WITHOUT ANY PROFIT MOTIVE. IT WAS SUBMITTED THAT BUSINESS AS DEFINE D IN SECTION 2(13), OF THE INCOME TAX ACT, INCLUDES ANY TRADE, COMMERCE, OR M ANUFACTURING OR ANY ADVENTURE OR CONCERN IN THE NATURE OF TRADE, COMMER CE, OR MANUFACTURE. IT WAS SUBMITTED THAT THESE WORDS ARE OF WIDE AND INDEFINI TE IMPORT, THE UNDER LYING IDEA BEING CONTINUOUS EXERCISE OF ACTIVITY. IT WAS SUBMITTED THAT THE WORD BUSINESS HAS BEEN DEFINED IN HALISBURYS LAWS OF ENGLAND, THIRD EDITION, VOL 38, PAGE 10 (AS QUOTED IN CIT VS. UPASANA HOSPITAL (225 ITR 845, 851 (KERALA), AS, ITA NO.200/COCH/2015 65 BUSINESS IS A WIDER TERM THAN AND NOT ANONYMOUS WI TH TRADE AND MEANS PRACTICALLY ANYTHING WHICH IS AN OCCUPATION AS DIST INGUISHED FROM A PLEASURE. IT WAS SUBMITTED THAT THE SYSTEMATIC AND ORGANIZED ACT IVITY OF THE ASSESSEE IN PROMOTION AND RUNNING OF AHSL AND AMSL CONSTITUTES BUSINESS OF THE ASSESSEE COMPANY. IN SUPPORT OF THIS PROPOSITION, RELIANCE WAS PLACED ON THE FOLLOWING PRECEDENTS: I) 6 ITR 765 (SC) NARAIN SWADESHI WEAVING MILLS V CEPT II) ) 34 ITR 368 (SC) MAZAGAON DOCK LTD. VS. CIT III) MAZAGAON DOCK LTD. V. CIT IV) ADDL. CIT VS. RAM KRIPAL TRIPATHI (1980) 125 ITR 4 08 (10 (ALL.) V) 101 ITR 234 (SC) LOK SHIKSHANA TRUST VS. CIT VI) 308 ITR 251 (RAJ.) CIT VS. HYCON INDIA LTD. 22.3 IT WAS SUBMITTED THAT SO FAR AS THE NATURE OF THE EXPENDITURE IN QUESTION IS CONCERNED, IT WAS SUBMITTED THAT THE EXPENDITURE IN QUESTION IS REVENUE IN NATURE IN AS MUCH AS IT IS CONNECTED WITH THE CONDUCT OF H EALTHCARE BUSINESS. IT WAS SUBMITTED THAT DR. KATARIYA HAS BEEN RENDERING SERV ICES TO THE HOSPITAL COMPANY AND THE SHARES IN QUESTION HAVE BEEN GIFTED TO HIM IN LIEU OF HIS SERVICES BY WAY OF ADDITION TO THE WAGES/SALARY. IT WAS SUBMITTED THAT EXPENDITURE CANNOT BE CONSTRUED AS PERSONAL EXPENSES OF THE PARENT COMPAN Y OR ANY OF THE SUBSIDIARY COMPANY NAMELY AHSL AND AMSL. IT WAS SUBMITTED THA T THE EXPENDITURE HAS BEEN INCURRED BY ASSESSEE ON GROUNDS OF COMMERCIAL EXPEDIENCY; AND DR. ITA NO.200/COCH/2015 66 KUSHAGRA KATARIYA HAD BEEN ALLOTTED 7,50,000 SHARE S OF AHSL AS SWEAT EQUITY SHARES BY AHSL IN MARCH 2007. IT WAS SUBMITTED THA T THE SERVICES RENDERED BY DR. KATARIYA HAVE BEEN EVALUATED AND APPRAISED IN THE S WEAT EQUITY VALUATION REPORT OF ARTEMIS HEALTH SCIENCES PREPARED BY SEKHR I VALUERS PVT. LTD., MUMBAI WHICH REPORT BRINGS OUT IN CLEAR TERMS THAT VALUABL E CONTRIBUTION MADE BY DR. KATARIYA FOR DEVELOPMENT OF THE HOSPITAL. IT WAS A LSO SUBMITTED THAT INTEREST PAID ON LOAN RAISED FOR CONTROLLING INTEREST IS ELIGIBLE FOR DEDUCTION IN VIEW OF THE FOLLOWING JUDGMENTS: I) 131 ITR 99 (GUJ) CIT VS. COTTON FABRIC LTD. II) 208 ITR 616 (CAL) CIT VS. RAJEEVA LOCHAN KANORIA III) 210 ITR 981 (CAL) CIT VS. JARDINE HENDARATORS IV) 244 CTR 226 (BOM) CIT VS. PHIL CORPORATION LTD. V) 125 ITR 227 (GUJ) CIT VS. LAKSHMI AGENTS PVT.LTD. VI) 321 ITR 498 (BOM) CIT VS. SRISHTI SECURITIES LTD. VII) 272 CTR 282 (DEL) CIT VS. HOLCIM INDIA (P) LTD. VIII) 378 ITR 33 (DEL) CHEMINVEST LTD. V. CIT REVERSING T HE ORDER OF TRIBUNAL IN THE CASE OF CHEMINVEST LTD. VS. ITO REPORTED IN 121 IT D 318 (DEL) IX) 378 ITR 28 (DEL) EICHER GOODEARTH LTD. V. CIT 22.4 IT WAS SUBMITTED THAT EXPENDITURE INCURRED FOR SUB SIDIARY COMPANY HAS TO BE ALLOWABLE, WHEN EVEN THE EXPENDITURE INCURRED FO R JOINT VENTURE IS ALLOWED AS EXPENDITURE IN THE CASE OF ACIT VS. APOL LO TYRES LTD. VIDE I.T.A. NO. 298/COCH/2009 (COCH) HAS STATED AS UNDER: ITA NO.200/COCH/2015 67 GROUND NO. 4: AFTER HEARING BOTH THE PARTIES , WE FIND THAT DURING ASSESSMENT PROCEEDINGS ASSESSING OFFICER NOTICED TH AT THE ASSESSEE COMPANY HAD ADVANCED A SUM OF RS. 32.70 CRORES TO G UJARAT PETRO ELECTRICAL LTD. (FOR SHORT GPEL) A COMPANY PROMOTED BY THE ASSESSEE AND HAD WRITTEN OFF THIS AMOUNT BY TRANSFER FROM TH E GENERAL RESERVE ACCOUNT AS PER THE BOARDS RESOLUTION PASSED IN THE BOARD MEETING HELD ON 26/06/2002. THOUGH THIS AMOUNT WAS NOT CHARGED TO THE PROFIT & LOSS ACCOUNT, BUT THE SAME WAS DEDUCTED WHILE COMPUTING TOTAL INCOME AS PER THE RETURN. GPEL WAS JOINTLY PROMOTED COMPANY B Y THE ASSESSEE AND GUJARAT INDUSTRIAL AND INVESTMENT CORPORATION (FOR SHORT GIIC) FOR TRANSFER OF ELECTRIC GRADE PAPER PHERIOLIC COPPER CLAD LAMIN ATES AND GLASS EPOXY COPPER CLAD LAMINATES. 22.5 HAVING REGARD TO THE ABOVE DISCUSSION IT WAS S UBMITTED THAT APPELLANT COMPANY HAS BEEN CARRYING OUT A REGULAR BUSINESS AC TIVITY OF PROMOTING, CONTROLLING, MANAGING, AND OPERATING THE AHSL PROJE CT AND THE AMOUNT OF INR 945.69 LACS IS THE TRADING LOSS UNDER SECTION 28(I) OF THE ACT INCURRED IN THIS BUSINESS. 22.6 ALTERNATIVELY, WITHOUT PREJUDICE TO THE AFORES AID SUBMISSIONS, IT WAS SUBMITTED THAT THE ISSUE OF DEDUCTION OF THE IMPUGN ED AMOUNT OF INR 945.69 LACS FROM ANOTHER ANGLE, NAMELY DEDUCTION U/S. 37(1 ) OF THE ACT. THE EXPRESSION FOR THE PURPOSE OF THE BUSINESS IS WIDER IN SCOPE THAN THE EXPRESSION FOR THE PURPOSES OF EARNING PROFITS AS USED IN SECTION 57( III) OF THE ACT. IT MAY TAKE IN NOT ONLY THE DAY TO DAY RUNNING OF A BUSINESS BUT A LSO THE RATIONALIZATION OF ITS ADMINISTRATION AND MODERNIZATION OF ITS MACHINERY. IT WAS SUBMITTED THAT IT MAY COMPREHEND IN A WIDE VARIETY OF MEASURES TO ENHANCE THE PROFITABILITY OF THE BUSINESS AND ENABLE TO RUN IT MORE EFFICIENTLY AND EFFECTIVELY; BUT EXPENDITURE INCURRED MUST BE INCIDENTAL TO BUSINESS AND SHOULD HAVE INCURRED BY THE TRADER ITA NO.200/COCH/2015 68 IN HIS CAPACITY AS A TRADER. IT WAS SUBMITTED THAT COMMERCIAL EXPEDIENCY IS THE BASIC PRE REQUISITE FOR DEDUCTION OF ANY EXPENDITUR E AS BUSINESS EXPENDITURE. IT WAS SUBMITTED THAT THE ASSESSEE HAD DEEP INTEREST I N THE AFFAIRS OF AHSL AND FOR ALL INTENTS AND PURPOSES AHSL IS A SISTER COMPANY O F THE APPELLANT COMPANY WHICH BELONGS TO A LARGER GROUP OF COMPANIES OF APO LLO GROUP. IT WAS SUBMITTED THAT ASSESSEE COMPANY PROPOSED TO EMBARK ON DIVERSIFICATION OF ITS BUSINESS ACTIVITIES TO NEW AREAS OF INDUSTRY AND ST RATEGIZE ITS BUSINESS MODEL SO AS TO CREATE SYNERGY IN DIVERSIFIED FIELDS OF ACTIVITY . IT WAS SUBMITTED THAT LOANS HAD BEEN ADVANCED TO AHSL AND CORPORATE GUARANTEES GIVE N TO BANKS AND FINANCIAL INSTITUTIONS ON GROUND OF COMMERCIAL EXPE DIENCY SO AS TO HELP A SISTER CONCERN IN WHICH THE ASSESSEE COMPANY IS SUBSTANTIA LLY INTERESTED. IT WAS SUBMITTED THAT SHARES HAVE BEEN GIFTED BY THE ASSES SEE TO DOCTOR KATARIYA, A KEY EMPLOYEE OF AHSL, FOR COMMERCIAL CONSIDERATION SINCE THE ASSESSEE IS DEEPLY INTERESTED IN THE WHOLLY OWNED SUBSIDIARY AN D SUCH AN EXPENDITURE IS IN THE INTEREST OF BUSINESS OF THE ASSESSEE. RELIANCE WAS PLACED ON THE FOLLOWING JUDGMENTS: I) S.A. BUILDERS V CIT(A) 288 ITR 1 (SC) II) CIT VS. DALMIA CEMENT (B.) LTD. 254 ITR 377 III) HERO CYCLES (P) LTD. VS. CIT 379 ITR 347 (SC) IV) 260 ITR 341 (CAL) KEJRIWAL ENTERPRISES VS. CIY V) 253 ITR 788 (P&H) CIT VS. PUNJAB AGRO INDUSTRIES LT D. VI) 125 ITR 462 (BOM) VASSANJI SONS & CO. P LTD. ITA NO.200/COCH/2015 69 VII) 74 ITR 780 (BOM) CIT VS. F.M. CHINOY AND CO (P) LTD . VIII) 119 ITR 380 (BOM) CIT VS. INVESTA INDUSTRIAL CORPOR ATION LTD. IX) 65 ITR 625 (SC) ESSEN P LTD VS. CIT X) 226 ITR 188 (SC) CIT VS. AMALGAMATIONS PVT. LTD. XI) I38 ITR 763 (CAL) CIT VS. GILLANDERS ARBUTHNOT 86 C O. LTD. XII) 245 ITR 724 (CAL) TURNER MORRISON AND CO. LTD. VS. CIT XIII) 297 ITR 167 (SC) CIT VS. INFOSYS TECHNOLOGIES LTD. 22.7 IT WAS SUBMITTED THAT WHEN SHARE ARE GIVEN IN THE NATURE OF INCENTIVE AND RETENTION PLAN, THESE CAN BE TREATED EMPLOYEE STOCK OPTION PLAN. IT IS ALSO SUBMITTED THAT DISCOUNT ON ESOP IS AN ALLOWABLE DED UCTION U/S. 37(1) OF THE ACT. RELIANCE WAS PLACED ON FOLLOWING JUDGMENTS: I) 23 TAXMANN.COM 286 (MAD) CIT VS. PVP VENTURES LTD. II) 190 ITR 220 (CAL) CIT VS. MACHINE TOOLS (INDIA) LTD . III) 63 SOT 242 (BAN-TRIB) NOVO NORDISK INDIA (P) LTD. V S. DCIT IV) I.T. ACT NO. 2817/AHD/2011 (AHD) CERA SANITARYWARE LTD. V. DCIT V) 25 ITR (T) 602 (BANG) (BANG) BIOCON LTD. VS. DCIT VI) 148 ITD 391 (CHENNAI-TRIB.) ACIT VS. MURGAPPA MANAG EMENT SERVICES LTD. 22.8 IT WAS SUBMITTED THAT FACET OF ISSUE INVOLVIN G THE RELATIONSHIP OF PARENT COMPANY AND WHOLLY OWNED SUBSIDIARY CAN BE CONSIDER ED FROM TWO DIFFERENT ITA NO.200/COCH/2015 70 ANGLES. FIRST, WHETHER IN THE FACTS AND CIRCUMSTANC ES OF THE PRESENT CASE IT CAN E SAID THAT BUSINESS OF THE WHOLLY OWNED SUBSIDIARY B EING RUN UNDER THE CONTROL OF THE PARENT COMPANY CAN BE TREATED AS BUSINESS OF TH E PARENT COMPANY FOR THE PURPOSES OF THE SECTION 37(1) AND, SECOND, WITHOUT PREJUDICE TO THE STAND TAKEN BY THE ASSESSEE ON THE FIRST QUESTION, WHETHER IN T HE FACTS AND THE CIRCUMSTANCES OF THE CASE AS ELUCIDATED HEREINBEFORE, IT CAN BE S AID THAT THE EXPENDITURE IN QUESTION IS COVERED UNDER THE PHRASEOLOGY FOR THE PURPOSE OF THE BUSINESS USED IN SECTION 37(1) AND WHETHER THE EXPENDITURE I S GOVERNED BY CONSIDERATION OF COMMERCIAL EXPEDIENCY. 22.9 IT WAS SUBMITTED THAT DR. KATARIYA IS ON DEPU TATION WITH HOSPITAL COMPANY AS CHIEF EXECUTIVE OFFICER OF AMSL. IT WAS SUBMITTE D THAT AMSL IS THE 100% OWNED SUBSIDIARY OF AHSL; AND THUS AMSL IS THE STEP DOWN SUBSIDIARY OF APPELLANT COMPANY. IT WAS SUBMITTED THAT THE QUEST ION WHETHER THE HEALTH CARE BUSINESS OF AHSL CAN BE TREATED AS THE BUSINES S OF THE ASSESSEE COMPANY HAS TO BE CONSIDERED IN THE CONTEXT OF DOCTRINE OF INDEPENDENT CORPORATE ENTITY DISTINCT FROM ITS SHARE HOLDER AND THE LIMITED LIAB ILITY OF THE SHARE HOLDER AS A CONSEQUENCE OF INCORPORATION OF THE COMPANY, AND , RELIANCE WAS PLACED ON THE JUDGMENT OF MYSORE HIGH COURT IN CIT VS. UNITED BREWERIES 89 ITR 17. IT WAS SUBMITTED THAT ATKINSON J. IN THE AFORESAID JUDGMEN T REVIEWED ALL THE AUTHORITIES AND CONCLUDED THAT IT WAS A QUESTION OF FACT IN EAC H CASE WHETHER THE SUBSIDIARY COMPANY WAS CARRYING ON THE PRESENT COM PANYS BUSINESS OR ITS OWN. HE CONSIDERED THAT SIX POINTS WERE RELEVANT FOR DET ERMINING THAT QUESTION: ITA NO.200/COCH/2015 71 1) WERE THE PROFITS TREATED AS THOSE OF THE PARENT COMPANY? 2) WERE THE PERSONS CONDUCTING THE BUSINESS APPOINT ED BY THE PARENT COMPANY? 3) WAS THE PARENT COMPANY THE HEAD AND BRAIN OF THE TRADING VENTURE? 4) DID THE PARENT COMPANY GOVERN THE ADVENTURE AND DECIDE WHAT SHOULD BE DONE AND WHAT CAPITAL SHOULD BE EMBARKED ON IT? 5) WERE THE PROFITS MADE BY ITS SKILL AND DIRECTION ? AND 6) WAS THE PARENT-COMPANY IN EFFECTUAL AND CONSTANT CONTROL? 22.10 REFERENCE WAS MADE TO DECISION BY SUPREME C OURT IN STATE OF U.P. VS. RENUSAGAR CO. AIR 1988 SC 1737. IT WAS SUBMITTED T HAT IT HAS BEEN HELD THEREIN THAT BUSINESS OF THE WHOLLY OWNED SUBSIDIARY WHICH IS INEXTRICABLY CONNECTED WITH THE PARENT COMPANY BELONGS TO THE PARENT COMPA NY. IT WAS STATED THAT RENUSAGAR IS A 100% SUBSIDIARY OF HINDALCO, AND WHO LLY OWNED AND CONTROLLED BY HINDALCO ESTABLISHED THE POWER PLANT FOR GENERAT ION OF ELECTRICITY WHICH WAS SUPPLIED TO THE PARENT COMPANY. THE SUPREME COURT HELD THAT THE POWER PLANT CAN BE CONSTRUCTED AS COVERED BY THE EXPRESSION OW N SOURCE OF GENERATION OF HINDALCO FOR THE PURPOSE OF LEVY OF EXCISE DUTY BY THE UTTAR PRADESH GOVERNMENT. IT WAS SUBMITTED THAT SUPREME COURT HE LD AS FOLLOWS (PAGE 1758): IN THE AFORESAID VIEW OF THE MATTER WE ARE OF THE OPINION THAT THE CORPORATE VEIL SHOULD BE LIFTED AND HINDALCO AND RE NUSAGAR BE TREATED AS ONE CONCERN AND RENUSAGARS POWER PLANT MUST BE TRE ATED AS THE OWN ITA NO.200/COCH/2015 72 SOURCE OF GENERATION OF HINDALCO AND SHOULD BE LIAB LE TO DUTY ON THAT BASIS. IN THE PREMISES THE CONSUMPTION OF SUCH ENERGY BY H INDALCO WILL FALL U/S. 3(1) OF THE ACT. THE LEARNED ADDITIONAL ADVOCATE- GENERAL FOR THE STATE RELIED ON SEVERAL DECISIONS; SOME OF WHICH HAVE BEE N NOTED. THE VEIL ON CORPORATE PERSONALITY EVEN THOUGH NOT LIFTED SOMETIMES IS BECOMING MORE AND MORE TRANSPARENT IN MODERN COMPAN Y JURISPRUDENCE. THEGHOST OF SALOMONS CASE (1897 AC 22) STILL VISIT S FREQUENTLY THE HOUNDS OF COMPANY LAW BUT THE VEIL HAS BEEN PIERCED IN MANY C ASES. SOME OF THESE HAVE BEEN NOTED BY JUSTICE P.B. MUKHARJI IN THE NEW JURISPRUDENCE.(TAGORE LAW LECTURE 183) 22.11 IT WAS SUBMITTED THAT THE AFORESAID DECISION RENDERED BY THE APEX COURT OF INDIA LENDS DIRECT SUPPORT TO THE CASE OF THE AS SESSEE. THE POWER PLANT OF RENUSAGAR WHICH IS WHOLLY OWNED SUBSIDIARY OF HINDA LCO HAS BEEN HELD BY THE SUPREME COURT AS BELONGING TO HINDALCO THE PARENT C OMPANY MAINLY ON THE GROUND THAT THE INSTANT CASE OF APPELLANT ARE ON MU CH STRONGER GROUND INAS MUCH AS APPELLANT THE PARENT COMPANY IS THE DIRECTI NG MIND AND HEAD OF THE SUBSIDIARY WHICH HAS NO PHYSICAL PRESENCE OF ITS OW N. IT WAS SUBMITTED THAT SUPREME COURT HAS REFERRED TO VARIOUS DECISIONS OF THE HOUSE OF LORDS AND OBSERVED THAT OVERRIDING CONSIDERATION OF JUSTICE A ND REASON WOULD JUSTIFY PIERCING OF THE CORPORATE VEIL AND THE SALOMON REPO RTED IN 86 CO LTD. 1897 AC 22 TAKING A RIGID VIEW ON THE ISSUE OF DISTINCTIVE AND SEPARATE IDENTITIES OF THE COMPANY AND THE SHAREHOLDER NEEDS FRESH LOOK IN THE CONTEXT OF EMERGING JURISPRUDENTIAL TRENDS. IT WAS SUBMITTED THAT THE SUPREME COURT HAS HEAVILY RELIED ON THE ENGLISH DECISION OF COURT OF APPEAL IN DHN FOOD DISTRIBUTION LTD. VS. LONDON BOROUGH OF TOWER HAMLETS REPORTED IN (1976) 3 ALL ER 462 AND ITA NO.200/COCH/2015 73 EXTENSIVELY REPRODUCED THE OBSERVATIONS OF LORD DEN NING AND LORD JUSTICE GOFF WHO OBSERVED AS FOLLOWS: IT IS NOT NECESSARY TO TAKE INTO ACCOUNT THE FACTS OF THE CASE. WE MAY HOWEVER NOTE THAT IN THAT CASE THE CORPORATE VEIL W AS LIFTED TO CONFER BENEFIT UPON A GROUP OF COMPANIES UNDER THE PROVISI ONS OF THE LAND COMPENSATION ACT, 1961 OF ENGLAND. LORD DENNING AT PAGE 467 OF THE REPORT HAS MADE CERTAIN INTERESTING OBSERVATIONS WH ICH ARE WORTH REPEATING IN THE CONTEXT OF THE INSTANT CASE. THE MASTER OF THE ROLLS SAID AT PAGE 467 AS FOLLOWS: THIRD, LIFTING THE CORPORATE VEIL. A FURTHER VERY INTERESTING POINT WAS RAISED BY COUNSEL FOR THE CLAIMANTS ON COMPANY LAW. WE AL L KNOW THAT IN MANY RESPECTS A GROUP OF COMPANIES IS TREATED TOGETHER F OR THE PURPOSE OF GENERAL ACCOUNTS, BALANCE SHEET AND PROFIT AND LOSS ACCOUNT. THEY ARE TREATED AS ONE CONCERN. PROFESSOR GOWER IN HIS BOO K ON COMPANY LAW SAYS; THERE IS EVIDENCE OF A GENERAL TENDENCY TO I GNORE THE SEPARATE LEGAL ENTITIES OF VARIOUS COMPANIES WITHIN A GROUP, AND TO LOOK INSTEAD AS THE ECONOMIC ENTITY OF THE WHOLE GROUP. THIS IS ES PECIALLY THE CASE WHEN A PARENT COMPANY OWNS ALL THE SHARES OF THE SUBSIDI ARIES, SO MUCH SO THAT IT CAN CONTROL EVERY MOVEMENT OF THE SUBSIDIARIES. THESE SUBSIDIARIES ARE BOUND HAND AND FOOT TO THE PARENT COMPANY AND MUST DO JUST WHAT THE PARENT COMPANY SAYS. A STRIKING INSTANCE IS THE DE CISION OF THE HOUSE OF LORDS IN HAROLD HOLDSWORTH 85 CO. (WAKEFIELD) LTD. V. CADDIES (1955) (1) ALL ER 725). SO HERE, THIS GROUP IS VIRTUALLY THE SAME AS A PARTNERSHIP IN WHICH ALL THE THREE COMPANIES ARE PARTNERS. THEY SHOULD N OT BE TREATED SEPARATELY SO AS TO BE DEFEATED ON A TECHNICAL POIN T. THEY SHOULD NOT BE DEPRIVED OF THE COMPENSATION WHICH SHOULD JUSTLY BE PAYABLE FOR DISTURBANCE. THE THREE COMPANIES, FOR PRESENT PURPO SES, BE TREATED AS ONE, AND THE PARENT COMPANY DHN, SHOULD BE TREATED AS ONE. SO THAT DHN ARE ENTITLED TO CLAIM COMPENSATION ACCORDINGLY. IT WAS NOT NECESSARY FOR THEM TO GO THROUGH A CONVEYANCING DEV ICE TO GET IT. IT WAS REALIZED THAT THE PRESIDENT OF THE LAND TRIBUNAL IN VIEW OF PREVIOUS CASES, FELT IT NECESSARY TO DECIDE AS HE DID. BUT NOW THAT THE MATTER HAS BEEN FULLY DISCUSSED IN THIS COURT, WE MUST DECIDE DIFFE RENTLY FROM HIM. THESE COMPANIES AS A GROUP ARE ENTITLED TO COMPENSATION N OT ONLY FOR THE VALUE OF THE LAND BUT ALSO COMPENSATION FOR DISTURBANCE. I WOULD ALLOW THE APPEAL ACCORDINGLY. LORD JUSTICE GOFF PROCEEDED WITH CAUTION AND OBSERV ED AS FOLLOWS AT PAGES 468 AND 469 OF THE REPORT: ITA NO.200/COCH/2015 74 SECONDLY ON THE FOOTING THAT THAT IS NOT IN ITSELF SUFFICIENT, STILL, IN MY JUDGMENT, THIS IS A CASE IN WHICH ONE IS ENTITLED T O LOOK AT THE REALITIES OF THE SITUATION AND TO PIERCE THE CORPORATE VEIL. I W ISH TO SAFEGUARD MYSELF BY SAYING THAT SO FAR AS THIS GROUND IS CONCERNED, I AM RELYING ON THE FACTS OF THIS PARTICULAR CASE. I WOULD NOT AT THIS JUNCT URE ACCEPT THAT IN EVERY CASE WHERE ONE HAS A GROUP OF COMPANIES ONE IS ENTI TLED TO PIERCE THE VEIL, BUT IN THIS CASE, THE TWO SUBSIDIARIES WERE B OTH WHOLLY OWNED; FURTHER, THEY HAD NO SEPARATE BUSINESS OPERATIONS WHATSOEVER ; THIRDLY, IN MY JUDGMENT, THE NATURE OF THE QUESTION INVOLVED IS HI GHLY RELEVANT NAMELY WHETHER THE OWNERS OF THIS BUSINESS HAVE BEEN DISTU RBED IN THEIR POSSESSION AND ENJOYMENT OF IT. I FIND SUPPORT FOR THIS VIEW IN A NUMBER OF CASES, FROM WHICH I WOULD MAKE A FEW BRIEF CITATION S, FIRST FROM HAROLD HOLDSWORTH AND CO. (WAKEFIELD) LTD. V. CADDIES WHE RE LORD RAID SAID: IT WAS ARGUED THAT THE SUBSIDIARY COMPANIES WERE SE PARATE LEGAL ENTITIES, EACH UNDER THE CONTROL OF ITS OWN BOARD OF DIRECTOR S, THAT IN LAW THE BOARD OF THE APPELLANT COMPANY COULD NOT ASSIGN ANY DUTIE S TO ANYONE IN RELATION TO THE MANAGEMENT OF THE SUBSIDIARY COMPAN IES AND THAT, THEREFORE, THE AGREEMENT CANNOT BE CONSTRUED AS ENT ITLING THEM TO ASSIGN ANY SUCH DUTIES TO THE RESPONDENT. MY LORDS, IN MY JUDGMENT, THIS IS TOO TECHNICAL AN ARGUMENT. THIS IS AN AGREEMENT IN RE M ERCATORIA, AND IT MUST BE CONSTRUED IN THE LIGHT OF THE FACTS AND REALITIE S OF THE SITUATION. THE APPELLANT COMPANY OWNED THE WHOLE SHARE CAPITAL OF BRITISH TEXTILE MFG. CO. AND UNDER THE AGREEMENT OF 1947, THE DIRECTORS OF THIS COMPANY WERE TO BE THE NOMINEES OF THE APPELLANT COMPANY. SO, IN FACT THE APPELLANT COMPANY COULD CONTROL THE INTERNAL MANAGEMENT OF TH E SUBSIDIARY COMPANIES AND, IN UNLIKELY EVENT OF THEIR BEING ANY DIFFICULTY, IT WAS ONLY NECESSARY TO GO THROUGH THE FORMAL PROCEDURE IN ORD ER TO MAKE THE DECISION OF THE APPELLANT COMPANYS BOARD FULLY EFF ECTIVE. THAT PARTICULAR PASSAGE IS, I THINK, ESPECIALLY A C OGENT HAVING REGARD TO THE FACT THAT THE COUNSEL FOR THE LOCAL AUTHORITY W AS CONSTRAINED TO ADMIT IN THIS CASE, IF THEY HAD THOUGHT OF IT SOON ENOUGH , DHN COULD, AS IT WERE, BY MOVING THE PIECES ON THEIR CHESSBOARD, HAVE PUT THEMSELVES IN A POSITION IN WHICH THE QUESTION WOULD HAVE BEEN WHOL LY UNARGUABLE. I ALSO REFER TO SCOTTISH CO-OPERATIVE WHOLESALE SOC IETY LTD. V. MEYER (1958 (3) ALL ER 66). THAT WAS A CASE UNDER S.210 OF THE COMPANIES ACT, 1948 AND VISCOUNT SIMONDS SAID: I DO NOT THINK THAT MY OWN VIEWS COULD BE STATED B ETTER THAN THE LATE LORD PRESIDENT COOPERS WORDS ON THE FIRST HEARING OF THIS CASE. HE SAID: IN MY VIEW, THIS SECTION WARRANTS THE COURT IN LOOKING AT THE BUSINESS REALITIES OF A SITUATION AND DOES NOT CONFINE THEM TO A NARRO W LEGALISTIC VIEW. ITA NO.200/COCH/2015 75 MY THIRD CITATION IS FROM THE JUDGMENT OF DANCKWERT S LJ IN MERCHANDISE TRANSPORT LTD. V. BRITISH TRANSPORT COMMISSION (196 1) (3) ALL ER 495 AT P.518) WHERE HE SAID THAT THE CASES: SHOW THAT WHERE THE CHARACTER OF A COMPANY, OR THE NATURE OF THE PERSONS WHO CONTROL IT, IS A RELEVANT FEATURE THE C OURT WILL GO BEHIND THE MERE STATUS OF THE COMPANY AS A LEGAL ENTITY, I WIL L CONSIDER WHO ARE THE PERSONS AS SHAREHOLDERS OR EVEN AS AGENTS WHO DIREC T AND CONTROL THE ACTIVITIES OF A COMPANY WHICH IS INCAPABLE OF DOING ANYTHING WITHOUT HUMAN ASSISTANCE. THE THIRD GROUND, WHICH I PLACE LAST BECAUSE IT IS LONGEST, BUT PERHAPS OUGHT TO COME FIRST IS THAT IN MY JUDGMENT, IN TRUT H, DHN WERE THE EQUITABLE OWNERS OF THE PROPERTY. IN ORDER TO RESO LVE THIS MATTER, IT WILL BE NECESSARY FOR ME TO REFER IN SOME DETAIL TO THE FAC TS. SHAW L.J. ALSO OBSERVED AT PAGE 473 AS FOLLOWS: EVEN IF THIS WERE NOT RIGHT, THERE IS FURTHER ARGUM ENT ADVANCED ON BEHALF OF THE CLAIMANTS THAT THERE WAS SO COMPLETE AN IDEN TITY OF THE DIFFERENT COMPANIES COMPRISED IN THE SO-CALLED GROUP THAT THE Y OUGHT TO BE REGARDED FOR THIS PURPOSE AS A SINGLE ENTITY. THE COMPLETENESS OF THAT IDENTITY MANIFESTED ITSELF IN VARIOUS WAYS. THE DI RECTORS OF THE DHN WERE THE SAME AS THE DIRECTORS OF BRONZE, THE SHAREHOLDE RS OF THE BRONZE WERE THE SAME AS IN DHN, THE PARENT COMPANY, AND THEY HA D A COMMON INTEREST IN MAINTAINING ON THE PROPERTY CONCERNED O F THE GROUP. IF ANYTHING WERE NECESSARY TO REINFORCE THE COMPLETE I DENTITY OF COMMERCIAL INTEREST AND PERSONALITY, CL.6, TO WHICH I HAVE REFERRED ALREADY, DEMONSTRATES IT, FOR DHN UNDERTOOK THE OBL IGATION TO PROCURE THEIR SUBSIDIARY COMPANY TO MAKE THE PAYMENTS WHICH THE BANK REQUIRED TO BE MADE. IF EACH MEMBER OF THE GROUP IS REGARDED AS A COMPANY IN ISOLATION, NOBODY AT ALL COULD HAVE CLAIMED COMPENS ATION IN A CASE WHICH PLAINLY CALLS FOR IT. BRONZE WOULD HAVE HAD THE LAND BUT NO BUSINESS TO DISTURB; DHN WOULD HAVE HAD THE BUSINESS BUT NO INTEREST IN THE LAND. 22.12 REFERENCE WAS PLACED ON THE HAROLD HOLDSWORT H AND CO. (WAKEFIELD), LTD. V. CADDIES (1955) 1 ALL ER 725, WHERE LORD NOR TON OF HENRYTON IN ENGLAND AT PG. 734 OF THE REPORT OBSERVED AS FOLLOWS: ITA NO.200/COCH/2015 76 MY LORDS, THIS CLAUSE REFERS TO A GROUP OF COMPANI ES CONSISTING OF THE APPELLANT COMPANY AND THEIR EXISTING SUBSIDIARY COM PANIES. I CANNOT READ THE CLAUSE AS COMPELLING THE BOARD TO ASSIGN D UTIES TO THE RESPONDENT IN RELATION TO THE BUSINESS OF EVERY COM PANY IN THE GROUP. NOR CAN I READ IT AS COMPELLING THE BOARD TO ASSIGN HIM DUTIES IN RELATION TO THE BUSINESS OF THE APPELLANT COMPANY. THAT BUSINESS I S NOT TREATED AS BEING ON A DIFFERENT FOOTING FROM THE BUSINESS OF BRITIS H TEXTILE OR OF ANOTHER SUBSIDIARY OF THE APPELLANT COMPANY, WHALLEY AND AP PLEYARD, LTD. WHICH IS MENTIONED IN THE RESPONDENTS CONDESCENDENCE AS I READ THE CLAUSE, IT LEAVES THE BOARD OF THE AP PELLANT COMPANY FREE TO ASSIGN TO THE RESPONDENT DUTIES IN RELATION TO THE BUSINESS OF ONE ONLY, OR TWO ONLY OR ALL OF THE COMPANIES IN THE GROUP, AND TO VARY THE ASSIGNMENT AND THE DUTIES FROM TIME TO TIME. FURTHER, I THINK THE CLAUSE LEAVES THE BOARD FREE TO APPOINT ANOTHER PERSON TO BE A MANAG ING DIRECTOR, AND TO DIVIDE THE DUTIES AND POWERS REFERRED TO IN THE CLAUSE BETWEEN THE RESPONDENT AND THE OTHER MANAGING DIRECTOR IN SUCH MANNER AS THEY THINK FIT. IT IS TRUE THAT EACH COMPANY IN THIS GROUP IS, IN LAW, A SEPARATE ENTITY, THE BUSINESS WHEREOF IS TO BE CARRIED ON BY ITS OWN DIRECTORS AND MANAGING DIRECTOR, IF ANY, BUT THERE IS NO DOUBT TH AT THE APPELLANT COMPANY, BY TAKING ANY NECESSARY FORMAL STEPS, COUL D MAKE ANY ARRANGEMENTS THEY PLEASED IN REGARD TO THE MANAGEME NT OF THE BUSINESS OF (FOR INSTANCE) BRITISH TEXTILE. THEY OWNED ALL THE ISSUED CAPITAL AND THE DIRECTORS WERE THEIR NOMINEES. IT IS SUBMITTED THAT LORD REID AT PAGES 737-738 OBS ERVED AS FOLLOWS: IT WAS ARGUED THAT THE SUBSIDIARY COMPANIES WERE S EPARATE LEGAL ENTITIES, EACH UNDER THE CONTROL OF ITS OWN BOARD OF DIRECTOR S, THAT IN LAW THE BOARD OF THE APPELLANT COMPANY COULD NOT ASSIGN ANY DUTIE S TO ANYONE IN RELATION TO THE MANAGEMENT OF THE SUBSIDIARY COMPAN IES, AND THAT, THEREFORE, THE AGREEMENT CANNOT BE CONSTRUED AS ENT ITLING THEM TO ASSIGN ANY SUCH DUTIES TO THE RESPONDENT. MY LORDS IN MY JUDGMENT, THIS IS TOO TECHNICAL AN A RGUMENT. THIS IS AN AGREEMENT IN RE MERCATARIA, AND IT MUST BE CONSTRUE D IN THE LIGHT OF THE FACTS AND REALITIES OF THE SITUATION. THE APPELLANT COMPANY OWNED THE WHOLE SHARE CAPITAL OF BRITISH TEXTILE MFG. CO., AN D, UNDER THE AGREEMENT OF 1947, THE DIRECTORS OF THE COMPANY WERE TO BE N OMINEES OF THE APPELLANT COMPANY. SO IN FACT, THE APPELLANT COMPA NY COULD CONTROL THE INTERNAL MANAGEMENT OF THEIR SUBSIDIARY COMPANIES, AND, IN THE UNLIKELY ITA NO.200/COCH/2015 77 EVENT, OF THEIR BEING ANY DIFFICULTY, IT WAS ONLY N ECESSARY TO GO THROUGH FORMAL PROCEDURE IN ORDER TO MAKE THE DECISION OF T HE APPELLANT COMPANYS BOARD FULLY EFFECTIVE. 22.13 IT WAS SUBMITTED THAT ADMITTEDLY THERE IS NO GENERAL PRINCIPLE THAT EVERY COMPANY IN A GROUP OF COMPANIES ARE TO BE REGARDED AS ONE; ON THE CONTRARY THE FUNDAMENTAL PRINCIPLE IS UNQUESTIONABLE THAT E ACH COMPANY IN A GROUP OF COMPANIES IS A SEPARATE LEGAL ENTITY POSSESSED OF S EPARATE RIGHTS AND LIABILITIES. IT WAS SUBMITTED THAT THE FACTS MAY JUSTIFY THE COURT TO IGNORE THE DISTINCTION BETWEEN THEM AND TREATING THEM AND TREATING THEM AS ONE. IT WAS SUBMITTED THAT EVEN IF THE DOCTRINE OF SINGLE ECONOMIC UNIT H AS NOT BEEN SPECIFICALLY MENTIONED YET CORPORATE LAW CANNOT BE DIVORCED FROM FACTS AND REALITIES AND BUSINESS REALITIES AND LEGALISTIC VIEW TAKEN. 22.14 IT WAS SUBMITTED THAT CORPORATE VEIL DOCTRIN E HAS BEEN ENACTED BY THE LEGISLATURE OF DIFFERENT COUNTRIES OF THE WORLD FOR THE PURPOSE OF PROMOTING ADVENTURE AND ENTERPRISE LIMITING THE LIABILITY OF THE ENTREPRENEUR. IT WAS SUBMITTED THAT THE CIRCUMSTANCES IN WHICH CORPORATE VEIL CAN BE PIERCED OR LIFTED HAVE BEEN LAID DOWN IN A STRING OF JUDICIAL PRONOUNCEMENTS BY COURTS IN INDIA, THE USA AND THE UK ETC. IT WAS SUBMITTED THA T THE EXPRESSION FOR THE PURPOSE OF THE BUSINESS USED IN SECTION 37(1) HAS TO BE INTERPRETED IN THE CONTEXT OF FACTS AND BUSINESS REALITIES OF THE SITU ATION. IT WAS SUBMITTED THAT AHSL IS A WHOLLY OWNED AND CONTROLLED BY THE HOLDING COM PANY AND IS BOUND HAND AND FOOT WITH THE HOLDING COMPANY, THAT THE HOLDING COMPANY IN SUCH ITA NO.200/COCH/2015 78 EVENTUALITY IS THE DE FACTO OWNER OF THE ENTERPRISE IF NOT THE DE JURE. RELIANCE WAS PLACED ON CONCEPT OF BENEFICIAL OWNERSHIP, BY T HE SUPREME COURT IN RENUSAGAR (SUPRA) AND FOLLOWING JUDGMENT. IT WAS S UBMITTED THAT IF AHSL IS A DISTINCT CORPORATE ENTITY HOLDING THE DE JURE OWNER SHIP OF HEALTH CARE BUSINESS YET IT CANNOT BE DENIED THAT THE ASSESSEE HAS BENEF ICIAL INTEREST IN THE HEALTH CARE BUSINESS; WHICH CANNOT BE DISREGARDED WHILE CO NSIDERING BUSINESS EXPEDIENCY OF EXPENDITURE. IT WAS SUBMITTED THAT E XPENDITURE INCURRED BY THE APPELLANT FOR THE PURPOSE OF BUSINESS IN WHICH IT H AS BEEN BENEFICIAL INTEREST AND BENEFICIAL INTEREST OWNERSHIP WOULD QUALIFY THE TES T OF COMMERCIAL EXPEDIENCY. IT WAS SUBMITTED THAT CONCEPT OF COMMERCIAL EXPEDIE NCY IS NOT A LEGAL CONCEPT AND IT IS BASED ON THE SUBJECTIVE JUDGMENT OF A B USINESSMAN. IT WAS SUBMITTED THAT EXPENSES HAS NO LEGAL CONTOURS AND IS ROOTED I N BUSINESS REALITIES AND COMMERCIAL CONSIDERATIONS. IT WAS SUBMITTED THAT S ECTION 37(1) DOES NOT ENACT ANY RESTRICTIVE CONDITION FOR DEDUCTION THAT THE AS SESSEE SHOULD BE THE LEGAL OWNER OF THE BUSINESS FOR ELIGIBILITY OF DEDUCTION OF EXPENDITURE. IT WAS SUBMITTED THAT IT SHALL BE VIOLATIVE OF THE BASIC PRINCIPLES OF CONSTRUCTION OF STATUTES TO READ ANY SUCH LIMITATION IN THE SECTION. IT WAS ALSO SU BMITTED THAT THEORY OF SINGLE ECONOMIC UNIT, AS ENDORSED AND APPROVED BY THE VARI OUS COURTS OF THE UK, USA AND INDIA IS IN FACT ROOTED IN THE BUSINESS REALITI ES OF THE SITUATION WHICH HAVE BEEN RECOGNIZED BY THE LEGISLATURE WHILE ENACTING S ECTION 212 OF THE COMPANIES ACT WHICH MAKES IT OBLIGATORY FOR THE HOL DING COMPANY TO INCLUDE THE BALANCE SHEET, PROFIT AND LOSS ACCOUNT, AS WELL AS AUDITORS REPORT AND BOARD ITA NO.200/COCH/2015 79 OF DIRECTORS REPORT OF EACH SUBSIDIARY WITH ITS BAL ANCE SHEET. IT WAS SUBMITTED THAT ASSESSEE COMPANY HAS FILED CONSOLIDATED BALANC E SHEET OF THE GROUP COMPRISING THE SUBSIDIARIES AND THE HOLDING COMPANY AFTER SEEKING EXEMPTION FROM THE CENTRAL GOVERNMENT UNDER SECTION 212(8) OF THE COMPANIES ACT. IT WAS FURTHER SUBMITTED THAT THE THEORY OF SINGLE ECONOMI C GROUP IS ALSO MANIFESTED IN THE ACCOUNTING PRINCIPLES AND POLICIES FORMULATED B Y THE PROFESSIONAL ACCOUNTING BODIES IN VARIOUS COUNTRIES OF THE WORLD . ACCOUNTING STANDARD- 21ISUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS O F INDIA DEALS WITH THE CONSOLIDATED FINANCIAL STATEMENTS OF THE HOLDING CO MPANY AND ITS SUBSIDIARIES. IT WAS SUBMITTED THAT IN THE CONTEXT OF SECTION 212 OF THE COMPANIES ACT AND ACCOUNTING STANDARD 21 IT WOULD BE ERRONEOUS TO SAY THAT A SUBSIDIARY COMPANY IN THE WORLD OF COMMERCE HAS IN REALITY NO NEXUS OR CONNECTION WITH THE HOLDING COMPANY AND THAT EYE OF EQUITY CANNOT PEEP BEHIND T HE CORPORATE VEIL OF THE SUBSIDIARY; AND SUCH A LEGALISTIC VIEW, IGNORING TH E BUSINESS REALITIES OF THE SITUATION, CANNOT BE ACCEPTED. IT WAS THUS PRAYED THAT DISALLOWANCE BE DELETED 23. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISS ION, PERUSED THE MATERIAL ON RECORD AND ORDER OF TEHAUTHORITIES BELOW. THE CIT(A ) WHILE SUSTAINING THE DISALLOWANCE HAS HELD AS UNDER: THE PARAMOUNT QUESTION IN THE ENTIRE ISSUE IS THAT ONCE, IT HAS BEEN UPHELD BY THE LD. BENCH ITAT, KOCHI FOR ASSESSMENT YEAR 20 08-09 & 2009-10 VIDE THEIR ORDER DATED 3-1-2014 THAT THE APPELLANTS INCOME FR OM LEASE RENT RECEIVED FROM M/S. APOLLO TYRES LTD., IS ASSESSABLE UNDER TH E HEAD INCOME FROM OTHER ITA NO.200/COCH/2015 80 SOURCES, HOW THE APPELLANT COULD CLAIM BUSINESS EX PENDITURE ON ACCOUNT OF GIFT, AS A HOLDING COMPANY MAKING GIFT OF SHARES TO THE EXTENT OF 15,75,500 OF AHSL WHICH IS 100% SUBSIDIARY COMPANY OF THE APP ELLANT UNDER SEC. 37 OF THE I.T. ACT. THIS QUERY WAS RAISED DURING THE COURSE OF APPEAL P ROCEEDINGS AND NOTED IN THE ORDER SHEET ON 21/01/2015. THE APPELLANT, HOWE VER, HAS SUBMITTED BY REITERATING THEIR STAND THAT THEY HAVE NOT ACCEPTED THE DECISION OF THE LD. ITAT, COCHIN BENCH, FOR HOLDING THE LEASE RENTAL IN COME ASINCOME FROM OTHER SOURCES AND,, THEY HAVE CHALLENGED THE SAME BEFORE THE HONBLE HIGH COURT OF KERALA. SINCE HAVE BEEN TREATING THE INCOME FROM LEAS RENTS AS BUSINESS INCOME, THEY HAVE MADE THEIR CLAIM FOR EXPENDITURE UNDER SECTION 37, ON ACCOUNT OF THE GIFT OF SHARES MADE T O THE CEO OF THE SUBSIDIARY COMPANY. THE AMOUNT OF EXPENDITURE HAVE BEEN QUANTIFIED BASED ON THE VALUE OF THE GIFTED SHARES NUMBERING 1 5,75,500/-. AS A MATTER OF FACT, THERE IS NO INCOME FROM BUSINE SS OR PROFESSION, AND ONLY INCOME IS THE INCOME FROM OTHER SOURCES. TILL DA TE, THE APPELLANTS INCOME HAS BEEN TREATED AS INCOME FROM OTHER SOURCES; THE RE IS NO QUESTION OF ALLOWING ANY BUSINESS EXPENDITURE U/S. 37 OF THE IT ACT. AS A MATTER OF FACT, THERE IS NO INCOME FROM BUSINE SS OR PROFESSION, AND ONLY INCOME IS THE INCOME FROM OTHER SOURCES, THEN, IN SUCH A CASE, NO QUESTION OF DEDUCTIBILITY OF BUSINESS EXPENDITURE U /S. 37 ARISES, BECAUSE, THE INCOME HAS NOT BEEN COMPUTED UNDER CHAPTER IVD OF T HE ACT. 23.1 THUS THE EDIFICE OF THE DISALLOWANCE OF RS.9.4 6 CRORES IS NO INCOME FROM BUSINESS AND THEREFORE EXPENDITURE INCURRED IS NOT ELIGIBLE FOR DEDUCTION U/S. 37(1) OF THE ACT. WE HAVE HOWEVER WHILE ADJUDICATIN G GROUND 1 HELD THAT INCOME FROM LEASE RENT OF RS.25 CRORES IS ASSESSABL E AS BUSINESS INCOME; AND THUS EXCONSEQUENTI THE FOUNDATION OF DISALLOWANCE C EASES TO EXIST AND, THEREFORE EXPENDITURE IS ELIGIBLE FOR DEDUCTION U/S . 37(1) OF THE ACT. HOWEVER, WE WOULD HAVE ENDED THE MATTER AT THAT, BUT, WE CAN NOT RESIST BUT TO STATE THAT ABSENCE OF INCOME ALONE IS NOT A RELEVANT TES T FOR ALLOWABILITY OF CLAIM OF EXPENDITURE EITHER U/S. 37(1) OF THE ACT OR EVEN SE CTION 57(III) OF THE ACT. IN THE ITA NO.200/COCH/2015 81 CASE OF CIT VS. RAJENDRA PRASAD MOODY 115 ITR 519 ( SC), THE FACTS WERE THAT ASSESSEE WERE BROTHERS AND BORROWED MONIES FOR MAKI NG INVESTMENT IN SHARES OF CERTAIN COMPANIES. INTEREST PAID WAS CLAIMED AS DEDUCTION. THE ASSESSING OFFICER DISALLOWED THE DEDUCTION. AAC HELD THAT SH ARE DID NOT YIELD ANY DIVIDEND, INTEREST ON BORROWED MONEY BUT EXPENDITUR E, PER SAY ALLOWABLE U/S. 57(III) OF THE ACT. THE TRIBUNAL UPHELD THE CLAIM OF ASSESSEE FOR DEDUCTION U/S. 57(III) OF THE ACT. THE HONBLE SUPREME COURT HELD THAT THE INTEREST ON MONEY BORROWED FOR INVESTMENT IN SHARES, WHICH HAD NOT YI ELDED ANY DIVIDEND WAS ADMISSIBLE U/S. 57(III) OF THE ACT. IT WAS HELD AS UNDER: IT IS ALSO INTERESTING TO NOTE THAT, ACCORDING TO THE REVENUE, THE EXPENDITURE WOULD DISQUALIFY OR DEDUCTION ONLY IF N O INCOME RESULTS FROM SUCH EXPENDITURE IN A PARTICULAR ASSESSMENT YEAR, B UT IF THERE IS SOME INCOME, HOWSOEVER SMALL OR MEAGER, THE EXPENDITURE WOULD BE ELIGIBLE FOR DEDUCTION. THIS MEANS THAT IN A CASE WHERE THE EXPENDITURE IS RS.1000/-, IF THERE IS INCOME OF EVEN RE. 1/-, THE EXPENDITURE WOULD BE DEDUCTIBLE AND THERE WOULD BE RESULTING LOSS OF RS. 999/- UNDER THE HEAD INCOME FROM OTHER SOURCES. BUT IF THERE IS NO IN COME, THEN, ON THE ARGUMENT OF THE REVENUE, THE EXPENDITURE WOULD HAVE TO BE IGNORED AS IT WOULD NOT BE LIABLE TO BE DEDUCTED. THIS WOULD INDEED BE A STRANGE AND HIGHLY ANOMALOUS RESULT AND IT IS DIFFICULT TO BELIEVE THAT THE LEGISLATURE COULD HAVE EVER INTENDED TO PRODUCE SUC H ILLOGICALITY. MOREOVER, IT MUST BE REMEMBERED THAT WHEN A PROFIT AND LOSS ACCOUNT IS CAST IN RESPECT OF ANY SOURCE OF INCOME, WHAT IS AL LOWED BY THE STATUTE AS PROPER EXPENDITURE WOULD BE DEBITED AS AN OUTGOI NG AND INCOME WOULD BE CREDITED AS A RECEIPT AND THE RESULTING IN COME OR LOSS WOULD BE DETERMINED. IT WOULD MAKE NO DIFFERENCE TO THIS PROCESS WHETHER THE EXPENDITURE IS X OR Y OR NIL.; WHATEVER IS THE PROP ER EXPENDITURE ALLOWED BY THE STATUTE WOULD BE DEBITED. EQUALLY, IT WOULD MAKE NO DIFFERENCE WHETHER THERE IS ANY INCOME AND IF SO, WHAT, SINCE WHATEVER IT BE X OR Y OR NIL, WOULD BE CREDITED. AND THE ULTIMATE PROFIT OR LOSS WOULD BE FOUND. WE FAIL TO APPRECIATE HOW EXPENDITURE WHICH IS OTHE RWISE A PROPER EXPENDITURE CAN CEASE TO BE SUCH MERELY BECAUSE THE RE IS NO RECEIPT OF INCOME. WHATEVER IS A PROPER OUTGOING BY WAY OF EXP ENDITURE MUST E DEBITED IRRESPECTIVE WHETHER THERE IS RECEIPT OF IN COME OR NOT. THAT IS ITA NO.200/COCH/2015 82 THE PLAIN REQUIREMENT OF PROPER ACCOUNTING AND THE INTERPRETATION OF SECTION 57(III) CANNOT BE DIFFERENT. THE DEDUCTION OF THE EXPENDITURE CANNOT, IN THE CIRCUMSTANCES, BE HELD TO BE CONDITI ONAL UPON THE MAKING OR EARNING OF THE INCOME. IT IS TRUE THAT THE LANGUAGE OF SECTION 37(1) IS A LITTLE WIDER THAN THAT OF SECTION 57(III), BUT WE DO NOT SEE HOW THAT CAN MAK E ANY DIFFERENCE IN THE TRUE INTERPRETATION OF SECTION 57(III). THE LA NGUAGE OF SECTION 57(III) IS CLEAR AND UNAMBIGUOUS AND IT HAS TO BE CONSTRUED AC CORDING TO ITS PLAIN NATURAL MEANING AND MERELY BECAUSE A SLIGHTLY WIDER PHRASEOLOGY IS EMPLOYED IN ANOTHER SECTION WHICH MAY TAKE IN SOMET HING MORE, IT DOES NOT MEAN THAT SECTION 57(III) SHOULD BE GIVEN A NAR ROW AND CONSTRICTED MEANING NOT WARRANTED BY THE LANGUAGE OF THE SECTIO N AND IN FACT, CONTRARY TO SUCH LANGUAGE. THIS VIEW WHICH WE ARE TAKING IS CLEARLY SUPPORTED BY THE OBSERVATIONS OF LORD THANKERTON IN HUGHES VS. BANK OF NEW ZEALAND W HERE THE LEARNED LAW LORD SAID: EXPENDITURE IN THE COURSE OF THE TRADE WHICH IS UN REMUNERATIVE IS NONE THE LESS A PROPER DEDUCTION, IF WHOLLY AND EXCLUSIV ELY MADE FOR THE PURPOSES OF THE TRADE. IT DOES NOT REQUIRE THE PRES ENCE OF A RECEIPT ON THE CREDIT SIDE TO JUSTIFY THE DEDUCTION OF AN EXPE NSE. 23.2 ALSO IN THE CASE OF CIT VS. AMALGAMATION (P ) RTD. FACTS WERE THAT CO. SSM EXECUTED PROMISSORY NOTE IN FAVOUR OF THE ASS ESSEE. SSM WENT INTO LIQUIDATION, ASSESSEE AS GUARANTOR WAS REQUIRED TO CLEAR OD. AFTER LIQUIDATION, SOME AMOUNT WAS DUE TO ASSESSEE FROM LIQUIDATING CO . ON ACCOUNT OF OD. THE ASSESSEE CLAIMED THE SAME AMOUNT AS LOSS, WHICH ARO SE IN COURSE OF & INCIDENTAL TO BUSINESS IN AY 1958-59. THE ASSESSEE RECEIVED RECEIPT IN COURSE OF LIQUIDATION OF SSM OVER AY 1959-1962-63. THE ASSES SING OFFICER HELD LOSS NOT INCIDENTAL TO BUSINESS OF ASSESSEE; CAPITAL LOSS NO T COVERED U/S. 12B. HELD LIQUIDATION RECEIPTS AS INCOME FOR AY 1959-60 TO 19 62-63 ALLOWED. IN CROSS APPEAL, TRIBUNAL HELD: ASSESSEE HAD GUARANTEED LOAN ON ITS OWN BUSINESS AND ITA NO.200/COCH/2015 83 LOSS ADMISSIBLE AS DEDUCTION. ALLOWABLE FOR A.Y. 1 962-63. ASSESSEE COULD HAVE ASCERTAINED LOSS IN TRANSACTION OF GUARANTEE OF LOA N IN FINAL STATE OF PAYMENT RECEIVED IN PY 1961-62, ORDER OF TRIBUNAL ALLOWED. IT WAS HELD AS UNDER: 17. THE AMOUNTS PAID BY THE ASSESSEE COMPANY TO TH E DIRECTORS OF ITS SUBSIDIARY COMPANIES CAN BE ADMISSIBLE AS A DEDUCTI ON U/S. 10(2)9XV) OF THE 1922 ACT OR SECTION 37(1) OF THE 1961 ACT ONLY IF THEY CAN BE REGARDED AS EXPENDITURE LAID OUT OR EXPENDED WHOLLY AND EXC LUSIVELY FOR THE PURPOSES OF THE BUSINESS OF THE ASSESSEE COMPANY. T HIS EXPRESSION WAS ASLSO USED IN THE INCOME-TAX ACT, 1918 IN U.K. IN ATHERTO N VS. BRITISH INSULATED & HELSBY CABLES LTD. (1925) 10 TC 155 (HL), VISCOUNT CAVE, LC, HAS THUS EXPLAINED THE SAID EXPRESSION: . A SUM OF OF MONEY EXPENDED, NOT OF NECESSITY AN D WITH A VIEW TO A DIRECT AND IMMEDIATE BENEFIT TO THE TRADE, BUT VOLU NTARILY AND ON THE GROUNDS OF THE COMMERCIAL EXPEDIENCY, AND IN ORDER INDIRECTLY TO FACILITATE THE CARRYING ON OF THE BUSINESS, MAY YET BE EXPENDE D WHOLLY OR EXCLUSIVELY FOR THE PURPOSES OF THE TRADE. (P.91) THESE OBSERVATIONS HAVE BEEN REFERRED TO WITH APPRO VAL BY THIS COURT WHILE CONSTRUING SECTION 10(2)9XV) (SEE: EASTERN INVESTME NTS LTD. V. CIT (1951) 20 ITR 1 AND CIT V. CHANDULAL KESHAVELAL & CO. (1960) 38 ITR 601). 18. IN TRAVANCORE TITANIUM PRODUCTS LTD. VS. CIT (1 966) 60 ITR 277, THIS COURT, WHILE CONSTRUING THE EXPRESSION FOR THE PURPOSE OF BUSINESS IN SECTION 10(2)9XV) OF THE 1922 ACT, HAS SAID: ..THE EXPENDITURE MUST BE INCIDENTAL TO THE BUSIN ESS AND MUST BE NECESSITATED OR JUSTIFIED BY COMMERCIAL EXPEDIENCY, . IT MUST BE DIRECTLY AND INTIMATELY CONNECTED WITH THE BUSINESS AS LAID OUT BY THE TAXPAYER IN HIS CHARACTER AS A TRADER. TO BE A PERMISSIBLE DEDUCTI ON, THERE MUST BE A DIRECT AND INTIMATE CONNECTION BETWEEN THE EXPENDIT URE AND THE BUSINESS, I.E., BETWEEN THE EXPENDITURE AND THE CHARACTER OF THE ASSESSEE AS A TRADER, AND NOT AS OWNER OF ASSETS, EVEN IF THEY AR E ASSETS OF THE BUSINESS. (P. 277) 19. IN INDIAN ALUMINIUM CO. LTD. VS. CO. LTD. VS. CIT (1972) 84 ITR 735 DECIDED BY A CONSTITUTION BENCH OF THIS COURT, THE AFOREMENTIONED TEST LAID DOWN IN TRAVANCORE TITANIUM CASE (196T6) 60 ITR 277 THAT TO BE A PERMISSIBLE DEDUCTION, THERE MUST BE A DIRECT AND I NTIMATE CONNECTION BETWEEN THE EXPENDITURE AND THE BUSINESS, I.E., BET WEEN THE EXPENDITURE AND THE CHARACTER OF THE ASSESSEE AS A TRADER AND NOT AS OWNER OF ASSETS, ITA NO.200/COCH/2015 84 EVEN IF THEY ARE ASSETS OF THE BUSINESS NEEDS TO BE QUALIFIED BY STATING THAT IF THE EXPENDITURE IS LAID OUT BY THE ASSESSEE AS OWNE R-CUM-TRADER, AND THE EXPENDITURE IS REALLY INCIDENTAL TO THE CARRYING ON OF HIS BUSINESS, IT MUST BE TREATED TO HAVE BEEN LAID OUT BY HIM AS A TRADER AN D AS INCIDENTAL TO HIS BUSINESS. (P. 747). THE HIGH COURT, IN OUR OPINION, HAS RIGHTLY PROCEED ED ON THE BASIS OF THAT THERE MUST BE A NEXUS BETWEEN EXPENDITURE AND BUSIN ESS OF THE ASSESSEE. 23.3 APPLYING THE FOREGOING PRINCIPLE TO THE FACTS , IT IS NOTED THAT DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR 2010- 11, 1575500 SHARES OF THE WHOLLY OWNED SUBSIDIARY COMPANY VIZ., ARTEMIS HEALT H SCIENCES LTD. (AHSL) WERE GIFTED TO DR. KUSHAGRA KATARIYA FOR HIS VALUABLE CO NTRIBUTION IN SETTING UP A SUPER SPECIALTY HOSPITAL UNDER ITS SUBSIDIARY ARTEMIS MDI CARE SERVICES LTD. (AMSL). THE MEMORANDUM OF ASSOCIATION OF THE COMPANY WAS AMENDE D VIDE POSTAL RESOLUTION DATED 17/05/2005 FOR CHANGING THE NAME O F THE COMPANY FROM PREMIER TYRES LTD. TO PTL ENTERPRISES LTD. AND FIVE NEW CLAUSES AS SERIAL NUMBER 43 TO 47 WERE INSERTED IN THE OBJECT CLAUSE OF THE COM PANY WHICH READS AS UNDER: 43 TO BUY SELL MANAGE, IMPROVE, MAINTAIN, TAKE ON LEASE, PROMOTE, ADMINISTER, OWN OR RUN HOSPITALS, CLINICS, NURSING HOMES, DISPENSARIES, MATERNITY HOMES, HEALTH RESORTS AND HEALTH CLUBS, P OLYCLINICS, MEDICAL CENTRES, CHILD WELFARE AND FAMILY WELFARE/PLANNING CENTRES, DIAGNOSTIC CENTRES, RESEARCH CENTRES, LABORATORIES FOR CARRYIN G OUT CLINICAL, PATHOLOGICAL, BIOLOGICAL AND DIAGNOSTIC, INVESTIGAT IONS, SUCH AS X-RAY, CT/CAT SCAN, ULTRA SOUND, ECG, MRI BLOOD TESTS AND PROVIDE ALL KINDS OF MEDICAL AND HEALTH SERVICES. 44 TO UNDERTAKE, PROMOITE, ASSIST OR ENGAGE IN ALL KINDS OF RESEARCH AND DEVELOPMENT WORK IN CONNECTION WITH HEALTH CARE, BI OTECHNOLOGICAL AND OTHER RELATED FACILITIES INCLUDING MOLECULE DEVELOP MENT ETC. 45 TO SET UP LABORATORIES AND UNDERTAKE CLINICAL R ESEARCH ON PATIENTS FOR HELPING MANUFACTURING AND DEVELOPMENT OF NEW DRUGS. ITA NO.200/COCH/2015 85 46 TO DESIGN, MANUFACTURE, IMPORT, EXPORT BUY SELL, INSTALL, MAINTAIN AND DEAL IN ALL KINDS OF PHARMACEUTICALS, CHEMICALS, ME DICINES AND DRUGS AND ALL KINDS OF MEDICAL EQUIPMENTS, INSTRUMENTS, APPAR ATUS AND THE LIKE. 47. TO ESTABLISH AND RUN MEDICAL COLLEGES OR INSTIT UTIONS TO EDUCATE AND TRAIN MEDICAL STUDENTS, NURSES, MIDWIVES AND HOSPIT ALS ADMINISTRATORS AND TO GRANT SUCH DEGREE, DIPLOMAS OR RECOGNITION AS TH E COMPANY MAY PRESCRIBE OR DEEM FIT FROM TIME TO TIME AND TO GRAN T STIPENDS, SCHOLARSHIPS OR ANY OTHER ASSISTANCE, MONETARY OR OTHERWISE TO W HOMSOEVER TO FURTHER THE CAUSE OF MEDICINE AND/OR MEDICAL RESEARCH. 23.4 THESE CLAUSES THUS EXPANDED THE SCOPE OF THE OBJECTS OF THE COMPANY TO INCLUDE, INTER-ALIA, RUNNING OF HOSPITALS, DIAGNOST IC CENTRES, PATHOLOGICAL LABORATORIES, MEDICAL RESEARCH, MEDICAL EDUCATION, DRUG MANUFACTURE AND SETTING UP OF FACILITIES FOR PROVIDING ALL KINDS OF MEDICAL AND HEALTH SERVICES. IT IS SEEN THAT IN PURSUANCE OF THE AFORESAIDOBJECTS, THE ASSESSEE COMPANY SET UP WHOLLY OWNED SUBSIDIARIES FOR DEVELOPMENT OF HEALTH CARE BUSINESS INCLUDES AHSL AND AMSL. 23.5 THE SETTING UP OF SUBSIDIARIES WHEREIN ASSESS EE HAS A 100% CONTROLLING INTEREST ENGAGED IN HEALTHCARE BUSINESS, TANTAMOUNT TO CARRYING ON BUSINESS BY THE ASSESSEE COMPANY; AND, EXPENDITURE INCURRED IN THE COURSE OF THE SAID BUSINESS IS ALSO BUSINESS EXPENDITURE ELIGIBLE FOR DEDUCTION U/S. 37(1) OF THE ACT IRRESPECTIVE OF THE INCOME FROM SUCH BUSINESS. ITA NO.200/COCH/2015 86 23.6 HAVING REGARED TO THE ABOVE DISALLOWANCE MAD E AND SUSTAINED IS DELETED. GROUND RAISED IS ALLOWED. 24. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS A LLOWED. PRONOUNCED IN THE OPEN COURT ON 2 9-09-2016. SD/- SD/- ( . ) (GEORGE GEORGE K.) ( . . ) (B. P. JAIN) /JUDICIAL MEMBER /ACCOUNTANT MEMBER & /PLACE: /COCHIN 3 /DATED: 29 TH SEPTEMBER, 2016 GJ/ 1 * (.4 54%. /COPY TO: 1. &' /M/S. PTL ENTERPRISES LTD., CHERUPUSHPAM BUILDING, SHANMUGHAM ROAD, KOCHI-682 031. 2. () &' /THE DEPUTY COMMISSIONER OF INCOME-TAX, CENTRAL CIR CLE-4(1), KOCHI. 3. ,6 . ( )/THE COMMISSIONER OF INCOME-TAX(APPEALS)-I, KOCHI, 4. ,6 . /THE COMMISSIONER OF INCOME-TAX, CENTRAL, 5. 478 (. , /THE DR/ITAT, COCHIN BENCH KCOHI. 6. 8: ;- /GUARD FILE. 1, /BY ORDER < /ASSISTANT REGISTRAR - . =/ . > . =/ ., /I.T.A.T., COCHIN ITA NO.200/COCH/2015 87