ROSE MERC LTD, MUMBAI V. ITO WD 7(2)(1), MUMBAI

ITA 4117/MUM/2012

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 87886 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 7 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-01-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 19-01-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 12-06-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: LUV KUMAR DR
• Keywords: Business income; Depreciation
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL D B ENCH, MUMBAI , , , BEFORE SHRI SANJAY ARORA, ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER ./ I.T.A. NO.4117/MUM/2012 ( / ASSESSMENT YEAR : 2007-08) ROSE MERC. LIMITED 191 QUAY STREET, REAY ROAD, MAZAGAON MUMBAI-400 010. / VS. INCOME TAX OFFICER WARD-17(2)(1) AAYAKAR BHAVAN MUMBAI. ./ ./PAN/GIR NO. : AACCR 3663 B ( /APPELLANT ) .. ( / RESPONDENT ) / APPELLANT BY : SHRI PARESH SHAPARIA ! / RESPONDENT BY : SHRI LUV KUMAR - DR ' # $ ! % / DATE OF HEARING : 19/01/2015 & '( ! % / DATE OF PRONOUNCEMENT : 23 /01/2015 ) / O R D E R PER VIJAY PAL RAO, JM : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 17/01/2012 OF CIT(A) FOR THE ASSESSMENT YEAR 2007-08. THE ASSESSE E HAS RAISED THE FOLLOWING GROUNDS:- I. TREATMENT OF INTEREST INCOME OF RS.20,75,604/- AS INCOME FROM OTHER SOURCES INSTEAD OF BUSINESS INCOME THE LEARNED CIT(A) ERRED IN CONFIRMING INTEREST INC OME OF RS. 20,75,604/- UNDER THE HEAD INCOME FROM OTHER SOURCES INSTEAD OF BUSIN ESS INCOME. 1. THE LEARNED CIT(A) OUGHT NOT TO HAVE CONFIRMED INTE REST INCOME OF RS.20,75,604/- UNDER THE HEAD BUSINESS INCOME OTHER THAN INCOME FR OM OTHER SOURCES. 2. THE INTEREST INCOME OF RS. 20,75,604/- REQUIRES TO BE TREATED AS BUSINESS INCOME. 2 4117/M/12 II. NON ALLOWANCE OF ADMINSTRATIVE, & OTHER EXPENSE S, INTEREST & FINANCE CHARGES & DEPRECIATION EXPENSES OF RS.10,36 ,599/- OUT OF TOTAL EXPENSES OF RS.11,61,990/- 1. THE LEARNED CIT(A) ERRED IN CONFIRMING NON ALLOW ANCE OF RS.10,36,599/- OUT OF TOTAL EXPENSES CLAIMED OF RS. 11,61,990/- U/S 37(1). 2 THE LEARNED CIT(A) OUGHT NOT TO HAVE CONFIRMED THE NON ALLOWANCE RS.10,36,599/- CLAIMED AS DEDUCTION U/S 37(1). 3. THE EXPENSES INCURRED ON ACCOUNT ADMINISTRATIVE, INTEREST, FINANCE, SALARY TO DIRECTORS, DEPRECIATION OF RS.10,36,599/- REQUIRES TO BE DELETED. 2. GROUND NO.1 REGARDING TREATMENT OF INTEREST INCO ME AS INCOME FROM OTHER SOURCES. THE MAIN BUSINESS OF THE ASSESSEE COMPANY WAS TRADING IN IRON AND STEEL MARKET. HOWEVER, THE SAID BUSINESS ACTIVITY WAS DIS CONTINUED BY THE ASSESSEE SINCE ASSESSMENT YEAR 2003-04. FROM THE ASSESSMENT YEAR 2 004-05 THE ASSESSEE HAS BEEN SHOWING INTEREST INCOME FROM LENDING MONEY. FOR THE YEAR UNDER CONSIDERATION THE ASSESSEE HAS SHOWN INTEREST INCOME OF RS.20,75,604/ - AS BUSINESS INCOME. THE AO WHILE FRAMING ASSESSMENT UNDER SECTION 143(3) HAS A SSESSED INTEREST INCOME AS INCOME FROM OTHER SOURCES AND CONSEQUENTLY DISALLOWED CERT AIN EXPENSES CLAIMED BY THE ASSESSEE . THE ASSESSEE HAS CHALLENGED THE ACTION O F THE AO BEFORE CIT(A) BUT COULD NOT SUCCEED. 2.1 BEFORE US, THE LD. AR HAS SUBMITTED THAT THE AS SESSEE HAS DISCONTINUED HIS BUSINESS OF TRADING IN IRON & STEEL IN ASSESSMENT Y EAR 2003-04 AND THEREAFTER THE ASSESSEE IS IN THE BUSINESS OF LENDING AND DERIVING INTEREST THERE FROM. THE LD. AR HAS REFERRED TO CLAUSE-39(A) OF MEMORANDUM OF ASSOCIATI ON (MOA) AND SUBMITTED THAT LENDING MONEY AND DERIVING INTEREST THERE FROM IS O NE OF THE OBJECT IN THE MOA. HE HAS REFERRED TO THE DETAILS OF INCOME SINCE ASSESSMENT YEAR 2004-05 TILL ASSESSMENT YEAR 2011-12 AND SUBMITTED THAT THE ONLY INCOME FOR ALL THESE YEARS IS INCOME FROM INTEREST EARNED FROM LENDING OF MONEY. HE HAS FURTHER SUBMIT TED THAT THE ASSESSEE IS ALSO PAYING INTEREST ON THE BORROWED MONEY WHICH WAS US ED FOR LENDING PURPOSE ON WHICH THE INTEREST INCOME IS EARNED. THUS, THE ACTIVITY O F BORROWING MONEY AND ADVANCING THE SAME TO EARN INTEREST IS A BUSINESS ACTIVITY OF THE ASSESSEE AND ACCORDINGLY THE INTEREST INCOME IS DERIVED FROM THE BUSINESS ACTIVITY OF THE ASSESSEE. THE ASSESSEE IS ENTITLED TO 3 4117/M/12 ADVANCE MONEY WITH OR WITHOUT INTEREST AS PER MOA. THEREFORE, THE MONEY LENDING WOULD FORM AN INTEGRAL PART OF THE ASSESSEES BUSIN ESS. THE ACTIVITY IS CARRIED ON REGULAR BASIS AND ORGANIZED MANNER. IT IS CONTINUED FROM YE AR TO YEAR AND FOR A NUMBER OF YEARS AND, THEREFORE, THE ACTIVITY SATISFIES ALL TH E TESTS OF THE TERM BUSINESS. IN SUPPORT OF HIS CONTENTION HE HAS RELIED UPON THE DECISION O F THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF RAJEEV ENTERPRISES VS. AO (2 SOT 347)(JP)(SB). HE HAS ALSO RELIED UPON THE FOLLOWING DECISIONS :- I) SUJAY TRADING P. LTD. VS. JT. CIT 305 ITR 256 (T HIRD MEMBER-ITAT MUM); II) CIT VS. GOVINDA CHOUDHARY & SONS (1995) 203 ITR 881(SC); III) TAMILNADU DAIRY DEVELOPMENT CORPORATION LTD. 2 16 ITR 535 (MAD.) IV) CIT VS. CALCUTTA BANK LTD. 37 ITR 171 AND V) SHAM PROGETTI S.P. A. VS. ADDL. CIT 132 ITR 70(D EL.) 2.2 ON THE OTHER HAND THE LD. DR HAS SUBMITTED THA T THE MAIN BUSINESS OF THE ASSESSEE WAS TRADING IN IRON AND STEEL MARKET WHICH WAS DISCONTINUED AND INTEREST INCOME IS ONLY FROM THE SURPLUS FUNDS OF THE ASSESS EE WHICH HAS NO DIRECT NEXUS WITH THE MAIN BUSINESS ACTIVITY OF THE ASSESSEE. HE HAS FURTHER CONTENDED THAT THE ASSESSEE HAS NOT CHARGED INTEREST FROM ALL THE PARTIES BUT, OUT OF SIX PARTIES TO WHOM THE LOAN WAS GIVEN THE ASSESSEE HAS CHARGED INTEREST ONLY FR OM TWO PARTIES. THIS SHOWS THAT EARNING OF INTEREST INCOME IS NOT SYSTEMATIC AND OR GANIZED ACTIVITY OF ASSESSEE COMPANY. HE HAS REFERRED TO THE FINDING OF CIT(A) A ND SUBMITTED THAT THE ASSESSEE IS ONLY CHANNELIZING THE INTEREST FREE LOANS FROM SIST ER CONCERNS AND ADVANCING THE SAME TO THE RELATED PARTIES THROUGH COMMON DIRECTORS/ RE LATIVES ETC,. THEREFORE, THE ASSESSEES BUSINESS IS NOT EARNING INTEREST INCOME FROM ADVANCING LOANS TO THE RELATED PARTIES. HE HAS RELIED UPON THE ORDERS OF AUTHORITI ES BELOW. 3. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WEL L AS RELEVANT MATERIAL ON RECORD. FOR THE YEAR UNDER CONSIDERATION THE ASSESSEE HAS S HOWN IN THE P & L ACCOUNT INTEREST INCOME OF RS.20,75,604/- AGAINST WHICH THE EXPENDIT URE OF RS.11,61,990/- HAS BEEN CLAIMED. THE INTEREST INCOME ACCORDINGLY DECLARED B Y THE ASSESSEE IS PROFIT BEFORE TAX. THE AUTHORITIES BELOW DID NOT ACCEPT THE CLAIM OF T HE ASSESSEE THAT THE INTEREST EARNED 4 4117/M/12 BY THE ASSESSEE IS A BUSINESS INCOME. THE ASSESSEE PLACED RELIANCE ON CLAUSE 39(A) OF THE MOA WHICH CONTEMPLATES THE OBJECTIVE OF THE ASS ESSEE AS UNDER :- CLAUSE 39 (A) TO LEND INVEST AND DEAL WITH THE M ONEY OF THE COMPANY EITHER WITH OR WITHOUT INTEREST OF SECURITY UPON SU CH TERMS AND CONDITIONS AND MANNER AS MAY FROM TIME TO TIME BE DETERMINED. (B) TO INVEST ANY MONEY OF THE COMPANY IN SUCH INVESTMENTS AS MAY BE THOUGH PROPER AND TO HOLD, SE LL OR OTHERWISE DEAL WITH SUCH INVESTMENT. 3.1 IT IS PERTINENT TO NOTE THAT CLAUSE 39 OF THE MOA IS NOT THE MAIN OBJECT OF THE ASSESSEE BUT IT CONTAINS THE OBJECTS INCIDENTAL OR ANCILLARY TO ATTAINMENT OF THE MAIN OBJECT. THEREFORE, THE CLAUSE-39 OF THE OBJECTS INC IDENTAL OR ANCILLARY TO THE MAIN OBJECT WOULD NOT HELP THE CASE OF THE ASSESSEE ON THE QUES TION OF NATURE OF THE ACTIVITY CARRIED OUT BY THE ASSESSEE . SIMILARLY, BORROWING AND LEND ING NOT BEING PART OF THE MAIN OBJECT OF THE ASSESSEE IS ALSO NOT SOLE CRITERIA TO DECIDE THE REAL NATURE OF THE ACTIVITY CARRIED OUT BY THE ASSESSEE. IF THE ACTIVITY ON ITS INDEPEN DENT EXAMINATION FOUND TO BE BUSINESS IN NATURE, THEN DE-HORSE THE OBJECT CLAUSE OF MOA, WOULD NOT CHANGE THE REAL NATURE OF THE ACTIVITY. THE DETAILS OF INCOME SINCE ASSESSMEN T YEAR 2003-04 ONWARDS OF THE ASSESSEE IS AS UNDER :- ASSESSMENT YEARS GROSS SALES IRON & STEEL INTEREST INCOME INTEREST PAID 2003-04 6,78,94,073 - - 2004-05 - 28,110 2005-06 - 9,12,669 2006-07 - 10,37,000 2007-08 - 20,75,604 2008-09 - 16,89,568 6,34,272 2009-10 - 31,22,740 8,40,981 2010-11 - 21,25,948 - 2011-12 - 20,21,427 7,31,848 5 4117/M/12 3.2 AS IT IS CLEAR FROM THE ABOVE TABLE SHOWING TH E INCOME OF THE ASSESSEE THAT UPTO ASSESSMENT YEAR 2003-04, THE ASSESSEE WAS EARNING I NCOME FROM TRADING IN IRON AND STEEL MARKET AND FROM ASSESSMENT YEAR 2004-05 ONWAR DS THE ASSESSEE HAS BEEN EARNING INTEREST INCOME CONSISTENTLY. THE CIT(A) HA S GIVEN MUCH EMPHASIS TO THE FACT THAT THE ASSESSEE IS TAKING FUND FROM THE SISTER CO NCERNS AND ADVANCING THE MONEY TO THE RELATED PARTIES ON WHICH THE SISTER CONCERN IS CHARGING THE INTEREST ONLY IN SOME OF THE CASES. WE DO NOT CONCUR WITH THE VIEW OF THE CI T(A) BECAUSE EVEN THE ASSESSEE IN THE PROCESS TAKING INTEREST FREE LOANS FROM SISTER CONCERN AND ADVANCING THE SAME TO THE RELATED PARTIES OF THE SISTER CONCERN, AND THER EBY IS INSTRUMENTAL IN CHANNELIZING THE FUNDS OF THE SISTER CONCERN BY GIVING LOAN TO THE D IRECTORS /RELATED PARTIES. IT IS NOT A CASE THAT THE LOAN GIVEN BY THE ASSESSEE TO THE DIR ECTORS AND RELATIVES ARE RELATED PARTIES OF THE ASSESSEE BUT THEY MAY BE DIRECTORS A ND RELATIVES OF THE SISTER CONCERN. THEREFORE, THIS ASPECT AS OBSERVED BY THE CIT(A) MA Y HAVE SOME BEARING AND RELEVANCE IN THE CASE OF SISTER CONCERN WHICH ARE ADVANCING INTEREST FREE LOANS TO THE ASSESSEE. WHEN THE ASSESSEE IS CONSISTENTLY TAKING LOANS AND ADVANCING THE SAME THEN IT IS A REGULAR AND SYSTEMATIC ACTIVITY OF THE ASSESSEE COM PANY. CHARGING INTEREST IS A BUSINESS DECISION OF THE ASSESSEE AND INCOME TAX AUTHORITIES CANNOT ENTER INTO THE SHOE OF THE BUSINESSMAN IN TAKING THE BUSINESS DECISION. WE FUR THER NOTE THAT PRIOR TO THE ASSESSMENT YEAR UNDER CONSIDERATION THE REVENUE HAS ACCEPTED THE INTEREST EARNED BY THE ASSESSEE AS BUSINESS INCOME THOUGH U/S. 143(1) . ONCE THE CLAIM OF THE ASSESSEE WAS ACCEPTED AS BUSINESS INCOME IN THE EARLIER YEAR , THEN WITHOUT DISTURBING THE POSITION IN THE EARLIER ASSESSMENT YEAR THE AO CANN OT TAKE A DIFFERENT VIEW IN THE ABSENCE OF DISTINGUISHING FACT FOR THE YEAR UNDER C ONSIDERATION. THEREFORE, EVEN IF THE LENDING OF MONEY IS NOT THE MAIN OBJECT OF THE ASSE SSEE AND THE ASSESSEE IS ALSO NOT REGISTERED AS A NON-BANKING FINANCIAL INSTITUTION T HE ACTIVITY CARRIED OUT BY THE ASSESSEE IS OTHERWISE MANIFEST THE INTENT AND CHARACTER OF A BUSINESS ACTIVITY. THE SAME CANNOT BE GIVEN A DIFFERENT TREATMENT ON THE GROUND THAT T HIS LENDING ACTIVITY IS NOT ENVISAGED IN THE MAIN OBJECTS OF THE ASSESSEE . ACCORDINGLY, WE FIND THAT THE DECISIONS RELIED UPON BY THE ASSESSEE SUPPORTS THE CLAIM OF THE ASSESSEE. THEREFORE, IN THE FACTS AND CIRCUMSTANCES OF THE CASE WE ARE OF THE VIEW THAT T HE CONSISTENT ACTIVITY OF LENDING AND 6 4117/M/12 EARNING THE INTEREST AS WELL AS BORROWING FUND FOR THE PURPOSE OF LENDING THE SAME IS BUSINESS ACTIVITY OF THE ASSESSEE. 4. GROUND NO. 2 IS REGARDING DISALLOWANCE OF EXPEND ITURE. WE HAVE HEARD THE LD. AR AND THE LD. DR AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE DISALLOWANCE OF EXPENDITURE IS CONSEQUENTIAL TO THE TREATMENT OF IN TEREST INCOME AS INCOME FROM OTHER SOURCES INSTEAD OF BUSINESS INCOME. IN VIEW OF OUR FINDING ON THE ISSUE OF INTEREST INCOME BEING BUSINESS INCOME GROUND NO.2 BECOMES IN FRUCTUOUS. 5. APPEAL BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 23/01/2015 ) ! & '( ' * +# , 23/01/2015 ! -$ SD/- SD/- ( SANJAY ARORA ) ( VIJAY PAL RAO ) / ACCOUNTANT MEMBER / JUDICIAL MEMBER MUMBAI; DATED 23/01/2015 . # . ./ JV, SR. PS / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A)- 4. / CIT 5. , , !' / DR, ITAT, MUMBAI 6. #$ %' / GUARD FILE. & & & & / BY ORDER, & //TRUE COPY// ' ' ' ' / &( &( &( &( ) ) ) ) (DY./ASSTT. REGISTRAR) , !' / ITAT, MUMBAI.