2005 (1) TMI 60 - HC - Income Tax

Whether for computing the profits in terms of section 32AB(3) the income by way of dividends interest on securities property income which is treated as business income under the provisions of Parts II and III of Schedule VI to the Companies Act 1956 is to be excluded and deducted under the said section is not to be allowed with reference thereto? We answer this question in the negative in favour of the assessee - Whether the petitioner can be considered as a trading company within the meaning of the Finance Act 1989 and Finance Act 1990? - assessee had claimed itself to be a non-trading company in order to avail of the benefit of reduced rate of income-tax - Held that money-lending business or receiving the interest or trade advance or trade debts would not change the characteristics of the company from a non-trading to a trading company So this question is answered in negative and in favor of assessee

Issues Involved:
1. Whether income by way of dividends, interest on securities, and property income, which is treated as business income under the Companies Act, 1956, should be excluded for computing profits under Section 32AB(3) of the Income-tax Act.
2. Whether the petitioner qualifies as a trading company within the meaning of the Finance Act, 1989, and Finance Act, 1990.

Issue-wise Detailed Analysis:

The Second Question: Assessee Whether a Non-Trading Company
The second question pertains to whether the assessee qualifies as a non-trading company for the assessment years 1989-90, 1990-91, and 1991-92 to avail of the benefit of a reduced rate of income tax. The Assessing Officer initially denied this benefit, but the Commissioner of Income-tax (Appeals) reversed this decision. However, the Tribunal disagreed with the Commissioner and sided with the Assessing Officer, holding that the assessee was a trading company.

The distinction between trading and non-trading companies arose due to an amendment effective from April 1, 1989. The assessee, primarily a tea broker and auctioneer, also engaged in other activities like agency commission, service charges, dividends, leasing business, cash incentives, and interest on loans. The question was whether these ancillary activities disqualified the assessee from being a non-trading company.

The Tribunal found substantial trade advances and trade debts, indicating trading activities. However, the court noted that these activities were carried out long before the relevant assessment years, and there was no evidence of similar activities during the concerned years. The principal business of the assessee was tea brokerage and auctioneering, and the ancillary activities did not change the company's primary business nature. Therefore, the court concluded that the assessee remained a non-trading company, referencing the decision in J. Thomas and Co. Ltd. v. CIT [2004] 267 ITR 585 (Cal).

The First Question: Section 32AB(3) - Dividends, Interest on Securities, Income from Property - Whether Business Income
The first question relates to whether income from dividends, interest on securities, and property income, treated as business income under the Companies Act, should be excluded for computing profits under Section 32AB(3) of the Income-tax Act for the assessment years 1989-90 and 1990-91.

The court referred to the decision in Britannia Industries Ltd. v. Joint CIT [2004] 271 ITR 123 (Cal), which distinguished between eligibility for and eligibility to the deduction. Once an assessee qualifies for the deduction, the income from the eligible business is eligible for deductions, irrespective of the income heads under the Income-tax Act. The court noted that the income in question was derived from interest on securities, advances, house properties, and dividends, which the Department argued were not from business or profession.

However, the court emphasized that the relevant computation for eligibility should be based on Part II/III of Schedule VI to the Companies Act, 1956, as per Section 32AB(5). The court rejected the Department's argument that only income from profits and gains of business and profession should be eligible for deduction. The court upheld the decision in Britannia Industries Ltd., concluding that the assessee's income from eligible business activities, even if categorized under different heads, qualifies for deduction under Section 32AB(3).

Conclusion:
The court concluded that the assessee is a non-trading company for the assessment years 1989-90, 1990-91, and 1991-92. The eligibility for deduction under Section 32AB(3) is not confined to specific income heads but applies to all income derived from eligible business activities. The appeal was allowed, and the Tribunal's order was set aside.

Order:
The appeal succeeds, and the Tribunal's order is set aside. The court answered question No. 1 in the negative in favor of the assessee for the assessment years 1989-90 and 1990-91 and question No. 2 in the negative in favor of the assessee for the assessment years 1989-90, 1990-91, and 1991-92. No order as to costs.

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