2008 (5) TMI 450 - AT - Income Tax

Interpretation of the statues - Provisions of section 67A - difference of opinion on the issue - Third Member Order - Whether provisions of section 67A of the Income-tax Act, 1961 can be invoked for computing total income of the assessee, who is a company, is a member of association of persons or body of individual, wherein the shares of the members are determinate and known ? Disallowance of depreciation on building acquired - HELD THAT - Undisputedly, the assessee was not engaged in the business of manufacturing, as such, the building could not be used for the manufacturing activities of the assessee. Moreover, during the course of hearing of the appeal, nothing is placed on behalf of the assessee to establish that this building acquired by the assessee were ever used for the purpose of business. In these circumstances, we are of the considered opinion that the CIT(A) is justified in disallowing the claim of depreciation of the assessee. We, accordingly, confirm the same. Disallowance of interest expenses - borrowed for the purpose of the business - HELD THAT - It is also evident from the record that the financial position of the Roplas (India) Ltd. were very critical and the return of principal amount was highly doubtful. It is not clear from the record that assessee was in regular terms of business with the Roplas (India) Ltd. We have also carefully examined the judgment of the Apex Court in the case of S.A. Builders Ltd. 2006 (12) TMI 82 - SUPREME COURT and we find that more emphasis was given to the words business exigencies of the assessee. Their Lordship have made it clear in para No. 36 of their judgment that it is not their opinion that in every case, interest on borrowed funds has to be allowed if the assessee advances it to a sister concern, it all depends on the facts and circumstances of the respective case. The commercial expediencies of the assessee for advancing interest-free loan to a sister concern is to be examined. In the instant case, no commercial expediencies of the assessee for giving interest-free advances to Roplas (India) Ltd., were explained during the course of hearing. We, therefore, of the view that revenue authorities are rightly disallowed the corresponding interest paid on the borrowed funds which were given to Roplas (India) Ltd. as an interest-free advance. Accordingly, the Order of the CIT(A) is confirmed. Disallowance of being expenses incurred - purpose of the business treating the same as non-business expenditure - The capital asset which was transferred and for which the capital gain was computed, were the shares and not the immovable property. We have also find force in the argument of the learned DR that the expenditure has nothing to do with the transfer of shares by the assessee and as such it cannot be allowed as an expenditure, relating to earning of the capital gain by the assessee. This expenditure also cannot be allowed as a business expenditure as the business of the assessee is financing and investment and not the perfecting of titles in which no business income is being earned. We, therefore, of the view that this expenditure, cannot be allowed as a business expenditure in the impugned assessment year. We, accordingly, confirm the Order of the CIT(A). Quantum of proportionate share of loss - We do not find any force in the revenue s contention that on account of reduction in holdings from 7.69 per cent to 1.54 per cent, a proportionate share of loss should be reduced to 1.54 per cent because except one day throughout the year, its holding remained 7.69 per cent. At the most, proportionate loss for one day be reduced by 6.15 per cent. The rest of the argument of the revenue is based on hypothecation and we do not endorse it. We, accordingly, find no merit in reduction of loss. But, in any case, this loss cannot be adjusted against the profits under the different heads of the assessee inasmuch as the provisions of section 67A cannot be applied in the assessee s case. We, accordingly, reject the claim of the assessee. In the result, both the appeals of the assessee are dismissed. Applicability of section 67A(1) - Association of persons - Assessee-company is a beneficiary unit holder in AOP, India Auto Ancillary Trust (IAAT) - assessee-company claimed the set off of the loss against the income under other head - Order of JM - HELD THAT - On careful reading of sec. 67A provision, we do not find any iota of doubt to interpret this section differently. It gives a clear meaning that total income of the assessee who is a member of AOP and BOI wherein the shares of members are determinate and known are to be computed as per the provisions of section 67A of the Act if the assessee is other than a company or a co-operative society or a society registered under the Societies Registration Act or under any law corresponding to that Act in force in any part of (India). But, in the instant case, assessee is admittedly a company, hence, its total income, cannot be computed as per the provisions of section 67A of the Income-tax Act. Accordingly, the proportionate share of the assessee in the AOPs i.e., (India) Auto Ancillary Trust cannot be adjusted against the income under different heads of the assessee as per the provisions of section 67A of the Act. No other provision in the Act provides such type of adjustment of loss against the other income of the assessee. In these circumstances, the assessee is not entitled to claim of set off of its proportionate share of loss against its other income. We, therefore, confirm the Order of the CIT(A) in this regard who has rightly adjudicated the issue. Order of AM - company or co-operative society or other types of societies can be termed as association of persons or Body of Individuals in a broad sense, however, the profits/losses of such entities do not come into the hands of members as such, hence, for this reason these entities have been excluded from association of persons or Body of Individuals for the purpose of section 67A of the Act. Order Third Member - The perusal of Section 40(ba) and Section 167B(1) clearly shows that the income of the entities specified in the parenthesis is not to be computed in the manner in which the income of AOP/BOI is to be computed. Section 67A provides the manner in which share of income/loss of member of such AOP/BOI is to be determined. Section 86 provides that such share of income/loss of member of such AOP/BOI shall be included in the total income but no tax shall be payable in respect of such income. If all the provisions are read together then in my view, the entities specified in the parenthesis in section 67A would qualify the AOP/BOI and not the member of such AOP/BOI. The context in which all the sections are placed in the statute book does not suggest that different meaning can be given to the words in the parenthesis in different sections even though identically worded. Whether the expression AOP or BOI can include a company or a co-operative society or a society within its ambit so that such entities can be excluded from the scope of AOP/BOI for the purpose of section 67A - Anything can be excluded from an item only when it is included in that item. If the answer to such question is in affirmative then the second question is what is the purpose behind such exclusion. There is no dispute that a co-operative society or a society registered under the Societies Registration Act, 1860 is always assessable as an AOP. This view is also fortified by the decision of the hon ble Madras High Court in the case of CIT v. Salem District Urban Bank Ltd. 1940 (2) TMI 13 - MADRAS HIGH COURT . This clearly shows that an association of persons can also be a company by virtue of the provisions contained in sub-clauses ( ii ) and ( iii ) of section 2(17) of the Act. Thus, the first question is to be answered in the affirmative by holding that the expression AOP includes a company or a co-operative society or a society mentioned in the parenthesis. Considering the different scheme of taxation in respect of income received by members from such entities, the Legislature has excluded these entities from the ambit of the expression AOP/BOI . Had the Legislature not excluded the entities specified in the parenthesis, it would have resulted in double taxation - once as per share determined under section 67A read with section 86 of the Act and again when dividend income is distributed by such entities to its members. Therefore, it is clear that the words in the parenthesis in section 67A of the Act qualify the expression Association of Persons or Body of Individuals and not the members of such AOP/BOI. Accordingly, I am in agreement with the view taken by the learned Accountant Member. In the light of majority view, it is held that provisions of section 67A of the Income-tax Act can be invoked for computing total income of the assessee, as the word in the parenthesis in section 67A of the Income-tax Act qualifies the expression association of persons or body of individuals and not the member of such AOP or BOI. Accordingly, the assessee succeeds in this ground No. 3

Summary

Issues Involved:
1. Disallowance of depreciation on building.
2. Disallowance of interest expenses on borrowed funds.
3. Disallowance of expenses related to exempt dividend income.
4. Disallowance of business expenses.
5. Applicability of Section 67A for loss adjustment from an AOP for a company member.

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation on Building:
The assessee claimed depreciation of Rs. 6,96,438 on a factory building acquired three days before the end of the financial year. The Assessing Officer disallowed this claim, arguing that the building was not used for business purposes. The CIT(A) upheld this disallowance, noting that the building was acquired as an investment and was not used for business in subsequent years. The Tribunal confirmed this, stating that the building was not used for manufacturing or any business activity, and thus, the depreciation claim was not justified.

2. Disallowance of Interest Expenses on Borrowed Funds:
The assessee borrowed Rs. 860 lakhs from Mahindra & Mahindra Ltd. and lent Rs. 473.20 lakhs interest-free to Roplas (India) Ltd. The Assessing Officer disallowed proportionate interest of Rs. 20,56,211, stating that no prudent businessman would make such an investment without benefit. The CIT(A) upheld this disallowance, emphasizing that the borrowed funds were not used for business purposes. The Tribunal confirmed this, noting that the assessee failed to establish any business exigency or benefit from the interest-free advance, and thus, the interest paid on borrowed funds could not be allowed as a business expenditure.

3. Disallowance of Expenses Related to Exempt Dividend Income:
The assessee did not press this ground during the hearing, and it was dismissed accordingly.

4. Disallowance of Business Expenses:
The assessee incurred Rs. 3,00,250 to perfect the title of a property sold in a previous year and claimed it as a revenue expenditure. The Assessing Officer disallowed this claim, and the CIT(A) upheld the disallowance, stating that the expenditure was not related to the transfer of shares or earning of business income. The Tribunal confirmed this, noting that the expenditure did not fall under the categories of cost of acquisition or improvement and was not related to the assessee's business of financing and investment.

5. Applicability of Section 67A for Loss Adjustment from an AOP for a Company Member:
The assessee, a member of the India Auto Ancillary Trust (an AOP), claimed a set-off of its share of loss (Rs. 12,89,911) against other income under Section 67A. The Assessing Officer and CIT(A) rejected this claim, interpreting that Section 67A did not apply to companies. The Tribunal members differed, with the Judicial Member supporting the CIT(A)'s view and the Accountant Member opposing it. The Third Member, appointed to resolve this, concluded that the words in the parenthesis in Section 67A qualify the AOP/BOI and not the member. Thus, the provisions of Section 67A apply, allowing the assessee to set off the loss against other income. The Tribunal, in light of the majority view, allowed the assessee's claim on this ground.