2014 (1) TMI 1593 - HC - Income Tax

Whether the loss in the cement division be set off against the profits from the finance division - Held that - The assessee was persuing both financiang and manufacturing activity simultaneously - The orders of CIT(A) also mentions a circular dated 1.7.2005, which categorically states that it is the RBI alone which is authorised to permit or refuse non-banking finance activity - The income tax authorities are not empowered to enforce the provisions powers of the RBI Act - Decided against Revenue.

Summary

Issues:
1. Whether the loss from the cement business can be adjusted against the profits of the non-banking finance institution (NBFC) activities.
2. Whether the income tax authorities can assess the legality of business activities conducted by a company.

Analysis:

Issue 1:
The High Court addressed the issue of adjusting the loss from the cement business against the profits of the NBFC activities. The assessing officer initially disallowed this adjustment, citing incompatibility with the RBI Act and the Industries Development and Regulation Act. However, the Appellate Commissioner disagreed, emphasizing that the legality of the cement business should not be questioned in income tax proceedings, especially when the company had obtained necessary approvals. The High Court concurred with this view, highlighting that the Income Tax Act focuses on taxing designated income, and the legality of activities falls under the purview of other regulators like the RBI. The Court noted that the RBI had authorized the company's non-banking finance activity, rendering the assessing officer's disallowance of the cement business losses inappropriate.

Issue 2:
The second issue revolved around whether the income tax authorities have the jurisdiction to assess the legality of a company's commercial activities. The revenue argued that the company could not conduct both finance and cement businesses due to provisions of the RBI Act, specifically section 45I(vi)(aa). However, the High Court clarified that income tax authorities lack the power to enforce RBI Act provisions, as the RBI is the sole regulator in such matters. The Court highlighted a circular indicating the RBI's authority to permit or refuse non-banking finance activities, which was relevant in the case as the RBI had granted the necessary license. Consequently, the Assessing Officer's disallowance of the cement business losses was deemed improper, and the High Court upheld the ITAT's order, emphasizing that no legal issue was present for consideration.

In conclusion, the High Court dismissed the appeal, affirming the ITAT's decision and emphasizing that the legality of business activities should be assessed by relevant regulators like the RBI, not by income tax authorities.