2001 (12) TMI 187 - AT - Income Tax

Summary

Issues Involved:
1. Classification of income as "business income" vs. "income from other sources."
2. Allowability of expenses claimed by the assessee.
3. Validity of the special resolution authorizing the business activities.
4. Assessment of the assessee's business activities (financing, trading in chemicals, and acting as an agent).

Issue-wise Detailed Analysis:

1. Classification of Income:
The primary issue was whether the assessee's income from interest, commission, etc., should be classified as "business income" or "income from other sources." The assessee argued that the income should be classified as "business income" based on a special resolution passed in 1984 authorizing the company to engage in financing and investment activities. However, the AO classified the income as "income from other sources," citing the lack of business activities and relying on the decision in *South India Shipping Corporation vs. CIT*.

2. Allowability of Expenses:
The assessee claimed expenses amounting to Rs. 2,32,888 against the income of Rs. 2,10,285.09. The AO disallowed these expenses, except for Rs. 55, arguing that the expenses were unrelated to the activities of earning income. The CIT(A) upheld this decision. The Tribunal emphasized that whether the income is classified under "business income" or "income from other sources," the AO must consider the allowability of expenses in accordance with the law.

3. Validity of the Special Resolution:
The assessee provided a resolution dated 28th November 1984, authorizing the company to engage in financing and investment activities. The Tribunal found this resolution to be invalid as it was dated before the incorporation of the company on 29th October 1984. Furthermore, no subsequent resolution was passed in compliance with Section 149(2A) of the Companies Act, 1956.

4. Assessment of Business Activities:
The Tribunal examined whether the assessee genuinely carried on business activities in financing, trading in chemicals, and acting as an agent. It was noted that the company was incorporated with the main object of trading in chemicals but had not shown substantial business activities in trading or financing. The Tribunal found that the assessee's activities did not meet the criteria of volume, frequency, continuity, and regularity required to classify them as business activities. The Tribunal also noted the lack of necessary permissions from the Reserve Bank of India for carrying on financing business and the absence of evidence supporting the assessee's claim of acting as an agent.

Conclusion:
The Tribunal concluded that the assessee did not carry on any business activities and that the income should be classified as "income from other sources." The Tribunal also directed the AO to reconsider the allowability of expenses claimed by the assessee in light of the findings and observations in the order. The appeal was partly allowed for statistical purposes.