1992 (2) TMI 120 - AT - Income Tax

Summary

Issues Involved:
1. Jurisdiction of the Commissioner of Income-tax under section 263.
2. Applicability of section 40A(8) of the Income-tax Act, 1961.
3. Classification of the assessee company as a financial company or trading company.
4. Treatment of interest payments and disallowance under section 40A(8).

Issue-wise Detailed Analysis:

1. Jurisdiction of the Commissioner of Income-tax under section 263:
The assessee contended that the notice under section 263 and the order of the Commissioner of Income-tax dated 27-3-1985 were without jurisdiction and ab initio invalid, as the assessment order had already merged with the Appellate Order of Commissioner of Income Tax (Appeals) dated 19-8-1983. The Tribunal admitted this additional ground but ultimately rejected it, stating that the issue under consideration was not the subject matter of appeal before the Commissioner (Appeals). The Tribunal also noted that the decision of the Special Bench in the case of Shree Arbuda Mills Ltd. was not being followed by various Benches of the Tribunal in Ahmedabad, as it appeared contrary to the ratio laid down by the Hon'ble High Court of Gujarat in Karsandas Bhagwandas Patel v. G.V. Shah, ITO.

2. Applicability of section 40A(8) of the Income-tax Act, 1961:
The primary issue was whether the provisions of section 40A(8) were applicable to the assessee company. The Commissioner of Income-tax held that the assessee company was a trading company and not a financial company, and thus, 15% of the interest payments made to various individuals should have been disallowed. The Tribunal, however, found that the view of the Commissioner was incorrect. The Tribunal stated that section 40A(8) is applicable to companies having income under the head "business" and that a company engaged in the business of holding investments like shares, stocks, etc., should be holding them as stock-in-trade for the income to be computed under the head 'business'.

3. Classification of the assessee company as a financial company or trading company:
The Tribunal analyzed whether the assessee company could be classified as a financial company within the meaning of section 40A(8)(c)(ii). The assessee argued that it was an investment company, as it carried on the acquisition of shares, stocks, etc., as its principal business. The Tribunal noted that the company's principal business was indeed the acquisition of shares and that the shares were held as stock-in-trade and not as investments. The Tribunal emphasized that for a company to be considered an investment company, the shares acquired should be kept as investments and not as stock-in-trade with the intention to sell for profit.

4. Treatment of interest payments and disallowance under section 40A(8):
The Commissioner of Income-tax had set aside the assessment order on the ground that the Income-tax Officer failed to disallow 15% of the interest payments under section 40A(8). The Tribunal, however, found that the Income-tax Officer's order was not erroneous and that the assessee company should be treated as a financial company, which includes an investment company as defined in the exclusion provided in clause (c) to Explanation. Therefore, the disallowance of interest under section 40A(8) was not called for.

Separate Judgments Delivered by the Judges:
Judicial Member's Opinion:
The Judicial Member disagreed with the Accountant Member's view and held that the assessee company was not an investment company within the meaning of section 40A(8)(c)(ii). The Judicial Member emphasized that the company's principal business was dealing and trading in shares, and not the acquisition of shares for holding as investments. The Judicial Member noted that the company's balance sheet and profit and loss account showed that the major part of its income came from trading activities, and thus, the company could not be classified as a financial company.

Third Member's Opinion:
The Third Member, Ch. G. Krishnamurthy, President, agreed with the Judicial Member's view. The Third Member noted that the company's balance sheet and profit and loss account indicated that the company was primarily engaged in trading activities and not in the acquisition of shares for holding as investments. The Third Member concluded that the assessee company could not be classified as a financial company within the meaning of section 40A(8)(c)(ii), and thus, the provisions of section 40A(8) were applicable, and the interest payments should have been disallowed.

Conclusion:
The majority opinion held that the Commissioner of Income-tax was correct in setting aside the assessment order and directing the Income-tax Officer to disallow the interest payments under section 40A(8) of the Income-tax Act, 1961. The appeal was dismissed, and the order of the Commissioner of Income-tax was upheld.