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TMI Blog2008 (5) TMI 450X X X X Extracts X X X X X X X X Extracts X X X X ..... llowing 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is 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 - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 - K.C. SINGHAL, V.K. GUPTA AND SUNIL KUMAR YADAV, JJ. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contended that the user of the building as a business asset commenced the moment it was acquired as a business asset. Since the building in question was readymade business asset, it was available for immediate use at the point of time of purchase itself. In support of this proposition, he placed a reliance upon some judgments. 4.1 The CIT(A) re-examined the issue in the light of legal provisions and judgments referred to before him and was of the view that the asset was not acquired for the purpose of business, but, only as an investment. Even in financial year 2003-04 the assets has not been put to use for the purpose of business, but, has been let out on rent. The CIT(A), further observed that assessee is not engaged in the business of manufacturing and therefore, it could not have used the factory building for manufacturing activity. Admittedly, the building was not put to use during the accounting year and even during the financial years 2001-02 and 2002-03 the factory building was not put to use and it remained vacant. It was only in financial year 2003-04, the building was let out. Since the building was not used for the purpose of business, the CIT(A) confirmed the disa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e CIT(A) re-examined the issue in the light of provisions of section 36(1)( iii ) and has observed that interest on borrowed capital can be allowed as deduction only if the borrowed capital is used for the purpose of business. One of the basic requirement of any transaction to be business is that there should be an intention to earn profit. In case of the assessee, the borrowed interest bearing funds were utilized for advancing interest-free loans. Thus the basic requirement of any transaction is to be treated as business is absent and no prudent businessman would utilize its interest bearing funds for making interest-free advances without any expectation of profit or any benefit. 9. The learned CIT(A) further held that the borrowed funds to the extent of Rs. 460 lakhs placed as interest-free inter-corporate deposits in Roplas (India) Ltd. were not used for the purpose of business. He accordingly confirmed the disallowance of the proportionate interest under section 36(1)( iii )/37(1) of the Income-tax Act. He further directed the Assessing Officer to disallow the proportionate interest relatable to non-business use of the borrowed funds of Rs. 460 lakhs only. 10. Aggrieved ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (India) Ltd. in order to protect the image of Mahendra group, does not have any merit, because, if this proposition is to be accepted that fund may flow among the group concerns without any check and wherever any concern of the group is having a sufficient taxable income, it may, borrow the substantial amount of interest and advance to other group concerns, as an interest-free advances and claim the interest paid, as a business expenditure, to reduce its taxable income. This cannot be the object of the judgment of the Apex Court in the case of S.A. Builders Ltd. ( supra ), in which the interest-free advances to its subsidiary was considered to have been done on account of business exigencies. 14. Having heard the rival submissions and from careful perusal of record we find that undisputedly assessee has borrowed Rs. 860 lakhs from Mahendra Mahendra Ltd. and paid interest of Rs. 37,36,986. Out of these borrowings an amount of Rs. 473.20 lakhs was given as interest-free deposits to Roplas (India) Ltd., an another group concern. The Assessing Officer disallowed the proportionate interest at Rs. 20,56,211 and the CIT(A) while re-appreciating the facts has noticed that out of to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15. We have also carefully examined the judgment of the Apex Court in the case of S.A. Builders Ltd. ( supra ) 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 of Rs. 460 lakhs which were given to Roplas (India) Ltd. as an interest-free advance. Accordingly, the Order of the CIT(A) is confirmed. ITA. No. 5319/Mum./2004 : 16. Through this appeal, the assessee has assailed the Order of the CIT(A) pertaining to the assessment year 2000-01 inter ali ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inced with the explanation of the assessee, the Assessing Officer disallowed the claim and made the addition of the same to the total income of the assessee. 19. The assessee preferred an appeal before the CIT(A) and reiterated its contention. Besides, an alternative argument was also raised that the expenditure was incurred with a view to protect and preserve the sale proceeds realized from the shares in International Instrument Ltd. as otherwise the buyer would have proceeded against the assessee and other shareholders. Therefore, the expenditure was allowable as a revenue expenditure. The assessee has also raised an another alternative argument that since these expenditures are incidental to realization of the sale proceeds of the shares in the company, it should be allowed by way of reduction in the sale considerations of the shares. The CIT(A) has examined all aspects as proposed by the assessee, but, was not convinced with it and he confirmed the disallowance. 20. Now the assessee has preferred an appeal before the Tribunal and has raised all arguments which were raised before the CIT(A). 21. The learned DR on the other hand has submitted that the assessee has sol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ordingly, confirm the Order of the CIT(A). 23. With regard to ground No. 3, the facts borne out from the record are that the assessee-company is a beneficiary unit holder in AOP, India Auto Ancillary Trust (IAAT). For the impugned assessment year, the AOP has filed its return of income apportioning a loss of Rs. 12,89,911 (calculated at the rate of 7.69 per cent) to the company as its portion. The companies unit holding underwent a change following the sale of this unit on 30-3-2000 from 7.69 per cent to 1.54 per cent. The assessee-company claimed the set off of the said loss of Rs. 12,89,911 against the income under other head, in its return of income for the impugned assessment year i.e., 2000-01, as per provisions of section 67A(1) of the Income-tax Act, 1961. The claim of the assessee was rejected by the Assessing Officer on the ground that section 67A is not applicable in the assessee s case. The provisions of section 67A can only be applied in those cases where a Member of Association of Persons (AOP) or a body of individuals is not a company or a co-operative society or a society registered under the Societies Registration Act. Since the assessee is a company, its tota ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... persons or a body of individuals and the shares of members are determinate and known. In the instant case, the assessee is admittedly a company and is a member of AOP or BOI and the shares of the assessee are determinate and known. As such the provisions of section 67A, cannot be invoked inasmuch as it can only be invoked in this case where the assessee is other than the company or co-operative societies or society. So far as quantum of loss is concerned, the learned DR has submitted that at the end of the year, the proportionate share holdings came down to 1.54 per cent on account of its sale, as such, the allocation of proportionate share of loss should be done according to holdings at the end of the year. He, accordingly, supported the order of the Assessing Officer. 27. We have heard the rival submissions and carefully perused the orders of the lower authorities in the light of provisions of section 67A(1) of the Income-tax Act and we find that the language of this section is quite unambiguous and clear and it has no other meaning except that it can only be applied to those assessees where they are other than the company or co-operative society or a society registered under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ords relate to an assessee who is a member of an association of persons or body of individuals. On careful reading of this 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... corresponding provisions of section 167B of the Act because both these sections i.e., sections 67A and 167B deal with the charge of tax where the shares of members in AOP or body of individuals are determinate and known and indeterminate and unknown respectively. Thus, both these provisions should apply to same category of assessees. To put it differently, it cannot happen that the provisions of section 67A would not be applicable to assessee, being company, whereas for levying the tax on the total income of the association of person or body of individuals under section 167B of the Act, the tax status of member, being a company, would be taken into consideration. The ld. Brother has reproduced the provisions of section 67A hereinbefore, hence, not reproduced again, however, for the sake of ready reference, the provisions of section 167B are reproduced as under : "167B. (1) Where the individual shares of the members of an association of persons or body of individuals (other than a company or a co-operative society or a society registered under the Societies Registration Act, 1860 (21 of 1860) or under any law corresponding to that Act in force in any part of India) in the whole ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o an assessee, being a company, then, it should have excluded the same by way of making the provisions as "in computing the total income of the assessee, other than a [company or co-operative society or a society registered under the Societies Registration Act, 1860, or under any law corresponding to that Act in force in any part of India], who is a member. . .". However, it is not so and these words have been incorporated in the later part of the section 67A. In my opinion, there appear no justified reasons to exclude an assessee, being a company of co-operative society or other society, from the applicability of the provisions of section 67A even otherwise. 3. Further, provisions of section 2(31)( v ) of the Act are also relevant, hence, reproduced as under : (31) "person" includes ( i )an individual, ( ii )a Hindu undivided family, ( iii )a company, ( iv )a firm, ( v )an association of persons or a body of individuals, whether incorporated or not, ( vi )a local authority, and ( vii )every artificial juridical person, not falling within any of the preceding sub-clauses. Explanation. For the purposes of this clause, an association of persons or a body of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... calculated at 7.69 per cent. Accordingly, this ground of the assessee stands disposed off in terms indicated above. REFERENCE UNDER SECTION 255 (4) OF THE INCOME TAX ACT IN ITA NO. 5319/M/2004 While adjudicating ground No. 3 in appeal No. ITA 5319/M/2004 both the members have expressed their independent views with regard to the applicability of provisions of section 67A of the Income-tax Act in a case where the assessee who is a company, is a member of the AOP or BOI, resulting into difference of opinion on the issue. We, therefore, make a reference to the Hon ble President for an appointment of a Third Member or to pass necessary order to adjudicate the following question of law on a point of difference. "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 ?" Registry is accordingly directed to place this reference before the Hon ble President for his kind perusal and necessary order. ORDER Per K.C. Singhal, Judicial Member (As a Third Member). As there was d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P could not be adjusted against its income computed under various heads. It was also observed by him that no other provision in the Act provides such type of adjustment of loss against the other income of the assessee. Consequently, he confirmed the order of lower authorities on this issue. 4. However, the learned Accountant Member took a different view by holding that the words in parenthesis in section 67A(1) of the Act relate to the AOP/BOI and not to the member an AOP or BOI. According to him, the provisions of section 67A of the Act should be considered along with the corresponding provisions of section 167B of the Act because both these sections deal with the charge of tax where the shares of members of AOP or BOI are determinate and known and undeterminate and unknown, respectively. Thus, both these provisions should apply to the same category of the assessee. After referring to the provisions of section 167B of the Act, it was observed by him that the words in parenthesis have been used by the Legislature with regard to an AOP or BOI. Therefore, similar would be the position with regard to the provisions of section 67A of the Act. It was further observed that if the Leg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ), or under any law corresponding to that Act in force in any part of India], who is a member of. . . . ( b )Section 2( 31 ) of the Act defines a person to include an association of persons or a body of individuals, whether incorporated or not . Thus, the law envisages an incorporated Association of Persons or an incorporated Body of Individuals apart from an unincorporated AOP or a BOI and hence the need to exclude incorporated entitles such as a company. ( c )Section 2( 17 ) defines a company to include any institution, association or body which is or was assessable or was assessed as a company for any assessment year under the Indian Income-tax Act, 1922 (11 of 1922), or which is or was assessable or was assessed under the Act as a company for any assessment year commencing on or before the 1st day of April, 1970, or Thus, at some point of time, a company included an association of persons or body of individuals. ( d )Section 167B imposes a charge on an AOP or BOI shares of whose members are indeterminate or unknown. The interpretation canvassed by the revenue would be prejudicial to interests thereof as it would mean that when a company is a member of an AOP a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the assessee as is apparent from the following proposition mentioned in para 2 : "( i )The return of income for the Company in Form No. 1 has specific space for offering share in profit or loss of URF/AOP/BOI at part B. Thus, the presupposition that a company, being a member of an AOP cannot, have its profit or loss determined and taxed in its hands, is misplaced. ( ii )Section 86 of the Income-tax Act makes it amply clear that the disputed phrase within the brackets applies to the AOP and not to the member. ( iii )Section 167B provides for the taxation of the profit or loss of the AOP, if the shares of profit or loss of the members are not determinate. Thus, if the bracketed phrase applies to the member, as has been differently presumed, then whether or not the shares of profit or loss are determinate, the AOP has to be taxed, in all events, if the companies are the members." Subsequently, in paras 3, 4 and 5 it has been submitted as under: "(3)Having said the above, it is prayed that Hon ble Member may kindly keep on record that the AOP s member-share in the instant case has not been found to be determinate and known. It appears that, the share holding of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned Accountant Member, such words qualify the words "the AOP/BOI" of which the assessee is a member. The purpose of section 67A is to compute the share of income/loss in the AOP/BOI. In order to appreciate the controversy, it would be appropriate to refer to the relevant provisions of section 40( ba ), section 67A, section 86 and section 167B which were inserted by Taxation Laws Amendment Act, 1989 with effect from 1-4-1989. Accordingly, the same are being reproduced as under : "Section 40( ba ) in the case of an association of persons or body of individuals [other than a company or a co-operative society or a society registered under the Societies Registration Act, 1860 (21 of 1860), or under any law corresponding to that Act in force in any part of India], any payment of interest, salary, bonus commission or remuneration, by whatever name called, made by such association or body to a member of such association or body." "Section 67A. (1) In computing the total income of an assessee who is a member of an association of persons or a body of individuals wherein the shares of the members are determinate and known [other than a company or a co-operative society or a society regist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other entities specified in the parenthesis from the scope of such AOP/BOI. The perusal of these two provisions 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. 10. Now the question arises 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 exclud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act. However, in the case of a company, co-operative society or society, the income is not apportioned amongst the members constituting these entities. Such entities may have income but may not declare dividend and thus nothing would be includible in the income of the members of such entities. On the other hand, these entities may not have income still they may declare dividend out of its accumulated profits. So, despite no income in the hands of such entities, the dividend declared by them would be assessable as income in the hands of members. Therefore, 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. 12. If the contention of the revenue is accepted then it will lead to absurd result not intended by the Legislature and also will be detrimental to the interes ..... X X X X Extracts X X X X X X X X Extracts X X X X
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