9911796707
TMI Blog2016 (6) TMI 1292X X X X Extracts X X X X X X X X Extracts X X X X ..... ven surrender of any licenses, registration etc. As per the agreement, it was the responsibility of the assessee to recruit labour for running the plant and meet all the labour law requirement in respect thereof, to purchase fuel and power required for running the plant, ensure the plant is properly insured, maintain the plant in working condition, undertake its repair and maintenance etc. The express so incurred by the appellant for the said responsibilities, were reimbursed by Apollo to it on actual basis. The production now by the appellant is in the name of Apollo and that too, to retain commercial viability in the operations and augment the financial position and at the same time bring about modernization and expansion in the plant. We are also of the opinion that disclosure in the financial statement as “other income” or there is one segment of the assessee is an irrelevant consideration. It is well settled principle that treatment in books of accounts is not determinative of the nature and taxability of income as held in the case of Tuticorin alkali Chemicals and Fertilizers Ltd. v. CIT (1997 (7) TMI 4 - SUPREME Court) Thus the income should fall under the head ‘profits and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... For the Respondent: Shri Shantam Bose, CIT(DR) ORDER PER B.P. JAIN, AM: This appeal of the assessee arises from the order of the Ld. CIT(A)-I, Kochi dated 29/01/2015 for the assessment year 2010-11. 2. The assessee has raised the following grounds of appeal: 1. The order of the Commissioner of Income Tax(Appeals)-I, Cochin to the extent appealed is against law, equity and justice. The learned CIT(Appeals) ered in confirming the decision of the Assessing Officer in treating lease rent received by the assessee company from Apollo Tyres Ltd. as "Income from Other Sources" as against "Income from Business" treated by the assessee company. On identical facts, the Hon'ble Income Tax Appellate Tribunal, Cochin Bench, has held in assessee's own case for the prior years that such receipt is to be assessed under the head "Income from business". However, for the assessment year 2007-08, the Hon. Income Tax Appellate Tribunal held that such lease rent received is to be assessed under the head "Income from other sources". Further, the Hon. Bench directed the Assessing Officer to allow expenses as per section 57 of the I.T. Act. The order of the Hon. Bench of ITAT is being contested ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /s. Apollo Tyres Ltd. ("Apollo"). According to the appellant the aforesaid income is business income, whereas the authorities below have held same to be income from other sources u/s. 562)(ii) of the Act. 4. the relevant facts are that the appellant company was incorporated on 29/10/1999 under the 'Companies' Act 1956 1956 to engage in the business of manufacturing of tyres. However, on account of poor financial viability the appellant company incurred losses and, eroded the entire net worth and was thus declared as a sick company under the Sick Industrial Companies Act, 1956 ("SICA"). Further on 17/04/1995 a rehabilitation scheme was prepared and sanctioned by Board for Industrial and Financial Reconstruction ("BIFR") and under the scheme it was provided that Apollo would take over the appellant company by subscribing to equity shares of appellant company. It was further provided that; a) Apollo will operate plant on an irrecoverable lease of eight years in consideration of lease rental of ₹ 45.50 crores for 8 years; b) Entire production to be sold in brand name of Apollo; c) Apollo to invest for modernization and expansion of plant d) No retrenchment of employee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clearly that Apollo Tyres Ltd. shall use the Plant of PTL for manufacture of automobile tyres and tubes and other products as it may deem fit in its own brand name using its own raw material. Thus, it is clear that Apollo Tyres Ltd. is merely using the plant and machinery of the assessee company for producing its products. Thus, it is purely a deal for leasing and the plant and machinery owned by the assessee, there is no scope for joint operations. Assessee's audited account classified the income received as "Other Income", not as "Income from Business". Thus, assessee received argument that the income received by leasing out its plant and machinery should be assessed under the head "Profit and Gains from Business" is not acceptable. The correct heads of income to be taxed is under "Income from Other Sources" u/s. 56(2)(ii) of the IT Act." 7. Before us the ld. Counsel for assessee has contended that the conclusion to treat the income as income from other sources is based on factually incorrect, legally misconceived assumptions apart from being based on contradictory findings and conclusions. 7.1 As regards the factually incorrect findings, it was contended that, Assessing Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red under the head depreciation of ₹ 9,05,673/-, rates and taxes of ₹ 7,37,564/-, insurance of ₹ 9,31,398/- and rend paid of ₹ 7,06,750/- under section 57(iii) of the Act though total expenditure incurred was of ₹ 212.62 lacs (apart from depreciation of ₹ 9.464 lacs). 7.4 The next submission of the appellant was that arrangement to operate the plant in a joint manner and not merely enjoy the fruits of ownership of assets and therefore such income was business income. It was submitted that risks relating to the appellant's part of the arrangement belong to the appellant. The appellant has to ensure compliance of all the laws relating to the labour employed , such as labour protection, PF etc. it was emphasized that in case a workmen is injured in the plant, the responsibility towards the same would be that of the appellant and not Apollo. Similarly, the risk of operating the plant also belongs to the appellant. Reference was made to the fact that the plant has been insured in the name of the appellant. Accordingly, it was stated that the activity carried out by the appellant is in the nature of business activity and not mere letting of an asset. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s placed on the following judgments:- i) CIT vs. Mysore Wine Products Ltd. 370 ITR 102 (Kar) ii) PHF Mall 86 Retail Management Ltd. v. ITO 110 ITD 337 (Kol) iii) Gesco Corporation Ltd. v. AcIT 31 SOT 132 (Mi) iv) CIT v. Goel Builders 331 ITR 344 (All) v) Bhagyanagar Construction (P) Ltd. v. ITO 99 ITD 18 (Hyd) vi) ITO v. Sheetal Khurana Food (P) Ltd. 115 ITD 47 (Asr) vii) CIT v. Allahabad Milling Co. (P) Ltd. 195 ITR 325 (All) 7.6 Our attention was also drawn to concept of wet lease v. dry lease in rte context of leasing of ships. It was submitted that in case of a dry lease, the lessor only leases the equipment to the lessee without any additional facility. As against this, a wet lease is a lease in which apart from the equipment, the lessor also provides the staff for operation of the equipment; and is responsible for its repair and maintenance, insurance, etc. It was submitted that Internationally, in the former case, the payment made to the lessor is generally regarded as payment for "use of equipment" and hence, treated as royalty, whereas in the latter case, the income is generally regarded as a profit from shipping activity and hence, covered under Artic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f India, the assessee has stated in its accounts that the company's operations predominantly comprises of only one segment - income from lease of plant of Apollo. It was contended that the requirements of the Companies Act are not to be applied as such while computing the income under the I.T. Act. It was stated that disclosure in the financial statement as "other income" or there is one segment of the assessee is an irrelevant consideration. Reliance was placed on the following judgments: i) CIT v. Arvind Kumar jain 205 Taxman 44 (Del) (Mag) ii) Kedarnath Jute Mfg. co. Ltd. 82 ITR 363 (SC) iii) Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT 227 ITR 172 (SC) iv) CIT vs. Idhayam Publications Ltd. 285 ITR 221 (Mad) 7.11 It was submitted that the authorities below had relied on the order of Tribunal for AY 2004-05 which was based upon the order of Tribunal in I.T.A. No.659/coch/2010 for AY 2007-08. It was submitted that in order u/s. 254(2) of the Act dated 20/07/2012 in M.P. No. 48/Coch/2010, the Tribunal has clarified that "the ld. DR pointed out that the Tribunal did not consider other facts such as expenses, sales tax registration etc. while addressing the qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 07 at a premium of ₹ 519.50 lacs and the premium with other capitalized cost is amortized over a period of 90 years. Monthly lease rental, lighting expenses, water charges etc. are debited as revenue expenditure." 7.12 The Ld. Counsel further submitted that appellant had vide postal resolution dated 17/05/2005 amended object clause of its Memorandum of Association to, inter alia, include the activity of running of hospitals, diagnostic centres, pathological laboratories, medical research, medical education, drug manufacture and setting up facilities for providing all kinds of medical and health services in its objects. In pursuance of the said object, it was submitted that the appellant had inter-alia set up two wholly owned subsidiaries for development of health care business as under: i) Artemis Health Services Limited; and ii) Artemis Medicare Services Limited 7.13 It was submitted that for said purpose, the appellant had taken loan of ₹ 49.80 crores in respect of which during the year it has incurred interest expense of ₹ 646.26 Lacs, which was claimed as deduction by the appellant while computing its income. It was submitted that appellant has incorp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e it was prayed that income of ₹ 25 crores regarded as business income as opposed to "income from other sources". 7.17 The Ld. CIT DR however submitted that the issue is squarely covered by the orders of Tribunal for earlier years and therefore the contention raised by the ld. Counsel are not maintainable. 7.18 As regards the factual submission it was stated that the matter requires verification. The ld. Counsel for the appellant opposed the aforesaid prayer and highlighted from the order of assessment that during the proceedings complete books of account and records had been produced and examined on random and test-check basis. Further it was submitted that details of all expenses were also furnished as has been admitted by the Assessing Officer when he held as under: "On verification of the profit and loss of the assessee, it was seen that assessee has incurred expenses for manufacturing, depreciation and bank charges. Further verification of manufacturing and other expenses, it was seen that major costs on account of manufacturing, administration and selling were reimbursed by Apollo Tyres Ltd. only ₹ 1,66,02,355/- was claimed by the assessee as its expenditure. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hird party for a limited period and receiving rent, such rent is to be treated as income from business. The cases relied upon by the assessee such as 20 ITR 451, 169 ITR 597, 195 ITR 3525, 138 ITR 18, 116 ITR 781, 266 ITR 106, 166 ITR 211, 211 ITR 370, 164 ITR 288 and 237 ITR 454 (mentioned in para 16 of this order) support the case of the assessee. In all these cases, the Hon'ble Supreme Court and various High Courts held that rental income received for a limited period by way of letting out plant and machinery because the assessee was unable to operate on account of some difficulties either obtaining the new materials or financial difficulties, etc., then that income has to be treated as income from business. The only limitation is that the assessee should have the present intention to revive the industry/activity in a future date when the difficulties ceased to exist or the assessee is in a position to overcome the difficulties. 21. From the facts stated as above, there is nothing on record to show that the assessee had no present intention to revive its business at an appropriate time. Therefore, this issue is decided against the revenue and in favour of the assessee." 8.3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Tribunal have held for A.Ys 1996-97 to 2003-04 that income from Apollo is taxable as business income and for A.Ys 2004-05 to 2009-10, it is taxable as income from other sources. 8.5 The Assessing Officer has also relied upon the order of the Tribunal for AY 2004-05 to arrive at the conclusion that in the instant year income of ₹ 25 crores is taxable as income from other sources. The order of the Tribunal dated 21.12.2012 for AY 2004-05 holds as under: "5. Admittedly the original lease period had expired by the year ending 31.3.2003 and for the year under consideration, a new lease rent agreement has been entered. The issue whether the lease rent is assessable under the head income from business or income from other sources was considered by this bench in the assessee's own case in I.T.A. No.659/coch/2010 relating to the assessment year 2007-08, and this Bench has taken a view that the assessee has not proved its claim that it is taking steps to revive the business. The observations made by this Tribunal are extracted below for the sake of convenience: "6. We have heard the rival contentions and carefully perused the material on record. There cannot be any disput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istration etc. while addressing the question and has taken the decision by considering the fact of time gap only, which is not correct. Since this Tribunal is dealing with the miscellaneous petition u/s. 254(2) of the Act, we are of the view that such new factors cannot be considered at this stage. Accordingly, we do not find any merit in the contentions of the assessee on this issue." 8.8 In the light of the above, the Ld. AR submitted that the precedent relied upon by the authorities below to negate the claim of the appellant did not consider the other facts such as expenses, sales tax registration etc. while determining the head for taxability of income received from Apollo and, has taken the decision by considering the fact of time gap, only. It was also highlighted that even the fact of time gap cannot be seen in isolation and, Tribunal itself in order for AY 2007-08 has held that intention to revive business activity is a question of fact and is required to be considered every year on the basis of facts and circumstances prevailing in that year. 8.9. To examine the above contentions, we take note that, for the instant year, assessee received lease rent of ₹ 25,00,00, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c) Repair and maintenance d) Personnel cost e) Expenses under any other head relatable to production manufacture of tyres/tubes." 8.12 It was specifically also agreed that appellant was responsible for compliance of all other statutory rules/regulations including labor, welfare, legislations pertaining to the employees/workmen employed by it and engaged in the manufacturing activities at the plant of PTL. It is a matter of record and undisputed that risk relating to operation of plant is also with appellant. 8.13 Thus having regard to the aforesaid factual position we are of the considered opinion that appellant is engaged in commercial exploitation of assets of the plant by way of operating the plant for manufacture of tyres for Apollo. There is no sale of assets or termination of license or retrenchment of labour employed at the plant. The intention of the appellant is to be also gauged by the fact that in the instant year it had taken 20.78 acres of land on 90 years lease w.e.f. 24.5.2007 at a premium of ₹ 519.50 lacs. Thus in our opinion there is no intention to exit the business carried on by the appellant company. Our above conclusion is also fortified from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stant year which has been incurred wholly and exclusively for business of the appellant company. 8.15 Furthermore, even judicially speaking the Apex Court vide judgment rendered on 11.8.2016 in the case of Rayala Corporation (P) Ltd. vs. ACIT 386 ITR 500 held where a company had only one business i.e. leasing of property and earning rent therefrom that even if letting of property is not main business as per Memorandum of Association such income should be assessed as business income and not house property. In arriving at the above conclusion, the Hon'ble Apex Court followed the judgment dated 9.4.2015 of Chennai Properties and Investments Ltd. vs. CIT 373 ITR 673 (SC) wherein it was held that if an assessee is having a house property and by way of business it is giving property on rent and if it is receiving rent from the said property as its business income, the said income, even if in the nature of rent, should be treated as "Business Income" because the assessee is having a business of renting his property and the rent which he receives is in the nature of his business income. 8.16. In the case of Chennai Properties and Investment Ltd. (supra), the Hon'ble Court followed the ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned counsel appearing for the Revenue is to the effect that the rent should be the main source of income or the purpose for which the company is incorporated should be to earn income from rent, so as to make the rental income to be the income taxable under the head "Profits and Gains of Business or Profession". It is an admitted fact in the instant case that the assessee company has only one business and that is of leasing its property and earning rent therefrom. Thus, even on the factual aspect, we do not find any substance in what has been submitted by the learned counsel appearing for the Revenue. 11. the judgment relied upon by the learned counsel appearing for the as squarely covers the facts of the case involved in the appeals. The business of the company is to lease its property and to earn rent and therefore, the income so earned should be treated as its business income." 8.19 Thus the ratio-descendi of the aforesaid judgment is that rental income is assessable as business income if the only income is from leasing of property even if leasing is not the main business of assessee. The agreement with Apollo is intravires the objects of the assessee as per Memorandum o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowing incomes, shall be chargeable to income-tax under the head "Income from other sources", namely: - (ii) income from machinery, plant or furniture belonging to the assessee and let on hire, if the income is not chargeable to income-tax under the head "Profits and gains of business or profession". 8.22 Section 56 of the Act being the residuary head of income under the frame work of the Act, can be resorted to only if an income is not chargeable under any other specific head of income. Section 56 of the Act which comes into play only if all other heads of income are excluded specifically. 8.23 The Apex Court has delved upon the issue in series of judgments. In the case of CEPT v. Shri Lakshmi Silk Mills Ltd. 20 ITR 451 (SC) the facts were that assessee company was a manufacturer of silk cloth and as a part of its business, it installed a plant for dyeing silk yarn. During the chargeable accounting period, January, 1, 1943, to 31st December, 1943, owing to difficulty in obtaining silk yarn on account of the war, it could not make use of this plant and it remained idle for some time. In August, 1943, it was let out to "a" person on a monthly rent. The question was whether su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by way of lease rent from the letting out of its assets was assessable to tax under the head "Profit and gains of business". Whether a particular income is income from business or from investment must be decided according to the general commonsense view of those who deal with those matters in the particular circumstances and the conduct of the parties concerned." In the above judgment it was noted that the Apex Court in the case of S.G. Mercantile Corpn. (P) Ltd. v. CIT has held that, the residuary head of income can be resorted to only if none of the specific heads is applicable to the income in question; it comes into operation only after the preceding heads are excluded. 8.25 In light of the above and having regard to the view clauses of the arrangement between Apollo and appellant it is apparent that the said, arrangement between the parties is that of contract manufacturing whereby the basic raw material for manufacture of the tyres is supplied by Apollo, and using the same the appellant manufactures the tyres for Apollo using its labour, fuel etc. Clearly, if the appellant fails to provide the labour, etc. the arrangement would not be workable, where there is a simple l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is concerned, it was held:- "that if constructive res judicata is not applied to such proceedings a party can file as many writ petitions as he likes and take one or two points every time. That clearly is opposed to considerations of public policy on which res judicata is based and would mean harassment and hardship to the opponent. Besides, if such a course is allowed to be adopted, the doctrine of finality of judgments pronounced by this Court would also be materially effected. We are, therefore, satisfied that the second writ petition filed by the appellant in the present case is barred by constructive res judicata." 8.28 sIt was finally concluded as under: "15. The decisions cited above have uniformly held that res judicata does not apply in matters pertaining to tax for different assessment years because res judicata applies to debar courts from entertaining issues on the same cause of action whereas the cause of action for each assessment year is distinct. The courts will generally adopt an earlier pronouncement of the law or a conclusion of fact unless there is a new ground urged or a material change in the factual position. The reason why the courts have held parties ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deal with the said Memorandum instead of denying deduction on the ground that the assessee in the preceding years throughout had declared the rental income under the head "Income from house property". Though in Bharat Sanchar Nigam Ltd. (supra) it was held that "the courts will generally adopt an earlier pronouncement of the law or a conclusion of fact unless there is a new ground urged or a material change in the factual position" (paragraph 20) and though as evident from the "order" in Shambhu Investments (P) Ltd. 9supra) wherein it was held that "what has to be seen in what was the primary object of the assessee while exploiting the property", however neither the Assessing Officer nor the Tribunal had considered the facts in the light of the Memorandum." 8.31 In final analysis we hold that the appellant commenced the business but on account of poor financial viability the appellant company incurred losses and, eroded the entire net worth and was declared sick company under the Sick Industrial Companies Act, 1956. A rehabilitation scheme was prepared and sanctioned by Board for Industrial and Financial Reconstruction. Scheme envisaged joint operation of the plant on an irrecove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subsidiary company is a separate taxable entity having its own Permanent Account Number; any expenditure incurred on behalf of the subsidiary company cannot be treated as a business expenditure in the hands of the holding company. Otherwise also, the appellant company has no income under the head Business and profession as their only source of income has been the rental income from leasing out the Plant and Machinery, which has been held as 'Income from Other Sources'. In such a case, expenses relating to business would not be allowable." 11. Before us the ld. Counsel for assessee has contended that both the agreements in the case of M/s. Vrinda Software Pvt. Ltd. and in the case of M/s. Mednet Asia Ltd. provide for reimbursement of expenditure, which stands allowed and therefore logically and legally denial of deduction is contradictory and untenable. It was submitted that thought the expenses incurred for Mednet Asia are for providing various consultancy services for the business of the subsidiary; the services of Vrinda Software are in the nature of providing Information Technology (IT) services to the company and not to subsidiary. It was further submitted that the claim of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure has been incurred for providing Information Technology (IT) services to the company and is thus business expenditure of the appellant company allowable u/s. 37(1) of the Act. So far as for providing consultancy by Mednet Asia is concerned it is noted that Assessing Officer has allowed expenditure of ₹ 1,19,846/- which was incurred towards reimbursement of expenditure incurred by Mednet Asia. No doubt, the services of Mednet Asia had been engaged by appellant in respect of business of the subsidiary, yet the same is allowable on account of commercial expediency. In the case of CIT vs. M/s. Holeim India (P) Ltd. 272 CTR 282 facts were that assessee was a subsidiary of Holderind Investments Ltd., Mauritius formed as a holding company for making downstream investments in cement manufacturing ventures in India. The assessee claimed administrative and miscellaneous expenses expenditure written off amounting to ₹ 8.75 crores and for the assessment year 2008-09, the assessee had claimed expenses amounting to ₹ 7.02 crores as personal expense, operating and other expenses, depreciation and financial expenses. The Assessing Officer held that assessee had not com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt in subsidiary company. 15. The Assessing Officer held that verification of the balance sheet revealed that assessee has investment amounting to ₹ 80,84,64,000/- as on 31/03/2010 and assessee loan liability is only ₹ 49,80,05,000/- which indicates that the entire interest liability was on account of its investment in subsidiary companies. He therefore concluded that interest expenditure amounting to ₹ 6,46,25,550/- cannot be allowed u/s. 57 of the Act. The disallowance was also held to be in order as per section 14A of the Act. The disallowance was also held to be in order as per section 14a of the Act. The CIT(A) however sustained the disallowance by invoking section 14A of the Act on the following basis: "2.2 During the course of appeal proceedings, it was explained by the appellant that the provision of section 14A was not applicable in respect of income from other sources. However, it is seen that section 14A is applicable for "computing the total income" under Chapter In view of the aforesaid, which includes income from other sources that by soanGround No. 3 relates to disallowance of expenditure of ₹ 6,46,25,550/- incurred towards interest paid on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 14A provides for disallowance of the expenditure even where taxpayer in a particular year has not earned any exempt income." In view of this, it is held that the Assessing Officer has rightly invoked the provisions of section 14A and worked out the difference. Accordingly, the addition made by the Assessing Officer is upheld and appeal on this ground is dismissed." 16. Before us the learned counsel contended that no disallowance under section 14A is valid as there is no income earned during the instant year and therefore, disallowance made is absolutely untenable. Reliance was also placed on the following judgments: i) CIT vs. Holcim India (P) Ltd. 272 CTR 282 (Del) ii) Cheminvest Ltd. vs. CIT 378 ITR 33 (Del) iii) CIT vs. Corretch Energy (P) Ltd. 111 DTR 146 (Guj) iv) CIT vs. Shivam Motors (P) Ltd. 111 DTR 143 (All) v) CIT vs. Delite Enterprises I.T.A. No. 110/2009 (Bom) vi) CIT vs. Winsome Textile Industries Ltd. 319 ITR 204 (P&H) vii) CIT vs. M/s. Lakhani Marketing Incl. 111 DTR 149 (P&H) viii) M/s. REI Agro Ltd. vs. DCIT 60 TTJ 107 (Cal) M affirmed by the judgment of Hon'ble Calcutta High Court in the case of CIT vs. M/s. REI Agro Ltd. GA 302 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of Apex Court in the case of CIT vs. Rajendra Prasad Moody 115 ITR 519. Reliance was also placed on the following judgments: i) S.A. Builders Ltd. vs. CiT 288 ITR 1 (SC) ii) Hero Cycles (P) Ltd. vs. CIT 379 ITR 347 (SC)) 16.3 It was therefore prayed that the disallowance made may kindly be deleted. 17. We have considered the rival submissions and perused the material on record and orders passed by the authorities below. It is undisputed that there is no income declared and claimed as exempt by the appellant. The investments held are sums invested in wholly owned subsidiary company, as part of controlling interest of appellant company. The Delhi High Court in the case of Joint Investment Pvt. Ltd. vs. CIT (supra), has held that disallowance u/s. 14A cannot exceed the amount of exempt income. The Delhi High Court in the case of Holcim India Pvt. Ltd. (supra) has held that there can be no disallowance u/s. 14A in the absence of any exempt income. The rational behind these judgments are that, the amount of disallowance should not exceed the exempt income. Similar view has been expressed in the following judgments: i) Cheminvest Ltd. vs. CIT 378 ITR 33 (Del) "23 In the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. Hence, what s. 14A provides is that if there is any expenditure which is incurred for earning the income is not an allowable deduction. For the year in question, the finding of fact is that the assessee had not earned any tax-free income. Hence, in the absence of any tax-free income, the corresponding expenditure could not be worked out for disallowance. The view of the CIT(A), which has been affirmed by the Tribunal, hence does not give rise to any substantial question of law. Hence, the deletion of the disallowance of R.2,03,752 made by the Assessing Officer was in order" iv) CIT vs. Delite Enterprises ITA No. 110/2009 (Bom) Revenue is in appeal on the following questions;- "Whether on facts and circumstances of the case and in law the Hon'ble Tribunal was right in deleting the disallowance made by the Assessing Officer of interest paid to the Assessee Company on borrowed fund amounting to ₹ 241.10 lakhs overlooking the fact that the borrowed funds were used by the Assessee Company to invest in the Capital of another Partnership Firm and s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lating to said amount out of total income paid to bank, holding that the assessee had diverted its borrowed funds to its sister concern without charging any interest. The CIT(A) accepted partial claim of the assessee on ground that out of total amount advanced by the assessee only certain sum had a clear nexus with borrowed funds, as balance amount had been paid out of receipts from other parties to whom no interest had been paid. However, on cross appeals, the Tribunal allowed the revenue's appeal. On the assessee's appeal , the High Court held that order of the Tribunal did not suffer from any factual or legal infirmity, as the amount in question had been advanced by the assessee to it sister concern out of overdraft account in which there was already a huge debit balance. The Hon'ble Supreme Court allowed the appeal of assessee and remand back to Tribunal for a fresh decision holding that where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company makes advances for business purposes, the assessee would in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans. It was held as under: "In our opin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idiary company are concerned, law in this behalf is recapitulated by this Court in the case of S.A. Builders Ltd. vs. CIT(Appeals) (2007) 288 ITR 1/158 Taxman 74. After taking note of and discussing on the scope of commercial expediency, the Court summed up the legal position in the following manner: "26 The expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency. 27 No doubt, as held in Madhav Prasad Jatia v. CIT (1979) (118 ITR 200) (SC), if the borrowed amount was donated for some sentimental or personal reasons and not on ground of commercial expediency, the interest thereon could not have been allowed u/s. 36(1)(iii) of the Act. In Madhav Prasad's case (19790 118 ITR 200 (SC), the borrowed amount was donated to a college with a view to commemorate the memory of the assessee's deceased husband after whom the college was to be named, it was held by this court that the interest on the borrowed fund in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of acquiring shares by way of investment as well as by way of stock-in-trade. It paid interest on borrowed funds and claimed deduction thereof u/s. 36(1)(iii). The Assessing Officer disallowed the entire amount of interest paid on the ground that the object of acquiring shares was not to earn dividend but to acquire a controlling interest in the company. The CIT(A) divided the interest between investment and stock-in-trade on a pro rata basis and held that the assessee was entitled to deduction of interest to the extent borrowed funds were used for acquiring shares by way of stock-in-trade. The Tribunal deleted the disallowance made by the Commisioner(Appeals). The Hon'ble High Court held that interest, which was disallowed to the extent of investment would have to be allowed. It was held therein as under: "4. This order was in appeal before ITAT. The learned tribunal addressed itself to the question, as to whether the assessee is entitled to deduction in respect of interest liability either u/s. 36(1)(3) or u/s. 57(3) of the Income Tax Act. Reliance was placed on the judgment of this court in the case of Commissioner of Income Tax vs. Lokhandawala Construction Industries Ltd. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on u/s. 36(1)(iii) of the Act, the nature of the expense - whether the expense was on capital account or revenue account - was irrelevant as the section itself says that interest paid by the assessee on the capital borrowed by the assessee was an item of deduction. That the utilization of the capita was irrelevant for the purpose of adjudicating the claim for deduction u/s. 36(1)(iii) of the Act. (see the judgment of the Bombay High Court in the case of Calico Dying and Printing Works vs. CIT (1958) 34 ITR 265). In that judgment, it has been laid down that where an assessee's claims deduction of interest paid on capital borrowed , all that the assessee had to show was that the capital which was borrowed was used for business purpose in the relevant year of account and it did not matter whether the capital was borrowed in order to acquire a revenue asset or a capital asset….." It may be noted that in India Cements Limited (supra) the Apex Court was specifically pleased to observe that the object of the loan is an irrelevant consideration. In the State of Madras vs. GJ. Coelhi (1964) 53 ITR 186 the Supreme Court was dealing with the deduction claimed u/s. 5(e) of the Madras ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as held by the Tribunal." 17.4 Following the aforesaid judicial precedents, it is held that expenditure claimed is eligible business expenditure u/s. 36(1)(iii) of the Act. Therefore, disallowance made and sustained is deleted. Ground raised by the assessee is allowed. 18. Ground No. 4 relate to disallowance of ₹ 9,45,69,750/- incurred by way of gift of equity shares of Artemis Health Sciences ltd. ('AHSL), a wholly owned subsidiary company to CEO of AhSl. 19. The facts in brief are that in the assessment year 2010-11, 15,75,500 shares of the wholly owned subsidiary company viz. Artemis Health Sciences Ltd. (AHSL) were gifted to Dr. Kushagra Katariya for his contribution in setting up a super specialty hospital under its subsidiary Artemis Medicare Services Ltd. (AMSL). The shares have been gifted by the assessee to Dr. Katariya, a key employee of AHSL. According to appellant, the said gift is for commercial consideration since the assessee is deeply interested in the wholly owned subsidiary and as such expenditure of ₹ 9,45,69,750/- was on account of commercial expediency is allowable as business expenditure u/s. 37(1) of the Act. The assessee has pleaded that it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision of the S.A. Builders vs. CIT 288 ITR 1 in support of the argument. The matter was already discussed. The question decided by the court is that whether the expenses were out of commercial expediency. Here the question is entirely different, the issue is allowabililty of expenditure in the hands of the assessee. The question of the commercial expediency or not arise only when the expenditure has incurred by the assessee. There is nothing on record to prove that there was a commercial expediency for the assessee The expenses were requirement of third party. If assessee argument is accepted, the distinction between companies will be lost. It will have far reaching impact in the tax avoidance schemes. Any company can incur any expenses of any of the subsidiaries or parent company and claim that it is out of commercial expediency. The various decisions quoted by the assessee is distinguishable in the fact that in all of them, it was the company itself that incurred expenses which benefitted indirectly the sister concern. The court was unequivocal in that, an indirect benefit to a third party was not a reason for disallowance of the expenses. In the given case, the benefit is not in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n such a case, no question of deductibility of business expenditure u/s. 37 arises, because, the income has not been computed under chapter IVD of the Act." 22. Before us the learned Counsel for assessee has contended that once the lease income is held to be "income from business" then the basis adopted by the learned CIT(A) ceases to exist and therefore expenditure incurred is an allowable expenditure. He emphasized that Assessing Officer accepted commercial expediency of subsidiary and CIT(A) accepted commercial expediency of assessee but did not allow on the ground that there is no income from business. It was submitted that once income is held as business income it is allowable as business expenditure. It was further submitted that even assuming income is from other sources then too the CIT(A) was not justified to deny claim of deduction on the ground that appellant does not have any income, as the said stand was contrary to the judgment of Apex Court in the case of CIT v. Rajendra Prasad Moody 115 ITR 519. It was submitted that the assessee has incorporated the said two wholly owned subsidiary companies with the purpose of expanding its own business object of providing servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wned subsidiary of AHSL and has been incorporated on 18/05/2004 as a private limited company and has been subsequently converted into a public limited company on 05/10/2009. It was submitted that AMSL is a step down subsidiary of appellant is running a super specialty hospital with 216 beds in Gurgaon by name of "Artemis Health institute" and has been accredited by NABH (National Accreditation Board of Hospitals 85 Healthcare). Reference was drawn to information regarding the assets, liabilities as well as turnover and profits of the hospital company has been annexed to the Annual Report of the assessee as required u/s. 212(8) of the companies Act, 1956. It was submitted that Dr. Katariya has been associated with the appellant company for development of the health care business and setting up of the super specialty hospital which deliver cutting edge medical services and medical care to patients. It was submitted that Dr. Katariya an alumnus of Maulana Azad Medical College, Delhi has worked with various hospitals in the United States and has been the associate professor of cardiothoracic surgery at the University of Miami) and has to his credit numerous books, monographs and journa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Narain Swadeshi Weaving Mills v CEPT ii) ) 34 ITR 368 (SC) Mazagaon Dock Ltd. vs. CIT iii) Mazagaon Dock Ltd. v. CIT iv) Addl. CIT vs. Ram Kripal Tripathi (1980) 125 ITR 408 (10 (All.) v) 101 ITR 234 (SC) Lok Shikshana Trust vs. CIT vi) 308 ITR 251 (Raj.) Cit vs. Hycon India Ltd. 22.3 It was submitted that so far as the nature of the expenditure in question is concerned, it was submitted that the expenditure in question is revenue in nature in as much as it is connected with the conduct of healthcare business. It was submitted that Dr. Katariya has been rendering services to the hospital company and the shares in question have been gifted to him in lieu of his services by way of addition to the wages/salary. It was submitted that expenditure cannot be construed as personal expenses of the parent company or any of the subsidiary company namely AHSL and AMSL. It was submitted that the expenditure has been incurred by assessee on grounds of commercial expediency; and Dr. Kushagra Katariya had been allotted 7,50,000 shares of AHSL as Sweat Equity Shares by AHSL in March 2007. It was submitted that the services rendered by Dr. Katariya have been evaluated and appraised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions, it was submitted that the issue of deduction of the impugned amount of INR 945.69 lacs from another angle, namely deduction u/s. 37(1) of the Act. The expression "for the purpose of the business" is wider in scope than the expression "for the purposes of earning profits" as used in section 57(iii) of the Act. It may take in not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery. It was submitted that it may comprehend in a wide variety of measures to enhance the profitability of the business and enable to run it more efficiently and effectively; but expenditure incurred must be incidental to business and should have incurred by the trader in his capacity as a trader. It was submitted that commercial expediency is the basic pre requisite for deduction of any expenditure as business expenditure. It was submitted that the assessee had deep interest in the affairs of AHSL and for all intents and purposes AHSL is a sister company of the appellant company which belongs to a larger group of companies of Apollo Group. It was submitted that assessee company proposed to embark on diversification of its busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... run under the control of the parent company can be treated as business of the parent company for the purposes of the section 37(1) and, second, without prejudice to the stand taken by the assessee on the first question, whether in the facts and the circumstances of the case as elucidated hereinbefore, it can be said that the expenditure in question is covered under the phraseology "for the purpose of the business" used in section 37(1) and whether the expenditure is governed by consideration of commercial expediency. 22.9 It was submitted that Dr. katariya is on deputation with hospital company as Chief Executive Officer of AMSL. It was submitted that AMSL is the 100% owned subsidiary of AHSL; and thus, AMSL is the step-down subsidiary of appellant company. It was submitted that the question whether the health care business of AHSL can be treated as the business of the assessee company has to be considered in the context of doctrine of independent corporate entity distinct from its shareholder and the limited liability of the shareholder as a consequence of incorporation of the company, and, reliance was placed on the judgment of Mysore High Court in CIT vs. United Breweries 89 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Tagore law Lecture 183) 22.11 It was submitted that the aforesaid decision rendered by the Apex Court of India lends direct support to the case of the assessee. The power plant of Renusagar which is wholly owned subsidiary of Hindalco has been held by the Supreme Court as belonging to Hindalco the parent company mainly on the ground that the instant case of appellant are on much stronger ground inas much as appellant the parent company is the directing mind and head of the subsidiary which has no physical presence of its own. It was submitted that Supreme Court has referred to various decisions of the House of Lords and observed that overriding consideration of justice and reason would justify piercing of the corporate veil and the Salomon reported in 86 Co Ltd. 1897 AC 22 taking a rigid view on the issue of distinctive and separate identities of the company and the shareholder needs fresh look in the context of emerging jurisprudential trends. It was submitted that the Supreme Court has heavily relied on the English decision Of Court of Appeal in DHN Food Distribution Ltd. vs. London Borough of Tower Hamlets reported in (1976) 3 ALL ER 462 and extensively reproduced the observat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stice Goff proceeded with caution and observed as follows at pages 468 and 469 of the report: "Secondly on the footing that that is not in itself sufficient, still, in my judgment, this is a case in which one is entitled to look at the realities of the situation and to pierce the corporate veil. I wish to safeguard myself by saying that so far as this ground is concerned, I am relying on the facts of this particular case. I would not at this juncture accept that in every case where one has a group of companies one is entitled to pierce the veil, but in this case, the two subsidiaries were both wholly owned; further, they had no separate business operations whatsoever; thirdly, in my judgment, the nature of the question involved is highly relevant namely whether the owners of this business have been disturbed in their possession and enjoyment of it. I find support for this view in a number of cases, from which I would make a few brief citations, first from Harold Holdsworth and Co. (Wakefield) Ltd. v. Caddies where Lord raid said: It was argued that the subsidiary companies were separate legal entities, each under the control of its own Board of Directors, that in law the Board ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in my judgment, in truth, DHN were the equitable owners of the property. In order to resolve this matter, it will be necessary for me to refer in some detail to the facts." Shaw L.J. also observed at page 473 as follows: Even if this were not right, there is further argument advanced on behalf of the claimants that there was so complete an identity of the different companies comprised in the so-called group that they ought to be regarded for this purpose as a single entity. The completeness of that identity manifested itself in various ways. The Directors of the DHN were the same as the Directors of Bronze, the shareholders of the Bronze were the same as in DHN, the parent company, and they had a common interest in maintaining on the property concerned of the group. If anything were necessary to reinforce the complete identity of commercial interest and personality, CL.6, to which I have referred already, demonstrates it, for DHN undertook the obligation to procure their subsidiary company to make the payments which the bank required to be made. If each member of the group is regarded as a company in isolation, nobody at all could have claimed compensation in a case which plainly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in my judgment, this is too technical an argument. This is an agreement in re mercataria, and it must be construed in the light of the facts and realities of the situation. The appellant company owned the whole share capital of British Textile Mfg. Co., and, under the agreement of 1947, the directors of the company were to be nominees of the appellant company. So in fact, the appellant company could control the internal management of their subsidiary companies, and, in the unlikely event, of their being any difficulty, it was only necessary to go through formal procedure in order to make the decision of the appellant company's Board fully effective." 22.13 It was submitted that admittedly there is no general principle that every company in a group of companies are to be regarded as one; on the contrary the fundamental principle is unquestionable that "each company in a group of companies is a separate legal entity possessed of separate rights and liabilities. It was submitted that the facts may justify the court to ignore the distinction between them and treating them and treating them as one. It was submitted that even if the doctrine of single economic unit has not been specif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gnized by the legislature while enacting section 212 of the Companies Act which makes it obligatory for the holding company to include the balance sheet, profit and loss account, as well as auditor's report and Board of Directors report of each subsidiary with its balance sheet. It was submitted that assessee company has filed consolidated balance sheet of the group comprising the subsidiaries and the holding company after seeking exemption from the Central Government under section 212(8) of the Companies Act. It was further submitted that the theory of single economic group is also manifested in the accounting principles and policies formulated by the professional accounting bodies in various countries of the world. Accounting Standard21isued by the Institute of Chartered Accountants of India deals with the consolidated financial statements of the holding company and its subsidiaries. It was submitted that in the context of section 212 of the Companies Act and Accounting Standard 21 it would be erroneous to say that a subsidiary company in the world of commerce has in reality no nexus or connection with the holding company and that eye of equity cannot peep behind the corporate ve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Ground 1 held that income from lease rent of ₹ 25 crores is assessable as business income; and thus exconsequenti the foundation of disallowance ceases to exist and, therefore expenditure is eligible for deduction u/s. 37(1) of the Act. However, we would have ended the matter at that, but, we cannot resist but to state that absence of income alone is not a relevant test for allowability of claim of expenditure either u/s. 37(1) of the Act or even section 57(iii) of the Act. In the case of CIT vs. Rajendra Prasad Moody 115 ITR 519 (SC), the facts were that assessee were brothers and borrowed monies for making investment in shares of certain companies. Interest paid was claimed as deduction. The Assessing Officer disallowed the deduction. AAC held that share did not yield any dividend, interest on borrowed money but expenditure, per say allowable u/s. 57(iii) of the Act. The Tribunal upheld the claim of assessee for deduction u/s. 57(iii) of the Act. The Hon'ble Supreme Court held that the interest on money borrowed for investment in shares, which had not yielded any dividend was admissible u/s. 57(iii) of the Act. It was held as under: "it is also interesting to note that, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not mean that section 57(iii) should be given a narrow and constricted meaning not warranted by the language of the section and in fact, contrary to such language. This view which we are taking is clearly supported by the observations of Lord Thankerton in Hughes vs. Bank of New Zealand where the learned Law Lord said: "Expenditure in the course of the trade which is unremunerative is none the less a proper deduction, if wholly and exclusively made for the purposes of the trade. It does not require the presence of a receipt on the credit side to justify the deduction of an expense." 23.2 Also in the case of CIT vs. Amalgamation (P) rtd. facts were that Co. "SSM" executed promissory note in favour of the assessee. "SSM" went into liquidation, assessee as guarantor was required to clear Od. After liquidation, some amount was due to assessee from liquidating co. on account of Od. The assessee claimed the same amount as loss, which arose in course of & incidental to business in AY 1958-59. The assessee received receipt in course of liquidation of SSM over AY 1959-1962-63. The Assessing Officer held loss not incidental to business of assessee; capital loss not covered u/s. 12B. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 277 that 'to be a permissible deduction, there must be a direct and intimate connection between the expenditure and the business, i.e., between the expenditure and the character of the assessee as a trader and not as owner of assets, even if they are assets of the business needs to be qualified by stating that if the expenditure is laid out by the assessee as owner-cum-trader, and the expenditure is really incidental to the carrying on of his business, it must be treated to have been laid out by him as a trader and as incidental to his business." (p. 747). The High Court, in our opinion, has rightly proceeded on the basis of that there must be a nexus between expenditure and business of the assessee." 23.3 Applying the foregoing principle to the facts, it is noted that during the previous year relevant to the assessment year 2010-11, 1575500 shares of the wholly owned subsidiary company viz., Artemis Health Sciences Ltd. (AHSL) were gifted to Dr. Kushagra Katariya for his valuable contribution in setting up a super specialty hospital under its subsidiary Artemis Mdicare Services Ltd. (AMSL). The Memorandum of Association of the company was amended vide postal resolution d ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
