9911796707
TMI Blog1987 (9) TMI 428X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee charged a concessional rent of 6 % to the HUF while it paid a higher interest to the bank. The assessee actually advanced a sum of ₹ 8,50,000 to the HUF by borrowing it from the bank. The ITO therefore disallowed the interest difference on this extra amount of ₹ 2,50,000 which the assessee had lent to the HUF, on the ground that there was no agreement in respect of this extra amount of loan. 3. The CIT (A) has allowed this interest amount. He has observed that due to cost escalation, the HUF had to invest more money for completing the construction and hence, the larger amount of loan had to be given by the assessee to the HUF . 3.1 It is important to note that the ITO has not disallowed the interest difference on the sum of ₹ 6 lacs. He has disallowed it on the excess amount over ₹ 6 lacs. Therefore the case of the Revenue is not that the excess interest is disallowable. Its case is based on the absence of an agreement regarding the excess amount given as loan over and above ₹ 6 lacs for which there was an agreement. The CIT (A) has rightly allowed that amount because absence of a written agreement cannot be a ground for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of S.G. Mercantile Corpn. (P.) Ltd. v. CIT [1972] 83 ITR 700 and pointed out the various steps taken by the assessee in order to earn this rental income. He also pointed out that the assessee s business in chemicals was continued in the relevant period. 8. The assessee had given the details of activities in respect of this income before the Commissioner which are as follows :- (i) The assessee negotiated with the bank and ascertained requirements and agreed to make a suitable adjustment in the building for giving it on rent to the bank. (ii) It entered into arrangement with the owner of the building i.e. the HUF and agreed to advance a large sum of ₹ 6 lacs to the owner so that the owner could make further construction and make available to the assessee additional floors which could be exploited by the development, alterations etc. to earn better income in future. (iii) The assessee procured and arranged for the funds from the bank which involved considerable discussion with the bank. It gave necessary guarantees and obtained personal guarantee from the Directors. (iv) It incurred travelling expenses which the IAC has recognised a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Karnani Properties Ltd. (supra) were far more extensive than in this case and that therefore the assessee s activities should not be regarded as business activities. In the case of S.G. Mercantile Corpn. (P.) Ltd. (supra) one of the objects specified in its memorandum of association was to take on lease or otherwise acquire and to hold, improve, lease or otherwise dispose of land, houses and other real and personal property and to deal with the same commercially. Within less than two weeks of its incorporation the company took on lease a market place for an initial term of 50 years, undertaking to spend ₹ 5 lakhs for the purpose of remodelling and repairing the structure on the site. It was also given the right to sublet the different portions. The assessee s activity during the period covered by the asstt. years 1956-57 to 1958-59 consisted of developing the property and letting out portions thereof as shops, stalls and ground spaces to shopkeepers, stall holders and daily casual market vendors. The question was whether the assessee s income from subletting was assessable as business income or as income from other sources. It was held that the income from sublettin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company did not consider it necessary to even draw up a separate Manufacturing Trading A/c. 2.1 During the previous year pertaining to assessment year 1979-80 the company entered into an agreement on 1-7-1978 with L.M. Patel B.M. Patel, HUF, whereby it took on lease a portion of the building known as Suraj Plaza for a monthly rental of ₹ 9,970. The members of the aforesaid HUF have a substantial and controlling interest in the assessee company. The company thereafter undertook certain work of erecting partitions in the aforesaid premises as well as interior decoration work and subsequently let it out to the Bank of Baroda at a rent substantially higher than what was payable to the HUF. 2.2 At this stage it would be necessary to state that there is no appreciable discussion regarding this aspect either in the draft assessment orders framed by the ITO or in the final orders. This could also be said of the directions issued by the IAC u/s. 144B as well as the objections raised by the assessee before the IAC. It seems that no serious challenge came from the side of the assessee to the action of the ITO in taxing the income under the head Other source ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, shows that there is no adjudication in respect of this common ground of appeal and it is also not clear whether the company withdrew the ground as there is no mention of this either in the appellate orders. 3. The learned CIT(A) has dealt with the issue in the following manner : On my request, the appellant has given a detailed note in six sheets dated 12-12-84. The factual position given therein clearly supports the appellant s plea that it should be treated as business activity. For the sake of brevity, I am not incorporating herein all those facts and contentions, but I must reproduce the conclusion contained in first part of para 10 of that note. This runs as follows : 10. In view of the aforesaid facts namely object of the company, the magnitude of the transactions of taking property on lease, scheme of taking further such premises on lease at a future date, generating finances from banks etc. to carry out this activity, to give advances to the owner for undertaking future constructions for business needs of the assessee, the type of development expenditure of alterations, colouring, repairs, maintenance, employment of staff for maintenance secu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age 68) is relevant. 1. The Company has done business in acquiring property on lease and letting it on sublease which is not covered under its object clauses. The process of altering the memorandum so as to include the same in the objects of the Company are in process. This is also the fact stated in the order of the Tribunal in ITA Nos. 557 to 559/Ahd/85 dated 13-10-86 in respect of the assessee s appeals before the Tribunal for the same years. The Tribunal observes- We also find from the order passed by the Commissioner (Appeals) that activity of leasing the premises taken on lease has been taken as business activity. As against this scanning the accounts of the limited company, we find in the notes to the accounts on page 124 of the paper book that business done in acquiring property on lease and letting it on sub-leasing is not covered by the object clause of the assessee and the process of altering the memorandum is continuing. (2) The assessee has stressed on the aspect of negotiations with customers which in this case happens to be only one namely the Bank of Baroda. The very fact that the premises were taken on lease vide agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 4,261, I feel that the expenses are for the business needs of the assessee and they are of the revenue in nature. It appears that the IAC issued his directions taking into account the totality of the circumstances governing the expenditure of which the travelling for purposes of the bank loan was only a part and not the entire whole. It is important to note that the assessee has sought to misquote at the CIT(A) stage. (5) The assessee has thereafter sought to impress upon the CIT(A) that incurring of expenditure on constructing partitions, interior decorations and electrical fittings was also a part of the business activity . It has also been urged that the assessee had to engage extra staff on account of undertaking on lease the aforesaid property and thereafter letting it out on rent. The discussion in the preceding paras is only to highlight the fact that the submissions before the CIT(A) by means of the letter dated 12-12-84 were purely of a general nature ; unsupported by any evidence. As pointed out, some of the facts had also been misquoted and the assessee did not care to point out to the CIT(A) that the approval of the proposed amendme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... blet the different portions, The appellant s activity during the period of three years in question consisted of developing the demised property and letting out portions of the same as shops, stalls and ground spaces. All these facts point to the conclusion that the taking of the property on lease and subletting portions of the same was part of the business and trading activity of the appellant. The conclusion of the Tribunal that the activities of the appellant in taking lease and subletting the demised premises were undertaken with the object of doing business was warranted on the facts of the case. Likewise, the conclusion of the Tribunal that the appellant-company in letting out the leasehold property was not acting as owner but as trader was borne out by the material on record. It is apparent that the decision was given on the facts of the case and one of which was that the objects clause of the Memorandum provided for such an activity. This is not so in the case of the assessee company. (2) The assessee s case to the effect that taking of the property on lease, carrying out certain modifications, giving it on further rent, etc. was part of a concerted busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... HUF. According to the agreement, the assessee was to advance a sum of ₹ 6,00,000 only at 6 % interest from 1-7-1978. The details of ₹ 26,262 (at 6 %) are as under: Rs. On ₹ 1,00,000 from 1-4-78 to 31-3-79 6,000 On ₹ 95,000 from 17-4-78 to 31-3-79 5,434 On ₹ 1,65,000 from 11-8-78 to 31-3-79 6,312 On ₹ 2,40,000 from 12-9-78 to 31-3-79 7,890 On ₹ 2,50,000 from 17-3-79 to 31-3-79 625 From the above particulars, it will be noticed that the assessee has received interest at the rate of 6 % in respect of periods prior to the date of agreement. Interest has also been charged @ 6% on the amounts advanced in excess of ₹ 6,00,000 agreed to be advanced at 6 %interest for and from 1-7-78 only. Therefore, the interest charged for the period 1-4-78 to 30-6-78 at the lower rate of 6 % was not covered by the agreement. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted for the subsequent two years. It seems that the CIT (A) while deleting the addition has been influenced by the decision taken by him to the effect that the activity of taking the building on lease from the HUF and thereafter giving it on rent to the bank constitutes a business activity . However, as this aspect of the matter has been reversed, the same cannot be relied upon so strongly at present. I am not in agreement with the observations of the learned CIT (A) to the effect that the terms of a written agreement can be varied orally and further that such variation can be inferred even from the conduct of the parties. According to me if an agree agreement is sought to be varied or modified then it should be done either by means of resolutions, writings or clear conduct on the part of the parties. In this case there is no evidence on record to show that the original agreement whereby a sum of ₹ 6 lacs was to be advanced at an interest rate of 6 % was sought to be altered either as a matter of policy or agreement. According to me, the company was to provide only to the extent of ₹ 6 lacs at the concessional rate of interest and nothing over and above. It would not b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... observed that the assessee had made payments on account of scooter and cycle stand to the HUF in all the 3 years under consideration. According to the ITO there was no agreement for the payment of such charges to the HUF. It was also observed by the ITO that the payment was unreasonable. keeping in view the amount actually earned by the assessee in respect of the scooter and cycle stand. Before I proceed further I would like to state that the amounts received and paid on account of the scooter and cycle stand as extracted from the assessment orders are as under : Asst. year Amt. received Amt. paid to the HUF Amount disallowed Rs. Rs. Rs. 1979-80 3,856 13,500 9,644 1980-81 9,442 18,000 8,558 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O to disallow the amount after adjusting the receipts is absolutely in order and the same is confirmed. The orders of the CIT(A) to this extent are reversed for all the three years. 14. As a result, the appeals filed by the Revenue for all the three years are partly allowed. REFERENCE UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 As we have differed on the following two questions, we refer them to the Hon ble President for the opinion of a Third Member u/s. 255(4) of the Act : 1. Whether the rent received by the assessee from the bank was business income ? 2. Whether the interest difference on the extra amount of ₹ 2,50,000 can be allowed as deduction THIRD MEMBER ORDER Per Shri Y. Upadhyaya, Vice President - the Hon ble President has assigned the following two questions for the decision of the Third Member u/s. 255(4) of the IT Act, 1961 : 1. Whether the rent received by the assessee from the bank was business income ? 2. Whether the interest difference on the extra amount of ₹ 2,50,000 can be allowed as deduction ? 2. Both the points of dispute are inter-related. The assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roda as a deduction. The ITO found that the assessee was not authorised by its object clause to take property on lease and, therefore, it was only the income from other sources and it was not its business income, Further the ITO found that there was an agreement for advancing of Rs, 6 lakhs carrying interest of 6 % per annum. There was no agreement between the assessee-company and the HUF for the further sum. He found that the assessee-company paid interest of 15%. to the bank. He, therefore, charged additional interest of 9% on the loan advanced to the HUF and added the same to the total income of the assessee. 5. The CIT(A), after considering the facts, the activities of the assessee, came to the conclusion that the assessee took out the lease from the HUF and further gave it only to the Bank of Baroda which constituted the business activities of the assessee. He was also of the opinion that the assessee paid the additional interest OD commercial expediency. He, therefore, treated the income from rent as income from business and allowed interest paid by the assessee. 6. The department came in appeal before the Tribunal and the learned Accountant Member and the J ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roval was sought of the Company Law Board which was received on 29-8-81. He further stated that the object clause is not conclusive for the determination of the head of the income. The actual activities of the assessee must be taken into consideration. He relied on CIT v. Himalayan Tiles Marble (P.) Ltd. [1975] 100 ITR 177 (Bom.) and 37 ITR 49 (SC). He stated the steps taken by the assessee for earning the income from the property. He indicated that the assessee was not having surplus fund which was invested in the property for earning rent. It was a venture by the assessee. The assessee-company took on lease a partly constructed building, advanced loan by borrowing money from a bank and it was a great venture of the assessee whether the assessee will be able to get a good tenant so that the assessee may get higher rent then what was paid by it and the assessee not only took this risk but the assessee also made various alterations and decorations so that the bank was attracted to offer gainful rent to the assessee. Therefore, the activity of the assessee was not of an investor but it was the activity of a businessman. Therefore, the Judicial Member rightly held that the income fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, when the dispute was raised by the auditors, the assessee immediately took steps and the resolution was passed on 15-1-1979 subject to the approval of the Company Law Board and the Company Law Board accorded its sanction by its letter dated 29-8-1981. It is correct that the object clause itself could not be conclusive. One must see the cumulative activities of the assessee -whether the activity constituted an adventure in the nature of business or the efforts of the assessee was only to earn rent from the property. The assessee had taken the property on lease, It had appointed a Director to look after the building. When doubt was expressed by the auditor it took steps to amend the object clause. It made efforts to get a good client. It got the overdraft facility from the bank. It sanctioned loan at cheaper rate to the HUF so that it can have the benefit of other floors. If all these activities of the assessee are taken into consideration along with the decided cases it is clear that the activities of the assessee was the activities of a businessman and, therefore, the income earned by the assessee from the leasehold property was the assessee s income from business. 9. T ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
