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TMI Blog1992 (2) TMI 120X X X X Extracts X X X X X X X X Extracts X X X X ..... he correct perspective the whole of the order is reproduced below:-- "On going, though the income-tax records of the assessee it was noticed that the assessment for assessment year 1982-83 was made on 31-3-1983 determining the total income at Rs.7,14,790. The income was revised to Rs.3,02,064 vide order dated 12-4-1983 giving effect to CIT(A)'s order. The assessee company had income from business of purchase and sale of shares and also income from dividend. The income from business was determined after giving deduction for interest payments made on borrowals. The assessee company being a trading company provisions of section 40A(8) were applicable and hence 15% of the interest payments made to various individuals was liable to be disallowed and added to the total income. Since the Income-tax Officer failed to do so the assessment order made by him was considered erroneous insofar as it was prejudicial to the interests of revenue. A notice under section 263 was, therefore, issued to the assessee asking it to show cause as to why the assessment order of the Income-tax Officer be not set aside/suitably modified under section 263 of the I.T. Act, 1961. 2. In response to the show-c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d has been registered as such with them. 4. The assessee has also drawn my attention to sections of section 109(ib)(ii) of the I.T. Act which defines an investment company m follows: "Investment company means, a company whose gross total income consists mainly of income which is char@ under IM head 'Interest on Securities' income from house properties, capital gain, and income from other source". Out of the gross total income of Rs.23,60 lacs, by the assessee income from other sources was Rs.23.48 lacs. In view of this it is claimed that in terms of the definition of investment company provided under section 109(ib)(ii) the assessee company would fall under the head 'investment company'. 5.The definition of investment company given under section 40A(8)(c)(ii) is as under: "An investment company, that is to say a company which carries on, as its principal business, the acquisition of shares, stock, bonds, debentures, debenture stock, or securities issued by the Government or a Local authority, or other marketable securities of a like nature." In terms of this definition a company which carries on, as its principal business, acquisition of shares would be an investment comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... representative of the assessee also moved for the admission of the additional ground on following basis as stated in the covering letter dated 29th July, 1987:-- "263 notice dated 16-3-1985 and Order of the Commissioner of Income-tax dated 27-3-1985 are without jurisdiction and therefore ab initio invalid in law in view of the fact that the assessment order had already merged in the Appellate Order of Commissioner of Income Tax (Appeals) dated 19-8-1983." The petitioner submits that the above ground raises a neat point of law which goes to the root of the matter and does not require any further evidence for adjudication thereof. Apart from going to the root of the matter, it raises a more fundamental question of jurisdiction of the Commissioner under section 263 and as is well established the jurisdiction cannot be vested by acquiescence of the party. The point in the additional ground was pointed out to us by Advocate Shri J.P. Shah when the undersigned went to entrust the brief to him for arguing before the Tribunal. That such a ground could be taken was not within our knowledge at the time of filing of the appeal. In the circumstances aforesaid we humbly request you to admit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Commissioner (Appeals), we find that the issue under consideration was not at all the subject matter of appeal before him. Besides, the decision of the Special Bench in the case of Shree Arbuda Mills Ltd. is not being followed by various Benches of the Tribunal in Ahmedabad because it appeared to them that the said decision was contrary to the ratio laid down by Hon'ble High Court of Gujarat in Karsandas Bhagwandas Patel v. G.V. Shah, ITO [1975] 98 ITR 255. That is why an elaborate, order was passed by C-Bench of the Ahmedabad Tribunal in the case of Shri Ramanbhai B. Patel in WT Appeal No. 232 Ahd. of 1985, dated 25-7-1986 wherein the basis for not following the decision of the Special Bench was explained. For the same reasons, therefore, we reject the ground regarding challenge to jurisdiction under section 263 of the Act on the aspect of merger. 5.2 Coming to the merits of the case, we have to state as follows. Section 40A opens in following language:-- "(1) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head "Profits sod gains of busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of India. Hence the view taken by us gains the added strength. Besides the ITO had followed the view of earlier assessments which became final. 6. In the result, the appeal succeeds. Per Shri M.A.A. Khan, Judicial Member - I have had the benefit of going through the order proposed by my learned brother but I regret my inability to subscribe to the findings recorded and conclusions arrived at by my learned brother in respect to the merits of the main issue relating to the applicability of section 40A(8) of the I.T. Act, 1961 (the Act) to appellant company (henceforth the 'company'). The relevant facts have been set out in the proposed order but I would like to point out at a few facts more in order to appreciate the real controversy in its right perspective. 2. The company was incorporated on Dec. 10, 1973 under the Companies Act, 1956 under the name of 'Prabhat Fabrics Pvt Ltd.'. The main objects of the company, as are disclosed by clause III of its Memorandum of Association, were to buy, sell, distribute, export and/or otherwise deal in textile fabrics, art silk and other synthetic fabrics as also to carry on business of spinning, weaving, manufacturing and/or dealing in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... authority, or other marketable securities of a like nature; or". 6. It may be pointed out that in the above definition of 'financial company' fall only such investment companies which (i) carry on the business of acquisition of shares, stocks, bonds, debentures etc. and (ii) such business is their 'Principal business'. To my mind in the above definition of 'financial company' which is to mean 'an investment company' for the of sub-section (8) of section 40A, stress has been laid on the nature and extend of business being carried on by such a company. The expressions 'acquisition' and 'principal business' used in the language of clause (e)(ii) are of much significance and need to be given their true meaning. The first, to my mind, should suggest an act or state of more than mere 'dealing' or 'trading' and the other should carry a meaning synonym to the expression 'mainly'. In other words, the expression 'acquisition' should embrace the element of 'holding' within its meaning and the expression "principal business" should mean the main business which brings the major part of income to the company. 7. The term 'acquisition' has quite a wide concept, meaning the procuring of prope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness consists wholly or mainly in holding of investments and proceeded to examine the true meaning of the latter part of the above expression. At the time of arguments the see company urged that the said expression should be given the same technical meaning as borne by the expression 'investment companies' used in section 87(f) of the Indian Companies Act, 1913 or as used in section 372(11) of the Companies Act 1956 and therefore, should be confined to such companies whose principal business was the acquisiton and holding of shares, debentures, stocks or other securities. As against it revenue had contended that the said expression should relate to a company whose income was derived from investments in contradistinction to the income received from manufacturing, or processing or trading operations and the word 'investment' in the contest in which it occurs should be understood in its ordinary popular sense and be not given technical meaning. Accepting the stand of revenue their Lordships examined the construction and true meaning of the term 'investment' and quoted the following words of Lord Normand in IRC v. Tootal Broadhurst Lee Co. Ltd. [1949] 29 TC 352, 373 with approval: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome. That characteristic of the nature of its income, which should make the major part of its income, would then represent its business activity of acquiring shares, stocks, debentures etc. in contradistinction of a business activity of dealing or trading in shares, stocks and debentures so as to entitle an investment company to claim exemption from the mischief of section 40A of the Act. It thus necessarily follows that income coming to such a company by its carrying on, as its principal business, acquisition of shares, debentures, stocks etc. would be dividend or interest income which would not fall within the ambit of section 40A(1). But if income coming to a company, (may be it is called as an investment company elsewhere in the Act or in the Companies Act, 1956 or has even been declared so by Reserve Bank of India), is the result of its carrying on, as its principal or main business, dealing or trading in shares, debentures or stocks etc. such a company would not and could not be a 'financial company' meaning 'investment company' for clause (c)(ii) of Explanation to sub-section (8) of section 40A and its income being business income would attract the provisions of section 40 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 1. Fixed assets 3,110 2. Issued subscri- 2. Investments 65,150 bed paid up 1,20,000 (unquoted fully paid up shares of various co-operative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 ces. 4,24,851 4. Loans & Advances (Unsecured) 1. To employees 2,000 &nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The details of particulars given; in the Balance Sheet evidently reveal that as on 31-12-1981, (relevant for the year under consideration), the company had fixed assets worth Rs.3,110 only and its total investments, comprising of unquoted fully paid up shares of various co-operative banks, stood at Rs.65,150 only. The current amounting to Rs.3,34,69,390 were utilised as stock in trade for dealing in quoted equity shares and debentures of Reliance Textile Industries Ltd. and not as investment in acquiring such shares and debentures. In other words, the company had carried on, as its principal business dealing and trading in shares and debentures so as to bring 'business income' to it. During the year under consideration it had not carried on, as its principal business, acquisition of shares and debentures etc. so as to bring dividend and interest income to it, giving thereby the character of an 'investment company' to it within the meaning of the term defined in clause (c)(ii) of Exp to sub-section (8) of section 40A. This point is further borne out clearly if we just have a look at the Profit and Loss account showing as to what income was earned and from which sources. 14. The su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 231 By Gross profit 30,44,572 expenses a/c. To Net profits 15,63,500 By dividend income 23,48,159 (after tax deducting of Rs.) ------------------------------------------------------------------------------------------ 15. The above picture of P & L account clearly shows that major put of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd debentures and, not providing finance it cannot be held to be a financial company, within the meaning of clause (c)(iv) of Explanation to sub-section (8) of section 40A of the Act. 19. In the final analysis I am led to conclude that the assessment as made by the ITO treating the appellant company as a financial (Investment) company and on that ground not applying the provisions of section 40A(8) of the Act in the computation of its income was rightly held by the learned Commissioner as erroneous and prejudicial to the interest of revenue. In my opinion the order under appeal should stand. 20. The appeal is dismissed. ORDER UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 Per Shri P.J, Goradia - Because of the difference of opinion between the Members of the Bench who heard the above appeal the point in difference is required to be referred to the Third Member for his opinion and, therefore, we propose the following question for the opinion of Third Member:-- "Whether the Commissioner of Income-tax erred sitting aside the assessment for the asst. year 1982-83 on the ground that the Income-tax Officer failed to make the disallowance in accordance with section 40A(8) of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es in the year under appeal, which according to it was only on account of investments and not on account of trading. It also pointed out that it was carrying on financial transactions in to investment operations, both of which were covered by section 40A(8) the section inapplicable to the facts of case. Reference was also made to the definition of Investment Company under the Non-Banking Financial Companies (Directions) 1977 issued by the Reserve Bank of India where an investment Company was defined as a company which is a financial institution carrying on as its, principal business acquisition of shares and securities. It was pointed out that this definition was more the same as the, definition of. investment company adopted in section 40A(8)(c)of the Income-tax Act. Finally he pointed out that out of the gross total income of Rs.23.60 lacs, income from other sources amounted to Rs.23.48 lacs which showed and proved that the operations of the company were mainly consisted of income chargable under the head 'income from other sources' and, therefore, the company must be regarded to be an investment company. 3. The Commissioner of Income-tax dealt with all these points in his orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee company should start investments and financial activities as provided for in its memorandum of association and thereafter it started in dealing in trading shares and debentures etc. Then he referred to section 40A(8) and de Explanations added thereto. It explained what a financial company meant. According to him a financial company is an investment company which carries on as its principal business the acquisition of shares, stocks, bonds, debentures, debenture stock or securities issued by the Government or a local authority, or other marketable securities of a like nature. Since the expression "acquisition" was used in the explanation, according to him the acquisition of shares, stocks etc. should be only with the element of holding them as investments and that holding should be the principal business and if investments are acquired for holding, they naturally excluded dealings in them as trading assets. Therefore, if they were trading assets, then it could not be said that the acquisition was for the purpose of holding and, therefore, it could not be said to be a financial company. In this context he made a reference to a decision by the Supreme Court in the case of Nawi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee and the departmental represntative at sufficient length. Their arguments were reiteration of their respective stands taken before the authorities below. The learned counsel for the assessee relied heavily on a decision of the Gujarat High Court in the case of Distributors (Baroda) P. Ltd. v. CIT [1968] 69 ITR 614 which was approved by the Supreme Court in CIT v. Distributors (Baroda) P. Ltd. [1972] 83 ITR 377 wherein the Supreme Court had to interpret clause (i) of Explanation 2 to section 23A of the Income-tax Act, 1922 which also dealt with a situation like the one before us namely business consisting of "wholly or mainly in the dealing in or holding of investments". The interpretation of this expression became relevant to apply the provisions of section 23A of the Income-tax Act, 1922. There the Supreme Court pointed out that when the Legislature speaks of the business of 'holding of investments' it refers to real, substantial, or systematic or organised course of activity of investment carried on by an assessee for a set purpose such as the earning of profits. The Supreme Court pointed out in this case at page 382 of the report that "It is easier to understand when the secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e available at cheaper rates and if he has the knowledge that there would be escalation in prices, he can purchase the shares and then sell them at a profit with a view to improve his acquisition. Even then he cannot be said to be a dealer in shares. By multiplying examples of this nature and drawing very heavily upon the enunciation of the law by the Supreme Court in the case referred to above, the learned counsel submitted that the dealing in shares should not have been held against the assessee so as to attract the provisions of section 40A(8) to disallow the interest. He commended the view expressed by the learned Accountant Member for acceptance. He also pointed out that the decision of the Supreme Court relied upon by the learned Judicial Member in the case of Nawin Estates (P.) Ltd. is not at all apposite. That was a decision given for a different purpose in dealing with a different situation and different section, the purpose of which was totally different. That analogy given in a different context should not have been imported in dealing with the present situation like the one where section 40A(8) was concerned with so many other ramifications. In sum, his argument was tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y is not a financial company and only a company engaged in trading activities insofar as the facts of this year are concerned. I do not have to reproduce section 40A(8) in this order as it was already reproduced by my learned brother the Judicial Member in his opinion. A careful reading of section 40A(8) would show that the legislative mandate is that if a company, not being a banking company or a financial company, incurs any expenditure by way of interest in respect of any deposit received by it, 15% of such expenditure shall not be allowed as a deduction. Insofar as the object of section 40A(8) is concerned, it is very clew that 15% of the interest expenditure incurred by a company other than a banking company or a financial company, shall not be allowed as deduction. In other words, except banking and financial companies, the other companies receiving deposits are not to be allowed the entire amount of interest paid, except by undergoing the cut imposed by the section. The purpose is very clear to understand. A trend has developed in the country, particularly in the corporate sector to receive deposits by offering very high rates of interest sometimes bordering on usuriousness. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... articular thing. Further even in cases where a company has more than one business activity and one of its activities is more substantial than the others, unless that activity is the primary activity of the company, it cannot be said that that company is engaged in wholly or mainly in anyone of its business activities. Section 23A applies only to cases where the primary activity of the company is in the dealing in or holding of investments. 14. Then the Supreme Court went on to explain the meaning of the expression "business of holding of investments" which is also akin to the expression used in the Explanation to section 40A(8). It held that when the legislature speaks of the business of holding of investments, it refers to real, substantial and systematic or organised course of activity of investment carried on by an assessee for a set purpose such as earning profits. In this context the Supreme Court also referred to the objects clause of the memorandum of association and then said that if there are more than one object and dealing in or holding of invesunents is one of the several objects, it could not be said that the primary object of the company is to carry on the business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se the primary object of the company as acquiring the shares for investment. 15. Further what was shown in the balance sheet as current asset was only the closing stock of the shares. When the closing stock of the shares in the trading activity by the assessee is shown as current assets, it is difficult to accept that that current asset constituted an investment, merely because of the magnitude of the amount. The shares account, therefore, clearly discloses the interest of the company according to me not to hold the shares as investment but only as a trading activity and Rs.3.34 crores worth of shares as current asset is not to be misunderstood an investment. Even in the balance sheet, these shares were shown as stock in trade and not as investments. Secondly, as rightly pointed out by the Representative, the gross profit in the trading activity of the, shares was as high Os Rs.30.44 lacs and the dividend income is about Rs.28 lacs before deduction of tax. The receipt of dividends may disclose a situation that the shares were held as investments and the dividend was received on the shares held as investments but this may also disclose that the dividends received on shares purchas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... totally different. A financial company is to receive shares and to hold them as investment without dealing in them as a trading activity and the holding of those shares must be the principal business of the financial company. It is also pertinent to note that under the Explanation, the principal business of an investment company should not be only of acquisition of shares but it can extend to acquisition of stocks, bonds, debentures, debenture stock or securities issued by the Government or local authority or other marketable securities of a like now. It is difficult to say that an investment company having its principal business of acquisition of shares, stocks etc. will deal in those shares and stocks as if it is a trading commodity. Dealing in shares and stocks as trading commodity is counter to and at variance with and also contra-indicative of and inconsistent with the acquisition of shares for investment. An investor would not deal in shares as frequently as a trader. Dealing in shares on day-to-day basis throughout the year distinguishes it from acquisition of shares by way of investment. 18. For these reasons, I am inclined to agree with the view expressed by the learned ..... X X X X Extracts X X X X X X X X Extracts X X X X
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