| SooperKanoon Citation | sooperkanoon.com/76150 |
| Court | Income Tax Appellate Tribunal ITAT Mumbai |
| Decided On | May-30-2008 |
| Judge | K Singhal, S K Yadav, S, V Gupta |
| Appellant | Mahindra Holdings and Finance |
| Respondent | Dcit and Ito |
3. On further appeal, the Members constituting the Bench differed on the interpretation of the provisions of Section 67A(1) of the Act.
According to the learned Judicial Member, the words in the parenthesis in Section 67A(1) of the Act relate to the member of AOP or BOI and not to the AOP/BOI. According to him, if the contention of the assessee is accepted it would give an absurd interpretation because BOI or AOP cannot be a company or a cooperative society or a society. Since the assessee is a company, it was held by him that the share of the assessee in AOP could not be adjusted against its income computed under various heads. It was also observed by him that no other provision in the Act provides such type of adjustment of loss against the other income of the asscssee. Consequently, he confirmed the order of lower authorities on this issue.
4. However, the learned Accountant Member took a different view by holding that the words in parenthesis in Section 67A(1) of the Act relate to the AOP/BOI and not to the member an AOP or BOL According to him, the provisions of Section 67A of the Act should be considered along with the corresponding provisions of Section 167B of the Act because both these Sections deal with the charge of tax where the shares of members of AOP or BOI arc determinate and known and undeterminate and unknown, respectively. Thus, both these provisions should apply to the same category of the assessee. After referring to the provisions of Section 167B of the Act, it was observed by him that the words in parenthesis have been used by the Legislature with regard to an AOP or BOI. Therefore, similar would be the position with regard to the provisions of Section 67A of the Act. It was further observed that if the Legislature intended to exclude the applicability of the provisions of Section 67A of the Act to an assessee being a company then it should have excluded the same by way of making the provisions as "in computing the total income of the assessee other than a company or cooperative society or a society registered under the Societies Registration Act, 1860 or under any law corresponding to that Act in force in any part of India who is a member".... According to him, since the words in parenthesis had been incorporated in the latter part of Section 67A of the Act, the same should be excluded from AOP or BOI and not from the member of AOP or BOI. He also referred to the definition of the word 'person' appearing in Section 2(31) to point out that such definition includes an AOP or BOI whether incorporated or not.
According to him, these words include the juridical person within its ambit. In support of his view reliance was placed on the hon'ble Supreme Court judgement in the case of Meera & Co., 224 ITR 635.
Therefore, even for such reasons, the provisions of Section 67A have to be understood so as to mean that a company or a cooperative society or society have been used with reference to the AOP or BOI. Accordingly, it was held by him that share of loss from the AOP should be set off in the hands of the assessee against other income computed under various heads.
5. In view of such difference of opinion, the Bench referred the question set out by me in para 1 of this order to the hon'ble President, Income Tax Appellate Tribunal Under Section 255(4) of the Act for nominating the Third Member. It is in this context that the hon'ble President, Income Tax Appellate Tribunal has nominated me to express my opinion on the question set out in para 1.
6. Both the parties have been heard at length. The learned Counsel for the assessee has extensively argued in support of the contention that the words in parenthesis in Section 67A(1) relate to AOP or BOI and not to member of an AOP or BOI. In brief, his submissions as set out in the written submissions are these: a) If the words in parenthesis were to regulate the word 'member' the positioning thereof would have been something tike this: In computing the total income of an assessee, other than a company or a co-operative society or society registered under the Societies Registration Act, 1860 (21 of 1860), or under any law corresponding to that Act in force in any part of India), who is a member of....
b) Section 2(31) of the Act defines a 'person' to include 'an association of persons or a body of individuals, whether incorporated or not'. Thus, the law envisages an incorporated Association of Persons or an incorporated 'Body of Individuals' apart from an unincorporated AOP or a BOI and hence the need to exclude incorporated entitles such as a company.
c) Section 2(17) defines a company to include any institution, association or body which is or was assessable or was assessed as a company for any assessment year under the Indian Income-tax Act, (sic) (11 of 1922), or which is or was assessable or was assessed under the Act as a company for any assessment year commencing on or before the 1^st day of April, 1970, or Thus, at some point of time, a 'company' included an association of persons or body of individuals.
d) Section 167B imposes a charge on an AOP or BOI shares of whose members are indeterminate or unknown.
The interpretation canvassed by the Revenue would be prejudicial to interests thereof as it would mean that when a company is a member of an AOP and shares of the members are indeterminate or unknown then such an AOP or BOI will not be subject to tax at the maximum marginal rate. This is contrary to the scheme of the Act.
e) The Form of the Return of Income (Form No. 1) prescribed in the Income Tax Rules clearly suggests that share of loss in an AOP has to he taken into account in computing the income even of a Company.
f) The clincher comes from Section 40(ba) the opening portion of which reads "in the case of association of persons or body of individuals- (other than a company or a co-operative society or a society registered under the Societies Registration Act, 1860 [21 of I860], or under any law corresponding to that Act in force in any part of India), any payment of interest, salary, bonus, commission or remuneration, by whatever name called, made by such association or body to a member of such association or body...." This Clause of Section 40 makes it abundantly clear that the words in parenthesis have been used in the Act with reference to an AOP or a BOI and not with reference to their members.
7. On the other hand, the learned CIT DR has agreed with the legal submissions advanced by the learned Counsel for the assessee but it was submitted by him that the share of the assessee in the AOP has not been found to be determinate and known and, therefore, the profit or loss can be considered in the hands of AOP itself and question of computing the loss of assessee in the said AOP does not arise and consequently, the setting off of the same would not arise. At this stage of hearing, it was brought to his notice that this aspect of the issue is not before me and consequently, there cannot be any adjudication on such issue. Further, it was observed that there was no dispute between the Members regarding the issue whether the shares of members of the AOP are determinate or known or not. Both the Members have proceeded on the basis that the AOP was such that shares of members were determinate and known. This is also apparent from the question itself set out in para 1. Accordingly, the learned DR was not permitted to advance his arguments in this behalf. However, it has been requested by him that his submissions may be placed on record. He has also given the written submissions. In the written submissions, he has agreed with the legal proposition canvassed by the learned Counsel for the assessee as is apparent from the following proposition mentioned in para 2: (i) The return of income for the Company in Form No. 1 has specific space for offering share in profit or loss of URF/AOP/BOI at part B. Thus, the presupposition that a company, being a member of an AOP cannot have its profit or loss determined and taxed in its hands, is misplaced.
(ii) Section 86 of the I.T. Act makes it amply clear that the disputed phrase within the brackets applies to the AOP and not to the member.
(iii) Section 167B provides for the taxation of the profit or loss of the AOP, if the shares of profit or loss of the members are not determinate. Thus, if the bracketed phrase applies to the member, as has been differently presumed, then whether or not the shares of profit or loss are determinate, the AOP has to be taxed, in all events, if the companies are the members.
3. Having said the above, it is prayed that Hon'ble Member may kindly keep on record that the AOP's member-share in the instant case has not been found to be determinate and known. It appears that, the share holding of the asses see-company, M/s. Mahindra Holdings & Finance Ltd., at 7.69% or 1.54% on the last date has been confused with the determinate share by the A.O. There is no material record that the A.O. had found out the determinate shares of other members. Pattern of share holding is not necessarily the pattern of share of profits or loss.
4. It is also prayed that the Hon'ble Member may put it on the record that the assessee's share holding at 7.69% or 1.54% as on the last daze, gives rise to a valid presumption that the so called AOP, India Auto Ancillary Trust was indeed a company. It is not understood as to how a Trust would have any of its shares to be held by others. It also appears that the word "Trust" has given rise to a misleading presumption that as though any entity with the word Trust in its name is actually a Trust and hence is to be assessed as an AOP. For example, Port Trust and Unit Trust of India are not necessarily the Trusts. The assessee, M/s. Mahindra Holding & Finance Ltd. has not clarified this position.
5. Therefore, it is submitted that the share of loss cannot be allocated to the assessee company M/s. Mahindra Holdings & Finance .Ltd in either of the situations: i. If the India Auto Ancillary Trust is a company (because Mahindra Holding has held shares of this entity) then as per the provisions of Section 67A, the share of loss/profit cannot be passed on to the members.
ii. If the India Auto Ancillary Trust is actually a trust (and hence to be assessed as an AOP), then there is no determined or known share of profit or loss. Again as per the provisions of Section 167B, the share of loss/profit cannot be passed on to the members.
Share holding is not the share of profit or loss.
8. Rival submissions of the parties have been considered carefully. In view of the written submissions filed by the learned DR on behalf of the revenue, the controversy before me has become academic only. Still I feel that in the interest; of justice, I should express my view without having influenced by the concession made on behalf of the Revenue.
9. The issue before me relates to the interpretation of the provisions of Section 67A of the Act. According to the learned Judicial Member, the words in the parenthesis qualify the words "the member of the AOP/BOI" while as per the view of the learned Accountant Member, such words qualify the words "the AOP/BOI" of which the assessee is a member. The purpose of Section 67A is to compute the share of income/loss in the AOP/BOI. In order to appreciate the controversy, it would be appropriate to refer to the relevant provisions of Section 40(ba), Section 67A, Section 86 and Section 167B which were inserted by Taxation Laws Amendment Act, 1989 with effect from 1.4.1989.
Accordingly, the same are being reproduced as under: Section 40[(ba) in the case of an association of persons or body of individuals [other than a company or a co-operative society or a society registered under the Societies Registration Act, 1860 (21 of 1860), or under any law corresponding to that Act in force in any part of India], any payment of interest salary, bonus commission or remuneration, by whatever name called, made by such association or body to a member of such association or body.
Section 67A. (1) In computing the total income of an assessee who is a member of an association of persons or a body of individuals wherein the shares of the members are determinate and known [other than a company or a cooperative society or a society registered under the Societies Registration Act, 1860 (21 of 1860), or under any law corresponding to that Act in force in any part of India], whether the net result of the. computation of the total income of such association or body is a profit or a loss, his share (whether a net profit or net loss) shall be computed as follows, namely- Section 86. Where the assessee is a member of an association of persons or body of individuals (other than a company or a co-operative society or a society registered under the Societies Registration Act, 1860 (21 of 1860), or under any taw corresponding to that Act in force in any part of India), income-tax shall not be payable by the assessee in respect of his share in the income of the association or body computed in the manner provided in Section 67A: Section 167B. (1) Where the individual shares of the members of an association of persons or body of individuals (other than a company or a co-operative society or a society registered under the Societies Registration Act, 1860 (21 of 1860) or under any law corresponding to that Act in force in any part of India) in the whole or any part of the income of such association or body are indeterminate or (sic) tax shall be charged on the total income of the association or body at the maximum marginal rate Provided that, where the total income of any member of such association or body is chargeable to tax at a rate which is higher than the maximum marginal rate, tax shall be charged on the total income of the association or body at such higher rate.
All the above provisions are relevant in determining the income/loss of cither AOP/BOI or of members of such AOP/BOL The words in the parenthesis m all these provisions are identical and, therefore, in my view, the meaning given to the words in parenthesis in all these provisions must be the same unless the context indicates otherwise.
Section 40(ba) provides certain disallowances in computing the income of AOP/BOI. However, such AOP/BOI excludes a company or a cooperative society or a society or other entities specified in the parenthesis.
Section 167B(1) provides the rate of tax at which tax on the income of AOP/BOI is to be charged where shares of members of such AOP/BOI are undeterminate or unknown. However, the Legislature has excluded the company or a cooperative society or a society or other entities specified in the parenthesis from the scope of such AOP/BOI. The perusal of these two provisions clearly shows that the income of the entities specified in the parenthesis is not to be computed m the manner in which the income of AOP/BOI is to be computed. Section 67A provides the manner in which share of income/loss of member of such AOP/BOI is to be determined. Section 86 provides that such share of income/loss of member of such AOP/BOI shall be included in the total income but no tax shall be payable in respect of such income. If all the provisions are read together then in my view, the entities specified in the parenthesis in Section 67A would qualify the AOP/BOI and not the member of such AOP/BOI. The context in which all the Sections arc placed in the statute book docs not suggest that different meaning can be given to the words in the parenthesis in different Sections even though identically worded.
10. Now the question arises whether the expression 'AOP or BOI' can include a company or a cooperative society or a society within its ambit so that such entities can be excluded from the scope of AOP/BOI for the purpose of Section 67A. Any thing can be excluded from an item only when it is included in that item. If the answer to such question is in affirmative then the second question is what is the purpose behind such exclusion. There is no dispute that a cooperative society or a society registered under the Societies Registration Act, 1860 is always assessable as an AOP. This view is also fortified by the decision of the hon'ble Madras High Court in the case of CIT v. Salem District Urban Bank Ltd. 8 ITR 266. As far as a company is concerned, it is defined in Section 2(17) of the Act which is reproduced as under: (ii) any body corporate incorporated by or under the laws of a country outside India, or (iii) any institution, association or body which is or was assessable or was assessed as a company for any assessment year under the Indian Income-tax Act, 1922 (11 of 1922), or which is or was assessable or was assessed under this Act as a company for any assessment year commencing on or before the 1st day of April, 1970, or (iv) any institution, association or body, whether incorporated or not and whether Indian or non-Indian, which is declared by general or special order of the Board to be a company: Provided that such institution, association or body shall be deemed to be a company only for such assessment year or assessment years (whether commencing before the 1st day of April, 1971, or on or after that date) as may be specified in the declaration;] The perusal of the above shows that an association of persons whether incorporated or not can be declared by the Board as a company.
Similarly an association or body as specified in Sub-clause (iii) above is also treated as a company. This clearly shows that an association of persons can also be. a company by virtue of the provisions contained in Sub-clauses (ii) and (iii) of Section 2(17) of the Act. Thus, the first question is to be answered in the affirmative by holding that the expression 'AOP' includes a company or a cooperative society or a society mentioned in the parenthesis.
11. Coming to the second question, it is seen that the purpose of Section 67A is to determine the share of income/loss in the profits/losses of the AOP since such share is to be included in the income of the member of AOP for rate purposes as per the provisions of Section 86 of the Act. However, in the case of a company, cooperative society or society, the income is not apportioned amongst the members constituting these entities. Such entities may have income but may not declare dividend and thus nothing would be includible in the income of the members of such entities. On the other hand, these entities may not have income still they may declare dividend out of its accumulated profits. So, despite no income in the hands of such entities, the dividend declared by them would be assessable as income in the hands of members. Therefore, considering the different scheme of taxation in respect of income received by members from such entities, the Legislature has excluded these entities from the ambit of the expression "AOP/BOI". Had the Legislature not excluded the entities specified in the parenthesis, it would have resulted in double taxation - once as per share determined Under Section 67A read with Section 86 of the Act and again when dividend income is distributed by such entities to its members.
12. If the contention of the Revenue is accepted then it will lead to absurd result not intended by the Legislature and also will be detrimental to the interest of revenue itself. If it is held that the words in the parenthesis qualifies the word 'member' and not the AOP/BOI then the company or a cooperative society or a society or other entities in the parenthesis would not be liable to pay any tax in respect of their share of income in the AOP/BOI as per the provisions of Section 86 of the Act even though such share of income is includible in the total income. In such cases, the companies or societies by themselves may not carry on any business and may form various AOP/BOI and may get away by paying lesser rate of tax on such AOP/BOI since AOP/BOI (having members whose shares are determinate or known) would be chargeable to normal rate of tax applicable to individuals. The interpretation put forth by the Revenue would give birth to legal device for evading the tax by the entities specified in the parenthesis. Such absurd result could never had been included by the Legislature. It is the well settled rule of interpretation that provisions of a statute should be interpreted in the manner which augment the object behind the Legislation and not in the manner which frustrates the object. Even the return form applicable in the case of company prescribed by the rule making authority provides for inclusion of share of profit or loss in the total income. Thus, the intent of the Legislature is very clear in this regard. Therefore, in my opinion, the stand of the Revenue cannot be accepted.
13. In view of the above discussion, it is clear that the words in the parenthesis in Section 67A of the Act qualify the expression "Association of Persons or Body of Individuals" and not the members of such AOP/BOI. Accordingly, I am in agreement with the view taken by the learned Accountant Member.
14. The matter would now go to the regular Bench for final disposal of the appeal.
1. While adjudicating ground No. 3 in appeal No. ITA 5319/M/2004 both the members have expressed their independent views with regard to the applicability of provisions of Section 67A of the I.T. Act in a case where the assessee who is a company, is a member of the AOP or BOI, resulting into difference of opinion on the issue. We, therefore, make a reference to the Hon'ble President for an appointment of a Third Member or to pass necessary order to adjudicate the following question of law on a point of difference.
Whether provisions of Section 67A of the I.T. Act, 1961 can be invoked for computing total income of the assessee, who is a company, is a member of association of persons or body of individual, wherein the shares of the members are determinate and known? 2. Registry is accordingly directed to place this reference before the Hon'ble President for his kind perusal and necessary order.
1. This appeal is preferred by the assessee assailing the order of the CIT (A) pertaining to the assessment year 2001-2002 interalia on following grounds: 1. The learned CIT (A) erred in confirming disallowance of Rs. 6,96,438/- being depreciation on building acquired during the year.
2. The learned CIT (A) has erred in confirming disallowance of interest expenses relatable to Rs. 460 lacs borrowed for the purpose of the business.
3. The learned CTT (A) has erred in confirming the disallowance under Section 14-A to the extent of Rs. 1,00,000/- without appreciating the fact that no expenditure was in fact incurred in relation to dividends.
2. During the course of hearing, the learned Counsel for the assessee has opted not to press ground No. 3. We, accordingly, dismiss ground No. 3 being not pressed.
3. With regard to ground No. 1, it is noticed that on 28-3-2001 i.e.
three days before closing of the accounting year, the assessee acquired a factory building from Roplas (India) Ltd., a Mahendra Group Company for a consideration of Rs. 1,39,28,767/- (excluding the price of land) and claimed depreciation at Rs. 6,96,438/- on this building. The Assessing Officer disallowed the claim of depreciation on the ground that the building was not used for the purpose of business carried on by the assessee.
4. The assessee preferred an appeal before the CIT (A) with the submissions that assessee is a finance company and is in the business, among other things, holding investments, providing finance and lending money. The main object of the company is to carry on business as financiers and investment and for that purpose to lend, invest money and negotiate loans in any form etc. It was further contended that one of the main objects incidental to the main object is to purchase, take on lease or in exchange or otherwise acquire land and building. The Roplas (India) Ltd. which had suffered a substantial losses, was liquidating its assets with a view to garner cash flows required to meet expense on account of VRS. It was stated that assessee company thought it to be a good proposition to acquire the land and building of Roplas (India) Ltd. with a view to exploit it as a business asset. It was further contended that the user of the building as a business asset commenced the moment it was acquired as a business asset. Since the building in question was readymade business asset, it was available for immediate use at the point of time of purchase itself. In support of this proposition, he placed a reliance upon some judgments.
4.1. The CIT (A) re-examined the issue in the light of legal provisions and judgments referred to before him and was of the view that the asset was not acquired for the purpose of business, but, only as an investment. Even in financial year 2003-2004 the assets has not been put to use for the purpose of business, but, has been let out on rent.
The CIT (A), further observed that assessee is not engaged in the business of manufacturing and therefore, it could not have used the factory building for manufacturing activity. Admittedly, the building was not put to use during the accounting year and even during the financial year 2001-2002 and 2002-2003 the factory building was not put to use and it remained vacant. It was only in financial year 2003-2004, the building was let out. Since the building was not used for the purpose of business, the CIT (A) confirmed the disallowance.
5. Now the assessee has preferred an appeal before the Tribunal and reiterated its contention. During the course of hearing, the assessee has candidly admitted that rental income earned in financial year 2003-2004 was offered as an income from house property. During the accounting year and the succeeding two financial years, the building remained vacant and was not put to use for the purpose of business.
Undisputedly, the assessee was not engaged in the business of manufacturing, as such, the building could not be used for the manufacturing activities of the assessee. He was simply a financier and investor and in such type of business activities, the factory building held by the assessee cannot called to be used for the purpose of business. More over, during the course of hearing of the appeal, nothing is placed on behalf of the assessee to establish that this building acquired by the assessee were ever used for the purpose of business. In these circumstances, we are of the considered opinion that the CIT (A) is justified in disallowing the claim of depreciation of the assessee. We, accordingly, confirm the same.
6. With regard to ground No. 2, it is noticed that assessee has obtained inter-corporate deposits of Rs. 860 lakhs from M/s. Mahindra & Mahindra Ltd. a group company and paid interest at Rs. 37,36,986/- to the said company. Out of these borrowings Rs. 473.20 lakhs was given as inter-corporate deposits at free of interest to Roplas (India) Ltd. another group concern. The Assessing Officer held that no prudent businessman will invest such huge funds in a manner that does not give any benefit. He, therefore, disallowed proportionate interest of Rs. 20,56,211/-.
7. The assessee preferred an appeal before the CIT (A) with the submissions that due to critical financial positions, Roplas (India) Ltd. required financial resources largely to meet the expenditure on VRS. Since they were not in a position to pay any interest, the interest on advances was not charged. It was further contended that assessee as a part of its business to form, promote subsidise and to assist Mahendra group companies, advanced these monies. Moreover, it was a business decision of the assessee to finance Roplas (India) Ltd., not to charge interest. Accordingly, the interest paid by the assessee on the borrowings is a business expenditure and should be allowed.
8. The CIT (A) re-examined the issue in the light of provisions of Section 36(1)(iii) and has observed that interest on borrowed capital can be allowed as deduction only if the borrowed capital is used for the purpose of business. One of the basic requirement of any transaction to be business is that there should be an intention to earn profit. In case of the assessee, the borrowed interest bearing funds were utilized for advancing interest free loans. Thus the basic requirement of any transaction is to be treated as business is absent and no prudent businessman would utilize its interest bearing funds for making interest free advances without any expectation of profit or any benefit.
9. The learned CIT (A) further held that the borrowed funds to the extent of Rs. 460 lakhs placed as interest free inter-corporate deposits in Roplas (India) Ltd. were not used for the purpose of business. He accordingly confirmed the disallowance of the proportionate interest under Section 36(1)(iii)/37(1) of the I.T. Act.
He further directed the Assessing Officer to disallow the proportionate interest relatable to non-business use of the borrowed funds of Rs. 460 lakhs only.
10. Aggrieved, the assessee preferred an appeal before the Tribunal with the submissions that assessee being one of the group company is required to look after the interest of the Mahendra & Mahendra group.
Being a listed company at a Stock Exchange, the Mahendra & Mahendra cannot finance the Roplas (India) Ltd. directly. It accordingly, adopted the route through assessee to finance the Roplas (India) Ltd. No interest was charged from the Roplas (India) Ltd. because they were not in a position to make any payment. The assessee has given the advances to one of the group concerns to protect the interests of Mahendra & Mahendra group.
11. The learned Counsel for the assessee has also placed a reliance upon the Judgment of the Apex Court in the case of S.A. Buildrs 288 TTR 12. The learned DR on the other hand has submitted that by giving an interest free advances out of the borrowed funds, the assessee did not get any benefit or a business profit. He invited our attention to the judgment of the Apex Court in the case of S.A. Builders 288 ITR 1 (supra) with the submissions that, no doubt the interest bearing funds can be given as interest free advances to the group concerns as inter-corporate deposits, but, it should be done for business exigencies of the assessee. The important factor which is to be seen in these type of cases is, the which is to be seen in these type of cases is, the business exigencies of the assessee for which the interest free advances were given to the subsidiaries or the group concerns. The onus is upon the assessee to establish that interest free advances were given to the subsidiary or a group concern for the business exigencies of the assessee. If he fails to establish it, the corresponding interest paid on the borrowed funds deserves to be disallowed.
13. The learned DR further contended that in the instant case undisputedly the assessee has borrowed a substantial amount from Mahendra & Mahendra and has given the same as interest free advances to Roplas (India) Ltd. who was on the verge of collapse or winding-up and even the recovery of the principal amount was not sure. Nothing had been placed on record so as to what benefit assessee would get by advancing this amount to Roplas (India) Ltd and what was the business exigencies for advancing the same. The argument of the learned Counsel for the assessee that assessee has given interest free advances to Roplas (India) Ltd in order to protect the image of Mahendra group, does not have any merit, because, if this proposition is to be accepted that fund may flow among the group concerns without any check and wherever any concern of the group is having a sufficient taxable income, it may, borrow the substantial amount of interest and advance to other group concerns, as an interest free advances and claim the interest paid, as a business expenditure, to reduce its taxable income.
This cannot be the object of the judgment of the Apex Court in the case of S.A. Builders 288 TTR 1 (supra), in which the interest free advances to its subsidiary was considered to have been done on account of business exigencies.
14. Having heard the rival submissions and from careful perusal of record we find that undisputedly assessee has borrowed Rs. 860 lakhs from Mahendra & Mahendra Ltd. and paid interest of Rs. 37,36,986/-. Out of these borrowings an amount of Rs. 473.20 lakhs was given as interest free deposits to Roplas (India) Ltd, an another group concern. The Assessing Officer disallowed the proportionate interest at Rs. 20,56,211/- and the CIT (A) while re-appreciating the facts has noticed that out of total interest free advances of Rs. 473.20 lakhs, Rs. 13.20 lakhs came out of own funds and only Rs. 460 lakhs came out of borrowed funds, on which, the proportionate interest can be disallowed. He, accordingly, directed the Assessing Officer to disallow the proportionate interest relatable to non-business use of the borrowed funds of Rs. 460 lakhs only. These observations of the CIT (A) were challenged by the Revenue. As such, the limited question before us is - Whether the proportionate interest of this borrowed fund of Rs. 460 lakhs which were given as interest free advances to Roplas (India) Ltd an another group concern, can be disallowed? It is also evident from the record that the financial position of the Roplas (India) Ltd were very critical and the return of principal amount was highly doubtful.
The assessee's main business is financing and investments and nothing is brought on record as to what business benefit, the assessee acquire on giving interest free advances to Roplas (India) Ltd, out of borrowed funds, on which, substantial interest was paid. It is also not clear from the record that assessee was in regular terms of business with the Roplas (India) Ltd. If the assessee is a financier and doing the business of finance, it could finance the Roplas (India) Ltd and could have charged the interest thereon and offered it to tax. But, instead of doing business transactions with the Roplas (India) Ltd, it had given the interest free advances, out of the borrowed funds. During the course of hearing, a specific querry was raised to explain as to on what business exigencies the interest free advances were given to Roplas (India) Ltd. In response thereto, it was admitted by the learned Counsel for the assessee, that he did not get any direct business benefit by giving such an advance, but, he did it, to protect the image of the Mahendra group. This explanation of the assessee cannot be considered, to be a valid justification for giving interest free advances to Roplas (India) Ltd, because, if it is considered to be a valid explanation, then the fund may flow from one group concern to another group concern freely without any check ; and profit earning group concern may advance the interest free advances out of its borrowings to other group concerns and claim the interest paid on borrowed funds, as a business expenditure, to reduce the taxable income.
15. We have also carefully examined the judgment of the Apex Court in the case of S.A. Builders 288 FTR 1 (supra) and we find that more emphasis was given to the words "business exigencies" of the assessee.
Their Lordship have made it clear in para No. 36 of their Judgment that it is not their opinion that in every case, interest on borrowed funds has to be allowed if the assessee advances it to a sister concern, it all depends on the facts and circumstances of the respective case. The commercial expediencies of the assessee for advancing interest free loan to a sister concern is to be examined. In the instant case, no commercial expediencies of the assessee for giving interest free advances to Roplas (India) Ltd, were explained during the course of hearing. We, therefore, of the view that revenue authorities are rightly disallowed the corresponding interest paid on the borrowed funds of Rs. 460 lakhs which were given to Roplas (India) Ltd as an interest free advance. Accordingly, the Order of the CIT (A) is confirmed.
16. ITA. No. 5319/Mum/2004: Through this appeal, the assessee has assailed the Order of the CIT (A) pertaining to the assessment year 2000-2001 interalia on the following grounds: 1. The learned CIT (A) erred in confirming disallowance of Rs. 3,00,250/- being expenses incurred for the purpose of the business treating the same as non-business expenditure.
2. The learned CIT (A) has erred in confirming disallowance of Rs. 1,50,000/- being part of miscellaneous expenses as having being incurred in relation to exempt dividend income when no such expenditure was in fact incurred.
3. (a) The learned CIT (A) grossly erred in holding that Section 67A(1) is not applicable if the member of an AOP or BOI is a company, without appreciating the fact that non-applicability of Section 67A(1) is with respect to the AOP/BOI and not with respect to its members.
(b) The learned CIT (A) has further erred in confirming the non-allowance of loss of Rs. 12,89,911/- being the share of loss in India Auto Ancillary Trust, an AOP. (c) Without prejudice to the above, tine learned CIT (A) erred in confirming the alternate action of the Assessing Officer in quantifying share of loss from AOP @ 1.54% as against 7.69% claimed by the appellant.
17. During the course of hearing, the learned Counsel for the assessee has opted not to press ground No. 2 and accordingly the same is dismissed being not pressed.
18. With regard to ground No. 1, it is noticed from the orders of the lower authorities that in the accounting year relevant to the assessment year 1998-99 the assessee company sold certain shares in a company called International Instrument Ltd. to Amassmen Video, Zermany. The said International Instrument Ltd. owned certain landed property at Bangalore. One of the Terms of Understanding of the Sale of shares was that the transferring the share holders would ensure that title of International Instrument Ltd. to the landed property at Bangalore was perfected. In the year under consideration, the transferring share holders incurred certain expenses to perfect the title of International Instrument Ltd. to the said landed property. The said expenses of Rs. 3,00,250/-represents the assessee's share of the said expenses and assessee claimed these expenses as revenue expenditure for the reasons that, the assessee is an investment company and the expenditure in question should be looked upon as expenditure incurred in the ordinary course of carrying of its business as an investment company. Being not convinced with the explanation of the assessee, the Assessing Officer disallowed the claim and made the addition of the same to the total income of the assessee.
19. The assessee preferred an appeal before the CIT (A) and reiterated its contention. Besides, an alternative argument was also raised that the expenditure was incurred with a view to protect and preserve the sale proceeds realized from the shares in International Instrument Ltd. as otherwise the buyer would have proceeded against the assessee and other share holders. Therefore, the expenditure was allowable as a revenue expenditure. The assessee has also raised an another alternative argument that since these expenditure are incidental to realization of the sale proceeds of the shares in the company, it should be allowed by way of reduction in the sale considerations of the shares. The CIT (A) has examined all aspects as proposed by the assessee, but, was not convinced with it and he confirmed the disallowance.
20. Now the assessee has preferred an appeal before the Tribunal and has raised all arguments which were raised before the CIT (A).
21. The learned DR on the other hand has submitted that the assessee has sold its 24.02% stake in M/s. International Instrument Ltd. to Management V.D.O. AG in assessment year 1998-99 and assessee has booked the capital gains accused to it after claiming cost of acquisition of the shares. As per the provisions of I.T. Act, assessee is entitled to debit the expenses which are allowed as cost of improvement or cost of acquisition within the meaning of Section 55 of the Act and assessee has rightly claimed the cost of acquisition of the shares in assessment year 1998-99 when he offered the capital gain accrued on this transactions. The learned DR further contended that the expenses incurred for getting certain clearance of title deeds in respect of certain properties does not fall within the meaning of cost of acquisition or cost of improvement of the capital asset. This expenditure has nothing to do with the transfer of shares by the assessee and cannot be allowed as an expenditure, related to earning of capital gains by the assessee. With regard to the allowability as a business expenditure, the said expenditure cannot be allowed as it was not expanded for earning any business income.
22. We have heard the rival submissions and carefully gone through the orders of the lower authorities and material available on record and we find that while computing the capital gain, the assessee is entitled to debit the expenses which are allowed as a cost of improvement or cost of acquisition within the meaning of Section 55 of the I.T. Act. The expenditure claimed by the assessee does not fall in any of the category enshrined in Section 55 of the I.T. Act. More over, the expenses incurred do not relate to the shares. The capital asset which was transferred and for which the capital gain was computed, were the shares and not the immovable property. We have also find force in the argument of the learned DR that the expenditure has nothing to do with the transfer of shares by the assessee and as such it cannot be allowed as an expenditure, relating to earning of the capital gain by the assessee. This expenditure also cannot be allowed as a business expenditure as the business of the assessee is financing and investment and not the perfecting of titles in which no business income is being earned. We, therefore, of the view that this expenditure, cannot be allowed as a business expenditure in the impugned assessment year. We, accordingly, confirm the Order of the CIT (A).
23. With regard to ground No. 3, the facts borne out from the record are that the assessee company is a beneficiary unit holder in AOP, India Auto Ancillary Trust (IAAT). For the impugned assessment year, the AOP has filed its return of income apportioning a loss of Rs. 12,89,911/- (calculated @ 7.69%) to the company as -its portion. The companies unit holding underwent a change following the sale of this unit on 30th March, 2000 from 7.69% to 1.54%. The assessee company claimed the set off of the said loss of Rs. 12,89,911/- against the income under other head, in its return of income for the impugned assessment year i.e., 2000-2001, as per provisions of Section 67A(1) of the I.T. Act, 1961. The claim of the assessee was rejected by the Assessing Officer on the ground that Section 67A is not applicable in the assessee's case. The provisions of Section 67A can only be applied in those cases where a Member of Association of Persons (AOP) or a body of individuals is not a company or a cooperative society or a society registered under the Societies Registration Act. Since the assessee is a company, its total income cannot be computed as per provisions of Section 67A and as such, the loss booked by the assessee cannot be allowed to be set off against the other income of the assessee. The Assessing Officer has also adjudicated the quantum of loss which can be allowed if the assessee is held to be covered by provisions of Section 67A of the Act. Since the assessee held only 1.59% shares as on 31/3/2000 he is entitled to offset share of loss if any worked out @ 1.54% and not @ 7.69%. He, accordingly, held that in those circumstances, assessee is entitled to share of loss only to the extent of Rs. 2,58,318/- and not Rs. 12,89,911/- as claimed by the assessee.
24. The assessee preferred an appeal before the CIT (A), but, he did not find favour with him.
25. Now the assessee has preferred an appeal before the Tribunal and has invited our attention to the provisions of Section 67A(1) of the Act with the submissions that the exclusion Clause refers the AOP or the body of individuals where the shares of members are determinate and known. Since the assessee's case falls within the purview of Section 67A, its provisions are applicable to the assessee's case and the proportionate share of loss in AOP is to be adjusted against the income earned under different heads of the assessee. With regard to quantum of proportionate. share of loss, the learned Counsel for the assessee has submitted that up to 30^th March, 2000, the assessee's share holding in AOP was 7.69% and it was reduced to 1.54% only for one day i.e., 31^st March, 2000 when the major portion of the units were sold. More over, in the books of AOP, the proportionate share of loss was allocated to the assessee's account at. 7.69%. If the Revenue is so meticulous in computation of proportionate share of loss in the assessee's hands it can only be reduced for a day in the ratio of 7.69% to 1.54%, but, it cannot be computed at 1.54% only for the reason that on 31^st March, 2000, the share holdings came down to 1.54%.
26. The learned DR on the other hand has submitted that the language of provisions of Section 67A quite unambiguous and clear that it can only be invoked to those cases where the assessee other than the company or cooperative societies or society registered under Societies Registration Act, is a member of association of persons or a body of individuals and the shares of members are determinate and known. In the instant case, the assessee is admittedly a company and is a member of AOP or BOI and the shares of the assessee are determinate and known. As such the provisions of Section 67A, cannot be invoked inasmuch as it can only be invoked in this case where the assessee is other than the company or cooperative societies or society. So far as quantum of loss is concerned, the learned DR has submitted that at the end of the year, the proportionate share holdings came down 1.54% on account of its sale, as such, the allocation of proportionate share of loss should be done according to holdings at the end of the year. He, accordingly, supported the order of the Assessing Officer.
27. We have heard the rival submissions and carefully perused the orders of the lower authorities in the light of provisions of Section 67A(1) of the I.T. Act and we find that the language of this Section is quite unambiguous and clear and it has no other meaning except that it can only be applied to those assessees where they are other than the company or cooperative society or a society registered under the Societies Registration Act and are the members of an association of persons or body of individuals wherein the shares of the members are determinate and known. For the sake of reference we extract the provisions of Section 67A(1) as under: 67A (1) In computing the total income of an assessee who is a member of an association of persons or a body of individuals wherein the shares of the members are determinate and known (other than a company or a cooperative society or a society registered under the Societies & Registration Act, 1860 (21 of 1860), or under any law corresponding to that Act in force in any part of India), whether the net result of the computation of the total income of such association or body is a profit or a loss, his share (whether a net profit or net loss) shall be computed as follows, namely: (a) any interest, salary, bonus, commission or remuneration by whatever name called, paid to any member in respect of the previous year shall be deducted from the total income of the association or body and the balance ascertained and apportioned among the members in the proportions in which they are entitled to share in the income of the association or body; (b) where the amount apportioned to a member under Clause (a) is a profit, any interest, salary, bonus, commission or remuneration aforesaid paid to the member by the association or body in respect of the previous year shall be added to that amount, and the result shall be treated as the member's share in the income of the association or body; (c) where the amount apportioned to a member under Clause (a) is a loss, any interest, salary, bonus, commission or remuneration aforesaid paid to the member by the association or body in respect of the previous year shall be adjusted against that amount, and the result shall be treated as the member's share in the income of the association or body.
28. We have also examined the arguments of the learned Counsel for the.
assessee that the words "other than company or a cooperative society or a society registered under the Societies Registration Act" relate to the association of persons or body of individuals and not with the assessee. If the contention of the assessee is accepted, it would give an absurd interpretation because the body of individuals or the AOPs cannot be a company or a cooperative society or society. These words relate to an assessee who is a member of an association of persons or body of individuals. On careful reading of this provision, we do not find any iota of doubt to interpret this Section differently. It gives a clear meaning that total income of the assessee who is a member of AOP and BOI wherein the shares of members are determinate and known are to be computed as per the provisions of Section 67A of the Act if the assessee is other than a company or a cooperative society or a society registered under the Societies Registration Act or under any law corresponding to that act in force in any. part, of (India). But, in the instant case, assessee is admittedly a company, hence, its total income, cannot be computed as per the provisions of Section 67A of the I.T. Act. Accordingly, the proportionate share of the assessee in the AOPs i.e., (India) Auto Ancillary Trust cannot be adjusted against the income under different heads of the assessee as per the provisions of Section 67A of the Act. No other provision in the Act provides such type of adjustment of loss against the other income of the assessee. In these circumstances, the assessee is not entitled to claim of set off of its proportionate share of loss against its other income. We, therefore, confirm the Order of the CIT (A) in this regard who has rightly adjudicated the issue.
29. So far as the other argument of the assessee with regard to quantum of proportionate share of loss is concerned, we find force in the contention of the assessee as up to 30^th March, 2000, assessee's holdings were at 7.69% and it was reduced for one day i.e., 31^st March, 2000 from 7.69% to 1.54% on account of sale of units. It is also not disputed that in the books of AOP allocated share of loss in the accounts of the assessee was at 7.69%. We do not find any force in the Revenue's contention that on account of reduction in holdings from 7.69% to 1.54% on 31^st March, 2000, a proportionate share of loss should be reduced to 1.54% because except one day throughout the year, its holding remained 7.69%. At the most, proportionate loss for one day i.e., 31-3-2000 be reduced by 6.15%. The rest of the argument of the Revenue is based on hypothecation and we do not endorse it. We, accordingly, find no merit in reduction of loss from Rs. 12,89,911/- to Rs. 2,58,318/-. But, in any case, this loss cannot be adjusted against the profits under the different heads of the assessee inasmuch as the provisions of Section 67A cannot be applied in the assessee's case. We, accordingly, reject the claim of the assessee.
1. I have gone through the proposed order of the Respected Judicial Member and have also discussed the issue with him. I am in full agreement with his views on all issues except ground No. 3 in ITA No.5319/M/2004 wherein he has held that the provisions of Section 67-A were not applicable to the assessee being a company. Hence, it is with this considerable regret that I feel constrained to right a separate dissenting note expressing the reasons for not being able to agree with him inspite of my profound respect for his views.
2. As far as the facts and contentions of both the parties are concerned, the same have been elaborately narrated by the ld. Brother, hence, no need to repeat again. In my opinion, the issue regarding the applicability of provisions of Section 67-A to the assessee has to be decided after taking into consideration the corresponding provisions of Section 167-B of the Act because both these Sections i.e. Section 67-A and 167-B deal with the charge of tax where the shares of members in AOP or body of individuals are determinate and known and indeterminate and un- known respectively. Thus, both these provisions should apply to same category of assessees. To put it differently, it cannot happen that the provisions of Section 67-A would not be applicable to assessee, being company, whereas for levying the tax on the total income of the association of person or body of individuals Under Section 167-B of the Act, the tax status of member, being a company, would be taken into consideration. The Ld. Brother has reproduced the provisions of Section 67-A hereinbefore, hence, not reproduced again, however, for the sake of ready reference, the provisions of Section 167-B are reproduced as under: 167B. (1) Where the individual shares of the members of an association of persons or body of individuals (other than a company or a co-operative society or a society registered under the Societies Registration Act, 1860 (21 of 1860) or under any law-corresponding to mat Act in force in any part of India) in the whole or any part of the income of such association or body are indeterminate or unknown, tax shall be charged on the total income of the association or body at the maximum marginal rate Provided that, where the total income of any member of such association or body is chargeable to tax at a rate which is higher than the maximum marginal rate, tax shall be charged on the total income of the association or body at such higher rate.
(2) Where, in the case of an association of persons or body of individuals as aforesaid [not being a case falling under Sub-section (1)],- (i) the total income of any member thereof for the previous year (excluding his share from such association or body) exceeds the maximum amount which is not chargeable to tax in the case of that member under the Finance Act of the relevant year, tax shall be charged on the total income of the association or body at the maximum marginal rate; (ii) any member or members thereof is or are chargeable to tax at a rate or rates which is or are higher than the maximum marginal rate, tax shall be charged on that portion or portions of the total income of the association or body which is or are relatable to the share or shares of such member or members at such higher rate or rates, as the case may be, and the balance of the total income of the association or body shall be taxed at the maximum marginal rate.
Explanation.- For the purposes of this section, the individual shares of the members of an association of persons or body of individuals in the whole or any part of the income of such association or body shall be deemed to be indeterminate or unknown if such shares (in relation to the whole or any part of such income) are indeterminate or unknown on the date of formation of such association or body or at any time thereafter.] From the perusal of s.s.(1) above, it is clear that the company or co-operative society or a society registered under the Societies Registration Act, 1960 have been used with regard to an association of persons or body of individuals which means that where any person is a member of such type of association of persons or body of individuals, then, provisions of Section 167B will not be applicable. Similar, would be the position with regard to the provisions of Section 67-A as the legislature, if wanted to exclude the applicability of provisions of Section 67-A to an assessee, being a company, then, it should have excluded the same by way of making the provisions as "in computing the total income of the assessee, other than a [company or cooperative society or a society registered under the Societies Registration Act, 1860, or under any law corresponding to that Act in force in any part of India], who is a member".... However, it is not so and these words have been incorporated in the later part of the Section 67-A. In my opinion, there appear no justified reasons to exclude an assessee, being a company of co-operative society or other society, from the applicability of the provisions of Section 67-A even otherwise.
3. Further, provisions of Section 2(31)(v) of the Act are also relevant, hence, reproduced as under: (v) an association of persons^52 or a body of individuals^52, whether incorporated or not, (vii) every artificial juridical person, not falling within any of the preceding sub-clauses.
^53[Explanation.- For the purposes of this clause, an association of persons or a body of individuals or a local authority or an artificial juridical person shall be deemed to be a person, whether or not such person or body or authority or juridical person was formed or established.
As per this definition, the body of individuals can be incorporated or not, hence, the body of individuals can also have artificial juridical person within its ambit. The Hon'ble Supreme Court in the case of Meera And Co. v. C.I.T. as reported in 224 ITR 635 (SC) also held so.
Therefore, even for this reason, the provisions of Section 67-A have to be understood so as to mean that the company or co-operative society or a society has been used with reference to association of persons or body of individuals and not with reference to the assessee in Section S7A as contended by the Revenue.
4. I am further of the opinion that company or co-operative society or other types of societies can be termed as association of persons or Body of Individuals in a broad sense, however, the profits/losses of such entities do not come into the hands of members as such, hence, for this reason these entities have been excluded from association of persons or Body of Individuals for the purpose of Section 67-A of the Act.
5. I would further like to add that though the provisions of Section 167-B and 2(31)(v) and aforesaid decision of Hon'ble Supreme Court were not brought to our notice during the course of hearing, but, in my humble view, the Tribunal has to decide the issue in accordance with the law and It should not decide the matter merely on the basis of what has been contended and, in such situations, the only requirement can be to give an opportunity to the party going to be effected to advance its views. However, since I am writing a dissent note, the effected party would get an opportunity of presenting it's view before the Third Member, therefore, there is no need to fix the case for hearing as part heard merely for this reason at this stage. Having held so, I further do not find any merit in the alternative view of the Revenue for reduction of losses from Rs. 12,89,911/- to Rs. 2,58,318/- and I hold that, at the most, proportionate loss for one day i.e. 31^st March, 2000 can be attributed in the ratio of 1.54% whereon the assessee's share got reduced to 1.54% from 7.69% on account of sale of units and for the rest of the year, the assessee's share in the loss should be calculated at 7.69%. Accordingly, this ground of the assessee stands disposed off in terms indicated above.