Finding that the financing/money lending business was also included as one of the objects behind the setting up of the Appellant company (builder/ financer) under the Memorandum of Association (MOA), the Bombay High Court ruled that the interest paid by the Appellant on bank funds borrowed for business purposes can be adjusted as a set off against interest received by it from lending part of the said borrowed funds to its sister concerns. Reference was made to the decision of the Apex Court in CIT Versus. Sarabhai Management Corporation Ltd. [(1991) 192 ITR 151], which held that “even if the first stage of acquisition of property cannot be treated as commencement of business, at least the second stage of making the property ready for being rented out constitutes the activity of commencement of business”.
The High Court also negated the claim of the Revenue Department that under Section 57(iii) of the Income Tax Act, only such expenditure can be deducted which is incurred for the purpose of earning of particular income. The Court also emphasized that the ITAT cannot treat the income earned for the A.Y. 1992-93 as ‘other sources’ while treating the similar income in the succeeding A.Y. 1993-94 under the head ‘business’. The Court therefore set aside the order passed by the ITAT and answered the appeal in favour of the taxpayer.
The Division Bench comprising Chief Justice Alok Aradhe and Justice Sandeep V. Marne also pointed out that the ITAT had erred in applying the meaning ascribed to the term ‘set-up’ under the Wealth Tax Act discussed by the Supreme Court in the case of CWT Versus. Ramaraju Surgical Cotton Mills Ltd [63 ITR 478], for deciding the issue arising out of the Income Tax Act. The Bench clarified that for taxation under the Wealth Tax Act, the industry needs to be fully established, whereas the business of letting out premises on hire involves multiple stages, beginning from the acquisition of property, repairing/furnishing the same, and then letting it out to tenants.
The Bench went on to observe that ‘business’ for the Income Tax Act would commence right from the stage of repairing and furnishing of property for being rented out, and cannot be treated as commenced only when the premises are actually let out to tenants. Thus, the judgment rendered in the context of setting up an industry for taxation under the Wealth Tax Act would have no application for deciding the issue of commencement of business within the meaning of the Income Tax Act.
Briefly, in this case, the Appellant-taxpayer engaged in the construction of business centres, buildings, leasing of premises, and financing, filed its return showing business income of Rs. 5,966/- under the head “business”, even after declaring interest receipt of Rs. 14.66 lacs, as it had claimed a deduction of interest of Rs. 13.37 lacs on fixed loan, and guarantee commission of Rs. 1.21 lacs. On being asked by the AO, the Appellant claimed that it had borrowed money on interest from Citibank, not only for expenses for furnishing the building, but for lending advances to its sister concerns. The AO, however, observed that the Appellant had secured the loan of Rs. 9.20 crores from Citibank against an equitable mortgage by deposit of title deeds of immovable properties belonging to companies under the same management and guaranteed by the Directors of the Appellant company. The AO therefore opined that the Appellant was not entitled to set off interest receipts against interest expenditure, and accordingly, he brought to tax the interest receipt of Rs. 14.66 lacs as ‘income from other sources’.
On appeal, the CIT(A) was of the view that the arrangement of appointing a financier and its temporary utilisation is one composite transaction, and therefore, the interest received by the Appellant on account of a temporary utilisation of the loan may be adjusted, and only the balance could be capitalized. This decision of the CIT(A) was reversed by the ITAT by holding that letting monies on interest was not a part of the main business, and hence, interest expenditure cannot be adjusted against the interest receipts.
Case Relied On:
Commissioner of Income-tax vs. Sarabhai Management Corporation Ltd – (1991) 192 ITR 151
Case Distinguished:
Tuticorin Alkali vs. Commissioner of Income-tax – [1997] 227 ITR 172 (SC)
CIT vs. Mimraj Manmal Ruia – (1972) 84 ITR 673 (Bombay)
CIT vs Jagmohandas J. Kapadia – (1966) 61 ITR 663 (Bombay)
Commissioner of Income-tax vs. Tamil Nadu Industrial Development Corporation Ltd. – [1991] 189 ITR 670 (Madras)
Additional Commissioner of Income-tax vs. Madras Fertilisers Ltd. – [1980] 122 ITR 139 (Madras)
Mathew Joseph vs. ACIT – [2017] 87 taxmann.com 317 (Kerala)
Commissioner of Income-tax (Central), Kanpur vs. Smt. Swapna Roy – [2010] 331 ITR 367 (Allahabad)
Appearances:
Advocates Bharat Raichandani and Bhagrai Sahu, for the Appellant/ Taxpayer
Advocate Arjun Gupta, for the Respondent/ Revenue
