M/S. TAMIL NADU INDUSTRIAL DEVELOPMENT CORPOR,CHENNAI vs. ACIT,, CHENNAI

आदेश / O R D E R PER M. BALAGANESH, ACCOUNTANT MEMBER: This is an appeal filed by the assessee against the order passed by the Ld. Commissioner of Income Tax, Chennai-I, Chennai U/s.263 of the Income Tax Act, 1961 (herein after referred to as ‘the Act’) dated 20.03.2008.

2 ITA No.1181/Chny/2008 of the Act, as well as on merits. At the time of hearing, the Ld.AR fairly stated that the assumption of jurisdiction in terms of Section 263 of the Act by the CIT is not pressed by him . However, he only wants the issues to be adjudicated on merits.

3 ITA No.1181/Chny/2008 Rs.63,73,938/- against expenditure of Rs.21,15,395/-. In the computation of book profit, the assessee has added an amount of Rs.33,64,300/- as prior period income. The actual amount of prior period income shown in Schedule 20 is Rs.63,73,936/-. Thus, there is difference of Rs30,09,638/- which was not added in the computation. The assessee was asked vide my letter dated 11 .03.2008 to furnish item-wise adjustment and explain how the same is in accordance with law. In my letter dated 11.02.2008, I have specifically pointed out this difference. The assessee has not furnished the reconciliation between prior period income as shown in Schedule 20 of Rs.63,73,938/- and Income of Rs.33,64,300/- added to book profit. One major item which has been included in the prior period income is interest of Rs.54, 18,651/- and there is no reason why the assessee should not add back the entire amount. As this has not been considered by the AO, his order is erroneous and prejudicial to the interest of revenue. AO is directed to verify from Schedule 20, the income which has not been added to book profit by the assessee and compute the actual amount to be added back after excluding those items of reversal which have not been allowed as deduction in the earlier years. Such items are reversal of provision of doubtful debts, reversal of excess provision for gratuity, reversal of excess bonus provision etc. Another item in the computation of book profit which requires verification is an amount of Rs.11,32,282/- which has been reduced from the book profits as provisions for gratuity and another amount of Rs.2,27,598/- which has also been reduced from the book profit as provision for leave salary. The actual amount of provision for gratuity which has been debited to the profit and loss account for this year is Rs.13,79,366/-. The assessee ought to have added back this amount to the book profit. Instead, the assessee has deducted from this an amount of Rs.25,11,648/- being gratuity paid by the assessee till the date of filing of return. Similarly, in the case of provision for leave salary the amount of provision debited to profit and loss account is Rs.4,97,124/- instead of adding this amount to book profit the assessee has adjusted an amount of Rs.7,24,722/- being the amount of leave salary actually paid. According to the assessee, these adjustments are made in accordance with explanation (i) to Section 115JB(2). The explanation (i) to Section II5JB(2) states that the net profit as shown in the P&L Account shall be reduced by ---

4 ITA No.1181/Chny/2008 the amount withdrawn from any reserve or provision (excluding a reserve created before the 1st day of April, 1997 otherwise than by way of a debit to the profit and loss account), if any such amount is credited to the profit and loss account: From this, it is clear that clause (i) applies only to those withdrawal from reserves which have been credited back to profit and loss account. It does not provide for adjustment against the provisions made for this year against the amount utilized by the assessee without crediting the amount to the P&L account. The assessee cannot, under this clause, deduct from book profits the amount utilized out of the reserve for payment of gratuity leave salary etc. The adjustment made by the assessee is, therefore, erroneous and prejudicial to the interest of the revenue. The AO is therefore directed to re-compute the book profit after withdrawing this adjustment.

We find from the aforesaid observation of CIT, the issue was set aside to the file of the Assessing Officer for making verification on merits. The Ld.AR fairly conceded before us that since, this is only a matter of factual verification by the Ld.AO and hence, he has no objection for the same. He only prayed that let the Ld.AO decide all those issues in accordance with law for which necessary direction may be given to him. The Ld.DR also fairly conceded to the said request of the Ld.AR. Accordingly, we hold that the order of the Ld.CIT in respect of the aforesaid issues is only set aside to the file of the Ld.AO for verification. Hence, we hold that the Ld.AO has to decide the taxability of those issues in accordance with law. Accordingly the order of the Ld.CIT in respect of those issues alone is

5 ITA No.1181/Chny/2008 upheld and the grounds raised by the assessee in respect of those specific issues are dismissed.

6 ITA No.1181/Chny/2008 profession’ or ‘income from other sources’ and consequently set-off of brought forward business losses from earlier years against such income.

The Ld.AO had adjusted the brought forward business loss of assessment year 1998-99 amounting to Rs.1,46,76,023/- against the aforesaid income. The Ld.CIT observed that brought forward business loss could be set-off only against business income of the assessee and since, in the opinion of the Ld.CIT, there was no business income for the assessee during the year under consideration, he held that the order passed by the Ld.AO is erroneous and prejudicial to the interest of the Revenue by allowing the set-off of brought forward loss. We find that it is undisputed that the assessee company is engaged in the promotion of industries in

7 ITA No.1181/Chny/2008 TamilNadu by making investment in various companies as well as having joint venture thereon. The amounts invested in those companies were by way of investment in shares for which the resultant income would be in the form of dividend till the time of holding of those shares. The said dividend income according to the assessee was to be reflected under the head ‘income from business’ and exemption, if any, provided U/s.10 of the Act should be claimed thereon. The main contention of the Ld.AR is since the assessee company is engaged in the business of promotion of industries by way of making investment in shares, the resultant income in the form of dividend would partake the character of business receipt and not ‘income from other source’. If the said dividend income is included as business income, then the assessee would be entitled for set-off of brought forward business loss against the same. The Ld.AR in this regard drew our attention to the agreement entered into with various industries wherein it is very clear that the assessee does not merely make investment in the said companies, but also participates in the day to day management in the affairs of the said company. The Ld.AR drew our attention to Page No.7 to 10 of the paper-book, relevant clause, Para (iv) clause 13, Para 5(v) clause 20,21 and 27 in respect of investments made in M/s. Titan Company Ltd. He also

8 ITA No.1181/Chny/2008 drew our attention to similar pages in the paper-book in respect of investments made in Tanfac Industries Ltd., TamilNadu Petro Products Ltd., and TamilNadu Newsprint and Papers Ltd. He also drew our attention to the orders passed by this Tribunal in assessee’s own case for the assessment years 1976-77, 1979-80, 1980-81 and 1981-82 in ITA Nos.2153 to 2156/Mds/1987 dated 19.03.1991, wherein this Tribunal had categorically given a finding that the assessee is a TamilNadu Government undertaking engaged in the promotion and development of new industrial undertakings in the State and for this purpose, it held shares in number of joint sector undertakings for which dividend income was received on those shares. This Tribunal in the said case had categorically held that the dividend income would form part of business of the assessee and accordingly taxable under the head ‘income from business’, although the same is assessable under the head ‘income from other sources’ by virtue of specific provision contained in Section 56(2)(i) of the Act. Accordingly, it had held that assessee would be entitled to set-off of brought forward business loss and unabsorbed depreciation of earlier years against the said dividend income.

9 ITA No.1181/Chny/2008 7. The Ld.AR also placed his reliance on the decision of this Tribunal in assessee’s own case reported in 124 ITD 117 for the assessment years 1994-95 and 1995-96, which is a third member decision dated 13.11.2009. We have gone through the said decision and we find it would be relevant to reproduce the operative portion of the said judgment of the third member which is as under:-

10 ITA No.1181/Chny/2008 whereas income from the other item is exempt under the Act, the entire permissible expenditure in earning the income from that head is deductible; and (iii) in computing ‘profits and gains of business or profession’ when an assessee is carrying on business in various ventures and some among them yield taxable income and the others do not, the question of allowability of the expenditure under s. 37 of the Act will depend on: (a) fulfilment of requirements of that provision noted above; and (b) on the fact whether all the ventures carried on by him constituted one indivisible business or not; if they do, the entire expenditure will be a permissible deduction but if they do not, the principle of apportionment of the expenditure will apply because there will be no nexus between the expenditure attributable to the venture not forming an integral part of the business and the expenditure sought to be deducted as the business expenditure of the assessee.” In short, the underlying principle laid down is that if different activities carried out by a person constitute indivisible business, then the apportionment of expenditure between taxable income and non-taxable income cannot be made. This was also the view taken by the Calcutta High Court in the case of National & Grindlays Bank (supra). 7. In the light of the above principles, we may now examine the facts in the present case. There is a clear finding by the CIT(A) that the shares were held by the assessee in its normal course of business activities and the dividend income has been considered as earned in course of the business. The learned Departmental Representative has, of course, disputed this finding by saying that one business of the assessee is that of promoting industries in the State by incurring expenditure on projects and which expenditure is converted into shares. The other business is stated to be that of investing upcoming industries by way of subscription to the capital of such companies. It this second activity, which according to the Departmental Representative an investment activity and therefore expenditure incurred to earn dividend income from this second activity has tob e disallowed. I am not agreeable with this proposition of the learned Departmental Representative for two reasons. Firstly, it is well established since the inception of the company that the assessee company is a development organisation. This is being declared year after year in the notes to the accounts. However, the learned Departmental Representative has given importance to the fact that investments are on a long-term basis. In my opinion, it may be so, but the fact remains that investment is made by the assessee in its role of a development organization and not as an investor to earn dividend income. In fact, the written submission of the learned departmental Representative supports this view. It is mentioned that the assessee invests in upcoming

11 ITA No.1181/Chny/2008 organization and not as an investor. The submission of the learned Departmental Representative further states that once a particular company is settled down into regular business, the assessee disinvests its shareholding. Now when a company may settle down the time period may vary from company to company. Thus the theory of investment on long- term basis gets belied. This submission also proves that the assessee is not making any investment with the sole purpose of earning dividend income. It is performing its role as a development organization to promote industries. Secondly, even if for the sake of argument the submission of the learned Departmental Representative that the investment is on long-term basis, is accepted, the Department has not made any bifurcation of the shares held by the assessee in the projects promoted by it and in the companies encouraged by it by subscribing to its shares. As a matter of fact, it will not be possible to make such bifurcation. These facts go to prove that the various activities carried out by the assessee constitute one single indivisible business which is of promoting industries in the State and therefore, the dividend income earned in the process assumes the character of a business income. In fact, the AO has assessed it as business income not only in this year but in all the earlier years as well. If it is an indivisible then there is no question of apportioning any expenditure to the dividend income which is subject to deduction under s. 80M of the Act.”

The ld.AR also placed reliance on the decision of the Hon’ble jurisdictional High Court in its own case reported in 368 ITR 545 for assessment years 1993-94 to 1997-98 vide order dated 27.08.2014. We find that though this decision was rendered in the context of Interest Tax Act, the Hon’ble Jurisdictional High Court has held that the assessee company is engaged in the business of promotion of industries in the State as well as in the business of financing thereon and accordingly would be considered as a credit institution falling within the definition of ‘financial company’ U/s.2(5B) of Interest Tax Act. The Ld.AR also placed his reliance on the decision of the

12 ITA No.1181/Chny/2008 Hon’ble Jurisdictional High Court in the case of CIT vs. Amalgamations (P) Ltd., reported in 108 ITR 895 wherein it was held as under:- “The question before us is whether the principle, which is applicable to the managing agency companies, can be applied to a company, which is carrying on the business of holding investments. As we have already seen, the decisions of the Supreme Court required a nexus between the business of the assessee and the expenditure that has been incurred. The business of the assessee is the holding of investments. If with reference to this business of the holding of investments any expenditure had been incurred, that would have been allowed as deduction. The business of holding investment and the businesses of the subsidiary companies are wholly separate and distinct. The expenditure that has been incurred in the present case cannot be said to be in carrying on the assessee's business of holding its investment. It could hold its investments and earn its dividends without incurring this expenditure. Before the introduction of the restrictive provision in the Companies Act of 1956, the respective companies were paying the directors for services rendered to them and they are now remunerated by the assessee. There was no change in the rendering of services. Merely because the law had changed and the managed company was not in a position to pay the same remuneration because of the restrictive statutory provision, it does not mean that what was prior to 1956 Act expenditure of the subsidiary could, after it, become the expenditure of the assessee. It was argued that, but for this expenditure, the services of the respective directors would not have been available. There is some reference to this aspect in the resolution passed by the assessee- company. Even on the basis that the services of the respective directors would not have been available, it does not, in our opinion, follow that the assessee was obliged to take over the expenditure as part of, or incidental to, its own business. The entities, viz., the assessee and the subsidiary companies, are independent for all relevant purposes. Though it was argued before the Tribunal that the assessee-company was carrying on its own business through the

13 ITA No.1181/Chny/2008 agency of the subsidiaries, the learned counsel did not put forward such a contention before us. The income of the assessee could only consist of the dividends from the subsidiary companies as and when declared. Even under the Act of 1922 as a result of the amendments made the dividend income has been specifically brought within the head "other sources". There are decisions of the highest authority which hold that notwithstanding the statutory requirement that the computation of the dividend income had to be under the head "other sources", still the income could be treated as business income for all other purposes. See Commissioner of Income-tax v. Cocanada Radhaswami Bank Ltd. and Commissioner of Income-tax v. Chugandas & Co. . Even bearing in mind this principle and assuming that we have to treat the dividend income as business income for our present purpose, still it cannot be held that there is such a nexus between the expenditure and the business or the income of the assessee so as to justify the deduction of the expenditure incurred in remunerating the directors who rendered services to the subsidiary companies and not to the assessee.” (Underlining provided by us) The Ld.AR also placed reliance on the Hon’ble Supreme Court in the case of CIT vs. Cocanada Radhaswami Bank Ltd., reported in 57 ITR 306, wherein it was held: “Though for the purpose of computation of the income, interest on securities is separately classified, income by way of interest from securities does not cease to be part of the income from business if the securities are part of the trading assets.”

14 ITA No.1181/Chny/2008 investment in shares in various joint sector undertakings, and thereby the resultant income in the form of dividend thereon would partake the character of business income, the subsequent investment made by the assessee company in those respective joint sector undertakings were not meant for promotion of industries and hence the dividend income would be taxable only under the head ‘income from other sources’ and not under the head ‘income from business’. Accordingly the Ld.DR argued that the findings given by this Tribunal and the Hon’ble Jurisdictional High Court in assessee’s own case cannot be applied in perpetuity in favour of the assessee. In this regard, the Ld.AR countered the arguement of the Ld.DR by stating that the subsequent investments were made only pursuant to fresh issue of shares made by those joint sector undertakings to all the existing shareholders including the assessee. As per the original agreement with the joint sector undertakings entered into by the assessee, the assessee was only holding 24% shares for those entities. Hence, the assessee is bound to maintain the said percentage of stake in all those entities even after fresh issue of shares made subsequently by those entities. Otherwise the assessee’s stake would get diluted and thereafter the assessee

15 ITA No.1181/Chny/2008 would not be able to participate in the day to day management of affairs of those respective undertakings.

16 ITA No.1181/Chny/2008 inception of the assessee company. Hence, the case laws relied upon by the Ld.AR which were passed by this Tribunal and by the Hon’ble Jurisdictional High Court in the assessee’s own case for the earlier years would rule the field even for the year under consideration before us. Accordingly, the observations of the Ld.CIT in Pages 6 to 8 of his order are dismissed and the grounds raised by the assessee in this regard are allowed.

Order pronounced on the 28th February, 2020 at Chennai.

Sd/- Sd/- (महावीर �संह ) (एम बाला गणेश) (Mahavir Singh) (M. Balaganesh) उपा�य� /Vice President लेखा सद�य /Accountant Member चे�नई/Chennai, �दनांक/Dated 28th February, 2020 RSR आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 2. ��यथ�/Respondent 3. आयकर आयु�त (अपील)/CIT(A) 4. आयकर आयु�त/CIT 5. �वभागीय ��त�न�ध/DR 6. गाड� फाईल/GF