BAJAJ CAPITAL VENTURES P.LTD,MUMBAI vs. DCIT 3(1)(1), MUMBAI

ORDER PER G.S.PANNU,A.M:

The captioned cross appeals filed by the assessee and Revenue pertaining to assessment year 2010-11 is directed against an order passed by CIT(A)-5, Mumbai dated 14/11/2014, which in turn, arises out of an order passed by the Assessing Officer under section 143(3) of the Income Tax Act, 1961 (in short ‘the Act’) dated 14/02/2014.

“1. Income Tax (Appeals) erred in confirming leasing income from commercial premises of Rs.50,32,440/-( 70% of 71,89,200/-) as "Income from House Property" as against" Profits & Gains from Business /Profession" as contended by the Appellant as leasing income arising on lease of the commercial premises is one of the major business activity of the company. 2) On the facts and circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) erred in confirming by not allowing C/f of Long Term Capital Loss arising on sale of preference shares by wrongly treating the same as equity shares and thus applying provisions of sec 10(38) of the Income Tax Act, 1961”

3.1 In appeal before the CIT(A), assessee contended that the lease income of business centre was assessable as business income and that leasing of commercial premises was one of the major activities of the assessee company. The assessee also canvassed before the CIT(A) that the impugned commercial premise was acquired out of surplus funds available with the assessee company with the intention of earning lease income. It was also canvassed that in the preceding assessment year of 2010-11, the income from lease has been assessed as business income. The CIT(A) has considered the submissions put-forth by the assessee. The CIT(A) noted that the assessee company had failed to furnish the nature of services rendered and, therefore, the Assessing Officer was justified in not treating the impugned premises to be a ‘business centre’ and taxing the rental income as ‘income from house property’. In coming to such a decision, the CIT(A) noted the reliance placed by the Assessing Officer on the following judgments:-

3.3 On the other hand, the Ld. Departmental Representative has reiterated the stand of the Assessing Officer in support of the case of the Revenue. Apart therefrom, the Ld. Departmental Representative emphasized that there was no specific amenities or services provided by the assessee so as to say that the lease agreement was in the nature of a business activity. The Ld. Departmental Representative also emphasized that in the return of income originally filed , assessee had declared such income as income from ‘house property’ and that it is only in the revised return of income that income was claimed to be assessable as ‘business income’.

3.4 We have carefully considered the rival submissions. The assessee before us is a private limited company, which owns a commercial premise, which has been rented to a group concern and it is deriving rental income therefrom. The point of dispute is whether the income so received is to be taxed under ‘the head house property’ or ‘profits and gains of business or profession’. As the relevant discussion in the orders of authorities below reveal, the stand of the assessee was that the income ought to be taxed under the head ‘profits and gains of business or profession’. The primary reason advanced was that the leased premises was a business centre and, therefore, earnings from such a premise were liable to be considered as ‘business income’. Factually speaking, the Assessing Officer as well as the CIT(A) have rendered a concurrent finding to the effect that assessee could not prove as to what services of the nature of business centre were being provided by it. On this aspect, even before us, the Ld. Representative for the assessee has not lead any material or evidence, which would enable us to interfere with the aforesaid factual finding of the lower authorities. Therefore, in so far as the plea of the assessee that the premise in question was providing business centre services is concerned,, the stand of the income tax authorities is hereby affirmed.

3.5 Before us, the Ld.Representative for the assessee has sought to justify the treatment of the impugned income as ‘business income’ on the ground that the activity of leasing out properties was a part of the objects of the assessee company and also the fact that the rental income was a substantial part of the total earnings of the assessee company. In this context, reliance has been placed on the judgment of the Hon'ble Supreme Court in the case of Chennai Properties Investments Ltd.(supra).

3.6 We have also carefully examined the plea set-up by the assessee based on the judgment of the Hon'ble Supreme Court in the case of Chennai Properties & Investment Ltd.(supra). Before we proceed further, we may refer to the following discussion in the judgment, which sums up the features of the case before the Hon’ble Supreme Court:-

“ The Memorandum of Association of the appellant-company which is placed on record mentions main objects as well as incidental or ancillary objections in clause III,(A) and (B) respectively. The main object of the appellant company is to acquire and hold the properties known as “Chennai House” and “Firhavin Estate” both in Chennai and to let out those properties as well as make advances upon the security of lands and building or other properties or any interest therein. What we emphasize is that holding the aforesaid properties and earning income by letting out those properties is the main objective of the company. It may further be recorded that in the return that was filed, entire income which accrued and was assessed in the said return was from letting out of these properties. It is so recorded and accepted by the assessing officer himself in his order.”

Notably, the Hon'ble Supreme Court noted that the main object of the company was to acquire and hold the properties in question before it and letting out the same. The Hon'ble Supreme Court emphasized that acquiring and holding of the two specified properties, and letting out them was the main object of the company. In the present case, it is not the main object of the company to acquire and hold the impugned property and to let out the same. We may add here that it is only the ancillary or incidental object of the assessee to inter-alia, lease properties and not the main objective which was the feature in the case before the Hon'ble Supreme Court. Secondly, Hon'ble Supreme Court also noticed that the entire income which was assessed was earned from letting out of the properties, which ostensibly is not the case here. In the present case, the income from rental of the premises is not the only source of income of the assessee company. Therefore, in our considered opinion, the factual matrix in the instant case is different and thus cannot be governed by the ratio of the judgment of the Hon'ble Supreme Court in the case of Chennai Properties Investments Ltd.(supra). At this point, we may refer to the ratio approved by the Hon'ble Supreme Court to the effect that it is not the ownership of property but the nature of activity of the assessee and nature of operations in relation to the property, which would be decisive to conclude as to whether a particular income is to be treated as ‘income from business’ or ‘income from house property’. The factual matrix in the present case, which lies concluded by the concurrent finding of the lower authorities, is to the effect that assessee has failed to establish as to what services of a business centre were being provided so as to justify its claim for taxing the lease rental as ‘business income’. Therefore, in our view, the fact-situation in the present case, stands on a different footing than what was before the Hon'ble Supreme Court in the case of Chennai Properties Investments Ltd.(supra).

3.7 Further, the reliance placed on the judgment of the Hon'ble Supreme Court in the case of Rayala Corporation Private Limited(supra) also does not help the case of the assessee. The fact-situation in the case of Rayala Corporation Private Limited(supra) was that the assessee therein had only one business and that was of leasing its property and earning rent therefrom. This is not the situation in the case before us. No doubt, Hon'ble Supreme Court noted that letting out of shops and properties was not the main business of the assessee as per the Memorandum of Association, but significantly it noted that it was the only business and, therefore, it proceeded to apply the law laid down in the case of Chennai Properties Investments Ltd.(supra), and upheld assessment of rental income as ‘business income’. The fact-situation in the present case is quite different inasmuch as it is nobody’s case that leasing of property is the only business of the assessee-company or that it is the only activity undertaken by the assessee-company. At the time of hearing, it was a common point between the parties that assessee had earned interest income from lending activities, which has been declared as business income by the assessee-company as also accepted by the Tribunal in the past. Thus, the fact-situation in the instant case is qualitatively distinct and, therefore, the ratio of the Hon'ble Supreme Court in the case of Rayala Corporation Private Limited(supra) is not applicable.

3.8 Another aspect canvassed by the assessee was that in assessment year 2010-11, the income from lease has been assessed as ‘business income’. Under normal circumstances, the aforesaid plea would have been potent in support of the plea that in the instant year also such income be taxed as business income. However, a perusal of the assessment order dated 24/12/2012 passed under section 143(3) for assessment year 2010-11 does not reveal any discussion on this aspect. On the contrary, the discussion in the assessment order in the instant year is quite detailed and is, in-fact based on a factual verification of the nature of the lease arrangement carried out by the Assessing Officer and, therefore, the issue has to be decided in the light of the applicable factual and legal position and cannot be governed by default based on the assessment order for assessment year 2010-11, which is conspicuous by its silence on the relevant facts or the applicable legal position. Therefore, on this aspect also we do not find any merit in the claim of the assessee to treat the rental income as ‘business income’. In the final analysis, therefore, having regard to the nature of activity of the assessee and the nature of operations in relation to the impugned property, the rental income is liable to be assessed as ‘income from house property’ and not as ‘business income’. Thus, on this aspect, assessee fails.

4.1 In this context, Ld. Representative for the assessee pointed out that assessee has suffered long term capital loss on sale of Preference shares, which was sought to be carried forward. It has been explained that there was no determination by the Assessing Officer on this aspect and when the issue was taken up before the CIT(A), he has also denied the same on a misconception that the loss was on account of sale of equity shares. The Ld. Representative for the assessee pointed out that assessee company would be satisfied if the matter is restored back to the file of Assessing Officer in order to appreciate the correct position and determine the long term capital loss on sale of Preference shares.

4.2 The Ld. Departmental Representative has not opposed the plea of the assessee to set-aside the issue back to the file of Assessing Officer.

4.3 In the above background, we restore the issue back to the file of the Assessing Officer who shall revisit the issue on the basis of the submissions of the assessee and decide afresh in accordance with law. Needless to say, the Assessing Officer shall allow the assessee a reasonable opportunity of being heard and thereafter, pass an order, on the said limited aspect, in accordance with law.

4.3 Thus, appeal of the assessee is partly allowed as above.

1."Whether on the facts and in the circumstances of the case and in law, the Id.CIT(A) was justified in deleting the disallowance of Rs.78,99,196/- made under section 14A read with Rule 8D(2)(i) of I.T.Rules-1962 without appreciating the fact that assessee had neither proved the nexus that the investments have been made out of interest free funds available with it nor furnished the utilization of the borrowed funds." 2. "Without prejudice to the Ground No.1 of above, if the disallowance made under section 14A read with Rule 8D(2)(i) is not accepted, as worked out in the assessment order, the disallowance under Rule 8D(2)(ii) shall be taken at Rs.34,45,372/-." 3 "Whether on the facts and in the circumstances of the case and in law, the Id.CIT(A) was justified in holding that the disallowance out of administrative expenses be restricted to Rs.4,08,033/- as against Rs.25,45,561j- made under section 14A read with Rule 8D(2)(iii) without appreciating the fact that disallowance out of administrative expenses was made by the AO after critical analysis of the expenses claimed in respect of business operation of the assessee on which no finding is given by the Id.CIT(A)." 4. "Without prejudice to the Ground Nos.1 to 3 of above, if relief j part relief is given in respect of disallowance made under section 14A read with Rule 8D is given to the assessee, then as worked out in the assessment order, the disallowance under section 36(1)(iii) of the I.T.Act-1961 shall be taken at Rs.14,79,794/-. " 5. "Whether on the facts and in the circumstances of the case and in law, the Id.CIT(A) was justified in treating the interest earned on money lending operation of 2,48,56,400/- under the head "Profits and Gains from Business and Profession" instead of "Income from Other Sources" treated by the AO without appreciating the fact that the assessee is not an NBFC and hence giving loans and advances to other parties cannot be considered as business activity.”

6.1 In this context, the brief facts are that the during the year under consideration assessee was found to have earned exempt income of Rs.35,000/- and noticing that assessee had not disallowed any amount towards expenditure under section 14A of the Act, the Assessing Officer show-caused the assessee. The claim of the assessee was that no disallowance was warranted under section 14A of the Act. The Assessing Officer noted that the entire interest expenditure of Rs.78,99,196/- was relatable to the borrowed funds utilized for making investments, therefore, the same was disallowable under section. 14A of the Act . Alternatively, the Assessing Officer worked out the disallowance out of interest expenditure in terms of rule 8D(2)(ii) of the Rules of Rs.34,45,372/-. The disallowance with respect to the expenses incurred for earning exempt income was made at Rs.25,45,561/- by applying rule 8D(2)(iii) of the Rules. Accordingly, in the final assessment the Assessing Officer restricted the disallowance to Rs.91,38,871/- under section 14A of the Act instead of the amount of Rs.1,04,44,942/- computed in terms of rule 8D of the Rules because the total expenditure debited in P&L account was only Rs.91,38,871/-.

6.2 The CIT(A) did not agree with the Assessing Officer with regard to the disallowance out of interest expenditure, as according to him, the interest expenditure on borrowed funds could not be allocated towards equity shares and, therefore, he deleted the disallowance of interest made by the Assessing Officer. With regard to the disallowance out of expenses, the CIT(A) observed that disallowance worked out by the Assessing Officer under rules 8D(2)(iii) of the Rules at Rs.24,45,561/- could not exceed the expenses debited in the P&L account and accordingly he limited the disallowance toRs.4,08,033/-. In sum-and-substance, out of the total disallowance of Rs.91,38,871/-, the CIT(A) restricted the disallowance to the extent of Rs.4,08,033/- and deleted the balance disallowance. The aforesaid action of the CIT(A) has been challenged by the Revenue by way of Ground of appeal No.1 to 3.

6.3 In so far as the finding of the CIT(A) that the interest on borrowed funds were utilized towards investment in equity shares are concerned, the same has not been negated before us by the Revenue. Therefore, the same is hereby affirmed. Even otherwise, we find that even with respect to the quantum of disallowance out of other expenses is concerned, we find no infirmity in the order of the CIT(A), which is hereby affirmed. Thus, in so far as Grounds of appeal No.1 to 3 of the Grounds of appeal, the Revenue has failed to produce any evidence in support of its claim, therefore, the same are dismissed.

4.3.1 The issue is considered. The written submission on the issue finds place in Para 3 of this order. In my considered view it has to be accepted that the assessee had deep interest in its subsidiaries and therefore, it had advanced borrowed funds to those subsidiaries even at lesser interest rate, it cannot be said that was not done for business purposes as admittedly both the subsidiaries are engaged in construction activity which has a long gestation period and require huge capital. It is also noted that by the year end, the assessee company had repaid its entire borrowed fund; and advances given to its subsidiaries were by way of running accounts, depending upon the requirement and as such the inter-transfer of the fund from one subsidiary [BIDCO] to the other [BIRPL] due to business expediency could not be taken a ground for disallowance of interest u/s 36(1)(iii). It is also noteworthy that over-all interest income from loans & advances so made to its subsidiaries and other corporate bodies amounted to Rs 2,48,56,400/- whereas the interest expense has been relatively lesser [Rs 78,99,196/-] and therefore from that point of view [i.e. concept of netting of interest] also disallowance u/s 36(1)(iii) was not called for. Accordingly, the disallowance, if any, u/s 36(1)(iii) also cannot be upheld.”

7.1 In this context, the relevant facts are as follows. In para – 5 of his order, the Assessing Officer has noted that assessee had raised unsecured loan on which interest was paid @10% per annum, whereas assessee had advanced monies to Bajaj International Realty Pvt. Ltd. and Bajaj Infrastructure Development Co. Ltd., which were its subsidiary and step- down subsidiary respectively at a lower interest rate of 7.50%. On being asked to justify, the assessee contended that the advancing of monies to its subsidiaries was on grounds of commercial expediency and that the funds were advanced for utilization by the subsidiaries in their business of construction activity. The assessee company relied on the judgment of the Hon'ble Supreme Court in the case of S.A Builders vs. CIT, 288 ITR 1(SC) to justify the advancing of loan to the subsidiaries and submitted that no part of interest be disallowed. The Assessing Officer noted that there was no material furnished by the assessee to show that as to whether the amounts advanced by the assessee were actually utilized by the subsidiaries in their businesses. The Assessing Officer also held that assessee was not able to prove any commercial expediency for advancing funds to the subsidiaries at a rate lower than the rate of interest paid on borrowings. Therefore, he disallowed the interest expenditure of Rs.14,79,794/- under section 36(1)(iii) of the Act, being the differential of interest paid on borrowings in excess of the rate charged from the subsidiaries. The CIT(A) has since set-aside the action of the Assessing Officer.

7.2 Before us, the Ld. Departmental Representative has vehemently pointed out that CIT(A) has set-aside the action of the Assessing Officer without countering any of the objections raised by the Assessing Officer.

7.3 On the other hand, the Ld. Representative for the assessee has placed reliance on the discussion made by the CIT(A) in assailing the Grounds raised by the Revenue.

7.4 We have carefully considered the rival submissions. In the context of the present controversy, the case of the assessee before the CIT(A) was based on the judgment of the Hon'ble Supreme Court in the case of S.A.Builders (supra). The point canvassed by the assessee was that the monies advanced to the subsidiaries were based commercial expediency, inasmuch as, assessee had deep interest in the subsidiaries as amounts were utilized by the subsidiaries in their activity of the construction business. In principle, no fault can be found in the plea set-up by the assessee, so however, it was essential for the CIT(A) to take into consideration the specified observation of the Assessing Officer to the effect that the assessee had failed to prove the utilization of such funds by the subsidiaries. Even at the time of hearing before us, when this was put across to the parties, the Ld. Representative for the assessee submitted that the assessee would be in a position to demonstrate the utilization of such funds by the subsidiaries for their business purposes and for that purpose the matter may be set-aside to the file of the Assessing Officer. Therefore, under these circumstances, it would be in the fitness of things that the said aspect, being a factual aspect, is appropriately put to verification by the Assessing Officer. The assessee shall submit appropriate evidence in support of its plea that the funds have been utilized by the subsidiaries for the purposes of their business and the Assessing Officer shall consider the same and, thereafter pass an appropriate fresh order on this aspect as per law. Thus, for statistical purposes, the Grounds of appeal No.4 raised by the Revenue is considered as allowed.

8. In so far as Grounds appeal No.5 is concerned, the same relates to the taxing of interest earned on money lending operations of Rs.2,48,56,400/-. The Assessing Officer taxed the interest earned on loans and advances as ‘income from other sources’ instead of ‘business income’. The CIT(A) noted that it was a recurring issue and following the order of the Tribunal in assessee’s own case for assessment year 2008-09 and also his own decision in assessment year 2010-11, directed the Assessing Officer to tax the interest income of Rs.2,48,56,400/- earned on loans and advances under the head ‘income from business and profession.’.

8.1 At the time of hearing, the Ld. Representative for the assessee pointed out that the order of the CIT(A) for assessment year 2010-11 has also been affirmed by the Tribunal in vide order dated 29/09/2015, therefore, the order of the CIT(A) deserves to be affirmed.

8.2 The Ld. Departmental Representative has not disputed the aforesaid factual matrix. Considering the precedents in assessee’s own case, we find that similar income by way of interest on money lending operations has to be assessed as ‘business income’. Therefore, the order of the CIT(A) on this aspect is affirmed and accordingly Revenue fails on this issue.

8.3 Resultantly, appeal of the Revenue is partly allowed, as above.

Order pronounced in the open court on 26/04/2017