CIT vs. NALWA INVESTMENT LTD

IN THE HIGH COURT OF DELHI AT NEW DELHI ITA No.L345 of 2OLO + % COMMISSIONER OF INCOME TAX throuqh: VERSUS Reserved On: March 37, 2077. Pronounced On: Mav 77, 2077. . . Appellant Mr. Abhishek Maratha, Sr. Standing Counsel. M/s. NALWA INVESTMENTS LTD. . . .Respondent throuqh: Mr. Ajay Vohra with Ms. Kavita Jha, Advocates. CORAM :- HON',BLE MR. JUSTTCE A.K. StKRt HON',BLE MR. JUSTTCE M.L. MEHTA 1. Whether Reporters of Local newspapers may be allowed to see the Judgment? 2. To be referred to the Reporter or not? 3. Whether the Judgment should be reported in the Digest? A.K. StKRl. l. For orders see, ITA No.270 of 2010. ,e (M.L. MEHTA) JUDGE MAY 11, 2011 pmc ITA No. 1345 of 2010 Page 1 of 1 Digitally Signed By:AMULYA Certify that the digital file and physical file have been compared and the digital data is as per the physical file and no page is missing. Signature Not Verified

REPORTABLE .. \ /il I * IN THE HIGH COURT OF DELHI AT NEW DELHI ( II I ITA No.27O of 2O1O with ITA No.L345 of 2OLO Reserved On: March 37,2077. % Pronounced On: MaY 77, 2077. 1) ITA No,27O of 2OLO COMMISSIONER OF INCOME TAX . . . Appellant throuoh : Mr. Anupam TriPathi, Sr. Standing Counsel. VERSUS M/s. NALWA INVESTMENTS LTD. . .Respondent throuoh: Mr. Ajay Vohra with Ms. Kavita Jha, Advocates. \ 2) ITA No.L345 of 2OlO COMMISSIONER OF INCOME TAX ' . . Appellant throuqh : Mr. Abhishek Maratha, Sr. Standing Counsel. VERSUS M/s. NALWA INVESTMENTS LTD. . . 'Respondent throuoh: Mr. Ajay Vohra with Ms. Kavita Jha, Advocates. CORAM :- HON',BLE MR. JUSTICE A,K,',SlKRl HON',BLE MR. JUSTICE M.L. MEHTA L. Whether Reporters of Local newspapers may be allowed to see the Judgment? 2. To be referred to the Reporter or not? ITA No.270 of 2010 & ITA No.1345 of 2010 Page 1 of 15

AO, however, found that in previous years, it was treated asp income from other sources, instead of business income. He, thus, accorded the same treatment in this year as well holding it to be income from other sources under Section 56 of the Act. At the same time, while computing the income of the assessee, the AO allowed business loss.es of the earlier years to be set.off against this dividend income as well. 4.' ' On perusal of the assessment record, the Commissioner of lncome Tax noticed that the AO had wrongly allowed the set off of the brought forward losses against this income, which was not the income from business but the income from other sources. He observed that the provisions for carry forward and set off of business are provided under Section 72(l) of the Act which provides that losses of business and profession can be carried forward and set off against the profit from business and profession in the subsequent year and cannot be set off against the subsequent incomes falling under the head 'lncome from . Other Sources'. He, thus, was of the opinion that allowing the set off of brought forward business loss to the extent of <44,5!,317l- had resulted in the assessment which was erroneous and prejudicial to the interest of Revenue. Show cause notice ,was given to the assessee, who filed its reply contending that the assessee was engaged in the business of investment and was holding the shares of other companies of ITA No.270 of 2010 & ITA No.1345 of 2010 Page 4 of 16

o the same group, - Inv'estment was meant for control and management of investee companies. The shar", .onrti,rt"d the business asset of the company and dividend earned from such investment was in nature of 'business income' and this income was eligible for set off against the brought forward business losses. After considering this response, the order was passed restoring the matter back to the file of the AO for the following reasons: "7. I have considered the contention of the Assessee and also gone through the various judgments cited by the assessee. Ratio of the judgments is applicable to the cases where examination of the facts established that purchase of shares was with intention to keep them as stock-in-trade. In the cases where intention at the time of purchase of share was to make long-term investments, the ratio would not apply. ln the case of Assessee Company, the Assessing Officer has failed to examine this crucial aspect as to what the nature of investments on which dividend was earned. As discussed in the preceding para, prima- facie, the investments were held as long-term investment and no part of the investment was considered stock-in-trade by the Assessee. Therefore, the Assessing Officer had failed to conduct the required enquiry and also had failed '1n app-lication of the provisions of Section 72 (1) of the l.T. Act' This rendered order passed. by the AO erroneous inasmuch as prejudicial to the interest of Revenue to that extent. In the case of M/s. Gee Vee Enterprises 99 ITR 375, the jurisdictional High Court has categorically held that failure of the Assessing Officer to conduct the required enquiry and accepting the statement of the assessee without due verification renders the order erroneous inasmuch as prejudicial to the interest of revenue. ln a more recent judgment rendered by the Allahabad High Court in the case of Jagdish Kumar Gulati Vs. CIT 269 ITR 7!, the Hon'ble Court considering various judicial pronouncements passed earlier viz' Duggal & Co. 220 ITR 456 (Delhi) K.A. Ramaswami crr6ttiat 220 lrR 657 (Mad.) etc. held that absence of proper enquiry in a matter renders an order erroneous ITA No.270 of 2010 & ITA No.1345 of 2010 Page 5 of 16

I o referred to supra though the decision is in relation to the lncome-tax Act, L922 would apply in all force in relation to the Income-tax Act, 196L. A principle laid down by the Hon'ble Supreme Court is to be followed and if this principle is applied to the facts of the present case, it is noticed that the view as taken by the AO in the scrutiny assessment is a plausible view' Further, it cannot be said that the AO has not applied his mind. This being so, we are of the view that the order of the CIT is bad in law insofar as the view taken by the AO.is a plausible view' ln the circumstances, the order of the CIT as passed u/s 263 on 07.O3.2OOB in the case of this assessee for AY 2OO3-04 is quashed'" 6. The neat submission of the learned counsels for the Revenue is that the entire approach of the Tribunal was erroneous inasmuch as it discussed the matter from a wrong angle and thus,' arrived at wrong conclusion. In this behalf, it was submitted that the AO had himself accepted the dividend income as income from other sources. However, without discussing as to whether it could assume the character of business income of the assessee, the AO allowed the set ofT of the carry forward business losses of previous year against this dividend income. No exercise was done by the Ao as to whether such an income could be given the character of business income and therefore, the CIT was right in restoring the matter back to the AO. 7, Mr. Ajay Vohra, learned counsel appearing for the aSseSSee, on the other hand, made a fervent plea that no dou6t the income was to be assessed under the head 'lhcome from other sources" but at the same time for the purposes of set off, it ITA No.270 of 2010 & ITA No.1345 of 2010 Page 7 of 15

e was permissible for the authorities to see the inherent character of the said income, which was business income' He referred to the following judgments in support of his arguments: (i) Commissioner of Income Tax Vs' Chugandas &. Co. 55 ITR 17 (SC); (ii) Commissioner of lncome Tax Vs, Cocanada ' Radhaswami Bank Ltd. 57 ITR 306 (SC1,' (iii) Commissioner of lncome Tax Vs' Excellent Commerciat Enterprises'and Investment Ltd. 2A2lrR 423 (iv) Commissioner of Income Tax Vs. Amalgamations (P) Limited 226ITR 188 (SC) Mr. Vohra also invoked the. principles of consistency and referred to certain judgments in support of his submission. We have considered the rival submission. lt is an admitted fact that the assessee is a non-banking finance company engaged in the business of investment in shares, securities, other debt instruments and financing loans and providing guarantees. The income of the aSSeSSee comprises of reiceipts from interest on loans and securities, professional income as well as dividend income and entire income was shown under the head 'lncome from Business and Profession', by the assessee. The CIT . observed that the balance sheet of the assessee company shows that all the investments in shares of bodies corporate ITA No.270 of 2010 & ITA No.1345 of 2010 Page 8 of 15 8.

e was grouped as long-term investment and no part of investment had been considered stock-in-trade and was not grouped as part of current assets. section 14 of the Act stipulates different heads under which income is to be assessed. Dividend income is assessable under the head 'lncome from other Sources'. This is the mandate of Section 56 (2) of the Act which reads as under: Section 56 (2): In particular, and without prejudice to the generality of the provisions of sub-section (l-), the following incomes shall be chargeable to income-tax under the head "lncome from other sources", namely :- (i) Dividends; (ia) Income referred to in sub-clause (viii) of clause (24) ' of section 2; (ib) Income referred to in sub-clause (ix) of clause Qa) ot section 2; (ic) Income referred to in sub-clause (x) of clause (24) of section 2, if such income is not chargeable to income-tax under the head "Profits and gains of business or profession"; (id) Income by way of interest on securities, if the income'is not ihargeable to income-tax under the head "Profits and gains of business or profession"; (ii) lncome from machinery, plant or furniture belonging to the assessee and let on hire, if the income is not chargeable to income-tax under the head "Profits and gains of business or Profession"; (iii) Where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the nuitoings is inseparable from the letting of the siid machinery, plant or furniture, the income from such letting, if it is not chargeable to income-tax under . the head "Profits and gains of business or profession"; (iv) Income referred to in sub-clause (xi) of clause (24]. of section 2, if such income is not chargeable to income-tax under the head "Profits and gains of business or profession" or under the head "Salaries". Page 9 of 15 ITA No.270 of 2010 & ITA No.1345 of 2010

@ a 9. . This position is not disputed. However, the argument of Mr. Vohra was that even if under the scheme of the Act, the dividend in"come is to be charged under the head 'lncome from other sources', the character of that income could still be looked into and it could be treated as business income for the purpose of set off. Mr. Vohra is right to this extent' 10. ln chugandas & co. (supra), the supreme court held that the heads of income were intended merely to indicate the claSSeS of income. These heads do not'exhaustively delimit Sources from which income arises. Business income is broken up under different heads only for the purpose of computation of the total income. By that breaking up, the income does not cease to be the income of the business, the different heads of income being only the classification prescribed by the lncome- tax Act for computation. This principle was repeated by the supreme .court in cocanada Radhaswami Bank Ltd. (supra). ln that case, the facts situation was somewhat similar. The assessee had earned Some interest income on the securities and the brought forward loss was sought to be set off against the income even computed under the head 'interest on securities'. The Court opined that the assessee was entitled to set off the loss brought forward against the entire income not only the income computed under the head 'business' but also the interest and securities in succeeding years. Following ITA No.270 of 2010 & ITA No.1345 of 2010 Page 10 of 15 ; J../-v

e observations in the said judgment give the rationale for ' permitting this course of action: "The scheme of the Income-tax Act is that income-tax is one tax. Section 6 of the Income-tax Act, 1922, classifies the taxable income under different heads for the purpose of computation of the net income of the assessee. 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 income from business if the securities are paft of the trading assets. Whether a particular income is part of the income from a business ialls to be decided not on the basis of the provisions of Section 6 but on commercial principles." 11. Thus, even if the interest on Securities is separately classified, view was taken that the said income would not cease to be part of income from business if the securities are part of trading assets. Gujarat High court in the case of Additional Commissioner of lncome Tax Vs. Laxmi Agents P. Ltd', t 25 ITR 227 followed the aforesaid principles and summed up the legal position in the following manner: "ln is thus clear that even though an item of income falls under a specific head, in spite of the fact that that item is earned for the purpose of business, for purposes other than the computation of income, the commercial character of that income can be taken into account' In the case before us, the commercial character of that income becomes helpftil to us in determining whether the borrowing on which the interest is paid was for the purposes of business. We therefore, conclude on the second question that the Tribunal was right in holding that though the income from dividend has to be assessed under a separate head, payment of interest by the assessee on amounts borrowed for purposes of investments must be allowed as business expenditure, and not as expenditure incurred for earning dividends. This, therefore, settles question No. 2." ITA No.270 of 2010 & ITA No.1345 of ZO1O Page 11 of 16

,a 12. lt would, therefore, be immaterial as to under what head specified under Section L4 of the Act that the income is computed. Even when it is not computed under the head 'income from profession and business', the ' commercial character of that income could still be taken into account. lf it is found that the particular income was derived from the business of the assessee, for the purposes of set off, it can be taken as business . income. This court in Excellent commercial Enterprises and lnvestment Ltd. (supra, has concurred with the aforesaid view. ln that case, the Court ruled as under: "Applying the above settled principles, the Income"tax Appellate Tribunal had affirmed a finding of the Income- tai Commissioner (Appeals) that the Company in the interest of its business and to earn additional profits arising from such stock-in-trade had invested its money which was earning dividends on shares held in stock-in- trade. This.was thus and rightly so treated as income from business and not income from other sources. No distinctive features have been placed before us which could persuade the Court to take a view different than the one which has been taken in the above orders. Even otherwise, it would be a finding of fact based and referable to the records which were produced before the lncome-tax Tribunal. Once it is held that the shares held by the assessed as a stock in trade and the income whether directly or incidentally for holding of such shares as stock-in-trade, would be business income then it cannot be said that the dividend income would fall as an income from other sources as contemplated under section 56 of the Act and that set off of under section 72 of the Act in subsequent year would not be permissible............" ITA No.270 of 2010 & ITA No.1345 of 2010 Page 12 of 15

(y o 13. So far so good, But the relevant question, which is the core one and led clT to pass the order under section 263, of the Act is as to whether the Ao applied his mind to the issue as to whether the dividend income could. be given the character of business income for the purpose of set off. we have already taken note of the order of the AO. He recorded that even a dividend income in question was shown as business income by the assessee. The AO did not agree with the same, as'in the . previous years this income was shown as dividend income. After saying so, the Ao straightaway allowed the set off of this income against the carry forward losses. The assessment order is totally silent and there is no discussion as to how this . dividend income was to be given the character of business income for the purpose of set off under Section 72 of the Act. lt was for this reason that the clT held that the Ao had not conducted any inquiry. The Tribunal, instead of appreciating these facts, went into the merits of the issue which the AO is supposed to deal with. lt addressed the question as to whether dividend income co.uld be given the character of business income and then observed that the view taken by the AO was plausible without appreciating that the AO had not even taken any view on this issue, it could not be said that the AO had not , applied his mind. The entire reading of the assessment order clearly demonstrates that no such view is taken at all by the AO ITA No.270 of 2010 & ITA No.1345 of 2010 Page 13 of 15

frt\ L4. on this aspect. lt is intriguing, in the circumstances, as to from where the Tribunal came to the conclusion that the view taken by the AO was plausible or that the AO had applied his mind. The Tribunal failed to appreciate the limited scope of appeal before it, viz., the validity of the order passed by the clT exercising his revisionary power under Section 263 of the Act. Order of the CIT clearly revealed that he had applied his mind on the relevant aspect and had rightly noticed that the character of the said income was not investigated by the AO. This is highlighted by the clT in Para 7 of the order passed by him, which is already extracted above. . Therein, the clT recorded that the Assessing Officer had failed to conduct the required enquiry and also had failed in application of the provisions of Section 72 (I) of the l.T. Act. This rendered order passed by the AO erroneous and prejudicial to the interest of Revenue to that extent. The Tribunal was, thus, supposed to adjudge the validity of such an order and not to go beyond when the challenge before it was limited to the said order passed by CIT in exercising the powers under Section 263 of the Act. Mr. Ajay Vohra, learned counsel appearing for the assessee argued that when the view taken by the AO was plausible one, it was not proper for the clT in exercise of his revisionary jurisdiction to interfere with that order and referred to the Page 14 of 15 15, ITA No.270 of 2010 & ITA No.1345 of 20IQ