Bombay High Court
Central Province Manganese Ore ... vs Commissioner Of ... on 8 March, 2017
Bench: V.A. Naik
ITRs 4TO6/02,7/95&18/98 1 Common Judgment
IN THE HIGH COURT OF JUDICATURE AT BOMBAY,
NAGPUR BENCH, NAGPUR.
INCOME TAX REFERENCE No. 4/2002
WITH
INCOME TAX REFERENCE No. 5/2002
WITH
INCOME TAX REFERENCE No. 6/2002
WITH
INCOME TAX REFERENCE No. 7/1995
WITH
INCOME TAX REFERENCE No. 18/1998
M/s Central Provinces Manganese Ore
Company Limited, Nagpur. APPLICANT
.....VERSUS.....
The Commissioner of Income-Tax,
(Vidarbha), Nagpur. RESPONDENT
Shri K.P. Dewani, counsel for the Assessee.
Shri Anand Parchure, counsel for the Department.
CORAM :SMT.VASANTI A NAIK AND
V.M. DESHPANDE, JJ.
DATE : 8 TH MARCH, 2017.
ORAL JUDGMENT (PER : SMT.VASANTI A NAIK, J.)
Whether on the facts and in the circumstances of the case, the
income of the assessee was assessable under the head 'business' rather
than income from 'other sources' is a question that is referred to this
Court for a decision in all the reference applications. The other two
questions that are referred are consequential and our answers to the same
would depend upon our answer to the aforesaid question that is referred
for a decision. In reference No.4 of 2001, an additional question 'whether
on the facts and in the circumstances of the case no income from interest
on the loan to Shri Ramprasad could be assessed during the assessment
year even on accrual basis, is also framed. Since the parties to all the
ITRs 4TO6/02,7/95&18/98 2 Common Judgment
reference applications are M/s Central Provinces Manganese Ore
Company Limited, Nagpur and the Income Tax Department, the
reference applications are heard together and are decided by this
common judgment.
2. Few facts giving rise to the questions that are referred for a
decision, are stated thus:-
The applicant-Assessee is a company registered in Great
Britain. The assessee has a branch in Nagpur. The assessee-Company
was dealing in the extraction and sale of manganese ore. The assessee
had under its control about 21 mines and in the year 1962, the
Government of India took over most of them. In 1973, steps were
initiated by the Government of India to take over the remaining mines as
also 49% share of the assessee in MOIL. However, the mines as well as
the share was finally taken over by the Government in the year 1977. As
soon as the assessee-Company became aware about the decision of the
Government of India to take over the mines in the year 1973, the assessee
decided to venture into another business. The assessee, therefore,
amended its Memorandum and Articles of Association to cover the
business of banking and money lending. This was done by the assessee-
Company by passing a special resolution on 08.06.1973. In furtherance
of the said object, as per the amended Memorandum and Articles of
ITRs 4TO6/02,7/95&18/98 3 Common Judgment
Association, the assessee advanced loan to about eight reputed companies
between 1973 to 1975. The loan was advanced on execution of pro-notes
and by mortgage of immovable property. On 09.02.1978, the Reserve
Bank of India informed the assessee that it was permitted to continue its
branch establishment in India only up to 30.06.1978 and that was only
for the purpose of winding up of the affairs of the assessee-Company and
the settlement of its pending matters. The Reserve Bank of India
permitted the assessee to confine its activities to the realization of its
assets and the permission for retention was extended from year to year up
to the relevant years, i.e. 1984-85, 1988-89, 1989-90, 1990-91, 1991-92
and 1992-93 with which we are concerned. The last installment of
recovery from one of the debtors, i.e. Ritz Hotel was fixed by the High
Court in July-1990. In respect of the loan that was recoverable from
MOIL, efforts were continued by the assessee even during the last
relevant assessment years. The term deposits from the bank had to be
frequently renewed or encashed according to the exigencies of business.
It was the assessee's case that the business activities continued during the
relevant assessment years and in view of the year to year extension
granted by the Reserve Bank of India in respect of the permission for
retention, the assessee had to maintain its branch and establishment for
the aforesaid business activity and was, therefore, required to incur
establishment expenses. The assessing officer disallowed the expenses in
full. The Commissioner of Income Tax (Appeals) allowed the expenses of
ITRs 4TO6/02,7/95&18/98 4 Common Judgment
audit and legal charges in full but, disallowed remaining expenses to the
extent of 20%. In some of the earlier years, the assessee had incurred
losses in the business and the department, after determining the loss,
refused to allow its set off. The income tax authorities held that the
income derived by the assessee from interest and the amount that was
recovered by the assessee would not fall under the head 'business' but,
would fall under the head income from 'other sources'. The Tribunal
rejected the claim of the assessee in the appeal filed by the assessee
before the Tribunal and upheld the finding of the assessing officer
disallowing the set off and holding that the income of the assessee was
not business income but, was income from other sources. In the aforesaid
factual background, the following questions were referred to this Court in
these reference applications for a decision:-
I. Whether on the facts and in the circumstances of the case, the
income of the assessee was assessable under the head
'business' rather than 'other sources'?
II. Whether on the facts and in the circumstances of the case,
there was any justification in law for the ad-hoc disallowance
of 20% of the establishment expenses?
III. Whether on the facts and in the circumstances of the case, the
set off of losses of earlier years could be allowed as a
deduction during this year?
ITRs 4TO6/02,7/95&18/98 5 Common Judgment
In reference No.4 of 2002, the following question is also
framed:-
IV. Whether on the facts and in the circumstances of the case, no
income from interest on the loan to Shri Ramprasad could be
assessed during the relevant year even on accrual basis?
3. The question that needs to be decided by us at the outset is
the first question that is referred to us and if the same is answered in the
affirmative and in favour of the assessee, the second and the third
question would necessarily be required to be decided in favour of the
assessee.
4. Shri Dewani, the learned counsel for the assessee, submitted
that the authorities harped upon the absence of license from the Reserve
Bank of India in respect of the business of money lending and financing
with the assessee to record a finding that the assessee could not have
advanced the loan to the eight parties to whom the advances were said to
have been made. It is stated that it could be gathered from the material
on record that in the year 1978, the Reserve Bank of India had permitted
the assessee to continue its branch establishment till 30.06.1978 for the
purpose of winding up of the affairs and there was permission by the
Reserve Bank of India to carry on the activities in respect of retention
from year to year. It is submitted that it is not disputed that loan was
ITRs 4TO6/02,7/95&18/98 6 Common Judgment
advanced to about eight parties by the assessee during the years 1973 to
1975 and it is also established from the material on record that in respect
of some companies, the amount was recoverable in the late 1980's and for
one of the companies, i.e. Ritz Hotel in the year 1990 in view of the
orders of the High Court. It is submitted that though the advances were
made by the assessee between 1973 to 1975, the recovery of the said
amount continued till the year 1990 and even thereafter. It is submitted
that while the recoveries were being made, the assessee had to maintain
its establishment at Nagpur and for maintaining the branch
establishment, the assessee had to incur establishment expenses. It is
submitted that the Tribunal has erroneously held that as the assessee did
not possess the license for banking and money lending it could not have
carried on the said business and the income from the business carried on
by the assessee would not be business income. It is submitted that in
almost similar set of facts, the Gujarat High Court has held that the
income derived by the assessee-Company in that case from deposits and
loans would be income from business and not income from other sources.
It is submitted that in the case before the Gujarat High Court, in the
assessment year in question, interest income was derived from loans
advanced to five parties and the Gujarat High Court held that the activity
of the assessee of advancing moneys to various parties was a sort of an
organized activity undertaken by the assessee-Company and, therefore,
the income from that activity was liable to be taxed as profits and gains of
ITRs 4TO6/02,7/95&18/98 7 Common Judgment
business and not as income from other sources. It is stated that the facts
involved in the present case and the case before the Gujarat High Court
are not only similar but are almost identical. It is stated that the case of
the assessee in the present case is on a stronger footing as the loan is
advanced by the assessee in this case to almost eight parties while
carrying on its business of financing.
5. It is then submitted on behalf of the assessee that the heads of
income are mutually exclusive and the time of the receipt does not decide
the question under which particular head such receipt should be assessed.
The learned counsel relied on the judgment of the Hon'ble Supreme Court
in the case of Nalinikant Ambalal Mody Versus S.A.L. Narayana Row,
reported in 1966 (61) ITR 0428 to canvass that the heads of income
must be decided not by considering the assessee's income but, by applying
the common notions of practical men. It is submitted that the assessee in
the case before the Hon'ble Supreme Court was a practicing advocate in
the High Court and after he was elevated to the Bench of the Court, some
outstanding fees were received by him and in that background, the
Hon'ble Supreme Court held that the receipts could not have been
brought under the residuary head of income from other sources and
should have been considered under the head 'profits and gains of business
or vocation'. It is submitted that by applying the said test, it could be
deduced that though the loan was advanced by the assessee to the parties
ITRs 4TO6/02,7/95&18/98 8 Common Judgment
in the years that were previous to the relevant assessment years, since the
loan was realized by the assessee during the relevant assessment years,
the income from the receipts so made and the interest on the same should
be considered as business income and not the income from other sources.
It is lastly submitted on behalf of the assessee by relying on the judgment
of the Hon'ble Supreme Court in the case of The Commissioner of Income
Tax Versus Piara Singh and the judgment in the case of Dr.T.A. Quereshi
Versus The Commissioner of Income Tax, reported in 1980 (124) ITR 40
and 2006(157) Taxman 514 that assuming that the petitioner did not
possess a valid license from the Reserve Bank of India for the purpose of
banking and money lending but, since the assessee was no doubt carrying
on a business in banking and money lending, the loss suffered by the
assessee in the said business or the expenses incurred by the assessee
for the establishment of such business were liable to be deducted.
It is submitted that in the aforesaid cases, the assessees were involved
in the business of smuggling and contraband goods and still the
Hon'ble Supreme Court held that the confiscation of currency notes
in the business of smuggling and the seizure of the stock of heroin
in the business of contraband goods was allowable as business
expenditure.
6. As regards the additional question referred to in the case of
Ramprasad, the learned counsel relied on the judgment of the Bombay
ITRs 4TO6/02,7/95&18/98 9 Common Judgment
High Court, dated 11.06.2014 in Income Tax Appeal No.221 of 2012 to
canvass that the accrued income on non-performing assets could not have
been added. It is submitted that in the said case before the High court,
the Tribunal had misdirected itself in law in making the addition in respect
of the accrued income of the non-performing asset and the High Court
held that since the income could not have been realized by the assessee,
the addition was liable to be deleted. It is submitted that the case in hand
is on a better footing than the case before the Bombay High Court. It is
submitted that it was therefore necessary for the assessing officer not to
include the income on accrual basis but the claim of the assessee was
wrongfully rejected.
7. Shri Parchure, the learned counsel for the respondent-
department, supported the order of the Income Tax Appellate Tribunal.
The learned counsel relied on paragraphs 11 and 12 of the order of the
Income Tax Appellate Tribunal in the appeal arising out of the matter
pertaining to the assessment years 1980-81 to 1983-84 to canvass that a
finding of fact is recorded by the Tribunal that the assessee has not
discharged its onus that it was actually carrying on the business
activity during the period under consideration. It is submitted that the
Tribunal has rightly held that it was necessary for the assessee to prove
not only that it had obtained prior permission to carry on business but,
also a special license to carry on the banking business. It is submitted
ITRs 4TO6/02,7/95&18/98 10 Common Judgment
that it is observed by the Tribunal that the assessee was maintaining a
dormant existence and continued its existence only for the purpose of
winding up. It is submitted that the authorities have rightly recorded a
finding of fact that the income derived by the assessee is income from
other sources and not income from business. The learned counsel relied
on the judgment of the Bombay High Court, reported in 1991(57)
Taxman 47 (Godavari Sugar Mills Ltd. Versus Commissioner of Income
Tax).
8. It appears on a perusal of the order of the Income Tax
Appellate Tribunal and on applying the tests laid down by the
Hon'ble Supreme Court and the Gujarat High Court in the judgments
referred to hereinabove that it would be necessary to answer the
reference in favour of the assessee and against the department. We find
on a reading of the judgment of the Gujarat High Court in the case of
Motilal Hirabhai (Supra) that in that case also, like the assessee in this
case, initially, the assessee was running a textile mill and after the
textile mills were closed down in view of the government decision, the
assessee-Company before the Gujarat High Court decided to do the
business of banking and financing. While doing the said business, the
assessee before the Gujarat High Court had not secured any specific
license for the banking business and the assessee had advanced loans to
about five parties. In the said case, the Gujarat High Court, after
ITRs 4TO6/02,7/95&18/98 11 Common Judgment
considering the material on record, came to a conclusion that the
activity undertaken by the assessee, of advancing moneys to various
parties was a sort of organized activity undertaken by the assessee-
Company and, therefore, the income from that activity was liable to be
taxed as profits and gains of business and not the income from other
sources. In the judgment of the Gujarat High Court, the High Court
observed that it is well established that it is for the revenue to establish
that the income earned by an assessee is within a particular taxing
provision and that it is on that account liable to be taxed as such.
The facts involved in the case before the Gujarat High Court and the
case in hand are almost identical. In the present case also, like the case in
the Gujarat High Court, the assessee was carrying on some other business,
i.e. the business in mining and after the Government of India took initial
steps to take over the mines in the year 1973, the assessee thought of
venturing in the business of banking and money lending as a fresh
avenue. Advances were made by the assessee-Company to about eight
parties and it is not in dispute that the loan advanced to Ritz Hotel was
recoverable in July-1990 as per the order of the High Court and the MOIL
had not cleared its dues even in the year 1990-91 and efforts were made
to recover the same. In the instant case also, like in the case of the
assessee before the Gujarat High Court, the assessee amended its
Memorandum and Articles of Association and included the business of
banking and money lending in its objects. It is not disputed that the
ITRs 4TO6/02,7/95&18/98 12 Common Judgment
assessee had advanced loan to about eight parties in the 1970s, as
could be gathered from the facts incorporated in the order of the
Income Tax Appellate Tribunal in the appeal pertaining to the
assessment year 1984-85. Since the loans were not recovered and the
business of banking and money lending was being wound up, the
assessee had to continue with its establishment at Nagpur and also had
to incur expenses for the business establishment. The facts involved
in the case before the Gujarat High Court and the present case are
similar and it would be necessary to hold in the circumstances of the
case that the activity of advancing money to about eight parties by
the assessee was a sort of an organized activity based on the
object mentioned in the Memorandum and Articles of Association
of the company and the income that was derived by the assessee was
liable to be taxed as income from business and not income from other
sources.
9. The observation of the Tribunal that since during the relevant
assessment years, the loan was not advanced, the income of the assessee
should be considered as income from other sources and not income from
business is not well founded. It is held by the Hon'ble Supreme Court in
the case of Nalinikant Ambalal Mody (Supra) that the amount received by
the assessee therein, who was a practicing lawyer in the High Court, after
he was elevated as a Hon'ble Judge to the High Court would represent the
ITRs 4TO6/02,7/95&18/98 13 Common Judgment
outstanding fees and the same was liable to be taxed under the head
'business income' and not 'income from other sources'. It is held by the
Hon'ble Supreme Court that the moneys received by the Hon'ble Judge in
that case after his elevation represented the outstanding dues of
professional work and as they were the fruits of the professional activity
of the assessee they could be charged to tax only under the head 'business
income'. By applying the test laid down by the Hon'ble Supreme Court in
the case of Nalinikant Ambalal Mody (Supra), it could be safely said that
the moneys received by the assessee from the eight parties during the
relevant assessment years would also be the fruits of the activity of
banking and money lending that was admittedly carried on by the
assessee during the year 1973 to 1975. The learned counsel for the
assessee has rightly relied on the judgments of the Hon'ble Supreme Court
in the case of Piara Singh (Supra) and Dr. T.A. Quereshi (Supra) to
substantiate his submission that even assuming that the assessee did not
possess a license in banking and money lending, nonetheless the expenses
incurred by the assessee for the business establishment in the business of
banking and money lending were liable to be deducted. In the case of
Piara Singh (Supra), currency notes were confiscated from the assessee,
who was carrying on the business of smuggling and it was held that the
confiscation of the currency notes is a loss occasioned in pursuing the
business and the said loss that springs directly from the carrying on of the
business was allowable as business loss. If the loss in the business of
ITRs 4TO6/02,7/95&18/98 14 Common Judgment
smuggling is allowable as business loss, it is difficult to digest that the
expenses incurred by the assessee-Company for the business
establishment for banking and money lending without a license, should
not be deducted. In the case of Dr.T.A. Quereshi (Supra), the assessee
was dealing in contraband goods and was engaged in the transport and
sale of heroin and it was held that the heroin seized from the assessee's
stock in trade could be allowable as business loss. The incidental
questions that are referred to this Court for a decision are answered by
the judgments of the Hon'ble Supreme Court in the case of Piara Singh
and Dr.T.A. Quereshi in favour of the assessee. It is also necessary to refer
to the judgment in the case of Commissioner of Income Tax Versus
Paramount Premises (Private) Limited, reported in 1991 (190) ITR 259,
relied on by the counsel for the assessee to hold that the interest earned
on deposits for short period with banks or given as loans would be
receipts arising out of the business activity and, hence, the same would be
assessable as business income. While deciding the appeals, the Income
Tax Appellate Tribunal did not consider the facts involved in this case in
detail and also the law that could have applied to the same before
upholding the finding of the Commissioner of Income Tax (Appeals) that
the entire expenses incurred by the assessee for maintaining its
establishment at Nagpur for the purpose of its business activity could not
have been deducted. Though some findings are recorded in paragraphs
11 and 12 of the order of the Tribunal on which reliance is placed by the
ITRs 4TO6/02,7/95&18/98 15 Common Judgment
counsel for the department, we find that the factual aspects involved in
the case are not considered in either the said paragraphs or in the other
part of the order. It is also conspicuous to note that although the
Tribunal had dismissed the appeals of the assessee after holding that the
income of the assessee was income from other sources and not income
from business and the expenses incurred for the business of the assessee
cannot be deducted, the Tribunal has in its order, dated 30.12.1991 on an
application for reference filed by the department under Section 256(1) of
the Act held that once the assessee was permitted to carry on the business
even for a limited period and the after effect of that business continued
for some time, the assessee could not be denied the expenses incurred for
the purpose of settling its tax matters and winding up as they are nothing
but continuance of the business activity. Surprisingly, the Tribunal also
records in the order made on the application under Section 256(1) of the
Act, that once the finding is given that the assessee is trying to carry on its
activity only with a view to recover its debts, then there is no other way
but to allow the bad debts and the trading losses. It is surprising that the
said observations go contrary to the observations made by the Tribunal in
all its earlier orders and assist the case of the assessee. It is also
surprising that though Chapter IV of the Income Tax Act deals with the
computation of only business income and also refers to certain deductions
to be made on actual payments under Section 43-B of the Act, the
assessing officer while passing the order for the relevant assessment years
ITRs 4TO6/02,7/95&18/98 16 Common Judgment
1992-93, after holding that the income of the assessee was the income
from other sources, applied Section 43-B that relates to the business
income and disallowed the claim of gratuity payable, on the ground that
actual payment of gratuity was not made as per the provisions of Section
43-B of the Act.
10. As regards the fourth question pertaining to the assessment of
income from interest on the loan advanced to Ramprasad, it would be
necessary to note that the assessee had advanced a sum of Rs.2,00,000/-
to Shri Ramprasad in the year 1975 on a pro-note with interest of 12%
per annum. Ramprasad paid the interest to the assessee only till
31.03.1978 and thereafter did not pay a single pie towards interest or
principal. As nothing could be recovered from the party, the loan was
ultimately written off in the year 1984 by the assessee. The assessee
claimed that since no real income was earned by the assessee, nothing
could be assessed in respect of the same. In the aforesaid set of facts, we
find that the Income Tax Appellate Tribunal was not justified in adding
accrued interest on the loan advanced to Shri Ramprasad, which was
ultimately written off in the year 1984. An addition in respect of the
accrued income of the non-performing asset could not have been made.
Since the income could not have been realized by the assessee, the
addition was liable to be deleted.
ITRs 4TO6/02,7/95&18/98 17 Common Judgment
11. Hence, we hereby hold that in the facts and circumstances of
the case, the income of the assessee was assessable under the head
'business' and not income from 'other sources'. Having answered the
aforesaid question in favour of the assessee, we hold that in the
circumstances of the case, there was no justification in law for the
disallowance of 20% of the establishment expenses. We further hold that
the set off of losses of earlier years could be allowed as deduction during
the relevant assessment year. We also hold that in the circumstances of
the case, no income from interest on the loan to Shri Ramprasad could be
assessed during the relevant assessment year on accrual basis when the
loan was written off in the year 1984.
Having answered the reference as aforesaid, the reference
applications stand disposed of with no order as to costs.
\
JUDGE JUDGE
APTE
