Delhi High Court

Asstt. Cit vs Manick Chand Damani on 18 July, 2001

Equivalent citations: (2001) 72 TTJ Del 675

ORDER

R.C. Sharma, A.M.

This appeal by the revenue is directed against the order of the Commissioner (Appeals), dated 20-7-1995, for the assessment year 1992-93. Following are the three grounds of appeal:

"1. For that on the facts and in the circumstances of the case of the learned Commissioner (Appeals) erred in allowing the expenditure of Rs. 41,383 out of Rs. 61,438 for earning commission disallowed by the assessing officer.

2. For that on the facts and in the circumstances of the case the learned Commissioner (Appeals) erred in directing the assessing officer to delete the addition of notional interest income of Rs. 2,02,734.

3. For that on the facts and in the circumstances of the case the learned Commissioner (Appeals) erred in allowing the interest of Rs. 8,03,116 paid to other parties disallowed by the assessing officer"

2. Brief facts of the case are that the assessed was carrying on business of ball-bearing in his proprietorship capacity-In addition to it, he was also engaged in financing and dealing in real estate, commission earning, share dealing, etc. He filed his return showing total income of Rs. 1,00,570. During the course of assessment under section 143(3), the assessing officer made several disallowances/additions and the income was finally assessed at Rs. 11,63,740. Aggrieved by the order of the assessing officer, the assessed filed his appeal to Commissioner (Appeals) and alleged that the assessing officer has failed to appreciate the facts of the case. By the alleged order the Commissioner (Appeals) deleted major additions, against which the revenue is now in appeal before us.

3. The first ground of appeal is regarding sustaining the disallowance of expenditure of Rs. 41,383.

4. During the course of assessment, the assessing officer held that view that the said proprietary concern of the assessed had earned only commission income of Rs. 40,111 and, therefore, the expenditure of Rs. 61,438 incurred by the said concern is not provided to be wholly and exclusively incurred for earning of the said commission income. He, therefore, estimated that the expenditure for earning the commission income earned, was Rs. 20,055 and thereby balance of Rs. 41,383 was disallowed.

5. It was submitted before the Commissioner (Appeals) that the assesseds business in ball-bearing was in the state of dormancy during the year and there was no sales. For the remission in this business, the assessed had to concentrate on other activities, such as procurement of orders for sale of bearings for the principal, financing and dealing in the estate, etc. The establishment expenses, telephone, etc. debited to profit & loss account was common to all those lines of activities. It was further argued that it was evident from the fact that no separate debits of expenses have been claimed for such other activities to which the assessed has diverted. So, the amount of the total expenses of Rs. 61,438 represents the overall expenditure for all the business taken together. It was also submitted that if the expenditure relating to commission alone could come to Rs. 20,055, the balance amount of Rs. 41,383 would logically become admissible against the income derived from other activities. It was alternatively argued that even otherwise, when the business in a year declines and is in a temporary lull, the establishment expenditure for running a business at a reduced scale shall require more or less the same establishment expenditure as were to be incurred in case of the full scale continuation of the business. From this point of view the entire expenditure of Rs. 61,438 is allowable.

6. The Commissioner (Appeals) observed that the establishment expenses, bonus, telephone, etc. which amount to the said sum of Rs. 60,438 are common to all the business activities. It was, therefore, held by the Commissioner (Appeals) that the disallowance by the assessing officer on the assumptions that the expenditure could relate only to the commission earning is arbitrary and based more upon conjecture and surmises than on correct appreciation of facts and circumstances of the case. The Commissioner (Appeals) thus directed the assessing officer to delete the addition of Rs. 41,383. Aggrieved by the Commissioner (Appeals)s direction, the revenue is now before us.

7. The learned authorised representative vehemently contended that the assessing officer had overlooked the fact that no incidental expenditure for other activities have been claimed and allowed in the determination of income from such other activities.

8. On the other hand, the learned Departmental Representative strongly supported the action of the assessing officer in disallowing the expenditure on the ground that entire expenditure was not proved by the assessed to be incurred for earning the commission income.

9. We have heard the rival submissions, gone through the orders of the authorities below and carefully perused the paper book filed by the learned authorised representative. We are of the view that the assessing officers basic misapprehension is that the entire expenditure is relatable to the earning of commission. Expenditure relating to commission income alone, as estimated by the assessing officer if comes to Rs. 20,055, the balance amount, viz., Rs. 41,383 would logically become admissible against the income derived from other activities as taken by the assessed. As per the statement of sources of income placed at Searial No. 2 of the paper book, it shows that there were interest income of Rs. 2,63,251, shares dealing income of Rs. 6,07,200 and also income by way of share of profit from several firms and AOPs. We are also impressed by the submission of learned authorised representative when all the business of the assessed have common management, common capital and common establishment, they have a unity that makes all the business into one individual whole. Reliance was placed on the decision of Honble Supreme Court in the case of Produce Exchange Corporation Ltd. v. CIT (1970) 77 ITR 739 (SC) and CIT v. Prithvi Insurance Co. (1967) 63 ITR 632 (SC). Thus, we can safely reach to the conclusion that when the expenditure are common to a number of activities and for one such activity alone, the assessing officer has estimated expenditure of Rs. 20,055, as reasonable, the balance amount of Rs. 41,383 which is attributable to the earning of Rs. 9.12 lakhs: (as per page No. 2 placed in the paper book), does not appear to be excessive or unreasonable. It is not the case of the assessing officer that establishment of assessed other than ball-bearing business has been wound up so as to conclude that no expenditure except what can reasonably be related to only commission income of ball-bearing business, be allowed. That could be the only ground to restrict the expenditure. The Honble Supreme Court in Standard Refinery & Distillery Ltd. v. CIT (1971) 79 ITR 9 (SC) has observed that the unity of multiple business furnished by the existence of common management, common capital, common administration and common place of business cannot also be brushed aside. Our view also gets support from the principles laid down by Supreme Court in Produce Exchange Corporation Ltd. v. CIT (supra) and CIT v. Prithvi Insurance Co. (supra). It was held in these cases that the decisive test is unity of control of two businesses having interconnection, interlacing, interdependence and unity furnished by their existence of common management, common business organisations, common administration, common fund and a common place of business which make the two or more business into one.

10. We have, therefore, of no alternate thought than to hold that the assessing officer was not justified in disallowing the expenditure of Rs. 41,383. There is no infirmity in the order of the Commissioner (Appeals). Revenues this ground of appeal is, therefore, dismissed.

11. The second grievance of the revenue is in Commissioner (Appeals)s direction to assessing officer to delete the addition of notional interest income of Rs. 2,02,734.

12. During the course of assessment, the assessing officer observed that the assessed has advanced a sum of Rs. 11,25,000 to a private limited company in which he was director. The assessing officer found that in the earlier years the assessed has shown interest income of Rs. 2,02,734 from this company but during the year under consideration the assessed has voluntarily foregone his legal claim of interest. The assessing officer thereafter added Rs. 2,02,734 in the income of the assessed.

13. It was contended before the Commissioner (Appeals) that the assessed in addition to shareholder of the said closely-held company, was substantially interested person in the said company. The assessed advanced loan to the company as it was in acute crisis for dearth of money. It was in the interest of the assessed that the advances were made so that the company could get out of its difficulty and its development plan could succeed to the benefit of the assessed as a person has substantial interest in it. The advances were interest bearing interest had been received in the past, but the company was further in financial difficulties disabling it from paying interest. Therefore, at a meeting of the Board of Directors of the company, a decision was taken to suspend the accrual of interest from 1-4-1991. The decision applied to all the directors including the assessed. It was quite clear that the company had no money available to pay the interest. Further, it was clear that if all the creditors would make demand of interest, the same will drive the company to a liquidation proceedings. The assessed has produced the balance sheet of the company before the assessing officer. The assessing officer however, wrongly observed that seven loan creditors did not accept the suspension of accrual of interest and insisted on its payment and also forced the company to pay. From this the assessing officer has inferred that the assessed has not claimed interest and such act is equivalent to assesseds relinquishment of the interest.

14. The Commissioner (Appeals) observed in his order that most of the creditors accepted companys proposal of suspension of accrual of interest, as a salvaging act of prudent financier to save its principal amount which is his stock-in-trade. It was, therefore, held by the Commissioner (Appeals) that the assessing officer was not justified in treating the interest not accrued as voluntary relinquishment of claim and thereby adding the same in assesseds income. The learned authorised representative vehemently argued that the assessing officers inference that the assessed has not claimed interest and such act is equivalent to assesseds relinquishment of interest is not a faithful representation of the fact.

15. On-the other hand, the learned Departmental Representative supported the assessing officers action in treating the interest foregone as assesseds income.

16. We have heard the rival submissions, gone through the orders of lower authorities and carefully perused the paper book filed by the learned authorised representative, assessing officers conclusion that the acceptance of non-accrual of interest was a voluntary relinquishment of a claim is totally misconceived and outcome of failure to appreciate the economic realities and their compelling effect. There was as many as 37 creditors of the said debtor company and total debt of the company amounted Rs. 83 lakhs. The assessing officer found that 7 creditors dissented and insisted on payment. It shows that 30 creditors including assessed accepted companys decision of not making payment of interest. The creditors took practical and realistic view after observing that once the debtor company is out of its financial crisis, it will be in the position to restart paying interest and unless it is given a breathe in its high crisis not only the interest but the principal itself is threatened to be lost. The creditors including the assessed accepted the said proposal of the company as a salvaging act of prudent financier to save its principal amount.

17. Thus, in our considered view the assessing officer was not justified in taxing the interest income not received by him. Our view also gets support from decision of Bombay High Court in H.M. Kashi Parekh & Co. Ltd. v. CIT (1960) 39 ITR 706 (Bom) in which it was held that income to be taxed must be the real income of the assessed. Tax can be charged only on what a man has received and not what he might have received but for his willful default. In this case ratio of Honble Supreme Court in CIT v. M/s Shoorji Vallabh Das & Co. (1962) 46 ITR 144 (SC) is applicable. In the case of Shoorji Vallabh (supra), a managing agency firm agreed to receive a lesser commission in the books of account. However, the commission as originally fixed was shown as having accrued to the assessed, but on question as to what income was to be assessed, it was held that mere book entry was not conclusive and what was to be considered was the real commission to which the managing agent became entitled in consequence of the agreement between the parties.

18. Thus, on the facts and circumstances of the case and the judicial precedents relied on above, we are of the considered opinion that the assessing officer was not justified in taxing the notional interest income of Rs. 2,02,734. We do not find any infirmity in the order of the Commissioner (Appeals), therefore, this ground of revenues appeal is also dismissed.

19. The last grievance of revenue is regarding Commissioner (Appeals)s action in allowing the interest of Rs. 8,03,116 paid to the other parties, disallowed by the assessing officer.

20. During the course of assessment, the assessing officer observed that the assessed abruptly claimed expenses of Rs. 8,19,048 which is inclusive of interest payment of Rs. 8,03,116 under the head income from other sources without justifying such claim of deduction. The assessing officer also found that out of total funds available with the assessed, he had made payment against booking of space amounting to Rs. 32,35,000. The assessing officer was of the opinion that as per accepted accounting principles, if any loan is utilised against any particular investment, the same should be charged/capitalised against such assets/investment and net profit and loss be ascertained in each case. Therefore, he disallowed the interest of Rs. 8,03,116 on the ground that assessed has debited the interest as expenses instead of capitalising the same. Another ground for disallowance is that the assessed has not shown the utilisation of the borrowed fund against specific assets/investment.

21. In the appeal the Commissioner (Appeals) observed that it is evident from the assessment order itself, that the assessing officer himself was aware that the assessed apart from having dealing in shares also operated as an estate dealer and was dealing therein and the loan was used as the source of financing the business of developing and promoting estate for sale. The assessing officer was, therefore, directed by the Commissioner (Appeals) to delete the addition of interest of Rs, 8,03,116. Against the above order of the Commissioner (Appeals), revenue came in appeal before us.

22. It was vehemently argued by the learned Departmental Representative that payment made for booking of space amounting to Rs. 32,35,000 was investment of the assessed. Therefore, interest relatable to it should be capitalised rather than eligible to be allowed as revenue expenses and thereby supported the action of the assessing officer.

23. On the other hand, the learned authorised representative relied on the detailed observation of Commissioner (Appeals) and argued that assessing officers ground for disallowance is that since no separate books of account were maintained for each line of activities, the interest cannot be allowed. It was further argued that the fact of entire funds being utilised in the estate development represents borrowed funds, was explained before the assessing officer. Therefore, so far as the amount of total employment of capital in estate development being identifiable, there is no difficulty in apportioning the balance loan capital and the financing activities.

24. We have heard the rival submissions, gone through the orders of the authorities below and carefully perused the paper book filed by the assessed. From the order of the assessing officer we understand that the basis of disallowance of interest is that the assessed had debited the interest expenses instead of capitalising the interest and thereby utilisation of the borrowed fund against specific assets/investment have not been shown. The assessing officer has grossly failed in appreciating the facts of the case. From the paper book filed by the learned authorised representative, it is crystal clear that the assessed was earning income from estate dealing continuously since last three years. Therefore, assesseds employment of capital for estate dealing and estate development was not investment but trading activities. The assessed acquired properties and developed it with the set purpose of selling the same at profit. This is the reason that assessed has made out trading and profit & loss account for the estate under development and the interest on borrowed fund used in said business must come as a debit. The manner and method of maintaining account could not be faulted and the assessing officer is not correct when the holds that in such a situation interest should not be allowed as revenue expenditure but as a capital expenditure. Statement of sources and utilisation of funds for different activities filed before the assessing officer and the Commissioner (Appeals) clearly exhibit the investment of fund in real estate business, share business, capital in firm AOP and proprietorship business, etc.

25. Other ground of assessing officer for disallowance of interest was that separate books of account were not maintained for each line of activity. The fact of entire funds utilised in estate development represents borrowed fund, were made known to the assessing officer. Thus, the amount of total employment of capital in estate development being identifiable there was no difficulty in apportioning the balance capital and the financing activities. We also find out of the statements submitted to the lower authorities that total fund of Rs. 74,52,188 available with the assessed was utilised as follows :

"Total fund utilised in the following business activities :

Rs.

In shares of domestic companies

8,71,913

In partnership firms, AOPs and proprietary concern

10,09,694

Interest-bearing loans & advances in financing business

16,63,581

Advances made free of interest to the assesseds real estate concerns for implementation of its respective development plans

6,72,000

Earnest money paid for acquiring properties as stock in the business of estate of development

32,35,000

Total

74,52,188"

Out of the total funds used amounting to Rs. 74,52,188 the sources were as follows :

Rs.

"Loan, on interest @ 12% & 15%

67,43,273

Loan interest free

5,48,500

Other liabilities interest free

83,798

From capital balance

76,617

Total fund

74,52,188"

Above statement of sources and uses of the funds make it crystal clear that entire borrowed funds had been used as working capital in his business. Moreover, interest on the money used for investment in shares in domestic companies amounting to Rs. 8,71,913, cannot be disallowed following the ratio of Honble Supreme Court in CIT v. Rajendra Prasad Moody (1978) 115 ITR 519 (SC). In this case the object of borrowing was acquisition of shares by way of investment for the purpose of earning income by way of dividend, therefore, interest was held to be allowable.

26. In view of above observation and on the basis of facts and circumstances of the case and detailed observations of the Commissioner (Appeals), we are of the considered view that the assessing officer was not justified in disallowing interest of Rs. 8,03,116. Commissioner (Appeals)s order is, therefore, confirmed and revenues this ground of appeal is also dismissed.

27. In the result, the appeal of the revenue is dismissed.