THE assessee company was incorporated with the main object of acquiring a holding of equity and preference shares of companies engaged in the business of cement, ready mix and aggregate and to provide financial management. It was the first return of the assessee company. The Assessing Officer noted that the total capital was at Rs.209.33 crores which was raised during this year, out of which a sum of Rs.207.78 crores was invested in the shares of Lafarge India Ltd. The assessee company also earned interest on fixed deposits of Rs.2,28,000/ – against which, it had claimed administrative and other expenses to the tune of Rs.2,69,85,000/ -. The Assessing Officer, while following the judgement of the High Court in the case of CIT Vs. K.K.Doshi & Co, held that interest earned on fixed deposits was required to be taxed under the head “income from other sources”. As regards the assessee’s claim for deduction of expenses, the Assessing Officer observed that it had invested Rs.207 crores in M/s.Lafarge India Ltd., a company engaged in manufacturing of cement. The Assessing Officer further held that the assessee had made shares investments, income from which being dividend qualifies for exemption under section 10(33) and natural consequence of that was that no deduction of expenditure was permissible. Accordingly, total income was determined at Rs.2,28,000/ – by disallowing the business loss as claimed by the assessee and charged it to tax under the head income from other sources’. In the first appeal, the CIT(A) categorized such interest income under the head ‘business income’. He further held that since no dividend income was earned hence provisions of Section 14A could not be attracted, resultantly deduction for expenses claimed by the assessee was allowed.And an aggrieved Revenue is before the Tribunal.The Tribunal noted that the assessee company came into existence with the main object of acquiring and holding controlling interest in the cement companies in India. It is a subsidiary of Financiere Lafarge (France) which is the largest cement producing company of the world. The main object of the assessee company, a subsidiary of the FL was to acquire and hold controlling interest in the equity share capital or preference or loan capital of any company or companies in India engaged in any business of cement, ready mix concrete and aggregate. During the year the assessee company raised capital of Rs.209 crores. It invested a sum of Rs.207.78 crores in one subsidiary company formed by it under the name and style of Lafarge India Pvt. Ltd. (LIL). The portion of the amount which was not immediately required, was kept by it in short term deposits in bank on which interest was earned.
The Tribunal further noted that the circumstances in which the interest was earned had absolutely no relation with the business of the company. The surplus amount available at its disposal was deposited in the bank in the FDRs and later it was withdrawn and invested at the appropriate time. So the interest was earned on the parking of its idle funds in the bank during the period in which they were not required to be utilized.
And wondered, “How such interest income can be held to be falling under the head ‘business income’ is anybody’s guess.”
So the Tribunal held that since the funds not immediately required by the assessee company for its business purpose were invested in FDRs, the interest thereon cannot be put to tax under the head ‘business income as held by the CIT(A) thus allowing the Revenue appeal.
The Revenue was also aggrieved by the CIT(A)’s orderdeleting the disallowance made by the Assessing Officer under section 14A of the Act.
The assessee claimed the deduction of administrative and other expenses to the tune of Rs.2.69 crores and the Assessing Officer, after considering the provisions of section 14A, came to hold that the assessee’s business activities were confined to the share investments, income from which, being dividends, qualified for exemption under section 10(33) and hence, the expenses so incurred were not eligible for deduction. However, the CIT(A) came to the conclusion that there was no exempt income earned by the assessee in this year and hence the provisions of Section 14A were not applicable.
The Tribunal observed that Section 14A provides that for the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.
Three conditions should be satisfied before invoking the provisions of this section which are as under:-
(i) the assessee should have incurred expenditure;
(ii) such expenditure should be in relation to income; &
(iii) such income does not form part of the total income under this Act.
It is only if these conditions are cumulatively satisfied, the provisions of Section 14A are attracted.
In the present case the Tribunal noted that
1. The assessee had incurred expenditure which fact has not been disputed by the Assessing Officer. The claim of the Revenue is that this expenditure is in relation to income which is exempt under section 10(33) of the Act. The only income is interest on fixed deposits with the bank. As against this income, the assessee had claimed expenditure of Rs.2,69,85,000/ -. Thus, it is seen that in the year in question there is no income of the assessee which is exempt under section 10(33) of the Act.
2. the opinion of the Assessing Officer that the assessee was not carrying on any business since there was no activity leading to the earning of income, becomes erroneous and unsustainable. When the assessee company has been set up with an object of making strategic investment in the shares of companies involved in the cement business, it cannot be held that the assessee is not carrying on any business.
3. In these circumstances, the natural consequence that follows is that expenses claimed by the assessee are deductible in full under the head “profit and gains from business or profession”.
So Revenue won partially.
