Case Law Details
IN THE ITAT DELHI BENCH ‘C’
Holcim (India) (P.) Ltd.
Versus
Income-tax Officer, Ward-12 (4), New Delhi
IT Appeal No. 2628 (Delhi) of 2010
[Assessment year 2006-07]
September 14, 2012
ORDER
A.N. Pahuja, Accountant Member – This appeal filed on 02.06.2010 by the assessee against an order dated 11.03.2010 of the ld. CIT(A)-XV, New Delhi, raises the following grounds:-
1. “That the CIT(A) erred on facts and in law in confirming the disallowance of Rs. 8,52,43,836/- made by the Assessing Officer u/s 14A of the Income-tax Act, 1961 (the Act).
1.1 That the CIT(A) erred on facts and in law in confirming the finding of the Assessing Officer that no business activity was carried out by the appellant and consequently the appellant was not eligible for deduction of various business expenses.
1.2 That the CIT(A) failed to appreciate that the provisions of section 14A of the Act were not applicable inasmuch as the appellant had made investment for acquiring and retaining controlling interest and not for earning any exempt income.
1.3 That the CIT(A) further failed to appreciate that the provisions of section 14A were, even otherwise, not applicable since no exempt income (dividend income) was actually earned by the appellant during the year under consideration.
2. Without prejudice, that on facts and circumstances of the case, the CIT(A) erred in confirming the entire disallowance of Rs. 8,52,43,836/- made by the Assessing Officer u/s 14A of the Act.
2.1 That the CIT(A) failed to appreciate that expenses incurred for earning interest income assessed as business income and also for maintaining the corporate identity of the appellant were, even otherwise, allowable under the provisions of the Act.
2.2 Without prejudice, that the CIT(A) further failed to appreciate that disallowance, if at all, should have been computed as per the formulae prescribed in Rule 8D(2)(iii) of the Income Tax Rules.
The appellant craves leave to add, amend, alter or vary from the above grounds of appeal before or at the time of hearing.”
2. Facts, in brief, as per relevant orders are that e-return declaring nil income filed on 30.11.2006 by the assessee, was selected for scrutiny with the service of a notice u/s 143(2) of the Income-tax Act, 1961 (hereinafter referred to as the Act), issued on 07.09.2007. During the course of assessment proceedings, the Assessing Officer (A.O. in short) observed that the assessee company was established pursuant to certain approvals received from the Foreign Investment Promotion Board[FIPB], for making downstream investments into other companies, engaged in cement and related industry. The assessee company was accorded approval on 18.12.2002 by FIPB for non resident investment in M/s Ambuja Cement Eastern India Ltd., for further downstream investment in the Associated Companies Ltd. and M/s Ambuja Cement India Ltd. The aforesaid approval was accorded for three years, and was renewed on 30.05.2005. In pursuant to the approval granted by FIPB, the assessee company made an investment of Rs. 18,509,150,756/- in purchase of 390,163,637 equity shares of Rs. 10/- each fully paid up at a price of Rs. 47.44 per share in M/s Ambuja Cement India Ltd.. To a query by the AO, the assessee submitted that the assessee made investment in order to obtain controlling interest, management etc. and the expenditure incurred therein was revenue in nature. Since the investment was made only in April, 2005, no income had been declared. For the year under consideration, the assessee declared only interest of Rs. 1,94,055/- on FDRs and claimed expenditure of Rs. 10,38,27,023/-. To a further query by the AO as to why the aforesaid expenditure be not disallowed, the assessee replied as under:-
“For the assessee company to exist and engage in the business activities under the laws of India, it is required to conduct its operations inter alia by setting up office premises for its registered office, employ individuals, obtain required approvals for carrying on its business etc. These activities in the assessee company are necessary so that the assessee company is in compliant to with the laws of India. Even the activities of making investments requires the assessee company to ensure that its existence is in a compliant manner – all of which required the assessee company to undertake several actions in keeping in view the laws of the country.
In order for the assessee company to consider making of investments it would inter alia require that the assessee company undertakes studies to ascertain potential opportunities of investments analyses data – financial and otherwise, meet with persons in the cement and other related industry to ascertain opportunities, prepare reports for review, etc. These activities are normal business activities in connection with any investment to be undertaken whether by an assessee company such as ours or even if it was by any other assessee company engaged in the manufacturing or services activity. All such activities would require the assessee company to incur expenses which are in connection with its business activities.
The assessee company has also incurred the expenses in the course of its normal business activities. Needless to mention, the investments as made by the assessee company are substantial investments and in common parlance would be regarded as “big-ticket” investments. It is natural that making of such substantial investments are preceded by appropriate data gathering, data analysis,, ascertainment of risks and other related matters, discussions to understand the environment relating to potential opportunities and many other similar matters. Post making of the investment it is also necessary for the company to follow up its investment portfolio. All such activity shall require the involvement of human effort which requires to be compensated for their efforts, and as such the assessee company has incurred such expenses and has rightly booked them as rising out of and in connection with undertaking of business activities under the laws of India.”
2.1 However, the AO did not accept the submissions of the assessee on the ground that the assessee itself conceded that main activities of the company for making investment in shares of ACEL was to acquire and retain control of the said company and, thus, the assessee did not carry on any business activity. In order to constitute a business activity, it must be with a motive of earning profit . While referring to decision of Hon’ble Delhi High Court in the case of Bharat Development (P.) Ltd. v. CIT [1982] 133 ITR 470, the AO observed that the action of the assessee company was not actuated by the profit motive but to earn dividend income only. Only one transaction of buying shares, although for taking controlling interest in the management of the company, did not constitute business for earning profit. Accordingly, the AO concluded that the said transaction of investment could not be regarded as carrying on the business for the purpose of section 28 of the Act. The AO further observed that the expenditure incurred for earning exempt dividend income is not allowable. Accordingly, while relying upon decisions in Everplus Security Finance Ltd. v. Dy. CIT [2006] 101 ITD 151 (Delhi); Kanu Metals (P.) Ltd. [IT Appeal No. 7211/Mum./2003, dated 30.5.2008]; Mohan T Advani Finance (P.) Ltd. v. ITO [2006] 9 SOT 675 (Mum.), Macintosh Finance Estates Ltd. v. Addl. CIT [2007] 12 SOT 324 (Mum.) and Dy. CIT v. SG Investments Industries Ltd. [2004] 89 ITD 44 (Kol.), the AO disallowed the entire expenditure of Rs. 10,38,27,023/-. Subsequently, the AO rectified the assessment order and restricted the disallowance to Rs. 8,52,43,836/-, the assessee having already offered disallowance of expenditure on account of stamp duty and provision for gratuity.
3. On appeal, the ld. CIT(A) upheld the findings of the AO as under:-
“I have considered the submissions of the appellant, the findings of the AO and the facts on record. The appellant company had made an investment of Rs. 1850.91 crores in .purchase of shares of M/s Amubja Cement India Ltd. As per the P & L a/c the company had incurred an expenditure of Rs. 103827023/- during the year. Out of the above expenditure in the computation of income the appellant had himself disallowed expenditure relating to stamp duty expenses, provisions for gratuity and depreciation as per the Company’s Act, and showed gross total loss of Rs. 85049781/- which is reflected in the order u/s 154 of the Act, dated 05.01.2009 copy of which was filed during the appellate proceedings. The AO has disallowed the expenditure of Rs. 103827023/-under the provisions of section 14A of the Act, and the assessable income was computed at 194055/- in the order u/s 154
The main contention of the appellant is that since no dividend income/ exempt income was received during the year, therefore, the disallowance made by the AO was not as per law. It has been submitted that the provisions of section 14A would apply only if any exempt income was received by the appellant during the relevant previous year which is not includable in the total taxable income, and since no such income was received during the year, therefore, no disallowance of expenditure could be made by the AO.
Section 14A of the 1.1. Act reads as under:
“14A. Expenditure incurred in relation to income not includible in total income.
(1) 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.
(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act.
(3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act:
Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.”
In view of the above provisions the allowance of expenditure in relation to dividend income would thus be not admissible in computing the income of an assessee under this Act. It would be so in both the situations i.e., whether the shares are held as investment as they are held on trading account as stock in trade.
The issue raised in this case is that the appellant had not earned or received any dividend in the year under consideration and, therefore, no disallowance can be made by invoking the provisions of section 14A of the Act. There is no force in this argument. When the expenditure is incurred in relation to income which does not form part of total income, it has to suffer the disallowance irrespective of the fact whether any income is earned by the assessee or not. Section 14A does not envisage any such exception. This is what is held by the Ahmedabad Bench of the Tribunal in the case of Harish Krishnakant Bhat (supra) when it observed that interest on monies borrowed for purchase of shares held as investment is not allowable whether or not there is any yield of dividend.
The term ‘expenditure incurred in relation to income’ used in section 14A is still wider than the ‘expenditure incurred for the purposes of business’. The Legislature, using the expression ‘expenditure in relation to income which does not form part of the total income’ in section 14A of the Act, in no way indicates that it does not encompass the disallowance of expenditure incurred in relation to the income in absence of actual receipt of income during the relevant previous year. On the contrary, as stated above, the term ‘in relation to’ is wide enough to include in its sweep the expenditure both ‘for making or earning income’ and ‘incurred wholly and exclusively for the purposes of business carried on by the assessee’.
The object of introducing the provision of this inserted section 14A by the Finance Act, 2001, with retrospective effect from 1-4-1962 was clarified in the provisions as well as in the memorandum explaining the provisions, notes on clauses relating to the Finance Bill, 2001 and in the Board’s Circular No. 14 of 2001, dated 22-11-2001 and Circular NO.8 of 2002, dated 27-8-2002 in the following way:
“Certain incomes are not includible while computing the total income as these are exempt under various provisions of the Act. There have been cases where deductions have been claimed in respect of such exempt, income. This in effect means that the tax incentive given by way of exemptions to certain categories of income is being used to reduce also the tax payable on the non-exempt income by debiting the expenses incurred to earn the exempt income against taxable income. This is against the basic principles of taxation whereby only the net income, i.e. gross income minus the expenditure, is taxed. On the same analogy, the exemption is also in respect of the net income. Expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income.
It is proposed to insert a new section 14A so as to clarify the intention of the Legislature since the inception of the Income-tax Act, 1961 that no deduction shall be made in respect of any expenditure incurred by the assessee in relation to income which does not form part of the total income the Income-tax Act.”
It is thus clear that provisions of section 14A will apply even when no exempt income has been earned.
The Hon’ble Special Bench of ITAT New Delhi vide ITA No. 87/Dell2008 in the case of M/s Cheminvest Ltd. v. ITO 2009 – TIOL – 515 -ITAT – Del – SB has observed as under:
“The language of subsection (1) of section 14A clearly provides that no deduction shall be allowed “in respect of expenditure incurred by the assessee in relation to income which does not from part of the total income under this Act”. On going through the simple and plain language, it is abundantly clear that the relation has to be seen between the exempt income and the expenditure incurred in relation to it and not vice versa. What is relevant is to work out the expenditure in relation to the exempt income and not to examine whether the expenditure incurred by the assessee has resulted into exempt income or taxable income. If the view point of the learned AR. is accepted then it would mean putting the cart in front of the horse and redrafting sub-section (1) of section 14A On going through sub-section (1), it can be clearly noticed that the exercise of making disallowance starts with firstly tracing out the exempt income and then initiating the process of working out the expenditure incurred in relation to such exempt income. It is clearly borne out from rule 8D as has been discussed infra that it has three clauses of sub-rule (2), being the expenditure directly relating to the exempt income as per clause (i); expenditure by way of interest which is not directly attributable to particular income as per clause (ii) and; an amount equal to one half per cent of the average of the value of investment as per clause (iii). The sum total of these three amounts is the amount disallowable under section 14A. From here it clearly emerges that stipulation of section is to compute the amount of expenditure which is not allowable u/s 14A as is relatable to the exempt income and not in considering all the expenses one by one for ascertaining if either of them have resulted into exempt income and thereafter considering such amount as dlsallowable u/s 14A If this way of interpretation of section 14A as suggested by the Id. AR is accepted, then the method of computing the expenditure as relatable to the exempt income as provided in rule 80, would become meaningless and the words ‘in accordance with such method as may be prescribed’ in sub-section (2) for determining the amount disallowable would require obliteration, which in our considered opinion is not possible’ ……….We have already repelled the contention raised on behalf of the assessee that the object of the expenditure is to be viewed as a determinative factor for making any disallowance under this section. It is simple and plain mat the disallowable expenditure is to be worked out which has relation with the exempt income and not otherwise. We are, therefore, not inclined to accept the assessee’s version that if the exempt income is incidental to the main business whose income is taxable, then the provisions of section 14A will be defeated. “
46. In the result, the question, whether disallowance u/s. 14A of the I. T. Act can be made in a year in which no exempt income has been earned or received by the assessee, is answered affirmatively against the assessee and in favour of the Revenue”.
In the instant case the appellant has made only one investment during the year. There are no other transactions for purchase or sale of shares with the objects of business during the year. For investment to be a business proposition, the investment should be for the purpose of business carried on by the appellant during the year. No such business has been carried out by the appellant except the single investment made by the appellant during the previous year. The appellant has also accepted that the investment was made in shares of ACEL to acquire and retain control of the said company. This in itself does not constitute a business. The only purpose in making the investment it to earn dividend income which is exempt. The entire expenditure incurred is fully related to the investment made by the appellant to earn exempt income. Since no other income has been shown by the appellant it strengthens the finding of the AD that the expenditure was relatable only to the earning of exempt income. In view of the discussions above and the decision of the Hon’ble Special Bench of ITAT in the case of Cheminvest Ltd. cited above, I am of the considered opinion that provisions of section 14A will apply in the instant case even though no exempt income has been earned during the year.
It is a fact that the appellant company’s managerial and administrative man power has been utilized in taking the complicated decisions regarding the investments which would yield exempt income, accordingly disallowance u/s 14A is necessary in instant case. Since the entire expenditure is attributable to the earning of exempt income only therefore the action of the Assessing Officer in disallowing the entire expenditure is in order. This ground of appeal is dismissed.”
4. The assessee is now in appeal before us against the aforesaid findings of the ld. CIT(A).The ld. AR on behalf of the assessee while carrying us through the impugned order contended that the assessee was engaged in the business of investment of their funds and acquiring controlling interest in the company. After obtaining the approval of FIPB and RBI , the assessee made investment of Rs. 1850.19 crores in the year under consideration. The only source of income of the assessee was interest from FDRs and no dividend was received during the year. The ld. AR vehemently argued that the expenditure incurred by the company could not be attributed to earning of dividend income. While referring to decision of Hon’ble Supreme Court in CIT v. Distributor (Baroda) (P.) Ltd. [1972] 83 ITR 377 (SC) the ld. AR argued that the expression business has to be understood in the commercial sense as involving any activity designed to earn profit. Inter alia, the ld. AR relied upon decisions in CIT v. Rajeev Lochan Kanoria [1994] 208 ITR 616; CIT v. Indian Bank Ltd. [1965] 56 ITR 77 (SC); CIT v. Model Mfg. Co. (P.) Ltd. [1980] 122 ITR 767 (Cal.); Hughes v. Bank of New Zealand [1938] 6 ITR 636 (HL); India Cements Ltd. v. CIT [1966] 60 ITR 52 (SC); P Krishna Menon v. CIT [1959] 35 ITR 48 (SC); Nabadwip Chandra Roy v. CIT [1962] 44 ITR 591 (Assam); & State of Madras v. G.J. Coelho [1964] 53 ITR 186 (SC).The ld. AR added that the expenditure incurred as a corporate entity to sustain itself, cannot be disallowed in terms of provision of section 14A of the Act and referred to decisions in CIT v. Apex Laboratories (P.) Ltd. [2010] 320 ITR 498 (Mad.); Addl. CIT v. Laxmi Agents (P.) Ltd. [1980] 125 ITR 227 (Guj); CIT v. Amritben R Shah [1999] 238 ITR 777, CIT v. Phil Corpn. Ltd. [2011] 202 Taxman 368, CIT v. Jardine Henderson Ltd. [1994] 210 ITR 981 and decision of Hon’ble Karnataka High Court in CCI Ltd. v. Jt. CIT [2012] 206 Taxman 563. To a query by the Bench, the ld. AR admitted that besides the aforesaid investment in the company, no other investment was made in any other company in the year under consideration or in subsequent years.
5. On the other hand, the ld. DR supported the findings of ld. CIT(A) while contending that entire expenditure having been incurred for earning dividend income from investments in order to gain control in various companies is disallowable u/s 14A of the Act. Inter alia, the ld. DR relied upon the decision in Cheminvest Ltd. v. ITO [2009] 317 ITR (AT) 86 (Delhi)(SB).
6. We have heard the ld. DR and gone through the facts of the case as also the aforesaid decisions relied upon by both the sides. First contention raised by the ld. AR as per ground no.1.1 is as to whether or not the assessee carried on any business activity in the year under consideration. The AO and the ld. CIT(A) found that the assessee made only one investment during the year and there were no other transactions of purchase or sale of shares with the object of carrying on of business during the year. Even before us no such material or evidence has been placed, which could establish that the assessee carried on any such business of making investments in various companies in the year under consideration or in subsequent years; rather the ld. AR admitted that the assessee did not undertake any such activity in subsequent years. The ld. AR argued that even with the sole transaction, the assessee carried on the business. Now which activities constituted business, has not been explained before us nor any material was referred to in support. The three words “trade”, “commerce” or “business” have been interpreted by the Hon’ble Supreme Court and other courts in their various decisions. The word “trade” was elucidated in the case of State of Punjab v. Bajaj Electricals Ltd. [1968] 2 SCR 536. It has been opined:-
“3. The expression “trade” is not defined in the Act. “Trade” in its primary meaning is the exchanging of goods for goods or goods for money; in its secondary meaning it is repeated activity in the nature of business carried on with a profit motive, the activity being manual or mercantile, as distinguished from the liberal arts or learned professions or agriculture. The question whether trade is carried on by a person at a given place must be determined on a consideration of all the circumstances. No test or set of tests which is or are decisive for all cases can be evolved for determining whether a person carries on trade at a particular place. The question, though one of mixed law and fact, must in each case be determined on a consideration of the nature of the trade, the various steps taken for carrying on the trade and other relevant facts.”
6.1 The Hon’ble Supreme Court in Khoday Distilleries Ltd. v. State of Karnataka [1995] 1 SCC 574 while referring to Words and Phrases Legally Defined, 3rd Edn., (Vol. 4; R-Z) by John B. Saunders, and decisions in Skinner v. Jack Breach Ltd. [1927] 2 KB 220 ; National Assn. of Local Government Officers v. Bolton Corpn. 1943 AC 166 and Aviation & Shipping Co. Ltd. v. Murray (Inspector of Taxes) [1961] 2 All. ER 805 concluded that the word ‘trade’ may include all the connotations of the word ‘business’. “Trade”, as per the Webster’s New Twentieth Century Dictionary (2nd edition), means amongst others, “a means of earning one’s living, occupation or work. In Black’s, Law Dictionary, trade means a business which a person has learnt or he carries on for procuring subsistence or profit; occupation or employment, etc. The meaning of “commerce” as given by the Concise Oxford Dictionary is “exchange of merchandise, specially on large scale”. In ordinary parlance, trade, and commerce carry with them the idea of purchase and sale with a view to make profit. If a person buys goods with a view to sell them for profit, it is an ordinary case of trade. If the transactions are on a large scale it is called commerce. Nobody can define the volume, which would convert a trade into commerce. The word “business” is the broadest term and is encompasses trade, commerce and other activities. Section 2(13) of the Act defines the term ‘Business’ as under:-
(13) “business” includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture”
6.2 The word “Business” is a word of large and indefinite import. According to Sampath Iyengar’s Law of Income-tax (9th edition), a business activity has four essential characteristics. Firstly, a business must be a continuous and systematic exercise of activity. Business is defined as an active occupation continuously carried on. Business vocation connotes some real, substantive and systematic course of activity or conduct with a set purpose. Second essential characteristic is profit motive or capable of producing profit. To regard an activity as business, there must be a course of dealings continued, or contemplated to be continued, normally with an object of making profit and not for sport or pleasure [Bharat Development (P.) Ltd.’s case (supra)]. The third essential characteristic is that a business transaction must be between two persons. Business is not a unilateral act. It is brought about by a transaction between two or more persons. And lastly, the business activity usually involves a twin activity. There is usually an element of reciprocity involved in a business transaction.. In Barendra Prosad Ray v. ITO [1981] 129 ITR 295, the Hon’ble Supreme Court has examined the scope of the term “business” in the general law or in common parlance as well as Indian Partnership Act, 1932 and held as under:-
“The expression “business” does not necessarily mean trade or manufacture only. It is being used as including within its scope professions, vocations and callings from a fairly long time. The Shorter Oxford English Dictionary defines “business” as “stated occupation, profession or trade” and “a man of business” is defined as meaning “an attorney” also. In view of the above dictionary meaning of the word ” business “, it cannot be said that the definition of business given in s. 45 of the Partnership Act, 1890 (53 & 54 Vic. c. 39), was an extended definition intended for the purpose of that Act only. Section 45 of that Act says:
“……..The expression ‘business’ includes every trade, occupation, or profession.” Section 2(b) of the Indian Partnership Act, 1932, also defines “business” thus: “‘Business ‘ includes every trade, occupation and profession.” The observation of Rowlatt J. in Christopher Barker & Sons v. IRC [1919] 2 KB 222, 228 (KB), “All professions are businesses, but all businesses are not professions ………. “also supports the view that professions are generally regarded as businesses. The same learned judge in another case, IRC v. Marine Steam Turbine Co. Ltd. [1920] 1 KB 193, 203 (KB) held:
The word ‘business’, however, is also used in another and a very different sense, as meaning an active occupation or profession continuously carried on and it is in this sense that the word is used in the Act with which we are here concerned.”
The word “business” is one of wide import and it means an activity carried on continuously and systematically by a person by the application of his labour or skill with a view to earning an income. We are of the view that in the context in which the expression “business connection” is used in s. 9(1) of the Act, there is no warrant for giving a restricted meaning to it excluding “professional connections” from its scope.”
6.3 In State of Andhra Pradesh v. H. Abdul Bakhi & Bros. [1964] 15 STC 644, the Hon’ble Supreme Court elucidated that the expression “business” is an extensively used word of indefinite import. In the taxing statutes it is used in the sense of an occupation or profession which occupies time, attention or labour of a person and normally associated with the object of making profit. It was held as under:
“4 …..To regard an activity as business there must be a course of dealings, either actually continued or contemplated to be continued with a profit motive, and not for sport or pleasure. But to be a dealer a person need not follow the activity of buying selling and supplying the same commodity. Mere buying for personal consumption i.e. without a profit motive will not make a person, dealer within the meaning of the Act, but a person who consumes a commodity bought by him in the course of his trade, or use in manufacturing another commodity for sale, would be regarded as a dealer….”
6.4 In the State of Gujarat v. Raipur Mfg. Co. [1967] 19 STC 1 (SC) it was stated that business is normally with the object of making profit. To regard an activity as business, there must be a course of dealings either actually continued or contemplated to be continued with profit motive and not for sport or pleasure. The expression “profit motive” does not postulate or intends that profit must, in fact, be earned. Nor does the expression cover a mere desire to make some monetary gain out of a transaction or a series of transactions. It predicates a motive which pervades the transaction(s) effected by the person in the course of his activity. Thereafter, it was observed as under:
“In actual practice, the profit motive may be easily discernible in some transactions: in others it would have to be inferred from a review of the circumstances attendant upon the transaction. For instance, where a person who purchases a commodity in bulk and sells it in retail it may be readily inferred that he has a profit motive in entering into the series of transactions of purchase and sale. A similar inference may be raised where a person manufactures finished goods from raw materials belonging to him or purchased by him, and sells them. But there a person comes to own in the course of his business of manufacturing or selling a commodity, some other commodity which is not a bye-product or a subsidiary product of that business and he sells that commodity, cogent evidence that he has intention to carry on business of selling that commodity would be required. Where a person in the course of carrying on a business is required to dispose of what may be called his fixed assets or his discarded goods acquired in the course of the business, an inference that he desired to carry on the business of selling his fixed assets or discarded goods would not ordinarily arise. To infer from a course of transactions that it is intended thereby to carry on business ordinarily the characteristics of volume, frequency, continuity and regularity indicating an intention to continue the activity of carrying on the transactions must exist. But no test is decisive of the intention to carry on the business: in the light of all the circumstances an inference that a person desires to carry on the business of selling goods may be raised.”
6.5 A similar view has been expressed in the Director of Supplies & Disposal v. Member, Board of Revenue [1967] 20 STC 398 (SC) wherein it has been held:-
“14. …The expression “business” though extensively used in taxing statutes, is a word of indefinite import. In taxing statutes, it is used in the sense of an occupation, or profession which occupies the time, attention and labour of a person, normally with the object of making profit. To regard an activity as business there must be a course of dealings, either actually continued or contemplated to be continued with a profit-motive; there must be some real and systematic or organised course of activity or conduct with a set purpose of making profit. To infer from a course of transactions that it is intended thereby to carry on business ordinarily there must exist the characteristics of volume, frequency, continuity and system indicating an intention to continue the activity of carrying on the transactions for a profit. But no single test or group of tests is decisive of the intention to carry on the business. It must be decided in circumstances of the each particular case whether an inference could be raised that the is carrying on the business of purchasing or selling of goods within the meaning of the statute.”
6.6 Likewise in Mrs. Sarojini Rajah v. CIT [1969] 71 ITR 504 (Mad.) in the context of difference between investment and business, the following observations, are relevant:-
“We think that the presence of commercial motive is a primary legal requisite of trade. Purchase and sale as a business deal in the present context may be another requisite. Intention to make a profit normally inspires trade and commerce, but it seems it may not be the essence of trade. Likewise, habitual dealing is ordinarily indicative of trade or commerce, but is not necessarily so, as pointed out by Rowlatt K. in Graham v. Green. There may be other legal requisites which may have to be satisfied with reference to the character of particular transactions in different kinds of trade or businesses. But whether these legal requisites are satisfied or are present will themselves, in their turn, be a mixed question of law and fact. The character of the motive or intention with reference to a transaction is a matter of inference from the other facts. It is here the badges of trade indicated by the Royal Commission earlier referred to are of assistance. The subject-matter of a transaction may by such as is commonly or usually dealt with in trade or commerce.”
6.7 Almost identical view has been expressed by the Patna High Court, Orissa High Court and Madras High Court in Eclat Construction (P.) Ltd. v. CIT [1988] 172 ITR 84, CIT v. M.P. Bazar [1993] 200 ITR 131 and CIT v. R.M. Meenakshisundaram [1995] 212 ITR 220 & Hon’ble Delhi High Court in Bharat Development (P.) Ltd. (supra), wherein Hon’ble High Courts expressed the view that the term “business” means some real, substantive, systematic or organized course of activity or conduct capable of producing profit.; the term “profit motive” is not only the sole or relevant consideration that has to be kept in mind. It is one of the aspects. Normally intention to earn profit is required. The definition of the term “business” may also vary depending upon taxability under Sales Tax, Excise Duty, Value Added Tax, etc. because these are not taxes on income but the taxable event occurs because of the “economic activity” involved. Even if a person is carrying on trading on the principle of “no loss no profit”, it may be liable to pay taxes or comply with the statute when the charge, or incidence of tax, is on the “economic activity” as recognized in Riverside Housing Association Ltd. v. Revenue & Customs Commissioner [2006] EWHC 2383 (Ch) and the case law cited therein). In Town Investments Ltd. v. Department of the Environment [1977] 1 All ER 813, a Government department was claiming benefit under a legislation that protected “business tenancies” from increase in rent. The term “business” in the said case by a majority decision was held to include Government activities. It was held that the word “business” is a etymological chameleon; it suits its meaning to the context in which it is found. It is not the term of legal art but in its dictionary meaning it includes anything which is an occupation, as distinguished from pleasure-anything which is an occupation or a duty which requires attention is business. It was also observed that business conveys in ordinary meaning the notion of a distinct enterprise (not necessarily for profit) having its distinct object, distinct management and distinct assets and liabilities. In the said decision reference was made to an earlier decision in the case Customs & Excise Commissioner v. Lord Fisher [1981] S.T.C. 238 (sic), and it was observed as under:
“In regard to “business” for the purpose of the Act. Ralph Gibson J. held in Customs and Excise Commissioners v. Lord Fisher on earlier authority “that ‘business’ is or may be in particular contexts a word of very wide meaning,” but that “the ordinary meaning of the word ‘business’ in the context of this Act excludes, in my judgment, any activity which is no more than an activity for pleasure and social enjoyment”, though the fact that the pursuit of profit or earnings was not the motive did not prevent an activity from being a business if in any other respect it plainly was. He referred, at p. 245, to six indicia listed by the counsel for the commissioners as the test as to weather an activity was a business- was it- (a) a “serious undertaking earnestly pursued;” (b) pursued with reasonable continuity; (c) substantial in amount; (d) conducted regularly on sound and recognized business principles; (e) predominantly concerned with the making of taxable supplies to consumers for a consideration; (f) such as consisted of taxable supplies of a kind commonly made by those who seek to make profit from them.”
6.8 Now adverting to decisions relied upon by the ld. AR. First such decision is Distributor Baroda (P.) Ltd. (supra), where in the issue was as to whether the assessee company ,incorporated with the object to acquire and hold shares, stocks, debentures, debenture stocks, bonds, obligations and securities issued or guaranteed by any company constituted or carrying on business in British India and to take part in the formation, management, supervision or control of the business or operation of any company or undertaking and for that purpose to appoint and remunerate any directors, accountants or other experts or agents, fell within the scope of section 23A of the Indian Income-tax Act, 1922. Hon’ble Apex Court held that on the basis of the assets used, it could not be concluded that the assessee’s business consisted “wholly or mainly” in the dealing in investments. It was observed that section 23A speaks of the business of “holding of investments” and when a person invests in the shares of some of the companies, it is difficult to say that his business is one of investing. In commercial circles investing is not considered as business. An investor may feel perplexed if he is called a businessman. Apparently, this decision was rendered in different contexts and settings and is ,thus not relevant.
6.8-1 In Rajeev Lochan Kanoria’s case (supra) relied upon by the ld. AR, the Revenue did not challenge as perverse the finding of the Tribunal that the assessee’s business activity consisted of acquiring shares for managing, controlling and rehabilitating different companies listed by the AO. Accordingly, it was concluded that interest on the borrowed capital is deductible under s. 36(1)(iii) of the Act. In Indian Bank Ltd.’s case (supra), it was concluded that interest paid by the bank on money borrowed from its various depositors had to be allowed in its entirety under s. 10(2)(iii) of the IT Act, 1922 and there was no warrant for disallowing a proportionate part of the interest referable to moneys borrowed for the purchase of securities whose interest was tax free. Similarly, in Model Mfg. Co. (P.) Ltd. (supra) interest paid on money borrowed for the purchase of the shares for the purpose of investment, but with the motive of acquiring controlling interest in a company, was held to deductible under s. 57 of the Act. Similar findings were arrived at in India Cements Ltd.(supra) & Coelho (G.J.) (supra). In P Krishna Menon (supra) payments made by a disciple were held to be income arising from the vocation of the assessee as a teacher of Vedanta and therefore it was concluded that no question of exemption under section 4(3)(vii) of the 1922 Act arose. In Nabadwip Chandra Roy’s case (supra) the assessee carried on textile business and in that capacity was nominated as director and Chairman of the Member Society viz. Assam Provincial Textile Cooperative Society as he was the chairman of the Member Society of the Silchar Sub-divisional Co-operative Society. Accordingly, it was concluded that the remuneration therefore which the assessee got for the services rendered as director was nothing but a receipt arising from the exercise of the textile business, vocation or occupation carried on by him. After perusal of all the decisions relied upon by the ld. AR, especially when the said decisions were rendered in altogether different contexts and settings and the ld. AR did not elaborate before us as to how these decisions improve the case of the assessee, we are of the opinion that reliance on these decisions is totally misplaced. In the instant case, the assessee did not place before us even a copy of Memorandum of Association of the company or objects of the company, despite specific request during the course of hearing of the appeal. There is no material before us to infer as to whether or not these objects were placed before the lower authorities nor there is anything to suggest that the assessee intended to undertake some real, substantive, systematic or organized course of activity or conduct; rather the assessee made sole investment of Rs. 1850.91 crores in purchase of shares of M/s Amubja Cement India Ltd. & as concluded by the ld. CIT(A) no other transactions for purchase or sale of shares with the objects of business during the year were made nor the ld. AR referred us to any such transactions and instead the ld. AR admitted that the investment was made in shares of ACEL to acquire and retain control of the said company and no other transaction either in the preceding or succeeding years was made. Whether the sole transaction of investment was with the object of carrying on of business, no such material has been placed before us so as to enable us to infer so. In view of the foregoing, we are not inclined to interfere with the findings of the ld. CIT(A). Consequently, ground no.1.1 in the appeal is dismissed.
7. As regards grounds relating to disallowance u/s 14A of the Act, the AO disallowed the entire expenses Rs. 10,38,27,023/-, invoking provisions of section 14A(2) of the Act read with Rule 8D of I.T. Rules, 1962,without even analyzing the nature of each of the item of expenditure, comprising the aforesaid amount. The assessee merely submitted that expenses were incurred in the course of its normal business activities and that substantial investments were preceded by appropriate data gathering, data analysis, ascertainment of risks and other related matters, discussions to understand the environment relating to potential opportunities and many other similar matters. Post making of the investment it is also necessary for the company to follow up its investment portfolio. All such activity required the investment of human effort, requiring compensation for their efforts. Apparently, the assessee did not furnish identify separate details of expenditure which had been incurred for earning income which did not form part of total income even when huge investments by way of share holders’ funds were made to the extent of Rs. 18,64,54,46,839/- until 31.3.2006 and did not even offer for disallowance any expenditure for earning income which did not form part of total income. The assessee in its balance sheet as on 31.3.2006 reflected under schedule IV the amount of Rs. 18,509,150,756/- as long term Investments in unquoted shares. As already observed, the assessee did not furnish any specific details of expenditure incurred for management and supervision of aforesaid huge investments either before the AO or the ld. CIT(A) in order to enable them to record their satisfaction on the claim of the assessee. Now for instance what is the nature of an amount of Rs. 30 lacs towards agreement termination charges debited in P/L account has not been explained either before the lower authorities or even before us. Of course, as per section 14A(2) of the Act, even where the assessee claims that there is no expenditure which had been incurred relating to income which does not form part of his total income, if the AO, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. The provisions clearly state that when the AO embarks upon such exercise, he must have regard to the accounts of the assessee; he cannot show a blind eye to the picture revealed by the accounts. Hon’ble Apex Court in Kantamani Venkata Narayana & Sons v. First Addl. ITO [1967] 63 ITR 638 and again in Malegaon Electricity Co. (P.) Ltd. v. CIT [1970] 78 ITR 466 (SC) observed that it is the duty of the assessee to bring to the notice of the Income tax Officer particular items in the books of account or portions of documents which are relevant. The law casts a duty on the assessee to disclose fully and truly all material facts necessary for his assessment for that year. Not even a whisper has been made before us as to whether or not relevant accounts were placed before the AO or the ld. CIT(A) in order to enable them to examine the claim of the assessee. The ld. CIT(A) merely referred to decision in Cheminvest Ltd. (supra) without even examining the relevant accounts or ascertaining the relevant facts and circumstances. Here we may point out that Hon’ble jurisdictional High Court in Maxopp Investment Ltd. v. CIT [2011] 15 taxmann.com 390 held that expenditure (including interest paid on funds borrowed) in respect of investment in shares of operating companies for acquiring and retaining a controlling interest therein is hit by section 14A inasmuch as the dividend received on such shares does not form part of the total income .
7.1 Hon’ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. v. Dy. CIT [2010] 328 ITR 81 while adjudicating a similar issue in the context of provisions of sec. 14A of the Act and Rule 8D of the IT Rules,1962 concluded that Rule 8D, inserted w.e.f 24.3.2008 cannot be regarded as retrospective because it enacts an artificial method of estimating expenditure relatable to tax-free income. It applies only w.e.f AY 2008-09. For the assessment years where Rule 8D does not apply, the AO will have to determine the quantum of disallowable expenditure by a reasonable method having regard to all the facts and circumstances, the Hon’ble High Court concluded.
7.2 Hon’ble Supreme Court in their decision dated 6.7.2010 in CIT v. Walfort Share & Stock Brokers (P.) Ltd. [2010] 326 ITR 1, inter alia, observed that for attracting section 14A of the Act there has to be a proximate cause for disallowance, which is its relationship with the tax exempt income. The theory of apportionment of expenditure between taxable and non-taxable has, in principle, been now widened under section 14A, Hon’ble Apex Court concluded. In the words of Hon’ble Apex Court:
“17. The insertion of section 14A with retrospective effect is the serious attempt on the part of the Parliament not to allow deduction in respect of any expenditure incurred by the assessee in relation to income, which does not form part of the total income under the Act against the taxable income (see Circular No. 14 of 2001, dated 22-11-2001). In other words, section 14A clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. In many cases the nature of expenses incurred by the assessee may be relatable partly to the exempt income and partly to the taxable income. In the absence of section 14A, the expenditure incurred in respect of exempt income was being claimed against taxable income. The mandate of section 14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The basic reason for insertion of section 14A is that certain incomes are not includible while computing total income as these are exempt under certain provisions of the Act. In the past, there have been cases in which deduction has been sought in respect of such incomes which in effect would mean that tax incentives to certain incomes was being used to reduce the tax payable on the non-exempt income by debiting the expenses, incurred to earn the exempt income, against taxable income. The basic principle of taxation is to tax the net income, i.e., gross income minus the expenditure. On the same analogy the exemption is also in respect of net income. Expenses allowed can only be in respect of earning of taxable income. This is the purport of section 14A. In section 14A, the first phrase is “for the purposes of computing the total income under this Chapter” which makes it clear that various heads of income as prescribed under Chapter IV would fall within section 14A. The next phrase is, “in relation to income which does not form part of total income under the Act”. It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of section 14A. Further, section 14 specifies five heads of income which are chargeable to tax. In order to be chargeable, an income has to be brought under one of the five heads. Sections 15 to 59 lay down the rules for computing income for the purpose of chargeability to tax under those heads. Sections 15 to 59 quantify the total income chargeable to tax. The permissible deductions enumerated in sections 15 to 59 are now to be allowed only with, reference to income which is brought under one of the above heads and is chargeable to tax. If an income like dividend income is not a part of the total income, the expenditure/deduction though of the nature specified in sections 15 to 59 but related to the income not forming part of total income could not be allowed against other income includible in the total income for the purpose of chargeability to tax. The theory of apportionment of expenditures between taxable and non-taxable has, in principle, been now widened under section 14A. Reading section 14 in juxtaposition with sections 15 to 59, it is clear that the words “expenditure incurred” in section 14A refers to expenditure on rent, taxes, salaries, interest, etc. in respect of which allowances are provided for (see sections 30 to 37)………………”
7.3 Hon’ble Punjab & Haryana High Court in their decision in CIT v. Hero Cycles Ltd. [2010] 323 ITR 518 have observed that disallowance under section 14A requires finding of incurring of expenditure and where it is found that for earning exempted income no expenditure has been incurred, disallowance under section 14A cannot stand.
7.4 In Cheminvest Ltd. (supra), Special Bench held that when the expenditure is incurred in relation to income which does not form part of total income, it has to suffer the disallowance irrespective of the fact whether any income is earned by the assessee or not and the provisions of sec. 14A of the Act do not envisage any such exception.
7.5 Hon’ble jurisdictional High Court in a recent decision dated 18.11.2011 in Maxopp Investment Ltd. (supra) held as under:
“41. Sub-section (2) of section 14A, as we have seen, stipulates that the Assessing Officer shall determine the amount of expenditure incurred in relation to income which does not form part of the total income “in accordance with such method as may be prescribed”. Of course, this determination can only be undertaken if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. This part of section 14A(2) which explicitly requires the fulfillment of a condition precedent is also implicit in section 14A(1) [as it now stands] as also in its initial avatar as section 14A. It is only the prescription with regard to the method of determining such expenditure which is new and which will operate prospectively. In other words, section 14A, even prior to the introduction of sub-sections (2) & (3) would require the assessing officer to first reject the claim of the assessee with regard to the extent of such expenditure and such rejection must be for disclosed cogent reasons. It is then that the question of determination of such expenditure by the assessing officer would arise. The requirement of adopting a specific method of determining such expenditure has been introduced by virtue of sub-section (2) of section 14A. Prior to that, the assessing officer was free to adopt any reasonable and acceptable method.
42. Thus, the fact that we have held that sub-sections (2) & (3) of section 14A and Rule 8D would operate prospectively (and, not retrospectively) does not mean that the assessing officer is not to satisfy himself with the correctness of the claim of the assessee with regard to such expenditure. If he is satisfied that the assessee has correctly reflected the amount of such expenditure, he has to do nothing further. On the other hand, if he is satisfied on an objective analysis and for cogent reasons that the amount of such expenditure as claimed by the assessee is not correct, he is required to determine the amount of such expenditure on the basis of a reasonable and acceptable method of apportionment. It would be appropriate to recall the words of the Supreme Court in Walfort (supra) to the following effect:
“The theory of apportionment of expenditure between taxable and non-taxable has, in principle, been now widened under section 14A.”
So, even for the pre-Rule 8D period, whenever the issue of section 14A arises before an Assessing Officer, he has, first of all, to ascertain the correctness of the claim of the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income under the said Act. Even where the assessee claims that no expenditure has been incurred in relation to income which does not form part of total income, the assessing officer will have to verify the correctness of such claim. In case, the assessing officer is satisfied with the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, the assessing officer is to accept the claim of the assessee insofar as the quantum of disallowance under section 14A is concerned. In such eventuality, the assessing officer cannot embark upon a determination of the amount of expenditure for the purposes of section 14A(1). In case, the assessing officer is not, on the basis of objective criteria and after giving the assessee a reasonable opportunity, satisfied with the correctness of the claim of the assessee, he shall have to reject the claim and state the reasons for doing so. Having done so, the assessing officer will have to determine the amount of expenditure incurred in relation to income which does not form part of the total income under the said Act. He is required to do so on the basis of a reasonable and acceptable method of apportionment.”
7.6. Hon’ble Calcutta High Court in Dhanuka & Sons v. CIT [2011] 12 taxmann.com 227 held that
“After hearing the learned counsel appearing for the parties and after going through the materials on record and the decisions cited by Mr. Khaitan, we find that the Supreme Court in the cases of CIT v. Maharastra Sugar Mills Ltd. [1971] 82 ITR 452 and Rajasthan State Warehousing Corpn. v. CIT [2000] 242 ITR 450 having held that where there is one indivisible business giving rise to taxable income as well as exempt income, the entire expenditure incurred in relation to that business would have to be allowed even if a part of the income earned from the business is exempt from tax, section 14A of the Act was enacted to overcome those judicial pronouncements. The object of section14A of the Act is to disallow the direct and indirect expenditure incurred in relation to income which does not form part of the total income.
8. In the case before us, there is no dispute that part of the income of the assessee from its business is from dividend which is exempt from tax whereas the assessee was unable to produce any material before the authorities below showing the source from which such shares were acquired. Mr. Khaitan strenuously contended before us that for the last few years before the relevant previous year, no new share has been acquired and thus, the loan that was taken and for which the interest is payable by the assessee was not for acquisition of those old shares and, therefore, the authorities below erred in law in giving benefit of proportionate deduction.
9. In our opinion, the mere fact that those shares were old ones and not acquired recently is immaterial. It is for the assessee to show the source of acquisition of those shares by production of materials that those were acquired from the funds available in the hands of the assessee at the relevant point of time without taking benefit of any loan. If those shares were purchased from the amount taken in loan, even for instance, five or ten years ago, it is for the assessee to show by the production of documentary evidence that such loaned amount had already been paid back and for the relevant assessment year, no interest is payable by the assessee for acquiring those old shares. In the absence of any such materials placed by the assessee, in our opinion, the authorities below rightly held that proportionate amount should be disallowed having regard to the total income and the income from the exempt source. In the absence of any material disclosing the source of acquisition of shares which is within the special knowledge of the assessee, the assessing authority took a most reasonable approach in assessment.”
7.7 As already observed, in the instant case, the assessee denied incurring any expenditure for earning income, which did not form part of total income during the course of assessment proceedings even when huge investments were made by the assessee in the shares for having controlling interest . In terms of the aforesaid decision of the Hon’ble jurisdictional High Court in Maxopp Investment Ltd. (supra), even where the assessee claims that no expenditure has been incurred in relation to income which does not form part of total income, the AO is required to verify the correctness of such claim. In case, the AO is not, on the basis of objective criteria and after giving the assessee a reasonable opportunity, satisfied with the correctness of the claim of the assessee, he shall have to reject the claim and state the reasons for doing so. Having done so, the AO has to determine the amount of expenditure incurred in relation to income which does not form part of the total income under the said Act, Hon’ble High Court concluded. Following the view taken in this decision, Hon’ble jurisdictional High Court in CIT v. Machino Plastic Ltd. [2012] 206 Taxman 117 (Delhi) (Mag.) in their decision dated 28.2.2012 in ITA no. 92 of 2011, restored the matter to the file of the AO, being handicapped because of failure of the assessee to furnish relevant details and particulars .In the instant case also, the AO was handicapped, because of failure of the assessee to furnish relevant details/particulars and accounts while making the disallowance in terms of provisions of sec. 14A of the Act. There is nothing in the assessment order or impugned order as to whether the assessee placed the relevant details & accounts before the AO nor the ld. CIT(A) seems to have undertaken any exercise to ascertain the details of expenditure objectively in managing and supervising the aforesaid huge investments. In view of the foregoing, we consider it fair and appropriate to set aside the order of the ld. CIT(A) and restore the matter to the file of the AO for deciding the issue, afresh in accordance with law in the light of our aforesaid observations and various judicial pronouncements, including those referred to above, after allowing sufficient opportunity to the assessee Needless to say that while redeciding the issue, the AO shall pass a speaking order, giving reasons for his satisfaction or otherwise, as pointed out by the Hon’ble jurisdictional High Court in their decision in Maxopp Investment Ltd.’s case (supra), bringing out clearly expenditure incurred in managing and supervising the aforesaid huge investments. The assessee is also directed to furnish all the relevant details of expenditure actually incurred in managing and supervising the aforesaid huge investments along with relevant accounts. With these observations, ground nos. 1, 2 to 2.1 in the appeal are disposed of while ground nos. 1.2, 1.3 & 2.2 are dismissed.
8. No additional ground having been raised before us in terms of residuary ground in the appeal, accordingly, this ground is dismissed.
9. No other plea or argument was made before us.
10. In the result, appeal is partly allowed but for statistical purposes.
