Madras H.C : The interest income arising to the assessee should be assessed under the head “other sources” and not under the head “business”?

High Court Of Madras

ACE Investments (P) Ltd. vs. CIT

Sections 28(i), 56

Asst. Year 1977-78, 1978-79, 1979-80, 1980-81, 1981-82

N.V. Balasubramanian & P. Thangavel, JJ.

Tax Case Nos. 1607 to 1611 of 1986

26th March, 1998

Counsel Appeared

V.S. Jayakumar, for the Applicant : C.V. Rajan, for the Respondent

JUDGMENT

N.V. BALASUBRAMANIAN, J. :

The following common question of law has been referred to us at the instance of the assessee relating to the assessment of its income for the asst. yrs. 1977-78 to 1981-82 for our consideration :

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the interest income arising to the assessee should be assessed under the head “other sources” and not under the head “business”?

2. The assessee is a company and the main objects of the company, as set out in its memorandum of association, inter alia, are : “1. To carry on business as capitalists financiers, concessionaires and merchants and to undertake and carry on and execute all kinds of financial, commercial, trading and other operations. To advance, deposit, or lend money on securities and properties to or with such persons and on such terms as may deem expedient to discount, buy, sell, exchange and deal in bills, notes, warrants, coupons and other negotiable or transferable securities or documents. To issue on commission, subscribe for take, acquire or hold, sell, exchange and deal in shares, stock, bonds, obligations or securities of any Government, local authorities or company. To guarantee or become liable for the payment of money or investments or for performance of any obligations and to transfer all kinds of trusts and agency business. To borrow or take deposits of money at interest or otherwise from any person or persons, local authority or Government and advance, lend or deposit any such money or other moneys on such security or otherwise as the company may deem expedient without doing banking business as defined in the Banking Companies Act, 1949.”

The assessee filed its returns of income for the asst. yrs. 1977-78 to 1981-82 and admitted the income under the head “business”. The claim of the assessee that its income under the head “business” should be set off against the business loss brought and carried forward from the earlier assessment years. The income admitted by the assessee in the various returns filed for the said assessment years consisted of interest receipts from fourteen private trusts, the beneficiaries of which are members of the family of Sri T.V. Sundaram Iyengar. The ITO examined the question in detail and found that the characteristics of money-lending business were absent in the advances made by the assessee to the fourteen private trusts and found that the advances were short-term advance, the rate of interest was low, there was no risk at all and frequency of transactions was absent and that there was no change of parties in the loan transaction. The ITO thus came to the conclusion that the transaction in question were only in the nature of investments made by the assessee and the interest income received by the assessee for the various assessment years cannot be regarded as income from money-lending business. Accordingly, he held that the income from the transactions should be assessed under the head “other sources” and not under the head “Business” as claimed by the assessee. The assessee preferred appeals against the orders of assessment before the CIT(A) and the CIT (A) confirmed the orders of the ITO. The assessee carried the matter further in appeal before the Tribunal and it was the case of the assessee that the loan advance came out of assessee’s own capital and not out of any borrowing on which the assessee was liable to pay interest. It was also submitted that the public financial institutions advance loans for longer period, but, still their income is considered under the head “business” and when banks lend loan to weaker sections of society or to some priority sectors, interest income on such loans is considered under the head “business”. The assessee also submitted before the Tribunal that transactions were entered into pursuant to the objects of the company, i.e., to carry on business as financiers and therefore, interest income should be assessed under the head “business”. The Tribunal considered the matter and found that surplus funds invested in the fourteen trusts were invested on a low rate of interest was a single instance and the income arising on the said deposits cannot be considered as income from money-lending business. The assessee has challenged the finding of the Tribunal and the question of law set out earlier has been referred under s. 256(1) of the IT Act. Mr. V.S. Jayakumar, learned counsel appearing for the assessee, submitted that right from the asst. yr. 1973-74, the assessee had been claiming that the interest income on the money lent to the fourteen private trusts should be assessed under the head “business”. He also brought to our attention that the finding of the Tribunal that for the asst. yr. 1976-77 wherein the Tribunal accepted the case of the assessee and recorded a finding that the assessee was carrying on business in share dealing and in money-lending business. For the asst. yrs. 1977-78 and 1978-79 the matter was reagitated and when the matter reached the Tribunal, the Tribunal set aside the assessment for the three assessment years and directed the ITO to re-do the assessment. Learned counsel submitted that the Tribunal has accepted the case of the assessee for the asst. yr. 1976-77 that the assessee was carrying on money- lending business and according to him, the only conclusion that would flow from the said order is that the assessee was carrying on money-lending business since there is no change in the factual situation and only with reference to fourteen transactions the Tribunal has recorded a finding that the assessee was carrying on money-lending business. Learned counsel for the assessee also submitted that the Tribunal was not correct in holding that from April 1975-82, the assessee did not make any advance to any other party and he referred to the order of the ITO for the asst. yr. 1977-78 wherein a sum of Rs. 3,585 was admitted as income from M/s Express Traders and the said sum was the interest income and the money was advanced to M/s Express Traders as a part of money-lending business. He also submitted that the object of the assessee-company was to advance, deposit of lend money and when there is an object clause in the memorandum of association to lend money and in pursuance of that object, the assessee had lend money, it must be taken that the money was advanced in the course of its money-lending business and the income from money-lending business should be regarded as income from business. He also submitted that mere absence of frequency in the transaction would not take the transaction out of the business net and convert the same as if the money was deposited in fourteen trusts. He, therefore, submitted that the Tribunal erred in law in holding that the interest income arising on the said deposits cannot be considered as income from moneylending business. In support of his submission, learned counsel for the assessee placed reliance on the decision of the Supreme Court in Investment Ltd. vs. CIT (1970) 77 ITR 533 (SC) : TC 14R.373 wherein the Supreme Court held that the order of the Tribunal holding that the shares and securities were the stock-in-trade of the assessee-company for an earlier assessment year would constitute good and cogent evidence to determine the nature of the transaction in shares and securities, for the subsequent assessment year. Learned counsel submitted that since the Tribunal has rendered a finding that for the earlier assessment year the assessee-company was carrying on money-lending business, it would constitute good evidence to show that the assessee was carrying on the money-lending business and there are no changes in the factual position.

7. Learned counsel for the assessee also relied on a decision of the Supreme Court in CIT vs. Calcutta National Bank Ltd. (1959) 37 ITR 171 (SC) : TC 12R.118, wherein the Supreme Court considered the provisions of Excess Profits Tax Act, 1940, and in that context, the Supreme Court held that the term “business” is a word of very wide and though ordinarily, “business” implies a continuous activity in carrying on a particular trade or avocation, it may also include an activity which may be called “quiescent” and submitted that there was a continuous activity, and the activity carried on by the assessee should be regarded as business activity. Learned counsel for theassessee also brought to our notice the decision of this Court in CIT vs. R.M. Meenakshisundaram (1995) 127 CTR (Mad) 329 : (1995) 212 ITR 220 (Mad) : TC S13.1382 and submitted that a question as to whether a particular source of income was from a business or not should be decided according to ordinary notions and whether the income was derived from an activity which has a set purpose and the motive for the activity was profit, and even a single or isolated transaction would constitute business. He, therefore, submitted that the decision of this Court in CIT vs. Meenakshisundaram (supra) would apply to the facts of this case. The next decision that was relied on by the learned counsel is the decision of the Delhi High Court in CIT vs. Bharat Insurance Co. Ltd. (1983) 34 CTR (Del) 371 : (1983) 142 ITR 342 (Del) : TC 12R.106 wherein the Delhi High Court held as under : “Business” is a term of wide amplitude which includes any trade, commerce or manufacture, or any adventure or concern in the nature of trade, commerce or manufacture. Ordinarily, business implies continuous activity in carrying on a particular trade or vocation but it may also include an activity which may be called quiescent.”

8. Learned counsel then, placed reliance on the decision of the Calcutta High Court in Lakshmi Narayan Board Mills (P) Ltd. vs. CIT (1994) 205 ITR 88 (Cal) : TC 13R.1385 wherein the Calcutta High Court held that the question whether the business was being carried on or was discontinued depends on the facts of each case and that it is not necessary that a business should be worked all the time and there may be long intervals of inactivity and a concern may still be a going concern though, it may for some time be quiet and dormant. Learned counsel further placed reliance on the decision of the Supreme Court in CIT vs. Nainital Bank Ltd. (1965) 55 ITR 707 (SC) : TC 14R.285 and submitted that cash is the stock-in-trade of a banking business and the degree of the risk or its frequency is not of much relevance but its nexus to the nature of the business is material. He, therefore, submitted that the assessee lend loan to fourteen trusts in one year and though there was no subsequent lending, what is relevant is the nature of the business and not the degree of risk or its frequency. He also submitted that had the assessee advanced money to fourteen trusts spread over a period of fourteen years, the income arising from such lending would be regarded as money-lending business and the mere fact that the transactions were carried out in one year would not make any difference and, therefore, the income from the advance should be regarded as income from the money-lending business.

9. Learned counsel for the Revenue, on the other hand, submitted that the Tribunal on the basis of the material placed before it came to the conclusion that the assessee was not carrying on any money-lending business and the interference drawn by the Tribunal was on the basis of the facts before the Tribunal and, therefore, the finding should be regarded as a finding of fact. Learned counsel for the Revenue placed reliance on the decision in Ghanshyamdas Gangadhar vs. CIT (1954) 25 ITR 318 (Pat) wherein the Patna High Court held that the question whether the assessee was or was not carrying on the business is a mixed question of fact and law and it is not purely a matter of legal inference and it is open to the Tribunal on the facts to hold that the assessee was not carrying on any business. He, therefore, submitted that in all the cases what is relevant is the nature of activity carried on by the assessee and when the Tribunal as the final fact-finding authority on the basis of the materials came to the conclusion that the assessee was not carrying on money-lending business, the finding arrived at by the Tribunal is a pure finding of fact and it cannot be interfered with. Learned counsel also placed reliance on the decision of the Supreme Court in Amarchand Sobhachand vs. CIT (1971) 82 ITR 591 (SC) : TC 15R.1405 and submitted that the finding of the Tribunal that the assessee carried on money-lending business is a finding of fact and when that finding is supported by evidence on record, that would be binding on the Court. Learned counsel for the Revenue also brought to our attention the decision of the Supreme Court in Kaicilda Wallang vs. U. Lokendra Suiam AIR 1987 SC 2047 wherein the Supreme Court considered the provisions of Assam Money Lenders Act, 1934, to hold that isolated transactions would not make the plaintiff a person engaged regularly in money-lending business and the mere object clause would not be sufficient. Learned counsel for the Revenue also submitted that the finding of the Tribunal for the earlier assessment year, viz., 1976-77 cannot be regarded as conclusive and hence it cannot be described as good evidence. According to him, the Tribunal had considered and found that it did not go into the matter deeply whether the assessee was really carrying on moneylending business and after considering the earlier order, the Tribunal has come to the conclusion that the assessee was not carrying on the money-lending business. He also submitted that insofar as interest amount received from M/s Express Traders is concerned, the money was advanced to M/s Express Traders only as deposit and it was not money lent in the course of money-lending business. Learned counsel for the Revenue submitted that the mere presence of the object clause would not be sufficient and other ingredients of money-lending business are absent and, therefore, the Tribunal was correct in holding that the assessee was not carrying on money-lending business.

10. We have carefully considered the submissions of the learned counsel on either side. It is not doubt true that right from the asst. yr. 1973-74 the assessee had been claiming that it was carrying on money-lending business.

For the asst. yr. 1973-74 the assessee went on appeal before the Tribunal and the Tribunal confirmed the finding of the ITO that the assessee was not carrying on money-lending business upto and including the asst. yr. 1973-74. For the next two asst. yrs. 1974-75 and 1975-76 the Tribunal also recorded a finding that the assessee was not carrying on money-lending business, though it found that the assessee was carrying on business in share dealings. For the asst. yr. 1976-77 the assessee claimed that it was carrying on business both in share dealings as well as in money-lending business. When the matter reached the Tribunal, the Tribunal, no doubt, recorded a finding that the assessee was carrying on business both in shares as well as in money-lending business. The Tribunal had considered the matter for the present assessment years and found that the earlier Tribunal has not considered the question in detail as the amount involved for the asst. yr. 1976-77 was a paltry amount of Rs. 1,046. Therefore, the finding recorded by the Tribunal for the asst. yr. 1976-77 cannot be regarded in anyway as conclusive the fact that the assessee was carrying on money-lending business from the asst. yr. 1976-77 onwards. The Tribunal, as a final fact-finding authority examined its own order for the asst. yr. 1976-77 and found because of the amount involved in the year, the Tribunal had not deeply gone into the matter which it should have been done and, therefore, the finding recorded by the Tribunal for the said earlier assessment years could not be conclusive of the matter. The decision of the Supreme Court on which learned counsel for the assessee placed strong reliance is the case of Investment Ltd. (supra) does not help the assessee. The Supreme Court in the said case held that the finding recorded by the Tribunal for an earlier assessment year as regards the nature of the transaction would not be conclusive and binding on the IT authorities or the Tribunal for the subsequent assessment years, but the earlier order of the Tribunal would constitute only a good and cogent evidence as regards the nature of the transaction. Therefore, when the earlier order of the Tribunal is to be regarded only as a piece of evidence, and it is no doubt true that great weight should be attached to the finding of the Tribunal, still, the order can be regarded only as a piece of evidence and cannot be regarded as conclusive of the matter in one may or other and once and for all future assessments and once the earlier order of the Tribunal is regarded as a piece of evidence and the Tribunal has considered the evidence and came to the conclusion that the finding recorded by the Tribunal was rendered on the facts of that case and because of the meagre amount involved, the Tribunal in the earlier order did not go into the matter deeply, the findings cannot be lightly disturbed. That apart, it is well settled that under the provisions of the IT Act each year of assessment is a self-contained year and there is no question of any res judicata in a proceedings under the IT Act. Therefore, the submission of the learned counsel for the assessee that because of the earlier order of the Tribunal for the asst. yr. 1976-77 the assessee should be regarded as carrying on money- lending business for the present assessment years also is not acceptable.

11. The second circumstance that was relied on by the learned counsel for the assessee the monies advanced to the fourteen trusts were not isolated transaction, and according to him, the Tribunal was not correct in holding that the assessee did not make any other advance to any other party. The ITO, for the asst. yr. 1977-78, no doubt, found that the assessee had admitted a sum of Rs. 3,585 as the income from M/s Express Traders. The CIT(A) in the common order passed for the asst. yrs. 1977-78 to 1979-80 and 1981-82 found that the money advanced by the assessee to M/s Express Traders was only a deposit and it was not money lent to the said concern in the course of its money-lending business. It is only because of the finding recorded by the CIT(A) that the money was given as deposit, the Tribunal has recorded a finding that the assessee did not make any advance to any other party. Therefore, the decision relied on by the learned counsel for the assessee is of no avail to the assessee.

12. Learned counsel for the assessee referred to object clause. Under the object clause the assessee is empowered to lend money on securities and properties to certain persons in the prescribed terms. We are of the opinion that mere presence of the object clause would not be sufficient to hold that the assessee was carrying on moneylending business. Learned counsel mainly relied on the decision of the Supreme Court in CIT vs. Nainital Bank Ltd. (supra) wherein the Supreme Court laid down certain tests to find out whether a person is carrying on business or not. The apex Court held that it would depend upon the volume of the business, frequency of the transaction, continuity, and the need under which the transaction was entered into. If the decision of the Supreme Court in Nainital Banks case (supra) is applied, it is clear that on the facts of this case, the amounts advanced were a short- term advances and they were advanced only to the fourteen trusts. The assessee had not advanced money to any other person. The rate of interest charged was on 6 per cent which the Tribunal considered the same to be as low, when compared to the market rate of interest prevalent at that time. There is also one other fact. It is seen that the interest was collected only after the payment of principal sum. The Tribunal also found that the persons to whom the advances were made were closely connected with the assessee and, therefore, mere presence of the object clause in the memorandum of association that the assessee can carry on money-lending business would not be sufficient and conclusive in the light of the other factual matters pointing out the nature of the transactions. Learned counsel cited the decision of the Supreme Court in the case of Calcutta National Bank Ltd. (cited supra) and it is a case arising under the Excess Profits Tax Act, 1940, and in that Act, the term ‘business’ has a wider meaning. The Supreme Court held that though the expression, ‘business’ implies a continuous activity in carrying on a particular trade or avocation, it may also include an activity which may be called ‘quiescent’. Applying the tests laid down in decision of the Supreme Court in the case of Calcutta National Bank Ltd. case, cited supra, to the facts of the case, it is essential for the assessee to prove that the activity was carried on continuously and systematically by the application of its labour and skill to earn income. In other words, there must be proof for continuous activity in carrying on a particular trade and on the facts of this case, it was clearly found that the activity indulged by the assessee was one time transaction and there was no continuous activity of dealing in money by the assessee in the course of its activity of the business. Therefore, the decision of the Supreme Court in the case of Calcutta National Bank Ltd. (cited supra) has no application to the facts of this case. The next decision that was relied on by the assessee is the decision of this Court in R.M. Meenakshisundaram’s case (supra) wherein this Court considered the question when a particular receipt can be regarded as business income and this Court held that the question must be decided according to ordinary notions of what a business is and the activity from which the income is derived must have a set purpose. It is seen in the instant case that there were no business dealings with any other person except the fourteen trusts and there was an absence of the motive for the interest charged was at abysmally low rate of 6 per cent which was comparatively lower to the prevalent market rate of interest. This Court, no doubt, held that even a single or isolated transaction can be regarded as business if there are indicia of trading activity, but have seen that there was no systematic or organised activity carried on by the assessee in dealing with the money. There was only an isolated transaction and there was no continuous activity in dealing with the money and the only one transaction entered into by the assessee was the lending of the money to the fourteen private trusts and the assessee had received the principal sum even before it received the interest. Therefore, applying the principle laid down by this Court, in our opinion, the assessee cannot be said to be carrying on money-lending business.

The decision of the Delhi High Court in Bharat Ins. Co. Ltd. case (supra), on which reliance has been placed, does not lay down any new, or different tests and, therefore, it is unnecessary to consider the said decision in detail. The Court, thereupon held that the business activity implies continuous activity in carrying on a particular trade or vocation which is absent in the instant case. The decision of the Calcutta High Court in Lakshmi Narayan Board Mills (P) Ltd. case (supra) on which reliance is placed by the assessee does not advance the case of the assessee and is distinguishable from the present case. In that case, the business has actually commenced and there was lull in carrying on that particular activity of the business and in that factual situation the Court held that even though, there was long absence in the business activity, the concern should be regarded as carrying on business activity. The decision of the Calcutta High Court has no application to the facts of this case as the assessee has to establish that it had commenced its money-lending business and in the absence of any finding that it had commenced the moneylending business in pursuance of the object clause, the decision of the Calcutta High Court has no application to the facts of this case. The decision in Nainital Bank Ltd. case (supra) is also not applicable to the facts of this case. The assessee in the instant case is not carrying on business in banking and, therefore, the money lent by it cannot be regarded as its stock-in-trade. In the context of banking business, the Supreme Court held that the degree of the risk or its frequency is not of much relevance but its nexus to the nature of the business is material. The decision of the Supreme Court relating to the banking business has no application as the assessee who claims to be a money-lender, it has been fairly submitted by the learned counsel for the assessee that it was not even registered under the provisions of the Tamil Nadu Money Lenders Act.

We are of the view that the finding arrived at by the Tribunal that the assessee was not carrying on money-lending business is a finding arrived at on the basis of materials on record and as held by the Supreme Court in Kaicilda Wallang vs. U. Lokendra Suiam (supra) the isolated transaction would not render the assessee to be regularly as engaged in money-lending business. The decision of the Supreme Court in Amarchand Sobha Chand case (supra) is to the effect that the finding arrived at by the Tribunal on the evidence on record is a finding of fact and would be binding on the Court. The Tribunal, in our opinion, on the basis of the materials has come to the right conclusion that the assessee had merely invested its surplus fund in the fourteen trusts and the interest charged was at a low rate of interest and it was an isolated transaction and the assessee has not advanced money in the course of its business in pursuance of the object clause in the memorandum of association. The Tribunal, in our opinion, has come to the correct conclusion in holding that the income of the assessee cannot be regarded as income derived from money-lending business, and it was derived from the deposits or investments made. In our view, the finding arrived at by the Tribunal on the basis of the materials is a pure finding of fact and no interference is called for in the tax case reference.

16. Accordingly, we answer the common question of law referred at the instance of the assessee, for various assessment years in the affirmative and against the assessee. The Revenue is entitled to costs to Rs. 1,500 one set.

[Citation : 244 ITR 166]

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