IN THE ITAT MUMBAI BENCH ‘G’, THIRD MEMBER

Sujay Trading (P.) Ltd.

v

Joint Commissioner of Income-tax, SR-30, Mumbai

K. P. T. THANGAL, VICE PRESIDENT, AS A THIRD MEMBER

R.P. TOLANI AND SUNIL KUMAR YADAV, JUDICIAL MEMBER

D. K. SRIVASTAVA, ACCOUNTANT MEMBER

IT APPEAL NO. 4348 (MUM.) OF 2001

[Assessment year 1994-95]

September 9, 2007

Section 28(i) of the Income-tax Act, 1961 - Business income- Chargeable as - Assessment year 1994-95 - Assessee-company was formed with its main object to trade in various goods - Besides, assessee’s ancillary objects were to lend and advance money and to invest in shares and securities, etc. - During relevant year, assessee passed a resolution to treat said ancillary object as its main object - Thereafter, assessee borrowed funds and invested it in various stocks, bonds etc. and earned interest thereon - In its return of income for relevant year, assessee showed interest income as its income from business - However, considering that assessee had not commenced business as per main object, Assessing Officer disallowed claim of assessee and treated interest income as its income from other sources - Whether by making said ancillary object as its main object, income earned by assessee was to be treated as its business income and not otherwise - Held, yes

FACTS

The assessee-company was formed with its main object to trade in various goods and commodities. Besides, the assessee’s ancillary objects were to lend and advance money and to invest surplus funds in shares, stocks, debentures, etc. On 3-4-1993, the board of directors of the assessee resolved to treat the ancillary objects to be its main object. During the assessment year 1994-95, the assessee earned income by way of interest on the surplus funds. In its return of income for the said year, the assessee declared said income as its business income. However, the Assessing Officer was of the view that the main object of the assessee was trading which business had not commenced during the relevant year, and, therefore, he brought to tax the interest income as income of assessee from other sources. On appeal, the Commissioner (Appeals) upheld the said disallowance. On further appeal, the Judicial Member held that since the assessee was entitled to convert the ancillary objects into main objects and having done so, the income earned was to be treated as income from business and not otherwise. On the other hand, the Accountant Member held that by merely making the said ancillary object as assessee’s main object, it could not be said that the business had been set up and, consequently, the income in question could not be treated as business income of the assessee. In view of the said difference of opinion between the Members, the issue was referred to the Third Member.

HELD [PER THIRD MEMBER]:

The view taken by the Judicial Member was to be accepted. The Accountant Member had not appreciated that the assessee was empowered to convert the ancillary object into main object and by adopting the Board’s resolution to this effect, the assessee had complied with the Company Law Regulation. Assessee had in fact borrowed the funds. Further, the view taken by the Judicial Member was to be accepted as the revenue itself had accepted in the preceding years and subsequent years the very same kind of transaction as assessee’s business income. As such, his order on this point was to be upheld. [Para 9]

EDITOR’S NOTE:

(1) As regards the expenditure incurred by the assessee on renovation of furniture, since by repair of furniture, no new asset came into existence, expenditure in question was allowable as revenue expenditure.

(2) As regards the expenditure in respect of payments made to employees, since it was not disputed that payments had not been made or made to the relatives and further since, the assessee was in a big way having transactions with various financial and investment organizations, its claim was allowable.

(3) As regards the legal and professional fees paid by the assessee on account of executing fund management agreement, since the assessee was in investment and finance management business and such agreements were executed always in the normal course of its business, expenses in question were allowable.

(4) As regards the traveling and conveyance expenses incurred by assessee on foreign travel, in view of fact that same were in connection with business of assessee and complete details whereof had been furnished, expenses not being personal, were allowable.

(5) As regards the telephone expenses and miscellaneous expenses, since the assessee had filed the relevant details, expenditure in question was allowable.