IN THE HIGH COURT OF JUDICATURE AT BOMBAY, NAGPUR BENCH, NAGPUR

ITRs 4TO6/02,7/95&18/98 1 Common Judgment IN THE HIGH COURT OF JUDICATURE AT BOMBAY, NAGPUR BENCH, NAGPUR. INCOME TAX REFERENCE No. 4/2002 WITH INCOME TAX REFERENCE No. 5/2002 WITH INCOME TAX REFERENCE No. 6/2002 WITH INCOME TAX REFERENCE No. 7/1995 WITH INCOME TAX REFERENCE No. 18/1998 M/s Central Provinces Manganese Ore Company Limited, Nagpur. APPLICANT...VERSUS... The Commissioner of Income Tax, (Vidarbha), Nagpur. RESPONDENT Shri K.P. Dewani, counsel for the Assessee. Shri Anand Parchure, counsel for the Department. CORAM :SMT.VASANTI A NAIK AND V.M. DESHPANDE, JJ. DATE : 8 TH MARCH, 2017. ORAL JUDGMENT (PER : SMT.VASANTI A NAIK, J.) Whether on the facts and in the circumstances of the case, the income of the assessee was assessable under the head 'business' rather than income from 'other sources' is a question that is referred to this Court for a decision in all the reference applications. The other two questions that are referred are consequential and our answers to the same would depend upon our answer to the aforesaid question that is referred for a decision. In reference No.4 of 2001, an additional question 'whether on the facts and in the circumstances of the case no income from interest on the loan to Shri Ramprasad could be assessed during the assessment year even on accrual basis, is also framed. Since the parties to all the ::: Uploaded on - 18/03/2017 ::: Downloaded on - 16/01/2019 05:14:34 :::

ITRs 4TO6/02,7/95&18/98 2 Common Judgment reference applications are M/s Central Provinces Manganese Ore Company Limited, Nagpur and the Income Tax Department, the reference applications are heard together and are decided by this common judgment. 2. Few facts giving rise to the questions that are referred for a decision, are stated thus: The applicant Assessee is a company registered in Great Britain. The assessee has a branch in Nagpur. The assessee Company was dealing in the extraction and sale of manganese ore. The assessee had under its control about 21 mines and in the year 1962, the Government of India took over most of them. In 1973, steps were initiated by the Government of India to take over the remaining mines as also 49% share of the assessee in MOIL. However, the mines as well as the share was finally taken over by the Government in the year 1977. As soon as the assessee Company became aware about the decision of the Government of India to take over the mines in the year 1973, the assessee decided to venture into another business. The assessee, therefore, amended its Memorandum and Articles of Association to cover the business of banking and money lending. This was done by the assessee Company by passing a special resolution on 08.06.1973. In furtherance of the said object, as per the amended Memorandum and Articles of ::: Uploaded on - 18/03/2017 ::: Downloaded on - 16/01/2019 05:14:34 :::

ITRs 4TO6/02,7/95&18/98 3 Common Judgment Association, the assessee advanced loan to about eight reputed companies between 1973 to 1975. The loan was advanced on execution of pro notes and by mortgage of immovable property. On 09.02.1978, the Reserve Bank of India informed the assessee that it was permitted to continue its branch establishment in India only up to 30.06.1978 and that was only for the purpose of winding up of the affairs of the assessee Company and the settlement of its pending matters. The Reserve Bank of India permitted the assessee to confine its activities to the realization of its assets and the permission for retention was extended from year to year up to the relevant years, i.e. 1984 85, 1988 89, 1989 90, 1990 91, 1991 92 and 1992 93 with which we are concerned. The last installment of recovery from one of the debtors, i.e. Ritz Hotel was fixed by the High Court in July 1990. In respect of the loan that was recoverable from MOIL, efforts were continued by the assessee even during the last relevant assessment years. The term deposits from the bank had to be frequently renewed or encashed according to the exigencies of business. It was the assessee's case that the business activities continued during the relevant assessment years and in view of the year to year extension granted by the Reserve Bank of India in respect of the permission for retention, the assessee had to maintain its branch and establishment for the aforesaid business activity and was, therefore, required to incur establishment expenses. The assessing officer disallowed the expenses in full. The Commissioner of Income Tax (Appeals) allowed the expenses of ::: Uploaded on - 18/03/2017 ::: Downloaded on - 16/01/2019 05:14:34 :::

ITRs 4TO6/02,7/95&18/98 4 Common Judgment audit and legal charges in full but, disallowed remaining expenses to the extent of 20%. In some of the earlier years, the assessee had incurred losses in the business and the department, after determining the loss, refused to allow its set off. The income tax authorities held that the income derived by the assessee from interest and the amount that was recovered by the assessee would not fall under the head 'business' but, would fall under the head income from 'other sources'. The Tribunal rejected the claim of the assessee in the appeal filed by the assessee before the Tribunal and upheld the finding of the assessing officer disallowing the set off and holding that the income of the assessee was not business income but, was income from other sources. In the aforesaid factual background, the following questions were referred to this Court in these reference applications for a decision: I. Whether on the facts and in the circumstances of the case, the income of the assessee was assessable under the head 'business' rather than 'other sources'? II. Whether on the facts and in the circumstances of the case, there was any justification in law for the ad hoc disallowance of 20% of the establishment expenses? III. Whether on the facts and in the circumstances of the case, the set off of losses of earlier years could be allowed as a deduction during this year?

ITRs 4TO6/02,7/95&18/98 5 Common Judgment In reference No.4 of 2002, the following question is also framed: IV. Whether on the facts and in the circumstances of the case, no income from interest on the loan to Shri Ramprasad could be assessed during the relevant year even on accrual basis? 3. The question that needs to be decided by us at the outset is the first question that is referred to us and if the same is answered in the affirmative and in favour of the assessee, the second and the third question would necessarily be required to be decided in favour of the assessee. 4. Shri Dewani, the learned counsel for the assessee, submitted that the authorities harped upon the absence of license from the Reserve Bank of India in respect of the business of money lending and financing with the assessee to record a finding that the assessee could not have advanced the loan to the eight parties to whom the advances were said to have been made. It is stated that it could be gathered from the material on record that in the year 1978, the Reserve Bank of India had permitted the assessee to continue its branch establishment till 30.06.1978 for the purpose of winding up of the affairs and there was permission by the Reserve Bank of India to carry on the activities in respect of retention from year to year. It is submitted that it is not disputed that loan was

ITRs 4TO6/02,7/95&18/98 6 Common Judgment advanced to about eight parties by the assessee during the years 1973 to 1975 and it is also established from the material on record that in respect of some companies, the amount was recoverable in the late 1980's and for one of the companies, i.e. Ritz Hotel in the year 1990 in view of the orders of the High Court. It is submitted that though the advances were made by the assessee between 1973 to 1975, the recovery of the said amount continued till the year 1990 and even thereafter. It is submitted that while the recoveries were being made, the assessee had to maintain its establishment at Nagpur and for maintaining the branch establishment, the assessee had to incur establishment expenses. It is submitted that the Tribunal has erroneously held that as the assessee did not possess the license for banking and money lending it could not have carried on the said business and the income from the business carried on by the assessee would not be business income. It is submitted that in almost similar set of facts, the Gujarat High Court has held that the income derived by the assessee Company in that case from deposits and loans would be income from business and not income from other sources. It is submitted that in the case before the Gujarat High Court, in the assessment year in question, interest income was derived from loans advanced to five parties and the Gujarat High Court held that the activity of the assessee of advancing moneys to various parties was a sort of an organized activity undertaken by the assessee Company and, therefore, the income from that activity was liable to be taxed as profits and gains of

ITRs 4TO6/02,7/95&18/98 7 Common Judgment business and not as income from other sources. It is stated that the facts involved in the present case and the case before the Gujarat High Court are not only similar but are almost identical. It is stated that the case of the assessee in the present case is on a stronger footing as the loan is advanced by the assessee in this case to almost eight parties while carrying on its business of financing. 5. It is then submitted on behalf of the assessee that the heads of income are mutually exclusive and the time of the receipt does not decide the question under which particular head such receipt should be assessed. The learned counsel relied on the judgment of the Hon'ble Supreme Court in the case of Nalinikant Ambalal Mody Versus S.A.L. Narayana Row, reported in 1966 (61) ITR 0428 to canvass that the heads of income must be decided not by considering the assessee's income but, by applying the common notions of practical men. It is submitted that the assessee in the case before the Hon'ble Supreme Court was a practicing advocate in the High Court and after he was elevated to the Bench of the Court, some outstanding fees were received by him and in that background, the Hon'ble Supreme Court held that the receipts could not have been brought under the residuary head of income from other sources and should have been considered under the head 'profits and gains of business or vocation'. It is submitted that by applying the said test, it could be deduced that though the loan was advanced by the assessee to the parties

ITRs 4TO6/02,7/95&18/98 8 Common Judgment in the years that were previous to the relevant assessment years, since the loan was realized by the assessee during the relevant assessment years, the income from the receipts so made and the interest on the same should be considered as business income and not the income from other sources. It is lastly submitted on behalf of the assessee by relying on the judgment of the Hon'ble Supreme Court in the case of The Commissioner of Income Tax Versus Piara Singh and the judgment in the case of Dr.T.A. Quereshi Versus The Commissioner of Income Tax, reported in 1980 (124) ITR 40 and 2006(157) Taxman 514 that assuming that the petitioner did not possess a valid license from the Reserve Bank of India for the purpose of banking and money lending but, since the assessee was no doubt carrying on a business in banking and money lending, the loss suffered by the assessee in the said business or the expenses incurred by the assessee for the establishment of such business were liable to be deducted. It is submitted that in the aforesaid cases, the assessees were involved in the business of smuggling and contraband goods and still the Hon'ble Supreme Court held that the confiscation of currency notes in the business of smuggling and the seizure of the stock of heroin in the business of contraband goods was allowable as business expenditure. 6. As regards the additional question referred to in the case of Ramprasad, the learned counsel relied on the judgment of the Bombay

ITRs 4TO6/02,7/95&18/98 9 Common Judgment High Court, dated 11.06.2014 in Income Tax Appeal No.221 of 2012 to canvass that the accrued income on non performing assets could not have been added. It is submitted that in the said case before the High court, the Tribunal had misdirected itself in law in making the addition in respect of the accrued income of the non performing asset and the High Court held that since the income could not have been realized by the assessee, the addition was liable to be deleted. It is submitted that the case in hand is on a better footing than the case before the Bombay High Court. It is submitted that it was therefore necessary for the assessing officer not to include the income on accrual basis but the claim of the assessee was wrongfully rejected. 7. Shri Parchure, the learned counsel for the respondentdepartment, supported the order of the Income Tax Appellate Tribunal. The learned counsel relied on paragraphs 11 and 12 of the order of the Income Tax Appellate Tribunal in the appeal arising out of the matter pertaining to the assessment years 1980 81 to 1983 84 to canvass that a finding of fact is recorded by the Tribunal that the assessee has not discharged its onus that it was actually carrying on the business activity during the period under consideration. It is submitted that the Tribunal has rightly held that it was necessary for the assessee to prove not only that it had obtained prior permission to carry on business but, also a special license to carry on the banking business. It is submitted

ITRs 4TO6/02,7/95&18/98 10 Common Judgment that it is observed by the Tribunal that the assessee was maintaining a dormant existence and continued its existence only for the purpose of winding up. It is submitted that the authorities have rightly recorded a finding of fact that the income derived by the assessee is income from other sources and not income from business. The learned counsel relied on the judgment of the Bombay High Court, reported in 1991(57) Taxman 47 (Godavari Sugar Mills Ltd. Versus Commissioner of Income Tax). 8. It appears on a perusal of the order of the Income Tax Appellate Tribunal and on applying the tests laid down by the Hon'ble Supreme Court and the Gujarat High Court in the judgments referred to hereinabove that it would be necessary to answer the reference in favour of the assessee and against the department. We find on a reading of the judgment of the Gujarat High Court in the case of Motilal Hirabhai (Supra) that in that case also, like the assessee in this case, initially, the assessee was running a textile mill and after the textile mills were closed down in view of the government decision, the assessee Company before the Gujarat High Court decided to do the business of banking and financing. While doing the said business, the assessee before the Gujarat High Court had not secured any specific license for the banking business and the assessee had advanced loans to about five parties. In the said case, the Gujarat High Court, after

ITRs 4TO6/02,7/95&18/98 11 Common Judgment considering the material on record, came to a conclusion that the activity undertaken by the assessee, of advancing moneys to various parties was a sort of organized activity undertaken by the assessee Company and, therefore, the income from that activity was liable to be taxed as profits and gains of business and not the income from other sources. In the judgment of the Gujarat High Court, the High Court observed that it is well established that it is for the revenue to establish that the income earned by an assessee is within a particular taxing provision and that it is on that account liable to be taxed as such. The facts involved in the case before the Gujarat High Court and the case in hand are almost identical. In the present case also, like the case in the Gujarat High Court, the assessee was carrying on some other business, i.e. the business in mining and after the Government of India took initial steps to take over the mines in the year 1973, the assessee thought of venturing in the business of banking and money lending as a fresh avenue. Advances were made by the assessee Company to about eight parties and it is not in dispute that the loan advanced to Ritz Hotel was recoverable in July 1990 as per the order of the High Court and the MOIL had not cleared its dues even in the year 1990 91 and efforts were made to recover the same. In the instant case also, like in the case of the assessee before the Gujarat High Court, the assessee amended its Memorandum and Articles of Association and included the business of banking and money lending in its objects. It is not disputed that the

ITRs 4TO6/02,7/95&18/98 12 Common Judgment assessee had advanced loan to about eight parties in the 1970s, as could be gathered from the facts incorporated in the order of the Income Tax Appellate Tribunal in the appeal pertaining to the assessment year 1984 85. Since the loans were not recovered and the business of banking and money lending was being wound up, the assessee had to continue with its establishment at Nagpur and also had to incur expenses for the business establishment. The facts involved in the case before the Gujarat High Court and the present case are similar and it would be necessary to hold in the circumstances of the case that the activity of advancing money to about eight parties by the assessee was a sort of an organized activity based on the object mentioned in the Memorandum and Articles of Association of the company and the income that was derived by the assessee was liable to be taxed as income from business and not income from other sources. 9. The observation of the Tribunal that since during the relevant assessment years, the loan was not advanced, the income of the assessee should be considered as income from other sources and not income from business is not well founded. It is held by the Hon'ble Supreme Court in the case of Nalinikant Ambalal Mody (Supra) that the amount received by the assessee therein, who was a practicing lawyer in the High Court, after he was elevated as a Hon'ble Judge to the High Court would represent the

ITRs 4TO6/02,7/95&18/98 13 Common Judgment outstanding fees and the same was liable to be taxed under the head 'business income' and not 'income from other sources'. It is held by the Hon'ble Supreme Court that the moneys received by the Hon'ble Judge in that case after his elevation represented the outstanding dues of professional work and as they were the fruits of the professional activity of the assessee they could be charged to tax only under the head 'business income'. By applying the test laid down by the Hon'ble Supreme Court in the case of Nalinikant Ambalal Mody (Supra), it could be safely said that the moneys received by the assessee from the eight parties during the relevant assessment years would also be the fruits of the activity of banking and money lending that was admittedly carried on by the assessee during the year 1973 to 1975. The learned counsel for the assessee has rightly relied on the judgments of the Hon'ble Supreme Court in the case of Piara Singh (Supra) and Dr. T.A. Quereshi (Supra) to substantiate his submission that even assuming that the assessee did not possess a license in banking and money lending, nonetheless the expenses incurred by the assessee for the business establishment in the business of banking and money lending were liable to be deducted. In the case of Piara Singh (Supra), currency notes were confiscated from the assessee, who was carrying on the business of smuggling and it was held that the confiscation of the currency notes is a loss occasioned in pursuing the business and the said loss that springs directly from the carrying on of the business was allowable as business loss. If the loss in the business of

ITRs 4TO6/02,7/95&18/98 14 Common Judgment smuggling is allowable as business loss, it is difficult to digest that the expenses incurred by the assessee Company for the business establishment for banking and money lending without a license, should not be deducted. In the case of Dr.T.A. Quereshi (Supra), the assessee was dealing in contraband goods and was engaged in the transport and sale of heroin and it was held that the heroin seized from the assessee's stock in trade could be allowable as business loss. The incidental questions that are referred to this Court for a decision are answered by the judgments of the Hon'ble Supreme Court in the case of Piara Singh and Dr.T.A. Quereshi in favour of the assessee. It is also necessary to refer to the judgment in the case of Commissioner of Income Tax Versus Paramount Premises (Private) Limited, reported in 1991 (190) ITR 259, relied on by the counsel for the assessee to hold that the interest earned on deposits for short period with banks or given as loans would be receipts arising out of the business activity and, hence, the same would be assessable as business income. While deciding the appeals, the Income Tax Appellate Tribunal did not consider the facts involved in this case in detail and also the law that could have applied to the same before upholding the finding of the Commissioner of Income Tax (Appeals) that the entire expenses incurred by the assessee for maintaining its establishment at Nagpur for the purpose of its business activity could not have been deducted. Though some findings are recorded in paragraphs 11 and 12 of the order of the Tribunal on which reliance is placed by the

ITRs 4TO6/02,7/95&18/98 15 Common Judgment counsel for the department, we find that the factual aspects involved in the case are not considered in either the said paragraphs or in the other part of the order. It is also conspicuous to note that although the Tribunal had dismissed the appeals of the assessee after holding that the income of the assessee was income from other sources and not income from business and the expenses incurred for the business of the assessee cannot be deducted, the Tribunal has in its order, dated 30.12.1991 on an application for reference filed by the department under Section 256(1) of the Act held that once the assessee was permitted to carry on the business even for a limited period and the after effect of that business continued for some time, the assessee could not be denied the expenses incurred for the purpose of settling its tax matters and winding up as they are nothing but continuance of the business activity. Surprisingly, the Tribunal also records in the order made on the application under Section 256(1) of the Act, that once the finding is given that the assessee is trying to carry on its activity only with a view to recover its debts, then there is no other way but to allow the bad debts and the trading losses. It is surprising that the said observations go contrary to the observations made by the Tribunal in all its earlier orders and assist the case of the assessee. It is also surprising that though Chapter IV of the Income Tax Act deals with the computation of only business income and also refers to certain deductions to be made on actual payments under Section 43 B of the Act, the assessing officer while passing the order for the relevant assessment years

ITRs 4TO6/02,7/95&18/98 16 Common Judgment 1992 93, after holding that the income of the assessee was the income from other sources, applied Section 43 B that relates to the business income and disallowed the claim of gratuity payable, on the ground that actual payment of gratuity was not made as per the provisions of Section 43 B of the Act. 10. As regards the fourth question pertaining to the assessment of income from interest on the loan advanced to Ramprasad, it would be necessary to note that the assessee had advanced a sum of Rs.2,00,000/ to Shri Ramprasad in the year 1975 on a pro note with interest of 12% per annum. Ramprasad paid the interest to the assessee only till 31.03.1978 and thereafter did not pay a single pie towards interest or principal. As nothing could be recovered from the party, the loan was ultimately written off in the year 1984 by the assessee. The assessee claimed that since no real income was earned by the assessee, nothing could be assessed in respect of the same. In the aforesaid set of facts, we find that the Income Tax Appellate Tribunal was not justified in adding accrued interest on the loan advanced to Shri Ramprasad, which was ultimately written off in the year 1984. An addition in respect of the accrued income of the non performing asset could not have been made. Since the income could not have been realized by the assessee, the addition was liable to be deleted.

ITRs 4TO6/02,7/95&18/98 17 Common Judgment 11. Hence, we hereby hold that in the facts and circumstances of the case, the income of the assessee was assessable under the head 'business' and not income from 'other sources'. Having answered the aforesaid question in favour of the assessee, we hold that in the circumstances of the case, there was no justification in law for the disallowance of 20% of the establishment expenses. We further hold that the set off of losses of earlier years could be allowed as deduction during the relevant assessment year. We also hold that in the circumstances of the case, no income from interest on the loan to Shri Ramprasad could be assessed during the relevant assessment year on accrual basis when the loan was written off in the year 1984. Having answered the reference as aforesaid, the reference applications stand disposed of with no order as to costs. \ JUDGE JUDGE APTE