The Hindu Business Line : A `head' that's ever on a roll

COMPUTATION of income under the Income-tax Act, 1961 (the Act) is by the process of categorising each source of income under the relevant head of income.

The Act contemplates various heads of income, such as a) income from salaries; b) income from house property; c) profits and gains from business; d) capital gains; and e) income from other sources.

It is settled law that wherever an item of income falls under a distinct head of income, it has to necessarily be categorised under that head. Controversies have erupted on the issue of classification. The dispute assumes significance since certain type of expenditure can be claimed only if an income is classified under a particular head of income.

More often than not, the department gains by classifying an item as `income from other sources' since various types of expenses cannot be claimed under this head. The assessee's approach will always be to classify an item of income as business income to gain the maximum advantage.

Recently, the Bangalore Bench of the Tribunal had to consider whether incidental activities of a steel manufacturing company, such as loans and advances, bills discounting, and so on, constitutes `business income' or any `income from other sources'. This issue came up for consideration in Jindal Vijayanagar Steel Ltd vs Assistant Commissioner of Income-tax (2003 87 ITD 630 Bangalore).

Facts, issues

The assessee is a large steel manufacturing company producing all kinds of metals both ferrous and non-ferrous, including steel, and so on. The objects, incidental or ancillary, covered a wide spectrum, such as import-export of all kinds of merchandise and services, lending and advancing monies, buying and selling of shares and securities, investment of surplus funds, to draw, accept and discount bills and a host of other activities.

The company, having obtained certificate of commencement of business, carried out various transactions in valuing bill discounting, structured financing, purchase and sale of bonds, government securities, inter-corporate and personal loans, and so on, from which the assessee-company earned a total income of Rs 11.07 crore.

The appellant-company had also issued a prospectus to raise money from the pubic on equity shares and redeemable convertible debentures so as to finance its long-term project regarding production of steel; however, no funds were made available to the company until the year-end.

To carry on its activities, the assessee-company had a central treasury division. The expenses incurred in the form of salary, rent, administration, and so on, were grouped under the head `Pre-operative expenditure and pending allocation' and the expenditure incurred for the issue of shares and debentures was shown under the head `miscellaneous expenditure' in the balance-sheet.

The assessee-company claimed the entire receipt of Rs 11.07 crore as not taxable. As an alternative submission it was claimed that the company had carried on the business during the year and the entire income after setting off expenditure should be computed under the head `business'. The assessing officer (AO), however, held that the assessee having not commenced its production in the steel plant, the income earned could not be treated as business income and, accordingly, treated the entire receipts under the head `Income from other sources'.

The AO further refused to allow the expenditure by holding that the expenses had no nexus with the earning of income. On appeal, the Commissioner (Appeals) upheld the order passed by the AO. The matter reached the Tribunal. The short question here is whether the treasury activities carried on by the Jindal Vijayanagar Steel can be treated as business income in accordance with the Act.

What is business?

The Act defines the term business in Section 2(13) to include any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. Admittedly, these words are of wide import and postulates continuous exercise of an activity. This definition is illustrative and not exhaustive and, as early as 1958, the Supreme Court explained the concept of business as a word of wide import in the Mazagaon Dock Ltd vs CIT (1958 34 ITR 368) case.

It is also testified that the frequency or repetition of the activity, though at times a decisive factor, is by no means an infallible test. The word `business' connotes some real substantial or systematic or organised course of activity or conduct with a set purpose.

In judging whether any business has been carried, what is to be seen is the actual activity carried on rather than any presumption. The Tribunal relied on the Supreme Court observation in CIT vs Calcutta National Bank Ltd (1959 37 ITR 171), where it was held that the term `business' is a word of very wide, though by no means determinate, scope.

It has rightly been observed in judicial decisions of high authority that it is neither practicable nor desirable to make any attempt at delimiting the ambit of its connotation. Each case has to be determined with reference to the particular kind of activity and occupation of the person concerned. 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'.

Tribunal decision

The Tribunal held that the company had commenced carrying on its business and therefore the income earned from treasury activities constitutes business income and has to be assessed as `profits and gains from business'.

The expenses incurred in the corporate treasury has a direct nexus with the activity carried on by the assessee and, hence, the Rs 15.43 crore incurred by the treasury division was an allowable business expenditure. The Tribunal observed that "The secured/unsecured loans were utilised for making certain investments and giving loans/advances. Thus, there was direct nexus between amount borrowed and investment/lending on which interest was earned. The investment/lending activity had been carried on in a systematic approach. The assessee had earned interest and profit on lending/investment other than the amount on public issue application money. The assessee had also paid interest charges and finance charges for raising various loans.

"Further, it maintained a corporate treasury division. Repeated borrowing of funds from various and lending of the same would all amount to carrying of systematic activity as envisaged under Section 28. Hence, the company had carried on the business during the year and the income therefrom should be computed under the head `business'. Even a single transaction could be construed as adventure in the nature of trade and when a systematic and series of transactions such as the one in the instant case is carried on by the assessee, it could not but be regarded as business in nature.

"There was ample evidence of the intention of the assessee to carry on those activities as business activities. Income under the head `Other sources' can be computed only when income or receipt can be brought under any other head under the Act."

The Tribunal accordingly allowed the appeal of the company and decided that the income in question is business income.

Time and again disputes on heads of income have arisen in the past and is bound to occur in the future. Similarly, categorisation of expenses for allowability is laid down in Section 30-37 of the Act in computing business income.

Maximum litigation has been on expenses being allowed under Section 37, the residuary section. It is time to rationalise these sections. There could, perhaps, be one comprehensive provision dealing with allowability of business expenses and another section on depreciation. Enough safeguards can be built to ensure capital expenditure is not allowed in computing business income.