COMMISSIONER OF INCOME TAX Vs. J K HOLDINGS

JUDGEMENT

(1.) THE above three appeals raise common question of fact and law and, therefore, they are taken up together for hearing and final disposal. They are filed by the Department. They are for the asst. yrs. 1989-90, 1990-91 and 1991-92. For the sake of convenience, facts in Appeal No. 1318 of 2000 are required to be stated. In all the three appeals, the following question of law arises for determination.

(2.) ON 25th May, 1989, a return of income was filed by M/s. J. K. Holdings returning income of Rs. 1,76,360. M/s J. K. Holdings is owned by K. J. Family Trust. The assessee had accepted deposits and had advanced loans to various parties. It had paid interest for borrowings and it received interest for lending. The income and expenditure account of the assessee shows payment of salary and bonus, staff welfare expenses, brokerage, bank charges and travelling expenses claimed by the assessee as deductions. The AO called upon the chartered accountants of the assessee to produce particulars of the borrowings. The assessee was called upon to produce the loan creditors in order to verify the genuineness of the borrowings. The assessee was not able to produce a single loan creditor though their names were given, Therefore, summons came to be issued by the AO and served upon the loan creditors. None of them appeared before the AO to explain the genuineness of their loan transactions. In the circumstances, the AO concluded that assessee's income came from undisclosed sources and introduced in the garb of loans. The loans were unproved. Therefore, the AO added back the interest on such loans to the income of the assessee. The AO concluded that the assessee was carrying on business for profits and gains. That, the expenses claimed were generally claimed in the business income. Therefore, the AO calculated the tax at maximum marginal rate in accordance with Section 161 (1a ). Being aggrieved, the assessee carried the matter in appeal to CIT (A ). It was argued on behalf of the assessee that the loans taken by the assessee were from the beneficiaries of the trust. That, these beneficiaries were also family members. That, the amounts received were invested in the firms in which the family members of the beneficiaries were the partners. That, the trustees of the trust had invested the amount without any intention of carrying on business and, therefore, the AO erred in concluding that the assessee was in the business. The CIT came to the conclusion that the expenses claimed were of the nature of business expenses claimable under Section 28 to Section 44 of the IT Act. That, the trust has created M/s. J. K. Holdings as a separate taxable entity only to avail lesser tax rate. The appeal was, therefore, dismissed. Being aggrieved, the assessee carried the matter in appeal to the Tribunal. The Tribunal concluded that M/s J. K. Holdings--assessee was created to centralise all minor's investments. That, the trust acted like a clearing house by obtaining loans at a specified rate of interest which was invested in several concerns for the benefit of the beneficiaries and on such investments, the assessee earned interest. That, there was no profit motive and, therefore, the interest income earned by the assessee was not assessable under the head "business income" but, the same was taxable under the head "other sources of income" and, consequently, the income earned by the assessee was not taxable at the maximum marginal rate. Being aggrieved, the Department has come by way of appeal under Section 260a of the IT Act. Arguments

(3.) MR. R. V. Desai, learned senior counsel appearing on behalf of the Department, contended that the trust had created M/s J. K. Holdings for running independent business. That, the amount which formed a corpus of the trust was already invested by the beneficiaries in respective family concerns. That, loans were taken from the beneficiaries of the trust, who were also family members and the amounts received were invested in the concerns in which the family members of the beneficiaries were partners. That, the expenses were in the nature of business expenses. Therefore, the AO was right in coming to the conclusion that the entire device was created to avail of cheaper tax rate. Mr. Porwal, learned counsel appearing on behalf of the assessee, on the other hand, contended that the trust acted like a clearing house. That, loans were taken from minors and beneficiaries and family friends and they were passed on to firms in which relatives of beneficiaries were the partners. That, there was no intention to make profits. That, M/s J. K. Holdings had all attributes of business, However, there was no intention to make profits. That, the intention was to channelise the funds of the beneficiaries and relatives. That, on one side, beneficiaries had surplus funds and on the other side, there were firms, which were in need of funds. In support, he relied upon the judgment of the Supreme Court in the case of Sole Trustee Loka Shikshana Trust v. CIT 1975 CTR (SC) 281 : (1975) 101 ITR 234 (SC ). Findings