TMI Blog1992 (9) TMI 149X X X X Extracts X X X X X X X X Extracts X X X X ..... lso be allowed as a deduction because the transaction was not carried out for the purpose of the business of the assessee. On appeal the CIT (Appeals) upheld the disallowance on the ground that it was a sham and was back-dated but did not agree that the disallowance could be made either under section 40(c) or under section 40A(5) or as a capital expenditure. 3. For the next assessment year 1986-87, the assessee made a consequential claim on the ground that if the transaction were to be accepted as having taken place in the next year the deduction should be given in computing the income of that year. The Assessing Officer rejected this claim for the same reasons as in the earlier year. But on appeal the CIT (Appeals) taking into consideration certain material not adverted to in the earlier year, agreed with the assessee that the transaction was genuine and had taken place in the previous year relevant to the assessment year 1985-86 itself. Accordingly, he was of the view that the claim for deduction of the amount could not be considered in the subsequent year. Therefore, while the assessee has filed an appeal for the assessment year 1985-86 on this point, the revenue has filed an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... served by Learned Hand in Commissioner v. Newman 159 F. 848 : " There is nothing sinister in so arranging one's affairs as to keep taxes as low as possible. " Income-tax is mitigated by an assessee who reduces his income or incurs expenditure in circumstances which reduces the assessable income or entitles him to reduction in his tax liability. For instance, most of the salary earners, such as Officers of the Government and Judges, invest their savings in National Savings Certificates and get a reduction under section 80-C so that the tax liability is reduced. It is obvious and the revenue cannot dispute that this is a case of tax mitigation which cannot be called " tax evasion " by a " scheme " or " device ". There is of course a " tax planning " in the investment of savings. But it does not amount to a " scheme ". Such a tax planning is often embarked on the advice of tax experts and yet there is nothing illegal about it. Such tax mitigation is quite different from a case of a " make-believe ", " device " or " scheme " which involves some sort of a pretence. The case of McDowell Co. Ltd. v. CTO [1985] 154 ITR 148 (SC) which is often cited by the revenue is a clear case of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 23-11-1983 when it considered that if the terms were revised it may be possible to accept it. In the meanwhile, the ECC advertised the premises on 30-11-1983 and T. Co., again made an offer on 1-12-1983. On 13-1-1984 the ECC accepted the new offer. In the minutes of the meeting of the Board of Directors of the assessee-company held on 26-3-1984 it was recorded that the new premises should be taken up in Bombay and the premises in Elephinstone House would be suitable. It was also recorded that there was an understanding between the assessee and T. Co. that T. Co. will provide furnished accommodation by taking the premises on lease and giving a sub-lease to the assessee. The reason for this was recorded as that if the assessee were to take the premises on its own and also furnish the same, it would have to raise finance up to 60 to 70 lakhs of rupees which it was not in a position to do, since its financial position was very acute whereas T. Co. has assured that it will be able to raise the sources and furnish the premises. It was thereby resolved to go by that arrangement. Thereafter, by a deed dated 1-6-1984 the ECC granted the leave and licence to T. Co. on payment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .84 lakhs was being given partly in deference to the wishes of the Bankers, since the bankers had orally agreed to advance Rs. 33 lakhs only if there was adequate collaterals for the loans and if this advance was secured under the agreement, then the finance will be available for furnishing the property. The Board thereupon ratified, confirmed and approved the agreement already entered into by the Director. T. Co. had paid interest-free deposit of Rs. 35 lakhs by cheque dated 7-6-1984 which was received on 6-6-1984 by the ECC and acknowledged by receipt dated 27-8-1984. There was a separate agreement dated 31-5-1985 by which T. Co. agreed to lease out the furnishing in the premises on a monthly rent of Rs. 3 per hundred on the value of Rs. 31,52,859 for a period of 5 years and 10P per one thousand for the next two years. The Club collected the Municipal tax effective from 1-6-1984 but at the request of T. Co. waived the licence fee for that month of June 1984 since there was only a passive user. 7. At a survey under section 133A in the premises of the assessee made on 5-2-1987, the revenue came upon a note prepared by S. Gurumurthy Co., Chartered Accountants headed " sche ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operty on lease at Rs. 25,000 per month paid by T. Co. to ECC, it had actually paid Rs. 47,000 per month to T. Co. and even if some adjustment is made for the interest-free deposit of Rs. 35 lakhs by T. Co. and the interest earned on deposit of Rs. 30 lakhs by the assessee, the amount paid by the assessee was more, such that as a result the taxable income of the assessee was reduced for this assessment year. This contention of the revenue ignores all other factors relevant to the issue such as the duration of the agreement and in particular whether there was a revenue loss so as to say that there was a tax evasion. The revenue reiterated that there was no need for the assessee to have introduced T. Co. in the transaction at all, as the assessee could have very well taken the premises directly from ECC and therefore this arrangement should be ignored. This contention proceeds on the assumption that the introduction of a middleman is per se unacceptable as prejudicial to the revenue. Such is not the law, because it is not for the revenue to say how the assessee should transact his business. Unless the middleman is a sham he cannot be ignored. More so when the assessee finds t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Co. for the recovery of the loan. It is also significant that T. Co. had been granted registration in its assessment. Though this may not be conclusive, it indicates that the revenue was then satisfied that that firm was genuine and its existence was a reality. 11. The next question is whether this transaction was entered into for business purposes or only for mitigating the tax. The assessee has demonstrated that its own finances were in the red and that it was the fee which was payable in advance amounting to Rs. 33.84 lakhs, which was the asset created by an agreement in favour of T. Co., which enabled it to obtain finance for furnishing the premises. There is on record a letter dated 17-12-1987 from M/s Sundaram Finance stating that the project of the assessee for directly furnishing the premises at a sum of Rs. 40 lakhs, being an equipment for a special purpose with no significant marketable value, could not be financed by them. On the other hand, in the application of T. Co. for finance from the Canara Bank it was specifically stated that the sum of Rs. 33.84 lakhs being the advance licence fee payable by the assessee to T. Co. would be offered as security. Clearly, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and not a commercial transaction. Even if the transaction had a fiscal objective, the element of commercial purpose that is writ so large upon the transaction with reference to the generation of finance cannot be ignored. Even an intention to seek such tax advantage can itself be considered to be a commercial purpose because the expenditure to which the tax is mitigated is equal to the extent to which funds are available to the assessee for use in its own business and hence it becomes in essence a commercial purpose. When we weigh the conflicting elements, we are led to conclude that the transaction was essentially a commercial transaction but in a fiscally advantageous form and not a transaction for fiscal advantage under the guise of a commercial transaction. 13. The alternative contention of the revenue was that the expenditure could not be accepted as laid out wholly and exclusively for the purpose of the business. But we have already found that unless the assessee was able to find the finance for equipping the office at Bombay by means of this transaction, the assessee's business would not have been prospered. There is material on record to show that after the Bombay offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore than the fair market value of the fee. The assessee has filed a certificate from the Chartered Accountants which shows that none of the partners of T. Co. had more than 20% share in the assessee-company. Even if they are taken as a group and considered to have exceeded the 20% limit of shareholding, the question that remains is whether the licence fee paid by the assessee was unreasonable or excessive. We find that T. Co. earned a pre-tax return of Rs. 79,000 per annum on its own investment of Rs. 6.8 lakhs which cannot be considered to be unreasonable or excessive as it is a yield of less than 10% on its capital employed in this venture. The revenue, however, compares the payment of licence fee by T Co. to ECC at Rs. 25,000 per month with the sub-licence fee of Rs. 47,000 paid by the assessee to T. Co. to show that it was excessive. But this is an over-simplification, for, it ignores other payments and deposits as well as the responsibilities taken over by T. Co. For instance, while T. Co. has to make an interest-free deposit of Rs. 35 lakhs, the assessee has given an interest-earning deposit of Rs. 30 lakhs and such interest cannot be ignored. Similarly, T. Co. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Assessing Officer had disallowed this expenditure also on the ground that it was a capital expenditure. He noted that even if the sub-licence was terminated, the amount paid in advance was not to be refunded and, therefore, it was a one time payment having the nature of a capital expenditure. On appeal, the CIT (Appeals) did not agree because he was of the view that apart from the rights as a licencee, the assessee had not acquired any advantage of an enduring nature. The contention of the revenue before us was that this amount should be considered to be a premium paid for the sub-licence for obtaining possession and was, therefore, a capital outlay. Reliance was placed on the decision in the case of CIT v. Panbari Tea Co. Ltd. [1965] 57 ITR 422 (SC). We find that this decision has no application to the facts of the present case. The Supreme Court has pointed out in that case that the indicia of a salami or premium are its single non-recurring character and payment prior to the creation of the tenancy. In the present case, it is clear from a reading of the agreement that what was paid was not a payment for letting into possession. Though the amount was a lump sum it actually re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 89,870 could be spread over a period of twenty years and allowance made at the rate of 1/20th each year. The learned counsel for the Commissioner has frankly admitted that he can find no provision in the Act for spreading out the expenditure over a period of twenty years. If the amount was laid out and expended wholly and exclusively for the purpose of the business and was not in the nature of a capital expenditure, the whole of it was allowable under section 10(2)(xv) of the Act. " There is also a justification for this in the provisions of the Act itself. The expenditure in question is allowable as an expenditure laid out or expended wholly and exclusively for the purpose of the business under section 37 such expenditure not being in the nature of capital expenditure. That section does not limit the expenditure to that incurred for the purpose of earning the income of the year. As long as it is laid out for the purpose of the business the fact that the assessee may derive some benefit from that expenditure for a period of more than a year does not detract from the eligibility of deduction under that section. Under the sub-licence deed, out of the fee payable monthly, a par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew of the Assessing Officer, he was wide off the mark. If the question is whether the sub-licence dated 8-6-1984 was executed on that date, one would have expected the executants and the witnesses to have been examined. It is stated that the witnesses were not examined and admittedly the executants have not denied the execution of the document on 8-6-1984. The authorities below have also over-looked the recital in the document which states that having taken oral permission and in anticipation of the specific written sanction being obtained from the landlord, T. Co. had agreed to give a licence to the assessee to occupy the premises. The operative portion also states that the licence is granted subject to approval and consent from the landlord. It must be noted that ECC had already confirmed in writing on 13-1-1984 that they had agreed to the terms and conditions for letting the property to T. Co. Therefore, the execution of an instrument in writing between the Club and T. Co. was not an essential pre-requisite for the execution of the document on 8-6-1984 by T. Co. to the assessee. Even if it is assumed that T. Co. was not authorised to sub-licence the premises on 8-6-198 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... summon all the documents seized by the Department as well as witnesses who can testify to the transaction to demonstrate the correct facts. We found it unnecessary to do so as the material on record itself reveals the falsity of the facts marshalled by the Assessing Officer. Running through the list we find that,---- (a) the licence deed though signed on 30-6-1984 takes effect from 1-6-1984 ; (b) the supplementary deed modifies the licence deed ; (c) the statements in the supplementary deed must be correct as it only makes good an omission in the licence deed ; (d) the omission of the term relating to deposit of Rs. 35 lakhs in the licence deed was to conform to the provisions of the Bombay Rent Act ; (e) the documents were only putting down the terms of a pre-existing oral agreement and had been sent after signing " without prejudice " to the other party for signature after modifying the language by mutual negotiation. So even if the final draft was approved on 24-6-1984 and the document signed on 30-6-1984, it takes effect from 1-6-1984 as agreed between the parties ; (f) opinion of counsel follows the normal pattern of the brief which generally refer to proposals and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity shareholdings are with one or more partners of the licensees. It is the wording of this clause which was the subject of discussion between the parties as it was not an open grant for a sub-licence but only a conditional grant and the assessee wanted to be sure that there will not be any difficulty in T. Co. sub-licensing the premises to it. The document which was first signed by T. Co. was then sent to ECC for signature with superscription " without prejudice " which was struck off when signed by ECC. The document itself states that the ECC had in a resolution dated 25-5-1984 authorised the trustees to sign the document who did so on 30-6-1984. In other words, this document was only reducing to writing an oral agreement already entered into between the parties. Moreover, as rightly pointed out by the CIT (Appeals) dealing with the next year's assessment, the sub-licence, not being a document required to be registered, only put into writing a pre-existing agreement and every agreement takes effect according to the intention of the parties stated in the document, no matter when it was signed. Even if the document had been signed in July, it would be effective from June as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd naturally it applies to the present assessment made on 31st March, 1987. According to the scheme, in scrutiny cases where an addition of Rs. 50,000 or more are upheld in appeal by the CIT (Appeals) to the extent of at least 50% and prosecution for concealment has been launched, the Assessing Officer would be entitled to a reward equivalent to a maximum of 10% of the additional income brought to tax. This indicates the motivation for making an addition with as many reasons as possible as well as without sufficient opportunity to the assessee to explain any doubts that could arise, so that the addition could somehow be upheld in the first appeal even if it is not sustained in the second appeal. It is also stated that prosecution has been launched against the assessee. It is to be noted that while the Assessing Officer gave 5 reasons for making the addition, the CIT(A) agreed with him only on 2 of the reasons. Even that has been found untenable by us. Therefore, in this kind of an assessment when the assessee is accused of devising a scheme for avoiding tax, one need not be shocked if the assessee were to retort that the assessment itself is a device for earning an unjustified rewa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as being in violation of the provisions of section 143(2) of the Income-tax Act. But we do not propose to do so, not only because the assessee has not pleaded for it, but also because having gone through the entire material on record, such a course would involve making a fresh assessment and putting the assessee to further expenditure of time and money which would only constitute further harassment. 27. We, therefore, hold that the agreement dated 8-6-1984 was executed on that date and it created a liability to pay advance licence fee of Rs. 33.84 lakhs and monthly fee of Rs. 47,000 with the consequence that the assessee was entitled to deduct both these amounts as an admissible revenue expenditure in computing its income for the previous year ended 30-6-1984. 28. The second issue in the appeal for the assessment year 1985-86 is with reference to the disallowance of Rs. 90,000 out of the interest paid on borrowed capital. The Assessing Officer noted that the assessee had paid Rs. 1,97,260 as interest whereas out of over-draft account a sum of Rs. 12 lakhs had been given to T. Co. on 30-1-1984 without charging interest. He was, therefore, of the opinion that this was diversio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure incurred for gathering information for use in further business and not for promoting any sales. After hearing the revenue, we are satisfied that this expenditure cannot be regarded as sales promotion expenditure. We accordingly direct that this amount be excluded from the computation of the disallowance under section 37(3A). 31. For this assessment year there is also an appeal by the revenue with regard to an addition of Rs. 5 lakhs being the estimated income of the sister concern, Collage. The Assessing Officer found that the partners of the firm Collage were related to the Directors of the assessee-company. He also came across certain guidelines given by the partners for the operations of Collage on re-organisation of that firm's business into different geographical units by splitting into 5 firms. He found that the assessee was the only customer of all the firm and came to the conclusion that the assessee controlled it totally. He accordingly estimated the income of the firm at Rs. 5 lakhs and added it into the income of the assessee. On appeal, the CIT (Appeals) found that if at all a disallowance had to be made, it could be made only under section 40A(2) for whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... grounds because he was faced with the fact that relevant material had been omitted to be considered in the earlier year and the assessee was also denied an adequate opportunity for explaining its case. Both these facts gave the CIT (Appeals) ample jurisdiction to decide the matter afresh particularly when there is no question of res judicata in income-tax matters - (See the decision in the case of CIT v. L.G. Ramamurthi [1977] 110 ITR 453 (Mad.). 36. The only other point in the appeal of the revenue for this year is the disallowance made under section 40(c) in respect of reimbursement of medical expenses which was deleted by the CIT (Appeals). He did so following the decision in the case of Jay Engg. Co. (182 ITR 181). It is also brought to our notice that for the earlier years 1983-84 and 1984-85 by order dated 25-4-1988 in ITA Nos. 1211 and 1212/Mds/86 the Appellate Tribunal has excluded the reimbursement of medical expenses from the operation of section 40(c) in the assessee's own case. Hence consistent with that situation, we confirm the order of the CIT (Appeals) on this point also for this year. 37. In the result, the assessee's appeal is allowed and the revenue's appeals ..... X X X X Extracts X X X X X X X X Extracts X X X X
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