9911796707
TMI Blog2011 (2) TMI 62X X X X Extracts X X X X X X X X Extracts X X X X ..... ermination by this court : "Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in allowing interest claimed by the assessee at a higher rate on the borrowings though the investment had been made by the assessee in the shares of a sister concern which gave a fixed return of income ?" 3. The facts, which were taken note of by the Division Bench of this court, while referring the question of law to the larger Bench are extracted below ([2010] 326 ITR 291, 293) : "2. The assessee borrowed money from a sister concern and paid interest therein at 18 per cent. per annum and purchased shares from the sister concern which carried dividend at 4 per cent. The Assessing Officer (AO) held that there was no justification to borrow funds at the rate of 18 per cent. interest for making investment in shares, which would give a dividend of 4 per cent. only. Having regard to the fact that the borrowing was made from a sister concern and the investment was also in another sister concern, the claim for interest was disallowed. It was held that the investment in shares was not for business purpose or business consideratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions should be construed literally or liberally nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it'." 4. The Tribunal upheld the plea of the assessee and held that the assessee could not be prevented from making investment only because the return from shares was low. The investment was incidental activity of the business and there was no effect on revenue as the assessee and the sister concern belonged to the same group. The transaction was bona fide and not sham. The relevant part of the order of the Tribunal is extracted below :Rs. 10. We have considered the rival contention and we have also perused the different rulings cited by the learned counsel and are of the view that the assessee did borrow certain funds at a higher rate of interest and utilized them for investments in certain preference shares. The assessee could not be prevented from making investment in certain shares only on the ground that the return from shares was very low. We do not agree with the Revenue that the benefit accruing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... derations of morality, but on the operation of the Income tax Act. Legislative injunction in taxing statutes may not, except on pain of penalty, be violated, but it may lawfully be circumvented.' 11. In CIT v. B. M. Kharwar [1969] 72 ITR 603, it was observed (headnote) : `The taxing authority is entitled and is indeed bound to determine the true legal relation resulting from a transaction. If the parties have chosen to conceal by a device the legal relation, it is open to the taxing authorities to unravel the device and to determine the true character of relationship. But the legal effect of a transaction cannot be displaced by probing into the "substance of the transaction".' 12. In McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148, the above observations were sought to be disapproved but in Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 (SC), it was observed that the observations of Chinnapa Reddy J. were not supported by other members of the Bench and the principles in IRC v. Fishers Executors [1926] AC 395 (HL) and in IRC v. Duke of Westminster [1936] AC 1 (HL), on which observations in A. Raman and Co. [1968] 67 ITR 11 (SC) and B. M. Kharwar [1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18 per cent. per annum. The Assessing Officer also noticed that the assessee had purchased 50,500 (4 per cent.) preference shares of Rs. 100 each of M/s. Hero Investments (P) Ltd., a sister concern, for Rs. 50,00,000 on November 30, 1984. The Assessing Officer was of the view that there was no justification to borrow funds carrying interest at 18 per cent. per annum for the purpose of making investment in shares which would have given dividend of only 4 per cent. per annum. In the aforesaid facts, the Assessing Officer opined that the expenditure incurred by the assessee in raising loans for the purpose of investment in shares was not for the purpose of business and accordingly, expenditure to that extent was disallowed. It was submitted that in terms of the provisions of section 57(iii) of the Income-tax Act, 1961 (for short, "the Act"), only that expenditure can be allowed, which was made to earn income. In the present case, the expenditure on interest made by the assessee was not for the purpose of earning income because from the very beginning it was known to the assessee that the investment would result in income less than the expenditure being made to earn that. The companie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k at the facts from a conservative point of view whereas the assessee may have to look for a broader aspect keeping in view long term planning. Many a times, to keep the flag flying, the group companies have to be supported with funds from financially healthy companies. The manner in which the transaction has been entered into by the assessee can at the best be termed as tax planning, but in no way it can be opined as tax evasion. Tax planning is permissible. Reliance for the purpose was placed upon McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148 (SC) and Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 (SC). 12. Learned counsel further submitted that even in S. A. Builders Ltd.'s case [2007] 288 ITR 1 (SC), the hon'ble the Supreme Court has opined that the expression "commercial expediency" is an expression of wide import and includes such expenditure which a prudent businessman incurs for the purpose of business. It may not have been incurred under any legal obligation, but still allowable if incurred on the ground of commercial expediency. Each case depends on its own facts. In the present case, there being a definite finding of fact recorded by the Tribunal in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness or profession. The same is dealt with in sections 28 to 44 of the Act. It provides for various permissible rebates and deductions for the purpose of computation of such income. Section 36 of the Act deals with other permissible deductions while computing the income from business or profession. Section 36(1)(iii) provides for deduction on account of amount of interest paid in respect of capital borrowed for the purpose of business or profession. 18. Section 37 of the Act is a residuary section which provides for deduction on account of expenditure not being capital in nature, which are not as such specified in sections 30 to 36 of the Act, but laid out or expended wholly and exclusively for the purpose of business or profession, while computing the income under the head "Profits and gains of business or profession". The import of sections 37(1) and 57(iii) of the Act was considered by the hon'ble the Supreme Court in CIT v. Rajendra Prasad Moody [1978] 115 ITR 519. It was a case where difference of opinion on the subject between various judgments of the High Courts was considered as the Tribunal had directly referred the matter for opinion of the hon'ble the Supreme C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction only if no income results from such expenditure in a particular assessment year, but if there is some income, howsoever small or meagre, the expenditure would be eligible for deduction. This means that in a case where the expenditure is Rs. 1,000, if there is income of even Re. 1, the expenditure would be deductible and there would be resulting loss of Rs. 999 under the head `Income from other sources'. But if there is no income, then, on the argument of the Revenue, the expenditure would have to be ignored as it would not be liable to be deducted. This would indeed be a strange and highly anomalous result and it is difficult to believe that the Legislature could have ever intended to produce such illogicality. Moreover, it must be remembered that when a profit and loss account is cast in respect of any source of income, what is allowed by the statute as proper expenditure would be debited as an outgoing and income would be credited as a receipt and the resulting income or loss would be determined. It would make no difference to this process whether the expenditure is X or Y or nil ; whatever is the proper expenditure allowed by the statute would be debited. Equally, it w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne the true character of the relationship. But the legal effect of a transaction cannot be displaced by probing into the `substance of the transaction'. This principle applies alike to cases in which the legal relation is recorded in a formal document, and to cases where it has to be gathered from evidence-oral and documentary-and conduct of the parties to the transaction. The observation made by Bose J. in Sir Kikabhai Premchand v. CIT [1953] 24 ITR 506, 509 (SC), `It is well recognised that in revenue cases regard must be had to the substance of the transaction rather than to its mere form. In the present case disregarding technicalities it is impossible to get away from the fact that the business is owned and run by the assessee himself. In such circumstances we are of the opinion that it is wholly unreal and artificial to separate the business from its owner and treat them as if they were separate entities trading with each other and then by means of a fictional sale introduce a fictional profit which in truth and in fact is non-existent', cannot be read as throwing any doubt on the principle that the true legal relation arising from a transaction alone determines the taxabilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern for commercial expediency in many other circumstances (which need not be enumerated here). However, where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans." (emphasis supplied) 21. A Division Bench of the Delhi High Court in Punjab Stainless Steel Industries v. CIT [2010] 324 ITR 396, while considering the issue regarding advance of interest free loan to sister concern opined that to claim deduction under section 36(1)(iii) of the Act, an assessee is required to prove that there is nexus between the advancing of funds and the business interest of the assessee-firm. The appropriate test in such a case would be as to whether a reasonable person stepping into the shoes of the directors/partners of the assessee-firm and working solely in the interest of the assessee firm/com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Saloman v. Saloman and Co. Ltd. [1897] AC 22 has to be watched very carefully. It has often been supposed to cast a veil over the personality of a limited company through which the courts cannot see. But that is not true. The courts can and often do draw aside the veil. They can, and often do, pull off the mask. They look to see what really lies behind. The Legislature has shown the way with group accounts and the rest. And the courts should follow suit . . .' 95. One of the most important circumstances in which the veil has been lifted is the cases of fraud or improper conduct of the promoters. Where dummy companies were incorporated by a promoter and his family members to conceal profits and avoid tax liability, the separate entity of the company has been ignored by looking through the veil and identifying those individuals who have deviced such method for their own benefits. 96. In Juggilal Kamlapat v. CIT [1969] 73 ITR 702 (SC) ; AIR 1969 SC 932 ; [1969] (1) SCR 988 it was found that three brothers who were partners in the assessee-firm were carrying on the managing agency in a dominant capacity in the guise of a limited company. The court held that the corpor ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
