TMI Blog2011 (2) TMI 62X X X X Extracts X X X X X X X X Extracts X X X X ..... stretched to hold a roving enquiry or deep probe. - - - - - Dated:- 1-2-2011 - KUMAR M. M., RAJESH BINDAL, JINDAL A. N., JJ. JUDGMENT Rajesh Bindal J.- The following question of law was referred by a Division Bench of this court vide order dated August 7, 2009 CIT v. Rockman Cycle Industries P. Ltd. [2010] 326 ITR 291 (P H), for consideration by a larger Bench : "Whether having regard to relationship between different concerns, where a transaction which is patently imprudent, takes place, the taxing authority should examine the question of business expediency and not go merely by the fact that the assessee had taken a decision in its wisdom which may be wrong or right ?" 2. Briefly, the facts are that the Income-tax Appellate Tribunal, Chandigarh Bench, Chandigarh (for short, "the Tribunal"), at the instance of the Revenue, referred the following question of law arising out of order dated November 19, 1995, passed in I. T. A. Nos. 70 and 93 of 1990 relating to assessment year 1986-87 for determination 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e finding of the Assessing Officer with the following observations ₹ 7.3. I do not find any reason to give relief to the appellant on this account. The another ground that the appellant is entitled to 4 per cent. dividend on these shares that in case of Highway Cycle Ind. Ltd., Ludhiana for the assessment year 1986-87 the Assistant Commissioner of Income-tax has added back the difference of 18 - 4 = 14 per cent. under similar circumstances on the amount borrowed for that company for purchase of similar shares. This plea of the appellant is also rejected as these are non-cumulative preference shares and no dividend has been declared by Hero Investments P. Limited for the year under consideration. It is held that the case of McDowell and Co. Ltd. reported in [1985] 154 ITR 148 is applicable, as the appellant has adopted circuitous method, where it was observed (page 160) : "the proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in favour of the assessee in the present case had followed its earlier order in the case of Pankaj Munjal Family Trust. A similar question of law arising therefrom was referred for opinion of this court vide I. T. R. Nos. 87 to 91 of 1995-CIT v. Pankaj Munjal Family Trust [2010] 326 ITR 286 (P H) and vide order dated July 9, 2008, the same was answered in favour of the assessee therein. While proposing to differ with the view taken by this court in Pankaj Munjal Family Trust's case [2010] 326 ITR 286 (P H) and with the following observations, the matter was referred for consideration by the larger Bench ([2010] 326 ITR 291, 296) : "10. In famous case of CIT v. A. Raman and Co. [1968] 67 ITR 11, it was observed (headnote) : `Avoidance of tax liability by so arranging commercial affairs that charge of tax is distributed is not prohibited. A taxpayer may resort to a device to divert the income before it accrues to arises to him. Effectiveness of the device depends not upon considerations 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nch in the earlier order in Pankaj Munjal Family Trust [2010] 326 ITR 286 (P H) affirmed the order of the Tribunal without applying the test of commercial expediency. We, thus, respectfully disagree with the view taken therein and refer the matter to a larger Bench." 5. In view of the aforesaid factual matrix the matter is before this Bench. 6 . Mr. K. K. Mehta, senior standing counsel addressed arguments for the Revenue, whereas Mr. Akshay Bhan, advocate made submissions for the assessee. 7. Learned counsel for the Revenue submitted that in the present case, during the financial year 1986-87, the assessee claimed deduction on account of payment of interest amounting to Rs. 26,66,408 to the bank and other creditors. During the course of assessment proceedings, the Assessing Officer noticed that the assessee had borrowed a sum of Rs. 45,00,000 from M/s. Majestic Auto Limited, another sister concern, on November 28, 1984, carrying interest at 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... challenged by the Revenue being perverse claiming any question of law thereon, hence, the issue of business expediency is not required to be gone into. Investment by an assessee in a venture today may or may not result in profit immediately, but the steps may have been taken as long term investment. Merely because in a particular assessment year when the expense was incurred, there was no profit earned by the assessee, the cost so incurred or the expenses so made could not be disallowed. The Revenue has no authority to go into the prudence of a businessman as he is the best judge for running his business, which may be in the form of a single establishment or a group of establishments. 11. Learned counsel further submitted that the opinion of different persons with regard to the fact as to whether a particular transaction is to be entered into or not would be subjective and differs from each other. The Assessing Officer may look 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 hea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appeals) (for short, "the CIT (A)") upheld the order of the Assessing Officer. However, the Tribunal relying upon its earlier decision accepted the plea of the assessee and the entire interest paid by it was allowed as expense. 16. A perusal of the orders passed by the Assessing Officer as well as the Commissioner of Income-tax (Appeals) shows that the claim of the assessee for deduction on account of payment of interest has been considered under section 57(iii) of the Act. 17. Section 57 of the Act deals with the income chargeable under the head "Income from other sources". It provides for various permissible deductions from such income. Chapter IV of the Act deals with computation of total income. The same has been divided into six parts, which deal with different heads under which the income is to be assessed. Part D thereof provides for computation of income in the form of profits and gains of business 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of the expenditure. It may be pointed out that an identical view was taken by this court in Eastern Investments Ltd. v. CIT [1951] 20 ITR 1, 4 (SC), where interpreting the corresponding provision in section 12(2) of the Indian Income-tax Act, 1922, which was ipsissima verba in the same terms as section 57(iii), Bose J., speaking on behalf of the court, observed : `It is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned.' It is indeed difficult to see how, after this observation of the court there can be any scope for controversy in regard to the interpretation of section 57(iii). It is also interesting to note that, according to the Revenue, the expenditure would disqualify for 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 exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in course of the trade which is unremunerative is none the less a proper deduction, if wholly and exclusively made for the purposes of the trade. It does not require the presence of a receipt on the credit side to justify the deduction of an expense'." 19. The issue regarding jurisdiction of the taxing authorities was considered by the hon'ble the Supreme Court in CIT v. B. M. Kharwar [1969] 72 ITR 603, wherein it was opined that a taxing authority is entitled and is indeed bound to determine the true legal relation resulting from a transaction. The relevant paragraph is extracted below (page 607) : "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 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 do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to maximize its profit. The income-tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits. 32. We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends on the facts and circumstances of the respective case. For instance, if the directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot 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 hen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot for making or earning such income, then deduction under section 57(iii) shall not be available and to ascertain the purpose, the courts may lift the veil. 93. In corporate law, the courts have ample power to lift the veil. It is the liability of the companies to be fair in dealing with tax matter. Being a separate juristic personality, it is expected that the companies shall not conceal their income or to escape the liability with regard to payment of tax. Lifting the corporate veil is to find out who is the real person, beneficiary or in controlling the position of the company. The doctrine of `lifting the veil' has marked a change and it is adopted whenever and wherever a situation warranted. 94. Lord Denning M. R. in Littlewoods Mail Order Stores v. IRC [1969] 1 WLR 1241 (CA) said (page 1254) : `The doctrine laid down in 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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