TMI Blog2012 (10) TMI 809X X X X Extracts X X X X X X X X Extracts X X X X ..... told that there are several unusual features which throw considerable doubt on the assessee's claim for deduction of the interest, it did not consider it proper to examine the matter further, but chose to take umbrage on the principle that the Tribunal cannot be expected to act as an investigating agency. It is true that the Tribunal cannot by itself embark upon an investigation and try to raise a new issue or make out a new case for the revenue which has not occurred to the revenue authorities, however, in the present case the AO did indicate the broad contours of the intention of the assessee to reduce his tax liability by claiming interest under Section 57(iii) on borrowings allegedly made from companies belonging to the same group for the purpose of acquiring shares, again in companies of the same group, which were closely held and did not yield any dividend. It is therefore, not a case where the Tribunal, for the first time, was being invited to investigate into an aspect which was not raised by the income tax authorities. The Tribunal, with respect, was not justified in brushing aside the invitation on the ground that it was not an investigating agency and has to limit it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the amount of interest on the loans borrowed from M/s. Sahara India Mutual Benefit Co. Ltd. for purchase of shares in several companies belonging to the Sahara Group. The AO further noticed that no income was shown under this head. 4. The Assessing Officer thereafter examined the utilisation of the loans taken by the assessee and found that the loans were utilised for purchase of shares in closely held companies (belonging to the Sahara Group) and they were not quoted shares. Some of the unquoted shares which had the face value of Rs. 100/- were found to have been bought by the assessee for very nominal amounts. 5. The assessee had in the earlier years borrowed funds at a rate of interest which was higher than the rate of interest for which he had lent the monies in those years to concerns belongings to the Sahara Group. According to the Assessing Officer, when the differential interest was brought to tax in those years under Section 2(24)(iv) of the Act as a benefit or perquisite, the assessee had resorted "to the new subterfuge" in order to avoid being assessed on the differential rate of interest. The method adopted by the assessee, according to the Assessing Officer, amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order to justify the allowance of interest on borrowed amounts under Section 57(iii), it was not necessary that the assessee should have actually earned any income and so long as the interest was paid for the purpose of making or earning any income, it would be allowable as a deduction notwithstanding that the intention of the assessee to earn income did not fructify. Before the Tribunal, a point was made on behalf of the Revenue that the question of allowing the claim of interest would arise only when the amount borrowed possessed the character of a loan, that in order to constitute a borrowing of monies it must be shown that the borrower had both the intention and also the capacity to repay the monies, that the borrowings of the assessee had piled up to a very huge amount over a period of years which the assessee could never repay, given his meagre income by way of salary. It was accordingly argued for the department that the lender companies will never be able to recover their monies from the assessee. Apparently, the point sought to be made by the Revenue was that the borrowing itself was sham and therefore, the interest was not eligible for deduction under Section 57(iii) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gitated by the Department. The Tribunal has to limit itself to the issues raised/agitated and considered by the A.O. In the instant case, the A.O. has never doubted that the funds borrowed by the assessee was not a loan. Apart from then A.O., who has accepted that the funds borrowed were in the nature of loan, we find that even the lender companies have treated the funds as loans advances and have also accounted for the interest as interest income. Such amount has also been taxed as interest income. We, therefore, hold that as the Department itself has accepted the borrowed funds as loan, there is not need of giving any finding whether the borrowed funds were in the nature of loan or not. While making these observations, we have also taken into consideration that the borrowed funds have been repaid in the assessment year 1999-2000. 11. We find that the AO's only objection to the allowance of deduction was that the borrowed funds have been utilized for purchase of shares from which no income has been earned. The factum of purchase of shares have not been doubted. The assessee has also earned interest income and dividend income on other investments. Thus, even if such income has be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not been considered by the Tribunal, which it ought to have, given its status under the Act as the final fact-finding body, the matter may be remanded for relevant findings on the aspect of tax avoidance, if necessary. 11. On behalf of the assessee, it is contended that the amounts borrowed by it were immediately invested in purchasing shares, though in companies belonging to the same group, that the loans taken in the previous year relevant to the assessment year 1994-95 were repaid in the previous year relevant to the assessment year 1999-2000 as was pleaded before the Tribunal on the basis of a statement filed on behalf of the assessee. Counsel argued that the Revenue authorities did not discharge their burden of proving that the loan transactions as well as the investments in the shares were sham, that the Assessing Officer did not examine the value of the shares and acquired by the assessee with reference to their financial position exhibited in their balance-sheets, or it was a mere one-line statement made by the Assessing Officer that the shares had no value or had a value of a few paise and that in these circumstances, there was no iota of evidence to show that the borrow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction of borrowing and lending was sham or was got up with the purpose of avoiding or reducing the tax liability, nothing prevents the revenue authorities from ignoring the claim. 13. The difficulty in the present case with the order of the Tribunal is that despite being told that there are several unusual features which throw considerable doubt on the assessee's claim for deduction of the interest, it did not consider it proper to examine the matter further, but chose to take umbrage on the principle that the Tribunal cannot be expected to act as an investigating agency. It is true that the Tribunal cannot by itself embark upon an investigation and try to raise a new issue or make out a new case for the revenue which has not occurred to the revenue authorities; however, in the present case the Assessing Officer did indicate the broad contours of the intention of the assessee to reduce his tax liability by claiming interest under Section 57(iii) on borrowings allegedly made from companies belonging to the same group for the purpose of acquiring shares, again in companies of the same group, which were closely held and did not yield any dividend. It is therefore, not a case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld not have normally attracted anyone. Mr. Ganesh objected to this on the ground that the Assessing Officer had no material before him such as the financial statements of the companies whose shares were acquired to show that they were worthless and he had made a sweeping statement - what Mr. Ganesh described as "one-line statement" - without any basis. Prima facie the objection holds water, but that does not really answer the question as to why the assessee who does not have any income from business, much less share business, and derives income only by way of salary would indulge in any such speculation in the hope that the shares acquired by him at a huge interest cost would at some future point of time bear fruit. The interest liability in the assessment year 1994-1995 itself amounts to Rs. 53,46,382/-; the salary income of the assessee, even including the perquisites, and without allowing the standard deduction is only Rs. 11,77,082/-. If these figures are taken note of, a question would naturally arise in anyone's mind as to how the assessee hopes to repay the loans. Another aspect which needs to be examined and ought to have been examined is whether the interest was actually ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an investor; (c) That though the Assessing Officer had stated in the assessment order that the shares were of the value of 'few paise or even zero", the assessee placed no material before the revenue authorities or before the Tribunal to dispute the statement, granting that it was a sweeping statement made by the Assessing Officer; even if it was a sweeping statement, the burden was on the assessee to show that it was factually wrong; (d) That the assessee was not an investor in shares nor was he a trader; in fact he was not carrying on any business. It was therefore, for him to show the motives which impelled him to acquire the shares of the group concerns. It is true that it was for the assessee to arrange his affairs the way he pleases. But at the same time, we cannot take away right of the Assessing Officer to inquire into the motive or purpose of the investment or acquisition of shares as it impinges upon the genuineness and liability of the claim of interest on the borrowings made for acquiring the shares under Section 57(iii) of the Act. 15. The Allahabad High Court (supra) in the case of Swapna Roy, wife of Subroto Roy and a connected assessee, did disapprove of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... listed in the stock exchange and not likely to fetch any resale value. The Assessing Officer may exaggerate the factual position but things as they stand reveal that no person shall make investment in companies which lack financial soundness and where there is remote chance of profit or to earn income. The expenditure towards interest on loan does not seem to lay out or expend wholly and exclusively for the purpose of making or earning income from the shares under section 57(iii) of the Act. The reasoning given by the Assessing Officer substantially seems to be correct while disallowing deduction. There is one other aspect of the matter. While interpreting the provisions contained in section 57(iii) of the Act, the Tribunal or the court has got ample power to pierce the veil. The court may find out from the material on record with regard to bona fide and intention of the assessee while claiming benefit of section 57(iii) of the Act. Every word of section 57(iii) of the Act should be given meaning." At page 400, the Allahabad High Court has noticed the peculiar features of the case, which are similar to the facts in the case of the assessees before us:- "It is strange that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee was to avoid his tax liability lawfully due, the Tribunal cannot plead helplessness; if it is prima facie convinced of the motives of the assessee and in the present case there was sufficient material before the Tribunal the Tribunal should not hesitate to order a deeper investigation into the facts in order to elicit the truth and in doing so, it has the power to remit the matter to the income tax authorities. In our opinion, in the present cases, the Tribunal ought to have kept the above principles in view. We further note that the present cases were transferred from Lucknow jurisdiction to Delhi jurisdiction by an order passed by the CBDT under Section 127 of the Act on 29.7.2005 (copy of the order filed with the appeal). Had the cases continued to be assessed in Lucknow, the judgment of the Allahabad High Court (supra) would have applied to them. If the facts are the same in all the cases, of which one of them had reached the Allahabad High Court which had frowned upon the device adopted by one of the assessees as a colorable device, it should logically follow that the decision should be the same in all the connected cases. 18. We therefore, answer the substantial ..... X X X X Extracts X X X X X X X X Extracts X X X X
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