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TMI Blog2007 (7) TMI 639X X X X Extracts X X X X X X X X Extracts X X X X ..... al was justified in not upholding the Assessing Officer's action in rejecting the assessee's claim in the above matter in the light of the Hon'ble Supreme Court's decision in the case of M/s Mc Dowell & Co. Ltd (1985) 154 ITR 146 (SC)? * Whether on the facts and in the circumstances of the case, the Tribunal was justified in allowing the assessee's claim for deduction u/s 35(2A) in respect of donation to Aparna Ashram?" 2. In brief, the facts and the proceedings which have given rise to questions under reference are as follows: The assessee is running a partnership firm registered within the meaning of Sec.183(b) of the Act. The assessee firm consisting of two partners - Sri.K.L. Srihari and Sri.K.Narayan with 92.5% and 7.5% share respectively, filed return for the assessment year 1984-85 admitting the income of ₹ 5,52,190/- (Rupees Five lakhs Fifty two thousand One hundred Ninety only) and later filed a revised return on 11.10.1986 admitting the income of ₹ 5,87,190/- (Rupees Five lakhs Eighty seven thousand One hundred Ninety only). A notice was issued to the assessee. In response to the notice, a representative of the assessee attended the accounts and were exa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een taken through the relevant records and orders passed by the Assessing Officer and the I Appellate Authority and the Tribunal. 8. The Learned Counsel for Revenue has made the following submissions: (i) The order of the I Appellate Authority confirmed by the Tribunal in disallowing service charges of ₹ 6,79,976/- (Rupees Six lakhs Seventy nine thousand Nine hundred Seventy six Only) and donation of ₹ 2,10,000/- (Rupees Two lakhs Ten thousand only) is not sustainable both in law and on facts. (ii) The order of the Tribunal disallowing a sum of ₹ 31,48,670/- (Rupees Thirty one lakhs Forty eight thousand Six hundred Seventy only) towards purchase of films by setting aside the order of I Appellate Authority and Assessing Authority is erroneous. (iii) The Assessing Officer and the I Appellate Authority by applying the principles laid down by the Supreme Court in the case of McDowell & Co. Ltd. VS. C.T.O. (1985) 154 ITR 148 considered the transactions relating to purchase of films to be not legitimate tax planning and it is impermissible tax avoidance. The I Appellate Authority after piercing through the veil of the transactions has held that it is colourable d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he decision in the case of Mathuram Agarwal Vs. State of Madhya Pradesh reported in (1999) 8 SCC 667 the Supreme Court has held that decision in DUKE OF WESTMINISTER'S case (1936) 8 ITR 522 (PC) and CIT Vs. Raman & Co. (1968) 67 ITR 11 (S.C.) are very much relevant even today. Therefore, the courts need not view with suspicion the legitimate tax planning of an Assessee to treat it as a device for avoidance of tax. It is further contended that decision of Supreme Court in case of McDowell & Co. Ltd. VS. C.T.O. (1985) 154 ITR 148 wherein it is held that tax planning may be legitimate provided it is within the framework of the law unless the same falls within the category of colourable devise which may properly be called a device or dubious method or subterfuge, has been diluted to some extent, by subsequent judgments of Supreme Court in the case of Mathuram Agarwal and Azadi Bachao Andolan's case. (iii) The learned Counsel for the assessee referring to the Notification issued by the Government of India vide Notification No.S.O.928 dated 24.11.1981 approving the research programme of M/s Aparna Ashrama to which the assessee had donated a sum of ₹ 2,10,000/- ( Rupees Two lakhs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. On this aspect, one of us, Chinnappa Reddy J. has proposed a separate and detailed opinion with which we agree." Thus from the above dictum of the Constitution Bench of the Supreme Court it is clear that the court is not precluded taking stock of and to expose the devices for what they really are and to refuse to give judicial benediction if there are colourable devices or dubious methods adopted to avoid tax payment. 12. The learned Counsel for the assesse relying on the judgment of the Supreme Court in Mathuram Agarwal's case referred to in Azadi Bachao Andolan's case has contended that principle in DUKE OF WESTMINISTER'S case (1936) AC 1 and CIT Vs. Raman & Co. (1968) 67 ITR 11 (S.C.) are very much relevant even today. 13. After carefully going through the judgment of the Constitution Bench of the Supreme Court in the case Mathuram Agrawal Vs. State of Madhya Pradesh, (1999) 8 SCC 667 we find that the Supreme Court has not stated anything which run contrary to the law la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... void the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges." Therefore, we hold that the law laid down in Mc Dowell's case on tax planning has neither been differentiated nor dissented in the case of Mathuram Agarwal Vs. State of Madhya Pradesh. Under the circumstances, applying the principles laid down by the Supreme Court in Mc Dowell's case we proceed to determine the questions under reference. 15. Re: Question No. 1 to CP.895/98: This question relates to deduction of Service Charges claimed by the Assessee which according to the assessee has been paid to M/s Universal Trading Company for the services provided to it in terms of agreement dated 1.9.1981. The assessee has claimed deduction of these Service Charges by invoking 37(1) of the Act. The main ingredient to be satisfied by the assessee for claiming such deduction is that expenditure laid cut or expended is exclusively for the purposes of business. 16. When the assessee was specifically asked to produce documents in proof of services rendered by M/s Universal Trading Company the assessee did not produce any documents. On the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to include service charges to M/s Universal Trading Company as one of the ways to reduce incidence of income tax. The Assessing Officer considering the constitution of assessee firm and M/s Universal Trading Company of both of which Sri.K.L.Srihari is a common partner, failure of the assessee to produce proof for services rendered by M/s Universal Trading Company and also taking note of the advise of Chartered Accountant by way of a Note to include service charges to M/s UTC as one of the ways to reduce incidence of income-tax, has held it impermissible to allow this deduction u/s 37(1) of the Act. 18. The I Appellate Authority-Commissioner of Income Tax, reversed this finding of the Assessing Authority and allowed deduction. After going through the order of I Appellate Authority, we find that the main reason for I Appellate Authority to extend the benefit under Sec.37(1) is that these items of expenditure had been accepted in full for the assessment year ending 1982-83 and in part for the assessment year ending 30.9.1982. At this juncture it is relevant to state, in regard to the claim of assessee that service charges were paid to M/s Universal Trading Company in terms of agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Loss Account under "Film Purchases". For better appreciation, the film business accounts as reflected in the assessee's books of accounts is reproduced below: To Op.Stock purchases: Aruna International Pvt. Ltd. Nil. By Realisation 96,330.28 By: Cl. Stock (Under Rule 9B): NIL By: Loss transferred to P&L A/c. 31,48,669.72 Date Ch.No. Amount 11.5.83 304279 7,00,000 23.9.83 304286 2,45,000 29.9.83 304287 3245000 3245000 32,45000 3245000 23. The assessee had declared income of ₹ 36 lakhs from arrack business in the assessment year. From the queries made and the replies given by assessee, the Assessing Officer has found assessee was carrying on profitable business in arrack. Suddenly it thought of entering into an altogether new venture of film business in which it had no experience. The assessee did not make any kind of correspondence with the lessors of the films to know as to how the films had faired on earlier occasions before entering into this business. The assessee made payment to the extent of ₹ 32.50 lakhs (Rupees thirty two lakhs Fifty thousand only) for purchasing films that to by resorting to borrowing. The assessee had made huge pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se films prior to their purchase by the assessee. On a careful consideration of the queries raised by the Assessing Officer and the replies furnished by the Assessee in the background of the Note (suggestion given by the Chartered Accountant of the Assessee) as resorting to film business would be one of the ways to reduce the incidence of income tax, the Assessing Officer has held that it is one of the ways adopted by the assessee to reduce the incidence of tax which essentially boomeranged on the assessee. The Assessing Officer referring to the decision of the Supreme Court in the case of Mc Dowell & Co. Ltd. Vs. CTO, (1985) 154 ITR 148 was held that the assessee adopted colourable devices to siphon off the profits earned in regular business and to claim disallowance of ₹ 31,48,670/- (Rupees Thirty one lakhs Forty eight thousand six hundred Seventy Only) as loss incurred from film purchases. 25. The I Appellate Authority considering the principles of law enunciated in Mc Dowell's case has held that said decision could be applied to the facts of the case to decide whether the scheme was legitimate tax planning or a colourable device or dubious method adopted to avoid tax in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terprises (Supra). Therefore, on identical facts and circumstances, the Tribunal having found the above transactions to be genuine and there being no evidence to prove that the above transactions are sham, we have to reject the claim of the authorities that these are bogus claims advanced with a view to reduce the incidence of taxation. We place our reliance wholly on the decision of the Tribunal (Supra)." The Tribunal has not even made a reference to the decision of the Supreme Court in Mc Dowell's case. It is apparent the Tribunal has solely relied upon the orders of the Income Tax Appellate Tribunal of Madras in ITA.3717/Mds/1987. In this context, we have gone through the orders passed by the Income Tax Appellate Tribunal to find out if the facts of the instant case and facts of the case in ITA.3717/Mds/1987 are identical and the points involved are one and the same. The details of costs of purchase of films referred to in that case are stated in paragraph 7 of Order of Income Tax Appellate Tribunal, Madras Bench. Though that order is not under challenge before us, we feel it necessary to make a brief reference to the transactions involved in that case to determine if the Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 2,75,000/-, it is ununderstandable why the assessee had paid ₹ 25.50 lakhs to Aruna, especially after seeking their performance in the market." On consideration of the above transactions, we find that the assessee in that case which included Sri.K.L.Srihari as one of the partners paid exorbitant amount towards purchase of films from one firm and sold the rights of exhibition to other Firm for a throwaway price, which apparently indicate that the transactions are not really what they purport to be. Therefore, we hold that the Tribunal was not justified in solely relying on the findings of Income Tax Tribunal, Madras, to disagree with the concurrent findings recorded by the I Appellate Authority and the Assessing Officer. On the other hand, we find the reasons stated by the Assessing Officer and the Appellate Authority to hold that the assessee's so-called adventure to film business and the transactions reflected in the books of accounts relating to the same are colourable transactions and dubious methods adopted to avoid tax liability. 29. The assess is shown to have borrowed a sum of ₹ 23 lakhs (Rupees Twenty three lakhs only) in cash from M/s Sujatha Films Pvt. Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nty three lakhs) to the assess firms and that such a loan transaction had not been followed by any correspondence and the assessee had not even executed any documents in favour of M/s Sujatha Films Pvt. Ltd. which is stated to have lent a sum of ₹ 23 lakhs (Rupees Twenty three lakhs). There was no prior correspondence relating to film business entered into between the assessee and M/s Aruna International Pvt. Ltd. before obtaining loan from M/s Sujatha Films Pvt. Ltd. The assessee did not have any kind of previous experience in the line of film business. The lessors of the films were themselves exhibitors of the film on behalf of the assessee as the assessee did not have any idea about the film business, utilization of orders and production of films, etc. The assessee had not even ascertained the collection potential in respect of these films. As against the total investment of ₹ 32.45 lakhs (Rupees Thirty two lakhs Forty five thousand only) the realization did not exceed ₹ 2,44,498/- (Rupees Two lakhs Forty four thousand Four hundred Ninety eight only) till 3.4.1987, going by the collections shown by the assessee total realization upto the end of lease period wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Madhya Pradesh, reported in (1999) 8 SCC 667 and the decision of the Supreme Court in the case of Union of India Vs. Azadi Bachao Andolan reported in (2003) 253 ITR 706 have not differed from what has been held by the Supreme Court on Tax planning in Mc Dowell & Co. Ltd. Vs. CTO (1985) 154 ITR 148. Therefore, we answer Question No.2 in the negative. 34. Re: Question No.3: The assessee claimed deduction of ₹ 2,10,000/- as amount donated to Aparna Ashrama sponsored by one Swami Dhirendra Brahmachari, by invoking the Notification No.SO.928 dated 24.11.1981 issued u/s (2A) of Sec.35 of the Act. It is seen from the copy of the notification that the approval is given by the government under Sec.35(2A) of the Income Tax Act subject to the following conditions: * That the Association will maintain a separate account of the amounts received and expenditure incurred for these projects as distinct from the other expenditure of the Aparna Ashrama. * That the Association will furnish annual returns of these scientific research projects to the Council by 31st May each year at the latest in such form it may be laid down and intimated to them for this purpose. * That the Associati ..... X X X X Extracts X X X X X X X X Extracts X X X X
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