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TMI Blog2020 (2) TMI 1363X X X X Extracts X X X X X X X X Extracts X X X X ..... er on the facts and circumstances of the case, the Appellate Tribunal was right in law in holding that the modus of utilizing the borrowed fund from group companies in purchasing shares of group companies was not fraudulent, sham and thereby, not illegal?" Issue notice to the other side. Paper book be filed within 3 months. List the appeal for final hearing after 3 months." 3. The Assessing Officer noticed during the assessment proceedings for assessment year 19971998 in case of the respondent assessee that the assessee was paying huge interest on the purported loans from group companies and such loans were utilized for purchasing shares of the said group companies. The Assessing Officer therefore, called for the explanation of the assessee to show cause why such interest expenditure should not be disallowed treating it to be dubious transaction with an ulterior motive to defraud the revenue and evade tax. The Assessing Officer after considering the explanation tendered by the assessee disallowed the interest payment of Rs. 2,64,49,312/out of the interest expenses of Rs. 3,49,92,157/as claimed in the Profit and Loss account of the assessee. 4. Being aggrieved and dissatisfied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has admitted that the amount borrowed from the Arvind Mills Limited have been utilized for purchasing shares of Arvind Intex Limited arid not shares of The Arvind Mills Limited. ix) It is a well settled principle of law that subject to the special requirements of the Act, the profit to be assessed are the real profits and they must be ascertained on ordinary principles of commercial trading and commercial accounting. It is thus clear that profit should be, computed after deducting the losses and expenditure incurred for the purposes of business unless the losses and expenditure are expressly, or by necessary implication, disallowed by the Act. It may be appreciated that the monies were borrowed for the purposes of business hence allowable under the provisions of Section 36(1)(iii) of the Act. 3.4 It was also argued that the concept of group company it is stated that such concept is nowhere defined in the Companies Act. It is an accepted fact that amounts were borrowed from Arvind Mills Ltd., the Company in which public are substantially interested and therefore, the question of the concept of group companies does not arise here. 3.5. The counsel for the appellant has further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here is saving the tax payable by actually incurring a real loss. It cannot be called a bogus loss for the reasons mentioned above. The fact the sale is to members of the family and that the shares remained in the family cannot derogate from the feet of the sale. 3.6. It was further pointed out that on perusal of the details given by the assessing officer in the assessment order itself it will be seen that there were opening credit balances in the account of Pinnacle Finance Ltd. and Arvind Intex Ltd. which have been repaid by the appellant during the year under consideration. Thus there is no fresh borrowings from these companies and hence the argument of the assessing officer with reference to the balance of the said companies are in total disregard of the facts of the case. There was opening balance of Rs. 5 crores in the account of Arvind Mills Ltd. and further borrowing of Rs. 9.51 crores were made. Thus there is no fresh borrowings from Arvind Mills Ltd. It may be stated here that the amount of Rs. 9.51 crores from Arvind Mills Ltd., during the year under consideration was mainly used for repayment of the past borrowings and not for investments in share as is alleged by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there is no justification for disallowance of interest paid to Arvind Mills Ltd. 3.8 The counsel for the appellant while dealing with the inter connection of the borrowings as tried to be made out in the assessment order, the following facts emerge: i) It may be perused from the details of the borrowed funds that so far as the Arvind Mills Ltd., are concerned, the opening balance was Rs. 5,00,93,630/. The repayments, during the year, were more than the loans taken (additions Rs. 9,51,40,000 and repayments Rs. 10,41,50,000). The closing balance is more than the opening balance due to interest. ii) As for the accounts of Pinnacle Finance and Arvind Intex Ltd., it may be observed that there are no fresh borrowings during the year and the opening balances have been repaid. iii) Similarly, borrowings from Orbit Finmark is only during the year under consideration, and it was only Rs. 5,00, 000/. Thus, it was vehemently argued that in view of the above factual position, the question of utilization of the borrowed fund during the year for the purpose of acquisition of shares simply does not arise. In any case, it may be observed from the assessment order that the Assessing Office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd debentures. So the Assessing Officer's conclusion of violation of section 77 is factually incorrect. Thus, having regard to the facts and circumstances of the case as well as the law on the subject the Assessing Officer is not justified in disallowing the sum of Rs. 26,44,932. The same is deleted. 6. The Tribunal also considered the decision in case of Addl. CIT v. Pinnacle Project and Infrastructure Pvt. Ltd in ITA No. 195/Ahd/2001 in similar facts and followed the same to uphold the order of the CIT(Appeals) and dismissed the appeal of the Revenue. The Tribunal in the impugned order has considered the decision in case of Pinnacle Project and Infrastructure Pvt. Ltd (supra) as under : "12. Since the tribunal (ITAT Ahmedabad Bench "B") has already decided the Revenue's appeal in the case of M/s. Pinnacle Project and Infrastructure Pvt. Ltd. for Asst. Year 199798in ITA No.195/Ahd/2001, order dated 24/03/2006, we decide the present appeal by following the decision in the case of M/s. Pinnacle Project and Infrastructure Pvt. Ltd. (supra) and, therefore, proceeding to consider the Tribunal's decision in that case, as under: (i) The facts in the case of M/s. Pinnacle Project ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rival submissions in the light of material placed before us. The borrowing of funds and utilization thereof for the purpose of business activity of the assessee is not disputed even by A.O. The only objection of AO is that the borrowed funds were utilized by the assessee for the purpose of purchasing shares of group companies, and, therefore, the principle laid down by the decision of Hon'ble Supreme Court in the case of McDowell & Co. Ltd.(supra) was applicable. It is, therefore, the A0 has disallowed the interest being a device adopted by assessee for reducing its income. One other ground on which the Assessing Officer proceeded to disallow the claim of interest is the applicability of provisions of section 77 of Companies Act, 1956. 12. As per the decision of Hon. Supreme Court in the case of McDowell & Co. Ltd. (supra) that it is open to everyone to show arrange his affairs as to reduce the brunt of taxation to the minimum and such a process does not constitute tax evasion, nor does it carry any ignominy. Tax planning may be legitimate provided it is within framework of the law Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the bel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s affairs with circumspection, within the framework of law, unless the same fall in the category of colourable device which may properly be called a device or a dubious method or a subterfuge clothed with apparent dignity." "This accords with our own view of the matter" 13. Further in the above decision in the case of Banyan & Berry (supra) while defining the words 'colourable device'. 'dubious methods' or 'subterfuge', their Lordships have observed that these words have special significance in legal world. The definition given to 'colourable' in Brown's Judicial Dictionary is as 'reverse of bona fide'. Referring to Black's Dictionary the word 'colourable' to mean that which is in appearance only and not in reality, what it purports to be hence, counterfeit, feigned having the appearance of truth. Seeing from that angle so as to find out that what is "colourable" in the present case, it is to be established that the transactions of payment of interest by the assessee were "reverse bona fide" or which were in appearance of truth. A perusal of the chart will reveal that assessee has deducted a substantial amount of TDS out of all the payments of interest ad the funds have also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ablish that there was anything doubtful or a questionable character. 16. As explained by Jurisdictional High Court in the case of Banyan & Berry (supra) and approved by Hon. Supreme Court in Azadi Bachao Andolan & Anr. (supra) that even by the decision in the case of McDowell, the freedom of the citizen to act in a manner according to his requirements, his wishes in the manner of doing any trade, activity or planning his affairs with circumspection, within the framework of law has not been affected. If such trade, activity or planning falls within the frame work of law, the same cannot be discarded unless that falls in the category of colourable device which may properly be called a device or a dubious method or subterfuge clothed with apparent dignity. Thus the assessee is free to act in a manner according to his requirements, his wishes in the manner of doing any trade, activity or planning his affairs with circumspection and which is within the framework of law. The assessee thus is entitled to do so and there is no prohibition put by the above mentioned decision of Hon. Supreme Court in the case of McDowell (supra). It has already been held that the transactions on the basi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ription by trustees of or for shares to be held by or for the benefit of employees holding a salaried office or employment in the company; (c) or the making by a company of loans, within the limit laid down in subsection (3) to persons (other than directors, or managers) bona fide in the employment of the company with a view to enabling those persons to purchase or subscribe for fully paidshares in the company or its holding company to be held by themselves by way of beneficial ownership. (3) No ban made to any person in pursuance of clause (c) of the foregoing proviso shall exceed in amount his salary or wages at that time for a period of six months. (4) If a company acts in contravention of subsection (1) to (3), the company, and every officer of the company who is in default, shall be punishable with fine which may extend to one thousand rupees. (5) Nothing in this section shall affect the right of a company to redeem any shares issued under section 80 or under any corresponding provision in any previous companies law." Sub-section (1) is not applicable to the facts of the case as it is not a case where company has bought its own shares. Sub-section (2) prohibits pub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asmuch as amount borrowed from group companies was again reinvested in the said group companies by claiming huge interest amount paid on the said fund to decrease the tax burden. Ms. Bhatt further pointed out that provisions of section 36(1)(iii) of the Income Tax Act, 1961 provides for allowance of expenditure genuinely incurred by respondent assessee but in the facts of the case, payment of expenditure incurred cannot be said to be genuinely incurred by the respondent assessee. It was further submitted that the interest payment made by the respondent assessee is also in contravention to the provisions of section 77 of the Companies Act, 1956 and hence the modus of utilising the borrowed funds from the group companies from purchasing shares of group companies was fraudulent, sham and thereby illegal. 8. It was submitted that the modus adopted by the respondent assessee is a clourable device as per the principles laid down by the Apex Court in case of McDowell & Co. Ltd. v. CTO reported in 154 ITR 148(SC). Learned Standing Counsel Ms. Bhatt invited the attention of the Court to the fact that as against total loss of Rs. 2,78,87,604/claimed by the respondent assessee, loss of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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