TMI Blog2006 (3) TMI 189X X X X Extracts X X X X X X X X Extracts X X X X ..... from 1-4-1997. It filed its return of income on 17-11-1997 declaring loss of Rs. 39,15,295. The return was accompanied by Form Nos. 3CA, 3CD and audited Profit Loss a/c and balance-sheet as provided under section 44AB of the Income-tax Act, 1961. 4. On going through the balance-sheet the Assessing Officer noticed that unsecured loans were mentioned at Rs. 71,25,53,703 and on these loans the assessee paid interest. Similarly he noticed that on investment side a stock-in-trade was shown at Rs. 54,51,85,726 which comprises mostly of Arvind Group Companies. Thus assessee was required to submit the details of its interest account and it was submitted before him vide letter dated 4-3-2000 wherein interest received was shown at Rs. 1,70,23,307 and interest paid was shown at Rs. 5,48,96,043. Thus there was a debit of interest of Rs. 3,78,72,736. The Assessing Officer further noticed that interest bearing loans were utilized for investment in shares of Arvind Intex Ltd. and it was to be disallowed. He further found that assessee had raised unsecured loans from six companies belonging to Arvind group and the said funds were utilized in purchasing shares which are shown as stock-in-trade ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ----------------------------------------- Qty. Amount Rate ----------------------------------------- Arvind Ltd. 91135 273404763 3000 OCD Average Market No. Arvind Intext Ltd. 210000 5190000 2471 ----------------------------------------- The assessee was required to show cause as to why the interest payments claimed by assessee should not be disallowed for the reasons that the interest bearing funds were utilized for the purpose of acquiring shares of these companies belonging to the same group. The Assessing Officer inferred that principle laid down by Hon. Supreme Court in the case of McDowell Co. Ltd. v. CTO [1985] 154 ITR 148 (SC) also applies to the case of assessee and the provisions of section 77 of the Act regarding violation for providing funds for buying its own shares also come into force. However, notwithstanding this he found that from the view of income-tax also it is a transaction which is not genuine for the reasons that on the one hand the assessee is paying interest on alleged loans from group companies whereas on the other hand same funds are being parked for acquiring the group company shares. Thus he proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been violated. It was submitted that assessee is a dealer in shares and profits and loss arising from these transactions is shown by the assessee in Profits and Loss a/c as business income. It was pleaded that even in the assessment order the Assessing Officer has accepted the computation of income based on profits shown as per books of account as disallowance of interest only has been made. Thus it was pleaded that undisputed facts of the case are as under:- (a) Appellant-company is engaged in the business of dealing in shares and securities, finance, investment, etc. (b) All the transactions of purchase and sale of shares are genuine transactions. (c) Optionally Convertible Debentures/shares of Arvind Intex Ltd. were listed on various Stock Exchanges. (d) It has borrowed monies for the purposes of its business and interest was paid during the course of carrying on the business. (e) Interest on the borrowings was not paid in excess of market rate. (f) Borrowing made from any of the companies is not utilized for purchasing shares of that company. Referring to these undisputed facts it was pleaded that as per well-settled principle of law, the profit to be assessed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest is an allowable deduction. Reference was made to the decision of Hon. Supreme Court in the case of Madhav Prasad Jatia v. CIT [1979] 118 ITR 200 to contend that where following three conditions were fulfilled the interest was to be allowable as business expenditure under the provisions of section 10(2)(iii): (a) that money (capital) must have been borrowed by the assessee, (b) that it must have been borrowed for the purpose of business, and (c) that the assessee must have paid interest on the said amount and claimed it as a deduction. It was pleaded that where all these three conditions are fulfilled interest could not be disallowed and for this purpose reliance was also placed on following decisions:- (1) Birla Gwalior (P) Ltd. v. CIT [1962] 44 ITR 847 (MP) (2) CIT v. Pudukottai Co. (P.) Ltd. [1972] 84 ITR 788 (Mad.) (3) D H Secheron Electrodes (P.) Ltd. v. CIT [1983] 142 ITR 528 (MP) (4) D H Secheron Electrodes (P.) Ltd. v. CIT [1984] 149 ITR 400 (MP) (5) Shahibag Entrepreneurs v. ITO [1994] 50 ITD 113 (Ahd.). Referring to these decisions it was pleaded that once it is found that capital is borrowed for the purpose of business the assessee is entitled to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he market including the group companies at rate of interest prevailing in the market. Reference was also made to the decision of Hon. Supreme Court in the case of CWT v. Arvind Narottam [1988] 173 ITR 479. Thus it was pleaded that claim of assessee could not be disallowed by application of the decision of Supreme Court in the case of McDowell Co. Ltd. 8. As regards the applicability of provisions of section 77 of the Companies Act, it was pleaded that borrowings made by the assessee were not prohibited by the provisions of section 77 of the Companies Act as the borrowings were never for the specific object of buyback of shares of the company who advanced loan to the assessee-company at the market rate. It is thus the disallowance of interest was agitated before CIT(A). The CIT(A) after considering all these submissions has deleted the disallowance as per paragraph 3.12 of the impugned order which is reproduced below for the sake of convenience:- "3.12 I have gone through the assessment order and I have considered the contentions raised by the appellant. I am of the considered opinion that the borrowings are for the business of the appellant, that on perusal of the details of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing Officer to prove that the borrowings made by assessee and the utilization of borrowed funds were in the nature of colourable device, dubious method or subterfuge as defined by Hon. Gujarat High Court in the case of Banyan Berry. He contended that it has also not been shown by the Assessing Officer that how there was a violation of provisions of section 77 of the Companies Act, 1956. He contended that even if there was any violation of section 77 for that reason interest could not be disallowed which is claimed by assessee under the provisions of section 36(1)(iii) of the Act. Thus he pleaded that ld. CIT(A) has rightly deleted the addition and his order should be upheld. 11. We have carefully considered the 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 Assessing Officer. The only objection of Assessing Officer 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. Supreme Court in the case of McDowell Co. Ltd. was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a device for avoidance of tax irrespective of legitimacy or genuineness of the Act; an inference which unfortunately, in our opinion, the Tribunal apparently appears to have drawn from the enunciation made in McDowell Co. Ltd. v. CTO [1985] 47 CTR (SC) 126: [1985] 154 ITR 148 (SC). The ratio of any decision has to be understood in the context it has been made. The facts and circumstances which lead to McDowell's decision leave us in no doubt that the principle enunciated in the above case has not affected 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, unless the same falls 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 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 'colour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into by the assessee for sale and purchase of shares for borrowing and lending of money was in the nature of "device". 15. Similarly referring to the word 'subterfuge' reference was made to Shorter Oxford English Dictionary which defines as to which one refers for escape or concealment. On historical principles it means an article or device to which a person refers in order to escape the force of an argument, an excuse with which conceals a clue. As pointed out earlier there is no material on record brought by the Assessing Officer to show that the transaction entered into by the assessee were in the nature of subterfuge. So also the expression "dubious" refers to a doubtful or questionable character. Here also there is no material on record to establish that there was anything doubtful or a questionable character. 16. As explained by Jurisdictional High Court in the case of Banyan Berry and approved by Hon. Supreme Court in Azadi Bachao Andolan's case that even by the decision in the case of McDowell Co. Ltd. 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 circu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o public company, and no private company which is a subsidiary of a public company, shall give, whether directly or indirectly; and whether by means of a loan, guarantee, the provision of security or otherwise, any financial assistance for the purpose of or in connection with a purchase of subscription made or to be made by any person of or for any shares in the company or in its holding company: Provided that nothing in this sub-section shall be taken to prohibit- (a) the lending of money by a banking company in the ordinary course of its business; or (b) the provision by a company, in accordance with any scheme for the time being in force, of money for the purchase of, or subscription for, fully paid up shares in the company or its holding company, being a purchase or subscription by trustees of or for shares to be held by or for the benefit of employees of the company, including any director holding a salaried office or employment in the company; or (c) the making by a company of loans, within the limit laid down in sub-section (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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer found that purchases were shown at Rs. 66,82,89,965 but as per quantitative details furnished with regard to purchases, the purchases were shown at Rs. 66,77,59,935. Thus he found that there was a difference of Rs. 5,30,030 and addition of Rs. 5,30,030 was made on account of inflation in the purchases. CIT(A) has deleted this addition on the ground that assessee had incurred the expenditure of Rs. 5,30,030 on stamp charges of share purchases and it was also explained during the course of assessment proceedings but it lost sight of Assessing Officer. Necessary details and reconciliation figures were submitted before CIT(A); and the details were duly certified by the auditors wherein they had clarified the facts on the matter. Thus CIT(A) observed that addition has been made on improper verification and appreciation. The revenue is aggrieved, hence in appeal before us. 20. After narrating the facts, ld. DR pleaded that it was never explained by the assessee before Assessing Officer that a sum of Rs. 5,30,030 represented expenses incurred by assessee on shares transfer stamp charges. A new plea was taken before CIT(A) and thus the factual verification was not done by Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X
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