TMI Blog2004 (3) TMI 323X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the assessee has claimed exemption in respect of the interest received whereas it has kept the loss on the sale of tax-free bonds merged into the sale and purchase transactions of shares and securities. This treatment given by the assessee was not proper, according to the AO. He noted that while buying and selling the tax-free bonds, the important factor to be noticed was the interest accrued on them and the price of the bonds depended on the interest accrued thereon. He, therefore, held that the purchase and sale transactions in the bonds and the assessee's right to receive the interest thereon are not mutually exclusive, but were merged into each other. He, therefore, held that the interest in respect of which exemption was claimed under s. 10 can only be the net interest. Accordingly, he held that there was only a negative earning from the tax-free bonds (Rs. 6,96,460 - Rs. 8,44,156) and hence, the assessee will not be eligible for any exemption under s. 10. In this view of the matter, the loss on sale of tax-free bonds was added back in the assessment. On appeal, the assessee contended that the business loss of Rs. 8,44,156 cannot be ignored. It was pointed out, relying on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d standing counsel which should not be permitted. With regard to the ruling in McDowell, it was pointed out that in the later decision of the Supreme Court in Union of India vs. Azadi Bachao Andolan (2003) 184 CTR (SC) 450 : (2003) 263 ITR 706 (SC), the Supreme Court has approved of the judgment of the Gujarat High Court in Banyan Berry vs. CIT (1996) 131 CTR (Guj) 127 : (1996) 222 ITR 831 (Guj), where it was held that a citizen is free to carry on his business in any manner provided the same is within the four corners of the law. It was also submitted that the ruling in McDowell has been considerably watered down in the later judgment of the Supreme Court. As regards the judgment of the Bombay High Court in American Express International, it was contended that the judgment was distinguishable on facts. It was pointed out that, in that judgment the assessee was consistently adjusting the broken period interest, both received and paid, against each other and the Department had also accepted the adjustment as correct for a long period of time. In the present case, the controversy is whether the loss in the sale of bonds could be disallowed. Further, it was submitted that the intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e IT Act. Supposing the bond is sold after the coupon date at Rs. 98, the loss would be Rs. 7 (105 - 98). This loss is what is claimed by the assessee in the computation of the business income which included dealings in shares and securities. What the AO has done is to disallow the loss of Rs. 7 for the reasons already mentioned. But when the genuineness of the sale or the price received by the assessee is not in question, we do not see how the loss can be disallowed. There is no evidence brought on record in the assessment order for both the assessment years to the effect that either the sale or the sales price is not genuine. The fact that the interest received is free of income-tax is a position recognised by the IT Act itself. The assessee has merely made use of the provisions of the law. Use of the provisions of the law cannot be considered to be abuse of law. Even if it is assumed that this is a premeditated transaction, there is nothing to impeach the genuineness of the transaction. Mere tax planning, without any motive to evade taxes through dubious or colourable devices, is not frowned upon even by the McDowell principle. 8. As regards the judgment in American Express In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly held that the business funds ought to have been utilised by the assessee for the corpus. Accordingly, he attributed a part of the financial and administrative expenses for the investment in tax-free bonds. He calculated such part at Rs. 3,88,162 and Rs. 5,675 being financial expenses and administrative expenses, respectively. On appeal, the assessee furnished details to show that the purchases of public sector bonds were directly financed by M/s Bimal S. Gandhi, M/s Hiten P. Dalal and M/s Industrial Credit Development Syndicate Ltd. The CIT(A) held that the money invested in the tax-free bonds came out of direct financing from certain parties. He also held on the basis of the judgment of the Supreme Court in the case of CIT vs. Indian Bank (1965) 56 ITR 77 (SC), that even if the amount is borrowed and interest is paid thereon on the purchase of tax-free securities, the interest would be an allowable deduction. In this view of the matter, he disapproved of the action of the AO in apportioning a part of the financial and administrative expenses for the earning of the tax-free interest. The Revenue is in appeal to contend that s. 14A is attracted to the present case. It was point ..... 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