2010 (5) TMI 544 - HC - Income Tax

Income from other sources Deduction Expenditure must be wholly and exclusively incurred to earn income Intention to earn income must be established Borrowed funds invested in financially fragile sister concerns No intention to earn income but merely to assist concerns deduction of interest paid on borrowings not allowable

Summary

Issues Involved:
1. Substantial illegality in deleting the addition of interest on loan.
2. Applicability of the principle of consistency in tax assessments.

Detailed Analysis:

1. Substantial Illegality in Deleting the Addition of Interest on Loan:

The court examined whether the first appellate court and the Tribunal committed substantial illegality by deleting the addition concerning interest on the loan taken from a company of the Sahara group without recording any finding regarding the dominant purpose for which the loan was taken, as mandated by clause (iii) of section 57 of the Income-tax Act.

Facts:
- The dispute pertains to the assessment year 1996-97.
- The assessee filed a return of income, later revised, showing a net loss.
- The assessee claimed interest on a loan taken from Sahara India Mutual Benefit Co. Limited (SIMBCL) for investment in shares of companies belonging to the Sahara group.
- The Assessing Officer disallowed the interest claim, noting the lack of collateral security, the privileged position of the assessee, and the financial instability of the companies where investments were made.
- The Commissioner of Income-tax (Appeals) allowed the deduction under section 57(iii), relying on previous years' orders.
- The Tribunal upheld the appellate authority's decision, maintaining consistency with earlier years.

Court's Observations:
- The Assessing Officer's findings indicated that the loan transactions were artificial and aimed at creating an interest liability to set off against future income, thereby avoiding tax.
- The appellate authority and Tribunal failed to address the substantial issues raised by the Assessing Officer, including the financial viability of the companies where investments were made.
- The principle of consistency should not override the need for a reasoned and justified assessment, especially when there is a significant change in circumstances or new material facts.

Conclusion:
The court concluded that the appellate court and Tribunal committed substantial illegality by deleting the addition without proper justification and consideration of the facts and circumstances.

2. Principle of Consistency in Tax Assessments:

The court examined whether the principle of consistency should apply, given that the controversy for the assessment year 1994-95 and subsequent year 1997-98 had been settled up to the appellate stage.

Court's Observations:
- The principle of consistency is generally followed to maintain certainty in law, but it is not absolute.
- The Supreme Court in various judgments has held that consistency should be maintained unless there are justifiable grounds for departure, such as a small amount of revenue involved or a change in circumstances.
- In the present case, the revenue involved was substantial, and the Assessing Officer's findings indicated significant discrepancies and lack of bona fide on the part of the assessee.
- The Tribunal and appellate authority failed to provide a reasoned order addressing the issues raised by the Assessing Officer, thereby rendering their decisions unjust and illegal.

Conclusion:
The court held that the principle of consistency should not apply in this case due to the substantial revenue involved and the lack of proper consideration of the facts and circumstances by the appellate authorities.

Final Judgment:
- The appellate court and Tribunal committed substantial illegality by deleting the addition concerning interest on the loan.
- The assessee is not entitled to benefit from the principle of consistency, and the Assessing Officer rightly assessed the income based on the material on record.
- The appeal is allowed, and no order as to costs.