2017 (9) TMI 1230 - HC - Income Tax

Disallowance of interest / commission paid by Assessee to depositors - interest less charged from Promoters and their relatives and their sister concerns? - invoke the doctrine of piercing the veil - Held that - Assessee is a Mutual Benefit Company duly declared so by Government of India, Ministry of Finance, under Section 620A of Act, 1956. Objective of Assessee is to receive, deposit and advance loans to its members. A.O. did not find that advancement of loan was not to the members of Assessee Company, but what it has observed, that a corporate body could not have been member of Assessee Company ignoring the fact that this prohibition came into force in 1995, hence was not applicable in A.Y. 1993-94. This Court in Commissioner of Income Tax (Central) vs. Sahara India Mutual Benefit Co. Ltd. 2014 (4) TMI 1015 - ALLAHABAD HIGH COURT followed observations made in Highways Construction Co. (P.) Ltd. v. CIT (1992 (11) TMI 86 - GAUHATI High Court) that additions made by A.O. on notional interest which was not in existent, is not legal. If Assessee had not bargained for interest, or had not collected interest, we fail to see how Income Tax authorities can fix a notional interest as due, or collected by Assessee. No such provision exist in Act, 1961 empowering Revenue to include in the income, interest which was not due or collected. In the present case, deposits were received from members and loans and advances were given on interest to members which is the business of Assessee Company. Thus all transactions were for the purpose of business. In such a scenario, when interest was actually paid by Assessee or accrued, who followed mercantile system of accounting, on application of this statutory provision, on incurring of such interest, Assessee would be entitled to deduction of full amount in assessment year in which it is paid. We have found, genuineness of business borrowing and further the fact that borrowing was for the purpose of business, has not been found to be illusionary, fictitious or colourable transaction. The factum that entire amount of interest has not been disallowed, shows that genuineness has been accepted even by A.O. That being so, no notion of so called prudent business transaction could have been imported by A.O. and it had to allow deduction. Piercing of Veil - reference to section 179 - Held that - The legislature thus has also recognised even in the said statute the principle that the doctrine of lifting of veil in the matter of tax dues is to be applied to prevent fraud etc. and not where the company has suffered despite its normal bona fide function. In a case where the corporate personality has been obtained by certain individuals as a cloak or a mask to prevent tax liability or to divert public funds or to defraud public at large or for some illegal purposes etc., to find out as to who are those beneficiaries who have proceeded to prevent such liability or to achieve an impermissible objective by taking recourse to corporate personality, the veil of the corporate personality shall be lifted so that those persons who are so identified are made responsible. However, this doctrine is not to be applied as a matter of course, in a routine manner and as a day to day affair. As submission that here is a case where this Court must pierce veil and find out sophisticated device of tax evasion on the part of Assessee, in our view, is a misconceived proposition inasmuch as without appreciating nature of Assessee Company, and its business etc., actual transactions cannot be doubted. Only a part of rate of interest was questioned, hence this broad proposition of invoking doctrine of lifting of veil is not justified to be raised in this case and we have no hesitation in rejecting the same. - Decided in favour of assessee.

Summary

Issues Involved:
1. Justification of Tribunal in deleting disallowance of interest/commission paid by Assessee to depositors.
2. Justification of Tribunal in ignoring the ratio of the decision laid down by Jurisdictional High Court in H.R. Sugar Factory P. Ltd. 187 ITR 363.

Issue-wise Analysis:

1. Justification of Tribunal in deleting disallowance of interest/commission paid by Assessee to depositors:

The Tribunal deleted the disallowance made by the Assessing Officer (A.O.) of the interest and commission paid by the Assessee to depositors. The A.O. had argued that the Assessee paid a high rate of interest and commission to obtain deposits but charged a lower rate of interest from its sister concerns, resulting in a loss. The A.O. disallowed ?29,20,123/- by calculating a notional interest rate of 24.50% instead of the actual rate of 16%. The Tribunal, however, found that the Assessee, a Mutual Benefit Company, was justified in its business decisions, including paying higher interest to attract deposits and lending at lower rates to ensure recoverability and liquidity. The Tribunal emphasized that the income tax is levied on the income earned and not on hypothetical income that could have been earned. The Tribunal cited Supreme Court and High Court judgments to support that no hypothetical income can be assessed if it cannot be realized. Therefore, the Tribunal upheld the deletion of the addition made by the A.O.

2. Justification of Tribunal in ignoring the ratio of the decision laid down by Jurisdictional High Court in H.R. Sugar Factory P. Ltd. 187 ITR 363:

The Tribunal distinguished the facts of the present case from those in H.R. Sugar Factory P. Ltd. The Tribunal noted that in H.R. Sugar Factory, the company lent substantial amounts to directors at low-interest rates, which was not related to the business purpose of the company. In contrast, the Assessee in the present case, a Mutual Benefit Company, lent money to its members, including directors, at varying interest rates based on business expediency. The Tribunal found that the Assessee's transactions were genuine, disclosed, and made for business purposes. The Tribunal also observed that the A.O. did not find any fictitious transactions or incorrect statements. The Tribunal concluded that the Assessee's business decisions, including the interest rates charged, were within the realm of commercial expediency and could not be assailed merely because they resulted in a lower profit. Therefore, the Tribunal did not find it necessary to follow the ratio of the decision in H.R. Sugar Factory P. Ltd. and upheld the CIT(A)'s order deleting the addition.

Conclusion:

The High Court dismissed the appeal, agreeing with the Tribunal's findings that the Assessee's transactions were genuine and made for business purposes. The Court emphasized that the A.O. cannot interfere with the business decisions of the Assessee from its own point of view. The Court also rejected the Revenue's argument to apply the doctrine of "lifting of veil" as there was no evidence of tax evasion or fraudulent activity. The appeal was dismissed, and the interim order, if any, was vacated.