2006 (3) TMI 189 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of disallowance of interest expenses amounting to Rs. 3,78,72,736.
2. Addition on account of inflated purchases amounting to Rs. 5,30,000.

Detailed Analysis:

1. Deletion of Disallowance of Interest Expenses:
The assessee-company, engaged in financing and trading in shares and securities, borrowed funds from group companies and utilized them for purchasing shares of the same group. The Assessing Officer disallowed the interest expenses, citing the application of the principle laid down in McDowell & Co. Ltd. v. CTO and a purported violation of Section 77 of the Companies Act. The Assessing Officer claimed the transactions were not genuine and constituted a "colourable device" to reduce taxable income.

The CIT(A) deleted the disallowance, noting that:
- The borrowings were for business purposes.
- The assessee's activities, including the purchase and sale of shares, were genuine and within the framework of the law.
- The interest paid was not in excess of the market rate.
- The provisions of Section 77 of the Companies Act were not violated as the borrowings were not for buying back the company's own shares.

The Tribunal upheld the CIT(A)'s decision, emphasizing that:
- The Assessing Officer failed to provide evidence that the transactions were "reverse bona fide" or merely for appearance.
- The decision in McDowell & Co. Ltd. does not apply as there was no "colourable device," "dubious method," or "subterfuge."
- The transactions were legitimate business activities, and the interest was allowable under Section 36(1)(iii) of the Income-tax Act.

2. Addition on Account of Inflated Purchases:
The Assessing Officer found a discrepancy of Rs. 5,30,030 between the purchases shown in the Profit & Loss account and the quantitative details provided. He added this amount, assuming it represented inflated purchases.

The CIT(A) deleted the addition, explaining that:
- The discrepancy was due to share transfer stamp charges incurred by the assessee.
- The necessary details and reconciliation figures were provided and certified by the auditors.

The Tribunal restored the issue to the Assessing Officer for factual verification, as it was unclear whether the details were furnished during the assessment proceedings.

Conclusion:
The appeal was partly allowed for statistical purposes, with the Tribunal confirming the deletion of the interest disallowance and remanding the issue of inflated purchases for further verification.