2013 (8) TMI 767 - HC - Income Tax

Addition on account of abandonment of interest on interest free loan given to sister concern Addition made u/s 4(1)(c) of the Gift Tax Act - Assessee has taken the advances/loans on the interest @ 18%. Equal interest was charged from some of the sister concerns. But no interest was charged from a few selected sister concerns. For this discrimination, neither any reason was given by the assessee nor the authorities below including the Tribunal have examined this aspect. Undoubtedly, the assessees are the financial concerns and their main object is to earn interest, then, why the interest was not earned from a few selected sister concerns Held that - The matter need to be examined on the basis of judgment in the case of Kamla Ganpati v Controller of State Duty, 2001 (2) TMI 132 - SUPREME Court as well as in the case of M. Janardan vs. Joint CIT, 2005 (1) TMI 14 - SUPREME Court . Examination to be done by the Hon ble Tribunal to establish the bonafied action on the part of the assessee Impugned order/judgment set aside and restored back the matter to the Tribunal to pass a fresh orders in the light of above discussions as per law.

Summary

Issues Involved:

1. Whether there was a deemed gift under Section 4(1)(c) of the Gift Tax Act in respect of the interest amount surrendered/abandoned by the respondent in favor of its sister concerns.
2. Whether the Tribunal was justified in holding that there was no deemed gift under Section 4(1)(c) of the Gift Tax Act due to the absence of an express or implied contract for charging interest on loans/advances.

Issue-wise Detailed Analysis:

1. Deemed Gift under Section 4(1)(c) of the Gift Tax Act:

The primary issue was whether the interest amount of Rs.1.70 crores, which the respondent did not charge from its sister concerns, constituted a deemed gift under Section 4(1)(c) of the Gift Tax Act. The Assessing Officer considered the interest-free transactions as taxable gifts and made additions accordingly. However, the First Appellate Authority and the Tribunal deleted these additions.

The Department argued that the assessee, a financial company, should have earned interest on the total funds available and that the non-charging of interest amounted to a deemed gift. Section 4(1)(c) was cited, which includes the release, discharge, surrender, forfeiture, or abandonment of any debt or interest in property as a deemed gift if not bona fide. The Department relied on precedents such as Sir Padampat Singhania and others vs. Commissioner of Gift-Tax and Commissioner, Gift-Tax vs. P. Gopinathan, emphasizing that non-bona fide transactions are caught within the mischief of Section 4(1)(c).

On the other hand, the respondent's counsel argued that the non-charging of interest did not fall under the transactions described in Section 4(1)(c). They contended that there was no release, discharge, surrender, forfeiture, or abandonment of any debt or interest in property. The counsel also highlighted that the definition of 'gift' under Section 2(xii) did not encompass notional interest and cited several cases to support their argument.

2. Justification of Tribunal's Decision:

The Tribunal held that there was no deemed gift as there was no express or implied contract between the respondent and its sister concerns for charging interest. The respondent's counsel supported this by stating that the Gift Tax Act's provisions could not be invoked in the absence of a transaction fitting the description in Section 4(1)(c). They also argued that the non-charging of interest did not constitute a transfer of property or right as defined in Section 2(xxiv).

The court observed that the assessee had taken loans at 18% interest and charged the same from some sister concerns but not from others, without providing any reason for this discrimination. This aspect was not examined by the Tribunal. The court emphasized the need to investigate whether the non-charging of interest was bona fide and how the interest-free advances were used by the sister concerns.

Conclusion:

The court set aside the Tribunal's order and remitted the matter back to the Tribunal to examine the bona fide nature of the transactions and other relevant aspects. The Tribunal was directed to pass a fresh order considering the discussions and legal provisions highlighted. The appeals were allowed for statistical purposes, and the Tribunal was instructed to decide the matter on priority within four months.