2013 (8) TMI 819 - HC - Income Tax

Deduction u/s 57(iii) or section 36(1)(iii) of the Income Tax Act Colourable transaction for tax avoidance - Assessee is a partner of M/s. Sahara India (Firm); and Director in various companies of M/s. Sahara Group. For the assessment year 1997-98, the assessee has filed loss return for ₹ 36,48,09,550/-. While completing regular assessment, the Assessing Officer disallowed the interest of ₹ 36,57,27,195/- claimed by the assessee as interest paid on loan for purchase of shares under the head income from other sources Held that - Assessee is a partner in the firm, known as M/s. Sahara India (Firm), where he is holding 62% shares and remaining shares are lying with other partners including Smt. Swapna Roy, the wife of the assessee. Thus, for all the purposes, the firm has become propriety concerned. This firm has collected the money from the public, on behalf of various companies of Sahara Groups - Firm has retained the money for a longer period without transmitted to the concerned companies. The firm has also borrowed the funds on interest from SIMBCL; a company of the group. The assessee has invested this amount in a few companies of Sahara Groups, which were suffering heavy losses - Loans were taken by the assessee on interest and invested in other loss making companies of the same Group. In the instant case, the assessee has invested the amount in the companies, which were already suffering heavy losses. So, there was no chance to receive any pecuniary benefits. Perhaps in the past also, the assessee might have invested some amounts without any financial benefit. In these circumstances, fresh investment made by the assessee cannot be considered for business purposes specially when the assessee is running a financial entity. The assessee is Managing Director in M/s. Sahara India Financial Corporation Ltd. (SIFCOL) and was aware about the financial health of all the companies of the group - Firm M/s. Sahara India had received money in the form of loan/advance from public and SIMBCL; SIFCOL; and Sahara India Housing Corporation Ltd. (SIHCL) and had retained it for a considerable period, before investing in loss making companies of the group - It appears that the interest paid on borrowed funds was not for exclusively and wholly for the purposes of business. No prudent businessman would like to make an investment in loss suffering companies when the firm itself has borrowed the funds on interest Reliance has been placed upon the case of McDowell & Co. Ltd. vs. C.T.O., 1985 (4) TMI 64 - SUPREME Court , wherein the Hon ble Apex Court observed that it is the duty of the Court to expose of colourable device by uplifting the corporate veil Decided in favor of Revenue. Taxability of perquisites Section 17(2) read with section 295(2)(c) of the Act - Assessee is a partner in M/s. Sahara India (Firm) and a Director in various group companies. The assessee was also receiving the salary income from M/s. Sahara India Financial Corporation Ltd. The assessee was enjoying the facilities of the free accommodation, furniture and fixtures, facility of servants, chauffeur driven car, telephone facility, facility of free water, electricity and foreign travel etc Held that - Perquisite denotes to a benefit amounts or advantage mostly in kind and enjoyed by the employee at the cost of employer, generally in addition to the salary or wages to which he is entitled - Perquisite is a part of salary and taxable. So, the perquisite will have to come under the clutches of the Income-tax. Being the salaried person, the assessee is entitled for the standard deduction on the salary. The remaining perquisite is taxable - Valuation of the perquisite, Section 295(2)(c) of the Act provides that CBDT may make rules for the determination of the value of any perquisite chargeable to tax under this Act in such manner and on such basis as appears to the Board to be proper and reasonable. Deemed dividend u/s 2(22)(e) of the Income Tax Act - Assessee was the Managing Director of M/s. Sahara India Financial Corporation Ltd., which is a Residuary Non-Banking Company collecting deposits from the public. The assessee was also a partner in M/s. Sahara India (Firm) which was acting as an agent of the said company for mobilizing the deposits. The assessee was the beneficial owner of the shares of M/s. Sahara India Financial Corporation Ltd. (SIFCOL); M/s. Sahara India Airlines Ltd.; M/s. Sahara India International Corporation Ltd.; as also a partner holding substantial interest in M/s. Sahara India (Firm). The assessee was having 62% share as partner in M/s. Sahara India (Firm) and remaining major share was holding by other partners including his wife Held that - The amount collected by the firm belongs to the company concerned. This amount is to be sent by the firm to the company promptly along with statement of account but the same was not done properly - Assessee deliberately retained or allowed to be retained the funds in the firm - The firm was supposed to send the money to the company promptly. Moreover, the Firm has shown the loan/advances from the company on its liability side in the balance-sheet, therefore, it is a loan for the firm. In the instant case, no circumstances were explained by the assessee for what reason the heavy deposits made by the investors were retained by the assessee in the Firm for a longer period. For this reason alone, it is a case of deemed income as the assessee is a shareholder in all the companies Decided in favor of Revenue. Section 64(1)(ii) of the Income Tax Act - Spouse of individual is in receipt by way of salary, commission, fees or any other form of remuneration whether in cash or in kind from a concern in which such individual has a substantial interest - Smt. Swapna Roy, the spouse of the assessee, was drawing a net income of ₹ 6,22,230/-. The AO has clubbed the income of Smt. Swapna Roy, the wife of the assessee, with the income of the assessee Held that - Smt. Swapna Roy is a post-graduate and is also a Director in many companies. She has expertise in business matter also. She is a separate assessee since long, so, her income cannot be clubbed Decided against the Revenue.

Summary

Issues Involved:
1. Disallowance of Interest
2. Perquisite Value
3. Deemed Dividend
4. Clubbing of Income

I. Disallowance of Interest:

The primary issue was whether the interest accrued on money borrowed from a company of the Sahara Group and invested in shares of other Sahara Group companies could be disallowed. The Assessing Officer (AO) disallowed the interest of Rs.36,57,27,195/- claimed by the assessee, arguing that the investments were made in loss-making companies with no intention of earning income, thus falling outside the purview of Section 57(iii) of the Income Tax Act, 1961. The Tribunal deleted this addition, relying on the Supreme Court judgment in Rajinder Pd. Moodi, which allows interest on borrowed capital even if no income accrued from the investment. However, the High Court found that the investments were not made wholly and exclusively for the purpose of earning income, but rather as a tax avoidance mechanism. The court restored the AO's disallowance of the interest, emphasizing the need to expose tax avoidance devices as per the McDowell & Co. Ltd. vs. C.T.O. case.

II. Perquisite Value:

The second issue concerned the addition of perquisite value for various benefits enjoyed by the assessee, such as rent-free accommodation, domestic servants, and chauffeur-driven cars. The AO added the value of these perquisites to the assessee's income, but the Tribunal deleted the addition without detailed discussion. The High Court noted that the assessee was a partner and director in various Sahara Group companies and was receiving salary income. The court emphasized that perquisites are taxable under Section 17(2) of the Income Tax Act, which includes benefits like rent-free accommodation and other amenities provided by the employer. The court restored the AO's valuation of the perquisites, making them taxable.

III. Deemed Dividend:

The third issue was the addition of deemed dividend under Section 2(22)(e) of the Income Tax Act. The AO added amounts retained by the firm M/s. Sahara India, which were supposed to be transmitted to Sahara Group companies, as deemed dividends. The Tribunal deleted this addition. The High Court noted that the assessee was the beneficial owner of shares in various Sahara Group companies and had substantial interest in the firm. The court found that the amounts retained by the firm were effectively loans from the companies, falling under the definition of deemed dividend. The court restored the AO's addition, emphasizing that loans granted by closely-held companies to shareholders with substantial interest should be treated as dividends to prevent tax avoidance.

IV. Clubbing of Income:

The final issue was the clubbing of income of the assessee's spouse, Smt. Swapna Roy, under Section 64(1)(ii) of the Income Tax Act. The AO clubbed her income with the assessee's, but the Tribunal treated them separately. The High Court upheld the Tribunal's decision, noting that Smt. Swapna Roy was a post-graduate, a director in many companies, and a separate assessee for a long time. Therefore, her income could not be clubbed with the assessee's.

Conclusion:

The High Court answered the substantial questions of law in favor of the department and against the assessee, allowing the department's appeals partly. The court restored the AO's disallowance of interest, valuation of perquisites, and addition of deemed dividends, while upholding the Tribunal's decision on the non-clubbing of the spouse's income.