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TMI Blog2012 (10) TMI 809X X X X Extracts X X X X X X X X Extracts X X X X ..... t the relevant time a partner in M/s Sahara India and a director in Sahara India Financial Corporation Ltd., Sahara India Housing Ltd. and Sahara India Airlines Ltd. In the return of income filed in respect of the assessment year 1994-1995, relevant to the previous year ended on 31.3.1994., the assessee declared a loss of Rs. 50,54,928/-. The return was initially processed under Section 143(1) (a) of the Income Tax Act, 1961 (Act, for short). Subsequently it was selected for scrutiny and notice under Section 143(2) was issued. In the course of the assessment proceedings, the Assessing Officer noticed that the assessee had declared a loss of Rs. 53,46,382/- under the head "income from other sources". He further noted that the loss represented the amount of interest on the loans borrowed from M/s. Sahara India Mutual Benefit Co. Ltd. for purchase of shares in several companies belonging to the Sahara Group. The AO further noticed that no income was shown under this head. 4. The Assessing Officer thereafter examined the utilisation of the loans taken by the assessee and found that the loans were utilised for purchase of shares in closely held companies (belonging to the Sahara Group) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue carried the matter in appeal before the Tribunal which passed a consolidated order in several cases, including the case of the assessees herein on 28.4.2005. It would appear that since the Tribunal deal with several cases together including the case of Subroto Roy, it had the benefit of the order of the CIT (Appeals) passed in his case, which had been relied upon by the CIT (Appeals) in the present assessee's case. The Tribunal noted that the CIT (Appeals) had accepted the assessee's claim for computation of a loss under the head 'income from other sources' on the basis of the judgment of the Supreme Court in Commissioner of Income Tax v. Raghunandan Prasad Moody, [1978] 115 ITR 519. In this case, the Supreme Court held that in order to justify the allowance of interest on borrowed amounts under Section 57(iii), it was not necessary that the assessee should have actually earned any income and so long as the interest was paid for the purpose of making or earning any income, it would be allowable as a deduction notwithstanding that the intention of the assessee to earn income did not fructify. Before the Tribunal, a point was made on behalf of the Revenue that the question of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mic since the loans had in fact been repaid. It was further urged on behalf of the assessee that the Tribunal was not an investigating agency and had to limit itself, while disposing of the appeal, to the issues raised before it and those issues which were not agitated or raised by the Assessing Officer cannot be considered by the Tribunal and the controversy be expanded. 9. The Tribunal on a consideration of the rival submissions, agreed with the contentions of the assessee and dismissed the ground raised by the Revenue in the following manner:- "10. As regards Revenue's observation about the powers of the Tribunal, we agree that the Tribunal has some inherent powers, but such powers cannot be extended to an issue which is not agitated by the Department. The Tribunal has to limit itself to the issues raised/agitated and considered by the A.O. In the instant case, the A.O. has never doubted that the funds borrowed by the assessee was not a loan. Apart from then A.O., who has accepted that the funds borrowed were in the nature of loan, we find that even the lender companies have treated the funds as loans advances and have also accounted for the interest as interest income. Such a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Allahabad High Court. It was contended that the Tribunal erred in failing to address itself to the question of tax avoidance or colorable device adopted by the assessee even though it was raised by the Assessing Officer as also by the Revenue before the Tribunal. It is contended that the judgment of the Supreme Court cited supra applied to the benefit of an assessee in a genuine case, but in the present case, there was sufficient material brought to the notice of the Tribunal and also adverted to in the assessment order, to show that the lending and borrowing were sham transactions and were gone through merely for the purpose of reducing the tax liability of the assessee. It is also contended that since the relevant facts have not been considered by the Tribunal, which it ought to have, given its status under the Act as the final fact-finding body, the matter may be remanded for relevant findings on the aspect of tax avoidance, if necessary. 11. On behalf of the assessee, it is contended that the amounts borrowed by it were immediately invested in purchasing shares, though in companies belonging to the same group, that the loans taken in the previous year relevant to the assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eme Court held that that it is not necessary for the purpose of obtaining the deduction under the clause, that the assessee should have actually earned any income and that it is sufficient if the assessee is able to prove that the expenditure was incurred 'for the purpose' of earning the income. It was observed, following the dictum of Lord Thankerton in the case of Hughes v. Bank of New Zealand [1938] 6 ITR 636 (HL) that it was not necessary to justify an item of debit in the profit and loss account, that there should be an item of credit in the said account. However, as rightly pointed out on behalf of the Revenue, the principle would apply to a genuine case of borrowing and lending and if there are materials to show that the transaction of borrowing and lending was sham or was got up with the purpose of avoiding or reducing the tax liability, nothing prevents the revenue authorities from ignoring the claim. 13. The difficulty in the present case with the order of the Tribunal is that despite being told that there are several unusual features which throw considerable doubt on the assessee's claim for deduction of the interest, it did not consider it proper to examine the matter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the motives of the assessee. The Assessing Officer had also made an interesting observation in the assessment order to the effect that in the earlier years, the assessee had borrowed monies from Sahara Group of Companies/Firms at a higher rate of interest and passed on the monies to other group concerns at a lower rate of interest and that when he found that the differential interest was assessed as benefit or perquisite under Section 2(24)(iv), he abandoned that method and adopted a different method which according to the Assessing Officer was a "new subterfuge", the new subterfuge being the borrowing of monies for interest and investing them in acquisition of shares of the group companies, shares which were worthless and would not have normally attracted anyone. Mr. Ganesh objected to this on the ground that the Assessing Officer had no material before him such as the financial statements of the companies whose shares were acquired to show that they were worthless and he had made a sweeping statement - what Mr. Ganesh described as "one-line statement" - without any basis. Prima facie the objection holds water, but that does not really answer the question as to why the assessee w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndulged in similar transactions and had made similar claims under Section 57(iii) and the cases of O.P. Srivastava, Subroto Roy and Joy Brata Roy were actually being heard by it along with the assessee's case; which showed a pattern; (b) That in the earlier years, the assessee had shown borrowings from group companies at a higher rate of interest and lent them at a lower rate of interest to group companies and when the differential interest was being assessed as benefit or perquisite, the assessee adopted a different modus operandi of borrowing monies from group concerns for huge interest and utilizing the monies for acquisition of shares in the group companies, despite the fact that the shares could have held no attraction to an investor; (c) That though the Assessing Officer had stated in the assessment order that the shares were of the value of 'few paise or even zero", the assessee placed no material before the revenue authorities or before the Tribunal to dispute the statement, granting that it was a sweeping statement made by the Assessing Officer; even if it was a sweeping statement, the burden was on the assessee to show that it was factually wrong; (d) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ging her stand. Neither the appellate authority nor the Tribunal has considered this aspect of the matter with regard to bona fide of the assessee. Though it is not unfair to borrow money or take loan from one concern and invest the same in other concern for the purpose of profit or income but while doing so, the assessee must act bona fide with primary motive to earn profit. The amount taken on loan from one concern and investment in other concern running in loss having fragile financial status cannot be treated as bona fide act on the part of the assessee. The action of the assessee suffers from lack of bona fide and seems to be a device to help sister concerns. Some of the companies where the assessee has made investments are not listed in the stock exchange and not likely to fetch any resale value. The Assessing Officer may exaggerate the factual position but things as they stand reveal that no person shall make investment in companies which lack financial soundness and where there is remote chance of profit or to earn income. The expenditure towards interest on loan does not seem to lay out or expend wholly and exclusively for the purpose of making or earning income from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .P. Srivastava. 17. The features mentioned in (a) to (d) supra have not been kept in view by the Tribunal while deciding the appeals. It has chosen to disregard the plea of the Revenue for further investigation into the matter though there was sufficient material, which was referred to by the Assessing Officer, to suspect the motives of the assesses in claiming such huge expenditure by way of interest under Section 57(iii) of the Act. It is necessary to keep in mind the duty of the Tribunal in such cases. They ought to pay due attention to the unusual or even suspicious features of the case. If they find sufficient material to show that the claim of the assessee may not be genuine or could be a sham or that the motive of the assessee was to avoid his tax liability lawfully due, the Tribunal cannot plead helplessness; if it is prima facie convinced of the motives of the assessee - and in the present case there was sufficient material before the Tribunal- the Tribunal should not hesitate to order a deeper investigation into the facts in order to elicit the truth and in doing so, it has the power to remit the matter to the income tax authorities. In our opinion, in the present cases, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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