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TMI Blog2015 (2) TMI 996X X X X Extracts X X X X X X X X Extracts X X X X ..... 57(iii) of the Act, the assessing authority considered the transactions as loan and not as OCDs. The investment made by the appellant - Assessee in the said four companies were not loss making concern at the relevant time and, therefore, the decision of the appellant - Assessee to borrow the money at a higher rate of interest and to invest the same in the said four companies at the rate of 12% with a hope to get shares in future was made to earn income. So, it appears that the Revenue splitted the transactions in such a manner that it upheld the genuineness of borrowing, payment and receipt of interest but when question of considering payment of additional interest of 6.5% came into consideration, it termed the said part of transaction as colourable device/tax planning. So, the question is whether the Revenue can split the transaction in the manner it did so. It is true that the Court cannot re-examine/re-appreciate the findings of fact recorded by the Tribunal but as a matter of fact, after splitting transaction, as done in the case on hand, the Tribunal was required to term/treat the entire transaction as a whole colourable device. Had it been so, the matter would stand on di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd leading to the present appeals. 3.1. The appellant - Assessee borrowed ₹ 3 crores from Arvind Mills Ltd. at the rate of 18.5% p.a. and invested the said amount in Optionally Convertible Debentures (for short, 'OCDs') at the rate of 12% p.a. till the said OCDs are converted into shares. The appellant - Assessee filed its return of income for the Assessment Year 1995-1996 on 30.03.1996 thereby declaring total income at Rs.NIL. The return so filed was processed under Section 143(1)(a) of the Act on 23.08.1996. During the year under consideration, the appellant - Assessee shown business income being Commission and Service charges as per Profit and Loss account at ₹ 19,51,590/- and after deducting expenses thereof, the balance amount was shown as income. Further, the appellant - Assessee claimed ₹ 19,50,000/-, which was excess interest paid over interest received during Assessment Year 1995-1996. In response to the notice, the appellant - Assessee submitted required details. The main thrust of the reply is such that the book value of equity shares on conversion of OCDs would be quite attractive as estimated book value of the equity shares of four companie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Padmavati Jai Krishna V/s. C.I.T. reported in 131 ITR 653 and also case of Virmati Jai Krishna V/s. C.I.T. reported in 131 I.T.R. 659 upheld in 166 ITR 176 (SC), held that amount to be allowable under Section 57(iii) of the Act was not wholly and exclusively spent towards earning of income and as the appellant - Assessee, as per the Assessing Officer, failed to establish the said fact, claim of allowability of interest of ₹ 19.50 lacs was disallowed and was added back to the total income of the appellant - Assessee. 3.4. The appellant - Assessee carried the matter in appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax, vide order dated 01.07.1999, while upholding the decision of the Assessing Officer, observed in para 5 as under:- 5. I have gone through the issue involved and the rival versions given. After going through the same it is felt that in this case the assessee company is simply borrowed funds at a higher rate of interest and has advanced the said funds to another interested company at lower rates. The claim of interest paid has necessarily to be examined with reference to the fact as to whether the expenses hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cause all the four companies vide condition (f) retain the right to buy back/redeem the debenture. Admittedly in this case debentures by all the four companies were redeemed on 21.10.1995 and 2.1.96. The Assessing Officer applied the judgment of the jurisdictional High Court in the case of Padmavati Jai Krishna vs. CIT, 131 ITR 653 and in the case of Virmati Jai Krishna Vs. CIT 131 ITR 659 affirmed by the Apex Court in 166 ITR 176 disallowed the interest to the extent of ₹ 19,50,000/-. This represent the difference of interest paid and charged by the assessee. In order to allow the expenditure u/s.57(iii) assessee must have incurred the expenditure for the purpose of earning the income. From the facts of the case, it is apparent that the assessee company has simply borrowed funds at a higher rate and has advanced the same to another interested company at a lower rate. Keeping in view the ratio of the judgment of the Apex Court in the case of Virmati Jai Krishna Vs. CIT reported in 166 ITR 176, in our opinion, the assessee is entitled to deduction of ₹ 36 lacs only u/s.57(iii) of the I.T. Act. In this context, we may mention that assessee is not entitled deduction of ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital appreciation in future. It was further submitted that the Tribunal has erred in distinguishing the judgment of the Hon'ble Apex Court rendered in the case of C.I.T. V/s. Rajendra Moody reported in 115 ITR 519 by merely pointing out that the debentures are not shares forgetting that in case of Rajendra Moody (supra), there was no dividend income at all whereas, in the case of appellant - Assessee, there was earning of 12% rate of interest apart from getting shares in future which would yield not only dividend but also capital appreciation. Learned advocate Mr.J.P. Shah, after referring to the decision of Punjab and Haryana High Court rendered in the case of Commissioner of Income Tax V/s. Pankaj Munjal Family Trust reported in 326 ITR 286, contended that merely because the appellant - Assessee borrowed amount at the rate of 18.5% p.a. for investing in 12% OCDs, it cannot be inferred that the said transaction was colourable because no person with ordinary prudence would borrow money at 18.5% and invest the same at lower rate of interest i.e. 12%. Relying upon the said decision, learned advocate Mr.J.P. Shah submitted that the appellant - Assessee has not adopted any dubious ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olved at the time of issue of such debentures inasmuch as total income from the business of the appellant - Assessee was ₹ 19.50 lacs and the difference of amount of interest paid and earning was also ₹ 19.50 lacs; (iv) the appellant - Assessee borrowed amount of ₹ 3 crores from Arvind Mills Ltd. which is a company of Lalbhai Group and invested the said amount in OCDs of the above said four companies of Lalbhai Group, so, it would not be ground of interference under section 260A of the Act by taking another view on materials already examined so as to hold otherwise. Relying upon the decision of the Hon'ble Apex Court rendered in the case of Boodireddy Chandraiah and others V/s. Arigela Laxmi and another reported in AIR 2008 SC 380, it is submitted that if finding of fact is not challenged and if particular view is taken by the authorities and even if another view is possible, it would not be the ground of interference under Section 260A of the Act unless apparent perversity is pointed out. According to learned advocate Mr.Bhatt, the appellant - Assessee has not raised any question of perversity in the present case. It is further submitted that the Revenue dete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... saction as a whole and not adopt a dissecting approach. (ii) All tax planning is not illegal or illegitimate or impermissible. (iii) There is no conflict between McDowell and Azadi Bachao or between McDowell and Mathuram Agrawal. 9.1. While answering the question Whether having regard to relationship between different concerns, where a transaction which is patently imprudent, takes place, the taxing authority should examine the question of business expediency and not go merely by the fact that the assessee had taken a decision in its wisdom which may be wrong or right? , the Larger Bench of Punjab Haryana High Court in case of Rockman Cycle Industries Private Limited (supra), observed as under: 18. Section 37 of the Act is a residuary section which provides for deduction on account of expenditure not being capital in nature, which are not as such specified in Sections 30 to 36 of the Act, but laid out or expended wholly and exclusively for the purpose of business or profession, while computing the income under the head profits and gains of business or profession . The import of Sections 37(1)(iii) and 57(iii) of the Act was considered by Hon'ble the Supreme Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Court there can be any scope for controversy in regard to the interpretation of s. 57(iii). It is also interesting to note that, according to the Revenue, the expenditure would disqualify for deduction only if no income results from such expenditure in a particular assessment year, but if there is some income, howsoever small or meagre, the expenditure would be eligible for deduction. This means that in a case where the expenditure is ₹ 1,000, if there is income of even Re. 1, the expenditure would be deductible and there would be resulting loss of ₹ 999 under the head Income from other sources . But if there is no income, then, on the argument of the Revenue, the expenditure would have to be ignored as it would not be liable to be deducted. This would indeed be a strange and highly anomalous result and it is difficult to believe that the legislature could have ever intended to produce such illogicality. Moreover, it must be remembered that when a profit and loss account is cast in respect of any source of income, what is allowed by the statute as proper expenditure would be debited as an outgoing and income would be credited as a receipt and the resulting income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g from a transaction. If the parties have chosen to conceal by a device the legal relation, it is open to the taxing authorities to unravel the device and to determine the true character of the relationship. But the legal effect of a transaction cannot be displaced by probing into the substance of the transaction . This principle applies alike to cases in which the legal relation is recorded in a formal document, and to cases where it has to be gathered from evidence- oral and documentary- and conduct of the parties to the transaction. The observation made by Bose J. in Sir Kikabhai Premchand vs. CIT (1953) 24 ITR 506, 509 (SC), It is well recognised that in revenue cases regard must be had to the substance of the transaction rather than to its mere form. In the present case disregarding technicalities it is impossible to get away from the fact that the business is owned and run by the assessee himself. In such circumstances we are of the opinion that it is wholly unreal and artificial to separate the business from its owner and treat them as if they were separate entities trading with each other and then by means of a fictional sale introduce a fictional profit which in truth an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or instance, if the directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern for commercial expediency in many other circumstances (which need not be enumerated here). However, where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans. [Emphasis supplied] 10. It is true that finding of facts recorded by all the three authorities in the instant case are not challenged and also it is not a case of the appellant - Assessee that findings of facts as recorded by the Assessing Officer, C.I.T. and the Tribunal are perverse in nature and, therefore, we are in agreement with the submissions made by learned advocate Mr.Bhatt that this Court cannot take another view so as to interfere with the findings of fact in ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. It is not in dispute that the appellant - Assessee invested the amount equally in the above four companies so as to get interest at the rate of 12% p.a. It is not a case of the Revenue that the estimated book value of the shares of the said company, as reproduced hereinabove, is not true or correct. Thus, the transaction of borrowing of ₹ 3 crores and payment of interest at the rate of 18.5% made by the appellant - Assessee to Arvind Mills Ltd. and, in turn, receipt of 12% interest by the appellant - Assessee from the investment made by it in the above four companies are believed and, therefore, the said transactions are genuine in nature. To disallow the deduction under Section 57(iii) of the Act, the assessing authority considered the transactions as loan and not as OCDs. The investment made by the appellant - Assessee in the said four companies were not loss making concern at the relevant time and, therefore, the decision of the appellant - Assessee to borrow the money at a higher rate of interest and to invest the same in the said four companies at the rate of 12% with a hope to get shares in future was made to earn income. So, it appears that the Revenue splitted the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that once the transaction is genuine merely because ithas been entered into with a motive to avoid tax, it would not become a colourable device and consequently earn any disqualification. The Hon'ble Supreme Court in the concluding paras of its judgment in Azadi Bachao Andolan (2003) 263 ITR 706 (SC) has rejected the submission that an act, which is otherwise valid in law, cannot be treated as non est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interest as per the perception of the Revenue. The aforesaid view looks to be correct view. It has ready support from the Division Bench judgment of this Court rendered in the case of Satya Nand Munjal (2002) 256 ITR 516 (P H) and the Division Bench judgment of Orissa High Court in the case of Industrial Development Corporation of Orissa Limited (2004) 268 ITR 130 and various other judgments of the Delhi and Madras High Courts (supra). 15. In the result, the question is answered in negative and in favour of the appellant - Assessee and against the Revenue. Hence, the impugned orders passed by the Tribunal are set aside to the aforesaid extent. Appeals are ..... X X X X Extracts X X X X X X X X Extracts X X X X
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