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TMI Blog2007 (7) TMI 639X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessing Officer s action in rejecting the assessee s claim in the above matter in the light of the Hon ble Supreme Court s decision in the case of M/s Mc Dowell Co. Ltd (1985) 154 ITR 146 (SC)? Whether on the facts and in the circumstances of the case, the Tribunal was justified in allowing the assessee s claim for deduction u/s 35(2A) in respect of donation to Aparna Ashram? 2. In brief, the facts and the proceedings which have given rise to questions under reference are as follows: The assessee is running a partnership firm registered within the meaning of Sec.183(b) of the Act. The assessee firm consisting of two partners Sri.K.L. Srihari and Sri.K.Narayan with 92.5% and 7.5% share respectively, filed return for the assessment year 1984-85 admitting the income of ₹ 5,52,190/- (Rupees Five lakhs Fifty two thousand One hundred Ninety only) and later filed a revised return on 11.10.1986 admitting the income of ₹ 5,87,190/- (Rupees Five lakhs Eighty seven thousand One hundred Ninety only). A notice was issued to the assessee. In response to the notice, a representative of the assessee attended the accounts and were examined. During the relevant year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore this Court. This Court after hearing the parties formulated the above questions for reference and directed the Tribunal to submit a statement of case as required under Sec.256(2) of the Act. 7. We have heard the learned Counsel for the Assessee and the learned Counsel for the Revenue and we have been taken through the relevant records and orders passed by the Assessing Officer and the I Appellate Authority and the Tribunal. 8. The Learned Counsel for Revenue has made the following submissions: (i) The order of the I Appellate Authority confirmed by the Tribunal in disallowing service charges of ₹ 6,79,976/- (Rupees Six lakhs Seventy nine thousand Nine hundred Seventy six Only) and donation of ₹ 2,10,000/- (Rupees Two lakhs Ten thousand only) is not sustainable both in law and on facts. (ii) The order of the Tribunal disallowing a sum of ₹ 31,48,670/- (Rupees Thirty one lakhs Forty eight thousand Six hundred Seventy only) towards purchase of films by setting aside the order of I Appellate Authority and Assessing Authority is erroneous. (iii) The Assessing Officer and the I Appellate Authority by applying the principles laid down by the Suprem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e spirit of the statute the courts shall not go beyond the transaction to brand them either as a devise or dubious method to avoid tax. (ii) The learned Counsel for the assessee has contended that in the case of Union of India Another Vs. Azadi Bachao Andolan and Another, reported in (2003) 263 ITR 706, referring to the decision in the case of Mathuram Agarwal Vs. State of Madhya Pradesh reported in (1999) 8 SCC 667 the Supreme Court has held that decision in DUKE OF WESTMINISTER S case (1936) 8 ITR 522 (PC) and CIT Vs. Raman Co. (1968) 67 ITR 11 (S.C.) are very much relevant even today. Therefore, the courts need not view with suspicion the legitimate tax planning of an Assessee to treat it as a device for avoidance of tax. It is further contended that decision of Supreme Court in case of McDowell Co. Ltd. VS. C.T.O. (1985) 154 ITR 148 wherein it is held that tax planning may be legitimate provided it is within the framework of the law unless the same falls within the category of colourable devise which may properly be called a device or dubious method or subterfuge, has been diluted to some extent, by subsequent judgments of Supreme Court in the case of Mathuram Agarwal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e parties in relation to legal positions. 11. The constitution Bench of the Supreme Court in the case of Mc Dowell Co. Ltd. Vs. CTO reported in (1985) 154 ITR 148 has held: Tax planning may be legitimate provided by its within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. On this aspect, one of us, Chinnappa Reddy J. has proposed a separate and detailed opinion with which we agree. Thus from the above dictum of the Constitution Bench of the Supreme Court it is clear that the court is not precluded taking stock of and to expose the devices for what they really are and to refuse to give judicial benediction if there are colourable devices or dubious methods adopted to avoid tax payment. 12. The learned Counsel for the assesse relying on the judgment of the Supreme Court in Mathuram Agarwal s case referred to in Azadi Bachao Andolan s case has contended that principle in DUKE OF WESTMINISTER S case (1936) AC 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the legislature to do the needful in the matter. The Supreme Court in the concluding portion of judgment in Mc Dowell s case has held thus: Tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. Therefore, we hold that the law laid down in Mc Dowell s case on tax planning has neither been differentiated nor dissented in the case of Mathuram Agarwal Vs. State of Madhya Pradesh. Under the circumstances, applying the principles laid down by the Supreme Court in Mc Dowell s case we proceed to determine the questions under reference. 15. Re: Question No. 1 to CP.895/98: This question relates to deduction of Service Charges claimed by the Assessee which according to the assessee has been paid to M/s Universal Trading Company for the services provided to it in terms of agreement dated 1.9.1981. The assessee has claimed deduction of these Service Charges by invoking 37(1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding Company has provided services to the assessee in terms of agreement dated 1.9.1981. 17. There is yeat another glaring reason to suspect this deduction. If the assessee firm had paid service charges to M/s Universal Trading Company in terms of agreement dated 1.9.1981, there was no need for the assessee to seek advice from its Chartered Accountant who in turn advised to include service charges to M/s Universal Trading Company as one of the ways to reduce incidence of income tax. The Assessing Officer considering the constitution of assessee firm and M/s Universal Trading Company of both of which Sri.K.L.Srihari is a common partner, failure of the assessee to produce proof for services rendered by M/s Universal Trading Company and also taking note of the advise of Chartered Accountant by way of a Note to include service charges to M/s UTC as one of the ways to reduce incidence of income-tax, has held it impermissible to allow this deduction u/s 37(1) of the Act. 18. The I Appellate Authority-Commissioner of Income Tax, reversed this finding of the Assessing Authority and allowed deduction. After going through the order of I Appellate Authority, we find that the main reason ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P.No.15/99: These two questions will have to be examined in the light of the decision of the Supreme Court in the case of Mc Dowell Co.Ltd. Vs. CTO (154 ITR 148). Therefore, these two questions are taken up together for consideration. 22. The Assessee had deducted a sum of ₹ 31,48,670/- (Rupees Thirty one lakhs Forty eight thousand Six hundred Seventy Only) in the Profit and Loss Account under Film Purchases . For better appreciation, the film business accounts as reflected in the assessee s books of accounts is reproduced below: To Op.Stock purchases: Aruna International Pvt. Ltd. Nil. By Realisation 96,330.28 By: Cl. Stock (Under Rule 9B): NIL By: Loss transferred to P L A/c. 31,48,669.72 Date Ch.No. Amount 11.5.83 304279 7,00,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned total profit of ₹ 49 lakhs from arrack business during the year 1983-84. The Assessing Officer rejected the deduction for the reasons stated below: 1. Film business was done mostly on borrowed funds. 2. The Managing Director of the Lender of the films M/s Sujatha Films Pvt. Ltd. And the Managing Director of the seller of the firms M/s Aruna International (P) Ltd, is the same person, viz. Sri.G. Venkateshwaran. 3. The borrowal of ₹ 23,00,000/- on 28.9.83 from M/s Sujotha Films (P) Ltd was in cash even though both the borrower and the lender had bank accounts. 4. No Pronote was executed even though the loan amount was huge and the payment was made in cash. There were not even terms of loan with regard to rate and payment of interest and the repayment of loan. 5. Before entering into film business with M/s Aruna International (P) Ltd. And before obtaining loan from M/s Sujatha Films Pvt. Ltd. there was no correspondence between assessee and aforesaid firms. 6. The assessee did not have any kind of previous experience in the line of business. 7. The lessors of the films themselves were the exhibitors of the films on behalf of the assessee which i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce or was it a transaction to avoid tax liability. 26. The I Appellate Authority has agreed with the findings of the Assessing Officer that assessee had borrowed funds from M/s Sujatha Films Pvt. Ltd to purchase leasehold rights of film from M/s Aruna International Pvt. Ltd. 27. After considering the reasons assigned by the Assessing Officer and the I Appellate Authority, we find that both the authorities with reference to the material available on record and bearing in mind the dictum of the Supreme Court on Tax planning in Mc Dowell Co. Ltd. Vs. CTI, (154 ITR 148), have disallowed the claim of ₹ 31,48,670/- (Rupees Thirty one lakhs Forty eight thousand Six hundred Seventy Only) claimed as deduction by the assessee towards loss in film business. 28. The Tribunal without going into the details and the facts of case and reasons assigned by the Assessing Officer and the I Appellate Authority and without discussing the law on the point, by solely relying on the order of the Income Tax Appellate Tribunal, Madras, in I.T.A Noo.317/Mds/1987 (Assessment Year 1984-85) relating to M/s Murugan Enterprises, Kancheepuram Vs. COT, Madras, of which Sri.K.L.Srihari is one of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Majestic Combines for ₹ 40,000/- on 13.2.82 for 10% realization. The film Kadal Meengal was released in the year 1981. The year of purchases and the price paid by Sujatha is not known. It was sold to Aruna on 5.5.83 for ₹ 25,000. Aruna sold the same to the assessee on 11.5.83 for ₹ 3,50,000/-. It was also sold to Marican Enterprises on 30.10.81 for ₹ 50,000/- for 10% realization. The film Moondru Mugam was released in the year 1982. It was sold by the producer to Sujatha on 10.8.82 for ₹ 3,25,000/- for Salem and Dharmapuri. Sujatha sold the same to Aruna on 5.5.83 for ₹ 75,000/-. Aruna sold the same to the assessee on 11.5.83 for ₹ 10,00,000/-. It was sold to Marican Enterprises for ₹ 40,000/- on 1.10.82 and to Mangadu Amman films for ₹ 4,000/- on 19.10.82. The film Pokkiri Raja was released in the year 1981. It was sold by the producer to Sujatha on 2.7.81 for Salem and Dharampuri for ₹ 2 lakhs. Sujatha sold the same to Aruna on 5.5.83 for ₹ 50,000/-. Aruna sold the same to the assessee on 11.5.83 for ₹ 4 lakhs. It was sold to Paramount Agencies for ₹ 14,00,000/-. The 5 films under considerati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exhibition of the very 5 films to M/s Aruna International (P) Ltd., only to get back a sum of ₹ 2,44,597/- (Rupees Two lakhs Forty Four thousand Five hundred Ninety Seven only) as realisations from film exhibition by the end of 30.9.1986 as against total investment of ₹ 32,45,000/- (Rupees Thirty two lakhs Forty five thousand only). 30. As already stated, when search operations were carried out in the business premises and also in different office premises of S. Kumar, Chartered Accountant, a Note which was given by the Chartered Accountant to Sri.K.L.Srihari was found and the assessee was given time to offer explanation, but the assessee did not cause any explanation. Thus, the reasons given by the Assessing Officer and the Appellate Authority for disallowance of ₹ 31,48,670/- (Rpees Thirty one lakhs Forty eight thousand Six hundred Seventy only) may be summarized as follows: The assessee who had made substantial profits from arrack business for the assessment year 1984-85, sought advice from his Chartered Accountant to suggest ways to reduce tax incidence for which the film business was shown as one of the ways to reduce tax incidence. The assessee is s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... through cheques by the Assessee to M/s Aruna International (P) Ltd. On an overall appreciation of transactions we have held that the transactions are not really what they purported to be. In order to appreciate this we have considered several intermediate transactions and each one of which is found to be not true. Therefore, payment made to M/s Sujatha Films Pvt. Ltd. through cheques does not give colour of respectability to the transactions. The transactions did not bear any semblance of commercial significance. 32. Therefore, on consideration of fact situation and bearing in mind law on the point, the reasons assigned by the Assessing Officer, the I Appellate Commissioner and the Tribunal, we agree with the findings recorded by the Assessing Officer the I Appellate Authority and hold that the Tribunal did not have any justification to reverse the findings recorded of the Assessing Officer and the I Appellate Authority and restore the orders of Assessing Officer and I Appellate Authority disallowing a sum of ₹ 31,48,670/- (Rupees Thirty one lakhs Forty eight thousand Six hundred Seventy only). Therefore, we answer Question No. 1 in the negative. 33. Re: Question No.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onditions by M/s Aparna Ashrama as stipulated in the notification. The Tribunal held that the conditions set out in the notification cited supra are mere guidelines and therefore allowed the claim of the assessee and accepted the deduction. 37. The Tribunal has misconstrued the conditions imposed in the notification as mere guidelines. We have gone through copy of Notification dated 24.11.1981. Condition Nos. 1 to 3 would stipulate that, the Association shall maintain a separate account of the amounts received and expenditure incurred for these research projects as distinct from the expenditure of Aparna Ashrama (Donee). The Donee (Aparna Ashrama) shall furnish annual returns of these scientific research projects to the Council before 31 st May, of each year, at the latest in such forms as may be laid down and intimated to them for this purpose. The Association shall furnish a copy of annual statement of accounts to the Council by 31 st May of each year and a copy of such statement to Income Tax Commissioner. 38. The notification was effective from 1.9.1981 to 24.4.1993. The Assessing Officer and the I Appellate Authority had found fault with the Assessee for not producing ..... X X X X Extracts X X X X X X X X Extracts X X X X
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