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TMI Blog2020 (2) TMI 1363X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 77 of the Companies Act which provides for restrictions on purchase by company or loans by company for purchase of its own or is holding company's shares. Sub-section(1) of section 77 is not applicable to the facts of the case as the assessee has not bought its own shares and sub-section(2) prohibits public company or private company which are subsidiaries giving financial assistance for purchasing the shares. Assessee has not given any financial assistance to any person for purchase of its shares.Section 77 cannot be made applicable in facts of the case because contravention, if any, may be in hands of the company who advanced money to the assessee company on interest. There is no infirmity in the impugned orders passed by both the authorities below as there is concurrent findings of fact so as to allow the interest expenditure claimed by the respondent assessee, as utilising the borrowed funds of the group companies for purchase of the shares of the groups companies are not fraudulent, sham and thereby not illegal - Decided in favour of assessee. - R/Tax Appeal No. 1817 of 2006 - - - Dated:- 11-2-2020 - Honourable Mr. Justice J.B. Pardiwala And Honourable Mr. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee were for the purpose of business and same were utilized for the purpose of business and, therefore, the assessee was justified in claiming interest expenses. CIT(Appeals) accordingly deleted the disallowance of interest of ₹ 2,64,49,312/made by the Assessing Officer. 5. The Revenue being aggrieved by the order of CIT(Appeals) preferred Second Appeal before the Tribunal. The Tribunal considered the fact that the interest expenses claimed by the assessee pertains to business of financing and trading in shares and securities carried on by the assessee as it had no capital of its own and assessee was procuring loan from various parties and had been investing in shares of the other companies which are found by the Revenue as group companies. The Tribunal after considering the findings arrived at by CIT(Appeals) held as under : 5. It was in view of above, the Id. counsel for the assessee had submitted before the CIT(Appeals), as under: 3..... i) That the appellant is engaged in business of holding of investments and dealer in shares and the profit or loss arising from these transaction is shown by the appellant in the Profit and Loss Account as busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any is not a facade company as it is duly registered under the provisions of the Companies Act, even the Income-Tax Department has allotted to it a separate Permanent Account Number and assessed it as a separate company and the Hon'ble Court has sanctioned the Scheme of Amalgamation wherein it has ordered the merger of the appellant company with Anmol Denim Ltd. All these facts prove that the appellant is not a facade company. In this regard, attention was invited to the decision of the Hon ble ITAT, Ahmedabad SMC Bench, in the case of Manini Niranjan, in ITA No.3/89, though on different count, ratio is useful. In that case, the appellant acquired shares of a private limited company stated by the ITO to be within the group and sold them to a trust where members of the appellant s family were trustees and thus incurred loss. It is also interesting to note that the appellant and family members of the appellant had borrowed money @7.5% from M/s. Lalbhai Dalpatbhai (HUF) and acquired 4% preference shares of the company stated by ITO to be within the group'. In that case, ITO applied the decision of the Supreme Court in the case of McDowell Co. Ltd. After considering a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g balance in the above referred accounts were used for the purpose of business of the appellant company and, therefore, there was no disallowance of interest payable in assessment year 1996-97 on these borrowings, it is submitted that, therefore, when there is no change in the facts regarding the opening balance there is no justification for taking different stand and making the disallowance of the interest on such opening balance. This view is supported by the decision of the Karnataka High Court in the case of CIT Vs. 192 ITR 165. Relevant para from Head Notes of said decision are as under: Held, that the amount due from N on the first day of the accounting year was the amount that stood outstanding on the last day of the previous accounting year and, therefore, its nature and status could not be different from its nature and status as on the last day of previous year. Regarding past, years, the appellant s claims for deduction were allowed in respect of the sums advanced during those years. This could be only on the assumption that those advances were not out of borrowed funds of the appellant. This finding during the previous years was the very basis of the deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, does not hold good. 3.9 It was also further argued that even if it is so correlated, it may be highlighted that the Assessing Officer has accepted that the appellant is a dealer in ready shares, as stated earlier. Even if, part of the borrowings are for shares treated as investments the appellant has disclosed dividend income and is accepted as such by the Assessing Officer. 3.10. It was contended that it is very clear that the appellant is dealer in-shares and therefore, the disallowance of interest boils down to a simple preposition as to whether the borrowings made were for the purpose of business or not. As stated earlier the borrowings are for the purpose of business of acquiring shares and dealing therein and therefore no part of the interest is disallowable. In this regard the appellant relied upon various judicial decisions. 6. The Assessee, in addition to aforesaid submissions, had made further submissions as contained in paragraph No.3.11 to 3.15 of the order of the CIT(Appeals). 7. The CIT(Appeals) allowed the assessee's appeal by observing as under: 3.16 I have gone through the assessment order and I have considered the contentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal s order are that M/s.Pinnacle Project and Infrastructure Pvt. Ltd. was also in the business of Financing and Trading in shares and securities and had procured loans from as much as six Private Limited and Limited Companies as detailed as page No.2 of the Tribunal's order which reads as under:- Op. Bal Receipt Repayment Interest Fds Closing Bal. 1 Anagram Finance Ltd. 0 900000 0 177169 57078 90177169 2 Arvind Cotspin Ltd. 0 55555000 5555000 627277 171802 627277 3 Arvind Polycot Ltd. 0 56185000 56185000 634390 173750 634390 4 Lalbhai Reality Finance P. Ltd 0 2750000 0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant part of the order of the Tribunal in the case of M/s. Pinnacle Project and Infrastructure Pvt. Ltd. (order dated 24/03/2006) as contained in paragraph Nos.11 to 18, reads as under: 11. We have carefully considered the rival submissions in the light of material placed before us. The borrowing of funds and utilization thereof for the purpose of business activity of the assessee is not disputed even by A.O. The only objection of AO is that the borrowed funds were utilized by the assessee for the purpose of purchasing shares of group companies, and, therefore, the principle laid down by the decision of Hon ble Supreme Court in the case of McDowell Co. Ltd.(supra) was applicable. It is, therefore, the A0 has disallowed the interest being a device adopted by assessee for reducing its income. One other ground on which the Assessing Officer proceeded to disallow the claim of interest is the applicability of provisions of section 77 of Companies Act, 1956. 12. As per the decision of Hon. Supreme Court in the case of McDowell Co. Ltd. (supra) that it is open to everyone to show arrange his affairs as to reduce the brunt of taxation to the minimum and such a process does no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision leave us in no doubt that the principle enunciated in the above case has not affected the freedom of the citizen to act in a manner according to his requirements, his wishes in the manner of doing any trade, activity or planning his affairs with circumspection, within the framework of law, unless the same fall in the category of colourable device which may properly be called a device or a dubious method or a subterfuge clothed with apparent dignity. This accords with our own view of the matter 13. Further in the above decision in the case of Banyan Berry (supra) while defining the words colourable device . dubious methods or subterfuge , their Lordships have observed that these words have special significance in legal world. The definition given to colourable in Brown s Judicial Dictionary is as reverse of bona fide . Referring to Black s Dictionary the word colourable to mean that which is in appearance only and not in reality, what it purports to be hence, counterfeit, feigned having the appearance of truth. Seeing from that angle so as to find out that what is colourable in the present case, it is to be established that the transactions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... material on record brought by the AO to show that the transaction entered into by the assessee were In the nature of subterfuge. So also the expression dubious refers to a doubtful or questionable character. Here also there is no material on record to establish that there was anything doubtful or a questionable character. 16. As explained by Jurisdictional High Court in the case of Banyan Berry (supra) and approved by Hon. Supreme Court in Azadi Bachao Andolan Anr. (supra) that even by the decision in the case of McDowell, the freedom of the citizen to act in a manner according to his requirements, his wishes in the manner of doing any trade, activity or planning his affairs with circumspection, within the framework of law has not been affected. If such trade, activity or planning falls within the frame work of law, the same cannot be discarded unless that falls in the category of colourable device which may properly be called a device or a dubious method or subterfuge clothed with apparent dignity. Thus the assessee is free to act in a manner according to his requirements, his wishes in the manner of doing any trade, activity or planning his affairs with circumspe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... banking company in the ordinary course of its business; or (b) the provision by a company, in accordance with any scheme for the time being in force, of money for the purchase of, or subscription for, fully paid up shares in the company or its holding company, being a purchase or subscription by trustees of or for shares to be held by or for the benefit of employees holding a salaried office or employment in the company; (c) or the making by a company of loans, within the limit laid down in subsection (3) to persons (other than directors, or managers) bona fide in the employment of the company with a view to enabling those persons to purchase or subscribe for fully paidshares in the company or its holding company to be held by themselves by way of beneficial ownership. (3) No ban made to any person in pursuance of clause (c) of the foregoing proviso shall exceed in amount his salary or wages at that time for a period of six months. (4) If a company acts in contravention of subsection (1) to (3), the company, and every officer of the company who is in default, shall be punishable with fine which may extend to one thousand rupees. (5) Nothing in this section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... old the order of the CIT(Appeals) in deleting the disallowance under appeal. 7. Learned Standing Counsel Ms. Mauna Bhatt appearing for the Revenue submitted that the Tribunal has committed an error by overlooking the fact that modus adopted by the respondent assessee is nothing but a camouflage so as to evade tax inasmuch as amount borrowed from group companies was again reinvested in the said group companies by claiming huge interest amount paid on the said fund to decrease the tax burden. Ms. Bhatt further pointed out that provisions of section 36(1)(iii) of the Income Tax Act, 1961 provides for allowance of expenditure genuinely incurred by respondent assessee but in the facts of the case, payment of expenditure incurred cannot be said to be genuinely incurred by the respondent assessee. It was further submitted that the interest payment made by the respondent assessee is also in contravention to the provisions of section 77 of the Companies Act, 1956 and hence the modus of utilising the borrowed funds from the group companies from purchasing shares of group companies was fraudulent, sham and thereby illegal. 8. It was submitted that the modus adopted by the responden ..... X X X X Extracts X X X X X X X X Extracts X X X X
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