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TMI Blog1980 (2) TMI 51X X X X Extracts X X X X X X X X Extracts X X X X ..... e-tax Act, 1961 ? (3) Whether, on the facts and in the circumstances of the case, the amount of Rs. 46,718, being interest paid on income-tax arrears, and Rs. 7,400, being commission paid on shares borrowed for the purpose of pledging them as security against income-tax demands, are permissible deductions under the provisions of the Income-tax Act, 1961 ? The assessee is the Dalmia Dadri Cement Ltd. and the assessment year 1963-64, the relevant previous year of which ended on December 31, 1962. The ITO had during the course of assessment found that the assessee had capitalised a sum of Rs. 16,46,617 as cost of the plant and machinery installed during the year. The same included the amount of Rs. 7,70,000 paid to the Bhagwati Glass Works Pvt. Ltd. (hereinafter referred to as "Bhagwati Glass"). This resulted from an agreement dated May 19, 1961, which the assessee had entered into with Bhagwati Glass. Thereby the latter had undertaken to fabricate and instal suitable driers for drying kankar which was the main raw material for the manufacture of cement. Fabrication of certain inlet and outlet trolleys, manufacture of suitable spirals lifters and their proper fittings in four dr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... converted into a round figure of Rs. 3,60,000. This decision was upheld in appeal by the AAC. He agreed that the expenses shown by the assessee to have been incurred were not incurred bona fide for the purpose of acquiring a capital asset but were incurred collusively. He was unable to accept the contention of the assessee that even if the transaction was collusive for inflating the purchase price, the same did not permit the ITO to compute some other cost. It was held that if the circumstances showed that an assessee had arranged to put an entirely fictitious price on its assets, its was open to the I.T. authority to refuse to accept that price and to ascertain what the true value was. When the matter went before the Appellate Tribunal, it was not disputed that the assessee and Bhagwati Glass were connected concerns indirectly controlled by Shri R. Dalmia. The Tribunal also found some merit in the revenues contention that the jobs said to have been done by Bhagwati Glass were not of such specialised or sophisticated character as to justify such huge profit. It also, to an extent, accepted that the claim of an assessee cannot be accepted always at its face value and the depart ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fined to cost aspect only. Instead, when the actuality part has been introduced, it has the implication of the reality or genuineness thereof. Any collusive, inflated or fictitious cost, it had been pleaded, cannot be brought within the scope of the term "actual cost". The object behind this legislation was contended to be to curb the malpractices and tendencies to inflate capital costs for obtaining higher depreciation while not burdening the other with any material tax liability. This is what, it is pointed out, has been attempted in the present case when a profit of Rs. 4,58,000 was handed over to Bhagwati Glass for the work executed by it of the value of Rs. 3,11,954 only. Bhagwati Glass was allowed unusually high profit which the assessee would not have in any normal commercial transaction allowed to any other concern. Rather the object of this inflated cost was clear as Bhagwati Glass had a carried forward loss of over Rs. 7 lakhs and thus was able to get the huge profit adjusted against the same without implication of any tax liability, and at the same time entitled the assessee to much higher depreciation and development rebate than it would have been entitled to. Rather th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As is clear from the narration of facts, in the books of Bhagwati Glass, the total expenditure incurred by it in the execution of the contract jobs was Rs. 3,11,954. As against that the assessee has paid Rs. 7,70,000 to it for execution of those jobs. This, on the face of it, appears to be a very high payment, specially when the Tribunal has noted that the jobs did not require any specialised or sophisticated skill. It was mostly a labour contract as the material was entirely supplied by the assessee. It is next also clear that the assessee and Bhagwati Glass were connected concerns indirectly owned by R. Dalmia, and that Bhagwati Glass had a carried forward loss of over Rs. 7 lakhs this year. The result has been that although Bhagwati Glass enjoyed a profit of about Rs. 4,58,000 in the execution of this contract, no tax liability ensued to it and the entire profit was wiped off against the large brought forward loss. At the same time, the assessee has claimed to be entitled to depreciation, etc., on the capital value of those works at Rs. 7,70,000. The I.T. authorities were, therefore, right in observing that there was considerable element of collusion in the entire affair which c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assets on his own, the High Court answered the question in the affirmative. On appeal to the Supreme Court, it was held that there was no error or infirmity that would justify interference by the Supreme Court. Similarly, the Calcutta High Court in Jogta Coal Co. Ltd. v. CIT [1965] 55 ITR 89, observed that if the circumstances showed than an assessee had arranged to put a fictitious price on his assets in a contract or conveyance, it was open to the I.T. authorities to refuse to accept that price, go behind the contract or conveyance and ascertain what the original cost was. The Lahore High Court (Pakistan) has also in the case of Pindi Kashmir Transport Co. Ltd. [1954] 26 ITR 595 (Lah-Pak), observed that the I.T. authorities were justified in law in going behind the contract for determining the original cost to the company, for the purpose of making allowance of depreciation. So far as the Explanations added to s. 43 of the Act, specially Expln. No. 3, under which alone the Tribunal has observed the interference by way of determination of actual cost can be made, we are of opinion that such Explanations are only elaborative and tend to bring out some of the circumstances in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to the amount of Rs. 8,679 claimed by the assessee as fee paid to lawyers for preparation and pursuing of income-tax appeals. The assessee has in this regard placed reliance upon the observations of the Supreme Court in the case of CIT v. Birla Cotton Spinning Weaving Mills Ltd. [1971] 82 ITR 166 (SC), to the effect that the earning of profit and payment of taxes are not isolated and independent activities of a business. These are continuous and take place from year to year during the whole period for which the business continues. If the assessee takes any step for reducing its liability to tax which results in more funds being left for the purpose of carrying on of business there is always the possibility of higher profit. Similarly, in Sree Meenakshi Mills Ltd. v. CIT [1967] 63 ITR 207, the Supreme Court observed that in order that an expenditure may be admissible as a deduction, it is not necessary that the primary motive in incurring it must be directly to earn income thereby. The Allahabad High Court too has in the case of Modi Sugar Mills Ltd. v. CIT [1973] 90 ITR 201 allowed expenditure reasonably and honestly incurred in connection with legal proceedings taken by an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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