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TMI Blog1989 (7) TMI 132X X X X Extracts X X X X X X X X Extracts X X X X ..... t of Rs. 1,64,024, stated to have been paid as under to the following parties : Rs. Alkapuri Investments P. Ltd. 3,180 Ambernath Inv. P. Ltd. 71,124 Ofisade P. Ltd. 73,321 Coromandal Inv. P. Ltd. 8,324 Dhaulgiri Inv. P. Ltd. 8,075 -------------------- 1,64,024 -------------------- On further scrutiny the ITO came to know that the company had obtained huge amounts of loan from certain parties and with the loans so obtained had purchased bonds of certain companies. Out of its holdings the company had donated 1212 bonds valued at Rs. 1,21,200 during the year under consideration. In the opinion of the ITO the claim of the company for interest expenditure was not justified in the facts and circumstances of the case. Therefore, by his letter dated 4-12-1984 which is reproduced below in extenso, the ITO called upon the company to explain the things appearing against it : " You are aware that the I.T. assessment proceedings for A. Y. 1982-83 are pending before me. During the course of hearing before me, various details have been submitted regarding the expenses claimed by your company for the accounting year relevant to A.Y. 1982-83. On going through the details filed before me i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st you to show cause why your claim of interest of Rs. 1,64,024 should not be disallowed and added back to your income u/s. 57(iii) of the I.T. Act. In the profit and loss account, you have shown dividend income of Rs. 2,87,759 and interest income earned from M/s. Alkapuri Investments P. Ltd. to the extent of Rs. 1,482. No income from any other sources has been declared by you. In view of this the income of your company for the year under consideration has to be assessed under the head 'Income from other sources'. Therefore, the preliminary expenses of Rs. 1,511 debited to profit & loss account are also proposed to be disallowed, as has been done in the past u/s. 57(iii) of the I.T. Act. Your reply should be furnished in writing on the next date of hearing, which is fixed on 10-12-1984 at 11.30 A.M. This letter may please be treated as notice u/s. 142(1) of the I.T. Act. " 4. To the above letter of the ITO the company submitted its reply dated 20-12-1984 on the following lines : " We are in receipt of your letter No. CC.III/Misc/84-85/CY-6053(1) dated 4th January, 1984 being notice u/s. 142(1) of the I.T. Act, asking us to submit our objections to the proposed disallowance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... abhai Enterprises Ltd. is as under : Rs 1. From Dhaulgiri Inv. P. Ltd. 10 1/2% 5,95,200 2. From Coromandal Inv. P. Ltd. 10 1/2% 6,15,650 3. From Alkapuri Inv. P. Ltd. 13 1/2% 8,59,800 ----------------------------- 20,72,650 ----------------------------- It will be observed that the borrowings from Dhaulgiri Investments P. Ltd., Coromandal Inv. Pvt. Ltd. and Alkapuri Inv. Pvt. Ltd. were utilised for acquiring income yielding assets. The company was under an obligation to pay interest to Ambemath Investments P. Ltd. and Ofisade P. Ltd. On the balance of the unpaid purchase price as stated in paragraphs 2 and 3 above for acquiring 11% redeemable bonds of Ambalal Sarabhai Enterprises Ltd. which is admittedly an income yielding asset : " (a) Thus at the end of the year i.e. 31-3-1982 the company held 1,20,073 11% secured non-convertible redeemable bonds, 1212 bonds of the aggregate face value of Rs. 1,21,200 having been donated to the two public charitable trusts --- 750 bonds to Lata Nidhi and 456 bonds to Bakul Nidhi. The company was also entitled to the right convertible debentures for which application money was paid and this entitlement was represented by the application mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the application money paid by the company by borrowing an amount of Rs. 8,59,800 from Alkapuri Investments Pvt. Ltd., the convertible debentures were allotted to the company on 2-6-1982 and a sum of Rs. 23,568 was paid by Ambalal Sarabhai Enterprises by way of interest from the date of the application to the date of allotment, which amount has been credited in the year 1982-83 corresponding to the assessment year 1983-84. In view of the aforesaid facts, the sale of bonds does not alter the character of the borrowings made by the company for acquiring an income yielding asset. On the contrary the sale has resulted in reducing the liability of the company for payment of interest in the assessment year 1983-84. We submit that what happened in the succeeding year is not relevant and does not have any bearing on the nature of the assets acquired or cost of finance raised for acquiring such income yielding assets. The transaction for purchase of the 11% bonds was bona fide and was acted upon by both the vendor and the purchases and the bonds were transferred from the name of the vendors to the name of the assessee, the purchaser company. In these circumstances and on the facts stated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see company to depress its taxable income and by later alienation of the so-called investments to the charitable trusts not to get the subsequent also taxed. The learned CIT(A) further observed that giving of donation was not apart and parcel of earning income from investments under the head 'Income from other sources'. In the opinion of the learned CIT(A) the assessee company had flitted away its income earning asset by giving donation in subsequent year and the only ostensible purpose for which the bonds were purchased was to claim deduction u/s. 57(iii). The learned CIT(A) even referred to the principles laid down in the Supreme Court decision in the case of McDowell & Co. Ltd. v. CTO [1985] 154 ITR 48 and observed that it was the settled position of law that the genuineness of the transaction was required to be seen from the viewpoint of its intended effect on fiscal purposes and that logic and reason alone cannot be of much avail for interpreting the tax statute. He accordingly dismissed company's appeal. 7. Aggrieved against the order of dismissal of its appeal by the learned CIT(A) the company has come up before us in the second appeal with the following effective grounds : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest. In the opinion of Mr. Mehta the authorities below should not have taken into account the subsequent facts and circumstances. It was also urged that the stand taken by the ITO that no income was returned by the assessee company was not correct in view of the fact that once the company had shown that borrowings were made for earning income the matter was over in so far as the question of allowing the interest expenses was concerned. 9. On the subject matter of second ground Mr. Mehta vehemently submitted that there was no necessity at all in attracting and applying the principles laid down by the Supreme Court in the case of McDowell & Co. Ltd. 10. In reply Mr. B.R. Kaushik, the learned Sr. DR, not only supported the order under appeal but also vehemently urged that the learned lower appellate authority has not only disallowed the claim of the assessee company on the sole ground that no income was earned but had also concurred with the ITO that the assessee company had not carried on any business activity. Mr. Kaushik pointed out that from A.Y. 1974-75 up to the year under consideration the assessee did not carry on any business activity. In this behalf Mr. Kaushik referre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e so called transaction but simply entries were made and such transaction should not get judicial recognition. 12. After having heard the rival submissions we are clearly of the opinion that the issue involved in the point has been rightly appreciated and decided by the learned CIT(A). 13. The principles governing the issues in the point are well settled. Section 57 of the Act contemplates that while computing the income chargeable under the head 'Income from other sources', any expenditure (not being in the nature of capital expenditure) laid out and expended wholly and exclusively for the purpose of making or earning income will be allowed as deduction. The wordings of this section clearly make the purpose of the expenditure of making or earning income as a prerequisite for allowing deduction. Actually earning income during the year the expenditure has been wholly and exclusively laid out or expended is not a prerequisite for allowability of the expenditure. But as contended by Mr. Kaushik the intention to earn income from the investment made must be there. Intention can be inferred from the conduct of the parties and from the manner they have behaved in the past and in subsequ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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