9911796707
TMI Blog1987 (2) TMI 87X X X X Extracts X X X X X X X X Extracts X X X X ..... see which was taxable under section 2(24) (iv) of the IT Act (hereinafter referred to as the "said section"). He, therefore, issued a show-cause notice dated 12-3-1985. The assessee have a reply stating the reasons why the amount should not be added. The ITO however rejected these contentions and adopting the rate of 18 per cent as the market rate added the deference worked out on this basis to the assessee's income. 3. Before the CIT (Appeals) it was contended that the said section applies only to natural persons and does not apply to companies because that section refers to relative of that person and only a natural person can have a relative. The CIT (Appeals) has rejected this contention for reasons stated in his order. It was also contended before him that any such benefit received by the company is already contained in the returned income and so it cannot be added again. This plea was also rejected for the reasons stated in the CIT (Appeals)'s order. The CIT (Appeal) however adopted the rate of 12 per cent and reduced the addition on this count. 4. On behalf of the assessee it was first of all pointed out that both the ITO and the CIT (Appeals) had not mentioned the basic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd 'obtained' in the said section is a positive word which meant that something must be got and not only saved as was alleged in this case by way of non-payment of interest or payment at a lower rate. Clause (iv) was intended to cover cases of benefits given by non-employers and in this connection our attention was invited to clause (iii) which was concerned with he benefits given by the employers. Further, the non-payment or lesser payment of interest was already contained in the returned income and taxation by adding the said amounts would result in double taxation. It was pointed out that although the ITO had relied upon the Supreme Court decision in the case of McDowell Co. Ltd. v. CTO [1985] 154 ITR 148, there was no allegation by him that this was a colourable transaction. It was submitted that there was no tax planning in this case and all that was done was amalgamation which could also have been done by taking Court's order. 5. On behalf of the revenue it was first of all pointed out that some of the mistakes which it was alleged that the ITO had committed, even the assessee had not noticed and that the rectification had been carried out in respect thereof. Coming to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved the payments. It was contended that the question of interest was a very relevant consideration in a commercial transaction and if it was paid by the assessee it has to be added in the case of the subsidiaries who had received the payments. Thus, it has to be added either in the case of the assessee or in the case of the subsidiaries and tax had to be paid either by the former or by the latter. 6. In rejoinder on behalf of the assessee some of the arguments urged earlier were reiterated. In connection with the meaning of the term 'person' in the said clause (iv) it was contended that the same word could not have different meaning in the same section. It was again submitted that the bargain regarding the purchase of the shares, bonds and undertakings has to be taken as a whole as it is and the question of interest could not be separated. It was again submitted that this was a transaction between the parent company and its fully owned subsidiaries and so the question of interest was irrelevant. The assessee was not bound to answer it because it was irrelevant. It was contended that a loan is different from unpaid purchase price and in that connection it was pointed out that ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard to say that the question of interest it irrelevant. In doing so, it appears to us that, the second submission contradictory to the first was made. In our view it cannot be said that the question of interest was irrelevant. This was a commercial transaction and interest calculation is a very relevant consideration. Even in the case of transitions between the parent company and its fully owned subsidiaries the right of the subsidiaries to interest is not lost by entering into a transaction with its parent company. If the subsidiary would have entered into a transaction with any other company interest would have been charged and there is no reason why a subsidiary should lose that right just because it enters into a transaction with its parent company--even if owning all its shares. The fact that the income of one may be got at any expenses of he other, is not relevant because they are two separate entities. To their common owners it may perhaps not make any difference but to the entities themselves it does make a difference. Further, in some cases interest has been paid which shows that it is relevant. However, the first part of this argument has considerable substance. The pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated 14-4-1986], Seth R. Dalmia v. CIT [1977] 110 ITR 644 (SC), CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC), and CIT v. Kasturbhai Lalbhai [1968] 70 ITR 267 (Guj.). 11. On behalf of the Revenue it was argued that borrowings were made in 1977, certain investments were made from those borrowings and so the borrowings were made for the investments. Therefore, according to the revenue, when the change in the investments occurred the borrowings could not be said to have been made for the new investments. Our attention was then invited to the following decisions: CIT v. United Wires Ropes [1980] 121 ITR 762 (Bom.), Addl. CIT v. Madras Fertilisers Ltd. [1980] 122 ITR 139 (Mad.), CIT v. New Central Jute Mills Co. Ltd. [1979] 118 ITR 1005 (Cal.) and Smt. Virmati Ramkrishna v. CIT [1981] 131 ITR 659 (Guj.). It was submitted that 4th and 9th test in the case of Smt. Virmati Ramkrishna were not satisfied in this case. Regarding the case of United Wire Ropes Ltd., the following passage from the report at page 766 was pointed out: "Further, it is not possible to regard the transaction of making deposit to closely related with the transaction of loan as to be considered as one sing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f of the revenue that when the investments are sold the sale proceeds are mixed with the assessee's general funds so that the connection between the original borrowing and the new investments is broken, cannot be accepted. It is not the physical connection between the money borrowed and the money invested which is material. It is only the continuity of the borrowing and the continuity of the kind of income. i.e., from other sources which are material. The authorities cited on behalf of the revenue do not help its case. In the case of Smt. Virmati Ramkrishna the 4th test to which our attention was drawn is as follows: "(iv) the purpose of making or earning such income must be the sole purpose for which the expenditure must have been incurred, that is to say, the expenditure should not have been incurred for such purpose as also for another purpose, or for a mixed purpose;" This point is fully answers above because the reference to such income only means 'income from other sources'. Test (ix) to which our attention was drawn is as follows: "(ix) it would not, however, suffice to establish merely that the expenditure was incurred in order indirectly to facilitate the carrying on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 57(iii). This has also been held in the case of Kasturbhai Lalbhai. The aforesaid decision of this Tribunal in the case of Estate of Saraladevi Sarabhai is also applicable here. It has also been stated above that the words 'such income' in the said clause (iii) refers only to the 'income from other sources'. Taking that into account the connection here is direct. Therefore, for all the above reasons we hold that the assessee is entitled to the deduction of interest amount. 15. That brings us to the last ground regarding the levy of interest. The ITO has levied interest under section 215. The CIT (Appeals) has upheld the levy but reduced it because of the partial relief given by him regarding the addition of interest under section 2(24) (iv). The decision of the Gujarat High Court in the case of CIT v. Bharat Machinery Hardware Mart [1982] 136 ITR 875 was cited before him but he has rejected that contention on the ground that that case dealt with section 217(1A) and not with section 215. We do not find that this is a material difference. The principles laid down in that case are applicable here. The assessee could not have reasonably foreseen that the interest under section ..... X X X X Extracts X X X X X X X X Extracts X X X X
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