TaxTMI 
TaxTMI 
2007 (7) TMI 639
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.... the facts and in the circumstances of the case, the Tribunal was justified in not upholding 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 Rs. 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 Rs. 5,87,190/- (Rupees Five lakhs Eighty seven thousand One hundred Ninety only). A notice was issued to the assessee. In response to the....
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....nce 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 Rs. 6,79,976/- (Rupees Six lakhs Seventy nine thousand Nine hundred Seventy six Only) and donation of Rs. 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 Rs. 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 Supreme Court in the case of McDowell & Co. Ltd. VS. C.T.O. (1985) 154 ITR 148 c....
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....d 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 and Azadi Bachao Andolan's case. (iii)....
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....gal 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 and CIT Vs. Raman & C....
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....slature 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(....
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.... correspondence to substantiate that in fact M/s Universal Trading 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 th....
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....ion No. 1 in the negative. 21. Re: Question Nos. 1 and 2 in CP.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 Rs. 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 23.9.83 304286 2,45,000 29.9.83 304287 3245000 3245000 32,45000 3245000 23. The assessee had declared income of Rs. 36 lakhs from arrack b....
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....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 is unheard of. 8. The assessee firm did not have any idea about the cost of acquisition in the hands of its lessors, the year/years of production of the films, etc. 9. The assessee did not even ascertain the collection potential in respect of these films prior to their purchase by the assessee. On a careful consideration of the queries raised by the Assessing Officer and the replies furnished by the Assessee in the background of the Note (suggestion given by the Chartered Accountant of the Assessee) as resorti....
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....Tax planning in Mc Dowell & Co. Ltd. Vs. CTI, (154 ITR 148), have disallowed the claim of Rs. 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 the partners, has held that it has no reasons to differ from the view taken in the aforesaid case and allowed the deduction. The relevant portion of the order reads thus: 11. All these facts are parallel to the ones found by the Tribunal in the case of Murugan Enterprises (Supra). Therefore, on identical facts and circumstances, the Tribunal having found the above transactions to be genuine and there being no evidence to prove that the above transactions are sham, we have to reject the claim of th....
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....a on 10.8.82 for Rs. 3,25,000/- for Salem and Dharmapuri. Sujatha sold the same to Aruna on 5.5.83 for Rs. 75,000/-. Aruna sold the same to the assessee on 11.5.83 for Rs. 10,00,000/-. It was sold to Marican Enterprises for Rs. 40,000/- on 1.10.82 and to Mangadu Amman films for Rs. 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 Rs. 2 lakhs. Sujatha sold the same to Aruna on 5.5.83 for Rs. 50,000/-. Aruna sold the same to the assessee on 11.5.83 for Rs. 4 lakhs. It was sold to Paramount Agencies for Rs. 14,00,000/-. The 5 films under consideration were purchased by Aruna for Rs. 2,75,000/- only vide agreement dated 5.5.93. Within a few days the assessee on 11.5.83 purchased the same 5 films for Rs. 25.50 lakhs. When the cost at which Aruna acquired these films from Sujatha is known to the assessee to be Rs. 2,75,000/-, it is ununderstandable why the assessee had paid Rs. 25.50 lakhs to Aruna, especially after seeking their performance in the market." On consideration of the above transactions, we find that the assessee in that case which i....
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.... 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 Rs. 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 shown to have borrowed a sum of Rs. 23 lakhs (Rupees Twenty three lakhs) in cash from M/s Sujatha Films Pvt. Ltd., though both the borrower and lender had not exceeded Rs. 10 lakhs (Rupees Ten lakhs) at any point of time till a day earlier to lending of Rs. 23 lakhs (Rupees Twenty three lakhs) to the assess firms and that such a loan transaction had not been followed by any correspondence and the assessee had not even executed any documents in favour of M/s Sujatha Films Pvt. Ltd. which is stated to have lent a sum of Rs. 23 lakhs (....
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....ation 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 Rs. 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: In the discussion made supra, we have held that what has been held by the Supreme Court on Tax planning in Mc Dowell & Co. Ltd. Vs. CTO, (1985) 154 ITR 148 holds the field and the subsequent decisions relied upon by the learned Counsel for the Assessee in the case of Mathuram Agrawal Vs. State of Madhya Pradesh, reported in (1999) 8 SCC 667 and the decision of the Supreme Court in the case of Union of India Vs. Azadi Bachao Andolan reported in (2003) 253 ITR 706 have not differed from what has been held by the Supreme Court on Tax planning in Mc Dowell & ....