TaxTMI 
TaxTMI 
2020 (2) TMI 1363
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....ed in purchasing the shares of the group companies?" (ii) Whether on the facts and circumstances of the case, the Appellate Tribunal was right in law in holding that the modus of utilizing the borrowed fund from group companies in purchasing shares of group companies was not fraudulent, sham and thereby, not illegal?" Issue notice to the other side. Paper book be filed within 3 months. List the appeal for final hearing after 3 months." 3. The Assessing Officer noticed during the assessment proceedings for assessment year 19971998 in case of the respondent assessee that the assessee was paying huge interest on the purported loans from group companies and such loans were utilized for purchasing shares of the said group companies. The Assessing Officer therefore, called for the explanation of the assessee to show cause why such interest expenditure should not be disallowed treating it to be dubious transaction with an ulterior motive to defraud the revenue and evade tax. The Assessing Officer after considering the explanation tendered by the assessee disallowed the interest payment of Rs. 2,64,49,312/out of the interest expenses of Rs. 3,49,92,157/as clai....
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.... the business. vii) Interest on the borrowings was not paid in excess of market rate. viii) In the assessment order, the Assessing Officer himself has admitted that the amount borrowed from the Arvind Mills Limited have been utilized for purchasing shares of Arvind Intex Limited arid not shares of The Arvind Mills Limited. ix) It is a well settled principle of law that subject to the special requirements of the Act, the profit to be assessed are the real profits and they must be ascertained on ordinary principles of commercial trading and commercial accounting. It is thus clear that profit should be, computed after deducting the losses and expenditure incurred for the purposes of business unless the losses and expenditure are expressly, or by necessary implication, disallowed by the Act. It may be appreciated that the monies were borrowed for the purposes of business hence allowable under the provisions of Section 36(1)(iii) of the Act. 3.4 It was also argued that the concept of group company it is stated that such concept is nowhere defined in the Companies Act. It is an accepted fact that amounts were borrowed from Arvind Mills Ltd., the Company in whic....
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....why the decision in McDowell's case is not applicable here. There is no reason why the transaction should be considered as a sham transaction or the loss should be disallowed. The appellant here is saving the tax payable by actually incurring a real loss. It cannot be called a bogus loss for the reasons mentioned above. The fact the sale is to members of the family and that the shares remained in the family cannot derogate from the feet of the sale. 3.6. It was further pointed out that on perusal of the details given by the assessing officer in the assessment order itself it will be seen that there were opening credit balances in the account of Pinnacle Finance Ltd. and Arvind Intex Ltd. which have been repaid by the appellant during the year under consideration. Thus there is no fresh borrowings from these companies and hence the argument of the assessing officer with reference to the balance of the said companies are in total disregard of the facts of the case. There was opening balance of Rs. 5 crores in the account of Arvind Mills Ltd. and further borrowing of Rs. 9.51 crores were made. Thus there is no fresh borrowings from Arvind Mills Ltd. It may be stated here that....
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.... for disallowance of interest on the further borrowings made from them, it may be noted that as against these further borrowings of Rs. 9.51 crores the appellant has already repaid Rs. 10.41 crores. Considering these aspects there is no justification for disallowance of interest paid to Arvind Mills Ltd. 3.8 The counsel for the appellant while dealing with the inter connection of the borrowings as tried to be made out in the assessment order, the following facts emerge: i) It may be perused from the details of the borrowed funds that so far as the Arvind Mills Ltd., are concerned, the opening balance was Rs. 5,00,93,630/. The repayments, during the year, were more than the loans taken (additions Rs. 9,51,40,000 and repayments Rs. 10,41,50,000). The closing balance is more than the opening balance due to interest. ii) As for the accounts of Pinnacle Finance and Arvind Intex Ltd., it may be observed that there are no fresh borrowings during the year and the opening balances have been repaid. iii) Similarly, borrowings from Orbit Finmark is only during the year under consideration, and it was only Rs. 5,00, 000/. Thus, it was vehemently arg....
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....rt the action of the Assessing Officer. I also find that on the facts and in law the Assessing Officer is not justified in holding that the appellant company has violated the provisions of section 77 of the Companies Act. In fact appellant company has dealt with more than one company's shares and debentures. So the Assessing Officer's conclusion of violation of section 77 is factually incorrect. Thus, having regard to the facts and circumstances of the case as well as the law on the subject the Assessing Officer is not justified in disallowing the sum of Rs. 26,44,932. The same is deleted. 6. The Tribunal also considered the decision in case of Addl. CIT v. Pinnacle Project and Infrastructure Pvt. Ltd in ITA No. 195/Ahd/2001 in similar facts and followed the same to uphold the order of the CIT(Appeals) and dismissed the appeal of the Revenue. The Tribunal in the impugned order has considered the decision in case of Pinnacle Project and Infrastructure Pvt. Ltd (supra) as under : "12. Since the tribunal (ITAT Ahmedabad Bench "B") has already decided the Revenue's appeal in the case of M/s. Pinnacle Project and Infrastructure Pvt. Ltd. for Asst. Year 199798in ITA No.19....
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....t was, in view above facts that the Hon'ble Tribunal, after having considered the arguments of both the parties as well as various decisions including the decision of Hon'ble Supreme Court in the case of McDowell & Co. v/s. CTO (154 ITR 148)(SC), upheld the order of the CIT(Appeals). 13.2. The relevant 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 clai....
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....hich unfortunately, in our opinion, the Tribunal apparently appears to have drawn from the enunciation made in McDowell & Co. Ltd. vs. CTO (1985) 47 CTR (S) 126: (1985) 154 ITR 148 (SC). The ratio of any decision has to be understood in the context it has been made. The facts and circumstances which lead to McDowell's 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 ....
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....ng to the word 'subterfuge' reference was made to Shorter Oxford English Dictionary which define as to which one refers for escape or concealment. On historical principles it means an article or device to which a person refers in order to escape the force of an argument, an excuse with which conceals a clue. As pointed out earlier there is no 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....
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....d whether by means of a loan, guarantee, the provision of security or otherwise, any financial assistance for the purpose of or in connection with a purchase of subscription made or to be made by any person of or for any shares in the company or in its holding company: provided that nothing in this subsection shall be taken to prohibit( a) the lending of money by a 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 ....
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..... and also the fact that both the parties, at the time of hearing of this appeal, had agreed that this appeal be decided on the basis of Tribunal's decision in the case of M/s. Pinnacle Project and Infrastructure Pvt. Ltd., we respectfully following the said decision of Tribunal (in the case of M/s. Pinnacle Project and Infrastructure Pvt. Ltd.in ITA No.195/Ahd/2001, for Asst. Year 199798, order dated 24/03/2006), uphold 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 incurr....