TaxTMI 
TaxTMI 
2006 (3) TMI 189
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.... Total Rs.3,84,02,766 --------------- 3. The assessee-company is engaged in the business activity of financing and trading in shares and securities. It has been incorporated on 3-7-1996. The assessee-company has merged and amalgamated with Anmol Denim Ltd. vide order of Hon. Gujarat High Court dated 30-10-1998 with effect from 1-4-1997. It filed its return of income on 17-11-1997 declaring loss of Rs. 39,15,295. The return was accompanied by Form Nos. 3CA, 3CD and audited Profit & Loss a/c and balance-sheet as provided under section 44AB of the Income-tax Act, 1961. 4. On going through the balance-sheet the Assessing Officer noticed that unsecured loans were mentioned at Rs. 71,25,53,703 and on these loans the assessee paid interest. Similarly he noticed that on investment side a stock-in-trade was shown at Rs. 54,51,85,726 which comprises mostly of Arvind Group Companies. Thus assessee was required to submit....
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....------------- ------------------------------------------------- Interest TDS Closing balance ------------------------------------------------- 177169 57078 90177169 627277 171802 627277 634390 173750 634390 1004782 116314 28504782 20684090 1174922 180569010 26960995 2995686 412040995 ------------------------------------------------- ----------------------------------------- Item Opening Stock ----------------------------------------- Qty. Amount Rate ----------------------------------------- Arvind Ltd. 91135 273404763 3000 OCD Average Market No. Arvind Intext Ltd. 210000  ....
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....onging to the same group. The Assessing Officer inferred that principle laid down by Hon. Supreme Court in the case of McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 (SC) also applies to the case of assessee and the provisions of section 77 of the Act regarding violation for providing funds for buying its own shares also come into force. However, notwithstanding this he found that from the view of income-tax also it is a transaction which is not genuine for the reasons that on the one hand the assessee is paying interest on alleged loans from group companies whereas on the other hand same funds are being parked for acquiring the group company shares. Thus he proceeded to disallow the interest with the following observations:- "In the light of the above facts and data, the assessee was pointedly asked as to why not the interest payment be disallowed as these even used for the purpose of acquiring shares of these companies belonging to the same group which has advanced funds to the assessee. Even the principle laid down in the case of McDowell Ltd. Squarely applies in this case and the provisions of section 77 of the Companies Act regarding violation for providing funds for buying ....
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....aling in shares and securities, finance, investment, etc. (b) All the transactions of purchase and sale of shares are genuine transactions. (c) Optionally Convertible Debentures/shares of Arvind Intex Ltd. were listed on various Stock Exchanges. (d) It has borrowed monies for the purposes of its business and interest was paid during the course of carrying on the business. (e) Interest on the borrowings was not paid in excess of market rate. (f) Borrowing made from any of the companies is not utilized for purchasing shares of that company. Referring to these undisputed facts it was pleaded that as per well-settled principle of law, the profit to be assessed are the real profits and they must be ascertained on ordinary principles of commercial trading and commercial accounting. Thus it is clear that profits should be computed after deducting the losses and expenditure incurred for the purpose of business unless, the losses and expenditure are expressly, or by necessary implication disallowed by the Act. It was pleaded that monies were borrowed for the purpose of business hence interest paid thereon is allowable as per provisions of section 36(1)(iii) of the Act. It ....
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....d amount and claimed it as a deduction. It was pleaded that where all these three conditions are fulfilled interest could not be disallowed and for this purpose reliance was also placed on following decisions:- (1) Birla Gwalior (P) Ltd. v. CIT [1962] 44 ITR 847 (MP) (2) CIT v. Pudukottai Co. (P.) Ltd. [1972] 84 ITR 788 (Mad.) (3) D&H Secheron Electrodes (P.) Ltd. v. CIT [1983] 142 ITR 528 (MP) (4) D&H Secheron Electrodes (P.) Ltd. v. CIT [1984] 149 ITR 400 (MP) (5) Shahibag Entrepreneurs v. ITO [1994] 50 ITD 113 (Ahd.). Referring to these decisions it was pleaded that once it is found that capital is borrowed for the purpose of business the assessee is entitled to interest as claimed thereon as deduction under section 36(1)(iii) of the Act regardless of even the fact that the assessee himself charges interest at the lower rates on monies advanced out of such borrowed loan or even provides interest free advances to the sister concern etc. and the only condition laid down by section 36(1)(iii) is that the amount should be borrowed for the purpose of business and the assessee must have paid the interest on the said amount and claimed it as a deduction. Thus it wa....
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....prohibited by the provisions of section 77 of the Companies Act as the borrowings were never for the specific object of buyback of shares of the company who advanced loan to the assessee-company at the market rate. It is thus the disallowance of interest was agitated before CIT(A). The CIT(A) after considering all these submissions has deleted the disallowance as per paragraph 3.12 of the impugned order which is reproduced below for the sake of convenience:- "3.12 I have gone through the assessment order and I have considered the contentions raised by the appellant. I am of the considered opinion that the borrowings are for the business of the appellant, that on perusal of the details of the funds are utilized for the purpose of business, therefore, the appellant is justified in claiming that the borrowings are held to be for the purpose of the business of the appellant. Once those borrowings are made for the purpose of business and in view of the ratio of the Supreme Court decision in Madhav Prasad Jatia's case and other decisions cited by the appellant as reproduced above there is absolutely no justification for disallowance of the claim either in full or in part. I also agree....
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....isallowed which is claimed by assessee under the provisions of section 36(1)(iii) of the Act. Thus he pleaded that ld. CIT(A) has rightly deleted the addition and his order should be upheld. 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 Assessing Officer. The only objection of Assessing Officer 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. Supreme Court in the case of McDowell & Co. Ltd. was applicable. It is, therefore, the Assessing Officer 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 claim of interest is the applicability of provisions of section 77 of Companies Act, 1956. 12. As per the decision of Hon. Supreme Court in the case of McDowell & Co. Ltd. that it is open to everyone to show/arrange his affairs as to reduce the brunt of taxation to the minimum ....
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....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 falls 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 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 fide'. Referring to Black's Dictionary the word 'colourable' to mean that which is in appearance only and not in reality, what it purports to be hence, counterfeit, feigned having the appearance of truth. Seeing from that angle so as to find out that what is "colourable" in the present case, it is to be established that the transactions of payment of interest by the assessee were "reverse bona fide" or which were in appearance....
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.... material on record brought by the Assessing Officer 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 and approved by Hon. Supreme Court in Azadi Bachao Andolan's case that even by the decision in the case of McDowell & Co. Ltd. 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 framework of law, the same cannot be discarded unless that falls in the category of colourable device which may properly be called a device or a dubious method or subterfuge clothed with apparent dignity. Thus the assessee is free to act in a manner according to his requirements, his wishes in the manner of doing any trade, activity or planning his affairs with circumsp....
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....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 of the company, including any director holding a salaried office or employment in the company; or (c) the making by a company of loans, within the limit laid down in sub-section (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 paid shares in the company or its holding company to be held by themselves by way of beneficial ownership. (3) No loan made to any person in pursuance of clause (c) of the foregoing proviso shall exceed in amount his salary or wages at that time for a period of six months. (4) If a company acts in contravention of sub-sections (1) to (3), the company, and every officer of the company who is in default, shall be punishable with fine which may extend....
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....ed during the course of assessment proceedings but it lost sight of Assessing Officer. Necessary details and reconciliation figures were submitted before CIT(A); and the details were duly certified by the auditors wherein they had clarified the facts on the matter. Thus CIT(A) observed that addition has been made on improper verification and appreciation. The revenue is aggrieved, hence in appeal before us. 20. After narrating the facts, ld. DR pleaded that it was never explained by the assessee before Assessing Officer that a sum of Rs. 5,30,030 represented expenses incurred by assessee on shares transfer stamp charges. A new plea was taken before CIT(A) and thus the factual verification was not done by Assessing Officer. Thus he pleaded that disallowance has wrongly been deleted by CIT(A). 21. Ld. counsel of the assessee drew our attention towards the chart enclosed at page 27 of the paper book to show that a sum of Rs. 5,30,029 related to share transfer stamp. The said chart is reproduced below for the sake of convenience:- -------------------------------------------------- Sl. Particulars Share transfer Date No. &....