Income Tax Appellate Tribunal - Indore
Dy. Commissioner Of Income Tax ... vs Kashyap Sweetners Pvt. Ltd. on 31 May, 2004
Equivalent citations: [2004]91ITD603(INDORE), (2004)85TTJ(INDORE)970
ORDER
T.R. Sood, Accountant Member ITA No. 424/Ind/97
1. In this appeal, revenue has taken the following seven grounds: -
"1. On the facts and in the circumstances of the case, the ld. CIT(A) erred in deleting the addition of Rs. 502222/- that was made by the AO on account of disallowance of interest as such disallowance was upheld by the ld. CIT(A) in the AY 1992-93.
2. On the facts and in the circumstances of the case, the ld. CIT(A) erred in deleting the addition of Rs. 21000/- that was made by the AO on account of notional interest on the amount of Rs. 2 lac advanced for non-business purposes.
3. On the facts and in the circumstances of the case, the ld. CIT(A) erred in deleting the addition of Rs. 2252413/- that was made by the AO on account of power subsidy treating it as revenue receipts, whereas the ld. CIT(A) has held it as capital receipts.
4. On the facts and in the circumstances of the case, the ld. CIT(A) erred in deleting the addition of Rs. 132975/- that was made by the AO on account of expenses incurred for installation of machinery (which is a fact admitted by the assessee itself) treating the same as capital expenditure.
5. On the facts and in the circumstances of the case, the ld. CIT(A) erred in directing the AO to include the interest on FDR and interest from 20th Century Finance in the total income for the purpose of allowing deduction Under Section 80HH & 801, as these interest cannot be said to have derived from 'industrial activity' whereas according to the ratio of the Hon'ble Delhi High Court's decision reported in ITR 208 page 636 (Del.), the action of the AO should have been upheld.
6 On the facts and in the circumstances of the case, the ld. CIT(A) erred in directing the AO to allow deduction Under Section 801 from the gross total income without deducting the admissible deduction Under Section 80HH from the gross total income.
7. On the facts and in the circumstances of the case, the ld. CIT(A) erred in allowing the claim of loss of Rs. 1133716/- for the reasons discussed in the asstt. order in para-9 to 12, as also considering the fact that the agreement of the assessee with M/s. Kashyap Publications (P) Ltd., was non-genuine with a motive to reduce the tax liability of the assessee. The order of the AO ought to have been upheld by the ld. CIT(A) keeping in view the ratio of the Hon'ble Supreme Court decision reported in 154 ITR 149 (S.C.)"
2. Ground Nos. 1 & 2. The brief facts in respect of these grounds are that AO during assessment proceedings noticed theft there was opening debit balance in two accounts of Kashyap Agro Oil Pvt. Ltd. amounting to Rs. 2566058/- and Rs. 2583587/-. In third account in the name of same company, there was a balance of Rs. 1,42,73,098/-. These amounts were adjusted by the assesses against purchases. However, AO was of the view that amounts which were initially for non-business purposes could not be converted into business purposes. Interest @ 18% was worked out at Rs. 5,02,222/- and this amount was disallowed. He further noticed that a sum of Rs. 1 lakh each was given to Shri J.K. Hiralal and Hukumchand Hiralal. Upon enquiry, it was submitted that amount was given towards purchase of land but no evidence was furnished for the same and thus notional interest for 7 months @ 18% amounting to Rs. 21000/- was added to the income of assessee. CIT(A) deleted these additions holding that these advances were mainly for the purpose of business and in case of advance for land the confirmation itself shows that advance was for the purpose of purchasing land.
3. Before us, ld. DR while supporting the order of AO strongly contended that similar addition was confirmed by CIT(A) in AY 1992-93, then how different view was taken.
4. On the other hand, ld. AR submitted that originally company was to start manufacturing activities of Starch also but bank and F.Is. insisted that a separate company be floated for that purpose, therefore, a separate company was incorporated and part of the loan was converted into share capital. He further submitted that it was basically two way transactions. Assessee was selling Maize to this other company and in turn that company was selling Starch to the assess company, therefore, same are business transactions. As far as advances for purchase of land are concerned he contended that copies of letters from these persons were submitted and the same were got verified by the CIT in the remand proceedings. He also submitted that in both the cases, no nexus was found between borrowed funds and money given as interest free advance to other parties and thus addition was not justified. In this regard, he relied on D & H Secheron Electodes Pvt. Ltd. v. CIT, 142 ITR 528, CIT v. Premier Auto Finance Ltd., 128 1TR 540.
5. We have considered the rival submissions carefully. We find force in the contention of ld. AR. It is wrong to say that CIT(A) has changed his view in this year because he has clearly noted that facts in the earlier year were different. We find that in this year only business transactions have commenced which may not be there in earlier years, therefore, such advances cannot be called advances without any business purpose. We also find that these amounts are in the nature of opening balance which clearly shows that no funds have been diverted during the year. In case of advance for purchase of land, it is not disputed that letters were filed before AO when the matter was being heard by the CIT(A). In any case, we find that AO has not found any nexus between borrowed funds and interest free advances given to others. We find that Hon'ble M.P. High Court has followed its own decision in case of D & H Secheron Electrodes Pvt. Ltd. v. CIT, 142 ITR 528 in R.D. Joshi & Co. v. CIT, 251 ITR 332. Following these decisions, we hold that these additions are not justified. In these circumstances, we confirm the order of ld. CIT(A).
6. Ground No. 3. After hearing both the parties, we find that issue is covered against the assessee by the decision of Hon'ble Supreme Court in Sahney Steels & Press Works Ltd. v. CIT, 228 ITR 253 and accordingly we decide this issue in favour of revenue. Thus, we set aside the order of CIT(A) in respect of this ground and restore that of AO.
7 Ground No. 4. The AO disallowed a sum of Rs. 132975/- out of various expenses consisting of fees for loan application, factory expenses, postage, bank commission charges, consultancy and interest etc. because same were incurred in connection with installation of plant and machinery. Ld. CIT(A) deleted this addition holding that there was nothing to suggest that new plant and machinery was acquired for new business and, therefore, claim of same being for existing business was held to be justified.
8. Before us, ld. DR strongly relied on the order of AO.
9. On the other hand, ld. AR referred to page 4 of the assessment order and pointed out that nature of expenses mentioned by AO was of revenue. He then submitted that it has been held in various decisions that whenever there was a common management and common funds even the new business was only an expansion of existing business and, therefore, such expenditure should be allowed as a revenue expenditure. In this regard, he relied on CIT v. Alembic Glass Industries Ltd., 103 ITR 715 and Prem Spg. & Wvg. Mills Co. Ltd. v. CIT, 98 ITR 20.
10. After considering the rival submissions carefully, we find that at best such expenditure can be said to have been incurred for expansion of existing business with a common management and common funds. Hon'ble Gujarat High Court in CIT v. Alembic Glass Industries Ltd. (supra), in similar circumstances held such expenses to be of revenue nature. Following that decision, we allow this expenditure to be of revenue nature and thus confirm the order of CIT(A).
11. Ground No. 5. The ld. DR submitted that this issue is covered against the assessee by decision of Supreme Court in Pandian Chemicals Ltd. v. CIT 262 ITR 278.
12. On the other hand, ld. AR contended that AO has assessed the entire income as business income, therefore, deduction Under Section 80HH is available. He also referred to order of this Bench in case of assessee for AY 92-93 in ITA No. 66/Ind/96, copy of which has been filed at page 67 to 74. He particularly referred to page 72 para 17 of the order where this issue was considered and at para 20, issue was decided in favour of assessee.
13. After considering the rival submissions, we find that Tribunal has rendered its decision on 15.4.2002 whereas judgment of the Hon'ble Supreme Court in Pandian Chemicals Ltd. v. CIT (supra) was delivered on 24.4.2003. Thus benefit of this Supreme Court decision was not available to the Tribunal. Hon'ble Supreme Court has clearly held that until and unless income is derived from industrial undertaking, deduction Under Section 80HH cannot be allowed. Hon'ble Supreme Court was concerned with the issue whether interest received from Electricity Board could be said to have been derived from industrial undertaking and Hon'ble Court held that it cannot be even if it was of compulsory nature. In these circumstances, following the order of Hon'ble Supreme Court, in Pandian Chemicals Ltd. v. CIT (supra) we decide this issue against the assessee.
14. Ground No. 6. After hearing both the parties we find that this issue is covered in favour of assessee by the decision of Hon'ble M.P. High Court in J.P. Tobacco Products Pvt. Ltd. v. CIT, 229 ITR 123 and same is decided against the revenue.
15. Ground No. 7. The brief facts are that assessee company has entered into an agreement with its sister concern company namely, Kashyap Publication Pvt. Ltd. which was engaged in the business of publishing a weekly newspaper. A daily newspaper was started by the Kashyap Publication Pvt. Ltd. in Oct.92. The assessee company entered into any agreement with this company through which rights of advertisement in the weekly as well as daily paper except those received form the Govt. and Semi-Govt. deptt. were taken over by the assessee company and in consideration of that a minimum guarantee return at a monthly payment of Rs. 4 lakhs was assured. Against this monthly consideration the assessee company became entitled to 50% share of revenue raised from non-govt. advertisement once the said sum exceeded the said sum of Rs. 4 lakhs. AO noticed that assessee company had never done any advertisement business previously. He also observed that two companies were under the same management and the agreement was only an arrangement to save taxes because Kasyap Publication Pvt. Ltd. had no taxable income. He also observed that past revenues did not justify the consideration of Rs. 4 lakhs to be paid P.M. This addition was deleted by ld. CIT(A) by holding that assessee company had genuinely entered into an agreement and carried on the business of advertisement and principle of McDowell's case could not be applied. CIT(A) referred to the decision of Supreme Court in CWT v. Arvind Narottam 173 ITR 479 (SC), where it was held that as long as true effect on the construction of deed is clear the question of tax avoidance is not a relevant consideration.
16. Before us, ld. DR referred to the contents of assessment order and submitted that Kasyap Publication Pvt. Ltd. was a sister concern. He contended that on investigation AO has clearly found that in this assessment year and next two assessment years, assessee had to incur losses on account of minimum amount of Rs. 4 lakhs which was payable every month because revenue for advertisement was not sufficient to meet this commitment.
17. He further submitted that AO from the assessment records of Kasyap Publications Pvt. Ltd., had noticed that there was loss in AY 92-93 and in AY 93-94 income was nil and in next two years there was a nominal income of Rs. 3559/- and Rs. 6363/- respectively. He also referred to the chart made by AO from which it emerges that for 5 months in this year the revenue from the advertisement after deducting the direct revenue i.e. Govt. and Semi-Govt. revenue was only Rs. 866284/- and in next two year, it was only Rs. 24.69 lakhs and Rs. 16.62 lakhs. He also referred to the observations made by AO that in publication business advertisement depends on the amount of circulation which is generally low in the beginning and picked up gradually, therefore, such publication have to incur losses in the initial period and start generating income only in the later period gradually. Thus, it was a clear cut case of tax avoidance and the ratio of Supreme Court decision in McDowell and Co. Ltd. v. CTO, 154 ITR 149 was applicable. He also contended that no information or basis was furnished before AO for calculating the minimum sum of Rs. 4 lakhs. Addl. information was filed before CIT(A) who has not referred the same to AO for his comments and thus in that sense also relief granted by ld. CIT(A) is not correct because same is in violation of Rule 46A of Income Tax Rules, 1962.
18. On the other hand, ld. AR vehemently argued that in this case no colourable device was used as suggested in McDowell's case. There was a genuine agreement and there is no finding in the assessment order that agreement was bogus. He referred to page 9 of the first appellate authority's order and pointed out that there was definitely a basis for calculation of minimum sum of Rs. 4 lakhs because when newspaper was started in the month of Oct.,92 revenue from other advertisements i.e. after excluding advertisement from Govt. and semi-Govt. agencies was Rs. 4,06,686/- He vehemently argued that there was an actual agreement and there was no facade which could lead to the application of McDowell's principle. He then referred to page 75 which is the copy of agreement entered into by the Co. with Kasyap Publications Pvt. Ltd. He referred to various terms and conditions and submitted that assessee company had a very valuable right to share the advertisement revenue in excess of Rs. 4 lakhs against which a minimum guarantee of Rs. 4 lakhs was provided by the Co. He then referred to page 78 to 83 which are copies of affidavits of various employees who were working with the Co. and were directly looking after the work of procurement of advertisement. He then referred to page 84 which is copy of the visiting cards of various employees. Then he referred to page 85 to 97 which are copies of appointment letters of employees and other correspondence in respect of booking of advertisement which clearly shows that assessee company was actually booking advertisements. Then he referred to page 98 to 104 which are copies of certificates given by various Cos., which clearly shows that advertisements were booked by the employees of the assessee company on behalf of Kasyap Publications Pvt. Ltd. All these evidences clearly show that assessee had expanded into advertisement business and was trying to generate more revenues. He particularly referred to page 108 and pointed out that advertisement revenue from non-Govt. organizations increased from Rs. 139996/- in Nov.,92 to Rs. 309263/- in March,93 which clearly shows that advertisement revenue was picking up and company had entered into right business. But later on such revenue did not pick up pace and Co. had to suffer losses. He contended that if a businessman entered into or expand into new area and does not generate profits that does not mean that business is not genuine and actual. Any business can lead into problems and ultimately suffer losses. He referred to the decision of Allahabad High Court in Pioneer Consulting Co. India Ltd. v. CIT, 85 ITR 410 where the assessee company was in an obligation being agent of T. Ltd. to collect the sum of money from various parties but failed to collect and paid such sum out of its own fund and the same was held to be business expenditure. He then referred to the decision of Rajasthan High Court in CIT v. Chunnilal Tak 160 ITR 617 where assessee company was liable to the Govt. in case it failed to lift minimum quantity of liquor such liability was held to be arising from carrying on the business and was held to be wholly and exclusively for the purpose of business. He also referred to the decision of Supreme Court in CWT v. Arvind Narottam (supra) where rigour of McDowell's principle had already been diluted. In this decision, Supreme Court has clearly held that in any event where the true effect on the construction of deeds is clear the appeal to discourage tax avoidance is not a relevant consideration. He vehemently contended that in view of this observation and keeping the genuineness of the agreement the losses suffered by assessee in advertisement business cannot be disallowed. He also relied on Union of India and Ors. v. Playworld Electronics Pvt. Ltd., 184 ITR 309.
19. We have considered the rival submissions very carefully and have gone through the relevant material on record as well as judgments cited by the parties. First of all we would like to examine the principles laid down in McDowell's case. In this case, Hon'ble Supreme Court was concerned with the question under Andhra Pradesh Sales-Tax Act whether Excise Duty paid by the buyers directly to the State would be included in the turnover of manufacturers for the purpose of sales-tax. The manufacturer company had contended that sales-tax was payable on the contractual sale price which did not include excise because same was paid directly by the customers as per the Excise Rules and they were issued distillery passes for release of liquor. Thus, the basic question before Hon'ble Supreme Court was whether Co. could legitimately reduce its sales-tax liability in this manner. The Court had in the earlier round decided this issue in favour of the manufacturer Co. but later on Excise Rules were amended and it was held that excise duty which was payable by the appellant but by amicable arrangement was being paid by the buyer was actually a part of the turnover of the appellant and was therefore liable to be so included for determination of liability for sales-tax. In this case itself, his lordship Hon'ble Justice Chinnappa Reddy had made observations regarding tax avoidance devices which were called colourable devices. It was observed that tax avoidance through such colourable device should not be encouraged by the Courts. It was further observed that it was neither fair nor desirable to expect the legislature to intervene and take care of every device and scheme to avoid taxation. It is upto the Court to take stock to determine the nature of the new and sophisticated legal device to avoid tax and to expose the device for which they really are and to refuse to get judicial benediction. Later on Hon'ble Supreme Court in CWT v. Arvind Narottam observed that where the true effect on the construction of deeds is clear, attempt to invoke McDowell would be futile. Now the question is what would constitute colourable device and in what type of cases the principles laid down in McDowell's case can be applied. Here we would like to note that observations made in McDowell's case were basically founded on three decisions of House of Lords in Ramsay Ltd. v. Inland Revenue (1982) A.C.300, H.L(E), I.R.V. Burmah Oil Co. Ltd'. (1982) S.T.C. 30, H.L.(Sc) and Furniss v. Dawson (1984) A.C.474, H.L.(E.). Recently various aspects of these three decisions have been considered in detail by the House of Lords in MACNIVEN (HM INSPECTOR OF TAXES V. WESTMORELAND INVESTMENT LTD., 255 ITR 612 (2001) 2 W.L.R. 377, H.L. In this case, there was a Company known as Westmoreland Investment Ltd. (for short 'WIL') and the sole shareholder of its parent company were the trustees of electricity supply pension scheme. Some investments were made by the trustees through this company and in such investments WIL suffered badly because of commercial property slum of 1970. It borrowed heavily from the Pension Scheme Trustees and had ultimately owed the trustees approximately £ 70 million including interest of more than £40 million. Its liabilities gradually exceeded its assets and all the liabilities were due to pension scheme trustees. In these circumstances, WIL was valueless but it had one potential asset i.e. its substantial accrued interest liability which could be converted into tax advantage. Under Section 338 payments of interest other than interest on bank loans, could be set off against the profit and any unused excess could be carried forward Under Section 17(5) of the Taxes Act, 1988. Thus, the situation was if WIL could pay to pension scheme trustees the amount of £ 40 million arrears of interest the company would have value as a company with substantial established tax losses. There were enough buyers in the market acquiring such companies and using the same as a vehicle to save taxes on their future profits on which tax would otherwise be payable. But first WIL had to pay the arrears of interest to the pension scheme trustees and for this WIL had no funds and was not in a position to even borrow from outsiders. The trustees of pension scheme, to whom WIL was indebted, paid money round in a circle in three instalments and WIL used this money in paying the outstanding arrears of interest to the trustees, after deducting the tax at source for which it accounted to Inland Revenue; and the trustees, as trustees of a tax exempt superannuation scheme, reclaimed this tax from the Inland Revenue. Now the question before House of Lords was whether payments of interest for the purpose of Section 338 of Income And Corporation Tax Act, 1988 was valid? The special Commissioner decided that the interest had been paid within the meaning of Section 338 and was deductible and this decision was reversed by the judge. The Court of Appeal allowed W.Limited's appeal. On further appeal, House of Lords held dismissing the appeal, that statutory construction involved ascertaining what Parliament had meant by using the language of the statute, and all other principles of construction were no more then guides to assist in that task; that the first step in the process was the identification of the concept to which the statute referred; that if the statutory language was constructed as referring to a commercial concept and steps which had no commercial purpose had been artificially inserted for tax purposes had been artificially inserted for tax purposes into a composite transaction they would be disregarded for the purposes of applying the relevant concept; that, however, a transaction which came within the statutory language, construed in the correct legal or commercial sense, could not be disregarded merely because it was entered into solely for tax purposes; that "payment" of interest within Section 338 was a legal concept which meant the simple discharge of a debt, and there was no apparent policy to be found in Section 338 which required a negative cash flow so as to exclude payment of the interest with money borrowed from the creditor for the purpose; that the statutory words could not be given a different meaning in the case of payment to a tax exempt lender which had been able to reclaim the tax; that the transactions did not come within any of the tax avoidance provisions; and that, accordingly, the payment of interest were deductible under Section 338. In this case, following observations were made:
"The Ramsay principle or, as I prefer to say the Ramsay approach to ascertaining the legal nature of transactions and to interpreting taxing statutes, has been the subject of observations in several later decisions. These observations should be read in the context of the particular statutory provisions and sets of facts under consideration. In particular, they cannot be understood as laying down factual pre-requisites which must exist before the court may apply the purposive Ramsay approach to the interpretation of a taxing statute. That would be to misunderstand the nature of the decision in the Ramsay case. Failure to recognise this can all too easily lead into error. In particular, the much-quoted observation of Lord Brightman in Furniss v. Dawson (1984) AC 474, 527, seems to have suffered in this way. Lord Brightman described, as the "limitations of the Ramsay principle", that there must be a pre-ordained series of transactions, or a single composite transaction, containing steps inserted which have no business purpose apart from the avoidance of a liability to tax. Where those two ingredients exist, the inserted steps are to be disregarded for fiscal purposes."
"Further, as I have sought to explain, the Ramsay case did not introduce a new legal principle. It would be wrong, therefore, to set bounds to the circumstances in which the Ramsay approach may be appropriate and helpful. The need to consider a document or transaction in its proper context, and the need to adopt a purposive approach when construing taxation legislation, are principles of general application. Where this leads depends upon the particular set of facts and the particular statute."
"As is well known, the Ramsay case (1982) AC 300 was concerned with a tax avoidance scheme designed to manufacture a capital loss to set off against a capital gain. The question before the House was whether a transaction by which the taxpayer company acquired certain shares for 185,034 and almost immediately sold them for 9,387, gave rise to a "loss accruing on a disposal of an asset" within the meaning of Section 23(1) of the Finance Act 1965. Both the acquisition and sale of the shares formed part of a pre-planned series of transactions by which the alleged loss was exactly balanced by a gain which was alleged to fall within an exemption from the charge. The aggregate effect was that the taxpayer suffered no loss except the payment of a fee to the promoters of the scheme."
"My Lords, it is worth pausing at this point to examine the characteristically compressed reasoning in a little more detail. A loss which arises at one stage of an indivisible process and cancelled out at a later stage of the same process is "not such a loss as the legislation is dealing with". The tax was not imposed "on arithmetical differences". In that case, what kind of loss was the legislation dealing with? The contrast being made throughout Lord Wilberforce's speech is between juristic or arithmetical realities on the one hand and commercial realities on the other. He is construing the words "disposal" and "loss" to refer to commercial concepts which are not necessarily confined by the categories of juristic analysis. In the Ramsay case (1982) AC 300, a director, or an accountant concerned to present a true and fair view of the taxpayer's dealings, would not have said that the company had entered into a transaction giving rise to a loss which happened to have been offset by a corresponding gain. There had never been any commercial possibility that the transactions would not have cancelled each other out. Therefore, notwithstanding the juristic independence of each of the stages of the circular transaction, the commercial view would have been to lump them all together, as the parties themselves intended and describe them as a composite transaction which had no financial consequences. The innovation in the Ramsay case was to give the statutory concepts of "disposal" and "loss" a commercial meaning. The new principle of construction was a recognition that the statutory language was intended to refer to commercial concepts, so that in the case of a concept such as a "disposal", the court was required to take a view of the facts which transcended the juristic individuality of the various parts of a preplanned series of transactions."
20. Court further reproduced the following para from Burmah's case: -
"First, there must be a pre-ordained series of transactions; or, if one likes, one single composite transaction. This composite transaction may or may not include the achievement of a legitimate commercial (i.e. business) end. The composite transaction does, in the instant case; it achieved a sale of the shares in the operating companies by the Dawsons to Wood Bastow. It did not in Ramsay. Secondly, there must be steps inserted which have no commercial (business) purpose apart from the avoidance of a liability to tax not 'no business effect'. If those two ingredients exist, the inserted steps are to be disregarded for fiscal purposes. The court must then look at the end result. Precisely how the end result will be taxed will depend on the terms of the taxing statute sought to be applied." "My Lords, this statement is a careful and accurate summary of the effect which the Ramsay construction of a statutory concept has upon the way the courts will decide whether a transaction falls within that concept or not. If the statutory language is construed as referring to a commercial concept, then it follows that steps which have no commercial purpose but which have been artificially inserted for tax purposes into a composite transaction will not affect the answer to the statutory question. When Lord Brightman said that the inserted steps are to be "disregarded for fiscal purposes", I think that he meant that they should be disregarded for the purpose of applying the relevant fiscal concept. In the Furniss case, this was the concept of a disposal by one person to another. For that purpose, and for that purpose only, the disposal to Greenjacket was disregarded. But that does not mean that it was treated even for tax purposes, as if it had never happened. The payment by Wood Bastow was undoubtedly to Greenjacket and so far as this might be relevant for tax or any other purposes, it could not be disregarded."
"My Lords, these are valuable insights and I respectfully suggest that particular attention should be paid to the way Lord Cooke of Thorndon dealt with the criteria stated by Lord Brightman in Furniss v. Dawson:
'Lord Brightman spoke of certain limitations (a pre-ordained series of transactions including steps with no commercial or business purpose apart from the avoidance of a liability to tax). The present case does not fall within these limitations, but it may be as well to add that, if the ultimate question is always the true bearing of a particular taxing provision on a particular set of facts, the initiations cannot be universals. Always one must go back to the discernible intent of the taxing Act. I suspect that the advisers of those bent on tax avoidance do not always pay sufficient heed to the theme in the speeches in the Furniss case....... to the effect that the journey's end may not yet have been found."
20.1. We would also like to note the observation of Hon'ble Supreme Court in Union of India v. Azadi Bachao Andolan 263 ITR 706 where decision of McDowell(1985) 154 ITR 148(SC) as well as principle lead down in Duke of Westminster's case (1936), AC 1(HL) & Ramsay's case (1982) AC 300(HL), Craven v. White (1988) 3 All ER 495, Furniss' case(1984) 1 All ER 530(HL) & Burmah Oil's case (1982) Simon's Tax Cases 30 have been analysed.
Hon'ble Supreme Court observed at page 758 that, we are unable to agree with the view that Duke of Westminster's case (1936) AC 1(HL); 19 TC 490 is dead, or that its ghost has boon exorcised in England. The house of Lords does not seem to think so, and we agree, with respect. In our view, the principle in Duke of Westminster's case 1936) AC 1(HL), 19 TC 490 is very much alive and kicking in the country of its birth."
The Apex Court approvingly extracted the following para of Madras High Court from M.V. Valliappan v. ITO 1988) 170 ITR 238, "has rightly concluded that the decision of McDowell(1985) 154 ITR 148(SC) cannot be read as laying down that every attempt at tax planning is illegitimate and must be ignored, or that every transaction or arrangement, which is a perfectly permissible under law, which has the effect of reducing the tax burden of the assessee, must be looked upon with disfavour."
It is further observed at page 760, "it thus appears to us that not only is the principle in Duke of Westminster's case (1936) AC 1(HL); 19 TC 490 alive and kicking in England, but it also seems to have acquired judicial benediction of the Constitutional Bench in India, notwithstanding the temporary turbulence created in the wake of McDowell's case (1985) 154 ITR 148(SC)."
While commenting on the words "sham" and "device" it was observed that "these words are not intended to be used as magic mantras or catch all phrases to defeat or nullify the effect of a legal situation & following para of Lord Atkin from Duke of Westminster's case was reproduced. "I do not use the word device in any sinister sense; for it has to be recognised that the subject, whether poor and humble or wealthy and noble, has the legal right so to dispose of his capital and income ay to attract upon himself the least amount of tax. The only function of a court of law is to determine the legal result of his disposition so far as they affect tax."
Further following observation were made at page 762, 763. "If the court finds that notwithstanding a series of legal steps taken by an assesses, the intended legal result has not been achieved, the court might be justified in overlooking the intermediate steps, but it would not be permissible for the court to treat the intervening legal steps as not est based upon some hypothetical assessment of the "real motive" of the assessee. In our view, the court must deal with what is tangible in an objective manner and cannot afford to chase a will-o'-the-wisp."
"We are unable to agree with the submission that an act which is otherwise valid in law can be treated as not est. merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interests."
21. From the above discussion and observations, it becomes clear that concept of tax avoidance is still valid as long same remains within four corners of law. It also become clear that the concept of "colourable devices" being used for tax avoidance can be applied only when a series of transactions is carried through without any commercial purpose but which have been artificially inserted for tax purposes into a composite transaction. Hon'ble Supreme Court in CWT v. Arvind Narottam (supra) has clearly laid down that where the true effect on the construction of deeds is clear then the appeal to discourage tax avoidance is not a relevant consideration. If any other interpretation is accepted, all legal agreements would become "colourable devices" whenever they lead to tax avoidance which cannot be the effect of McDowell's case.
22. Now let us examine issue before us in the light of above noted observations. The assessee company had entered into an agreement with Kasyap Publications Pvt. Ltd. From the recitations, we find that Kasyap Publications Pvt. Ltd. was having constraint of staff and funds and a set up to increase its business prospects for procuring advertisements for its weekly and daily newspaper. On the other hand, assessee company was well established company and had fulfledged offices at. Bombay and Delhi and had established marketing set up and business connections. From the covenants of the agreement, we find that assessee company undertook to book advertisement from non-government parties for the Kasyap Publication Pvt. Ltd. Though it guaranteed a minimum sum of Rs. 4 lakhs P.M. but at the same time it was entitled to share 50% of non-Govt. advertisements revenue in excess of this Rs. 4 lakhs. We futher find that advertisements revenue of Kasyap Publications Pvt. Ltd. for the month of Oct.,92 from non-government parties was Rs. 4,06,686/- and that was the basis for entering into the agreement with the expectations that revenue would increase further. Here it is pertinent to note that we do not find any merit in the contention of ld. DR that all this information was not brought to the notice of AO. We find from the first appellate authority's order that Shri S.K. Singh, Dy. Commissioner (Assessment) was present before the CIT(A) which clearly shows that he was aware of the facts and we also find from the order of CIT(A) that he has made various contentions also during the appeal proceedings. Further from the details of business procured during the year, we find that advertisement revenue from non-government companies increased from Rs. 139996/- in Nov.,92 to Rs. 309263/- in March,93 which means revenue was increasing very fast and assessee company could have easily earned profit from this venture. We also find that assessee had furnished lot of evidences before the AO, such as, evidence regarding appointment of staff for the purpose of advertisement business their affidavits, correspondence in respect of advertisement business, copies of certificates from various companies regarding this advertisement business. All these facts lead only to one conclusion that assessee had entered into the new business by entering into such agreements. There are no series of transactions as envisaged in McDowell's case which have the result of producing only tax effect. The agreement definitely had a commercial purpose and business was actually carried on by the assessee company. There is no finding by the AO that agreement was bogus and business was never carried on by assessee. He has merely proceeded to make the addition on the basis of McDowell's case which is not justified in the facts of the case. We think ld. CIT(A) has made a very pertinent observation that if this arrangement has produced profits, AO would have no objection to such arrangement. In these circumstances, we find nothing wrong with the order of ld. CIT(A) and confirm the same.
23. In the result, appeal is partly allowed.
24. ITA No. 745/Ind/97 In this appeal, revenue has raised the following five grounds: -
"1. On the facts and in the circumstances of the case, the ld. CIT(A) erred in deleting the addition of Rs. 36000/- that was made by the A.O. on account of notional interest on the amount of Rs. 2 lacs advanced for non-business purposes.
2. On the facts and in the circumstances of the case, the ld. CIT(A) erred in directing the A.O. to include the interest in MPEB deposits of Rs. 116837/- and interest on FDR of Rs. 98946/- in the total income for the purpose of allowing deductions Under Section 80HH & 801 as these interest cannot be said to have derived from "Industrial Activity" whereas according to the ratio of the Honourable High Courts decision reported in ITR 208 page 636 (Del), the action of the A.O. should have been upheld.
3. On the facts and in the circumstances of the case, the ld. CIT(A) erred in deleting the addition of Rs. 90993/- (103127-12134 upheld) that was made by the A.O. on account of expenses incurred for installation of machinery treating the same as capital expenditure.
4. On the facts and in the circumstances of the case, the ld. CIT(A) erred in allowing the claim of loss of Rs. 24,26,304/- for the reasons discussed in the assessment order in para 9 as also considering the fact that the agreement of the assessee with M/s. Kashyap Publication (P) Ltd. was non genuine with a motive to reduce the tax liability of the assessee. The order of the A.O. ought to have been upheld by the ld. CIT(A) keeping in view the ratio of Honourable Supreme Court decision reported in 154 ITR 149 (SC).
5. On the facts and in the circumstances of the case, the ld. CIT(A) erred in directing the A.O. to allow 801 deduction on gross total income without being reduced by the amounts of 80HH deduction."
25. As discussed above, ground Nos. 1, 3, 4 & 5 are rejected and decided against the revenue. Ground No. 2 is allowed and decided in favour of revenue.
26. In the result, appeal is partly allowed.