Gujarat High Court
Commissioner Of Income Tax vs Pankti Polytex Pvt. Ltd. on 11 February, 2020
Author: Bhargav D. Karia
Bench: J.B.Pardiwala, Bhargav D. Karia
C/TAXAP/1817/2006 ORDER
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/TAX APPEAL NO. 1817 of 2006
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COMMISSIONER OF INCOME TAX
Versus
PANKTI POLYTEX PVT. LTD.
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Appearance:
MRS MAUNA M BHATT for the Appellant(s) No. 1
SERVED BY AFFIX(N) for the Opponent(s) No. 1
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CORAM: HONOURABLE MR. JUSTICE J.B.PARDIWALA
and
HONOURABLE MR. JUSTICE BHARGAV D. KARIA
Date : 11/02/2020
ORAL ORDER
(PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA)
1. This appeal under section 260A of the Act is filed at the instance of the Revenue challenging the order dated 28th April, 2006 passed by the Income Tax Appellate Tribunal, Ahmedabad in ITA No. 175/Ahd/2001 for the assessment year 19971998.
2. This Court has passed the following order dated 9th August, 2007 while admitting the substantial questions of law :
"Heard learned counsel for the appellant.
The appeal is admitted in terms of the following questions:
"(i) Whether on the facts and circumstances of the case, the Appellate Tribunal was right in law in Page 1 of 21 Downloaded on : Sat Feb 13 19:35:49 IST 2021 C/TAXAP/1817/2006 ORDER allowing the interest expenditure on the borrowed funds from the group companies, which funds were in turn utilized 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 claimed in the Profit and Loss account of the assessee.
4. Being aggrieved and dissatisfied by the disallowance of the interest expenses by the Assessing Officer, the assessee preferred an appeal before the CIT(Appeals) who by order dated 4th October, 2000 allowed the appeal of the assessee Page 2 of 21 Downloaded on : Sat Feb 13 19:35:49 IST 2021 C/TAXAP/1817/2006 ORDER holding that the borrowings made by the assessee were for the purpose of business and same were utilized for the purpose of business and, therefore, the assessee was justified in claiming interest expenses. CIT(Appeals) accordingly deleted the disallowance of interest of Rs.2,64,49,312/ made by the Assessing Officer.
5. The Revenue being aggrieved by the order of CIT(Appeals) preferred Second Appeal before the Tribunal. The Tribunal considered the fact that the interest expenses claimed by the assessee pertains to business of financing and trading in shares and securities carried on by the assessee as it had no capital of its own and assessee was procuring loan from various parties and had been investing in shares of the other companies which are found by the Revenue as group companies. The Tribunal after considering the findings arrived at by CIT(Appeals) held as under :
"5. It was in view of above, the Id. counsel for the assessee had submitted before the CIT(Appeals), as under:
3.....
i) That the appellant is engaged in business of holding of investments and dealer in shares and the profit or loss arising from these transaction is shown by the appellant in the Profit and Loss Account as business income, this year as well as in the present assessment order this factual aspect is accepted in so far as the computation of income is based on profit as per the books and to that the disallowance of interest of Rs.2,64,49,312/ is made.
ii) That the appellant has disclosed the dividend income of Rs.1,44,566/ from the shares held. This has also been accepted by the Assessing Officer.
iii) Appellant Company is engaged in the business of
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C/TAXAP/1817/2006 ORDER
holding of Investment and dealing in shares and securities, finance etc.
iv) All the transactions of purchase and sale of shares are genuine transactions.
v) Optionally Convertible Debentures/Shares of Arvind Intex Limited were listed on various Stock Exchanges.
vi) It has borrowed monies for the purposes of its business and interest was paid during the course of carrying on 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 which public are substantially interested and therefore, the question of the concept of group companies does not arise here.
3.5. The counsel for the appellant has further pointed that on page8 of the assessment order the Assessing Officer has held that the appellant company is a facade company. In this connection it is submitted that the appellant Page 4 of 21 Downloaded on : Sat Feb 13 19:35:49 IST 2021 C/TAXAP/1817/2006 ORDER company is not a facade company as it is duly registered under the provisions of the Companies Act, even the IncomeTax Department has allotted to it a separate Permanent Account Number and assessed it as a separate company and the Hon'ble Court has sanctioned the Scheme of Amalgamation wherein it has ordered the merger of the appellant company with Anmol Denim Ltd. All these facts prove that the appellant is not a facade company. In this regard, attention was invited to the decision of the Hon'ble ITAT, Ahmedabad SMC Bench, in the case of Manini Niranjan, in ITA No.3/89, though on different count, ratio is useful. In that case, the appellant acquired shares of a private limited company stated by the ITO to be "within the group" and sold them to a trust where members of the appellant's family were trustees and thus incurred loss. It is also interesting to note that the appellant and family members of the appellant had borrowed money @7.5% from M/s. Lalbhai Dalpatbhai (HUF) and acquired 4% preference shares of the company stated by ITO to be "within the group'. In that case, ITO applied the decision of the Supreme Court in the case of McDowell & Co. Ltd. After considering all the facts, the ITAT has held that since the vendor and the purchaser are separate entities, the loss must be regarded as real. It may even be a calculated loss, an intentional loss, but nevertheless, it s a real loss in terms of law because the entities are separate. The feet that money has been borrowed at double the rate of interest, then the preference dividend will also not make any difference. The ITO has in that case stated that this is not a decision of prudent businessman but it is not necessary that every decision should be a sound decision in order to judge the genuineness of the transaction. The intention may be to reduce the tax liability but for that benefit the appellant has incurred a loss which has to be regarded genuine because the sale is to be regarded as genuine for the above reasons. That is 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.
Page 5 of 21 Downloaded on : Sat Feb 13 19:35:49 IST 2021C/TAXAP/1817/2006 ORDER 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 the amount of Rs.9.51 crores from Arvind Mills Ltd., during the year under consideration was mainly used for repayment of the past borrowings and not for investments in share as is alleged by the assessing officer. The argument of the assessing officer thus are in total disregard of the facts of the appellant's case.
3.7. It was pointed out that the opening balance in the above referred accounts were used for the purpose of business of the appellant company and, therefore, there was no disallowance of interest payable in assessment year 199697 on these borrowings, it is submitted that, therefore, when there is no change in the facts regarding the opening balance there is no justification for taking different stand and making the disallowance of the interest on such opening balance. This view is supported by the decision of the Karnataka High Court in the case of CIT Vs. 192 ITR 165. Relevant para from Head Notes of said decision are as under:
"Held, that the amount due from N on the first day of the accounting year was the amount that stood outstanding on the last day of the previous accounting year and, therefore, its nature and status could not be different from its nature and status as on the last day of previous year. Regarding past, years, the appellant's claims for deduction were allowed in respect of the sums advanced during those years. This could be only on the assumption that those advances were not out of borrowed funds of the appellant. This finding during the previous years was the very basis of the deductions permitted during the past years, it would not be equitable to permit the Revenue to take a different stand now in respect of the amounts which were the Page 6 of 21 Downloaded on : Sat Feb 13 19:35:49 IST 2021 C/TAXAP/1817/2006 ORDER subject matter of previous years assessments."
Considering the facts and the law on the subject, the disallowance of the interest with reference to the opening balance is not at all justified. As regards the balance of Arvind Mills Ltd., it may be stated that for the reasons stated above there is no justification for disallowance with reference to the opening balance. Further borrowings from them are used for repayment of loans borrowed in the past and thus it is used for the purpose of business. In any case such borrowings are used for repayment of the past loans and, therefore, also in view of the above referred to decision, there is no justification 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 argued that in view of the above factual position, the question of utilization of the borrowed fund during the year for the purpose of acquisition of shares simply does not arise. In any case, it may be observed from the assessment order that the Page 7 of 21 Downloaded on : Sat Feb 13 19:35:49 IST 2021 C/TAXAP/1817/2006 ORDER Assessing Officer has not specifically correlated the borrowings for a particular share or shares. The very basis for the decision, therefore, does not hold good.
3.9 It was also further argued that even if it is so correlated, it may be highlighted that the Assessing Officer has accepted that the appellant is a dealer in ready shares, as stated earlier. Even if, part of the borrowings are for shares treated as investments the appellant has disclosed dividend income and is accepted as such by the Assessing Officer.
3.10. It was contended that it is very clear that the appellant is dealer in shares and therefore, the disallowance of interest boils down to a simple preposition as to whether the borrowings made were for the purpose of business or not. As stated earlier the borrowings are for the purpose of business of acquiring shares and dealing therein and therefore no part of the interest is disallowable. In this regard the appellant relied upon various judicial decisions."
6. The Assessee, in addition to aforesaid submissions, had made further submissions as contained in paragraph No.3.11 to 3.15 of the order of the CIT(Appeals).
7. The CIT(Appeals) allowed the assessee's appeal by observing as under:
"3.16 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 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 were made for the purpose of the business of the appellant. Once those borrowings are held to be for the purpose of business in view of the ratio of the Supreme Court decision in Madhav Prasad Jatia (supra) and other decision cited by the appellant as reproduced above there is absolutely no justification in disallowing the claim either in full or in part. I also agree with the learned counsel of the appellant that the reliance placed by the Assessing Officer on the Hon'ble Supreme Court in McDowell is misplaced and does not support the action of the Assessing Officer. I also find that on the facts and in law the Page 8 of 21 Downloaded on : Sat Feb 13 19:35:49 IST 2021 C/TAXAP/1817/2006 ORDER 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.195/Ahd/2001, order dated 24/03/2006, we decide the present appeal by following the decision in the case of M/s. Pinnacle Project and Infrastructure Pvt. Ltd. (supra) and, therefore, proceeding to consider the Tribunal's decision in that case, as under:
(i) The facts in the case of M/s. Pinnacle Project and Infrastructure Pvt. Ltd. as having been borne out from paragraph Nos.3 to 10 of Tribunal's order are that M/s.Pinnacle Project and Infrastructure Pvt. Ltd. was also in the business of Financing and Trading in shares and securities and had procured loans from as much as six Private Limited and Limited Companies as detailed as page No.2 of the Page 9 of 21 Downloaded on : Sat Feb 13 19:35:49 IST 2021 C/TAXAP/1817/2006 ORDER Tribunal's order which reads as under: Op. Receipt Repayment Interest Fds Closing Bal Bal.
1 Anagram 0 900000 0 177169 57078 90177169 Finance Ltd.
2 Arvind 0 55555000 5555000 627277 171802 627277 Cotspin Ltd.
3 Arvind 0 56185000 56185000 634390 173750 634390 Polycot Ltd.
4 Lalbhai 0 2750000 0 1004782 116314 28504782 Reality Finance P. Ltd 5 Orbit 0 455455000 295570000 20684090 1174922 180569010 Finmark Ltd 6 The 0 404680000 19600000 26960995 2995686 412040995 Arvind Mills Ltd.
Item Opening stock Additio Sales Closing Stock
n
Arvind Qty Amt Rate Q Ad R Q Sa R Qty Amt. Rate
Ltd OCD t dl a t l a
Avg.Mar y Am t y es t
ke t t e Am e
No. t.
Rate
91135 2734047 3000 - - - - 91135 273404763 3000
63
Arving 210000 5190000 2417 - - - - - - 21000 5190000 2471
Mills
Ltd
(ii) The loans so procured had been Invested In purchasing the shares and optional convertible debentures of M/s.Arvind Mills Ltd. and M/s. Arvind Inted Ltd. has been done by the present assessee.
(iii) M/s. Pinnacle Project and Infrastructure Pvt. Ltd. had paid Interest on borrowings to the extent of Rs.3,78,72,736/ deduction of which was disallowed by the Assessing Officer by Page 10 of 21 Downloaded on : Sat Feb 13 19:35:49 IST 2021 C/TAXAP/1817/2006 ORDER following his findings in the case of present assessee before us. The CIT(Appeals) had deleted the disallowance on the basis of similar findings as have been given in the present case reproduced by us in the earlier part of this order.
13.1. It 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 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. (supra) that it is open to everyone to show arrange his affairs as to reduce the brunt of taxation to the minimum and such a process does not constitute tax evasion, nor does it carry any ignominy. Tax planning may be Page 11 of 21 Downloaded on : Sat Feb 13 19:35:49 IST 2021 C/TAXAP/1817/2006 ORDER legitimate provided it is within framework of the 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. This decision of Hon. Supreme Court was considered by their Lordships of Hon. Gujarat High Court in the case of Banyan & Berry (supra) and considering the said decision it was observed by their Lordships that the said decision has not affected the freedom of an assessee to plan his business affairs within the framework of law unless the same fell in the category of colourable device which may properly be called a device or a dubious method or a subterfuge clothed with apparent dignity and the decision in the case of McDowell & Co. Ltd. (supra) does not lay down that tax payers must arrange his affairs so as to arrange maximum tax liability and every act resulting in tax reduction, exemption or not attracting tax should be treated as device of tax avoidance. This principle laid down by Hon. Gujarat High Court has been approved by Hon. Supreme Court in the case of Union of India & Anr. Vs. Azadi Bachao Andolan & Anr. 263 ITR 706 (SC). It will be relevant to reproduce below the observations of Hon. Supreme Court in the case of Union of India & Anr. Vs. Azadi Bachao Andolan & Anr.(at page 759 of the report) (supra): "108. We may also refer to the judgement of Gujarat High Court in Banyan & Berry Vs. CIT (1996) 131 CTR (Guj.) 127: (1996) 222 ITR 831 (Guj) at 850 where referring to McDowell (supra),the Court observed:
"The Court nowhere said that every action or inaction on the part of the tax payer which results in reduction of tax liability to which he may be subjected in future, is to be viewed with suspicion and be treated as a device for avoidance of tax irrespective of legitimacy or genuineness of the act; an inference which unfortunately, in our opinion, the Tribunal apparently appears to have drawn from the Page 12 of 21 Downloaded on : Sat Feb 13 19:35:49 IST 2021 C/TAXAP/1817/2006 ORDER 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 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 of truth. A perusal of the chart will reveal that assessee has deducted a substantial amount of TDS out of all the payments of interest ad the funds have also been borrowed through banking channels. Unless It is shown that all these were 'reverse bona fide' or interest was paid for only for appearance and not reality the transactions entered into by the assessee could not be held to be "colourable" so as to fall these transactions within the ambit of "colourable device" as defined by Hon. Page 13 of 21 Downloaded on : Sat Feb 13 19:35:49 IST 2021 C/TAXAP/1817/2006 ORDER Jurisdictional High Court. A perusal of assessment order will reveal that no material has been brought on record by AO to show that the interest payment by the assessee and receipt of loan and transaction of purchases and sales of shares entered into by the assessee were 'reverse bona fide' or these were the transaction which were for appearance and not in reality and they were feigned of having the appearance of truth. In absence of any material on record to establish such circumstances, mere saying will not make the transactions of the assessee recorded in the books of accounts as "colourable device."
14. Examining the word 'device', their Lordships found that as per Shorter Oxford Dictionary it means inneuity, something device, arrangement, plan, contrivance, a plot or a trick and as per Black's Dictionary 'device' is referred as contrivance, a scheme, trick. Here also no material has been brought on record by AO to suggest that it was a device, arrangement, plan or contrivance there is no material on record to suggest that any of the sales or purchases of the shares made by the assessee was found by the revenue authorities to be the transaction in contrivance of any law, thus the same were in the nature of device. In absence of any such material it cannot be held that the transaction entered into by the assessee for sale and purchase of shares for borrowing and lending of money was in the nature of "device".
15. Similarly referring 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 Page 14 of 21 Downloaded on : Sat Feb 13 19:35:49 IST 2021 C/TAXAP/1817/2006 ORDER 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 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 circumspection and which is within the framework of law. The assessee thus is entitled to do so and there is no prohibition put by the above mentioned decision of Hon. Supreme Court in the case of McDowell (supra). It has already been held that the transactions on the basis of which the AO has disallowed the interest have not been shown or established to be the colourable device or dubious method or subterfuge clothed with apparent dignity. No single instance has been brought on record to prove the existence of "colourable device", "dubious method" or "subterfuge" as these are the ingredients to bring the planning of the assessee within the purview of falling the same in the ambit of situation described in the case of McDowell & Co. (supra). Thus we hold that there is absence of any material to say that the transactions entered into by the assessee with regard to which interest has been paid by the assessee to fall within the category of "colourable device", "dubious method" or "subterfuge" to bring the applicability of decision in the case of McDowell & Co. (supra). So by applying Page 15 of 21 Downloaded on : Sat Feb 13 19:35:49 IST 2021 C/TAXAP/1817/2006 ORDER the ratio of McDowell and Co. (supra) the interest could not be disallowed.
17. Now as it relates to the applicability of section 77 of the Companies Act, 1956 to the transaction by the assessee on which the interest has been paid it is observed that the said contravention has not been proved or established by the AO. Section of Companies Act, 1956 is interest could not be disallowed.
"S. 77 Restrictions on purchase by company, or loans by company for purchase, of its own or is holding company's shares (1) No company limited by shares and no company limited by guarantee and having a share capital, shall have power to buy its own shares, unless the consequent reduction of capital is effected and sanctioned in pursuance of section 100 to 104 or of section 402.
(2) No public company, and no private company which is a subsidiary of a public company, shall give, whether directly or indirectly; and 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 Page 16 of 21 Downloaded on : Sat Feb 13 19:35:49 IST 2021 C/TAXAP/1817/2006 ORDER 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 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 paidshares in the company or its holding company to be held by themselves by way of beneficial ownership.
(3) No ban 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 section (1) to (3), the company, and every officer of the company who is in default, shall be punishable with fine which may extend to one thousand rupees.
(5) Nothing in this section shall affect the right of a company to redeem any shares issued under section 80 or under any corresponding provision in any previous companies law."
Subsection (1) is not applicable to the facts of the case as it is not a case where company has bought its own shares. Subsection (2) prohibits public companies and private companies which are their subsidiaries giving financial assistance to persons for purchasing their shares. In the present case, the assessee company has not given any financial assistance to persons for purchase of its shares. Thus there is no contravention of section 77 of the Companies Act, 1956. The contravention, if any, may be in the hands of companies who have advanced the money to the assessee company. Thus section 77 of Companies Act is not applicable to the case of assessee company, Page 17 of 21 Downloaded on : Sat Feb 13 19:35:49 IST 2021 C/TAXAP/1817/2006 ORDER therefore, disallowance of interest based on contravention of section 77 holds no ground.
18. It is not disputed that sale and purchase of shares and to receive money on interest and lending thereof are the business activities of the assessee company. Therefore, the transactions entered into by the assessee were the transactions entered into by it in the normal course of its business. It is not the case of revenue that the money obtained by assessee company on interest was utilized for any purpose other than its business. In other words, it is not the case of revenue that interest bearing funds were utilized by the assessee for the purpose other than its business. If it is so, interest has to be allowed under section 36(1 )(iii) of the Act and has rightly been held to be allowable by CIT(A). We confirm his order and this ground of the department is dismissed."
14. After having considered the totality of the facts and circumstances of the case and the fact that the issues involved in the present case are same/similar to the issues as were involved in the case of M/s. Pinnacle Project and Infrastructure Pvt. Ltd. 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 Page 18 of 21 Downloaded on : Sat Feb 13 19:35:49 IST 2021 C/TAXAP/1817/2006 ORDER 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 incurred by the respondent assessee. It was further submitted that the interest payment made by the respondent assessee is also in contravention to the provisions of section 77 of the Companies Act, 1956 and hence the modus of utilising the borrowed funds from the group companies from purchasing shares of group companies was fraudulent, sham and thereby illegal.
8. It was submitted that the modus adopted by the respondent assessee is a clourable device as per the principles laid down by the Apex Court in case of McDowell & Co. Ltd. v. CTO reported in 154 ITR 148(SC). Learned Standing Counsel Ms. Bhatt invited the attention of the Court to the fact that as against total loss of Rs.2,78,87,604/ claimed by the respondent assessee, loss of Rs.2,64,49,312/, pertains to interest paid to the group companies.
9. It was also submitted that the modus of the respondent assessee is to borrow the funds of the group companies and invest in share of the group companies and thereafter claiming the interest paid on the borrowed fund is only with a view to evade the tax and, therefore, the Assessing Officer has rightly disallowed the interest expenditure of the respondent assessee.
10. Though served, no one appears for the respondent Page 19 of 21 Downloaded on : Sat Feb 13 19:35:49 IST 2021 C/TAXAP/1817/2006 ORDER assessee.
11. Having heard the learned Standing Counsel for the Revenue and having considered the findings arrived at by the CIT(Appeals) as well as the Tribunal, it appears that the funds borrowed by the respondent assessee were utilised for the purpose of its business. It is also found by both the authorities below that the transactions entered into by the assessee were the transactions entered by it in the normal course of business and it is not the case of the Revenue that the funds borrowed by the assessee company on interest was utilised for any purpose other than its business. In other words, it is not the case of the Revenue that the assessee utilised interest bearing funds for the purpose other than its business. Therefore, in view of such concurrent findings of fact, interest expenditure claimed by the assessee has been rightly allowed under section 36(1)(iii) of the Act by the CIT(Appeals) as well as the Tribunal.
12. Insofar as contention raised on behalf of the Revenue that in view of section 77 of the Companies Act, 1956, the assessee could not have invested in the shares of the group companies by utilising the borrowed funds, it would be necessary to refer to section 77 of the Companies Act which provides for restrictions on purchase by company or loans by company for purchase of its own or is holding company's shares. Subsection(1) of section 77 is not applicable to the facts of the case as the assessee has not bought its own shares and subsection(2) prohibits public company or private company which are subsidiaries giving Page 20 of 21 Downloaded on : Sat Feb 13 19:35:49 IST 2021 C/TAXAP/1817/2006 ORDER financial assistance for purchasing the shares. In the facts of the case, the assessee has not given any financial assistance to any person for purchase of its shares. Hence, section 77 cannot be made applicable in facts of the case because contravention, if any, may be in hands of the company who advanced money to the assessee company on interest.
13. In view of the above discussion, there is no infirmity in the impugned orders passed by both the authorities below as there is concurrent findings of fact so as to allow the interest expenditure claimed by the respondent assessee, as utilising the borrowed funds of the group companies for purchase of the shares of the groups companies are not fraudulent, sham and thereby not illegal.
14. In the result, both the substantial questions of law are answered in the affirmative i.e. in favour of the assessee and against the Revenue.
15. Appeal is accordingly dismissed. No order as to costs.
(J. B. PARDIWALA, J) (BHARGAV D. KARIA, J) RAGHUNATH R NAIR Page 21 of 21 Downloaded on : Sat Feb 13 19:35:49 IST 2021