Income Tax Appellate Tribunal - Ahmedabad
Parikh Enterprises Pvt. Ltd. vs Assistant Commissioner Of Income Tax. ... on 17 November, 1995
Equivalent citations: (1996)56TTJ(AHD)529
ORDER
B. M. KOTHARI, A.M. :
These cross-appeals by the Revenue as well as by the assessee are directed against an order passed by the CIT(A) on 11th Jan., 1991, for asst. yr. 1986-87 and involve consideration of common points. Hence, these are being disposed of by this common order.
2. The facts relating to the common ground raised in Revenues appeal as well as assessees appeal relate to a disallowance made out of interest expenditure by the Assessing Officer (AO).
3. The facts relating to the aforesaid common ground has been mentioned by the AO in para 2(i) of the assessment order which are reproduced hereunder :
"On going through the balance sheet of the company, it has been seen that the assessee has shown unsecured new loans to the tune of Rs. 41,23,999 from a member of the company. On further scrutiny of the details submitted by the assessee it has been found that the member from whom the loan has been taken is AP Industries Investment P. Ltd., which is a company under the same management and is also a shareholder of the assessee-company. Examination of the printed copy of the balance sheet shows that the assessee has made investment in two of its subsidiary companies to the extent shown as below :
1.
Virarch Holding Pvt. Ltd.
Rs. 20,00,800
2. Vikrant Holding Pvt. Ltd.
Rs. 20,00,800 Rs. 40,01,600 The investment made by the assessee-company in the above-mentioned two subsidiaries is in respect of the purchase of shares as indicated below :
Investment in Virarch Holding Co.
8 equity shares of Rs. 100 each Rs. 800 20,000 4% redeemable non-cumulative preference shares of Rs. 100 each fully paid-up Rs. 20,00,000 Rs. 20,00,800 Investment in Vikrant Holding P. Ltd.
8 equity shares of Rs. 100 each Rs. 800 20,000 4% redeemable non-cumulative preference shares of Rs. 100 each fully paid-up Rs. 20,00,000 Rs. 20,00,800 On going through the balance sheet of the above-mentioned two subsidiaries, it has been seen that each of the said two subsidiaries has advanced an amount of Rs. 20,00,000 to A. P. Industries Investment Pvt. Ltd. who is one of the shareholders of the assessee-company and comes under the same management in which the assessee-company comes. The amount of Rs. 40,00,000 received by the A. P. Industry Investment Pvt. Ltd. from the aforesaid two subsidiaries has further been advanced to the assessee (sic) has claimed interest of Rs. 81,213 as payable to A. P. Industry Investment Pvt. Ltd."
4. The AO further observed that the assessees own funds was only Rs. 25,79,564. The amount of secured loan taken from bank was Rs. 47,29,921. The unsecured loan aggregating to Rs. 47,60,987 included the loan of Rs. 40 lakhs received from M/s A. P. Industry Investment Pvt. Ltd. who in turn had received a sum of Rs. 20 lakhs each from the aforesaid two subsidiaries of the assessee-company as has been discussed above. The AO after taking into consideration the explanations submitted on behalf of the assessee came to the conclusion that the investment made by the assessee-company in the above-mentioned two subsidiary companies cannot be said to have been made for earning any income, but the same has been utilised as a ruse to reduce the tax liability by way of claiming interest on the amounts borrowed by the assessee-company from its creditors including the bank and were received back through the media of the subsidiaries and the A. P. Industry Investment Pvt. Ltd. to whom interest is claimed to be payable. This, according to the AO, was a dubious planning which comes within the ambit of the ratio of the judgment of Supreme Court in the case of McDowell & Co. Ltd. vs. CTO (1985) 154 ITR 148 (SC). He, therefore, disallowed interest at the rate of 18% on Rs. 40 lakhs and thereby disallowed a sum of Rs. 7,20,000 out of interest expenditure.
5. The CIT(A) observed that interest payable to SBI was not in any manner affected by this transaction and, therefore, there is no question of any disallowance of any interest paid to the SBI. But the interest paid to A. P. Industry Investment Pvt. Ltd. is a result of this colourable device and the same cannot be held to be a genuine business outgoing. He, therefore, held that the interest paid to A. P. Industries Investment Co. Ltd. amounting to Rs. 81,906 should be disallowed. He, thus, restricted the disallowance out of interest to the extent of Rs. 81,906 out of the total disallowance of Rs. 7,20,000 made by the AO.
6. The assessee is aggrieved by the confirmation of disallowance to the extent of Rs. 81,906 and the Revenue is aggrieved by the relief granted by the CIT(A) by restricting it to Rs. 81,906 out of the total disallowance of Rs. 7,20,000.
7. The learned counsel for the assessee submitted that the AO has grossly erred in disallowing Rs. 7,20,000 by presuming that the funds borrowed from the bank have been diverted for investment in the two subsidiary companies for acquiring preference shares of those companies. The amount invested in the two subsidiary companies for purchase of preference shares directly came from the loan of Rs. 40 lakhs received from A. P. Industries Investment Pvt. Ltd. To corroborate the contention, he invited our attention towards the copy of bank statement, the extracts of which has been reproduced at page 5 of the order of the CIT(A). The said entries in the bank statement reveals that there is a credit entry of Rs. 40 lakhs on 28th April, 1984, and on the same date there are two debit entries of Rs. 20 lakhs each. This shows that there was a direct nexus between the said sum of Rs. 40 lakhs borrowed from M/s A. P. Industries Investment Co. Ltd. with the investment made by the assessee-company for purchase of redeemable non-cumulative preference shares of Rs. 20 lakhs each in the aforesaid two subsidiary companies. In view of these facts, disallowance out of interest paid to bank or disallowance made at the rate of 18% (sic - on) Rs. 40 lakhs which comes to Rs. 7,20,000 made by the AO is fully unjustified.
8. The learned counsel for the assessee thereafter submitted that the disallowance of interest of Rs. 81,096 payable to M/s A. P. Industries Investment Pvt. Ltd. at the rate of 4% per annum which comes to Rs. 81,096 is clearly allowable as the said amount was utilised for investment in the two subsidiary companies for acquiring redeemable preference shares as stated before. The investment in the subsidiary companies for purchase of preference shares was made in view of commercial expediency and such a transaction cannot be treated as a colourable device made with a view to avoid tax liability. The learned counsel submitted that there was no motive or avoidance of tax liability as the assessee had furnished a return declaring loss of Rs. 4,24,492. M/s A. P. Industries Investment Co. P. Ltd. (for short APL) had also declared a loss of Rs. 271 for asst. yr. 1986-87 which was accepted by the AO vide assessment order dt. 26th Aug., 1986. The two subsidiary companies namely, M/s Vikrant Holdings P. Ltd. and M/s Virarch Holdings P. Ltd. both had declared loss of Rs. 631 and 766 for asst. yr. 1986-87 which were also accepted by the respective AOs holding jurisdiction over those companies. All these facts clearly prove total absence of any motive of tax avoidance in the above-referred transactions. He placed reliance on judgments reported in Shree Digvijay Cement Co. Ltd. vs. CIT (1982) 138 ITR 45 (Guj), CIT vs. Vadilal Lalubhai (1972) 86 ITR 2 (SC), CIT vs. Rajendra Prasad Moody (1978) 115 ITR 519 (SC) and Addl. CIT vs. Laxmi Agents P. Ltd. (1980) 125 ITR 227 (Guj) to support his contention that the CIT(A) ought to have deleted the entire amount of disallowance made out of interest expenditure including the interest of Rs. 81,096 payable to M/s APL.
8.1. The learned Departmental Representative submitted that the aforesaid transaction of investment of Rs. 20 lakhs each made in the two subsidiary companies, who in turn have given a loan of Rs. 40 lakhs to APL and M/s APL then had given a loan of Rs. 40 lakhs is a scheme which was designed with the sole motive of avoidance of tax liability. The principles of law laid down by the Honble Supreme Court in the case of McDowell are clearly applicable. The CIT(A) ought to have confirmed the entire disallowance of Rs. 7,20,000 made by the AO out of interest expenditure. He submitted that the assessee made investments of Rs. 20 lakhs each in the two subsidiary companies for acquiring redeemable non-cumulative preference shares which did not produce any income to the assessee in the years under consideration. Those two subsidiary companies in turn have given loan of Rs. 20 lakhs each to M/s APL on interest at the rate of 3%. The income of Rs. 60,000 generated by these two companies was washed away by way of salaries including salary of Rs. 48,000 debited in the accounts of these two subsidiary companies as payable to its Managing Director, Director who are relatives of the Directors and the assessee-company. The same amount which belongs to the assessee was routed through these two subsidiaries and M/s APL and the amount came back to the assessee in the form of a borrowing from M/s APL on which interest was paid at the rate of 4%. Such interest is apparently not allowable expenditure. He also submitted that the assessee has taken loan from bank on which interest at 18% or so has been paid and the AO was, therefore, justified in disallowing interest at the rate of 18% per annum on total amount of Rs. 40 lakhs. He relied upon the elaborate reasons mentioned in the assessment order. The learned Departmental Representative further submitted that the motive of tax avoidance cannot be judged in the light of loss declared in the year under consideration, but even if the assessee is able to get the carry forward of losses, it would result in loss to the Revenue and tax advantage to the assessee for all the future years to come. He, therefore, strongly urged that the order of the CIT(A) should be set aside and the disallowance of Rs. 7,20,000 made by the AO should be confirmed.
9. We have carefully considered the submissions made by the learned representative of the parties and have also gone through the orders of the learned Departmental Representative. We have also perused the various documents submitted in the compilation to which our attention was drawn during the course of hearing.
9.1. It will be worthwhile to reproduce the entries appearing in the bank statement of the assessees bank account which has been reproduced in the order of the CIT(A) at page 5 :
"Date Particulars Withdrawals Deposits Dr./Cr.
Balance 27.4.84 To D/s.
35.00 To 933 89,500.00 Dr. 10,72,561.98 28.4.84 To Cly. 922 353.50 10,92,670.92 To Int.
19,755.24 Dr. Dr. Fr.
40,00,000 To Cl. 940 20,00,000.00 941 20,00,000.00 Dr. 10,92,670.92"
The aforesaid bank statement clearly reveals that the investment made in the two subsidiary companies had a direct nexus with the loan of Rs. 40 lakhs received from APL. It is, therefore, clear that the loan borrowed by the assessee from the bank has nothing to do with the investment of Rs. 20 lakhs made in each of the two subsidiary companies. It has a direct nexus with the sum of Rs. 40 lakhs received from M/s APL on interest at the rate of 4% per annum.
9.2. The Dy. CIT(A) submitted a report to the CIT(A) vide letter dt. 5th Dec., 1990, during the course of hearing of the appeal for asst. yr. 1986-87. It has been admitted by the AO before the CIT(A) that with regard to the quantum of interest, the AO has calculated the same at the rate of 18% on Rs. 40 lakhs which does not appear to be correct. He, therefore, submitted before the CIT(A) that at the most interest disallowable will come to Rs. 81,096.
9.3. In view of the aforesaid facts and in view of the concession made by the AO, before the CIT(A) the ground raised by the Revenue in its appeal has no merit and, therefore, the same deserves to be rejected.
10. Coming to the ground raised by the assessee in its appeal in relation to this point, we find that the transaction made by the assessee-company by way of investment in the two subsidiary companies for acquiring redeemable preference shares of Rs. 20 lakhs each is an independent transaction. The loan transaction made between the two subsidiary companies with M/s APL by which both those companies advanced loan of Rs. 20 lakhs each on interest is a separate and independent transaction. The genuineness of that transaction by which the two subsidiary companies derived interest from M/s APL at the rate of 3% per annum has been accepted as a genuine transaction and such income by way of interest from M/s APL after deducting the expenses has been accepted in their respective assessments. It is true that their assessments have been completed under s. 143(1), but even after recording of such findings in the case of the appellant, the Department did not make any efforts to revise the order in the cases of the two subsidiaries companies either under s. 263 or under s. 147. Those orders have become final. Similarly, the assessment in the case of M/s APL in which the interest income received by M/s APL from the assessee-company and the interest paid by M/s APL to these two subsidiary companies have been accepted as genuine. The assessment of M/s APL has also not been reopened or revised under s. 147 or under s. 263. It is thus clear that the transaction of loan given by the subsidiary companies to M/s APL has been accepted as genuine in the income-tax proceedings in cases of the two subsidiary companies and in the case of M/s APL. The interest income received by M/s APL from the assessee-company has been taxed as income in the hands of M/s APL and all those orders have been allowed to achieve finality by the Department in those cases. It cannot, therefore, be said that the transactions made between the assessee and the two subsidiary companies and the further transaction made between the two subsidiary companies and APL and further transaction made between APL and the assessee are non-genuine transactions. Every case of reduction in tax liability cannot be termed as a transaction made with the sole motive of avoidance of tax. If by entering into a transaction, the income of an assessee in truth diminishes, it would not be a case of avoidance of tax unless it is established that the assessee in fact is the real owner of that income which is ostensibly shown as income of other persons, but it is available for use and enjoyment by the assessee. The assessee cannot withdraw the amount from the two subsidiary companies which was invested for purchase of redeemable non-cumulative preference shares. Those can be realised only in accordance with the terms of redemption of such preference shares. The fact that the investment of Rs. 20 lakhs each made by the assessee in the two subsidiary companies did not produce any income is also of no consequence or that by itself cannot justify disallowance of interest on funds borrowed from APL for investment made in the two subsidiary companies. Such a principle of law has been laid down by the Honble Supreme Court in the case of CIT vs. Rajendra Prasad Mody (supra). The Honble Supreme Court in the aforesaid judgment has clearly held that where the assessee borrowed monies for the purpose of making investment in certain shares and paid interest thereon during the accounting period relevant to the assessment year but did not receive any dividend on the shares purchased with those monies, interests on monies borrowed for investment in shares which had not yielded any dividend was admissible as a deduction under s. 57(iii) of IT Act, 1961, in computing its total income under the head income from other sources. The same principle would apply even if the investment is regarded as a business investment and the income therefrom is held to be assessable as income from business. After considering the submissions made by the learned representative of the parties and after going through the various judgments relied upon by the learned counsel for the assessee, we are of the considered opinion that the assessee is also entitled to grant of deduction of Rs. 81,096 being the amount of interest payable to M/s APL.
10.1. In view of the aforesaid discussion, we are of the considered opinion that the entire disallowance of Rs. 7,20,000 made by the AO was not justified and valid. We direct the AO to delete the entire amount of disallowance made out of interest expenditure.
11. The second ground of assessees appeal relates to finding given by the CIT(A) denying the assessees claim for grant of 100% depreciation on deferred interest balance of Rs. 1,30,500 (Rs. 1,78,800 less Rs. 48,300 current year).
11.1. The learned counsel for the assessee was fair enough to admit that in view of Expln. 8 to s. 43(1), this ground will have to be decided against the assessee. The grounds so raised by the assessee is, therefore, rejected in view of the clear provision contained in Expln. 8 to s. 43(1).
12. The third ground of assessees appeal relates to disallowance of Rs. 6,000 incurred by way of capital issue expenses which was regarded by the AO and the CIT(A) as capital expenditure.
12.1. This ground by the assessee also has no merit as issue expenses for raising the capital has been held to be capital expenditure. The learned counsel for the assessee rightly did not contest this point before us. The same is, therefore, rejected.
13. In ground No. 4, the assessee has challenged the finding given by the CIT(A) with regard to interest levied under s. 217.
13.1. The learned counsel for the assessee submitted that the whole issue relating to interest under s. 217 would be purely academic if the Revenues appeal is dismissed by the Tribunal. Since we have dismissed the ground raised by the Revenue in its appeal there will be ultimately a figure of assessed loss which will not attract the provisions of s. 217. The AO is, therefore, directed to grant consequential relief.
14. We will now come to the remaining grounds raised in Revenues appeal. In ground No. 1(ii), the Revenue has challenged the deletion of disallowance of Rs. 45,127 made by the CIT(A) in respect of bonus paid in excess of minimum payable under the Bonus Act.
14.1. The CIT(A) after taking into consideration the submissions made on behalf of the assessee and the decisions referred to in para 4 of the order passed by him observed that the assessee has been paying bonus at the rate of 20% right from asst. yr. 1980-81. Most of the assessments have been made under s. 143(1) but some assessments have been made under s. 143(3) as in asst. yrs. 1981-82 and 1984-85 wherein such bonus has been allowed by the Department. The CIT(A) further observed that the bonus which is not covered by the Bonus Act may not be admissible under the first proviso to s. 36(1)(ii) but the same can still be allowed under the second proviso provided the bonus payment is reasonable with reference to the pay of employees and the conditions of the service, the profit of the business and the general practice in similar business or profession. The CIT(A) also placed reliance on judgment of Kerala High Court in the case of CIT vs. P. Ali Kunju M. A. Nazir Cashew Industries (1987) 166 ITR 611 (Ker).
In view of the aforesaid discussions and the judgment, the CIT(A) directed the AO to allow the claim of bonus after ensuring that the three conditions laid down by the Honble Kerala High Court are satisfied in the case of the appellant.
14.2. We do not find any infirmity in such a view taken by the learned CIT(A). The order passed by him is perfectly valid and is justified. He has merely restored back the issue to the AO and directed him to allow the deduction only if the three conditions laid down in the second proviso to s. 36(1)(ii) are fulfilled in the case of the assessee. Such a view taken by the CIT(A) is perfectly valid and requires no interference.
15. In the result, Revenues appeal is dismissed and the assessees appeal is partly allowed.