Punjab & Haryana H.C : the Tribunal was right in law in allowing interest as claimed by the assessee at a higher rate on borrowings to the nominal fixed expected return on investments made in purchase of shares out of such borrowings from family concerns

High Court Of Punjab & Haryana

CIT vs. Pankaj Munjal Family Trust

Section 57(iii)

Asst. Year 1983-84, 1984-85, 1986-87, 1987-88, 1988-89

Satish Kumar Mittal & Rakesh Kumar Garg, JJ.

IT Ref. Nos. 87 to 91 of 1995

9th July, 2008

Counsel appeared :

K.K. Mehta, for the CIT : Aman Bansal, for the Assessee

JUDGMENT

Satish Kumar Mittal, J. :

This order shall dispose of IT Ref. Nos. 87 to 91 of 1995 in which a common substantial question of law has been referred.

2. On the direction of this Court given in IT Case Nos. 149 and 150 of 1992 and 22, 23 and 166 of 1993 dt. 23rd Nov., 1994, the Income-tax Appellate Tribunal, Chandigarh Bench, Chandigarh (hereinafter referred to as “the Tribunal”) has referred the following substantial question of law in the case of the assessee pertaining to the asst. yrs. 1983-84, 1984-85, 1986-87, 1987-88 and 1988-89 for the opinion of this Court :

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in allowing interest as claimed by the assessee at a higher rate on borrowings to the nominal fixed expected return on investments made in purchase of shares out of such borrowings from family concerns ?”

3. The assessee in this case is a family trust. For the asst. yr. 1983-84, the AO framed assessment under s. 143(3) of the IT Act, 1961 (hereinafter referred to as “the Act”) on 24th Dec.,1985 accepting the income returned by the assessee. The CIT(Central), Ludhiana, exercising the power under s. 263 of the Act called for the record and noticed that the assessee had taken a loan of Rs. 1,75,000 at 16 per cent, from family concerns which was utilized by it for the purchase of 4 per cent, non-cumulative preference shares. The assessee had claimed a deduction for Rs. 29,277 towards the interest amount from its income for the asst. yr. 1983-84 which was allowed by the AO. The CIT(Central), Ludhiana, while considering the said assessment order as prejudicial and erroneous to the interests of the Revenue, issued show-cause notice to the assessee for setting aside the order off the AO. After hearing the assessee, the CIT(Central), Ludhiana, vide his order dt. 29th March, 1988, held that the ITO while framing the assessment did not apply her mind to the reasonableness or otherwise of the interest claimed by the assessee in respect of the borrowings made from the family concerns at a higher rate of interest and investment of such borrowings in shares of closely related companies at a fixed nominal return for times to come. Accordingly, the CIT(Central), Ludhiana, modified the order of assessment and directed the AO to restrict the allowance of interest on the borrowings to the extent of the expected return on the investment made out of such borrowings and disallowed the balance interest as claimed by the assessee.

4. Similarly, for the asst. yr. 1984-85, the return of income was filed on 30th June, 1984, declaring a net loss of Rs. 16,783. The assessment was framed by the AO on 27th Feb., 1987, accepting the loss of Rs. 16,783. In this year also, the CIT(Central), Ludhiana, took action under s. 263 of the Act and issued similar directions, vide its order dt. 29th March, 1988, as issued for asst. yr. 198384.

5. The assessee challenged the order of the CIT(Central), Ludhiana, before the Tribunal. The Tribunal, vide its consolidated order dt. 9th Aug., 1991, cancelled the orders of the CIT (Central), Ludhiana, while holding as under “It is now well settled that it is not for the Revenue to (sic) a businessman how to conduct his business. The AO when he made the impugned assessments went through the process of law established as per statute and for each of the assessment years under appeal made order under s. 143(3) of the Act. He had pointedly applied his mind and allowed the payment of interest as claimed by the assessee after his judicial satisfaction. It is now settled by the judgment of the Supreme Court in the case of Jain Brothers that officers who are enjoined upon to perform the statutory duties would do so in a bona fide manner unless evidencie is there to show to the contrary. In this case, there is no evidence to the contrary and the CIT has proceeded on the assumption that the AO merely accepted the claim. This type of interference in the assessment orders made after due consideration under s. 143(3) does not fall within the ambit of s. 263 of the Act. The impugned orders of the CIT are, therefore, without justification. They are cancelled as such.”

6. For these two assessment years, the Tribunal, on the directions of this Court, has referred the aforesaid substantial question of law for the opinion of this Court.

7. For the asst. yr. 1986-87, the assessee had claimed an interest of Rs. 29,277 as having been paid to M/s Brij Mohan Lal Om Parkash on loan of Rs. 1,75,000 at 16 per cent, for the purchase of 4 per cent, non-cumulative preference shares. The AO while passing the assessment order restricted the allowance of interest to 4 per cent, on the initial amount borrowed which was worked out to Rs. 7,000. The balance of Rs. 22,277 was disallowed. Similarly, for the asst. yr. 1987-88, the interest of Rs. 34,080 was restricted to Rs. 7,000 and an addition of Rs. 27,080 was made. For the asst. yr. 1988-89, the AO restricted the interest of Rs. 35,775 to Rs. 7,000 thereby resulting in an addition of Rs. 28,775 on the same analogy.

8. Feeling aggrieved against those orders, the assessee filed appeals. The Dy. CIT(A), Ludhiana, vide its consolidated order dt. 11th July, 1991, dismissed the appeals of the assessee and affirmed the orders of the AO. Feeling aggrieved against the said order, the assessee filed appeals before the Tribunal, who, vide order dt. 12th Feb., 1992, by following its own decision in the case of the assessee pertaining to the asst. yr. 1985-86 allowed the appeals of the assessee on the same reasoning. With regard to these assessment years also, on the directions of this Court, the Tribunal has referred the aforesaid substantial question of law for the opinion of this Court.

9. The sole question for consideration before this Court is whether the Tribunal was right in law in allowing interest as claimed by the assessee at a higher rate on borrowings to the nominal fixed expected return on investments made in purchase of shares out of such borrowings from family concerns.

10. Counsel for the Revenue submitted that while passing the impugned order, the Tribunal has not applied its mind as to the reasonableness or otherwise to the interest claimed by the assessee in respect of the borrowings made from the family concerns/close relations at a higher rate of interest and investment of such borrowings in shares of closely related companies at a fixed nominal return for all times to come. Learned counsel submitted that in fact the assessee has adopted a colourable device to reduce its tax liability which is not permissible under the law. In support of his contention, learned counsel for the Revenue relied upon the following observations of the Supreme Court made in McDowell & Co. Ltd. vs. CTO (1985) 47 CTR (SC) 126 : (1985) 154 ITR 148 (SC) (headnote) : “Tax planning may be legitimate provided it is within the frame-work of 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.”

11. On the other hand, learned counsel for the assessee submitted that the assessee had taken a business decision while borrowing the amount on interest at 16 per cent, and investing the same in purchase of preference shares of the company where it had equity shares. The said investment was made with a view to nourish the equity capital which has the effect of increase in the market value of original investment in equity shares. Learned counsel further submitted that the assessee has not adopted any dubious method to evade the payment of tax. He also submitted that it was not the case of the Department that the assessee has not actually paid the interest at the aforesaid rate to the lender. When actual payment of interest at a particular rate was made to the lender, then if the assessee had taken the loan at that rate, in that eventuality, such loan transaction cannot be said to be a colourable device to evade payment of tax. Therefore, the learned counsel submitted that there is no illegality in the impugned order passed by the Tribunal and no substantial question of law is arising out of the said order.

12. After hearing the learned counsel for the parties and going through the impugned order, we do not find any force in the contention raised by the learned counsel for the Revenue; and, in our opinion, no substantial question of law is arising from the impugned order passed by the Tribunal. In the present case, undisputedly, the assessee has borrowed certain amount from the family concerns at 16 per cent. It is also not the case of the Revenue that the assessee has not paid the interest at the said rate to the lender. Merely because the assessee has invested the said borrowed amount for the purchase of 4 per cent, non-cumulative preference shares, it cannot be presumed that the said transaction was colourable because no person with ordinary prudence will borrow money at 16 per cent, and invest the same for the purpose of non-cumulative preference shares. It is the wisdom of the assessee to take a business decision. If a wrong or unwise decision has been taken by the assessee, it cannot be said that the decision is dubious, or the assessee in such transaction has adopted dubious method to evade the payment of tax. In the instant case, there is no evidence of any dubious method or practice adopted by the assessee. Tax planning is a legitimate right of the assessee. In the present case, the assessee has not adopted any colourable device or dubious method while borrowing certain amount at a higher rate of interest. The Revenue has also not brought on record any evidence to show that the interest paid by the assessee on the aforesaid borrowed amount was highly exorbitant and no such rate of interest was ever prevalent in the market. Therefore, in our opinion, the Tribunal is right in law in allowing interest as claimed by the assessee.

13. In view of the above, we decide the question referred in the affirmative, i.e., in favour of the assessee and against the Revenue.

[Citation : 326 ITR 286]