Case Law Details
Tax authorities can determine true character of a transaction. Further, the tax authorities should evaluate a transaction from the point of view of prudent businessman
Recently, the High Court of Punjab and Haryana (the High Court) in the case of CIT Vs. Rock man Cycle Industries Private Limited [201 1-TIOL-88-HC-P&H-IT-LB] held that if the taxpayers used certain devices to conceal true nature of the transaction, it was the duty of the taxing authority to unravel the device and determine its true character.
Further, the tax authorities should look at the matter from the point of view of prudent businessman.
However, the High Court held that the legal effect of the transaction cannot be displaced by probing into the substance of the transaction.
Facts of the case
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In the given situation the A.O. should apply one more test what is the net profit percentage of the business carried on by the assessee. If it is more than 4% say 10%then A.O. can take the view that it is a colourable device.However if it is say 3% or loss then it could be considered as colourable device. From the assessee’s point of view investment in preference shares is not just for earning dividend income for a particular assessement year only. There can be some other commercial purpose say possibility of making inroads in the company. Secondly the department should not ignore the fact that the interest earned by the sister concern would be charged to tax it is not tax free. If it is colourable device the assessee would have opted for rate of interest less than 18 %.