DECIDED BY: HIGH COURT OF ALLAHABAD, IN THE CASE OF: CIT Vs. Swapna Roy APPEAL NO: ITA No. 9 of 2005, DECIDED ON May 24, 2010
_______JUDGEMENT_______
1. Appeal under Section 260-A of the Income Tax Act was admitted on 14.2.2005. The Court has not framed substantial question of law itself while admitting the appeal keeping in view the question of law framed by the appellant enumerated in the memo of appeal. After hearing learned counsel for the parties on 18.3.2010, the following substantial question of law was framed by the Court:
1. Whether the first appellate court and the tribunal had committed substantial illegality by deleting the addition with regard to interest on the loan taken from a company of Sahara Group without recording any finding with regard to dominant purpose for which the loan was taken keeping in mandate of class-III of Section 57 of the Income Tax Act?
2. Keeping in view the fact that the controversy with regard to assessment year 1994-95 and subsequent year 1997- 98 has been settled upto appellate stage and question involve in the present assessment year is the same as of those years now it is not open for this court to enter into illegality committed by the appellate authority or tribunal and appeal is not maintainable ?
2. The dispute relates to assessment year 1996-97. The assessee filed her return of income on 13.8.1996 disclosing net loss of Rs.17,38,311/-. Notice under Section 143(2) of the Income Tax Act, 1961, in short, Act was issued on 8.10.1996. Notice under Section 142(1) of the Act was issued on 31.10.1996. These notices were served upon the respondent assessee on 10.10.1996 and 11.10.1996 respectively.
3. After service of notice aforesaid, the assessee filed a revised return on 31.3.1998 reducing the loss to the tune of Rs.30,56,670/- In consequence thereof, notice under Section 143(1)(a) was sent for service on 23.9.1998, followed by a notice dated 26.9.1996 under Section 142(1) of the Act which was served on the assessee on 30.10.1998.
4. The respondent assessee claims to be employee of M/s Sahara India, a firm of which the assessee is working as Head of Department of personnel affairs. In form 16, the gross salary of the assessee has been disclosed as Rs.1,57,250/- per month.
5. The assessee has also shown herself as partner in M/s. Chhavi Advertising and M/s. Sahara India Marketing. The assessee claimed loss under the head of other sources being interest accrued on loan taken for the purpose of investments in share capital of companies belonging to the group of income accrued during the year. Though the assessee has claimed unabsorbed brought forward losses for earlier year but the amount has not been specified in the return. The assessment immediately preceding year of 1995-96 was completed on a positive income by the time the assessing officer was considering the income and loss return of the assessee for the year 1996-97.
6. The income drawn by the assessee as salary is from Sahara India Limited where Shri Subroto Roy (husband) is one of the partners with 63% share. Keeping in view the relationship of the assessee with her husband having 63% interest, the assessing officer observed that in view of the provisions contained in Section 64(i)(ii), the income of the assessee is liable to be clubbed in the hands of her husband Shri Subroto Roy. The assessing officer has noted that the assessee does not possess any technical or professional qualification required for appointment as Head of Department in the firm M/s. Sahara India Limited. However, the assessing officer keeping in view the fact that the respondent assessee has filed separate return of income, it was considered on a protective basis in her assessment without any prejudice to treatment in view of Section 64(i)(ii) of the Act.
7. The assessing officer has considered the question with regard to foreign tour of the assessee to Hongkong, Singapur, United Kingdom, France, Switzerland and disallowed the claim on the ground that the assessee has not adduced any evidence in support of her contention that the foreign travels were undertaken for the purpose of business of her employer. The assessing officer has considered the assessee’s income from other sources from Radio, doordarshan and GFDA Scheme which is Rs.2,060/- and Rs.20,000/- respectively.
8. However, the controversy involved in the present appeal relates to disallowing the interest claimed on the loan taken from Sahara India Mutual Benefit Co. Limited (in short, SIMBCL).
The assessee has taken the following loan from SIMBCL:
01.4.95 Opening balance 20,712,923.47
09.08.95 Amount Paid 1,150,000.00
04.12.95 Amount Paid 3,520,000.00
09.12.95 Amount Paid 499,000.00
22.12.95 Amount Paid 20,000,000.00
31.03.96 Interest 8,446,885.00
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54,328,808.47
The assessee invested the amount received aforesaid as under:
09.08.95 11,50,000 Investment in Chhabi Advertising (Firm)
04.12.95 35,20,000 Investment in Sahara India Marketing (Firm) 09.12.95 4,99,000 Investment in Shares of Sahara India Electrical Limited
22.12.95 1,00,00,000Investment in shares of Sahara India Housing Limited
23.12.95 1,00,00,000 Investment in share of Sahara India International Corpn. Ltd.
9. Before the assessing officer, the assessee claimed interest on the aforesaid loan pertaining to respective year. The assessing officer has observed that the figure for the claim of loan substantially vary between original return filed and the revised return which according to the assessing officer is as under :
1. Claim as per original return 71,80,561/-
2. Claim as per revised return 31,98,921/-
3. Claim as per statement filed on 18.2.99 21,30,827/-
4. Figure as per statement reproduced above 84,46,885/-
5. Figure as per letter dated 18.2.99 81,08,386/-
10. The assessing officer noted that in similar way, the loan was taken by all the assessee belonging to Sahara Group namely shri Subroto Roy Sahara, Smt. Swapna Roy, Shri J.B. Roy, Shri O.P. Srivastava, Shri Istiaque Ahmad, Shri Sanjay Bahadur Mishra, Shri U.K. Bose and all of them claimed deduction of interest accrued on the loan under Section 57(iii) of the Act.
11. It has been noted by the assessing officer that the loan amount was advanced from time to time without any collateral security and only on the basis of personal security. The loan advanced to assessee without any collateral security by the companies of the Sahara Group has been taken as unusual act on the part of the companies by the assessing officer.
12. It has been noted by the assessing officer that the assessee is substantial share holder of companies and partnership firms belonging to Sahara India Groups (supra), hence occupies a privileged position vis-à-vis other ordinary persons who have approached M/s. Sahara India Mutual Benefit Co. Limited for loan. It has been further noted by the assessing officer that the Directors who hold substantial interest in M/s. SIMBCL are Ashok Roy Chaudhary, brother in law of Shri Subroto Roy Sahara, the Managing worker of the whole group and Smt. Vandana Bhargava.
13. The assessing officer observed that since the assessee does not hold shares having 10% voting power or more as stipulated in Section 2(22)(e) of the Act, the provision of deemed dividend are not directly attracted. The assessing officer observed that the whole transaction has been made to circumvent the provision of law/statutory provision and the loan was obtained by the assessee by virtue of her privileged beneficial position in the group. While narrating the factual position, the assessing officer observed that there is no stipulation in the sanction letter for the loan with regard to manner in which the principal or interest accrued thereon are to be repaid. Virtually, in absence of any terms and conditions entered into between parties or imposed by the company of the firm, the repayment of loan has been left at the sweet will of loanee, i.e. the assessee Smt. Swapna Roy. There appears to be no specific pinpointed stipulation in the terms and conditions of the loan requiring to pay the same in specified period. The sanction letter obtained in the case of Ishtiaq Ahmad , one of the recipients of such loan vaguely mentions that the loan shall be repayable in five years. Apart from above, it has been noted by the assessing officer that the total amount of debt of assessee at the face value much exceeds the value of assets. If the amount of interest accrued on the loan is included in the amount of debt, the total liability to repay the interest is not supported by any commensurate asset or income.
14. The assessing officer has noted that the companies in whose shares the loan has been invested are the companies belonging to the Sahara Group and they have never declared any dividend nor there is any possibility of their declaring any dividend in future. The assessing officer observed that many of the companies have already closed their activities and many like Sahara India Limited would have more liabilities than assets. The assessing officer remarked that the value of shares are not even worth the dust. It has also been noted by the assessing officer that the firm in which the loan money has been introduced and the capital are either closed or running in huge loss like Sahara India Mass Communication. The assessing officer observed that virtually, the loan amount has been adjusted against the loss accumulated over the years.
15. Keeping in view the conflicting figure claimed by the assessee at different stages of assessment proceeding while submitting revised return or revised statement, the assessing officer observed that the amount of interest varied by wide margins which shows the lack of knowledge on the part of assessee with regard to her real liability.
16. In spite of repeated demand raised by the assessing officer, the assessee failed to produce the share certificates, in respect of the shares held by them. The assessing officer noted that only few certificates were produced but not the original shares as in the case of Subroto Roy Sahara, J.B. Roy, O.P. Srivastava and Ishtiaq Ahmad. Before the assessing officer, the assessee failed to explain as to how they would repay the loan since the investments made out of the loan was productive and many of the companies have either closed or their business are running on hot water. It has been noted by the assessing officer that in most of the cases though the cheques for loan amount were issued earlier but were presented for payment at the bank at the end of financial year like 13th February, 1996 or in some cases in March, 1996.
17. Keeping in view the facts and circumstances of the case and over-all evidence on record, the assessing officer observed that the liability to pay interest is not real but artificial and hypothetical. There is neither intention nor any possibility to repay the loan or interest by assessee in future and likely to remain on paper for years to come. Assessing officer further observed that the companies in which the loan has been invested are not listed in the stock exchange and as such are not marketable and hence those are not likely to fetch any resale value and in near future, those companies are not likely to declare any dividend keeping in view past 20 years history of the group.
18. Keeping in view the fact that there is no possibility of income of any dividend in future and not even a penny has ever been earned by the assessee from the shares held in the past so far, the amount in question cannot be treated as expense towards interest on loan was allowed or expanded wholly and exclusively for the purpose of making or earning income for dividend in view of the provisions contained in Section 57(iii) of the Act. The assessing officer observed that the reference of making and earning income under Section 57(iii) of the Act should be construed as reference to real and feasible income. The assessing officer observed that the expenses incurred for the purpose of earning imaginary or hypothetical dividend in future is not substantiated by placing any material on record. Hence not allowable under Section 57(iii) of the Act. It has been observed that to attract Section 57(iii) of the Act, it is necessary that the possibility of income coming from investment. The possibility should be real and not hypothetical. The word, “expanded” wholly and exclusively for the purpose of making or earning such income used in Section 57(iii) should be construed in strict sense and not liberally to give a way to the assessee to abuse the provision.
19. It has also been observed by the assessing officer that the whole nature of loan transaction involved and the artificial interest liability created in order to set off the existing and future real income of the assessee and thereby to avoid the incidence of taxation, falls within the scope of mischief of activities. It has also been observed by the assessing officer that the income disclosed by the assessee in the return of income is the income from salary which is accounted for by the assessee on each basis and the deductions/rebates allowable on th same are also claimed on the same basis. In spite of lot transaction, the assessee has not maintained any book of accounts.
20. Accordingly, the assessing officer had declined to provide any deduction with regard to interest of Rs.31,98, 921/- under Section 57(iii) of the Act.
21. The finding recorded by the assessing officer dated 23.3.1999 under Section 143(iii) of the Act was the subject matter of appeal before the Commissioner, Appeal, Lucknow (CIT/Appeal). The first appellate authority had partly allowed the appeal and allowed their deduction under Section 57(iii) of the Act relying upon his earlier order dated 23.7.1998 for the assessment year 1995-96. While allowing the appeal, the C.I.T. Appeals with regard to foreign travel of assessee observed that the appellant is in a position to furnish necessary detail to prove that the expenditure with regard to foreign travel of Rs.2,18,820/- which was added to total income of the assessee could be expenditure and proved by the assessee. Hence the assessee should be given an opportunity to produce evidence and the matter was remitted for reconsideration by the assessing officer by providing fresh opportunity to prove that the foreign travels were undertaken for the employer’s business. With regard to disallowing the appellant’s claim of Rs.21,30,827/- in respect of interest paid on borrowed capital for the purpose of investment in share of companies, C.I.T. Appeals relied upon the earlier verdict of the year 1995-96 allowing such claim. The appellate authority has observed that only difference is the reliance placed by the assessing officer on the judgment of Madras High Court reported in 151 ITR 653 CIT versus Sujani Taxtile (P) Limited which does not apply. Disallowance of the appellant’s claim amounting to Rs.21,30,827/- in respect of interest paid on borrowed capital for the purposes of investment in the share of companies was set aside by the C.I.T. (Appeals) and allowed under Section 57(iii) of the Act.
22. The revenue as well as the assessee preferred an appeal before the tribunal. Before the tribunal, the revenue raised the plea that the C.I.T.(Appeals) was not justified in deleting addition of Rs.21,30,827/-. However, the tribunal also relying upon its order dated 12.3.2004 for assessment year 1994-95 had dismissed the appeal of revenue as well as the cross objections.
23. Feeling aggrieved, the revenue preferred the present appeal with submission that whole purpose of taking loans from a company of the Sahara Group and investing the same in the shares of the closely held companies of the same group was to create an artificial interest liability in the case of the assessee in order to set off the existing and future income of the assessee and thereby to avoid incidence of taxation through this colourable device. It has been stated that the assessee has only acted as a conduit in the aforesaid transfer of funds from one company of the group to other concerns of the same group.
There has been no dominant intention of earning any income from the said transactions and the real purpose was to avoid incidence of taxation. For the questions framed above, the learned counsel for the appellant has relied upon the case in Income Tax Appeal No.42 of 2003 Commissioner of Income Tax (Central) Kanpur versus Shri Deepak M. Kothari, Kanpur and the cases reported in (2006)13 SCC 252 State, CBI versus Sashi Balasubramanian and another, 154 ITR 148 (SC) McDowell and Co. Ltd. versus Commercial Tax Officer, 238 ITR 777 Commissioner of Income Tax versus Amritabeen R. Shah, 151 ITR 653 Commissioner of Income Tax versus Sujani Textiles (P.) limited, 131 ITR 659 Smt. Virmati Ramkrishna versus Commissioner of Income Tax, Gujarat-III, 115 ITR 519 SC Commissioner of Income Tax, West Bengal-III versus Rajendra Prasad Moody and 201 ITR 464 Sarabhai Sons (P.) Limited versus Commissioner of Income Tax.
24. On the other hand, learned counsel for the respondent has relied upon the judgment reported in (2001)10 SCC 231 Union of India and others versus Kaumudini Narayan Dalal and another, , (2002)1 SCC 605 Union of India versus Satish Panalal Shah, (2005)12 SCC 241 CCE, Meerut versus Eureka Forbes Limited, (2005)12 SCC 242 Collector of Central Excise & Customs versus P.M.P. Components Limited, (2005)12 SCC 419 Commissioner of Central Excise and Customs, Cochin I versus Alsthom T&D Transformers Limited, (2005)12 SCC 420 State of A.P. Versus Bhooratnam & Co., (2008)8 SCC 739 C.K. Gangadharan and another versus Commissioner of Income Tax, Cochin, judgment and order dated 3.2.2005 passed in WT Appeal No.4 of 1999 Commissioner of Wealth Tax versus Allied Finance (P) Limited, (2004)266 ITR 349 Director of Income Tax versus Lovely Bal Shiksha Parishad, (1992)193 ITR 321 Radhasoami Satsang versus Commissioner of Income Tax.
25. During the course of hearing, it was vehemently argued by the appellant’s counsel that since the quantum of tax involved in previous years was not substantial, hence the department has not filed appeal against the earlier assessment years’ proceeds.
26. For adjudication of the question framed, it is necessary to look into the return filed, assessments made and the financial status of the companies. The information supplied has not been disputed by the learned counsel for the respondents in the form of chart which is reproduced as under :
