THE issues before the Bench are - Whether AO has rightly
disallowed interest expenditure on loan observing that by making investment of
borrowed interest bearing funds for non productive purpose, assessee diverted
his income and adopted a colourable device to reduce tax liability; Whether the
rent-free accommodation provided to the assessee is perquisite even though the
assessee was doing official work from there and Whether when the company in
question is a company in which assessee has been controlling its affairs and
possessing a block of majority shares, loan given to assessee or the partnership
firm in which assessee is having controlling interest, is to be treated as
deemed dividend. And the assessee loses the battle.
A) Assessee claimed interest expenditure on loan for purchase of shares under the head income from other sources. AO noticed that assessee obtained loan from ‘SIMBCL’, and the loan amount was invested in purchase of shares of closely held companies of ‘S’ Group which were incurring heavy losses and there was no possibility to get dividend on share capital of these companies. AO opined that by making investment of "borrowed interest bearing funds" for non productive purpose, the assessee had diverted his income and had adopted a colorable device to reduce tax liability and made disallowance. CIT (A) as well as ITAT deleted the disallowance.
Revenue contended that ITAT wrongly confirmed deletion merely relying on the judgement of Apex Court in the case Rajinder Pd. Moodi where it was observed that interest on borrowed capital has to be allowed u/s 57(iii) even in cases where no income had accrued on investment, if the said expenses towards interest were incurred wholly and exclusively for the purpose of earning income from other sources without appreciating that the purpose of making or earning income from the said investments in shares was grossly lacking. In the case of assessee, there was no possibility of any income coming to the assessee. Both the appellate authorities failed to appreciate that transactions were entered into by the assessee with the companies/concerns of Sahara Group with the sole aim to avoid tax by employing dubious means and that such colourable devices cannot be a part of tax planning.
Assessee contended that the whole approach of the AO was incorrect as the AO had accepted that the loans taken by the assessee were invested and purchased in the share. Entire observations were based only on surmises and conjectures. Assessee took the loan from SIMBCL and claimed payment of interest to the said company. Such interest had been declared by the said company in its income. A person will not take investment in share just to throw away his money unless and until he has a hope to earn an income from such investment. Whether the investment is a bad investment or a good investment depends upon the study of the person making the investment in the performance of the company.
B) Assessee was partner in firm and director in various group companies. From one company he was getting salary income. AO observed that assessee was enjoying perquisite by way of rent free accommodation, furniture and fixtures, facility of servants, chauffeur driven car, telephone facility, facility of free water, electricity and foreign travel etc and added the value of said perquisite. CIT (A) considered partly amount as perquisite. ITAT allowed the appeal of the assessee and deleted the addition made by AO and confirmed by CIT (A).
Facts of the case
A) Assessee claimed interest expenditure on loan for purchase of shares under the head income from other sources. AO noticed that assessee obtained loan from ‘SIMBCL’, and the loan amount was invested in purchase of shares of closely held companies of ‘S’ Group which were incurring heavy losses and there was no possibility to get dividend on share capital of these companies. AO opined that by making investment of "borrowed interest bearing funds" for non productive purpose, the assessee had diverted his income and had adopted a colorable device to reduce tax liability and made disallowance. CIT (A) as well as ITAT deleted the disallowance.
Revenue contended that ITAT wrongly confirmed deletion merely relying on the judgement of Apex Court in the case Rajinder Pd. Moodi where it was observed that interest on borrowed capital has to be allowed u/s 57(iii) even in cases where no income had accrued on investment, if the said expenses towards interest were incurred wholly and exclusively for the purpose of earning income from other sources without appreciating that the purpose of making or earning income from the said investments in shares was grossly lacking. In the case of assessee, there was no possibility of any income coming to the assessee. Both the appellate authorities failed to appreciate that transactions were entered into by the assessee with the companies/concerns of Sahara Group with the sole aim to avoid tax by employing dubious means and that such colourable devices cannot be a part of tax planning.
Assessee contended that the whole approach of the AO was incorrect as the AO had accepted that the loans taken by the assessee were invested and purchased in the share. Entire observations were based only on surmises and conjectures. Assessee took the loan from SIMBCL and claimed payment of interest to the said company. Such interest had been declared by the said company in its income. A person will not take investment in share just to throw away his money unless and until he has a hope to earn an income from such investment. Whether the investment is a bad investment or a good investment depends upon the study of the person making the investment in the performance of the company.
B) Assessee was partner in firm and director in various group companies. From one company he was getting salary income. AO observed that assessee was enjoying perquisite by way of rent free accommodation, furniture and fixtures, facility of servants, chauffeur driven car, telephone facility, facility of free water, electricity and foreign travel etc and added the value of said perquisite. CIT (A) considered partly amount as perquisite. ITAT allowed the appeal of the assessee and deleted the addition made by AO and confirmed by CIT (A).
Assessee contended that official
work was being carried out from the premises owned by the firm. Addition
pertaining to the furniture was made without any evidence on record. Regarding
the salary to the servants, all the servants were engaged for the purpose of
keeping of the property pertaining to the firm, which was used for official
purposes. On similar grounds, the perquisite value on account of car,
telephones, electricity, etc., were challenged.
C) AO made addition u/s 2(22)(e) of the Act observing that SISICOL is a company in which the public are not substantially interested and it was a private limited company. Assessee was a beneficial owner of shares of SISICOL and also partner of 62% shares in the profits of Sahara India i.e. holding substantial interest in the firm. SISICOL, having accumulated profit, offered loan to assessee through his current account and SISICOL also offered to Sahara India by not receiving the amount from Sahara India when the same had been collected for SISICOL. Sahara India had also shown the loan / advance from SISICOL on its liability side affirming the action of retaining deposit collected by Sahara India. Since, all the conditions of section 2(22)(e) were fulfilled, addition was made. If corporate veil is lifted by a Taxman, it is revealed that assessee was controlling the firm as well as the company, SISICOL.
Assessee contended that AO failed to appreciate the relationship between which was acting as an agent and the principals i.e. the Companies. Amounts which were collected by the firm in carrying on of the business activities for and on behalf of the principals were during the course of business and by no stretch of imagination it can be termed as loan by the company to the firm. Thus, Section 2(22)(e) was not applicable.
After hearing both the parties, the High Court held that,
A) ++ the loans were taken by the assessee on interest and invested in other loss making companies of the same Group. Thus, the assessee has set off the payment of interest against his income. The payment of interest was higher, so, the assessee has filed the loss return. Thus, this abnormal method was adopted for diversion of the fund and reducing the tax liability. It was a poor tax planning. There was no chance to receive any pecuniary benefits. Perhaps in the past also, the assessee might have invested some amounts without any financial benefit. Fresh investment made by the assessee cannot be considered for business purposes specially when the assessee is running a financial entity. The assessee is Managing Director and was aware about the financial health of all the companies of the group. The interest paid on borrowed funds was not for exclusively and wholly for the purposes of business. No prudent businessman would like to make an investment in loss suffering companies when the firm itself has borrowed the funds on interest. In fact, it was colourable devices for tax evasion to avoid tax liability;
B) ++ the perquisite denotes to a benefit amounts or advantage mostly in kind and enjoyed by the employee at the cost of employer, generally in addition to the salary or wages to which he is entitled. Perquisite, are in many cases, in nature of voluntary payment attached to an office and employment. Section 17(2) of the Act includes the value of rent free accommodation provided to the assessee by his employer; the value of any concession in the matter of rent in respect of any accommodation provided to the assessee by his employer. In the instant case, as per the Inspector Report, AO mentioned that the Inspector also submits a report that the residence of the assessee was a composite propriety, in which apparently there was no office. Carrying of official work from the residence and maintaining the office are two difference aspects. When there is no office, then the residence cannot be considered to be used for official purposes. As per section 28(iv), the value of the perquisite is to be separately taxed. This provision cannot be treated as share income from the firm and is not exempted under the provisions of Section 17(2). The perquisite value is taxable pertaining to the sweeper, gardener, watchmen, rent free accommodation etc. The value of perquisite taken by the AO is correct and the same is taxable;
C) ++ as per memorandum of understanding between the firm and the company, the firm has issued receipt to the depositors in the name of the company and, therefore, the amount collected by the firm belongs to the company concerned. This amount is to be sent by the firm to the company promptly along with statement of account but the same was not done properly. Therefore, it cannot be said that there was no payment to the company to the firm. The Firm has shown the loan/advances from the company on its liability side in the balance-sheet, therefore, it is a loan for the firm. The word "Dividend" in its ordinary meaning, is a distributive share of the profits or income of a company given to its shareholders. Had the assessee not retained the amount in the Firm and transmitted the same immediately to the concerned companies then companies might have earned the profits, or at least saved interest liability. If the conditions of section 2(22)(e) are fulfilled, then a dividend would arise to the extent to which the company possesses accumulated profits. The company in question is a company in which assessee is controlling its affairs and possessing a block of majority shares. Since there was substantial income of the assessee and a tax planning was made by this nobel method to avoid the payment of tax. So, the assessee would not be liable to pay tax. In order to avoid such a tax liability the loan were granted. When such a loan is advanced to a shareholder who has a substantial interest in the company, the inference is irresistible that the loan is a made-up affair, and there is every reason for treating such a loan as dividend. No circumstances were explained by the assessee for what reason the heavy deposits made by the investors were retained by the assessee in the Firm for a longer period. It is a case of deemed income as the assessee is a shareholder in all the companies. Hence order of AO is confirmed.
C) AO made addition u/s 2(22)(e) of the Act observing that SISICOL is a company in which the public are not substantially interested and it was a private limited company. Assessee was a beneficial owner of shares of SISICOL and also partner of 62% shares in the profits of Sahara India i.e. holding substantial interest in the firm. SISICOL, having accumulated profit, offered loan to assessee through his current account and SISICOL also offered to Sahara India by not receiving the amount from Sahara India when the same had been collected for SISICOL. Sahara India had also shown the loan / advance from SISICOL on its liability side affirming the action of retaining deposit collected by Sahara India. Since, all the conditions of section 2(22)(e) were fulfilled, addition was made. If corporate veil is lifted by a Taxman, it is revealed that assessee was controlling the firm as well as the company, SISICOL.
Assessee contended that AO failed to appreciate the relationship between which was acting as an agent and the principals i.e. the Companies. Amounts which were collected by the firm in carrying on of the business activities for and on behalf of the principals were during the course of business and by no stretch of imagination it can be termed as loan by the company to the firm. Thus, Section 2(22)(e) was not applicable.
After hearing both the parties, the High Court held that,
A) ++ the loans were taken by the assessee on interest and invested in other loss making companies of the same Group. Thus, the assessee has set off the payment of interest against his income. The payment of interest was higher, so, the assessee has filed the loss return. Thus, this abnormal method was adopted for diversion of the fund and reducing the tax liability. It was a poor tax planning. There was no chance to receive any pecuniary benefits. Perhaps in the past also, the assessee might have invested some amounts without any financial benefit. Fresh investment made by the assessee cannot be considered for business purposes specially when the assessee is running a financial entity. The assessee is Managing Director and was aware about the financial health of all the companies of the group. The interest paid on borrowed funds was not for exclusively and wholly for the purposes of business. No prudent businessman would like to make an investment in loss suffering companies when the firm itself has borrowed the funds on interest. In fact, it was colourable devices for tax evasion to avoid tax liability;
B) ++ the perquisite denotes to a benefit amounts or advantage mostly in kind and enjoyed by the employee at the cost of employer, generally in addition to the salary or wages to which he is entitled. Perquisite, are in many cases, in nature of voluntary payment attached to an office and employment. Section 17(2) of the Act includes the value of rent free accommodation provided to the assessee by his employer; the value of any concession in the matter of rent in respect of any accommodation provided to the assessee by his employer. In the instant case, as per the Inspector Report, AO mentioned that the Inspector also submits a report that the residence of the assessee was a composite propriety, in which apparently there was no office. Carrying of official work from the residence and maintaining the office are two difference aspects. When there is no office, then the residence cannot be considered to be used for official purposes. As per section 28(iv), the value of the perquisite is to be separately taxed. This provision cannot be treated as share income from the firm and is not exempted under the provisions of Section 17(2). The perquisite value is taxable pertaining to the sweeper, gardener, watchmen, rent free accommodation etc. The value of perquisite taken by the AO is correct and the same is taxable;
C) ++ as per memorandum of understanding between the firm and the company, the firm has issued receipt to the depositors in the name of the company and, therefore, the amount collected by the firm belongs to the company concerned. This amount is to be sent by the firm to the company promptly along with statement of account but the same was not done properly. Therefore, it cannot be said that there was no payment to the company to the firm. The Firm has shown the loan/advances from the company on its liability side in the balance-sheet, therefore, it is a loan for the firm. The word "Dividend" in its ordinary meaning, is a distributive share of the profits or income of a company given to its shareholders. Had the assessee not retained the amount in the Firm and transmitted the same immediately to the concerned companies then companies might have earned the profits, or at least saved interest liability. If the conditions of section 2(22)(e) are fulfilled, then a dividend would arise to the extent to which the company possesses accumulated profits. The company in question is a company in which assessee is controlling its affairs and possessing a block of majority shares. Since there was substantial income of the assessee and a tax planning was made by this nobel method to avoid the payment of tax. So, the assessee would not be liable to pay tax. In order to avoid such a tax liability the loan were granted. When such a loan is advanced to a shareholder who has a substantial interest in the company, the inference is irresistible that the loan is a made-up affair, and there is every reason for treating such a loan as dividend. No circumstances were explained by the assessee for what reason the heavy deposits made by the investors were retained by the assessee in the Firm for a longer period. It is a case of deemed income as the assessee is a shareholder in all the companies. Hence order of AO is confirmed.
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