Commissioner of Income Tax, Bangalore vs L.K. Trust

V. Gopala Gowda, J.—The revenue has questioned the correctness of the order dated 22-2-2001 passed by the income tax Appellate Tribunal, Bangalore, in ITA No. 2032/Bang./1992, allowing the appeal of the assessee and setting aside the order passed by the first appellate authority by framing the following substantial questions of law and urging various grounds in support of the same which reads as follows:- 1. Whether the assessee who is carrying on film business is entitled to claim deduction u/s 36(1)(iii) of the Act in respect of interest of Rs. 21,74,234 on amount borrowed from corporation bank to purchase shares of Shaw Wallace and Company Limited on behalf of itself and other firm?

Whether the assessee and its beneficiaries who borrowed a sum of Rs. 3,80,00,000 and transferred the same to M/s. Gayathri Holding Private Limited who in turn advanced this amount to G. Venkateshwaran to purchase shares on his behalf and on behalf of M/s. Sujatha Films Limited, Sujatha Productions Private Limited, Aruna International Private Limited and Sujatha Estate (Private) Limited, from Shaw Wallace and Company Limited is nothing but a colourable devise adopted to seek benefit of interest allowance u/s 36(1)(iii) of the income tax Act?

Brief facts of the case are stated for appreciating the rival legal contentions urged on behalf of the parties and to answer the questions framed. The respondent-assessee is a private family Trust, inter alia, carrying on film business. During the assessment year 1989-90 it earned an income of Rs. 2,71,15,630. Out of this, in the returns filed, a sum of Rs. 21,74,234 deducted towards interest paid on the loan amount borrowed from Corporation Bank. The details of the loan borrowed are as under:-

Date

Name of Borrower

Amount of Loan

25-11-87

L.K. Trust

1,80,00,000

25-11-87

K.L. Ramachandra

40,00,000

26-11-87

K.L. Srihari

85,00,000

26-11-87

K.L.A. Padmanabhasa

45,00,000

26-11-87

K.L. Swamy

30,00,000

Total

3,80,00,000

On 26-11-1987 the aforementioned amount of Rs. 3,80,00,000 was transferred to a shareholder Gayathri Holdings Private Ltd. (hereinafter mentioned as GHPL), which in turn advanced to G. Venkateshwaran & group of companies for the purchase of shares of Shaw Wallace and Company. As on 31-3-1980 the said group of companies transferred shares worth Rs. 1,48,23,915 to GHPL and the balance amount of Rs. 2,31,76,085 was due to it. The assessing authority by its order dated 11-8-1992, out of Rs. 21,74,234 claimed deduction towards interest paid on the loan borrowed u/s 36(1)(iii) of the income tax Act, disallowed a sum of Rs. 13,26,062 on pro rata basis. Being aggrieved by the same, the respondent-assessee filed first appeal. The first appellate authority confirmed the assessment order. Against that, the assessee filed second appeal before the income tax Appellate Tribunal. The Tribunal, applying the three conditions laid down in the case of Madhav Prasad Jatia Vs. Commissioner of Income Tax, U.P. Lucknow, held that the assessee has fulfilled all the three conditions and therefore it is entitled to claim deduction of interest paid out of the income derived. The revenue is aggrieved by the same and filed this appeal.

Sri M.V. Seshachala, learned counsel for the revenue submitted that the impugned order is not only erroneous but error in law as the same is contrary to section 36(1)(iii) of the Act. According to him, the Tribunal has misdirected itself by applying the aforementioned decision. He further submitted that the said decision has no application to the facts of this case. Therefore, the learned counsel submits that the substantial questions of law framed be answered in favour of the revenue.

Mr. Kulkarni, learned counsel for the assessee relied upon the clauses in the Trust Deed, the Balance Sheet and submitted that the loan amount was given for borrowing the shares of Shaw Wallace and it is a commercial expediency. In support of this, he cited the decision of the Supreme Court S.A. Builders Ltd. Vs. Commissioner of Income Tax (Appeals), Chandigarh and Another, . The learned counsel submitted that the Tribunal has rightly set-aside the erroneous findings recorded on the contentious points in the order of the first appellate authority and therefore contends that no substantial questions of law, much less the questions framed, would arise for consideration of this Court and sought for dismissal of the appeal. Alternatively, he has requested that if this Court comes to the conclusion that the impugned order of the Tribunal is not correct, to remand the matter to the assessing authority or the deduction allowed by the assessing authority need not be disturbed.

We have carefully examined the rival legal contentions urged by the learned counsel on behalf of the parties keeping in view section 36(1)(iii) of the Act and the nature of the claim made for deduction towards interest. To know whether the assessee is entitled to or not for the deduction claimed by it, the relevant portion of section 36(1)(iii) of the Act are extracted hereunder:-

Other deductions.--(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28-

(iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession:

Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalised in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction.

[Emphasis supplied]

From the underlined portions in the proviso, it is clear that the interest paid in respect of the amount borrowed for acquisition of asset, deduction shall not be allowed till such asset was first put to use. In the instant case, the loan amount was borrowed by the assessee to purchase the shares of Shaw Wallace. Clause 11(c) of the Trust Deed of the assessee provides for acquisition of stocks, shares, debentures, annuities and securities. The loan amount so borrowed was given to GHPL. This amount is shown as "sundry creditors" in the Balance Sheet of GHPL. In the Notes on Accounts, it is mentioned as under:-

Sundry Creditors include Rs. 3,84,85,000 from a party towards subscription of Equity Shares to be issued in future pursuant to certain arrangements to be entered into between the Company and the Party. The said arrangements have not materialised. The liability for interest, if any, will be accounted for a settlement of the above transaction. It also includes Rs. 1,000 payable to director of the company towards remuneration.

Firstly, the words ''Equity Shares to be issued in future'' is indicative of the fact that there is no immediate acquisition of shares of Shaw Wallace. Secondly, as already noticed, as per the proviso to section 36(1)(iii) of the Act, the amount of interest paid on the borrowed amount for acquisition of assets shall not be given deduction till such asset is put to use. Since there is no full acquisition of shares, the Assessing Officer has rightly disallowed the claim on pro rata basis and the first appellate authority rightly confirmed the same. The Tribunal committed an error not applying its mind to these aspects of the matter. The Tribunal wrongly applied the decisions in the case of CIT v. Associated Fibre & Rubber Industries (P.) Ltd. [1999] 236 ITR 4711 (SC) and the conditions mentioned in Madhav Prasad Jatia''s case (supra).

The loan borrowed by the assessee was for the purpose of acquisition of shares. That is not materialised. Unless asset is acquired and put to use, deduction for the interest cannot be claimed. Allowing any such deduction will be contrary to the proviso to section 36(1)(iii) of the Act. Therefore, the order passed by the Tribunal is in blatant violation of the said provision.

We are noticing this kind of orders passed by the Tribunal frequently. Therefore, we are constrained to observe that whenever such claims for deduction are made in tax matters, the authorities should apply their mind to each and every wordings in the provisions of the Act and Rules and interpret the same keeping in view the intentment and object of the Act. This observation is warranted as the authorities are passing orders mechanically without proper application of mind and exceeding their jurisdiction and power. The statutory power entrusted with the authorities is a ''trust'' coupled with duty, as held by the Apex Court in State of Punjab and Another Vs. Gurdial Singh and Others, In this regard, it is necessary to extract the observations of the Supreme Court in the case of Gurdial Singh (supra). In that decision, the observations made at paragraph 9 in Benjamin''s case are extracted, which are as under:-

The question then, is what is mala fides in the jurisprudence of power? Legal malice is gibberish unless juristic clarity keeps it separate from the popular concept of personal vice. Pithily put, bad faith which invalidates the exercise of power - sometimes called colourable exercise or fraud on power and often times overlaps motives, passions and satisfactions - is the attainment of ends beyond the sanctioned purposes of power by simulation or pretension of gaining a legitimate goal. If the use of the power is for the fulfillment of a legitimate object the actuation or catalysation by malice is not legicidal. The action is bad where true object is to reach an end different from the one for which the power is entrusted, goaded by extraneous considerations, good or bad, but irrelevant to the entrustment. When the custodian of power is influenced in its exercise by considerations outside those for promotion of which the power is vested, the Court calls it a colourable exercise and is undeceived by illusion. In a broad, blurred sense, Benjamin Disraeli was not off the mark even in law when he stated. ''I repeat... that all power is a trust - that we are accountable for its exercise that - from the people and for the people, all springs, and all must exist''. Fraud on power voids the order if it is not exercised bona fide for the end designed. Fraud in this context is not equal to moral turpitude and embraces all cases in which the action impugned is to affect some object which is beyond the purpose and intent of the power, whether this be malice-lade or even benign. If the purpose is corrupt, the resultant act is bad. If considerations foreign to the scope of the power or extraneous to the statute, enter the verdict or impulse the action mala fides or fraud on power vitiates the acquisition or other official act." (p. 321)

The Tribunal ought to have exercised its power keeping in view these observations.

For the reasons stated above, the substantial questions of law framed in the appeal memorandum arise in this case and accepting the submissions made by the learned counsel for the revenue and rejecting the submissions of the learned counsel for the assessee, we answer the questions in favour of the revenue and against the assessee. We also hold that the decisions relied upon in support of the claim of the assessee are not applicable to the facts of the case.

The appeal is allowed and the order of the Tribunal is set aside.

In the circumstances of the case, there is no need to consider the alternative prayer made by the learned counsel for the respondent-assessee, as we are not disturbing the same. The Registry is directed to send a copy of this order to the Commissioner of income tax and also the Tribunal for rectification of the mistakes in future.