R_K. Sahoo & Sons Huf v. The Commissioner Of Income Tax, Chandigarh

3672ITA No. 332 of 2005 IN THE HIGH COURT OF PUNJAB AND HARYANAAT CHANDIGARH. ITA No. 332 of 2005Date of Decision : 16.07.2018 R_K. Sahoo & Sons HUF Appellant Versus The Commissioner of Income Tax, Chandigarh Respondent CORAM: HON'BLE MR. JUSTICE AJAY KUMAR MITTALHON'BLE MR. JUSTICK AVNEESH JHINGAN Present :Mrs. Radhika Suri, Senior Advocate withMr. M.S. Kanda, Advocatefor the appellant, Mrs. Urvashi Dhugga, Sr. Standing Counselfor the respondent. AVNEESH JHINGAN, J. The assessee has filed the present appeal under Section 260A of the Income Tax Act, 1961 (for short ‘the Act’) against the order dated26.05.2005 of Income Tax Appellate Tribunal, Chandigarh (for short"Tribunal'). The assessment year involved is 1997-98. 2 According to the appellant-assessee, the following substantial questions of law arise for consideration :- 1).Whether in facts and circumstances of the case, theTribunal was right in law in disallowing deduction of Rs.3,21,877/- which was interest paid on fund borrowed forinvestments in shares for the purpose of earning income in theform ofdividend.11).Whether the decision of the Tribunal is contrary to theratio of the Supreme Court in CIT vs. Rajender Parshad MoaiILI5 TTR Page 519 3672ITA No. 332 of 2005 111).Whether in facts and circumstances of the case, theTribunal was right in holding that the beneficial owner ofshares is not entitled to deduction u/s 57(i11) ofthe Income TaxActiv).Whether the order of the Tribunal is perverse asconclusions drawn by it are contrary to the material on recordnamely agreements dated 22[nd]January, 1996 and §[th]October,1996. v).Whether in facts and circumstances of the case, theTribunal, could adjudicate on a matter not pleaded before it? 3]Appeal was admitted for considering question Nos. (1), (41) and (iil). 4The assessee-HUF filed a return declaring income ofvO5,61,781/- for the assessment year 1997-98. The case was selected forscrutiny and a notice was issued. The Assessing Officer, vide order dated19.11.1999, amongst other things, made an addition of 43,21,3877/- bydisallowing deduction of interest claimed under Section 57 (111) of the Act, 5]Agegrieved of the assessment order, an appeal was filed. TheCommissioner of Income Tax (Appeals), Chandigarh [CIT(A)], vide orderdated 26.11.2001, allowed the appeal. 6]The revenue filed an appeal before the Tribunal. The Tribunal,vide order dated 26.05.2005, set aside the order of C.I.T.(A) deleting theaddition of =3,21,877/- and upheld the addition made by the AssessingOtficer. vaAggrieved of the order, the present appeal has been filed by the asSsessee § As per the agreement entered by the assessee with four persons,the assessee horrowed funds to invest in shares of M/s Kamla Dials andDevices Limited at Parwanoo. Rate of interest of loan was 28% per annum.The lenders were to buy shares of M/s Kamla Dials and Devices Limited in their own name and to retain the same for a period of one year and one day.Thereafter, the appellant was to pay money and shares were to betransferred to the assessee. During the relevant assessment year, the lendershad purchased shares in his name. It was claimed that the assessee was thebeneficial owner of these shares. The assessee claimed deduction of interestpaid to the lenders under Section 57(i11) of the Act. QOThough three substantial questions of law have been framed,The issue involved would be whether in the facts and circumstances of thecase, the assessee was entitled to deduction under Section 57 (iii) of theAct? 10,The challenge in the appeal to the disallowance of deduction byrelying upon the decision of the Supreme Court in the case ofCIT. Vs.Rajendra Prasad Moody (1978) 115 ITR 5191s not well founded. — 11.It would be appropriate to quote clauses 9 and 10 of theagreement :- QOThough three substantial questions of law have been framed,The issue involved would be whether in the facts and circumstances of thecase, the assessee was entitled to deduction under Section 57 (iii) of theAct? 10,The challenge in the appeal to the disallowance of deduction byrelying upon the decision of the Supreme Court in the case ofCIT. Vs.Rajendra Prasad Moody (1978) 115 ITR 5191s not well founded. — 11.It would be appropriate to quote clauses 9 and 10 of theagreement :- 9dWith the mutual agreement of both the parties, thelenders may purchase upto 50% ofthe shares allotted to him atthe total cost of acquisition of these shares, and in this case,the Borrower shall not repay the proportionate amount ofprincipal and interest due on such number of shares as areopted to be purchased by the lenders. TO.In case the Borrower fails to repay the principal orinterest due on the amount of loans under this Agreement,granted from time to time, after the period of this Agreementi.e. 1 year and I day, the lenders shall have after giving anotice in writing of at least one month, an option to eitherenforce the specific performance of the Agreement OR sell theshares through the Stock Exchange where the shares are listed,or in the open market, or through public auction and recoverthe balance amount duefrom the Borrower. | 12.From plain reading of the Clause 9 of the agreement it isevident that the appellant was not bound to purchase all the shares from the lenders. By mutual agreement, lenders could purchase upto 50% of theshares allotted. The deduction was rightly disallowed, as it was only afterend of the year, it would emerge as to how many shares were actuallytransferred to the appellant. 13)According to Clause 10, in case the borrowers failed to repaythe amount of loan, lenders had option to enforce specific performance or toSell the shares through Stock Exchange, in open market or auction andthereafter recover the balance amount. As per this clause also, the appellantwas to become owner of the shares at the end of one year and one day of theallotment of the shares if the shares were transferred to the appellant. 14The Tribunal, considering the facts and circumstances of thecase, decided the issue against the assessee. The operational part of theorder is quoted below:- 13.After hearing both the parties, we are of the consideredview that the disallowance made by the AO is justified and theCIT (A) is wrong in deleting the disallowance. In this case, itis not disputed that the company, namely, M/s Kamla Dials &Devices had decided to float the right share in the market at apremium of Rs. 18/- per share. The respondent has enteredinto an agreement with four different parties. As _ per theagreement, the investors were required to subscribe to equityshares against the renounced forms to be arranged by therespondent. The application money was to be paid by thelenders @ Rs.14 per share. As per the agreement, the lenderswas entitled to retain the shares in their name for a period ofone year and one day from the date of allotment and theborrower was required to transfer the shares to the respondentor his nominee. The borrower later on was also required topayfor the call money allotted to the lenders. On the basis ofthis arrangement, the assessee claimed interest @ 28% asdeduction which was denied by the AO and allowed by theCIT(A). In our considered view, the deduction of the Hon'bleSupreme Court in the case ofRajendra Prasad Moody (supra),is inapplicable to thefacts of this case insofar as the assesseewas to acquire the shares after the expiry of one year and oneday. Since no shares were held in the name of the respondentnor was any investment made in the name ofthe respondent inthe year under appeal, the respondent was not entitled todeduction u/s 57 of the Income Tax Act, 1961. Section 57(i11) 3672ITA No. 332 of 2005 3672ITA No. 332 of 2005 provides for deduction of any expenditure laid out orexpended wholly and exclusivelyfor the purposes ofmaking orearning of income. In the year under appeal, admittedly,assessee could not have received any income as shares wereneither held in his name nor was there any possibility oftransfer ofsuch shares in the name of the assessee during theyear under appeal. The shares were allotted in the name ofthe lenderss and dividend, if any, declared would be in thename of the lenders and not in the name ofthe assessee. Sinceno investment was made for earning of the dividend income inthe year under appeal, the decision of Supreme Court in thecase of Rajendra Prasad Moody (supra), as already pointedout, 1s inapplicable. The said decision applies in such caseswhere the investment is made by the assesseefor the purposesof earning dividend income. Though receipt of dividend is nota condition precedent for allowance of deduction, yet theintention of the assessee to earn income is necessary for thepurposes of allowance of deduction. In this case, the assesseenever intended to earn any dividend income in the year underappeal, and therefore, the interest claimed by the assessee asdeduction has wrongly been allowed by the CIT(A), theaddition ofRs. 3,21,877/- 1s accordingly restored. 15.In the tacts and circumstances of the present case, the pre-requisite of Section 57(i11) of the Act that expenditure was made for thepurpose of making or earning income is not satisfied. The Supreme Court inRajendra Prasad MoodyAcase (supra) held that there is no requirementunder Section 57(111) and deduction would be allowed only if any income isactually made or earned. There is no quarrel with the said proposition.Undisputedly, during the relevant year, the appellant was not the owner ofthe shares. The shares were purchased in the name of lenders who kept theShares for the entire year. Accordingly, the argument that the appellant wasthe beneficial owner of the shares and the lenders had kept the shares onlyfor the purpose of security deserves rejection. Thus, in the absence of theappellant-assessee being the owner of the shares during the year underconsideration, no benefit can be derived from the aforesaid pronouncement, 3672ITA No. 332 of 2005 Tribunal. 17.The substantial question of law as claimed is answered accordingly. 18) The appeal is dismissed. | AJAY KUMAR MITTAL]JUDGE 16.07.2018pankaj baweja | AVNEESH JHINGAN |JUDGEWhether speaking/reasoned ?Yes/ NoWhether reportable ?Ves/ No