The judgment of the court was delivered by
Elipe Dharma Rao J.-This appeal is filed against the order dated March 28, 2008, passed by the Income-tax Appellate Tribunal, Madras "C" Bench in I. T. A. No. 576/Mds/2007. On completion of the assessment proceedings in respect of the assessment year 2003-04, the Assessing Officer made certain additions in respect of car parking spaces and providing air conditioning equipment as well as disallowed the claim made by the assessee regarding the cost of improvement made to the property; loss of shares ; interest on investment in sister concerns and licence fee paid to M/s. RPG Enterprises Ltd. The appeal filed by the assessee before the Commissioner of Income-tax (Appeals) as against the said order was allowed. Aggrieved by the said order, the Revenue filed an appeal before the Income-tax Appellate Tribunal, which dismissed the appeal. Challenging the same, the Revenue has filed this T. C. (A.) No. 1980 of 2008. At the time of admitting the above tax case appeal, the following substantial questions of law were framed :
"1. Whether, in the facts and in the circumstances of the case, the Tribunal was right in deleting the addition of Rs. 35 lakhs made on account of car parking spaces allotted to the assessee-company?
2. Whether, in the facts and in the circumstances of the case, the Tribunal was right in deleting the addition of Rs. 50 lakhs made on account of accrued rights due to the contractual obligation of the developer to provide air conditioning equipment ?
3. Whether, in the facts and in the circumstances of the case, the Tribunal was right in directing the Assessing Officer to consider the compensation paid to the tenants for obtaining vacant possession as 'cost of improvement' and allow the relief as claimed by the assesseecompany ?
4. Whether, in the facts and in the circumstances of the case, the Tribunal was right in confirming the Commissioner of Income-tax (Appeals) order with respect to the loss suffered by the assessee in share transactions is a genuine loss and thereby directing the Assessing Officer to assess the loss as per the provisions of the Income-tax Act and allow the benefit of set off and/or/carry forward thereof ?
5. Whether, in the facts and in the circumstances of the case, the Tribunal was right in allowing the interest paid towards borrowed capital which was not used for business purpose as per the conditions laid down in section 36(1)(iii) of the Act ?
6. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the licence fee paid to M/s. RPG Enterprises Ltd. can be deducted as a business expenditure ?"
While admitting the above tax case appeal, a Division Bench of this court has recorded that issues 1 and 2 had already been decided in favour of the Revenue in the case of CIT v. Mangal Tirth Estates Ltd. [2008] 303 ITR 366 (Mad) and issues 3, 5 and 6 had been raised in T. C. (A.) No. 977 of 2005, which had been admitted. However, since the same has been disputed by the learned senior counsel for the assessee and further since there was no consensus and a clear finding on whether the said issues are covered by the said judgment, we proceed to deal with all the issues hereunder :
Substantial questions of law Nos. 1 and 2
Heard learned standing counsel for the Revenue and learned senior counsel for the respondent-assessee. We have given our careful consideration to the orders passed by the authorities below and that of the Tribunal in the light of the materials available on record The respondent-assessee entered into an agreement with a developer for development of their property situated at Chennai under which the developer was to construct for the assessee 1,50,000 sq. ft. of area free of cost and 20 per cent. of the sale value subject to a minimum of Rs. 200 per sq. ft. of the balance constructed area on the land. The assessing authority treated the income from the development of land with the help of the developer-promoter as business income of the assessee and assessed to tax. The assessing authority made an addition of Rs. 35,00,000 and Rs. 50,00,000 as notional value of the benefits towards allotment of 35 car park spaces and provision of air-conditioning equipment at free of cost by the developer for 29,000 sq. ft. built up area to the business income of the assessee. We have carefully gone through the agreement entered into between the assessee and the developer/promoter. From the clauses contained in the said agreement, we are satisfied that the transaction between the parties was for granting developing rights in the land for a specified consideration. The agreement provided for allotment of a specified car parking spaces to the respondent-assessee and provision of air-conditioning equipment at free of cost by the developer to the built-up area of 29,000 sq. ft. for which benefits, the assessing authority assigned some notional value and added it to the income of the assessee. The appellate authority as well as the Tribunal deleted the said additions on certain finding of facts. As against the notional value added for 35 car park spaces, the appellate authority and the Tribunal found that in the certificate dated September 15, 2006, the developer admitted that the car park spaces were not included in the sanctioned built-up area and, therefore, not included in the saleable area. The authority also found that the certificate also confirmed that there was no sale or transfer of car park areas to the assessee and that the assessee was allowed to park the cars in the open space against the refundable security deposits. The appellate authority found that the evidence on record do not go to show that the assessee acquired a legal right and interest in the car park areas and that the assessee was only given a privilege of using a non-saleable vacant space and, therefore, no value could be assigned to the benefit granted by the developer having no monetary value. On the provision of air-conditioning equipment by the developer, it was found by the appellate authority and the Tribunal that the developer/promoter failed to perform his part of contractual obligation and did not provide the air-conditioning equipment at free of cost till the property was transferred to the respondent-assessee. It was based on the abovesaid findings of fact that the appellate authority and the Tribunal deleted the addition of income made by the assessing authority. Further, it is well settled principle that tax could be levied only on real income and not on hypothetical income. The additions made by the assessing authority were not real income but hypothetical in view of the fact that the developer had failed to provide the air-conditioning in terms of the contract which was also confirmed by the developer.
Furthermore, the Tribunal in its discussion on the issues that is at page 9 of the order has categorically rendered a finding that the assessee had no freedom to transfer the right, title and interest over the car parking spaces and that the benefit of privilege granted was only personal which could not be transferred to any third party for consideration. The addition made by the assessing authority was to the tune of Rs. 1,00,000 per car parking space. Even this addition was only an estimate without any legal or factual basis. It is axiomatic that on the one hand the assessing authority has disallowed the deduction of Rs. 10,00,000 towards the cost of acquisition of car parks and on the other hand additions were made to the income at Rs. 1,00,000 per car park and thus the assessing authority had adopted two separate yardsticks for different assessment years. This, in our view, goes to the root of the issue and the Tribunal has rightly held that the additions are not tenable, thus confirming the findings of the appellate authority. We have also given our anxious consideration to the judgment of this court in CIT v. Mangal Tirth Estates Ltd. [2008] 303 ITR 366 (Mad) and found that the said case stands completely on a different factual footing since no such condition to park the cars in open spaces against the refundable deposits is involved therein. Therefore, it cannot have any bearing to the facts of the present case.
Therefore, we find no reason to interfere with the well-reasoned order of the appellate authority in deleting the said notional additions of income and that the Tribunal committed no error in confirming the order of the appellate authority. In our considered view, since the order passed by the appellate authority was based on findings of facts based on the materials available on record, which was confirmed by the Tribunal, we see no reason to interfere with the same in this appeal filed under section 260A of the Income-tax Act. We, accordingly, confirm the order of the Tribunal and answer the substantial questions of law in the affirmative and against the Revenue.
We will now advert to the decisions cited by learned standing counsel for the Revenue on the issue of car parking space and air-conditioning. Learned counsel relied on the following decisions :
(a) CIT v. Central India Industries Ltd. [1971] 82 ITR 555 (SC), wherein the honourable Supreme Court held as follows (page 561) :
"There is no provision in the Act which makes the assessment of income dependent on refund. The provisions relating to assessment are independent of refund though the provisions relating to refund may depend on assessment. Equitable considerations are not relevant in interpreting the provisions of a taxing statute, apart from the fact the equity pleaded in this case is remote possibility."
(b) CIT v. Ashokbhai Chimanbhai [1965] 56 ITR 42 (SC), wherein the honourable Supreme Court held as follows (page 52) :
"There was in this case no assignment of the profits which had already accrued to the assessee. Profits accrued to Ashokbhai and on the date on which they accrued the assessee had because of the deed of partition no interest in the profits. The Revenue authorities could not claim that profits which under the instrument of partition did not accrue or arise to Ashokbhai as representing the Hindu undivided family must for purposes of taxation be so deemed."
(d) Godhra Electricity Co. Ltd. v. CIT [1997] 225 ITR 746 (SC), wherein the honourable Supreme Court held as under (page 760) :
"The question whether there was real accrual of income to the assessee-company in respect of the enhanced charges for supply of electricity has to be considered by taking the probability or improbability of realisation in a realistic manner. If the matter is considered in this light, it is not possible to hold that there was real accrual of income to the assessee-company in respect of the enhanced charges for supply of electricity which were added by the Income-tax Officer while passing the assessment orders in respect of the assessment years under consideration. The Appellate Assistant Commissioner was right in deleting the said addition made by the Income-tax Officer and the Tribunal had rightly held that the claim at the increased rates as made by the assessee-company on the basis of which necessary entries were made represented only hypothetical income and the impugned amounts as brought to tax by the Incometax Officer did not represent the income which had really accrued to the assessee-company during the relevant previous years. The High Court, in our opinion, was in error in upsetting the said view of the Tribunal."
We have carefully analysed the decisions cited on behalf of the Revenue. In our view none of the above decisions are relatable to the peculiar facts of the present case where no right to transfer the car park rights has accrued in favour of the assessee and merely open space was being utilized beyond the permissible FSI for parking of vehicles. Furthermore, as discussed above, the notional additions on account of provision for air-conditioning does not arise in the facts of the present case as no such provision was actually provided by the developer. Therefore, we are of the view that the decisions relied on by the Revenue are of no assistance to them. Furthermore, the Tribunal and the appellate authority concurrently held on facts against the Revenue, with which we see no reason interfere and depart.
For the above reasons, we answer the substantial questions of law Nos. 1 and 2 in the affirmative and against the Revenue.
Substantial question of law No. 3
This ground pertains to the Revenue's challenge to the order of the appellate authority and the Tribunal reversing the order of the assessing authority disallowing the assessee's claim of indexation benefit to the cost of improvement.
Learned standing counsel for the Revenue argued that the appellate authority and the Tribunal erred in treating the compensation paid to the tenants for vacating the premises as "cost of improvement". It was argued that the compensation paid to the tenants was an expenditure incurred in relation to transfer of capital asset and, therefore, allowable under section 48(1)(i) of the Act which entails no indexation benefits to the assessee.
Learned standing counsel relied on the following decision in support of his arguments on compensation paid to the tenants and indexation benefit.
CIT v. A. Venkataraman [1982] 137 ITR 846 (Mad). It was held as follows (page 850) :
"On a reference to the partition deed, what the Tribunal says is correct. But we would not like to uphold the decision of the Tribunal on this ground alone. There is a more pertinent ground for the disallowances. The claim of the assessees to deduct the provision the marriage expenses of the sister, as an admissible item of expenditure, has been put forward on the terms of the partition deed, and not under any specific statutory provision relating to the taxation of capital gains. Section 48 carries the marginal note 'Mode of computation and deduction'. As it happens this section contains the only provision for allowance of deductions in the computation of capital gains. Clause (1) of this section provides for deduction of expenditure incurred wholly and exclusively in connection with the transfer of the capital asset, clause (ii) requires that the cost of acquisition of the capital asset as well as the cost of any improvement to the capital asset, must be deducted in order to arrive at the capital gains. Apart from these two clauses in section 48, there is no other provision in the Act which permits deductions of any kind in the computation of capital gains. It may be that there was no obligation for making a provision for the marriage of the assessee's sister and the liability was created under the very terms of the partition deed, under which they were allotted the items of properties, which were subsequently sold, which sale led to realisation of capital gains. Even so, the mere liability of obligation cannot be regarded as an item of expenditure, let alone an expenditure incurred wholly and exclusively in connection with the sale of the properties. The obligation was connected with the partition arrangements, and not with anything else. Our answer to the third question in the two groups of references is accordingly against the assessees and in favour of the Department."
On the other hand, learned senior counsel for the respondent-assessee by putting forth the submissions made before the appellate authority and the Tribunal submitted that the compensation paid to the tenants could not be held to be expenditure incurred in relation to transfer of the property. It was further submitted that such payment of compensation became necessary to get the vacant possession of the property without getting involved in litigation and this was in the interest of business expediency. By payment of such compensation, the assessee could easily obtain vacant possession of the property which resulted in improvement in the assessee's right and interest, over the said property. Learned counsel submitted that such expenditure, therefore, would constitute "cost of improvement" and that the assessee was entitled for the indexation benefit. Learned senior counsel would submit that in the case of the very same assessee this court in the judgment dated April 2, 2012, in T. C. (A.) No. 977 of 2005 held the issue of payment of compensation to the tenants for obtaining vacant possession in favour of the assessee even before the appellate authority which was not challenged by the Revenue either before the Tribunal or before this court. Therefore, the issue has now attained finality and it cannot now be contended that the payment of compensation to tenants cannot be legitimately treated as cost of improvement. Once it is treated as cost of improvement, the necessary corollary would be the entitlement of benefit of indexation available to the assessee in terms of the Act. In this regard, learned counsel drew our attention to paragraph 9 of this court in T. C. (A.) No. 977 of 2005, in which this court held as under :
"We are also making it clear that the Tribunal is directed to decide only the quantum of the amount and the same cannot be below Rs. 75 per sq. ft. since against the order of the Commissioner of Income-tax (Appeals), it is only the assessee who filed the appeal before the Tribunal not the Revenue."
Finally, contending that this issue is also barred by the principles of res judicata, learned senior counsel for the assessee cited the following decision :
Radhasoami Satsang v. CIT [1992] 193 ITR 321 (SC), wherein the honourable Supreme Court held as follows (page 329) :
"We are aware of the fact that, strictly speaking, res judicata does not apply to income-tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order it would not be at all appropriate to allow the position to be changed in a subsequent year."
We have gone through the findings of the appellate authority and the Tribunal in the light of the materials available on record. The payment of compensation to the tenants for delivering vacant possession not disputed. On a perusal of the development agreement the assessee entered into with the developer, we found that the agreement nowhere imposed an obligation on the part of the assessee to settle the claim of the tenants for getting vacant possession of the property and in the absence of such contractual obligation, we are of the considered view that the payment of compensation to the tenants for getting vacant possession of the property could not be related to transfer of development rights. On the other hand, the compensation paid to the tenants for delivering the vacant possession, improved the right and interest of the assessee over the property and, therefore, it would amount to improvement cost. It was also brought to our notice that a similar claim of the assessee for the earlier assessment years were allowed by the assessing authorities. We, therefore, find no erroneous approach or infirmity in the findings of the appellate authority and the Tribunal that the compensation paid to tenants for getting vacant possession would amount to cost of improvement and that the assessee was entitled for indexation benefit on that account. Furthermore, in the light of the decision of this court in T. C. (A.) No. 977 of 2005 which we have extracted supra, we find no reason by which the Revenue can yet again agitate the same issue having not opted to file an appeal against the assessee before the Tribunal. In our opinion, the issue, as rightly submitted by the learned senior counsel and in view of the decision of the hon'ble Supreme Court, cited supra, is barred by res judicata. Furthermore, section 48(ii) provides for deduction towards "costs of any improvement". In this case, compensation was paid to the tenants to obtain vacant possession so that the property could be put to better use and construct the building for which an agreement was entered into with the developer. This, in our view, would constitute a "cost on improvement" as the said cost is incurred only for beneficial utilisation of the property. We, therefore, answer the substantial question of law No. 3 against the Revenue.
Substantial question of law No. 4
This substantial question of law raised by the Revenue challenges the finding of the Tribunal in confirming the order of the appellate authority reversing the assessment of the assessing authority disallowing the assessed claim of Rs. 21,72,37,997 as capital loss on sale of shares of the group companies treating it as a manipulated or bogus loss.
Learned standing counsel for the Revenue argued that in the absence of any material furnished by the assessee, the Tribunal erred in holding that the loss suffered by the assessee in share transactions was a genuine loss. It was also argued that in the absence of the assessee furnishing the market value and providing correct valuation, the assessing authority had no other option but to disallow the claim on loss of shares. The loss was suffered mainly on sale of unquoted shares and such a claim was bogus made with a motive to avoid tax. Learned standing counsel relied on the following decisions :
(a) CIT v. Arvind Investments Ltd. [1991] 192 ITR 365 (Cal) wherein it has been held as follows (page 371):
"Sub-section (1) of section 73 restricts the scope of section 70 which permits setting off of loss from one source against the profit from another source falling under the same head of income and subsection (1) of section 73 categorically declares that any loss arising from speculation business shall not be set off except against profits and gains of another speculation business. In other words, if there is a speculation loss and also gain from another source of non-speculation business, then such speculation loss cannot be set off against the profit of a non-speculation business.
Sub-section (2) of section 73 restricts the scope of section 72 which provides for carrying forward and setting off of business losses. If any loss computed in respect of a speculation business has not been wholly set off, such loss may be carried forward and set off against profits and gains of any speculation business in the following assessment years."
(b) McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148 (SC), wherein the Supreme Court observed as follows (page 160) :
"In our view, the proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it. A hint of this approach is to be found in the judgment of Desai J. in Wood Polymer Ltd., In re and Bengal Hotels P. Ltd., In re [1977] 47 Comp Cas 597 (Guj) where the learned Judge refused to accord. sanction to the amalgamation of companies as it would lead to avoidance of tax.
It is neither fair not desirable to expect the Legislature to intervene and take care of every device and scheme to avoid taxation. It is up to the court to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and consider whether the situation created by the devices could be related to the existing legislation with the aid of 'emerging' techniques of interpretation . . ."
The purport of citing this decision by the learned counsel for the Revenue was to drive home the point that the loss on account of sale of shares was actually a camouflaged loss and was in his view a "colourable device" to avoid payment of tax.
The learned senior counsel for the assessee submitted that the appellate authority as well as the Tribunal on a thorough scrutiny of the materials available on record concurrently found that before the assessing authority the assessee had produced all primary evidences which it was expected of possessing in the course of sale of shares. Learned senior counsel invited our attention to the relevant findings of fact recorded by the appellate authority as well as the Tribunal in this regard and submitted that the conclusions arrived at by the appellate authority as well as the Tribunal are based on certain finding of facts from the materials and evidence available on record and the same cannot be interfered with by this court.
Learned senior counsel, in support of his arguments, relied on the following decision :
(a) CIT v. Currency Investment Ltd. [2000] 241 ITR 494 (Cal). It was held as under (page 495) :
"The learned Tribunal has concluded that in view of the facts of this case, the assessee has made out a case of a genuine loss in share transaction. Whether the shares were sold or not and for how much the shares were purchased and for how much the shares were sold is basically a question of fact. The identity of the parties through whom the shares were purchased and to whom the shares were sold is disclosed. Even the broker through whom the shares were purchased was produced. The payment was received by an account payee cheque and the payment was also made by the account payee cheque when the shares were purchased. The identity of the share brokers and the person through whom the shares were purchased and shares were sold is not disputed. Merely because the assessee could not produce a broker through whom the shares were sold or the person to whom the shares were sold, it does not affect the genuineness of shares in case when the assessee came with a fact and disclosed the identity of the persons from whom the shares were purchased and sold. If the assessee failed to produce those persons, that alone does not affect the genuineness of transactions.
Summons can be issued under section 131 of the Act to compel them to appear before the Income-tax Officer or the Assessing Officer. But that has not been done. One more factor has been highlighted by the Assessing Officer that the delivery of shares is on November 9, 1982, when the sale was on October 22, 1982. Merely because of the fact that all shares were delivered after 10/15 days from the date of sale also does not affect the claim of the assessee regarding the genuineness of sale of shares by the assessee and when there is no evidence on record that the shares are not purchased by the assessee, there is no justification to disallow the loss only on the ground that delivery of shares has been taken on the same date, when the shares are delivered to purchaser.
Whether the assessee suffered loss on account of the share transactions in question is basically an issue based on finding of fact and on the given facts, it cannot be said that the finding of the Tribunal is perverse. Even when two opinions are possible if one view possible is taken by the Tribunal that cannot be said as perverse." The learned senior counsel submitted that the above decision would go to show that if the assessee has made out a case of a genuine loss in share transaction and the Tribunal decides on the basis of that, then the decision taken by the Tribunal cannot be contended as perverse.
(b) CIT v. Karam Chand Thapar and Brothers [1989] 176 ITR 535 (SC), wherein the honourable Supreme Court held (page 540) :
"In deciding the question whether the Tribunal should have referred the aforesaid two questions to the court for determination, there are certain well-settled principles which have to be borne in mind. In CIT v. Dalmia Jain and Co. Ltd. [1972] 83 ITR 438 (SC), this court held that whether a particular loss is a trading loss or a capital loss is primarily a question of fact. Where the Tribunal has come to the conclusion that the loss incurred by the assessee in the sale of shares held by it was a trading loss and it is not the case of the Department that in arriving at its decision, the Tribunal had taken into consideration any irrelevant material or failed to take into consideration any relevant materials there is no room for interference by the court. It is well-settled that the Tribunal is the final fact finding body. The questions whether a particular loss is a trading loss or a capital loss and whether the loss is genuine or bogus are primarily questions which have to be determined on appreciation of facts. The findings of the Tribunal on these questions are not liable to be interfered with unless the Tribunal has taken into consideration any irrelevant material or has failed to take into consideration any relevant material or the conclusion arrived at by the Tribunal is perverse in the sense that no reasonable person, on the basis of facts before the Tribunal, could have come to the conclusion to which the Tribunal has come. It is equally settled that the decision of the Tribunal has not to be scrutinised sentence by sentence merely to find out whether all facts have been set out in detail by the Tribunal or whether some incidental fact which appears on the record has not been noticed by the Tribunal in its judgment. If the court on a fair reading of the judgment off the Tribunal, finds that it has taken into account all relevant material and has not taken into account any irrelevant material in basing its conclusions, the decision of the Tribunal is not liable to be interfered with, unless, of course, the conclusions arrived at by the Tribunal are perverse. Keeping these principles in mind in the present case, we find that the Tribunal has taken note of all the relevant circumstances which appear on the record and which were referred to by the Departmental representatives before the Tribunal. It has not taken into account any material which could be said to be irrelevant in arriving at its conclusions. In considering whether the shares of Bharat Starch and Chemicals Ltd. and Greaves Cotton and Co. Ltd. were held by the assessee as stock-in-trade or as capital, the Tribunal has taken into account the fact that the assessee was earlier treated by the Department as a dealer in shares, as pointed out by Mr. Manchanda, but that circumstance cannot be regarded as irrelevant in view of the decision to which we have already referred. It is also not possible to say that the decision of the Tribunal is perverse. Mr. Manchanda strongly contended before us that the Tribunal has nowhere stated in terms that it has taken into consideration the totality of circumstances or the cumulative effect of the circumstances pointed out to the Tribunal and hence the matter should be remanded to the Tribunal. In our view, there is no substance in this submission. It is true that the Tribunal has not stated in terms that it has considered the cumulative effect of the circumstances pointed out to the Tribunal, but, on the other hand, a plain reading of the judgment of the Tribunal makes it clear that the Tribunal has, in fact, taken into account the cumulative effect of the circumstances on record before the Tribunal. It is not necessary for the Tribunal to state in its judgment specifically or in express words that it has taken into account the cumulative effect of the circumstances or has considered the totality of facts, as if that were a magic formula ; if the judgment of the Tribunal shows that it has, in fact, done so, there is no reason to interfere with the decision of the Tribunal. In our opinion, there is no merit in this appeal and it must fail."
The learned senior counsel submitted that the hon'ble Supreme Court has time and again held that if the Tribunal has come to a conclusion that the loss incurred by the assessee in the sale of shares held by it was a trading loss and it should be treated so. It is not the case of the Department that in arriving at its decision, the Tribunal had taken into consideration any irrelevant material or failed to take into consideration any relevant material and, therefore, there is no room for interference by this court. It is well-settled that the Tribunal is the final fact-finding body.
(c) CIT v. Emerald Commercial Ltd. [2001] 250 ITR 539 (Cal). In this the Calcutta High Court held as follows (page 541) :
"It is also brought to our notice that on almost similar facts this court has considered the similar issue in the case of CIT v. Carbo Industrial Holdings Ltd. [2000] 244 ITR 422 (Cal) and answered the question in favour of the assessee.
The admitted facts in this case are that the details of purchase and sale of shares are furnished. The payment and receipt are by account payee cheque. The identity of seller and purchaser is not in dispute. The disallowance is basically made on the ground that the assessee failed to produce the brokers for verification of the transaction. Following our view in the earlier case referred to non-production of the share broker by the assessee does not disentitle the assessee for claim of loss in a genuine transaction of shares.
Considering the aforesaid facts and our view expressed in the case of CIT v. Carbo Industrial Holdings Ltd. [2000] 244 ITR 422 (Cal), we answer question No. 1 whether the finding of the Tribunal is based on material, in the affirmative and whether this finding of the Tribunal is perverse, we answer it in the negative, i.e., in favour of the assessee and against the Revenue."
(d) CIT v. Dalmia Jain and Co. [1972] 83 ITR 438 (SC), wherein the honourable Supreme Court held as under (page 439) :
"The point that arises for decision in these appeals is whether the loss incurred by the assessee in the sale of some shares held by it is a trading loss or a capital loss. There is no dispute that the assessee did incur loss by the sale of those shares. It is established that the assessee was dealing in shares. It is also established that in the previous years, such losses were given deduction too while computing the total income of the assessee. The Tribunal as well as the High Court have concurrently come to the conclusion that the loss in question is trading loss. The question whether a particular loss is a trading loss or a capital loss is primarily a question of fact. It is not the case of the department that in arriving at its decision, the Tribunal has taken into consideration any irrelevant consideration or failed to take into consideration any relevant consideration. Hence, there is no room for interference by this court."
(a) Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 (SC), wherein the honourable Supreme Court has held that (page 755) :
"In our view, the proper way to construe a taxing statute, while considering a device to avoid tax is not to ask whether a provision should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it."
The learned senior counsel submitted that the question whether a particular loss is a trading loss or a capital loss is primarily a question of fact. It is not the case of the Department that in arriving at its decision, the Tribunal has taken into consideration any irrelevant consideration or failed to take into consideration any relevant consideration. Hence, this court cannot interfere in this issue.
We have given our anxious consideration to the reasons given and findings arrived at by the appellate authority and the Tribunal. We find from the order of the appellate authority that with the material available on record he had proceeded to adjudicate the claim of the assessee. The appellate authority on scrutiny of the material available on record found that the assessee had produced all the required primary evidence such as copies of bills, contract notes, receipts for sale consideration, share particulars, etc., relating to the sale of shares. The appellate authority also found that the assessing authority did not prove these documents or evidence to be false or bogus. On appreciation of the factual aspects of the matter, the appellate authority held that the assessing authority was not justified in holding the sale of shares as bogus and the claim was made with a motive to avoid payment of tax. The appellate authority was found to be satisfied with the materials available on record that the loss suffered by the assessee in sale of shares was a genuine loss and, therefore, entitled to claim the loss under "Capital gains". The finding of the appellate authority was based on the materials available on record and, therefore, is a finding of fact. The Tribunal, concurring with the said finding, held that there was no convincing material put forth by the Revenue to establish that the assessee was claiming loss on ostensible sale of shares belonging to the group companies with the motive of tax avoidance. The Tribunal also confirmed the finding of the appellate authority that all the required primary evidence relating to sale of shares were produced before the assessing authority and that the assessing authority did not point out any infirmity in those evidence. The Tribunal also found that the assessing authority could not accept a transaction in part and reject or disbelieve the rest only for the purpose of assessment of loss. On a careful analysis of the orders of the appellate authority and the Tribunal in the light of the material available on record and the arguments made, we see no reason to interfere with the concurrent findings of fact recorded by the authorities below. There is no infirmity in the order passed by the Tribunal confirming the order of the appellate authority directing the assessing authority to assess the loss on sale of shares under the head "Long-term capital gains". We are also not convinced that the decision cited by the Revenue in the case of McDowell Co., cited supra, in any way support the case of the Revenue and the claim of loss on account of sale of shares, in our view, does not appear to be any "colourable device" as an instrument for avoidance of tax as wrongly argued on the part of the Revenue. On the contrary, the decision relied upon by the assessee in Azadi Bachao Andolan's case, cited supra, would show that the test to determine whether the claim is a colourable device or not is to determine whether the transaction is a device to avoid tax and whether the transaction is such that the judicial process may accord its approval to it. The Tribunal has analysed the materials on record to come to a conclusion that the loss on account of sale of shares was a genuine and that the said loss has occurred in the course of business and cannot be added to the income of the assessee in any manner. Furthermore, the Revenue has failed to demonstrate as to how the loss on account of sale of shares is not genuine but a colourable device. We, therefore, answer the substantial question of law No. 4 raised by the Revenue against them and in favour of the assessee.
Substantial question of law No. 5
The Revenue has raised this substantial question of law on the correctness of the Tribunal in allowing the assessee's claim of interest paid on borrowed capital.
The learned standing counsel for the Revenue argued that the interest paid on borrowed capital was not utilised for the assessee's business purposes. It was argued that the borrowed capital was mainly invested in shares of group companies and as such, interest claimed to have paid on such borrowed capital was used for the purposes of the assessee's business.
In support of his argument, the learned standing counsel relied on the following decisions :
(a) In K. Somasundaram and Brothers v. CIT [1999] 238 ITR 939 (Mad), wherein it was held as follows (page 943) :
"The amount borrowed for the business remains a liability for the business till its discharge. The fact that the amount borrowed may have been invested in the purchase of machinery or utilised as working capital or used in any other way does not in any way affect the liability for repayment of the amount borrowed. So long as the money borrowed is used in the business, interest paid on such borrowing is a proper charge on the business and is allowable as an expenditure. Under section 36(1)(iii) of the Act, amounts diverted not being used for the purposes of the business, interest relating to the operation diverted cannot be treated as an item of permissible deduction in the computation of income."
(b) CIT v. Munjal Sales Corporation [2008] 298 ITR 294 (P&H). It was held as under (page 295) :
"We have already considered an identical issue in CIT v. Abhishek Industries Ltd. [2006] 286 ITR 1 (P & H) wherein this court held as under (page 12) :
“As far as the issue of establishment of nexus of the funds borrowed vis-a-vis the funds diverted towards sister concern on interestfree basis is concerned, in our view, the stand of the assessee that the onus of proving the nexus of funds available with the assessee with the funds advanced to the sister concerns without interest is on the Revenue is not correct. Section 36(1)(iii) of the Act provides for deductions of interest on the loans raised for business purposes. Once the assessee claims any such deduction in the books of account, the onus will be on the assessee to satisfy the Assessing Officer that whatever loans were raised by the assessee, the same were used for business purposes. If in the process of examination of genuineness of such a deduction, it transpires that the assessee had advanced certain funds to sister concerns or any other person without any interest, there would be a very heavy onus on the assessee to be discharged before the Assessing Officer to the effect that in spite of pending term loans and working capital loans on which the assessee is incurring liability to pay interest, still there was justification to advance loans to sister concerns for non-business purposes without any interest and, accordingly, the assessee should be allowed deduction of interest being paid on the loans raised by it to that extent. In our view, even the plea of nexus of loans raised by the assessee with the funds advanced to the sister concerns on interest-free basis, may be it is pleaded to be out of sale proceeds or share capital or different account cannot be accepted.
Entire money in a business entity comes in a common kitty. The monies received as share capital, as term loans, as working capital loan, as sale proceeds, etc., do not have any different colour. Whatever are the receipts in the business, they have the colour of business receipts and have no separate identification. Sources has no concern whatsoever. The only thing sufficient to disallow the interest paid on the borrowing to the extent the amount is lent to sister concern without carrying any interest for non-business purposes would be that the assessee has some loans or other interest bearing debts to be repaid. In case the assessee had some surplus amount which, according to it, could not be repaid prematurely to any financial institution, still the same is either required to be circulated and utilised for the purpose of business or to be invested in a manner in which it generates income and not that it is diverted towards sister concern free of interest.' " On the other hand, learned senior counsel for the respondent assessee, reiterating the submissions made before the appellate authority and the Tribunal submitted that all the requirements under section 36(1)(iii) of the Income-tax Act for an allowance on interest paid on borrowed capital were fulfilled by the assessee. It was proved in the present case that the assessee had borrowed capital, the borrowed capital was used for business purposes and that interest was paid an borrowed capital. No material had been produced by the Revenue to show that the borrowed capital was utilised by the assessee for non-business purposes. Learned senior counsel submitted that the order passed by the Tribunal calls for no interference in this appeal. Learned senior counsel, to buttress his arguments, relied on the following decisions :
(a) Radhasoami Satsang v. CIT [1992] 193 ITR 321 (SC), wherein the honourable Supreme Court held as under (page 329) :
"We are aware of the fact that, strictly speaking, res judicata does not apply to income-tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year."
(b) CIT v. Phil Corporation Ltd. [2011] 244 CTR 226 (Bom), wherein the Bombay High Court held as under:
"Mr. Sonak, learned counsel, for respondent No. 1 submitted that the Tribunal has rightly relied on the decision of Shree Digvijay Cement Co. Ltd. v. CIT [1982] 138 ITR 45 (Guj) ; [1982] 26 CTR (Guj) 184 of the Gujarat High Court. He further relied on CIT v. Jardine Henderson Ltd. [1994] 210 ITR 981 (Cal) ; [1995] 125 CTR (Cal) 12 of the Calcutta High Court, wherein it was held that the interest paid on borrowings utilized for the purchase of shares in order to retain managing agency by the assessee-company was held allowable as business expenditure. We find that the reasoning of the Tribunal that the overdraft was not operated only for investing in the shares of subsidiary company and that the fact that it was also used for investment in the shares of the subsidiary company to have control over that company and, therefore, the element of interest paid on the overdraft was not susceptible of bifurcation and, therefore, the respondent No. 1 is entitled to the deduction under section 36(1)(iii) of the Income-tax Act is correct and deserves to be accepted." (c) In CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140 (SC), the honourable Supreme Court held as under (page 150) :
"The aforesaid discussion leads to the following result : The expression 'for the purpose of the business' is wider in scope than the expression 'for the purpose of earning profits'. Its range is wide : it may take in not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery ; it may include measure for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title ; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for carrying on of a business ; it may comprehend many other acts incidental to the carrying on of a business. However, wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. It cannot include sums spent by the assessee as agent of a third party, whether the origin of the agency is voluntary or statutory ; in that event, he pays the amount on behalf of another and for a purpose unconnected with the business. In the present case, the company, as a statutory agent of the deceased owners of the shares, paid the sums payable by the legal representatives of the deceased shareholders. The payments have nothing to do with the conduct of the business. The fact that on his default, if any, in the payment of the dues the Revenue may realise the amounts from the business assets is a consequence of the default of the assessee in not discharging his statutory obligation, but it does not make the expenditure any the more expenditure incurred in the conduct of the business. It is manifest that the amounts in question were paid by the assessee as a statutory agent to discharge a statutory duty unconnected with the business, though the occasion for the imposition arose because of the territorial nexus afforded by the accident of its doing business in India. We, therefore, hold that the estate duty paid by the respondent was not an allowable deduction under section 10(2)(xv) of the Act. We answer the question in the negative. The order of the High Court is wrong and is set aside."
We have carefully scrutinised the reasons given by the appellate authority and the Tribunal for allowing the assessee's claim of interest paid on borrowed capital. The appellate authority and the Tribunal found that the investment made in shares by the assessee by utilising borrowed capital was for strategic business purposes because the companies were promoted as special purpose companies to strengthen and promote its existing business by combining different business segments and, therefore, the claim was fully allowable under section 36(1)(iii). We also found that the Revenue did not adduce any material to show that the borrowed capital was utilised by the assessee for non-business purposes. The appellate authority, in our considered view, was correct in allowing the claim of the assessee and deleting the disallowance made by the assessing authority. We also found that the Tribunal in correct appreciation of the matter had in turn confirmed the finding of the appellate authority. We see no reason to interfere with the order passed by the Tribunal. We, for the reasons stated above, answer substantial question of law No. 5 in the affirmative and against the Revenue.
Substantial question of law No. 6
This substantial question of law relates to the assessee's claim of licence fee payment made to M/s. RPG Enterprises Ltd. The claim of the assessee was disallowed by the assessing authority. The appellate authority, however, deleted the disallowance. The deletion was confirmed by the Tribunal.
Learned standing counsel for the Revenue assailed the order of the Tribunal submitting that the payment of licence fee was not wholly and exclusively for the business purpose of the assessee and that the expenditure incurred was a mere reimbursement of the expenditure incurred by M/s. RPG Enterprises Ltd. for its own activities and not for the assessee's business purposes. It was argued that the appellate authority and the Tribunal erred in holding that the licence fee paid was for the business purposes of the assessee.
Learned senior counsel submitted that the payment of licence fee to a common group resource company is a practice among many business enterprises.
Having heard the learned standing counsel for the Revenue and the learned counsel for the respondent-assessee, we have carefully gone through the material available on record and the order passed by the authorities below and that of the Tribunal.
The assessing authority held that the respondent-assessee and M/s. RPG Enterprises Ltd. are two different legal entities under the Income-tax Act and, therefore, the sharing of expenditure of some other entity by the assessee was not an allowable expenditure. The assessing authority was of the view that it may be true and not disputed that RPG Enterprises Ltd. had incurred this expenditure but the business purpose of assessee reimbursing the said expenses to RPG Enterprises Ltd. was not established and that the payment of licence fee was more in the nature of an application of income by the assessee. The Assessing Officer disallowed the claim of the assessee towards licence fee paid to M/s. RPG Enterprises Ltd. and added the said amounts to their income. The appellate authority, the Commissioner of Income-tax (Appeals) relying on the order passed by the Kolkatta Income-tax Appellate Tribunal in the case of M/s. Philips Carbon Black Ltd. was of the view that by taking the benefit of the common business establishment, the assessee could access the expert advice in various business fields and, therefore, licence fee paid to M/s. RPG Enterprises Ltd. was a business expenditure incurred wholly and exclusively for the purpose of business. The appellate authority found that the facts and circumstances of the assessee's case were identical to the facts of M/s. Philips Carbon Black Ltd. and, therefore, following the order passed by the Kolkatta Income-tax Appellate Tribunal set aside the order of the assessing authority and deleted the disallowance of licence fee paid to M/s. RPG Enterprise Ltd. In the appeal before the Tribunal by the Revenue, the Tribunal following the decision of the co-ordinate Bench of the Madras Income-tax Appellate Tribunal in the case of RPG Transmission Ltd. in I. T. A. Nos. 751 to 753/ Mds/2005, held that since the material facts and circumstances governing payments made by the assessee towards licence fee were the same as in the case of RPG Transmission Ltd., confirmed the order of the Commissioner of Income-tax (Appeals) in deleting the disallowance of licence fee paid to RPG Enterprises Ltd. and rejected the appeal filed by the Revenue. It, however, appears that in the appeal before the Tribunal neither the Revenue nor the assessee has brought to the notice of the Tribunal that the earlier order passed by the Tribunal in the case of RPG Transmission Ltd. in I. T. A. Nos. 751 to 753/Mds/2005 was subject matter of further appeal before this court.
In the connected appeal in T. C. (A.) Nos. 310 to 312 of 2007 and 1388 to 1390 of 2007-since reported in CIT v. RPG Transmissions Ltd. [2013] 359 ITR 673 (Mad) (infra) and also T. C. (A.) No. 1783 of 2008 filed by the Revenue against M/s. RPG Transmission Ltd. and M/s. Spencer and Co. Ltd. respectively, which appeals were heard and disposed of together with these appeals today, we have dealt with the very same issue of licence fee payment at length. The fact situation relating to the claim of licence fee payment to M/s. RPG Enterprises Ltd. is similar to the case on hand except for different assessment year. We hereunder quote the relevant part of our finding on the licence fee payment to RPG Enterprises Ltd. in our judgment in T. C. (A.) No. 1783 of 2008 since reported in CIT v. Spencers and Co. Ltd. (No. 2) [2013] 359 ITR 630 (Mad) (page 639) :
"Before us, reiterating the findings of the Tribunal in the order impugned in this appeal, learned counsel for the respondent-assessee drew our attention of the decision of the Calcutta High Court in Philips Carbon's case, where the Calcutta High Court had dismissed the appeal filed by the Revenue on the licence fee holding that no substantial question of law was involved. It is pertinent here to note that the said decision was no rendered on the merits of such expenditure which was allowed as business expenditure but the High Court was of the view that no substantial question of law was involved. In such circumstances, the said decision of the Calcutta High Court may not be of any assistance to the respondent-assessee to substantiate their claim. It was also pointed out on behalf of the respondent-assessee that the Bombay Tribunal in the case of RPG Life Science has allowed the deductions towards licence fee paid to RPG Enterprises Ltd. and that the said decision of the Bombay Tribunal was confirmed by the Bombay High Court. We note from the order of the Bombay High Court that the appeals were dismissed at the stage of admission as the High Court was of the view that no substantial question of law was involved for a decision by the High Court.
We have carefully perused the order passed by the Bombay Tribunal, which was taken up in appeal before the Bombay High Court. We find that the findings recorded by the Bombay Tribunal were essentially based on the decision of the Madras Bench of the Tribunal rendered in RPG Transmission's case, which order is impugned before this court. We, therefore, cannot solely rely on the decisions cited by the learned counsel for the respondent-assessee as at the time of rendering the above said decision, the present appeal was already admitted and therefore, this court could very well examine the correctness or otherwise of the Tribunal's order We have carefully examined the order of the Tribunal, which is impugned before us in this appeal. We find that while concurring with the Commissioner of Income-tax (Appeals) on the issue of licence fee paid, the Tribunal had set aside the findings of the assessing authority. The essential fact which emerged from the material on record was whether the expenditure incurred by the assessee towards payment of licence fee to M/s. RPG Enterprises Ltd. was justifiable on facts for allowance. We note from the order of the Commissioner of Income-tax (Appeals) as well as the order of the Tribunal that respondent-assessee by availing of the service benefits from the group resource company, viz., M/s. RPG Enterprises Ltd. availed of valuable benefit for their business operations and that the payment of licence fee to M/s. RPG Enterprises Ltd. by the respondent-assessee was towards their share of actual expenses incurred by M/s. RPG Enterprises Ltd. The Commissioner of Income-tax (Appeals) and the Tribunal in their orders clearly pointed out that the expenditure incurred by the respondent assessee towards licence fee payment to M/s. RPG Enterprises Ltd. were relatable to the business expediency and profits of the respondent-assessee and that the benefits availed of by the respondent-assessee from the service of the group resource company was tangible and justified. We do not see any reason to interfere with the concurrent finding of fact recorded by the Commissioner of Income-tax (Appeals) and the Tribunal. The orders passed by the Commissioner of Income-tax (Appeals) and the Tribunal contained cogent reasons for arriving at such findings.
The issue regarding licence fee paid is squarely covered by two decisions of the High Courts of Bombay and Calcutta (referred to above) in which the question of law raised by the Revenue was rejected in the assessee's group company case. It is settled law in so far as the scope, power and ambit of the High Court in exercise of jurisdiction under section 260A of the Income-tax Act and the sum and substance of the decisions relied upon by the learned counsel on either side is that once the Tribunal and the appellate authority has decided case with reference to the explanation offered by the assessee in detail then the court cannot interfere on the case. Further, if the findings of fact arrived at by the authorities below are based on proper appreciation of the facts and the material available on record and surrounding circumstances then that will not involve any substantive question of law.
Following the said decisions of the High Court, we answer the substantial question of law No. 1 raised in this appeal in the affirmative and against the Revenue."
In this appeal also, we do not find any reason on the facts and circumstances, to take a different view. We, accordingly, answer the substantial question of law No. 6 raised by the Revenue on the claim of licence fee payment in the present appeals in the affirmative and against the Revenue.
In the result, we see no merit in the appeal. The appeal is accordingly dismissed. No costs.