- (1.) The following question of law was referred by a Division Bench of this Court vide order dated 7.8.2009 for consideration by a larger Bench: Whether having regard to relationship between different concerns, where a transaction which is patently imprudent, takes place, the taxing authority should examine the question of business expediency and not go merely by the fact that the Assessee had taken a decision in its wisdom which may be wrong or right
(2.) Briefly, the facts are that the Income Tax Appellate Tribunal, Chandigarh Bench, Chandigarh (for short, 'the Tribunal'), at the instance of the revenue, referred the following question of law arising out of order dated 19.11.1995, passed in ITA Nos. 70 and 93 of 1990 relating to assessment year 1986-87 for determination by this Court: Whether on the facts and in the circumstances of the case, the ITAT was right in law in allowing interest claimed by the Assessee at a higher rate on the borrowings though the investment had been made by the Assessee in the shares of a sister concern which gave a fixed return of income.
(3.) The facts, which were taken note of by the Division Bench of this Court, while referring the question of law to the larger Bench are extracted below: 2. The Assessee borrowed money from sister concern and paid interest therein @ 18% per annum and purchased shares from sister concern which carried dividend @ 4%. The Assessing Officer (AO) held that there was no justification to borrow funds at the rate of 18% interest for making investment in shares, which would give a dividend of 4% only. Having regard to the fact that the borrowing was made from sister concern and investment was also in another sister concern, the claim for interest was disallowed. It was held that investment of shares was not for business purpose or business consideration. Observations of the AO are as under: 3... No prudent person will make such an investment. A man may invest in equity share may get 10%, may get dividend of 50% of more along with appreciation or may not get the dividend at all. In preference shares the return determines its market value. At the rate of 4%, preference share may fetch not more than Rs. 30/- to 35/- per share of the face value of Rs. 100/-. For the purpose of wealth tax the value of these shares has been shown between Rs 30/- to 35/- by the share holders. In the Assessee's case it knew before making the investment that the maximum yield expected could not be more than 4%. The Assessee belongs to one of the largest group of M/s Hero Cycles (P) Limited and is assisted by a number of senior counsels. The Assessee's conduct of paying higher interest to the sister concern of the same group by taking a loan for the purchase of preference shares with a low fixed yield is a clear cut colourable dubious device to reduce the tax liability, such device is not permissible in view of the Hon'ble Supreme Court's decision in the case of Mc.Dowell & Co. Limited, reported in , 154 ITR 148. Penalty proceedings under Section 271(1)(c) are initiated for furnishing of in accurate particulars of income. 3. The CIT (A) upheld the finding of the Assessing Officer with following observations: 7.3. I do not find any reason to give relief to the Appellant on this account. The another ground that the Appellant is entitled to 4% dividend on these shares that in case of Highway Cycle Ind. Ltd. Ludhiana for assessment year 1986-87 the ACIT has added back the difference of 18-4= 14% under similar circumstances on the amount borrowed for that company for purchase of similar shares. This plea of the Appellant is also rejected as these are non-cumulative preference shares and no dividend has been declared by Hero Investments P. Limited for the year under consideration. It is held that the case of Mc. Dowell & Co. Limited (, 154 ITR 148) is applicable, as the Appellant has adopted circuitous method, where it was observed: 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.;