Voltamp Referigeration Services Vs. Income Tax Officer - Court Judgment

Excerpt:

.....preferred second appeal against the said order. this year also, the cit(a) confirmed the disallowance but reduced it to rs. 21,250 considering the fact that the accounting year was of one year and three months.4. the contention of the learned counsel was that the impugned amount of rs. 2 lakhs was withdrawn much earlier in the accounting year relevant to asst. yr. 1987-88. it was pointed out that in asst. yr.1987-88, no such disallowance was made. in asst. yr. 1988-89, though the cit(a) had sustained the disallowance, no second appeal was preferred by the assessee because of smallness of the amount. in any case, it was pointed out that the firm had borrowed funds for its business purpose and interest thereon had to be allowed as business expenditure. if the transaction, which was otherwise genuine in all respects, resulted in some tax saving, it could not be considered as a colourable device for which contention, the learned counsel placed reliance on the decision of the hon'ble supreme court in the case of union of india and anr. v. azadi bachao andolan and anr. (2003) 263 itr 706 (sc). reliance was also placed on the decision of the hon'ble karnataka high court in the case of.....

Judgment:

1. The assessee is in appeal before us against the order of the learned CIT(A), dt. 26th March, 2002 for asst. yr. 1989-90. The only ground raised in the appeal relates to the disallowance of interest amounting to Rs. 21,250.

2. In the course of assessment proceedings, it was observed by the AO that a sum of Rs. 2 lakhs was withdrawn by two partners from their respective capital accounts with the assessee-firm and had invested it in another firm known as Vadilal & Sons. The assessee-firm then borrowed funds immediately from Vadilal & Sons on which interest was paid. The AO was of the view that the assessee had adopted this device in order to reduce its taxable income. The AO, therefore, made a proportionate disallowance of interest payment which amounted to Rs. 45,000. The AO also referred to the assessment order for asst. yr.

1980-81 wherein a similar disallowance was made.

3. The learned CIT(A) referred to the appellate order for asst. yr.

1988-89 wherein the disallowance was reduced in proportion to the length of the accounting year and also observed that the assessee had not preferred second appeal against the said order. This year also, the CIT(A) confirmed the disallowance but reduced it to Rs. 21,250 considering the fact that the accounting year was of one year and three months.

4. The contention of the learned counsel was that the impugned amount of Rs. 2 lakhs was withdrawn much earlier in the accounting year relevant to asst. yr. 1987-88. It was pointed out that in asst. yr.

1987-88, no such disallowance was made. In asst. yr. 1988-89, though the CIT(A) had sustained the disallowance, no second appeal was preferred by the assessee because of smallness of the amount. In any case, it was pointed out that the firm had borrowed funds for its business purpose and interest thereon had to be allowed as business expenditure. If the transaction, which was otherwise genuine in all respects, resulted in some tax saving, it could not be considered as a colourable device for which contention, the learned counsel placed reliance on the decision of the Hon'ble Supreme Court in the case of Union of India and Anr. v. Azadi Bachao Andolan and Anr. (2003) 263 ITR 706 (SC). Reliance was also placed on the decision of the Hon'ble Karnataka High Court in the case of CIT v. M. Vinoda Rao and Ors.

(1993) 200 ITR 50 (Kar). The learned Departmental Representative relied on the orders of the authorities below.

5. We have duly considered the rival contentions and the material on record. There is no allegation by any of the lower authorities that the monies borrowed by the assessee-firm were not for the purpose of business. When it is not disputed that the monies were borrowed for business purpose, there is no reason to disallow the interest paid thereon unless it is proved that the transaction is not genuine. There is also no allegation from any of the lower authorities that the transaction is not genuine. If at all it is considered to be non-genuine by the Revenue authorities, it is on the ground that it was a device entered into by the assessee to reduce its own income-tax liability. In our view, it is a myopic way of looking at the things.

Simply because the transaction resulted into reduction in tax liability, it does not automatically become a colourable device. This view has been expressed by the Hon'ble Supreme Court in the case of Azadi Bachao Andolan (supra). Therefore, we are of the view that the disallowance made is neither justifiable nor tenable in the eyes of law. We delete the same.

6. Before parting, it may be mentioned that in asst. yr. 1987-88, no disallowance was made by the Department on this count. In asst. yr.

1988-89, the Department did make a disallowance which was confirmed by the CIT(A) but second appeal was not preferred by the assessee because of smallness of the amount. In asst. yr. 1989-90, i.e., the year under consideration, the Department has, again made the disallowance. Suffice it to say that consistency should be the hallmark in the case of the same assessee from year to year unless there are strong reasons to deviate from the stand already taken.