ORDER
46. Their Lordships of Hon'ble Supreme Court in the case reported in : JT 2010(4) SC 35 Assistant Commissioner, Commercial, Tax Department, Works, Contract and Leasing, Quota v. Shukla and Brothers has held that it shall be obligatory on the part of the judicial or quasi judicial authority to pass a reasoned order while exercising statutory jurisdiction.
47. The aforesaid view to pass reasoned order by the authorities which includes quasi-judicial authorities is consistently reiterated by the Hon'ble Supreme Court in earlier judgments. It has been held by their Lordships that the authorities have to record reasons, otherwise it may become a tool for harassment vide K.R. Deb v. The Collector of Central Excise, Shillong : AIR 1971 SC 1447; State of Assam and Anr. v. J.N. Roy Biswas AIR 1975 SC 2277; State of Punjab v. Kashmir Singh 1997 SCC (L&S;) 88; Union of India and Ors. v. P. Thayagarajan : AIR 1999 SC 449; and Union of India v. K.D. Pandey and Anr. : (2002) 10 SCC 471.
48. In view of above, the tribunal should have dealt with the facts and circumstances and question of law involved and raised by the authorities, may be in precise instead of dismissing the appeal merely on the ground of consistency. Non-consideration of grounds assigned by the assessing authority by the appellate authority or the tribunal renders the order passed by them unjust, illegal and violative of Article 14 of the Constitution of India.
49. Hon'ble Supreme Court in a case reported in : AIR 1955 SC 633 U.J.S. Chopra v. State of Bombayheld that the judgment is the expression of opinion of the Court arrived at after due consideration of evidence and the arguments which shall form judicial determination.
50. In a case reported in : AIR 1957 SC 389 State of Bihar v. Ram Naresh Pandey and Ors. their Lordships of Hon'ble Supreme Court held that the judgment means a decision which affect the merit of a question between the parties by determining some right or liability.
Thus, it shall always be obligatory on the part of the appellate court or the tribunal to determine the issue involved by passing a reasoned order after considering the grounds and material on record as well as the finding and observations made by the assessing authority/ appellate authority.
DUTY OF APPELLATE AUTHORITY/TRIBUNAL
51. It is also settled law that the appellate authority while dissenting with the order of the subordinate authority should meet out the finding recorded by the original authority by assigning reasons. In the present case, reason assigned by the tribunal while taking different view than of the assessing authority is not based on due consideration of entire grounds relied upon by the assessing authority.
52. Hon'ble Supreme Court in a case reported in (2001)2 JT (SC) 407 Santosh Hazari v. Purushottam Tiwari(Dead) by L.Rs. held as under:
The appellate Court has jurisdiction to reverse or affirm the findings of the trial Court. First appeal is a valuable right of the parties and unless restricted by law, the whole case is therein open for hearing both on questions of fact and law. The judgment of the Appellate Court must, therefore, reflect its conscious application of mind, and record findings supported by reasons, on all the issues arising along with the contentions put forth, and pressed by the parties for decision of the Appellate Court.....
While reversing a finding of fact the Appellate Court must come into close quarters with the reasoning assigned by the trial Court and then assign its own reasons for arriving at a different finding. This would satisfy the Court hearing a further appeal that the First Appellate Court had discharged the duty expected of it.
The aforesaid proposition of law has been reiterated in a case reported in : AIR 2001 SC 2171 Madhukar and Ors. v. Sangram and Ors.
53. In an earlier judgment reported in : AIR 1998 SC 2713 Punjab National Bank and Ors. v. Kunj Behari Misra Hon'ble Supreme Court after considering catena of earlier judgments held that in case the disciplinary authority disagrees with the conclusion reached by the enquiry officer, then while recording his own finding, it shall be obligatory to deal with the reason given by the enquiry officer. On the same analogy, in case the appellate authority differs with the finding recorded by the assessing officer, then each and every issue, grounds and circumstances dealt with by the assessing officer must be considered and difference of opinion must be supported by reasoned order.
Hence also, the appeal cannot be thrown out merely on the ground to maintain consistency with previous years.
BINDING PRECEDENT
54. Reliance placed by the learned Counsel for the assessee to the dismissal of the appeal in limine by the Delhi High Court or the Supreme Court seems to be not sustainable. A perusal of the order passed by the Delhi High Court and Hon'ble Supreme Court shows that the appeal has been dismissed without recording a finding with regard to argument advanced or dispute raised. It is settled law that a judgment shall be binding only in case the dispute is identical based on same set of facts. The judgment should be considered in reference to the context keeping in view the facts and circumstances of each case. It is not borne out from the judgment of the Delhi High Court that the question cropped up for adjudication in this Court was raised and adjudicated by the Delhi High Court.
55. The expression, 'judgment' has been defined in Section 2(9) of the Code of Civil Procedure. The judgment means the statement given by a Judge on the grounds of a decree or order. Meaning thereby the Court has to state the ground on which it bases its decision. It must be intelligible and must have a meaning. It has a distinction from a word, order as the latter may not contain reasons. Unless, a judgment is based on reason, it would not be possible for an appellate/revisional Court to decide as to whether the judgment is in accordance with law vide : AIR 1954 SC 194 Surendra Singh and Ors. v. State of U.P.
56. Hon'ble Supreme Court in a case reported in : AIR 1970 SC 1168 Tarapore & Co. Madras v. Tractors Export Moscow held that the judgment means a final adjudication by the Court of rights of the parties.
57. In AIR 1964 SC 1099 (C.B.) Vidyacharan Shukla v. Khubchand Baghel and Ors. their Lordships of Hon'ble Supreme Court held that the judgment is statement of reason given by a Judge.
58. So far as the argument of the respondent's counsel with regard to binding precedent is concerned, it has been held by Hon'ble Supreme Court by catena of judgments that the issue which has not been considered by the Court while delivering a judgment cannot be said to be binding as a decision of the Court takes its colour from the questions involved in the case in which it is rendered and while applying decision to a later case, the court must carefully try to ascertain true principle laid down by the decision of the Court. The court should not place reliance upon the decision without discussing as to how the factual situation fits in with the fact, situation of the decision on which reliance is placed as it has to be ascertained by analyzing all the material facts and issue involved in the case and argued by both sides. The judgment has to be read with reference to and in context with a particular statutory provisions interpreted by the Court, as the Court has to examine as to what principle of law has been decided and the decision cannot be relied upon in support of a proposition that it did not decide vide : AIR 1971 SC 530 H.H. Maharajadhiraja Madhav Rao Jivaji Rao Scindia Bahadur and Ors. v. Union of India : AIR 1985 SC 218 Amar Nath Om Parkash and Ors. v. State of Punjab and Ors. : AIR 1980 SC 1707 Rajpur Ruda Meha and Ors. v. State of Gujarat : (1992) 4 SCC 363 C.I.T. v. Sun Engineering Works (P) Limited. : (1993) 2 SCC 386Sarva Shramik Sangh, Bombay v. Indian Hume Pipe Co. Limited and Anr. : AIR 2005 SC 2499 Makhija Construction and Enggr. Pvt. Limited v. Indore Development Authority and Ors.
59. In : AIR 2002 SC 1187 Jawahar Lal Sazawal and Ors. v. State of Jammu and Kashmir and Ors. their Lordships of Hon'ble Supreme Court held that a judgment may not be followed in a given case if it has some distinguishing features.
60. In : AIR 2003 SC 511 Bhavnagar University v. Palitana Sugar Mill (P) Limited, Hon'ble Supreme Court held that a decision is an authority for which it is decided and not what can logically be deduced therefrom. A little difference in facts or additional facts may make a lot of difference in the precedential value of a decision.
61. The aforesaid principle of law has been followed in other cases reported in : AIR 2002 SC 3088 Delhi Administration v. Manohar Lal : AIR 2003 SC 2339 Union of India v. Chajju Ram : AIR 2003 SC 2661 Ashwani Kumar Singh v. U.P. Public Service Commission and Ors.
62. In view of above, keeping in view the finding and the material discussed by the assessing authority and the submission made by the parties, the judgment of the Delhi High Court does not have binding precedent being not a reasoned order deciding the issue in question. It also lacks persuasive effect being not deciding the issue involved.
INCOME FROM OTHER SOURCES (Section 57(iii) of the Income Tax Act)
63. The question cropped up as to whether the amount invested by the assessee in sisters concerned running in loss since several years may be treated as investment made exclusively for the purpose of making or earning such income. Section 57(iii) of the Act is reproduced as under:
any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income.
64. Accordingly, the expenditure wholly and exclusively for the purpose of making or earning income may be deducted. It shall be appropriate to consider some of the pronouncements of other High Courts and Hon'ble Supreme Court.
65. The Calcutta High Court in a case reported in (2005) 273 ITR 353 (Cal) Consolidated Fibres and Chemicals Limited v. Commissioner of Income Tax while interpreting Section 57(iii) of the Act held that taxability of income is not dependent upon its destination or the manner of its utilisation. It has to be seen at the point of accrual. It is not necessary that there should be a direct connection between the interest paid and the interest received for the purpose of claiming benefit under Section 57(iii). It should be seen whether the amount has been laid out or expended wholly and exclusively for the purpose of earning the income. Unless this test is satisfied the benefit under Section 57(iii) shall not be available.
66. Hon'ble Supreme Court in a leading case reported in (1978) 115 ITR 516 (SC) Commissioner of Income Tax, West Bengal-III v. Rajendra Prasad Moody held that it is not necessary that any income should, in fact, have been earned as a result of expenditure. It is also not necessary to show that the expenditure was profitable one or that, in fact, any profit was earned.
67. Their Lordships held that merely because there is no profit the assessee's right to claim benefit under Section 57(iii) of the Act may not be thrown out. However, a close reading of judgment of Rajendra Prasad Moody (supra) shows that the Hon'ble Supreme court observed that the expenditure should be proper and bona fide. It shall be appropriate to reproduce relevant portion of the judgment of Rajendra Prasad Moody (supra):
We fail to appreciate how expenditure which is otherwise a proper expenditure can cease to be such merely because there is no receipt of income. Whatever is a proper outgoing by way of expenditure must be debited irrespective whether there is receipt of income or not. That is the plain requirement of proper accounting and the interpretation of Section 57(iii) cannot be different. The deduction of the expenditure cannot, in the circumstances, be held to be conditional upon the making or earning of the income.
Hon'ble Supreme Court further observed (supra):It is true that the language of Section 37(1) is a little wider than that of Section 57(iii), but we do not see how that can make any difference in the true interpretation of Section 57(iii). The language of Section 57(iii) is clear and unambiguous and it has to be construed according to its plain natural meaning and merely because a slightly wider phraseology is employed in another section which may take in something more, it does not mean that Section 57(iii) should be given a narrow and constricted meaning not warranted by the language of the section and in fact, contrary to such language.
68. In view of above, the condition precedent to avail the benefit of Section 57(iii) of the Act is that the investment must be proper and justified. Proper investment means correct investment with intention to earn profit. In Oxford Learner's Dictionary, the word, 'proper' has been defined as right or correct action in accordance with rules. Action should be real and good enough to avail the very object and purpose of investment acceptable socially and morally. (Oxford Advance Learner's Dictionary page 1210(7th Edition).
69. In 1994 ITR 2006 Patna 350 CIT v. Bihar Limited Calcutta High Court held that the expenditure is allowable as deduction from income from other sources only if it is found that, in fact, it has been expended wholly and exclusively for the purpose of making or earning such income and it is not in the nature of capital expenditure.
70. In a case reported in : 151 ITR 653 Commissioner of Income Tax v. Sujani Textiles (P) Limited it has been held by the Madras High Court that where there was no question for any receipt of income from that source against which the interest on the borrowed funds could be set off, the interest paid by the company on borrowed funds could not be allowed as a deduction either under Section 36(1)(iii) or under Section 57(iii). The view taken by Madras High Court seems to be correct and we are in agreement to it.
71. In a case reported in : 154 ITR 148 Mcdowell and Co. Limited v. Commercial Tax Officer Hon'ble Supreme Court took the note of the fact that the consequences of tax avoidance by an assessee is enormous. The black money flowing in the market discourage the honest taxpayers to file return and cause loss to exchequer.
72. It has been further observed that (supra), in a civilized society, the evasion of tax by dishonest taxpayers should be dealt with firmly and proper way to construe a taxing statute while considering a device to avoid tax is to be construed literally and strictly to preserve and check the tax avoidance. To reproduce relevant portion (supra):
We think that time has come for us to depart from the Westminster principle as emphatically as the British Courts have done and to dissociate ourselves from the observations of Shah, J. and similar observations made elsewhere. The evil consequences of tax avoidance are manifold. First there is substantial loss of much needed public revenue, particularly in a welfare State like ours. Next there is the serious' disturbance caused to the economy of the country by the piling up of mountains of black money, directly causing inflation. Then there is 'the large hidden loss' to the community (as pointed out by Master Sheatcroft in 18 Modern Law Review 209) by some of the best brains in the country being involved in the perpetual war waged between the tax-avoider and his expert team of advisers, lawyers and accountants on one side and the tax-gatherer and his perhaps not so skillful advisers on the other side. Then again there is the 'sense of injustice and inequality which tax avoidance arouses in the breasts of those who are unwilling or unable to profit by it'. Last but not the least is the ethics (to be precise, the lack of it) of transferring the burden of tax liability to the shoulders of the guileless good citizens from those of the 'artful dodgers'. It may, indeed, be difficult for lesser mortals to attain the state of mind of Mr. Justice Holmes, who said, 'Taxes are what we pay for civilized society. I like to pay taxes. With them I buy civilization.' But, surely, it is high time for the judiciary in India too to part its ways from the principle of Westminster and the alluring logic of tax avoidance, we now live in a welfare State whose financial needs, if backed by the law, have to be respected and met. We must recognise that there is behind taxation laws as much moral sanction as behind any other welfare legislation and it is a pretence to say that avoidance of taxation is not unethical and that it stands on no less moral plane than honest payment of taxation. 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.
73. The Delhi High Court in a case reported in : 238 ITR 777 Commissioner of Income Tax v. Amritaben R. Shah held that the expenditure must be with primary motive of earning income. In order that an expenditure may be admissible under Section 57 of the Act, it is necessary that the primary motive of incurring it is directly to earn income falling under the head 'Income from other sources'. It shall be appropriate to reproduce from the judgment of Amritaben R. Shah (supra):
The question which arises in this case is: whether the expenditure incurred for borrowing money for purchasing shares for acquiring controlling interest in a company can be held to be an expenditure incurred wholly or exclusively for earning income from dividend. There is no dispute in this case that the shares in question were purchased by the assessee for the purpose of acquiring controlling interest in the company and not for earning dividend. That being so, the expenditure incurred by way of interest on the loan taken by the assessee for the said purpose cannot be held to be an expenditure incurred wholly and exclusively for the purpose of earning income by way of dividends. From the nature of transaction, it is clear that the expenditure was not for the purpose of earning income by way of dividends but for the purpose of acquiring controlling interest in the company and, therefore, it would not be allowable as a deduction under Section 57(iii) of the Act.
74. In another case reported in 1964 (33) ITR 140 Commissioner of Income Tax v. Amritaben R. Shah Hon'ble Supreme Court held that the expression 'for the purpose of business' is narrower than the expression 'for the purpose of making or earning profit' and the same view has been followed in : (1971) 82 ITR 166Commissioner of Income Tax, West Bengal I v. Birla Cotton Spinning and Weaving Mills Limited.
75. In 2001 ITR 464 Sarabhai Sons Private Limited, a Division Bench of Gujarat High Court held that income, in fact, should have been earned as a result of expenditure. However, the purpose of making or earning such income must be the sole purpose for which the expenditure must have been incurred. The distinction between purpose and motive must always be borne in mind for what is relevant is the manifest and immediate purpose and not the motive of personal consideration moving in the mind of the assessee for incurring expenditure.
76. The legislature to their wisdom has used the word 'laid out or expended wholly and exclusively for the purpose of making or earning such income. By using the word 'wholly and exclusively', the legislature cast a duty on the assessee to establish that the expenditure made was to earn income and not for any other purpose. These words make it obligatory for the assessee to ensure that by making investment, he or she had understood to earn income. For the purpose of earning income through the investment the assessee has to take into account the financial prospect of the company concerned. The principle applied to ascertain the intention of assessee to earn income shall be what a man of common prudence will think while expending in a company. In case there is no material on record to establish that the expenditure of the assessee is done bona fidely to earn income, the deduction under Section 57(iii) of the Act shall not be available.
77. In the present context, the assessee has repeatedly submitted incorrect statement(supra) and borrowed the money for investment in her sister concerned managed by her close associate and relative which are running in loss without any expectation to gain profit. A man of common prudence shall never like to make investment in a company whose financial status is fragile and not liable to make profit.
78. The investment must be wholly and exclusively for the purpose of earning profit. At least dominant purpose of investment made must be to earn profit. The decision taken under the circumstances while making an investment should reveal that there was likelihood to earn profit. The investment or expenditure made in a company where there is no hope of earning profit shall not be covered by the Section 57(iii) of the Act (laid out or expended wholly and exclusively for the purpose of making or earning such income).
79. After filing original return the petitioner has submitted revised return and statements giving out different figures. This act on the part of the assessee reveals that she has not acted bona fidely and tried to avail the benefit of Section 57(iii) of the Act by changing her stand. Neither the appellate authority nor the tribunal has considered this aspect of the matter with regard to bona fide of the assessee.
80. Though it is not unfair to borrow money or take loan from one concern and invest the same in other concern for the purpose of profit or income but while doing so, the assessee must act bona fide with primary motive to earn profit. The amount taken on loan from one concern and investment in other concern running in loss having fragile financial status cannot be treated as bona fide act on the part of the assessee. The action of the assess suffers from lack of bona fide and seems to be a device to help sister concern.
81. Some of the companies where the assessee has made investments are not listed in the stock exchange and not likely to fetch any resale value. The assessing officer may exaggerate the factual position but things as stand reveals that no person shall make investment in the companies which lacks financial soundness and where there is remote chance of profit or to earn income. The expenditure towards interest on loan does not seem to lay out or expend wholly and exclusively for the purpose of making or earning income from the shares under Section 57(iii) of the Act. The reasoning given by the assessing officer substantially seems to be correct while disallowing deduction.
82. There is one other aspect of the matter. While interpreting the provisions contained in Section 57(iii) of the Act, the tribunal or the Court has got ample power to pierce the veil. The Court may find out from the material on record with regard to bona fide and intention of the assessee while claiming benefit of Section 57(iii) of the Act. Every word of Section 57(3) of the Act should be given meaning.
83. Hon'ble supreme Court consistently held that the taxing statute should be construed strictly vide : 2004 (10) SCC 201 State of West Bengal v. Kesoram Industries Ltd : AIR 2000 SC 109 Mathuram Agarwal v. State of M.P. : (1999)7 SCC 106 Mysore Minerals Limited M.G. Road, Bangalore v. CIT, Karnataka, Bangalore.
84. It is no longer res integra that while interpreting statutory provisions, each and every word of the Act, every section and every chapter should be taken into account in reference to context. According to Maxwell any construction which may leave without affecting any part of the language of a statute should ordinarily be rejected. Relevant portion from Maxwell on the Interpretation of Statutes (12th edition page 36) is reproduced as under:
A construction which would leave without effect any part of the language of a statute will normally be rejected. Thus, where an Act plainly gave an appeal from one quarter sessions to another, it was observed that such a provision, through extraordinary and perhaps an oversight, could not be eliminated.
85. In : 2006 (2) SCC 670 Vemareddy Kumaraswami Reddy and Anr. v. State of Andhra Pradesh their Lordship of Hon'ble Supreme Court affirmed the principle of construction and held that when the language of the statute is clear and unambiguous court can not make any addition or subtraction of words.
86. In : AIR 2007 SC 2742 M.C.D. v. Keemat Rai Gupta and : AIR 2007 SC 2625 Mohan v. State of Maharashtra, their Lordship of Hon'ble Supreme Court ruled that Court should not add or delete the words of a statute. Casus Omisus should not be supplied when the language of the statute is clear and unambiguous.
87. In : AIR 2008 SC 1797 Karnataka State Financial Corporation v. N. Narasimahaiah and Ors. Hon'ble Supreme Court held that while construing a statute it can not be extended to a situation not contemplated thereby. Entire statue must be first read as a whole then section by section, phrase by phrase and word by word. While discharging statutory obligation with regard to take action against a person in a particular manner that should be done in the same manner. Interpretation of statute should not depend upon contingency but it should be interpreted from its own word and language used.
88. In (2000) 3 SC 485 K.V. Shivakumar Kumar v. Appropriate Authority Hon'ble Supreme Court has held that equity or hardship are not relevant consideration for interpretation for taxing law.
89. In : 2004 (10) SCC 201 State of West Bengal v. Kesoram Industries Ltd., Hon'ble Supreme Court held that taxing statute should be construed strictly. If a person sought to be taxed comes within the letter of law, he must be taxed. However, in case, he does not fall in taxing category, tax cannot be imposed. There is no room for any intendment. There is no equity about tax. There is no presumption as to tax. Nothing is to be read and nothing is to be implied.
90. In 1994 ITR (2006) 688 Sc H.H. Lakshmi Bai v. Commissioner of Wealth-Tax, Hon'ble Supreme Court held that taxing statute in particular, have to be strictly construed and there is no equity in taxing provision.
91. In : 2007 (3) SCC 668 Mahim Patram (P) Ltd v. Union of India, Hon'ble Supreme Court held that taxing statute should be strictly interpreted.
LIFTING OF VEIL
92. Accordingly, while considering a case to extend the benefit under Section 57(iii) of the Act, the effect of words, 'wholly and exclusively for the purpose' may not be diluted. By using three words, i.e. 'wholly', 'exclusively' and 'purpose', the legislature had made it mandatory to find out the reason behind investment. In case, the dominant purpose is not for making or earning such income, then deduction under Section 57(iii) shall not be available and to ascertain the purpose, the courts may lift the veil.
93. In corporate law, the Courts have ample power to lift the veil. It is the liability of the companies to be fair in dealing with tax matter. Being a separate juristic personality, it is expected that the companies shall not conceal their income or to escape the liability with regard to payment of tax. Lifting the corporate veil is to find out who is real person, beneficiary or in controlling the position of the company. The doctrine of 'lifting the veil' has marked a change and it is adopted whenever and wherever a situation warranted.
94. Lord Denning M.R. in Littlewoods Stores v. I.R.C. (1969) 1 W.L.R. 1241 said:
The doctrine laid down in Salomon's case has to be watched very carefully. It has often been supposed to cast a veil over the personality of a limited company through which the courts cannot see. But that is not true. The courts can, and often do, draw aside the veil. They can, and often do, pull off the mask. They look to see what really lies behind. The legislature has shown the way with group accounts and the rest. And the courts should follow suit....
95. One of the most important circumstance in which the veil has been lifted is the cases of fraud or improper conduct of the promoters. Where dummy companies were incorporated by a promoter and his family members to conceal profits and avoid tax liability, the separate entity of the company has been ignored by looking through the veil and identifying those individuals who have deviced such method for their own benefits.
96. In Juggilal Kamlapat v. Commissioner of Income Tax : AIR 1969 SC 932 : : 1969(1) SCR 988 it was found that three brothers who were partners in the assessee firm were carrying on the managing agency in a dominant capacity in the guise of a limited company. The court held that the corporate entity has to be disregarded if it is used for tax evasion or to circumvent tax obligation or to perpetrate fraud.
97. In C.I.T. v. Associates Clothiers Ltd. AIR 1963 Cal. 629 there was a sale by a company to another having some shareholders and the former company owning all shares in the latter. It was h