Business expenditure — Interest expenditure — Matter remanded to the High Court to determine whether the transactions were entered into with the idea of evading tax.

[CIT v. Ashini Lease Finance P. Ltd., (2009) 309 ITR
320 (SC)].

The Assessing Officer for the A.Y.s 1996-97 and 1997-98
found that borrowed funds were invested to acquire control of AEC.
Accordingly, he disallowed the interest expenses u/s.36(1)(iii). This was on
the footing that the assessee had paid interest to Torrent Financiers and
Torrent Leasing and Finance Private Limited (sister companies of the assessee).
According to the order of assessment, the borrowed funds were deployed by the
assessee-company during the relevant year in order to purchase equity shares
of AEC, which company was subsequently taken over not by the assessee but by
the Torrent group. During the relevant year, the total investment made by the
assessee in the takeover and acquisition of business of AEC amounted to only
Rs.22,59,969. The Assessing Officer detected that after acquiring the shares
of AEC Ltd. the assessee sold the shares of AEC at Rs.63,57,925 and further
that subsequently, the said AEC Ltd. had been taken over and acquired by the
Torrent group. The record indicated, prima facie, that the assessee-company
had acquired the shares of AEC through finances arranged mainly from the
Torrent group (sister companies) along with two other companies, only to
enable the Torrent group to acquire and take over the business of AEC.

The Commissioner of Income-tax (Appeals) as well as the
Tribunal both however found that the borrowings were for the purposes of
business. The question, therefore, which arose for consideration before the
High Court was: Whether the assessee was entitled to deduction in respect of
interest paid by it to the Torrent group? The High Court held that whether the
borrowings were for the purpose of business or not, was basically based on the
finding of fact. The High Court held that considering the concurrent finding
of fact, there was no perversity in the order. On an appeal the Supreme Court
held that prima facie, it appeared that the High Court had lost sight
of the facts which, if proved and established, indicate circular trading was
entered into solely with the idea of evading tax. The Supreme Court expressed
the prima facie view only in support of its order as relevant aspects
had not been considered by the Tribunal and, observed that the above reasons
should not be taken as its conclusion. Therefore, according to the Supreme
Court the High Court had erred in dismissing the appeals on the ground that no
substantial question of law arose for determination.

The Supreme Court set aside the judgment of the High Court
and restored tax appeals to the file of the High Court with a direction to the
High Court to dispose of these appeals in accordance with law.