Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 1987-88 - Assessee borrowed money from its sister concern carrying interest at rate of 18 per cent per annum and purchased preference shares from another sister concern which carried dividend at rate of 4 per cent - Assessing Officer held that there was no justification to borrow funds at rate of 18 per cent interest for making investment in shares, which would give a dividend of 4 per cent only - Having regard to fact that borrowing was made from sister concern and investment was also in another sister concern, claim for deduction of interest was disallowed by Assessing Officer - Whether Assessing Officer or appellate authorities and even Courts can determine true legal relation resulting from a transaction between different concerns and if some device has been used by assessee to conceal true nature of transaction, it is duty of taxing authority to unravel device and determine its true character - Held, yes - Whether, however, legal effect of transaction cannot be displaced by probing into 'substance of transaction' and taxing authority must not look at matter from their own viewpoint but that of a prudent businessman - Held, yes [Matter remanded] FACTS The assessee borrowed money from its sister-concern carrying interest @ 18% per annum and purchased preference shares of another company carrying divided @ 4%. The Assessing Officer held that there was no justification to borrow funds @ 18% per annum for making investment in shares carrying divided of only 4%. The Assessing Officer disallowed the interest as expense to the extent beyond 4%. The Commissioner (Appeals) upheld the order of the Assessing Officer. However, the Tribunal relying upon its earlier decision in Pankaj Munjal Family Trust, accepted the plea of the assessee and allowed the entire interest paid by the assessee as expenses. The revenue filed before the High Court. The High Court found that a similar question of law was referred for opinion of the court inCIT v. Pankaj Munjal Family Trust [2010] 326 ITR 286 (Punj. & Har.), which was answered in favour of the assessee therein. While…

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