The Commissioner Of Income Tax,Chennai v. M/S.asian Peroxides Ltd

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 12.10.2020 CORAM THE HON'BLE DR.JUSTICE VINEET KOTHARIANDTHE HON'BLE MR.JUSTICE M.S.RAMESH T.C.(A) NOS.718/2017, 918 & 919 OF 2014 The Commissioner of Income Tax,Chennai. Appellant Vs. M/s.Asian Peroxides Ltd.,69, 3rd Floor, Armenian Street,Chennai 600 001. PAN: Respondent Tax Case (Appeal) No.718/2017 filed under Section 260A ofthe Income Tax Act, 1961 against the order of the Income TaxAppellate Tribunal, 'C' Bench, Chennai, dated 3.4.2017 made inITA No.2861/Mds/2016 against the order of the commissioner ofIncome Tax(A)-1, Chennai, in ITA No. 45/15-16/A-1,dated20/07/2016 Under section 143(3) and 250 of the Income Tax Act1961 against the order of the Deputy Commissioner of Income TaxCorporate Circle-1(1), Chennai, dated 12/03/2015 made inAAACA213G for the assessment year 2012-13 Tax Case (Appeals) 918 & 919 of 2014 filed under Section260A of the Income Tax Act, 1961 against the order of the IncomeTax Appellate Tribunal, 'C' Bench, Chennai, dated 18.2.2014 madein ITA Nos.911/Mds/2013 and 1031/Mds/2013 against the order ofthe Commissioner of Income Tax Appeal- IX, Chennai dated29/01/2013, made in ITA No. 43/11-12 Under section 143(3) of theIncome Tax Act 1961 against the order of the Deputy Commissionerof Income Tax Company Circle 1(1), Chennai dated 24/12/2020 madein AAACA6213G(Ax2-002 for the assessment year 2008-09 . For Appellant : Mrs.R.Hemalatha, Senior Standing Counsel For Respondent : Mr.R.Vijayaraghavan COMMON JUDGMENT (Delivered by DR.VINEET KOTHARI,J) The Revenue has preferred these Appeals raising the following substantial questions of law under Section 260A of theAct for the Assessment Year 2012-2013:- “(i) Whether the disallowance of Rs.4.43 croresmade under Section 36(1)(iii) is to be allowedespecially when the Assessee has diverted interestbearing funds to its sister concern withoutcharging any interest and such diversion of fundsis covered by Section 36(1)(iii)? (ii) Whether disallowance made under Section 36(1)(iii) is to be allowed especially when theAssessee has sufficient funds which could beutilized for its own business activity instead ofborrowing funds outside by paying huge interestpayment by reducing the tax liability and on suchdiversion of funds to its sister concernproportionate interest on such diversion is to bemade?“ 2. The relevant findings of the learned Tribunal in favourof the Assessee and by which the learned Tribunal dismissed theAppeal of the Revenue and upheld the order of the learnedCommissioner of Income Tax (Appeals) dated 20[th] July 2016 infavour of the Assessee are quoted below for ready reference:- (ii) Whether disallowance made under Section 36(1)(iii) is to be allowed especially when theAssessee has sufficient funds which could beutilized for its own business activity instead ofborrowing funds outside by paying huge interestpayment by reducing the tax liability and on suchdiversion of funds to its sister concernproportionate interest on such diversion is to bemade?“ 2. The relevant findings of the learned Tribunal in favourof the Assessee and by which the learned Tribunal dismissed theAppeal of the Revenue and upheld the order of the learnedCommissioner of Income Tax (Appeals) dated 20[th] July 2016 infavour of the Assessee are quoted below for ready reference:- “The Brief facts of the case that the asseeseecompany is in the business of manufacture. ofHydrogen Peroxide and filed its Return of Income forthe assessment year 2012-13 on 30.09.2012 withtotal loss of Rs.8,55,03,164/- and the case wasselected for scrutiny under CASS and notice U/s.143(2) of the Act was issued. In compliance to thenotice, the Ld. AR of the assessee appeared onvarious dates and filed the details. The Ld. AO onperusal of the financial statements found that theassessee has claimed an amount of Rs.6,08,56,000/-as interest and financial charges pertaining to theinterest on term loans, working capital and otherfinancial expenses. Whereas the assessee companyhaving borrowed the funds and paying interest, hasalso provided interest free loans to its sisterconcerns and the Ld. AO found that amountoutstanding as on 31.03.2012 is Rs.19,74,55,000/-.The Ld. AO observed that the assessee has borrowedliability as on 31.03.2012 Rs.26,42,21,000/- andpaying interest and on the similar issue ofdisallowance of interest on borrowed funds in theassessee’s own case for the assessment year 2008-09,the Revenue is agitating the case before the Hon’bleHigh Court of Madras, the Ld.AO on the similarlines, made proportionate disallowance of interest payments taking into consideration the interest freeadvances provided to the subsidiaries/sisterconcerns Rs.4,43,25,189/- as this expenditure wasnot incurred wholly and exclusively for the purposeof business U/s.36(1)(iii) of the Act and with otheradditions passed order U/s.143(3) of the Act dated12.03.2015. 4. Aggrieved by the order of the Ld. AO, theassessee has filed an appeal before the Ld. CIT(A).The Ld. AR argued the grounds and reiterated thesubmissions of assessment proceedings. The Ld. CIT(A) considered the findings of the AO and thesubmissions of assessee and the judicial decisionsand relied on the assessee's own case for theassessment year 2000-09, where such similardisallowance made by the Assessing Officer and theLd. CIT(A) has deleted the addition. On appeal bythe Revenue, the Tribunal had confirmed the CIT(A)in favour of the assessee in ITA No.911/Mds/2013dated 08.02.2014. The Ld. CIT(A) relied on the Co-ordinate bench decision and allowed the appealobserved at para 6 of the order. “6. I have carefully perused the facts inissue, submissions made by the appellant andmaterial on record. I find that the Hon'bleITAT vide order dated 18.2.2014 in ITANo.911/Mds/2013 at page No.9 Para No.10 havecategorically held that the AO had erred bydisallowing the interest incurred by theappellant on the premise that interest bearingfunds have been diverted to the sister concernsand consequently allowed the appeal in favourof the appellant. Material facts remainingsimilar, respectfully following the order ofthe Hon'ble ITAT this issue is decided infavour of the appellant. The AO directed todelete the disallowance of Rs.4,43,25,189/-.This ground of appeal is allowed.” Aggrieved by the CIT(A) order, Revenue hasfiled an appeal with the Tribunal. Aggrieved by the CIT(A) order, Revenue hasfiled an appeal with the Tribunal. 5. Before us the Ld. DR argued that the Ld CIT(A) has erred in deleting the disallowance U/s. 36(1)(iii) of the Act without considering the factthat the assessee has provided interest freeadvances and the assessee could not substantiatethat the own funds were utilized for the purpose ofproviding the interest free advances and supportedthe arguments with the judicial decisions. Contra, the Ld.AR relied on the orders of the Ld. CIT(A) andsupported with the Tribunal decisions. 6. We heard the rival submissions, perused thematerial on record and judicial decisions. The solesubstantial ground of Revenue being disallowanceU/s.36(1)(iii) of the Act was deleted by the Ld. CIT(A) relying on the judicial decisions. We find thesimilar issue in the assessee’s own case for the AY2008-09 in ITA No.911/Mds/2013 held at para 9 & 10as under: "9. We have heard both the parties andcarefully perused the materials available onrecord from the orders of the Ld. AssessingOfficer, it is apparent that the assesseehas share capital of approximately Rs.43.30crores and reserve and surplus of Rs.35.61crores as on 31/03/2008 and further from thebalance sheet it is apparent that theassessee has share capital of Rs.43.30crores and Rs.37.30 crores reserves &surplus as on 31/03/2007, thus the assesseehas own funds far exceeding the advance forRs.24.36 crores made to its sister concerns.Further the claim of the assessee that ithad transferred accumulate losses to theextent of Rs.14.17 to its sister concernshas not been looked into by the Ld.AO, needless to mention that in such casedisallowance of interest expense on thepremises that interest bearing funds havebeen diverted would be incorrect. However,the following decisions rendered by varioushigher judiciary has held that if theassessee has own funds exceeding theadvances made to sister concerns, theninterest expenditure cannot be disallowed onthe premises that the assessee has divertedinterest bearing fund to its sisterconcerns. (i) CIT Vs. Reliance Utilities And PowerLtd. ([2009] 313 ITR 340 (Bom.)) Held, dismissing the appeal, that ifthere were funds available both interest-free and overdraft and/or loans take, then apresumption would arise that investmentswould be out of the interest-free fundsgenerated or available with the company, ifthe interest-free funds were sufficient to meet the investments. In this case, thispresumption was established considering thefunding of fact both by the Commissioner(Appeals) and the Tribunal. The interest wasdeductible. (ii). CIT Vs. Bharti Televenture Ltd.([2011] 331 ITR 502(Del))([2011] 331 ITR 502(Del)) (i) CIT Vs. Reliance Utilities And PowerLtd. ([2009] 313 ITR 340 (Bom.)) Held, dismissing the appeal, that ifthere were funds available both interest-free and overdraft and/or loans take, then apresumption would arise that investmentswould be out of the interest-free fundsgenerated or available with the company, ifthe interest-free funds were sufficient to meet the investments. In this case, thispresumption was established considering thefunding of fact both by the Commissioner(Appeals) and the Tribunal. The interest wasdeductible. (ii). CIT Vs. Bharti Televenture Ltd.([2011] 331 ITR 502(Del))([2011] 331 ITR 502(Del)) Held, dismissing the appeal, that theorder of the Commissioner (Appeals) and theTribunal showed that the assessee wasmaintaining a bank account with mixed commonfunds in which all deposits and withdrawalswere made. There was no specific instancenoted by the AO of direct nexus between theborrowed funds and the advances made to thesubsidiaries. The AO had made generalobservations without pointing out anyspecific instance where an interest bearingborrowing was advanced to the subsidiariesor establishing that the borrowings made bythe assessee were not for business purposes.Both appellate authorities were of the viewthat the assessee had explained the sourcesof the advances and investments made to thesubsidiaries, which could not be linked tothe borrowed funds and that the advanceswere made out of the assessee’s own capital.At the relevant time the assessee was foundto have adequate non-interest bearing fundsby way of share capital and reserves. Evenotherwise, the advances were found to bemade to the subsidiaries for businessconsiderations, i.e out of commercialexpediency of the assessee. That being thefactual position reflected from the recordof the assessee, the onus that lay on itstood discharged. There was no ground tointerfere with those findings. 10. Considering the above decisions ofthe Hon'ble High Court of Bombay in the caseCIT Vs. Reliance Utilities And Power Ltd &the decision of Hon'ble High Court of Delhiin the case CIT Vs. Bharti TeleventureLtd., which are identical to the facts ofthe case before us, we are of the opinionthat the Ld. Assessing Officer has erred bydisallowingtheinterestexpenditureincurred by the assessee on the premisesthat interest bearing funds have been diverted to the sister concerns. Therefore,we hereby delete the addition made by theLd. Assessing Officer, which was furtherconfirmed by the Ld. CIT(A) on this issue.Thus, the ground No.3 raised by the assesseein its appeal is allowed in its favour andconsequently the ground Nos.2.1 & 2.2 raisedby the Revenue is decided against theRevenue.” 7. We respectfully follow the Co-ordinate bench decision in assessee’s owncase and dismissed the Revenue appeal. 8. In the result, the Revenue appeal isdismissed." 3. The learned Tribunal has apparently only relied upon itsprevious decision for the Assessment Year 2008-2009 in ITANo.911/Mds/2013 which is the subject matter of T.C.A.No.918 of2014 which is also being disposed of today. The other questioninvolved in the said Assessment Year 2008-2009 with regard tocarry forward unabsorbed depreciation by the Assessee is notpressed by the learned Senior Standing Counsel for the Revenue. 4. The only question, therefore, present before us is withregard to disallowance under Section 36(1)(iii) of the Act. Thesaid provision of the Act provides for "Other Deductions" underSection 36 of the Act other than those specified from Sections30 to 35 including their various sub-sections in Chapter II-D ofthe Income Tax Act. The relevant part of the said provisioninsofar as clause (iii) is concerned is quoted for readyreference:- “Other deductions. 4. The only question, therefore, present before us is withregard to disallowance under Section 36(1)(iii) of the Act. Thesaid provision of the Act provides for "Other Deductions" underSection 36 of the Act other than those specified from Sections30 to 35 including their various sub-sections in Chapter II-D ofthe Income Tax Act. The relevant part of the said provisioninsofar as clause (iii) is concerned is quoted for readyreference:- “Other deductions. 36. (1) The deductions provided for in thefollowing clauses shall be allowed in respect ofthe matters dealt with therein, all computing theincome referred to in section 28-- (i) the amount of any premium paid in respectof insurance against risk of damage ordestruction of stocks or stores used for thepurposes of the business or profession; (ia) the amount of any premium paid by afederal milk co-operative society to effector to keep in force an insurance on the lifeof the cattle owned by a member of a co-operative society, being a primary societyengaged in supplying milk raised by itsmembers to such federal milk co-operativesociety; (ib) the amount of any premium paid by anymode of payment other than cash by theassessee as an employer to effect or to keepin force an an insurance on the health of hisemployees under a scheme framed in thisbehalf by-- (A) the General Insurance Corporation ofIndia formed under section 9 of theGeneralInsuranceBusiness(Nationalisation) Act, 1972 (57 of 1972)and approved by the Central Government; or (B) any other insurer and approved by theInsurance Regulatory and DevelopmentAuthority established under sub-section(1) of section 3 of the InsuranceRegulatory and Development Authority Act,1999 (41 of 1999); (ii) any sum paid to an employee as bonus orcommission for services rendered, where suchsum would not have been payable to him asprofits or dividend if it had not been paidas bonus or commission; (iii) the amount of the interest paid inrespect of capital borrowed for the purposesof the business or profession." 5. The learned Senior Standing Counsel Mrs.R.Hemalathaappearing for the Revenue has urged that the Assessee Companywhile having majorly only borrowed funds from its Banks and paidinterest thereon, diverted substantial part of those funds toits Subsidiary Company and did not charge any interest thereonfrom the Subsidiary Company, and therefore the learned AssessingAuthority was justified in disallowing the proportionate part ofthe interest the Assessee Company paid to its Bank, underSection 36(1)(iii) of the Act to the tune of Rs.4,43,25,189/-which is computed in para 2 of the Assessment Order dated12.3.2015 which is also quoted below for ready reference:- "2. To keep the issue of proportionate interestdisallowance alive, it is proposed to consider theassessee's action of diverting the loans and advances tothe sister concern and reducing the profit with entireinterest expenditure as not maintainable. This coupledwith the assessee's submissions, which lack evidences,that are required to prove that the interest free loansgiven to sister concerns are not out of borrowed fundand also placing reliance on the case of R.Dalmia vs.CIT 133 ITR 169 (Del), where the Hon'ble High Courtdecided that "Wherever the interest paid concerns the borrowed money for business as well as non businesspurposes, the claim may be disallowed in its entirety ifno adequate material is adduced by the assessee todetermine that portion of interest which pertains tobusiness purposes", the non-claimable interestexpenditure in the hands of the assessee is worked outas under: Interest bearing secured Funds - Rs.26,42,21,000..(A)Average Interest free loan advanced-Rs.19,24,48,500/-..(B)Interest expense debited in the P&L -Rs.6,08,56,000/- ..(C) Proportionate interest disallowance u/s.36(1)(iii) =(B/A)xC = (19,24,48,500/26,42,21,000) x 6,08,56,000 borrowed money for business as well as non businesspurposes, the claim may be disallowed in its entirety ifno adequate material is adduced by the assessee todetermine that portion of interest which pertains tobusiness purposes", the non-claimable interestexpenditure in the hands of the assessee is worked outas under: Interest bearing secured Funds - Rs.26,42,21,000..(A)Average Interest free loan advanced-Rs.19,24,48,500/-..(B)Interest expense debited in the P&L -Rs.6,08,56,000/- ..(C) Proportionate interest disallowance u/s.36(1)(iii) =(B/A)xC = (19,24,48,500/26,42,21,000) x 6,08,56,000 = Rs.4,43,25,189/-SincetheaboveinterestamountingtoRs.4,43,25,189/- cannot be said to be an expenditureincurred wholly and exclusively for the purposes ofassessee's business the said expenditure is disallowedu/s.36(1)(iii) of the Act." 6. The learned Senior Standing Counsel for the Revenue,therefore, submitted that since the Assessee Company did nothave any interest-free Surplus Fund with it to advance loan toits Subsidiary Company, and therefore, diversion of such fundscannot be meant for that purpose and consequently, thedisallowance under Section 36(1)(iii) of the Act out of theamount of interest paid by the Assessee Company to its Bank wasjustified. 7. Per contra, the learned counsel for the AssesseeMr.R.Vijayaraghavan submitted with reference to T.C.A.No.918 of2014 that the Assessee had, in fact, transferred a Division ofUnit of the Assessee Company viz., Sodium Perborate Division toits Subsidiary Company, M/s.Chemasia Industries Limited on31.3.2002 for a sale consideration of Rs.14.17 crores againstwhich Rs.1.97 crores of Receivable of the Subsidiary Company wastransferred to the Assessee company M/s.Asian Peroxides Limited,but, the remaining sale consideration was not paid to theAssessee Company and which is said to be still outstanding. Hefurther submitted that a loan outstanding liability of Rs.7.88crores of the said Subsidiary Company Chemasia IndustriesLimited was also taken over by the Assessee and a small amountof Rs.0.18 crores was is the balance of amounts from variousloans given by the Assessee Company to its Sister Concerns. 8. The learned counsel for the Assessee submitted that no interest was charged from the Subsidiary Company on suchoutstanding amount of unpaid consideration for transfer of itsSodium Perborate Division. Further he submitted that theAssessee Company had a Share Capital to the extent ofRs.43,30,75,000/- and Reserve and Surplus to the extent ofRs.35,61,38,000/-, totalling to Rs.78,92,13,000/- out of which,interest-free funds was available with the Assessee Company andtherefore, relying upon the decision of the Hon'ble SupremeCourt in the case of Commissioner of Income Tax v. RelianceIndustries Limited reported in (2019) 307 CTR (SC) 121 in whichthe Hon’ble Supreme Court has held that if any Assessee has gotSurplus Funds exceeding the advances made to its Subsidiaries, apresumption could be made that interest bearing Funds have notbeen diverted to its Subsidiary Company. 9. Having heard the learned counsel for the parties, we areof the opinion that the matter is required to be remanded backto the Assessing Authority for holding enquiry into the matteras to whether the interest bearing borrowed funds were used foradvancing loan to the Subsidiary Company or the Surplus Funds ofthe Company were so diverted. Prima facie, it appears that itwas a case of unpaid sale price for transfer of of the SodiumPerborate Division made by the Assessee Company to itsSubsidiary Company M/s.Chemasia Industries Limited and theoutstanding loan liability to the 7.88 crores was also takenover by the Assessee Company. Therefore, even though borrowedfunds might have been diverted, but the fact remains that theAssessee did not charge any interest on such unpaid price fromthe Subsidiary Company and even took over another loan liabilityof the Subsidiary Company. 10. The Assessing Authority has merely worked out thedisallowance under Section 36(1)(iii) vide the afore-quotedportion from the Assessment order on the basis of AverageInterest free loan and Interest bearing Secured Funds from theAssessee Company. The Assessing Authority has not gone into theaspect of the unpaid sale price by the Subsidiary Company. Thesaid enquiry was necessary before making any disallowance underSection 36(1)(iii) the Act. 11. Therefore, in our opinion, the matter deserves to beremanded to the Assessing Authority for holding an enquiry intothis aspect of the matter and then consider the question ofdisallowance under Section 36(1)(iii) of the Act. Accordingly,we set aside all the three orders of the three Authorities belowfor the Assessment Year 20012-2013 and direct the AssessingAuthority to pass fresh orders in accordance with law aftergiving opportunity of hearing to the Assessee. In view of theconsiderable number of years having already passed, freshorders may be passed within a period of one year from today. With these directions, the Appeals are disposed of. No orderas to costs. Sd/- Assistant Registrar(CS III) //True Copy// Sub Assistant Registrar ssk. To1. Income Tax Appellate Tribunal, 'C' Bench, Chennai.1. Income Tax Appellate Tribunal, 'C' Bench, Chennai. 2. The Commissioner of Income Tax,(A)-1, Chennai. Chennai. 3. The Deputy Commissioner of Income tax, Corporate Circle 1(1), Chennai 600 034. Corporate Circle 1(1), Chennai 600 034. 4. The Commissioner of Income Tax Appeal-IX, Chennai Chennai +2 cc to Mr.Subbaraya Aiyar, Advocate, S.R.No.33790&33791+2 cc to Mr.T.Ravikumar, Advocate, S.R.34001&34002+2 cc to Mr.T.Ravikumar, Advocate, S.R.34001&34002 GP(CO)NRA(11/12/2020) T.C.A. Nos.718/2017, 918 & 919 of 2014