The Commissioner Of Income Tax,Chennai v. M/S.diamond Engineering (Chennai) Private Ltd

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 23.08.2021 CORAM : THE HON'BLE MR.JUSTICE T.S.SIVAGNANAMAND THE HON'BLE MR.JUSTICE SATHI KUMAR SUKUMARA KURUP T.C.A.NO.458 OF 2016 The Commissioner of Income tax,Chennai. ... Appellant/Respondent Vs M/s.Diamond Engineering (Chennai) Private Ltd.,179, Old Mahaballipuram Road,Sholinganallur, Chennai – 600 119.PAN: AACD3949E ... Respondent/Appellant PRAYER:- Tax Case Appeal filed under Section 260-A of the Income TaxAct, 1961 against the order of the Income Tax AppellateTribunal, Madras, “C” Bench, Chennai dated 11.11.2015 passed inI.T.A.No.820/Mds/2013. Against the Order of Commissioner of Income Tax(A)-IX,Chennai, dated 28.02.2013 in ITA.No.624/2011-2012 for theAssessment Year 2009-2010, against the Assessment Order passedby the Assistant Commissioner of Income Tax, Company Circle-I(4), Chennai – 34, dated 21.12.2011 for PA/GIR.No.AAACD3949E,for the Assessment Year 2009-2010. For Appellant : Mrs.R.Hemalatha, Senior Standing Counsel For Respondent : Mr.A.S.Sriraman (Delivered by T.S.SIVAGNANAM, J.) This Appeal filed under Section 260-A of the Income Tax Act,1961 ('the Act' for brevity) is directed against the order dated https://hcservices.ecourts.gov.in/hcservices/ 11.11.2015 in I.T.A.No.820/Mds/2013 passed by the Income TaxAppellate Tribunal “C” Bench, Chennai (for brevity “theTribunal”) for the Assessment Year 2009-2010. 2. The Appeal was admitted on 19.07.2016 to decide thefollowing substantial questions of law:- “1.Whether on the facts and circumstances ofthe case, the Tribunal was right in permittingthe matter to AO for the limited purpose ofverifying whether the amount of equity capitalreserve/surplus was more than the interest freeadvances given to sister concern without givingscope to the department to verify the factwhether these funds were not available on thedate of advancing the interest free loans? 2.Is not the finding of the Tribunal bad byremitting the matter to the AO for the limitedpurpose especially when the Assessee hadcontended the advances were made towards materialcosts which was found to be incorrect since thecost of the entire services related concern waslower than the advances made? 3.Whether on the facts and circumstances ofthe case, the Tribunal was right in disallowingthe additions made by the AO under Section 36 (1)(iii) of the Income Tax Act and remitting it backwithout appreciating the fact that there was nobusiness expediency involved in advancing theinterest free loan to sister concerns?” 3. We have elaborately heard Ms.R.Hemalatha, Learned SeniorStanding Counsel appearing for the Appellant/Revenue andMr.A.S.Sriraman, Learned Counsel appearing for the Respondent/Assessee. 4. At the first blush, on going through the order passed bythe Tribunal, we wondered as to why the Revenue is aggrieved bythe impugned order, as the Tribunal has remanded the matter backto the Assessing Officer for certain verification. However, ona careful reading of the order passed by the Tribunal, we foundthat legal questions have been raised by way of this Tax CaseAppeal by the Revenue which require consideration. 5. The Assessee is a company registered under IndianCompanies Act, 1956 following Mercantile method of accountingengaged, in the business of Engineering and Fabrication. TheAssessee filed its return of income for the Assessment Year https://hcservices.ecourts.gov.in/hcservices/ under consideration, 2009-10 on 29.09.2009 declaring an incomeof Rs.13,42,02,851/-. The return was processed under Section143 (1) of the Act. Subsequently, the case was selected forscrutiny and notice under Section 143 (2) of the Act was issuedon 30.08.2010, pursuant to which the Authorized Representativeof the Assessee was heard in the matter and details were calledfor. 5. The Assessee is a company registered under IndianCompanies Act, 1956 following Mercantile method of accountingengaged, in the business of Engineering and Fabrication. TheAssessee filed its return of income for the Assessment Year https://hcservices.ecourts.gov.in/hcservices/ under consideration, 2009-10 on 29.09.2009 declaring an incomeof Rs.13,42,02,851/-. The return was processed under Section143 (1) of the Act. Subsequently, the case was selected forscrutiny and notice under Section 143 (2) of the Act was issuedon 30.08.2010, pursuant to which the Authorized Representativeof the Assessee was heard in the matter and details were calledfor. 6. The issue before us in the instant Appeal is with regardto the allegation of diversion of funds by way of interest freeloans to related concerns. The Assessing Officer after notingthe facts, requested the Assessee to justify huge interest freeadvances to its related concerns. The reply given by theAssessee was that those units have to buy huge quantity of rawmaterials to execute the work in progress and therefore, thesepayments were made as advance to meet the material cost.Subsequently, the Assessee took another stand by way of anotherstatement that the nature of work requires minimum land spaceand outsources lesser value addition works which require largeland space to its associate concerns and accordingly to performthe above jobs, it has to pay huge advance to cover the cost ofmaterial and also the working capital. 7. Admittedly, there appears to be a slight discrepancybetween the two replies given by the Assessee. The AssessingOfficer on going through the explanation and noting thetransaction pointed out that in the P & L account and thebalance sheet of the two related concerns namely, EmeraldEngineering Unit II and Ruby Engineering, held that almost theirentire receipts are from the Assessee-Company and they do nothave any secured or unsecured loans. On the other hand, apartfrom the revenue receipt from the Assessee Company for theservices rendered, these related concerns have also receivedhuge advances. On analysis of the advances given to the relatedconcerns, the following findings were returned by the AssessingOfficer. “(d)An analysis of the above table showsthat in the case of Emerald Engineering, theadvances received during the year amounts toRs.10.71 crores which are still outstanding as on31-03-2009 and if we add the opening balance, thetotal outstanding advances as on 31-03-2009 forwhich the related concern has to render servicein future comes to Rs.14.28 crores, whereas, thetotal volume of services rendered by the relatedconcern for the whole year in the F.Y.08-09 isonly Rs.9.55 crores. The entire Rs.9.55 croresshould also have been paid as otherwise, theassessee company would have figured as sundry “(d)An analysis of the above table showsthat in the case of Emerald Engineering, theadvances received during the year amounts toRs.10.71 crores which are still outstanding as on31-03-2009 and if we add the opening balance, thetotal outstanding advances as on 31-03-2009 forwhich the related concern has to render servicein future comes to Rs.14.28 crores, whereas, thetotal volume of services rendered by the relatedconcern for the whole year in the F.Y.08-09 isonly Rs.9.55 crores. The entire Rs.9.55 croresshould also have been paid as otherwise, theassessee company would have figured as sundry debtors in the related concern's books.Similarly, in the case of Ruby Engineering, thecorresponding figures are: advances receivedduring the year Rs.5.63 crores, which are stilloutstanding as on 31-03-2009 for which therelated concern has to render service in future –Rs.7.30 crores, the total volume of servicesrendered by the related concern for the wholeyear in the F.Y.08-09- Rs.7.12 crores. In thisrelated concern also, the assessee company is notfiguring as sundry debtor meaning, the entireconsideration for the services rendered duringthe year has already been received from theassessee. It is common knowledge that in thenormal business transactions, the advances wouldmostly be in the range of 15% to 20% of the totalvolume of the work to be done or the services tobe rendered, and in general, it will relate tothe services likely to be rendered in the nexttwo or three months. Also, it will always be thecase that advances can never be far in excess ofthe services rendered and in most cases, in fact,it will be the case of full services alreadyrendered but par of the consideration yet to bepaid, where the volume of work is so huge.However, in the assessee's case, it is a starkreality that the assessee has not only made 100%payment towards the services rendered by therelated concerns, but, over and above that, evenexceeding the total turnover of the year, it hasadvanced interest free funds to the relatedconcerns during the year.” 8. The Assessee's explanation was that these advances aremade towards material cost. The correctness of such explanationwas examined by the Assessing Officer and deeper scrutiny intothe facts was made and on perusal of the fixed assets during theyear, it was observed that there are huge addition to fixedassets during the year which could only have been funded out ofthe advances received from the Assessee, as those concerns donot have any other loans or the capital or reserves to fundsuch huge capital addition. By way of illustration, theAssessing Officer pointed out that in respect of EmeraldEngineering, the total of liabilities is Rs.16.52 crores out ofwhich Rs.14.28 crores is the outstanding advance from theAssessee. Similarly, at the assets side, out of Rs.16.52 crores,Rs.16.24 crores relates to fixed assets and the addition duringthe year to fixed assets is Rs.10.57 crores. In the case ofother related concern, viz., Ruby Engineering, the total ofliabilities side is Rs.7.41 crores, advance from the Assessee company is Rs.7.30 crores, total of fixed assets is Rs.7.22crores and addition to fixed assets during the year is Rs.5.60crores. 9. Further, the financial health of the Assessee company wasalso noted by the Assessing Officer and it was pointed out thatthe Assessee is having a total borrowal of Rs.65.55 crores andthe total finance charges incurred comes to Rs.21,74,70,019/-.Out of the said amount, the Assessing Officer excluded the bankcharges of Rs.3,88,33,959/-, the total interest paid comes toRs.17,86,36,060/- Ultimately, the Assessing Officer came to theconclusion that proportionate disallowance has to be made andthe argument that these interests were paid for loans taken fora specific purpose and they do not form part of the fundsdiverted to related concerns, is not tenable. company is Rs.7.30 crores, total of fixed assets is Rs.7.22crores and addition to fixed assets during the year is Rs.5.60crores. 9. Further, the financial health of the Assessee company wasalso noted by the Assessing Officer and it was pointed out thatthe Assessee is having a total borrowal of Rs.65.55 crores andthe total finance charges incurred comes to Rs.21,74,70,019/-.Out of the said amount, the Assessing Officer excluded the bankcharges of Rs.3,88,33,959/-, the total interest paid comes toRs.17,86,36,060/- Ultimately, the Assessing Officer came to theconclusion that proportionate disallowance has to be made andthe argument that these interests were paid for loans taken fora specific purpose and they do not form part of the fundsdiverted to related concerns, is not tenable. 10. Aggrieved by the said order, the Assessee preferred anAppeal to the Commissioner of Income Tax (Appeals) -IX (forbrevity “the CIT(A)”) under Section 250(6) of the Act. By orderdated 28.02.2013, the CIT(A) re-examined the factual positionand confirmed the order passed by the Assessing Officer. Hence,the Assessee was on appeal before the Tribunal. The Tribunalwithout looking at the background position of the order,remanded the matter back, which is a qualified remand for thelimited purposes of verifying the amount of equity capital andreserves/surplus disclosed in the balance sheet. Further, theTribunal has qualified by stating that if the Assessing Officerfinds that the non-interest bearing fund of the Assessee is morethan the interest free advance extended to its sister concerns,then the Assessing Officer shall delete the addition made by himto the tune of Rs.3,27,78,927/- towards disallowance ofproportionate interest on interest free fund diverted to itssister concerns. 11. The order passed by the Tribunal partly appears to be aremand order. However, it does not appear to be an open remand,but a qualified remand to the Assessing Officer to complete theassessment and the Assessing Officer is assigned to do only aclerical job. 12. On a reading of the order passed by the Tribunal, wefind, the same is absolutely devoid of any reasons. Theoperative portion of the order is in Paragraph Number 5 whichreads as follows: “5.We have heard both the parties andcarefully perused the materials available onrecord. On perusing the balance sheet submittedby the assessee it is apparent that the assesseeis having reserves and surplus of Rs.11.8 crores approximately and Rs.20/- crore equity as on01.04.2008. This fund of the assessee is non-interest bearing and available to the assesseefor deploying in the business as it deems fit.Therefore, the non-interest bearing fund of theassessee company viz. Equity and reserves/surplusof Rs.31.8 crores (approx.) can be presumed tohave be advanced as the interest free advances tothe sister company of Rs.21.6 crores (approx)which is far less than the non-interest bearingfund available with the assessee company. Hence,the addition made by the Ld.Assessing Officer bydisallowing the interest is not warranted. Sincethese facts were not examined by the Revenue, wehereby remit the matter back to the file of theLd.Assessing Officer for the limited purposes ofverifying the amount of equity captial &reserves/surplus disclosed in the balance sheetand if the Ld.A.O. Finds that the non-interestbearing fund of the assessee is more than theinterest free advance extended to its sisterconcern then the Ld.A.O. Shall delete theaddition made by him of Rs.3,27,78,927/- towardsdisallowance of proportionate interest oninterest-free fund diverted to sister concerns.However if found otherwise he shall passappropriate order as per law and merits.” None of the facts as noted by the Assessing Officer or by theCIT(A) with regard to the question as to how the assets werediverted to the related concerns, has not been touched upon bythe Tribunal. To say the least, the order passed by the Tribunalis devoid of reasons and therefore, bereft of particulars andnon-est in law. 13. Though the Tribunal states that on perusing the balancesheet submitted by the Assessee, it is seen that the Assessee ishaving reserves and surplus of Rs.11.8 crores approximately andRs.20 crore equity as on 01.04.2008, the Tribunal concluded thatthis fund of the Assessee is a non-interest bearing fund and isavailable to the business as it deems fit. There is nodiscussion as to the finding rendered by Assessing Officer,wherein detailed examination has been done regarding the fundflow and transaction. This aspect was noted by the CIT(A) andreasons have been given by the CIT(A) holding that it is evidentthat the Assessee has given its funds to its sister concerns tomeet their capital expenditure and not given to meet materialcost as claimed by the Assessee and the CIT(A) held that theAppellant's funds are diverted to its sister concerns and bydoing so, the Assessee did not get anything in return and hence, the interest expenditure paid by the Assessee is required to berestricted proportionately which was quantified by the AssessingOfficer at Rs.3,27,78,927/-. 14. The Tribunal has not rendered any finding with regard tothe correctness of the above finding given by the CIT(A) whichconfirmed the finding rendered by the Assessing Officer.Therefore, we are of the clear view that Tribunal haserroneously passed the order, that too, without any findingregarding the findings of the Assessing Officer or the CIT(A),which was wrong on facts. Therefore, we are of the clear viewthat the order passed by the Tribunal calls for interference. 15. Accordingly, this Tax Case Appeal is allowed and thesubstantial questions of law are answered in favour of theRevenue. No costs. Sd/- Assistant Registrar(CS V) //True Copy// Sub Assistant Registrar ay To1.The Commissioner of Income tax,Chennai.2.The Income Tax Appellate Tribunal 'C' Bench,Chennai.3.The Commissioner of Income Tax(A)-IX,Chennai.4.The Assistant Commissioner of Income Tax,Company Circle-I(4),Chennai – 34. +1cc to Mr.S.Sridhar, Advocate, S.R.No.42220+1cc to Mr.T.Ravikumar, Advocate, S.R.No.42209 T.C.A.NO.458 OF 2016 AK-II(CO)PBS/23/09/2021