The Commissioner of Income-tax, Chennai v. Asian Peroxides Ltd
[Citation -2020-LL-1012-37]

Citation 2020-LL-1012-37
Appellant Name The Commissioner of Income-tax, Chennai
Respondent Name Asian Peroxides Ltd.
Court HIGH COURT OF MADRAS
Relevant Act Income-tax
Date of Order 12/10/2020
Assessment Year 2012-13
Judgment View Judgment
Keyword Tags interest bearing borrowed funds • interest on borrowed funds • proportionate disallowance • disallowance of interest • unabsorbed depreciation • proportionate interest • commercial expediency • interest expenditure • interest free loans • loans and advances • outstanding amount • services rendered • interest expense • borrowing funds • borrowed money • tax liability • surplus funds • carry forward • diversion of fund
Bot Summary: 36(1)(iii) of the Act without considering the fact that the assessee has provided interest free advances and the assessee could not substantiate that the own funds were utilized for the purpose of providing the interest free advances and supported the arguments with the judicial decisions. We have heard both the parties and carefully perused the materials available on record from the orders of the Ld. Assessing Officer, it is apparent that the assessee has share capital of approximately Rs.43.30 crores and reserve and surplus of Rs.35.61 crores as on 31/03/2008 and further from the balance sheet it is apparent that the assessee has share capital of Rs.43.30 crores and Rs.37.30 crores reserves surplus as on 31/03/2007, thus the assessee has own funds far exceeding the advance for Rs.24.36 crores made to its sister concerns. The following decisions rendered by various higher judiciary has held that if the assessee has own funds exceeding the advances made to sister concerns, then interest expenditure cannot be disallowed on the premises that the assessee has diverted interest bearing fund to its sister concerns. The learned Senior Standing Counsel Mrs.R.Hemalatha appearing for the Revenue has urged that the Assessee Company while having majorly only borrowed funds from its Banks and paid interest thereon, diverted substantial part of those funds to its Subsidiary Company and did not charge any interest thereon from the Subsidiary Company, and therefore the learned Assessing Authority was justified in disallowing the proportionate part of the interest the Assessee Company paid to its Bank, under Section 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 dated 12.3.2015 which is also quoted below for ready reference:- 2. The learned Senior Standing Counsel for the Revenue submitted that since the Assessee Company did not have any interest-free Surplus Fund with it to advance loan to its Subsidiary Company, and therefore, diversion of such funds cannot be meant for that purpose and consequently, the disallowance under Section 36(1)(iii) of the Act out of the amount of interest paid by the Assessee Company to its Bank was justified. 918 of 2014 that the Assessee had transferred a Division of Unit of the Assessee Company viz. The Assessing Authority has merely worked out the disallowance under Section 36(1)(iii) vide the afore-quoted portion from the Assessment order on the basis of Average Interest free loan and Interest bearing Secured Funds from the Assessee Company.


Judgt. dt. 12.10.2020 in T.C.A.718/2017, 918 & 919/2014 CIT v. Asian Peroxides Ltd. 1/20 IN HIGH COURT OF JUDICATURE AT MADRAS DATED: 12.10.2020 CORAM HON'BLE DR.JUSTICE VINEET KOTHARI AND HON'BLE MR.JUSTICE M.S.RAMESH T.C.(A) Nos.718/2017, 918 & 919 of 2014 Commissioner of Income Tax, Chennai. Appellant Vs. M/s.Asian Peroxides Ltd., 69, 3rd Floor, Armenian Street, Chennai 600 001. PAN: AAACA6213G Respondent Tax Case (Appeal) No.718/2017 filed under Section 260A of Income Tax Act, 1961 against order of Income Tax Appellate Tribunal, 'C' Bench, Chennai, dated 3.4.2017 made in ITA No.2861/Mds/2016. Tax Case (Appeals) 918 & 919 of 2014 filed under Section 260A of Income Tax Act, 1961 against order of Income Tax Appellate Tribunal, 'C' Bench, Chennai, dated 18.2.2014 made in ITA Nos.911/Mds/2013 and 1031/Mds/2013. For Appellant : Mrs.R.Hemalatha, Senior Standing Counsel For Respondent : Mr.R.Vijayaraghavan http://www.judis.nic.in Judgt. dt. 12.10.2020 in T.C.A.718/2017, 918 & 919/2014 CIT v. Asian Peroxides Ltd. 2/20 COMMON JUDGMENT (Delivered by DR.VINEET KOTHARI,J) Revenue has preferred these Appeals raising following substantial questions of law under Section 260A of Act for Assessment Year 2012-2013:- (i) Whether disallowance of Rs.4.43 crores made under Section 36(1)(iii) is to be allowed especially when Assessee has diverted interest bearing funds to its sister concern without charging any interest and such diversion of funds is covered by Section 36(1)(iii)? (ii) Whether disallowance made under Section 36(1)(iii) is to be allowed especially when Assessee has sufficient funds which could be utilized for its own business activity instead of borrowing funds outside by paying huge interest payment by reducing tax liability and on such diversion of funds to its sister concern proportionate interest on such diversion is to be made? 2. relevant findings of learned Tribunal in favour of Assessee and by which learned Tribunal dismissed Appeal of http://www.judis.nic.in Judgt. dt. 12.10.2020 in T.C.A.718/2017, 918 & 919/2014 CIT v. Asian Peroxides Ltd. 3/20 Revenue and upheld order of learned Commissioner of Income Tax (Appeals) dated 20th July 2016 in favour of Assessee are quoted below for ready reference:- Brief facts of case that asseesee company is in business of manufacture. of Hydrogen Peroxide and filed its Return of Income for assessment year 2012-13 on 30.09.2012 with total loss of Rs.8,55,03,164/- and case was selected for scrutiny under CASS and notice U/s.143(2) of Act was issued. In compliance to notice, Ld. AR of assessee appeared on various dates and filed details. Ld. AO on perusal of financial statements found that assessee has claimed amount of Rs.6,08,56,000/- as interest and financial charges pertaining to interest on term loans, working capital and other financial expenses. Whereas assessee company having borrowed funds and paying interest, has also provided interest free loans to its sister concerns and Ld. AO found that amount outstanding as on 31.03.2012 is http://www.judis.nic.in Judgt. dt. 12.10.2020 in T.C.A.718/2017, 918 & 919/2014 CIT v. Asian Peroxides Ltd. 4/20 Rs.19,74,55,000/-. Ld. AO observed that assessee has borrowed liability as on 31.03.2012 Rs.26,42,21,000/- and paying interest and on similar issue of disallowance of interest on borrowed funds in assessee s own case for assessment year 2008-09, Revenue is agitating case before Hon ble High Court of Madras, Ld.AO on similar lines, made proportionate disallowance of interest payments taking into consideration interest free advances provided to subsidiaries/sister concerns Rs.4,43,25,189/- as this expenditure was not incurred wholly and exclusively for purpose of business U/s.36(1)(iii) of Act and with other additions passed order U/s.143(3) of Act dated 12.03.2015. 4. Aggrieved by order of Ld. AO, assessee has filed appeal before Ld. CIT(A). Ld. AR argued grounds and reiterated submissions of assessment proceedings. Ld. CIT(A) considered findings of AO and submissions of assessee and judicial decisions and http://www.judis.nic.in Judgt. dt. 12.10.2020 in T.C.A.718/2017, 918 & 919/2014 CIT v. Asian Peroxides Ltd. 5/20 relied on assessee's own case for assessment year 2000-09, where such similar disallowance made by Assessing Officer and Ld. CIT(A) has deleted addition. On appeal by Revenue, Tribunal had confirmed CIT(A) in favour of assessee in ITA No.911/Mds/2013 dated 08.02.2014. Ld. CIT(A) relied on Co-ordinate bench decision and allowed appeal observed at para 6 of order. 6. I have carefully perused facts in issue, submissions made by appellant and material on record. I find that Hon'ble ITAT vide order dated 18.2.2014 in ITA No.911/Mds/2013 at page No.9 Para No.10 have categorically held that AO had erred by disallowing interest incurred by appellant on premise that interest bearing funds have been diverted to sister concerns and consequently allowed appeal in favour of appellant. Material facts remaining similar, respectfully following order of Hon'ble http://www.judis.nic.in Judgt. dt. 12.10.2020 in T.C.A.718/2017, 918 & 919/2014 CIT v. Asian Peroxides Ltd. 6/20 ITAT this issue is decided in favour of appellant. AO directed to delete disallowance of Rs.4,43,25,189/-. This ground of appeal is allowed. Aggrieved by CIT(A) order, Revenue has filed appeal with Tribunal. 5. Before us Ld. DR argued that Ld CIT(A) has erred in deleting disallowance U/s. 36(1)(iii) of Act without considering fact that assessee has provided interest free advances and assessee could not substantiate that own funds were utilized for purpose of providing interest free advances and supported arguments with judicial decisions. Contra, Ld.AR relied on orders of Ld. CIT(A) and supported with Tribunal decisions. 6. We heard rival submissions, perused material on record and judicial decisions. sole substantial ground of Revenue being disallowance U/s.36(1)(iii) of Act was deleted by Ld. CIT(A) relying on judicial decisions. We find similar http://www.judis.nic.in Judgt. dt. 12.10.2020 in T.C.A.718/2017, 918 & 919/2014 CIT v. Asian Peroxides Ltd. 7/20 issue in assessee s own case for AY 2008-09 in ITA No.911/Mds/2013 held at para 9 & 10 as under: "9. We have heard both parties and carefully perused materials available on record from orders of Ld. Assessing Officer, it is apparent that assessee has share capital of approximately Rs.43.30 crores and reserve and surplus of Rs.35.61 crores as on 31/03/2008 and further from balance sheet it is apparent that assessee has share capital of Rs.43.30 crores and Rs.37.30 crores reserves & surplus as on 31/03/2007, thus assessee has own funds far exceeding advance for Rs.24.36 crores made to its sister concerns. Further claim of assessee that it had transferred accumulate losses to extent of Rs.14.17 to its sister concerns has not been looked into by Ld.AO, need less to mention that in such case disallowance of interest expense on premises that interest bearing funds have http://www.judis.nic.in Judgt. dt. 12.10.2020 in T.C.A.718/2017, 918 & 919/2014 CIT v. Asian Peroxides Ltd. 8/20 been diverted would be incorrect. However, following decisions rendered by various higher judiciary has held that if assessee has own funds exceeding advances made to sister concerns, then interest expenditure cannot be disallowed on premises that assessee has diverted interest bearing fund to its sister concerns. (i) CIT Vs. Reliance Utilities And Power Ltd. ([2009] 313 ITR 340 (Bom.)) Held, dismissing appeal, that if there were funds available both interest-free and overdraft and/or loans take, then presumption would arise that investments would be out of interest-free funds generated or available with company, if interest-free funds were sufficient to meet investments. In this case, this presumption was established considering funding of fact both by Commissioner (Appeals) and Tribunal. interest was http://www.judis.nic.in Judgt. dt. 12.10.2020 in T.C.A.718/2017, 918 & 919/2014 CIT v. Asian Peroxides Ltd. 9/20 deductible. (ii). CIT Vs. Bharti Televenture Ltd. ([2011] 331 ITR 502(Del)) Held, dismissing appeal, that order of Commissioner (Appeals) and Tribunal showed that assessee was maintaining bank account with mixed common funds in which all deposits and withdrawals were made. There was no specific instance noted by AO of direct nexus between borrowed funds and advances made to subsidiaries. AO had made general observations without pointing out any specific instance where interest bearing borrowing was advanced to subsidiaries or establishing that borrowings made by assessee were not for business purposes. Both appellate authorities were of view that assessee had explained sources of advances and investments made to subsidiaries, which http://www.judis.nic.in Judgt. dt. 12.10.2020 in T.C.A.718/2017, 918 & 919/2014 CIT v. Asian Peroxides Ltd. 10/20 could not be linked to borrowed funds and that advances were made out of assessee s own capital. At relevant time assessee was found to have adequate non-interest bearing funds by way of share capital and reserves. Even otherwise, advances were found to be made to subsidiaries for business considerations, i.e out of commercial expediency of assessee. That being factual position reflected from record of assessee, onus that lay on it stood discharged. There was no ground to interfere with those findings. 10. Considering above decisions of Hon'ble High Court of Bombay in case CIT Vs. Reliance Utilities And Power Ltd & decision of Hon'ble High Court of Delhi in case CIT Vs. Bharti Televenture Ltd., which are identical to facts of case before us, we are of opinion that Ld. Assessing Officer has erred by disallowing interest http://www.judis.nic.in Judgt. dt. 12.10.2020 in T.C.A.718/2017, 918 & 919/2014 CIT v. Asian Peroxides Ltd. 11/20 expenditure incurred by assessee on premises that interest bearing funds have been diverted to sister concerns. Therefore, we hereby delete addition made by Ld. Assessing Officer, which was further confirmed by Ld. CIT(A) on this issue. Thus, ground No.3 raised by assessee in its appeal is allowed in its favour and consequently ground Nos.2.1 & 2.2 raised by Revenue is decided against Revenue. 7. We respectfully follow Co-ordinate bench decision in assessee s own case and dismissed Revenue appeal. 8. In result, Revenue appeal is dismissed." 3. learned Tribunal has apparently only relied upon its previous decision for Assessment Year 2008-2009 in ITA No.911/Mds/2013 which is subject matter of T.C.A.No.918 of 2014 which is also being disposed of today. other question involved in said Assessment Year 2008-2009 with regard to carry forward http://www.judis.nic.in Judgt. dt. 12.10.2020 in T.C.A.718/2017, 918 & 919/2014 CIT v. Asian Peroxides Ltd. 12/20 unabsorbed depreciation by Assessee is not pressed by learned Senior Standing Counsel for Revenue. 4. only question, therefore, present before us is with regard to disallowance under Section 36(1)(iii) of Act. said provision of Act provides for "Other Deductions" under Section 36 of Act other than those specified from Sections 30 to 35 including their various sub-sections in Chapter II-D of Income Tax Act. relevant part of said provision insofar as clause (iii) is concerned is quoted for ready reference:- Other deductions. 36. (1) deductions provided for in following clauses shall be allowed in respect of matters dealt with therein, all computing income referred to in section 28-- (i) amount of any premium paid in respect of insurance against risk of damage or destruction of stocks or stores used for purposes of business or profession; (ia) amount of any premium paid by federal milk co-operative society to effect or to keep in force insurance on life of http://www.judis.nic.in Judgt. dt. 12.10.2020 in T.C.A.718/2017, 918 & 919/2014 CIT v. Asian Peroxides Ltd. 13/20 cattle owned by member of co-operative society, being primary society engaged in supplying milk raised by its members to such federal milk co-operative society; (ib) amount of any premium paid by any mode of payment other than cash by assessee as employer to effect or to keep in force an insurance on health of his employees under scheme framed in this behalf by-- (A) General Insurance Corporation of India formed under section 9 of General Insurance Business (Nationalisation) Act, 1972 (57 of 1972) and approved by Central Government; or (B) any other insurer and approved by Insurance Regulatory and Development Authority established under sub-section (1) of section 3 of Insurance Regulatory and Development Authority Act, 1999 (41 of 1999); http://www.judis.nic.in Judgt. dt. 12.10.2020 in T.C.A.718/2017, 918 & 919/2014 CIT v. Asian Peroxides Ltd. 14/20 (ii) any sum paid to employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission; (iii) amount of interest paid in respect of capital borrowed for purposes of business or profession." 5. learned Senior Standing Counsel Mrs.R.Hemalatha appearing for Revenue has urged that Assessee Company while having majorly only borrowed funds from its Banks and paid interest thereon, diverted substantial part of those funds to its Subsidiary Company and did not charge any interest thereon from Subsidiary Company, and therefore learned Assessing Authority was justified in disallowing proportionate part of interest Assessee Company paid to its Bank, under Section 36(1)(iii) of Act to tune of Rs.4,43,25,189/- which is computed in para 2 of Assessment Order dated 12.3.2015 which is also quoted below for ready reference:- "2. To keep issue of proportionate interest disallowance alive, it is proposed to consider assessee's action of http://www.judis.nic.in Judgt. dt. 12.10.2020 in T.C.A.718/2017, 918 & 919/2014 CIT v. Asian Peroxides Ltd. 15/20 diverting loans and advances to sister concern and reducing profit with entire interest expenditure as not maintainable. This coupled with assessee's submissions, which lack evidences, that are required to prove that interest free loans given to sister concerns are not out of borrowed fund and also placing reliance on case of R.Dalmia vs. CIT 133 ITR 169 (Del), where Hon'ble High Court decided that "Wherever interest paid concerns borrowed money for business as well as non business purposes, claim may be disallowed in its entirety if no adequate material is adduced by assessee to determine that portion of interest which pertains to business purposes", non-claimable interest expenditure in hands of assessee is worked out as 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 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/- http://www.judis.nic.in Judgt. dt. 12.10.2020 in T.C.A.718/2017, 918 & 919/2014 CIT v. Asian Peroxides Ltd. 16/20 Since above interest amounting to Rs.4,43,25,189/- cannot be said to be expenditure incurred wholly and exclusively for purposes of assessee's business said expenditure is disallowed u/s.36(1)(iii) of Act." 6. learned Senior Standing Counsel for Revenue, therefore, submitted that since Assessee Company did not have any interest-free Surplus Fund with it to advance loan to its Subsidiary Company, and therefore, diversion of such funds cannot be meant for that purpose and consequently, disallowance under Section 36(1)(iii) of Act out of amount of interest paid by Assessee Company to its Bank was justified. 7. Per contra, learned counsel for Assessee Mr.R.Vijayaraghavan submitted with reference to T.C.A.No.918 of 2014 that Assessee had, in fact, transferred Division of Unit of Assessee Company viz., Sodium Perborate Division to its Subsidiary Company, M/s.Chemasia Industries Limited on 31.3.2002 for sale consideration of Rs.14.17 crores against which Rs.1.97 crores of Receivable of Subsidiary Company was transferred to Assessee company M/s.Asian Peroxides Limited, but, remaining sale consideration was not paid to Assessee Company and which is http://www.judis.nic.in Judgt. dt. 12.10.2020 in T.C.A.718/2017, 918 & 919/2014 CIT v. Asian Peroxides Ltd. 17/20 said to be still outstanding. He further submitted that loan outstanding liability of Rs.7.88 crores of said Subsidiary Company Chemasia Industries Limited was also taken over by Assessee and small amount of Rs.0.18 crores was is balance of amounts from various loans given by Assessee Company to its Sister Concerns. 8. learned counsel for Assessee submitted that no interest was charged from Subsidiary Company on such outstanding amount of unpaid consideration for transfer of its Sodium Perborate Division. Further he submitted that Assessee Company had Share Capital to extent of Rs.43,30,75,000/- and Reserve and Surplus to extent of Rs.35,61,38,000/-, totalling to Rs.78,92,13,000/- out of which, interest-free funds was available with Assessee Company and therefore, relying upon decision of Hon'ble Supreme Court in case of Commissioner of Income Tax v. Reliance Industries Limited reported in (2019) 307 CTR (SC) 121 in which Hon ble Supreme Court has held that if any Assessee has got Surplus Funds exceeding advances made to its Subsidiaries, presumption could be made that interest bearing Funds have not been diverted to its Subsidiary Company. 9. Having heard learned counsel for parties, we are of opinion that matter is required to be remanded back to http://www.judis.nic.in Judgt. dt. 12.10.2020 in T.C.A.718/2017, 918 & 919/2014 CIT v. Asian Peroxides Ltd. 18/20 Assessing Authority for holding enquiry into matter as to whether interest bearing borrowed funds were used for advancing loan to Subsidiary Company or Surplus Funds of Company were so diverted. Prima facie, it appears that it was case of unpaid sale price for transfer of of Sodium Perborate Division made by Assessee Company to its Subsidiary Company M/s.Chemasia Industries Limited and outstanding loan liability to 7.88 crores was also taken over by Assessee Company. Therefore, even though borrowed funds might have been diverted, but fact remains that Assessee did not charge any interest on such unpaid price from Subsidiary Company and even took over another loan liability of Subsidiary Company. 10. Assessing Authority has merely worked out disallowance under Section 36(1)(iii) vide afore-quoted portion from Assessment order on basis of Average Interest free loan and Interest bearing Secured Funds from Assessee Company. Assessing Authority has not gone into aspect of unpaid sale price by Subsidiary Company. said enquiry was necessary before making any disallowance under Section 36(1)(iii) Act. 11. Therefore, in our opinion, matter deserves to be remanded to Assessing Authority for holding enquiry into this http://www.judis.nic.in Judgt. dt. 12.10.2020 in T.C.A.718/2017, 918 & 919/2014 CIT v. Asian Peroxides Ltd. 19/20 aspect of matter and then consider question of disallowance under Section 36(1)(iii) of Act. Accordingly, we set aside all three orders of three Authorities below for Assessment Year 20012-2013 and direct Assessing Authority to pass fresh orders in accordance with law after giving opportunity of hearing to Assessee. In view of considerable number of years having already passed, fresh orders may be passed within period of one year from today. With these directions, Appeals are disposed of. No order as to costs. (V.K.,J.) (M.S.R.,J.) 12.10.2020 Index : Yes/No Internet : Yes/No ssk. To 1. Income Tax Appellate Tribunal, 'C' Bench, Chennai. 2. Commissioner of Income Tax, Chennai. 3. Deputy Commissioner of Income tax, Corporate Circle 1(1), Chennai 600 034. 4. M/s.Asian Peroxides Ltd., 69, 3rd Floor, Armenian Street, Chennai 600 001. http://www.judis.nic.in Judgt. dt. 12.10.2020 in T.C.A.718/2017, 918 & 919/2014 CIT v. Asian Peroxides Ltd. 20/20 DR.VINEET KOTHARI, J. and M.S.RAMESH, J ssk. T.C.A. Nos.718/2017, 918 & 919 of 2014 12.10.2020 http://www.judis.nic.in Commissioner of Income-tax, Chennai v. Asian Peroxides Ltd
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