EVEREST KANTO CYLINDER LTD ,MUMBAI V. DY COMMISSIONER OF INCOME TAX, CIRCLE 3(4), MUMBAI, MUMBAI

ITA 1931/MUM/2024

AI Insights

The case involves Everest Kanto Cylinder Ltd, which appealed against the revisionary order under Section 263 of the Income-tax Act, 1961, concerning the assessment year 2018-19. The Principal Commissioner of Income-tax had revised the assessment order, deeming it erroneous and prejudicial to the interests of the revenue, primarily based on an audit objection that the interest charged on loans to subsidiaries was at a comparatively low rate. The Tribunal examined whether the revision was justified, considering the thorough inquiry conducted by the Assessing Officer and the legal precedents cited by the assessee.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 474450 (ITAT-MUMBAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-01-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Assessment Year: 2018-2019
• Other Referred Cases: PCIT vs. ECT Investments and Holdings Pvt. Ltd., PCIT vs Pramod Kumar Tekriwal, PCIT vs. Cartier Leaflin (P.) Ltd., Rolta Shares & Stocks Pvt. Ltd. vs. DCIT
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: BISWANATH DAS
• Assessee Lawyers: SEKHAR GUPTA
• Keywords: Set aside; Transfer pricing; International transaction; Audit objection; Revision of order
• Section: 143(3); 142(1); 263; 13

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “E”, MUMBAI BEFORE SHRI ANIKESH BANERJEE, JUDICIAL MEMBER AND MISS PADMAVATHY S., ACCOUNTANT MEMBER ITA No.1931/Mum/2024 (Assessment Year: 2018-19) Everest Kanto Cylinder Ltd 204, Raheja Centre, Free Press Journal Marg, Nariman Point, Mumbai-400 021 PAN: AAACE0836F vs Deputy Commissioner of Income- tax, Circle 3(4), Mumbai. World Trade Centre 1, Cuff Parade, Mumbai-400005 APPLICANT RESPONDENT Assessee by : Shri Sekhar Gupta Respondent by : Shri Biswanath Das - CIT DR Date of hearing : 01/01/2025 Date of pronouncement : 03/01/2025 O R D E R PER ANIKESH BANERJEE, JM: The instant appeal of the assessee was filed against the order of the Principal Commissioner of Income-tax, Mumbai-3 (for brevity ‘Ld.PCIT’), order passed under section 263 of the Income-tax Act, 1961 (in short, ‘the Act’) for Assessment Year 2018-19, date of order 29/03/2024. The impugned order was emanated from the order of the Learned National e-Assessment Centre, Delhi (hereinafter, ‘Ld.AO’) order passed under section 143(3) read with section 144B of the Act, date of order 22/05/2021. 2 ITA No.1931 /Mum/2024 Everest Kanto Cylinder Ltd 2. The assessee has taken the following grounds:- “1. On the facts and circumstances of the case and in law the Principal CIT has erred in initiating proceedings us. 263 of the Income Tax Act, 1961 by wrongly assuming Jurisdiction u/s. 263 hence, the order passed is bad in law and void-ab initio. 2. Without prejudice to the ground No.1, the learned Principal CTT has erred in passing the revisionary order u/s. 263 of Income Tax Act in spite of the fact that the learned assessing officer had made adequate enquiries during the course of the assessment proceedings and the assessing officer has take a permissible view. order passed by the assessing officer is neither erroneous nor prejudicial to the interest of the revenue and hence, the order of the principal CIT to be set aside. 3. The learned principal CIT has revised the order of the assessing officer u/s 263 only on the basis of the audit objection and hence such an order u/s 263 is illegal and bad in the eyes of law. 4. The assessee craves leave to add, alter or amend the above grounds of appeal.” 3. Brief facts of the case are that the case revolves around an assessment finalized under Section 143(3) read with Section 144B of the Act. During the relevant financial year, the assessee recorded finance expenses of Rs.2,668.23 lakhs in its profit and loss account. The assessee disclosed total borrowings of Rs.21,058.17 lakhs in its balance sheet and extended loans to two subsidiaries: EKC Industries (Tianjin) Co. Ltd., China For this international transaction, the assessee charged interest at 7.5% on the principal amount of Rs.21.27 crores, amounting to Rs.158.37 lakhs. Calcutta Compressions & Liquefaction Engineering Ltd., Kolkata 3 ITA No.1931 /Mum/2024 Everest Kanto Cylinder Ltd No interest was charged on the loan extended to this domestic subsidiary. The loan, initiated during the financial year 2010–11, subsequently became deferred and irrecoverable. A provision for doubtful recovery was created as of March 31, 2015, and the unrecoverable interest was written off in the financial year 2023– 24. The principal amount of the loan remains outstanding, and the entire loan continues to be recorded in the books of accounts. The assessee relied on the Supreme Court's ruling in PCIT vs. ECT Investments and Holdings Pvt. Ltd., which upheld the Hon’ble Bombay High Court's judgment (2020)117 taxmann.com 123(Bom)). The ruling stated that deferred interest on borrowed capital provided to a subsidiary due to business exigency is not taxable under Section 36(1)(iii) of the Act. Based on this precedent, the Ld. AR argued that no interest was charged to the Indian subsidiary. During assessment proceedings, the Ld. AO issued a notice under Section 142(1) of the Act, to which the assessee provided detailed responses, including the loan particulars in Questionnaires Nos. 13 and 14. After deliberation, the Ld. AO added Rs.158.37 lakhs to the assessee’s total income, corresponding to the interest on the loan provided. Aggrieved by this addition, the assessee appealed before the Commissioner of Income Tax (Appeals), where, according to the Ld. AR, the appeal is still pending.Subsequently, the Ld. PCIT invoked jurisdiction under Section 263 of the Act. The Ld. PCIT observed that: No interest was charged on the loan to the Indian subsidiary. The interest charged on the international transaction with the Chinese subsidiary was at a comparatively low rate. The Ld. PCIT deemed the assessment order to be erroneous and prejudicial to the interest of the revenue. Accordingly, the Ld. PCIT directed a fresh assessment, 4 ITA No.1931 /Mum/2024 Everest Kanto Cylinder Ltd recommending that interest at 12.67% be added on the loans extended to both subsidiaries. Aggrieved by this revisionary order, the assessee has filed the present appeal before this forum. 4. During the argument, the Ld.AR stated that the issue was already considered by the Ld.AO during the assessment proceedings. The Ld.AR drew our attention on impugned assessment order, para 8, related to addition of interest in deferred recognitions, which is reproduced as below:- “8. Addition of interest deferred for recognition 8.1 During the assessment proceedings, it was observed that the tax auditor had made the following disclosure in Clause 13(f) of the Tax Audit Report in relation to ICDS IV - Revenue Recognition: \"The Assessee has deferred the recognition of interest income of Rs. 158.37 Lakhs, due to uncertainties involved in ultimate collection of the outstanding amounts.\" In this regard, the assessee was asked vide notice u/s 142(1) dated 10.12.2020 to provideA.Y. 2018-19 documentary evidences in support of this position and also provide a detailed note explaining the deferment of revenue recognition in compliance with the provisions of ICDS IV. The assessee vide reply dated 12.01.2021 submitted that the loan was given to the subsidiary company, EKC Industries (Tianjin) Co. Ltd. Since the principal amount was not recoverable from the subsidiary company, the interest amount of Rs.158.37 lakhs which was due from them has not been charged and deferred. 8.2 The submission of the assessee has been considered and has not been found to be satisfactory. The Income Computation and Disclosure Standards were introduced and made applicable from AY 2017-18. The provisions of ICDS IV on Revenue Recognition clearly provide that interest shall accrue on time basis. The relevant provision of the ICDS are produced below: \"8. (1) Subject to sub paragraph (2) interest shall accrue on the time basis determined by the amount outstanding and the rate applicable. (2) Interest on refund of any tax, duty or cess shall be deemed to be the income of the previous year in which such interest is received.\" 5 ITA No.1931 /Mum/2024 Everest Kanto Cylinder Ltd 8.3 Further, the GBDT vide Circular No. 10/2017 dated 23 March, 2017 has explained the following regarding this provision: \"Question 13: The condition of reasonable certainty of ultimate collection is not laid down for taxation of interest, royalty and dividend, Whether the taxpayer is obliged to account for such income even when the collection thereof is uncertain? Answer. As a principle, interest accrues on time basis and royalty accrues on the basis of contractual terms. Subsequent non recovery in eithercases can be claimed as deduction in view of amendment to S. 36(1)(vii). Further, the provisions of the Act (e.g. Section 43D) shall prevail over the provisions of ICDS.\" 8.4 From a perusal of the provisions of Para 8 of ICDS IV and the above CBDT Circular, it is clear that the recognition of income on account of interest cannot be deferred. The interest income has to be recognized on time basis. Therefore, the interest income of Rs.158.37 lakhs which has been deferred for recognition by the assessee is being added to the income of the assessee for the year under consideration. 8.5 Since, this unit is satisfied that the assessee has under reported its income, penalty proceedings u/s 270A of the Income Tax Act, 1961 is being initiated separately. (Addition of Rs. 1,58,37,000/-)” 5. In further argument, the Ld.AR stated that the assessee had paid the amount as loan to the subsidiary company is from its own fund and details of explanation of fund and capital account is submitted in support in paper book which is reproduced as below:- 1. Loan to related parties. 1 Calcutta Compressions & Liquefactions Engineering Ltd. (Subsidiary Company) Less : Provision in loan 5.82 1.38 2 EKC Industries (Tianjin) Co. Ltd (Subsidiary in China) Principal Amount 21.27 20.57 41.84 6 ITA No.1931 /Mum/2024 Everest Kanto Cylinder Ltd Add : Accrued interest 3 Advance to Kishore Thakkar (Employee) 0.17 Total 46.45 2.Equity. 1 Equity share capital 22.44 2 Other equity 143.86 Total 166.30 3. Borrowings Rs.in crores 1. Non current borrowings 139.53 2. Current borrowings 71.05 Total 210.58 4. Interest paid and received. Rs.in crores 1. Interest paid during the year 33.78 2. Interest received during the year 9.04 6. The Ld.AR respectfully relied on the order of PCIT vs Pramod Kumar Tekriwal (2023) 154 taxmann.com 142 (SC) where the Hon’ble Apex Court dismissed the appeal of the revenue for the ground that the assessee has produced all the relevant documents before the Ld.AO and the Ld.AO had taken one possible view out of two and assumption of jurisdiction by Principal CIT under section 263 which is erroneous but High Court by the order held that since the factual findings taken by the ITAT, there is no error in the Tribunal which allowed the appeal of the assessee. 7 ITA No.1931 /Mum/2024 Everest Kanto Cylinder Ltd 7. In the case of PCIT vs. Cartier Leaflin (P.) Ltd. [(2023) 146 taxmann.com 281 (SC)], it was held that if the Ld. AO has adopted a plausible view, there is no justification for invoking Section 263 to revise the assessment order. This ruling applies even if it is alleged that the AO did not examine certain aspects, such as the books of account or the share trading transactions conducted by the assessee through demat accounts, during the assessment proceedings. A similar position was upheld by the co-ordinate bench “D” of the ITAT, Mumbai, in the case of Rolta Shares & Stocks Pvt. Ltd. vs. DCIT (ITA No. 2115/Mum/2024), with the pronouncement dated 1/08/2024. The Ld. AR contended that the AO had duly accepted the assessee’s explanation regarding the interest charged to the foreign company and the absence of interest charged to the Indian company. However, the Ld. PCIT considered that interest should have been charged at a rate of 12.67% on the outstanding loan amount. Consequently, the Ld. PCIT concluded that the AO’s order was erroneous and prejudicial to the interests of the revenue. 8. The Ld. DR vehemently argued in favor of the revisional order passed by the Ld. PCIT and relied upon the same. However, the Ld. DR was unable to cite any contrary judgment that would refute the submissions made by the Ld. AR. 9. We have heard the rival submissions and carefully considered the documents placed on record. The invocation of Section 263 hinges on the fulfillment of two essential conditions: (i) the assessment order must be erroneous; and (ii) it must be prejudicial to the interests of the revenue. Upon examining the assessment order, we observe that the Ld. AO had conducted a thorough inquiry, as evidenced by the issuance of notices under Section 142(1) of the Act (refer to Points 13 and 14, enclosed in APB pages 1 to 6) 8 ITA No.1931 /Mum/2024 Everest Kanto Cylinder Ltd and the assessee's reply dated 12.01/2021 (enclosed in APB pages 7 to 10). The queries raised by the Ld. AO specifically pertained to the interest on loans extended to subsidiary companies. As part of the assessment proceedings, an addition of Rs. 1,58,37,000/- was made. This demonstrates that the Ld. AO duly applied his mind to the matter and took a considered view while accepting the assessee’s explanation regarding the interest on loans to subsidiaries. Therefore, the issue was adequately addressed, leaving no grounds for invoking the provisions of Section 263 of the Act. In arriving at this conclusion, we respectfully rely on the judgments in Cartier Leaflin (P.) Ltd. (supra) and Pramod Kumar Tekriwal (supra), as well as the decision of the co-ordinate bench of the ITAT, Mumbai, in Rolta Shares & Stocks Pvt. Ltd. (supra). Moreover, we note that the assessee had sufficient own funds to extend loans to its subsidiaries. It is a settled principle that interest need not be charged on loans provided to subsidiaries if the loans are extended for reasons of business expediency, as upheld by the Hon’ble Supreme Court in E City Investments and Holdings Pvt. Ltd. (supra). Regarding the international transaction, the assessee charged interest at a rate of 7.5% on the balance loan amount of Rs.21.27 crore, amounting to Rs.158.37 lakh. It is pertinent to note that in prior assessment years, the department had accepted a lower interest rate of 5%.As for the Indian subsidiary, the loan has been under dispute since 2015, with the interest eventually written off. Given these facts, we find that the order passed by the Ld. AO is neither erroneous nor prejudicial to the revenue. Since one of the two mandatory conditions for 9 ITA No.1931 /Mum/2024 Everest Kanto Cylinder Ltd invoking Section 263 is not satisfied, the provisions of Section 263 cannot be applied. In view of the above, the assessee’s grounds of appeal succeed. 10. In the result, the appeal of the assessee bearing ITA No.1931/Mum/2024is allowed. Order pronounced in the open court on 03rd day of January 2025. Sd/- sd/- (PADMAVATHY S.) (ANIKESH BANERJEE) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai,दिन ांक/Dated: 03/01/2025 Pavanan Copy of the Order forwarded to: 1. अपील र्थी/The Appellant , 2. प्रदिव िी/ The Respondent. 3. आयकरआयुक्त CIT 4. दवभ गीयप्रदिदनदि, आय.अपी.अदि., मुबांई/DR, ITAT, Mumbai 5. ग र्डफ इल/Guard file. BY ORDER, //True Copy// (Asstt. Registrar), ITAT, Mumbai "