Southern Petrochemical Industries Corpn Ltd., CHENNAI V. ACIT, CHENNAI

ITA 1418/CHNY/2014

• Counselvise Citation: [2016] 121 COUNSELVISE.COM (IT) 3939 (ITAT-CHENNAI)
• Duration Of Justice: 2 year(s) 7 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-12-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 27-10-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 22-05-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PATHLAVATH PEERYACIT
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Depreciation; Earning of tax free income; Proportionate interest; Wholly owned subsidiary; Bad and doubtful debts; Commercial expediency
• Section: 43B; 14A; 115JB; 11

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI . . . , .. ' #$, & '( BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI D.S. SUNDER SINGH, ACCOUNTANT MEMBER ./ ITA NO.1418/MDS/2014 * +* / ASSESSMENT YEAR : 2009-10 M/S SOUTHERN PETROCHEMICAL INDUSTRIES CORPN. LTD., 88, MOUNT ROAD, GUINDY, CHENNAI - 600 032. PAN : AAACS 4668 K V. THE ASST/JOINT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE V(1), CHENNAI - 600 034. (-./ APPELLANT) (/0-./ RESPONDENT) ./ ITA NO.1821/MDS/2014 * +* / ASSESSMENT YEAR : 2009-10 THE DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE V(1), CHENNAI - 600 034. V. M/S SOUTHERN PETROCHEMICAL INDUSTRIES CORPN. LTD. (SPIC), SPIC HOUSE, 88, MOUNT ROAD, GUINDY, CHENNAI - 600 032. (-./ APPELLANT) (/0-./ RESPONDENT) *12 3 4 /ASSESSEE BY : SH. R. VIJAYARAGHAVAN, ADVOCATE 5 3 4 /REVENUE BY : SH. PATHLAVATH PEERYA, CIT ' 3 2& / DATE OF HEARING : 27.10.2016 67+ 3 2& / DATE OF PRONOUNCEMENT : 27.12.2016 2 I.T.A. NO.1418 & 1821/MDS/14 / O R D E R PER N.R.S. GANESAN, JUDICIAL MEMBER: BOTH THE APPEALS FILED BY THE ASSESSEE AND THE R EVENUE ARE DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF I NCOME TAX (APPEALS) V, CHENNAI, DATED 25.02.2014 AND PERTAIN TO ASSESSMENT YEAR 2009-10. THEREFORE, WE HEARD BOTH THE APPEALS TOGETHER AND DISPOSING OF THE SAME BY THIS COMMON O RDER. LETS FIRST TAKE ASSESSEES APPEAL IN I.T.A. NO.1418/MDS/2014. 2. THE FIRST ISSUE ARISES FOR CONSIDERATION IS DISA LLOWANCE OF CLUB EXPENSES TO THE EXTENT OF 1,17,478/-. 3. SH. R. VIJAYARAGHAVAN, THE LD.COUNSEL FOR THE AS SESSEE, SUBMITTED THAT HE IS NOT PRESSING THIS GROUND. THE LD.COUNSEL MADE AN ENDORSEMENT TO THIS EFFECT IN THE APPEAL FOLDER. THE LD. D.R. HAS NO OBJECTION TO DISMISS THIS GROUND AS NOT PRESSED. 4. IN VIEW OF THE ABOVE, THE GROUND RELATING TO DIS ALLOWANCE OF CLUB EXPENSES OF 1,17,478/- IS DISMISSED AS NOT PRESSED. 3 I.T.A. NO.1418 & 1821/MDS/14 5. NOW COMING TO NEXT GROUND OF APPEAL WITH REGARD TO DISALLOWANCE MADE UNDER SECTION 14A OF THE INCOME-T AX ACT, 1961 (IN SHORT 'THE ACT') READ WITH RULE 8D OF THE INCOM E-TAX RULES, 1962. 6. SH. R. VIJAYARAGHAVAN, THE LD.COUNSEL FOR THE AS SESSEE, SUBMITTED THAT WHILE COMPUTING THE PROFIT OF THE AS SESSEE, THE ASSESSING OFFICER DISALLOWED 4,83,96,673/-. ACCORDING TO THE LD. COUNSEL, THERE WAS NO INVESTMENT DURING THE YEAR UN DER CONSIDERATION. THEREFORE, THE THIRD LIMB OF RULE 8 D IS NOT APPLICABLE AT ALL. THE ASSESSEE HAS NOT INCURRED ANY DIRECT E XPENDITURE FOR EARNING EXEMPT INCOME. THEREFORE, THE FIRST LIMB O F RULE 8D IS ALSO NOT APPLICABLE. REFERRING TO SECOND LIMB, THE LD.C OUNSEL SUBMITTED THAT THE INVESTMENT WAS MADE IN THE SUBSIDIARY COMP ANIES AND GROUP COMPANIES. THEREFORE, THERE CANNOT BE ANY DI SALLOWANCE OF EXPENDITURE. THE LD.COUNSEL FURTHER SUBMITTED THAT THE ASSESSEE ITSELF DISALLOWED A SUM OF 17,59,411/-, THEREFORE, FURTHER DISALLOWANCE CANNOT BE MADE. 7. WE HEARD SH. PATHLAVATH PEERYA, THE LD. DEPARTME NTAL REPRESENTATIVE, ALSO. SECTION 14A OF THE ACT READ WITH RULE 8D PROVIDES FOR METHOD OF DISALLOWANCE WHEN THE ASSESS EE CLAIMS THAT NO EXPENDITURE WAS INCURRED FOR EARNING THE EXEMPT INCOME. THE 4 I.T.A. NO.1418 & 1821/MDS/14 FIRST LIMB OF RULE 8D PROVIDES FOR DISALLOWANCE OF DIRECT EXPENDITURE; SECOND LIMB OF RULE 8D PROVIDES FOR DISALLOWANCE OF EXPENDITURE WHICH IS NOT RELATABLE TO ANY PARTICULAR INCOME; TH E THIRD LIMB PROVIDES FOR 0.5% OF INVESTMENT, INCOME FROM WHICH DOES NOT FORM PART OF THE TOTAL INCOME. THE ASSESSEE NOW CLAIMS THAT NO INVESTMENT WAS MADE DURING THE YEAR UNDER CONSIDERA TION. HOWEVER, THE BALANCE SHEET IS NOT AVAILABLE ON THE FILE OF THIS TRIBUNAL. THEREFORE, WE ARE UNABLE TO VERIFY THE C LAIM OF THE ASSESSEE. WE ARE ALSO UNABLE TO ACCEPT THE CLAIM O F THE ASSESSEE THAT THERE WAS NO DIRECT EXPENDITURE, THEREFORE, RU LE 8D(2)(I) IS NOT APPLICABLE. THE ASSESSEE CLAIMS THAT INVESTMENT WA S MADE IN THE SUBSIDIARY COMPANIES AND GROUP COMPANIES. THE ASSE SSEE COULD NOT EXPLAIN HOW THE COMPANIES IN WHICH THE INVESTME NT WAS MADE, WERE SISTER CONCERNS OR GROUP CONCERNS OF THE ASSES SEE. THE SHAREHOLDING PATTERN OF THE COMPANIES IN WHICH THE INVESTMENT WAS MADE, WAS NOT AVAILABLE ON RECORD. 8. FOR THE ASSESSMENT YEAR 2000-01, THIS TRIBUNAL I N I.T.A. NO.2252/MDS/2003 EXAMINED THIS ISSUE AND REMANDED B ACK THE MATTER TO THE FILE OF THE ASSESSING OFFICER FOR RE- EXAMINATION. THE ASSESSEE HAS PRODUCED A COPY OF THE ORDER OF THIS T RIBUNAL FOR THE 5 I.T.A. NO.1418 & 1821/MDS/14 ASSESSMENT YEAR 2000-01. FOR THE ASSESSMENT YEAR 2 000-01, THE ASSESSEE CLAIMED BEFORE THIS TRIBUNAL THAT INVESTME NT WAS MADE IN THE COMPANY WHICH PRODUCES THE BASIC RAW MATERIAL R EQUIRED BY THE ASSESSEE. ON A QUERY FROM THE BENCH, THE LD.COUNSE L FOR THE ASSESSEE SUBMITTED THAT RAW MATERIAL WAS NOT SUPPLI ED AT FREE OF COST. IT IS ALSO NOT THE CASE OF THE ASSESSEE THAT THE ASSESSEE HAD PURCHASED RAW MATERIAL AT SUBSIDIZED PRICE OR COST. MOREOVER, INCOME OF THE COMPANIES, WHICH ARE OUTSID E INDIA, WAS NOT TAXABLE IN THE HANDS OF THE ASSESSEE IN INDIA. ALL THESE FACTS ARE NOT BROUGHT TO THE NOTICE OF THE EARLIER BENCH WHIC H DECIDED THE CASE. WHEN THE INCOME OF THE ASSESSEE WAS FROM THE COMPANIES WHICH SITUATED OUTSIDE INDIA AND THE ASSESSEE CLAIM S THAT THE MONEY WAS INVESTED IN OTHER COMPANIES, WHICH ARE SA ID TO BE SUBSIDIARY COMPANIES, WHY THE EXPENDITURE INCURRED BY THE ASSESSEE SHOULD NOT BE DISALLOWED WAS NOT EXAMINED BY THIS TRIBUNAL FOR ASSESSMENT YEAR 2000-01. THEREFORE, T HIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THE MATTER NEEDS TO BE RECONSIDERED. ACCORDINGLY, THE ORDERS OF BOTH THE AUTHORITIES BEL OW ARE SET ASIDE AND THE ISSUE IS REMITTED BACK TO THE FILE OF THE A SSESSING OFFICER. THE ASSESSING OFFICER SHALL RE-EXAMINE THE MATTER A FRESH AND BRING ON RECORD SHAREHOLDING PATTERN OF THE COMPANIES IN WHICH THE 6 I.T.A. NO.1418 & 1821/MDS/14 INVESTMENT WAS MADE BY THE ASSESSEE AND HOW THE COM PANIES OUTSIDE INDIA ARE SUBSIDIARY COMPANIES OF THE ASSES SEE AND THEREAFTER DECIDE THE ISSUE IN ACCORDANCE WITH LAW, AFTER GIVING A REASONABLE OPPORTUNITY TO THE ASSESSEE. 9. THE NEXT GROUND OF APPEAL IS WITH REGARD BAD DEB TS WRITTEN OFF TO THE EXTENT OF 8,22,569/-. THE LD.COUNSEL FOR THE ASSESSEE VERY FAIRLY SUBMITTED THAT HE IS NOT PRESSING THIS GROUND. THE LD.COUNSEL HAS ALSO MADE ENDORSEMENT IN THE APPEAL FOLDER. THE LD. D.R. HAS NO OBJECTION TO DISMISS THIS GROUND AS NOT PRESSED. ACCORDINGLY, THE GROUND RAISED BY THE ASSESSEE WITH REGARD TO DISALLOWANCE OF BAD DEBTS TO THE EXTENT OF 8,22,569/- IS DISMISSED AS NOT PRESSED. 10. SIMILARLY, THE GROUND RELATES TO DISALLOWANCE O F DEPRECIATION IS ALSO NOT PRESSED BY THE LD.COUNSEL FOR THE ASSES SEE. ACCORDINGLY, THE SAME IS ALSO DISMISSED AS NOT PRES SED. 11. NOW THE LAST GROUND IS WITH REGARD TO DISALLOWA NCE OF 15,35,279/- WHILE COMPUTING PROFIT UNDER SECTION 11 5JB OF THE ACT. 12. SH. R. VIJAYARAGHAVAN, THE LD.COUNSEL FOR THE A SSESSEE, SUBMITTED THAT WHILE COMPUTING THE PROFIT UNDER THE NORMAL 7 I.T.A. NO.1418 & 1821/MDS/14 PROVISIONS OF INCOME-TAX ACT, THE ASSESSING OFFICER DISALLOWED A SUM OF 15,35,279/- BEING ELECTRICITY TAX LEVIED BY THE TAM IL NADU ELECTRICITY BOARD UNDER TAMIL NADU TAX ON CONSUMPTI ON OR SALE OF ELECTRICITY ACT, 2003. THE LD.COUNSEL SUBMITTED TH AT THE ASSESSEE CHALLENGED THE VERY LEVY OF ELECTRICITY TAX AND A W RIT PETITION IS PENDING BEFORE THE HIGH COURT. SINCE THE TAX WAS L EVIED AND IT WAS REMAINING UNPAID, THE ASSESSING OFFICER DISALLOWED THE SAME UNDER THE NORMAL PROVISIONS BY APPLYING SECTION 43B OF TH E ACT. HOWEVER, WHILE COMPUTING THE PROFIT UNDER SECTION 115JB OF T HE ACT, THE ASSESSING OFFICER HAS ALSO DISALLOWED ON THE GROUND THAT IT IS A CONTINGENT LIABILITY. ACCORDING TO THE LD. COUNSEL , IT IS NOT A CONTINGENT LIABILITY AND THE TAX WAS ALREADY LEVIED . A MERE PENDENCY OF WRIT PETITION BEFORE THE HIGH COURT CAN NOT BE A REASON TO TREAT THE ELECTRICITY TAX LEVIED ON THE ASSESSEE AS CONTINGENCY LIABILITY. THE LIABILITY TO PAY ELECTRICITY TAX IS NOT ON THE BASIS OF HAPPENING OF SOME EVENT. THE TAX WAS ALREADY LEVIE D, THEREFORE, ACCORDING TO THE LD. COUNSEL, IT IS NOT A CONTINGEN T LIABILITY, HENCE, THE ASSESSING OFFICER IS NOT JUSTIFIED IN DISALLOWI NG THE CLAIM OF THE ASSESSEE. 8 I.T.A. NO.1418 & 1821/MDS/14 13. ON THE CONTRARY, SH. PATHLAVATH PEERYA, THE LD. DEPARTMENTAL REPRESENTATIVE, SUBMITTED THAT EXPLANA TION 1(C) TO SECTION 115JB OF THE ACT CLEARLY SAYS THAT THE BOOK PROFIT COMPUTED UNDER THE COMPANIES ACT, 1956 HAS TO BE INCREASED B Y THE AMOUNT PROVIDED FOR MEETING OTHER THAN THE ASCERTAINED LIA BILITY. IN THE CASE BEFORE US, ACCORDING TO THE LD. D.R., THOUGH A DEMA ND WAS RAISED IN THE FORM OF ELECTRICITY TAX, THE ASSESSEE HAS CH ALLENGED THE SAME BEFORE THE HIGH COURT AND THE HIGH COURT STAYED THE PAYMENT OF ELECTRICITY TAX. THE FURTHER LIABILITY OR PAYMENT OF ELECTRICITY TAX WOULD DEPEND UPON THE ORDER OF THE HIGH COURT. THEREFORE , ACCORDING TO THE LD. D.R., THE PAYMENT WOULD DEPEND UPON THE CON TINGENT, NAMELY, ORDER OF THE HIGH COURT. THEREFORE, ACCORD ING TO THE LD. D.R., IT CANNOT BE SAID THAT THE PAYMENT OF TAX LIA BILITY IS AN ASCERTAINED LIABILITY. HENCE, ACCORDING TO THE LD. D.R., IT HAS TO BE INCREASED OVER AND ABOVE THE BOOK PROFIT COMPUTED U NDER THE PROVISIONS OF COMPANIES ACT. 14. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EIT HER SIDE AND PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. EXPLANATION 1(C) TO SECTION 115JB OF THE ACT CLEARLY SAYS THAT OTHER THAN ASCERTAINED LIABILITY, IT HAS TO BE INCREASED OVER AND ABOVE TH E BOOK PROFIT. THE 9 I.T.A. NO.1418 & 1821/MDS/14 ASSESSEE NOW CLAIMS THAT MERE PENDENCY OF WRIT PETI TION BEFORE THE HIGH COURT CANNOT BE SAID THAT THE LIABILITY IS NOT AN UNASCERTAINED LIABILITY. THE FACT REMAINS THAT THE LIABILITY TO PAY THE ELECTRICITY TAX WOULD DEPEND UPON THE DECISION THAT MAY BE TAKEN BY THE MADRAS HIGH COURT IN THE WRIT PETITION SAID TO BE PENDING. AS ON TODAY, EVEN THOUGH THERE WAS A LIABILITY AND DEMAND RAISED BY T HE CONCERNED AUTHORITY, THE HIGH COURT STAYED THE RECOVERY AND T HE PAYMENT OF ELECTRICITY TAX WOULD DEPEND UPON THE DECISION THAT MAY BE TAKEN BY THE HIGH COURT. THEREFORE, AS ON TODAY, IT IS NOT AN ASCERTAINED LIABILITY. HENCE, IT HAS TO BE INCREASED AS PROVID ED IN EXPLANATION 1 TO SECTION 115JB OF THE ACT. THEREFORE, THIS TRIBU NAL DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF THE LOWER AUT HORITY AND ACCORDINGLY THE SAME IS CONFIRMED. 15. NOW COMING TO REVENUES APPEAL IN I.T.A. NO.1821/MDS/2014, THE ONLY ISSUE ARISES FOR CONSIDE RATION IS DISALLOWANCE OF PROPORTIONATE INTEREST EXPENSES ON THE FUNDS DIVERTED TO ASSOCIATE COMPANIES. 16. SH. PATHLAVATH PEERYA, THE LD. DEPARTMENTAL REPRESENTATIVE, SUBMITTED THAT THE ASSESSEE BORROWE D FUNDS FOR BUSINESS PURPOSE IN INDIA AND INVESTED THE SAME IN COMPANIES AT 10 I.T.A. NO.1418 & 1821/MDS/14 DUBAI AND JORDON. THE INCOME OF THE COMPANIES AT J ORDON AND DUBAI IS NOT TAXABLE IN INDIA. HOWEVER, THE ASSESS EE CLAIMS THAT THE INVESTMENT MADE IN THOSE COMPANIES FROM THE BOR ROWED FUNDS WAS FOR BUSINESS PURPOSE. ACCORDING TO THE LD. D.R ., THE FUNDS DIVERTED TO FOREIGN COUNTRY HAVE TO BE TREATED AS D IVERSION OF BORROWED FUNDS, THEREFORE, THE INTEREST RELATABLE T O THOSE FUNDS HAS TO BE DISALLOWED. 17. ON THE CONTRARY, SH. R. VIJAYARAGHAVAN, THE LD. COUNSEL FOR THE ASSESSEE, SUBMITTED THAT THE ASSESSEE ADVANCED A SUM OF 9632.96 LAKHS TO ITS GROUP COMPANIES OUT OF INTERES T FREE FUNDS. THE ADVANCE WAS GIVEN FOR BUSINESS PURPOSE AND OUT OF COMMERCIAL EXPEDIENCY. FOR THE ASSESSMENT YEAR 2000-01, THIS TRIBUNAL, BY ORDER DATED 20.10.2004, ALLOWED SIMILAR CLAIM OF TH E ASSESSEE. ON A QUERY FROM THE BENCH, HOW THE COMPANIES AT DUBAI AN D JORDAN ARE GROUP COMPANIES OF THE ASSESSEE? THE LD.COUNSEL SU BMITTED THAT THEY ARE 100% SUBSIDIARY OF THE ASSESSEE-COMPANY. 18. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EIT HER SIDE AND PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. THE ASSESSEE CLAIMS THAT INTEREST FREE FUNDS WERE DIVERTED TO TH E COMPANIES AT DUBAI AND JORDON. THE ASSESSEE ALSO CLAIMS THAT TH EY ARE SISTER 11 I.T.A. NO.1418 & 1821/MDS/14 CONCERNS OF THE ASSESSEE. HOWEVER, THE SHAREHOLDIN G PATTERN OF SO-CALLED COMPANIES AT DUBAI AND JORDON ARE NOT AVA ILABLE ON RECORD. THEREFORE, IT IS NOT KNOWN HOW THE ASSESSE E CLAIMS THAT THE ADVANCES WERE MADE TO SISTER CONCERNS. MOREOVER, T HE BALANCE SHEET AND OTHER FINANCIAL DOCUMENTS WERE NOT AVAILA BLE ON RECORD. THEREFORE, IT IS NOT KNOWN WHETHER THE ASSESSEE HAS ADVANCED FUNDS OUT OF INTEREST FREE FUNDS OR BORROWED FUNDS. IT IS NOT IN DISPUTE THAT THE ASSESSEE BORROWED FUNDS FOR BUSINE SS PURPOSE AND THE SAME REMAIN OUTSTANDING DURING THE YEAR UNDER C ONSIDERATION. THEREFORE, WE HAVE TO EXAMINE HOW MUCH FUNDS WERE B ORROWED AND WHETHER THERE WAS ANY NEXUS BETWEEN BORROWED FUNDS AND INVESTMENT MADE IN DUBAI AND JORDON. THE SHAREHOLD ING PATTERN OF THOSE COMPANIES IS ALSO NOT KNOWN. SINCE THESE FAC TS WERE NOT AVAILABLE ON RECORD AND THE SAME WERE ALSO NOT EXAM INED BY EARLIER BENCH OF THIS TRIBUNAL DURING THE ASSESSMENT YEAR 2 000-01, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THE MATT ER NEEDS TO BE RE- EXAMINED. ACCORDINGLY, THE ORDERS OF THE AUTHORITI ES BELOW ARE SET ASIDE AND DISALLOWANCE OF PROPORTIONATE INTEREST EX PENSES ON THE ADVANCE MADE TO GROUP COMPANIES ARE REMITTED BACK T O THE FILE OF THE ASSESSING OFFICER. THE ASSESSING OFFICER SHALL RE-EXAMINE THE MATTER AFRESH AND BRING ON RECORD THE SHAREHOLDING PATTERN OF THE 12 I.T.A. NO.1418 & 1821/MDS/14 COMPANIES AT DUBAI AND JORDON AND HOW MUCH ADVANCES WERE MADE AND ALSO FIND OUT WHETHER THE INCOME FROM THE GROUP COMPANIES IN WHICH ADVANCES WERE MADE, IS TAXABLE I N INDIA, AND THE OBJECT FOR WHICH THE MONEY WAS ADVANCED AND UTI LIZATION OF FUNDS BY THE COMPANIES WHICH RECEIVED THE FUNDS FRO M THE ASSESSEE AND THEREAFTER DECIDE THE ISSUE IN ACCORDA NCE WITH LAW, AFTER GIVING A REASONABLE OPPORTUNITY TO THE ASSESS EE. 19. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES AND THE APPEAL FIL ED BY THE REVENUE IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON 27 TH DECEMBER, 2016 AT CHENNAI. SD/- SD/- ( . . ' #$ ) ( . . . ) (D.S. SUNDER SINGH) (N.R.S. GANESAN) & / ACCOUNTANT MEMBER /JUDICIAL MEMBER /CHENNAI, 9 /DATED, THE 27 TH DECEMBER, 2016. KRI. 3 /2#: ;:+2 /COPY TO: 1. *12 /ASSESSEE 2. ASSESSING OFFICER 3. ' <2 () /CIT(A)-V, CHENNAI 4. ' <2 /CIT-V, CHENNAI-34 5. := /2 /DR 6. * > /GF.