Empee Holdings Ltd., CHENNAI V. DCIT, CHENNAI

ITA 1502/CHNY/2014

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 8947 (ITAT-CHENNAI)
• Duration Of Justice: 2 year(s) 1 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-07-2016
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 23-06-2016
• Assessment Year: 2003-2004
• Appeal Filed On: 02-06-2014
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: DURAI
• Assessee Lawyers: S SRIDHAR
• Keywords: Difference of opinion; Assessment record; Commercial expediency; Reason to believe; Change of opinion

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI , . ! , '!# BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER ./ I.T.A. NO. 1502/MDS/2014 ' $ %$ / ASSESSMENT YEAR : 2003-2004 M/S. EMPEE HOLDINGS LTD, EMPEE TOWERS NO.59, HARRIS ROAD, PUDUPET, CHENNAI 600 002. VS. THE DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE II(1) CHENNAI [PAN AABCE 5490N] ( / APPELLANT) ( /RESPONDENT) &' ( ) / APPELLANT BY : SHRI. S. SRIDHAR, ADVOCATE *+&' ( ) /RESPONDENT BY : SHRI. DURAI PANDIAN, IRS, ADDL. CIT ( , / DATE OF HEARING : 23-06-2016 -.% ( , / DATE OF PRONOUNCEMENT : 19-07-2016 / O R D E R PER G. PAVAN KUMAR, JUDICIAL MEMBER : THE APPEAL FILED BY THE ASSESSEE IS DIRECTED AG AINST ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS)-II, CHE NNAI IN ITA NO.417/13-14, DT 07.03.2014 FOR THE ASSESSMENT YEAR 2003-2004 PASSED U/S.143(3) R.W.S. 147 AND 250 OF THE INCOME TAX ACT, 1961 (HEREIN AFTER REFERRED TO AS THE ACT). ITA NO.1502/MDS/2014 :- 2 -: 2. THE THREE SUBSTANTIVE GROUNDS RAISED BY THE ASSESS EE BEING (I) THE LD. COMMISSIONER OF INCOME TAX (APPEALS) ER RED IN CONFIRMING THE RE-ASSESSMENT PROCEEDINGS U/S.143(3) R.W.S 147 OF THE ACT AS VALID (II) THE LD. COMMISSIONER OF INCOME TAX (AP PEALS) ERRED IN SUSTAINING THE DISALLOWANCE OF INTEREST AGGREGATING TO 7.62,89,206/- CLAIMED U/S.36(1)(III) OF THE ACT WITHOUT APPRECIAT ING THAT THE LOANS WERE ADVANCED WITHOUT INTEREST TO GROUP COMPANIES F OR BUSINESS PURPOSES AND (III) THE LD. CIT(A) ERRED IN SUSTAIN ING THE DISALLOWANCE OF FEE PAID TO REGISTRAR OF COMPANIES (ROC). 3. AT THE TIME OF HEARING, THE LD. COUNSEL HAS NOT PRE SSED GROUND NO. THREE, BEING FEES PAID TO REGISTRAR OF C OMPANIES AND WE ADJUDICATE FIRST TWO GROUNDS. 4. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE I S AN INVESTMENT COMPANY AND FILED RETURN OF INCOME FOR THE ASSESSMENT YEAR 2003-2004 ON 01.12.2003 WITH TOTAL INCOME OF 7 4,33,900/- AND THE RETURN OF INCOME WAS PROCESSED U/S.143(1) OF T HE ACT ON 23.06.2004. SUBSEQUENTLY, THE LD. ASSESSING OFFICE R ISSUED NOTICE U/S.148 OF THE ACT HAVING REASON TO BELIEVE THAT TH E INCOME ESCAPED ASSESSMENT WERE ASSESSEE COMPANY HAS DIVERTED INTER EST BEARING BORROWED FUNDS TO GROUP COMPANIES WITHOUT CHARGING ANY INTEREST. ITA NO.1502/MDS/2014 :- 3 -: THE LD. AUTHORISED REPRESENTATIVE FILED LETTER DATE D 12.04.2010 TO TREAT ORIGINAL RETURN FILED AS IN RESPONSE TO NOTICE U/S .148 OF THE ACT. IN THE SCRUTINY PROCEEDINGS, THE LD. ASSESSING OFFICER ON PERUSAL OF THE FINANCIAL STATEMENTS FOUND THAT THE ASSESSEE COMPAN Y HAS UNSECURED LOAN AS ON 31.03.2003 79,04,02,441/- AS AGAINST PR EVIOUS YEAR BALANCE AS AT 31.03.2002 BEING 726,23,506/- AND THE ASSESSEE HAS DEBITED TO PROFIT AND LOSS ACCOUNT 762,89,206/- B EING INTEREST ON UNSECURED LOAN OBTAINED FROM M/S. EMPEE SUGARS & C HEMICALS LIMITED. THE CONTENTION OF THE ASSESSEE COMPANY THA T THE ASSESSEE HAS NOT CHARGED ANY INTEREST ON LOANS ADVANCED TO G ROUP COMPANIES AND NO PART OF INTEREST BEARING FUNDS WERE UTILIZE D FOR LENDING TO GROUP COMPANIES. FURTHER, THE LD. ASSESSING OFFICER PERUSED THE BALANCE SHEET FOUND THAT ASSESSEE COMPANY DOES NOT HAVE ANY RESERVE AND SURPLUS AT THE STARTING OF FINANCIAL YE AR AND IT IS NOT POSSIBLE FOR THE ASSESSEE COMPANY TO PROVIDE UNSECU RED LOANS TO GROUP COMPANIES AND SHOW CAUSE NOTICE WAS ISSUED AN D THE LD. AUTHORISED REPRESENTATIVE FILED EXPLANATION AT PARA 6.2 AS UNDER:- WE SUBMIT THAT THE ADVANCE GIVEN TO M/S. EMPEE DISTILLERIES LIMITED IS OUT OF THE INTEREST BEARING FUNDS IS ERRONEOUS AND NOT JUSTIFIED. THIS IS BECAUSE OF THE FACT, WE HAVE AVAILABILITY OF NON INTEREST BEARING FUNDS OF 73 CRORES BEING THE SHARE APPLICATION MONEY EARLIER. IN ANY EVENT, THE MONEY ADVANCED TO M/S. EMPEE DISTILERIES LIMITE D SHOULD NOT BE CONSIDERED AS DIVERSION FOR NON BUSIN ESS PURPOSE IN AS MUCH AS THE GROUP DEVELOPMENT ESPECIA LLY IN THE CONTEST OF COMMON MANAGEMENT, UNITY AND CONTROL AS ITA NO.1502/MDS/2014 :- 4 -: WELL AS INTER-LACING OF FUNDS SHOULD BE TAKEN INTO CONSIDERATION AND THE MONIES ADVANCED ARE USED ONLY IN THE BUSINESS OF THE OTHER GROUP COMPANY. IN THIS R EGARD, THE DECISION OF SUPREME COURT REPORTED IN 288 ITR 1 IS APT AND RELEVANT. THEREFORE, IT IS REQUESTED THAT THE INTEREST PAID TO M/S. EMPEE SUGARS & CHEMICALS LIMITED MAY B E CONSIDERED FOR DEDUCTION . THE LD. ASSESSING OFFICER ALSO REVIEWED THE EXIST ING SHARE APPLICATION MONEY PENDING ALLOTMENT AND THEY ARE INTEREST FREE FUNDS AND FURTHER ON COMPARISON WITH SHARE APPLICATION MONEY WITH UNS ECURED LOANS PROVIDED TO SISTER CONCERN, THERE IS WIDE GAP OF SO URCE AVAILABILITY BUT THE LD. AUTHORISED REPRESENTATIVE JUSTIFIED THE ADV ANCES TO GROUP COMPANIES ARE FOR THE PURPOSE OF COMPANIES DEVELOPM ENT FORMING PART OF SAME MANAGEMENT. THE LD. ASSESSING OFFICER FURT HER MADE A EXHAUSTIVE FINDINGS ON GROUP COMPANY M/S. EMPEE SU GARS AND CHEMICALS LTD WHICH HAS ADVANCED MONEY TO THE ASSES SEE COMPANY IS LOSS MAKING COMPANY AND PERUSED THE FINANCIAL STAT EMENTS AND FOUND THAT NO TAX WAS PAID ON INTEREST RECEIVED FROM THE ASSESSEE COMPANY. THEREFORE, THE LD. ASSESSING OFFICER CONSI DERING THE ABOVE FACTS IN THE NATURE OF COLOURABLE DEVICE TO EVADE TAX AND DISALLOWED INTEREST CHARGES ALONG OTHER DISALLOWANCE AND PASSE D ORDER. AGGRIEVED BY THE ORDER, THE ASSESSEE FILED AN APPEAL BEFORE C OMMISSIONER OF INCOME TAX (APPEALS). ITA NO.1502/MDS/2014 :- 5 -: 5. IN THE APPELLATE PROCEEDINGS, THE LD. AUTHORISED REPRESENTATIVE ARGUED THE GROUNDS ON RE-ASSESSMENT AND INTEREST DISALLOWANCE. THE LD. COMMISSIONER OF INCOME TAX ( APPEALS) RELIED ON THE FINDINGS OF THE LD. ASSESSING OFFICER AT PAGE 5 TO 7 AND HIGHLIGHTED THAT THE ASSESSEE COMPANY HAS PROVIDED INTEREST FREE LOAN OF 76,80,01,522/- TO THE GROUP COMPANIES ON THE CONCEP T OF COMMERCIAL EXPEDIENCY AND TO PROTECT MUTUAL INTEREST OF GROUP COMPANIES. FURTHER THE ASSESSEE COMPANY COULD NOT EXPLAIN WIT H DETAILS COMPELLING REASONS TO MAKE INTEREST FREE LOAN TO M /S. EMPEE DISTILLERIES LTD AND OTHERS. THE LD. COMMISSIONER OF INCOME TAX (APPEALS) FOUND DIVERSION OF INTEREST BEARING FUN D FOR NON BUSINESS PURPOSE AND DOUBTED THE GENUINENESS. THE ASSESSEE COMPANY HAS RECEIVED INTEREST BEARING UNSECURED LOANS FROM M/S. EMPEE SUGARS & CHEMICALS LTD AND DEBITED THE INTEREST CHARGES IN THE PROFIT AND LOSS ACCOUNT AND ACCOMMODATED INTEREST FEE ADVANCE TO GROUP CONCERN M/S. EMPEE DISTILLERIES LTD. THE LENDER COMPANY M/S . M/S. EMPEE SUGARS & CHEMICALS LTD BEING RECIPIENT OF INTEREST ON ADVANCES FROM THE ASSESSEE COMPANY IS A LOSS MAKING COMPANY AND C LAIMED SET OFF OF LOSS WITH INTEREST. WHILE THE ASSESSEE COMPANY HAS ADJUSTED THE INTEREST PAYMENT COMPONENT AGAINST INCOME OF MUTUAL FUNDS. THERE IS NO NEXUS OF INTEREST PAID BY THE ASSESSEE COMPANY AND INCOME ON ITA NO.1502/MDS/2014 :- 6 -: REDEMPTION OF MUTUAL FUNDS. WITH THESE OBSERVATION S, THE LD. COMMISSIONER OF INCOME TAX (APPEALS) HAS CONFIRMED THE ORDER OF LD. ASSESSING OFFICER. AGGRIEVED BY THE ORDER OF COMMI SSIONER OF INCOME TAX (APPEALS), THE ASSESSEE ASSAILED AN APPEAL BEFO RE TRIBUNAL. 6. BEFORE US, THE LD. AUTHORISED REPRESENTATIVE ARGUED THE GROUNDS AND REITERATED THE FACTS OF ASSESSMENT AND APPELLATE PROCEEDINGS AND REFERRED TO THE PAPER BOOK FILED IN THE ASSESSMENT PROCEEDINGS CONTAINING MEMORANDUM OF UNDERSTANDING AND MANAGEMENT LIST OF DIRECTORS AND SHAREHOLDER PATTE RN. THE LD. AUTHORISED REPRESENTATIVE EMPHASIZED THAT THE ASSE SSEE COMPANY HAS ADVANCED NON INTEREST BEARING FUNDS TO GROUP CO MPANY M/S. EMPEE DISTILLERIES BEING UNDER SAME MANAGEMENT ON C OMMERCIAL EXPEDIENCY AND TO PROTECT MUTUAL INTEREST AND SUPP ORTED THE ARGUMENTS WITH LIST OF DIRECTORS OF ALL THE GROUP C OMPANIES M/S. EMPEE SUGARS & CHEMICALS LTD, M/S. EMPEE DISTILLERIES HAV ING COMMON DIRECTORS. ON SHAREHOLDING PATTERN, SHARES OF M/S . EMPEE SUGARS LTD HELD BY M/S. EMPEE DISTILLERIES LTD WITH SHARE HOL DING 63.43 % SHARES AND ASSESSEE COMPANY HOLDS 2.29% OF SHARES. FURTHER, THE REGISTERED OFFICE OF M/S. EMPEE HOLDINGS LTD AND M/S. EMPEE DISTILLERIES LTD AND ADMINISTRATIVE OFFICE OF M/S. EMPEE SUGARS AUTHORISED REPRESENTATIVE HAVING COMMON ADDRESS. THE ASSESSEE ITA NO.1502/MDS/2014 :- 7 -: COMPANY PROVIDED UNSECURED LOANS TO M/S. EMPEE DIST ILLERIES LTD ON CONCEPT OF PROTECTION OF MUTUAL TRUST WITH BUSINESS EXPEDIENCY AND PRAYED FOR SETTING ASIDE THE ORDER OF CIT(A) AND AL LOW THE GROUNDS OF PAYMENT OF INTEREST TO GROUP COMPANY. 7. CONTRA, THE LD. DEPARTMENTAL REPRESENTATIVE RELIED ON THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS) AND A RGUED ON DISALLOWANCE WERE THE TRANSACTION OF NON CHARGING OF INTEREST ON ADVANCE PAID TO M/S. EMPEE DISTILLERIES LTD SHALL N OT BE CALLED AS BUSINESS EXPEDIENCY AS SAME HAVING COMMON DIRECTORS AND SHARE HOLDERS AND PRAYED FOR DISMISSING THE APPEAL. 8. WE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MATERIA L ON RECORD AND JUDICIAL DECISIONS. THE LD. AUTHORISED R EPRESENTATIVE VEHEMENTLY ARGUED THAT THE ASSESSEE COMPANY HAVING SAME MANAGEMENT AND DUE TO INTERSE MUTUAL TRUST WITH GRO UP COMPANIES AND THE CONCEPT OF BUSINESS EXPEDIENCY BORROWED FU NDS WERE NOT UTILIZED FOR THE PURPOSE OF ADVANCING INTEREST FREE LOANS. WE PERUSED THE FINANCIAL STATEMENTS AT PAGE NOS. 3 TO 7 OF P APER BOOK WERE THE ASSESSEE COMPANY HAVING COMMON DIRECTORS WITH OTHE R GROUP COMPANIES AND PROMOTER SHAREHOLDING. FURTHER, ON I N DEPTH ANALYZING M/S. EMPEE DISTILLERIES LTD HOLDS 63.43 % OF SHARES ALONGWITH ASSESSEE COMPANY 2.2% OF SHARES IN M/S. EMPEE SUGA RS AND ITA NO.1502/MDS/2014 :- 8 -: CHEMICALS AND M/S. EMPEE DISTILLERIES LTD HOLDS 27.67% SHARE OF THE ASSESSEE COMPANY. THE TRANSACTION OF CHAIN HOL DING OF SHARES BY THE ASSESSEE COMPANY AND COMMON INDIVIDUAL SHARE H OLDERS PROVE THAT THERE EXIST HOLDING AND SUBSIDIARY COMPANY OPE RATIONS HAVING REGISTERED OFFICE AT ONE PLACE. WE ALSO PERUSED TH E PROFIT AND LOSS ACCOUNT WERE THE SOURCE OF INCOME OF ASSESSEE COM PANY BEING INCOME FROM MUTUAL FUNDS AND ISSUE REVOLVES AROUN D WHETHER THE ASSESSEE COMPANY HAVING OBTAINED INTEREST BEARING L OAN FROM M/S. EMPEE SUGARS AND CHEMICALS LTD GRANTING INTEREST F REE LOANS TO ANOTHER GROUP COMPANIES IS A PRUDENT BUSINESS PRACT ICE. THE SHARES OF M/S. EMPEE SUGARS & CHEMICALS LTD BEING 63.43% ARE DIRECTLY HELD BY M/S. EMPEE DISTILLERIES LTD AND WE COULD NOT UNDERS TAND WHY THE LOANS WAS ROUTED THROUGH THE ASSESSEE COMPANY. THE INCOM E OF THE ASSESSEE COMPANY IS ONLY ON REDEMPTION OF MUTUAL FU NDS AND NO BUSINESS ACTIVITIES ARE CARRIED IN THE PREVIOUS YEA R. THE EXPLANATIONS THAT THE INTEREST FREE LOAN PROVIDED TO M/S. EMPEE DISTILLERIES LTD ARE OUT OF INTEREST FREE FUNDS CANNOT BE ACCEPTED AS TH E FINANCIAL STATEMENTS OF THE ASSESSEE COMPANY COULD NOT SUPPOR T ARGUMENTS OF THE LD. AUTHORISED REPRESENTATIVE. THE LD. AUTHORI SED REPRESENTATIVE RELIED ON THE DECISION OF CIT VS. HERO CYCLES (323 ITR 518 ) (P & H) BUT WE ARE OF THE OPINION THAT THE ASSESSEE COMPANY ON ONE HAND OBTAIN ITA NO.1502/MDS/2014 :- 9 -: INTEREST BEARING LOANS FROM THE SAME MANAGEMENT CO MPANY AND GIVE INTEREST FREE LOANS TO OTHER COMPANY IN THE SAME MA NAGEMENT AND SET OFF INTEREST CHARGED ON LOAN FUNDS AGAINST INCOME ON REDEMPTION OF MUTUAL FUNDS AND WHEREAS INTEREST INCOME IN THE HAN DS OF M/S. EMPEE SUGARS AND CHEMICALS LTD DOES NOT SUBJECT TO TAX DU E TO BUSINESS LOSSES. SO, CONSIDERING THE APPARENT FACTS, FINANC IAL STATEMENT, CONCEPT OF SAME MANAGEMENT AND CHAIN HOLDING OF SHA RES AND TAX ADJUSTMENTS, WE FOUND THAT THE LD. COMMISSIONER OF INCOME TAX (APPEALS) HAS EXAMINED THE EVIDENCE ON RECORD VIS- -VIS EXPLANATIONS MADE BY THE ASSESSEE. WE DOES NOT SEE ANY REASON T O INTERFERE WITH THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS) O N THIS GROUND AND WE UPHOLD THE SAME AND DISMISS THE GROUND OF TH E ASSESSEE. 9. ON THE VALIDITY OF RE-ASSESSMENT PROCEEDINGS, WE H EARD THE RIVAL SUBMISSIONS, PERUSED THE MATERIAL ON RECORD A ND JUDICIAL DECISIONS CITED. THE LD. AUTHORISED REPRESENTATIVE ARGUED TH AT THE RE- ASSESSMENT PROCEEDINGS ARE BAD IN LAW DUE TO CHANGE OF OPINION. THE LD. ASSESSING OFFICER WITHOUT ANY MATERIAL REOPENED THE ASSESSMENT U/S. 147 OF THE ACT AS THE SAME WAS AVAILABLE BEFOR E THE LD. ASSESSING OFFICER WHILE PASSING INTIMATION U/S.143(1) OF THE ACT. THE LD. DEPARTMENTAL REPRESENTATIVE PRODUCED COPY OF REASO NS RECORDED BY ITA NO.1502/MDS/2014 :- 10 -: THE LD. ASSESSING OFFICER ON RE-ASSESSMENT PROCEEDI NGS. WE FOUND FROM THE RECORDS, AGAINST INCOME ON REDEMPTION OF MUTUAL FUNDS, THE ASSESSEE COMPANY HAS CLAIMED ADMINISTRATIVE EXPENDI TURE AND FINANCE CHARGES IN THE NATURE OF INTEREST ON ADVANCES FROM M/S. EMPEE SUGARS AND CHEMICAL LTD AND ALSO INCREASE IN UNSECURED LO ANS COMPARED TO EARLIER YEARS. THE FACTUAL MATRIX THAT THE ASSESSE E HAS NOT CHARGED ANY INTEREST ON ADVANCES TO M/S. EMPEE DISTILLERIES LTD. BUT CLAIMED INTEREST IN PROFIT AND LOSS ACCOUNT FOR ADVANCES FR OM GROUP COMPANY. THE LD. AUTHORISED REPRESENTATIVE EXPLAINED THAT AD VANCES ARE MADE ON COMMERCIAL EXPEDIENCY AND INTEREST EXPENDITURE HAS TO BE ALLOWED. WE CONSIDERING THE APPARENT FACTS FOUND O N VERIFICATION ALL THE THREE COMPANIES ARE UNDER SAME MANAGEMENT AND W ITH COMMON SHAREHOLDING. WE ARE NOT CONVINCED WITH THE CONC EPT OF CHANGE OF OPINION AS THE FINANCIAL STATEMENTS CLEARLY SHOWS THAT THE INTEREST WAS PAID ON ADVANCES BUT NOT CHARGED IN RESPECT OF ADVANCES PROVIDED TO THE GROUP COMPANY. FURTHER INCREASE IN UNSECURE D LOANS AND ASSESSEES COMPANY INCOME IS NOT FROM BUSINESS ACTI VITY BUT ONLY OUT OF REDEMPTION OF MUTUAL FUNDS. THEREFORE, THE LD. A SSESSING OFFICER WAS RIGHT CONSIDERING THE REASONS FOR RE-ASSESSME NT AND ISSUED NOTICE U/S.148 OF THE ACT WITHIN SIX YEARS AND BASE D ON THE INFORMATION AS PER ASSESSMENT RECORDS AND HENCE THE RE-ASSESSME NT PROCEEDINGS ITA NO.1502/MDS/2014 :- 11 -: ARE VALID AND WE UPHELD THE ORDER OF THE COMMISSION ER OF INCOME TAX (APPEALS) ON THIS GROUND AND DISMISS THE GROUND. 10. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS DISMIS SED. ORDER PRONOUNCED ON TUESDAY, THE 19 TH DAY OF JULY, 2016, AT CHENNAI. SD/- SD/- ( ) (CHANDRA POOJARI) / ACCOUNTANT MEMBER ( . ! ) (G. PAVAN KUMAR) / JUDICIAL MEMBER / CHENNAI 1 / DATED:19.07.2016 KV 2 ( *',34 54%, / COPY TO: 1 . &' / APPELLANT 3. 6, () / CIT(A) 5. 49: *',' / DR 2. *+&' / RESPONDENT 4. 6, / CIT 6. : $ ; / GF