M/s. TRIGYN TECHNOLOGIES LTD., MUMBAI V. DCIT CIR. 8(3), MUMBAI

ITA 1610/MUM/2006

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 8633 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 10 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-01-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 16-11-2010
• Assessment Year: 2002-2003
• Appeal Filed On: 08-03-2006
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: DR B SENTHIL KUMAR
• Assessee Lawyers: YOGESH A THAR
• Keywords: Additional evidence; Wholly owned subsidiary; Bad and doubtful debts; Commercial expediency
• Section: 14A

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH D, MUMBAI BEFORE SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER AND SHRI. V. DURGA RAO,JUDICIAL MEMBER. I.T.A. NO. 1610/MUM/2006. ASSESSMENT YEAR : 2002-03 I.T.A. NO.4935/MUM/2007 ASSESSMENT YEAR : 2003-04. C.O. NO. 258/MUM/2007 (IN ITA NO. 4929/MUM/2007) ASSESSMENT YEAR : 2003-04. TRIGYN TECHNOLOGIES LTD., DY. COMMISSIONER OF INCOME-TAX, 27A, SDF- 1, SEEPZ, VS. CIR.8(3), MUMBAI. ANDHERI (E), MUMBAI 400 096 PAN AAACL2065K APPELLANT/CROSS OBJECTOR. RESPONDENT. I.T.A. NO. 4929/MUM/2007 ASSESSMENT YEAR : 2003-04. ASSTT. COMMISSIONER OF INCOME-TAX, TRIGYN TECHNOLOGIES LTD., RANGE-8(3), MUMBAI. VS. MUMBAI. APPELLANT. RESPONDENT. ASSESSEE BY : SHRI YOGESH A. THAR. DEPARTMENT BY : DR. B. SENTH IL KUMAR. 2 O R D E R PER J. SUDHAKAR REDDY, A.M. : THE ASSESSEE HAS FILED AN APPEAL FOR THE ASSESSMEN T YEAR 2002-03 AND THERE ARE CROSS APPEALS FOR THE ASSESSMENT YEAR 2003-04. THE ASSESSEE HAS ALSO FILED THE CROSS OBJECTION IN THE REVENUE APPEAL FOR THE ASSES SMENT YEAR 2003-04. AS THE ISSUES ARISING IN ALL THESE APPEALS ARE COMMON AND THE APPEALS BELONG TO THE SAME ASSESEE, FOR THE SAKE OF CONVENIENCE, THEY ARE HEAR D TOGETHER AND DISPOSED OF BY WAY OF THIS COMMON ORDER. 2. THE ASSESSEE IS A COMPANY AND IS ENGAGED IN THE BUSINESS OF DEVELOPMENT AND EXPORT OF SOFTWARE. IN THIS PROCESS THE COMPANY IS PROVIDING CUSTOM ENGINEERED SOFTWARE SOLUTION, CONSULTING ASSIGNMENT S, SOFTWARE MIGRATION AND MAINTENANCE. 3. THE ISSUE THAT ARISES IN THE ASSESSEES APPEAL F OR THE ASSESSMENT YEAR 2002- 03 IS THE DISALLOWANCE MADE U/S 36(1)(III). WE FIR ST CONSIDER THIS ISSUE OF DISALLOWANCE U/S 36(1)(III). 4. THE FACTS ARE BROUGHT OUT BY THE AO AT PAGE 2 PA RA 5 OF HIS ORDER WHICH ARE EXTRACTED BELOW FOR READY REFERENCE. 5. IT IS SEEN THAT THE ASSESSEE HAS BORROWED FUND DURING THE YEAR AND PAID INTEREST OF RS.6,66,55,470/-. IT IS ALSO SEEN FROM THE SCHEDULE-11 THAT THE ASSESSEE HAS MADE INTEREST FREE ADVANCES TO ITS SUB SIDIARIES DURING THE YEAR AS DETAILED BELOW : UNSECURED & CONSIDERED GOOD LOAN TO SUBSIDIARY 11,90,23,928 EMPLOYEES 2,08,43,364 3 UNSECURED & CONSIDERED DOUBTFUL SUBSIDIARY 24,19,40,473 EMPLOYEES 10,29,326 38,28,37,091 THE LOANS GIVEN TO ITS SUBSIDIARIES INCLUDES THE F OLLOWING : TRIGYN TECHNOLOGIES INDIA PVT. LTD. 24,45,67,918 (SUBSIDIARY OF THE ASSESSEE COMPANY) LEADING EDGE INFOTECH LIMITED 3,62,10,664 (COMES UNDER THE SAME MANAGEMENT) DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS, TH E ASSESSEE WAS ASKED TO SHOW CAUSE AS TO WHY INTEREST SHOULD NOT B E CHARGED ON THESE LOANS AND ADVANCES. THE ASSESSEE FILED ITS REPLY VIDE LET TER DATED 21.12.2004 & 28.02.2005 WHEREIN THE ASSESSEE HAS CONTENDED THAT IT HAS SUFFICIENT SURPLUS FUND TO MEET OUT THESE LOANS AND ADVANCES GIVEN TO THE SUBSIDIARIES AND EMPLOYEES. THE AMOUNTS ADVANCED TO THE SUBSIDIARIE S ARE OUT OF OWN FUND OF THE ASSESSEE AND NOT OUT OF BORROWED FUNDS. THE ENTIRE ADVANCES ARE FOR THE PURPOSE OF WORK IN CAPITAL NEEDS OF THE SUBSIDI ARIES. ALL THE SUBSIDIARIES ARE IN HEAVY LOSSES AND HENCE, ARE NOT IN A POSITIO N TO PAY ANY INTEREST ON THE LOANS RECEIVED FROM HOLDING COMPANY. IT IS FURTHER CONTENDED THAT IT MAY PLEASE BE APPRECIATED THAT THE COMPANY WAS FORCED T O MAKE THESE INTEREST FREE ADVANCES FOR PROTECTING ITS INVESTMENT IN THE SUBSIDIARIES. IF THE COMPANY HAD CHOSEN NOT TO FUND FOR PROTECTING ITS I NVESTMENT IN THE SUBSIDIARIES, THEIR BUSINESS WOULD HAVE COLLAPSE AN D THE COMPANYS INVESTMENT IN THESE SUBSIDIARIES WOULD HAVE BECOME WORTHLESS. HENCE, THE COMPANY HAS ADVANCED VARIOUS AMOUNTS TO ITS SUBSIDI ARIES WITHOUT INTEREST FOR THE PURPOSE OF BUSINESS. IT IS FURTHER SUBMITTE D THAT IF INTEREST WAS CHARGED FROM THE SUBSIDIARIES, THE ONLY EFFECT FROM TAX PERSPECTIVE IS INCREASE IN LOSSES IN THE HANDS OF THE SUBSIDIARIES AND NOTIONAL REDUCTION IN THE HANDS OF THE COMPANY. THIS WOULD BE REVENUE NEU TRAL AND HAS NEW BENEFIT TO THE REVENUE. FURTHER, IN VIEW OF LARGE L OSSES AND PRECARIOUS FINANCIAL CONDITIONS OF THE SUBSIDIARIES, THIS AMO UNT WOULD HAVE TO BE WRITTEN OFF SUBSEQUENTLY. THE ASSESSEE HAS ALSO CON TENDED THAT ALTERNATIVELY THE INTEREST IS ALLOWABLE IN RESPECT OF THE CAPITAL BORROWED FOR THE PURPOSE OF BUSINESS U/S 36(1)(III) AS PROVIDING FINANCIAL SUPP ORT TO HOLDING SUBSIDIARIES 4 FOR PROTECTING ITS INVESTMENT IN THE SUBSIDIARIES I S VERY MUCH FOR THIS PURPOSE OF BUSINESS. THE ABOVE ARGUMENTS OF THE ASSESSEE HAVE CONSIDERED CAREFULLY. THE SAME ARE NOT ACCEPTABLE AS THE ASSESSEE COMPANY ITS ELF IS PASSING THROUGH A BAD PHASE. DURING THE YEAR IT HAS INCURRED HUGE LOS SES. THEREFORE, THE ASSESSEES ARGUMENT THAT THE INTEREST FREE LOANS AN D ADVANCES WERE GIVEN TO SUBSIDIARIES FOR PROTECTING ITS INVESTMENT IN THE S UBSIDIARIES AND IF COMPANY HAD CHOSEN NOT TO FUND THE OPERATIONS OF THE SUBSID IARIES WOULD HAVE BECOME WORTHLESS IS NOT ACCEPTABLE. THE ASSESSEE HAS FAIL ED TO PROVE THAT THE FUNDS WERE UTILIZED FOR BUSINESS PURPOSE OF THE COMPANY. THEREFORE, THE INTEREST IS CHARGED ON THE ADVANCES GIVEN TO THE SUBSIDIARIES A ND EMPLOYEES @ 15% WHICH COMES TO RS.5,74,25,564/-. THUS INTEREST PAID IS DISALLOWED TO THE EXTENT OF RS.5,74,25,564/- AND ADDED BACK TO THE TO TAL INCOME OF THE ASSESSEE. FOR THIS RELIANCE IS PLACED ON THE RATIO OF DECISION IN THE CASE OF ORISSA CEMENT LTD. 258 ITR 365(DELHI). 5. ON APPEAL, THE FIRST APPELLATE AUTHORITY NOTED T HE FOLLOWING SUBMISSIONS OF THE ASSESSEE. IT IS SUBMITTED THAT THE ACTION OF THE AO IS ON AC COUNT OF NON-APPRECIATION OF THE FACTS CORRECTLY AND IN PROPER PERSPECTIVE. I T WAS SUBMITTED TO THE AO THAT THE APPELLANT COMPANY HAD ADVANCED THE AMOUNTS TO ITS SUBSIDIARIES IN THE COURSE OF ITS BUSINESS ACTIVITIES AS THE SURVIV AL OF THOSE COMPANIES WERE CRUCIAL TO THE ACTIVITIES AND BUSINESS OF THE APPEL LANT. THE GAMUT OF THE RELATIONSHIP OF THE APPELLANT COMPANY AND ITS SUBSI DIARIES IS AS UNDER : (A) THE APPELLANT COMPANY IS A LISTED PUBLIC LIMITE D COMPANY WHICH WAS INCORPORATED BY THE NAME OF LEADING EDGE SYSTEMS PV T. LTD. IN 1986. IT BECAME A PUBLIC LIMITED COMPANY IN 1994. (B) THE APPELLANT COMPANY HAS BEEN IN THE BUSINESS OF SOFTWARE DEVELOPMENT AND SOFTWARE SERVICES SINCE 1991. THE A PPELLANT HAS BEEN ACTIVE IN U.S.A. INITIALLY IT HAD ONLY ONE WHOLLY O WNED SUBSIDIARY COMPANY, LEADING EDGE INFOTECH PVT. LTD. THE FOCUS OF THE AP PELLANT WAS DEVELOPING LOCAL MARKETS WHEREAS THE MAIN LEADING EDGE SYSTEMS LTD. WAS FOCUSING ON INTERNATIONAL MARKET. 5 (C) SOMETIME IN 2000-01, THE APPELLANT COMPANY HAD A MERGER WITH A GROUP KNOWN AS E-CAPITAL. THIS GROUP WAS PROMOTED BY CHAS E GROUP (NOW KNOWN AS J.P. MORGAN CHASE). THE MERGER WAS BY SHARE SWAP . THERE WAS NO CASH DEAL. UPON MERGER THE NAME OF THE APPELLANT COMPANY WAS CHANGED TO THE PRESENT NAME, TRIGYN TECHNOLOGIES LTD. (D) ON MERGER OF THE COMPANIES, THE APPELLANT COMPA NY BECAME THE HOLDING COMPANY HAVING WHOLLY OWNED SUBSIDIARIES MA INLY : (I) LEADING EDGE INFOTECH LTD. (II) TRIGYN TECHNOLOGIES INDIA P. LTD.. (TTIPL) (III) TRIGYN TECHNOLOGIES INCORPORATED U.S.A. AS PER THE REVISED BUSINESS STRATEGY, THE SYNERGIES OF THE BUSINESS OPERATIONS OF THE APPELLANT COMPANY AND ITS SUBSIDIARIES WERE RE-ALIGNED AND THE FUNCTIONS OF THE VARIOUS COMPANIES WERE MADE COMPLI MENTARY AND SUPPLEMENTARY TO EACH OTHER SO A TO AVOID DUPLICATI ON OF INTEREST AND DERIVING MAXIMUM VALUE IN ITS OPERATIONS. THE MAIN FUNCTIONS OF THESE COMPANIES ARE: (I) LEADING EDGE INFOTECH LTD. IS INVOLVED IN DEVELOPIN G CUSTOMIZED SOFTWARE AND SERVICES IN THE DOMESTIC MARKET. (II) TTIL IS INVOLVED WITH DEVELOPING CUSTOMIZED SOFTWAR E AND SERVICES FOR INTERNATIONAL MARKET. (III) TRIGYN TECHNOLOGIES LTD. IS SPEAR HEADING COMPANYS BUSINESS IN U.S.A. WHICH FORMS THE MAJOR MARKET IN THE WORLD. IT WAS EXPLAINED TO THE AO THAT THE BUSINESS OF THE GROUP IS ARRANGED IN SUCH A WAY THAT EXISTENCE OF EACH COMPANY IS INTER DEPEN DENT ON THE OTHER. THE WHEEL WOULD NOT TURN EFFICIENTLY UNLESS EACH COMPON ENT FUNCTIONED WELL. TO ILLUSTRATE DEVELOPMENT OF SERVICES IN U.S.A. REQUIR ES COMPLETE BACK UP IN INDIA HENCE THE SUBSIDIARIES IN INDIA HAVE TO LEND SUPPORT. FURTHER, THE CUSTOMIZED PRODUCT CAN BE DEVELOPED BY THE SUBSIDIA RIES FOR PROVIDING EFFICIENT ONSITE SERVICES IN U.S.A. TO THE CLIENTS OF THE APPELLANT COMPANY. (E) DURING THE PERIOD BEGINNING FROM 2000-01, THE E NTIRE SOFTWARE INDUSTRY SAW A SEVERE DOWNTREND AND ONCE PROFITABLE COMPANIE S, TURNED LOSS MAKING COMPANIES AND TRIGYN TECHNOLOGIES GROUP WAS NO EXCE PTION. THE DOWNTREND WAS NOT ONLY ON ACCOUNT OF FALL IN BUSINE SS BUT ALSO ON ACCOUNT OF 6 BAD DEBTS DUE TO SEVERAL FOREIGN COMPANIES FILING FOR INSOLVENCY. THIS RESULTED IN CASH CRUNCH. IN ORDER TO PROTECT ITS SU BSIDIARIES, THE APPELLANT COMPANY DID WHAT ONLY RESPONSIBLE PARENT WOULD DO I .E. TO STAND BY AND SUPPORT THE CHILD IN CASE OF NEED. THE APPELLANT CO MPANY OVER A FEW YEARS, SUPPORTED ITS SUBSIDIARIES BY GIVING THEM INTEREST FREE LOANS AS THE SAME WAS NECESSARY FOR THEIR SURVIVAL AND IN TURN ITS OWN SU RVIVAL AS IF THESE SUBSIDIARIES HAD FAILED, THEN IN TURN THE COMPANYS BUSINESS COULD ALSO FACE CLOSURE AS IT WOULD NOT HAVE SUPPORT TO CARRY ON IT S COMMITMENTS. THE ASSESSEE EMPHASIZED BEFORE THE CIT(APPEALS) THA T, IN CASE THE BUSINESS OF THE SUBSIDIARY IS COLLAPSED, IT WOULD HAVE A SEVERE REP ERCUSSION ON THE EMPLOYEES OF THE ASSESSEE COMPANY AND KEEPING THIS ISSUE IN VIEW , A BUSINESS DECISION WAS TAKEN TO FUND THE SUBSIDIARIES AND HELP IT TO ATTAIN NORM ALCY. 6. AN ALTERNATIVE SUBMISSION IS MADE THAT THE ASSES SEE HAD SUFFICIENT INTEREST FREE FUNDS, WHICH WAS ADVANCED TO THE SUBSIDIARIES. IT WAS POINTED OUT THAT MONEY WAS ADVANCED TO THE SUBSIDIARIES IN THE EARLIER YEA RS AND WHEREAS LOAN WAS TAKEN FROM M/S GLOBAL TRUST BANK IN THE YEAR 2000-01. THE FIRST APPELLATE AUTHORITY REJECTED THE CONTENTIONS BY HOLDING THAT: A) THE ADVANCES WERE NOT MADE OUT OF OWN FUNDS. B) THAT PROTECTING ITS INVESTMENT IN SUBSIDIARIES IS NOT AN ACTIVITY OF BUSINESS AND HENCE THE SAME WAS NOT PAID FOR THE PU RPOSE OF BUSINESS. C) THE JUDGMENT OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF PHALTAN SUGAR WORKS LTD. VS. CIT 208 ITR 989 (BOM.) APPLIES TO TH E FACTS OF THE CASE. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US. 7. THE LEARNED COUNSEL FOR THE ASSESSEE, MR. YOGESH A. THAR, REPEATED THE CONTENTIONS RAISED BEFORE THE FIRST APPELLATE AUTHO RITY. HE VEHEMENTLY CONTENDED THAT THE AMOUNTS GIVEN TO THE SUBSIDIARIES AS LOANS , WAS FOR BUSINESS PURPOSE, 7 AND WERE FOR THE BUSINESS OF THE ASSESSEE, AS THE BUSINESS OF THE GROUP IS INTER DEPENDENT ON EACH OTHER. HE TOOK US THROUGH THE ARG UMENTS MADE BY THE ASSESSEE BEFORE THE AO AS WELL AS THE FIRST APPELLATE AUTHOR ITY ON THIS ISSUE. HE RELIED ON THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE O F S.A. BUILDERS 288 ITR 1 AND POINTED OUT THAT THE HONBLE APEX COURT HAS HEL D THAT THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF PHALTAN SU GAR WORKS LTD. IS NO MORE A GOOD LAW AND THAT THE TEST LAID DOWN IS WHETHER THE AMOUNT HAS BEEN ADVANCED TO THE SUBSIDIARIES WAS DONE, HAS A MEASURE OF COMMERC IAL EXPEDIENCY. ALTERNATIVELY HE ARGUED THAT THE ASSESSEE HAS SUFF ICIENT FUNDS, FROM OUT OF WHICH THE ADVANCES HAVE BEEN MADE. HE REFERRED TO T HE PAPER BOOK PAGES 1 TO 8 WHICH IS AN ANNUAL REPORT FOR THE YEAR ENDED 31 ST MARCH, 2001 AND DREW THE ATTENTION OF THE BENCH TO VARIOUS FIGURES TO DEMONS TRATE THAT THE ASSESSEE HAS SUFFICIENT INTEREST FREE FUNDS, WHICH HAVE BEEN ADV ANCED TO SUBSIDIARIES. HE RELIED ON THE JURISDICTIONAL HIGH COURT DECISION IN THE CA SE OF RELIANCE UTILITIES & POWER LTD. 178 TAXMAN 135 FOR THE PROPOSITION THAT, IF TH ERE ARE FUNDS AVAILABLE, BOTH INTEREST FREE AND OVERDRAFT AND/OR LOANS TAKEN, THE N THE PRESUMPTION WOULD ARISE THAT INVESTMENT WOULD BE OUT OF THE INTEREST-FREE F UNDS GENERATED OR AVAILABLE WITH THE COMPANY, IF THE INTEREST FREE FUNDS WERE SUFFIC IENT TO MEET THE INVESTMENTS. THAT THE LOANS AND ADVANCES INCLUDED ADVANCES TO E MPLOYEES AMOUNTED TO RS.1,66,04,232/- AS ON 31-03-2001 AND THAT THESE FI GURES HAVE TO BE ELIMINATED. THAT SECTION 14A DOES NOT COME INTO PLAY AS TWO OF THE SUBSIDIARIES I.E. ECAPITAL SOLUTIONS LTD. AND TRIGYN TECHNOLOGIES INCORPORATED USA ARE FOREIGN SUBSIDIARIES. ONLY IN THE CASE OF LEADING EDGE INF OTECH LTD., WHICH IS AN INDIAN SUBSIDIARY, AN AMOUNT OF RS.50 LAKHS WAS GIVEN. THE QUESTION OF 14A APPLY TO FOREIGN SUBSIDIARIES DOES NOT ARISE. 8 8. THE LEARNED DR. MR. B. SENTHIL KUMAR, ON THE OTH ER HAND, RELIED ON THE ORDER OF THE CIT(APPEALS) AND DREW THE ATTENTION OF THE BENCH TO PAGE 4 OF THE CIT(APPEALS) ORDER WHERE AT PARA (E) THE ASSESSEE HAS PLEADED THAT IT SUPPORTED ITS SUBSIDIARIES BY GIVING INTEREST FREE LOANS, AS THE SAME WAS NECESSARY FOR THEIR SURVIVAL AND IN TERM ITS OWN SURVIVAL, AS, IF THESE SUBSIDIARIES FAIL, THE COMPANYS BUSINESS COULD ALSO FACE CLOSURE AND THEREAFTER DRE W THE ATTENTION OF THE BENCH TO THE FINDING OF THE FIRST APPELLATE AUTHORITY AT PAG E 7 WHEREIN IT IS HELD AS FOLLOWS: IT IS CLEAR THAT APPELLANT HAS USED INTEREST BEAR ING BORROWED FUND TO FINANCE ITS INVESTMENTS AS WELL AS FOR THE PURPOSE OF GIVIN G INTEREST FREE LOANS TO THE SUBSIDIARIES. THEREFORE, CONTENTION OF APPELLANT TH AT INVESTMENTS HAVE BEEN MADE AND LOANS HAVE BEEN GIVEN TO THE SUBSIDIARIES OUT OF ITS SURPLUS FUNDS IS NOT CORRECT. AS REGARDS APPELLANTS CONTENTION THAT LOANS WERE GIVEN TO PROTECT ITS INVESTMENTS IN SUBSIDIARIES, SAME IS AL SO NOT TENABLE AS, IN MY OPINION, PROTECTING THE INVESTMENTS IN SUBSIDIARIES IS NOT AN ACTIVITY OF BUSINESS. 9. FURTHER, HE REFERRED TO THE DECISION IN THE CASE OF S.A. BUILDERS AND SUBMITTED THAT THE COURT HAS HELD THAT THE SUBSIDIA RY SHOULD USE THE AMOUNT, BORROWED FROM THE HOLDING COMPANY, FOR THE PURPOSE OF BUSINESS. HE PLACED RELIANCE ON PARA 35 OF THAT JUDGMENT AND ARGUED THA T IN THE CASE ON HAND NOBODY HAS EXAMINED WHETHER THE SUBSIDIARY WHICH HAD BORRO WED THE FUNDS, HAS UTILIZED THE SAME FOR ITS BUSINESS PURPOSE. ON THE ISSUE OF THE ASSESSEE HAVING SURPLUS FUNDS, THE LEARNED DR REFERRED TO THE FINDING OF TH E CIT(APPEALS) AT PAGE 6 OF HIS ORDER AND TO THE VARIOUS FIGURES GIVEN THEREIN AND SUPPORTED THE SAME. HE SUBMITTED THAT THE LOAN AMOUNT OF RS.64 LAKHS HAS G ONE INTO THE COMMON POOL AND THEREAFTER UTILIZED FOR GIVING ADVANCES TO THE SUBS IDIARIES. 10. RIVAL CONTENTIONS HEARD. ON A CAREFUL CONSIDERA TION OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND A PERUSAL OF THE PAPE RS ON RECORD AND THE ORDERS OF THE AUTHORITIES BELOW AS WELL AS THE CASE LAWS CITE D, WE HOLD AS FOLLOWS. 9 11. THE AOS FINDING IS THAT THE ASSESSEE IS PASSIN G THROUGH BAD DAYS AND HAS INCURRED HUGE LOSSES AND THAT THE PLEA OF THE ASSES SEE, THAT IF INTEREST FREE LOANS ARE NOT GIVEN TO SUBSIDIARIES, THEIR BUSINESS WOULD COL LAPSE AND THE COMPANYS INVESTMENT IN SUBSIDIARIES WOULD BECOME WORTHLESS, IS NOT ACCEPTABLE. THE CIT(APPEALS) AT PAGE 7, HELD THAT, APPELLANTS CON TENTION THAT LOANS WERE GIVEN TO PROTECT ITS INVESTMENT IN SUBSIDIARIES, SAME IS AL SO NOT TENABLE AS, IN MY OPINION, PROTECTING THE INVESTMENTS IN SUBSIDIARIES IS NOT AN ACTIVITY OF BUSINESS. NOTHING HAS BEEN SAID IN BOTH THESE ORDERS ABOUT, THE PLEA OF THE ASSESSEE, WHICH IS BROUGHT OUT IN ITS SUBMISSION BEFORE THE CIT(APPEALS), WHIC H IS EXTRACTED AT PARA 5 PAGES 4, 5 AND 6 OF THIS ORDER. THE ASSESSEE HAS PLEADED TH AT THE SYNERGIES OF THE BUSINESS OPERATION OF THE ASSESSEE COMPANY AND ITS SUBSIDIAR IES WERE RE-ALIGNED AND THE FUNCTIONS OF THE VARIOUS COMPANIES WERE MADE COMPLI MENTARY AND SUPPLEMENTARY TO EACH OTHER, SO AS TO AVOID DUPLICATION OF INTERE ST AND DERIVING MAXIMUM VALUE IN ITS OPERATION. IT WAS EXPLAINED THAT EACH COMPANY I S INTER-DEPENDENT ON THE OTHER. IT IS ALSO EXPLAINED THAT INTEREST FREE LOANS HAD TO B E ADVANCED TO THE SUBSIDIARIES FOR THEIR SURVIVAL, AS THE SURVIVAL OF THE ASSESSEE WOU LD BE STAKE, IF THE SUBSIDIARIES FAILED. THESE SUBMISSIONS ARE NOT CONTROVERTED EITH ER BY THE CIT(APPEALS) OR BY THE AO. IN FACT THE LD.CIT(A) ACCEPTED THESE SUBMIS SIONS OF THE ASSESSEE IN THE NEXT ASSESSMENT YEAR 2003-04 AND GRANTED RELIEF TO THE ASSESSEE. 12. THE HONBLE SUPREME COURT IN THE CASE OF S.A. B UILDERS LTD. AT PARA 21 OBSERVED AS FOLLOWS : THE TEST, IN OUR OPINION, IN SUCH A CASE IS REALL Y WHETHER THIS WAS DONE AS A MEASURE OF COMMERCIAL EXPEDIENCY. FURTHER AT PAGE 35, IT HELD AS FOLLOWS: HOWEVER, WHERE IT IS OBVIOUS THAT A HOLDING COMPAN Y HAS A DEEP INTEREST IN ITS SUBSIDIARY, AND HENCE IF THE HOLDING COMPANY AD VANCES BORROWED MONEY 10 TO A SUBSIDIARY AND THE SAME IS USED BY THE SUBSIDI ARY FOR SOME BUSINESS PURPOSE, THE ASSESSEE WOULD, IN OUR OPINION, ORDIN ARILY BE ENTITLED TO DEDUCTION OF INTEREST ON ITS BORROWED LOANS. THIS JUDGMENT APPLIES ON ALL FOURS TO THE CASE ON H AND. THE LEARNED CIT(APPEALS) RELIED ON THE DECISION OF THE BOMBAY HIGH COURT IN THE CASE OF PHALTAN SUGAR WORKS LTD. (SUPRA) AND THIS DECISION WAS HELD TO BE INCORRECT BY THE HONBLE COURT IN THE CASE OF S.A. BUILDERS. 13. COMING TO THE CIT(APPEALS) APPREHENSION THAT S ECTION 14A WOULD COME INTO PLAY, WE FIND THAT THIS IS INCORRECT FOR THE R EASON THAT THE MAJORITY OF THE SUBSIDIARIES ARE FOREIGN SUBSIDIARIES AND THE QUES TION OF 14A BEING APPLIED FOR DIVIDEND RECEIVED FROM THEM DOES NOT ARISE. EVEN OT HERWISE SECTION 14A AND SECTION 36(1)(III), OPERATE IN DIFFERENT FIELDS. 14. IN VIEW OF THE ABOVE DISCUSSION, WE RESPECTFULL Y FOLLOW THE JUDGMENT OF THE APEX COURT IN THE CASE OF S.A. BUILDERS AND ALLOW G ROUND NO.2 OF THE ASSESSEE. 15. AS WE HAVE GRANTED RELIEF TO THE ASSESSEE BY FO LLOWING THE DECISION IN THE CASE OF S.A. BUILDERS, WE WOULD NOT ADJUDICATE THE ISSUE AS TO WHETHER THE ASSESSEE HAS INTEREST FREE SURPLUS FUNDS. 16. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT ALL OTHER GROUNDS ARE EITHER GENERAL IN NATURE AS IN THE CASE OF GROUND N O.1, 4 AND 5 OR ALTERNATIVE SUBMISSION AS IN THE CASE OF GROUND NO. 6,7 AND 8. IN VIEW OF THE ABOVE SUBMISSION, WE DISMISS OTHER GROUNDS WITHOUT ADJUDI CATION, IN VIEW OF OUR DECISION ON GROUND NO.2. 17. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS IT A NO.1610/MUM/2006 IS ALLOWED IN PART. 11 18. NOW WE TAKE UP THE ASSESSEES APPEAL FOR ASSESS MENT YEAR 2003-04 IN ITA NO. 4935/MUM/2007. THE FIRST GROUND IS ON THE DISAL LOWANCE OF INTEREST ON LOAN ADVANCED TO SUBSIDIARIES. UNLIKE IN THE EARLIER YEA R, THE FIRST APPELLATE AUTHORITY FOLLOWED THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF S.A. BUILDERS LTD. 288 ITR 1 AND HELD THAT AS FAR AS LOANS THAT A RE ADVANCED TO DIRECT SUBSIDIARIES, INTEREST DISALLOWANCE CANNOT BE MADE. WHILE DOING S O, THE CIT(APPEALS) HELD THAT THE LOANS ADVANCED TO THE SUBSIDIARIES OF THE DIRE CT SUBSIDIARIES OF THE ASSESSEE COMPANY, ARE NOT COVERED BY THE DECISION IN THE CA SE OF S.A. BUILDERS LTD. AND INTEREST TO THE EXTENT OF LOANS GIVEN TO SUCH COMPA NIES OUT OF BORROWED FUNDS CANNOT BE ALLOWED. INTEREST FREE LOANS HAVE BEEN GI VEN TO LEADING EDGE INFOTECH LTD. WHICH IS A 100% SUBSIDIARY OF THE ASSESSEE COM PANY. THE SECOND LOAN HAS BEEN GIVEN TO M/S TRIGYN TECHNOLOGIES INDIA P. LTD. , WHICH IS A 100% SUBSIDIARY OF ECAPITAL SOLUTIONS (MAURITIUS), WHICH IN TURN IS A 100% SUBSIDIARY OF THE ASSESSEE COMPANY. THE CIT(APPEALS) WHILE HOLDING TH AT THE LOAN GIVEN TO LEADING EDGE INFOTECH LTD. IS FOR COMMERCIAL EXPEDIENCY, HE LD THAT IN CASE LOAN GIVEN TO TRIGYN TECHNOLOGIES INDIA PVT. LTD., THE ENTITY IS INCORPORATED UNDER FOREIGN LAW AND HENCE CANNOT BE CONSIDERED AS ADVANCE GIVEN FOR THE PURPOSE OF ASSESSEES OWN BUSINESS. ON THIS PART OF OBSERVATION, THE ASSE SSEE IS BEFORE US. 19. THE LEARNED COUNSEL DREW OUR ATTENTION TO SECTI ON 4 OF THE COMPANIES ACT WHERE AT CLAUSE (C) IT IS HELD AS FOLLOWS : S.4 MEANING OF HOLDING COMPANY AND SUBSIDIARY (1) FOR THE PURPOSE OF THIS ACT, A COMPANY SHALL, SUBJECT TO THE PROVIS IONS OF SUB-SECTION (3), BE DEEMED TO BE A SUBSIDIARY OF ANOTHER IF, BUT ONLY I F, - (A) ----- (B) ----- 12 (C) THE FIRST-MENTIONED COMPANY IS A SUBSIDIARY OF ANY COMPANY WHICH IS THAT OTHERS SUBSIDIARY. 20. IN OUR HUMBLE OPINION, A 100% SUBSIDIARY OF THE ASSESSEE COMPANY, IS ALSO A SUBSIDIARY OF THE ASSESSEE COMPANY AND THE AMOUNT G IVEN TO IT, CANNOT BE CONSIDERED AS THAT WHICH IS NOT GIVEN FOR THE PURPO SE OF BUSINESS FOR THE SOLE REASON THAT THE COMPANY HAS BEEN INCORPORATED UNDER FOREIG N LAWS. THUS WE DISAGREE WITH THE FINDINGS OF THE FIRST APPELLATE AUTHORITY AND A LLOW GROUND NOS. 1 TO 4 OF THE ASSESSEE, FOR THE SAME REASON GIVEN WHILE ALLOWING GROUND NO.2 OF THE ASSESSEES APPEAL FOR A.Y. 2002-03. 21. GROUND NO. 5 TO 7 ARE ON THE ISSUE OF DISALLOW ANCE OF EMPLOYERS AND EMPLOYEES CONTRIBUTION TO PF AND ESI. THE UNDISPUT ED FACT IS THAT THE PAYMENTS IN QUESTION WERE MADE BEFORE THE DUE DATE SPECIFIED FOR FILING OF THE RETURN. IN SUCH CIRCUMSTANCES, AS ADMITTED BY BOTH THE PARTIES, THE ISSUE OF EMPLOYERS CONTRIBUTION TO PF AND ESI IS COVERED BY THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. ALOM EXTRUSIONS LTD. 319 ITR 306 AND AS FAR AS EMPLOYEES CONTRIBUTION IS CONCERNED, THE ISSUE IS COVERED BY THE DECISION OF C-BENCH OF THE TRIBUNAL IN ITA NO. 6847/MUM/2008, ORDER DATED 28 TH JANUARY, 2010. RESPECTIVELY FOLLOWING THE SAME, WE ALLOW GROUND NOS. 5, 6 AND 7. 22. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED. 23. THIS BRINGS US TO ITA NO. 4929/MUM/2007 BEING T HE APPEAL BY THE REVENUE. 24. GROUND NO.1 RELATES TO THE DISALLOWANCE OF INTE REST, ON THE GROUND THAT INTEREST FREE ADVANCES WERE MADE TO SUBSIDIARIES. T HE CIT(APPEALS) HAD FOLLOWED THE DECISION OF THE APEX COURT IN THE CASE OF S.A. BUILDERS AND GRANTED RELIEF TO THE ASSESSEE IN THE CASE OF DIRECT SUBSIDIARIES. ONLY I N THE CASE OF 100% SUBSIDIARIES TO THE 100% SUBSIDIARIES OF THE ASSESSEE, THE CIT(APPE ALS) DENIED RELIEF. 13 25. CONSISTENT WITH THE VIEW TAKEN BY US FOR THE AS SESSMENT YEAR 2002-03 ON THE VERY SAME ISSUE, WE UPHOLD THE ORDER OF THE FIRST A PPELLATE AUTHORITY. 26. COMING TO GROUND NO.2, THE ISSUE RELATES TO THE DISALLOWANCE OF EMPLOYEES CONTRIBUTION. THE UNDISPUTED FACT IS THAT THE AMOUN T IS PAID WITHIN THE GRACE PERIOD ALLOWED UNDER THE RESPECTIVE ENACTMENT. IN VIEW OF THE DECISION OF THE APEX COURT IN THE CASE OF ALOM EXTRUSIONS LTD. (SUPRA) THIS GR OUND OF THE REVENUE IS DISMISSED. 27. GROUND NO.3 IS ON THE DISALLOWANCE OF INTEREST PAID TO GLOBAL TRUST BANK U/S 43B. AT PARA 4.3 PAGE 8 OF THE ORDER THE CIT(APPEAL S) OBSERVED AS FOLLOWS: 4.3 I HAVE CONSIDERED THE FACTS OF THE CASE AND SU BMISSION MADE BY THE APPELLANT. A.O. HAS DISALLOWED THE AMOUNT ON THE GR OUND THAT NO DATE HAS BEEN MENTIONED BY THE AUDITORS IN RESPECT OF PAYMEN T OF INTEREST TO GLOBAL TRUST BANK. THE APPELLANT HAS FILED DETAILS OF LOAN PAYMENT AS ALSO COPY OF THE BANK OF GLOBAL TRUST BANK LTD. SHOWING PAYMENT OF SUCH INTEREST. IT HAS BEEN STATED BEFORE ME THAT THIS INFORMATION WAS FUR NISHED TO A.O. CONSIDERING THE FACT THAT THE AUDITORS HAD CERTIFI ED THE ACTUAL PAYMENT OF INTEREST WHICH IS SUPPORTED BY THE COPY OF BANK ACC OUNT FILED, THE SAME CANNOT BE DISALLOWED. ACCORDINGLY, THIS ADDITION IS DELETED. WE FIND NO INFIRMITY IN THIS FINDING AND UPHOLD THE SAME. 28. GROUND NO. 4 IS ON THE ISSUE OF COMPLYING WITH THE PROVISIONS OF RULE 46A OF INCOME TAX RULES. WE DO NOT FIND THAT THE CIT(AP PEALS) HAS ADMITTED ANY ADDITIONAL EVIDENCE. UNDER THESE CIRCUMSTANCES, THI S GROUND IS TO BE DISMISSED. 29. IN THE RESULT, THE REVENUES APPEAL IS DISMISSE D. 30. THIS BRINGS US TO C.O. NO. 258/MUM/2007 IN REVE NUES APPEAL IN ITA NO. 4929/MUM/2007 14 31. THE LEARNED COUNSEL SUBMITTED THAT THE CROSS OB JECTION BECOME INFRUCTUOUS IN VIEW OF THE REVENUE AND ASSESSEES APPEALS FOR T HE VERY SAME YEAR. IN VIEW OF THE ABOVE SUBMISSION, WE DISMISS THIS CROSS OBJECTI ON. ORDER PRONOUNCED IN THE OPEN COURT ON 28 TH JANUARY , 2011. SD/- SD/- (V. DURGA RAO)) (J. SUDHAK AR REDDY) JUDICIAL MEMBER. A CCOUNTANT MEMBER MUMBAI, DATED: 28 TH JANUARY, 2011. WAKODE COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, D-BENCH (TRUE COPY) BY ORDER ASSTT. REGISTRA R, ITAT, MUMBAI BENCHES, MUMBAI.