M/s. Kern Enterprises Private Limited, CHENNAI V. ACIT, CHENNAI

ITA 167/CHNY/2012

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 61218 (ITAT-CHENNAI)
• Duration Of Justice: 42 year(s) 5 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-06-2012
• Appeal Filed By: Assessee
• Assessment Year: misc
• Appeal Filed On: 01-01-1970
• Court: TRIBUNAL
• Department Lawyers: K E B RANGAR AJAN JR
• Assessee Lawyers: B RAMAKRISHNAN
• Keywords: Wholly owned subsidiary; Commercial expediency; Revenue expenditure
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI BEFORE SHRI ABRAHAM P.GEORGE, ACCOUNTANT ME MBER AND SHRI VIKAS AWASTHY, JUDICIAL MEMBER ITA NOS.166 & 167/MDS/2012 (ASSESSMENT YEARS: 2007-08 & 2008-09) M/S. KERN ENTERPRISES PVT.LTD., (FORMERLY PENAR SPECIALITY PRODUCTS PVT.LTD) NO.12, 3 RD MAIN ROAD, KASTURBA NAGAR, ADYAR, CHENNAI-600 020. PAN:AACCP0566F VS. ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE-V(2), CHENNAI-34. (APPELLANT) (RESPONDENT) APPELLANT BY : MR. B.RAMAKRISHNAN, CA RESPONDENT BY : MR. K.E .B.RANGARAJAN, JR.STANDING COUNSEL DATE OF HEARING : 20 TH JUNE, 2012 DATE OF PRONOUNCEMENT : 28 TH JUNE, 2012 O R D E R PER ABRAHAM P.GEORGE, ACCOUNTANT MEMBER: THESE ARE APPEALS FILED BY THE ASSESSEE CHALLENGING INTEREST DISALLOWANCE OF ` 22,48,961/- AND ` 36,17,810/- FOR THE RESPECTIVE YEARS. 2. FACTS APROPOS ARE THAT THE ASSESSEE, ENGAGED IN CONTRACT MANUFACTURE OF INDUSTRIAL CHEMICALS, HAD C LAIMED THESE AMOUNTS AS INTEREST INCURRED ON BORROWED FUND S. ASSESSEE HAD MADE INVESTMENTS OF ` 5,34,38,000/- IN WHOLLY OWNED SUBSIDIARY COMPANIES. ASSESSING OFFICER DUR ING THE ITA NOS.166 & 167/MDS/2012 2 COURSE OF ASSESSMENT REQUIRED THE ASSESSEE TO EXPLA IN AS TO WHY PRO-RATA INTEREST ON BORROWED FUNDS SHOULD NOT BE DISALLOWED. REPLY OF THE ASSESSEE WAS THAT THESE W ERE ALL LOSS MAKING COMPANIES WHERE INVESTMENTS WERE MADE A ND THEY NEVER INTENDED TO DECLARE ANY DIVIDEND. ASSES SEE HAD BORROWED FUNDS FROM INDIAN SYNTANS INVESTMENTS PVT. LTD. FOR MAKING SUCH INVESTMENTS. ASSESSING OFFICER WAS OF THE VIEW THAT INVESTMENTS WERE NOT DIRECTLY FOR BUSINESS PUR POSE OF THE ASSESSEE AND THUS HE DISALLOWED THE CLAIM. 3. ON APPEAL BEFORE CIT(A), ARGUMENT OF THE ASSESSE E WAS THAT SUCH INVESTMENTS WERE MADE AS PART OF THE EXPANSION OF BUSINESS ACTIVITY OF THE ASSESSEE FROM INDIAN SOIL TO FOREIGN SOIL BY ESTABLISHING SUBSIDIARIES. AS PER THE ASSESSEE, THERE WAS NO MATERIAL WITH THE ASSESSING OFFICER FOR COMING TO A CONCLUSION THAT THERE WAS NO BUSINE SS PURPOSE BEHIND SUCH INVESTMENT. ASSESSEE SUBMITTED BEFORE THE CIT(A) THAT INVESTMENTS WERE MADE IN WHOLLY OWN ED SUBSIDIARY COMPANY NAMELY VETRIVA A.G. SWITZERLAND AND THE MONEY BORROWED WERE USED FOR SUCH INVESTMENTS. THIS , AS PER THE ASSESSEE, WAS EXPANSION OF HIS OWN BUSINESS ACTIVITY ITA NOS.166 & 167/MDS/2012 3 THROUGH SUBSIDIARY. AS PER THE ASSESSEE, IT WAS A S UCCESSFUL CONCERN IN THE LINE OF CONTRACT MANUFACTURE OF INDU STRIAL CHEMICALS AND THEREFORE BY ESTABLISHING A WHOLLY O WNED SUBSIDIARY IN SWITZERLAND IT COULD HARNESS ITS ABIL ITY IN THIS FIELD AND EXPAND ITS OPERATIONS. THUS, AS PER ASSESSEE, E XPENSES HAVE TO BE ALLOWED SINCE THIS WAS PART OF ITS BUSIN ESS EXPANSION PROGRAMME. RELIANCE WAS PLACED ON THE DEC ISION OF THE HONBLE APEX COURT IN THE CASE OF S.A.BUILDE RS VS. CIT.,( 280 ITR 1) AND CIT VS. DALMIA CEMENTS BHARAT LTD., (254 ITR 377). HOWEVER, THE CIT(A) WAS NOT IMPRESSE D. ACCORDING TO HIM, FOR ALLOWING INTEREST PAID ON BOR ROWED FUNDS, IT WAS NECESSARY THAT COMMERCIAL EXPEDIENCY OF THE ADVANCES WERE ESTABLISHED. AS PER THE CIT(A) EXCEP T FOR PUTTING ARGUMENTS, THERE WAS NOTHING ON RECORD TO S HOW THAT MONEY ADVANCED TO THE SO CALLED SUBSIDIARY WAS FOR COMMERCIAL EXPEDIENT PURPOSE. AS PER THE CIT(A) THE ASSESSEE DID NOT DISCHARGE ITS ONUS TO SHOW THAT TH E EXPENDITURE INCURRED WAS WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. IN THIS VIEW OF THE MATTER, HE CONFIRMED THE ADDITIONS MADE BY THE ASSESSING OFFICER. ITA NOS.166 & 167/MDS/2012 4 4. NOW, BEFORE US, THE AUTHORIZED REPRESENTATIVE ST RONGLY ASSAILING THE ORDER OF THE CIT(A), SUBMITTED THAT INVESTMENTS MADE IN WHOLLY OWNED SUBSIDIARY WAS BASED ON A COMM ERCIAL EXPEDIENT DECISION TAKEN BY THE ASSESSEE FOR EXPANS ION OF ITS BUSINESS. ACCORDING TO HIM, IN VIEW OF THE DECISION OF THE HONBLE APEX COURT IN THE CASE OF S.A.BUILDERS VS. CIT (SUPRA) THE CLAIM WAS ALLOWABLE. RELIANCE WAS ALSO PLACED ON THE DECISION OF THE HONBLE BOMBAY HIGH COURT AT G OA IN THE CASE OF CIT VS. PHIL CORPORATION LTD. & ANR., (244 CTR 226). 5. PER CONTRA, DEPARTMENTAL REPRESENTATIVE SUPPORTI NG THE ORDERS OF THE AUTHORITIES BELOW, SUBMITTED THAT THE ASSESSEE DID NOT PRODUCE ANY RECORDS TO PROVE COMME RCIAL EXPEDIENCY. FURTHER, ACCORDING TO HIM, HONBLE APE X COURT IN AN APPEAL FILED BY THE REVENUE AGAINST THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF TULIP STAR HOTELS LTD. (338 ITR 482) HAD HELD THAT ITS OWN EARLIER DECISI ON IN THE CASE OF S.A.BUILDERS REQUIRED A FRESH LOOK. ACCORDI NGLY ASSESSEES RELIANCE ON THE DECISION OF S.A.BUILDERS WAS MISPLACED. FURTHER, ASSESSEE HAD NEVER SUBSTANTIATE D ITS ITA NOS.166 & 167/MDS/2012 5 CLAIM THAT INVESTMENTS WERE MADE FOR THE PURPOSE OF BUSINESS EXPANSION. 6. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. SUBMISSION OF THE ASSESSEE BEFORE THE ASSESSING OFFICER WAS THAT INVESTMENTS MADE IN WHOL LY OWNED SUBSIDIARY COMPANY DID NOT RESULT IN ANY INCOME TAX ABLE IN INDIA SINCE SUCH COMPANIES WERE REGISTERED ABROAD. SINCE THERE WAS NO DIVIDEND INCOME POSSIBLE WHICH COULD B E TAXED IN INDIA, AS PER THE ASSESSEE, INTEREST PAYMENT FOR FUNDS BORROWED FOR MAKING SUCH INVESTMENTS COULD NOT BE DISALLOWED. ASSESSEE FILED A LETTER DATED 10.11.20 09 BEFORE THE ASSESSING OFFICER WHEREIN ITS EXPLANATION FOR T HE INVESTMENTS WERE GIVEN READ AS UNDER:- THE ASSESSEE INVESTED ` 5,34,38,000/- IN ITS FULLY OWNED SUBSIDIARY VETRIVAL MINERAL AG. SWITZERLAND FOR MANUFACTURING, PROCESSING, TRADING OF PRODUCTS IN CHEMICALS IN SWITZERLAND. THE ASSESSEE IS PRESENTLY CARRYING OUT MANUFACTURING OF INDUSTRIAL CHEMICALS FOR A EUROPEAN MNCS WHOLLY OWNED SUBSIDIARY LANXESS INDIA PVT.LTD & WANTED TO EXPLORE THE POSSIBILITIES OF GETTING SIMILAR OPPORTUNITIES FROM OTHER CHEMICAL COMPANY IN EUROPE AND FOR THIS PURPOSE HAD FORMED A 100% SUBSIDIARY IN SWITZERLAND. THE ASSESSEE HAS BORROWED FUNDS FOR INVESTING IN ITA NOS.166 & 167/MDS/2012 6 WHOLLY OWNED SUBSIDIARY AND INTEREST THEREON AMOUNTED TO ` 2,248,961/- WHICH WAS CLAIMED AS REVENUE EXPENDITURE. YOU HAVE REQUIRED THE ASSESSEE TO SHOW CAUSE WHY THE SAID AMOUNT SHOULD NOT BE ALLOWED U/S.36(1)(III) READ WITH SECTION 14A. IN THIS CONNECTION, WE SUBMIT THAT THE DIVIDEND IF ANY RECEIVED IN INDIA FROM FOREIGN COMPANY IS NOT EXEMPT FROM TAX AS IT WILL NOT BE A DIVIDEND COVERED U/S.115-O WHICH ALONE IS EXEMPT U/S.10(34). FURTHER THE LONG TERM PROFIT ON SALE OF SHARES IS ALSO NOT EXEMPT SINCE IT IS NO T COVERED U/S.10(38). HENCE THERE IS NO APPLICATION OF SECTION 14A IN THE PRESENT CASE. THE SUBSIDIARY WAS FORMED AS A LIMITED COMPANY IN SWITZERLAND ONLY TO LIMIT THE LIABILITY OF THE SUBSIDIARY COMPANY AND A LEGAL ENTITY IN THAT COUNTRY WOULD FACILITATE THE SUBSIDIARY COMPANY TO ACQUIRE CONTRACT MANUFACTURING FOR THE ASSESSEE. HENCE, IT IS SUBMITTED THAT THE FUNDS BORROWED ARE FOR COMMERCIAL EXPEDIENCY AND INCURRED FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. THE ASSESSEE RELIES ON THE DECISION OF S.A.BUILDERS 288 ITR 1 AND ALSO THE DECISION OF THE DELHI HIGH COURT IN DALMIA CEMENT BHARATH LTD. DATED 24.07.2009, A COPY OF WHICH IS ENCLOSED FOR YOUR READY REFERENCE. BEFORE THE CIT(A) ALSO, ITS CONTENTIONS WERE MORE O R LESS THE SAME BUT IT BROUGHT IN ANOTHER LINE OF ARGUMENT TH AT THESE WERE ALL COMMERCIALLY EXPEDIENT INVESTMENTS FOR THE BUSINESS PURPOSE OF THE ASSESSEE. NO DOUBT, IN THE CASE OF ITA NOS.166 & 167/MDS/2012 7 S.A.BUILDERS, THE HONBLE APEX COURT HELD THAT INVE STMENTS IN SUBSIDIARIES WHERE SUCH INVESTMENTS WERE COMMERCIAL EXPEDIENT WOULD NOT AUTOMATICALLY WARRANT DISALLOWA NCE OF PRO-RATA INTEREST PAID ON BORROWED CAPITAL. AS NOTE D BY THE CIT(A), IN THE SAME DECISION, THE HONBLE APEX COUR T HELD THAT IT DEPENDS UPON THE FACTS AND CIRCUMSTANCES OF THE CASE AND THE COMMERCIAL EXPEDIENCY REQUIRED TO BE DEMONS TRATED. IN ANY CASE, THIS DECISION OF HONBLE APEX COURT IS UNDER REVIEW AS POINTED OUT BY THE D.R. ASSESSEE HAD CON TENDED THAT INVESTMENTS WERE MADE IN WHOLLY SUBSIDIARY COM PANY, THAT SUCH WHOLLY SUBSIDIARY COMPANY WERE IN THE SAM E LINE OF BUSINESS, THAT ESTABLISHMENT OF WHOLLY OWNED SUBSID IARY WAS A PART OF ITS BUSINESS PURPOSE AND THAT SUCH INVES TMENTS WERE COMMERCIALLY EXPEDIENT. EXCEPT FOR MAKING THES E ARGUMENTS, NO EVIDENCE WHATSOEVER WAS PRODUCED BY THE ASSESSEE BEFORE THE LOWER AUTHORITIES. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, WE ARE OF THE OPINION TH AT THE MATTER REQUIRES FRESH LOOK BY THE ASSESSING OFFICER . ASSESSING OFFICER HAS TO VERIFY WHETHER INVESTMENTS WERE MADE FOR THE PURPOSE THE BUSINESS AND WHETHER SUCH ITA NOS.166 & 167/MDS/2012 8 INVESTMENTS IN THE SUBSIDIARY WAS BASED ON COMMERCI AL EXPEDIENCY. WE, THEREFORE, SET ASIDE THE ORDERS OF THE AUTHORITIES BELOW AND REGARDING ALLOWANCE OF EXPENS ES BACK TO THE FILE OF THE ASSESSING OFFICER TO DECIDE THE MATTER AFRESH IN ACCORDANCE WITH LAW. 8. IN THE RESULT, BOTH THE APPEALS OF THE ASSESSEE ARE ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THURSDAY, THE 28 TH DAY OF JUNE, 2012 AT CHENNAI. SD/- SD/- (VIKAS AWASTHY) (ABRAHAM P.GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 28 TH JUNE, 2012. SOMU COPY TO: (1) APPELLANT (4) CIT(A) (2) RESPONDENT (5) D.R. (3) CIT (6) G.F.