ACIT, CHENNAI V. M/s. Best & Crompton Engineering Ltd., CHENNAI

ITA 1674/CHNY/2008

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 61040 (ITAT-CHENNAI)
• Duration Of Justice: 3 year(s) 8 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-05-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 03-05-2012
• Assessment Year: 2004-2005
• Appeal Filed On: 06-08-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K E B RENGARAJAN JR
• Assessee Lawyers: S SUBRAMANIAN
• Keywords: Commercial expediency

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.1673 &1674/MDS/2008 (ASSESSMENT YEARS: 2003-04 & 2004-05) ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE I(2), NEW BLOCK, VI FLOOR, 12,M.G.ROAD, CHENNAI-600 034. VS. M/S.BEST & CROMPTON ENGINEERING .LTD. 39, INDUSTRIAL ESTATE, AMBATTUR, CHENNAI-600 098. PAN:AAACB2753N (APPELLANT) (RESPONDENT) APPELLANT BY : MR. K.E.B.RENGARAJAN, J R. STANDING COUNSEL RESPONDENT BY : MR. S. SUBRAMANIAN, C.A DATE OF HEARING : 3 RD MAY, 2012 DATE OF PRONOUNCEMENT : 3 RD MAY, 2012 O R D E R PER VIKAS AWASTHY, JUDICIAL MEMBER: THE PRESENT TWO APPEALS I.E. ITA NO.1673/MDS/2008 RELEVANT TO THE ASSESSMENT YEAR 2003-04 AND ITA NO.1674/MDS/2008 RELEVANT TO THE ASSESSMENT YEAR 20 04-05 HAVE BEEN FILED BY THE REVENUE AGAINST THE COMMO N ORDER OF CIT(A)-VIII, CHENNAI DATED 27.05.2008. SINCE I SSUES INVOLVED IN BOTH THESE APPEALS ARE COMMON, THEY WER E HEARD TOGETHER AND ARE DECIDED BY THIS COMMON ORDER. ITA NOS. 1673 & 1674/MDS/2008 2 2. THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND MARKETING OF ELECTRICAL AND MECHA NICAL ENGINEERING GOODS AND ELECTRICAL CONTRACTING AND CO NSTRUCTION ENGINEERING. THE ASSESSEE FILED ITS RETURN OF INCOM E RELEVANT TO THE ASSESSMENT YEAR 2003-04 DECLARING ITS INCOME TO BE NIL. THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRU TINY AND NOTICE UNDER SECTION 143(2) WAS ISSUED TO THE ASSES SEE ON 11.10.2004. DURING THE COURSE OF ASSESSMENT, THE AS SESSING OFFICER MADE CERTAIN ADDITIONS/DISALLOWANCES IN THE TOTAL INCOME OF THE ASSESSEE AND ASSESSED TOTAL LOSS OF ` 6,81,69,969/-. 3. FOR THE ASSESSMENT YEAR 2004-05, THE RETURN OF I NCOME WAS PROCESSED UNDER SECTION 143(1) AND LATER ON THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY AND NOTICE U NDER SECTION 143(2) WAS ISSUED TO THE ASSESSEE ON 8.9.20 05. THE ASSESSING OFFICER FOR THE ASSESSMENT YEAR 2004-05 M ADE CERTAIN DISALLOWANCES/ADDITIONS AND ASSESSED LONG TERM CAPITAL GAIN TO THE TUNE OF ` 4,39,61,049/- AND RAISED A DEMAND OF ` 1,13,42,939/- INCLUDING INTEREST UNDER SECTION 234B. AGGRIEVED AGAINST THE ASSESSMENT ORDERS DATED ITA NOS. 1673 & 1674/MDS/2008 3 23.03.2006 AND 21.12.2006 RELEVANT TO THE ASSESSME NT YEARS 2003-04 AND 2004-05 RESPECTIVELY, ASSESSEE PREFERRE D APPEALS BEFORE THE CIT(A). THE CIT(A) AFTER GOING T HROUGH THE DOCUMENTS ON RECORD, SUBMISSIONS MADE BY THE PARTIE S AND THE CASE LAWS RELIED UPON, PARTLY ALLOWED THE APPEA LS OF THE ASSESSEE. FOR THE ASSESSMENT YEARS 2003-04 AND 200 4-05, ONE OF THE GROUNDS ADJUDICATED BY THE CIT(A) WAS DISALLOWANCE OF INTEREST ON BORROWED FUNDS AND FOR THE ASSESSMENT YEAR 2004-05 THE OTHER GROUND INTER ALIA DECIDED BY CIT(A) WAS DISALLOWANCE OF WRITE OFF OF ADVANCES GIVEN BY ASSESSEE TO ITS SUBSIDIARIES. THE CIT(A) DECIDED B OTH THE ABOVE GROUNDS IN FAVOUR OF THE ASSESSEE. AGGRIEVED AGAINST THE AFORESAID DELETION OF DISALLOWANCE OF INTEREST ON BORROWED FUNDS AND DELETION OF DISALLOWANCE OF WRITE OFF OF ADVANCES BY THE CIT(A), THE DEPARTMENT PREFERRED PRESENT APPEAL S BEFORE THE TRIBUNAL FOR THE ASSESSMENT YEARS 2003-04 AND 2 004-05. 4. SHRI K.E.B.RENGARAJAN, DEPARTMENTAL REPRESENTATI VE APPEARING ON BEHALF OF THE DEPARTMENT SUBMITTED THA T THE CIT(A) HAS ERRED IN DELETING THE DISALLOWANCE OF IN TEREST ON BORROWED FUNDS WHICH ARE DIVERTED TO THE SISTER CON CERNS OF ITA NOS. 1673 & 1674/MDS/2008 4 THE ASSESSEE COMPANY. HE SUBMITTED THAT ASSESSEE HA S BEEN PAYING HUGE INTEREST ON BORROWED FUNDS AND HA S ADVANCED THE SAID FUNDS AS INTEREST FREE LOAN TO IT S SISTER CONCERNS. INTEREST EXPENDITURE INCURRED BY THE ASSE SSEE IS NOT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF ASSES SEES BUSINESS. HE CONTENDED THAT THE CIT(A) HAS ERRED ON RELYING UPON THE JUDGEMENT OF HONBLE SUPREME COURT OF INDI A IN THE CASE OF S.A. BUILDERS REPORTED AS 288 ITR 1. HE SU BMITTED THAT THE CASE OF THE DEPARTMENT IS SQUARELY COVER ED BY THE JUDGEMENT OF HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF ABHISHEK INDUSTRIES REPORTED AS 286 ITR 1. WITH REGARD TO SECOND GROUND OF APPEAL, THE D.R. SUBMIT TED THAT THE CIT(A) HAS WRONGLY DELETED THE DISALLOWANCE OF WRITE OFF OF ADVANCES GIVEN BY THE ASSESSEE TO ITS SUBSIDIARIES. THE CIT(A) HAS ONLY RELIED ON THE MEMORANDUM OF ASSOCIA TION OF THE COMPANY TO COME TO THE CONCLUSION THAT THE ASSE SSEE COMPANY WAS ENGAGED IN THE BUSINESS OF PROVIDING FI NANCE. HE SUBMITTED THAT THE CIT(A) HAS FAILED TO OBSERVE THAT THE ASSESSEE HAD NOT GIVEN ADVANCE TO ANY OTHER OUTSIDE RS AND THE TRANSACTIONS WERE ONLY WITH SISTER CONCERNS. HE FURTHER ITA NOS. 1673 & 1674/MDS/2008 5 SUBMITTED THAT THE ADVANCES GIVEN BY THE ASSESSEE T O ITS SUBSIDIARIES OR SISTER COMPANIES WERE NOT FOR THE PURPOSE OF ASSESSEES BUSINESS AND THEREFORE, IT CANNOT BE SAI D THAT ADVANCES WERE GIVEN IN THE REGULAR COURSE OF BUSINE SS OF THE ASSESSEE. EXCEPT ABOVE GROUNDS, NO OTHER GROUND WA S PRESSED BY THE D.R 5. ON THE OTHER HAND, SHRI S.SUBRAMANIAM, AUTHORIZE D REPRESENTATIVE APPEARING ON BEHALF OF THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAD GIVEN LOAN TO ITS SUBSIDIARIE S FROM THE BORROWED FUNDS DURING THE COURSE OF ITS BUSINESS. H OWEVER, THESE SUBSIDIARY COMPANIES HAVE BECOME SICK ON ACCO UNT OF BUSINESS LOSSES. AS A HOLDING COMPANY, THE ASSESSEE HAD TO SUPPORT THE SUBSIDIARY COMPANIES AS THESE COMPANIES WERE FLOATED BY THE ASSESSEE. IT HAD TO SUPPORT THE BUSI NESS REQUIREMENTS OF THE SUBSIDIARY COMPANY OUT OF COMME RCIAL EXPEDIENCY. THE SUBSIDIARY COMPANIES HAD TO DEPEND ON THE ASSESSEE COMPANY FOR ITS WORKING CAPITAL REQUIREMEN TS, AS THESE COMPANIES DID NOT HAVE FIXED ASSETS BASE AND ARE DEPENDENT ON HOLDING COMPANY FOR THEIR FINANCIAL REQUIREMENTS. HE SUBMITTED THAT THE CIT(A) HAS RIG HTLY ITA NOS. 1673 & 1674/MDS/2008 6 ALLOWED THE APPEALS OF THE ASSESSEE AND THE ORDER OF CIT(A) IS A WELL-REASONED AND DETAILED ORDER. HE FURTHER C ONTENDED THAT THE CASE OF THE ASSESSEE IS SQUARELY COVERED B Y THE JUDGEMENT OF THE HONBLE SUPREME COURT OF INDIA IN THE CASE OF S.A.BUILDERS VS. CIT REPORTED AS 288 ITR 1. AS REGARDS ASSESSMENT YEAR 2004-05, WHERE THE DEPARTMENT HAS INTER ALIA TAKEN THE GROUND OF DELE TING THE DISALLOWANCE OF WRITE OFF OF ADVANCES GIVEN BY ASSE SSEE COMPANY TO ITS SUBSIDIARIES, MR. SUBRAMANIAM SUBMIT TED THAT THE AMOUNT WAS ADVANCED TO THREE SUBSIDIARY COMPANI ES I.E. I) BEACON TILEMAN LTD. II) BEACON CARBONS & ELECTRI CALS (INDIA) LTD & III) THREE C SYSTEMS LIMITED. THE A BOVE SAID COMPANIES WENT UNDER LIQUIDATION ON THE ORDERS OF H ONBLE HIGH COURT OF MADRAS. THE ASSESSEE HAD FUNDED THESE COMPANIES PURELY ON COMMERCIAL EXPEDIENCY AS THE G ROWTH OF THE SUBSIDIARY COMPANIES WOULD HAVE HELPED IN VA LUATION OF BUSINESS OF THE ASSESSEE. THE LOSS INCURRED BY THE ASSESSEE COMPANY ON ACCOUNT OF ADVANCES GIVEN TO THE ABOVE S AID SUBSIDIARIES HAS BEEN WRITTEN OFF AS THESE COMPANIE S ARE ITA NOS. 1673 & 1674/MDS/2008 7 UNDER LIQUIDATION AND AMOUNT ADVANCED CANNOT BE REC OVERED. THUS, IT IS A BUSINESS LOSS AND IS AN ALLOWABLE EXP ENDITURE. 6. WE HAVE HEARD THE PARTIES AND HAVE PERUSED THE ORDERS PASSED BY THE CIT(A) AS WELL AS THE ASSESSIN G OFFICER. WE HAVE ALSO GONE THROUGH THE JUDGEMENTS CITED BY T HE RESPECTIVE PARTIES. IT IS AN ADMITTED FACT THAT LOA N WAS ADVANCED BY THE ASSESSEE COMPANY TO THE SUBSIDIARIE S. THE ASSESSING OFFICER IN HIS ASSESSMENT ORDER DATED 23 .3.2006 HAS STATED THAT ONE OF THE SUBSIDIARY COMPANIES HAS PAID INTEREST TO THE TUNE OF ` 9,19,270/- TO THE ASSESSEE. THE OTHER SUBSIDIARY COMPANIES TO WHOM LOAN HAS BEEN ADVANCED , THEY HAVE FILED APPLICATION BEFORE BIFR AS THEY HAVE GON E SICK. AS PER THE CONDITIONS LAID DOWN BY THE BIFR NO INTERES T CAN BE CHARGED BY HOLDING COMPANY ON ITS SUBSIDIARY. THE F ACTS AND CIRCUMSTANCES OF THE CASE SHOW THAT THE ASSESSEE HA S EXTENDED LOANS AND ADVANCES TO ITS SUBSIDIARIES TO SUPPORT THE BUSINESS AND ON ACCOUNT OF COMMERCIAL EXPEDIENC Y. THE SUBSIDIARIES COULD NOT REPAY THE LOANS OR ADVANCES FOR THE REASON THAT THEY HAVE INCURRED HUGE FINANCIAL LOSSE S AND HAVE GONE SICK. THE ASSESSING OFFICER HAS NOT DISPUTED T HE FACT ITA NOS. 1673 & 1674/MDS/2008 8 THAT SUBSIDIARY COMPANIES ARE UNDER LIQUIDATION PRO CEEDINGS AND THEREFORE LOANS ARE NOT RECOVERABLE. IT IS UND ERSTANDABLE THAT ASSESSEE WAS CONSTRAINED TO WRITE OFF THE ADVA NCES AS THE SAME WERE NOT RECOVERABLE ON ACCOUNT OF LOSSES SUFFERED BY THE SUBSIDIARIES AND IN SOME OF THE CASES ON ACC OUNT OF LIQUIDATION PROCEEDINGS. THE ASSESSEE IS ENTITLED T O CLAIM THE SAME AS DEDUCTION. THE HONBLE SUPREME COURT OF IND IA IN THE CASE OF S.A.BUILDERS (SUPRA) HAS HELD THAT WHERE IT IS OBVIOUS THAT A HOLDING COMPANY HAS A DEEP INTEREST IN ITS SUBSIDIARY, AND HENCE IF THE HOLDING COMPANY ADVANC ES BORROWED MONEY TO A SUBSIDIARY AND THE SAME IS USED BY THE SUBSIDIARY FOR SOME BUSINESS PURPOSES, THE ASSESSEE WOULD, IN OUR OPINION, ORDINARILY BE ENTITLED TO DEDUCTION OF INTEREST ON ITS BORROWED LOANS. IN THE INSTANT CASE, IT IS AN ADMITTED FACT THAT THE LOANS ADVANCED TO THE SUBSIDIARY COMPANIES WERE UTILIZED BY THEM FOR THEIR BUSINESS REQUIREMENTS AN D HAVE NOT BEEN UTILIZED FOR THE PERSONAL BENEFITS OF THE INDIVIDUALS/DIRECTORS. THEREFORE, THE CIT(A) HAS R IGHTLY DELETED THE DISALLOWANCE OF INTEREST ON BORROWED FUNDS ADVA NCED AS LOAN TO SUBSIDIARY COMPANIES BY THE ASSESSEE. ITA NOS. 1673 & 1674/MDS/2008 9 7. IN VIEW OF THE ABOVE, WE DO NOT FIND ANY INFIRMI TY IN THE ORDER PASSED BY THE CIT(A) AND UPHOLD THE SAME. THU S, BOTH THE APPEALS OF THE REVENUE ARE DISMISSED AS DEVOID OF ANY MERIT. ORDER PRONOUNCED IN THE OPEN COURT AT THE TIME OF HEARING ON THURSDAY, THE 3 RD MAY, 2012 AT CHENNAI. SD/- SD/- (ABRAHAM P.GEORGE) (VIKAS AWASTHY) ACCOUNTANT MEMBER JUDICIAL MEMBER CHENNAI, DATED THE 3 RD MAY, 2012. SOMU COPY TO: (1) APPELLANT (4) CIT(A) (2) RESPONDENT (5) D.R. (3) CIT (6) G.F.