DCIT, Bangalore V. Kurlon Ltd., Bangalore

ITA 28/BANG/2015

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 8690 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-01-2016
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 12-11-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 12-01-2015
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: R B KRISHNA
• Assessee Lawyers: DR P K SRIHARI
• Keywords: Opportunity of being heard; Commercial expediency
• Section: 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER ITA NO.28/BANG/2015 ASSESSMENT YEAR : 2009-10 THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 4(1)(1), BANGALORE. VS. KURLON LTD., NO.301-303, NORTH BLOCK, III FLOOR, MANIPAL CENTRE, NO.47, DICKENSON ROAD, BENGALURU 560 042. PAN: AABCK 2150K APPELLANT RESPONDENT APPELLANT BY : SHRI R.B. KRISHNA, ADVOCATE RESPONDENT BY : DR. P.K. SRIHARI, ADDL. CIT(DR) DATE OF HEARING : 12.11.2015 DATE OF PRONOUNCEMENT : 21.01.2016 O R D E R PER ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST TH E ORDER OF THE CIT(APPEALS)-I, BANGALORE RELATING TO ASSESSMENT YE AR 2009-10. 2. THE ASSESSEE IS A PUBLIC LIMITED COMPANY ENGAGED IN THE MANUFACTURE AND DISTRIBUTION OF RUBBERIZED MATTRESS ES AND ALLIED PRODUCTS. THE ASSESSEE FILED ITS RETURN OF INCOME FOR AY 2009 -10 ON 30.09.2009 ITA NO.28/BANG/2015 PAGE 2 OF 8 DECLARING TOTAL INCOME AT RS. 20,66,45,960/-. INITI ALLY, THE RETURN WAS PROCESSED U/S 143(1) AND THEN SELECTED FOR SCRUTINY . IN THE ASSESSMENT CONCLUDED U/S 143(3), THE TOTAL INCOME HAS BEEN DET ERMINED AT RS.22,03,59,532/- DUE TO CERTAIN DISALLOWANCES. 3. ONE OF THE DISALLOWANCES MADE WAS AN AMOUNT OF R S.41,62,382/- ON THE GROUND THAT THE ASSESSEE HAD DIVERTED A MAJOR P ORTION OF THE LOANS TAKEN BY IT TO ITS SUBSIDIARY CONCERN. 4. ON APPEAL, THE CIT(APPEALS) DELETED THE DISALLOW ANCE OF RS.41,62,382/-, HOLDING THAT THE ADVANCE GIVEN BY T HE ASSESSEE TO ITS SUBSIDIARY WAS OUT OF COMMERCIAL EXPEDIENCY. AGGRI EVED, THE DEPARTMENT WENT IN APPEAL BEFORE THE TRIBUNAL. 5. THE TRIBUNAL IN ITS ORDER ITA NO.302/BANG/2013 D ATED 06.12.2013 REMANDED THE ISSUE BACK TO THE FILE OF THE CIT(A) F OR RECONSIDERATION. THE RELEVANT PARAGRAPH OF THE TRIBUNALS ORDER IS REPRO DUCED BELOW:- 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS, WE F IND THAT THE CIT(A) HAS NOT GIVEN ANY BASIS ON WHICH HE HAS COME TO THE CONCLUSION THAT THE INTEREST FREE LOANS WERE GIVEN TO THE SUBSIDIARY COMPANY OWING TO COMMERCIAL EXPEDIENCY. MERELY BECAUSE, THE RELATIONSHIP BETWEEN THE LENDER COMPAN Y AND THE BORROWER COMPANY IS THAT OF A HOLDING A SUBSIDIARY COMPANY, COMMERCIAL EXPEDIENCY IS NOT ESTABLISHED. THE FACTS WHICH SUPPORT THE NECESSITY OF THE ASSESSEE IN ITS BUSINE SS INTEREST TO GIVE INTEREST FREE LOANS TO THE SUBSIDIARY COMPANY HAD TO BE PLEADED AND ESTABLISHED. SUCH FACTS HAVE NEITHER B EEN PLEADED NOR ESTABLISHED BY THE ASSESSEE. IN SUCH CIRCUMSTAN CES, WE ARE OF THE VIEW THAT THE FINDINGS OF THE CIT(A) IS WITHOUT ANY BASIS. WE ARE ALSO .OF THE VIEW THAT THE AVAILABILITY OF SURP LUS FUNDS WHICH ITA NO.28/BANG/2015 PAGE 3 OF 8 WERE USED TO MAKE INTEREST FREE ADVANCES TO SUBSIDI ARY COMPANY HAD NOT BEEN PLEADED BY THE ASSESSEE NEITHER BEFORE THE CIT(A) NOR BEFORE THE AO. THEREFORE, THIS BASIS ON WHICH T HE CIT(A) DELETED THE ADDITION MADE BY THE AO CANNOT BE SUSTA INED. 8. WE ARE HOWEVER OF THE VIEW, THE QUESTION OF COM MERCIAL EXPEDIENCY HAS TO BE EXAMINED BY THE CIT(A) AND FOR THIS PURPOSE, THE ORDER OF THE CIT(A) IS SET ASIDE AND R EMANDED TO THE CIT(A) FOR FRESH CONSIDERATION. THE LEARNED DR IN T HE COURSE OF SUBMISSIONS BEFORE US HAS VERY STRONGLY URGED THAT THE ASSESSEE SHOULD NOT BE GIVEN ANOTHER OPPORTUNITY BY SETTING ASIDE FOR FRESH EXAMINATION OF COMMERCIAL EXPEDIENCY. WE, HOWEVER, FIND THAT NO DETAILS WHATSOEVER WERE EITHER CALLED FOR BY THE AO OR CIT(A) IN THIS REGARD. IN THESE CIRCUMSTANCES AND IN THE I NTEREST OF JUSTICE, WE DEEM IT APPROPRIATE TO AFFORD OPPORTUNITY TO THE ASSESSEE. THE ASSESSEE WILL FURNISH THE FACTS AND CIRCUMSTANCES W HICH WILL GO TO SHOW THAT THE INTEREST FREE LOANS TO SUBSIDIARY COM PANY WERE OWING TO COMMERCIAL EXPEDIENCY. THE CIT(A) WILL DEC IDE THE ISSUE IN ACCORDANCE WITH LAW AFTER AFFORDING THE AS SESSEE AN OPPORTUNITY OF BEING HEARD. . 6. THE FACTS ARE THE ASSESSEE HAD TAKEN LOANS AMOUN T TO RS.44,07,29,994/- ON WHICH IT HAD PAID INTEREST OF RS.6,51,61,035/- AND THAT IT HAD ADVANCED A SUM OF RS.3,63,11,215/- WITHOUT C HARGING INTEREST TO ITS SUBSIDIARY, NAMELY KURLON CESARE FURNITURE PVT. LTD . (KCF), IN WHICH THE ASSESSEE HELD 52% OF SHARE CAPITAL. ACCORDING TO TH E AO, WHEN THE ASSESSEE ITSELF HAD TO BORROW FUNDS FOR ITS REQUIRE MENTS, THERE IS NO BUSINESS EXPEDIENCY FOR IT TO ADVANCE MONEY TO ITS SUBSIDIARY WITHOUT CHARGING INTEREST. THE CIT(A) IN THE FIRST ROUND BY HIS ORDER DATED 27.12.2012 OBSERVED THAT THE ASSESSEE STRONGLY ARGU ED THAT THE SAID SUBSIDIARY WAS FINANCED BY THEM AS A HOLDING COMPAN Y OUT OF COMMERCIAL EXPEDIENCY. IT WAS FURTHER SUBMITTED BY THE LEARNE D COUNSEL FOR THE ITA NO.28/BANG/2015 PAGE 4 OF 8 ASSESSEE THAT THE SUBSIDIARY UTILIZED THE FUNDS FOR THE PURPOSE OF BUSINESS AND THE SUBSIDIARY FINALLY GOT AMALGAMATED WITH THE ASSESSEE AS PER HIGH COURT ORDER DATED 7.4.2011. THE CIT(A) IN HIS ORDER 27.12.2012 FURTHER HELD AS FOLLOWS:- IT IS SEEN FROM THE BALANCE SHEET THAT LOAN FUNDS HAVE REDUCED TO RS.4407.30 LAKHS ON 31.03.2009 COMPARED TO RS.46 68.07 LAKHS AS ON 31.03.2008. IT IS SEEN FROM THE BALANCE SHEET THAT THE SHARE CAPITAL AND RESERVES HAVE GONE UP TO RS.6752.24 LAK HS AS ON 31.03.2009 COMPARED TO RS.5672.90 LAKHS AS ON 31.03 .2008. IN VIEW OF THIS THERE WAS SUFFICIENT INTEREST FREE FUN DS AVAILABLE TO THE ASSESSEE TO MAKE ADVANCES TO THE SUBSIDIARY COM PANY. AS THE ASSESSEE ADVANCED THE FUNDS TO THE SUBSIDIARY COMPA NY AS COMMERCIAL EXPEDIENCY THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF S.A.BUILDERS (288 ITR 1) SQUAR ELY APPLIES TO THE FACTS OF THE CASE. WHEN THE INTEREST FREE FUNDS ARE USED FOR THE PURPOSE OF BUSINESS, NO DISALLOWANCE CAN BE MADE. I N VIEW OF THIS THE SUBMISSIONS OF THE ASSESSEE ARE ACCEPTABLE AND ADDITIONS OF RS.41,62,382/- IS DELETED AND AO IS DIRECTED ACCORD INGLY. 7. IN THE SECOND ROUND, THE CIT(A) HELD THAT THE IS SUE HAS TO BE VIEWED FROM TWO ANGLES: (I) WHETHER THERE WAS COMMERCIAL EXPEDIENCY FOR TH E APPELLANT TO GIVE THE LOAN FREE OF INTEREST SO THAT THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF SA BUILDERS (2 83 ITR 1) WOULD BE APPLICABLE? AND (II) WHETHER THE LOAN HAD BEEN ADVANCED BY THE APPE LLANT FROM ITS OWN FUNDS TO M/S KCF? ITA NO.28/BANG/2015 PAGE 5 OF 8 8. THE CIT(APPEALS) OBSERVED THAT THE RELATIONSHIP BETWEEN THE ASSESSEE AND M/S KCF IS TWO-FOLD. IN THE FIRST INS TANCE, M/S KCF BECAME A SUBSIDIARY COMPANY FOLLOWING ITS AMALGAMATION WIT H EFFECT FROM 1/4/2009 AS EVIDENCED BY THE APPROVAL GIVEN BY THE HONBLE H IGH COURT OF KARNATAKA SINCE ITS ORIGINAL PLAN OF HAVING COLLABORATION WIT H AN ITALIAN COMPANY FELL THROUGH DUE TO THE LATTERS DECISION NOT TO PARTICI PATE IN M/S KCF. THE RELATIONSHIP BETWEEN THE ASSESSEE AND M/S KCF IS, T HEREFORE, ONE OF HOLDING COMPANY AND SUBSIDIARY WITH 52% SHARE IN TH E CAPITAL. THE OTHER SUBMISSION IS THAT THE MATTRESSES MANUFACTURED BY T HE ASSESSEE ARE USED IN THE FURNITURE ITEMS MANUFACTURED BY THE SUBSIDIA RY, WHICH IS SUPPORTED BY SALES MADE BY THE ASSESSEE TO THE SUBSIDIARY COMPAN Y AS PER THE DETAILS FURNISHED DURING THE APPEAL HEARING. THIS, THEREFOR E, ESTABLISHES BUSINESS RELATIONSHIP BETWEEN THE APPELLANT AND ITS SUBSIDIA RY I.E. M/S KCF. 9. AS REGARDS AVAILABILITY OF OWN FUNDS WITH THE AS SESSEE FOR GIVING THE INTEREST-FREE LOAN, THE ASSESSEE FURNISHED THE FOLL OWING DATA FROM PAGE 22 OF THE ANNUAL REPORT FOR THE YEAR ENDED 31/3/2008: ITA NO.28/BANG/2015 PAGE 6 OF 8 10. ACCORDING TO THE CIT(APPEALS), THUS, AS DECLARE D IN THE RELEVANT ANNUAL REPORT, THE ASSESSEE HAD SUBSTANTIAL FUNDS A MOUNTING TO RS.20,14,69,766/- FOR GIVING A LOAN OF RS.3,63,11,2 15/- FREE OF INTEREST. IN THIS REGARD, THE CIT(A) REFERRED TO THE OBSERVATION S OF HIS PREDECESSOR REPRODUCED ABOVE ARE ALSO RELEVANT. THE CIT(A) OBS ERVED THAT IT IS NOT IN DISPUTE THAT THE LOAN HAS BEEN GIVEN BY THE ASSESSE E TO A COMPANY WHICH BECAME ITS SUBSIDIARY WITH THE APPROVAL OF THE HON BLE HIGH COURT OF KARNATAKA, AFTER THE SUBSIDIARYS PROPOSAL FOR COLL ABORATION WITH AN ITALIAN COMPANY FELL THROUGH. THE CIT(A) HELD THAT IN VIEW OF THE AVAILABILITY OF ITS OWN FUNDS AND THE NEXUS BETWEEN THE ASSESSEES BUSI NESS AND THE BUSINESS OF ITS SUBSIDIARY COMPANY, THE AO WAS NOT JUSTIFIED IN DISALLOWING A SUM OF RS.41,62,382/- AS INTEREST ATTRIBUTABLE TO THE LOAN OF RS.3,63,11,215/- GIVEN FREE OF INTEREST TO M/S KCF IN THE LIGHT OF THE DECISION OF THE HONBLE SUPREME COURT IN SA BUILDERS LTD. V. CIT (288 ITR 1) . THE CIT(A) THEREFORE DELETED THE DISALLOWANCE OF RS.41,62,382/- MADE BY THE AO. 11. AGGRIEVED, THE DEPARTMENT IS IN APPEAL BEFORE U S ON THE FOLLOWING EFFECTIVE GROUNDS OF APPEAL:- 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, TH E LD. CIT(A) HAS ERRED IN DELETING THE ADDITION MADE BY THE AO U /S. 36(1)(III) READ WITH SECTION 37 RELYING ON THE DECISION OF THE HONBLE SUPREME COURT IN SA BUILDERS LTD. V. CIT (288 ITR 1 ). 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS FAILED TO APPRECIATE THE FACT THAT THE AMALGAMA TION TOOK EFFECT FROM 1.4.2009. DURING THE PREVIOUS YEAR RELEVANT T O THE ITA NO.28/BANG/2015 PAGE 7 OF 8 ASSESSMENT YEAR, M/S. KURLON CESARE FURNITURE PVT. LTD. WAS NOT AN AMALGAMATED ENTITY BUT AN INDEPENDENT COMPANY. HENCE, THE CLAIM OF COMMERCIAL EXPEDIENCY IS NOT JUSTIFIABLE A ND CIT(A) HAS ERRED IN RELYING ON THIS ARGUMENT. 4. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS FAILED TO APPRECIATE THE FACT THAT WHEN THE ASS ESSEE HAD TAKEN LOAN INCURRING SUBSTANTIAL INTEREST PAYMENT, ITS AD VANCING LOAN TO THE SUBSIDIARY COMPANY WITHOUT CHARGING INTEREST IS NOT TENABLE. 12. THE LEARNED COUNSEL FOR THE ASSESSEE BEFORE US REITERATED THE SUBMISSIONS MADE BEFORE THE CIT(A) WHICH ARE AS FOL LOWS:- 4.1 IT IS THE BASIC DUTY AND RESPONSIBILITY OF TH E HOLDING COMPANY TO ENSURE THAT THE SUBSIDIARY COMPANYS OPE RATIONS ARE CARRIED ON SMOOTHLY. IN ORDER TO FULFIL THIS OBLIGA TION, THE HOLDING COMPANY HAS TO FUND THE SUBSIDIARY COMPANY WHENEVER REQUIRED. SUCH FUNDING AMOUNTS TO COMMERCIAL EXPEDIENCY, WI THOUT WHICH THE SUBSIDIARY COMPANY WILL BE RENDERED HELPL ESS AND THE OPERATIONS OF BOTH THE SUBSIDIARY COMPANY AND THE H OLDING COMPANY MAY GET EFFECTED (READ AFFECTED) WHICH MA Y ULTIMATELY RESULT IN ADVERSE SITUATIONS. HENCE TO AVOID SUCH C IRCUMSTANCES, IT IS NECESSARY TO REACH OUT TO THE SUBSIDIARY COMPANY AND SUCH A GESTURE. CANNOT BE TERMED AS NOT ARISING OUT OF CO MMERCIAL EXPEDIENCY. 4.2 IT MAY KINDLY BE NOTED THAT THE BUSINESS OF TH E ASSESSEE IE., MANUFACTURE OF VARIOUS TYPES OF MATTRESSES AND RELA TED ITEMS ARE LINED TO THE SUBSIDIARY COMPANYS BUSINESS OF FURNI TURE MANUFACTURING. IN THE FURNITURE MANUFACTURING, PART OF THE MATERIALS USED ARE MANUFACTURED BY THE HOLDING COMP ANY. IN VIEW OF THIS, THE BUSINESS OF THE HOLDING COMPANY A ND THAT OF THE SUBSIDIARY COMPANY ARE INEXTRICABLY LINKED. 13. WE HAVE HEARD BOTH THE PARTIES. THE LD. CIT(A PPEALS) HAS FOLLOWED THE DECISION OF THE HONBLE SUPREME COURT IN THE DE CISION OF SA BUILDERS (SUPRA) . HOWEVER, WE FIND THAT THE ASSESSEE HAS NOT ESTAB LISHED THE NEXUS ITA NO.28/BANG/2015 PAGE 8 OF 8 WITH EVIDENCE WITH RESPECT TO THE LOAN GIVEN BY THE ASSESSEE TO ITS SUBSIDIARY IN ORDER TO PROVE THAT THERE HAS BEEN CO MMERCIAL EXPEDIENCY. HENCE WE SET ASIDE THE ISSUE TO THE FILE OF THE LD. CIT(APPEALS) TO EXAMINE AND DECIDE THIS ISSUE AFRESH IN ACCORDANCE WITH LAW . 14. IN THE RESULT, THE DEPARTMENTAL APPEAL IS ALLOW ED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON THIS 21 ST DAY OF JANUARY, 2016. SD/- SD/- ( INTURI RAMA RAO ) (ASHA VIJAYARAGHAVAN ) ACCOUNTANT MEMBER JUDICIAL M EMBER BANGALORE, DATED, THE 21 ST JANUARY, 2016. /D S/ COPY TO: 1. APPELLANT 2. RESPONDENTS 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.