DCIT, Cir-10, Kolkata, Kolkata V. M/s DIC India Ltd., Kolkata

ITA 315/KOL/2014

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 4355 (ITAT-KOLKATA)
• Duration Of Justice: 2 year(s) 7 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-10-2016
• Appeal Filed By: Department
• Bench Allotted: B
• Assessment Year: 2008-2009
• Appeal Filed On: 20-02-2014
• Court: TRIBUNAL
• Department Lawyers: R AJAT KUMAR KUREEL JCIT LD
• Assessee Lawyers: D S DAML E FCA LD
• Keywords: Source of fund; Wholly owned subsidiary
• Section: 142(1)

Judgement Text

ITA NO. 315/KOL/14 M/S. DIC INDIA LTD 1 IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, KOLKATA BEFORE: SHRI WASEEM AHMED, ACCOUNTANT MEMBER AND SHRI S.S.VISWANETHRA RAVI, JUDICIAL ME MBER I.T.A. NO. 315/KOL/2014 A.Y: 2008-09 D.C.I.T, CIR-10, KOLKATA VS. M/S. DIC INDIA LTD PAN:AABCC0703C (APPELLANT) (RESPONDENT) APPEARANCES BY: SHRI RAJAT KUMAR KUREEL, JCIT, LD. SR.DR FOR THE REVENUE SHRI D.S. DAMLE, FCA, LD.AR FOR THE ASSESSEE DATE OF HEARING : 25-07- 2016 DATE OF PRONOUNCEMENT : 19-10-2016 O R D E R SHRI S.S. VISWANETHRA RAVI, JM :- THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER DATED 19-11-2013 PASSED BY THE COMMISSIONER OF INCO ME TAX(APPEALS), XII, KOLKATA FOR THE ASSESSMENT YEAR 2008-09. 2. IN THIS APPEAL, THE REVENUE HAS RAISED THE FOLLO WING EFFECTIVE GROUND:- 1. THAT ON THE FACTS IN THE CIRCUMSTANCES OF THE CA SE AND AS PER LAW LD. CIT(A) ERRED IN DELETING THE ADDITION AMOUN TING RS. 11463036/- U/S 36(I)(III). 2. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND AS PER LAW LD. CIT(A) ERRED IN DELETING THE ADDITION O F INTEREST PAID ITA NO. 315/KOL/14 M/S. DIC INDIA LTD 2 BY THE ASSESSEE ON BORROWED FUND UTILIZED FOR INVES TMENT IN SUBSIDIARY COMPANY. 3. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND AS PER LAW LD. CIT(A) ERRED TO DELETE THE FACTUAL FIND ING MADE BY THE AO ON THE BASIS OF AVAILABLE RECORDS. 3. THE ASSESSEE IS A COMPANY AND ENGAGED IN THE BU SINESS OF MANUFACTURING, TRADING AND SELLING OF PRINTING INKS , INDUSTRIAL ADHESIVE AND OTHER ALLIED PRODUCTS AND FILED ITS RE TURN OF INCOME DECLARING TOTAL INCOME OF RS.19,26,75,196/- ON 29.0 9.2008. UNDER SCRUTINY, NOTICES U/S.143(2) AND 142(1) OF TH E ACT WERE ISSUED AND IN RESPONSE, THE ASSESSEE APPEARED AND R EPRESENTED ITS CASE THROUGH ITS REPRESENTATIVES. 4. THE AO FOUND THAT THE ASSESEE HAS DEBITED INTERE ST OF RS.6,28,93,526/- IN THE P & L ACCOUNT AND TOTAL INV ESTMENT STANDING AS ON 31.03.2008 OF RS.10,75,33,170/- IN T HE EQUITY SHARES OF DIC COATINGS INDIA LTD, WHICH IS A SUBSID IARY COMPANY. THE AO WAS OF THE OPINION THAT THE SAID IN VESTMENT IS NOT USED FOR BUSINESS PURPOSE AND IT IS NOT A BUSIN ESS ACTIVITY OF THE ASSESSEE. THE ASSESSEE EXPLAINED THE SAID I NVESTMENT IN DIC COATINGS INDIA LTD WAS MADE FROM OWN AND SURPL US FUND OF ASSESSE. ON EXAMINATION OF PAST RECORDS THE AO NOTI CED THAT THE ASSESSEE COMPANY HAS MADE INVESTMENT DURING THE YEAR ENDING 31.03.1998 AND ASCERTAINED THE SOURCE OF INV ESTMENT AND NOTICED AS UNDER: SOURCE OF FUND 31.03.1998 31.03.1997 OWN FUND I.E. SHARE AND RESERVE 81,12,06,002 56,78,26,597 INVESTMENT IN FIXED ASSET 26,45,78,764 26,07,81,73 4 INVENTORY 24,06,07,085 22,51,58,282 CASH AND BANK 10,47,91,899 6,50,91,568 LOANS AND ADVANCES 16,57,50,580 11,77,01,712 ITA NO. 315/KOL/14 M/S. DIC INDIA LTD 3 TOTAL 77,57,28,328 66,87,33,296 INVESTMENT IN OTHER THAN COATS COATING INDIA LTD. (NOW DIC COATING INDIA LTD.) 2,03,40,350 2,67,60,100 TOTAL 157,17,97,006 69,54,93,396 INVESTMENT IN COATS COATING INDIA LTD. (NOW DIC COATING INDIA LTD. 29,89,87,270 NIL 5. ACCORDING TO AO THAT THE ASSESSEE HAS EXHAUSTED ITS ENTIRE OWN SOURCE TOWARDS ACQUISITION / INVESTMENT / EXPEN DITURE FOR THE PURPOSE OF THE COMPANY AND THE ASSESSEE WAS NOT LEFT WITH OWN SOURCES TO INVEST IN THE SAID SUBSIDIARY COMPAN Y. THE AO HELD THAT THE ASSESSEE UTILIZED ITS OWN FUNDS WHICH RESULTED IN EARNING OF EXEMPTED INCOME. IN ABSENCE OF SPECIFIC CALCULATION WITH REFERENCE TO SAID INVESTMENTS, THE AO OPINED T HAT AMOUNT OF RS.10,75,33,170/- HAS NOT BEEN USED FOR THE PURP OSE OF BUSINESS AND AVERAGE INTEREST THEREON WAS DISALLOWE D. AMOUNT OF LOAN AS ON 31.03.2007 RS. 79,26,58,9671- AMOUNT OF LOAN AS ON 31.03.2008 RS. 38,78,81,383/- AVERAGE OF LOAN RS. 59,02,70,175/- AMOUNT DEBITED INTO P & L ACCOUNT RS. 6,28,93,526 /- AVERAGE RATE OF INTEREST 10.66% AMOUNT OF INTEREST @ 10.66% ON RS.10,75,33,170/- RS. 1,14,63,036/- 6. THE AO WAS OF THE OPINION THAT THE ASSESSEE BORR OWED CERTAIN FUNDS ON WHICH LIABILITY TO PAY INTEREST IS BEING INCURRED AND ON THE OTHER HAND CERTAIN AMOUNTS HAD BEEN ADVA NCED TO OTHERS WITHOUT CARRYING ANY INTEREST AND WITHOUT AN Y BUSINESS PURPOSE, THE INTEREST TO THAT EXTENT IS LIABLE TO B E DISALLOWED U/S.36(1)(III) OF THE ACT. THE AMOUNT OF INTEREST ITA NO. 315/KOL/14 M/S. DIC INDIA LTD 4 RS.1,14,63,036/-@10.66% ON INVESTMENT OF RS.10,75,3 3,170/- IN SUBSIDIARY COMPANY WAS DISALLOWED AND ADDED TO T HE TOTAL INCOME OF THE ASSESSEE. 7. THE ASSESSEE QUESTIONED THE ORDER OF ASSESSMENT BEFORE THE CIT-A. THE CONTENTION OF THE ASSESSEE WAS THAT THE FACTUAL MATRIX INVOLVED IN THE ORDER PASSED BY CIT-A IN ASS ESSEE'S OWN CASE FOR AY 2005-06 IS AS SAME TO THE FACTS OF THE CASE YEAR UNDER CONSIDERATION. FURTHER, SUBMITTED THAT THE SH ARES OF THE SUBSIDIARY COMPANY WERE ACQUIRED PURSUANT TO SALE O F COATING BUSINESS IN TERMS OF A SCHEME OF ARRANGEMENT APPROV ED BY HONBLE CALCUTTA HIGH COURT AND NO FRESH INVESTMENT S WERE MADE IN THE YEAR UNDER CONSIDERATION. CONSIDERING T HE SUBMISSIONS OF THE ASSESSE, THE CIT-A DELETED THE A DDITION MADE CONSEQUENT TO THE DISALLOWANCE BY TAKING REFER ENCE TO THE ORDER PASSED BY THE CIT-A FOR A.Y 2005-06 AND THE R ELEVANT PORTION OF WHICH IS REPRODUCED AS UNDER:- THE APPELLANT IS ENGAGED IN THE BUSINESS OF MANUFAC TURING, TRADING & SELLING OF PRINTING INKS, INDUSTRIAL ADHE SIVE AND OTHER ALLIED PRODUCTS. THE APPELLANT HAS ONLY ONE I NVESTMENT WHICH IS IN ITS WHOLLY OWNED SUBSIDIARY, DIC COATIN GS LIMITED WHICH WAS MADE IN THE YEAR 1997. TILL 31.12.1997 TH E APPELLANT WAS CARRYING ON BUSINESS OF CAN COATINGS THROUGH ITS COATINGS DIVISION HAVING MANUFACTURING FACILITIES A T BANGALORE. IN TERMS OF THE ORDER PASSED BY THE CALCUTTA HIGH C OURT U/S 391 TO 394 OF THE COMPANIES ACT, 1956 APPROVING A S CHEME OF ARRANGEMENT; COATING BUSINESS ON A GOING CONCERN BA SIS WITH ALL ITS ASSETS AND LIABILITIES WAS TRANSFERRED ON S LUMP SALE BASIS TO APPELLANT'S WHOLLY OWNED SUBSIDIARY VIZ. D IC COATINGS LIMITED (THEN KNOWN AS COATES COATINGS I. LTD.) EFF ECTIVE FROM 1.1.1998. AS PER THE TERMS APPROVED BY THE HIGH COU RT THE CONSIDERATION FOR SALE OF COATING BUSINESS WAS ENTI RELY SATISFIED BY THE TRANSFEREE BY ISSUING ITS EQUITY S HARES. AS SUCH IT WILL BE APPRECIATED THAT NO BORROWED FUNDS WERE UTILIZED BY THE ASSESSEE FOR ACQUIRING THE SHARES O F THE WHOLLY OWNED SUBSIDIARY. IN THE FACTS OF THE CASE IT IS AM PLY CLEAR THAT THE SHARES WERE ALLOTTED TO THE APPELLANT IN C ONSIDERATION OF SALE OF ITS COATING BUSINESS UNDERTAKING INTO IT S WHOLLY OWNED SUBSIDIARY AND ACCORDINGLY THE INVESTMENTS WE RE NOT MADE OUT OF INTEREST BEARING FUNDS. ITA NO. 315/KOL/14 M/S. DIC INDIA LTD 5 AS IS APPARENT FROM THE INVESTMENT SCHEDULE, NO FRE SH INVESTMENTS WERE MADE DURING THE RELEVANT ASSESSMEN T YEAR 2008-09. THE ONLY INVESTMENT IN THE BOOKS OF THE AP PELLANT AS ON 31 .03.2008 WAS SHARES IN THE' WHOLLY OWNED SUBS IDIARY DIC COATING INDIA LIMITED WHICH WAS ACQUIRED IN 199 7-98. IT IS PERTINENT TO SUBMIT THAT IN THE INCOME-TAX ASSES SMENTS UPTO AY 2005-06 THE ASSESSING OFFICER IN THE REGULA R ASSESSMENT NEVER DISALLOWED INTEREST WITH REFERENCE TO INVESTMENT MADE BY THE APPELLANT IN ITS WHOLLY OWNE D SUBSIDIARY. THIS ISSUE CAME UP FOR CONSIDERATION IN THE APPELLANT'S CASE FOR AY 2005-06. IN THAT YEAR ALSO THE ASSESSING OFFICER HAD DISALLOWED INTEREST OF RS.21, 19, 144/- WITH REFERENCE TO THE INVESTMENT IN DIC COATING IND IA LIMITED HOLDING THAT INTEREST BEARING FUNDS WERE UTILIZED T O MAKE THE INVESTMENTS. ON APPEAL, THE CLT(APPEALS)-XII, KOLKA TA IN HIS ORDER IN APPEAL NO. 456/XII/R-10/08-09 DATED 08.07. 2011 HELD THAT THE FACTS ON RECORD CLEARLY ESTABLISH THA T THE INVESTMENT IN WHOLLY OWNED SUBSIDIARY WAS MADE PURS UANT TO A SCHEME OF ARRANGEMENT APPROVED BY THE CALCUTTA HI GH COURT WHEREBY THE COATING BUSINESS WAS TRANSFERRED ON SLUMP SALE BASIS TO THE SUBSIDIARY WHICH IN CONSIDERATION ALLOTTED SHARES TO THE ASSESSEE. SINCE THE ASSESSEE HAD ESTA BLISHED THAT THE SOURCE OF ACQUISITION OF SHARES OF THE WHO LLY OWNED SUBSIDIARY WAS SALE OF COATING BUSINESS AND NOT INT EREST BEARING FUNDS, THE CIT(APPEALS) HELD THAT THE INTER EST PAID ON BORROWINGS COULD NOT BE DISALLOWED AND ACCORDINGLY DELETED THE ADDITION OF RS.21,19, 144/-. IT IS MATERIAL TO MENTION THAT THE DEPARTMENT HAS N OT PREFERRED AN APPEAL AGAINST THE ORDER OF THE CIT(AP PEALS) FOR AY 2005-06 BEFORE THE HON'BLE ITAT, KOLKATA. HOWEVE R IN THE VARIOUS GROUNDS TAKEN IN THE APPEAL THE DEPARTMENT HAS NOT OBJECTED TO THE CIT(APPEALS)'S ORDER DELETING THE I NTEREST DISALLOWED WITH REFERENCE TO INVESTMENT IN THE WHOL LY OWNED SUBSIDIARY. MEANING THEREBY THE DEPARTMENT HAS ACCE PTED THE FACTUAL FINDINGS OF THE CIT(APPEALS) TO THE EFFECT THAT THE INVESTMENTS WERE NOT MADE OUT OF INTEREST BEARING F UNDS. THE APPELLATE ORDER OF CIT(APPEALS) FOR AY 2005-06 TO T HE EXTENT OF DELETION OF INTEREST DISALLOWANCE HAS THEREFORE ATTAINED FINALITY. THE APPELLANT SUBMITS THAT THE FACTUAL MA TRIX INVOLVED IN THE APPELLATE ORDER PASSED BY YOUR PRED ECESSOR IN APPELLANT'S OWN CASE FOR AY 2005-06 IS PARI MATERIA TO THE FACTS INVOLVED IN THE RELEVANT YEAR UNDER CONSIDERA TION. IN THE IMPUGNED ORDER THE ASSESSING OFFICER HAS CATEGORICA LLY OBSERVED THAT THE APPELLANT HAS ONLY SINGLE INVESTM ENT IN ITS WHOLLY OWNED SUBSIDIARY DIC COATING INDIA LIMITED W HICH WAS ACQUIRED IN 1997. HE HAS ALSO NOTED THE FACT THAT T HE SHARES OF THE SUBSIDIARY WERE ACQUIRED PURSUANT TO SALE OF COATING BUSINESS TO THE LATTER IN TERMS OF A SCHEME OF ARRA NGEMENT APPROVED BY CALCUTTA HIGH COURT. UNDISPUTEDLY NO FR ESH INVESTMENTS WERE MADE IN THE YEAR UNDER CONSIDERATI ON. IN THE CIRCUMSTANCES WHEN THE FACT PERMEATING THROUGH THE YEARS IS EXACTLY THE SAME, IT IS PRAYED THAT FOLLOWING TH E ORDER PASSED BY YOUR ID. PREDECESSOR FOR THE ASSESSMENT Y EAR 2005- ITA NO. 315/KOL/14 M/S. DIC INDIA LTD 6 06, THE INTEREST OF RS.1, 14,63,036/- DISALLOWED BY THE AO UNDER SECTION 36( 1) (III) MAY KINDLY BE DELETED IN FULL. IN THE LIGHT OF THE ABOVE DISCUSSION & FINDINGS AN D PERUSING THE ENTIRE FACTS OF THE CASE INCLUDING THE FINDINGS OF THE AO, I AM INCLINED TO AGREE WITH THE CONTENTION OF THE A/R THE FACTUAL MATRIX INVOLVED IN THE APPELLATE ORDER PASSED BY MY PREDECESSOR IN APPELLANT'S OWN CASE FOR AY 2005-06 IS PARI MATERIA TO THE FACTS INVOLVED IN THE RELEVANT YEAR UNDER CONSIDERATION, IN THE IMPUGNED ORDER THE ASSESSING OFFICER HAS CATEGORICALLY OBSERVED THAT THE APPELLANT HAS ONLY SINGLE INVESTMENT IN ITS WHOLLY OWNED SUBSIDIARY DIC COATI NG LNDIO LIMITED WHICH WAS ACQUIRED IN 1997. HE HAS ALSO NOT ED THE FACT THAT THE SHARES OF THE SUBSIDIARY WERE ACQUIRED PUR SUANT TO SALE OF COATING BUSINESS TO THE LATTER IN TERMS OF A SCH EME OF ARRANGEMENT APPROVED BY CALCUTTA HIGH COURT. HENCE, UNDISPUTEDLY NO FRESH INVESTMENTS WERE MADE IN THE YEAR UNDER CONSIDERATION. UNDER THE FACTS AND IN THE CIRCUMSTA NCES WHEN THE FACT PERMEATING THROUGH THE YEARS IS EXACTLY TH E SAME, FOLLOWING THE ORDER PASSED BY MY PREDECESSOR FOR TH E ASSESSMENT YEAR 2005-06 IN APPELLANT'S OWN CASE, I DIRECT THE AO TO DELETE THE DISALLOWANCE OF INTEREST ON BORROW ED FUNDS OF RS.1,14,63,036/- MADE BY HIM UNDER SECTION 36(1)(II I) OF THE ACT. THUS, THESE GROUNDS OF APPEAL OF THE APPELLANT ARE ALLOWED. 8. THE REVENUE IN CHALLENGE BY RAISING AFOREMENTION ED GROUNDS AGAINST THE ORDER OF CIT-A IS IN APPEAL BEF ORE US. THE LD. DR RELIED ON THE ORDER OF AO. THE LD.AR SUBMITS THAT THE AO REPRODUCED THE ASSESSMENT ORDER PASSED FOR AY 20 05-06 AND REITERATED THE SAME SUBMISSIONS AS MADE IN THE FIRST APPELLATE PROCEEDINGS AND RELIED ON THE ORDER OF CI T-A. 9. HEARD RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FIND THAT THAT THE EQUITY S HARES OF THE SUBSIDIARY COMPANY I.E DIC COATINGS INDIA LTD WERE ACQUIRED PURSUANT TO SALE OF COATING BUSINESS BY THE ASSESSE IN TERMS OF A SCHEME OF ARRANGEMENT APPROVED BY HONBLE CALCUTT A HIGH COURT. THE CIT-A EXAMINED THE FACTS OF THE ORDER PA SSED BY THE CIT-A FOR A.Y 2005-06 AND FOUND SATISFIED THAT THE FACTS INVOLVED THEREIN IN THE FIRST APPELLATE ORDER FOR A Y 2005-06 IS ONE AND SAME TO THE FACTS OF CASE THE YEAR UNDER CO NSIDERATION. ITA NO. 315/KOL/14 M/S. DIC INDIA LTD 7 FURTHER, THE CIT-A FOUND THAT THE ASSESSEE INVESTED ONLY IN ITS WHOLLY OWNED SUBSIDIARY DIC COATING LNDIA LIMITED W HICH WAS ACQUIRED IN 1997 IN TERMS OF THE SCHEME APPROVED BY THE HONBLE HIGH COURT OF CALCUTTA. UNDISPUTEDLY, THE R EVENUE DID NOT CARRY THE FIRST APPELLATE ORDER FOR A.Y 2005-06 IN APPEAL TO THE HIGHER FORUMS HAVING JURISDICTION. THEREFORE, W E FIND NO INFIRMITY IN THE ORDER IMPUGNED BEFORE US AND THE S AID ORDER PASSED BY THE CIT-A IS JUSTIFIED IN DELETING THE DI SALLOWANCE OF INTEREST MADE ON ACCOUNT OF BORROWED FUNDS TO AN OF RS.1,14,63,036/- U/S. 36(1)(III) OF THE ACT AND CON FIRMED. ACCORDINGLY, GROUNDS RAISED BY THE REVENUE ARE DISM ISSED. 10. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 19 TH OCTOBER,2016 SD/- SD/- WASEEM AHMED S.S.VISWANE THRA RAVI ACCOUNTANT MEMBER JUDICIA L MEMBER DATED: 19/10/2016 1. THE APPELLANT/ DEPARTMENT : THE DEPUTY COMMISSIONER OF INCOME TAX, CIR-10, P-7 CHOWRINGHEE SQUARE, 3 RD FLOOR, KOL-69. 2 . THE RESPONDENT/ ASSESSEE: M/S. DIC INDIA LTD, TRANSPORT DEPOT ROAD, TARATOLA, KOL-88. 3. CIT 4. CIT(A) 5. THE DEPARTMENTAL REPRESENTATIVE 6. GUARD FILE TRUE COPY BY ORDER ASSISTANT REGIS TRAR ** PRADIP SPS INCOME TAX APPELLATE TRIBUNAL KOLKATA BENCHES, KOLKATA COPY OF THE ORDER FORWARDED TO : -