ACIT, CIRCLE - I (1), CHENNAI V. M/S. TCP LIMITED, CHENNAI

ITA 3358/CHNY/2019

• Counselvise Citation: [2021] 107 COUNSELVISE.COM (IT) 8521 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 7 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-08-2021
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 04-05-2021
• Assessment Year: 2005-2006
• Appeal Filed On: 12-12-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: G JOHNSON
• Assessee Lawyers: MRS S VIDYA
• Keywords: Proportionate interest; Reassessment proceedings; Set aside
• Section: 10

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , A B ENCH, CHENNAI , . , % BEFORE SHRI MAHAVIR SINGH, VICE-PRESIDENT AND SHRI G.MANJUNATHA, ACCOUNTANT MEMBER ./ I.T.A.NO.3358/CHNY/2019 ( / ASSESSMENT YEAR: 2005-06) THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-I(1) CHENNAI-34. VS M/S. TCP LTD. 10, TCP SAPTHAGIRIBHAVAN KARPAGAMBAL NAGAR, MYLAPORE, CHENNAI-600 004 . PAN: AAACT 3615K ( /APPELLANT) ( /RESPONDENT) / APPELLANT BY : MR. G.JOHNSON, ADDL.CIT /RESPONDENT BY : MRS.S.VIDYA, C.A /DATE OF HEARING : 06.07.2021 /DATE OF PRONOUNCEMENT : 09.08.2021 / O R D E R PER G.MANJUNATHA, AM: THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAIN ST THE ORDER OF THE LEARNED CIT(A)-18, CHENNAI DATED 13.09 .2019 AND PERTAINS TO ASSESSMENT YEAR 2005-06. 2. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL:- 1. THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) IS ERRONEOUS ON FACTS OF THE CASE AND IN LAW. 2. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE ID. CIT(A) WAS CORRECT IN DELETING THE INTEREST DISALLOWANCE OF RS.4,39,58,399/-? 2 ITA NO.3358/CHNY/2019 3. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE ID. CIT(A) WAS CORRECT IN NOT APPRECIATING THE FACT THAT THE GENERAL RESERVE AND BALANCES IN PROFIT AND LOSS ACC OUNT CANNOT BE CONSIDERED AS LIQUID CASH AVAILABLE FOR I MMEDIATE DISBURSEMENT? 4. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE ID. CIT(A) WAS CORRECT IN NOT APPRECIATING THE FACT THAT THE GENERAL RESERVE AND BALANCES IN P8& L ACCOUNT BEING NON- LIQUIDABLE, IMMEDIATE SOURCE FOR INTEREST FREE ADVA NCES IS FROM ITS CC ACCOUNT HELD WITH BANK, AN INTEREST BEARING BORROWING? 5. FOR THESE GROUNDS AND ANY OTHER GROUND INCLUDING AMENDMENT OF GROUNDS THAT MAY BE RAISED DURING THE COURSE OF THE APPEAL PROCEEDINGS, THE ORDER OF LEARNED CIT (APPEALS) MAY BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A DOMESTIC COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF CHEMICALS AND GENERATION OF POWER FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2005-06 ON 31.10.2005 DECLARI NG TOTAL INCOME OF ` NIL UNDER THE NORMAL PROVISIONS OF INCOME TAX ACT, 1961 AND BOOK PROFIT OF RS.35,10,88,600/- U/S.115J B OF THE ACT. THE ASSESSMENT FOR IMPUGNED ASSESSMENT YEAR HAS BE EN COMPLETED U/S.143(3) OF THE ACT, ON 28.12.2017 AND DETERMINED TOTAL INCOME OF RS.30,26,90,998/- BY MA KING ADDITIONS TOWARDS DISALLOWANCE OF PROPORTIONATE IN TEREST 3 ITA NO.3358/CHNY/2019 TOWARDS DIVERSION OF INTEREST FREE FUNDS TO RELATE D PARTIES WITHOUT CHARGING ANY INTEREST. 4. THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LEARNED CIT(A) AND THE LEARNED CIT(A) FOR THE REAS ONS STATED IN HIS APPELLATE ORDER DATED 13.09.2019 AND BY FOLLOWI NG THE DECISION OF ITAT., CHENNAI IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2004-05 IN ITA NO.1629/CHNY/2018 DA TED 08.05.2019, DELETED ADDITIONS MADE BY THE ASSESSING OFFICER TOWARDS DISALLOWANCE OF PROPORTIONATE INTEREST BY HOLDING THAT NO INTEREST BEARING FUNDS HAS BEEN USED FOR ADVANCE LOANS TO RELATED PARTIES AND CONSEQUENTLY, PROPORTIONATE IN TEREST INCURRED ON LOANS CANNOT BE DISALLOWED. AGGRIEVED BY THE LEARNED CIT(A) ORDER, THE REVENUE IS IN APPEAL BEF ORE US. 5. THE LEARNED DR APPEARING FOR THE REVENUE SUBMITT ED THAT LEARNED CIT(A) HAS ERRED IN DELETING INTEREST DISAL LOWANCE WITHOUT APPRECIATING FACT THAT THE ASSESSEE HAS DIV ERTED INTEREST BEARING FUNDS TO RELATED PARTIES FOR NON-BUSINESS PURPOSES AND HENCE, PROPORTIONATE INTEREST RELATABLE TO DIVERSI ON OF FUNDS NEEDS TO BE DISALLOWED. THE LEARNED DR FURTHER SUB MITTED THAT 4 ITA NO.3358/CHNY/2019 LEARNED CIT(A) WAS NOT CORRECT IN HOLDING THAT THE ASSESSEE HAS GIVEN LOANS OUT OF ITS OWN FUNDS BEING GENERAL RESERVES WITHOUT APPRECIATING THE FACT THAT GENERAL RESERVE AND BALANCE OF PROFIT & LOSS ACCOUNT CANNOT BE CONSIDERED AS L IQUID CASH AVAILABLE FOR IMMEDIATE DISBURSEMENT. 6. THE LEARNED AR FOR THE ASSESSEE, ON THE OTHER HAND, SUBMITTED THAT THE ISSUE IS SQUARELY COVERED IN FAV OUR OF THE ASSESSEE BY THE DECISION OF ITAT IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2004-05 IN ITA NO.1629/CHNY/2018, W HERE THE TRIBUNAL BY FOLLOWING DECISION OF THE HONBLE B OMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIES & P OWER LTD. (313 ITR 340) HELD THAT WHEN MIXED FUNDS ARE USED FOR G IVING LOANS AND ADVANCES, A GENERAL PRESUMPTION GOES IN FAVOUR OF THE ASSESSEE THAT LOANS AND ADVANCES ARE GIVEN OUT OF ITS OWN FUNDS, AND CONSEQUENTLY, NO DISALLOWANCE CAN BE MAD E TOWARDS PROPORTIONATE INTEREST EXPENSES. 7. WE HAVE HEARD BOTH THE PARTIES, PERUSED MATERIAL AVAILABLE ON RECORD AND GONE THROUGH ORDERS OF THE AUTHORITIES BELOW. THE ISSUE IS SQUARELY COVERED IN FAVOUR OF T HE ASSESSEE 5 ITA NO.3358/CHNY/2019 BY THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN C ASE FOR ASSESSMENT YEAR 2004-05, WHERE THE TRIBUNAL BY FOLL OWING MIXED FUNDS THEORY IN LIGHT OF THE DECISION OF HON BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIE S & POWER LTD. (SUPRA), HELD THAT WHEN INTEREST FREE LOAN IS EXTEN DED THEY ARE FIRSTLY SOURCED OUT OF INTEREST FREE FUNDS AND IF I T IS NOT SUFFICIENT TO COVER UP THE ENTIRE EXTENT OF INTEREST FREE LOAN , THE BALANCE IS MET OUT OF INTEREST BEARING FUNDS. THE TRIBUNAL FU RTHER NOTED THAT IN THE PRESENT CASE, THE ASSESSEE HAS SUFFICI ENT OWN FUNDS BEING SHARE CAPITAL, RESERVES AND BALANCE IN PROFI T & LOSS ACCOUNT, WHICH IS SUFFICIENT TO COVER LOANS GIVEN TO RELATED PARTIES WITHOUT ANY INTEREST AND HENCE, NO INTERE ST COULD BE DISALLOWED FOR DIVERSION OF FUNDS TO RELATED PARTIE S. THE RELEVANT FINDINGS OF THE TRIBUNAL ARE AS UNDER:- 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREF ULLY PERUSED THE MATERIALS ON RECORD. FROM THE FACTS OF THE CASE , IT IS APPARENT THAT THE LOAN EXTENDED BY THE ASSESSEE COM PANY TO ITS SISTER CONCERNS ARE LESS THAN THE AGGREGATE OF THE ASSESSEES EQUITY SHARE CAPITAL, GENERAL RESERVES, ACCUMULATED PROFITS AND RESERVES AND THE SAME IS NOT IN DISPUTE . IT IS ALSO APPARENT THAT THE ASSESSEE COMPANY HAS BEEN CONSIST ENTLY UTILIZING THE CASH GENERATED FROM EQUITY SHARE CAPI TAL, GENERAL RESERVES, ACCUMULATED PROFITS AND SURPLUS FOR ITS B USINESS PURPOSES. DURING THE RELEVANT ASSESSMENT YEARS IT A PPEARS THAT 6 ITA NO.3358/CHNY/2019 THE ASSESSEE COMPANY HAS OBTAINED INTEREST BEARING LOAN AND PASSED ON THE SAME TO ITS SISTER CONCERNS AS INTERE ST FREE LOANS. FROM THE ABOVE FACTS, IT IS OBVIOUS THAT THE ASSESS EE COMPANY MIGHT HAVE DIVERTED ITS INTEREST BEARING FUNDS TO I TS SISTER CONCERNS AS INTEREST FREE LOAN. NEVERTHELESS IT IS ALSO PERTINENT TO MENTION THAT THE ASSESSEES OWN FUNDS SUCH AS EQ UITY SHARE CAPITAL, GENERAL RESERVES, ACCUMULATED PROFITS AND SURPLUSARE MUCH MORE THAN THE INTEREST FREE LOAN EXTENDED TO T HE ASSESSEES SISTER CONCERN. AS POINTED OUT BY THE LD .AR THERE IS NO PROHIBITION UNDER THE ACT FOR THE ASSESSEE COMPA NY TO CONDUCT ITS BUSINESS ENTIRELY OUT OF BORROWED FUNDS AND IN SUCH SITUATION, THE INTEREST EXPENDITURE INCURRED BY THE ASSESSEE IS ALLOWABLE AS DEDUCTION AS PER THE PROVISIONS OF THE ACT. FURTHER THE ASSESSEE COMPANY IS ALSO AT LIBERTY TO DEPLOY I TS ENTIRE INTEREST FREE FUNDS IN WHATSOEVER MANNER IT DEEMS F IT SUBJECT TO THE SANCTIONS GRANTED UNDER THE MEMORANDUM OF ASSOC IATION OF THE ASSESSEE COMPANY AND YET CARRY OUT ITS BUSINESS SOURCED FROM INTEREST BEARING FUNDS. IN AN IDENTICAL SITUAT ION IN THE CASE CIT VS. RELIANCE UTILITIES AND POWERS LTD., REPORTE D IN 313 ITR 340 WHEREIN THE ASSESSEE HAD EQUITY SHARE CAPITAL O F RS.180 CRORES, RESERVES & SURPLUS RS,120.80 CRORES, DEPR ECIATION RESERVES OF RS.95.39 CRORES AGGREGATING TO RS.398.1 9 CRORES, THE ASSESSING OFFICER HAD RECORDED A FINDING THAT T HE SUM OF RS.213 CRORES WAS INVESTED OUT OF THE ASSESSEES OW N FUNDS AND RS.147 CRORES WAS INVESTED OUT OF BORROWED FUND S AND THEREFORE DISALLOWED INTEREST AMOUNTING TO RS.4.4 C RORES CALCULATED AT 12% PER ANNUM FOR 3 MONTHS FROM JAN 2000 TO MAR 2000, THE HONBLE BOMBAY HIGH COURT HAD HELD T HAT: IF THERE WERE FINDS AVAILABLE BOTH INTEREST FREE A ND OVERDRAFT AND/OR LOANS TAKEN, THEN A PRESUMPTION WO ULD ARISE THAT INVESTMENTS WOULD BE OUT OF THE INTEREST -FREE 7 ITA NO.3358/CHNY/2019 FUNDS GENERATED OR AVAILABLE WITH THE COMPANY, IF T HE INTEREST-FREE FUNDS WERE SUFFICIENT TO MEET THE INVESTMENTS. IN THIS CASE THIS PRESUMPTION WAS ESTABLISHED CONSIDERING THE FINDING OF FACT BOTH BY THE COMMISSIONER (APPEALS) AND THE TRIBUNAL. THE INTERE ST WAS DEDUCTIBLE. 6.1 FURTHER IN THE CASE CIT VS. HOTEL SAVERA REPORT ED IN 239 ITR 795 WHEREIN THE FACTS WERE THAT: THE ASSESSEE WAS A REGISTERED FIRM AND ITS ORIGINA L ASSESSMENT FOR THE ASSESSMENT YEAR 1972-73, WAS COM PLETED ALLOWING A CERTAIN AMOUNT IF INTEREST PAID BY THE A SSESSEE ON ITS BORROWING FOR THE PURPOSE OF BUSINESS, LATER, T HE REVENUE AUDIT POINTED OUT THAT SOME OF THE MONEYS WHICH THE ASSESSEE HAD BORROWED HAD BEEN UTILIZED FOR THE ADVANCE OF L OANS TO A PRIVATE LIMITED COMPANY AND ON SUCH LENDING NO INTE REST HAD BEEN CHARGED. REASSESSMENT PROCEEDINGS WERE STARTED AND A PART OF THE INTEREST WAS DISALLOWED. THE TRIBUNAL F OUND THAT THE TOTAL AMOUNT IN THE PARTNERS CAPITAL AND CURRENT A CCOUNT WAS GREATER THAN THE AMOUNT ADVANCED TO THE PRIVATE COM PANY. THE TRIBUNAL FOUND THAT THE AMOUNT BORROWED BY THE FIRM HAD BEEN MIXED WITH ITS OWN FUNDS AND HENCE THE PRESUMP TION WAS THAT THE AMOUNT HAD BEEN ADVANCED HI THE FIRM //ONI ITS OWN FUNDS. IT ALLOWED DEDUCTION OF THE ENTIRE AMOUN T OF INTEREST ON BORROWED CAPITAL. SUBSEQUENTLY THE HONBLE JURISDICTIONAL MADRAS HIGH COURT HELD THAT THERE WAS A TOTAL AMOUNT CREDITED IN THE PARTNERS CAPITAL AS WELL AS CURRENT ACCOUNT. A SIMM OF RS,1O,95,O1O WAS ARRIVED AT IN THE PARTNERS ACCOUNT AFTER TAKING NOTE OF AL L THE DRAWINGS MADE BY THEM AND THE LOSSES THAT WERE INCURRED IN T HE BUSINESS FOR THE YEAR ENDED ON MARCH 31,1972. EVEN AFTER DEB ITING THE 8 ITA NO.3358/CHNY/2019 DRAWINGS AND THE LOSS IN THE BUSINESS, THE JCTS SHO WED THAT THERE WERE SUFFICIENT FUNDS WITH THE FIRM TO COVER THE ENTIRE ADVANCE TO THE PRIVATE LIMITED COMPANY. THE REVENUE HAD NOT MADE ANY ATTEMPT BEFORE THE TRIBUNAL TO SHOW THAT T HE FIRM HAD PAID INTEREST ON THE AMOUNT OUTSTANDING IN THE ACCO UNTS OF THE PARTNER. THERE WAS NO FINDING EITHER BY THE ASSESSI NG AUTHORITY OR BY THE APPELLATE ASSISTANT COMMISSIONER OR BY TH E TRIBUNAL THAT THE FIRM HAD PAID INTEREST TO THE PARTNERS ON THE CREDIT BALANCE. IN SUCH A SITUATION, THE POSITIONTHAT REMA INED WAS THAT THE FIRM HAD ITS OWN FUNDS AS WELL AS BORROWED FIEN DS. IT WAS NOT CLEAR THAT THE FIRM HAD NOT ADVANCED MONEY OUT 0/IT S OWN FUNDS AND IN THE ABSENCE OF ANY MATERIALS TO INDICATE THA T THE FIRM HAD ADVANCED MONEYS TO THE PRIVATE LIMITED COMPANY OUT OF FUNDS BORROWED FUR BUSINESS PURPOSES. THE PRESUMPTION WOU LD ARISE, WHERE THERE WAS A COMMON FUND, THAT THE MONEY ADVAN CED CAME ONLY OUT OF ITS OWN FUNDS. THE TRIBUNAL WAS RI GHT IN HOLDING THAT NO PART OF THE INTEREST SHOULD BE DISA LLOWED ESPECIALLY IN THE ABSENCE OF ANY FINDING THAT THE M ONEY BORROWED WAS ADVANCED TO THE PRIVATE LIMITED COMPAN Y FREE OF INTEREST. 6.2 FURTHER ON SIMILAR SITUATION THIS BENCH OF THE TRIBUNAL ON IDENTICAL SITUATION IN THE CASE MIS. TIL HEALTHCARE PVT. LTD. IN ITA NO. 2416/CHNY/2017 VIDE ORDER DATED 17.04.2018 FOLLOWING THE DECISION OF THE HONBLE JURISDICTIONAL MADRAS H IGH COURT IN THE CASE CIT VS. HOTEL SAVERA AND THE DECISION OF T HE HONBLE BOMBAY HIGH COURT IN THE CASE CIT VS. RELIANCE UTIL ITIES & POWER LTD., DELETED THE ADDITION MADE BY THE LD.AO WHEN THE ASSESSEE HAD INTEREST FREE FUNDS SUCH AS SHARE CAPI TAL AND RESERVES & SURPLUS IN EXCESS TO THE INTEREST FREE L OAN EXTENDED BASED ON THE PRESUMPTION THAT INTEREST FREE LOAN WA S EXTENDED SOURCED FROM ITS INTEREST FREE FUNDS. 9 ITA NO.3358/CHNY/2019 6.3 IT IS A WELL KNOWN FACT THAT WHEN FUNDS ARE PO OLED IN TOGETHER THEY GET INTRINSICALLY MIXED UP AND CANNOT BE PHYSICALLY IDENTIFIED AS TO FROM WHICH SOURCE SUCH FUNDS HAVE BEEN SOURCED. ITIS AKIN TO A SITUATION WHEN A PILE OF WA TER IS ACCUMULATED FROM DIFFERENT SOURCE THEN THE IDENTITY OF THE SOURCE LOSES ITS CHARACTERISTICS. IN SUCH SITUATION VARIOUS HIGHER JUDICIARY HAS HELD THAT WHEN FUNDS FROM DIFFERENT S OURCE SUCH AS NON INTEREST BEARING SOURCE(OWN SOURCE) AND INTE REST BEARING SOURCE SUCH AS EQUITY SHARE CAPITAL, GENERAL RESERV ES, ACCUMULATED PROFITS, RESERVES AND INTEREST BEARING LOAN RECEIVED ARE MIXED UP BY WAY OF INTRODUCING THEM IN THE BOOKS OF ACCOUNTS THEN THERE IS A PRESUMPTION THAT WHEN I NTEREST FREE LOAN IS EXTENDED THEY ARE FIRSTLY SOURCED OUT OF IN TEREST FREE FUNDS AND IF IT NOT SUFFICIENT TO COVER UP THE ENTI RE EXTEND OF INTEREST FREE LOAN THE BALANCE IS MET OUT OF INTERE ST BEARING FUNDS. IN THE CASE OF THE ASSESSEE, THE ASSESSEES EQUITY SHARE CAPITAL, GENERAL RESERVES, ACCUMULATED PROFITS AND RESERVES EXCEEDS THE INTEREST FREE LOAN EXTENDED DURING THE RELEVANT ASSESSMENT YEARS AND THE SAME IS NOT IN DISPUTE. TH EREFORE THE FACTS IN THE CASE OF THE ASSESSEE ARE IDENTICAL TO THE CASE DECIDED BY THE HONBLE JURISDICTIONAL MADRAS HIGH C OURT, HONBLE BOMBAY HIGH COURT, AND THE CHENNAI BENCHES OF THE TRIBUNAL CITED HEREIN ABOVE. HENCE RESPECTFULLY FOL LOWING THE DECISION OF THE HIGHER JUDICIARY WE HEREBY DIRECT T HE LD.AO TO DELETE THE ADDITION MADE BY DISALLOWING THE PROPORT IONATE INTEREST TOWARDS THE INTEREST FREELOAN EXTENDED FOR ALL THE RELEVANT ASSESSMENT YEARS IN APPEAL BEFORE US. IT I S ALSO PERTINENT TO MENTION THAT THE DECISION CITED BY THE LD. DR IN THE CASE K.SOMASUNDRAM & BROS SUPRA HAS NO APPLICATION TO THE CASE OF THE ASSESSEE BECAUSE THERE IS NO FINDING IN THAT CASE REGARDING THE EQUITY SHARE CAPITAL, GENERAL RESERVE S, AND 10 ITA NO.3358/CHNY/2019 ACCUMULATED PROFITS AND RESERVES OF THE ASSESSEE CO MPANY TO BE IN EXCESS OF THE INTEREST FREE LOAN EXTENDED. 8. IN THIS VIEW OF THE MATTER AND CONSISTENT WITH T HE VIEW TAKEN BY THE CO-ORDINATE BENCH, WE ARE OF THE CONSI DERED VIEW THAT THERE IS NO ERROR IN THE FINDINGS RECORDED BY THE LEARNED CIT(A) TO DELETE DISALLOWANCES MADE BY THE ASSESSIN G OFFICER TOWARDS PROPORTIONATE INTEREST AND HENCE, WE ARE IN CLINED TO UPHOLD FINDINGS OF THE LEARNED CIT(A) AND DISMISS A PPEAL FILED BY THE REVENUE. 9. IN THE RESULT, APPEAL FILED BY THE REVENUE IS DI SMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 9 TH AUGUST, 2021 SD/- SD/ ( ) ( . ) (MAHAVIR SINGH) (G. MANJUNATHA ) / VICE-PRESIDENT % / ACCOUNTANT MEMBER ' /CHENNAI, ( / DATED 9 TH AUGUST, 2021 DS *+ ,+ /COPY TO: 1. APPELLANT 2. RESPONDENT 3. - () /CIT(A) 4. - /CIT 5. + 1 /DR 6. /GF .