THE ACIT,CIRCLE-1, RAJAHMUNDRY., Rajahmundry V. M/s Asia Pacific Commodities Ltd, Tadepallegudem

ITA 350/VIZ/2012

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 5304 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 1 year(s) 2 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-12-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Assessment Year: 2009-2010
• Appeal Filed On: 21-09-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: D MANOJ KUMAR
• Keywords: Proportionate interest; Wholly owned subsidiary

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, VISHAKHAPATNAM BEFORE S/SHRI B. RAMAKOTAIAH (AM) & SAKTIJIT DEY (JM) I.T.A. NO S .349 & 350/VIZ/2012 ASSESSMENT YEARS :2008 - 09 & 2009 - 2010 ACIT, CIRCLE - 1, RAJAHMUNDRY, VS. ASIA PACIFIC COMMODITIES LTD., TANUKU ROAD, TADEPALLIGUDEM, WEST GODAVARI DIST, TADEPALLEGUDEM PAN/GIR NO. : AADCAA 6269 K ( APPELLANT ) .. ( RESPONDENT ) APPELLANT BY : SHRI D.MANOJ KUMAR, DR RESPONDENT BY : SHRI C.SUBRAHMANYAM DATE OF HEARING : 0 5/12/2013 DATE OF PRONOUNCEMENT : 0 6 /12/2013 O R D E R PER SAKTIJIT DEY, JM THE REVENUE HAS FILED BOTH THESE APPEALS FOR ASSESSMENT YEARS 2008 - 09 AND 2009 - 2010 AGAINST SEPARATE ORDERS DATED 28.06.2012 OF LD CIT(A) - VISAKHAPATNAM. 2. IN BOTH THE APPEALS, THE ONLY COMMON ISSUE RAISED BY THE REVENUE IS AS TO WHETHER LD CIT(A) WAS JUSTIFIED IN DELETING THE ADDITION MADE BY THE AO ON ACCOUNT OF INTEREST CHARGED ON INTEREST FREE ADV ANCE MADE TO SUBSIDIARIES. 3. SINCE FACTS ARE IDENTICAL AND ISSUE IS COMMON, WE DEAL WITH THE FACTS IN I.T.A. NO.349/VIZ/2 012 FOR ASSESSMENT YEAR 2008 - 09 AND DECISION WILL APPLY TO ASSESSMENT YEAR 2009 - 2010. 2 4. BRIEFLY STATED THE FACTS ARE THAT ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING EDIBLE OILS AND RELATED PRODUCTS. FOR THE ASSESSMENT YEAR UNDER DISPUTE, ASSESSEE FILED ITS RETURN OF INCOME DECLARING TOTAL INCOME OF RS.2,06,61,108/ - . INITIALLY THE RETURN WAS PROCESSED UNDER SECTION 143(1) OF THE ACT. SUBSEQUENTLY, ASSESSEES CASE WAS SELECTED FOR SCRUTINY AND DURING THE SCRUTINY ASSESSMENT PROCEEDINGS, AO WHILE EXAMINING THE BALANCE SHEET OF THE ASSESSEE NOTICED THAT UNDER THE HEAD LOANS AND ADVANCES AN AMOUNT OF RS.1,67,70,559/ - HAS BEEN S HOWN AS ADVANCE MADE TO SUBSIDIARIES. HOWEVER, ASSESSEE HAS NOT SHOWN ANY INTEREST INCOME ON THE AFORESAID ADVANCES. AO, THEREFORE, HELD THAT AS THERE IS NO BUSINESS ASSOCIATION WITH THE SUBSIDIARIES AND ASSESSEE HAD DIVERTED INTEREST BEARING FUNDS TO SISTER CONCERNS/SUBSIDIARIES, ASSESSEE IS LIABLE TO CHARGE INTEREST ON THE ADVANCES @ 11% PER ANNUM, THE RATE AT WHICH THE ASSESSEE COMPANY IS PAYING INTEREST TO BANKS ON BORROWED FUNDS. AO, THEREFORE, ASKED THE ASSESSEE TO EXPLAIN WHY INTEREST CALCULATE D @ 11% ON THE INTEREST FREE ADVANCE SHOULD NOT BE TREATED AS INCOME BY THE ASSESSEE. IN RESPONSE TO SHOW CAUSE NOTICE ISSUED BY THE ASSESSING OFFICER, ASSESSEE SUBMITTED THAT IT HAS FLOATED WHOLLY OWNED SUBSIDIARY COMPANIES IN THE NAME OF M/S. AUJASYA PO WER PROJECTS PVT LTD., AND M/S. ASIA RENEWABLE ENERGY (P) LTD., AND HAS MADE INTEREST FREE ADVANCE TO THESE TWO SUBSIDIARIES TOWARDS PURCHASE OF LAND AND TO DEVELOP POWER PROJECTS. IT WAS SUBMITTED THAT THE ADVANCE WAS MADE WITH A CONDITION THAT SUBSEQU ENTLY IT WILL BE CONVERTED INTO SHARE CAPITAL WHEN THE FINAL PROJECT TAKES OFF. IT WAS THEREFORE, CONTENDED THAT SINCE THE ADVANCE WAS MADE FOR BUSINESS EXPEDIENCY, NO ADDITION TOWARDS DISALLOWANCE OF INTEREST CAN BE MADE ON ACCOUNT OF INTEREST FREE ADVAN CE. IN SUPPORT OF THIS CONTENTION, ASSESSEE RELIED UPON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF S.A.BUILDERS, 288 ITR 1(SC). AO, HOWEVER, DID NOT ACCEPT THE CONTENTION OF THE ASSESSEE BY HOLDING THAT ASSESSEE COULD NOT ESTABLISH THE BUSINESS EXPEDIENCY IN ADVANCING INTEREST FREE FUNDS TO SUBSIDIARIES. HE, THEREFORE, HELD THAT THE RATIO LAID DOWN IN THE CASE OF S.A.BUILDERS (SUPRA) WILL NOT APPLY. AO FURTHER HELD THAT THE CONTENTION OF THE ASSESSEE THAT INTEREST FREE ADVANCES WERE MADE OUT OF SURPLUS FUNDS IS ALSO NOT ACCEPTABLE IN VIEW OF THE DECISION OF HONBLE KERALA HIGH COURT IN THE CASE OF CIT VS. V.I.BAY & CO., 25 4 ITR 248, WHEREIN, IT IS HELD THAT SO LONG AS THE ASSESSEE IS NOT BENEFICIARY OF THE INVESTMENTS, THE WORKING OUT OF PROPORTIONATE 3 DISALLOWANCE IS NOT DISPUTABLE. HE FURTHER REFERRING TO THE SAID DECISION NOTED THAT WHETHER THEY ARE FROM MONIES ON WHICH INTEREST IS PAID OR FROM C ASH BALANCES AVAILABLE WITH THE COMPANY, IS ALSO NOT RELEVANT BECAUSE IF CASH BALANCES ARE AVAILABLE THE BORROWING ITSELF IS NOT FOR THE PURPOSE OF THE BUSINESS AND AN ASSESSEE WITH LIQUIDITY CANNOT CLAIM THAT IT CAN GIVE INTEREST FREE ADVANCES TO THE OTHE RS AND THEN BORROW FUNDS FROM THE BANK ON INTEREST FOR BUSINESS PURPOSES. SUCH BORROWINGS WILL NOT BE FOR BUSINESS PURPOSES, BUT FOR SUPPLEMENTING THE CASH DIVERTED BY THE ASSESSEE WITHOUT ANY BENEFIT TO IT. HE FURTHER NOTED THAT ASSESSEE HAS ALLOCATED S HARES TO THE EXTENT OF RS.198000 TO THE SUBSIDIARIES. AO HOLDING THAT SAID AMOUNTS WERE ADVANCED FROM THE INTEREST BEARING BORROWED FUNDS, FINALLY CAME TO CONCLUSION THAT THE INTEREST IS TO BE CHARGED ON ACCOUNT OF ADVANCING OF INTEREST FREE FUNDS TO THE SUBSIDIARIES AND CALCULATED @ 11% WHICH WOULD BE RS.17,45,827/ - AND, ACCORDINGLY ADDED THE SAME TO THE INCOME OF THE ASSESSEE. BEING AGGRIEVED OF SUCH ADDITION, ASSESSEE PREFERRED APPEAL BEFORE THE CIT(A). 5. LD CIT(A) AFTER CONSIDERING THE CONTENTION OF THE ASSESSEE IN THE LIGHT OF THE RATIO LAID DOWN IN THE CASE OF S.A.BUILDERS (SUPRA) AND ALSO FOLLOWING THE DECISION OF A COORDINATE BENCH OF THIS TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2006 - 07 ON SIMILAR ISSUE, DELETED THE ADDITION MADE B Y THE AO, INTER ALIA, OBSERVING AS UNDER: DURING THE APPELLATE PROCEEDINGS, IT IS POINTED OUT BY THE ASSESSEE THAT SIMILAR DISALLOWANCE WAS MADE IN THE EARLIER YEAR I.E. IN ASSESSMENT YEAR 2006 - 07 AND THE ISSUE WAS CONTESTED BEFORE THE HONBLE ITAT, VISAK HAPATNAM. HONBLE ITAT, VISAKHAPATNAM VIDE ITS ORDER DT.19.8.2010 IN I.T.A. NO.383/V/2009 HELD THAT THE ISSUE IS SQUARELY COVERED BY THE HONBLE APEX COURT JUDGMENT IN THE CASE OF S.A.BUILDERS IN FAVOUR OF THE ASSESSEE. HONBLE ITAT THUS DELETED THE ADDI TION MADE ON ACCOUNT OF DISALLOWANCE OF PROPORTIONATE INTEREST. I HAVE GONE THROUGH THE SAID DECISION OF THE HONBLE TRIBUNAL AND FIND THAT THE ASSESSEES CASE FOR THE CURRENT YEAR IS SQUARELY COVERED BY THE HONBLE TRIBUNALS DECISION CITED ABOVE. THEREF ORE, RESPECTFULLY FOLLOWING THE HONBLE TRIBUNALS DECISION, I DIRECT THE AO TO DELETE THE ADDITION MADE. 6. WE HAVE CONSIDERED SUBMISSIONS OF LD REPRESENTATIVES OF PARTIES AND ORDERS OF AUTHORITIES BELOW. IT IS THE CONTENTION OF LD D.R. THAT LD CIT(A) W AS NOT JUSTIFIED IN 4 DELETING THE ADDITION ONLY RELYING UPON THE DECISION OF COORDINATE BENCH OF THIS TRIBUNAL IN EARLIER YEARS AS EACH ASSESSMENT YEAR IS INDEPENDENT AND PRINCIPLE OF RES - JUDICATA DOES NOT APPLY TO THE INCOME TAX PROCEEDINGS. IT IS THE FUR THER CONTENTION OF LD D.R. THAT UNLESS BUSINESS EXPEDIENCY FOR ADVANCING THE INTEREST FREE AMOUNT IS SUBSTANTIATED, ADDITION CAN BE MADE ON THAT ACCOUNT. 7. ON THE OTHER HA ND, IT IS THE CONTENTION OF LD A .R. THAT THE RATIO OF THE DECISION OF COORDINATE BEN CH IN ASSESSEES CASE SQUARELY APPLY TO THIS YEAR ALSO AS THE FACTS ARE IDENTICAL. IN SUPPORT OF SUCH CONTENTION, LD A.R. PLACED A COPY OF THE ORDER PASSED BY THIS TRIBUNAL IN I.T.A. NO.383/VIZ/2009 DT.19.8.2010, RELATING TO ASSESSMENT YEAR 2006 - 07. 8. TH ERE IS NO DISPUTE TO THE FACT THAT M/S. AUJASYA POWER PROJECTS PVT LTD., AND M/S. ASIA RENEWABLE ENER GY (P) LTD., ARE SUBSIDIARIES OF THE ASSESSEE. IT IS ALSO THE CONSISTENT STAND OF THE ASSESSEE BEFORE THE AO AS WELL AS BEFORE LD CIT(A) THAT THE ADVANCES WERE MADE TO THE SUBSIDIARIES ON ACCOUNT OF BUSINESS EXPEDIENCY FOR THE PURPOSE OF PURCHASE OF LAND AND TO DEVE LOP POWER PROJECTS AS THE POWER GENERATED BY THEM CAN BE UTILIZED BY THE ASSESSEE IN FUTURE. IT IS ALSO THE CASE OF THE ASSESSEE THAT INTEREST F REE ADVANCE ULTIMATELY WILL BE CONVERTED INTO SHARE CAPITAL WHEN THE PROJECTS FINALLY TAKE OFF. IN THIS CONTEXT, LD A.R. SUBMITTED THAT DURING THE CURRENT YEAR, THE INTEREST FREE ADVANCE HAS BEEN CONVERTED TO EQUITY. ON PERUSAL OF THE ASSESSMENT ORDER, I T BECOMES CRYSTAL CLEAR THAT THE AO HAS BASICALLY REJECTED THE CONTENTION OF THE ASSESSEE BY HOLDING THAT ASSESSEE HAS NOT SUBSTANTIATED BUSINESS EXPEDIENCY OF ADVANCING INTEREST FREE MONEY TO THE SUBSIDIARIES. IN THIS CONTEXT, WE MAY REFER TO THE ORDER O F THE COORDINATE BENCH IN ASSESSEES CASE FOR ASSESSMENT YEAR 2006 - 07 (SUPRA). THE COORDINATE BENCH AFTER CONSIDERING THE CONTENTIONS OF THE ASSESSEE THAT INTEREST FREE ADVANCE WAS MADE FOR THE PURPOSE OF BUSINESS AS ASSESSEE CAN UTILIZE THE POWER GENERAT ED BY IT ONCE THE PROJECT IS COMPLETE, HELD THAT IN VIEW OF THE RATIO LAID DOWN BY THE SUPREME COURT IN THE CASE OF S.A.BUILDERS (SUPRA), SINCE INTEREST FREE ADVANCES WERE FOR THE PURPOSES OF BUSINESS, NO PRESUMPTIVE ADDITION SDE CAN BE MADE BY COMPUTING IN TEREST ON THE SAID INTEREST FREE ADVANCE. WE FIND THAT THE FACTS IN THE PRESENT CASE ARE IDENTICAL TO THE FACTS FOR THE ASSESSMENT YEAR 2006 - 07(SUPRA) ON THE 5 BASIS OF WHICH, COORDINATE BENCH HAS DECIDED THE ISSUE. THE DEPARTMENT HAS NOT BROUGHT ANY OTHER MATERIAL OR EVIDENCE TO CONTROVERT THE FINDINGS OF THE COORDINATE BENCH. HENCE, RESPECTFULLY FOLLOWING THE DECISION OF COORDINATE BENCH (SUPRA), WHICH IS ON THE BASIS OF THE RATIO LAID DOWN IN THE CASE OF S.A.BUILDERS (SUPRA), WE UPHOLD THE ORDER OF LD C IT(A) BY REJECTING THE GROUNDS OF APPEAL TAKEN BY THE DEPARTMENT. 9. I N THE RESU LT, THE APPEALS OF THE REVENUE ARE DISMISSED . ORDER PRONOUNCED IN THE OPEN COURT ON 6 / 12/2013. . SD/ - S D/ - (B.RAMAKOTAIAH ) ( SAKTIJIT DEY ) ACCOUNTANT MEMBER JUDICIAL MEMBER VISHAKHAPATNAM DATED 0 6 / 12/2013 PARIDA , SR. PS COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT : ACIT, CIRCLE - 1, RAJAHMUNDRY 2. THE RESPONDENT. : ASIA PACIFIC COMMODITIES LTD., TANUKU ROAD, TADEPALLIGUDEM, WEST GODAVARI DIST, TADEPALLEGUDEM 3. THE CIT(A) - VISAKHAPATNAM 4. CIT CONCERNED 5. DR, ITAT, VISHAKHAPATNAM 6. GUARD FILE. BY ORDER SR.PS, ITAT, VISHAKHAPATNAM //TRUE COPY//