M/s. Ecoplast Ltd., Valsad V. Asst. Cmmissioner of Income Tax,Valsad Renge, Valsad

ITA 545/SRT/2019

AI Insights

Ecoplast Ltd. appealed against the order of the Commissioner of Income Tax (Appeals), which confirmed the disallowance of notional interest expenses on an interest-free loan of Rs.3,72,18,771 given to its subsidiary, M/s Synergy Films Pvt. Ltd. The Assessing Officer had initially disallowed the interest expense, attributing it to the interest-bearing loans of the assessee. The Tribunal, however, found that the loans to the subsidiary were financed from the company's own interest-free funds, and thus, the disallowance was not justified. The Tribunal's decision was influenced by precedents and the principle that a parent company can utilize its free funds to support its wholly-owned subsidiary.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 301883 (ITAT-SURAT)
• Duration Of Justice: 3 year(s) 4 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-03-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 22-02-2023
• Assessment Year: 2016-2017
• Appeal Filed On: 28-11-2019
• Other Referred Cases: S. A. Builders Ltd. vs CIT (A), Chandigarh, CIT vs Dalmia Cement Ltd., CIT vs. Reliance Utilities and Power Ltd
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: SAPNESH SHETH
• Keywords: Proportionate interest; Wholly owned subsidiary; Commercial expediency; Revenue expenditure
• Section: 142(1); 143(1); 143(2)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, SURAT BENCH, SURAT BEFORE SHRI PAWAN SINGH, JM & DR. A. L. SAINI, AM आयकर अपील सं./ITA No.545/SRT/2019 Ǔनधा[रण वष[/Assessment Year: (2016-17) (Physical Court Hearing) Ecoplast Ltd., S No.309, National Highway No.8, Water Works Cross Road, Abrama, Valsad – 396002. Vs. The ACIT, Valsad Circle, Valsad. (Assessee) (Respondent) èथायीलेखासं./जीआइआरसं./PAN/GIR No.: AAACE5030H Assessee by Shri Sapnesh Sheth, CA Respondent by Shri Vinod Kumar, Sr. DR Date of Hearing 23/02/2023 Date of Pronouncement 30/03/2023 आदेश / O R D E R PER DR. A. L. SAINI, AM: Captioned appeal filed by the assessee, pertaining to Assessment Year (AY) 2016-17, is directed against the order passed by the Learned Commissioner of Income Tax (Appeals), Valsad [in short “the ld. CIT(A)”], in Appeal No. ITBA/APL/S/250/2019-20/1018802572(1), dated 11.10.2019, which in turn arises out of an assessment order passed by Assessing Officer under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”), dated 14.12.2018. 2. The grounds of appeal raised by the assessee are as follows: “1) Disallowance of Interest Expenses of Rs.47,82,612 related to Interest free Advance/loan given to its subsidiary company. The Hon’ble CIT(A) has erred in confirming the disallowance of notional interest expense attributable to interest free Advance/loan of Rs.3,72,18,771/- given by Assessee to its subsidiary Company M/s Synergy Films Pvt. Ltd. at an average rate of 12.85% on the loans taken by the assessee, disregarding the fact that the loan advanced to Subsidiary Company out of commercial expediency was financed from interest free funds accumulated by the Company. Page | 2 ITA 545/SRT/2019/AY.2016-17 Ecoplast Ltd. 2) The assessee craves, to consider the above grounds of appeal without prejudice to each other and craves leaves to add, alter, delete or modify all or any of the above grounds of appeal on or before the final date of hearing.” 3. Succinct facts are that assessee before us is a private limited company and filed its original return of income for FY.2015-16 relevant to AY.2016-17 on 20/09/2016 declaring total income of Rs.4,44,29,190/-. The assessee Company is stated to be engaged in the business of manufacturing of plastics. The assessee Company was deriving income from Business or Profession and other sources during the year. The return was processed under section 143(1) of the IT Act, 1961. Thereafter, the assessee’s case was selected for scrutiny and accordingly, notice under section 143(2) of the Act was issued on 28/09/2017 and duly served upon the assessee. Subsequently, notices under section 142(1) of the Act with questionnaire were sent to assessee from time to time, for seeking further details. On verification of details furnished by the assessee company, it was observed by Assessing Officer that the assessee has lent interest free Advance/loan of Rs.3,72,18,771/- to its subsidiary company, M/s Synergy Films Pvt. Ltd. Whereas the assessee has taken loan of Rs.10,39,57,784/- which comprises of long term and short term loan from various financial Institutions, it has long term borrowing of Rs.3,26,70,450/- and short term borrowing of Rs.7,12,87,334/- and paying interest expenses of Rs. 1,33,54,616/-. Thus, the assessee is paying interest on the borrowing and the same is claimed as revenue expenditure under Financial Account and it was observed by AO that average rate of interest paid for the purpose is 12.85% on loan taken. 4. Since the assessee has lent out interest free loan, where as it is paying interest at rate i.e. 12.85% on interest bearing loan. Thus, the assessee ought to have shown income attributable to the amount lent as advances/loans at the rate of 12.85%. Therefore, vide notice u/s 142(1) of the IT Act dated 26/11/2018, the assessee was asked to explain as to why the proportionate interest should not be disallowed. 5. In response to the same, the assessee company filed its reply on 01/12/2018 in which it claimed that the loan advanced to subsidiary company is Page | 3 ITA 545/SRT/2019/AY.2016-17 Ecoplast Ltd. financed from Interest Free Funds accumulated by the company. The assessee has also claimed that the loan was advanced out of commercial expediency to expand the business of the subsidiary company. Further, assessee- company has also relied on many case laws including S. A. Builders Ltd. vs CIT (A), Chandigarh. 6. However, Assessing Officer rejected the contention of the assessee and held that if the assessee had interest free funds at his disposal, then there was no need to borrow the loan from banks on long term and short term finance. Therefore, Assessing Officer held that the provisions of section 36(1)(iii) of the IT Act is clearly attracted in the case of assessee. Accordingly, a proportionate disallowance which worked out to Rs.47,82,612/- being 12.85% of Rs.3,72,18,771/- was disallowed and added to total income of the assessee. 7. Aggrieved by the order of the Assessing Officer, the assessee carried the matter in appeal before the ld. CIT(A), who has confirmed the addition made by the Assessing Officer. Aggrieved by the order of Ld. CIT(A), the assessee is in further appeal before us. 8. Shri Sapnesh Sheth, Learned Counsel for the assessee, argued that Assessee Company had advanced Interest free Loan to its Subsidiary company M/s Synergy Films Pvt Ltd. amounting to Rs.3,72,18,771/- in the preceding years. The loan to Subsidiary is an opening balance carried forward from preceding years and no new/fresh loans were advanced during the previous year relevant to the assessment year under consideration. The interest expenses incurred during the year solely relate to the borrowings made and utilized during the year for the business of the assessee. The details of interest bearing borrowings of the Company during the previous year relevant to the assessment year under consideration were as under: Page | 4 ITA 545/SRT/2019/AY.2016-17 Ecoplast Ltd. Page | 5 ITA 545/SRT/2019/AY.2016-17 Ecoplast Ltd. With help of the above chart, ld Counsel argued that all the Interest bearing loans were availed for specific purposes with specified end uses and in the absence of advancement of any further Interest free loan to subsidiary during the previous year relevant to the assessment year under consideration, and there cannot be any attribution to Interest paid on the borrowings for the purpose of proportionate disallowance in respect of loan advanced to subsidiary in the preceding years as there was no advancement of loan during the year. The loans advanced to subsidiary company in the preceding years can be attributed to Interest Free funds accumulated by the Assessee-Company. That is, loans advanced to subsidiary company was out of own accumulated share capital, reserve and surplus/profits. The loans borrowed for specific purpose has been used for specific purposes only. Therefore, addition made by the assessing officer may be deleted. Page | 6 ITA 545/SRT/2019/AY.2016-17 Ecoplast Ltd. 9. On the other hand, the Learned Departmental Representative (Ld. DR) for the Revenue submitted that assessee’s issue in present appeal under consideration is squarely covered against the assessee by the judgment of the Hon'ble Tribunal which was considered by the Assessing Officer. The Ld. DR also pointed out that here is no change in the facts, so far the previous assessment year is concerned, that is, assessment year 2012-13 and the current assessment year under consideration 2016-17. The only differential fact is that the percent holding which is at 100% today in the subsidiary company, was 75% in earlier years. As on today the holding is 100% in the subsidisry therefore, it is a hundred percent subsidiary company but the other facts remain same which were there in the assessment year 2012-13, therefore the order of the Tribunal in assessee’s own case should be followed and assessee’s appeal should be dismissed. 10. We have heard both the parties and carefully gone through the submissions put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the facts of the case including the findings of the ld. CIT(A) and other material brought on record. We note that Ld. Counsel for the assessee submitted before us the following documents and evidences: (i) Bank of Baroda sanction letter issued to M/s Synergy Films Pvt. Ltd. (vide paper book page nos. 45 to 55). (ii) Loan agreement between assessee and M/s Synergy Films Pvt. Ltd. (vide paper book page nos. 56 to 58). (iii) Relevant portion of audited balance sheet and profit and loss account for AY.2016-17 (vide paper books page nos.59 to 60). 11. We note that M/s Synergy Films Pvt. Ltd. is wholly owned subsidiary company, therefore it is the extension of the business of the parent company, hence it is the prerogative of the assessee to utilize the own free funds for giving loan and advances to subsidiary company to expand business base. The Ld. Counsel pointed out that loans and advances were given to subsidiary company out of share capital and reserve and surplus funds which is sufficient to meet the Page | 7 ITA 545/SRT/2019/AY.2016-17 Ecoplast Ltd. loan requirement to the subsidiary company. The Ld. Counsel pointed out that the assessee had own interest free funds to the tune of Rs.20,21,60,982/- and loan has been given to the subsidiary company only to the tune of Rs.3,72,18,771/-, therefore such loan to the subsidiary company is out of the own interest free funds and hence disallowance should not be made. The Ld. Counsel also stated that no doubt the assessee-company has borrowed the money from banks / financial institutions for specific purposes, such as, car loan, fixed asset loan, working capital loan etc. and these are the routine borrowings of the company to facilitate the day to day cash flow of the assessee-company. Therefore, it was contended by the Ld. Counsel that loans and advances have been given only to 100% wholly owned subsidiary company, from interest free funds, therefore, interest may not be disallowed. 12. From the above facts, we note that only parent company can help the wholly owned subsidiary company. The profit and loss of the wholly owned subsidiary company is the profit and loss of the parent company. We note that loan at a concessional rate of interest were given to sister concern for commercial expediency. The loan advanced to subsidiary company is financed from Interest Free Funds accumulated by the company, as noted above. Such loan was advanced out of commercial expediency to expand the business of the subsidiary company. For that reliance can be place on the decision of Hon'ble Supreme Court in the case of SA builder Ltd. Vs CIT, 158 Taxman 74, Delhi High Court. Other decisions referred by the assessee on this issue were: In the case of CIT Vs Dalmia cement Ltd. 254 ITR 377, and in the case of CIT Vs. Reliance Utilities and Power Ltd 313 ITR 340. Thus, we note that above facts and decision of Hon`ble Supreme Court in the case of SA builder Ltd. Vs CIT, 158 Taxman 74, have not been considered by the Tribunal ( in assessee`s own case) in right perspective. Who can help the wholly owned subsidiary in needy hours? This is the parent company, who can help the wholly owned subsidiary in needy hours to save the business. Based on these facts, we note that addition made by the assessing officer needs to be deleted. Page | 8 ITA 545/SRT/2019/AY.2016-17 Ecoplast Ltd. 13. The assessee submitted the accumulated sources of funds as at 01/04/2015, which are as under: Thus, we note that the entire loan to subsidiary, is brought forward from preceding years and is financed from Interest Free Funds after considering Application of Funds for Fixed Assets and Working Capital. Thus, no part of Loan to subsidiary is attributable to Interest Free loans which were taken for specific purposes. The Assessee Company had advanced loan to its wholly owned subsidiary Company, M/s Synergy Films Pvt Ltd, as a 100% stake Holder Company is required to provide quasi capital and margin for working capital as mandated by the Banker of the subsidiary Company who has sanctioned the bank facilities with the stipulation that Company to maintain the level of Page | 9 ITA 545/SRT/2019/AY.2016-17 Ecoplast Ltd. Unsecured loans from Holding Company at the projected level and same is sub- ordinated to the bank dues till the currency of the facilities. 14. The assessee (Ecoplast Limited) has also given corporate guarantee of Rs.396 lakhs. The strategic investment in subsidiary was made mainly to explore the business potential of the Company's Multilayer film business due to logistic advantage and favorable market conditions prevailing in the Eastern and North Eastern Region. The subsidiary has extended the market reach of Ecoplast Limited to the untapped markets in the state of Assam, Arunachal Pradesh, Nagaland, Manipur, Mizoram, Tripura, Bhutan, Sikkim, West Bengal, Bihar, Jharkhand and all states of Bangladesh. Thus loans were advanced out of commercial expediency to expand the business of the company in North Eastern Region and to protect the investment made in the subsidiary company. M/s Synergy Films Pvt. Ltd. utilized money received from the assessee Company for business purpose of working capital to continue its operations and to service its loan repayment obligation to Financial Institution. The ld Counsel submitted the following comments on the findings of ITAT order in assessee`s own case as follows: ITAT’s findings for AY 2012-13 Assessee’s response to ITAT’s findings The sister concern had increased the losses from Rs 57.99 lakhs to Rs 91.27 lakhs for AY 2012-13 implying that the future prospects of the sister concern was not sound. The profits of the sister concern had increased from Rs 9.49 lakhs to Rs 59.88 lakhs in the previous year relevant to the assessment year under consideration (Refer "Exhibit F") Other Partners had left the said sister concern during the previous year relevant to the assessment year under consideration. M/s Synergy Films Pvt Ltd is a wholly owned subsidiary Company and being a 100% stakeholder, Company is required to provide quasi capital and margin for working capital as mandated by the Banker of the subsidiary Company. The Assessee Company had failed to establish the link with interest free funds available and loans lent out of said funds to the sister concerns. The Interest Free Loan advanced to subsidiary company is solely attributable to interest free funds as demonstrated in the preceding para "a" above. The Share Capital relates to the old period, which implies that it has already been utilized for the Share capital is not the only interest free fund as Company has substantial accumulated free reserves generated Page | 10 ITA 545/SRT/2019/AY.2016-17 Ecoplast Ltd. purchase of asset, hence it cannot be said to be available with the Assessee Company for the money to be lent. out of internal cash accruals. In any case, no loan was advanced during the previous year from the interest bearing fund which were availed for specific end uses. 15. Thus, the facts on the basis of which, Tribunal has decided the case in assessee`s own case are substantially different from the facts of the case for the period under appeal and therefore cannot be relied. Therefore, respectfully following the decision of Hon'ble Supreme Court in the case of SA Builder Ltd. (supra), we delete the addition of Rs.47,82,612/- made by the Assessing Officer. 16. In the result, appeal filed by the assessee is allowed. Order pronounced on 30/03/2023 by placing the result on the Notice Board. Sd/- Sd/- (PAWAN SINGH) (Dr. A.L. SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER lwjr /Surat Ǒदनांक/ Date: 30/03/2023 SAMANTA Copy of the Order forwarded to 1. The Assessee 2. The Respondent 3. The CIT(A) 4. CIT 5. DR/AR, ITAT, Surat 6. Guard File By Order // TRUE COPY // Assistant Registrar/Sr. PS/PS ITAT, Surat