HINDALCO - ALMEX AEROSPACE LTD, MUMBAI V. DCIT RG 5(1), MUMBAI

ITA 7166/MUM/2013

• Counselvise Citation: [2015] 121 COUNSELVISE.COM (IT) 0665 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 5 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-05-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: H
• Assessment Year: 2010-2011
• Appeal Filed On: 06-12-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: BANDI
• Keywords: Maximum Marginal Rate
• Section: 6

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL H BENCH, MUMBAI . . , . , BEFORE SHRI I.P. BANSAL, JM AND RAJENDRA, AM ./ I.T.A. NO.7166/MUM/2013 ( / ASSESSMENT YEAR : 2010-11 HINDALCO ALMEX AEROSPACE LTD. 3 RD FLOOR, CENTURY BHAVAN, DR.ANNIE BESANT ROAD, WORLI, MUMBAI 400 030 / VS. THE DCIT, RANGE 5(1), ROOM NO.525, AAYKAR BHAVAN, MK ROAD, MUMBAI 400020 ./ ./ PAN/GIR NO. : AABCH 7909P ( / APPELLANT ) .. ( / RESPONDENT ) A PPELLANT BY SHRI BANDI RESPONDENT BY SHRI SANJAY PUNGLIA ' #$ / DATE OF HEARING : 06/05/2015 ' #$ / DATE OF PRONOUNCEMENT : 06/05/2015 / O R D E R PER I.P.BANSAL, J.M: THIS IS AN APPEAL FILED BY THE ASSESSEE AND IT IS DIRECTED AGAINST ORDER PASSED BY LD. CIT(A)-9,MUMBAI DATED 12/09/2013 FO R ASSESSMENT YEAR 2010-11. GROUNDS OF APPEAL READ AS UNDER: 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) ERRED IN LAW AND ON FACTS IN CONFIRMING THE CONTENTION OF AO IN DISA LLOWAING INTEREST OF RS.25,78,915/- U/S. 36(1)(III)/ 37 (I) OF THE INCOM E TAX ACT, 1961. 2. THE LD. CIT(A) FAILED TO APPRECIATE APPELLANTS CONTENTION THAT THIS LOAN WAS TO REPLACE THE HIGH COST LOAN. 2. THE ASSESSEE IS JOINT VENTURE OF HINDALCO INDUST RIES LTD. AND ALMEX USA WITH 70% AND 30% SHARES RESPECTIVELY TO MANUFAC TURE HIGH STRENGTH ALLUMINIUM ALLOY PRODUCTS TO SPECIFICALLY CATER T O THE AEROSPACE INDUSTRY. IT WAS SET UP IN 2006 AND COMMERCIAL PRODUCTION WAS STARTED IN LATER PART OF 2008. IT IS THE CASE OF THE ASSESSEE THAT UNSECUR ED LOANS WERE OBTAINED BY ./ I.T.A. NO.7166/MUM/2013 ( / ASSESSMENT YEAR : 2010-11 2 IT FROM HINDALCO INDUSTRIES LTD. @5.54%, IN RESPECT OF WHICH IMPUGNED INTEREST OF RS.25,78,915/- CLAIMED WITH THE INTENTI ON TO REDUCE THE BURDEN OF EARLIER BORROWINGS WHICH WAS ON HIGHER RATE OF INTEREST. HOWEVER, AO DID NOT ACCEPT SUCH SUBMISSION OF THE ASSESSEE AND DISA LLOWED THE IMPUGNED INTEREST ON THE GROUND THAT ALMEX USA BEING 30% STA KE HOLDER WAS REQUIRED TO BRING CAPITAL INFUSION INTO JOINT VENTURE OF THE ASSESSEE WHICH WAS NOT BROUGHT AND IN LIEU OF THE SAME HINDALCO INDUSTRIES LTD. BEING MAJORITY PROMOTER PROVIDED UNSECURED LOAN TO THE ASSESSEE O F WHICH INTEREST IS CLAIMED AND CANNOT BE ALLOWED FOR THE REASON THAT INTEREST PAYMENT BY THE ASSESSEE TO HINDALCO INDUSTRIES LTD. WOULD NOT HAV E BEEN NECESSITATED IF M/S. ALMEX USA BROUGHT IN ITS SHARE EQUITY INFUSION AS PER AGREEMENT. LD. CIT(A) HAS ALSO UPHELD SUCH ACTION OF AO. THE ASSE SSEE IS AGGRIEVED, HENCE, HAS RAISED AFOREMENTIONED GROUNDS OF APPEAL. 3. LD. AR DREW OUR ATTENTION TOWARDS SUBMISSIONS MA DE BEFORE AO VIDE LETTER DATED 27/12/2012. SOME PORTION OF THE SAID LETTER HAS ALSO BEEN REPRODUCED BY THE AO IN THE ASSESSMENT ORDER. IN T HE SAID LETTER IT HAS BEEN SUBMITTED THAT ASSESSEE WAS HAVING LOANS FROM HDFC BANK LTD. AND ABN AMRO BANK WHICH WAS ON MUCH HIGHER RATES OF INTERES T AND TO REDUCE INTEREST BURDEN THE ASSESSEE TOOK UNSECURED LOAN FR OM JOINT STAKE HOLDER AT LESSER RATE, THEREFORE, THE SAME IS ALLOWABLE UNDER SECTION 36(1)(III) OF THE INCOME TAX ACT, 1961(THE ACT). IT WAS SUBMITTED TH AT AO AS WELL AS LD. CIT(A) HAVE COMMITTED AN ERROR IN MAKING AND UPHOLD ING DISALLOWANCE. IT WAS SUBMITTED BY LD.AR THAT IN THE FACTS AND CIRCUM STANCES OF THE CASE, THE CLAIM OF THE ASSESSEE SHOULD BE ALLOWED. 4. ON THE OTHER HAND, LD. DR RELYING UPON THE ORDER PASSED BY AO AND LD. CIT(A) SUBMITTED THAT ADDITION HAS RIGHTLY BEEN UPHELD BY LD.CIT(A) AND HIS ORDER SHOULD BE UPHELD. 5. WE HAVE HEARD BOTH THE PARTIES AND THEIR CONTENT IONS HAVE CAREFULLY BEEN CONSIDERED. WE HAVE PERUSED THE SUBMISSIONS OF THE ASSESSEE FILED ./ I.T.A. NO.7166/MUM/2013 ( / ASSESSMENT YEAR : 2010-11 3 VIDE LETTER DATED 27/12/2012 SUBMITTED TO AO, COPY OF THE SAME IS FILED AT PAGES 25 TO 26 OF THE PAPER BOOK. IT WILL BE RELEV ANT TO REPRODUCE THIS LETTER OF THE ASSESSEE TO THE AO. RATE OF INTEREST CHARGED BY BANKS AND HINDALCO IS GIVEN HEREIN BELOW: SN NAME OF BANK/PARTY NATURE OF LOAN RATE INTEREST 1 HDFC BANK LIMITED SECURED LOAN 11.75% FIXED FOR FIRST YEAR AND THEN ON 5 YEAR G SEC + 300 BPS 2 ABN AMRO BANK SECURED LOAN 6 MONTH LIBOR + 105 BP S PER ANNUM 3 HINDALCO INDUSTRIES LIMITED UNSECURED LOAN 5.54% THE DETAILS OF INTEREST PAID BY ASSESSEE COMPANY TO HDFC BANK, ABN AMRO AND HINDALCO ALONG WITH SUPPORTING ARE ATTACHED AS PER ANNEXURE 1 2. WITH REGARDS TO JUSTIFICATION FOR PAYMENT OF INT EREST OF RS. 25,78,915 TO HINDALCO INDUSTRIES LIMITED, WE STATE AS UNDER:- (I) HAAL WAS SETUP IN 2006 AS A JOINT VENTURE OF A LMEX USA INCORPORATED (30%) AND HINDALCO INDUSTRIES LTD (70%) TO MANUFACTURE HIGH S TRENGTH ALUMINIUM ALLOY PRODUCTS TO SPECIFICALLY CATER TO THE AEROSPACE INDUSTRY THE COMMERCIAL PRODUCTION COMMENCED IN LATE 2008. HOWEVER, GIVEN THE FINANCIAL AND ECONOMIC TURMOIL GLOBALLY, ESPECIALLY IN THE AE ROSPACE INDUSTRY, THE PROJECT WAS NOT ABLE TO PRODUCE RESULTS, AS ENVISAGED IN THE OR IGINAL BUSINESS MODEL. ACCORDINGLY, THE PROMOTERS INFUSED EQUITY ALL THROUGHOUT, TO SER VICE THE LOAN. THE PROMOTERS ALSO INFUSED EQUITY AGGREGATING TO INR 5.11 CRS, TO MAKE GOOD THE WORKING CAPITAL GAP AS WELL. GIVEN THE FINANCIAL IMPACT ON THE COMPANY, DUE TO I NTEREST SERVICING ON THE LOAN, THE PROMOTERS PROPOSED TO INFUSE EQUITY INTO THE COMPAN Y AND PREPAY THE LOAN, SO THAT THEY WOULD BE LESSENED WITH THE BURDEN OF INTEREST SERVICING ON THE LOAN. HAD THE PROJECT PROGRESSED AS ORIGINALLY ENVISAGED BY THE P ROMOTERS, CASH FLOWS GENERATED BY THE COMPANY WOULD HAVE FACILITATED TO SERVICE THE L OAN. GIVEN THE STATE OF THE GLOBAL ECONOMY, IT WAS -EXPECTED THAT THE COMPANY WOULD TA KE LONGER GESTATION PERIOD THAN ORIGINALLY ANTICIPATED AND THEREFORE PROMOTERS PROP OSED THIS COURSE OF ACTION SO THAT IN THE LONG TERM THE COMPANY HAVE SUSTAINABLE AND V IABLE COMMERCIAL OPERATIONS AS HAS BEEN PLANNED ORIGINALLY. (II) WITH THE OBJECTIVE TO PREPAY THE OUTSTANDING LOAN THE COMPANY HAD MADE A CAPITAL CALL FROM THE SHAREHOLDERS IN ITS BOARD MEE TING DATED 29TH OCTOBER 2009.(COPY OF EXTRACT OF MEETING IS ENCLOSED AS ANN EXURE 2) (III)AS THE ALMEX INC. UNABLE TO BRING THE EQUITY, HINDALCO AS PER JOINT VENTURE AGREEMENT BROUGHT IN THE FUND OF RS 21 CRS. BY WAY OF AN UNSECURED LOAN. (IV) IT ENABLED THE ASSESSEE COMPANY TO PREPAY ITS SECURED LOAN OF HDFC BANK AND ABN AMRO, THEREBY LESSENING THE BURDEN OF INTEREST AND FOREIGN CURRENCY RISK. (V) UNSECURED LOAN FROM HINDALCO CARRYING INTEREST RATE APPROX 5.5% IS FAR LESSER THAN THE RATE OF INTEREST CHARGED BY AN INDIAN BANK I.E. HDFC BANK @ 11.75%. [INTERNAL CUP]. ./ I.T.A. NO.7166/MUM/2013 ( / ASSESSMENT YEAR : 2010-11 4 (VI) THERE IS NO TAX BENEFIT TO THE ASSESSEE COMPAN Y AS THERE ARE CARRIED FORWARD LOSSES IN THE ASSESSEE COMPANY AND ASSESSEE IS A SE Z UNIT. ON THE OTHER HAND HINDALCO INDUSTRIES LTD BEING AN INDIAN COMPANY HAS PAID THE TAXES ON SUCH INTEREST AT MAXIMUM MARGINAL RATE. BASED ON ABOVE IT IS SUBMITTED THAT THE INTEREST P AYMENT TO HINDALCO OF RS. 25,78,915 IS AT ARM'S LENGTH AND AN ALLOWABLE EXPEN DITURE IN THE HANDS OF THE ASSESSEE COMPANY. WE TRUST THE ABOVE MEETS WITH YOUR GOODSELF'S REQUI REMENTS AND WOULD BE HAPPY TO PROVIDE FURTHER ADDITIONAL INFORMATION / CLARIFICAT ION THAT YOUR GOODSELF MAY DESIRE. 5.1 IF ABOVE SUBMISSIONS OF THE ASSESSEE ARE TAKEN INTO CONSIDERATION, THEN IT CAN BE SEEN THAT EARLIER SECURED LOANS AVAI LED BY THE ASSESSEE FROM HDFC BANK LTD. AND ABN AMRO BANK WERE ON HIGHER RAT E OF INTEREST WHICH WERE TO BE REPAID BY THE FRESH UNSECURED LOANS RAIS ED FROM THE PROMOTER OF THE JOINT VENTURE, WHICH WAS AT MUCH LESSER RATE OF INTEREST. IN OUR OPINION, SUCH INTEREST PAID BY THE ASSESSEE IS ALLOWABLE AS IN CASE ASSESSEE DID NOT OBTAIN SUCH UNSECURED LOAN THEN THE INTEREST CLAIME D BY THE ASSESSEE WOULD BE MUCH HIGHER THAN THE INTEREST CLAIMED ON THE UNS ECURED LOANS OBTAINED BY THE ASSESSEE FROM HINDALCO INDUSTRIES LTD. IT I S NOT THE CASE OF THE REVENUE THAT THE SAID UNSECURED LOAN WAS NOT OBTAIN ED OR UTILIZED FOR THE PURPOSE AS STATED IN THE AFOREMENTIONED REPLY. THE REQUIREMENT OF ALLOWABILITY OF INTEREST UNDER SECTION 36(1)(III) A RE MET AS THE AMOUNT OBTAINED BY THE ASSESSEE FROM HINDALCO INDUSTRIES L TD. WAS MONEY BORROWED BY THE ASSESSEE FOR THE PURPOSE OF ITS BUS INESS. 5.2 IN VIEW OF ABOVE DISCUSSIONS, WE HOLD THAT THE DISALLOWANCE HAS WRONGLY SUSTAINED BY LD. CIT(A), WHICH REQUIRES TO BE DELETED. ACCORDINGLY, THE SAME IS DELETED. 6. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 06/05/2015 ' * +, 06/05/2015 ' SD/- SD/- (RAJENDRA) . . (I.P.BANSAL) /ACCOUNTANT MEMBER /JUDICIAL MEMBER MUMBAI; + DATED 06/05/2015 ./ I.T.A. NO.7166/MUM/2013 ( / ASSESSMENT YEAR : 2010-11 5 !'# $#! / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. /# ( ) / THE CIT(A)- 4. /# / CIT 5. 01 #23 , $ 23 , / DR, ITAT, MUMBAI 6. 4 / GUARD FILE. / BY ORDER, 0# # //TRUE COPY// / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI . . .VM , SR. PS