PARAKKOTT INVESTMENT INDIA PVT LTD ,MUMBAI V. INCOME TAX OFFICER WARD 14(2)(4), MUMBAI

ITA 2137/MUM/2024

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Parakkott Investments India Pvt. Ltd. appealed against the order of the CIT(A), National Faceless Appeal Centre, which upheld the disallowances made by the Income Tax Officer under sections 36(1)(iii) and 14A r.w.r. 8D(2)(iii) of the Income-tax Act for the Assessment Year 2017-18. The primary issues were the disallowance of interest expenses on loans given to an associate company, J.J. Poly Impex Pvt. Ltd., and the disallowance related to expenses incurred in earning exempt income. The Tribunal examined the circumstances under which the loans were given and the financial condition of J.J. Poly Impex Pvt. Ltd., concluding that the loans were given out of commercial expediency. Additionally, it was found that no exempt income was earned during the year, negating the need for disallowance under section 14A.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 33130 (ITAT-MUMBAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-02-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2017-2018
• Other Referred Cases: PCIT vs. E-City Investment and Holdings Pvt. Ltd., PCIT vs. Kohinoor Project Pvt. Ltd.
• Laws Referred To: Income-tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Proportionate interest; Question of law; Commercial expediency; Earning of tax free income; Rule 8D
• Section: 143(3); 10; 14A

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH MUMBAI BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI GIRISH AGRAWAL, ACCOUNTANT MEMBER ITA No. 2137/MUM/2024 Assessment Year: 2017-18 Parakkott Investments India Pvt. Ltd., C-206, Ghatkopar Industrial Estate, Off LBS Marg, Ghatkopar (West), Mumbai – 400 086 (PAN : AAECP5669F) Vs. Income-tax Officer – 14(2)(4), Mumbai (Appellant) (Respondent) Present for: Assessee : Shri M. Subramaniam, Advocate Revenue : Shri Krishna Kumar, Sr. DR Date of Hearing : 25.11.2024 Date of Pronouncement : 19.02.2025 O R D E R PER GIRISH AGRAWAL, ACCOUNTANT MEMBER: This appeal filed by the assessee is against the order of Ld. CIT(A), National Faceless Appeal Centre (NFAC), vide order nos. ITBA/NFAC/S/250/2023-24/1062955328(1), dated 19.03.2024 respectively, passed against the assessment order by Income Tax Officer, Ward 14(2)(4), Mumbai u/s. 143(3) of the Income-tax Act 2 ITA No.2137/MUM/2024 Parakkott Investments India Pvt. Ltd., AY 2017-18 (hereinafter referred to as the “Act”), dated 09.12.2019 for Assessment Year 2017-18. 2. Assessee is in appeal on two issues, the first relating to disallowance of Rs.1,46,67,258/- u/s. 36(i)(iii) and secondly on disallowance of Rs.24,08,096/- u/s. 14A r.w.r. 8D(2)(iii). 3. Brief facts of the case are that assessee is engaged in the business of investment in equity shares in associate entities and maintains equity holding in group concerns having income from business and profession. Assessee filed its return of income on 10.11.2017, reporting the total income at Rs.10,94,100/-. From the financial statements of the assessee, ld. Assessing Officer noticed that assessee has issued share capital of Rs.2,00,00,000/- and has Reserve and Surplus of Rs.4,28,96,856/-, Hence the assessee has its own fund of Rs.6,28,96,856/-. During the year under consideration, assessee company has taken unsecured loan of Rs.44,85,30,928/- from the various parties and has debited the profit and loss accounts the interest expenses of Rs.2,89,08,354/- on the unsecured loan taken. Further, assessee company has given the loan of Rs. 24,56,34,253/- and has credited the profit and loss accounts the interest income of Rs.3,09,45,100/-. 3.1. From the details of loan given to various parties, it revealed that the assessee has given loan of Rs. Rs.15,36,31,071/- to one of its associates company J. J. Poly Impex Pvt. Ltd. It was noticed that assessee has not charged any interest on the said loan. As the assessee claimed interest expenses in Profit & Loss account and did 3 ITA No.2137/MUM/2024 Parakkott Investments India Pvt. Ltd., AY 2017-18 not charged interest on the loan given to associates company, a show cause notice dated 20.11.2019 was issued to the assessee requesting it to explain as to why an amount of Rs.1,46,67,258/- (proportionate interest chargeable on the loan of Rs.15,36,31,071/- given to J.J. Poly Impex Pvt. Ltd.) should not be disallowed from the interest expenses of Rs.2,89,08,354 claimed in the profit and loss account. 3.2. On this, assessee explained its case by submitting as under: “During the year under review, J J Poly Impex Private Limited, one of the entities to whom the assessee had given loans, who were dealing in polymer products, had severe financial problems due to market conditions of the polymer industry. It can be seen from the statement of unsecured loans given, which was submitted to you earlier vide submission dated 25.10.19, substantial amounts were advanced during the year under review, mainly with a view to assist J J Poly Impex Private Limited to tide over the financial constraints. Despite the best of the efforts, both on the part of the said party and the assessee, the operation of the said party could not be improved and consequently resulting in a huge loss for the year of Rs 16,63,01,857 (PY Profit of Rs 1,20,09,182) on a sales turnover of Rs 2,37,99,345,250 (PY Rs 2,86,09,33,442). As explained earlier, the main reason for this situation was the market situation of polymer industry wherein the prices of polymer products dropped drastically in the global market, which resulted in lower realization for J J Poly Impex Private Limited.. The loss for the year also resulted in the net worth of the said party being completely wiped out. In view of this situation and also considering the continuing down trend in the polymer industry. the assessee was not very sure of the recovery of the amount and as part of prudent policy decided on not charging interest to the said party for the year under review. It would be pertinent to note here that the downward trend of J J Poly Impex Private Limited continued in the years too and as a result the lending banks have declared their advances to the said party as NPA. The party has also taken a stand of its status of going concern to be uncertain and as accordingly reported in its financial statement for the FY 2018-19.” 4 ITA No.2137/MUM/2024 Parakkott Investments India Pvt. Ltd., AY 2017-18 3.3. After considering the submissions made by the assessee, ld. Assessing Officer analysed the provisions contained in section 36(1)(iii). He observed that assessee has utilised interest bearing funds for giving interest free loan to its associate company. According to him, assessee has not utilised the borrowed funds fully and exclusively for the purpose of its business or profession. Assessee has not established commercial expediency with its associate company. According to him, business of assessee is financial services whereas that of J. J Poly Impex Pvt. Ltd. is dealing in polymers. On explanation given by assessee relating to financial constraints faced by its associate company, J.J. Poly Impex Pvt. Ltd., ld. Assessing Officer took note of assessee failing to prove commercial expediency of advancing interest free funds to its associate company even though he took record of the fear of assessee that it was not sure of recovery of amount and that because of such fear, interest free loans were advanced to the associate company. The said para-4.7 is extracted below: “4.7 The fear of the assessee was that it was not very sure of the recovery of the amount it does not mean the advancing of interest free loan to the associate company is being in the course of carrying on the business by the assessee. In view of associate company being declared NPA does not justify advancing of interest free loan out of borrowed funds, as the same is not for the purpose of business of the assessee. The assessee failed to prove that the advancement involved any logical grounds of commercial expediency and provide nexus between the interest expenditure and the purpose of business.” 3.4. Ld. Assessing Officer thus, worked out proportionate interest at Rs.1,46,67,258/- for making the disallowance and added it back to the total income of the assessee. 5 ITA No.2137/MUM/2024 Parakkott Investments India Pvt. Ltd., AY 2017-18 3.5. On the second issue relating to disallowance made u/s.14A r.w.r. 8D(2)(iii), despite noting the fact from submissions made by the assessee that it had not earned any exempt income during the year, ld. Assessing Officer proceeded to invoke Rule 8D for the purpose of computing disallowance u/s. 14A. In this respect, he observed that assessee has taken long term borrowings of Rs.44,85,30,926/- and diverted its borrowings towards strategic investment and not for business purposes which requires disallowance u/s.14A r.w.r. 8D. He negated the contention of the assessee of it having not earned any exempt income as noted in para – 7.5 of the impugned order. Accordingly, disallowance was worked out at Rs.24,08,096/-. Assessee reiterated its submissions before the ld. CIT(A) but all in vain. 4. From the submissions made by the assessee before the ld. CIT(A), we take note of the details furnished to explain the financial constraints at the end of its associate company, J.J. Poly Impex Pvt. Ltd. which are extracted below for ready reference: “During the year under review, the Appellant had given loans to one of its associate entities, viz. J J Poly Impex Private Limited (JJPIPL). JJPIPL had faced severe financial constraints due to the overall market condition of the polymer industry, in which they were dealing in. Since the available bank finances were fully utilized by JJPIPL and further bank finances were not available, the Appellant had to intervene, as it was an associate entity and funded the operation of JJPIPL. Also it would be pertinent to note that the one of the activities of the Appellant is that of lending and financing operations. A statement of unsecured loans given by the Appellant, which includes the loans given to JJPIPL along with a loan confirmation statement of JJPIPL is enclosed herewith and the both these documents were also submitted to the leamed AO during the course of the assessment proceedings. It can be seen from the loan confirmation that substantial amounts were advanced during the second half of the year under review. Despite the best efforts on the part of both the parties, viz JJPIPL and the Appellant, the operations of JJPIPL could not be improved and consequently resulting in substantial reduction in the turnover for the year under review as compared to the previous year. We are giving below a comparative chart of year wise sales turnover and profit/loss for the year for three FYs, viz 2015-16, 2016-17 (year under review), 2017-18 and 2018-19- 6 ITA No.2137/MUM/2024 Parakkott Investments India Pvt. Ltd., AY 2017-18 Financial year Sales Turnover (Rs) Profit/(Loss)(Rs) 2015-16 3,11,43,03,842 1,59,94,492 2016-17 2,86,09,33,442 1,20,09,182 2017-18 2,37,99,34,250 (16,63,01,857) 2018-19 1,85,49,75,780 (31,26,87,299) As explained earlier, the main reason for this situation was the market situation of polymer industry wherein the prices of polymer products dropped drastically in the global market, which resulted in lower realization for JJPIPL. The losses generated also completely eroded the net worth of JJPIPL. In fact, this downward trend continued for the FY 2019-20 also, wherein the sales turnover was Rs 24,71,74,689 and loss for the year had gone upto Rs 3,23,33,659. Thus it can be clearly seen that there has been a continuous deterioration of the financial position of JJPIPL. In view of the above financial situation of JJPIPL, the Appellant was not sure of recovery of the loans given and interest thereon. Accordingly, at the time of finalization of its accounts for the FY 2016-17 (year under review), the Appellant decided, as part of prudent accounting policy, not to charge interest to JJPIPL It would be pertinent to note here that due to the continuing downward trend in the financial situation of JJPIPL, the lending banks declared their advances to JJPIPL as NPA in the FY 2018-19. An application has been filed u/s 10 of the Insolvency and Bankruptcy Code 2016 and the same has been admitted. All the above facts were placed before the learned AO during the course of assessment hearings. It was also pointed out to the learned AO that the decision of the Appellant of not charging the interest was vindicated by the fact that JJPIPL was in NCLT under the Insolvency and Bankruptcy Code\". 4.1. In respect of disallowance made u/s. 14A also assessee reiterated its submissions that it did not earn any exempt income during the year and hence no disallowance is called for. Ld. CIT(A) held against the assessee on both the issues. 5. Before us, ld. Counsel for the assessee reiterated the facts and submissions made before the authorities below and placed all the corroborative documentary evidences in the paper book containing 94 pages. Transaction of interest free loan given by assessee to its 7 ITA No.2137/MUM/2024 Parakkott Investments India Pvt. Ltd., AY 2017-18 associate company, J.J. Poly Impex Pvt. Ltd. is not in dispute. The sole contention of the authorities below is that assessee has diverted its interest-bearing borrowed funds to its associate company without charge of any interest. It is important to note that assessee is engaged in the business of investment and financing activities. Assessee has evidently demonstrated its case of granting interest free loan to this company to bail it out from the financial constraints faced by it. We note that loan advanced by the assessee to its associate company is for the purpose of commercial expediency, i.e., to bail it out from financial constraints faced by it. Assessee has demonstrated nexus between the expenditure and the purpose of the business in the explanations extracted above. It is the assessee who has to take its business decisions in alignment with the business interest. Revenue cannot put itself in the arm chair of businessman and assume the role to question the business decisions taken by the assessee. 5.1. Similar issue came up before the Hon'ble Jurisdictional High Court of Bombay in the case of PCIT vs. E-City Investment and Holdings Pvt. Ltd. [2020] 117 taxmann.com 123 (Bom) whereby the substantial question of law raised before the Hon'ble Court is extracted below: “(1) Whether on the facts and circumstances of the case and in law, the ITAT erred in not upholding the decision of the learned CIT(A) in allowing assessee's claim for deduction of interest on borrowed fund when the same is utilised to give interest free loan/share application money to subsidiary companies?” 5.2. Hon'ble Court answered the above substantial question of law in favour of the assessee by dismissing the appeal filed by Revenue by making following observations: “2. Respondent-assessee is a private limited company and is engaged in the business of financing. During the scrutiny assessment of the assessee's return 8 ITA No.2137/MUM/2024 Parakkott Investments India Pvt. Ltd., AY 2017-18 for the assessment year 2008-09. Assessing Officer noticed that the assessee had claimed expenditure of interest paid on borrowed funds. The assessee had also funded its sister concern without charging interest. The Assessing Officer therefore disallowed the interest expenditure. The issue eventually reached the Tribunal. The Tribunal by the impugned judgment held in favour of the assessee. The Tribunal referred to and relied upon the decision of the Supreme Court in case of S.A. Builders Ltd. v. CIT 228 ITR 1 (SC) and concluded as under: - \"If the aforesaid ratio laid down by Hon'ble Apex Court is analyzed by keeping the same in juxtaposition with the facts of the present appeal, firstly, we find that there is no finding by the Assessing Officer that the funds were not utilized for business purposes and secondly, we note that advancing loan to the sister-concern was for the purposes of \"Commercial Expediency\", thus, we find merit in the contention of the ld. Counsel for the assessee. So far as, the issue of commercial expediency is concerned, the decision has to be taken by the assessee and the Assessing Officer is not expected to sit in the chair of the assessee and to decide the business interest. The assessee is to watch its business interest well. Once it is established that there was nexus between the expenditure and purpose of the business (which need not necessarily be the business of the assessee itself) the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profits.\" 3. We do not find any error in view of the Tribunal. The entire issue is squarely covered in favour of the assessee in case of S.A. Builders Ltd. (supra). The Tribunal correctly held that the assessee's decision to fund its subsidiaries driven by business exigency. 4. In the result, no question of law arises. Income-tax Appeal is dismissed.\" 6. Considering the facts on record, explanations furnished and the judicial precedent of Hon'ble Jurisdictional High Court of Bombay (supra), disallowance made by ld. Assessing Officer, u/s. 36(1)(iii) of Rs. 1,46,67,258/- is deleted. Ground no.1 raised by the assessee is allowed. 7. On the second issue relating to disallowance u/s.14A, it is an undisputed fact that assessee did not earn any exempt income during the year. The issue before hand is no longer res integra. Reference is made to the decision of Hon'ble Jurisdictional High Court of Bombay in the case of PCIT vs. Kohinoor Project Pvt. Ltd.[2020] 425 ITR 700 9 ITA No.2137/MUM/2024 Parakkott Investments India Pvt. Ltd., AY 2017-18 (Bom) wherein Hon'ble Court dismissing the appeal by the Revenue held that Tribunal was justified in holding that when there was no exempt income declared for the Assessment Year 2008-09, there could not be any disallowance u/s.14A r.w.r. 8D. In the given set of undisputed facts and the aforesaid judicial precedent of Hon'ble Jurisdictional High Court of Bombay (supra) disallowance made by ld. Assessing Officer by applying Rule 8D(2)(iii) is deleted. In the result, ground no.2 is allowed. 8. In the result, appeal of the assessee is allowed. Order is pronounced in the open court on 19 February, 2025 Sd/- Sd/- (Amit Shukla) (Girish Agrawal) Judicial Member Accountant Member Dated: 19 February, 2025 MP, Sr.P.S. Copy to : 1. The Appellant 2. The Respondent 3. DR, ITAT, Mumbai 4. 5. Guard File CIT BY ORDER, (Dy./Asstt.Registrar) ITAT, Mumbai "