CIT CHANDIGARH V. M/S DSM ANTI INFECTIVES INDIA LTD.

ITA/257/2009

AI Insights

The case revolves around the appeals by the Commissioner of Income Tax, Chandigarh, against the orders allowing deductions for interest payments made by M/s DSM Anti Infectives India Limited on loans taken from its parent company and given as interest-free loans to HMGB. The primary legal question was whether these transactions were for commercial expediency and thus eligible for deductions under Section 36(1)(iii) of the Income Tax Act. The Tribunal and CIT(A) had previously ruled in favor of the assessee, leading to the present appeals by the revenue.

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 737950 (HC-CHANDIGARH)
• Appeal Type: Others
• Pronouncement Date: 28-10-2013
• Assessment Year: misc
• Other Referred Cases: CIT v. Abhishek Industries Limited, CIT v. Motor General Finance Limited, Indian Shavings Products Limited v. Commissioner of Income Tax, S.A.Builders Limited v. CIT(Appeals), CIT v. Panipat Woollen and General Mills Co. Limited, CIT v. Bharti Televenture Limited, CIT v. Reliance Communication Infrastructure, CIT v. Malayalam Plantations Limited, Madhav Prasad Jatia v. CIT, Deputy Commissioner of Income Tax v. Core Health Limited, CIT v. Monnet Industries Limited
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: SHASHI KAPILA; SIDDHARTH KAPILA; R R MAURYA; DEEPAK SURI
• Assessee Lawyers: URVASHI DHUGGA
• Keywords: Assessment year 2003-04; Commercial expediency; Deduction admissibility; Interest free loan; Interest free loan
• Section: 143(3); 143(1); 36 (1) (iii); 260A

Judgement Text

"ITA No.257 of 2009 (O&M) 1 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No.257 of 2009 (O&M) Date of decision: 28.10.2013 The Commissioner of Income Tax I, Chandigarh …Appellant Vs. M/s DSM Anti Infectives India Limited …Respondent CORAM: HON’BLE MR. JUSTICE AJAY KUMAR MITTAL HON’BLE MR. JUSTICE JASPAL SINGH Present: Ms. Urvashi Dhugga, Advocate for the appellant. Ms. Shashi M. Kapila, Mr. Siddharth Kapila, Mr. R.R.Maurya and Mr. Deepak Suri, Advocates for the respondent. Ajay Kumar Mittal,J. 1. This order shall dispose of ITA Nos.257 and 258 of 2009 as learned counsel for the parties are agreed that the facts and the issue involved in both the appeals are identical. However, the facts are being extracted from ITA No.257 of 2009. 2. ITA No.257 of 2009 has been preferred by the revenue under Section 260A of the Income Tax Act, 1961 (in short, “the Act”) against the order dated 15.10.2008, Annexure A.3, passed by the Income Tax Appellate Tribunal, Chandigarh Bench ‘B’ (in short, “the Tribunal”) passed in ITA No.366/CHANDI/2007, for the assessment year 2003-04, claiming following substantial questions of law:- “1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in relying upon section 36(1)(iii) in Singh Gurbax 2014.01.08 13:47 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.257 of 2009 (O&M) 2 isolation without considering the fact that the assessee has not only borrowed money but also has advanced money from which the assessee was liable to receive interest income? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the advances made to ‘Hindustan Max G. B were actually for commercial expediency particularly since the advances pertained to the earlier years and whether the commercial expediency can be said to have existed over a prolonged period of a number of years when no such transaction has taken place in the succeeding years?” 3. Briefly, the facts necessary for adjudication of the controversy involved, as narrated in the appeal, may be noticed. The assessee company is engaged in the business of manufacturing of bulk drugs and intermediates. It filed its return of income for the assessment year 2003-04 on 21.11.2003 declaring a loss of ` 9,62,90,388/-. The case was processed under section 143(1) of the Act on 29.3.2004. Assessment under section 143 (3) of the Act was completed at a loss of ` 8,86,63,952/-. The assessee had taken loans from its parent company and advanced certain sum of money as interest free loan to Hindustan Max G.B. Limited (HMGB) in order to secure its own business as HMGB was not having funds for producing the products which were used as raw material for the assessee. The Assessing Officer vide order dated 28.3.2006, Annexure A.1, disallowed the interest payment of ` 76,26,436/- made to its parent company holding that the expenditure was not incurred for business purposes. Aggrieved by the order, the assessee filed appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. Vide order dated 17.1.2007, Annexure A.2, the CIT(A) allowed the appeal. The department went in appeal against the said order. Singh Gurbax 2014.01.08 13:47 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.257 of 2009 (O&M) 3 Vide order dated 15.10.2008, Annexure A.3, the appeal was dismissed. Hence the present appeals by the revenue. 4. Learned counsel for the revenue submitted that the CIT(A) and the Tribunal had erred in allowing deduction on account of interest paid by the assessee on loans taken from parent company and given to HMGB, a joint venture company promoted by the assessee company together with Hindustan Antibiotics Limited, as interest free loan to it. According to the revenue, the same was inadmissible under section 36(1) (iii) of the Act in view of the decision of this Court in CIT v. Abhishek Industries Limited, (2006) 286 ITR 1. It was also argued that the assessee had declared losses in the returns filed and therefore, in view of the decision of Delhi High Court in CIT v. Motor General Finance Limited, (2002) 254 ITR 449 and Rajasthan High Court in Indian Shavings Products Limited v. Commissioner of Income Tax, (2004) 265 ITR 250, the claim for deduction on account of interest free loan to M/s HMGB was not correctly allowed. 5. On the other hand, learned counsel for the revenue urged that as held by the Supreme court in S.A.Builders Limited v. CIT(Appeals) and another, (2007) 288 ITR 1, the authorities were required to examine the commercial expediency in giving interest free loan to M/s HMGB so as to decide with regard to the deduction under section 36(1) (iii) of the Act. It was argued that even the Assessing Officer had not controverted that commercial expediency existed while framing assessment relating to assessment year 2004-05. Support was drawn from judgments in CIT v. Panipat Woollen and General Mills Co. Limited, (1976) 103 ITR 66 (SC), Singh Gurbax 2014.01.08 13:47 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.257 of 2009 (O&M) 4 S.A.Builders's case (supra), Marudhar Chemicals and Pharmaceuticals P. Limited, (2009) 319 ITR 75 (P&H), CIT v. Bharti Televenture Limited, (2011) 331 ITR 502 (Delhi), CIT v. Reliance Communication Infrastructure, (2013) 260 CTR 159 (Bom), CIT v. Malayalam Plantations Limited, 53 ITR 140 (SC) and Madhav Prasad Jatia v. CIT, (1979) 118 ITR 200 (SC). There was commercial expediency as recorded by the CIT(A) and the tribunal and therefore, the same being finding of fact, is not liable to be interfered with in view of judgments in Deputy Commissioner of Income Tax v. Core Health Limited, (2008) 298 ITR 194 (SC) and CIT v. Monnet Industries Limited, (2012) 350 ITR 304 (SC). 6. After hearing learned counsel for the parties, we do not find any merit in the appeal. 7. The primary question for consideration is - whether there was commercial expediency in giving interest free loans by the assessee to M/s HMGB which was a joint venture company of the assessee with Hindustan Antibiotics Limited? 8. It would be advantageous to refer to the findings recorded by the CIT(A) as well as the Tribunal. The CIT(A) in appeal relating to the assessment year 2003-04 had recorded as under:- “It is noted that HMGB Limited manufactures and supplies Penicillin G which is a critical raw material for the appellant. The table below provide an overview of the total raw material (Penicillin G) purchased by the appellant from all suppliers and the raw material purchased from HMGB Limited during the Singh Gurbax 2014.01.08 13:47 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.257 of 2009 (O&M) 5 previous year relevant to the assessment year 2003-04 under consideration:- Particulars Quantity in Kg. % of total purchases Penicillin G- Imported (A) 1012686 38.37% Penicillin G- Domestic *from HMGB Limited 120256 0 45.56% *Other suppliers 424098 16.07% (B) 1626658 61.63% Total (A+B) 2639344 100% It is seen from the above that the purchases of Penicillin BG from HMGB Limited constitutes about 45.56% of total purchases and about 73.93% of total domestic purchases, therefore, by advancing the sum of money, the appellant has in fact secured its own business and ensured that it meets up its own production schedule. It is also observed that if the appellant would not have provided the advances to the HMGB Limited the production capacity of the appellant would have been reduced considerably because of not receiving the raw material supplied by HMGB Limited in timely manner. In view of the above, it is held that the advances made to HMGB Limited were for the purposes of the business of the appellant.” 9. Additionally, it may be noticed that the CIT(A) while dealing with appeal for the assessment year 2004-05 had concluded as under:- “7. I have carefully considered the submission of the assessee. In my opinion, the assessee deserves to succeed because of the following reasons:- (A) In Para I of its submissions, the assessee explained that the average cost of interest bearing funds is only 2-3% whereas the amount was advanced to HMGB @ 16.50% and earned Singh Gurbax 2014.01.08 13:47 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.257 of 2009 (O&M) 6 an interest of ` 2,63,93,820/- during the previous year 2003-04. (B) The advances were made to a joint venture company to secure assessee’s own business. (C) It was explained that HMGB was providing a high quality and most reliable source of supply and it gave assured supply of key raw material. (D) HMGB provided raw material at less than the market rate. (E) The assessee has given a chart where the average cost of material was compared with other persons. As per figures given by the assessee which have been placed at Annexure 2, the cost from joint venture company is lower than the cost from other concerns where the quantity is comparable. (F) The assessee has written off the amount being irrecoverable as the company filed an application before BIFR on 18.2.2002. (G) The amount of advances and also the amounts of purchases during the year are also comparable. 8. After going through the complete reply which has been reproduced above, I am satisfied that there was a commercial expediency for making such advances. My predecessor has also taken a similar view on the identical issue and has given relief to the assessee. Therefore, the Assessing Officer is directed to delete the addition made of ` 4,55,00,000/-.” 10. Still further, the Tribunal while dealing with the appeals for both the assessment years had concluded as under:- “8. Applying the above tests to the facts of the case of the assessee, it is seen that undisputedly borrowings have been made by the assessee company from the holding company on which it is paying interest. Now, the claim of Assessing Officer is that the assessee has made advances to HMGB, its subsidiary company by utilizing the borrowings and writing off the internet due to it. In our view, the advances Singh Gurbax 2014.01.08 13:47 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.257 of 2009 (O&M) 7 have been made to HMGB for commercial consideration since the assessee company is entitled to purchase raw material from the said company and infact the component of supply from HMGB is substantial. Apart from the above, on the advances made, the assessee is also entitled to an interest at the rate of 16.5%. It is no doubt true that a part of such interest pertaining to the instant year and previous year has been written off on account of losses suffered by the HMGB, yet it is also a fact that even in the instant year, the assessee has earned interest on the advances made to HMGB of sum of Rs.5.08 crores, which has been offered for tax. It is thus evident that, the borrowings made by the assessee company from the parent company had been utilized for the purpose of business or profession. The claim of the appellant has been accepted consistently in the past and allowed by the Assessing Officer and the deduction claimed on account of interest expenditure has been allowed. There are no changes in the facts and circumstances other than that the part of the interest accrued and due on the advances made to HMGB has been written off in the instant year. This fact alone cannot be a basis to suggest that the borrowings from the parent company has not been utilized for business purposes particularly when it is not in dispute that the assessee had earned interest of Rs.5.08 crores even in the year under consideration which forms part of the income assessed. It is also not in dispute that the assessee had raised interest free loan of Rs.95 crores from its parent company in the past which too has been put to use by the assessee in its business and it has been claim of the assessee before the lower authorities that the amount advances to HMGB is out of such amount. There is no finding in the assessment order that the advances made to HMGB in the past years, which are outstanding during the year, have been made out of the Singh Gurbax 2014.01.08 13:47 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.257 of 2009 (O&M) 8 interest bearing loan from the parent company. In any case we are not going into this aspect. In our view, there is sufficient material to show that the relationship of the assessee with its subsidiary, HMGB was based on commercial expediency and the advancing of the amount was for business purpose. In this regard, we may make a reference to the order of the CIT(A) for assessment year 2004-05 which is also subject mater of appeal before us. The CIT(A) has tabulated the price advantage to the assessee on purchases made from HMGB, an uncontroverted fact, which clearly indicates commercial prudence apart from ensuring continuous and timely supplies. Thus, on the grounds of consistency and commercial expediency, the deduction claimed by the assessee company is in accordance with law and the CIT) (A) correctly allowed the claim of the assessee. In such circumstances, the interest paid on the borrowings of Rs.76,21,436/- is an allowable deduction under section 36 (1) (iii) of the Act in terms of the latest judgment of Apex Court in the case of S.A.Builders (supra) wherein it has been observed as under:- It is true that the borrowed amount in question was not utilised by the assessee in its own business, but had been advanced as interest free loan to its sister concern. However, in our opinion that fact is not really relevant. What is relevant is whether the assessee advanced such amount to its sister concern as a measure of commercial expediency. We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends on the facts and circumstances of the respective case. For instance, if the directors of the sister concern utilize the amount advanced to it by the assessee for their personal Singh Gurbax 2014.01.08 13:47 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.257 of 2009 (O&M) 9 benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern for commercial expediency in many other circumstances (which need not be enumerated here). However, where it is obvious that holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans.” 11. From the above, it emerges that the CIT (A) and the Tribunal had concluded that there was commercial expediency in giving interest free loan to HMGB and the deduction was admissible under Section 36(1) (iii) of the Act. The primary factors inter alia which were taken into consideration were that: (i) the HMGB had provided raw material to the assessee at less than the market rate; (ii) the HMGB was providing a high quality and cost reliable source of supply and it gave assured supply of key raw material; (iii) the assessee had taken loan by paying interest at the rate of 2-3% whereas the amount was advanced to HMGB at the rate of 16.50% and earned interest of `2,63,93,820/- during the assessment year 2004-05. (iv) further, the average cost of material which was paid by the assessee to the joint venture was lower than the Singh Gurbax 2014.01.08 13:47 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.257 of 2009 (O&M) 10 cost from other concerns where the quantity was comparable. The aforesaid findings of CIT(A) and the Tribunal have not been shown to be erroneous or perverse in any manner. 12. In all fairness to learned counsel for the revenue, adverting to the judgments relied upon by her, in view of the findings of fact recorded by CIT(A) and the Tribunal that there existed commercial expediency in giving interest free loan to HMGB, which findings are not shown to be against the record, no advantage can be derived by the revenue from the pronouncement reported in Abhishek Industries Limited's case (supra). In so far as Motor General Finance Limited and Indian Shavings Products Limited's cases (supra) are concerned, these pronouncements were prior to judgment of the Apex Court in S.A.Builders's case (supra). Further, on factual matrix therein, no commercial expediency was shown to be existing and therefore, in view of distinguishable circumstances involved, these do not advance the case of the revenue. 13. In view of the above, the substantial questions of law are answered against the revenue and in favour of the assessee. Consequently, both the appeals are dismissed. (Ajay Kumar Mittal) Judge October 28, 2013 (Jaspal Singh) ‘gs’ Judge Singh Gurbax 2014.01.08 13:47 I attest to the accuracy and integrity of this document High Court Chandigarh "