Thiruvalluvar Textiles (P) Ltd. Vs ACIT (ITAT Chennai)
The appeals before the Income Tax Appellate Tribunal, Chennai, arose from the orders of the Commissioner of Income Tax (Appeals) dated 24.01.2025 for Assessment Years 2008-09 to 2011-12. The common issue in all the appeals concerned the disallowance of interest on advances made by the assessee company to its wholly owned subsidiary, M/s. The Narasimha Mills Pvt. Ltd. (TNMPL). The disallowance amounted to Rs.3,40,04,077 for AY 2008-09, Rs.2,45,30,864 each for AYs 2009-10 and 2010-11, and Rs.4,92,34,816 for AY 2011-12. Since the issue was common, the Tribunal treated AY 2008-09 as the lead case and applied its findings mutatis mutandis to the remaining years.
For AY 2008-09, the assessee, engaged in the manufacture of cotton yarn, filed its return declaring a loss. The return was processed under Section 143(1), later selected for scrutiny, and an assessment under Section 143(3) was completed on 30.12.2010. Subsequently, the Commissioner of Income Tax set aside the assessment under Section 264 and directed the Assessing Officer to make a fresh assessment. During the fresh proceedings, the Assessing Officer noted that the assessee had invested Rs.19,62,46,913 in equity shares of TNMPL and advanced Rs.7,57,85,706 to the subsidiary. The Assessing Officer observed that the assessee had borrowed approximately Rs.150.89 crore for business purposes and claimed interest expenditure thereon. Since, according to the Assessing Officer, the assessee lacked accumulated profits or reserves sufficient to make the investments and advances, he presumed that borrowed funds had been diverted for non-business purposes. The Assessing Officer also recorded that the investments and advances were made in connection with acquiring TNMPL and treated the acquisition as a capital asset. On that basis, proportionate interest at 12.5% on both the investments and advances was disallowed.
