Trimex Industries Pvt Ltd Vs ACIT (ITAT Chennai)
ITAT Chennai held that disallowing the interest to the extent of amount advanced to its sister concern unsustainable as subsidiaries are engaged in the business as that of the assessee and it is called the expansion of business.
Facts- The AO on perusal of profit & loss account and balance sheet of the assessee noted that there was substantial increase in quantum of secured loans and unsecured loans during the relevant financial year 2008-09. The AO noted the details of total loans including secured and unsecured loans as on 31.03.2008 were Rs.55.47 crores, whereas the same have been increased to Rs.109.02 crores as on 31.03.2009. Further, he noted from the Schedule of Financial Charges that assessee has paid interest on term loan of Rs.2.01 crores and interest of working capital loan of Rs.11.07 crores compared to last year’s of Rs.1.36 crores and Rs.5.10 crores respectively.
According to AO in view of the above, the assessee had made substantial borrowings and paid huge interest in respect of the same which has been claimed as business expenditure amounting to Rs.3,30,08,590/-. Hence, he required the assessee to explain as to why the interest pertaining to the above interest free advance given to subsidiaries or sister concern i.e., investment shown in Trimax Sands as on 31.03.2009 at Rs.57 crores, donation paid of Rs.5 crores to Sri Sathya Sai Medical Trust on 04.08.2008, advance made to Pradeep Shipping of R.34,16,061/- on 28.02.2009 and interest claimed on the same to be disallowed.
The CIT(A) confirmed the action of the AO in disallowing the interest to the extent of amount advanced to its sister concern, Pradeep Shipping and donation made to Sri Sathya Sai Medical Trust. Being aggrieved, the present appeal is filed.
Conclusion- Held that the assessee’s subsidiaries namely Pradeep Shipping Pvt. Ltd., and Trimex Sands Pvt. Ltd., both are subsidiaries and engaged in the business as that of the assessee and it is called the expansion of business. Even in these subsidiaries and that of the assessee, there is common management and unity of control is there. Once this fact is there, the Revenue cannot disallow the interest expenditure because it is incurred for the purpose of business. Hence, we allow the interest and direct the AO accordingly. The appeal of the assessee is allowed.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
These cross appeals by the assessee and Revenue for the assessment years 2009-10 & 2013-14 are arising out of the orders of the Commissioner of Income Tax (Appeals)-18, Chennai in ITBA/APL/M/250/2022-23/1045817426(1) & 1046514558(1) dated 22.09.2022 & 28.10.2022. The assessments were framed by the ACIT, Central Circle 1(3), Chennai for the assessment years 200910 & 2013-14 u/s.143(3) r.w.s. 92CA(3) of the Income Tax Act, 1961 (hereinafter the ‘Act’), vide orders dated 25.03.2013 & 20.12.2016 respectively. The appeal by the assessee for the assessment year 2012-13 in IT(TP)A No.77/CHNY/2022 is arising out of the order of the Commissioner of Income Tax (Appeals)-18, Chennai in ITBA/APL/M/250/2022-23/1046514079(1) dated 28.10.2022. The assessment was framed by the ACIT, Central Circle 1(3), Chennai u/s.143(3) r.w.s. 92CA(3) of the Act dated 07.03.2016.
Assessee’s Appeals in IT(TP)A Nos. 77 & 78/CHNY/2022
2. The only common issue in these two appeals of assessee for the assessment years 2012-13 & 2013-14 is as regards to the order of CIT(A) confirming the action of the AO in disallowing expenses relatable to exempt income by invoking the provisions of section 14A of the Act r.w. rule 8D(2)(ii) & 8D(2)(iii) of the Income Tax Rules, 1962 (hereinafter the ‘Rules’) for interest disallowance and administrative expenses disallowance. For this, the assessee has raised various grounds in both the years, which are exhaustive and argumentative and hence, need not be reproduced.
3. The facts and circumstances are exactly identical in both the years and hence, by way of this common order these appeals are being disposed off.
4. Brief facts relating to assessment year 2012-13 in IT(TP)A No.77/CHNY/2022 are that the AO while framing assessment noticed that the assessee has received dividend income of Rs.32,78,79,872/- which includes dividend of Rs.32,78,44,905/-from the investment made by assessee in the shares of Trimex Sands Pvt. Ltd., a subsidiary company. The AO noted that the assessee has claimed interest expenditure in its P&L account amounting to Rs.16,63,71,259/-. He also noted that the investment in shares of Trimex Sands Pvt. Ltd., as on 31.03.2011 was at Rs.67,50,99,900/- and the same investment was in the financial year ending 31.03.2012. The AO noted that the funds available as on 31.03.2011 was only Rs.31,93,83,450/- and as on 31.03.2012, the availability of funds was Rs.44,25,66,430/- and this was due to increase in share capital to the tune of Rs.2,14,46,600/-. The AO observed that the interest expenses has not materially altered from Rs.17,06,44,678/- as on 31.03.2011 to Rs.16,63,71,259/- as on 31.03.2012. Accordingly the AO invoked Rule 8D(2)(ii) and disallowed interest expenses to the extent of Rs.4,80,62,722/-.
4.1 Similarly, the AO also taken average value of investment made by assessee and computed disallowance by taking 0.5% of the average value of investment under Rule 8D(2)(iii) at Rs.33,75,500/-Thereby the AO computed the disallowance u/s.14 of the Act r.w. rule 8D(2)(ii) at Rs.4,80,62,722/- and under rule 8D(2)(iii) at Rs.33,75,500/- and thereby aggregate disallowance at Rs.5,14,38,221/-. Aggrieved assessee preferred appeal before the CIT(A).
5. The CIT(A) simpliciter dismissed the ground of assessee despite the fact that the assessee before CIT(A) filed complete details of availability of funds but without going into the same, he observed that the AO has adopted the formula enacted by legislature under Rule 8D(2) and the formula prescribes that no such ground can be taken that the assessee has more interest free funds without one to one correlation. Hence, he dismissed the assessee’s ground. Aggrieved, now assessee is in appeal before the Tribunal.
6. We have heard rival contentions and gone through facts and circumstances of the case. We also noted that the assessee’s interest free funds as on 31.03.2012 at Rs.78.34 crores which is excess of investment made in the shares giving rise to exempt income i.e., dividend income of Rs.32.98 crores on the investment of Rs.76.29 crores. The assessee also filed details of working capital term limit of Rs.18,17,17,947/- which was available with the assessee and the same cannot be included while computing disallowance. The assessee has given revised working for making disallowance and added that only disallowance under Rule 8D(2)(ii) will be at Rs.51,29,547/- and under Rule 8D(2)(iii) at Rs.8,79,583/-, thereby total disallowance of expenditure should be restricted at Rs.60,09,130/- as against computed by the AO at Rs.5,14,38,221/-. When these revised working was provided to the Revenue, the ld. Senior DR could not controvert the above fact situation but only requested that matter can be referred back to the file of the AO for considering the availability of funds i.e, interest free funds available with the assessee on 31.03.2012. The relevant revised working is reproduced from the order of CIT(A) as under:-
