Case Law Details
CIT Vs Reliance Industries Ltd (Supreme Court of India)
The Supreme Court of India adjudicated the appeals filed by the Revenue against the judgment of the Bombay High Court dated 22 & 23 August 2017 for the assessment years 2003-04, 2004-05, 2005-06, and 2006-07. The case dealt with multiple significant questions of law, including the allowability of interest deductions, the optionality of claiming depreciation, the nature of pre-operative expenses, deductions under Section 80M, and issues related to transfer pricing adjustments.
Questions Raised by the Revenue
The Revenue’s appeals raised five primary questions:
Interest Deduction: Whether the High Court was correct in holding that interest on funds provided to subsidiaries is allowable as a deduction under Section 36(1)(iii) of the Income Tax Act, 1961, even if the interest would not have been payable to banks if the funds were not provided to the subsidiaries.
Depreciation Claim: Whether the High Court was correct in upholding the Tribunal’s view that prior to the insertion of Explanation-5 to Section 32 of the Act, the claim of depreciation was optional and could not be imposed on the assessee if it had not claimed it.
Pre-operative Expenses: Whether pre-operative expenses incurred in connection with the creation of plant and machinery in units that had not commenced production are revenue in nature.
Deduction under Section 80M: Whether expenditure on an estimated basis can be reduced from dividends for deduction under Section 80M of the Act.
Transfer Pricing Adjustment: Whether the High Court was correct in upholding the Tribunal’s view in sustaining the deletion of the transfer pricing adjustment made to consultancy charges, particularly when the Transfer Pricing Officer (TPO) had adopted the same mark-up for its European associate as the assessee had adopted for its USA associate.
Supreme Court’s Observations and Rulings
Interest Deduction: The Supreme Court found that the issue was a pure question of fact. The High Court had noted the Tribunal’s finding that the interest-free funds available to the assessee were sufficient to meet its investments, thus presuming that the investments were made from these interest-free funds. Since the Tribunal followed its order for the assessment year 2002-03 and no new substantial evidence was presented, the Supreme Court found no reason to interfere with the High Court’s judgment on this matter. The appeals concerning this question were dismissed.
Depreciation Claim: The Supreme Court noted that the issue of whether the claim of depreciation was optional before the insertion of Explanation-5 to Section 32 was governed by its decision in Plastiblends India Limited Vs. Additional Commissioner of Income Tax, Mumbai and Another (2017). The High Court had not considered this decision. Therefore, the Supreme Court remanded this issue back to the High Court for fresh consideration, keeping all rights and contentions of both the Revenue and the assessee open.
Pre-operative Expenses, Deduction under Section 80M, and Transfer Pricing Adjustment: The Supreme Court observed that the High Court had failed to independently evaluate the merits of the departmental appeals concerning these issues. To facilitate a fresh examination, the Supreme Court set aside the impugned judgment of the High Court on these questions and remanded them for reconsideration.
Consolidated Hearing: The Supreme Court noted that appeals concerning two other questions were pending before the High Court. It allowed the parties to apply for a consolidated hearing to address all related issues comprehensively.
Conclusion
The Supreme Court’s judgment highlights the importance of thorough and independent evaluation of facts and legal questions by lower courts. By remanding several key issues back to the High Court, the Supreme Court ensured that the principles of justice and proper legal procedure were upheld, allowing for a detailed re-examination of the contentious matters in accordance with the relevant legal precedents.
FULL TEXT OF THE SUPREME COURT JUDGMENT/ORDER
Delay condoned.
Exemption from filing certified copy of the impugned judgment granted.
Leave granted.
These appeals have arisen from the judgment of the Bombay High Court dated 22 & 23 August,2017 for Assessment Years 2003-04, 2004-05, 2005-06 and 2006-07.
The High Court has passed a common order for all the
Assessment Years. Learned counsel for the assessee states that all the questions which have been framed do not necessarily arise for each Assessment Year. A chart has been tendered, explaining the position. The chart is taken on the record.
The appeals by the Revenue raise the following questions:
1. Whether the High Court is correct in holding that interest amount being interest referable to funds given to subsidiaries is allowable as deduction under Section 36(1)(iii) of the Income Tax Act, 1961 (for short ‘the Act’) when the interest would not have been payable to banks, if funds were not provided to subsidiaries;
2. Whether on the facts and in the circumstances of the case and in law, the High Court is correct in upholding the Tribunal’s view that prior to insertion of Explanation-5 to Section 32 of the Act, the claim of depreciation was optional and could not be thrust on the assessee, if it had not claimed it;
3. Whether on the facts and in the circumstances of the case and in law, the High Court is correct in upholding the Tribunal’s view that pre-operative expenses incurred in connection with creation of plant & machinery in units which have not commenced production, are revenue in nature;
4. Whether on the facts and in the circumstances of the case and in law, the High Court is correct in upholding the Tribunal’s view that expenditure on estimated basis cannot be reduced from dividends for deduction under Section 80M of the Act; and
5. Whether on the facts and in the circumstances of the case and in law, the High Court is correct in upholding the Tribunal’s view in sustaining the deletion of the Transfer Pricing adjustment made to consultancy charges, especially when the TPO had adopted the same mark up in relation to its European associate, what the assessee itself had adopted in relation to its USA associate.
Insofar as the first question is concerned, the issue raises a pure question of fact. The High Court has noted the finding of the Tribunal that the interest free funds available to the assessee were sufficient to meet its investment. Hence, it could be presumed that the investments were made from the interest free funds available with the assessee. The Tribunal has also followed its own order for Assessment Year 2002-03.
In view of the above findings, we find no reason to interfere with the judgment of the High Court in regard to the first question. Accordingly, the appeals are dismissed in regard to the first question.
Insofar as the second question is concnered, the issue, it is common ground, is governed by the decision of this Court in Plastiblends India Limited Vs. Additional Commissioner of Income Tax, Mumbai and Another (2017) 9 SCC 685.
The High Court has not had the benefit of the decision of this Court. Hence, we are of the view that it would be appropriate to remand the issue for fresh decision by the High Court bearing in mind the law laid down in the above case. We keep open all the rights and contentions of the Revenue and the assessee in regard to the applicability of the provision for the relevant Assessment Years.
As regards, the third question pertaining to preoperative expenses; the fourth question pertaining to the deduction under Section 80M of the Act; and the fifth question pertaining to transfer pricing, the High Court has failed to independently evaluate the merits of the departmental appeals. Hence, we consider it appropriate that the aforesaid questions are considered afresh by the High Court.
In order to facilitate a fresh exercise being conducted in relation to the aforesaid four questions (Question Nos.2,3,4 and 5), we allow the appeals and set aside the impugned judgment of the High Court. The appeals stand restored to the file of the High Court for that purpose.
This Court has been apprised of the fact that appeals are pending before the High Court against two other questions. Hence, it would be open to the parties to apply to the High Court for a consolidated hearing. These appeals are accordingly disposed of. There shall be no order as to costs.
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