CITY LUBRICANTS PVT. LTD.,CHENNAI vs. ACIT, CHENNAI

This appeal filed by the assessee is directed against the order of the ld. Commissioner of Income Tax (Appeals) 4(i/c), Chennai, dated 09.09.2019 relevant to the assessment year 2010-11.

Brief facts of the case are that the assessee filed its return of income for the assessment year 2010-11 on 15.10.2010 declaring loss of ₹.25,65,746/- under normal provisions and book profits at ₹.33,47,141/-. The return was initially processed under section 143(1) of the Income Tax Act, 1961 [“Act” in short]. Subsequently, the case was selected for scrutiny under CASS and notices under section 143(2) and 142(1) of the Act were issued calling or the books of accounts. After considering the details furnished in response to the notices, the Assessing Officer has completed the assessment under section 143(3) of the Act dated 28.02.2013 by assessing total income of the assessee at ₹.4,69,839/- after making disallowance under section 14A of the Act and disallowance of interest under section 36(1)(iii) of the Act.

With regard to the disallowance of interest expenditure, in the assessment order, the Assessing Officer has observed that the interest expenditure incurred by the assessee was attributable to the interest free loan of ₹.73,69,000/- given to Oyster Medisafe Ltd. and the debit balance of ₹.50,01,777/- was also not eligible under section 36(1)(iii) of the Act as the same was not incurred for the purpose of business. Further, the amount was also not eligible to be deducted under section 37 of the Act as the same was not laid out or expended wholly or exclusively for the purpose of business. The Assessing Officer further observed that the said loan was advanced to a group concern without charging any interest and the debit balance in the account of the subsidiary company was also in the nature of interest free loan. Since the assessee has paid interest at the rate of 14% on the loans availed from banks, the Assessing Officer determined the interest expenses at the rate of 14% on the interest free loans of ₹.1,23,70,777/- [73,69,000 + 50,01,777) to ₹.17,31,909/- and brought to tax. On appeal, the ld. CIT(A) confirmed the disallowance.

On being aggrieved, the assessee is in appeal before the Tribunal. None appeared on behalf of the assessee despite various opportunities afforded. Hence, we proceed to decide the appeal on merits after hearing the ld. DR.

We have heard the ld. DR, perused the materials available on record and gone through the orders of authorities below. In the assessment order, the Assessing Officer has observed that the assessee had granted interest free loan of ₹.73,69,000/- to OMSL and ₹.50,01,777/- to CIPL while the assessee paid interest of ₹.99,86,153/- for the loans availed by it from various banks to the tune of ₹.6,18,20,968/-. Since the assessee was paying interest @ 14% to the loans availed from the banks, the Assessing Officer charged the interest @ 14% on the interest free loans granted to its subsidiaries and disallowed the interest expenses to the extent of ₹.17,31,909/-. In the appellate order, the ld. CIT(A) has observed that the borrowed funds and own funds were mixed and it cannot be said that the interest free advances were only out of own funds.

In this case, the submissions of the assessee before the ld. CIT(A) are reproduced as under: “8. Per contra the AR countered the AO’s reasonings as under: “............ The appellant has not utilized the borrowed funds for making strategic investment or advancing any money to the group companies. During the F.Y. 2005-06 the appellant had invested in M/s. Oyster Medisafe Limited as a strategic investment. However shares were issued only to the extent of ₹.66.31 lakhs and balance amount of ₹.79.63 lakhs being converted into unsecured loan by M/s. Oyster Medisafe Limited. Therefore the investment was made prior to obtaining the loan from banks. The appellant subsequently found that the transaction was not viable and hence withdrew the investments in the subsequent year. In respect of the investment that were converted as unsecured loan, the appellant had charged interest from M/s. Oyster Medisafe Limited in the F.Y. 2010-11 and the same been offered to income..... Therefore the said interest expenditure cannot relate to the amount advanced to M/s. Oyster Medisafe Limited. When there is no nexus between the investments made and the loan obtained from banks, there is no question of any disallowance of interest as the borrowings were fully utilized for the purpose of business......”. In the appellate order, the ld. CIT(A) has not disputed the above submissions of the assessee. However, the ld. CIT(A) has observed that borrowed funds and own funds were kept in common kitty and therefore, it cannot be said that the interest free advances were only out of own funds. The claim of the assessee before the authorities below is that the assessee had granted interest free loans to its subsidiaries out of its own fund and borrowed funds were utilized for acquiring capital assets. It is not in dispute that the interest free funds available to the assessee were sufficient to meet its investment and thus, it could be presumed that the investments were made from the interest free funds available with the assessee. Our view is duly fortified by the Hon’ble Supreme Court in the case of CIT v. Reliance Industries Ltd. [2019] 410 ITR 466 (SC), wherein, similar findings of the Tribunal were duly affirmed by the higher Courts. Under the above facts and circumstances, the addition made towards disallowance of interest stands deleted.

In the result, the appeal filed by the assessee is allowed. Order pronounced on 15th February, 2023 at Chennai.