TRIMEX INDUSTRIES PVT LTD,CHENNAI vs. CIT(A)-18, CHENNAI

आदेश /O R D E R

PER G. MANJUNATHA, ACCOUNTANT MEMBER:

This appeal filed by the assessee is directed against the order passed by the learned Commissioner of Income Tax (Appeals)-18, Chennai, dated 08.10.2021 and pertains to assessment year 2010-11.

:-2-: ITA. No: 13/Chny/2022 2. The assessee has raised the following grounds of appeal: “1. The order of the Commissioner of Income tax (Appeals) is contrary to law, facts of the case and material on record. 2.1 In the facts and circumstances of the case, the CIT(A) ought to have held that the appellant company is entitled to the deduction under Sec.36(1)(iii) of the Act. 2.2 The CIT(A) grossly erred in not appreciating that where the holding company has deep interest in its subsidiary and the money advanced was for business interest of its of subsidiary, the holding company should ordinarily be allowed the benefit of deduction under Sec.36(1)(iii) unless there is material in the possession of the Assessing Officer to the effect that the money advanced was utilised by the subsidiary for non- business purposes. (CIT Vs KEC International Ltd - Madras High Court in TCA 113/2009 dated 02/12/2019) 2.3 The CIT(A) failed to appreciate that the Assessing Officer is not within his limits to suggest to the assesse as how to manage its affairs and that the assesse is entitled to make better use of its resources in the best interest of its business. 2.4 The Assessing Officer and the CIT(A) have failed to appreciate that the strategic investment by the assesse company with its subsidiary lead to improved financial results of the subsidiary in the following years fetching substantial revenue to the exchequer by way of taxes and also enhanced the value of assessee's investments and hence the observation of the Assessing Officer and the CIT(A) that there was no commercial expediency could be treated to be contrary to facts and deserve to be discounted. For these grounds and such other grounds as may be adduced either before or during the appeal proceedings, the appellant prays that the Assessing Officer may be directed to allow the claim of the appellant for deduction under Sec.36(1)(iii) of the Act and render justice.”

:-3-: ITA. No: 13/Chny/2022 affidavit explaining the reasons for the delay has been filed. The AR, further submitted that the assessee could not file appeals within the time allowed under the Act, due to the fact that appeal papers was received on 03.11.2021 and the assessee is away from headquarters on official duties, which caused delay of 03 days. The delay in filing appeal is neither intentional nor willful but for the unavoidable reasons, therefore, delay may be condoned in the interest of advancement of substantial justice.

:-4-: ITA. No: 13/Chny/2022 condonation of delay and hence, delay in filing of appeal is condoned and appeal filed by the assessee is admitted for adjudication.

:-5-: ITA. No: 13/Chny/2022 7. The AO, however, was not convinced with the explanation furnished by the assessee and according to the Assessing Officer, the assessee could not establish business expediency in investment with subsidiary companies and therefore, by following certain judicial precedence worked out notional interest @ 12.7% on investments made in subsidiary companies and made addition of Rs. 97,18,008/- u/s. 36(1)(iii) of the Act. The relevant findings of the AO are as under: “6.4 I have considered the above submissions of the assessee and the Judicial decisions relied upon by the assessee. The major issue involved in all the above cases was regarding the availability of surplus funds and interest free funds with the assessee and lack of nexus between the borrowed funds & interest free loans & advances given and therefore the Courts have held that the interest free advances were forwarded from the interest free funds and surplus available with the assessee. On this grounds the Courts have deleted the addition made on account of interest paid on interest free loans and advances. Further it is seen that in the case of the decision relied upon by the assessee of S.A. Builders cited supra, the Supreme Court has held that allowability of interest paid will depend upon the facts and circumstances of each case and it is not that in every case interest on borrowed loan has to disallowed if the assessee advances it to a sister concern. 6.5 As regard M/s. Trimex Sands also the assessee has only submitted that the investments were made subsidiary company for the purpose of the business and same should be allowed u/s.36(1)(ii) of the I.T.Act, 1961. As per the assessee

:-6-: ITA. No: 13/Chny/2022 The Trimex Sands is a subsidiary company of the assessee incorporate for the purpose of setting up a beach sand project. The assessee has not brought on the record that how the investment in the subsidiary company is commercially expedient to them. The assessee has stated that the Trimex Sands was setting up a beach sand project. The assessee has not furnished any detail to prove how the setting of the beach sand project was beneficial to them in the present or future. Further since a new project was setting by the subsidiary company the interest paid on account of investments and loans and advances are of the nature of capital expenditure which should have gone to the cost of investment By claiming the interest as revenue expenditure in their books of account the assessee has produce the distorted picture of their profit of the current year. Thus the interest paid on investments cannot be allowed as business expenditure. From the above facts its crystal clear that the assessee has not discharged its onus to establish that the above investments, and loan to Subsioiary was for the purpose of the business and there was business exigency to do SU. Hence the decision of the Supreme Court in the case of $.A. Builders(Supra) does not apply to the facts of the Case of the assessee. The assessee has paid huge interest to the bank on the debit balances for each month. Further the assessee has not brought any incident to prove that the loans and advances in Trimex Sands has been made out of these surplus funds with them. 1t is seen that the assessee has received share application money to the tune of Rs. 3.73 crores as at 31.03.2010. It is also seen that the assessee has incurred heavy loss of rs.21.61 Crores during the year as compared to 8.46 Crores as at 31.03.2009.

:-7-: ITA. No: 13/Chny/2022 6.6 The Hon'ble Kerala High Court in the case of CIT V. Harrisons Malayalam Ltd. (210 Taxman 115 dt. 03/08/20 12) has dealt with the issue of allowability of the interest paid in respect of loans and advances given tosubsidiary concerns. In the said decision, the Hon'ble High Court has also discussed the decision of the Supreme Court relied upon by the assessee. While addressing the issue of assessee's claim that loans to subsidiary Companies were from its internal resources, the Hon'ble Court has held that if such interest free loans were not made, then at least the assessee need not have borrowed from other entities for meeting its day-to-day expenses. The Hon'ble High Court has held that the interest paid on such funds could not be claimed as business expenditure. the case of the assessee as discussed above that they have paid huge interest of Rs.17,81,86,171 /-. Since the loans and advances & investments have been mostly made from the above bank account, the assessee Could have reduced its liabilities on account of interest if the surplus funds etc., were utilized for the payment of liabilities of these banks, has the ratio of decision of Kerala high Court is fully applicable to the fact of the assessee's case.

6.7 In view of the above facts the interest payment on the amounts utilized for the above investment is considered as the expenditure not incurred for the purpose of the business and the same has been disallowed put of the interest expenditure claimed by the assessee. Further, from the details submitted by the assessee regarding the interest on loans paid to banks on term loans and cash credit loans, the average rate of tax worked out to 12.7% per annum. In respect of the investment made during the year in Trimex Sanas as discussed above the disallowable interest

:-8-: ITA. No: 13/Chny/2022 works out to Rs.82,88,257/-. This interest has been worked out on the average rate of interest on which the assessee has borrowed funds from the banks. in respect of investments in Laviosa Trimmex industries Pvt Ltd. On investment of Rs. 1,62,40,490 on 22.07.09, interest works out to Rs. 14,29,751/- @ 12.7% average rate of interest therefore a sum of Rs. 97,18,008/- out of the interest expenditure claimed by the assessee is disallowed as the expenditure not incurred for the purpose of the business.”

:-9-: ITA. No: 13/Chny/2022 had availed loan at an average rate of 12.7% interest as observed by the AO. The AO disallowed Rs 97,18,008 being 12.7% of the said loans and advances 11. As per provisions of section 36(1)iii) of the Act, the interest on loans raised by the appellant for business purposes is available as a business deduction. If the appellant claims deduction in terms of section 36 for the purpose of computation of income referred to in section 28, it is incumbent on the appellant to place materials in support of its claim. Section 36(1)(iii) of the Act relates to amount of interest paid on capital borrowed for the purposes of the business, profession or vocation. The appellant is required to satisfy the AO that it is entitled to obtain deduction in accordance with the provisions. If, in the process of examination of genuineness of such deduction, it transpires that the appellant advanced certain funds to sister concerns without charging interest, onus on the appellant is heavy inasmuch as there was justification to lend interest free loan to sister concern that in spite of outstanding loans on which the appellant is incurring liability to pay interest. 12. The Hon'ble Apex Court in the case of S.A.Builders Ltd. Vs CIT (288 ITR 1) has held that the correct approach to the issue of grant of deduction u/s 36(1iii) would be to examine whether the amount advanced to the subsidiary or associated company or- any other party was advanced as a measure of commercial expediency and not from the point of view whether the amount was advanced for earning profits. It was held that if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes (which need not necessarily be the business of the assessee itself), the assessee would, ordinarily be entitled to deduction of interest on its borrowed loans. Elaborating upon the connotations of 'commercial expediency',

:-10-: ITA. No: 13/Chny/2022 the Hon'ble Court observed that II the expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business and that the expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure, if it was incurred on grounds of commercial expediency". 12.1 At the same time, it is relevant to refer to the observations of the Hon'ble Supreme Court in its judgment that it is not their opinion that in each and every case interest on borrowed funds has to be allowed, if the assessee advances to its sister concerns. 13. In this context, it needs to be examined whether the amounts in question that were advanced to sister concern without any interest were justified by reasons of commercial expediency or not. No justification has been provided by the appellant for the amounts advanced and perusal of the written submission filed do not touch upon the issue at all except making general statements.The appellant has not demonstrated that there was nexus between the expenditure and purpose of the business; and that the appellant has not brought on record any material on record to ( establish) the fact that the loan given by the assessee company to the sister entity is in the commercial expediency". It is not disputed that borrowed funds availed by the appellant were advanced to sister concerns without charging interest. The appellant has not demonstrated that there is proximate nexus between the business of the assessee-company and that of the company in which investments were made in the form of share. The AO per contra, pointed out that the appellant did not give any such convincing reasons for granting interest free loans to its group companies, apart from a generalized statement that the loan was given in the context of common

:-11-: ITA. No: 13/Chny/2022 management, unity and control. It is not the case of the appellant that it utilized its borrowed capital for strategic business purposes with a view to strengthening and promoting its existing business by combining different business segments as the AO has observed that the appellant could not furnish as to how the advances made to M/s Trimax Sands that was incorporated for the purpose of setting up of a project could be construed as commercially expedient. In the circumstances, the appellant is not entitled to the benefit of the ratio laid down in the case of S.A.Builders(supra) by simply accepting the submission of the assessee. Accordingly, the interest expenditure incurred by the appellant that have been claimed u/s 36(1)(iii) is not allowable. 14. I am thus of the view that once it is borne out from the record that the appellant had borrowed certain funds on which liability to pay interest is being incurred and on the other hand, certain amounts had been advanced to sister concerns or others without carrying any interest and any business purpose, the interest to the extent the advance had been made without carrying any interest is to be disallowed under section 36(1)(iii). Such borrowings to that extent t possibly be held for the purpose of business but for supplementing the cash diverted without deriving any benefit out of it . 15. Further, the above conclusion is fortified by the decision of the Hon'ble High Court of adras in the case of Empee Holdings Ltd. Vs DCIT, Company Circle II(I), Chennai[2019] 109 taxmann.com 10 (Madras). 16. The appellant has also placed reliance on the decisions KBC International (Supra)and Spencers & Co. Ltd. The facts of the case, the cases of KEC International (Supra) and Spencers & Co. Ltd. are distinguishable inasmuch as the issue of commercial expediency was upheld, therein in view of the investments in existing business of the loanees.

:-12-: ITA. No: 13/Chny/2022 17. In view of the foregoing discussions, I do not find any infirmity in the decision of the AO in effecting the impugned disallowance. Accordingly, the appellant's grounds are dismissed.”

:-13-: ITA. No: 13/Chny/2022 bearing funds for non-business purpose. Therefore, he submitted that the order of the AO and ld. CIT(A) should be upheld.

:-14-: ITA. No: 13/Chny/2022 disallowance of interest u/s. 36(1)(iii) of the Act, does not arise.

:-15-: ITA. No: 13/Chny/2022 the case of G.E.T. Water Solutions Pvt Ltd vs ACIT (Supra), where the Tribunal after considering relevant facts held that, once the assessee establishes the business connection for commercial expediency, then the assessee is at liberty to deal with its finances, in accordance with its requirements and the AO cannot sit in arms chair of the businessman to decide its business affairs and direct how to deploy its funds. As long as the assessee establishes the business connection, then it is free to deal with its affairs in accordance with its requirements. In this case, there is no dispute with regard to the fact that investments made by the assessee with its subsidiary companies gives business advantage to the assessee, because the assessee company and subsidiary companies are in similar line of business. As regards, case laws relied upon by the CIT(A) in the case of Empee Holdings Ltd vs DCIT (Supra), we find that the ratio laid down by Hon’ble High Court of Madras in the said case is not applicable to facts of this case, because in the said case the question of law answered by the Hon’ble Madras High Court is on the issue on re-opening of assessment u/s. 147 of the Act, but not on the issue of disallowance on interest u/s. 36(1)(iii) of the Act, for interest free advances to group companies for non-business purpose. Therefore, we are

:-16-: ITA. No: 13/Chny/2022 of the considered view that the case laws relied upon by the Ld. CIT(A) has no application to the facts of the present case.