M/S SOUTHERN TPETROCHEMICAL INDUSTRIES CORPRATION LIMITED,CHENNAI vs. ITO, CORPORATE WARD-3(1), CHENNAI

आदेश / O R D E R PER G. MANJUNATHA, ACCOUNTANT MEMBER: This appeal filed by the assessee is directed against the order of the Principal Commissioner of Income Tax, Chennai-3, passed u/s.263 of the Income tax Act, 1961 dated 30.03.2022 and pertains to assessment year 2017-18.

:: 2 :: because the decision of the Assessing Officer is not inconsonance with the view of the Pr. CIT.

2.1 The Pr. Commissioner of Income Tax failed to appreciate that the scrutiny assessment was completed u/s.143 (3) after examining the books of account and considering the various details filed before the assessing officer.

2.2 The Pr. Commissioner of Income Tax ought to have appreciated that if the assessing officer has taken one of the two possible views it cannot be termed as erroneous and prejudicial to the interest of revenue. [Malabar Industrial Co. (vs) CIT 243 ITR 83 (SC)]

3. The Pr. Commissioner of Income Tax ought to have held that the amount investment in subsidiary (M/s SPIC Fertilizers Chemicals Limited, Mauritius/Dubai) for the purpose of business and hence the write off the same constitutes business loss.

3.1 The Pr. Commissioner of Income Tax erred in concluding there is no direct nexus between business of the assesse ignoring the fact that ITAT in assesses own case for the Assessment Year 2000-01 (ITA.No.2252/Mds/2003) has held that the investment in SFCL was for the purpose of business of the appellant.

3.2 The Pr. Commissioner 'of Income Tax ought to have appreciated that the SFCL was created only for the purpose of setting up a manufacturing facility for producing Ammonia and Urea in Dubai only for the consumption of appellant. Hence the investment in SFCL is for the purpose of business of the Assessee.

4. The Pr. Commissioner of Income Tax ought to have accepted the contention of the appellant that the write off the Investment in SFCL should be deducted from the book profit.

4.1 The Pr. Commissioner of Income Tax ought to have appreciated the provision made for diminution in value in respect of this investment in Assessment year 2009-10was added back to book profit and hence the entire write off of investment during this year should be deducted from the book profit.

4.2 The Pr. Commissioner of Income Tax erred in holding that the Assessee have quoted the provision of Section 115JA, whereas the assessee had only referred to Explanation (i) to Section 115JB to prove that the provision for diminution made in earlier was not allowable/allowed.

4.3 The Pr. Commissioner of Income Tax erred in holding that sum of Rs.20547.39 lakhs was debited in Profit Et Loss Account towards investment in subsidiary which is not allowable.

4.4 The Pr. Commissioner of Income Tax ought to have appreciated the Debit of Rs.205 .47 crores included write off of equity investments Rs.183 cores (supra above) and an advance of Rs.22 crores provision for which has claimed as deduction and allowed in the Assessment year 2008-09. Hence only Rs.183 crores being the Investment now claimed as deduction. Hence, the amount written off is allowable as deduction from book profits.

5. The Pr. Commissioner of Income Tax ought to have appreciated the very same issue was raised at the time of original assessment and the appellant have submitted full details. Hence Pr. Commissioner of Income Tax erred in assuming Jurisdiction in respect of issue which was queried and explained and accepted by the Assessing officer at the time of original assessment.'

6. The Pr. Commissioner of Income tax erred in not considering the decisions relied on by the appellant in proper perspective.

7. When there are two views possible and the Assessing Officer has taken on possible view, order of assessment cannot be considered as erroneous and Pr. CIT erred in assuming jurisdiction u/s.263.

8. The Appellant craves leave to adduce additional grounds at the time of hearing.

i. The investment written off to the tune of Rs.184,53,62,000/ being investments in subsidiary SFCL, Dubai. ii Rs.20,547.39 Lakhs which is debited in the P&L A/c towards the winding up of the subsidiary company. iii. Deduction claimed while computing of book profit under section 115JB for the amount of Rs.138,40,21,000/- which is for diminution in the value of investments. iv. Claim of hedging Loss of Rs.453.74 Crores (Appellant's explanation on this issue was accepted and this issue was dropped in the final order of the Commissioner of Income Tax dated 30.3.2022)

5. In response to show cause notice issued u/s.263 of the Act, the assessee submitted that the assessment order passed by the Assessing Officer is neither erroneous nor prejudicial to the interest of the revenue.

During assessment proceedings, the AO has called for details by specific questionnaire on the issue of loss claimed on written off investment in subsidiary for which the assessee has filed relevant details including the purpose of setting up subsidiary in Dubai, relevant approvals from the government and also has filed a write up on how diminution in value of investment, is allowable as business loss. The Assessing Officer after considering relevant facts has accepted explanation furnished by the assessee and completed assessment by allowing deduction towards loss on investment in subsidiary. Therefore, it cannot be said that assessment order passed by the Assessing Officer is erroneous in so far it is prejudicial to the interest of the revenue.

6. The ld.PCIT after considering relevant submissions of the assessee and also taken note of various facts opined that assessment order passed by the Assessing Officer u/s.143(3) of the Act, dated 28.12.2019 is erroneous in so far as it is prejudicial to the interest of the revenue, because, the Assessing Officer has simply accepted explanation furnished by the assessee without carrying out enquiries, which he ought to have been carried out in terms of Explanation-2 to Sec.263 of the Act, which rendered the assessment order passed by the Assessing Officer erroneous in so far it is prejudicial to the interest of the revenue. Therefore, set aside the assessment order passed by the Assessing Officer and direct the Assessing Officer to re-do the assessment after examining all the issues in details after affording sufficient opportunities of being heard to the assessee. The relevant findings of the PCIT are as under:

6.1 It is not clear that how the establishment of a plant which produce ammonia and urea at Dubai by a subsidiary will be beneficial for the Indian Company which also produce similar products. The assessee is not claiming that ammonia and urea are scarce raw materials for their Indian plants. On verification of the annual report of the assessee company, the manufacture of Urea is the main activity of company which contributes to 99% of the turnover of the company.

6.2 It may also be noticed that the UAE plant is not a branch or unit of the Assessee company. It is separate legal entity and its income is not liable to be taxed in India. The corollary is that its losses cannot be adjusted against the profits of the Assessee company.

6.3 In view of the above, I don't agree with the contention of the Assessee company that there is a direct nexus between the investment and the business of the Assessee in India. Therefore, the investment written off to the tune of Rs.184,53,62,000/- is not an allowable deduction for the Assessee company.

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6.4. From this, it is clear that the Assessing Officer had not examined this issue in detail, which was erroneous as it was prejudicial to the interest of the revenue.

7.1 From the above, it is clear that the Assessee had followed the provisions of Section 43AA of the Income Tax Act and hence it is an allowable expenditure. In view of this, proceedings u/s.263 on this issue is hereby dropped.

8. The next issue is regarding the Rs.20,547.39 Lakhs which is debited in the P&L A/c towards the winding up of the subsidiary company. As mentioned in Paras 6 to 6.4, this is apparently not an allowable expenditure as it was not incurred for the purposes of earning income in India. From this, it is clear that the Assessing Officer had not examined this issue in detail, which was erroneous as it was prejudicial to the interest of the revenue.

9. The next issue is regarding the deduction claimed while computing of book profit under section 115JB for the amount of Rs.138,40,21,000'--. which is for diminution in the value of investments.

10. However, the clause (i) of the Explanation to subsection 2 of the Section 115JB dearly states that "the amount or amounts set aside as provision for the diminution in the value of assets" are to added to the book profit.

10.1. This year the Assessee's book profit is Rs.2739.31 Lakhs and the amount and in the MAT computation statement the Assessee claimed a deduction of Rs.138,40,21,000/- claiming that it was disallowed in the MAT computation for the financial year 2008-09. For this, they are quoting the provisions of Section 115JA which is not applicable from 01.04.2001 as the said section was replaced by Section 115JB. In view of this, it is clear that the Assessing Officer had not examined this issue in detail, which was erroneous as it was prejudicial to the interest of the revenue.

7. The ld.AR for the assessee submitted that the ld.PCIT erred in assuming jurisdiction u/s.263 of the Act and holding that the assessment order is erroneous and prejudicial to the interest of the revenue, merely, because the decision of the Assessing Officer is not inconsonance with the view of the PCIT. The ld.AR for the assessee submitted that during scrutiny assessment the assessee has filed all details and the Assessing Officer after being satisfied with the explanation furnished by the assessee accepted the claim of write off loss on investment. Therefore, it cannot be said that the assessment order passed by the Assessing Officer is erroneous and prejudicial to the interest of the revenue, merely because there is no specific discussion on this issue in the assessment order. The ld.AR for the assessee further submitted that the assessee has filed all details regarding provision made for diminution in value of investments and subsequent disallowance of said loss in the income memo for relevant assessment years. The assessee had also explained to the Assessing Officer reversal of provision created in books when it is no longer required and also excluding the same from book profits in terms of Clause (i) of Explanation 2 to Sec.115JB of the Act. The Assessing Officer after considering relevant facts has rightly allowed the claim of the assessee and thus, the PCIT is erred in revising the assessment order u/s.263 of the Act.

Necessary approval for promoting and investing in a wholly owned subsidiary company in Dubai, UAE was obtained from RBI vide their letter dated 5.3.1997 (page 13 of paper Book). Later on due to statutory requirement of UAE, the investment of the Appellant in the UAE subsidiary was routed through wholly owned subsidiary in Mauritius. This restructuring had the approval of RBI vide their letter dated 25.3.1998 (Page 20 of the paper Book). The Company in Mauritius had only investment in the Dubai Company as its asset. Subsequently, when the Dubai entity was not able to obtain Natural gas, required for the manufacture of Ammonia and urea, the Dubai Company had no other alternative but to wind up its operation. The Appellant had provided for the entire investment in Dubai through the Investment in Mauritius in the Assessment years 2008-09 and 2009-10 to the tune of Rs.4613.40 lakhs and Rs.13840.21 lakhs respectively and the same was disallowed in computing the taxable income for the Assessment Years 2008-09 and AY 2009-10. The Memo of computation of income was submitted before the Assessing officer. As the company at Dubai was wound up, during the year the investments made by the Appellant in that company through its subsidiary in Mauritius was written off. As the Investment was in the course of and for the purpose of the business of the Assessee, the amount written off was claimed as a deduction from the business income. The Assessee did not claim the write off in their first return of income but claimed it in the revised return.

Point No: 1(iv) :- Copy of return of income -- Original or revised, if any, for AY 2017 18. Please state the reason for filling revised return (if applicable) with proper evidence for substantiating the changes

Please find enclosed herewith revised return vide Annexure 3. Company made provision for diminution in the value of investment during the Assessment year 2008-09 and 2009-10 to the tune of Rs.4613.40 lakhs and Rs.13840.21 Lakhs respectively and the same was disallowed by us in the respective year memo computation of income enclosed vide Annexure 4 and 5. We made the said investments to set up Urea and Ammonia Plant at Dubai which is supported by EGM minute's approval enclosed vide Annexure 6. During the current assessment year the investment was written off in Statement of Profit and Joss and claimed as deduction under memo computation of income (Copy of the relevant extract of Board Resolution enclosed vide Annexure 7). There is a direct nexus between the said investment and the business of the assessee which was also confirmed in our own case by /TAT for the assessment year 2000-01 vide copy enclosed vide Annexure 8 allowed with respect to interest on advance given to SFCL allowable as business expenditure under section 37 of Income Tax Act.

Further we are enclosing vide Annexure 9 herewith ITAT Delhi order on Sahara Global Vision Private Limited Vs ACIT, allowing loss due to write off of investments in joint venture is allowable business expenditure.

The above said disallowance was properly claimed under MAT computation DUE not considered in regular computation hence filed revised return to consider the same.

11. Thus, the entire background of investment in the Subsidiary in Dubai through the pass through subsidiary in Mauritius as well as the reason for writing off was fully explained in the reply dated 27.11.2019.

The assessee had also explained its case with help of decision of the Delhi tribunal where it was held that loss on account of divestment of investment made in subsidiary for the purpose of business is allowable as a business loss. The Assessing Officer after considering relevant submissions, had completed assessment and accepted write off of loss on account of investment in subsidiary.

18. Now, coming to the second contention of the assessee, we find considerable force in the argument of the learned counsel for the assessee and the decision of the Hon'ble Madras High Court in the case of Indian Commerce & Industries Co. (P) Ltd. vs. CIT (supra) squarely covers this issue. In that case, as noted by the learned CIT(A), it was held "that the shares were purchased because of coercion by the company and also with a view to increase the assessee's business with the company. Hence, there was a nexus between the business of the assessee and the purchase of shares." In the present case also, we find that since the assessee had made the investment in a company which was to produce the basic raw material required by the assessee, it has to be held to be a case of the assessee's expansion of business and, therefore, the funds were utilized for business purpose. The assessee in its written submissions has pointed out that both the companies were subsidiaries of the assessee. It is pointed out that IM/s Indo Jordan Chemical Co., Jordan, with which the assessee had entered into a joint venture, owned phosphate mines which was a basic raw material for manufacture of phosphoric acid. Similarly, SPIC Fertilizers and Chemicals, FZE, (SFCL), at Dubai was engaged in the manufacture of ammonia and urea which were raw materials for the fertilizer business of the assessee. It is pointed out

that both ammonia and phosphoric acid accounted for 44.27 per cent in value of the total raw material consumption. Thus, even if borrowed funds were utilized, still the assessee would be entitled for deduction under s. 36(1)(iii) of the Act, in view of the decision of the Hon'ble Madras High Court in the case of Sivakami Mills Ltd. (supra), affirmed by the Hon'ble Supreme Court in (1998) 144 CTR (sc) 172: (1997) 227 ITR 465 (SC) (supra), wherein it was held that interest on deferred payment for purchase of machinery was revenue expenditure. The decision in State of Madras vs. G.J. Coelho (supra) also supports this view. In this case it was held that the payment of interest on the amount borrowed for the purchase of the plantation when the whole transaction of purchase and the working of the plantation was viewed as an integrated whole, was so closely related to the plantation that the expenditure could be said to be laid out or expended wholly and exclusively for the purpose of the plantations. Therefore, the assessee, in any view of the matter, succeeds on the strength of its second contention.

A bare reading of this provision makes it clear that the prerequisite to exercise of jurisdiction by the CIT suo motu under it, is that the order of the ITO is erroneous insofar as it is prejudicial to the interests of the Revenue. The CIT has to be satisfied of twin conditions, namely, (i) the order of the AO sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent-if the order of the ITO is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue-recourse cannot be had to s. 263(1) of the Act.

Again the court observed:

The phrase 'prejudicial to the interests of the Revenue' has to be read in conjunction with an erroneous order passed by the AO. Every loss of revenue as a consequence of an order of AO cannot be treated as prejudicial to the interests of the Revenue, for example, when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the ITO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the ITO is unsustainable in law.

At this stage we may clarify that under para 10 of the judgment in the case of Malabar Industrial Co. Ltd. (supra) this Court has taken the view that the phrase “prejudicial to the interest of the Revenue” under s. 263 has to be read in conjunction with the expression “erroneous” order passed by the AO. Every loss of revenue as a consequence of an order of the AO cannot be treated as prejudicial to the interest of the Revenue. For example, when the ITO adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the ITO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the Revenue, unless the view taken by the ITO is unsustainable in law.

(i). ACE designers Ltd v ACIT 275 Taman 100 (Kar.) (ii). CIT v Colgate Palmolive (India) Ltd 370 ITR 728 Born. (iii). Indian Commerce and Industries Co P Ltd 213 ITR 533 Mad. (iv). Patnaik and Co Ltd. 161 ITR 365 SC.

"7. In the backdrop of aforesaid well settled legal position, the facts of the case in hand may be adverted to. From the perusal of the note annexed to the income filed before the assessing officer, it is evident that assessee had set up an establishment in USA during Financial Year 1992-93 for the exclusive purpose of marketing assessee's products and for promoting its business in US and Latin America. It has further been stated in the note that looking to the stringent norms of product liability in US market, the assessee decided to have a separate Wholly Owned Entity in the US having limited liability. The approval for aforesaid purpose was obtained from the Reserve Bank of India. The assessee therefore, invested funds in equity for meeting the revenue expenses of Wholly Owned Subsidiary Company's balance sheet. However, WOS could not perform up to company's expectations and therefore, it was decided to wind up WOS operations in USA. While granting approval for closure of was, RBI permitted the company to write off the whole of investment made in WOS and unrealized export receivables. The assessee therefore, made a claim to write off the loss of Rs.3,41,23,200/-as revenue expenses allowable under the provisions of the Act.

"The Commissioner and the Tribunal concurrently found that the Camelot was fully owned subsidiary of the Assessee and engaged in the manufacturing of tooth brushes exclusively for the sole client namely the Assessee. Shares purchased of Camelot were also sold by the Assessee to one Ramesh Sukharam Vaidya for consideration of Rs.45,00,000/-. The Assessing Officer held that the sum of Rs.5,50,00,000/- which was invested by the Assessee in the equity of Camelot on 17 March 2003 and which have been used to repay the loan to the Assessee company, amounting to Rs.5.5 crores, before 1 March 2003 would demonstrate that the purpose of investment was to give a Long Term Enduring Benefit to the Assessee. Merely because it was made in the normal course of business, it cannot be termed as anything but long term investment. This conclusion of the Assessing Officer was challenged in the Appeal before the First Appellate Authority and the Commissioner concluded that the main reason for setting up Camelot was to manufacture tooth brushes exclusively for the Assessee. Since the Assessee was relying on Camelot for manufacturing of tooth brushes to be traded by the Assessee, the investment is nothing but a measure of commercial expediency to further business objectives and primarily related to the business operations of the Assessee. At no point of time the investment in Camelot was made with an intention to realize any enhancement value thereof or to earn dividend income. The investment was made to separately house the integral part of the business activity. In such circumstances, the Commissioner relied upon the above judgments and allowed the Appeal. He concluded that the loss of Rs.5.50 crores is a business loss in the hands of the Assessee. He set aside the order of the Assessing Officer.

8. The Revenue carried the matter in Appeal and the Tribunal has dealt with this issue extensively. In para 7 of its order, the Tribunal has upheld the conclusion of the Commissioner and by giving additional reason.

9. Upon perusal of this material, we are unable to agree with Mr.Pinto that question 5.1 reproduced above is a substantial question of law. Given the peculiar facts and circumstances and the nature of the investment so also being for commercial expediency, the view taken by the Commissioner and the Tribunal concurrently cannot be termed as perverse. That view being imminently possible in the given facts and circumstances. It does not raise any substantial question of law."

27. The next issue is regarding Rs.205.47 Crores which is debited in the P&L A/c towards the winding up of the subsidiary company. As mentioned in para 6 to 6.4 of Pr. CIT order, it was held that this is not an allowable expenditure as it was not incurred for the purpose of earning income in India. From this, it is clear that the Assessing Officer had not examined this issue in detail, which was erroneous as it was prejudicial to the interest of the revenue. We find that said amount of Rs.205.47 Crores consist of two parts, namely investment written off in SFCL of Rs.184.53 Crores and balance Rs.20.94 Crores represents write off of Rs.17.41 Crores towards Advance to SFCL & Rs.3.53 Crores receivable from SFCL towards cost of employees deputed by the Appellant. With respect to SFCL investment written off to the tune of Rs.184.53 Crores, already we held that it is revenue in nature and is allowable business expenditure. As regards remaining amount, the Assessee made provision in the books of accounts towards SFCL advance to the tune of Rs.16.30 Crores in AY 2008-09, Rs.0.93 Crores in AY 2009-10 & Rs.0.18 Crores in AY 2010-11 and disallowed the same in the respective year Computation of Memo of income. Also amounts receivable from SFCL to the tune of Rs.3.53 Cores provided in books during AY 2008¬09 was also disallowed in the memo of income. Appellant had provided copy of the respective year's memo of computation. Though in the years of making provision the same was disallowed in the memo of computation for the respective years, but in the year under appeal the amount was written off by adjusting the provision against the receivable, but the same was not claimed as deduction in the Memo of income. Therefore, the PCIT's observation in dealing with disallowance of Rs.205.47 Crores is infructuous as (i) claim for deduction of Rs.184.53 Crores has been dealt with by the PCIT separately (earlier point) and the balance of Rs.20.94 Crores was not at all claimed by the Appellant or allowed in the Assessment. In fact, the AR made a feeble attempt that the additional amount of Rs.20.94 Crores being an eligible deduction the appellate authority may allow the additional deduction Rs.20.94 Crores. As this is an appeal against the order of PCIT dealing with erroneous and prejudicial orders, it is not permissible to grant additional benefit while disposing an order of revision u/s 263. Hence, this issue does not arise separately as the claim for Rs.184.53 Crores has been dealt with above and the additional deduction of Rs.20.54 Crores was not claimed by the Appellant in their return.

Hence, revision power of the PCIT on this issue is also fails.

The write off of the investment was claimed as a deduction as loss on investment of the assets and the amount of provision reversed and credited to P&L was excluded in computing the Book Profits under Clause (i) to Explanation (1) to Section 115JB, which reads as under:

"Section 115JB Explanation: if any amount referred to in clauses (a) to (i) is debited to the statement of profit and loss or if any amount referred to in clause (j) is not credited to the statement of profit and loss, and as reduced by,

(i) the amount withdrawn from any reserve or provision (excluding a reserve created before the 1st day of April, 1997 otherwise than by way of a debit to the statement of profit and loss), if any such amount is credited to the statement of profit and loss:

Provided that where this section is applicable to an assessee in any previous year, the amount withdrawn from reserves created or provisions made in a previous year relevant to the assessment year commencing on or after the 1st day of April, 1997 shall not be reduced from the book profit unless the book profit of such year has been increased by those reserves or provisions (out of which the said amount was withdrawn) under this Explanation or Explanation below the second proviso to section 115JA, as the case may be"

Thus, we are of the considered view that the power of revision of PCIT on this issue is also failed.

The Ld.AO after considering relevant submissions of the assessee has taken one of the possible view and accepted write off investment in subsidiary as business loss and also reversal of provision created for diminution in value of investment and credited to P&L A/c from the book profit computed u/s.115JB of the Act. Further, on merits also deduction claimed by the assessee towards loss on investment in subsidiary is allowable deduction as Revenue expenditure, because, the investment in subsidiary is for the purpose of business of the assessee and assessee has derived business advantage by making investment in subsidiary. Further, exclusion of reversal of provision from book profit computed u/s.115JB of the Act, is also in accordance with Clause (i) of Explanation (1) to Sec.115JB of the Act, and the assessee has rightly excluded reversal of provision in the impugned assessment year, because, when provision was created in the AY 2009-10, the assessee has added back said provision while computing book profit u/s.115JB of the Act. Therefore, we are of the considered view that the PCIT is erred in assuming his jurisdiction u/s.263 of the Act, and setting aside the assessment order passed by the AO u/s.143(3) dated 28.12.2019. Hence, we quashed the order passed by the PCIT u/s.263 of the Act.