ACIT, CHENNAI vs. SUNDARAM FASTENERS LIMITED, CHENNAI

For the purpose of adjudication, facts from AY 2006-07 have been considered in the appeal. The grounds taken by the revenue in AY 2006- 07 read as under: - 1.

The order of the ld. CIT(A) is contrary to the law and facts of the case The Ld. CIT(A) erred in deleting the disallowance of interest when assessee 2. failed to prove the Commercial expediency in advancing interets free loan to a subsidiary company. 2.1 The Ld. CIT(A) failed to appreciate that the revenue has filed an appeal against the order of the Hon’ble Tribunal in the assessee’s own case on the very same issue for the AYs 2003-04 and 2005-06 before the Hon’ble Madras High Court, which is still pending. 2.2 The Ld. CIT(A) ought to have appreciated that the Dispute Resolution Panel (DRP) has confirmed the addition made by the Assessing Offcier on the very same issue for the AYs 2012-13 and 2013-14. As evident, the sole subject matter of the appeal is interest disallowance u/s 36(1)(iii).

Vide its ground No. 3, the grievance raised by the Revenue is that the ld. Commissioner of Income Tax (Appeals) deleted a disallowance of notional interest working out to Rs.2,70,52,088/-, as relatable to interest free loans granted by the assessee to its subsidiary.

Before us, the ld. Departmental Representative submitted that assessee could not show commercial expediency for the loans given to its subsidiaries. As per ld. Departmental Representative, the assessee had borrowed Rs.43,860/- lakhs of which it had given free interest loan of Rs.3,379/- lakhs. Ld. Departmental Representative submitted that interest of Rs.2,958/- lakhs was paid by the assessee on the loans taken by it. As per ld. Departmental Representative the amount of interest free loans were utilized by Sundaram Fasteners Investment Ltd (SFIL) which in turn gave loans to certain other companies. Thus, as per ld. Departmental Representative assessee could not demonstrate how the loans given were commercially expedient. 22. Per contra, the ld. Authorised Representative supported the orders of the Commissioner of Income Tax (Appeals) and submitted that by virtue of judgment of Apex Court in the case of S.A. Builders Ltd vs. CIT (A) and Another (2007) 288 ITR 1(SC) loans given to subsidiary were always deemed commercial expedient. According to him, M/s. SFIL was making investments and giving inter corporate loans to its subsidiaries in China since assessee could not directly invest in a subsidiary in China. Further, as per the ld. Authorised Representative in Revenue’s appeal for assessment year 2005-06, same issue had come up before and Tribunal in vide order dated 15.07.2016 deleted such interest disallowance. 23. We have considered the rival contentions and perused the orders of the authorities below. No doubt the issue was decided in favour of the assessee by this Tribunal for the assessment year 2005- 06 on Revenue appeal. However, in the said order, the assessee could demonstrate that the amounts loaned to the subsidiary companies was much less than its net worth. As for as the reliance placed by the assessee on the judgment of Apex Court in the case of S.A. Builders Ltd (supra), the lordship had remitted the matter back to the Tribunal for enquiry whether interest loans were given to the sister concern was as a measure of commercial expediency. Their lordship took a view that once nexus was established between the expenditure and the purpose of the business, which need not necessary be business of the assessee itself, Revenue could not disallow the claim assuming what was reasonable. Considering, the facts and circumstances of the case, we are of the opinion that lower authorities failed to verify whether loans given by the assessee to its subsidiaries were commercially expedient. The amount that were given as loans was not stagnant. Therefore, we set aside the order of the lower authorities and remit the issue regarding allowability of pro-rata interest on interest free loans granted to subsidiaries, back to the file of the ld. Assessing Officer for consideration of fresh in accordance with law. Ground No.3 of the Revenue is allowed for statistical purpose.

Pursuant to these directions, assessment has been reframed by Ld. AO wherein the assessee was called upon to demonstrate commercial expediency of granting of loan to subsidiaries i.e., M/s Sundaram Fasteners Investment Ltd. (SFIL). After considering assessee’s reply, Ld. AO held that the business objects of investee company i.e., M/s Sundaram Fasteners Investment Ltd. (SFIL) were separate and distinct than that of the assessee. Achieving the objects of SFIL could not be said to be the business of the assessee. The entire advances as given by assessee to SFIL were further utilized by SFIL to grant loans to other entities. Therefore, the test of commercial expediency was not satisfied since the receiver did not utilize the loan for its business purposes. The assessee also failed to prove that the advances were given out of non- interest-bearing funds. Finally, the interest of Rs.270.52 Lacs as computed in the original assessment proceedings was again disallowed and added back to the income of the assessee. Appellate Proceedings 5.1 During appellate proceedings, drawing attention to submissions as made during original assessment proceedings, the assessee submitted that loans were advanced out of own funds and it was in furtherance of its own business interest. The loans were advanced out of commercial expediency and the same were advanced out of sufficient cash generation available with the assessee. 5.2 The attention was also drawn to the fact that SFIL was wholly owned subsidiary of the assessee and was incorporated as on investment arm of the assessee. As an investment company, it promoted new ventures and made investments on behalf of the assessee, granted loans and acquired shares of other companies. M/s SFIL was a registered NBFC and its objects were money lending. During the year, the assessee advanced fresh loans of Rs.1462.47 Lacs to M/s SFIL out of which Rs.497.35 Lacs was interest frees loans. The same was partly utilized by SFIL to grant interest-free loan to another entity i.e., M/s Upasana Engineering Ltd. The same was also utilized to grant interest free loans as well as to make equity investment in an entity namely M/s TVS infotech Ltd. The details of the same have already been tabulated on page-6 of the impugned order. The earlier loans were stated to be advanced to M/s Sundaram Fasteners (Zhejiang Ltd. China) (in short ‘SFZL’). M/s Upasana Engineering Ltd. was stated to be engaged in manufacturing and sale of automotive components which were supplied to two-wheeler industries. The assessee was also supplying various products to this industry. The amount of dividend received from this entity amounted to Rs.850.82 Lacs from financial years 2015-16 to 2018- 19. The financial performance of this entity revealed that it generated return on capital employed in the range of 19% to 22% during financial years 2015-16 to 2017-18. M/s TVS Infotech Ltd. was stated to be engaged in the business of software development, implementation of ERP, data center services and software consultancy services. The assessee invested in this entity through M/s SFIL. It was submitted that the assessee’s accounting system was running on SAP and the assessee had outsourced all its IT requirements to M/s TVS Infotech Ltd. The assessee was able to get expeditious response to all its IT requirements as opposed to depending upon third parties. In this way, the confidentiality of business and operational data was maintained. It was also tabulated that the Profit of this entity increased over a period of time. M/s SFZL was stated to be promoted by the assessee through SFIL to manufacture and sell fasteners and bearing housings in overseas market. The dividend received from this entity, over the years, were also tabulated. 5.3 In the above background, it was submitted that the assessee benefitted from strategic investments in the form of dividend, capital appreciation and cost-effective IT services. Therefore, the loans advanced to SFIL could be said to have been utilized for business purposes. The assessee had parental obligation to support SFIL by granting loans for furtherance of its own business interest and therefore, the test of commercial expediency was duly satisfied. 5.4 As per tabulation, the opening interest free loans as granted to SFIL were Rs.3605.38 Lacs and fresh loan of Rs.497.35 Lacs were granted to this entity during the year. However, there was repayment of loans of Rs.765.51 Lacs and the closing balance of loans stood at Rs.3337.22 Lacs. The assessee also submitted that it had sufficient cash generation and net worth to grant interest free loans during AY 2005-06 in which the loans were granted. As per the Annual Report for AY 2005- 06, the assessee generated funds of Rs.6895 Lacs. Accordingly, the assessee relied on various decisions including the decision of Hon’ble Supreme Court in the case of CIT V/s S.A.Builders (288 ITR 1), the decision of Hon’ble Madras High Court in CIT V/s Hotel Savera (239 ITR 795) and the decision of Hon’ble Bombay High Court in CIT V/s Reliance Utilities (313 ITR 340) in support of various arguments. 5.5 The Ld. CIT(A), after due consideration of factual matrix, noted that this issue was recurring in nature. In AYs 2003-04 and 2005-06, this issued was held by Tribunal in assessee’s favor. Similar favorable view was taken by Ld. DRP in AY 2010-11. However, in AYs 2012-13 & 2013- 14, Ld. DRP upheld the disallowance. Considering the favorable decisions of the Tribunal and considering the fact that the assessee was able to demonstrate commercial expediency of advancing loans as well as considering the fact that the assessee had surplus funds at the time of advancing loans, the additions were deleted. Aggrieved, the revenue is in further appeal before us. Arguments before us 6. The Ld. CIT-DR advanced arguments to submit that the test of commercial expediency was not satisfied by the assessee. The Ld. CIT- DR also submitted that the objects of SFIL were separate than that of assessee’s objects and SFIL was an investment company. Further, the assessee did not furnish cash flow statements in support of the fact that investments were sourced out of profit generation or out of interest free funds as available with the assessee. Thus the onus as casted upon the assessee was not discharged.

The Ld. AR, on the other hand, controverted the stand of Ld. CIT- DR by submitting that the funds position was duly furnished by the assessee before lower authorities and the ratio of various judicial decisions including the decision of Hon’ble Supreme Court in the case of CIT V/s S.A.Builders (288 ITR 1), the decision of Hon’ble Madras High Court in CIT V/s Hotel Savera (239 ITR 795) and the decision of Hon’ble Bombay High Court in CIT V/s Reliance Utilities (313 ITR 340) was applicable to the assessee’s case. The Ld. AR also submitted that the test of commercial expediency was duly satisfied by the assessee which has already been elaborated by Ld. CIT(A) in the impugned order.

Having heard rival submissions and after due consideration of material facts, our adjudication would be as given in succeeding paragraphs. Our findings and Adjudication 9. Upon perusal of material facts, it could be gathered that the loans have been advanced by the assessee to its subsidiary i.e., SFIL which is an investment arm of the assessee. M/s SFIL, as on investment company, promoted new ventures and made investments on behalf of the assessee, granted loans and acquired shares of other companies. M/s SFIL was a registered NBFC and its objects were money lending. During the year, fresh loans have been advanced to M/s Upasana Engineering Ltd. which is in the same line of business as that of assessee. A part of the loans and equity investments have been made in M/s TVS Infotech Ltd. which facilitated IT operations for the assessee. The earlier loans as granted to M/s SFZL were utilized to expand overseas market. It is also an undisputed fact that all these entities generated dividend and the assessee was benefitted by way of dividend, capital appreciation and ease of operations. Thus the test of commercial expediency, in our opinion, was duly satisfied by the assessee. It could be said that the investments were made in furtherance of business interest and the ratio of decision of Hon’ble Supreme Court in the case of CIT V/s S.A. Builders (288 ITR 1) would favor the case of the assessee. In this decision, it was held that once nexus was established between the expenditure and the purpose of the business, which need not necessarily be the business of the assessee itself, revenue could not disallow the claim assuming what was reasonable.

Another aspect of the matter is that the assessee is successful in establishing that there was sufficient cash generation to make the aforesaid investments. In fact, overall interest free loans have reduced from Rs.3605.38 Lacs to Rs.3337.22 Lacs during the year. As against this, there was sufficient cash generation to source this investment. Therefore, as per the ratio of Hon’ble Supreme Court in the case of CIT V/s Reliance Industries Ltd. (307 CTR 121), it could be presumed that the investments were made from interest free funds available with the assessee. The ratio of decision of Hon’ble Madras High Court in CIT V/s Hotel Savera (239 ITR 795) as well the decision of Hon’ble Bombay High Court in CIT V/s Reliance Utilities (313 ITR 340) was applicable to the case of the assessee. The availability of cash surplus as tabulated by the assessee in its reply to Ld. CIT(A) was as under: - (Rs. In Lacs) Particulars FY 2007-08 FY 2006-07 FY 2005-06 Net Worth 42211 37476 32387 Profit before tax 10446 11194 9615 Less : Tax 3499 4008 3422 Profit After Tax 6947 7168 6194 Add : Depreciation 3423 3012 2739 Less : Dividend Paid 2213 2096 2037 Cash flow after Tax 8158 8101 6895 Upon perusal, it could be seen that the assessee has sufficient cash generation to advance loans.

As far as the revenue’s reliance on the case law of Punjab & Haryana High Court in CIT V/s Abhishek Industries Ltd. (156 Taxman 257) is concerned, we find that the same is distinguishable on facts. In that case, the assessee debited interest expenses as pre-operative expenses and advanced large sum of money interest free to sister concerns before the commencement of production. Accordingly, Ld. AO held that the borrowings were diverted for non-business proposes. Therefore, this case law differs on facts. In the present case, the loans have been advanced in furtherance of assessee’s business interest and the assessee has sufficient cash generation to fund those advances. These facts have already been noted by us in the preceding paragraphs.

Lastly, we find that similar issue stood covered in assessee’s favor by the decision of this Tribunal for AYs 2003-04 & 2005-06, & ors. order dated 15.07.2016. Nothing has been shown to us that the aforesaid order has been reversed by any judicial authority, in any manner or the ratio of the same is not applicable to the facts of this year.

In view of the foregoing, the impugned order would not require any interference on our part. By confirming the stand of Ld. CIT(A), we dismiss the appeal. Appeal for AY 2007-08 14. It is undisputed position that similar are the facts in AY 2007-08. The Ld. AO has repeated interest disallowance of Rs.230.92 Lacs on similar reasoning. However, the Ld. CIT(A), on similar findings, has deleted the additions. Aggrieved, the revenue is in further appeal before us. 15. Since facts as well as issue is similar in this year, our findings as well as adjudication as for AY 2006-07 shall mutatis mutandis apply to this year also. Resultantly, the appeal stands dismissed. Conclusion 16. Both the appeal stands dismissed.