NELSUN PAPER MILL LIMITED,CHENNAI vs. ITO CORPORATE WARD 4(4), CHENNAI

आदेश / O R D E R PER SHRI S. JAYARAMAN, ACCOUNTANT MEMBER:

While making the assessment for the AY 2013-14, the AO observed from the financials of the assessee company that its total borrowing was Rs.25.16 Crs. during the year as against Rs.10.48 Crs. during the last year. The interest expenditure incurred during the year was Rs.5.85 Crs. as against Rs.2.99 Crs in the last year. He has also noticed that the assessee’s turnover fell from Rs.70.08 Crs. in the last year to Rs.61.12 Crs. during the year. Therefore, the AO held that the borrowed fund was utilized for investment and not in the assessee’s business. Therefore, he worked out the proportionate interest on such investment at Rs.3.41 Crs. and disallowed holding that it was not at all related to the assessee’s business.

Further, the AO found that the assessee has borrowed Rs.39.96 Crs. on which, it incurred interest expenditure of Rs.5.85 Crs., it has invested Rs.25.00 Crs. in the equities of subsidiary company, M/s.Cochin Kagaz Ltd., which would yield only an exempt income. Therefore, he proposed to make disallowance u/s.14A r.w.r.8D. The assessee submitted that the investment & 1713 /Chny/2019 :- 3 -: made in the subsidiary company was with an intention to widen the business base not to earn tax free returns. The assesse is not into the business of investment, dividend earned from this investment would be purely incidental. Therefore, it was submitted that no disallowance is required.

However, the AO held that the assessee failed to state how the impugned investment will generate taxable Revenue or income. Therefore, he invoked Sec.14A r.w.r.8D. For arriving out the disallowance u/s.14A r.w.r.8D, from the total interest claim, the AO deducted the disallowance already made at Rs.3.41 Crs. and on the balance interest of Rs.3.24 Crs, he made disallowance u/r.8D(2)(ii) & (iii) at Rs.78,21,795/-. Aggrieved, the assessee filed an appeal before the Commissioner of Income Tax(A). The Ld.CIT(A) held that the assessee company claims to have borrowed monies for the sake of its expansion as well as to make investment. There is no direct nexus between the borrowings of the assessee as well as specific investments. Therefore, he deleted the interest disallowance made at Rs.3.41 Crs. However, the Ld.CIT(A) directed the AO to take the entire interest expenditure claimed by the assessee at Rs.5.85 Crs. for computing the disallowance u/s.14A r.w.r.8D holding that this would sufficiently take care of any diversion of borrowed capital towards making tax exempt investments. Accordingly, the Ld.CIT(A) directed the AO to re-compute the disallowance u/s.14A r.w.r8D by taking the interest expenditure at Rs.5.75 Crs. Aggrieved against the order of the Ld.CIT(A), the assessee as well as the Revenue filed these appeals. & 1713 /Chny/2019 :- 4 -:

“….To promote any company or companies for the purposes of acquiring all or any of the property, rights and liabilities of the company or for any other purpose which may seem directly or indirectly calculated to benefit this company….”.

The Ld.AR submitted that the assessee invested the impugned sum for widening its business base in accordance with its objects, supra.

Therefore, the investment has not been made with a purpose to earn tax & 1713 /Chny/2019 :- 5 -: free returns. The assessee has not received any dividend so far from the subsidiary company as it is in the initial stages. Since the investment is made on account of business expediency, the investment made by the assessee in its subsidiary company are not to be reckoned for disallowance u/s.14A r.w.r.8D. Per contra, Ld.DR submitted that the AO has clearly established in the Assessment Order that the amount borrowed during the year is fully utilized for the purpose of investment and not in the business.

Therefore, the Ld.CIT(A) erred in holding that the AO has not been able to establish any direct link between the borrowings and the tax exempt investments. The Ld.DR wanted to share certain document to show that the amount advanced by the assessee to its sister concern was not used for the purpose of business. However, the Ld.AR strongly objected to the action of the Ld.DR stating that sharing of the document at the time of hearing without furnishing those copies in advance to the assessee’s representative / Court should not be permitted and therefore, we did not permit the Ld.DR to share such impugned document.

investment as on 31.03.2012 was at Rs.11,04,54,185/-. Thus, the assessee has made a fresh investment of Rs.13.96 Crs. during the year.

The AO noticed that the assessee has claimed huge financial cost during the year at Rs.5.85 Crs. Though, the assessee claimed that the impugned expenditure is on account of business expediency before the Ld.CIT(A) in its grounds of appeal, this issue was not examined by the AO in the Assessment Order. The Ld.CIT(A) has merely extracted the assessee’s submissions and observed that the assessee company claims to have borrowed monies for the sake of its expansion as well as to make investments. The borrowings have got ploughed into the common bank account and common expenditure of the company. There is no direct nexus between the borrowings of the assessee as well as any specific investments, etc. However, it is not known on what material/evidence, the Ld.CIT(A) has arrived on such conclusion. Prima facie, the financials indicate that the assessee during the year has incurred a huge loss of Rs.5,51,97,022/- (before tax) which reduced the shareholder’s funds from Rs.18.05 Crs. as on 31.03.2012 to Rs.12.27 Crs. as on 31.03.2013. The lower authorities have not examined as to what are the date(s) on which the shares were acquired and whether on such date(s), the assessee had any non-interest bearing fund, etc. Therefore, in our considered view, the lower authorities have not examined, the relevant issues, particularly: i. Whether the borrowed funds were used for the acquisition of shares in the subsidiary company? ii. The purpose for which the assessee acquired the impugned shares and when the subsidiary is claimed to be in intial stages whether the premium & 1713 /Chny/2019 :- 7 -: paid is commensurating and what the sister concern did with that money advanced by the assessee, in other words, whether this was really done as a measure of business or commercial expediency, etc.

Therefore, we deem it fit to set-aside the order of the Ld.CIT(A) and remit the issues back to the AO for a fresh examination. Since the issue related to the disallowance u/s.14A r.w.r.8D is also inter-mixed with the determination as to whether the acquisition of shares in the subsidiary company is for the purpose of business or investment or otherwise, an issue which is remitted, supra, we are of the view that this issue also requires to be remitted back to the AO for a fresh examination. The assessee shall produce all original primary/secondary evidences/materials before the AO in support of its contentions so that the genuineness of the claims could be examined and appropriately dealt with by the AO. The AO on due examination and after affording adequate opportunity to the assessee, shall pass an order on merits.

Order pronounced on the 23rd day of December, 2020, in Chennai.