ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-2, KOTA, KOTA vs. CHAMBAL FERTILIZERS AND CHEMICALS LTD, KOTA

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ITA 1098/JPR/2024Status: DisposedITAT Jaipur27 August 2025AY 2015-1639 pages
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What did the Tribunal hold?

The Tribunal held that the issue of allowance/disallowance of interest claimed under Section 36(1)(iii) in respect of amounts invested in subsidiaries/group companies/associates requires a fresh determination. The findings of the CIT(A) on this issue were set aside, and the matter was remitted to the Assessing Officer (AO) to determine the amount of interest-free funds available with the assessee after verifying relevant documents. The AO is to adjudicate the issue in accordance with law. Regarding the valuation of shares and any resulting loss from the merger of CFCL Technologies Ltd. with CFCL Ventures Ltd., the Tribunal found that the valuation needed to be assessed before any further findings could be recorded. The CIT(A)'s findings in this regard were also set aside, and the matter was remanded to the AO for determining the valuation of shares as on the date of transfer, after providing an opportunity of being heard to the parties. The Tribunal noted that there was no merit in the Revenue's contention that the merger was not a 'transfer' under Section 2(47) of the Act, citing the decision in Commissioner of Income Tax, Cochin v. Mrs. Grace Collis and Ors. The appeals filed by the department were partly allowed for statistical purposes concerning the interest disallowance issue, and dismissed on other issues based on the findings recorded.

What were the facts?

The assessee, Chambal Fertilizers and Chemicals Ltd., is a public limited company engaged in manufacturing and trading. The appeals by the Revenue challenge orders of the CIT(A) for assessment years 2010-11, 2011-12, 2015-16, 2016-17, and 2017-18. These appeals arise from a remand by the ITAT, which had directed the CIT(A) to decide afresh the issue of notional interest on investments in subsidiary companies. The CIT(A) had previously allowed the assessee's appeal on this point, directing the deletion of additions made by the Assessing Officer (AO). The Revenue's appeals contest these deletions, arguing the AO's disallowance under Section 36(1)(iii) was wrongly characterized by the CIT(A) as under Section 14A. Additionally, other issues like club expenses, loans and advances, and contribution to a DAV Trust were decided by the CIT(A), with the Revenue challenging some of these deletions.

What were the issues?

1. Whether the CIT(A) erred in deleting the disallowance of interest amounting to Rs. 29,36,97,412/- (AY 2010-11), Rs. 25,78,65,553/- (AY 2011-12), Rs. 56,08,94,534/- (AY 2015-16), and Rs. 40,35,43,107/- (AY 2016-17) made by the AO under Section 36(1)(iii) of the Income Tax Act, 1961, on account of alleged utilization of borrowed funds for investments in subsidiary companies? 2. Whether the CIT(A) erred in deleting the addition of Rs. 16,25,226/- (AY 2015-16) and Rs. 3,73,206/- (AY 2016-17) made by the AO on account of club expenses? 3. Whether the CIT(A) erred in deleting the addition of Rs. 45,18,254/- (AY 2015-16) and Rs. 10,09,101/- (AY 2016-17) made by the AO on account of disallowance of loans and advances to subsidiary/group companies? 4. Whether the CIT(A) erred in deleting the addition of Rs. 82,10,270/- (AY 2015-16) made by the AO by disallowing contribution to DAV Trust Management Society? 5. Whether the extinguishment of rights in CFCL Technologies Ltd. on its merger with CFCL Ventures Ltd. constituted a 'transfer' under Section 2(47) of the Act, and if so, whether the valuation of shares and the resulting capital loss claimed by the assessee were correctly determined? Assessee's contentions: The assessee relies on the findings of the CIT(A) and argues that the AO's disallowance of interest was wrongly made and that the CIT(A) correctly set aside the AO's findings. For issue 5, the assessee stands by the CIT(A)'s reasoning that the extinguishment of rights was a capital loss arising from a transfer under Section 2(47). The assessee also argues that if the AO disbelieved the valuation, he should have provided his own valuation. Revenue's contentions: The Revenue contends that the CIT(A) incorrectly characterized the AO's disallowance as under Section 14A when it was made under Section 36(1)(iii). The Revenue also challenges the deletion of additions related to club expenses, loans and advances, and contribution to the DAV Trust. For issue 5, the Revenue argues that there was no 'transfer' within the meaning of Section 2(47) and that the loss claimed was notional.

Which sections of the Income-tax Act were involved?

Section 36(1)(iii),Section 14A,Section 2(47),Section 45

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Income Tax Appellate Tribunal, JAIPUR BENCHES,”A-Bench” JAIPUR

Before: SHRI GAGAN GOYAL, AM & SHRI NARINDER KUMAR, JM

Result

56.

As a result, as regards the issue of allowance/disallowance of interest claimed u/s 36(1)(iii) of the Act in respect of the amounts said to have been invested in subsidiaries/group companies/associates, findings recorded by Learned CIT(A) are set aside, and the matter is remitted to Learned Assessing Officer for decision afresh so as to record finding as to amount(s) of interest free funds available with the assessee during the assessment years under consideration, after verification of all relevant documents relied on behalf of the assessee in this regard, and then adjudicate the issue involved in accordance with law.

1.

As regards the valuation of the shares and loss, if any, in view of the findings recorded above, the same is required to be assessed, before any further finding could be recorded about actual or notional loss, and as such, the findings recorded by Learned CIT(A) are set aside in this regard, and the matter is remanded to the Ld. Assessing Officer for determination of the 1097 TO 1099 & 1091/JPR/2024 Chambal Fertilizers and Chemicals Ltd., Kota valuation of the shares as on the date of transfer thereof, after providing reasonable opportunity of being heard to the parties.

1.

In view of the above discussion, the appeals filed by the department are partly allowed for statistical purposes.

As regards other issues, in view of the above findings recorded under each head, the appeals filed by the department are hereby dismissed.

Copy of the common order is also placed in the connected appeal file. File consignment to the record room after the needful is done by the office. Order pronounced in the open court on 27/08/2025.

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