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Facts
The assessee claimed deduction for interest expenditure on loans used for investment in overseas subsidiaries. The PCIT invoked Section 263, holding the Assessing Officer's order erroneous and prejudicial to revenue, as the interest expenditure was deemed not allowable under Section 36(1)(iii) because the investment generated dividend income. The assessee argued that the DRP had previously ruled in their favor on similar issues for earlier assessment years.
Held
The Tribunal found that the DRP had consistently ruled in favor of the assessee on the allowability of interest expenditure for investments in overseas subsidiaries for previous assessment years. The Tribunal also referred to High Court decisions which supported the view that interest on borrowed funds utilized for business purposes, including acquiring controlling interest in companies, is deductible under Section 36(1)(iii).
Key Issues
Whether the PCIT was justified in invoking Section 263 to revise the assessment order concerning the allowability of interest expenditure on loans used for investment in overseas subsidiaries.
Sections Cited
263, 143(3), 144C(13), 144C(5), 36(1)(iii), 142(1)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, MUMBAI BENCH “E”, MUMBAI
Before: SHRI AMARJIT SINGH & SHRI ANIKESH BANERJEE
O R D E R
PER AMARJIT SINGH, ACCOUNTANT MEMBER:
This appeal of the assessee for the assessment year 2017-18 is directed against the order dated 28.12.2021 passed by the ld. Commissioner of Income-tax (DRP-2), Mumbai-1. The assessee has raised the following grounds of appeal:
“1. The Learned Principal Commissioner of Income Tax ("PCIT") has erred in law and in facts by passing the Order u/s 263 of the Act despite the fact that the assessment was done of the aforesaid year u/s 143(3) r.w.s 144C(13) of the Act by assessing officer after considering the directions received u/s 144C(5) of the Act from Dispute Resolution Penal ("DRP") which is a collegium of three Principal Commissioner or Commissioner of Income Tax.
The learned PCIT erred in invoking the provisions of Section 263 and setting aside the assessment for A.Y. 2017-18, without appreciating the fact and that the Assessing Officer's order was neither erroneous nor prejudicial to the interest of the revenue.
Tata Chemicals Limited A.Y. 2017-18 3. The learned PCIT erred in referring to and relying on facts and giving findings thereon without appreciating the relevant facts and circumstances and on the contrary replying on facts and circumstances which are not relevant to the use thereby rendering his finding to be such that no reasonable person duly briefed in the matter could have ever given.”
There is a delay in filing this appeal by 220 days. The assessee has filed application for condonation of delay in filing the appeal on 29.12.2023. It is reported in the condonation application that the order u/s 263 of the Act passed by the ld. PCIT-2, Mumbai was uploaded in the income tax portal of the Income Tax Department on 27.03.2023. It is further stated that tax team of the assessee was initially of the view that revision order passed by the PCIT u/s 26(3) of the Act was to be challenged before the First Appellate Authority (CIT(A) after raising the demand by the assessing officer. However, after receiving the legal advice from the counsel it became clear that validity of order u/s 263 of the Act cannot be challenged before the First Appellate Authority therefore, there was delay in filing the impugned appeal before the ITAT. The assessee also submitted that delay in filing the appeal was unintentional and bona fide. The Hon’ble Supreme Court in the case of Collector Land Acquisition vs Mst, Katiji & Ors. Civil Appeal No. 460 of 1987 dated 19.12.1987 held that sufficient cause for the purpose of condonation of delay should be interpreted with a view to do even handed justice on merit in preference to the approach which scuttles a decision on merit. In the light of the above facts and findings, we condone the delay of 304 days in filing this appeal in order to decide the appeal on merit.
Fact in brief is that the return of income declaring total income of Rs. 808,97,18,330/- was filed on 29.08.2017. The case was Tata Chemicals Limited A.Y. 2017-18 subject to scrutiny assessment and final assessment order u/s 143(3) r.w.s. 144C(13) r.w.s. 144B of the Act was passed on 28.01.2022 assessing the total income at Rs. 824,20,33,550/- under normal provisions of the Act. Subsequently, the PCIT, Mumbai-2 on examination of the record noticed that assessee company had claimed an interest expenditure of Rs. 276.66 out of which interest on loan utilized for investment in overseas subsidiaries was Rs. 156.12 crores. The ld. PCIT was of the view that interest expenditure pertaining to the loan amount provided to the subsidiaries of the assessee company was not eligible for deduction u/s 36(1)(iii) of the Act. In response to the query, the assessee submitted that assessee has provided requisite details vide its submission dated 19.03.2021 before the assessing officer and the assessing officer was aware about the interest bearing outstanding loan amount and has collected necessary information also. The assessee has also placed reliance on the various judicial pronouncements as reproduced at page no. 3 to 4 of the order passed u/s 263 of the Act. The ld. PCIT was of the view that assessee had utilized the loan amount for making investment in its subsidiary company from which it had earned dividend income which was taxable as income from other sources therefore, assessing officer had not verified the issue of availability of interest u/s 36(1)(iii) of the Act. Accordingly, the ld. PCIT treated the assessment order passed u/s 143(3) r.w.s. 144C(13) r.w.s. 144B of the Act dated 28.01.2022 as erroneous in so far as it is prejudicial to the interest of Revenue.
During the course of appellate proceedings before us, the ld. Counsel submitted that the impugned loans were obtained in the A.Y. 2009-10 for making investment in the share capital of the Tata Chemicals Limited A.Y. 2017-18 subsidiary company. He submitted that A.Y. 2009-10 was the first year on the issue of allowability of interest u/s 36(1)(iii) of the Act and the ld. DRP has decided the issue in favour of the assessee. In this regard, the ld. Counsel has also referred the order of DRP for the A.Y. 2009-10 placed in the paper book. The ld. Counsel further submitted that the DRP decided the similar issue of allowability of interest u/s 36(1)(iii) in respect of the loan provided to the subsidiary of the assessee company in favour of the assessee from A.Y. 2009-10 to 2011-12. The ld. Counsel further submitted as per the old provision, the department can file appeal against the direction of the DRP before the ITAT therefore in the A.Y. 2012-13 DRP has only decided the issue against the assessee on the ground that department has filed appeal against the order of DRP in the A.Y. 2009-10 to 2011-12. He further submitted that nowhere on merit, the DRP has decided the issue against the assessee on the issue contested in this appeal. The ld. Counsel has also placed reliance on the various judicial pronouncements as placed in the paper book. He particularly referred the case of Concentrix Services (I) Pvt. Ltd. [ITA No. 778 of 2017] dated 04.09.2019, Phil Corporation (244 CTR 226) (Bom HC), Srishti Securities (321 ITR 498/183 Taxman 159) (BOM) & Tata Industries Limited 82 taxmann.com 227 (ITA 4630/M/2016).
On the other hand, ld. DR supported the order of ld. PCIT passed u/s 263 of the Act. He submitted that order passed by the assessing officer was rightly held by the ld. PCIT as erroneous and prejudicial to the interest of Revenue on the issue of allowability of interest expenditure on the loan extended by the assessee to its subsidiary company.
Tata Chemicals Limited A.Y. 2017-18 6. Heard both the sides and perused the material on record. The assessee company had made investment in shares of the overseas subsidiary company and claimed deduction of interest expenditure of Rs. 156.12 u/s 36(1)(iii) of the Act. The ld. PCIT held that the impugned claim of interest expenditure is not allowable u/s 36(1)(iii) of the Act since the assessee will be receiving dividend income on the investment which is taxable as income from other sources. Therefore, the ld. PCIT has treated the assessment order passed by the assessing officer as discussed supra in this order as erroneous and prejudicial to the interest of Revenue. Before us, the ld. Counsel submitted that during the course of assessment, assessee has filed copies of all the statements of bank accounts and other confirmations etc. and as per Note 7 to the financial statement for the year ended 31st March, 2017 of investment placed at page no. 22 of the paper book the complete detail of investment in equity instruments in subsidiaries of the assessee were mentioned. During the course of assessment, the assessing officer in the notice issued u/s 142(1) of the Act on 27.02.2021 has asked the assessee to file copies of bank statement to substantiate the outstanding balances of loan. The assessee vide submission dated 19.03.2021 has submitted the particulars of the loan outstanding confirmation etc. before the assessing officer. We have also perused the copies of directions issued by the DRP for A.Y. 2009-10 to 2012-13 as placed in the paper book in respect of claim of interest of expenditure for investment in overseas subsidiaries. In the A.Y. 2009-10 vide direction u/s 144C(5) of the Income Tax Act, 1961 dated 27.12.2013, the DRP after considering the submission of the assessee stated that object of the assessee was to make investment in the acquisition of Tata Chemicals Limited A.Y. 2017-18 share capital of the subsidiary to consolidate its overall business interest. Therefore, the DRP after following the decision of Core Health Care Ltd. (167 taxman 206) (SC) and Lokhandwala Construction Inds. Ltd. (260 ITR 579) Bombay High Court held that interest payment to be allowable u/s 36(1)(iii) of the Act. Similarly, in the A.Y. 2010-11 & 2011-12 the DRP has decided the issue in favour of the assessee. However, in the A.Y. 2012-13, the DRP on the basis of issue contested by the Revenue before the ITAT rejected the objection filed by the assessee on the ground of keeping the issue alive. It is evident from the above referred direction issued by the DRP that issue was not rejected on merit.
Further, we have perused the decision of Concentrix Services (I) Pvt. Ltd. wherein Hon’ble Mumbai High Court has decided the following question of law referred:
“2. Whether on facts and in the circumstances of the case and in law, the Tribunal was justified in its direction that the money advanced to the AE as share application money is not to be considered as loan, ignoring the fact that this money was being utilized as working capital and not deposited in an escrow account in cases where monies are received in cases of share application? 3. Whether on facts and in the circumstances of the case and in law, the Tribunal was justified in directing the A.O to delete the disallowance u/s 36(1) (iii) of the IT Act, 1961 without appreciating the fact that the acquisition of business by way of investing into shares of that company through either Special Purpose Vehicle or directly cannot be considered to be ordinary event of the business and therefore, cannot be termed as expenditure incurred for the purpose of assessee's business, which is providing IteS services?'
The Hon’ble Bombay High Court held that where the assessee claims deduction of interest paid on capital borrowed, all that assessee has to show is that the borrowed fund were utilized for Tata Chemicals Limited A.Y. 2017-18 business purpose if so then interest will have to be allowed as deduction. In that case, the Hon’ble Bombay High Court further held that it was the business decision of the assessee to enhance/expand its activities and presence in the world market for that purpose had acquired controlling interest in the business of M/s. Minacs Canada which was in the same line of business as the assessee therefore to make the investment for the purpose of its business loan was taken, therefore, the interest incurred on loan taken for investment in acquiring interest in a company which was in the same line of business as that of the assessee would be allowed expenditure u/s 36(1)(iii) of the Act.
We have also perused the decision of Hon’ble Bombay High Court in the case of Phil Corporation wherein it is held that assessee has invested the amount in the subsidiary company for acquiring its share to have of control over majority shares but not to earn dividend interest therefore, the assessee is entitled to deduction u/s 36(1)(iii) of the Act.
We have also perused the decision of Hon’ble Bombay High Court in the case of Srishti Securities wherein also in the similar issue the borrowed amount was utilized for the purpose acquisition of capital of the subsidiary company and it was held that assessee is entitled for deduction u/s 36(1)(iii) in respect of the interest expenditure incurred on the amount invested.
We have also perused the decision of Tata Industries Limited.
We find that this is a recurring issue since the F.Y. 2008-09 when the assessee company had issued External Commercial Tata Chemicals Limited A.Y. 2017-18 Borrowing to funds for acquiring its overseas subsidiaries which was in the same line of business. The assessee company has acquired General Chemical Industries Product (GCIP) which was one of the large soda, ash players in the US market. The assessee has claimed deduction as business expenditure in respect of interest expenditure incurred on loans (on ECB & NCD) utilized for investment in its overseas subsidiary and all these loans were drawn in earlier years. The assessee has categorically provided the break-up of this outstanding loan in its submission made before the assessing officer on 19.03.2021 along with bank statement and confirmation etc. The AO has not taken any contrary view that the interest expenditure incurred on such loan is not incurred for the purpose of business. The assessee has also brought all these facts before the ld. PCIT during the proceeding initiated u/s 263 of the Act along with the findings of the DRP for A.Y. 2009-10 to 2011-12 decided in favour of the assessee and directions for the A.Y. 2012-13 and 2013-14 was against the assessee in order to keep the issue alive as the department has appealed to the ITAT against the direction issued by the DRP. Before the ld. PCIT, the assessee explained the legal propositions along with the various judicial pronouncements on the proposition that interest paid on borrowed funds for the purpose of acquiring control of companies is an allowable expenditure u/s 36(1)(iii) of the Act. However, the ld. PCIT has not controverted the factual and legal submission filed by the assessee before treating the order passed by the assessing officer u/s 143(3) r.w.s. 144C of the Act as erroneous and prejudicial to the interest of Revenue. Looking to the above facts and findings, we consider that order passed by the ld. PCIT u/s 263 of the Act dated 27.03.2023 is not sustainable in
In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 30.12.2024.
Sd/- Sd/- (ANIKESH BANERJEE) (AMARJIT SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, Dated: 30.12.2024 Biswajit, Sr. P.S.