AMMEGA BELTING INDIA PVT LTD,CHENNAI vs. PCIT, CHENNAI-1, CHENNAI

The Ld. AR advanced arguments assailing the revision of the order on the ground that no prejudice had been caused to the revenue. The Ld.CIT-DR justified the revision of the order on the facts of the case. Having heard rival submissions and upon perusal of case records, our adjudication would be as under.

The assessee being resident corporate assessee is stated to be engaged in supply of industrial power transmission belts for automobile companies. During assessment proceedings, Ld. AO noted that the assessee obtained External Commercial Borrowings (ECB) and claimed foreign exchange fluctuation against the same. The loan was taken by the assessee from its holding company M/s. Megadyne Asia Pacific Ltd. However, the assessee did not produce relevant loan agreement. The Ld. AO held that loan was long-term unsecured borrowings and exchange fluctuation loss was claimed on loan which was payable in future. Therefore, the claim was contingent in nature and accordingly, disallowed.

Subsequently, Ld. Pr.CIT, upon perusal of Column 21(b)(ii) of Tax Audit Report in Form 3CD, noted that Tax Auditor reported disallowance of 30% u/s 40(a)(ia) towards interest paid to M/s. Megadyne Asia Pacific Ltd., Hongkong. The same was also disallowed by the assessee in the computation of Income. However, as per extant statutory provisions of Sec.40(a)(i), 100% of the interest should have been disallowed against interest payment to foreign entity. This issue was not considered in the assessment order. The additional disallowance to be made was quantified at Rs.32.11 Lacs in para 2.3 of the impugned order.

Another factor leading to the revision of the order was that the assessee claimed amount of Rs.1,20,235/- as interest & penalty out of which the assessee disallowed only a sum of Rs.2,721/- which represent interest on TDS. The balance amount of Rs.1,17,514/- (Rs.1,20,235 – Rs.2,721) was also to be disallowed. 6. The assessee submitted that as per the terms of the agreement, the interest would become due and payable only on January 01st of each year. The assessee had duly deducted TDS whenever the interest became payable. For accounting purposes, the interest was calculated up-to March-end even though it was neither due nor payable. The interest and penalties were stated to be compensatory in nature. 7. However, aforesaid submissions could not find favor with Ld. Pr.CIT who observed that the assessee did not furnish the agreement of ECB loans. The claim that the holding company was following the calendar year was not tenable. The accrued interest as claimed was to be considered for disallowance. Further, the claim that the fines and penalties were compensatory was not tenable considering the decision of Hon’ble High Court of Madras in CIT vs. Rane Brake Linings Ltd.

Finally, the assessment order was held to be erroneous and prejudicial to the interest of the revenue and accordingly, partly set aside with a direction to Ld. AO to examine the aforesaid issues and pass a fresh order in this regard. Aggrieved as aforesaid, the assessee is in further appeal before us.

We find that both the issues as flagged by Ld. Pr. CIT in the impugned order have never been examined by Ld. AO during the course of assessment proceedings. The issue of disallowance u/s 40(a)(ia), though reported by Tax Auditor, was not at all examined. The assessee made disallowance of 30% u/s 40(a)(ia) as against the fact that the provisions of Sec.40(a)(i) would apply to interest paid to a foreign entity and the provisions of Sec.40(a)(ia) would have no application in such a case. The copies of agreement of ECB loan were also not furnished by the assessee before any of the lower authorities. The issue of interest and penalties also skipped to be examined by Ld. AO since there is no material on record to suggest that any queries were made by Ld. AO in this regard during the course of assessment proceedings. On these facts, the revision of the order could not be faulted with. We see no reason to interfere in the same. However, our adjudication as above would not be construed to have any expression on the merits of the case. The assessee is free to agitate the impugned issues during consequential assessment proceedings. All the issues, on merits, are kept open.

The appeal stands dismissed. Order pronounced on 3rd September, 2024