SOUTHERN PETROCHEMICAL INDUSTRIES CORPORATION LTD.,CHENNAI vs. ITO, CHENNAI

आयकर अपीलीय अिधकरण “ए” "ायपीठ चे"ई म"। IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH, CHENNAI माननीय "ी महावीर िसंह, उपा ! एवं माननीय "ी मनोज कुमार अ%वाल ,लेखा सद( के सम!। BEFORE HON’BLE SHRI MAHAVIR SINGH, VP AND HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM 1.आयकरअपील सं./ ITA No.206/Chny/2023 (िनधा*रण वष* / Assessment Year: 2005-06) & 2.आयकरअपील सं./ ITA No.207/Chny/2023 (िनधा*रण वष* / Assessment Year: 2005-06) M/s. Southern Petrochemical Income Tax Officer बनाम Industries Corporation Limited Corporate Ward-3(1) 88, Spic House, Mount Road, Guindy, Chennai-600 034. / Vs. Chennai-600 032. "थायीलेखासं./जीआइआरसं./PAN/GIR No. AAACS-4668-K (अपीलाथ"/Appellant) : (" थ" / Respondent) अपीलाथ"कीओरसे/ Appellant by : Shri R. Vijayaraghavan & Shri Saroj Kumar Parida (Advocates)-Ld. ARs " थ"कीओरसे/Respondent by : Shri Nilay Baran Som (CIT) & Shri AR V Sreenivasan (Addl. CIT)-Ld. DRs सुनवाईकीतारीख/Date of Hearing : 16-10-2023 घोषणाकीतारीख /Date of Pronouncement : 10-01-2024 आदेश / O R D E R Manoj Kumar Aggarwal (Accountant Member)

Centre (NFAC), Delhi [CIT(A)] on 29.12.2022 in the matter of an assessment framed by Ld. Assessing Officer [AO] u/s. 143(3) r.w.s. 263 of the Act on 14.11.2011. ITA No.207/Chny/2023 arises out of an order passed by learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [CIT(A)] on 29.12.2022 in the matter of an assessment framed by Ld. Assessing Officer [AO] u/s. 143(3) on 12.12.2008. 2. In an assessment framed by Ld. AO u/s 143(3) on 12.12.2008, the returned loss of Rs.170.20 Crores was determined at income of Rs.139.87 Crores after certain adjustments and disallowances. In an assessment framed u/s 143(3) r.w.s. 263 on 14.11.2011 consequent to revisionary order dated 25.03.2011, the assessed income of Rs.139.87 Crores was re-determined at Rs.153.35 Crores after more adjustments. 3. The assessee assailed both these orders before first appellate authority vide common order dated 29.12.2022 which is in further challenge before us. The assessment framed u/s 143(3) is subject matter of ITA No.207/Chny/2023 whereas assessment framed u/s 143(3) r.w.s. 263 is subject matter of ITA No.206/Chny/2023. 4. The grounds raised by the assessee in ITA No.207/Chny/2023 are as under: - 1. The order of National Faceless Appeal Centre (NFAC), Delhi /CIT(A) is contrary to law, facts and in the circumstances of the case. 2. The CIT(A) / NFAC erred in confirming the disallowance of the interest paid to financial institutions u/s 43B amounting to Rs.54,18,70,424/ -. 2.1 The CIT(A) / NFAC ought to have appreciated that the interest converted in to loans and the same be allowed as deduction in the relevant assessment year in which such provisions are reversed and credited to the profit & loss account. 2.2 The CIT(A) / NFAC having come to conclusion @ para 4.1.3.3 of the CIT(A) order that the reversal of liability will become income in the years, the loan is waved off. But since the liability is not allowed and already taxed, the appellant's request makes sense. While in principle the same is correct but still upheld the disallowance made by the Assessing officer is uncalled for.

As is evident, the additions / disallowance which forms the subject matter of this appeal are three-folds i.e., (i) Disallowance u/s 43B of interest converted in to loans by financial institutions; (ii) Disallowance of proportionate interest expenditure; (iii) Disallowance of Bad debts written-off. 5. The grounds raised by the assessee in ITA No.206/Chny/2023 are as under: - 1. The order of National Faceless Appeal Centre (NFAC), Delhi /CIT(A) is contrary to law, facts and in the circumstances of the case. 2. The CIT(A) / NFAC erred in confirming the disallowance of additional interest of Rs.12.75,760/- on the advances given to group concerns on gross interest expenditure basis. 2.1 The CIT(A) I NFAC ought to have appreciated that the appellant has claimed only net interest as revenue expenditure in the return of income. As the interest of Rs.164.51 Lacs has been offered as income by the appellant in its income tax return and in as much as the interest expenditure was not claimed to that extent, the interest disallowance was rightly computed by the assesseing officer based on the net interest while completing the assessment u/s 143(3). 2.2 The CIT(A) I NFAC ought to have appreciated that the appellant has sufficient own funds and hence no part of interest on borrowings can be disallowed in relation to advances given to group companies. 3. The CIT(A)/NFAC erred in treating the interest expenditure not claimed by the appellant to an extent of Rs.10,71,61,000 as income arising from the business assessable u/s 28(iv) in the hand of the appellant. 3.1 The CIT(A) I NFAC ought to have appreciated that the observation of the appellant vide item 11(a) to Notes on Accounts annexed to the audited Annual Report for the assessment year 2005-06 and upheld the said disclosure was made only for statistical purposes and to quantify the interest expenditure not claimed by the appellants and as such amounts cannot be subjected to tax, since the interest expenditure already accounted for by the appellants was only at reduced rate of interest, Hence, the amount cannot form appellant’s income u/s 28(iv). The sole issue that arises for our consideration is interest disallowance and computation thereof. 6. The Ld. AR advanced arguments on impugned issues citing various judicial decisions and also filed written submissions to support the case of the assessee. The revenue also advanced arguments and filed written submissions in support of impugned order. Having heard rival submissions and upon perusal of case records, our adjudication would be as given in succeeding paragraphs. The assessee being resident corporate assessee is stated to be engaged in manufacturing and marketing of fertilizers, pharma, biotech products and providing engineering services. 7. Disallowance u/s 43B of interest converted into loans by financial institutions 7.1 As per assessee’s Annual Report, the assessee claimed interest expenditure of Rs.18063.35 Lacs which include interest payable to banks and financial institutions. It transpired that out of said expenditure, interest to the tune of Rs.5418.70 Lacs was converted into loans during the year. As per explanations (3C) and (3D) to Sec.43B as inserted by Finance Act, 2006 with effect from 01.04.1989 and 01.04.1997 respectively, such conversion would not be deemed to be actual payment of interest and therefore, the prohibition contained u/s 43B (1) would apply with full force in respect of such interest converted into loans. The assessee referred to the decision of Hon’ble Apex Court in the case of Gujarat Polycrete Pvt. Ltd. (246 ITR 463) and also CBDT Circular No.674 dated 29.12.2003 which provided that sales tax liability converted into loan shall be allowed as deduction in the year in which the conversion is permitted by the State Government. However, Ld. AO held that the said decision / Circular would apply only in respect of Sales Tax Deferral Schemes as notified by State Government and would not apply to interest liability converted into loans by banks and financial institutions. The Ld. AO relied on the decision of Hon’ble High Court of Madras in the case of Kalpana Lamps and Components Ltd. (255 ITR 491) wherein it was held that mere postponement of liability to pay interest does not amount to actual or constructive discharge. Further, the amendment made by Finance Act, 2006 would squarely apply and accordingly, the claim of interest to the extent of Rs.5418.70 Lacs was disallowed u/s 43B. The Ld. CIT(A) confirmed the same against which the assessee is in further appeal before us. 7.2 This issue is recurring in nature and we have decided this issue against the assessee in ITA No.204/Chny/2023 for AY 2004-05 as under: - 7.3 Having considered the orders of lower authorities, we find that the adjudication of Ld. CIT(A) is in accordance with the statutory provisions as well as binding decision of Hon’ble High Court of Madras. The amendment brought in by Finance Act 2006 were squarely applicable. Considering the same, mere conversion of interest into loan would not amount to actual or constructive payment. Therefore,

the same has rightly been disallowed considering the provisions of Sec.43B. The assessee is free to make the claim of the same whenever it is eligible to claim the deduction in accordance with law. The corresponding grounds stand disposed-off accordingly. Facts being the same and taking consistent view, we uphold the decision of Ld. CIT(A). The corresponding grounds raised by the assessee stand dismissed. 8. Disallowance of proportionate Interest Expenditure 8.1 The assessee claimed interest expenditure of Rs.18063.35 Lacs against loan liabilities of Rs.213530.70 Lacs. However, it was noted by Ld. AO that the assessee advanced various sum to group entities without interest which are tabulated on page no.6 of the assessment order as under: - No. Name of the Party Amount (In Lacs) 1. SPIC Fertilizers & Chemicals Ltd. 1613.92 (SFCL, FZE), Dubai 2. Indo Jordan Chemicals Ltd. (IJCL) 1442.89 3. Ind-ITAL Chemicals Ltd. (TPL) 1.23 4. Spic Biotechnologies Ltd. 220.73 5. SPIC Petrochemicals Ltd. (SPC) 82.39 6. SPEL semiconductor Ltd. 6960.18 7. National Aromatics and Petrochemicals 1553.85 Corp. Ltd. (NAPCL) 8. Tuticorin Alkali Chemicals and 4678.45 Fertilizers Ltd. (TAC) 9. SPIC Jet Engg. Construction Ltd. 1.55 Total 16555.19 The assessee, inter-alia, submitted that own funds were utilized to make those investments. The assessee also relied on the decision of Hon’ble Supreme Court in the case of CIT V/s S.A. Builders (288 ITR 1) to bolster its claim. However, rejecting the same, Ld. AO computed proportionate disallowance of Rs.1400.46 Lacs. Pursuant to revisionary directions u/s 263, the impugned disallowance was enhanced by Rs.12.75 Lacs vide order dated 14.11.2011 by considering gross

interest expenditure instead of net interest expenditure as directed by revisionary authority. 8.2 During appellate proceedings, the assessee assailed the impugned disallowance on the ground that all these investments had business nexus and also raised plea of sufficiency of own funds to make these investments. The assessee also relied on the decision of Hon’ble Supreme Court in the case of ACG Associated Capsules Pvt. Ltd. (18 Taxmann.com 137) to plead that only net interest expense was to be considered for the purpose of disallowance. 8.3 However, rejecting the submissions of the assessee, Ld. CIT(A) confirmed the impugned disallowance except disallowance made against advances given to M/s Tuticorin Alkali Chemicals and Fertilizers Ltd. (TAC). The plea to consider net interest was also rejected. The adjudication of Ld. CIT(A) reduced the impugned disallowance to Rs.1013.85 Lacs against which the assessee is in further appeal before us. 8.4 We find that this issue has been decided by us in assessee’s favor in ITA No. 204/Chny/2023 for AY 2004-05 as under: - Our findings and Adjudication 11. From the facts, it emerges that impugned advances have been given by the assessee in the ordinary course of business to all these entities. The investments have been made in joint ventures entities though the projects may not have fructified for the assessee. It could be seen that SFCL, FZE is 100% subsidiary of SFCL Mauritius in which the assessee owns stake of 83.54%. The investment made by the assessee was for expansion of assessee’s business. This business of this entity is stated to be having direct nexus with the assessee’s main business of manufacturing of Urea and fertilizers etc. The assessee has undertaken to buy back the entire production of Urea from this entity. The ministry of chemicals and fertilizers, vide its letter dated 03.12.1998, informed the assessee that import of urea by assessee from this entity will be given preference. The aforesaid facts substantiate the arguments that investments made by the assessee had direct business nexus and therefore, 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 by Hon’ble Court 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. In fact, Tribunal in ITA No.232/Chny/2022 order dated 23.09.2022 for AY 2017-18, in similar issue, quashed revisionary proceedings on the ground that the loss of investments so made by the assessee was a business loss and the same was one of the possible views. Considering the same, the view taken by Ld. AO in allowing the business loss was upheld. To allow the expenditure, it would not be necessary that the project should fructify. Considering all these facts, we would hold that impugned disallowance against this entity could not be sustained. Similarly, the investments made in IJCL were made as a joint venture investment. This entity was to manufacture phosphoric acid and the entire production was to be sold to the assessee. The assessee made 60% contribution in this entity. The venture was to ensure supply of critical raw material for the assessee. Simply because the project could not fructify would not disentitle the claim of the assessee that it had business connection with this entity. The investment made by the assessee has RBI approval vide letter dated 22.09.1994 which is placed on page nos.100 & 101 of paper-book-1. This being so, disallowance of interest either u/s 37(1) or u/s 36(1)(iii) could not be said to be justified. We order so. The advances given to SPEL have been given by the assessee as a promoter entity to meet its debt obligations and capital expenditure. The advances were given by the assessee to this entity only up-to financial year 2000-01. During impugned year, the advances made by the assessee have been converted into equity shares. In earlier years, when the advances were given, the assessee is having sufficient own interest free funds to make these investments. The working of the same has been given on page nos. 7 & 8 of the paper-book-1. Similar findings have been rendered by us in assessee’s own case vide ITA No.170/Chny/2023 for AY 2003-04. Therefore, the assessee’s ground would succeed to that extent both on commercial expediency as well as on the ground of having sufficient own funds. M/s NAPCL is a joint venture entity of the assessee to produce Benzene, orthoxylene, paraxylene and PTA. However, the project has failed to commence production which has led to impugned disallowance. Nevertheless, there is direct business nexus of making the investment. The reason for delay in execution of the project is the fact that there was delay in getting regulatory approvals which is beyond the control of the assessee. The assessee has entered into MOU with Chennai Petroleum Corporation Limited to establish a large petrochemical plant near Chennai. The plant was to produce raw material for the assessee. The same has resulted into formation of this entity. As per the terms of MOU, the expenses of the joint venture are to be shared equally by the joint venture entities. Considering the same, the assessee has advances sum to this entity towards it share of the expenditure of the project. The investment would ultimately convert into equity shares. All these facts would establish the claim of the assessee that the investment had direct business nexus and therefore, no disallowance could have been made for this investment. Regarding investment in SPC, upon perusal of page no. 182 of the paper-book, it could be noted that the assessee has, in fact, charged interest from this entity. The outstanding loan amount including interest has been converted into equity and bonds which is evident from assessee’s financial statements. Therefore, there is no question of disallowing interest against this investment. The Ld. AR has pointed out that there is no investment made by the assessee in SPIC Technologies Ltd. for Rs.2200.66 Lacs. In fact, the assessee has made investment of Rs.220.66 Lacs in another entity viz. M/s SPIC Bio technologies Ltd. The Ld. AR has stated that the assessee has surplus net owned funds in the year in which the advances were given. The position of net owned funds has been summarized on page nos. 34 to 37 of paper book-2 along with extract of Balance Sheet, Profit & Loss Account and status of reserves and Surplus. After going through the same, we concur with the submissions of Ld. AR that the assessee had surplus net funds and disallowance need not be made in terms of decision of Hon’ble Supreme Court in the case of CIT V/s Reliance Industries Ltd. (307 CTR 121) which held that it could be presumed that the investments were made out of 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) also supports the case of the assessee. The interest disallowance on inter-corporate deposits of Rs.675 Lacs has been deleted by us in assessee’s own case vide ITA No.170/Chny/2023 for AY 2003-04 on the ground that in the year when these deposits were placed, the assessee had sufficient own funds to make the investments. Taking consistent view, no disallowance is called for against these ICDs. Finally, considering the facts and circumstances of the case, the impugned disallowance of Rs.5519.30 Lacs as sustained in impugned order could not be sustained in law. We order so.

In the above order, detailed findings have been rendered by us with respect to each of the parties under consideration. We have concurred with the plea of business nexus as well as sufficiency of own funds. The facts are quite similar in this year. The issue whether gross interest is to be taken or net interest is to be taken has been rendered infructuous in nature. Even otherwise, considering the ratio of decision of Hon’ble Supreme Court in the case of ACG Associated Capsules Pvt. Ltd. (18 Taxmann.com 137), only net interest expenditure was to be considered while computing impugned disallowance since interest income has been assessed as business income only and the same had business nexus with the assessee. The grounds raised in both the appeals stand allowed accordingly.

in the case of M/s Pure Beverages Ltd. (209 ITR 131) and also the decision of Hon’ble High Court of Bombay in the case of M/s IBM World Trade Corporation (186 ITR 412) lays down similar proposition. Respectfully following all these binding decisions, we delete the impugned disallowance as sustained in the impugned order. The corresponding grounds raised by the assessee stand allowed. 10. The appeal stand partly allowed. 11.1 The assessment so framed by Ld. AO u/s 143(3) was subjected to revision u/s 263 by revisionary authority vide order dated 25.03.2011. Consequently, another assessment was framed u/s 143(3) r.w.s. 263 on 14.11.2011 making some more additions / disallowances which are subject matter of ITA No.206/Chny/2023. The sole issue that arises for our consideration is interest disallowance and computation thereof. 11.2 Pursuant to revisionary directions, Ld. AO enhanced interest disallowance by Rs.12.75 Lacs by considering gross interest expenditure instead of net interest expenditure. The Ld. CIT(A) confirmed the same. Since we have deleted interest disallowance in totality, this ground has is deemed to have been allowed. The Ld.AO is directed to delete impugned disallowance of Rs.12.75 Lacs. 11.3 The revisionary authority also directed Ld. AO to bring to tax interest relief availed by the assessee for Rs.1071.61 Lacs under Corporate Debt Restructuring (CDR) package. The Ld. AO added the same to the income of the assessee. During appellate proceedings, the assessee submitted that interest was accounted in the books at reduced rates only and therefore, the question of adding the same

would not arise. Concurring with the same, Ld. CIT(A) directed Ld. AO as under: - Evidently, the appellant has not provided the required documents with respect to what was the original rate of interest and the interest relief in the CDR package, in the appeal proceedings. Granting further time in this appeal pending for almost 13 years is not possible. Therefore, the AO is directed to determine, what was the interest payable in the year concerned at that point of time (before 31/03/2005) in view of the CDR package approved and whether the appellant debited that amount only, as claimed. If the applicant has claimed interest beyond the amount in the CDR package, the same to be brought to tax u/s 36(1)(iii). Aggrieved as aforesaid, the assessee is in further appeal before us. 11.4 From the facts, it emerges that the assessee has accounted interest expenditure at reduced rates only and the separate reporting made by Auditor is part of statutory disclosure only. The Ld. CIT(A) has well appreciated the plea of the assessee and observed that the assessee did not provide the requisite documents and computations to support its stand. Accordingly, Ld. AO has been directed to verify the claim of the assessee. Therefore, no further directions are required in the matter. The directions given in the impugned order are quite apt and sufficient. No further directions are required in the matter. The grounds stand dismissed. The appeal stands partly allowed. Conclusion 12. Both the appeals stand partly allowed. Order pronounced on 10th January,2024 (MAHAVIR SINGH) (MANOJ KUMAR AGGARWAL) उपा45 / VICE PRESIDENT लेखा सद7 / ACCOUNTANT MEMBER चे9ई Chennai; िदनांक Dated :10-01-2024 DS

आदेशकीBितिलिपअ%ेिषत/Copy of the Order forwarded to : 1. अपीलाथ"/Appellant 2. " थ"/Respondent 3. आयकरआयुA/CIT 4. भागीय"ितिनिध/DR 5. गाडFफाईल/GF