EMPEE HOLDINGS LTD.,CHENNAI vs. DCIT, CHENNAI

आदेश / O R D E R PER G. PAVAN KUMAR, JUDICIAL MEMBER:

ITA No.1502/Mds/2014 :- 2 -:

The three substantive grounds raised by the assessee being 2.

(i) The ld. Commissioner of Income Tax (Appeals) erred in confirming the re-assessment proceedings u/s.143(3) r.w.s 147 of the Act as valid (ii) The ld. Commissioner of Income Tax (Appeals) erred in sustaining the disallowance of interest aggregating to �.62,89,206/- claimed u/s.36(1)(iii) of the Act without appreciating that the loans were advanced without interest to Group companies for business purposes and (iii) the ld. CIT(A) erred in sustaining the disallowance of fee paid to Registrar of Companies (ROC).

At the time of hearing, the ld. Counsel has not pressed 3. ground No. three, being fees paid to Registrar of Companies and we adjudicate first two grounds.

The Brief facts of the case are that the assessee is an 4. investment company and filed Return of income for the assessment year 2003-2004 on 01.12.2003 with total income of �4,33,900/- and the return of income was processed u/s.143(1) of the Act on 23.06.2004. Subsequently, the ld. Assessing Officer issued notice u/s.148 of the Act having reason to believe that the income escaped assessment were assessee company has diverted interest bearing borrowed funds to group companies without charging any interest.

ITA No.1502/Mds/2014 :- 3 -:

The ld. Authorised Representative filed letter dated 12.04.2010 to treat original return filed as in response to notice u/s.148 of the Act. In the scrutiny proceedings, The ld. Assessing Officer on perusal of the financial statements found that the assessee company has unsecured loan as on 31.03.2003 �9,04,02,441/- as against previous year balance as at 31.03.2002 being �26,23,506/- and the assessee has debited to profit and loss account �62,89,206/- being interest on unsecured loan obtained from M/s. Empee Sugars & Chemicals Limited. The contention of the assessee company that the assessee has not charged any interest on loans advanced to group companies and no part of interest bearing funds were utilized for lending to group companies. Further, the ld. Assessing Officer perused the Balance sheet found that assessee company does not have any reserve and surplus at the starting of financial year and it is not possible for the assessee company to provide unsecured loans to group companies and show cause notice was issued and the ld. Authorised Representative filed explanation at para 6.2 as under:-

‘’We submit that the advance given to M/s. Empee Distilleries Limited is out of the interest bearing funds is erroneous and not justified. This is because of the fact, we have availability of non interest bearing funds of �3 Crores being the share application money earlier. In any event, the money advanced to M/s. Empee Distileries Limited should not be considered as diversion for non business purpose in as much as the group development especially in the contest of common management, unity and control as ITA No.1502/Mds/2014 :- 4 -: well as inter-lacing of funds should be taken into consideration and the monies advanced are used only in the business of the other group company. In this regard, the decision of Supreme Court reported in 288 ITR 1 is apt and relevant. Therefore, it is requested that the interest paid to M/s. Empee Sugars & Chemicals Limited may be considered for deduction’’.

The ld. Assessing Officer also reviewed the existing share application money pending allotment and they are interest free funds and further on comparison with share application money with unsecured loans provided to sister concern, there is wide gap of source availability but the ld. Authorised Representative justified the advances to group companies are for the purpose of companies development forming part of same management. The ld. Assessing Officer further made a exhaustive findings on group company M/s. Empee Sugars and Chemicals Ltd which has advanced money to the assessee company is loss making company and perused the financial statements and found that no tax was paid on interest received from the assessee company. Therefore, the ld. Assessing Officer considering the above facts in the nature of colourable device to evade tax and disallowed interest charges along other disallowance and passed order. Aggrieved by the order, the assessee filed an appeal before Commissioner of Income Tax (Appeals).

ITA No.1502/Mds/2014 :- 5 -:

In the appellate proceedings, the ld. Authorised 5.

Representative argued the grounds on re-assessment and interest disallowance. The ld. Commissioner of Income Tax (Appeals) relied on the findings of the ld. Assessing Officer at page 5 to 7 and Highlighted that the assessee company has provided interest free loan of �6,80,01,522/- to the group companies on the concept of commercial expediency and to protect mutual interest of group companies.

Further the assessee company could not explain with details compelling reasons to make interest free loan to M/s. Empee Distilleries Ltd and others. The ld. Commissioner of Income Tax (Appeals) found diversion of interest bearing fund for non business purpose and doubted the genuineness. The assessee company has received interest bearing unsecured loans from M/s. Empee Sugars & Chemicals Ltd and debited the interest charges in the profit and loss account and accommodated interest fee advance to group concern M/s. Empee Distilleries Ltd. The lender company M/s. M/s. Empee Sugars & Chemicals Ltd being recipient of interest on advances from the assessee company is a loss making company and claimed set off of loss with interest. While the assessee company has adjusted the interest payment component against income of mutual funds. There is no nexus of interest paid by the assessee company and income on ITA No.1502/Mds/2014 :- 6 -: redemption of mutual funds. With these observations, the ld. Commissioner of Income Tax (Appeals) has confirmed the order of ld. Assessing Officer. Aggrieved by the order of Commissioner of Income Tax (Appeals), the assessee assailed an appeal before Tribunal.

Before us, the ld. Authorised Representative argued the 6. grounds and reiterated the facts of assessment and appellate proceedings and referred to the paper book filed in the assessment proceedings containing Memorandum of Understanding and management list of Directors and shareholder pattern. The ld. Authorised Representative emphasized that the assessee company has advanced non interest bearing funds to group company M/s.

Empee Distilleries being under same management on commercial expediency and to protect mutual interest and supported the arguments with list of Directors of all the group companies M/s. Empee Sugars & Chemicals Ltd, M/s. Empee Distilleries having common directors. On shareholding pattern, shares of M/s. Empee Sugars Ltd held by M/s. Empee Distilleries Ltd with share holding 63.43 % shares and assessee company holds 2.29% of shares. Further, the registered office of M/s. Empee Holdings Ltd and M/s. Empee Distilleries Ltd and administrative office of M/s. Empee Sugars Authorised Representative having common address. The assessee

ITA No.1502/Mds/2014 :- 7 -: company provided unsecured loans to M/s. Empee Distilleries Ltd on concept of protection of mutual trust with Business expediency and prayed for setting aside the order of CIT(A) and allow the grounds of payment of interest to group company.

Chemicals and M/s. Empee Distilleries Ltd holds 27.67% share of the assessee company. The transaction of chain Holding of shares by the assessee company and common individual share holders prove that there exist holding and subsidiary company operations having registered office at one place. We also perused the profit and loss account were the source of income of assessee company being income from mutual funds and issue revolves around whether the assessee company having obtained interest bearing loan from M/s.

Empee Sugars and Chemicals Ltd granting interest free loans to another group companies is a prudent business practice. The shares of M/s. Empee Sugars & Chemicals Ltd being 63.43% are directly held by M/s. Empee Distilleries Ltd and we could not understand why the loans was routed through the assessee company. The income of the assessee company is only on redemption of mutual funds and no business activities are carried in the previous year. The explanations that the interest free loan provided to M/s. Empee Distilleries Ltd are out of interest free funds cannot be accepted as the financial statements of the assessee company could not support arguments of the ld. Authorised Representative. The ld. Authorised Representative relied on the decision of CIT vs. Hero Cycles (323 ITR 518) (P & H) but we are of the opinion that the assessee company on one hand obtain

ITA No.1502/Mds/2014 :- 9 -:

Interest bearing loans from the same management company and give interest free loans to other company in the same management and set off interest charged on loan funds against income on redemption of mutual funds and whereas interest income in the hands of M/s. Empee sugars and Chemicals Ltd does not subject to tax due to Business losses. So, considering the Apparent facts, financial statement, concept of same management and chain holding of shares and tax adjustments, we found that the ld. Commissioner of Income Tax (Appeals) has examined the evidence on record vis-à-vis explanations made by the assessee. We does not see any reason to interfere with the order of Commissioner of Income Tax (Appeals) on this ground and we uphold the same and dismiss the ground of the assessee.

On the validity of re-assessment proceedings, We heard the 9. rival submissions, perused the material on record and judicial decisions cited. The ld. Authorised Representative argued that the re- assessment proceedings are bad in law due to change of opinion. The ld. Assessing Officer without any material reopened the assessment u/s. 147 of the Act as the same was available before the ld. Assessing Officer while passing Intimation u/s.143(1) of the Act. The ld. Departmental Representative produced copy of Reasons recorded by ITA No.1502/Mds/2014 :- 10 -: the ld. Assessing Officer on re-assessment proceedings. We found from the records, Against income on redemption of mutual funds, the assessee company has claimed administrative expenditure and finance charges in the nature of interest on advances from M/s. Empee Sugars and Chemical Ltd and also increase in unsecured loans compared to earlier years. The factual matrix that the assessee has not charged any interest on advances to M/s. Empee Distilleries Ltd. But claimed interest in profit and loss account for advances from group company.

The ld. Authorised Representative explained that advances are made on commercial expediency and interest expenditure has to be allowed. We considering the apparent facts found on verification All the three companies are under same management and with common shareholding. We are not convinced with the concept of change of opinion as the financial statements clearly shows that the interest was paid on advances but not charged in respect of advances provided to the group company. Further increase in unsecured loans and assessee’s company income is not from business activity but only out of redemption of mutual funds. Therefore, the ld. Assessing Officer was right considering the reasons for re-assessment and issued notice u/s.148 of the Act within six years and based on the information as per assessment records and hence the re-assessment proceedings

ITA No.1502/Mds/2014 :- 11 -: are valid and we upheld the order of the Commissioner of Income Tax (Appeals) on this ground and dismiss the ground.

In the result, the appeal of the assessee is dismissed. 10.

Order pronounced on Tuesday, the 19th day of July, 2016, at Chennai.