VADILAL INDUSTRIES LTD.,AHMEDABAD vs. THE JT. CIT, RANGE-8, AHMEDABAD

The assessee has raised following grounds of appeal:-

In this case, return of income declaring income of Rs. Nil was filed on 31st March, 2012. Subsequently, the case was selected under scrutiny by issuing of notice u/s. 143(2) of the act on 3rd August, 2012. During the course of assessment proceedings, the assessing officer noticed that assessee has provided loan of Rs. 1,50,000/- US $ (Rs. 70,85,000/-) to its foreign subsidiary assessee on which no interest was charged. The assessing officer observed that on other hand, the assessee has incurred interest expenses of Rs. 9.61 crores. Therefore the assessee was asked why not proportionate interest expenses should be disallowed. The assessee submitted that it had given loan to Vadilal, INC, USA subsidiary in USA and offered LIBOR rate average for the whole year @ 0.27% of o Rs. 12618/-. The assessing officer has not accepted the explanation of the assessee on the ground that the more relevant is the cost at which the assessee has obtained its interest bearing fund in India. The has determined the effective interest rate in the case of the assessee to 5.1%.Accordingly, the assessing officer has disallowed Rs. 3,61,335/- as interest expenditure on the amount of loan provided to the subsidiary without charging any interest.

Aggrieved assessee failed before the ld. CIT(A). The ld. CIT(A) has sustained the addition made by the assessing officer by observing as under:- “5. The submissions are considered. It is seen that deduction under section 36(1)(iii) is governed by provisions of section 40A(2)(a) which provides that if any excessive expenditure or unreasonable benefit has been extended to his sister concern covered by provisions of section 40A(2)(b) , then excessive expenditure incurred for the benefit of relative covered by clause (b) is disallowed. Hence the contention of the appellant that the rate at which foreign subsidiary would have availed loan is not relevant. What is required to be seen is that expenses incurred by the appellant in extending the benefit to the relative. The assessing officer has considered the cost to the appellant by taking the overall view of the availability of funds. Needless to state that funds of the appellant are mixed and no case has been made out that only the interest free funds were utilised to grant credit to the sister concern. In view of this, I agree with the findings of the assessing officer and disallowance made by her in the order is confirmed. Ground number 3 is dismissed.”

We have heard the rival contentions and perused the material on record carefully. We observed that that cost of funds in the hands of the assessee is to be determined to consider the unreasonable benefit extended to its subsidiary as per the provisions of section 40A(2)(b) of the act as against the rate at which the foreign subsidiary would have availed loan. We have noticed that the assessing officer has determined such cost of the funds @ 5.1% after taking into consideration the availability of fund with the assessee. The assessee has not contraverted these findings of the assessing officer with specific relevant material. After considering the above facts and findings, we are of the view that it is unreasonable to accept interest @ 0.27% as against the cost of the funds available to the assessee

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