M/S. ECOPLAST LTD.,,VALSAD vs. ASST. CMMISSIONER OF INCOME TAX,VALSAD RENGE,, VALSAD

ITA 545/SRT/2019/AY.2016-17 Ecoplast Ltd. 2) The assessee craves, to consider the above grounds of appeal without prejudice to each other and craves leaves to add, alter, delete or modify all or any of the above grounds of appeal on or before the final date of hearing.”

In response to the same, the assessee company filed its reply on 01/12/2018 in which it claimed that the loan advanced to subsidiary company is ITA 545/SRT/2019/AY.2016-17 Ecoplast Ltd. financed from Interest Free Funds accumulated by the company. The assessee has also claimed that the loan was advanced out of commercial expediency to expand the business of the subsidiary company. Further, assessee- company has also relied on many case laws including S. A. Builders Ltd. vs CIT (A), Chandigarh.

However, Assessing Officer rejected the contention of the assessee and held that if the assessee had interest free funds at his disposal, then there was no need to borrow the loan from banks on long term and short term finance. Therefore, Assessing Officer held that the provisions of section 36(1)(iii) of the IT Act is clearly attracted in the case of assessee. Accordingly, a proportionate disallowance which worked out to Rs.47,82,612/- being 12.85% of Rs.3,72,18,771/- was disallowed and added to total income of the assessee.

Aggrieved by the order of the Assessing Officer, the assessee carried the matter in appeal before the ld. CIT(A), who has confirmed the addition made by the Assessing Officer. Aggrieved by the order of Ld. CIT(A), the assessee is in further appeal before us.

Shri Sapnesh Sheth, Learned Counsel for the assessee, argued that Assessee Company had advanced Interest free Loan to its Subsidiary company M/s Synergy Films Pvt Ltd. amounting to Rs.3,72,18,771/- in the preceding years. The loan to Subsidiary is an opening balance carried forward from preceding years and no new/fresh loans were advanced during the previous year relevant to the assessment year under consideration. The interest expenses incurred during the year solely relate to the borrowings made and utilized during the year for the business of the assessee. The details of interest bearing borrowings of the Company during the previous year relevant to the assessment year under consideration were as under:

On the other hand, the Learned Departmental Representative (Ld. DR) for the Revenue submitted that assessee’s issue in present appeal under consideration is squarely covered against the assessee by the judgment of the Hon'ble Tribunal which was considered by the Assessing Officer. The Ld. DR also pointed out that here is no change in the facts, so far the previous assessment year is concerned, that is, assessment year 2012-13 and the current assessment year under consideration 2016-17. The only differential fact is that the percent holding which is at 100% today in the subsidiary company, was 75% in earlier years. As on today the holding is 100% in the subsidisry therefore, it is a hundred percent subsidiary company but the other facts remain same which were there in the assessment year 2012-13, therefore the order of the Tribunal in assessee’s own case should be followed and assessee’s appeal should be dismissed.

We have heard both the parties and carefully gone through the submissions put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the facts of the case including the findings of the ld. CIT(A) and other material brought on record. We note that Ld. Counsel for the assessee submitted before us the following documents and evidences: (i) Bank of Baroda sanction letter issued to M/s Synergy Films Pvt. Ltd. (vide paper book page nos. 45 to 55). (ii) Loan agreement between assessee and M/s Synergy Films Pvt. Ltd. (vide paper book page nos. 56 to 58). (iii) Relevant portion of audited balance sheet and profit and loss account for AY.2016-17 (vide paper books page nos.59 to 60).

We note that M/s Synergy Films Pvt. Ltd. is wholly owned subsidiary company, therefore it is the extension of the business of the parent company, hence it is the prerogative of the assessee to utilize the own free funds for giving loan and advances to subsidiary company to expand business base. The Ld. Counsel pointed out that loans and advances were given to subsidiary company out of share capital and reserve and surplus funds which is sufficient to meet the Page | 6

From the above facts, we note that only parent company can help the wholly owned subsidiary company. The profit and loss of the wholly owned subsidiary company is the profit and loss of the parent company. We note that loan at a concessional rate of interest were given to sister concern for commercial expediency. The loan advanced to subsidiary company is financed from Interest Free Funds accumulated by the company, as noted above. Such loan was advanced out of commercial expediency to expand the business of the subsidiary company. For that reliance can be place on the decision of Hon'ble Supreme Court in the case of SA builder Ltd. Vs CIT, 158 Taxman 74, Delhi High Court. Other decisions referred by the assessee on this issue were: In the case of CIT Vs Dalmia cement Ltd. 254 ITR 377, and in the case of CIT Vs. Reliance Utilities and Power Ltd 313 ITR 340. Thus, we note that above facts and decision of Hon`ble Supreme Court in the case of SA builder Ltd. Vs CIT, 158 Taxman 74, have not been considered by the Tribunal ( in assessee`s own case) in right perspective. Who can help the wholly owned subsidiary in needy hours? This is the parent company, who can help the wholly owned subsidiary in needy hours to save the business. Based on these facts, we note that addition made by the assessing officer needs to be deleted.

The assessee (Ecoplast Limited) has also given corporate guarantee of Rs.396 lakhs. The strategic investment in subsidiary was made mainly to explore the business potential of the Company's Multilayer film business due to logistic advantage and favorable market conditions prevailing in the Eastern and North Eastern Region. The subsidiary has extended the market reach of Ecoplast Limited to the untapped markets in the state of Assam, Arunachal Pradesh, Nagaland, Manipur, Mizoram, Tripura, Bhutan, Sikkim, West Bengal, Bihar, Jharkhand and all states of Bangladesh. Thus loans were advanced out of commercial expediency to expand the business of the company in North Eastern Region and to protect the investment made in the subsidiary company. M/s Synergy Films Pvt. Ltd. utilized money received from the assessee Company for business purpose of working capital to continue its operations and to service its loan repayment obligation to Financial Institution. The ld Counsel submitted the following comments on the findings of ITAT order in assessee`s own case as follows: ITAT’s findings for AY 2012-13 Assessee’s response to ITAT’s findings The sister concern had increased The profits of the sister concern had the losses from Rs 57.99 lakhs to Rs increased from Rs 9.49 lakhs to Rs 91.27 lakhs for AY 2012-13 59.88 lakhs in the previous year implying that the future prospects of relevant to the assessment year under the sister concern was not sound. consideration (Refer "Exhibit F") Other Partners had left the said M/s Synergy Films Pvt Ltd is a wholly sister concern during the previous owned subsidiary Company and being year relevant to the assessment year a 100% stakeholder, Company is under consideration. required to provide quasi capital and margin for working capital as mandated by the Banker of the subsidiary Company. The Assessee Company had failed to The Interest Free Loan advanced to establish the link with interest free subsidiary company is solely funds available and loans lent out of attributable to interest free funds as said funds to the sister concerns. demonstrated in the preceding para "a" above. The Share Capital relates to the old Share capital is not the only interest period, which implies that it has free fund as Company has substantial already been utilized for the accumulated free reserves generated ITA 545/SRT/2019/AY.2016-17 Ecoplast Ltd. purchase of asset, hence it cannot out of internal cash accruals. In any be said to be available with the case, no loan was advanced during the Assessee Company for the money to previous year from the interest bearing be lent. fund which were availed for specific end uses.

Thus, the facts on the basis of which, Tribunal has decided the case in assessee`s own case are substantially different from the facts of the case for the period under appeal and therefore cannot be relied. Therefore, respectfully following the decision of Hon'ble Supreme Court in the case of SA Builder Ltd. (supra), we delete the addition of Rs.47,82,612/- made by the Assessing Officer.

In the result, appeal filed by the assessee is allowed.