SAKTHI AUTO COMPONENTS LIMITED,CHENNAI vs. DCIT, COIMBATORE

The assessee has filed this appeal challenging the validity of revision order dated 22.03.2013, passed by Ld. Commissioner of Income Tax-I, Coimbatore and it relates to assessment year 2008- 09.

We heard the parties and perused the record. The assessment in the hands of the assessee was completed under Section 143(3) of the Income-tax Act, 1961 (in short 'the Act') for the year under consideration, on 27.12.2010. The Ld. CIT, on examination of the record, noticed that the assessee had debited Profit & Loss account with a sum of `19.45 Crores towards dividend payable to preferential shareholders. The assessee had brought forward the opening accumulated losses of `16.68 Crores and during the current year, it had incurred a loss of ` 25.43 Crores, both aggregating to an accumulated loss to `42.11 Crores. In the notes on account, the assessee had stated that the dividend was declared in anticipation of dividend income to be received from foreign subsidiaries. It was further stated that the assessee did not receive dividend income and hence it had treated the dividend declared on preference shareholders as advances recoverable. On the basis of these facts, the Ld. CIT took the view that the assessee has used borrowed funds for declaring dividend on preference shareholders. Accordingly, the Ld. CIT took the view that the interest on loans relatable to dividend so declared is not allowable as deduction under Section 36(1)(iii) of the Act. Accordingly, he set aside the assessment order and directed the Assessing Officer to redo the same afresh in the light of the discussion made by him.

The Ld. counsel appearing for the assessee submitted that the assessee had declared only interim dividend on preference shareholders and the same was decided to be recovered subsequently. He further submitted that the Ld. CIT has presumed that the assessee has used the borrowed funds for disbursing the dividend, whereas the fact remains that the assessee had sufficient funds with it. The Ld. counsel further submitted that the Ld. CIT has considered the losses without adding the non-cash expenditure, i.e. depreciation. He submitted that the assessee had actually realized cash surplus during the year under consideration. The Ld. counsel further submitted that the Ld. CIT was not right in law for presuming that the interest on borrowings, if any made, for disbursing the dividend income is not allowable as expenditure. He submitted that in the following cases, it has been held that the interest paid on amount borrowed for payment of dividend is allowable as deduction:-

On the contrary, the Ld. D.R. submitted that the Assessing Officer did not look into this matter and hence the Ld. CIT was justified in passing the impugned revision order.

Having heard the rival submissions, we are of the view that there is a merit in the contentions of the Ld. counsel. We have already noticed that the Ld. CIT has passed the impugned revision order only on the reasoning that the interest on borrowings, if any made, for disbursing dividend is not allowable as deduction under Section 36(1)(iii) of the Act. However, the various case laws relied on by the Ld. counsel make it very clear that the interest on the amounts borrowed for payment of dividend is allowable as deduction. Thus, it is seen that the very foundation on which the impugned revision order has been passed by Ld. CIT fails, in which case we are not able to sustain the same. Accordingly, we set aside the revision order passed by the Ld. CIT.

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