Madras High Court
The Commissioner Of Income Tax vs M/S.Diamond Engineering ... on 23 August, 2021
T.C.A.No.458 of 2016
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED : 23.08.2021
CORAM :
The Hon'ble MR.JUSTICE T.S.SIVAGNANAM
and
The Hon'ble MR.JUSTICE SATHI KUMAR SUKUMARA KURUP
T.C.A.No.458 of 2016
The Commissioner of Income tax,
Chennai. ... Appellant
Vs
M/s.Diamond Engineering (Chennai) Private Ltd.,
179, Old Mahaballipuram Road,
Sholinganallur, Chennai – 600 119.
PAN: AACD3949E ... Respondent
PRAYER : Tax Case Appeal filed under Section 260-A of the Income
Tax Act, 1961 against the order of the Income Tax Appellate Tribunal,
Madras, “C” Bench, Chennai dated 11.11.2015 passed in
I.T.A.No.820/Mds/2013.
For Appellant : Mrs.R.Hemalatha, Senior
Standing Counsel.
For Respondent : Mr.A.S.Sriraman.
https://www.mhc.tn.gov.in/judis/
1/14
T.C.A.No.458 of 2016
JUDGMENT
(Delivered by T.S.SIVAGNANAM, J.)
This Appeal filed under Section 260-A of the Income Tax Act,
1961 ('the Act' for brevity) is directed against the order dated 11.11.2015
in I.T.A.No.820/Mds/2013 passed by the Income Tax Appellate Tribunal
“C” Bench, Chennai (for brevity “the Tribunal”) for the Assessment Year
2009-2010.
2.The Appeal was admitted on 19.07.2016 to decide the
following substantial questions of law:-
“1.Whether on the facts and circumstances of the
case, the Tribunal was right in permitting the matter to AO
for the limited purpose of verifying whether the amount of
equity capital reserve/surplus was more than the interest
free advances given to sister concern without giving scope
to the department to verify the fact whether these funds
were not available on the date of advancing the interest
free loans?
2.Is not the finding of the Tribunal bad by
remitting the matter to the AO for the limited purpose
https://www.mhc.tn.gov.in/judis/
T.C.A.No.458 of 2016
especially when the Assessee had contended the advances
were made towards material costs which was found to be
incorrect since the cost of the entire services related
concern was lower than the advances made?
3.Whether on the facts and circumstances of the
case, the Tribunal was right in disallowing the additions
made by the AO under Section 36 (1) (iii) of the Income
Tax Act and remitting it back without appreciating the fact
that there was no business expediency involved in
advancing the interest free loan to sister concerns?”
3.We have elaborately heard Ms.R.Hemalatha, Learned Senior
Standing Counsel appearing for the Appellant / Revenue and
Mr.A.S.Sriraman, Learned Counsel appearing for the Respondent /
Assessee.
4.At the first blush, on going through the order passed by the
Tribunal, we wondered as to why the Revenue is aggrieved by the
impugned order, as the Tribunal has remanded the matter back to the
Assessing Officer for certain verification. However, on a careful reading
of the order passed by the Tribunal, we found that legal questions have
https://www.mhc.tn.gov.in/judis/
T.C.A.No.458 of 2016
been raised by way of this Tax Case Appeal by the Revenue which
require consideration.
5.The Assessee is a company registered under Indian
Companies Act, 1956 following Mercantile method of accounting
engaged, in the business of Engineering and Fabrication. The Assessee
filed its return of income for the Assessment Year under consideration,
2009-10 on 29.09.2009 declaring an income of Rs.13,42,02,851/-. The
return was processed under Section 143 (1) of the Act. Subsequently, the
case was selected for scrutiny and notice under Section 143 (2) of the Act
was issued on 30.08.2010, pursuant to which the Authorized
Representative of the Assessee was heard in the matter and details were
called for.
6.The issue before us in the instant Appeal is with regard to the
allegation of diversion of funds by way of interest free loans to related
concerns. The Assessing Officer after noting the facts, requested the
Assessee to justify huge interest free advances to its related concerns.
The reply given by the Assessee was that those units have to buy huge
quantity of raw materials to execute the work in progress and therefore,
https://www.mhc.tn.gov.in/judis/
T.C.A.No.458 of 2016
these payments were made as advance to meet the material cost.
Subsequently, the Assessee took another stand by way of another
statement that the nature of work requires minimum land space and
outsources lesser value addition works which require large land space to
its associate concerns and accordingly to perform the above jobs, it has to
pay huge advance to cover the cost of material and also the working
capital.
7.Admittedly, there appears to be a slight discrepancy between
the two replies given by the Assessee. The Assessing Officer on going
through the explanation and noting the transaction pointed out that in the
P & L account and the balance sheet of the two related concerns namely,
Emerald Engineering Unit II and Ruby Engineering, held that almost
their entire receipts are from the Assessee-Company and they do not have
any secured or unsecured loans. On the other hand, apart from the
revenue receipt from the Assessee Company for the services rendered,
these related concerns have also received huge advances. On analysis of
the advances given to the related concerns, the following findings were
returned by the Assessing Officer.
“(d)An analysis of the above table shows that in
https://www.mhc.tn.gov.in/judis/
T.C.A.No.458 of 2016
the case of Emerald Engineering, the advances received
during the year amounts to Rs.10.71 crores which are still
outstanding as on 31-03-2009 and if we add the opening
balance, the total outstanding advances as on 31-03-2009
for which the related concern has to render service in
future comes to Rs.14.28 crores, whereas, the total volume
of services rendered by the related concern for the whole
year in the F.Y.08-09 is only Rs.9.55 crores. The entire
Rs.9.55 crores should also have been paid as otherwise,
the assessee company would have figured as sundry
debtors in the related concern's books. Similarly, in the
case of Ruby Engineering, the corresponding figures are:
advances received during the year Rs.5.63 crores, which
are still outstanding as on 31-03-2009 for which the
related concern has to render service in future – Rs.7.30
crores, the total volume of services rendered by the related
concern for the whole year in the F.Y.08-09- Rs.7.12
crores. In this related concern also, the assessee company
is not figuring as sundry debtor meaning, the entire
consideration for the services rendered during the year
has already been received from the assessee. It is common
knowledge that in the normal business transactions, the
advances would mostly be in the range of 15% to 20% of
the total volume of the work to be done or the services to
be rendered, and in general, it will relate to the services
likely to be rendered in the next two or three months.
https://www.mhc.tn.gov.in/judis/
T.C.A.No.458 of 2016
Also, it will always be the case that advances can never be
far in excess of the services rendered and in most cases, in
fact, it will be the case of full services already rendered
but par of the consideration yet to be paid, where the
volume of work is so huge. However, in the assessee's
case, it is a stark reality that the assessee has not only
made 100% payment towards the services rendered by the
related concerns, but, over and above that, even exceeding
the total turnover of the year, it has advanced interest free
funds to the related concerns during the year.”
8.The Assessee's explanation was that these advances are made
towards material cost. The correctness of such explanation was
examined by the Assessing Officer and deeper scrutiny into the facts was
made and on perusal of the fixed assets during the year, it was observed
that there are huge addition to fixed assets during the year which could
only have been funded out of the advances received from the Assessee,
as those concerns do not have any other loans or the capital or reserves
to fund such huge capital addition. By way of illustration, the Assessing
Officer pointed out that in respect of Emerald Engineering, the total of
liabilities is Rs.16.52 crores out of which Rs.14.28 crores is the
outstanding advance from the Assessee. Similarly, at the assets side, out
https://www.mhc.tn.gov.in/judis/
T.C.A.No.458 of 2016
of Rs.16.52 crores, Rs.16.24 crores relates to fixed assets and the
addition during the year to fixed assets is Rs.10.57 crores. In the case of
other related concern, viz., Ruby Engineering, the total of liabilities side
is Rs.7.41 crores, advance from the Assessee company is Rs.7.30 crores,
total of fixed assets is Rs.7.22 crores and addition to fixed assets during
the year is Rs.5.60 crores.
9.Further, the financial health of the Assessee company was
also noted by the Assessing Officer and it was pointed out that the
Assessee is having a total borrowal of Rs.65.55 crores and the total
finance charges incurred comes to Rs.21,74,70,019/-. Out of the said
amount, the Assessing Officer excluded the bank charges of
Rs.3,88,33,959/-, the total interest paid comes to Rs.17,86,36,060/-
Ultimately, the Assessing Officer came to the conclusion that
proportionate disallowance has to be made and the argument that these
interests were paid for loans taken for a specific purpose and they do not
form part of the funds diverted to related concerns, is not tenable.
10.Aggrieved by the said order, the Assessee preferred an
Appeal to the Commissioner of Income Tax (Appeals) -IX (for brevity
“the CIT(A)”) under Section 250(6) of the Act. By order dated
https://www.mhc.tn.gov.in/judis/
T.C.A.No.458 of 2016
28.02.2013, the CIT(A) re-examined the factual position and confirmed
the order passed by the Assessing Officer. Hence, the Assessee was on
appeal before the Tribunal. The Tribunal without looking at the
background position of the order, remanded the matter back, which is a
qualified remand for the limited purposes of verifying the amount of
equity capital and reserves/surplus disclosed in the balance sheet.
Further, the Tribunal has qualified by stating that if the Assessing Officer
finds that the non-interest bearing fund of the Assessee is more than the
interest free advance extended to its sister concerns, then the Assessing
Officer shall delete the addition made by him to the tune of
Rs.3,27,78,927/- towards disallowance of proportionate interest on
interest free fund diverted to its sister concerns.
11.The order passed by the Tribunal partly appears to be a
remand order. However, it does not appear to be an open remand, but a
qualified remand to the Assessing Officer to complete the assessment and
the Assessing Officer is assigned to do only a clerical job.
12.On a reading of the order passed by the Tribunal, we find,
the same is absolutely devoid of any reasons. The operative portion of
https://www.mhc.tn.gov.in/judis/
T.C.A.No.458 of 2016
the order is in Paragraph Number 5 which reads as follows:
“5.We have heard both the parties and carefully
perused the materials available on record. On perusing
the balance sheet submitted by the assessee it is apparent
that the assessee is having reserves and surplus of Rs.11.8
crores approximately and Rs.20/- crore equity as on
01.04.2008. This fund of the assessee is non-interest
bearing and available to the assessee for deploying in the
business as it deems fit. Therefore, the non-interest
bearing fund of the assessee company viz. Equity and
reserves/surplus of Rs.31.8 crores (approx.) can be
presumed to have be advanced as the interest free
advances to the sister company of Rs.21.6 crores (approx)
which is far less than the non-interest bearing fund
available with the assessee company. Hence, the addition
made by the Ld.Assessing Officer by disallowing the
interest is not warranted. Since these facts were not
examined by the Revenue, we hereby remit the matter back
to the file of the Ld.Assessing Officer for the limited
purposes of verifying the amount of equity captial &
reserves/surplus disclosed in the balance sheet and if the
Ld.A.O. Finds that the non-interest bearing fund of the
assessee is more than the interest free advance extended to
its sister concern then the Ld.A.O. Shall delete the addition
made by him of Rs.3,27,78,927/- towards disallowance of
https://www.mhc.tn.gov.in/judis/
T.C.A.No.458 of 2016
proportionate interest on interest-free fund diverted to
sister concerns. However if found otherwise he shall pass
appropriate order as per law and merits.”
None of the facts as noted by the Assessing Officer or by the CIT(A)
with regard to the question as to how the assets were diverted to the
related concerns, has not been touched upon by the Tribunal. To say the
least, the order passed by the Tribunal is devoid of reasons and therefore,
bereft of particulars and non-est in law.
13.Though the Tribunal states that on perusing the balance
sheet submitted by the Assessee, it is seen that the Assessee is having
reserves and surplus of Rs.11.8 crores approximately and Rs.20 crore
equity as on 01.04.2008, the Tribunal concluded that this fund of the
Assessee is a non-interest bearing fund and is available to the business as
it deems fit. There is no discussion as to the finding rendered by
Assessing Officer, wherein detailed examination has been done regarding
the fund flow and transaction. This aspect was noted by the CIT(A) and
reasons have been given by the CIT(A) holding that it is evident that the
Assessee has given its funds to its sister concerns to meet their capital
https://www.mhc.tn.gov.in/judis/
T.C.A.No.458 of 2016
expenditure and not given to meet material cost as claimed by the
Assessee and the CIT(A) held that the Appellant's funds are diverted to
its sister concerns and by doing so, the Assessee did not get anything in
return and hence, the interest expenditure paid by the Assessee is
required to be restricted proportionately which was quantified by the
Assessing Officer at Rs.3,27,78,927/-.
14.The Tribunal has not rendered any finding with regard to
the correctness of the above finding given by the CIT(A) which
confirmed the finding rendered by the Assessing Officer. Therefore, we
are of the clear view that Tribunal has erroneously passed the order, that
too, without any finding regarding the findings of the Assessing Officer
or the CIT(A), which was wrong on facts. Therefore, we are of the clear
view that the order passed by the Tribunal calls for interference.
15.Accordingly, this Tax Case Appeal is allowed and the
substantial questions of law are answered in favour of the Revenue. No
https://www.mhc.tn.gov.in/judis/
T.C.A.No.458 of 2016
costs.
(T.S.S.,J.) (S.S.K.,J.)
23.08.2021
ay
Index:Yes/No
Internet:Yes/No
To
1.The Commissioner of Income tax,
Chennai.
2.The Income Tax Appellate Tribunal 'C' Bench,
Chennai.
https://www.mhc.tn.gov.in/judis/
T.C.A.No.458 of 2016
T.S.SIVAGNANAM, J.
and
SATHI KUMAR SUKUMARA KURUP, J.
ay
T.C.A.No.458 of 2016
Dated: 23.08.2021
https://www.mhc.tn.gov.in/judis/
