2019 (1) TMI 757 - SC - Income Tax

Disallowance of interest being the interest referable to interest free loans and advances given to subsidiary companies - interest free fund available to the assessee is sufficient to meet its investment - Held that - The issue raises a pure question of fact. The High Court has noted the finding of the Tribunal that the interest free funds available to the assessee were sufficient to meet its investment. Hence it could be presumed that the investments were made from the interest free funds available with the assessee. The Tribunal has also followed its own order for Assessment Year 2002-03. In view of the above findings we find no reason to interfere with the judgment of the High Court in regard to the first question. Accordingly the appeals are dismissed in regard to the first question. Claim of depreciation - optional and could not be thrust on the assessee if it had not claimed it - Held that - Isuue to be governed by the decision of this Court in Plastiblends India Limited Vs. Additional Commissioner of Income Tax Mumbai and Another 2017 (10) TMI 423 - SUPREME COURT Pre-operative expenses incurred in connection with creation of plant machinery in units which have not commenced production - allowable revenue expenditure - deduction under Section 80M - transfer pricing adjustment - Held that - As High Court has failed to independently evaluate the merits of the departmental appeals. Hence we consider it appropriate that the aforesaid questions are considered afresh by the High Court. In order to facilitate a fresh exercise being conducted in relation to the aforesaid four questions (Question Nos.2, 3, 4 and 5) we allow the appeals and set aside the impugned judgment of the High Court. The appeals stand restored to the file of the High Court for that purpose.

The core legal questions considered by the Court in these appeals arising from the Bombay High Court's judgment for Assessment Years 2003-04 to 2006-07 are as follows:

1. Whether interest paid on funds lent to subsidiaries is deductible under Section 36(1)(iii) of the Income Tax Act, 1961, even if such interest would not have been payable to banks had the funds not been advanced to subsidiaries;

2. Whether prior to the insertion of Explanation 5 to Section 32 of the Act, the claim for depreciation was optional and could not be imposed on an assessee who had not claimed it;

3. Whether pre-operative expenses incurred in relation to the creation of plant and machinery in units not yet commenced production are of revenue nature;

4. Whether expenditure estimated and deducted from dividends can be allowed as a deduction under Section 80M of the Act;

5. Whether the Transfer Pricing Officer's (TPO) adjustment to consultancy charges is sustainable, especially when the same mark-up was accepted in relation to the assessee's USA associate and the TPO adopted a similar mark-up for the European associate.

Issue 1: Deductibility of Interest on Funds Lent to Subsidiaries under Section 36(1)(iii)

The legal framework involves Section 36(1)(iii) of the Income Tax Act, which allows deduction of interest on borrowed capital used for business purposes. The question was whether interest paid on funds lent to subsidiaries qualifies as deductible interest.

The Tribunal found that the assessee had sufficient interest-free funds to meet its investments, implying that the interest-bearing funds were not necessarily used for advancing to subsidiaries. The High Court upheld this factual finding, concluding that the interest paid was allowable as a deduction.

The Court noted that this issue was primarily factual and that the Tribunal's findings were consistent with prior orders for Assessment Year 2002-03. The Court found no reason to interfere with the High Court's conclusion, dismissing the appeals on this point.

Issue 2: Optional Nature of Depreciation Claim Prior to Explanation 5 to Section 32

Before Explanation 5 was inserted to Section 32 of the Act, the question was whether claiming depreciation was optional and could not be forced upon an assessee who chose not to claim it.

The relevant precedent is the Supreme Court's decision in Plastiblends India Limited v. Additional Commissioner of Income Tax (2017), which clarified the legal position on depreciation claims.

The High Court had not had the benefit of this decision when it rendered its judgment. Therefore, the Supreme Court remanded this issue for fresh consideration by the High Court in light of the Plastiblends ruling. The Court explicitly kept open all rights and contentions of both parties regarding the applicability of the provision for the relevant years.

Issue 3: Nature of Pre-operative Expenses

The question was whether pre-operative expenses incurred in connection with plant and machinery for units not yet in production are revenue or capital in nature.

The High Court had upheld the Tribunal's view that these expenses are revenue in nature, but the Supreme Court observed that the High Court failed to independently evaluate the merits of the departmental appeals on this issue.

The Court directed a fresh examination of this question by the High Court, emphasizing the need for an independent assessment rather than mere affirmation of the Tribunal's findings.

Issue 4: Deduction under Section 80M Regarding Estimated Expenditure

This issue concerned whether expenditure deducted on an estimated basis from dividends is allowable under Section 80M of the Act.

The High Court had upheld the Tribunal's view disallowing such estimated deductions. However, similar to Issue 3, the Supreme Court found that the High Court had not independently evaluated the departmental appeals' merits.

The matter was remanded for fresh consideration by the High Court.

Issue 5: Transfer Pricing Adjustment to Consultancy Charges

The question was whether the Transfer Pricing Officer's adjustment to consultancy charges was justified, especially given that the TPO had accepted the same mark-up for the assessee's USA associate and applied a similar mark-up for its European associate.

The High Court had sustained the deletion of the transfer pricing adjustment. The Supreme Court, however, noted the lack of independent evaluation by the High Court and remanded the issue for fresh consideration.

Significant Holdings and Core Principles

The Court held that the deductibility of interest under Section 36(1)(iii) is a question of fact and that findings of the Tribunal and High Court on sufficiency of interest-free funds are binding unless perverse. The Court stated: "In view of the above findings, we find no reason to interfere with the judgment of the High Court in regard to the first question."

On the question of depreciation claims prior to Explanation 5 to Section 32, the Court emphasized adherence to precedent, remanding the issue for reconsideration in light of the Plastiblends decision, thereby preserving legal consistency and ensuring proper application of law.

For the remaining issues-pre-operative expenses, Section 80M deductions, and transfer pricing adjustments-the Court underscored the necessity of independent judicial scrutiny rather than mere affirmation of lower authorities, ordering remand for fresh evaluation.

The appeals were disposed of with directions for consolidated hearing if parties so apply, and no order as to costs was made.

← Previous Next →