2014 (2) TMI 1390 - AT - Income Tax

Carry forward of Unabsorbed depreciation - treatment to brought forward unabsorbed depreciation claim - HELD THAT - As decided in PIONEER ASIA PACKING P. LTD. 2007 (11) TMI 285 - MADRAS HIGH COURT and GENERAL MOTORS INDIA PVT. LTD 2012 (8) TMI 714 - GUJARAT HIGH COURT by virtue of the provisions of Sec.32 (2), as amended by Finance Act, 2001, unabsorbed depreciation available in the assessment year 1997-98, 1999-00, 2000-01 2001-02 could be carried forward and set off during the succeeding years. Accordingly, we hereby hold that in the relevant assessment year, the assessee shall be entitled to set off unabsorbed depreciation carry forward from the earlier years - Assessing Officer is therefore, directed to modify his order accordingly. Thus, this ground raised by the assessee is allowed in its favour. Interest for borrowed funds - Advances to sister concerns - HELD THAT - Assessee has own funds far exceeding the advance made to its sister concerns. Further the claim of the assessee that it had transferred accumulate losses to its sister concerns has not been looked into by the Ld.AO, need less to mention that in such case disallowance of interest expense on the premises that interest bearing funds have been diverted would be incorrect. However the following decisions rendered by various higher judiciary has held that if the assessee has own funds exceeding the advances made to sister concerns, then interest expenditure cannot be disallowed on the premises that the assessee has diverted interest bearing fund to its sister concerns. Considering the above decisions in the case CIT Vs. Reliance Utilities And Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT in the case CIT Vs. Bharti Televenture Ltd 2011 (1) TMI 326 - DELHI HIGH COURT which are identical to the facts of the case before us, we are of the opinion that the Ld. Assessing Officer has erred by disallowing the interest expenditure incurred by the assessee on the premises that interest bearing funds have been diverted to the sister concerns. Therefore, we hereby delete the addition made by the Ld. Assessing Officer, which was further confirmed by the Ld. CIT (A) on this issue - Decided in favour of assessee.

Summary

Issues:
1. Disallowance of carry forward of unabsorbed depreciation.
2. Disallowance of interest on loans to sister concerns.

Analysis:

Issue 1: Disallowance of carry forward of unabsorbed depreciation
The assessee, a limited company in the business of manufacturing hydrogen peroxide, filed its return for the assessment year 2008-09 with Nil income after setting off brought forward unabsorbed depreciation. The Assessing Officer disallowed the carry forward claim citing Section 32(2) of the Act. The Appellate Tribunal noted that the Finance Act, 2001, allowed unabsorbed depreciation to be carried forward indefinitely from April 1, 2002, onwards. Relying on decisions of the Gujarat High Court and Madras High Court, the Tribunal held that the assessee could set off unabsorbed depreciation from earlier years amounting to Rs. 10,5717,523. Consequently, the Assessing Officer was directed to modify the order in favor of the assessee.

Issue 2: Disallowance of interest on loans to sister concerns
The Assessing Officer disallowed interest expenditure of Rs. 1,82,67,713, citing loans given interest-free to sister concerns. The CIT (A) confirmed the disallowance related to a subsidiary but held that a portion of the amount should not be treated as diversion of interest-bearing borrowed funds. The Appellate Tribunal noted the sufficient own funds of the appellant and cited precedents where interest expenditure cannot be disallowed if the assessee has own funds exceeding the advances to sister concerns. Relying on decisions of the Bombay High Court and Delhi High Court, the Tribunal held that the Assessing Officer erred in disallowing interest expenditure and deleted the addition made by the Assessing Officer. Consequently, the ground raised by the assessee was allowed, and the Revenue's appeal was dismissed.

In conclusion, the Appellate Tribunal allowed the assessee's appeal regarding the carry forward of unabsorbed depreciation and disallowed the Revenue's appeal concerning the disallowance of interest on loans to sister concerns. The judgment was pronounced on February 18, 2014, at Chennai.