2013 (4) TMI 517 - HC - Income Tax

Interest-free loans to its wholly owned subsidiary - disallowances were made to the extent of the interest that would have accrued on the loans given to subsidiary companies. - Held that - it is not the case of the assessee that it had sufficient funds in its account to maintain interest-free loans to its subsidiaries. The assessee would, taking into account the total profits or rather receipts of the business of the year, contend that such receipts being more than the loans granted to the subsidiaries, it can only be assumed that the loans to the subsidiaries were from its own funds. The facts noticed by us regarding borrowings made immediately before the loans to subsidiaries were granted distinguishes the instant case on facts from the cases cited above. This fact noticed by the Assessing Officer would establish a direct nexus with the borrowings made by the assessee and loans granted by the assessee. - following the decision in decision in K.Somasundaram s case 1998 (8) TMI 59 - MADRAS High Court decided against the assessee. Deduction u/s 80HHC - export business being a loss - restriction in section 80AB - held that - The second issue is no more res integra in view of the binding authoritative pronouncements of the Hon ble Supreme Court in ITO v. Induflex Products P.Ltd. 2005 (12) TMI 49 - SUPREME COURT and A.M.Moosa v. CIT 2007 (9) TMI 24 - SUPREME COURT . - The result of consolidated export activity of manufactured goods and trading goods are to be taken into account for claiming relief under Section 80HHC read with Section 80AB. - Decided in favor of revenue.

Summary

Issues Involved:
1. Deduction of interest on loans advanced to subsidiary companies.
2. Proof of degree of ownership of subsidiary companies.
3. Deduction under Section 80HHC of the Income Tax Act in light of export business losses.

Issue-wise Detailed Analysis:

1. Deduction of Interest on Loans Advanced to Subsidiary Companies:

The assessee company claimed interest on loans amounting to Rs. 7.75 crores for the assessment year 1992-93. The Assessing Officer disallowed the interest to the extent of Rs. 17,13,406/- and Rs. 3,31,747/- charged to the Kerala Tea Account and Tamilnadu Tea Account, respectively, because the assessee had advanced interest-free loans to its wholly-owned subsidiary companies. The Revenue relied on the Madras High Court decision in K. Somasundaram and Bros. v. C.I.T., which held that interest deduction is only permissible when borrowed funds are used for business purposes. The court found a direct nexus between the borrowings and the interest-free advances to subsidiaries, distinguishing this case from others cited by the assessee. The court held that the assessee's contention that loans to subsidiaries were from internal resources was not substantiated, and thus, the disallowance by the Assessing Officer was justified. The question was answered in favor of the Revenue, reversing the orders of the Tribunal and the first appellate authority.

2. Proof of Degree of Ownership of Subsidiary Companies:

The second issue concerned whether the Tribunal correctly held that the subsidiary companies were wholly owned by the assessee. Given the court's decision on the first issue, this question was deemed insignificant and was not addressed.

3. Deduction under Section 80HHC of the Income Tax Act:

The assessee claimed a deduction under Section 80HHC for export business, which was disallowed by the Assessing Officer due to losses in the export business of manufactured goods. The court referenced the Supreme Court decisions in ITO v. Induflex Products P. Ltd. and A.M. Moosa v. CIT, which mandate that the net result of consolidated export activities, including both manufactured and trading goods, should be considered for Section 80HHC deductions. Consequently, the court held that the deduction claim was rightly disallowed, answering this question in favor of the Revenue and reversing the orders of the Tribunal and the first appellate authority.

Conclusion:

The court allowed the Income Tax Appeal, upholding the Assessing Officer's disallowances and reversing the decisions of the Tribunal and the first appellate authority on both the interest on loans and the Section 80HHC deduction issues.