The High Court
Case Details
IN THE HIGH COURT OF ORISSA AT CUTTACK ITA Nos. 31, 33, 34, 35, 37 and 38 of 2017 ITA No. 31 of 2017 Principal Commissioner of Income Tax, Bhubaneswar …. Appellant -versus- Industrial Development Corporation of Odisha Ltd. … Respondent ITA No. 33 of 2017 Principal Commissioner of Income Tax, Bhubaneswar …. Appellant -versus- Industrial Development Corporation of Odisha Ltd. … Respondent ITA No. 34 of 2017 Principal Commissioner of Income Tax, Bhubaneswar …. Appellant -versus- Industrial Development Corporation of Odisha Ltd. … Respondent ITA No. 35 of 2017 Principal Commissioner of Income Tax, Bhubaneswar …. Appellant -versus- Industrial Development Corporation of Odisha Ltd. … Respondent ITA Nos. 31, 33, 34, 35, 37 and 38 of 2017 Page 1 of 9 ITA No. 37 of 2017 Principal Commissioner of Income Tax, Bhubaneswar …. Appellant -versus- Industrial Development Corporation of Odisha Ltd. … Respondent AND ITA No. 38 of 2017 Principal Commissioner of Income Tax, Bhubaneswar …. Appellant -versus- Industrial Development Corporation of Odisha Ltd. … Respondent Advocates, appeared in these cases: For Appellant(s) For Respondent(s) : :
Legal Reasoning
Mr.Tushar Kanti Satapathy Senior Standing Counsel Mr. Sidhartha Ray, Advocate along with Mrs. Pami Rath, Adv. CORAM: THE CHIEF JUSTICE JUSTICE M.S. RAMAN JUDGMENT 14.11.2022 Dr. S. Muralidhar, CJ. 1. The present appeals by the Revenue are directed against a common order dated 26th April, 2017 of the Income Tax Appellate Tribunal, Cuttack Bench, Cuttack (ITAT) in ITA ITA Nos. 31, 33, 34, 35, 37 and 38 of 2017 Page 2 of 9 No.449/CTK/2010 for the Assessment Year (AY) 2007-08; ITA No.493/CTK/2011 for the AY 2008-09; ITA No.585/CTK/2012 for the AY 2009-10; ITA No.558/CTK/2013 for the AY 2006-07 and ITA No.98/CTK/2010 for the AY 2006-07. 2. While admitting these appeals on 18th December, 2019 the following two questions were framed for consideration by this Court: the facts and in the case and when the “(1) Whether on circumstances of the compensation made by the assesse company to the subsidiaries which are by themselves are independent legal entities and does not amount to industrial assisting promotional activities of undertaking in the case of the assesse company and hence it is not a business expenditure attributable to the assessee company? (2) Whether on the facts and in the circumstances of the case, the learned ITAT is correct in law in directing to allow deduction for compensation made by the assesse company to its subsidiaries which is not in relation to its own business of the assessee company and also not incidental to the business of the assessee?” 3. Whereas in ITA No.38 of 2017, the following question was framed by this Court on 18th December, 2019: “Whether on the facts and in the circumstances of the case and when the assesse company has not been able to explain regarding the circumstances under which the interest-free loan was given to the subsidiaries by the assessee company and further has not been able to furnish about the details of utilization of such loan by the subsidiaries, the ITA Nos. 31, 33, 34, 35, 37 and 38 of 2017 Page 3 of 9 Tribunal is correct in law in directing to allow deduction for interest claimed on the loan taken by it? 4. This Court has heard the submissions of Mr. T.K. Satapathy, learned Senior Standing Counsel for the Appellant-Department and Mr. Sidhartha Ray, learned counsel along with Mrs. Pami Rath, learned counsel appearing for the Respondent-Assessee. 5. The background facts are that the Assessee during the AYs in question debited a certain sum to its profit and loss account towards compensation paid to its two subsidiaries i.e. M/s. IDCOL Kalinga Iron Works Ltd. (IKIWL) and M/s. IDCOL Ferro Chrome and Alloys Ltd. (IFCAL) towards difference in the price of ores purchased by the said subsidiary companies from the Assessee and others. 6. During the course of assessment, the Respondent-Assessee was asked to explain the above payment of ‘compensation’ to the two subsidiary companies. The explanation offered was that two mines operated by the Assessee were taken for captive use and this was to assure cheap raw material supply to ensure the long- term viability of the subsidiary companies. However, on finding that the ores available in the said mines were not suitable for use in production of high carbon Ferro Chrome, the ores were sold in the open market and the ores of desired grade and specification were purchased from outside parties, which resulted in substantial ITA Nos. 31, 33, 34, 35, 37 and 38 of 2017 Page 4 of 9 financial loss to the subsidiaries. It was this loss which was sought to be compensated by the Assessee. 7. The Assessing Officer (AO) did not accept the above explanation and disallowed the claim of expenditure on the ground that it was not incurred “wholly and exclusively for the purposes of the business” of the Assessee. In arriving at this conclusion, the AO relied on the decision of the Supreme Court in Travancore Titanium Products Ltd. v. Commissioner of Income Tax, Kerala (1966) 60 ITR 277 where it was held as under: or by “The position may therefore be summarised thus: the nature of the expenditure or outgoing must be adjudged in the light of accepted commercial practice and trading principles. The expenditure must be incidental to the business and must be commercial justified necessitated expediency. It must be directly and intimately connected with the business and be laid out by the taxpayer in his character as a trader. To be a permissible deduction, there must be a direct and intimate connection between the expenditure and the business i.e. between the expenditure and the character of the assessee as a trader, and not as owner of assets, even if they are assets of the business.” 8. After the Commissioner of Income Tax (Appeals) only partly granted relief in the appeals filed by the Assessee, it approached the ITAT which has by the impugned common order allowed the Assessee’s appeals. Inter alia in the impugned order, it was noticed by the ITAT in para 22 as under: ITA Nos. 31, 33, 34, 35, 37 and 38 of 2017 Page 5 of 9 “22. Identical issue was raised in assessee’s own case before the Tribunal vide ITA Nos.69 & 70/CTK/94 for assessment year 1989-90 & 1990- 91 and has been decided in favour of the assessee that by holding, by “financing or aiding or assisting any promotional activities of industrial undertaking is part of the business of the assessee company” for overall promotion of industrial development in Orissa.” the Co-ordinate Bench 9. On 20th April, 2022 when these appeals were heard, a query was posed to Mr. Satapathy, learned Senior Standing Counsel for the Revenue, by the Court whether any appeal had been filed by the Department against the orders of the ITAT in the appeals in ITA Nos.69 and 70/CTK of 1994 filed by the Assessee for AYs 1989-90 and 1990-91. 10. An affidavit has been filed by the Department today in which it sought to be contended that the aforementioned order of the ITAT for AYs 1989-90 and 1990-91 is distinguishable on facts. It is sought to be submitted that in the said order of the ITAT the issue concerned making of loans and advances by the Assessee to its subsidiaries, which were then subsequently written off whereas in the present cases what was paid to the subsidiaries was ‘compensation’ for supposedly business losses of the subsidiaries. 11. Mr. Satapathy, learned Senior Standing Counsel for the Appellant draws attention of this Court to para 5 of the memorandum of appeal where again it is pleaded that the facts concerning ITA Nos.69 and 70/CTK/1994 are distinguishable and ITA Nos. 31, 33, 34, 35, 37 and 38 of 2017 Page 6 of 9 therefore, the said order can have no application to the facts of the cases on hand. Mr. Satapathy further informed the Court that he had no information about any appeal having been filed in this Court against the order of the ITAT in ITA Nos.69 and 70/CTK/1994. 12. This Court has perused the order of the ITAT dated 25th September, 1997 in ITA No.69 and 70/CTK/1994. The said appeals were filed indeed by the very same Assessee and the issue concerned expenditure incurred by the Assessee in the form of loans and advances to its subsidiaries which were subsequently written off. There again the issue was whether such amount could be legitimately claimed as business expenditure within the purview of Section 37 of the Act? After the AO and the CIT(A) had disallowed the said amount as deduction, the Assessee approached the ITAT. Among the reasons that weighed with the ITAT for allowing the claim of the Assessee was that “Loans and advances, promotional activities, etc., in our opinion, are not outside the objects of the assessee- company as per its Memorandum of Association and hence the loss arising in writing off the loans and advances is liable to be treated as loss incurred in the course of carrying on its business and allowable as deduction in the years under consideration. Similarly, the expenditure incurred on the aborted projects in the wake of the decisions mentioned herein above, is allowable as revenue expenditure. As far as the year of allowability is concerned, neither the assessing officer nor the first appellate authority disputed the bona fides of the assessee in writing off the amounts in the year under consideration.” ITA Nos. 31, 33, 34, 35, 37 and 38 of 2017 Page 7 of 9 13. In arriving at the above conclusion, the ITAT relied on the decisions of the Supreme Court in CIT v. Amalgamation Pvt. Ltd. [1997] 226 ITR 188 (SC) and Essen Pvt. Ltd. v. CIT [1967] 65 ITR 625 (SC) and of the Calcutta High Court in CIT v. Gillanders Arbuthnot & Co. Ltd. [1982] 138 ITR 763 (Cal). 14. In the present case, while the nomenclature used for the expenditure incurred may have been different during AYs 1989- 90 and 1990-91 where it was ‘loans and advances’ which were subsequently written off, the fact remains that it was an irrecoverable expenditure as far as the Assessee was concerned. In the present AYs as well, what was paid as ‘compensation’ by the Assessee to the very same subsidiaries was to recoup the business losses of the subsidiaries, and was again irrecoverable as far as the Assessee is concerned. Considering that the expenditure was in the nature of moneys advanced to the subsidiaries, it cannot be said that there is no intimate connection between the Assessee and the two subsidiaries as far as the business activities are concerned. In that sense the decision of the ITAT to allow the expenditure cannot be said to be inconsistent with the dictum of the Supreme Court in Travancore Titanium Products Ltd.(supra).It must therefore be concluded that the expenditure incurred by the Assessee in the present cases is not only incidental to the business of the Assessee but also necessitated or justified by commercial expediency. ITA Nos. 31, 33, 34, 35, 37 and 38 of 2017 Page 8 of 9 15. Consequently, the Court is not persuaded that the ITAT has in the present cases committed any legal error in answering the questions framed in favour of the Assessee and against the Department. 16. As far as the present appeals are concerned, for the reasons aforementioned questions Nos.1 and 2 as noted in para 2 above and the solitary question noted in para 3 above are again answered in favour of the Assessee and against the Department. The appeals are, accordingly, dismissed, but in the circumstances, with no order as to costs. (S. Muralidhar) Chief Justice (M.S. Raman) Judge S.K.Jena/Secy. ITA Nos. 31, 33, 34, 35, 37 and 38 of 2017 Page 9 of 9