1. Appeals concerning interest deductions under Section 36(1)(iii), depreciation under Section 32, pre-operative expenses, Section 80M deductions, and transfer pricing adjustments under the Income Tax Act. (Para 4 , 6 )
Back
Next 
2019 Supreme(SC) 668
SUPREME COURT OF INDIA
Dhananjaya Y. Chandrachud, Hemant Gupta, JJ.
COMMISSIONER OF INCOME TAX - Appellant
Vs.
M/S RELIANCE INDUSTRIES LTD - Respondent
Civil Appeal No. 10 of 2019 (@SLP (C) No. 37 of 2019 @ Diary No. 32695 of 2018) with Civil Appeal No. 11 of 2019 (@SLP (C) No. 35 of 2019 @ Diary No. 29863 of 2018), Civil Appeal No. 12 of 2019 (@SLP (C) No. 38 of 2019 @ Diary No. 30030 of 2018) and Civil Appeal No. 13 of 2019 (@SLP (C) No. 39 of 2019 @ Diary No. 36149 of 2018)
Decided On : 02-01-2019
Important Points
The court's decision was influenced by the interpretation of the Income Tax Act, 1961, particularly regarding the allowance of interest amount as deduction, claim of depreciation, pre-operative expenses, deduction under Section 80M of the Act, and transfer pricing adjustment.
Subject
Taxation Law - Income Tax
Act Referred
Headnote
Interest Deduction - Income Tax - The court dismissed the appeal regarding the allowance of interest amount as deduction under Section 36(1)(iii) of the Income Tax Act, 1961, as the investments were made from interest-free funds available with the assessee.
Fact of the Case:
The appeals arose from the judgment of the Bombay High Court for Assessment Years 2003-04, 2004-05, 2005-06, and 2006-07. The High Court passed a common order for all the Assessment Years.
Finding of the Court:
The court dismissed the appeal regarding the first question, remanded the issue for fresh decision regarding the second question, and set aside the judgment of the High Court for the third, fourth, and fifth questions, restoring the appeals to the file of the High Court for reconsideration.
Issues: The issues raised in the appeals included the allowance of interest amount as deduction, the claim of depreciation, pre-operative expenses, deduction under Section 80M of the Act, and transfer pricing adjustment.
Ratio Decidendi: The court found no reason to interfere with the judgment of the High Court regarding the first question, remanded the issue for fresh decision based on a previous decision for the second question, and set aside the judgment of the High Court for the third, fourth, and fifth questions.
Final Decision: The appeals were dismissed in regard to the first question, the issue regarding the second question was remanded for fresh decision, and the judgment of the High Court was set aside for the third, fourth, and fifth questions, restoring the appeals to the file of the High Court for reconsideration.
Legal Category Hierarchy
Advocates appeared:
For the Appellant :Mr. Rupesh Kumar, Mr. D.L. Chidanand, Mr. Shreyash Bhardwaj, Advocates and Mrs. Anil Katiyar, AOR.
For the Respondent:Mr. R. Venkatraman, Sr. Advocate, Mr. K.R. Sasiprabhu, AOR, Mr. Amit K. Mathur and Mr. Somiran Sharma, Advs.
For the Appellant :Mr. Rupesh Kumar, Mr. D.L. Chidanand, Mr. Shreyash Bhardwaj, Advocates and Mrs. Anil Katiyar, AOR.
For the Respondent:Mr. R. Venkatraman, Sr. Advocate, Mr. K.R. Sasiprabhu, AOR, Mr. Amit K. Mathur and Mr. Somiran Sharma, Advs.
Table of Contents
2. Revenue challenged the allowability of interest deductions, the optional nature of depreciation, the revenue nature of pre-operative expenses, estimated expenditure for Section 80M, and transfer pricing adjustments. (Para 6 )
3. The court held the interest deduction issue was a question of fact, while other issues required fresh evaluation or application of binding Supreme Court precedent. (Para 7 , 10 , 11 )
4. Factual findings by the Tribunal regarding interest-free funds are upheld; legal issues must be decided based on current Supreme Court precedents and independent merit evaluation. (Para 7 , 10 , 11 )
5. Appeals dismissed regarding interest deductions; judgment set aside and remanded to the High Court for fresh consideration of depreciation, pre-operative expenses, Section 80M, and transfer pricing. (Para 8 , 12 )
6. Is interest on funds provided to subsidiaries allowable as a deduction under Section 36(1)(iii) of the Income Tax Act?
Yes, if the Tribunal finds as a matter of fact that the assessee had sufficient interest-free funds to meet the investment, such a finding is generally not interfered with by higher courts. (Para 7 , 8 )
7. Was the claim of depreciation optional prior to the insertion of Explanation-5 to Section 32 of the Income Tax Act?
The court did not decide this on merits but remanded the issue to the High Court to be decided in accordance with the law laid down in Plastiblends India Limited vs. Additional Commissioner of Income Tax. (Para 9 , 10 )
8. How should the High Court treat departmental appeals regarding pre-operative expenses, Section 80M deductions, and transfer pricing adjustments?
The High Court must independently evaluate the merits of the departmental appeals rather than merely upholding the Tribunal's view without conducting its own independent analysis of the merits. (Para 11 , 12 )
ORDER :
1. Delay condoned.
2. Exemption from filing certified copy of the impugned judgment granted.
3. Leave granted.
4. These appeals have arisen from the judgment of the Bombay High Court dated 22 & 23 August,2017 for Assessment Years 2003-04, 2004-05, 2005-06 and 2006-07.
5. The High Court has passed a common order for all the Assessment Years. Learned counsel for the assessee states that all the questions which have been framed do not necessarily arise for each Assessment Year. A chart has been tendered, explaining the position. The chart is taken on the record.
6. The appeals by the Revenue raise the following questions:
1. Whether the High Court is correct in holding that interest amount being interest referable to funds given to subsidiaries is allowable as deduction under Section 36 (1)(iii) of the Income Tax Act, 1961 (for short 'the Act') when the interest would not have been payable to banks, if funds were not provided to subsidiaries;
2. Whether on the facts and in the circumstances of the case and in law, the High Court is correct in upholding the Tribunal's view that prior to insertion of Explanation-5 to Section 32 of the Act, the claim of depreciation was optional and could not be thrust on the assessee, if it had not claimed it;
3. Whether on the facts and in the circumstances of the case and in law, the High Court is correct in upholding the Tribunal's view that pre-operative expenses incurred in connection with creation of plant & machinery in units which have not commenced production, are revenue in nature;
4. Whether on the facts and in the circumstances of the case and in law, the High Court is correct in upholding the Tribunal's view that expenditure on estimated basis cannot be reduced from dividends for deduction under Section 80M of the Act; and
5. Whether on the facts and in the circumstances of the case and in law, the High Court is correct in upholding the Tribunal's view in sustaining the deletion of the Transfer Pricing adjustment made to consultancy charges, especially when the TPO had adopted the same mark up in relation to its European associate, what the assessee itself had adopted in relation to its USA associate.
7. Insofar as the first question is concerned, 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.
8. 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.
9. Insofar as the second question is concerned, the issue, it is common ground, is governed by the decision of this Court in Plastiblends India Limited vs. Additional Commissioner of Income Tax, Mumbai and Another (2017) 9 SCC 685.
10. The High Court has not had the benefit of the decision of this Court. Hence, we are of the view that it would be appropriate to remand the issue for fresh decision by the High Court bearing in mind the law laid down in the above case. We keep open all the rights and contentions of the Revenue and the assessee in regard to the applicability of the provision for the relevant Assessment Years.
11. As regards, the third question pertaining to preoperative expenses; the fourth question pertaining to the deduction under Section 80M of the Act; and the fifth question pertaining to transfer pricing, the 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.
12. 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 as
