HALDIA COKE AND CHEMICALS PVT. LTD.,CHENNAI vs. DCIT CIRCLE 11(1), NEW DELHI

BEFORE SHRI C.M. GARG, JUDICIAL MEMBER AND DR. B.R.R. KUMAR, ACCOUNTANT MEMBER Assessment Year: 2015-16 Haldia Code and Chemicals Pvt. Ltd., Vs. DCIT, No.18/3, Sigapi Achi Building, Circle-11(1), 4th Floor, Rukmini Lakshmipathi Road, New Delhi. Egmore, Chennai, Tamilnadu – 600 004. PAN: AABCH5389P (Appellant) (Respondent) Assessee by : Shri R. Sivaraman, Advocate Revenue by : Shri Anuj Garg, Sr. DR Date of Hearing : 08.02.2023 Date of Pronouncement : 13.02.2023 ORDER This appeal filed by the assessee is directed against the order dated 27.12.2018 of the CIT(A)-22, New Delhi, relating to Assessment Year 2015-16.

taken by the assessee read as under:- “1. The order of the CIT(A) dated 27.12.2018 is contrary to law and facts of the case.

2. The CIT(A) erred in confirm the disallowance u/s.36(1)(iii) of Rs.6,08,62,071/-

3. The CIT(A) erred in not appreciating the fact that the entire finance cost related to the appellant’s business activities.

4. The CIT(A) erred in not appreciating the fact that the investments in shares and share application money (except the investments of Rs.4,99,400/- in Asia Coke Ltd), which the Assessing Officer has taken into account for the purpose of computing disallowance u/s.36(1)(iii) were out of own funds.

5. The CIT(A) erred in confirming the disallowance made u/s.37(1) of Rs. 1,50,39,602/- 6. The CIT(A) erred in not appreciating the fact that the entire expenditure related to the appellant’s business activities and hence disallowance u/s.37(1) is not attracted. 7. The CIT(A) erred in not appreciating the fact that the investments in shares and share application money (except the investments of Rs.4,99,400/- in Asia Coke Ltd) which the Assessing Officer has taken into account for the purpose of computing disallowance u/s.37(1) were out of own funds. 8. The CIT(A) erred in not appreciating the fact that the Assessing Officer cannot make disallowance twice one u/s.14A and again u/s.36(1)(iii) and 37(1). 9. For these and other grounds that may be adduced before or at the time of hearing , the Hon’ble ITAT may be pleased to delete the following additions: i. Disallowance u/s.36(1 )(iii) of Rs.6,08,62,071/- ii. Disallowance u/s.37(1) of Rs.1,50,39,602/-.“

3. At the very outset, the ld. Counsel of the assessee submitted that the issues involved in this appeal are covered by the decision of the Tribunal in assessee’s own case for AY 2014-15. It was also submitted that for AY 2014-15, under identical facts and circumstances, the Tribunal has restored the appeal of the assessee to the file of the CIT(A) with the direction to pass a detailed order considering all facts of the assessee’s argument and case laws referred providing, adequate opportunity of hearing to the assessee.

5. On careful consideration of the rival submissions and on perusal of the order of the ld.CIT(A) and the order of the Tribunal in assessee’s own case(supra), we are of the considered opinion that issues involved in the instant appeal are covered by the decision of the Tribunal in assessee’s own case for AY 2014-15. The ld. Counsel has also made similar arguments for the instant year as made for AY 2014-15. The relevant part of the order of the Tribunal in assessee’s own case for AY 2014-15 read as under:-

“3. Brief facts of the case are that the assessee during the year was engaged in the trading of coke and coal. In the course of assessment, the Assessing Officer (AO) noted that the assessee has made sizeable investment and the assessee has incurred sizeable amount of financial cost in this regard; that assessee has not made any disallowance with regard to interest expenses as well as other expenses inspite of the admission of the fact that certain investments made out of borrowed funds. AO enquired from the assessee as to why disallowance should not be done under section 14A of the Income-tax Act, 1961 (for short ‘the Act’) and without prejudice to the above, justify the interest payment u/s 36(1)(iii). Assessee responded that assessee has made investment in the subsidiary companies; that investment in mutual funds of Rs.3,00,000/- has also been done; that assessee has not received any dividend income during the year; that investment made in subsidiary companies is not with the objective of earning dividend income but matter of commercial expediency. The assessee submitted following chart :- Particulars of 31.03.2014 01.04.2013 Source of investments funds Indian Subsidiaries Ennore Coke Limited 65,85,58,438 65,85,58,438 Out of capital Wellman Coke ( India) 2,52,52,659 2,52,52,659 Out of capital Limited Asia Coke Limited 4,99,400 4,99,400 Borrowed funds Aditya Coke Products Pvt 44,50,00,000 - Transfer from Limited share application money Mahala Coke Products Pvt 6,00,00,000 - Transfer from 3

Limited share application money Ennore Coke Limited 1,00,00,00,000 - Conversion of loans and advances Foreign Subsidiaries Mississipi Minerals Inc, 14,70,97,500 14,70,97,500 Out of capital USA (formerly known as Tiger American Minerals, Inc USA) Laeger Minerals Inc, USA 11,12,12,500 11,12,12,500 Out of capital Mutual Fund 30,000 Units of Rs.10/- 3,00,000 - Borrowed funds each_ Union KBC Capital Protection Oriented Fund Series 5 - Regular Plan Growth As on 31.03.2014, there was a balance of share application money of Rs.6,00,00,000 paid to Scorpio Energy Resources Pvt. Ltd. The share application money does not qualify for computation of disallowance u/s.14A r.w. Rule 8D as the share application money is only an advance. It qualifies as investments for the purpose of computation of disallowance u/s.14A r.w. Rule 80 only after allotment of shares. In this connection, we rely on the following ITAT Order : i. ITAT Delhi decision in the case of T&T Motors Limited Vs Addl.CIT, Range-16, New Delhi (I.T.A No.5096/Del/2011 dated 22.11.2013) -Annexure-2 ii. Aban Investments (P.) Ltd Vs DCIT, Company Circle 1 (1), Chennai [2012] 52 SOT 36 (Chennai)(URO) - Annexure-3 In the following cases, it has been held that strategic investments made in subsidiary companies have to be excluded for computation of disallowance u/s.14A r.w. Rule 8D. I. ITAT Chennai in the case of EIH Associated Hotels Ltd Vs D CIT In date 17.07.2013 - Annexure 4 II. ITAT Chennai decision in the case of L&T Infrastructure Development Projects Ltd Vs ITO (37 IIR (Trib) 10). - Annexure 5 III. Interglobe Enterprises Ltd VS DCIT (ITA No.1362 & 1032 / Del / 2013 dated 04.04.2014 - Annexure 6 The investments in foreign subsidiary companies have to be excluded for computation of disallowance u/s.14A r.w. Rule 80 as the income from foreign subsidiaries is taxable. In the following cases, it has been held that where no exempt income is received, disallowance u/s.14A r.to Rule 80 is not attracted. a. Chem Investments Vs CIT ( 234 Taxmann 761)- Annexure 7 b. CIT Vs Correctech Energy Pot Ltd (372 ITR 97)- Annexure 8 The above case laws squarely applies to our case.

For the assessment year 2011-12, the Assessing Officer has made disallowance u/s.14A r.to.Rule 8D of Rs.2,03,27,420/-. The break up of this amount is given below: Rule 8D2(ii) Rs. 1,77,24,516/- Rule 802(iii) Rs. 26,05,935/- Total Rs.2,03,27,420/- The CIT(A) in his order in dated 23.09.2015 has deleted the addition of Rs.2,00,83,808/- out of the addition of Rs.2,03,27,420/-. We are submitting herewith copy of the CIT(A)'s order for your kind perusal. (Annexure 9) For the above reasons, we request you not to make any disallowance u/s.l4A r.w. Rule 8D.”

4. AO rejected the assessee’s plea that share application money does not quantify for disallowance u/s 14A. He also rejected assessee’s submission that investment made as strategic investment in subsidiary can help the case of the assessee. He also rejected the plea that no dividend income has been earned so disallowance u/s 14A cannot be done. In this regard, he referred to the CBDT Circular issued by the Board. AO made lot of discussion why disallowance should be done even when exempt income has not been earned. AO further held that for AY 2012-13, the contention of the assessee was accepted that investments till AY 2012-13 in Ennore Coke Ltd. of Rs.65,85,58,438/- and Wellman Coke India Ltd. of Rs.2,52,52,659/- have been made out of capital. Hence he excluded the same. He further noted that since assessee has admitted that investment in Asia Coke Ltd. of Rs.4,99,400/- was made out of borrowed funds, therefore, interest was disallowed under Rule 8D(i). As regards share application money, it is construed that same was made out of mixed funds. AO made disallowance u/s 14A by making following computations :- Clause Particulars Amount i. Disallowance of 499400*0.15(interest interest directly taken at 15 %) 8D(2)(i) related to investments in Asia Coke Ltd. 749810 Rule8D(2)(i) ii. Disallowance of Interest expenditure Rule 8D(2)(ii) Interest A expenditure 37,13,30,488* incurred during -14,86,32,823 the year (suomoto disallowance) =

22,26,97,665(A) Average Value of B (2065499400 + 1565649400 Investment 1065499400)/2(B) including share application money Average of Total assets (10824373975+ 11339790014)/2(C)- (from the figure of balance sheet an amount of C Rs.68,38,11,097 is 10398270897 reduced as the said investments were considered to be directly from the Disallowance = capital) A*B/C

8D(2))ii)

3,35,30,367 iii. Aggregate of Value of Investment 31.03.2014 8D(2)(iii) Opening and Total for Closing Value of Investment 300,79,20,497 (Average Value & of Investment including share 31.03.2013 application 174,93,10,497 money) ½% of above Average value of investment including share application money Rule 8D(2)(iii) 0.5% of above (274,96,10,497 + 174,93,10,497/2)*0.5%

The value of investments taken here are all domestic investments including share application money as this is pertaining to holding cost other than 1,12,47,302 interest. ** Total disallowance (Aggregate of (i), (ii) & (iii) 4,55,27,479 4,55,27,479 Amount to be disallowed * Only the interest expenses of the total financial cost has been considered and the stamping handling charges, commission, bank charges have been excluded. The working of the above disallowance will change in case the assessee gets relief on ALP adjustment. ** The value of domestic investments for the purpose of holding and maintenance cost for calculating disallowance u/s 37(1) is taken as total, whereas for the purpose of interest only relatable to borrowed funds and mixed funds have been considered. Therefore, the disallowance u/s 14A r.w. Rule8D of 4,55,27,479 for the year under consideration is made accordingly. Penalty proceedings u/s 271(1)(c) is initiated accordingly.”

6. Thereafter, AO made some theoretical discussion about the reasons of disallowance. AO was of the opinion that assessee has to give justification for the purpose of business to claim the interest expenditure. He further observed as under:- “ The investments besides generation of income under the head capital gains on account of transfer can only generate an income under the head income from other 7 sources in the form of dividend. The deduction for interest is provided u/s. 57 of the Income Tax Act, if the dividend falls as income u/s 56(1)(i) of Income Tax Act. The dividend from the shares and securities have been specifically made exempt u/s 10(34), 10(34A), etc., and as the dividend from domestic companies has been specifically made exempt u/s 10(34) of the Income Tax Act. Therefore, the investments made in shares and securities and the dividend yield from the same being .exempt from tax because of specific provision of the Act would not attract the head of income from other sources. The department, therefore cannot invoke the provision of section 56(1) under the head of income from other sources in the case of such investments and the assessee has also been thus snatched away from the deduction of relevant interest u/s 57 of the Act accordingly. Therefore, the assessee in case of the domestic investments in shares and securities cannot claim deduction of such interest u/s 36(1)(iii) and also is not allowed deduction of such interest u/s 57 or u/s 48 (which anyway does not provide interest deduction. The general and administrative expenses claimed u/s 37(1) and incurred by the assessee to the extent relatable to investment is also be disallowed invoking the same arguments as stated above as being not allowable u/s 57 or u/s 48 as the case may be. While passing the assessment order for A.Y. 2012-13 the contention of the assessee was accepted that the investment made till A.Y. 2012-13 in Enmore Coke Ltd. of Rs.65,85,58,438 and Wellman Coke India Ltd. of Rs. 2,52,52,659 have been made out of capital. Therefore the same is excluded from the disallowance for interest u/ s 36(1)(iii) and as the assessee has admitted that Asia Coke Ltd. investment of Rs. 499400 has been out of borrowed funds, therefore the interest is disallowed directly u/ s 36(1)(iii) as regards the share application money it is construed that the same have been made out of mixed funds, therefore the investment to asset ratio is applied for the interest disallowance. The total assets have been reduced by the cumulative figure of Rs 68,38,11,097 being directly attributed to capital of the investments in Enmore Coke Ltd. of Rs. 65,85,58,438 and Wellman Coke India Ltd. of Rs.2,52,52,659/-.”

9. Against the above order, assessee filed an appeal before the ld. CIT (A). Ld. CIT (A) elaborately noted the submission of the assessee. He deleted the disallowance made u/s 14A. However, as regards 8 disallowance u/s 36(1)(iii) & 37(1), by a rather mechanical order, he confirmed the addition as under :- “The first issue is with respect to disallowance interest of Rs.3,35,30,367/- u/s. 36(1)(iii) and the second issue is regarding amount of Rs.1,12,47,302/- disallowed u/s 37(1) of the I.T. Act, 1961. In the assessment order, the AO has stated that the addition u/s 36(1)(iii) and u/s. 37(1) are made without prejudice to the disallowance u/s 14A and if the same is not upheld then the disallowance would lie u/s 36(1)(iii) and u/s 37(1). It is seen that the appellant has added an interest of Rs. 14,86,32,823/- on account of advance to foreign subsidiary. The assessment order has been perused in detail and it is noted that the AO has correctly worked out the value of domestic Investments for the purpose of holding and maintenance cost for calculating disallowance u/s 37(1) which is taken as total, whereas for the purpose of interest only relatable to borrowed funds and mixed funds have been considered. The submission filed by the appellant and case laws cited have been perused and arguments are not found to be tenable. I find no reason to interfere with the AO's order on the addition made u/s. 36(1)(iii) and u/s. 37(1). Appeal on these issues are dismissed.”

11. We note that assessee has made elaborate submissions and relied upon several case laws before ld. CIT (A). Ld. CIT(A) did not deal with them and has passed rather laconic order. It is settled law that even administrative order has to be considered with rule of natural justice. Moreover, we note that assessee has given following written submissions:- “7. We are submitting herewith details of finance cost claimed by us and details of investments and sources of funds vide Annexure.

8. From the details of finance cost given vide annexure, it could be seen that they related to LC and LC related, interest on borrowings from a few companies for business needs and not for other than business needs. The entire finance cost was incurred for business purpose. The Assessing Officer disallowed under rule 8D 2(ii) interest of Rs. 3,35,30,367 and again he has chosen to disallow identical amount u/s.36(1 )(iii). 14A comes last in the sequence of disallowance of expense. Expenses allowable under sections 29 to 37 may get hit by section 14A and not the other way. The final test is 14A. Section 14A came to be inserted in the IT Act to overcome the difficulty in law in disallowing expenses incurred for investments appearing as part of business and generating income not forming part of total income. There cannot be uncertainty of sections chosen for disallowance and secondly in the case of business if section 14A is not applicable the question of disallowance u/s.29 to 37 does not arise as it is only after passing the test of allowance u/s.29 to 37 that the test u/s.14A needs to taken.

10. Disallowance u/s 37(1) : Rs.1, 12,47,302 The Assessing Officer disallowed Rs.1,12,47,302 u/s 37(1) towards General & Administrative expenses incurred by the appellant to the extent relatable to investment as not allowable u/s 57 or 48. We submit that the entire general and administrative expenses related to our business activity and it does not relate to the investments in securities. For the above reasons, we submit that no disallowance u/s 37(1) is attracted.