M/S SESA RESOURS LTD,PANAJI vs. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-1(1), PANAJI

Facts of the case are that the assessee is a Limited Company engaged in the business of Mining and Processing of Iron ore for exports, Shipping and Stevedoring. Assessment for the impugned assessment years were taken up and against the additions/ disallowances made by Assessing Officer, appeals were preferred before the First Appellate Authority which were partly allowed. Now the aggrieved parties are in appeal before this Tribunal. Various grounds of appeal raised are common and it has also been stated that most of the issues raised in the instant appeals are covered by the decisions of this Tribunal in assessee’s own case and other decisions. Assessee has filed detailed written submissions on each of the grounds raised by the Assessee as well as by the Revenue and ld. Departmental Representative on the other hand, has supported the finding of ld.CIT(A) deciding in favour of the Revenue and the finding of the Assessing Officer where the addition has been deleted by the CIT(A).

We have heard the rival submissions made by both the sides and perused the record. We will first take up the assessee’s appeals for A.Ys 2009-10 to 2012-13 where the common issue raised is against the finding of ld. CIT(A) confirming the disallowance u/s. 14A of the Act for the administrative expenses @0.5% of the average value of investments. Ld. Counsel for the assessee made two fold arguments, firstly that ld. Assessing Officer has not recorded proper satisfaction as mandated/ required u/s.14A of the Act and secondly without prejudice to the first contention, it is submitted that investments for the purposes of calculating the average value are only to be confined to those investments which yield exempt income.

So far as the, first fold of contention is concerned we have carefully gone through the Assessment Orders of all the impugned assessment years and find that ld. Assessing Officer has examined the issue in detail and has gone through the audited financial statements of the assessee and observing that various investments were made in the equities and other investments and that the assessee is earning exempt income. Since it is humanly not possible to bifurcate total expenses incurred during the year for the purpose of maintaining the investments, the formula has been provided under Rule 8D of the Income Tax Rules 1962. Therefore, in our considered view ld. Assessing Officer has successfully recorded dissatisfaction for the suo moto disallowance made by the assessee u/s.14A of the Act and has finally applied 0.5% of the average value of investments formula for computing the disallowance u/s. 14A of the Act.

As regards the alternate contention of the assessee is concerned, we find that it has been constantly held in plethora of decisions including that of special bench in the case of ACIT vs. Vireet Investment Pvt. Ltd. (2017) 82 Taxman 415 (Delhi - Trib.) (SB) where in the disallowance u/s.14A of the Act is to be restricted for the investments which fetches exempt income. The investments at the close of each of the financial years in appeal before us is into various types of investments which includes the investments on which the assessee earns exempt income. Further the specific details of these investments were not available before the Revenue Authorities at the time of assessment. We therefore deem it appropriate that for the specific purpose of computing 0.5% of the average value of investments, the matter deserves to be restored to the file of ld. Jurisdictional Assessing Officer for necessary verification and examining all the details to be filed by the assessee. We direct the Assessing Officer that disallowance u/s. 14A of the Act in no circumstances should exceed the exempt income earned by the assessee and for the purpose of calculating the average value of investments only those investments on which either exempt income in the form of dividend or tax free interest has been earned as well as the investments on which assessee may earn exempt dividend income in future because strictly restricting the investments on which exempt income has been earned during the year will create lot of confusion because sometimes the dividend are declared in a particular year and sometimes not. Therefore, all those investments which have or may provide exempt income to the assessee in the form of dividend, deserves to be added in the list of investments for the purpose of calculating the average value of investments. We further hold that even the investments in closely held subsidiaries/holding/group companies from which assessee earns or may earn exempt income in the form of dividend should also be included in the average value of investments. With these directions this issue of disallowance u/s.14A of the Act r.w.r.t. Rule 8D(iii) of I.T. Rules for calculating 0.5% of Average value of investment is restored to the file of ld. Jurisdictional Assessing Officer and the common issue raised by Assessee for A.Ys. 2009-10 to 2012-13 are hereby allowed for statistical purposes.

Second issue raised by the assessee for A.Y. 2009-2010 is against the disallowance of Compensatory Afforestation expenses and amortizing the same proportionately, we find that this is the second round before this Tribunal. Originally ld. Assessing Officer treated the Afforestation expenses of Rs.70,78,076/- as capital expenditure but the Tribunal vide order dated 20-08-2015 in ITA No.252/PAN/2015 held it to be revenue in nature but directed the Assessing Officer to amortize and allow this expenditure over the period of mining lease and in proportion of quantity of ore extracted and subsequently ld.CIT(A) has confirmed this treatment.

Now the Ld. Counsel for the assessee has submitted that payment of Compensatory Afforestation was made to enable the effective undertaking and continuation of existing mining business and no enduring benefit was received. We however fail to find any merit in these submissions because the Tribunal has already considered this issue and held it to be revenue expenditure and the issue being remanded to the Assessing Officer to amortize and allow this expenditure over the period of mining lease and in proportion to quantity of ore extracted, the same has been confirmed by ld.CIT(A) and the finding of ld. CIT(A) therefore needs no interference. Thus, ground no. 1 raised by the assessee for A.Y. 2009-10 is hereby dismissed.

Next common issue relates to disallowance of Foreign Exchange loss on forward contracts for A.Y 2009-10. Ld.CIT(A) partly sustained the disallowance. Whereas, for A.Y. 2010-11 the total disallowance of Foreign Exchange loss on forward contracts made by the Assessing Officer has been deleted. We observe that this is also the second round of litigation before this Tribunal. Ld.CIT(A) in the second round held that loss is speculative in nature but arose from the foreign exchange booked in the forward market to hedge against raising of losses from exchange fluctuation in relation to iron ore exports some of which could not materialize and the contracts had to be cancelled. Now once the genuineness of Foreign Exchange loss has not been doubted, then making partial disallowance by ld. CIT(A) for A.Y. 2009-10 seems to be unwarranted specially when the various details including name of bank, currency, amount booked/cancelled, quantification of gain and loss etc. were submitted. It is also brought to our notice that similar issue in the case of appellant’s parent company has been decided in favour of the assessee in Sesa Goa limited vs. JCIT in ITA No.72/PAN/2012 dated 08.03.2013 against which the Department has not filed any appeal before the Hon’ble High Court as evident from the appellate order dated 23.09.2013 and the decision of this Tribunal in the case of parent company Sesa Goa limited has been decided placing reliance of the judgment Hon’ble High Court of Bombay in the case of CIT(A) vs. Badridas Gauridu Pvt. Ltd. (2003) 261 ITR 256 (Bom.). Ld. Departmental Representative failed to controvert these contentions by placing any other binding precedent in its favour. We are therefore of the considered view that partial disallowance for Foreign Exchange loss on forward contracts for A.Y. 2009-10 is uncalled for. Ground No. 3 raised by the assessee for A.Y. 2009-10 is allowed and Ground No. 3 to 7 and Ground No. 5 for A.Ys. 2009-10 and 2010-11 raised by the Revenue are hereby dismissed.

Now we take up the issues raised by the Revenue for A.Ys. 2009-10 to 2012-13 which is against the finding of ld. CIT(A) deleting the disallowance u/s.14A of the Act towards the interest cost.

We note that the interest disallowance u/s. 14A of the Act has been made by the Assessing Officer while calculating the total disallowance u/s.14A. It has been constantly held in plethora of judgments that where the assessee has surplus interest free funds in the form of Equity Share Capital, Reserves and Surplus and other interest free funds to cover up the investments made which fetches exempt income, then in absence of any specific finding of the Revenue Authorities on the application of borrowed funds to the investments, it is to be presumed that investments have been made out of the interest free surplus funds available with the assessee. For this we place reliance on the decision of Hon’ble Apex Court in the case of South Indian Bank Limited v. CIT (2021) 438 ITR 1 and also the judgment of Hon’ble Bombay High Court in the case of CIT vs.

Next common issue for A.Y. 2012-13 is against the deletion of disallowance of repairs and maintenance expenses incurred on ships namely M V Priyamvada and M.V. Goan Pride.

We observe that the assessee has incurred repair and maintenance expenses on these two ships and claimed it as revenue expenditure but the same were held to be capital by the Assessing Officer. In appeal, ld. CIT(A) has held it to be revenue in nature. We have gone through the finding of ld. CIT(A) and observe that the alleged expenditure incurred for ship repairs were necessary for operating and maintaining the trans shippers in good working condition and in accordance with regulatory norms and no new asset or advantage with an enduring benefit was brought into existence. Identical issues were held in favour of the assessee by this Tribunal in assessee’s own case for A.Y. 2009-10 in the first round in vs. ACIT in ITA No.252/PAN/2015 order dated 20.08.2015 which has subsequently been confirmed by the Hon’ble High Court in Tax Appeal No. 57/2016. We therefore respectively following the decision of Hon’ble Jurisdictional High Court fail to find any inconsistency in the finding of ld. CIT(A) holding that ship repairs expenses are revenue in nature. Accordingly, Ground No. 2 for A.Y. 2008-09 and Ground No. 6 for A.Y. 2012-13 raised by the Revenue are dismissed.

Next common issue raised by the Revenue for A.Ys. 2010-11, 2011-12 and 2012-13 is challenging the finding of ld. CIT(A) deleting the disallowance u/s. 40(a)(ia) of the Act made by the Assessing Officer on account of non-deduction of TDS on Demurrage paid to non-resident buyers of iron ore. We find that the assessee is exporter of iron ore and in the process of exporting its goods has to pay demurrage to the non-residents where such demurrage paid is subject to deduction of tax u/s.195 of the Act. We find that the ld. CIT(A) has deleted the addition placing reliance on the decision in the case of parent company of the assessee in PCIT v. Sesa Goa limited in Tax Appeal No.68/ 2016 by the Hon’ble High Court and the decision of this Tribunal in Sesa Goa Ltd. Vs. JCIT in ITA No.72/PAN/2012 dated 08.03.2013 against which Revenue has not filed any appeal. In view of the above, we confirm the finding of ld. CIT(A) that demurrage paid to non-resident buyers of the iron ore is not subject to deduction of tax at source and therefore ld. Assessing Officer erred in making disallowance u/s. 40(a)(ia) of the Act. Ground No. 3 for A.Y. 2010-11 and Ground No.4 2011-12 and 2012-13 raised by the Revenue are dismissed.

Next issue for A.Y. 2011-12 raised by the Revenue is that ld. CIT(A) erred in granting depreciation on UPS at 60% instead of 15%.

We find that this issue has already been dealt by this Tribunal in assessee’s own case for A.Y. 2009-10 in vs. ACIT (supra) where the Tribunal has allowed the depreciation on UPS at 60%. Thus, no interference is called for in the finding of ld. CIT(A). Ground No. 2 raised by the Revenue for A.Y. 2011-12 is dismissed.

Next issue raised by the Revenue for A.Ys. 2008-09 and 2010- 11 is that ld. CIT(A) erred in deleting the disallowance of export Commission paid without deduction of tax at source.

We find that this issue is no longer res integra and it has been held in plethora of case that on the Commission paid to non-resident for providing export orders where such non-residents have no Permanent Establishment in India, there is no requirement to deduct tax at source because the income of such non-residents is not chargeable to tax in India. Similar issue already has stands decided in favour of the assessee in case of its parent company Sesa Goa Limited vs. DCIT in ITA No.72/PAN/2012 dated 08.03.2013 and therefore no interference is called for in the finding of ld. CIT(A). Ground No. 4 raised for A.Ys. 2008-09 and 2010-11 are hereby dismissed.

In Ground No. 2 for A.Y.2012-13, Revenue has challenged the finding of ld. CIT(A) deleting the disallowance of 50% additional depreciation on Plant and Machinery.

We have gone through the finding of ld. CIT(A) as well as the facts of the present case and find that the appellant has claimed additional depreciation on additions made to Plant and Machinery during the second half of A.Y.2011-12. In other words, in the preceding A.Y.2011-12, the assessee has purchased Plant and Machinery in the second half and therefore has only claimed 50% of the additional depreciation in the preceding assessment year and the remaining 50% has been claimed in the A.Y. 2012-13. Since the additional depreciation of 50% has been allowed in the previous A.Y. 2011-12, we find that ld. CIT(A) has rightly held that once the additional depreciation is admitted in the previous assessment year the balance 50% must be allowed in the subsequent assessment year. Thus, no infirmity is called for in the finding of ld.CIT(A). Ground no. 2 raised by the Revenue for A.Y. 2012-13 is dismissed.

Ground No. 3 raised by the Revenue for A.Ys. 2011-12 and 2012-13 challenging the finding of the ld. CIT(A) that the additional depreciation on Plant and Machinery on Mining activity deserves to be disallowed as the mining activity does not amount to Manufacture.

Ld. Counsel for the Assessee has contended that this issue has already been adjudicated in the case of parent company Sesa Goa Limited vs. JCIT for A.Y. 2009-10 by this Tribunal in ITA No.72/PAN,/2012 order dated 08.03.2013 which had attained finality and no subsequent appeal has been filed by the Department before the Hon’ble High Court. In the absence of any binding precedent referred by the ld. CIT-DR, respectively following the judicial precedents, we find that the ld. CIT(A) has rightly allowed the additional depreciation on Plant and Machinery utilized in the mining activity. Ground no. 3 raised by the Revenue for A.Ys. 2011-12 and 2012-13 are dismissed.

Ground No. 5 raised by the Revenue for A.Y. 2012-13 relates to the deletion of addition made by the Assessing Officer towards expenditure on construction of road.

We find that this issue has already been dealt by this Tribunal in assessee’s own case for A.Y. 2008-09 in the assessee’s parent company Sesa Goa Ltd. vs. JCIT vide ITA No. 89/PAN/2012 dated 17.05.2013 where the construction/ improvement of the public road has been allowed as it was necessary for the smooth movement of iron ore trucks in the vicinity of mines and no new asset has come into existence for giving enduring benefit and such expenses incurred for construction of road has been allowed following the binding precedent. We thus fail to find any infirmity in the finding of ld. CIT(A). Ground No. 5 raised by the Revenue for A.Y.2012-13 is also dismissed.

Ground No. 7 raised by the Revenue for A.Y. 2012-13 is that the ld. CIT(A) erred in treating the profit on sale of current investments as business income instead of capital gains.

We observe that during the year under consideration the assessee company has shown short term capital gain and long term capital gain from sale of investments. Ld. Assessing officer observed that considering the volume of transactions/ amount involved, frequency of transaction, the profit on sale of these shares should be treated as business income. We note that when the matter travelled before ld. CIT(A), he made reference to the CBDT Circular No. 6/2016 dated 29.02.2016 where the guidelines have been provided with regard to treatment of profits arising on sale/ purchase of shares. It is noticed that the assessee has held securities as investments and not stock-in-trade and in all these years Assessing Officer has also made disallowance u/s. 14A on the very same investments. Therefore, such investments are not part of the stock- in-trade. It is also noteworthy that the assessee has switched over maximum investments from mutual funds to the investments in equity shares. Therefore, considering the facts of the present case we find that assessee is not a trader in securities and the investments held are not held as stock- in-trade and therefore as per the guidelines provided by CBDT No. 6 /2016 referred supra, we fail to find any infirmity in the finding of ld. CIT(A) and therefore the profit on sale of current investment has been rightly treated as capital gain. Ground No. 7 raised by the Revenue is dismissed.

In the result, all the appeals of the Revenue are dismissed whereas all the appeals of the assessee are partly allowed for statistical purposes.