TATA STEEL LIMITED ,MUMBAI vs. THE PRINCIPLE COMMISSIONER OF INCOME TAX, MUMBAI

आदेश / O R D E R PER M. BALAGANESH (A.M):

These appeals in ITA Nos.1315/Mum/2022 & 1316/Mum/2022 for A.Y.2011-12 & 2012-13 preferred by the order against the revision order of the ld. Principal Commissioner of Income Tax PCIT, Mumbai-2 u/s.263 of the Act dated 31/03/2021 for the A.Y.2011-12 & 2012-13.

Identical issues are involved in both these appeals and hence, they are taken up and disposed of by this common order for the sake of convenience.

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1.1. Both these parties mutually agreed that appeal for A.Y.2011-12 may be taken as the lead case and the decision rendered thereon shall apply for A.Y.2012-13 also in view of identical facts except with variance in figures.

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revision order u/s.263 of the Act, the assessee preferred an appeal before this Tribunal which was disposed of by this Tribunal in ITA Nos. 2466 and 2467/Mum/2018 for A.Yrs. 2011-12 and 2012-13 respectively vide order dated 29/03/2019 wherein this Tribunal had restored the matter back to the file of the ld. PCIT for disposal of the Jurisdictional ground and other grounds as it was not decided by the ld. PCIT while passing the original revision order u/s.263 of the Act dated 22/03/2018. Pursuant to this order of this Tribunal, the ld. PCIT issued a show cause notice u/s.263 of the Act on 08/03/2021 as under:-

"On examination of records, & is observed that the assessment order dated 25.01.2016 passed by the Assessing Officer was erroneous in so far as it was prejudicial to the interest of the revenue due to the following reasons: (i)Rs.24,85,25,000 has been reduced from taxable income in Statement of Computation of Total Income on account of Hybrid Bond Expenses and Rs 678,90,411 on account of Return on Perpetual Bond although the said amounts were not debited in profit and loss account. The Assessing Officer allowed this amount which was prima facie not allowable due to the following 1. The expenditure were not of revenue nature as it was not debited in profit and loss account. 2. Perpetual (Hybrid) bonds and perpetual bonds are akin to equity and therefore any expense on account of interest on this account is appropriation of profit. 3 Perpetual bonds or Hybrid bonds are not debts or rowing as the option to call is not available to holders of the bonds and therefore, interest payable paid on these bonds are not allowable under section 36(1)(iii) of the Act Reliance is placed on the decision of Hon'ble Haryana High Court in the case of Pepsu Road Transport Corpn v CIT 130 ITR 18(P&H) wherein it has been held that an element of refund or repayment is a must in the concept of borrowing. If there is no obligation to refund the capital provided interest on such capital is not deductible 4. The Hon'ble DRP has sustained an identical disallowance in the case of the assessee for A.Y. 2013-14. (ii) In view of the aforesaid facts and provisions of the Act, the Assessing Officer was required to examine and disallow the aforesaid claims of reduction from taxable income. However, no such examination or disallowance was made. The failure of the Assessing Officer to make the enquiries which were warranted in

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the facts and circumstances of the case and under the provisions of law and failure to disallow the aforesaid claims of reduction has rendered the assessment order dt 25.01.2016 erroneous in so far it is prejudicial to the interest of revenue."

3.1. The assessee filed its written submissions in response to the show- cause notice stating that the ld. PCIT could invoke revision jurisdiction u/s.263 of the Act only if the order has been passed by the subordinate authority i.e. the Assessing Officer. In the instant case, the final assessment order dated 25/01/2016 was passed pursuant to the directions of the ld. DRP which comprised of collegium of three Senior Officers in the rank of Commissioner of Income Tax. Hence, the PCIT cannot resort to invoke his revision jurisdiction u/s.263 of the Act on an order which has been effectively passed by the Officers of the same rank. It was argued that the ld. AO is completely bound by the directions of the ld. DRP and effectively the order passed thereon would become the order passed by the three Commissioners by the Income Tax. This preliminary objection was addressed by the ld. PCIT in para 7.1 of his order dismissing the plea of the assessee. The main plea of dismissal was that the revision powers of the ld. PCIT u/s.263 of the Act is restricted only in respect of matters that had already been considered and decided by the ld. Commissioner of Income Tax (Appeals). According to the ld. PCIT, other than these all other orders are subjected to revision u/s.263 of the Act. The ld. PCIT also placed reliance on the decision of the co-ordinate Bench of Kolkata Tribunal in the case of Philips India Ltd. vs. PCIT in ITA No.1142/Kol/2016 dated 27/03/2019 wherein the similar proposition was addressed.

3.2. In this regard, we find that the Hon‟ble Karnataka High Court in the case of Devas Multimedia Pvt. Ltd. vs. PCIT reported in 419 ITR 391 (Kar)

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had also addressed the very same issue. The relevant operative portion of the said order is reproduced hereunder:-

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adequate enquiries with regard to the said issue and deduction was granted to the assessee accordingly. Accordingly, it was submitted that this cannot be a case of lack of enquiry by the ld. AO and hence, it was pleaded that the revision proceedings initiated by the ld. PCIT on the ground that the ld. AO had not made any enquiries on the impugned issue is factually incorrect and requested for dropping the proceedings.

4.1. With regard to this aspect of the issue, we find from page 1 of the paper book that the ld. AO during the course of personal hearing on 20/02/2015 had indeed asked for various details and explanations from the assessee and one such query raised by the ld. AO vide question No.8 is as under:-

“8. Proof of utilisation of Hybrid Bond expenses and show-cause as to why the same should not be treated as capital in nature.”

4.2. The assessee vide letter dated 27/02/2015 filed on 02/03/2015 made a detailed submission regarding this aspect before the ld. AO. The letter dated 27/02/2015 is enclosed in pages 2-8 of the paper book filed before us. For the sake of convenience, the said letter is reproduced hereunder:-

This is with reference to our ongoing assessment in respect of the financial year 2010-11 relevant to the captioned assessment year and the notings made during the hearing held on 20 February 2015 in connection with proof of utilisation of Hybrid Bond Expenses & show cause as to why the same should not be treated as capital in nature, we wish to submit as under: 1. During March 2011, the Company has issued Unsecured, Perpetual Non Convertible Debentures ('PNCDs') (also know as "Hybrid Securities") on private placement basis, of Rs. 1500 crs at the rate of 11.50% per annum for first 10 years. PNCDs are perpetual in nature with no maturity or redemption and are callable only at the option of the Company. The Company can exercise a call option to redeem the PNCDs at par only at the end of 10 years from the date of allotment of PNCD and at the end of every year thereafter.

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As opposed to the above the PNDCs cannot perfore be treated as Equity for the following reasons: a. A PNDC is not a "Share" within the meaning of Section 2(46) or 2(46A) of the Companies Act, 1956 (as applicable then). b. PNDC holders are not regarded as Members of the Company. c. PNDC holders do not have any voting rights in any of the meetings of the Company. d. Provisions of the Companies Act, 1956 viz., issue of Share Capital, Increase in Share Capital, Rights issue, reduction in Share Capital, buy back of Shares etc, do not apply to the PNDCs. e. The PNDCs are neither in nature of Equity Share Capital nor Preference Share Capital f. In the event of the liquidation of the Company, the PNDC holders would not be entitled to share in the assets of the Company.

4.3. The assessee also placed reliance on the following decisions in support of its claim of deduction of issue expenses and interest as revenue expenditure before the ld. AO:-

(a) Decision of the Hon‟ble Supreme Court in the case of India Cements Ltd. vs. CIT reported in 60 ITR 52. (b) Decision of the Hon‟ble Rajasthan High Court in the case of CIT vs. Secure Meters Ltd reported in 221 CTR 405 (Raj) (c) Decision of the Hon‟ble Jurisdictional High Court in the case of Premier Automobiles Ltd vs. CIT reported in 80 ITR 415

4.4. Based on the aforesaid factual submissions and judicial precedents, the assessee concluded that the expenses of Rs.24,85,25,000/- incurred on the issue of PNCDs i.e. Hybrid Securities are Revenue in nature allowable as business expenses. The assessee also gave the details of issue expenses as under:-

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4.5. The assessee also enclosed the relevant portion of the Information Memorandum for issue of Unsecured, Subordinated Perpetual listed rated Hybrid Securities in the form of Non-Convertible Debentures on Private Placement Basis containing the terms and conditions of the issue together with the details of utilisation thereon before the ld. AO. This is enclosed in pages 7 & 8 of the paper book. We find that the ld. AO had duly appreciated the aforesaid submissions cum explanations given by the assessee together with the relevant documentary evidences thereon and accepted the stand of the assessee by granting deduction thereon. Hence, it amounts to complete enquiry made by the ld. AO on the impugned issue.

4.6. It is also pertinent to note that the ld. AO in the assessment proceedings had resorted to make disallowance of expenses u/s.14A of the Act for which purpose, he has considered the interest component of Rs.833.47 Crores as one of the items like calculating the disallowance under Rule 8D(2)(ii) of the Income Tax Rules. Similarly, the ld. AO had also considered the interest of Rs.715,06,00,632/- and proceeded to disallow the same on the ground that it is paid on borrowings which were

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used for acquiring controlling interest in a company which is capital investment and accordingly, such interest expenditure was disallowed u/s.36(1)(iii) of the Act by the ld. AO. These two acts clearly go to prove that the ld. AO had indeed examined the entire borrowings made by the assessee and the interest paid thereon by the assessee during the course of assessment proceedings. Hence, there is complete application of mind on the part of the ld. AO with regard to the borrowings made and interest incurred by the assessee. Hence, we hold that the ld. AO having taken a possible view in the matter after due application of mind while framing the assessment, the said assessment cannot be termed as erroneous by the ld. PCIT while invoking revision jurisdiction u/s.263 of the Act. In fact, these submissions were also made by the assessee before the ld. PCIT. Infact, we find the ld. PCIT had changed his stand from „lack of enquiry‟ by the ld. AO to „inadequate enquiry‟ while passing the revision order u/s. 263. In the show-cause notice, the ld. PCIT states that no enquiries were carried out by the ld. AO with regard to the impugned issue. After going through the submissions of the assessee that enquiries were made in the course of assessment proceedings by the ld. AO and replies were filed by the assessee, the ld. PCIT changed his stand that „full enquiry‟ was not made by the ld. AO on the impugned issue. This is evident from para 7.2 of his order. Again somewhere in the middle in para 7.2, the ld. PCIT again states that the assessment was framed by the ld. AO „without making enquiries‟. This proves the complete shifting of stand by the ld. PCIT from “No Enquiry” to “Inadequate Enquiry” and to “No Enquiry”. Finally in para 7.6 of his order, the ld. PCIT concludes that “full enquiry” was not made by the ld. AO. This categorically goes to prove that non- application of mind by the ld. PCIT. The law is very well settled that revision jurisdiction u/s.263 of the Act could be invoked only when there is „lack of enquiry‟ and not when there is “inadequate enquiry”. However,

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in the instant case before us, it is not a case of „inadequate enquiry‟ by the ld. AO. In fact, the ld. AO had enquired the matter in full and had taken to its logical conclusion while framing the assessment. Hence, the provisions of Explanation 2 to Section 263 of the Act which came into effect from A.Y.2015-16 also would not be applicable in the instant case. Moreover, we find that Explanation 2 to Section 263 of the Act was never sought to be used by the ld. PCIT in the show-cause notice issued to the assessee. This was used for the first time only in the revision order passed u/s.263 of the Act. The ld. DR also argued before us that merely because the assessee had raised a query on the borrowings and interest paid thereon and more particularly with regard to Hybrid Securities, it does not amount to application of mind of the ld. AO. The ld. DR vehemently argued that proper and full enquiry had not been carried out by the ld. AO and assessee himself was not sure as to whether the interest paid on borrowings would be allowable either u/s.36(1)(iii) or u/s.37(1) of the Act. The ld. DR argued that accordingly there is some doubt as to whether the money received by the assessee is borrowing in the form of perpetual bonds or is it akin to equity. When assessee itself is doubtful, how could the ld. AO arrive to a logical conclusion on the issue was the predominant argument of the ld. DR before us.

4.7. We find that the assessee during the course of assessment proceedings itself had submitted the entire facts of the case by placing reliance on various provisions of the Companies Act and SEBI Regulations and had also taken efforts to explain the meaning of the term “debentures”, “debts”, “bonds”, “shares” etc., under provisions of various Acts. The assessee had specifically pointed out in para 5 of its reply filed before the ld. AO vide letter dated 27/02/2015 filed on 02/03/2015 that the purpose of issue of this Hybrid Securities is clearly set out in page 39

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of the Information Memorandum wherein it specifies that utilisation of funds proposed to be raised through this private placement will be for general corporate purposes, however, excluding specifically acquisition or purchase of land, investment in equity / capital markets. The main case of the Revenue is only that the perpetual debentures issued are akin to equity and hence, it does not fall under the ambit of borrowing and accordingly, no interest would become allowable on the said alleged borrowing. In this regard, we find that assessee had already explained the very same query before the ld. AO at the time of assessment proceedings itself which is evident from the reply filed by the assessee which is reproduced hereinabove at the beginning of the order. Moreover, we also find that these bonds were indeed repaid by the assessee on 18/03/2021 with interest and on 11/05/2021 with interest. The evidences in this regard are enclosed in pages 254 and 255 of the paper book filed before us and the fact of repayment of these borrowings with interest had also been duly notified by the assessee to BSE Ltd. and NSE Ltd as per the requirement of SEBI regulations. For the sake of convenience, the intimation given to BSE and NSE are reproduced hereunder:

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4.8. This categorically goes to prove that it is not a case of equity and the issue of perpetual bonds is only borrowing made by the assessee. Since the said borrowing has been used for business purposes of the assessee, the interest paid thereon would be squarely allowable as deduction u/s.36(1)(iii) of the Act. Hence, even on merits, the action of the ld. PCIT would have no legs to stand.

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aggregating to Rs. 1500 crores. It is demonstrated from the detailed submission and copies of documents placed in the paper book that assessing officer has made detailed inquiry/verification during the course of assessment proceedings that assessee has borrowed funds for business use by issue of debentures. The borrowed fund were payable on call option exercising by company after the 10th year or any at the end of every year thereafter. It was also explained that the lenders were not entitled to share any surplus or bear any loss like shareholders. Debentures trustee were appointed to safeguard Interest of the lenders. The assessee company had also stated on the basis of aforesaid discussion that it had borrowed fund for the purpose of its business and the interest on debenture was deductible in computing the income from profit and gains from business and profession. In the light of the above facts and after considering the detailed material furnished by the assessee during the course of assessment proceedings before the assessing officer we observe that the assessee has categorically explained to the assessing officer with relevant supporting material that it has issued unsecured perpetual non-convertible debentures and such lenders were not entitled to share any surplus or bear any loss like shareholders. These debentures were entitled for fixed interest @ 11.40% along with redemption after the 10th year. These facts and submission were also brought to the notice of the Id. Pr. CIT during the course of proceedings u/s. 263 of the Act, however, the Id. Pr. CIT without controverting these undisputed fact held that assessment order was erroneous so far it was prejudicial to the interest of Revenue. Therefore, we consider that the order passed by the Id. Pr. CIT u/s. 263 is unjustified and we quash the same. Therefore, we allow the ground of appeal of the assessee.

Order pronounced on 23/12/2022 by way of proper mentioning in the notice board.

Sd/- Sd/- (PAVAN KUMAR GADALE) (M.BALAGANESH) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated 23/12/2022

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KARUNA, sr.ps

Copy of the Order forwarded to : The Appellant 1. The Respondent. 2. The CIT(A), Mumbai. 3. CIT 4. DR, ITAT, Mumbai 5. 6. Guard file. //True Copy//

BY ORDER,

(Sr. Private Secretary / Asstt. Registrar) ITAT, Mumbai