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Income Tax Appellate Tribunal, “K”, BENCH
Before: SHRI R.C.SHARMA, AM & SHRI VIKAS AWASTHY, JM
his order. The A.O. also observed that the assessee has not proved that the borrowed money was used for giving ICDs, hence, the interest expenditure cannot be allowed as deduction even if the interest income is held taxable under the head income from other sources.
From the record, we found that the business activities of the assessee comprises of shipping business, logistics business and oilfield business. The shipping and logistics business is being carried out by the assessee itself whereas the oilfield business is being carried out by the assessee through its subsidiary. We had also gone through the Memorandum of Association of the assessee and found that the main object of the assessee is “to enter into and conduct the business of owning and/ or leasing and/ or hiring and/ or operating all types of onshore and offshore drilling rings.” Thus, it is clear that even as per the memorandum, it was main objection of the assessee. The assessee was Essar Shiping Ltd. Vs ACIT carrying out business of drilling oil rigs through its subsidiary for this purpose the assessee borrowed money and advanced the same as ICDs to its subsidiary to carry out the drilling business. Thus, the business so carried out by the subsidiary was as per the main objects of the assessee company. The assessee had not given ICD to its subsidiary for the purpose of earning interest income. Accordingly, the income on such ICD has to be treated as business income only, since it has been earned in the course of the business of the assessee and forms part of the business of the company.
From the record, we found that during the previous year relevant to assessment year under consideration, the assessee has earned interest income from ICDs of Rs. 60.16 crores and from banks of Rs. 1.81 crores. The break up of the interest income is as under:-
Sr. No. Name Amount of interest Remarks 1. Essar oilfield 53,97,05,043 This company is step down Services India Ltd. subsidiary of assessee 2. Essar Steel India 5,57,23,697 This company is group Ltd. company of assessee.
Essar Oilfield 53,45,802/- This company is wholly Services ltd owned subsidiary of Mauritius assessee 4. Energy 7,80,763/- This company is wholly Transportation owned subsidiary of International Ltd. assessee 5. Interest from 1,81,44,909 Interest on margin money banks given to bank The money advanced to companies at Sr. No. 1 to 4 are group/ subsidiary companies and the money has been given for business
Essar Shiping Ltd. Vs ACIT purpose of assessee. The A.O. has not brought any material on record to suggest that the assessee had given intercorporate deposit to subsidiaries for earning interest income. It is also not the case of AO that the assessee had given its surplus funds to subsidiary for earning interest income. Thus, the income on ICD is to be assessed under the head ‘business income.’ Similar view has been taken by the Coordinate Bench of the ITAT, Mumbai in the case of Tolani Private Limited in order dated 04/01/2018 wherein the assessee was engaged in operation of ships had advanced loan/ICD to its subsidiary for acquiring ship, it was held that even on the basis of commercial expediency, the assessee was bound to assist its subsidiary, the interest income earned on such loans/ICD is liable to be assessed as income under the head “business income” and not under the head “income from other sources”.
With regard to bank interest income amounting to Rs. 1,81,44,909/-, the same has been received on margin money which the assessee was required to keep with banks as per terms of sanction, hence the same is also for purpose of business. The money so kept with the bank as margin money was out of business compulsion and not as
per the sweet will of the assessee, therefore, the interest earned on such margin money is also liable to be taxed as business income.
Essar Shiping Ltd. Vs ACIT 31. Assessee is also aggrieved for disallowance of interest expenditure. The A.O. has dealt with the issue at page Nos. 9 to 14.
From the record we found that during the year, interest of Rs. 136,82,29,020/- was directly incurred for non tonnage activity and common interest of Rs. 37,75,64,523/- was allocated towards non- tonnage activity. Thus, the total interest expenditure of Rs. 174,57,93,543/- was claimed u/s 36(1)(iii) of the Act as business expenditure. It was contended before the Assessing Officer that the assessee is involved in business of oil drilling and the interest expenditure incurred was on account of loan taken from bank and LIC.
The amount of money taken from bank and LIC was used for providing ICDs to its subsidiaries, as the business of oil drilling was carried out by assessee through its subsidiary. It was also contended that similar interest expenditure has been allowed u/s.36(1)(iii) in A.Y. 2011-12. The Assessing Officer held that oil drilling is not the business of assessee. He further held that interest income earned from ICDs has been taxed under the head income from other sources and hence interest expenditure cannot be allowed u/s 36(1)(iii) of the Act. The A.O. further held that out of total interest an amount of Rs. 1,56,83,680 has been paid for aircraft taken on lease and the assessee has not explained the nexus between expenses claimed with receipt of non tonnage
Essar Shiping Ltd. Vs ACIT activities. Accordingly, he disallowed the said interest expenditure u/s 36(1)(iii) of the Act.
We had carefully gone through the entire details placed on record and found that the interest expenditure of Rs. 136,82,29,021 (174,57,93,544 - 37,75,64,523) is as under:
Sr.No. Particulars Amount (Rs) Purpose of loan 1. Interest paid to 19,91,29,094 Amount borrowed in A.Y. Yes Bank 2012-13 and used for investment in shares of Essar Oilfields Services Limited, Mauritius which is wholly owned subsidiary of assessee established for purpose of carrying out oilfield business.
Interest paid on 48,03,11,032 Amount received from LIC NCS from LIC in A.Y. 2010-11 was utilized for giving ICD to subsidiary company for carrying out oilfield business. The income from ICD has been offered as business income under non tonnage activity.
3. Interest on FCCB 67,31,05,2015 Amount borrowed in A.Y. 2011-12 and used for investment in preference shares in wholly owned subsidiary for carrying out oilfield business.
Interest on aircraft 1,56,83,680 Income earned from taken on lease operation of aircraft has been offered as business income under non tonnage activity.
Essar Shiping Ltd. Vs ACIT 5. Total 136,82,29,021/-
It is evident from the above chart that interest expenditure of Rs. 135,25,45,341/- has been incurred on amount borrowed for purpose of giving lCD to its subsidiary and interest of Rs. 1,56,83,680/- has been incurred on aircraft taken on lease.
As discussed hereinabove, the assessee derives business income from tonnage activity and non-tonnage activity. One of the activities, income from which is offered as business income under non tonnage, is oilfield business. As per object clause of the memorandum, one of the main object of the assessee was to carry out oil drilling business, which is also evident from the Director’s report placed on record. Since the oil drilling business was carried out by the assessee through its subsidiary, loan was taken for giving as ICD to its subsidiary and assessee invested in subsidiary to acquire complete control over it since the assessee was to carry out its business of oil drilling through its subsidiaries. Therefore, the interest expenditure should be allowed as business expenditure U/s 36(1)(iii) of the Act. Since the investment was made in the group company for strategic purpose and not for earning dividend. Thus, the interest expenditure is allowable U/s 36(1)(iii) of the Act in so far as we have already held that the income on ICD earned from subsidiaries was liable to be taxed under the head income from business. From the record
Essar Shiping Ltd. Vs ACIT we found that the said interest expenditure was effectively incurred for oil drilling business of assessee and hence the same is on account of business and allowable u/s 36(1)(iii) of the Act. In order to support our proposition, reliance is placed on following decisions; a) CIT v. Phil Corporation Ltd [244 CTR 226 (Born)] b) CIT vs. Colgate Palmolive India Limited [(370 ITR 728) (Bom)] c) CIT v. Investa Industrial Corpn. Ltd. [(119 FUR 380) (Bom.)] d) CIT v. RPG Transmission Ltd. [359 ITR 673 (Mad)] e) Raptakos Brett & Co. Ltd vs. PCIT. (ITA No. 2251/Mu m/2015) (Mumbai Tribunal)
In all the above cases, it has been held that if the investment is made in subsidiary for the purpose of business, the loss or expenditure incurred by assessee would be allowable as business expenditure.
With respect to interest on aircraft taken on lease, we observe that assessee had offered income earned from operation of aircraft as business income, the interest paid for aircraft taken on lease is essentially allowable as business expense u/s.36(1)(iii) of the IT Act.
We also observe that even otherwise the interest expenditure incurred on the loans which are given to its subsidiaries as ICD on which interest was received by the assessee, such interest expenditure is Essar Shiping Ltd. Vs ACIT eligible to be allowed U/s 57(iii) of the Act while computing net interest income, our this observation is without prejudice to our above observation that interest on loan is eligible for deduction U/s 36(1)(iii) of the Act.
It was also argued by the ld AR that no interest disallowance on old/outstanding loan can be made in the current year, if the same was allowed in earlier year. It was submitted that the said interest expenditure pertaining to amount borrowed from LIC has been allowed in A.Y. 2010-11 in case of Essar Ports Limited and A.Y. 2011-12 in case of assessee by the Assessing Officer in the scrutiny assessment order passed u/s 143(3) of the Act. In order to support this proposition, reliance was placed on the following decisions;
a) CIT v Sridev Enterprises [192 ITR 165 (Kar)] b) Escorts Ltd. v. ACIT [104 ITD 427 (Del)] c) Maiwa Cotton Spg. Mills v. ACIT [89 lTD 65 (TM)(Chd)] d) ITO v. J.M.P. Enterprises [101 lTD 324 (SMC)(Asr)] e) Virendra R. Gandhi v. ACIT (Tax Appeal No. 20 of 2004 with Tax Appeal No. 124 of 2005) dated 27.11.2014( (Gujarat High Court)
Since we have already directed the A.O. to allow deduction of interest expenditure U/s 36(1)(iii) of the Act, even following the rule of consistency, the A.O. should have allowed the same as per the Essar Shiping Ltd. Vs ACIT treatment given by him in earlier years since there is no change in facts and circumstances of the case during the year under consideration.
Thus, even on the doctrine of consistency, we find sufficient force in the argument of the ld AR that the interest expenditure which have already been allowed under business head of income in earlier year, the same should be allowed in the similar manner even during the year since there is no change in the facts and circumstances of the case.
We had also carefully perused the bank statement demonstrating the said nexus which is placed on record. It is evident from the said bank statement and ledger account that there is a direct nexus between the borrowed funds and the funds advanced to the subsidiary and hence the interest expenditure should otherwise be allowed as deduction U/s 57(iii) of the Act.
We are also of the view that even if the interest income is taxed as income from other sources, then the interest expenditure so incurred for earning the same should be allowed as deduction U/s 57(iii) of the Act. Since there was a direct nexus between the funds borrowed from the LIC and the money advanced to the subsidiary company and hence the interest expenditure of Rs. 48,03,11,032/- is otherwise liable to be allowed U/s 57(iii) of the Act. We direct accordingly.
Essar Shiping Ltd. Vs ACIT 41. From the record we found that AO had disallowed the interest paid on the funds borrowed which was given to subsidiaries / group companies. Since the ICDs were given to subsidiary in order to promote the business since an amount advanced to subsidiary would ultimately benefit the assessee, the interest paid is allowable as business expenditure. In order to support the said contention reliance is placed on the decision of the Hon'ble Supreme Court in the case of S.A, Builders v.
CIT (288 ITR1). In the said decision the Hon'ble Supreme Court has held that if the assessee has borrowed funds and advanced the same to its subsidiary in order to promote the business of its subsidiary, then the interest paid by the assessee on borrowed funds is a business expenditure and no interest disallowance can be made u/s 36(l)(iii) of the Act. In the present case, the assessee has advanced ICD to its subsidiary in order to promote their business and charged interest thereon. Applying the ratio laid down by the Hon'ble Supreme Court in the case of S.A. Builders v. CIT (supra), wherein it has been held that interest expenditure incurred by the assessee is allowable as business expenditure, the interest income earned by the assessee on ICD given to subsidiary to promote their business would be taxable as business income. The said decision of the Hon'ble Supreme Court in the case of S.A. Builders v. CIT (supra) was followed by the Hon'ble Supreme Court in the case of Hero Cycles v. CIT (379 ITR 347). Further reliance is also Essar Shiping Ltd. Vs ACIT placed on the decisions of the Hon'ble Bombay High Court in the case of CIT v Piramal Glass Limited in Income Tax Appeal No 566 of 2017 dated 11.06.2019 (Bom), CIT v Sesa Resources Ltd. [404 ITR 707 (Bom)] and CIT v Reebok India Company (98 taxmann.com 413) in order to support our contention that interest expenditure is to be allowed u/s.36(1)(iii) while computing the income under head of “business and profession”.
Corresponding interest income is to be assessed under head of business income.
The interest expenditure of INR48.03 crores was incurred during the year on the loan taken from LIC for giving the same as ICD to EOSIL on which interest income of INR53.97 crores was earned. As per the bank statement, there is direct nexus between the loan received from LIC and the ICD given, therefore, without prejudice to our conclusion that the income from ICD forms part of the business income of the assessee, corresponding interest expense has to be allowed against interest income earned by the assessee irrespective of the head of the income under which it is assessed. Thus, we observe that interest expenditure is otherwise allowable u/s.57(iii) since there is direct nexus between the interest expenditure and interest income earned by assessee.
Essar Shiping Ltd. Vs ACIT 43. From the record we also found that the money was borrowed from LIC and advanced to its wholly owned subsidiary EOSIL as lCD in the earlier A.Y. 2010-11. The assessee was demerged from Essar Port Limited w.e.f. 01.10.2010 i.e. in A.Y. 2011-12. The money was advanced by Essar Ports Limited to EOSIL in A.Y. 2010-11 and Essar Ports Ltd received interest which was offered as business income. The same has been accepted by Assessing Officer in A.Y. 2010-11 as business income in the assessment order passed in case of Essar Ports Limited.
Subsequently also in the assessment proceedings for A.Y. 2011-12, the same has been accepted by Assessing Officer as business income in case of Essar Ports Limited and in case of assessee also as business income in scrutiny assessment framed u/s 143(3) of the Act. The relevant assessment order so passed U/s 143(3) of the Act for the A.Y. 2010-11 and 2011-12 are placed on record. However, during the year under consideration, the assessee continued to receive similar interest income on the lCD from EOSIL which was given out of money borrowed from LIC. The assessee offered the same as business income but the he A.O. treated the same as income from other sources. There is no change in the facts and circumstances of the case during the year under consideration as compared to earlier years wherein the AO had assessed the very same income under the head of business income. Hence, even on the principles of consistency, the interest income received by the Essar Shiping Ltd. Vs ACIT assessee should be taxed as business income. In order to support the said contention reliance is placed on the decision of the Hon’ble Supreme Court in the case of CIT vs. Excel Industries (358 ITR 295). Accordingly, we do not find any justification in the order of AO for treating interest income as “income from other sources”.
In view of the above discussion, we direct the AO to treat interest income as “income from business” and to allow interest expenditure u/s.36(1)(iii) of the I.T. Act. We direct accordingly.
The last grievance of the assessee relates to disallowance of common interest expenditure of Rs. 35,98,89,248/-. The A.O. has dealt with the issue at page No. 11 and 12. From the record we found that the assessee had claimed common interest expenditure of Rs. 48,82,67,263/- which has been apportioned to tonnage and non tonnage activity. The assessee allocated the said expenditure in the ratio of assets employed between tonnage and non tonnage activities. The Assessing Officer apportioned the said expenditure on the basis of turnover between tonnage and non tonnage activities. We do not find any merit in the order of the A.O. in so far as the interest expenditure is periodic cost of borrowing incurred for the purpose of financing business activities. Therefore it has to be apportioned on basis of cost of financing i.e. value of assets and not on basis of turnover, since the Essar Shiping Ltd. Vs ACIT turnover of the business has got no relation with the interest expenditure so incurred by the assessee. We, accordingly, restore this issue to the file of the A.O. to recompute the same by allocating interest expenditure in the ratio of assets employed between the tonnage and non tonnage activities. We direct accordingly.
The next grievance of the assessee as contained at ground No.9 relates to assessing the supervision management fees of Rs. 7,07,52,924/-, as belonging to tonnage business. This ground was not pressed by ld. AR, we therefore, dismiss this ground as not pressed.
Accordingly, this ground of appeal is dismissed.
47. Ground No.10 is consequential to ground No.9, wherein it was contention of ld. AR that once the income is treated as income under tonnage tax income, the same should not again be taxed as part of normal income offered by the assessee. It was pointed out by ld. AR that AO has inadvertently added the same income in normal business income shown by the assessee which amount to double taxation of same income. From the record we found that AO was justified in treating the income of Rs.7,07,52,924/- as tonnage tax income, however, the same should not again form the part of normal business income. We found that AO has inadvertently again added the same income under the head normal business income, which amount to double taxation of same
Essar Shiping Ltd. Vs ACIT income, accordingly, we direct the AO to reduce the same from normal business income after due verification. We direct accordingly.
In the result, ground No.10 is allowed for statistical purposes.
In the result, this appeal of the assessee is allowed in part, in terms indicated hereinabove.
Order pronounced in the open court on 06th March, 2020.