IMPERIAL CONSULTANTS & SECURITIES LTD. (FORMERLY KNOWN AS OMPERIAL CONSULTANTS & SECURITIES PVT. LTD.),MUMBAI vs. DCIT -6 (3)(1), MUMBAI

At the time of hearing the learned counsel for the assessee pressed only Ground No. 4(a) raised by the assessee and all other grounds, namely

Brief facts of the case are that the assessee filed return of income on 30.09.2012 declaring loss of Rs. 1170,64,32,415/- other than the loss under long term capital gain which was Rs. 20,89,72,023/-. The return of income tax was later on revised on 29.03.2014 declaring total income at nil other than the loss of `66,38,62,883/- under the head of long term capital gain. Thereafter the case was selected under compulsory scrutiny and notices were issued and served upon the assessee. The assessee has made some borrowings and one of the major borrowings was on account of Zero Coupon Bonds issued by M/s. Essar House Ltd. Out of the borrowed fund, the assessee has advanced money through inter corporate deposits ( hereinafter referred to as ICD) to M/s. Essar Oil Ltd. The transactions of borrowing and lending were carried out during the financial years 2009- 10, 2010-11 and 2011-12. The transactions were carried out earlier by assessee’s predecessor M/s. Essar Investment Ltd. and after demerger of investment and finance division of Essar Investment Ltd. merged with the assessee w.e.f. 01.04.2010. In the return of income, the assessee declared interest income of `124.58 crores under Section 56 of the Act as income from other sources against which interest expenditure of `143.30 crores was claimed. According to the AO the assessee has not furnished complete particulars of the said claim as deduction under Section 57 of the Act can only be allowed when the expense is exclusively and wholly incurred for the purpose of earning that income and accordingly, the AO passed the assessment order wherein, inter alia, he disallowed the entire amount of interest of `143.30 crores claimed by the assessee under Section 57 of the Act by framing the assessment under Section 143(3) of the Act dated 31st March, 2015.

The ZCBs were initially issued to Essar House Ltd (EHL) by Essar Investments Ltd (EIL). Similarly, the ICDs with Essar OIL Ltd (EOL) were placed by EIL. On demerger of the Investment & Finance Division of EIL into the appellant company on the appointed date of 01.04.2010, the said liability of ZCBs and the said asset of ICDs were vested with the appellant company along with other assets and liabilities of the Investment & Finance Division of EIL and the same were incorporated in the books of account of the appellant during the previous year relevant to the present assessment year after the demerger was approved by the Hon'ble Bombay High Court on 20.01.2012. In view of this reason, the ledger accounts of the ZCBs issued to EHL and ICDs placed with EOL in the books of account of EIL and the bank account statements/bank books of EIL for the FYs 2009-10, 2010-11 and 2011-12, when the relevant transactions took place, are required to be examined in order to ascertain whether there was a direct nexus between the funds raised by issue of ZCBs to EHL and the funds invested by way of ICDs in EOL as claimed by the appellant for the purpose of ascertaining whether the interest expenditure in respect of the ZCBs has been incurred for the purpose of earning the interest income on ICDs for the purpose of being eligible for deduction u/s. 57(iii) of the Act.

On perusal of the ledger account extracts of the ZCBs issued to EHL and ICDs placed with EOL in the books of account of EIL for the FYs 2009-10, 2010-11 and 2011-12, it is seen that the details of ZCBs issued to EHL and ICDs placed with EOL during these years are as under: FY ZCBs issued to ICDs placed with EOL (Rs.) EHL (Rs.) 12.25% ICDs 9.75 % ICDS 9.5% ICDs Total ICDs 2009-10 739,73,50,000 382,10,49,929 199,80,00,000 429,40,31,008 1011,30,80,937 2010-11 571,46,30,000 0 195,50,00,000 505,30,74,276 700,80,74,276 2011-12 494,31,80,000 0 886,50,00,000 0 886,50,00,000 Total 1805,51,60,000 382,10,49,929 1281,80,00,000 934,71,05,284 2598,61,55,213 82. As regards the flow of funds, it is seen that the receipt of funds on issue of ZCBs and the placement of funds in ICDs took place through the following bank accounts of the appellant and the appellant either furnished the bank account statements or the bank books maintained in the books of account in respect of the said bank accounts alongwith the written submission dated 09.11.2017 and the verification of the direct nexus has been made with reference to the said bank account statements or the bank books: Sr. Name of the Bank Account No. Evidence furnished No. 1 ING Vysya Bank 500011017018 Bank account statement 2 ING Vysya Bank 500011026084 Bank account statement

As can be seen from the table above, direct nexus between the funds received by the appellant from EHL by issue of ZCBs and the funds advanced by the appellant to EOL by way of ICDs is found to be exist to the extent of Rs. 1746.68 Crores out of the total amount of ICDs of Rs.2598.61 Crores placed with EOL during the FYs 2009-10 to 2011-12. This shows that only 67.21% of the amounts advanced as ICDs to EOL were met out of the borrowings made from EHL by issue of ZCBs.

However, on further examination, it is noticed that though such direct nexus existed to the extent of Rs. 1746.68 Crores at the time when the amounts were advanced to EOL by way of ICDs, there was considerable repayment of ICDs by EOL to the appellant during the FYs 2009-10 and 2010-11. It is seen that though funds to the extent of 1712.10 Cores were advanced to EOL towards ICDs during the FYs 2009-10 and 2010-11 (Rs.1011.30 Crores + Rs. 700.80 Crores), the amount of ICDs that were outstanding at the beginning of the previous year relevant to the assessment year under consideration stood at Rs.968,79,55,915/- only. The break-up of the ICDs outstanding as on 01.04.2011, as seen from the ledger accounts of the ICDs with EOL, is as under:

Based on the above data regarding the amount of ICDs outstanding with EOL at different points of time during the year, the weighted average daily balance of the ICDs with EOL during the year works out to Rs.1098,43,16,568/-. As already mentioned earlier, only 67.21% of the amount advanced by way of ICDs to EOL was met out of the borrowings made from EHL by issue of ZCBs. In view of this, 67.21% of the weighted average daily balance of the ICDs with EOL of Rs. 1098,43,16,568/- during the year can be considered to have been sourced out of such borrowings. Accordingly, the ICDs to the extent of Rs.738,25,59,165/- only can be considered to have been sourced out of the borrowings made from EHL by way of ZCBs for the year under consideration.

The appellant has incurred interest expenditure of Rs. 143,30,28,270/- during the year in respect of the ZCBs of Rs. 1805,51,60,000/- issued to EOL. Out of such borrowed funds of Rs. 1805,51,60,000/-, the amount utilised for earning interest income from the ICDs placed with EOL during the year under consideration amounted to Rs.738,25,59,165/-as mentioned in the preceding paragraph, which represents 40.89% of the borrowed funds. The proportionate interest expenditure in respect of the borrowed funds so utilised towards ICDs of Rs.738,25,59,165/- works out to Rs.58,59,65,260/-. Hence, interest expenditure incurred on the ZCBs to the extent of Rs.58,59,65,260/- only can be considered to have been incurred for the purpose of earning the interest income from the ICDs placed with EOL. In view of this, it is held that the appellant is eligible for deduction of interest expenditure of Rs.58,59,65,260/- u/s.57(iii) of the Act, while computing the income under the head Income from Other Sources as against the claim for deduction of Rs.143,30,28,270/- made by the appellant in the return of income. 89. The appellant advanced a without prejudice contention that all the interest expenses and interest income are consolidated in the P & L account and it is therefore necessary to apportion the interest expenditure on a pro-rata basis to allow deduction u/s.57(iii) of the Act. It was stated that the working of deduction of interest u/s.57(iii) of the Act on a pro-rata basis has been submitted at page No.152 of the written submission dated 11.01.2017 wherein it has been computed at Rs.136,33,80,525/-. It was stated that the average Imperial Consultants & Securities Ltd./DCIT, Circle - 6(3)(1) value of the ICDs/loans given/debentures in respect of which interest income was earned and the average value of loans and advances from others and Short Term borrowings on which interest expenditure was incurred were taken into account for computing the interest expenditure of Rs.136.33 Crores to be allowed u/s.57(iii) on a pro- rata basis.

In this regard, on perusal of the working furnished by the appellant in the written submission dated 11.01.2017, it is seen that the appellant has considered the entire finance cost of Rs.1022,76,70,168/- for the purpose of apportionment and arrived at proportionate interest expenditure of Rs.136,33,80,525/-. However, it is pertinent to point out that while computing the income under the head business in the return of income, the appellant added back the entire finance cost of Rs.1022.76 Crores and claimed deduction for the interest expenditure on ZCBs of 143.30 Crores included in the said finance cost while computing income under the head Income from Other Sources. No deduction was claimed for the balance finance cost of Rs.879.46 Crores under any head of income in the return of income. The reason for the same was that the said finance cost was incurred towards the borrowings utilised for making investments in shares and securities in the group companies and others. It is therefore evident from the treatment given by the appellant itself in the return of income that the finance cost to the extent of Rs.879.46 Crores has no relation to the earning of interest income by the appellant from ICDs and loans and advances. Hence, the without prejudice contention of the appellant for allowing deduction for interest expenditure of Rs. 136,33,80,525/- computed on a pro-rata basis by apportioning the entire finance cost of Rs. 1022.76 Crores is held to be untenable in the facts of the case.

The appellant also advanced another without prejudice contention that the AO ought to have disallowed interest to the extent of Rs.18.72 crores only, representing the excess of the interest expenditure of Rs.143.30 crores on ZCBs over the interest income of Rs.124.58 crores. In support of this proposition, the appellant relied on the decision of the Hon'ble Supreme Court in the case of Keshavji Ravji & Co. Vs. CIT 183 ITR 1. However, on careful perusal of the decision of the Hon'ble Supreme Court relied upon by the appellant, it is seen that the same is distinguishable on facts and therefore not applicable to the facts of the appellant's case. In the said case, the Hon'ble Supreme Court dealt with the issue of disallowance of interest paid to the partners of a firm on the capital contributed by then and held that where the appellant firm paid interest to partners on capital contributed by them and received interest from partners on borrowings made by them, the said transactions had element of mutuality and were referable to funds of partnership as such and therefore only the excess interest paid by appellant firm is liable to disallowance under section 40(b) of the Act. As can be seen, the issue dealt by the Hon'ble Supreme Court is completely different from the issue under consideration in the case of the appellant. Hence, it is Imperial Consultants & Securities Ltd./DCIT, Circle - 6(3)(1) considered that the said decision of the Hon'ble Supreme Court is not applicable to the appellant's case. Accordingly, this without prejudice contention of the appellant is held to be unsustainable.

In view of the detailed discussion above, it is held that the appellant is eligible for deduction of interest expenditure of Rs.58,59,65,2607- u/s.57(iii) of the Act, while computing the income under the head Income from Other Sources as against the claim for deduction of Rs. 143,30,28,2707- made by the appellant in the return of income. In the assessment order, the AO disallowed the entire claim of deduction of interest of Rs. 143,30,28,270/-. The AO is therefore directed to allow deduction for interest expenditure to the extent of Rs.58,59,65,260/- u/s.57(iii) of the Act, while computing the income under the head Income from Other Sources. The disallowance of the balance interest expenditure of Rs.84,70,63,010/- is upheld. This ground of appeal

As regards the interest pertaining to advances made in the current year, the learned A.R. submitted that the learned CIT(A) has analysed the transactions and reproduced the relevant table on page Nos. 49 & 50 of the appellate order, which is extracted hereinabove in the CIT(A) findings as reproduced above. While pointing out the apparent mistakes in the table, the learned A.R. pointed out that on 30.09.2011 an advance of `200

In respect of the category that interest expenditure corresponding to interest income other than interest received from Essar Oil Ltd. may be allowed, the learned A.R. submitted that the CIT(A) erred in ignoring the interest expenditure corresponding to the interest other than interest received from Esar Oil Ltd. The learned A.R. submitted that the assessee has received total interest of `124.58 crores as is observed by the learned CIT(A) at page No. 46, para 78 of the appellate order. The learned A.R. therefore prayed that the AO may be directed to allow the interest expenditure in respect of interest income other than interest received from Essar Oil Ltd. The learned A.R. further submitted that computation of corresponding interest expenditure should be on proportionate basis, as submitted earlier, wherever direct nexus is not available.

Finally the learned A.R. submitted that the issue of calculation of allowable interest expenditure may be set aside to the file of the AO with specific direction as has been prayed hereinabove.

The ld DR , on the other hand relied, heavily on the order of AO by submitting that the interest expenses as claimed by the assessee u/s 57 of the Act against the interest income was rightly disallowed by the AO.

We have considered the rival submissions and perused the material on record including the case law cited by the learned A.R. In this case the assessee has declared interest income of `124.58 crores under Section 56 of the Act against which it had claimed interest expenditure of `143.30 crores under Section 57 of the Act. After perusing the order of the CIT(A), especially interest pertaining to advance made in earlier years we observe that the assessment for A.Y. 2011-12 has also been framed and the said claim of the assessee under Section 57(iii) of the Act has been allowed by the AO as is apparent from the copy of the assessment order filed at page Nos. 24 & 25 of the Paper Book. We further note that Revenue has not taken any step for reopening the assessment for A.Y. 2011-12. Further assessee’s own fund in the form of share capital is only `24.50 lakhs and thus there is merit in the contentions of the assessee that the entire amount of interest expenditure is to be allowed to the assessee considering the fact that the amounts advanced were out of loaned money Besides , once interest expenditure has been allowed in a particular year, the same cannot be disallowed in the subsequent year unless there is change in the facts. The case of the assessee is supported by the decision of the Hon'ble Gujarat High Court in the case of Virendra R. Gandhi (supra) wherein substantial question of law raised is extracted as under: - "Whether, on the facts and in the circumstances of the case, the interest of Rs. 4,42,207/- was rightly disallowed under Section 57(Hi) of the Income-tax Act, 1961 even when the interest on the same borrowing had been allowed in the immediately preceding assessment year?" In disposing of this appeal, the Hon'ble Court followed their decision rendered on 19.11.2014 in Tax Appeal No. 230 of 2003. The relevant observations made by the Hon'ble Court in answering the substantial question of law are as under:

We also find merit in the contentions of the assessee that interest expenditure corresponding to interest income other than interest received from Essar Oil Ltd. is to be allowed. We note that the total interest income during the year was `125.58 crores out of which interest received from Essar Oil Ltd. is `102.02 crores as observed by the learned CIT(A) on page No. 46, para 78 of the appellate order and therefore in our opinion assessee has to be allowed interest expenditure in respect of interest income other than interest received from Essar Oil Ltd. Needless to say that computation of corresponding interest expenditure has to be on proportionate basis, as observed earlier, wherever no direct nexus is available. Considering the facts in the light of the discussions given hereinabove we are restoring the issue of calculation of interest expenditure to the file of AO with the direction as contained hereinabove i.e (i) to calculate correct amount of interest in respect of advances given in earlier years,(ii) calculate the correct amount of interest pertaining to advances made during the year and (iii) to calculate interest expenditure corresponding to interest income other than interest received from Essar Oil Ltd. and allow the same. The issue is restored for the limited purpose of calculation. Ground is allowed for statistical purposes.

Assessee has also raised additional grounds which are reproduced as under: -

The learned A.R. at the outset submitted that the additional grounds raised above do not require any verification of facts and are coming out of the assessment records. Therefore the learned A.R. prayed that the same may kindly be admitted for adjudication. The ld AR relied on the following decisions on the admissibility of additional grounds:

The learned D.R., on the other hand, strongly opposed admission of additional grounds on the ground that these grounds were never raised before the learned CIT(A) nor the claim was made in the return of income so far as ground Nos. 3 & 4 were concerned. The learned D.R. submitted that these grounds could be admitted only if the facts regarding these grounds were available before the AO. Accordingly the learned D.R. prayed that additional grounds may kindly be dismissed.

The learned A.R. rebutting the arguments of the learned D.R. submitted that since there was loss during the year, there was no occasion to claim the deduction under Section 80G of the Act in respect of donations. However, in respect of the remaining three grounds all the facts were already before the AO.

So far as Additional Ground Nos. 1 & 2 are concerned we have already adjudicated the issue of interest expenditure with reference to interest expenditure on Zero Coupon Bonds amounting to `143.30 crores, restoring the matter back to the file of the AO. Needless to say that where there is no nexus, proportionate interest expenditure is to be allowed. This ground has already been decided by us in Ground No. 4(a) hereinabove. Accordingly, the grounds are restored to AO to be decided on the same lines.

So far as Additional Ground Nos. 3 & 4 are concerned we admit the grounds for adjudication and restore the same to the file of the AO with the direction to decide the same after verifying the facts and affording reasonable opportunity of hearing to the assessee.

In the result, assessee’s appeal is partly allowed.

The grounds raised

The Appellant prays that the order of the CIT (Appeals) on the above grounds be set aside and that of the AO be restored."

The issue raised in Ground No. 1 is against the order of CIT(A) allowing deduction of interest expenditure to the tune of `58,59,65,260/- under Section 57(iii) of the Act out of total disallowance of `143.30 crores made by the AO based upon the additional evidences in the form of bank statement admitted by CIT(A) in violation of Rule 46A of the I.T. Rules.

After hearing the rival submissions and perusing the material on record we observe that the CIT(A) has recorded a finding regarding admission of additional evidences in para 18 of page 12 of the appellate order after calling remand reports from the AO from time to time, which are discussed in detail in the appellate order. We further note that the learned CIT(A) has accepted the bank statement which is an authentic document issued by the third party. We further note that the AO has not called for any bank statement during the course of hearing and thus it was given only to the First Appellate Authority after the learned CIT(A) has specifically called for the same. Accordingly we find no prejudice caused to the Revenue by the decision of the learned CIT(A). Accordingly Grounds raised by the Revenue is dismissed.

After hearing both the parties and perusing the material on record we observe that Learned CIT(A) recorded clear cut finding that the assessee has not claimed any expenditure in computation of income. Similarly, while discussing the computation of book profit under Section 115JB of the Act the learned CIT(A) at page No. 95 onwards has given a finding that the assessee has already disallowed expenditure under Section 14A of the Act on which the learned AO has failed to give any contrary findings. Under these facts and circumstances, we are not inclined to interfere in the order of the CIT(A) and accordingly the grounds raised by the Revenue are dismissed.

In the result, appeal of the Revenue is dismissed.

In the nutshell, the appeal filed by the assessee is partly allowed for statistical purpose and the appeal of the Revenue is dismissed.