ASST CIT 6(2)(2), MUMBAI vs. ESSAR HOUSE LTD, MUMBAI

Per Rajesh Kumar, Accountant Member:

1. On the facts and in the circumstances of the case and in law, the Id C1T(A) has erred, in deleting the disallowance made u/s 14A r.w.r 8D ofRs.53,24,46,761/- ignoring the CBDT circular no. 5/2014 dated 11.02.2014 that disallowance u/s 14A has to be made irrespective of the fact whether any exempt income has been earned during the year by the assessee or not?

4 On the facts and in the circumstances of the case the CIT(A) has erred in allowing the interest expenses, without appreciating the fact that the interest on sales tax liability has been paid to Essar Oil Ltd, as per the agreement with M/s. Essar Oil Ltd. and the assessee has no connection to the income earned by M/s. Essar Oil Ltd. 5, "On the facts and in the circumstances of the case the CIT(A) has erred in allowing the expenses of the nature of interest on sales tax liability without appreciating the fact that the assessee entered into agreement dated March 2009 with M/s. Essar Oil Ltd by way of misrepresentation of facts as M/s. Essar Oil Ltd. was not eligible for the benefit and hence, the agreement itself was void.

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

7. The Appellant craves leave to amend or alter any ground or to submit additional new ground, which may be necessary.”

3. The issue raised in first ground of appeal is against the deletion of disallowance by the Ld. CIT(A) of Rs.53,24,46,761/- as made by the AO under section 14A read with Rule 8D.

3 ITA No.7332/M/2016 M/s. Essar House Pvt. Ltd. the instant year, the assessee invested Rs.180,551,60,000/- in the securities on which the assessee did not receive any exempt income during the year by way of dividend. The assessee submitted before the AO that no disallowance under section 14A of the Act can be made as the assessee does not have receive any exempt income during the year. AO did not accept the contentions of the assessee and calculated the disallowance at Rs.53,24,46,751/- on account of interest and administrative expenses by applying the provisions of section 14A read with rule 8D.

4 ITA No.7332/M/2016 M/s. Essar House Pvt. Ltd.

The Ld. A.R. prayed before the Bench that in view of the ratio laid down in the various decisions as stated above the ground raised by the Revenue may be dismissed by upholding the order of Ld. CIT(A) on this issue.

5 ITA No.7332/M/2016 M/s. Essar House Pvt. Ltd. to be made when there is no exempt income. Accordingly, the ground No.1 is dismissed. 9. The issue raised in ground No.2 to 5 is against the deletion of disallowance in respect of interest Rs.296.19 crores on sales tax liability by Ld. CIT(A) as made by the AO.

1 Income from House property Rs 9,60,71,661/- 2 Income from business (-) Rs 15,47,79,024/-

Income from other sources Rs 72,36,6747- Rs 5,14,70,689/- Gross Total income/ Total Income On perusal of the profit and loss account it is seen that only income from asset hiring of Rs 72,00,000/- and balance written back of Rs 26,296/- are offered for tax as a business income. Balance receipt is either shown as income from house property or income from other sources. On carefully perusal of the profit & loss account and balance sheet, it is seen that the appellant has acquired the inventories of Rs 153,59,95,449/- during the year. Total inventories as on 31.03.2012 is Rs 155,12,01,450/-. The inventories contain debentures and deep discount bonds which regain unsold at the year end. It is also seen that, during the year, the appellant has claimed the finance cost of Rs 311,20,00,841/- out of which Rs 296,18,97,878; - is claimed for the expenses u/s 57 of the Act, that is, balance finance cost of Rs.15,01,02,963/- is claimed as business expenses. It is found that because of such a heavy finance cost the appellant has claimed a heavy business loss. In the previous year, though the appellant has sold the shares & securities of Rs 31.66cr there was a total finance cost of Rs 1.43 cr only. The increase in finance cost is apparently attributable for the purpose of acquiring the inventories and non receipt of trade receivable of Rs 301,90,45,296/-. During the year under consideration only a heavy receipt of interest is appearing and no other receipt is appearing which indicates that the trade receivable is the interest receivable and that is receivable from the group concern Imperial Consultants and Securities Pvt Ltd. It is pertinent to mention here that as far as the profit and loss account is concerned for the year under consideration, finance cost of Rs 15.01 cr is the direct cost attributable for acquiring the inventory which has to be capitalised by the appellant. But the appellant has claimed it in the profit and loss account. Under these circumstances, it cannot be held that the profit and loss account prepared by the appellant gives the true profit for the year under consideration. Further, I find merit in the AO's contention that the transaction between the group concerns is a colourable transaction. It is seen that Essar Oil Limited is not eligible to transfer the sales tax liability. Earlier, the sales tax liability was acquired by one of the group 7 ITA No.7332/M/2016 M/s. Essar House Pvt. Ltd. concern called India Securities Limited which is registered at Essar House" which subsequently transferred the same to the appellant. It is seen that investment is made in the group concern, the EOL can also invest this amount in the group concern. Such transactions entered into by group concerns is definitely nothing but a "colourable device" to avoid tax. Therefore, the explanation submitted by the appellant company is not wholly acceptable but at the same time it can not be ignored that the appellant has incurred the expenses to earn the income. Therefore/ keeping in view the totality of the circumstances, it is reasonable to confirm the addition of Rs 15 cr. Therefore, AO is directed to delete the balance addition of Rs 281,29,00,0007-. Hence the Ground no 3 of the appeal is partly allowed.

12. The Ld. D.R. relied heavily on the order of AO and submitted that the said transaction was deliberately entered into between two group concerns in order to circumvent the tax liability. The Ld. D.R. drew our attention to para 5 of the assessment order wherein it is stated that Essar Oil Ltd. was entitled to collect sales tax and defer the payment of the said sales tax up to 14.08.2020. The said deferred tax liability was payable in six installments starting from 2021-22. Essar Oil Ltd. desired to assign the above sales tax liability in favour of any other entity by paying the present value of such liability and the present value was to be worked out by discounting the sales tax liability as per the discounting rate based on the yield of government securities and rate of interest offered by the schedule banks on the fixed deposits. The Ld. D.R. submitted that there is no force in the arguments of the Ld. A.R. that assessee desired to have defeasance of the above tax liability. The Ld. D.R. relied heavily on the order of Ld. CIT vs. Gopinathan 248 ITR 449 SC as has been relied upon by the AO. The Ld. D.R. submitted that there is the transaction between the two group concerns to evade the tax liability and is a colourable transaction especially in view of the Hon’ble Supreme 8 ITA No.7332/M/2016 M/s. Essar House Pvt. Ltd. Court decision and therefore submitted that the order of Ld. CIT(A) may be set aside and that of the AO may be restored.

9 ITA No.7332/M/2016 M/s. Essar House Pvt. Ltd. of the sales tax liability and as a result the payment for the same had to be made immediately to the government. Thus as per the terms of the agreement dated 31.3.20019 , Essar Oil Ltd. demanded Rs.1805.52 crores being money paid by it to the assessee along with interest. In order to make payment to Essar Oil Ltd, the assessee encashed the zero coupon bonds of Imperial Consultants and Securities Pvt. Ltd. The assessee received interest income from zero coupon bonds of Rs.296.90 crores and same was credited to P&L Account. Similarly, the assessee has to pay interest of Rs.296.19 crores to the Essar Oil Ltd. which was debited to the P & L Account. In the computation of income the income was offered as income from other sources and interest expenditure was claimed against the said income under section 57(iii) of the Act. The Ld. A.R. argued that since the amount received from Essar Oil Ltd. was invested in the zero coupon bonds of Imperial Consultants and Securities Pvt. Ltd., any interest payable on the money received from Essar Oil Ltd. is allowable as deduction under section 57(iii) of the Act against the interest income received from the zero coupon bonds as there is a direct nexus between the amount received from Essar Oil Ltd. and amount invested in zero coupon bonds of Imperial Consultants and Securities Pvt. Ltd. Hence, interest paid on the sale tax liability to Essar Oil Ltd. is allowable as deduction under section 57(iii) of the Act against the interest earned from the zero coupon bonds. The Ld. A.R. submitted that the reliance of the AO on the decision of Hon’ble Supreme Court in the case of CIT vs. Gopinathan 248 ITR 449 is wrong as in the said case the assessee had surplus funds which 10 ITA No.7332/M/2016 M/s. Essar House Pvt. Ltd. were invested in fixed deposits. On the security of these fixed deposits, the assessee took a loan from bank and paid interest. It was under these facts, the Hon’ble Supreme Court held that interest paid on money borrowed from bank is not allowable under section 57(iii) of the Ac against the interest income on fixed deposits. Since, the assessee had not borrowed the money and invested in the fixed deposits, the Ld. A.R. submitted that in the present case there is a direct nexus between the amount of Rs.1805.52 crores received from Essar Oil Ltd. on which interest is paid to the tune of Rs.296.19 crores and the said amount of Rs.1805.52 crores was given to Imperial Consultants and Securities Pvt. Ltd. on which interest to the tune of Rs.296.19 crores was earned and hence the interest paid is allowable deduction against the interest income as it is not a case where surplus funds were lying with the assessee and the same were invested for earning interest income. The Ld. A.R. submitted that detailed submissions were also made before the AO vide letter dated 27.03.2015 which is filed at paper book page No.124 and Ld. CIT(A) has reproduced the same in the appellate order at page No.3 to 10. The ld AR argued that it is only after considering the said submissions of the assessee, Ld. CIT(A) has deleted the disallowance of interest made by the AO. The Ld. A.R. contended that practically there is no real income in that entire transaction as is clear from the fact that whatever income was earned by the assessee has a corresponding liability attached to it and hence assessee has not gained anything from the said transaction. The Ld. A.R. submitted that income received from Imperial Consultants and Securities Pvt. Ltd. can

11 ITA No.7332/M/2016 M/s. Essar House Pvt. Ltd. not be taxed without considering the expenditure in the form of interest payment to Essar Oil Ltd. Therefore, the conclusion of the AO that this is a colourable devise was totally wrong and can not be accepted. The Ld. A.R. further argued that the said transaction was treated as colourable devise by the AO in the light of subsequent judgment of Hon’ble Supreme Court wherein it was held that Essar Oil Ltd. was never entitled to sales tax incentive scheme. The Ld. A.R. submitted that on the date of entering into the transaction between the assessee and Essar Oil Ltd., the later was very much entitled to the said scheme and such transaction was entered into between the two entities prior to the judgment of the Hon’ble Supreme Court. The Ld. A.R. submitted that it was a commercial transaction entered into by both the parties and only subsequently , Essar Oil Ltd. became ineligible for the said scheme by a subsequent judgment of Hon’ble Supreme Court. The Ld. A.R. therefore submitted that the subsequent decision of the Hon’ble Supreme Court holding that Essar Oil Ltd. is not entitled to the scheme would not make the transaction a colourable devise more so merely because transaction was between group concerns and thus the conclusion of the AO is based on presumptions and assumptions without any material on record.

12 ITA No.7332/M/2016 M/s. Essar House Pvt. Ltd. Ltd. decided to assign the sales tax liability to another entity at the present value which was worked out at Rs.1805.52 crores. The sales tax liability was assigned in favour of the assessee and the assessee received Rs. 1,805.52 Cr from Essar Oil Ltd. from time to time. The said money received by the assessee was invested in zero coupon bonds of Imperial Consultants and Securities Pvt. Ltd. In the meantime the Hon’ble Supreme Court delivered a judgment in a case filed by the Sales Tax Department, Government of Gujarat wherein the Hon’ble Supreme Court held that Essar Oil Ltd. was not entitled to sales tax incentive scheme following which the Essar Oil Ltd. was asked to make the payment to the government exchequer. As per the agreement between Essar Oil Ltd. and the assessee the money was to be paid along with interest, thus assessee had to pay interest of Rs.296.19 crores to Essar Oil Ltd. The assessee enashed the bonds and received interest income on the said zero coupon bonds of Rs.296.90 crores. The assessee credited the income by way of interest on zero coupon bonds in the P&L account while interest paid was charged in the P&L Account. While making the computation of income, the assessee offered the said income under the head of other sources by claiming interest paid to Essar Oil Ltd. of Rs.296.19 crores under section 57(iii) of the Act. After the examining the facts, we are of the considered opinion that there is a direct nexus between the money received by the assessee from Essar Oil Ltd. upon the assignment of sales tax liability and therefore there is a nexus between the interest received from the zero coupon bonds and interest liability which the assessee was liable to pay as per the 13 ITA No.7332/M/2016 M/s. Essar House Pvt. Ltd. agreement on the said assigned amount accordingly the same is allowable under section 57(iii) of the Act. We have carefully perused the decision passed in the case of CIT vs. Gopinathan (supra) and observed that the facts in the case are distinguishable from the facts of the present case. In the said case the assessee had surplus funds which were invested in fixed deposits and the assessee earned interest on such fixed deposits. Therefore, Hon’ble Supreme Court held that interest paid on money borrowed from the bank against the security the fixed deposits is not allowable under section 57(iii) of the Act. Since the income earned by the assessee by way of interest from zero coupon bonds had a corresponding liability attached to it. The assessee has not gained anything from the said transaction and thus it is incorrect to say that interest has to be taxed without allowing deduction under section 57(iii). In our opinion, the said transaction is not a sham transaction in view of the fact that the assignment of liability on account of sales tax and VAT has taken place at present value has taken place on a date which was prior to the decision of the Hon’ble Supreme Court. It was clearly a commercial transaction entered into between two entities though related and therefore not colourable transactions to circumvent tax liability. Accordingly, we hold that Ld. CIT(A) has passed a very reasoned and speaking order which does not require any interference at our end.

ITA No.7332/M/2016 (Assessee’s appeal)

14 ITA No.7332/M/2016 M/s. Essar House Pvt. Ltd. 15. The only issue raised by the assessee is against the disallowance of interest expenditure amounting to Rs.15,01,02,963/- on the ground that same is capital in nature as the money was utilized for purchase of inventories and therefore required to be capitalized during the year.

15 ITA No.7332/M/2016 M/s. Essar House Pvt. Ltd. to the counsel of the assessee, the said expenditure is allowable expenditure under section 36(1)(iii) of the Act. The Ld. A.R. pointed out that Ld. CIT(A) recorded a finding of facts that said interest was incurred on borrowings used for acquiring inventories which can be verified from the schedule of long term borrowings in the balance sheet wherein it is evident that assessee has borrowed Rs.145.25 crore from Indiabulls Financial Services Ltd. during the year and has invested the same in the inventories. The Ld. A.R. submitted that the money borrowed was for the purpose of inventories and interest paid on such borrowings can not be capitalized but allowable as revenue expenditure under section 36(1)(iii) of the Act. The Ld. A.R. relied on the decision of Tribunal in the case of ACIT vs. Aditya Propcon (P) Ltd. in ITA No.762/JP/2012 dated 30.01.2014 wherein it has been held that amount borrowed for the purpose of acquiring inventories, then interest paid on the said amount is allowable as deduction under section 36(1)(iii) of the Act. The Ld. A.R. submitted that the said order of the Tribunal has been upheld by the Rajastan High Court in DB ITA No.82/2014 & ors dated 10.10.2017. The Ld. A.R. thus prayed that in view of the said ratio laid down, the disallowance of expenditure made by the Ld. CIT(A) may kindly be deleted.

Order pronounced in the open court on 04.04.2019.