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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
Before: SHRI SHAMIM YAHYA, AM & SHRI SANDEEP GOSAIN, JM
आयकर अपील�य अ�धकरण “ई” �यायपीठ मुंबई म�। IN THE INCOME TAX APPELLATE TRIBUNAL “E” BENCH, MUMBAI BEFORE SHRI SHAMIM YAHYA, AM AND SHRI SANDEEP GOSAIN, JM आयकर अपील सं./I.T.A. No. 1849/Mum/2015 (�नधा�रण वष� / Assessment Year: 2009-10) Essar Power Limited Addl. CIT, Range – 5(1) बनाम/ Equinox Business Park, Tower 2, Mumbai Off BKC, LBS Marg, Kurla (W), Vs. Mumbai-400 070 �थायी लेखा सं./जीआइआर सं./PAN/GIR No. AAACE 0895 J (अपीलाथ� /Appellant) (��यथ� / Respondent) : अपीलाथ� क� ओर से / Appellant by : Shri Vijay Mehta ��यथ� क� ओर से/Respondent by : Shri K. S. Rajendrakumar सुनवाई क� तार�ख / : 18.08.2017 Date of Hearing घोषणा क� तार�ख / : 17.10.2017 Date of Pronouncement आदेश / O R D E R Per Shamim Yahya, A. M.: This appeal by the assessee is directed against the order of the Assessing Officer (A.O.) passed u/s. 144C(13) r.w.s. 143(3) of the Income Tax Act, 1961 (‘the Act’ hereinafter) dated 16.01.2015 pertaining to the assessment year (A.Y.) 2009-10, passed pursuant to the direction of the ld. Dispute Resolution Panel (DRP)-1, Mumbai, direction dated 31.12.2013.
The grounds of appeal read as under: 1. The Assessing Officer has erred in assessing the income of the appellant at Rs.12,31,49,020/- under normal provisions of the Act and assessing the
2 ITA No. 1849/Mum/2015 (A.Y. 2009-10) Essar Power Limited vs. Addl. CIT book profit under section 115JB of the Act of at Rs.32,21,56,445/-vide assessment order passed under section 143(3) read with section 144C of the Act. 2. The Assessing Officer has erred in assessing the interest income of Rs. 3,89,65,319/- under the head "income from other sources" instead of business income. 3. The Assessing Officer has erred in making addition of Rs. 3,65,00,326/-in respect of provision for income tax recoverable from Gujarat Electricity Board and Essar Steel Ltd. while computing normal income under the Act as well as computing book profit u/s. 115JB of the Act. 4. The Assessing Officer has erred in disallowing Rs.43,39,710/-, being depreciation claimed on the major overhauling expenditure capitalized in A.Y. 2003-04. 5. The Assessing Officer has erred in disallowing Rs.6,53,14,500/- u/s. 14A of the Act read with Rule 8D while computing normal income under the Act and adding the same while determining book profit u/s. 115JB of the Act. 6. The Assessing Officer has erred in disallowing Rs.3,04,65,754/-, being interest expenditure claimed under section 36(l)(iii) of the Act. 7. The learned Assessing Officer has erred in initiating penalty proceedings under section 271(l)(c) of the Act.
The ld. Counsel of the assessee has submitted an additional ground also which reads as under: 1. The order passed by the Assessing Officer u/s. 144C r.w.s 143(3) of the Act dated 16.01.2015 in conformity with the direction of the Hon’ble DRP is time barred and hence is bad in law.
In the additional ground, the assessee has agitated that the order passed by the A.O. u/s. 144C r.w.s. 143(3) of the Act dated 16.01.2015 pursuant to the direction of the ld. DRP is time barred, hence, bad in law. In connection with the additional ground, the ld. Counsel of the assessee has submitted that the assessment order passed is time barred, hence invalid, as it is passed beyond limitation period. It has been submitted that the additional ground of appeal purely raises the question of law and all relevant materials are already on record. Hence, placing reliance upon the following Hon’ble Apex Court and Hon’ble High Court decision, it has been prayed that the additional ground may be admitted:
3 ITA No. 1849/Mum/2015 (A.Y. 2009-10) Essar Power Limited vs. Addl. CIT 1. National Thermal Power Co. Ltd. v. CIT [1998] 229 ITR 383 (SC) 2. Jute Corporation of India v. CIT [1991] 187 ITR 688 (SC) 3. Ahmedabad Electricity Co. Ltd. v. CIT (1993) 199 ITR 351 (Bom) (FB)
Upon hearing both the Counsel and perusing the record, we admit with the additional ground and, accordingly, proceed to adjudicate the additional ground raised. In this case, the DRP has passed the direction dated 31.12.2013. As per the ld. Counsel of the assessee, the A.O. has time to pass the consequential order till 28.02.2014 as per section 144C(13) r.w.s. 143(3) of the Act. In the meanwhile, the assessee has filed writ petition before the Hon'ble jurisdictional High Court. The Hon'ble jurisdictional High Court directed the A.O. not to pass the final assessment order till the disposal of the petition. According to the assessee’s counsel, the A.O. had further time of 30 days to pass the consequential order. Vide order dated 18.11.2014, the Hon'ble Bombay High Court directed the A.O. to pass the final assessment order after deleting the transfer pricing adjustment on issue of equity shares. As per the contention of the assessee, the time limit for passing the order u/s. 144C(13) r.w.s. 143(3) of the Act expired on 18.12.2014 being 30 days from 18.11.2014. Hence, it is the contention of the assessee that since the final assessment order was passed by the A.O. on 16.1.2015, the same is beyond the permissible time limit. The ld. Counsel of the assessee has given a chart depicting the chronology of the events as under: Sr. No. Date Particulars 1. 02.01.2014 Order passed by the Hon’ble DRP dated 31.12.2013 received by Assessing Officer. The Assessing Officer had time to pass consequential order till 28.02.2014 as per s. 144C(13) r.w.s. 143(3) of the Act 2. 29.01.2014 Order of the Hon'ble Bombay High Court directing the Assessing Officer not to pass the final assessment order till disposal of Writ petition. The Assessing Officer had a further time of 30 days to pass the consequential order as per s. 144C(13) r.w.s. 143(3) of the Act.
4 ITA No. 1849/Mum/2015 (A.Y. 2009-10) Essar Power Limited vs. Addl. CIT 3. 18.11.2014 Order of the Hon'ble Bombay High Court directing the Assessing Officer to pass the final assessment order after deleting the transfer pricing adjustment on issue of equity shares. 4. 18.12.2014 Time limit for passing order u/s. 144C(13) r.w.s 143(3) of the Act expired being 30 days from 18.11.2014 5. 16.01.2015 Order passed u/s. 144C(13) r.w.s. 143(3) of the Act by the Assessing Officer.
In this connection, the ld. Counsel of the assessee relies on the case laws as
under:
Honda Trading Corporation vs. Dy. CIT in ITA No.1132/Del/2015 dated 15.09.2015 (Delhi-Trib) 2. Mahindra & Mahindra Ltd. vs. Dy. CIT [2009] 30 SOT 374 (Mum-SB)
Per contra, the ld. Departmental Representative (DR) has submitted that in this case the Hon’ble High Court has passed an order. It is in pursuance that the Hon'ble High Court order that the A.O. has passed the order. Hence, he submitted that the order has been passed well within the mandated time as per section 153(6)(i) of the Act. Further, the ld. Departmental Representative placed reliance on the following case law:
Himalayan Drug Co. vs. Dy. CIT – ITAT (Bangalore) 84 Taxmann.com 8/ IT(TP) Appeal No. 807 (Bang.) of 2016 dated 21.06.2017
We have carefully considered the submissions and perused the records. We can gainfully refer to the provision of section 144C(13) r.w.s. 143(3) of the Act. The said section reads as under: Reference to dispute resolution panel. 144C. (1) The Assessing Officer shall, notwithstanding anything to the contrary contained in this Act, …………. (2) …………..
5 ITA No. 1849/Mum/2015 (A.Y. 2009-10) Essar Power Limited vs. Addl. CIT (13) Upon receipt of the directions issued under sub-section (5), the Assessing Officer shall, in conformity with the directions, complete, notwithstanding anything to the contrary contained in section 1536[or section 153B], the assessment without providing any further opportunity of being heard to the assessee, within one month from the end of the month in which such direction is received. 9. We further find that section 153 dealing with the time limit have completion of assessment, reassessment and re-computation provides by way of sub section (6) as under: Time limit for completion of assessment, reassessment and recomputation. 153. (1) No order of assessment62 shall be made under section 143 or section 144 at any time after (2) ……….. (6) Nothing contained in sub-sections (1) and (2) shall apply to the following classes of assessments, reassessments and recomputation which may, subject to the provisions of sub-sections (3) and (5), be completed— (i) where the assessment, reassessment or recomputation is made on the assessee or any person in consequence of or to give effect to any finding or direction63 contained in an order under section 250, section 254, section 260, section 262, section 263, or section 264 or in an order of any court in a proceeding otherwise than by way of appeal or reference under this Act, on or before the expiry of twelve months from the end of the month in which such order is received or passed by the Principal Commissioner or Commissioner, as the case may be; or (ii) where, in the case of a firm, an assessment is made on a partner of the firm in consequence of an assessment made on the firm under section 147, on or before the expiry of twelve months from the end of the month in which the assessment order in the case of the firm is passed. 10. Now in this case, it is the contention of the ld. Counsel of the assessee that the original direction of DRP was dated 30.12.2013. As per section 144C(13), the A.O. had one month from the end of the month in which such direction was received to pass the order. However, the Hon'ble Bombay High Court on 29.01.2014 directed the A.O. not to pass the final assessment order. On 18.11.2014, the Hon'ble Bombay High Court directed the A.O. to pass the final assessment order after deleting the
6 ITA No. 1849/Mum/2015 (A.Y. 2009-10) Essar Power Limited vs. Addl. CIT transfer pricing adjustment. Now it is the contention of the assessee that period of one month as mandated u/s. 144C(13) commenced from the date of passing of the Hon'ble Bombay High Court dated 18.11.2014. Thus according to the ld. Counsel of the assessee, the A.O. had time limit upto 18.12.2014, i.e., within 30 days from 18.11.2014 to pass the assessment order. Since the assessment order was passed on 16.01.2015 beyond the date of 18.12.2014, hence as per the ld. Counsel of the assessee the same is time barred. We find that in this case, the Hon’ble High Court has passed an order dated 18.11.2014 in which certain directions have been given to the A.O.
We may gainfully refer to the Hon’ble High Court’s order dated 18.11.2014 as under: At the instance of the Counsel the petition is taken up for final disposal at the stage of admission. 2) This petition challenges the following orders:- a) Order dated 30 January 2013 passed by the TPO under Section 92CA(3) of the Income Tax Act, 1961 (“the Act”); b) Draft Assessment Order dated 26 March 2013 passed by the Assessing Officer; and c) Order dated 31 December 2013 passed by the DRP under Section 144C(5) of the Act. 3) The impugned orders have taken a view that the issue of shares to non resident Associated Enterprises gives rise 'to income out of an International Transaction under Chapter X of the Act. This is to the extent of the short fall, that is, the difference between the Arms Length Price (ALP) of issue of equity shares and the actual issue price, is sought to be brought to tax as income.
4) Mr. Pardiwala, learned Counsel for the petitioner, submits that the issue stands concluded in favour of the petitioner by the decision of this Court in Vodafone India Services Private Ltd. Vs. Union of India 368 ITR Page 1 (Vodafone-IV). This Court in a subsequent decision in W. P. No.589 of 2014 filed by Vodafone India Services Pvt. Ltd. vs. Union of India (Vodafone V) rendered on/13 October 2014 has broadly summarized its finding in Vodafone IV as under:- "(i) The sine-qua-non- to apply Chapter X of the Act would be arising of Income under the Act out of an International Transaction. This
7 ITA No. 1849/Mum/2015 (A.Y. 2009-10) Essar Power Limited vs. Addl. CIT income should be chargeable under the Act, before Chapter X can be applied; (ii) The definition of income does not include within its scope capital receipts arising out of capital account transaction unless so specified in Section 2(24) of the Act as income; (iii) There is no charge in the Act to tax amounts received and/or arising on account of issue of shares by an Indian entity to a non- resident entity in Sections 4,5,15,22,28,45 and 56 of the Act. This is as it arises out of Capital Accounts transaction and, therefore, is not income; (iv) Chapter X of the Act does not contain any charging provision but is a machinery provision to arrive at ALP of a transaction between Associated Enterprises; and (v) Chapter X of the Act does not change the character of the receipts but only permits re-quantification of income uninfluenced by the relationship between the Associated Enterprises".
5) Mr, Tejveer Singh, learned Counsel appearing for the Revenue very fairly states that the issue arising in the present petition stands covered in favour of the petitioner by the decision of this Court in Vodafone-IV.
6) This Court by an order dated 29 January 2014 had restrained the Assessing Officer from acting further in pursuance of the impugned order dated 31 December 2013 passed by the DRP. The above stay continues till today. Thus, no final assessment order has been passed till date.
7) In view of the above, the directions of the DRP to tax short fall in consideration received on the basis of the ALP receivable on the issue of Equity shares to Associated Enterprises are set aside. The Assessing Officer is directed to pass the final assessment order on the above basis.
A reading of the above order of the Hon’ble High Court reveals that the Hon’ble High Court has ordered that the directions of the ld. Dispute Resolution Panel to take shortfall on the consideration received on the basis of the ALP receivable on the issue of equity shares to Associated Enterprises are set aside. The Hon’ble High Court has found the issue covered in favour of the assessee by the decisions rendered in Vodafone India Services Private Ltd. (supra). Hence, the Hon’ble High Court has ordered the A.O. not to comply with ld. Dispute Resolution Panel direction to take shortfall on the consideration received on the basis of ALP recoverable on the issue of
8 ITA No. 1849/Mum/2015 (A.Y. 2009-10) Essar Power Limited vs. Addl. CIT equity shares to Associated Enterprises. Thereafter, the A.O. was directed to pass the final assessment order on the above basis. We find that the above order of the ld. Hon’ble High Court clearly falls under the ambit of provision of section 153(6), in which it has been inter alia provided that orders pursuant to an order of any court in a proceeding otherwise than by way of appeal or reference under this Act should be passed before the expiry of 12 months from the end of the month in which such order is received or passed. Admittedly, the assessment order in this case has been passed on 16.1.2015 which is well within 12 month from November, 2014 in which month the Hon’ble High Court has passed the order. Hence, we find that the order passed by the A.O. is well within the time limit mandated as per section 153(6) which in our considered opinion is applicable in this case.
The time limit prescribed in section 144C(13) refers to the time limit upon receipt of the directions of the DRP within which the A.O. has to pass the order. Thus as per section 144C(13), when such an assessment is done upon the receipt of direction from the ld. Dispute Resolution Panel, the time limit of one month is mandatory. However, in the present case, as discussed hereinabove, the order passed by the Assessing Officer is not upon the receipt of the directions issued by the ld. Dispute Resolution Panel, but upon the receipt of an order by the Hon’ble High Court, wherein the direction of the ld. Dispute Resolution Panel has been modified. Hence, the Assessing Officer has to pass the order under direction of ld. Dispute Resolution Panel upon which the Hon’ble High Court has passed as order. Hence, this is clearly a case wherein the provisions of section 153(6) come into play. As already found hereinabove, the assessment order passed by the Assessing Officer is well within the time limit mandated as per section 153(6) of the Act. Hence, the additional ground raised by the assessee stands dismissed.
9 ITA No. 1849/Mum/2015 (A.Y. 2009-10) Essar Power Limited vs. Addl. CIT
The ld. counsel of the assessee relies upon the decision of ITAT Delhi Bench decision in the case of Honda Trading Corporation (supra) and Mahindra & Mahindra Ltd. vs. DCIT 30 SOT 374. Both are not applicable on the facts of the case. In those cases, there was no order from the Hon’ble High Court with reference to which the time limit was to be computed. Hence, this case is distinguishable from these two decisions.
On merits of the issues raised in this appeal, the ld. Counsel of the assessee has submitted that majority of the issues raised are already covered except the ground relating to disallowances of interest expenditure u/s. 36(1)(1) amounting to Rs.3,04,65,754/-. The ld. Departmental Representative does not dispute this proposition. The ld. Counsel has submitted following chart for ready reference: Gr. Issue Amount (Rs.) A.O. DRP Remarks No. Page Page No. No. 1 General 2 Directing the A.O. to treat 5 41 Issue at Sr. No. l(i) and (ii) are covered in interest income on favour of assessee vide i) Order of tribunal in assessee's own case for i) loan given to employees 1,078 AY 2003-04 reported in 142 ITD 251 (Mum) ii) margin deposits 1,78,86,221 (Page No.23-24 of PB, Para Nos. 46 to 49) iii) interest on ICDs 77,10,958 ii) Order of tribunal in assessee's own for AYs. iv) Interest on Fixed deposits 1,33,67,062 2004-05 to 2006-07 being ITA Nos. 3555,3711/M/2008 and 2492, 2535/M/2009 dated 12.7.2013 (Page Nos. 33, 37; para nos. 12, 25) 3 Confirming the addition for the 3,65,00,326 8-17 41,42 Addition under normal provisions of the Act provision of income tax Covered against the assessee vide recoverable from GUVNL and i) Order of tribunal in assessee’s own case for Essar Steel Ltd. while AY 2003-04 reported in 142 ITD 251 (Mum) computing income under the (page nos. 15 to 23 of PB, para nos. 10 to 41) normal provision of the Act and for purpose of book profit u/s. ii) Order of tribunal in assessee’s own case for 115JB of the Act AY’s 2004-05 to 2006-07 being ITA Nos. 3555, 3711/M/2008 and 2492, 2535/M/2009 dated 12.07.2013 (Page Nos. 30-32,35-36; Para Nos. 6-8, 18, 23). Addition while computing book profit u/s. 115 JB of the Act i) Covered in favour of assessee vide order of tribunal in assessee’s own case for AY 2008-09
10 ITA No. 1849/Mum/2015 (A.Y. 2009-10) Essar Power Limited vs. Addl. CIT being MA No. 67/Mum/2014 arising out of ITA No: 7413/Mum/2011 dated 02.05.2014 (Page Nos. 52-53, 4-5) 4 Disallowance of depreciation 43,39,710 17 42 This ground of appeal is not pressed 5 Confirming the disallowance of 6,53,14,500 18-35 42-42 Assessee has not received any exempt income expenditure ½ % as per Rule during the year 8D r.w.s 14A of the Act under normal provisions as well as while computing book profit u/s. 115JB of the Act 6 Disallowance of interest 3,04,65,754 36-42 43 expenditure u/s. 36(1)(iii) of the Act.
Now we proceed with the adjudication of the issues on merits.
Ground no. 1: This is a general ground.
Ground no. 2 relating to interest income. The detail of the breakup of the interest in this case is as under: Gr. Issue Amount (Rs.) No. 2 i) loan given to employees 1,078 ii) margin deposits 1,78,86,221 iii) interest on ICDs 77,10,958 iv) Interest on Fixed deposits 1,33,67,062
As per the above chart submitted by the learned counsel of the assessee, the interest mentioned in item number (i) and (ii) are covered in favour of the assessee by the decision of the tribunal in assessee's own case mentioned above.
The ld. DR did not dispute this proposition. Accordingly, we hold that respectfully following the precedent in assessee's own case, these interest incomes mentioned in item number (i) and (ii) above should be treated as income from business.
11 ITA No. 1849/Mum/2015 (A.Y. 2009-10) Essar Power Limited vs. Addl. CIT 20. As regards the interest on ICDs and interest on fixed deposits, the ld. Counsel of the assessee fairly conceded that these should be treated as income from other sources. Accordingly, we uphold the order's of the authorities below, confirming the treatment of this interest income as income from other sources.
Ground no. 3 relates to the addition for the provision of income tax recoverable from Gujarat Electricity Board and Essar Steel Ltd while computing normal income under the Act as well as computing book profit u/s. 115 JB of the Act. The issue as regards the addition under the normal provisions of the Act is covered against the assessee by the tribunal's order in assessee's own case as mentioned in the chart above. Accordingly, under the normal provisions of the Act, we confirm the addition for the provisions made in this regard.
As regards the addition while computing the book profit u/s. 115 JB of the Act is concerned, the same is covered in favour of the assessee by the decision of ITAT in assessee's own case as mentioned in the chart above. Hence, we set aside the order of the authorities below on this issue and hold that no addition in this regard is sustainable while computing book profit u/s. 115 JB of the Act.
Ground no. 4 relating to deprecation. The ld. Counsel of the assessee submitted that he shall not be pressing for this ground. Hence, this ground is dismissed as not pressed.
Ground no. 5 is relating to disallowance u/s. 14A: The Assessing Officer had made a disallowance u/s. 14A read with Rule 8D, amounting to Rs.6,53,14,500/- being disallowance on account of exempt income. The assessee plea before the authorities below that it has not earned any exempt income and, hence, no disallowance is called for has been rejected. The ld. Dispute Resolution Panel while deciding this issue of the assessee has referred to the ITAT Special Bench
12 ITA No. 1849/Mum/2015 (A.Y. 2009-10) Essar Power Limited vs. Addl. CIT decision in the case of Cheminvest Ltd. vs. ITO [2009] 121 ITD 318 (Del)(SB). The ld. Counsel of the assessee has submitted that the decision of the Special Bench relied upon by the ld. DRP panel has already been set aside by Hon’ble Delhi High Court in the case of Cheminvest Ltd. in 281 CTR 447 (Del). He further submitted that the Hon'ble jurisdictional High Court has also followed the above decision of the Hon’ble Delhi High Court in the case of Pr. CIT v/s. M/s. Ballarpur Industries Ltd. in ITA No. 51 of 2016 dated 13.10.2016. Hence, the ld. Counsel pleaded that no disallowance u/s. 14A is called for as the assessee has not earned any exempt income. The ld. Counsel further submitted that since the purpose of the investment is to obtain controlling stake in the subsidiary group company, no disallowance u/s. 14A should be done. For this proposition, the ld. Counsel placed reliance upon several case laws.
Upon careful consideration, we find that it has been held by Hon’ble Delhi High Court as well as Hon’ble jurisdictional High Court that no disallowance u/s. 14A is required when the assessee has not earned any exempt income. We may gainfully refer to the decision of Hon’ble jurisdictional High Court in the case of a Ballarpur Industries Ltd. (supra) as under: By this income tax appeal, the appellant-Department challenges the orders of the Commissioner of Income Tax and the Income Tax Appellate Tribunal, Nagpur. On hearing the learned Counsel for the Department and on a perusal of the impugned orders, it appears that both the Authorities have recorded a clear finding of fact that there was no exempt income earned by the assessee. While holding so, the Authorities relied on the judgment of the Delhi High Court in Income Tax Appeal No. 749/2014, which holds that the expression "does not form part of the total income" in Section 14A of the Income Tax Act, 1961 envisages that there should be an actual receipt of the income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. The Income Tax Appellate Tribunal held that the provisions of Section 14A of the Income Tax Act, 1961 would not apply to the facts of this case as no exempt income was received or receivable during the relevant previous year. It is not the case of the Assessing Officer that any actual income was received by the
13 ITA No. 1849/Mum/2015 (A.Y. 2009-10) Essar Power Limited vs. Addl. CIT assessee and the same was includible in the total income. In the facts of the case, the Authorities held that since the investments made by the assessee in the sister concerns were not the actual income received by the assessee, they could not have been included in the total income. The findings of facts recorded by both the Authorities do not give rise to any substantial question of law.
Hence, respectfully following the precedent, we set aside the orders of the authority below and hold that since the assessee has not earned any exempt income, no disallowance u/s. 14A is required.
Ground no. 6 relating to disallowance of interest expenditure claimed: Brief facts on this case and the reasoning of the assessing officer making the disallowance as emanating from the order of the assessing officer reads as under: 10. Disallowance u/s.36(11(iii) 10.1 During the year, assessee has taken Inter Corporate Deposit (ICD) from Vadinar Power Company Ltd. (VPCL) amounting to Rs. 50 Cr on 27th June '08. The said ICD was carrying interest rate of 8% p.a. Total interest expense on said ICD debited to P & L account by the assessee is Rs. 3,04,65,754/-. It is further noticed that during the year, the assessee has paid to Vadinar Power Company Ltd. (VPCL) Rs.59.75 Cr on various dates towards subscribing equity shares of VPCL. Assessee was asked to justify as to why interest expense of Rs. 3.05 Cr as mentioned above should not be disallowed as it has taken interest bearing ICD from the group company during the year and given advance to the said company for investment in equity shares of that company during the year. 10.2 In response to the above, assessee, vide letter dated 25.03.2013, has furnished its submissions contending that the amount of ICD taken were utilized for repayment of principal portion of existing loans however, it was stated that the advance given for equity shares were sourced from amount received from assessee's holding company by issuance of shares of assessee. It was also contended that ICD was taken from VPCL after advance towards equity was infused into VPCL and there is no linkage between ICD taken and advance for equity given to VPCL. 10.3 The submissions made by the assessee as also the documents furnished in support of its contentions have been carefully examined. From the Bank
14 ITA No. 1849/Mum/2015 (A.Y. 2009-10) Essar Power Limited vs. Addl. CIT
summary furnished by the assessee, it is noticed that the assessee has given sums aggregating to Rs.59.75 Crore to VPCL on various dates. It is further noticed that the assessee has received ICD of Rs.50 Cr from VPCL on 27.06.2008. The Ledger account of Vadinar Company Ltd. (Advance Towards Equity shares) as appearing in the books of assessee is as under: Posting Text Amount Cumm. Balance ADVANCE ISSUE OF Date TOWARDS SHARES EQUITY
Opening Balance 499.780,001.00 499,780,001.00
25.06.2008 VADINAR POWER 110,000,000.00 609,780.001.00 110,000,000.00 CO.LIMITED- ADV.AGST.EQUITY
03.07.2008 VADINAR POWER 10,000,000.00 619,780,001.00 10,000,000,00 CO.LIMITED- ADV.AGST.EQUITY
01.09.2008 VADINAR POWER 50,000,000.00 669,780,001.00 50,000,000.00 CO.LIMITED- ADV.AGST.EQUITY
17.09.2008 VADINAR POWER 85,000,000.00 754,780,001.00 85,000,000.00 CO.LIM1TED- ADV.AGST.EQUITY
29.09.2008 FV@RS.10PER SHARE- (754,780,000.00} 1.00 (754,780,000.00) TOTAL SH 75478000
27.11.2008 VADINAR POWER 10,000,000.00 10,000,001.00 10,000,000.00 CG.LIMITED- ADV.AGST.EQUITY
12.01.2009 VADINAR POWER 150,000,000.00 160,000,001.00 150,000,000,00 CO.LIMITED- ADV.AGST.EQUITY
12,01.2009 FV@RS.10PER SHARE- (150,000,000.00) 10,000,001.00 (150,000,000.00) TOTAL SH 150000QO
19.03.2009 VADINAR POWER 2,500,000.00 12,500.001.00 2,500,000.00 CO.L1MITED- ADV.AGST.EQUITY
20.03.2009 VADINAR POWER 40,000.000.00 52,500,001.00 40,000,000.00 CO.LIMITED- ADV.AGST.EOUITY
20.03.2009 VADINAR POWER 140,000,000.00 192,500,001.00 140,000,000,00 CO.LIMITED- ADV.AGST.EQUITY
15 ITA No. 1849/Mum/2015 (A.Y. 2009-10) Essar Power Limited vs. Addl. CIT 192,500,001.00 597,500,000.00 (904,780,000.00) Closing balance 192,500,001.00
The Ledger account of Vadinar Power Company Ltd. (ICD) as appearing in the books of assessee is as under:
Posting Date Text Amount Cumm. Balance Opening Balance - 27.06.2008 50 CRS ICD REVD FM VPCL @ 8% ON 27.06.08 (500,000,000.00) (500,000,000.00) Closing balance (500,000,000.00)
From a perusal of the aforesaid two ledger accounts simultaneously, it is evident that there is a opening balance of Rs.49 Crore lying with VPCL at the opening of the year & assessee has given a sum of Rs.11 Crore on 25.06.2008 to M/s.VPCL as advance towards equity shares and on 27.06.2008, the assessee has received Rs.50 Crore on 27.06.2008 from VPCL as ICD. Hence, it is crystal clear that the amount of Rs.50 Crores received as ICD is from the opening balance of Rs.49 Crore and the sum of Rs.ll Crore given by the assessee to VPCL as advance for equity shares during the year and Further, on receipt of Rs.50 Crore from VPCL on 27.06.2008, the assessee has again given certain sums (Rs.1 Crore on 03.07.2008, Rs.5 Crore on 01.09.2008 & Rs.8,5 Crore on 17.09.2008) and subsequently on 29.09.2008, shares of Nos.75478000 were allotted to the assessee. Afterwards, the assessee has again given certain sums as advance for shares (Rs.1 Crore on 27.11.2008, Rs.16 Crore on 12.01.2009 and Rs. 1 Crore on 12.01.2009) for which shares of Nos.1.5 Cr were allotted on 12.01.2009. Similarly, sums of Rs.l.25 Crore, Rs.5.25 Crore & Rs.19.25 Crore were given on 19.03.2009 & 20.03.2009 which were shown as 'advance for equity shares' for which no allotment was made till 31.03.2009. No interest has been charged on the imputed sums, whereas the assessee is paying interest on the ICD. From an analysis of the entire gamut of facts and the flow of funds - inflow & outflow -it clearly transpires that the assessee has taken back its own money given to VPCL as 'advance for equity shares' under the garb of 'ICD' and paid an interest of Rs.3.04 Crore on the very same amount @ 8%. There is a direct nexus between the amount given by the assessee to VPCL in the form of 'advance for shares' and the amount taken by the assessee back in the form of
16 ITA No. 1849/Mum/2015 (A.Y. 2009-10) Essar Power Limited vs. Addl. CIT 'ICD'. In fact it is the same amount that was given by it to VPCL as advance was routed back to the assessee as ICD. In a way, the assessee is creating the liability of interest on its own money. 10.4 Even otherwise, if it was to be stated that there is no direct nexus between the interest bearing borrowed funds and its utilization for investment purposes as required, it is seen from the perusal of the Balance Sheet of the assessee as on 31.03.2009 that though interest free borrowed funds and own funds exceeded the funds on which the interest was required to be paid, however, own funds (capital) and interest free loans have already been invested in the Fixed Assets and Investments in Shares of its subsidiaries & other companies (other than VPCL) as can be seen from the perusal of Balance Sheet and hence are not available for giving advance towards investment in shares of VPCL. 10.5 Section 36(l)(iii) clearly states that the amount of interest paid in respect of borrowed capital will be allowed only if the borrowed capital was used for the purpose of business or profession. The above analysis proves beyond doubt that these transactions are not assessee's genuine business transactions. Since, the interest has been paid on the borrowed capital (ICD) to a group company and subsequently, investments were made in the same company by way of purchase of equity shares of VPCL is not allowable u/s.36(l)(iii) of the Act. 10.6 Since the assessee has claimed interest expense u/s.36(l)(iii), therefore, the onus is on the assessee to prove that the entire borrowed funds were used for the purpose of business and retained in the business during the relevant year. In this respect reliance is placed on case of M/s. Kishanchand Chellaram Vs. CIT [114 ITR 654 (Bom.)]. In this case, it was held that deduction of interest paid on borrowed capital is allowable only if the capital was borrowed as well as used for the purpose of business. The facts of this case are squarely applicable in the case of the assessee. The purpose for which the amount given to VPCL cannot be held as 'business purpose' and assessee has unnecessarily burdened the business with the interest expense on Inter Corporate Deposits (ICD) given by VPCL and finally the amount is seen to have been diverted for investment in the same company, VPCL which has charged interest on the imputed ICD, It has been held in the following case laws that primarily the onus is on the assessee to prove that interest claimed is deductible U/s.36(l)(iii (i) CIT vs. Coimbatore Salem Transport Pvt. Ltd. 61 ITR 480 (Mad.) (ii) Kishinchand Cheliaram vs. CIT 114 ITR 654 (Bom.) (iii) R. Dalmiya vs. CIT 133 ITR 169 (Del.) (iv) CIT vs. M.S.Venkateshwaran 222 ITR 163 (Mad.) (v) K.Somasundaram & Brothers vs. CIT 238 ITR 939 (Mad.)
17 ITA No. 1849/Mum/2015 (A.Y. 2009-10) Essar Power Limited vs. Addl. CIT (vi) CIT vs. Motor General Finance Ltd. 254 ITR 449 (Del.) has confirmed in principle in Motor General Finance Ltd. vs. CU 267 ITR 381 (SC) 7 Further reliance is placed on CIT Vs. Coimbatore Sale Transport Pvt. Ltd. [61 ITR , 487 (Mad)] in which the court has held that it is for the assessee to prove that each of the loan on which interest is paid, was utilized for the purpose of business. Since the assessee has failed to prove the need to borrow funds from VPC and finally utilize its funds for purchase of shares of VPCL to whom it paid interest, therefore, the interest expense claimed by the assessee cannot be allowed as the assessee has failed to discharge onus lying on him. On this issue, reliance Is also placed on CIT vs. M.S. Venkateshwar [222 ITR 939], the Hon'ble Madras High Court has held that the capital borrowed should not only be invested in the business but should continue to remain in the business. If after investment in the business, the return thereon i.e. sale proceeds to the extent that are not crystallized into profits are diverted elsewhere the interest would not be allowable u/s.36(l)(iii) of the Act. In the case of assessee, the assessee has diverted the mixed funds towards purchase of shares of VPCL, therefore, the facts of the case are also applicable in the case of assessee. 10.8 In the case of AOT, 10(1) v, Landmark Builders P. Ltd. I.T.A. No. 2937/Mum/2Q02, it was held by the Hon'ble ITAT that – “the disallowance of interest as made by the AO was completely in conformity with the principles laid down in S.A. Builders v, CIT, 288 ITR 1 (SC). Relying heavily on the judgment in S.A. Builders (supra)" -- - As stated earlier, the High Court, the Tribunal and the income-tax authorities had applied the test of availability of funds u/s 36(l)(iii) which the Hon'ble Supreme Court has disapproved and termed such an approach as erroneous. The test, as mandated by the Hon'ble Supreme Court, in such a case is "really" whether interest free advance has been given as a measure of commercial expediency, In view of such a categorical judgment of the Hon'ble Supreme Court, it is difficult for us to hold that the test of availability of interest-free funds is still applicable and valid for allowing/disallowing the claim of interest u/s 36(l)(iii), What is really relevant is the test of commercial expediency as the. focus of Section 36(l)(iii) is to grant deduction in respect of "the amount of interest paid in respect of capital borrowed for the purposes of the business or profession". It is therefore the test of commercial expediency in giving interest-free funds which is relevant for deciding the issue. The AO has applied the correct test, i.e., the test of commercial expediency to make the impugned disallowance and therefore it is confirmed."
18 ITA No. 1849/Mum/2015 (A.Y. 2009-10) Essar Power Limited vs. Addl. CIT 10.9 The activity of investment in shares cannot be accepted as business activity/ commercial expediency of the assessee. 10.10 If the assessee to submit the direct nexus to prove that investments in shares of VPCL is made out of its own funds, and also the utilization of the borrowed funds which the assessee failed to provide. The onus was on the assessee to prove with evidence and satisfy the assessing officer that interest bearing fund is not diverted for the non interest bearing or non income earning purpose, since deduction on account of interest was being claimed by it. Further, in the process of examination, it has been noted that the assessee has paid interest to its group company and has diverted funds in investments to the same company from where no income is earned. There would be very heavy onus on the assessee to be discharged before the Assessing Officer to show the nexus that borrowed funds was utilized for the purpose of business carried out during the year. In the absence of any evidence having been furnished, the contention of the assessee that borrowed funds were utilized for the purpose of its business cannot be accepted. Entire money in a business entity comes in a common kitty. The monies received as share capital, as term loan, as working capital loan, as sale proceeds etc. do not have any different colour. 10.11 As discussed above the assessee has utilized its common kitty funds in acquiring shares of VPCL (its subsidiary subsequently) from where no business is generated during the year and no income is shown. On the contrary interest expenditure is shown to have been made to the said group company. Thus an amount invested in subsidiary is held to be given for Non Business purpose and without any Commercial Expediency. Considering this the deduction claimed for the interest paid by the assessee is not allowable in view of the decision given by the Hon'ble Supreme Court in the case of M/s 5 A Builders Ltd as reported in 288 JTR 1 (2007). In this case the Apex Court has held that interest paid on borrowed funds is allowable as deduction u/s 36(l)(iii), 37 only if the amounts lent to sister concerns are for the "Purpose of Business" w out of "Commercial Expediency". In view of the above facts the undersigned is not satisfied with the claim of the assessee that borrowed funds are utilized for the purpose of business only as no evidence is furnished in this regard. 10.12 In view of the above, the interest will not be an allowable deduction in respect of funds utilized for any of the above mentioned purposes. Hence, the entire expenditure of Rs.3,04,65,754/- debited to the Profit & Loss account on account of the interest on Inter Corporate Deposit (ICD) was proposed to be disallowed u/s. 36(1)(iii) of the I. T. Act.
19 ITA No. 1849/Mum/2015 (A.Y. 2009-10) Essar Power Limited vs. Addl. CIT 24. Upon objection of the assessee, the ld. Dispute Resolution Panel upheld the action of the Assessing Officer by observing as under: The objection of the assessee is regarding disallowance of interest expenditure of Rs.30,465,754 under section 36(1)(iii) of the Act on the basis that it was not for business purpose. The assessee took an ICD of Rs.50 crores from Vadinar Power Company Limited (‘VPCL’), carrying an interest rate of 8%. Further during the year the assessee paid to VPCL Rs.59.75 crore towards subscribing equity shares on which no interest was received. The assessee claimed that the source of the funds for advance towards equity was the equity infused by the assessee’s parent company, and that the amount was advanced prior to taking of ICD. We have considered the facts of the case and the submissions of the assessee. No direct nexus of non-interest-bearing funds having been used for the purpose of investment has been produced before us. Further despite making a claim regarding commercial expediency no evidence has been placed to demonstrate or justify its claim. Hence, it is clear that the assessee has claimed expenditure u/s. 36(1)(iii) on loans borrowed without demonstrating that it was fully used for the purpose of business of the assessee. Hence we are of the view that the ratio of the decision of honourable ITAT in the case of Landmark Builders Private Limited in ITA No. 2937/Mum/2002, in principle, holding that the test of availability of interest free funds is not applicable unless it is demonstrated that the advance was made as a measure of commercial expediency is also applicable to the facts of the case. Accordingly, the action of the AO is upheld.
Against the above order, the assessee is in appeal before us.
We have heard both the Counsel and perused the records. The ld. Counsel of the assessee submitted that the assessee is a power company; it is making investments as a natural activity. He submitted that the assessee had adequate own funds to make advance for share issue, no borrowed funds were utilized for this. The ld. Counsel further submitted that he is stating at bar that the loan obtained was utilized for business purposes and he submitted that he had no objection if the matter is remitted to the Assessing Officer to examine this aspect. The ld. Counsel submitted that the assessee had subsequently also received share capital against the advance for share. He submitted that it is not true that money given being advance for share has been received back in the guise of loan.
20 ITA No. 1849/Mum/2015 (A.Y. 2009-10) Essar Power Limited vs. Addl. CIT 27. Per contra, the ld. Departmental Representative submitted that the assessee has not submitted any fund flow statement before the authorities below. He submitted that the assessee is having huge amount of unsecured loan which are interest bearing. He submitted that it is clear from the ledger account details hereinabove that it is only the amount which was earlier advanced to the lender company as advance for share, free of interest has been received back as loan (ICD-inter corporate deposit) on which the assessee is paying interest. Hence, the ld. Departmental Representative submitted that this is not at all a case of borrowed fund, but it is the case of refund of own money on which interest has been paid. The ld. Departmental Representative further submitted that VPCL, the company from whom the loan has been taken is not a subsidiary of the assessee company.
We have carefully considered the submissions of the counsels and perused the records. We find that the assessee has taken inter corporate deposit from Vadinar Power Company Ltd. (hereinafter referred as ‘VPCL’) amounting to Rs.50 crores at 8% interest. It is undisputed that at the time of giving the loan, VPCL had received and had a balance of Rs.60 crores received from the assessee towards advance for equity shares. Thereafter, the assessee company had given further amounts towards share capital. Further, shares have also been allotted to the assessee company from VPCL. However, as on 31.03.2009, the balance in the advance for share account to VPCL was Rs.19,25,00,000/-. In this factual scenario, the case of the assessee is that the assessee has genuinely borrowed Rs.50 crores in the form of ICD from VPCL @ 8% on 27.6.2008. The interest paid thereon has been claimed u/s. 36(1)(iii).
Section 36(1)(iii) provides for allowance of amount of interest paid in respect of capital borrowed for the purpose of the business or profession. Thus, for allowance of interest expenditure u/s. 36(1)(iii) firstly, the capital should be borrowed and secondly, it should be for the purpose of business or profession. As the facts of this
21 ITA No. 1849/Mum/2015 (A.Y. 2009-10) Essar Power Limited vs. Addl. CIT case detailed herein above clearly indicate that at the time of the said borrowal of fund of Rs.50 crores, the assessee already had given an advance free of interest of Rs.60 crores to VPCL towards equity share capital. As a matter of fact, the assessee gave further advances towards equity and equity shares were allotted only on 29.09.2008 which is more than three months from the said date of borrowal. Hence, it is crystal clear that as on the date of borrowal and upto 3 months thereafter, no equity shares had been allotted and the lender company was indebted to assessee for a sum of Rs.60 crores. Hence, it is clearly evident that this is not a case of capital borrowed but the assessee’s own money given free of interest for advance for equity shares coming back as interest bearing inter corporate deposit. Hence, the assessee clearly fails the test of the amount having been borrowed, for allowance of interest under section 36(1)(iii).
The next issue is whether the amount borrowed was used for business purposes. In this regard, the Assessing Officer has clearly brought on record that no detail whatsoever was given for the utilization of the said borrowed fund. The Assessing Officer has given a finding that the assessee had not at all discharged the onus to explain that the capital was borrowed as well as used for the purpose of business. The Assessing Officer has gone on to mention that the assessee has unnecessarily burdened the business by inter corporate deposit obtained from VPCL. We further note that before ld. Dispute Resolution Panel also the assessee has not produced necessary details or evidence showing that the borrowed funds have been utilized for the purpose of business. This aspect has been clearly mentioned in the direction of the ld. Dispute Resolution Panel wherein it has been categorically stated that the assessee had not shown any evidence in this regard. Before us also the assessee had not submitted any detail to counter this clear finding of the authorities below that there was absence of necessary evidence to show that the amount borrowed was used for the purpose of business. The ld. Counsel of the assessee had submitted that the matter
22 ITA No. 1849/Mum/2015 (A.Y. 2009-10) Essar Power Limited vs. Addl. CIT may be remitted to the Assessing Officer to enable the assessee to prove this aspect. In our considered opinion, at this stage, there is no cogency in this submission. The assessee has not produced any detail of the utilization of the said borrowed amount for business purpose, despite adverse comments by the Assessing Officer and ld. Dispute Resolution Panel at any stage even upto the level of ITAT. Hence, there is no point of remitting the matter again. Accordingly, we uphold the order of the authorities below holding that the payment of interest claimed on account of ICD of Rs.50 crores from VPCL is not allowable as per the provisions of section 36(1)(iii). In the result, this appeal by the assessee stands partly allowed. 31. Order pronounced in the open court on 17.10.2017
Sd/- Sd/- (Sandeep Gosain) (Shamim Yahya) �या�यक सद�य / Judicial Member लेखा सद�य / Accountant Member मुंबई Mumbai; �दनांक Dated : 17.10.2017 व.�न.स./Roshani, Sr. PS आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : अपीलाथ� / The Appellant 1. ��यथ� / The Respondent 2. आयकर आयु�त(अपील) / The CIT(A) 3. आयकर आयु�त / CIT - concerned 4. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, मुंबई / DR, ITAT, Mumbai 5. गाड� फाईल / Guard File 6. आदेशानुसार/ BY ORDER, उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील�य अ�धकरण, मुंबई / ITAT, Mumbai