DCIT, CHENNAI vs. SICAL LOGISTICS LTD., CHENNAI

आदेश /O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER

The appeals filed by the Revenue and the cross-objection

filed by the assessee are directed against different orders of the

Commissioner of Income-tax (Appeals) for the assessment years

2008-09, 2009-10 & 2010-11.

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- - 3 ITA 1695 to 1697 & CO 84/Mds/14 further submitted that the investments on which dividend are

received were invested only out of self generated profits and no

borrowed funds were invested for investments.

on record. For the assessment year 2008-09, sec.14A, although

applicable, Rule 8D cannot be applied, since it was inserted to

Rule-8D only on 24.03.2008. Being so, we direct the AO to

disallow 2% of the exempted income as incurred to earn the

same in terms of provisions of sec.14A r.w.Rule 8D, as per the

judgement of the Madras High Court in the case of Simpson &

Co., Vs. DCIT in Tax Case No.2621 of 2006 dated 15.10.2002.

Further, we make it clear that if the disallowance sustained by

CIT(A), is more than 2% of gross exempted income same to be

sustained. This ground of appeal is partly allowed for the

assessment year 2008-09 in ITA No.1695/Mds/2014.

4.1 For the assessment years 2009-10 and 2010-11, the

contention of the AR is that the assessee made investments

which were towards acquisition of shares and units in various

- - 4 ITA 1695 to 1697 & CO 84/Mds/14 mutual funds. These investments made for long term purposes

and in order to achieve the company’s vision of becoming multi-

model operator. According to him the investments are kept in

long term period in investment portfolio and gain arising from it

on transfer is liable for capital gains tax. Further, he submitted

that certain investments are foreign subsidiary and the dividend

received from foreign subsidiary is taxable as such Sec.14A

have no application. In our considered opinion, provisions of

sec.14A as well as Rule 8D are applicable while computing the

disallowance and the AO has to exclude the investment in

subsidiary companies and also investment which does not yield

any exempted income while applying the Rule-8D. This view of

ours is fortified by order of Tribunal in the case of EIH Associated

Hotels Ltd Vs. DCIT reported in 2013- TIOL-796-ITAT-MAD and

also the judgments of the Madras High Court in the case of

Redington (India) Ltd., Vs. ACIT in T.C.A No.520 of 2016 dated

23.12.2016 and CIT Vs. M/s.Chettinad Logistics Pvt.

Ltd.,Chennai in T.C.A No.24 to 2017 dated 13.03.2017.

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5.1 Further, the AO has to consider the availability of share

capital, reserves and surplus while invoking the provisions of

sec.14A read with Rule 8D of the Income-tax Rules, as this is the

non-interest bearing own funds available with the assessee for

investments and due weightage to be given while computing

average value of investments in the formula in Rule 8D.

5.2 With regard to the interest on borrowings used for the

specific purpose, it is to be noted that this issue came for

consideration before this Tribunal in the case of ACIT v. M/s.

Farida Shoes Pvt. Ltd. In ITA Nos.2102 & 2103/Mds/2015 dated

8.1.2016, wherein it was held as under :-

“5.1 Coming to the merits of the issue regarding disallowance u/s.14A r.w. Rule 8D of the I.T.Rules, in our opinion, similar issue was considered by this Tribunal in the case of ACIT v. M/s. Best & Crompton Engineering Ltd. in ITA No.1603/Mds/2012 dated 16.7.2013, wherein it was observed that interest on borrowings used for the business purpose cannot be considered for the purpose of computing disallowance u/s.14A r.w. Rule 8D(2)(ii) of the IT Rules and the relevant portion is reproduced as below: “10. Heard both sides. Perused the orders of lower authorities and the decision of Calcutta Bench of this Tribunal relied on by the assessee’s counsel. This issue has been considered elaborately by the Commissioner of Income Tax(Appeals) and deleted the interest on bank loan and term loans which were not utilized for making any investments having tax free income. While holding so, the Commissioner of Income Tax (Appeals) held as under:-

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“5.2.1 Having held that provisions of rule 8D are applicable, let us now examine whether the amount has been correctly quantified. The AO had calculated the disallowance at ₹ Nil, ₹1,04,38,000/- and ₹ 26,87,000/- under (i), (ii) & (iii) of rule 80 (2)respectively. There is no dispute regarding the first component, because it is Nil. With regard to the second component being the expenditure by way of interest which is not directly attributable to any particular income or receipt, the AO has determined the amount at ₹ 1,04,38,000/. The AO has taken into account the entire interest expenditure of ₹ 5,79,46,000/- for computing the above disallowance. The Id.AR, in his submission, has given the break-Up of interest which includes (1) interest on bank loans: ı 67,92,000/- (2) interest on term loans ₹3,82,11,000/- and (3) interest on other accounts: ₹1,29,43,000/-. If loans have been sanctioned for specific projects/expansion and have been utilized towards the same, then obviously they could not have been utilized for making any investments having tax-free incomes. From the copy of the sanction letters from State Bank of Bikaner & Jaipur it can be seen that the loan was granted with a specific requirement that the loan shall be utilized for purchase of imported machinery while in the case of loan from Federal Bank, it is seen that the loan was to be utilized for expansion of projects. Sanction of both these loans prohibit utilization of funds for purposes other than for the utilization for which they are sanctioned. From the ledger extract for the year ended 31.03.2008 for both loan accounts, it is seen that no amount has been utilized for investment in subsidiaries which earns tax-free income. The loan amounts were fully disbursed and utilized in the year ended 31.03.2008 (A.Y. 2008-09) itself. Taking into all the facts as stated above, I am of the considered opinion that if loans/borrowed amounts are granted for specific projects/expansion and no amount from the same has been directly utilized for investments, then the first and second limb of rule 80 attributing the interest payments to the investments will not be applicable. Accordingly, interest on bank loan and term ₹67,92,000/- ₹ loan amounting to and 3,82,11,000/- respectively are to be excluded from the calculation to determine the disallowance under rule 8D(2)(ii). The AO is, therefore, directed to take into account only the remaining interest on other accounts amounting to ₹1,29,43,000/- for computing the proportionate disallowance under rule 8D(2)(ii).” 11. On going through the order of the Commissioner of Income Tax (Appeals), we find that the Commissioner of Income Tax (Appeals) excluded the interest on bank loan and term loans from the calculation of disallowance under Rule 8D(2)(ii) as the assessee has utilized the bank loan and term loan for the purpose of purchase of machineries and for expansion of projects and these loans were specifically sanctioned for specific project

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and such loans were also used for the purpose for which they were sanctioned. In the circumstances, we find that the Commissioner of Income Tax (Appeals) has rightly excluded such interest from the purview of computation of disallowance under Rule 8D(2)(ii).

“11. There is no dispute about working of this method so far as rule 8D(2)(i) and (iii) is concerned. It is only with regard to the computation under rule 8D(2)(ii) that the Assessing Officer and the CIT(A) have different approaches. This provision admittedly deals with a situation in which “ the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt” . Clearly, therefore, this sub clause seeks to allocate ‘common interest expenses’ to taxable income and tax exempt income. In other words, going by the plain wordings of rule 8D(2)(ii) what is sought to be allocated is “expenditure by way of interest………..which is not directly attributable to any particular income or receipt” and the only categories of income and receipt, so far as scheme of rule 8 D is concerned, are mutually exclusive categories of ’tax exempt income and receipt’ and ‘taxable income and receipt’. No other classification is germane to the context in which rule 8 D is set out, nor does the scheme of Section 14 A leave any ambiguity about it. 12. Ironically, however, the definition of variable ‘A’ embedded in formula under rule 8D(2)(ii) is clearly incongruous inasmuch while it specifically excludes interest expenditure directly related to tax exempt income, it does not exclude interest expenditure directly related to taxable income. Resultantly, while rule 8D(2)(ii) admittedly seeks to allocate “expenditure by way of interest, which is not directly attributable to any particular income or receipt” it ends up allocating “expenditure by way of interest, which is not directly attributable to any particular income or receipt, plus interest which is directly attributable to taxable income” (emphasis by underlining supplied by us). This incongruity will be more glaring with the help of following simple example: In the case of A & Co Ltd, total interest expenditure is ₹ 1,00,000, out of which interest expenditure in

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respect of acquiring shares from which tax free dividend earned is ₹10,000. Out of the balance ₹ 90,000, the assessee has paid interest of ₹ 80,000 for factory building construction which clearly relates to the taxable income. The interest expenditure which is “not directly attributable to any particular receipt or income” is thus only ₹ 10,000. However, in terms of the formula in rule 8D (2)(ii), allocation of interest which is not directly attributable to any particular income or receipt will be for ₹ 90,000 because, as per formula the value of A (i.e. such interest expenses to be allocated between tax exempt and taxable income) will be “ A = amount of expenditure by way of interest other than the amount of interest included in clause (i) [ i.e. direct interest expenses for tax exempt income] incurred during the previous year”. Let us say the assets relating to taxable income and tax exempt income are in the ratio of 4:1. In such a case, the interest disallowable under rule 8 D(2)(ii) will be ₹18,000 whereas entire common interest expenditure will only be ₹ 10,000/-. 13. The incongruity arises because, as the wordings of rule 8D(2)(ii) exist, out of total interest expenses, interest expenses directly relatable to tax exempt income are excluded, interest expenses directly relatable to taxable income, even if any, are not excluded. 14. The question then arises whether we can tinker with the formula prescribed under rule 8D(2)(ii) of the Income Tax Rules, or construe it any other manner other than what is supported by plain words of the rule 8 D (2)(ii). 15. We find that notwithstanding the rigid words of Rule 8D(2)(ii), the stand taken by the revenue authorities about its application, as was before Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg Co Ltd Vs DCIT (328 ITR 81) when constitutional validity of rule 8 D was in challenge,is that “ It is only the interest on borrowed funds that would be apportioned and the amount of expenditure by way of interest that will be taken (as 'A' in the formula) will exclude any expenditure by way of interest which is directly attributable to any particular income or receipt (for example—any aspect of the assessee's business such as plant/machinery etc.)”. Therefore, it is not only the interest directly attributable to tax exempt income, i.e. under rule 6D(2)(i), but also interest directly relatable to taxable income, which is to be excluded from the definition of variable ‘A’ in formula as per rule 6D(2)(ii), and rightly so, because it is only then that common interest expenses, which are to be allocated as indirectly relatable to taxable income and tax exempt income, can be computed. This is clear from the following

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observations made by Their Lordships of Hon’ble Bombay High Court in the case of Godrej & Boyce (supra): “60. In the affidavit-in-reply that has been filed on behalf of the Revenue an explanation has been provided of the rationale underlying r. 8D. In the written submissions which have been filed by the Addl. Solicitor General it has been stated, with reference to r. 8D(2)(ii) that since funds are fungible, it would be difficult to allocate the actual quantum of borrowed funds that have been used for making tax-free investments. It is only the interest on borrowed funds that would be apportioned and the amount of expenditure by way of interest that will be taken (as 'A' in the formula) will exclude any expenditure by way of interest which is directly attributable to any particular income or receipt (for example—any aspect of the assessee's business such as plant/machinery etc.)…………… The justification that has been offered in support of the rationale for r. 8D cannot be regarded as being capricious, perverse or arbitrary. Applying the tests formulated by the Supreme Court it is not possible for this Court to hold that there is writ on the statute or on the subordinate legislation perversity, caprice or irrationality. There is certainly no 'madness in the method'. 16. Once the revenue authorities have taken a particular stand about the applicability of formula set out in rule 8 D(2)(ii), and based on such a stand constitutional validity is upheld by Hon’ble High Court, it cannot be open to revenue authorities to take any other stand on the issue with regard to the actual implementation of the formula in the case of any assessee. Viewed thus, the correct application of the formula set out in rule 8D(2)(ii) is that, as has been noted by Hon’ble Bombay High Court in the case of Godrej and Boyce (supra), “amount of expenditure by way of interest that will be taken (as 'A' in the formula) will exclude any expenditure by way of interest which is directly attributable to any particular income or receipt (for example—any aspect of the assessee's business such as plant/machinery etc.)”. Accordingly, even by revenue’s own admission, interest expenses directly attributable to tax exempt income as also directly attributable to taxable income, are required to be excluded from computation of common interest expenses to be allocated under rule 8D(2)(ii). 17. To the above extent, therefore, we have to proceed on the basis that rigour of rule 8 D (2)(ii) is relaxed in actual implementation, and revenue authorities, having taken that stand when constitutional validity of rule 8 D was in challenge before Hon’ble High Court, cannot now decline the same. Ideally, it is for the Central Board of Direct Taxes to make the position clear one way or the other either by initiating suitable

10 - - ITA 1695 to 1697 & CO 84/Mds/14

amendment to rule 8D(2)(ii) or by adopting an interpretation as per plain words of the said rule, but even on the face of things as they are at present , in our humble understanding, revenue authorities cannot take one stand when demonstrating lack of ‘perversity, caprice or irrationality’ in rule 8D before Hon’ble High Court, and take another stand when it comes to actual implementation of the rule in real life situations. Therefore, even as we are alive to the fact that the stand of the learned Departmental Representative is in accordance with the strict wording of rule 8D(2)(ii), we have to hold that, for the reasons set out above, this rigid stand cannot be applied in practice.” 13. In view of the decision of the Calcutta Bench of this Tribunal cited above, we uphold the order of the Commissioner of Income Tax (Appeals) in excluding the interest on bank loan and term loans for the purpose of computing disallowance under Rule 8D(2)(ii). The grounds raised by the Revenue are rejected on this issue.” 5.3 In view of the above decision, we are of the opinion that the interest on borrowing which are made for specific purpose of business cannot be considered for the purpose of applying Rule 8D of the Income Tax Rules.

5.4 Further, investments in sister concerns or subsidiaries with which the assessee is having business transactions, that investments cannot be considered for the purpose of applicability of Rule-8D. For this proposition we rely on the judgments of Tribunal in the case of Sun TV Networks in ITA No.1340 & 1341/Mds./15 & 1578 to 1579/Mds/15 wherein held that:- “12. We have considered the rival submissions on either side and perused the relevant material available on record. The main contention of the assessee is that the available share capital including reserves and surplus was �2385.7 Crores as on 31.03.2010. The available share capital is �1970.4 Crores and Reserves and surplus is � 21,886.7 Crores. The investments made in mutual funds including

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subsidiary companies are only � 541.11 Crores. Therefore, it cannot be said that the assessee has diverted the borrowed funds for making any investment either in the sister concerns or in the mutual funds. When the assessee has sufficient share capital, reserves and surplus, this Tribunal is of the considered opinion that there cannot be any disallowance towards the interest paid on the borrowed funds under Section 14A of the Act. For the purpose of disallowing interest income under Section 14A read with Rule 8D, there should be nexus between the borrowed funds and investment made by the assessee in the share capital and mutual funds. In the absence of any nexus, the presumption is that the assessee has invested the available interest-free funds in share capital and mutual funds. Furthermore, making investment in sister concerns is for commercial expediency in view of the judgment of Apex Court in S.A. Builders Ltd. v. CIT (2007) 288 ITR 1. It is not the case of the Revenue that the sister concern or any of the Directors has misused the funds invested by the assessee. When the sister concern uses the funds only for business purpose, there was commercial expediency for making investment. Therefore, this Tribunal is of the considered opinion that there cannot be any disallowance under Section 14A of the Act read with Rule 8D of the Income-tax Rules, 1962.

5.5 Further, we also make it clear that the own funds which is in the form of share capital and reserves and surplus, which was available to the assessee to make investments which is yielding exempted income have no cost and therefore, it is to be given due weightage while applying the formula of Rule 8D. This view of ours is fortified by the order of the co- ordinate Bench in the case of Beach Miners Co. Pvt Ltd. Vs.

12 - - ITA 1695 to 1697 & CO 84/Mds/14

ACIT in ITA No.2110/Mds./14 dated 06.08.15 wherein held that: “6.1. Ground No.3 – Disallowance of expenditure by invoking the provisions of section 14A of the Act for � 3,11,34,630/- since the assessee had made investments of � 71,55,33,570/- for earning exempt income. At the outset, we find that there is no merit for the Revenue to make addition of � 3,11,34,630/- invoking the provisions of section 14A of the Act because the investment made of � 71,55,33,570/-, bears no cost in the form of interest or whatsoever, since the funds by which the investment is made is assessee’s own funds. Further, these investments are made only with sister companies of the assessee and no cost can be attributed for the management of such funds. Therefore, we hereby delete the addition of � 3,11,34,630/- made by the Ld. Assessing Officer invoking the provisions of section 14A of the Act. This ground raised by the assessee is allowed in its favour. “

5.6 In view of the above judgments, one has to consider the

assessee’s own fund i.e. capital and reserves as available

on the date of investment which yields exempted income

and exclude the same and thereafter A.O shall apply the

Formula in Rule 8D and also exclude investments in

subsidiaries as held by the above order of Co-ordinate

Bench. With this observation, we remit the issue relating to

disallowance u/s.14A r.w.r.8D to the file of AO for fresh

consideration.

13 - - ITA 1695 to 1697 & CO 84/Mds/14 5.7 Accordingly, relating to disallowance under section 14A in A.Y 2009-10, & 2010-11 is remitted to the file of the AO to

re-compute the same after giving opportunity to the assessee.

6.1 The facts of the issue as narrated in ITA No.1695/Mds/2014 for the asst. year 2008-09 are that the assessee has given interest free advances to its related concerns to the extent of ₹ 248 crores for the AY 2008-09. The AO has disallowed an amount of ₹ 13,61,41,202/- for the AY 2008-09 as interest expenditure incurred not wholly and exclusively for the business purpose of the assessee on the

ground that the proportionate interest expenditure attributable to the amounts advanced by the assessee company towards its associates as interest free loan. The ld. AR has objected the

above addition and submitted the written submission before AO, which reads as under:

14 - - ITA 1695 to 1697 & CO 84/Mds/14 Interest disallowance proportionate to subsidiary advance – ₹ 13,61,41,202/- The advance of ₹ 24899.44 lakhs to various subsidiaries of the

assessee was made as details below:

Advances to Companies A Y 2008-09 Bergen Offshore Logistics Pte Ltd. 8,388.47 Dividend Receivable – Bergen offshore 479.34 Norseal Global Offshore Pte Ltd. Sical Infra Assets Ltd. 7,984.24 Sical Multimodal and Rail Transport Ltd.(SAM) 5,000.00 Sical Multimodal and Rail Transport Ltd 200.85 SICAL Hambuja Logistics Pvt. Ltd. 159.01 Nagpur Sical Gupta Road Terminals Ltd. 322.92 Nagpur Sical Gupta Logistics Ltd. 60.30 Sical Distriparks Ltd. Chennai International Terminal Pvt. Ltd. 100.00 Sical Iron Ore Terminals Ltd. 2,201.20 Sical Iron Ore Terminal (Bangalore) Ltd. Ennore Automotive Logistics Ltd. PSA Sical Terminals Ltd. 3.09 Total 24,899.44

Accordingly, disallowances were made at ₹ 13,61,41,202/- for the AY 2008-09 and ₹ 2,06,54,000/- for the AY 2009-10 and 3.14

crores for the AY 2010-11. Aggrieved, the assessee went in

appeal before the CIT(Appeals).

assessee has not proved the existence of any business

compulsion or commercial expediency warranting making such

huge advances commensurate with the returns received from

15 - - ITA 1695 to 1697 & CO 84/Mds/14 the sister concerns. Since the funds are interest bearing which are placed at the disposal of sister concerns, the AO opined that huge interest paid by the assessee company to the loan creditors is not justifiable from the commercial point of view, disallowed interest paid after considering 10% of the above advances treating the same as for commercial expediency and the balance amount is disallowed at ₹ 3,14,89,492/-.

7.1 The assessee in his submissions before the CIT(Appeals) stated that the loans amounting to ₹ 7211.29 lakhs have been advanced to 9 different companies in terms of commercial expediency. Further, it was submitted that the loans have been extended to the 9 sister concerns for the purpose of expansion of the business of the assessee itself. The assessee primarily objected to the disallowances made on the interest to the extent of ₹ 3,14,89,482/- on the ground that the advances were given out of own funds and the borrowed funds are not diverted to subsidiaries. The assessee was engaged in Multi Model Logistics and Stevedoring activities expending his business activities. The subsidiaries were developing the road, rail, port

16 - - ITA 1695 to 1697 & CO 84/Mds/14 terminal and various places. Their activities will aid the

assessee to get more contracts and earn profit. Thus, there is a

direct nexus between the business of the assessee and

subsidiary companies. The judgment of the Supreme Court in

the case of S.A.Builders( 288 ITR 01 ) is applicable to the

assessee’s case and no interest disallowance is warranted.

7.2 According to the CIT(Appeals), the Supreme Court in the

above case (S.A.Builders) held that once it is established that

there was nexus between the expenditure incurred for the

purpose of the business, which need not necessarily be the

business of the assessee itself, the Revenue cannot justifiable

claim to put itself in the arm chair of business man or in the

position of the Board of Directors and assumed the role to

decide how much is reasonable expenditure having regard to the

circumstances of the case. No business man can be compelled

to maximize its profit. The IT authorities must not look at the

matter from their own view point but that of prudent business

man. One has to see the transfer of the borrowed funds to a

sister concern from the point of view of commercial expediency

17 - - ITA 1695 to 1697 & CO 84/Mds/14 and not from the point of view whether the amount was

advanced for earning profits. If the Directors of the sister

concerns utilized the amount advanced to it by the assessee for

their personal benefit, obviously the amount advanced to it by

the assessee for their personal benefit and it cannot be said that

such money was advanced as a measure of commercial

expediency. However, where it is obvious that a holding

company has a deep interest in its subsidiary, if the holding

company advances borrowed money in the subsidiary and the

same is used by the subsidiary for business purposes, hence,

the assessee would be entitled to deduction of interest on its

borrowed loans. According to the CIT(Appeals), this view has

also been advanced by the Delhi High Court in the case of

Dalmia Cement Ltd. v. CIT (354 ITR 377). Further, the

CIT(Appeals) observed that the assessee advanced funds to the

extent of 7211.29 lakhs to its subsidiary companies wherein

some of them are 100% wholly owned subsidiaries and engaged

in the expansion of assessee’s business in a Multi Model

Logistics and Stevedoring activities. The CIT(Appeals) also

observed that over and above, the AO has not established that

18 - - ITA 1695 to 1697 & CO 84/Mds/14 only borrowed funds from banks of Financial Institutions are

used to fund the advances to subsidiary companies, hence no

interest on borrowed funds can be attributable to the advances

which can be disallowed. Since there is a clear commercial

expediency and business expansion drive is seen from the Multi

Model Logistics and Stevedoring activities of the assessee,

according to the CIT(Appeals), the addition made by the AO is

unwarranted. Accordingly, he deleted the addition made by the

AO. Against this, the Revenue is in appeal before us.

7.3 We have heard both the parties and perused the material

on record. The question involved in this case is only about the

allowability of the interest on borrowed funds and hence we are

dealing only with that question. In this connection, we refer to s.

36(1)(iii) of the IT Act, 1961 which states that "the amount of the

interest paid in respect of capital borrowed for the purposes of

the business or profession" has to be allowed as a deduction in

computing the income-tax under s. 28 of the Act.

7.4 In our considered opinion the expression "for the purpose

of business" occurring under the provision is wider in scope than

19 - - ITA 1695 to 1697 & CO 84/Mds/14 the expression "for the purpose of earning income, profits or

gains".

7.5 In our opinion, the A.O has approached the matter from

an erroneous angle. In the present case, even if the assessee

borrowed the fund from the bank and lent it to its sister-concern,

as interest-free loan, the test in such a case is really whether this

was done as a measure of commercial expediency or not.

7.6 In our opinion, the decisions relating to s. 37 of the Act will

also be applicable to s. 36(1)(iii) because in s. 37 also the

expression used is "for the purpose of business". It has been

consistently held in decisions relating to s. 37 that the expression

"for the purpose of business" includes expenditure voluntarily

incurred for commercial expediency, and it is immaterial if a third

party also benefits thereby.

7.7 In our considered opinion, in order to claim a deduction, it

is enough to show that the money is expended, not of necessity

and with a view to direct and immediate benefit, but voluntarily

and on grounds of commercial expediency and in order to

indirectly facilitate the carrying on the business. The above test

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e.g. Eastern Investments Ltd. vs. CIT (1951) 20 ITR 1 (SC), CIT

vs. Chandulal Keshavlal & Co. (1960) 38 ITR 601 (SC), SA

Builders Ltd. v. CIT ( 288 ITR 1(SC) ), Hero Cylces Pvt Ltd. Vs.

CIT (379 ITR 347)(SC) etc.

7.8 In our opinion, the A.O should have approached the

question of allowability of interest on the borrowed funds from

the above angle. In other words, the A.O should have enquired

as to whether the interest-free loan was given to the sister

company, or to a subsidiary of the assessee as a measure of

commercial expediency, and if it was, it should have been

allowed.

7.9 The expression "commercial expediency" is an expression

of wide import and includes such expenditure as a prudent

businessman incurs for the purpose of business. The

expenditure may not have been incurred under any legal

obligation, but yet it is allowable as business expenditure if it was

incurred on grounds of commercial expediency.

21 - - ITA 1695 to 1697 & CO 84/Mds/14 7.10 Thus, the ratio of Madhav Prasad Jatia’s case (118 ITR 200) (SC) is that the borrowed fund advanced to a third party

should be for commercial expediency if it is sought to be allowed under s. 36(1)(iii) of the Act.

7.11 In the present case, the CIT(A) has examined whether the amount advanced to the sister-concern was by way of

commercial expediency or not and came to a conclusion that it is on account of commercial expediency and incurred for the purpose of business of its sister concerns which indirectly facilitate the carrying on the business of the assessee. It has

been repeatedly held by Supreme Court that the expression "for the purpose of business" is wider in scope than the expression

"for the purpose of earning profits" vide CIT vs. Malayalam

Plantations Ltd. (1964) 53 ITR 140 (SC), CIT vs. Birla

Cotton Spinning & Weaving Mills Ltd. (1971) 82 ITR 166

(SC), SA Builders Ltd. v. CIT ( 288 ITR 1(SC) ), Hero Cylces Pvt Ltd. Vs. CIT (379 ITR 347)(SC) etc.

7.12 The A.O should have examined the purpose for which the assessee advanced the money to its sister-concern, and

22 - - ITA 1695 to 1697 & CO 84/Mds/14 what the sister-concern did with this money, in order to decide

whether it was for commercial expediency, but that has not been

done by him. However, CIT(Appeals) carried on that exercise

and came to a conclusion that there is clear commercial

expediency and business expansion drive which was seen from

the Multi Model Logistics and Stevedoring activities of the

assessee.

7.13 It is true that the borrowed amount in question was not

utilized by the assessee in its own business, but had been

advanced as interest-free loan to its sister-concern. What is

relevant is whether the assessee advanced such amount to its

sister-concern as a measure of commercial expediency.

7.14 It is to be noted that the Delhi High Court in CIT vs.

Dalmia Cement (Bharat) Ltd. 254 ITR 377 (Del) is applicable to

the facts of the present case. It was held that once it is

established that there was nexus between the expenditure and

the purpose of the business (which need not necessarily be the

business of the assessee itself), the Revenue cannot justifiably

claim to put itself in the armchair of the businessman or in the

23 - - ITA 1695 to 1697 & CO 84/Mds/14 position of the board of directors and assume the role to decide

how much is reasonable expenditure having regard to the

circumstances of the case. No businessman can be compelled

to maximize its profit. The lower authorities must put themselves

in the shoes of the assessee and see how a prudent

businessman would act. The authorities must not look at the

matter from their own viewpoint but that of a prudent

businessman. As already stated above, we have to see the

transfer of the borrowed funds to a sister-concern from the point

of view of commercial expediency and not from the point of view

whether the amount was advanced for earning profits. In such

circumstances, it is not possible to us to confirm the

disallowance of interest u/s.36(1)(iii) of the Act.

7.15 Further, it is a settled legal position that income of an

assessee has to be computed under various heads specified

under section 14 of the Act. Therefore, the deductions are to be

allowed in computing the income under various heads only to the

24 - - ITA 1695 to 1697 & CO 84/Mds/14 extent it is provided by the Legislature under that very heads.

The computation of capital gain is provided in section 48 of the

Act. According to this section, the only deductions which are

allowable are - (1) the cost of acquisition of the asset, (2) the

cost of any improvement thereto and (3) expenditure incurred

wholly and exclusively in connection with the transfer of the

asset. The cost of acquisition, in our opinion, means the amount

paid for acquiring the asset. Once the asset is acquired, then any

expenditure incurred thereafter cannot be considered as the cost

of acquisition, since such expenditure would not have any nexus

with the acquisition of the asset. Wherever the Legislature

intended to allow such expenditure as deduction, it had

specifically provided so under various heads. For example, in

computing the income from house property, the assessee is

allowed deduction under section 24 of the Act on account of

interest paid on the borrowed funds utilised for acquiring the

immovable property. Similarly, when the income is to be

computed under the head "Profits and gains from business or

profession", the deduction account of interest on borrowed fund

is provided under section 36(1)(iii) the Act, where the business

25 - - ITA 1695 to 1697 & CO 84/Mds/14 assets are acquired out of borrowed funds. At this stage, it may

be pertinent to note that depreciation is also allowable as

deduction under section 32 in respect of business assets on the

cost of acquisition. In determining the cost of acquisition, the

interest component after bringing the asset into existence is not

taken into consideration as Explanation 8 to section 43 of the

Act. If the interest is to be added to cost of acquisition, then the

assessee would be entitled to double deduction once under

section 36(1)(iii) and the other under section 32 of Act, which is

not permissible in view of the decision of the Supreme Court in

the case of Escorts Ltd. v. UOI[1993] 199 ITR 43.

7.16 Similarly, when the shares are purchased by way of

investment, and the dividend is received in respect of such

shares, the interest paid on borrowed funds has been held to be

allowable as deduction against dividend income. The Supreme

Court has gone a step further in the case of CIT vs. Rajendra

Prasad Moody [1978] 115 ITR 519, wherein it has been held that

deduction on account of interest paid on borrowed funds is

allowable as deduction in computing the income under the head

26 - - ITA 1695 to 1697 & CO 84/Mds/14 ‘Income from other sources’, even where the dividend is not

received in a particular year. If this is the legal position, then we

are afraid, how the interest paid by the assessee can be

considered as part of the cost of acquisition of the shares. If the

contention of the assessee is accepted then it would amount to

allowing double deduction i.e., under section 57 as well as under

section 48 of the Act, which can never be the intention of the

Legislature. As already stated, the double deduction is prohibited

as laid down by the Supreme Court in the case of Escorts Ltd.

(supra). The entire scheme of the Act, therefore, reveals that

interest component after the date of acquisition and till the date

of sale cannot be treated as the cost of acquisition. It is only

allowable as a revenue deduction on year to year basis against

the income generated from such asset or likely to be generated

to the extent provided by the Legislature under different heads.

7.17 The above view is also fortified by the decision of the

coordinate Bench of the Tribunal in the case of Macintosh

Finance Estates Ltd. vs. ACIT(12 SOT 324), wherein it has been

held "once we find that interest expenses is an allowable

expenditure under the head "Income from other sources”, it

27 - - ITA 1695 to 1697 & CO 84/Mds/14 cannot be allowed to be added to the cost of investment only

because in this year no deduction is allowable because the

dividend income has been made exempt’’. The following

observations of Supreme Court in the case of Saharanpur

Electric Supply Co. Ltd vs. CIT (1992) 194 ITR 294 (SC) were

relied on by the Court:-

‘’In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets’’.

7.18 A bare look at the above observations reveals that actual

cost would include all expenditure necessary to bring the assets

into existence and put them in working condition. Nowhere in the

above observations, the Supreme Court held that the expenditure

incurred after the acquisition of asset would be included in the cost

of assets. The terminal point is the time when the asset is brought

into existence or when the asset is put in a working condition.

Therefore, on the basis of the Supreme Court judgment, it cannot

be said that expenditure incurred after the asset brought into

existence, i.e., after the acquisition of the asset would form part of

28 - - ITA 1695 to 1697 & CO 84/Mds/14 the actual cost. The Supreme Court laid down the proposition that

interest paid on monies borrowed for acquisition of capital asset

and to meet expenses connected with its installation etc. and

capitalized, has to be added to the cost of asset for the purpose of

deprecation.

7.19 Thus in our opinion if the money was borrowed for

investment in subsidiary company, and it resulted in promote the

business of the assessee as well as helpful to the assessee for

having management control over-said such subsidiary company,

then the interest expenditure should be allowed u/s.36(1)(iii) of the

Act.

7.20 In the present case, as rightly submitted by the ld. A.R that

the assessee diverted the funds for making advance to the

subsidiaries, hence, we are of the opinion that the AO cannot

disallow the notional interest, it is not the case of the Revenue that

the subsidiary companies had misused the funds for any other

purpose. In other words, since the subsidiary companies used the

funds for their business purpose, and there is nexus between the

business of the assessee and the subsidiaries, which facilitated the

29 - - ITA 1695 to 1697 & CO 84/Mds/14 business advantage of the assessee company, there cannot be

any disallowance towards notional interest as held by the Supreme

Court in the M/s.S.A Builders (288 ITR 1). Further, this view has

also been advanced by the Delhi High Court in the case of Dalmia

Cement Ltd. v. CIT (354 ITR 377). Further, the CIT(Appeals)

observed that the assessee advanced funds to its subsidiary

companies wherein some of them are 100% wholly owned

subsidiaries and engaged in the expansion of assessee’s business

in a Multi Model Logistics and Stevedoring activities. The

CIT(Appeals) also observed that over and above, the AO has not

established that only borrowed funds from banks of Financial

Institutions are used to fund the advances to subsidiary

companies, hence no interest on borrowed funds can be

attributable to the advances which can be disallowed. Since there

is a clear commercial expediency and business expansion drive is

seen from the in Multi Model Logistics and Stevedoring activities of

the assessee, according to the CIT(Appeals), the addition made by

the AO is unwarranted and we do not find any infirmity in the

findings of the CIT(A) on this issue. Accordingly, this ground raised

by the Revenue in its appeals stand dismissed.

30 - - ITA 1695 to 1697 & CO 84/Mds/14 8. The next ground in ITA No.1697/Mds/2014 for the assessment year 2010-11 is with regard to deletion of ₹ 1.20 crore on the issue of

disallowance of deduction u/s.80IA of the Act.

(SLL) is a company engaged in the business of Stevedoring,

transportation, warehousing etc. During 200-01, the assessee

entered into a build, operate and transfer agreement with Tamilnadu

Electricity Board (TNEB). Accordingly, the assessee has to build the

coal handling equipments at Ennore Port and manage and maintain

the facility for 20 years. After the expiry of 20 years period the facility

has to be handed over / transferred to the TNEB. The facility

developed by the assessee forms part of the port and is developed in

the port.

9.1 TNEB will be charged for the handling of coal through the

facility developed by the assessee. The assessee commenced its

operation of handling coal at Ennore Port in February 2002.

Assessee is running the business of coal handling from the financial

year 2001-02.

31 - - ITA 1695 to 1697 & CO 84/Mds/14 9.2 From the assessment year 2002-03 to 2006-07 the said

business end in income-tax loss carried forward and the same was

set off against the taxable income of the business in the AY 2007-08.

For the AYs 2007-08 to 2009-10, gross total income of the assessee

was either loss or consisted of long term capital gain against which

the assessee could not claim deduction under Chapter VIA. For the

AY 2010-11, the assessee has paid the tax under normal provisions.

On the basis of the above facts, the assessee claimed the deduction u/s.80IA of the Act to the extent of ₹ 8,05,21,425/- while computing

the income liable for taxation for the AY 2010-11, which was

disallowed by the AO. Before the Ld.CIT(A), the assessee submitted

that it has claimed exemption for the infrastructure facilities provide

by the assessee to TNEB, at Ennore Port Trust on the following

reasons:-

a) Coal handling facility is owned by the Company registered in India. b) Agreement is entered with TNEB, a statutory body constituted under the Electricity (Supply) Act, 1948 to operate and maintain the facility on a BOT basis and it has commenced operation after 1.4.95 i.e. February, 2002. c) The definition of infrastructure facility includes port and as per the certification from the Ennore Port Ltd., the facility developed by Sical Logistics Ltd forms part of Port.

I

32 - - ITA 1695 to 1697 & CO 84/Mds/14

Further, the ld.A.R relied on CBDT circular no 793 dated 23.062000

which clarified that structures at ports for storage, loading and

unloading etc will be included in the definition of port for the purposes

of sections 10 (23G) and section 80 IA subject to the following

conditions are to be fulfilled —

i) The Port authority has issued a certificate that the said structures form part of the port. ii) Structures are built under BOT or BOLT schemes and there is an agreement to transfer the structures to the said authority on the expiry of the time stipulated under the agreement.

In the above circumstances, it is amply clear that the assessee has

fulfilled various conditions laid down for the deduction claimed u/s

801A supported by various judgements pronounced by various

High/Supreme Court.

33 - - ITA 1695 to 1697 & CO 84/Mds/14 deduction claimed to the extent of Rs.8,05,21 ,425/- in the return filed for the asst year under consideration. In so far as, the above mentioned conditions were satisfied, the

appellant is eligible for the deduction claimed u/s 801A. The appellant

has also furnished a copy of the agreement between the appellant

and TNEB and also the certificate issued by the Ennore Port stating

that the coal handing facility developed by the appellant forms part of

the port. Over and above Section 80lA (2) gives an option to the

assessee to claim the deduction for 10 years out of 15 years from the

year of commencement. The appellant has commenced operation in

2001 -02 and it can claim deduction within 15 years in the block

period of 2001-02 to 2015 -16. Since from the AY 2002-03 to 2006-

07 which resulted in loss, the appellant has carried forward the same

loss and set off against the taxable income till Assessment year

2006-07. The deduction u/s 80lA is not claimed till Assessment year

2006-07. Thus the appellant has exercised the option of claiming

deduction u/s 80IA from the AY 2007-08 onwards. However, the

appellant has not claimed the option for claiming deduction u/s 8OlA

till AY 2009-10 due to gross total income of the appellant was either

loss or consisted of Long Term Capital Gain. For the AY 2010-11, the

34 - - ITA 1695 to 1697 & CO 84/Mds/14 tax was payable under normal provision and the gross total income

consisted of income from business. Hence the assessee claimed

the deduction in the year 2010-11. On that basis the Ld.CIT(A)

allowed the claim of assessee. Against this, the Revenue is in appeal

before us.

record. The main contention of the ld.D.R is that deduction u/s.80-

IA(4) could be allowed only in the case when the assessee entered

into contract with the Ennore Port Trust, but not with TNEB. TNEB is

only a customer of Ennore Port Trust, who does not own the

infrastructure facilities and the conditions laid down u/s.80-IA(4) of

the Act was not satisfied.

10.1 The contentions of the assessee is that the assessee has

rightly claimed the deduction u/s 80-lA by fulfilling the conditions

stipulated u/s 80-IA. The deduction will be available if the enterprise

is owned by a company or consortium of companies registered in

India, enters into an agreement with the Central or a State

Government or a Local Authority or any Statutory Body for

development, maintenance and operation of a new infrastructure

35 - - ITA 1695 to 1697 & CO 84/Mds/14 facility, transfers such infrastructure facility after the period stipulated

in the agreement to such Government or Authority or Body concerned

and starts operating and maintaining the infrastructure facility on or

after 1st April 1995. Infrastructure facility has been defined “to mean

a Road, Highway, Bridge, Airport, Port or Rail system or any other

public facility of a similar nature as maybe notified by the Board. The

provisions of Sec. 80-IA shall not apply to a person who executes a

work contract entered into with the undertaking or enterprise referred

to in the said section. However, in a case where a person makes the

investments and he himself executes the development work, i.e.

carries out the Civil construction work, he will be eligible for Tax

Benefit u/s 801A. In contrast to this, a person who enters into a

contract with another person ( i.e. undertaking or enterprise refer to

Sec. 80-IA) for executing works contract, will not be eligible for the

Tax Benefit u/s 801A. Since the assessee in the instant case is not a

contractor and developed the infrastructure facility on BOT/ BOOT

fulfilling the conditions stipulated u/s 801A, the appellant is eligible to

claim the deduction u/s 801A. The appellant placed its reliance on

Hon’ble Gujarat High Court in the case of Katira Construction Ltd., Vs

Union of India & Others 352 ITR 513 which squarely applies to the

36 - - ITA 1695 to 1697 & CO 84/Mds/14 facts of the instant case as the appellant developed new

infrastructure facility i.e the coal handling facility on its own by an

agreement entered into with TNEB. The infrastructure facility

developed by the appellant in the form of coal handling facility for

importing coal at Ennore Port need not be owned by the Ennore Port

Trust it can as well be owned by the appellant being a third party

which provides the same facility can as well be eligible to claim the

deduction u/s 801A (4). It tantamount to i.e. the new infrastructure

facility a part and parcel of port, the appellant being a developer is

definitely eligible for deduction provided u/s 80lA(4). As the appellant

company is registered in India and entered into agreement with TNEB

(a State Govt. Authority) for providing the infrastructure facility in the

form of coal handling at cost for a stipulated period of 20 years and

the coal handling facility to be transferred to TNEB after stipulated

period. The TNEB had the exclusive rights over the berth in Ennore

Port for importing coal, the appellant had to enter into an agreement

for coal handling with the TNEB itself. Thus the appellant satisfies the

requirements in the entirety for claiming the deduction u/s 801A (4) of

the IT Act. The appellant further placed its reliance in the case / of

Baja] Tempo Ltd., Vs. CIT 196 ITR 188 (SC) wherein the Apex Court

37 - - ITA 1695 to 1697 & CO 84/Mds/14 has held that the provision relating to deduction u/s 80 of the Act

should be construed liberally and in favour of the assessee. Thus, the

appellant is eligible to claim of the deduction u/s 801A and claimed

correctly. However, keeping in view of the objections raised by the

Assessing Officer the claim of deduction u/s 8OlA on the ground that

the appellant has shown magnified profits by making some

computation errors by not allocating the common expenditure while

working out the profits of the undertaking. Such expenditure which

was not considered is in the form of remuneration paid to the

Directors, Commission and Sitting Fee to the Directors, payment to

Auditors, Travelling and Conveyance, Expenditure and Depreciations

in respect of Office Equipments. The Assessing Officer is of the

opinion that out of the sale, proportionate expenditure should have

been taken into account by the appellant to show the current profits

earned from the undertaking. The CIT(A) agreed with the contentions

of the Assessing Officer; however the Assessing Officer could not

give any re-computation in the said deduction for allowing correct

claim of the assessee for deduction u/s. 80-IA. Considering the facts

and circumstances of the case, the CIT(A) on an estimated basis

15% of the claim made by the assessee for deduction u/s. 80-IA was

38 - - ITA 1695 to 1697 & CO 84/Mds/14 disallowed to show the correct profits after reducing common expenditure for the above claim and the CIT(A) directed the AO to

allow the balance amount of Rs.6,84,43,211/- (Rs.8,05,21,425/- Rs.1,20,78,213/- ). Accordingly, we confirm the findings of the CIT(Appeals) on this issue and reject the ground taken by the

Revenue. Therefore, the ground of appeal is dismissed.

“5.1 The ld. CIT(A) erred in deleting the disallowance u/s 40(a)(i) on FCCB of ₹ 12.09 crore made by the AO, by holding that the assessee is required to deduct tax on the maturity of the FCCBs at the end of five year one month only; that since the assessee had bought back the FCCBs midway, TDS provisions u/s.195 are not applicable as per CBDT Circular No.4/2004.”

that adequate taxes have not been deducted out of such premium payables required u/s.195 of the Act. The assessee issued foreign currency convertible bonds during April 2006 for an amount of US$75 million, which would mature in five years and one day. The bonds

39 - - ITA 1695 to 1697 & CO 84/Mds/14 carried on overall premium of 36.49% which gave a yield to maturity rate of 6.32% calculated on half yearly basis. The details furnished in schedule 4 to the balance sheet would indicate that the assessee created a cumulative provision of ₹ 61.30 crores in respect of the premium payable by it on the foreign currency convertible bonds issued by it during April 2006. The premium payable for the relevant previous year of ₹ 12.09 crores was also included in the said provision and the quantification of the said premium at ₹ 12.09 crores had been done.

12.1 The bonds issued are in the nature of borrowing for the purpose of business and the expenditure incurred for the said borrowing is revenue expenditure as held by the Apex Court in the case of ‘India Cements Ltd’ (60 ITR 52) and hence, the interest payable on the bonds by the name ‘premium’ is also allowable as business expenditure. With this, in view, premium payable on the bonds, the assessee can claim premium payable on a pro rata basis as held by the Apex Court in the case of ‘Madras Industrial Investment Corporation Ltd. (225 ITR 802). Accordingly, the assessee claimed the said premium payable of ₹ 12.09 crores as

40 - - ITA 1695 to 1697 & CO 84/Mds/14 expenditure in the computation of income liable for assessment for the asst. year under consideration. However, the AO observed that the premium payable of ₹ 12.09 crores claimed as a deductible expenditure by the assessee is not admissible under the provisions of sec.40(a)(i) of the Act, as the taxes required to be deducted under

the provisions of sec.195 of the Act out of the above mentioned expenditure have not been deducted and remitted to the Govt. account and by the notice dated 13.3.2013, the AO requested the assessee to show cause as to why such a disallowance should not

be effected while completing the assessment for the asst. year under consideration.

“i. the premium on foreign currency convertible bonds is payable at the end of 5th year at the time of maturity as per the terms and conditions of the issue. For income tax purposes, the same is claimed on accrual basis. At the end of each year, the premium is not credited to the payee as the amount is due only at the end of 5 years. Hence, both payment/credit are not made to the non resident during the year. Accordingly there is no liability

41 - - ITA 1695 to 1697 & CO 84/Mds/14 to deduct TDS u/s.195 of IT Act 1961 and as there is no liability to deduct tax u/s.195 of the IT Act 1961, the expenditure under consideration cannot be disallowed u/s.40(a)(i) of IT Act 1961.

ii. the appellant also referred, to the CBDT circular No.2 of 2002 issued in the context of TDS on deep discount Bonds / strips u/s.193 of IT Act 1961. It was clarified in the said circular that the TDS would be on the difference between the bid price and redemption price and shall be deducted at the time of maturity. The same reasoning can be extended to Foreign Currency convertible bonds and TDS shall be deducted only at the time of maturity / redemption. The appellant has complied with the above provisions, and the applicable TDS was deposited at the time of maturity. Hence, no disallowance u/s.40(a)(i) is called for.

iii. The exchange rate also keeps differing from date to date and the appellant is not sure the rate at which the premium would be paid to the Bond holders. It can only be the best estimate of the amount payable to the Bond Holders which accrues during the year. However, the payment may be different from what had accrued. For example, certain bond holders may opt for buy back at a lower rate, in which the premium gets reversed. Hence, it is difficult to exactly determined as to what would be

42 - - ITA 1695 to 1697 & CO 84/Mds/14 the amount payable to the Non-Resident before the maturity date / redemption date. So the premium is not credited to the bond holders account and treated as provision for outstanding expenses. When there is no reasonable certainty on the amount of income accruing in the hands of Non Resident, then TDS cannot be made. To reach the above conclusion, the appellant placed reliance on the decision of ITAT Mumbai in the case of IDBI V. Income Tax Officer (293 ITR 267).

iv. There cannot be any disallowance if the recipient had offered the same to tax. Since in the case of the appellant, the recipients have offered the premium for tax in India as per their method of accounting, no disallowance can be made u/s.40(a)(i) of IT Act 1961.

v. The whole scheme of TDS proceeds on the assumption that the person whose liability to pay an income, knows the identity of the recipient. For the vicarious TDS liability there has to be a principal tax liability and such principal tax liability comes into existence only when it can be ascertained.

vi. The appellant has neither credited the party (not known), nor paid the amount during the relevant previous year and hence section 195 of IT Act 1961 is not applicable.

43 - - ITA 1695 to 1697 & CO 84/Mds/14

vii. The explanation to Sec.195 of IT Act 1961 cannot be invoked in a case where the person who is to receive the premium cannot be identified and this position was accepted by the CBDT in their letter dated 05.07.96 addressed to TISCO Ltd, and a copy of the said letter enclosed as Annexure 18 to this “written arguments”. However, the assessing officer did not agree with the explanations given by the appellant, as above, but, though it fit to disallow the premium payable on foreign currency convertible bonds to the extent of ₹ 12.09 crores u/s.40(a)(i) of IT Act in the assessment order under appeal.”

The AO did not accept the explanations offered by the assessee

and disallowed the claim of the assessee. Aggrieved, the

assessee went in appeal before the CIT(Appeals).

Circular No.2/2002 dated 15.2.2002 and 4/2004 dated

13.5.2004, relied on by the assessee, observed that these are

issued by the CBDT in relation to a clarification regarding Tax

Deduction at Source u/s.193 of the Act from interest on Deep

Discount Bonds. Further, the CIT(Appeals) observed that the

44 - - ITA 1695 to 1697 & CO 84/Mds/14 tax payers are facing difficulties in view of sec.199 of the Act,

which provides that credit for tax deduction at source shall be

allowed only in the year in which the corresponding income is

declared. Thus, it is clarified that the tax is required to be

deducted at source u/s.193 or 195, as the case may be only at

the time of redemption of such bonds, irrespective of whether the

income from the bonds has been declared by the bond holder on

accrual basis from year to year or declared only in the year of

redemption. The CBDT Circular No.4/2004 issued subsequent

to the Circular No.2/2002 clearly mentioned that tax is required

to be deducted at source u/s.193 or 195, only at the time of

redemption of such bonds, irrespective of whether the income

from the bonds has been declared by the bond holder on

approved basis from year to year or declared only in the year of

redemption. Thus, the CIT(Appeals) opined that the assessee

is required to deduct tax on the maturity of the FCCBs at the end

of five one month then only the assessee is supposed to deduct

tax. According to the CIT(Appeals), since, the assessee has

bought back the FCCBs midway, the TDS provisions u/s.195 are

not applicable as per the Circular No.4/2004 issued by the CBDT

45 - - ITA 1695 to 1697 & CO 84/Mds/14 and Rule 37DA of the IT Rules is also not applicable in the case

of the assessee, which provides a situation where tax is to be

deducted on income, which is assessable over a number of

years as well as credit to such deduction of tax shall be given to

in the same ratio as the income is assessed.

14.1 The ld. AR placed his reliance on the decision of the

Tribunal, Mumbai Bench in the case of IDBI v. ITO, in 293 ITR

267(Mum.)(A.T), before the CIT(Appeals), to support his view.

14.2 Even in the case of the assessee, who had created the

interest payable to interest liability account and not debited the

same to the P & L account during the year under consideration,

but failed to deduct TDS. The deduction of tax at source can

only effected when the payee is known. In this case, the GDRs

being transferable or traded at Singapore Stock Exchange, being

a transferable on bidding and on simple endorsement and

delivery, the relevant registration date being a date subsequent

to the closure of books of account, the assessee could not have

ascertained the payees at the point of time when the provision

for interest accrued but not due was made. Accordingly, the

46 - - ITA 1695 to 1697 & CO 84/Mds/14 CIT(Appeals) observed that no tax was required to be deducted at source in respect of the provision for interest payable made by

the assessee which reflected provision for interest accrued but not due, in a situation where the ultimate recipient of such interest accrued but not due could not have been ascertained at

the point of time, when the provision is made. The interest to such bond holders is to be paid as are registered with the assessee company, but they could not have been any method of ascertaining at the time of the making the provision for interest accrued but not due as on 31st March of the Current Financial Year under consideration. According to the CIT(Appeals), it is important to bear in mind that taxes were duly deducted at

source at the time of payment. However, the assessee did not have any liability to deduct tax at source, in respect of provision for interest accrued but not due. Following the decision of the

Tribunal cited supra in the case of IDBI v.ITO and CBDT Circular No.4/2004, the CIT(Appeals) observed that the assessee is not required to deduct TDS on the premium payable at ₹ 12.09 crores during the year under consideration and directed the AO to delete the addition made for non-deduction of

47 - - ITA 1695 to 1697 & CO 84/Mds/14 TDS u/s.40(a)(i) of the Act. Against this, the Revenue is in

appeal before us.

on record. We have gone through the submissions of the

assessee on deduction of TDS on the premium payable at

Rs.12.09 crores as well as the assessment order on this issue.

The ld.A.R placed reliance in Board Circular No.2/2002 dated

15.02.2002 as well as Circular No.4/2004 dated 13.05.2004. The

circular issued by the CBDT is in relation to a clarification

regarding Tax Deduction at Source u/s 193 of the IT Act from

interest on Deep Discount Bonds. In this circular, it was

discussed that the tax payers are facing difficulties in view of

section 199 of the IT Act which provides that credit for tax

deduction at source shall be allowed only in the year in which the

corresponding income is declared. Thus, it is clarified that the tax

is required to be deducted at source u/s 193 or 195, as the case

may be only at the time of redemption of such bonds,

irrespective of whether the income from the bonds has been

declared by the bond holder on accrual basis from year to year

48 - - ITA 1695 to 1697 & CO 84/Mds/14 or declared only in the year of redemption. The CBDT Circular

No.4/2004 issued subsequent to the circular No.2/2002 clearly

mentioned that tax is required to be deducted at source u/s 193

or 195, only at the time of redemption of such bonds, irrespective

of whether the income from the bonds has been declared by the

bond holder on approved basis from year to year or declared

only in the year of redemption. Thus it is clear the appellant is

required to deduct tax on the maturity of the FCCBs at the end of

five year one month then only the appellant is supposed to

deduct tax. Since the appellant has bought back the FCCBs

midway, the TDS provisions uls 195 not applicable as per the

circular In this regard, Rule 37DA of the IT Rules is also not

applicable in the case of the appellant which provides a situation

where tax is deducted on income which is assessable over a

number of years as weIl as credit to such deduction of tax shall

be given to in the same ratio as the income is assessed. Further,

the ld. AR of the appellant further placed his reliance on IDBI Vs.

ITO cited supra wherein the Tribunal has discussed the core

issue in this case pertains to the scope of Explanation to Sec.

193 of the Act which requires whether tax to be deducted at

49 - - ITA 1695 to 1697 & CO 84/Mds/14 source in respect of the ‘provision for interest accrued but not

due’ made by an assessee, whether the ultimate recipient of

such interest accrued but not due cannot be ascertained at the

point of time when the provision is made.

15.1 The expression ‘interest accrued but not due’ is

essentially an accounting expression which refers to the interest

liability which has arisen in respect of the interest payable by a

person but liability to pay such interest has not been criticized.

The expression becomes particularly relevant when interest is

payable on a date, later than the date on which books of

accounts of the assessee are closed annually. At the time of

closure of annual accounts, the assessee has incurred the

liability in respect of interest but the liability is to be discharged at

a later date. Even in the case of the assessee who had created

the interest payable to interest liability account and not debited

the same to the P & L account during the year under

consideration, but failed to deduct TDS. The deduction of tax at

source can only be effected when the payee is known. In the

instant case of the appellant, the GDRs being transferable or

50 - - ITA 1695 to 1697 & CO 84/Mds/14 traded at Singapore Stock Exchange, being a transferable on

bidding and on simple endorsement and delivery, the relevant

registration date being a date subsequent to the closure of books

of accounts, the assessee could not have ascertained the

payees at the point of time when the provision for interest

accrued but not due was made. Accordingly, no tax was required

to be deducted at source in respect of the provision for interest

payable made by the assessee which reflected provision for

interest accrued but not due, in a situation where the ultimate

recipient of such interest accrued but not due could not have

been ascertained at the point of time when the provision is

made. The interest to such bond holders is to be paid as are

registered with the assessee company, but they could not have

been any method of ascertaining at the time of the making the provision for interest accrued but not due as on 31st March of

the Current Financial Year under consideration. It is important to

bear in mind that taxes were duly deducted at source at the time

of payment. However, the assessee did not have any liability to

deduct tax at source, in respect of provision for interest. accrued

but not due.

51 - - ITA 1695 to 1697 & CO 84/Mds/14

15.2 Keeping in view of the CBDT Circular No.4/2004 as well as the ratio held in the case of IDBI mentioned supra which

are squarely applicable to facts of the case of the appellant and therefore the appellant is not required to deduct TDS on the premium payable at Rs.12.09 crores during the year under

consideration. The Ld.CIT(A) directed the ld. Assessing Officer to delete the addition made for non-deduction of TDS u/s.40(a)(ia) of the Act. We do not find any infirmity in the order

of ld. Learned Commissioner of Income Tax(A) and the same is confirmed. As discussed above premium payable on FCCB bond on maturity cannot be equated with interest so as to deduct the TDS on it. Accordingly, this ground of appeal is dismissed.

52 - - ITA 1695 to 1697 & CO 84/Mds/14 17. The facts of the issue are that the AO assessed the premium on the foreign currency convertible bonds pertaining to the period 1.4.2009 to 31.12.2009 in respect of foreign currency convertible bonds bought back by the assessee u/s.28(i) and 29(iv) of the Act to the extent of ₹ 25,61,65,000/-. The assessee has issued FCCBs during April 2006 for an amount of US$ 75 million dollars which will mature in five years one day. The Bonds carry an overall premium of ₹ 36,49% which gives a yield- to-maturity rate of 6.32% calculated on half yearly basis. The assessee accordingly calculated the premium from year to year and claimed the premium on accrual basis in the earlier three asst. years 2007-08, 2008-09 and 2009-10 totalling to ₹ 72.76 crores. During the present previous year, out of the total bonds worth 75m $, the assessee bought back bonds of face value of 38.25 million US$ at a huge discount resulting in two-fold benefit to it. Firstly, no premium is payable on the amount covered by such buy back and accordingly the amount which was claimed as expenditure in earlier three asst. years was offered as income u/s.41(1) of the Act. Secondly, the liability of ₹ 38.25 m$ itself was purchased back at 15.86 m$ at a huge discount resulting in

53 - - ITA 1695 to 1697 & CO 84/Mds/14 a substantial benefit in the form of reduction in liability to the

extent of the difference between the two. The total benefit works out to ₹ 160.3834 crores which was recognized in the books of

the assessee. The computation of the benefit was furnished by

the assessee as under : ₹ 171.8458 cr Buy back quantity 38.25 m$ ₹ 62.7223 cr Add : Premium accrued for financial years 13.96 m$ 2006-07 to 2009-10 ₹ 234.5681 cr Total 52.21 m$ ₹ 74.1847 cr Less : Amount at which bonds were 15.86 m$ bought back ₹ 160.3834 cr Profit on buy back 36.35 m$

The assessee, out of the amount of ₹ 160.38 crores, a sum of ₹83.50 crores was adjusted against the goodwill write off. In this

regard, a note is given in the schedule 19B as point No.21,

wherein it is mentioned exclusively the profit on buy back after

impairment of goodwill. As per the accounting standard 26, the

impairment of intangible assets has to be treated as an expense

and like other expenses this also has to be debited to the profit

and loss account. In other words, net amount after expensing

the goodwill impairment is credited to the profit and loss account.

The effect on the book profit would be ‘nil’ in both the cases viz.

54 - - ITA 1695 to 1697 & CO 84/Mds/14 crediting the net amount to the profit and loss account or crediting the gross amount of profit on buy back and debiting the

goodwill write off / impairment of goodwill to the profit and loss account. Out of the balance ₹ 76.88 crores, a sum of ₹ 62.72 crores pertains to the premium payable with regard to premium,

originally at the time of issue of bonds, the premium payable was adjusted against the share premium account. Accordingly, the premium extinguished was also adjusted against the share premium account. The share premium does not form part of

reserves since the same is not available for all the purposes and available only for specific purposes as prescribed under the Companies Act, 1956 and the balance amount of ₹ 14.16 crores

was credited to the profit and loss account. It was also claimed by the assessee that the profit on buy back would not constitute income taxable under the provisions of sec.28(iv) of the Act.

17.1 However, the AO differed with the assessee on the taxability of the profit arising on the buyback of FCCBs. According to the AO, the assessee gets a benefit regarding premium payable in so far as a consequence to the buyback not

55 - - ITA 1695 to 1697 & CO 84/Mds/14 only for the three earlier years, but also for the current asst. year, the liability to pay premium on bond worth 38.25 million US$ vanished. Hence, according to the AO, in continuation of the treatment given by the assessee to the premium for the earlier three asst. years of offering of the disappeared liability to tax, the premium liability which ceased to exist for the current asst. year also should have been offered to tax. This is a benefit to the assessee on the revenue account, in the nature of benefit mentioned in sec.28(iv) of the Act, and which is not convertible into money. Hence, the same squarely falls u/s.28(iv) of the Act and liable to be treated as income. Such benefit was computed at ₹ 25.61 crores (total premium benefit ₹ 62.72 crores – offered in earlier years ₹ 37.11 = ₹ 25.61 crores).

17.2 The assessee was requested in the notice dated 13.3.2013 to explain as to why the above amount of ₹ 25.61 crores should not be taxed, for the asst. year under consideration and the assessee filed its reply dated 19.3.2013. The assessee also filed its further replies dated 22.3.2013 and 26.3.2013. In the reply dated 19.3.2013, the assessee referred

56 - - ITA 1695 to 1697 & CO 84/Mds/14 to the facts pertaining to the issue on hand and the assessee

claimed that the FCCB was utilized for purchase of capital

assets and cannot be used for working capital requirements, as

per the regulations of the Reserve Bank of India. The assessee

also relied on the decision of the Jurisdictional High Court in the

case of ISKRAMEMCO REGENT Ltd. vs. CIT (331 ITR 317),

wherein the above issue has been discussed. The assessee

also placed reliance on the decisions in the cases of Mahindra &

Mahindra Ltd. v. CIT (261 ITR 501-Bom), CIT v. Chetan

Chemicals (P) Ltd. (267 ITR 770-Guj), Iskraemeco Regent Ltd.

Vs. C.I.T in [2011] 331 ITR 317(Mad.) in support of its

contentions.

17.3 However, the AO observed that the decision in 331 ITR

317(Mad) is not applicable to the case of the assessee, as the

facts are different. In the cases cited, according to the AO, the

issue involved was with reference to the loan amount waived by

the bank consequent on one time settlement with its customer

and the court held that the waiver amount is not taxable

u/s.28(iv) of the Act. But in the case of the assessee, according

57 - - ITA 1695 to 1697 & CO 84/Mds/14 to the AO, the facts are different. The assessee itself treated

such premium relating to earlier years as income during the

present financial year u/s.41(1) of the Act, but did not do so for

the current asst. year and therefore, as an extension thereto, it

was proposed to treat the premium relating to the current

financial year 2009-10, for which no premium is payable

consequent on buyback of the bonds, as income of the present

previous year. The value of the bond which was listed on

Singapore Stock Exchange has come down below the face value

and was traded at a discount and the assessee made use of the

opportunity to reduce its liability and accordingly, bought back

the bonds at a discount which resulted in both interest and

principal benefit to it. Whereas, in the case before the Madras

High Court, it was a case of waiver by the bank of the loan,

which, but for the waiver, would have been payable by the bank

and hence, the case law under reference does not help the

assessee. Further, the AO observed that the premium relating to the current asst. year of ₹ 25.61 crores, which is a benefit,

which accrued to the assessee on buyback of the bonds is

treated as income as per the provisions of sec.28(i) and 28(iv) of

58 - - ITA 1695 to 1697 & CO 84/Mds/14 the Act and brought to tax the amount of ₹ 25.61 crores.

Aggrieved, the assessee went in appeal before the

CIT(Appeals).

18.1 After verifying the details of approval letters given by the

RBI as well as correspondence with YES Bank and

allotment of LRN approving the FCCB loan obtained as per

ECB/FCCB Guidelines and also Certification of Form No.83

issued by the YES Bank to the RBI, the CIT(Appeals), observed

that the FCCB loan obtained is in compliance of ECB Guideline

as well as the assessee is required to submit ECB-2 Return as

per Circular No.60 dated 31.1.2004 on monthly basis giving the

details of withdrawals of Foreign loan amount, utilization,

repayment, conversion, redemption and other payments etc.,

starting from March 2006, the details filed by the assessee as

mentioned amply proved that the loan obtained in the form of

FCCBs at 75 million US$ following the guidelines and circulars

issued by the RBI from time to time.

18.2 The CIT(Appeals) observed that the various documents

filed showed that the assessee has followed the guidelines of

59 - - ITA 1695 to 1697 & CO 84/Mds/14 RBI Circular No.5 dated 1.8.2005 and the assessee has also

followed the RBI guidelines in issuing the FCCBs and the

utilization funds showed that the funds have been utilized for

purchase of capital equipments and machinery as can be seen

from the statement of utilization of FCCB funds.

18.3 According to the CIT(Appeals), even in the case of

payment made towards buyback of FCCBs, governed by the RBI

Guidelines in Circular No.39 dated 8.12.2008, the assessee has

proved that the funds used for buyback have been generated

from its off-shore foreign reserves available with Bergen off-

shore Logistics PTE Ltd., which is a wholly Owned Overseas

Subsidiary, which has sufficient foreign reserves for payment of

buyback of FCCBs. The amount paid for buyback of FCCBs is at ₹ 74.18 crores or US$ 15.86 million under automatic route as

stipulated by the RBI Circular No.5 out of foreign currency funds

the assessee had received from its own group concerned of

Wholly Owned Overseas Subsidiary i.e. Bergen Off-shore Global

PTE Ltd., Singapore. The RBI in its guidelines as per Circular

No.39 has stipulated certain guidelines for buyback / repayment

60 - - ITA 1695 to 1697 & CO 84/Mds/14 of FCCBs vide Circular dated 8.12.2008 once the assessee

prefers to pay back towards FCCBs in Foreign Currency then

there is no requirement of approval from the RBI. The assessee

can follow an automatic route by utilizing its own foreign

reserves for prepayment or buyback of FCCBs as allowed by

RBI guidelines vide Circular No.39. The assessee company has followed this route by repaying ₹ 74.18 crores or US$ 15.87

million out of its own subsidiary foreign reserves. The RBI’s

approvals is required for prepayment or buyback of FCCBs,

once the assessee does not have foreign reserves but as Indian

Currency in terms of Rupees for prepayment or buyback of

FCCBs, wherein RBI permission is required for converting the

Indian Currency into Foreign Currency through approval route.

Since, the assessee has followed automatic route apparently no

formal approval from the RBI is required for buyback /

prepayment of FCCBs. This amount has been paid out of

Foreign subsidiary company of the assessee i.e. Bergen Off-

shore Global PTE Ltd., Singapore, which was having sufficient

foreign reserves at US$ 16.10 million out of which Bergen Off-

shore Global PTE Ltd., has transferred an amount of US$ 15.86

61 - - ITA 1695 to 1697 & CO 84/Mds/14 million to the account of the assessee company maintained with

RBS Coutts Bank Singapore from 16.1.2009 to 16.11.2009. The

assessee company paid out of this RBS Coutts Bank account

the amount of buyback of FCCBs to the tune of 74.18 crores or

US$ 15.86 million to the bank of New York, Mellon, London.

Thus, the assessee had sufficient foreign reserves funds available for payment of ₹ 74.18 crores on account of buyback of

FCCBs to the bond holders via RBS Coutts and via Hedge

Grove Street and ultimately the bonds were cancelled vide letter

dated 31.3.2010 written by Sical Logistics Ltd., to Bank of New

York, Mellon, London and reconfirmed by Bank of New York,

Mellon vide email dated 21.9.2010. Also letter issued by Bank of

New York, Mellon on 9.4.2011 clearly indicates that the current

nominal value of the bonds stands reduced at 6.75 million US$.

Also it may pertinent to add that verification of compliance of

FCCB guidelines is a matter concerned with Reserve Bank of

India (RBI) before allowing any movement of Foreign currency

either inward or outward remittances of Foreign currency or

Indian convertible currency.

62 - - ITA 1695 to 1697 & CO 84/Mds/14 18.4 As far as the Financial Action Task Force (FATF) is

concerned which prescribes assessment of the implementation

of Anti-money Laundering and Counter-Terrorist Financing

(AML/CFT) Standard in Singapore, which are issued by Monitory

Authority of Singapore and covered the full range of measures

required by the FATF recommendations in particular, Customer

Due Diligence requirements which are very broad and are

effectively implemented by Singaporean Financial Institutions.

Over all, Singapore has a comprehensive regime to provide

International Cooperation in all the foreign currency transactions.

All the foreign transactions entered into by the assessee’s

company are subjected to FATF guidelines as can be verifiable

from the material filed by the assessee in support of the above

foreign transactions. In case any default on the part of the

assessee activities, it is the Singapore Government which has to

object any apply FATF guidelines before allowing all these

transactions from the assessee group of companies as well as

Foreign Currency transactions. On verifying the material brought

on record, the CIT (Appeals) observed that the assessee

followed the guidelines of various Financial Institutions as per

63 - - ITA 1695 to 1697 & CO 84/Mds/14 Singaporean Laws which are all subjected to FATF guidelines.

Thus, the assessee has brought on record material relevant to

the compliance of various guidelines in repayment of foreign

currency for buy-back of FCCB bonds.

18.5 Regarding the issue of Due Diligence Certificate as per

the RBI Circular No.5 dated 1.8.2005, which prescribes that the

Due Diligence Certificate has to be furnished from the Overseas

Banker duly designated authorized dealer. The said circular also

required the Form 83 to be submitted through authorized dealer.

After allotting loan registration number(LRN) by the RBI based

on the certification given by the authorized dealer, Form 83

certification by the authorized dealer itself becomes the final

evidence of compliance with the RBI guidelines as per Circulars

issued by the RBI from time to time. Thus, keeping in view of

the various approval letters issued by the RBI and authorized

dealer i.e. ‘YES’ Bank, Form 83 and utilization certificate of

FCCBs funds the assessee has fulfilled the RBI guidelines as

well as circulars issued from time to time thereby complying the

various RBI conditions in issuing FCCBs as well as buying back

64 - - ITA 1695 to 1697 & CO 84/Mds/14

FCCBs. Therefore, according to the CIT(Appeals), the

contentions of the AO that the assessee has not followed RBI

guidelines is not based on material facts, as the assessee has

filed documentary evidences as appended above proved with

evidence that the assessee has complied with all the RBI

guidelines in issuing as well as buying back of FCCBs.

18.6 The assessee company has also filed a statement of

utilization of FCCB Funds, which is as under :

SICAL LOGISTICS LIMITED STATEMENT OF UTILIZATION OF FCCB FUNDS Particulars Debit / Utilization ₹ US $ Purchase of Ship / Dredger 4,63,28,582 2,08,04,42,330 Platform Vessel – TORINO and Dredger – PORTOFINO by transfer / investment in Bergen Offshore Logistics Pte Ltd. and its 100% subsidiary Norsea Global Offshore Pte Ltd.

Purchase of Railway License 1,12,40,292 50,00,00,000 Licensing Fees for purchase of Category I Concessionair

Purchase of Land for Rail Terminal Development

Bangalore 40,55,964 18,04,20,776 Minjur 5,61,117 2,49,60,050 Mumbai 21,59,093 9,60,42,571 Anupampattu 75,03,020 33,37,55,562 Purchase of Trucks 54,893 24,41,796

65 - - ITA 1695 to 1697 & CO 84/Mds/14

FCCB Issue Expenses 30,97,038 13,71,00,169 Total Funds raised through issue of 7,50,00,000 3,35,51,63,254 FCCB

18.7 The CIT(Appeals), after verifying the written submissions as well as enclosed documents submitted by the ld. AR, observed that the profit arising on the buyback of FCCBs has been quantified by the assessee at ₹ 160.38 crores, which consists of profit on buyback of FCCBs at ₹ 97.66 crores and the premium which accrued on the bonds bought back at ₹ 62.72 crores aggregating to ₹ 160.38 crores. The cit(Appeals) observed that the AO in his assessment order quantified the same profit at ₹ 160.38 but bifurcated into profit on buyback at 134.77 crores and the premium at ₹ 25.61crores and included the premium which accrued on the bonds bought relating to the financial years 2006-07, 2007-08 and 2008-09 – together at ₹37.11 crores in the profit on the buyback of shares quantified at 134.77 crores. The AO has set the mistake in calculation by correction bifurcation of the said profit into profit and buyback of FCCBs at ₹ 97.66 crores and premium relating to the buyback of FCCBs at ₹ 67.72 crores. Thus, the total quantum of profit

66 - - ITA 1695 to 1697 & CO 84/Mds/14 arising from the buyback FCCBs remains at ₹ 160.38 crores. Hence, according to the CIT(Appeals), there cannot be any enhancement of income over and above the profit on buyback of FCCBs at ₹ 160.38 crores, as expressed by the AO vide his letter dated 19.6.2013.

18.8 The CIT(Appeals) observed that the assessee submitted that both the amounts mentioned above are not taxable as income of the assessee for the year under consideration. The assessee in its submissions stated that the assessee company has already returned back the premium relating to earlier financial years i.e. 2006-07 to 2008-09 amounting to ₹ 37.11 crores, which was claimed as a deduction in the profit and loss account of the respective financial years, as revenue expenditure, admitted as income in the financial year 2009-10 relevant to the asst. year under consideration and paid taxes on ₹ 37.11 crores. This was done u/s.41(1) of the Act. A similar adjustment was not required for the financial year under consideration as the premium relating to this period i.e. at ₹ 25.61 crores was neither debited to the profit and loss account

67 - - ITA 1695 to 1697 & CO 84/Mds/14 nor claimed as expenditure during the period under

consideration. Since the assessee has not claimed the balance amount of ₹ 25.61 crores relevant to the year under

consideration, the assessee has taken the same amount to the

provision premium account, which cannot be treated as income

and even the provisions of sec.41(1) of the Act are not

applicable and hence cannot be taxed as income either 28(i) or

28(iv) of the Act.

18.9 Regarding the addition made by the AO on account of

benefit of premium payable as a consequent to the buyback of

FCCBs not only for the earlier 3 years, but also for the current

asst. year, the assessee in its submission stated that once the

liability to pay premium on bond worth 38.25 million US$

vanished on account of buyback of FCCBs, the assessee

company did not have any premium liability which has ceased to

exist for the current asst. year. Hence, there is no liability on the

part of the assessee company to offer the non-existing liability to

that of the treatment given by the assessee to the premium for

the earlier three asst. years.

68 - - ITA 1695 to 1697 & CO 84/Mds/14

18.10 As far as the FCCBs received in the form of loan from

abroad was utilized only for the purpose of purchase of capital

assets as per the regulation of RBI. Such loan amount cannot

be used for working capital requirements. This has been

brought to the knowledge of AO during the course of

assessment proceedings and also placed its reliance on several

case laws such as Iskramemco Regent Ltd. vs. CIT (331 ITR

317), which is squarely applicable to the facts of the assessee’s

case. The value of the bond which was listed on Singapore

Stock Exchange has come down below the face value and was

traded at a discount and the assessee made use of such

occasion to reduce its liability and accordingly, bought back the

bonds at a discount resulted in both interest and principal benefit

to it. Before the Madras High Court, it was a case of waiver by

the bank of the loan as a onetime settlement resulted in

reduction in liability or remission in principal. Whereas the AO

observed that the premium relating to the current asst. year at ₹25.61 crores (62.72 – 37.11), which is a benefit accrued to the

assessee on buyback of the bonds and treated the same as

69 - - ITA 1695 to 1697 & CO 84/Mds/14 income as per the provisions of sec.28(i) and 28(iv) of the Act.

18.11 After verifying the various submissions as well as

supportive case laws and the assessment order, the

CIT(Appeals) observed that FCCBs is debt instrument issued by

corporate entities for rising debt funds which also gives an option

to the bond holder for seeking conversion of the debt into equity

at an agreed valuation. The FCCBs issued by corporate entities

can be redeemed/repaid either through redemption or converted

into equity shares at the option of the bond holder. Due to

certain market conditions, few bond holders have agreed to

buyback of their holdings on bonds ahead of the maturity date.

Due to early redemption of bonds, which are redeemed at a

discount to the face value of the bonds, in addition to interest

accrued if any till such redemption. Accordingly, FCCBs are

being redeemed at a lesser value than the book value resulted in

principal remission.

18.12 The CIT(Appeals) observed that the assessee, who

has followed the principle of accounting consistently in treating

the premium payable as a revenue liability and has debited an

70 - - ITA 1695 to 1697 & CO 84/Mds/14 amount of ₹ 37.11 crores under the premium payable account for the financial years 2006-07 to 2008-09. Similarly, the premium of ₹ 25.61 crores is related to the financial years 2009- 10, 2010-11 and 2011-12, not debited to the profit and loss account of the said financial years. Since, the assessee has bought back the bonds to which the premium payable at ₹ 62.72 crores relate to, the assessee has followed the accepted accounting principle of reversing the claims made to the extent of ₹ 37.11 crores made for the earlier years towards premium payable and offered the same as income of the financial year 2009-10 i.e. the year under consideration in the memo of adjusted statement of income liable for assessment. The assessee has not debited the amount of ₹ 25.61 crores to the profit and loss account of the financial year 2009-10 as the said liability has not accrued because of the buyback of the FCCBs. Hence, the assessee has followed uniform accounting principle regarding the admission of the revenue liability as per the provisions of Accounting Standards and accordingly followed for all the financial years from 2006-07 to 2009-10.

71 - - ITA 1695 to 1697 & CO 84/Mds/14 18.13 After going through the statutory permission obtained

by the assessee company from RBI, which has authorized Yes

Bank, Chennai, which is considered as Authorized Dealer (AD)

to obtain External Commercial Borrowings (ECB) in the form of

FCCBs, the CIT(Appeals) observed that the assessee company

is also submitted a statement of utilization of FCCB Funds,

wherein the assessee has used the entire amount of FCCBs for

purchasing of capital asset such as purchase of Ship/Dredger,

purchase of Railway License, purchase of Land for Rail Terminal

Development at Bangalore, Minjur, Mumbai and Anupampattu.

Apart from the above purchase of capital assets, the assessee

has also purchased some Trucks. The entire amount of FCCB

funds has been utilized as per the RBI Guidelines and

accordingly, invested in capital assets as it is seen from the

statement of utilization of FCCBs funds. Once the Foreign loan

was taken for the purpose of capital assets, any gain connected

with the assets will result into capital receipts. The CIT(Appeals)

also observed that it is clear by several judicial pronouncements

even though it is connected with forward contract in Foreign

currency which was obtained for purchase of capital assets, that

72 - - ITA 1695 to 1697 & CO 84/Mds/14 the amount received by the assessee on account of forward

contract in foreign currency was a capital receipt and not exigible

to tax. According to the CIT(Appeals), the same view has been

held in the case of M/s. Sutlej Cotton Mills Pvt. Ltd. vs. CIT (SC)

(116 ITR 1), M/s. Tiruveni Engineering Works Ltd. vs. CIT ( 156

ITR 202)( Delhi) and Gujarat Narmadha Vally Fertilizers Ltd. vs.

CIT (Ahd) ( 73 TTJ 787).

18.14 According to the CIT(Appeals), it is a settled position

that a gain arising from a fixed capital is capital receipt and not

chargeable to tax. It is taxable as revenue item, when it is

preferable to circulating capital or stock-in-trade. The fixed

capital is what the owner turns to project by keeping in its own

position. Circulating capital is what the assessee makes profit of

by parting with a letting it change its masters. The entire loan

transaction in the instant case under consideration was for the

purpose of acquisition of fixed assets as per the guidelines

approved by the RBI which the assessee has followed from time

to time obtaining required permissions, which is supported by the

following judicial precedents:

73 - - ITA 1695 to 1697 & CO 84/Mds/14 1. Tata Locomotive & Engineering Ltd. vs. CIT (60 ITR 405-SC) 2. Mahindra & Mahindra Ltd. vs. CIT (91 ITR 130-Mum) 3. Sutlej Cotton Mills Ltd. vs. CIT (116 ITR 17) 4. Union Corporate India Ltd. vs. CIT (19 CTR 351-Cal.) 5. Tiruvani Engineering Works Ltd. vs. CIT (156 ITR 202-Del.) 6. Calcutta Electricity Supply Corporation Ltd. (59 CTR 232-Cal.) 7. EID Parry Ltd. vs. CIT (69 ITR 49-Mad.)/174 ITR 11(Mad). 8. Gujarat Namadha Valley Fertilizers Ltd. vs. DCIT (73 TTJ 787-Ahd.)

18.15 The CIT(Appeals) observed that any foreign currency

or any currency is neither a commodity nor shares. The sale of

Goods Act specifically excludes cash from the definition of

Goods. Besides, no person other than authorized dealers and

money changes are allowed in India to trade in foreign currency

much less speculate. Section 8 of the Foreign Exchange

Regulation Act (FERA) 1973 provides that except with prior

general or special permission of RBI, no person other than an

authorized dealer shall purchase, acquire, borrow or sell foreign

currency. The CIT(Appeals) observed that in this case, the

authorized dealer i.e. YES Bank permitted by the RBI as per

FERA has dealt the foreign currency transaction entered into by the assessee company for obtaining a loan amount of ₹ 75

million US$ obtained from Bank of New York, London by issuing

74 - - ITA 1695 to 1697 & CO 84/Mds/14 Foreign Currency Convertible Bonds (FCCBs). For obtaining a

foreign loan, the guidelines prescribed by the RBI have to be

strictly complied with. According to the CIT(Appeals), the

assessee has undergone the entire process of getting

permission from the RBI by duly complying all the guidelines of

External Commercial Borrowings (ECB) Policy guidelines issued

by the RBI from time to time which are equally applicable to

FCCBs for getting the external borrowing for the purpose of

purchasing capital assets. According to the CIT(Appeals), the

assessee had obtained the relevant permission as per the policy

of ECB/FCCBs, following RBI guidelines. The CIT(Appeals)

observed that the AO is not justified by making an allegation

that the assessee company has not followed the RBI Guidelines

in obtaining foreign loan. Therefore, the contention of the AO is

not accepted that the assessee has not proved whether the RBI

Guidelines are to be followed or not ? According to the

CIT(Appeals), the assessee company has proved that the

foreign funds have been utilized for acquiring capital assets. In

this regard, the reliance placed by the assessee on the

Jurisdictional High Court in the case of Iskraemeco Regent Ltd.

75 - - ITA 1695 to 1697 & CO 84/Mds/14 vs. CIT (331 ITR 317), is squarely applicable to the assessee’s

case, as the funds were utilized for the purchase of capital asset

as it is seen from the utilization of funds.

18.16 The Madras High Court dealt the situation wherein the

assessee had obtained a loan from SBI for acquiring assets and

it had paid a part of the principal amount in the earlier asst.

years. In the relevant asst. year, a onetime settlement was

arrived at between the assessee and the bank in terms of which

bank waived outstanding due of principal amount and interest.

The assessee credited waiver of principal amount to ‘Capital

Reserve Account’ in balance sheet treating it as capital in nature.

Whereas the AO treated the said amount as income coming

under the purview of sec.28(iv) r.w. sec.2(24) of the Act. The

transaction in the case being a loan transaction the jurisdictional

High Court held that sec.28(iv) of the Act would have no

application and amount of waiver could not be termed as income

u/s.2(24) of the Act. In the case of the assessee, the profit

arising on the buyback of FCCBs which has been quantified by the assessee at ₹ 160.38 crores which has been bifurcated into

76 - - ITA 1695 to 1697 & CO 84/Mds/14 profit on buyback at ₹ 97.66 crores and the premiums which accrued on the bonds bought back at ₹ 62.72 crores.

18.17 Similarly, the assessee has placed reliance on the decision of the Supreme Court in the case of CIT Vs. Tosha International (319 ITR 7 (St)(SC), wherein it was held that remission of principal amount of loan did not amount to income

u/s.41(1) nor u/s.28(iv) nor u/s.2(24) of the Act. The remission would become income u/s.41(1) of the Act only if the assessee claimed deduction in respect of expenditure or trading liability.

The CIT(Appeals) observed that in the present case, remission of premium on amount of loan so obtained on account of buyback of FCCBs, the assessee has not claimed as

expenditure or trading liability in the financial year relevant to the asst. year under consideration. Even in the case of earlier 3 years i.e. for financial years 2006-07, 2007-08 and 2009-10, the assessee has reversed the claim of the expenditure and offered

for taxation and paid the taxes during the year under consideration. So far as waiver of interest was concerned on account of buyback of FCCBs during the year under

77 - - ITA 1695 to 1697 & CO 84/Mds/14 consideration, the assessee company had not claimed same as

expenditure in computation of income. The remission would

become income only if the assessee has claimed deduction in

respect of expenditure or trading liability. In Mahindra &

Mahindra Ltd. vs. CIT (161 ITR 501), the High Court of Bombay

held that waiver of the loan repayment was not related to stock-

in-trade but to capital asset and, therefore, it was not remission

of liability u/s.41(1) of the Act.

18.18 Further, the CIT(Appeals) observed that the profit

arising from the buyback of bonds is capital in nature and the

premium payable on the said bonds has been considered by the

assessee as revenue in nature. However, the AO took the stand that the entire premium payable of ₹ 62.72 crores relating to the

bonds bought back will constitute income assessable under the

head ‘business’ as per the provisions of sec.28(iv) of the Act.

However, the provisions of sec.28(iv) of the Act would not be

applicable to the remission in the premium payable consequent

to the buyback of the FCCBs, as it does not result in perquisite

or benefit as contemplated under the said provisions. The

78 - - ITA 1695 to 1697 & CO 84/Mds/14 language of sec.28(iv) speaks of ‘whether convertible into money

or not’. Since the benefit contemplated under this sub section is

not directly in terms of money. The AO has also accepted the

contention in his assessment order that the ‘benefit is obviously

not connected to money’. The assessee in its submission stated

that whatever amortizations debited in the profit and loss

account in the earlier years have been made good by way of

compensation as per the provisions of sec.41(1), since the

assessee’s liability are towards premium on FCCBs which is not

a principle amount. Since the assessee has not created this

liability by debiting the Trading Account with the intention that it

is not a trading liability. Waiver of trading liability is alone

taxable. The act of writing back un-debited premium is to give

accounting effect to the business transactions. Hence, this un- debited premium to the tune of ₹ 25.61 crores is not taxable

either u/s.28(i) or 28(iv) of the Act. The contention of the

assessee is supported by the jurisdictional High Court in the

case of Iskraemeco Regent Ltd. cited supra, wherein the

assessee adopted a loan from State Bank of India for acquiring a

capital asset and it had paid a part of the principal amount in the

79 - - ITA 1695 to 1697 & CO 84/Mds/14 earlier asst. years. In the relevant asst. years, a onetime

settlement was arrived at between the assessee and the bank in

terms of which, the bank waived outstanding due of principle

amount and interest. The assessee credited waiver of principal,

amount to capital reserve account in balance sheet treated it as

capital in nature whereas the AO treated the said amount as

income under the provisions of sec.28(iv) r.w.sec.2(24) of the

Act. The Jurisdictional High Court of Madras held that the

transaction in the instant case being a loan transactions,

sec.28(iv) of the Act would not apply to the same and amount of

waiver could not be termed as income u/s.2(24) of the Act. The

Court held that sec.28(iv) does not have any application to a

transaction involving money. Since the assessee was not

trading in money transaction and the grant of loan by a bank

cannot be termed as a trading transaction and held that it cannot

also be construed in the course of business. The Court further

held that sec.41(1) also could not have any application. The

taxability of an amount which has not been treated as a trading

liability with a debit to the profit and loss account cannot

construe the income of an assessee. In the instant case, the

80 - - ITA 1695 to 1697 & CO 84/Mds/14 assessee did not debit the premium of ₹ 25.61 crores to the profit and loss account of the financial years 2009-10 to 2011-12.

Once the trading liability relating to premium payable ceased to exist with the buy back of the FCCBs under consideration, accordingly, the assessee has returned back premium to the extent of ₹ 37.11 crores debited to the earlier financial years and offered for taxation during the financial year 2009-10 i.e. year under consideration. The above contention of the assessee has also been supported by the judgment of the Supreme Court in

the case of CIT Vs.Tosha International (319 ITR 7 (St)(SC), wherein it was held that remission of principal amount of loan did not amount to income u/s.41(1) nor u/s.18(iv) nor u/s.2(24) of the

Act. Similarly, the assessee placed its reliance in the case of ‘Sutlej Cotton Mills Ltd. v. CIT (116 ITR 1), wherein it was held that non-existent income cannot be taxed either under the

provisions of sec.28(i) or sec.28(iv) of the Act. In Mahindra & Mahindra Ltd. vs. CIT (261 ITR 501), the High Court of Bombay held that waiver of the loan repayment was not related to stock-

in-trade but to capital asset and, therefore, it was not a remission of liability u/s.41(1) of the Act. Accordingly, the CIT(Appeals)

81 - - ITA 1695 to 1697 & CO 84/Mds/14 observed that the addition made by the AO to the extent of ₹62.72 crores as business income is to be deleted which is inclusive of ₹ 37.11 crores offered by the assessee on account of reversing the claims made for earlier years i.e. 2006-07 to 2008-09.

19.1 Before the CIT(Appeals), in this regard, reiterated that the proceeds of FCCBs was utilized only for capital purposes i.e. for purchase of fixed assets, making payment of issue expenses and partly for funding the buyback of FCCB itself. As per the guidelines of RBI, foreign loans received on account of

82 - - ITA 1695 to 1697 & CO 84/Mds/14 ECBs/FCCBs cannot be utilized for revenue expenses or

working capital requirements. Therefore, this liability cannot be

treated as trade liability. Obtaining loan for business purpose

does not form part of the trading activity and waiver of the same

does not form part of trading receipt. A grant of loan by a bank

cannot be termed as a trading transaction and it cannot also be

construed in the course of business. The assessee company

obtained the loan for the purpose of investing in its capital

assets. A part of this loan amount along with interest was

waived by way of an agreement between the parties. In the

case referred by the AO i.e. Sundaram Iyengar & Sons Ltd. (225

ITR 344), the facts are totally different to that of the assessee’s

case, where in the referred case above, there was a trading

transaction in which the money was received by the assessee in

the course of carrying on in his business. The loan in its entirety

was completely waived, the loan itself was taken for a trading

activity and on waiving, it was retained in business by the

assessee. In the case of Sundaram Iyengar & Sons Ltd., cited

supra, there was a trading transaction and the money received

was used towards a business transaction. Thus, the said facts

83 - - ITA 1695 to 1697 & CO 84/Mds/14 would indicate that the ratio laid down in TV Sundaram Iyengar &

Sons Ltd.’s case (supra) has no application at all to the facts and

circumstances of this case.

19.2 The CIT(Appeals) observed that even deposit of money

cannot be treated as a trading receipt; therefore, the amount

referred to the loans obtained by the assessee towards the

purchase of its capital assets would not constitute a trading

receipt and the same view has been held in the case of AVM

Ltd. vs. CIT (146 ITR 355). According to the CIT(Appeals), the

contention of the AO regarding the application of sec.28(iv) of

the Act is also not tenable, as the section can be applicable only

to the cases, where the benefit or perquisite are received in kind.

This section does not apply to the benefits in cash or money and

it applies only to a transaction arising from business and this

view has also been supported by the Delhi High Court in the

case of Ravinder Singh vs. CIT (205 ITR 353) and Alchemic Pvt.

Ltd. v. CIT (130 ITR 168). Section 28(iv) provides for

chargeability of profits and gains or business or profession with

relation to the value of any benefit or perquisite arising out of

84 - - ITA 1695 to 1697 & CO 84/Mds/14 business or the exercise of profession and therefore, the same would not include the money transactions. Thus, the

CIT(Appeals) observed that sec.28(iv) of the Act makes it clear that it would cover only transactions other than money transactions. Since, in the instant case under consideration, the

transaction involved being a loan transaction and being a transaction of money, sec.28(iv) of the Act has no application. In support of this contentions, several case laws have been mentioned by the assessee, which were discussed in relation to the premium amount of ₹ 62.72 crores in earlier paragraphs which are equally applicable to the issue under consideration relating to principal amount of ₹ 97.66 crores received on

account of remission of liability or buyback of FCCBs. According to the CIT(Appeals), similarly, sec.41(1) of the Act also does not apply to the facts of the assessee’s case, as it mandates that

there has to be an actual allowance or deduction made for the purpose of computing income under the said section. As there is no claim of such allowance or deduction in the case of the

assessee regarding either remission in liability or premium, the question of application of sec.41(1) of the Act also does not arise

85 - - ITA 1695 to 1697 & CO 84/Mds/14 for consideration. In support of the claim, the ld. AR has cited

the following judgments before the CIT(Appeals).

i) P. Ganesh Chettiary vs. CIT (133 ITR 103)[Mad.] ii) AVM Ltd. vs. CIT (146 ITR 355) iii) Alchemic Pvt. Ltd. v. CIT (130 ITR 168). iv) Mafthlal Ganga Bai & Co. (P) Ltd. vs. CIT (219 ITR 644) v) Garden Silk Mill Pvt. Ltd. vs. DCIT (320 ITR 720 (Guj.)

19.3 The CIT(Appeals) observed that the above case laws

are all in support of the assessee’s case that sec.28(iv) has no

application to a money transaction and hence not applicable to

the facts of the present case under consideration. In view of the

above findings, the CIT (Appeals) observed that the profit on buyback of FCCB to the extent of ₹ 97.66 crores which

represents the gain received on account of waiver of capital

liability is not taxable u/s.28(iv) of the Act and the company is not

in the business of money market transactions and as well the

profit on buyback of FCCBs cannot be treated as business

income. Further, the CIT(Appeals) observed that even the

contention of the AO that the gain arose as a result of an

adventure in the nature of trade and therefore, such gain falls

86 - - ITA 1695 to 1697 & CO 84/Mds/14 u/s.28(iv) of the Act notwithstanding the nature of the assessee’s

business do not stand on legality. An isolated transaction cannot

be considered as trade. In case, such a transaction forms part

of series of transaction then only it reflects the transaction as

adventure is in the nature of trade. Therefore, according to the

CIT(Appeals), this cannot be applied to the assessee’s case of

isolated transaction of buyback of FCCBs to tax the profits even

u/s.28(iv) of the Act. Accordingly, he allowed this ground of

appeal of the assessee. Against this, the Revenue is in appeal

before us.

on record. It is observed that the stand of the D.R to treat the

surplus or redemption debenture as a revenue receipt exigible to

tax is based mainly on the proposition that such surplus

assumes the similar nature and character as that of discount on

debenture, which has been held to be a revenue expenditure by

the various courts including the Apex Court. It is herein

pertinent to note that the proposition pronounced in the various

judicial pronouncements is in support of Revenue’s stand are

87 - - ITA 1695 to 1697 & CO 84/Mds/14

that Madras industrial Investments corporation Vs. Learned

Commissioner of Income Tax in 225 ITR 802(S.C) and the

National Engineering Industries Ltd. Vs. C.I.T in [1999] 236 ITR

577 (Cal).

cited by the learned representatives of both the sides.

a) In the case of Madras Industrial Investment Corporation

vs. CIT (supra) wherein held that:-

“The discount on debentures is an allowable revenue expenditure. When a company issues debentures at a discount, it incurs a liability to pay the trading amount than what its borrowed at a future date. The liability to pay a larger amount than the amount received for the debentures is a liability which has been incurred by the company for the purpose of its business in order to generate funds for its business activities. The purpose of payment of discount is to secure a benefit over a number of years and since there is a continuing benefit to the business of the assessee-company over the entire period, the said liability should be spread over the period of the debentures.”

b) In the case of National Engineering Industries vs. CIT (supra) wherein held that:-

“The liability to pay debenture premium is to be spread over the years from the issue of debentures to the year of redemption.”

88 - - ITA 1695 to 1697 & CO 84/Mds/14

c) In the case of Himachal Pradesh Financial Corporation Ltd. vs. CIT (232 ITR 158) wherein held that:-

“The amount of discount on bonds and debentures has to be spread out proportionately over the number of years for which the bonds are issued and the proportionate amount of such discount would be an allowable expenditure in the relevant assessment years.”

d) In the case of M.P. Financial Corporation vs. CIT (165 ITR 765) wherein held that:-

“The amount of discount on bonds and debentures in effect represents deferred interest and looking it as a loss, a proportionate amount of discount can be written off out of revenue every year during the period the bonds would remain outstanding.”

e) In the case of CIT Vs. Scindia Steam Naviagation Co. Ltd ( 125 ITR 118(Bom.) wherein observed that:-

“15. The surpluses accrued to the company since the debentures were quoted at a discount in the open market. We are only concerned with the surpluses in the last two years, viz., Rs. 44,048 in the accounting year 1956- 57 and Rs. 46,511 in the accounting year 1957-58. The surpluses in the earlier years were not charged to tax. The ITO took the view that since the assessee-company was purchasing and cancelling debentures year after year, these two amounts for the two years in question could properly be regarded as business profits. According to him, profit-making was the dominant motive and in view of the motive and the frequency and the nature of the transactions, the conclusion was inescapable that these were business profits and should be regarded properly as part of the business income of the assessee for these years. In appeal, the AC. agreed with the ITO, relying on the definition of "gross income" in the United States' Inland

89 - - ITA 1695 to 1697 & CO 84/Mds/14

Revenue Code. In further appeal, the Tribunal upheld the assessee's contention, observing that what had been done had nothing whatsoever to do with the regular business of shipping. According to the Tribunal, what had been done was to materially alter its permanent framework or its capital structure and in the process the assessee had taken advantage of the favourable capital market. Such operation, according to the Tribunal, was essentially relatable to its capital and the benefit reaped by the company was essentially a capital benefit. According to the Tribunal, "the mere frequency of operations does not change the capital aspect. It had to be from year to year because investment, each year, had to be confined to a prescribed amount of sinking fund, except in the year 1952-53 when the accumulated sinking fund could be utilised". It was further observed that it was not possible to trace any indicia of trade in these operations as alleged by the Departmental representative. According to the Tribunal, in the context in which it was done, it was more proper to take the view that what had been done was with a view to reduce the capital commitments in the context of favourable capital market.

90 - - ITA 1695 to 1697 & CO 84/Mds/14 that it was part of the business profits of the assessee. We are in agreement with this conclusion.. It is quite clear that the accrual of surplus cannot be regarded as equivalent to profits earned out of the business activity. Once that conclusion is reached, it is immaterial for us to consider whether the accrual of surplus by the assessee-company is of capital nature or asset. In this view of the matter we are in agreement with the conclusions of the Tribunal and the question would be required to be answered in favour of the assessee.

show that the discount at which the debentures or bonds

are issued on a premium which is payable on the

redemption of the bonds or debentures, is regarded as a

revenue expenditure by the various Courts treating the

same as akin to the additional interest payable by the

assessee-company in respect of the said bonds or

debentures and as such the discount or premium so

payable as per the terms and conditions of the debenture or

bond was considered as the cost incurred by the assessee

for the purpose of its business in order to generate funds for

its business activities. It is thus clear that the character of

discount or premium payable on the redemption of

debentures as per the agreed terms and conditions is

altogether different from the surplus arising to the assessee

91 - - ITA 1695 to 1697 & CO 84/Mds/14 from the redemption of debentures prematurely in the

present case inasmuch as the discount/premium on

debentures operates in the revenue field whereas the

surplus on redemption of debentures being an integral part

of the exercise of restructuring its capital operates in the

capital field. We, therefore, are of the view that the discount

on debentures cannot be equated with the surplus on the

redemption of debentures arising to the assessee in the

present case and this being so, the analogy on the basis of

which the discount was held to be revenue expenditure by

the various Courts cannot be straightaway applied to the

surplus on redemption in the present case to hold it as a

revenue receipt. As a matter of fact, the liability on account

of debentures was certainly not a trading liability and as

held by the Hon’ble Delhi High Court in the case of CIT vs.

Phool Chand Jiwan Ram (131 ITR 37) the remission of

portion of such liability does not give rise to any income of

revenue nature which could be subjected to tax.

Steam Navigation Company Ltd. [125 ITR 118] wherein

92 - - ITA 1695 to 1697 & CO 84/Mds/14

held that the surplus on redemption of debenture could not

be treated as a revenue receipt. In the said case, the

decision of Hon’ble Supreme Court in the case of India

Cement Ltd. vs. CIT (62 ITR 52), was also relied upon by

the Revenue and the Hon’ble Bombay High Court found the

same distinguishable on facts for the following reasons

given in para No. 16 of its judgment :

"Mr. Joshi on behalf of the CIT, drew our attention to the decision of the Supreme Court in India Cement Ltd. vs. CIT (1996) 60 ITR 52 (SC), where distinction was made between obtaining of capital by issue of shares and obtaining loan by debentures. It is important to remember in connection with the observations to be found in the above decision that they are in the context of considering the amount spent by the assessee towards stamp duty, registration fee, lawyer’s fee, etc. in connection with the loan which the assessee in the case before the Supreme Court, had obtained from the Industrial Finance Corporation and which had been secured by a charge on its fixed assets. The transactions which we are considering are of a totally different nature and it appears to us to be improper to pick out stray observations from a decision and apply them in a totally different context to a different set of facts."

before the Hon’ble Bombay High Court are similar to the facts of

93 - - ITA 1695 to 1697 & CO 84/Mds/14 the present case in as much as certain amounts had accrued to

the assessee in that case as a result of cancellation of the

debentures by way of investment made by the company in its

own debentures which were being quoted at discount. This

surplus amount accrued to the assessee-company was regarded

as a business profits by the AO as the company was found to be

purchasing and cancelling its debentures year after year. In the

appeal filed by the assessee, the first appellate authority agreed

with the AO and when the matter was carried before the Tribunal

in a further appeal, the Tribunal upheld the assessee’s stand

observing that what had been done by the assessee-company

was to materially alter its capital structure and in the process the

assessee had taken advantage of the favourable capital market

which was essentially relatable to its capital and the benefit

reaped by the assessee-company was essentially a capital

benefit. The Hon’ble Bombay High Court found itself in

agreement with the conclusion drawn by the Tribunal observing

that it is quite clear that the accrual of surplus cannot be

regarded as equivalent to profits earned out of its business

activity and once that conclusion is reached, it is immaterial to

94 - - ITA 1695 to 1697 & CO 84/Mds/14 consider whether the accrual of surplus by the assessee-

company is of capital nature or not. In our opinion, this decision

of the Hon’ble Bombay High Court is squarely applicable to the

facts of the present case and respectfully following the same as

well as for the reasons given above, we hold that the learned

CIT(A) was fully justified in deleting the addition made by AO on

this issue, holding that the same cannot be treated as a revenue

receipt. His impugned order on this issue is, therefore, to be

upheld.

of jurisdictional High Court in the case of C.I.T Vs. Ramaniyam

Homes P. Ltd., in (2016) 95 CCH 0147/ 384 ITR 530 (Mad.)

wherein the jurisdictional High Court deferred from earlier

decision of the co-ordinate bench on the issue of taxability of

waiver of loan taken for acquiring a capital asset, and also that

waiver of principal portion of such loan would fall within the

purview of Sec.28(iv) of the Act and hence, taxable as revenue

receipt. Earlier judgement of jurisdictional High Court in the case

of Iskraemeco Regent Ltd. Vs. C.I.T in [2011] 331 ITR 317(Mad.)

wherein held on the above issue that waiver of loan which has

95 - - ITA 1695 to 1697 & CO 84/Mds/14

been taken for acquiring the capital asset, is not a trade liability

and waiver of such loan cannot consider as income u/s.41(1) or

28(iv) of the Act. The same view was taken by Madras High

Court in the case of C.I.T Vs. M/s.Fidelity Textiles P Ltd., in Tax

case (Appeal) No.1034 /2007 vide order dated 24.02.2016

wherein considering the judgement of Supreme Cort in the case

of TVS Sundram Iyengar and Sons Ltd. In 88 Taxman 429(SC)

and the judgement in Iskraemeco Regent Ltd. (supra) observed

as follows:-

“6. Insofar as the decision in TVS Sundram Iyengar and Sons Ltd.(supra) is concerned, the arose out of admitted facts to the effect that the assessee itself treated the money as its own and took it to the P&L A/c. Paragraph 23 of the said decision reads as follows:- “23. In the present case, the money was received by the assessee in course of carrying on his business. Although it was treated as deposit and was of capital nature at the point of time it was received, by influx of time the money has become the assessee's own money. What remains after adjustment of the deposits has not been claimed by the customers. The claims of the customers have become barred by limitation. The assessee itself has treated the money as its own money and taken the amount to its profit and loss account. There is no explanation from the assessee why the surplus money was taken to its profit and loss account even if it was somebody else's money. In fact,

96 - - ITA 1695 to 1697 & CO 84/Mds/14

as Atkinson, J. pointed out that what the assessee did was the commonsense way of dealing with the amounts.”

8 Therefore, we are of the considered view that the ratio in TVS Sundaram Iyengar and Sons Limited will not apply to the case on hand. The protection given to the British National by the agreement dated 26.06.2000, cannot be treated as a consideration. The Customs Department was not bound by such an undertaking given by the two Indian Nationals. At the most it was a promise on the part of the Indian Nationals to protect the British National against any claim from the Customs Department. It was a promise to hedge the risk that may fall upon the British National.

decision without understanding the factual situation involved in

the said decision and how it would apply to the facts involved in

the subsequent case. A ratio laid down by a higher forum shall

97 - - ITA 1695 to 1697 & CO 84/Mds/14 not be taken out of the context and construed like a statute. The

reduction in value of debenture at the time of redemption cannot

be equated as a waiver of loan so as to treat it as a revenue

receipt. Further, in our opinion, wavier of interest cannot be

equated with gain on redemption of debentures. Such an

interpretation of judgment is totally out of context in which the

question arose for the decision in that case. It is neither

desirable nor permissible to pick out a word or a sentence form

the judtgment of a Court, divorced from the context of the

question under consideration and treat it to be the complete

“Law” declared by the Court. The judgement must be read as a

whole and the observation from the judgment have to be

considered in the light of the questions which were before the

court. A decision of the Court takes its colour from the

questions involved in the case which it is rendered and, while

applying the decision to a later case, the courts must carefully

tried to ascertain the true principle laid down by the decision of

the court and not to pick out words or sentences from the

judgement, divorced from the context of the question under

consideration by the court to support their reasoning.(Ref.

98 - - ITA 1695 to 1697 & CO 84/Mds/14 Madhav Rao Jivaji Rao Scindia Bahadur Vs. UOI [1971] 3 SCR

9; AIR 1971 SC 530.

himself raised the ground in ground No.6.3 that the CIT(A) erred

in placing reliance in the case of M/s.Iskromeaco Regent Ltd as

the facts of that case is different from the instant case and the

Department has not accepted that decision and SLP is pending

before the Supreme Court in Diary Number 18135/2011.

However, contradictory to this, the DR once again relied on the

later judgment of jurisdictional High Court in the case of CIT Vs.

Ramaniyam Homes P Ltd. (Supra) which was on similar facts

with regard to the treatment of wavier of loan, which the action

DR is not proper. Even otherwise, the judgement of Supreme

Court in the case of C.I.T Vs. Vegetable Products Ltd., in [1973]

88 ITR 192 (SC) held that decision is in favour of assessee have

to be acted upon.

vs. PVP Venture Ltd in 90 DTR 340 held that while adjudicating

99 - - ITA 1695 to 1697 & CO 84/Mds/14 the issue relating to the gain on exchange of fluctuation, which

related to the issue of shares in the form of GDS considered as

a capital nature and not taxable by placing reliance on the

judgment of Supreme Court in the case of Sutlej Cotton Mills

Ltd. In [1979] 116 ITR 1 (SC) and also in the case of E. I. D.

Parry Limited in [1988] 174 ITR 11 (Mad) and Jagatjit Industries

Ltd., in [2011] 337 ITR 21 (Del).

gain at the time of redemption of debenture cannot be brought

into tax in terms of Sec.28(iv) of the Act or under section 41(1)

of the Act which is being a capital receipt. The same is

applicable with regard to cessation of premium on FCCB bought

back to the tune of Rs.25.61 crores. Accordingly, we dismiss

the ground taken by the Revenue on this issue and upheld the

order of ld. Learned Commissioner of Income Tax(A).

with regard to deleting the addition to the book profit u/s.115JB of the Act of ₹146.22 crores made by the AO.

100 - - ITA 1695 to 1697 & CO 84/Mds/14

30.1 The facts of the case are that the assessee admitted a book profit of ₹3,22,32,469/-, under the provisions of Companies Act, 1956 for the purpose of MAT under the provisions of sec.115JB of the Act. However, the Assessing Officer made an addition of ₹146,22,34,000/- to the book profit for the purposes of MAT u/s.115JB of the Act at ₹149,44,66,469/- with a corresponding tax effect of ₹25,39,84,576/-. The AO has made the addition of ₹146,22,34,000/- on the ground that the assessee earned a profit of ₹ 160.3834 crores on buyback of FCCBs and the same was not treated as income under the extra ordinary item as mentioned in AS 5, but adjusted against the goodwill and share premium account and a small left over sum of ₹14.16 crores was only credited to the profit and loss account as an extraordinary item. The assessee explained that it had written off goodwill to the extent of ₹83.50 crores against the said profit in line with the AS 26 & AS 14. The amount of Good Will write off is as certified by the auditors and decided in the Board Minutes. The amount of Good Will of ₹83.50 crores has been written off out of the

101 - - ITA 1695 to 1697 & CO 84/Mds/14 total Good Will amount of ₹170.86 crores created during the AY 2007-08, which has been accepted by the AO. The premium reversal was set off against the share premium of ₹62.72 crores and the balance of ₹14.16 crores was carried to profit and loss account.

30.2 The AO has not accepted the reply of the assessee. The AO observed that the Good Will of ₹ 83.50 crores referred to by the assessee is the result of amalgamations / demerges and AS 26 does not apply to such Good Will. Therefore, to that extent, the profit and loss account requires to be adjusted. Further, the AO observed that as regards the setting off of the balance profits, against the share premium, the assessee could not justify its action with reference to any accounting standard. Hence, the AO observed that the adjustment of Good Will and share premium, which are not in accordance with the mandatory accounting standards were made only to reduce its book profit for the purpose of MAT u/s.115JB of the Act. Therefore, according to the AO, the book profits have to be re-adjusted in accordance with the mandatory accounting standard by adding

102 - - ITA 1695 to 1697 & CO 84/Mds/14 back the entire profit of ( ₹ 160.3834 crores - ₹ 14.16 crores = ₹ 146.22 crores) to the book profits as required under AS-5. Accordingly, the AO made an addition of ₹ 146,22,34,000/- to the book profit returned for the computation of book profits for the purpose of MAT under the provisions of sec.115JB of the Act. Aggrieved, the assessee went in appeal before the CIT(Appeals).

103 - - ITA 1695 to 1697 & CO 84/Mds/14 14. It is seen from Accounting Standards that the Accounting

Standard 14 prescribes that the amortization charge of Good Will

for each period should be recognized as an expense unless

another Accounting Standard permits or requires it to be

included in the carrying amount of another asset. Once profit on

buy back of FCCBs to the extent utilized to write off Good Will is

credited to profit and loss account amortization will also to be

debited to profit and loss account. The net effect on the profit is

NIL.

31.1 The adjustment of premium reversal to share premium

account is submitted to be in line with the Companies Act

requirements. Though there is no specific reference to any

Accounting Standards the accounting treatment given by the

assessee is in accordance with Companies Act. The balance left out profit of ₹ 14.16 crores was credited by the assessee and

duly offered for book profit.

31.2 The CIT(Appeals) observed that the AO referred to

applicability of AS-26 to Good Will write off but not referred to the

prescription under Accounting Standards 14. However, the AO

104 - - ITA 1695 to 1697 & CO 84/Mds/14 had concluded the addition under AS-5. Therefore, according to

the CIT(Appeals), the AO himself is not clear about the

provisions or prescriptions under Accounting Standards and

Companies Act. Accordingly, the CIT(Appeals) deleted the

addition worked out by the AO for the purpose of MAT u/s.115JB of the Act ₹ 146,22,34,000/-. Against this, the Revenue is in

appeal before us.

on record. In view of our findings in the earlier para is with regard

to treatment of gain on redemption of debenture at discount rate

and premium on FCCB brought back, which is in capital field and

it cannot be brought to P&L A/c by re-casting the same which

was prepared in conformity with the ` of Part-II of Schedule-VI of

Company Act, 1956 and more so, the Supreme Court in the case

of Apollo Tyres Ltd vs CIT, 255 ITR 273 wherein held that:-

“The use of the words “in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act” in section 115J was made for the limited purpose of empowering the Assessing Officer to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, the Assessing Officer has to accept the authenticity of the accounts with reference to the

105 - - ITA 1695 to 1697 & CO 84/Mds/14 provisions of the Companies Act, which obligate the company to maintain its accounts in a manner provided by that Act and the same to be scrutinised and certified by statutory auditors and approved by the company in general meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and be satisfied that the accounts of the company are maintained in accordance with the requirements of the Companies Act. Sub-section (1A) of section 115J does not empower the Assessing Officer to embark upon a fresh enquiry in regard to the entries made in the books of account of the company.”

32.1 Hence, the Learned Assessing Officer cannot disturb the

computation of book profit on the issue raised by him. This

ground of Revenue’s appeal is rejected.

No.1695/Mds./2014 in Ground No.4.1 is with regard to deletion

of addition in respect of long term capital gain on sale of

vanagaram land by holding that the assesseee’s valuation report

as on 1.4.81 is valid.

33.1 The facts of the issue are that the assessee has claimed

long term capital gain from sale of Vanagaram land of

106 - - ITA 1695 to 1697 & CO 84/Mds/14 `39,92,868/-. While computing the long term capital gain from

sale of land, the assessee has adopted fair market value as on

01.04.1981 as the cost of acquisition. Based on the valuation report at `665.80 per sq.ft., assessee obtained a valuation

report from M/s.Anbu Sivam Valuers, a registered valuer stating the fair market value as on 01.04.1981 to be `665.80 per sq.mt.

However, the valuation report is without any supporting evidence

or proof or basis as to how this value has been arrived.

Therefore, as there is no basis for this valuation report, the

Learned Assessing Officer rejected the same. Moreover, the

guideline value as on 01.04.1981 was obtained from Sub

Registrar officer, the value of the relevant land as on 01.04.1981 is `7500/- for the area sold. The guideline value communicated

by the SRO is based on a systematic proven data base therefore

the Learned Assessing Officer adopted the guideline value as

per the records of Sub Register and accordingly worked out the

long term capital gain. Aggrieved, the assessee carried the

appeal before the ld. Learned Commissioner of Income Tax(A).

33.2 On appeal, the ld. Learned Commissioner of Income

107 - - ITA 1695 to 1697 & CO 84/Mds/14 Tax(A) observed that the assessee has sold land at Vanagaram

in 3 different assessment years i.e.2004-05, 2007-08 and 2008-

value as on 01.04.1981 was settled by the order of Tribunal in

I.T.A No.1206/Mds./11 in favour of the assessee wherein held

that it is a common factor that the guideline values were not

updated in earlier period. The valuer’s report has taken into

account all the relevant factors. The ld. Learned Commissioner

of Income Tax(A) following the decision of Tribunal in assessee’s

own case for earlier years, directed the Learned Assessing

Officer to delete the addition made at Rs.30,15,807/-. Against

this, the Revenue is in appeal before us.

on record. This issue is squarely covered by the earlier order of

Tribunal in assessee’s own case I.T.A No.1206/Mds./11 for

earlier years i.e 2004-05, 2007-08 & 2008-09, which was

followed by the ld. Learned Commissioner of Income Tax(A).

Therefore, we do not find any infirmity in the order of Tribunal

and the same is confirmed. This issue raised by the Revenue

stands dismissed.

108 - - ITA 1695 to 1697 & CO 84/Mds/14

Cross objections No.80/Mds./2014

for which he made an endorsement.

not pressed.

erred in sustaining the action of the AO in bringing to tax

`4,55,84,615/- being the difference between the receipts/income

as per Form No.26AS and the audited books of account in the

computation of taxable total income without assigning proper

reasons and justification.

36.1 The ld. Authorised Representative of assessee submitted

that the assessee had explained in detail for the differential

109 - - ITA 1695 to 1697 & CO 84/Mds/14 figure of receipts/income as per Form No.26AS and audited

books of accounts. Further, the ld. A.R put forth the following

points for our consideration.

A. Customer Name difference between the one in 26 AS and in Books of Accounts: i) The work order or billing is made to the business entity / Trade

Name, however in certain cases the name in 26 AS and Trade

Name differs especially when it is proprietary business. Name in

26 AS is that of individual proprietor however, accounting in our

books is in the name of trade. Hence, there is difference on

comparison by name.

ii) Assessing officer confirmed this addition after receiving

confirmation in case of Valliappan Valliappan. In that case also

the proprietor name is Valliappan Valliappan in which credit

appears in 26 AS statement and the trade name is Valli & Sons

in which income is accounted in our books of accounts.

iii) A confirmation is placed on record in respect of such

difference to the tune of Rs.1,22,13,989/- along with the

statement of accounts in books.

110 - - ITA 1695 to 1697 & CO 84/Mds/14 Trade Name: Associated Trading Company (invoices are also raised in this name) Proprietor Name: Surendra Singh Bhatia

The customer name difference is also on account of change in

the name subsequent to the financial year. Accounting is in the

old name or in one of their trade / division name however, 26 AS

shows the new name / company name retrospectively as per

TAN master.

Total differences on account of name change amounts to

Rs.3,89,66,586/-

Customers filing their TDS return with Wrong PAN: B.

Sical Logistics Limited was previously known as South India

Corporation (Agencies) Limited and were in the various

businesses including services and trading. Various businesses

were carried on in different trade names. In the year 2008, there

was major reorganization by demerging various businesses to

Sicagen India Limited. The customers of demerged businesses

continued to remit TDS in the name of Sical Logistics Limited

itself leading difference in accounted income and 26 AS

111 - - ITA 1695 to 1697 & CO 84/Mds/14

receipts. The assessee is ready for disallowing the credit in

respect of such receipts and request to delete the additions.

Total additions on account of this is Rs.66,18,029/- and TDS pertaining to the same is Rs.8,02,674/-

C. Form No.26 AS is not the final proof to warrant additions: The amount in the Form No.26 AS is keep on changing for every

revised returns filed by the deductor for any corrections in PAN

or amount. Hence, this cannot be taken to be the base to

determine income of the Payee especially during the teething

period. E-filing of TDS and credit based on same was brought

only from AY 2009-10 and would be too early to adopt the same

as foolproof. This is clear from the amounts shown in Form

No.26 AS on downloaded on various dates for the same PAN

and Asst Year as tabulated below:

Particulars Amount TDS 26 AS as on 12.4.2010 97,29,83,499 2,54,04,560 26 AS as on 04.6.2014 1,46,40,67,738 3,73,89,519 26 AS as on 07.2.2017 1,47,11,44,364 3,74,97,657

112 - - ITA 1695 to 1697 & CO 84/Mds/14 Total Income as per Books is higher than the income shown in 26 AS even after all the revisions as listed out above.

According to ld.A.R,The CIT (Appeals) erred in sustaining the

action of the AO in bringing to tax Rs. 4,55,84,615/- being the

difference between the receipts/income as per Form No. 26AS

and the audited books of account in ‘the computation of taxable

total income without assigning proper reasons and justification.

opinion, figures in Form No.26AS is required to be reconciled

with the books of accounts maintained by the assessee and AR

pleaded that if an opportunity is given to the assessee, it could

be reconciled the same. Considering the plea of the AR, we are

inclined to remit the issue to the file of the AO with a direction to

assessee to reconcile the same and the Assessing Officer shall

consider all the argument raised by the assessee before us on

this issue and pass fresh order. This issue in the C.O is partly

allowed for statistical purposes.

partly allowed, the appeals of Revenue in ITA Nos. 1696 &

113 - - ITA 1695 to 1697 & CO 84/Mds/14 1697/Mds./14 and the Cross Objections raised by the Assessee in C.O No.84/Mds./2014 are partly allowed for statistical purposes. Order pronounced on 18th August, 2017 at Chennai.

Sd/- Sd/- (धु�वु� आर.एल रे�डी) (चं� पूजार�) (Duvvuru RL Reddy) (Chandra Poojari) �या�यक सद�य/Judicial Member लेखा सद�य/Accountant Member चे�नई/Chennai, �दनांक/Dated, the 18th August, 2017. K S Sundaram

आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 3. आयकर आयु�त (अपील)/CIT(A) 5. �वभागीय ��त�न�ध/DR 2. ��यथ�/Respondent 4. आयकर आयु�त/CIT 6. गाड� फाईल/GF