ESSEL INFRAPROJECTS LTD,MUMBAI vs. DCIT CIR 7(1), MUMBAI

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13,62,536/- but deleted the interest disallowance of ` 1.48 crores on the reasoning that the share application money given to M/s. Pan India Infrastructure Pvt. Ltd. is for the purpose of business of the assessee.

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“3.5 Regarding the advance of Rs.25 crores to M/s. Pan India Infrastructure Pvt. Ltd. as share application money, I find that the contention of the appellant as given above would need b accepted. U/s 36 (1)(iii) of the IT Act interest paid "in respect of capital borrowed for the purposes of business" is a permissible deduction in the computation of profits and gains of business or profession. From the language used therein, it is evident that the availability of the deduction is subject to the following three conditions, viz. (i) Money (Capital) that is money, should have been borrowed; (ii) such borrowing should be for the purposes of business or profession of the assessee; and (iii) the assessee should have paid interest on the said amount which is claimed by him as an allowance under this clause. The real test to allow the interest as deduction u/s. 36(l)(iii) is whether this was done as a measure of commercial expediency. It has been held that in order to claim a deduction, it is enough to show that the money is expended, not on necessity and with a view to direct and immediate benefit, but voluntarily and on account of commercial expediency and in order to indirectly to facilitate the carrying on the business. It is not relevant whether the assessee has utilized the borrowed amount in its own business or has advanced the same as 5 Essel Infraprojects Ltd. interest-free loan to its sister concern. What is relevant is whether the amount so advanced was as a measure of commercial expediency or not. It is not necessary that the amount so advanced is earning profit or not but there must be some nexus between expenses and the purpose of business. If the assessee makes a claim for deduction in terms of section 36, he has to place materials in support of his claim of entitlement to the deduction. The assessee has to satisfy the assessing authority that he is entitled to obtain deduction in accordance with the taxing statute. Unless the borrowing is for the purposes of business or profession, the interest on such borrowing is not deductible. Therefore, what is to be seen is "business purpose" and what the sister-concern did with the money advanced the AO has relied upon the order of CIT v/s United Breweries (1973) 89 ITR 17 (Mys) to state that the said interest income was capital in nature and cannot be allowed. The AO has also relied upon the proviso to section 36 (I) (iii) of the IT Act to state that the investment in the shares of the subsidiary would need to be disallowed as interest-bearing loans had been used for advancing Rs.25 crores as share application money to gain control of the said subsidiary. Stating this, the AO proceeded to disallow the entire interest expenditure of Rs. 1,48,10,695/- debited in the P&L Account holding it to be capital in nature. In the submission made, it has been argued by the appellant that the AO has misunderstood the entire transactions. The submission of the appellant has been reproduced above in this order wherein it has been stated by the appellant that it is engaged in the business of infrastructure development management and finance in addition to its amusement park and water park. The wholly owned subsidiary to which these funds are provided to, take up the infrastructure project on behalf of the company. The finance provided to the wholly owned subsidiary by way of advance for share application money is for its business of infrastructure and is used for that purpose. In this case, the amount has been advanced to Pan India Infrastructure Pvt. Ltd. for development of MMKI toll road Project and the said concern further passed on the amount to its wholly owned subsidiary Maharashtra Hydrocarbon Products Pvt. Ltd. which is 50% share holder of MMKIPL which is in the business of construction management and operation of Malegaon Kopargaon road project. Therefore, it cannot be stated that the same was not for the purpose of the business of the appellant. Carefully considering the issue, I find that this contention of the appellant would need to be accepted. It is seen that the appellant has been able to connect the advance made by the appellant to its subsidiary with its business purpose. As the nexus between the advance of funds and the business of the appellant carried out through the subsidiary stands established, no disallowance u/s 36 (1) (iii) of the IT Act was warranted. It has been stated

6 Essel Infraprojects Ltd. by the Hon'ble Courts that interest on funds borrowed by the assessee for investment in a joint venture was allowable as deduction even though the borrowings were kept as share application money in the joint venture company without charging any interest. I find that the AO has also not doubted the business nexus as he has proceeded to make the disallowance under the proviso to section 36(1) (iii) of the IT Act. However, a reading of the section as reproduced above in this order clearly shows that the said proviso is not applicable on this issue. It is seen that the appellant had already completed one road project regarding the road under question and therefore, it cannot be said that that interest-bearing funds loaned in the form of share capital to its subsidiary are for, assets which had not been put to use. Accordingly, the interest payment on the amount of Fts.25 crores advanced to the subsidiary from interest-bearing funds would need to be allowed as a deduction. The AO is directed to calculate accordingly and allowed the benefit to the appellant. This ground of appeal raised by the appellant is, therefore, allowed.”

12. On careful perusal of the order passed by the learned CIT(A) on this issue, we noticed that the learned CIT(A) has analysed the facts prevailing in the instant case in proper perspective and has taken a plausible view. Hence we do not find any reason to interfere with the order passed by him on this issue.

13. The next issue contested by the revenue relates to the disallowance of Rs.62.00 crores relating to Repairs and Maintenance. The AO noticed that the repairs and maintenance expenses claimed by the assessee has increased during the year. When called for explanations, the assessee submitted that a fire has broken out in INS Prabal Ship (kept for public viewing in the park) and the assessee had incurred a sum of Rs.78.97 lakhs in repairing the same. The AO noticed that the assessee had lodged insurance claim of Rs.62 lakhs on account of fire and the claim was shown in the Balance Sheet under the head “Loans and advances”. The AO took the view that the assessee has not credited the insurance claim amount in the Profit and loss account and accordingly assessed the same as income of the assessee.

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9 Essel Infraprojects Ltd. the year under consideration, we are of the view that the disallowance u/s 14A of the Act may be restricted to the same level of 10% of dividend income and the same, in our considered view, would work out to a reasonable figure for making disallowance. Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to restrict the disallowance to 10% of the exempt dividend income earned by the assessee during the year under consideration.

10 Essel Infraprojects Ltd. with the law. We also direct the assessee to assist the AO in collecting details from M/s Kamat Hotels P Ltd.

Rs.2,41,65,640/-. If the above said figure of Rs.2.41 crores does not include the depreciation amount of Rs.97,118/-, then there is no requirement of disallowing the same again. Accordingly we set aside this to the file of the AO for the limited purpose of verifying as to whether the depreciation of Rs.2.41 crores allowed by the AO includes the amount of Rs.97,118/- or not. If it is not included, then the AO should delete the addition of Rs.97,118/-, otherwise the addition shall be sustained. The order of Ld CIT(A) passed on this issue stands set aside accordingly.

The assessee is engaged in the business of infrastructure development management and finance in addition to its amusement parks and water parks as per the Memorandum of Association of the company. The name of the company is also changed from Pan India Paryatan Limited to Essel Infraprojects Limited to reflect the addition to the infrastructure business activities carried on by the company. The business of infrastructure requires filing bids, tenders for getting work i. e. Roads, bridges, Airports, Ports etc to prove capabilities to execute such contract

12 Essel Infraprojects Ltd. and price to be charged for the contract etc. These bids many times fail for any reason including technical or financial reasons and the lowest with technical capabilities wins the bid. For making bid or tender submission requires highly technical knowledge financial and commercial understanding and sometimes require help of outside consultants, JV Partners, etc. for technical and financial support all these require huge expenses to be incurred.

The question arises in whether such expenses on the tenders, bids for getting business in the line of business of the assessee are in the nature of revenue or capital?

Main Objects as per the Memorandum of Association are as under.

To purchase, erect or otherwise acquire and equip, any other amusement center, public or private parks or other hotels in Bombay or elsewhere in India or in any other part of the world or to carry on the business of public amusements coach, cab, carriage, motor car, proprietors, livery stable keepers, importers and brokers of food live stock and hair dressers, perfumers, clubs, baths, dressing rooms, reading, writing and newspaper rooms, libraries, ground and places of amusement, recreation sports and to own and/or run cinema houses, theatres, concert halls, circus properties picture places, studios, dramas or other entertainment.

To construct, improve, maintain, develop, work, manage, carry out or control any building, factories, works, roads, ways, railways, sidings, bridges, wells, reservoirs, water courses, wharfs warehouses, electric works, shops, stores, chawls and other building for housing work people and other otherwise assist to take part in the construction, improvement maintenance, development, working management and control any infrastructure related projects and/or other works and convenience which may seem connected directly or indirectly to advance the interest of the company and to join the other person and/or other company doing any of these things. Infrastructure activities carried on by the assessee are as under :- The assessee has given Rs. 25 Crores to Pan India 1) Infrastructure Private Limited, its wholly owned subsidiary company which is engaged in infrastructure activities.

The assessee also proposes to develop Multi product Special 2) Economic Zone (SEZ) project in the Gorai - Manori - Uttan region. The assessee has obtained in-principle approval from the State as well as the Central Government for development of the SEZ. This 13 Essel Infraprojects Ltd. activity has started during the year.

The Company has incorporated a wholly owned subsidiary 3) Essel Airport Infrastructure Private Limited.

The assessee had in response to the "invitation to register an 4) expression of interests" issued by the Airports Authority of India ("AAP) for the Restructuring and Modernization of Mumbai and Delhi Airport, submitted the bid. The consortium of the assessee was declared as a pre- qualified bidder to submit the technical and financial bid for the said project by the AAI. The ultimate bid was however given in favour of other competitive bidder. During the year the assessee has incurred expenses of Rs. 27,675,530/-for the purpose of making designing, layouts and other documents required for the purpose of the bid. The details of expenses are enclosed. The expenses mainly consists of Consultants Fees of Rs. 14,058,745/- and Bank Guarantee and other related bank charges of Rs. 8,411,034/, As the ultimate bid was awarded to some other bidder, the expenses have been debited to Profit and Loss account for the year and grouped under Exceptional Items, as required by Accounting Standard.

The Ld A.0. has altogether gone on wrong notion and misunderstanding of facts and hence he termed these expenses being pre-operative or pre- commencement hence capital in nature. He considered the project as new line of business hence capital in nature. It is proposal and in principle approval of Govt. etc makes it capital in nature as per the observations of the Ld A.0. and Company's proposal to take up the project through its WOS-Essel Airports Infrastructure Pvt. Ltd.

Contrary to his understanding the business of the assessee is infrastructure development, management, etc hence all expenses relating to it from procurement of project, execution and managing are revenue in nature. There are always expenses incurred for getting project that pre- commencement but it is relating to its business hence revenue in nature, it is not the assessee setting up capital assets like factory etc. for running and earning income. He understood projects means capital account. Hence these are biding and tender related expenses pre-commencement and pre- awarding of contract but still revenue expenses. When the assessee is engaged in the business of infrastructure each project may be huge and different some may be building roads, metro rail, stadiums, other may be port, Airport, bridges, dams, etc hence these cannot be termed as new line of business or new business but 14 Essel Infraprojects Ltd. are all part of existing business of infrastructure hence revenue in nature. Making bids require (RFP-Request for proposal) from the authority/concern in principle approval to bid (qualified to bid) and govt. calling bids, sometimes technical first and the financial bids or together. Hence in principle proposal does not make it capital project. To qualify for in principle and proposal (RFP) is first step to enter the ring without this you cannot bid even and bidding is also proposal till you are selected it is proposal it is accepted or not it depends upon so many factors and other competitors. The in principle or bidding or proposal are like giving CV for employment you go on giving C Vs till you are selected and CV making, filing, appearing for interview etc are akin to RFP, bidding but these are for big projects hence require huge expenses for making layouts, designs, schemes, financial data, estimates, etc.

Had the bidding done by the assessee been successful, the project would have allotted to the assessee. However, that would not have made assessee owner of the Airport itself even in that scenario the expenses are on revenue account. Hence, in any case the assessee could not become owner of the asset for which bid is made, whether the bid is allotted or not.

The assessee has incurred these expenses on the making of proposal/bid/tender for Airport renovation being for its infrastructure business are expenses of revenue in nature, neither capital nor non- business or personal expenses hence allowable u/s 37 of the Act.

The Ld A.0. has observed that these expenses are reflected as exceptional item and shown below the line in Profit & Loss Account as also netted off against profit on sale of Jaipur Park hence he concluded that these are capital in nature.

The nature of expenses is not decided by its disclosure in the accounts. The revenue and capital or any other item can be grouped under exceptional items below the line as per accounting standard or accounting practice and it is mainly done so that results of operations can be clearly visible to the stakeholders. The exceptional item are exceptional including non-recurring, huge in volume amount which can distort company's operational results hence grouped and shown separately. While grouping the revenue and capital in one group does not change in nature of each other. Finally the way in which the accounting entries are made by an assessee does not decide the nature or allowability of expense.

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Hon 'ble Supreme Court in Badridas Daga (34 ITR 10) after referring to the decision in Chimavis case, Gresham Life Assurance Society vs Styles and Pondicherry Railways Cos case, their Lorships proceeded to observe:

"The result in that when a claim is made for a deduction for which there is no specific provision in section 10 (2) whether it is admissible or not will depend on whether, having regard to accepted commercial practice and trading principles, it can be said to arise out of carrying on of the business and to be incidental to it. If that is established, then the deduction must be allowed provided of course there is no prohibition against it, express or implied, in the Act." This view is also upheld by Apex Court in Sutlej Cotton Mills Ltd. (116 ITR 1) and jurisdictional High Court in Dempo & Co. (P) Ltd. (206 1TR 291) wherein it was held that "whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter".

Section 37 of the IT Act, 1961

Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession".

The infrastructure have continued in the subsequent years and the assessee has applied for a number of bids as is evident from the copy of balance sheet and profit & loss account for the later years. The airport expenses are incurred wholly and exclusively for the infrastructure business and are neither capital nor personal in nature hence allowable u/s 37(1) of the Act."

As noticed earlier, the Ld CIT(A) upheld the view taken by the AO by holding that the assessee has commenced a new line of business and the same is not linked to the existing business of the assessee. He also observed that the 16 Essel Infraprojects Ltd. projects were under preparatory stage and the assessee itself has capitalized the expenditure, which indicates that the benefit would accrue to the assessee in the future.

assessee. We have gone through the said order. The assessee before Hon’ble High Court was engaged in the business of operation of rings for extraction of oil and undertaking other oil related activities. It incurred certain expenses on bidding in connection with exploration of oil. The question that arose was whether the expenditure incurred on unsuccessful bidding is allowable as deduction. The Tribunal held that the expenditure incurred on bidding, even if it is unsuccessful, should be allowed as deduction. The Hon’ble Bombay High Court held that the finding recorded by the Tribunal is finding of fact and hence no question of law arises.

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Order has been pronounced in the Court on 11.1.2017.