DCIT 5(1), MUMBAI v. M/s. ESSAR INVESTMENT LTD., MUMBAI

ITA 5001/MUM/2005 | 2002-2003
Pronouncement Date: 07-12-2011 | Result: Partly Allowed

Appeal Details

RSA Number 500119914 RSA 2005
Assessee PAN AAACE1491Q
Bench Mumbai
Appeal Number ITA 5001/MUM/2005
Duration Of Justice 6 year(s) 4 month(s) 25 day(s)
Appellant DCIT 5(1), MUMBAI
Respondent M/s. ESSAR INVESTMENT LTD., MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 07-12-2011
Appeal Filed By Department
Order Result Partly Allowed
Bench Allotted A
Tribunal Order Date 07-12-2011
Date Of Final Hearing 02-11-2011
Next Hearing Date 02-11-2011
Assessment Year 2002-2003
Appeal Filed On 13-07-2005
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH MUMBAI BEFORE SHRI D.K. AGARWAL (JM) AND SHRI RAJENDRA SINGH (AM) ITA NO. 4831/M/2005 ASSESSMENT YEAR:2002-2003 M/S. ESSAR INVESTMENTS LIMITED ESSAR HOUSE 11 KESHAVRAO KHADYE MARG MAHALAXMI MUMBAI 400 034. PAN: AAACE1491Q DEPUTY COMMISSIONER OF INCOME TAX RANGE 5(1) ROOM NO. 568/525 AAYAKAR BHAVAN MUMBAI 400 020. (APPELLANT) (RESPONDENT) ITA NO. 5001/M/2005 ASSESSMENT YEAR:2002-2003 DEPUTY COMMISSIONER OF INCOME TAX RANGE 5(1) ROOM NO.568/525 AAYAKAR BHAVAN MUMBAI 400 020. M/S. ESSAR INVESTMENTS LIMITED ESSAR HOUSE 11 KESHAVARAO KHADYE MARG MAHALAXMI MUMBAI 400 034. PAN: AAACE1491Q (RESPONDENT) ASSESSEE BY: REVENUE BY: SHRI VIJAY MEHTA MRS. USHA NAIR DATE OF HEARING: DATE OF PRONOUNCEMENT: 2-11-2011 7-12-2011 O R D E R PER D.K. AGARWAL (JM): THESE CROSS APPEALS BY THE ASSESSEE AND REVENUE ARE DIRECTED AGAINST THE ORDER DATED 6.5.2005 PASSED BY THE LD. CIT ITA NO. 5001/M/2005 AY:2002-2003 ITA NO. 5001/M/2005 2 (A) FOR THE ASSESSMENT YEAR 2002-2003. BOTH THESE APPEALS ARE DISPOSED OF BY THIS COMMON ORDER FOR THE SAKE OF CO NVENIENCE. 2. BRIEFLY STATED FACTS OF THE CASE ARE THAT THE A SSESSEE DERIVES INCOME FROM HIRING OF CRANES TO ONGC AND OT HER OIL REFINERIES MANAGEMENT SERVICES TO GROUP COMPANIES DIVIDENDS AND INTEREST FROM INVESTMENTS AND INCOME FROM SALE OF INVESTMENT AND TRADING IN SHARES. IT FILED RETURN DECLARING LOSS OF RS.56 78 74 068/-. HOWEVER THE ASSESSMENT WAS C OMPLETED UNDER NORMAL PROVISIONS OF THE ACT AT LOSS OF RS. 31 39 57 516/- AND U/S 115JB AT LOSS OF RS.54 13 66 418/- INCLUDI NG THE DISALLOWANCE OF INTEREST RELATED TO SHARES RS.17 32 53 552/- AND DISALLOWANCE OF INTEREST ON INTEREST FREE LOANS RS .8 06 63 000/-. 3. ON APPEAL THE LD. CIT (A) WHILE DIRECTING THE A O TO FALLOW THE APPELLATE ORDER FOR THE ASSESSMENT YEARS 1999-2 000 AND 2001-02 PARTLY ALLOWED THE APPEAL. 4. BEING AGGRIEVED BY THE ORDER OF THE LD. CIT (A) THE ASSESSEE AND REVENUE BOTH ARE IN APPEAL BEFORE US. 5. GROUND NOS. 1 2 AND 3 IN ASSESSEES APPEAL ARE A GAINST THE SUSTENANCE OF DISALLOWANCE OF INTEREST RELATED TO U /S 14A AND GROUND NO.1 IN REVENUES APPEAL IS AGAINST THE RELI EF ALLOWED BY THE LD. CIT (A) IN RESPECT OF DISALLOWANCE MADE U/S 14A OF THE ACT. ITA NO. 5001/M/2005 AY:2002-2003 ITA NO. 5001/M/2005 3 6. BRIEFLY STATED FACTS OF THE CASE ARE THAT DURING THE ASSESSMENT PROCEEDINGS THE AO OBSERVED THAT THE ASS ESSEE HAD MADE AN INVESTMENT TO THE EXTENT OF RS. 469.79 CROR ES OUT OF WHICH INVESTMENTS AMOUNTING TO RS. 419.40 CRORES WE RE MADE IN SHARES OF INDIAN COMPANIES OF THE SAME GROUP. IT H AS BEEN FURTHER OBSERVED THAT THE INCOME THEREFROM WILL BE EARNED EITHER AS NON TAXABLE DIVIDEND INCOME OR THE INCOME WOULD BE EARNED AS CAPITAL GAINS ON THE TRANSFER OF SUCH SHARES. I N CASE OF SALE OF SHARES EXPENSES RELATED TO ACQUISITION OR IMPROV EMENT ONLY WOULD BE ELIGIBLE FOR DEDUCTION AND NOT INTEREST IN CURRED ON SUCH BORROWED FUNDS FOR ACQUISITION OF THE SHARES. FROM THE PROFIT AND LOSS ACCOUNT FILED IT WAS FURTHER OBSERVED BY T HE AO THAT THE ASSESSEE HAD PAID TOTAL INTEREST AND FINANCE CHARGE S AMOUNTING TO RS. 44.47 CRORES. TOTAL BORROWED FUNDS WERE AMO UNTED TO RS. 739.76 CRORES. ACCORDING TO THE AO THE ASSESSEE H AD INVESTED BORROWED FUNDS IN ACQUISITION OF SHARES INCOME FRO M WHICH IS EXEMPT AS AFORESAID THEREFORE HE DISALLOWED THE P RORATA INTEREST OF RS. 17 32 53 552/- BASED ON THE WORKING GIVEN BY HIM IN THE IMPUGNED ASSESSMENT ORDER. 7. ON APPEAL THE LD. CIT (A) OBSERVED THAT THE SIM ILAR ISSUE WAS CONSIDERED BY HIM IN THE APPELLANTS OWN CASE F OR THE ASSESSMENT YEARS 1999-2000 & 2001-2002 WHEREIN HE H AS CALCULATED THE DISALLOWANCE TO BE MADE IN THE APPEL LANTS CASE ITA NO. 5001/M/2005 AY:2002-2003 ITA NO. 5001/M/2005 4 AND THERE IS NO MATERIAL CHANGE IN THE FACTS AND HE NCE HE DIRECTED THE AO TO CALCULATE THE DISALLOWANCE OF IN TEREST ON THE BASIS ADOPTED BY HIM IN THE ORDER DATED 6.3.2003 FO R ASSESSMENT YEAR 1999-2000. 8. AT THE TIME OF HEARING THE LEARNED COUNSEL FOR THE ASSESSEE WHILE EXPLAINING THE ISSUE FROM THE ASSESSMENT ORDE R SUBMITS THAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSE E BY THE ORDER OF THE TRIBUNAL IN THE ASSESSEES OWN CASE IN M/S. ESSAR INVESTMENTS LIMITED V/S JT.CIT (OSD) & VICE-VERSA I N ITA NO.4023/M/2003 ITA NO.4024/M/2003 ITA NO.5723/M/2 004 ITA NO.3841/M/2003 ITA NO. 3842/M/2003 AND ITA NO.6154/M/2004 FOR THE ASSESSMENT YEARS 1998-99 19 99-2000 AND 2001-2002 ORDER DATED 9.7.2008 WHEREIN THE TRIB UNAL WHILE DELETING THE DISALLOWANCE SUSTAINED BY THE LEARNED CIT (A) DISMISSED THE REVENUES APPEAL. HE FURTHER SUBMITS THAT RECENTLY THE TRIBUNAL IN THE ASSESSEES OWN CASE IN ITA NO.4133/M/2009 FOR AY 2005-2006 ORDER DATED 15.6.20 11 HAS AGAIN CONSIDERED THE SIMILAR ISSUE IN THE LIGHT OF RECENT DECISION OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF GODREJ AND BOYCE MANUFACTURING COMPANY LTD. VS. DCIT (2010) 32 8 ITR 81 (BOM) AND HAS SET ASIDE THE ISSUE TO THE FILE OF T HE AO TO DECIDE THE SAME DE NOVO AFTER CONSIDERING THE DECISION OF THE TRIBUNAL IN THE ASSESSEES OWN CASE AND ALL THE CONTENTIONS OF THE ASSESSEE. HE FURTHER SUBMITS THAT HE HAS NO OBJECT ION IF THE ITA NO. 5001/M/2005 AY:2002-2003 ITA NO. 5001/M/2005 5 ISSUE IS SET ASIDE TO THE FILE OF THE AO TO DECIDE THE SAME IN THE LIGHT OF THE SAID ORDER OF THE TRIBUNAL WHICH WAS N OT OBJECTED TO BY THE LD. DR. 9. HAVING CAREFULLY CONSIDERED THE SUBMISSIONS OF T HE RIVAL PARTIES AND PERUSING THE MATERIAL AVAILABLE ON RECO RD WE FIND THAT THERE IS NO DISPUTE THAT THE DECISION OF THE T RIBUNAL IN THE ASSESSEES OWN CASE FOR THE AYS 1998-1999 1999-200 0 AND 2001-2002 DATED 9.7.2008 IS PRIOR TO THE DECISION O F THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF GODRAJ & B OYCE MANUFACTURING CO. LTD. (SUPRA) WHEREIN THEIR LORDSH IPS AFTER CONSIDERING THE DECISION OF THE TRIBUNAL IN DAGA CA PITAL MANAGEMENT PVT. LTD. (117 ITD 169) (MUM) (SPECIAL B ENCH) WHILE HOLDING THAT THE PROVISION OF SUB-SECTION (2) & (3) OF SEC.14A OF THE ACT ARE CONSTITUTIONALLY VALID HAVE HELD VIDE PLACITUM 88(VI) APPEARING AT PAGE 138 OF THE 328 IT R AS UNDER: (VI) EVEN PRIOR TO ASSESSMENT YEAR 2008-09 WHEN RULE 8D WAS NOT APPLICABLE THE ASSESSING OFFICER HAS TO ENFORC E THE PROVISIONS OF SUB SECTION (1) OF SECTION 14A. FOR THAT PURPOS E THE ASSESSING OFFICER IS DUTY BOUND TO DETERMINE THE EXPENDITURE WHICH HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FOR M PART OF THE TOTAL INCOME UNDER THE ACT. THE ASSESSING OFFICER MUST A DOPT A REASONABLE BASIS OR METHOD CONSISTENT WITH ALL THE RELEVANT FACTS AND CIRCUMSTANCES AFTER FURNISHING A REASONABLE OPP ORTUNITY TO THE ASSESSEE TO PLACE ALL GERMANE MATERIAL ON THE RECOR D; 10. IN ASSESSEES OWN CASE IN ESSAR INVESTMENTS LTD . VS. ACIT IN ITA NO. 4133/M/2009 FOR AY 2005-06 DATED 15.6.20 11 THE TRIBUNAL VIDE PARA 4 OF ITS ORDER HAS HELD AS UNDER : ITA NO. 5001/M/2005 AY:2002-2003 ITA NO. 5001/M/2005 6 WE HAVE HEARD THE PARTIES. THE LD. COUNSEL FOR T HE ASSESSEE SUBMITS THAT THE ENTIRE INVESTMENT IN THE SHARES MADE BY THE ASSESSEE COMPANY FOR THE STRATEGIC PURP OSE. HE FURTHER SUBMITS THAT IN THE PRECEDING YEAR AS WE LL AS IN THE SUBSEQUENT YEAR IDENTICAL DISALLOWANCES WERE M ADE BUT THE TRIBUNAL HAS DELETED THE ADDITIONS. NOW THE SC OPE OF SECTION 14A HAS BEEN EXAMINED AND EXPLAINED BY THE HONBLE JURISDICTIONAL BOMBAY HIGH COURT IN THE CASE OF GOD REJ & BOYCE MANUFACTURING COMPANY PVT. LTD. 234 CTR (BOM) 1 THE HONBLE HIGH COURT HAS HELD THAT RULE 8D HAS NO RETROSPECTIVE OPERATION. BOTH THE PARTIES AGREED T HAT MATTER MAY BE SET ASIDE TO THE FILE OF ASSESSING OFFICER F OR FRESH ADJUDICATION KEEPING THE ISSUE OPEN. WE THEREFORE SET ASIDE THE ISSUE AND RESTORED THE ISSUE TO THE FILE OF ASSESSING OFFICER TO DECIDE THE SAME DE NOVO AFTER CONSIDERING THE DECISION OF THE TRIBUNAL IN ASSESSE ES OWN CASE IN THE PRECEDING ASSESSMENT YEAR AS IT IS CONT ENDED BY THE LD. COUNSEL THAT THE TRIBUNAL HAS DELETED THE A DDITION ON THE IDENTICAL SET OF FACTS. THE ASSESSING OFFICER HAS TO TAKE INTO CONSIDERATION THE DECISION OF THE JURISDICTION AL HIGH COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING C O.PVT. LTD. THE ASSESSING OFFICER SHOULD CONSIDER ALL THE CONTENTIONS OF THE ASSESSEE AND ACCORDINGLY DECIDE THE ISSUE OF DISALLOWANCE U/S 14A OF THE ACT. NEEDLESS TO SA Y THAT THE ASSESSING OFFICER SHALL AFFORD A REASONABLE OPPORTU NITY OF BEING HEARD TO THE ASSESSEE. ACCORDINGLY GROUND NO .1 IS ALLOWED FOR STATISTICAL PURPOSES. 11. IN THE ABSENCE OF ANY DISTINGUISHING FEATURE BR OUGHT ON RECORD BY THE PARTIES WE RESPECTFULLY FOLLOWING THE AFORESAID DECISIONS SET ASIDE THE ORDERS PASSED BY THE REVENU E AUTHORITIES ON THIS ACCOUNT AND SEND BACK THE MATTER TO THE FI LE OF THE AO TO DECIDE THE SAME DE-NOVO IN THE LIGHT OF THE DIRECT IONS GIVEN IN THE ABOVE DECISIONS AND ACCORDING TO LAW AFTER PROV IDING REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESS EE. THE GROUND NOS. 1 2 3 TAKEN BY THE ASSESSEE AND GROUND NO. 1 TAKEN BY THE REVENUE ARE THEREFORE PARTLY ALLOWED FOR S TATISTICAL PURPOSES. ITA NO. 5001/M/2005 AY:2002-2003 ITA NO. 5001/M/2005 7 12. GROUND NO.4 IN ASSESSEES APPEAL IS AGAINST THE SUSTENANCE OF DISALLOWANCE OF INTEREST ON INTEREST FREE LOANS AND GROUND NO. 2 IN REVENUES APPEAL IS AGAINST THE RELIEF ALLOWE D BY THE LD. CIT (A) OUT OF THE DISALLOWANCE OF INTEREST ON INTE REST FREE LOANS. 13. THE BRIEF FACTS OF THE ABOVE ISSUE ARE THAT IT WAS INTERALIA OBSERVED BY THE AO THAT THE ASSESSEE HAD MADE ADVAN CES TO FOLLOWING COMPANIES ON WHICH NO INTEREST WAS CHARGE D WHEREAS THE ASSESSEE HAS USED ITS OWNED AND BORROWED FUNDS FOR ALL SUCH ADVANCES. A) ESSAR STEEL LTD. RS. 206.31 CRORES B) ESSAR POWER LTD. RS. 133.14 CRORES C) INTEREST BEARING ICDS RS. 2.00 CRORES D) ADVANCE AGAINST INVESTMENT RS. 0.60 CRORES TOTAL RS. 341.51 CRORES . ON BEING ASKED IT WAS SUBMITTED BY THE ASSESSEE THA T THE ABOVE ADVANCES WERE GIVEN TO CONCERNS FOR WHICH THE ASSES SEE WAS INVOLVED AS A PROMOTER. HOWEVER ACCORDING TO THE AO THE ASSESSEE COULD NOT EXPLAIN AS TO HOW INTEREST FREE ADVANCES GIVEN TO THESE COMPANIES BE CONSIDERED FOR THE BUSI NESS PURPOSES AS THE BUSINESS FUNDS WERE DIVERTED FOR NO N BUSINESS PURPOSES. ACCORDING TO AO THE INTEREST CLAIMED BY THE ASSESSEE WOULD NOT BE ALLOWED AS DEDUCTION U/S 36(1)(III). THE AO RELIED ON JUDGMENTS OF VARIOUS HIGH COURTS IN THIS REGARD. AFTER ITA NO. 5001/M/2005 AY:2002-2003 ITA NO. 5001/M/2005 8 ARRIVING AT THIS CONCLUSION THE AO LISTED THE TOTA L ASSETS ON 31.3.2002 AND 31.3.2001 AND WORKED OUT THE AVERAGE OF BOTH. FURTHER AO WORKED OUT HEAD-WISE % OF THE TOTAL ASSE TS AND % RELATING TO LOANS AND ADVANCES ACCORDINGLY AND AP PLIED THE % SO ARRIVED AT TO THE TOTAL INTEREST AND WORKED OU T A FIGURE OF RS. 8 06 63 000/- (AFTER REDUCING THE INTEREST RECE IVED THEREFROM) WHICH HE DISALLOWED AND ADDED TO THE TOT AL INCOME OF THE ASSESSEE. 14. ON APPEAL THE LD. CIT (A) OBSERVED THAT THE SI MILAR ISSUE WAS DECIDED BY HIM IN THE APPELLANTS OWN CASE IN A YS 1999-2000 AND AY 2001-2002. IN LINE WITH THE SAME HE DIRECTE D THE AO TO DISALLOW THE INTEREST AS CALCULATED IN ACCORDANCE W ITH THE CALCULATION ADOPTED BY HIM IN THE ORDER DATED 6.3.2 003 FOR AY 1999-2000. HE FURTHER DIRECTED THE AO TO VERIFY TH E APPELLANTS CLAIM FOR INTER CORPORATE LOANS OF RS. 2 CRORES IS INTEREST BEARING. IF THE CONTENTION OF THE ASSESSEE IS FOUND TO BE CO RRECT IN THAT EVENT HE DIRECTED THE AO TO DELETE THE PROPORTIONAT E DISALLOWANCE OF INTEREST MADE BY HIM ON THE SAME. 15. AT THE TIME OF HEARING THE LD. COUNSEL FOR THE ASSESSEE SUBMITS THAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE AY 1998-1999 1999-2000 AND 2001-2002 (SUPRA) WHEREIN THE TRIBUNAL AFTER CONSIDERING THE DECISION OF HONBLE SUPREME COURT ITA NO. 5001/M/2005 AY:2002-2003 ITA NO. 5001/M/2005 9 IN THE CASE OF SA BUILDERS LTD. VS. CIT (A) (2007) 288 ITR 1(SC) HAS DELETED THE DISALLOWANCE MADE BY THE AO. IT WA S FURTHER SUBMITTED THAT THE SIMILAR VIEW HAS BEEN FOLLOWED B Y THE TRIBUNAL IN THE ASSESSEES OWN CASE IN ITA NO. 5083 & 5642/M /2007 FOR THE AYS 2000-2001 & 2003-2004 ORDER DATED 11.12.20 09. THE LEARNED COUNSEL FOR THE ASSESSEE HAS ALSO PLACED ON RECORD THE COPY OF THE SAID ORDER OF THE TRIBUNAL. 16. ON THE OTHER HAND THE LD. DR SUPPORTS THE ORDE R OF THE AO. 17. HAVING CAREFULLY CONSIDERING THE SUBMISSIONS O F THE RIVAL PARTIES AND PERUSING THE MATERIAL AVAILABLE ON RECO RD WE FIND THAT THE FACTS ARE NOT IN DISPUTE. WE FIND MERIT IN THE PLEA OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT ON THE ID ENTICAL FACTS THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE ASS ESSMENT YEARS 1998-1999 1999-2000 & 2000-2002 VIDE PARA 23 OF TH E ORDER DATED 9.7.2008 HAS HELD THAT THE ASSESSEE HAD ADVAN CED THE LOANS TO THE GROUP CONCERNS FOR ITS BUSINESS PURPOS E IN SUCH A CASE INTEREST ON SUCH ADVANCES CANNOT BE DISALLOWE D. THE SIMILAR VIEW HAS BEEN FOLLOWED BY THE TRIBUNAL IN THE ASSESSEES OWN CASE IN ITA NO. 5083 & 5642/M/2007 FOR AYS 2000 -2001 & 2003-2004 DATED 11.12.2009. IN THE ABSENCE OF ANY DISTINGUISHING FEATURE BROUGHT ON RECORD BY THE REV ENUE WE RESPECTFULLY FOLLOWING THE RATIO OF DECISION OF THE HONBLE SUPREME COURT IN SA BUILDERS (SUPRA) AND THE CONSI STENT VIEW OF ITA NO. 5001/M/2005 AY:2002-2003 ITA NO. 5001/M/2005 10 THE TRIBUNAL HOLD THAT THE ASSESSEE HAS ADVANCED T HE INTEREST FREE LOANS TO THE GROUP CONCERNS FOR ITS BUSINESS P URPOSES AND HENCE INTEREST ON SUCH INTEREST FREE ADVANCES CANNO T BE DISALLOWED AND ACCORDINGLY WE DELETE THE DISALLOWAN CE OF INTEREST SUSTAINED BY THE LD. CIT (A). THE GROUND TAKEN BY THE ASSESSEE IS THEREFORE ALLOWED AND THE GROUND TAKEN BY THE REVENUE STANDS REJECTED. 18. IN THE RESULT ASSESSEE AND REVENUES APPEALS S TAND PARTLY ALLOWED FOR STATISTICAL PURPOSES. THE ORDER WAS PRONOUNCED IN OPEN COURT ON 7TH DEC. 2011. SD SD ( RAJENDRA SINGH ) ( D.K.AGARWAL) ACCOUNTANT MEMBER JUDICIAL MEMBER DATE : 7TH DECEMBER 2011. AT :MUMBAI OKK COPY TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) MUMBAI CONCERNED 4. THE CIT MUMBAI CITY CONCERNED 5. THE DR A BENCH ITAT MUMBAI // TRUE COPY// BY ORDER ASSISTANT REGISTRAR ITAT MUMBAI BENCHES MUMBAI