ESSAR PROJECTS (INDIA) LTD, MUMBAI V. ASST CIT 5(1), MUMBAI

ITA 1844/MUM/2015

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 0096 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 2 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-06-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Next Hearing Date: 15-05-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 30-03-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S C TIWARI
• Assessee Lawyers: ANUJ KISNANDWALA
• Keywords: Business income; Business expenditure; Earning of tax free income; Commercial expediency; Onus to prove
• Section: 234B; 14A; 37(1); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL L , BENCH MUMBAI BEFORE SHRI R.C.SHARMA, AM & SHRI RAVISH SOOD , JM ITA NO. 1844 / MUM/20 1 5 & 1845/MUM/2015 ( ASSESSMENT YEAR : 2009 - 10 & 2010 - 11 ) M/S. ESSAR PROJECTS (INDIA) LTD., IN THE MATTER OF ESSAR PROJECT MANAGEMENT CONSULTANTS (SINCE AMALGAMATED), ESSAR HOUSE, 11 KK MARG, MAHALAXMI, MUMBAI 400 034 VS. ASST CIT 5 (1), MUMBAI PAN/GIR NO. AAACE2358J APPELLANT ) .. RESPONDENT ) ASSESSEE BY SHRI ANUJ KISNANDWALA & SHRI VIJAY MEHTA REV ENUE BY SHRI S/C. TIWARI DATE OF HEARING 15 / 05 /201 7 DATE OF PRONOUNCEME NT 21 / 06 /201 7 / O R D E R PER R.C.SHARMA (A.M) : THESE ARE THE APPEALS FILED BY ASSESSEE AGAINST THE ORDER OF DRP FOR THE A.Y.2009 - 10 AND 2010 - 11 IN THE MATTER OF ORDER PASSED U/S.143(3) R.W.S. 144C (13) OF THE IT ACT. 2. RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PERUSED. 3. FACTS IN BRIEF ARE THAT ASSESSEE IS ENGAGED IN THE CONSTRUCTION ACTIVITIES. COMMON GROUNDS HAVE BEEN TAKEN BY ASSESSEE IN BOTH THE YEARS UND ER CONSIDERATION, THEREFORE BOTH THE APPEALS WERE HEARD TOGETHER AND ARE NOW DECIDED BY THIS COMMON ORDER. DURING THE COURSE OF SCRUTINY ASSESSMENT, AO DISALLOWED ASSESSEES CLAIM OF PROVISIONS FOR LEAVE ENCASHMENT ON THE PLEA THAT IT IS IN CONTRAVENTION O F STATUTORY PROVISIONS U/S.43B OF THE ACT. 4. BY THE IMPUGNED ORDER, CIT(A) CONFIRMED THE ACTION OF THE AO. ITA NO. 1844/MUMBAI/2015 & 1845/MUM/2015 M/S. ESSAR PROJECTS (INDIA) LTD., 2 5. IT WAS CONTENTION OF LEARNED AR THAT LEAVE ENCASHMENT WAS CLAIMED ON THE BASIS OF DECISION OF CALCUTTA HIGH COURT IN CASE OF EXIDE INDUSTRIES LIM ITED, OPERATION OF WHICH WAS STOPPED BY THE HONBLE SUPREME COURT. 6. OUR ATTENTION WAS INVITED TO THE ORDER OF THE TRIBUNAL IN CASE OF BIRLA SUNLIFE ASSET MANAGEMENT COMPANY LTD., IN ITA NO.5457/MUM/2013 DATED 30/06/2015 WHEREIN UNDER SIMILAR FACTS AND C IRCUMSTANCES, MATTER WAS RESTORED BACK TO THE FILE OF THE AO. 7. WE HAD CAREFULLY GONE THROUGH THE ORDER OF THE TRIBUNAL IN CASE OF BIRLA SUNLIFE ASSET MANAGEMENT COMPANY LTD., (SUPRA) WHEREIN MATTER WAS RESTORED BACK BY THE TRIBUNAL TO THE AO AFTER HAVIN G THE FOLLOWING OBSERVATION: - 9. IN VIEW OF THE OBSERVATIONS OF THE HONBLE SUPREME COURT, IN OUR VIEW, IT WILL BE PROPER TO DISPOSE OF THIS APPEAL IN THE LIGHT OF THE ORDER OF THE HONBLE S UPREME COURT DATED 08.05.2009 PASSED IN THE C ASE OF CIT VS. EXIDE INDUSTRIES LTD. (SUPRA). WE THEREFORE DISPOSE OF THE PRESENT APPEAL WITH A DIRECTION THAT THE ASSESSEE WILL PAY THE TAX AS IF SECTION 43B(F) IS ON THE STATUTE BOOK, HOWEVER, TILL THE DECISION OF THE HONBLE SUPREM E COURT IN THE CASE OF CIT VS. EXIDE I NDUSTRIES LTD. (SUPRA), THE REVENUE WILL NOT RECOVER THE PENALTY AND INTEREST WHICH MAY ACCRUE TILL THE DECISION OF THE APPEAL BY THE HONBLE SUPREME COURT IN THE CASE OF EXIDE I NDUSTRIES LTD. IT WOULD BE OPEN TO THE DEPARTMENT TO RECOVER THE OUTSTANDING INTEREST DEMAND IN CASE THE CIVIL APPEAL OF THE DEPARTMENT IN THE CASE OF EXIDE INDUSTRIES LTD. (SUPRA) IS ALLOWED BY THE HONBLE SUPREME COURT. SUBJECT TO OUR ABOVE OBS ERVATIONS, THE MATTER IS RESTORED TO THE FILE OF THE AO TO BE ADJUDICATED AFRESH AS PER THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF EXIDE INDUSTRIES LTD. (SUPRA). 8 . AS THE FACTS AND CIRCUMSTANCES IN THE PRESEN T CASE ARE SAME, RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL, WE ALSO SET ASIDE THE MATTER BACK TO THE FILE OF THE AO TO DECIDE AFRESH AS PER THE DIRECTIONS GIVEN BY THE TRIBUNAL IN THE ABOVE ORDER. WE DIRECT ACCORDINGLY. ITA NO. 1844/MUMBAI/2015 & 1845/MUM/2015 M/S. ESSAR PROJECTS (INDIA) LTD., 3 9 . AO HAS ALSO DISALLOWED INTEREST OF RS.2,57,801/ - PAID ON TDS U/S.220 BY OBSERVING THAT SAME IS NOT ALLOWABLE U/S.40(A)(II) OF THE IT ACT. IT WAS CONTENTION OF LEARNED AR THAT INTEREST ON TDS IS A BUSINESS EXPENDITURE ALLOWABLE U/S 37 OF THE ACT AND IS NOT HIT BY THE PROVISIONS O F S. 40(A)(II). IT IS SUBMITTED THAT TDS IS NOT THE TAX IIABILITY OF THE ASSESS E E BUT THE SAME IS THE TAX LIABILITY OF A THIRD PERSON. IT IS SUBMITTED THAT WHEN AN ASSESS E E INCURS CERTAIN EXPENDITURE AND MAKES PAYMENT, TDS IS REQUIRED TO BE DEDUCTED AND BA LANCE AMOUNT IS TO BE PAID TO THE PAYEE. EG: IF AN ASS ESSEE INCURS EXPENDITURE OF RS. 100 , THE ASSESSE E DEDUCTS TDS OF RS. 10 (ASSUMING RATE OF TDS IS 10%) AND PAYS RS. 90 TO THE PAYEE. IT IS SUBMITTED THAT TDS DEDUCTED IS NOTHING BUT TAX ON INCOME OF THE RECIPIENT WHICH HAS TO BE DEPOSITED WITH THE GOVERNMENT. IT IS SUBMITTED THAT ASSESSE E IS SADDLED WITH A VICARIOUS LIABILITY THAT THE TAX ON INCOME OF THE SELLER HAS TO BE DEPOSITED WITH THE GOVERNMENT BY ASSESSE E . 10 . AS PER LEARNED AR IN THE ABOVE EXAMP LE, THE ASSESSE E WOULD CLAIM RS. 100 AS AN EXPENDITURE IN THE PROFIT AND LOSS ACCOUNT AND THE SAID EXPENDITURE W OULD BE ALLO WED AS A BU S IN ESS EXPENDITURE. IT IS SUBMITTED THAT IN THE PRESENT CASE, ASS E SSING OFFICER HAS ALLOWED ENTIRE EXPENDITURE U/S 37 OF THE ACT. I T IS SUBMITTED THAT INTEREST ON THE S AID EXPENDITURE IS AN ALLOWABLE DEDUCTION SINCE THE PRINCIPAL AMOUNT ITSELF IS AN ALLOWABLE EXPENDITURE. IT IS SUBMITTED THAT, ASSUMING THAT ASSESSE E HAD MAD E LATE PAYMENT AND IF SELLER WOULD HAVE CHARGED INTE REST ON SAID DELAYED PAYMENT, THE INTEREST WOULD HAVE BEEN ALLOWABLE AS A BUSINESS EXPENDITURE. ITA NO. 1844/MUMBAI/2015 & 1845/MUM/2015 M/S. ESSAR PROJECTS (INDIA) LTD., 4 11 . IT IS FURTHER SUBMITTED THAT ASSESSING OFFICER HAS INVOKED THE PROVISIONS OF S. 40(A)(II) OF THE ACT WHICH IS NOT APPLICABLE TO THE INTEREST PAYMENT SO MAD E BY ASSESSEE. 12 . AS PER LEARNED AR, O N PERUSAL OF THE SAID PROVISIONS, IT IS EVIDENT THAT WHAT IS DISALLOWABLE IS 'ANY SUM PAID ON ACCOUNT OF ANY RATE OR TAX LEVIED ON PROFITS OR GAINS OF ANY BUSINESS OR PROFESSION'. IT IS SUBMITTED THAT AS PER THE SAID PROVISIONS, INCOME TAX PAYABLE BY ASSESSE E OR INTEREST ON INCOME TAX PAYABLE BY ASSESS E E I.E. PERSONAL INCOME TAX IS NOT ALLOWABLE AS DEDUCTION. IT IS SUBMITTED THAT TDS IS NOT PERSONAL TAX RATHER IT IS A TAX O N THE THIRD PERSON WHICH WOULD NOT BE COVERED U/S 40(A)(II). SIMILARLY INTEREST PAID ON TDS IS NOT 'ON ACCOUNT OF 'ANY PERSONAL TAX AND HENCE THE SAME WOULD NOT BE HIT BY THE PROVISIONS OF S. 40(A)(II) OF THE ACT. 1 3 . IT WAS ALSO SUBMITTED THAT IT IS NOT THE CASE OF THE ASSESSING OFFICER THAT INTERES T PAID IS NOT AN EXPENDITURE U/S 37 OF THE ACT. IT IS SUBMITTED THAT THE ASSESSING OFFICER HAS EQUATED THE INTEREST ON TDS WITH INTEREST LEVIED U/S 234A, 234B AND 234C OF THE ACT AND HAS CONCLUDED THAT THE SAME IS NOT ALLOWABLE U/S 40(A)(II) OF THE ACT WHI CH IS ERRONEOUS. 1 4 . IT WAS FURTHER SUBMITTED THAT INTEREST ON LATE PAYMENT OF TDS CANNOT BE EQUATED WITH INTEREST CHARGED U/S 234A, 234B AND 234C OF THE ACT SINCE INTEREST CHARGED U/S 234A, 234B AND 234C OF THE ACT ARE INTEREST CHARGED ON PERSONAL INCOME TAX AND NOT IN CASE OF THIRD PERSON. IT IS SUBMITTED THAT REASON FOR NOT ALLOWING DEDUCTION OF PERSONAL INCOME TAX IS THAT THE SAME IS PERSONAL LIABILITY. SINCE IT IS CALCULATED AFTER DETERMINING THE PROFITS AND GAINS FROM BUSINESS, THERE IS NO QUESTION O F CLAIMING TH E ITA NO. 1844/MUMBAI/2015 & 1845/MUM/2015 M/S. ESSAR PROJECTS (INDIA) LTD., 5 SAME AS EXPENDITURE FOR PURPOSE OF BUSINESS. WHEREAS TDS IS TAX OF THIRD PARTY DEDUCTED BY ASSESSEE AT THE TIME OF MAKING PAYMENT TO PAYEE WHIC H IS A BUSINESS EXPENDITURE AND IS ACCEPTED BY ASSESSING OFFICER. 1 5 . IT WAS FURTHER SUBMITTED TH AT THE ASSESSE E IS HAVING AN OVERDRAFT ACCOUNT WITH THE BANK. IF THE ASSESSE E HAD MADE TIMELY PAYMENT OF T D S, THE OVERDRAFT WOULD HAVE INCREASED AND THE ASSESSE E WOULD HAVE TO PAY INTEREST ON OVERDRAFT WHICH WOULD HAVE BEEN ALLOWED AS A DEDUCTION. IN VIEW OF THE SAME, IT IS SUBMITTED THAT THERE WAS NO BENEFIT TO ASSESS E E IN DEPOSITING THE TD S LATE AND THERE WAS NO MALAFIDE INTENTION. 1 6 . IT WAS ALSO SUBMITTED THAT THE LD. D .R. HAS RELIED UPON ORDER OF THE HON'BLE TRIBUNAL IN CASE OF ADDL. CIT V. WHITE INDU STRIES AUSTRALIA LTD [81 TAXMANN.COM 33 (KOL) ] TO CONTEND THAT INTEREST ON TD S IS NOT ALLOWABLE AS DEDUCTION SINCE IT IS IN NATURE OF INTEREST ON TAX LIABILITY. IT IS SUBMITTED THAT THE FACTS IN THE D ECISION RELIED UPON BY THE LD. D R. ARE TOTALLY DIFFERENT FROM THE ISSUE IN THE PRESENT CASE. IN THE CASE RELIED UPON BY THE LD. D R, THE ASSESSE E WAS A NON RESIDENT COMPANY WHO HAD ENTERED INTO A CONTRACT WITH COAL INDIA LTD FOR BUSINESS PURPOSE. IT FILED A RETURN OF INCOME DECLARING PROCUREMENT FEES RECEIVED FO R RENDERING SERVICES. THE ASSESSING OFFICER WAS OF THE VIEW THAT PROCUREMENT FEES WAS TAXABLE IN HANDS OF ASSESS E E AND TAX PAID BY COAL INDIA LTD ON BEHALF OF ASSESS E E WAS INCOME IN HANDS OF ASSESSE E . IT WAS FOUND THAT COAL INDIA LTD HAD DEFAULTED IN MAKIN G PAYMENT OF TAX. THE HON'BLE TRIBUNAL HELD THAT IF IT WAS FOUND THAT THE PAYER HAD DEFAULTED IN DEDUCTING TAX AT SOURCE THE DEPARTMENT IS FREE TO TAKE ACTION AGAINST THE PAYER U/S 201 OF THE ACT. IT ITA NO. 1844/MUMBAI/2015 & 1845/MUM/2015 M/S. ESSAR PROJECTS (INDIA) LTD., 6 FURTHER HELD THAT IF PAYER HAD DEFAULTED IN DEDUCTING TA X AT SOURCE FROM SUCH PAYMENTS THE NON RESIDEN T IS NO ABSOLVED FROM PAYMENT OF TAXES THEREUPON. 1 7 . THE FACTS OF THE PRESENT CASE ARE NOT WITH REGARD TO THE SHORT DEDUCTION OF TDS MADE BY ASSESSEE. IN THE PRESENT CASE, TDS HAS BEEN DEDUCTED CORRECTLY BUT THE SAME WAS NOT DEPOSITED IN TIME WITH THE GOVER NMENT ON WHICH THE ASSESSEE PAID INTEREST. THE SAID INTEREST IS A BUSINESS EXPENDIT URE AND NOT HIT BY PROVISIONS OF S. 40(A)(II) FOR REASONS STATED ABOVE. 18 . IT WAS FURTHER SUBMITTED THAT THE INTEREST PAID ON TDS IS COMPENSATORY IN NATURE AND HENCE WOULD NOT BE HIT BY EXPLANATION TO S. 37(1) OF THE ACT. IN VIEW OF THE ABOVE, IT IS SUBMITTED THAT INTEREST ON TDS IS ALLOWABLE US/ 37 OF THE ACT AND IS NOT HIT BY PROVI SION OF S. 40(A)(II) OF THE ACT. 19 . WE HAV E CONSIDERED RIVAL CONTENTIONS AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. IN THIS CASE, AO HAS DISALLOWED INTEREST PAID ON DELAYED PAYMENT OF TDS BY INVOKING PROVISION OF SECTION 40(A)(II). SO FAR AS NATURE OF PAYMENT IS CONCERNED, WE ARE IN AGR EEMENT WITH LEARNED AR THAT THIS INTEREST IS NOT ON THE PERSONAL TAX BUT IS ATTRIBUTABLE TO THE TAX WHICH, THE ASSESSEE HAS DEDUCTED IN RESPECT OF PAYMENT MADE TO OTHERS. DISALLOWANCE U/S.40(A)(II) IS IN RESPECT OF ANY RATE OR TAX LEVIED ON PROFIT OR GAINS OF ANY BUSINESS OR PROFESSION. HOWEVER, SAID PAYMENT OF INTEREST ON THE DELAYED DEPOSIT OF TDS DOES NOT FALL UNDER THE CATEGORY OF PAYMENT ENUMERATED U/S. 40(A)(II). ACCORDINGLY, WE DO NOT FIND ANY JUSTIFICATION FOR DISALLOWANCE OF SUCH INTEREST U/S.40(A) (II) OF I.T. ACT. ITA NO. 1844/MUMBAI/2015 & 1845/MUM/2015 M/S. ESSAR PROJECTS (INDIA) LTD., 7 20 . NEXT GRIEVANCE OF THE ASSESSEE RELATES TO DISALLOWANCE OF INTEREST ON ANOTHER CORPORATE DEPOSIT. 21 . IT WAS CONTENDED BY LEARNED AR THAT INTEREST INCOME HAS BEEN OFFERED BY ASSESSEE IN THE YEAR OF RECEIPT I.E., A.Y.2011 - 12, THEREFOR E, ADDING THE SAME IN THE ASSESSMENT YEAR UNDER CONSIDERATION AMOUNTS TO DOUBLE TAXATION OF THE SAME INCOME. 2 2 . WE HAVE CONSIDERED RIVAL CONTENTIONS AND FOUND THAT INTEREST ON INTER CORPORATE DEPOSIT HAS BEEN TAXED BY THE AO ON ACCRUAL BASIS WHICH IS COR RECT AS PER THE METHOD OF ACCOUNT FOLLOWED BY THE ASSESSEE. 23 . IN SO FAR AS ASSESSEE HAS OFFERED THIS INTEREST INCOME IN THE A.Y.2011 - 12 ON THE PLEA THAT IT WAS ACTUALLY RECEIVED IN THE A.Y. 2011 - 12, W E DIRECT THE AO TO REDUCE THE SAME IN THE A.Y.2011 - 12, OTHERWISE IT WILL AMOUNT TO DOUBLE TAXATION OF THE SAME INCOME. WE DIRECT ACCORDINGLY. 24. ASSESSEE IS ALSO AGGRIEVED FOR DISALLOWANCE OF INTEREST U/S. 36(I)(III). 2 5 . WE HAVE CONSIDERED RIVAL CONTENTIONS AND FOUND THAT AO HAS DISALLOWED INTEREST U/S.36( I)(III) ON THE PLEA THAT ASSESSEE HAS USED BORROWED FUNDS FOR INVESTMENT IN SUBSIDIARY AND THE SAME WAS NOT FOR THE PURPOSE OF BUSINESS. 2 6 . IT WAS CONTENDED BY LEARNED AR THAT THE ASSESSE E WAS INVOLVED IN THE BUSINESS OF PROJECT CONSTRUCTION INCLUDE MARI NE CONSTRUCTION BUSINESS. HOWEVER, DURING THE PREVIOUS YEAR RELEVANT TO AY. 2009 - 10, FOR THE PURPOSE OF BETTER CO - ORDINATION AND TO MANAGE THE BUSINESS OF MARINE CONSTRUCTION THE DIVISION OF MARINE CONSTRUCTION WAS HIVED OFF AND A SEPARATE COMPANY NAMED ES SAR OFFSHORE SUBSEA LTD (EOSL) WAS ITA NO. 1844/MUMBAI/2015 & 1845/MUM/2015 M/S. ESSAR PROJECTS (INDIA) LTD., 8 FORMED TO TAKE CARE OF MARINE CONSTRUCTION BUSINESS. DURING PREVIOUS YEAR RELEVANT TO AY. 2009 - 10, THE ASSESSEE HAD INVESTED ENTIRELY IN THE SHARE CAPITAL OF EOSL IN ORDER TO HAVE A BETTER CONTROL OVER THE SPECIALIZED NAT URE OF THIS BUSINESS. IT IS FURTHER SUBMITTED THAT THE SAME INVESTMENT IS CONTINUED IN THE PREVIOUS YEAR RELEVANT TO AY. 2010 - 11. 2 7 . IT WA S FURTHER SUBMITTED THAT THE ACTIVITY OF MARINE CONSTRUCTION - WAS AN INTEGRAL PART OF THE ASSESSEE'S BUSINESS. THUS, THE ASSESSEE HAD DEEP INTEREST IN THE MARINE CONSTRUCTION BUSINESS AND AS A RESULT THE ASSESSEE INVESTED ENTIRELY IN THE SHARE CAPITAL OF EOSL. IT IS SUBMITTED THAT THE ABOVE INVESTMENTS WERE MADE AS AN EXTENSION OF EXISTING BUSINESS WHICH WERE PURELY ON A CCOUNT OF COMMERCIAL EXPEDIENCY. 2 8 . HOWEVER, THE ASSESSING OFFICER HAS HELD THAT BORROWED FUNDS WERE USED FOR THE ABOVE INVESTMENTS IN SUBSIDIARY AND HENCE, HE DISALLOWED THE INTEREST ON BORROWED FUNDS U/S 36(1)(III) OF THE ACT. 2 9 . WE HAVE CONSIDERED R IVAL CONTENTIONS. FROM THE RECORD, WE FOUND THAT DURING THE COURSE OF ASSESSMENT THE ASSESSEE, VIDE LETTER DATED 22.03. 2 013 HAS FURNISHED COPIES OF BANK STATEMENT FROM DENA BANK FROM WHICH THE FUNDS CORRESPONDING TO THE INVESTMENT IN AFORESAID EQUITY SHARE S HAVE BEEN MADE BY THE ASSESSEE. THE RELEVANT DETAILS ARE EXTRACTED HEREIN BELOW FOR BETTER UNDERSTANDING OF THE ISSUE: S.NO. ENTRY DATE POSTING DATE AMOUNT (RS.) TEXT BANK 1 10.03.2009 01.03.2009 15,00,000 AS PER DR BOI - MUM - CC - 160301100 00019 - DEPOSIT 2 06.04.2009 01.03.2009 4,50,00,000 BEING . INVESTMENT BOI - MUM - CC - 16030110000019 - DEPOSIT ITA NO. 1844/MUMBAI/2015 & 1845/MUM/2015 M/S. ESSAR PROJECTS (INDIA) LTD., 9 3 06.04.2009 01.03.2009 2,30,00,000 INVEST IN ESOSL BOI - MUM - CC - 16030110000019 - DEPOSIT 4 10.03.2 009 10.03.2009 9,99,53,000 RTGS TO ESOSL DENA - MUM - CC - 3142S0 - PAY TOTAL 16,84,53,000 3 0 . ON THE BASIS OF ABOVE STATEMENT, AO OBSERVED AS UNDER: - THE ASSESSEE HAS UTILIZED FUNDS AGGREGATING TO RS.16,84,53,000/ - AS APPEARI NG IN THE ABOVE TABLE LYING IN THE CASH CREDIT A/C TOWARDS INVESTMENT IN EQUITY SHARES OF AFORESAID COMPANIES. THE FUNDS LYING IN THE CASH CREDIT A/C ARE INTEREST - BEARING FUNDS. IT IS ALSO NOTICED THAT DURING THE YEAR THE ASSESSEE HAS SHOWN LIABILITY AMOUN TING TO RS.32,07,82,000/ - AS 'INTEREST ON CASH CREDITS' DEBITED TO THE PROFIT & LOSS A/C UNDER THE HEAD 'INTEREST AND FINANCE CHARGES'. THEREFORE, A PART OF INTEREST COST IS DIRECTLY ATTRIBUTABLE TO THE FUNDS DIVERTED TOWARDS INVESTMENT IN EQUITY SHARES FR OM CASH CREDIT ACCOUNT. DURING THE YEAR THERE IS A SUBSTANTIAL INCREASE IN THE BORROWED FUNDS OBTAINED BY THE ASSESSEE, AS CAN BE SEEN FROM THE BALANCE SHEET. TOTAL LOAN FUNDS AT THE OPENING OF THE YEAR STOOD AT RS.972.15 CRORE, WHEREAS SUCH BORROWED FU NDS AT THE END OF THE YEAR STOOD AT RS.1863.21 CRORE. THE ENTIRE INVESTMENTS OF RS.44.95 CRORE WAS MADE DURING THE YEAR ITSELF. FURTHER, IT IS SEEN FROM THE PERUSAL OF THE BALANCE SHEET OF THE ASSESSEE AS ON 31.03.2009 THAT THOUGH THERE IS AN INCREASE I N THE CAPITAL RESERVES & SURPLUS FROM RS.496.30 CRORE TO RS.600.00 CRORE, THERE IS CORRESPONDING INCREASE IN THE FIXED ASSETS AS WELL. FIXED ASSETS INCREASED FROM RS.550.13 CRORE TO RS.974.15 CRORE. THEREFORE, IT CANNOT BE STATED THAT INTEREST - FREE FUNDS A RE AVAILABLE WITH THE ASSESSEE TO MAKE INVESTMENT IN EQUITIES OF EOSSL & OTHERS. THE ASSESSEE HAS NOT FURNISHED ANY SUBMISSION/EXPLANATION AS TO WHY INTEREST ATTRIBUTABLE TO THE AFORESAID INVESTMENTS SHOULD NOT BE DISALLOWED. 3 1 . AFTER HAVING THE ABOV E OBSERVATION AO STATED THAT INTEREST PAID IN RESPECT OF BORROWED CAPITAL WILL BE ALLOWED ONLY IF THE BORROWED CAPITAL WAS USED FOR THE PURPOSE OF BUSINESS OR PROFESSION. THE ABOVE ANALYSIS PROVES BEYOND DOUBT TH AT THESE TRANSACTIONS ARE NOT ASSESSEE'S GEN UINE BUSIN ESS TRANSACTIONS. SINCE, THE I NTEREST HAS BEEN PAID ON THE BORROWED CAPITAL ITA NO. 1844/MUMBAI/2015 & 1845/MUM/2015 M/S. ESSAR PROJECTS (INDIA) LTD., 10 WHICH WAS UTILIZED TOWARDS INVESTMENTS IN EQUITY SHARES OF EOSSL IS NOT ALLOWAB LE U/S.36(1)(III) OF THE ACT. 32 . THE AO FURTHER OBSERVED THAT SINCE THE ASSESSEE HAS CLAIM ED INTEREST EXPENSE U/S.36(1)(III), THEREFORE, THE ONUS IS ON THE ASSESSEE TO PROVE THAT THE ENTIRE BORROWED FUNDS WERE USED FOR THE PURPOSE OF BUSINESS AND RETAINED IN THE BUSINESS DURING THE RELEVANT YEAR . 33 . THE AO FURTHER OBSERVED THAT IF THE ASSESSEE HAD NOT MADE INVESTMENT IN EOSSL, THE NEED TO BORROW MONEY WOULD HAVE BEEN ALLEVIATED. SINCE THE ASSESSEE HAS NOT FURNISHED ANY EVIDENCE OR FUND FLOW STATEMENT TO PROVE THAT THE MONIES ADVANCED TO ITS SUBSIDIARIES IS NOT MADE OUT OF BORROWED FUNDS THE CON TENTION OF THE ASSESSEE IS NOT ACCEPTABLE AS IT IS FOR THE ASSESSEE TO SUBMIT THE DIRECT NEXUS TO PROVE THAT INVESTMENTS IN SHARES OF EOSSL IS MADE OUT OF ITS OWN FUNDS, AND ALSO THE UTILIZATION OF THE BORROWED FUNDS WH ICH THE ASSESSEE FAILED TO PROVE . THE ONUS WAS ON THE ASSESSEE TO PROVE WITH EVIDENCE AND SATI SF Y THE ASSESSING OFFICER THAT INTEREST BEARING FUND IS NOT DIVERTED FOR THE NON INTEREST BEARING OR NON INCOME EARNING PURPOSE, SINCE DEDUCTION ON ACCOUNT OF INTEREST WAS BEING CLAIMED BY IT. FURTHE R, IN THE PROCESS OF EXAMINATION, IT HAS BEEN NOTED THAT THE ASSESSEE HAS PAID INTEREST TO ITS GROUP COMPANY AND HAS DIVERTED FUNDS IN INVESTMENTS TO THE SAME COMPANY FROM WHERE NO INCOME IS EARNED. THERE WOULD BE VERY HEAVY ONUS ON THE ASSESSEE TO BE DISC HARGED BEFORE THE ASSESSING OFFICER TO SHOW THE NEXUS THAT BORROWED FUNDS WAS UTILIZED FOR THE PURPOSE OF BUSINESS CARRIED OUT DURING THE YEAR. IN THE ABSENCE OF ANY EVIDENCE HAVING BEEN FURNISHED, THE CONTENTION OF ITA NO. 1844/MUMBAI/2015 & 1845/MUM/2015 M/S. ESSAR PROJECTS (INDIA) LTD., 11 THE ASSESSEE THAT BORROWED FUNDS WERE UT ILIZED FOR THE PURPOSE OF ITS BUSINESS CANNOT BE ACCEPTED. ENTIRE MONEY IN A BUSINESS ENTITY COMES IN A COMMON KITTY. THE MONIES RECEIVED AS SHARE CAPITAL, AS TERM LOAN, AS WORKING CAPITAL LOAN, AS SALE PROCEEDS ETC. DO NOT HAVE ANY DIFFERENT C O LOUR. 34 . IN VIEW OF THE ABOVE DISCUSSION, AO DISALLOWED INTEREST ATTRIBUTABLE TO THE INVESTMENT IN EQUITY SHARES. BY THE IMPUGNED ORDER CIT(A) CONFIRMED AOS ACTION. 35 . IT WAS SUBMITTED BY LD. AR THAT THE INVESTMENT WAS PURELY TO MANAGE THE BUSINESS OF MAR INE CONSTRUCTION WHICH WAS EARLIER CARRIED OUT BY THE ASSESSEE. HENCE, INTEREST PAID ON AMOUNT BORROWED FOR INVESTMENT IN SUBSIDIARY SHOULD BE ALLOWED AS A DEDUCTION SINCE THE INVESTMENT WAS PURELY ON ACCOUNT OF COMMERCIAL EXPEDIENCY. 3 6 . IT WA S FURTHER S UBMITTED THAT EOSL HAD GOT A 3 YEAR CONTRACT FROM ONGC FOR OFFSHORE CONSTRUCTION SERVICES. AS A PART OF THE CONTRACT, EOSL HAD TO PERFORM CERTAIN FABRICATION WORK WHICH WAS SUB - CONTRACTED TO THE ASSESSEE BY EOSL. 3 7 . IT WA S SUBMITTED THAT THE ASSESSEE HAS ALSO EARNED CERTAIN INCOME FROM THIS SUB-CONTRACT IN THE PREVIOUS YEAR RELEVANT TO A.Y. 2012 - 13. HENCE, IT IS EVIDENT THAT THE INVESTMENT IN SUBSIDIARY ALSO BROUGHT ADDITIONAL BUSINESS INCOME TO THE ASSESSEE. 3 8 . IT WA S SUBMITTED THAT THE HON'BLE SUPREME COURT IN THE CASE OF S.A. B UILDERS V CIT (288 ITR I), HAS HELD THAT THE INTEREST PAID ON AMOUNT BORROWED BY HOLDING COMPANY AND ADVANCED TO SUBSIDIARY FOR THE ITA NO. 1844/MUMBAI/2015 & 1845/MUM/2015 M/S. ESSAR PROJECTS (INDIA) LTD., 12 PURPOSE OF ITS BUSINESS HAS TO BE ALLOWED AS A DEDUCTION WHERE THE HOLDING COMPANY HAS DEEP IN T E REST IN ITS SUBSIDIARY. IN THE PRESENT CASE, IT IS EVIDENT FROM THAT THE ASSESSEE HAS INVESTED IN EOSL PURELY TO MANAGE THE SP ECIALIS ED NATURE OF MARINE CONSTRUCTION BUSINESS' AND HENCE, THE INVESTMENT MADE BY THE ASSESSEE IS PURE ON ACCOUNT OF COMMERCIAL EXPEDIENCY. IT IS REITERATED THAT THE ASSESSEE WAS ALSO ABLE TO EARN INCOME FROM SUB - CONTRACT GIVEN BY EOSL WHICH FURTHER STRENGTHENS THE STAND OF THE ASSESSEE THAT THE SAID INVESTMENT WERE FOR BUSINESS PURPOSE. IT WAS FURTHER SUBMITTED THAT THE ASSESSEE H AS SUFFICIENT OWN FUNDS TO COVER UP THE INVESTMENTS IN SUBSIDIARY. THE OWN FUNDS AVAILABLE WITH THE ASSESSEE AS PER THE BALANCE SHEET AS ON 31.03.2009 ARE RS 600.02 CRORES WHEREAS THE INVESTMENTS ARE RS. 44.95 CRORES. 3 9 . RELIANCE WAS PLACED ON THE DECISI ON OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITIES (313 ITR 340) WHEREIN IT WAS HELD THAT, IN CASE OF MIXED FUNDS, IF OWN FUNDS ARE SUFFICIENT TO COVER UP THE VALUE OF INVESTMENTS IT HAS TO BE PRESUMED THAT THE OWN FUNDS HAVE BEEN UTILISED F OR THE PURPOSE OF INVESTMENTS AND HENCE, NO INTEREST DISALLOWANCE IS REQUIRED TO BE MADE U/S 36(1)(III) UNDER THE ACT. 40 . IT WA S FURTHER SUBMITTED THAT THE ASSESSE E HAS USED THE OVERDRAFT ACCOUNT FOR MAKING INVESTMENT IN SUBSIDIARY. IT WAS SUBMITTED THAT MERELY BECAUSE OVERDRAFT ACCOUNT WAS USED FOR MAKING INVESTMENTS, IT CANNOT BE CONCLUDED THAT INTEREST FREE FUNDS WERE NOT USED FOR MAKING INVESTMENT. ON THE OTHER HAND, LD. DR RELIED ON THE ORDER OF LOWER AUTHORITIES. ITA NO. 1844/MUMBAI/2015 & 1845/MUM/2015 M/S. ESSAR PROJECTS (INDIA) LTD., 13 4 1 . IN THIS REGARD, RELIANCE WAS AL SO PLACED ON THE DECISION OF JURISDICTIONAL HIGH COURT IN CASE OF RELIANCE UTILITIES. 42 . WE HAVE GONE THROUGH THE ORDERS OF AUTHORITIES BELOW AND CONSIDERED THE RIVAL CONTENTIONS. AS PER THE DECISION IN CASE OF RELIANCE UTILITIES I F THE ASSESSEE IS HAVIN G SUFFICIENT OWN FUNDS NO DISALLOWANCE OF INTEREST CAN BE MADE FOR INVESTMENT IN THE SHARES OF SUBSIDIARY COMPANIES. FROM THE RECORD WE FOUND THAT AS PER THE AUDITED BALANCE SHEET PLACED ON RECORD THE ASSESSEE WAS HAVING OWN FUNDS OF RS.600.02 CRORES AS ON 31.3.2009, WHEREAS THE INVESTMENTS WERE TO THE TUNE OF RS.44.95 CRORES. THERE WAS ALSO INCREASE IN CAPITAL RESERVE AND SURPLUS FROM RS.496.30 CRORES TO RS.600 CRORES AS ON 31.3.2009. THUS, IT IS CLEAR THAT THE ASSESSEE WAS HAVING SUFFICIENT OWN FUNDS FOR INVESTMENT IN SUBSIDIARY WHICH WAS ALSO FOR THE PURPOSE OF BUSINESS. IN VIEW OF THE DECISION OF HONBLE SUPREME COURT IN CASE OF S A BUILDERS, SINCE THERE WAS BUSINESS EXPEDIENCY, INVESTMENT IN SUBSIDIARY IS TO BE TREATED FOR THE PURPOSE OF BUSINESS. ACCOR DINGLY, WE DO NOT FIND ANY JUSTIFICATION FOR THE DISALLOWANCE OF INTEREST U/S. 36(1)(III) OF THE ACT. 4 4 . THE AO HAS ALSO MADE DISALLOWANCE U/S.14A READ WITH RULE 8D AMOUNTING TO RS.47,43,477/ - . WE HAVE CONSIDERED RIVAL CONTENTIONS AND FOUND THAT NO EXEMP T INCOME HAS BEEN RECEIVED BY ASSESSEE DURING THE YEAR, HENCE NO DISALLOWANCE CAN BE MADE U/S.14A IN VIEW OF THE DECISION OF BOMBAY HIGH COURT IN CASE OF BALLARPUR INDUSTRIES LTD., IN ITA NO.51/2016 DATED 13/10/2016. OUR VIEW IS ALSO SUPPORTED BY THE FOLLO WING DECISIONS : - ITA NO. 1844/MUMBAI/2015 & 1845/MUM/2015 M/S. ESSAR PROJECTS (INDIA) LTD., 14 1. JOINT INVESTMENTS V. CIT (372 ITR 694 (DEL) 2 . INDUS VALLEY INVESTMENTS V DCIT BEING ITA NO.3763/DEL/2013 FOR A.Y.2009 - 10 DATED 29/04/2015 3 . M/S. DAGA GLOBAL CHEMICALS VS. ASST. CIT BEING ITA NO.5592/MUM/2012 DATED 01/01/2015. 4 . M/S. SLYVEX CABLE CO. PVT. LTD., V DY. CIT BEING ITA NO.8581/MUM/2011 FOR A.Y.2008 - 09 DATED 24/02/2016. 4 5 . IN VIEW OF THE ABOVE, WE DIRECT THE AO TO DE LETE THE DISALLOWANCE MADE U/S. 14A DURING THE YEAR SINCE ASSESSEE WAS NOT IN RECEIPT OF ANY EXEMPT INCOME. 4 6 . IN GROUND NO.8, ASSESSEE IS AGGRIEVED FOR ADDITION MADE ON THE BASIS OF MISMATCH OF AIR INFORMATION WITH THE ASSESSEES BOOKS OF ACCOUNTS. 4 7 . WE HAVE CONSIDERED RIVAL CONTENTIONS AND FOUND THAT AO HAS DOWNLOADED AIR DATA OF TDS AND AFTER MATCHING IT WITH ASSESSEES INVESTMENT, ASKED THE ASSESSEE TO RECONCILE THE SAME WITH ITS BOOKS OF ACCOUNTS. THE ASSESSEE FILED DETAILS OF RECONCILIATION OF AIR INFORMATION VIDE LETTER DATED 08/03/2013. ON DOING A PARTY - WISE RECONCILIATION, AO FOUND THAT THE FOLLOWIN G RECEIPTS AGGREGATING TO RS.4,99,58,097/ - ARE NOT RECORDED IN THE BOOKS OF THE ASSESSEE. NAME OF THE PARTY AS PER AIR AS PER BOOKS DIFFERENCE REMARKS STATE BANK OF HYDERABAD 11,91,043 0 11,91,043 ACCOUNTED IN A.Y.2010 - 11 ESSAR HOLDINGS LTD., 4,44,05,195 0 4,44,05,195 ACCOUNTED IN A.Y.2010 - 11 HINDUSTAN CONSTRUCTION CO. 43,61,859 0 43,61,859 NOT PERTAINS TO ASSESSEE TOTAL 4,99,58,097 4,99,58,097 4 8 . T HE ASSESSEE WAS ASKED TO RECONCILE THE DIFFERENCE OF INCOME PARTY WISE AS SHOWN IN ITS BOOKS OF ACCOU NT AND AS REFLECTED IN AIR DATA. IT WAS SUBMITTED BY THE ASSESSEE THAT THE AMOUNTS CREDITED BY ESSAR ITA NO. 1844/MUMBAI/2015 & 1845/MUM/2015 M/S. ESSAR PROJECTS (INDIA) LTD., 15 HOLDINGS LTD. & STATE BANK OF HYDERABAD HAVE BEEN ACCOUNTED FOR BY THE ASSESSEE IN F.Y.2009 - 10 (A.Y.2010 - 11). WITH REGARD TO THE AMOUNT SHOWN TO HAVE RECE IVED BY THE ASSESSEE FROM HINDUSTAN CONSTRUCTION CO., IT WAS CONTENDED THAT THE SAME DOES NOT PERTAIN TO THE ASSESSEE . 4 9 . AFTER CONSIDERING THE ASSESSEES REPLY W ITH REGARD TO AMOUNTS RECEIVED FROM ESSAR HOLDINGS LTD. & STATE BANK OF HYDERABAD, AO OBSERV ED THAT SIN CE THESE AMOUNTS WERE CREDITED BY THE AFORESAID PARTIES TO THE ASSESSEE'S ACCOUNT IN THE PERIOD FALLING IN THE CURRENT YEAR, THE INCOME HAS BEEN ACCRUED TO THE ASSESSEE IN THE YEAR UNDER CONSIDERATION ITSELF. FURTHER, THE CREDIT FOR THE TDS CORR ESPONDING TO THESE RECEIPTS WAS ALSO APPEARING IN THE FORM NO.26AS. HENCE, THE INCOME IN RESPECT OF THESE RECEIPTS IS CHARGEABLE TO TAX DURING THE YEAR UNDER ASSESSMENT ITSELF. IN SO FAR AS THE AMOUNT OF RS.43,61,859/ - RECEIVED BY THE ASSESSEE FROM M/S. HI NDUSTAN CONSTRUCTION CO., THE ASSESSEE HAS FAILED TO PRODUCE ANY EVIDENCE IN SUPPORT OF ITS CLAIM THAT THE SAID AMOUNT DOES NOT PERTAIN TO IT. THE ASSESSEE HAS FAILED TO GET CONFIRMATION FROM THE PARTIES IN RESPECT OF WHOM THERE WAS MISMATCH OF RECEIPTS. THE ONUS TO PROVE ANY CLAIM MADE BY THE ASSESSEE IS ON THE ASSESSEE ITSELF AS IS HELD BY THE APEX COURT IN THE CASE OF CIT V / S CALCUTTA SALES AGENCY P LTD (19 ITR 191). THE ASSESSEE HAS NOT DISCHARGED HIS PRIMARY ONUS TO MATCH THE RECEIPTS IN ITS ACCOUNTS WITH THE AIR DATA. THE INCOME AMOUNTING TO RS.4,99,58,097/ - IS REFLECTED IN THE AIR INFORMATION BUT NOT RECORDED IN THE BOOKS OF THE ASSESSEE OR INCOME SHOWN IS LESS IN THE BOOKS OF ACCOU NTS THAN THE AMOUNT REFLECTED IN AIR INFORMATION AND THE ASSESSEE HAS FAILED ITA NO. 1844/MUMBAI/2015 & 1845/MUM/2015 M/S. ESSAR PROJECTS (INDIA) LTD., 16 TO RECONCILE THE SAME IN SPITE OF SUFFICIENT OPPORTUNITY EXTENDED TO IT. THEREFORE, IN ABSENCE OF SATISFACTORY EXPLANATION/ DOCUMENTARY PROOF SUBMITTED BY THE ASSESSEE AS TO MISMATCH OF RS.4,99,58,097/ - RECEIVED FROM ABOVE PARTIES IN ITS ACCOUNTS, THE SAID SUM OF RS.4,99,58,097/ - IS TREATED AS INCOME OF THE ASSESSEE ON THE BASIS OF MISMATCH OF AIR INFORMATION/DATA WITH BOOKS OF ACCOUNTS . 50 . THE DRP HAS ALSO REJECTED ASSESSEES CONTENTION BY HAVING ITS OBSERVATION AT PARA 23.2 OF ITS ORDER. HOWEVER, NOTHING WAS PLACED BEFORE US BY LEARNED AR SO AS TO PERSUADE AS TO DEVIATE FROM THE FINDINGS AND CONCLUSION OF THE LOWER AUTHORITIES, EXCEPT THE SUM OF RS.43,61,859/ - . IT APPEARS THAT AO HAS INADVERTENTLY AGAIN ADDED THE SAME IN ASSESSEES INCOME. SINCE THE AMOUNT HAS BEEN DELETED BY DRP, WE DIRECT THE AO TO DELETE THE SUM OF RS.43,61, 8 59/ - . 51 . IT WAS ALSO CONTENTION OF LEARNED AR THAT BALANCE AMOUNT HAS BEEN OFFERED TO INCOME IN THE A.Y.2010 - 11. IN THE INTEREST OF JUSTICE, WE DIRECT THE AO TO VERIFY TH E INCOME OFFERED BY THE ASSESSEE IN THE A.Y.2010 - 11 AND IF THE AO FOUND THAT SAME INCOME HAS BEEN OFFERED BY THE ASSESSEE IN THE A.Y.2010 - 11, THE SAME SHOULD BE EXCLUDED FROM THE INCOME OF A.Y.2010 - 11. WE DIRECT ACCORDINGLY. ITA NO. 1844/MUMBAI/2015 & 1845/MUM/2015 M/S. ESSAR PROJECTS (INDIA) LTD., 17 52 . GROUNDS RAISED IN THE A.Y. 2010 - 11 ARE ALSO SAME AS DISCUSSED IN THE A.Y.2009 - 10, ACCORDINGLY, FOLLOWING THE SAME REASONING, WE DIRECT THE AO TO DECIDE IN TERMS OF DIRECTIONS GIVEN HEREINABOVE. 5 3 . IN THE RESULT, APPEALS ARE ALLOWED IN PART IN TERMS INDICATED HEREINABOVE. O RDER PRO NOUNCED IN THE OPEN COURT ON THIS 26 / 06 /2017 SD/ - ( RAVISH SOOD ) SD/ - ( R.C.SHARMA ) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED 26 / 06 /201 7 KARUNA SR. PS COPY OF THE ORD ER FORWARDED TO : BY ORDER, ( ASSTT. REGISTRAR) ITAT, MUMBAI 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A), MUMBAI. 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY//