ESSAR STEEL (HAZIRA) LTD ( SINCE MERGED WITH ESSAR STEEL INDIA LTD), MUMBAI V. ASST CIT CIR 5(1), MUMBAI

ITA 6020/MUM/2012

• Counselvise Citation: [2015] 120 COUNSELVISE.COM (IT) 9188 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 5 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-03-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Next Hearing Date: 16-12-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 03-10-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: NEIL PHILIP
• Keywords: Source of fund
• Section: 56

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH E, MUMBAI BEFORE SHRI D. KARUNAKAR RAO, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER ITA NOS. 6020 & 6021/MUM/2012 ASSESSMENT YEARS: 2008-09 & 2009-10 ESSAR STEEL (HAZIRA) LIMITED (SINCE MERGED WITH ESSAR STEEL INDIA LTD.) ESSAR HOUSE 11, K.K. MARG, MAHALAXMI, MUMBAI 400 034 PAN:-AABCE 4852 VS. ACIT, CIR 5(1) AAYAKAR BHAVAN M.K. ROAD MUMBAI 400 020 (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI VIJAY MEHTA REVENUE BY : SHRI NE IL PHILIP DATE OF HEARING : 09.03.2015 DATE OF ORDER : 25 . 03.2015 O R D E R PER AMIT SHUKLA, JM: THE AFORESAID APPEALS HAVE BEEN FILED BY THE ASSES SEE AGAINST SEPARATE IMPUGNED ORDERS OF EVEN DATE, 16.07.2012 P ASSED BY LD. CIT-9 MUMBAI, FOR THE QUANTUM OF ASSESSMENT PASSED U/S 14 3(3) FOR THE A.YS. 2008-09 AND 2009-10. SINCE THE ISSUE INVOLVED IN BO TH THE APPEALS ARE COMMON, ARISING OUT OF IDENTICAL SET FACTS THEREFOR E, FOR THE SAKE OF CONVENIENCE SAME WERE HEARD TOGETHER. 2. FIRST OF ALL WE WILL TAKE APPEAL FOR THE A.Y. 20 08-09, WHEREIN THE ONLY ISSUE RAISED IN VARIOUS GROUNDS OF APPEAL IS T HAT, THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN NOT SETTING OFF THE IN TEREST EXPENDITURE OF ITA NOS. 6020 & 6021/MUM/2012 ASSESSMENT YEARS: 2008-09 & 2009-10 2 RS.5,02,732/-, AGAINST INTEREST INCOME OF RS.1,80,5 3,158/- OFFERED UNDER THE HEAD INCOME FROM OTHER SOURCES. 3. THE FACTS IN BRIEF ARE THAT THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF STEEL. DURING T HE YEAR, THE ASSESSEE COMPANY WAS IN THE PROCESS OF SETTING UP A STEEL PL ANT PROJECT IN A SPECIAL ECONOMIC ZONE AT HAZIRA, GUJARAT. THE ASSES SEE HAD NOT COMMENCED ITS REVENUE OPERATIONS DURING THE YEAR. I N THE COURSE OF THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAD SHOWN INTEREST ON TERM DEPOSIT AND ICD OF RS.1, 80,53,158/-. OUT OF THE SAID AMOUNT INTEREST OF RS.2,87,671/- RELATING TO THE PROJECT WAS TRANSFERRED TO THE CAPITAL WORK IN PROGRESS AND BAL ANCE INTEREST OF RS.1,77,65,487/- WAS CREDITED IN THE ACCOUNT. IN TH E COMPUTATION OF INCOME, OUT OF THE GROSS INTEREST INCOME OF RS.1,80 ,53,158/-, THE ASSESSEE HAS SET OFF THE INTEREST EXPENDITURE OF RS .5,02,732/- ON BORROWINGS DIRECTLY LINKED WITH FUNDS PARKED IN THE DEPOSITS. THE BALANCE INTEREST INCOME OF RS.1,75,50,426/- WAS OFF ERED TO TAX UNDER THE HEAD INCOME FROM OTHER SOURCES. IN RESPONSE T O THE SHOW CAUSE NOTICE AS TO WHY SETTING OFF OF INTEREST SHOULD NOT BE DISALLOWED AND THE ENTIRE GROSS INTEREST RECEIPT SHOULD NOT BE TAXED A S INCOME FROM OTHER SOURCES, THE ASSESSEE SUBMITTED THAT THE INTEREST EXPENDITURE RELATING TO THE BORROWINGS FOR THE PURPOSE OF SETTING UP OF STEEL PLANT HAS NOT BEEN DEBITED IN THE P&L ACCOUNT BUT TAKEN AS PRE OP ERATIVE EXPENSES, ONLY INTEREST INCOME OF RS.1,77,65,487/- WHICH WAS THE INTEREST INCOME ON TERMED DEPOSITS OUT OF THE FUNDS WHICH WERE NOT IMMEDIATELY REQUIRED FOR THE BUSINESS AND WAS OFFERED TO TAX AS INCOME FROM OTHER SOURCES. THE INTEREST EXPENDITURE OF RS.5,02,732/- WAS ON RUPEE TERM LOAN OF RS. 40 CRORES WHICH WAS DIRECTLY LINKED WIT H THE INTEREST INCOME. ITA NOS. 6020 & 6021/MUM/2012 ASSESSMENT YEARS: 2008-09 & 2009-10 3 THE ASSESSEES DETAIL SUBMISSIONS IN THIS REGARD HA S BEEN INCORPORATED BY THE AO FROM PAGES 2 TO 7 OF THE ASSESSMENT ORDER . HOWEVER, THE LD. ASSESSING OFFICER AFTER RELYING UPON THE DECISION O F ALLAHABAD HIGH COURT IN THE CASE OF KISAN SAHAKARI CHINI MILLS LTD. VS. CIT AND THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF TUTICORIN ALKALI CHEMICALS AND FERTILIZERS LTD. VS. CIT REPORTED IN (1997) 227 ITR 172 (SC), HELD THAT SUCH INTEREST EXPENDITURE CANNOT BE SET OFF AGAINST THE INTEREST INCOME AND SAME SHOULD BE CAPITALIZED UNDER THE HEAD PRE O PERATIVE EXPENSES. HIS DETAIL ANALYSIS FOR MAKING THE DECISIONS AND RE LIANCE ON OTHER DECISION HAVE BEEN DEALT AND INCORPORATED BY HIM FR OM PAGES 7 TO 12 OF THE ASSESSMENT ORDER. 4. BEFORE THE LD. CIT(A), THE ASSESSEE AGAIN REITER ATED ITS SUBMISSIONS AND CLARIFIED THAT THE ASSESSEE COMPANY HAS NOT DEBITED ANY INTEREST EXPENDITURE RELATING TO ITS BORROWING TO THE P& L ACCOUNT. THE TOTAL FINANCE COST OF RS.1,91,18,95,453/- WAS D EBITED TO PRE- OPERATIVE EXPENSES AND THE CORRESPONDING INTEREST O F RS.28,80,96,587/- ON DEPOSITS EARMARKED AGAINST THE BORROWING FACILIT IES WAS DEDUCTED AND THE NET FINANCE COST OF RS.1,62,37,98,866/- WAS SHO WN IN C.W.I.P. ONLY THE INTEREST INCOME ON TERM DEPOSITS OF RS.1,80,53, 158/- WHICH WAS PARKED OUT OF FUNDS NOT IMMEDIATELY REQUIRED WAS OF FERED TO TAX AS INCOME FROM OTHER SOURCES AFTER REDUCING THE INTE REST EXPENDITURE OF RS.5,02,732/- ON RUPEE TERM LOAN OF RS.40 CRORES. T HE SAID INTEREST EXPENDITURE WAS DIRECTLY RELATED TO THE INTEREST IN COME OFFERED FOR TAXATION UNDER THE HEAD INCOME FROM OTHER SOURCES . IT WAS ALSO CALRIFIED THAT THE DECISION OF HONBLE SUPREME COUR T IN THE CASE OF TUTICORIN ALKALI CHEMICALS AND FERTILIZERS LTD.(SUP RA) WAS IN CONNECTION WITH TAXABILITY OF INTEREST EARNED BEFORE THE COMME NCEMENT OF FINANCE ITA NOS. 6020 & 6021/MUM/2012 ASSESSMENT YEARS: 2008-09 & 2009-10 4 OF SHORT TERM DEPOSIT, WHICH WAS TREATED AS TO BE T AXED UNDER THE HEAD INCOME FROM OTHER SOURCES. THE APEX COURT HAS HEL D THAT INTEREST INCOME EARNED BY THE ASSESSEE BEFORE THE COMMENCEME NT OF BUSINESS WOULD NOT GO TO REDUCE THE INTEREST PAYABLE BY THE ASSESSEE WHICH WOULD BE CAPITALIZED AFTER THE COMMENCEMENT OF PROD UCTION WERE INSTEAD WOULD BE TAXABLE. WHEREAS IN THE CASE OF TH E ASSESSEE, THE ASSESSEE HAS ALREADY OFFERED THE INTEREST INCOME AS INCOME FROM OTHER SOURCES AND HAS CLAIMED EXPENDITURE WHICH IS DIRECT LY ATTRIBUTABLE TO EARNING OF THE INTEREST INCOME. THE LD. CIT(A), TOO RELIED UPON AND REITERATED THE RATIO AND THE DECISION OF THE HONBL E SUPREME COURT IN THE CASE OF TUTICORIN ALKALI CHEMICALS AND FERTILIZERS LTD. AND HELD THAT ASSESSEE MAY BE ENTITLED TO CAPITALIZE INTEREST PAY ABLE BY IT, HOWEVER, IT CANNOT CLAIM AN ADJUSTMENT OF THIS EXPENDITURE AGAI NST INTEREST ASSESSABLE U/S 56. THE EXPENDITURE WHICH ARE ALLOWA BLE AS DEDUCTION HAVE TO BE WITHIN THE AMBIT OF SECTION 57 ONLY, I.E . IF THEY HAVE BEEN INCURRED FOR THE PURPOSE OF INCOME ASSESSABLE U/S 5 6, WHICH THE ASSESSEE HAS FAILED TO PROVE. SINCE THE BUSINESS OF THE ASSESSEE HAD NOT STARTED THEREFORE, THERE CANNOT BE ANY PROFIT OR LO SS INCURRED BY THE ASSESSEE IN THE RELEVANT ASSESSMENT YEAR AND ACCORD INGLY THE EXPENDITURE BY THE ASSESSEE FOR THE PURPOSE OF SETT ING UP OF THE BUSINESS COULD NOT BE ALLOWED AS DEDUCTION NOR COUL D BE ADJUSTED AGAINST ANY OTHER INCOME IN ANY OTHER HEAD. HE AGAI N REFERRED TO CATENA OF DECISIONS IN SUPPORT OF DECISION. 5. BEFORE US LEARNED COUNSEL SHRI VIJAY MEHTA, SUBM ITTED THAT THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF TUTICORIN ALKALI CHEMICALS AND FERTILIZERS LTD. (SUPRA) WILL NOT BE APPLICABLE AT ALL BECAUSE HERE IN THIS CASE THE ASSESSEE HAS ALREADY OFFERED THE INTEREST ITA NOS. 6020 & 6021/MUM/2012 ASSESSMENT YEARS: 2008-09 & 2009-10 5 INCOME TO BE TAXED UNDER THE HEAD INCOME FROM OTHE R SOURCES AND THE INTEREST EXPENDITURE WHICH IS DIRECTLY ATTRIBUT ABLE TO EARNING OF SUCH AN INCOME HAS TO BE ALLOWED. 6. ON THE OTHER HAND LD. DR HAD STRONGLY RELIED UPO N THE ORDER OF THE LD. CIT(A). 7. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND THE FINDING GIVEN IN THE IMPUGNED ORDERS, IT IS NOTED THAT, FOR FINANCING TH E STEEL PLANT PROJECT, THE ASSESSEE HAD MADE BORROWING IN THE FORM OF RUPE E TERM LOANS, BUYERS CREDIT FACILITY, FOREIGN CURRENCY SECURED BY WAY OF MARGIN MONEY DEPOSITS AND HYPOTHECATION OF ASSETS. THE SAID AMOU NT HAS BEEN REFLECTED AS SECURED LOANS IN THE BALANCE SHEET. TH E ASSESSEE HAS DEBITED THE TOTAL FINANCE COST I.E. INTEREST EXPEND ITURE RELATING TO ITS BORROWING TO PRE-OPERATIVE EXPENSES AND NOT TO THE P&L ACCOUNT. THE CORRESPONDING INTEREST INCOME EARNED ON DEPOSITS EA RMARKED AGAINST THE BORROWING FACILITIES HAS BEEN DEDUCTED FROM THE SAME AND THE NET FINANCE COST HAS BEEN SHOWN IN C.W.I.P. THUS, THE I NTEREST EXPENDITURE AND INTEREST EARNING RELATING TO SETTING UP OF PROJ ECT HAS NOT BEEN ROUTED THROUGH P&L ACCOUNT. A SEPARATE INTEREST INCOME ON TERM DEPOSITS OF RS.1,80,53,158/- WHICH WAS PARKED OUT OF FUNDS NOT IMMEDIATELY REQUIRED WAS OFFERED TO TAX AS INCOME FROM OTHER S OURCES. FROM THE SAID INCOME THE ASSESSEE HAS REDUCED THE INTEREST E XPENDITURE OF RS.5,02,732/- WHICH WAS CLAIMED TO BE DIRECTLY LINK ED AND ATTRIBUTABLE TO EARNING OF SUCH INTEREST INCOME. SO FAR AS CAPITALI ZATION OF INTEREST EARNED ON MARGIN MONEY WHICH WERE EARMARKED AGAINST THE BORROWING FACILITY HAS BEEN ACCEPTED BY THE AO. THE ONLY DISP UTE IS THAT WHETHER THE INTEREST OF RS.5,02,732/- PAID ON THE BORROWING S WHICH WERE SOURCE OF FUNDS PARKED IN TERM DEPOSITS HAS TO ALLOW AS EX PENDITURE OR NOT. IF ITA NOS. 6020 & 6021/MUM/2012 ASSESSMENT YEARS: 2008-09 & 2009-10 6 THE INTEREST EXPENDITURE HAS DIRECT BEARING AND NEX US WITH THE EARNING OF INTEREST INCOME U/S 56, THEN THE SAME HAS TO BE ALLOWED WHILE COMPUTING THE SAID INCOME. HEAVY RELIANCE HAS BEEN PLACED ON THE DECISION OF HONBLE APEX COURT IN THE CASE OF TUTICORIN ALKALI CHEMICALS AND FERTILIZERS LTD. (SUPRA) BY THE AO AS WELL AS LD. CIT(A) FOR DISALLOWING THE SETTING OFF OF INTEREST OF RS.5,02, 732/- FROM THE INTEREST INCOME OF RS.1,80,53,158/-. IN THE CASE BEFORE THE HONBLE SUPREME COURT THE MAIN ISSUE INVOLVED WAS, WHETHER THE INTE REST DERIVED BY THE ASSESSEE FROM THE BORROWED FUNDS WHICH WERE INVESTE D IN THE SHORT TERM DEPOSITS WITH THE BANK WOULD BE CHARGEABLE TO TAX UNDER THE HEAD INCOME FROM OTHER SOURCES AND TO REDUCE THE INTER EST PAYABLE BY THE ASSESSEE ON TERM LOANS SECURED BY THE ASSESSEE FROM FINANCIAL INSTITUTIONS WHICH WOULD BE CAPITALIZED AFTER THE C OMMENCEMENT OF COMMERCIAL PRODUCTION. THE ASSESSEES CASE WAS THAT , SINCE IT HAD NOT COMMENCED BUSINESS AND THEREFORE, THE INCOME DERIVE D FROM THE FUNDS BORROWED WAS SETTING UP OF THE FACTORY SHOULD BE AD JUSTED AGAINST THE INTEREST PAYABLE ON THE BORROWED FUNDS. THE HONBLE SUPREME COURT HELD THAT THE FACT THAT THE SOURCE OF INCOME WAS BO RROWED MONEY DOES NOT LEAD TO ANY INFERENCE THAT IT IS NOT A REVENUE RECEIPT. THE INTEREST EARNED BY THE ASSESSEE IS ASSESSABLE U/S 56 AND ONL Y SUCH EXPENDITURE CAN BE ALLOWED WHICH HAS BEEN SET OUT IN CLAUSES (I ) TO (III) IN SECTION 57. IN THAT CASE IT WAS NOT THE CASE OF THE ASSESSEE TH AT THE INTEREST PAYABLE BY IT ON THE TERM LOANS SHOULD BE ALLOWED AS DEDUCT ION U/S 57. HERE ALSO IF THE INTEREST PAYABLE ON THE BORROWED FUNDS ARE D IRECTLY RELATABLE TO SETTING UP OF THE PROJECT, THEN PERHAPS THE DECISIO N OF THE LD. CIT(A) WOULD BE ASSAILABLE, BUT HERE IN THIS CASE, THE ASS ESSEES CLAIM IS THAT INTEREST EXPENDITURE WAS DIRECTLY RELATED TO EARNIN G THE INTEREST INCOME ITA NOS. 6020 & 6021/MUM/2012 ASSESSMENT YEARS: 2008-09 & 2009-10 7 TAXABLE UNDER THE HEAD INCOME FROM OTHER SOURCES. HENCE THE DECISION OF HONBLE SUPREME COURT AND OTHER DECISIO NS AS RELIED UPON BY THE LD. CIT(A) WILL NOT BE APPLICABLE. IN ORDER TO ESTABLISH THAT SUCH AN INTEREST EXPENDITURE WAS DIRECTLY RELATED TO THE IN TEREST INCOME, THE MATTER IS BEING RESTORED BACK TO THE FILE OF THE AO TO VERIFY THE ASSESSEES CONTENTION AND TO SEE, WHETHER THERE IS A DIRECT NEXUS OF THE INTEREST EXPENDITURE INCURRED TO THE INTEREST INCOM E EARNED. IF THAT IS SO, THEN AO WILL ALLOW THE INTEREST EXPENDITURE OR SET OFF AGAINST SUCH INTEREST INCOME, WHILE DOING SO AO WILL GIVE DUE A ND EFFECTIVE OPPORTUNITY TO THE ASSESSEE TO DEMONSTRATE ITS CAS E BEFORE HIM. ACCORDINGLY, THE GROUND RAISED BY THE ASSESSEE IS T REATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSE. 8. IN THE A.Y. 2009-10, THE SAME ISSUE HAS BEEN CHA LLENGED WHEREIN THE ASSESSEE IS AGGRIEVED BY NOT ALLOWING THE INTER EST EXPENDITURE OF RS.2,98,36,981/- FROM BEING SET OFF AGAINST THE INT EREST INCOME OF RS.5,54,94,722/- OFFERED UNDER THE HEAD INCOME FRO M OTHER SOURCES. THE DECISION GIVEN IN THE AFORESAID APPEAL WILL APP LY MUTATIS MUTANDIS IN THIS APPEAL ALSO AND ACCORDINGLY, ON SIMILAR DIRECT ION MATTER IS RESTORED BACK TO THE FILE OF THE AO AND IN THE RESULT THE GR OUND RAISED BY THE ASSESSEE IS TREATED AS PARTLY ALLOWED FOR STATISTIC AL PURPOSE. 9. IN THE RESULT, APPEALS FILED BY THE ASSESSEE ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 25 TH DAY OF MARCH, 2015. SD/- SD/- (D.KARUNAKAR RAO) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER ITA NOS. 6020 & 6021/MUM/2012 ASSESSMENT YEARS: 2008-09 & 2009-10 8 MUMBAI, DATED: 25.03.2015 *SRIVASTAVA COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR E BENCH //TRUE COPY// BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.