TaxTMI 
TaxTMI 
2019 (12) TMI 575
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....ibunal has filed concise grounds of appeal with Income-Tax Appellate Tribunal, Chennai (hereinafter called "the Tribunal"), which concise grounds of appeal read as under:- "1. The order of The Commissioner of Income Tax is contrary to law, facts and circumstances of the case. 1.1. The Commissioner of Income Tax erred in assuming jurisdiction under Section 263 to revise the assessment order and treating the assessment order as erroneous and prejudicial to the interest of revenue. 2. The Commissioner of Income Tax erred in holding that the Appellant is not entitled to deduction in respect of interest and exchange fluctuation loss outstanding on Floating Rate Notes (FRN) amounting to Rs. 11627.84 lakhs. 2.1. The Commissioner of Income Tax ought to have appreciated that all the material facts were placed by the Appellants before the assessing officer at the time of assessment and the assessing officer after considering the same has formed a view that the said expenditure charged of by the Appellants in the Books of Account is a revenue expenditure and accordingly allowed the deduction in his assessment order dated 30.3.2006. 3. The Commissio....
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....annexed to the audited Annual Report for the assessment year 2003-2004 and upheld that the said disclosure was made only for statistical purposes and to highlight the non-receipt of confirmation on the reduction in interest rate from two secured lenders. 5.2. The Commissioner of Income Tax ought to have considered that the Appellants have actually accounted the interest expenditure only at reduced rates as per the CDR and the amount disclosed in the Annual Report was neither claimed by the Appellants in their return nor allowed by the assessing officer at the time of assessment and therefore, will not form part of any benefit or perquisite as per Sec.28 (iv) of the Income Tax Act 1961. 5.3. The Commissioner of Income tax ought to have appreciated that there was no reduction/remission of liability which has been claimed and allowed pertaining to the earlier years. Hence the reliefs granted by the banks are not chargeable under Section 41(1). 5.4. The Appellant craves leave to file additional grounds at the time of hearing." 3. The brief facts of case are that the assessee is engaged in the business of Fertilizers, Pharma , Bio-tech and Engineering Servi....
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....sp; Dated: 24.10.2007 To The Principal Officer, M/s SPIC Ltd., SPIC House, 88, Mount Road, Guindy, Chennai-600032. Sir, Sub: Revision of assessment in the case of the company - Asst. Year 2003-04 - notice u/s 263 reg. **** On perusal of the records for the Asst. Year 2003-04 it is noticed that the assessment has been completed on 30.3.2006 u/s 143(3) of the IT Act in your case which is erroneous in so far as it is prejudicial to the interest of revenue for the following reasons: It is seen from the Annual Report, notes on accounts, Item No.16, you have raised US Dollars 120 Millions as unsecured floating rate notes(FRN) in 1996 for financing the import of capital goods for its operations and projects and for general corporate purposes. Interest and exchange fluctuations incurred up to 31.3.2002 part of the loan has been carried forward in capital work in progress ....
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.....36 lakhs for the year ending 31.3.2003 has been considered as interest relief in the accounts. In the annual report for Asst. Year 2004-05 interest relief availed from various banks and financial institutions included Rs. 1827.88 lakhs (including Rs. 943.90 lakhs for the year 2003-04). The balance of Rs. 883.98 lakhs pertained to earlier year 2002-03(AY 2003- 04). This sum had been omitted to be considered and was required to be brought to tax for the Asst. Year 2003-04. The above aspect was not considered by the AO while completing the asst order which resulted in the escapement of income. Hence I consider the order of the assessment passed by the AO on 30.3.2006 for the AY 2003-04 as erroneous in so far as it is prejudicial to the interest of revenue and therefore propose to direct the AO to revise the assessment passed u/s 143(3) dated 30.3.2006. In this connection, you are hereby given show cause notice as to why directions should not be given to revise the impugned order u/s 263 of the IT Act in the above issue. If no reply is received, it will be presumed that you have no objection in revising the assessment for the Asst. Year 2003-04 on the proposed lines.....
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....al goods for its other Divisions and such assets were utilised by the Company for the purpose of its business. The allocation of FRN funds to various Divisions of SPIC was based on the application of funds for the purpose of acquiring the capital assets. The unallocated portion of the funds was in the Company's system with an ultimate objective of purchase of capital goods in the future. Since the borrowal through FRNs was made in foreign currency (i.e. US$), the loan liability was valued at the end of each Financial Year and the loan liability restated by the Company in the balance sheet of the respective years. The difference between the loan liability of the previous and current year (either gain or loss) was treated as exchange fluctuation and the same was allocated/adjusted on the cost of assets based on the application of funds on these assets. During the assessment years 1997-1998 to 2000-2001, the total exchange loss incurred by the Company was Rs. 15128.07 lakhs. Out of Rs. 15128.07 lakhs, exchange loss capitalised based on the allocation of funds for capital expenditure was Rs. 7235.26 lakhs. The exchange fluctuation charged to Profit and Lo....
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.... the Company vide Item 16 to the Notes on Accounts annexed to the audited Annual Report of the assessment year 2003-2004 and the observations of the statutory auditors are as follows: 'The Company had raised USD 120 million as unsecured Floating Rate Notes (FRN) in 1996 for financing the import of Capital Goods for Its operations and projects and for general corporate purposes. Interest and exchange fluctuation incurred up to 31 March 2000 on part of the loan was being carried forward in capital work in progress as it was expected to be adjusted to proposed projects / schemes. As no such proposed projects are now envisaged during the current year interest of Ks.7760,49 lakhs and exchange fluctuation (net) of Rs. 3867.35 lakhs lying in capital work in progress have been charged to profit and loss account". A statement containing the overall movement of allocated/unallocated FRN fund; interest and exchange fluctuation thereon capitalised, charged to Profit and Loss account and carried on in the capital work in progress account for the assessment years 1997-98 to 2003-2004 are enclosed as Annexure-l, II and III, for your kind perusal. The relevant detail....
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....icals, FZE, Dubai, has already been upheld by the Tribunal and the Hon'ble ITAT vide its order No. ITA- 2252/Mds/2003 dt. 20.10.2004 for the assessment year 2000-01 and the common order No.640/Mds/2002, 123 and 124/Mds/2004 dated 3.8.2005 for the assessment years 1997-98, 1998-99 and 1999-00 has held that the interest on such advances is a business expenditure. In this connection, we also wish to point out that the Hon'ble Supreme Court in the case of S.A. Builders Ltd. Vs. Commissioner of Income Tax (Appeals) and others reported in 288 ITR-1 had held that the interest expenditure incurred by the assessee on the amount borrowed by it for advancing the same to its sister concerns is a business expenditure and therefore allowable u/s 36(1)[iii) of the Income Tax Act since such advances were made only out of commercial expediency. Applying the ratio of the above judgment of the Apex Court, the entire interest expenditure of Rs. 3151.15 lakhs on the advances made by the assessee Company to its subsidiary/group companies may be allowed as a business expenditure, since such advances were made by the assessee Company only out of commercial expediency. The above s....
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.... Pending execution of necessary documents and compliance with certain special and general conditions of the CDR which has been agreed to by the Company and the Promoters, the interest relief of Rs. 4110.36 lakhs for the year ending 31 March 2003 has been considered in these accounts. The balances of loans / interest pending implementation of CDR are subject to confirmation and resultant adjustments, if any, would be made after the implementation of the package". Further, the assessing officer at the time of scrutiny assessment was also informed by the assessee Company vide letter dated 20.2.2006 that the Company had accounted interest expenditure only at the reduced rate in the Books of Account and therefore, the relief of Rs. 4110.36 lakhs was disclosed in the Notes on Accounts only for statistical purpose. The workings relating to the interest savings of Rs. 4110.36 lakhs for the purpose of disclosure in the Notes on Accounts is also enclosed vide Annexure-V for your kind perusal. Further, the statutory auditors of the assessee Company vide Item No. 12 of Notes on accounts annexed with the audited accounts for the year 2003-04 (assessment year 2004-05) have....
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....the time of framing of scrutiny assessment u/s 143(3) on the issue of write off capital work in progress consisting of interest on FRN as well foreign exchange fluctuation loss on FRN of earlier years which stood debited to capital work-in-progress in earlier years prior to impugned ay: 2003-04 and the same was charged off as Revenue Expenses in Profit and Loss Account during the impugned year under consideration before us viz. ay: 2003-04 and the assessee during the course of original assessment proceedings held by the AO u/s 143(3) read with Section 143(2) of the 1961 Act vide submissions 05.07.2006(page 51-53/paper book) replied before the AO , which reply is reproduced hereunder:- "July 5, 2006 Asst. Commissioner of Income Tax, Company Circle - V(1), Aayakkar Bhavan, 121 Nungambakkam High Road, CHENNAI-600 034 Dear Sir, Sub: SPIC Ltd. - Income Tax assessment for the year 2003-04 - interest and Foreign Exchange fluctuations of Rs. 11627.84 lakhs (Interest Rs. 7760.50 lakhs + Rs. 3867.35 lakhs) - Certain further particulars called for. We solicit kind reference to our letter dated 9.3.2006 wherein th....
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....chase of capital goods/expansion schemes. Out of Rs. 5139.17 lakhs, the Company had capitalised the exchange loss of Rs. 74.63 lakhs during the assessment year 2002-2003 and the balance exchange loss of Rs. 5064.54 lakhs was carried in the capital work in progress account. During the assessment year 2003-2004, an exchange gain of Rs. 1008.55 lakhs was adjusted against the carried forward exchange loss of Rs. 5064.54 lakhs and a sum of Rs. 188.64 lakhs was further capitalised out of the above balance, by which unallocated foreign exchange fluctuation carried in the capital work in progress account was reduced to Rs. 3867.35 lakhs as at the end of the assessment year 2003- 2004. Likewise, the total interest paid by the Company on the above unsecured loan during the assessment years 1997-1998 to 2000-2001 was Rs. 20905.10 lakhs. Out of the above, interest amounting to Rs. 3195.63 lakhs was capitalised during the relevant assessment years and interest amounting to Rs. 9948.98 lakhs was charged to Profit and Loss account. The balance interest of Rs. 7760.49 lakhs was carried in the capital work in progress account, in order to capitalise the same in the future....
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....received by us amounting to Rs. 88,57,620/- and the balance alone was claimed as Revenue expenditure in the Income Tax Return. A copy of the insurance claim settled by the New India Assurance Company is enclosed (Annexure-VIII) for your kind perusal. As the write off, of the above asset was in line with the provisions of Sec. 32(1) (iii), we request your goodself to allow the same as revenue expenditure." The aforesaid reply was accepted by the AO and no additions were made to the income of the assessee while framing assessment u/s 143(3) of the 1961 Act. 4.5 The learned CIT after considering replies of the assessee filed in response to the SCN issued by learned CIT u/s 263 of the 1961 Act during the course of revisionary proceedings u/s 263 of the 1961 Act and on perusal of the records rejected the contentions of the assessee and held that assessment order dated 30.03.2006 passed by AO as erroneous so far as prejudicial to the interest of Revenue, by holding as under vide revisionary order dated 05.02.2008 passed by learned CIT u/s 263 of the 1961 Act (issue wise decision of learned CIT in its revisionary order dated 05.02.2008 is reproduced hereunder): I) Claim of ....
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....ied upon by the asssessee related to the case of an assessee engaged in production of films. He started production of two films and incurred an expenditure of Rs. 14,000/- therein and subsequently abandoned the" project. The High Court considered that when the assessee found that the project was not likely to be profitable he gave it up in order that he was freed from his efforts from the production of two films and the assessee can concentrate on making of better and more profitable ventures in film making. The High Court therefore allowed it as revenue expenditure. Thus, the facts and circumstances of the case relied on are quite different from the facts in the instant case and therefore this decision is of no help to the assessee being clearly distinguishable. Hence, in view of the above reasons, I hereby direct the AO to modify the assessment by disallowing the interest-and exchange fluctuation loss of Rs. 11627.84 lakhs in question." II) Claim of Write off of Rs. 202.42 lacs of DG Set-Decision of learned CIT u/s 263 of the 1961 Act "3.2 I have carefully considered the above submissions. As per section 32(1)(iii) if any machinery or plant on which dep....
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.... to examine the above two items namely the question of a) disallowance of prorated interest on the interest credit of Rs. 139.96 lakhs and b) disallowance of interest on borrowed capital of Rs. 16.78 crores given by the assessee to its associated company in the light of the law laid down by the Apex Court in the case of S.A.Builders Ltd., referred to above. In other words the AO should examine whether the amounts were advanced to the sister concerns by the assessee as a measure of commercial expediency or not and decide the issue accordingly. 5. The next issue is regarding the interest income on deposits, etc. Amounting to Rs. 139.96 lakhs that has been set off against the gross interest payment of Rs. 17942.66 lakhs and whether the disallowance of proportionate interest on loan to sister concern should not be based on the gross interest liability. This issue has been covered in the previous paragraph and the directions given therein hold good." V) Interest Disallowance on ICD of Rs. 675 lacs and decision of learned CIT u/s 263 of the 1961 Act "6. Regarding the proportionate interest disallowance on inter corporate deposits of Rs. 675 la....
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....ng Rate Notes(FRN) which was for acquisition of capital assets/projects and for working capital purposes . The assessee has added interest paid and foreign exchange loss on the date of Balance Sheet to Capital Assets in those cases where funds were applied for acquisition of capital assets/projects and in case if the funds are applied for working capital , then the said interest / foreign exchange losses were charged to Profit and Loss Account as Revenue Expenses. It was submitted that so far as unallocated funds are concerned, the interest and foreign exchange fluctuation loss on these FRN were debited to capital work in progress from year to year until ay: 2002-03 and in this year under consideration before the Bench viz. ay: 2003-04 as it was envisaged that no project is to be undertaken , entire outstanding balance in capital work in progress was charged to P & L account as Revenue Expenses. Thus , capital work in progress accumulated since 1996 onwards until ay: 2002-03 wrt to unappropriated funds were charged off to P & L Account in the year under consideration viz. ay: 2003-04 . It was stated that projects envisaged to be set up were shelved and amount standing in capital....
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....ssessment u/s 143(3) of the 1961 Act , as advances made to this company namely SPEL Semiconductor Limited was not brought within in ambit of disallowance by the AO and it is only for the first time learned CIT brought this associate company of the assessee namely SPEL Semiconductors Limited within ambit of disallowance by invoking revisionary powers u/s 263 of the 1961 Act with respect to interest free advances made to the said associate/group company. It was fairly admitted that issue before learned CIT(A) was not with respect to advances made by assessee to its associate/group company namely SPEL Semi Conductors Limited and learned CIT(A) was seized of other advances made by assessee to other group company for which interest was disallowed by the AO which later was allowed by learned CIT(A). It was submitted that later this advance to SPEL Semi Conductor Limited was converted into equity. It was claimed that these advances were made owing to commercial expediency . 5.1.4 With respect to next effective issue of ICD placed to the tune of Rs. 675 lacs on which no income was received, it was submitted by learned counsel for the assessee that the assessee has its own funds which ar....
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.... into the issues and examine the same on merits. Thus , in nutshell , the learned CIT DR would pray for confirming and sustaining the revisionary order dated 05.02.2008 passed by learned CIT u/s 263 of the 1961 Act . 5.3 In rejoinder, the learned counsel for the assessee submitted that DG set can be an separate undertaking . 6. We have considered rival contentions and perused the material on record including orders of authorities below and cited case laws. We have observed that the assessee is engaged in the business of Fertilizers, Pharma , Bio-tech and Engineering Services. It is observed that the assessee is dealing in :- a) Tuticorn Factory- Manufacturing and sale of Urea , DAP , Aluminum and Fluoride. b) SMO, EHVT Division- Execution of turnkey projects and execution of electrification works contract. c) Pharma Division- Manufacture of bulk drugs and formulations including PEN-G ; and d) Bio-tech Division- Production of tissue culture plants, enzymes and export of cut flowers. The assessee had filed its return of income with Revenue for impugned assessment year ay: 2003-04 on 23.10.2003 declaring loss of Rs. 403,84,01,506/-. The sai....
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....proceed to adjudicate all the six issues/grounds which led learned CIT to invoke its extraordinary powers as are contained in Section 263 of the 1961 Act to declare assessment order passed by AO u/s 143(3) of the 1961 Act to be erroneous so far as prejudicial to the interest of Revenue . The factual matrix of the case before us is undisputed and only it is to be tested whether decision of learned CIT in invoking revisionary powers u/s 263 of the 1961 Act on undisputed facts before us was valid and sustainable in the eyes of law keeping in view powers vested in learned CIT by virtue of Section 263 of the 1961 Act. We will now proceed issue wise taking one by one all the six issues/grounds which led learned CIT to invoke its extraordinary revisionary powers u/s 263 of the 1961 Act:- I) Claim of Write off of Interest and Foreign Exchange Fluctuation Loss on FRN of US $ 120 Millions issued by assessee in the year 1996:- The assessee raised Floating Rate Note(FRN) to the tune of US$ 120 Millions in the year 1996. The said borrowings are denominated in foreign currency. These FRN's are due for repayment/maturity in 2003. The offer document dated 11.01.1996 issued by ass....
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.... 2003. The assessee has claimed that it has unallocated funds remaining out of proceeds of FRN raised in 1996 which are so far not allocated for any usages. The assessee has debited interest as well foreign exchange fluctuation loss on these unallocated funds out of FRN raised in 1996 to capital work-inprogress from year to year since 1996 till the end of preceding ay: 2002-03 and no claim of deduction of Revenue Expenses or by way of benefit of Depreciation is claimed till ay: 2002-03 on this capital work in progress was claimed by assessee from Revenue. Thus, no prejudice was caused to Revenue until ay: 2002-03 as no benefit of any deduction/expenses either by way of Revenue Expenses or Depreciation was claimed by assessee until ay: 2002-03 on these un-allocable funds out of proceeds of FRN raised in as far as back in 1996 while computing income chargeable to income-tax , but in the year under consideration viz. previous year relevant to ay: 2003-04, the assessee has claimed that it is decided that the company does not intend to undertake or envisaged any further expansion and hence the entire outstanding amount as was appearing in the aforesaid capital work in progress account u....
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....e cited in contentions of the assessee at para 5 of this order but we are afraid whence no details are forthcoming from the assessee as detailed above, we fail to understand how these judgments can be applied to the benefit of the assessee. The learned AO merely accepted the contention of the assessee that projects are abandoned or it is no more envisaged that any projects will be undertaken and the entire capital work in progress as was accumulated since 1996 until ay: 2002-03 was allowed by AO as Revenue Expenses while computing income of the assessee for ay: 2003-04. The assessee has completely failed to discharge its onus and the AO clearly erred in accepting the bald statement made by the assessee without conducting any enquiry and certainly the action of the AO in accepting these capital work in progress accumulated over years as Revenue expenses in the year under consideration while computing income of the assessee chargeable to tax without making any enquiry which was certainly warranted based on facts and circumstances of this case before allowing entire capital work in progress existing upto ay: 2002-03 as Revenue expenses in this year viz. ay: 2003-04 is clearly erroneou....
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.... that crankshaft was part of the DG Set and the said wdv of crankshaft was part of the Block of Asset and the block has not ceased to exist even after taking into effect insurance claim received by the assessee, as the end of the previous year . The impugned ay: 2003-04 is before us and there is a concept of Block of Asset for providing depreciation u/s 32 of the 1961 Act which was applicable for impugned ay under consideration and Section 50 will come into play under the specified circumstances mentioned in Section 50 . In this case, there is an observation by learned CIT that the block of asset has not ceased to exist and there is a balance in the Block of Asset even at year end after adjusting the insurance claim received by assessee on crank shaft. Block of Asset is defined u/s 2(11) of the 1961 Act . There is no doubt that there is a different scheme of providing deprecation on undertaking engaged in generation or generation and distribution of power u/s 32(1)(i) read with Section 32(1)(iii) of the 1961 Act. These are matter of enquiry while we have observed that the AO simply accepted the claim of assessee during the course of assessment proceedings without making fu....
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....e has pleaded before learned CIT , commercial expediency in granting of these interest free advances to SPEL Semi Conductor Limited and reliance was placed on decision of Hon'ble Supreme Court in the case of S.A.Builders Limited(supra). The learned CIT in exercise of its revisionary powers has only directed AO to examine the claim as to commercial expediency in grant of these interest free advances to said associated/group company namely SPEL Semi Conductor Limited. The assessee on its part is claiming huge interest expenditure on borrowings, thus it was incumbent on the AO to see whether the interest bearing funds are utilized for business purposes keeping in view commercial expediency before allowing these expenses as business expenses and there is no diversion of funds for non-business purposes. Since there was complete lack of enquiry by AO wrt to interest free advance of Rs. 16.78 crores made by assessee to SPEL Semi Conductor Limited , the learned CIT rightly held the assessment order passed by AO as erroneous so far as prejudicial to the interest of Revenue within provisions of Section 263 of the 1961 Act. In any case, directions are issued by learned CIT to AO to e....
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....etting off of interest income earned by assessee with interest expenses incurred and considering of net interest expenses for disallowance of proportionate interest expenses , we have observed that net interest expenses were considered for disallowance of interest expenses after adjusting interest income received by assessee with interest expenses. We have observed that Chennai-tribunal in assessee's own case in ITA no. 961 & 962/Mds/2011 for ay: 2005-06 and 2006-07 , vide common order dated 09.02.2017 at para 10 page 17 , has held as as under: "10. We have heard both the parties and perused the material on record. Admittedly the interest paid by the assessee on borrowings used for the purpose of the business to be allowed as deduction while computing the income of assessee. The interest received by the assessee cannot be set off against the interest paid by the assessee. The interest paid and claimed as a deduction in the computation of profits and gains of the business, cannot be set off against interest received under the head "income from other sources". So that while computing the disallowance of interest on money advanced to group concern, the gross interest to be co....
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....ee. We uphold revisionary order passed by learned CIT . We order accordingly. VI) Interest Waiver of Rs. 883.93 lacs in CDR:- The learned CIT observed from notes to accounts forming part of the audited financial statement that consequent to Corporate Debt Restructuring (CDR) undertaken by Banks/FI of the assessee, an amount of Rs. 4110.36 lacs has been considered as interest relief for the year ending 31.03.2003. The learned CIT observed that in the annual report for ay: 2004-05 , interest relief availed from various banks and financial institutions included Rs. 1827.88 lacs ( including Rs. 943.90 lacs for the year 2003-04) . Thus , balance amount of Rs. 883.98 lacs pertained to earlier year 2002-03 ( ay: 2003-04) which has been omitted to be brought to tax for ay: 2003-04. The learned CIT observed that the AO did not consider this aspect while framing assessment u/s 143(3) of the 1961 Act and hence the assessment order was held to be erroneous and prejudicial to the interest of Revenue u/s 263 of the 1961 Act. The auditors stated in the notes to accounts that CDR cell approved package on 19.03.2003 giving certain terms and conditions for business and financial re....