TaxTMI 
TaxTMI 
2019 (12) TMI 1034
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....less Rs. 58,59,65,260/-) u/s 36(1)(iii) of the Act though claimed by the appellant u/s 57(iii) of the Act. 3. Brief facts of the case are that the assessee filed return of income on 30.09.2012 declaring loss of Rs. 1170,64,32,415/- other than the loss under long term capital gain which was Rs. 20,89,72,023/-. The return of income tax was later on revised on 29.03.2014 declaring total income at nil other than the loss of Rs. 66,38,62,883/- under the head of long term capital gain. Thereafter the case was selected under compulsory scrutiny and notices were issued and served upon the assessee. The assessee has made some borrowings and one of the major borrowings was on account of Zero Coupon Bonds issued by M/s. Essar House Ltd. Out of the borrowed fund, the assessee has advanced money through inter corporate deposits ( hereinafter referred to as ICD) to M/s. Essar Oil Ltd. The transactions of borrowing and lending were carried out during the financial years 2009- 10, 2010-11 and 2011-12. The transactions were carried out earlier by assessee's predecessor M/s. Essar Investment Ltd. and after demerger of investment and finance division of Essar Investment Ltd. merged with the assess....
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....bsp; Essar Oil Limited 102,02,64,568 Himachal Futuristic Communications Ltd 1,20,00,000 Equinox Business Parks Pvt. Ltd 44,45,013 Indsec Securities & Finance Ltd 9,00,000 Surajbari Windfarm Development Pvt Ltd 85,81,233 Matix Fertilisers and Chemical Pvt Ltd 1,13,68,219 Sub-total 105,75,59,033 2 Interest on loans and advances to others 1,25,35,486 3 Interest on debentures 17,57,19,994 Total 124,58,14,513 79. As can be seen from the above, the interest income shown by the appellant comprised of interest of Rs. 105,75,59,033/- in respect of ICDs, interest of Rs. 1,35,35,486/-in respect of loans and advances to others and interest of Rs. 17,57,19,994/- in respect of debentures. The interest income of Rs. 105,75,59,033/- shown in respect of ICDs comprised of interest income of Rs. 102,02,64,568/- in respect of ICDs placed with Essar Oil Ltd. and interest of Rs. 3,72,94,465/- in respect of ICDs placed with other companies. 80. The ZCBs were initially issued to Essar House Ltd (EHL) by Essar Investments Ltd (EIL). Similarly, the ICDs wi....
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.... dated 09.11.2017 and the verification of the direct nexus has been made with reference to the said bank account statements or the bank books: Sr. No. Name of the Bank Account No. Evidence furnished 1 ING Vysya Bank 500011017018 Bank account statement 2 ING Vysya Bank 500011026084 Bank account statement 3 State Bank of Mysore 54030683976 Bank Book 4 State Bank of Mysore Equity support account Bank Book 5 Punjab National Bank Bank Book 6 Axis Bank Bank Book 7 Royal Bank of Scotland 183643 Bank Book 8 ICICI Bank 623505366830 Bank Book 83. On examination of the ledger accounts of the ZCBs issued to EHL and ICDs placed with EOL along with the bank account statements/bank books, it is noticed that direct nexus between the funds raised by issue of ZCBs to EHL and the funds invested by way of ICDs in EOL exists to the extent shown in the table below: Sr. No. Funds received from EHL on issue of ZCBs Funds placed with EOL by way of ICDs Amount (Rs.) Date Amount 1 27.04.2009 225,00,00,000 28.04.2009 40,00,00,00....
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.... Rs. 1746.68 Crores out of the total amount of ICDs of Rs. 2598.61 Crores placed with EOL during the FYs 2009-10 to 2011-12. This shows that only 67.21% of the amounts advanced as ICDs to EOL were met out of the borrowings made from EHL by issue of ZCBs. 85. However, on further examination, it is noticed that though such direct nexus existed to the extent of Rs. 1746.68 Crores at the time when the amounts were advanced to EOL by way of ICDs, there was considerable repayment of ICDs by EOL to the appellant during the FYs 2009-10 and 2010-11. It is seen that though funds to the extent of 1712.10 Cores were advanced to EOL towards ICDs during the FYs 2009-10 and 2010-11 (Rs. 1011.30 Crores + Rs. 700.80 Crores), the amount of ICDs that were outstanding at the beginning of the previous year relevant to the assessment year under consideration stood at Rs. 968,79,55,915/- only. The break-up of the ICDs outstanding as on 01.04.2011, as seen from the ledger accounts of the ICDs with EOL, is as under: Particulars of the ICDs with EOL as on 01.04.2011 Amount (Rs.) 12.75% ICDs 0 9.75% ICDs 105,00,00,000 9.5% ICDs 863,79,55,915 Total 968,79,55,915 ....
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....such borrowings. Accordingly, the ICDs to the extent of Rs. 738,25,59,165/- only can be considered to have been sourced out of the borrowings made from EHL by way of ZCBs for the year under consideration. 88. The appellant has incurred interest expenditure of Rs. 143,30,28,270/- during the year in respect of the ZCBs of Rs. 1805,51,60,000/- issued to EOL. Out of such borrowed funds of Rs. 1805,51,60,000/-, the amount utilised for earning interest income from the ICDs placed with EOL during the year under consideration amounted to Rs. 738,25,59,165/-as mentioned in the preceding paragraph, which represents 40.89% of the borrowed funds. The proportionate interest expenditure in respect of the borrowed funds so utilised towards ICDs of Rs. 738,25,59,165/- works out to Rs. 58,59,65,260/-. Hence, interest expenditure incurred on the ZCBs to the extent of Rs. 58,59,65,260/- only can be considered to have been incurred for the purpose of earning the interest income from the ICDs placed with EOL. In view of this, it is held that the appellant is eligible for deduction of interest expenditure of Rs. 58,59,65,260/- u/s.57(iii) of the Act, while computing the income under the head In....
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.... computed on a pro-rata basis by apportioning the entire finance cost of Rs. 1022.76 Crores is held to be untenable in the facts of the case. 91. The appellant also advanced another without prejudice contention that the AO ought to have disallowed interest to the extent of Rs. 18.72 crores only, representing the excess of the interest expenditure of Rs. 143.30 crores on ZCBs over the interest income of Rs. 124.58 crores. In support of this proposition, the appellant relied on the decision of the Hon'ble Supreme Court in the case of Keshavji Ravji & Co. Vs. CIT 183 ITR 1. However, on careful perusal of the decision of the Hon'ble Supreme Court relied upon by the appellant, it is seen that the same is distinguishable on facts and therefore not applicable to the facts of the appellant's case. In the said case, the Hon'ble Supreme Court dealt with the issue of disallowance of interest paid to the partners of a firm on the capital contributed by then and held that where the appellant firm paid interest to partners on capital contributed by them and received interest from partners on borrowings made by them, the said transactions had element of mutuality and were....
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....e under the first category, the learned A.R. submitted that the CIT(A) has analysed the transactions pertaining to earlier years. The learned A.R. submitted that in the immediately preceding year, the assessee has made a claim under Section 57 of the Act in respect of the entire amount of interest and the same was allowed by the AO while passing the assessment order under Section 143(3) of the Act. Referring to the computation of total income and assessment order for A.Y. 2011012 filed at pages 22 and 24 of the Paper Book, the learned A.R. further submitted that the claim of entire amount of interest expenditure is justified in view of the fact that assessee has share capital of only Rs. 24.50 lakhs. Therefore, irrespective of the nexus, it can easily be concluded that the assessee has incurred corresponding interest expenditure. The learned A.R. submitted that if the interest expenditure has been allowed in a particular year, the same cannot be disallowed in subsequent year unless there is a change in the facts and circumstances. The learned A.R. relied upon the decision of the Hon'ble Gujarat High Court in the case of Virendra R. Gandhi vs. ACIT Tax Appeal No. 20 of 2004& ....
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....In respect of the category that interest expenditure corresponding to interest income other than interest received from Essar Oil Ltd. may be allowed, the learned A.R. submitted that the CIT(A) erred in ignoring the interest expenditure corresponding to the interest other than interest received from Esar Oil Ltd. The learned A.R. submitted that the assessee has received total interest of Rs. 124.58 crores as is observed by the learned CIT(A) at page No. 46, para 78 of the appellate order. The learned A.R. therefore prayed that the AO may be directed to allow the interest expenditure in respect of interest income other than interest received from Essar Oil Ltd. The learned A.R. further submitted that computation of corresponding interest expenditure should be on proportionate basis, as submitted earlier, wherever direct nexus is not available. 9. Finally the learned A.R. submitted that the issue of calculation of allowable interest expenditure may be set aside to the file of the AO with specific direction as has been prayed hereinabove. 10. The ld DR , on the other hand relied, heavily on the order of AO by submitting that the interest expenses as claimed by the assessee u/s 5....
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.... substantial question of law are as under: "5. We have heard learned advocates for the parties. It appears that while admitting these appeals the Court had directed to hear these appeals along with Tax Appeal No. 230 of 2003 as the question of law involved in these appeals are identical to Tax Appeal No. 230 of 2003,. We have already decided the said Tax Appeal No. 230 of 2003 on 19fh November, 2014 in the following manner: 4. Mr. Shah, learned counsel for the appellant has taken us to the order of the Assessing Officer, Commissioner of Income Tax as well as the order of the Tribunal and submitted that the Tribunal has committed error in upholding the disallowance of interest of Rs. 3,81,924/-from the total interest of Rs. 5,49,006/- paid by the assessee. He further submitted that the Tribunal has not properly appreciated the fact that the appellant was maintaining one common account in which all his income was deposited and from which withdrawal for all the expenditure was done. 4.1 He has drawn our attention to the provisions of Section 57(iii) of the Income Tax Act, which reads as under: '(iii) any other expenditure (not being in the natur....
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....are convinced with the arguments of the AR that interest should be allowed on proportionate basis. The case of the assessee gets support from the decision of the Mumbai Bench of the Tribunal in the case of J.F. Laboratories Ltd. (supra) wherein the Bench has held as under: - "Held : There is no gainsaying the fact that the Tribunal, while restoring this issue to the AO felt that if the pre-operative expenses including interest on borrowed capital have been incurred directly for earning the interest income, appropriate deduction under s. 57(iii) has to be allowed. The Tribunal directed the AO to allow opportunity to the assessee and to verify as to whether the assessee has incurred any expenditure for the purposes of earning or making the income within the meaning of s. 57(iii) and if so, what is the extent of such expenditure. The Tribunal made it abundantly clear that the assessee's claim was admitted in principle. In other words, the principle of apportionment of expenditure allowable under s. 57(iii) is inherent in the order of the Tribunal. The scope of the AO in the restored matter was limited to ascertaining the quantum of expenditure which is allowable under s. ....
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....g to interest income other than interest received from Essar Oil Ltd. and allow the same. The issue is restored for the limited purpose of calculation. Ground is allowed for statistical purposes. 14. Assessee has also raised additional grounds which are reproduced as under: - "1. The learned CIT (A) ought to have directed the Assessing Officer ("AO") to allow the interest expenditure, out of the total finance cost incurred by the appellant company, against the interest income on ICDs/debentures even where he has found that there is no direct nexus with the borrowing. 2. Without prejudice to the above, the learned CIT (A) ought to have directed the AO to allow the proportionate interest expenditure, out of the total finance cost incurred by the appellant company, against the interest income on ICDs/Debentures even where he has found that there is no nexus with the borrowing. 3. On the facts and circumstances of the case and in law, the learned CIT(A) ought to have directed the AO for granting IDS credit to the extent of Rs. 10,45,30,427/- u/s 199 of the Act. 4. On the facts and circumstances of the case and in law, the learned CIT(A) ought to h....
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.... the issue of interest expenditure with reference to interest expenditure on Zero Coupon Bonds amounting to Rs. 143.30 crores, restoring the matter back to the file of the AO. Needless to say that where there is no nexus, proportionate interest expenditure is to be allowed. This ground has already been decided by us in Ground No. 4(a) hereinabove. Accordingly, the grounds are restored to AO to be decided on the same lines. 19. So far as Additional Ground Nos. 3 & 4 are concerned we admit the grounds for adjudication and restore the same to the file of the AO with the direction to decide the same after verifying the facts and affording reasonable opportunity of hearing to the assessee. 20. In the result, assessee's appeal is partly allowed. ITA No. 2797/Mum/2018 21. The grounds raised by the Revenue in this appeal reads as under: "1. On the facts and in circumstances of the case and in law, the Ld. CIT(A) erred in allowing deduction for interest expenditure to the extent of Rs. 58,59,65,260/- u/s. 57(iii) of the Act, out of the total disallowance of interest of Rs. 143.30 crores made by A.O., which was based on additional evidence, in the form of bank stateme....