TaxTMI 
TaxTMI 
TaxTMI 
2024 (9) TMI 1890
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....s. 1,681,776,090/- and book profit at loss of Rs. 8,822,243,600/-, was dismissed. 2. Assessee aggrieved with the same has raised following grounds of appeal: - Disallowance of loss on account of assignment of certain receivables and payable is pursuant to valuation and reassessment of companies' ability to collect the amount of Rs. 251,30,00,000/- 1. On the facts and in the circumstances of the case, The Learned Commissioner of Income Tax (Appeals) - 48 and the learned assessing officer erred on facts and in law in disallowing loss of Rs. 2,513,000,000/- actually incurred during the year up on assignment of identified receivables and payable is comprising intercorporate deposits, interest thereon, security deposits, other receivables, and payable is from or to Essar group entities based on incorrect facts and surmises. The appellant submits that the net losses incurred on assignment of receivables and payable is based on a detailed evaluation by an independent valuer are deductible under section 36(1)(vii) of the income tax act, 1961 (The Act). 2. The learned CIT - A and the learned AO erred in rejecting the alternate claim of the deductibility of the ....
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....s done in the prior assessment years. The appellant prays that the adjustment made by the learned AO and upheld by the learned CIT (A) in respect of partial disallowance of interest expenses claimed in excess of interest income on ICD is be deleted. Disallowance of interest expenses incurred for the loan taken for investment in Ennegaon Limited, Mauritius Rs. 171,57,00,000 6. The learned CIT (A) and the learned AO erred in on facts and in law in disallowing interest expenses incurred on financial assistance obtained from banks for making strategic equity investment in foreign company, completely overlooking the facts and circumstances relating to the investment. The appellant submits that the interest, being squarely covered under the specific provisions of section 36(1)(IIA) be held as deductible as claimed. 7. Without prejudice to the above, the learned CIT(A) and the learned AO erred on facts and in law in not allowing the interest expenses incurred formation investment for furtherance of business of the appellant under section 37(1) of the act. The appellant prays that the adjustment made by the learned AO and upheld by the learned C....
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.... eighteen documents. Out of that it was stated that thirteen documents are already part of departmental records however not submitted during the assessment proceedings for assessment year 2017 - 18. With respect to documents mentioned at serial number 14 is a memorandum of Association of the company, board note relating to investments in Enneagon Limited Mauritius (serial number 15), audited financial statements of Enneagon Limited Mauritius (serial number 16) and board resolution for assignment of receivables and payable (serial number 17) are the additional evidence. At serial number 18 assessee has submitted the computation of income for assessment year 2017 -18. With respect to serial number 1 to 13 the contention of the assessee was that about documents are part departmental records for the respective assessment years and the assessing officer has relied on the same in the assessment order for assessment year 2017 - 18. The same are now being relied upon by the assessee company to substantiate that interest income on intercorporate deposits given by the appellant were offered to tax in respective years in return of income as business income and have been assessed also as busin....
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....ently visit tax office to clear pending rectification orders and order giving effects. Under these circumstances considering that due to Covid - 19 related restrictions, the assessee wanted further time. Therefore, it was submitted that assessee could not submit the detail. As this was the sufficient cause for not adducing these details before the ld. Lower Authorities, now it should be admitted. 10. The learned departmental representative vehemently objected to the same and submitted that the learned CIT - A has disposed of the appeal of the assessee on 25/2/2022. The assessee is relying on his letter dated 18 February 2021 wherein assessee is seeking time. He submits that the assessee has made a further submission on 8 November 2021 before the learned CIT - A wherein once again the assessee has sought time of 10 days. He further submitted that since 8 November 2021 to 25/2/2022, 4 months' Time was available with the assessee, but nothing was submitted before the learned CIT - A. Therefore, the claim of the assessee is that no time was granted to the assessee by the learned CIT - A for submission of the additional evidence is devoid of any merit and is an incorrect statement. H....
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....by the Ld.assessing officer in paragraph number 4 of the assessment order and by the learned CIT - A in paragraph number 5 of the appellate order. 15. The learned assessing officer has noted as under: - "4.1 During the year under consideration the assessee has declared earnings before exceptional items and tax at Rs. 347.5 crores. The assessee has claimed Rs. 918.68 Crores as exceptional items due to which its profit before tax shrinks to a loss of Rs. 570.83 crores. 4.2 it is seen from the notes to accounts, item 40 deals with the exceptional items. The assessee was asked to provide details of such expenses vide notice under section 142(1) dated 11/11/2019. Vide its submissions dated 6/12/2019, the assessee has provided details of such expenses claimed in the profit and loss account. 4.3 Item 40 (a) to the notes deals with the 'Debit to profit or loss on reassessment of the company's ability to collect the amount specified in note 56'. The amount debited towards this head is Rs. 177.50 crores. It is further seen that this amount has not been added back to the total income of the assessee. The assessee was show caused to explain why such amount should ....
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....ome in previous years. Consequently, based on the provisions of the law and fact of our case, this amount is clearly allowable as a deduction." 4.5.2 The submissions made by the assessee in relation to loss on transfer of ICDs and interest thereon have been perused. As per the assessee's own submissions vide submissions dated 12/9/2019, the assessee's business is that of integrated oil terminal situated at vadinar, Gujarat. It has a capacity of 58 MMTPA and handles crude oil and petroleum products. These facilities cater to provide services only to Nayara Energy Ltd (formerly known as Essar oil Ltd.). 4.5.3 The assessee is taking refuge only on the thin ground that in earlier year it has recognised interest income as business income. Hence it may be construed to be in money lending business. The surmise of the assessee is not acceptable. To put things in perspective the following facts should be noted: - 1. The assessee - Vadinar Ports and Terminals Ltd (VPTL) and Vadinar oil terminal Ltd (VOTL) has received intercorporate deposits (ICD) from Essaroil and Essar ports Ltd in earlier years. The funds out of these ICDs are advanced as ICDs to ESSAR group com....
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....oncerns from the ICDs from group entities and loans taken from financial institutions. That such advances made to group concerns have been written off during the year not on account of failure to recover the debts, but on account of reassignment of such deposits to a group concern. Against the reassignment of net deposits worth Rs. 250 crores, the assessee has received a sum of Rs. 4.8 crores. As a result, the assessee has booked a loss of Rs. 251.30 crores. It is thus clear that this is not a case of advance turning bad, but a sham transaction to book fictious expenses in the books of account. 4.6 Again, vide submissions dated 24/12/2019 the assessee stated that the loss incurred on ICDs and security along with accrued interest is allowable as deduction under section 36(1)(vii) read with section 36(2) and under section 28(i). The submissions of the assessee are not acceptable. The conditions in relation to business loss are clear: - 1. That it should be incidental to the carrying on of the business. 2. Should be on revenue account. 3. Should be a real loss and not a notional fictitious one. 4. Should have actually been incurred and not ....
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....and loss is fictious, it is not allowable as bad debt and not allowable as business loss. 17. Assessee challenged this addition before the learned CIT - A. In para number 5.1 to 5.7 the learned CIT has discussed the proceedings before the learned assessing officer. In paragraph number 5.8 onwards the findings of the learned CIT - A are rendered as under: - "5.8 At the appellate stage, the appellant has contended that loss arising on transfer of ICDs is allowable as a deduction. However, if the assessee had doubts about a particular ICD being recovered back it would have recalled the ICD in that year itself instead of bearing loss arising on transfer. Here the loss was not incidental to the business, nor was of revenue account. As pointed out by the AO, the assessee has booked a loss on account of assignment of debts to its group concern IATPL. IATPL is Essar group company and is not an asset reconstruction company. In fact, IATPL is a shareholder of Essar oil. Essar oil had advanced ICDs to VPTL and VOTL and the agreement to assign certain assets and liability of the assessee company to IATPL was executed on 31st of March 2017. Appellant's contention that the loss on ac....
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....ppellant cannot absolve it from its liability. The AO had placed on record the entire gamut of finding and there is no further requirement for elaboration. In view of the overall facts discussed as above addition made of Rs. 2,513,000,000 on account of loss on transfer of ICD is apparent. This ground of appeal is dismissed." 18. Thus ld. CIT (A) confirmed the disallowance on all three aspects. Therefore, assessee is in appeal before us. Assessee has filed a paper book containing 628 pages initially and further paper book containing 629 pages to 914 pages were submitted on 19 June 2023 as additional evidence. Assessee has also submitted in response to query raised by the bench a paper book containing five different documents to substantiate it claim in response to the date of hearing held on 14 February 2024. 19. The learned authorised representative first took us to page number 230 of the paper book to show that as per annexure A details of assets and liabilities assigned under agreement with Ibrox aviation and trading private limited are mentioned as five different intercorporate deposits amounting to Rs. 738.25 crores, security deposit amounting to Rs. 3 crores along with o....
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....fit and loss account. He further referred to the question before the honourable High Court in paragraph number [1] and thereafter reference of special bench in paragraph number [3] and argument of the assessee in paragraph number [4]. He thereafter referred to paragraph number 14 wherein it has been held that where the assessee is a stockbroker on behalf of its client is as much a part of that that of shares transacted as is the brokerage which is charged by the assessee on the transaction. Therefore, his argument was that assessee satisfies the conditions laid down under the act for write-off of the bat that. Accordingly, the assessee should be granted the same as a deduction as bad debt. He further referred to the decision of the honourable Bombay High Court in PCIT versus Mahindra engineering and chemical products Ltd (2021) 439 ITR 399 (Bom) dated 27 October 2021 wherein the facts clearly shows that when the interest income is brought to tax as business income in the earlier assessment years, advances made in the course of the business when return of their should be allowed as a deduction under section 36(1)(vii) and section 36(2)(1) of the act. The learned authorised represent....
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....publicly available documents which explains the rationale of the above deal. He further submitted that on attention to page number 231 is again that assessee has transferred both the assets and liabilities. The intercorporate deposits were an asset having the grave doubt about recovery of the amount. Assessee was hopeful if there is a change in shareholding there would be improvement in the chances of recovery. He referred to 5 intercorporate deposits which were doubtful of recovery part of the transfer he also referred to liability payable of Rs. 699 crores also part of the transferred asset. With reference to the rational, he referred to paper book page number 1027 to 1044 which is a credit rating for bank facilities of Vadinar oil terminal Ltd by care ratings dated 23 May 2018. He referred to page number 1030 wherein detailed rational of Essar oil Ltd was mentioned in that report. He referred to page number 1035 of that care ratings report relating to Vadinar Oil terminal Ltd. He further referred to the financial statement of the assessee for assessment year 2018 - 19 to 2020 - 21 to show that there is a decline in interest cost, there is decrease in borrowing there is increase ....
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....Further the clubbing of the assets and liabilities together does not have any rational. He further stated that the deduction is neither available as bad debt as claimed by the assessee before the learned assessing officer and not also as a business loss. He further submitted that the learned assessing officer has given a detail reason which are not controverted by the assessee. 29. The learned CIT DR further submitted that all the decision cited by the learned authorised representative are taking the claim that the claim of the assessee is under the head bad debt, it is not about that but a sham transaction which has been claimed as a deduction or business loss by the assessee. He submitted that when the gross assets of the value of Rs. 955 crores which are earning good income along with the liability of Essar oil Ltd of Rs. 699.29 crores having the net asset value of Rs. 256.09 crores are sold to a sister concern for only Rs. 4.79 crores itself shows that the transaction is sham. 30. He further submitted that that there is a qualification in the auditor's report wherein there is a qualified opinion is given by the auditor. He further referred to the profit and loss account o....
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....lue of the assets transferred is Rs. 256.09 crore. The issue is that it is sold to a sister concern IATPL only for Rs. 4.98 crores. Thus, assessee has incurred loss of Rs. 251.30 crore. Whether these losses allowable as bad debt, business loss or not. 35. To reach at the conclusion, following important fact noted from the annual report of the assessee company are required to be mentioned. There is a scheme of arrangement and change in holding company as per directors' report at page number 13 of the annual report of the company wherein it is mentioned as under: - "Scheme of arrangement and change in holding company. As on March 31, 2016, Essar ports Ltd (EPL) was the holding company of the company. In view of the composite scheme of arrangement amongst the company, Vadinar ports and terminals Ltd, Essar power and minerals Ltd, Yash hotels private limited, Hazira Coke Ltd and Essar ports Ltd (the scheme) as approved by the honourable High Court of Gujarat effective July 1 (2016, Essar power and minerals Ltd (EPML) and Vadinar ports terminals Ltd have merged with your company. As a result, your company has issued equity shares to all the shareholders of ....
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....3 crore - refer not 21)" 38. Note number 57 on going concern is also required to be considered which is as under: - "57 Going Concern The ability of the company to continue as a going concern is predicated on the successful implementation of SPAs together with the escrow arrangement for deployment of the sales consideration towards the liquidation of amounts due to the company from certain related parties and have the required cash flows to meet its financial obligations.' 39. It is interesting to note that assessee has entered into an agreement for transfer of identified assets and liabilities between Vadinar Oil terminal Ltd and Essar Steel Jharkhand Ltd on 31st day of March 2017 wherein details of the third parties are identified assets amounting to Rs. 1614 crores along with the amount of identified liability of Rs. 1599 crores having net value of Rs. 15.14 crores were sold for net consideration of 15.1 crores. Therefore, in sale of assets and liabilities to Essar steel Jharkhand Ltd there is no loss or profit. 40. The transaction with Ibrox aviation in trading private limited of Rs. 4.78 crores are described in the related party transaction in note n....
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....ough the escrow arrangement, we are unable to express an opinion on the recoverability of the caring values of the investment and the dues aggregating to Rs. 3613.44 crore as of 31 March 2017 or debit to the statement of profit and loss of Rs. 177.50 crore for the year." 45. Thus, there is no qualification with respect to transaction of sale of similar assets and liabilities to Essar Steel Jharkhand Limited, but it is on transaction of Ibrox Aviation and Trading Pvt Ltd Only. 46. Now it is interesting to note that the management in its reply in the director's report to the qualification of the auditor as under: - a) Management response to qualification under basis for qualified opinion in the auditor's report on standalone and consolidated financial statements: - The company had receivable from various group companies and other entities, operating in steel, shipping, and other sectors. Due to the weakening of the sectors and data duration of the financial condition (including restructuring of that is) of these entities, a situation has arise in wherein the value of the receivables from these entities has significantly declined and recovery of their dues is l....
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....17 on recoverable values of receivables from Essar sipping Ltd in terms of the report dated 4 April 2017. On the report on recoverable values of receivable from Essar sipping Ltd and Imperial consultants and securities, it was held that that out of the ICD including interest under the receivable of Essar sipping Ltd of Rs. 55 crores the range of the recovery of the receivable is only 93% to 99.4% and in case of Imperial consultant and securities Ltd on ICD and interest another receivable of Rs. 306.9 crores the range of the receivable is only 44.6% to 59%. Similarly report on recoverable value of Essar steel India Ltd as per report dated 4 April 2017, on outstanding of Rs. 305 crores, it is stated that the interest of Rs. 80 crores are not recoverable and on the balance sum of Rs. 224 crores the recovery would be in the range of 5% to 14%. Thus, out of the total receivable of Rs. 955.38 crores, the recoverable report of only Rs. 667.35 crores were placed before us, thus for the balance Rs. 328 crores there is no reply about the recoverability report. 50. All the reports of the Grant Thornton are pertaining to the period April 2017 and were dated 4 April 2017 whereas the agreemen....
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....ontrolling stake being non-public shareholding in the company was to be acquired by Essar oil Ltd (EOL) as a condition precedent to the share purchase agreements (SPA) executed on October 15, 2016 by the majority stakeholders of EOL to sell their shareholding to petrol complex Pte Ltd and Kesani Enterprises Co Ltd. As a result, the company will no longer remain a part of the Essar group and accordingly the company intends to settle all its assets and liabilities and realise the dues from related parties and other entities as envisaged in the transaction documents exist to pursuant to the SPAs." 54. However, when the bench asked for these documents because that is the offshoot of the transaction by which a sum of Rs. 251 crores have been booked in the profit and loss account as an exceptional item, it was stated that such agreement is not accessible by the assessee and therefore not in a possession of the assessee and hence not produced. 55. We note that when the assessee mentions the same in its directors' report, notes on accounts etc, when the going concern itself hinges on that agreement, how the assessee is not having any access to that document. The nonproduction of such....
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....s not the business of the assessee to make investment in intercorporate deposits. Therefore, the loss of Rs. 177.50 crores are not allowable as a business loss. 59. The argument of the assessee is that it has offered the interest income as business income and therefore this investment should also be considered as business activity of the assessee. We do not find any force in this argument for the simple reason that the investments held by the assessee as investment activities. Further the memorandum of Association of the company furnished before us as additional evidence shows that the main object of the assessee company is of shipping and transportation. The serial number 14 under the head object incidental or ancillary to the attainment of the main object where lending is mentioned does not help the case of the assessee because it is not the business activity of the assessee. It only supports the main object of the assessee. Thus, the loss incurred by the assessee is on capital account and not on revenue account and it is not a business loss which can be granted as deduction to the assessee. 60. Therefore, we do not find any infirmity in the order of the learned assessing o....
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....e purposes of his business. This decision has been affirmed by the honourable High Court in 52 ITR 165. Therefore, the interest income on intercorporate deposit was considered by the AO under the head income from other sources instead of business income for statistical purposes and further the excess claim of interest amounting to Rs. 158.12 crores [being Rs. 253.30 crores minus Rs. 95.38 crores] were disallowed. Accordingly, the disallowance of Rs. 1,581,200,000 was made by the learned assessing officer. 63. The assessee challenged the same before the learned CIT - A wherein the learned CIT - A has confirmed the addition for the reason that when the assessee has raised the business loans for the business purposes on which interest liability is incurred for payment and on the other hand the funds were advanced to sister concern for non-business purposes on interest free or on average interest basis, then the interest payable by the assessee to the financial institutions cannot be held to be used funds for business purposes and no deduction accordingly can be permitted under section 36(1)(iii) of the act. The learned CIT - A has also held that the assessee has casually claimed th....
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.... However, the interest has also been charged at rates higher than the rates at which the source of funds has been borrowed. During the year, the assessee would not charge any interest on loan given to Essar Steel India Ltd and Essar Dredging Ltd because of their financial and operational challenges and the strong likelihood of not receiving those interest. The management of the company in larger interest of recovery of intercorporate deposits decided not to charge the interest for this year as is evident from the financial statement. Then he relied extensively on the submission made by the assessee at page number 1934 of paper book. The learned authorised representative further referred to the paper book page number 307 (page number 314 - 315). 65. The learned authorised representative vehemently submitted that identical issue arose in case of the assessee for assessment year in ITA number 777/M/2022 four assessment year 2016 - 17 wherein the coordinate bench vide order dated 10/10/2022 has dealt with the same issue and the claim of the assessee was allowed. 66. The learned authorised representative further referred to the miscellaneous application number 332/M/2022 in ITA nu....
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....77 lakhs. The deposits with Essar steel Ltd at the beginning of the year was Rs. 30,552.62 lakhs and from Essar dredging Ltd of Rs. 123,502.78 lakhs. On both these accounts, assessee has not charged any interest. These ICD is assigned on the last day of the financial year and therefore are not outstanding at the end of the year. The only reason advanced by the assessee is that the financial condition of the debtor was not good and therefore assessee did not charge any interest on these deposits. Except submissions made before the lower authorities, no evidence of commercial expediency was submitted before us. However, the decision of the coordinate bench in ITA number 777/M/2022 for assessment year 2016 -17 dated 10/10/2022 was placed before us and stated that the decision also deals with the issue para number 2 specifically mentioned and subsequently paragraph number 12 - 13 was mentioned. Subsequently the miscellaneous application number 332 in that ITA dated 6/2/2023 was discussed. The miscellaneous application was only with respect to the restoration of the appeal to the assessing officer on that issue in ITA number which was then decided by the coordinate bench and deleted the....
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....m of the assessee that the above investment was meant to carry out trading activity, however, no such activities could be carried out because of the prevalent market conditions. In August 2017, these shares of the subsidiary company were brought back from the assessee. Therefore, in this entire process of less than one year the assessee incurred a loss of Rs. 127.93 crores on the transaction. The AO further noted that over and above the above loss, the assessee has also debited finance cost of Rs. 171.57 crores in its books of account as specific finance cost incurred towards investment in a subsidiary. Before the assessing Officer no documents in relation to the above proposed plan of acquisition of the subsidiary company for the purpose of trading was produced and further the record suggested that no business happened in that company. Therefore, the learned assessing officer reached at a conclusion that assessee has provided that finance, fund movement shows that once the funds landed in its books, there is nothing brought on record to prove that this investment was in relation to the business. Accordingly, he disallowed the sum of Rs. 171,57,00,000 of the interest expenditure. ....
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....of the assessee company, board note relating to investment in the subsidiary company, audited financial statement of the subsidiary company are produced as additional evidence at page number 629 to 914 of the paper book. He referred to page number 869 of the paper book to show that item number 10 of the agenda was with respect to the new financing facility of US$ 450 million and use of proceeds for equity infusion into overseas subsidiaries. He submitted that the subsidiary is a Global Business License - 1 company Incorporated in Mauritius for the purpose of carrying out, trading related business. The joint-venture company will have an equity contributed by the assessee and another company in the ratio of 65:35. He further referred to page number 885 onwards which is the annual account of the subsidiary company for the year ended on 31st of March 2017. The assessee further relied upon the decision of the honourable Supreme Court in case of SA Builders [ supra] and submitted that if the advance to the subsidiary is for the reasons of business expediency, no disallowance can be made. The learned authorised representative further referred to page number 287 of the paper book wherein a....