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TMI Blog2019 (12) TMI 575X X X X Extracts X X X X X X X X Extracts X X X X ..... ith 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 Commissioner of Income Tax erred in holding that the Appellant is not entitled to deduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 Services. The AO observed in its assessment order that the assessee is dealing in :- a) Tuticorn Factory- Manufacturing and sale of Urea , D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsp; 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 as it was expected to be adjusted to proposed projects/schemes. As no such proposed projects are envisaged during the current year, interest of Rs. 7760.49 exchange fluctuation (Net) of Rs. 3867.35 lakhs being capital work in progress have been charged to P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. In this regard, you are requested to appear before me on 06.11.2007 at 11.00 a.m. in my office in the IV Floor of Main Building, 121 Nungambakkam High Road, Chennai-34 either in person or through a duly authorised representative along with the written submissions, if any, in the above matter. 4.3 The assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 Loss account during the relevant assessment years was Rs. 2753.64 lakhs. The balance exchange fluctuation amounting to Rs. 5139.17 lakhs was carried in the capital work in progress account for the purpose of capitalisation as and when FRN funds were utilised for the purpose of purchase of capital goods/expansion schemes. Out of Rs. 5139.17 lakhs, the Company had capitalised the exch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tuation 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 details were already furnished to the assessing officer by the assessee Company during the assessment proceedings vide its letter dated 5.7.2006. The assessing officer after examining all the materials facts on record has come to the conclusion that the amount of Rs. 11627.84 lakhs represents the cost of projects given up by the assessee Company and allowed the expenditure since it consists of only interest and exchange fluctuation. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 submissions are made by the assessee Company against your proposal to add Rs. 139.96 lakhs being the set off claimed by the Assessee Company towards interest income and the disallowance of proportionate interest on borrowed capital of Rs. 16.78 crores given to the associate company, viz. SPEL Semi Conductor Ltd. Since the entire interest on the advances given to subsidiary/ group companies is an allowable expenditure, the question of disallowance of prorated interest on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iny 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 also observed as follows: 'The restructuring of the Debt Portfolio under the Corporate Debt Restructuring Mechanism [CDR) has been implemented during the year. Consequent to this, interest relief availed from various Banks and Financial institutions under the CDR Scheme or otherwise includes Rs. 1827.88 lakhs (including Rs. 943.90 lakhs for the year) availed from two lenders who are yet to confirm their consent for reduction in the interest rate. The balances of loans/interest accrued to some of the lenders are also subject to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the details relating to the borrowal of US$ 120 million against unsecured Floating Rate Notes (FRNs) during the year 1996 and interest and exchange fluctuation's amounting to Rs. 116.28 crores charged to the Profit and Loss Account during the assessment year 2003-2004 were furnished. As desired by your goodself, a copy of the offer document dated 11.1.96 (Annexure-l) is enclosed for your kind perusal. As seen from Page No.20 of the Offer document, the net proceeds of the issue was expected around US$ 118.06 million after expenses and the same will be applied by the assessee company towards financing the import of capital goods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 projects/expansion schemes. The Company envisaged certain future projects and desired to capitalise the interest and exchange fluctuation carried in the capital work in progress account. The total amount carried by the Company in the capital work in progress account at the end of the assessment year 2003-2004 was Rs. 11627.35 lakhs (Interest Rs. 7760.50 lakhs + Exchange fluctuation Rs. 3867.35 lakhs), which related to the assessment years 1997-98 to 2000-2001. As no further expansion schemes were undertaken or envisaged by the Company, the Company had charged of the entire amount of Rs. 11627.85 lakhs to the Profit and Loss account in the assessment year 2003-2004, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ings 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 Write off of Interest and Foreign Exchange Fluctuation Loss on FRN of US $ 120 Millions issued by assessee in the year 1996-Decision of learned CIT u/s 263 of the 1961 Act "2.2 On careful consideration of the above submissions and perusal of the records and report of the AO, I find that even though all the materials delineated above were placed before the AO at the time of assessment on being called for, the AO had not taken any specific view on the matter of deducibility of the expenditure to the tune of Rs. 11627.84 lakhs under consideration. The AO had not embarked upon any critical examination of the material in the light of the significant fact that the expenditure did not relate to the year of account. It is clear that the AO without ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uishable. 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 depreciation had been allowed is destroyed in the previous year then the amount by which the insurance payable falls short of the WDV thereof shall be allowed as a deduction provided such deficiency is actually written off in the books of accounts. It is seen from the Annexure 5 to IT depreciation schedule giving details of deletion of plant and machinery that the amount realised on account of the deletions of generator set under consideration has been given as Rs. 88,57,620/-. It is clear from the records that: the DG set under consideration had already been included in the block of assets (plant and machinery) for claiming IT depreciation. The insurance amount received on the DG set of Rs. 88.57 lakhs had already been duly deducted from the opening WDV of that block and that ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hould 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 lakhs made by the assessee, the assessee stated that these deposits were placed by the assesseee during the year 1999-2000 and that as seen from the audited annual report for the Asst. Year 2000-01 the company had reported a profit of Rs. 2837.26 lakhs and also carried a general reserve of Rs. 23924.42 lakhs as on 31.3.2000. The assessee stated that it was evident from the above that the ICDs were placed by the assessee only from its own funds and no borrowed funds were utilised for the said purpose and therefore the question of disallowance of any interest on such ICDs does not arise. 6.2 I hereby direct the AO to examine whether the ICDs had been placed from the internal accruals of the assessee as contended. If the AO finds that a part of the interest bearing borrowed funds had been utilised for making ICDs, he is directed to apply the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 work in progress was written off to Profit and Loss as Revenue Expenses. Our attention was drawn to page 70-73/paper book filed with tribunal , which is offering circular/document issued by assessee for raising Floating Rate Note(FRN) of US $ 120 Million due for maturity in 2003. In this document it written that net proceeds of FRN after meeting issue expenses will be used for the purposes of financing imports into India of capital goods for its operations and projects it is involved and for general corporate purposes permitted by GOI. It is stated that these projects which the assessee was contemplating to set up were shelved . The assessee's counsel would rely on the decision of Hon'ble Delhi High Court in the case of Indo Rama Synthetic ( India) Limited v. CIT reported in (2010) 228 CTR 0278(Del.) and decision of Hon'ble High Court of Jharkhand in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 are sufficient to advance these ICD's and presumption should be drawn that the assessee advanced these ICD's out of its own available funds. 5.1.5 With respect to interest waiver on CDR , it was claimed that there was no waiver of interest by FI's/Banks finalized as it was subject to approvals by FI's/Banks. Our attention was drawn to page 12 of the revisionary order of learned CIT , wherein the learned CIT has directed AO to examine this issue. 5.2 The learned CIT-DR would submitted in rebuttal that learned CIT has rightly exercised its revisionary powers u/s 263 of the 1961 Act as assessment order originally passed by the AO u/s 143(3) of the 1961 Act on 30.03.2006 was erroneous so far as prejudicial to the interest of Revenue. It was submitted that foreign exchange fluctuation loess on FRN was incurred which was capital loss. The assessee has claimed to have abandoned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 said return of income was processed by Revenue u/s 143(1) of the 1961 Act on 12.03.2004. The assessee filed revised return of income with Revenue on 30.03.2004 declaring loss of Rs. 298,10,70,500/- . In this revised return of income filed on 30.03.2004 by assessee with Revenue, the assessee had offered an interest income of Rs. 105.73 crores. Later scrutiny assessment was framed by AO vide assessment order dated 30.03.2006 passed u/s 143(3) of the 1961 Act , assessing loss of the assessee at Rs. 342,32,81,858/-. Thereafter, learned CIT invoked its revisionary powers u/s 263 of the 1961 Act and issued show cause notice dated 24.10.2007 to assessee as to why the assessment order of the AO be not held as erroneous so far as prejudicial to the interest of Revenue within provisions of Section 263 of the 1961 Act, on as many as six issues/grounds which we have enumerated in detail in preceding para's of this order. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 96:- 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 assessee for raising these FRN to the tune of US $ 120 Million is filed by assessee and is placed on record in file. The net proceed stated to be expected from issue of FRN is around US $ 118.06 Million , after meeting issue expenses. These FRN's issued by assessee are denominated in foreign currency and liability of the assesse to pay interest and repayment of principal is also denominated in foreign currency. It is stated in the said offer document that proceeds of FRN will be utilized for financing the import into India of capital goods for its operations and projects in which the assessee is involved and for general corporate purposes permitted by Government of India. Thus, these FRN's were issued in the year 1996 and were due for maturity /repayment in 2003. Since its issue and receipt of proceeds by the assessee in 1996, the assessee was charging off interest and foreign exchange fluctuation loss to the Capital Assets wherei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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 until ay: 2002-03 representing interest on un-allocated funds out of proceedings of FRN and foreign exchange loss on restatement of loan liability denominated in foreign currency as at year end from year to year since 1996 until ay: 2002-03 was charged off as Revenue Expense in Profit and Loss Account. There is no whisper by assessee company as to how these unallocated funds out of proceeds of FRN were utilized/applied by assessee since 1996 until ay: 2003-04, i.e. whether these unallocated funds were continued to be held in escrow account with banks or with current account maintained with bank, FDR's , government securities etc. or were diverted out to other entities etc.. It is to be noted that proceeds of these FRN's could only be utilized for the purposes permitted by GOI and it could not be diverted for any other purposes as per policy of GOI. The purpose for raising these FRN was for financing the import into India of capital goo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 erroneous and prejudicial to the interest of Revenue and learned CIT rightly interfered by invoking his revisionary powers u/s 263 of the 1961 Act. It is pertinent that 2003 is the year when these FRN's were due for repayments and the assessee is claiming that for entire duration of FRN running from 1996 when the same was raised till its maturity , proceeds were unallocated . The onus was heavy on assessee to prove that not only the funds were unallocated for projects or working capital, but the same was kept in escrow account maintained with bank or in a bank account/ FDR's , government securities etc or other permitted purposes as there were restrictions imposed by GOI on end use of foreign currency borrowings made through FRN's as the funds cannot be allowed to be diverted for purposes other than permitted usages. The evidences which could be produced but are not produced , the presumption will be drawn against the person who is in positio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 further enquiries as were necessarily warranted in the factual matrix of the case. The AO did not verify whether the write off Rs. 202.42 lacs on account of written down value net of insurance claim with respect to crank shaft which formed part of DG Set is to be governed by concept of Block Asset as the block of asset did not cease to exist even at year end or else it will be governed as in the case of undertaking engaged in generation of power u/s 32(1)(i) of the 1961 Act read with Section 32(1)(iii) of the 1961 Act. These are fact finding exercise which AO was obligated necessarily to undertake before allowing or disallowing the claim of the assessee but in the instant case, the AO did not made any enquiry whatsoever before allowing the claim of the assessee. Under these circumstances, the learned CIT exercise its revisionary powers u/s 263 of the 1961 Act and directions were issued by learned CIT to AO to carry out fresh examination of the claim preferr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld 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 examine the claim of the assessee that these advances are made owing to commercial expediency. We are not inclined to interfere with the revisionary order passed by learned CIT u/s 263 on this issue. While upholding the decision of learned CIT u/s 263 of the 1961 Act, we also note that the AO has disallowed proportionate interest expenses on interest free advances made by assessee to other group entities, while no enquiry was made by AO with respect to proportionate disallowance of interest expenses on interest free advances made to this group entity namely SPEL Semi Conductor Limited. The AO did not made any additions on disallowance of proportionate disallowance of interest expenses on interest free advances made by assessee to its group entity namely SPEL Semi Conductor Limited , while other disallowance of proportionate interest expenses on interest free advances made to other group entity was made which was subject matter of challenge by assessee before learned CIT(A) . T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nst 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 considered and proportionate interest disallowance to be worked out, being so, the CIT justified in giving the direction to the AO accordingly." We are in agreement with afore-said decision of co-ordinate benches of the Chennai-tribunal and we affirm decision of learned CIT passed u/s 263 of the 1961 Act for impugned ay: 2003-04 . We order accordingly. V) Interest Disallowance on ICD of Rs. 675 lacs and decision of learned CIT u/s 263 of the 1961 Act:- It was observed by learned CIT from notes to accounts to Balance Sheet that the assessee has placed funds in interest free ICD to the tune of Rs. 675 lacs . The learned AO did not made any enquiry as to the interest free funds placed by assessee with ICD. The said funds were claimed by assessee to have been deployed in the year 1999-00 and the assessee placed audited financial statements before the learned CIT stating that it has earned profits of Rs. 2837.26 lacs during the year under consideration and it had a carried general reserves to the tune of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tors stated in the notes to accounts that CDR cell approved package on 19.03.2003 giving certain terms and conditions for business and financial restructuring including sharing of security amongst lenders, which is pending final approval by the lenders. It was submitted that interest relief to the tune of Rs. 4110.36 lacs for the year ending 31.03.2003 has been considered in these accounts , which is pending execution of necessary documents and compliances with certain special and general conditions. The assessee submitted that the AO was informed during assessment proceedings that company has accounted for interest expenses only at reduced rate of interest in books of accounts and therefore the interest relief of Rs. 4110.36 lacs was disclosed in notes to accounts only for statistical purposes. The learned CIT observed that the AO has not considered the above issue in proper perspective and direction were issued to the AO to examine the issue in proper perspective after considering submissions of the assessee in accordance with law and the AO shall be entitled to call for fresh evidences , if so required and to examine the same. The assessee has availed loans/borrowings from for ..... 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