Essar Shipping Limited , Mumbai vs Principal Commissioner Of Income Tax

4. A detailed reply dated 20.03.2018 was filed assailing the correctness of the issues raised in the notice u/s. 263 of the Act. The Ld. Pr. CIT, however, not accepted the submissions made by the assessee and, issued the following directions vide his order dated 28.03.2018:

"5. I have perused the relevant record and also considered the submissions made on behalf of the assessee company. The assessee claimed interest expenditure of Rs. 123,10,57,100/- which was allocated to the tonnage and non- tonnage business. The interest expenditure of R. 81,36,80,821/- allocated to non- tonnage business included interest expenditure of Rs. 39,61,61,644/- and Rs. 27,57,66,170/-related to NCD and FCCB respectively, which should have been allocated to tonnage as well as non-tonnage business in the ratio of turnover. The Ld. AR submitted that the borrowed fund in the form of NCD and FCCB was utilized for giving Inter Corporate Deposit and for investment in wholly-owned subsidiary company thereby indicating that the fund was utilized for non-tonnage business. The Ld. AR further submitted that the assessee borrowed money from LIC and gave Inter Corporate Deposit of Rs. 418 crores to its wholly-owned subsidiary M/s. Essar Oilfield Services India Limited (EOSIL) engaged in business of oil drilling operations and there was one-to-one nexus between the borrowed fund and the Inter Corporate Deposit given to EOSIL which could be verified from the bank statement. The Ld. AR added that the money borrowed in the form of FCCB was ITA NO.3156/MUM/2018 (A.Y: 2011-12) M/s. Essar Shipping Limited invested in its wholly owned subsidiary M/s. Essar Oilfield Services Limited, Mauritius (EOSL) and the direct nexus could be verified from FIRCs. The assessment record reveals that the issue was not at all examined by the AO at the assessment stage. As no query in this regard was raised by the AO, no submission as made in the present proceedings u/s. 263 was filed before him. The AO failed to examine the nexus between borrowed fund and its utilization for the purposes of non-tonnage business as claimed by the assessee company in course of the present proceedings. In absence of such investigation, the AO was erroneous in allowing the claim of the assessee in allocating the entire expenditure on account of interest related to NCD and FCCB to non-tonnage business instead of allocating the same to tonnage and non-tonnage business in the ratio of respective turnover. Also, the AO did not examine the magnitude of interest earned on ICD. Secondly, interest expenditure of Rs. 81,36,80,8217- allocated to non-tonnage business include interest of Rs. 14,17,53,007/- on account of investment that was clearly not allowable in view of the provisions of section 437(1) which reads as: any expenditure (not being expenditure of the nature described in section 30 to 36 and not being in the nature of capital expenditure or personal expenses of thee assessee) laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and Gains of business or profession". The AO failed to ascertain the facts and examine the issue of allowability of interest related to investment as business expenditure in view of the provisions of section 37(1). The AO also failed to examine the veracity of the claim now made by the assessee that such interest was anyway allowable u/s. 36(1)(iii). The above discussion clearly suggested that the AO allowed the claims of interest expenditure allocated to non-tonnage business without carrying out proper investigation so as to ascertain the relevant facts which rendered the assessment erroneous in so far as it is prejudicial to the interest of the revenue within the meaning of section 263. The AO passed the assessment order without making inquiries or verifications as stated above which should have been made thereby attracting the provisions of clause (a) of Explanation 2 to section 263(1) and therefore the assessment order shall be deemed to be erroneous in so far as it is prejudicial to the interest of the revenue. I therefore invoke the provisions of section 263 and set aside the impugned assessment order u/s. 144C(1) read with section 143(3) passed on 10.04.2015 and direct the AO to conduct proper investigation in the issues involved as narrated above and then frame fresh assessment after allowing reasonable opportunity to the assessee."

9. Ld. Counsel for the assessee referring to Page Nos. 36 to 56 of the Paper Book which is the reply furnished by the assessee in response to notice issued u/s. 263 of the Act submits that, a detailed reply was ITA NO.3156/MUM/2018 (A.Y: 2011-12) M/s. Essar Shipping Limited furnished before Ld. Pr.CIT explaining the allocation made by the assessee in respect of interest to tonnage business and non-tonnage business. The Ld. Counsel for the assessee submits that it has been brought to the notice of the Ld. Pr.CIT that there is one to one nexus for the money received by the assessee company and the said amount has been given as Inter Corporate Deposits [hereinafter in short "ICD"] to its wholly owned subsidiary M/s. Essar Oilfield Services India Ltd [EOSIL] which is carrying on the business of oil drilling operations. Ld. Counsel for the assessee submits that in fact the bank statements were also furnished before the Ld. Pr.CIT in proof of nexus between the amount received and advanced to EOSIL. Therefore, it is submitted that the moneys borrowed by the assessee in the form of NCD and FCCB has been utilized for using ICD and for investments in wholly owned subsidiary company. Thus, it has been submitted that the said amount has been wholly utilized for non-tonnage business. Learned Counsel for the assessee submitted that, the moneys borrowed in the form of FCCB had been invested in its wholly owned subsidiary company M/s. Essar Oilfield Services Limited, Mauritius [EOSL]. Ld. Counsel for the assessee submits that a direct nexus between money received by the assessee and the investment made in preference shares of ESOL can be established from FIRC showing money received by the assessee company and ITA NO.3156/MUM/2018 (A.Y: 2011-12) M/s. Essar Shipping Limited outward remittance. It is submitted that a copy of FIRC and outward remittance were also furnished before the Ld. Pr.CIT establishing this fact.

Tonnage
Total Tonnage
activity
Sl.No. Particulars (in Activity Remarks
(in
Crores) (in
Crores)
Crores)
1. Interest on loan utilised for 36.00 36.00 - -
acquisition of ship
2. Interest on NCD issued to LIC. 39.61 39.61 This allocation has been
The proceeds of NCD was accepted by the AO u/s.
utilised for giving ICD to Essar 143(3) of the Act in A.Y.
Oilfield Services (India) Ltd. 2011-12 (in the case of
Interest income on ICD has been Essar Ports Ltd.
offered as business income (non- (predecessor)
tonnage activity)
3. Interest on FCCB. The proceeds 27.57 27.57 This allocation has been
of FCCB was utilised for making accepted by the AO u/s.
investment in subsidiary which 143(3) of the Act in A.Y,
was involved in logistics business 2011-12 (in the case of
(non-tonnage activity) Essar Ports Ltd
predecessor).
4, Balance interest expenditure 19.92 5.75 14.17 Accepted as revenue
allocated between tonnage and expenditure by the AO u/s.
non-tonnage income in the ratio 143(3) of the Act in A.Y.
of funds utilised 2011-12 (in the case of
Essar Ports Ltd -
predecessor).
5. Total interest expenditure 123.10 41.75 81.35 -

16. It has been submitted that assessee has paid interest on FCCB of ₹.27.57 Crores, the proceeds of FCCB were for making investments in subsidiary which was involved in logistics business which falls under non tonnage business. It is submitted that interest expenditure on FCCB for the period from 01.04.2010 to 30.09.2010 has been claimed under non-tonnage business by M/s. Essar Ports Limited i.e. the predecessor of the assessee company and the same has been accepted by the Assessing Officer u/s. 143(3) for the A.Y. 2011-12.

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