Vedanta Limited v. Union of India

2. (2021) 133 taxmann.com 43 (Bom) “8. Interest on moneys borrowed for the purposes of business is a necessary item of expenditure in a business. For allowance of a claim for deduction of interest under the said section, all that is necessary is that firstly, the money, i.e. capital, must have been borrowed by the assessee; secondly, it must have been borrowed for the purpose of business; and, thirdly, the assessee must have paid interest on the borrowed amount [See: Calico Dyeing & Printing Works v. Commr. Of Income-tax, Bombay City-II (1958) 34 ITR 265]. All that is germane is: whether the borrowing was, or was not, for the purpose of business. The expression "for the purpose of business" occurring in Section 36(1)(iii) indicates that once the test of "for the purpose of business" is satisfied in respect of the capital borrowed, the assessee would be entitled to deduction under Section 36(1)(iii) of the 1961 Act. This provision makes no distinction between money borrowed to acquire a capital asset or a revenue asset. All that the section requires is that the assessee must borrow capital and the purpose of the borrowing must be for business which is carried on by the assessee in the year of account. What sub- section (iii) emphasizes is the user of the capital and not the user of the asset which comes into existence as a result of the borrowed capital unlike Section 37 which expressly excludes an expense of a capital nature. The legislature has, therefore, made no distinction in Section 36(1)(iii) between "capital borrowed for a revenue purpose" and "capital borrowed for a capital purpose". An assessee is entitled to claim interest paid on borrowed capital provided that capital is used for business purpose irrespective of what may be the result of using the capital which the assessee has borrowed. Further, the words "actual cost" do not find place in Section 36(1)(iii) of the 1961 Act which otherwise find place in Sections 32, 32A etc of the 1961 Act. The expression "actual cost" is defined in Section 43(1) of the 1961 Act which is essentially a definition section which is subject to the context to the contrary.” Paragraph 16 of Maharashtra Hybrid Seeds Co. Ltd.(Supra): “16 Coming to the third question, Mr. Suresh Kumar submitted that the Revenue’s stand was that deduction for interest under Section 36(1)(iii) of the Act was allowable only if the assets acquired out of the borrowed capital has been put to use. Mr. Suresh Kumar in fairness submitted that the judgment of the Apex Court in Deputy Commissioner of Income Tax V/s. Core Health Care Ltd.[3] squarely covers this question and the Apex Court has held that such interest is allowable under Section 36(1)(iii). The Apex Court has held that interest on moneys borrowed for the purposes of business is a necessary item of expenditure in a business. For allowance of a claim for deduction of interest under the said section, all that is necessary is that firstly, the money, i.e., capital, must have been borrowed by the assessee; secondly, it must have been borrowed for the purpose of business; and, thirdly, the assessee must have paid interest on the borrowed amount. The Apex Court has also held that all that is germane is: whether the borrowing was, or was not, for the purpose of business. Paragraphs 8 and 9 of the said judgment read as under:

3. (2008) 167 Taxmann 206 (SC)

8. Interest on moneys borrowed for the purposes of business is a necessary item of expenditure in a business. For allowance of a claim for deduction of interest under the said section, all that is necessary is that firstly, the money, i.e. capital, must have been borrowed by the assessee; secondly, it must have been borrowed for the purpose of business; and, thirdly, the assessee must have paid interest on the borrowed amount [See: Calico Dyeing & Printing Works v. Commr. Of Income-tax, Bombay City-II (1958) 34 ITR 265]. All that is germane is: whether the borrowing was, or was not, for the purpose of business. The expression "for the purpose of business" occurring in Section 36(1)(iii) indicates that once the test of "for the purpose of business" is satisfied in respect of the capital borrowed, the assessee would be entitled to deduction under Section 36(1)(iii) of the 1961 Act. This provision makes no distinction between money borrowed to acquire a capital asset or a revenue asset. All that the section requires is that the assessee must borrow capital and the purpose of the borrowing must be for business which is carried on by the assessee in the year of account. What sub- section (iii) emphasizes is the user of the capital and not the user of the asset which comes into existence as a result of the borrowed capital unlike Section 37 which expressly excludes an expense of a capital nature. The legislature has, therefore, made no distinction in Section 36(1)(iii) between "capital borrowed for a revenue purpose" and "capital borrowed for a capital purpose". An assessee is entitled to claim interest paid on borrowed capital provided that capital is used for business purpose irrespective of what may be the result of using the capital which the assessee has borrowed. Further, the words "actual cost" do not find place in Section 36(1)(iii) of the 1961 Act which otherwise find place in Sections 32, 32A etc of the 1961 Act. The expression "actual cost" is defined in Section 43(1) of the 1961 Act which is essentially a definition section which is subject to the context to the contrary.

9. In the case of Commissioner of Income-tax v. Associated Fibre and Rubber Industries (P) Ltd. (1999) 236 ITR 471, the Division Bench of this Court held as follows: "Even though the machinery has not been actually used in the business at the time when the assessment was made, the same has to be treated as a business asset as it was purchased only for business purposes. In the circumstances, the interest paid on the amount borrowed for purpose of such machinery is certainly a deductible amount." In our view, if petitioner would succeed on the issue of change of opinion itself, we do not have to go further on the issue whether the interest paid on moneys for the purpose of business will be an item of expenditure in a business.

9 We are satisfied that it is a clear case of change of opinion. The reasons to believe that it was a fit case for re-opening, reads as under: “In this case return of income was filed on 28-11 2003 declaring the income of Rs. (-) 135236525. Assessment u/s 143(3) was completed on 6-03-2006 on income of Rs.(-) 135236525. While going through the Profit & Loss Account it is seen that the loss is arised mainly due to the payment of interest of Rs224379054 on the various loans taken by the assessee. It also seen that the entire loans have been taken for the purchase of the shares of the Hindustan Zinc Ltd. The total investment is at Rs.777,61,71,027. It is noteworthy to mention here that the said investments are made to have the controlling stake in the said company and not for the business purpose Whenever an investment is made to have the controlling stake in the company then the interest paid on the loans taken for the financing such transactions has to be disallowed as capital expenditure. As the assessee has claimed excess expenditure of Rs. 224379054/- and the same is allowed by the AO it has resulted into under assessment to the extent of Rs. 224379054/-. It is also found that the assessee has revised the return of income for AY 2005-06 by disallowing the expences on account of interest income. In view of this I have reason to believe that excess loss has been allowed to the assessee and this is a fit case to reopen u/s 147 of the IT Act. Issue notice u/s 148 of the IT Act”.

10 The same issue of investment of Rs.777,61,71,027/- and interest on loans taken etc., were subject matter of a query raised by the AO as can be seen from the letter dated 26th October 2005 issued to petitioner. The said portion of details of investments of the said letter reads as under: “(a) ……………. (b) Investments made during the year with its sources – Rs.777,61,71,027/-. (c) ……………. (d ……………. (e) ……………. (f) Interest and finance charges:

(i) On inter corporate deposits – Rs.17,20,75,343/-

(ii) Guarantee Commission – Rs.3,54,78,171 (with nature of expenses)

(iii) Loan Arrangement Fees – Rs.1,60,79,000/-

(iv) Trustee Fees – Rs.7,45,583/-

(g) ……………” Petitioner also addressed a communication dated 6th January 2006 to give an explanation in regard to allowability of interest and other expenditure as revenue expenditure, in which petitioner has pitched its case as under: “The Assessee-Company is registered as a Non-banking Financial Company ("NBFC") with the Reserve Bank of India. Interest and other expenses incurred by the company is allowable as a deduction as the same is revenue in nature and has been incurred exclusively for the purpose of business, investment being a business for a NBFC. The assessee company submits that the interest expenses incurred by the assessee company is allowable as deduction under Section 36(1)(iii) of the Act. As the money is actually borrowed by the company, it has paid interest on the same and it is for the purpose of business of the company as the main business is to make investment since it is NBFC. The propositions laid down by the following case laws support the allowability of interest expenses.”

11 After considering these submissions, the assessment order dated 6th March 2006 came to be passed. Mr. Suresh Kumar states there is no discussion in the assessment order. As held in Aroni Commercials Ltd. Vs. Deputy Commissioner of Income Tax-2(1)4, once a query is raised during the assessment proceedings and the assessee has replied to it, it follows the query raised was a subject of consideration of the assessing officer while completing the assessment. It is not necessary that an assessment order should contain reference and/or discussion to disclose its satisfaction in respect of the query raised. In Aroni Commercial (Supra) the court said “ it is not necessary that an assessment order should contain reference and/or discussion to disclose its satisfaction in respect of the query raised. If an assessing officer has to record the consideration bestowed by him on all issues raised by him during the assessment proceedings even where he is

4. (2014) 44 taxmann.com 304 (Bombay) satisfied, it would be impossible for the assessing officer to complete all the assessments which are required to be scrutinised under Section 143(3) of the Act. Paragraph 14 of Aroni Commercials (Supra) reads as under: “14) We find that during the assessment proceedings the petitioner had by a letter dated 9 July 2010 pointed out that they were engaged in the business of financing trading and investment in shares and securities. Further, by a letter dated 8 September 2010 during the course of assessment proceedings on a specific query made by the Assessing Officer, the petitioner has disclosed in detail as to why its profit on sale of investments should not be taxed as business profits but charged to tax under the head capital gain. In support of its contention the petitioner had also relied upon CBDT Circular No.4/2007 dated 15 June 2007. (The reasons for reopening furnished by the Assessing Officer also places reliance upon CBDT Circular dated 15 June 2007). It would therefore, be noticed that the very ground on which the notice dated 28 March 2013 seeks to reopen the assessment for assessment year 2008-09 was considered by the Assessing Officer while originally passing assessment order dated 12 October 2010. This by itself demonstrates the fact that notice dated 28 March 2013 under Section 148 of the Act seeking to reopen assessment for A.Y. 2008-09 is based on mere change of opinion. However, according to Mr. Chhotaray, learned Counsel for the revenue the aforesaid issue now raised has not been considered earlier as the ASN 18/23 WP-137-14.sxw same is not referred to in the assessment order dated 12 October 2010 passed for A.Y. 2008-09. We are of the view that once a query is raised during the assessment proceedings and the assessee has replied to it, it follows that the query raised was a subject of consideration of the Assessing Officer while completing the assessment. It is not necessary that an assessment order should contain reference and/or discussion to disclose its satisfaction in respect of the query raised. If an Assessing Officer has to record the consideration bestowed by him on all issues raised by him during the assessment proceeding even where he is satisfied then it would be impossible for the Assessing Officer to complete all the assessments which are required to be scrutinized by him under Section 143(3) of the Act. Moreover, one must not forget that the manner in which an assessment order is to be drafted is the sole domain of the Assessing Officer and it is not open to an assessee to insist that the assessment order must record all the questions raised and the satisfaction in respect thereof of the Assessing Officer. The only requirement is that the Assessing Officer ought to have considered the objection now raised in the grounds for issuing notice under Section 148 of the Act, during the original assessment proceedings. There can be no doubt in the present facts as evidenced by a letter dated 8 September 2012 the very issue of taxability of sale of shares under the head capital gain or the head profits and gains from business was a subject matter of consideration by the Assessing Officer during the original ASN 19/23 WP-137-14.sxw assessment proceedings leading to an order dated 12 October 2010. It would therefore, follow that the reopening of the assessment by impugned notice dated 28 March 2013 is merely on the basis of change of opinion of the Assessing Officer from that held earlier during the course of assessment proceeding leading to the order dated 12 October 2010. This change of opinion does not constitute justification and/or reasons to believe that income chargeable to tax has escaped assessment.”

12 In the circumstances, in our view, the notice to reopen dated 28th March 2008 is merely on the basis of change of opinion of the AO from that held earlier during the course of assessment proceedings leading to the assessment order dated 6th March 2006. This change of opinion, in our view, does not constitute justification and/or reasons to believe that income chargeable to tax has escaped assessment.

13 In the circumstances, we do not wish to go further on the other points raised. Petition allowed. Rule granted on 1st September 2009 made absolute in terms of prayer clause (a), which reads as under: “(a) that a writ in the nature of certiorari or any other similar writ under Article 226 of the Constitution of India calling for the records of the case and after going through the same and examining the legality thereof to quash and cancel the notice issued under Section 148 of the Act dated 28th March 2008 by the respondent no.2 relating to the assessment year 2003-04 read with the recorded reasons dated 28th March 2008 and the order on objection dated 22nd May 2009 and all proceeding thereunder and/or pursuance thereof (being Exs. D F and J.).”