Wp/1158/2009 Of Sterlite Opportunities And Ventures Ltd v. B.d. Naik, Deputy Commissioner Of Income Tax And 3 Ors

Digitallysigned byMEERAMEERAMAHESHMAHESHJADHAVJADHAVDate:2023.07.0610:53:04+0530 IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTIONWRIT PETITION NO.1158 OF 2009 Vedanta Limited)A Company Incorporated under the)Provisions of the Companies Act, 1956)having its Registered Office at 1[st] Floor)C Wind, Unit 103, Corporate Avenue)Atul Projects, Chakala, Andheri (East))Mumbai Maharashtra 400 093)..Petitioner V/s.1 Mr. B.D.Naik, Deputy Commissioner)of Income Tax Range 8(3), Mumbai)having his office at Room No.204, )floor, Aayakar Bhavan, M. K. Road,)Mumbai 400 020)2 Mr. S.A.Shaikh, Deputy Commissioner)of Income Tax, Range 8(3), Mumbai)having his office at Room No.204, )floor, Aayakar Bhavan, M. K. Road,)Mumbai 400 020)3 Commissioner of Income Tax-VIII,)Mumbai having his office at Aaykar Bhavan)M. K. Road, Mumbai 400 020)4 Union of India, Though)the Secretary, Department of Revenue,)Ministry of Finance, North Block,)New Delhi 110 001) …Respondents ---- Ms Fereshte Sethna a/w Mr. Mrunal Parekh i/b DMD Advocates for Petitioner. Mr. Suresh Kumar for Respondents. ---- CORAM : K.R. SHRIRAM & FIRDOSH. P. POONIWALLA, JJ DATED : 30[th] JUNE 2023 (ORAL JUDGMENT PER K. R. SHRIRAM J.) 1 Petitioner is impugning a notice dated 28[th] March 2008 issued under Section 148 of the Income Tax Act 1961 (the Act) issued by respondent no.2relating to AY-2003-2004 and the order on objections dated 22[nd] May 2009.2Petition was originally filed by one Sterlite Opportunities and VenturesLimited. Subsequently, original petitioner was, as per the scheme ofamalgamation between original petitioner and one Sterlite Industries(India) Limited, approved by the Hon’ble Madras High Court in its orderdated 29[th] March 2012 amalgamated with Sterlite Industries (India) Ltd.The Hon’ble Madras High Court approved another scheme of amalgamationbetween Sterlite Industries (India) Ltd. and other companies and Sesa GoaLimited on 25[th] March 2013. The name of the company, Sesa Goa Limitedwas changed to Sesa Sterlite Limited on 18[th] September 2013 and thereafterto Vedanta Limited on 21[st] April 2015. Petition was accordingly amendedpursuant to leave granted by this court by its orders dated 6[th] January 2022and 3[rd] February 2022. 3Petitioner on 28[th] November 2003 filed return of income underSection 139 of the Act for AY-2003-2004 showing a total loss ofRs.13,52,36,525/-. Alongwith annual returns, petitioner also filed auditedprofit and loss account and balance sheet, as also the Tax Audit Reportunder Section 44AB of the Act and other documents. The return wasprocessed under Section 143(1) of the Act and was subsequently selectedfor random scrutiny as per score based system. Statutory notices underSections 143(2) and 142(1) of the Act were issued and petitioner respondedto those notices. Petitioner also received letters dated 9[th] September 2005 and 26[th] October 2005 from the Assessing Officer (AO), calling uponpetitioner to furnish various information and explanation, particularly whichis relevant to the matter at hand, i.e., the details of investments madeduring the year with its sources – Rs.777,61,71,027/- and interest andfinance charges on (i) 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/- and (iv) trustee fees –Rs.7,45,583/-. 4Petitioner responded to the queries and also by letter dated 6[th]January 2006, gave an explanation in regard to allowability of interest andother expenses as revenue expenditure. Petitioner also relied on variousjudgments of High Court and Apex Court. Following this, an assessmentorder dated 6[th] March 2006 came to be passed, assessing petitioner’s incomeat Rs.(-)13,52,36,525/-. 4Petitioner responded to the queries and also by letter dated 6[th]January 2006, gave an explanation in regard to allowability of interest andother expenses as revenue expenditure. Petitioner also relied on variousjudgments of High Court and Apex Court. Following this, an assessmentorder dated 6[th] March 2006 came to be passed, assessing petitioner’s incomeat Rs.(-)13,52,36,525/-. 5Subsequently, petitioner received the impugned notice dated 28[th]March 2008, alleging that AO had reason to believe that the income for AY-2003-2004 has escaped the assessment within the meaning of Section 147of the Act. As reasons were not provided, petitioner filed a Writ PetitionNo.2724 of 2008. The said petition came to be disposed on 16[th] December2008 whereby respondent no.3 was directed to provide the reasonsrecorded. After the reasons were made available, petitioner, thereafter,responded to the notice by giving detailed reply vide its letter dated 29[th]December 2008. Notwithstanding the reply, without giving any proper reasons, respondent no.1, by an order dated 23[rd] January 2009 rejected theobjections. Again petitioner approached this court by filing a Writ PetitionNo.395 of 2009, which came to be disposed by an order dated 3[rd] March2009 by which, this court was pleased to quash and set aside the orderdated 23[rd] January 2009 and respondent no.1 was directed to considerpetitioner’s objections afresh and decide the matter. Respondent no.1accordingly decided the matter and passed the impugned order dated 22[nd]May 2009. 6Petitioner has approached this court once again and the primaryground of petitioner is the reasons to believe itself indicated nothing butchange of opinion, and change of opinion which does not constitutejustification and/or reasons to believe that income chargeable to tax hasescaped assessment. It is also submitted that in the reasons recorded inwriting, it has been stated that Rs.22,43,79,054/- has been claimed asinterest on various loans taken by the assessee but the details available inSchedule 9 of the audited balance sheet of the company indicates that theamount of Rs.22,43,79,054/- consisted of interest on intercorporatedeposits – Rs.17,20,75,343/-, guarantee commission–Rs.3,54,78,171/-, loanarrangement fees – Rs.1,60,79,000/-, trustee fees – Rs.7,45,583/- and bankcharges–Rs.957/-. Therefore, since this break up indicates thatRs.22,43,79,054/- was not only on account of interest but other financecharges as well, the notice under Section 148 has been mechanically issuedwithout any application of mind and without any reason to believe. 7It is also submitted that just because the assessee revised the return ofincome for AY-2005-2006 by disallowing the expenses on account of interestincome, the refund was for assessment year entirely different from theimpugned assessment year, each assessment year is separate and that cannever be a ground for re-opening the assessment. The primary thrust was, ofcourse, on change of opinion. 8Ms Sethna also submitted that in any event the interest on borrowingcan never be capitalised because as held by the Apex Court in DeputyCommissioner of Income Tax Vs. Core Health Care Ltd.1 which was followedby this court in Commissioner of Income Tax Vs. Maharashtra Hybrid SeedsCo. Ltd.2, interest on moneys borrowed for the purposes of business is onnecessary item of expenditure in a business. Ms Sethna submitted thatindisputably the original petitioner was an investment company and used toborrow money to invest the money in shares of various entities. The originalpetitioner decided to carry on metals business in zinc and lead throughformation of subsidiary by acquiring shares in the company carrying on zincand lead business. Therefore, interest on moneys which were borrowed foracquiring shares in the company carrying on zinc and lead businessnecessarily will be an item of expenditure in a business. It would be usefulto refer to paragraph 8 in Core Health (Supra) and paragraph 16 inMaharashtra Hybrid Seeds Co. Ltd. (Supra), which read as under: Paragraph 8 of Core Health (Supra): 1. (2008) 167 Taxman 206 (SC) 2. (2021) 133 taxmann.com 43 (Bom) “8. Interest on moneys borrowed for the purposes of business is anecessary item of expenditure in a business. For allowance of a claimfor deduction of interest under the said section, all that is necessary isthat firstly, the money, i.e. capital, must have been borrowed by theassessee; secondly, it must have been borrowed for the purpose ofbusiness; and, thirdly, the assessee must have paid interest on theborrowed amount [See: Calico Dyeing & Printing Works v. Commr. OfIncome-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 Section36(1)(iii) indicates that once the test of "for the purpose of business"is satisfied in respect of the capital borrowed, the assessee would beentitled to deduction under Section 36(1)(iii) of the 1961 Act. Thisprovision makes no distinction between money borrowed to acquire acapital asset or a revenue asset. All that the section requires is that theassessee must borrow capital and the purpose of the borrowing mustbe for business which is carried on by the assessee in the year ofaccount. What sub- section (iii) emphasizes is the user of the capitaland not the user of the asset which comes into existence as a result ofthe borrowed capital unlike Section 37 which expressly excludes anexpense of a capital nature. The legislature has, therefore, made nodistinction in Section 36(1)(iii) between "capital borrowed for arevenue purpose" and "capital borrowed for a capital purpose". Anassessee is entitled to claim interest paid on borrowed capitalprovided that capital is used for business purpose irrespective of whatmay be the result of using the capital which the assessee hasborrowed. Further, the words "actual cost" do not find place in Section36(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 inSection 43(1) of the 1961 Act which is essentially a definition sectionwhich 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 thatthe Revenue’s stand was that deduction for interest under Section36(1)(iii) of the Act was allowable only if the assets acquired out ofthe borrowed capital has been put to use. Mr. Suresh Kumar infairness submitted that the judgment of the Apex Court in DeputyCommissioner of Income Tax V/s. Core Health Care Ltd.3 squarelycovers this question and the Apex Court has held that such interest isallowable under Section 36(1)(iii). The Apex Court has held thatinterest on moneys borrowed for the purposes of business is anecessary item of expenditure in a business. For allowance of a claimfor deduction of interest under the said section, all that is necessary isthat firstly, the money, i.e., capital, must have been borrowed by theassessee; secondly, it must have been borrowed for the purpose ofbusiness; and, thirdly, the assessee must have paid interest on theborrowed amount. The Apex Court has also held that all that isgermane is : whether the borrowing was, or was not, for the purposeof business. Paragraphs 8 and 9 of the said judgment read as under : 8. Interest on moneys borrowed for the purposes ofbusiness is a necessary item of expenditure in a business. Forallowance of a claim for deduction of interest under the said section,all that is necessary is that firstly, the money, i.e. capital, must havebeen borrowed by the assessee; secondly, it must have been borrowedfor the purpose of business; and, thirdly, the assessee must have paidinterest on the borrowed amount [See: Calico Dyeing & PrintingWorks 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 thepurpose of business. The expression "for the purpose of business"occurring in Section 36(1)(iii) indicates that once the test of "for thepurpose of business" is satisfied in respect of the capital borrowed, theassessee would be entitled to deduction under Section 36(1)(iii) ofthe 1961 Act. This provision makes no distinction between moneyborrowed to acquire a capital asset or a revenue asset. All that thesection requires is that the assessee must borrow capital and thepurpose of the borrowing must be for business which is carried on bythe assessee in the year of account. What sub- section (iii) emphasizesis the user of the capital and not the user of the asset which comesinto existence as a result of the borrowed capital unlike Section 37which expressly excludes an expense of a capital nature. Thelegislature has, therefore, made no distinction in Section 36(1)(iii)between "capital borrowed for a revenue purpose" and "capitalborrowed for a capital purpose". An assessee is entitled to claiminterest paid on borrowed capital provided that capital is used forbusiness purpose irrespective of what may be the result of using thecapital which the assessee has borrowed. Further, the words "actualcost" do not find place in Section 36(1)(iii) of the 1961 Act whichotherwise find place in Sections 32, 32A etc of the 1961 Act. Theexpression "actual cost" is defined in Section 43(1) of the 1961 Actwhich is essentially a definition section which is subject to the contextto the contrary. 9. In the case of Commissioner of Income-tax v. Associated Fibre andRubber Industries (P) Ltd. (1999) 236 ITR 471, the Division Bench ofthis Court held as follows: "Even though the machinery has not been actuallyused in the business at the time when the assessmentwas made, the same has to be treated as a businessasset as it was purchased only for business purposes.In the circumstances, the interest paid on theamount borrowed for purpose of such machinery iscertainly 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. 9We are satisfied that it is a clear case of change of opinion. Thereasons to believe that it was a fit case for re-opening, reads as under: "Even though the machinery has not been actuallyused in the business at the time when the assessmentwas made, the same has to be treated as a businessasset as it was purchased only for business purposes.In the circumstances, the interest paid on theamount borrowed for purpose of such machinery iscertainly 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. 9We are satisfied that it is a clear case of change of opinion. Thereasons 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 theincome of Rs. (-) 135236525. Assessment u/s 143(3) was completedon 6-03-2006 on income of Rs.(-) 135236525. While going throughthe Profit & Loss Account it is seen that the loss is arised mainly dueto the payment of interest of Rs224379054 on the various loans takenby the assessee. It also seen that the entire loans have been taken forthe purchase of the shares of the Hindustan Zinc Ltd. The totalinvestment is at Rs.777,61,71,027. It is noteworthy to mention herethat the said investments are made to have the controlling stake inthe said company and not for the business purpose Whenever aninvestment is made to have the controlling stake in the company thenthe interest paid on the loans taken for the financing suchtransactions has to be disallowed as capital expenditure. As theassessee has claimed excess expenditure of Rs. 224379054/- and thesame is allowed by the AO it has resulted into under assessment tothe extent of Rs. 224379054/-. It is also found that the assessee hasrevised the return of income for AY 2005-06 by disallowing theexpences on account of interest income. In view of this I have reasonto believe that excess loss has been allowed to the assessee and this isa fit case to reopen u/s 147 of the IT Act. Issue notice u/s 148 of theIT 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 26[th] October 2005 issued to petitioner. The said portion of details of investments of the said letter reads as under: Petitioner also addressed a communication dated 6[th] January 2006 to give an explanation in regard to allowability of interest and otherexpenditure as revenue expenditure, in which petitioner has pitched its case as under: “The Assessee-Company is registered as a Non-banking FinancialCompany ("NBFC") with the Reserve Bank of India. Interest and otherexpenses incurred by the company is allowable as a deduction as thesame is revenue in nature and has been incurred exclusively for thepurpose of business, investment being a business for a NBFC. Theassessee company submits that the interest expenses incurred by theassessee company is allowable as deduction under Section 36(1)(iii)of the Act. As the money is actually borrowed by the company, it haspaid interest on the same and it is for the purpose of business of thecompany as the main business is to make investment since it is NBFC.The propositions laid down by the following case laws support theallowability of interest expenses.” as under: “The Assessee-Company is registered as a Non-banking FinancialCompany ("NBFC") with the Reserve Bank of India. Interest and otherexpenses incurred by the company is allowable as a deduction as thesame is revenue in nature and has been incurred exclusively for thepurpose of business, investment being a business for a NBFC. Theassessee company submits that the interest expenses incurred by theassessee company is allowable as deduction under Section 36(1)(iii)of the Act. As the money is actually borrowed by the company, it haspaid interest on the same and it is for the purpose of business of thecompany as the main business is to make investment since it is NBFC.The propositions laid down by the following case laws support theallowability of interest expenses.” 11After considering these submissions, the assessment order dated 6[th]March 2006 came to be passed. Mr. Suresh Kumar states there is nodiscussion 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 theassessment proceedings and the assessee has replied to it, it follows thequery raised was a subject of consideration of the assessing officer whilecompleting the assessment. It is not necessary that an assessment ordershould contain reference and/or discussion to disclose its satisfaction inrespect of the query raised. In Aroni Commercial (Supra) the court said “ itis not necessary that an assessment order should contain reference and/ordiscussion to disclose its satisfaction in respect of the query raised. If anassessing officer has to record the consideration bestowed by him on allissues 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 theassessments which are required to be scrutinised under Section 143(3) of the Act. Paragraph 14 of Aroni Commercials (Supra) reads as under: 4. (2014) 44 taxmann.com 304 (Bombay) satisfied, it would be impossible for the assessing officer to complete all theassessments 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 petitionerhad by a letter dated 9 July 2010 pointed out that they were engagedin the business of financing trading and investment in shares andsecurities. Further, by a letter dated 8 September 2010 during thecourse of assessment proceedings on a specific query made by theAssessing Officer, the petitioner has disclosed in detail as to why itsprofit on sale of investments should not be taxed as business profitsbut charged to tax under the head capital gain. In support of itscontention the petitioner had also relied upon CBDT CircularNo.4/2007 dated 15 June 2007. (The reasons for reopening furnishedby the Assessing Officer also places reliance upon CBDT Circulardated 15 June 2007). It would therefore, be noticed that the veryground on which the notice dated 28 March 2013 seeks to reopen theassessment for assessment year 2008-09 was considered by theAssessing Officer while originally passing assessment order dated 12October 2010. This by itself demonstrates the fact that notice dated28 March 2013 under Section 148 of the Act seeking to reopenassessment for A.Y. 2008-09 is based on mere change of opinion.However, according to Mr. Chhotaray, learned Counsel for the revenuethe aforesaid issue now raised has not been considered earlier as theASN 18/23 WP-137-14 .sxw same is not referred to in the assessmentorder dated 12 October 2010 passed for A.Y. 2008-09. We are of theview that once a query is raised during the assessment proceedingsand the assessee has replied to it, it follows that the query raised wasa subject of consideration of the Assessing Officer while completingthe assessment. It is not necessary that an assessment order shouldcontain reference and/or discussion to disclose its satisfaction inrespect of the query raised. If an Assessing Officer has to record theconsideration bestowed by him on all issues raised by him during theassessment proceeding even where he is satisfied then it would beimpossible for the Assessing Officer to complete all the assessmentswhich are required to be scrutinized by him under Section 143(3) ofthe Act. Moreover, one must not forget that the manner in which anassessment order is to be drafted is the sole domain of the AssessingOfficer and it is not open to an assessee to insist that the assessmentorder must record all the questions raised and the satisfaction inrespect thereof of the Assessing Officer. The only requirement is thatthe Assessing Officer ought to have considered the objection nowraised in the grounds for issuing notice under Section 148 of the Act,during the original assessment proceedings. There can be no doubt inthe present facts as evidenced by a letter dated 8 September 2012 thevery issue of taxability of sale of shares under the head capital gain orthe head profits and gains from business was a subject matter ofconsideration by the Assessing Officer during the original ASN 19/23WP-137-14 .sxw assessment proceedings leading to an order dated 12October 2010. It would therefore, follow that the reopening of theassessment by impugned notice dated 28 March 2013 is merely on the basis of change of opinion of the Assessing Officer from that heldearlier during the course of assessment proceeding leading to theorder dated 12 October 2010. This change of opinion does notconstitute justification and/or reasons to believe that incomechargeable to tax has escaped assessment.” basis of change of opinion of the Assessing Officer from that heldearlier during the course of assessment proceeding leading to theorder dated 12 October 2010. This change of opinion does notconstitute justification and/or reasons to believe that incomechargeable to tax has escaped assessment.” 12In the circumstances, in our view, the notice to reopen dated 28[th]March 2008 is merely on the basis of change of opinion of the AO from thatheld earlier during the course of assessment proceedings leading to theassessment order dated 6[th] March 2006. This change of opinion, in our view,does not constitute justification and/or reasons to believe that incomechargeable to tax has escaped assessment. 13In the circumstances, we do not wish to go further on the other points raised. Petition allowed. Rule granted on 1[st] 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 writunder Article 226 of the Constitution of India calling for the records ofthe case and after going through the same and examining the legalitythereof to quash and cancel the notice issued under Section 148 of theAct dated 28[th] March 2008 by the respondent no.2 relating to theassessment year 2003-04 read with the recorded reasons dated 28[th]March 2008 and the order on objection dated 22[nd] May 2009 and allproceeding thereunder and/or pursuance thereof (being Exs. D F andJ.).” 14Petition disposed. No order as to costs. (FIRDOSH P POONIWALLA, J.) (K.R. SHRIRAM, J.)