ACIT Vs Sesa Resources Limited (ITAT Panaji)
Section 14A Disallowance Cannot Exceed Exempt Income; Investments Yielding Future Exempt Dividends Also Count: ITAT
The Panaji Bench of the Income Tax Appellate Tribunal (ITAT) held that disallowance under Section 14A cannot exceed the exempt income earned, while directing that the investment base should include investments which have yielded or may yield exempt dividend income. The ruling came in cross appeals involving Sesa Resources Limited for Assessment Years 2008-09 to 2012-13.
The Tribunal also decided disputes concerning foreign exchange losses, interest expenditure, ship repairs, payments to non-residents, depreciation, road expenditure and gains from investments. All Revenue appeals were dismissed, while the assessee’s appeals were partly allowed for statistical purposes.
The common order was pronounced on 26 October 2026 by Dr. Manish Borad, Accountant Member, and Vinay Bhamore, Judicial Member.
Background of the Dispute
The assessee carried on the business of mining and processing iron ore for export, shipping and stevedoring. Following additions and disallowances in assessments, the CIT(A) granted partial relief. Both sides approached the Tribunal against the findings adverse to them.
Several issues were covered by earlier decisions involving the assessee or its parent company, Sesa Goa Limited.
Section 14A: Satisfaction Recorded, Computation Remanded
For AYs 2009-10 to 2012-13, the assessee challenged administrative expenditure disallowance calculated at 0.5% of the average value of investments. It argued that the Assessing Officer had not recorded proper dissatisfaction with its voluntary disallowance. Alternatively, it sought restriction of the investment base to investments yielding exempt income.
The Tribunal rejected the first argument. It found that the Assessing Officer had examined the audited financial statements, investments and exempt income, and had adequately recorded dissatisfaction before applying the prescribed formula.
However, it restored the computation to the jurisdictional Assessing Officer for verification of investment details.
The Tribunal directed that the disallowance must not exceed exempt income. It further held that the average investment value should cover investments yielding exempt dividends or tax-free interest, as well as investments which may yield exempt dividends in future. Investments in subsidiaries, holding companies and group companies were also to be included where they earned or could earn exempt income.
Interest Disallowance Deleted
The Tribunal upheld deletion of the interest component of the Section 14A disallowance.
Relying on South Indian Bank Limited v. CIT and CIT v. HDFC Bank Ltd., it held that where sufficient interest-free funds cover the investments, those investments are presumed to have been made from such funds, unless the Revenue establishes a specific application of borrowed money.
The Revenue’s grounds on this issue for AYs 2008-09 to 2012-13 were dismissed.
Afforestation Expenses: Earlier Amortisation Direction Sustained
For AY 2009-10, the assessee sought relief regarding compensatory afforestation expenditure of Rs.70,78,076.
An earlier Tribunal order had already treated the expenditure as revenue in nature, while directing its amortisation over the mining lease period in proportion to ore extracted. Since the subsequent proceedings followed that direction, the Tribunal declined to interfere and dismissed the assessee’s ground.
Foreign Exchange Loss on Forward Contracts Allowed
The Tribunal deleted the partial disallowance of foreign exchange loss on forward contracts for AY 2009-10 and rejected the Revenue’s related challenges for AYs 2009-10 and 2010-11.
The contracts were entered into to hedge exchange fluctuation risks connected with iron ore exports, although some exports did not materialise and contracts were cancelled. The genuineness of the losses was not disputed, and supporting particulars had been furnished.
The Tribunal followed the favourable decision in the parent company’s case, which relied on CIT v. Badridas Gauridu Pvt. Ltd.
Ship Repairs and Public Road Expenditure Allowed
Expenditure on repairs to MV Priyamvada and MV Goan Pride was held to be revenue expenditure. The repairs maintained the vessels in operating condition and ensured regulatory compliance, without creating a new asset or enduring advantage.
The Tribunal also upheld relief for public road construction or improvement expenditure, following precedent recognising its connection with the smooth movement of iron ore trucks near the mines.
Non-Resident Payments and Depreciation Relief Sustained
Following earlier decisions, the Tribunal upheld deletion of disallowance relating to demurrage paid to non-resident iron ore buyers, accepting that tax deduction was not required on the payments under consideration.
It similarly upheld relief for export commission paid to non-residents without a permanent establishment in India, whose income was not chargeable to tax in India.
The Tribunal sustained 60% depreciation on UPS, allowance of the remaining 50% additional depreciation in the subsequent year, and additional depreciation on plant and machinery used in mining activity.
Investment Gains Taxable as Capital Gains
The Tribunal upheld treatment of profits from current investments as capital gains, considering CBDT Circular No.6/2016. The securities were held as investments rather than stock-in-trade. Transaction volume and frequency did not justify treating the assessee as a securities trader on the facts recorded.
Cases Discussed
- ACIT v. Vireet Investment Pvt. Ltd. — (2017) 82 taxmann.com 415 (Delhi ITAT SB)
- South Indian Bank Ltd. v. CIT — (2021) 438 ITR 1 (SC)
- CIT v. HDFC Bank Ltd. — (2014) 366 ITR 505 (Bombay HC)
- CIT v. Badridas Gauridu Pvt. Ltd. — (2003) 261 ITR 256 (Bombay HC)
- Sesa Goa Ltd. v. JCIT — ITA No. 72/PAN/2012 (ITAT Panaji)
- Sesa Resources Ltd. v. ACIT — ITA No. 252/PAN/2015 (ITAT Panaji)
- PCIT v. Sesa Goa Ltd. — Tax Appeal No. 68/2016 (Bombay HC)
FULL TEXT OF THE ORDER OF ITAT PANAJI
These are cross appeals filed by the Revenue and Assessee for the A.Yrs. 2009-10 to 2012-13. Revenue has also filed an appeal for A.Y.2008-09 against the order of ld.CIT(A) dated 30.08.2017. Since the issues raised in these appeals are mostly common, these were heard together and are being disposed of by this common order for the sake of convenience.
2. Facts of the case are that the assessee is a Limited Company engaged in the business of Mining and Processing of Iron ore for exports, Shipping and Stevedoring. Assessment for the impugned assessment years were taken up and against the additions/ disallowances made by Assessing Officer, appeals were preferred before the First Appellate Authority which were partly allowed. Now the aggrieved parties are in appeal before this Tribunal. Various grounds of appeal raised are common and it has also been stated that most of the issues raised in the instant appeals are covered by the decisions of this Tribunal in assessee’s own case and other decisions. Assessee has filed detailed written submissions on each of the grounds raised by the Assessee as well as by the Revenue and ld. Departmental Representative on the other hand, has supported the finding of ld.CIT(A) deciding in favour of the Revenue and the finding of the Assessing Officer where the addition has been deleted by the CIT(A).
3. We have heard the rival submissions made by both the sides and perused the record. We will first take up the assessee’s appeals for A.Ys 2009-10 to 2012-13 where the common issue raised is against the finding of ld. CIT(A) confirming the disallowance u/s. 14A of the Act for the administrative expenses @0.5% of the average value of investments. Ld. Counsel for the assessee made two fold arguments, firstly that ld. Assessing Officer has not recorded proper satisfaction as mandated/ required u/s.14A of the Act and secondly without prejudice to the first contention, it is submitted that investments for the purposes of calculating the average value are only to be confined to those investments which yield exempt income.
4. So far as the, first fold of contention is concerned we have carefully gone through the Assessment Orders of all the impugned assessment years and find that ld. Assessing Officer has examined the issue in detail and has gone through the audited financial statements of the assessee and observing that various investments were made in the equities and other investments and that the assessee is earning exempt income. Since it is humanly not possible to bifurcate total expenses incurred during the year for the purpose of maintaining the investments, the formula has been provided under Rule 8D of the Income Tax Rules 1962. Therefore, in our considered view ld. Assessing Officer has successfully recorded dissatisfaction for the suo moto disallowance made by the assessee u/s.14A of the Act and has finally applied 0.5% of the average value of investments formula for computing the disallowance u/s. 14A of the Act.
5. As regards the alternate contention of the assessee is concerned, we find that it has been constantly held in plethora of decisions including that of special bench in the case of ACIT vs. Vireet Investment Pvt. Ltd. (2017) 82 Taxman 415 (Delhi – Trib.) (SB) where in the disallowance u/s.14A of the Act is to be restricted for the investments which fetches exempt income. The investments at the close of each of the financial years in appeal before us is into various types of investments which includes the investments on which the assessee earns exempt income. Further the specific details of these investments were not available before the Revenue Authorities at the time of assessment. We therefore deem it appropriate that for the specific purpose of computing 0.5% of the average value of investments, the matter deserves to be restored to the file of ld. Jurisdictional Assessing Officer for necessary verification and examining all the details to be filed by the assessee. We direct the Assessing Officer that disallowance u/s. 14A of the Act in no circumstances should exceed the exempt income earned by the assessee and for the purpose of calculating the average value of investments only those investments on which either exempt income in the form of dividend or tax free interest has been earned as well as the investments on which assessee may earn exempt dividend income in future because strictly restricting the investments on which exempt income has been earned during the year will create lot of confusion because sometimes the dividend are declared in a particular year and sometimes not. Therefore, all those investments which have or may provide exempt income to the assessee in the form of dividend, deserves to be added in the list of investments for the purpose of calculating the average value of investments. We further hold that even the investments in closely held subsidiaries/holding/group companies from which assessee earns or may earn exempt income in the form of dividend should also be included in the average value of investments. With these directions this issue of disallowance u/s.14A of the Act r.w.r.t. Rule 8D(iii) of I.T. Rules for calculating 0.5% of Average value of investment is restored to the file of ld. Jurisdictional Assessing Officer and the common issue raised by Assessee for A.Ys. 2009-10 to 2012-13 are hereby allowed for statistical purposes.
6. Second issue raised by the assessee for A.Y. 2009- 2010 is against the disallowance of Compensatory Afforestation expenses and amortizing the same proportionately, we find that this is the second round before this Tribunal. Originally ld. Assessing Officer treated the Afforestation expenses of Rs.70,78,076/- as capital expenditure but the Tribunal vide order dated 20-08- 2015 in ITA No.252/PAN/2015 held it to be revenue in nature but directed the Assessing Officer to amortize and allow this expenditure over the period of mining lease and in proportion of quantity of ore extracted and subsequently ld.CIT(A) has confirmed this treatment.
7. Now the Ld. Counsel for the assessee has submitted that payment of Compensatory Afforestation was made to enable the effective undertaking and continuation of existing mining business and no enduring benefit was received. We however fail to find any merit in these submissions because the Tribunal has already considered this issue and held it to be revenue expenditure and the issue being remanded to the Assessing Officer to amortize and allow this expenditure over the period of mining lease and in proportion to quantity of ore extracted, the same has been confirmed by ld.CIT(A) and the finding of ld. CIT(A) therefore needs no interference. Thus, ground no. 1 raised by the assessee for A.Y. 2009-1 0 is hereby dismissed.
8. Next common issue relates to disallowance of Foreign Exchange loss on forward contracts for A.Y 2009-10. Ld.CIT(A) partly sustained the disallowance. Whereas, for A.Y. 2010- 11 the total disallowance of Foreign Exchange loss on forward contracts made by the Assessing Officer has been deleted. We observe that this is also the second round of litigation before this Tribunal. Ld.CIT(A) in the second round held that loss is speculative in nature but arose from the foreign exchange booked in the forward market to hedge against raising of losses from exchange fluctuation in relation to iron ore exports some of which could not materialize and the contracts had to be cancelled. Now once the genuineness of Foreign Exchange loss has not been doubted, then making partial disallowance by ld. CIT(A) for A.Y. 2009- 10 seems to be unwarranted specially when the various details including name of bank, currency, amount booked/cancelled, quantification of gain and loss etc. were submitted. It is also brought to our notice that similar issue in the case of appellant’s parent company has been decided in favour of the assessee in Sesa Goa limited vs. JCIT in ITA No.72/PAN/2012 08.03. 2013 against which the Department has not filed any appeal before the Hon’ble High Court as evident from the appellate order dated 23.09.2013 and the decision of this Tribunal in the case of parent company Sesa Goa limited has been decided placing reliance of the judgment Hon’ble High Court of Bombay in the case of CIT(A) vs. Badridas Gauridu Pvt. Ltd. (2003) 261 ITR 256 (Bom.). L d. Departmental Representative failed to controvert these contentions by placing any other binding precedent in its favour. We are therefore of the considered view that partial disallowance for Foreign Exchange loss on forward contracts for A.Y. 2009- 10 is uncalled for. Ground No. 3 raised by the assessee for A.Y. 2009- 10 is allowed and Ground No. 3 to 7 and Ground No. 5 for A.Ys. 2009-10 and 2010-11 raised by the Revenue are hereby dismissed.
9. Now we take up the issues raised by the Revenue for A.Ys. 2009-10 to 2012- 13 which is against the finding of ld. CIT(A) deleting the disallowance u/s.14A of the Act towards the interest cost.
10. W e note that the interest disallowance u/s. 14A of the Act has been made by the Assessin g Officer while calculating the total disallowance u/s.14A. It has been constantly held in plethora of judgments that where the assessee has surplus interest free funds in the form of Equity Share Capital, Reserves and Surplus and other interest free funds to cover up the investments made which fetch es exempt income, then in absence of any specific finding of the Revenue Authorities on the application of borrowed funds to the investments, it is to be presumed that investments have been made out of the interest free surplus funds available with the assessee. F or this we place reliance on the decision of Hon’b le Apex Court in the case of South Indian Bank Limited v. CIT (2021) 438 ITR 1 and also the judgment of Hon’ble Bombay High Court in the case of CIT vs. HDFC Bank Ltd. (2014) 366 ITR 505 and in absence of any other binding precedent in favour of the Revenue, th is common ground raised by the Revenue against the deletion of interest disallowance u/s. 14A of the Act made by the Assessing Officer interest co st is hereby dismissed. Respective grounds for A.Y. 2008- 09 to A.Y. 2012-13 raised by the Revenue on this issue stands dismissed.
11. Next common issue for A.Y. 2012- 13 is against the deletion of disallowance of repairs and maintenance expenses incurred on ships namely M V Priyamvada and M.V. Goan Pride. 12. We observe that the assessee has incurred repair and maintenance expenses on these two ships and claimed it as revenue expenditure but the same were held to be capital by the Assessing Officer. In appeal, l d. CIT(A) has held it to be revenue in nature. We have gone through the finding of ld. CIT(A) and observe that the alleged expenditure incurred for ship repairs were necessary for operating and maintaining the trans shippers in good working condition and in accordance with regulatory norms and no new asset or advantage with an enduring benefit was brought into existence. Identical issues were held in favour of the assessee by this Tribunal in assessee’s own case for A.Y. 2009-10 in the first round in Sesa Resources Limited vs. ACIT in ITA No.252/PAN/2015 order dated 20.08.2015 which has subsequently been confirmed by the Hon’ble High Court in Tax Appeal No. 57/2016. We therefore respectively following the decision of Hon’ble Jurisdictional High Court fail to find any inconsistency in the finding of ld. CIT(A) holding that ship repairs expenses are revenue in nature. Accordingly, Ground N o. 2 for A.Y. 2008-09 and Ground No. 6 for A.Y. 2012- 13 raised by the Revenue are dismissed.
13. Next common issue raised by the Revenue for A.Ys. 2010- 11, 2011-12 and 2012-13 is challenging the finding of ld. CIT(A) deleting the disallowance u/s. 40(a)(ia) of the Act made by the Assessing Officer on account of non-deduction of TDS on D emurrage paid to non-resident buyers o f iron ore. We find that the assessee is exporter of iron ore and in the process of exporting its goods has to pay demurrage to the non-residents where such demurrage paid is subject to deduction of tax u/s.195 of the Act. We find that the ld. CIT(A) has deleted the addition placing reliance on the decision in the case of parent company of the assessee in PCIT v. Sesa Goa limited in Tax Appeal No.68/ 2016 by the Hon’ble High Court and the decision of this Tribunal in Sesa Goa Ltd. Vs. JCIT in ITA No.72/PAN/2012 dated 08.03.2013 against which Revenue has not filed any appeal. In view of the above, we confirm the finding of ld. CIT(A) that demurrage paid to non-resident buyers of the iron ore is not subject to deduction of tax at source and therefore ld. Assessing Officer erred in making disallowance u/s. 40(a)(ia) of the Act. Ground No. 3 for A.Y. 2010-11 and Ground No.4 2011-12 and 2012-13 raised by the Revenue are dismissed.
14. Next issue for A.Y. 2011- 12 raised by the Revenue is that ld. CIT(A) erred in granting depreciation on UPS at 60% instead of 15%.
15. W e find that this issue has already been dealt by this Tribunal in assessee’s own case for A.Y. 2009-10 in Sesa Resources Limited vs . ACIT (supra) where the Tribunal has allowed the dep reciation on UPS at 60%. Thus, no interference is called for in the finding of ld. CIT(A). Ground No. 2 raised by the Revenue for A.Y. 2011- 12 is dismissed.
16. Next issue raised by the Revenue for A.Ys. 2008-09 and 2010 -11 is that ld. CIT(A) erred in deleting the disallowance of export Commission paid without deduction of tax at source.
17. We find that this issue is no longer res integra and it has been held in plethora of case that on the Commission paid to non- resident for providing export orders where such non-residents have no Permanent Establishment in India, there is no requirement to deduct tax at source because the income of such non-residents is not chargeable to tax in India. Similar issue already has stands decided in favour of the assessee in case of its parent company Sesa Goa Limited vs. DCIT in ITA No.72/PAN/2012 dated 08.03.2013 and therefore no interference is called for in the finding of ld. CIT(A). Ground No. 4 raised for A.Ys. 2008-09 and 2010- 11 are hereby dismissed.
18. In Ground No. 2 for A.Y.2012-13, Revenue has challenged the finding of ld. CIT(A) deleting the disallowance of 50% additional depreciation on Plant and Machinery.
19. We have gone through the finding of ld. CIT(A) as well as the facts of the present case and find that the appellant has claimed additional depreciation on additions made to Plant and Machinery during the second half of A.Y.2011-12. In other words, in the preceding A.Y.2011-12, the assessee has purchased Plant and Machinery in the second half and therefore has only claimed 50% of the additional depreciation in the preceding assessment year and the remaining 50% has been claimed in the A.Y. 2012-13. Since the additional depreciation of 50% has been allowed in the previous A.Y. 2011-12, we find that ld. CIT(A) has rightly held that once the additional depreciation is admitted in the previous assessment year the balance 50% must be allowed in the subsequent year. Thus, no infirmity is called for in the finding of ld.CIT(A). Ground no. 2 raised by the Revenue for A.Y. 2012-13 is dismissed.
20. Ground No. 3 raised by the Revenue for A.Ys. 2011- 12 and 2012- 13 challenging the finding of the ld. CIT(A) that the additional depreciation on Plant and Machinery on Mining activity deserves to be disallowed as the mining activity does not amount to Manufacture.
21. Ld. Counsel for the Assessee has contended that this issue has already been adjudicated in the case of parent company Sesa Goa Limited vs. JCIT for A.Y. 2009-10 by this Tribunal in ITA No.72/PAN,/2012 order dated 08.03. 2013 which had attained finality and no subsequent appeal has been filed by the Department before the Hon’ble High Court. I n the absence of any binding precedent referred by the ld. CIT- DR, respectively following the judicial precedents, we find that the ld. CIT(A) has rightly allowed the additional depreciation on Plant and Machinery utilized in the mining activity. Ground no. 3 raised by the Revenue for A.Ys. 2011- 12 and 2012-13 are dismissed.
22. Ground No. 5 raised by the Revenue for A.Y. 2012- 13 relates to the deletion of addition made by the Assessing Officer towards expenditure on construction of road. 23. We find that this issue has already been dealt by this Tribunal in assessee’s own case for A.Y. 2008- 09 in the assessee’s parent company Sesa Goa Ltd. vs. JCIT vide ITA No. 89/PAN/20 12 dated 17.05.2013 w here the construction/ improvement of the public road has been allowed as it was necessary for the smooth movement of iron ore trucks in the vicinity of mines and no new asset has come into existence for giving enduring benefit and such expenses incurred precedent. We thus fail to find any infirmity in the finding of ld. CIT(A). Ground No. 5 raised by the Revenue for A.Y.2012- 13 is also dismissed.
24. Ground No. 7 raised by the Revenue for A.Y. 2012- 13 is that the ld. CIT(A) erred in treating the profit on sale of current investments as business income instead of capital gains.
25. We observe that during the year under consideration the assessee company has shown short term capital gain and long term capital gain from sale of investments. Ld. Assessing officer observed that considering the volume of transactions/ amount involved, frequency of transaction, the pro fit on sale of these shares should be treated as business income. W e note that when the matter travelled before ld. CIT(A), he made reference to the CBDT Circular No. 6/2016 dated 29.02. 2016 where the guidelines have been provided with regard to treatment of profits arising on sale/ purchase of shares. It is noticed that the assessee has held securities as investments and not stock-in-trade and in all these years Assessing Officer has also made disallowance u/s. 14A on the very same investments. Therefore, such investments are not part of the stock- in-trade. It is also noteworthy that the assessee has switched over maximum investments from mutual funds to the investments in equity shares. Therefore, considering the facts of the present case we find that assessee is not a trader in securities and the investments held are not held as stock- in-trade and therefore as per the guidelines provided by CBDT No. 6 /2016 referred supra, w e fail to find any infirmity in the finding of ld. CIT(A) and therefore the profit on sale of current investment has been rightly treated as capital gain. Ground No. 7 raised by the Revenue is dismissed.
26. In the result, all the appeals of the Revenue are dismissed whereas all the appeals of the assessee are partly allowed for statistical purposes.
Order pronounced on th October 2026 under Rule 34(5) of the Income Tax (Appellate Tribunal) Rules, 1963.
