Interest Expenditure on Funds Borrowed for Foreign Acquisition Held Allowable as Business Expenditure — DCIT vs Tata Steel Ltd. (ITAT Mumbai)

Overview of the Case

The Mumbai Bench of the Income Tax Appellate Tribunal adjudicated cross appeals preferred by both the Revenue and the assessee in the matter of DCIT vs Tata Steel Ltd., arising out of the order passed by CIT(A)-6, Mumbai vide order no. CIT(A)-6/IT-182/2013-14 dated 05.03.2014, which in turn was directed against the reassessment order passed by ACIT 2(3), Mumbai under Section 143(3) read with Section 147 of the Income Tax Act, 1961, dated 07.02.2014 for Assessment Year 2008–09.

Two substantive disputes came up for adjudication before the Tribunal:

1. Addition of Rs. 871.17 crore on account of alleged excess/illegal mining, based on show cause notices issued by the Government of Odisha (raised by Revenue)
2. Disallowance of interest expenditure of Rs. 518.75 crore incurred on borrowed funds deployed for acquisition of equity in Corus Group PLC, UK (raised by assessee)

The Tribunal dismissed the Revenue's appeal and allowed the assessee's appeal, holding both additions made by the Assessing Officer to be unsustainable.

Background: Reopening of Assessment

The assessee — a Public Limited Company engaged in manufacturing and trading of steel — originally filed its return of income on 29.09.2008 declaring total income of Rs. 6,378.97 crore under normal provisions of the Income Tax Act, 1961, and also disclosed taxable book profit of Rs. 6,893.80 crore under Section 115JB. The case was taken up for scrutiny under Section 143(3) and assessed at total income of Rs. 6,538.90 crore after certain adjustments.

Subsequently, the Assessing Officer invoked the provisions of Section 147 read with Section 148 to reopen the assessment on two grounds:

• That the assessee had undertaken excessive mining during FY 2007–08 and the resulting income was not disclosed during original assessment proceedings
• That interest expenditure on borrowings used for investment in Corus Group PLC had been disallowed in AY 2009–10 proceedings and a similar disallowance was warranted for AY 2008–09 as well

Issue I — Alleged Excess/Illegal Mining Addition of Rs. 871.17 Crore

Facts and Assessing Officer's Findings

Show cause notices were issued by the Government of Odisha to the assessee in relation to alleged excessive mining at three locations during FY 2007–08. Based on the quantities and values indicated in these notices, the Assessing Officer made an addition of Rs. 871,17,30,496/-, concluding that profits from excess mineral production remained unaccounted in the books of the assessee.

The following mineral-wise breakup was relied upon by the Assessing Officer:

CIT(A)'s Findings and Remand Report

During appellate proceedings before the CIT(A), the assessee submitted detailed documentary evidence. A remand report was called from the Assessing Officer, who — upon verification — acknowledged that the quantities mentioned in the show cause notices were consistent with the quantities certified in auditor certificates and duly recorded in mining returns filed with Odisha mining authorities. The Assessing Officer's remand report specifically stated:

"the quantity of production of each type of ore determined in the applicable PN is in agreement with the quantity of production of such ore certified in the corresponding Auditors' Certificate and/or returned in the corresponding Mining Return filed by the assessee with the Odisha Mining Authorities during the relevant year and forming part of the records of the assessee. Further, Auditors have certified that the said production is recorded in the assessee's books of account."

The CIT(A) also placed reliance on decisions of the Dispute Resolution Panel (DRP) in the assessee's own case for AY 2009–10 and AY 2010–11, where identical additions had been deleted, as well as first appellate orders for AY 2006–07 and AY 2007–08, resulting in deletion of the addition.

Tribunal's Decision on Mining Issue

The Coordinate Bench of ITAT Mumbai had already adjudicated Revenue's appeal on identical facts for AY 2006–07 and AY 2007–08 in ITA No. 3553 & 3554/Mum/2016 dated 22.09.2023 and decided the matter in favour of the assessee. The Tribunal in the present case extracted and relied upon the relevant findings from that order:

"No material has been placed on record by the Revenue to controvert the findings of the CIT(A). We find no reason to interfere with the findings of CIT(A) on this issue."

Since the Revenue did not place any contrary material before the Tribunal, and the factual position stood consistently established through multiple proceedings, the Tribunal found no basis to interfere with the CIT(A)'s order deleting the addition. The Revenue's appeal on the mining issue was accordingly dismissed.

Issue II — Disallowance of Interest of Rs. 518.75 Crore on Funds Borrowed for Corus Acquisition

Transaction Structure and Financing Arrangement

The assessee undertook a leveraged acquisition of Corus Group PLC (Corus), a UK-based steel company, through a structured financing mechanism involving its wholly owned subsidiaries. The financing architecture was as follows: