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Income Tax Appellate Tribunal, AHMEDABAD “B” BENCH
Before: SHRI PRADIP KUMAR KEDIA & SHRI MAHAVIR PRASAD
PER MAHAVIR PRASAD, JUDICIAL MEMBER
This appeal filed by the Assessee is directed against the order of the Ld. CIT(A)-2, Vadodara dated 11.12.2017 pertaining to A.Y. 2014-15 and following grounds have been taken:
2 . A.Y. 2014-15 1. The order of the learned Commissioner (Appeals) is against law and facts.
2. The learned Commissioner (Appeals) erred in confirming disallowance of interest to the extent of Rs.810007- on account of interest free loans to related parties. Your Appellant submits that the disallowance is not justified and prays that the same be deleted.
3. The learned Commissioner (Appeals) erred in confirming disallowance of rent to the extent of Rs.1788024/- under section 40A(2) of the Income-tax Act, 1961, considering it as excessive. Your Appellant submits that the disallowance is not justified and prays that the same be deleted.
4. The learned Commissioner (Appeals) erred in confirming disallowance of sales promotion expenses to the extent of Rs.316534/-. Your Appellant submits that the disallowance is not justified and prays that the same be deleted.
The facts of the case are that assessee is engaged in the business of manufacturing of pharmaceutical bulk drugs. During the year under consideration, the assessee company declared net profit of Rs. 1.26 crores on turnover of Rs. 40.85 crores as against the net profit of Rs. 2.56 lakhs on turnover of Rs. 32.33 crores in the last year.
During the assessment proceedings, the assessee was asked to furnish the details of interest expenditure, it is noticed assessee has incurred interest expenditure of Rs. 25,34,212.57/-.
In response to the query, assessee stated that it has taken term loan from the bank which was sanctioned for construction of Warehouse/Administration building and it has paid interest on loan. But ld. A.O. did not allow interest expenditure on the ground that warehouse and Administration building was not put to use during the year under consideration, interest relatable to the 3 . A.Y. 2014-15 assessee should have capitalized the interest paid on the said term loan. Since assessee has failed to do so then ld. A.O. made addition of Rs. 25,34,213/-.
Against the said order, assessee preferred first statutory appeal before the ld. CIT(A) who partly allowed the appeal of the assessee and confirmed interest to the extent of Rs. 81,000/-.
Before us, ld. A.R. cited an order of Co-ordinate Bench wherein it is stated that matter has been decided in favour of the assessee with regard to interest and relevant portion of the ITAT order is reproduced:
The 1st issue raised by the assessee is that the learned CIT (A) erred in confirming the disallowance of interest expenses amounting to Rs. 23,38,126 .00 only by treating the same as capital in nature.
9. The assessee in the year under consideration has incurred interest expenses of Rs. 23,38,126.00 on the term loan which was utilized in the construction of warehouse and administrative building. The assessee has shown the cost incurred on the construction of warehouse and administrative building as capital working progress in its balance sheet as on 31 March 2013. Thus the assessee did not claim the appreciation on such work in progress on the rationale that the same was not put to use in the year under consideration.
However, the AO sought clarification from the assessee for not capitalizing the interest expenses on the loan utilized in the construction of impugned work-in- progress. The assessee justified its stand by submitting that the impugned buildings were ready to use in the current financial year and at the same time, it has started the repayment of the loan in the year under consideration.
However, the AO was not satisfied with the contention of the assessee by observing that - i. The impugned assets have not been put to use during the year.
4 . A.Y. 2014-15 ii. There was also no evidence suggesting that the construction of the impugned property was completed during the year. In view of the above, the AO disregarded the contention of the assessee and accordingly treated the amount of interest as capital in nature. Thus, the AO added the amount of interest to the total income of the assessee.
The aggrieved assessee preferred an appeal to the learned CIT (A).
The assessee before the learned CIT (A) submitted that the construction of the warehouse and the administrative building does not represent the extension of the business. Therefore the interest expenses need not be capitalized irrespective of the fact that the impugned assets were not put to use during the year.
However, the learned CIT (A) confirmed the order of the AO by observing that the construction of a warehouse and administrative building does not represent the routine assets. Therefore the same should be considered as an extension for the purpose of the business of the assessee. Being aggrieved by the order of the learned CIT (A) the assessee is in appeal before us.
10. The learned AR before us filed a paper book running from pages 1 to 11 of the paper book and reiterated the submission as made before the learned CIT (A).
On the other hand, the learned DR vehemently supported the order of the authorities below.
We have heard the rival contentions of both the parties and perused the materials available on record. The facts relating to the issue are not in dispute, and the same has already been explained in the preceding paragraph. Therefore, we are not inclined to repeat the same for the sake of brevity and convenience.
At this juncture, we find it important to refer the provisions of section 36 (1)(iii) of the Act as applicable in the year under consideration, which reads as under: (iii) the amount of the interest 38 paid in respect of capital 38 borrowed 38 for the purposes of the business 38 or profession : 39[Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalised in the books of account or not); for any period beginning 5 . A.Y. 2014-15 from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction.]
A perusal of the above provision reveals that the amount of interest on the borrowed fund used for the acquisition of an asset for the extension of the existing business needs to be capitalized. Thus it is clear that any expenditure by way of interest on the borrowed fund utilized for the acquisition of capital assets needs not to be capitalized merely on the basis that such capital assets were not put to use in the relevant year. But if the acquisition of assets relates to the extension of the business then the interest expenses on the borrowed fund used for the acquisition of such assets need to be capitalized till such assets is put to use.
In the case on hand, it is an undisputed fact that the asset was not put to use in the year under consideration. Thus the issue arises whether such assets were acquired for the extension of the business or not. If yes, then the interest needs to be capitalized. However, the grievance of the assessee before us is that there is no extension in the business. As such, the impugned buildings being a warehouse and the administrative building were constructed for effective management of the business which cannot be termed as an extension of the business.
The assessee is engaged in the business of manufacturing of pharmaceutical bulk drugs, and in our humble understanding, there will not be any increase in the capacity of the production of the assessee after the construction of the warehouse and the administrative building. Therefore, in our considered view the construction of the impugned buildings cannot be treated as an extension of the business as envisaged under the proviso to section 36(1)(iii) of the Act as it stood during the relevant period under consideration. Accordingly, we are not convinced with the finding of the learned CIT (A). Accordingly, we set aside the order of the learned CIT (A) and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed.
7. In parity with the Co-ordinate Bench order in assessee’s own case in preceding year, we allow this ground of the appeal of the assessee.
6 . A.Y. 2014-15 8. Now we come to ground relating to disallowance of rent to the extent of Rs. 79,44,024/- u/s. 40A(2).
It was noticed from the profit and loss account that the assessee has debited expenses of Rs. 79,44,024/- as office rent. In reply to the notice, assessee stated that property has taken on lease for its manufacturing activity fromAugust, 2013 and rent was paid @ 6 lac per annum and rented property belong to one of the director. Thereafter a notice was issued to the assessee to furnish the details of payment made to persons specified u/s. 40A(2)(b) of the Act in the context of services rendered, adequacy and justification for the payment so made in comparison to identical payments made to outside party or person.
In reply, assessee stated that whole operation of the company is done from factory interest initially the company was registered office at Toran Complex, O.P. Road, Vadodara. Thereafter office was shifted to GIDC, Makarpura, Vadodara in 2008.
11. But assessee could not submit in comparable nearby property and thereafter ld. A.O. disallowed the claim of the assessee.
12. In appeal, ld. CIT(A) confirmed the action of the ld. A.O.
We have gone through the relevant record and impugned order. As assessee did not file any detail or any comparables of nearby property that why so much was paid to related persons even before us, assessee did not file any details.
7 . A.Y. 2014-15 14. In the absence of any explanation or detail, we confirm the action of the lower authorities. Thus, this ground of appeal of the assessee is dismissed.
15. Now we come next ground relating to sales promotion expenses of Rs. 3,16,534/-.
Assessee claimed to have distributed gold coins in order to fetch sales promotion and assessee contention was that looking to the turnover, the business expenditure was very small.
But ld. A.O. and ld. CIT(A) were not convinced with the plea of the assessee and disallowed the Sales promotion expenses of Rs. 3,16,534/-.
We have gone through the relevant record and impugned order and heard both the parties, assessee has purchased gold coins on 02.11.2012 by two different Invoices for Rs. 1,61,812/- and Rs. 1,63,845/-. But assessee could not provide the details to whom gold coins were given on account of business promotion.
Appellant has failed to provide any details. Therefore, in the absence of the any supportive documents, we dismiss this ground of the appeal of the Assessee.
In the result, appeal filed by the Assessee is partly allowed.