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Income Tax Appellate Tribunal, “ D ” BENCH, AHMEDABAD
Before: SHRI WASEEM AHMED & Ms. MADHUMITA ROY
आदेश / O R D E R
PER WASEEM AHMED, ACCOUNTANT MEMBER:
The captioned appeal has been filed at the instance of the Assessee against the order of the Commissioner of Income Tax (Appeals)–6, Ahmedabad [CIT(A) in short] vide appeal no.CIT(A)-6/49/16-17 dated 31/07/2017 arising in the assessment order passed under s.143(3) of the Income Tax Act, 1961(hereinafter referred to as "the Act") dated 29/02/2016 relevant to Assessment Year (AY) 2012-13.
The Assessee has raised the following grounds of appeal:-
The Bhavnagar Salt & Industrial Works vs. ACIT Asst.Year - 2013-14 - 2 - Your appellant being aggrieved by the Order passed by the learned Commissioner of Income Tax (Appeals)-6 presents this appeal against the same on the following grounds .
1. The Commissioner of Income Tax (Appeals) has erred in law and on facts in disallowing expenses of Rs.4,62,459/- being bank charges incurred for borrowing funds of Rs.3,60,549/- and legal/professional fees of Rs.1,01,910/- by not appreciating the fact that the above mentioned expenses were incurred in normal course of business activity and therefore debited to P&L account and claimed as revenue expenditure. Further it is stated that there is no interest expenses element involved in it for capitalize the same. It is therefore submitted that the addition of Rs.4,26,459/- in respect of such expenses are totally incorrect both on facts and on law. The same may please be deleted now.
2. The order passed by the learned CIT(A) is bad in law and contrary to the provisions of law and facts. It is submitted that the same be held so now.
3. Your appellant craves leave to add, alter and/or to amend all or any of the grounds before the final hearing.
The solitary issue raised by the assessee is that the ld. CIT(A) erred in confirming the order of the Assessing Officer by treating the bank charges/professional fees as capital in nature.
The facts in brief are that assessee is a Private Limited Company and engaged in the business of manufacturing of Salt. The assessee in the year under consideration has incurred an expense of Rs. 4,62,459/- in connection with the bank borrowing. The bank borrowing was utilised for the windmill project, a new and separate business of the assessee, which was under the progress in the year under consideration. The assessee claimed so-called expenditure as Revenue in nature and accordingly the same was debited in the Profit & Loss Account. However, the Assessing Officer being dissatisfied with the claim of the assessee contended that the expenditure has been incurred in connection
The Bhavnagar Salt & Industrial Works vs. ACIT Asst.Year - 2013-14 - 3 - with the windmill project which is under the progress. Accordingly, the same needs to be capitalized as per Accounting Standard-16 issued by the Institute of Chartered Accountant of India. Finally, the Assessing Officer held that the same cannot be allowed as deduction u/s 36(1)(iii) of the Act. Accordingly, the same was disallowed and added to the total income of the assessee.
Aggrieved assessee, preferred appeal to the Ld. CIT(A).
The assessee before the Ld.CIT(A) claimed that it has incurred the impugned expenditure in the course of its business activities. Therefore, the same should be treated as revenue in nature. However, the Ld. CIT(A) disregarded the contention of the assessee by observing as under:-
“6.3. After careful consideration of findings of the AO and the submission of the appellant this ground is adjudicated as follows: It is seen that during the year under consideration, the appellant was establishing a Wind Mill project. For setting up of the same, the appellant obtained term loan from UCO Bank. The appellant incurred expenditure of Rs.3,60,549/- as processing charges for this term loan. The appellant also incurred expenditure of Rs.1,01,865/- on Stamp Paper, document charges and fees for preparing project report. The appellant debited total amount of Rs.4,62,459/- to the P&L A/c. claiming this as revenue expenditure. As mentioned above, the appellant has incurred these expenses for obtaining terms loan for a Wind Mill project which is work-in-progress during the year under consideration and has not been completed. Therefore, the amount is not allowable u/s.36(1)(iii) of the Act as the same is to be capitalized. In its submission, the appellant has tried to explain that the above mentioned expenses were incurred in normal course of business activity and therefore debited to the P&L A/c. and claimed as revenue expenditure. The appellant goes on to explain further that above mentioned bank charges of Rs.3,60,549/-
The Bhavnagar Salt & Industrial Works vs. ACIT Asst.Year - 2013-14
- 4 - and legal professional fees of Rs.1,01,910/- were incurred for obtaining loan from UCO Bank. There is an inherent contradiction in the submission of the appellant. On the one side it says that the expenses were incurred in normal course of business activity and on the other side it says that the same were incurred for obtaining term loan for the Wind Mill project which has not started.
It is clear that the appellant is in the process of setting up of the Wind Mill project and project has not been completed during the year under consideration. Therefore, the amount is not allowable u/s.36(1)(iii) of the Act which reads as under: (iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession:- 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 capitalized in the books of account or not); for any period beginning 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. The appellant ahs relied on the decision of hon’ble Supreme Court in India Cements Ltd. Vs. CIT (1966) 60 ITR 52 (SC) in support of its contention “….that a loan obtained cannot be treated as an asset or an advantage for enduring benefit of business of assessees and a loan is a liability and has to be repaid and a liability cannot be considered as an asset or an advantage…..”. Reliance by the appellant on this case is totally misplaced as the facts of the above case are entirely different from the facts of the case of the appellant. In the above quoted case, the loan obtained by the assessee was in order to facilitate running of the business of the company and not for setting up a new business or extension of an existing business. In the case of the appellant, the loan has been obtained for setting up a new Wind Mill project. Hence, the ratio of the above judgment is not applicable to the case of the appellant. 6.4. Therefore, in view of discussion above, it is held that the AO was right in disallowing expenditure of Rs.4,62,459/-. Accordingly, the addition of Rs.4,62,459/- made by the AO is upheld. This ground of appeal is dismissed.”
Aggrieved by the order of the Ld. CIT(A), the assessee is in appeal before us.
The Bhavnagar Salt & Industrial Works vs. ACIT Asst.Year - 2013-14 - 5 -
The Ld.AR before us submitted that the expenditure was incurred in the course of business and, therefore, the same should be allowed as deduction. The Ld.AR in support of his contention relied on the order of this Special Bench in the case of Ashima Syntex Ltd. vs. ACIT reported in [2006] 100 ITD 247 (Ahmedabad) (SB).
On the other hand, ld. DR vehemently supported the orders of the authorities below.
We have heard rival contentions of both the parties and perused the material available on record. The assessee in the present case is engaged in the business of manufacturing of salt. But, the assessee has incurred the expenses in connection with the bank borrowing for its windmill project which is distinct from its present business. Admittedly, the cost incurred for its windmill project was classified as work-in- progress in the balance-sheet. In other words, the commercial activity of windmill project was not commenced in the year under consideration. Therefore, in our considered view, the expenditure incurred by the assessee till the commencement of the commercial activity from windmill project needs to be capitalized.
The rulings referred by the Ld.AR in the case of Ashima Syntex Ltd.(supra) is distinguishable from the case on hand. In that case, the expenditure was incurred by the assessee in respect to the convertible debenture which was not to be repaid by the assessee. Therefore, in that The Bhavnagar Salt & Industrial Works vs. ACIT Asst.Year - 2013-14 - 6 - case, the expenditure incurred by the assessee in connection with the issue of convertible debentures was allowed as deduction treating the same as revenue expenditure. However, in the present case, the expenditure was incurred in connection with the bank borrowing which was to be repaid by the assessee in due course of time. Therefore, the case law relied upon by the Ld.AR will not help the assessee in the given facts and circumstances. Hence, we dismiss the ground of appeal raised by the assessee.