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Income Tax Appellate Tribunal, AHMEDABAD BENCH ‘D’, AHMEDABAD
These two appeals were heard together, pertain to the assessee and involve some common issues. As a matter of convenience, therefore, both the appeals are being disposed of by this common order. Assessment Year 2012-13 This appeal is directed against learned CIT(A)’s order dated 19th December 2. 2016, in the matter of assessment under section 143(3) of the Income-tax Act, 1961, for the assessment year 2012-13.
In ground no.1, the assessee has raised the following grievance:-
“1. The learned CIT(A) erred in law and on facts in confirming disallowance of Rs.1,41,198/- towards the claim of depreciation in respect of electrification, which according to appellant is entitled to 15% rate of depreciation instead of 10% allowed by the learned AO. It is submitted that it be so held now and the & 517/Ahd/2017 Akash Fashion Prints Pvt Ltd Vs. ITO Assessment year: 2012-13 & 2013-14 Page 2 of 7 amount of Rs.1,41,198/- made towards excess claim of depreciation be deleted.”
To adjudicate on this grievance, only a few material facts need to be taken note of. During the course of scrutiny assessment proceedings, it was noticed that the assessee has claimed depreciation @ 15% in respect of additions to electric fittings. It was explained by the assessee that these additions are in respect of switches, starters, control panels etc which are part of plant and machinery. The Assessing Officer, however, rejected this plea on the ground that once a specific rate is prescribed for electric fittings @ 10%, the depreciation has to be allowed only at that rate. The depreciation of Rs.1,41,198/- was thus disallowed. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. Not satisfied, the assessee is in further appeal before us.
We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.
We find that undoubtedly in a situation in which an electric fitting is indeed an integral part of the plant and machinery, depreciation has to be allowed at the rate applicable for the plant and machinery. However, that aspect of the matter has not been examined by any of the authorities below. We, therefore, deem it fit and proper to remit the matter to the file of the Assessing Officer for fresh examination in the light of our observations above. Ordered, accordingly.
Ground no. 1 is thus allowed for statistical purposes.
In ground no.2, the appellant has raised the following grievance:-
“2. The learned CIT(A) erred in law and on facts in confirming an addition of Rs.12,594/- u/s 2(24) r.w.s. 36(1)(v)(a) of the Act towards Employees’ Contribution under P.F. Act. It is submitted that it be so held now and the addition made be deleted.”
Learned representatives fairly agree that the issue is covered, in favour of the revenue, by Hon’ble jurisdictional High Court’s judgment in the case of CIT vs. Gujarat State Road Transport Corp. Ltd [(2014) 366 ITR 170 (Guj)]. We, therefore, approve the conclusion arrived at by the CIT(A) and decline to interfere in the matter.
Ground no.2 is dismissed.
In ground no. 3, the appellant has raised the following grievance:-
“3. The learned CIT(A) grossly erred in law and on facts in confirming disallowance of Rs.19,26,111/- out of interest expenses incurred by the appellant on the ground that the same is attributable to capital work in progress. The learned CIT(A) failed to appreciate that – & 517/Ahd/2017 Akash Fashion Prints Pvt Ltd Vs. ITO Assessment year: 2012-13 & 2013-14 Page 3 of 7 i) The appellant has not borrowed any amount for the purpose of financing capital work in progress; and ii) The appellant had sufficient interest free funds to finance its capital work in progress
It is submitted that it be so held now and disallowance made be deleted.”
So far as this grievance of the assessee is concerned, the relevant material facts are like this. During the course of scrutiny assessment proceedings, the Assessing Officer noticed that while the assessee has claimed deduction of Rs.1,66,07,166/- on account of interest paid on secured and unsecured loans and while the assessee has invested Rs.2,60,93,203/- in the capital work in progress, no part of interest expenses is disallowed as capital expenditure. When assessee was confronted with this position, it was explained by the assessee that there was net reduction in term loans and that no part of the loans was thus used in capital work in progress. Rejecting this plea, the assessee made the proportionate disallowance of Rs.19,26,111/-. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. Learned CIT(A) confirmed the disallowance by observing as follows:-
“4.3. I have gone through the facts and the submission of the appellant carefully. It is seen that assessee has debited an amount of Rs. 1,66,07,166/- being interest paid on loans obtained as secured & unsecured loan to Banks & Financial Institutions. Further, the A.O. has observed that appellant is having total borrowed funds of Rs. 22,49,78,784/- on which assessee has paid interest of 1,66,07,166/-. Thus, Assessee has total assets of Rs.22,56,53,205/- including capital work-in-progress of Rs.2,60,93,203/-. Accordingly, interest worked out on Capital Work in progress of is disallowed to the extent of Rs. 19,26,111/- by the A.O.
On the other hand appellant has stated that no borrowing was taken for creating the capital work in progress. He has submitted the balance sheet of the appellant company which has shown Rs. 2,60,93,203/- as capital work in progress on account of the following items:- a. Buildings - Rs. 1,09,94,284/- b. Common ETP Plant - Rs. 1,50,98,919/- ------------------------ Total Rs. 2,60,93,203/-
He has also submitted that while the amount was spent on Capital Work in Progress during the year gradually over the period, no fresh term loan was taken from the Bank. He further contended that the whole of expenditure on Capital Work In Progress was incurred out of Cash Profit of the company during the years under consideration. As there was no borrowing for this block of assets (Capital Work In Progress), there was no interest payment on this account. The appellant has also argued that the method of calculation of & 517/Ahd/2017 Akash Fashion Prints Pvt Ltd Vs. ITO Assessment year: 2012-13 & 2013-14 Page 4 of 7 notional interest by the Income Tax Officer is also wrong. Therefore, this disallowance need be deleted.
4.4 On careful consideration of observation of Assessing Officer and contention of appellant, it is seen that the proviso with clause (iii) of sub- section (1) of section 36 of the Act, it is clear that, any amount of 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 accounts or not) for any period beginning from the date on which the capital was borrowed for acquisition of asset till the date on which such asset was first put to use, shall not be allowed as deduction. Payment of betterment charges is capital expenditure. Therefore, payment of interest on annual installments of the betterment charges will have to be regarded as capital expenditure, because it has no direct nexus with the day-to-day running of the business of the assessee as held in CIT Vs. Ahmedabad Mfg. & Calico Printing Co. Ltd (Guj.) 215 ITR 735. The appellant has submitted the details but from the details it is seen that the appellant has not established one to one nexus between interest free fund and expenditure incurred on the capital work in progress. The appellant has taken FD(OD),cash credit and corporate loans which can be utilized for the acquisition of capital work in progress. In view of the above facts and discussion, the addition made by the A. O. of Rs.19,26,111/- is confirmed. The ground of the appeal is dismissed.”
The assessee is not satisfied and is in further appeal before us.
We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.
We find that this issue is now covered, in favour of the assessee, by a co- ordinate bench’s decision in the case of PG Foils Ltd Vs. ACIT (ITA No. 912/Ahd/2015; order dated 11.12.2018) inasmuch as when the assessee has sufficient interest free funds to meet the investment, no part of interest can be said to be relatable to investment in question. In the said decision, co-ordinate bench has observed as follows:-
“22. We have heard the rival contentions and perused the material available on record. At the outset, we note that the own interest-free fund available with the assessee exceeds the amount of investment made in the capital work-in- progress. Therefore, we can presume that the assessee in such capital work- in-progress invested the own fund. In holding so, we find support and guidance from the judgment of Hon’ble Bombay High Court in the case of Reliance Utilities and Power Ltd. reported in 313 ITR 340 wherein it was held as under:-
“The principle therefore would be that if there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund & 517/Ahd/2017 Akash Fashion Prints Pvt Ltd Vs. ITO Assessment year: 2012-13 & 2013-14 Page 5 of 7 generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption is established considering the finding of fact both by the CIT(A) and Tribunal”.
22.1. Similarly, we also rely on the judgment of the Hon’ble Bombay High Court in the case of CIT vs. HDFC Bank Ltd reported in 366 ITR 505 (Bom). The relevant extract of the order is reproduced below:-
“Where assessee's capital, profit reserves, surplus and current account deposits were higher than the investment in tax-free securities, it would have to be presumed that investment made by the Assessee would be out of the interest-free funds available with Assessee and no disallowance was warranted u/s 14A.”
22.2. Similarly, we also find support from the judgment of Hon’ble Gujarat High Court in the case of UTI Bank Ltd. reported in 32 Taxmann.com 370 where the headnote reads as under :
“If there are sufficient interest free funds to meet tax free investments, they are presumed to be made from interest free funds and not loaned funds and no disallowance can be made under section 14A”.
22.3 In view of the above proposition, we hold that no disallowance of interest expense claimed by the assessee can be made on account of fund invested in the capital work in progress as discussed above. Hence, we reverse the order of the authorities below. The AO is directed to delete the addition made by him. Thus the ground of assessee’s appeal is allowed.”
In view of the above discussions, as also bearing in mind entirety of the case, we uphold the plea of assessee in principle, as stated above, and remit the matter to the file of the Assessing Officer for necessary factual verification.
Ground no. 3 is thus allowed for statistical purposes.
No other issue was raised before us.
In the result, is partly allowed in the terms indicated above.
Assessment Year 2013-14 This appeal is directed against learned CIT(A)’s order dated 19th December 20. 2016, in the matter of assessment under section 143(3) of the Income-tax Act, 1961, for the assessment year 2013-14. & 517/Ahd/2017 Akash Fashion Prints Pvt Ltd Vs. ITO Assessment year: 2012-13 & 2013-14 Page 6 of 7
In ground no.1, the assessee has raised the following grievance:-
“1. The learned CIT(A) erred in law and on facts in confirming disallowance of Rs.1,25,216/- towards the claim of depreciation in respect of electrification, which according to appellant is entitled to 15% rate of depreciation instead of 10% allowed by the learned AO. It is submitted that it be so held now and the amount of Rs.1,25,216/- made towards excess claim of depreciation be deleted.”
Following the stand taken by us for the immediately preceding year, and for the reasons set out therein, as detailed earlier in this consolidated order, we remit this issue to the file of the Assessing Officer for fresh adjudication in the terms indicated. The observation made, on this issue, for the assessment year 2012-13 will apply mutatis mutandis for this assessment year as well. The matter accordingly stands restored to the file of the Assessing Officer.
Ground no.1 is thus allowed for statistical purposes.
In ground no.2, the appellant has raised the following grievance:-
“2. The learned CIT(A) erred in law and on facts in confirming an addition of Rs.1,97,040/- u/s 2(24) r.w.s. 36(1)(v)(a) of the Act towards Employees’ Contribution under P.F. Act. It is submitted that it be so held now and the addition made be deleted.”
Learned representatives fairly agree that the issue is covered, in favour of the revenue, by Hon’ble jurisdictional High Court’s judgment in the case of CIT vs. Gujarat State Road Transport Corp. Ltd [(2014) 366 ITR 170 (Guj)]. We, therefore, approve the conclusion arrived at by the CIT(A) and decline to interfere in the matter.
Ground no.2 is dismissed.
In ground no.3, the assessee has raised the following grievance:-
“3. The learned CIT(A) grossly erred in law and on facts in confirming disallowance of Rs.23,61,618/- out of interest expenses incurred by the appellant on the ground that the same is attributable to capital work in progress. The learned CIT(A) failed to appreciate that – i) The appellant has not borrowed any amount for the purpose of financing capital work in progress; and ii) The appellant had sufficient interest free funds to finance its capital work in progress It is submitted that it be so held now and disallowance made be deleted.”
& 517/Ahd/2017 Akash Fashion Prints Pvt Ltd Vs. ITO Assessment year: 2012-13 & 2013-14 Page 7 of 7
Following the stand taken by us for the immediately preceding year, and for the reasons set out therein, as detailed earlier in this consolidated order, we remit this issue to the file of the Assessing Officer for fresh adjudication in the terms indicated. The observation made, on this issue, for the assessment year 2012-13 will apply mutatis mutandis for this assessment year as well. The matter accordingly stands restored to the file of the Assessing Officer.
Ground no.3 is thus allowed for statistical purposes.
In the result, is also partly allowed in the terms indicated above.
To sum up, both the appeals are partly allowed as indicated above. Pronounced in the open court today on the 1st day of July, 2019.