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Income Tax Appellate Tribunal, AHMEDABAD – BENCH ‘C’
Before: SHRI RAJPAL YADAV & SHRI WASEEM AHMED
PER RAJPAL YADAV, JUDICIAL MEMBER : Assessee is in appeal before the Tribunal against order of the ld.CIT(A)-1, Ahmedabad dated 28.4.2017 passed for the Asstt.Year 2014-15.
Sole grievance of the assessee is that the ld.CIT(A) has erred in law and on facts by confirming the disallowance of interest expenditure to the extent of 9.75% under section 36(1)(iii) of the Act in respect of capital work-in-progress.
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Brief facts of the case are that the assessee has filed its return of income on 7.11.2014 declaring total income at NIL. The case of the assessee was selected for scrutiny assessment and notice under section 143(2) was issued and served upon the assessee. It emerges out from the record that the assessee at the relevant time was engaged in manufacturing of fine product (denier) in POY, FDY, DTY and texturised yarn. It has shown total turnover of Rs.344.55 crores and net profit at Rs.3,86,54,576/-. On scrutiny of the accounts the ld.AO observed that the assessee has shown closing capital work-in-progress at Rs.4,81,60,593/-. It has debited interest expenditure of Rs.6,95,72,774/-. He was of the opinion that interest expenditure was partly required to be disallowed on work-in-progress. He observed that in the Asstt.Year 2012-13, the ld.CIT(A) has restricted the disallowance at the rate of 10.75%. Thus, he worked out the disallowance in this year at 18,96,716/- . On appeal, the ld.CIT(A) has confirmed the disallowance by relying upon the order of the ld.CIT(A) in the Asstt.Year 2013-14. The discussion made by the ld.CIT(A) in this respect reads as under: “h) Without prejudice to what is stated above, even if your Honor is of the view that disallowance shall be made in respect of interest expense than it should be made by taking interest rate @9.75% as per the terms of CDR to the company instead of 10.75%. We would further like to state that similar view has been already accepted by the Hon'ble CIT(A)-1 in companies appeal for AY.2013-14.
2.3. I have carefully considered the Assessment Order and the submission of the appellant carefully. The Assessing Officer has made disallowance of interest on capital work in progress of Rs. 18,96,716/-. it is pertinent to note that similar disallowance was made by Assessing Officer in AY. 2013-14 wherein CIT(A)~1 vide order dated 28th /J February, 2017 in Appeal No. 344/ClT(A)-1 has held as under:-
2.3. "I have gone through the facts and the submission of the appellant carefully. In the assessment order A.O has observed that
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there is a closing capital work-in-progress of Rs.4,83,38,831/- and the assessee has debited an amount of Rs. 1,46,18.356/- in the P&L A/c, on working capital. The assessee was asked by the A.O. as to why proportionate interest @12% should not be capitalized and also show caused as to why the difference should not be added to the total income. Since no separate account has been maintained and the investment is made from common hotchpotch fund, interest is required to be disallowed. The Assessing Officer had disallowed interest on capital work in progress by calculating interest on the Capital Work in Progress of Rs.4,83,38,831/- on daily basis @12% for whole year and disallowed total interest of Rs. 17,34,463/-.
The appellant has submitted that for the purpose of procurement of such assets, no new term loan has been taken by the appellant during the year; hence entire investment has been made out of the interest free funds available with the company.
The appellant has further submitted that the appellant company a/so have paid up capital of Rs.18,55,00,000/-, Reserve & Surplus of Rs.32,52,89,886/~ and Interest free unsecured loan of Rs. 33,73,88,300/- for the purpose of making such payments in respect of such capital work in progress. Since no new fund has been raised by way of term loan by the appellant company, it is quite clear that such amount has been paid out of interest free loan, internal cash accruals and paid up capital of the company. The reliance has been placed on the decision High Court in the case of Commissioner of Income Tax Vs. Reliance Utilities & Power Ltd 178 Taxman 135{Bom.) "...xx where in it has been categorically specified that when there are interest free and interest bearing both funds are available then basic presumption is that such interest free advance has been made out of interest free advance available. The appellant has further submitted that without prejudice to what is stated above we would further like to state that as per Corporate Debt restructuring scheme where in it has been categorically specified that interest rate as per CDR Scheme shall be 9,75% for the Funded Interest Term Loan and 10.75% p.a. for the Working capital and Term Loan. However, Assessing Officer has failed to appreciate such fact and made disallowance at notional rate of 12%.
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2.4. The submissions of the appellant's have been considered. The reliance of appellant on various case laws is considered, it is seen that, in each case it was required to examine the availability of funds and the source of the same, it is seen that the appellant company is having mixed funds and is not having separate accounts for different operations. From the combined balance sheet of the appellant, it is seen that both secured and unsecured loans have gone up substantially high during the year under appeal. It is further seen that the appellant was already having heavy investment in fixed assets which is more than several times of Share capital. In view of this, the claim of the applicant that its investment in capital work in progress should be assumed from share capital and business cash flow is difficult to be accepted. It is seen from the debt structuring scheme approved and interest charged is at the rate of 9.75%. As the interest on term loan is 9.75% the charging of at the rate of 12% by the assessing officer is on the higher side. It would be appropriate and fair to adopt the interest at the rate of 9.75% for the calculation of interest on capital work on progress. This view has also been taken in the earlier years in the appellant case by the CIT(A)1 where he had hold that interest on capital work in progress should be calculated at the rate of 9.75% and not at the rate of 12%. In view of the above discussion and following the decision of my predecessor for earlier assessment years, the assessing officer is directed to calculate the interest on capital work on progress on daily basis at the rate of 9.75% on the amount of Rs. 4,83,38,831 ATMs ground of appeal is partly allowed".
In view of above referred order, issue of disallowance of interest on capital work in progress is already decided in favour of Appellant and issue raised in year under consideration is identical with facts of preceding Assessment Year. Thus, the assessing officer is directed to calculate the interest on capital work on progress on daily basis at the rate of 9.75% on the amount of Rs. 4,81,60,593/-. This ground of appeal is partly allowed.”
The ld.counsel for the assessee at the outset contended that the ld.CIT(A) has not recorded any finding in this year, rather relied upon the order of ld.CIT(A) in the Asstt.Year 2013-14, whereas in the Asstt.Year 2013-14, the ld.CIT(A) has followed the order of A.Y.2012-13.
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The Tribunal has deleted such disallowance in the Asstt.Year 2012-13 also. This order has been followed in ITA No.983/Ahd/2017 for the Asstt.Year 2013-14. Putting reliance upon this order, the ld.counsel for the assessee contended that disallowance be deleted. On the other hand, the ld.DR relied upon the order of the ld.CIT(A).
We have duly considered rival contentions and gone through the record carefully. A perusal of the order of the ld.CIT(A) would indicate that the ld.CIT(A) has not recorded any finding rather simply relied upon the order of the ld.CIT(A) in the Asstt.Year 2013-14. This order did not meet approval of the Tribunal in the Asstt.Year 2013-14. The Tribunal has allowed the appeal of the assessee and deleted the disallowance by observing as under:
“8. We have heard rival submissions. As pointed out on behalf of the assessee, we find that the disallowance of interest on capital work-in- progress was reversed by the co-ordinate bench in assessee's own case in AY 2012-13. The relevant operative part of the order of the ITAT is reproduced hereunder:
"5. With the assistance of the Id.representatives, we have gone through the record carefully. The assessee has annual report containing the balance sheet and placed on record other details. The assessee has reserves and surplus of more than Es.48 crores. It has internal accrual during the year which can lake care of such investments. The Id. counsel for the assessee took us through net cash flow from operations available on page no.20 of the annual report which suggest that the assessee has net cash flow Rs.16,55,474/-. Thus, considering interest free funds available with the assessee in the shape of share capital, reserves and surplus, as well as net revenue from operations, we are of the view that alleged investment in WIP could be assumed as carried from these surplus funds. No notional interest ought to be calculated for capiialization. In order to fortify ourselves, we would like to refer to the decision of Hon'ble Bombay High Court in the case of
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CIT Vs. Reliance Utilities & Power Ltd., 313 ITR 340 (Bom). In view of the above, this ground of appeal is allowed. "
The facts and the circumstances being similar without any material change, we do not see any reason to depart from the view already taken in this regard. In parity with the findings of the co- ordinate bench, we find that merit in the plea of the assessee. The AO is accordingly directed to delete the addition made on this score.” 6. Since there is no disparity on the facts, and no independent finding recorded by the ld.CIT(A) in this year except following his predecessor’s order, we are of the view that following order of Co- ordinate Bench of the ITAT, this disallowance deserves to be deleted. We allow the appeal of the assessee and delete the impugned disallowance.
In the result, appeal of the assessee is allowed. Pronounced in the Open Court on 25th March, 2019.
Sd/- Sd/- (WASEEM AHMED) (RAJPAL YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBER
Ahmedabad; Dated, 25/03/2019