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Income Tax Appellate Tribunal, AHMEDABAD - BENCH ‘C’
Before: SHRI RAJPAL YADAV & SHRI AMARJIT SINGH
PER RAJPAL YADAV, JUDICIAL MEMBER:
Assessee is in appeal before the Tribunal against order of the ld.CIT(A)-I, Ahmedabad dated 19.12.2013 for the Asstt.Year 2010-11. 2. In the first ground of appeal, the assessee has pleaded that the ld.CIT(A) has erred in confirming the disallowance of interest expenses at the rate of 13% on additions made to the fixed assets during F.Y.2009-10. 3. Brief facts of the case are that the assessee has filed its return of income on 2.10.2010 declaring total income (-) Rs.6,57,45,872/-. The 2 case of the assessee was selected for scrutiny assessment and notice under section 143(2) was issued and served upon the assessee. On scrutiny of the accounts, it revealed to the AO that during the year under consideration it has made addition in the assets of Rs.21,77,49,433/-. This includes work-in-progress of Rs.1,63,97,510/- outstanding in the books of accounts as on 31.3.2009. According to the AO, section 36(1)(iii) contemplates that the interest paid in respect of capital borrowed for acquisition of assets for extension of existing business for any period beginning from the date on which capital was borrowed for acquisition of the assets till the date on which such asset was first put to use shall not be allowed as deduction. He examined the date of acquisition of assets vis-à-vis their actual user and arrived at a conclusion that the interest at the rate of 18% required to be capitalized because some of the machineries were put to use on 1.7.2009, whereas the payment for acquisition of these assets were made from 1.4.2009. The ld.AO has prepared a table showing details of assets, book value, date of payment, date of put to use and amount of interest at the rate of 18% from 1.4.2009 to the date of assets put to use. He worked out such amount at Rs.1,19,17,827/-. He granted depreciation on these capitalized assets and ultimately made an addition of Rs.1,12,37,056/-.
Dissatisfied with this working of the AO, assessee carried the matter before the ld.CIT(A). It has raised multi-fold submissions. It firstly contended that interest paid to the bank was 13% and not 18% at which the AO has calculated the interest for capitalization. It further contended that out of the total assets acquired by the assessee, 35% were purchased from interest-free funds available with the assessee. An explanation qua this effect has been given to the ld.CIT(A) and copy of such explanation is available at page no.27 and 28 of the paper book. Similar explanation has been given on 17.12.2013 which was available on page no.29 and 30. 3 “To, The Comm. of Income Tax, (A) 1, Room No. 339, 3rd Floor Aaykar Bhavan, Ashram Road, Ahmedabad.
Ref: Notice u/s. 250 of the Act in case of Yamir Packaging Pvt. Ltd. A.Y.2010- 11
Sub: Written Submission
Respected Sir,
Further to our submissions dated 22nd October 2013 and as required by your honor, our explanations are as under:
Total funds employed in the industry Rs. in lacs
INTEREST FREE FUNDS
Paid up capital
98
Reserves and surplus
19
Sales Tax deferment
47
Deferred Tax
18
Total own funds 1201.82
Interest free creditors (909.52-(295.99+115.77)) 497.76 -------------- Total Interest free fund employed ‘A’ 1699.58 --------------- INTEREST BEARING FUND
Secured Loans 2407.06 Unsecured Loans 352.08 Interest Bearing Creditors 411.76 -------------- Total Interest bearing fund ‘B’ 3170.90 -------------- Total funds deployed in industry A+B 4870.48 % of interest free funds to total fund 34.90%
% of interest bearing funds to total fund 65.10%
Total New Investment in expansion 2118.92 Total new bank loan taken for expansion 1555.16
% of loan for new expansion 73.39%
Sir it is clear from the above that we have about 34.90% interest free funds in the industry whereas we are considering our margin at 26.61% only and 4 disallowance of on loan which constitutes to 73.39% which we have in fact taken for expansion. Our earlier submission that disallowance of interest on total cost of additions are not is proved from our above details. The loan for expansion constitute only 73.39%. The total expansion is not done from only interest bearing funds. Payments made from our reserves and other interest free funds also. Moreover sir no bank will give 100% finance for establishing any industry. Our margin is must for up of any industry. Please consider the fact that all advance payments or other petty payments are from our margin only. We have on our own has given you the details of payment made from loans and interest which can be disallowed and capitalised in our earlier submission. We are also enclosing herewith the payment details of various machineries as required by you. Please consider our above submissions and allow the appeal and oblige.”
The ld.CIT(A) has gone through these contentions and thereafter partly allowed appeal of the assessee. The ld.CIT(A) has directed the AO to check the date of payment made by the assessee for purchase of machinery, rate of interest which was paid by the assessee for availing loan, and date on which the machinery was put to use, and thereafter calculate the interest for capitalization.
Before us, the ld.counsel for the assessee contended that the assessee has sufficient interest-free funds which can take care of acquisition of these assts. He made reference to page no.27 of the paper book. According to him, the assessee has already capitalized a sum of Rs.8,97,500/-. It can take care of such expenditure and no separate calculation of interest expenses required to be made for capitalization. In support of his contentions, he relied upon the following decisions:
> CIT vs. Torrent Power Ltd. - 363 ITR 474 (Guj); > CIT vs. Suzlon Energy Ltd. - 354 ITR 630 (Guj); > CIT vs. Gujarat Power Corporation Ltd. - 352 ITR 583 (Guj); > CIT vs. Hitachi Home & Life Solutions (I). Ltd. - (2014) taxntann.com 540 (Guj); > CIT vs. Reliance Utilities & Power Ltd. - 313 ITR 340 (Bom); 5 > Munjal Sales Corporation vs. CIT - 298 ITR 298 (SC);
On the other hand, the ld.DR relied upon order of the AO.
We have duly considered rival contentions and gone through the record carefully. As far as the calculation of interest expenditure for capitalization under section 36(1)(iii) of the Act representing the expenses for acquiring machinery before it be put to actual user is concerned there is no dispute amongst the parties. If machinery was being acquired from interest-bearing funds and it was not actually put to use, then for that period interest component is required to be capitalized. Question before us is, whether the assessee is able to demonstrate availability of interest-free fund from which it can be alleged that no interest expenditure have been incurred by it, which could be capitalized. We have perused the submissions of the assessee before the ld.CIT(A) extracted (supra) as well as reproduced by the ld.CIT(A). We are of the view that from these submissions, it is quite difficult to record a categorical finding. The ld.CIT(A) has therefore rightly directed the AO to verify the additions made by the assessee. In other words, ld.AO shall verify three aspects viz. (a) dates of purchase of machinery, (b) availability of interest-free funds with the assessee on the date of purchase; (c) actual user of the machinery, and (d) rate of interest paid by the assessee on its borrowings. After availing these details, he would work out which is the actual amount required to be capitalized. The ld.AO shall thereafter give set off of already interest capitalized by the assessee on these assets. With the above observation, we treat this ground of appeal as partly allowed.
In the next ground of appeal, grievance of the assessee is that the ld.CIT(A) has erred in confirming the disallowance of preliminary expenses amounting to Rs.9,39,887/-. 6
The ld.counsel for the assessee contended that the assessee has incurred expenses of Rs.46,99,434/- and claimed 1/5th of it at Rs.9,39,887/-. The AO disallowed the claim of the assessee. The ld.counsel for the assessee contended that such expenses eligible under section 37 of the Act being 1/5th , was denied to the assessee. He placed reliance upon the decision of the Hon’ble Supreme Court in the case of India Cement Ltd. Vs. CIT, 60 ITR 52 (SC). On the other hand, the ld.DR relied upon the order of the ld.CIT(A).
We have perused record carefully. On page no.65 of the paper book, the assessee has placed on record details of such expenditure. These preliminary expenses were claimed in schedule no.
In schedule no.16, there are no details except total amount and 1/5th written off by the assessee. The ld.CIT(A) has confirmed disallowance on the ground that genuineness of the expenditure has not been proved. Nothing brought before the Tribunal, and therefore, after going through the finding of the ld.CIT(A), we do not find any reason to interfere in the order of the ld.CIT(A). There is no evidence produced by the assessee in support of its. In view of the above discussion, this ground of appeal is rejected.
In the result, the appeals of the assessee is partly allowed for statistical purpose. Order pronounced in the Court on 17th January, 2019 at Ahmedabad. (AMARJIT SINGH) JUDICIAL MEMBER
Ahmedabad; Dated 17/01/2019
आदेश क" ""त"ल"प अ"े"षत/Copy of the Order forwarded to :