M/S IOL CHEMICALS AND PHARMACEUTICALS LTD.,LUDHIANA vs. ACIT, C -6, LUDHIANA

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ITA 1450/CHANDI/2018Status: DisposedITAT Chandigarh15 April 2019AY 2013-148 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal restored the matter to the Assessing Officer for fresh consideration, directing him to examine the availability of own/interest-free funds against capital work in progress and advances in light of Supreme Court decisions. For other expenses, the disallowances were deleted.

What were the facts?

The assessee claimed interest expenses, but the Assessing Officer disallowed a portion, arguing it should be capitalized as it related to borrowed funds used for capital work in progress and advances. The CIT(A) upheld these disallowances.

What were the issues?

Whether interest on borrowed funds used for capital work in progress and advances should be disallowed or capitalized, and whether certain business expenses were properly vouched.

Which sections of the Income-tax Act were involved?

Section 36(1)(iii)

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आदेश/Order

Per Sanjay Garg, Judicial Member:

The present appeals for different assessment years have been preferred by the assessee against the separate orders dated 14.9.2018 of the Commissioner of Income Tax (Appeals)-3, Ludhiana [hereinafter referred to as CIT(A)].

2.

First we take up assessee’s appeal in ITA No.1450/Chd/2018 for assessment year 2013-14.

ITA Nos.1450 & 1451-c-18- M/s IOL Chemicals and Pharmaceuticals Ltd., Ludhiana 2

3.

The sole ground taken by the assessee in this appeal is regarding the action of the Ld. CIT(A) in upholding the disallowance of a sum of ₹

29,10,663/- out of interest account made by the Assessing officer u/s

36(1)(iii) of the Income-tax Act, 1961 (in short 'the Act').

4.

The brief facts relating to the issue are that during the course of

assessment proceedings, the Assessing officer found that the assessee had shown capital work in progress to the extent of ₹ 31,50,70,871/-. He

observed that the assessee had made the payment of capital advance and

investment for construction of building out of borrowed funds which was

required to be capitalized up to the end of the financial year. The assessee

submitted that the interest on term loan taken for the purchase of

machinery had been duly capitalized and that the funds used for building

were out of own funds / interest free funds available with the assessee.

However, the Assessing officer observed that the entire amount of building

construction and machinery installation and capital advance was much

more than the term loan utilized. In the absence of any specific details, the

Assessing officer worked out the notional interest expenditure which was

required to be capitalized u/s s 36(1)(iii) of the Act and added the same to

the income of the assessee.

5.

Being aggrieved by the order of the Assessing officer, the assessee

preferred appeal before the Ld. CIT(A) but remained unsuccessful.

6.

Before us, Ld. Counsel for the assessee has submitted that the term

loans were taken for specific purposes and the term loans taken for

ITA Nos.1450 & 1451-c-18- M/s IOL Chemicals and Pharmaceuticals Ltd., Ludhiana 3

machinery were duly capitalized till the machinery was put to use. That

there was no other borrowed funds with the assessee. That the source of

funds for the building was out of the interest free funds available with the

assessee out of sale proceeds of the year. That the assessee had capitalized

the interest of ₹ 1,08,92,663/- during the year. That all the details of the

capital work-in-progress, the funds used and the source of the funds were

furnished but lower authorities have failed to properly appreciate the

details submitted by the assessee. The Ld. counsel has also submitted that

the lower authorities have also failed to consider the proposition of law

laid down by the Hon'ble Supreme Court in the case of ‘CIT (LTU) Vs.

Reliance Industries Ltd.’ [2010] 410 ITR 466 (SC), wherein, the Hon'ble

Supreme Court has again confirmed the proposition of law that if the own

funds / interest free funds are available with the assessee to meet the

investment, presumption will be that the assessee had used its own /

interest free funds for the said investment.

7.

The Ld. DR, on the other hand, has relied upon the findings of the

lower authorities.

8.

Considering the above submissions of the assessee, in our view, the

matter is required to be restored to the file of the Assessing officer to duly

consider the aforesaid contention of the assessee, examine the details of

the finances available with the assessee vis-a-vis amount capitalized by the

assessee and decide the issue afresh in the light of the decision of the

Hon'ble Supreme Court in the case of ‘CIT (LTU) Vs. Reliance Industries

Ltd.’ (supra). The orders of the lower authorities are set aside and the

ITA Nos.1450 & 1451-c-18- M/s IOL Chemicals and Pharmaceuticals Ltd., Ludhiana 4

matter is remanded to the Assessing officer to decide the issue afresh as

per the observations made above.

In the result, the appeal of the assessee is treated as allowed for

statistical purposes.

ITA No. 1451/Chd/2018 9. The assessee in this appeal has raised the following grounds of

appeal: 1. That order passed u/s 250(6) of the Income-tax Act, 1961 (in short 'the Act') by the Ld. CIT(A)-3,Ludhiana is against law and facts on the file in as much as she was not justified to arbitrarily uphold the action of the Ld. Assessing officer in disallowing a sum of ₹ 4,86,491/- out of interest account.

2.

That Ld. CIT(A) was further not justified to arbitrarily uphold the disallowance of ₹ 3,39,385/- out of Diwali expenses, gardening expenses, printing & Stationery expenses and website promotion charges.

10.

Ground No.1: Vide ground No.1, the assessee has agitated the action of the Ld. CIT(A) in upholding the disallowance of a sum of ₹ 4,86,491/-

made by the Assessing officer out of the interest account under the

provisions of section 36(i)(ii) of the Act.

11.

During the assessment proceedings, the Assessing officer observed that the assessee had given working capital advance of ₹ 84,60,720/- out of

borrowed funds which were relatable to work in progress. Since the assets

were not put to use, the Assessing officer calculated the disallowance of

interest by invoking the provisions of section 36(1)(iii) of the Act and

ITA Nos.1450 & 1451-c-18- M/s IOL Chemicals and Pharmaceuticals Ltd., Ludhiana 5

worked out the notional interest expenditure of ₹ 4,86,491/- and added

back the same to the total income of the assessee.

12.

Being aggrieved by the above order of the Assessing officer, the

assessee preferred appeal before the Ld. CIT(A). It was submitted before

the Ld. CIT(A) that the own / interest free funds of the assessee were

sufficient to meet the investment / interest free advances / capital work in

progress, made by the assessee, however, the Ld. CIT(A) held that since

the funds used by the assessee were out of mixed funds, hence, the

provisions of sec 36(1) (iii) of the Act have been rightly invoked by the

Assessing officer.

13.

Before us, the Ld. Counsel for the assessee has submitted that the

assessee was possessed of sufficient own funds to meet the investments /

capital advances. That the assessee company during the year raised funds

by way of share capital to the tune of ₹ 37.79 crores which were credited

to its cash credit account /current account. That the sale proceeds of the

assessee company were also credited to these accounts and that these funds

have been used in making the capital advance in question. Moreover, the

funds utilized were out of current account which was interest free funds.

That even otherwise the issue was squarely covered by the decision of the

Hon'ble Supreme Court in the case of ‘CIT (LTU) Vs. Reliance Industries

Ltd.’ [2010] (supra).

ITA Nos.1450 & 1451-c-18- M/s IOL Chemicals and Pharmaceuticals Ltd., Ludhiana 6

14.

The Ld. DR could not rebut the aforesaid facts that the assessee was

possessed of own sufficient / interest free funds available with it to meet

the capital advances in question.

15.

We find that the issue is squarely covered by the decision of the

Hon'ble Supreme court in the case of ‘CIT (LTU) Vs. Reliance Industries

Ltd.’ (supra). We therefore, do not find any justification on the part of the

lower authorities in making the impugned disallowance. The same is

ordered to be deleted.

This issue is decided in favour of the assessee.

16.

Ground No.2: Vide this ground, the assessee has agitated the action of the CIT(A) in confirming the disallowance of ₹ 3,39,385/- as against the

disallowance of ₹ 3,77,055/- made by the Assessing officer. The Assessing

officer made the disallowance of ₹ 3,77,055/- out of the Diwali Expenses,

Gardening expenses, Printing & Stationery and website promotion

expenses on the ground that the same were not properly vouched.

17.

Before the Ld. CIT(A), the assessee submitted that most of the

expenses incurred by the assessee were by way of account payee cheques / bills. As in case of Diwali expenses, out of total expenses of ₹ 4,27,541/-,

a single bill amount of ₹ 3,75,000/- was paid through cheque. Likewise, the

expenses on website promotion, most of the debits are out of the last years

prepaid expenditure carried over to the year under consideration and that

no cash expenditure were incurred during the year. That similar was the

position of disallowance made out of other two expenditure i.e. printing &

stationary and gardening expenses. However, the Ld. CIT(A) gave part

ITA Nos.1450 & 1451-c-18- M/s IOL Chemicals and Pharmaceuticals Ltd., Ludhiana 7

relief to the assessee and confirmed the remaining expenditure for want

of proper vouchers.

15.

We have considered the rival submission on this issue. Considering

the nature of the expenditure i.e. as ‘Diwali expenses, gardening expenses,

printing and stationary and website promotion expenditure’ incurred which

are usually incurred in day to day business activity and also considering

the smallness of the amount and further submissions of the assessee that

most of the expenditure were paid through account payee cheques, we do

not find any justification on the part of the lower authorities in making the

disallowance in respect of the aforesaid expenditure. The disallowances

made by the lower authorities on this issue are therefore, ordered to be

deleted.

In the result, this appeal of the assessee is treated as allowed.

In the result, the appeal of the assessee for the assessment year

2013-14 is treated as allowed for statistical purposes and appeal for the

assessment year 2014-15 is hereby allowed.

Order pronounced in the Open Court on 22.04.2019

Sd/- Sd/- (संजय गग� / SANJAY GARG) (एन. के. सैनी / N.K. SAINI) उपा�य� / Vice President �या�यक सद�य/ Judicial Member Dated : 22. 04.2019 “आर.के.” आदेश क� ��त�ल�प अ�े�षत/ Copy of the order forwarded to : 1. अपीलाथ�/ The Appellant 2. ��यथ�/ The Respondent 3. आयकर आयु�त/ CIT 4. आयकर आयु�त (अपील)/ The CIT(A) 5. �वभागीय ��त�न�ध, आयकर अपील�य आ�धकरण, च�डीगढ़/ DR, ITAT, CHANDIGARH 6. गाड� फाईल/ Guard File

ITA Nos.1450 & 1451-c-18- M/s IOL Chemicals and Pharmaceuticals Ltd., Ludhiana 8

आदेशानुसार/ By order, सहायक पंजीकार/ Assistant Registrar

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