CIL NOVA PETROCHEMICALS LTD.,AHMEDABAD vs. DY.COMMISSIONER OF INCOME TAX,CIRCLE-1(1)(2), AHMEDABAD

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ITA 388/AHD/2016Status: DisposedITAT Ahmedabad13 August 2018AY 2012-133 pages
AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that the assessee had sufficient interest-free funds in the form of reserves, surplus, and net revenue from operations to cover the investment in WIP. Therefore, no notional interest should be capitalized.

What were the facts?

The assessee company was engaged in manufacturing and trading. The AO noticed closing stock of work-in-progress (WIP) and interest expenditure, and capitalized proportionate interest to WIP. The CIT(A) partly allowed the assessee's appeal.

What were the issues?

Whether proportionate interest on funds used for capital work-in-progress should be capitalized when sufficient interest-free funds are available with the assessee.

Which sections of the Income-tax Act were involved?

Section 36(1)(iii)

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Income Tax Appellate Tribunal, AHMEDABAD – BENCH ‘A’

Before: SHRI RAJPAL YADAV & SHRI WASEEM AHMED

For Appellant: Shri S.N. Soparkar, AR
For Respondent: Shri S.K. Dev, Sr.DR
Hearing: 10/08/2018

PER RAJPAL YADAV, JUDICIAL MEMBER : Assessee is in appeal before the Tribunal against order of the ld.CIT(A)-1, Ahmedabad dated 10.12.2015 for the assessment year 2012-13.

2.

Solitary grievance of the assessee is that the ld.CIT(A) has erred in confirming addition of Rs.39,90,874/- which has been added by the AO under section 36(1)(iii) of the Income Tax Act, 1961.

ITA No.388/Ahd/2016 - 2 - 3. Brief facts of the case are that the assessee-company at the relevant time was engaged in manufacturing of very fine produce (denier) in POY, FDY, DTY and trading of fabrics. It has filed its return of income electronically 22.9.2012 declaring total income at Rs.NIL after setting off brought forward unabsorbed depreciation. On scrutiny of the accounts, the ld.AO noticed that the assessee has shown closing stock of work-in- progress (“WIP” for short) at Rs.4,79,83,831/-. He further noticed that interest expenditure of Rs.42,06,30,534/-. The AO was of the opinion that proportionate interest to the addition made to capital WIP ought to be calculated and should be capitalized in WIP. He accordingly calculated such interest relatable to capital WIP at Rs.49,11,845/- and made addition. On appeal, theld.CIT(A) had allowed it partly.

4.

Before us, the ld.cousnel for the assessee submitted that the assessee has not taken any fresh loans representing work carried out in the capital field. It was also contended that the assessee has far more interest free funds than the one alleged to be used for capital WIP. It was also contended that interest was charged at the rate of 9.75% as against rate estimated by the AO at 12%. As observed earlier, the ld.CIT(A) has partly accepted this contention and calculated the notional interest representing the alleged WIP at 9.75%. This has reduced quantum of interest disallowed by the AO vis-à-vis confirmed by the ld.CIT(A). The ld.DR on the other hand relied upon the order of the AO.

5.

With the assistance of the ld.representatives, we have gone through the record carefully. The assessee has placed on record annual report containing the balance sheet and other details. The assessee has reserves and surplus of more than Rs.48 crores. It has internal accrual during the

ITA No.388/Ahd/2016 - 3 -

year which can take care of such investments. The ld.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 capitalization. In order to fortify ourselves, we would like to refer to the decision of Hon’ble Bombay High Court in the case of CIT Vs. Reliance Utilities & Power Ltd., 313 ITR 340 (Bom). In view of the above, this ground of appeal is allowed.

6.

In the result, the appeal of the assessee is allowed.

Pronounced in the Open Court on 13th August, 2018.

Sd/- Sd/- (WASEEM AHMED) (RAJPAL YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBER

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