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Facts
The assessee firm made significant additions to fixed assets using interest-bearing loans. The Assessing Officer (AO) disallowed Rs. 31,27,064/- of interest expenditure, holding it should be capitalized as the assets were not put to use in the relevant assessment year (AY 2016-17), and also raised issues about non-claiming of depreciation on new assets. The CIT(A) confirmed a disallowance of Rs. 11,27,064/- out of the total addition.
Held
The Tribunal agreed that interest on loans for assets not yet put to use should be capitalized. However, it upheld the CIT(A)'s decision to allow Rs. 20,00,000/- of interest on cash credit for working capital as a revenue expenditure. It further directed the AO to quantify and allow depreciation on the capitalized interest for the subsequent Assessment Year 2017-18.
Key Issues
Whether interest expenditure incurred on loans for acquiring new fixed assets, which were not put to use in the relevant assessment year, should be capitalized or treated as revenue expenditure, and the subsequent allowance of depreciation.
Sections Cited
250, 44AB
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “A” BENCH”, KOLKATA
Dharmaraj Rice Mill, Baliguni, Uchkaran, Nanoor, West Bengal - 731301 [PAN: AAGFD1708E] ……..…...…………….... Appellant vs. ACIT, Circle-3, Suri, Aayakar Bhawan, Lal Kuthi Para, Suri, Birbhum - 731101 ................................. Respondent Appearances by: Assessee represented by : Shri B.S. Chandra, FCA Department represented by : Smt. Aditi Yadav, Sr. DR Date of concluding the hearing : 09.07.2025 Date of pronouncing the order : 15.07.2025 O R D E R
PER SANJAY AWASTHI, ACCOUNTANT MEMBER
The present appeal arises from the order u/s 250 of the Income Tax Act, 1961 (hereafter “the Act”), passed by the Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi vide order dated 24.09.2024.
1.2 In this case the facts may be briefly summarized. The assessee firm has filed its return of income on 16.10.2016 declaring total income at Rs. 53,41,140/-. The case was selected for scrutiny under CASS for verification of the issue, "Whether deduction claimed on account of depreciation is admissible." As per AO's findings, the assessee firm had made major additions to fixed assets during the relevant previous year. However, the assessee firm claimed depreciation on the written down value of the assets, not including the newly added assets. Further, the AO found that the assets Dharmaraj Rice Mill introduced during the previous year were purchased from the interest- bearing loan from the bank. The AO took a view that the interest paid for acquiring the new assets should have been capitalised, and he disallowed the interest expenditure of Rs.31,27,064/-.
1.3 Aggrieved with this action, the assessee has approached the ITAT with grounds of appeal which are lengthy and argumentative. Suffice it to say that the assessee has challenged the action of Ld. CIT(A) in confirming the disallowance of Rs. 11,27,064/- out of the total addition of Rs. 39,90,809/-.
2. Before us, the Ld. AR pointed out that the entire interest outgoing deserved to be treated as a revenue expenditure. It was averred that the assessee had gone in for extensive renovation of plant and machinery and the new plant and machinery was put to commercial use only from 01.04.2016. To this effect a certificate dated 30.03.2016 was placed before us for perusal. It was argued that the interest expense was allowable, in its entirety, as a revenue expense.
2.1 The Ld. DR pointed out that if a partial block of plant and machinery was not used during a particular year then any interest liability thereon needed to be capitalized. Thus, it was stated that the Ld. CIT(A) had correctly allowed a certain portion of interest as revenue since it was demonstrably incurred for servicing requirements for procurement of raw material and working capital requirement.
We have carefully considered the averments of Ld. AR/DR and also gone through the records before us. The admitted facts are that the new plant and machinery was put to use only after 01.04.2016 (after the present assessment year) and justifiably no depreciation has been booked on such plant and machinery for the year under consideration. Accordingly, it is understood that as per accounting principles any interest outgo, before putting the said machinery to use, would need to be “5.3.2 In have perused the submissions of the appellant and the reason stated by the AO for the impugned addition in this case and one thing is clear that the appellant firm has incurred capital expenditure in the relevant previous year. Total amount of capital expenditure, as brought out by the AO, is Rs 3,69,14,651/- which includes expenditure on addition of plant and machinery at Rs. 3,28,60,242/- and expenditure on building and shed at Rs.39,90,809/-. The AO has brought on record that the assessee, who is appellant in this appeal, has not clearly explained the source of the said capital expenditure. The assessee firm has availed cash credit loans and term loans during the relevant previous year. The assessee incurred interest expenses on loan at Rs. 44,38,761/-. The AO has brought on record that the assessee did not claim depreciation on the added assets of value Rs 3,69,14,651/- and as per audit report u/s 44AB, the plant and machinery valued at Rs. 328,60,242/- and building valued at Rs.39,90,809/- were put to use on 31/03/2016 whereas in utilisation certificate submitted by the assessee, these assets were put to use with effect from the Feb 2016. The AO has taken a view that date on which the added asset were put to use has not been clearly established by the assessee, further the assessee has not claimed depreciation on these added assets therefore these the AO held that these added asset has not been put to use during the relevant previous year. Here, I agree with the view of AO so far as issue of added assets being put to use during the relevant previous year is concerned. The appellant has stated in ground of appeal that modernisation has taken place in the running condition of the plant and depreciation has not been claimed due to absence of the completion certificate. It is noted that the explanation of the appellant with regard to added assets being put to use during the relevant previous has not been consistent, without completion certificate the asset cannot be deemed to be in the put to use condition. Therefore, the AO's view is held right. 5.3.3 However the AO has erred in disallowing the interest charges to the extent of Rs. 20,00,000/- on the cash credit loan. The appellant, in this regard, has stated that the cash credit loan cum working capital has been financed by the bank for procurement of raw material and cash credit/working capital fund is under close monitoring of the bank therefore interest on cash credit loan cannot be capitalised. Considering the appellant explanation and the fact that cash credit facility is extended by the bank through current account to meet the regular operations of business, interest charges on cash credit loan to the extent of Rs. 20,00,000/-, which was disallowed by the AO, is allowed as revenue expenditure.” 3.1 Accordingly, we find no reason to differ with the findings of Ld. CIT(A).
However, before parting with this issue it deserves to be directed that the depreciation of the plant and machinery under consideration needs to be quantified after adding the impugned interest. Thus, the Ld.AO must allow the same as depreciation for AY 2017-18.
Order pronounced on 15.07.2025