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Facts
These are cross-appeals for AY 2016-17. The AO made disallowances related to Section 35AD claim, prior period expenses, and interest on work-in-progress (WIP). The CIT(A) deleted the disallowances for Section 35AD and prior period expenses but sustained the disallowance of interest on WIP, leading to appeals from both the Revenue and the Assessee.
Held
The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to delete disallowances for Section 35AD and prior period expenses, citing judicial precedents. For the Assessee's appeal concerning interest on WIP, the Tribunal admitted new evidence and remanded the matter back to the Assessing Officer for a fresh adjudication.
Key Issues
Whether the conditions for Section 35AD deduction were satisfied; the allowability of prior period expenses under the mercantile system; and the disallowance of interest on work-in-progress.
Sections Cited
35AD, 143(3), 145(2), 36(1)(iii)
AI-generated summary — verify with the full judgment below
Order PER LALIET KUMAR, J.M: The captioned appeals are cross appeals filed by the Revenue and the Assessee against the order of the Ld. CIT(A), National Faceless Appeal Centre (NFAC), Delhi. First, we shall deal with the appeal of the Revenue in wherein, following grounds have been raised:
Whether on the facts and in the circumstances of the case, the Ld. CIT(A) is right in law in holding that the assessee satisfied the conditions stipulated under Section 35AD of the Income Tax Act, 1961? Whether on the facts and in the circumstances of the case, the case of the assessee falls within the four corners of proviso to section 35AD of the Income Tax Act, 1961?
2. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) is right in law in allowing the appeal of the assessee in the absence of any conclusion that for the prior period expenses in the mercantile system of accounting, the expenditure is to be charged to the year to which it relates?
It is prayed that the order of the Ld. CIT(A) be set-aside and that of the AO be restored.
2. The appeal by the Revenue is directed against the order of the Ld. Commissioner of Income-tax (Appeals), NFAC, Delhi, dated 26.05.2023 for the assessment year 2016-17. The Assessing Officer had framed assessment u/s 143(3) determining total income of ₹40,59,34,396/- after making disallowances, inter alia, of ₹39,86,09,294/- claimed u/s 35AD, ₹14,12,930/- on account of prior period expenses and ₹59,12,172/- on account of interest on work-in-progress.
3. The Ld. CIT(A) deleted the disallowances made u/s 35AD and prior period expenses, but sustained the disallowance of interest on WIP. Aggrieved, the Revenue has come up in appeal raising grounds that the CIT(A) erred in law in holding that the assessee satisfied the conditions of section 35AD, erred in allowing prior period expenses despite the mercantile system of accounting, and wrongly deleted the additions made by the Assessing Officer. Assessee is in appeal before us on WIP disallowance sustained by Ld. CIT(A) .
At the time of hearing, the Ld. Departmental Representative strongly relied upon the assessment order. He submitted that the Assessing Officer had rightly held that the proviso to section 35AD(1) permits deduction only in respect of expenditure incurred prior to the commencement of the specified business, whereas in the present case the assessee was already carrying on warehousing operations for several years and therefore not entitled to such deduction. He further submitted that the CIT(A) erred in merely following the earlier orders of the Tribunal without appreciating that the Department has filed appeals before the Hon’ble Punjab & Haryana High Court and the matter has not reached finality.
With regard to prior period expenses, the Ld. DR contended that under mercantile system expenditure is to be claimed in the year to which it relates, and the CIT(A) erred in granting relief without any proof of crystallization of liability in the year under consideration.
As regards the disallowance of interest on WIP, it was his argument that the CIT(A) rightly noted that fresh loans were taken during the year and the assessee had failed to furnish evidence to demonstrate that borrowed funds were not utilized for the capital work-in-progress. Accordingly, he urged that the order of the Assessing Officer be restored in toto.
In reply, the Ld. Authorised Representative of the assessee supported the order of the CIT(A). He submitted that the assessee is a State Government undertaking engaged in warehousing of agricultural produce, and section 35AD was specifically enacted to encourage such infrastructural investments. He pointed out that in the assessee’s own case for assessment years 2012-13 to 2014-15, the Chandigarh Bench of the Tribunal had already held that deduction u/s 35AD was allowable, and once such binding precedent exists, the CIT(A) was fully justified in following it.
Regarding prior period expenses, the Ld. AR argued that the liability crystallized only during the year and as per Accounting Standard II notified u/s 145(2), such crystallized liabilities are allowable. He placed reliance on the Tribunal’s earlier orders in assessee’s own case for AYs 2010-11 and 2011-12 wherein similar expenses had been accepted.
On the issue of interest on WIP, it was contended that no fresh borrowings were made for construction of new godowns and the work-in- progress was financed entirely from internal reserves and surplus. He had filled the evidence by way of sanctioned letter issued by bank at pages 24 to 59, and it was prayed that this issue may be remanded back to the file of Assessing Officer for denovo examination
According to him, the interest expenditure pertained to operational godowns and the Assessing Officer wrongly presumed diversion of borrowed funds. Reliance was placed on the judgment of the Hon’ble Punjab & Haryana High Court in Bright Enterprises Pvt. Ltd. (381 ITR 107) for the proposition that where sufficient interest-free funds are available, no disallowance can be made merely on presumption. He therefore prayed for confirmation of relief already granted by the CIT(A) and deletion of the disallowance sustained on account of interest on WIP.
We have carefully considered the rival submissions and perused the record. We note that the CIT(A), while granting relief, has placed reliance on the decisions of the Chandigarh Bench of the Tribunal in assessee’s own case for earlier years, wherein it has been held that the assessee is entitled to deduction u/s 35AD in respect of expenditure incurred on construction of warehouses. For ease of reference, we reproduce paragraph 4.3.1 of the CIT(A)’s order which reads: “The appellant has relied on the fact that the jurisdictional ITAT Chandigarh Bench A in appeal 1214/CHD/2016, 367/CHD/2018 and 390/CHD/2018 for the assessment years 2012-13 to 2014-15 in the case of the appellant itself, has on identical facts and circumstances decided the issue in favour of appellant … as the judgement of the jurisdictional higher court (ITAT Chandigarh) is binding on the first appellate authority, the same is followed and the AO is directed to delete the addition.”
Respectfully following the binding precedent, we see no reason to interfere with the order of the CIT(A) deleting the disallowance made u/s 35AD.
13 Similarly, with regard to prior period expenses, the CIT(A) has followed the decision of the Tribunal in assessee’s own case. The relevant finding at paragraph 5.3.1 of the impugned order notes that the issue already stands covered in favour of the assessee by coordinate Bench decisions. No contrary material or decision has been brought before us by the Revenue. We therefore uphold the order of the CIT(A) deleting the disallowance of prior period expenses. In the result the appeal of the revenue is dismissed.
Accordingly, while the order of the CIT(A) is upheld on the issues of deduction u/s 35AD and prior period expenses, the issue relating to disallowance of interest on WIP is restored to the file of the Assessing Officer with direction to examine the additional evidence and decide the matter afresh in accordance with law after affording adequate opportunity of hearing to the assessee.
In the result, the appeal filed by the Revenue is dismissed, In view of the above discussion, we are of the considered opinion that the order of the CIT(A) does not call for any interference. The appeal filed by the Revenue is accordingly dismissed.
The grounds raised
by the Assessee are as under:
1. That on the facts and in the circumstances of the case the Learned CIT (A) Panchkula has erred in law and facts in upholding the contention of the learned AO in adding Rs.59,12,172/- under section 36(1)(iii) of the Income Tax Act, 1961 inspite of complete documents alongwith reasons and no additional documents called for which is the base of the upholding the contention of the learned AO.
That the appellant reserves the right to add, amend or delete one or more of the grounds of appeal before the appeal is disposed off.
17. As regards the disallowance of interest on WIP, the CIT(A) has given a categorical finding in paragraph 6.3.2 of the order that during the year the assessee’s balance sheet showed an increase in term loans and unsecured loans and that no evidence was produced to show that such borrowings were not utilised for WIP. On these facts, the disallowance was sustained. Before us, however, the assessee has filed additional evidence to demonstrate the availability of interest-free funds and non-utilisation of borrowed funds for WIP by way of a sanctioned letter issued by the bank. In the light of the judgment of the Hon’ble Supreme Court in NTPC Ltd. v. CIT (229 ITR 383), the Tribunal has broad powers to admit a new ground or evidence which goes to the root of the matter and where all relevant facts are already on record. Respectfully following this principle, we admit the additional evidence and consider it and proper to remit the matter back to the file of the Assessing Officer for de novo adjudication after verifying the same. Accordingly, appeal of the Assessee stands allowed for statistical purposes.