M/S. ROBOSOFT TECHNOLOGIES PVT. LTD.,,UDUPI vs. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE - 1, UDUPI

IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : BANGALORE BEFORE SHRI ARUN KUMAR GARODIA, ACCOUNTANT MEMBER AND SHRI PAVAN KUMAR GADALE, JUDICIAL MEMBER

ITA Nos. 497 to 500/Bang/2017 Assessment Years : 2010-11 to 2013-14 M/s. Robosoft Technologies The Deputy Commissioner Pvt. Ltd., of Income Tax, 217, N.H. 17, Santhekatte, Vs. Circle – 1, Udupi – 576 105. Udupi. PAN: AACCR0768B APPELLANT RESPONDENT Assessee by : Smt. Sheetal Borkar, Advocate Revenue by : Shri Shahnawaz-ul-Rahman, JCIT (DR) Date of hearing : 05.09.2019 Date of Pronouncement : 25.10.2019 O R D E R Per Shri A.K. Garodia, Accountant Member All these four appeals are filed by the assessee which are directed against four separate orders of ld. CIT(A), Mangaluru out of which, one order is dated 30.12.2016 for Assessment Year 2010-11, one order is dated 29.12.2016 for Assessment Year 2011-12 and two orders are dated 10.01.2017 for Assessment Years 2012-13 and 2013-14. All these appeals were heard together and are being disposed of by way of this common order for the sake of convenience. 2. The grounds raised by the assessee for Assessment Year 2010-11 in ITA No. 497/Bang/2017 are as under. “1. The order of the learned Commissioner of Income tax (Appeals), Mangaluru is opposed to law and on facts of the case. 2. Disallowance of interest paid attributable for capital work-in- progress: (a) The learned CIT (Appeals), Mangaluru has erred in law in upholding the Assessing Officer disallowance made amounting to Rs.23,47,900/-, being interest paid claimed as revenue expenditure under section 36(1)(iii) of the Income tax Act. (b) The learned CIT (Appeals), Mangaluru has failed to comprehend the fact that, AS 16 does not permit capitalization of interest when the suspension of the work is not temporary.

ITA Nos. 497 to 500/Bang/2017 Page 2 of 12 (c) The leaned CIT (Appeals), Mangaluru has erred in law in holding that, the case laws relied on by the appellant were prior to the insertion of proviso to section 36(1)(iii) which was introduced with effect from 1.4.2004. 3. The Appellant craves leave to add, amend or alter any of the forgoing grounds. 4. For these and any other grounds that may be urged before the Hon'ble ITAT, it is prayed that the Hon'ble ITAT may allow the appeal with cost.” 3. The grounds raised by the assessee for Assessment Year 2011-12 in ITA No. 498/Bang/2017 are as under. “1. The order of the learned Commissioner of Income tax (Appeals), Mangaluru is opposed to law and on facts of the case. 2. Disallowance of deduction claimed under section 10A: (a) The learned CIT (Appeals), Mangaluru has erred in law in upholding the disallowance of deduction claimed under section 10A for the assessment year 2011-2012 by holding that, appellant is entitled for deduction up to the assessment year 2010-11 only. (b) The learned CIT (Appeals), Mangaluru has grossly ignored the following decisions and the Board Circular relied on by the Appellant. i. CIT Vs. Expert Outsource (P) Limited (2012) (20 taxmann.com 481) (Kar) ii. ITO Vs. Expo Packaging (78 Taxman 212) ITAT Ahmedabad Bench. iii. Moser Baer India Limited Vs. JCIT (108 ITD 80) ITAT Delhi Bench. iv. CBDT Circular No.308, dated 29.6.1981. (c) The learned CIT (Appeals), Mangaluru has failed to comprehend the fact that, two financial years during which the company has incurred losses and no relief under section 10A was claimed in the period of ten consecutive years during which the relief is available. (d) The learned CIT (Appeals), Mangaluru has failed to appreciate the fact that, virtually the new undertaking has come into being during 2006-2007 and erred in holding that, the claim of the appellant that a new undertaking has come in to being is devoid of merit, whereas he himself has held for the earlier assessment year 2010-2011 the undertaking has started from the assessment year 2001-2002 (vide his order dated 30.12.2016 in ITA No.3/UDP/CIT(A) MNG/2013-14). 3. Disallowance of interest paid attributable for capital work-in- progress: (a) The learned CIT (Appeals), Mangaluru has erred in law in upholding the Assessing Officer disallowance made amounting to Rs.23,47,900/- as against a sum of Rs.13,29,744/-claimed by the Appellant, being interest paid claimed as revenue expenditure under section 36(1)(iii) of the Income tax Act. (b) The learned CIT (Appeals), Mangaluru has failed to comprehend the fact that, AS 16 does not permit capitalization of interest when the

ITA Nos. 497 to 500/Bang/2017 Page 3 of 12 suspension of the work is not temporary. (c) The leaned CIT (Appeals), Mangaluru has erred in law in holding that, the case laws relied on by the appellant were prior to the insertion of proviso to section 36(1)(iii) which was introduced with effect from 1.4.2004. 4. The Appellant craves leave to add, amend or alter any of the forgoing grounds. 5. For these and any other grounds that may be urged before the Hon'ble ITAT, it is prayed that the Hon'ble ITAT may allow the appeal with cost.” 4. The grounds raised by the assessee for Assessment Year 2012-13 in ITA No. 499/Bang/2017 are as under. “1. The order of the learned Commissioner of Income tax (Appeals), Mangaluru is opposed to law and on facts of the case. 2. Disallowance of interest paid attributable for capital work-in- progress: (a) The learned CIT (Appeals), Mangaluru has erred in law in upholding the Assessing Officer disallowance made amounting to Rs.23,47,900/- as against a sum of Rs.10,72,355/-claimed by the Appellant, being interest paid claimed as revenue expenditure under section 36(1)(iii) of the Income tax Act. (b) The learned CIT (Appeals), Mangaluru has failed to comprehend the fact that, AS 16 does not permit capitalization of interest when the suspension of the work is not temporary. (c) The leaned CIT (Appeals), Mangaluru has erred in law in holding that, the case laws relied on by the appellant were prior to the insertion of proviso to section 36(1)(iii) which was introduced with effect from 1.4.2004. 3. The Appellant craves leave to add, amend or alter any of the forgoing grounds. 4. For these and any other grounds that may be urged before the Hon'ble ITAT, it is prayed that the Hon'ble ITAT may allow the appeal with cost.” 5. The grounds raised by the assessee for Assessment Year 2013-14 in ITA No. 500/Bang/2017 are as under. “1. The order of the learned Commissioner of Income tax (Appeals), Mangaluru is opposed to law and on facts of the case. 2. Disallowance of interest paid attributable for capital work-in- progress: (a) The learned CIT (Appeals), Mangaluru has erred in law in upholding the Assessing Officer disallowance made amounting to Rs.25,47,339/- as against a sum of Rs.8,23,893/-claimed by the Appellant, being interest paid claimed as revenue expenditure under section 36(1)(iii) of the Income tax Act. (b) The learned CIT (Appeals), Mangaluru has failed to comprehend the fact that, AS 16 does not permit capitalization of interest when the suspension of the work is not temporary.

ITA Nos. 497 to 500/Bang/2017 Page 4 of 12 (c) The leaned CIT (Appeals), Mangaluru has erred in law in holding that, the case laws relied on by the appellant were prior to the insertion of proviso to section 36(1)(iii) which was introduced with effect from 1.4.2004. 3. The Appellant craves leave to add, amend or alter any of the forgoing grounds. 4. For these and any other grounds that may be urged before the Hon'ble ITAT, it is prayed that the Hon'ble ITAT may allow the appeal with cost.” 6. In Assessment Year 2010-11, para nos. 4 to 4.2 of the assessment order are relevant regarding the disallowance made by the AO out of interest expenditure by invoking the proviso to section 36(1)(iii). For ready reference, these paras from the assessment order for Assessment Year 2010-11 are reproduced hereinbelow. “4. Disallowance of Interest attributable to capital work in progress: 4.1 As per the 'significant accounting policies' annexed to the accounts, the expenditure incurred on fixed assets and their purchase related expenses are capitalized. If the work is incomplete or the asset is not ready for use, the expenditure is debited to capital work in progress. However, as seen from the accounts, during the year the assessee has charged the borrowing cost attributable to capital work in progress (building) of Rs 23,47,900/- to P & L account. When asked to show cause why the same should not be capitalized, the assessee vide letter dated 08.03.2013 submitted as under : " The Company had been capitalizing interest on term loan which is attributable to capital work in progress (Building) for the FYs 2007-08 & 2008-09. However, during the current year , company has charged such interest on Term Loan to P & L account, as there was no progress/activity in the construction of building, during the FY 2007-08 to 2009-10. This change in accounting treatment is and in accordance with and to comply with the provisions of accounting standard 16- Borrowing cost, issued by ICA'. As per Accounting Standard — 16 on borrowing costs, capitalization of borrowing costs is not suspended when there is a temporary delay. In FY 2007-08 and FY 2008-09, management of the company was of the opinion that the delay in completion of the Project was due to technical and administrative reasons and hence the capitalization of proportionate interest cost pertaining to capital work in progress could be continued. However, from FY 2009-10 onwards as the delay was getting beyond a reasonable period, the capitalization of interest cost pertaining to the 'capital work in progress' was stopped." 4.2 The above explanation of the assessee is not acceptable. As per AS-16 capitalization of borrowing costs is not normally suspended during a period when substantial technical and administrative work is being carried out. Capitalization of borrowing costs is also not suspended when a temporary delay is a necessary part of the process

ITA Nos. 497 to 500/Bang/2017 Page 5 of 12 of getting an asset ready for its intended use or sale. Regardless of the treatment by the assessee in its books, it is to be noted that expenses have to be allocated as per its nature i.e., whether it is routine business expenses or an expense which has some specific nature. Proviso to section 36(1)(iii) stipulates that any amount of the interest paid in respect of capital borrowed for acquisition of an asset for extension of existing business, whether capitalized in the books of account or not, for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall riot be allowed as deduction. Explanation 8 below 43(1) also stipulates that interest paid/payable in connection with the acquisition of an asset which is relatable to period before such asset is first put to use shall be included in actual cost. The assessee company had been capitalizing interest on term loan which is attributable to capital work in progress (Building) till the Financial Year 2008-09. For the reasons stated above, during the current year also these expenses have to be loaded to capital work in progress and not be charged to P & L account. The borrowing cost written off during the year Rs. 23,47,900/- is therefore disallowed.” 7. Being aggrieved, the assessee carried the matter in appeal before ld. CIT(A). This issue was decided by ld. CIT(A) against the assessee as per para no. 6.4 of his order in that year which is also reproduced hereinbelow for ready reference. “6.4 The submissions of the appellant were considered. The proviso to 36(1)(iii) was introduced w.e.f 01.04.2004. The cases relied upon by the appellant were prior to the insertion of proviso. The appellant repeated the same submissions which were placed before the AO. The AO dealt with all submissions of the appellant in the order and rightly rejected the claim of the appellant. There is no reason to interfere with the assessment order. Accordingly, the grounds on this issue are rejected.” 8. Now the assessee is in further appeal before us. Similarly, in Assessment Year 2011-12 also, disallowance was made by the AO on the basis of its observations in para no. B.4 of its order available on pages 11 and 12 of the assessment order for Assessment Year 2011-12. These paras are also reproduced hereinbelow for ready reference. “B.4. Regardless of the treatment by the assessee in its books it is to be noted that expenses have to be allocated as per its nature i.e., whether it is routine business expenses or an expense which has some specific nature. Proviso to section 36(1)(iii) stipulates that any amount of the interest paid in respect of capital borrowed for acquisition of an asset for extension of existing business, whether capitalized in the books of accounts or not, for any period beginning

ITA Nos. 497 to 500/Bang/2017 Page 6 of 12 from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction. Explanation 8 below 43(1) also stipulates that interest paid/payable in connection with the acquisition of an asset which is relatable to period before such asset is first put to use shall be included in actual cost. The assessee company had been capitalizing interest on term loan which is attributable to capital work in progress (Building) till the FY 2008-09. For the reasons stated above, during the current year also these expenses have to be loaded to capital work in progress and not be charged to P&L Account. In the submission the assessee has shown the interest amount attributable to capital work in progress to approximately Rs.13,29,744/- but the ledger account or the basis of calculation of this interest has not been filed. It is found from the assessment order for the last FY i.e., AY 2010-11 that the AO had disallowed Rs.23,47,900/- as interest related to the capital work in progress which has been charged to the P&L A/c. Since the capital work in progress remains the same in this FY also hence the interest of Rs.23,47,900/- is disallowed out of the interest debited in the account. Hence the addition under this head is Rs,23,47,900/-.” 9. He has also referred to Explanation 8 below section 43(1) of the IT Act. The AO has also noted in the para reproduced above that assessee company had been capitalizing interest on term loan which is attributable to capital work in progress (Building) till the FY 2008-09. In this year also, the assessee carried the matter in appeal before ld. CIT(A) but without success. Before ld. CIT(A) in this year, this was the specific submission made by the assessee that proviso to section 36(1)(iii) is applicable only in the case of acquisition of asset in connection with extension of the business of the assessee and if the assets are required in ordinary course of carrying on of business, there is no bar on allowability of the claim of interest even if the same is related to the period prior to the date on which the asset is first put to use. In spite of this specific submission made before ld. CIT(A), the issue was decided by ld. CIT(A) as per para no. 6.5 of his order against the assessee. For ready reference, this para is reproduced from the order of ld. CIT(A) for Assessment Year 2011-12. “6.5 The submissions of the appellant were considered. The proviso to 36(1)(iii) was introduced w.e.f 01.04.2004. The cases relied upon by the appellant were prior to the insertion of proviso. The appellant repeated the same submissions which were placed before the AO. The AO dealt with all submissions of the appellant in the order and rightly rejected the claim of the appellant. There is no reason to interfere with the assessment order. Accordingly, the grounds on this issue are

ITA Nos. 497 to 500/Bang/2017 Page 7 of 12 rejected.” 10. In the remaining two years also, the facts are same and in these two years, the ld. CIT(A) has followed his own order for Assessment Years 2010-11 and 2011-12. Now the assessee is in further appeal before us in all these four years. 11. It is submitted by ld. AR of assessee that the proviso to section 36(1)(iii) was inserted by Finance Act, 2003 w.e.f. 01.04.2004 and the same was amended by the Finance Act, 2015 w.e.f. 01.04.2016 and as per the amendment, these words “for extension of existing business or profession” were omitted from this proviso. It was submitted that hence, before amendment w.e.f. 01.04.2016, this proviso is applicable only in those cases where the borrowed funds are used for acquisition of an asset for extension of existing business or profession. T was submitted that in the present case, there is no finding of any of the authorities below that the assets in question were acquired for extension of existing business of the assessee and therefore, this proviso is not applicable. The ld. DR of revenue supported the orders of authorities below.

ITA Nos. 497 to 500/Bang/2017 Page 8 of 12 2. The Hon'ble ITAT Delhi in AT 86 T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) 86 ITA NO 2518/Del/2014 (D) has also followed the decision of the Hon'ble Punjab and Haryana High Court in the case of M/s Nahar Poly Films Ltd.(supra). Copies of the judgements in the cases of Nahar Poly Films Ltd.(supra) and AT 86 T Global Network Services (India) Pvt Ltd (supra) are submitted herewith for the kind consideration of this Hon'ble Tribunal”

ITA Nos. 497 to 500/Bang/2017 Page 9 of 12 15. We have considered the rival submissions. We find that as per the relevant paras of the assessment order for Assessment Years 2010-11 and 2011-12 reproduced above, it is seen that although the AO has noted that as per the proviso to section 36(1)(iii), any amount of interest paid in respect of capital borrowed for acquisition of an asset for extension of existing business, whether capitalized in the books of accounts or not, for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use but there is no finding that in the present case also, the asset in question were acquired for extension/expansion of existing business. In the order of ld. CIT(A) also, there is no finding although a specific submission was made before ld. CIT(A) that proviso to section 36(1)(iii) is applicable only to extension of existing business. For ready reference, we reproduce the proviso to section 36(1)(iii) as introduced by Finance Act, 2003 w.e.f. 01.04.2004. We also reproduce the amended provisions of said proviso as amended by the Finance Act, 2015 w.e.f. 01.04.016. Both are as under. “Other deductions. 36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28— (iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession : Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalised in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction. Explanation.—Recurring subscriptions paid periodically by shareholders, or subscribers in Mutual Benefit Societies which fulfil such conditions as may be prescribed, shall be deemed to be capital borrowed within the meaning of this clause;” Amended provisions “Other deductions. 36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28— (iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession :

ITA Nos. 497 to 500/Bang/2017 Page 10 of 12 Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset (whether capitalised in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction. Explanation.—Recurring subscriptions paid periodically by shareholders, or subscribers in Mutual Benefit Societies which fulfil such conditions as may be prescribed, shall be deemed to be capital borrowed within the meaning of this clause;” 16. Hence, it is seen that in the present case, the unamended provisions are applicable because the amended provisions are applicable w.e.f. 01.04.2016 i.e. Assessment Year 2016-17 and thereafter. Hence there has to be a specific finding that the assets in question in the present case were acquired for extension/expansion of existing business. We have also reproduced the relevant portion of the assessment order as well as the order of ld. CIT(A) and we find that none of the authorities below has given any such finding that the asset in question were acquired for extension/expansion of existing business of the assessee. In the statement of facts filed by the assessee before ld. CIT(A) for Assessment Year 2010- 11, it was specifically submitted by the assessee that the assessee was carrying on its business in leased premises scattered over three places and for proper control, it was decided to purchase land and construct one building thereon to consolidate its activities at one place. These Statement of Facts are reproduced hereinbelow for ready reference:- “II. DEDUCTIBILITY OF INTEREST Your Appellant was carrying on its. business in leased premises scattered over three places. For proper control, it was decided to purchase land and construct one building thereon to consolidate its activities at one place. The unit was shifted to new building from 01/11/2006. A larger than required building was constructed taking into account future business development. Basement, ground and first floors were occupied and the rest was not actually put to use. The management was of the opinion that business will develop and subsequent floors will be actually used within a short time. Capitalisation of interest on term loan relatable to capital work in process was done from 01/11/2006 to 31/03/2009. During the year 2009-10 the management decided to charge the relatable interest in the unused building to revenue. In hindsight even now that portion is not used for business.”

ITA Nos. 497 to 500/Bang/2017 Page 11 of 12 17. From these Statement of facts, it comes out that the purchase of land was for consolidation of various units at one place and not for extension/expansion of existing business and although it is a fact that some portion of building was not completed and was under construction but this is not the fact that the building was not put to use at all. In fact, three units were shifted to this new building w. e. f. 01.11.2006 as stated in Statement of Facts as reproduced above and this is not a finding of CIT (A) that this fact is incorrect. Learned DR also has also not made out a case that this fact is not correct. Hence it comes out that there is no extension/expansion and it is a case of consolidation of three units at one place. Constructed portion of building is used also and hence, in our considered opinion, under these facts, the proviso to section 36 (1) (iii) is not applicable and therefore, the disallowance is not justified and we delete the same in all four years. Regarding the judgments cited by the learned DR of the revenue, we find that the same are not applicable in the facts of the present case. 18. In Assessment Year 2011-12, the issue raised as per ground no. 2 is regarding upholding of disallowance of deduction claimed u/s. 10A of the IT Act for Assessment Year 2011-12 by holding that assessee is entitled for deduction up to Assessment Year 2010-11 only. This issue is in Assessment Year 2011-12 only and not in any other year. Regarding this issue, it was submitted by ld. AR of assessee that written submissions filed by the assessee before CIT (A) are reproduced by him in Para 5.5 on pages 4 to 12 of his order. Our attention was drawn to page 4 of his order and it was pointed out that this was one of the submissions that on 29.06.2005, STPI accorded approval for the proposed taking over of STP activities/operations of the proprietorship concern by the assessee company and thereafter, the said proprietorship concern was taken over by the assessee company on 01.07.2005 and thereafter, the assessee company made new investments in such a manner as resulting in a new undertaking for the purpose of section 10A. It was submitted that the decision of CIT (A) on this aspect is contained in Para 5.15 of his order and in this para, he has proceeded on this basis that in Grounds of appeal, this is the claim of the assessee that virtually, a new undertaking has come into being during 2006

ITA Nos. 497 to 500/Bang/2017 Page 12 of 12 – 07. It was submitted that this is true that in ground No. 1 as reproduced by CIT (A) in Para 5.1 of his order, it is stated that virtually, a new undertaking has come into being during 2006 – 07 but in the written submissions reproduced by CIT (A) in Para 5.5 of his order, this categorical claim was made that new investments in such a manner as resulting in a new undertaking for the purpose of section 10A. It was submitted that in view of these facts, this issue should be restored to CIT (A) for a fresh decision by way of a speaking order after considering the written submissions. Learned DR of the revenue supported the order of CIT (A). 19. We have considered the rival submissions. We feel it proper to restore back this issue to CIT (A) for a fresh decision by way of a speaking order after considering the written submissions and after providing adequate opportunity of being heard to both sides. We order accordingly. 20. In the result, the four appeals filed by the assessee are allowed in the terms indicated above. Order pronounced in the open court on the date mentioned on the caption page.

Sd/- Sd/- (PAVAN KUMAR GADALE) (ARUN KUMAR GARODIA) Judicial Member Accountant Member Bangalore, Dated, the 25th October, 2019. /MS/ Copy to: 1. Appellant 4. CIT(A) 2. Respondent 5. DR, ITAT, Bangalore 3. CIT 6. Guard file By order

Assistant Registrar, Income Tax Appellate Tribunal, Bangalore.