Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, MUMBAI BENCH “D” MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI N.K. PRADHAN
ORDER PER N.K. PRADHAN, A.M. This is an appeal filed by the assessee. The relevant assessment year is 2010-11. The appeal is directed against the order of the Commissioner of Income Tax-24, Mumbai [in short ‘CIT(A)’] and arises out of the assessment completed u/s 143(3) of the Income Tax Act 1961, (the ‘Act’).
The ground of appeal
filed by the assessee reads as under: The CIT(A) has erred in law and in facts in upholding the AO’s decision of disallowing the part of interest on working capital loan u/s 36(1)(iii) of the Income Tax Act, 1961 by treating the same as capital in nature.
3. Briefly stated, the facts are that the assessee filed its return of income for the assessment year (AY) 2010-11 on 14.10.2010 declaring total loss at Rs.63,92,200/-. The assessee is engaged in the business of manufacture and sale of knitted socks. During the course of assessment proceedings, the Assessing Officer (AO) on perusal of the audited accounts found that the assessee-company has used funds raised by way of working capital facilities from bank on short term basis aggregating to Rs.2,94,85,640/- for long term investment in fixed assets in factory ; however, no amount of interest was capitalized in the schedule of fixed assets. In response to a query raised by the AO, the assessee submitted that for the purpose of calculation of ‘working capital utilized for the investment in fixed assets in the factory’, debit balance of profit and loss account is taken into account which is incorrect as the same includes depreciation which is not a cash loss and after excluding this, there is no gap as considered in the working. The AO noted that the assessee failed to file any evidence in support of his above contentions. As the assessee failed to file the supporting evidence, the AO worked out the interest amount on working capital utilized for long term investment as under :
“the interest amount required to be capitalized is worked out on the basis of average of opening and closing balance of loan and total interest paid during the year. The working of interest liable to capitalized is hereunder : - Average amount of loan taken during the year {(4,79,82,697 – As on 31.03.2010) + (4,92,11,931 – As on 21.03.2009)} = 4,85,97,314. Total amount of interest paid on account of loan on working facilities = 44,93,951/- which is worked out to 9.24% of average amount of loan. Working of interest amount on ‘working capital utilized for long term investment of Rs.2,94,85,640/- (2,94,85,640 x 9.24%) = 27,24,473/-.” Referring to section 36(1)(iii) of the Act, the AO made a disallowance of the above interest amount of Rs.27,24,473/- being utilized for capital creation.
In appeal, the Ld. CIT(A) agreed with the reasons given by the AO and confirmed the disallowance of Rs.27,24,473/-.
Before us, the Ld. counsel for the assessee submits that the cash flow statement forming a part of the audited financial statements and duly signed by the same auditor clearly indicates that long term funds were not diverted for short term purposes by the assessee. It is further explained by him that the fund flow statement prepared on the basis of the balance sheet for the current year and previous year also show that there was no diversion of working capital towards fixed assets. It is argued by him that without prejudice to the above, section 36(1)(iii) mandates that interest (other than interest for borrowings for acquisition of an asset for extension of an existing business) on borrowings for the purpose of business are deductible in the year in which the interest liability is incurred.
In the alternative, the Ld. counsel files a chart showing working of interest on the basis of number of days till the date asset was put to use. As per the said working the amount of expenditure comes to Rs.14,46,125/-. It is submitted by him that at best the amount of interest would come to Rs.14,46,125/- in place of Rs.27,24,473/- arrived at by the AO. The said working is produced below :
Working of Interest on the basis of Number of Days till the Date Asset was put to use Sr. No Range of Days Amount of Assets Calculation of put to use Interest based on Number of Days 1 0-30 1,184,131 8,993 2 31-60 2,504,700 38,044 3 61-90 2,012,828 45,859 4 91-100 1,982,817 50,195 5 101-110 114,500 3,188 6 111-130 1,034,283 34,038 7 131-150 271,236 10,300 8 151-160 189,314 7,668 9 161-170 48,531 2,089 10 171-180 22,192 1,011 11 181-190 360,602 17,344 12 191-200 - - 13 201-210 - -
14 211-220 2,556,028 142,353 15 221-230 716,403 41,712 16 231-240 63,978 3,887 17 241-250 16,424,097 1,039,443 Total 29,485,640 1,446,125 Notes (i) Short term Working Capital Loan treated Rs 2,94,85,640/- by AO as used for Fixed Assets (ii) Rate of Interest determined by the A.6 9.24% (iii) Amount of Interest treated as Capital Rs 27,24,473/- Expenditure by the AO (iv) Amount of interest as per Working Rs.14,46,125/-
On the other hand, the Ld. DR supports the order passed by the AO and then confirmed by the Ld. CIT(A). In this regard, reference is made by him to Serial No. (xvii) of Annexure to Auditor’s Report (paragraph 3). It is thus stated by him that as the working of interest by the AO is based on sound reasoning, the same may be confirmed.
We have heard the rival submissions and perused the relevant materials on record. The fact remains that at Serial No. (xvii) to Annexure to paragraph 3 of the Auditor’s Report, we come across the following observation of the Auditor
“(xvii) According to the information and explanations given to us and on overall examination of the balance sheet and cash flow statement of the Company, we report that the Company has used funds raised by way of working capital facilities from bank on short term basis, aggregating to Rs.29,485,640 for long term investment in fixed assets in factory.” In view of the above comment by the Auditor, there is merit in the observation of the AO to rework the interest amount on working capital for long term investment. However, we find that there is more merit in the working of interest on the basis of number of days till the date asset was put to use, as filed by the Ld. counsel computing it at Rs.14,46,125/-. But this working was neither available to the AO nor to the Ld. CIT(A). Therefore, to arrive at a proper finding, we set aside the order of the Ld. CIT(A) and restore the matter to the file of the AO to make an order afresh by working interest on the basis of number of days till the date asset was put to use. We direct the assessee to file the relevant documents/evidence before the AO in this regard. The AO would give reasonable opportunity to the assessee before finalizing the order. As the matter has been restored to the file of the AO, we are not adverting to the case-laws relied on by both sides.