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Income Tax Appellate Tribunal, “C” BENCH, AHMEDABAD
Before: S/SHRI PRAMOD M. JAGTAP & T.R. SENTHIL KUMAR
आयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरण, अहमदाबाद �यायपीठ आयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरण अहमदाबाद �यायपीठ अहमदाबाद �यायपीठ ‘C’ अहमदाबाद। अहमदाबाद �यायपीठ अहमदाबाद। अहमदाबाद। अहमदाबाद। IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH, AHMEDABAD (Conducted Through Virtual Court) ] ] BEFORE S/SHRI PRAMOD M. JAGTAP, VICE PRESIDENT AND T.R. SENTHIL KUMAR, JUDICIAL MEMBER ITA No.993/Ahd/2016 Assessment Year :2012-13 Aarvee Denims & Exports DCIT, Cir.1(1)(1) 191, Shahwadi, Vs Ahmedabad. Nr.Old Octroi Naka Narol-Sarkhej Highway Ahmedabad 382 405. PAN : AABCA 6019 P ITA No.1553/Ahd/2016 Assessment Year : 2012-13 DCIT, Cir.1(1)(1) Aarvee Denims & Exports Ahmedabad. Vs Ahmedabad 382 405. PAN : AABCA 6019 P अपीलाथ�/ (Appellant) �� यथ�/(Respondent) Assessee by : Shri D.K. Parikh, AR Revenue by : Shri V.K. Singh, Sr.DR सुनवाई क� तार�ख/Date of Hearing : 24/02/2022 घोषणा क� तार�ख /Date of Pronouncement: 30/03/2022 आदेश/O R D E R PER T.R. SENTHIL KUMAR, JUDICIAL MEMBER: These cross appeals filed by the assessee and the Revenue are against order dated 30.3.2016 passed by Ld.Commissioner of Income-tax (Appeals)-1, Ahmedabad [for short “Ld.CIT(A)] in appeal No.CIT(A)-1/DCIT, Cir.1(1)(1)/738/2014-15 relating to the assessment year 2012-13. We dispose of both the appeals by this common order.
First we take assessee’s appeal in ITA No.993/Ahd/2016.
In this appeal, the assessee has raised three grounds. Ground no.1, included five sub-grounds which are descriptive and argumentative
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in nature. Admittedly, only effective issue involved in this ground is that the ld.CIT(A) has erred in law and on facts in confirming addition of interest amounting to Rs.1,97,17,500/-, which was paid as advance to one Shri Ravindersingh Mital for purchase of land.
Facts in brief, as emerging out from the relevant orders of the Revenue authorities, the assessee company is engaged in manufacturing of fabrics, cotton yarn and power generation (wind mill & power plant). The assessee has filed return of income on 28.9.2012 declaring total income of Rs.13,35,69,580/-. The return was processed under section 143(1), and thereafter the case of the assessee was selected for scrutiny assessment by issuance of notice under section 143(2), which was served upon the assessee. During the assessment proceedings, from the details submitted by the assessee, the ld.AO noticed that the assessee had given Rs.3,61,50,000/- as advance to one Shri Ravindrasingh Mittal for a land deal. AO further noticed that as per the record no interest has been charged on such advances, nor land deal has been materialized. On a show cause notice, it was explained by the assessee that the assessee has entered into a sale agreement dated 20.10.2007 with Shri Ravindrasingh Mittal and made on advance of Rs.13,14,50,000/-for purchase of land at Mouje Sahawadi, Tal. City, Dist. Ahmedabad admeasuring 64977 sq.yards at the rate of 3500/- per square yard. Since the said seller failed to deliver necessary documents viz. title clearance etc. to the assessee within the time frame, deal could not be materialized, and the assessee was compelled to revoke the agreement to sell, and by legal notice demanded refund of advance money. Assessee explained that since terms of agreement did not contain charging of interest in the event of non- performance, the assessee-company has no right to ask for interest from the party. However, the ld.AO did not satisfy with the explanation of the assessee. He was of the view that looking to the size of advance, the assessee failed to explain the business expediency of providing interest free advances to the seller, without any reason. Therefore, the ld.AO
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disbelieved execution of the alleged sale agreement, legal notice and the termination deed filed by the assessee, and he presumed that the assessee might have received some unaccounted consideration in lieu of such interest free advances. He accordingly worked out addition Rs.1,97,17,500/- on account of interest payment at the rate of 15% of the whole advance payment of Rs.13,14,50,000/-. This addition was challenged before the ld.CIT(A). Before the ld.CIT(A), it was submitted by the assessee that the ld.AO has failed to bring any material on record to suggest that impugned advance made by the assessee to the seller was not for the business purpose nor proved business expediency. Advances were made to the seller from 2003 to 2007, but in all these years no such dispute was raised by the Department. Land was to be purchased for business expansion and advances were made during the financial year 2007-08 and 2008-09 out of company’s capital and free reserves. It was submitted that aggregate amount of capital and free reserves as on 31.3.2007 was at Rs.181,37,29,753/-, and the AO failed to point out any nexus between interest bearing funds and the advances given for the purchase of land. Further, the issue of charging of interest has not been raised in earlier years or in the subsequent year where assessments were completed under section 143(3) of the Act. It was further submitted that opening balance of advances as on 1.4.2011 was Rs.13,31,50,000/-, out of which the assessee has received Rs.9,70,00,000/- in the month of march, 2012, and the balance amount advance of Rs.3,61,50,000/- was received in the month of April, 2012 in terms of mutual agreement between the parties for cancellation of agreement of sale. Therefore, the decision of the ld.AO in making addition on account of interest expenditure was not based on the facts and figure on record, rather on some extraneous consideration, which has no reason or justification. However, the assessee made an alternative claim that even notional interest charged by the AO at 15% was very much on higher side, as the AO has charged on the basis of legal notice dated 4.3.2010 issued by the assessee to the seller. At the most it should be 9.75% p.a. because this
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rate was charged by the AO while disallowing interest in respect of capital work-in-progress. Applying the same principle, the ld.AO should have calculated the interest at the rate of 9.75%p.a. on the outstanding advance as on 1.4.2011 till the receipt only. In this way, the assessee submitted that the amount of interest would be Rs.58,38,468/- as against Rs.1,93,17,500/-.
5 On the other hand, the ld.DR supported the orders of the Revenue authorities and pleaded to sustain the addition.
We have considered rival submissions; perused the material available on record, and also orders of the authorities below. Issue before us is, whether the assessee is liable to be charged with interest on account of advance payment of Rs.13,14,50,000/- made to the seller viz. Ravindrasingh Mittal since 2007 for purchase of land situated at Mouje Sahahwadi, Tal. City, Dist. Ahmedabad admeasuring 64977 sq.yards at the rate of 3500/- per square yard, which ultimately could not materialize due to non-performance of terms of agreement ? The case of the assessee is that the impugned land dealing could not be materialized due to the fact that seller could not provide title clearance certificate in time, and therefore, legal notice issued was to the assessee demanding refund of advance money paid with interest. Thereafter a termination deed dated 5.3.2012 was signed by both the parties. During the previous year the assessee-company has received back an amount of Rs.9,70,00,000/- in March, 2012 and the balance amount of Rs.3,61,50,000/- was received in the month of April, 2012. Since there was a substantial delay, and the fact that since the seller was not able to perform his contractual obligation, as a prudent businessman, the assessee-company had to settle and satisfy with the principal amount, otherwise its claim would be mired in legal imbroglio. Agreement to sell did not stipulate charging of any interest in the event of non-performance. The allegation of the Department was that assessee has diverted interest bearing funds to non-
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business purpose, and the alleged documents viz. agreement to sell, termination deed etc. are fictitious and concocted for concealing the interest payment received by the assessee, but the same was not proved by some concrete evidence. The assessee has demonstrated before the appellate authority that the assessee has sufficient interest free funds available with it so as to make such dealing, which was not denied by the authority. Even in the earlier years the department has never questioned business advances shown in the books of accounts. In fact, the assessee did make such advances out of the interest free funds in the financial years 2007-08 and 2008-09 for the purchases of the land for the business expansion, which fact has also not been denied by the Department. We are of the view that the case of the department was not borne out from any material evidences, rather out of assumption that the assessee would have earned interest out of such payment and advances were made out of interest bearing fund. But where is the proof to make such an assumption ? We are unable to accept this view of the department in the absence of any piece of evidence. The assessee all through contended that the advances were made out of interest free funds, and because of substantial delay in execution and likely non-performance of the deal, the assessee has to forgo the interest, and accept return of money advanced. It is trite law that AO cannot question the reasonableness by putting himself in the arm-chair of the businessman and assume status or character of the assessee. It is for the assessee to decide, whether the expenses should be incurred in the course of his business. Therefore, the action of both the authorities has no legal justification. In view of the above, and after considering the facts in entirety, we do not find any merit in the action of the Revenue authorities in making addition of interest charge on the impugned advances made to the seller. Accordingly, we delete the impugned addition, and allow this ground of appeal.
Now we take ground no.2. This ground reads as under: “Quantum of Interest:
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Without prejudice to the above, the ld.CIT(A) has erred in law and on facts in not considering and adjudicating the alternative ground of appeal of the appellant that the ld.DCIT wrongly calculated interest at the flat rate of 15% on the amount of Rs.13,14,50,000/- when the self same AO calculated interest at 9.75% while disallowing interest in respect of capital work-in-progress and that the same should be only on 49.75% of the advances outstanding as on 1-4-2011 till the date of receipt only.”
Since we have deleted impugned addition of Rs.1,97,17,500/- on account of interest on advance made to the seller, while dealing with ground no.1 (supra), this ground becomes infructous, and accordingly dismissed.
So far as third ground regarding disallowance of employee’s contribution towards ESIC of Rs.2,59,892/-, at the time of hearing, the ld.counsel for the assessee has not pressed the same for adjudication, hence this ground is dismissed for want of prosecution.
In the result, appeal of the assessee is partly allowed.
Now we take Revenue’s appeal in ITA No.1553/Ahd/2016.
Ground No.1: In this ground, the Revenue is aggrieved by the action of the ld.CIT(A) in deleting the addition of Rs.4,41,00,700/- made on account of disallowance of deduction claimed under section 80IA of the Act.
Facts in brief are that during the assessment proceedings, it was revealed to the AO that the assessee has claimed deduction under section 80IA of Rs,4,41,00,700/- in respect of two units i.e. Windmill Unit-1 and Windmill Unit-II. The assessee was asked to furnish details and justification for claiming the deduction. It was explained by the assessee as per the amendment to section 80IA(2) of the Act, once the assessee has opted for initial year, he is entitled to claim deduction under section 80IA
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for ten consecutive years out of fifteen years slab chosen by him, and losses of the years starting from the initial assessment year alone are to be brought forward as stipulated in section 80IA(5) of the Act. The ld.AO did not accept this contention of the assessee, he inter alia held that the assessee was required to set off losses of the eligible business against the subsequent year income of the eligible business even though these were set off in earlier years. Therefore, the quantum of deduction under section 80IA has to be computed after deduction of the notional brought forward loss, even though they have been set off against earlier years’ income. Accordingly, the ld.AO worked out amount available for deduction under section 80IA at NIL. Aggrieved by the action of the AO, the assessee preferred appeal before the ld.CIT(A), who after considering the claim of the assessee, and relying upon various case laws, allowed the claim of the assessee. Not satisfied with the order of the ld.CIT(A) is Revenue is now before the Tribunal.
Both the parties relied upon respective orders of the Revenue authorities and prayed for allowing their respective claims. Further, the ld.counsel for the assessee to support its claim also relied upon the judgment of Hon’ble Madras High Court in the case of Valaudhswamu Spg. Mills, 340 ITR 477, decision of ITAT in the case of Sadbhav Engg. Ltd., 153 ITD 2334 which followed Hon’ble Madras High Court decision, and CBDT Circular No.1/2016 dated 15.2.2016.
We have considered rival submissions and gone through the orders of the Revenue authorities, and also certain case laws cited by the parties. The issue before us is, whether the profit earned by the assessee during the assessment year 2012-13 would be entitled for deduction under section 80IA of the Act without deducting the losses, which were absorbed in the earlier years or not. With little effort, we would say that the issue is no longer resintegra in view of the judgment of the Madras High Court in a
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case of Velayudhaswamy Spinning Mills P. Ltd. & Sudan Spinning Mills (P). Ltd. (2012) 340 ITR 477. The Hon’ble Court observed that - “From a readying of the above, it is clear that the eligible business were the only source of income, during the previous year relevant to the initial assessment year and every subsequent assessment years. When the assessee exercises the option, the only losses of the years beginning from initial assessment year alone are to be brought forward and no losses of earlier years which were already set off against the income of the assessee. Looking forward to a period of ten years from the initial assessment is contemplated. It does not allow the Revenue to look backward and find out if there is any loss of earlier years and bring forward notionally even though the same were set off against other income of the assessee and the set off against the current income of the eligible business. Once the set off is taken place in earlier year against the other income of the assessee, the Revenue cannot rework the set off amount and bring it notionally. A fiction created in subsection does not contemplates to bring set off amount notionally. The fiction is created only for the limited purpose and the same cannot be extended beyond the purpose for which it is created.”
The above judgment of the Madras High Court has been confirmed by the Apex Court in Special Leave Petition NO.33475 of 2016.
In the light of the above, we find that the ld.CIT(A) while allowing the claim of deduction under section 80IA of the Act, has also considered the judgment of Hon’ble Madras High Court cited (supra). Further more, the CBDT vide Cir.No.1/2016 dated 15.2.2016 put to rest this issue and directed the DR’s not to pursue this issue in pending cases. Therefore, we do not find any infirmity in his order, which is upheld, and this ground of Revenue is dismissed.
Now we would take ground no.2: In this ground, the grievance of the Revenue is that the ld.CIT(A) has erred in deleting addition of Rs.15,22,527/- made on account of disallowance under section 40(a)(ia) of the Act.
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In this regard, briefly stating, the assessee-company has made a payment of Rs.15,22,527/- to one Naroda Enviro Projects Ltd. towards land fill charges of solid waste. The ld.AO sought for furnishing of TDS details. From the details, the ld.AO noticed that the assessee has not deducted TDS while making payment to the said concern. Assessee submitted that the said concern is a non-profit making concern and registered under section 12AA of the Act, and the service provided by them was not in the nature of contract. The said concern has filed return of income, and the assessee has furnished copy of invoice issued by the concern. The ld.AO did not accept the explanation of the assessee. He accordingly invoked provisions of section 40(a)(ia) of the Act. However, in appeal, the ld.CIT(A) after relying on various judgment including the judgment of Hon’ble Delhi High Court in the case of CIT Vs. Ansal Landmark Township P.Ltd,377 ITR 635directed the ld.AO to verify Form NO.26A and delete the impugned addition. Aggrieved by this direction, the Revenue is in appeal before the Tribunal.
Heard both the parties; perused respective orders and also judgments cited. We find that the issue in question stands covered in favour of the assessee by the decision of Hon’ble Delhi High Court in the case of CIT Vs. Ansal Landmark Township P.Ltd. (supra), which was similar to the decision of Agra Bench of ITAT in the case of Rajiv Kumar Agarwal vs. ACIT [ITA No. 337 (Agra) of 2013] on the applicability of section 40(a)(ia) of the Act. Hence, order of the ld.CIT(A) does not warrant our interference. Accordingly, this ground of Revenue is rejected.
Ground no.3 relates to deletion of addition of Rs.3,03,686/- made on account of disallowance of excess depreciation in respect of computer software.
The ld.AO noticed that the assessee has claimed depreciation on computer software at 60% amounting to Rs.5,20,605/-. According to the
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AO, since software being intangible asset, eligible depreciation rate is 25%. To the show cause notice, assessee explained that computer software is not intangible asset, rather it is part and parcel of the computer system, and therefore, the rate applicable to the computer at 60% is also applicable to the software. The assessee further submitted that during the year there was no addition to the block of assets, and such claim was allowed since beginning by the AO. However, the ld.AO did not buy this argument of the assessee. He maintained his view that the software is intangible assets, and therefore, depreciation at the rate of 25% is allowable. Accordingly, the ld.AO disallowed excess amount of Rs.3,03,686/- and added to the total income of the assessee. This disallowance was challenged before the ld.CIT(A). After considering the submissions of the assessee, the ld.CIT(A) found that as per rates prescribed in Appendix-1 to Rule 5 of the Income Tax Rules, the applicable rate of depreciation for the computer software is 60%, as it was not intangible assets. Accordingly, the ld.CIT(A) allowed the claim of the assessee and directed the AO allow 60% depreciation on the computer software of the assessee. Not satisfied with the order of the CIT(A), Revenue has come before the Tribunal in appeal.
Having heard both the sides, we have perused orders of authorities below on this issue. The claim of the assessee is that computer software purchased by it is eligible for depreciation at the rate of 60%. However, the ld.AO was of the view that software purchased by the assessee was not integral part of the computer system, but it was a license for use of software, and therefore assessee was not entitled for depreciation at the rate of 60%. He accordingly applied depreciation at 25%. However, the ld.CIT(A) allowed the claim of depreciation by holding that the software purchased by the assessee is tangible assets, and therefore, as per Appendix-1 to Rule 5 of the IT Rules, assessee is entitled for depreciation at the rate of 60%. While holding so, he also observed that similar claim was allowed by the AO since beginning in the past, and therefore, there
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was no justification to restrict depreciation at 25%. Though the nature of acquisition, whether computer software was purchased outright or a license for use of any computer software was not clear, but the fact as recorded by the ld.CIT(A) that similar claim from beginning in the past was allowed by the department, and there was no addition during the year, cannot be said unjustifiable. Thus, we are not inclined to reverse the order of the ld.CIT(A) on this issue. This ground of appeal is also dismissed.
Ground No.4: The ld.CIT(A) erred in law and on facts in deleting the addition of Rs.41,21,439/- made on account of disallowance of interest on Foreign Currency Convertible Bonds (“FCCB”).
While framing assessment proceedings, the ld.AO noticed from the Statement of Income that the assessee has bought back Foreign Currency Convertible Bonds (FCCB) amounting to USD 3500000 and paid financial charges/premium amounting to Rs.41,21,439/-. He further noticed that instead of debiting this financial charge to profit & loss account, the assessee has debited FCCB Redemption Premium account created for this purpose. Further, provision for accrued interest of FCCB was required to be made by debiting Security Premium Account and crediting FCCB Premium Payable account. In this regard, the ld.AO sought explanation from the assessee as to why the said financial charge of Rs.41,21,439/- has not been debited to the profit & loss account, and why it should not be treated as a capital loss on account of loss on redemption of FCCB. Accordingly, the ld.AO proposed to make an addition of Rs.41,21,439/- to the income of the assessee. It was explained by the assessee that company has raised the above FCCB for the purpose of business and the same was in the nature of contingent liability and therefore financial charges/expenditure incurred by the assessee are business expenditure allowable as deduction. Further, the assessee was required to prepare balance sheet as per accounting norms and standards prescribed by
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Institute of Chartered Accountants. The assessee has also furnished details of FCCB, year-wise details of provision relating to FCCB Interest and entries passed in the books at the time of buyback. The assessee has also explained accounting treatment adopted in its books of accounts in this behalf. However, the explanation of the assessee was not found acceptable to the AO. The AO maintained his stand that the assessee should have debited the financial charges on account of redemption of FCCB to profit & loss account instead of just showing the same in the statement of income. Further, the loss on account of redemption was a capital loss, and therefore not allowable. The AO thus disallowed the claim of the assessee and added the same to the total income of the assessee. Aggrieved against this addition, the assessee approached the ld.CIT(A). Before the ld.CIT(A), the assessee while reiterating the submissions made before the AO, also submitted that FCCB investors enjoyed option to exercise for receiving equity. The said FCCB was a liability on the assessee-company and the company was bound to discharge the liability on due date, if the bond holders do not exercise their option to convert into equity. The claim for deduction of financial charges was towards loan liability which was repaid with interest, and now exist no liability. Therefore, interest on liability was revenue in nature, and was fully allowable. Assessee further pointed out that the assessee was claiming liability pertained to the concerned year when the same arose each year and by reversal of entry, the resultant income was also offered and taxed by the Department, therefore, the claim of the assessee was perfectly justified and allowable. The ld.CIT(A) after having found the explanation and submissions of the assessee justifiable, allowed the claim of the assessee with the following finding:
“7.3. / have carefully considered the facts and the observations of the A.O. and the submissions of the appellant. I find that the appellant had issued FCCB bonds which are used for the purposes of its business. Premium on Bonds and debentures is held to be revenue expenditure. The accounting treatment given by the appellant is explained as narrated
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by AO at page 22 to 24 of his order. The reversal entry of premium is made at the time of actual buy back opted by the bond holders. The appellant has offered profit on such redemption in the past as income in the year 2009-10 and 2010-11 which is I shown in the chart at page No. 23 of the assessment order. The same is taxed as revenue income in the past which is not disputed by the AO. In the year under consideration however, the reversal resulted in to revenue loss and hence claimed as deductible expenditure of Rs. 41,21,439/-. The said system and treatment of accounting is accepted in the past. In my opinion, the AO is not justified to hold that such expenditure or loss is on capital account. The income or loss on account of above interest expenses depends on exercise of option by bond holders to redeem the bonds and is accordingly accounted for at the end of each year. I am of the opinion that the AO ought not to have changed the stand in the year under consideration when similar J treatment was accepted in earlier years when there was profit in similar situation. The AO is directed to delete the disallowance made. Further, the AO has not accepted the alternative stand of the appellant that by making above disallowance, the profit eligible for deduction u/s 80-IA in respect of proportion relating to Wind Mill Unit will increase and correspondingly deduction of similar amount will also increase. On the ground that deduction u/s 80-IA was disallowed. Having regard to the ground of deduction u/s 80-IA having been allowed by me, the alternative submission of the appellant that disallowance of FCCB interest will result in enhanced profit and deduction under section 80-IA would be justified. However, since I have held that disallowance is not justified considering the same system accepted in past when the appellant disclosed income due to the above method , the alternative submission for enhanced deduction u/s 80IA if the amount is disallowed become academic. In the result this ground of appeal is allowed.”
Aggrieved by the action of the ld.CIT(A), Revenue is before the Tribunal.
Before us, the ld.DR supported the order of the AO. On the other hand, the ld.counsel for the assessee besides relying on the finding of the ld.CIT(A) further submitted that the Foreign Currency Convertible Bonds issued by the assessee-company was a liability for the purpose of business. These bonds were liable to be redeemed at the end of certain period alongwith specified rate of interest, if the bond holder does not exercise the option of converting the same into equity. The company was
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also having option to buy back the bonds at the prevailing market-rate and as a result the company may decide accordingly considering commercial expediency, if it was profitable and advisable to extinguish the liability. In that event, the assessee company can have either profit or loss in the books due to buy-back or in other words by extinguishment of the debt liability. It is further pleaded that the assessee-company had issued FCCB to the tune of USD 2,00,00,000/- on 11.4.2007, and out of this, USD 1,00,00,000 was bought back in the F.Y.2009-10 wherein the company has declared income of Rs.7,72,95,808/- in the computation of income. Similarly, during F.Y.2010-11 the company bought back USD 25,00,0000 and declared income of Rs.75,80,574/- in the computation of income. Now during the assessment year 2012-13 the company again bought back USD35,00,000 and incurred loss of Rs.41,21,439/- and claimed the same as deduction from computation of income. All these facts known to the department. On one hand, the department accepted the income from the redemption of FCCB as revenue income and taxed accordingly, but when there was a loss on account of redemption of FCCB, the department rejected the same and treated the same as capital loss. This contradictory approach of the department is not justified. The ld.counsel for the assessee in support of his contentions that expenditure incurred on the liability of loan was allowable expenditure, relied on the decision of Hon’ble Rajasthan High Court in the case of Secure Meters Ltd., 321 ITR 611.
We have considered submissions made by the both the parties; perused orders of Revenue authorities and material available on record. Key contention of the assessee is whether FCCB bond issued by the assessee for the purpose of business is a liability, and the expenditure incurred on account of redemption of the same is an allowable expenditure or not. This question is answered by the Hon’ble Rajasthan High Court in the case of CIT Vs. Secure Meters Ltd. (supra), wherein it was held that “Admittedly the debentures when issued is a loan, and
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therefore, whether it is convertible, or non-convertible, does not militate against the nature of the debenture, being loan, and therefore, the expenditure incurred would be admissible as revenue expenditure.” We are of the view that both debentures or loan fall within the ambit of loan, and therefore, the assessee is entitled for deduction of the expenditure/loss incurred on redemption of bonds. Further, as recorded by the ld.CIT(A) in his impugned extracted (supra) that in the year 2009-10 and 2010-11, when the assessee company redeemed a FCCB, it has earned income of Rs.7,72,95,808/- and Rs.75,30,574/- respectively and shown the same in the statement of income and offered to tax, which the department has accepted as income. However, when the assessee redeemed the balance bond in the year 2011-12, it has incurred loss of Rs.41,21,439/- and when the same was claimed as deduction in the statement of income, the same was rejected by the AO by treating the same as capital loss. Thus, the AO has taken different and inconsistent stand, which is not permissible in law. After going through the well-reasoned order of the ld.CIT(A), we do not find any merit in the ground of revenue, which we dismiss, and confirm the impugned order.
Ground no.5 is against the action of the ld.CIT(A) in deleting addition of Rs.1,12,263/- made by the AO under section 41(1) of the Act in respect of cessation of liabilities.
With the help of ld.representatives, we have gone through the orders of the Revenue and also perused material available on record. We find that in the balance sheet of the assessee for the last three years, the assessee shown outstanding sundry creditors to the extent of Rs.1,12,263/-. The ld.AO presumed that since the liability was not paid off even after three years, the same was ceased to exist, and in view of provision of section 41(1) of the Act any amount benefit which was obtained by a person with respect to any loss, expenditure or trading liability incurred in any earlier Assessment Years will have to be written
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back to the profit and loss account of the assessee and taxed accordingly. In the absence of satisfactory reply, the ld.AO treated outstanding liability of Rs.1,12,263/- as deemed income of the assessee in terms of the above provisions, and added the same to the total income of the assessee. However, the ld.CIT(A) did not concur with the finding of the ld.AO. He observed that since the assessee has not written back the impugned liability and continued to be shown the same as liability in the books of accounts, and therefore, provisions of section 41(1) of the Act did not get attracted, and no addition can be made. For this proposition, the ld.CIT(A) relied upon the judgement of Hon’ble Gujarat High Court in the case of CIT Vs. Bhogilal Ramjibhai Atara, 43 taxmann.com; CIT Vs Nitin S. Garg, 208 taxmann 16. The ld.CIT(A) has also reproduced the relevant part of the above judgment at page nos.28 and 29 of the impugned order. Based on the finding of the ld.CIT(A), we are also of the view that resort to section 41(1) can be taken only if the liability of the assessee can be said to have been ceased finally and there is no possibility or reviving it. No doubt, the impugned liability still exists in the books of accounts of the assessee and the same has not been written back. Since there is no evidence of cessation of the liability, the impugned amount cannot be assessed to tax. Since the order of the ld.CIT(A) is based on some authoritative judgments, our interference on this issue is unwarranted. Thus, the order of the ld.CIT(A) on this issue is accordingly confirmed, and this ground of revenue is dismissed.
Now come to ground no.6 and last ground of the appeal of the Revenue, which reads as under:
“6. That the ld.CIT(A) erred in law and on facts in deleting the addition of Rs.18,89,259/- made on account of disallowance of interest u/s.36(1)(iii) of the Act in respect of capital-work-in-process.”
Brief facts of the case in this behalf is that in the balance sheet the assessee has shown capital work-in-progress at Rs.794.45 lakhs. The assessee was asked to furnish the details and to state whether interest on
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account of the said capital work-in-progress has been capitalized or not. Assessee furnished details thereof and contended that no interest bearing loan was utilized for the capital work-in-progress, but acquired out of cash profit generated during the year, which amounted to Rs.47,88,11,656/- before tax and depreciation. However, the ld.AO has not satisfied with the explanation of the assessee, and disallowed the interest of Rs.18,89,259/- by stating that material placed during the assessment proceedings did not reflect that no amount of interest bearing fund have been utilized in respect of capital work-in-process. Assessee preferred appeal before the ld.CIT(A), who after going through the submissions of the assessee and examining availability of interest free funds with the assessee, allowed claim and deleted the disallowance of interest. Aggrieved, Revenue is now before the Tribunal.
The ld.DR supported the order of the AO. On the other hand, the ld.counsel for the assessee while reiterating submissions made before the lower authorities, also contended that provisions of section 36(1)(iii) for disallowance of interest is applicable only in respect of capital borrowed for acquisition of an asset, when there is no borrowing for acquisition of any of these assets the question of any disallowance of interest does not arise. The assessee company has acquired the assets of Rs.7,94,44,853/- out of cash profit generated during the year amounting to Rs.47,88,11,656/-, the details of which has already submitted during the assessment proceedings. In view of huge cash surplus, it was not correct to say that any interest bearing funds have been utilized for the purpose or out of the basket of interest bearing funds, for acquisition or utilization in respect of capital work-in-process. The action of the AO, therefore, was without appreciation of the facts on record which the ld.CIT(A) has rightly reversed by allowing the claim of the assessee. To support its case, the ld.counsel for the assessee has also relied upon the various case laws including decisions in the case of Reliance Utilities, 313 ITR 340 (Bom);
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Gujarat High Court decision in the case of Torrent Leasing, and some of the decisions of ITAT, Ahmedabad Bench.
We have considered submissions of the both the parties; perused the impugned orders authorities below. The ld.AO has made the impugned disallowance of interest on the presumption that the assessee would have utilized interest bearing funds for the capital work-in-process. This presumption by the AO was despite the repeated submission of the assessee that there was no borrowing for acquisition of any of the assets and the company has acquired these assets out of the cash profit generated during the year, and therefore, there was no question of disallowance of interest. This presumption is contrary to the settled position that when there is a sufficient interest free funds available with the assessee, then it can be presumed investment was made out of such funds, no disallowance should be made. This position of the assessee is clearly emerging out of the record, as noted by the ld.CIT(A) in his impugned order. For clarity, we would take note of finding of the ld.CIT(A) as follows:
“9.3. I have carefully considered the observations of the A.O. for making this disallowance and the submissions of the appellant. The AO has made disallowance by applying proviso to section 36(1)(iii) on the ground that the appellant had interest bearing and interest free funds. He therefore worked out ratio of interest bearing funds to total funds and applied the same on the work in process. Strongly objecting to the said approach, the Id AR submitted that this type of approach is not permitted as there has to be specific finding that assets comprising of work in process were purchased or acquired out of interest bearing funds on which interest was paid. He submitted that the nexus of acquisition of assets being from interest bearing funds had to be established by AO and once it is shown that the assessee had huge amount of interest free funds in the form of capital and reserve as well as current year's profit which is more than the cost of work in process, proviso to section 36(1)(Hi) cannot be applied as presumption in such a case is that acquisition is out of interest free funds available with the assessee. Having regard to the judgments of the Supreme Court in the case of Supreme Court in the case of Munjal Sales Corp vs. CIT 298 ITR 298 in which it was observed that where the profits earned during the year are sufficient to cover interest free
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advance, such profit is to be considered as available own interest free funds, the ground of the appellant deserves to be accepted as the net cash profit for the year under consideration is more than 47 Crores as against which Capital work in process is only 7.94 Crores. The decision in the case of Torrent Financiers 73 TTJ 624 (AHD) and Bombay High Court in the case of CIT vs Reliance Utility & Power Ltd 313 ITR 340 also lays down how the presumption about nexus is to be drawn. I have also considered the decision of the Delhi ITAT in the case of ACIT vs. Asmit Singh ITA No: 1862/Delhi/ 2012 in which CIT(A) deleted disallowance which was confirmed in favour of assessee by the ITAT by observing that the AO had wrongly invoked proviso to section 36(1)(iii) of the Act without recording a specific finding that the amount of interest paid is in respect of capital borrowed for acquisition of an asset for extension of existing business or profession and if direct nexus between the capita! borrowed and the acquisition of asset has not been established proviso cannot be invoked. Considering the factual and above legal position, the disallowance made by AO at Rs. 18,89,259/- is deleted. This ground of appeal is therefore, allowed.”
In view of the above, we do not find any reason to interfere with the order of the ld.CIT(A) deleting addition of disallowance of interest u/s. 36(1)(iii) of the Act, which we uphold, and this ground of the Revenue stands rejected.
In the result, appeal of the assessee is partly allowed, while that of the Revenue is dismissed.
Order pronounced in the Court on 30th March, 2022 at Ahmedabad.
Sd/- Sd/- (PRAMOD M. JAGTAP) (T.R. SENTHIL KUMAR) JUDICIAL MEMBER VICE-PRESIDENT
Ahmedabad, dated 30/03/2022 vk*