M/S. HAVMOR ICE CREAM LIMITED,,AHMEDABAD vs. THE DCIT, CIRCLE-2(1)(1),, AHMEDABAD

आयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरण, अहमदाबाद "यायपीठ आयकर अपीलीय अिधकरण अहमदाबाद "यायपीठ अहमदाबाद "यायपीठ ‘ C ’ अहमदाबाद अहमदाबाद "यायपीठ अहमदाबाद अहमदाबाद । अहमदाबाद IN THE INCOME TAX APPELLATE TRIBUNAL “ C ” BENCH, AHMEDABAD (Through web-based video conferencing platform) ] ] BEFORE SHRI PRAMOD M. JAGTAP, VICE PRESIDENT AND SHRI T.R. SENTHIL KUMAR, JUDICIAL MEMBER Assessment Year : 2013-14 M/s. Havmor Ice Cream Limited The Deputy Commissioner of 2nd Floor, Commerce House IV Vs Income-tax, Besides Shell Petrol Pump Circle-2(1)(1), Prahladnagar, Ahmedabad Ahmedabad PAN : AABCH 6766 L अपीलाथ"/ (Appellant) "" यथ"/ (Respondent) Assessee by : Shri Dhinal Shah, CA Revenue by : Shri V.K. Singh, Sr.DR सुनवाई क" तार"ख/Date of Hearing : 25/03/2022 घोषणा क" तार"ख /Date of Pronouncement: 30/03/2022 आदेश/O R D E R PER PRAMOD M. JAGTAP, VICE-PRESIDENT This appeal filed by the Assessee is directed against the order of Ld. Commissioner of Income-tax (Appeals)-2, Ahmedabad [CIT(A)] dated 12.10.2017 and the solitary issue relating to disallowance of Rs.15,52,172/- on account of interest as made by the Assessing Officer and confirmed by the Ld.CIT(A) is raised therein by way of the following original grounds:- “Ground No.1 – Disallowance of Rs.15,52,172/- under section 36(1)(iii) towards Capital Work in Progress (“CWIP”) 1. Based on the facts and circumstances of the case and in law, the learned CIT(A) has erred in making disallowance of interest of Rs.15,52,172/- under section 36(1)(iii) of the Act on account of expenditure incurred by the Appellant on CWIP. 2. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in considering the facts that expenditure incurred on CWIP AY 2013-14 Havmor Ice Cream Ltd. vs. DCIT 2

has not resulted into an extension of any existing business within the meaning of the proviso to section 36(1)(iii) of the Act and accordingly, no disallowance of interest can be made under section 36(1)(iii) of the Act. 3. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in rejecting that the Appellant has sufficient owned funds to make investment in CWIP and accordingly, no interest on borrowed funds should be disallowed under section 36(1)(iii) of the Act. 4. On the facts and circumstances of the case and in law, the learned CIT(A), has erred in not appreciating the fact that the Appellant has made the payments towards CWIP from its own funds and no immediate borrowings have been utilized to make the payments for the CWIP. 5. Without prejudice to the above, the learned CIT(A) erred in not considering the submission of the Appellant that in case he wishes to consider that borrowed funds have been utilized for CWIP, disallowance of interest can be restricted to Rs.13,73,065/- by taking into consideration the relevant dates of payments made towards CWIP during the year under consideration instead of computing such disallowance at flat rate of @ 12% of the value of CWIP.”

2.1. The explanation of the assessee was not found acceptable by the Assessing Officer. According to him, there was a failure on the part of the assessee to establish any nexus between the acquisition of various items forming part of CWIP and utilization of owned funds. He held that in the absence of such nexus, interest paid on loans by the assessee was directly attributable to various items forming part of CWIP as on 31/03/2013 and interest to that extent was required to be capitalized u/s.36(1)(iii) of the Income Tax Act, 1961 (“the Act”). Accordingly, he calculated such interest by applying rate of 12% per annum at Rs.15,52,172/- and capitalized the same which resulted in addition/disallowance on account of interest to the extent of Rs.15,52,172/-.

3.1. The Ld.CIT(A) did not find merit in the submissions made on behalf of the assessee on the issue and proceeded to confirm the addition made by the Assessing Officer by way of capitalizing to the extent of Rs.15,52,172/- vide paragraph Nos.3.3 to 3.7 of his impugned order which read as under:

“3.3. I have carefully considered the facts of the case, the assessment order and the written submissions of the appellant. The AO has made the disallowance of interest amounting to Rs.15,52,172/- being 12% of CWIP u/s. 36(1)(iii) of the Act. The AO has held that capital work in progress is required to be capitalized as per proviso of section 36(1)(iii).

3.4. Appellant on the other hand has submitted that it has commenced construction of first floor and cold storage facility and has incurred Rs.3,08,66,535/- appearing as CWIP. Appellant contended that the expenditure does not amount to any extension of business or expansion of business and accordingly, no disallowances u/s.36(1)(iii) is warranted. Appellant further argued that payment has been made from the cash credit account in which collection from customer of Rs.36,81,88,828/- has been deposited against the cost incurred in CWIP of Rs.2,73,46,951/- and as the appellant has its own fund, disallowances u/s. 36(1)(iii) is uncalled for.

3.5. The proviso of section 36(1)(iii) states that any amount of the interest paid in respect of capital borrowed for acquisition of an asset for any period beginning from the date on which the capital was borrowed for acquisition of the assets till the date on which such asset was put to use shall not be allowed AY 2013-14 Havmor Ice Cream Ltd. vs. DCIT 5

as deduction. As the expenses incurred in construction of first floor and cold storage termed as CWIP is asset and acquired out of cash credit account which is a borrowed fund, proviso to section 36(1)(iii) are clearly applicable. As regard appellant's argument that it has its own accrual to make investment in CWIP, appellant has incurred expenditure out of cash credit account on which interest has been paid. Appellant has relied on the case of Nirma Limited in which Honourable Tribunal has stated that in a case of cash credit account, where business receipts are credited in the same bank account, it cannot be said conclusively that overdraft in the bank account on the date of payment of advance tax is on account of payment of advance tax and not on account of other business payment made on the same date or preceding dates. The ratio in above case does not help the appellant as Honourable Bench has itself stated that overdraft in the bank account cannot be exclusively said to be on account of other business payments. In view of the above, the AC was justified to make the disallowance.

3.6. It is noted that identical issue has been decided by CIT(A)-2, Ahmedabad in appellant's own case in A.Y. 2012-13 vide appellate order dated 29/02/2016, whereby the issue has been decided against the appellant. The relevant portion of the order is reproduced hereunder:-

"4.3. Decision: I have carefully considered the facts of the case, the assessment order and the written submissions of the appellant. The AO has made the disallowance of interest amounting to Rs.10,75,906/- on the average WIP. The AO observed that the appellant had shown an amount of Rs.1,79,31,767/- as closing WIP on account of investment in the new factory construction at 185A, Phase-I, Naroda, GIDC, Ahmedabad. During the year under consideration various machines were under installation by the appellant. Out of the aforesaid total cost of Rs.1,79,31,767/-, the appellant has made the payment of Rs.99,08,118/- with the balance unpaid at Rs.80,23,649/-. It has been pleaded by the appellant that the payment towards CWIP has been made from the sale receipts of the Ice Cream, and therefore, the appellant has not utilised the borrowings to make payment for the CWIP. Hence, no interest disallowance is warranted. On going through the bank statement copy submitted, it has been found that at the time of making the payment the appellant had the overdraft balance in its cash credit account in Corporation Bank. This is more evident from the details of such overdraft balance on the immediate date of the payment towards CWIP depicted as under:- AY 2013-14 Havmor Ice Cream Ltd. vs. DCIT 6

Date of Amount Overdraft balance in CWIP payment paid towards bank account CWIP (Rs.) immediately prior to the CWIP payment (Rs.) 26/10/2011 5,91,992/- 1,32,23,054/- 22/12/2011 4,50,000/- 30,28,460/- 23/12/2011 27,000/- 1,79,13,226/- 27/12/2011 10,715/- 7,67,680/- 31/12/2011 8,542/- 1,49,60,391/- 02/01/2012 58,736/- 5,62,16,162/- 06/01/2012 27,000/- 2,52,22,648/- 20/01/2012 2,035/- 6,01,46,517/- 03/02/2012 1,83,784/- 8,73,74,902- 04/02/2012 9,317/- 9,13,07,846/- 06/02/2012 2,33,396/- 9,08,84,082/- 10/02/2012 83,651/- 12,60,98,639- 17/02/2012 1,60,792/- 13,63,32,590/- 18/02/2012 17,301/- 13,34,55,335/- 23/02/2012 1,55,850/- 12,58,10,950/- 29/02/2012 37,49,723/- 11,25,28,157/- 02/03/2012 20,81,781/- 1 1,72,99,713/- 08/03/2012 4,51,398/- 11,24,97,677/- 09/03/2012 1,83,077/- 11,27,.04,361/- 13/03/2012 6,07,304/- 9,84,26,960/- 16/03/2012 83,810/- 10,84,36,838/- 23/03/2012 62,062/- 10,55,32,056/- 24/03/2012 94,690/- 9,80,96,908/- 30/03/2012 2,32,147/- 4,09, 50,312/- 31/03/2012 3,42,014- 4,00,82,083/- Total 99,08,118/-

From the above chart, it is very much apparent that when the CWIP payments were made by the appellant, the appellant was already availing the overdraft facility and there was credit balance in the bank account. So by making the payment of CWIP, the overdraft balance has increased to the extent of the payment towards CWIP. Thus, from the above table, the claim of the appellant that the payment have been made out of its own funds in the form of share capital, reserves and surplus is found not correct. In fact, the share capital and reserves and surplus funds have already been exhausted by the appellant by investment in various assets and towards working capital requirements. The case laws relied upon by the appellant are not relevant and not identical to the facts of the case. AY 2013-14 Havmor Ice Cream Ltd. vs. DCIT 7

4.4. The appellant has further contended that the provisions of section 36(1)(iii) are not applicable in view of the various judgments for the reason that it was not the extension of business but it was mere continuation of the existing business of the appellant and do not represent capital assets utilised for setting up of another line of business. This argument itself contradicts with the appellant's own stand taken before the AO that the interest for the two months in respect of the new plant in A.Y. 2011-12 has already been capitalised by the appellant obviously treating the same as extension of the existing business. Moreover, as per the proviso to section 36(1)(iii), it is amply clear that any interest paid in respect of capital borrowed for acquisition of an asset, even for the extension of the existing business has to be capitalised till the date on which such asset was first put to use and the same cannot be allowed as deduction. Thus, the provisions of section 36(1)(iii) are clearly applicable even in respect of the extension of the existing business and hence appellant's contention is not accepted, in view of the aforesaid discussion, the disallowance of interest claim made by the AO is found correct and justified and hence the same is confirmed.

Thus the ground of appeal is dismissed.”

3.7. In view of the above and considering the fact that identical issue has been decided by CIT(A)-2, Ahmedabad in the immediately preceding year i.e. A.Y. 2012-13, the disallowance made is confirmed.

The ground of appeal is dismissed.”

“8. We have heard the rival contentions and perused the material on record carefully. The assessee had shown an amount of Rs. 1,79,31,767/- as closing WIP on account of investment in the new factory construction at 185A, AY 2013-14 Havmor Ice Cream Ltd. vs. DCIT 8

Phase - I, Naroda, GIDC, Ahmedabad. During the year under consideration various machines were under installation by the appellant. Out of the aforesaid total cost of Rs.1,79,31,767/-, the assessee has made the payment of Rs.99,08,118/-with the balance unpaid at Rs.80,23,649/-. It has been established from the findings of the Ld. CIT(A) that most of the payment towards CWIP has been made out of the overdraft balance in its cash credit account in Corporation Bank. The assessee has failed to demonstrate that how the payments have been made out of its own funds. The Ld Counsel has furnished a paper book containing the following judicial pronouncements:-

We observe after perusal of above judicial pronouncements and from the proviso to section 36(1)(iii) that any interest paid in respect of capital borrowed for acquisition of an asset, even for the extension of the existing business has to be capitalized till the date on which such asset was first put to use and the same cannot be allowed as deduction. However, for want of information and supporting evidences, the assessing officer capitalized the interest @12% on the various items forming part of CWIP. After considering the above facts and judicial findings, we consider it will be appropriate to restore this issue to the file of the assessing officer for deciding afresh after taking into consideration the exact date of additions to various items forming part of CWIP and after excluding the period when the capital asset actually put to use in the lights of the directions laid down in the above judicial pronouncements. Therefore, as directed, we restore this issue to the AY 2013-14 Havmor Ice Cream Ltd. vs. DCIT 9

file of the assessing officer for deciding afresh after affording adequate opportunities to the assessee.”

The Tribunal thus decided the issue against the assessee in principle by relying on the proviso to section 36(1)(iii) of the Act and restored the issue relating to quantification of interest to be capitalized to the file of the Assessing Officer.

5.1. The proviso to clause (iii) to sub-section (1) of section 36 of the Act relied upon and applied by the Tribunal, as applicable to the year under consideration, reads as under:

“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 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, shall not be allowed as deduction”.

5.2. At the time of hearing, the Ld. Counsel for the assessee has contended that the aforesaid proviso is not applicable in the case of the assessee and the decision rendered by the Tribunal in assessee’s own case for AY 2012-13 is not in consonance with the judgement of Hon’ble Gujarat High Court delivered in the case of CIT vs. Nirma Ltd. reported in 367 ITR 12 (Guj.). He has contended that the acquisition of assets as reflected in CWIP did not constitute extension of existing business of the assessee-company and, therefore, proviso to section 36(1)(iii) of the Act is not applicable in the case of the assessee. Without prejudice to this contention and as an alternative, he has also contended that sufficient own funds in the form of share capital and reserves and surplus to the extent of Rs.33.83 crores were available with the assessee-company at the relevant time and since the same were AY 2013-14 Havmor Ice Cream Ltd. vs. DCIT 10

sufficient to acquire the assets in the form of CWIP at Rs.3.08 crores, there was no utilization of borrowed funds for acquisition of said assets and there was no question of disallowance of any interest.

during the year under consideration in order to facilitate the production of Ice Cream. As further submitted on behalf of the assessee-company before the Ld. CIT(A), it had incurred a total cost of Rs.3.08 crores till 31/03/2013 and the same was reflected as Capital Work-in-Progress (CWIP) in its books of account. Since the said construction had started in the immediately preceding year, i.e. AY 2012-13 and interest expenses to the extent attributable to the expenditure incurred on CWIP was disallowed by the Assessing Officer, the similar issue had come up for consideration before the Tribunal in AY 2012-13, wherein the action of the Assessing Officer in capitalizing the interest was upheld by the Tribunal in principle by applying the proviso to section 36(1)(iii) of the Act thereby holding that the CWIP represented acquisition of assets by the assessee-company for extension of its existing business. The Ld.Counsel for the assessee has challenged this decision rendered by the Tribunal in assessee’s own case for the immediately preceding year by relying on the decision of Hon’ble Gujarat High Court in the case of Nirma Limited (supra). It is, however, observed that the Assessing Officer in that case had disallowed the interest expenses on the ground that the interest was paid by way of pre-operative expenditure and the assessee himself had capitalized such expenditure. The Ld.CIT(A) and the Tribunal, however, concurrently came to the conclusion that there was inter-connection, inter-lacing and inter-dependence of the management, financial and administrative control of various units of Nirma Limited and, therefore, the business in question was continuation of the existing business of the assessee and not a new business. Keeping in view these concurrent findings of fact recorded by the Ld.CIT(A) as well as the Tribunal, it was held by the Lordship of Hon’ble Gujarat High Court that it was not a case of entirely a new project undertaken by the assessee and AY 2013-14 Havmor Ice Cream Ltd. vs. DCIT 12

since it was an extension of existing business, the disallowance of interest was rightly deleted by the Tribunal by relying on the decision of Hon’ble Supreme Court in the case of Dy.CIT vs. Core Health Care Ltd. reported in 298 ITR 194 (2008)[SC]. It is thus clear that the context in which the issue relating to disallowance of interest expenditure came to be decided by the Hon’ble Jurisdictional High Court in the case of Nirma Limited (supra) was entirely different and eventhough it was found as a fact in that case that it was a case of extension of existing business, the interest expenditure was allowed as deduction since the proviso to section 36(1)(iii) of the Act inserted by Finance Act, 2003, w.e.f. 01-04-2004 was not apparently applicable in that case. As rightly contended by the Ld. DR, the ratio of the decision of Hon’ble Jurisdictional High Court in the case of Nirma Limited (supra), thus is not applicable in the present case and the reliance of the Ld. Counsel for the assessee thereon in support of the assessee’s case is clearly misplaced. Similarly, the other judicial pronouncements cited by the Ld. Counsel for the assessee are distinguishable on facts and even the assessment years involved therein were prior to the insertion of the first proviso to section 36(1)(iii) in the Statute with effect from 01/04/2004. We therefore find no justifiable reason to take a different view on this issue from the one taken by the Co-ordinate Bench of this Tribunal in assessee’s own case for AY 2012-13 and hold that the proviso to section 36(1)(iii) of the Act is clearly applicable in the facts of the present case as rightly held by the Ld. CIT(A) while confirming the action of the Assessing Officer in capitalizing the interest expenditure.

crores and since the same were sufficient to acquire the assets in the form of CWIP of Rs.3.08 crores, there was no utilization of borrowed funds for acquisition of the said assets, it is observed that a similar stand was taken by the assessee before the Assessing Officer as well as before the Ld.CIT(A). However, keeping in view that the expenditure towards CWIP was incurred by the assessee from cash-credit account, it was held by the authorities below that there was a direct nexus between the interest-bearing borrowed funds and acquisition of assets by the assessee-company and this contention raised on behalf of the assessee-company was rejected by them. In our opinion, it is necessary to see overall financial position of the assessee as reflected in the balance-sheet as well as in the cash-flow statement to ascertain exactly as to whether the investment in acquisition of assets is made by the assessee from its owned funds or borrowed funds and the nexus theory as applied by the authorities below is not always a correct test which may sometime gives a misleading picture. In this regard, the Ld. Counsel for the assessee has made an attempt to support and substantiate the assessee’s case on this issue by referring to the relevant balance-sheet and cash-flow statement of the assessee-company (copies of which are placed in the paper-book). However, keeping in view that this aspect of the matter has not been examined either by the Assessing Officer or by the Ld.CIT(A) having regard to the overall financial position of the assessee- company at the relevant time, we consider it fair and proper in the interest of justice to restore this issue to the file of the Assessing Officer for such examination. The Assessing Officer is directed to verify the claim of the assessee of having been made the investment in the asset (CWIP) from its own funds from the overall financial position of the assessee-company as reflected in the relevant balance-sheet and cash-flow statement and decide AY 2013-14 Havmor Ice Cream Ltd. vs. DCIT 14

the issue afresh on such verification in accordance with law after giving the assessee a proper and sufficient opportunity of being heard. Grounds as originally raised in this appeal are thus treated as partly allowed for statistical purposes.

“On the facts and circumstances of the case and in law, the Appellant may please be granted deduction under section 80-IB(11A) of the Act, amounting to Rs.6,57,71,906, being profits and gains derived by the eligible undertaking engaged in the manufacturing of ice cream.”

Infrastructure Pvt Ltd Vs. Pr. CIT, decided vide its order dated 15.02.2022 in Special Civil Application No.16364 of 2021, wherein the decision of the Tribunal holding that the assessee having failed to make a claim for deduction under Section 80IA(4) in the original return, the same cannot be allowed to be raised for the first time in revision under Section 264 of the Act in view of sub-section (5) of Section 80A of the Act is upheld by their Lordships. Keeping in view the same, we dismiss the additional ground raised by the assessee at threshold.

Order pronounced in the Court on 30th March, 2022 at Ahmedabad. (T.R. SENTHIL KUMAR) VICE-PRESIDENT Ahmedabad, Dated 30/ 03/2022 ट".सी.नायर, व."न.स./T.C. NAIR, Sr. PS / *Bt आदेश क" ""त"ल"प अ"े"षत/Copy of the Order forwarded to : 1. अपीलाथ" / The Appellant 2. ""यथ" / The Respondent. 3. संबं"धत आयकर आयु"त / Concerned CIT 4. आयकर आयु"त ( अपील ) / The CIT(A)-2, Ahmedabad 5. "वभागीय ""त"न"ध , आयकर अपील"य अ"धकरण , राजोकट/DR,ITAT, Ahmedabad, 6. गाड" फाईल /Guard file.

आदेशानुसार/ BY ORDER, स"या"पत ""त ////

सहायक पंजीकार (Asstt.