Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, MUMBAI BENCH “A”, MUMBAI
Before: SHRI G. MANJUNATHA & SHRI RAM LAL NEGI
Per G. Manjunatha, Accountant Member:
This appeal filed by the assessee is directed against order of the Commissioner of Income Tax (Appeals)-17, Mumbai dated 26.02.2018 and it pertains to assessment year 2008-09. The assessee has raised the following grounds of appeal:
1. The learned CIT (Appeals) has erred in law and on the facts of the case in sustaining the order of the assessing officer disallowing interest of Rs.1,22,10,166/- u/s. 36(1)(iii) of the Income Tax Act.
2. The assessee company craves leave to add, alter or amend the above ground of appeal.”
The brief facts of the case are that the assessee company is engaged in the business of manufacturing of petrochemical products had filed its return of income for assessment year
2 M/s. Laffans Petrochemicals Ltd. 2008-09 on 08.09.2008 declaring total income of Rs.3,90,04,129/-. The assessment has been computed under section 143(3) of the Income Tax Act, 1961 on 14.12.2010 determining the total income of Rs.5,48,30,780/- by making various additions including disallowance of depreciation on building and electrical fittings and also capitalization of finance cost towards amount spent for acquisition of fixed assets amounting to Rs.1,22,10,166/-. In first round of litigation, the matter went up to Tribunal, where the Tribunal has upheld the findings of Ld. CIT(A) in deleting the additions made by the AO towards depreciation on building and electrical fittings. However, in respect of capitalization of finance cost, the issue has been set aside to the file of the AO to verify the facts with regard to claim of the assessee that investments in fixed assets are out of own funds. In consequent assessment proceedings, the AO has reiterated its findings in respect of capitalization of interest expenses under section 36(1)(iii) on the ground that the assessee has failed to file any evidences including copies of consortium accounts as well as cash flow statements to prove availability of interest free funds at its disposal for making investments in fixed assets. The relevant findings of the AO are as under: “5.8 The submissions put forth by the assessee have been carefully considered. As observed by the Hon'ble ITAT, the issue as to whether the interest bearing funds were used for making investments or interest free funds were available at the time of making investments can be analysed by taking into consideration the day-to-day cash flow statement. The Hon'ble ITAT has further observed that the cash credit accounts in the consortium of banks maintained by the assessee are required to be looked into in order to ascertain whether in a particular bank account, the assessee had deposited any money or not and whether common funds, i.e. interest free funds and interest bearing funds are available in that account. These evidences have not been furnished by the assessee in order to prove that the investments in fixed assets were made from the common funds. The assessee has merely stated that the evidences were already furnished at the time of original assessment proceedings. The Hon'ble ITAT has held that the current year's profit is not an item available through the year and it cannot be a fixed sum. It was observed that during the original assessment proceedings that the assessee had opening reserves of Rs,25.50 crores which were already invested in the 3 M/s. Laffans Petrochemicals Ltd. form of fixed assets of Rs.27.05 crores (opening gross block) and therefore, there were no free reserves available to meet the cost of fixed assets acquired during the year. As regards the free reserves for the year under consideration, it was noticed that the assessee did not generate enough cash from its operations to meet the cost of fixed assets. As per the cash flow statement of the assessee, it was noticed that the assessee utilized most of its borrowings for acquisition of fixed assets. It was further noticed that the assessee utilized its borrowings and opening cash to meet the negative flow from its operating activities for the year. 5.9 To rebut the findings made in the original assessment proceedings, the assessee is required to file the copies of consortium of accounts as well as daily cash flow statements to prove that the assessee had sufficient interest free funds at its disposal for making investments in fixed assets. In the absence of any supporting evidences, the assessee's contention that the investments were made out of own funds cannot be accepted. In view of the above discussion and in view of the provisions of section 36(1)(iii) and Explanation 8 of section 43(l) of the Act, the proportionate finance cost of Rs.1,22,10,166/- as worked out in the order u/s. 143(3) dated 14.12.2010 is hereby capitalized and the same is added to the total income of the assessee. Penalty proceedings u/s. 271(1)(c) of the Act are initiated separately for furnishing of inaccurate particulars of income inaccurate particulars of income.”
Aggrieved by the assessment order, the assessee carried the matter before the Ld. CIT(A). Before the Ld. CIT(A), the assessee has reiterated its submissions made before the AO to argue that it has own funds in form of share capital and reserves in excess of amount invested in fixed assets, therefore the question of interest disallowance under section 36(1)(iii) read with Explanation 8 to section 43(1) does not arise. The Ld. CIT(A) after considering the submissions of the assessee and also taking note of directions of the Tribunal, in first round of litigation held that although assessee claims to have used own funds for investment in fixed assets, but failed to file cash flow statement and other details in order to prove availability of own funds. Therefore, he opined that there is no error in the findings of the AO and accordingly, upheld additions made towards interest capitalization and dismissed appeal filed by the assessee. The relevant findings of the Ld. CIT(A) are as under: “4.1 I have carefully considered the facts and brief background of the case along with submissions and arguments of the AR of the appellant company. The relevant orders have also been considered. The basis of effect given by the A.O. has been examined.
4 M/s. Laffans Petrochemicals Ltd. 4.2 The dispute is solely on the issue of utilization of funds for making investment in capital assets. During original assessment u/s 143(3), it was observed by the A.O. that the appellant has utilized interest bearing funds of Rs,7,98,83,438/- for acquisition of fixed assets which were not put to use. Thus, in the background of provisions of Explanation 8 to Section 43(1) and proviso to section 36(1)(iii) of the Act, the A.O. capitalized proportionate interest for acquiring the capital asset which was not put to use. Upon appeal, the CIT(A) on the basis of his own appreciation of the available funds, allowed the appeal of the appellant. Being aggrieved, the revenue preferred further appeal before the Hon'ble Tribunal which vide order dated 25.04.2013 has set aside the order giving certain crucial observations and directions. The relevant portion is quoted below :-
"The issue as to whether the interest bearing funds were used for making investments or interest free funds were available at the time of making investments is a pure question of facts which can be analysed by taking into consideration the day-to-day cash flow statement. For example, the assessee's share capital, reserves and surplus as on the first day of the accounting year is Rs.33.50 crore and investment in assets is only to the tune of Rs.27.05 crore, it cannot be inferred that sum of Rs.6.45 crore is available with the assessee. There is a possibility that the assessee might have purchased raw material, etc. and there may not be any cash available as on the first day of the accounting year. The current year's profit is not an item available throughout the year and it cannot be a fixed sum. Ordinarily, the amount available with the assessee is recycled or utilized in purchase of raw material, etc. For example, on 1st May, 2007, the assessee has no liquid funds and availed cash credit facility to purchase assets worth Rs.5 crore but on a subsequent day, say after one month, the assessee had received certain sums in the ordinary course of business, it cannot be inferred that the original investment was made out of the interest free funds available subsequently. Even at the end of the year current year's profit may not be available with the assessee since it would have been utilized for different purposes. In fact the learned CIT(A) mentioned that the assessee maintained cash credit accounts in the 'consortium of banks' which are required to be looked in to as to whether in a particular bank account the assessee had deposited any money or not and whether common funds, i.e. interest free funds and interest bearing funds are available in that account and if the assessee is able to prove that from the said common funds investments were made, then certainly the decision of the Hon'ble High Court can be applied in principle." 4.3 The following important points comes out from the analysis of directions of the Hon'ble Tribunal:-
(i) Actual utilization of funds whether interest free or interest bearing is a question of facts which can be analyzed only from scrutiny of day to day cash flow statement. (ii) The Hon'ble Tribunal has observed that from the amount reflected in share capital reserves & surplus it cannot automatically be inferred that these amounts are available with the assessee. There is a 5 M/s. Laffans Petrochemicals Ltd. possibility of investment in raw material etc. and it may not be available in a liquid form. (iii) What is important is availability of interest free investible surplus which needs to be examined. (iv) Even the current year profit is not an item available through the year. Ordinarily such amounts are recycled or utilized in purchase of raw material. (v) In this case, the cash credit account in consortium of bank was required to be looked into in order to see whether the assessee had deposited any money or not, whether common funds i.e. interest free funds or interest bearing funds are available in that account, (vi) (vi) The direction was very categorical to examine the cash flow statement day to day availability and investment and ultimately investible surplus on the date of making such investments.
4.4 The A.O. has rightly observed that submission of bank statement, claim of deposit put of sale proceeds etc. cannot be a sufficient compliance in the background of directions of the Hon'ble Tribunal. No cash flow statement or day to day cash availability or direct nexus between investment and availability of funds could be submitted before the A.O. During the appellate proceeding, the twin arguments has been taken. First argument is the same which has been put forth before the A.O. i.e. the receipt of funds from debtors. None of the specific direction of the Tribunal has been complied. Thus, this argument is devoid of any merit and the AO's conclusion cannot be interfered with. Secondly, as mentioned earlier, there were cross appeals before the Hon'ble ITAT, Mumbai, against the order of the CIT(A) in original assessment. The department's appeal resulting into set aside of issue of capitalization of interest which is the subject matter of appeal, was set aside first i.e. 26-04.2013. The assessee company's appeal against the order of the CIT(A) has been decided later, precisely on 20.02.2015. The AR off the appellant company has claimed that vide this order, the ITAT has allowed depreciation under various heads which was the subject matter of scrutiny by the A.O. where he concluded that assets were not put to use during the relevant previous year. First of all, It is not clear whether the assets for which the Hon'ble Tribunal has allowed depreciation are the same assets. Moreover, before me, the order for adjudication is order u/s 143(3) r.w.s. 254 meaning by, it has to be examined whether the A.O. has followed the directions of the ITAT vide order dated 26.04.2013 or not. The order of the ITAT was to be complied within the narrow boundary of limitations under the directions of the Hon'ble ITAT. Thus, in my opinion any subsequent decision of any appellate authority will not have any bearing on the specific directions given by the ITAT. Thus, in my opinion, there is no reason and justification to interfere with the order of the A.O. Ground of appeal is, therefore, dismissed and the order of the AO is upheld.”
The Ld. A.R. for the assessee submitted that the Ld. CIT(A) was erred in confirming the additions made by the AO towards disallowance of interest expenses under section 36(1)(iii) without appreciating the fact that the assessee has filed complete details
6 M/s. Laffans Petrochemicals Ltd. including consortium account statement and also cash flow statements before the AO to prove availability of own funds to make investments in fixed assets. The Ld. A.R. further submitted that the assessee has filed a letter to the AO on 13.04.2015 and explained evidences filed in support of availability of own funds before his staff Mr. Prakash and also stated that Mr. Prakash has checked the same and satisfied that the payments have been made out of sales realizations. Although, enough evidences have been filed to prove availability of own funds, the AO as well as the Ld. CIT(A) ignored all evidences filed to justify availability of own funds and made additions under section 36(1)(iii) of the Income Tax Act, 1961. In this regard, she has filed a statement along with financial statement explaining total own funds available with the assessee and amount of investments made in fixed assets.
The Ld. D.R., on the other hand, strongly supporting the order of Ld. CIT(A) submitted that even in remand proceedings the assessee has failed to file cash flow statement and other details before the AO as well as the Ld. CIT(A) in light of directions of the ITAT. Therefore, there is no error in the findings recorded by the Ld. CIT(A) in confirming the additions made towards disallowance of interest.
We have heard rival submissions of both the parties, perused the material available on record and gone through the orders of the authorities below. The whole issue revolves around disallowance of interest expenses under section 36(1)(iii) read with proviso provided thereto, as per which the assessee has utilised borrowed funds for acquisition of capital assets.
7 M/s. Laffans Petrochemicals Ltd. Consequently, the AO has capitalized interest expenses to capital assets on the ground that the assessee has failed to prove availability of own funds. It is the claim of the assessee before the lower authorities that its own funds in form of share capital and reserves is much more than the amount of investments in fixed assets. Consequently, no disallowance could be made in respect of interest expenses, when the assessee has proved availability of own funds. We find that in the first round of litigation, the Tribunal has set aside the issue to the file of the AO to verify certain facts with regard to claim of the assessee that its own funds are in excess of investments in fixed assets and directed the AO to verify the facts with regard to cash credit accounts maintained in the consortium banks and also availability of own funds as on the date of investments in the fixed assets. We further noted that in remand proceedings, the AO observed that although the Tribunal has directed the assessee to file cash flow statements to prove availability of sufficient interest free funds at its disposal for making investments in fixed assets, the assessee has failed to file any evidences to prove availability of own funds. We further note that even the Ld. CIT(A) has recorded categorical finding in the light of observations of the Tribunal that although there is direction from the Tribunal to file cash flow statement and other details to ascertain availability of own funds, the assessee has failed to file any details including cash flow statements. However, the fact remains that the assessee has filed a letter written to the AO on 13.04.2015 along with rectification application under section 154 of the Act, where it has been stated that two box files containing all the bank statements have 8 M/s. Laffans Petrochemicals Ltd. been filed before the AO to prove the availability of own funds and the said letter is part of paper book filed by the assessee. The assessee has also filed financial statement along with computation of own fund as per which its own fund in form of capital and reserves and surplus is in excess of investments made in fixed assets. The assessee claims that it has filed necessary details before the AO, including bank statements to prove availability of own funds, whereas the lower authorities claims that no evidence has been filed including cash flow statement in order to prove availability of own funds. Therefore, we are of the considered view that the issue needs to be reexamined by the AO in light of claim of the assessee that it has sufficient own funds which has been used for acquisition of fixed assets. If, assessee is able to prove the availability of sufficient own funds which is in excess of investments in fixed assets, then the question of disallowance of interest expenditure under section 36(1)(iii) does not arise, even if proviso provided thereto states that interest paid on borrowed funds needs to be capitalized till the date such assets are put to use, in view of the decision of Hon’ble Bombay High Court in the case of CIT vs. HDFC Bank Ltd. in ITA No.330 of 2012 decided on 23rd July 2014. Hence, we set aside the issue to the file of the AO and direct him to verify the claim of the assessee in light of decision of Hon’ble Bombay High Court in the case of CIT vs. HDFC Bank Ltd. (supra) where the Hon’ble Court clearly held that if own funds is in excess of investments made in fixed assets, then the general presumption goes in favour of the assessee that investments in assets is out of own funds. Needless to say, the assessee shall furnish necessary evidences including cash flow
9 M/s. Laffans Petrochemicals Ltd. statement to prove availability of own funds. In case, the assessee proves availability of own funds, then the AO is directed to delete the additions made towards capitalization of interest under section 36(1)(iii) read with Explanation 8 to section 43(1) of the Income Tax Act, 1961.
In the result, appeal filed by the assessee is allowed for statistical purposes.
Order pronounced in the open court on 22.07.2019.