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ORDER UNDER SECTION 254(1)OF INCOME TAX ACT PER PAWAN SINGH, JUDICIAL MEMBER; 1. This appeal by assessee under section 253 of Income-tax Act (‘Act’) is directed against the order of ld. Commissioner of Income-tax (Appeals)- 17, Mumbai [hereinafter referred as ld. CIT(A)] dated 20.12.2017 for Assessment Year 2013-14. The sole ground of appeal
raised by the assessee is that the ld. Dy.CIT has erred in disallowing the interest expenses of Rs. 1,42,78,820/- as Capital in nature u/s. 36(1)(iii) during the year.
2. Brief facts of the case are that the assessee-company is engaged in the business of manufacturing of frame assembly of chesis and tubes, filed Mum 2018-M/s KLT Automotive and Tubular Products Ltd. it’s return of income on 30.11.2013 declaring loss of Rs. 13,76,29,431/-.
During the assessment, the Assessing Officer noted that assessee made investment in capital asset and in subsidiary of Rs. 132.21 Crore. The assessee has capitalized the interest totaling of Rs. 14.44 Crore. The percentage of interest capitalization was worked out by Assessing of 10.92%. On perusal of record, the Assessing Officer noted that assessee has paid interest to Bank on the financial institution at the average rate of 12%, therefore, the assessee was asked as to why the differential amount of interest should not be capitalized. The assessee filed its reply and stated that assessee earned direct income from the part of these investments and no interest should be disallowed. The Assessing Officer noted that assessee has not submitted any details in this regard. The Assessing Officer took his view that interest bearing funds have been used for making capital investment. Therefore, the Assessing Officer disallowed 1.08% of Rs. 132.21 Crore which is worked out at Rs. 1,42,78,820/-. On appeal before the ld. CIT(A), the action of Assessing Officer was confirmed. Thus, further aggrieved by the order of ld. CIT(A), the assessee has filed the present appeal before us.
We have heard the submission of ld. Authorized Representative (AR) of the assessee and ld. Department Representative (DR) for the revenue and perused the material available on record. The ld. AR of the assessee submits that Assessing Officer disallowed the interest expenditure of Rs. 2 Mum 2018-M/s KLT Automotive and Tubular Products Ltd. 1.42 Crore u/s 36(1)(iii) without any evidence to contrary. The addition is based purely on assumption and surmises. The assessee has capital of Rs. 198.11 Crore, whereas investment in associate/subsidiary was made only Rs. 23.84 Crore. The assessee has made suo-moto disallowance of Rs. 14.44 Crore and therefore, further disallowance under section 36(1)(iii) was unjustified. The ld. AR of the assessee further submits that the assessee has utilized his own funds from the capital and reserve for making the said investment. In support of his submission, the ld. AR of the assessee relied upon the decision of Hon’ble Supreme Court in CIT vs. Reliance Industries Ltd. (410 ITR 466). The ld. AR of the assessee further invited our attention on the Profit & Loss Account as on 31.03.2013 wherein the assessee has shown to have own Reserve & Surplus of Rs. 189.25 Crore and share capital of Rs.8.85 Crore (page -19 of PB).
On the other hand, the ld. DR for the revenue supported the order of lower authorities. The ld. DR further submits that assessee himself capitalized the interest expenditure which is about 11%. The assessee has paid interest average rate on 12%. The differential of Rs. 1.42 Crore was disallowed on account of proportionate differential by Assessing Officer.
We have considered the rival submission of the parties and have gone through the orders of authorities below. The Assessing Officer made the 3 Mum 2018-M/s KLT Automotive and Tubular Products Ltd. disallowance of Rs. 1.42 Crore u/s 36(1)(iii) on taking view that the assessee has capitalized interest @ 10.92%. However, the interest expenditure which the assessee claimed in Profit & Loss Account from financial institution is @ 12%. The Assessing Officer made the disallowance of differential rate of interest. The ld. CIT(A) concluded that the main issue is the differential rate of interest which has neither been explained by the assessee during the assessment nor at appellate proceeding. Therefore, the ld CIT(A) did not find any reason to deviate from the disallowance.
We have noted that assessee has given detailed written submission which before ld CIT(A), which has been recorded in para-2.2 of his order, wherein it is recorded that assessee claimed that they have the capital of Rs. 198.11 Crore and whereas the investment in associate/subsidiary is only Rs. 23.83 Crore and that the fixed asset of Rs. 119.69 Crore has already been put to use during the year. The assessee also asserted that it has already disallowed interest expenses of Rs. 14.44 Crore and that the investments are made out of their own fund.
However, the ld. CIT(A) has not given any finding on those submissions. We have perused the balance-sheet of assessee as on 31.03.2013. The assessee has owned share capital of Rs. 8.85 Crore and Reserve & Surplus of Rs. 189.25 Crore. The assessee has made investment of Rs. 23.85 Crore only. The Hon’ble Supreme Court in CIT 4 Mum 2018-M/s KLT Automotive and Tubular Products Ltd. vs. Reliance Industries Ltd. (supra) held that where the assessee has sufficient fund to meet the investment in subsidiaries, the interest disallowance was not justified. Therefore, considering the ratio of decision of Hon’ble Apex Court, the disallowance made by Assessing Officer is deleted. The assessing officer is directed accordingly.
In the result, appeal of the assessee is allowed.
Order pronounced in the open court on 22/05/2019.
Sd/- Sd/- G.S. PANNU PAWAN SINGH VICE-PRESIDENT JUDICIAL MEMBER Mumbai, Date: 22.05.2019 SK Copy of the Order forwarded to : 1. Assessee 2. Respondent 3. The concerned CIT(A) 4. The concerned CIT 5. DR “C” Bench, ITAT, Mumbai 6. Guard File