M/S. RACHITECH ENGINEERING P. LTD.,NEW DELHI vs. ACIT, FARIDABAD

The first ground is against the confirmation of addition of Rs.6,36,211/- made under proviso to section 36(1)(iii) of the Act.

Briefly stated, the facts of the case are that the assessee filed return declaring total income of Rs.44.10 lac. During the course of assessment proceedings, the Assessing Officer observed that `Building under construction’ as appearing in the assessee’s balance sheet stood at Rs.27,62,666/-. He further noticed that the assessee had shown an advance given for land amounting to Rs.61,92,392/-. Since such building was under construction, the Assessing Officer opined that proviso to section 36(1)(iii) was attracted and, hence, the interest relatable to the loans utilized in construction of building, was to be capitalized. He calculated the proportionate amount of interest attributable to `Land and building under construction’ and Advance for land at Rs.6,36,211/-. Such disallowance was confirmed in the first appeal.

We have heard both the sides and perused the relevant material on record. It is seen from the Schedule of Fixed Assets, a copy of which is placed at page 13 of the paper book, that the balance under the head ‘Building under construction’ as on 01.04.2009 stood at Rs.27,62,666/-. No addition was made during the year and, thus, the opening balance became the closing balance as well. In so far as the amount of Rs.61,92,392/- is concerned, the same is a loan advanced. Schedule I to the assessee’s balance sheet shows the opening as well as closing balance at Rs.61.92 lac. It is, therefore, clear that the amount of Rs.61.92 lac was advanced in the preceding years and not in the year under consideration. This shows that the assessee did neither incur any expenditure on construction nor gave any fresh advance of land during the year, which implies that the entire amount was spent/given in earlier years. In the scrutiny assessment for the immediately preceding assessment year, namely, 2009-10, the AO did not make any disallowance on account of interest under proviso to section 36(1)(iii) of the Act, by impliedly accepting that such investment was not made out of interest bearing funds. Disallowance of interest was made in the assessment for the assessment year 2007-

8. However, the ld. CIT(A) deleted the same vide his order dated 21.07.2011 and the Department has accepted such order without preferring any further appeal. This shows that the Revenue accepted the position that investment in construction of building under progress and advance for purchase of land were made out of own funds in the preceding years. As no expenditure was incurred in construction of building etc. during the year under consideration, obviously, there can be no question of any disallowance in terms of proviso to section 36(1)(iii). This ground is, therefore, allowed.

The only other ground raised in this appeal is against confirmation of disallowance of software expenses amounting to Rs.67,600/- treated as capital expenditure.

Briefly stated, the facts of this ground are that the assessee claimed deduction of Rs.67,600/- for purchase of Gear box software as revenue expenditure. On being called upon to explain as to why this amount was not capitalized, the assessee submitted that the Gear box software was an application software purchased for designing a few specific gear boxes in the cranes which were manufactured during the year and such software was not of permanent use. Not convinced with the assessee’s contention, the Assessing Officer treated the amount as capital expenditure eligible for depreciation @ 30%. This is how, addition of Rs.47,320/- was made on this count. The ld. CIT(A) sustained the same.

We have heard both the sides and perused the relevant material on record. It is found from the assessment order itself that the assessee categorically stated that the Gear box software, an application software, was purchased by the assessee for designing a few specific gear boxes in the crane which were manufactured during the year itself and such software became useless thereafter.

In the result, the appeal is allowed.