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Income Tax Appellate Tribunal, : ‘D’ BENCH, KOLKATA
Before: Shri S.S.Viswanethra Ravi & Shri Dr. Arjun Lal Saini
Shri S.S.Viswanethra Ravi, JM:
This is appeal filed by the Revenue is directed against the order of the CIT-(A),- I, Kolkata dated 06-01-2016 for the assessment year 2012-13.
The brief facts of the case are that the assessee is a company and engaged in the business of manufacturing of pig iron and marketing of C.I pipes, castings and ferro alloys. The assessee filed its return for the A.Y under consideration on 08-03-2013 showing income of Rs.61,87,241/-. Under scrutiny, notices u/s. 143(2) and 142(1) of the Act were issued. In response to which, the AR of the assessee appeared and filed various details and documents in support of the return filed before the AO. The AO determined the total income at Rs.1,81,82,105/- as against returned income of Rs.61,87,241/- inter-alia making various disallowances on account of interest (Rs.4,46,817/-), depreciation (Rs.89,41,080/-) and disallowance (Rs.26,06,967/-) u/s. 43B of the Act vide his order dt. 09-02-2015 passed u/s. 143(3) of the Act.
ITA No.450/Kol/2016 2 M/s.PRS Metaliks Pvt. Ltd
Ground no.1 relates to deletion of disallowances of Rs. 89,41,080/- and Rs.4,46,817/- on account of depreciation and interest respectively by the CIT-A.
On perusal of records, the AO found that during the previous year the assessee was not engaged in manufacturing activities. In the Tax Audit Report, hereinafter in short ‘TAR’, the AO found that the assessee claimed deprecation on plant & machinery, factory building and electric installation as under:-
Plant & Machinery Rs.8041396.46 Factory installation Rs.444267.96 Electrical installation Rs.455415.50 Total Rs.8941079.92 Say Rs.8941080/-
The AO show caused the assessee why not the disallowance on depreciation on unused machinery can be made. The assessee explained that the depreciation is allowable since the machinery is put to use in earlier year and, therefore, the depreciation cannot be disallowed. The AO held that the depreciation is allowed only if it is used for the purpose of business or profession as the assessee failed to meet the conditions as laid down by the Act. Therefore, the AO disallowed the claim of depreciation of Rs.89,41,080/-.
Aggrieved, the assessee challenged the order of the AO in making such disallowance before the CIT-A contending that the assessee is engaged in the business of manufacturing of pig iron. It set up its industry in the F.Y 2006-07. The production started in the year 2008-09. Steel market, which was in the boom in the year 2008-09 started falling day by day from year 2009-10. But, due to such unfavourable market conditions, the assessee had to stop its production from F.Y 2011-12. It was waiting for favourable market condition to resume its production. Machineries and plant are kept ready for use. Further submitted that it was settled principle of law that expenditure including depreciation during suspension of activity
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for unfavourable market condition that is during the period of lull are allowable as business expenditure. In support of the contention the assessee relied on the decision of the Hon’ble Calcutta High Court in the case of CIT Vs. Norplex Oak India reported in 198 Taxman 470(Cal), wherein it was held that the word ‘used’ appearing in section 32(1) should be given a reasonable meaning. By introducing the said provision, the legislature wanted to give the benefit of depreciation on the plant & machinery purchased by the assessee and used for the purpose of the business. The word ‘used’ should be interpreted to mean a situation where the machineries which are required for running an assessee’s business have been kept for the said purpose. The assessee placed the reliance on the decision of the Hon’ble High Court of Calcutta in the case of CIT Vs. Union Carbide (I) Ltd reported in (2002) 254 ITR 488(Cal), wherein it has been held that the word ‘used’ occurring in section 32 of the Act should be given broad construction and if it is not actually in use, the assessee should be entitled to the benefit of depreciation if it is otherwise ready for use. Beside this, the assessee also relied on the following decisions/case laws:- CIT Vs. India Tea & Timber Co. 221 ITR 857(Gau) Held that depreciation should be allowed as a deduction even through the factory did not work during the year as expression ‘used’ should have a wider meaning so as to include not only actual but also passive user. CIT Vs. Refrigeration & Allied Industries Ltd 247 ITR 12(Del) Held that depreciation should be allowed even through the assets could not be used during the year, since the obligation to keep the machinery in good working condition sot that it can be used at any moment was present. Hira Financial Services Ltd 298 ITR 245(Mad) Held that where the assessee could not use the plant & machinery for strike, but kept them ready for use it shall be considered that the plant & machinery were used for the purpose of the business. General Corporation Ltd Vs. CIT (1935) 003 ITR 0350(Mad) CIT Vs. Bharat Nidhi Ltd (1966) 060 ITR 0520 (P&H) CIT Vs. Harish Chander Jaggannath Prasad (1961) 043 ITR 0231(P&H), KarsondasRanchhoddass Vs. CIT (1972) 083 ITR 0001(Bom.) (1983) 142 ITR 0342(Del) CIT Vs. Bharat Insurance Co. Ltd
The CIT-A after considering the above submissions of the assessee held that the assessee is entitled to claim depreciation and,
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therefore, directed the AO to delete the addition of Rs.89,41,08/- on account of depreciation by stating as under:- “I have considered the observation made by the AO and written submission made by the AR of the appellant. I find that there is sufficient force in the submission of the AR of the appellant. The Appellant Company which was engaged in manufacture of pig Iron and had stopped its production during the F.Y 2011-12 due to unfavourable market conditions and had claimed that the Plant & Machinery were kept ready for use. The AO issued a show cause during assessment proceedings and proposed to disallow the claim of depreciation on Plant & Machinery, Factory Building & Electric Installation as the Machinery was not put to use during the year. The AO disallowed the appellant claim of depreciation holding that the assessee had failed to meet the condition laid down for use of P & M for claim of depreciation. The Appellant has through its written submission mainly contended that the Machineries were kept ready for use and also contended that it is settled principle of law that expenditure including depreciation during suspension of activity for unfavourable market condition that is during the period of full are allowable as business expenditure. The appellant has placed reliance on judgment on the case laws of the jurisdiction High Court in the case of CIT v. Norplex Oak India 198 Taxman 470(Cal) & CIT v. Union Carbide (I) Ltd. (2002) 254 ITR 488(cal) & CIT v India Tea & Timber Co 221 ITR 857(Gau). In view of the above discussion and the totality of the facts of the case, it is held that the appellant is entitled to claim of depreciation in respect of P & M which was kept ready for use. The AO is directed to delete the addition of Rs.89,41,080/- out of depreciation.”
Aggrieved by such order of the CIT-A, the Revenue is in appeal before us. The ld.DR relied on the order of the AO in making disallowance on depreciation. On the other hand, the ld.AR of the assessee has opposed the order of the AO. He reiterated his same submission made before the CIT-A and supported the impugned order of the CIT-A in directing to delete the same to the AO.
Heard rival submissions and perused the material available on record including the case laws relied on by the assessee before the CIT-A as well as before us. It is not the case of the revenue that the assessee has ceased to carry on its business permanently. It is only a case of temporary lull in the business against which the machineries were not put to use. On introduction of concept of block assets the provisions of section 32 of the Act by the Tax Laws (Amendment) Act, 1986, which came into force w.e.f 1-4-1980 the concept of usage of asset(s) for the purpose of claiming of depreciation has become redundant. Apart from the above, the law laid down by the several decisions cited by the assessee before the CIT-A clearly permits the allowance of depreciation, when the machineries are kept for ready to
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use. On perusal of the case laws relied on by the assessee before the CIT-A, in our opinion that the CIT-A has rightly appreciated the facts and has rightly come to the conclusion that the assessee is entitled to claim the deprecation and accordingly, directed the AO to delete the impugned addition on this issue. We further find that the CIT-A has discussed the issue thoroughly with various case laws. We do not find any infirmity in the impugned order of the CIT-A in directing and deleting the same to the AO. Thereby, the ground on the issue of deletion of depreciation of Rs.89,41,080/- raised by the revenue is dismissed.
Next effective issue in ground no.1 i.e. deletion of disallowance of Rs.4,46,817/- on account of interest by the CIT-A.
On perusal of the balance sheet the AO found that the assessee gave short term loan & advance of Rs.6,67,61,785/-, on which no interest was charged. On perusal of the Profit & Loss account the AO noticed that the assessee paid interest amounting to Rs.65,81,723/- and claimed the same as deductible expenditure computing the income from business. The AO called the assessee to explain why the interest bearing loan was given to others as interest free advance. In reply, the assessee submitted that it had taken secured loan, unsecured loan and interest paid thereon as under:- Loan Amount Interest Term Loan from Indian Overseas Rs.1,63,59,998 Rs.65,70,241 Bank Unsecured Loans from others Rs.4,65,52,948 Nil (Interest free)
The assessee paid interest on term loan of Rs.65,70,241/-. The assessee pointed out that no interest was paid on unsecured loans as it is interest free loan. The assessee also pointed out that it has net worth (share capital + reserve & surplus) of Rs.4,69,93,522/- and unsecured loans from others Rs.4,65,52,948/- totaling to Rs.9,39,87,044/- and the loan/advance given for business purpose is only Rs.6,67,61,785/-, break up of which are as under:-
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Loans/advance for business purpose Rs. 99,20,152/- Receivable for commission b.f from last year Rs.1,35,73,372/- Receivable for commission current year Rs.4,32,68,261/- Total: Rs.6,67,61,785/-
The assessee submitted that Rs.99,20,152/- can be said to have advanced out of capital worth & interest free loan of Rs.9,39,87,044/- and no disallowance is attracted on account of interest. However, the AO held that the assessee declared that Rs.99,20,152/- was given as interest free loan/advance and was unable to prove conclusively that the interest free loan/advance was given out of non interest bearing fund. Accordingly, the AO found that the interest expenditure amounting to Rs.4,46,817/- [ ie. Rs.39,89,440 x 11.2%] is disallowable as it is not utilized for the purpose of the business.
Aggrieved, the assessee challenged the order of the AO in making such disallowance before the CIT-A. Before him the assessee contended that the entire term loan was used for acquisition of plant & machinery and no part of the said loan has been used for any other purpose. The working capital loan was also used for working capital requirement. Beside the above, the assessee had interest free unsecured loan amounting to Rs.4,65,52,948/- and own fund amounting to Rs.9,04,93,522/-. The assessee has not given interest free loan of Rs.99,20,152/- as found by the AO. The sum of Rs. 99,20,152/- appearing under the head’ short term loan & advances ‘represents business advances and recoverable on account of different taxes and deposits. The details of Rs.99,20,152/- are as under :- Name Amount (Rs.) Purpose Deputy Commissioner of 15,48,479 Sales tax Commercial taxes Security Deposit (JSEB) 21,200 Security deposit to JSEB FA & CAO South eastern 80,570 To Railway Railway Ashe Controls Pvt Limited 15,366 Purchase Advance Essel Mining & Industries 5,72,122 Purchase Advance Limited
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Map Mines & minerals Limited 5,50,000 Purchase Advance New India Mineral 1,81,491 Purchase Advance Padma Logistic & and Khanij 88,801 Purchase Advance P.Ltd Pradeep Coke Industries 1,25,889 Purchase Advance Sakchi Industries 7,025 Purchase Advance Sunrise Trading Co. 60,679 Purchase Advance Yash Agencies 2,00,000 Purchase Advance Anjaneya Consultancy (P) 16,13,705 Advance for Consultancy Limited AnjaneyaIspat Limited 1,17,750 Purchase Advance Anup Sarogi 8,50,000 Advance for land purchase Core Minerals 27,132 Purchase Advance Govinda Impex Limited 22,55,615 Purchase Advance MN Singh 51,000 Purchase Advance Mongia Hi Tech (P) Limited 10,00,000 Purchase Advance Parth Ispat (India) Pvt Limited 53,328 Purchase Advance Rajesh Steel Trading Co. 1,90,000 Purchase Advance TLPL Logistics Private Limited 10,000 Advance to Transporter Vishal Enterprises 3,00,000 Purchase Advance TOTAL 99,20,152
Before the CIT-A the assessee submitted that since the assessee has not given any interest free loan as such question of any disallowance of interest does not arise at all. Without prejudice to the above it may further be pointed out that the assessee has used entire interest bearing loan for business purpose only and even if Rs.99,20,152 is considered as interest free loan granted by the assessee, its own fund amounting to Rs.9,04,93,522/- and interest free unsecured loan accepted amounting to Rs. 45,38,321/- aggregating to Rs.9,50,31,843/- far exceeded the loan granted. Before the CIT-A the assessee has also submitted that it is a settled law that where assessee’s interest free fund exceeds the interest free loan given, no disallowance of interest can be made. For this proposition, the assessee relied on following case laws:- CIT Vs. Kajal Export (2014) 362 ITR 328 (Guj.) CIT Vs. Vijaywada Bottling Co. Ltd 356 ITR 625(AP) CIT Vs. Raghuvir Synthetics Ltd 354 ITR 222(Guj) CIT Vs. Reliance Utilities & Power Ltd 313 ITR 340(Bom) CIT Vs. Prem Heavy Engnrs Works P.Ltd 285 ITR 554(All) D & H Secheron Electrodies P.Ltd 142 ITR 528(MP) CIT Vs. Gopikrishna Murlidhar 47 ITR 469 (AP) Regal Theatre Vs. CIT 225 ITR 205(Del) 247 ITR 510(Gau) CIT Vs. India Carbon Ltd
After considering the above the CIT-A held that the ratio of the cited case laws are found to be squarely applicable to the facts of the present case. He also held that the finding of the AO in disallowing Rs.4,46,817/- as interest for non-business purpose is erroneous and
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unjustified and accordingly directed the AO to delete the addition of Rs.4,46,817/- by observing as under:-
“I have carefully considered the material before me, I found that the AO has erred in holding that the appellant had failed to establish the nexus between interest paid and interest free advances. The A.R of the appellant in his written submission has categorically mentioned that the company had taken interest bearing loan from Indian Overseas Bank of Rs.2,72,69,998/- and working capital loan from Indian Overseas Bank Rs.27,74,806/-. The above entire loan was used for acquisition of plant and machinery and no part of the said loan has been used for any other' purposes. The working capital loan was also used for working capital requirement. The appellant above assessee had interest free unsecured loan amounting to Rs. 4,65,52,948/- and also had own funds amounting to Rs.9,04,93522/-. Therefore, the finding of the AO that assessee has given interest free loan out of interest-free funds is not correct. The sum of Rs.99,20,152/- appearing under the heading short term loan and advance represents business advances and recoverable on account of different tax and advances. It is settled law that where appellant's interest free fund exceed the interest free loan given no disallowance of interest can be made for this proposition. Reliance was placed upon citation in the case of CIT vs. Kajal Exports (2014) 362 ITR 328 (Guj) (Page 5-6). CIT vs. Vijaywada Bottling Co. Ltd. 356 ITR 625 (AP), CIT vs. Raghuvir Synthetics Ltd. 354 ITR 222 (Guj), Reliance Utilities and power Ltd. 313 ITR 340 (Born), CIT vs. Prem Heavy Engineering Works Pvt. Ltd 285 ITR 554 (All)., D & H Secheron Electrodes Pvt. Ltd vs. CIT 142 ITR 528(MP), CIT vs.Gopikrishna Murlidhar 47 ITR 469 (AP), Regal Theatre vs. CIT 225 ITR 205(Del), CIT vs. India Carbon Ltd 247 ITR 510 (Gau). Considering the above discussion and ratio of the cited case laws which is found to be squarely applicable to the facts of the instant case, it is held that the finding of the AO in disallowing Rs.4,46,817 as interest for non-business purpose is erroneous and unjustified. Therefore, I direct the AO to delete the addition of Rs.4,46,817/-. This ground is allowed. “
Aggrieved by such order of the CIT-A, the Revenue is in appeal before us and contended that the CIT-A accepted the plea of the assessee without thorough verification. The ld.DR relied on the order of the AO making disallowance on interest for non-business purpose. On the other hand, the ld.AR of the assessee has opposed the order of the AO. He reiterated his same submission made before the CIT-A and supported the impugned order of the CIT-A in directing and deleting the same. He also submits that the AO arbitrarily disallowed the said addition without verifying the details as given by the assessee.
Heard rival submissions and perused the material including the case laws relied on by the assessee before the CIT-A as well as before us. It is clear from the findings of the CIT-A that the term loan and working capital loan both were availed by the assessee. The assessee used only interest bearing loan for the purpose of business
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i.e term loan used for acquiring plant & machinery and working capital loan used for working capital, which has been demonstrated by the assessee. Therefore, the disallowance on interest for non business purpose is totally erroneous and unjustified. This disallowance cannot be sustained. The existence of own fund of the assessee is far better than the advances given by the assessee. The decisions as relied on by the CIT-A clearly supports the case of the assessee. Therefore, the CIT-A was justified in directing the AO to delete the addition of Rs. 4,46,817/-. We find that the CIT-A has analyzed the case laws as relied on by the assessee on this issue. It is settled law that where assessee’s interest free fund exceed the interest free loan given no disallowance of interest can be made by the decisions of various courts. Thus, the CIT-A was fully justified in directing to delete the same to the AO. We do not find any reason to interfere with the order of the CIT-A on this issue. We uphold the same. Thereby, the issue in ground no. 1 deletion of interest Rs.4,46,817/- raised by the revenue is dismissed.
Ground nos.2 & 3 raised by the revenue are argumentative in nature, which needs no adjudication. Hence, the same are dismissed.
Ground no. 4 is general in nature, which requires no adjudication. Hence, the same is dismissed.
In the result, the appeal of the Revenue ITA No. 450/Kol/2016 for the A.Y 2012-13 is dismissed. Order pronounced in the open court on 10-01-2018
Sd/- Sd/- Arjun Lal Saini S.S. Viswanethra Ravi Accountant Member Judicial Member Dated :10-01-2018
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PP(Sr.P.S.) Copy of the order forwarded to: Appellant/Revenue :The DCIT, Cir-2(2), Aaykar Bhawan,7th Fl., 1. P-7, Chowringhee Square, Kolkata-69. Respondent/Assessee: M/s.PRS Metaliks Ltd 20 East India House, 1st 2 Fl., Room No.1A, British Indian Estate-69. 3. The CIT(A), Kolkata 4. CIT , Kolkata 5. DR, Kolkata Benches, Kolkata
/True Copy, By order
Sr.P.S, Head of Office ITAT Kolkata