M/S CRI LTD.,KOLKATA vs. DCIT, CIR-11(1), KOLKATA, KOLKATA

- This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals)-20, Kolkata dated 19.02.2015. Assessment was framed by ITO Ward-45(2), Kolkata u/s 143(3)/263 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 07.01.2013 for assessment year 2006-07. Shri S.K. Agarwal, Ld. Authorized Representative appeared on behalf of assessee and Shri Saurabh Kumar, Ld. Departmental Representative appeared on behalf of Revenue.

Inter-connected issue raised by assessee is that Ld. CIT(A) erred in confirming the order of Assessing Officer by sustaining the addition of ₹3,31,501/- on account of interest u/s 36(1)(iii) of the Act. A.Y. 2007-08 M/s CRI Ltd. Vs. DCIT Cir-11(1), Kol. Page 2 3. Briefly stated facts are that assessee is a limited company and engaged in manufacturing of ball pen, refill and trading of ball pen refills and wire. The assessee has shown closing capital work-in-progress for ₹89,77,842/- in its balance-sheet as on 31.03.2007. The closing CWIP was inclusive of the machine imported during the year for ₹69,40,669/- from Mikron Machine Technology (MMT for short). At the time of payment to MMT dated 19.09.2006 assessee has to bear the loss of ₹5,74,807/- on account of foreign exchange fluctuation. The payment to MMT was made by the assessee from its HSBC Bank account bearing No. 031433402001. Thus, the total value of machine forming part of CWIP comes to ₹75,15,476/- (cost of machine Rs.69,40,669 + 5,74,807/- being foreign exchange fluctuation loss) as the machine was part of capital working-in-progress which proves that it was not put to use during the year. The Assessing Officer, during the course of assessment proceedings observed that assessee has taken fresh working capital loan of ₹2.50 crores from HSBC Bank. The working capital loan from HSBC Bank was received by assessee in two installments i.e. 1.50 crores on 31.08 2006 and ₹ 1 crore on 18.11.2006. The AO further observed the working capital loan of ₹1.50 crores was transferred to the current account of the assessee maintained with HSBC Bank being account No.031433402001. It was also observed that there was no withdrawal from the current account of assessee after transferring the amount of loan except a payment to MMT for ₹75,15,476/- made on 16.09.2006. Thus, AO opined that the borrowed fund has been utilized for the purpose of acquiring the machine which has not been put to use during the year. Thus, the disallowance needs to be made of the interest on the loan amount used for the purchase of machinery as per the provision of Section 36(1)(iii) of the Act. 3.1 The AO observed that assessee has claimed interest expense of ₹11,02,730/- against the working capital loan of ₹2.50 crores availed from the HSBC Bank during the year. Thus, accordingly, AO worked out the amount of A.Y. 2007-08 M/s CRI Ltd. Vs. DCIT Cir-11(1), Kol. Page 3 proportionate interest on the amount utilized in the acquisition of machine as detailed under:- ”Total interest pad x borrowed capital utilized for acquisition of asset Total borrowed capital = Rs11,02,730/- x Rs.75,15,476/- = Rs.3,31,501/- Rs.2,50,00,000 Thus, the AO disallowed the amount of interest expense of ₹33,1501/- and added under the provision of Sec. 36(1)(iii) of the Act and added to the total income of assessee.

Aggrieved, assessee preferred an appeal before Ld. CIT(A). The assessee before Ld. CIT(A) submitted that the payment for the acquisition of machines were made out of its own fund and as such no borrowed fund has been utilized either directly or indirectly for the acquisition of machine. Therefore, no disallowance can be warranted under the provision of Sec. 36(1)(iii) of the Act. However, Ld. CIT(A) disregarded the contention of assessee and confirmed the order of AO by observing as under:- “… … I however do not find merit in the submissions of the assessee. The assessee took working capital loan of Rs.1.50 crore on 31.-08-2006 which was immediately transferred to its current account wherefrom the payment was made on 16-09-2006 towards the acquisition of plant & machinery. The AO has therefore rightly held in the impugned order that the material on record suggested that the payment was made out of the working capital loan. Under the circumstances, the AO was justified in invoking the proviso to section 36(1)(iii). The disallowance of interest of Rs.3,31,5011/- as made by the AO in the I is confirmed. … ..” Aggrieved by the above finding of Ld. CIT(A), the assessee is in appeal before the Tribunal.

Ld. AR for the assessee filed paper book which is running pages from 1 to 23 and submitted that assessee has sufficient owned fund as evident from the audited balance sheet placed on page 12 of the paper book. The ld. AR also submitted that borrowed fund of the assessee has been reduced in comparison to the earlier year. In this regard, Ld. AR relied on the judgment of Hon'ble Bombay High Court in the case of Reliance Utility Power 313 ITR 340. Accordingly it was submitted that it can be inferred that no borrowed fund has been utilized in the acquisition of machine. Ld. AR in support of assessee’s A.Y. 2007-08 M/s CRI Ltd. Vs. DCIT Cir-11(1), Kol. Page 4 claim drew our attention at page 12 of the paper book where the balance- sheet of the assessee was placed. He further argued that there is no provision to utilize working capital loan for the acquisition of the machinery and therefore, no borrowed fund has been utilized in the closing WIP. Ld. AR before us also filed the bank sanctioned letter in support of assessee’s claim which is placed on record. On the other hand, Ld. DR submitted that in the instant case no presumption can be drawn on the basis that assessee has sufficient fund and therefore no borrowed fund has been utilized. It is because the AO has established direct nexus between the amount borrowed from the bank and utilized for the purchase of machinery. Ld. DR heavily relied on the order of Authorities Below.

We have heard the rival contentions of both the parties and perused the material available on record. In the instant case, AO has made the disallowance of interest expense claimed by assessee on the ground that part of loan was utilized in acquiring the machinery which has not been put to use during the year. As per the AO the amount of proportionate interest paid on the borrowed fund utilized on the acquisition of machinery which has not been put to use cannot be allowed as deduction in terms of the provision of Sec.36(1)(iii) of the Act. The disallowance made by AO was subsequently confirmed by Ld. CIT(A). Ld. AR before us claimed that it had sufficient fund and therefore a presumption can be drawn that no borrowed fund has been utilized in acquisition of machinery. Ld. AR in support of assessee’s claim relied on the judgment of Hon'ble Bombay High Court in the case of Reliance Utility (supra) wherein it was held as under:- “10. If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available. In our opinion the Supreme Court in East India Pharmaceutical Works Ltd.'s case (supra) had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd.'s case (supra) where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running