NARASU'S SPINNING MILLS,SALEM vs. ACIT, SALEM

आदेश /O R D E R

PER N.R.S. GANESAN, JUDICIAL MEMBER: This appeal of the assessee is directed against the order of the Commissioner of Income Tax (Appeals), Salem, dated 27.03.2015 and pertains to assessment year 2011-12.

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Section 40(a)(ia) of the Income-tax Act, 1961 (in short 'the Act') on

the ground that the assessee has not made any TDS at the time of

payment and the recipient of the amount has submitted Form 15H

on 10.04.2011. According to the Ld. counsel, the recipient of the

amount informed the assessee in advance that she would provide

Form 15H, therefore, the amount was credited to the account of Ms.

M. Krishnaveni on 31.03.2011. According to the Ld. counsel, even

in earlier assessment years, the said Ms. M. Krishnaveni used to file

Form 15H and the assessee has paid the amount without deducting

the tax. During the year consideration, Form 15H in fact was filed

on 10.04.2011, before the due date for deposit of the TDS amount.

Since the assessee was informed in advance, according to the Ld.

counsel, the TDS was not made and in fact, the assessee has filed

the TDS certificate subsequently. Therefore, there cannot be any

disallowance. The Ld.counsel placed his reliance on the decision of

the Jodhpur Bench of this Tribunal in ITO v. Pearl Organic Coatings

(2004) 4 SOT 755, the decision of Mumbai Bench of this Tribunal in

Karwat Steel Traders v. ITO (2013) 145 ITD 370 and Delhi Bench

of this Tribunal in Vijaya Bank v. ITO (2014) 31 ITR(Trib) 427.

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Representative, submitted that the assessee at the time of crediting

the interest income has to deduct tax as required under Section

194A of the Act. In this case, admittedly, the interest was credited

in the books of account before 10.04.2011 and the tax was not

deducted. Therefore, the expenditure claimed by the assessee to the extent of `71,016/- towards payment of interest cannot be

allowed under Section 40(a)(ia) of the Act. Therefore, merely

because the assessee has received Form 15H on 10.04.2011 that

cannot be a reason for allowing the claim of the assessee.

perused the relevant material available on record. We have

carefully gone through the provisions of Section 40(a)(ia) of the Act.

Section 40(a)(ia) of the Act clearly says that when the tax is

deductible at source and such tax has not been deducted or after

deduction it was not paid before the due date for filing the return of

income, then the expenditure, which is otherwise allowable under

the provisions of Income-tax Act, has to be disallowed. In the case before us, admittedly, the interest payment of `71,016/- is claimed

as expenditure. The question arises for consideration is when the

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assessee has not deducted tax under Section 194A of the Act in

respect of the payment of interest income, whether such

expenditure otherwise allowable can be allowed in view of Section

40(a)(ia) of the Act. Section 40(a)(ia) clearly says that the tax is

deductible at source. The fact remains that the assessee is making

similar payment to the very recipient in the earlier assessment year

and tax was not deducted as required under Section 40(a)(ia) of the

Act on the basis of Form 15H filed by the recipient. The fact is that

the recipient of interest amount informed the assessee that she will

file Form 15H. Accordingly, at the time of credit, the tax was not

deducted. Subsequently Form 15H was filed on 10.04.2011, before

the due date for depositing the amount in the Government account.

When the recipient filed Form 15H, there is no liability on the part of

the assessee to deduct tax. Admittedly, the tax was not deducted at

the time of credit. However, before the due date for filing return of

income, the recipient filed Form 15H. Therefore, on the date of

filing of return of income, tax is not deductible on the amount paid to

the recipient since Form 15H is filed. When there is no requirement

for deduction of tax in view of filing of Form 15H by the recipient on

10.04.2011, this Tribunal is of the considered opinion that there

cannot be any disallowance under Section 40(a)(ia) of the Act.

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Therefore, this Tribunal is unable to uphold the order of the lower

authority and accordingly, the order of the lower authority is set aside and the addition of `71,016/- is deleted.

that the assessee is in the business of generating electricity through

windmill. During the year under consideration, the assessee has

added one more windmill to the existing business. Therefore,

according to the Ld. counsel, it was an expansion of business and

not extension of business. Therefore, proviso to Section 36(1)(iii)

of the Act is not applicable. However, the Assessing Officer found

that the assessee has to capitalize the interest on the borrowed

funds till the machinery is put to use. Referring to Section 36(1)(iii)

of the Act, the Ld.counsel submitted that the interest payment till the

machinery was put to use has to be capitalized when the business

of the assessee was extended. In this case, it is not an extension of

business but expansion of business. When the business was

expanded by adding one more windmill, according to the Ld.

counsel, the proviso to Section 36(1)(iii) of the Act is not applicable.

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The Ld.counsel placed his reliance on the decision of Ahmedabad

Bench of this Tribunal in Gujarat Mineral Development Corporation

Ltd. v. ACIT (2013) 140 ITD 603 and the judgment of Apex Court in

DCIT v. Core Health Care Ltd. (2008) 298 ITR 194.

Representative, submitted that Section 36(1)(iii) of the Act, which is

very much applicable during the year under consideration, clearly

says that when the assessee borrowed funds for acquisition of

asset, whether it is capitalized in the books of account or not. The

interest paid on the borrowed funds from the date of borrowing till

the capital asset was put to use shall not be allowed as deduction.

According to the Ld. counsel, the Parliament qualified the

“extension” of business with the word “existing”. Therefore, when

the assessee borrowed capital for acquisition of asset for extension

of existing business, the interest cannot be allowed since the

machinery or capital has to be put to use. Referring to the

argument of the Ld.counsel that it was only expansion and not

extension, the Ld. D.R. pointed out that the extension is in respect

of existing business. Admittedly, when the assessee is generating

electricity through windmill by adding one more windmill, the

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assessee is extending the business of existing generation of

electricity. It is not a new business of the assessee. Therefore, the

intention of the Parliament is that the capital asset shall be utilised

for extending the existing business. In this case, admittedly, the

existing business was extended. Therefore, there is no question of

any expansion as claimed by the assessee. Hence, the

CIT(Appeals) has rightly confirmed the addition made by the

Assessing Officer.

perused the relevant material available on record. We have

carefully gone through the provisions of Section 36(1)(iii) of the Act

which reads as follows:-

“36(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28- (iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession : Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalised in the books of account or not) ; for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction :

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Explanation — Recurring subscriptions paid periodically by shareholders, or subscribers in Mutual Benefit Societies which fulfil such conditions as may be prescribed, shall be deemed to be capital borrowed within the meaning of this clause ;” As rightly submitted by the Ld. D.R., the Parliament qualified the

word “extension” with the word “existing business or profession”.

Therefore, what is to be extended is existing business or profession.

The contention of the Ld.counsel for the assessee is that addition of

one more windmill does not amount to extension, it is only an

expansion of the business. This Tribunal is of the considered

opinion that when the assessee is admittedly in the business of

generation of electricity through windmill and made addition of one

more windmill, it is an extension of such existing business of

generation of electricity through windmill. Therefore, the capital

borrowed is for acquisition of asset for extension of the existing

business or profession. When the assessee paid interest on the

borrowed capital, which was used for acquisition of asset for

extension of the existing business of generation of electricity

through windmill, this Tribunal is of the considered opinion that the

interest cannot be allowed as deduction till the capital asset

acquired by the assessee is put to use. In this case, admittedly, the

capital asset purchased is not put to use. Therefore, the

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CIT(Appeals) has rightly confirmed the addition made by the

Assessing Officer.

Ahmedabad Bench in Gujarat Mineral Development Corporation

Ltd. (supra). In the case before Ahmedabad Bench, the assessee is

engaged in the business of manufacturing lignite. The Ahmedabad

Bench of this Tribunal found that the borrowed funds are for the

purpose of setting up a new unit of the existing business. However,

the assessee before the Ahmedabad Bench set up a new unit for

production of altogether a new product. Therefore, the Ahmedabad

Bench of this Tribunal found that the interest on borrowed funds

cannot be allowed as deduction. The Parliament, by Finance Act,

2003 w.e.f. 01.04.2004, introduced proviso to Section 36(1)(iii) to

capitalize the interest on borrowed funds till the asset was put to

use. The Ahmedabad Bench of this Tribunal had no occasion to go

through the proviso to Section 36(1)(iii) of the Act. Therefore, this

Tribunal is of the considered opinion that the decision of

Ahmedabad Bench of this Tribunal may not be of any assistance to

the assessee.

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Court in the case of Core Health Care Ltd. (supra). In this case, the

Apex Court found that the assessee was entitled to deduction under

Section 36(1)(iii) of the Act prior to amendment by Finance Act,

2003 in respect of the money borrowed for purchase of machinery

even though the assessee had not used the machinery in the year

of borrowing. The Apex Court found that proviso to Section

36(1)(iii) will operate prospectively. Admittedly, the proviso to

Section 36(1)(iii) of the Act is effective during the year under

consideration. Therefore, unless the machinery is put to use, the

assessee cannot claim deduction. Therefore, this judgment of the

Apex Court is also not of any assistance to the assessee.

interfere with the order of the CIT(Appeals) and accordingly, the

same is confirmed.

India, towards Narasu’s Spinning Mills Employees Group Gratuity

Fund.

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Employees Group Gratuity Fund to LIC. The assessee has also

produced a copy of the receipt for payment of money before the

Assessing Officer. According to the Ld. counsel, the payment of

money is not disputed. Once the money is paid in the year out of

the hands of the assessee, in view of judgment of Apex Court in CIT

v. Textool Co. Ltd. (2013) 263 CTR 257, the amount paid by the

assessee has to be allowed under Section 36(1)(v) of the Act.

submitted that admittedly, the Employees Group Gratuity Fund is

not approved by the Commissioner during the year under

consideration. Therefore, the payment made by the assessee

cannot be allowed.

perused the relevant material available on record. An identical

situation was considered by the Apex Court in the case of Textool

Co. Ltd. (supra). The Apex Court found that the real intention

behind Section 36(1)(v) of the Act is that the employer should not

have any control over funds of irrevocable trust created exclusively

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for the benefit of the employees. Since the Fund created by the LIC

for the benefit of the employees of the assessee and contribution

made by the assessee ultimately came back to the Employees

Gratuity Fund, the Apex Court found that the conditions stipulated

under Section 36(1)(v) of the Act is satisfied. In the case before us,

the application made by the assessee is still pending before the

Commissioner for approval and the amount was paid to the LIC.

The assessee had no control over the Fund created by the LIC for

the benefit of its employees. Since the assessee has no control

over the funds and application is still pending before the

Commissioner, this Tribunal is of the considered opinion that there

is no reason to disallow the claim of the assessee. Since the funds

of the assessee have gone out of the hands of the assessee and

the assessee has no control over the funds, the dictum laid down by

the Apex Court is squarely applicable to the facts of the case.

Accordingly, we set aside the orders of the lower authorities and the addition made by the Assessing Officer to the extent of `46,71,233/-

is deleted.

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Order pronounced on 9th December, 2015 at Chennai. sd/- sd/- (ए. मोहन अलंकामणी) (एन.आर.एस. गणेशन) (A. Mohan Alankamony) (N.R.S. Ganesan) लेखा सद�य/Accountant Member �या�यक सद�य/Judicial Member

चे�नई/Chennai, �दनांक/Dated, the 9th December, 2015.

Kri. आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 2. ��यथ�/Respondent 3. आयकर आयु�त (अपील)/CIT(A), Salem 4. आयकर आयु�त/CIT, Salem 5. �वभागीय ��त�न�ध/DR 6. गाड� फाईल/GF.