Intas Biopharmaceuticals Ltd Vs DCIT (ITAT Ahmedabad)
No disallowance of interest u/s 36 (1)(iii) based on wrong presumption of AO that only interest-bearing funds were used for CWIP
Conclusion: Since huge interest free funds available with assessee the presumption of AO that only the interest bearing funds were utilized towards CWIP, was not correct. AO was not justified in addition of interest expenses debited in the P&L account, a sum of Rs.2,12,94,836/- was capitalized towards CWIP under Section 36(1)(iii) of and added to the total income of the assessee.
Held: AO noticed that assessee had made huge addition to the fixed assets CWIP during the year. He, therefore, called for the working of capitalization of interest on CWIP. It was explained by assessee that CWIP included an amount of Rs.1,43,41,166/- towards interest capitalization by assessee itself. AO, however, was not satisfied with the explanation of assessee. He, therefore, considered the borrowed funds of the assessee vis-à-vis CWIP and proportionate interest disallowance on CWIP. Accordingly, out of total interest expenses debited in the P&L account, a sum of Rs.2,12,94,836/- was capitalized towards CWIP under Section 36(1)(iii) of the Act and added to the total income of the assessee. The addition as made by the AO was upheld by the Ld. CIT(A). It was held that AO had not given any reason for working out the proportionate interest disallowance on CWIP. It was found that assessee had itself capitalized interest of Rs.14,341,166/- to CWIP-Tangibles and another interest amount of Rs.108,888,368/- to CWIP-Intangibles as on 31st March, 2011, which was duly certified by the auditor. Further, AO had made the disallowance on the presumption that all the interest bearing funds were utilized towards CWIP, which was not correct. From the Schedule-B of balance sheet it was seen that assessee had surplus reserve of Rs.3,392,038,627/- which also would have been deployed towards CWIP. In fact fresh share premium of Rs.2,356,380,318/-was received during the current year only. Considering this huge interest free funds available with assessee the presumption of AO that only the interest bearing funds were utilized towards CWIP, was not correct. Therefore, the disallowance as made by the AO which was based on wrong presumption, couldn’t be held as correct. Moreso, in the case of CIT Vs. Reliance Industries Ltd., 410 ITR 466(SC) holding that where mixed funds were available and where sufficient interest free funds were there the presumption was that the same were used for the purpose of making interest free investments, calling for no disallowance under section 36(1)(iii). Therefore, the disallowance of interest of Rs.2,12,94,836/- as made by the AO was deleted.
