Disallowance of interest on loan on Plant & Machinery and Capital WIP by capitalizing it is unsustainable

DCIT Vs GNA Duraparts Ltd (ITAT Amritsar)

Facts- AO noticed that the assessee has made an addition to fixed assets of INR 53,06,14,928/- and has also taken a new term loan of INR 28,41,66,284/- from the Central Bank of India. AO made an addition of an Addition of INR 2,86,84,840/-. Further, the interest amounting to INR 51,24,000/- interest paid on the purchase of machinery is disallowed from revenue expenses and is capitalized into Machinery under installation. Additionally, the interest paid on the loan to the addition of the building under construction and for the new term loan for the building is calculated @ 15% which is Rs. 63,59,908/- also disallowed from revenue expenditure by the AO.

Conclusion- Held that order of CIT(A) sustained on the issue restricting the disallowance of non-capitalization of interest on bank loan on Plant & Machinery and on account of non-capitalization of interest expenditure on Capital Work in Progress u/s 36(1)(iii) of the Income Tax Act.

FULL TEXT OF THE ORDER OF ITAT AMRITSAR 

The cross appeals are filed by the Revenue and the assessees against the order of the Commissioner of Income Tax (Appeals)-5, Ludhiana even dated 17.10.2017 in respect of assessment year 2013-14.

2. The Department has taken the following grounds of appeal in ITA No. 800/Asr/2017:

“1. Whether on facts and in circumstances of the case, the Ld. CIT(A) has erred in restricting the disallowance of Rs. 2,41,77,820/- to Rs. 47,69,748/-made on account of interest expenditure u/s 36(1)(iii) of the Income Tax Act, 1961 for non capitalization of interest expenditure on Capital Work in Progress by relying on additional evidences without allowing any opportunity to the AO and ignoring the mandatory provisions of Rule 46A of Income Tax Rules, 1962.

2. The appellant craves leave to add or amend the grounds of appeal on or before is heard and disposed off.”

3. Grounds of appeal in ITA No. 801/Asr/2017:

“1. Whether on facts and in circumstances of the case, the Ld. CIT(A) has erred in restricting the disallowance of Rs. 1,19,95,692/- to Rs. 44,55,010/-made on account of non capitalization of interest on loan on Plant & Machinery and Rs. 1,66,89,148/- to Rs. 58,58,800/- made on account of non capitalization of interest expenditure on Capital Work in Progress u/s 36(1)(iii) of the Income Tax Act, 1961 by relying on additional evidences without allowing any opportunity to the AO and ignoring the mandatory provisions of Rule 46A of Income Tax Rules, 1962.

2. The appellant craves leave to add or amend the grounds of appeal on or before is heard and disposed off.”

4. The counsel for the assessee has taken the following grounds of appeal in ITA No. 12/Asr/2018:

“1. That on the facts and circumstances of the case, the authority below has wrongly confirmed the addition of Rs. 9,68,989/- out of Foreign Tour expenses without any justification.

2. That on the facts and circumstances of the case, the Ld. CAT (A) has wrongly confirmed the addition of Rs. 3,80,783/- out of registration charges of vehicles.

3. That on the facts and circumstances of the case, the authority below has wrongly confirmed the addition of Rs. 4,15,000/- under printing & stationery expenses head.

4. That on the facts and circumstances of the case, a sum of Rs. 1,40,159/-has wrongly been disallowed by the Id. AO and upheld by the Ld. CTT(A) on account of payment made by the assessee to M/s. Rupcon Engineers.

5. That on the facts and circumstances of the case, the Ld. CIT(A) has wrongly confirmed the addition of Rs.l3,48,000/- on account of training expenses of Sh. Keerat Seehra.

6. That on the facts and circumstances of the case, the authority below has wrongly confirmed the addition of Rs. 47,69,748/- ( Rs. 42,27,860/- + Rs. 5,41,888/-) being interest disallowed without any justification.

7. That the Ld. CIT(A) has failed to appreciate that on facts and circumstances of the case, the learned AO has erred in law and on facts in framing impugned assessment order in violation of CBDT instruction No. 7 of 2014 dated 26.09.2014.

8. That the Ld. CIT(A) has failed to appreciate that the Ld. AO exceeded his jurisdiction in framing impugned assessment order.

9. That the impugned assessment is against the principles of natural justice.

10. That the explanations and submissions of the appellant should have been considered in proper context.

11. That proper opportunity should have been allowed.

12. The appellant prays to add or amend any ground of appeal before or at the time of hearing.”

5. Grounds of appeal in ITA No. 13/Asr/2018:

“1. That on the facts and circumstances of the case, the authority below has wrongly confirmed the addition of Rs. 1,91,403/- out of Foreign Tour expenses without any justification.

2. That on the facts and circumstances of the case, the Ld. CAT (A) has wrongly confirmed the addition of Rs. 1,88,152/- out of registration charges of vehicles.

3. That on the facts and circumstances of the case, a sum of Rs. 1,52,594/-has wrongly been disallowed by the AO and upheld by the Ld. CIT(A) on account of payment made by the assessee being incidental expenses.

4. That on the facts and circumstances of the case, the authority below has wrongly confirmed the addition of Rs. 1,03,13,890/- ( Rs. 58,58,800/- + Rs. 44,55,010/-) being interest disallowed without any justification.

5. That the Ld. CIT(A) has failed to appreciate that on facts and circumstances of the case, the learned AO has erred in law and on facts in framing impugned assessment order in violation of CBDT instruction No. 7 of 2014 dated 26.09.2014.

6. That the Ld. CIT(A) has failed to appreciate that the Ld. AO exceeded his jurisdiction in framing impugned assessment order.

7. That the impugned assessment is against the principles of natural justice.

8. That the explanations and submissions of the appellant should have been considered in proper context.

9. That proper opportunity should have been allowed.

10. The appellant prays to add or amend any ground of appeal before or at the time of hearing.”

6. At the time of hearing, the Ld. counsel for the assessee of Sh. Gunjeet Singh Syal, Advocate stated that he has been instructed by the appeallnt assesses to withdraw their appeals in ITA Nos. 12 & 13/Asr/2018. Accordingly, he has given a noting on the ground of appeal memo of these appeals that the appeals not pressed in respect of ITA Nos. 12 & 13/Asr/2018. The Ld. DR has no objection for the same.

6.1 Accordingly, the assessees appeal in ITA Nos. 12 & 13/Asr/2018 stands dismissed as not pressed.

7. Since the revenue, has taken sole ground of appeal, in both the departmental appeals, on identical facts, and hence, these appeals are heard together and disposed of together by this common order.

8. The facts are taken from ITA No. 801/Asr/2017 as a lead case to adjudicate the common issue of non capitalization of interest expenditure on Capital Work in Progress u/s 36(1)(iii) of the Income Tax Act, 1961 and that non capitalization of interest on loan on Plant & machinery allegedly by relying on additional evidences without allowing an opportunity to the AO and ignoring the mandatory provisions of Rule 46A of IT Rules, 1962.

9. Briefly the facts on record are that, the appellant assessee, a limited company engaged in the business of manufacturing of Exels etc. During the course of scrutiny assessment, the AO has noticed that the assessee has made an addition into fixed assets of Rs. 53,06,14,928/- and has also taken a new term loan of Rs. 28,41,66,284/- from Central Bank of India. The AO has examined the issue with reference to the books of account and submission filed by the assessee before him and made an addition of Addition of Rs. 2,86,84,840/- (i.e.Rs. 1,66,89,148/- + Rs. 1,19,95,692/-) by observing as under:

The issue involved in the following paras relates to the Capitalization of Interest & Installation Charges on Addition to Fixed Assets.

8. Issue of Capital Work In Progress:- During the course of examination of information/documents furnished by the assessee, it was found that the assessee has made additions in Capital Work In Progress of Rs. 28,93,64,113 (building under construction of Rs. 8,38,62,512 and machinery under installation Rs. 20,55,01,601). In this regard assessee vide this office letter No. 1214 dated 17.03.2016 was asked as:-

“During the year under consideration you have taken term loans of Rs. 28.05 crores from various banks on which you have paid huge amount of interest. On the other hand you made additions in Capital Work In Progress of Rs. 28.93 crores. Perusal of record submitted by you show that you have not capitalized any interest or installation charges in Capital Work In Progress (machinery under installation and building under construction). Please show cause as to why not interest @ 1 5 % and installation charges @ 8% be capitalized?”

In response to the above query the assessee filed its reply on 22.03.2016 which is reproduced as under:-

“As regards capital work in progress of Rs. 28.80 Crores, it is submitted that soft copy of our books of accounts is in possession of your honour from where you could pick up these figures. On perusal of capital work In progress account your honour will appreciate that various incidental expenses pertaining to installation of machinery have already been capitalized in the value of machinery. Therefore, non capitalization of installation does not arise.

Regarding interest on Term Loan of Rs. 28.05 Crores, it is submitted that Term Loan has been utilized for the purchase of machinery to capital work In progress. Majority of these machines have been purchased by opening letter of credits with banks for more than 260 days. Copies of letter of Credits have already been taken on record vide our reply dated 10.03.2016 at para 3. therefore, there is no question of capitalization of any interest as no interest has been paid or accrued on machinery under installation pertaining to capital work in progress.

Your honour will appreciate that the assessee company has substantiate interest free funds to make capital expenditure. The details of interest free funds are as under:

Share Capital                    Rs. 15.16 Crores

Reserve & Surplus                     Rs. 74.86 Crores

Accumulated depreciation                Rs. 86.68 Crores

TOTAL:                  Rs. 176.70 Crores

Therefore the natural presumption is that the payment of machinery is from interest free funds which need no capitalization of interest”.

The reply of the assessee was carefully considered and was not found satisfactory. Therefore, again vide show cause letter No. 1234 dated 23-03-2016, assessee was asked as follows:-

“You were asked via notice u/s 142(1) of IT Act no. 1214 dated 17/03/2016 regarding capitalization of interest against term loan w.r.t capital work in progress of Rs. 28.80 crores. You submitted on 22/03/2016 that “term loan of Rs 28.05 crores has been utilized for the purchase of machinery pertaining to capital work in progress. Majority of these machines have been purchased by opening letter of credits with banks for more than 360 days “

Undersigned has perused all the records but not satisfied with your reply. You are hereby given one more opportunity to put forth your case as to why interest paid on term loan be not capitalized vis a vis capital work in progress. Please supplement your reply with documentary evidence.

Further, you submitted soft copy of records but undersigned is not able to figure out where you have capitalized the installation charges. Please again produce/show the same”

In response to this assessee filed a reply on 28-03-2016, which is reproduced as under:-

“As submitted in our reply dated 23.03.2016, it is once again submitted that machinery pertaining to capital work in progress has been purchased by opening letter of credit for more than 360 days. Copies of letter of credits have been placed on record vide our reply dated 10.03.2016 at para-3. Majority of the machinery in capital work In progress imported from Germany. Copy of bill dated 06.12.2012 of Lasco Press is being enclosed herewith whereby it has been duly stated that payment has to be made on/before 27.09.2013 ie after receiving this machine in out premises. Copy of letter of credit of Central Bank of India is also being enclosed herewith duly stating the payment to be made within 36Q days of bill of lading. Therefore, when the payment of letter of credit has not been paid, no question of capitalization of interest arises. Further, copy of account of some vendors have also been placed on record vide reply dated 10.03.2016 at para-3. Wherein the payments have been made after installation of machine. Therefore, there is no question of capitalization of interest. In your questionnaire your honour has also directed us to produce copies of LCs opened for purchase of machinery. This it-self proves that the machinery has been purchased on credit and no payment in respect of the same have been made, therefore, once again evidencing the fact that no interest is required to be capitalized.

Your honour will appreciate that the assessee company has substantiate interest free funds to make capital expenditure. The detail of interest free funds is as under:

Share Capital               Rs. 15.16 Crores

Reserve & Surplus                  Rs74.68Crores

Accumulated depreciation       Rs. 86.68 Crores

TO TAL:            Rs.176.52 Crores

Therefore, the natural presumption is that the payment of machinery is from interest free funds which needs no capitalization of interest.

Regarding installation charges on machinery & Building in capital work in progress, it is submitted that on 22.03.2016 all the bills in respect of additions made in capital work in progress have been duly produced which on your instruction were minutely scrutinized by Mr. Kulbir Mahey, Inspector alongwith Mr. Dixit, Assistant. The assessee company had produced original bills of installation expenses which have already been capitalized in capital work in progress account. It is once again reiterated that soft copy of our Books of accounts has already been filed with your honour. On perusal of Building & Machinery account in capital work in progress, it is submitted that installation charges have been duly capitalized, so, therefore, there is no question of estimating installation charges at 8%. In your questionnaire your honour has also directed us to produce copies of certain bills. These bills pertain to installation capitalized and no further capitalization is required.

Without prejudice to the above, we have repeatedly filed copy of bills pertaining to Building and Plant & machinery and also Capital work in progress which have been thoroughly checked by you subordinates without pin-pointing any machine on which interest or installation or expenses are required to be capitalized. Now at the fag end of the assessment, your honour on the basis of conjecture and surmises is proposing to capitalize interest and installation expenses that too on adhoc basis and by not pin-pointing specific Buildings or Plants & Machinery or Capital work in progress would be highly arbitrary, illegal and unjust.

We reserve our right of rebuttal after we are provided information on specific Buildings or plants and machinery or capital work in progress on which your honour proposes to capitalize interest and installation expenses”

The replies filed by the assessee are carefully considered and following observations are made:-

• Under capital work in progress, the assessee made an addition of Rs. 28,93,64,113/-.
• During the year under consideration assessee has taken a New term loan of Rs. 24,17,72,472/- for Machinery from Central Bank of India and a New Term Loan of Rs. 4,23,93,812/- for Building from Central Bank of India. That is during the year the assessee has taken a new term loan of Rs. 28,41,66,284/-from Central Bank of India.
• Assessee himself accepted that the New Term Loan is used for Plant & Machinery and Building and its is also clear that the bank make it sure that the term loan is used for the purpose for which it is granted. Thus it is established that the new term loan of Rs. 28,41,66,284/- from Central Bank of India is used for Plant & Machinery and Building respectively and interest is paid against the same.
• Although the assessee was asked to submit a list in serial order containing all the items purchased and corresponding LCs appended thereto. But assessee did not furnish the information in that fashion. In his reply assessee furnished that he purchased machinery under installation against L.Cs, but he submitted only one L.C. He produced bill of Lasco Umformtechnik, Werkzeugmaschinenfabrik vide which a Machine (which is put under the head Capital Work In Progress, as per his reply dated 28-03-2016) for Euros 24,40,000/- on 06-12-2012. Assessee furnished a L.C. of Central Bank of India under which the Machine is purchased. It is evident on the bill that payment of Euros 4,88,000/- is already paid in Five Payment each of Euros 97,600/- from 12-11 to 04-12 as 1^st Rest of the amount is payable through confirm letter of credit No. 0035212IM0000004. By Central Bank of India. It is also evident from the L.C of Central Bank of India which in its sixth line states that, it is drawn for Euros 19,52,000/-. Thus, if the assessee’s contention is accepted that the machine is purchased against L.C even then L.C is drawn only for Euros 19,52,000/- and the balance amount of Euros 4,88,000/- were already paid. On this amount of Euros 4,88,000/- assessee has paid interest and the same is therefore, needs to be capitalized. Its value in Indian Rupees comes out to be Rs. 3,41,60,000/-. The interest @ 15% comes out to be Rs. 51,24,000/-. Thus, the interest amounting to Rs. 51,24,000!– is disallowed from revenue expenses and is capitalized into Machinery under installation
• As the assessee produced only one L.C of Euros 24,40,000/-. The value of which in Indian Rupees on 06-12-2012 comes out to be Rs. 17,08,00,000/-. But total addition into Plant & Machinery under installation is Rs. 20,55,01,601/-. Regarding remaining Rs. 3,47,01,601/-, assessee submitted no L.Cs, but has taken a new term loan of Rs. 24,17,72,472/- from Central Bank of India during the assessment year 2013-14. Therefore, he must have used the term loan of Rs. 3,47,01,601/- for the purchase of machinery under installation and also must have paid interest on the same, which has not been capitalized by the assessee. As the assessee did not furnish the details about the payment of interest against the new term loan, despite repeated requests, the interest thus @ 15% (Rs. 52,05,240!-) Is capitalized and disallowed from revenue expenses and added back to the returned income of the assessee.
• During the year under consideration the assessee has shown addition into building under construction of Rs. 8,38,62,512/- and has also taken a new term loan for building of Rs. 4,23,93,812/-. As the new term loan of Rs. 4,23,93,812/- is used for specific purpose i.e. building, assessee must have paid interest on this term loan, which has not been capitalized during the year. Further, assessee did not submit the amount of interest paid against new term loan taken for building. Therefore, the interest paid is calculated @ 15% which comes out to be Rs. 63,59,908!-. The same is thus disallowed from revenue expense and added back to the returned income of the assessee.
• Regarding assessee’s contention that he had interest free funds of Rs. 176.52 Crores, it is clarified that these funds were only notional in nature, because the assessee had invested in the fixed assets (Rs. 194,27,72,340/-) and also in current assets. Further, it is clarified that assessee has taken a new term loan for Plant & Machinery and Building which is used for the same purpose. Therefore, to the extent new term loan is taken and used, it is very much clear that it had been used for machinery & building (Capital Work In progress). And interest paid against this during the year under consideration, which was not capitalized.
• Regarding his contention that he also invested interest free funds for the purchase of Plant & Machinery and Construction of building, it is clarified that interest is capitalized only to the extent of new term loan taken (Rs. 23,41,66,284/-) and not against the total addition of Rs. 28,93,64,113/- into C.W.P. But as far as the new term loan is concerned, it is once again emphasized that it was used only for Building & Machinery (that is the purpose for which it was taken). It is also evident that the interest has been paid on this term loan during the year, which is not capitalized by the assessee. Hence, an amount of Rs. 1,66,89,148!– which is paid as interest is hereby capitalized and disallowed from the revenue expenses claimed by the assessee.
• Conclusively during the year under consideration assessee has made additions into Capital Work in Progress of Rs. 28,93,64,113/- (Machinery under installation Rs. 20,55,01,601/-, Building under Construction Rs. 8,38,62,512/-). On the other hand assessee has taken a new term of Rs. 28,41,66,284/- (which is used only for the purchase of machinery and construction of building). As the assets added into C.W.P of Rs. 28,93,64,113/- had not been put to use till the end of Assessment Year 2013-

14, all the additions made into it are required to be capitalized. Thus, the interest paid on the addition into C.W.P (as is discussed above) needs to be capitalized. Hon’ble the Supreme Court in M/s Challapalli Sugars Ltd. vs. CIT, [1975] 98 ITR 167 case held that the interest paid before the asset was first put to use would be included in the actual cost thereof and has to be treated as capital expenditure and not revenue in nature. In Oswal Spinning’s case P & H Court answered the question as to whether the interest paid by the assessee on purchase of machinery should be considered as part of the cost of machinery. This Court held that the interest paid on acquisition of machinery should be treated as part of the cost of machinery while relying upon Challapalli Sugar Ltd. v. CIT (supra); CIT v. Tensile Steel Ltd. (Guj.), [1976] 104 ITR 581; Ballarpur Paper and Straw Board v. CIT (Bom.), [1979] 118 ITR 613 and CIT v. New Central Jute Mills (Cal.), [1982) 135 ITR 736. While dealing with an identical issue, Calcutta High Court in JCT Ltd. Vs. Deputy Commissioner of Income-tax and another [2005] 276 ITR 115, decided the issue in favour of the Revenue and against the assessee by holding that even in cases of expansion of existing business, the interest paid or payable on the loans raised for acquisition of new asset would not be termed as revenue expenditure deductible under Section 36(1)(iii) of the Act. Hence, an amount of Rs. 1,66,89,148/- which is paid as interest is hereby capitalized and disallowed from the revenue expenses claimed by the assessee. Thus, an amount of Rs.1,66,89,148/- is added back to the returned income of the assessee subjected to penalty proceedings u/s 271(1)(C) of the I.T. Act, 1961 as the assessee has furnished inaccurate particulars of income on this account as above.

Further there was an addition of Rs. 23,85,60,480/- in the Block of Plant & Machinery and the AO asked the assessee as to why interest @ 15% and installation charges @ 8% be not capitalized. In response the assessee repeated the submission that payments have been made after installation of Machinery and in many cases Machinery were purchased by opening Letter of Credit. The arguments of the assessee were not found acceptably by the AO. The AO mentioned that assessee has made addition of Rs. 44,40,62,414/- into Plant & Machinery and has taken a new Term Loan Rs. 24,17,72,472/- out of which Rs. 17,29,10,817/- by used for the purchase of Plant & Machinery and interest is paid on this Loan during the year under consideration. Accordingly, after allowing depreciation @ 7.5% the AO made addition of Rs. 1,19,95,692/-.

10. Aggrieved with the assessment order, the assessee went in appeal before the Ld. CIT(A), where the Ld. CIT(A) has granted part relief by observing vide para 3.6 as under:

“3.6 Grounds of Appeal Nos. 6 & 7 relate to addition of Rs. 1,66,89,148/- and Rs. 1,19,95,692/- on account of disallowance of interest u/s 36(l)(iii) and capitalization of interest on loan. The AO has mentioned that examination of document showed addition in Capital Work in Progress of Rs. 28,93,64,113/- (which includes building under construction of Rs. 8,38,62,512/-and machinery under installation Rs. 20,55,01,601/-). The AO mentioned that the assessee was required to file information in specific format which he failed to do. Accordingly a show cause notice was given to the assessee stating that term loan of Rs. 28.05 crores was taken during the year and addition in Capital Work in Progress was Rs. 28.93 crores. The AO asked the assessee as to why interest @ 15% and installation charges @ 8% should not be capitalized. In reply, the assessee submitted that incidental expenses pertaining to installation of machinery have already been capitalized in the value of machinery and soft copy of books is already given to the AO. As regards, interest on term loan it was submitted that majority of machinery has been purchased by opening Letter of Credits with the bank by more than 360 days and as no interest has been paid or accrued on machinery under installation, therefore no question of capitalization of interest on capital work in progress relating to machinery. On further query by the AO the assessee submitted copy of bill dated 06.12.2012 of Lasco Press and argued that the payment was to be made after receiving this Machine in assessee’s premises. The assessee further filed copies of some account of vendors wherein payments have been made after installation of machinery and argued that there was no question of capitalization of interest. It was also argued that assessee has substantial interest free funds to make capital expenditure like share capital, reserves & surpluses and accumulated depreciation total amounting to Rs. 176.52 crores. The reply of the assessee was not found convincing by the AO. The AO observed that in respect of Lasco Press an amount of Euros 4,88,000 was already paid before opening of LC and interest on this amount needs to be capitalized. Accordingly, a sum of Rs. 51,24,000/- was disallowed from the revenue expenditure and capitalized into machinery under installation. Similarly, a disallowance of Rs. 52,05,240/- was made in respect of other plant & machinery under installation for which as per AO Term Loan of Rs. 3,47,01,601/- must have been used. For ‘Building Under Construction’, as per AO, out of total value of Rs. 8,38,62,512/- a new Term Loan of Rs. 4,23,93,812/-was taken and interest on the same has not been capitalized. Therefore, the AO disallowed Rs. 63,59,908/- on this account. Thus, a total disallowance of Rs. 1,66,89,148/- as interest paid on capital borrowings in respect of Capital Work in Progress of Rs. 28,93,64,113/- was made. Further there was an addition of Rs. 23,85,60,480/- in the Block of Plant & Machinery and the AO asked the assessee as to why interest @ 15% and installation charges @ 8% be not capitalized. In response the assessee repeated the submission that payments have been made after installation of Machinery and in many cases Machinery were purchased by opening Letter of Credit. The arguments of the assessee were not found acceptably by the AO. The AO mentioned that assessee has made addition of Rs. 44,40,62,414/- into Plant & Machinery and has taken a new Term Loan Rs. 24,17,72,472/- out of which Rs. 17,29,10,817/- by used for the purchase of Plant & Machinery and interest is paid on this Loan during the year under consideration. Accordingly, after allowing depreciation @ 7.5% the AO made addition of Rs. 1,19,95,692/-.

The facts of the case, the basis of disallowance/addition made by the AO and the arguments of the AR have been considered. The AR repeated the argument that assessee has sufficient own funds to make addition in fixed assets. It was also argued that AO has disallowed interest in excess of what has been debited in Profit & Loss account in respect of new Term Loans. It was also argued that machinery has been put to use from 30.09.2012 and payment has been made in some cases on 04.07.2013, therefore no interest is to be capitalized. As per AR, the interest paid after installation of the Machinery was allowable as revenue expenditure. The AR was asked to file the copies of bills of addition to plant & machinery along with the evidence of their first put to use. These were got verified through the Inspector of Income Tax, posted in this office. From the details regarding the date of installation, date of put to use and date of payment, the interest amount in respect of the New Machinery installed have been calculated as per the table attached as Annexure-I. The interest relating to period prior to the date of first put to use of the Machinery has been arrived at Rs. 58,58,880/- which needs to be capitalized as per proviso to section 36(l)(iii).

As regards, disallowance in respect of ‘Building Under Construction’ it was submitted that building was constructed by purchase of material on credit. As per AR, interest of Rs. 44,55,010/- was paid on new Term Loan for building. It has also been argued that a part of the building was appearing in the opening balance and has been put to use during last year itself. Under these facts the disallowance on account of building should not exceed this amount d is restricted to Rs. 44,55,010/-. Thus the total disallowance on account of capitalization of interest on fresh Term Loan for Machinery and Building both under the head Capital Work in Progress and direct addition to the fixed assets comes to Rs. 1,03,13,890/- (Rs. 58,58,800 + Rs. 44,55,010). Therefore, the addition to the extent of Rs. 1,03,13,890/- out of total addition of Rs. 2,86,84,840/- (Rs. 1,66,89,148 + Rs. 1,19,95,692) is sustained and the appellant gets the relief of the balance amount. Depreciation is to be allowed by the AO as per law.

Accordingly, these grounds of appeal are partly allowed.”

11. The Ld. CIT-DR contended that the Ld. CIT(A) has also added facts and circumstances of the case and restricting the addition of Rs. 1,66,89,148/- to Rs. 58,58,8000/- and addition of Rs. 1,19,95,692/- to Rs. 44,55,010/ made by the Assessing Officer on account of capitalization of interest expenditure on borrowed loan on capitalization of new machinery which was not put to use and Capital Work in Progress respectively u/s 36(1)(iii) of the Income Tax Act, 1961 by relying on additional evidences without allowing any opportunity to the AO and in violation of provisions of Rule 46A of the IT Rules, 1962. He further submitted that the Ld. CIT(A) has conducted enquiry from the assessee during the course of appellate proceedings and verified bills which constitute additional evidence and required to be forwarded to the AO to filed its comment in rebuttal. The CIT(DR) alleged that additional evidence is taken in form of documents mentioned at page 8, paragraph a to f of CIT(A) order and that Chart showing calculation of interest mentioned at page 9, paragraph 2.3 of CIT(A). He contended that the verification done by the Ld. CIT(A) by way of enquiries conducted from the assessee in respect of the capitalization of interest expenditure of Capital Work in Progress by procuring the documentary evidence in form of bills during the course of the appellate proceedings, without granting opportunity to the AO is gross violation Rule 46A. He requested that the matter may be remanded back to the AO for verification of the claim of the assessee in the light of the documentary evidences filed in the form of bills and vouchers as regards to the addition in plant and machinery put to use.

12. Per contra, the Ld. counsel for the assessee supported the order of the Ld. CIT(A) to support this contention, the Ld. counsel has filed a written note which is reproduced as under:

“BEFORE THE HON’BLE INCOME TAX APPELLATE TRIBUNAL, AMRITSAR BENCH, AMRITSAR

IN THE CASE OF

Dept. Appeal:

“1. Whether on facts and circumstances of the case, the Ld. CIT(A) has erred in restricting the addition of Rs. 1,19,95,692/- to Rs. 44,55,010/- made on account of non-capitalisation of-‘interest on loan on Plant & Machinery and Rs. 1,66,89,148/- to Rs. 58,58,800/- on account of non-capitalisation of interest on Capital Work in Progress u/s 36(l)(iii) of the Income Tax Act, 1961 by relying on additional evidence without allowing any opportunity to the AO and ignoring the mandatory provisions of Rule 46A and ignoring the mandatory provisions of Rule 46A of the Income Tax Rules, 1962. “

Facts of the Case

1. First and foremost, it is submitted that in the present case, during the pendency of appellate proceedings before Ld. CIT(A), no additional evidence has been placed on record by the assessee.

2. Further, there is no allegation in the assessment order that certain bills, vouchers or other documentary evidence were not produced during the course of assessment proceedings in respect of Building and Plant & Machinery. The only allegation of the Ld AO is that information was not provided as per chart annexed as Annexure 1 to the assessment order.

3. At the fag end of the assessment proceedings ie on 17.03.2016 the AO issued Show Cause Notice asking the Assessee as no interest and installation charges had been capitalised in respect of Capital Work in Progress (Building and Plant & Machinery), then why interest @ 15% & installation charges @ 8% should not be disallowed. (Refer page 13, paragraph 9 of assessment order)

4. The assessee filed reply dated 22.03.2016 and produced bills, vouchers or ether documentary evidence in respect of in respect of interest & installation expenditure on Capital Work in Progress (Building and Plant & Machinery). (Refer page 13, last paragraph of assessment order).

5. On 23.03,2016, the AO again issued notice proposing to disallow interest of Rs. 6.52 crores (entire Term Loan Old & New) and installation charges @ 8% on Capital Work in Progress (Building and Plant & Machinery). (Refer page 14 of assessment order).

6. The assessee filed reply on 28.03.2016 and produced bills, vouchers or other documentary evidence in respect of in respect of interest & installation expenditure on Capital Work in Progress (Building and Plant & Machinery) and specifically asked the AO to pinpoint the Capital Work in Progress, Building, Plant & Machinery where interest & installation expenditure was required to be capitalised. The AO without pinpointing any defects made huge disallowance of interest only that too in excess of what has been debited in the P&L Account in respect of new Term Loans. (Refer page 14 & 15 of assessment order).

During the course of assessment proceedings, high-pitched addition was made by the Ld. AO by disallowing interest in excess of what has been debited in P&L Account in respect of the New Loans. For e.g. the total interest expense debited in P&L Account on Term Loan (Old & New) is Rs. 6,52,22,969/-. However, interest expense on New Term Loan is 2.19.23.249/- and Rs. 2.86.84.840/- has been disallowed by the Ld. AO. Further, the Ld. AO has disallowed interest @ 15% whereas the banks have sanctioned New Loans @ 12.75%. The Ld. AO also conveniently ignored that various Plants & Machinery were purchased on credit.

7. It is pertinent to mention here that during the course of assessment the assessee was able to satisfy the AO by producing bills, vouchers or other documentary evidence in respect of installation expenditure and the AO did not make any disallowance of same and was gracious enough to allow Depreciation on the same as he was satisfied that the same were “put to use” by the assessee.

8. As the interest expense on New Term Loan was Rs. 2.19 crores and whereas Rs. 2.86 Crores have been disallowed by the Ld. AO, therefore, for the purpose of disposing off the appeal, the Ld. CIT(A) u/s 250(4) read with Rule 46A(4) of the rules directed the assessee to produce copies of bills of machinery which were produced during the course of assessment against which loans were availed from banks along with the details regarding their first nut to use for the purpose of disallowance of interest u/s 36(l)(iii). The details and documents were got verified by the Inspector of Income Tax. (Refer page 9, paragraph 2.2 to 2.3 and page 14, paragraph 2 of CITA order.)

10. Argument of Ld. C1T, DR and Assessee’s response are as under:

12. During the course of appellant proceedings, the Ld. CIT(A) directed the assesee to once again produce bills of machinery against which loans were availed from bank along with detail regarding their first put to use for the purpose of disallowance of interest. Paragraph 2.2 to 2.3 at page 9 of the CIT(A) order are as under:

“2.2 The AR was asked to file copies of bills of machinery against which loans were availed from the Bank along with detail regarding their first put to use for the purpose of disallowance of interest u/s 36(l)(iii). In response, the AR submitted as under:

………………………………..

…………………………………..

2.3 These details and documents were sot verified in this office through the Inspector of Income Tcix and calculation of interest not allowable as per vrovisio to section 36fl)(iii) for the period from the date of loan till the date when the asset were first out to use, have been vlacecl on record. ”

13. While concluding the Ld. CIT(A) observed at page 9, Paragraph 2 as under:

“………………The AR was asked to file the copies of bills of addition to plant & machinery alone with the evidence of their first put to use. These were sot verified through the Inspector of Income Tax, posted in this office. From the details regarding the date of installation, date of put to use and date ofpayment, the interest amount in respect of the New Machinery installed have been calculated as per the table attached as Annexure-l. The interest relating to period prior to the date of first put to use of the Machinery has been arrived at Rs. 58,58,880/- which needs to be capitalized as per proviso to section 36(l)(iii)……….. ’ ’

14. As stated above, no additional evidence has been sou-motto placed on record by the assessee. It was the Ld. CIT(A) who directed the assessee to produce copies of bills of machinery which were produced during the course of assessment.

15. The Ld. ClT(A) has powers to make further inquiry as per Section 250(4) of the Act which is as under:

“(4) The Commissioner (Appeals) may, before disposing of any appeal, make such further inquiry as he thinks fit. or may direct the Assessing Officer to make further inquiry and report the result of the same to the Commissioner (Appeals).”

16. Further, Rule 46A(4) of the IT Rules is as under:

“(4) Nothing contained in this rule shall affect the power of the [Deputy Commissioner (Appeals)] [or, as the case may be, the Commissioner (Appeals)] to direct the production of any document, or the examination of any witness, to enable him to dispose of the anneal. or for any other substantial cause including the enhancement of the assessment or penalty (whether on his own motion or on the request of the fAssessins Officer!) under clause (a) of sub-section (I) of section 251 or the imposition of penalty under section 271. “

17. On a conjoint reading of Section 250(4) of the Act and Rule 46A(4) of the rules, it is clear that right to produce additional evidence by the appellant is fettered whereas, the powers of Ld. CIT(A) to call for any evidence/in formation/documents are unfettered and on his own motion, Ld. C1T(A) can ask the appellant to produce any evidence/information/documents. In other words, there are restrictions on the rights of an appellant to produce additional evidence but u/s 250(4) there are no restrictions on the powers of Ld. CIT(A) to call for any evidence/information/documents.

18. Reliance is placed on the decision of Hon’ble ITAT in the case of DOT vs N£ Technologies India (P.) Ltd (2014) 47.taxtnann.com 405 tHvdh where in at paragraph 27 it has been observed as under:

“27. In the Instant case the entire additional evidence has come on the record of the first appellate authority because the first appellate authority decided to examine the fads of the case in depth and adjudicate upon the matter on the basis of evidence and material thus gathered. The learned CIT(A) was empowered to do so under the provisions of Section 250(4). The results of enquiry conducted by him could either go to further cement the case made out by the assessing officer or to help out the assessee against the findings of the assessing officer. The mere fact that the results of the enquiries thus conducted supported the case of the assessee and not that of Revenue has no bearing on the jurisdiction and powers of the learned CIT(A). The learned CIT(A) could have confronted the assessing officer with the evidence thus received and the material thus gathered and allow the assessing officer to have his say in the matter and perhaps had he done so this dispute would not have arisen. But we do not see any requirement in taw that the first appellate authority should invariably consult or confront the assessing officer every time an additional evidence that was not before the assessing officer comes on the record of the first appellate authority. Where the additional evidence is obtained by the first appellate authority on its own motion, there is no requirement in law to consult/confront the assessing officer with such additional evidence. There may be cases where additional evidence is admitted by the first appellate authority on a request or application being made by the assessee. In such cases Sub-rule (2) of rule 46A requires the first appellate authority to allow the assessing officer a further opportunity to rebut the fresh evidence filed by the assessee. Even that requirement cannot be said to be a rule of universal application. If the additional evidence furnished by the assessee before the appellate authority is in the nature of clinching evidence leaving no further room for any doubt or controversy in such a case no useful purpose would be served on performing the ritual of forwarding the evidence/material to the assessing officer and obtain his report. In such exceptional circumstances the requirement of Sub-rule (3) may be dispensed with. ”

19. Under these circumstances, it is submitted that during the appellate proceedings, no additional evidence has been placed on record by the assessee and it was the Ld. C1T(A) who u/s 250(4) of the Act read with Rule 46A(4) of the rules, directed the assessee to produce copies of bills of machinery which were produced during the course of assessment, therefore, no additional evidence has been placed on record by the assessee and the Revenue’s appeal deserves to be dismissed.”

13. We have heard both the sides, perused the material on record, the appellate order, assessment order and submission made before us. Admittedly, the appellant has taken term loan during the year under consideration. The Ld. CIT (DR) contended that the AO has rightly held that an amount of Rs. 1,66,89,148/- paid as interest on this loan is being not capitalized and so disallowed by the AO from the revenue expenses claimed by the assessee. Similarly, the assessee has made additions into Capital Work in Progress (in short C.W.P) of Rs. 28,93,64,113/- (Machinery under installation Rs. 20,55,01,601/- and Building under Construction Rs. 8,38,62,512/-). Thus, the interest paid on the addition into C.W.P needs to be capitalized.

14. The Ld. Counsel submitted that during the appellate proceedings, the appellant assesse has placed bills and invoices of capital expenditure as required by the Ld. C1T(A) u/s 250(4) of the Act which were also claimed to be produced before the AO, during the course of assessment. The Ld. AR thereby contended that production of books of account, bills and voucher before the CIT(A) does not form additional evidence as these were being placed on record before the AO by the assessee. The counsel argued that the appellant assessee has not filed any additional evidence or new documents, in respect of addition to plant and machinery, and work in progress before the CIT(A), in this impugned order, have not been denied. The bills produced at the appellate stage, were in compliance to the quarries of the Ld. CIT(A).

15. The ld. Counsel in rebuttal to DR’s contentions explained that the documents mentioned at page 8, paragraph a to f of CIT(A) order are soft copy of the books of account of the assessee as filed with the AO, during the course of assessment, not additional evidence. As regards to the Chart showing calculation of interest contains data collected and collated from data books of account, bills, vouchers & other documentary evidence produced during the course of assessment and as such, chart per se is not additional evidence.

16. From the above, it is evident that the department’s objection to the impugned orders that CIT(A)’s restricting the disallowance of Rs. 1,19,95,692/- to Rs. 44,55,010/- made on account of non capitalization of interest on loan on Plant & Machinery and Rs. 1,66,89,148/- to Rs. 58,58,800/- made on account of non capitalization of interest expenditure on Capital Work in Progress u/s 36(1)(iii) of the Income Tax Act, 1961 by relying on additional evidences without allowing any opportunity to the AO and ignoring the mandatory provisions of Rule 46A of Income Tax Rules, 1962 is not based on the true appreciation of facts on record. We found that, the Ld. CIT(A) required the assessee to produce copies of bills of machinery u/s 250(4) of the Act, which were also produced during the course of assessment. Therefore, in our view, such verification and examination of bills by the CIT(A) which were produced during assessment proceeding would not constitute furnishing of additional evidence on record by the assessee as alleged by the department.

17. The Ld. CIT(A) has discussed the details regarding the date of installation, date of put to use and date of payment, and that the interest amount in respect of the New Machinery installed have been calculated as per the table attached as Annexure-I. Accordingly, the interest relating to period prior to the date of first put to use of the Machinery has been arrived at Rs. 58,58,880/- which is confirmed as to be capitalized as per proviso to section 36(l)(iii). Further as regards to disallowance in respect of ‘Building Under Construction’, the CIT(A) has considered that building was constructed by purchase of material on credit and accordingly, interest of Rs. 44,55,010/- was paid on new Term Loan for building confirmed.

18. The facts and issue in I.T.A. No. 800 /Asr/2017 are exactly identical to the facts discussed herein above in I.T.A. No. 801/Asr/2017, therefore, the finding’s given in I.T.A. No. 801 /Asr/2017 shall be applicable to the I.T.A. No. 800 /Asr/2017, in mutatis mutandis on the issue non capitalization of interest.

19. In the backdrop of the aforesaid discussion, and considering the facts of the case, we find no infirmity in the order of the CIT(A) on the issue of restricting the disallowance of non capitalization of interest on bank loan on Plant & Machinery and on account of non capitalization of interest expenditure on Capital Work in Progress u/s 36(1)(iii) of the Income Tax Act. Thus, the impugned orders of the CIT(A) are sustained and the ground of department are rejected in respect of both the appeals .

20. In the backdrop of the aforesaid discussion, the appeals of the departments and the assessees are disposed of in the terms indicated as above.

Order pronounced in the open court on 05.05.2022