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:-
