Brief of the Case
ITAT Ahmedabad held In the case of Ashima Dyecot Limited vs. DCIT that interest on capital borrowed for plant & machinery which already has put to use for commercial production is allowed u/s 36 (1) (iii). In the given case, it is presumed that the assessee has put to use its plant and machinery and the assessee has already started its commercial production on 23.9.1996. Therefore, we held it entitled for deduction of sum incurred on capital borrowed for purpose of the business.
Facts of the Case
The assessee started its commercial production on 23.9.96 and continued to make heavy additions during October to March 1997 of Rs. 38, 38, 78,342/-. The assessee also shown capital work in progress as on 31.3.1997 of Rs.16,01,69,517/-. This total sum reads almost Rs.54 crores. The assessing officer quoted alleged failure in producing details of the above said outgo and substantive addition in its plant and machinery even after its commercial production had started with usage of borrowed fund to invoke section 36(1)(iii). Accordingly, a disallowance of Rs.1,97,32,000 on account of interest was made by the AO.
Contention of the Assessee
The ld counsel of the assessee refers to the hon’ble apex court’s judgment in Core Health Care 298 ITR 198 (SC) and submits that section 36(1) (iii) only requires the interest sum in respect of capital borrowed for the purpose of the business or profession.
Contention of the Revenue
The ld counsel of the revenue supported the AO’s order.
Held by CIT (A)
ITA 14 & 58/Ahd/2012
CIT (A) partly allowed the assessee’s appeal. It was held that in the present case the AO has categorically mentioned that during the year ending March, 1997 the appellant has purchased Plant and Machinery of Rs.38.38 crores out of which Rs. 16.01 crores is shown as capital work-in progress and that after the date of commercial production on 23/9/1996, the appellant has purchased total Plant & Machinery worth Rs.54 crores including the capital work-in-progress. This finding of the AO is not disputed by the appellant. This shows that all the Plant & Machinery was not put to use by the appellant for its production. It is therefore essential to know whether such Plant and Machinery is purchased by the appellant out of its own funds or borrowed funds.
In view of the above discussion, the AO is directed to examine the project report to know whether all the machineries in. respect of which the loan was sanctioned prior to the setting up of the business of the appellant, had been put to use for commercial production. If he finds that only some of the machineries as per the project report have been installed and put to use for the commercial production, then he would allow interest expenses on the borrowed funds utilised for the purchase of only those machineries which had been put to use for commercial production. In respect of the machinery not put to use for commercial production interest expenses on the borrowed funds will be disallowed by him. The appellant would be entitled to capitalisation of such interest expenses in the cost of that plant and machinery till the time it is put to use for commercial production. It would be the duty of the appellant to provide the details of project report and the machineries put to use for commercial production in respect of which, the loan was obtained by the appellant and claimed in the return of income.’
CIT (A) dismissed the revenue appeal. It was held that the AO has followed the assessment order for A.Y. 1997-98 to make disallowance of interest of Rs. 1,25,06,250/- without mentioning as to which Plant & Machinery were not put to use by the appellant. In A.Y. 1998-99 no disallowance of interest was made by the AO on this ground. Further in A.Y. 1999-2000 the appellant has shown sales of more than 136 crores. In the, absence of any contrary finding it would be presumed that the Plant’& Machinery was put to use by the appellant and therefore, the interest expense is allowable on the borrowed funds for machinery.
Held by ITAT
ITA 14 & 58/Ahd/2012
The assessee refers to the hon’ble apex court’s judgment in Core Health Care 298 ITR 198 (SC) and submits that section 36(1)(iii) only requires the interest sum in respect of capital borrowed for the purpose of the business or profession. The Revenue seeks to restore the Assessing Officer’s finding. We intend to disagree with submissions of both the parties.
A coordinate bench in its earlier order has already held facts of the issue involved in the impugned assessment year identical to those in assessment year 1995-96. However, both the lower authorities have nowhere considered any consequential order passed in the earlier assessment year. In other words, they have not taken into account the specific directions in the earlier remand order. Nor do the parties before us have placed on record any such consequential order passed in earlier assessment year dealing with the very issue of interest disallowance. In these circumstances, we reiterate our earlier directions and remit the grounds raised by both the parties to the Assessing Officer for passing a fresh order as per law invariably following consequential order; if any, passed in assessment year 1995-96 in furtherance to the tribunal’s direction.
Accordingly both the appeals allowed for statistical purpose.
A perusal of this case reveal that assessing officer had disallowed impugned interest sum of Rs.1,25,06,250/- on the very same line as in assessment year 1997-98. The CIT (A) has distinguished facts of the impugned assessment year with those involved in 1997-98 as adjudicated herein above. He presumes that the assessee has put to use its plant and machinery and allows the impugned interest sum to have been incurred on borrowed funds for machinery. We reiterate that the assessee has already started its commercial production on 23.9.1996. Therefore, we held it entitled for deduction of sum incurred on capital borrowed for purpose of the business in question.
Accordingly, appeal of the revenue dismissed.