Section 263 Revision Partly Sustained for Unexamined Interest Capitalisation: ITAT Mumbai

Solvay Specialities India Private Limited Vs PCIT (ITAT Mumbai)

Summary: The Mumbai Bench of the Income Tax Appellate Tribunal partly allowed the appeal of Solvay Specialities India Private Limited against the revisionary order passed by the PCIT under Section 263 for AY 2018-19. The original assessment had been completed under Section 143(3) read with Sections 144C(13) and 144B, assessing total income at ₹32.33 crore against NIL returned income. The PCIT subsequently identified four issues: capitalisation of interest expenditure of ₹2,01,05,674 relating to borrowed funds allegedly utilised for acquisition of capital assets; TDS implications concerning interest of ₹82,66,943; miscellaneous expenditure of ₹2,30,57,711; and service-provider charges of ₹71,45,41,614 paid to overseas entities.

On the first issue, the assessee contended that External Commercial Borrowings of ₹90 crore had been obtained for general corporate purposes and working-capital requirements. It relied upon the board resolution dated 10 June 2015 and asserted that sufficient own funds were available for acquisition of fixed assets. The Tribunal, however, found that the actual application of the borrowed funds towards working-capital requirements had not been demonstrated. Merely stating in the board resolution that the borrowing was for general business needs did not establish actual utilisation, particularly because “general business needs” did not necessarily restrict utilisation to revenue expenditure. More importantly, no enquiry had been conducted by the AO during assessment proceedings on the specific issue of whether borrowed funds were utilised for acquisition of capital assets. The Tribunal therefore upheld the PCIT’s direction requiring fresh examination of the capitalisation of interest expenditure of ₹2,01,05,674.