2012 (1) TMI 224 - AT - Income Tax

Disallowance of interest under section 36(1)(i) - Held that - Under the provisions of section 36(1)(iii), any interest on borrowings made for acquisition of assets for extension of existing business is required to be capitalized till the asset is first put to use. In this case, assessee had made total advance payments of ₹ 1,53,25,5000/- for acquisition of two new premises out of payment made during the year was ₹ 10,06,000/- and balance payment had been made in the earlier years. Authorities below have proceeded with the presumption that the assets had been acquired from borrowed funds. However, no basis for such finding has been given. The assessee has pointed out that most of the payments had been made in earlier years in which year there was no disallowance of interest. Therefore, in the earlier years, the payments were made from own funds. During the year, payment was only ₹ 10.06 lacs. Assessee had own funds of ₹ 3.95 crores and interest free borrowing of ₹ 7.92 crores. In addition, current year profit was itself ₹ 96.00 lacs. Considering these facts in our view source of current payment is easily explained from own funds. Therefore, when the payment for acquisition of assets have been made from own funds, there cannot be any case of disallowance of interest. We, therefore, set aside the order of CIT(A) and delete the addition made.

Summary

Issues: Disallowance of interest under section 36(1)(i) of the IT Act for the assessment year 2006-07.

Analysis:
1. The appellant, a manufacturer and exporter of diamonds, appealed against the disallowance of interest under section 36(1)(i) of the IT Act for the assessment year 2006-07. The dispute arose from the advance payments made by the appellant for the purchase of new premises at two diamond bourses. The Assessing Officer (AO) disallowed the interest by capitalizing it towards the acquisition of new assets for business expansion. The appellant contended that the payments were made from its own funds and not borrowed funds, as claimed by the AO. The Commissioner of Income Tax (Appeals) upheld the disallowance, albeit at a reduced amount. The appellant then appealed to the Tribunal challenging the decision.

2. During the proceedings, the appellant argued that it had not used any borrowed funds for the acquisition of new premises. The appellant had substantial capital and reserves, specific loans, and interest-free borrowings, making it plausible that the payments were made from its own funds. The AO had not disallowed interest in earlier years when similar payments were made, further supporting the appellant's claim. The Tribunal examined the facts and found that most payments for the acquisition were made in previous years without any interest disallowance. The current year's payment was relatively small and easily explainable from the appellant's own funds. Considering these factors, the Tribunal concluded that since the payments for the assets were made from the appellant's own funds, there was no basis for the disallowance of interest. Therefore, the Tribunal set aside the decision of the Commissioner of Income Tax (Appeals) and deleted the addition made, ruling in favor of the appellant.

3. The Tribunal pronounced the order in favor of the appellant, allowing the appeal and rejecting the disallowance of interest under section 36(1)(i) of the IT Act for the assessment year 2006-07.