2012 (5) TMI 760 - AT - Income Tax

Addition made under section 36(1)(iii) - Held that - AO noted that the assessee had shown capital work-in-progress in its Balance Sheet and consequently computed disallowance in view of the provisions of proviso to section 36(1)(iii). The CIT (Appeals) has given the finding that no loan had been raised by the assessee company for the purchase of furnace or for the construction of building. The said finding of the CIT (Appeals) had not been controverted by the learned D.R. for the Revenue. Further the CIT (Appeals) has also noted that the total investment made by the assessee during the year on capital work-in-progress was ₹ 42.46 lacs spent on furnace and ₹ 33.23 lacs on the building as against the net profit of the assessee for the year at ₹ 1.97 crores. We find no merit in the disallowance made by the Assessing Officer. Uploading the order of the CIT (Appeals) we dismiss ground No.1 raised by the Revenue. TDS u/s 194A - addition made by invoking provisions of section 40(a)(ia) - Held that - The payment of interest being made to a bank is outside the purview of deduction of tax under section 194A of the Act. Thus, the assessee was not liable to deduct TDS on such payment of interest on the installment due to M/s UTI Bank Ltd. Upholding the order of the CIT (Appeals) we dismiss ground No.2 raised by the Revenue.

Summary

Issues:
1. Deletion of addition under section 36(1)(iii) of the Income Tax Act.
2. Disallowance of interest payment under section 40(a)(ia) of the Income Tax Act.

Issue 1: Deletion of addition under section 36(1)(iii) of the Income Tax Act:
The Revenue appealed against the deletion of an addition made under section 36(1)(iii) of the Act. The Assessing Officer disallowed and capitalized interest amounting to Rs. 6,33,729 as per the provisions of section 36(1)(iii) of the Act. However, the CIT (Appeals) observed that the capital investment was made from internal accruals, no loans were raised for the acquisition of assets, and the Assessing Officer did not identify any borrowings for asset acquisition. The CIT (Appeals) noted that the total investment in capital work-in-progress was significantly lower than the net profit, concluding that no loan was taken for the asset purchase. The Tribunal upheld the CIT (Appeals) decision, emphasizing that no borrowings were made for the capital work-in-progress, leading to the dismissal of the Revenue's appeal.

Issue 2: Disallowance of interest payment under section 40(a)(ia) of the Income Tax Act:
The second issue pertained to the disallowance of Rs. 2,89,995 for interest payment under section 40(a)(ia) of the Act. The Assessing Officer disallowed this amount due to non-deduction of TDS on interest paid to a non-banking company. However, the CIT (Appeals) allowed the claim based on a loan agreement between the assessee, UTI Bank, and the non-banking company, indicating that the latter was a conduit for the bank. The loan agreement specified the terms of repayment and installment payments, clarifying that the interest was due on the loan borrowed from the bank. As the payment was made to the bank, it was not subject to TDS under section 194A of the Act. The Tribunal upheld the CIT (Appeals) decision, dismissing the Revenue's appeal on this issue as well.

In conclusion, the Appellate Tribunal ITAT Chandigarh, comprising Ms. Sushma Chowla and Shri Mehar Singh, dismissed the Revenue's appeal, ruling in favor of the assessee on both issues related to the deletion of addition under section 36(1)(iii) and the disallowance of interest payment under section 40(a)(ia) of the Income Tax Act for the assessment year 2007-08.