2012 (5) TMI 318 - AT - Income Tax

Disallowance of interest - capitalization - Explanation 8 to sec. 43(1) - business from a rented premises - held that - Through this ground, the assessee is contending that if deduction of interest amounting to Rs. 6.57 lakhs is not allowed, then such amount should be allowed to be capitalized to the cost of office/godown and depreciation may be allowed on the same. We accept this ground partly to the extent of allowing capitalization of this amount of interest to the cost of office/godown. However, we are not inclined to grant any depreciation on it for the reason that the said office and godown have not admittedly been put to use for the current year. This additional ground is, therefore, partly allowed. Unaccounted sale - shortage in goods - held that - The return for the said assessment year 2004-05 was scrutinized by the AO and assessment order was passed u/s. 143(3). Page no. 161 to 164 of the paper book is a copy of the assessment order for assessment year 2004-05, from which it can be seen that no addition on account of shortage was made. Thus, it becomes evident that the shortage of 2.93% has been accepted by the Revenue for the assessment year 2004-05. In that view of the matter, there is no reason to reject lower net shortage of 2.17% for the current year. In view of the foregoing reasons, we are of the considered opinion that the authorities below were not justified in making and sustaining the addition of Rs. 29.22 lakhs on this count, which is hereby ordered to be deleted. These grounds are, therefore, allowed.

Summary

Issues Involved:
1. Disallowance of interest expenditure.
2. Addition of unaccounted sales.
3. Levy of interest under section 234B.

Detailed Analysis:

1. Disallowance of Interest Expenditure:
The assessee contested the confirmation of disallowance of interest amounting to Rs. 6,57,820/-. The facts reveal that the assessee incurred total interest expenditure of Rs. 52.69 lakhs, with secured loans amounting to Rs. 4.88 crore. The assessee had shown 'Capital work in progress' of Rs. 1,59,53,085/- for new office premises and a godown, on which no depreciation was claimed as these assets were not put to use. The Assessing Officer (AO) determined that the interest related to the acquisition of these assets should be capitalized under the proviso to section 36(1)(iii). The CIT(A) supported this view, referencing Explanation 8 to section 43(1) and a Full Bench judgment of the Punjab & Haryana High Court in CIT v. Vardhaman Polytech Ltd. The Tribunal upheld this decision, stating that the interest incurred on capital borrowed for the acquisition of an asset for the extension of existing business must be capitalized until the asset is put to use. Consequently, the disallowance of interest as revenue expenditure was confirmed.

2. Addition of Unaccounted Sales:
The AO added Rs. 29,22,082/- to the assessee's income on account of unaccounted sales, based on a higher production shrinkage of 12.62% and a shortage of 3.35% in finished goods, compared to previous years. The AO allowed a shortage of 75,000 meters against the assessee's claim of 1,26,139 meters, attributing the remaining shortage to unaccounted sales. The CIT(A) echoed the AO's findings. However, the Tribunal, after examining detailed quantitative records and bill-wise production data, found that the assessee maintained complete records of finished goods and their respective output. The Tribunal noted that the AO did not contradict the assessee's submissions during remand proceedings and that the minor increase in shortage percentage could be attributed to various factors like quality of raw materials and market conditions. The Tribunal concluded that the AO failed to prove the quantitative details incorrect and that the addition based on presumed unaccounted sales was unjustified. Therefore, the addition of Rs. 29,22,082/- was deleted.

3. Levy of Interest Under Section 234B:
The last issue regarding the levy of interest under section 234B was deemed consequential and was not separately analyzed in detail.

Conclusion:
The appeal was partly allowed. The Tribunal confirmed the disallowance of interest expenditure as capitalized but deleted the addition of unaccounted sales. The issue of interest under section 234B was treated as consequential.