2013 (5) TMI 615 - AT - Income Tax

Disallowance of interest u/s 36(1)(iii) - whether interest free funds were available at the time of making investments is a pure question of facts which can be analysed by taking into consideration the day-to-day cash flow statement? - CIT(A) allowed the claim - Held that - The assessee s share capital, reserves and surplus as on the first day of the accounting year is Rs.33.50 crores and investment in assets is only to the tune of Rs.27.05 crores it cannot be inferred that a sum of Rs.6.45 crores is available with the assessee. There is a possibility that the assessee might have purchased raw material, etc. and there may not be any cash available as on the first day of the accounting year. The current year s profit is not an item available throughout the year and it cannot be a fixed sum. Ordinarily, the amount available with the assessee is recycled or utilised in purchase of raw material, etc. Even at the end of the year current year s profit may not be available with the assessee since it would have been utilised for different purposes. In fact CIT(A) mentioned that the assessee maintained cash credit accounts in the consortium of banks which are required to be looked into as to whether in a particular bank account the assessee had deposited any money or not and whether common funds, i.e. interest free funds and interest bearing funds are available in that account and if the assessee is able to prove that from the said common funds investments were made, then certainly the decision of CIT vs. Reliance Utilities and Power Ltd. 2009 (1) TMI 4 - HIGH COURT BOMBAY can be applied in principle. Since these facts were not properly brought on record, in the interest of justice it reasonable to set aside the matter to the file of the AO with a direction to call for details and after analysing the consortium of accounts as well as daily cash flow statements decide the issue in accordance of law - appeal filed by the Revenue is treated allowed for statistical purpose.

Summary

Issues:
- Disallowance of interest under section 36(1)(iii)

Analysis:
1. The appeal by the Revenue challenged the order deleting the disallowance of interest under section 36(1)(iii) for the assessment year 2008-09.

2. The Assessing Officer (AO) noted that the assessee obtained secured loans and incurred finance costs, primarily for acquiring fixed assets. The AO contended that interest expenditure related to the period before the assets were put to use should be capitalized.

3. The assessee argued that it had sufficient reserves and did not borrow funds for asset investments. The AO disagreed, stating that the borrowings were indeed used for fixed asset acquisition, hence interest costs needed to be capitalized.

4. Before the CIT(A), the assessee maintained that operational profits were used for fixed asset investments, supported by cash flow statements and profit figures. The CIT(A) found in favor of the assessee, considering the availability of operational income for investments.

5. The Revenue appealed, arguing that the common account's cash flow at the time of investment should be analyzed to determine the source of funds. The assessee contended that opening reserves and profits were adequate for investments in fixed assets.

6. The Tribunal observed that the availability of interest-free funds at the time of investment is crucial. As proper facts were not presented, the matter was remanded to the AO for detailed analysis of daily cash flows and account statements to ascertain the source of funds used for investments.

7. Ultimately, the Tribunal allowed the Revenue's appeal for statistical purposes, emphasizing the importance of accurately determining the source of funds for fixed asset investments based on daily cash flow statements and account details.