2013 (11) TMI 671 - AT - Income Tax

Claim of interest expenditure - during earlier years interest was capitalized as work in progress towards acquisition of property - later transaction could not materialized, the expenditure set-off as expenses Held that - Assessee is not in the business of construction of building and therefore, the monies were not borrowed for obtaining development rights in respect of land unlike in the case relied upon by ld. AR in the case of Lokhandwala Construction Inds. Ltd. 2003 (1) TMI 93 - BOMBAY High Court . The assessee borrowed money to acquire capital asset and the interest on borrowed capital was capitalized by the assessee in the relevant assessment years. In view of above, the said interest expenditure is related to assessment years 1997-98 to 1999-2000 and not to the assessment year under consideration, the assessment year in which the assessee is claiming the interest as revenue expenditure. There is no dispute that the assessee is following mercantile system of accounting and therefore the expenditure on account of interest should have been claimed by assessee in the concerned relevant assessment years Decided against the Assessee. Disallowance of interest on account of use of interest bearing funds for non-business purposes - Assessee paid a sum of Rs.7,18,35,000/- to Saraldisha Investments in the Financial Year 1999-2000 as an advance to acquire shares of one of its subsidiary company Atco Healthcare Ltd. It is observed that the assessee could not get shares, the said amount was treated as loan Held that - Assessment were completed u/s 143(1) of the Act. Further, the assessee could not establish the link that the advance was given by assessee out of its own funds and no borrowed monies were used. Ld. AR also fairly conceded that the assessee could not furnish the requisite details to establish that borrowed monies were used by assessee for its business purposes and only own money was used to give advance to purchase shares of its subsidiary company Decided against the Assessee.

Issues Involved:
1. Disallowance of Rs.3,51,55,074/- as "Capital Work-in-Progress".
2. Disallowance of interest of Rs.3,37,58,560/- on account of use of interest-bearing funds for non-business purposes.

Issue-wise Detailed Analysis:

1. Disallowance of Rs.3,51,55,074/- as "Capital Work-in-Progress":

The assessee, engaged in manufacturing retail automation products, polycarbonate bottles, and plastic articles, had paid an advance to acquire properties from a builder, and the interest on the borrowed funds for these purchases was capitalized in earlier financial years (1997-98 to 1999-2000). In the assessment year 2003-04, the assessee reversed these entries, debiting the interest amount to the Profit & Loss Account and crediting Rs.3,51,55,074/- to "Capital Work-in-Progress" written off, claiming it as a deduction.

The Assessing Officer (AO) disallowed this claim, stating there is no provision in the Income Tax Act allowing the write-off of "Capital Work-in-Progress" as a deduction. The AO emphasized that the expenditure was incurred in earlier years and was capital in nature. This position was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)], who noted that the assessee follows a mercantile system of accounting, and the interest expenditure related to earlier years should not be allowed as a deduction in the current year. The CIT(A) further stated that the expenditure was for acquiring a capital asset, and if the project was not implemented, it should be treated as a capital loss, not a revenue expenditure.

The Tribunal agreed with the CIT(A), noting that the assessee is not in the business of construction and the borrowed money was for acquiring a capital asset. The interest expenditure related to previous assessment years and should have been claimed in those years. The Tribunal confirmed the order of the CIT(A) and rejected the assessee's appeal on this ground.

2. Disallowance of interest of Rs.3,37,58,560/- on account of use of interest-bearing funds for non-business purposes:

The assessee had paid Rs.7,18,35,000/- as an advance to acquire shares of its subsidiary company, which was later treated as a loan. The AO noted that the borrowed capital was not used for the assessee's business but for the subsidiary's business. The AO disallowed the interest of Rs.3,37,58,560/- under Section 36(1)(iii) of the Act, relying on the High Court decision in Phaltan Sugar Works Ltd V/s CIT, which held that the business of a subsidiary cannot be considered as the business of the assessee company.

The assessee argued that the advance was for commercial expediency and relied on the Supreme Court decision in S.A Builders vs. CIT. However, the CIT(A) upheld the AO's disallowance, stating that the advance was for purchasing shares, not for business purposes, and the assessee is not an investment company. The CIT(A) concluded that the interest expenditure amounted to a diversion of funds.

During the Tribunal hearing, the assessee's representative admitted that the nexus between the advance and borrowed funds was not established and that the requisite details were not furnished. The Tribunal, agreeing with the CIT(A), found no reason to interfere with the order and rejected the assessee's appeal on this ground.

Conclusion:

The appeal of the assessee was dismissed, with the Tribunal upholding the disallowance of Rs.3,51,55,074/- as "Capital Work-in-Progress" and the disallowance of interest of Rs.3,37,58,560/- for non-business use of borrowed funds. The Tribunal's decision was pronounced in the open court on November 6, 2013.

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