2014 (12) TMI 223 - AT - Income Tax

Validity of reopening of assessment u/s 147/148 Held that - The assessee had furnished the return of income declaring total income of ₹ 3.46 Cr on 13.12.2006 - the re-opening of assessment u/s 147/148 of the Act is valid because of the fact that diversion of funds was not properly disclosed by the assessee and therefore proviso to section 147 is not applicable thus, the proceedings initiated u/s 147/148 of the Act have been validity initiated and completed. Capital work in progress disallowed u/s 36(1)(iii) Held that - Following the decision in Amartex Industries Limited Versus The Addl. CIT, Range 1, Chandigarh & Others 2012 (11) TMI 626 - ITAT CHANDIGARH - section 36(1)(iii) clearly provides that where harrowed funds have been utilized for investment in the fixed assets for the period from the date of utilization of the funds till the date of putting the assets to use interest relatable to such deployment of funds is to be disallowed thus, the matter is to be remitted back to the AO to re-work the disallowance u/s 36(1)(iii) of the Act by applying pro-rata day product method and not by applying flat rate of interest on the closing balance of each day Decided partly in favour of assessee. Depreciation on fixed assets installed at Baddi unit disallowed Held that - During the year, no manufacturing activity was carried out at the unit and part of the assets were transferred to the Dera Bassi unit by the assessee - However, balance assets were lying in Baddi unit and the assessee claimed depreciation on the same which was disallowed by the AO and CIT(A) - assessee had temporarily suspended the activities at Baddi unit and had re-started manufacturing activity in AY 2011-12 relying upon COMMISSIONER OF INCOME TAX Versus YAMAHA MOTOR INDIA PVT. LTD. 2009 (8) TMI 27 - DELHI HIGH COURT wherein it was held that as long as the machinery was available for use, though not actually used, it fill within the expression used for the purpose of the business and the assesses could claim the benefit of depreciation thus, the AO is directed to allow depreciation on the fixed assets remaining at Baddi unit Decided in favour of assessee. Interest on monthly balances of capital WIP - Held that - The chargeability of interest on the amounts debited to work-in-progress is upheld - the contention of the assessee that the amounts debited to work-in-progress had been transferred to the fixed assets and the balance amount left under the head was only on account of interest thus, the matter is remitted back to the AO for verification of claim of assessee Decided in favour of assessee.

Summary

Issues Involved:

1. Validity of reassessment proceedings under sections 147/148 of the Income Tax Act.
2. Disallowance of interest under section 36(1)(iii) of the Income Tax Act on capital work-in-progress.
3. Disallowance of depreciation on fixed assets at the Baddi unit.
4. Disallowance under section 14A of the Income Tax Act read with Rule 8D.

Issue-wise Detailed Analysis:

1. Validity of Reassessment Proceedings under Sections 147/148:

The assessee contended that the initiation and conclusion of reassessment proceedings under sections 147/148 were invalid. The tribunal admitted this legal issue, referencing the Supreme Court's decision in National Thermal Power Co. Ltd. The tribunal found that the reassessment was valid because the fact of diversion of funds was not properly disclosed by the assessee, making the proceedings initiated under sections 147/148 valid.

2. Disallowance of Interest under Section 36(1)(iii) on Capital Work-in-Progress:

For the assessment year 2006-07, the tribunal noted that the Assessing Officer disallowed interest claimed under section 36(1)(iii) because the capital assets were not put to use during the year. This was upheld by the Commissioner of Income Tax (Appeals) based on the Punjab & Haryana High Court decision in CIT Vs Abhishek Industries Ltd. The tribunal directed the Assessing Officer to rework the disallowance on a pro-rata day product method rather than applying a flat rate of interest.

For the assessment year 2009-10, a similar disallowance was made and upheld. The tribunal followed its earlier decision and directed the Assessing Officer to rework the disallowance using the same method.

For the assessment year 2010-11, the tribunal acknowledged that the issue was covered against the assessee by its earlier decision. However, it directed the Assessing Officer to verify the claim that the amounts debited to work-in-progress had been transferred to fixed assets and that the balance amount under the said head was only interest. If verified, no disallowance was warranted.

3. Disallowance of Depreciation on Fixed Assets at Baddi Unit:

For the assessment year 2009-10, the tribunal addressed the disallowance of depreciation on fixed assets at the Baddi unit, where no work was carried out during the year. The tribunal found merit in the assessee's argument that the assets were part of the block of assets and depreciation should be allowed even if the unit was temporarily not in use. The tribunal relied on the Delhi High Court's decision in CIT Vs Yamaha Motor India Pvt. Ltd., directing the Assessing Officer to allow depreciation.

For the assessment year 2010-11, the tribunal followed its earlier decision and allowed depreciation on the fixed assets at the Baddi unit.

4. Disallowance under Section 14A Read with Rule 8D:

For the assessment year 2009-10, the tribunal noted that the assessee did not press the ground related to disallowance under section 14A read with Rule 8D, and hence, it was dismissed.

For the assessment year 2010-11, the tribunal dismissed the ground as it was not pressed by the assessee.

Conclusion:

The tribunal partly allowed the appeals for all three assessment years, directing the Assessing Officer to rework certain disallowances and verify specific claims. The reassessment proceedings under sections 147/148 were upheld as valid, and the disallowance of interest under section 36(1)(iii) was to be recalculated using a pro-rata day product method. Depreciation on fixed assets at the Baddi unit was allowed based on the concept of the block of assets. Disallowance under section 14A read with Rule 8D was dismissed as not pressed by the assessee.