2015 (9) TMI 1353 - AT - Income Tax

Disallowance u/s 36(1)(iii) - CIT(A) held that the capital work in progress in the balance sheet is shown at ₹ 6,59,49,078/-, therefore, interest attributable to such amount has to be disallowed in view of the proviso to section 36(1)(iii) - as the assessee has already disallowed interest to the extent of ₹ 33,55,108/- on capital work in progress, therefore, credit for the said amount was allowed CIT(A) restricted the disallowance at ₹ 45,58,781/- - Held that - As relying on CIT v. Core Health Care Ltd. 2008 (2) TMI 8 - SUPREME COURT OF INDIA as well as the amendment by way of insertion of proviso to section 36(1) (iii), the interest on monies borrowed for acquiring a capital asset would be disallowed till it is brought to use on the basis that it would add to the cost of the asset. We observe that addition to the CWIP for the relevant assessment year under consideration is ₹ 4,74,04,622/- Further we observe as the extension took place throughout the year, one cannot apply the rate of interest 12% on each item. The assessee has given a detailed chart regarding the calculation of interest pertaining to each restaurant which is amounting to ₹ 33,22,108/-. As the interest was payable on each restaurant starting at different months during the year it is not correct on the ld.CIT(A) to apply the rate of interest for the full year. The assessee has applied mean method and arrived at ₹ 2,37,02,311/- on which the interest is applied at the rate of 12 % which comes to ₹ 28,44,277/-. The assessee has already capitalized ₹ 33,22,108/-. Neither the assessing officer nor the Ld. CIT(A) has verified the interest capitalized and the calculation of capital work in progress by the assessee, and has made addition on notional basis. The authorities below has also not brought on recorded any evidence on the basis of which they have rejected assessee s claim.In the interest of justice, we remit the issue back to ld.A.O for verifying the interest capitalized by the assessee with a direction that the disallowance should not be on notional basis. The assessing officer is further directed that in the event the working provided by the assessee, that has been reproduced in hereinabove appears to be correct, he may allow the same. - Decided in favour of assessee for statistical purposes.

Summary

Issues:
1. Disallowance of interest on capital work in progress.
2. Interpretation of Section 36(1)(iii) of the Income Tax Act.
3. Application of interest rate on capital work in progress.
4. Verification of interest capitalized by the assessee.

Issue 1: Disallowance of interest on capital work in progress:
The appellant challenged the order of the ld. CIT(A) regarding the disallowance of interest amounting to Rs. 45,58,781 out of a total disallowance of Rs. 79,13,889 made by the ld. AO. The disallowance was based on the proviso to section 36(1)(iii) of the IT Act, which requires interest to be capitalized for funds invested in capital work in progress. The appellant argued that the interest should only be disallowed on a pro-rata basis and not for the entire year. The tribunal observed that the assessing officer and the CIT(A) had not verified the interest capitalized by the appellant and made the disallowance on a notional basis. Consequently, the issue was remitted back to the AO for proper verification, with a direction not to disallow interest on a notional basis.

Issue 2: Interpretation of Section 36(1)(iii) of the Income Tax Act:
The tribunal examined the legal position under Section 36(1)(iii) of the Income Tax Act, which deals with the deduction of interest paid in respect of capital borrowed for business purposes. The provision states that interest on capital borrowed for the acquisition of an asset for the extension of an existing business shall not be allowed as a deduction. The tribunal cited judicial pronouncements and highlighted that interest on borrowed funds for acquiring a capital asset would be disallowed until the asset is put to use, as it adds to the cost of the asset.

Issue 3: Application of interest rate on capital work in progress:
The tribunal noted discrepancies in the application of the interest rate on capital work in progress by the assessing officer and the CIT(A). The appellant provided a detailed calculation showing that the interest should be restricted to the capital work in progress related to plant and machinery only. The tribunal agreed with the appellant's methodology and directed the AO to verify the interest capitalized by the appellant, emphasizing that disallowance should not be made on a notional basis.

Issue 4: Verification of interest capitalized by the assessee:
The tribunal highlighted that neither the assessing officer nor the CIT(A) had verified the interest capitalized by the appellant, leading to the disallowance being made on a notional basis. In the interest of justice, the tribunal remitted the issue back to the AO for proper verification, instructing that disallowance should not be based on a notional calculation. The tribunal directed the AO to allow the claimed amount if the working provided by the appellant was found to be correct.

In conclusion, the tribunal allowed the appellant's claim for statistical purposes and directed a reevaluation of the interest disallowance issue by the assessing officer. The appeal was allowed for statistical purposes, emphasizing the need for proper verification and calculation of interest on capital work in progress.