2015 (10) TMI 2240 - AT - Income Tax

Disallowance of interest on borrowed funds u/s 36(1)(iii) - CIT(A) restricted the addition - Held that - Admittedly, the investments were made by the assessee in the shares of its sister concerns in the earlier years, in which years no disallowance of interest was made. Further, the claim of the assessee before us is that the said investment was made with its sister concerns because it has business dealings with sister concerns and hence, the advances were for commercial exigency. In the totality of the above said facts and circumstances and in the absence of any finding by the Assessing Officer that the interest bearing funds available with the assessee have been utilized for making the aforesaid interest free investments, we find no merit in the disallowance made under section 36(1)(iii) of the Act. In this regard, we place reliance on the ratio laid down by the Hon ble Bombay High Court in CIT Vs. Reliance Utilities and Power Limited (2009 (1) TMI 4 - HIGH COURT BOMBAY). Accordingly, we set-aside the order of CIT(A) in restricting the disallowance to ₹ 5,89,573/- and direct the Assessing Officer to delete the same - Decided in favour of assessee. Additional depreciation on expenditure on moulds disallowed - Held that - The additional depreciation on assets is allowable under section 32(1)(iia) of the Act. However, no additional depreciation is allowable as per the proviso to section 32(1)(iia) of the Act, where plant & machinery installed after 31.03.2005, was earlier used either within India or outside India by any other person. Further, additional depreciation is not allowable on any office appliances. The assessee had paid labour charges for the conversion of its old mould into new mould and there was no purchase of new plant & machinery. In the above said facts and circumstances, we find no merit in the claim of the assessee and upholding the order of CIT(A) in disallowing additional depreciation on expenditure of ₹ 68,035/- incurred on account of labour charges in respect of conversion of old mould into new mould - Decided against assessee. Disallowance of sales promotion expenses - Held that - The claim of the assessee was that the payments were made through ICICI bank credit card. Except filing the statement of payments at pages 72 and 73 of the Paper Book, the assessee has failed to furnish any bills or any details or break-up of the expenditure incurred by the assessee under the head sales promotion expenses . It is the requirement of law that for allowing any expenditure under section 37(1) of the Act, onus is upon the assessee to establish that the said expenditure has been incurred for carrying on its business. Where the assessee has failed to furnish even basic details of the break-up of expenditure or the nature of expenditure, we find no merit in the claim of the assessee and consequently, the same is rejected. The CIT(A) has already allowed 1/3rd of business expenditure. - Decided against assessee.

Summary

Issues Involved:
1. Disallowance under section 36(1)(iii) towards interest on borrowed funds.
2. Disallowance towards additional depreciation on expenditure on moulds.
3. Disallowance incurred on sales promotion expenses.

Issue-wise Detailed Analysis:

1. Disallowance under section 36(1)(iii) towards interest on borrowed funds:
The assessee, a private limited company engaged in the manufacture of P.S.C. Poles, had made investments in shares of sister concerns and given interest-free loans and advances to them. The Assessing Officer (AO) noted that the assessee had interest-bearing borrowed funds and calculated a notional disallowance of interest at 12% on the net investment in shares and interest-free advances. The AO restricted the disallowance to the actual interest debited in the books. The CIT(A) upheld this disallowance but adjusted it considering the interest-free funds available with the assessee, resulting in a disallowance of Rs. 5,89,573/-. The assessee argued that no new investments were made during the year and that the investments were made due to commercial exigency. The Tribunal found that the investments were made in earlier years without any disallowance of interest and concluded that there was no merit in the disallowance under section 36(1)(iii) of the Act. The Tribunal relied on the Bombay High Court's decision in CIT Vs. Reliance Utilities and Power Limited and directed the AO to delete the disallowance.

2. Disallowance towards additional depreciation on expenditure on moulds:
The AO disallowed additional depreciation claimed by the assessee on the expenditure incurred for converting old moulds into new ones, arguing that no new plant and machinery were purchased. The CIT(A) confirmed the disallowance of Rs. 13,607/- on the conversion of old moulds into new ones but accepted the claim for additional depreciation on a generator set and other items incorrectly disallowed by the AO. The Tribunal upheld the CIT(A)'s decision, stating that additional depreciation is not allowable for converting old assets into new ones without purchasing new plant and machinery.

3. Disallowance incurred on sales promotion expenses:
The assessee claimed sales promotion expenses but failed to provide documentary evidence or bills to support the claim. The AO disallowed the entire expenditure, noting that the main customers were through tenders and the claim of presenting gifts was irrelevant. The CIT(A) allowed 1/3rd of the expenditure due to payments made through credit card but confirmed the disallowance of Rs. 1,02,193/-. The Tribunal upheld the CIT(A)'s decision, emphasizing the requirement for the assessee to furnish basic details and evidence to claim such expenses under section 37(1) of the Act.

Conclusion:
The appeal was partly allowed, with the Tribunal directing the deletion of the disallowance under section 36(1)(iii) but upholding the disallowances related to additional depreciation on moulds and sales promotion expenses.