2016 (1) TMI 713 - AT - Income Tax

Disallowance of interest - CIT(A) deleted the addition - Held that - There is no finding in the assessment order also to suggest that the assessee did not use the borrowed funds for the purpose of business. In the event that the assessee maintains mercantile system of accounting, has provided interest on the loans from the Ministry in its accounts, and since, there is no evidence to suggest that interest on the loans have been waived by the Ministry, the disallowance of interest invoking the provision of section 36(1)(iii) is not in order, no matter that interest has not been paid on the borrowings from the Government. In view of these findings, we do not find any infirmity in the conclusion arrived at by the ld.CIT(A) while deleting the disallowance of impugned interest. - Decided in favour of assessee Disallowance of 50% of depreciation on Bathinda Plant - CIT(A) deleting the addition - Held that - As before deleting the addition, the ld. CIT(A) should have afforded an opportunity to the Assessing Officer to examine the sale invoices placed before him for the first time, which has been made the sole basis for deletion of addition. There is also no finding in the impugned order whether the production alleged to have been made before 01.10.2003 was a regular production or on trial basis. In view of these facts, we think it appropriate to restore the issue to the file of Assessing Officer for deciding the issue de novo after examining the evidences laid before the ld. CIT(A) in the form of sale invoices. The Assessing Officer shall also give finding on the contention of the assessee that depreciation is allowable even on the ground of passive use of the asset. The Assessee shall be at liberty to place all evidence, if any, before the Assessing Officer in support of its claim. Needless to say, the assessee shall be afforded reasonable opportunity of being heard before deciding the issue afresh - Decided in favour of assessee for statistical purposes.

Summary

Issues:
1. Disallowance of interest expenses on loans from Ministry of Chemical and Fertilizer for assessment years 2004-05 & 2005-06.
2. Disallowance of depreciation based on sales invoices for assessment year 2004-05.

Analysis:

Issue 1: Disallowance of Interest Expenses
The Revenue challenged the deletion of interest expenses on loans from the Ministry of Chemical and Fertilizer for assessment years 2004-05 & 2005-06. The Assessing Officer disallowed the interest expenses, citing non-payment of interest to the Ministry. However, the CIT(A) deleted the disallowance. The Tribunal noted that for interest to be allowed as a deduction under section 36(1)(iii), the loan must be for business purposes, interest should be payable, and the funds should be used for business. As there was no evidence to suggest otherwise, the disallowance was not justified. The Tribunal upheld the CIT(A)'s decision, ruling in favor of the assessee.

Issue 2: Disallowance of Depreciation
Regarding the disallowance of 50% of depreciation on the Bathinda Plant for the assessment year 2004-05, the Revenue contended that the plant started operations from October 1, 2003, and thus, only partial depreciation should be allowed. The CIT(A) deleted the disallowance based on three sale invoices from September 2003. However, the Tribunal found that the CIT(A) should have allowed the Assessing Officer to examine the invoices under Rule 46A of the Income-tax Rules. As the production date of the plant and the nature of production were unclear, the issue was remanded back to the Assessing Officer for a fresh decision. The Tribunal partially allowed the Revenue's appeal for statistical purposes.

Conclusion:
The Tribunal partly allowed the appeal for assessment year 2004-05 and dismissed the appeal for 2005-06. The disallowance of interest expenses was deemed unjustified, while the issue of depreciation was remanded for further examination. The judgment upheld the principles of deduction under section 36(1)(iii) and emphasized the importance of providing opportunities for examination under relevant rules in tax assessments.