2014 (10) TMI 1045 - AT - Income Tax

Disallowance of interest expenditure u/s 36 (1)(iii) - disallow interest expenses in total disregard of the facts and figures furnished to establish acquisition and use of asset by the appellant - interest was paid on account of capital borrowed towards the acquisition of asset - HELD THAT - The purpose of the borrowing has to be determined on the facts of each case. Then the use of the capital borrowed is required to be examined. From A.Y. 2004-05 the borrowing is shown specifically for the purpose of acquiring a capital asset. So the out come of this proviso is that the interest would not be admissible for deduction till date the new asset is brought to use. An option is available to the assessee to capitalized the interest amount. The effect of the proviso to Section 36(1)(iii) inserted with the fact of 2004-05 is to disallow interest on Money borrowed for acquiring capital asset till the date on which the asset is brought to use; even if it is for expansion of existing business. As per our humble understanding the law had always made a difference between money borrowed for existing business whether it is for expansion or otherwise with that the money borrowed for setting up an altogether new business - now as per this insertion of the proviso the Revenue Department felt that the expansion of business should be put on par with a new business and that interest on borrowing for capital asset for the purposes of expansion should also be treated as part of capital expenditure in the case of Hindustan Zinc Limited . 2003 (7) TMI 21 - RAJASTHAN HIGH COURT . The undisputed fact is that in terms of the agreements which are placed on record; the assessee APPL has agreed to purchase the said unit. The agreement dated 21st day of May 2003 has clearly mentioned that MIL desired to transfer and APPL had desired to purchase the said unit with a clear and marketable title. From this agreement it is also evident that MIL had only permitted APPL as licensee to enter upon the said unit till the completion of sale. Which means that the process of transfer of the property was going on at the time when those agreements were signed the assessee was in the process of acquiring the said units (an asset) during the relevant period. Therefore the AO was of the view that an expenditure incurred such as interest expenditure was required to be capitalized for the period during which the capital asset has not been transferred in the name of the assessee. A serious option has been raised by the AO that had this property was owned by the assessee APPL then it should have been disclosed in the balance sheet under the schedule of assets but it was not so. Reasons given by the AO for the impugned disallowance appears to be sustainable in the eyes of law. We have to see the applicability of the proviso annexed to Section 36(i)(ii) that whether interest is allowable in respect of money borrowed for acquisition of an asset. Then the appellant has cited the case law of Bright Automobiles and Plastics Ltd. 2004 (9) TMI 24 - MADHYA PRADESH HIGH COURT to explain the definition of term acquiring is for the purpose of Sec.35AB and held that assessee need not become absolute owner of know-how. We are of the view that there in point in mixing up the issue with the other provisions of IT Act and to be strictly decided in the light of the language of Section 36(i)(iii) to be read alongwith the proviso inserted by the statute. Exactly this was opined by the Hon ble Supreme Court in the case of Core Health Care Ltd. 2008 (2) TMI 8 - SUPREME COURT that Section 36(i)(iii) has to be read on its own terms because it is a code by itself. Therefore; finally we hereby conclude that the disallowance was rightly made by the Revenue Department in all the years hence confirmed. Resultantly grounds are dismissed. Disallowance of depreciation was that the Director of the Company had purchased the motor car in his name - HELD THAT - The bill for the purchase of the car was also in the name of the Director. Hence it was held that since the assessee company was not the legal owner of the motor car therefore claim of depreciation was not allowable. CIT(A) has confirmed the action of the AO. Now before us an order in the case of ITO Vs. Typhoon Financial Services 2011 (1) TMI 1567 - ITAT AHMEDABAD as held CIT(A) gave a specific finding that the motor car was purchased out of the funds of the assessee-company and was also used for the purpose of business of the assessee-company. Merely because the registration was in the name of one of the directors would not disallow the claim of the assessee. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of interest expenditure under Section 36(1)(iii)
2. Set off of brought forward business loss
3. Disallowance of depreciation on a car

Issue-wise Detailed Analysis:

1. Disallowance of Interest Expenditure under Section 36(1)(iii):

The primary issue pertains to the disallowance of interest expenditure of Rs. 10,92,000 for the assessment years 2005-06, 2006-07, and 2009-10. The assessee argued that the interest expenditure should be allowed as it was incurred wholly and exclusively for business purposes. The Assessing Officer (AO) disallowed the interest expenditure, citing that the funds were borrowed for acquiring a unit of Mafatlal Industries Ltd. and thus fell under the proviso to Section 36(1)(iii). The AO noted that no conveyance deed was executed, no manufacturing activity was undertaken by the assessee, and the acquired asset was not shown in the balance sheet. The AO concluded that the interest paid was for capital borrowed for asset acquisition, hence not allowable.

The CIT(A) upheld the AO's decision, stating that the interest was to be capitalized until the asset was acquired and put to use. The CIT(A) emphasized that the unit was not transferred to the appellant company, and thus, the interest on borrowed funds used for acquisition fell within the proviso to Section 36(1)(iii).

The Tribunal, after considering the arguments and relevant case laws, supported the Revenue's view. It was noted that the proviso to Section 36(1)(iii) inserted by the Finance Act 2003, effective from 1.4.2004, disallowed interest on money borrowed for acquiring a capital asset until the asset is put to use. The Tribunal concluded that the disallowance was rightly made by the Revenue Department.

2. Set off of Brought Forward Business Loss:

For the assessment year 2006-07, the assessee contested the non-allowance of set-off of brought forward business loss of Rs. 10,21,207. The CIT(A) observed that after setting off the loss against the income for A.Y. 2005-06, no brought forward loss was available. The Tribunal found no error in the CIT(A)'s observation and dismissed this ground, affirming that the set-off of loss was consequential to the outcome of the appeal for A.Y. 2005-06.

3. Disallowance of Depreciation on a Car:

For the assessment year 2009-10, the assessee challenged the disallowance of depreciation of Rs. 3,82,492 on a car owned and used for business purposes. The AO disallowed the depreciation, stating that the car was purchased in the name of the Director and not the company. The CIT(A) upheld this decision.

However, the Tribunal referred to a precedent (ITO Vs. Typhoon Financial Services) where it was held that a car purchased out of the company's funds and used for business purposes should be allowed for depreciation, even if registered in the Director's name. Respectfully following this decision, the Tribunal directed to allow the depreciation, thus partly allowing the appeal for A.Y. 2009-10.

Conclusion:

- Appeals for A.Y. 2005-06 and A.Y. 2006-07 were dismissed.
- Appeal for A.Y. 2009-10 was partly allowed, granting depreciation on the car.