2019 (1) TMI 2005 - AT - Income Tax

Disallowance of interest expenses - unsecured loans are raised for the purpose of making investments in the capital work in progress - HELD THAT - Unsecured loans are raised for the purpose of making investments in the capital work in progress. This presumption clearly contradicts with CIT(A) s own finding as reproduced above to the effect that the appellant s funds are mixed and from the common funds investments are made in CWIP as well as inventory and debtors etc . If the funds are mixed funds as is the finding of the CIT(A) there cannot be any basis for the conclusion as has been eventually adopted by him that entire unsecured loans are used for the purpose of investment in CWIP (i.e. capital work in progress). It is also not in dispute and the financial statements filed by the assessee clearly re-establish that that the investments in CWIP are far in excess of the interest free funds available to the assessee. In such circumstances in the light of judgment in the case of CIT Vs Raghuvir Synthetics Ltd 2013 (7) TMI 806 - GUJARAT HIGH COURT and Reliance Utilities Power Ltd ( 2009 (1) TMI 4 - BOMBAY HIGH COURT ) the presumption has to be that the investments are made out of interest free funds. That is the approach consistently taken by various coordinate benches of this Tribunal. Clearly therefore whichever way one looks at it there is no legally sustainable foundation for the presumption that borrowed funds were used in the capital work in progress. CIT(A) himself admits that the funds are mixed and that the only basis is the nature of loan i.e. secured loan vs unsecured loan. In view of these discussions as also bearing in mind entirety of the case we uphold the plea of the assessee and delete the impugned disallowance on the admitted presumption that the secured loans were used in the capital work in progress. The assessee succeeds on this point. Disallowance being repairs and maintenance expenses of Plant and Machinery, repairs and maintenance expenses to factory building AND vehicle expenses telephone expenses and office expenses - HELD THAT - We are of the considered view that the impugned disallowance which are purely adhoc in nature are simply based on surmises and conjectures and cannot therefore meet any judicial approval. The stand of the assessee that all the details were duly produced before the Assessing Officer and that there is no requisition which remains to be complied with has simply been brushed aside. In any case in the case of a corporate assessee there is no question of personal expenses. We have also noted that similar disallowances have been deleted in the earlier years as well. In view of these discussions as also bearing in mind entirety of the case we uphold these grievances of the assessee and delete the impugned disallowances. Disallowance out of labour charges - CIT-A reducing the same to 10% instead of 20% disallowed by the Assessing Officer instead of deleting the same in toto - HELD THAT - The reasons for upholding the disallowance are rather vague and proceed on sweeping generalizations. The allowances are purely adhoc in nature and no specific legally sustainable defects have been pointed out and the stand of the assessee that all the details were duly produced before the Assessing Officer and that there is no requisition which remains to be complied with has simply been brushed aside. We have also noted that similar disallowances have been deleted in the earlier years as well. In view of these discussions as also bearing in mind entirety of the case we uphold the grievance of the assessee and delete the impugned disallowance in entirety. Deduction u/s. 80HHC - reduction of 90% of interest income and misc. income from the profit of eligible business income and by rejecting the claim of deduction in respect of export incentives - HELD THAT - As fairly agree that this issue is required to be restored to the file of the Assessing Officer for fresh adjudication with the benefit of direct decisions from Hon ble Supreme Court in the case of ACG Associated Capsules Ltd 2012 (2) TMI 101 - SUPREME COURT and Topman Exports 2012 (2) TMI 100 - SUPREME COURT That is precisely what was done by the Tribunal in the earlier assessment years. We accept the plea and remit the matter to the file of the AO for fresh adjudication as such.

Summary

Issues:
1. Disallowance of interest expense in assessment under section 143(3) of the Income Tax Act, 1961 for the assessment year 2004-05.
2. Adhoc disallowances of repairs and maintenance expenses, vehicle expenses, telephone expenses, office expenses, and labour charges.
3. Restriction of deduction under section 80HHC of the Act and rejection of claim of deduction in respect of export incentives.
4. Penalty under section 271(1)(c) of the Income Tax Act, 1961 for disallowance of interest.

Issue 1: Disallowance of Interest Expense
The appellant challenged the disallowance of Rs.40,65,595 out of interest expense by the CIT(A) in the assessment under section 143(3) for the assessment year 2004-05. The Assessing Officer and CIT(A) disallowed the interest on the basis that it was related to capital work in progress (CWIP). However, the ITAT Ahmedabad held that the disallowance was based on presumption without sufficient evidence. The tribunal noted that the funds were mixed, and investments were made from common funds. Referring to legal precedents, the tribunal ruled in favor of the assessee, deleting the disallowance.

Issue 2: Adhoc Disallowances
The appellant contested adhoc disallowances of repairs and maintenance expenses, vehicle expenses, telephone expenses, office expenses, and labour charges. The disallowances were made without concrete evidence and were based on surmises. The ITAT Ahmedabad found these disallowances to lack judicial approval as they were arbitrary and not supported by specific defects. The tribunal upheld the appellant's plea and deleted the impugned disallowances.

Issue 3: Restriction of Deduction under Section 80HHC
Regarding the restriction of deduction under section 80HHC of the Act and rejection of the claim of deduction in respect of export incentives, the ITAT Ahmedabad agreed to restore the matter to the Assessing Officer for fresh adjudication based on relevant legal decisions from the Supreme Court. The tribunal allowed ground no. 6 for statistical purposes and remitted the issue for further examination.

Issue 4: Penalty under Section 271(1)(c)
The penalty under section 271(1)(c) was imposed concerning the disallowance of interest, which was subsequently deleted by the ITAT Ahmedabad in the earlier order. As the quantum of disallowance was annulled, the tribunal ruled to delete the penalty as well. Consequently, the appeal against the penalty was allowed.

In conclusion, the ITAT Ahmedabad partly allowed ITA No. 278/Ahd/2009 and fully allowed ITA No. 806/Ahd/12, delivering the judgment on January 29, 2019.