2013 (12) TMI 1741 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of interest expenses in Dera Bassi unit.
2. Estimation of notional interest on capital work in progress.
3. Estimation of notional interest on additions to fixed assets.
4. Estimation of notional interest on funds in the name of Baddi trading unit.
5. Capitalization of web/software development expenses.
6. Reduction of claim u/s 80IC by shifting/allocating expenses.
7. Wrong calculation of deduction u/s 80IC.
8. Disallowance of carried forward depreciation loss.

Summary:

Issue 1: Disallowance of Interest Expenses
The assessee, engaged in drug formulation with units at Dera Bassi and Baddi, faced disallowance of Rs. 31,06,069/- in interest expenses for Dera Bassi unit due to alleged fund diversion to Baddi unit. The Assessing Officer (AO) computed disallowance based on 10.75% interest rate. The CIT(A) upheld this disallowance. The Tribunal directed the AO to recompute disallowance using the average cost of debt, considering mixed funds, following the ratio in CIT Vs Abhishek Industries Ltd. and DCIT Vs MTZ Polyfilms Ltd.

Issue 2: Notional Interest on Capital Work in Progress
The AO observed that interest on capital work in progress should be capitalized. The Tribunal agreed but directed the AO to apply the average cost of debt for disallowance computation.

Issue 3: Notional Interest on Additions to Fixed Assets
The AO noted that interest on fixed assets additions should be capitalized. The Tribunal found no merit in disallowance if assets were put to use within the year, allowing the assessee's claim.

Issue 4: Notional Interest on Funds in Baddi Trading Unit
The Tribunal directed the AO to consider only the opening balance for disallowance computation and apply the average cost of debt. The total disallowance should not exceed Rs. 31,06,069/-.

Issue 5: Capitalization of Web/Software Development Expenses
The AO capitalized web/software development expenses, allowing 60% depreciation. The Tribunal upheld this, citing the amendment to include computer software as tangible assets under Rule 5 of Income Tax Rules, 1962.

Issue 6: Reduction of Claim u/s 80IC by Shifting/Allocating Expenses
The AO allocated common expenses among units, reducing the deduction u/s 80IC. The Tribunal directed the AO to consider turnover and expenses of all units, avoiding double disallowance.

Issue 7: Wrong Calculation of Deduction u/s 80IC
The Tribunal directed the AO to recompute the deduction u/s 80IC, ensuring no double addition.

Issue 8: Disallowance of Carried Forward Depreciation Loss
The assessee did not press this ground, and it was dismissed.

Conclusion:
The appeal was partly allowed, with directions for recomputation and consideration of average cost of debt for interest disallowance, proper allocation of expenses, and avoidance of double disallowance.