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2023 (9) TMI 1453 - AT - Income TaxCapitalizing the interest expenditure on Capital Work in Progress (CWIP) - AO observed that the assessee did not furnish any details pertaining to funds flow movement to prove that only surplus funds available with the assessee were utilized for the purpose of purchase of various items grouped under the head CWIP - as assessee was not able prove that there was no diversion of interest bearing funds and that the interest free funds available with the assessee which were utilized for making investment in Capital Work in Progress, AO added back a sum u/s 36(1)(iii) of the Act - CIT(A) decided the issue in favour of the assessee by observing that during the year under consideration, the assessee had sufficient interest free funds in the form of share capital, reserve and surplus - HELD THAT - A perusal of the observations made by Ld. CIT(A) clearly shows that substantial interest free funds were available with the assessee far in excess of the investment made in Capital Work in Progress. In the case of Amod Stamping (P.) Ltd 2014 (7) TMI 753 - GUJARAT HIGH COURT held that where assessee had sufficient interest free fund available with it to be invested in mutual funds, deduction of interest expenditure on borrowed fund could not be disallowed under section 36(1)(iii) of the Act. In the case of Gujarat State Fertilizers Chemicals Ltd. 2013 (7) TMI 701 - GUJARAT HIGH COURT held that where assessee's own funds exceeded investment made to earn exempted income, and borrowed funds had not been used for investments, disallowance of 10 per cent of dividend income was impermissible. In the case of Beekons Industries Ltd. 2023 (3) TMI 323 - PUNJAB AND HARYANA HIGH COURT it is held that where assessee-company had given loan to a directors' relative without charging interest and it also claimed deduction under section 36(1)(iii) of interest paid on loan taken from bank, since loan to director's relative was financed by assessee from self sources without any cost, disallowance of interest paid on loan taken on pro rata basis was not justified. Thus we observe that on identical set of facts, the Assessing Officer did not make any disallowance in the hands of the assessee under Section 36(1)(iii) of the Act in the previous assessment. Therefore we find no infirmity in the order of Ld. CIT(A) in deleting the additions made under Section 36(1)(iii) of the Act. Decided against revenue. Disallowance of Foreign Commission Expenses u/s 40(a)(i) of the Act - CIT(A) has primarily given relief to the assessee on the ground that names and address of the brokers / agents, copies of bank debit advice issued for outward remittance, debit notes and export invoices etc. were furnished by the assessee and accordingly, the Ld. CIT(A) directed to delete the addition - HELD THAT - We observe that the commission expenses has risen substantially from Rs. 46,903/- to 60,64,640/- during the impugned year under consideration. Assessee has placed on reliance on certain documents which have been placed before us for our consideration in order to substantiate the nature of expenses which have been incurred in support of the fact that services were rendered outside of India. What we notice that there has been a substantial increase in foreign commission expenses during the year under consideration and the Department i.e. both the AO and Ld. CIT(A) did not have opportunity to examine the foreign commission expenses in absence of copies of Agreements which have not been furnished at any stage of the proceedings. In our considered view, in order to decide on the nature / genuineness of services which have been rendered by the broker / agents and whether TDS is required to be deducted on such payments, it is important that the Department should analyze the details including copies of Agreements, which have been furnished before us on sample basis for the first time. Accordingly, in the interest of justice this issue is being restored to the file of AO for denovo consideration - Ground of the Department's appeal is allowed for statistical purposes. Disallowance of warranty liability - CIT(A) deleted addition - HELD THAT - Certain facts are noteworthy. Firstly, on identical set of facts, the Department has allowed the appeal of the assessee for the past years as well. The Department has not pointed out to any specific circumstances which would necessitate a change in the position taken by the Department. Second, it is observed that in some cases, the goods supplied by the assessee carry a warranty period of upto eight years. It is for this specific reason, as observed that CIT(A) that the assessee has made a provision for warranty for a period of five years from the date of sale. Thirdly, after the period the warranty period is over i.e. after five years, the assessee has suo moto offered the unutilized portion of the provision for warranty expenses and offered the same to tax in the return of income. Therefore, the provision for warranty is a Revenue neutral exercise and after the period when the warranty is over, the assessee suo moto offers the same to tax in its return of income. This fact has also been specifically taken note of by Ld. CIT(A) while allowing the appeal of the assessee on this issue. Fourthly, the assessee has given a reasonable basis as to why a provision of warranty @ 5% of net sales has been booked, which is for the reason that the assessee has provided a bank guarantee of Rs. 10.42 cores to its clients which can be forfeited in the event of default in providing any after sales application. CIT(A) has observed that the assessee is clearly incurred substantial risk on account of bank guarantees which have been given to its customers and therefore, looking into the instant facts, a provision of warranty @ 5% of the net sales is quite reasonable, looking into the instant facts. CIT(A) also observed that on perusal of various instances of warranty provided to customers, it was seen that in several cases the period of warranty ranged to eight years as well. Accordingly, a provision of warranty for a period of five years was justified in the instant set of facts. It is a well settled principle that provision of warranty, if done on a scientific and rational basis is allowable to the assessee. However, what qualifies as scientific / rational would depend on assessee's line of business, the nature of warranty that it provides and a period of warranty provided by the assessee. Thus we find no infirmity in the order of Ld. CIT(A) so as to call for any interference. Decided in favour of assessee. Disallowance of interest expenses claimed on business advances u/s 36(1)(iii) - CIT(A) deleted addition - HELD THAT -We observe that the assessee has substantial share holder funds including reserves and surplus at its disposal. Further, the assessee has profit after tax of Rs. 2,80,11,727/-, which is in excess as compared to the advance of Rs. 2,66,40,000/- given to M/s. Shivalik Reality Pvt. Ltd. The Ld. CIT(A) on consideration of the above facts had arrived at the factual finding that the advances have been made by the assessee from own interest free funds and further in the immediately preceding Assessment Year 2011-12, no disallowances was made by the Assessing Officer in respect of such advances - no infirmity in the order of Ld. CIT(A) so as to call for any interference. Decided in favour of assessee. Addition u/s 14A - CIT(A) restricted the disallowance which was the dividend income claimed to be exempt by the assessee - HELD THAT - It is a well settled principle of law that the amount of disallowance under Section 14A of the Act cannot exceed the amount of income claimed to be exempt by the assessee. Accordingly, and the observations made by Ld. CIT(A) in the appellate order, we find no infirmity in the order passed by Ld. CIT(A) so as to call for any interference. Disallowance on account of commission to foreign agents - CIT(A) deleted addition - HELD THAT - In light of our observations made on A.Y. 2012-13 the matter is being restored to the file of the Assessing Officer for carrying out necessary verification, since the Department did not have the opportunity of analyzing the necessary agreements etc. which have been placed on record before us for the first time. Ground of the Department's appeal is allowed for statistical purposes.
Issues Involved:
1. Capitalization of Interest Expense on Capital Work in Progress (CWIP) 2. Disallowance under Section 36(1)(iii) of the Act 3. Disallowance of Foreign Commission Expenses under Section 40(a)(i) of the Act 4. Disallowance on account of Warranty Liability 5. Disallowance of Interest Expense on Business Advance 6. Disallowance under Section 14A of the Act Summary: Issue 1: Capitalization of Interest Expense on CWIP The Department challenged the Ld. CIT(A)'s decision to capitalize interest expenditure of Rs. 20,18,037/- on CWIP. The Assessing Officer (AO) added this amount back under Section 36(1)(iii) due to lack of evidence that interest-bearing funds were not used for CWIP. The Ld. CIT(A) found that the assessee had sufficient interest-free funds and deleted the addition. The Tribunal upheld the Ld. CIT(A)'s decision, citing substantial interest-free funds and relevant judicial precedents. Issue 2: Disallowance under Section 36(1)(iii) of the Act The AO disallowed Rs. 84,000/- under Section 36(1)(iii) for interest-free loans to a sister concern. The Ld. CIT(A) deleted the disallowance, noting the assessee's sufficient profits and lack of nexus between borrowed funds and advances. The Tribunal upheld the Ld. CIT(A)'s decision, finding no error in facts or law. Issue 3: Disallowance of Foreign Commission Expenses under Section 40(a)(i) of the Act The AO disallowed Rs. 60,64,640/- in foreign commission expenses due to lack of agreements and evidence of services rendered. The Ld. CIT(A) allowed the appeal, noting the payments were genuine and made through banking channels. The Tribunal restored the issue to the AO for de novo consideration, emphasizing the need for agreement analysis. Issue 4: Disallowance on account of Warranty Liability The AO disallowed Rs. 2,96,84,828/- for warranty claims, deeming them contingent liabilities without a scientific basis. The Ld. CIT(A) allowed the appeal, citing the assessee's consistent practice and substantial bank guarantees. The Tribunal upheld the Ld. CIT(A)'s decision, referencing judicial precedents supporting scientifically based warranty provisions. Issue 5: Disallowance of Interest Expense on Business Advance The AO disallowed Rs. 31,96,800/- for advances on office purchase, assuming borrowed funds were used. The Ld. CIT(A) deleted the disallowance, highlighting the assessee's substantial interest-free funds. The Tribunal upheld the Ld. CIT(A)'s decision, finding no infirmity. Issue 6: Disallowance under Section 14A of the Act The AO disallowed Rs. 3,95,014/- under Section 14A. The Ld. CIT(A) restricted this to Rs. 1,95,599/-, the amount of exempt dividend income. The Tribunal upheld the Ld. CIT(A)'s decision, noting that disallowance cannot exceed exempt income. Additional Appeals: For subsequent assessment years (A.Y. 2013-14 and A.Y. 2015-16), the Tribunal's decisions mirrored those for A.Y. 2012-13. Issues regarding foreign commission expenses were remanded for further verification, while disallowances for warranty provisions and interest expenses were dismissed. Conclusion: The Tribunal partly allowed the Department's appeals for statistical purposes and dismissed the assessee's cross-objection as not pressed.
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