2016 (5) TMI 1152 - HC - Income Tax

Disallowance of interest relatable to investment in capital-work-in-progress - ITAT deleted the addition - Held that - Under the proviso to Section 36(1)(iii) of the Act inserted by Finance Act, 2003 w.e.f. 2004-05, it is provided that such amount of interest paid in respect of capital borrowed for acquisition of assets for the period beginning from the date on which the said capital was borrowed for the acquisition of assets till the date the same are first put to use, such interest is required to be disallowed as deduction. Examining the factual matrix herein, the total work in progress as on 31.3.2005 was ₹ 364.44 lacs which comprised of ₹ 331.68 lacs as the opening balance in the account and ₹ 32.76 lacs was added during the year. There was no loan which was outstanding as on 31.3.2004 and 31.3.2005 and none of the interest bearing funds were utilized for the investment in the said opening work in progress. Similar issue of disallowance of interest on account of investment in the capital work in progress had come before the Tribunal in assessee s own case relating to assessment year 2004-05 and the Tribunal upholding the order of CIT (A) held that no interest bearing capital was invested in the aforesaid capital work in progress, which is opening balance for the year under consideration. In view thereof, the Tribunal upheld the order of CIT(A) by recording that there is no merit in disallowing the interest attributable to the opening capital work in progress of ₹ 331.68 lacs. Further, the Tribunal also recorded that the assessee during the year had made an addition of ₹ 36.27 lacs to the said capital work in progress and claimed not to have borrowed any fresh loan during the relevant period. Nothing was produced by the revenue to show to the contrary. Thus, the deletion of addition of ₹ 56,48,840/- by the CIT(A) was upheld by the Tribunal correctly - Decided against revenue

Summary

Issues:
- Disallowance of interest on capital work in progress

Analysis:
The High Court of Punjab and Haryana heard two appeals (ITA Nos. 268 and 269 of 2011) concerning the disallowance of interest on capital work in progress under Section 260A of the Income Tax Act, 1961. The primary issue revolved around whether the Tribunal was correct in upholding the CIT(A)'s decision to delete the addition of ?56,48,840 made by the Assessing Officer on account of disallowance of interest related to investment in capital work in progress. The Court examined the provisions of the Act inserted by the Finance Act, 2003, which require disallowance of interest paid in respect of capital borrowed for asset acquisition until the assets are first put to use. The Court noted that in the instant case, the assessee had not utilized any interest bearing funds for the investment in the opening work in progress, and no fresh loans were taken during the relevant period. The Tribunal had previously upheld the CIT(A)'s decision in a similar case for the assessment year 2004-05, where it was held that no interest bearing capital was invested in the capital work in progress. Consequently, the Court upheld the Tribunal's decision to delete the addition of ?56,48,840 made by the Assessing Officer.

The Court emphasized that the Revenue failed to provide any evidence to counter the assessee's claim that no interest bearing funds were utilized for the investment in the capital work in progress. The Tribunal's decision was based on the factual matrix and previous rulings in similar cases, leading to the conclusion that there was no merit in disallowing the interest attributable to the investment in the capital work in progress. The Court found no error or perversity in the Tribunal's approach, leading to the dismissal of the appeals by the Revenue. Consequently, the substantial question of law was answered in favor of the assessee, and the appeals were dismissed.