2017 (7) TMI 206 - AT - Income Tax

Disallowance of interest -as per AO loans have been utilized for the purpose of acquisition of capital assets - Held that - AO aforesaid conclusion is not supported by any evidence on record. We find that while upholding the order of AO, though Ld. CIT(A) has stated that though the cash credit loan account was not used for the purpose of acquisition of capital assets but since as per the ledger, the cash credit funds were utilized for the repayment of funds availed for work in progress, the expenditure was not allowable. CIT(A) though has disallowed the interest but has given a finding that the amount borrowed from cash credit account was not utilized for acquisition of capital assets. No evidence has been brought on record by Revenue to demonstrate that the general purpose loan or term loan which was for take-over of loan from Bank of Maharashtra was utilized for acquisition of capital assets. In such a situation, we are of the view that no disallowance of interest is called for merely on the basis of presumption. We therefore direct the deletion of disallowance of interest made by the AO. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of professional fees.
2. Disallowance of interest on capital borrowed for work-in-progress.
3. Disallowance of proportionate interest on funds used for repayment of loan for work-in-progress.
4. Disallowance of interest on repayment of term loan from Axis Bank.
5. Appeal by Revenue on low tax effect.

Issue-wise Detailed Analysis:

1. Disallowance of Professional Fees:
The assessee did not press this ground, and it was dismissed as not pressed.

2. Disallowance of Interest on Capital Borrowed for Work-in-Progress:
During assessment, the AO noted that the assessee had availed secured loans from various banks, including term loans from the State Bank of India (SBI). The AO disallowed interest of ?14,31,882/- as it was used for capital assets and work-in-progress, not allowable as revenue expenditure. The CIT(A) partly upheld this disallowance, confirming ?9,19,855/- related to capital WIP but deleting ?5,12,027/- related to a corporate loan for expansion of marketing and distribution network.

3. Disallowance of Proportionate Interest on Funds Used for Repayment of Loan for Work-in-Progress:
The AO disallowed ?1,95,442/- as proportionate interest on funds used for repayment of loans taken for capital WIP and a hotel project. The CIT(A) confirmed ?1,88,561/- of this disallowance, excluding ?6,881/- related to repayments made in February/March 2010.

4. Disallowance of Interest on Repayment of Term Loan from Axis Bank:
The AO disallowed ?9,75,826/- as interest on funds used for repayment of Axis Bank project loans, considering it capital expenditure. The CIT(A) confirmed ?9,41,363/- of this disallowance, excluding ?34,462/- related to repayments made in February/March 2010. The assessee argued that the loans were for business expansion and not for capital assets, and the interest was already capitalized as project cost.

5. Appeal by Revenue on Low Tax Effect:
The Revenue's appeal was dismissed due to low tax effect, as per the CBDT Circular No. 21 of 2015, which prescribes a monetary limit of ?10 lakhs for filing appeals. The tax effect in the Revenue's appeal was below this limit.

Conclusion:
The assessee's appeal was partly allowed, and the Revenue's appeal was dismissed. The disallowance of professional fees was dismissed as not pressed. The disallowance of interest on capital borrowed for work-in-progress was partly upheld and partly deleted. The disallowance of proportionate interest on funds used for repayment of loans was mostly upheld, with minor exclusions. The disallowance of interest on repayment of term loans from Axis Bank was largely upheld, with some exclusions. The Revenue's appeal was dismissed due to low tax effect.