2018 (1) TMI 579 - AT - Income Tax

Addition u/s 36(1)(iii) for non-capitalisation of interest on advance given for land purchased and for non-capitalisation of interest on opening capital work-in-progress - sufficient interest-free funds for advancing for purchase for land and also for construction - Held that - As far as the legal and factual position as considered by the Commissioner of Income-tax (Appeals), we find there is no infirmity pointed out by the Revenue on record. The fact that to the extent relief has been granted, the conclusion has been drawn on the basis of facts that the purchase and construction was from the interest-free funds available to the assessee which finding of fact we note remains unassailed on record. Arguments to the contrary advanced by the learned senior Departmental representative are found to be exfacie contrary to facts on record. The facts on record that entire interest expenditure on term loan from Allahabad Bank has duly been capitalised is an accepted fact which remains unassailed and has constantly been argued even before the Assessing Officer - Decided against revenue

Issues Involved:

1. Justification of the Commissioner of Income-tax (Appeals) in restricting the addition to ?4,80,000 against ?63,16,618 made by the Assessing Officer under section 36(1)(iii) for non-capitalisation of interest on advance given for land purchased and for non-capitalisation of interest on opening capital work-in-progress.
2. Justification of the Commissioner of Income-tax (Appeals) in accepting that the assessee had sufficient interest-free funds for advancing for the purchase of land and construction when the funds used were from accounts where business profits and loan money were credited.

Issue-wise Detailed Analysis:

1. Justification of the Commissioner of Income-tax (Appeals) in restricting the addition to ?4,80,000 against ?63,16,618:

The Revenue challenged the correctness of the order dated September 28, 2016, which restricted the addition made by the Assessing Officer. The Assessing Officer had made additions based on the non-capitalisation of interest on the opening capital work-in-progress and the advance given for land purchased. The Commissioner of Income-tax (Appeals) found that the assessee had used its own interest-free funds for the purchase of land and construction of a godown, and thus, the interest cost on these funds did not need to be capitalised. The Commissioner of Income-tax (Appeals) restricted the addition to ?4,80,000, which was the interest on ?40,00,000 borrowed funds used in the assessment year 2009-10, rather than the ?63,16,618 calculated by the Assessing Officer. This decision was based on the audited financial statements and the availability of sufficient interest-free funds in the preceding years.

2. Justification of the Commissioner of Income-tax (Appeals) in accepting that the assessee had sufficient interest-free funds:

The Departmental representative argued that the funds in the assessee's accounts were mixed, comprising both business profits and loan money, making it difficult to determine if only non-interest-bearing funds were advanced. However, the Commissioner of Income-tax (Appeals) held that the assessee had sufficient interest-free funds available for the purchase of land and construction of the godown. This was supported by the audited financial statements for the assessment years 2009-10 to 2012-13, which showed substantial interest-free funds in the form of share capital, reserves and surplus, and loans from directors. The Commissioner of Income-tax (Appeals) concluded that the interest cost on these funds did not need to be capitalised, as the funds were not borrowed.

Comprehensive Judgment Analysis:

The Tribunal upheld the findings of the Commissioner of Income-tax (Appeals), noting that the assessee had sufficient interest-free funds for the land purchase and construction activities. The Tribunal referred to several judicial precedents, including the decisions in Bright Enterprises Pvt. Ltd. v. CIT and Hero Cycles P. Ltd. v. CIT, which established that if interest-free funds are available, it is presumed that investments are made from these funds. The Tribunal dismissed the Departmental appeal, affirming that the Commissioner of Income-tax (Appeals) correctly restricted the addition to ?4,80,000 and provided relief of ?58,36,618 to the assessee.

Conclusion:

The appeal of the Revenue was dismissed, and the order pronounced in the open court on October 24, 2017, confirmed the findings of the Commissioner of Income-tax (Appeals) regarding the non-capitalisation of interest and the availability of sufficient interest-free funds for the assessee's investments.

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