2018 (2) TMI 1699 - AT - Income Tax

Disallowance u/s 36 (l) (iii) - Penalty proceedings u/s.271(l)(c) - Held that - Interest expenditure of ₹ 19,92,128/- is disallowed in view of the provisions of Sec.36(l)(iii) of the Act and added back to the total income of the assessee company. Penalty proceedings u/s.271(l)(c) of the Act are initiated for furnishing inaccurate particulars of income and thereby concealment of income. It is pertinent to clarify that, the assessee company has paid interest of ₹ 4,80,110/- to Lily Enclave Pvt. Ltd. In this regard on verification of the record of the assessee company for the A.Y.2009-10, it is noticed that, the unsecured loan received from Lily Enclave Pvt. Ltd. has been treated as unexplained cash credit u/s.68 of the Act vide order u/s.153C / 153A r.w.s. 143(3) of the Act dated 30/12/2011. The said unexplained cash credit has been confirmed by the Ld.CIT(A)-III, Ahmedabad. Therefore, interest expenditure to the extent of ₹ 4,80,110/- is not allowed. However, no separate addition is made since the entire interest expenditure has been disallowed, as discussed above. Disallowance u/s 35D - Held that - As we can see from the memorandum and articles of association of Taxworld Fashions Private Limited company main business is not a rental business. Appellant shows that as per balance sheet of the appellant company, it is shown that it is plea of CEPT plant to be under consideration. Further, the nature of business of the appellant is manufacturing and trading of cloth, but appellant had made statement before the lower authorities that rental income of ₹ 72,00,000/- earned during the year was its business income. After going through the record, we can see that appellant yet to start its business. So in our considered opinion, we are not convinced with the argument of the ld. AO but direct the AO to capitalize ₹ 72,00,000/- and allow depreciation. So far as disallowance u/s.35D of the Act is concerned appellant had not started its business activity and even the plant and building are still under construction. The appellant has merely stated in its submission that it had not business activity of plant and machinery under construction. But this fact is not correct because no business activity has been shown by the appellant and no supportive documents have been filed by the appellant during the year under consideration. In audit to get deduction u/s.35D of the Act must against the manufacturing our business activities. So in our considered opinion, this ground cannot be allowed.

Summary

Issues Involved:
1. Disallowance of ?19,92,128/- under Section 36(1)(iii) of the Income Tax Act.
2. Disallowance of ?5,73,796/- under Section 35D of the Income Tax Act.

Detailed Analysis:

1. Disallowance under Section 36(1)(iii):

During the assessment proceedings, it was noted that the assessee company reported only rental income of ?7,20,000/- and no business receipts or sales. However, the company claimed business expenditure of ?30,03,166/- in the Profit & Loss Account. The Assessing Officer (AO) raised queries regarding the nature of this expenditure and the classification of rental income under the head "income from house property."

The assessee argued that the rental income was business income, as the land was temporarily let out to Nandan Exim Pvt. Ltd. for parking purposes. They cited the Supreme Court decision in Universal Plast v. CIT, asserting that income from temporarily letting out a business asset should be treated as business income.

However, the AO found contradictions in the assessee's submissions and noted that the factory building and plant were still under construction, as evidenced by the balance sheet. Thus, the interest expenditure of ?19,92,128/- was disallowed under Section 36(1)(iii), as it should be capitalized until the assets are put to use. The AO relied on several judicial precedents, including Nahar Polyfilms Ltd. v. CIT and CIT v. Vardhman Polytex Ltd., to support this view.

The tribunal upheld the AO's decision, noting that the assessee had not commenced its business and the assets were under construction. However, it directed the AO to capitalize the interest expenditure and allow depreciation.

2. Disallowance under Section 35D:

The assessee claimed preliminary expenses of ?5,73,796/- (1/5th of ?28,68,982/-) under Section 35D. The AO disallowed this claim, stating that the expenses were not covered under Section 35D(2)/(3) and the business had not commenced.

The assessee did not provide any substantial evidence to counter this finding. The tribunal noted that the company had not started its business activities, and the plant and building were still under construction. It held that to claim deduction under Section 35D, the business must be operational. Consequently, the tribunal upheld the disallowance but directed the AO to capitalize the preliminary expenses and allow depreciation.

Conclusion:

The appeal filed by the assessee was dismissed. The tribunal upheld the disallowances made by the AO under Sections 36(1)(iii) and 35D, but directed the AO to capitalize the disallowed amounts and allow depreciation as per law.