2019 (4) TMI 258 - AT - Income Tax

Addition u/s 36(1)(iii) - addition of notional interest in WIP - own interest free funds available with the assessee - HELD THAT - The assessee has reserves and surplus of more than ₹ 48 crores. It has internal accrual during the year which can take care of such investments. The assessee took us through net cash flow from operations available on page no.20 of the annual report which suggest that the assessee has net cash flow. Thus, considering interest free funds available with the assessee in the shape of share capital, reserves and surplus, as well as net revenue from operations, we are of the view that alleged investment in WIP could be assumed as carried from these surplus funds. No notional interest ought to be calculated for capitalization. See case of CIT Vs. Reliance Utilities & Power Ltd 2009 (1) TMI 4 - BOMBAY HIGH COURT - Decided in favour of assessee.

Summary

Issues:
Appeal against addition under section 36(1)(iii) of the Income Tax Act, 1961.

Analysis:
The appellant contested the addition of ?39,90,874 made by the Assessing Officer (AO) under section 36(1)(iii) of the Income Tax Act, 1961. The appellant, engaged in manufacturing and trading activities, declared a total income of ?NIL after setting off unabsorbed depreciation. The AO observed a closing stock of work-in-progress (WIP) at ?4,79,83,831 and interest expenditure of ?42,06,30,534. The AO calculated interest related to capital WIP at ?49,11,845 and added it to the income. The Commissioner of Income Tax (Appeals) partially allowed the appeal.

The appellant argued that no fresh loans were taken for the alleged capital WIP and had sufficient interest-free funds to cover it. The interest rate charged was 9.75% instead of the estimated 12% by the AO. The CIT(A) accepted part of this contention, reducing the disallowed interest. The Departmental Representative supported the AO's order.

Upon review, the Tribunal found the appellant's reserves and surplus exceeded ?48 crores, with internal accruals capable of funding the investments. The net cash flow from operations was ?16,55,474, indicating ample interest-free funds from share capital and reserves. Relying on the decision of the Bombay High Court in CIT Vs. Reliance Utilities & Power Ltd., the Tribunal concluded that no notional interest should be calculated for capitalization. Consequently, the appeal was allowed, overturning the addition.

In conclusion, the Tribunal allowed the appellant's appeal, emphasizing the availability of interest-free funds and surplus to support the alleged investment in WIP. The decision was pronounced on 13th August 2018.