2019 (4) TMI 509 - AT - Income Tax

Capitalization of interest u/s.36(1)(iii) - addition to capital WIP from the date of sanction of loan as against disallowance made for the whole year in the assessment order - HELD THAT - Hon ble Supreme Court in the matter of DCIT v/s. Core Healthcare Ltd. 2008 (2) TMI 8 - SUPREME COURT OF INDIA wherein it is held that interest on borrowed capital to be allowed and makes no distinction between money borrowed to acquire a capital or a revenue asset and section 36(1)(iii) requires that assessee must borrow capital and the purpose of the borrowing must be for business which is carried on by the assessee in the year of account. Unlike, section 37 which expressly excludes an expense of a capital nature, section 36(1)(iii) emphasizes is the user of the capital and not the user of the asset which case into existence as a result of borrowed capital. The legislature has, therefore. made no distinction in section 36(1)(iii) between capital borrowed for a revenue purpose and capital borrowed for a capital purpose . An assessee is entitled to claim on borrowed capital provided that capital is used for business irrespective of what may be the result of using the capital which the assessee has borrowed. Further, the words actual cost do not find place in section 36(1)(iii) of the Act. In this case, assessee has taken loan from Bank/financial institution and paid interest and the same is reflecting in the balance-sheet of the assessee. Therefore, we are of the opinion that relief should be granted to the assessee/appellant. Levy of penalty u/s.271(1)(c) and charging of interest u/s.234-A, 234-B, 234-C & 234-D - HELD THAT - We have granted relief to the assessee. Therefore, we do not want to adjudicate separately.

Summary

Issues:
- Disallowance of interest expense
- Capitalization of interest expenditure
- Levy of penalty u/s.271(1)(c)
- Charging of interest u/s.234-A, 234-B, 234-C & 234-D

Disallowance of Interest Expense:
The appeals were filed against the appellate orders of the Commissioner of Income Tax(Appeals) regarding the disallowance of interest expense. The Assessee's grounds of appeal challenged the disallowance of interest expense amounting to ?93,88,884 out of a total disallowance of ?2,53,26,078. The facts revealed that the Assessing Officer had made the disallowance based on the presumption that borrowed funds were used for the purchase of a dredger not put to use. However, it was argued that the dredger in question was already in use, and the capitalization of interest expenditure was restricted to the addition made to capital Work-in-Progress. The Tribunal, after considering relevant precedents, held that the relief should be granted to the Assessee as the borrowed capital was used for business purposes.

Capitalization of Interest Expenditure:
The Tribunal analyzed the provisions of section 36(1)(iii) of the Income Tax Act, emphasizing the requirement that the capital borrowed must be used for business purposes. Citing the case of DCIT v/s. Core Healthcare Ltd., it was established that borrowed capital used for business, irrespective of the nature of the asset acquired, is eligible for interest deduction. The Tribunal also referred to the Vardhaman Polytec Ltd. case, outlining the necessity of a nexus between borrowed funds and business interest. In this case, as the Assessee had taken a loan for business purposes and paid interest, the Tribunal granted relief, allowing the claim on borrowed capital.

Levy of Penalty u/s.271(1)(c) and Charging of Interest u/s.234-A, 234-B, 234-C & 234-D:
Since relief was granted to the Assessee regarding the disallowance of interest expense, the Tribunal deemed the grounds for the levy of penalty u/s.271(1)(c) and charging of interest u/s.234-A, 234-B, 234-C & 234-D as consequential. Therefore, no separate adjudication was required on these grounds. The Tribunal allowed the appeals of the Assessee for both assessment years, 2010-11 and 2011-12, based on the relief granted in the primary appeal.

In conclusion, the Tribunal granted relief to the Assessee concerning the disallowance of interest expense and emphasized the eligibility of interest deduction on borrowed capital used for business purposes. The consequential issues of penalty and interest charges were not adjudicated separately due to the relief granted. The appeals of the Assessee for both assessment years were allowed by the Tribunal.