2020 (1) TMI 953 - AT - Income Tax

Disallowance of interest expenses u/s 36(1)(iii) - interest expenses incurred by the assessee on the borrowed money utilized for the acquisition of the machineries - HELD THAT - Admittedly, there was the acquisition of the new machinery out of the borrowed fund which was not put to use during the year under consideration. But the question arises whether such acquisition of machinery amounts to the extension of the existing business. None of the authorities below has put some light on this aspect. As such the proviso to section 36(1)(iii) of the Act mandates to capitalize the amount of interest on the machine acquired out of the borrowed fund provided such acquisition results in the extension of the business Value of the machine acquired by the assessee during the year is negligible to the total value of the plant and machineries shown by the assessee in its balance-sheet as on 31 March 2011. Such, small addition in the plant and machinery cannot amount to the extension of the existing business. As there is no detail available before us suggesting that there was some increase in the production/sales etc, we are not inclined to treat the interest expense on the acquisition of such machinery out of the borrowed fund as extension of the existing business. Accordingly we hold that as there was no extension of the existing business, therefore the amount of interest expenses incurred by the assessee on the borrowed money utilized for the acquisition of the machineries is eligible for deduction as revenue expense. Hence the ground of Appeal of the assessee is allowed. Disallowance u/s 14A - HELD THAT - It is presumed that the investment has been made by the assessee out of its own fund without utilizing the borrowed money. Accordingly there cannot be any disallowance on account of interest expense. In holding so we find support and guidance from the judgment of CIT Vs.UTI Bank ltd. 2013 (8) TMI 238 - GUJARAT HIGH COURT wherein it was held no disallowance of interest expenses is warranted if the own fund of the assessee exceeds the amount of investment. Regarding the addition of administrative expenses, the Ld. AR did not advance any argument at the time of hearing considering the smallness amount involved therein. Accordingly, we do not find any reason to interfere in the finding of the Ld. CIT-A. Accordingly we confirm the disallowance of ₹ 12,807.00 on account of administrative expenses. Hence the ground of appeal of the assessee is partly allowed. Disallowance of books profit under section 115JB for addition u/s 14A - HELD THAT - Disallowances made under the provisions of Sec. 14A r.w.r. 8D of the IT Rules, cannot be applied to the provision of Sec. 115JB of the Act as per the direction of the Hon'ble Calcutta High Court in the case of CIT Vs. Jayshree Tea Industries Ltd. 2014 (11) TMI 1169 - CALCUTTA HIGH COURT Disallowance as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently - HELD THAT - there is no mechanism provided under the clause (f) to Explanation-1 of Sec. 115JB of the Act to make the disallowance independently. Therefore our action for restoring back the issue to the file of AO would unnecessarily cause further litigation. Thus we limit the disallowance on an ad-hoc basis @ 1 % of the exempted income under the clause (f) to Explanation-1 of Sec. 115JB of the Act subject to the condition that the disallowance shall not exceed the amount of disallowance determined by the authorities below under the provisions of section 14A r.w.r. 8D of Income Tax Rules. Hence, the ground of appeal of the assessee is partly allowed. Addition on account of interest on the income tax refund - assessee before us agreed for the addition of the impugned amount of interest on the income tax refund but requested to give a direction to delete the same from the income of the subsequent assessment year provided such interest has been offered to tax - HELD THAT - DR has not brought anything on record contrary to the argument advanced for the assessee. The scheme of Act prohibits taxing the same income twice. Thus if such amount of interest income has already been offered to tax by the assessee in any of the assessment year, then the same shall stand deleted. Accordingly we set aside the file to the AO with the direction to adjudicate the issue afresh as per the provisions of law and in the light of the above stated discussion. Hence the ground of appeal of the assessee is allowed for the statistical purposes.

Summary

Issues Involved:
1. Disallowance of interest expenses under section 36(1)(iii) of the Income Tax Act.
2. Disallowance under section 14A read with Rule 8D of the Income Tax Rules.
3. Simultaneous disallowance of interest under sections 36(1)(iii) and 14A.
4. Addition of disallowance under section 14A to book profits under section 115JB.
5. Addition of interest on income tax refund.
6. Breach of law and Principles of Natural Justice.
7. Levying of interest under section 234A/B/C/D.
8. Initiation of penalty under section 271(1)(c).

Issue-wise Detailed Analysis:

1. Disallowance of Interest Expenses under Section 36(1)(iii):
The assessee, a private limited company engaged in industrial and commercial construction, borrowed money to acquire machinery but did not use the machine within the financial year. The AO disallowed the interest expense of ?1,41,235 under section 36(1)(iii), stating that the interest on borrowed funds for machinery not put to use is not deductible. The CIT(A) upheld this disallowance. However, the Tribunal noted that the acquisition did not extend the existing business and the machinery value was negligible compared to the total plant and machinery value. Therefore, the interest expense was deemed a revenue expense and allowed as a deduction.

2. Disallowance under Section 14A read with Rule 8D:
The assessee received exempt income of ?50,554 but did not disallow any expenses under section 14A. The AO disallowed ?76,311, including interest and administrative expenses. The CIT(A) partly upheld this, limiting the disallowance to the exempt income. The Tribunal found that the assessee's own funds exceeded the investments, thus no interest disallowance was warranted, referencing the Gujarat High Court's decision in CIT Vs. UTI Bank Ltd. However, the administrative expense disallowance of ?12,807 was upheld due to the small amount involved.

3. Simultaneous Disallowance of Interest under Sections 36(1)(iii) and 14A:
This issue was not separately adjudicated as the Tribunal allowed the interest expense under section 36(1)(iii) and confirmed the administrative expense under section 14A.

4. Addition of Disallowance under Section 14A to Book Profits under Section 115JB:
The AO added the section 14A disallowance to the book profits under section 115JB. The Tribunal noted that disallowances under section 14A cannot be applied to section 115JB, referencing the Special Bench decision in ACIT vs. Vireet Investment Pvt. Ltd. However, an ad-hoc disallowance of 1% of the exempt income was directed to be made under clause (f) to Explanation-1 of section 115JB, ensuring it does not exceed the section 14A disallowance.

5. Addition of Interest on Income Tax Refund:
The AO added ?1,70,127 as interest on income tax refund, which the assessee claimed was offered in the subsequent year. The Tribunal directed the AO to verify and ensure no double taxation occurs, allowing the ground for statistical purposes.

6. Breach of Law and Principles of Natural Justice:
This issue was not specifically addressed in the Tribunal's decision.

7. Levying of Interest under Section 234A/B/C/D:
This issue was not specifically addressed in the Tribunal's decision.

8. Initiation of Penalty under Section 271(1)(c):
This issue was not specifically addressed in the Tribunal's decision.

Conclusion:
The appeal was partly allowed for statistical purposes, with significant relief granted on the disallowance of interest expenses and the addition to book profits under section 115JB. The Tribunal provided detailed reasoning, referencing relevant case law and statutory provisions.