2021 (7) TMI 716 - AT - Income Tax

Addition on account of sundry creditors - HELD THAT - No addition could be made under this Section because (i) there was Opening Balance and no New Credit had appeared in the Books of the assessee this year, and that (ii) it was the Debit Balance against M/ s Agrawal Coal Corp. P Ltd. (ACCL) and not the Credit Balance, and hence no addition could be made u/s 68. CIT (A) has gone through the reconciliation Statement for the difference between balance of assessee and M/s ACCL.As held that on perusal of the Reconciliation Statement reveals Nil balance of the assessee as per the accounts of ACCL on 31.03.10 and that of ₹ 4,86,531 /- as per the Books of the assessee. It is seen that such reconciliation includes an amount which has been shown as an amount Written Off by that party, i.e. ACCL, as per the ledger maintained by that party. There was actually a Debit of ₹ 4,86,531 /-, which was wrongly taken as a Credit from M/s ACCL by the Assessing Officer. In view of the entire facts of the case, we decline to interfere with the order of the ld. CIT (A).Since, the ld. CIT (A) observation with regard to the amount of ₹ 2,59,994/- is not a ground of appeal before us, no action is called for. Interest on the borrowed capital - Interest attributable from the period of the installation of the new Plant up to the date of start of commercial use of the Plant - HELD THAT - Having gone through the entire factum of the case, owing to the similar determinative factum of put to use in ICDS IX, AS-16, the judicial pronouncements, provisions to Section 36 (1)(iii) and Explanation 8 to Section 43 (1), we hereby hold that the Interest has to be treated as Revenue Expenditure and need not be Capitalized. Accordingly, the disallowance is hereby directed to be deleted.

Summary

Issues Involved:
1. Deletion of addition made by AO on account of sundry creditors.
2. Deletion of addition made by AO on account of interest paid on borrowed funds from the date of installation of the power plant to the date of commercial start.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Sundry Creditors:

The revenue challenged the CIT(A)'s decision to delete the addition of ?4,25,79,094 made by the AO due to unproved purchases from three parties: Concast Exim Ltd., Fridon Kikalishvili, and Aggarwal Coal Corporation Pvt. Ltd. During the assessment, the assessee failed to provide confirmations for these creditors. However, during the appellate proceedings, the assessee submitted documentary evidence including confirmation, bills, and transport receipts, which were forwarded to the AO for a remand report.

The CIT(A) examined the reconciliation statements and documents provided by the assessee and found that the AO had delayed the examination of these details. The reconciliation revealed minor differences due to customs duties, foreign exchange fluctuations, and excise duties. For instance, the major difference of ?5,40,20,748 with Concast Exim Ltd. was due to the timing of purchase entries. After reconciliation, the difference was only ?20, leading to the conclusion that no addition was warranted.

Similarly, for Fridon Kikalishvili, the reconciliation showed a minor difference due to customs duties, and the closing balances matched closely. For Aggarwal Coal Corporation Pvt. Ltd., the reconciliation revealed a debit balance, not a credit balance, and the difference was due to amounts written off by the party.

2. Deletion of Addition on Account of Interest Paid on Borrowed Funds:

The AO disallowed ?28,84,000 of interest paid on borrowed funds from the date of installation of the power plant to the date of commercial start, arguing that it should be capitalized as per accounting principles. The assessee contended that the "Trial Run" period constituted actual use and relied on the Supreme Court judgment in Commissioner of Income Tax vs. Shri Rama Multi Tech Ltd.

The Tribunal examined relevant case laws, including PCIT Vs Larsen & Turbo Ltd., which supported the view that trial runs constitute actual use, allowing for depreciation and interest deductions. The Tribunal also referred to ICDS IX, AS-16, and provisions of Section 36(1)(iii) and Explanation 8 to Section 43(1), which support treating such interest as revenue expenditure once the asset is put to use.

The Tribunal concluded that the interest of ?28,84,000 should be treated as revenue expenditure and need not be capitalized, directing the deletion of the disallowance.

Conclusion:

The appeal of the revenue was dismissed, upholding the CIT(A)'s decision to delete the additions on account of sundry creditors and interest paid on borrowed funds. The judgment emphasized the importance of reconciliation and proper documentation in resolving discrepancies and the treatment of trial run periods in accounting for interest expenses.