2013 (3) TMI 459 - AT - Income Tax

Disallowance of interest u/s 36(1)(iii) - Proportionate disallowance of interest u/s 36(1)(iii) - Disallowance under section 43B - Accrued interest income - Held that - assessee in its letter has given full details of loans and advances. - We find the A.O. has not considered the letter giving all the details and simply mentioned in the order that the assessee company failed to submit any explanation in this regard. Further when the assessee company is having own funds of and borrowed funds of the A.O., in our opinion, was not justified in calculating the interest attributable to capital work in progress only out of the borrowed funds especially. Regarding Disallowance U/s 43B - held that - Interest payable to banks amounts to only Rs. 2,19,15,545/- out of which of Rs. 79,29,330/- has already been disallowed as part of capital work in progress which I have confirmed above. Hence, only a sum of Rs. 1,39,86,215/- (2,19,15,545-79,29,330) is required to be disallowed u/s 43B. The addition made is thus restricted to Rs. 1,39,86,215/- as against that made at Rs. 1,83,00,000 by the A.O. Interest pertaining to the previous year and is payable as interest on balance sale consideration payable for acquiring a capital asset. The assessee has already commenced its commercial production and there is no dispute on this aspect. The amount in question is allowable u/s.37(1) of the Act. The the provisions of Sec.43-B of the Act will not apply to the facts of the present case, since unpaid sale consideration cannot be said to be monies borrowed. Dismiss the appeal by the Revenue. The interest receivable shown against Mangalaya was the outstanding interest of earlier year. As no portion of the impugned sum has accrued during the year, the addition made of is deleted. The ground raised by the Revenue is dismissed. The appeal filed by the Revenue dismissed.

Summary

Issues Involved:
1. Disallowance of interest under Section 36(1)(iii) of the Income Tax Act.
2. Proportionate disallowance of interest under Section 36(1)(iii) for loans and advances.
3. Disallowance of interest under Section 43B.
4. Disallowance of interest payable to GIDC.
5. Addition of accrued interest income.

Issue-wise Detailed Analysis:

1. Disallowance of Interest under Section 36(1)(iii):
The Revenue challenged the CIT(A)'s order restricting the disallowance of interest to Rs. 79,29,330/- out of Rs. 1,85,13,497/- disallowed by the A.O. The A.O. had determined the disallowable interest based on the capital work in progress and borrowed funds. The CIT(A) found that the A.O. wrongly allocated the total interest and concluded that only Rs. 79,29,330/- was attributable to capital work in progress. The Tribunal upheld the CIT(A)'s order, noting that the A.O. failed to consider the assessee's own funds and borrowed funds collectively and dismissed the Revenue's ground.

2. Proportionate Disallowance of Interest for Loans and Advances:
The Revenue contested the CIT(A)'s deletion of proportionate disallowance of Rs. 34,54,480/-. The A.O. had disallowed this amount, alleging that loans and advances were made out of interest-bearing borrowed funds without charging interest. The CIT(A) found that most advances were for business purposes and not necessitating interest charges. The Tribunal upheld the CIT(A)'s decision, noting that the A.O. did not establish a nexus between borrowed funds and interest-free advances, and dismissed the Revenue's ground.

3. Disallowance of Interest under Section 43B:
The Revenue challenged the CIT(A)'s order restricting the disallowance to Rs. 1,39,86,215/- out of Rs. 2,19,15,545/- disallowed by the A.O. The A.O. disallowed the interest payable to banks as it was unpaid, invoking Section 43B. The CIT(A) found that only Rs. 1,39,86,215/- was disallowable after accounting for interest already disallowed as part of capital work in progress. The Tribunal upheld the CIT(A)'s order, finding no infirmity in the CIT(A)'s reasoning, and dismissed the Revenue's ground.

4. Disallowance of Interest Payable to GIDC:
The Revenue contested the deletion of disallowance of Rs. 39,00,000/- payable to GIDC. The CIT(A) had deleted the disallowance, following the Tribunal's decision in the assessee's case for the previous year, where it was held that the interest expenditure was allowable under Section 37(1) and not subject to Section 43B. The Tribunal, following its earlier decision, upheld the CIT(A)'s order and dismissed the Revenue's ground.

5. Addition of Accrued Interest Income:
The Revenue challenged the deletion of Rs. 1,36,72,457/- added by the A.O. as accrued interest income. The A.O. had added the amount, considering it accrued during the year under the mercantile system of accounting. The CIT(A) found that these amounts were carried forward from earlier years and not accrued during the year. The Tribunal upheld the CIT(A)'s order, noting that the Revenue could not controvert the assessee's submission or point out any factual error, and dismissed the Revenue's ground.

Conclusion:
The Tribunal dismissed the Revenue's appeal on all grounds, upholding the CIT(A)'s decisions on the disallowance of interest under Sections 36(1)(iii) and 43B, the treatment of interest payable to GIDC, and the addition of accrued interest income.