2015 (6) TMI 567 - AT - Income Tax

Disallowance of interest - AYs are 1997-98 - Held that - The assessee refers to judgment in Core Health Care (2008 (2) TMI 8 - SUPREME COURT OF INDIA ) and submits that section 36(1)(iii) only requires the interest sum in respect of capital borrowed for the purpose of the business or profession. The Revenue seeks to restore the Assessing Officer s finding. We intend to disagree with submissions of both the parties. It stands narrated in the preceding paragraph that a coordinate bench in its earlier order has already held facts of the issue involved in the impugned assessment year identical to those in assessment year 1995-96 (supra). However, both the lower authorities have nowhere considered any consequential order passed in the earlier assessment year. In other words, they have not taken into account the specific directions in the earlier remand order. Nor do the parties before us have placed on record any such consequential order passed in earlier assessment year dealing with the very issue of interest disallowance. In these circumstances, we reiterate our earlier directions and remit the grounds raised by both the parties to the Assessing Officer for passing a fresh order as per law invariably following consequential order; if any, passed in assessment year 1995-96 in furtherance to the tribunal s direction. - Decided in favour of assessee for statistical purposes. Assessment Year 1999-2000 - The CIT(A) has distinguished facts of the impugned assessment year with those involved in 1997-98 as adjudicated herein above. He presumes that the assessee has put to use its plant and machinery and allows the impugned interest sum to have been incurred on borrowed funds for machinery. We reiterate that the assessee has already started its commercial production on 23.9.1996. Therefore, we held it entitled for deduction of impugned sum incurred on capital borrowed for purpose of the business in question - Decided in favour of assessee.

Issues Involved:
1. Interest disallowance for the period after the commencement of production.
2. Jurisdiction of the Assessing Officer (AO) and Commissioner of Income Tax (Appeals) [CIT(A)] to raise new issues.
3. Distinction between expansion and newly set up business for interest deduction.
4. Verification of facts in light of the Supreme Court judgment in DCIT vs. Core Health Care.
5. Determination of whether machinery was put to use for commercial production.

Issue-Wise Detailed Analysis:

1. Interest Disallowance for the Period After the Commencement of Production:
The assessee argued that the CIT(A) erred in holding that interest on borrowings for assets not used for actual production was not allowable as a deduction. The AO had disallowed the interest sum of Rs. 1,97,32,000/- on the grounds that the assessee had capitalized the interest expenses and also claimed them as revenue expenditure. The CIT(A) partly accepted the assessee's arguments but directed the AO to examine the project report to determine whether all the machineries for which the loan was sanctioned had been put to use for commercial production. The CIT(A) concluded that interest expenses could be capitalized until the asset is put to use, after which it may be claimed as a deduction under section 36 of the Income-tax Act.

2. Jurisdiction of AO and CIT(A) to Raise New Issues:
The assessee contended that the AO was directed only to give effect to the decision of Core Healthcare by the Tribunal and had no jurisdiction to raise new issues. The CIT(A) inferred that if some business assets were not used for actual production, then the business was not set up on the date of commencement of production. The Tribunal noted that the AO had drawn a distinction in facts from the Core Healthcare case and concluded that interest was disallowed because the production had not started.

3. Distinction Between Expansion and Newly Set Up Business for Interest Deduction:
The CIT(A) clarified that the decision of the Supreme Court in Core Healthcare was in respect of interest on borrowed funds used for business expansion. There was a difference between expansion and newly set up business. For newly set up businesses, interest liability up to the commencement of production should be capitalized, and after the asset is put to use, it may be claimed as a deduction under section 36. The CIT(A) directed the AO to verify whether all the machineries for which the loan was sanctioned had been put to use for commercial production.

4. Verification of Facts in Light of the Supreme Court Judgment in DCIT vs. Core Health Care:
The Tribunal noted that a coordinate bench had remanded the issue back to the AO for verification of facts in light of the Supreme Court judgment in Core Health Care. The AO had observed that the facts of the assessee's case were materially different from those in Core Healthcare. The Tribunal reiterated its earlier directions and remitted the grounds raised by both parties to the AO for passing a fresh order as per law, following any consequential order passed in the earlier assessment year.

5. Determination of Whether Machinery Was Put to Use for Commercial Production:
For the assessment year 1999-2000, the AO had disallowed the interest sum of Rs. 1,25,06,250/- on similar grounds as in 1997-98. The CIT(A) accepted the assessee's contentions, noting that the additions during the year were only Rs. 2.68 crores and the facts were different from 1997-98. The CIT(A) presumed that the machinery was put to use and allowed the interest expense on borrowed funds for machinery. The Tribunal upheld this finding, noting that the assessee had already started commercial production on 23.9.1996 and was entitled to the deduction of the interest sum incurred on capital borrowed for business purposes.

Conclusion:
The appeals for the assessment year 1997-98 (ITAs 14 & 58/Ahd/2012) were allowed for statistical purposes, and the appeal for the assessment year 1999-2000 (ITA 59/Ahd/2012) was dismissed. The Tribunal directed the AO to follow the specific directions in the earlier remand order and verify the facts in light of the Supreme Court judgment in Core Health Care.

← Previous Next →