2022 (1) TMI 676 - AT - Income Tax

Disallowance of interest expenses under the provisions of section 36(1)(iii) - Whether the land acquired by the assessee on deferred payment basis and interest paid on the outstanding amount of purchase consideration, does the outstanding amount represent the borrowed fund? - HELD THAT - A perusal of the above provisions reveals that the entire interest cost has to be capitalized if it was incurred in connection with the capital asset. Thus, without going into the provisions whether it relates to the expansion/extension of the business, interest cost cannot be allowed as revenue expenses in the given facts and circumstances. Accordingly, we do not find any infirmity in the order of the authorities below. Thus we uphold the same. Hence the ground of appeal of the assessee is dismissed. Rectification of mistake u/s 154 - Accrual of income - treating the unutilized MODVAT credit as income of the assessee - AO rejected the contention of the assessee by observing that the issue of MODVAT credit has been decided right up to the tribunal against the assessee and therefore there remains no mistake apparent from record - HELD THAT - Admittedly, non-consideration of the judgment of the jurisdictional High Court amounts to a mistake apparent from record as held in the case of ACIT vs. Saurashtra Kutch Stock Exchange Ltd 2008 (9) TMI 11 - SUPREME COURT . We are conscious to the fact that the appeal was decided by the ITAT in the case of the assessee 2010 (8) TMI 1155 - ITAT AHMEDABAD rejecting the same in limine on the reasoning that nobody from the side of the assessee presented the case. The issue was decided by the ITAT without going into merit of the facts of the case. Whether there is a mistake apparent from record in the light of the judgment of Hon ble Supreme Court as discussed above, it is pertinent to note that the order of the AO and the learned CIT (A) got merged with the order of the ITAT. Therefore, if any rectification is required of a mistake being apparent from record that can only be effected in the order of the tribunal and not in the order of the AO or the learned CIT (A). However the assessee, has not challenge the order of the ITAT on the reasoning that there is a mistake in the order of the ITAT. To our understanding, the order of the ITAT has reached to its finality. Accordingly we do not find reason to interfere in the order of the learned CIT (A). Hence the ground of appeal of the assessee is dismissed.

Summary

Issues Involved:
1. Disallowance of interest expenses under section 36(1)(iii) of the Income Tax Act.
2. Treatment of unutilized MODVAT credit as income under section 154 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance of Interest Expenses under Section 36(1)(iii):
The primary issue in this case is whether the interest expenses incurred by the assessee on the outstanding amount for the purchase of land can be allowed as a deduction under section 36(1)(iii) of the Income Tax Act. The assessee, a private limited company engaged in the business of manufacturing whitening agents, purchased land from the Gujarat Industrial Development Corporation (GIDC) for ?1,73,25,000/-. The payment terms included a down payment and the balance in 12 quarterly installments with interest at 12.5%. The assessee treated the balance amount as a loan in its books and claimed the interest as a deductible expense.

The Assessing Officer (AO) disallowed the interest expense, arguing that the land was not used for business purposes in the relevant year and that the interest should be capitalized as per section 36(1)(iii). The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this view, stating that the land was for business expansion and the interest cost should be capitalized. The Tribunal agreed, citing Explanation 8 to section 43(1), which mandates capitalization of interest incurred in connection with the acquisition of a capital asset until it is put to use. Thus, the appeal on this ground was dismissed.

2. Treatment of Unutilized MODVAT Credit as Income under Section 154:
The second issue concerns the treatment of unutilized MODVAT credit amounting to ?20,30,909/- as income. The AO added this amount to the assessee's total income in the assessment for AY 2004-05, and this was upheld by the CIT(A) and the ITAT. The assessee filed an application under section 154, claiming there was a mistake apparent from the record, citing the Gujarat High Court's decision in Nirma India Ltd. v. Dy. DCIT, which held that unutilized MODVAT credit should not be treated as income.

The AO rejected the application, stating that the issue had already been adjudicated up to the Tribunal level. The CIT(A) also dismissed the appeal, noting that the assessee failed to demonstrate that the unutilized MODVAT credit was included in the income statement. The Tribunal upheld this decision, emphasizing that non-consideration of a jurisdictional High Court decision constitutes a mistake apparent from the record, but rectification should be sought from the Tribunal, not the AO or CIT(A). Since the assessee did not challenge the Tribunal's order, the appeal was dismissed.

Conclusion:
Both appeals by the assessee were dismissed. The Tribunal upheld the disallowance of interest expenses under section 36(1)(iii) and the treatment of unutilized MODVAT credit as income, emphasizing the need for capitalization of interest costs related to capital assets and the procedural correctness in seeking rectification under section 154.