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2022 (4) TMI 99 - AT - Income TaxDisallowance u/s 36(1)(iii) towards Capital Work in Progress ( CWIP ) - HELD THAT - As held that it was not a case of entirely a new project undertaken by the assessee and since it was an extension of existing business, the disallowance of interest was rightly deleted by the Tribunal by relying on the decision of Core Health Care Ltd. 2008 (2) TMI 8 - SUPREME COURT - It is thus clear that the context in which the issue relating to disallowance of interest expenditure came to be decided in the case of Nirma Limited 2014 (10) TMI 388 - GUJARAT HIGH COURT was entirely different and eventhough it was found as a fact in that case that it was a case of extension of existing business, the interest expenditure was allowed as deduction since the proviso to section 36(1)(iii) of the Act inserted by Finance Act, 2003, w.e.f. 01-04-2004 was not apparently applicable in that case. As rightly contended by the Ld. DR, the ratio of the decision in the case of Nirma Limited (supra), thus is not applicable in the present case and the reliance of the Ld. Counsel for the assessee thereon in support of the assessee s case is clearly misplaced. Similarly, the other judicial pronouncements cited by assessee are distinguishable on facts and even the assessment years involved therein were prior to the insertion of the first proviso to section 36(1)(iii) in the Statute with effect from 01/04/2004. We therefore find no justifiable reason to take a different view on this issue from the one taken by the Co-ordinate Bench of this Tribunal in assessee s own case for AY 2012-13 and hold that the proviso to section 36(1)(iii) of the Act is clearly applicable in the facts of the present case as rightly held by the Ld. CIT(A) while confirming the action of the AO in capitalizing the interest expenditure. As regards the alternative argument raised by the assessee that the assessee-company, at the relevant time, had own funds in the form of share capital, reserves and surplus to the extent of ₹ 33.83 crores and since the same were sufficient to acquire the assets in the form of CWIP of ₹ 3.08 crores, there was no utilization of borrowed funds for acquisition of the said assets, it is observed that a similar stand was taken by the assessee before the AO as well as before the Ld.CIT(A). Keeping in view that the expenditure towards CWIP was incurred by the assessee from cash-credit account, it was held by the authorities below that there was a direct nexus between the interest-bearing borrowed funds and acquisition of assets by the assessee-company and this contention raised on behalf of the assessee-company was rejected by them. It is necessary to see overall financial position of the assessee as reflected in the balance-sheet as well as in the cash-flow statement to ascertain exactly as to whether the investment in acquisition of assets is made by the assessee from its owned funds or borrowed funds and the nexus theory as applied by the authorities below is not always a correct test which may sometime gives a misleading picture. In this regard, assessee has made an attempt to support and substantiate the assessee s case on this issue by referring to the relevant balance-sheet and cash-flow statement of the assessee-company (copies of which are placed in the paper-book). However, keeping in view that this aspect of the matter has not been examined either by the AO or by the Ld.CIT(A) having regard to the overall financial position of the assessee-company at the relevant time, we consider it fair and proper in the interest of justice to restore this issue to the file of the Assessing Officer for such examination - AO is directed to verify the claim of the assessee of having been made the investment in the asset (CWIP) from its own funds from the overall financial position of the assessee-company as reflected in the relevant balance-sheet and cash-flow statement and decide the issue afresh on such verification in accordance with law after giving the assessee a proper and sufficient opportunity of being heard. Grounds as originally raised in this appeal are thus treated as partly allowed for statistical purposes. Deduction u/s 80-IB(11A) being profits and gains derived by the eligible undertaking engaged in the manufacturing of ice cream - HELD THAT - As per the provision contained in sub-section (5) of Section 80A of the Act where the assessee fails to make a claim in his return of income for any deduction under any provision of Chapter VIA under the heading C.-Deductions in respect of certain incomes , no deduction shall be allowed to him thereunder. In the case of EBR Enterprises 2019 (6) TMI 484 - BOMBAY HIGH COURT as held that the provisions contained in sub-section (5) of Section 80A of the Act restrict the power of the Assessing Officer as well as the higher authorities and this decision in the case of Rachna Infrastructure Pvt Ltd 2022 (3) TMI 256 - GUJARAT HIGH COURT wherein the decision of the Tribunal holding that the assessee having failed to make a claim for deduction under Section 80IA(4) in the original return, the same cannot be allowed to be raised for the first time in revision under Section 264 of the Act in view of sub-section (5) of Section 80A of the Act is upheld by their Lordships. Keeping in view the same, we dismiss the additional ground raised by the assessee at threshold.
Issues Involved:
1. Disallowance of ?15,52,172/- under section 36(1)(iii) towards Capital Work in Progress (CWIP). 2. Application of proviso to section 36(1)(iii) of the Income Tax Act. 3. Nexus between borrowed funds and CWIP. 4. Alternative argument regarding the use of own funds for CWIP. 5. Additional ground for deduction under section 80-IB(11A) of the Act. Detailed Analysis: 1. Disallowance of ?15,52,172/- under section 36(1)(iii) towards CWIP: The primary issue in this appeal is the disallowance of ?15,52,172/- on account of interest, which was made by the Assessing Officer (AO) and confirmed by the Commissioner of Income-tax (Appeals) [CIT(A)]. The disallowance pertains to the interest on borrowed funds used for Capital Work in Progress (CWIP). 2. Application of Proviso to Section 36(1)(iii): The AO capitalized the interest by applying the proviso to section 36(1)(iii) of the Income Tax Act, which mandates that any interest paid on capital borrowed for the acquisition of an asset for the extension of an existing business must be capitalized until the asset is put to use. This was upheld by the CIT(A), who noted that the CWIP involved the construction of a first floor and cold storage facilities, thus constituting an extension of the existing business. 3. Nexus Between Borrowed Funds and CWIP: The AO and CIT(A) both concluded that there was a direct nexus between the borrowed funds and the acquisition of assets forming part of CWIP. The assessee's argument that the payments for CWIP were made from its own funds was rejected. The authorities relied on the fact that the payments were made from a cash credit account, which indicated the use of borrowed funds. 4. Alternative Argument Regarding the Use of Own Funds: The assessee contended that it had sufficient own funds (?33.83 crores) to cover the CWIP costs (?3.08 crores), arguing that no borrowed funds were used. The Tribunal found merit in examining the overall financial position of the assessee, as reflected in the balance sheet and cash flow statement, to ascertain whether own funds or borrowed funds were used for CWIP. The issue was restored to the AO for fresh examination. 5. Additional Ground for Deduction Under Section 80-IB(11A): The assessee raised an additional ground for deduction under section 80-IB(11A) amounting to ?6,57,71,906/-. This claim was not made in the original return of income. The Tribunal dismissed this additional ground at the threshold, citing sub-section (5) of Section 80A, which restricts the allowance of deductions not claimed in the return of income. Conclusion: The Tribunal upheld the disallowance of interest in principle, relying on the proviso to section 36(1)(iii). However, it restored the issue of quantifying the interest to be capitalized to the AO for fresh examination, considering the overall financial position of the assessee. The additional ground for deduction under section 80-IB(11A) was dismissed. The appeal was partly allowed for statistical purposes.
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