2022 (6) TMI 1017 - AT - Income Tax

Disallowance of interest - disallowance shows that in the financial statement AO notice that the assessee company has given a deposit for premises which is shown Under short term loans and advances in schedule 16 of the balance sheet - HELD THAT - The clear-cut finding on reading of the annual accounts of the assessee shows that assessee has interest free funds available with it in the form of share capital and free reserve which is a much more than the interest free advances given by the assessee to its sister concern. Therefore the presumption is always available in favour of the assessee that assessee has utilised non-interest-bearing funds for giving impugned deposit to the sister concern. The contention of the assessee is also supported by several judicial precedents, which have upheld the above proposition - we do not find any reason to uphold the orders of the lower authorities. Accordingly, ground number 1 of the appeal is allowed and the learned AO is directed to delete the disallowance of interest Disallowance on account of Dies written off - DR stated that the Dies are part of plant and machinery and therefore, any loss on account of that is a capital loss and cannot be allowed as deduction as revenue expenditure - CIT-A deleted the addition - HELD THAT - As raw material consumption has been reduced to the extent of ₹ 21,263,638/ . This is for the reason that every year assessee is making valuation of dies at the end of the year and resultant profit or loss compared to the valuation of earlier year, the same is credited or debited to raw material consumption account the profit and loss account. At the time of preparing the computation of total income, if valuation has gone down, it is debited to the profit and loss account (raw material consumed) and in the computation of total income, it is not claimed as deduction from business income. Similarly, if there is any increase in valuation, such increase is credited to the profit and loss account (raw material consumed) and thereby showing lower amount of raw material consumed, but at the time of computation of total income such credit is removed from the profit and loss account. This is so because the valuation increase/decrease in the dies is not at all revenue expenditure. Similarly, assessee never claims it is a deduction. Lower authorities did not appreciate that difference in valuation in dies is merely rotated through profit and loss account but it did not affect the computation of total income for taxation. The confusion might have arisen because of the nomenclature given by the assessee of the particular item - such nomenclature should not have come into the way of lower authorities in determining the correct nature of treatment to be given while computing the taxable income of the assessee. In view of this, obviously for the above reasons given by us, we do not find any infirmity in the order of the learned CIT A in deleting the addition - Decided against revenue. Nature of Subsidy receipts - treating the grant received by the assessee as revenue receipt chargeable to tax against the contention of the assessee that same is a subsidy, therefore, it is a capital receipt not chargeable to tax - HELD THAT - As relying on MSS India Pvt Ltd 2019 (1) TMI 1978 - ITAT PUNE subsidy received by the assessee in the form of octroi duty refund as a capital receipt not chargeable to tax. Accordingly, we allow ground number 2 of the appeal of the assessee.

Issues Involved:
1. Disallowance of interest under Section 36(1)(iii) of the Income Tax Act, 1961.
2. Treatment of Government grant as Business Income vs. Capital Receipt.
3. Disallowance of Dies written off as capital expenditure.

Detailed Analysis:

1. Disallowance of Interest (?21,36,252/-):

The Assessee's ground of appeal contested the disallowance of interest under Section 36(1)(iii) of the Income Tax Act, 1961. The Assessing Officer (AO) disallowed the interest expenditure on the grounds that the Assessee had given interest-free deposits while incurring interest on borrowed funds. The AO argued that the deposit was non-business expenditure. The CIT (A) upheld the AO's decision, dismissing the Assessee's claim of having sufficient interest-free funds. However, the Tribunal found that the Assessee had sufficient interest-free funds amounting to ?27.38 crores, which exceeded the interest-free advances given. Thus, the Tribunal allowed the Assessee's appeal, directing the AO to delete the disallowance of interest.

2. Treatment of Government Grant (?1,32,07,000/-):

The Assessee received a State Government subsidy for expansion in the form of Octroi duty refund, which was credited to the capital reserve account. The AO treated this grant as revenue income, arguing it was recurring and linked to business operations. The CIT (A) upheld this view, stating the subsidy was not for capital purposes but to assist in business operations. However, the Tribunal referenced a coordinate bench decision, concluding that the subsidy was a capital receipt not chargeable to tax, as it was for promoting industrialization. Thus, the Tribunal allowed the Assessee's appeal, treating the subsidy as a capital receipt.

3. Disallowance of Dies Written Off (?2,12,63,638/-):

The Revenue's ground of appeal challenged the CIT (A)'s deletion of disallowance for Dies written off, arguing it was a capital loss. The Tribunal noted that the Assessee did not claim this amount as a deduction from business income but merely adjusted it in the raw material consumption account. The Tribunal found no infirmity in the CIT (A)'s order, which correctly deleted the addition made by the AO. Consequently, the Tribunal dismissed the Revenue's appeal.

Summary of Judgments:

For the assessment year 2013-14, the Tribunal dismissed the Revenue's appeal and allowed the Assessee's appeal, directing the deletion of the interest disallowance and treating the Government grant as a capital receipt.

For the assessment year 2014-15, the Tribunal found the issues identical to those of the previous year and allowed the Assessee's appeal, reversing the lower authorities' decisions on interest disallowance and treatment of the Government grant.

Conclusion:

The Tribunal's comprehensive analysis led to the dismissal of the Revenue's appeal and the allowance of the Assessee's appeals for both assessment years, emphasizing the correct treatment of interest disallowance and Government grants as per legal precedents and factual findings.

← Previous Next →