2022 (8) TMI 596 - AT - Income Tax

Addition u/s 80IB - Claim denied as assessee deemed not carrying on the manufacturing operations - AR submitted that the assessee is an SSI Unit engaged in the manufacture of forgings, tractor and auto part - HELD THAT - We find that nothing has been brought on record by the Revenue either during the course of proceedings before the lower authorities or before us that there has been any change in the nature of manufacturing activities being carried out by the assessee in the earlier years and in the year under consideration. The assessee has been claiming deduction u/s 80IB in the earlier years in respect of its own sales as well as labour income and which has been allowed by the AO in terms of order passed u/s 143(3) r/w 153A - There is nothing on record that the claim of deduction so allowed in the earlier years has subsequently been withdrawn. Therefore, following the principle of consistency where there are no changes in the facts and circumstances of the case as well as following the legal proposition so laid down in the aforesaid decision by the Hon ble High Court, the assessee shall be eligible for grant of deduction u/s 80IB for the impugned assessment year. The order so passed by the ld CIT(A) is thus set-aside and the ground of appeal taken by the assessee is allowed. Addition u/s 36(1)(iii) - AO worked out disallowance on the entire investment made during the preceding year @12% p.a. and after deducting the interest already disallowed by the assessee, disallowed a sum on the ground that the assessee is paying huge amount of interest and other borrowings - HELD THAT - Assessee has contended that besides the loan of Rs 15 lacs, rest all payments towards the purchase of machinery has been funded through internal accruals however it has failed to support and demonstrate the same through its financials and/or documentation either before the lower authorities and even before us, nothing has been brought on record to support the said contention. Regarding other contention of the assessee that where the borrowed funds were raised and utilized, it enters the common pool of funds available with the assessee, in such a scenario, average rate of interest should be applied instead of rate of interest in respect of particular borrowing, we find merit in the said contention and remand the matter to the file of the AO to verify the average rate of interest prevailing on borrowings done by the assessee during the year under consideration and determine the amount of interest so determined for the purposes of making the disallowance under section 36(1)(iii). Needless to say, the assessee be given credit for interest already capitalized in the books of accounts. In the result, the ground of appeal is allowed for statistical purposes.

Summary

Issues Involved:
1. Sustenance of disallowance of deduction under Section 80IB.
2. Sustenance of addition under Section 36(1)(iii).

Issue-wise Detailed Analysis:

1. Sustenance of Disallowance of Deduction under Section 80IB:
The primary issue was the disallowance of a deduction amounting to Rs. 41,79,868/- under Section 80IB of the Income Tax Act. The assessee, an SSI unit engaged in manufacturing forgings, tractor, and auto parts, argued that its manufacturing activities included both using its own raw materials and performing job work on raw materials supplied by customers. The assessee contended that the latter also constituted manufacturing under Section 80IB and had been allowed in previous assessment years (2003-04 to 2006-07).

The Tribunal noted that the Revenue did not demonstrate any change in the nature of the assessee's activities from earlier years. The assessee had consistently claimed and been granted the deduction under Section 80IB in previous years. The Tribunal cited the Bombay High Court's decision in Simple Food Products P. Ltd., which held that if a deduction was allowed in the initial assessment year, it could not be withdrawn in subsequent years unless the initial year's deduction was also withdrawn. The Tribunal concluded that the assessee was eligible for the deduction under Section 80IB for the impugned assessment year, setting aside the CIT(A)'s order and allowing the ground of appeal.

2. Sustenance of Addition under Section 36(1)(iii):
The second issue was the disallowance of Rs. 2,66,629/- under Section 36(1)(iii) related to interest on borrowed funds used for acquiring assets. The assessee argued that it had already capitalized the interest on the borrowed amount used for acquiring a furnace and that the remaining investment was made from internal accruals. The AO, however, disallowed the interest on the entire investment, citing the assessee's significant interest payments on other borrowings and relying on the Punjab & Haryana High Court's decision in Abhishek Industries Ltd.

The Tribunal found merit in the assessee's contention that in cases where borrowed funds are mixed with internal funds, the average rate of interest should be applied. The Tribunal remanded the matter to the AO to verify the average rate of interest on the borrowings and determine the disallowance accordingly, giving credit for the interest already capitalized by the assessee. The ground of appeal was allowed for statistical purposes.

ITA No.101/Chd/2020:
The sole ground in this appeal was the sustenance of disallowance of Rs. 36,86,676/- under Section 36(1)(iii). The facts and circumstances were identical to those in ITA No. 100/CHD/2020. The Tribunal applied the same findings and directions, remanding the matter to the AO to determine the average rate of interest and adjust the disallowance accordingly. This ground was also allowed for statistical purposes.

Conclusion:
In summary, the Tribunal allowed the appeal regarding the disallowance under Section 80IB, citing consistency with previous assessments and relevant case law. For the disallowance under Section 36(1)(iii), the Tribunal remanded the matter to the AO for recalculating the disallowance based on the average rate of interest, allowing the ground for statistical purposes. Both appeals were disposed of in light of these directions.