Osho Forge Ltd., Ludhiana V. DCIT,Circle-1, Ludhiana

ITA 100/CHANDI/2020

• Counselvise Citation: [2022] 107 COUNSELVISE.COM (IT) 1049 (ITAT-CHANDIGARH)
• Duration Of Justice: 2 year(s) 6 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-08-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2007-2008
• Appeal Filed On: 27-01-2020
• Result in Favour of: Matter Remanded
• Court: TRIBUNAL
• Keywords: Depreciation; Principle of natural justice; Rule of consistency; Earning of tax free income; Commercial expediency; Capital expenditure; Set aside
• Section: 263; 143(3); 153A; 80IB; 143(1); 191; 13

Judgement Text

These are two appeals filed by the assessee against the respective orders of the learned Commissioner of Income Tax (Appeals)-5, Ludhiana, dated 29.11.2019 pertaining to assessment years 2007-08 & 2009-10 respectively. Since common issues are involved in these two appeals, these were heard together and are being disposed off by this consolidated order. 2. In ITA No No.100/Chd/2020, the assessee has taken the following grounds of appeal: 1. “That the Ld. CIT(A) has erred in law and facts of the case in upholding the addition of Rs. 41,79,868/- u/s 80IB. आयकर अपील य अ धकरण, ‘बी’ यायपीठ, च डीगढ़। IN THE INCOME TAX APPELLATE TRIBUNAL ‘B’ BENCH: CHANDIGARH BEFORE SMT. DIVA SINGH, JUDICIAL MEMBER AND SHRI VIKRAM SINGH YADAV, ACCOUNTANT MEMBER आयकर अपील सं./ITA Nos.100 & 101/Chd/2020 नधा रण वष /Assessment Years: 2007-08 & 2009-10 M/s.Osho Forge Ltd., D-42, Phase V, Focal Point, Ludhiana-141 010. v. The Dy. Commissioner- of Income Tax, Circle-1, Ludhiana. [PAN: AAACO 3362 L] (अपीलाथ /Appellant) (!"यथ /Respondent) अपीलाथ क# ओर से/ Appellant by : Mr.Sarabjit Garg, CA !"यथ क# ओर से /Respondent by : Dr.Ranjeet Kaur, Sr.DR स ु नवाई क# तार ख/Date of Hearing : 20.06.2022 घोषणा क# तार ख /Date of Pronouncement : 02.08.2022 आदेश / O R D E R PER VIKRAM SINGH YADAV, ACCOUNTANT MEMBER: ITA Nos.100 & 101/Chd/2020 :: 2 :: 2. That the Ld. CIT(A) has erred in law and facts of the case in upholding the addition of Rs.2,66,629/- u/s 36(1)(iii).” 3. At the outset, it is noted that this is the second round of appellate proceedings before the Tribunal. Earlier, the Co-ordinate Bench in its order dated 02.01.2017 in ITA No.763/C/2016 had set aside the order of the ld.CIT(A) with a direction to decide the same on merits irrespective of the fact as to whether permission u/s.153D of the Act, was taken or not before passing the fresh assessment order by the AO as per the directions of the ld.CIT(A) u/s.263 of the Act. The ld CIT(A) has since passed the order in the set-aside proceedings and against the said order and findings contained therein, the assessee is again in appeal before us. 4. In Ground No.1, the assessee has challenged the sustenance of disallowance of deduction of Rs.41,79,868/- u/s.80IB of the Act. During the course of hearing, the ld. AR submitted that the assessee is an SSI Unit engaged in the manufacture of forgings, tractor and auto parts. It was submitted that the assessee was carrying on the manufacturing operations using its own raw material which was sold as finished goods and also carried out manufacturing activities on raw materials supplied by others, against which the labour job bills were raised. It was submitted that all these activities form part of the activities of the industrial undertaking and amount to manufacture and fall within the meaning of Sec.80IB of the Act. It was submitted that manufacturing expenses have been incurred on these activities in the same manner as in case of own manufacturing. The only difference between sale and labour income is ITA Nos.100 & 101/Chd/2020 :: 3 :: that in case of sale, manufacturing operations are performed on own raw materials and in case of labour income, manufacturing operations are performed on raw material provided by the customers. It was submitted that the assessee has been claiming the deduction on income from these activities u/s.80IB(3) of the Act and in the past assessment years namely AYs 2003-04, 2004-05, 2005-06 & 2006-07, the deduction so claimed has been allowed by the AO while framing the assessment u/s.153A r.w.s.143(3) of the Act. It was submitted that there is no change in the nature of business of the assessee company and thereby, there is no basis for disallowing the claim for the year under consideration. In support, reliance was placed on the decision of the Hon’ble Bombay High Court in case of Simple Food Products P.Ltd. v. CIT reported in [2017] 84 taxmann.com 239, wherein it was held that in the absence of deduction in the initial assessment hereby withdrawn, relief of subsequent years could not be withheld. Further, reliance was placed on the submissions made before the ld.CIT(A), which read as under: 2. Ground No. 2:-That on the facts and circumstances of the case and in law the Ld. AO has erred in making disallowance of Rs.41,79,868/- u/s 80IB. a) That during the course of de-novo assessment proceedings, vide submission dated 20.01.2014, in response to query on the subject, the assessee submitted as under:- Brief details of activities on which labour income was earned are given hereunder: Heat treatment Rs.47,96,623/- Complete Machining of Bull Gears Rs.60,43,629/- Machining - Other components Rs.30,92,642/- Total Rs.1,39,32,894/- The aforesaid amount represents the total amount received from above activities. Manufacturing expenses have been incurred on these activities in the same manner as in case of items manufactured for the assessee itself. ITA Nos.100 & 101/Chd/2020 :: 4 :: The only difference between sale and labour income in case of assessee is that in case of sale, the assessee uses its own raw material whereas in case of labour income the raw material is provided by the 3rd parties for carrying out manufacturing operations thereon, in the same manner as in case of components manufactures for itself. That the labour income has been received by the assessee, by utilizing its plant and machinery installed in the undertaking, gave rise to income which had a direct nexus with the assessee's industrial undertaking. That when the assessee is entitled to claim exemption in respect of income derived from such processes doing for itself, there is no reason as to why he would not be entitled to so merely because the raw material component was being supplied by other customers and for whom the assessee was doing the job. In fact, deduction under Section 80-IB is given on the profits derived from the manufacturing process, being undertaken by the assessee which qualify for deduction. That in the case of CIT v. Tamil Nadu Heat Treatment & Fetting Services (P) Ltd., 238 ITR 529 (Mad), it was held that the process of heat treatment to crankshaft, etc. were absolutely essential for rendering it marketable. Automobile parts, as crankshafts, need to be subjected to heat treatment to increase the wear and tear resistance to remove the inordinate stress and increased tensile strength. That prior to machining the component is called by different name and falls under different tariff head under Central Excise and after machining it is called by different name and falls under different tariff head under Central Excise. That it has been held in the following cases that it is immaterial that the assessee was doing the job work also for customers and was charging them on job-work basis or on the basis of labour charges. It will still be qualified as carrying eligible business under Section 80IB:- Commissioner of Income Tax v. Metalman Auto (P) Ltd., (2011) 52 DTR (P&H) 385; Commissioner of Income Tax v. Vallabh Yams (P.) Ltd., (2011) 51 DTR (P&H) 236; CIT v. Impel Forge & Allied Industries Ltd., (2010) 326 ITR 27 (P&H) CIT v. Rane (Mad) Ltd., 238 ITR 377 (Mad) Dy. CIT v. Harjivandas Juthabhai Zaveri & Another, 258 ITR 785 (Gujarat). CIT vs. Sadhu Forgings Ltd. ITA No. 167/2011 (Delhi) - Copy enclosed. b) That Ld. AO has rejected the submission of the assessee simply with the remark "The explanation of the assessee has been considered and found no merits in it", without in any way examining it on merits and how the case law relied upon by the assessee was not applicable to the facts and circumstances of this case. This is against law of natural justice. Further the Ld. AO has placed reliance upon the judgment of jurisdictional Punjab & Haryana High Court in the case of Friends Castings P. Ltd. vs. CIT (2011) 50 DTR 61. The facts in case are totally different from the facts and circumstances in this case. In this case the Hon'ble High Court at para 6 observed " Learned counsel for the assessee was unable to advance any argument to dispel the finding recorded by the CIT(A) and upheld by the Tribunal that the receipt on account of job work was not a result of manufacturing or by producing article or thing and , therefore, the assessee was not entitled to claim deduction thereon u/s 80-IA". In this case as explained during the course of assessment proceedings and in succeeding para, this judgment is not applicable to the facts and circumstances of the case. c) Now examining whether each of the activities from which labour income was earned by the assessee amounts to manufacture or not. Heat treatment:- ' in the case of CIT v. Tamil Nadu Heat Treatment & Fetting Services (P) Ltd., 238 ITR 529 (Mad), it was held that the process of heat treatment to crankshaft, etc. ITA Nos.100 & 101/Chd/2020 :: 5 :: were absolutely essential for rendering it marketable. Automobile parts such as crankshafts, need to be subjected to heat treatment to increase the wear and tear resistance to remove the inordinate stress and increased tensile strength. Complete machining of Bull Gears:-This involves conversion of bull gear forgings in to finished Bull Gear to make it marketable. Forging of Bull Gears is intermediate product. Upon machining it becomes final product ready for use. Prior to machining, the component is called by different name and falls under different tariff head under Central Excise and after machining it is called by different name and falls under different tariff head under Central Excise. Hence it amounts to manufacture as held in case of Impel Forge & Allied Industries Ltd. (Supra) Machining - Other components:-This is the process done on raw material which is nothing but a part and parcel of the manufacturing process of industrial undertaking. As held by Hon'ble Delhi High Court in case of Sadhu Forgings Ltd. (Supra), these receipts cannot be said to be independent of the manufacturing activities of the undertaking of the assessee and thus could not be excluded from the profits and gains derived from the industrial undertaking for the purpose of computing deduction under Section 80 IB. d) Without prejudice to what is stated above, even if it is assumed that the job work activities carried on by the assessee are not manufacturing activities carried during the course of its manufacturing activities, the entire amount of receipt thereof cannot be treated as its income as has been done in this case, because in carrying out these activities, the assessee had incurred expenditure like power, wages, stock & spare, machinery maintenance and depreciation etc. in the same manner, as in case of manufacturing activities. Therefore, the profit therefrom should be working out after allocating all the expenses in the ratio of conversion from sale i.e. (sale - Raw material cost) and job work income. Only thereafter disallowance, if any, u/s 80 IB can be worked out” 5. It was further submitted that the ld. CIT(A) has upheld the disallowance u/s 80IB of the Act, without distinguishing on merits, as to how the aforesaid case laws so relied upon by the assessee are not applicable and case laws in case of Friends Castings Pvt. Ltd. v. CIT reported in [2011] 50 DTS 61, relied upon by the AO is applicable in this case. It was submitted that the facts in case of Friends Castings Pvt. Ltd., are distinguishable. It was further submitted that the ld. CIT(A) has disallowed the claim of the assessee not on the merits but rather on the ground that the order u/s.263 of the Act was not challenged by the assessee. It was submitted that the same is against all canons of justice and same cannot be sustained in the eyes of law. ITA Nos.100 & 101/Chd/2020 :: 6 :: 6. Per contra, the ld. DR relied upon the findings of the AO as well as the ld.CIT(A) and our reference was drawn to the findings of the ld.CIT(A) which are contained in para no.3.2 of the impugned order, which reads as under: “The facts of the case, basis of addition made by the AO and the arguments of the AR during the appellate proceedings has been considered. The AR has argued that the 'labour income' has been received by the assessee utilizing its plant and machinery giving rise to income which has a direct nexus with assessee's industrial undertaking. AR repeated the argument that if exemption for doing such process for itself was allowable, there is no reason why it should not be allowed because the raw material was supplied by other customers. It was also claimed that if it was not a manufacturing activity then the whole of the receipt cannot be treated as income as the assessee has incurred expenditure like power, wages, deprecation etc. It is thus a fact that the assessee has carried out only the job work for others in respect of these receipts and has not been able to show that the 'labour income' of Rs.1,39,32,894/- is in the nature of manufacturing activity by the assessee for making it eligible for deduction u/s.80IB. The AO has relied upon the judgment of jurisdictional High Court for the disallowance after the case was set-aside u/s.263. The AR has not been able to demonstrate that the order passed u/s.263 was successfully challenged by the assessee. On the facts and circumstances of the case and in view of the judgment relied upon by the AO, the disallowance made by the AO on account of labour charges by way of denial of deduction u/s 80IB, is found sustainable and hence, confirmed.” 7. We have heard the rival contentions and purused the material available on record. The assessee company is engaged in the manufacture of forgings, tractor and auto parts and for the year under consideration, it filed its return of income u/s 153A declaring income of Rs 1,85,09,520/- and claiming deduction u/s 80IB amounting to Rs ITA Nos.100 & 101/Chd/2020 :: 7 :: 78,35,974/-. The assessment was completed u/s 143(3) at an income of Rs 1,87,09,520/-. Thereafter, pursuant to order u/s 263, a denovo assessment was completed vide order passed u/s 143(3) r/w 263 dated 18.03.2014 wherein the claim of deduction u/s 80IB @ 30% in respect of labour income of Rs 1,39,32,894/- amounting to Rs 41,79,868/- was disallowed by the AO and added to the total income in the hands of the assessee. The contention of the ld AR on behalf of the assessee is that there has been no change in the nature of business and the assessee has been undertaking similar manufacturing activities in the earlier years and has been claiming deduction and which has been allowed by the Assessing officer for A.Y 2003-04, 2004-05, 2005-06 and 2006-07 respectively. It has been contended that only difference between sales and labour income is that in case of sales, the manufacturing operations are performed on own raw material and in case of labour income, manufacturing operations are performed on raw material provided by the customers. The figures of sales and labour income and corresponding deduction claimed and allowed have also been submitted and it has been contended that the assessment in all these years have been completed u/s 143(3) r/w 153A of the Act and therefore, where there is no change in the facts and circumstances of the case, deduction claimed for the year under consideration cannot be disallowed. Further, reliance has been placed on the Hon’ble Bombay High Court decision in case of Simple Food Products (P) Ltd (supra) in support of the contention that in absence of deduction ITA Nos.100 & 101/Chd/2020 :: 8 :: in the initial assessment year being withdrawn, deduction so claimed for the impugned assessment year cannot be withdrawn. In the said decision, the Hon’ble High Court has held as under: “j) According to us, the entire issue is no longer res-integra. The impugned order of the Tribunal has, after recording that the appellant - Assessee relies upon the decision of this Court in Paul Brothers (supra) has not dealt with the same. It gives no finding as to why and in what manner it would not apply to the present facts. Further, we find that distinction which has been made in the impugned order of the Tribunal with regard to Dnishaw Frozen Foods Ltd. (supra) viz. that the assessment in that case has been completed under Section 143(3) of the Act in initial year and it is only in such cases that the Revenue be barred from denying the claim for deduction in the subsequent Assessment Years, unless the claim for deduction has been withdrawn in the initial year when deduction was claimed and allowed unlike an assessment which is completed under Section 143(1) of the Act. We have perused the decision of this Court in Dinshaw Frozen Food Ltd. Nagpur (supra) which in turn has followed the decision Paul Brothers (supra). We note that there is no finding in the two orders to the effect that the in the initial year the claim under Section 80IA/IB of the Act was granted by virtue of an order passed under Section 143(3) of the Act. Nothing has been brought on record to indicate that there has been some change in manufacturing process from that existing when the claim was allowed in the initial year i.e. Assessment Year 1996- 1997 and subject Assessments. The intent/object of the deduction under Section 80IA/IB of the Act is to encourage setting up of industries to manufacture goods which are not specified in the Eleventh Schedule to the Act. (k) The distinction sought to be made by Mr. Bhattad, learned counsel for the Revenue that the claim for deduction in Paul Brothers (supra) the deduction was an investment based deduction, while in the present case, we are concerned with the performance base deduction. This is in -fact, no distinction. In absence of the Revenue being able to establish that for the subject Assessment Years, the facts with regard to the performance were different from facts with regard to the performance in which the claim for deduction in initial year was allowed, the grant of deduction in the subsequent subject Assessment Year cannot be withheld. The other issue raised by Mr. Bhattad that merely because a claim was allowed in an earlier year would not prohibit the revenue from disallowing the claim in subsequent assessment years is no longer res-integra as this Court in Paul Brothers (supra) as it is categorically held that in absence of deduction granted in the initial Assessment Years being withdrawn, the relief for subsequent Assessment Years could not be withheld. The basis for the same is found in sub-clause (3) under Section 80IA/IB of the Act which gives deduction for 10 consecutive years to the profit and gains of an Industrial undertaking from initial year of assessment when the deduction was allowed, subject to the condition laid down therein. It is not the Revenue's contention that the condition in clause (3) of Section 80IB of the Act has not been fulfilled. Therefore, once deduction is granted in the initial Assessment Year, the same would continue for the period of 10 consecutive year unless the relief for initial year is also withdrawn at the time of withholding the relief under Section 80IA/IB of the Act. ITA Nos.100 & 101/Chd/2020 :: 9 :: (l) Mr. Bhattad also points out that under the Act, there is distinction between assessment which has been completed under Section 143(3) of the Act and intimation given to Assessee under Section 143(1) of the Act. In support of, he places reliance in Rajesh Jhaveri Stock Brokers, (supra) which brings out the distinction, by pointing out that an intimation under Section 143(1) of the Act is only a ministerial act and no examination of the claim is made by the Assessing Officer. However, one must recognize the fact that the aforesaid decision in case of Rajesh Jhaveri Stock Brokers (supra) was rendered in the context of reopening of assessments. As against that the decisions of this Court in Paul Brothers (supra) and Dinshaw Frozen Food Ltd. Nagpur (supra) were while dealing with deduction under Chapter VIA of the Act. This Court in the above two cases has very categorically held that in absence of relief/deduction for the initial year being withdrawn, the relief under Chapter VI-A of the Act (Section 80IA/80IB of the Act) in case of Dinshaw Frozen Food Ltd., Nagpur (supra) cannot be withheld for the subsequent years. The manner in which the relief has been granted in the initial Assessment Year is not determinative for withholding the relief in the subsequent Assessment Years. In-fact, in Paul Brothers (supra), our Court had occasion to observe the deduction allowed in the initial year i.e. Assessment Year, 1980-1981 was without any discussion. (m) According to us, the decision of this Court in Paul Brothers (supra) and the Dinshaw Frozen Food Ltd. Nagpur (supra), conclude the issue in favour of the appellant - Assessee and against the Revenue. (n) Thus, the substantial questions of at No.1 is answered in the affirmative i.e. in favour of the appellant-Assessee and against the Revenue.” 8. Applying the aforesaid legal proposition in the instant case, 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 Assessing officer in terms of order passed u/s 143(3) r/w 153A of the Act. 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 ITA Nos.100 & 101/Chd/2020 :: 10 :: 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. 9. In Ground No.2, the assessee has challenged the sustenance of addition of Rs.2,66,629/- u/s 36(1)(iii) of the Act. In this regard, our reference was drawn to the submissions made before the ld. CIT(A) which are contained in Para Nos.3(a) to (e) of the impugned order which read as under: “3. Ground No.3:-That on the facts and circumstances of the case and in law the Ld. AO has erred in making disallowance of Rs.2,66,629/- u/s 36(l)(iii). a) That during the course of de-novo assessment proceedings it was submitted as under:- Copy of account of furnace under erection is enclosed. On a perusal of the same your honour will kindly observe that the assessee has already capitalized interest amounting to Rs.161249/- against the same. Loan of Rs.15.00 lacs was received from PNB on 19.01.2006 @10.75% p.a., against which interest amounting to Rs. 31808/- was capitalized during FY 2005-06 and Rs.1,61,249/- during FY 2006-07. Rest of the amount was incurred from cash accruals during the year amounting to Rs.4,81,34,348/-. Treatment given by the assessee is perfectly in accordance with the provisions of section 36(l)(iii), which provides that where any amount of interest is paid, in respect of capital borrowed for acquisition of asset, then such interest which is relatable to the period beginning from the date of on which the capital was borrowed for acquisition of asset till the date on which such asset is first put to use, shall not be allowed as deduction. The Hon'ble ITAT Chandigarh in case of DCIT vs Samrat Forging ltd. in ITA No.975/Chd/2011 has supported the aforesaid view. b) The Ld. AO has unlawfully rejected the submission of the assessee simply with the remark "The explanation of the assessee has been considered and found no merits in it". Further Ld. AO has placed reliance on the judgment of Punjab & Haryana High Court in case of Abhishek Industries Ltd. wherein the concept of common pool of funds has been applied. The fact that assessee is paying huge amount of interest on other borrowings cannot form the basis for disallowance u/s.36(l)(iii). Further It has been held by Punjab & Haryana High Court in case of CIT vs. Kudu Industries [2015] 62 taxmann.com 191 (Punjab & Haryana) that The various amounts advanced to the assessee get merged into a ITA Nos.100 & 101/Chd/2020 :: 11 :: common pool. There is no justification then either for the assessee or for the department to take into consideration the rate of interest in respect of a particular advance or advances to the assessee. The only logical approach is to take into consideration the average interest rate at which the assessee has availed of the advances. In this case the Hon'ble Court specifically observed that the judgment of this Court in Commissioner of Income Tax-I, Ludhiana vs. M/s.Abhishek Industries, Ludhiana (supra) does not deal with the question of the rate of interest to be applied in cases where the assessee has mixed funds available with it. Hence even if this judgment is applied u/s.36(l)(iii), average rate of interest on which funds have been borrowed by the assessee should have been applied for working out disallowance u/s.36(l)(iii), not 12% as has been done in this case. c) That the concept of common pool of funds can be applied only-when the funds of business are used for non business purposes. For investments generating exempt income disallowance has to be made u/s 14A. In this case investment in fixed assets has been made out of commercial expediency. Therefore, no disallowance can be made u/s 36(l)(iii) as per law laid down by Hon'ble Supreme Court of India in case of S.A. Builders Ltd. vs. CIT 288 ITR 1 (SC). d) That Section 36(l)(iii) specifically deals with interest paid in respect of capital borrowed for acquisition of an asset. Proviso to Section 36(l)(iii) reads as under:- [Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset [for extension of existing business or profession](whether capitalised in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction.] A review of the aforesaid proviso clearly indicated that only interest paid, in respect of capital borrowed for acquisition of an asset shall not be allowed. Hence the disallowance already made the assessee on specific amount borrowed is perfectly in accordance with this proviso. e) In view of the foregoing, it is prayed that the disallowance made u/s 36(l)(iii) may kindly be deleted.” 10. It was further submitted that the assessee has incurred the expenditure on furnace during the financial year ending 31.03.2006 amounting to Rs. 33,03,641/- and Rs. 4,21,198/- during the Financial year ending 31.03.2007 totaling to Rs.37,24,839/- and to finance the above investment, the assessee had obtained a loan of Rs.15 lakhs from PNB on 19.01.2016 and the rest of the investment was made out of cash accruals during the respective years. It was submitted that interest amounting to Rs.31,808/- and Rs.1,61,249/- were capitalized during the FY 2005-06 and FY 2006-07 respectively as per the provisions of Sec.36(1)(iii) of the Act. It was submitted that despite the same, the AO ITA Nos.100 & 101/Chd/2020 :: 12 :: has worked out the 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 of Rs.2,66,629/- on the ground that the assessee is paying huge amount of interest and other borrowings by relying upon the decision of the Punjab & Haryana High Court in case of Abhishek Industries Ltd. It was submitted that various decisions relied on by the assessee during the course of appellate proceedings have neither been considered nor distinguished by the ld.CIT(A) and therefore, relying on the same, the assessee prayed for deleting the disallowance so sustained by the ld.CIT(A). 11. Per Contra, the ld. DR relied on the findings of the AO as well as the ld.CIT(A) and our reference was drawn to the findings of the ld.CIT(A), which are contained in Para No.3.3 of the impugned order, which reads as under: “The facts of the case, basis of addition made by the AO and the arguments of the AR during the appellate proceedings has been considered. The AR mentioned that the only interest paid in respect of capital borrowed for acquisition of asset shall not be allowed as per proviso to Section 36(1)(iii). The AR was asked to file the ledger account of machinery under construction and show that payment other than Rs.15,00,000/-, has been made out of own funds. However no such details have been filed. It is a fact that the assessee paid interest on borrowed fund and has shown plant and machinery under erection at Rs.38,99,089/- which has not been put to use. It has not been demonstrated that borrowed funds have not been used for the purpose of plant and machinery under erection and therefore as per proviso to Section 36(1)(iii) interest on the same is not allowable as deduction. A part of the interest has early been disallowed by the assessee and AO has disallowed only the balance amount. Hence, under the facts and circumstances of the case, the disallowance made by the AO is found sustainable and therefore, confirmed” 12. We have heard the rival contentions and purused the material available on record. The assessee has contended that besides the loan of Rs 15 lacs, rest all payments towards the purchase of machinery has been ITA Nos.100 & 101/Chd/2020 :: 13 :: 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. 13. In the result, the appeal of the assessee is disposed off in light of aforesaid directions. ITA No.101/Chd/2020 14. The sole ground of the appeal relates to sustenance of disallowance of Rs.36,86,676/- u/s.36(1)(iii) of the Act by the ld.CIT(A). 15. In this regard, the ld.AR submitted that the facts and circumstances of the case are identical as in ITA No. 100/CHD/2020 and reiterated the ITA Nos.100 & 101/Chd/2020 :: 14 :: submissions made before the ld.CIT(A) which are contained at para nos.3 & 4 of the impugned order, which reads as under: “a) That during the course of de-novo assessment proceedings it was submitted as under:- Copies of account of various fixed assets under construction/erection/installation are enclosed. On a perusal of the same your honour will kindly observe that the assessee has already capitalized interest on amounts borrowed against the same. Calculation of interest capitalized against amount borrowed has been duly given in each asset count. Rest of the amounts were incurred out of own funds plus cash accruals amounting to Rs.3,64,03,407/- generated during the year. Treatment given by the assessee is perfectly in accordance with the provisions of section 36(l)(iii), which provides that where any amount of rest is paid, in respect of capital borrowed for acquisition of asset, 'en such interest which is relatable to the period beginning from the date of on which the capital was borrowed for acquisition of asset till the date on which such asset is first put to use, shall not be allowed as deduction. The Hon'ble ITAT Chandigarh in case of DCIT vs. Samrat Forging ltd. in ITA No.975/Chd/2011 has supported the aforesaid view. b) The Ld. AO has rejected the submission of the assessee simply with the remark "The explanation of the assessee has been considered and found no merits in it. The assessee in its reply admitted that he has taken a loan for part amount only and the balance amount has been paid out of internal accruals. But at the same time the assessee has not substantiated his reply by support of evidence. The fact cannot be ignored that the assessee is paying huge amounts of interest on other bank ' borrowings. The Ld. AO has placed reliance on the judgment of Punjab & Haryana High Court in case of Abhishek Industries Ltd. wherein the concept of common pool of funds has been discussed in detail. The fact that assessee is paying huge amount of interest on other borrowings cannot form the basis for disallowance u/s.36(1)(iii). Further, it has been held by Punjab & Haryana High Court in case of CIT vs. Kudu Industries [2015] 62 taxmann.com 191 (Punjab & Haryana) that the various amounts advanced to the assessee get merged into a common pool. There is no justification then either for the assessee or for the department to take into consideration the rate of interest in respect of a particular advance or advances to the assessee. The only logical approach is to take into consideration the average interest rate at which the assessee has availed of the advances. In this case the Hon'ble Court specifically observed that the judgment of this Court in Commissioner of Income Tax-I, Ludhiana vs. M/s Abhishek Industries, Ludhiana (supra) does not deal with the question of the rate of interest to be applied in cases where the assessee has mixed funds available with it. Hence even if this judgment is applied u/s 36(l)(iii), average rate of interest on which funds have been borrowed by the assessee should have been applied for working out disallowance u/s.36(1)(iii), not 12% as has been done in this case. c) That the concept of common pool of funds can be applied only when the funds of business are used for non business purposes. For investments generating exempt income disallowance has to be made u/s 14A. In this case investment in fixed assets has been made out of commercial expediency. Therefore, no disallowance can be made u/s.36(1)(iii) as per law laid down by Hon'ble Supreme Court of India in case of S.A. Builders Ltd. vs. CIT 288 ITR 1 (SC). d) That Section 36(l)(iii) specifically deals with interest paid in respect of capital borrowed for acquisition of an asset. Proviso to Section 36(1)(iii) reads as under:- [Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset [for extension of existing business or profession](whether capitalized in the books of account or not); for any period beginning from the date on ITA Nos.100 & 101/Chd/2020 :: 15 :: which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction.] A review of the aforesaid proviso clearly indicated that only interest paid, in respect of capital borrowed for acquisition of an asset shall not be allowed. Hence the disallowance of Rs.39,17,410/- already made the assessee on specific amount borrowed is perfectly in accordance with proviso. In view of the foregoing, it is prayed that the disallowance made u/s.36(1)(iii) may kindly be deleted. 16. Further, the ld AR placed reliance on the written submissions which read as under: 2.2 That to further its business, the appellant had incurred expenditure on Machinery under installation and building under construction as per details given below: Machinery Under Installation Rs. 3,50,73,080 Building Under Construction Rs. 2,43,51,898 Total Rs. 5,94,24,979 This capital expenditure was made out of the following sources: Loans of Punjab National Bank Rs. 4,76,94,355 Cash Accruals Rs. 1,17,30,624 Total Rs. 5,94,24,979 The appellant had cash accrual as per details given below during the year under appeal:- AY PAT Depreciation Cash Accruals 2009-10 14699030* 17172974 31872004 * including deferred tax Rs. 14347500/- 2.3 That despite the fact that the assessee had already capitalized interest u/s.36(1)(iii), the Ld. AO worked out the interest to be disallowed on the entire amount of capital expenditure made during the year under appeal @12% p.a for full ,year irrespective of date of incurrence of capital expenditure and after deducting the interest already disallowed by the assessee amounting to Rs.39,17,410/-, disallowed a further sum of Rs. 36,83,6767-on the ground that the assessee is paying huge amounts of interest on other bank borrowings and by relying on the judgment of Hon'ble Punjab & Haryana High Court in case of Abhishek Industries Ltd., 2.4 During the course of appeal it was stated that the treatment given by the assessee has found favour with Hon'ble ITAT, Chandigarh in case of DCIT vs. Samrat Forging Ltd. in ITA No.975/Chd/2011. It was further submitted that investment in fixed assets was made out of commercial expediency. Therefore, no disallowance could be made u/s 36(1)(iii) as held by Hon'ble Apex Court in case of S.A. Builders Ltd. vs. CIT 288 ITR 1 (SC). Further attention of the Ld. CIT(A) was drawn to the judgment of Hon'ble Punjab & Haryana High Court in case of CIT vs. Kudu Industries as reported in [2015] 62 taxmann.com 191 wherein it was held various amounts advanced to the assessee get merged into a common pool. Therefore, there is no justification either for the assessee or for the department to take into consideration the rate of interest in respect of a particular advance or advances to the assessee. The only logical approach is to take into consideration the average interest rate at which the assessee has availed of the advances. In this case the Hon'ble Court specifically observed that the judgment of this Court in ITA Nos.100 & 101/Chd/2020 :: 16 :: Commissioner of Income Tax-l, Ludhiana, vs. M/s.Abhishek Industries, Ludhiana (supra) does not deal with the question of the rate of interest to be applied in cases where the assessee has mixed funds available with it. Hence even if this judgment is applied u/s.36(1)(iii), average rate of interest on which funds have been borrowed by the assessee should have been applied for working out disallowance u/s.36(1)(iii), not 12% as has been done in this case. In view of the foregoing, it is prayed disallowance made on this score may kindly be deleted.” 17. Per contra, the ld. DR relied on the findings of the AO as well as the ld.CIT(A) and our reference was drawn to the findings of the ld.CIT(A), which are contained at para 3.2 of the impugned order, which reads as under: “The facts of the case, basis of addition made by the AO and the arguments of the AR during the appellate proceedings has been considered. The AR mentioned that the only interest paid in respect of capital borrowed for acquisition of asset shall not be allowed as per proviso to section 36(l)(iiij. The AR was asked to file the ledger account of machinery under construction and show that payments have been made out of own funds. However no such details have been filed. It is a fact that the assessee paid interest on borrowed funds and has shown plant and machinery under erection at Rs.6,33,42,387/- which has not been put to use. It has not been demonstrated that borrowed funds have not been used for the purpose of plant and machinery under erection and therefore as per proviso to section 36(l)(iii) interest on the same is not allowable as deduction. A part of the interest has early been disallowed by the assesses and AO has disallowed only the balance amount. Hence, under the facts and circumstances of the case the disallowance made by the AO is found sustainable and hence confirmed” 18. We have heard the rival contentions and purused the material available on record. Given that the facts and circumstances of the case are exactly identical as in ITA No. 100/CHD/2020 as fairly submitted by both the parties during the course of hearing, our findings and directions contained in Para 11 supra disposing off assessee’s ground of appeal in ITA no. 100/CHD/2020 shall apply mutatis mutandis to this appeal. Hence, the sole ground of appeal is allowed for statistical purposes. 19. In the result, the appeal filed by the assessee is allowed for statistical purposes. ITA Nos.100 & 101/Chd/2020 :: 17 :: In the result, both the appeals filed by the assessee are disposed off in light of aforesaid directions. Order pronounced on the 2 nd day of August, 2022, in Chandigarh. Sd/- (DIVA SINGH) या यक सद.य/JUDICIAL MEMBER Sd/- (VIKRAM SINGH YADAV) लेखा सद.य/ACCOUNTANT MEMBER च डीगढ़/Chandigarh, /दनांक/Dated: 2 nd August, 2022. TLN, Sr.PS आदेश क# ! त0ल1प अ2े1षत/Copy of the order forwarded to: 1. अपीलाथ / The Appellant 2. !"यथ / The Respondent 3. आयकर आय ु 3त/ CIT 4. आयकर आय ु 3त (अपील)/ The CIT(A) 5. 1वभागीय ! त न ध, आयकर अपील य आ धकरण, च डीगढ़/ DR, ITAT, Chandigarh 6. गाड फाईल/ Guard File आदेशान ु सार/ By Order सहायक पंजीकार/ Assistant Registrar