ESKAY DYESTUFFS & ORGANIC CHEMICALS P. LTD, MUMBAI V. ACIT CIR 2(1), MUMBAI

ITA 1479/MUM/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 7948 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 1 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-03-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Next Hearing Date: 23-02-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 24-02-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SONGATE
• Assessee Lawyers: P R TOPRANI
• Keywords: Revenue expenditure; Capital expenditure
• Section: 37(1); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES, E, MUMBAI BEFORE SHRI S V MEHROTRA, ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER ITA NO. 1479/MUM/2010 (ASSESSMENT YEAR 2006-07) ESKAY DYESTUFFS AND ORGANIC CHEMICALS P LTD, 22 DDS BRELVI ROAD, FORT, MUMBAI-400001 PAN:AAACE1232H . APPELLANT VS THE ACIT CIR -2(1) MUMBAI RESPONDENT APPELLANT BY : SHRI P R TOPRANI RESPONDENT BY : SHRI SONGATE O R D E R PER VIJAY PAL RAO,JM THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 01.1.2010 OF CIT(A) FOR THE ASSESSMEN T YEAR 2006-07. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS IN THIS APPEAL: ITA NO. 1479/MUM/2010 (ASSESSMENT YEAR 2006-07) 2 1. THE LD. CIT(A) ERRED IN CONFIRMING THE ADDITION MADE BY THE LD. AO IN THE IMPUGNED ORDER TO THE INCOME OF THE APPELLANT ON ACCOUNT OF REPLACEMENT OF TWO REACTORS AMOUNTING TO RS.26,48,655/- WHICH WAS CLAIMED AS CURRENT REVENUE BY THE APPELLANT; 2. THE LD. CIT(A) ERRED IN CONFIRMING THE ADDITION MADE BY THE LD. AO TO THE INCOME OF THE APPELLANT IN THE IMPUGNED ORDER AMOUNTING TO RS.17,25,610/- ON ACCOUNT OF ADHOC 50% DISALLOWANCE OF INTEREST ON LOANS. THE LOANS WERE TAKEN FOR PAYMENT MADE TO CREDITORS FOR GOODS AND EXPENSES. 3. GROUNDS OF APPEAL NO.1 IS REGARDING THE DISALLO WANCE OF EXPENDITURE OF REPLACEMENT OF TWO REACTOR. IN TH E ASSESSMENT ORDER, THE AO DISALLOWED A SUM OF RS.26,48,655/- WHICH WERE CLAIMED AS REVENUE EXPEN SES RELATING TO REPLACEMENT OF OLD REACTOR WITH NEW ONE S. 3.1. ON APPEAL, HE CIT(A) HAS CONFIRMED THE ADDITI ON MADE BY THE AO. 3.2. BEFORE US, THE LEARNED AR OF THE ASSESSEE HAS SUBMITTED THAT THE ASSESSEE IS ENGAGED IN THE MANUFACTURING OF OPTICAL BRIGHTNERS. THE PLANT MANUFACTURERS OPTICAL WHITENING AGENT AND FLUORESC ENT BRIGHTENING AGENTS SOLD UNDER THE TRADE NAME SKAYW HIT. IN THE PLANT, THE MANUFACTURING PROCESS INCLUDES MIXIN G OF THE ITA NO. 1479/MUM/2010 (ASSESSMENT YEAR 2006-07) 3 CHEMICAL IN THE DIFFERENT TEMPERATURES CONDITIONS, THE REACTION AND MIXING PROCESS TAKE PLACE IN THE REAC TOR AND THE PROCESS TIME IS ABOUT 16 TO 18 HOURS IN THE R EACTOR. THUS AFTER ONE REACTOR ITS SOLUTION IS TRANSFERRED TO THE ANOTHER REACTOR FOR ISOLATION AND THEREAFTER IT IS TRANSFERRED TO ANOTHER REACTOR FOR WORK UP I.E. ISOLATION FOLL OWED BY FOR FILTRATION IN A FILTER PRESS AND DRYING IN A SP RAY DRIER OR OVEN. THE LD. AR OF THE ASSESSEE HAS EXPLAINED TH E FUNCTIONING OF THE PLANT AND SUBMITTED THAT IT CONSISTS OF DIFFERENT SOLUTIONS ITEMS FROM WHERE THESE CHEMICA LS ARE TRANSFERRED TO VARIOUS REACTORS AND AFTER COMPLETI NG THE PROCESS OF MIXING THE REACTION IN THE REACTOR IT IS TRANSFERRED TO THE FILTER PRESS AND DRYING IN A SP RAY DRIER OR OVEN. THE REACTOR IS BASICALLY A STIRRED TANK IN WHICH CHEMICALS ARE MIXED IN A DESIRED SEQUENCE. IT IS A STEEL VESSEL IN WHICH A CHEMICAL REACTION TAKES PLACE. IT IS STIRRED BY A STIRRER THROUGH A GEAR BOX AND MOTOR. THE L IQUID IN IT IS AGITATED BY THE STIRRER IN WHICH CHEMICALS ARE A DDED IN A DESIRED SEQUENCE. THE REACTION MASS IS HEATED BY A JACKET OR LIMPET COILS TO OBTAIN THE NEEDED TEMPERATURE. IN A CHEMICAL PLANT IT IS THE 1 ST STAGE IN THE MANUFACTURE OF THE PRODUCT AFTER WHICH THE OTHER PROCESS STARTS. THU S HE HAS SUBMITTED THAT THE FUNCTION OF THE REACTOR IS SUPP ORTED BY A ITA NO. 1479/MUM/2010 (ASSESSMENT YEAR 2006-07) 4 MOTOR GEAR BOX AND ASSEMBLY, BEARING HOUSING, MOUNT ING BLOCK, PARTS OF THE TOP DISH WHICH WERE REUSABLE. THE REPLACEMENT EXPENDITURES ARE ONLY FOR REPLACING TH E TANK AND NOT OTHER PARTS OF THE REACTORS. THEREFORE, IT IS NOT THE REPLACEMENT OF THE COMPLETE REACTOR. HE HAS FU RTHER SUBMITTED THAT THE PROCESS OF MANUFACTURING OPTIC AL WHITENING AGENTS AND FLUORESCENT CHAIN IS PASSING T HROUGH THE NEXT REACTOR AND THEN FINAL PRODUCT COMES OUT. THUS, THE LEANED AR OF HE ASSESSEE HAS SUBMITTED THAT THE EXPENDITURE INCURRED ON THE PARTS OF THE ENTIRE R EACTOR AND MANUFACTURING MACHINERY IS ONLY FOR THE BUSINESS PURPOSE AND THE EXPENDITURE ALLOWABLE U/S 37 (VII) OF THE ACT. HE HAS FURTHER POINTED OUT THAT BY REPLACING THE TANK AND PART OF THE REACTOR DOES NOT INCREASE THE INSTALLED CAPA CITY WHICH REMAINS CONSTANT AND THERE IS NO ENDURING BE NEFIT BY REPLACING THE REACTOR. HE HAS RELIED UPON THE O RDER OF THE CHENNAI BENCH OF THIS TRIBUNAL. LOYAL TEXT ILE MILLS LTD V/S DCIT REPORTED IN (2006) 6 SOT 97 (CHENNAI) AND THE DECISION OF THE HON. SUPREME COURT IN THE CASE OF CIT V/S RAMARAJU SURGICAL COTTON MILLS REPORTED IN 29 4 ITR 328(SC). ITA NO. 1479/MUM/2010 (ASSESSMENT YEAR 2006-07) 5 3.3 ON THE OTHER HAND, THE LEARNED DR HAS SUBMITTED THAT SINCE THE ASSESSEE HAS REPLACED THE OLD REACTORS BY NEW ONE WHICH IS CERTAINLY AN EXPENDITURE OF CAPITAL IN NATURE. HE HAS FURTHER SUBMITTED THAT WHEN THE ENTIRE MACH INERY HAS BEEN REPLACED THEN IT CANNOT BE ALLOWED AS REV ENUE EXPENDITURE. HE HAS RELIED UPON THE DECISION DECI SION OF HON'BLE APEX COURT IN THE CASE OF CIT VS. SARAVANA SPINNING MILLS P. LTD. (2007) 293 ITR 201 (SC) WHER EIN IT HAS BEEN OBSERVED THAT : ..EACH MACHINE IS SEPARATE AND AN INDEPENDENT UNIT AND BY REPLACING THAT UNIT OBVIOUSLY A NEW ASSET HAS BEEN BROUGHT INTO EXISTENCE AND, THEREFORE, THE EXPENDITURE IS CAPITAL IN NATURE. HE HAS FURTHER SUBMITTED THAT IN THE INSTANT CASE, THE MACHINERY REPLACED GIVES THE ASSESSEE A BENEFIT OF ENDURING NATURE AND, THEREFORE, THE EXPENDITURE INCURRED ON SUCH REPLACEMENT IS IN THE NATURE OF CAPITAL EXPENDITURE. THE EXPENDITURE IS MADE FOR ACQUIRING OR BRINGING INTO EXISTENCE AN ALTOGETHER NEW ASSET, WHICH IS TO DERIVE ENDURING ADVANTAGE TO THE ASSESSEES BUSINESS. THEREFORE, THE EXPENDITURE IS ATTRIBUTABLE TO CAPITAL EXPENDITURE AND IS CAPITAL IN NATURE 3.4 WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND RELEVANT RECORD. SINCE THE EXPENDITURE HAS BEEN I NCURRED FOR THE REPLACEMENT OF THE REACTOR THEREFORE THE CLAIM IS NOT THAT OF CURRENT REPAIRS U/S 31 BUT THE CLAIM OF THE ITA NO. 1479/MUM/2010 (ASSESSMENT YEAR 2006-07) 6 ASSESSEE IS FOR REVENUE EXPENDITURE U/S 37 OF THE ACT. AS REGARD THE DECISION OF THE HONORABLE SUPREME COURT IN THE CASE OF CIT VS. SARAVANA SPINNING MILLS P. LTD.(SU PRA), THE SAME DOES NOT APPLY IN THE PRESENT FACTS AND CIRCUMSTANCES OF THE CASE BECAUSE IN THE SAID DE CISION THE HON. SUPREME COURT HAS SPECIFICALLY CLARIFIED THAT THE DISPUTE WAS ONLY IN RESPECT OF CURRENT REPAIRS AND THEREFORE NO OPINION WAS EXPRESSED IN THE CASE OF THE ASSESSE E WHERE DEDUCTION WAS CLAIMED U/S 37 OF THE ACT. HOW EVER, THE HON. SUPREME COURT IN PARAGRAPHS 12 OF THE DE CISION IN THE CASE OF CIT VS. SARAVANA SPINNING MILLS P. LTD. (SUPRA) HAS OBSERVED AS UNDER: FROM THE ABOVE FACTS, IT IS CLEAR THAT BLOW ROOM, CARDING, COMBING, DRAWING, ROVING, SPINNING AND WINDING ARE DIFFERENT DEPARTMENTS / DIVISIONS IN A TEXTILE MILL. IN EACH DEPARTMENT / DIVISION THERE ARE SEVERAL MACHINES. EACH OF THE ABOVE DEPARTMENTS / DIVISION PERFORMS DIFFERENT FUNCTIONS AND THE FUNCTIONING OF EACH DEPARTMENT / DIVISION PRODUCES A DIFFERENT OUTPUT WHICH IS CARRIED FORWARD TO THE NEXT DEPARTMENT / DIVISION HAVING DIFFERENT MACHINES THEREIN. ................ LASTLY, IT CANNOT BE SAID THAT THE TEXTILE MILL CONSTITUTES A PLANT AS IT IS ONE CONTINUOUS PROCESS OF MANUFACTURE BEGINNING FROM BLOW ROOM TO THE WINDING SECTION. AS STATED ABOVE, DIFFERENT OUTPUTS FLOW FROM DIFFERENT SEGMENTS OF PRODUCTION LIKE BLOW ROOM, CARDING, COMBING, ROVING, WINDING ETC. IN THE CASE OF A TEXTILE MILL THERE IS NO PROCESS WHEREBY RAW MATERIAL IS FED ITA NO. 1479/MUM/2010 (ASSESSMENT YEAR 2006-07) 7 ON ONE END AND THE FINISHED PRODUCT COMES OUT AT THE OTHER END WITHOUT INTERVENTION IN BETWEEN. ............ THEREFORE, THE TRIBUNAL AND THE HIGH COURT ERRED IN HOLDING THAT THE MANUFACTURING PROCESS IN THE TEXTILE MILL IS ONE CONTINUOUS INTEGRATED PROCESS. 3.5 THUS, IT IS IMPORTANT TO NOTE THAT WHILE DECID ING THE ISSUE IT IS ESSENTIAL TO FIRST DETERMINE WHETHER T HE REPLACEMENT IS FOR THE ENTIRE MACHINERY OR IT IS O NLY A PART OF THE CONTINUOUS INTEGRATED MANUFACTURING PROCES S. FURTHER, THE HONBLE SUPREME COURT IN THE SAID CASE HAS ALSO OBSERVED IN PARA NO. 13, AND THE RELEVANT PORT ION IS QUOTED AS UNDER:- AS STATED ABOVE, EACH MACHINE IN A SEGMENT HAS AN INDEPENDENT ROLE TO PLAY IN THE MILL AND THE OUTPUT OF EACH DIVISION IS DIFFERENT FROM THE OTHER REPAIR IMPLIES THE EXISTENCE OF A PART OF THE MACHINE WHIC H HAS MALFUNCTION. IF THE ARGUMENT OF THE ASSESSEE HEREIN BEFORE US IS TO BE ACCEPTED IT WOULD RESULT IN ABSURDITY AND IT WOULD MAKE THE PROVISIONS OF SECTI ON 31(I) COMPLETELY REDUNDANT. ACCORDING TO SHRI R. VENKATARAMAN, LEARNED SENIOR COUNSEL FOR THE ASSESSEE, THE TEXTILE PLANT CONSISTS OF ABOUT 25 MACHINES. ONE OF SUCH MACHINES IS THE RING FRAME. IF THE ARGUMENT OF THE ASSESSEE IS TO BE ACCEPTED, IT WOULD MEAN THAT PERIODICALLY ONE MACHINE OUT OF 25 WOULD BE REPLACED, AND ON THAT BASIS, FROM TIME TO TIME, EACH OF THESE 25 MACHINES IN THE TEXTILE PLAN T WOULD BE ENTITLED TO CLAIM ALLOWANCE UNDER SECTION 31(I). IN OUR VIEW, THE ASSESSING OFFICER WAS RIGH T IN ITA NO. 1479/MUM/2010 (ASSESSMENT YEAR 2006-07) 8 HOLDING THAT EACH MACHINE INCLUDING THE RING FRAME WAS AN INDEPENDENT AND SEPARATE MACHINE CAPABLE OF INDEPENDENT AND SPECIFIC FUNCTION AND, THEREFORE, T HE EXPENDITURE INCURRED FOR REPLACEMENT OF THE NEW MACHINE WOULD NOT COME WITHIN THE MEANING OF THE WORDS CURRENT REPAIRS. IN THE PRESENT CASE, IT I S NOT THE CASE OF THE ASSESSEE THAT A PART OF THE MACHINE (OUT OF 25 MACHINES) NEEDED REPAIRS. THE ENTIRE MACHINE HAD BEEN REPLACED. THEREFORE, THE EXPENDITURE INCURRED BY THE ASSESSEE DID NOT FALL WITHIN THE MEANING OF CURRENT REPAIRS IN SECTION 31(I). 3.6 . LASTLY, THE HONBLE SUPREME COURT IN PARA NOS. 18 & 19 OF THE SAID CASE HAS HELD AS UNDER:- BEFORE CONCLUDING, ONE ASPECT NEEDS TO BE DISCUSSED. IT WAS SUBMITTED ON BEHALF OF THE ASSESSEES, IN THE PRESENT CASE, THAT ALTHOUGH THE ASSESSEES HAD CLAIMED DEDUCTION UNDER SECTION 31(I) , THEY SHOULD BE PERMITTED TO CLAIM DEDUCTION UNDER SECTION 37(1) AS ON THE FACTS IT HAS BEEN HELD BY T HE COMMISSIONER OF INCOME TAX (APPEALS), TRIBUNAL AND THE HIGH COURT THAT THE EXPENDITURE WAS REVENUE IN NATURE. WE FIND NO MERIT IN THIS CONTENTION. AS S TATED ABOVE, EVEN IF THE EXPENDITURE INCURRED IS REVENUE IN NATURE, STILL IT MAY NOT FALL IN THE CONNOTATION OF THE WORDS CURRENT REPAIRS UNDER SECTION 31(I) WHICH T EST HAS NOT KEPT IN MIND. AS HELD BY CHAGLA C. J. IN T HE CASE OF NEW SHOROCK SPINNING AND MANUFACTURING CO. LTD. (1956) 30 ITR 338 (BOM) ALL REPAIRS DO NOT ATT RACT SECTION 31(I) EVEN THOUGH THE EXPENDITURE IS REVENU E IN NATURE. THEREFORE, THE BASIC TEST , WHICH HAD N OT BEEN APPLIED, IN THE PRESENT CASE, BY THE COMMISSIONER OF INCOME TAX (APPEALS), THE TRIBUNAL AND THE HIGH COURT, IS WHETHER THE EXPENDITURE CAME WITHIN THE EXPRESSION CURRENT REPAIRS. INSTEAD A LL THE THREE AUTHORITIES PROCEEDED ON THE FOOTING THAT SINCE THE EXPENDITURE WAS REVENUE IT CONSTITUTED CURRENT REPAIRS. IT IS FOR THIS REASON THAT WE H AVE INTERFERED WITH THE CONCURRENT FINDINGS GIVEN BY TH E COMMISSIONER OF INCOME TAX (APPEALS), THE TRIBUNAL AND THE HIGH COURT. ITA NO. 1479/MUM/2010 (ASSESSMENT YEAR 2006-07) 9 FOR THE AFORESTATED REASONS, WE FIND MERIT IN THE ABOVE BATCH OF CIVIL APPEALS FILED BY THE DEPARTMEN T. ACCORDINGLY, WE HOLD IN THIS BATCH OF CIVIL APPEALS THAT THE ASSESSEES WERE NOT ENTITLED TO CLAIM ALLOWANCE UNDER SECTION 31(I) OF THE INCOME TAX ACT AS IT STO OD AT THE RELEVANT TIME. ACCORDINGLY, THE CIVIL APPEA LS STAND ALLOWED WITH NO ORDER AS TO COSTS. 3.7 FROM THE ABOVE DECISION, IT IS CLEAR THAT THE H ONBLE APEX COURT HAS HELD THAT THE TEXTILE MILL IS NOT ON E CONTINUOUS INTEGRATED PROCESS. EACH MACHINE IN A S EGMENT HAS AN INDEPENDENT ROLE TO PLAY IN THE MILL AND THE OUTPUT OF EACH DIVISION IS DIFFERENT FROM THE OTHER. SINCE T HE ISSUE IN THE SAID CASE WAS ONLY CLAIMED AS CURRENT REPAIRS U /S 31 OF THE INCOME TAX ACT, THE HON'BLE APEX COURT DID NOT EXPRESS ANY OPINION REGARDING THE CLAIM U/S 37. 3.8 IN THE CASE OF CIT VS. RAMARAJU SURGICAL COTTON MILLS (2007) 294 ITR 328 (SC), THE ISSUE WAS THE CLAIM OF DEDUCTION U/S 37 OF THE INCOME TAX ACT. THE HONBL E SUPREME COURT REMANDED THE MATTER TO THE RECORD OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) FOR DE CIDING THE ISSUE BY APPLYING THE TEST FOR THE CLAIM OF EXP ENDITURE U/S 37 OF THE INCOME TAX ACT. IN PARA 5 OF THE SAI D CASE, THE HON'BLE APEX COURT HAS OBSERVED AS UNDER:- ITA NO. 1479/MUM/2010 (ASSESSMENT YEAR 2006-07) 10 THERE ARE A NUMBER OF TESTS WHICH ARE REQUIRED TO BE CONSIDERED WHILE DECIDING WHETHER THE EXPENDITURE WAS REVENUE OR CAPITAL IN NATURE. A NUMBER OF JUDGMENTS HAVE BEEN CITED BEFORE US IN THAT REGARD. HOWEVER, IN THE ABSENCE OF THE REQUISITE DETAILS REGARDING THE PRODUCTION CAPACITY REMAINING CONSTANT EVEN AFTER REPLACEMENT, THE MATTER NEEDS TO BE REMITTED TO THE COMMISSIONER (APPEALS). THERE IS ONE MORE REASON WHY WE ARE INCLINED TO REMIT THE MATTER. AS STATED ABOVE, THE IMPUGNED JUDGMENT OF THE MADRAS HIGH COURT IN THE CASE OF JANAKIRAM MILLS LTD. HAS BEEN SET ASIDE BY THIS COURT AS THERE WAS CONFUSION BETWEEN THE TESTS TO BE APPLIED IN RESPECT OF SECTION 31 VIS--VIS THE TEST TO BE APPLIED IN THE CASE OF SECTION 37 OF THE INCOME TAX ACT. WITHOUT EXPRESSING ANY OPINION ON THE MERITS OF THE CASE WE REMIT THE MATTER TO THE COMMISSIONER (APPEALS) WHO WILL DECIDE THE QUESTION IN ACCORDANCE WITH LAW. 3.9 SINCE THE CRUCIAL FACT HAS NOT BEEN DECIDED BY THE LOWER AUTHORITIES AS TO WHETHER THE REACTOR REPLAC ED BY THE ASSESSEE ARE SEPARATE INDEPENDANT MACHINERY OR I S ONLY PART OF INTEGRATED MANUFACTURING PROCESS. THEREFOR E, THE MATTER REQUIRES VERIFICATION AND ADJUDICATION AFTER DETERMINATION OF THIS ASPECTS. ACCORDINGLY, THIS ISSUE IS SET ASIDE TO THE RECORD OF THE AO TO VERIFY AND THE N ADJUDICATE THE ISSUE IN VIEW OF THE ABOVE OBSERVATI ONS. 4. GROUND NO.1 OF THE APPEAL IS ALLOWED FOR STATIST ICAL PURPOSES. ITA NO. 1479/MUM/2010 (ASSESSMENT YEAR 2006-07) 11 5. GROUND NO.2 REGARDING DISALLOWANCE OF INTEREST EXPENSES. DURING THE ASSESSMENT PROCEEDINGS THE AO NOTED THAT THE ASSESSEE HAS DEBITED THE INTEREST EX PENSES OF RS.34,51,219/-. THE ASSESSEE HAS TAKEN SLOC L OAN OF RS.30 LAKHS AND TERM LOAN OF RS.78,34,030/- FROM STATE BANK OF INDIA ON WHICH THE INTEREST WAS PAID. THE AO OBSERVED THAT THIS AMOUNT WAS UTILIZED FOR MAKING T HE PAYMENT TO VARIOUS SUPPLIERS VIZ. M/S STERLING FA BRICATING ENGG. PVT LTF., M/S N M PATEL ENGINEERING P LTD, M/S VINAY CONSTRUWEL , M/S MANISH ENGINEERING CORPORAT ION, M/S TAURAS HEAD SYSTEMS, L/S LARSEN AND TOUBRO AN D M/S INDU CORPORATION FOR ACQUIRING THE NEW ASSETS . AFTER CONSIDERING THE EXPLANATION AND REPLY OF THE ASSESS EE, THE AO DISALLOWED 50% OF THE INTEREST EXPENSES OF RS.17,25,610/- BEING THE INTEREST PAID IN RESPECT OF THE CAPITAL BORROWED FOR ACQUISITION OF ASSETS WHICH WAS NOT USED. 5.1. ON APPEAL, THE CIT(A) OBSERVED THAT SINCE THE ASSESSEE IS NOT MAINTAINING SEPARATE BANK ACCOUNT OR SEPARATE TRANSACTION IN RESPECT OF SETTING OF NE W UNIT AND EXPENDITURES FOR THE EXISTING BUSINESS THEREFORE, T HE AO IS JUSTIFIED IN DISALLOWING 50% OF THE INTEREST. ITA NO. 1479/MUM/2010 (ASSESSMENT YEAR 2006-07) 12 5.2 BEFORE US, THE LEARNED AR OF THE ASSESSEE HAS SUBMITTED THAT THE ASSESSEE PURCHASED THE MACHINERY FOR UNIT II WHICH WERE NOT PUT TO USE BUT THE SAME WE RE CAPITALIZED AS WORK- IN- PROGRESS. THIS WORK- IN- PROGRESS WAS FINANCED BY THE ASSESSEE FROM ITS OWN INTERNAL SOURCES, RESERVE AND SURPLUS. HE HAS CONTENDED THA T THE RESERVE AND SURPLUS STANDING IN THE BOOKS OF THE AC COUNTS ARE RS.2,13,41,882. THE PAYMENT OF SUPPLIERS WERE MADE BY OBTAINING THE LOAN FROM STATE BANK OF INDIA AN D THE INTEREST ON THE SAID TERM LOAN AMOUNTING TO RS.1,02 ,858/- AND ONLY TO BE DISALLOWED CAPITAL EXPENSES. 5.3 THE LD. AR OF THE ASSESSEE ARGUED THAT THE DISALLOWANCE OF 50% OF THE TOTAL INTEREST IS NOT J USTIFIED WHEN THE ASSESSEE WAS HAVING ITS OWN FUND FOR PU RCHASE OF MACHINERY FOR THE UNIT-II. HE HAS REFERRED THE DETAILS OF FUND AND THE TERM LOAN AND THE INTEREST PAID BY THE ASSESSEE. THUS, THE LEARNED AR OF THE ASSESSEE HA S SUBMITTED THAT IF AT ALL ANY DISALLOWANCE IS CALLE D FOR I.E. ONLY TO THE EXTENT OF RS.1,02,858/-. ITA NO. 1479/MUM/2010 (ASSESSMENT YEAR 2006-07) 13 5.4 ON THE HAND, THE LEARNED DR SUBMITTED THAT THE CIT(A) HAS CONSIDERED THESE ALL CONTENTIONS OF THE ASSESSEE AND FOUND THAT THE RESERVE AND SURPLUS SHO WN BY THE ASSESSEE IN THE BALANCE SHEET IS SUPPORTED BY T HE ASSETS IN THE BALANCE SHEET. WHEN THE ASSESSEE HAS GIVEN THE ADVANCES TO THE VARIOUS PARTIES FOR SUPPLY OF M ACHINERY FOR UNIT-II OUT OF THE BORROWED FUNDS THEN THE DISA LLOWANCE MADE BY THE AO AND CONFIRMED BY THE CIT(A) IS JUST IFIED. HE HAS RELIED UPON THE ORDERS OF THE LOWER AUTHORIT IES. 5.5 WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND RELEVANT RECORD. THE AO MADE THE ADDITION ON THE BASIS THAT THE ASSESSEE HAS UTILIZED THE BORROWED FUNDS F OR THE PURCHASE OF MACHINERY WHICH HAS SHOWN AS WIP FOR TH E UNIT NO.-II BEING ESTABLISHED BY THE ASSESSEE. SINCE T HE MACHINERIES WERE NOT PUT TO USE THE INTEREST CANNOT BE ALLOWED. THE CIT(A) HAS CONFIRMED THE DISALLOWANCE MADE BY THE AO ON THE SIMILAR REASONING. THE ASSESSEE RIGHT FROM THE BEGINNING HAS BEEN CONTENDING THAT THE BOR ROWED FUNDS HAS NOT BEE UTILIZED FOR THE PURCHASE OF MACH INERY FOR UNIT II AND THE ASSESSEES OWN INTERNAL FUNDS WERE UTILIZED. IN THE ABSENCE OF THE PROPER CASH-FLOW STATEMENT SH OWING THE AVAILABILITY OF THE FUNDS AND UTILIZATION OF TH E SAME IT IS ITA NO. 1479/MUM/2010 (ASSESSMENT YEAR 2006-07) 14 NOT POSSIBLE TO ADJUDICATE THE ISSUE PROPERLY. THER EFORE, IN OUR VIEW THE ISSUE NEEDS PROPER VERIFICATION AND EXAMINATION . ACCORDINGLY, WE SET ASIDE THIS ISSUE TO THE RECORD OF THE CIT(A) FOR VERIFICATION AND EXAMINATI ON OF THE AVAILABILITY OF THE FUNDS FROM THE CASH FLOW STATEM ENT TO BE CONSTRUCTED BY THE ASSESSEE AND ACCORDINGLY DECIDE THE ISSUE AFRESH. 6. GROUNDS OF APPEAL NO.2 IS ALLOWED FOR STATISTICA L PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 25TH MAR ,2011 SD SD (S V MEHROTRA ) (VIJAY PAL RAO) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED 25 TH MAR 2011 SRL:7311 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT CONCERNED 4. CIT(A) CONCERNED 5. DR CONCERNED BENCH BY ORDER TRUE COPY ASSTT. REGISTRAR, ITAT, MUMBAI