Annapurna Polymers Pvt.Ltd., Ahmedabad V. The ACIT.,Circle-1, Ahmedabad

ITA 1599/AHD/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 80391 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 2 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-10-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 06-08-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 23-07-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ROOP CHAND
• Assessee Lawyers: S N SOPARKAR
• Keywords: Capital asset; Depreciation; Additional evidence; Revenue expenditure; Capital expenditure
• Section: 32; 12; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, AHMEDABAD BEFORE SHRI MUKUL KR. SHRAWAT, JUDICIAL MEMBER AND SHRI N.S. SAINI , ACCOUNTANT MEMBER ITA NO.548/AHD/2011 A.Y.200 6 - 0 7 ANNAPURNA POLYMERS PVT. LTD., 103, AAKANKSHA SHRIMALI SOCIETY, NR. NAVRANG PURA CROSSING, AHMEDABAD. PAN: AABCA 8452A VS ACIT, CIRCLE - 1, AHMEDABAD. (APPELLANT) (RESPONDENT) ITA NO . 1 598 & 1599 /AHD/20 1 2 A. Y S . 200 5 - 0 6 & 2009 - 10 ANNAPURNA POLYMERS PVT. LTD., 103, AAKANKSHA SHRIMALI SOCIETY, NR. NAVRANGPURA CROSSING, AHMEDAB AD. PAN: AABCA 8452A VS ACIT, CIRCLE - 1, AHMEDABAD. (APPELLANT) (RESPONDENT) REVENUE BY : SHRI ROOPCHAND , SR. D.R. , ASSESSEE(S) BY : SHRI S.N. SOPARKAR , AR / DATE OF HEARING : 0 6 / 0 8 /201 4 / DATE OF PRONOUNCEMENT: 1 / 10 /201 4 / O R D E R PER SHRI MUKUL KUMAR SHRAWAT, JUDICIAL MEMBER THESE THREE APPEALS HAVE BEEN FILED BY THE ASSESSEE RESPECTIVELY FOR THE ASSESSMENT YEAR S 2005 - 06, 2006 - 07 AND 2009 - 10 EMANATING FROM THE ORDERS OF LEARNED CIT(A) - VI, AHMEDABAD DATED 7 TH JUNE, 2012, 24 TH JUNE, 2011. ITA NOS.548/AHD/2011 & 1598, 1599/AHD/2012 ANNAPURNA POLYMERS PVT. LTD. VS. ACIT CIRCLE - 1, AHMEDABAD FOR A.YS. 2005 - 06, 2006 - 07, 2009 - 10 - 2 - 2. IN RESPECT OF THESE YEARS, THE ASSESSEE HAS RAISED COMMON GROUNDS AND THE LEAD ASSESSMENT YEAR IS 2005 - 06; HENCE, THE GROUND REPRODUCED AS UNDER: 1. L D. CIT (A) ERR ED IN LAW AND ON FACTS IN CONFIRMING DISALLOWANCE OF INTEREST EXPENDITURE OF RS. 10,92,000 / - MADE BY AO U/S 36 (1)(III) OF THE ACT IN SET ASIDE PROCEEDINGS IGNORING SPECIFIC DIRECTION BY THE HON'BLE ITAT. BOTH THE LOWER AUTHORITIES ERRED IN APPLYING PROVIS O TO SECTION 36( 1 )(III) OF THE ACT TO DISALLOW INTEREST EXPENSES IN TOTAL DISREGARD OF THE FACTS AND FIGURES FURNISHED TO ESTABLISH ACQUISITION AND USE OF ASSET BY THE APPELLANT. LD. CIT (A) OUGHT TO HAVE ALLOWED THE INTEREST EXPENSE INCURRED WHOLLY AND EX CLUSIVELY FOR THE PURPOSE OF THE BUSINESS AS CLAIMED ON THE BORROWED FUNDS BY QUASHING ORDER OF AO. 3. FACTS IN BRIEF ARE THAT THE ASSESSEE COMPANY IS IN THE BUSINESS OF TRADING OF COTTON AND MANUFACTURING OF YARN. AN ASSESSMENT WAS MADE U/S.143(3) R.W. S. 254 DATED 21.12.2010, WHICH IS THE SUBJECT MATTER OF THIS APPEAL. THE AO HAS NOTED THAT FOR A.Y. 2005 - 06 AGAINST THE ORDER OF LEARNED CIT(A) AN APPEAL WAS PREFERRED BY THE ASSESSEE AND ITAT AHMEDABAD IN ITA NO.1445/AHD/2009 VIDE AN ORDER DATED 17.07.200 9 HAS RESTORED THE ISSUE BACK TO THE FILE OF THE AO TO REDECIDE IN THE LIGHT OF THE HON BLE SUPREME COURT DECISION IN THE CASE OF CORE HEALTH CARE LTD., 298 ITR 194 (SC). THE AO HAS REPRODUCED THE SAID PORTION OF THE ITAT ORDER . T HEREAFTER AO HAS DISCUSSED THE PROVISO TO SECTION 36(1)(III) WHICH SAYS THAT, ANY AMOUNT OF 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 PERI OD 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 . ACCORDING TO AO, THE FUNDS HAVE BEEN BORROWED FOR ACQUIRING THE UNIT OF MA FATLAL INDUSTRIES LTD., SO AS TO EXPAND THE BUSINESS OF THE ASSESSEE. DUE TO THIS REASON, THE AO HAS HELD THAT THE SAID PROVISO IS APPLICABLE ON THE FACTS OF THE CASE. ITA NOS.548/AHD/2011 & 1598, 1599/AHD/2012 ANNAPURNA POLYMERS PVT. LTD. VS. ACIT CIRCLE - 1, AHMEDABAD FOR A.YS. 2005 - 06, 2006 - 07, 2009 - 10 - 3 - THE AO HAS ALSO OPINED THAT NO CONVEYANCE DEED WAS EXECUTED AND THAT DURING THE RELEVANT PERIOD NO MANUFACTURING ACTIVITY HAD BEEN UNDERTAKEN BY THE ASSESSEE . IT WAS ALSO OBSERVED BY THE AO THAT THE SAID MAFATLAL INDUSTRIES WAS PERFORMING THE JOB WORK ACTIVITY FOR THE ASSESSEE. THE AO HAS ALSO EXAMINED THE BALANCESHEET AND NOTED THAT THE ASS ET STATED TO BE ACQUIRED FROM MAFATLAL INDUSTRY WAS NOT SHOWN IN THE SCHEDULE OF THE F IXED A SSET OF THE BALANCE SHEET. THEREFORE , HE HAS CONCLUDED THAT THE INTEREST CLAIMED AMOUNT ING TO RS.10,92,000/ - WAS PAID IN RESPECT OF CAPITAL BORROWED FOR THE ACQU ISITION OF THE UNIT OF MAFATLAL INDUSTRIES, HENCE NOT AN ALLOWABLE EXPENDITURE. HE HAS ALSO HELD THAT THE SAID PROVISO IS APPLICABLE AS HELD IN THE CASE OF CORE HEALTH CARE LTD. (SUPRA). IN COMPLIANCE OF THE SHOW CAUSE NOTICE, THE ASSESSEE HAS FURNISHED A REPLY, RELEVANT PORTION EXTRACTED BELOW: 1. WITH REFERENCE TO YOUR LETTER DATED 16/08/2010, YOUR GOODSELF MAINLY ON FOLLOWING THREE COUNTS HAS INTENDED TO INVOKE PROVISO TO S.36(1)(III) AND SHOW CAUSED THE ASSESSEE COMPANY AS TO WHY INTEREST CHARGES AMOU NTING TO RS. 10,92, 000 / - SHOULD NOT BE DISALLOWED AS PER THE PROVISIONS OF S. 36(1)(III) OF THE ACT. (A) CONVEYANCE DEED FOR THE SALE OF THE MAFATLAL INDUSTRIES LTD. UNIT HAS NOT BEEN EXECUTED TILL DATE. (B) IT HAS BEEN FOUND THAT DURING RELEVANT PERI OD, NO MANUFACTURING ACTIVITY HAS UNDERTAKEN BY THE ASSESSEE COMPANY AND THE WHOLE MANUFACTURING WAS CARRIED OUT THROUGH JOB WORK FROM OUTSIDE PARTIES. ( C) IT HAS BEEN FOUND THAT THE ASSETS STATED TO BE ACQUIRED FROM MAFATLAL INDUSTRIES LTD. ARE NOT SHOWN IN THE SCHEDULE OF FIXED ASSETS. 2. IN THIS CONNECTION THE ASSESSEE COMPANY SUBMITS THAT PROVISO TO S. 36(1)( II I) OF THE ACT IS NOT APPLICABLE IN THE CASE OF THE ASSESSEE. PROVISO TO S.36( 1 )(III) PROVIDES THAT ANY AMOUNT OF 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 WHICH THE CAPITAL WAS BORROWED FOR ACQUISITION OF THE ASSET TI LL THE DATE ON WHICH SUCH ASSET WAS FIRST PUT TO USE, SHALL NOT BE ALLOWED AS DEDUCTION. 3. IN THE PRESENT CASE BEFORE YOUR GOODSELF, THE ASSESSEE COMPANY HAS NOT ACQUIRED ANY ASS E T FOR EXTENSION OF EXISTING BUSINESS, ON THE CONTRARY THE ASSESSEE COMPANY ACQUIRED RUNNING B U SINESS OF MAFATLAL INDUSTRIES LTD. AND THEREFORE PROVISO TO S. 36(1)( II I) CAN NOT BE INVOKED AND INTEREST EXPENDITURE SHOULD BE ALLOWED. ITA NOS.548/AHD/2011 & 1598, 1599/AHD/2012 ANNAPURNA POLYMERS PVT. LTD. VS. ACIT CIRCLE - 1, AHMEDABAD FOR A.YS. 2005 - 06, 2006 - 07, 2009 - 10 - 4 - 4. SO FAR AS THE OBJECTIONS (A) AND (C), AS NOTED IN PARA 1 ABOVE, ARE CONCERNED, THE ASSESSEE SUBMI TS THAT PENDING REGULATORY AND LEGAL FORMALITIES, THE PROCESS OF ACQUISITION NOT RECORDED IN THE BOOKS OF ACCOUNTS. HOWEVER THE ASSESSEE HAS TAKEN OVER THE POSSESSION OF THE SAID MAFATLAL INDUSTRIES LIMITED PLANT AND MACHINERIES AND OPERATING THE SAME AND THEREFORE THE INTEREST CLAIM HAS TO BE A/LOWED. IN ANY CASE, ASSUMING WHILE DENYING THAT THE CONVEYANCE DEED HAS NOT BEEN EXECUTED TILL DATE, IT MEANS THAT ASSETS OF THE MAFATLAL INDUSTRIES LTD. HAVE NOT BEEN ACQUIRED BUT ONLY USED BY THE ASSESSEE AND THER EFORE NOT R ECORDED FOR IN THE BOOKS OF ACCOUNTS AS ASSETS AND HENCE INTEREST EXPENDITURE INCURRED TO ACQUIRED USER OF ASSETS MAY BE A L LOWED AS ALLOWABLE EXPENDITURE WITHIN T HE SCHEME OF THE ACT. THEREFORE , THE ASSESSEE COMPANY SUBMITS THAT EVEN IF OBJECTIO NS (A) AND (C) ARE ACCEPTED, THEN AL SO INTEREST EXPENDITURE IS ALLOWABLE TO THE ASSESSEE COMPANY. FURTHER ASSUMING BUT WITHOUT ADMITTING ASSESSEE SUBMITS THAT THE AMOUNT HAS BEEN BORROWED FOR ACQUIRING UNDER STATED ASSETS THEN ALSO THE INTEREST SHALL BE DI SALLOWED FOR THE PERIOD BEGINNING FROM THE DATE ON WHICH THE CAPITAL WAS BORROWED TILL THE DATE ON WHICH SUCH ASSET WAS FIRST PUT TO USE. HOWEVER, IN THE PRESENT CASE BEFORE YOUR GOODSELF, THE ASSETS WERE PUT TO USE FROM THE VERY FIRST DAY AND THEREFORE TH ERE IS NO QUESTION OF DISALLOWING INTEREST BY INVOKING PROVISO TO S.36(1)(I II ) OF THE ACT . 5. IN RESPECT OF OBJECTION (B) NOTED ABOVE IN PARA 1, ASSESSEE SUBMITS THAT IT IS FACTUALLY INCORRECT THAT NO MANUFACTURING ACTIVITY HAS BEEN CARRIED OUT. ASSESSEE COMPANY VIDE LETTER DATED 12/08/2010 HAS ACQUIRED POSSESSION OF UNIT OF MAFATLAL INDUSTRIES LTD. AROUND ON JUNE 2003 AND STARTED PRODUCTION AT THE SAID UNIT. ASSESSEE COMPANY HAS ALSO ANNEXED STATEMENT SHOWING PRODUCTION CARRIED OUT AT UNIT OF MAFATLA L IND USTRIES LTD. FROM JUNE 2003 TO MARCH 2005 ALONGWITH THE LETTER DATED 12/08/2010. YOUR GOODSELF ALSO OBSERVED THAT MAFATLAL INDUSTRIES LTD. IS PERFORMING JOB WORKS ACTIVITIES FOR THE ASSESSEE COMPANY, NOW IN THIS CONTEXT, THE ASSESSEE SUBMITS THAT IT IS A M ATTER OF NO CONSEQUENCES WHETHER THE SAID UNIT IS DOING MANUFACTURING ACTIVITIES ON ITS OWN ACCOUNT OR CARRYING OUT JOB WORK ACTIVATES; ONCE THE MACHINERIES OR ASSETS ARE USED FOR THE PURPOSE OF BUSINESS, INTEREST EXPENDITURE IS ALLOWABLE U/S 36(1)(III) OF THE ACT.' 4. ACCORDING TO AO, THE ASSESSEE WAS NOT ABLE TO EVEN ESTABLISH THAT THE ASSET WAS ACQUIRED BECAUSE THE CONVEYANCE DEED WAS NOT EXECUTED AND MOREOVER THE ASSESSEE HAD NOT STARTED ANY MANUFACTURING ACTIVITY. THE ASSESSEE HAD CARRIED OUT THE MANU FACTURING ACTIVITY OUTSIDE THROUGH JOB WORK. FINALLY BY APPLYING THE PROVISO TO SECTION 36(1)(III) AND THE RATIO LAID DOWN IN THE CASE OF CORE HEALTH CARE LTD., THE AO HAS DISALLOWED THE INTEREST CLAIMED OF RS.10,92,000/ - ON THE GROUND THE ITA NOS.548/AHD/2011 & 1598, 1599/AHD/2012 ANNAPURNA POLYMERS PVT. LTD. VS. ACIT CIRCLE - 1, AHMEDABAD FOR A.YS. 2005 - 06, 2006 - 07, 2009 - 10 - 5 - INTEREST WAS PAI D ON ACCOUNT OF CAPITAL BORROWED TOWARDS THE ACQUISITION OF ASSET. BEING AGGRIEVED, AGAIN THE MATTER WAS CARRIED BEFORE THE FIRST APPELLATE AUTHORITY. 5. BEFORE LEARNED CIT(A) ALMOST IDENTICAL SUBMISSIONS WERE REITERATED AND AFTER CONSIDERING THOSE SUBMIS SIONS LEARNED CIT(A) HAS HELD THAT THE INTEREST WAS TO BE CAPITALIZED TILL THE ASSET WAS ACQUIRED AND PUT TO USE; HENCE, THE DISALLOWANCE OF INTEREST WAS RIGHTLY MADE BY THE AO. RELEVANT PARAGRAPH 3.3 IS REPRODUCED BELOW: 3.3 I HAVE CONSIDERED THE FACTS O F THE CASE; ASSESSMENT ORDER AND APPELLANT S WRITTEN SUBMISSION. IT IS NOT IN DISPUTE THAT APPELLANT BORROWED INTEREST BEARING FUNDS FOR ACQUISITION OF RUNNING UNIT FROM MAFATLAL INDUSTRIES LTD. THE SAID UNIT WAS NOT TRANSFERRED TO THE APPELLANT COMPANY TI LL THE END OF THIS YEAR AND AS SUCH APPELLANT HAS NOT BECOME OWNER OF THE SAID ASSET. THE ACQUIRED UNIT IS ALSO NOT INCLUDED IN THE BALANCE SHEET. APPELLANT PAID PART OF THE CONSIDERATION HOWEVER THE ENTIRE CONSIDERATION IS NOT PAID TILL THE END OF THIS YE AR. THEREFORE THE SALE OF UNIT IS NOT COMPLETE AND ACQUISITION OF THE UNIT IS ALSO NOT COMPLETE. I HAVE GONE THROUGH THE RELEVANT AGREEMENTS SUBMITTED BY THE APPELLANT AND AS PER THAT THE TRANSFER OR POSSESSION OF THE UNIT IS NOT GIVEN TO THE APPELLANT. AP PELLANT ONLY GOT THE RIGHT TO RUN THE UNIT IN THE NAME OF MAFATLAL INDUSTRIES LTD ON PAYMENT OF LICENCE FEE OF RS 45000 PER MONTH. THIS IS GETTING THE UNIT ON LEASE RATHER THAN ACQUIRING THE UNIT. SINCE APPELLANT DID NOT GET ANY RIGHT AVAILABLE ON ACQUISIT ION OF UNIT, IT CANNOT BE SAID THAT THE UNIT WAS ACQUIRED BY THE APPELLANT. RUNNING THE UNIT UNDER LICENSE AGREEMENT CANNOT BE EQUATED WITH TAKING POSSESSION OF THE UNIT ON ACQUISITION AND THEREFORE PAYMENT MADE FOR ACQUISITION HAS NOTHING TO DO WITH THE U SE OF UNIT UNDER LEASE. IT IS NOT IN DISPUTE THAT APPELLANT MADE THE PAYMENT FOR ACQUIRING THE RUNNING UNIT OF MIL. THE PAYMENT WAS MADE FROM INTEREST - BEARING BORROWED FUNDS. THE ASSET WAS IN PROCESS OF ACQUISITION UNTIL THEN THE INTEREST PAID ON BORROWED FUNDS USED FOR SUCH ACQUISITION CANNOT BE ALLOWED TILL THE ASSETS WERE USED BY THE APPELLANT AFTER ACQUISITION. IT IS NOT IN DISPUTE THAT ASSET IS NOT YE T ACQUIRED AND THEREFORE INTEREST ON SUCH BORROWED FUNDS USED FOR ACQUIRING ASSET FALLS WITHIN THE PRO VISO TO SECTION 36 (1) (HI) OF IT ACT. THE UNIT MIGHT BE RUNNING BUT THE SAME IS NOT ACQUIRED BY THE APPELLANT TILL THE SALE IS COMPLETE AND ASSET IS BROUGHT IN THE BOOKS. THE ADVANCE PAYMENT TO MIL IT IS STILL SHOWN AS ADVANCE AND NO ACQUISITION OF ASSET IS MADE TILL THE END OF THE ACCOUNTING YEAR THEREFORE INTEREST ON SUCH BORROWED FUNDS CANNOT BE ALLOWED BY VIRTUE OF THE SAID PROVISION. IT IS WRONG ON THE PART OF THE APPELLANT TO ARGUE THAT PROVISO DOES NOT APPLY IN THIS CASE SINCE ASSET IS ITA NOS.548/AHD/2011 & 1598, 1599/AHD/2012 ANNAPURNA POLYMERS PVT. LTD. VS. ACIT CIRCLE - 1, AHMEDABAD FOR A.YS. 2005 - 06, 2006 - 07, 2009 - 10 - 6 - ALREADY IN US E. THE ASSET IS IN USE BY WAY OF LICENCE AGREEMENT AND NOT BY WAY OF ACQUISITION OR APPELLANT'S OWNERSHIP. THE PAYMENT IS MADE FOR ACQUISITION OF ASSET WHICH IS NOT YET MATERIALISED AND THEREFORE USE OF ASSET BY WAY OF LICENSEE CANNOT BE TREATED AS ASSET P UT TO USE AFTER ACQUISITION. THE MOMENT THE ACQUISITION IS COMPLETE, APPELLANT WILL BE ENTITLED TO CLAIM INTEREST ON SUCH BORROWED FUNDS USED FOR ACQUISITION OF ASSET. TILL THEN THE PROVISO IS APPLICABLE AND APPELLANT IS NOT ENTITLED TO CLAIM INTEREST. THE DECISION OF HONOURABLE SUPREME COURT IN THE CASE OF CORE HEALTHCARE DOES NOT APPLY SINCE ASSESSMENT YEAR IS AFTER INSERTION OF PROVISO AND BY VIRTUE OF THIS, INTEREST HAS TO BE CAPITALIZED TILL THE ASSET IS ACQUIRED AND PUT TO USE. ACCORDINGLY I CONFIRM T HE DISALLOWANCE OF INTEREST MADE BY THE ASSESSING OFFICER. 6. FROM THE SIDE OF THE ASSESSEE, LEARNED AR, MR. S.N. SOPARKAR APPEA RED AND REFERRED THE AGREEMENTS WHICH WERE EXECUTED WITH MAFATLAL INDUSTRIES TO DEMONSTRATE THAT THE INTENTION OF THE ASSESSEE WAS TO ACQUIRE THE UNIT OF MAFATLAL INDUSTRIES LTD. THERE WAS A HUGE CONSIDERATION OF AROUND RS.3 CRORE TO BE PAID BY THE ASSESSEE TO MAFATLAL INDUSTRIES AND IN TURN MIL TO DISCHARGE THE LIABILITY . H E HAS INFORMED THAT THE SAID ACQUISITION BY THE ASSESSEE WAS AS PER THE TERMS PRONOUNCED BY BIFR FOR RE - CONSTRUCTION OF THE FINANCIAL AFFAIRS OF MIL. 6.1 THE NEXT PLANK OF ARGUMENT OF LEARNED AR WAS THAT THE AO HAS DECIDED THE ISSUE BEYOND THE DIRECTIONS OF THE ITAT TO DECIDE IN TERMS OF CORE HEALTH CARE (SUPR A) DECISION. THE ASSESSEE HAD PAID SUBSTANTIAL AMOUNT TO MIL AND ALSO TAKEN OVER THE POSSESSION IN JUNE, 2003. ACCORDING TO HIM, THE AO HAS NOT CORRECTLY APPRECIATED THE FACTS OF THE CASE. 7. A LEGAL ARGUMENT HAS BEEN RAISED BY LEARNED AR THAT THE TERM ACQUISITION IS NOT AT PAR WITH OWNERSHIP . H E HAS PLACED RELIANCE ON A DECISION OF CIT VS. BRIGHT AUTOMOTIVES AND PLASTIC LTD., 141 TAXMAN 582 (M.P.). IN THE SAID DECISION, HON BLE COURT HAS OPINED THAT THE ITA NOS.548/AHD/2011 & 1598, 1599/AHD/2012 ANNAPURNA POLYMERS PVT. LTD. VS. ACIT CIRCLE - 1, AHMEDABAD FOR A.YS. 2005 - 06, 2006 - 07, 2009 - 10 - 7 - EXPRESSION ACQUIRING IN SECTION HAS TO BE GIV EN A LIBERAL MEANING. ACCORDING TO HON BLE COURT IN ORDER TO ATTRACT THE RIGOUR OF SECTION 35AB IT MAY NOT BE NECESSARY FOR ASSESSEE TO ACTUALLY BECOME THE ABSOLUTE OWNER OF THE KNOW HOW. BUT IF ON PAYMENT AN ASSESSEE IS ABLE TO KNOW HOW TO RUN THE BUSINES S THEN THE REQUIREMENT OF SECTION 35AB STANDS SATISFY. LEARNED AR HAS THEREFORE ARGUED THAT EVEN AFTER SOME OF THE FORMALITIES WERE NOT COMPLETED FOR TRANSFER OF TITLE IN FAVOUR OF THE ASSESSEE DUE TO THE AGREEMENT ASSIGNED AND THE POSSESSION TAKEN OVER ; T HE ASSESSEE HAD ACQUIRED THE ASSET IN QUESTION FOR THE PURPOSE OF THE BUSINESS; HENCE, UNDER THE MAIN CLAUSE (III) OF SECTION 33 THE AMOUNT OF INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR THE PURPOSE OF BUSINESS SHOULD HAVE BEEN ALLOWED. 1. CIT VS. BR IGHT AUTOMOTIVES AND PLASTICS LTD., 273 ITR 59 (MP - INDORE BENCH) , 2. CIT VS. PODAR CEMENT PVT. LTD., 226 ITR 62 5 (SC) 3. MYSORE MINERALS LTD., 239 ITR 775 (SC) 8. FROM THE SIDE OF THE REVENUE, LEARNED SR. D . R . , MR. ROOP CHAND APPEARED. ALTHOUGH HE HAS MOVED A REQUEST FOR ADMISSION OF AN ADDITIONAL EVIDENCE BUT THAT EVIDENCE WAS NOTHING BUT THE ANNUAL REPORT OF MAFATLAL INDUSTRIES LTD. TO DEMONSTRATE THAT THE SAID COM PANY HAD AGREED TO SELL ITS CLOSED AHMEDABAD UNIT TO THE ASSESSEE ; I.E., ANNA PURNA POLY MERS PVT. LTD. (APPL). B UT THIS FACT BEING NOT CONTROVERTED THAT THE ASSESSEE INDEED WANTED TO ACQUIRE THE UNIT IN QUESTION, WE DO NOT CONSIDER IT NECESSARY TO DISCUSS AT LENGTH ABOUT THE QUESTION OF ADMISSION OF ADDITIONAL EVIDENCE. EVEN THE APPELLANT HAS NOT OBJECTED FOR THE SAME. IN ANY CASE, THE MAIN ARGUMENT OF LEARNED DR WAS THAT THE INTEREST WAS NOT TO BE CLAIMED AS REVENUE EXPENDITURE BUT AS PER LAW IT WAS REQUIRED TO BE C APITALIZED. HE HAS FURTHER ARGUED THAT THE INTEREST WAS PAID ON THE ITA NOS.548/AHD/2011 & 1598, 1599/AHD/2012 ANNAPURNA POLYMERS PVT. LTD. VS. ACIT CIRCLE - 1, AHMEDABAD FOR A.YS. 2005 - 06, 2006 - 07, 2009 - 10 - 8 - CAPITAL BO RROWED FOR ACQUISITION OF NEW UNIT; HENCE, IT WAS A CAPITAL EXPENDITURE UPTO THE DATE SUCH ASSET HAS BEEN PUT TO USE FOR BUSINESS PURPOSE. FOR THE PRIOR PERIOD THE INTEREST WAS REQUIRED TO BE C APITALIZED. HE HAS THEREFORE PLEADED THAT THE VIEW TAKEN BY THE REVENUE AUTHORITIES SHOULD BE AFFIRMED. 9. WE HAVE HEARD THE SUBMISSIONS OF BOTH THE SIDES AND CAREFULLY PERUSED THE ORDERS OF THE AUTHORITIES BELOW IN THE LIGHT OF COMPILATION FILED BEFORE US. WE HAVE CAREFULLY PERUSED THE CASE LAW CITED. A PROVISO HAS BEEN INSERTED IN SECTION 36(1)(III) W.E.F. 1.4.2004 FINANCE ACT 2003 WHICH READS AS UNDER: PROVIDED THAT NAY 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 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 DEDUCTIONS. 9.1 THE PURPOSE OF THE BORROWING HAS TO BE DETERMINED ON THE FACTS OF EACH CASE . T HEN THE USE OF THE CAPITAL BORROWED IS REQUIRED TO BE EXAMINED . F ROM A.Y. 2004 - 05 THE BORROWING IS SHOWN SPECIFICALLY FOR THE PURPOSE OF ACQUIRING A CAPITAL ASSET . SO, THE OUT COME OF THIS PROVISO IS THAT THE INTEREST WOULD NOT BE ADMISSIBLE FOR DEDUCTION TILL DATE THE NEW ASSET IS BROUGHT TO USE. AN OPTION IS AVAILABLE TO THE ASS SEE TO CAPITALIZED THE INTEREST AMOUNT . T HE EFFECT OF THE PROVISO TO SECTION 36(1)(III) INSERTED WITH THE FACT O F 2004 - 05 IS TO DISALLOW INTEREST O N MONEY BORROWED FOR ACQUIRING CAPITAL ASSET TILL THE DATE ON WHICH THE ASSET IS BROUGHT TO USE ; EVEN IF IT IS FOR EXPAN S ION OF EXISTING BUSINESS. AS PER OUR HUMBLE UNDERSTANDING, THE LAW HAD ALWAYS MADE A DIFFERENCE BETW EEN MONEY BORROWED FOR EXISTING BUSINESS, WHETHER IT IS FOR EXPANSION OR ITA NOS.548/AHD/2011 & 1598, 1599/AHD/2012 ANNAPURNA POLYMERS PVT. LTD. VS. ACIT CIRCLE - 1, AHMEDABAD FOR A.YS. 2005 - 06, 2006 - 07, 2009 - 10 - 9 - OTHERWISE, WITH THAT THE MONEY BORROWED FOR SETTING UP AN ALTOGETHER NEW BUSINESS. HOWEVER, NOW AS PER THIS INSERTION OF THE PROVISO THE REVENUE DEPARTMENT FELT THAT THE EXPANSION OF BUSINESS SHOULD BE PUT ON PAR WITH A NEW BUSINESS AND THAT INTEREST ON BORROWING FOR CAPITAL ASSET FOR THE PURPOSES OF EXPANSION SHOULD ALSO BE TREATED AS PART OF CAPITAL EXPENDITURE IN THE CASE OF HINDUSTAN ZINC LIMITED, 269 ITR 369, IT WAS HELD AS UNDER: (CAPTION REPRODUCED) THE PROVISO INSERTED TO CLAUSE (III) OF SUB - SECTION (1) OF SECTION 36 OF THE INCOME - TAX ACT, 1961, THAT THE INTEREST PAID ON THE BORROWINGS FOR EXPANSION OF BUSINESS SHOULD NOT BE ALLOWED UNLESS THE NEW ASSETS ARE PUT TO USE HAS BEEN MADE EFFECTIVE FROM APRIL 1, 2004. THE ASSESSEE CLAIMED DEDUCTION OF THE INTEREST ON THE AMOUNT BORROWED BY IT FOR EXPANSION OF ITS BUSINESS FOR THE ASSESSMENT YEAR 1991 - 92. THE PRAYER WAS REJECTED, HOLDING THAT AS THE ASSETS WERE NOT PUT IN USE, THE AMOU NT OF INTEREST COULD NOT BE ALLOWED AS REVENUE EXPENDITURE. THE TRIBUNAL ALLOWED THE CLAIM HOLDING THAT WHEN THERE IS EXPANSION OF BUSINESS, WHETHER THE A S SETS ARE PUT TO USE IS IRRELEVANT. ON APPEAL TO THE HIGH COURT: HELD, DISMISSING THE APPEAL THAT ONCE A LOAN HAS BEEN TAKEN FOR THE PURPOSE OF EXPANSION OF BUSINESS, THE INTEREST SO PAID IS ALLOWABLE UNDER SECTION 36(1)(III) OF THE ACT. SINCE THE PROVISO WAS INSERTED UNDER CLAUSE (III) OF SUB SECTION (1) OF SECTION 36 OF THE ACT ONLY WITH EFFECT FROM APRI L, 2004, THE ASSESSEE WAS ENTITLED TO THE DEDUCTION FOR THE ASSESSMENT YEAR 1991 - 92. 9.2 THE UNDISPUTED FACT IS THAT IN TERMS OF THE AGREEMENT S, WHICH ARE PLACED ON RECORD ; THE ASSESSEE APPL HAS AGREED TO PURCHASE THE SAID UNIT. THE AGREEMENT DATED 21 S T DAY OF MAY, 2003 HAS CLEARLY MENTIONED THAT MIL DESIRED TO TRANSFER AND APPL HAD DESIRED TO PURCHASE THE SAID UNIT WITH A CLEAR AND MARKETABLE TITLE. FROM THIS AGREEMENT, IT IS ALSO EVIDENT THAT MIL HAD ONLY PERMITTED APPL AS LICENSEE TO ENTER UPON THE S AID UNIT TILL THE COMPLETION OF SALE . W HICH MEANS THAT THE PROCESS OF TRANSFER OF THE PROPERTY WAS GOING ON AT THE TIME WHEN THOSE AGREEMENTS WERE SIGNED , T HE ASSESSEE WAS IN THE PROCESS OF ACQUIRING THE SAID UNIT S, ( AN ASSET ) DURING THE RELEVANT PERIOD. T HEREFORE, THE AO WAS OF THE VIEW THAT AN EXPENDITURE INCURRED , SUCH AS INTEREST EXPENDITURE , WAS REQUIRED TO ITA NOS.548/AHD/2011 & 1598, 1599/AHD/2012 ANNAPURNA POLYMERS PVT. LTD. VS. ACIT CIRCLE - 1, AHMEDABAD FOR A.YS. 2005 - 06, 2006 - 07, 2009 - 10 - 10 - BE CAPITALIZED FOR THE PERIOD DURING WHICH THE CAPITAL ASSET HAS NOT BEEN TRANSFERRED IN THE NAME OF THE ASSESSEE. A SERIOUS OPTION HAS BEEN RAISED BY THE AO THAT HAD THIS PROPERTY WAS OWNED BY THE ASSESSEE APPL , THEN IT SHOULD HAVE BEEN DI SCLOSED IN THE BALANCE SHEET UNDER THE SCHEDULE OF ASSETS, BUT IT WAS NOT SO. REASONS GIVEN BY THE AO FOR THE IMPUGNED DISALLOWANCE APPEARS TO BE SUSTAINABLE IN THE EYES OF LAW. 9.3 AS FAR AS THE DECISION OF CORE HEALTH CARE LTD. 298 ITR 194 (SC) IS CONCERNED THE ACTION OF THE AO FOR DISALLOWANCE OF INTEREST IN RESPECT OF BORROWINGS UTILIZED FOR PURPOSE OF ACQUIRING MACHINERY ACCORDING TO US WAS JUSTIFIABLE. ON CAREFUL PERUSAL OF THE SAID WE HAVE NOTED THAT THE HON BLE COURT HAS SPECIFICALLY OBSERVED THAT THE PROVISO INSERTED IN SECTION 36(I)(III) BY THE FINANCE ACT 2003 W.E.F. 1.04.2004, WILL OPERATE PROSPECTIVELY. THEREFORE THE LAW LAID DOWN IS SQUARELY APPLICA BLE FOR THE YEARS UNDER APPEAL. FEW OTHER DECISIONS ARE RELIED UPON BY LEARNED AR IN MYSORE MINERALS (SUPRA); BUT IN THAT CASE THE CORE ISSUE WAS ABOUT THE MEANING OF THE TERM OWNER FOR THE PURPOSE OF APPLICABILITY OF SECTION 32 OF THE ACT. ON THE OTHER HAND, WE HAVE TO SEE THE APPLICABILITY OF THE PROVISO ANNEXED TO SECTION 36(I)(II) THAT WHETHER INTEREST IS ALLOWABLE IN RESPECT OF MONEY BORROWED FOR ACQUISITION OF AN ASSET. THEN, THE APPELLANT HAS CITED THE CASE LAW OF BRIGHT AUTOMOBILES AND PLASTICS LTD. (SUPRA) TO EXPLAIN THE DEFINITION OF TERM ACQUIRING IS FOR THE PURPOSE OF SEC.35AB AND HELD THAT ASSESSEE NEED NOT BECOME ABSOLUTE OWNER OF KNOW - HOW. WE ARE OF THE VIEW THAT THERE IN POINT IN MIXING UP THE ISSUE WITH THE OTHER PROVISIONS OF IT ACT A ND TO BE STRICTLY DECIDED IN THE LIGHT OF THE LANGUAGE OF SECTION 36(I)(III) TO BE READ ALONGWITH THE PROVISO IN SERT ED BY THE STATU TE. EXACTLY THIS WAS OPINED BY THE HON BLE SUPREME ITA NOS.548/AHD/2011 & 1598, 1599/AHD/2012 ANNAPURNA POLYMERS PVT. LTD. VS. ACIT CIRCLE - 1, AHMEDABAD FOR A.YS. 2005 - 06, 2006 - 07, 2009 - 10 - 11 - COURT IN THE CASE OF CORE HEALTH CARE LTD. (SUPRA) THAT SECTION 36(I)(III) HAS TO BE READ ON ITS OWN TERMS BECAUSE IT IS A CODE BY ITSELF. THEREFORE; FINALLY WE HEREBY CONCLUDE THAT THE DISALLOWANCE WAS RIGHTLY MADE BY THE REVENUE DEPARTMENT IN ALL THE YEARS HENCE CONFIRMED. RESULTANTLY GROUNDS ARE DISMISSED. 10. FOR A.Y. 2006 - 07, THERE IS ONE MORE GROUND READS AS UNDER: 2. THE LD. CIT(A) HAS GROSSLY ERRED IN LAW AND ON FACTS IN CONFIRMING THE ACTION OF AO IN NOT ALLOWING SET OFF OF THE BROUGHT FORWARD BUSINESS LOSS OF RS.10,21,207/ - AGAINST THE INCOME OF THE YEAR UNDER CONSIDE RATION. BOTH THE LOWER AUTHORITIES FAILED TO APPRECIATE VARIOUS SUBMISSIONS, EXPLANATIONS AND INFORMATION SUBMITTED BY THE APPELLANT FROM TIME TO TIME THAT OUGHT TO HAVE BEEN CONSIDERED. 11. AT THE START ITSELF , LEARNED AR HAS STATED THAT THIS IS A CONSE QUENTIAL GROUND. WE HAVE NOTED THAT A FINDING WAS GIVEN BY LEARNED CIT(A) THAT AFTER SETTING OFF OF L OSS AGAINST THE INCOME FOR A.Y. 2005 - 06, THERE WAS NO BROUGHT FORWARD LOSS AVAILABLE TO THE ASSESSEE. HOWEVER, LEARNED CIT(A) HAS DIRECTED THAT THE SET OFF OF L OS S WAS CONSEQUENTIAL IN NATURE DEPENDING UPON THE OUTCOME OF THE APPEAL FOR A.Y.2005 - 06. WE FIND NO FALLACY IN THIS OBSERVATION OF LEARNED CIT(A); HENCE, THIS GROUND OF THE ASSESSEE HAS NO FORCE, THEREFORE, DISMISSED. 12. FOR A.Y. 2009 - 10, THE ASSES SEE HAS RAISED ONE MORE GROUND REPRODUCED BELOW: LD. CIT(A) ERRED IN LAW AND ON FACTS IN CONFIRMING DISALLOWANCE OF DEPRECIATION OF RS.3,82,492/ - ON CAR OWNED AND USED FOR THE BUSINESS OF THE APPELLANT BY AO ON IRRELEVANT GROUNDS. THE DEPRECIATION BEING C ORRECTLY CLAIMED IN ACCORDANCE WITH PROVISIONS OF SECTION 32 OF THE ACT OUGHT TO HAVE BEEN ALLOWED AS CLAIMED. ITA NOS.548/AHD/2011 & 1598, 1599/AHD/2012 ANNAPURNA POLYMERS PVT. LTD. VS. ACIT CIRCLE - 1, AHMEDABAD FOR A.YS. 2005 - 06, 2006 - 07, 2009 - 10 - 12 - 13. THE REASON FOR DISALLOWANCE OF DEPRECIATION WAS THAT THE DIRECTOR OF THE COMPANY HAD PURCHASED THE MOTOR CAR IN HIS NAME. THE BILL FOR THE PURCHASE OF THE CAR WAS ALSO IN THE NAME OF THE DIRECTOR. HENCE, IT WAS HELD THAT SINCE THE ASSESSEE COMPANY WAS NOT THE LEGAL OWNER OF THE MOTOR CAR, THEREFORE, CLAIM OF DEPRECIATION WAS NOT ALLOWABLE . LEARNED CIT(A) HAS CONFIRMED THE ACTION OF THE AO. NO W BEFORE US AN ORDER OF THE TRIBUNAL ITAT B BENCH AHMEDABAD PRONOUNCED IN THE CASE OF ITO VS. TYPHOON FINANCIAL SERVICES (ITA NO.1703/AHD/2009) A.Y. 2006 - 07 ORDER DATED 21 ST JANUARY, 2011 HAS BEEN CITED WHEREIN IT WAS HELD AS UNDER: 6. ON CONSIDERATION OF THE RIVAL SUBMISSIONS, WE FIND NO MERIT IN THESE GROUNDS OF THE REVENUE. THE LEARNED CIT(A) GAVE A SPECIFIC FINDING THAT THE MOTOR CAR WAS PURCHASED OUT OF THE FUNDS OF THE ASSESSEE - COMPANY AND WAS ALSO USED FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE - C OMPANY. MERELY BECAUSE THE REGISTRATION WAS IN THE NAME OF ONE OF THE DIRECTORS WOULD NOT DISALLOW THE CLAIM OF THE ASSESSEE. DECISION RELIED UPON BY THE LEARNED CIT(A) IN THE IMPUGNED ORDER SUPPORT THE FINDINGS OF THE LEARNED CIT(A). WE, THEREFORE, DO NOT FIND ANY MERIT IN THE GROUND NO.3 AND 4 OF THE ASSESSEE, THE SAME ARE ACCORDINGLY DISMISSED. 14. RESPECTFULLY FOLLOWING TH I S DECISION , WE HEREBY DIRECT TO ALLOW THE DEPRECIATION; HENCE, THIS GROUND IS ALLOWED. 15. IN THE RESULT, ASSESSEE S APPEAL FOR A.Y.2005 - 06 & A.Y.2006 - 07 ARE DISMISSED AND THE APPEAL FOR A.Y.2009 - 10 IS PARTLY ALLOWED. SD/ - SD/ - ( N.S. SAINI ) ( MUKUL KR. SHRAWAT ) ACCOUNTANT MEMBER JU DICIAL MEMBER AHMEDABAD; DATED 1 / 10 / 20 1 4 PRABHAT KR. KESARWANI , SR. P . S . / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. ITA NOS.548/AHD/2011 & 1598, 1599/AHD/2012 ANNAPURNA POLYMERS PVT. LTD. VS. ACIT CIRCLE - 1, AHMEDABAD FOR A.YS. 2005 - 06, 2006 - 07, 2009 - 10 - 13 - 3. / CONCERNED CIT 4. ( ) / THE CIT(A) - III, AHMEDABAD 5. , , / DR, ITAT, AHMEDABAD 6. / GUARD FILE . / BY ORDER, / ( DY./ASSTT.REGISTRAR) , / ITAT, AHMEDABAD