SPC Life Sciences Private Limited, Vadodara V. DCIT Circle 2(1) (1), Vadodara

ITA 203/AHD/2018

• Counselvise Citation: [2019] 112 COUNSELVISE.COM (IT) 2145 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 9 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-11-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2014-2015
• Appeal Filed On: 24-01-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: VIKRAM S SHARMA
• Keywords: Capital asset; Business expenditure; Set aside

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD B BENCH (BEFORE SHRI PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER & SHRI MAHAVIR PRASAD, JUDICIAL MEMBER) ITA. NO: 203/AHD/2018 (ASSESSMENT YEAR: 2014-15) SPC LIFE SCIENCES PRIVATE LIMITED 284/1,2,3 G.I.D.C. ESTATE, MAKARPURA 390010 V/S DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-2(1)(1), VADODARA (APPELLANT) (RESPONDENT) PAN: AAJCS 0610G APPELLANT BY : SHRI SURENDRA MODIANI, AR RESPONDENT BY : SHRI VIKRAM S. SHARMA, JCIT, ( )/ ORDER DATE OF HEARING : 26 -08-201 9 DATE OF PRONOUNCEMENT : 22 -11-2019 PER MAHAVIR PRASAD, JUDICIAL MEMBER 1. THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST THE ORDER OF THE LD. CIT(A)-2, VADODARA DATED 11.12.2017 PERTAINING TO A .Y. 2014-15 AND FOLLOWING GROUNDS HAVE BEEN TAKEN: ITA NO. 203/ AHD/2018 . A.Y. 2014-1 5 2 1. THE ORDER OF THE LEARNED COMMISSIONER (APPEALS) IS AGAINST LAW AND FACTS. 2. THE LEARNED COMMISSIONER (APPEALS) ERRED IN CON FIRMING DISALLOWANCE OF INTEREST TO THE EXTENT OF RS.810007- ON ACCOUNT OF INTEREST FREE LOANS TO RELATED PARTIES. YOUR APPELLANT SUBMITS THAT THE DISALLOWANCE IS NOT JUSTIFIED AND PRAYS THAT THE SAME BE DELETED. 3. THE LEARNED COMMISSIONER (APPEALS) ERRED IN CON FIRMING DISALLOWANCE OF RENT TO THE EXTENT OF RS.1788024/- UNDER SECTION 40A(2) OF THE INCOME-TAX ACT, 1961, CONSIDERING IT AS EXCESSIVE. YOUR APPELLANT SUBMITS THAT THE DISALLOWANCE IS NOT JUSTIFIED AND PRAYS THAT THE SAME BE DELETED. 4. THE LEARNED COMMISSIONER (APPEALS) ERRED IN CON FIRMING DISALLOWANCE OF SALES PROMOTION EXPENSES TO THE EXTENT OF RS.316534/-. YOUR APPELLANT SUBMITS THAT THE DISALLOWANCE IS NOT JUSTIFIED AND PRAYS THAT THE SAME BE DELETED. 2. THE FACTS OF THE CASE ARE THAT ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF PHARMACEUTICAL BULK DRUGS. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE COMPANY DECLARED NET PR OFIT OF RS. 1.26 CRORES ON TURNOVER OF RS. 40.85 CRORES AS AGAINST THE NET PRO FIT OF RS. 2.56 LAKHS ON TURNOVER OF RS. 32.33 CRORES IN THE LAST YEAR. 3. DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSEE WAS ASKED TO FURNISH THE DETAILS OF INTEREST EXPENDITURE, IT IS NOTICED ASSE SSEE HAS INCURRED INTEREST EXPENDITURE OF RS. 25,34,212.57/-. 4. IN RESPONSE TO THE QUERY, ASSESSEE STATED THAT IT H AS TAKEN TERM LOAN FROM THE BANK WHICH WAS SANCTIONED FOR CONSTRUCTION OF WAREH OUSE/ADMINISTRATION BUILDING AND IT HAS PAID INTEREST ON LOAN. BUT LD. A.O. DID NOT ALLOW INTEREST EXPENDITURE ON THE GROUND THAT WAREHOUSE AND ADMINI STRATION BUILDING WAS NOT PUT TO USE DURING THE YEAR UNDER CONSIDERATION, INTEREST RELATABLE TO THE ITA NO. 203/ AHD/2018 . A.Y. 2014-1 5 3 ASSESSEE SHOULD HAVE CAPITALIZED THE INTEREST PAID ON THE SAID TERM LOAN. SINCE ASSESSEE HAS FAILED TO DO SO THEN LD. A.O. MADE ADD ITION OF RS. 25,34,213/-. 5. AGAINST THE SAID ORDER, ASSESSEE PREFERRED FIRST ST ATUTORY APPEAL BEFORE THE LD. CIT(A) WHO PARTLY ALLOWED THE APPEAL OF THE ASSESSE E AND CONFIRMED INTEREST TO THE EXTENT OF RS. 81,000/-. 6. BEFORE US, LD. A.R. CITED AN ORDER OF CO-ORDINATE B ENCH WHEREIN IT IS STATED THAT MATTER HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE W ITH REGARD TO INTEREST AND RELEVANT PORTION OF THE ITAT ORDER IS REPRODUCED: 8. THE 1ST ISSUE RAISED BY THE ASSESSEE IS THAT THE LEARNED CIT (A) ERRED IN CONFIRMING THE DISALLOWANCE OF INTEREST EXPENSES AM OUNTING TO RS. 23,38,126 .00 ONLY BY TREATING THE SAME AS CAPITAL IN NATURE. 9. THE ASSESSEE IN THE YEAR UNDER CONSIDERATION HAS INCURRED INTEREST EXPENSES OF RS. 23,38,126.00 ON THE TERM LOAN WHICH WAS UTIL IZED IN THE CONSTRUCTION OF WAREHOUSE AND ADMINISTRATIVE BUILDING. THE ASSESSEE HAS SHOWN THE COST INCURRED ON THE CONSTRUCTION OF WAREHOUSE AND ADMIN ISTRATIVE BUILDING AS CAPITAL WORKING PROGRESS IN ITS BALANCE SHEET AS ON 31 MARC H 2013. THUS THE ASSESSEE DID NOT CLAIM THE APPRECIATION ON SUCH WORK IN PROGRESS ON THE RATIONALE THAT THE SAME WAS NOT PUT TO USE IN THE YEAR UNDER CONSIDERA TION. HOWEVER, THE AO SOUGHT CLARIFICATION FROM THE ASSES SEE FOR NOT CAPITALIZING THE INTEREST EXPENSES ON THE LOAN UTILIZED IN THE CONST RUCTION OF IMPUGNED WORK-IN- PROGRESS. THE ASSESSEE JUSTIFIED ITS STAND BY SUBMITTING THAT THE IMPUGNED BUILDINGS WERE READY TO USE IN THE CURRENT FINANCIAL YEAR AND AT T HE SAME TIME, IT HAS STARTED THE REPAYMENT OF THE LOAN IN THE YEAR UNDER CONSIDERATI ON. HOWEVER, THE AO WAS NOT SATISFIED WITH THE CONTENTI ON OF THE ASSESSEE BY OBSERVING THAT - I. THE IMPUGNED ASSETS HAVE NOT BEEN PUT TO USE DUR ING THE YEAR. ITA NO. 203/ AHD/2018 . A.Y. 2014-1 5 4 II. THERE WAS ALSO NO EVIDENCE SUGGESTING THAT THE CONSTRUCTION OF THE IMPUGNED PROPERTY WAS COMPLETED DURING THE YEAR. IN VIEW OF THE ABOVE, THE AO DISREGARDED THE CONTEN TION OF THE ASSESSEE AND ACCORDINGLY TREATED THE AMOUNT OF INTEREST AS CAPIT AL IN NATURE. THUS, THE AO ADDED THE AMOUNT OF INTEREST TO THE TOTAL INCOME OF THE ASSESSEE. THE AGGRIEVED ASSESSEE PREFERRED AN APPEAL TO THE L EARNED CIT (A). THE ASSESSEE BEFORE THE LEARNED CIT (A) SUBMITTED T HAT THE CONSTRUCTION OF THE WAREHOUSE AND THE ADMINISTRATIVE BUILDING DOES NOT REPRESENT THE EXTENSION OF THE BUSINESS. THEREFORE THE INTEREST EXPENSES NEED NOT BE CAPITALIZED IRRESPECTIVE OF THE FACT THAT THE IMPUGNED ASSETS WERE NOT PUT T O USE DURING THE YEAR. HOWEVER, THE LEARNED CIT (A) CONFIRMED THE ORDER OF THE AO BY OBSERVING THAT THE CONSTRUCTION OF A WAREHOUSE AND ADMINISTRATIVE BUIL DING DOES NOT REPRESENT THE ROUTINE ASSETS. THEREFORE THE SAME SHOULD BE CONSID ERED AS AN EXTENSION FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE. BEING AGGRIEVED BY THE ORDER OF THE LEARNED CIT (A) THE ASSESSEE IS IN APPEAL BEFORE US. 10. THE LEARNED AR BEFORE US FILED A PAPER BOOK RUNNING FROM PAGES 1 TO 11 OF THE PAPER BOOK AND REITERATED THE SUBMISSION AS MAD E BEFORE THE LEARNED CIT (A). 11. ON THE OTHER HAND, THE LEARNED DR VEHEMENT LY SUPPORTED THE ORDER OF THE AUTHORITIES BELOW. 12. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE PARTIES AND PERUSED THE MATERIALS AVAILABLE ON RECORD. THE FACTS RELATING T O THE ISSUE ARE NOT IN DISPUTE, AND THE SAME HAS ALREADY BEEN EXPLAINED IN THE PREC EDING PARAGRAPH. THEREFORE, WE ARE NOT INCLINED TO REPEAT THE SAME FOR THE SAKE OF BREVITY AND CONVENIENCE. AT THIS JUNCTURE, WE FIND IT IMPORTANT TO REFER THE PROVISIONS OF SECTION 36 (1)(III) OF THE ACT AS APPLICABLE IN THE YEAR UNDER CONSIDERATI ON, WHICH READS AS UNDER: (III) THE AMOUNT OF THE INTEREST 38 PAID IN RESPEC T OF CAPITAL 38 BORROWED 38 FOR THE PURPOSES OF THE BUSINESS 38 OR PROFESSION : 39[PROVIDED THAT ANY AMOUNT OF THE INTEREST PAID, I N RESPECT OF CAPITAL BORROWED FOR ACQUISITION OF AN ASSET FOR EXTENSION OF EXISTI NG BUSINESS OR PROFESSION (WHETHER CAPITALISED IN THE BOOKS OF ACCOUNT OR NOT ); FOR ANY PERIOD BEGINNING ITA NO. 203/ AHD/2018 . A.Y. 2014-1 5 5 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 PERUSAL OF THE ABOVE PROVISION REVEALS THAT THE A MOUNT OF INTEREST ON THE BORROWED FUND USED FOR THE ACQUISITION OF AN ASSET FOR THE EXTENSION OF THE EXISTING BUSINESS NEEDS TO BE CAPITALIZED. THUS IT IS CLEAR THAT ANY EXPENDITURE BY WAY OF INTEREST ON THE BORROWED FUND UTILIZED FOR T HE ACQUISITION OF CAPITAL ASSETS NEEDS NOT TO BE CAPITALIZED MERELY ON THE BASIS THA T SUCH CAPITAL ASSETS WERE NOT PUT TO USE IN THE RELEVANT YEAR. BUT IF THE ACQUISI TION OF ASSETS RELATES TO THE EXTENSION OF THE BUSINESS THEN THE INTEREST EXPENSE S ON THE BORROWED FUND USED FOR THE ACQUISITION OF SUCH ASSETS NEED TO BE CAPIT ALIZED TILL SUCH ASSETS IS PUT TO USE. IN THE CASE ON HAND, IT IS AN UNDISPUTED FACT THAT THE ASSET WAS NOT PUT TO USE IN THE YEAR UNDER CONSIDERATION. THUS THE ISSUE ARISES WHETHER SUCH ASSETS WERE ACQUIRED FOR THE EXTENSION OF THE BUSINESS OR NOT. IF YES, THEN THE INTEREST NEEDS TO BE CAPITALIZED. HOWEVER, THE GRIEVANCE OF THE ASSES SEE BEFORE US IS THAT THERE IS NO EXTENSION IN THE BUSINESS. AS SUCH, THE IMPUGNED BUILDINGS BEING A WAREHOUSE AND THE ADMINISTRATIVE BUILDING WERE CONSTRUCTED FO R EFFECTIVE MANAGEMENT OF THE BUSINESS WHICH CANNOT BE TERMED AS AN EXTENSION OF THE BUSINESS. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACT URING OF PHARMACEUTICAL BULK DRUGS, AND IN OUR HUMBLE UNDERSTANDING, THERE WILL NOT BE ANY INCREASE IN THE CAPACITY OF THE PRODUCTION OF THE ASSESSEE AFTER TH E CONSTRUCTION OF THE WAREHOUSE AND THE ADMINISTRATIVE BUILDING. THEREFOR E, IN OUR CONSIDERED VIEW THE CONSTRUCTION OF THE IMPUGNED BUILDINGS CANNOT BE TR EATED AS AN EXTENSION OF THE BUSINESS AS ENVISAGED UNDER THE PROVISO TO SECTION 36(1)(III) OF THE ACT AS IT STOOD DURING THE RELEVANT PERIOD UNDER CONSIDERATION. ACC ORDINGLY, WE ARE NOT CONVINCED WITH THE FINDING OF THE LEARNED CIT (A). ACCORDINGLY, WE SET ASIDE THE ORDER OF THE LEARNED CIT (A) AND DIRECT THE AO TO D ELETE THE ADDITION MADE BY HIM. HENCE THE GROUND OF APPEAL OF THE ASSESSEE IS ALLOW ED. 7. IN PARITY WITH THE CO-ORDINATE BENCH ORDER IN ASSES SEES OWN CASE IN PRECEDING YEAR, WE ALLOW THIS GROUND OF THE APPEAL OF THE ASS ESSEE. ITA NO. 203/ AHD/2018 . A.Y. 2014-1 5 6 8. NOW WE COME TO GROUND RELATING TO DISALLOWANCE OF R ENT TO THE EXTENT OF RS. 79,44,024/- U/S. 40A(2). 9. IT WAS NOTICED FROM THE PROFIT AND LOSS ACCOUNT THA T THE ASSESSEE HAS DEBITED EXPENSES OF RS. 79,44,024/- AS OFFICE RENT. IN REPL Y TO THE NOTICE, ASSESSEE STATED THAT PROPERTY HAS TAKEN ON LEASE FOR ITS MANUFACTU RING ACTIVITY FROMAUGUST, 2013 AND RENT WAS PAID @ 6 LAC PER ANNUM AND RENTED PROPERTY BELONG TO ONE OF THE DIRECTOR. THEREAFTER A NOTICE WAS ISSUED TO THE ASSESSEE TO FURNISH THE DETAILS OF PAYMENT MADE TO PERSONS SPECIFIED U/S. 4 0A(2)(B) OF THE ACT IN THE CONTEXT OF SERVICES RENDERED, ADEQUACY AND JUSTIFIC ATION FOR THE PAYMENT SO MADE IN COMPARISON TO IDENTICAL PAYMENTS MADE TO OU TSIDE PARTY OR PERSON. 10. IN REPLY, ASSESSEE STATED THAT WHOLE OPERATION OF T HE COMPANY IS DONE FROM FACTORY INTEREST INITIALLY THE COMPANY WAS REGISTER ED OFFICE AT TORAN COMPLEX, O.P. ROAD, VADODARA. THEREAFTER OFFICE WAS SHIFTED TO GIDC, MAKARPURA, VADODARA IN 2008. 11. BUT ASSESSEE COULD NOT SUBMIT IN COMPARABLE NEARBY PROPERTY AND THEREAFTER LD. A.O. DISALLOWED THE CLAIM OF THE ASSESSEE. 12. IN APPEAL, LD. CIT(A) CONFIRMED THE ACTION OF THE L D. A.O. 13. WE HAVE GONE THROUGH THE RELEVANT RECORD AND IMPUGN ED ORDER. AS ASSESSEE DID NOT FILE ANY DETAIL OR ANY COMPARABLES OF NEARB Y PROPERTY THAT WHY SO MUCH WAS PAID TO RELATED PERSONS EVEN BEFORE US, ASSESSE E DID NOT FILE ANY DETAILS. ITA NO. 203/ AHD/2018 . A.Y. 2014-1 5 7 14. IN THE ABSENCE OF ANY EXPLANATION OR DETAIL, WE CON FIRM THE ACTION OF THE LOWER AUTHORITIES. THUS, THIS GROUND OF APPEAL OF THE ASS ESSEE IS DISMISSED. 15. NOW WE COME NEXT GROUND RELATING TO SALES PROMOTION EXPENSES OF RS. 3,16,534/-. 16. ASSESSEE CLAIMED TO HAVE DISTRIBUTED GOLD COINS IN ORDER TO FETCH SALES PROMOTION AND ASSESSEE CONTENTION WAS THAT LOOKING TO THE TURNOVER, THE BUSINESS EXPENDITURE WAS VERY SMALL. 17. BUT LD. A.O. AND LD. CIT(A) WERE NOT CONVINCED WITH THE PLEA OF THE ASSESSEE AND DISALLOWED THE SALES PROMOTION EXPENSES OF RS. 3,16,534/-. 18. WE HAVE GONE THROUGH THE RELEVANT RECORD AND IMPUGN ED ORDER AND HEARD BOTH THE PARTIES, ASSESSEE HAS PURCHASED GOLD COINS ON 0 2.11.2012 BY TWO DIFFERENT INVOICES FOR RS. 1,61,812/- AND RS. 1,63,845/-. BU T ASSESSEE COULD NOT PROVIDE THE DETAILS TO WHOM GOLD COINS WERE GIVEN ON ACCOUN T OF BUSINESS PROMOTION. 19. APPELLANT HAS FAILED TO PROVIDE ANY DETAILS. THEREF ORE, IN THE ABSENCE OF THE ANY SUPPORTIVE DOCUMENTS, WE DISMISS THIS GROUND OF THE APPEAL OF THE ASSESSEE. 20. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS PART LY ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON 22 - 11- 2019 SD/- SD/- (PRADIP KUMAR KEDIA) (MAHAVIR PRASAD) ACCOUNTANT MEMBER TRUE COPY JUDICIAL MEMBER AHMEDABAD: DATED 22/11/2019 ITA NO. 203/ AHD/2018 . A.Y. 2014-1 5 8 RAJESH COPY OF THE ORDER FORWARDED TO: - 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT (APPEALS) 4. THE CIT CONCERNED. 5. THE DR., ITAT, AHMEDABAD. 6. GUARD FILE. BY ORDER DEPUTY/ASSTT.REGISTRAR ITAT,AHME DABAD