Varia Engineering Works Pvt. Ltd., Ahmedabad V. The Dy.CIT, Circle-8, Ahmedabad

ITA 2696/AHD/2013

AI Insights

The case involves Varia Engineering Works Pvt. Ltd., which appealed against the order of the Commissioner of Income Tax (Appeals)-IV, Ahmedabad, which itself arose from an order passed by the DCIT(OSD), Circle-8, Ahmedabad. The primary issues in the appeal were the disallowance of consultancy charges, interest expenses, and certain traveling expenses claimed by the appellant for the Assessment Year 2010-11. The Tribunal heard the appeal ex parte due to the absence of representation from the appellant and upheld the decisions of the lower authorities on all grounds contested.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 124717 (ITAT-AHMEDABAD)
• Duration Of Justice: 9 year(s) 6 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-06-2023
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 05-06-2023
• Assessment Year: 2010-2011
• Appeal Filed On: 17-11-2013
• Other Referred Cases: CIT vs. Hindustan Conductors (P) Ltd., CIT v. Navsari Cotton & Silk Mills Ltd., Rambahadur Thakur Ltd. v. CIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Capital asset; Depreciation; Cost of acquisition; Revenue expenditure; Capital expenditure
• Section: 37; 143(3); 37(1); 43; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH, AHMEDABAD BEFORE SMT.ANNAPURNA GUPTA, ACCOUNTANT MEMBER & Ms. MADHUMITA ROY, JUDICIAL MEMBER आयकर अपील सं./ I. T. A. No . 2 696/Ahd/20 13 ( नधा रण वष / A ss es sment Year : 2010-11) V a ria E n gi ne e r i ng W o rk s Pvt . L t d. Ph a s e - I V, G .I . D . C ., V a tv a , A h me da ba d बनाम/ Vs . D. C .I . T . C ir c l e- 8, A h m e da b ad थायी लेखा सं./जीआइआर सं./P A N / G I R N o . : A A B C V 0 3 9 6 G (अपीलाथ /Appellant) . . ( यथ / Respondent) अपीलाथ ओर से /Appellant by : None यथ क ओर से/Respondent by : Shri Mukesh Jain, Sr. D.R. स ु नवाई क तार ख / D a t e o f H e a r i ng 06/06/2023 घोषणा क तार ख /D a t e o f P ro n o u nc e me n t 09/06/2023 O R D E R PER Ms. MADHUMITA ROY - JM: The instant appeal filed by the assessee is directed against the order dated 27.09.2013 passed by the Commissioner of Income Tax (Appeals)-IV, Ahmedabad (in short ‘the CIT(A)’), arising out of the order dated 25.02.2013 passed by the DCIT(OSD), Circle-8, Ahmedabad under section 143(3) of the Income Tax Act, 1961 (hereinafter referred as to ‘the Act’) for Assessment Year 2010-11 with the following grounds: ITA No. 2696/Ahd/2013 (Varia Engineering Works Pvt. Ltd. vs. DCIT) A.Y.– 2010-11 - 2 - “1 The Ld. CIT(appeals) has erred in law and on facts in upholding the disallowance out of consultancy charges of Rs.20,76,342/- as capital expenditure relatable to capital work in progress and not allowable u/s.37(1)of the Act. 2 He has erred in law and on facts in upholding the disallowance of interest of Rs.44,89,423/- as pertaining to capital work in progress without properly appreciating the facts of the appellant. 3 He has erred in law and on facts in upholding disallowance of Rs.2,14,419/- out of travelling expenses.“ 2. At the time of hearing of the instant appeal, none appeared on behalf of the assessee. It has been pointed out by the Ld. DR that Official Liquidator has been appointed in this matter and notices upon the Official Liquidator were also issued on different occasions through DR. The same is also reflecting from the note sheet prepared in the file. However, as none appeared on behalf of the assesse today, neither adjournment has been sought for, we are deciding the appeal ex parte. 3. First ground relates to disallowance of consultancy charges of Rs.20,76,342/- as capital expenditure relatable to capital work in progress, not allowable under Section 37(1) of the Act. 4. In reply to the show cause issued to the assessee on 17.01.2013 in respect to the claim of consultancy charges, the assessee has submitted as follows: “In connection with the proportionate Consultancy charges to be capitalized we have to respectfully submit that these are correctly debited to Profit & Loss Account as Revenue expenditure and correctly claimed as Revenue expenditure u/s. 36(1)(iii). Please note that renewal of our old CC limit, Letter of Credit and Term Loan Credit were enhanced. These enhanced limit was for the existing business and continuity of the business as the company had lot of outstanding and there were credit consists. This interest or consultancy expenditure is not for any extension of the business or for a new business, but exclusively for the continuation of existing business only. In view of this, there is no ground of ITA No. 2696/Ahd/2013 (Varia Engineering Works Pvt. Ltd. vs. DCIT) A.Y.– 2010-11 - 3 - disallowance of any consultancy/interest expenditure proportionately and request you not to make any addition on this ground.” 5. As the part of consultancy charges has been paid in connection with term loan for purchase of fixed assets, according to the Ld. AO, such expenditure needs to be capitalized. As per the working of disallowance made by the assessee of Rs.20,76,342/- was, therefore, disallowed and added back to the total income of the assessee holding it capital in nature, which was, in turn, confirmed by the First Appellate Authority with the following observation: “(d).2 The appellant reiterated the explanation and contended that AO has not appreciated the facts, explanation and evidences properly. The payments made for consultancy expenses are for advisory services in the matter of financial consultancy for credit facilities and therefore the same is wholly and exclusively for the purpose of business and allowable both u/s.36(1)(iii) of the Act being part of expenses for borrowed capital as well as u/s.37 of the Act. (d).3 As per ledger a/c. of consultancy expenses for 01.04.2009 to 31.03.2010 (Page 51) an expenditure of Rs. 37,42,884 was debited in P&L account. Further consultancy charges for 01.04.2009 to 31.03.2010 (Page 52-53) a further Rs. 12,000 were incurred and debited in P&L account. It is therefore in total Rs. 37,54,884 debited in P&L account. Out of it, excluding charges for 'ISO 9001-2008 certificate', 'labour law' and excise matter, the amount for consultancy of loan syndication, credit facility and short term loan is of Rs.37,00,000 (9,50,000 + 25,00,000 + 2,50,000). The appellant submitted the details about various payments made from the term loan a/c, from C.C.A/c. and work in progress of Rs. 26,65,59,505 (Page 55 to 56 of paper book). (d).4 As far as claim of deduction u/s.36(1)(iii) of the Act is concerned, I am not inclined with the contention of appellant that consultancy charges paid for increase/enhancing the credit limit term loan etc. are in the nature of interest. Section 36(1)(iii) of the Act is specific provision for allowability of only interest on borrowed capital for the purpose of business and not for any other kind of expenses. Hon'ble Bombay High Court in the case of CIT vs. Hindustan Conductors (P)Ltd. (2000) 108 Taxman 258 held that – Any and every payment in the garb of interest in excess of what can really be termed as 'interest' cannot be allowed as deduction under the section 36(l)(iii) of the Act." These charges / payments are not finance charges and appellant had already taken into account the processing charges for both Bank of India as well as State Bank of India in the capital work in progress. It is therefore, the allowability of these consultancy charges has to be examined only u/s.37(1) of the Act. (d).5 I am not inclined with the AO that without assigning any sustainable reason he treated these expenditure as capital because a part of this expenditure is relatable to acquisition of loan from bank for capital assets purchases as reflected by the appellant in ITA No. 2696/Ahd/2013 (Varia Engineering Works Pvt. Ltd. vs. DCIT) A.Y.– 2010-11 - 4 - work-in-progress. As per explanation 8 to section 43 of the Act, it is only the interest component along with cost of asset which is required to be added or capitalized for working put cost of acquisition before the capital asset put to use. On the other hand as per details filed by appellant, none of such expenditure was capitalized by appellant. Considering the nature of expenditure i.e. consultancy subjected to service tax and IDS provisions, the same is revenue in character i.e. the expenditure is not to bring into any asset of enduring nature but the controversy is related to proportion out of such expenditure relatable to 'work in progress' for acquisition and establishment of unit giving enduring benefit and before the same put to use, any expenditure relatable to such expenses required to be capitalized. Considering the Hon'ble Gujarat High Court judgement in the case of CIT v. Navsari Cotton & Silk Mills Ltd. (1982) 135 ITR 546 detailing various positive and negative tests and Full Bench judgement of Hon'ble Kerala High Court in the case of Rambahadur Thakur Ltd. v. CIT (2003) 1 KLT 687, it is beyond doubt that a part of such expenditure (as evidenced by details of work in progress as well as payment made from term loan a/c. and cc a/c) is for the loans from where substantial payment were made in respect of 'capital work in progress' and not for existing business or continuing the business hence such part is excludable as capital expenditure and not allowable u/s.37(1) of the Act. That part of expenditure is not for commercial expediency for facilitating the carrying on the business. It is therefore, such part expenses out of consultancy charges are though not capital expenditure but the same are related to /incidental to acquisition of plant/machinery for 'capital work in progress' and therefore not allowable u/s.37(1) of the Act. Now in reference to quantum of disallowances, on being asked, the appellant himself submitted the working of disallowances of Rs. 20,76,342/- (No such details were filed before me in appeal) and therefore the dispute of quantum of disallowance is not justified if there and agitated. In fact, submission of such details / working itself substantiate that appellant is in agreement with A.O. that out of total consultancy charges of Rs.37,54,884/-, an expenditure of Rs. 2076,342/- are relatable to 'capital work in progress' and not allowable u/s 37(1) of the Act. It is therefore the disallowance and addition so made by A.O. are upheld and this ground is dismissed. 6. It further appears that the part of expenditure is for the loan from where substantial payments were made in respect of capital work in progress and not for existing business or continuing the business. The same has been found to be excludable as capital expenditure and not allowable under Section 37(1) of the Act. The same is, therefore, though not capital expenditure but related to incidental to acquisition of plant/machinery for capital work in progress. The appellant himself worked out such disallowance of Rs.20,76,342/- relatable to capital work in progress and therefore finally found not allowable under Section 37 of the Act by the Ld. CIT(A), which according to us is just and proper and without any ambiguity, particularly, in the absence of any ITA No. 2696/Ahd/2013 (Varia Engineering Works Pvt. Ltd. vs. DCIT) A.Y.– 2010-11 - 5 - assistance rendered by the assessee before us. The same is, therefore, upheld. This ground of appeal, thus, fails. 7. Second ground relates to the disallowance of interest of Rs.44,89,423/-, which is the subject matter before us. The Ld. AO disallowed the interest of Rs.63,37,826/- on the ground that the same is relatable to ‘capital work in progress’. The appellant, on the other hand, requested for direction for capitalization and allowability and depreciation thereon. It was further pointed out by the assessee that there is no direct nexus between funds utilized for the capital work in progress and availability of sufficient interest free funds, however, the same were not found to be acceptable in the absence of funds flow submitted by the assessee. 8. During the course of appellate proceeding, the assessee submitted as follows: (e).3 The appellant during appeal contended that A.O. has not appreciated the explanation and evidences submitted in this regard. The appellant reiterated the contention of mixed bag of transaction in C.C. a/c. It is also contended that appellant already disallowed (capitalized) following expenditure: (i) Interest to Bank 7,87,883/- (ii) Processing Charges for BOI 9,00,000/- (iii) Processing charges for SBI 27,54,000/- 44,41,883/- It is also contended that in working out disallowance of Rs. 63,37,826/-, a major part of Rs. 62,48,448/- is relatable to an amount of Rs. 5,20,70,400/-and the same is related to opening debit balance of M/s Rim Jhim Ispath Ltd. of Rs. 4.95 crore and during previous year only Rs. 50 lac was made on 08/05/09 and amount of Rs. 41.5 lac was received on 30/11/09. Similarly further payment of Rs. 60 lac was made on 28/03/10. The A.O. worked out interest on Rs. 5,20,70,400/- for whole year though no such payment was made during previous year. ITA No. 2696/Ahd/2013 (Varia Engineering Works Pvt. Ltd. vs. DCIT) A.Y.– 2010-11 - 6 - 9. However, finally, the Ld. CIT(A) worked out Rs.44,00,045/- as extended by the appellant towards capital work in progress and working of interest thereon and the same amount, therefore, has been confirmed by the Ld. CIT(A). The reason given by the Ld. CIT(A) as narrated hereinabove seems to be justified in the absence of any assistance rendered by the assessee before us. The same is, therefore, upheld. 10. Third ground relates to the disallowance of Rs.2,14,419/- on account of travelling expenses, which is a subject matter before us. 11. During assessment proceeding, the purpose of travelling was not submitted by the appellant, the details of such travels or the tour since not submitted, the foreign travel expenses of Rs.6,74,542/- was disallowed by the Ld. AO. 12. Before the First Appellate Authority, the details thereof was duly submitted, particularly, bills for ticket booking, forex purchases etc. Upon verification of the same, the Ld. CIT(A) restricted such disallowance to the amount of Rs.2,14,419/- with the following observations: “The appellant submitted details in the form of bills for ticket booking, forex purchase etc. From the verification of such bill / vouchers, it has been gathered that (i) Shri Bhawan Bharwad and Shri Himanshu Varia travelled through Thai Airways with return ticket from Mumbai to Bangkok and back on 29/12/09 to 01/01/2010. The bill dt. 28/12/09 from M/s Royal orient Tours & Travels, Ahmedabad for Rs. 24697/- each i.e. total Rs. 49394 (page 87-88 of P.B.) and related forex expenditure Rs. 1,42,075/- as evident by bill dt. 29/12/09 from M/s Weizmann (page 92 of P.B.) is not related to business but for a pleasure trip. The appellant failed to submit the purpose, of such visit with evidences. (ii) In respect of Shri Gujjar Umang visit to Syria on 22/03/10 for business purpose, no detail regarding bill and purpose is given. He is not the director of appellant ITA No. 2696/Ahd/2013 (Varia Engineering Works Pvt. Ltd. vs. DCIT) A.Y.– 2010-11 - 7 - company. It is therefore expenditure of Rs. 22950/- in this regard is neither verifiable nor can be considered for business. In view of factual finding as above, total expenditure of Rs. 214419 (49394 + 142075 + 22950) is treated as not for business purpose or unsubstantiated. It is therefore out of total disallowance of Rs. 674542, an amount of Rs. 2,14,419/- so disallowed is upheld. The A.O. is directed to delete the balance addition of Rs. 4,60,123/- (674542 - 214419). The appellant gets part relief.” 13. As the impugned amount of Rs.49,394/-, Rs.1,42,075/- and Rs.22950/- was not found related to business, the restriction of addition made by the Ld. CIT(A) to the amount of Rs.2,14,419/- is found to be justifiable. The same is, therefore, confirmed. The ground of appeal is, thus, found to be devoid of any merit and, thus, dismissed. 14. In the result, assessee’s appeal is dismissed. This Order pronounced on 09/06/2023 Sd/- Sd/- (ANNAPURNA GUPTA) (MADHUMITA ROY) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad; Dated 09/06/2023 S. K. SINHA True Copy आदेश क त ल प अ े षत/Copy of the Order forwarded to : 1. अपीलाथ / The Appellant 2. यथ / The Respondent. 3. संबं%धत आयकर आय ु 'त / Concerned CIT 4. आयकर आय ु 'त(अपील) / The CIT(A)- 5. *वभागीय -त-न%ध, आयकर अपील य अ%धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड3 फाईल / Guard file. आदेशान ु सार/ BY ORDER, उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील$य अ%धकरण, अहमदाबाद / ITAT, Ahmedabad