Orley Laboratories Pvt.Ltd., Ahmedabad V. The Income tax Officer,Ward-5(2), Ahmedabad

ITA 3044/AHD/2009

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 57346 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 4 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-03-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 13-03-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 12-11-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAHUL KUMAR
• Assessee Lawyers: K M MEHTA
• Keywords: Capital asset; Depreciation

Judgement Text

ITA NO.3044/AHD/2009 ASSESSMENT YEAR 2005- 06 . 1 IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, AHMEDABAD (BEFORE SHRI G.C.GUPTA VICE PRESIDENT & SHRI ANIL C HATURVEDI A.M.) I.T.A. NO. 3 044/AHD/2009 (ASSESSMENT YEAR: 2005- 06 ) ORLEY LABORATORIES PVT. LTD., 76 HIRABHAI MARKET, DIWANBALLUBHAI ROAD, AHMEDABAD. (APPELLANT) VS. INCOME TAX OFFICER, WARD 5(2), PRATYAKSHA BHAVAN, NEAR PANJARA POLE, AMBAWADI, AHMEDABAD. (RESPONDENT) PAN: ASAACO 2270M APPELLANT BY : SHRI K. M. MEHTA. RESPONDENT BY : SHRI RAHUL KUMAR, SR.D.R. ( )/ ORDER DATE OF HEARING : 13-3-2012 DATE OF PRONOUNCEMENT : 30-3-2012 PER: SHRI ANIL CHATURVEDI, ACCOUNTANT MEMBER. THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE O RDER OF CIT (A) XI, AHMEDABAD DATED 16-1-2009 FOR THE ASSESSMENT YEAR 2 005-06. 2. THE ASSESSEE HAS RAISED FOLLOWING GROUNDS:- 1. THAT THE LD. COMMISSIOER OF INCOME TAX (A) HAS ERRED ON FACTS AND IN LAW IN UPHOLDING THE DISALLOWANCE OF INTEREST AMOUN TING TO RS.1,72,983/- AS CAPITAL IN NATURE. 2. THAT THE LD. COMMISSIONER OF INCOME TAX (A) FAIL ED TO APPRECIATE THAT FOR CAPITAL WORK IN PROGRESS, THE APPELLANT HA S INCREASED SHARE CAPITAL, ITA NO.3044/AHD/2009 ASSESSMENT YEAR 2005- 06 . 2 OBTAINED INTEREST FREE UNSECURED DEPOSITS FROM DIRE CTORS AND RELATIVES AND HAD SUFFICIENT NET PROFIT AND CASH FLOW FROM OPERAT IONS FOR BALANCE CAPITAL WORK IN PROGRESS OF RS.1,14,465/- AND THEREFORE HE ERRED IN UPHOLDING THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. 3. THE BRIEF FACTS OF THE CASE ARE THAT RETURN OF I NCOME WAS FILED BY THE ASSESSEE COMPANY ON 30-11-2005 DECLARING TOTAL INCOME AT RS. 4,20,860/-.THE CASE WAS SELECTED FOR SCRUTINY. DURING THE COURSE OF ASSESSM ENT PROCEEDINGS, THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HAS SHOWN AN AMO UNT OF RS.56.14 LACS AS CAPITAL WORK IN PROGRESS. HE FURTHER OBSERVED THAT DURING T HE YEAR THE UNSECURED LOAN HAS INCREASED FROM RS. 36.43 LACS TO RS.65.26 LACS. HE WAS OF THE VIEW THAT THE FIXED ASSETS (INCLUDING CAPITAL WORK IN PROGRESS) WAS FIN ANCED BY THE UNSECURED LOANS. IT WAS ALSO OBSERVED BY HIM THAT THE BORROWING COST OF FIXED ASSETS TILL THE DATE OF ITS PUTTING TO USE HAS NOT BEEN CAPITALIZED BY THE ASSESSEE. ACCORDING TO HIM THE BORROWING COST ATTRIBUTABLE TO THE ADDITION MADE TO THE FIXED ASSETS TILL THE DATE OF ITS PUTTING TO USE SHOULD HAVE BEEN CAPITALIZED TO THE FIXED ASSETS. ACCORDINGLY, HE DETERMINED THE BORROWING COST ATTRIBUTABLE TO THE A DDITION MADE TO FIXED ASSETS @ 6% OF THE INCREASE IN UNSECURED LOAN (RS.28.83 LACS ) AND WORKED OUT INTEREST AMOUNT OF RS. 1,72,983/- AND HELD IT TO BE OF CAPIT AL IN NATURE AND ACCORDINGLY DISALLOWED THE SAME. 4. THE DETAILED OBSERVATION MADE BY ASSESSING OFFIC ER WITH RESPECT TO THE DISALLOWANCE IS GIVEN IN PARAGRAPH 4 AND 4.1 OF H IS ORDER WHICH IS REPRODUCED AS UNDER:- 4. ON GOING THROUGH THE RETURN OF INCOME AND DETAI LS FILED DURING THE ASSESSMENT PROCEEDINGS,. IT IS OBSERVED FROM THE SC HEDULE A OF FIXED ASSETS THAT DURING THE YEAR TOTAL ADDITION TO FIXED ASSETS IS MADE OF RS.64,71,198/-, OUT OF WHICH RS.56,14,465/- IS SHOWN AS A CAPITAL W ORK IN PROGRESS. ON GOING THROUGH THE DETAILS OF ADDITION IN FIXED ASSE TS FURNISHED BY THE ITA NO.3044/AHD/2009 ASSESSMENT YEAR 2005- 06 . 3 ASSESSEE, IT IS OBSERVED THAT THE BORROWING COST O F THE FIXED ASSETS TILL THE DATE OF ITS PUTTING TO USE HAS NOT BEEN CAPITALIZED BY THE ASSESSEE . IT IS SEEN THAT DURING THE YEAR UNSECURED LOAN HAS BEEN INCREA SED FROM RS.36.43 LAC TO RS.65.26 LAC. ON BEING ASKED, THE ASSESSEE STATE D IN HIS SUBMISSION DATED NIL (SUBMITTED ON 22-11-2007) THAT THE INCREA SE IN UNSECURED LOAN FROM SHARE HOLDERS OF RS.28,83,055/- IS USED MAINLY FOR ADDITION TO FIXED ASSETS INCLUDING CAPITAL WORK-IN PROGRESS. FROM THE ABOVE SUBMISSION OF THE ASSESSEE, IT IS VERY CLEAR THAT THE INCREASE IN FUND/UNSECURED LOAN IS USED FOR ADDITION MADE TO FIXED ASSETS. THE ASSESSE E HAS SHOWN AN AMOUNT OF RS.56.14 LAC AS CAPITAL WORK-IN-PROGRESS. THEREF ORE, THE BORROWING COST ATTRIBUTABLE TO ADDITION MADE TO FIXED ASSETS TILL THE DATE OF ITS PUTTING TO USE IS TO BE CAPITALIZED IN FIXED ASSETS. AT THIS J UNCTURE, IT WOULD BE PERTINENT TO REFER TO PROVISO TO SECTION 36 (1)(III ) WHICH IS AS UNDER:- PROVISO TO SECTION 36(1)(III) IS APPLICABLE IF THE FOLLOWING CONDITIONS ARE SATISFIED. A. CAPITAL IS BORROWED FOR ACQUIRING A CAPITAL ASSET; B. INTEREST IS PAID (OR PAYABLE ) IN RESPECT OF THE BORROWED CAPITAL; C. THE CAPITAL IS BORROWED FOR ACQUISITION OF AN AS SET FOR THE PURPOSE OF EXTENSION OF AN EXISTING BUSINESS OR PROFESSION; AN D D. IN THE BOOKS OF ACCOUNT, THE INTEREST LIABILITY MAY (MAY NOT BE) CAPITALIZED. IF THE ABOVE CONDITIONS ARE SATISFIED, THEN INTERES T LIABILITY FOR THE PERIOD COMMENCING FROM THE DATE OF BORROWING TILL THE DATE ON WHICH SUCH ASSET WAS PUT TO USE, SHALL NOT BE ALLOWED AS DEDUCTION U NDER SECTION 36(1)(III). 4.1. TO DETERMINE THE BORROWING COST FOR THE AVERAG E PERIOD WHICH CAN BE ATTRIBUTABLE TO THE ADDITION MADE TO FIXED ASSET S, THE RATE OF INTEREST IS ADOPTED AT 6%,WHICH WORKS OUT TO RS.1,72,983/- (28, 83,055 X 6%). THEREFORE, AN AMOUNT OF RS.1,72,983/- IS HEREBY DIS ALLOWED OUT OF THE TOTAL INTEREST EXPENSES OF RS. 4,19,842/-, BEING CAPITAL IN NATURE, AND THE SAME IS ADDED TO THE TOTAL INCOME OF THE ASSESSEE. 5. AGGRIEVED BY THE DISALLOWANCE MADE BY THE A.O., THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT (A). CIT (A) VIDE H IS ORDER DATED 16-1-2009 ITA NO.3044/AHD/2009 ASSESSMENT YEAR 2005- 06 . 4 AGREED WITH THE FINDING OF THE ASSESSING OFFICER AN D HELD THAT THE CAPITAL BORROWED WAS BEING PUT INTO FOR ACQUISITION OF ASSET DURING THE YEAR AND THEREFORE, THE A.O. HAS RIGHTLY TREATED THE INTEREST ON THE SAID CAPITA L AS BEING CAPITAL IN NATURE AND DISALLOWED IT. 6. NOW THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. THE ASSESSEE SUBMITS THAT THE CAPITAL WORK IN PROGRESS OF RS.56,14,465/- IS F INANCED BY INCREASE IN SHARE CAPITAL OF RS.30,00,000/-, NON INTEREST BEARING UNS ECURED DEPOSIT FROM DIRECTORS AND RELATIVES OF RS,.25,00,000/-, RS.1,14,465/- IS USED OUT OF NET PROFITS, RS.3,14,725/- OUT OF CASH FLOW FROM DEPRECIATION AN D RS.3,60,173/- FROM ACCUMULATED PROFITS. ACCORDING TO THE LD. AR THE AS SESSEE HAD NON INTEREST BEARING FUNDS AND THEREFORE, THERE IS NO QUESTION OF UTILIZ ATION OF INTEREST BEARING FUNDS AND THEREFORE THERE SHOULD BE NO DISALLOWANCE WITH RESP ECT TO INTEREST. THE AR FURTHER STATED THAT THERE IS NO INCREASE AT ALL IN THE SECU RED CASH CREDIT FACILITY DURING THE YEAR AND THEREFORE, THE QUESTION OF UTILIZATION OF INTEREST BEARING BANK FUNDS FOR ACQUISITION OF FIXED ASSETS ALSO DOES NOT ARISE. TH E LD. A.R. FURTHER PLACED ON RECORD ITS AUDITED BALANCE SHEET AS AT 31-3-2005. T HE A.R. REITERATED THAT SINCE SUFFICIENT AMOUNT OF INTEREST FREE FUNDS WAS AVAILA BLE WITH IT THERE WAS NO QUESTION OF DISALLOWANCE OF ANY INTEREST. 7. THE DR ON THE OTHER HAND, PLACED RELIANCE ON THE ORDER OF ASSESSING OFFICER AND CIT (A). 8. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE PARTIES AND PERUSED THE RECORD AND WRITTEN SUBMISSIONS FILED BY THE AR OF T HE ASSESSEE. IT IS AN UNDISPUTED FACT THAT THE ANALYSIS OF THE BALANCE SHEET AS ON 3 1-3-2005 OF THE ASSESSEE SHOWS ITA NO.3044/AHD/2009 ASSESSMENT YEAR 2005- 06 . 5 THAT THE ASSESSEE HAS INCURRED RS.56,14,465/- TOWAR DS CAPITAL WORK IN PROGRESS. IT IS ALSO UNDISPUTED THAT DURING THE PERIOD, THE ASSESSE E HAS INCREASED ITS SHARE CAPITAL BY RS.30 LAC BY ISSUE OF NEW SHARES, INCREASE IN UN SECURED LOAN FROM SHAREHOLDERS BY RS.25 LACS. IT IS ALSO A FACT THAT DURING THE YE AR ENDED 31-3-2005, THE NET PROFIT OF THE COMPANY WAS TO THE TUNE OF RS.3.14 LACS AFTE R CHARGING DEPRECIATION OF RS.3.60 LACS. THE ASSESSEE HAS ALSO SUBMITTED BEFOR E THE CIT (A) THAT THE UNSECURED INTEREST FREE LOANS OF RS.25 LAC EACH WER E TAKEN FROM 2 PERSONS NAMELY RAJKUMAR PAREKH AND RAJKUMAR MOHANLAL, HUF. THIS FA CT HAS ALSO NOT BEEN DISPUTED BY LD. D.R. NOR HAS HE PRODUCED ANY EVIDEN CE TO THE CONTRARY. IT IS THEREFORE, VERY CLEAR THAT THE ASSESSEE HAD SUFFICI ENT INTEREST FREE FUNDS AT ITS DISPOSAL FOR MAKING INVESTMENTS IN FIXED ASSETS (CA PITAL WORK IN PROGRESS). IN VIEW OF THE TOTALITY OF FACTS, WE ARE OF THE VIEW THAT N O PART OF INTEREST CAN BE CONSIDERED TO BE OF CAPITAL IN NATURE AND THEREFORE THERE CAN BE NO DISALLOWANCE OF INTEREST. ACCORDINGLY, WE DIRECT THAT THE ADDITION OF RS.1,72 ,983/- MADE BY THE A.O. BE DELETED. 9. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED. ORDER PRONOUNCED IN OPEN COURT ON 30 - 3 - 20 12. SD/- SD/- (G.C.GUPTA) (ANIL CHATURVEDI) VICE PRESIDENT ACCOUNTANT MEMBER AHMEDABAD. S.A.PATKI. ITA NO.3044/AHD/2009 ASSESSMENT YEAR 2005- 06 . 6 COPY OF THE ORDER FORWARDED TO: - 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT (APPEALS)-XI, AHMEDABAD. 4. THE CIT CONCERNED. 5. THE DR., ITAT, AHMEDABAD. 6. GUARD FILE. BY ORDER DEPUTY/ASSTT.REGISTRAR ITAT,AHMEDABAD. 1.DATE OF DICTATION - -2012 2.DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE TH E DICTATING 13 / 3 / 2012 MEMBER.OTHER MEMBER. 3.DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. P.S./P.S 15 - 3 -2012. 4.DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT - -2012 5.DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR .P.S./P.S - -2012 6.DATE ON WHICH THE FILE GOES TO THE BENCH CLERK - -2012. 7.DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 8.THE DATE ON WHICH THE FILE GOES TO THE ASSTT. REG ISTRAR FOR SIGNATURE ON THE ORDER 9.DATE OF DESPATCH OF THE ORDER..