SPARSH BPO SERVICES LTD, MUMBAI V. DCIT 9(3), MUMBAI

ITA 3144/MUM/2016

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 5604 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 2 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-07-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: H
• Assessment Year: 2011-2012
• Appeal Filed On: 04-05-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAJESH KUMAR YADAVLD
• Assessee Lawyers: S K TYAGI LD
• Keywords: Notional interest

Judgement Text

ITA NO.3144/MUM/2016 SPARSH BPO SERVICES LIMITED ASSESSMENT YEAR-2011-12 IN THE INCOME TAX APPELLATE TRIBUNAL H BENCH, MUMBAI , BEFORE SHRI JOGINDER SINGH, JM AND SHRI MANOJ KUMAR AGGARWAL, AM I.T.A. NO.3144/MUM/2016 ( ASSESSMENT YEAR:2011-12) SPARSH BPO SERVICES LIMITED PLOT CST-140-A/28, INTELENET TOWERS I, NEW LINK ROAD MINDSPACE, MALAD(W) MUMBAI-400 064 VS. DEPUTY COMMISSIONER OF INCOME TAX 9(3) MUMBAI PAN/GIR NO. AABCI-4527-L ( APPELLANT ) : ( !' RESPONDENT ) A SSESSEE BY : S.K.TYAGI, LD.AR RE VENUE BY : RAJESH KUMAR YADAV, LD. DR #$ DATE OF HEARING : 21/06/2018 %&' $ / DATE OF PRONOUNCEMENT : 04 /07/2018 O R D E R PER MANOJ KUMAR AGGARWAL (ACCOUNTANT MEMBER) 1. AFORESAID APPEAL BY ASSESSEE FOR ASSESSMENT YEAR [AY] 2011-12 CONTEST THE ORDER OF THE LD. COMMISSIONER OF INCOME -TAX (APPEALS)-21 [CIT(A)], MUMBAI, APPEAL NO.CIT(A)-21/DCIT-13(2)(1)/IT-180/2014-15 DATED 22/02/2016 QUA CONFIRMATION OF INTEREST DISALLOWANCE U/S 36(1)(III ). THE ASSESSMENT FOR IMPUGNED AY WAS FRAMED BY LD. DEPUTY ITA NO.3144/MUM/2016 SPARSH BPO SERVICES LIMITED ASSESSMENT YEAR-2011-12 2 COMMISSIONER OF INCOME TAX-9(3), MUMBAI [AO] U/S 14 3(3) OF THE INCOME TAX ACT, 1961 ON 26/03/2014 WHEREIN THE LOSS OF THE ASSESSEE WAS DETERMINED AT RS.180.97 LACS AFTER SOLE DISALLO WANCE OF RS.57.02 LACS ON ACCOUNT OF INTEREST ATTRIBUTABLE TO CAPITAL WORK-IN-PROGRESS. DURING IMPUGNED AY, THE ASSESSEE WAS ENGAGED IN PRO VIDING INFORMATION TECHNOLOGY ENABLED SERVICES [ITES]. 2. FACTS QUA THE DISPUTE ARE THAT THE FINANCIAL STATEMENTS OF TH E ASSESSEE REFLECTED YEAR END CAPITAL WORK-IN-PROGRESS [CWIP] AT RS.4.26 CRORES. THE OPENING CWIP STOOD AT RS.13.05 CRORES WHICH TRANSLATED INTO AVERAGE CWIP FOR THE YEAR AT RS.8.65 CRORES. THE SAID CWIP DID NOT HAVE ANY INTEREST COMPONENT WHICH LED THE LD. A O TO APPORTION THE INTEREST EXPENDITURE CLAIMED BY THE ASSESSEE IN THE IMPUGNED AY TOWARDS THE SAME. THE ASSESSEES COST OF CAPITAL WA S WORKED OUT AS 9.28% SINCE IT CLAIMED INTEREST EXPENDITURE OF RS.1 7.45 CRORES AGAINST OUTSTANDING LOAN OF RS.188.03 CRORES. IT WAS FURTHE R NOTED THAT APPROX. 71% OF THE FIXED ASSETS AGGREGATING TO RS.262.77 CR ORES WERE FINANCED OUT OF OUTSTANDING LOAN. FINALLY, APPLYING COST OF CAPITAL I.E. 9.28% TO 71% OF AVERAGE CWIP OF RS.8.65 CRORES, LD. AO COMPUTED INTEREST DISALLOWANCE OF RS.57.02 LACS, WHICH AS A LOGICAL C ONSEQUENCE, WAS ALLOWED TO BE CAPITALIZED WITH CWIP. 3. AGGRIEVED THE ASSESSEE CONTESTED THE SAME WITHOU T ANY SUCCESS BEFORE LD. CIT(A) VIDE IMPUGNED ORDER DATED 22/02/2 016 WHERE LD. CIT(A), AFTER DUE CONSIDERATION, CONCLUDED THE MATT ER IN THE FOLLOWING MANNER:- 7. I HAVE CONSIDERED THE SUBMISSION OF THE A.R., TH E ASSESSMENT ORDER AND FACTS ON RECORD, CAREFULLY. IT IS SEEN THAT THE POINT IN QUE STION HERE IS NOT ANY NOTIONAL INTEREST BEING COMPUTED. INSTEAD, THE ASSESSING OFFICER HAS NOT ACCEPTED THE CLAIM OF THE ITA NO.3144/MUM/2016 SPARSH BPO SERVICES LIMITED ASSESSMENT YEAR-2011-12 3 ENTIRE AMOUNT OF INTEREST AND FINANCE CHARGES AS CU RRENT REVENUE EXPENSES WITHOUT CONSIDERED ITS UTILIZATION FOR VARIOUS USES SUCH AS CAPITAL WORK-IN-PROGRESS. A PERUSAL OF THE BALANCE SHEET SHOWS THAT THE SHARE CAPITAL L AST YEAR WAS RS.36.14 CRORES. THE INCREASE IN SHARE CAPITAL DURING THE YEAR WAS R S.31 CRORES. AND SHARE CAPITAL WENT UP TO RS.67.14 CRORES. THE SECURED LOAN HAD CO ME DOWN FROM RS.7.28 CRORES TO RS.21.24 CRORES DURING THE YEAR. SIMILARLY, UNSE CURED LOAN HAS COME DOWN FROM RS.177.28 CRORES TO RS.166.78 CRORES. THE GROSS BLO CK OF FIXED ASSETS HAD GONE UP FROM RS.240 CRORES TORS.258 CRORES. THE CAPITAL WOR K-IN-PROGRESS HAD COME DOWN FROM RS.13.05 CRORES TO RS.4.26 CRORES. THE CURRENT ASSET STOOD AT RS.110.75 CRORES AS AGAINST CURRENT LIABILITIES OF RS.32.92 CRORES. THE CURRENT ASSETS NET OF CURRENT LIABILITY HAS COME DOWN FROM RS.94.46 CRORES TO RS. 77.82 CRORES. THE LOSS AS PER PROFIT AND LOSS A/C. STOOD AT RS.30.85 CRORES. THE LOSS DURING THE YEAR WAS RS.13.46 CRORES. IT IS IN THIS FACTUAL BACK DROP TH AT THE CONCLUSION OF THE ASSESSING OFFICER HAS TO SEEN AGAINST SUBMISSION OF THE APPEL LANT. THE SHARE CAPITAL INCREASE HAS BEEN USED UP TO MEET THE LOSSES AS WELL AS REPA YMENT OF LOANS. IT IS ALSO SEEN THAT A PART OF THE CAPITAL WORK-IN-PROGRESS HAS BEE N CAPITALIZED IN THE FIXED ASSETS IN THE CURRENT YEAR. 8. SINCE THE APPELLANT CANNOT DEMONSTRATE THAT THE LOANS HAVE NOT BEEN UTILIZED FOR CAPITAL WORK-IN-PROGRESS, A MIXED COMPOSITION OF FI NANCING ASSUMED IS VALID. THE PRINCIPLE ADOPTED BY ASSESSING OFFICER IS UPHELD. THE GROUND OF APPEAL IS DISMISSED. THE ASSESSING OFFICER WILL HOWEVER GIVE EFFECT BY CONSIDERING THE INCREASED VALUE OF CAPITAL WORK IN PROGRESS IN SUBS EQUENT YEARS. AGGRIEVED, THE ASSESSEE IS IN FURTHER APPEAL BEFORE US. 4. THE LD. AUTHORIZED REPRESENTATIVE FOR ASSESSEE [ AR], SH. S.K.TYAGI , DRAWING OUR ATTENTION TO THE FINANCIAL STATEMENTS , SUBMITTED THAT NO NEW LOANS WERE OBTAINED BY THE ASSESSEE DUR ING THE IMPUGNED AY AND THE ASSESSEE IS FOLLOWING CONSISTENT METHOD OF ACCOUNTING AND NO SUCH ADDITION HAS BEEN MADE BY THE REVENUE AGAIN ST CWIP IN EARLIER YEARS. THE SAME HAS BEEN CONTROVERTED BY LD. DR, SH. RAJESH KUMAR YADAV, BY SUBMITTING THAT THE ONUS WAS ON ASSESSEE TO PROV E THAT CWIP WAS FINANCED OUT OF INTEREST FREE OWN FUNDS. 5. WE HAVE CAREFULLY HEARD THE RIVAL CONTENTIONS AN D PERUSED THE DOCUMENTS PLACED IN THE PAPER-BOOK INCLUDING JUDICIAL PRONOUNCEMENTS CITED BEFORE US TO SUPPORT THE CONTENTIONS. WE FIND THE MATTER TO BE FACTUAL ONE. A PERUSAL OF THE CAPITAL STRUCTURE AS EMANATING FROM FINANCIAL ITA NO.3144/MUM/2016 SPARSH BPO SERVICES LIMITED ASSESSMENT YEAR-2011-12 4 STATEMENT PLACED ON RECORD REVEAL THAT THE DURING I MPUGNED AY, THE ASSESSEES SHARE CAPITAL HAS INCREASED BY RS.31 CRO RES WHEREAS LOANS FUNDS HAVE BEEN REDUCED FROM RS.244 CRORES TO RS.187 CRORES. AT THE SAME TIME, THE CWIP HAS, IN FACT, BEEN REDUCED FROM RS.13.05 CRORES TO RS.4.26 CRORES. THE NET CURRENT ASSETS HA VE BEEN REDUCED FROM RS.94.46 CRORES TO RS.77.82 CRORES. THE INCREA SE IN FIXED ASSETS, PRIMA FACIE, REVEALS THAT CWIP HAS BEEN CONVERTED INTO FIXED ASSETS. SIMILAR OBSERVATIONS HAVE BEEN MADE BY LD. FIRST AP PELLATE AUTHORITY. THE ABOVE FACTS AND FIGURES, IN OUR OPINION, SUPPOR T THE CASE OF THE ASSESSEE IN VIEW OF THE SETTLED LEGAL POSITION THAT IN CASE OF MIXED USE OF COMMON FUNDS, PRESUMPTION GOES IN ASSESSEES FAVOR THAT INVESTMENTS WERE MADE OUT OF OWN FUNDS. THE SAME IS DULY SUPPOR TED BY THE JUDGMENT OF OUR JURISDICTIONAL HONBLE BOMBAY HIGH COURT RENDERED IN CIT VS. HDFC BANK LIMITED [ITA NO. 330 OF 2012]. DRAWING ANALOGY FROM THE SAME, WE DELETE THE IMPUGNED ADDITION AND ALLOW THE CLAIM OF THE ASSESSEE. AS A LOGICAL CONSEQUENCE, THE CAPITAL IZATION THEREOF AS ALLOWED BY LOWER AUTHORITIES STAND REVERSED. 5. RESULTANTLY, THE ASSESSEES APPEAL STAND ALLOWED . ORDER PRONOUNCED IN THE OPEN COURT ON 04 TH JULY , 2018. SD/- SD/- (JOGINDER SINGH) (MANOJ KUMAR AGGARWAL) / JUDICIAL MEMBER / ACCOUNTANT MEMBER (# MUMBAI; DATED : 04 .07.2018. SR.PS:-THIRUMALESH ITA NO.3144/MUM/2016 SPARSH BPO SERVICES LIMITED ASSESSMENT YEAR-2011-12 5 ! COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. !' / THE RESPONDENT 3. ) / THE CIT(A) 4. ) / CIT CONCERNED 5. * !$+ +' (# / DR, ITAT, MUMBAI 6. ,-. # GUARD FILE ' / BY ORDER, # '$% (DY./ASSTT.REGISTRAR) (# / ITAT, MUMBAI