Raviraj Foils Ltd., Ahmedabad V. The Income tax Officer,Ward-5(3), Ahmedabad

ITA 3739/AHD/2007

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 9852 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-10-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 22-06-2010
• Assessment Year: 2004-2005
• Appeal Filed On: 25-09-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K M MAHESH
• Assessee Lawyers: P M MEHTA
• Keywords: Principle of natural justice; Proportionate interest; Notional interest; Set aside
• Section: 143(1); 143(2)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH 'C' [BEFORE S/SHRI T K SHARMA,JM & A N PAHUJA,AM] ITA NO.3739/AHD/2007 (ASSESSMENT YEAR:-2004-05) RAVIRAJ FOILS LIMITED, 702, SAFFRON BUILDING, 7 TH FLOOR, PANCHWATI, AHMEDABAD [PAN: AAACR 7333 J] V/S INCOME-TAX OFFICER, WARD- 5(3),AHMEDABAD [APPELLANT] [RESPONDENT] ASSESSEE BY :- SHRI P M MEHTA, AR RESPONDENT BY:- SHRI K M MAHESH, DR O R D E R A N PAHUJA: THIS APPEAL FILED BY THE ASSESSEE AGAINST AN ORDE R DATED 12-07-2007 OF THE LD.CIT(APPEALS)-XI, AHMEDAB AD, RAISES THE FOLLOWING GROUNDS:- 1. IN LAW AND IN THE FACTS AND IN THE CIRCUMSTANCE S OF THE APPELLANTS CASE, THE CIT(A) HAS ERRED IN CONFIRMING THE DISALLOWANCE OF NOTIONAL INTEREST EXPENSES AMOUNTING TO RS.8,64,262, BY TREATING AS I NTEREST CAPITALIZED IN WORK-IN-PROGRESS WHEN NO SUCH DISALLOWANCE IS CALLE D FOR. IT MAY BE DELETED. 2. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND AND/OR WITHDRAW ANY GROUND OR GROUNDS OF APPEAL EITHER BEF ORE OR DURING THE COURSE OF HEARING OF THE APPEAL. 2 ADVERTING TO THE GROUND NO.1 IN THE APPEAL, FACTS , IN BRIEF, AS PER RELEVANT ORDERS ARE THAT RETURN DECLARING LOSS OF RS.3,63,73,594/-FILED ON 29-10-2004 BY THE ASSESSEE , MANUFACTURING ALUMINIUM FOILS, AFTER BEING PROCESSED U/S 143(1) O F THE INCOME-TAX ACT, 1961 [ HEREINAFTER REFERRED TO AS THE ACT], WAS SELECTED FOR SCRUTINY WITH THE ISSUE OF A NOTICE U/S 143(2) OF T HE ACT ON 14.10.2005. ON VERIFICATION OF BALANCE-SHEET, THE A O FOUND THAT THE ASSESSEE HAD SHOWN UNDER THE HEAD APPLICATION OF F UNDS, CAPITAL WORK-IN-PROGRESS OF RS.2,22,02,183/-. THE AO SHOWCA USED THE ASSESSEE AS TO WHY PROPORTIONATE INTEREST SHOULD NO T BE CAPITALIZED ITA NO. 3739/AHD/2007 2 ON THE AMOUNT OF BORROWED ADVANCES UTILIZED FOR C APITAL WORK- IN- PROGRESS WHILE THE WORK-IN-PROGRESS WAS NOT PUT T O USE FOR THE PURPOSE OF BUSINESS. THE ASSESSEE REPLIED THAT THE CAPITAL WORK-IN- PROGRESS DURING THE YEAR WAS OPENING BALANCE AND TH AT BEING FOR THE PURPOSE OF BUSINESS, NO DISALLOWANCE OF INTEREST COULD BE MAD E. IT WAS POINTED OUT THAT THE PAYMENTS WERE MADE OUT OF INTEREST FREE FUNDS AVAIL ABLE WITH THE ASSESSEE. HOWEVER, THE AO DID NOT ACCEPT THE SUBMISSIONS OF T HE ASSESSEE ON THE GROUND THAT ANY AMOUNT OF INTEREST PAID IN RESPECT OF CAPI TAL BORROWED FOR ACQUISITION OF AN ASSET WAS CAPITAL IN NATURE AND INTEREST PAID ON SUCH ASSETS HAD TO BE CAPITALIZED TILL THE DATE ON WHICH SUCH ASSET WAS F IRST PUT TO USE FOR THE BUSINESS PURPOSES DURING THE YEAR .AS REGARDS CONTENTION OF THE ASSESSEE THAT THE SAID PAYMENTS WERE MADE OUT OF INTEREST FREE FUNDS , THE AO POINTED OUT THAT SINCE NET WORTH OF THE ASSESSEE WAS NEGATIVE, THE PAYMENT MUST HAVE BEEN PAID OUT OF SECURED AND UNSECURED LOANS. THEREFORE, RELYING UP ON THE DECISION OF THE HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT V/S ABHISHEK INDUSTRIES LTD.,286 ITR 1, THE AO DISALLOWED AN AMOUNT OF RS. 26,64,261/- CALCULATED @ 12% ON THE AMOUNT OF RS.2,22,02,183/- . 3 ON APPEAL, THE LD. CIT(A) DEALT WITH THE ISSUE AS UNDER: 3.2 THE SUBMISSIONS OF THE A. R. OF THE APPELLANT HAVE BEEN PERUSED. THE DECISIONS REFERRED AS ABOVE, WHICH ARE RELIED U PON BY THE A. R. OF THE APPELLANT AND THE OBSERVATIONS OF THE ASSESSING OFF ICER IN THE ASSESSMENT ORDER HAVE ALSO EXAMINED. 3.2.1 AS IT COULD BE SEEN FROM THE ABOVE SUBMISSION , IT APPEARS THAT THE APPELLANT IS HAVING SUFFICIENT INTEREST FREE FUNDS AND OTHER CURRENT LIABILITIES APART FROM SHARE CAPITAL AND RESERVES. IT IS THE CO NTENTION OF THE A. R. THAT THE APPELLANT HAS ADVANCED MONEY ONLY TOWARDS CAPIT AL GOODS WITH AN INTENTION TO ACQUIRE THEM. THEREFORE, IT CAN BE TRE ATED THAT SUCH ADVANCES ARE OUT OF INTEREST FREE LOANS AVAILABLE WITH THE A PPELLANT. 3.2.2 FURTHER, IT IS CONTENDED THAT THE APPELLANT HAD RECEIVED SHARE CAPITAL OF RS.1,50,00,000/- AND THE SAME IS ADVANCED TO AMB ICA CORPORATION FOR CAPITAL GOODS PURPOSE, THEREFORE, NO INTEREST COULD BE CHARGED TO THAT EXTENT AND PLEADED THAT THE AO HAS WRONGLY COMPUTED INTEREST AND ADDED TO APPELLANTS INCOME. ITA NO. 3739/AHD/2007 3 3.2.3. I HAVE PERUSED THE DETAILS AND SUBMISSIONS OF THE AR. IT IS SEEN THAT THE AO HAS NOT ESTABLISHED THE NEXUS BETWEEN THE BO RROWED FUNDS AND FUNDS EMPLOYED FOR WORK IN PROGRESS. AS IT IS DISCU SSED ABOVE, THE APPELLANT HAD RECEIVED CAPITAL TO EXTENT OF RS.1,50 ,00,000/- WHICH WAS GIVEN TO AMBICA CORPORATION FOR CAPITAL GOODS PURPO SE. THEREFORE, TO THAT EXTENT, I AM OF THE OPINION THAT THE FUNDS EMPLOYED IN WORK IN PROGRESS ARE INTEREST FREE FUNDS, AND HENCE, NO INTEREST COULD B E CHARGED FOR CAPITALIZING PURPOSE. 3.2.4. IN THE LIGHT OF ABOVE, THE AO IS DIRECTED T O CHARGE INTEREST ON BALANCE AMOUNT OF RS.72,02,183/- ONLY AND NOT ON EN TIRE AMOUNT OF RS.2,22,02,183/-. ACCORDINGLY, THIS GROUND OF APPEA L IS PARTLY ALLOWED. 4 THE ASSESSEE IS NOW IN APPEAL BEFORE US AGAINST T HE AFORESAID FINDINGS OF THE LD. CIT(A).THE LD. AR ON BEHALF OF THE ASSESSEE WHILE REFERRING US TO THE BREAKUP OF WORKING IN PROGRESS CONTENDED THAT NO NEW FUNDS WERE CREDITED IN THIS ACCOUNT WHILE PAYM ENTS WERE MADE OUT OF INTEREST FREE FUNDS . THEREFORE, NO DISALLOWANCE CO ULD BE MADE. THE LEARNED DR, ON THE OTHER HAND, SUPPORTED THE IMPUGNED ORDE R. 5. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUG H THE FACTS OF THE CASE. WE FIND THAT THE AO DISALLOWED AN AMOUNT OF RS.26,64,261/- CALCULATED @ 12% ON THE AMOUNT OF RS.2,22,02,183/- ON ACCOUNT OF CAPITAL WORK-IN-PROGRESS ON THE GROUND THAT THE NET WORTH O F THE COMPANY BEING NEGATIVE, THE ASSESSEE UTILIZED ONLY BORROWED FUNDS FOR THE C APITAL WORK- IN-PROGRESS AND THAT THE ASSET HAVING NOT BEEN USED IN THE BUSINESS , INTEREST HAD TO BE CAPITALIZED ALONG WITH WORK IN PROGRESS. ON APPEAL, THE LD. CI T(A) CONCLUDED THAT THE ASSESSEE HAD ADVANCED RS.1,50,00,000/- TO AMBICA CO RPORATION FOR CAPITAL GOODS OUT OF SHARE CAPITAL AND THEREFORE TO THAT EX TENT THE FUNDS EMPLOYED IN WORK IN PROGRESS WERE INTEREST FREE FUNDS, AND THER EFORE, NO INTEREST COULD BE CHARGED FOR CAPITALIZING PURPOSES. THEREFORE, HE DI RECTED TO CHARGE INTEREST ON THE BALANCE AMOUNT. A MERE GLANCE AT THE IMPUGNED O RDER REVEALS THAT THE LD. CIT(A) HAVE NOT ASSIGNED ANY REASONS AT ALL FOR ISS UING SUCH DIRECTIONS TO THE AO NOR ANALYSED THE ISSUE IN ITS PROPER PERSPECTIVE. I N THE ABSENCE OF ANY REASONS FOR UPHOLDING THE DISALLOWANCE TO THE E XTENT OF RS.8,64,262/-, WE ARE OF THE OPINION THAT THE AFOR ESAID ORDER OF THE ITA NO. 3739/AHD/2007 4 LD. CIT(A) IS NOT A SPEAKING ORDER. THE APPLICATION OF MIND TO THE MATERIAL FACTS AND THE ARGUMENTS SHOULD MANIFEST ITSELF IN T HE ORDER. SECTION 250(6) OF THE INCOME TAX ACT ,1961 MANDATES THAT THE ORDER OF THE CIT(A) WHILE DISPOSING OF THE APPEAL SHALL BE IN WRITING AND SHALL STATE THE POINTS FOR DETERMINATION, THE DECISION THEREON AND THE REASON FOR THE DECISION. AS IS APPARENT FROM THE IMPUGNED ORDER, IN OUR OPINION, THE ORDER PASSED BY THE LD. CIT(A) IS CRYPTIC AND GROSSLY VIOLATIVE OF ONE OF THE FACETS OF THE RULES OF NATURAL JUSTICE, NAMELY, THAT EVERY JUDICIAL/QUASI-JUDICIAL BODY/AUTHORITY MUST P ASS REASONED ORDER, WHICH SHOULD REFLECT APPLICATION OF MIND BY THE CONCERNED AUTHORITY TO THE ISSUES/POINTS RAISED BEFORE IT. THE REQUIREMENT OF RECORDING OF R EASONS AND COMMUNICATION THEREOF HAS BEEN READ AS AN INTEGRAL PART OF THE CO NCEPT OF FAIR PROCEDURE. THE REQUIREMENT OF RECORDING OF REASONS BY THE QUASI-JU DICIAL AUTHORITIES IS AN IMPORTANT SAFEGUARD TO ENSURE OBSERVANCE OF THE RUL E OF LAW. IT INTRODUCES CLARITY, CHECKS THE INTRODUCTION OF EXTRANEOUS OR IRRELEVANT CONSIDERATIONS AND MINIMIZES ARBITRARINESS IN THE DECISION-MAKING PROCESS. WE MA Y REITERATE THAT A DECISION DOES NOT MERELY MEAN THE CONCLUSION. IT EMBRACES WITHIN ITS FOLD THE REASONS FORMING BASIS FOR THE CONCLUSION.[MUKHTIAR SINGH VS . STATE OF PUNJAB,(1995)1SCC 760(SC)]. AS IS APPARENT, THE IMPUGNED ORDER SUFFER S FROM LACK OF REASONING AND IS NOT A SPEAKING ORDER. IN VIEW OF THE FOREGOING , ESPECIALLY WHEN THE LD. CIT(A) HAS NOT PASSED A SPEAKING ORDER ON THE ISSUE RAISE D IN GROUND NO. 1 IN THE APPEAL ,WE CONSIDER IT FAIR AND APPROPRIATE TO SET ASIDE THE ORDER OF THE LD. CIT(A) AND RESTORE THE MATTER TO HIS FILE FOR DECIDING THE ISSUE RAISED IN THE SAID GROUND AFRESH IN ACCORDANCE WITH LAW, AFTER ALLOWING SUFFI CIENT OPPORTUNITY TO BOTH THE PARTIES. NEEDLESS TO SAY THAT WHILE REDECIDING THE ISSUE, THE LEARNED CIT(A) SHALL PASS A SPEAKING ORDER, KEEPING IN MIND, INTER ALIA, THE MANDATE OF PROVISIONS OF SEC. 250(6) OF THE ACT. WITH THESE OBSERVATIONS, GR OUND NO. 1 IS DISPOSED OF. 6. NO ADDITIONAL GROUND HAVING BEEN RAISED IN TER MS OF THE RESIDUARY GROUND NO.2, ACCORDINGLY, THIS GROUND IS DISMISSED. ITA NO. 3739/AHD/2007 5 7. IN THE RESULT, APPEAL IS ALLOWED FOR STATIST ICAL PURPOSES ORDER PRONOUNCED IN THE COURT TODAY ON 1-10-2010 SD/- SD/- (T.K.SHARMA) JUDICIAL MEMBER (A N PAHUJA) ACCOUNTANT MEMBER DATED : 1-10 -2010 COPY OF THE ORDER FORWARDED TO: 1. RAVIRAJ FOILS LIMITED, 702, SAFFRON BUILDING, 7 TH FLOOR, PANCHWATI, AHMEDABAD 2. ITO, WARD-5(3), AHMEDABAD 3. CIT CONCERNED 4. CIT(A)-XI, AHMEDABAD 5. DR, BENCH-C, ITAT, AHMEDABAD 6. GUARD FILE BY ORDER DEPUTY REGISTRAR ASSISTANT REGISTRAR ITAT, AHMEDABAD