Devyani International Ltd., New Delhi V. DCIT, New Delhi

ITA 6176/DEL/2012

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 97154 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 8 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-09-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 28-08-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 13-12-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PARWINDER KAUR
• Assessee Lawyers: V K JAIN; NEER SINGH
• Keywords: Capital asset; Proportionate interest; Notional interest; Capital expenditure

Judgement Text

1 ITA NO. 61 76/DEL/2012 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH:B NEW DELHI BEFORE SHRI T.S. KAPOOR, ACCOUNTANT MEMBER & SMT. BEENA PILLAI, JUDICIAL MEMBER I.T.A .NO. 6176/DE L/2012 (ASSESSMENT YEAR-2009- 10) DEVYANI INTERNATIONAL LTD., F-2/7, OKHLA INDUSTRIAL AREA, PHASE-1, NEW DELHI. AABCD5534A VS DCIT, CIRCLE 10(1), NEW DELHI. APPELLANT BY SH. V.K. JAIN, CA & SH. NEER SINGH, ADV. RESPONDENT BY SMT. PARWINDER KAUR, SR. DR ORDER PER BEENA PILLAI, JUDICIAL MEMBER : THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST TH E ORDER OF LD. CIT(A)-XIII, NEW DELHI DATED 19.10.2012 FOR A.Y. 20 09-10 ON THE FOLLOWING GROUNDS: 1. THE ORDER PASSED BY THE HONBLE CIT(A) IS BAD IN L AW, WRONG ON FACTS AND AGAINST THE PRINCIPLES OF NATURA L JUSTICE; 2. A) THE LD. CIT(A) HAS ERRED IN CONFIRMING THE DI SALLOWANCE OF RS. 4558781/- OUT OF TOTAL DISALLOWANCE OF RS. 7 913889/- MADE BY THE LD. AO BY INVOKING THE PROVISIONS OF PR OVISO TO SECTION 36(1)(III) OF THE INCOME TAX ACT ON THE GRO UNDS THAT INTEREST MUST HAVE BEEN EXPENDED BY THE APPELLANT COMPANY ON SUMS INVESTED ON CAPITAL WORK IN PROGRES S OUTSTANDING AS ON 31.03.2009 AMOUNTING TO RS. 65949078/-; DATE OF HEARING 28.08.2015 DATE OF PRONOUNCEMENT 02.09.2015 2 ITA NO. 61 76/DEL/2012 B) THE LD. CIT(A) HAS FAILED TO APPRECIATE THAT TH E LD. AO HAD MADE DISALLOWANCE OUT OF INTEREST PAID BY USING A VERY NON SCIENTIFIC AND CRUDE METHOD BY APPLYING AN ADHO C RATE OF 12% OF THE CLOSING BALANCE UNDER THE HEAD CAPIT AL WORK- IN-PROGRESS WHEREAS THE APPELLANT COMPANY IN ITS A UDITED BALANCE SHEET AS AT 31.03.2009 ON ITS OWN HAD CAPIT ALIZED INTEREST AMOUNTING TO RS. 3355108/- TO CAPITAL WORK -IN- PROGRESS ACCOUNT BY USING A SCIENTIFIC METHOD AND T HE AMOUNT OF ACTUAL CAPITAL EXPENDITURE AND THE ACTUAL PERIOD FOR WHICH THE INTEREST SHOULD BE CAPITALIZED. C) WITHOUT PREJUDICE, THE HONBLE CIT(A) HAS CONFI RMED THE COMPUTATION OF INTEREST MADE BY THE LD. AO @ 12% ON THE CLOSING BALANCE OF CAPITAL WORK IN PROGRESS OF RS. 65949078/- WITHOUT APPRECIATING THE FACT THAT MAJOR PART OF THE CWIP HAVE BEEN INCURRED OUT OF NON-INTEREST BEA RING SHAREHOLDERS FUNDS AND ALSO CAPITAL EXPENDITURE HAV E BEEN INCURRED THROUGHOUT THE YEAR AND INTEREST CAN ONLY BE DISALLOWED ON PRO-RATA BASIS AND NOT FOR THE ENTIRE YEAR. THE APPELLANT CRAVES LEAVE TO ADD, ALTER AMEND, DEL ETE FOREGO OR MODIFY ANY OF THE GROUNDS OF APPEAL BEFORE OR AT THE TIME OF HEARING. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE CO MPANY IS A FRANCHISEE OF PIZZA HUT RESTAURANTS, KFC RESTAURANT S & COSTA COFFEE OUTLETS. THE ASSESSEE COMPANY HAS ALSO UNDE RTAKEN TRADING IN BEVERAGES UNDER THE BRAND NAME PEPSI, SEVENUP, M IRINDA, MOUNT & DEW ETC. THE ASSESSEE FILED ITS RETURN OF INCOME ON 29.09.2009 DECLARING A TOTAL INCOME OF RS.3,51,23,800/-. THE C ASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY. 3. DURING THE YEAR THE COMPANY HAS SHOWN CAPITAL WORK IN PROGRESS AT RS. 65949078/-. AND HAS PAID INTEREST O F RS. 118609032/-. DURING ASSESSMENT PROCEEDINGS ASSESSE E WAS ASKED TO EXPLAIN AS TO WHY THE PROPORTIONATE INTEREST, NO T BE DISALLOWED. THE ASSESSEE SUBMITTED THAT, HE HAS HIS OWN CAPITAL AND RESERVE & 3 ITA NO. 61 76/DEL/2012 SURPLUS, ACCORDINGLY NO DISALLOWANCE SHALL BE MADE. THE PLEA OF THE ASSESSEE HAS BEEN EXAMINED BY THE LD. A.O. IT WAS NOTICED THAT OUT OF THE TOTAL FUNDS AVAILABLE WITH THE COMPANY THE C OMPANY HAS MADE INVESTMENT AND HAS ALSO GIVEN LOAN AND ADVANCE S. THE LD. A.O FORMED A VIEW FROM THESE FACTS THAT THERE IS A CLEA R NEXUS THAT THE CAPITAL IN PROGRESS OR THE EQUIVALENT AMOUNT HAS BE EN INVESTED OUT OF THE BORROWED FUNDS. THE ASSESSEE HAS ALSO TAKEN A PLEA THAT THE CAPITAL WORK IN PROGRESS REPRESENTS EXTENSION OF HI S EXISTING BUSINESS. THE ASSESSING OFFICER HELD THAT APPELLANT HAS NOT ATTRIBUTED ANY INTEREST ON THIS CAPITAL WORK IN PRO GRESS, THEREFORE, HE HAS DISALLOWED NOTIONAL INTEREST OF RS. 79,13,889/- AT THE RATE OF 12% ON THE CAPITAL WORK IN PROGRESS OF RS. 6,59,49, 078/- AND ADDED TO THE TOTAL INCOME U/S 36(1)(III) OF THE IT ACT. CAPITAL WORK IN PROGRESS 6,59,49,078/ - BANK RATE 12% 79,13,889/ - 4. AGGRIEVED BY THE ORDER PASSED BY THE A.O, THE ASSES SEE WENT INTO APPEAL BEFORE LD. CIT(A). THE LD. CIT(A) HELD THAT THE CAPITAL WORK IN PROGRESS IN THE BALANCE SHEET IS SHOWN AT R S. 6,59,49,078/-, THEREFORE, INTEREST ATTRIBUTABLE TO SUCH AMOUNT HAS TO BE DISALLOWED IN VIEW OF THE PROVISO TO SECTION 36(1)(III) OF THE IT ACT. HOWEVER, AS THE ASSESSEE HAS ALREADY DISALLOWED INTEREST TO THE EXTENT OF RS. 33,55,108/- ON CAPITAL WORK IN PROGRESS, THEREFORE, CREDIT FOR THE SAID AMOUNT WAS ALLOWED. THE LD. CIT(A) RESTRICTED THE DISALLOWANCE AT RS. 45,58,781/-. 5. AGGRIEVED BY THE ORDER OF THE LD.CIT(A), THE ASSES SEE IS IN APPEAL BEFORE US. 4 ITA NO. 61 76/DEL/2012 6. WE HAVE HEARD THE SUBMISSIONS OF BOTH THE PARTIE S AND HAVE PERUSED THE RECORDS OF THE CASE. 7. DURING THE COURSE OF PROCEEDINGS, THE AR SUBMITT ED THAT CAPITAL WORK IN PROGRESS ON ACCOUNT OF PLANT AND MA CHINERY FOR THE YEAR UNDER CONSIDERATION IS ONLY RS. 4,74,04,622. I T IS AN ADMITTED POSITION THAT THE ASSESSEE HAS ALREADY DISALLOWED R S. 33,55,108/- ON ACCOUNT OF INTEREST AND SAME HAS BEEN CAPITALIZE D IN THE BALANCE SHEET (PAGES 134 & 144) . THE LD. A.R SUBMITTED THAT THE CAPITAL WORK IN PROGRESS AS PER BALANCE SHEET IS RS. 6,59,4 9,078/- WHICH INCLUDES THE CLOSING BALANCE OF THE PREVIOUS ASSESS MENT YEAR. THE LD. A.R, THEREFORE SUBMITTED THAT, AT THE MOST IF I NTEREST IS TO BE CAPITALIZED ON CAPITAL WORK IN PROGRESS, IT SHOULD BE RESTRICTED TO CAPITAL WORK IN PROGRESS ON PLANT AND MACHINERY OF RS. 4,74,04,622/- ONLY. 8. ON THE OTHER HAND THE LD. D.R. CONTENDED THAT TH E SALARY, WAGES AND OTHER ADMINISTRATIVE EXPENSES ARE IN THE NATURE OF PRE OPERATIVE EXPENSES AND PLACE HER RELIANCE ON THE DE CISION OF HONBLE SUPREME COURT IN THE CASE OF VARDHMAN POLYTEX LTD. V. CIT [210 TAXMAN 261 (SC)]. 9. LET US FIRST EXAMINE THE LEGAL POSITION UNDER SE CTION 36 (1) (III) OF THE I.T. ACT, 1962, WHICH READS AS UNDER:- (1) THE DEDUCTIONS PROVIDED FOR IN THE FOLLOWING CLAUSE S SHALL BE ALLOWED IN RESPECT OF THE MATTERS DEALT WI TH THEREIN, IN COMPUTING THE INCOME REFERRED TO IN SECTION 28- 5 ITA NO. 61 76/DEL/2012 (III) THE AMOUNT OF THE INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR THE PURPOSES OF THE BUSINESS O R PROFESSION: PROVIDED THAT ANY AMOUNT OF THE INTEREST PAID, IN RESPECT OF CAPITAL BORROWED FOR ACQUISITION OF AN A SSET FOR EXTENSION OF EXISTING BUSINESS OR PROFESSION (WHETH ER CAPITALIZED IN THE BOOKS OF ACCOUNT OR NOT); FOR AN Y PERIOD BEGINNING FROM THE DATE ON WHICH THE CAPITAL WAS BO RROWED FOR ACQUISITION OF THE ASSET TILL THE DATE ON WHICH SUCH ASSET WAS FIRST PUT TO USE, SHALL NOT BE ALLOWED AS DEDUC TION.) EXPLANATION.- RECURRING SUBSCRIPTIONS PAID PERIODIC ALLY BY SHAREHOLDERS, OR SUBSCRIBERS IN MUTUAL BENEFIT SOCI ETIES WHICH FULFILL SUCH CONDITIONS AS MAY BE PRESCRIBED, SHALL BE DEEMED TO BE CAPITAL BORROWED WITHIN THE MEANING OF THIS CLAUSE. THIS PROVISION FOR CAPITALIZATION OF INTEREST WAS H ELD TO BE EFFECTIVE PROSPECTIVELY I.E. W.E.F. 01.04.200 4 INTEREST ON BORROWINGS, FOR THE PURPOSE OF BUSINESS OR PROFESSION HAS BEEN WELL RECOGNIZED DEDUCTION, STAT UTORILY ADMISSIBLE TO THE TAXPAYER IN COMPUTING THE TAXABLE INCOME FROM BUSINESS OR PROFESSION. THE LAW ON THE ISSUE I S WELL SETTLED AND HAS BEEN CLEARLY LAID DOWN BY A NUMBER OF DECISIONS OF HONBLE SUPREME COURT AND HIGH COURTS IN VARIOUS CASES. ONCE IT IS BORN OUT FROM THE RECORD THAT THE ASSESSEE HAD BORROWED CERTAIN FUNDS ON WHICH LIABIL ITY TO PAY INTEREST IS BEING INCURRED AND ON THE OTHER HAN D, CERTAIN AMOUNTS HAD BEEN ADVANCED TO SISTER CONCERNS OR OTH ERS WITHOUT CARRYING ANY INTEREST AND WITHOUT ANY BUSIN ESS PURPOSE, THE INTEREST TO THE EXTENT THE ADVANCE HAD BEEN MADE WITHOUT CARRYING ANY INTEREST IS TO BE DISALLO WED UNDER SECTION 36 (1) (III) OF THE ACT. 10. HONBLE APEX COURT IN THE CASE OF CIT V. CORE H EALTH CARE LTD. 298 ITR 194 (SC) HAS HELD THAT; 6 ITA NO. 61 76/DEL/2012 SECTION 36(1)(III) OF THE 1961 ACT HAS TO BE READ ON ITS OWN TERMS. IT IS A CODE BY ITSELF. SECTION 36(1)(III) I S ATTRACTED WHEN THE ASSESSEE BORROWS THE CAPITAL FOR THE PURPO SE OF HIS BUSINESS. IT DOES NOT MATTER WHETHER THE CAPITAL IS BORROWED IN ORDER TO ACQUIRE A REVENUE ASSET OR A CAPITAL AS SET, BECAUSE OF THAT THE SECTION REQUIRES IS THAT THE AS SESSEE MUST BORROW THE CAPITAL FOR THE PURPOSE OF HIS BUSINESS. THIS DICHOTOMY BETWEEN THE BORROWING OF A LOAN AND ACTUA L APPLICATION THEREOF IN THE PURCHASE OF A CAPITAL AS SET, SEEMS TO PROCEED ON THE BASIS THAT A MERE TRANSACTION OF BORROWING DOES NOT, BY ITSELF BRING ANY NEW ASSET OF ENDURING NATURE INTO EXISTENCE, AND THAT IT IS THE TRANSACTION OF I NVESTMENT OF THE BORROWED CAPITAL IN THE PURCHASE OF A NEW ASSET WHICH BRINGS THAT ASSET INTO EXISTENCE. THE TRANSACTION O F BORROWING IS NOT THE SAME AS THE TRANSACTION OF INVESTMENT. I F THIS DICHOTOMY IS KEPT IN MIND IT BECOMES CLEAR THAT THE TRANSACTION OF BORROWING ATTRACTS THE PROVISIONS OF SECTION 36(1)(III). 11. SIMILAR IS THE VIEW TAKEN BY THE HONBLE HIGH C OURT OF PUNJAB AND HARYANA IN THE CASE OF CIT VS. VARDHAMAN POLYT EX LTD., REPORTED IN (2008) 229 ITR 152(FB). 12. IN VIEW OF THE ABOVE JUDICIAL PRONOUNCEMENT AS WELL AS THE AMENDMENT BY WAY OF INSERTION OF PROVISO TO SECTION 36(1) (III), THE INTEREST ON MONIES BORROWED FOR ACQUIRING A CAPITAL ASSET WOULD BE DISALLOWED TILL IT IS BROUGHT TO USE ON THE BASI S THAT IT WOULD ADD TO THE COST OF THE ASSET. 13. THE ASSESSEE HAS CALCULATED THE CAPITAL WORK IN PROGRESS IN THE FOLLOWING MANNER: 7 ITA NO. 61 76/DEL/2012 DEVYANI INTERNATIONAL LIMITED ASSESSMENT YEAR 2009-10 S.NO. PARTICULARS AMOUNT (RS.) 1. CAPITAL WORK IN PROGRESS (AS PER BALANCE SHEET) 6,59,49,078 BANK RATE @ 12% 79,13,889 2. ACTUAL COST OF CWIP WITHOUT PRE - OPERATIVE EXPENSES 4,74,04,622 INTEREST @ 12% 56, 88,555 3. TOTAL ADDITIONS TO CWIP 4,74,04,622 4. AVERAGE CWIP FOR THE WHOLE YEAR CALCULATED ON MEAN METHOD 2,37,02,311 INTEREST @ 12% 28,44,277 5. INTEREST ALREADY CAPITALIZED TO CWIP AS PER WORKING ENCLOSED 33,55,108 14. WE OBSERVE THAT ADDITION TO THE CWIP FOR THE RE LEVANT ASSESSMENT YEAR UNDER CONSIDERATION IS RS.4,74,04,6 22/- FURTHER WE OBSERVE AS THE EXTENSION TOOK PLACE THROUGHOUT T HE YEAR, ONE CANNOT APPLY THE RATE OF INTEREST 12% ON EACH ITEM. THE ASSESSEE HAS GIVEN A DETAILED CHART REGARDING THE CALCULATIO N OF INTEREST PERTAINING TO EACH RESTAURANT WHICH IS AMOUNTING TO RS.33,22,108/-. AS THE INTEREST WAS PAYABLE ON EACH RESTAURANT STARTING AT DIFFERENT MONTHS DURING THE YEAR IT IS NOT CORRECT ON THE LD.CIT(A) TO APPLY THE RATE OF INTEREST FOR THE FUL L YEAR. THE ASSESSEE HAS APPLIED MEAN METHOD AND ARRIVED AT RS.2,37,02,3 11/- ON WHICH THE INTEREST IS APPLIED AT THE RATE OF 12 % W HICH COMES TO RS.28,44,277/-. THE ASSESSEE HAS ALREADY CAPITALIZE D RS.33,22,108/-. 14.1 NEITHER THE ASSESSING OFFICER NOR THE LD. CIT( A) HAS VERIFIED THE INTEREST CAPITALIZED AND THE CALCULATION OF CAPITAL WORK IN PROGRESS BY THE ASSESSEE, AND HAS MADE ADDITION ON NOTIONAL BASIS. THE 8 ITA NO. 61 76/DEL/2012 AUTHORITIES BELOW HAS ALSO NOT BROUGHT ON RECORDED ANY EVIDENCE ON THE BASIS OF WHICH THEY HAVE REJECTED ASSESSEES CL AIM. 14.2 IN THE INTEREST OF JUSTICE, WE REMIT THE ISSUE BACK TO LD.A.O FOR VERIFYING THE INTEREST CAPITALIZED BY THE ASSESSEE WITH A DIRECTION THAT THE DISALLOWANCE SHOULD NOT BE ON NOTIONAL BAS IS. THE ASSESSING OFFICER IS FURTHER DIRECTED THAT IN THE E VENT THE WORKING PROVIDED BY THE ASSESSEE, THAT HAS BEEN REPRODUCED IN HEREINABOVE APPEARS TO BE CORRECT, HE MAY ALLOW THE SAME. 15. WE, THEREFORE, ALLOW THE CLAIM OF THE ASSESSEE FOR STATISTICAL PURPOSES. 16. IN THE RESULT, THE APPEAL IS ALLOWED FOR STATIS TICAL PURPOSES. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 02/09/ 2015 SD/- SD/- (T.S. KAPOOR) (BEENA PILLAI) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: *KAVITA, P.S. COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI 9 ITA NO. 61 76/DEL/2012 DATE 1. DRAFT DICTATED ON 31.08.2015 , 01.09.2015 2. DRAFT PLACED BEFORE AUTHOR 31.08.2015, 01.09.2015 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER 02.09.2015 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. 02.09.2015 5. APPROVED DRAFT COMES TO THE SR.PS/PS 02.09.2015 6. KEPT FOR PRONOUNCEMENT ON 02.09.2015 7. FILE SENT TO THE BENCH CLERK 02.09.2015 8. DATE ON WHICH FILE GOES TO THE AR 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 10. DATE OF DISPATCH OF ORDER.