DEPUTY COMMISSIONER OF INCOME TAX 1(2)(2), MUMBAI V. NEOSYM INDUSTRY LIMITED, MUMBAI

ITA 6615/MUM/2017

• Counselvise Citation: [2019] 112 COUNSELVISE.COM (IT) 1754 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-12-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2012-2013
• Appeal Filed On: 15-11-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: KAVITA P KAUSHIKLD
• Assessee Lawyers: P P BHANDARILD ARS
• Keywords: Source of fund; Proportionate interest; Capital expenditure
• Section: 143(3)

Judgement Text

NEOSYM INDUSTRY LIMITED ASSESSMENT YEARS :2011-12 TO 2013-14 1 IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, MUMBAI , , BEFORE HONBLE SHRI MAHAVIR SINGH, JM AND HONBLE SHRI MANOJ KUMAR AGGARWAL, AM ./ I.T.A. NO.4561/MUM/2017 ( / ASSESSMENT YEAR : 2011-12 ) & ./ I.T.A. NO.6615/MUM/2017 ( / ASSESSMENT YEAR : 2012-13 ) & ./ I.T.A. NO.6616/MUM/2017 ( / ASSESSMENT YEAR : 2013-14 ) D CIT - 1 (2)(2) , 5 TH FLOOR, AAYKAR BHAVAN M.K. ROAD, MUMBAI-400 020. / VS. M/S. NEOSYM INDUSTRY LTD. INDUSTRY HOUSE, 1 ST FLOOR BACKBAY RECLAMATION CHURCHGATE, MUMBAI-400 020. %& ./ ./PAN/GIR NO. AAACT-3782-D ( &( /APPELLANT ) : ( )*&( / RESPONDENT ) ASSESSEE BY : S/ SHRI NITESH JOSHI & P.P. BHANDARI-LD. ARS REVENUE BY : MS. KAVITA P. KAUSHIK-LD. DR / DATE OF HEARING : 26/11/2019 / DATE OF PRONOUNCEMENT : 10/12/2019 / O R D E R MANOJ KUMAR AGGARWAL (ACCOUNTANT MEMBER) 1.1 AFORESAID APPEALS BY REVENUE FOR ASSESSMENT YEA RS [IN SHORT REFERRED TO AS AY] 2011-12 TO 2013-14 CONTEST SEP ARATE ORDERS OF FIRST APPELLATE AUTHORITY. SINCE COMMON ISSUES ARE INVOLVED, ALL THE NEOSYM INDUSTRY LIMITED ASSESSMENT YEARS :2011-12 TO 2013-14 2 APPEALS WERE HEARD TOGETHER AND ARE NOW BEING DISPO SED OF BY WAY OF THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE AND B REVITY. 1.2 FIRST, WE TAKE UP APPEAL FOR AY 2011-12 WHEREIN THE SOLE GROUND RAISED BY REVENUE READ AS UNDER: - WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW, THE LD. CIT(A) WAS JUSTIFIED IN DELETING THE ADDITIONS OF RS.1,26, 00,000/- WITHOUT ANY EVIDENCE OR FUND FLOW STATEMENT TO SUBSTANTIATE ANY NEXUS BETWE EN THE SOURCES OF FUNDS AND THEIR APPLICATION SO AS TO REVEAL THE SOURCE OF CAP ITAL WIP. 2.1 BRIEF FACTS ARE THAT THE ASSESSEE BEING RESIDEN T CORPORATE ASSESSEE STATED TO BE ENGAGED IN THE BUSINESS OF MANUFACTURI NG OF NON-FERROUS SHEETS, STRIPS, FOILS, ALLOYS AND S.G. IRON CASTING S ETC., WAS ASSESSED FOR YEAR UNDER CONSIDERATION U/S. 143(3) ON 26/03/2014 WHEREIN THE ASSESSEE WAS SADDLED WITH INTEREST DISALLOWANCE U/S .36(1)(III) FOR RS.126 LACS WHICH FORMS THE SUBJECT MATTER OF PRESENT APPE AL BEFORE US. 2.2 DURING ASSESSMENT PROCEEDINGS, UPON PERUSAL OF FINANCIAL STATEMENTS, IT TRANSPIRED THAT THE ASSESSEE HAD REF LECTED CAPITAL WORK-IN- PROGRESS [CWIP] FOR RS.764 LACS. AT THE SAME TIME, THE ASSESSEE HAD DEBITED INTEREST EXPENDITURE OF RS.687 LACS IN ITS PROFIT & LOSS ACCOUNT CLAIMING THE SAME TO BE REVENUE IN NATURE. THE SAID FACT LED LD. AO TO WORK OUT INTEREST DISALLOWANCE U/S 36(1)(III). THE ASSESSEE DEFENDED THE SAME BY SUBMITTING THAT CWIP WAS NOT FUNDED OUT OF BORROWED FUNDS. HOWEVER, IN THE ABSENCE OF FUNDS FLOW STATEMENT, TH E SAID PLEA WAS REJECTED AND IT WAS OPINED THAT THE ASSESSEE COULD NOT ESTABLISH NEXUS BETWEEN SOURCE OF FUNDS AND THEIR APPLICATION. 2.3 CONSEQUENTLY, LD. AO COMPUTED INTEREST DISALLOW ANCE U/S. 36(1)(III) FOR RS.126 LACS WHICH WAS NOTHING BUT PROPORTIONATE INTEREST DIVIDED IN THE RATIO OF CWIP AND BORROWED FUNDS. NEOSYM INDUSTRY LIMITED ASSESSMENT YEARS :2011-12 TO 2013-14 3 3.1 BEFORE LD. CIT(A), THE ASSESSEE SUBMITTED THAT IT INCURRED CAPITAL EXPENDITURE AT ITS EXISTING FACILITIES TOWARDS PURC HASE OF MACHINERY, COMPUTER SOFTWARE AND OTHER UTILITIES. SINCE THE AS SETS WERE NOT PUT TO USE, THE EXPENDITURE INCURRED ON THESE HEADS WAS CA RRIED IN ACCOUNTS UNDER THE HEAD CWIP WHICH HAD CLOSING BALANCE OF RS .764.26 LACS, THE BREAK-UP OF WHICH WAS ALSO PROVIDED. AS AGAINST THI S, THE ASSESSEE HAD SUFFICIENT OWN FUNDS OF RS.127.17 CRORES IN THE SHA PE OF SHARE CAPITAL AND FREE RESERVES AS AGAINST CAPITAL EXPENDITURE OF RS.7.64 CRORES. THE BREAK-UP OF THE BORROWINGS AS WELL AS FINANCE COST WAS ALSO PROVIDED WHICH HAVE ALREADY BEEN EXTRACTED AT PARA 2.3.1 OF THE IMPUGNED ORDER. THE SUBSTANTIAL FINANCE COST OF RS.569.07 LACS WAS STATED TO BE INCURRED ON ACCOUNT OF WORKING CAPITAL BANK BORROWINGS. IT W AS PLEADED THAT BANK BORROWINGS WERE MEANT TO FUND WORKING CAPITAL REQUI REMENTS AND COULD NOT BE USED FOR ANY OTHER PURPOSE. IT WAS ALSO POIN TED OUT THAT NO BORROWINGS WERE AVAILED BY THE ASSESSEE TO ACQUIRE FIXED ASSETS. THE ATTENTION WAS DRAWN TO THE FACT THAT CASH FLOW STAT EMENT ALREADY FORMED PART OF THE FINANCIAL STATEMENTS. IN THE ABOVE BACK GROUND, IT WAS PLEADED THAT INTEREST DISALLOWANCE AS MADE BY LD. AO WAS NO T JUSTIFIED. RELIANCE WAS PLACED ON THE DECISION OF HONBLE BOMBAY HIGH C OURT RENDERED IN HDFC BANK LTD. V/S DCIT FOR THE SUBMISSIONS THAT A PRESUMPTION WAS TO BE DRAWN IN ASSESSEES FAVOR THAT THE INVESTMENT S WERE OUT OF FREE FUNDS AVAILABLE WITH THE ASSESSEE. 3.2 THE LD. CIT(A), AFTER APPRECIATING THE PROVISIO NS OF SECTION 36(1)(III), OPINED THAT THE PROVISO TO THAT SECTION WOULD APPLY ONLY IN CASE OF EXTENSION OF EXISTING BUSINESS, WHICH WAS NOT TH E CASE HERE SINCE THE EXPENDITURE ON UTILITIES, COMPUTER SOFTWARE, STAFF QUARTERS, MACHINERIES NEOSYM INDUSTRY LIMITED ASSESSMENT YEARS :2011-12 TO 2013-14 4 COULD NOT BE CONSTRUED AS EXTENSION OF EXISTING BUS INESS. FURTHER, THE ASSESSEES OWN FUNDS WERE SUBSTANTIALLY HIGHER THAN CLOSING CWIP. THE LOANS FROM BANK WERE FOR WORKING CAPITAL FACILITY O NLY AND BORROWED FOR SPECIFIC PURPOSE. THEREFORE, KEEPING IN VIEW ALL TH ESE FACTORS, THE DISALLOWANCE U/S 36(1)(III) WOULD NOT BE SUSTAINABL E AND ACCORDINGLY, LD. AO WAS DIRECTED TO DELETE THE SAID DISALLOWANCE. AG GRIEVED, THE REVENUE IS UNDER FURTHER APPEAL BEFORE US. 4. WE HAVE CAREFULLY HEARD THE RIVAL SUBMISSIONS, P ERUSED RELEVANT MATERIAL ON RECORD INCLUDING DOCUMENTS PLACED IN TH E PAPER-BOOK. UPON DUE CONSIDERATION OF FACTUAL MATRIX AS ENUMERATED B Y US IN THE PRECEDING PARAGRAPHS, THE UNDISPUTED POSITION THAT EMERGES IS THE FACT THAT THERE WAS NO EXTENSION OF EXISTING BUSINESS BY THE ASSESS EE WHICH WOULD ATTRACT DISALLOWANCE AS ENVISAGED BY PROVISO TO SEC TION 36(1)(III). AS RIGHTLY OBSERVED BY LEARNED FIRST APPELLATE AUTHORI TY, THE SAID EXPENDITURE WAS INCURRED TOWARDS ADVANCE FOR MACHINERY & CIVIL WORK, SAP IMPLEMENTATION WORK, ADVANCE FOR STAFF QUARTERS, EX PENDITURE ON WATER PIPE LINE ETC., THE NATURE OF WHICH WOULD NOT LEAD TO A CONCLUSION THAT THERE WAS AN EXTENSION OF EXISTING BUSINESS. 5. ANOTHER UNDISPUTED FACT IS THAT THE ASSESSEE HAD SUFFICIENT OWN INTEREST FREE FUNDS IN THE SHAPE OF SHARE CAPITAL A ND FREE RESERVES WHICH FAR EXCEEDED THE CWIP EXPENDITURE INCURRED BY THE ASSESSEE. IN SUCH A CASE, UNTIL NEXUS OF BORROWED FUNDS VIS--VI S CAPITAL EXPENDITURE IS ESTABLISHED BY LD. AO, A PRESUMPTION WOULD BE DR AWN IN ASSESSEES FAVOR THAT THE STATED CWIP WAS FUNDED OUT OF ITS OW N INTEREST FREE FUNDS. FOR THE SAID PROPOSITION, RELIANCE COULD BE PLACED ON THE DECISION OF HONBLE BOMBAY HIGH COURT IN CIT V/S RELIANCE INDUSTRIES LTD. (86 NEOSYM INDUSTRY LIMITED ASSESSMENT YEARS :2011-12 TO 2013-14 5 TAXMANN.COM 24) CONFIRMING THE SAID PRESUMPTION IN ASSESSEES FAVOR . THE REVENUES APPEAL, ON THE STATED ISSUE, HAS ALRE ADY BEEN DISMISSED BY HONBLE SUPREME COURT WHICH IS REPORTED AT 102 T AXMANN.COM 52. 6. ANOTHER FACTOR TO BE NOTED IS THAT THE BANK BORR OWING WAS TO FUND THE WORKING CAPITAL FACILITIES ONLY AND THE SAME WE RE BORROWED FOR SPECIFIC PURPOSE. NOTHING OR RECORD WOULD INDICATE THAT THESE BORROWINGS WERE DIVERTED BY THE ASSESSEE TO MEET CAPITAL EXPEN DITURE. 7. KEEPING IN VIEW ALL THE ABOVE STATED FACTORS, WE DO NOT FIND ANY INFIRMITY IN THE IMPUGNED ORDER IN DELETING THE INT EREST DISALLOWANCE AS MADE BY LD. AO. THEREFORE, BY CONFIRMING THE IMPUGN ED ORDER, WE DISMISS THE APPEAL. ITA NO.6615/MUM/2017, AY 2012-13 8.1 FACTS ARE SLIGHTLY DIFFERENT IN THIS YEAR SINCE THE ASSESSEE HAS OBTAINED SPECIFIC TERM LOANS TO INSTALL A NEW STATE OF ART FACILITY TO MANUFACTURE ENGINE BLOCKS AND HEADS AT ITS CASTING FACTORY AT PUNE. ACCORDINGLY, IT HAS ALREADY CAPITALIZED INTEREST OF RS.631.28 LACS AS PER THE APPLICABLE ACCOUNTING STANDARDS. HOWEVER, LD. A O COMPUTED ADDITIONAL INTEREST DISALLOWANCE OF RS.521.27 LACS AND ADDED THE SAME TO THE INCOME OF THE ASSESSEE. THE SAID DISALLOWANC E HAS BEEN COMPUTED IN THE RATIO OF CWIP TO BORROWED FUNDS, AS DONE IN AY 2011- 12. 8.2 UPON FURTHER APPEAL, LEARNED FIRST APPELLATE AU THORITY NOTED THAT OWN FUNDS WERE HIGHER THAN CWIP. FURTHER CASH GENER ATED FROM OPERATIONS OF RS.11.07 CRORES AND TERM LOAN OF RS.8 4.88 CRORES WAS SUFFICIENT TO MEET CWIP OF RS.85.82 CRORES. SINCE, TERM LOAN INTEREST NEOSYM INDUSTRY LIMITED ASSESSMENT YEARS :2011-12 TO 2013-14 6 WAS ALREADY CAPITALIZED, NO FURTHER DISALLOWANCE WO ULD BE WARRANTED. AGGRIEVED, THE REVENUE IS UNDER FURTHER APPEAL BEFO RE US. 8.3 UPON DUE CONSIDERATION OF FACTUAL MATRIX FOR TH IS YEAR, WE FIND THAT THE ASSESSEE HAS ALREADY CAPITALIZED INTEREST ON FR ESH TERM LOANS TAKEN SPECIFICALLY FOR THE PURPOSE OF MEETING INCREMENTAL CAPITAL EXPENDITURE AND THEREFORE, NO FURTHER DISALLOWANCE WOULD BE WAR RANTED ON THIS ACCOUNT. THIS BEING THE CASE, OUR OTHER OBSERVATION S & REASONING AS GIVEN FOR AY 2011-12, WOULD APPLY QUA BALANCE DISALLOWANCE. UNDISPUTEDLY, OWN FUNDS FAR EXCEEDED THE CAPITAL EX PENDITURE AND A PRESUMPTION WOULD LIE IN ASSESSEES FAVOR THAT THE EXPENDITURE WAS FUNDED OUT OF OWN INTEREST FREE FUNDS. THEREFORE, C ONCURRING WITH STAND OF LD. CIT(A), WE DISMISS THE APPEAL. ITA NO.6616/MUM/2017, AY 2013-14 9.1 FACTS IN THIS YEAR ARE SIMILAR TO AY 2012-13. T HE ASSESSEE CAPITALIZED INTEREST OF RS.55 LACS, BUT LD. AO COMP UTED ADDITIONAL INTEREST DISALLOWANCE OF RS.202.65 LACS ON SIMILAR LINES. THE LD. CIT(A) DELETED THE SAME, ON MORE OR LESS SIMILAR REASONING S. AGGRIEVED, THE REVENUE IS UNDER FURTHER APPEAL BEFORE US. 9.2 FACTS BEING PARI-MATERIA THE SAME AS IN AY 2012-13, OUR OBSERVATIONS, FINDINGS AS WELL AS ADJUDICATION SHAL L, MUTATIS MUTANDIS, APPLY TO THIS YEAR ALSO. RESULTANTLY, THE APPEAL ST ANDS DISMISSED. CONCLUSION 10. ALL THE APPEALS STAND DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 10 TH DECEMBER, 2019 SD/- SD/- (MAHAVIR SINGH) (MA NOJ KUMAR AGGARWAL) / JUDICIAL MEMBER / ACCOUNTANT MEMBER NEOSYM INDUSTRY LIMITED ASSESSMENT YEARS :2011-12 TO 2013-14 7 MUMBAI; DATED : 10/12/2019 SR.PS, JAISY VARGHESE !'! / COPY OF THE ORDER FORWARDED TO : 1. &( / THE APPELLANT 2. )*&( / THE RESPONDENT 3. 1 ( ) / THE CIT(A) 4. 1 / CIT CONCERNED 5. 23),4 , 4 , / DR, ITAT, MUMBAI 6. 3567 / GUARD FILE / BY ORDER, / (DY./ASSTT.REGISTRAR) , / ITAT, MUMBAI.