Sonali Castings P. Ltd, Secunderabad V. DCIT, Circle 3(2), Hyderabad

ITA 723/HYD/2010

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 2589 (ITAT-HYDERABAD)
• Duration Of Justice: 6 year(s) 11 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-05-2017
• Appeal Filed By: Assessee
• Bench Allotted: A
• Next Hearing Date: 16-03-2017
• Assessment Year: 2006-2007
• Appeal Filed On: 12-05-2010
• Court: TRIBUNAL
• Department Lawyers: M V ANIL KUMAR
• Assessee Lawyers: A SITARAMA RAO
• Keywords: Capital asset; Depreciation; Business expenditure; Proportionate interest; Revenue expenditure
• Section: 40A(3); 143(3); 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A, HYDERABAD BEFORE SMT P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO. 723/HYD/2010 ASSESSMENT YEAR: 2006-07 M/S. SONALI CASTINGS PVT. LTD., HYDERABAD. PAN AADCS 0831M VS. DY. COMMISSIONER OF INCOME TAX-3(2) HYDERABAD. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI A. SITARAMA RAO REVENUE BY : SHRI M.V. ANIL KUMAR DATE OF HEARING : 27-03-2017 DATE OF PRONOUNCEMENT : 05-05-2017 ORDER PER B. RAMAKOTAIAH, AM THIS IS AN APPEAL FILED BY ASSESSEE FOR A.Y 2006- 07 AGAINST THE ORDER OF CIT(A)-IV, HYDERABAD DATED 03-02- 2010. ASSESSEE HAS RAISED VARIOUS GROUNDS, WHICH ARE BEING DECIDED AFTER HEARING BOTH THE PARTIES. 2. BRIEFLY STATED, ASSESSEE IS A PRIVATE LIMITED COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURE OF CI CASTINGS AND THE COMPANY FOR THE A.Y 2006-07 FILED ITS RETURN OF INCOME ON 30-11-2006 ADMITTING AN INCOME OF RS. 47,21,234/- FROM THE BUSINESS AND CAPITAL GAINS OF RS. 12,96,230/-. A.O WHILE COMPLETING THE ASSESSMENT UNDER 2 ITA NO. 723/HYD/2010 M/S SONALI CASTINGS PVT LTD., HYDERABAD. SECTION 143(3) ON 30-12-2008 HAS MADE VARIOUS DISALLOWANCES, WHICH LD. CIT(A) CONFIRMED, EXCEPT THE CLAIM OF EXCESS DEPRECIATION WHICH WAS GIVEN RELIEF AND ON WHICH REVENUE IS NOT AN APPEAL. AGGRIEVED ON THE ORDR OF LD.CIT)A), ASSESSEE IS IN APPEAL BEFORE US. 3. GROUND NO.1 IS AS UNDER: 1. THE CIT(A) ERRED IN LAW AND FACTS OF THE CASE IN CONFIRMING THE ADDITION OF RS. 58,714/- BY THE ASSESSING OFFICER UNDER SECTION 40A(3) OF THE INCOME TAX ACT, 1961, IGNORING THE FACT THAT THEY ARE INDEPENDENT PAYMENTS SUPPORTED BY VOUCHERS AND CANNOT BE AGGREGATED. 3.1 THE ISSUE PERTAINING TO THIS GROUND IS THAT A.O NOTICED FROM BOOKS OF ACCOUNTS THAT ASSESSEE MADE PAYMENTS ON VARIOUS DATES IN CASH EXCEEDING RS. 20,000/- EACH AMOUNTING TO RS. 2,93,569/- AND 20% THEREOF WAS DISALLOWED INVOKING THE PROVISIONS OF SECTION 40A(3). 3.2 BEFORE LD. CIT(A), ASSESSEE CONTESTED THAT THERE IS NO SINGLE PAYMENT IN EXCESS OF RS. 20,000/- AND THE AMOUNTS WERE PAID AT DIFFERENT TIMES IN THE DAY, WHICH WOULD NOT ATTRACT PROVISIONS OF SEC. 40A(3) OF THE IT ACT. COPY OF THE CASH BOOK FURNISHED IN SUPPORT OF THE CLAIM. 3.3 LD. CIT (A) WHILE ACCEPTING THAT THE PAYMENTS HAVE BEEN MADE ON SEVERAL OCCASIONS ON A DAY, THE CONTENTIONS OF ASSESSEE HAVE NOT ACCEPTED THAT ASSESSEE HAS NOT SUBSTANTIATED THAT THE AMOUNTS WERE PAID AT DIFFERENT TIMES AND THEREFORE WOULD ATTRACT THE PROVISIONS 3 ITA NO. 723/HYD/2010 M/S SONALI CASTINGS PVT LTD., HYDERABAD. OF SEC. 40A(3) OF THE IT ACT, ACCORDINGLY CONFIRMED THE DISALLOWANCE MADE. 3.4 REFERRING TO THE FINDINGS OF THE LD. CIT(A), LD. COUNSEL ADMITTED THAT THE PAYMENTS WERE MADE AT DIFFERENT POINTS OF TIME AND IT IS LESS THAN RS. 20,000/- PER PAYMENT. HE REFERRED TO THE PROVISIONS OF SEC. 40A(3) OF THE IT ACT TO SUBMIT THAT THE SECTION WAS AMENDED W.E.F 01-04- 2008 SO AS TO CONSIDER THE AGGREGATE PAYMENTS IN A DAY AND SAME WAS NOT APPLICABLE FOR IMPUGNED ASSESSMENT YEAR. 3.5 AFTER CONSIDERING THE RIVAL CONTENTIONS, WE ARE IN AGREEMENT WITH THE CONTENTIONS OF THE ASSESSEES COUNSEL. PROVISIONS OF SECTION 40A(3) OF THE IT ACT BEFORE ITS AMENDMENT BY THE FINANCE ACT 2008, IS AS UNDER: SUBSECTION-3 WHERE THE ASSESSEE INCURS ANY EXPENDITURE IN RESPECT OF WHICH PAYMENT IS MADE IN A SUM EXCEEDING RS. 20,000/- OTHERWISE THAN BY AN ACCOUNT PAYEE CHEQUE DRAWN ON A BANK OR ACCOUNT PAYEE BANK DRAFT, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF SUCH EXPENDITURE. THERE IS A FINDING BOTH BY A.O AND BY CIT(A) THAT EACH OF THE PAYMENT IS LESS THAN RS. 20,000/-. THE CONTENTIONS OF A.O AND CIT(A) THE PAYMENTS IN A DAY HAVE EXCEEDED RS. 20,000/- DOES NOT APPLY TO THE IMPUGNED ASSESSMENT YEAR AS THE NEW PROVISION HAS COME INTO EFFECT W.E.F 01-04-2008. THE AMENDED PROVISION IS AS UNDER : WHERE ASSESSEE INCURS ANY EXPENDITURE IN RESPECT OF PAYMENTS WHICH A PAYMENT OR AGGREGATE MADE TO A PERSON IN A DAY, OTHERWISE THAN BY AN ACCOUNT PAYEE 4 ITA NO. 723/HYD/2010 M/S SONALI CASTINGS PVT LTD., HYDERABAD. CHEQEE DRAWN ON A BANK OR ACCOUNT PAYEE BANK DRAFT, EXCEEDS RS. 20,000/-, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF SUCH EXPENDITURE. THUS, THE AGGREGATE OF PAYMENTS IN A DAY WOULD APPLY FROM A.Y 2009-10 ONLY, AND NOT APPLICABLE FOR THE IMPUGNED ASSESSMENT YEAR. SINCE EACH OF THE PAYMENT IS LESS THAN RS. 20,000/-, EVEN IF IT IS PAID TO SAME PERSON IN A DAY, THE SAME CANNOT BE DISALLOWED AS THE PROVISIONS OF SEC. 40A(3) OF THE IT ACT AS APPLICABLE ARE NOT ATTRACTED. ACCORDINGLY, THE DISALLOWANCES MADE BY A.O, AS CONFIRMED BY CIT(A), STANDS DELETED. THE GROUND IS ALLOWED. 4. GROUND NO.2 IS AS UNDER: 2. THE CIT(A) OUGHT TO HAVE DELETED THE ADDITION UNDER SECTION 40(A)(IA) OF THE INCOME TAX ACT, 1961 AMOUNTING TO RS. 1,78,280/- CONSIDERING THE FACT THAT TDS HAS BEEN DEDUCTED AND PAID. 4.1 THE ISSUE PERTAINS TO DISALLOWANCE OF AN AMOUNT OF RS. 1,78,280/- INVOKING PROVISIONS OF SEC. 40A(3) OF THE IT ACT. A.O NOTICED THAT IN FIVE CASES OF CONTRACTORS, TDS HAS BEEN CHARGED TO RESPECTIVE ACCOUNTS AND LATER RS. 50,620 WAS WRITTEN OFF. A.O NOTED THAT ASSESSEE HAD PAID/CREDITED VARIOUS ACCOUNTS TO CONTRACTORS WITHOUT DEDUCTING TDS. HOWEVER, ASSESSEE SUBMITTED THAT TAX ON CONTRACT AMOUNTS HAVE BEEN PAID TO THE GOVERNMENT AND EXPENDITURE HAS BEEN INCURRED BY THE COMPANY ITSELF. A.O INVOKING THE PROVISION OF SEC. 195A OF THE IT ACT GROSSED UP THE AMOUNT AND DISALLOWED AN AMOUNT RS. 1,78,280/-. 4.2 LD. CIT(A) AFTER EXAMINING THE CONTENTIONS OF ASSESSEE, DIRECTED THE A.O TO VERIFY THAT ONLY AN AMOUNT OF 5 ITA NO. 723/HYD/2010 M/S SONALI CASTINGS PVT LTD., HYDERABAD. RS. 50,620/- HAS BEEN PAID BY ASSESSEE AND TO RECOMPUTE THE AMOUNT DISALLOWABLE U/S 40(A)(IA) OF THE IT ACT. 4.3 AFTER CONSIDERING THE RIVAL CONTENTIONS AND DIRECTIONS OF THE CIT(A), WE ARE OF THE OPINION THAT THE AMOUNT MENTIONED IN THE GROUND IS NOT CORRECT AS THE CIT(A) HAS PARTLY ALLOWED THE AMOUNT AND DIRECTED THE A.O TO VERIFY THE AMOUNT OF RS. 50,620/-, ACCORDINGLY THE GROUND TO AN EXTENT OF RS. 1,78,280/- DOES NOT ARISE. WE WERE INFORMED THAT A.O HAS NOT GIVEN CONSEQUENTIAL EFFECT TO THE ORDER OF CIT(A). IT WAS SUBMITTED THAT THERE IS NO OUTSTANDING AMOUNT AT THE END OF THE YEAR AND HENCE PROVISIONS OF SEC. 40(A)(IA) DOES NOT APPLY, IN VIEW OF THE SPECIAL BENCH DECISION OF ITAT VIZAG BENCH IN THE CASE OF MERLYIN SHIPPING AND TRANSPORT VS. ACIT, 16 ITR (AT) (1)(VIZAG). WHILE AGREEING WITH THE ORDER OF CIT(A) TO VERIFY THE CONTENTION, WE ARE OF THE OPINION THAT PROVISIONS OF SEC. 40(A)(IA) CANNOT BE INVOKED ON THIS FACT. IN CASE ASSESSEE HAS PAID THE TDS ON BEHALF OF THE CONTRACTORS AND WRITTEN OFF THE AMOUNT TO AN EXTENT OF RS. 50,620/-, THE SAME CANNOT BE ALLOWED AS BUSINESS EXPENDITURE U/S 37(1) OF THE IT ACT. PROVISIONS OF SEC. 195A OF THE IT ACT AND PROVISIONS OF SEC. 201 AND 201(1A) OF THE IT ACT MAY APPLY BUT NOT PROVISIONS OF SEC. 40(A)(IA) OF THE IT ACT. IN THESE CIRCUMSTANCES, A.O IS DIRECTED TO EXAMINE THE ISSUE AFRESH AND EXAMINE WHETHER PROVISIONS OF SEC.37 WOULD APPLY.. THE GROUND IS CONSIDERED ALLOWED FOR STATISTICAL PURPOSES. 6 ITA NO. 723/HYD/2010 M/S SONALI CASTINGS PVT LTD., HYDERABAD. 5. GROUND NO.3 IS AS UNDER: 3. THE CIT (A) OUGHT TO HAVE DELETED THE ADDITION OF RS. 15,800/- UNDER SEC. 40(A)(IA) AS REPORTED IN THE TAX AUDIT ON CONSIDERING THE FACT THAT TDS HAS BEEN PAID. 5.1 ISSUE ARISING OUT OF THIS GROUND WAS THAT AN AMOUNT OF RS. 15,800/- HAS BEEN PAID WITHOUT DEDUCTING TAX. ASSESSEE SUBMITTED THAT THE TDS HAS BEEN DEDUCTED ON THE SAID PAYMENT AND THE AMOUNT HAS ALREADY REMITTED TO THE GOVERNMENT ACCOUNT. EVEN THOUGH THE SAME WAS REITERATED BEFORE LD. CIT(A), LD. CIT(A) REJECTED THE GROUND THAT ASSESSEE HAS NOT PREFERRED THE GROUND NOR SUBSTANTIATED THE CONTENTIONS MADE IN THE STATEMENTS OF FACTS. 5.2 AFTER CONSIDER THE RIVAL CONTENTIONS, WE ARE OF THE OPINION THAT THE DISALLOWANCE IS NOT WARRANTED. ASSESSEE HAS NOT VIOLATED THE PROVISIONS OF SEC. 40(A)(IA) OF THE IT ACT AS THE TDS HAS BEEN DEDUCTED AND PAID TO THE GOVERNMENT. MOREOVER THE AMOUNT IS ALSO NOT OUTSTANDING AT THE END OF THE YEAR. IN VIEW OF THAT, WE DIRECT THE A.O TO DELETE THE AMOUNT AND THE GROUND IS ACCORDINGLY ALLOWED. 6. GROUND NOS. 4 & 5 ARE AS UNDER: 4. THE CIT(A) OUGHT TO HAVE CONSIDERED THAT FACT THAT RENT PAID OF RS. 8,10,000/- FOR THE MANAGING DIRECTORS RESIDENCE IS IN THE COURSE OF BUSINESS AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OF THE COMPANY AND ALLOWED THE SAME ON THE RATION OF THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF UPPER INDIA PUBLISHING HOUSING (P) LTD., VS. CIT 117 ITR 569 (SC) AND ALSO THAT IN THE CASE OF D C GANDHI ASSOCIATES VS ITO 32 ITD 285. 7 ITA NO. 723/HYD/2010 M/S SONALI CASTINGS PVT LTD., HYDERABAD. 5. THE CIT(A) ERRED IN LAW AND FACTS OF THE CASE IN NOT ALLOWING THE EXPENDITURE INCURRENT IN THE COURSE OF BUSINESS AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS ON THE GROUND THAT THIS PAYMENT OF RENT IS NOT REFLECTED IN FORM 12 BA. YOUR APPELLANT PRAYS THAT ADDITION OF RS. 8,10,000/- MAY BE DELETED. 6.1 THE GROUNDS PERTAIN TO THE ISSUE OF DISALLOWANCE U/S 40A OF THE IT ACT. BRIEF FACTS OF THE ISSUES ARE THAT ASSESSEE CLAIMED AN AMOUNT OF RS. 8,10,000/- AS AN EXPENDITURE. A.O DISALLOWED THE SAME INVOKING THE PROVISIONS OF SEC. 40A OF THE IT ACT HOLDING THAT THE EXPENDITURE IS NOT RELATABLE TO THE BUSINESS AND WAS GIVEN AS THE BENEFIT TO THE DIRECTOR. 6.2 ASSESSEE CONTENDED THE MATTER BEFORE LD. CIT(A) THAT THE ABOVE AMOUNT WAS PAID AS RENT TO TWO OWNERS, DIRECTOR SHRI C.V. ANAND REDDY HAVING 40% OF THE SHARE AND SMT. C. VEENA REDDY HAVING 60% SHARE AND THE HOUSE WAS GIVEN FOR THE PURPOSE OF RESIDENCE OF THE DIRECTOR AS PER THE TERMS OF EMPLOYMENT. IT WAS SUBMITTED THAT PROVISIONS OF SEC. 40A OF THE IT ACT DO NOT APPLY. FURTHER IT WAS CONTENDED THAT THERE IS NO FINDING BY THE A.O ABOUT UNREASONABLENESS OF SUCH PAYMENT. ASSESSEE REFERRED TO VARIOUS CASE LAW AS DISCUSSED BY LD. CIT IN PARA 10.2. HOWEVER LD. CIT(A) DID NOT AGREE AS THE RENT PAID ON BEHALF OF DIRECTOR WAS NOT REFLECTED IN FORM NO. 12BA, THEREFORE THE EXPENDITURE IS NOT PROVED AND THE DISALLOWANCE MADE BY A.O WAS CONFIRMED IN ORDER. 6.3 REFERRING TO THE PAPER BOOK PLACED ON RECORD, IT WAS THE SUBMISSION OF THE LD. COUNSEL THAT BOTH SHRI C.V. 8 ITA NO. 723/HYD/2010 M/S SONALI CASTINGS PVT LTD., HYDERABAD. ANAND REDDY AND SMT. C. VEENA REDDY HAVE DECLARED THESE AMOUNTS AS INCOME IN THEIR HANDS AND IT IS THE OBLIGATION OF THE COMPANY TO PROVIDE THE RESIDENCE TO THE DIRECTOR. COMING TO THE ISSUE OF NOT REFLECTING THE SAME IN THE HANDS OF THE DIRECTOR, IT WAS PLACED ON RECORD THE WORKING OF PERQUISITES IN THE HANDS OF THE MANAGING DIRECTOR, WHICH COMES TO TAXABLE RENT FREE ACCOMMODATION VALUE AT RS. 1,26,750/-. IT WAS SUBMITTED THAT IN THE COMPUTATION OF INCOME BY THAT ASSESSEE EVEN THOUGH THIS AMOUNT WAS NOT TAKEN SEPARATELY, THERE WAS EXCESS INCOME OFFERED. LD. COUNSEL REFERRED TO THE RETURN FILED AT RS. 13,28,963/- WHEREAS THE REVISED COMPUTATION OF THE DIRECTOR WOULD COME TO RS. 11,62,590/-. IT WAS SUBMITTED THAT THE EXPENDITURE WAS FOR THE PURPOSE OF BUSINESS AND ALLOWABLE IN THE HANDS OF THE COMPANY. 6.4 AFTER CONSIDERING THE RIVAL CONTENTIONS, WE ARE OF THE OPINION THAT PROVISION OF RENT FREE ACCOMMODATION TO THE DIRECTOR IS GENERALLY PROVIDED BY THE COMPANY. HOWEVER, ASSESSEE HAS NOT PLACED ON RECORD THE TERMS OF EMPLOYMENT OR THE RESOLUTION PASSED WITH REFERENCE TO THE PROVISION OF ACCOMMODATION TO THE MANAGING DIRECTOR. NOT ONLY THAT A.O HAS INVOKED THE PROVISION OF SEC. 40A OF THE IT ACT, HOWEVER, THERE IS NO FINDING OF A.O THAT AMOUNT WAS UNREASONABLE. IN THESE CIRCUMSTANCES THE DISALLOWANCE CANNOT BE EITHER DELETED OR SUSTAINED IN THE ABSENCE OF COMPLETE DETAILS. IT IS A FACT THAT THE RESPECTIVE RECIPIENTS HAVE DECLARED THE INCOME. IT IS ALSO FACT THAT DIRECTOR HAS NOT SHOWN ITS VALUE IN THE COMPUTATION OF INCOME NOR THE COMPANY INCLUDED IN FORM NO. 16 GIVEN TO THE DIRECTOR. IN 9 ITA NO. 723/HYD/2010 M/S SONALI CASTINGS PVT LTD., HYDERABAD. THESE CIRCUMSTANCES, WE ARE OF THE OPINION THAT THE SAME IS REQUIRED TO REEXAMINED (1) WITH REFERENCE TO THE AGREEMENT OR RESOLUTION FOR PROVIDING THE RENT FREE ACCOMMODATION TO THE DIRECTOR. (2) WHETHER SAME ACCOMMODATION WAS PROVIDED IN EARLIER YEARS AND LATER YEARS (3) WHETHER THE RENT PAID IS REASONABLE OR NOT AND (4) WHETHER THE VALUE OF PERQUISITES IN THE HANDS OF THE DIRECTOR REQUIRED TO BE BROUGHT TO TAX SEPARATELY, KEEPING IN MIND THAT COMPUTATIONS PROVIDED BY THE ASSESSEE IN THE PAPER BOOK. IN ORDER TO EXAMINE THESE ISSUES, WE HERE BY SET ASIDE THE ENTIRE ISSUE TO THE FILE OF THE A.O TO BE REEXAMINED AND DETERMINED ACCORDING TO THE PROVISIONS OF ACT. ASSESSEE SHOULD BE GIVEN DUE OPPORTUNITY TO PLACE THE NECESSARY EVIDENCE ON RECORD JUSTIFYING THE CLAIM. THE GROUND IS CONSIDERED ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. 7. GROUND NOS. 6, 7 & 8 ARE AS UNDER: 6. YOUR APPELLANT SUBMITS THAT THE A.O ERRED INLAW AND FACTS OF THE CASE IN DISALLOWING THE PROPORTIONATE INTEREST AMOUNT TO RS. 13,32,330/-. YOUR APPELLANT SUBMITS THAT IT IS AN EXISTING BUSINESS AND THE CAPITAL WORK IN PROGRESS RELATED TO THE SAME BUSINESS. HENCE DISALLOWANCE IS NOT CORREC.T 7. YOUR APPELLANT SUBMITS THAT THE APEX COURT IN THECAE OF CIT VS ASSOCIATED FIBER AND RUBBER INDUSTRIES PVT. LTD. 236 ITR 471 (SC) SQUARELY COVERS THE FACTS OF THE PRESENT CASE AND THE ADDITION SHOULD BE DELETED. 8. THE CIT(A) HAS IGNORED THE FACT THAT WORKING CAPITAL FACILITIES CANNOT BE USED FOR CAPITAL WORKS AND THE ALTERNATIVE STAND THAT AT BEST THE INTEREST ON TERM LOAN IN PROPORTION MAY BE DISALLOWED OUT HAVE BEEN CONSIDERED. 7.1 THE ISSUE PERTAINING TO THESE GROUNDS ARE THAT ASSESSEE HAD SHOWN AN AMOUNT OF RS. 91,63,211/- AS 10 ITA NO. 723/HYD/2010 M/S SONALI CASTINGS PVT LTD., HYDERABAD. CAPITAL WORK-IN-PROGRESS. SINCE ASSESSEE AVAILED LOANS OF RS. 2.59 CRORES AND DEBITED INTEREST AND FINANCIAL CHARGES OF RS. 37,70,628/-, THE A.O DISALLOWED PROPORTIONATE RATE OF INTEREST ON THE AMOUNT ATTRIBUTABLE TO CWIP TO AN EXTENT OF RS. 13,32,330/-. 7.2 ASSESSEE CONTENDED BEFORE LD. CIT(A) THAT THE AMOUNT IS ALLOWABLE AS A REVENUE EXPENDITURE, FOLLOWING PRINCIPLES LAID DOWN BY HONBLE SUPREME COURT IN THE CASE OF CIT VS. ASSOCIATED AND FIBER AND RUBBER INDUSTRIES PVT. LTD, 236 ITR 471 (SC). LD. CIT(A) HOWEVER DISTINGUISHED THE SAID JUDGMENT AS IT PERTAINS TO A.Y 1972-73. HE ALSO REFERRED TO THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF DCIT VS CORE HEALTH CARE LTD., (2008) 298 ITR 194 (SC) AND STATED THAT PROVISO INSERTED IN SEC. 36(1)(III) OF THE IT ACT W.E.F 01-04-2004 WILL OPERATE PROSPECTIVELY AND ACCORDINGLY THE PROPORTIONATE DISALLOWANCE WAS REQUIRED TO BE CAPITALIZED. 7.3 THE LD. COUNSEL WHILE REITERATING THE SUBMISSIONS MADE BEFORE CIT(A), REFERRED TO THE JUDGMENT OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS BHARAT HOTELS LTD 381 ITR 0222 FOR THE PROPOSITION THAT IN A BUSINESS WHICH IS ALREADY IN EXISTENCE, THE FUNDS BORROWED FOR EXPANSION OF THE BUSINESS IS ALLOWABLE AS REVENUE EXPENDITURE. IT WAS FURTHER SUBMITTED THAT THE TERM LOAN OBTAINED FROM NEW MACHINERY WAS ONLY RS. 69.30 LAKHS AND NOT ENTIRE AMOUNT WHICH INCLUDE WORKING CAPITAL LOANS BY HYPOTHECATION OF STOCK. IF AT ALL A DISALLOWANCE IS REQUIRED, IT SHOULD BE RESTRICTED TO THE TERM LOAN OBTAINED 11 ITA NO. 723/HYD/2010 M/S SONALI CASTINGS PVT LTD., HYDERABAD. FOR THE PURPOSE OF INVESTING IN ASSETS AND NOT ON THE WORKING CAPITAL LOANS. 7.4 WE HAVE EXAMINED THE RIVAL CONTENTIONS AND PERUSED THE DOCUMENTS PLACED ON RECORD. LD. CIT(A) RIGHTLY CONCLUDED THAT THE PRINCIPLES LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. ASSOCIATED AND FIBER AND RUBBER INDUSTRIES PVT. LTD, (SUPRA) WOULD NOT APPLY TO THE IMPUGNED ASSESSMENT YEAR AS THERE WAS CHANGE IN THE PROVISIONS W.E.F 01-04-2004. THIS ISSUE WAS ELABORATELY DISCUSSED BY THE HONBLE SUPREME COURT IN THE CASE OF DCIT VS CORE HEALTH CARE LTD., (SUPRA). IN THAT CASE, THE PROVISION AS APPLICABLE TO PRIOR TO 01-04-2004 WAS DISCUSSED AND THE AMOUNTS ATTRIBUTABLE TO EXPANSION OF BUSINESS WAS ALLOWED AS REVENUE EXPENDITURE. HOWEVER, THE HONBLE SUPREME COURT ALSO VERY CATEGORICALLY OBSERVED THAT THERE WAS AN AMENDMENT TO THE PROVISIONS BY INSERTION OF A PROVISO WHICH RESTRICTS THE INTEREST ALLOWANCE ON THE ASSETS WHICH ARE NOT PUT TO USE. SINCE THE ASSETS IN QUESTION ARE NOT YET USED AND ARE SHOWN AS CAPITAL WORK- IN-PROGRESS, THE INTEREST ATTRIBUTABLE TO BORROWING OF FUNDS FOR PURCHASE OF SUCH ASSETS IS NOT ALLOWABLE DEDUCTION U/S 36(1)(III) OF THE IT ACT. HOWEVER, A.O WORKING ON A PROPORTIONATE BASIS CANNOT BE CONSIDERED CORRECT AS WORKING CAPITAL LOANS OBTAINED BY ASSESSEE COMPANY GENERALLY WILL HAVE NOT ANY BEARING ON THE INVESTMENTS MADE FOR CAPITAL ASSETS. ASSESSEE STATES THAT TERM LOAN WAS TO THE TUNE OF RS. 69,30,328/- ONLY. A.O WAS DIRECTED TO RESTRICT THE INTEREST CLAIM ON THE AMOUNTS BORROWED FOR THE PURPOSE OF CAPITAL WORK-IN-PROGRESS. 12 ITA NO. 723/HYD/2010 M/S SONALI CASTINGS PVT LTD., HYDERABAD. 7.5 LD. COUNSEL RELIED ON THE RECENT JUDGMENT OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS BHARAT HOTELS LTD., (2016) 381 ITR 0222 (DC). HEREIN ALSO THE HONBLE HIGH COURT HAS NOTICED THAT THE PROVISO TO SEC. 36(1)(III) OF THE IT ACT WILL APPLY W.E.F 01-04-2004 AS CONSIDERED BY THE HONBLE SUPREME COURT IN THE ABOVE REFERRED CASE AND ALLOWED THE EXPENDITURE FOR EXPANSION OF HOTELS IN OTHER PLACES FOR THE IMPUGNED YEAR A.Y 2000-01. THE SAID JUDGMENT WILL APPLY TO THE PROVISIONS PRIOR TO 01- 4-2004. HOWEVER, THE IMPUGNED ASSESSMENT YEAR IN THIS CASE IS A.Y 2006-07. CONSEQUENTLY THE PROVISO INSERTED IN SEC. 36(1)(III) OF THE IT ACT R.W.S 43(1) EXPLANATION 8, THE A.OS ACTION IS TO BE UPHELD, SUBJECT TO RESTRICTING THE INTEREST TO THE BORROWED AMOUNT OF RS. 69,30,328/-. NEEDLESS TO SAY THAT THE ABOVE INTEREST DISALLOWED WITH FORM PART OF ACTUAL COST, AS AND WHEN THE SAID ASSETS ARE PUT TO USE. WITH THESE OBSERVATIONS AND DIRECTIONS, THE GROUNDS ARE CONSIDERED PARTY ALLOWED. A.O IS DIRECTED TO REWORK THE INTEREST DISALLOWABLE ON THE LOANS AVAILED FOR CWIP. 8. IN THE RESULT, APPEAL FILED BY ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 05 TH MAY, 2017. SD/- SD/- (P. MADHAVI DEVI) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER HYDERABAD, DATED: 05 TH 3MAY , 2017. 13 ITA NO. 723/HYD/2010 M/S SONALI CASTINGS PVT LTD., HYDERABAD. KRK 1 M/S SONALI CASTINGS PVT LTD C/O M. ANANDAM & CO., CAS, 7A, SURYA TOWERS, S.D. ROAD, SECUNDERABAD-3 2 DYCIT-3(2), HYDERABAD. 3 CIT (A)-VI, HYDERABAD. 4 ADDL. CIT, RANGE-3, HYDERABAD. 5 THE DR, ITAT HYDERABAD 6 GUARD FILE