DCIT, CIR-10, KOLKATA, Kolkata V. M/s DIC India Ltd., Kolkata

ITA 864/KOL/2014

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 1695 (ITAT-KOLKATA)
• Duration Of Justice: 3 year(s) 1 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-06-2017
• Appeal Filed By: Department
• Bench Allotted: C
• Next Hearing Date: 22-05-2017
• Assessment Year: 2006-2007
• Appeal Filed On: 05-05-2014
• Court: TRIBUNAL
• Keywords: Capital asset; Proportionate interest; Additional evidence; Wholly owned subsidiary; Capital expenditure
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA BENCH, KOLKATA (BENCH C) BEFORE SHRI ABY. T. VARKEY, JUDICIAL MEMBER AND SHRI M. BALAGANESH, ACCOUNTANT MEMBER I.T.A. NO.864/KOL/2014 ASSESSMENT YEAR 2006-07 CO. NO.61/KOL/2014 (ARISING OUT OF I.T.A NO.864/KOL/2014 A.Y 2006-07) ORDER PER M. BALAGANESH , AM THIS APPEAL BY ASSESSEE IS ARISING OUT OF ORDER OF CIT(A)-XIX, KOLKATA VIDE APPEAL NO.418/CIT(A)-XIX/CIRCLE-10/KOL/13-14 DATED 26.02.2014 AGAINST THE ORDER OF THE ASSESSMENT FRAMED BY D.C.I.T, CIR-10, KOLKATA UNDER SECTION 143(3) D.C.I.T, CIR 10, KOLKATA -VS- M/S. DIC INDIA LTD. [PAN : AABCC0703C] (APPELLANT) (RESPONDENT) M/S. DIC INDIA LTD. [PAN : AABCC0703C] -VS- D.C.I.T, CIR 10, KOLKATA (CROSS OBJECTOR) (DEPARTMENT) FOR THE APPELLANT SHRI TANUJ NEOGI, JCIT, SR. DR FOR THE RESPONDENT SHRI D. S. DAMLE, AR DATE OF HEARING 22.05.2017 DATE OF PRONOUNCEMENT 07.06.2017 2 I.T.A.NO.864/KOL/2014 CO. NO.61/KOL/2014 ASSESSMENT YEAR 2006-07 M/S. DIC INDIA LTD. OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT) FOR ASSESSMENT YEAR 2006-07 VIDE HIS ORDER DATED 31.12.2009. 2. THE FIRST ISSUE TO BE DECIDED IN THE APPEAL OF THE REVENUE IS AS TO WHETHER THE LD CITA WAS JUSTIFIED IN DELETING THE DISALLOWANCE OF INTEREST U/S 36(1)(III) OF THE ACT AMOUNTING TO RS 77,35,506/- , IN THE FACTS AND CIRCUMSTANCES OF THE CASE. 2.1. THE BRIEF FACTS OF THIS ISSUE IS THAT THE ASSESSEE IS A PUBLIC LIMITED COMPANY ENGAGED IN MANUFACTURING OF FERTILIZERS, CHEMICALS AND PAINTS. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE LD AO OBSERVED THAT ASSESSEE HAD DEBITED INTEREST OF RS 3,42,20,036/- IN ITS PROFIT AND LOSS ACCOUNT. THE LD AO ON EXAMINATION OF THE BALANCE SHEET OF THE ASSESSEE, OBSERVED THAT IT HAD MADE TOTAL INVESTMENT OF RS 10,75,33,920/- AS ON 31.3.2006 AND RS 10,75,34,420/- AS ON 31.3.2005. OUT OF THIS TOTAL INVESTMENT, AN AMOUNT OF RS 10,75,31,470/- WAS INVESTED IN THE EQUITY SHARES OF DIC COATINGS INDIA LTD WHICH IS A SUBSIDIARY COMPANY OF THE ASSESSEE. THE ASSESSEE WAS ASKED TO SHOW CAUSE AS TO WHY AN AMOUNT OF RS 10,75,33,920/- SHOULD NOT BE CONSIDERED THAT THIS MUCH OF AMOUNT IS NOT USED FOR THE PURPOSE OF BUSINESS RATHER A SUBSIDIARY COMPANY HAS BEEN ACCOMMODATED BY ADVANCING MONEY WHICH IS NOT A BUSINESS ACTIVITY OF THE ASSESSEE COMPANY. MOREOVER, THIS INVESTMENT HAD NOT FETCHED ANY INCOME TO THE ASSESSEE. THE LD AO OBSERVED THAT THE SAID INVESTMENT WAS MADE WAY BACK IN FINANCIAL YEAR 1997-98 AND ON EXAMINATION OF BALANCE SHEET AS ON 31.3.1998, HE OBSERVED THAT THE ASSESSEE WAS NOT LEFT WITH OWN FUNDS FOR MAKING THIS INVESTMENT AT THAT POINT OF TIME. ACCORDINGLY, HE CONCLUDED THAT THE SAID INVESTMENT WAS MADE ONLY OUT OF BORROWED FUNDS OF THE ASSESSEE AND THAT THE SAID INVESTMENT HAS BEEN CARRIED FORWARD UPTO 31.3.2006 RELEVANT TO ASST YEAR 2006-07. HE ACCORDINGLY TOOK THE AVERAGE VALUE OF INVESTMENTS AS ON 31.3.2006 AND FOUND THAT IT CONSTITUTES 7.19% 3 I.T.A.NO.864/KOL/2014 CO. NO.61/KOL/2014 ASSESSMENT YEAR 2006-07 M/S. DIC INDIA LTD. OF AVERAGE VALUE OF LOANS. ACCORDINGLY HE APPLIED 7.19% ON INVESTMENT IN SUBSIDIARY AND DISALLOWED A SUM OF RS 77,35,506/- ON THE GROUND THAT BORROWINGS WERE NOT USED FOR THE PURPOSE OF BUSINESS. IN OTHER WORDS, THE LD AO CONCLUDED THAT THE INVESTMENT IN SUBSIDIARY IS NOT FOR THE PURPOSE OF BUSINESS AND ACCORDINGLY DISALLOWANCE OF INTEREST U/S 36(1)(III) OF THE ACT IS WARRANTED ON A PROPORTIONATE BASIS. 2.2. IT WAS SUBMITTED BEFORE THE LD CITA THAT THE ASSESSEE TILL DECEMBER 1997 WAS CARRYING ON BUSINESS OF INDUSTRIAL COATINGS THROUGH ITS UNDERTAKING AT BANGALORE. THE SAID INDUSTRIAL COATING DIVISION WAS TRANSFERRED BY WAY OF SLUMP SALE TO DIC COATINGS LTD (FORMERLY COATS COATINGS LTD) WITH EFFECT FROM 1.1.1998. THE TRANSFER OF THE UNDERTAKING ON SLUMP SALE BASIS WAS CARRIED OUT IN CONFORMITY WITH THE SCHEME OF ARRANGEMENT APPROVED BY THE HONBLE CALCUTTA HIGH COURT WHICH WAS GIVEN EFFECT FROM 1.1.1998. IN ACCORDANCE WITH THE APPROVED SCHEME OF ARRANGEMENT, ENTIRE SALE CONSIDERATION FOR TRANSFER OF BUSINESS UNDERTAKING WAS SATISFIED BY WAY OF ALLOTMENT OF EQUITY SHARES OF THE TRANSFEREE COMPANY I.E DIC COATINGS LTD. THE COPY OF THE SCHEME OF ARRANGEMENT WAS SUBMITTED BEFORE THE LD CITA. IT WAS SUBMITTED THAT THE AFORESAID FACTS ESTABLISH THAT SHARES WERE ACQUIRED OUT OF PROCEEDS OF SALE OF BUSINESS UNDERTAKING AND NOT BY UTILIZING BORROWED FUNDS. IT WAS ALSO SUBMITTED THAT SIMILAR DISALLOWANCE WAS MADE BY THE LD AO IN ASST YEAR 2003-04 U/S 36(1)(III) OF THE ACT AND IN ASST YEAR 2005-06 U/S 14A OF THE ACT, WHICH WERE DELETED BY THE LD CITA ON THE GROUND THAT THE CONSIDERATION FOR TRANSFER OF BUSINESS UNDERTAKING WAS PAID TO THE ASSESSEE BY WAY OF ALLOTMENT OF SHARES IN THE TRANSFEREE COMPANY AND NO PHYSICAL OUTFLOW OF FUNDS HAD INDEED TAKEN PLACE. HENCE IT WAS HELD THAT THERE IS NO QUESTION OF UTILIZING THE BORROWED FUNDS FOR THE PURPOSE OF MAKING INVESTMENT IN THE WHOLLY OWNED SUBSIDIARY AND ACCORDINGLY NO DISALLOWANCE OF INTEREST U/S 36(1)(III) WAS WARRANTED. THE LD CITA FOLLOWED THE SAID ORDER OF HIS PREDECESSOR AND DELETED THE 4 I.T.A.NO.864/KOL/2014 CO. NO.61/KOL/2014 ASSESSMENT YEAR 2006-07 M/S. DIC INDIA LTD. DISALLOWANCE OF INTEREST MADE BY THE LD AO. AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE US ON THE FOLLOWING GROUND:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND AS PER LAW LD. CIT(A) ERRED IN DELETING THE ADDITION OF INTEREST AMOUNTING TO RS.7735506/- UTILIZED FOR INVESTMENT IN SUBSIDIARY COMPANY. 2.3. THE LD DR VEHEMENTLY RELIED ON THE ORDER OF THE LD AO. IN RESPONSE TO THIS, THE LD AR STATED THAT THE LD CITA HAD DULY APPRECIATED THE FACTS PLACED BEFORE HIM WITH COGENT EVIDENCES AND HAD RELIED ON THE ORDER OF HIS PREDECESSOR FOR ASST YEAR 2003-04, WHICH WAS FURTHER SUBJECTED TO APPEAL BY THE REVENUE BEFORE THIS TRIBUNAL. HE ARGUED THAT THIS TRIBUNAL HAD DISMISSED THE REVENUES APPEAL IN ITA NO. 221/KOL/2012 FOR ASST YEAR 2003-04 DATED 24.7.2014 BY CLEARLY HOLDING THAT THE INVESTMENTS WERE MADE WAY BACK IN FINANCIAL YEAR 1997-98 AND THAT THE SAID INVESTMENTS WERE MERELY CARRIED FORWARD IN THE BOOKS UPTO THE YEAR UNDER APPEAL AND THAT NO BORROWED FUNDS WERE UTILIZED FOR MAKING THOSE INVESTMENTS. 2.4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD INCLUDING THE CO-ORDINATE BENCH DECISION OF THIS TRIBUNAL IN ASSESSEES OWN CASE FOR ASST YEAR 2003-04 WHICH ARE ENCLOSED IN THE PAPER BOOK OF THE ASSESSEE. WE FIND THAT THE INVESTMENTS IN WHOLLY OWNED SUBSIDIARY WERE MADE IN FY 1997- 98 AT THE TIME OF TRANSFER OF UNDERTAKING OF INDUSTRIAL COATINGS DIVISION BY WAY OF SLUMP SALE TO DIC COATINGS LTD (WHOLLY OWNED SUBSIDIARY OF ASSESSEE) AND THE SCHEME OF ARRANGEMENT VALIDATING THE TRANSFER WAS DULY APPROVED BY THE HONBLE CALCUTTA HIGH COURT . WE FIND THAT THE ASSESSEE HAD DULY REPORTED THE CAPITAL GAINS IN ASST YEAR 1998-99 IN RESPECT OF THIS SLUMP SALE WHICH HAS BEEN ACCEPTED BY THE REVENUE. WE FIND THAT THE LD CITA AND THIS TRIBUNAL IN ASST YEAR 2003-04 HAD GIVEN A CATEGORICAL FINDING ( WHICH HAS NOT BEEN CONTROVERTED BY THE REVENUE 5 I.T.A.NO.864/KOL/2014 CO. NO.61/KOL/2014 ASSESSMENT YEAR 2006-07 M/S. DIC INDIA LTD. BEFORE US) THAT THE INVESTMENT IN SHARES WERE MADE IN SUBSIDIARY COMPANY AND CONSIDERATION WAS SETTLED BY WAY OF ALLOTMENT OF SHARES FOR TRANSFER OF UNDERTAKING TO SUBSIDIARY COMPANY. HENCE IT IS NOTHING BUT ALLOTMENT OF SHARES BY WAY OF CONSIDERATION OTHER THAN CASH. THIS ITSELF GOES TO PROVE THAT NO FUNDS WERE UTILIZED FOR MAKING IN INVESTMENT IN SHARES OF SUBSIDIARY COMPANY. HENCE THERE IS NO QUESTION OF UTILIZATION OF EITHER OWN OR BORROWED FUNDS OF THE ASSESSEE. HENCE THERE IS NO QUESTION OF DISALLOWANCE OF INTEREST U/S 36(1)(III) OF THE ACT. WE DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF THE LD CITA IN THIS REGARD. ACCORDINGLY, THE GROUND NO. 1 RAISED BY THE REVENUE IS DISMISSED. 3. THE NEXT ISSUE TO BE DECIDED IN THIS APPEAL OF THE REVENUE IS AS TO WHETHER THE LD CITA WAS JUSTIFIED IN DELETING THE DISALLOWANCE OF INTEREST U/S 36(1)(III) AMOUNTING TO RS 26,62,588/- IN RESPECT OF CAPITAL WORK IN PROGRESS, IN THE FACTS AND CIRCUMSTANCES OF THE CASE. 3.1. THE BRIEF FACTS OF THIS ISSUE IS THAT THE LD AO OBSERVED THAT ASSESSEE HAS SHOWN CAPITAL WORK IN PROGRESS AS ON 31.03.2005 AND 31.03.2006 FOR RS 2,42,34,848/- AND RS 4,66,64,511/- RESPECTIVELY. THE ASSESSEE HAS DEBITED INTEREST OF RS 3,42,20,036/- IN ITS PROFIT AND LOSS ACCOUNT. THE ASSESSEE WAS ASKED TO EXPLAIN AS TO WHY THE INTEREST PERTAINING TO CAPITAL WORK IN PROGRESS SHOULD NOT BE DISALLOWED CONSIDERING THE SAME FOR THE ACQUISITION OF CAPITAL ASSET WHICH IS PUT TO USE OR NOT PUT TO USE DURING THE YEAR. THE ASSESSEE FURNISHED THE FOLLOWING DETAILS IN A TABULAR FORM AS CALLED FOR BY THE LD AO VIDE LETTER DATED 17.11.2009:- OP. CWIP CURRENT EXP. CAPITALIZED FROM OP. CWIP CAPITALIZED FROM CURRENT CWIP CLOSING CWIP HEAD NIL 45.324 NIL NIL 45.324 CENTRAL TECH. 6 I.T.A.NO.864/KOL/2014 CO. NO.61/KOL/2014 ASSESSMENT YEAR 2006-07 M/S. DIC INDIA LTD. DEPTT. 25,65,663 24,13,151 NIL 6,69,157 43,09,658 CALCUTTA FACTORY 1,36,197 2,030 NIL NIL 1,38,227 EASTERN REGION DEPOT 2,47,016 1,54,384 NIL 1,47,434 2.53.966 HEADQUARTER NIL 2,50,416 NIL 1,15,206 1,35,210 MUMBAI FACTORY 1,81,16,269 50,94,667 NIL NIL 2,32,10,936 AHMEDABAD FACTORY NIL 2,40,000 NIL 2,40,000 NIL BHIWANDI MFG. DEPOT 56,19,506 11,68,076 NIL NIL 67,87,583 NOIDA FACTORY NIL 3,12,936 NIL 3,12,936 NIL DELHI FACTORY 7,14,490 NIL NIL NIL 7,14,490 BANGALORE FACTORY 2,73,99,143 96,80,986 NIL 14,84,733 3,55,95,396 TOTAL ADD: AMT. NOT CAPITALIZED 14,84,733 3,70,80,129 ADD: ITEM IMPORTED 95,84,382 TOTAL 4,66,64,511 FROM THE AFORESAID TABLE, THE LD AO CONCLUDED THAT CAPITAL WORK IN PROGRESS HAS NOT BEEN CAPITALIZED FOR THE PERIOD 31.3.2006 AND 31.3.2007 AS THE INVESTMENT RELATE TO ERECTION OF NEW UNIT LOCATED IN NOIDA, U.P. WHICH WAS COMMENCED ONLY IN SEPTEMBER 2008. FOR WANT OF NECESSARY DETAILS, HE WORKED OUT THE PROPORTIONATE INTEREST ATTRIBUTABLE TO CAPITAL WORK IN PROGRESS AND DISALLOWED THE SAME U/S 36(1)(III) OF THE ACT . HE ACCORDINGLY TOOK THE AVERAGE VALUE OF INVESTMENTS AS ON 31.3.2006 AND FOUND THAT IT CONSTITUTES 7.19% OF AVERAGE VALUE OF LOANS. ACCORDINGLY HE APPLIED 7.19% ON AVERAGE VALUE OF CAPITAL WORKIN 7 I.T.A.NO.864/KOL/2014 CO. NO.61/KOL/2014 ASSESSMENT YEAR 2006-07 M/S. DIC INDIA LTD. PROGRESS AT RS 3,70,31,827/- AND DISALLOWED A SUM OF RS 26,62,588/- STATING THAT THE SAME HAD TO BE CAPITALIZED TO CAPITAL WORK IN PROGRESS U/S 36(1)(III) OF THE ACT. 3.2. BEFORE THE LD CITA, IT WAS SUBMITTED THAT THE ASSESSEE IS A MULTI DIVISIONAL AND MULTI LOCATIONAL COMPANY. IT HAS MANUFACTURING PLANTS AT KOLKATA, MUMBAI, NOIDA, AHMEDABAD, BANGALORE AND CHENNAI. BESIDES THE ASSESSEE HAD ADMINISTRATIVE OFFICES AND DEPOTS IN DIFFERENT CITIES. GROSS BLOCK OF FIXED ASSETS AS ON 31.3.2005 WAS RS 71.84 CRORES WHICH STOOD INCREASED TO RS 77.46 CRORES DURING THE YEAR UNDER CONSIDERATION. CAPITAL WORK IN PROGRESS WAS RS 4.66 CRORES AS ON 31.3.2006. IT WAS SUBMITTED THAT IN ANY MODERN MANUFACTURING BUSINESS, IT WAS NECESSARY FOR THE ORGANIZATION TO UPGRADE MANUFACTURING OPERATIONS BY ADDING NEW MACHINERIES BASED ON NEWER INNOVATIONS AND TECHNOLOGICAL ADVANCES AND IT IS IMPERATIVE TO RETAIN COMPETITIVE EDGE. CONSIDERING THE BUSINESS EXIGENCIES AND NECESSITIES THE ASSESSEE REGULARLY MAKES ADDITIONS TO THE PLANT, MACHINERIES, EQUIPMENTS AT ITS EXISTING MANUFACTURING; RESEARCH & DEVELOPMENT AND ADMINISTRATIVE LOCATIONS. ADDITIONS TO PLANT AND MACHINERIES FOR TECHNICAL UPGRADATION AT EXISTING LOCATIONS IS INTEGRAL TO THE COMPANYS BUSINESS PLANS OF IMPROVING PRODUCT QUALITY AND ENSURE BETTER VALUE ADDITION TO THE PRODUCTS AND THEREBY EARN HIGHER REVENUES. IT WAS STATED THAT DURING THE YEAR UNDER CONSIDERATION, THE GROSS BLOCK OF THE ASSESSEE WAS INCREASED BY RS 597.95 LACS AND THE TURNOVER INCREASED FROM RS 253.20 CRORES TO RS 292.03 CRORES RECORDING AN INCREASE OF 15%. ADDITIONS WERE CARRIED OUT AT THE EXISTING MANUFACTURING AND ADMINISTRATIVE LOCATIONS AND NO INCREASED CAPACITY WAS CREATED. DURING THE YEAR, NET PROFIT OF THE COMPANY WAS RS 14.20 CRORES AND NET CASH ACCRUALS FOR THE YEAR WERE RS 19.34 CRORES AND THE COMPANYS INTERNAL ACCRUALS WERE SUBSTANTIALLY HIGHER THAN THE COST OF ADDITIONS TO FIXED ASSETS AND CAPITAL WORK IN PROGRESS. ACCORDINGLY, IT WAS PLEADED THAT THE ADDITIONS TO CAPITAL WORK IN PROGRESS WERE 8 I.T.A.NO.864/KOL/2014 CO. NO.61/KOL/2014 ASSESSMENT YEAR 2006-07 M/S. DIC INDIA LTD. MADE OUT OF OWN FUNDS AND NO MATERIAL WAS BROUGHT ON RECORD BY THE LD AO TO PROVE THAT THE COST OF CAPITAL WORK IN PROGRESS WAS ENTIRELY MET OUT OF BORROWED FUNDS. IT WAS ARGUED THAT PROVISIONS OF SECTION 36(1)(III) OF THE ACT PERMITS DEDUCTION FOR INTEREST PAID EVEN WHERE THE BORROWED FUNDS ARE UTILIZED FOR ACQUIRING CAPITAL ASSETS FOR EXISTING BUSINESS OF THE ASSESSEE. THE ASSESSEE EXPLAINED THAT THE LD AO HAD WRONGLY APPLIED THE PROVISO TO SECTION 36(1)(III) OF THE ACT. IT STATED THAT PROVISO TO SECTION 36(1)(III) OF THE ACT REQUIRES THAT ANY AMOUNT OF INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR ACQUISITION OF AN ASSET FOR EXTENSION OF EXISTING BUSINESS SHALL NOT BE ALLOWED TILL THE DATE ON WHICH SUCH ASSET IS FIRST PUT TO USE. THE PROVISO COMES INTO PLAY ONLY WHERE CAPITAL BORROWED HAS BEEN UTILIZED FOR ACQUISITION OF AN ASSET FOR EXTENSION OF AN EXISTING BUSINESS. IT NO WHERE PROVIDES THAT IN CASE OF ACQUISITION OF EVERY NEW ASSET, INTEREST WILL BE DISALLOWED TILL IT IS PUT TO USE. IT IS ONLY WHEN THE ACQUISITION OF ASSETS, RESULT IN EXTENSION OF THE BUSINESS, PROVISO REQUIRES CAPITALIZATION OF INTEREST UPTO THE DATE OF PUTTING TO USE OF ASSETS WHICH CAUSES EXTENSION OF BUSINESS. EXTENSION OF BUSINESS IS THE PRE-REQUISITE FOR INVOKING PROVISO TO SECTION 36(1)(III) OF THE ACT AND THEREFORE IT WAS FOR THE LD AO TO FIRST SHOW THAT CAPITAL WORK IN PROGRESS PERTAINED TO EXTENSION OF ASSESSEES EXISTING BUSINESS. 3.2.1. IT WAS ALSO SUBMITTED THAT THE LD AO IN THE IMPUGNED ORDER HAD EXTRACTED A CHART IN WHICH LOCATION WISE DETAILS OF CAPITAL WIP WERE DISCUSSED FROM WHICH IT WILL BE NOTED THAT THE SAID EXPENDITURE PERTAINED TO CAPITAL OUTLAYS AT 10 EXISTING LOCATIONS. THE EXPENDITURE PERTAINED TO ROUTINE ADDITIONS MADE TO EXISTING MANUFACTURING, ADMINISTRATIVE AND R&D FACILITIES. THE CAPITAL EXPENDITURE WAS NOT INCURRED FOR THE PURPOSE OF EXTENSION OF EXISTING BUSINESS. THERE IS NO MATERIAL ON RECORD NOR IT IS LD AOS CASE THAT CAPITAL WIP RESULTED IN SUBSTANTIAL ADDITION TO OR AUGMENTATION OF MANUFACTURING CAPACITIES OR IT PERTAINED TO SETTING 9 I.T.A.NO.864/KOL/2014 CO. NO.61/KOL/2014 ASSESSMENT YEAR 2006-07 M/S. DIC INDIA LTD. UP OF A NEW UNIT, RESULTING IN EXTENSION OF BUSINESS. IN THE ABSENCE OF SUCH FINDING, THERE CANNOT BE ANY APPLICABILITY OF PROVISO TO SECTION 36(1)(III) OF THE ACT. 3.3. THE LD CITA DELETED THE DISALLOWANCE OF INTEREST BY OBSERVING AS UNDER:- 7.2. I HAVE CAREFULLY CONSIDERED THE AR'S SUBMISSIONS & PERUSED THE REASONS DISCUSSED IN THE IMPUGNED ORDER. THE AO DISALLOWED THE INTEREST PAID ON THE GROUND THAT THE APPELLANT DID NOT FULFILL CONDITIONS OF SECTION 36(1)(III). ACCORDING TO AO THE ENTIRE CAPITAL WORK IN PROGRESS AS ON 31 ST MARCH 2006 WAS FUNDED OUT OF BORROWED FUNDS. FROM THE AUDITED ACCOUNTS IT HOWEVER APPEARED THAT THE CAPITAL WORK IN PROGRESS AS ON 31.03.2006 WAS ONLY RS.4.66 CRORES. APPELLANT'S OPERATING PROFITS FOR THE YEAR WERE RS.14.20 CRORES AND THE NET CASH ACCRUALS FOR THE SAID YEAR WERE RS.19.34 CRORES. THESE FACTS THEREFORE INDICATE THAT APPELLANT'S INTERNAL ACCRUALS WERE FAR HIGHER THAN THE VALUE OF WORK-IN-PROGRESS. LN THE ASSESSMENT ORDER THE AO DID NOT BRING ON RECORD ANY COGENT MATERIAL OR EMPIRICAL DATA WHICH SUPPORTED AO'S ALLEGED FINDING THAT FUNDS UTILIZED TO MEET COST OF CAPITAL WORK IN PROGRESS ENTIRELY CAME OUT OF THE BORROWED FUNDS. IN THE ABOVE BACKGROUND, THEREFORE I FIND THAT THE AO'S CONCLUSION THAT THE ADDITION TO THE CAPITAL WORK IN PROGRESS WAS MADE BY THE APPELLANT ONLY OUT OF BORROWED FUNDS WAS NOT SUPPORTED BY ANY FACTUAL DATA. BEFORE MAKING THE DISALLOWANCE OUT OF INTEREST PAID THE ONUS WAS ON THE AO TO PROVE THAT THE BORROWED FUNDS WERE NOT UTILIZED FOR APPELLANT'S BUSINESS PURPOSES AND WHICH THE AO FAILED TO DISCHARGE. I ALSO FIND FORCE IN THE ALTERNATIVE SUBMISSIONS OF THE AR THAT NO PART OF THE INTEREST PAID WAS DISALLOWABLE MERELY BECAUSE THE APPELLANT HAD UNDERTAKEN AUGMENTATION OF THE FIXED ASSETS. IN TODAY'S TECHNOLOGICALLY FAST PACED BUSINESS ENVIRONMENT, NO BUSINESS ORGANIZATION CAN REMAIN STATIC. EVERY MANUFACTURING BUSINESS NEEDS REGULAR UPGRADATION OF MANUFACTURING OPERATIONS AND THEREFORE EVERY BUSINESS HAS ONGOING NEED FOR MAKING ADDITIONS TO THE MANUFACTURING APPARATUS BASED ON NEWER TECHNOLOGIES. THE EXPRESSION 'FOR THE PURPOSES OF BUSINESS' USED IN SECTION 36(1)(III) IS MUCH WIDER IN ITS CONNOTATION AND INCLUDES IN ITS AMBIT IMPROVISATION, INNOVATIONS OR TECHNICAL UPGRADATION OF THE MANUFACTURING BASE. SECTION 36(1)(III) AS WAS IN FORCE TILL AY 2003-04 PERMITTED DEDUCTION FOR INTEREST PAID ON BORROWED FUNDS EVEN WHERE THE BORROWED FUNDS WERE UTILIZED FOR MAKING SUBSTANTIAL EXPANSION OF THE 10 I.T.A.NO.864/KOL/2014 CO. NO.61/KOL/2014 ASSESSMENT YEAR 2006-07 M/S. DIC INDIA LTD. BUSINESS OPERATIONS OR IN CONNECTION WITH SETTING UP OF NEW UNDERTAKINGS CONNECTED WITH THE EXISTING BUSINESS. 7.3. A PROVISO TO SECTION 36(1)(III) WAS INSERTED BY THE FINANCE ACT 2003 W.E.F. 01.04.2004 BY WHICH INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR ACQUISITION OF AN ASSET FOR EXTENSION OF EXISTING BUSINESS BECAME DISALLOWABLE TILL THE ASSET WAS FIRST FOR PUT TO USE. ADMITTEDLY, IN THE YEAR UNDER CONSIDERATION PROVISO TO SECTION 36(1)(III) WAS APPLICABLE. HOWEVER, IN ORDER TO INVOKE PROVISO TO SECTION 36(1)(III) IT WAS NECESSARY FOR THE AO TO PROVE THAT CAPITAL BORROWED WAS UTILIZED FOR ACQUISITION OF AN ASSET WHICH RESULTED IN 'EXTENSION' OF THE EXISTING BUSINESS. IN MY OPINION, EVERY ADDITION TO THE FIXED ASSET DOES NOT QUALIFY TO BE CALLED 'EXTENSION OF EXISTING BUSINESS. FROM THE DETAILS OF CAPITAL WIP EXTRACTED BY THE AO IN THE ASSESSMENT ORDER, IT APPEARED THAT THE ASSESSEE HAD INCURRED EXPENDITURE AT ITS 10 LOCATIONS. THE EXPENSES INCURRED WERE TOWARDS ADDITIONS MADE TO EXISTING MANUFACTURING, ADMINISTRATION AND R&D FACILITIES. NO MATERIAL WAS BROUGHT ON RECORD BY THE AO WHICH IN ANY MANNER SHOWED THAT EXPENDITURE INCURRED ON CAPITAL WORK IN PROGRESS ULTIMATELY RESULTED IN EXTENSION OR EXPANSION OF EXISTING BUSINESS. NO MATERIAL WAS ALSO BROUGHT ON RECORD BY THE AO THAT AS A CONSEQUENCE OF THE ADDITIONS TO CAPITAL WIP THE PRODUCTION CAPACITIES WERE AUGMENTED OR EXISTING BUSINESS GOT FURTHER EXPANDED OR EXTENDED. VIEWED FROM ANY ANGLE THEREFORE, I AM SATISFIED THE AO DID NOT BRING ON RECORD SUFFICIENT MATERIAL WHICH WOULD IN ANY MANNER ESTABLISH THAT PROVISO TO SECTION 36(1)(III) WAS APPLICABLE TO THE APPELLANTS CASE. ON THE OTHER HAND, THERE APPEARED SUFFICIENT MATERIAL ON RECORD WHICH SHOWED THAT APPELLANTS OPERATING PROFITS AND INTERNAL ACCRUALS FOR THE YEAR UNDER CONSIDERATION WERE SUFFICIENT TO MEET COST OF ADDITIONS TO THE FIXED ASSESTS INCLUDING CAPITAL WIP. FURTHER THE ADDITIONS TO THE FIXED ASSETS AND CAPITAL WIP WERE IN RESPECT OF ACQUISITION OF ASSESTS IN THE ORDINARY COURSE OF BUSINESS; NOT RESULTING IN EXTENSION OF APPELLANTS EXISTING BUSINESS. IN THE CIRCUMSTANCES, I DO NOT FIND MERIT IN THE DISALLOWANCE MADE BY THE AO. ACCORDINGLY, THE ADDITION MADE BY THE AO ON THIS COUNT AMOUNTING TO RS.26,62,588/- IS HEREBY DELETED. 3.4. AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE US ON THE FOLLOWING GROUNDS:- 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND AS PER LAW LD. CIT(A) ERRED IN DELETING THE ADDITION AMOUNTING TO RS.2662588/- MADE U/S 11 I.T.A.NO.864/KOL/2014 CO. NO.61/KOL/2014 ASSESSMENT YEAR 2006-07 M/S. DIC INDIA LTD. 36(1)(III) IGNORING THAT A.R OF THE ASSESSEE ADMITTED DURING ASSESSMENT PROCESS ACCEPTED THE ISSUE RELATING TO CAPITAL WORK IN PROGRESS VIDE ORDER SHEET DATED 09/11/2009. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND AS PER LAW LD. CIT(A) ERRED IN DELETING THE INTEREST UTILIZED FOR CAPITAL WORK IN PROGRESS. 3.5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. WE FIND THAT THE LD CITA HAD GIVEN A DETAILED FINDING AS TO WHY THE PROVISO TO SECTION 36(1)(III) OF THE ACT CANNOT BE MADE APPLICABLE TO THE FACTS OF THE INSTANT CASE. WE FIND THAT THE ASSESSEE IS HAVING SUFFICIENT INTERNAL ACCRUALS AND CASH PROFITS DURING THE YEAR TO MAKE ADDITIONS TO CAPITAL WORK IN PROGRESS DURING THE YEAR AND HENCE IT COULD BE SAFELY PRESUMED THAT NO PART OF BORROWED FUNDS WERE UTILIZED FOR THE COST OF ADDITIONS TO WORK IN PROGRESS. IN ANY CASE, THERE CANNOT BE ANY DISALLOWANCE OF INTEREST PROPORTIONATELY FOR THE OPENING CAPITAL WORK IN PROGRESS BROUGHT FORWARD FROM EARLIER YEAR. WE ALSO FIND THAT NO DISALLOWANCE OF INTEREST WAS MADE FOR THE SAME IN THE EARLIER YEAR . WE ALSO FIND THAT SIMILAR ADDITION WAS MADE BY THE LD AO IN THIS YEAR UNDER APPEAL IN THE SUM OF RS 4,05,068/- IN RESPECT OF INTEREST WITH REFERENCE TO ORACLE PROJECT COST CONSIDERING IT AS CAPITAL IN NATURE, WHICH WAS DELETED BY THE LD CITA. AGAINST THIS, THE REVENUE HAD NOT PREFERRED ANY APPEAL BEFORE US. WE ALSO FIND THAT THE LD AO HAD NOT BROUGHT ANY MATERIAL ON RECORD TO PROVE THAT ONLY THE BORROWED FUNDS WERE UTILIZED BY THE ASSESSEE FOR INVESTMENT IN CAPITAL WORK IN PROGRESS. WE FIND THAT THE FINDINGS GIVEN BY THE LD CITA ARE CATEGORICAL AND IN VIEW OF THE FACT THAT THE SAME ARE NOT CONTROVERTED BY THE REVENUE BEFORE US, WE DO NOT FIND ANY JUSTIFIABLE REASON TO INTERFERE WITH THE ORDER OF THE LD CITA. ACCORDINGLY, THE GROUND NOS. 2 & 3 RAISED BY THE REVENUE ARE DISMISSED. 12 I.T.A.NO.864/KOL/2014 CO. NO.61/KOL/2014 ASSESSMENT YEAR 2006-07 M/S. DIC INDIA LTD. 4. THE LAST ISSUE TO BE DECIDED IN THIS APPEAL OF THE REVENUE IS AS TO WHETHER THE LD CITA WAS JUSTIFIED IN DELETING THE ADDITION MADE ON ACCOUNT OF CLOSING STOCK AMOUNTING TO RS 3,49,225/- IN THE FACTS AND CIRCUMSTANCES OF THE CASE. 4.1. THE BRIEF FACTS OF THIS ISSUE IS THAT THE LD AO ON EXAMINATION OF SCHEDULE 17(12) CONTAINING QUANTITATIVE DETAILS AS PER COMPANIES ACT FOUND THAT FOR RUBBER BLANKET , THE CLOSING STOCK WAS VALUED AT RS 1888 PER SQ.YARD, WHEREAS THE OPENING STOCK WAS VALUED AT RS 2,511 PER SQ.YARD , PURCHASES DURING THE YEAR WERE MADE AT RS 3,654 PER SQ.YARD AND SALES WERE MADE AT RS 4,178 PER SQ.YARD. ACCORDINGLY, HE SHOWCAUSED THE ASSESSEE AS TO WHY THE CLOSING STOCK SHOULD NOT BE VALUED AT RS 3,654 PER SQ.YARD FOLLOWING FIFO METHOD FOR VALUATION OF STOCK. THE ASSESSEE REPLIED THAT THE DIFFERENCE IS DUE TO PURCHASE AND SALE OF DIFFERENT GRADES OF RUBBER BLANKET. THE ASSESSEE ALSO FURNSIEHD THE MONTH WISE DETAILS OF PURCHASES OF RUBBER BLANKET FOR TRADING ITEMS. THE LD AO FOUND THAT THE AVERAGE PURCHASE RATE FOR THE SAME WAS IN THE RANGE OF RS 2,583 TO RS 2,610 PER SQ.YARD. THE LD AO ACCORDINGLY VALUED THE CLOSING STOCK QUANTITY OF 491 AT RS 2,600 PER SQ.YARD AND ACCORDINGLY BROUGHT THE DIFFERENCE IN THE STOCK VALUE OF RS 3,49,225/- TO TAX. 4.2. THE ASSESSEE EXPLAINED BEFORE THE LD CITA THAT PURCHASES WERE INDEED EFFECTED DURING THE PERIOD APRIL TO AUGUST 2005 AT PRICES VARYING BETWEEN RS 2,583 TO RS 2,610 PER SQ.YARD. THIS STOCK OF RUBBER BLANKET WAS MAINTAINED AT ASSESSEES FACTORY AND DEPOT AT AHMEDABAD. TILL 31.3.2006 SOME OF THE STOCK OF BLANKETS HAD REMAINED UNMOVED FOR MORE THAN 6 MONTHS. AT THE CLOSE OF THE ACCOUNTING YEAR, PHYSICAL VERIFICATION OF THE STOCKS WERE CONDUCTED. ON SUCH PHYSICAL INSPECTION, IT WAS FOUND THAT THE PHYSICAL STOCK AVAILABLE WAS 491 SQ.YARDS. AT THE AVERAGE COST OF RS 2,573.05 PER SQ.YARD , CLOSING STOCK SHOULD HAVE BEEN REFLECTED AT RS 12,63,370/-. THE PHYSICAL INSPECTION OF CLOSING STOCK 13 I.T.A.NO.864/KOL/2014 CO. NO.61/KOL/2014 ASSESSMENT YEAR 2006-07 M/S. DIC INDIA LTD. HOWEVER REVEALED THAT 97.99 SQ.YARDS OF BLANKETS WERE COMPLETELY DAMAGED AND THEREFORE NOT IN SALEABLE CONDITION. BESIDES STOCK OF 54.09 YARDS WERE IN SOMEWHAT DAMAGED CONDITION AND THEREFORE HAD DEPRECIATED IN ITS VALUE. BASED ON THE REPORT FURNISHED BY THE GENERAL MANAGER OF AHMEDABAD FACTORY, THE DAMAGED STOCK OF 97.99 SQ.YARDS WAS VALUED AT RS 50 PER SQ.YARD BEIGN THE SALVAGE VALUE AND 54.09 SQ.YARDS OF BLANKETS WAS VALUED AT RS 765 PER SQ.YARD BEING ITS LIKELY RECOVERY PRICE. THE ASSESSEE FILED THE COPY OF REPORT OF PHYSICAL INSPECTION AND RECOMMENDATIONS OF THE GENERAL MANAGER , AHMEDABAD FACTORY TO PROVE THIS VALUATION. ACCORDINGLY THE CLOSING STOCK WAS FINALLY VALUED AT RS 9,27,375/- AND HENCE PRAYED THAT NO ADJUSTMENT NEED TO BE MADE THEREON. 4.3. THE LD CITA DELETED THE ADDITION BY OBSERVING AS UNDER:- 10.2. I HAVE EXAMINED THE ARS SUBMISSIONS & PERUSED THE DETAILS OF INVENTORY VALUATION. BEFORE ME APPELLANT FILED COPY OF THE REPOT OF PHYSICAL VERIFICATION OF STOCK AT FACTORY AND DEPORT AT AHMEDABAD IN WHICH STOCK OF RUBBER BLANKETS IN THE DAMAGED CONDITION WAS IDENTIFIED. THESE DOCUMENTS WERE FORWARDED FOR THE AOS COMMENTS IN JUNE 2011. NO ADVERSE COMMENTS WERE FURNISHED BY THE AO IN HIS REMAND REPORT DATED 08.11.2012. AS PER THE NORMALLY ACCEPTED ACCOUNTING STANDARDS INVENTORY VALUATION IS REQUIRED TO BE CARRIED OUT ON THE PRINCIPLE OF LOWER OF THE COST OR REALIZABLE VALUE. IN THE CIRCUMSTANCES, WHEN THE APPELLANT DETECTED STOCK OF RUBBER BLANKETS IN DAMAGED CONDITION THEN VALUE THEREOF WAS LIABLE TO BE ASCERTAINED WITH REFERENCE TO ITS REALIZABLE VALUE AND NOT AT COST. THE CONTEMPORANEOUS DOCUMENTARY EVIDENCE PLACED ON RECORD SHOWED THAT THE APPELLANT HAD CARRIED OUT PHYSICAL INSPECTION OF THE STOCK OF RUBBER BLANKETS AT ITS AHMEDABAD FACTORY & DEPORT IN WHICH SOME OF THE ITEMS WERE FOUND TO BE IN DAMAGED CONDITIONS. IN THE CIRCUMSTANCES, IF IN RESPECT OF SUCH DAMAGED STOCK THE APPELLANT VALUED THE INVENTORY AT REALIZABLE VALUE WHICH WAS LESS THAN THE COST THEN IN MY CONSIDERED OPINION THE APPELLANT DID NOT COMMIT ANY ERROR WHEN IT FOLLOWED ACCEPTED PRINCIPLE OF VALUATION. HAVING REGARD TO THE TOTALITY OF THE FACTS AND CIRCUMSTANCES THEREFORE I DO NOT FIND THAT NAY INFIRMITY WAS COMMITTED BY THE APPELLANT IN VALUING THE DAMAGED STOCK OF RUBBER BLANKET AT REALIZABLE VALUE. THE ADDITION OF RS.3,49,225 MADE ON ACCOUNT OF ALLEGED UNDER-VALUATION OF STOCK IS THEREFORE DELETED. 14 I.T.A.NO.864/KOL/2014 CO. NO.61/KOL/2014 ASSESSMENT YEAR 2006-07 M/S. DIC INDIA LTD. 4.4. AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE US ON THE FOLLOWING GROUNDS:- 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND AS PER LAW LD. CIT(A) ERRED IN DELETING THE ADDITION OF CLOSING STOCK AMOUNTING TO RS.349225/- THOUGH THE A.O MADE THE ADDITION ON FIFO METHOD (AT COST). 4.5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. WE FIND THAT THE LD CITA HAD CALLED FOR A REMAND REPORT WITH REGARD TO THE ADDITIONAL EVIDENCES SUBMITTED BY THE ASSESSEE BEFORE HIM WITH REGARD TO THE VALUATION OF CLOSING STOCKS AND OBSERVED THAT THE LD AO HAD NOT DRAWN ANY ADVERSE INFERENCE ON THE SAID EVIDENCES IN HIS REMAND REPORT DATED 8.11.2012. WE FIND THAT THE INVENTORIES ARE TO BE VALUED AT COST OR NET REALIZABLE VALUE WHICHEVER IS LOWER. HENCE THERE IS NOTHING WRONG IN THE VALUATION METHOD ADOPTED BY THE ASSESSEE IN ADOPTING THE NET REALIZABLE VALUE FOR SOME OF ITS DAMAGED STOCKS AND VALUING THE REMAINING QUANTITY AT COST. NO INFIRMITY COULD BE ATTRIBUTED TO THIS METHOD OF VALUATION. HENCE WE HOLD THAT THE LD CITA HAD RIGHTLY DELETED THE ADDITION MADE ON THIS ACCOUNT. ACCORDINGLY, THE GROUND NO. 4 RAISED BY THE REVENUE IS DISMISSED. 5. THE GROUND NO. 5 RAISED BY THE REVENUE IS GENERAL IN NATURE AND DOES NOT REQUIRE ANY SPECIFIC ADJUDICATION. CO NO. 61/KOL/2014 OF THE ASSESSEE 6. DURING THE COURSE OF HEARING, THE LD AR STATED THAT HE IS NOT PRESSING THE CROSS OBJECTIONS PREFERRED BY THE ASSESSEE. THE SAME IS RECKONED AS THE STATEMENT FROM THE BAR AND ACCORDINGLY, THE CROSS OBJECTIONS OF THE ASSESSEE IS DISMISSED AS NOT PRESSED. 15 I.T.A.NO.864/KOL/2014 CO. NO.61/KOL/2014 ASSESSMENT YEAR 2006-07 M/S. DIC INDIA LTD. 7. IN THE RESULT, BOTH THE APPEAL OF THE REVENUE AND CROSS OBJECTIONS OF THE ASSESSEE ARE DISMISSED. ORDER PRONOUNCED IN THE COURT ON 07.06.2017. SD/- SD/- [A. T. VARKEY] [M. BALAGANESH] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 07.06.2017 { RS SPS} COPY OF THE ORDER FORWARDED TO: 1. ASSESSEE M/S. DIC INDIA LTD., TRANSPORT DEPO ROAD, TARATOLLA, KOLKATA 700 088. 2. REVENUE D.C.I.T., CIR 10, KOLKATA 3. CIT(A)- KOLKATA. 4. CIT , KOLKATA. 5. CIT(DR), KOLKATA BENCHES, KOLKATA. TRUE COPY BY ORDER SENIOR PRIVATE SECRETARY HEAD OF OFFICE, DDO, KOLKATA BENCHES, KOLKATA.