ACIT, Ludhiana V. M/s Raghav Exports, Doraha

ITA 893/CHANDI/2015

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 8240 (ITAT-CHANDIGARH)
• Duration Of Justice: 1 year(s) 3 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-03-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: Not Allotted
• Next Hearing Date: 07-09-2016
• Assessment Year: 2011-2012
• Appeal Filed On: 10-12-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income; Depreciation; Deemed to accrue or arise in india; Proportionate interest; Tax effect; Unabsorbed depreciation
• Section: 69C; 133A; 32; 69; 6; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH, CHANDIGARH BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND MS. ANNAPURNA GUPTA, ACCOUNTANT MEMBER ITA NO.893/CHD/2015 (ASSESSMENT YEAR : 2011-12) THE A.C.I.T., VS. M/S RAGHAV EXPORTS, CIRCLE-I, G.T. ROAD, LUDHIANA. DORAHA PAN: AAGFR8555H (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI SUSHIL KUMAR, CIT DR RESPONDENT BY : SHRI SUDHIR SEHGAL DATE OF HEARING : 15.12.2016 DATE OF PRONOUNCEMENT : 14.03.2017 O R D E R PER ANNAPURNA GUPTA, A.M . : THE APPEAL FILED BY THE REVENUE IS DIRECTED AGAINS T THE ORDER OF LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-I, LUDHIANA DATED 30.9.2015, RELATING TO ASSESSMENT YEAR 2011-12. 2. GROUND NOS.1AND 2 RAISED BY THE REVENUE ARE ON THE SAME ISSUE AND RELATE TO THE ALLOWANCE OF SET O FF OF DEPRECIATION AGAINST DEEMED INCOME U/S 69, 69A, 69B AND 69C OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT ).THE SAME ARE THEREFORE BEING TAKEN UP TOGETHER. 2 3. GROUND NOS.1, 2(A) AND 2(B) RAISED BY THE REVENUE READ AS UNDER: 1. WHETHER UPON FACTS AND CIRCUMSTANCES OF THE CAS E, THE LD. CIT(A) WAS JUSTIFIED IN DISREGARDING THE FINDINGS OF THE AO AND ALLOWING THE ASSESSEE TO SET OFF UNABSORBED DEPRECI ATION UPTO THE EXTENT OF RS.1.25 CRORES AGAINST THE DEEMED INC OME U/S 69, 69A, 69B & 69C OF THE INCOME TAX ACT, 1961? 2(A) WHETHER THE LD CIT(A) WAS JUSTIFIED IN NOT CO NSIDERING THAT LOSS ARISING OUT OF DEPRECIATION IS ALSO A PART OF BUSIN ESS LOSS AND HENCE DECISION OF HON'BLE PUNJAB AND HARYANA HIGH C OURT IN THE CASE OF KIM PHARMA (P) LTD. (ITANO. 106 OF 2011) IS CLEARLY APPLICABLE. 2(B) WHETHER THE LD CIT(A) WAS JUSTIFIED IN NOT CO NSIDERING THE FACT THAT LOSS ARISING OUT OF DEPRECIATION IS ALSO A PAR T OF BUSINESS LOSS, HENCE IN THE NATURE OF BUSINESS LOSS AS DEPRE CIATION IS AN EXPENSE ALLOWABLE U/S 32 AS DEPRECIATION OF UNABSO RBED DEPRECIATION, WHICH FALLS IN THE SCHEME OF ASSESSMENT THAT IS LAID DOWN UNDER INCOME TAX ACT, 1961 FOR MAKING ASSESSME NT OF INCOME FROM BUSINESS AND PROFESSION AS PER SECTION 28 TO 44 OF I.T. ACT, 1961 AND THEREFORE DECISION OF HON'BLE PUNJAB AND HARYANA HIGH COURT IN THE CASE OF KIM PHARMA (P) LT D. (ITA NO. 106 OF 2011) IS CLEARLY APPLICABLE. 4. BRIEF FACTS RELATING TO THE ISSUE ARE THAT A SU RVEY U/S 133A OF THE ACT WAS CONDUCTED AT THE BUSINESS PREMISES OF THE ASSESSEE ON 06.07.2010. DURING THE COURSE OF SURVEY CERTAIN DISCREPANCIES WERE FOUND, TO COVER UP WHICH THE ASSESSEE VOLUNTARILY DISCLOSED/SURRENDERED ADDITIONAL INCOME OF 3 RS.1,25,00,000/- UNDER THE HEAD BUILDING ACCOUNT FOR THE IMPUGNED YEAR. THEREAFTER THE ASSESSEE FILED I NCOME TAX RETURN FOR THE IMPUGNED ASSESSMENT YEAR DECLARI NG LOSS OF RS.81,29,564/- AFTER INCLUDING THE AFORESAI D SURRENDERED INCOME. THE ASSESSING OFFICER RELYING ON THE JUDGMENT OF THE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF M/S KIM PHARMA (P) LTD. VS. CIT IN ITA NO.106 OF 2011 (O&M), THE DECISION OF THE GUJRAT HI GH COURT IN THE CASE OF FAKIR MOHMED HAJI HASAN VS. CIT (2001) 247 ITR 290, AND THE DECISION OF THE I.T.A.T ., CHANDIGARH BENCH IN THE CASE OF M/S LIBERTY PLYWOO D PVT. LTD. VS. ACIT IN ITA NO.727/CHD/2012 DATED 17.12.2012 AND REPORTED IN 29 TAXMAN.COM 268, HELD THAT THE SURRENDERED INCOME COULD NOT BE TREATED AS INCO ME UNDER ANY HEAD SINCE THE SOURCE OF INCOME DISCLOSED DURING SURVEY HAD REMAINED UNEXPLAINED AND THUS TRE ATED THE SURRENDERED INCOME AS DEEMED INCOME OF THE ASSE SSEE U/S 69C OF THE ACT AND FURTHER DID NOT ALLOW SET OF F OF DEPRECIATION LOSS OF RS.2,07,09,627/- AGAINST THE S AME. 6. THE ASSESSEE FILED APPEAL AGAINST THE AFORESAID ACTION OF THE ASSESSING OFFICER TO THE LD. CIT (APP EALS), WHO UPHELD THE TREATMENT OF THE SURRENDERED INCOME AS DEEMED INCOME U/S 69C OF THE ACT BUT ALLOWED SET O FF OF DEPRECIATION LOSSES FOLLOWING THE DECISION OF THE I .T.A.T., CHANDIGARH BENCH IN THE CASE OF M/S LIBERTY PLYWOOD PVT. LTD. (SUPRA). THE RELEVANT FINDING OF THE LD. CIT (APPEALS) AT PARA 4.2 OF ITS ORDER IS AS UNDER: 4 4.2 I HAVE CONSIDERED THE FACTS OF THE CASE, THE BA SIS OF ADDITION AND THE SUBMISSIONS DURING THE COURSE OF THE ASSESSMENT AS WELL AS APPELLATE PROCEEDINGS. THE ASS ESSING OFFICER CONSIDERED THE SURRENDERED INCOME AS DEEMED INCOME U/S 69A, 69B AND 69C AND THE SAME WAS NOT ALLOWED T O BE SET OFF AGAINST BUSINESS LOSS/DEPRECIATION LOSS BY RE LYING ON THE JUDGMENT OF THE HON'BLE ITAT CHANDIGARH BENCH IN THE CASE OF MI/S LIBERTY PLYWOOD PVT. LTD., ITA NO.727/CHD/2012. DECISION OF THE JURISDICTIONAL ITA T CHANDIGARH BENCH IN THE CASE OF LIBERTY PLYWOOD (P) LTD IN ITA NO. 727/CHD/2012 VIDE ORDER DATED 13/12/2012. HOWEVER, ON A PERUSAL OF THE SAID DECISION IT IS SEEN T HAT IT HAS BEEN DIRECTED TO ALLOW SET-OFF UNABSORBED DEPRE CIATION FROM DEEMED INCOME SURRENDERED DURING THE SURVEY. IN THE SAID CASE IT HAS BEEN OBSERVED THAT THE DECISION OF HON'BLE PUNJAB AND HARYANA HIGH COURT IN THE CASE O F M/S KIM PHARMA (P) LTD. VS. CIT. IT WAS HELD THAT SURRENDERED INCOME DURING THE SURVEY HAS TO BE ASSESSED SEPARATEL Y AS DEEMED INCOME AND SET-OFF OF LOSSES U/S 70 AND 70(1 ) WAS NOT POSSIBLE AGAINST SUCH INCOME. HOWEVER, THE SAID DECISION DOES NOT DEAL WITH THE ISSUE OF SETTING OFF OF DEPRECIATION U/S 32(2) AND THAT UNABSORBED DEPRECIAT ION WHICH IS CARRIED FORWARD AS CURRENT DEPRECIATION U/S 32(2) IS CLEARLY AVAILABLE FOR SETTING-OFF. THE HON'BLE I TAT REFERRED TO THE CASE OF THE SPECIAL BENCH OF THE HON'BLE TRI BUNAL IN THE CASE OF DCIT VS. GUARANTY LTD. (2010) 4 ITR (TRIB) 210 (MUM) SB FOR THE SAME AND HELD AS UNDER:- 'FROM THE ABOVE IT IS CLEAR THAT UNABSORBED DEPRECI ATION FOR THE BLOCK OF ASSESSMENT YEAR 1997-98 TO 2001-02 WHICH COULD NOT HAVE BEEN SET OFF EARLIER, CANNOT BE ALLOWED TO BE SET OFF NOW. THEREFORE, WE SET ASIDE THE ORDER OF THE ID. CIT(A) AND REMIT THE MATTER BACK TO THE FILE OF ASSESSING OFFICER WITH A DIRECTION TO ON LY ALLOW SET OFF OF UNABSORBED DEPRECIATION WHICH IS OUTSIDE THE BLOCK OF ASSESSMENT YEAR 1997-98 TO 200 1- 02.' 5 ACCORDINGLY, THE ASSESSING OFFICER WAS NOT JUSTIFIED IS NOT ALLOWING IN NOT ADJUSTING DEPRECIATION OF CURRENT YEA R AGAINST THE DEEMED INCOME. THUS, THESE GROUNDS OF APP EAL ARE ALLOWED. 7. AGGRIEVED BY THE SAME, THE REVENUE HAS RAISED THE PRESENT GROUNDS BEFORE US. DURING THE COURSE O F HEARING BEFORE US, THE LD. DR FILED HIS SUBMISSIONS ON THE ISSUE IN WRITING BEFORE US VIDE HIS SUBMISSIONS DAT ED 15.12.2016. THE LD. DR RELIED UPON THE SAME AND AR GUED BEFORE US THAT THE HON'BLE PUNJAB & HARYANA HIGH CO URT IN THE CASE OF M/S KIM PHARMA (P) LTD. (SUPRA) HAD CLEARLY STATED THAT THE DECISION OF THE HON'BLE GUJ ARAT HIGH COURT IN THE CASE OF FAKIR MOHMED HAJI HASAN (SUPRA) APPLIES TO THE FACTS OF THE CASE AND QUOTIN G FROM THE SAID DECISION OF HE GUJARAT HIGH COURT, THE LD. DR STATED THAT IT HAD BEEN CATEGORICALLY STATED BY THE GUJARAT HIGH COURT THAT DEDUCTIONS, CORRESPONDING TO HEADS OF INCOME, COULD NOT BE ALLOWED AGAINST DEEMED INCOME U/S 69, 69A, 69B AND 69C OF THE ACT SINCE IT DID NOT FA LL UNDER ANY HEAD OF INCOME AS PROVIDED U/S 14 OF THE ACT. THE LD. DR CONTENDED THAT UNABSORBED DEPRECIATION WAS ALSO ONE OF SUCH DEDUCTION AND IT SHOULD BE ALLOWED AGAINST ONE OR MORE HEADS OF INCOME AND SINCE DEEMED INCOME DOES N OT FALL UNDER ANY HEAD, SET OFF OF UNABSORBED DEPRECIA TION COULD NOT BE ALLOWED AGAINST THE SAME. THE LD. DR POINTED OUT THAT THE HON'BLE PUNJAB & HARYANA HIGH COURT HAD EXTRACTED THE ABOVE FINDING OF THE HON'BLE GUJA RAT HIGH COURT AND STATED THAT THE SAID DECISION APPLIE S 6 SQUARELY TO THE FACTS OF THE PRESENT CASE. THE LD. DR, THEREFORE, STATED THAT AS PER THE DECISION OF THE H ON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF M/S KIM P HARMA (P) LTD. (SUPRA) NO SET OFF OF UNABSORBED DEPRECIAT ION WAS ALLOWABLE AGAINST THE DEEMED INCOME U/S 69 OF THE A CT. 8. THE LD. COUNSEL FOR THE ASSESSEE, ON THE OTHER HAND, COUNTERED BY SAYING THAT THE LD. CIT (APPEALS ) HAD ALLOWED THE SET OFF RELYING UPON THE DECISION OF TH E COORDINATE BENCH OF THE I.T.A.T., CHANDIGARH IN THE CASE OF M/S LIBERTY PLYWOOD PVT. LTD. (SUPRA). THE LD. COUNSEL FOR THE ASSESSEE FURTHER STATED THAT THE SAID DECIS ION HAD BEEN FOLLOWED BY THE I.T.A.T., CHANDIGARH BENCH IN ANOTHER CASE ALSO I.E. ACIT VS. M/S RAGHAV WOOLLEN MILLS IN ITA NO.892/CHD/2015 DATED 1.8.2016. THE LD. COU NSEL FOR THE ASSESSEE STATED THAT THE FACTS IN M/S RAGHA V WOOLLEN MILLS (SUPRA) WERE IDENTICAL TO THE FACTS O F THE PRESENT CASE AND THE DECISION RENDERED THEREIN SQUA RELY APPLIES TO THE PRESENT CASE. 9. WE HAVE HEARD BOTH THE PARTIES. WE HAVE ALSO GONE THROUGH THE ORDER OF THE LD. CIT (APPEALS). W E FIND THAT UNDISPUTED FACTS IN THE PRESENT CASE ARE THAT THE SURRENDERED INCOME OF RS.1,25,00,000/- HAS BEEN TRE ATED AS DEEMED INCOME U/S 69C OF THE ACT ASSESSED AS SUC H AND NOT UNDER ANY OF THE SPECIFIED HEADS AS PER THE ACT, FOLLOWING THE JUDGMENT OF THE HON'BLE JURISDICTIONA L HIGH COURT IN THE CASE OF M/S KIM PHARMA (P) LTD. (SUPRA ). THE ASSESSEE HAS NOT COME UP IN APPEAL AGAINST THIS FIN DING OF 7 THE LD. CIT (APPEALS). THUS FOR ALL PURPOSES, THE SURRENDERED INCOME IS TO BE TREATED AS DEEMED INCOM E U/S 69C OF THE ACT. FURTHER THE ASSESSEE HAD CLAIMED DEPRECIATION TO THE EXTENT OF RS.2,07,09,627/- DURI NG THE IMPUGNED YEAR. WHILE THE ASSESSEE HAS CLAIMED AND BEEN ALLOWED SET OFF OF THIS DEPRECIATION TO THE EXTENT OF AND AGAINST THE SURRENDERED INCOME OF RS.1,25,00,000/-, THE REVENUE HAS CONTESTED THE SAME RELYING UPON THE DEC ISION OF THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CAS E OF M/S KIM PHARMA (P) LTD. (SUPRA) WHICH WAS RENDERED FOLLOWING THE JUDGMENT OF THE HON'BLE GUJARAT HIGH COURT IN THE CASE OF FAKIR MOHMED HAJI HASAN (SUPRA). TH E LD. CIT (APPEALS) HAS GRANTED THE SET OFF TO THE ASSESS EE FOLLOWING THE DECISION OF THE I.T.A.T., CHANDIGARH BENCH IN THE CASE OF M/S LIBERTY PLYWOOD PVT. LTD. (SUPRA), WHICH DEALING WITH AN IDENTICAL ISSUE HAD STATED THAT SET OFF OF DEPRECIATION IS ALLOWABLE AGAINST DEEMED INCOME. 10. WE HAVE GONE THROUGH THE DECISION OF THE ITAT IN THE CASE OF LIBERTY PLYWOOD (SUPRA). IN THE SAID DECISION, AS RIGHTLY POINTED OUT BY THE LD. CIT (AP PEALS), IT WAS OBSERVED BY THE ITAT, THAT THE DECISION OF T HE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF M/S KIM PHARMA (P) LTD. (SUPRA) HAD DEALT WITH THE ISSU E OF TREATMENT OF SURRENDERED INCOME AS DEEMED INCOME AN D SET OFF OF LOSS U/S 70 AND 71 OF THE ACT AGAINST TH E SAME, WHICH THE HON'BLE HIGH COURT HAD HELD WAS NOT POSSI BLE AGAINST SUCH INCOME. THE I.T.A.T. THEREAFTER HAD H ELD 8 THAT THE SAID DECISION DID NOT DEAL WITH THE ISSUE OF SET OFF OF DEPRECIATION AND THE SAME WAS CLEARLY AVAILABLE FOR SETTING OFF. THE RELEVANT FINDINGS OF THE ITAT IN L IBERTY PLYWOOD (SUPRA) AT PARA 11-15 OF ITS ORDER, ARE AS UNDER: 11.THUS IT IS CLEAR FROM THE ABOVE THAT ONCE THE I TEM OF RECEIPT IS HELD TO BE FALLING UNDER A PARTICULAR HEAD THEN THE SAME CANNOT BE CHARGED ALTERNATIVELY UNDER ANOTHER HEAD PARTICULARLY UNDER THE HEAD 'INCOME FROM OTHER SOURCES'. THIS OBSERVATION CANNOT LEAD T O THE CONCLUSION IF INCOME DOES NOT BELONG TO A PARTICULAR HEAD SAME CA NNOT BE CHARGED AT ALL. AS FAR AS THE DECISION OF AHMEDABAD BENCH O F THE TRIBUNAL IN CASE OF FASHION WORD V ACIT, ITA NO. 1 634/AHD/2006 (SUPRA) IS CONCERNED INTERPRETING THE DECISION OF HON'BLE HIGH COURT IN CASE OF FASHION WORD V ACIT, ITA NO. 1 634/AHD/2006 (SUPRA) HAS TO GIVE A WAY TO INTERPRETATION PUT ON THE SAME DECISION BY T HE HON'BLE PUNJAB & HARYANA HIGH COURT IN CASE OF M/S KIM PHARMA (P) LTD. V. CIT, ITA NO. 106 OF 2011 (O&M), HON'BLE HIGH COURT CLEARLY H ELD THAT SURRENDERED INCOME CAN BE TAXED AS DEEMED INCOME WI THOUT SETTING OFF OF THE LOSSES U/S 70 & 71 . WE ARE BOUND TO FOL LOW THE DECISION OF HON'BLE PUNJAB & HARYANA HIGH COURT AND FOLLOWING T HE SAME, WE HOLD THAT SURRENDERED INCOME HAS TO BE ASSESSED SEPARATE LY AS DEEMED INCOME. 12 COMING TO THE ISSUE OF SETTING OFF OF DEPRECIATI ON U/S 32(2), FIRST OF ALL IT HAS TO BE NOTICED THAT THE DECISION OF H O N ' B L E P U N J A B & H A R Y A N A H I G H C O U R T I N C A S E O F M /S K I M PHARMA (P) LTD. V. CIT, (SUPRA) HELD THAT SURRENDERED INCOME DURING TH E SURVEY HAS TO BE ASSESSED SEPARATELY AS DEEMED INCOME AND SET OFF OF LOSSES U/S 70 & 71 WAS NOT POSSIBLE AGAINST SUCH INCOME. HOWEVER, I T IS CLEAR THAT THIS DECISION DOES NOT DEAL WITH THE ISSUE OF SETTING OF F OF DEPRECIATION U/S 32(2). SECTION 32(2) READS AS UNDER: '32(2) WHERE, IN THE ASSESSMENT OF THE ASSESSEE, FU LL EFFECT CANNOT BE GIVEN TO ANY ALLOWANCE UNDER SUB-SECTION (1) IN ANY PREVIOUS YEAR, OWING TO THERE BEING NO PROFITS OR GAINS CHARGEABLE FOR THAT PREVIOUS YEAR, OR OWING TO THE PROFITS OR GAINS CHARGEABLE B EING LESS THAN THE ALLOWANCE, THEN, SUBJECT TO THE PROVISIONS OF SUB-S ECTION (2) OF SECTION 72 AND SUB-SECTION (3) OF SECTION 73 , THE ALLOWANCE OR THE PART OF THE ALLOWANCE TO WHICH EFFECT HAS NOT BEEN GIVEN, AS TH E CASE MAY BE, SHALL BE ADDED TO THE AMOUNT OF THE ALLOWANCE FOR D EPRECIATION FOR THE FOLLOWING PREVIOUS YEAR AND DEEMED TO BE PART OF TH AT ALLOWANCE, OR IF THERE IS NO SUCH ALLOWANCE FOR THAT PREVIOUS YEAR, BE DEEMED TO BE THE ALLOWANCE FOR THAT PREVIOUS YEAR, AND SO ON FOR THE SUCCEEDING PREVIOUS YEARS.] THE PLAIN READING OF THE ABOVE CLEARLY SHOWS THAT I F THE DEPRECIATION CANNOT BE FULLY ADJUSTED AGAINST PROFITS AND GAINS CHARGEABLE IN THE RELEVANT YEAR BECAUSE OF INEFFICIENCY OF THE PROFIT S THEN THE SAME WOULD BE ADDED TO THE DEPRECIATION OF THE FOLLOWING YEAR. THIS MEANS THAT UNABSORBED DEPRECIATION WHICH CANNOT BE SET OF F IN A PARTICULAR YEAR, WOULD BECOME CURRENT DEPRECIATION IN THE FOLL OWING YEAR AND THERE IS NO RESTRICTION AGAINST SUCH SET OFF. THERE FORE, UN-ABSORBED DEPRECIATION WHICH IS CARRY FORWARD AS CURRENT DEPR ECIATION U/S 32(2) IS CLEARLY AVAILABLE FOR SETTING OFF AND SIMILAR VIEW WAS TAKEN BY THE AHMEDABAD BENCH OF THE TRIBUNAL IN CASE OF ITO V. H YTAISUN MAGNETICS LTD. ITAS NO. 2897 & 2898/AHD/2008 HELD AS UNDER: 9 'WE FIND THAT IT IS NOT IN DISPUTE THAT DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE HAD INCOME OF RS. 2,34,1 0,540/- ASSESSED UNDER THE HEAD INCOME FROM OTHER SOURCES IN VIEW OF PROVISIONS OF SECTION 69 OF THE ACT. FURTHER IT IS ALSO NOT IN DI SPUTE THAT THE ASSESSEE HAD BROUGHT FORWARD UNABSORBED DEPRECIATION OF RS. 10.13 CRORES IN ASSESSMENT YEAR 1993-94 , RS. 1.59 CRORES IN ASSESS MENT YEAR 1994- 95 AND RS. 68.14 LAKHS IN ASSESSMENT YEAR 1995-96 W HICH IS AVAILABLE FOR SET OFF AGAINST INCOME OF THE CURRENT YEAR. AS PER PROVISIONS OF SECTION 32(2) UNABSORBED DEPRECIATION ARE DEEMED AS PART OF CURRENT YEARS DEPRECIATION TO THE EXTENT OF AVAILABLE INCO ME. FURTHER THERE IS NO PROVISIONS UNDER THE INCOME TAX ACT TO PROHIBIT SET OFF OF CURRENT YEARS BUSINESS LOSS AGAINST INCOME OF THE ASSESSEE WHICH IS ASSESSABLE UNDER THE HEAD INCOME FROM OTHER SOURCES . SECTION 70 DOES NOT PROHIBIT SUCH SET OFF. 13. HOWEVER, THIS PROVISION HAS BEEN AMENDED TWICE W.E.F. 1.4.1997 BY FINANCE ACT (NO. 2 OF 1 996) AND AGAINST ON 1.4. 2002 BY FINANCE ACT, 2001. CERTAIN RESTRICTIONS WERE INTRODUCED AGA IN SET OFF OF BY SUCH UNABSORBED DEPRECIATION. CONTROVERSY ALSO AROSE IN THIS RESPECT. ULTIMATELY THE MATTER TRAVELED TO THE SPECIAL BENCH OF THE TRIBUNAL IN CASE OF DCIT V. TIMES GUARANTY LTD. (2010) 4 ITR (T RIB ) 210 (MUM)(SB). IN THIS CASE IT WAS HELD AS UNDER:- 'UNDER SECTION 32(2) OF THE INCOME-TAX ACT, 1961, P RIOR TO ITS SUBSTITUTION, BY THE FINANCE (NO. 2) ACT, 1996 WITH EFFECT FROM APRIL 1,1997 THE CURRENT DEPRECIATION UNDER SECTION 32(1) COULD BE ADJUSTED AGAINST INCOME UNDER ANY HEAD INCLUDING 'CAPITAL GA INS' AND 'INCOME FROM HOUSE PROPERTY' IN THE SAME YEAR. IF THERE REM AINED SOME UNADJUSTED DEPRECIATION ALLOWANCE, THAT WAS CARRIED FORWARD IN THE FOLLOWING YEAR(S) FOR SET OFF AGAINST INCOME UNDER ANY OTHER HEADS JUST LIKE CURRENT DEPRECIATION ALLOWANCE UNDER SECTION 3 2(1) PERTAINING TO SUCH YEAR. UNDER SUB-SECTION (2) OF SECTION 32 AS SUBSTITUTED BY THE FINANCE (NO. 2) ACT, 1996, WITH EFFECT FROM APRIL 1,1997, THE SC OPE OF SET-OFF OF THE BROUGHT FORWARD UNABSORBED DEPRECIATION ALLOWANCE W AS RESTRICTED TO THE INCOME UNDER THE HEAD 'PROFITS AND GAINS OF BUS INESS OR PROFESSION'. UNDER CLAUSE (I) OF SUBSTITUTED SUB-SE CTION (2), THE UNABSORBED DEPRECIATION ALLOWANCE COULD BE SET OFF AGAINST 'PROFITS AND GAINS' OF ANY BUSINESS OR PROFESSION CARRIED ON BY THE ASSESSEE FOR THAT ASSESSMENT YEAR. UNDER CLAUSE (II) OF SUB-SECT ION (2) IF THE UNABSORBED DEPRECIATION ALLOWANCE COULD NOT BE WHOL LY SET OFF UNDER CLAUSE (I), THE AMOUNT NOT SO SET OFF COULD BE SET OFF FROM THE 'INCOME UNDER ANY OTHER HEAD', IF ANY, ASSESSABLE FOR THAT ASSESSMENT YEAR. THE PROVISION FOR CARRY FORWARD AND SET-OFF OF UNAB SORBED DEPRECIATION FOR ANY NUMBER OF YEARS AGAINST INCOME UNDER ANY HE AD, WAS FURTHER DILUTED BY WAY OF CLAUSE (III)(B) TO SECTION 32(2) RESTRICTING THE RIGHT TO SET-OFF OF UNABSORBED DEPRECIATION FOR A PERIOD OF NOT MORE THAN EIGHT ASSESSMENT YEARS SUCCEEDING THE ASSESSMENT YEAR IN WHICH THE ALLOWANCE WAS FIRST COMPUTED. THIS PART OF THE PROV ISION DID NOT DEAL WITH THE TREATMENT OF UNADJUSTED BROUGHT FORWARD DE PRECIATION ALLOWANCE FOR AND UP TO THE ASSESSMENT YEAR 1996-97 . THE FINANCE MINISTER CLARIFIED THE AMENDMENT AS PROSPECTIVE INAS MUCH AS THE CUMULATIVE UNABSORBED DEPRECIATION BROUGHT FORWARD AS ON APRIL 1, 1997, COULD BE SET OFF AGAINST TAXABLE PROFITS OR I NCOME UNDER ANY OTHER HEAD FOR THE ASSESSMENT YEAR 1997-98 AND SEVE N SUBSEQUENT ASSESSMENT YEARS. IN OTHER WORDS, THE PERIOD OF EIG HT YEARS UNDER CLAUSE (III)(B) OF SECTION 32(2) CAME TO BE RECKONE D FROM ASSESSMENT YEAR 1997-98 IRRESPECTIVE OF THE FACT THAT THE UNAD JUSTED BROUGHT FORWARD DEPRECIATION AROSE IN AN EARLIER ASSESSMENT YEAR. THUS, ON THE 10 STRENGTH OF THE CLARIFICATION GIVEN BY THE FINANCE MINISTER, THE UNADJUSTED DEPRECIATION BROUGHT FORWARD UP TO APRIL 1,1997 BECAME ELI-GIBLE FOR SET OFF NOT ONLY AGAINST THE BUSINESS INCOME BUT ALSO AGAINST INCOME UNDER OTHER HEADS IN EIGHT ASSESSMEN T YEARS. TWO LIKE EXPRESSIONS ARE USED IN SUB-SECTION (2), V IZ, FIRSTLY, 'PROFITS OR GAINS ' IN THE MAIN PART OF SUB-SECTION (2) AND THE N, 'PROFITS AND GAINS' IN CLAUSE (I). THE EXPRESSION 'PROFITS AND G AINS' AS USED IN CLAUSE (I) OR (III)(A) REFERS ONLY TO INCOME UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION'. SECTION 32(2) WAS AGAIN SUBSTITUTED BY THE FINANCE ACT, 2001 WITH EFFECT FROM APRIL 1, 2002 RESTORING THE PROVISION A S PREVAILING PRIOR TO THE AMENDMENT MADE BY THE FINANCE (NO. 2) ACT, 1996 WITH EFFECT FROM APRIL 1,1997. SUB-SECTION (2) OF SECTION 32 IS A SUBSTANTIVE PROV ISION AND NOT A PROCEDURAL ONE. IT IS SETTLED LEGAL POSITION THAT T HE AMENDMENT TO A SUBSTANTIVE PROVISION IS NORMALLY PROSPECTIVE UNLES S EXPRESSLY STATED OTHERWISE OR IT APPEARS SO BY NECESSARY IMPLICATION . IT IS NOWHERE SEEN EITHER FROM THE NOTES ON CLAUSES OR MEMORANDUM EXPL AINING THE PROVISION OF THE FINANCE BILL 2001, THAT SUBSTITUTI ON OF SUB-SECTION (2) OF SECTION 32 IS RETROSPECTIVE. THEREFORE, THE SUBS TANTIVE PROVISION CONTAINED IN SECTION 32(2) AS SUBSTITUTED BY THE FI NANCE ACT, 2001 WITH EFFECT FROM APRIL 1, 2002, IS PROSPECTIVELY AP PLICABLE TO THE ASSESSMENT YEAR 2002-03 ONWARDS. SECTION 32(2) IS A DEEMING PROVISION AND BY A LEGAL FICTION, THE AMOUNT OF DEPRECIATION ALLOWANCE UNDER SECTION 32(1) WHICH IS NOT FULLY ABSORBED AGAINST INCOME FOR THAT YEAR IS DEEMED TO BE PART OF THE DEPRECIATION ALLOWANCE FOR THE SUCCEEDING YEAR(S). A DEEMING PROVISION CANNOT BE EXTENDED BEYOND THE PURPOSE FOR WHICH IT IS INTENDED. SECTION 32( 1) DEALS WITH DEPRECIATION AL LOWANCE FOR THE CURRENT YEAR. IT IS ONLY WHEN THE ASSESSMENT OF THE ASSESSEE FROM ASSESSMENT YEAR 2002-03 ONWARDS IS MADE IN WHICH DE PRECIATION ALLOWANCE FOR THE CURRENT YEAR UNDER SECTION 32(1) CANNOT BE GIVEN FULL EFFECT, OWING TO THE INADEQUACY OF PROFITS, THAT TH E DIRECTIVE OF THE DEEMING PROVISION UNDER SECTION 32(2) SHALL APPLY. WHEREVER THERE IS MENTION OF LOSS UNDER A PARTICULA R HEAD FOR THE CURRENT YEAR WHICH IS SOUGHT TO BE SET OFF AGAINST THE INCOME UNDER THE SAME HEAD OR OTHER HEADS OF THE INCOME FOR THAT VER Y YEAR, THE WORDS 'CANNOT BE' AND 'HAS NOT BEEN' HAVE BEEN BROUGHT IN TO PLAY. THE WORDS, 'CANNOT BE' AND 'HAS NOT BEEN' USED IN THE P RESENT TENSE IN SECTION 32(2) SUGGEST THAT THE REFERENCE TO DEPRECI ATION ALLOWANCE UNDER SECTION 32( 1), WHICH COULD NOT BE ADJUSTED D UE TO INADEQUACY OF PROFITS, IS FOR THE CURRENT YEAR ALONE STARTING FROM ASSESSMENT YEAR 2002-03 ONWARDS. THE BROUGHT FORWARD UNABSORBED DEP RECIATION OF EARLIER YEARS CANNOT BE INCLUDED WITHIN THE SCOPE O F SECTION 32(2). IN SECTION 32(2) THE DEPRECIATION ALLOWANCE FOR THE CURRENT YEAR TO WHICH FULL EFFECT CANNOT BE GIVEN DUE TO THE PAUCIT Y OF PROFITS, HAS BEEN REFERRED TO AS 'UNABSORBED DEPRECIATION ALLOWANCE'. SUCH UNABSORBED DEPRECIATION ALLOWANCE FOR THE ASSESSMENT YEARS 199 7-98 TO 2001-02 STRICTLY COMES UNDER SECTION 32(2) AS 'UNABSORBED D EPRECIATION ALLOWANCE'. AS THE LANGUAGE OF THIS DEEMING PROVISION DOES NOT TAL K OF ANY BROUGHT FORWARD 'UNABSORBED DEPRECIATION ALLOWA NCE' OR DEPRECIATION ALLOWANCE WHICH COULD NOT BE GIVEN EFF ECT TO IN THE EARLIER YEARS THAT RESULTANTLY BECAME PART OF SECTION 32(2) , THERE IS NO QUESTION OF EXPANDING THE SCOPE OF THE LEGAL FICTIO N. 11 THE PURPOSE OF A LEGAL FICTION IN SECTION 32(2) IS TO MAKE THE UNABSORBED CARRIED FORWARD DEPRECIATION PARTAKE OF THE SAME CHARACTER AS THE CURRENT DEPRECIATION IN THE FOLLOW ING YEAR. IN OTHER WORDS THE OBJECT OF THE PROVISION IS TO TREAT THE W HOLE OR PART OF THE DEPRECIATION ALLOWANCE UNDER SECTION 32(1), WHICH C OULD NOT BE ADJUSTED IN THE FIRST YEAR, AS THE CURRENT DEPRECIA TION UNDER SECTION 32(1) IN THE SECOND YEAR. IN THE SECOND YEAR, SUCH DEPRECIATION OF FIRST YEAR BECOMES PART AND PARCEL OF DEPRECIATION UNDER SECTION 32(1) OF THE SECOND YEAR. IF AGAIN IN THE SECOND YEAR, THE T OTAL OF DEPRECIATION UNDER SECTION 32(1) (INCLUDING THE AMOUNT OF ALLOWA NCE WHICH CAME FROM FIRST YEAR AND BECAME DEPRECIATION UNDER SECTI ON 32(1) IN THE SECOND YEAR) CANNOT BE ABSORBED, IT SHALL BECOME CU RRENT DEPRECIATION FOR THE THIRD YEAR TO BE DEALT WITH IN THE SAME MAN NER AS THE AMOUNT OF DEPRECIATION IN THE THIRD YEAR AND SO ON. ONCE T HE UNABSORBED DEPRECIATION FOR THE FIRST YEAR IS GIVEN THE CHARAC TER OF CURRENT DEPRECIATION IN THE SECOND YEAR, THE PURPOSE OF SEC TION 32(2) IS FULFILLED. THE 'UNABSORBED DEPRECIATION ALLOWANCE' OF THE PERIOD AFTER SUBSTITUTION BY THE FINANCE (NO. 2) ACT, 1996 CANNO T BE GIVEN THE CHARACTER OF CURRENT DEPRECIATION IN THE ASSESSMENT YEARS AFTER SUBSTITUTION WITH EFFECT FROM APRIL 1, 2002. CIT V. MOTHER INDIA REFRIGERATION INDUSTRIES P. LTD . [1985] 155 ITR 711 (SC) RELIED ON. THEREFORE, THE LAW PREVAILING AS ON THE 1ST APRIL O F THE ASSESSMENT YEAR 2002-03 AND SUBSEQUENT YEARS DOES NOT PERMIT T HE BROUGHT FORWARD UN-ABSORBED DEPRECIATION ALLOWANCE OF THE P ERIOD AFTER SUBSTITUTION BY THE FINANCE (NO. 2) ACT, 1996 TO AS SUME THE CHARACTER OF DEPRECIATION UNDER SECTION 32(1) IN THESE ASSESS MENT YEARS. IF THERE IS BOTH REPEAL OF THE OLD PROVISION AND SI MULTANEOUS INSERTION OF A NEW PROVISION IN ITS PLACE, IT IS CALLED 'SUBS TITUTION'. BUT FOR THE RELAXATION GIVEN BY THE FINANCE MINISTER IN PARLIAMENT, THE BROUGHT FORWARD UNADJUSTED DEPRECIATION OF THE PERI OD PRIOR TO THE AMENDMENT MADE BY THE FINANCE (NO. 2) ACT, 1996 WIT H EFFECT FROM APRIL 1,1997 WOULD HAVE ELAPSED. THERE IS NO SUCH C ONCESSION GIVEN BY THE FINANCE MINISTER WHILE SUBSTITUTING THE PROVISIO NS OF SECTION 32(2) WITH EFFECT FROM APRIL 1, 2002. THEREFORE, THE BROU GHT FORWARD UNABSORBED DEPRECIATION ALLOWANCE OF THE PERIOD AFT ER SUBSTITUTION BY THE FINANCE (NO. 2) ACT, 1996 CANNOT BE TREATED AS THE CURRENT DEPRECIATION IN THE ASSESSMENT YEARS UNDER CONSIDER ATION. THE POSITION CAN BE SUMMED UP AS FOLLOWS : FOR THE ASSESSMENT YEARS 1997-98 TO 2001-02 BROUGHT FORWARD UNADJUSTED DEPRECIATION ALLOWANCE FOR AND UP TO ASS ESSMENT YEAR 1996-97 (THE 'FIRST UNADJUSTED DEPRECIATION ALLOWAN CE'), WHICH COULD NOT BE SET OFF UP TO ASSESSMENT YEAR 1996-97, SHALL BE CARRIED FORWARD FOR SET OFF AGAINST INCOME UNDER ANY HEAD FOR A MAX IMUM PERIOD OF EIGHT ASSESSMENT YEARS STARTING FROM ASSESSMENT YEA R 1997-98. CURRENT DEPRECIATION FOR THE YEAR UNDER SECTION 32( 1) (FOR EACH YEAR SEPARATELY STARTING FROM ASSESSMENT YEARS 1997-98 U P TO 2001-02) CAN BE SET OFF FIRSTLY AGAINST BUSINESS INCOME AND THEN AGAINST INCOME UNDER ANY OTHER HEAD. THE AMOUNT OF CURRENT DEPRECI ATION FOR ASSESSMENT YEARS 1997-98 TO 2001-02 WHICH CANNOT BE SO SET OFF, THE 'SECOND UNABSORBED DEPRECIATION ALLOWANCE', SHALL B E CARRIED FORWARD FOR A MAXIMUM PERIOD OF EIGHT ASSESSMENT YEARS FROM THE ASSESSMENT YEAR IMMEDIATELY SUCCEEDING THE ASSESSMENT YEAR FOR WHICH IT WAS FIRST COMPUTED, TO BE SET OFF ONLY AGAINST THE INCOME UND ER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION'. FOR THE ASSESSMENT YEAR 12 2002-03 ONWARDS THE 'FIRST UNADJUSTED DEPRECIATION ALLOWANCE' CAN BE SET OFF UP TO ASSESSMENT YEAR 2004-05, THAT IS, THE REMAINING PERIOD OUT OF MAXIMUM PERIOD OF EIGHT ASSESSMENT YEARS AGA INST INCOME UNDER ANY HEAD. THE 'SECOND UNABSORBED DEPRECIATION ALLOWANCE' CAN BE SET OFF ONLY AGAINST THE INCOME UNDER THE HEAD ' PROFITS AND GAINS OF BUSINESS OR PROFESSION' WITHIN A PERIOD OF EIGHT AS SESSMENT YEARS SUCCEEDING THE ASSESSMENT YEAR FOR WHICH IT WAS FIR ST COMPUTED. CURRENT DEPRECIATION FOR THE YEAR UNDER SECTION 32( 1), FOR EACH YEAR SEPARATELY, STARTING FROM ASSESSMENT YEAR 2002-03 C AN BE SET OFF AGAINST INCOME UNDER ANY HEAD. THE AMOUNT OF DEPREC IATION ALLOWANCE NOT SO SET OFF (THE 'THIRD UNADJUSTED DEPRECIATION ALLOWANCE') SHALL BE CARRIED FORWARD TO THE FOLLOWING YEAR. THE 'THIRD U NADJUSTED DEPRECIATION ALLOWANCE' SHALL BE DEEMED DEPRECIATIO N UNDER SECTION 32(1), THAT IS DEPRECIATION FOR THE CURRENT YEAR IN THE FOLLOWING YEAR(S) TO BE SET OFF AGAINST INCOME UNDER ANY HEAD, LIKE C URRENT DEPRECIATION, IN PERPETUITY.' 14. FROM THE ABOVE IT IS CLEAR THAT UNABSORBED DEPR ECIATION FOR THE BLOCK OF ASSESSMENT YEAR 1 997-98 TO 2001 -02 WHICH COULD NOT HAVE BEEN SET OFF EARLIER, CANNOT BE ALLOWED TO BE SET O FF NOW. THEREFORE, WE SET ASIDE THE ORDER OF THE LD. CIT(A) AND REMIT THE MATTER BACK TO THE FILE OF ASSESSING OFFICER WITH A DIRECTION TO ONLY ALLOW SET OFF OF UNABSORBED DEPRECIATION WHICH IS OUTSIDE THE BLOCK OF ASSESSMENT YEAR 1 997-98 TO 2001 -02 . 15 IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. (EMPHASIS SUPPLIED BY US) 11. THE SAID DECISION OF THE ITAT WAS CHALLENGED B Y THE REVENUE IN THE HIGH COURT. THE HIGH COURT HAS IN TU RN DISMISSED THE REVENUES APPEAL ON ACCOUNT OF LOW TAX EFFECT VIDE ITS ORDER IN ITA NO.118 OF 2015 DATED 25.1.201 6. THUS IN EFFECT THE ORDER OF THE ITAT STANDS UNCHALLENGED. T HE REVENUE HAS NOT BROUGHT TO OUR NOTICE ANY OTHER DECISION OF THE HIGH COURT OR THE ITAT ON THE ISSUE, NOR HAS BROUGHT TO OUR NOTICE ANY FACTS DISTINGUISHING THE PRESENT CASE FROM LIBE RTY PLYWOOD (SUPRA). THE ONLY CONTENTION OF THE LEARNE D D.R. APPEARS TO BE THAT THE SAID DECISION OF THE I.T.A.T . IS NOT IN CONFORMITY WITH THE DECISION OF THE JURISDICTIONAL HIGH COURT IN M/S KIM PHARMA (P) LTD. (SUPRA). BUT AS NOTED AB OVE THE SAID DECISION HAS CONSIDERED THE PROPOSITION LAID D OWN IN M/S KIM PHARMA (P) LTD. (SUPRA) AND DISTINGUISHED I T. IN 13 VIEW OF THE SAME WE FIND NO INFIRMITY IN THE ORDER OF THE CIT (APPEALS), WHO HAS ALLOWED SET OFF OF DEPRECIAT ION AGAINST THE DEEMED INCOME FOLLOWING THE DECISION OF THE I.T.A.T. IN M/S LIBERTY PLYWOOD PVT. LTD. (SUPRA).W E THEREFORE HOLD THAT THE ASSESSEE IS ENTITLED TO SET OFF OF DEPRECIATION AGAINST THE SURRENDERED INCOME OF RS.1 .25 CRORES ASSESSED U/S 69C OF THE ACT. 12. THE GROUND RAISED BY THE REVENUE AGAINST THE SAME IN GROUND NOS. 1,2(A) AND 2(B) ARE, THEREFORE, DISMISSED. 13. GROUND NO.3 RAISED BY THE REVENUE READS AS UNDER: 3. WHETHER UPON FACTS AND CIRCUMSTANCES OF THE CAS E, THE LD. CIT(A) WAS JUSTIFIED IN DELETING THE ADDITION OF RS.4,38,300/- MADE U/S 36(L)(III) OF THE INCOME TAX ACT, 1961 ON ACCOUNT OF PROPORTIONATE INTEREST BEING CAPITALIZED ON BUILDING UNDER CONSTRUCTION? 14. THE ISSUE IN THE SAID GROUND RELATES TO DELETI ON OF ADDITION MADE UNDER SECTION 36(1)(III) OF THE AC T. 15. BRIEF FACTS RELATING TO THE ISSUE ARE THAT THE ASSESSING OFFICER, DURING ASSESSMENT PROCEEDINGS, N OTED THAT THE ASSESSEE HAD SHOWN BUILDING UNDER CONSTRUC TION AMOUNTING TO RS.1,81,20,341/- AND FURTHER NO INTERE ST HAD BEEN CAPITALIZED AGAINST THE SAID BUILDING WHIC H HAD NOT BEEN PUT TO USE TILL THE END OF THE FINANCIAL Y EAR. THE ASSESSEE SUBMITTED BEFORE THE ASSESSING OFFICER THA T NO 14 INTEREST BEARING FUNDS HAD BEEN USED FOR THE PURPOS E OF CONSTRUCTION OF THE BUILDING AND THE BUILDING HAD B EEN CONSTRUCTED OUT OF ITS OWN INTEREST FREE UNSECURED LOANS AND CAPITAL WHICH WERE SUFFICIENT FOR THE SAID PURP OSE. THE ASSESSING OFFICER REJECTED THE CONTENTION OF TH E ASSESSEE AND APPLYING THE DECISION OF THE HON'BLE P UNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. ABHISHE KK INDUSTRIES LTD., 286 ITR 1 DISALLOWED THE INTEREST TO THE EXTENT OF RS.4,38,300/- UNDER SECTION 36(1)(III) 1 ST PROVISO R.W.S. 43(1) EXPLANATION-8 OF THE INCOME TAX ACT,19 61. 16. BEFORE THE LEARNED CIT (APPEALS), THE ASSESSEE REITERATED THE CONTENTION MADE BEFORE THE ASSESSING OFFICER STATING THAT IT HAD ENOUGH INTEREST FREE FU NDS FOR THE PURPOSE OF INVESTING IN THE CONSTRUCTION OF BUI LDING AND THAT ALL THE INTEREST BEARING FUNDS WERE OLD AN D AGAINST MACHINERY INSTALLED IN EARLIER YEARS AND, THEREFORE, INTEREST PAID THEREON COULD NOT BE ATTRI BUTED TO THE BUILDING CONSTRUCTED. THE LEARNED CIT (APPEALS) HELD THAT FOR THE PURPOSE OF ATTRACTING THE PROVISIONS O F SECTION 36(1)(III) 1 ST PROVISO, THE FULFILLMENT OF TWO CONDITIONS WAS ESSENTIAL; I)THAT THE CAPITAL SHOULD BE BORROWED FO R ACQUISITION OF AN ASSET AND THE ASSET SHOULD BE ACQ UIRED FOR EXPANSION OF EXISTING BUSINESS. THE LEARNED CI T (APPEALS) HELD THAT THE ASSESSING OFFICER HAD GIVEN NO FINDING REGARDING THE FULFILLMENT OF BOTH THE CONDI TIONS AND, THEREFORE, WAS NOT JUSTIFIED IN MAKING THE SAI D DISALLOWANCE. 15 17. BEFORE US, THE LD. COUNSEL OF THE ASSESSEE CONTENDED THAT IT HAD TIME AND AGAIN DEMONSTRATED B EFORE THE LOWER AUTHORITIES THAT IT HAD SUFFICIENT OWN FU NDS FOR THE PURPOSE OF MAKING IMPUGNED INVESTMENT IN THE CONSTRUCTION OF THE BUILDING AND THAT ITS INTEREST BEARING FUNDS HAD NOT BEEN USED FOR CONSTRUCTION OF THE BUI LDING BUT FOR ACQUIRING MACHINERY. THEREFORE, THE LD. CO UNSEL OF THE ASSESSEE CONTENDED THAT THE LEARNED CIT (APPEAL S) HAD RIGHTLY DELETED THE DISALLOWANCE MADE UNDER SECTION 36(1)(III) OF THE ACT. 18. THE LEARNED D.R., ON THE OTHER HAND, RELIED UP ON THE ORDER OF THE ASSESSING OFFICER. 19. WE HAVE HEARD BOTH THE PARTIES. WE FIND NO INFIRMITY IN THE ORDER OF THE LEARNED CIT (APPEALS) . THE FOLLOWING FACTS HAVE NOT BEEN DISPUTED IN THE PRESE NT CASE: 1) BUILDING UNDER CONSTRUCTION SHOWN IN THE IMPUGNED YEAR AMOUNTED TO RS.1,81,20,341/-. 2) OUT OF THE ABOVE RS.1,25,00,000/- IS ATTRIBUTABLE TO THE AMOUNT SURRENDERED BY THE ASSESSEE DURING SURVEY. 3) ONLY THE BALANCE RS.56,20,341/- WAS ATTRIBUTED TO HAVING BEEN MADE OUT OF INTEREST BEARING BORROWED FUNDS. 4) THE ASSESSEE HAD INTEREST FREE FUNDS AMOUNTING TO RS.15,77,77,152/- AS FOLLOWS: I) PARTNERS CAPITAL ACCOUNT = RS.14,14,27,152/- 16 II) FAMILY UNSECURED INTEREST FREE LOAN = RS.1,63,50,000/- 20. FURTHER WE FIND THAT THE ASSESSEE HAD CONTENDE D THAT ALL ITS INTEREST BEARING LOANS WERE OLD, TAKEN FOR THE PURPOSE OF PURCHASING MACHINERY AND THIS FACT HAS N OT BEEN CONTROVERTED OR DISPUTED BY THE REVENUE. 21. CLEARLY, THE LEARNED CIT (APPEALS) HAS CORRECT LY APPRECIATED THE FACTS OF THE CASE AND HELD THAT SIN CE THERE IS NO DISPUTE ABOUT THE FACT THAT THE INTEREST BEARING FUNDS HAVE NOT BEEN USED FOR THE PURPOSE OF INVESTING IN THE A FORESAID BUILDING AND THE AVAILABILITY OF ENOUGH OWN FUNDS W ITH THE ASSESSEE HAS ALSO NOT BEEN DISPUTED, THERE IS NO C ASE AT ALL FOR MAKING ANY DISALLOWANCE OF INTEREST UNDER SECTI ON 36(1)(III) OF THE ACT. THE PRESUMPTION OF USER OF INTEREST FR EE FUNDS IN CASE OF AVAILABILITY OF MIXED FUNDS HAS BEEN LAID D OWN BY THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF BR IGHT ENTERPRISES PVT . LTD . VS . CIT , JALANDHAR , IN ITA NO . 224 OF 2013, CIT VS . KAPSONS ASSOCIATES, ITA NO.354 OF 2013 (O&M), GURDAS GARG VS. CIT IN ITA NO.413 OF 2014 AND BY TH E HON'BLE SUPREME COURT IN THE CASE OF HERO CYCLES PVT. LTD. VS. CIT, CIVIL APPEAL NO.514 OF 2008 DATED 5.11.2005. FOLLO WING THE SAME ALSO, WE HOLD THAT SINCE IN THE PRESENT CASE I T HAS BEEN DEMONSTRATED THAT THERE WAS ENOUGH SURPLUS FUNDS AV AILABLE WITH THE ASSESSEE TO MAKE IMPUGNED INVESTMENT IN TH E BUILDING, THE PRESUMPTION SHOULD BE THAT THE INVEST MENT HAS BEEN MADE OUT OF THE SAME, CALLING FOR NO DISALLOWA NCE U/S 36(1)(III) OF THE ACT. 17 22. IN VIEW OF THE ABOVE, WE UPHOLD THE ORDER OF T HE LD. CIT (APPEALS) IN DELETING THE DISALLOWANCE MADE U/S 36(1)(III) OF THE ACT ON ACCOUNT OF PROPORTIONATE I NTEREST BEING CAPITALIZED ON BUILDING CONSTRUCTION AMOUNTIN G TO RS.4,38,300/-. 23. GROUND NO.3 RAISED BY THE REVENUE, IS, THEREFORE, DISMISSED. 24. GROUND NO.4 RAISED BY THE REVENUE READS AS UNDER: 4. WHETHER UPON FACTS AND CIRCUMSTANCES OF THE CAS E, WAS LD. CIT(A) JUSTIFIED DIRECTING THE AO TO CALCULATE DISALLOWANCE U/S 36(1)(III) OF THE ACT, 1961 UPON E XCLUDING THE PAYMENTS OF RS.10,80,720/- MADE BY ASSESSEE FRO M EXCHANGE EARNERS FOREIGN CURRENCY ACCOUNT (EEFC)? 25. BRIEF FACTS RELATING TO THE ISSUE ARE THAT DUR ING ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTICE D THAT THE ASSESSEE HAD ADVANCED A SUM OF RS.37,13,280/- T O M/S H. STOLL GMBH COMPANY FOR PURCHASE OF MACHINERY ON 28.2.2011. THE ASSESSING OFFICER ALSO FOUND THA T THE ASSESSEE HAD RAISED SECURED AND UNSECURED LOANS AND PAID INTEREST THEREON. ON BEING QUESTIONED AS TO W HY PROPORTIONATE INTEREST RELATING TO THESE ADVANCES B E NOT CAPITALIZED, THE ASSESSEE SUBMITTED THAT IT HAD ADV ANCED 42,000 EUROS (RS.26,32,560/-) FROM CC HYPOTHECATION ACCOUNT WITH PNB AND 18,000 EUROS (RS.10,80,720/-) FROM 18 EXCHANGE EARNERS FOREIGN CURRENCY ACCOUNT (IN SHOR T EEFC ACCOUNT) WITH PNB IN WHICH IT HAD ITS OWN DE POSIT AND THERE WAS NO BORROWINGS. FURTHER, THE ASSESSEE SUBMITTED THAT IT HAD INTEREST FREE FUNDS TOTALLING RS.15.77 CRORES IN THE FORM OF PARTNERS CAPITAL AN D UNSECURED LOANS FROM FAMILY MEMBERS. THE ASSESSING OFFICER REJECTED ASSESSEES CONTENTION AND RELYING UPON THE JUDGMENT OF THE HON'BLE PUNJAB & HARYANA HIGH C OURT IN THE CASE OF CIT VS. ABHISHEK INDUSTRIES LTD., 2 86 ITR 1 DISALLOWED THE INTEREST EXPENDITURE PROPORTIONATE T O THE ADVANCES MADE AND CAPITALIZED THE SAME IN THE COST OF THE ASSET. 26. BEFORE THE LEARNED CIT (APPEALS), THE ASSESSEE REITERATED THE CONTENTIONS MADE BEFORE THE ASSESSIN G OFFICER, WHO HELD THAT THE ADVANCES MADE OF 18000/- EUROS FROM EEFC ACCOUNT WITH PNB COULD NOT BE SAID TO HAVE BEEN MADE OUT OF ANY INTEREST BEARING BORROWED FUNDS SINCE THE ASSESSEE HAD DEPOSITED ITS EARNINGS FROM EXPORT SALES IN THE SAID ACCOUNT AND, THEREFORE, DE LETED THE PROPORTIONATE INTEREST RELATED TO THE SAID ADVA NCE. REGARDING THE BALANCE ADVANCE OF 42,000/- EUROS, SI NCE THE ASSESSEE HAD CONCEDED THAT THE SAME MAY BE CONSIDERED FOR DISALLOWANCE, THE LEARNED CIT (APPEA LS) UPHELD THE SAME. 27. AGGRIEVED BY THE DELETION OF DISALLOWANCE MADE BY THE LEARNED CIT (APPEALS) ON ACCOUNT OF ADVANCE OF 19 18,000/- EUROS MADE FROM EEFC ACCOUNT OF THE ASSESS EE, THE REVENUE HAS NOW COME UP IN APPEAL BEFORE US. 28. DURING THE COURSE OF HEARING, THE LEARNED D.R. RELIED UPON THE ORDER OF THE ASSESSING OFFICER, WHI LE THE LD. COUNSEL OF THE ASSESSEE REITERATED THE CONTENTI ONS MADE BEFORE THE LOWER AUTHORITIES AND RELIED UPON T HE ORDER OF THE LEARNED CIT (APPEALS). 29. WE FIND NO INFIRMITY IN THE ORDER OF THE LEARN ED CIT (APPEALS). THE ASSESSEE HAS ALL ALONG CONTENDE D THAT THE ADVANCE OF 18,000/- EUROS HAS BEEN MADE FROM IT S EEFC ACCOUNT IN WHICH PROCEEDS FROM ITS EXPORT SALE S IN FOREIGN CURRENCY IS DEPOSITED. THE REVENUE HAS NOT DISPUTED OR CONTROVERTED THIS FACT. IT HAS NOT BRO UGHT ON RECORD ANY EVIDENCE TO DISPROVE THIS CONTENTION OF THE ASSESSEE NOR HAS IT CHALLENGED THIS CONTENTION. IN VIEW OF THESE FACTS, THE ADVANCE OF 18,000/- EUROS CAN ONLY BE ATTRIBUTED TO THE FOREIGN EXCHANGE EARNINGS OF THE ASSESSEE AND NOT TO ANY INTEREST BEARING BORROWED F UNDS. THE LEARNED CIT (APPEALS), WE FIND, HAS CORRECTLY APPRECIATED THE FACTS OF THE CASE AND DELETED DISAL LOWANCE TO THE EXTENT OF ADVANCES MADE FROM EEFC ACCOUNT AMOUNTING TO 18,000/- EUROS. EVEN BEFORE US, THE LEARNED D.R. HAS NOT BEEN ABLE TO DEMONSTRATE AS TO HOW THE AFORESAID ADVANCES CAN BE ATTRIBUTED TO ANY INT EREST BEARING BORROWINGS OF THE ASSESSEE. IN THE LIGHT O F THE SAME, WE UPHOLD THE ORDER OF THE LEARNED CIT (APPEA LS) IN DELETING DISALLOWANCE OF PROPORTIONATE INTEREST ON THE 20 ADVANCE OF 18,000/- EUROS. THE GROUND OF APPEAL NO .4 RAISED BY THE REVENUE IS DISMISSED. 30. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT. SD/- SD/- (BHAVNESH SAINI) (ANNAPURNA GUPTA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 14 TH MARCH, 2017 *RATI* COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) 4. THE CIT 5. THE DR ASSISTANT REGISTRAR, ITAT, CHANDIGARH