MANAN COTSYN PRIVATE LIMITED ,MUMBAI V. .DCIT-CIRCLE 2(2)(1), MUMBAI

ITA 1652/MUM/2024

AI Insights

Manan Cotsyn Private Limited appealed against the order of the Commissioner of Income Tax (Appeals), which had confirmed the disallowance of interest expenses and additions made by the Assessing Officer. The main issues revolved around the disallowance of interest expenses amounting to Rs.7,39,043 under section 36(1)(iii) of the Income Tax Act, 1961, and the addition of Rs.1,27,780 due to discrepancies between Form 26AS and the company's books. The Tribunal found that the interest expenses were incurred for assets that were put to use during the trial production phase and thus should be treated as revenue expenditure. The Tribunal also remanded the issue of the discrepancy in reported income for further investigation by the Assessing Officer.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 33063 (ITAT-MUMBAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-12-2024
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2013-2014
• Other Referred Cases: CIT v Ashima Syntex, CIT v Union Carbide, CIT v Vindhyachal Distilleries Pvt Ltd, CIT v Piccadilly Agro Industries Ltd, ACIT vs. Nilkanth Concast Pvt Ltd, CIT vs. Sri Rama Multitech Ltd, PCIT vs. L & T ltd, Western India Vegetable Product vs. CIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PARESH DESHPANDE
• Assessee Lawyers: DINKLE HARIA; INVOKING
• Keywords: Revised return; Revenue expenditure; Depreciation; Capital receipt; Principle of natural justice; TDS; FORM 26AS
• Section: 143(1); 251; 208; 13; 36 (1) (iii)

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH, MUMBAI BEFORE SMT BEENA PILLAI, JUDICIAL MEMBER AND SMT RENU JAUHRI, ACCOUNTANT MEMBER ITA No.1652/M/2024 Assessment Year: 2013-14 Manan Cotsyn Private Limited A-301/302, Dynasy Business Park, Andheri Kurla Road, J. B. Nagar, Andheri (East), Mumbai- 400059. PAN: AAFCM0378K Vs. DCIT- Circle 2(2)(1) Room No. 545, 5th Floor, Aayakar Bhavan, Maharishi Karve Road, Mumbai- 400020. Appellant : Respondent Present for: Assessee by : Ms. Dinkle Haria Revenue by : Shri Paresh Deshpande- Sr. A.R. Date of Hearing : 10.10.2024 Date of Pronouncement : 17.12.2024 O R D E R Per Beena Pillai, JM: Present appeal filed by the assessee arises out of order dated 05.02.2024 passed by Ld. CIT(A), Addl/JCIT (A)-4, Kolkata for assessment year 2013-14 on following grounds of appeal: ITA No.1652/MUM/2024 Manan Cotsyn Private Limited; A. Y.2013-14 Page | 2 1. “THE ORDER BAD, ILLEGAL AND WITHOUT JURISDICTION 1.1. In the facts and the circumstances of the case, and in law, the appellate order framed by the Commissioner of Income tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi, ['Ld. CIT (A)'] be held as bad, illegal and without jurisdiction, as the same is framed in breach of the statutory provisions and the scheme and as otherwise also is not in accordance with the law. 1.2. Otherwise also, in the facts and the circumstances of the case, and in law, the appellate order so framed by the Ld. CIT (A) is bad and illegal void as the same is arbitrary and perverse. 2. NATURAL JUSTICE 2.1. It is submitted that, in the facts and the circumstances of the case, and in law, the appellate order so framed be held as bad and illegal, as: (i) The same is framed in gross breach of the principles of natural justice; and (ii) The same is passed without application of mind to the facts and the submissions brought on record by the Appellant. 2.2. Without prejudice to the generality of the above ground, in the facts and the circumstances of the case, the appellate order so passed is bad and illegal as the Ld. CIT (A) erred in – (i) Not granting proper, sufficient and adequate opportunity of being heard; and (ii) Not providing an opportunity of personal hearing to the Appellant. 2.3. It is submitted that in the facts and the circumstances of the case, and in law, no such action was called for. WITHOUT PREJUDICE TO THE ABOVE 3. DISALLOWANCE OF INTEREST EXPENSES OF RS. 7,39,043/- u/s.36(1)(iii) OF THE ACT 3.1. The Ld. CIT (A) erred in confirming the action of the A.O. in making disallowance of interest expenditure of Rs. 7,39,043/- from the income of the Appellant by invoking the proviso to section 36 (1) (iii) of the Income tax Act, 1961 [\"the Act\"]. 3.2. While doing so, the Ld. CIT (A) failed to appreciate that the trial run of the production had already started from 01.04.2012, and, therefore the assets acquired out of borrowed funds were put to use from 01.04.2012. ITA No.1652/MUM/2024 Manan Cotsyn Private Limited; A. Y.2013-14 Page | 3 3.3. It is submitted that in the facts and the circumstances of the case, and in law, no such disallowance was called for. 3.4. Without further prejudice to the above, assuming but not admitting that the disallowance of interest expenditure was called for by the A.O., the Ld. CIT (A) failed to appreciate that this interest expenditure was to be capitalized to cost of the asset and, therefore, to that extent was eligible for depreciation. 3.5. Without further prejudice to the above, assuming but not admitting that some disallowance was called for, the Ld. CIT (A) failed to appreciate that the computation of the disallowance made by the A.O. was arbitrary, excessive and not in accordance with the law. 4. ADDITION OF RS. 1,27,780/- ON ACCOUNT OF DIFFERENCE BETWEEN FORM 26AS AND BOOKS OF ACCOUNTS 4.1. The Ld. CIT (A) erred in confirming the action of the A.O. in making addition of Rs. 1,27,780/- on account of the alleged difference between the income as reflected in Form 26AS and the income shown by the Appellant in Profit & Loss Account. 4.2. While doing so, the Ld. CIT (A) failed to appreciate that no such income had accrued / was earned by the Appellant during the previous year and that such income was mistakenly reflected in Form 26AS of the Appellant. 4.3. It is submitted that in the facts and the circumstances of the case, and in law, no such addition was called for. 4.4. Without further prejudice to the above, assuming but not admitting that some addition was called for, the Ld. CIT (A) failed to appreciate that the computation of the addition made by the A.O. was arbitrary, excessive and not in accordance with the law. 5. INTEREST SUBSIDY OF RS. 24,69,929/- ΤO BE TREATED AS CAPITAL RECEIPT 5.1. The Ld. CIT (A) erred in not allowing the addition claim of the Appellant to treat the interest subsidy pertaining to R - TUFS scheme of Rs. 24,69,929/- as capital receipt. 5.2. While doing so, the Ld. CIT (A) failed to appreciate that fresh claim for the first time can be made before the Assessing Officer during the assessment proceeding. 5.3. It is submitted that in the facts and the circumstances of the case, and in law, such rejection of the claim of treating the interest subsidy was not called for. LIBERTY ITA No.1652/MUM/2024 Manan Cotsyn Private Limited; A. Y.2013-14 Page | 4 6. The Appellant craves leave to add, alter, delete or modify all or any the above ground at the time of hearing.” Brief facts of the case are as under: 2. The assessee filed its return of income on 29.09.2013 declaring loss of Rs.54650683/- the return of income was processed u/s. 143(1) of the act and the case was selected for scrutiny and notice u/s.143(2) of the act was issued to the assessee. Subsequently notice u/s. 143(1) issued calling upon details. In response to statutory notices, representative of the assessee attended the proceedings and filed details and submissions from time to time. 2.1. Ld.AO noted that, the assessee is engaged in the process of production of textiles. It was noted that, the processing house carries various activities such as dying, bleaching, mercerzing, finishing, packing etc. Ld.AO noted that, total receipts in P & L A/c., includes revenue from operation amounting to Rs. 9,88,89,049/- and other income amounting of Rs.14,80,524/-. After debiting expenditure towards employee benefit , finance cost and others, loss of Rs.5,46,50,683/- was declared by the assessee. 2.2. Ld.AO noted that, the assessee claimed total interest expenditure of Rs.1,45,36,620/-. Accordingly, the assessee was called upon to furnish details of interest expenditure. It was noted that, the assessee incurred interest expenditure of Rs.7,39,043 for prior period. Ld.AO was of the opinion that assessee cannot be allowed this expenditure as per the proviso to section 36(1)(iii). ITA No.1652/MUM/2024 Manan Cotsyn Private Limited; A. Y.2013-14 Page | 5 2.3. The Ld.AO also noted that, details revealed on 26AS and the details appearing in the books of account of the assessee were not matching. The assessee thus called upon to reconcile the statement. Upon the reconciliation statement submitted by the assessee, vide letter dated 16.12.2015 noted that, there was difference of Rs.3,73,718/- in receipt shown by the assessee in its books of accounts and receipts appearing in 26AS. The assessee was thus called upon to file submission in respect of the same, and to respond as to why the unreconciled recipes should not be added as the income in the hands of assessee. 2.4. The assessee in response to same submitted that, there are certain monies not received by the assessee from certain parties, however the deductor deducted tax pertaining to year under consideration. This contention of assessee was not accepted by the Ld.AO. The Ld.AO thus made total addition thereby reducing the loss to Rs.5,44,01,226/- Aggrieved by the order of the Ld.AO assessee preferred appeal before the Ld.CIT(A) 3. The Ld.CIT(A) dismissed the grounds of appeal and confirm the addition made by the Ld.AO. before the Ld.CIT(A) the assessee raised additional point of interest subsidy that was to be treated as capital receipt. This issue was also dismissed by Ld.CIT(A), observing that, no information regarding the same was filed by the assessee before Ld.AO. ITA No.1652/MUM/2024 Manan Cotsyn Private Limited; A. Y.2013-14 Page | 6 Aggrieved the order of this Ld.CIT(A) the assessee is in appeal before this Tribunal. 4. Ld.AR submitted that Ground No. 3 raised by the assessee is on disallowance of interest expenses u/s. 36 (1)(iii). The Ld.AR submitted that, the interest expense pertain to the pre- production period was charged to revenue because, trial production started as on 01.04.2012. The Ld.AR submitted that, such trial run expenses are to be charged to revenue and accordingly claimed to be revenue expense. He submitted that, the word ‘commercial production' is different from the word 'put to use’. He placed reliance on following cases that, the term 'use' has a wide connotation, and includes, use for trial production:- i. CIT v Ashima Syntex 251 ITR 133 ii. CIT v Union Carbide 254 ITR 488 iii. CIT v Vindhyachal Distilleries Pvt Ltd 272 ITR 583, (2005) 196 CTR (MP) 644 iv. CIT v Piccadilly Agro Industries Ltd 311 ITR 24, (2007) 212 CTR (P&H) 505). 4.1. The Ld.AR submitted that, in present facts the assets were put to use for trial run before the commercial production began. He submitted that, the asset was first put to use on 01.04.2012, and commercial production started on 19.04.2012. He submitted that, as per the proviso to Section 36(1)(iii); “any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for any ITA No.1652/MUM/2024 Manan Cotsyn Private Limited; A. Y.2013-14 Page | 7 period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction. He submitted that, as per reading of the section, interest amount will be allowed as deduction to assessee as it was charged to revenue only after the asset was first put to use. 4.2. On the contrary, the Ld.DR relied on the orders passed by the authorities below and submitted that, the assessee has not furnished any supportive documents for such expenses and accordingly, disallowance made by the Ld.AO deserved to be upheld. We have perused the submissions advanced by both the parties in light of records placed before us. 5. The Ld.AR relied on page 138 of paper book, wherein Engineer Certificate is placed stating that, the assessee had taken trial run during the 1st week of April and subsequently on successful trail run, the management decided to take the commercial production on 19th April. He placed reliance on page 168 and 169 of the paper book, wherein the raw materials for the purposes of dying like nitric acid were purchased by the assessee. It is thus the submissions that, the assessee started commercial production on 19.04.2012 and had consumed 208 KWH of power between the period 17/02/2012 to 16/03/2012 and 2839 KWH of energy during the period of trial run placed at page 138 of paper book. The energy ITA No.1652/MUM/2024 Manan Cotsyn Private Limited; A. Y.2013-14 Page | 8 consumed between 1.04.2012 to 18.04.2012 clearly indicates increase in consumption of electricity, due to increase in usage of machineries for processing of cloth to fabric. It is noted that, the ratio of consumption of electricity is in proportion to increase in processing of fabric which is clear from the copies of electricity consumption invoice for the month of March – 2012, April- 2012 and May- 2012 enclosed as Annexure 5A, 5B and 5C at pages 30- 32 of the paper book. 5.1. Further it is noted that, the consumption of water has also increased in the month of April and May as compared to March 2012 which is clear from the water bill issued by Maharashtra Industrial Development Corporation placed at page 33-35 of paper book. The Ld.AR placed in the PB details of job card recording, voucher and challan cum invoice dated 14.04.2012 revealing that the goods received were processed during the trial run, and were sent for approval. The details are placed at page 38, 39 and 40. It cannot be accepted that no supportive evidences were filed by the assessee as all these details were furnished before the Ld.AO as well as the Ld.CIT(A) which is evident from the rectification application filed by the assessee before the Ld.CIT(A) placed at page 123-125 of the PB. 5.2. The assessee placed reliance on the decisions of Hon'ble Delhi Tribunal in case of ACIT vs. Nilkanth Concast Pvt Ltd reported in (2021) 130 taxmann.com 224 in support of the submissions that once the assessee establishes the trial run, the interest for the ITA No.1652/MUM/2024 Manan Cotsyn Private Limited; A. Y.2013-14 Page | 9 period from installation to trial run should be allowed as revenue expenditure. The assessee also relied on following decisions :- i. Decision of Hon'ble Supreme Court in case of CIT vs. Sri Rama Multitech Ltd. Reported in (2017) 80 taxmann.com 375. ii. Decision of Hon'ble supreme court in case of PCIT vs. L & T ltd. reported in (2018) 98 tax 368, iii. Decision of Bombay High Court in case of Western India Vegetable Product vs. CIT reported in (1954) 26 ITR 151. 5.3. It is noted that Hon'ble Delhi Tribunal in case of ACIT vs. Nilkanth Concast Pvt Ltd (supra) considered guidelines under ICDX - IX in relation to borrowing cost, and observed as under; “31. We have also gone through the ICDS IX with relation to capitalization of borrowing costs. The main guidelines with regard to the capitalization of borrowing costs are as under: 1. The borrowing costs should be capitalized to an extent to which it is incurred during the reporting period on the borrowed funds, specifically for the purpose of acquisition, construction or production of qualifying asset. 2. The capitalization will commence from the date when the funds have been borrowed, in case funds have been borrowed for the purpose of acquisition, construction or production of qualifying asset. In case of inventory, it will commence from the date, the utilization of borrowed funds have been started. 3. The capitalization of borrowing cost will cease when the qualifying asset is first put to use. In case of inventory, it will cease when the activities necessary to prepare such inventory, for its sale, are substantially completed 4. When the construction of qualifying asset is taken up in parts and a substantially completed parts capable of being used then, the capitalization of borrowing costs will cease: a. In case of part of qualifying asset, when such part of qualifying asset is first put to use ITA No.1652/MUM/2024 Manan Cotsyn Private Limited; A. Y.2013-14 Page | 10 b. In case of part of inventory, when the activities necessary to prepare such part of inventory, for its sale, are substantially completed 32. CBDT vide Notification No. 87, dated 29-9-2016 Central Government notified amended ICDS with effect from the assessment year 2017-18. 33. Having gone through the entire factum of the case, owing to the similar determinative factum of \"put to use\" in ICDS IX, AS-16, the judicial pronouncements, provisions to Section 36(1)(iii) and Explanation 8 to Section 43(1), we hereby hold that the Interest of Rs. 28,84,000/- has to be treated as Revenue Expenditure and need not be Capitalized. Accordingly, the disallowance of Rs. 28,84,000/- is hereby directed to be deleted. 34. In result, the appeal of the revenue is dismissed.” 5.4. Nothing contrary has been brought on record by Ld.DR in order to deviate from above view. We are therefore of the opinion that, there are sufficient material placed on record leading to the conclusion that, machines were put to use. The interest expenditure therefore amounting to Rs.7,39,043/- incurred has to be treated as revenue expenditure and cannot be capitalised. Accordingly grounds no 3 raised by the assessee stands allowed. 6. Ground no. 4 is on account of difference between form 26AS and books of account. 6.1. In our view this issue requires to be remanded to the Ld.AO based on the affidavit filed by the assessee placed at page 105-106 of the PB which is scanned and reproduced as under: I, Deepak Wahi, Director of M/s Manan Cotsyn Private Limited, (herein after referred to as 'Company') having office at A-301/302, Dynasty Business Park, J. B. Nagar, Andheri (East) Mumbai-400 096, Maharashtra, India do hereby on solemn affirmation declare as under: ITA No.1652/MUM/2024 Manan Cotsyn Private Limited; A. Y.2013-14 Page | 11 That the Company has verified its records and confirm that during the period from April 2012 to March 2013, the Company has provided textile processing service to M/s Manish Textiles aggregating to Rs.3,75,670 and against which has received money to the extent of Rs. 95,519, as under: Invoice No. Date of Invoice Amount of invoice Discount TDS Cheque No. Cheque Date Bank Amount received in bank (Rs.) Aug/02 /67 21.08.2012 1,45,519 5,822 2,795 371429 01.10. 2 012 Saraswat Co- operative Bank 1,36,904 Aug/03 /83 30.08.2012 1,35,050 3000 371536 03.11. 2 012 Saraswat Co- operative Bank 1,47,000 1426 18.09.2012 81.910 1498 25.09.2012 13,191 - - Total 3,75,670/- 5822 5795 2,83,902/ - I confirm that the Company has not received cheque bearing number \"371498\" dated 31\" March, 2013 of Rs.2,13,734 as claimed by M/s. Manish Textiles. I confirm that in respect of said amount of Rs.2,13,734, Company has neither provided any services to M/s Manish Textiles nor has issued any invoice to them. I confirm that outstanding amount due from M/s Manish Textile till date is Rs.80,151/-. I hereby state that whatever is stated herein above is true to the best of my knowledge.” 6.2. The Ld.AO is directed to issue notice u/s. 133 to M/s. Manish Textiles to verify the above facts narrated in the affidavit by the assessee and to consider the claim in accordance with law. Accordingly ground no. 4 raised by the assessee stands partly allowed for statistical purposes. 7. Ground No. 5 raised by the assessee is on the treatment given to the interest subsidy as revenue receipt. It is submitted that this claim of assessee was raised by the assessee before the Ld.CIT(A) by ITA No.1652/MUM/2024 Manan Cotsyn Private Limited; A. Y.2013-14 Page | 12 way of an additional ground. The Ld.AR submitted that interest subsidy of Rs.2469929/- is to be treated as capital receipt and a prayer was made to consider the loss as per the revise computation of income attached. The Ld.CIT(A) placing reliance on the decision of Hon'ble Supreme Court in case of M/s. Goetz India Ltd vs CIT reported in 2023 151 taxmann.com 196. the Ld.CIT(A) observed that no supporting documents were filed by the assessee in the form of revised accounts statement and tax audit reports and thus rejected the claim of the assessee. We have perused the submissions advanced by both sides in light of records placed before us. 7.1. In the interest of justice we remit this issue to Ld.AO to verify the claim in accordance with law. We draw support from the following observation of Hon'ble Supreme Court in case Goetz India Ltd (supra) as under:- “4. The decision in question is that the power of the Tribunal under section 254 of the Income-tax Act, 1961, is to entertain for the first time a point of law provided the fact on the basis of which the issue of law can be raised before the Tribunal. The decision does not in any way relate to the power of the Assessing Officer to entertain a claim for deduction otherwise than by filing a revised return. In the circumstances of the case, we dismiss the civil appeal. However, we make it clear that the issue in this case is limited to the power of the assessing authority and does not impinge on the power of the Income-tax Appellate Tribunal under section 254 of the Income-tax Act, 1961. There shall be no order as to costs.” 8. Respectfully following the above view, we direct the Ld.AO to verify the claim of the assessee having regard to the evidences filed in accordance with law. ITA No.1652/MUM/2024 Manan Cotsyn Private Limited; A. Y.2013-14 Page | 13 Accordingly the grounds raised by the assessee stands partly allowed for statistical purposes. In the result the appeal filed by the assessee stands partly allowed for statistical purposes. Order pronounced in the open court on 17.12.2024. Sd/- Sd/- RENU JAUHRI BEENA PILLAI ACCOUNTANT MEMBER JUDICIAL MEMBER Place: Mumbai, Dated: 17.12.2024 Snehal C. Ayare, Stenographer/Dragon Copy of the order forwarded to : 1. The Appellant 2. The Respondent 3. Ld.DR, ITAT, Mumbai 4. Guard File 5. CIT //True Copy// BY ORDER, (Dy./Asstt. Registrar) ITAT, Mumbai "