Income Tax Appellate Tribunal - Chandigarh
Garyson Motors (P) Ltd., Ludhiana vs Assessee on 30 June, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
'SMC' BENCH, CHANDIGARH
BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER
ITA No. 86/CHD/2016
Assessment Year: 2008-09
M/s Garyson Motors (P) Ltd., Vs The ACI T,
Sherpur Chowk, Circle-I
G.T.Road, Ludhiana.
Ludhiana.
PAN: AABCG6317N
(Appellant) (Respondent)
Appellant by : Shri Ashwani Kumar &
Shri Aditya Kumar
Respondent by : Shri S.K.Mittal, DR
Date of Hearing : 29.06.2016
Date of Pronouncement : 30.06.2016
O R D E R
PER BHAVNESH SAINI,JM This appeal by assessee has been directed against the order of ld. CIT(Appeals)-I, Ludhiana dated 22.12.2015 for assessment year 2008-09.
2. I have heard ld. Representatives of both the parties and perused the material on record.
3. On ground No. 1, assessee challenged the disallowance of Rs. 10,27,500/- out of interest. During 2 the course of assessment proceedings, the Assessing Officer noticed that assessee company has given the following advances :
i) Advance against lease of property - Rs. 40 lacs
ii) Rent advance to Balwinder/Niramal - Rs. 28 lacs
4. The assessee company has also borrowed funds on which interest expenditure has been incurred and claimed as business expenditure under section 36(1)(iii) of the Income Tax Act. The assessee was directed to explain as to why interest proportionate to these advances be not disallowed. The assessee explained that advance of Rs. 40 lacs was given to the Directors as advance against lease of property, this advance has been outstanding for last two years and advance of Rs. 28 lacs has been given to the Directors as security and advance against rent which was to be adjusted with the rent over a long period of time. The Assessing Officer relied upon decision of Hon'ble Punjab & Haryana High Court in the case of Abhishek Industries Ltd. 286 ITR 1. Therefore, according to the Assessing Officer, in respect of advances given for non-business purpose, interest expenditure was to be disallowed on proportionate basis. The assessee, however, placed reliance upon decision of Hon'ble Supreme Court in the case of S.A.Builders 288 ITR 1. The Assessing Officer, however, on examination of the case found that assessee has borrowed funds on which 3 interest expenditure has been incurred which is depicted in Profit & Loss Account. The assessee has given interest free advances to its Directors as mentioned above. The issue is to be examined whether the advances are given for the purpose of commercial expediency. 4(i) The Assessing Officer held that the assessee company has given advance against lease hold property to its own Directors amounting to Rs. 40 lacs which was outstanding for more than two years. The assessee has not received any possession of the said land on lease. It was, therefore, colorable device to advance business funds to the Directors in the garb of advance for lease hold property. Further, the assessee has made advance to Shri Balwinder and Shri Nirmal amounting to Rs. 28 lacs. According to Assessing Officer, assessee paid such a huge amount as advance and then made arrangement for its deduction over a long period of time. Therefore, business funds of the assessee were transferred to the Directors for non-business purposes. The Assessing Officer, accordingly, held that above advances have been given to the Directors for non business purposes. Therefore, interest proportionate to the said advances @ 15% amounting to Rs. 10,27,500/- was disallowed and added to the income of the assessee.
5. The assessee filed written submission before ld. CIT(Appeals) which is reproduced in the impugned order 4 in which assessee reiterated the submissions made before Assessing Officer and also submitted that said advance of Rs. 40 lacs was made to the Directors against lease of the property which was owned by the Directors of the assessee company. The assessee company in turn, mortgaged the said property to the bank to secure the additional funds in order to run the business operations. Therefore, no disallowance should be made. The assessee has sufficient funds available. It was also submitted that copy of the agreement for rent was filed before Assessing Officer explaining the business and commercial expediency of the said advance. Therefore, advance was made for business purposes only. The assessee, therefore, submitted that all the advances were given for business purposes, therefore, no disallowance should be made.
6. The ld. CIT(Appeals) found that advance of Rs. 40 lacs was given past two years and no possession of the lease hold property have been taken. The assessee did not prove business expediency, however, it was fund that as per Rent Agreement, Rs. 1 lac to be adjusted from monthly rent of Rs. 2,50,000/- and further that Rs. 6 lacs out of the total amount of Rs. 28 lacs was in the nature of security. Therefore, Rs. 6 lac was deleted and remaining additions were confirmed.
5
7. After considering rival submissions, I am of the view addition is wholly unjustified. It is admitted fact that the advance of Rs. 40 lacs was given to the Directors which was outstanding for the last past two years. Therefore, no advance have been given to the Directors in assessment year under appeal. The assessee explained before ld. CIT(Appeals) that advance was given against the lease of property which was owned by the Directors of the assessee company. The assessee company, in turn, mortgaged the said property of the Directors to the bank to secure the additional funds in order to run the business operations in subsequent years successfully. These submissions of the assessee have not been examined in proper perspective because when the properties of the Directors against which advances have been given, have been further mortgaged by the assessee company for business purposes, then the advance cannot be treated as interest free advance so as to make disallowance under section 36(1)(iii) of the Act.
8. Further, as regards rent advance and security given to the Directors, the assessee filed copy of the Rent Agreement and explained that it was for business and commercial expediency to give advance. The ld. CIT(Appeals) partly accepted the contention of the assessee that security deposit to be allowed which is connected with business activities of the assessee. However, for rest of the amount, no specific reasons have 6 been given as to why the advance was not for business purposes. In Civil Law, advance rent paid shall have to be adjusted against the future rent which was also claimed by the assessee before authorities below, therefore, same could not be treated as advance for non business purposes. Further, ld. counsel for the assessee referred to the audited accounts of the assessee which shows that assessee company has share capital of Rs. 28.40 lacs with reserves and surplus in a sum of Rs. 3.05 Cr. These amounts are sufficient to cover up the above advances given to the Directors even if the same are considered to be given for non business purposes to which, I have not agreed above.
9. The ld. counsel for the assessee relied upon decision of Hon'ble Punjab & Haryana High Court in the case of Kapson Associates 381 ITR 204 in which it was held that, "Assessee havin g suff icient in ter est f ree advances to cover interest free advances, no d i s a l l o wa n c e under section 36(1)(iii) is permissible". The ld. counsel for the assessee also relied upon decision of the Supreme Court in the case of Hero Cycles Pvt. Ltd. 379 ITR 347 in which also, the same point have been decided and the decision of the Hon'ble Punjab & Haryana High Court in the case of Abhishek Industries Ltd. (supra) have been over-ruled. Therefore, considering the facts and circumstances and above discussion, I am of the view disallowance under section 36(1)(iii) of the Act is wholly inappropriate. I, 7 therefore, set aside the orders of the authorities below and delete the addition of Rs. 10,27,500/-.
10. In the result, ground No. 1 of the appeal of the assessee is accordingly, allowed.
11. On ground No. 2, assessee challenged the disallowance amounting to Rs. 2,61,616/- and Rs. 10,025/- out of interest. The first ground relates to disallowance of Rs. 2,61,616/- out of interest account on the issue of interest capitalization of Building Account amounting to Rs. 1,09,80,031/-. During the course of assessment proceedings, the Assessing Officer found that the abovesaid addition to the Building Account of the aforesaid amount has been put to use at various times during the year. The assessee also has term loan and other borrowed funds on which interest expenditure was being incurred. Thus, the assessee was asked to show cause whether interest pertaining to pre-operative period of the building has been capitalized or not. The submission was not found acceptable as any expenditure incurred prior to an asset being put to use was to be added to the actual cost of the asset. Further, Explanation-8 to sub-section (1) of Section 43 regarding the capitalization of the interest relating to purchase of new assets has been considered by the Assessing Officer which was retrospective that the position of law as regards the capitalization of the interest paid in 8 connection with the acquisition of asset after it has been put to use. The intention of the legislature was further explained vide circular No. 461 dated 09.07.1986 which was considered by the Assessing Officer regarding the disallowance.
11(i) From the above proviso, it was clear that no deduction under section 36(1)(iii) of the Act will be allowed in respect of any amount of interest paid in respect of capital borrowed for acquisition of new assets for extension of existing business for the period from the date on which the capital was borrowed for acquisition of asset till the date on which asset was first put to use. The assessee contended that only internal accruals and amounts introduced by the promoters amounting to Rs. 1.08 Cr has been used for addition to building. This contention was not acceptable as assessee has not been able to show any direct nexus between the internal accruals and expenses incurred on the building. The Assessing Officer, therefore, disallowed interest of Rs. 2,61,616/-.
12. The assessee reiterated the submissions made before ld. CIT(Appeals). It was also submitted that funds used for construction of building were not out of borrowed funds and thus, no disallowance is called for. The ld. CIT(Appeals) referred to proviso to Section 36(1)(ii) of the Act and noted that the interest liability for the period commencing from the date of borrowing till 9 the date on which said asset was first put to use, shall not be allowed as deduction under section 36(1)(iii) of the Act. The ld. CIT(Appeals) also found that assessee has not maintained any separate accounts for its own funds. The assessee has not been able to show any direct nexus between the internal accruals and the expenses incurred on the building. No fund-flow statement has been provided. No separate documents have been filed in support of the contention. Therefore, ld. CIT(Appeals) upheld the finding of the Assessing Officer in disallowing the aforesaid amount as proportionate interest to the pre-operative period of the building under proviso to Section 36(1)(iii) of the Act.
13. After considering rival submissions, I am not inclined to interfere with the orders of authorities below. It is not in dispute that assessee made additions to the building account which have been put to use at various times during the year. The assessee has also term loans and other borrowed funds on which interest expenditure was being incurred. The assessee claimed that only internal accruals and amounts introduced by the partners have been used for addition to building but assessee has not been able to show any direct nexus with the internal accruals and expenses incurred on the building. Thus, proviso to Section 36(1)(iii) of the Act would clearly apply in the case of the assessee and the interest expenditure claimed to the pre-operative period 10 of the building shall have to be disallowed. The ld. counsel for the assessee merely reiterated the submissions made before authorities below and have not pointed out any infirmity in the orders of the authorities below. In this view of the matter, I am not inclined to interfere with the order of the ld. CIT(Appeals) on this issue. The findings are, therefore, confirmed and part of this ground of appeal is dismissed.
13(i) As regards disallowance of Rs. 10,025/- out of interest account on capital advance on account of advance given to M/s Real Elevator Ltd. amounting to Rs. 2,65,000/-, Assessing Officer noted that this advance was given for installation of the lift in the business premises of the assessee. In the absence of reply of the assessee, Assessing Officer disallowed proportionate interest and made the addition. The assessee submitted before ld. CIT(Appeals) that advance was given for purchase of lift to be fitted in the building meant for business purposes. It was, therefore, amount spent for business expediency and no disallowance should be made. The ld. CIT(Appeals) found that assessee has not been able to prove that internal accruals have been used for making investment in the purchase of lift and accordingly, confirmed the addition.
14. After considering rival submissions, I am not inclined to interfere with the orders of the authorities 11 below. The Assessing Officer applied proviso to Section 36(1)(iii) of the Act. This issue is same as have been considered above. No specific arguments have been made to controvert the findings of authorities below. Therefore, expenses incurred for pre-operative period cannot be allowed. In the absence of any rebuttal to the findings of authorities below, I do not find any merit in part of this ground of appeal of the assessee. Same is accordingly, dismissed.
15. In the result, ground No. 2 of appeal of the assessee is dismissed.
16. On ground No. 3, assessee challenged the disallowance of depreciation amounting to Rs. 54,621/- on DIP KIT a part of plant and machinery at 10% as against claimed as 15%. During the course of assessment proceedings, Assessing Officer noted that assessee had purchased and put to use DIP KIT amounting to Rs. 13,04,261/- during the year and claimed depreciation @ 15% on the same. The assessee was asked to provide proof in support of the claim of depreciation on DIP KIT @ 15%. The reply of the assessee was not found acceptable. Further, the assessee stated that DIP KIT is hoarding used for advertisement which was fitted with the logo of company and was, therefore, eligible for depreciation as 'plant'. However, from the definition of Section 43(3), it is 12 clear that hoarding cannot be treated as plant which is being used for the purpose of business of the assessee. It can be treated as part of building on which it is mounted for the purpose of advertisement. Therefore, Assessing Officer held that DIP KIT is not eligible for depreciation @ 15%. The Assessing Officer allowed depreciation @ 10% and made the above addition.
17. The assessee challenged the addition before ld. CIT(Appeals) and claimed that DIP KIT is plant and machinery. It was also submitted that said asset is hoarding used for advertisement fitted with logo of Tata Motors, Fiat etc.
18. The ld. CIT(Appeals), considering the issue in detail confirmed the addition and dismissed appeal of the assessee. His findings in para 5.2 of the appellate order are reproduced as under :
"I have considered the facts of the case, the basis of disallowance made by the Assessing Officer and the arguments made by the appellant during the assessment as well as the appellate proceedings. In order to be a 'machinery' four factors must exist :-
(1) a complete and integrated collection of several objects or articles (2) These objects and articles should interact in unison upon or with each other (3) This interaction is prompted by application of force which may be manual or motive power (4) The definite result. [Ambica wood Work vs. State of Gujarat, (1979) 43 STC 338, 342 (Guj). The definition of 'plant' given by Lindley LJ. in Yarmouth vs. France (1887) 19 QBD 647, 658 which has generally been adopted for income tax purposes, stands. He said "There is no definition of plant in the Act: but, in its ordinary sense, it includes whatever 13 apparatus is used by a businessman for carrying on his business not his stock in trade which he buys or makes for sale; but all goods and chattels fixed or movable, live or dead, which he keeps for permanent employment in his business". In order to find out if a building or structure or part thereof constitutes 'plant', the functional test must be applied. It must be seen whether the subject-matter involved, i.e. the building of structure or part thereof, constitutes an apparatus or a tool of the taxpayer or whether it is merely a space where the tax payer carries on his business. If the building or structure or part thereof is something by means of which the business activities are carried on, it would amount to a 'plant'. On the other hand, where the structure plays no part in the carrying on of these activities but merely constitutes a place within which these are carried on, it cannot be regarded as a 'plant' [CIT vs Kanodia Warehousing Corporation(1980)]. Therefore, as held by the Assessing Officer it is clear that the DIPKIT cannot be treated as 'plant' which is being used for the business purpose of the appellant it is to be treated as a part of the 'building' on which it is mounted for advertising purpose.
Therefore, dipkit is eligible for depreciation at the rate of 10% and not at the rate of 15% as claimed by the appellant. The excess depreciation claimed amounting to Rs.54,621/- was rightly disallowed. This ground of appeal is dismissed
19. After considering rival submissions, I do not find any merit in this ground of appeal of the assessee. The ld. CIT(Appeals) considered several judgements in his findings for holding that DIP KIT cannot be treated as a plant. The assessee also failed to satisfy functional test in this case. The assessee merely claimed that DIP KIT is a hoarding used for advertisement. The Assessing Officer, therefore, rightly treated this to be a part of building on which it is mounted for the purpose of 14 advertisement. During the course of hearing, ld. counsel for the assessee was not able to point out any infirmity in the findings of the ld. CIT(Appeals). Therefore, in the absence of any evidence or material on record to disprove that the findings of the authorities below, authorities below were justified in holding that DIP KIT cannot be treated as plant so as to entitle for higher depreciation. This ground has no merit, the same is accordingly dismissed.
20. In the result, appeal of the assessee is partly allowed.
Order pronounced in the Open Court.
` Sd/-
(BHAVNESH SAINI)
JUDICIAL MEMBER
Dated: 30 t h June,2016.
'Poonam'
Copy to:
The Appellant, The Respondent, The CI T(A), The CI T,DR Assistant Registrar, I TAT Chandigarh