Income Tax Appellate Tribunal - Mumbai
Hind Rectifiers Limited, Mumbai vs Assessee on 29 June, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES "H", MUMBAI
BEFORE SHRI. D. MANMOHAN, VICE PRESIDENT
AND SHRI. RAJENDRA SINGH (A.M.)
ITA No.3364/M/2011
ASSESSMENT YEAR: 2008-2009
M/s. Hind Rectifiers Limited, Assistant Commissioner of Income
Lake Road, Bhandup (West), Tax, Range 10(3),
Mumbai - 400 078. Aayakar Bhavan, M.K. Road,
PAN: AAACH1781Q Vs. Mumbai - 400 020.
(Appellant) (Respondent)
Appellant by : Ms. Charul Toprani & Meena Khivasarao
Respondent by : Mr. V. V. Sastri
Date of hearing:5.6.2012 Date of order: 29.6.2012
ORDER
PER RAJENDRA SINGH, A.M.
This appeal filed by the assessee is directed against the order dated 23.2.2011 of CIT (A) for the Assessment Year 2008-09. The assessee in the appeal has raised dispute on three different grounds. The first dispute is regarding disallowance of interest of Rs. 23,67,420/- attributing the same towards Capital Work In Progress (CWIP). AO during the assessment proceedings noted that the assessee had shown the Capital WIP of Rs. 3,59,98,525/- as on 31.3.2008. The assessee during the year had incurred expenditure of Rs. 66.16 lakhs on WIP and had capitalized assets worth Rs. 22.94 lakhs during the year. The assessee had also borrowed funds to the tune of Rs. 12.09 crores. The AO also noted that the assessee had both own funds as well as interest bearing funds which were mixed. The AO observed that it was not proved by the assessee that interest bearing funds were used only for the purpose of business and not utilized towards capital expenditure. The AO therefore did not accept the explanation of the assessee that 2 ITA No.3364/M/2011 borrowed funds had not been utilized towards capital expenditure. The AO noted that the assessee had incurred interest expenditure of Rs. 85.86 lakhs on loan funds of Rs. 12.09 crores giving the average interest rate of 7% per annum. He therefore attributed the interest towards capital WIP @ 7% of closing WIP of Rs. 3,38,20,296/- which came to Rs. 23,67,420/-. The AO accordingly disallowed the claim of interest to the extent of Rs. 23,67,420/-.
2.1. The assessee disputed the decision of AO and submitted before the CIT (A) that the assessee had sufficient capital from internal accruals and therefore no borrowed funds were utilised for capital expenditure. It was also submitted that the interest also include bank charges and interest on vehicle loans which could not be considered towards capital WIP. The CIT (A) did not accept the contention raised. It was observed by him that assessee had not given transaction details to show that borrowed funds were not utilized. He therefore confirmed the disallowance made by AO aggrieved by which the assessee is in appeal before Tribunal.
2.2. Before us, the learned AR for the assessee submitted that the assessee had sufficient funds of its own to incur the expenditure on account of WIP. She referred to the balance sheet placed at page 4 of the paper book to point out that reserve and capital was to the tune of Rs. 36.56 crore compared to Rs. 26.48 crores in the preceding year showing that own funds had increased by Rs.10 crores. The increase in loans was only to the tune of Rs. 3 crores. Further, the addition to capital WIP was only Rs. 43 lakhs which could be easily made by the internal accruals as profit during the year was Rs. 14 crores. It was also submitted that capital WIP included opening balance of Rs. 3.16 crores but in the earlier year no disallowance of interest was made. Therefore, no disallowance could be made in 3 ITA No.3364/M/2011 relation to the opening balance. It was further pointed out that interest paid by the assessee also included a sum of Rs. 26 lakhs on account of bank charges and there was also interest on vehicle loans which could not be considered towards capital WIP. In any case, it was submitted that own funds were sufficient to explain the addition to the capital WIP and therefore no disallowance could be made. The learned DR on the other hand supported the orders of authorities below and placed reliance on the findings given in the respective orders. 2.3. We have perused the record and considered the rival contentions accordingly. The dispute is regarding attribution of the part of interest expenditure of Rs. 85.86 lakhs towards the capital WIP. The assessee had borrowings as well as own funds which were mixed and therefore it was not possible to pin point as to which funds were utilised towards capital WIP. The lower authorities therefore attributed interest at the average rate of interest of 7% to the average WIP which included opening balance of Rs. 3.16 crores and thus made disallowance of Rs. 23,67,420/-. CIT (A) has confirmed the disallowance. It has been argued by the assessee that it had sufficient funds to explain the addition to capital WIP during the year and therefore no disallowance could be made. After careful consideration of submissions of the assessee and material placed on record, we find substance in the argument advanced by the learned AR. There is opening WIP of Rs. 3.16 crores in relation to which no disallowance of interest had been made in the preceding year which means that capital WIP to that extent had been accepted by the department as explained from own funds. Therefore no disallowance of interest can be made in relation to the opening WIP. The addition during the year is only Rs. 66.50 lakh. The capital and reserve of the assessee had increased during the year of Rs.10 crores and increase in loans during the year was only of Rs. 3 crore. Moreover, the assessee during the year had earned profit of Rs. 14 crores. 4 ITA No.3364/M/2011 Therefore, in our view the capital addition during the year is easily explained out of own funds. We therefore see no reason for any disallowance on account of interest. The order of CIT (A) confirming the disallowance is therefore set aside and the claim of the assessee is allowed.
3. The second dispute is regarding disallowance of depreciation on UPS. The AO during the assessment proceedings noted that assessee had claimed depreciation @ 60% in respect of UPS total cost of which was Rs. 8,71,871/-, treating the same as computer. The assessee explained that UPS was used with the computers for protection from loss of data and therefore it had to be treated as an integral part of computer for which depreciation was allowable @ 60%. AO however did not accept the claim of the assessee. It was observed by him that UPS was an apparatus used for the purpose of backup of electric power to the electrical equipments, machines, computers etc. Its use was that of inverter which is an electrical equipment and not computer. He therefore allowed depreciation only @ 15%. The excess claim of Rs. 3,91,947/- was disallowed. In appeal, the assessee reiterated earlier submissions that UPS was purchased specifically for computers and was thus integral part of computer system which was required for smooth functioning of the computers and therefore depreciation @ 60% should be allowed. The assessee placed reliance on the decision of Special Bench of Tribunal in the case of Datacraft India ltd. (40 SOT 295). The CIT (A) however did not accept the explanation given. It was observed by him that, in case the argument was accepted, then even generator has to be treated as computer and depreciation has to be allowed. He therefore confirmed the order of AO allowing the depreciation @ 15% aggrieved by which the assessee is in appeal before Tribunal. 5 ITA No.3364/M/2011 3.1. We have heard both the parties, perused the records and considered the matter accordingly. The dispute is regarding the rate of depreciation on UPS used by the assessee for working of computers. The assessee has claimed depreciation @ 60% treating the UPS as an integral part of computer. The authorities below have however allowed depreciation at the normal rate of 15%. The learned AR has argued that depreciation @ 60% should be allowed following the decision of Special Bench of Tribunal in case of DCIT vs. Datacraft India Ltd (supra) and judgment of Hon'ble High Court of Delhi in case of CIT vs. Orient Ceramics & Industries Ltd (56 DTR 396) . We have carefully perused the said decision of Tribunal in case of DCIT vs. Datacraft India Ltd (supra). In that case, the issue was allowability of depreciation @ 60% on routers and switches. The Special Bench noted that the function of a router was to receive data from one computer and make it available to another computer for viewing or further processing. Routers also help in transfer of data from network to computer. The Special Bench also noted that switches were shorter version of routers which perform similar functions within a limited sphere. The Special Bench therefore held that routers and switches could be classified as computer hardware when they are used along with the computer and accordingly held that depreciation has to be allowed @ 60%. The decision of Special Bench is therefore distinguishable and not applicable to the facts of the present case. However, Hon'ble High Court of Delhi in case of CIT vs. Orient Ceramics & Industries Ltd (supra) following the earlier judgment in case of CIT vs. BSES Yamuna Powers Ltd dated 31st August, 2010 in ITA No. 1267 have taken the view that depreciation @ 60% has to be allowed in case of UPS. No contrary judgment of the jurisdictional High Court or the Apex Court has been brought to our notice. We therefore respectfully following the judgment of Hon'ble High Court 6 ITA No.3364/M/2011 of Delhi in case of Orient Ceramics & Industries Ltd (surpa), set aside the order of CIT (A) and allow the claim of assessee.
4. The third dispute is regarding nature of interest income of Rs. 4,39,682/- The assessee treated the interest income as business income. The AO however did not accept the claim and treated the interest income as income from other sources. In appeal, the assessee submitted that interest income had been received from fixed deposits kept as margin money for LCs / Bank Guarantee and also as security deposit with Maharashtra State Electricity Board (MSEB). It was submitted that the interest income should be treated as business income. CIT (A) did not accept the claim of the assessee. It was observed by him that the interest income was not derived from business as held by Hon'ble Supreme Court in case of Pandian Chemicals ( 262 ITR 278). CIT (A) therefore treated interest income as income from other sources aggrieved by which the assessee is in appeal before Tribunal.
4.1. Before us, the learned AR for the assessee reiterated the submissions made before CIT (A) that interest income had arisen from FDRs kept as margin money for the purpose of business and from the deposits with MSEB in connection with business and therefore it should be treated as business income. The learned DR on the other hand placed reliance on the orders of authorities below. 4.2. We have perused the records and considered the rival contentions carefully. The dispute is regarding the nature of interest income received by assessee from FDRs and other deposits. The authorities below treated the interest income as income from other sources following the judgment of Hon'ble Supreme Court in case of Pandian Chemicals (supra). The said judgment in our view is distinguishable as the same is applicable to the cases where the income had to be 7 ITA No.3364/M/2011 considered as derived from a particular activity. The present case is not on the issue whether the interest income is derived from business. The issue is whether the interest can be considered as business income. The assessee has claimed that interest had arisen from FDRs kept as margin money for the purpose of business and from deposits kept with MSEB in connection with business. This claim has not been controverted by the Revenue. Therefore, in our view, the interest income in this case has to be considered as incidental business income. This view is supported by the judgment of Hon'ble High Court of Bombay in case of Indo Swiss Jewell (284 ITR 369). We therefore set aside the order of CIT (A) and allow the claim of assessee.
5. In the result, the appeal of the assessee is allowed.
Order was pronounced in the open court on 29.6.2012
Sd/- Sd/-
(D. MANMOHAN) (RAJENDRA SINGH)
VICE PRESIDENT ACCOUNTANT MEMBER
Date : 29.6.2012
Okk
At :Mumbai
Copy to :
1. The Appellant
2. The Respondent
3. The CIT(A), Mumbai concerned
4. The CIT, Mumbai City concerned
5. The DR "H" Bench, ITAT, Mumbai
// True Copy//
By Order
Assistant Registrar
ITAT, Mumbai Benches, Mumbai