Income Tax Appellate Tribunal - Ahmedabad
Nas Packaging Pvt. Ltd.,, Anand vs The Income Tax Officer, Ward-3(1)(1),, ... on 1 January, 2019
IN THE INCOME TAX APPELLATE TRIBUNAL
" SMC " BENCH, AHMEDABAD
BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER And
MS. MADHUMITA ROY, JUDICIAL MEMBER
आयकर अपील सं./ITA No. 2398/Ahd/2016
( नधा रण वष /Assess ment Year : 2012-13)
NAS Packaging Pvt.Ltd. बनाम/ The Income Tax
6, Aryanagar Society Vs. Officer
Amul Dairy Road Ward-3(1)(1)
Anand (Gujarat) Ahmedabad
थायी ले खा सं . /जीआइआर सं . / PAN/GIR No. : AABCN 0641 G
(अपीलाथ /Appellant) .. ( यथ / Respondent)
अपीलाथ ओर से/ Appellant by : Shri Karan Shah, AR
यथ क ओर से/Respondent by: Jaya Chaudhary, Sr.DR
ु वाई क तार ख/
सन Date of Heari ng 11/12/2018
घोषणा क तार ख /Date of Pronounce ment 01/01/2019
आदे श / O R D E R
PER WASEEM AHMED, ACCOUNTANT MEMBER:
The captioned appeal has been filed at the instance of the Assessee against the order of the Commissioner of Income Tax (Appeals)-9, Ahmedabad [CIT(A) in short] vide appeal no.CIT(A)-9/37/ITO Wd- 3(1)(1)/15-16 dated 27/07/2018 arising in the assessment order passed under s.143(3) of the Income Tax Act, 1961(here-in-after referred to as "the Act") dated 10.3.2015 relevant to Assessment Year (AY) 2011-12/
2. The assessee has raised following grounds of appeal:-
1. The Ld. CIT(A) has grossly erred in law and on facts in dismissing the appeal. He ought to have allowed the appeal fully ITA No.2398/Ahd/2016 Nas Packaging Pvt.Ltd. vs. ITO Asst.Year - 2012-13 -2- in accordance with the grounds of appeal raised by the appellant before him.
I. DISALLOWANCE OF LOSS OF INTEREST -
Rs.9,73,704/-
1. The Ld. CIT(A) has erred in law and on facts while confirming the disallowance of loss of interest of Rs.9,73,704/- as made by the A.O.
2. The Ld. CIT(A) has erred in law and on facts while failing to properly consider the written submission filed by the appellant as well as various judicial pronouncements relied upon by the appellant.
3. The only issue raised by the assessee is that learned CIT (A) erred in confirming the order of the AO by sustaining the disallowance of interest of ₹9,73,704/- only.
4. Briefly stated facts are that the assessee is a private Ltd company and engaged in the business of trading and exports of merchandise. The assessee has also declared income by way of interest under the head business and profession. The assessee during the year has purchased land and building amounting to ₹1,83,00,000/- dated 30th June 2011. The assessee utilized the borrowed fund in the purchase of such land and building.
5. The assessee has leased out this land and building to its associate concern and received the rent amounting to ₹13,05,000/- only in the year under consideration.ITA No.2398/Ahd/2016
Nas Packaging Pvt.Ltd. vs. ITO Asst.Year - 2012-13 -3-
6. As the assessee acquired this land and building out of the borrowed fund, therefore, the assessee has claimed a deduction of interest expenses amounting to ₹9,73,704/- against such rental income.
7. However, the AO was of the view that the assessee company was incorporated for manufacturing activities but did not carry out any manufacturing activity. Therefore, the AO opined that such land and building had not been put to use by the assessee. Therefore, the interest paid on loan utilized for the purchase of such land and building needs to be capitalized. Therefore, the interest expenses claimed against the lease rental income cannot be allowed as deduction. Accordingly, the AO disallowed the same and added to the total income of the assessee.
8. Aggrieved assessee preferred an appeal to learned CIT (A). The assessee before the learned CIT (A) submitted that there were sufficient interest-free funds available with the assessee which was utilized to make interest free advance to its concern namely M/s Anjars Harihar Engineering Company Pvt. Ltd.
9. It has declared interest income against the interest cost incurred by it on the borrowings. Thus, there was no diversion of the interest-bearing fund to non-interest bearing advance.
10. However, the learned CIT (A) disregarded the contention of the assessee and confirmed the order of the AO by observing as under:
ITA No.2398/Ahd/2016Nas Packaging Pvt.Ltd. vs. ITO Asst.Year - 2012-13 -4- "4.2 I have carefully considered the rival contentions, observation of the A.O and the case laws relied upon by the appellant. It is observed that the A.O has made a disallowance of Rs. 9,73,704/-
on account of loss of interest incurred due to capitalization of stock in trade to capital asset which was required to be added to the cost of the capital asset. The appellant had filed the return of income on 30/9/2012 for A.Y.2012-13 declaring total income of Rs.1,63,990/-. The appellant has thereafter revised the return of income and declared the total loss of Rs.1,38,077/-. The A.O has observed that during the year under consideration no manufacturing or production activities have been undertaken by the appellant. During the year under consideration the appellant was engaged in the business of financing. The appellant had advanced loans with interest to M/s. Adarsh Plant Protect Ltd. which is a related party of the appellant. The opening balance of the debt was Rs. 2,19,62,429/-- whereas at the end of the year the balance was of Rs.37,27,541/-. The appellant had charged interest on loan from the associate company at the rate of 10%. The A.O has further observed that on 30/6/2011 the appellant had purchased land and building for a consideration of Rs. 1,83,00,000/-. Thus, there has been a decrease to that extent from the receivables of Adarsh Plant Protect Ltd. The A.O has further observed that the appellant has received the interest income of Rs. 13,6,238/- whereas it has incurred interest expenses amounting to Rs.22,89,942/-. The A.O has mentioned at para-3.2 that the appellant had borrowed funds from its lender on which the interest at the rate of 9% was paid whereas it has charged 10% from the loans advanced by it. The purchase consideration of Rs. 1,83,00,000/- was fully met by the appellant out of the loans advanced by it to M/s. Adarsh Plant Protect Ltd. According to AO the loan advanced to M/s. Adarsh Plant Protect Ltd. included the funds that the appellant had borrowed from its lenders on which it had been paying interest. Further, the A.O has observed that during the year the appellant has reflected income from house property from the land and building acquired from M/s. Adarsh Plant Protect Ltd. as well as it has reflected the lease rent that it has earned on the said acquired property. The said property acquired from Adarsh Plant Protect Ltd. was leased back to Adarsh Plant Protect. Thus, the A.O has concluded that the asset that were acquired by the appellant were not put to use for its business purposes.
ITA No.2398/Ahd/2016Nas Packaging Pvt.Ltd. vs. ITO Asst.Year - 2012-13 -5- Accordingly, the A.O has calculated the loss of interest of Rs. 9,73,704/- and added it to the cost of the capital asset. The loss of interest of Rs. 9,73,704/- was disallowed and added to the total income of the appellant. During the assessment proceedings the appellant had submitted before the A.O that it had got the possession of plot of land and factory building in discharging its inter-corporate deposit given to Adarsh Plant Protect Ltd. and therefore up to the date of said discharge of loan the company had received the interest. However, the interest paid on its unsecured loans are in compliance of its liability towards interest payable. Therefore, the company has not expended any interest in acquisition of property and thus does not require to capitalise the interest component. However, the A.O has not agreed with the contention of the appellant and made the addition of Rs.9,73,704/- by disallowing the interest loss. During the appellate proceedings the appellant has contended the same reasons with regard to the loan taken by it before the A.O. The A.R of the appellant was categorically asked whether the borrowed funds on which interest has been paid by the appellant were advanced to M/s. Adarsh Plant Protect Ltd. or not? The answer was affirmative. The A.R submitted that no funds were advanced to the appellant during the year under consideration as M/s. Adarsh Plant Protect Ltd. was not able to repay the money advanced to it by the appellant. The only way to recover or protect its funds was to acquire the assets available with Adarsh Plant Protect Ltd. and hence the land and building was acquired at the prevalent cost of Rs.1,83,00,000/-. The remaining funds are still receivable from Adarsh Plant Protect Ltd. on which the appellant is charging interest. It is apparent from the transaction undertaken by the appellant with Adarsh Plant Protect that the interest bearing borrowed funds were advanced to a related party namely Adarsh Plant Protect Ltd. at the rate of 10%. As the appellant has acquired an asset which it has not been to put to use, it was required by the appellant to capitalize the interest component of the borrowed funds used for acquiring the assets to the cost of land and building. Therefore, I am of the considered opinion that the A.O has rightly disallowed the interest loss of Rs. 9,73,704/-. Thus, the ground of appeal Nos.3 and 4 are hereby dismissed."
ITA No.2398/Ahd/2016Nas Packaging Pvt.Ltd. vs. ITO Asst.Year - 2012-13 -6- 10.1. Being aggrieved by the order of ld. CIT-A, the assessee is in appeal before us.
11. The ld. AR before us submitted that the interest cost has been incurred against the rental income. Therefore the same should be disallowed.
12. On the other hand, the ld. DR submitted that the owned funds of the assessee are insufficient therefore the interest to the extent of diversion of borrowed fund should be disallowed. The ld. DR vehemently supported the order of the authorities below.
13. We have heard the rival contentions and perused the materials available on record. From the preceding discussion, we note certain facts as detailed under:
Share capital of the assessee: 1,00,400 Reserve and surplus as on 31. 03. 2009: 12,94,006 Total owned fund 13,94,406
Interest-free borrowings from various persons:1,27,09,749 Total interest free fund: 1,41,04,155 13.1. We further note that the AO has given very clear-cut finding that the assessee has used the borrowed fund for the acquisition of the land and building as discussed above. It is also undisputed that the assessee in ITA No.2398/Ahd/2016 Nas Packaging Pvt.Ltd. vs. ITO Asst.Year - 2012-13 -7- respect of such land building has declared income under the head house property which has been duly accepted by the Revenue. Thus, it is transpired that the interest expenses incurred by the assessee in respect of such land and building is eligible for deduction against the rental income. At this juncture we find important to reproduce the provisions of section 24(b) of the Act which reads as under:
Section 24 (b) where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital:
Provided that in respect of property referred to in sub-section (2) of section 23, the amount of deduction shall not exceed thirty thousand rupees:
Provided further that where the property referred to in the first proviso is acquired or constructed with capital borrowed on or after the 1st day of April, 1999 and such acquisition or construction is completed within "five years" from the end of the financial year in which capital was borrowed], the amount of deduction under this clause shall not exceed [two lakh rupees].
Explanation.--Where the property has been acquired or constructed with borrowed capital, the interest, if any, payable on such capital borrowed for the period prior to the previous year in which the property has been acquired or constructed, as reduced by any part thereof allowed as deduction under any other provision of this Act, shall be deducted under this clause in equal instalments for the said previous year and for each of the four immediately succeeding previous years:]
14. A plain reading of the above provision reveals that the assessee is very much eligible for deduction on account of interest expenses incurred by it against the rental income. In the case on hand, the assessee has claimed interest expenses amounting to Rs. 9,73,704/- against such rental ITA No.2398/Ahd/2016 Nas Packaging Pvt.Ltd. vs. ITO Asst.Year - 2012-13 -8- income which is eligible for deduction as per the provisions of section 24(b) of the Act as discussed above.
15. Thus in our considered view, there cannot be any disallowance of the interest expenses claimed by the assessee against the rental income. Similarly, we also note that the assessee had interest-free funds in its hands amounting to Rs. 1,41,04,155/- which was utilized as an interest- free advance for Rs. 99,56,515/- given to M/s Anjars Harihar engineering company Pvt. Ltd. Thus it is clear that the assessee has shown interest income against the interest expenses incurred by it on the interest-bearing loan. In our considered view, there cannot be any disallowance of interest expenses if the assessee has offered interest income against such interest expenses.
16. It is also pertinent to note that the assessee before the lower authorities have claimed that it had interest free fund amounting to ₹ 1,27,09,749/ only. The learned CIT (A) has not disputed the submission made by the assessee. Therefore, we are of the view that there was no interest expense incurred by the assessee on such borrowing.
17. After considering the facts in totality, we are of the view that no disallowance of interest expenses is warranted in the given facts and circumstances. Thus, we reverse the order of authorities below. Accordingly, we set aside the order of learned CIT (A) and direct the AO ITA No.2398/Ahd/2016 Nas Packaging Pvt.Ltd. vs. ITO Asst.Year - 2012-13 -9- to delete the addition made by him. Hence the ground of appeal of the assessee is allowed.
18. In the result, the appeal of the Assessee is allowed.
This Order pronounced in Open Court on 01/01/2019
Sd/- Sd/-
(MS.MADHUMITA ROY) (WASEEM AHMED)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Ahmedabad; Dated 01 / 01 /2019
ट .सी.नायर, व.(न.स./T.C. NAIR, Sr. PS
आदे श क त ल प अ े षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent.
3. संबं*धत आयकर आयु,त / Concerned CIT
4. आयकर आयु,त(अपील) / The CIT(A)-9, Ahmedabad
5. /वभागीय (त(न*ध, आयकर अपील य अ*धकरण, अहमदाबाद / DR, ITAT, Ahmedabad
6. गाड5 फाईल / Guard file.
आदे शानुसार/ BY ORDER, स या/पत (त //True Copy// उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील$य अ%धकरण, अहमदाबाद / ITAT, Ahmedabad
1. Date of dictation 24.12.2018 (word processed by Hon'ble Member in his computer)
2. Date on which the typed draft is placed before the Dictating Member ...24.12.2018
3. Other Member...
4. Date on which the approved draft comes to the Sr.P.S./P.S ...
5. Date on which the fair order is placed before the Dictating Member for pronouncement......
6. Date on which the fair order comes back to the Sr.P.S./P.S.......4.1.19
7. Date on which the file goes to the Bench Clerk.....................4.1.19
8. Date on which the file goes to the Head Clerk..........................................
9. The date on which the file goes to the Assistant Registrar for signature on the order..........................
10. Date of Despatch of the Order...............