2019 (4) TMI 1990 - AT - Income Tax

Disallowance of interest u/s 36(1)(iii) - assessee has submitted that the term loans were taken for specific purposes and the term loans taken for machinery were duly capitalized till the machinery was put to use. That there was no other borrowed funds with the assessee - HELD THAT - The matter is required to be restored to the file of the Assessing officer to duly consider the aforesaid contention of the assessee examine the details of the finances available with the assessee vis-a-vis amount capitalized by the assessee and decide the issue afresh in the light of the decision of the Hon ble Supreme Court in the case of CIT (LTU) Vs. Reliance Industries Ltd. 2019 (1) TMI 757 - SUPREME COURT - The orders of the lower authorities are set aside and the matter is remanded to the Assessing officer to decide the issue afresh as per the observations made above. Disallowance of expenditure - addition of the Diwali Expenses Gardening expenses Printing Stationery and website promotion expenses on the ground that the same were not properly vouched - HELD THAT - For nature of the expenditure i.e. as Diwali expenses gardening expenses printing and stationary and website promotion expenditure incurred which are usually incurred in day to day business activity and also considering the smallness of the amount and further submissions of the assessee that most of the expenditure were paid through account payee cheques we do not find any justification on the part of the lower authorities in making the disallowance in respect of the aforesaid expenditure - Appeal of the assessee is treated as allowed.

Summary

Issues Involved:
1. Disallowance of interest under section 36(1)(iii) for capital work in progress.
2. Disallowance of interest on working capital advance and other expenses.

Issue 1: Disallowance of interest under section 36(1)(iii) for capital work in progress:
- The assessee appealed against the disallowance of Rs. 29,10,663 out of the interest account under section 36(1)(iii) for assessment year 2013-14.
- The Assessing officer found that the assessee had shown capital work in progress amounting to Rs. 31,50,70,871 and made payments using borrowed funds.
- The Assessing officer calculated notional interest expenditure to be capitalized under section 36(1)(iii) due to lack of specific details provided by the assessee.
- The assessee argued that funds for building were from interest-free funds and own funds, and interest on term loans for machinery was duly capitalized.
- The Tribunal set aside lower authorities' orders and remanded the matter to the Assessing officer to consider the assessee's contentions and decide afresh in light of the Supreme Court's decision in 'CIT (LTU) Vs. Reliance Industries Ltd.'

Issue 2: Disallowance of interest on working capital advance and other expenses:
- The assessee appealed against the disallowance of Rs. 4,86,491 out of the interest account and Rs. 3,39,385 out of various expenses for a different assessment year.
- The Assessing officer disallowed interest on working capital advance and other expenses under section 36(1)(iii) and section 36(i)(ii) respectively.
- The assessee contended that it had sufficient own funds to meet the investments and capital advances.
- The Tribunal found that the assessee had own sufficient/interest-free funds to cover the capital advances, and the disallowances were unjustified based on the Supreme Court's decision in 'CIT (LTU) Vs. Reliance Industries Ltd.'
- Disallowances made by lower authorities in respect of various expenses were ordered to be deleted due to proper documentation and nature of expenditures.
- The appeal was allowed for both assessment years, and the orders were pronounced in open court on 22.04.2019.

This detailed analysis covers the disallowance of interest under section 36(1)(iii) for capital work in progress and the disallowance of interest on working capital advance and other expenses, providing a comprehensive understanding of the judgment.