TMI Blog2001 (8) TMI 280X X X X Extracts X X X X X X X X Extracts X X X X ..... been borrowed for company's business and is an allowable business expenditure under s. 36(1)(iii) of the IT Act. The AO treated the claim of the assessee-company as not prima facie admissible following the provisions of s. 145(1) of the Act and the Accounting Standard-10 of the Institute of Chartered Accountants of India. As per AO since the new project/expansion project in respect of which interest has been capitalised in the books has not started commercial production, the interest claimed will be capital expenditure, therefore, not allowable under s. 36(1)(iii). The AO observed that provisions of s. 36(1)(iii) specifying the admissibility of interest on borrowed capital for the purpose of business has to be interpreted as interest accrued on utilisation of borrowed capital for the purpose of business which is already in operation and such interest liability cannot be extended to a situation where borrowed fund had been utilised in a total new project/expansion project being undertaken by the assessee and which is not completed in all respects by the end of the accounting year. 4. As per AO the assessee has claimed expenditure incurred on railway siding amounting to Rs. 3,56,96 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot override s. 29 and the Accounting Standard-10 for disallowances is not notified under s. 145 of the Act. 6. While arguing before the CIT(A), the learned authorised representative submitted that for prima facie admissibility of interest as per s. 36(1)(iii) of the Act, the amount of interest paid in respect of capital borrowed for the purpose of business is an allowable expenditure. It was emphasised that expression "for the purpose of business" occurring in s. 36(1)(iii) is wider in scope than the expression for the purpose of earning income, profit and gains occurring under s. 57(3) of the IT Act. It was also argued that since the assessee-company has only borrowed money for the expansion of its business, the AO was not justified in treating the claim of interest as capital expenditure when specific provision for allowing the same under s. 36(1)(iii) is available. The authorised representative further submitted that the claim of interest can also be treated as debatable issue and cannot be subjected to adjustment under s. 143(1)(a) of the Act. 7. While objecting the adjustment made by the AO on railway siding expenditure, the authorised representative submitted that the exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pecial rate, the nature of expenditure in such, apart, from facilitating the business activities of the assessee-company has brought in an asset of enduring nature and it has made basic alterations in the profit earning structure of the assessee-company. The CIT(A) also observed that there is no specific provision under the Act to allow the said expenditure as revenue expenditure when the assessee has treated the same as capital expenditure in its books. As per CIT(A) there is specific provision under the Act in s. 37 where any expenditure which is capital in nature, is not to be allowed. The CIT(A), therefore, held that the claim of expenditure representing railway siding is an incorrect claim and also a claim which is patently inadmissible in law, therefore, prima facie adjustment applied by the AO by treating the same as capital expenditure is justified. 10. Against the above order of the CIT(A), the assessee and the Revenue both has come up in appeal and the assessee has also filed a cross-objection. 11. It was vehemently argued by the learned authorised representative that even though the expenditure towards railway siding is capitalised in the books as per the guidelines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ple : (i) If under s. 24(1)(i) the deduction in respect of repairs and collection charges is claimed in excess of 1/5th of the annual value (applicable with effect from asst. yr. 1993-94), such excess can be disallowed as a prima facie adjustment. (ii) If the rebate on contribution eligible under s. 88 is claimed in excess of 20 per cent of such contribution the excess can be disallowed, provided there is indication of the total amount of such contribution in the return or the accompanying accounts or documents. (d) Any claim which is patently inadmissible in law. Example : Deduction of items like income-tax, wealth-tax, personal expenses, depreciation claimed on conveyances under the head 'salary', depreciation claimed under the head 'house property' and the like. The items of disallowance should be such that no two opinions are possible on their inadmissibility. 3. The Board desires that no other prima facie disallowance should be made except with the previous approval of the CIT who will, after according approval in suitable cases, bring the same to the notice of the Board. 4. The above procedure applies to all returns pending processing under s. 143(1) on the dat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... presentative has drawn our attention towards the order of the CIT(A) in which the CIT(A) has held that the claim of the assessee was patently inadmissible merely because the assessee has treated it as a deferred revenue expense in its books of accounts for safeguarding the image of the assessee-company. 13. On the other hand, the learned senior Departmental Representative vehemently argued that prima facie adjustment under s. 143(1)(a) can be done on the basis of information available in the return or the accompanying accounts or the documents. The learned senior Departmental Representative has drawn our attention towards Schedule E of the Fifteenth Annual Report of the assessee-company in which railway siding was shown as advantage in the gross block of the assessee-company within 1st April, 1992 to 31st March, 1998. The learned senior authorised representative very nicely argued that the annual report comprising of audited balance sheets of the assessee-company with annexure of various expenses and fixed assets along with the Director's report is a liability of the assessee-company and whatever is mentioned therein duly certified by the auditors and counter-certified by the dir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital expenditure is very thin and a great deal of investigation and search into the real nature of expenses has to be made before an acceptable solution can be arrived at. It clearly implies that a claim of expenses as revenue cannot be disallowed as patently disallowable expenses. Hon'ble Supreme Court in Empire Jute Co. Ltd. vs. CIT laid down that there may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n all the officers employed in the execution of the Act. 16. Regarding prima facie adjustment on account of interest payment, the learned senior Departmental Representative drew our attention towards the director's report contained in Fifteenth Annual Report of the company in which it was stated that the expansion project was expected to be commissioned by March, 1998, within the projected cost of Rs. 80 crores, and Schedule 3 forming part of P L a/c of annual report in which interest was shown at Rs. 3,72,88,601 and Schedule 3 of the P L a/c in which interest debited as expenditure was shown at Rs. 1,46,03,753. On the basis of these informations the learned senior Departmental Representative argued that there was an apparent difference of Rs. 2.26 crores in the interest as shown in Schedule 3, vis-a-vis interest shown in the P L a/c, therefore, it is a fit case for prima facie adjustment regarding claim of interest amounting to Rs. 2,26,84,848 in respect of borrowed capital for its expansion project. It was further argued that as the project was not completed as per the director's report forming part of the Fifteenth Annual Report of the assessee-company, interest payable on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... non-statutory guidance, notes for filing the return of income, is not so filed. 17. The interest claim of the assessee was also not a claim for deduction or of any amount which exceeds the statutory limits imposed as per cl. (c) of Circular No. 689. Such claim for deductions has been defined in the circular as claim for repairs under s. 24(1)(i), collection charges, claim in excess of 1/5th of annual value, such excess can be disallowed as a prima facie adjustment. Even under the head any claim which is patently inadmissible in law, as per Circular No. 689 has been defined as claim for income-tax, wealth-tax, personal expenses, depreciation claimed under the head 'house property' and the like. It has also been specifically mentioned in the circular that items of disallowance should be such that no two opinions are possible on their inadmissibility. Lastly it has been categorically mentioned in the circular that the Board desires that no other prima facie disallowances should be made except with the previous approval of the CIT who will, after according approval in suitable cases, bring the same in the notice of the Board. In the instant case, we do not find any such approval bein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest which works out to be Rs. 1,46,03,753 has been claimed by the assessee as interest expenditure debited in the P L a/c as per Schedule. Therefore, on the face of balance sheet itself, there is no question of any confusion. In the computation of income the assessee-company had clearly mentioned and claimed interest on expansion of the company's business at Rs. 2,26,84,848. Thus, the claim in respect of interest can neither be treated as incorrect claim without going into the details of accounts nor such claim can be treated as patently inadmissible in law. Thus, on the facts and in the circumstances of the case, keeping in view the spirit of Circular No. 689, we are of the considered view that the claim of interest and claim of railway siding expenditure was a debatable one and it requires examination of books of accounts and other documents for determining its real nature, i.e., capital or revenue. Therefore, both the claims cannot be subjected to the prima facie adjustment, under s. 143(1)(a). 18. In the result, assessee's appeal is allowed and the Revenue's appeal is dismissed and the cross-objection of the assessee becomes infructuous and is dismissed. - - TaxTMI - TMI ..... X X X X Extracts X X X X X X X X Extracts X X X X
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