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Ashima Dyecot Limited and others Versus Dy. CIT, Central Circle -1 (3) , Ahmedabad and others

Disallowance of interest - AYs are 1997-98 - Held that:- The assessee refers to judgment in Core Health Care (2008 (2) TMI 8 - SUPREME COURT OF INDIA ) and submits that section 36(1)(iii) only requires the interest sum in respect of capital borrowed for the purpose of the business or profession. The Revenue seeks to restore the Assessing Officerís finding. We intend to disagree with submissions of both the parties. It stands narrated in the preceding paragraph that a coordinate bench in its earl .....

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ry issue of interest disallowance. In these circumstances, we reiterate our earlier directions and remit the grounds raised by both the parties to the Assessing Officer for passing a fresh order as per law invariably following consequential order; if any, passed in assessment year 1995-96 in furtherance to the tribunalís direction. - Decided in favour of assessee for statistical purposes.

Assessment Year 1999-2000 - The CIT(A) has distinguished facts of the impugned assessment year wi .....

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.58 & 59/Ahd/2012 - Dated:- 9-6-2015 - S/Shri N. S. Saini and S. S. Godara,JJ. For the Petitioner: Shri Vijay Ranjan, AR For the Respondent:Shri D. C. Mishra, Sr. D.R. ORDER PER S. S. Godara, Judicial Member These are three appeals. The relevant AYs are 1997-98 & 1999-2000. The assessee and the Revenue have filed cross appeals in the former assessment year. The Revenue has filed another appeal in the latter assessment year. All these cases have arisen from a common of the CIT(A)-III, Ahmedab .....

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ut prejudice, on the facts and in the circumstances of the appellant s case, the CIT(A) erred in holding that even for A.Y. 1997-98 (i.e. prior to A.Y. 2004-05) interest for the period falling after commencement of production will not be allowable on the borrowings which were allegedly referable to those assets which had not been used for actual production and further erred in not allowing deduction of a sum of ₹ 1,97,32,000/- which pertained to the period falling after commencement of pro .....

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sset are not used for actual production then in respect of those assets business is not set up on the date of commencement of production. 5. Without prejudice on the facts and in the circumstances of the appellant s case the CIT(A) erred in inferring that after completion of original project if further expansion of business takes place then interest on borrowings for that expansion will be deductible but interest attributable to those assets which constituted part of original project would not b .....

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etting up of the business of the assessee had been put to use for commercial production, even though the assessment order has been passed on the basis of directions issued by Hon ble ITAT and detailed verifications have been made by the AO. 2. On the facts and in the circumstances of the case and in law, the CIT(A) ought to have upheld the order of the AO. 3. It is, therefore, prayed that the order of the CIT(A) be set aside and that of the AO be restored to the above extent. 3. This is second r .....

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ed therein that an identical issue had arisen in its case in assessment year 1995-96 in ITA 720/Ahd/1999 and a coordinate bench in its dated 25.11.2003 had remitted the issue back to the assessing officer for decision afresh as per case law of DCIT vs. Core Health Care 298 ITR 198 (SC). The latter coordinate bench accepted this prayer of the assessee and passed a remand order accordingly for verification of the facts as per the aforesaid case law. 4. The Assessing Officer took up consequential p .....

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court that a new business had been set up or commenced during the assessment year in question. Thereafter, the assessing officer turned to the facts of the instant case. The assessee had started its commercial production on 23.9.96. end continued to make heavy additions during October to March 1997 of ₹ 38, 38, 78,342/-. The assessee had also shown capital work in progress as on 31.3.1997 of ₹ 16, 01, 69, 517/-. This total sum reads almost ₹ 54 crores. The assessing officer quo .....

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mencement of production should be capitalized -Challapalli Sugars Ltd. vs. CIT (1975) 98 ITR 167 (SC) After the asset is first put to use It cannot be capitalized (Expln.8 to sec.43(1). It may be claimed as deduction under section 36 (see also Note infra) Situation 2 -An existing concern acquiring asset for expanding the same business Upto the time the asset is put to use I can be capitalized (i.e. added to the cost of asset). It cannot be claimed as deduction as revenue expenditure under sectio .....

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of interest sum amounting to ₹ 1,97,32,000/-. 5. The assessee preferred an appeal. The CIT(A)has partly accepted its arguments as follows : 4. I have considered the statement of facts attached with the appeal memo. It may be mentioned that the Hon'able ITAT while setting aside the issue to the file of the AO has directed the AO as under: "14. We have considered the rival submissions and perused the record. We find that the fact of the case required verification in the light of the .....

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facts of the case as appearing in the case of Core-Healthcare and that of assessee are materially different. This is so, because in the case of assessee even though the commercial production was started on 23/9/1996, the assessee continued to make heavy additions towards plant and machinery and the addition during October to March 1997period amounted to ₹ 38,38,78,342. In addition, the assessee has also shown capital work in progress for the year ending 31/3/1997. at an amount of ₹ .....

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ed upon." 4.2. In this case the commercial production-was started on 23/9/1996. This fact has not been disputed by the AO in the assessment order. According to the AO since the business is 'newly setup, up to the time of commencement of commercial production the interest liability up to the stage of commencement of production should be capitalised as held by the Hon'ble Supreme Court in the case of Challapalli Sugar Ltd, 98 ITR 167 (SC). However, after the asset is first put to use, .....

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sset is first put to use, may be capitalised. Alternatively at the option of the taxpayer interest can be claimed as deduction under section 36 as revenue expenditure. The AO also referred to a situation where an existing concern acquires asset for expending its business. In that case upto the time the asset is first put to use the interest on the borrowed capital can be capitalized. It cannot be claimed as deduction under section 36 of the Income-tax Act. The interest can be claimed only after .....

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loan of Rs. 'X' for its new project of business, say, in respect of 10 looms. Out of this, the appellant installed only two Looms (say) and stalled commercial production out of these, two looms. The balance eight looms were not yet put to use for the commercial production. In that case, the appellant would be entitled to interest in respect of the borrowed funds used for the purchase of two looms only. In respect of the balance eight looms not put to use or from which commercial product .....

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ess cannot be expanded unless it is first fully setup. If the original project of the appellant was to install 10 looms and only two looms are put to use by the appellant out of the 10 looms and from such two looms the appellant had started commercial production, then it cannot be said that the balance eight looms represent the expansion of the business. The decision of Hon'ble Supreme Court; in the case of Core Healthcare would not apply in respect of the interest expenses incurred for the .....

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e Healthcare has discussed the situations about the interest expenditure on the borrowed funds of the live looms. It does not discuss the situation: regarding the eight looms not put to use for the newly setting up of its business. Further, the contention of the appellant that the ITAT, Special -Bench in the case of.Ashima Syntex Ltd., 117 ITD.l (Ahd) has allowed interest expenses, is of no help since in that case there was no such finding of the AO that the Plant and Machinery has not been put .....

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ows that all the Plant & Machinery was not put to use by the appellant for its production. It is therefore essential to know whether such Plant and Machinery is purchased by the appellant out of its own funds or borrowed funds. 4.5. In view of the above discussion, the AO is directed to examine the project report to know whether all the machineries in. respect of which the loan was sanctioned prior to the setting up of the business of the appellant, had been put to use for commercial product .....

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of such interest expenses in the cost of that plant and machinery till the time it is put to use for commercial production. It would be the duty of the appellant to provide the details of project report and the machineries .put to use for commercial production in respect of which, the loan was obtained by the appellant and claimed in the return of income. This leaves both the parties aggrieved. 6. We have heard both the sides and perused the case files. The assessee refers to the hon ble apex c .....

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assessment year 1995-96 (supra). However, both the lower authorities have nowhere considered any consequential order passed in the earlier assessment year. In other words, they have not taken into account the specific directions in the earlier remand order. Nor do the parties before us have placed on record any such consequential order passed in earlier assessment year dealing with the very issue of interest disallowance. In these circumstances, we reiterate our earlier directions and remit the .....

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