TMI Blog2015 (9) TMI 1353X X X X Extracts X X X X X X X X Extracts X X X X ..... (iii), the interest on monies borrowed for acquiring a capital asset would be disallowed till it is brought to use on the basis that it would add to the cost of the asset. We observe that addition to the CWIP for the relevant assessment year under consideration is ₹ 4,74,04,622/- Further we observe as the extension took place throughout the year, one cannot apply the rate of interest 12% on each item. The assessee has given a detailed chart regarding the calculation of interest pertaining to each restaurant which is amounting to ₹ 33,22,108/-. As the interest was payable on each restaurant starting at different months during the year it is not correct on the ld.CIT(A) to apply the rate of interest for the full year. The asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ural justice; 2. a) The ld. CIT(A) has erred in confirming the disallowance of ₹ 4558781/- out of total disallowance of ₹ 7913889/- made by the ld. AO by invoking the provisions of proviso to section 36(1)(iii) of the Income Tax Act on the grounds that interest must have been expended by the appellant company on sums invested on capital work in progress outstanding as on 31.03.2009 amounting to ₹ 65949078/-; b) The ld. CIT(A) has failed to appreciate that the ld. AO had made disallowance out of interest paid by using a very non scientific and crude method by applying an adhoc rate of 12% of the closing balance under the head Capital Workin- Progress whereas the appellant company in its audited Balance Sheet a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the proportionate interest, not be disallowed. The assessee submitted that, he has his own capital and reserve surplus, accordingly no disallowance shall be made. The plea of the assessee has been examined by the ld. A.O. It was noticed that out of the total funds available with the company the company has made investment and has also given loan and advances. The Ld. A.O formed a view from these facts that there is a clear nexus that the capital in progress or the equivalent amount has been invested out of the borrowed funds. The assessee has also taken a plea that the capital work in progress represents extension of his existing business. The Assessing Officer held that appellant has not attributed any interest on this capital work in pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A.R submitted that the capital work in progress as per balance sheet is ₹ 6,59,49,078/- which includes the closing balance of the previous assessment year. The Ld. A.R, therefore submitted that, at the most if interest is to be capitalized on capital work in progress, it should be restricted to capital work in progress on plant and machinery of ₹ 4,74,04,622/- only. 8. On the other hand the Ld. D.R. contended that the salary, wages and other administrative expenses are in the nature of pre operative expenses and place her reliance on the decision of Hon ble Supreme Court in the case of Vardhman Polytex Ltd. V. CIT [210 Taxman 261 (SC)]. 9. Let us first examine the legal position under Section 36 (1) (iii) of the I.T. Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e record that the assessee had borrowed certain funds on which liability to pay interest is being incurred and on the other hand, certain amounts had been advanced to sister concerns or others without carrying any interest and without any business purpose, the interest to the extent the advance had been made without carrying any interest is to be disallowed under section 36 (1) (iii) of the Act. 10. Hon ble Apex Court in the case of CIT v. Core Health Care Ltd. 298 ITR 194 (SC) has held that; Section 36(1)(iii) of the 1961 Act has to be read on its own terms. It is a Code by itself. Section 36(1)(iii) is attracted when the assessee borrows the capital for the purpose of his business. It does not matter whether the capital is borro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Amount (Rs.) 1. Capital Work in Progress (As per Balance Sheet) 6,59,49,078 Bank rate @ 12% 79,13,889 2. Actual cost of CWIP without preoperative expenses 4,74,04,622 Interest @ 12% 56,88,555 3. Total additions to CWIP 4,74,04,622 4. Average CWIP for the whole year calculated on mean method 2,37,02,311 Interest @ 12% 28,44,277 5. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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