9911796707
TMI Blog2018 (2) TMI 1699X X X X Extracts X X X X X X X X Extracts X X X X ..... above, if the said amount of interest of Rs. 19,92,128/- is held as not allowable the same be directed to be capitalized as preliminary expense and direction be granted to allow depreciation on the same considering it as capital expenditure. 2.0(i) The learned C1T(A) erred in confirming disallowance of Rs. 5,73,796/- u/s 35D of the Act made by the learned A.O. (ii) Without prejudice to above, if it is held that this amount of preliminary expense of Rs. 28,68,982/- of which 1/5th, i.e. Rs. 5,73,796/- is not allowable u/s.35D of the act, the said amount may please be directed to be allowed to be capitalized and appropriate thereon be directed to be granted." 3. The relevant facts as culled out from the materials on record are as under:- The assessee company was incorporated with an object to carry on Manufacturing in trading of cloth. The case was discussed with AR during the course of assessment proceedings. 4. The issues arising during the course of assessment, proceedings, which affect the total income of the assessee company, are discussed as under: 4.1 Disallowances us36 (l) (iii) of the IT Act During the assessment proceedings, it is noticed that the assessee compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erty which is meant for ultimate use of the business (for setting up a textile manufacturing unit in this case), the income arising out of this letting out is treated as Income from Business. (Universal Plast V CIT (1999) 237 ITR 454(sc) At Page 460 based on the earlier decisions of the court including CIT V Shri Lakshmi Silk Mills Limited (1951) 20 ITR 451 (SC) Kindly note that during the year, the company incurred expenditure of Rs. 30,03,166/- for earning the business income. Therefore, the expenditure incurred is allowable expenditure." The reply of the assessee company has been duly considered as regards to the rent income. However, as per the reply of the assessee company it is found that the interest expenditure debited in the Profit & Loss account is not allowable as per proviso of section 36(i)(iii) of the I.T. Act. Therefore, a show-cause notice was issued to the assessee company on 31/10/2014 and case was fixed for hearing on 02/12/2014 regarding disallowances of interest expenditure of Rs. 19,92,128/- u/s.36(i)(vii) of the I.T. Act. The relevant portion of the show-cause notice is reproduced hereunder: "3. On verification of the reply, it is noticed that you have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if a commercial asset is not capable of being used as such, then its being let out to others does not result in an income which is income of business, but it cannot be said that an asset, which was acquired and used for the purpose of business ceased to be a commercial asset of that business as soon as it is temporarily put out of use or let out to another person for use in his business or trade. The yield of income by a commercial asset is the profit of the business irrespective of the manner in which that asset is exploited by the owner of the business. He is entitled to exploit it to his best advantage and he may do so either by using it himself personally or by letting it out to somebody else. In CEPT vs. Shri Lakshmi Silk Mills Limited (1951) 20 itr 451 (SC), the assessee owned a dying plant which could not be used by it personally owing to non availability of yarn. It therefore, let out the plant to another company on rental basis. The question for consideration was whether the rental income was assessable as profit from business. The court held that it was a part of the normal activity of the assessee's business to earn money by making use of its machinery by either e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the assessee company. As per the provision of section 36(i)(iii) of the Act, any amount of the interest paid in respect of borrowed fund, shall not be allowed as deduction, till the date on which the asset was first put to use. In the present case, as is established above, the Plant & Building are still under construction and therefore, the assessee company is required to capitalize the interest expenditure of Rs. 19,92,128/- until the date the assets are put to use. Accordingly, the assessee company is not entitled to deduction claimed u/s.36(l)(iii) of the Act. ii) Reliance is placed on the judgment in the case of Nahar Polyfilms Ltd. Vs. CIT(P&H)201 Taxman 304, wherein it is held that: "since this amounts to extension of business and machinery was not put to use during 'the previous year, interest incurred is to be capitalized till the machinery is put to use Provision to section 36(i)(iii) considered." iii) In the case of CIT Vs. Vardhman Polytex Ltd. (P & H) 299 ITR 152, it is held as under: "Interest on capital borrowed for the purpose of acquisition of the assets of the new unit is to be allowed as a revenue expenditure only when such assets starts yielding income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es are covered in the definition given in the section 35D(2)/(3) of the I.T. Act and also the business activity of the assessee company has not yet started and the Plant & Building are under construction. Therefore, the assessee company is prima-facie not eligible for deduction u/s.35D(1) of the I.T. Act. Accordingly, a showcause notice was issued to the assessee company vide letter dated 31/10/2014 and case was fixed for hearing on 02/12/2014 for disallowance of expenditure claimed as preliminary expenditure u/s.35D of the I.T. Act. The relevant portion of the show cause notice is reproduced hereunder: "4. Further, your company has claimed deduction of Rs. 5,73,796/- (1/5thof total pre-operative expenses of Rs. 28,68,981/-) u/s.35D of the Act being preliminary expenses written-off. However On verification of the detail & submitted regarding the preliminary and pre-operative expenses, it is seen that none of expenditure are covered in the definition provided u/s.35D(2) of the Act. You are, therefore, requested to explain why the claim for preliminary expenses of Rs. 5,73,796/- should not be disallowed and added back to the total income of your company. In response to the above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Against the said addition assessee preferred first statutory appeal before the ld. CIT who dismissed the appeal of the appellant. 7. We have gone through the relevant record and paper book filed by the appellant. As we can see that company had not started its business during the year under consideration and there were no receipts or sales during the year under consideration. The appellant on the other hand claim that it had earned rental income of Rs. 7,20,000/- during the year which was its business income and hence expenses were allowable. As we can see from the memorandum and articles of association of Taxworld Fashions Private Limited company main business is not a rental business. Appellant shows that as per balance sheet of the appellant company, it is shown that it is plea of CEPT plant to be under consideration. Further, the nature of business of the appellant is manufacturing and trading of cloth, but appellant had made statement before the lower authorities that rental income of Rs. 72,00,000/- earned during the year was its business income. After going through the record, we can see that appellant yet to start its business. So in our considered opinion, we are not convi ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
