K.S.S. Abhishek Safety Systems Pvt. Ltd.,1-Underhill Lane, N. Delhi. VS. ACIT, Range-1, New Delhi.
April, 17th 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH `D' NEW DELHI)
BEFORE SHRI U.B.S. BEDI, JUDICIAL MEMBER
SHRI T.S. KAPOOR, ACCOUNTANT MEMBER
Assessment year : 2005-06
K.S.S. Abhishek Safety ACIT,
Systems Pvt. Ltd., Range-1,
1-Underhill Lane, N. Delhi. v. New Delhi.
PAN /GIR/No.AAACA 2837-J
Appellant by : Shri Suresh, C.A.
Respondent by : Ms. Sumana Sen, DR.
PER TS KAPOOR, AM:
This is an appeal filed by the assessee against the order of Ld CIT(A)
dated 16.11.2009. The grounds raised by the assessee are as under:-
1. The lower authorities have erred in holding the sum of
`.15,19,372/- being interest paid to HSIDC is capital in nature.
Such findings are opposed to evidences on record.
2. The lower authorities have erred in holding the sum of
`.2,21,034/- is interest relating to the capital asset of the
appellant. Such findings are opposed to evidences on record.
3. The lower authorities have erred in holding that the processing
charges of `.48,250/- have resulted in long term benefit to the
appellant and are related to the creation of capital Asset. Such
findings are opposed to evidences on record.
2 ITA No334/Del/10
4. The above grounds of appeal are independent and without
prejudice to one another.
2. The brief facts of the case are that the assessee filed its return of
income on 31.,10.2005 declaring total income at `.2,60,15,490/-. The
case was selected for scrutiny. During assessment proceedings, the
Assessing Officer observed that the assessee had classified some
capital work in progress in the balance sheet and there was
capitalization of interest also. The assessee was asked to clarify the
treatment of such interest amounting to `.15,19,372/- and to comment
on its nature and allowability of the same. The assessee in its reply
submitted that the land situated at IMT Manesar was allotted to the
assessee in the month of November, 2003 and the same was
capitalized in the month of 2004. The amount of `.15,19,372/-
represented an opening balance of `.5,20,818/- & current year interest
of `.9,98,554/-. It was further submitted that opening balance was
transferred from Land account to Profit & loss Account along with
current year's interest of `.9,98,554/- and in all a TOTAL OF
`.15,19,372/- WAS DEBITED TO p&l Account. Both these amounts
totaling of `.15,19,372/- was paid to HSIDC as interest on installments
of plot. It was further submitted that the possession of land was
handed over in the last year itself and the amount of interest was
transferred to revenue account and reflected under the head finance
charges and under the sub head interest to other fixed loan. The
Assessing Officer held that interest clearly pertained to land on which
construction of factory had begun and was shown under the head
capital work in progress and further held that amount of interest to
HSIDC on installment of plot which was yet to be put to use was capital
in nature. Therefore, he disallowed the amount.
3 ITA No334/Del/10
3. The Assessing Officer further observed that assessee had
debited an amount of `.2,21,034/- as interest paid on building term
loan. The assessee was asked to furnish details of term loan along
with treatment of interest, The assessee submitted that capital work in
progress for the factory had commenced in financial year 2003-04 and
upto March, 2004 total amount spent in capital work in progress
amounted to `.68.89 lakhs. It was further submitted that during the
year under consideration, the assessee further spent an amount of
`.277.09 lakhs. It was further submitted that term loan for building was
sanctioned in the month of March, 2005 and bank had provided as on
31.3.2005 an amount of `.2,21,034/- as interest and had recovered the
same through CC Account in subsequent year. It was further submitted
that since assessee was running a unit and working capital of the
company was utilized for making addition under capital work in
progress, therefore, the amount of interest on term loan was taken to
revenue and was classified under the head financial expenses. The
Assessing Officer held that term loan was indeed disbursed in the
month of March, 2005 which was meant for construction of factory
building and held it to be capital in nature and was disallowed.
4. The Assessing Officer further disallowed an amount of `.48,250/-
being processing charges charged by bank on term loan. The
Assessing Officer held that the same were incurred due to term loan
which was obtained for construction of factory and therefore this
expenditure also needed to be capitalized as the benefit was of
enduring nature and hence it was allowed.
5. Dissatisfied with the order, the assessee carried the matter to Ld
CIT(A) which upheld the additions made by the Assessing Officer and
therefore the assessee filed appeal before this Tribunal.
4 ITA No334/Del/10
6. At the outset, the Ld AR submitted that assessee was already
into the business of manufacturing of seat belt and for setting up of
another unit land was allotted in earlier year, the payment of which
was to be made in installments. He further argued that possession
was handed over to the assessee and construction was started
thereon. In support of the claim, he took us to page 1,2, & 19 of paper
book to highlight that land was indeed allotted and interest consisted
of opening balance of `.5,20,818/- relating to earlier year which was
not claimed as revenue expenditure in the earlier year. He further
took us to pages 28 to 38 where quotations of construction of building
and copy of account of contractor was placed. In view of the above
facts, he argued that assessee was already into the business and the
expenditure of interest was incurred to further carry on its business in
the new premises and therefore was allowable u/s 36(1)(iii) of the
Income Tax Act, 1961 . Reliance in this respect was placed on the
1. Capital Bus Service v. CIT, New Delhi 123 ITR 404 (Delhi High
2. India Cement Ltd. v. CIT, Madras 60 ITR 52.
3. Bombay Steam Navigation Co. Pvt. Ltd. v. CIT 28 ITR 919 (SC).
7. In respect of ground No.2, the Ld AR submitted that the assessee
had constructed major portion of factory building out of its cash profits
and in this respect he took us to page 14 of paper book wherein
relevant copy of P&L Account was placed. He further submitted that
loan was sanctioned only at the fag end of the year and no amount can
be said to have been used for the construction of building out of bank
loan. In this respect he took us to page 44 of paper book wherein copy
5 ITA No334/Del/10
of account of State Bank of India was placed. The Ld AR invited our
attention to the fact that part amount of term loan from Indian Bank
was credited in the account of assessee on 4.3.2005 only. Similarly,
our attention was invited to page 42 of paper book wherein copy of
term loan account with Indian Bank was placed. The Ld AR invited our
attention to the fact that bank had disbursed the loan of `.270 lakhs
between 4.3.2005 to 10.3.2005. In view of the above fact, the Ld AR
submitted that the assessee had utilized its profits and working capital
towards construction of building and therefore the interest charged by
the Indian Bank was a revenue expenditure. With regard to ground
No.3 regarding processing charges, the same arguments were
advanced as the same were incurred for carrying on business activity
of the assessee.
8. Reliance in this respect was placed on the case law of CIT v.
Goyal MG Gases (P) Ltd. as decided by Hon'ble Delhi High Court to
highlight the ratio that purpose of loan was not relevant and the only
thing mattered was its utilization.
9. The Ld DR, on the other hand, took us to page 29 of paper book
where scope of work to be done was placed and in view of this he
argued that factory building was to be constructed which was the asset
in consideration on which interest on loan was paid and which had not
been put to use. He took us to provisions of section 36(1)(iii) along
with its proviso and argued that it was a simple case where monies or
expenses including interest on loan can be claimed as revenue
expenditure only after these are put to use. In respect of ground No.2,
the Ld AR submitted that though term loan was not used but the
amount was credited to other accounts of the assessee and which the
assessee had used for its purposes as it liked. He further argued that it
6 ITA No334/Del/10
does not matter if the assessee had spent for acquisition of assets out
of its own sources and then replaced it with term loan. Therefore, he
argued that interest on term loan was indeed a capital expenditure.
The Ld AR in his rejoinder submitted that written submissions before Ld
CIT(A) may be taken as read.
10. We have heard the rival submissions of both the parties and
have gone through the material available on record. The first ground of
appeal relates to interest paid by assessee on installments of loan
taken for the purchase of land and second ground of appeal relates to
interest paid on term loan obtained from Indian Bank for construction
of factory building thereon. The dispute between the parties is
regarding treatment of interest paid on above loans as to whether the
same was revenue or capital in nature. Since the dispute is directly on
the provisions of section 36(1)(iii) it is salutary on our part to go
through the provisions of this section which are as under:-
"36(1): The deduction provided for in the following clauses shall be
allowed in respect of matter dealt with therein in computing the
income referred to in section 28.
(i) & (ii) xxxxxxxxx
(iii) The amount of interest paid in respect of capital borrowed for
the purpose of business or profession.
Provided that any amount of interest paid in respect of capital
borrowed for acquisition of asset for extension of existing business
or profession (whether capitalized in the books of accounts or not) is
for any period beginning from the date on which the capital was
borrowed for acquisition of the asset till the date on which such
asset was first put to use, shall not be allowed as deduction."
7 ITA No334/Del/10
So the plain reading of section clearly establishes that interest on
loan taken for acquisition of such assets which are acquired by the
assessee for extension of its existing business are not allowable till
they are put to use. In the present case, there is no doubt and
there is no dispute regarding the fact that assets were not put to
use. Therefore, in our opinion the Assessing Officer had rightly
made the disallowances and Ld CIT(A) had rightly confirmed the
same. The Ld AR has relied upon the following case laws:-
1. Capital Bus Service Ltd. v. CIT: In this case the assessee had
kept ready buses for being run on contract basis on temporary
permit such as marriage/private route and for lack of demand,
the buses were not employed for more than 30 days in the
previous year. The question in this case was regarding
allowance of depreciation for full year and Hon'ble Delhi High
Court had rightly held that buses were eligible for depreciation.
However, the present case is not regarding allowance of
depreciation but it is regarding allowance of interest u/s
36(1)(iii). Therefore, the facts of the case are not similar at all.
2. India Cement Ltd. v. CIT: In this case, the question answered by
Hon'ble Supreme Court as to whether the amount spent towards
stamp duty, registration fees, lawyer fees for creating charge on
fixed assets in favour of IFCI was a capital expenditure or
revenue nature which the Hon'ble Court had rightly held to be of
revenue nature. However, the present case is regarding
allowability of interest on loan taken for acquisition of assets
which were not put to use and which is directly dealt by the
provisos to section 36(1)(iii) of the Act. Therefore, this case is
also not applicable to first two grounds. However, the same is
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applicable to third ground which relates to payment of
processing charges paid by the assessee.
3. CIT v. Goyal MG Gases Ltd.: In this case the question decided by
Hon'ble Delhi High Court was regarding allowability of loss due to
foreign exchange fluctuation which is altogether different than
the facts and circumstances of the present case.
4. Bombay Steam Navigation Co. Pvt. Ltd. v. CIT: The facts of this
case are that pursuant to a scheme of amalgamation, the
assessee company had acquired the assets of two companies
and had paid part consideration by issuing equity share and
balance amount was to carry interest until repaid. The Hon'ble
Supreme Court had held that such interest was allowable as
revenue expenditure holding that transaction of acquisition of
asset was closely related to commencement and carrying on of
assessee's business and interest paid on un-paid balance was to
be regarded as expanded for the purpose of business. However,
the facts of the present case are different as in this case interest
was not paid for carrying out of business but was paid on loans
taken for acquisition of fixed assets which were not put to use.
11. In view of the above, ground No.1 & 2 are dismissed. As regards
ground No.3 regarding disallowance of processing charges we are of
the opinion that they are allowable business expenditure which were
incurred by the assessee during the course of business. The nature of
expenses is similar to expenses as incurred in the case of India Cement
Ltd. V. CIT (supra) as relied upon by the assessee. Therefore, we hold
that processing expenses were of revenue nature and hence allowable.
Ground No.3 is allowed.
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12. In view of the above, the appeal of the assessee is partly
13. Order pronounced in the open court on 12th day of April, 2013.
(U.B.S. BEDI) (T.S. KAPOOR)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Copy forwarded to:-
1. The appellant
2. The respondent
3. The CIT
4. The CIT (A)-, New Delhi.
5. The DR, ITAT, Loknayak Bhawan, Khan Market, New Delhi.
(ITAT, New Delhi).
Date of hearing 23.1.2013
Date of Dictation 8.4.2013
Date of Typing 8.4.2013
Date of order signed by 12.4.2013
both the Members &
Date of order uploaded on net 12.4.2013
& sent to the Bench concerned.