Annapurna Polymers Pvt.Ltd., ... vs Assessee

अपीलाथ!/ (Appellant) "#यथ!/ (Respondent)

Assessee(s) by : Shri Parin Shah Revenue by : Shri B.L. Yadav, Sr.DR

सन ु वाई क तार ख/ Dateof Hearing : 10/03/2015 घोषणा क तार ख / Date of Pronouncement: 13/03/2015

आदे श/O R D E R

PER N.S. SAINI, ACCOUNTANT MEMBER: This an appeal filed by

the assessee against order of the CIT(A)-VI, Ahmedabad dated 01/03/2011 for Asstt.Year 2007-08.

2. The sole ground of the assessee reads as under:

"1. The ld.CIT(A) has grossly erred in law and on facts in confirming disallowance of Rs.20,97,961/- made by AO out of interest expenses claimed by the appellant u/s,.36(1)(iii) of the Act. Both the lower authorities have erred in not appreciating the contention of the appellant that the funds borrowed were utilized for the purpose of business that did not warrant any disallowance. The ld.CIT(A) ought to have allowed the interest claimed on the borrowed funds and quashed the order of the AO."

3. Brief facts of the case are that from a perusal of the profit & Loss account, the AO observed that the assessee has debited interest of Rs.48,35,653/-. The AO further observed that the assessee had taken unsecured loan of Rs.7,70,01,033/- as on 31.3.2007. Further, it was observed that the assessee had given loan of Rs.18,63,013/- and ITA No.1065/Ahd/2011 2

advance of Rs.5,10,00,000/-. The AO noted that the advance of Rs.5.10 crores was given for purchase of Mafatlal Industries Ltd., but the deal had not materialized as the assessee had not taken legal possession of the said property till date. Since the assessee was not owner of the mill, the according to the AO, Rs.5.10 crores paid could not be said to have been for the business purpose of the assessee. According to the AO as per the proviso to section 36(1)(iii) interest paid on loan for acquisition of capital asset is allowable deduction only when the asset is put to use. As the acquisition of mill from Mafatlal Industries Ltd. had not finalized, therefore, the concerned capital asset has not been put to use, and therefore, he made disallowance of proportionate interest expenditure of Rs.20,97,961/-.

4. On appeal, the CIT(A) confirmed the action of the AO.

5. The AR of the assessee filed before us a copy of the order of this Tribunal passed in the case of the assessee itself in the Asstt.Year 2005-06, 2006-07 and 2009-10 in ITA No.548/Ahd/2011 and 1598 & 1599/Ahd/2012 vide consolidated order dated 1/10/2014 and submitted that by this order the Tribunal had decided a very same issue against the assessee. Therefore, the appeal of the assessee is liable to dismissed.

6. We find that the Tribunal vide its order dated 1.10.2014 at page no.8, para-9 held as under:

"9. We have heard the submissions of both the sides and carefully perused the orders of the Authorities below in the light of compilation filed before us. We have carefully perused the case law cited. A proviso has been inserted in Section 36(1)(iii) w.e.f. 1.4.2004 Finance Act 2003 which reads as under:

"Provided that nay amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalized in the books of account or not); for any period beginning from the ITA No.1065/Ahd/2011 3

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 deductions."

9.1 The purpose of the borrowing has to be determined on the facts of each case. Then the use of the capital borrowed is required to be examined. From A.Y. 2004-05 the borrowing is shown specifically for the purpose of acquiring a capital asset. So, the outcome of this proviso is that the interest would not be admissible for deduction till date the new asset is brought to use. An option is available to the asssee to capitalized the interest amount. The effect of the "proviso to Section 36(1)(iii) inserted with the fact of 2004-05 is to disallow interest on Money borrowed for acquiring capital asset till the date on which the asset is brought to use; even if it is for expansion of existing business. As per our humble understanding, the law had always made a difference between money borrowed for existing business, whether it is for expansion or otherwise, with that the money borrowed for setting up an altogether new business. However, now as per this insertion of the proviso the Revenue Department felt that the expansion of business should be put on par with a new business and that interest on borrowing for capital asset for the purposes of expansion should also be treated as part of capital expenditure in the case of Hindustan Zinc Limited, 269 ITR 369, it was held as under: (caption reproduced)

"The proviso inserted to clause (iii) of sub-section (1) of section 36 of the Income-Tax Act, 1961, that the interest paid on the borrowings for expansion of business should not be allowed unless the new assets are put to use has been made effective from April 1, 2004.

The assessee claimed deduction of the interest on the amount borrowed by it for expansion of its business for the assessment year 1991-92. The prayer was rejected, holding that as the assets were not put in use, the amount of interest could not be allowed as revenue expenditure. The Tribunal allowed the claim holding that when there is expansion of business, whether the assets are put to use is irrelevant. On appeal to the High Court:

Held, dismissing the appeal that once a loan has been taken for the purpose of expansion of business, the interest so paid is allowable under section 36(1)(iii) of the Act. Since the proviso was inserted under clause (iii) of sub section (1) of section 36 of the Act only with effect from April, 2004, the assessee was entitled to the deduction for the assessment year 1991-92."

ITA No.1065/Ahd/2011 4 9.2 The undisputed fact is that in terms of the agreements, which are placed on record; the assessee 'APPL' has agreed to purchase the said unit. The agreement dated 21st day of May, 2003 has clearly mentioned that MIL desired to transfer and APPL had desired to purchase the said unit with a clear and marketable title. From this agreement, it is also evident that MIL had only permitted APPL as licensee to enter upon the said unit till the completion of sale. Which means that the process of transfer of the property was going on at the time when those agreements were signed, the assessee was in the process of acquiring the said units, (an asset) during the relevant period. Therefore, the AO was of the view that an expenditure incurred, such as interest expenditure, was required to be capitalized for the period during which the capital asset has not been transferred in the name of the assessee. A serious option has been raised by the AO that had this property was owned by the assessee "APPL", then it should have been disclosed in the balance sheet under the schedule of assets, but it was not so. Reasons given by the AO for the impugned disallowance appears to be sustainable in the eyes of law.

9.3 As far as the decision of Core Health Care Ltd. 298 ITR 194 (SC) is concerned the action of the AO for disallowance of interest in respect of borrowings utilized for purpose of acquiring machinery according to us was justifiable. On careful perusal of the said we have noted that the Hon'ble Court has specifically observed that the proviso inserted in Section 36(i)(iii) by the Finance Act 2003 w.e.f. 1.04.2004, will operate prospectively.

Therefore the law laid down is squarely applicable for the years under appeal. Few other decisions are relied upon by learned AR in Mysore Minerals (supra); but in that case the core issue was about the meaning of the term "owner" for the purpose of applicability of Section 32 of the Act. On the other hand, we have to see the applicability of the proviso annexed to Section 36(i)(ii) that whether interest is allowable in respect of money borrowed for "acquisition" of an asset. Then, the appellant has cited the case law of Bright Automobiles and Plastics Ltd. (supra) to explain the definition of term "acquiring" is for the purpose of Sec.35AB and held that assessee need not become absolute owner of know- how. We are of the view that there in point in mixing up the issue with the other provisions of IT Act and to be strictly decided in the light of the language of Section 36(i)(iii) to be read alongwith the proviso inserted by the statute. Exactly this was opined by the Hon'ble Supreme Court in the case of Core Health Care Ltd. (supra) that Section 36(i)(iii) has to be read on its own terms because it is a code by itself. Therefore; finally we hereby conclude that the disallowance was rightly made by the Revenue ITA No.1065/Ahd/2011 5

Department in all the years hence confirmed. Resultantly grounds are dismissed."

7. In view of the above order of the Tribunal, the ground of the appeal of the assessee is dismissed.

8. In the result, the appeal of the assessee is dismissed.

Order pronounced in the Court on Friday, the 13th March, 2015 at Ahmedabad.

Sd/- Sd/-

(SHAILENDRA KUMAR YADAV) ( N.S. SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER