Handloom Bhandar,, Kanpur vs Assessee

This is assessee's appeal directed against the order passed by learned CIT(A)-II, Kanpur dated 13/08/2012 for the assessment year 2009-2010. In this appeal, the assessee has raised the following grounds:

"1. Because the impugned order is contrary to provisions contained in 36(i)(iii) and proviso thereto as Appellant did not borrow any loan far acquisition of assets amounting to Rs.33,98,636/-.

2. Because the estimation of borrowing cost by the Learned Commissioner of Income Tax (Appeals) and the Assessing Officer is based on surmises and conjectures and not supported by facts and figures, therefore, capitalization of interest of Rs.7,47,700/- is liable to be deleted.

3. Because the Appellant having furnished comparative Balance Sheets for the Assessment Year 2008-09 and 2009-10 and Funds Flow Statement which clearly indicate that no part of Unsecured Loans were utilized in acquisition of Capital Assets amounting to Rs.33,98,636/-, the learned Commissioner of Income Tax (Appeals) was not justified to upheld the order of the Assessing Officer."

2 2. It was submitted by Learned A.R. of the assessee that the Assessing Officer in para 4.2 and 4.3 of his order has reproduced the reply submitted by the assessee dated 18/04/2011. He further submitted that there is no fresh borrowing in this year and therefore, proviso to section 36(1)(iii) is not applicable. He also placed reliance on a Tribunal decision rendered in the case of Tata Finance Ltd. vs. ACIT [2008] 20 SOT 47 (ITAT[Mum]).

3. Learned D.R. of the Revenue supported the orders of the authorities below.

4. We have considered the rival submissions. We find that proviso to section 36(1)(iii) was inserted with effect from 01/04/2004 and therefore, the same is applicable in the present year. As per this proviso, 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 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. As per the facts noted by the Assessing Officer in para 4.2 and 4.3 of the assessment order, the addition of Rs.33,98,636/- under the head 'machinery' in the schedule of fixed assets during the year were not put to use. But there is another contention of the assessee that the said assets were not financed by any bank. Now this aspect is to be examined as to whether such investment in fixed assets is by way of utilization of interest bearing borrowed funds or not. In this regard, we find that the balance sheet of the assessee is available on page No. 44 of the paper book. As per the balance sheet, the funds available with the assessee is by way of unsecured loan, secured loan and PNB overdraft account apart from Sundry creditors and liability for expenses. This is not the case of the assessee that the assets are financed by outstanding sundry 3

creditors or liability for expenses. Hence, it has to be accepted that such acquisition of fixed assets are finance by unsecured loans and secured loans. In our considered opinion, this is immaterial as to whether the borrowings are specifically made by the assessee for acquisition of fixed assets or the general borrowings on interest were used for acquisition of fixed assets. In any case, the interest paid on such borrowing, used for acquisition of fixed assets is not allowable before the assets are put to use. Since this is not in dispute that the assets were not put to use and source of finance of the all these assets is not interest free and it is only interest bearing because the assessee is not having any interest free fund as per the balance sheet of the assessee available on page No. 44 of the paper book, we do not find any reason to interfere in the disallowance made by the Assessing Officer and confirmed by CIT(A). We, therefore, decline to interfere in the order of CIT(A).

5. Regarding the Tribunal decision, cited by Learned A.R. of the assessee, we find that this Tribunal decision is in relation to assessment year 92-93 i.e. before the insertion of the provision to section 36(1)(iii) of the Act and therefore, not applicable in the present case.

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

(Order was pronounced in the open court on the date mentioned on the caption page)

Sd/. Sd/.

(SUNIL KUMAR YADAV) ( A. K. GARODIA ) Judicial Member Accountant Member

Dated:31/03/2015 *C.L.Singh Copy of the order forwarded to : 1.The Appellant 2.The Respondent. 3.Concerned CIT 4.The CIT(A) 5.D.R., I.T.A.T., Lucknow Asstt. Registrar