The Commissioner Of Income Tax-Iii, Ludhiana v. M/S Oswal Knit India, Ludhiana

ITA No. 268 of 2011 -1- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 268 of 2011 (O&M) Date of Decision: 5.5.2016 The Commissioner of Income Tax-III, Ludhiana ....Appellant. Versus M/s Oswal Knit India, Ludhiana ...Respondent. 1.Whether the Reporters of the local papers may be allowed to see the judgment?the judgment? 2.To be referred to the Reporters or not? YES 3.Whether the judgment should be reported in the Digest? CORAM:-HON'BLE MR. JUSTICE AJAY KUMAR MITTAL.HON'BLE MR. JUSTICE SHEKHER DHAWAN. PRESENT: Mr. Rajesh Katoch, Advocate for the appellant. None for the respondent. AJAY KUMAR MITTAL, J. 1.This order shall dispose of two appeals bearing ITA Nos.268 and 269 of 2011 as according to learned counsel for the revenue,identical issue is involved therein. For brevity, the facts are beingextracted from ITA No. 268 of 2011. 2.ITA No. 268 of 2011 has been preferred by the revenueunder Section 260A of the Income Tax Act, 1961 (in short “the Act”)against the order dated 30.11.2010 (Annexure-3) passed by the IncomeTax Appellate Tribunal, Chandigarh Bench “B”, Chandigarh (hereinafterreferred to as “the Tribunal”) in ITA No. 1043/CHD/2010, for the ITA No. 268 of 2011 assessment year 2005-06, claiming the following substantial question oflaw:- Whether on the facts and in the circumstances of thecase, the Hon'ble ITAT is right in upholding the orderof CIT(A) dated 18.05.2010, thereby deleting theaddition of ` 56,48,840/- made by the AssessingOfficer on account of disallowance of interestrelatable to investment in capital-work-in-progress? 3.A few facts necessary for adjudication of the instant appealas narrated therein may be noticed. The assessee derives income frommanufacturing of Hosiery garments and filed its return of income on31.10.2005 for the assessment year 2005-06 declaring 'nil' income.However, the tax was paid by the assessee under the MAT on bookprofits of ` 24,93,327/- under Section 115JB of the Act. The said returnwas processed under Section 143(1) of the Act at deemed income. Theassessee filed revised return on 8.1.2007 at 'nil' income. Theassessment was completed under Section 143(3) of the Act by theAssessing Officer vide order dated 24.12.2007 (Annexure-1) where theAssessing Officer had made the following disallowances:- a)disallowance of depreciation on rented property= ` 20,592/-.= ` 20,592/-. b)disallowance out of staff welfare expenses = ` 50,000/-.= ` 50,000/-. c)disallowance of interest on capital work inprogress = ` 56,48,840/-.progress = ` 56,48,840/-. d)disallowance of prior period expenditure = ` 72,302/-. After adjusting the brought forward business loss for the assessmentyear 1999-2000 and brought forward depreciation for assessment years1997-98, 1998-99 and 1999-2000, the income was assessed at 'nil'. 4.Feeling aggrieved, the assessee filed an appeal before theCommissioner of Income Tax (Appeals) [for brevity “the CIT(A)”]challenging the aforesaid additions except addition on account of staffwelfare expenses. The CIT(A) vide order dated 18.5.2010 (Annexure-2)partly allowed the appeal and deleted the addition made on account ofdisallowance of interest on capital work in progress. Thereafter, therevenue filed two appeals against the separate orders dated 18.5.2010(Annexure-2) and dated 27.6.2010 for the assessment years 2005-06and 2006-07 before the Tribunal. The Tribunal vide order dated30.11.2010 (Annexure-3) upheld the order of the CIT(A) and dismissedthe appeals. Hence, the present appeals by the revenue. 5.We have heard learned counsel for the revenue. 6.The primary issue that arises for consideration in this appealis whether the Tribunal was right in upholding the order of the CIT(A)thereby deleting the addition of ` 56,48,840/- made by the AssessingOfficer on account of disallowance of interest relatable to investment incapital work in progress. 5.We have heard learned counsel for the revenue. 6.The primary issue that arises for consideration in this appealis whether the Tribunal was right in upholding the order of the CIT(A)thereby deleting the addition of ` 56,48,840/- made by the AssessingOfficer on account of disallowance of interest relatable to investment incapital work in progress. 7.Under the proviso to Section 36(1)(iii) of the Act inserted byFinance Act, 2003 w.e.f. 2004-05, it is provided that such amount ofinterest paid in respect of capital borrowed for acquisition of assets forthe period beginning from the date on which the said capital wasborrowed for the acquisition of assets till the date the same are first putto use, such interest is required to be disallowed as deduction.Examining the factual matrix herein, the total work in progress as on 31.3.2005 was ` 364.44 lacs which comprised of ` 331.68 lacs as theopening balance in the account and ` 32.76 lacs was added during theyear. There was no loan which was outstanding as on 31.3.2004 and31.3.2005 and none of the interest bearing funds were utilized for theinvestment in the said opening work in progress. The similar issue ofdisallowance of interest on account of investment in the capital work inprogress had come before the Tribunal in assessee's own case relatingto assessment year 2004-05 and the Tribunal upholding the order of CIT(A) held that no interest bearing capital was invested in the aforesaidcapital work in progress, which is opening balance for the year underconsideration. In view thereof, the Tribunal upheld the order of CIT(A)by recording that there is no merit in disallowing the interest attributableto the opening capital work in progress of ` 331.68 lacs. Further, theTribunal also recorded that the assessee during the year had made anaddition of ` 36.27 lacs to the said capital work in progress and claimednot to have borrowed any fresh loan during the relevant period. Nothingwas produced by the revenue to show to the contrary. Thus, the deletionof addition of ` 56,48,840/- by the CIT(A) was upheld by the Tribunal.The relevant findings recorded by the Tribunal read thus:- “We have heard the rival contentions and perused therecords. Under the provisions of proviso to Section36(1)(iii) of the Income Tax Act inserted by FinanceAct, 2003 w.e.f. 2004-05, it is provided that suchamount of interest paid in respect of capital borrowedfor acquisition of assets for the period from date onwhich the said capital was borrowed for theacquisition of assets till the date the same are put to use, such interest is required to disallowed prior tomaking any disallowance under the aforesaidprovisions of the Income Tax Act. The requirement isto establish that certain bearing borrowed capital wasutilized by the assessee for the acquisition of suchassets. In the facts of the present case, the total workin progress as on 31.3.2005 was ` 364.44 lacs. Asum of ` 331.68 lacs was the opening balance in theaccount and ` 32.76 lacs was added during the year.The claim of the assessee before us was that theloan, if any, was repaid in the earlier year and no loanwas outstanding as on 31.3.2004 and 31.3.2005. Itwas further pointed out that none of the interestbearing funds were utilized for the investment in thesaid opening work in progress. We find that similarissue of disallowance of interest on account ofinvestment in the capital work in progress arosebefore the Tribunal in assessee's own case relating toassessment year 2004-05. The Tribunal upholdingthe order of CIT(A) dismissed the appeal filed by therevenue holding that no interest bearing capital wasinvested in the aforesaid capital work in progress,which is opening balance for the year underconsideration. In view of the ratio laid down by theTribunal in assessee's own case relating toassessment year 2004-05 in ITA No. 965/Chd/2009vide order dated 18.1.2010, we uphold the order of -6- -6- CIT(A) that there is no merit in disallowing the interestattributable to the opening capital work in progress of` 331.68 lacs. 6.The assessee during the year had made anaddition of ` 36.27 lacs to the said capital work inprogress and claimed not to have borrowed any freshloan during the relevant period. The Revenue hadfailed to bring on record any evidence to the contraryand in view thereof, we find no merit in disallowing theinterest attributable to the investment made in thecapital work in progress at ` 32.76 lacs during theyear. We uphold the order of CIT(A) in this regard.” 8.In view of the above, there is no error or perversity could bepointed out in the approach of the Tribunal warranting interference bythis Court. Consequently, the substantial question of law is answeredaccordingly. Finding no merit in the appeals, the same are herebydismissed. (AJAY KUMAR MITTAL)JUDGE May 5, 2016 gbs (SHEKHER DHAWAN) JUDGE