Tribunal directs proper interest verification, disallows notional basis, allows claim for statistical purposes.

The tribunal remitted the issue back to the assessing officer for proper verification, directing not to disallow interest on a notional basis. It emphasized that interest should be disallowed on a pro-rata basis and instructed the AO to verify the interest capitalized by the appellant. The tribunal highlighted discrepancies in the application of the interest rate on capital work in progress and allowed the appellant's claim for statistical purposes. The appeal was allowed for statistical purposes, stressing the importance of accurate verification and calculation of interest on capital work in progress.

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Issues:
1. Disallowance of interest on capital work in progress.
2. Interpretation of Section 36(1)(iii) of the Income Tax Act.
3. Application of interest rate on capital work in progress.
4. Verification of interest capitalized by the assessee.

Issue 1: Disallowance of interest on capital work in progress:
The appellant challenged the order of the ld. CIT(A) regarding the disallowance of interest amounting to Rs. 45,58,781 out of a total disallowance of Rs. 79,13,889 made by the ld. AO. The disallowance was based on the proviso to section 36(1)(iii) of the IT Act, which requires interest to be capitalized for funds invested in capital work in progress. The appellant argued that the interest should only be disallowed on a pro-rata basis and not for the entire year. The tribunal observed that the assessing officer and the CIT(A) had not verified the interest capitalized by the appellant and made the disallowance on a notional basis. Consequently, the issue was remitted back to the AO for proper verification, with a direction not to disallow interest on a notional basis.

Issue 2: Interpretation of Section 36(1)(iii) of the Income Tax Act:
The tribunal examined the legal position under Section 36(1)(iii) of the Income Tax Act, which deals with the deduction of interest paid in respect of capital borrowed for business purposes. The provision states that interest on capital borrowed for the acquisition of an asset for the extension of an existing business shall not be allowed as a deduction. The tribunal cited judicial pronouncements and highlighted that interest on borrowed funds for acquiring a capital asset would be disallowed until the asset is put to use, as it adds to the cost of the asset.

Issue 3: Application of interest rate on capital work in progress:
The tribunal noted discrepancies in the application of the interest rate on capital work in progress by the assessing officer and the CIT(A). The appellant provided a detailed calculation showing that the interest should be restricted to the capital work in progress related to plant and machinery only. The tribunal agreed with the appellant's methodology and directed the AO to verify the interest capitalized by the appellant, emphasizing that disallowance should not be made on a notional basis.

Issue 4: Verification of interest capitalized by the assessee:
The tribunal highlighted that neither the assessing officer nor the CIT(A) had verified the interest capitalized by the appellant, leading to the disallowance being made on a notional basis. In the interest of justice, the tribunal remitted the issue back to the AO for proper verification, instructing that disallowance should not be based on a notional calculation. The tribunal directed the AO to allow the claimed amount if the working provided by the appellant was found to be correct.

In conclusion, the tribunal allowed the appellant's claim for statistical purposes and directed a reevaluation of the interest disallowance issue by the assessing officer. The appeal was allowed for statistical purposes, emphasizing the need for proper verification and calculation of interest on capital work in progress.

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