2017 (8) TMI 1611 - AT - Income Tax

Tribunal dismisses Revenue's appeal, upholds CIT(A)'s decision on disallowance & interest capitalization.

ACIT, Circle 1 (1), Sambalpur Versus Patnaik Minerals Pvt Ltd., Orissa

The Tribunal dismissed the Revenue's appeal on both issues. The disallowance under Section 14A was deleted as the AO did not record dissatisfaction with ... Disallowance of expenditure u/s.14A r.w.r. 8D - HELD THAT:- As decided in assessee own case [2012 (3) TMI 486 - ITAT CUTTACK]AO had not recorded his satisfaction regarding not accepting the disallowable expenditure shown by the appellant. The investment in such assets were made by the appellant from its operational surplus and not from loan funds - addition u/s 14A to be deleted. Interest accrued on term loan availed for captive power plant (CPP) and Ore beneficiation Plant (OBP) - HELD THAT:- D.R. could not controvert the findings of the CIT(A) to the effect that from the details of the capital work in progress of the assessee, it was evident that the same consist of cost of the captive power plant and ore beneficiation plant. The assessee had availed term loan for setting up of the plants and has capitalized the interest pertaining to the term loans for both the plants. The assessee has capitalised as per Accounting Standard of 16 of ICAI. The assessee had submitted details of interest and finance charges incurred by it and the accounts regarding capitalization of the same. Therefore, we find no good reason to interfere with the order of the CIT(A), which is hereby confirmed the ground of appeal is dismissed. Issues Involved:1. Disallowance of expenditure under Section 14A of the Income Tax Act.2. Capitalization of interest on term loans for Captive Power Plant (CPP) and Ore Beneficiation Plant (OBP).Detailed Analysis:1. Disallowance of expenditure under Section 14A of the Income Tax Act:The Revenue's grievance was that the CIT(A) erred in confirming the order of the Assessing Officer (AO) in deleting the disallowance of expenditure of Rs. 6,44,42,275/- made under Section 14A of the Act. The AO had made the disallowance under Section 14A read with Rule 8D of the Income Tax Rules. On appeal, the CIT(A) deleted the disallowance.During the hearing, both parties agreed that the issue was covered in favor of the assessee by a previous decision of the Tribunal in the assessee’s own case for the assessment year 2010-2011. The Tribunal had discussed the issue and confirmed the CIT(A)'s action in deleting the disallowance made by the AO.The facts revealed that the AO found the assessee had shown investments in financial assets like shares and mutual funds and earned dividend income. The assessee had on its own disallowed Rs. 8,57,512/- as expenses under Section 14A for earning exempt income. However, the AO opined that Rule 8D was applicable and calculated the disallowance at Rs. 14,34,60,722/-, adding the same to the total income of the assessee.The CIT(A) noted that the AO did not record satisfaction regarding the correctness of the assessee's claim in respect of such expenditure. The AO's observation that the self-declared disallowance was on the lower side was not sufficient to invoke Rule 8D. The CIT(A) relied on various judicial decisions and observed that the investments were made from the assessee's operational surplus and not from borrowed funds.The Tribunal upheld the CIT(A)'s order, noting that the AO had not recorded his dissatisfaction with the assessee's claim. The investments were made from the assessee’s own funds, and no portion of the interest paid during the year could be allocated to the exempt income. The Tribunal dismissed the Revenue's appeal, following the precedent set in the assessee’s own case for the previous assessment year.2. Capitalization of interest on term loans for Captive Power Plant (CPP) and Ore Beneficiation Plant (OBP):The Revenue contended that the CIT(A) erred in accepting the assessee's claim that the interest accrued on term loans for CPP and OBP amounting to Rs. 10,63,560/- and Rs. 50,23,112/- respectively had been capitalized and not claimed as a deduction in the profit and loss account.The AO observed that the assessee had shown capital work in progress and incurred interest liability on loans. Since the assets were still in the process of installation and not yet put to use, the AO disallowed the interest on loan corresponding to the capital work in progress, determining the disallowance at Rs. 2,30,76,352/-.On appeal, the assessee submitted that the interest on term loans for CPP and OBP had been capitalized as per Accounting Standard 16 of ICAI and not charged to the profit and loss account. The CIT(A) found that the AO had not verified the details regarding the capitalization of interest paid for acquiring capital assets. The CIT(A) directed the AO to delete the addition.The Tribunal, after considering the rival submissions and materials on record, found that the CIT(A)'s findings were not controverted by the Revenue. The interest on term loans for CPP and OBP had been capitalized as per Accounting Standard 16, and the details of interest and finance charges were submitted. The Tribunal confirmed the CIT(A)'s order and dismissed the Revenue's appeal.Conclusion:The Tribunal dismissed the Revenue's appeal on both issues, upholding the CIT(A)'s orders. The disallowance under Section 14A was deleted as the AO did not record dissatisfaction with the assessee's claim, and the interest on term loans for CPP and OBP was correctly capitalized as per Accounting Standard 16. The Tribunal's decision was pronounced in the open court on 03/08/2017.