2018 (4) TMI 1918 - AT - Income Tax

Tribunal dismisses ESIC contribution disallowance, partially allows interest appeal for Capital Work in Progress.

M/s. Havmor Ice Cream ltd, Versus The DCIT, Circle-2 (1) (1), Ahmedabad

M/s. Havmor Ice Cream ltd, Versus The DCIT, Circle-2 (1) (1), Ahmedabad - TMI Issues Involved:1. Disallowance of ESIC under section 36(1)(va) r.w.s. 2(24)(x) of the Act.2. Disallowance of interest under section 36(1)(iii) towards Capital Work in Progress (CWIP).Issue-wise Detailed Analysis:1. Disallowance of ESIC under section 36(1)(va) r.w.s. 2(24)(x) of the Act:The assessee appealed against the disallowance of Rs. 1,48,520 towards ESIC, contending that the ESIC contribution was a labor expense for the company, as it was contributed by the assessee without recovery from laborers. The Assessing Officer (AO) disallowed the amount due to late payment, relying on the judgment of Gujarat State Road Transport Corporation (2014) 41 taxman.com 100 (Guj), stating that the payment was made on 26th July 2012, whereas the due date was 21st April 2012.The CIT(A) upheld the AO’s decision, noting that the ESIC contributions were deposited after the due date specified under the ESIC Act. The appellant's claim that the contributions were made from its own funds and were not recoverable from casual laborers was found unverifiable. The CIT(A) emphasized that the provisions of section 2(24)(x) r.w.s. 36(1)(va) were applicable, as the labor expenses payable to employees were deposited as contributions on their behalf. The Tribunal agreed with the CIT(A) and dismissed the appeal on this ground, affirming that the provisions of section 2(24)(x) r.w.s. 36(1)(va) were rightly applied.2. Disallowance of interest under section 36(1)(iii) towards Capital Work in Progress (CWIP):The second issue involved the disallowance of Rs. 10,75,906 under section 36(1)(iii) on account of interest related to CWIP. The AO observed that the closing CWIP was Rs. 1,79,31,767 and noted that the assessee had not capitalized any interest. The AO computed interest at 12% on the CWIP, stating that the assessee failed to provide specific reasons and supporting evidence for not capitalizing the interest.The CIT(A) upheld the AO’s decision, highlighting that the payments towards CWIP were made from an overdraft balance in the cash credit account, contradicting the assessee's claim of using own funds. The CIT(A) also noted that the provisions of section 36(1)(iii) apply to the extension of existing business, requiring capitalization of interest until the asset is put to use.The Tribunal reviewed the case, including various judicial pronouncements, and concluded that the interest paid for capital borrowed for asset acquisition must be capitalized until the asset is first put to use. However, due to a lack of specific information and supporting evidence, the Tribunal restored the issue to the AO for a fresh decision. The AO was directed to consider the exact dates of additions to CWIP items and exclude periods when the capital asset was actually put to use, following judicial guidelines.Conclusion:The Tribunal dismissed the appeal regarding the ESIC disallowance, affirming the CIT(A)'s decision. For the interest disallowance under section 36(1)(iii), the Tribunal restored the issue to the AO for a fresh decision, directing consideration of specific dates and judicial guidelines. The appeal was partly allowed.