Tribunal upholds AO's disallowances under Income Tax Act, directs capitalization & depreciation.

The tribunal dismissed the appeal, upholding the disallowances made by the Assessing Officer under Sections 36(1)(iii) and 35D of the Income Tax Act. The tribunal directed the AO to capitalize the disallowed amounts and allow depreciation in accordance with the law.

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Issues Involved:
1. Disallowance of Rs. 19,92,128/- under Section 36(1)(iii) of the Income Tax Act.
2. Disallowance of Rs. 5,73,796/- under Section 35D of the Income Tax Act.

Detailed Analysis:

1. Disallowance under Section 36(1)(iii):

During the assessment proceedings, it was noted that the assessee company reported only rental income of Rs. 7,20,000/- and no business receipts or sales. However, the company claimed business expenditure of Rs. 30,03,166/- in the Profit & Loss Account. The Assessing Officer (AO) raised queries regarding the nature of this expenditure and the classification of rental income under the head "income from house property."

The assessee argued that the rental income was business income, as the land was temporarily let out to Nandan Exim Pvt. Ltd. for parking purposes. They cited the Supreme Court decision in Universal Plast v. CIT, asserting that income from temporarily letting out a business asset should be treated as business income.

However, the AO found contradictions in the assessee's submissions and noted that the factory building and plant were still under construction, as evidenced by the balance sheet. Thus, the interest expenditure of Rs. 19,92,128/- was disallowed under Section 36(1)(iii), as it should be capitalized until the assets are put to use. The AO relied on several judicial precedents, including Nahar Polyfilms Ltd. v. CIT and CIT v. Vardhman Polytex Ltd., to support this view.

The tribunal upheld the AO's decision, noting that the assessee had not commenced its business and the assets were under construction. However, it directed the AO to capitalize the interest expenditure and allow depreciation.

2. Disallowance under Section 35D:

The assessee claimed preliminary expenses of Rs. 5,73,796/- (1/5th of Rs. 28,68,982/-) under Section 35D. The AO disallowed this claim, stating that the expenses were not covered under Section 35D(2)/(3) and the business had not commenced.

The assessee did not provide any substantial evidence to counter this finding. The tribunal noted that the company had not started its business activities, and the plant and building were still under construction. It held that to claim deduction under Section 35D, the business must be operational. Consequently, the tribunal upheld the disallowance but directed the AO to capitalize the preliminary expenses and allow depreciation.

Conclusion:

The appeal filed by the assessee was dismissed. The tribunal upheld the disallowances made by the AO under Sections 36(1)(iii) and 35D, but directed the AO to capitalize the disallowed amounts and allow depreciation as per law.

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