Tribunal Allows Appeal on Disallowance under Sections 80IB & 36(1)(iii)

The Tribunal allowed the appeal regarding the disallowance under Section 80IB, emphasizing consistency with previous assessments and relevant case law. For the disallowance under Section 36(1)(iii), the Tribunal remanded the matter to the AO for recalculating the disallowance based on the average rate of interest, allowing the ground for statistical purposes. Both appeals were disposed of in light of these directions.

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Issues Involved:
1. Sustenance of disallowance of deduction under Section 80IB.
2. Sustenance of addition under Section 36(1)(iii).

Issue-wise Detailed Analysis:

1. Sustenance of Disallowance of Deduction under Section 80IB:
The primary issue was the disallowance of a deduction amounting to Rs. 41,79,868/- under Section 80IB of the Income Tax Act. The assessee, an SSI unit engaged in manufacturing forgings, tractor, and auto parts, argued that its manufacturing activities included both using its own raw materials and performing job work on raw materials supplied by customers. The assessee contended that the latter also constituted manufacturing under Section 80IB and had been allowed in previous assessment years (2003-04 to 2006-07).

The Tribunal noted that the Revenue did not demonstrate any change in the nature of the assessee's activities from earlier years. The assessee had consistently claimed and been granted the deduction under Section 80IB in previous years. The Tribunal cited the Bombay High Court's decision in Simple Food Products P. Ltd., which held that if a deduction was allowed in the initial assessment year, it could not be withdrawn in subsequent years unless the initial year's deduction was also withdrawn. The Tribunal concluded that the assessee was eligible for the deduction under Section 80IB for the impugned assessment year, setting aside the CIT(A)'s order and allowing the ground of appeal.

2. Sustenance of Addition under Section 36(1)(iii):
The second issue was the disallowance of Rs. 2,66,629/- under Section 36(1)(iii) related to interest on borrowed funds used for acquiring assets. The assessee argued that it had already capitalized the interest on the borrowed amount used for acquiring a furnace and that the remaining investment was made from internal accruals. The AO, however, disallowed the interest on the entire investment, citing the assessee's significant interest payments on other borrowings and relying on the Punjab & Haryana High Court's decision in Abhishek Industries Ltd.

The Tribunal found merit in the assessee's contention that in cases where borrowed funds are mixed with internal funds, the average rate of interest should be applied. The Tribunal remanded the matter to the AO to verify the average rate of interest on the borrowings and determine the disallowance accordingly, giving credit for the interest already capitalized by the assessee. The ground of appeal was allowed for statistical purposes.

ITA No.101/Chd/2020:
The sole ground in this appeal was the sustenance of disallowance of Rs. 36,86,676/- under Section 36(1)(iii). The facts and circumstances were identical to those in ITA No. 100/CHD/2020. The Tribunal applied the same findings and directions, remanding the matter to the AO to determine the average rate of interest and adjust the disallowance accordingly. This ground was also allowed for statistical purposes.

Conclusion:
In summary, the Tribunal allowed the appeal regarding the disallowance under Section 80IB, citing consistency with previous assessments and relevant case law. For the disallowance under Section 36(1)(iii), the Tribunal remanded the matter to the AO for recalculating the disallowance based on the average rate of interest, allowing the ground for statistical purposes. Both appeals were disposed of in light of these directions.

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