ITAT partially allows appeal for AY 2005-06 & fully for AY 2006-07, deleting various disallowances.

For the Assessment Year 2005-06, the appeal was partly allowed by the ITAT. The disallowance of interest expenses on capital work-in-progress, prior period expenses, depreciation, and a portion of travelling expenses were deleted. The disallowance of a portion of vehicle and maintenance expenses was also removed. In the Assessment Year 2006-07, the ITAT allowed the appeal, deleting the disallowance related to interest expenses on capital work-in-progress.

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Issues Involved:

1. Addition of Rs. 6,01,250/- as share issue expenses treated as capital in nature.
2. Disallowance of interest expense of Rs. 59,82,299/- on the ground that it pertains to capital work-in-progress.
3. Disallowance of Rs. 3,16,834/- considering the same as prior period expenses.
4. Disallowance of depreciation of Rs. 38,15,681/-.
5. Disallowance of 5% of travelling expenses amounting to Rs. 1,494,780/-.
6. Disallowance of Rs. 50,000/- out of vehicle and maintenance expenses.

Detailed Analysis:

Assessment Year 2005-06:

Ground Number 1:
- The counsel for the assessee did not press for this ground. Consequently, it was dismissed as being not pressed.

Ground Number 2:
- The AO observed that the Capital Work-in-Progress (CWIP) was partly financed by interest-bearing funds and disallowed Rs. 59,82,299/- on a pro-rata basis. The CIT(A) upheld the AO's decision, relying on the previous year's order.
- The ITAT noted that in the assessee's own case for AY 2004-05, it was established that interest-free funds far exceeded the investments in CWIP, leading to the presumption that investments were made out of interest-free funds. Following this precedent, the ITAT allowed the appeal for AY 2005-06, deleting the disallowance.

Ground Number 3:
- The AO disallowed Rs. 3,16,834/- as prior period expenses. The CIT(A) upheld this disallowance, stating the assessee failed to prove these expenses crystallized during the year under consideration.
- The ITAT found merit in the assessee's argument that it consistently offered prior period income and claimed prior period expenses, which is a tax-neutral exercise. Citing judicial precedents, the ITAT allowed the appeal, deleting the disallowance.

Ground Number 4:
- The AO disallowed depreciation of Rs. 38,15,681/- on the ground that the assessee failed to prove the utilization of the machineries. The CIT(A) upheld the disallowance.
- The ITAT noted that the assessee provided certificates from the General Manager and an independent party confirming the installation and use of the machinery. Given that the Department accepted these certificates in subsequent years, the ITAT allowed the appeal, permitting the depreciation claim.

Ground Number 5:
- The AO disallowed 10% of travelling expenses due to lack of concrete evidence, which the CIT(A) reduced to 5%.
- The ITAT upheld the CIT(A)'s decision, noting that most expenses were incurred in cash and supported by self-made vouchers, making them unverifiable.

Ground Number 6:
- The AO made an ad hoc disallowance of Rs. 50,000/- out of vehicle and maintenance expenses, which the CIT(A) upheld.
- The ITAT, referencing the assessee's own case for AY 2004-05 where a similar disallowance was deleted, allowed the appeal, deleting the disallowance.

Assessment Year 2006-07:

Ground Number 1:
- The issue was identical to Ground Number 2 for AY 2005-06. Since the ITAT decided in favor of the assessee for AY 2005-06, it similarly allowed the appeal for AY 2006-07, deleting the disallowance of Rs. 51,90,224/-.

Conclusion:
- For AY 2005-06, the appeal was partly allowed.
- For AY 2006-07, the appeal was allowed.

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