2001 (8) TMI 280 - AT - Income Tax

Appellate tribunal favors assessee, dismissing Revenue's appeal. Interest and railway siding expenditure deemed debatable.

The appellate tribunal ruled in favor of the assessee, dismissing the Revenue's appeal and the assessee's cross-objection. It held that both the interest ... Prima Facie Adjustment Issues Involved:1. Prima facie adjustment of interest claimed as expenditure under section 36(1)(iii).2. Prima facie adjustment of railway siding expenditure.Issue-wise Detailed Analysis:1. Prima Facie Adjustment of Interest Claimed as Expenditure under Section 36(1)(iii):The AO disallowed the interest claimed by the assessee on borrowed capital for an expansion project, treating it as capital expenditure since the project had not commenced commercial production. The AO relied on section 145(1) and Accounting Standard-10, concluding that interest on a new project not yet operational is not allowable under section 36(1)(iii).The CIT(A) deleted this addition, stating the issue was debatable and multiple opinions were possible regarding the treatment of interest paid. The CIT(A) referenced various High Court and Supreme Court judgments supporting the admissibility of such interest under section 36(1)(iii).The appellate tribunal agreed with the CIT(A), noting that the interest claim was not patently inadmissible and required further inquiry. The tribunal emphasized that prima facie adjustments should only be made for claims clearly inadmissible on the face of the return, as per CBDT Circular No. 689. The tribunal concluded that the interest claim was a debatable issue and could not be subjected to prima facie adjustment under section 143(1)(a).2. Prima Facie Adjustment of Railway Siding Expenditure:The AO treated the railway siding expenditure as capital expenditure, arguing it resulted in an asset providing enduring benefits. The AO allowed depreciation on the railway siding but disallowed the revenue expenditure claim, citing section 145 and Accounting Standard-1.The CIT(A) upheld the AO's decision, reasoning that the expenditure, treated as capital in the books, brought an enduring asset and altered the profit-earning structure. The CIT(A) noted that there was no specific provision under the Act to allow such expenditure as revenue when treated as capital in the books.The appellate tribunal, however, disagreed with the CIT(A). It referred to the CBDT Circular No. 689, which restricts prima facie disallowances to specific types of claims. The tribunal cited Supreme Court judgments, asserting that the nature of expenditure should be considered in a commercial sense, and the railway siding expenditure, aimed at improving business efficiency, was revenue in nature. The tribunal concluded that the claim was debatable and beyond the scope of prima facie adjustment under section 143(1)(a).Conclusion:The tribunal allowed the assessee's appeal, dismissing the Revenue's appeal and the assessee's cross-objection. It held that both the interest and railway siding expenditure claims were debatable and required detailed examination, thus not suitable for prima facie adjustment under section 143(1)(a).