TaxTMI 
TaxTMI 
2018 (1) TMI 579
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....s and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals) was justified in accepting that the assessee was having sufficient interest-free funds for advancing for purchase for land and also for construction when the funds used from the same accounts where profits of the business and loan money received is credited ?" 2. The learned senior Departmental representative relying upon the assessment order submitted that on account of the specific reasoning recorded in paragraph 3 to paragraph 3.4, the stated additions were made in the hands of the assessee. It was submitted that the assessee has argued that the loans and advances were given for land on which a factory was constructed. It was her submission that the additions were maintainable for non-capitalisation of interest on opening capital work-in-progress as well as the advance given for land purchased. The assessee, it was submitted, was required to explain the same and since the explanation was contrary to the facts and provisions of law the disallowance under section 36(1)(iii) of the Act was maintainable. Carrying us through the assessment order, the relief granted by the Commissioner of Incom....
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....on/disallowance. I have also considered the written submissions filed by the assessee-company vide letter dated September 28, 2016 on the issue under reference. I have also considered various judicial pronouncements relied upon by the assessee as well as other material placed by the assessee-company on record. On careful consideration of the assessment order, it has been noticed that the Assessing Officer has made the impugned addition as in her opinion the assessee-company has purchased land and made construction of godown thereon by utilising borrowed funds and as the asset has not been put to use, the interest cost pertaining to the borrowed funds utilised for the purchase of land and construction of godown thereon which has not been put to use should have been capitalised in view of the proviso to section 36(1)(iii) of the Act. On the other hand, the assessee-company through its learned authorised representatives has submitted that the interest cost of borrowed funds which have been utilised specifically for the purposes of construction of godown on the land has already been capitalised. It has further been submitted that the assessee-company has also used its own interest-free....
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.... spent on construction of godown Rs. 1,22,98,678 Amount stated to be spent on construction out of borrowed funds Rs. 48,66,625 Amount stated to be spent on construction out of own funds till end of the year Rs. 74,32,053 Interest-free funds available with the assessee-company Share capital Rs. 3,01,00,000 Reserve and surplus Rs. 65,46,949 Share application money Rs. 1,00,00,000 Loan from directors Rs. 41,319 Rs. 4,66,88,268 In view of these facts, it can be said that the assessee-company was having sufficient interest-free funds to make advance of Rs. 34,00,000 for the purchase of land and spend Rs. 74,32,053 to make investment in the construction of godown. Assessment year 2011-12 Advance given for the purchase of land to directors Rs. 2,40,00,000 Amount spent on construction of godown Rs. 2,38,72,498 Amount stated to be spent on construction out of borrowed funds Rs. 1,69,67,553 Amount stated....
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.... Rs. 40,00,000 which was paid in the assessment year 2009-10 out of interest bearing funds was certainly required to be capitalised which has not been done by the assessee-company. The interest amount which was required to be capitalised comes to Rs. 4,80,000 (12 per cent. of Rs. 40,00,000) and not Rs. 63,16,618 as arrived at by the Assessing Officer. Under such circumstances, the addition made by the Assessing Officer on account of capitalisation of interest is restricted to Rs. 4,80,000 as against made by the Assessing Officer at Rs. 63,16,618. 6.4 In view of the abovestated facts and in the circumstances of the case, the addition made by the Assessing Officer on account of capitalisation of interest is restricted to Rs. 4,80,000 and the balance addition of Rs. 58,36,618 is directed to be deleted. The assessee will thus get a relief of Rs. 58,36,618 out of addition of Rs. 63,16,618. In the result, grounds No. 2 of appeal taken by the assessee-company is partly allowed." 3.2 Accordingly, it was his submission that the Departmental appeal may be dismissed. 4. The learned senior Departmental representative in reply submitted that the Commissioner of Income-tax (....
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....or generated in the business by the company is no longer resintegra. Reference may also be made to another decision of the apex court in the case of Hero Cycles Pvt. Ltd. v. CIT [2015] 379 ITR 347 (SC) wherein taking cognizance of the decision of the Delhi High Court in the case of CIT v. Dalmia Cement (B.) Ltd. [2002] 254 ITR 377 (Delhi) their Lordships held that once it was established that there was a nexus between expenditure and purpose of business, the Revenue could not justifiably claim to put itself in the armchair of businessman or in position of the board of directors and assume the role to decide how much was reasonable expenditure having regard to circumstances of the case. Affirming the well-settled legal principle, it was held by the court that no businessman could be compelled to maximise his profit and the Income-tax authorities must put themselves in the shoes of assessee and see how a prudent businessman would act. The court deprecated the attitude of the tax authorities in looking at the matter from their own view point instead of looking at it from the point of view of a prudent businessman. The court was seized of the facts in the said case where an advance of ....
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....elf namely in the case of Madhav Prasad Jatia v. CIT [1979] 118 ITR 200 (SC) their Lordships took into consideration the fact that the position would be different if the borrowed amount was donated for some sentimental or personal reason and not on the grounds of commercial expediency. In such a situation it has been held that the claim of interest could not have been allowed under section 36(1)(iii) of the Act. In the facts of Madhav Prasad's case, the borrowed amount was donated to a college with a to commemorate the memory of the assessee's deceased husband after whom the college was to be named. It was in those circumstances that the court held that such an expenditure may not be said to be for commercial expediency. The court in the latest decision took note of the fact that the principle enunciated in S. A. Builders' case was that borrowed fund advanced to a third party should be for commercial expediency if it is sought to be allowed under section 36(1)(iii) of the Act etc. The court further took into consideration the distinction of the expression "for the purpose of business" which, it was noted is wide in the scope than the expression "for the purpose of earni....