TaxTMI 
TaxTMI 
2014 (10) TMI 1045
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....he facts and figures furnished to establish acquisition and use of asset by the appellant. Ld. CIT (A) ought to have allowed the interest expense incurred wholly and exclusively for the purpose of the business as claimed on the borrowed funds by quashing order of AO." 3. Facts in brief are that the assessee company is in the business of trading of cotton and manufacturing of yarn. An assessment was made u/s.143(3) r.w.s. 254 dated 21.12.2010, which is the subject matter of this appeal. The AO has noted that for A.Y. 2005-06 against the order of learned CIT(A) an appeal was preferred by the assessee and ITAT Ahmedabad in ITA No.1445/Ahd/2009 vide an order dated 17.07.2009 has restored the issue back to the file of the AO to redecide in the light of the Hon'ble Supreme Court decision in the case of Core Health Care Ltd., 298 ITR 194 (SC). The AO has reproduced the said portion of the ITAT order. Thereafter AO has discussed the proviso to Section 36(1)(iii) which says that, "any amount of interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalized in the books of account or not); for any period begin....
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....capitalized in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction. 3. In the present case before your goodself, the assessee company has not acquired any asset for extension of existing business, on the contrary the assessee company acquired running business of Mafatlal Industries Ltd. and therefore proviso to S. 36(1)(iii) can not be invoked and interest expenditure should be allowed. 4. So far as the objections (a) and (c), as noted in para 1 above, are concerned, the assessee submits that pending regulatory and legal formalities, the process of acquisition not recorded in the books of accounts. However the assessee has taken over the possession of the said Mafatlal Industries Limited Plant and machineries and operating the same and therefore the interest claim has to be a/lowed. In any case, assuming while denying that the conveyance deed has not been executed till date, it means that assets of the Mafatlal Industries Ltd. have not been acquired but only used by the assessee and therefore not recorded for i....
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....re the First Appellate Authority. 5. Before learned CIT(A) almost identical submissions were reiterated and after considering those submissions learned CIT(A) has held that the interest was to be capitalized till the asset was acquired and put to use; hence, the disallowance of interest was rightly made by the AO. Relevant paragraph 3.3 is reproduced below: "3.3 I have considered the facts of the case; assessment order and appellant's written submission. It is not in dispute that appellant borrowed interest bearing funds for acquisition of running unit from Mafatlal Industries Ltd. The said unit was not transferred to the appellant company till the end of this year and as such appellant has not become owner of the said asset. The acquired unit is also not included in the balance sheet. Appellant paid part of the consideration however the entire consideration is not paid till the end of this year. Therefore the sale of unit is not complete and acquisition of the unit is also not complete. I have gone through the relevant agreements submitted by the appellant and as per that the transfer or possession of the unit is not given to the appellant. Appellant only got the right to run th....
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....ppeared and referred the agreements which were executed with Mafatlal Industries to demonstrate that the intention of the assessee was to acquire the unit of Mafatlal Industries Ltd. There was a huge consideration of around Rs. 3 crore to be paid by the assessee to Mafatlal Industries and in turn MIL to discharge the liability. He has informed that the said acquisition by the assessee was as per the terms pronounced by BIFR for re-construction of the financial affairs of MIL. 6.1 The next plank of argument of learned AR was that the AO has decided the issue beyond the directions of the ITAT to decide in terms of Core Health Care (supra) decision. The assessee had paid substantial amount to MIL and also taken over the possession in June, 2003. According to him, the AO has not correctly appreciated the facts of the case. 7. A legal argument has been raised by learned AR that the term "acquisition" is not at par with "ownership". He has placed reliance on a decision of CIT Vs. Bright Automotives and Plastic Ltd., 141 taxman 582 (M.P.). In the said decision, Hon'ble Court has opined that the expression "acquiring" in Section has to be given a liberal meaning. According to Hon'ble Cou....
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....in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalized in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deductions." 9.1 The purpose of the borrowing has to be determined on the facts of each case. Then the use of the capital borrowed is required to be examined. From A.Y. 2004-05 the borrowing is shown specifically for the purpose of acquiring a capital asset. So, the out come of this proviso is that the interest would not be admissible for deduction till date the new asset is brought to use. An option is available to the asssee to capitalized the interest amount. The effect of the "proviso to Section 36(1)(iii) inserted with the fact of 2004-05 is to disallow interest on Money borrowed for acquiring capital asset till the date on which the asset is brought to use; even if it is for expansion of existing business. As per our humble understanding, the law had always made a difference between money borrowed for existing business, whether it is fo....
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....ich the capital asset has not been transferred in the name of the assessee. A serious option has been raised by the AO that had this property was owned by the assessee "APPL", then it should have been disclosed in the balance sheet under the schedule of assets, but it was not so. Reasons given by the AO for the impugned disallowance appears to be sustainable in the eyes of law. 9.3 As far as the decision of Core Health Care Ltd. 298 ITR 194 (SC) is concerned the action of the AO for disallowance of interest in respect of borrowings utilized for purpose of acquiring machinery according to us was justifiable. On careful perusal of the said we have noted that the Hon'ble Court has specifically observed that the proviso inserted in Section 36(i)(iii) by the Finance Act 2003 w.e.f. 1.04.2004, will operate prospectively. Therefore the law laid down is squarely applicable for the years under appeal. Few other decisions are relied upon by learned AR in Mysore Minerals (supra); but in that case the core issue was about the meaning of the term "owner" for the purpose of applicability of Section 32 of the Act. On the other hand, we have to see the applicability of the proviso annexed to Sect....