AI Drafter 
TaxTMI 
TaxTMI 
2022 (3) TMI 1242
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....unt of proportionate interest attributable to capital work-in-progress. 4. The assessee, in the present case, is a company which is engaged in the business of manufacturing of various specialty chemicals like pharmaceuticals, agro chemicals, dyes and pigments, etc. It is also engaged in the generation of wind power. The return of income for the year under consideration, i.e. AY 2013-14, was filed by the assessee on 28.09.2013 declaring total income of Rs. 40,43,110/-. The said return was selected for scrutiny and a notice under Section 143(2) of the Act was issued by the Assessing Officer to the assessee on 03.09.2014. During the course of assessment proceedings, it was noticed by the Assessing Officer that the assessee has shown an amount of Rs. 41,52,223/- as capital work-in-progress. Since the interest paid on the capital borrowed for acquisition of asset in the form of capital work-in-progress was not an allowable deduction as per the proviso to Section 36(1)(iii) of the Act, the assessee was called upon by the Assessing Officer to explain as to why the proportionate interest attributable to the capital borrowed for capital work-in-progress should not be disallowed being cap....
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....the assessee and proceeded to confirm the disallowance made by the Assessing Officer on account of proportionate interest for the following reasons given in paragraph No. 4.3 of his impugned order:- "4.3. Ground No.4 and 4.1 are pertaining to capitalization of interest at Rs. 3,04,193/- with the cost of capital work-in-progress. The AO noticed that the assessee had shown capital work-in-progress at Rs. 41,52,223/- and hence, interest pertaining to the same should be capitalized. On perusal of the balance sheet, I also find that there was huge capital work-in-progress to the extent of Rs. 2,43,35,790/- out of which the amount of Rs. 2,01,83,567/- has been transferred to assets. The Volume of capital work-in-progress clearly indicates expansion of business and hence, in view of provisions of Proviso to Section 36(1)(iii), interest expenditure pertaining to acquisition of asset has to be capitalized till the asset is put to use. During the course of the appellant proceedings, it was noticed that the investment was made out of cash credit account bearing cost of interest. However, the Ld AR has claimed in his written submission that negative balance in cash credit account has ....
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....arned CIT(A) has given any specific finding on this aspect of the matter on the basis of overall financial position of the assessee-company and the matter may, therefore, be sent back to the Assessing Officer for such verification. We are inclined to accept this contention of the learned DR. The impugned order of the learned CIT(A) on this issue is accordingly set aside and the matter is restored to the file of the Assessing Officer to decide the same afresh after verifying overall financial position of the assessee-company in order to ascertain whether the investment in capital work-in-progress was made by the assessee-company out of its own interest free funds or interest-bearing borrowed funds. The Assessing Officer is accordingly directed to decide this issue afresh after such verification and after giving the assessee proper and sufficient opportunity of being heard. 8. The next issue involved in Ground No.3 relates to the disallowance of Rs. 35,70,587/- made by the Assessing Officer on account of proportionate interest attributable to the borrowed funds allegedly utilized by the assessee for giving interest free advances to its subsidiary company. 9. In the Profit and L....
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....siness exigency and business purpose of such interest free advances. The Ld. AR has heavily relied upon the decision of the Hon'ble Supreme Court in the case of SA Builders (2007) 288 ITR 1 (SC). Since, the appellant has failed to establish business exigency and business purpose of such advances, the decision of the Hon'ble Supreme Court relied upon is of no help. 4.4.1. Alternatively, it has been argued that the interest free advances to the subsidiary company were given out of own funds having no interest burden. However, I find that the advances to the subsidiary company were given out of cash credit account bearing interest burden. Keeping in view this position, the Ld. AR vide order sheet entry dated 09.05.2018 was specifically asked to furnish copy of cash credit account, but instead of furnishing copy of cash credit account, he has submitted a reply stating that the utilization of cash credit has been reduced from Rs. 12,34,85,362 as on 01.04.2012 to Rs. 7,31,13,430/-. However, on perusal of the balance sheet (Note No.7), I find that utilization of cash credit facility as on 31.03,2013 is Rs. 14,13,95,794/-. Presuming that there was reduction in the utilizat....
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....t free advance to the subsidiary company was made by the authorities below by applying the direct nexus theory since the assessee was found to have given the said advance directly from the Cash Credit Account. The case of the assessee as made out before the authorities below and specifically before the Tribunal is that sufficient interest free funds in the form of share capital, reserve & surplus and internal accruals were available at the relevant time to give interest free advance to the subsidiary company and there being the case of mixed funds maintained by the assessee-company, this issue is required to be considered having regard to the overall financial position of the assessee-company and not by applying the direct nexus theory. Following our conclusion drawn on the issue raised in Ground No.2, we restore this issue also to the file of the Assessing Officer for deciding the same afresh after verifying the overall financial position of the assessee-company in order to ascertain as to whether the interest free advance was given by the assessee-company out of interest free funds available at the relevant time or from the interest-bearing borrowed funds. The Assessing Officer i....