No disallowance for interest paid on capital work in progress if sufficient interest-free funds available

No disallowance for interest paid on capital work in progress u/s 36(1)(iii) where sufficient interest-free funds available, presumption is that investments were out of such funds

ABCAUS Case Law Citation:
ABCAUS 2877 (2019) (04) ITAT

Important Case Laws Cited/relied upon by the parties
Hero Cycles Pvt. Ltd. Vs. CIT, 379 ITR 347 (SC)
CIT (LTU) Vs. Reliance Industries Ltd. (2019) 410 ITR 466 (SC).

The instant appeal was preferred by the assessee agitating the action of the Commissioner of Income Tax (Appeals) whereby he confirmed of the disallowance made by the Assessing Officer (AO) in respect of interest paid on capital work in progress invoking the provisions of section 36(1)(iii) of the Income Tax Act, 1961 (the Act).

The AO observed that the assessee had showed an amount under the head ‘Capital Work in Progress’, but the said asset was not put to use in the year under consideration. The AO further observed that the assessee had borrowed huge loans for business and paid interest thereon.

The AO, therefore, capitalized the notional interest of capital work in progress and added the same to the returned income of the assessee.

In appeal before the CIT(A), the assessee submitted that it had its own sufficient funds to meet the capital work in progress. That no borrowed funds were used for capital work in progress and no fresh loans were taken by the assessee during the year under consideration. Also the assessee during the year had also earned sufficient profits.

The assessee submitted that even otherwise, in the case of mixed funds also, the presumption will be that the assessee had used it is own funds for making the investments.

The CIT(A), however, held that since the assessee had used mixed funds, hence notional interest was rightly calculated by the A.O. and thus was rightly added to the income of the assessee.

Being aggrieved by the order of the CIT(A), the assessee went in appeal before the Tribunal.

The Tribunal noted that there was no denial or rebuttal to the plea of the assessee that the assessee had been possessed of own sufficient funds to meet the capital work in progress. Further the assessee had demonstrated that no new loans were taken during the year. Also, even the loans taken by the assessee were term loans for specific purposes, which could not be used for any other purpose than that for which the loan was taken.

The Tribunal noted that the unrebutted facts were that the assessee was possessed of sufficient own funds, which included share capital, reserves and surpluses and further the profits of the assessee for the year under consideration were sufficient to meet the capital work in progress.

The Tribunal observed that the proposition of law laid down by the Hon’ble Supreme Court squarely applied to the facts of the case. Moreover, the issue was now covered by the latest decision of the Hon’ble Supreme Court where it held that where Interest-free funds are available with assessee are sufficient to meet investment, the presumption is that investments were out of interest free funds.

 The Tribunal accordingly decided the issue in favour of the assessee and deleted the disallowance made by the lower authorities.

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