Interest of Loans on Plant & Machinery and CWP cannot be capitalised and Disallowed: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT), Amritsar Bench consisting of M L Meena, Accountant Member and Anikesh Banerjee, Judicial Member has held that non-capitalisation interest of loan on plant & machinery and Capital Work in Progress (CWP) cannot be capitalised and disallowed under section 36(1)(iii) of Income Tax Act and upheld the order of CIT restricting the disallowance.

The appellant assessee, a limited company engaged in the business of manufacturing Exels etc. The AO noticed that the assessee has made an addition to fixed assets of Rs. 53,06,14,928/- and has also taken a new term loan of Rs. 28,41,66,284/- from the Central Bank of India. The AO made an addition of an Addition of Rs. 2,86,84,840/- and the interest amounting to Rs. 51,24,000/-interest paid on the purchase of machinery is disallowed from revenue expenses and is capitalized into Machinery under installation. The interest paid on the loan to the addition of the building under construction and for the new term loan for the building is calculated @ 15% which is Rs. 63,59,908/- also disallowed from revenue expenditure by the AO.

The appellant revenue contended that the restriction of disallowance made by CIT(A) without granting the opportunity to the AO is a violation of Rule 46A, where the assessee procured additional documentary evidence and requested the matter be remand back for verification. In contra, the appellant assessee argued that no additional evidence or new documents were submitted before the CIT(A)It was contended by the appellant revenue that the interest paid on the addition into Capital Work in Progress needs to be capitalized.  

The assessee contended that the payments have been made after the installation of the Machinery and the Machinery was purchased by opening a Letter of Credit, hence it was not capitalised. Further, contended that the production of books of account, bills and vouchers before the CIT(A) does not form additional evidence and not filed any additional evidence or new documents, in respect of the addition to plant and machinery, and work in progress. 

The Tribunal observed infirmity in the objection of revenue to the impugned orders that CIT(A)’s restricting the disallowance of Rs. 1,19,95,692/- to Rs. 44,55,010/- made on account of non-capitalization of interest on the loan on Plant & Machinery and Rs. 1,66,89,148/- to Rs. 58,58,800/- made on account of non-capitalization of interest expenditure on Capital Work in Progress u/s 36(1)(iii) of the Income Tax Act, 1961. It was observed that CIT(A) required the assessee to produce copies of bills of machinery u/s 250(4) of the Act, which was also produced during assessment and such documents would not constitute additional evidence.

The appellant assessee was represented by Shri Gunjeet Singh Syal and the revenue was respondent by Shri Sanjeev Kaushal.

To Read the full text of the Order CLICK HERE

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