M/S JOYALUKKAS INDIA LTD v. THE ASSISTANT COMMISSIONER OF INCOME TAX

``` IN THE HIGH COURT OF KERALA AT ERNAKULAM ``` ``` PRESENT ``` ``` THE HONOURABLE MR.JUSTICE S.V.BHATTI ``` ``` & ``` ``` THE HONOURABLE MR.JUSTICE BASANT BALAJI ``` ``` WEDNESDAY, THE 21[ST] DAY OF DECEMBER 2022 / 30TH AGRAHAYANA, 1944 ``` ``` I.T.A. NO.10OF 2019 ``` ``` OF I.T.A.TRIBUNAL, COCHIN BENCH) ``` ## **`APPELLANT/APPELLANT:`** ``` M/S.JOYALUKKAS INDIA LTD, (NOW M/S. JOYALUKKAS INDIA PVT LTD), MARINE DRIVE, SHANMUGHAM ROAD, KOCHI - 682 031. BY ADVS. ANIL D. NAIR SRI.SREEJITH R.NAIR SMT. ARYA ANIL SMT. NILOOFAR O. NIZAM ``` ## **`RESPONDENT/RESPONDENT:`** ``` THE ASSISTANT COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE - 1(2), KOCHI 682 018. ``` ``` ADV.NAVNEETH N.NATH ``` ``` THIS INCOME TAX APPEAL HAVING COME UP FOR ADMISSION ON 21.12.2022, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ``` I.T.A. No.10/2019 2 ## JUDGMENT (Dated: 21[st] December, 2022) ## Basant Balaji, J. The appellant challenges the order of the Income Tax Appellate Tribunal, Cochin Bench in ITA No.190/Coch/2015 dated 10.04.2018 dismissing assessee’s appeal. 2. The appellant is engaged in the trading of textile materials, manufacturing and trading of jewellery. The return of income filed for the Annual Year 2010-11 by the appellant was processed under Section 143(1) and subsequently picked up for scrutiny and notice under Section 143 of the Income Tax Act ('the Act' for short) was issued on 27.09.2011. A reference to the Transfer Pricing Officer was made by the 1[st] respondent to determine whether the international transactions have been made at Arm’s Length Price in accordance with Section 92CA of the Income Tax Act. 3. The Dispute Resolution Panel by Annexure-A communication concurred with the findings of the Transfer I.T.A. No.10/2019 3 Pricing Officer and resulted in a draft order dated 25.03.2014 under Section 143(3) read with 144C(1) of the Act. Though objections to the draft order were filed before the dispute resolution panel, the panel vide order dated 29.12.2014 upheld some of the additions proposed in the draft assessment order and thereafter the respondent passed the final assessment order under Section 143(3) read with Section 144C of the Act. Aggrieved by the said order made under Section 143(3) and 144C (13), an appeal was filed before the Tribunal. The issue that came up for consideration before the Tribunal was regarding the disallowance of an amount of Rs.92,28,405/- under proviso to Section 36(1)(iii) of the Act. The second appeal raises the said question. 4. The following substantial questions of law arise for consideration: - _i. In the facts and circumstances of the case, ought not the Tribunal have held that disallowance u/s.36(1)(iii) of the Act on notional interest incurred by the appellant was bad in law,_ I.T.A. No.10/2019 4 - _i. In the facts and circumstances of the case, ought not the tribunal have held that the interest paid on loan raised for day to day running of the business was revenue expenditure and provision of Section 36(1)(iii) would not apply._ 5. The counsel for the appellant Sri.Anil D.Nair argues that the Dispute Resolution Panel was not justified in treating interest of Rs.92,28,405/- on working capital loans availed from banks as incurred for the acquisition of assets and disallowing the same under the proviso to Section 36(1)(iii). The improvements to all these properties are a Revenue expenditure and hence the proviso is not applicable. He relies on the judgment of the Full Bench in _Indus Motors Company Pvt. Ltd., v. Deputy Commissioner of Income Tax [2016 382 ITR 503 (KER)]_ , wherein a reference was made to the Full Bench regarding the correctness of a decision of the appellants’ case itself. The Full Bench of this Court after elaborately considering the reference held as follows: _“As has been observed above, whether an expenditure incurred by assessee in a particular case is a capital expenditure or revenue expenditure has to be decided on the facts of that case by applying the relevant tests. Explanation 1 to S.32(1)(i) does not intend to lay down that whenever_ I.T.A. No.10/2019 5 _expenditure has been incurred by the assessee for the purpose of business or profession on the construction of any structure or doing of any work in or in relation to or by way of renovation or improvement to the building, then such expenditure has to be mandatorily treated as capital expenditure. The explanation only meant that in the event any capital expenditure is incurred by the assessee, the provisions of S.32(1) shall be applicable as if the said structure or work is a building owned by the assessee. We thus answer the reference holding that the ratio of the judgment of the Division Bench in Joy Alukkas case as expressed in paragraph 28 of the judgment needs no reconsideration”._ Relying on the said decision, the learned counsel submits that the entire expenditure has to be treated as revenue expenditure and disallowance has to be set aside. Therefore, the Tribunal went wrong in dismissing the appeal. 6. The learned counsel for the revenue Sri.Navneeth N.Nath submits that the decision of the Full Bench as well as that of the appellant himself cannot be applied in full vigour to the facts of this case, as the Full Bench has held that the expenditure incurred by the assessee in a particular case is a capital expenditure or revenue expenditure has to be decided on the facts of that case by applying the relevant test. Section 36(1)(iii) of the Income Tax Act deals with other I.T.A. No.10/2019 6 deductions. Sub Section(iii) specifies the interest rate in respect of capital borrowed for the purpose of business or profession. Proviso to the said section clarifies that the amount of interest paid in respect of capital borrowed for the acquisition of an asset, for extension of existing business or profession 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 used shall not be allowed as deduction. Strong reliance is based on the judgment of the Full Bench as well as the Division Bench. Whether the dictum laid down by the Division Bench is applicable to the case on hand or not is the mooted question. The principle decided in the assessee’s own case is that the amount extended to a refurbishing, organisation etc., constitutes a revenue expenditure. The contention raised in this case arises under Section 36(1)(iii) and the proviso. The effect of the said section is to treat the expenditure as deemed capital expenditure and to come out of such presumption, the assessee has to establish its case I.T.A. No.10/2019 7 ## adverting to the proof rendered by the assessee. The Dispute ## Resolution Panel has held as follows: _“3.1.9.3. We have considered carefully the assessee’s submissions and other material on record. It is an admitted fact that the assessee is paying interest and they have utilized part of funds for Capital WIP. It is also an admitted fact that the assessee could not substantiate the fact that no interest bearing funds were used for such capital WIP. No day to day fund flow has been submitted. In absence of such fund flow the assessee’s claim that no interest bearing funds were used for capital WIP remains unsubstantiated. It is settled legal position that it is the onus of the assessee, who claims any expenditure to prove that the said expenditure, including the expenditure claimed u/s.36(1)(iii), was for business purposes, and not for the acquisition of capital asset. The objection is therefore not acceptable”._ 7. The Tribunal after appreciating the contentions raised has held that, the assessee has not placed any evidence that the capital work in progress actually was related to the renovation of the lease on the building which was allowed as a business expenditure in the assessment year under consideration. In the absence of any evidence to the contrary that it was not a capital expenditure, the Tribunal was justified in accepting the findings entered by the Dispute Resolution Panel as confirmed by the assessment order. It is for the I.T.A. No.10/2019 8 assessee to substantiate the claim made for expenditure as revenue expenditure. The absence of material revenue rightly presumed what is prescribed in Section 36(1)(iii) of the Act. The assessee failed to produce any evidence to that effect. Hence, the Tribunal was justified in dismissing the appeal filed by the assessee. In the result, the appeal fails and the substantial questions of law are answered against the assessee, and the same is dismissed. _Sd/-_ S.V.BHATTI, JUDGE _Sd/-_ BASANT BALAJI, JUDGE ss I.T.A. No.10/2019 9 ## **`APPENDIX OF ITA 10/2019`** ``` PETITIONER ANNEXURES: ``` ``` ANNEXURE - A ``` ``` TRUE COPY OF ORDER OF THE DISPUTE RESOLUTION PANEL DATED 29/12/2014 UNDER SECTION 144C(5) OF THE ACT. ``` ``` ANNEXURE - BTRUE COPY OF THE FINAL ASSESSMENT ORDER PASSED BY THE RESPONDENT U/S.144C R.W.S 143(3) OF THE ACT DATED 16.01.2015. ``` ``` ANNEXURE - CTRUE COPY OF THE ORDER OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH DATED 10.04.2018. ```