Interest on borrowed capital from the date of ‘Trial Run’ till date of commercial start to be treated as revenue expenditure: Delhi ITAT

Case details: ACIT, Central Circle-19, New Delhi v. Nilkanth Concast (P.) Ltd., - [2021] 130 taxmann.com 224 (Delhi - Trib.)

Judiciary and Counsel Details

• • Kul Bharat, Judicial Member and Dr. B.R.R. Kumar, Accountant Member
  • Arvind Kumar, Adv. for the Appellant.
  • Ms. Rinku Singh, Sr. DR for the Respondent.

Facts of the Case

The assessee was a private limited company engaged in the manufacturing of sponge iron, M.S. billets and TMT bars. The assesse claimed expenditure in respect of interest on borrowed capital attributable from the period of installation of new power plant up to the date of start of commercial use of the plant.

Assessing Officer (AO) capitalized the amount of interest of Rs. 28,84,000/- being interest from installation to commercial operation on the ground that as per the accounting principles, the interest paid should be capitalized till date the power plant was put to use, and hence disallowed the claim of Rs. 28,84,000/-.

Relying upon the judicial precedents, the assessee argued that the new power plant was used ‘Trial Run’. Such ‘Trial Run’ was to be treated as actual use, and hence interest for the period from the installation for ‘Trial Run’ till actual commencement use of plant should also be allowed as revenue expenditure.

On assessee’s appeal, the CIT(A) reversing the stand taken by the AO and treated interest expense as revenue expenditure. Aggrieved-AO filed the instant appeal before the Tribunal.

ITAT Held

The Delhi Tribunal held that there was no dispute that the Power Plant was used for ‘Trial Run’ from the date of the installation to the date of the start of commercial use. AO had made the disallowance on the ground that the interest incurred for the period before the commercial starting of the Power Plant had to be disallowed, without taking into account the period for ‘Trial Run’.

The Apex Court in the case of Pr. CIT v. Larsen and Toubro Ltd. [2018] 98 taxmann.com 368/259 Taxman 79 (SC) has ruled that once the plant commenced operations and a reasonable quantity of product is produced, the business is set up even if the product was substandard and not marketable.

ITAT referred to the proviso to section 36(1)(iii) of the Income-tax Act, 1961, AS-16, judicial precedents, and ICDS IX. Owing to the similar determinative factum of “put to use” in the referred statutes, the ITAT held that interest paid on from date of ‘Trial Run’ of the new plant to be treated as revenue expenditure.

Case Review

• • CIT v. Shri Rama Multi Tech Ltd. [2017] 80 taxmann.com 375/247 Taxman 148/393 ITR 371 (SC) (para 23) distinguished.

List of Cases Referred to

• • CIT v. Shri Rama Multi Tech Ltd. [2017] 80 taxmann.com 375/247 Taxman 148/393 ITR 371 (SC) (para 20)
  • Pr. CIT v. Larsen and Toubro Ltd. [2018] 98 taxmann.com 368/259 Taxman 79 (SC) (para 25)
  • CIT v. Escorts Tractors Ltd. [2015] 56 taxmann.com 333/230 Taxman 584 (Delhi) (para 26)
  • Western India Vegetable Products Ltd. v. CIT [1954] 26 ITR 151 (Bom.) (para 28)
  • CIT v. Forging & Stamping (P.) Ltd. [1979] 119 ITR 616 (Bom.) (para 29)
  • Asstt. CIT v. Paharpur Cooling Towers (P.) Ltd. [1993] 44 ITD 540 (Cal.) (para 30)