2016 (1) TMI 1098 - AT - Income Tax

Addition made on account of disallowance of interest paid on borrowed funds - partial allowance of interest by the CIT(A) as against the total disallowance made by AO under section 36(1)(iii) - Held that - We find no merit in the orders of authorities below in working out the interest attributable to the loans relatable to 12 projects under construction, has been not allowable as deduction in the hands of assessee. The assessee was following unit sale method of accounting, where revenue was recognized on sale of the units completed by it. The assessee was not following project completion method. Though the assessee was capitalizing the cost of projects which were under consideration, the revenue relatable to units of such projects was offered to tax as and when the units were sold by the assessee. Thus, in such circumstances, there is no merit in holding that the interest attributable to the alleged loans utilized for 12 projects under consideration is to be disallowed in the hands of assessee. We find no merit in the orders of authorities below in this regard. Where the assessee is engaged in the business of construction and development and the project undertaken by the assessee constitute stock in trade / work-inprogress and are not capital assets owned by the assessee, the proviso to section 36(1)(iii) of the Act do not apply and there is no merit in restricting the deduction on account of interest expenditure on loan availed for carrying on the business of the assessee. Accordingly, we direct the Assessing Officer to allow the expenditure of ₹ 11,26,17,000/- in the hands of the assessee. At this juncture, we also want to refer to the alternate plea raised by the assessee before the Assessing Officer that at best disallowance of ₹ 52,15,480/- can be made being attributable to qualifying assets. The said alternate contention was without prejudice to the main contention and in view of our allowing the claim of the assessee in totality, we find no merit in the alternate plea raised by the assessee. Consequently, the grounds of appeal raised by the assessee are allowed and the grounds of appeal raised by the Revenue are dismissed.- Decided in favour of assessee

Summary

Issues Involved:
1. Addition on account of disallowance of interest.
2. Erroneous levy of interest under section 234B.
3. Partial allowance of interest by the CIT(A).

Detailed Analysis:

Addition on Account of Disallowance of Interest:

The primary issue was the addition of Rs. 6,46,81,281 to the income of the appellant on account of disallowance of interest paid on borrowed funds. The appellant argued that they were engaged in the business of real estate development, and hence, any interest paid for the project should be allowable under section 36(1)(iii) of the Income Tax Act, 1961. The appellant contended that they followed a consistent accounting practice for recording interest expenses, which was accepted in the past, and that the concept of qualifying and non-qualifying assets as per AS-16 should not be imported into the Income Tax Act for considering the allowability of interest expenses.

The Revenue, on the other hand, appealed against the partial allowance of interest by the CIT(A) and argued that the entire disallowance of Rs. 11,26,17,000 by the Assessing Officer should be upheld. The Assessing Officer had disallowed interest expenses on the grounds that the borrowing costs directly attributable to the acquisition, construction, or production of a qualifying asset should be capitalized as per AS-16.

The Tribunal held that the substantive provisions of section 36(1)(iii) of the Act allow the deduction of interest paid on capital borrowed for the purpose of business or profession. The proviso to this section restricts the disallowance of interest only for the period till the asset is not put to use, and this proviso is applicable only to capital assets and not to current assets. The Tribunal found no merit in the Revenue's argument that the proviso applied to current assets. The Tribunal also rejected the application of AS-16 for disallowing the interest expenditure, stating that the specific provisions of the Income Tax Act prevail over accounting standards.

The Tribunal concluded that the interest expenditure incurred by the appellant was allowable as it was incurred for carrying on the business, and the business had commenced with the start of the project itself. Therefore, the disallowance of Rs. 6,46,81,280 was not justified, and the appellant's claim was allowed in totality.

Erroneous Levy of Interest Under Section 234B:

The appellant also raised a ground against the levy of interest under section 234B of the Act. However, the Tribunal did not provide a detailed analysis on this issue, as the main contention regarding the disallowance of interest was resolved in favor of the appellant.

Partial Allowance of Interest by the CIT(A):

The Revenue's appeal was against the partial allowance of interest by the CIT(A). The CIT(A) had disallowed interest expenses to the extent of Rs. 6,46,81,280, considering the interest attributable to qualifying assets. The Tribunal, however, held that the entire interest expenditure of Rs. 11,26,17,000 should be allowed as the proviso to section 36(1)(iii) did not apply to current assets, and the specific provisions of the Income Tax Act prevail over accounting standards.

In conclusion, the Tribunal allowed the appeal of the appellant and dismissed the appeal of the Revenue, directing the Assessing Officer to allow the expenditure of Rs. 11,26,17,000 in the hands of the appellant.