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2017 (11) TMI 1894 - AT - Income TaxDisallowability of interest u/s 36(1) - interest expenditure is capitalized to WIP account and the income was recognized on the basis of Percentage Completion Method - HELD THAT - Any amount of the interest paid in respect of capital borrowed for the business purposes constitutes an allowable deduction. The said clause (iii) of section 36(1) of the Act supports the assessee s claim in the present case. This view is upheld in the case of CIT Vs. Lokhandwala Construction Industries Ltd. 2003 (1) TMI 93 - BOMBAY HIGH COURT as well as the decision of the Tribunal in the case of M/s. Ashish Builders Pvt. Ltd. 2016 (11) TMI 709 - ITAT MUMBAI irrespective of the method of accounting of recognising the income followed by the assessee. The present case involves the payment of interest of the interest paid to debenture holders Financial institutions Unsecured loan etc. It is not the case of the Revenue that the interest claim and related capital borrowed was not utilised by the assessee for business purposes of the assessee. The claim of the assessee in capitalising the interest expenditure to the WIP account which was the base for computing or recognising the taxable profits of the year is in accordance with the declared policy of Percentage Completion Method for income recognition.The claim of the assessee is fair and reasonable. Therefore the order of CIT(A) on this issue is required to be reversed. Accordingly Ground Nos. 1 to 6 raised by the assessee are allowed.
Issues Involved:
1. Disallowability of interest expenditure of ?3,00,57,566/-. 2. Method of accounting for income recognition (Percentage Completion Method vs. Project Completion Method). 3. Allowability of interest expenditure under Section 36(1)(iii) of the Income Tax Act. Issue-wise Detailed Analysis: 1. Disallowability of Interest Expenditure of ?3,00,57,566/-: The core issue revolves around the disallowability of the interest expenditure amounting to ?3,00,57,566/- which was capitalized to the Work-in-Progress (WIP) account by the assessee. The Assessing Officer (AO) disallowed this claim on the grounds that the assessee follows the Project Completion Method, and therefore, any deduction should be allowable only at the end of the project. The AO's decision was based on the mistaken belief that the assessee follows the Project Completion Method instead of the Percentage Completion Method. The CIT(A) confirmed the AO's decision, leading to the assessee's appeal. 2. Method of Accounting for Income Recognition: The assessee follows the Percentage Completion Method for income recognition, which contrasts with the AO's belief that the Project Completion Method was being followed. This method involves recognizing income based on the percentage of project completion rather than at the end of the project. The AO's misunderstanding led to the incorrect conclusion that the interest expenditure should be disallowed until the project's completion. The CIT(A) upheld this view, despite the assessee's consistent use of the Percentage Completion Method. 3. Allowability of Interest Expenditure Under Section 36(1)(iii): The assessee argued that the entire interest expenditure of ?8,19,23,638/- (?5,18,66,672/- + ?3,00,57,566/-) is allowable under Section 36(1)(iii) of the Income Tax Act, which permits the deduction of interest paid on capital borrowed for business purposes. The proviso to this section prohibits the deduction of interest on capital borrowed for acquiring an asset, but this does not apply to interest incurred for business purposes. The assessee cited various judgments, including the jurisdictional High Court judgment in the case of CIT Vs. Lokhandwala Construction Industries Ltd., which supports the deduction of interest on borrowed capital used for business purposes. The Mumbai Bench of the Tribunal in the case of M/s. Ashish Builders Pvt. Ltd. also upheld the allowability of such interest expenditure, even when the Percentage Completion Method is followed. Judgment: The Tribunal found that the AO's decision was based on a mistaken belief regarding the method of accounting followed by the assessee. The Tribunal referred to jurisdictional High Court judgments and previous Tribunal decisions, which consistently upheld the allowability of interest expenditure under Section 36(1)(iii) irrespective of the method of accounting for income recognition. The Tribunal concluded that the interest expenditure of ?3,00,57,566/- capitalized to the WIP account is allowable as it was incurred for business purposes. Consequently, the order of the CIT(A) was reversed, and the assessee's claim was allowed. Conclusion: The appeal of the assessee was partly allowed, with the Tribunal recognizing the allowability of the interest expenditure of ?3,00,57,566/- under Section 36(1)(iii) of the Income Tax Act, in accordance with the Percentage Completion Method of accounting for income recognition. The decision emphasized the importance of following the correct method of accounting and the consistent application of legal principles regarding interest expenditure deductions.
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