2018 (1) TMI 1588 - AT - Income Tax

Capitalization of interest expenses - loan has been taken to invest in capital asset - HELD THAT - CIT(A) has only accepted the alternative claim of the assessee and allowed capitalization of interest expenditure since no business activity was carried out by the assessee during impugned AY. AO, in paragraph 3.2 of the quantum assessment order has also expressed similar view. Regarding rate of interest of 32%, the revenue could not point out how the same was excessive or unreasonable in the circumstances. The other expenditure of ₹ 41,900/-, being administrative in nature and incurred to maintain the corporate identity has rightly been allowed as revenue expenditure. Finding no strength in revenue s appeal, we dismiss the same.

Summary

Issues:
Appeal against capitalization of interest expenses without opportunity to AO and justification of interest rate.

Analysis:
The appeal by the revenue contested the order of the Ld. CIT(A) allowing capitalization of interest expenses without providing an opportunity to the AO and without verifying the purpose of the loan. The AO disallowed the entire expenditure claimed by the assessee, including finance expenses of &8377; 2,94,31,532/-, as no business activity was evident. The Ld. CIT(A) concurred with the assessee's claim, stating that the appellant was more of an investor than a trader of flats, and allowed the interest expenses to be capitalized. The appellant argued that even if the flat purchases were not considered business activity, the interest expenses should be capitalized and the balance expenses allowed for company maintenance. The Ld. CIT(A) upheld this alternative claim, emphasizing the need for capitalization due to lack of business activity during the assessment year.

The revenue's contention was supported by the Ld. DR, while the Ld. AR highlighted the need for capitalization if the expenditure was not allowable as revenue expenditure. The ITAT, after considering the arguments and material on record, agreed with the Ld. CIT(A) and dismissed the revenue's appeal. It was noted that the Ld. CIT(A) had accepted the alternative claim of the assessee regarding capitalization of interest expenditure due to the absence of business activity during the assessment year. The ITAT found no basis to challenge the interest rate of 32% or the administrative expenditure of &8377; 41,900/-, which was allowed as revenue expenditure for maintaining corporate identity. Consequently, the revenue's appeal was dismissed, affirming the decision of the Ld. CIT(A) regarding the capitalization of interest expenses and other related matters.

In conclusion, the ITAT upheld the decision of the Ld. CIT(A) to allow the capitalization of interest expenses in the absence of business activity during the assessment year. The ITAT found no merit in the revenue's appeal, dismissing it and affirming the allowance of interest expenses as capital expenditure.