2019 (11) TMI 1670 - AT - Income Tax

Revenue expenditure allowance - deduction on account of interest paid towards delayed payment of IDC/EDC charges to the Haryana Government - allowable expenditure u/s 37 or penal in nature as interest has been charged by concerned authority for delay - AO has disallowed the same considering it penal in nature and also on the reasoning that such expenditure should form part of the work-in-progress as assessee is a developer and deduction of same will be available against the sale of the project - HELD THAT - Such expenditure is penal in nature the same is covered in favour of the assessee by the judgment of the coordinate bench of the ITAT in the case of M/s Ferrous Township Pvt. Ltd. 2017 (9) TMI 1947 - ITAT DELHI whereby it was held that interest payable on EDC charges is not penal in nature. Such expenditure should form part of the work-in-progress - As seen that this interest is in respect of outstanding EDC charges payable for a project the realization of which has already taken place in earlier years - interest is on an amount outstanding and payable for the services availed in respect of the project which stands already completed and sold in earlier years - such an interest cannot form part of the work-in-progress. The interest payment on the outstanding balance in respect of the trade creditors is revenue in nature and allowable expenditure while computing business income - uphold the order of the CIT (A) deleting the above addition. - Decided in favour of assessee.

Summary

Issues:
1. Allowance of interest expenditure as revenue expenditure.
2. Discrepancy in claimed interest expenditure for the assessment year.
3. Classification of interest expenses on delayed payment of EDC as business expenditure.

Issue 1 - Allowance of interest expenditure as revenue expenditure:
The Revenue filed an appeal against an order by the Ld. CIT (Appeals)-29 Delhi, regarding the quantum of assessment for the A.Y. 2012-13. The Revenue contended that the interest expenditure should not be allowed as revenue expenditure solely based on previous assessments, as each assessment is independent. The AO disallowed the interest expenditure, considering it penal in nature and part of the project cost. However, the CIT (A) held that the interest payment was not penal and was eligible for deduction as business income. The Tribunal referred to a similar case and ruled in favor of the assessee, stating that interest payable on EDC charges is not penal in nature and is revenue expenditure.

Issue 2 - Discrepancy in claimed interest expenditure for the assessment year:
The Revenue argued that the assessee had claimed interest expenditure for a different assessment year, which was not supported by the assessment records. The assessee clarified that the interest payment was related to EDC charges payable to HUDA and was a legitimate business expenditure. The Tribunal upheld the CIT (A)'s decision, stating that the interest payment was revenue in nature and rightly deleted the addition.

Issue 3 - Classification of interest expenses on delayed payment of EDC as business expenditure:
The Revenue contended that the interest payment for delayed EDC charges should be considered part of the project cost and carried forward as stock. The assessee argued that the interest payment was related to a project already completed and sold in previous years, making it a revenue expenditure. The Tribunal agreed with the assessee, stating that the interest on outstanding EDC charges cannot be part of work-in-progress and upheld the CIT (A)'s decision to delete the addition.

In conclusion, the Tribunal dismissed the Revenue's appeal, affirming the CIT (A)'s decision to allow the interest expenditure as revenue expenditure and rejecting the claim that it should be part of the project cost. The judgment highlighted the distinction between penal and revenue expenditure, emphasizing the nature of the interest payment on EDC charges as a legitimate business expense.