2016 (11) TMI 1713 - AT - Income Tax

Interest income from the sister Concern - assessee had borrowed an amount from the Andhra Bank in the financial year 2010-11 on interest @18.25 p.a., out of which partial amount was advanced by the assessee to sister concern MDC @12% p.a - as per DR amount of interest paid to Andhra bank ought to have been capitalised to WIP as the amount was borrowed for working capital - HELD THAT - Assessee has borrowed the said amount from Andhra Bank for the purpose of working capital facilities which is used for making advance of ₹ 8 crores to MDC and also for other purposes for meeting administrative expenses. It is stated that assessee has advanced the said amount to MDC for commercial expediency and placed reliance on the decision of the Hon ble Supreme court in the case of SA Builders Limited 2006 (12) TMI 82 - SUPREME COURT The assessee is partner in MDC entitled for 50% share in profits and the said concern is also engaged in real estate and construction. The Revenue could not controvert the said contention of the assessee that the said amount was advanced keeping in view commercial expediency as stated above, thus keeping in view our above detailed reasoning, we are of the considered view that the addition made by the Assessing Officer by disallowing the interest expenses and adding the same to WIP is not sustainable keeping in view peculiar facts and circumstances of the case. The revenue is also not able to show that inventories are acquired out of borrowings and interest is to be capitalised keeping in view AS-16 issued by ICAI. The AS-2 issued by ICAI clearly stipulates that generally the interest shall not be added to the inventories as the same does not usually bring the inventories to the present location and condition The assessee has earned interest income from MDC f ₹ 3,37,40,072/- which is offered for taxation, while interest paid for Andhra Bank on OD is ₹ 1,59,27,795/- and hence there is net interest income which had been earned by the assessee. We have also noted a peculiar fact that advances received from customer by the assessee as at 31-03-2012 is ₹ 68.57 crores, while closing WIP is ₹ 45.04 crores, thus advances from customer received by the assessee are higher than closing WIP as at 31-03-2012. Thus, keeping in view our detailed discussions and reasoning as set out above, we donot find any infirmity in the appellate order of the learned CIT(A), which we confirm and refuse to interfere - Appeal of revenue dismissed.

Summary

Issues Involved:

1. Whether the interest expenses should be included in the closing work in progress (WIP).
2. Whether the differential interest paid to the bank and charged from the sister concern should be disallowed.

Issue-wise Detailed Analysis:

1. Inclusion of Interest Expenses in Closing Work in Progress (WIP):

The Revenue argued that the interest paid on a loan taken for business purposes should be included in the closing WIP. The Assessing Officer (AO) observed that the assessee, engaged in real estate development, had taken a loan from Andhra Bank for working capital, which was used for construction activities. The AO contended that the interest paid on this loan should be directly attributed to the construction activities and thus included in the closing WIP, relying on the Supreme Court decision in CIT v. British Paint India Pvt. Ltd. The AO added ?1,59,27,795/- to the income of the assessee and the closing WIP.

The assessee argued that the loan was for working capital, not specifically for construction, and thus the interest should be considered an indirect expense. The assessee referred to Accounting Standard 2 (AS-2) issued by ICAI, which states that interest and other borrowing costs are not usually included in the cost of inventories. The CIT(A) supported the assessee's view, noting that the loan was utilized for various purposes, including administrative expenses and advances to a unit where the assessee had a business interest. The CIT(A) deleted the addition made by the AO, concluding that the interest expenses were not directly attributable to the WIP.

The tribunal upheld the CIT(A)'s decision, emphasizing that the interest cost should not be added to the inventories as per AS-2. The tribunal also noted that the assessee had a positive net interest income, as the interest received from the sister concern was higher than the interest paid to the bank. The tribunal found no infirmity in the CIT(A)'s order and confirmed the deletion of the addition.

2. Disallowance of Differential Interest:

The AO disallowed the differential interest of ?54,54,724/- on the grounds that the assessee paid a higher interest rate (18.25% p.a.) to the bank while charging a lower interest rate (12% p.a.) from the sister concern, MDC. The AO argued that this practice was against the basic principle of earning profits and made the addition to the income of the assessee.

The assessee contended that the interest received from MDC was ?3,37,40,072/-, which was higher than the interest paid to the bank. The assessee also argued that the advance to MDC was made out of commercial expediency, as the assessee held a 50% share in MDC's profits. The CIT(A) observed that the assessee had sufficient own funds and that the loan to MDC was for business considerations. The CIT(A) allowed the assessee's ground on statistical purposes, noting that no separate addition of ?54,54,724/- was made by the AO.

The tribunal agreed with the CIT(A), noting that the assessee had a positive net interest income and that the advance to MDC was made for commercial expediency. The tribunal also highlighted that the Revenue had not made any disallowance of interest in the preceding year. The tribunal confirmed the CIT(A)'s order and dismissed the Revenue's appeal.

Conclusion:

The tribunal dismissed the Revenue's appeal and upheld the CIT(A)'s decision, confirming that the interest expenses should not be included in the closing WIP and that the differential interest disallowance was not warranted. The cross-objection of the assessee was also dismissed as withdrawn.