2021 (4) TMI 1308 - AT - Income Tax

Interest disallowance u/s 36(1)(iii) - assessee had borrowed funds from bank and group entities and paid aggregate interest - Assessee claimed deduction of net interest from business income in statement of computation of income on the reasoning that interest expenditure was periodic cost and hence, an allowable deduction u/s 36(1)(iii) - going by Accounting Standard 7 issued by Institute of Chartered Accountants of India (ICAI), AO opined that expenses directly related to the project were to be debited to cost of project and could be claimed as deduction only in the year in which corresponding income of the project was credited in Books of Accounts and offered to tax - HELD THAT - It is quite evident that the assessee was following percentage of completion method of accounting to recognize revenue from operations as against the case law of Tribunal Special Bench in M/s Wall Street Construction Limited. 2005 (9) TMI 228 - ITAT BOMBAY-F which deal with a case wherein the assessee was following completed contract method and therefore, the said decision was not applicable to the facts of the case, as rightly held by learned first appellate authority. As undisputed fact that the assessee was engaged in real estate construction and had borrowed capital for business purposes. No other diversion of income has been alleged by Ld. AO. As noted by Ld. CIT(A), the interest was paid to debenture holders, financial institutions as well as unsecured loan creditors and the loan was utilized for business purposes. The funds were borrowed for the purpose of construction and have gone into the projects of the assessee which constitute assessee s stock-in-trade and not capital asset. In view of these clear cut findings, the adjudication of Ld. CIT(A) could not be faulted with. Another important fact is that the assessee has followed consistent accounting treatment to charge interest expenditure in the accounts. Therefore, the ground thus raised by the revenue stand dismissed. Set-off of brought forward losses - HELD THAT - This ground would also not survive in view of the fact that the provisions of Sec.79 were not applicable to the assessee since assessee is a company in which public is substantially interested. This fact could not be controverted by revenue before us. Therefore, this ground also stands dismissed.

Summary

Issues:
1. Deletion of interest disallowance under section 36(1)(iii)
2. Set-off of brought forward losses

Analysis:

Deletion of interest disallowance under section 36(1)(iii):
The appeal by Revenue contested the order of Ld. Commissioner of Income Tax (Appeals) regarding the addition of ?4,39,49,000 under section 36(1)(iii) and its capitalization to work in progress. The assessee, engaged in real estate, followed the percentage of completion method of accounting. The dispute arose regarding the deduction of net interest of ?439.49 Lacs from business income under section 36(1)(iii). The Ld. AO disallowed the interest expenditure based on Accounting Standard 7, stating that interest cost should be allowed as a deduction only in the year when corresponding income is offered to tax. However, the Ld. CIT(A) allowed the deduction, citing judicial precedents and the nature of the funds borrowed for business purposes. The Tribunal concurred with the Ld. CIT(A) and directed the deletion of the addition, emphasizing that interest paid for capital borrowed for business purposes constitutes an allowable deduction.

Set-off of brought forward losses:
The second issue pertained to the set-off of brought forward losses amounting to ?741.37 Lacs. The Ld. AO restricted the set-off to ?308.48 Lacs due to changes in shareholding, despite the allowance in the previous assessment year. The Ld. CIT(A) directed the Ld. AO to set-off the eligible carry forward losses, stating that the provisions of Sec.79 were not applicable to the assessee as it was a company in which the public was substantially interested. The Tribunal upheld this decision, noting that Sec.79 did not apply to the assessee. Consequently, the ground for set-off of brought forward losses was dismissed.

In conclusion, the Tribunal dismissed the appeal, upholding the Ld. CIT(A)'s decisions on both issues. The assessee's consistent accounting treatment and the nature of funds borrowed for business purposes supported the allowance of interest deduction under section 36(1)(iii). Additionally, the provisions of Sec.79 were deemed inapplicable to the assessee, allowing the set-off of brought forward losses.