2022 (4) TMI 1469 - AT - Income Tax

Addition u/s 36(1)(iii) - interest expenditure incurred during the year - assessee has considered the interest component in the work in progress - contentions of the Ld. AR that the assessee is following the mercantile method of accounting and the revenue recognition is as per the project completion method of Accounting Standard of ICAI. But the A.O. was not satisfied with the explanations and disallowed the claim and added to the work in progress.- As per assessee interest expenses have been claimed as deduction in the year of incurrence and the interest is periodic cost and the claim has to be allowed u/s 36(1)(iii) - CIT(A) has considered the assessee s submissions on the interest capitalization and is of the opinion that it is a recurring issue and dealt on the jurisdictional High Court and the Honble Tribunal decisions and directed the A.O. to delete the addition and allowed the grounds of appeal of the assessee HELD THAT - As held in the assessee s group company M/s Palava Developers Pvt Ltd and Lodha Developer 2020 (4) TMI 842 - ITAT MUMBAI since the revenue could not controvert the findings of the Ld.CIT(A) that the project constructed by the assessee for which the loans have been taken is not a stock in trade and also the other findings of the Ld.CIT(A) we do not find any valid reason to interfere with the findings of the Ld.CIT(A) and accordingly we sustain the order of the Ld.CIT(A) on this issue Also in M/S. NATIONAL STANDARD PVT. LTD. 2021 (4) TMI 1308 - ITAT MUMBAI it is 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 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 - DR could not controvert the findings of the CIT(A) on this disputed issue with any new cogent evidence/ material information to take a different view. Accordingly we do not find any infirmity in the order of the CIT(A) -Decided against revenue.

Summary

Issues Involved:
1. Deletion of addition of Rs. 3,44,34,000/- made by the A.O u/s 36(1)(iii) and capitalized to work in progress.
2. Allowing the interest payment of Rs. 3,09,205/- on unsecured loans alleged to be bogus accommodation entries.

Detailed Analysis:

1. Deletion of Addition of Rs. 3,44,34,000/- u/s 36(1)(iii):

The assessee, engaged in land development and real estate, filed a return for A.Y. 2013-14 showing a loss. During scrutiny, the Assessing Officer (A.O.) noted that the assessee followed the mercantile system of accounting and percentage completion method for revenue recognition. The assessee borrowed interest-bearing funds, and the net interest expenses of Rs. 344.34 lakhs were debited to the profit and loss account. The A.O. disallowed this interest expense, capitalizing it to work in progress, as he believed it should not be claimed under Section 36(1)(iii).

The CIT(A) reversed this decision, citing that the interest expense is a recurring issue and should be allowed as a deduction under Section 36(1)(iii). The CIT(A) relied on the jurisdictional High Court and Tribunal decisions, including the case of Lokhandwala Construction Industries Ltd., which held that interest on loans for stock-in-trade is deductible. The revenue appealed this decision, but the Tribunal upheld the CIT(A)’s order, emphasizing the consistent judicial stance that interest expenses related to business operations are deductible under Section 36(1)(iii), regardless of whether they are capitalized in the books.

2. Allowing Interest Payment of Rs. 3,09,205/- on Unsecured Loans:

The A.O. disallowed the interest payment on unsecured loans, labeling them as bogus accommodation entries. However, the CIT(A) allowed this interest payment, considering the assessee's detailed submissions and supporting judicial precedents. The Tribunal supported the CIT(A)’s decision, noting that the interest expenses were incurred for business purposes and were consistent with the legal provisions and past judicial decisions.

Conclusion:

The Tribunal dismissed the revenue’s appeal, affirming that the interest expenses claimed by the assessee under Section 36(1)(iii) are deductible. The Tribunal emphasized that the interest on funds borrowed for business purposes, including stock-in-trade, is allowable as a deduction. The Tribunal also noted that the CIT(A) had thoroughly considered the relevant laws, amendments, and judicial decisions before arriving at the conclusion. Thus, the Tribunal found no reason to interfere with the CIT(A)’s order. The appeal by the revenue was dismissed, and the CIT(A)’s order was upheld.