2018 (4) TMI 694 - AT - Income Tax

Disallowance of interest payments - Held that - Interest expenses incurred by the assessee have been added to the Closing Stock of Work in progress. Hence if this claim of expenditure is disallowed, it would result into reduction in the Cost of Work-in-progress. By any stretch of imagination this cannot be considered as income of the assessee as the same has only been carried forward as Cost to the future years and not been claimed as expenditure for this year. Since the amount is not at all debited to the Profit & Loss A/c, the addition of the Interest Paid to the income of assessee firm by the AO is bad in law. No merit in the action of lower authorities for adding the interest paid by assessee which was added in the work in progress during the years under consideration and has not been claimed as expenditure. Appeals of assessee are allowed.

Summary

Issues:
Appeals filed by the assessee against the disallowance of interest payments for A.Y. 2010-11, 2011-12, and 2012-13.

Analysis:
In the judgment, the Appellate Tribunal considered the appeals filed by the assessee against the disallowance of interest payments in the years under consideration. The assessee, a partnership firm engaged in construction and development activities, had various ongoing projects. The disallowance of interest payments was a key issue in all the years. The Tribunal examined the facts, including the projects at Wadala, Lalbaug, Parel Sewri Division, and Indira Nagar, Jogeshwari. The Tribunal noted that the assessee had entered into agreements with developers, made payments, but due to delays and cancellations, received the money back in some instances.

The Assessing Officer (AO) disallowed the interest expenditure, considering it not in the course of the assessee's current business. However, the Tribunal found that the borrowing and advancing of money for projects were part of the regular course of the assessee's business as a builder. The Tribunal emphasized that in the construction business, projects may not always materialize due to various factors, and exiting a project can be a prudent business decision. The Tribunal highlighted that the interest expenses were added to the cost of work-in-progress and not claimed as expenditure in the Profit & Loss account.

The Tribunal referred to various judicial decisions, including those by the Calcutta High Court, Bombay High Court, Bombay Tribunal, Supreme Court, and Delhi High Court, which emphasized the allowability of interest paid on borrowed capital for business purposes. The Tribunal also cited guidelines from the Institute of Chartered Accountants of India regarding project costs and borrowing costs in real estate transactions. Additionally, the Tribunal referenced a Pune Tribunal case where a similar disallowance of interest expenditure was overturned.

Ultimately, the Tribunal concluded that the interest paid by the assessee, added to the work in progress and not claimed as expenditure, should not have been added to the income of the assessee. Following the legal principles and precedents discussed, the Tribunal allowed the appeals of the assessee, ruling in favor of the assessee regarding the disallowance of interest payments in the years under consideration.

The judgment highlighted the commercial expediency, business purpose, and prudent decision-making by the assessee in the context of the construction and development business, leading to the reversal of the disallowance of interest payments by the lower authorities.