2018 (10) TMI 673 - AT - Income Tax

Business expenditure - amount paid for acquiring rights in the plot - nature of interest paid on borrowings - The assessee is engaged in business of real estate developments and construction. The assessee has carried the cost of the said I T Park being developed/constructed by the assessee as inventories/project work-in-progress. Held that - The borrowings made by the assessee on which interest expenditure were incurred were all mainly directed towards working capital for development/construction of the aforesaid I T Park including acquisition cost of the plot of land and also acquiring rights from the erstwhile JV partners. The assessee is continuously debiting interest cost to the carrying cost of inventories/project work-in-progress. The assessee debited ₹ 95,17,500/- towards interest for borrowing wrt acquisition costs for acquiring interest of erstwhile JV partners namely M/s Om Metals Limited and M/s Well Wisher Constructions and Finance P. Ltd. in the carrying cost of inventories/project work-in-progress during the year under consideration. The Revenue treated the entire transaction as sham and hence this interest also got disallowed. The Mumbai- tribunal has consistently since AY 2006-07 to 2011-12 has held the aforesaid transactions for acquisition of rights from erstwhile JV partners by the assessee in 50 acres of plot of land allotted by MIDC in Navi Mumbai for settin up I T Park and consequently payment of interest as genuine transaction allowable as business deduction while computing income. Decided in favor of assessee.

Summary

Issues Involved:
1. Whether the amount payable to Om Metals Ltd. and Wellwisher Construction and Finance Pvt Ltd. amounting to ?87.05 crores reflected in the books under 'Inventories' is a non-business expenditure.
2. Whether the disallowance of interest expense attributable to the monies borrowed for financing the payments to Om Metals Ltd. and Wellwisher Construction and Finance Pvt Ltd. and reducing such interest from the value of 'Inventories' is justified.

Issue-wise Detailed Analysis:

1. Amount Payable to Om Metals Ltd. and Wellwisher Construction and Finance Pvt Ltd. as Non-Business Expenditure:
The assessee, engaged in real estate development, had transactions with Om Metals Ltd. and Wellwisher Construction and Finance Pvt Ltd. amounting to ?87.05 crores, which were reflected as 'Inventories' in the books. The Revenue initially treated these transactions as sham and non-genuine, disallowing the amounts and considering them non-business expenditures. The CIT(A) upheld this view based on previous assessments.

However, the assessee argued that these transactions were genuine, supported by earlier tribunal decisions for AY 2006-07 to AY 2011-12, which upheld the genuineness of the payments made for relinquishing rights under a JV agreement for land allotted by MIDC. The tribunal noted that the payments were accepted as genuine in the hands of the recipients (Om Metals Ltd. and Wellwisher Construction and Finance Pvt Ltd.), and thus, could not be considered non-genuine in the hands of the assessee. The tribunal emphasized the involvement of multiple agencies, including government authorities, which further validated the genuineness of the transactions.

The tribunal concluded that the payments made to Om Metals Ltd. and Wellwisher Construction and Finance Pvt Ltd. were genuine business transactions and allowed the amounts to be reflected under 'Inventories'.

2. Disallowance of Interest Expense Attributable to Borrowings for Payments to Om Metals Ltd. and Wellwisher Construction and Finance Pvt Ltd.:
The AO disallowed the interest expense of ?95,17,500/- attributable to borrowings used for payments to Om Metals Ltd. and Wellwisher Construction and Finance Pvt Ltd., considering the transactions sham. This interest was debited to inventories by the assessee.

The tribunal, referencing its earlier decisions, held that since the transactions were genuine, the interest on borrowings for these payments should also be allowed. The tribunal noted that the assessee's project for setting up an IT Park was still under construction, and the interest costs were part of the carrying cost of inventories/project work-in-progress.

The tribunal directed the AO to delete the disallowance of interest, affirming that the interest expense incurred on borrowed funds for genuine business transactions should be allowed as a deduction.

Conclusion:
The tribunal allowed the appeal of the assessee, confirming that the payments to Om Metals Ltd. and Wellwisher Construction and Finance Pvt Ltd. were genuine business expenditures and that the interest expense on borrowings for these payments should be allowed as a deduction. The tribunal's decision was consistent with its earlier rulings for the assessee's previous assessment years.