2019 (5) TMI 1274 - HC - Income Tax

Deduction of Interest Expenditure u/s 36(1) - Capital OR revenue - method of accounting prescribed u/s 145A VS - Proviso to Section 36(1) - engaged in the business of Real Estate - interest on the borrowed capital to purchase the land - interest paid was admittedly capitalised in books - HELD THAT - The Proviso to Section 36(1) of the Act incorporated in Part D of Chapter IV of the Act providing for the Method of Computation of Total Income , quoted above, will, in our opinion, override the provisions of Section 145A, which is incorporated in Chapter IV of the Act relating to Procedure for Assessment . The words in the Proviso to Section 36(1) of the Act whether capitalised or not will override the accounting practice followed in the Books of Accounts by the Assessee. The Assessee has admittedly capitalised the interest paid on the borrowed capital in the present case. The Assessee has also not claimed before us or before the Authorities below that the land in question was put to use in the Assessment Years in question. Mere purchase of the land in the Years in question out of the borrowed capital does not entitle the Assessee to claim such interest paid on borrowed capital as a deductible expenditure in the present Assessment Years merely on the basis of method of accounting prescribed u/s 145A which was brought in the statute to undo the effect of the decision of the Delhi High Court which quashed the CBDT Notification finding it to be ultra vires. The method of accounting provided for valuation of inventory u/s 145A does not determine the allowability of the expenditure. The Proviso to Section 36(1), which says that such claim of deduction will be allowed in the Assessment Years, when it was put to use, will override the provisions contained in Section 145A. Since the position of law and the inter play of the above provisions are very clear, we do not find any substantial question of law to be arising in the present case for our consideration. - Decided against assessee.

Summary

Issues:
1. Deductibility of interest expenditure in the business of the Assessee.
2. Classification of interest expenditure as capital in nature.
3. Compliance with accounting practices under the Income Tax Act.

Analysis:

Issue 1: Deductibility of interest expenditure
The Assessee, engaged in Real Estate business, appealed the disallowed claim of interest expenditure on borrowed capital for land purchase. The Tribunal observed that the interest expenditure was capitalized in the books as work in progress due to the ongoing projects. The Assessee claimed the interest expenditure as a deduction in the income computation memo for tax payments. The Tribunal held that the claim was not in line with Accounting Standards or statutory provisions, as the projects were yet to generate income. The Assessee's conduct indicated treating the expenditure as capital in nature. The Tribunal concluded that the interest expenditure was capital and not allowable as a deduction for tax purposes.

Issue 2: Classification of interest expenditure
The Assessee argued that post the insertion of Section 145A, interest paid on borrowed capital should be allowed as a deduction, irrespective of capitalization. The Revenue contended that deduction is permissible only when the asset is put to use. The Court noted that the Proviso to Section 36(1) overrides accounting practices, requiring deduction only when the asset is utilized. The method of accounting under Section 145A does not determine deductibility. As the land remained unused, the deduction for interest expenditure was not allowable in the Assessment Years in question.

Issue 3: Compliance with accounting practices
The Court emphasized that the Proviso to Section 36(1) takes precedence over Section 145A, emphasizing deduction eligibility upon asset utilization. The Assessee's capitalization of interest and non-usage of the land in question during the Assessment Years led to the dismissal of the Appeals. The Court found no substantial question of law for consideration, resulting in the dismissal of the Assessee's Appeals.

In conclusion, the Court upheld the disallowance of interest expenditure deduction, highlighting the importance of asset utilization for deduction eligibility, overriding accounting methods. The Appeals were dismissed, emphasizing adherence to statutory provisions for tax deductions.