2021 (6) TMI 235 - AT - Income Tax

Disallowance of prior period interest expenses which relates to work-in-progress - assessee pleaded that it had not claimed any expenditure or deduction towards the said prior period interest and that the same has only been debited to work-in-progress - HELD THAT - Admittedly, this interest expense though pertains to AY 2012-13 was never claimed as deduction by the assessee. If due provision has been made on mercantile basis then the same would have got included in the opening work-in-progress and the opening work-in-progress thereon would have increased byinterest expenses. Since no provision was made by the assessee in AY 2012-13 for this interest expense, it was not included in the opening work-in-progress. As assessee had included the same in the closing work-in-progress in AY 2012-13. Hence this is a clear case of omission of booking an expenditure to the closing work in progress, which was rectified during the year under consideration. In any case, we find that assessee has not claimed any deduction for the same warranting any disallowance. Hence, we also find that assessee has furnished Profit Loss Account for the year ended on 31.03.2013 without interest expenses and with interest expenses to drive home the point that loss for the year remains the same in both the scenario. As safely concluded that loss for the year continues to remain the same and hence the contention of the assessee that it had not claimed any deduction in the return of income for the AY 2013-14 towards prior period interest deserves to be accepted and accordingly the grounds raised by the assessee are allowed.

Summary

Issues:
Disallowance of prior period interest expenses in the assessment year 2013-14.

Analysis:
1. The appeal pertained to the disallowance of prior period interest expenses amounting to ?7,61,59,332/- relating to work-in-progress for the assessment year 2013-14.
2. The assessee, engaged in real estate development, had incurred a loss from business during the year, declaring a net loss of ?2,68,68,902/- initially, later revised to ?2,72,40,409/-.
3. The Assessing Officer observed the debiting of ?7,61,59,332/- towards prior period interest expenses for the assessment year 2012-13, which the assessee claimed was debited to the cost of inventory and not claimed as an expenditure.
4. Despite the genuineness of the interest expenditure not being questioned, the AO proceeded to disallow it, a decision upheld by the CIT(A).
5. The interest expenses were recorded as a "Prior Period Adjustment" in the Profit & Loss Account but were debited to the cost of inventory, forming part of the closing inventory.
6. The interest expenses were included in the closing work-in-progress, rectifying the omission of booking the expenditure in the prior period.
7. The assessee demonstrated that the loss for the year remained the same whether interest expenses were included or not in the Profit & Loss Account, justifying that no deduction was claimed for the prior period interest expenses.
8. The Tribunal concluded that the assessee's contention of not claiming any deduction for the prior period interest expenses was valid, and thus allowed the appeal.

This detailed analysis of the judgment showcases the intricacies of the case, focusing on the treatment of prior period interest expenses in the context of work-in-progress and the impact on the overall financials of the assessee.