2021 (10) TMI 686 - HC - Income Tax

Claim of interest expenditure on loan obtained for the purchase of land in MRC Nagar - Significance of term put to use - as per AO assessee, having not commenced the project in MRC Nagar and had not offered any income from the project, all the expenditures, which are specifically attributable to the project, have to be accounted as 'Work-in-Progress' and only when the income is generated and offered from the project, the expenditure can be claimed - HELD THAT - When the appeal was being heard by the CIT(A), the assessee furnished an Abstract of Expenses pertaining to MRC Nagar project and the expenses were in the nature of advertisement expenses, architect fees, CMDA charges, consultancy charges, electricity charges, legal fees, rent, security charges, site expenses, various labour charges and purchase of materials. Assessee had also furnished the ledger accounts for these expenses and also the facts that they carried on major work of demolition of the existing structure which was newly built by the previous owner for Hotel business and this demolition was done by the assessee. This factual position would go to show that the land was put to use in the Assessment Year under consideration. Tribunal had rightly noted that the term put to use in the proviso in Section 36(1)(iii) would be applied to capital asset/income earning apparatus/facilitating the business activity and therefore, the Statute envisages the importance of such capital asset should be put to use in the business in contra distinction to the inventory of the assessee. Tribunal noted that the inventory in the business/holding of inventory in the business by itself is a business activity in the normal course and in continuation of business of construction pursued by the assessee - attempt to apply the proviso to the case of the assessee would lead to wrong interpretation of law and therefore, the reasons given by the Assessing Officer to disallow the interest expenditure by applying the provisions of Section 36(1)(iii) is not in accordance with law - Tribunal noted that the assessee is into the business of Real Estate Development and in the process of executing two projects at different places and the Assessing Officer was not justified in treating the two projects on stand-alone basis and also that the property in MRC Nagar was not put to use. Tribunal noted that the assessee has offered substantial income from the Atlantic project and the attempt to apply Matching Concept principle is misconceived. Tribunal was right in allowing the appeal filed by the assessee and holding that the term put to use applies to capital asset only because capital asset is held to facilitate the business activity and sometimes, it needs to be prepared after it is acquired for being used to facilitate the business activity and in the instant case, the assessee was able to establish that substantial activities had been done in the project, which would go to show that the property purchased has been put to use. - Decided against revenue.

Summary

Issues Involved:
1. Whether the Tribunal was right in deleting the additions made by the AO regarding the capitalization of interest cost for the MRC Nagar project.
2. Whether the interest expenditure pertaining to the MRC Nagar project, which is under development, should be capitalized and added to the closing work in progress.

Issue-wise Detailed Analysis:

1. Deletion of Additions by the Tribunal:
The Revenue challenged the Tribunal's decision to delete the additions made by the Assessing Officer (AO) concerning the capitalization of interest cost for the MRC Nagar project. The AO had observed that the loan obtained by the assessee was specifically for purchasing land in MRC Nagar. Since the project had not commenced and no income was generated from it, the AO held that the expenditure should be accounted as 'Work-in-Progress' and not claimed as revenue expenditure. The Tribunal, however, found that the assessee was in the business of Real Estate Development and the loan was for business purposes. The Tribunal noted that the land was put to use in the Assessment Year under consideration, as evidenced by various expenses incurred by the assessee, such as advertisement expenses, architect fees, and demolition of existing structures. The Tribunal concluded that the term "put to use" applies to capital assets and not inventory, and thus, the AO's disallowance of interest expenditure was incorrect.

2. Capitalization of Interest Expenditure:
The AO argued that the interest expenditure for the MRC Nagar project should be capitalized as the project was under development and no income was generated from it. The AO referred to Accounting Standard 16 (AS-16), which mandates that borrowing costs directly attributable to the acquisition, construction, or production of a qualifying asset should be capitalized. The Tribunal, however, held that AS-16 was not applicable in this case. The Tribunal noted that the assessee's business involved executing multiple projects, and the segregation of projects by the AO was incorrect. The Tribunal emphasized that the inventory held by the assessee was part of the business activity, and the purchase of inventory should be considered a continuation of the same business activity, not an extension. The Tribunal also dismissed the AO's reliance on the Matching Concept, stating that the assessee had offered substantial income from another project (Atlantic project) and the interest expenditure should be allowed as a deduction under Section 36(1)(iii) of the Income Tax Act.

Conclusion:
The Tribunal's decision to allow the appeal filed by the assessee was upheld, and the Revenue's appeal was dismissed. The Tribunal correctly interpreted the term "put to use" to apply to capital assets and not inventory. The substantial activities undertaken by the assessee in the MRC Nagar project demonstrated that the property was put to use. Consequently, the substantial questions of law were answered against the Revenue, and the interest expenditure claimed by the assessee was allowed as a deduction.