2022 (5) TMI 599 - AT - Income Tax

Deduction u/s 36(1)(iii) - treatment given to the interest paid by the assessee on its loans, while the assessee takes it to the work in progress, but then in the computation of income, the same is claimed as a deduction under section 36(1)(iii) - double deduction for deduction of interest as also deduction of WIP at the pint of booking revenue - HELD THAT - The coordinate benches have consistently held that in view of the specific provisions under section 36(1)(iii), interest is to be allowed as a deduction irrespective of its capitalization as WIP, but while charging the WIP, corresponding reduction is to be allowed for the interest already claimed as deduction. In any event, the very foundation of disallowance is special bench decision in the case of Wall Street Construction 2005 (9) TMI 228 - ITAT BOMBAY-F which stands reversed in the case of CIT Vs Lokhandwala Construction Industries Limited 2003 (1) TMI 93 - BOMBAY HIGH COURT which holds good even today. The proviso to Section 36(1)(iii) does not come into play in the present case as the residential units are part of the stock in trade, and not the capital assets. Respectfully following the views so expressed by the coordinate benches, we approve the detailed and well-reasoned approach adopted by the CIT(A) and decline to interfere, in principle, in the matter. As regards the learned Departmental Representative s apprehension of double deduction, however, we consider it fit and proper to add that once these amounts are allowed as deduction in the year of incurring the expenditure, the same shall not be eligible for being allowed as deduction yet again as a part of the work in progress being debited to the profit and loss account in any subsequent year. The double deduction will thus not be permissible. The conclusions arrived at by the learned CIT(A), subject to this observation, are approved. Learned representatives fairly agree that whatever we decide for the assessment year 2013-14 will equally apply to the other two assessment years 2014-15 and 2015-16 as well. The conclusions arrived at by the learned CIT(A) for the other two years must also be approved, subject to the observations above, as well. Appeal dismissed.

Issues Involved:
1. Deletion of the addition of interest expenses under Section 36(1)(iii) of the Income Tax Act, 1961.
2. Applicability of the proviso to Section 36(1)(iii) introduced by the Finance Act 2003.
3. Treatment of interest expenses in the context of the percentage of completion method.

Issue-wise Detailed Analysis:

1. Deletion of the Addition of Interest Expenses under Section 36(1)(iii):
The primary issue revolves around whether the interest expenses claimed by the assessee under Section 36(1)(iii) should be allowed as a deduction. The assessee, engaged in real estate construction, followed the percentage of completion method for revenue recognition and claimed interest expenses as a deduction. The Assessing Officer disallowed this deduction, arguing that the interest should be capitalized to the work in progress (WIP) and allowed only when the corresponding income is offered to tax. This view was supported by the Special Bench decision in Wall Construction Co Ltd Vs JCIT (102 TTJ 505). However, the CIT(A) deleted the disallowance, relying on the Supreme Court judgment in Taparia Tools Ltd vs. DCIT (2015) 272 ITR 605 and the jurisdictional High Court's decision in Lokhandwala Construction Inds. Ltd. 260 ITR 579, which held that interest on borrowed funds used for stock-in-trade is deductible under Section 36(1)(iii).

2. Applicability of the Proviso to Section 36(1)(iii) Introduced by the Finance Act 2003:
The Assessing Officer argued that the proviso to Section 36(1)(iii), introduced by the Finance Act 2003, prohibits the allowance of interest costs if the borrowed funds are used for acquiring a capital asset. However, the CIT(A) found that the borrowed funds were used for stock-in-trade, not capital assets, making the proviso inapplicable. The CIT(A) relied on the Supreme Court's rejection of the SLP against the Bombay High Court's judgment in Lokhandwala Construction Inds. Ltd., which affirmed that interest on loans for stock-in-trade is deductible.

3. Treatment of Interest Expenses in the Context of the Percentage of Completion Method:
The Assessing Officer contended that the interest expenses should be capitalized to the WIP, as per the Accounting Standard 7 and the guidance note on accounting for real estate transactions issued by the ICAI. The CIT(A) disagreed, stating that interest expenses are a period cost and should be allowed as a deduction in the year incurred. The CIT(A) cited multiple ITAT decisions, including those in the cases of Ashish Builders Pvt Ltd vs. ACIT and Rohan Estates Pvt Ltd vs. ACIT, which supported the view that interest expenses should be charged to the profit and loss account in the year incurred, irrespective of their capitalization as WIP.

Conclusion:
The ITAT upheld the CIT(A)'s decision to delete the disallowance of interest expenses, agreeing that the interest on borrowed funds used for stock-in-trade is deductible under Section 36(1)(iii). The ITAT also noted that the proviso to Section 36(1)(iii) does not apply since the funds were used for stock-in-trade, not capital assets. The ITAT emphasized that the interest expenses should be allowed as a deduction in the year incurred, following the consistent view of the coordinate benches and the jurisdictional High Court's decision in Lokhandwala Construction Inds. Ltd. However, the ITAT clarified that once these amounts are allowed as a deduction in the year of incurring the expenditure, they should not be allowed again as part of the WIP in any subsequent year, to prevent double deduction.

Final Judgment:
The ITAT dismissed the appeals filed by the Assessing Officer for the assessment years 2013-14, 2014-15, and 2015-16, subject to the observation that double deduction of interest expenses is not permissible. The conclusions arrived at by the CIT(A) were approved, ensuring that the interest expenses claimed by the assessee were allowed as deductions in the respective assessment years.

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