2018 (6) TMI 420 - AT - Income Tax

Disallowance of the interest - payment of excessive interest on unsecured loan - arbitrary interest rate application on advances - Held that - No justification for the A.O. to make notional disallowance of ₹ 4,80,000/- by applying arbitrary interest rate of 12% on advances of ₹ 40 lakhs. Since the explanation given by the assessee in the written submissions reproduced above, have not been rebutted by the Revenue through any evidence or material on record, therefore, the calculation given by assessee for capitalizing interest in various projects is just and proper which is supported by book entries. The assessee availed balance amount in business and rightly claimed it to be revenue expenditure because all the amounts are coming-up in the mixed bank accounts maintained by assessee. Therefore, separate bifurcation would not be possible for the assessee. No disallowance to be made - Decided in favour of assessee Disallowance on account of interest on unsecured loans - Held that - The explanation of assessee have not been rejected by the authorities below. Therefore, considering the totality of the facts and circumstances of the case and that similar issue have been considered in A.Y. 2012-2013 above, the facts in this assessment year are on better footing, therefore, authorities below were not justified in disallowing the interest incurred by assessee wholly and exclusively for the purpose of business. The A.O. also has not brought any evidence on record if borrowed funds have been used for non-business purposes ? No nexus have been pointed-out between borrowed funds and non-business activities of the assessee or if borrowed funds have been used for the projects pending completion. In this view of the matter, we set aside the orders of the authorities below and delete the entire addition. - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance of interest on unsecured loans for A.Y. 2012-2013.
2. Disallowance of interest on unsecured loans for A.Y. 2014-2015.

Issue-wise Detailed Analysis:

1. Disallowance of Interest on Unsecured Loans for A.Y. 2012-2013:
The assessee claimed interest expenses in the Profit & Loss Account, of which a portion was capitalized for specific projects. The Assessing Officer (A.O.) questioned the capitalization and disallowed an additional amount, asserting that the interest on unsecured loans should be capitalized entirely due to their use in inventory and work-in-progress. The A.O. applied a flat interest rate of 12% on the unsecured loans and added the difference to the income of the assessee. Additionally, an advance given for a project was also subjected to interest capitalization.

The assessee contended that the authorities had misinterpreted the financial statements and that the interest capitalization was correctly done. The assessee provided detailed calculations and explanations, including a verification letter from the auditor correcting an error in the financial statements. The assessee argued that the A.O. had arbitrarily applied the interest rate without proper basis and had ignored the interest-free loans available to the assessee.

The Tribunal found that the assessee had provided a detailed and justified explanation for the interest capitalization, supported by financial records and auditor verification. The authorities below had not disputed the interest capitalized for specific projects but had incorrectly applied a flat interest rate. The Tribunal concluded that the disallowance was unjustified and deleted the entire addition.

2. Disallowance of Interest on Unsecured Loans for A.Y. 2014-2015:
The assessee's primary business involved construction projects, and during the year under appeal, the assessee was involved in two development projects. The A.O. disallowed the interest expenses claimed by the assessee, arguing that the entire money in the business entity comes into a common kitty and thus, the burden of proof was on the assessee to show the utilization of funds.

The assessee argued that the Model Town Project was ready for sale, and interest on unsecured loans was claimed as revenue expenditure. The assessee provided detailed accounts and bank statements, showing that the interest on loans was capitalized where necessary. The assessee maintained mixed bank accounts, making it difficult to trace the exact utilization of unsecured loans. The assessee also relied on Accounting Standard AS-16, which supports the cessation of interest capitalization when the asset is ready for sale.

The Tribunal found that the assessee had provided sufficient evidence and explanations for the interest claimed as revenue expenditure. The authorities below had not disputed the details provided by the assessee but had relied on a general principle without specific evidence. The Tribunal noted that the judgment relied upon by the A.O. had been overruled by the Supreme Court, and the assessee's explanation was consistent with the facts and accounting standards. The Tribunal concluded that the disallowance was unjustified and deleted the entire addition.

Conclusion:
Both the appeals of the assessee were allowed, with the Tribunal setting aside the orders of the authorities below and deleting the entire disallowance of interest on unsecured loans for both assessment years.