2022 (12) TMI 356 - AT - Income Tax

Disallowance u/s 36(1)(iii) - AO held that the assessee did not capitalize any interest on such loans in respect of land classified as current asset - interest capitalization in case of fixed asset and not with respect to current asset - CIT-A deleted the addition by holding that the land is stock-in-trade - HELD THAT - Undisputedly, the stock-in-trade are to be valued on conservative basis on lower of cost or market value. The interest costs are not to be capitalized along with stock-in-trade. This being so, the interest cost so paid by the assessee towards stock-in-trade would be revenue expenditure for the assessee. This situation would be akin to a situation wherein the assessee has borrowed working capital loans to procure stock and paid interest on such loans. In such a case, the interest costs are not to be capitalized with stock-in-trade but interest payment would become part of trading operations for the assessee and the same are allowable as revenue expenditure. The proviso to Sec.36(1)(iii) as introduced w.e.f. 01.04.2004 would apply only in situation wherein the capital has been borrowed for acquisition of fixed assets and not otherwise. The Hon ble Court Ceebros Hotels (P.) Ltd. 2021 (10) TMI 686 - MADRAS HIGH COURT inter-alia, confirmed the stand of Tribunal that the term put to use in the proviso to Sec.36(1)(iii) would apply to capital assets / 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 contradistinction to the inventory of the assessee. The decision of Bangalore Tribunal in DCIT vs. Cornerstone Property Investment (P) Ltd. 2020 (8) TMI 366 - ITAT BANGALORE also support the view that interest paid on borrowed funds for acquisition of land which was an inventory would be allowable u/s 36(1)(iii). The decision of Hon ble High Court of Madras in the case of Mahindra World City Developers Ltd. 2019 (5) TMI 1274 - MADRAS HIGH COURT as referred to by Ld. Sr. DR, is a case wherein proviso to Sec.36(1)(iii) has been found to be applicable and this case laws deals with interest on capital borrowed to acquire capital assets. Therefore, this case law does not apply to the facts of case before us. Revenue appeal dismissed.

Summary

Issues:
1. Disallowance u/s 36(1)(iii) for interest paid on loans for land classified as stock-in-trade.
2. Interpretation of relevant case laws and proviso to Section 36(1)(iii) of the Income Tax Act.
3. Application of Accounting Standards in capitalizing interest costs.
4. Adjudication of appeal by Revenue for Assessment Year 2016-17.

Analysis:

Issue 1: Disallowance u/s 36(1)(iii) for interest paid on loans for land classified as stock-in-trade:
The Revenue appealed against the order of the Commissioner of Income Tax (Appeals) regarding the disallowance of interest paid by the assessee on loans for land classified as stock-in-trade. The Assessing Officer disallowed a portion of the interest under Section 36(1)(iii) as the capital was borrowed for acquiring the land. The Revenue contended that interest paid on such loans should not be allowed as a deduction. However, the assessee argued that the land formed part of stock-in-trade and interest costs should be treated as revenue expenditure. The Tribunal found that interest costs on stock-in-trade are allowable as revenue expenditure and not to be capitalized, as per relevant case laws and provisions.

Issue 2: Interpretation of relevant case laws and proviso to Section 36(1)(iii) of the Income Tax Act:
The Tribunal analyzed various case laws cited by both parties, including the decision of the Bombay High Court in Jayantilal Investments case, which supported the assessee's position. The Tribunal distinguished the applicability of the proviso to Section 36(1)(iii), stating that it applies to capital borrowed for fixed assets and not stock-in-trade. The Tribunal also referred to the Madras High Court's decision in CIT v. Ceebros Hotels, emphasizing that the term 'put to use' in the proviso applies to capital assets facilitating business activities, not inventory. The Tribunal concluded that the proviso did not impact the case at hand.

Issue 3: Application of Accounting Standards in capitalizing interest costs:
The Assessing Officer relied on Accounting Standards to justify the disallowance of interest under Section 36(1)(iii). However, the Tribunal noted that interest is to be treated as a period cost and allowed as a deduction when incurred. The Tribunal emphasized that interest on stock-in-trade should be considered as revenue expenditure, aligning with the Accounting Standards and case laws cited by the assessee.

Issue 4: Adjudication of appeal by Revenue for Assessment Year 2016-17:
The Tribunal dismissed the Revenue's appeal for the Assessment Year 2016-17, upholding the Commissioner of Income Tax (Appeals)'s decision in favor of the assessee. The Tribunal concluded that the interest costs on loans for land classified as stock-in-trade were allowable as revenue expenditure, based on the nature of the business activities and legal interpretations provided in the judgment.

In conclusion, the Tribunal's detailed analysis and interpretation of relevant provisions, case laws, and Accounting Standards led to the dismissal of the Revenue's appeal, affirming the treatment of interest costs as revenue expenditure for the assessee in the context of land classified as stock-in-trade.