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TMI Blog2016 (1) TMI 1098X X X X Extracts X X X X X X X X Extracts X X X X ..... il 2013) under section 250 of the Income-tax Act, 1961 ('Act') on the following grounds which are independent and without prejudice to each other: Addition on account of disallowance of interest 1. erred in confirming the addition of Rs. 6,46,81,281/- to the income of the appellant on account of disallowance of interest paid on borrowed funds; 2. erred in confirming the action of the learned AO in capitalising the expenses incurred on interest debited to the Profit and Loss account by applying the Accounting Standard 16 (AS) "Borrowing Cost"; 3. should have appreciated the fact that the Appellant is a developer and engaged in the business of real estate and hence, any interest paid for project would be allowable per the provisions of section 36(1 )(iii) of the Act as incurred for the purpose of business; 4. failed to appreciate the fact that the Appellant has, followed a consistent accounting practice for recording interest expenses, wherein interest were never allocable to a particular project and the same has been accepted in past; 5. failed to appreciate that there is no such concept of qualifying asset and nonqualifying asset (as laid down by ICAI in AS16) in the In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , which worked out to 13.36%. During the year under consideration, the assessee was carrying on the construction activity in two types of projects i.e. where the sales of the respective units in different projects were offered to tax and other projects where no sales were offered to tax. The assessee had debited sum of Rs. 14,43,90,385/- under the head 'finance charges' to the Profit & Loss Account. As per Schedule 17 attached to the audit report, out of the above said amount, sum of Rs. 9,14,71,691/- was paid as interest on unsecured loan amounting to Rs. 100.80 crores and the balance sum of Rs. 5,29,18,694/- was paid as interest on secured loan amounting to Rs. 15.44 crores. Further, from the Schedule attached to the Balance Sheet, the Assessing Officer observed that the assessee had paid sum of Rs. 28,00,85,615/- towards advances for properties, had invested sum of Rs. 33,90,22,732/- in properties shown as inventories, sum of Rs. 93,94,61,134/- in project sites and work-in progress of various projects amounting to Rs. 65.95 crores. The total investment worked out to Rs. 221,79,45,000/-. In view of above, the Assessing Officer observed that the claim of deduction of entire amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isition of 'asset for extension of existing business or profession', until the asset is put to use. Further, he made reference to the provisions of section 32 of the Act and Rule 5 of Income Tax Rules, 1962 (in short 'the Rules'), where the expression 'asset put to use' finds place. The assessee further stressed that 'put to use concept' apply only to capital asset and such expression was never used for the case of stock-in-trade, as the latter was always held for sale and not for put to use. The disallowance thus, as per the proviso would not apply and additionally where capital borrowed had been utilized for the purpose of normal business activities of the construction and trading in properties carried on by the assessee, and not for the purpose of extension of the existing business, on this ground also, the proviso would not be applicable. Further contention of the assessee was that it was entitled to claim interest paid on borrowed capital, where capital was used for business purpose irrespective of the purpose of using such borrowed capital. Reliance was placed on the ratio laid down by the Hon'ble Supreme Court in DCIT Vs. Core Health Care Ltd. (2008) 167 Taxman 206 (SC) that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ported in 101 ITD 156 (SB) (Mum), was not applicable, wherein it was held that the interest identifiable with a project should be allowed only in the year when the project was completed and the income from that project was offered for taxation. Another point of distinction was that the method of accounting was not regularly followed in the matter before the Special Bench, whereas the assessee was following such method from year to year. Another plea before the authorities below was that the interest element which was charged to the Profit & Loss Account was related to spending in several projects at hand, plots in properties, working capital, etc. and could not be attributed or identifiable with a particular project. In such circumstances, where the interest cost could not be identified and attributed towards specific project, the partial disallowance of interest was not warranted. Reliance in this regard was placed on the decision of Pune Bench of Tribunal in DCIT Vs. Thakkar Developers reported in 115 TTJ 841. It was contended by the assessee that AS-16 was applicable only in cases where the cost directly attributable to construction of qualifying assets and where there is no suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Assessing Officer re-worked the utilization of interest bearing borrowed funds. However, since mixed funds were utilized for investment in qualifying assets, the proportionate interest out of interest debited to Profit & Loss Account amounting to Rs. 14.43 crores was disallowed, the same, as per the Assessing Officer, had been used for investment in qualifying assets and allowed to be capitalized. The interest capitalized was held to be set off against the profits derived from the qualifying assets. In view thereof, the Assessing Officer re-worked the proportionate interest relatable to such investments at Rs. 11,26,17,700/-. The Assessing Officer also directed that the said interest cost would be allowed to set off against the profits derived from the qualifying assets as and when declared by the assessee. 13. The CIT(A) after considering the submissions of assessee noted that the first issue to be decided was whether the borrowing cost was an admissible deduction under section 36(1)(iii) of the Act as claimed by the assessee notwithstanding the position that out of 17 building projects undertaken by the assessee, 12 projects were still in execution stage and no income was r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the year, the expenses except finance cost incurred in respect of these projects were capitalized and shown as work-in-progress under the head projects as on 31.03.2009. No sales had been offered during the year from 12 projects on the ground that the assessee recognized the profits on transfer of significant risks and rewards associated with a particular unit in the projects and the said projects had not reached that stage. On the other hand, the deduction in respect of entire borrowing cost was claimed under section 36(1)(iii) of the Act against the receipts of other five projects and other income of the assessee. As per the CIT(A), this method of accounting finance cost results in distortion of profits in a particular year. As per him, true profits could be determined only when the entire cost of the incomplete projects, including the finance cost was capitalized and added to the value of work-in-progress of these projects. For this proposition of matching concept, reliance was placed on the ratio laid down by the Hon'ble Bombay High Court in Taparia Tools Ltd. Vs. JCIT (2003) 260 ITR 102 (Bom). The CIT(A) further held that the ratio laid down by the Mumbai Special Bench of Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ready for intended use or sale soon after purchase or acquisition, the CIT(A) held that the proviso was not applicable. Even AS-16 recognized that the assets which are ready for use or sale when acquired are not qualified assets for the purpose of capitalization of borrowing cost. In view thereof, the CIT(A) held that the Assessing Officer was not justified in treating the land and advances for land of the aggregate value of Rs. 61,91,08,347/- as qualifying assets for the purpose of capitalization of borrowing cost relatable to these two assets. The interest attributable to the same as per the CIT(A), could not be capitalized and added to the cost of properties either under proviso to section 36(1)(iii) of the Act or AS-16. The CIT(A) acknowledged the order of Assessing Officer, wherein it was observed that the funds utilized by the assessee in the course of business were mixed funds and loans were not raised for any specific project. The funds were drawn from common pool of funds for its business activities by the assessee. In this background, the CIT(A) held that for capitalization of interest in the case of incomplete projects and for ascertaining true profits of the year, reco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wance of Rs. 11.26 crores by the Assessing Officer should be upheld. 18. The learned Authorized Representative for the assessee pointed out that the assessee was a promoter, developer and develops plots out of bigger plots and also develops buildings. The first contention raised by the learned Authorized Representative for the assessee was that the proviso to section 36(1)(iii) of the Act was not applicable. In respect of AS-16, it was pointed out that the same was not binding. He further pointed out that all accounting standards wherever applicable, have been made applicable w.e.f. 01.04.2015 and at the relevant time, no accounting standards were applicable, which could override the Income-tax provisions. He also submitted that the provisions of sections 80IB(10), 145, 10A and 10B of the Act are standalone provisions, under which profits had to be determined. Referring to the proviso to section 36(1)(iii) of the Act, he pointed out that the same applies for acquisition of assets 'for extension of existing business'. Dispute in the present appeal was in respect of stock-in-trade and as to whether proviso was applicable or main section applies. Our attention was drawn to the observ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aryana High Court in Nahar Poly Films Ltd. Vs. CIT reported in 13 taxmann.com 41. He further pointed out that Pune Bench of Tribunal in DCIT Vs. Thakkar Developers (supra) had held that the decision in Wall Street Constructions Ltd. Vs. JCIT (supra) was not applicable. Another point raised by the learned Authorized Representative for the assessee was that the said provision was inserted w.e.f. assessment year 2004-05 and no such adjustment was made in earlier years. However, the adjustment was made only in respect of working of interest cost under section 80IB(10) of the Act. 19. The learned Departmental Representative for the Revenue in reply, pointed out that under the proviso to section 36(1)(iii) of the Act, there were three conditions i.e. (a) it is to be applied against the acquisition of asset, (b) for extension of existing business and (c) whether capitalized or not. Since the asset was not defined under the Act, hence, reference is to be made to AS-16. Our attention was drawn to the order of CIT(A) at pages 25 to 28, who differentiated the current and capital assets. She further pointed out that the assessee himself had capitalized the cost of purchases as work-in-progres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and other 12 projects were under development and no part of the said projects were ready for sale. In addition, the assessee was also holding stock of lands and had also made advances for purchase of lands. During the year under consideration, the assessee had claimed interest expenditure of Rs. 14,43,90,385/- as revenue expenditure. The claim of the assessee was that it had incurred the above said interest expenditure for the purpose of carrying on its business and the same was allowable as revenue expenditure in its hands irrespective of some of the projects not being available for sale. The assessee for the year under consideration had shown total turnover of Rs. 29.87 crores and had offered sum of Rs. 39.08 lakhs as profit from construction business. The assessee was undertaking two types of projects i.e. one set of projects which were eligible for deduction under section 80IB(10) of the Act and the second set of projects which were not eligible for deduction under section 80IB(10) of the Act. The finance charges of Rs. 14.43 crores debited to the Profit & Loss Account constituted of sum of Rs. 9.14 crores paid as interest on unsecured loans amounting to Rs. 100.80 crores and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d there was no merit in capitalizing any part of the borrowing cost being relatable to cost of such project. The assessee was recognizing the cost of the project, which had not been sold during the year under the umbrella of work-inprogress but the case of the assessee was that no part of finance cost was to be treated as part of work-in-progress since the provisions of section 36(1)(iii) of the Act made the interest cost as eligible for deduction. 22. The provisions of section 36(1)(iii) of the Act and the proviso thereunder read as under:- "36(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in Section 28 - (i) and (ii)****** (iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession :- Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalized in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the proviso clearly establish that the said provisions are applicable to capital assets acquired by the assessee and are not relatable to current assets. In case, we accept the proposition offered by the Revenue authorities, then in order to work out the disallowance of interest in the hands of assessee in respect of current assets held by the assessee i.e. the investment in properties which has not been sold during the current year, then the date on which such asset was first put to use cannot be applied, because once the current assets held by the assessee is complete in all respects, the same will not be put to use, but would be sold in the market to the prospective buyers. In such circumstances, we hold that there is no merit in the observations of the Revenue authorities that the proviso is applicable both to the current and / or capital assets. In our opinion, the proviso is clearly applicable only to capital assets and has no relevance in respect of current assets. In other words, if the amount of capital borrowed by the assessee is utilized for acquisition of non-capital assets, then such interest is allowable in the hands of the assessee, in view of main substantive pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... where the interest cost is not attributable to the specific project undertaken by the assessee and constitute mixed funds in the hands of assessee, which in turn, were utilized for carrying on of the business in entirety, there is no merit in relying on Accounting Standard 16 to work out the disallowance of interest expenditure. Para 6 of Accounting Standard 16 clearly prescribed the borrowing costs which are directly attributable to acquisition, construction or production of qualifying asset, then the same is to be capitalized as part of the cost of assessee. The authorities below have failed to point out the borrowed finances were directly attributable to the construction of specific project, against which the disallowance is being made. In the absence of any identification of the finance costs being directly relatable to the so-called project under consideration, we find no merit in the reliance placed upon by the authorities below on the said Accounting Standards. In this regard, we find support from the ratio laid down by the Pune Bench of Tribunal in DCIT Vs. Thakkar Developers (supra). 26. Further, the issue before the Hon'ble Bombay High Court in CIT Vs. K. Raheja Pvt. Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apitalized and shown as workin- progress. The assessee was in the process of constructing the aforesaid 12 projects and the expenditure incurred for construction of the said projects was capitalized as work-in-progress and was to be claimed as deduction against the sales made of the units in the said projects. This method of accounting wherein the finance cost was not capitalized in proportion to the 12 projects undertaken by the assessee, as per the CIT(A) would result in distortion of profits in a particular year. Admittedly, where the assessee was using mixed funds and was accounting for the expenditure out of said mixed funds and where there is no basis for determining the funds utilized for the said projects, we find no merit in the orders of authorities below in this regard. Under the provisions of the Act, the interest expenditure perse is allowable as deduction in case the same is incurred during the course of carrying on of the business. Where the assessee has conceptualized a project and started constructing the same implies that the assessee is engaged in carrying on of its business of construction activity. Merely because, the project has not been completed and the unit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing concept is not embedded in law, unless the assessee himself applies matching concept in computation. The Hon'ble Apex Court has also considered the decision cited by the department in the case Madras Industrial Corporation case 225 ITR 802 (SC) for deferred revenue expenses. The court held that in that case the assessee itself chose to defer revenue expenses so the court allowed the same. Otherwise there is no doubt that under the Act the concept of deferred revenue is not in existence." 31. Applying the said proposition laid down by the Hon'ble Supreme Court, we hold that the assessee is entitled to the claim of deduction of interest expenditure in the year of claim. 32. The CIT(A) has also applied the proviso to section 36(1)(iii) of the Act in respect of the interest relatable to 12 incomplete projects, which were in execution stage and as per the CIT(A), the said proviso came into play in respect of such projects. As held by us in the paras herein above, wherein we have held that the provisions of the proviso to section 36(1)(iii) of the Act are applicable to capital assets only and not to current assets, we find no merit in the proposition proposed by the CIT(A). The so- ..... X X X X Extracts X X X X X X X X Extracts X X X X
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