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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 ..... his regard. Where the assessee is engaged in the business of construction and development and the project undertaken by the assessee constitute stock in trade / work-inprogress and are not capital assets owned by the assessee, the proviso to section 36(1)(iii) of the Act do not apply and there is no merit in restricting the deduction on account of interest expenditure on loan availed for carrying on the business of the assessee. Accordingly, we direct the Assessing Officer to allow the expenditure of ₹ 11,26,17,000/- in the hands of the assessee. At this juncture, we also want to refer to the alternate plea raised by the assessee before the Assessing Officer that at best disallowance of ₹ 52,15,480/- can be made being attributable to qualifying assets. The said alternate contention was without prejudice to the main contention and in view of our allowing the claim of the assessee in totality, we find no merit in the alternate plea raised by the assessee. Consequently, the grounds of appeal raised by the assessee are allowed and the grounds of appeal raised by the Revenue are dismissed.- Decided in favour of assessee - ITA No.900/PN/2013, ITA No.1147/PN/2013 - - - D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the entire interest free funds available with the Appellant against the qualifying assets, while computing the aforesaid disallowance. Erroneous levy of interest under section 234B 7. has erred in levying interest under section 234B of the Act. Any consequential relief, to which the Appellant may be entitled under the law in pursuance of the aforesaid grounds of appeal, or otherwise, may thus be granted. The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing of the appeal, so as to enable the Hon ble Tribunal to decide this appeal according to law. 4. The Revenue in ITA No. 1147/PN/2013 has raised the following grounds of appeal:- 1) The CIT (A) has erred in law and on facts by partly allowing interest amount, disallowed u/s 36(1)(iii) of the Income Tax Act , 1961. 2) The CIT(A) should have upheld the order of the Assessing Officer by confirming Interest Disallowed ₹ 11,26,17,000/- by AO u/s 36(1)(iii) of the I T Act, 1961. 3) The Order of the C1T(A) may be vacated and that of Assessing Officer be restored. 4) The appellant craves leave to add, amend or alter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f section 36(1)(iii) of the Act. The said section 43(1) of the Act talks of actual cost in so far as the interest paid on borrowings made for acquisition of capital assets are concerned. Since both the provisions co-existed under the Act, the Assessing Officer held that in such circumstances, the option exercised in the books of account would be decisive. In case of existing business, the interest paid on borrowings for acquisition of capital assets could be treated as revenue expenditure after the assets have been put to use, as well as capital expenditure, before it was put to use. Reliance was placed on Accounting Standard 7 issued by the Institute of Chartered Accountants of India (ICAI), wherein it is prescribed that the finance costs are specifically attributable to a particular contract and the same had to be included as part of accounting contract costs. Further, the said accounting mandate is fortified by Accounting Standard 16 issued in the year 2000. The Assessing Officer was of the view that building project would come under the definition of qualifying asset and the method to be adopted for treatment of finance costs in respect of qualifying asset, was prescribed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction was not started during the relevant year, the claim for deduction of interest on borrowings made for investment in machinery was allowed under section 36(1)(iii) of the Act. Further, reliance was placed on the ratio laid down by the Hon ble Bombay High Court in CIT Vs. Lokhandwala Constructions Industries Ltd. reported in 260 ITR 579 (Bom), wherein following the aforesaid principle, it was held that the construction project undertaken by the assessee constituted its stock-in-trade and hence, interest payable on loan availed for execution of the said project was entitled for deduction under section 36(1)(iii) of the Act. The assessee further contended that AS-16 was not relevant and once the claim of deduction was covered by specific provision i.e. under section 36(1)(iii) of the Act, the same should not be disallowed. Further contention of the assessee in this regard was that even if AS-16 was to be applied and the interest cost was to be capitalized, the deductibility of interest for tax purpose would not be impaired and the assessee is entitled to claim the deduction for computing the taxable income. 10. The next contention in this regard was that the provisions of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of the year. The assessee also contended that where mixed funds were available, a presumption would apply that non-interest bearing funds were utilized for making investment in qualifying assets and in this regard, the assessee drew statement of qualifying assets and non-qualifying assets under various heads and allocated interest expenses and pointed out that out of total borrowed funds of ₹ 116 crores, ₹ 112 crores had been utilized for spending on non-qualifying assets and spending on qualifying assets had largely been made through interest free source of funds. Accordingly, without admitting any disallowance, in view of the directions of the Assessing Officer, the disallowance of interest as per assessee s calculations could be restricted to ₹ 52,15,480/-. Rejecting the explanation of the assessee, the Assessing Officer held that building project would come under the definition of qualifying asset and the method adopted for treatment of finance costs in respect of qualifying asset would be as per para 6 of AS-16, which provides that the borrowing cost that is directly attributable to the acquisition, construction or production of a qualifying asset, should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar. The CIT(A) was of the view that with reference to provisions of section 36(1)(iii) of the Act and its proviso, the issue has to be seen from the prospective that the interest paid excluded interest paid for execution of 12 projects at different locations and hence, the first condition that the interest was paid in respect of capital borrowed for acquisition of asset was satisfied. As regards second contention of the assessee that the extension of existing business has to be read in conjunction with the expression put to use , which applies only to capital assets and not in the context of stock-intrade since the same was held for sale and not for put to use , was held to be not tenable. The CIT(A) was of the view that the word used is asset for extension of existing business and proviso does not say for acquisition of capital asset, where the proviso does not make a distinction between current asset or capital asset. Reference was made to the recommendations made by the Kelkar Committee and the CIT(A) observed that in the proviso, the Legislature has used the word assets in the final enactment, though in the recommendations of the Committee, the words were cost of capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T (supra), though not directly applicable to the facts of the present case, but the general principle laid down by the Special Bench was applicable and the interest relatable to a particular project had to be added to the work-in-progress till the income was recognized from the project. In respect of reliance on the decision in CIT Vs. Lokhandwala Constructions Industries Ltd. (supra), the CIT(A) observed that the same was not applicable as it was rendered prior to insertion of proviso to section 36(1)(iii) of the Act. Secondly, the controversy in the present case was not whether projects in questions are stock-in-trade or capital assets. The dispute was whether borrowing cost relatable to these projects, which take a substantial period of time to get ready for their intended use or sale, i.e. qualifying assets defined in AS-16 needs to be capitalized and added to the cost for the project. In respect of second reliance on the decision in DCIT Vs. Thakkar Developers (supra), the CIT(A) pointed out that the said decision was also rendered before the proviso was introduced. Secondly, Pune Bench of Tribunal did not have benefit of AS-16 while rendering the judgment. As regards the prin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to be made, was the contention of the Assessing Officer, but the contention of the assessee in this regard was that in view of specific provisions of the Act i.e. section 36(1)(iii) of the Act, the same prevails over the treatment for the purpose of accounting and once any claim is allowable under the Act, the same could not be disallowed because of different treatment as suggested in any other Act, Rules, Regulations, Accounting Standards, etc. The CIT(A) admitted to the proposition that accounting treatment or accounting standards should not determine the allowance of deduction if there is a specific provision for deduction under the provisions of Income Tax Act. But, since the deduction under section 36(1)(iii) of the Act was not admissible in respect of interest relatable to 12 incomplete projects, which were in execution stage and the proviso to section 36(1)(iii) of the Act came to play in respect of these projects. In such circumstances, accounting principles or relevant accounting standards had to be taken into account to ascertain correct profits of the assessee for the year. 15. In respect of second contention of common pool of funds consisting of interest free and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ations of CIT(A) at page 15 of the appellate order and it was pointed out that he applied AS-16 to the effect if no sales for 12 properties, then such assets were qualifying assets and the Assessing Officer at last page of the assessment order calculated the disallowance at ₹ 11.26 crores against which, both the assessee and the Revenue are in appeal. Our attention was drawn to the observations of CIT(A) under paras 5 and 5.1 onwards at page 22 of the appellate order, wherein he referred to the asset meaning as work-in-progress. The next contention of the learned Authorized Representative for the assessee before us was that as per AS-16, if there was no activity of purchases and sales, then it was a qualifying asset, but where the purchases were delayed, conservative approach had to be taken and interest could be written off. The learned Authorized Representative for the assessee pointed out that since the accounting standards, if any, are effectively to be applied from 01.04.2015, AS-16 was not binding at that time and it could not override the provisions of main section i.e. 36(1)(iii) of the Act. He further stressed that the proviso to section was not applicable. In respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rogress and hence, the interest cost has also to be capitalized. Further, reliance was placed on the order of CIT(A) on other aspects. 20. In rejoinder, the learned Authorized Representative for the assessee pointed out that the loan was borrowed for regular business activities and the assets acquired by the assessee were shown as stock-in-trade. It was pointed out that where the assessee was utilizing the borrowed funds for purchases, which were eligible for deduction under section 80IB(10) of the Act, allowance of part of cost of project was allowable. However, when the assessee has claimed the deduction under section 36(1)(iii) of the Act, then the same could not be disturbed. He further pointed out that stock-in-trade, extension of business and in view of various cases, loss in expenditure is met for carrying on of the business and the same is to be allowed as revenue expenditure. In respect of AS-16, it was pointed out that the same was operating from 01.04.2015 and the same could be invoked, provided it was operating and binding on the assessee. First of all, the said AS-16 was not binding as the notification was issued by the CBDT on 31.03.2015, which made it effective fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to ₹ 100.80 crores and the balance sum of ₹ 5.29 crores was paid as interest on secured loans amounting to ₹ 15.44 crores. The case of the Assessing Officer was that where the assessee had made investment of ₹ 221.79 crores, then the proportionate interest cost attributable to such investment was to be disallowed in the hands of the assessee under section 43(1) of the Act. On the other hand, the claim of the assessee was that the entire interest cost was attributable to funds utilized for carrying on the business of the assessee and hence, was allowable expenditure under section 36(1)(iii) of the Act. The Assessing Officer on the other hand, was also of the view that in view of the proviso to section 36(1)(iii) of the Act, where the assets have not been put to use, then the interest relatable such assets is not allowable as deduction in the hands of the assessee. In this regard, the Assessing Officer made a reference to the schedules attached to the Balance Sheet and noted that the assessee had paid sum of about ₹ 28 crores towards advances for properties, had invested sum of ₹ 33.90 crores in properties shown as inventories and sum of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction. Explanation. Recurring subscriptions paid periodically by shareholders, or subscribers in Mutual Benefit Societies which fulfill such conditions as may be prescribed, shall be deemed to be capital borrowed within the meaning of this clause. 23. The substantive provisions of the Act entitle the assessee to claim deduction on account of interest paid in respect of capital borrowed for the purpose of business or profession. The intention of the statute is to allow the expenditure on account of finance cost as allowable in the hands of the assessee where the capital borrowed has been utilized for the purpose of business or profession. The ambit of expression purpose of business has to be considered for allowing the deduction on account of interest paid in respect of such capital borrowed, which in turn, has been utilized for carrying on the business of the assessee. The proviso thereunder restricts the disallowance of amount of interest paid, in respect of the capital borrowed for acquisition of an asset for expansion of existing busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is allowable in the hands of the assessee, in view of main substantive provisions of section 36(1)(iii) of the Act. The proviso restricts the disallowance of interest only for the period till which the asset is not put to use. Once the asset is put to use, then the interest relatable to acquisition of such capital asset is also allowable as deduction in the hands of assessee as the asset after being put to use is utilized for the purpose of carrying on the business. 24. The second aspect of the issue is the Accounting Standard 16 issued by ICAI. In the first instance, we agree with the proposition raised by the learned Authorized Representative for the assessee that where the deduction or otherwise of an expenditure is covered by the substantive provisions of the Act, there is no merit in referring to the accounting standards issued by ICAI for working out the disallowance in the hands of assessee. In this regard, we find support from the ratio laid down by the Hon ble Bombay High Court in CIT Vs. M/s. Reliance Industrial Infrastructure Ltd. in Income Tax Appeal No.3611 of 2010, order dated 17.08.2015. 25. Under para 6 of accounting standards 16, it is prescribed that the bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther, the issue before the Hon ble Bombay High Court in CIT Vs. K. Raheja Pvt. Ltd. (supra) was as under:- (i) whether on the facts and the circumstances of the case and in Law the Hon ble ITAT was right in holding that claim made by the assessee for deduction of Finance Cost by way of interest is in conformity with the Accounting Standard-7 issued by the Institute of Chartered Accountants of India and the exemptions provided therein? 27. The Hon ble Bombay High Court held as under:- The finding of fact recorded by the Tribunal is that there is no identity between a particular borrowing and a particular line of business and there is no basis for coming to a conclusion that interest attributable to the loans should be appointed amongst the various business activities of the assessee and the portion attributable to the construction activity should be deferred and made a part of the work in progress to defer the interest expenditure till completion of the project. In our opinion, the issue raised in this appeal are squarely covered by the judgment of this Court in the case Commissioner of Income Tax. Vs. Lokhandwalal Construction Inds. Ltd., reported at 260 ITR 579 . In thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of construction activity. Merely because, the project has not been completed and the units were not sold does not mean that the business of the assessee is not being carried on. The business whether it results in profits in this year or next year is being carried on by the assessee and during the course of carrying on such business, it had incurred the finance cost, which is duly allowable as revenue expenditure in the hands of the assessee. The finance costs as such relates to various business activities of the assessee is to be allowed as deduction in the hands of assessee as the assessee had utilized the said funds for carrying on its business. As pointed out by us in the paras hereinabove, the business has commenced on the start of the project itself and there is no merit in holding that since no part of the 12 projects has been sold by the assessee, the business relatable to such projects had not commenced. 30. Now, coming to the alternate stand of the CIT(A) that allowance of such finance cost would result in distortion of profits in a particular year was based upon the ratio laid down by the Hon ble Bombay High Court in Taparia Tools Ltd. Vs. JCIT (supra). The said propos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly and not to current assets, we find no merit in the proposition proposed by the CIT(A). The so-called 12 projects of the assessee are the current assets of the assessee, as the assessee is engaged in the business of construction activity and the said projects are not capital assets of the assessee, which have to be put into use, but have to be sold in the open market and allowance of interest relatable to such current assets cannot be curtailed by invoking the provisions of proviso to section 36(1)(iii) of the Act. 33. One more aspect which has to be taken note of that in addition to carrying on the activity of development of buildings, promoter and development of buildings, the assessee was also engaged in the development of plots out of bigger plots. The assessee for the year under consideration had shown profit on sale of plots i.e. plot shown by the assessee was business asset. The acquisition cost of which has been met out of the interest bearing funds, then the interest relatable to such secured / unsecured funds is allowable in the hands of assessee. In this regard, we find merit in the order of CIT(A) and find no merit in the ground of appeal raised by the Revenue. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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