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TMI Blog2018 (6) TMI 420X X X X Extracts X X X X X X X X Extracts X X X X ..... ized for the inventory in respect of Model Town and Sukhdev Vihar project. The Ld. CIT(A) has erred in sustaining the disallowance. The disallowance as made and sustained is erroneous and deserves to be deleted. 2. That without prejudice to the above, the disallowance for interest of Rs. 1,673,452/- as made by the Ld. AO and sustained by Ld. CIT(A) is excessive as the same exceeds the amount of interest of Rs. 10,23,183/- related to unsecured loans which was claimed by the assessee as revenue expenditure as per the return of income. As such too the disallowance as made and sustained is erroneous and deserves to be deleted." 4. During the year under consideration, it was found that assessee had claimed interest in P & L A/c at Rs. 55,25,092/-, out of which, assessee had capitalized interest of Rs. 32,19,030/- and Rs. 11,66,729/- on utilisation of borrowed funds for Common Wealth Games Flats and Model Town project. As the borrowed funds are mainly utilised for inventory and work-in-progress, assessee was requested to explain why all the interest payments may not be capitalized. In response to this, assessee stated that term loan from Religare was utilised for Common Wealth Games ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 7,500/- towards miscellaneous adjustment. The details of the Total Interest Cost is as under : (detailed chart enclosed at page 26 of the P/k) (i) Interest on Secured Loan from Religare for CWG Flats Rs.32,19,030/- (ii) Interest on Secured loan from HDFC Bank for car Rs. 1,17,150/- (iii) Interest on Unsecured loan Rs.31.89,440/- Total Interest Rs. 65,25,620/- : Less (i) Miscellaneous Adjustment Rs. 7,500/- (ii) Interest Capitalised for Sukhdev Vihar Project^ (out of Interest on Unsecured loan) Rs. 9.93,029/- Interest debited to the P & L Account (Note 17 to the Accounts, page 8 of P/k) Rs.55,25,092/- Less: (claimed in Computation of Income at page 29 of P/k) (i) Interest on the Secured Loans from Religare Finvest Ltd. used in purchase of Common Wealth Games flats capitalised in the Computation of Income (in computation at page 29 of P/K) Rs.32,19,030/- (ii) Interest Capitalised for Model Town Project capitalised -in Computation of Income (out of Unsecured loans) (in computation at page 29 of P/K) Rs.l 1,65,729/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see has arrived at the figure of Rs. 2,28,92,475/- which is the maximum total investment which may be presumed to be out of unsecured loans. After arriving at the above figure, assessee has worked-out the proportion of total investment out of interest bearing unsecured loans which comes to Rs. 1,78,64,036/-. Thereafter, applying the interest rate of 12%, the assessee arrived at the figure of Rs. 21,43,684/-, being the figure of maximum interest that may be attributable to the on going projects of the assessee. The assessee had already capitalized an amount of Rs. 21,58,758/- (Rs.11,65,729/- towards Model Town Project and Rs. 9,93,029/- towards Sukhdev Vihar Project) which is more than the figure of maximum interest allocable as calculated in chart filed, it is clear that no further amount of interest may be allocated towards the ongoing project of the assessee as alleged by the A.O. It is agreed by the authorities below that term loan taken from Religare was utilised for Common Wealth Games flats, interest on which to the tune of Rs. 32,19,030/- has already been capitalized and was not claimed as revenue expenditure. Therefore, no further addition is justified. It was further state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orders of the authorities below. 5. After considering the rival submissions, we do not find any justification to sustain the addition. The assessee has given detailed explanation with regard to interest capitalized on three projects as noted to above, which have not been disputed by the authorities below. The assessee ultimately claimed Rs. 11,40,333/- as revenue expenditure. The assessee has given basis as to how much interest is to be capitalized on three projects. The authorities below without any justification have applied interest rate of 12% for the purpose of making addition against the assessee. The assessee's Auditor has filed letter of verification to the effect that the interest cost of Rs. 4,54,373/- is wrongly mentioned, whereas the correct figure is Rs. 9,93,029/-. Therefore, such a figure should not have been disbelieved without verification of the fact. The assessee has explained this figure through the evidence and material on record as well as by filing Letter of Declaration from the C.A. The authorities below have not disputed the interest capitalized on loan taken from Religare Finvest Ltd., used in the projects of Common Wealth Games flats. The assessee alrea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilt-up space. Occasionally, the Company also undertakes contractual construction work. The assessee e-filed its return of income declaring NIL income. The assessment was concluded by disallowing the interest expenses of Rs. 25,27,036/-. The assessee challenged the addition before Ld. CIT(A). The written submissions of the assessee is reproduced in the appellate order in which the assessee explained that during the year under appeal, assessee was involved in two development projects in collaboration namely Model Town Project and Sukhdev Vihar Project. Whereas Model Town Project was ready for sale and in fact, one flat out of it was sold by the assessee and another project being Sukhdev Vihar Project was still under development. Apart from the above, the assessee-company has also invested in flats at Common Wealth Games, pending possession of which, the advance/instalments given has been shown under "Long Term Loans and Advances" under sub-head "Advance/Expenditure for purchase of flat". Such flat was purchased out of loan taken from M/s. Religare Finvest Limited and the entire interest paid on loan from Religare Finvest Limited during the year has been added to such advance account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n which it is provided "capitalization of borrowing costs should cease when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete." An asset is normally ready for its intended use or sale when its physical construction or production is complete even though routine administrative work might still continue. It is amply clear that no capitalization of interest is required for Model Town Project. He has further submitted that assessee maintained mixed bank accounts wherein all funds including own funds being share capital, sales and loan funds comprising of secured loans, interest bearing unsecured loans, non-interest bearing unsecured loans etc., are credited. Therefore, it is, difficult to bring-out the exact nexus of utilisation of the unsecured loans, especially when the said loans were received long back. In view of the contention of the assessee that mixed bank accounts are maintained wherein both interest bearing unsecured loans and non-interest bearing unsecured loans have been credited, it may be safely presumed that alleged utilisation of unsecured loans for Common Wealth Games flat is out of assessee's noninteres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hand, Ld. D.R. relied upon the orders of the authorities below. 11. After considering the rival submissions, we do not find any justification to sustain the addition. Similar issue have been considered in A.Y. 2012-2013 as well and the assessee explained that wherever interest is to be capitalized, for various projects, it was capitalized and the balance amount have been used wholly and exclusively for the purpose of business, therefore, interest was allowed in A.Y. 2012-2013 as deduction. In the assessment year under appeal, the assessee further explained that Model Town Project was ready for sale and in fact, one flat out of it has been sold. Therefore, the interest to that extent shall have to be allowed as deduction in favour of the assessee. The assessee further explained similarly that wherever interest is to be capitalized for pending projects, it has been capitalized. The assessee also explained that assessee has sufficient capital and reserves, therefore, it should be presumed that funds available with the assessee have been used for the purpose of making investments. Therefore, such explanation should be taken into consideration while deciding the issue in favour of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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