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TMI Blog2021 (4) TMI 115X X X X Extracts X X X X X X X X Extracts X X X X ..... ase and holding of inventory itself is a business activity. Respectfully following the decision of case of CIT Vs. Aditya Propcon Pvt. Ltd. [ 2017 (11) TMI 392 - RAJASTHAN HIGH COURT] , we are of the considered view that interest paid on loan borrowed for purchase of land and holding it as inventory cannot be considered as acquisition of capital asset for the purpose of disallowing interest by invoking provisions of proviso to section 36(1)(iii) - AO well as the learned CIT(A) without appreciating legal position has disallowed interest paid on loans u/s. 36(1)(iii) of the Act. Hence, we set aside the order passed by the learned CIT(A) and direct the Assessing Officer to delete the addition made towards disallowance of interest under section 36(1)(iii) of the Act. Appeal filed by the assessee is allowed. - I.T.A.No.3372/Chny/2019 - - - Dated:- 31-3-2021 - Shri V. Durga Rao, Judicial Member And Shri G. Manjunatha, Accountant Member For the Appellant : Mr.S.Sridhar, Advocate For the Respondent : Mr. Abani Kanta Nayak, CIT ORDER PER G.MANJUNATHA, AM: This appeal filed by the assessee is directed against the order of the learned CIT(A)-1, Chennai dated 0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... findings. 7. The CIT (Appeals) failed to appreciate that the decisions cited were completely ignored and misconstrued and ought to have appreciated that the claim for deduction of interest expenses under consideration was proper and justified on the facts and in the circumstances of the case. 8. The CIT (Appeals) failed to appreciate that there was no proper opportunity given before passing the impugned order and any order passed in violation of the principles of natural justice is nullity in law. 3. Brief facts of the case are that the assessee company is engaged in the business of running hotel and real estate development filed its return of income for the assessment year 2015-16 on 27.09.2015 declaring total income as Nil. During the year under consideration, the assessee has claimed interest expenses of ₹ 41,37,73,978/- on term loan of ₹ 301.92 crores borrowed from IFCI Ltd. Chennai. The said loan has been taken for the purpose of purchase of 90.53 grounds of land at Satyadev Avenue, MRC Nagar Main Road, Raja Annamalaipuram, Chennai. The said land has been treated as inventory in the books of account of the assessee. The case has been taken up for scr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essing Officer has also distinguished case laws relied upon by the assessee and further relied upon the decision of ITAT, Mumbai Special Bench in the case of Wallstreet Construction Ltd. Vs JCIT 101 ITD 156 to support his finding. The Assessing Officer has also distinguished the decision of the Hon'ble Supreme Court in the case of M/s.Taparia Tools Ltd. Vs., JCIT 260 ITR 102 relied upon by the assessee on the ground although, interest expenditure is revenue in nature, but because asset was not put to use in the relevant assessment year, as per proviso to section 36(1)(iii) of the Act, said interest expenditure should be added to the cost of asset. Further, the Assessing Officer has also rejected arguments of the assessee in light of matching concept principles of accounting on the ground that when there is no revenue recognized from the project, then expenditure incurred for said project cannot be allowed as deduction. Accordingly, rejected the arguments taken by the assessee and disallowed interest paid on loan borrowed u/s.36(1)(iii) of the Act. The relevant findings of the Assessing Officer are as under:- 11.4 According to ASI6. capitalisation of borrowing cost shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he cost of land if it is held without any associated development activity. The facts of the present case of assessee are entirely different on his ground As mentioned in Para 8 above it could be seer that the assessee has acquired the land at MRC Nagar for ₹ 525.80 Crore did some construction activity and showed it as opening Work in- Progress amounting to Rs I0.23 Crore and also expended ₹ 5.17 Crore during the current year towards the project In the case cited by the assessee, the land was kept idle, the land has been used in be construction activity by the assessee in its cwn case. Thus the facts of the assessee cited by the assessee are on different footing and hence not applicable to the present case. 13 Decision irn the case of Wallstreet Construction Ltd: 13 Instead the fact of the decision in the case of Wallstreet Construction Ltd, vs JCIT, Mumbai SB 101 lTD 156 (MUMBAI(SB). are more relevant to the present case of the assessee The ITAT answered the following question, In case of a builder following project completion method, engaged in simultaneous construction of multiple projects, whether interest cost is a period cost or .1 has to be added to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n view of the above discussions factual and legal propositions, the claim of interest expenditure of ₹ 41.37 Crore towards the loan obtained specifically for the purpose of purchasing land at MRC Nagar is disallowed and added to the Work-in-Progress of Inventory 5. Being aggrieved by the assessment order, the assessee preferred an appeal before CIT(A). Before the learned CIT(A), the assessee has reiterated its arguments made before the Assessing Officer and also relied upon the decision of Hon ble Gujarat High Court in the case of DCIT Vs. Core Healthcare Ltd., (2001) 251 ITR 61. The sum and substance of arguments of the assessee before the learned CIT(A) are that interest paid on loan borrowed for the purpose of business cannot be disallowed u/s.36(1)(iii) of the Act, when such business has been commenced and further revenue has been recognized from the business. The assessee further contended that the Assessing Officer has completely erred in disallowing interest by considering AS-16 issued by the ICAI without understanding the fact that accounting standard issued by ICAI cannot override income-tax provisions, because allowability or otherwise of expenses needs to be c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts executed by the assessee are different and project at MRC Nagar is not started recognizing revenue for the impugned assessment year, then the expenditure incurred towards said project including interest paid on loan borrowed for acquisition of land cannot be allowed as deduction, but needs to be added to the cost of the asset. Accordingly, rejected the arguments taken by the assessee and confirmed additions made towards disallowance of interest expenditure of ₹ 41,37,73,978/- u/s.36(1)(iii) of the Act. The relevant findings of the learned CIT(A) are as under:- The submissions of the appellant were considered vis-a-vis the findings of the A,O. While examining the appellant s submissions regarding the interest of ₹ 41,37,73,978/ claimed towards repayment of loan to IFCI Ltd. Chennai, it was noted that the appellant itself was following the recognition of income and expenditure as per the Accounting Standards of ICAI. The A.O discussed the guidelines as furnished in Accounting Standards 16. It was noted that borrowing cost which were directly attributable to the acquisition construction or production of a qualifying asset should be capitalized as part of that asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal that normal interest and borrowing cost cannot form part of cost of inventory. The Tribunal cited that when an assessee is following a method of valuation of inventory as per Accounting Standards prescribed by ICAI, the appellant was justified in considering interest as a period cost and debiting it in its P L. Account. The appellant also stated that the proviso to section 36(l)(iii lays down the test of putting to use the asset as the criteria for the claim of the cost of borrowing, It was submitted that the asset was already put to use by the appellant by way of commencement of the housing project. The appellant also raised the issue pertaining to matching concept . The company cited the ratio of the decision of the Supreme Court reported in 372 ITR 605 in the case of Taparia Teds Ltd vs JCIT. The Apex Court had ruled that revenue expenditure incurred n a particular year had to be allowed in that year. Hence) it was claimed that the interest expenditure incurred during the A.Y ought to have been allowed in the computation of taxable total income. In their written submissions the appellant drew attention to the provisions of section 37(1) of the Act and held that the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asset situated at MRC Nagar. Since the transaction was yet to be completed it was laid down that the appellant shall provide an internal security by way of deposit of the title deeds of Atlantic Hotels property at Egmore. The aforesaid interim security deposit shall be released on the execution of sale deed for Viceroy Hotels Ltd in respect of MRC Nagar property. While examining the other conditions, it was noted that clause (xii) of pre disbursement conditions states that IFCL shall retain the right to appoint an independent agency to verify sales of MRC Nagar project space, rate/sq.ft and remittances to project account etc. on a monthly/quarterly basis. A study of the factual matrix indicates that the loan borrowed from IFCI Ltd was exclusively for the MRC Nagar project. This project was distinct from that of Atlantic, Egmore. Hence, the appellants claim that the project wise distinction made by the A.O not in consonance with the Income tax Act is not justified. The terms and conditions given by IFCI clearly point out the fact that the project is an exclusive one and has to be accounted for separately. It is noted that the appellant has not maintained the details separa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e items of SC were those that were directly attributable to the acquisition, constriction or production of a QA. The BC incurred on qualifying asset is to be capitalized only if all the three following conditions are fulfilled. i)Expenditure on QA is being incurred ii Borrowing cost are incurred iii) Activities are in progress As per AS 16, the Accounting policy following for treatment of BC and the amount of BC capitalized during the period have to be disclosed. The appellant s case involves the purchase of land and construction of building. The borrowing from IFCI was towards acquisition of land at MRC Nagar for purposes of construction of residential apartments. The assets for which the borrowing cost were incurred are found to utilize substantial period of time to get ready for its intended use or sale. Hence, this Accounting Standard has been found to be appropriate for the appellant s case. The interest attributed to the acquisition of land in accordance with AS 16 has to be capitalized irrespective of whether they fall under the category of fixed assets/investment properties or inventory. It was also noted that capitalization of borrowing cost s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he appellant had also claimed deduction of interest on borrowed capital u/s.36(1](hi) of the Act on the grounds that the appellant was carrying on the existing business of construction by virtue of purchase of inventory being the property at MRC Nagar for development purposes. The moot point concerns whether the MRC project had commenced its operations during the A.Y 2014- 15 for the purposes for which it had been conceived. Although the appellant has furnished details of expenses incurred for the project, it has to be ascertained whether these expenses can be considered as pertaining to the business of construction of residential buildings as proposed to be carried out in the MRC Nagar project. The Director s Report for the F.Y ended March 2015 provides details regarding the projects of the company. It was stated that the company had made substantial progress in the Atlantic Residential Project and that the project would he completed and handed over during the current financial year, As regards the MRC Nagar project, the Directors Report stated thus: Your Board has taken appropriate action and initiated all necessary steps to continence the project at MRC Nagar during the en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s were in the nature of pre-operative expenditure. Therefore the allowability of the deduction of interest expenditure can be considered only when the project at MRC Nagar would commence its business operations. Hence, the rule that revenue expenditure incurred in a particular year is to be allowed in that year itself is not found applicable in the instant case. The appellant also had relied on the decision of the Bangalore Tribunal (2016) 71 taxmann.com 184 in the case of DCIT vs. JSR Constructions Pvt. Ltd. In that case, the assessee was doing road work based on contracts awarded to it. The Hon ble Bangalore Tribunal C Bench held that interest Cost attributed to loans taken for financing its normal trading activity is a period cost that has to be charged to P L Account. The ITAT had referred to clause 12 of the Accounting Standard 2 and stated that normal interest and borrowing cost cannot form pan of costs of inventory. It was stated that when an assessee is following method of valuation of inventory which was in accordance with the prescribed Accounting Standards, the assessee cannot be made to adopt a different method and it cannot be said that the appellant had underst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laces. When the business of various real estate developments are considered as one segment, then segregation of the projects undertaken by the assessee is incorrect. The AR further submitted that the learned CIT(A) failed to appreciate that conclusion reached on non-commencement of project which was relating to claim of interest expenditure was wholly unjustified and ought to have appreciated that commencement of business under consideration should be reckoned from the date of purchase of the land with structures meant for development of while further ought to have appreciated that having not disputed fact of the assessee that assessee has engaged in the business of the property development, standalone approach by segregating the project under scrutiny for the purpose of considering allowability of interest expenses is erroneous . The AR for the assessee further referring to the decision of Hon ble Gujarat High Court in the case of CIT Vs. Aditya Propcon Pvt. Ltd. vide order No.82 of 2014 dated 10.10.2017 submitted that under identical set of facts, the Hon ble High Court held that interest on funds borrowed to purchase land which is part of inventory of the assessee is an allowab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant previous year. Therefore, interest paid on loan borrowed for the purpose of purchase of land cannot be allowed as deduction u/s. 36(1)(iii) or alternatively 37(1) of the Act. The DR further referring to the decision of Hon'ble Supreme Court in the case of CIT vs. U.P State Industrial Development Corporation 225 ITR 703(SC), submitted that during the pre-commencement period interest paid on loan is not allowable as deduction, but it would go to increase cost of the asset. Therefore, he submitted that there is no error in the findings recorded by the learned CIT(A) to affirm disallowance of interest u/s. 36(1)(iii) of the Act by the Assessing Officer and hence, the order of learned CIT(A) should be upheld. 9. We have heard both the parties, perused the materials available on record and gone through orders of the authorities below along with various case laws cited by learned counsel for the assessee as well as the Revenue. The factual matrix of impugned dispute as borne out from records indicate that the assessee has borrowed loan from M/s. IFCI Ltd. for the purpose of purchase of land at MRC Nagar, Chennai and claimed interest paid on such loan u/s. 36(1)(iii) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he purpose of business of the assessee. In this case, there is no doubts whatsoever, with regard to the fact that loan borrowed from IFCI Ltd., is for the purpose of business of the assessee. In fact, the Assessing Officer has categorically admitted that loan is borrowed for the purpose of business of the assessee. However, he has denied interest deduction only on the ground that asset purchased by the assessee was not put to use in the impugned assessment year for the purpose of business of the assessee. 11. We have given our thoughtful consideration to the reasons given by the Assessing Officer for disallowing interest paid on loan and find that there is no substance in the reasons given by the Assessing Officer in light of Accounting Standard- 16 issued by the ICAI, because AS-16 deals with issue of borrowing cost which is specifically for the purpose of treatment of interest paid on loan borrowed for acquisition of long term asset like asset that necessarily takes substantial period of time to get ready for intended use or sale. Although, it does not specifically says it is not applicable to an asset being inventory in the business of the assessee, but if you see definiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jects at different places. The Assessing Officer has considered two different projects on standalone basis and held that project at MRC Nagar is not yet commenced its activities. In our considered view, the reasons given by the Assessing Officer to treat MRC Nagar project on standalone basis is purely on presumption and cannot be accepted as correct approach, more particularly, when construction business is a separate vertical pursued by the assessee and in the said construction business, the said projects are executed. The acquisition of property at MRC Nagar cannot be equated to extension of existing business, with a view to consider disallowance of the claim of interest payments on the capital borrowed and on the contrary, acquisition of property should be equated to the inventory of the assessee and not as capital asset which treatment is correctly carried out in the financial statement pertaining to the financial year under consideration. The purchase of inventory in the course of carrying on existing business of construction should be reckoned as continuation of same business activity in the routine/normal course and cannot be equated or termed as extension of business activi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant findings of the Hon ble High Court are as under:- 9. He further contended that the Tribunal has also committed error in observing as under:- 18. We have heard the parties and perused the material available on record and also the orders of the authorities below. We find that the books of accounts of the assessee are audited and the ld. Auditor has not given any adverse comment for not following the accounting standards which are mandatory for a company u/s 211 of the Companies Act, 1956. We also find that there is n dispute that the said land is part of inventory for the assessee and is not a capital asset. The assessee has produced evidences of no increase in the land price and AO has not brought anything on record to support that the assessee would be able to realise the interest cost incurred over and above the cost of purchase of land. In such circumstances, as per basic accounting principles of valuation of inventory that the inventory is to be valued at cost or net realisable value which -ever is lower. The uncontroverted evidences show that there is no buyer of the similar land in same vicinity at the price which is lesser than the price paid by the assessee an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cquisition for being used to facilitate the business activity. As against this, purchase and holding of inventory item itself is a business activity. In absence of this proviso, section 36(1) (iii) earlier entitled assessee to claim interest in respect of capital assets, even for the period during which they were under construction as held in various judgments pointed out by the ld. AR of the assessee. The interest was found allowable despite its capitalization in the books of accounts in the judgments. We are therefore, of the opinion that the interest on funds borrowed to purchase land which is part of inventory of the assessee company is an allowable deduction u/s 36(1)(iii). We accordingly reject this ground of the departmental appeal also. 10. Counsel for the respondent has supported the order of the authorities and contended that the both the authorities have rightly held in favour of the assessee inasmuch as even if the contentions which have been advanced by the department, no tax liability has been reduced or there is any case of evasion of tax. 14. The present case, acquisition of land for its development in the course of real estate activities of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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