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TMI Blog2021 (12) TMI 305X X X X Extracts X X X X X X X X Extracts X X X X ..... O has rightfully disallowed the proportionate interest expense by following matching principle of accounting? 3. The ld CIT(A) erred in deleting the disallowance made u/s 36(1)(iii) without appreciating the fact that the assessee claimed that the borrowed money was utilized for purchasing Stock in Trade and not any fixed asset, on the contrary it was logically concluded by the AO in her assessment order that the most of portion of the borrowed money has not been utilized for purchasing Stock in Trade, which needs to be passed through P&L but for acquiring Other Current asset as 'Land and Project Cost' which exposes to balance sheet only not P&L, hence by following matching principle of accounting, the AO has rightfully disallowed the proportionate interest expense? 4. The ld CIT(A) erred in deleting the disallowance made u/s 36(1)(iii) by relying on The Judgments in the cases of M/s Core Health Care Ltd. (SC) dated 08.02.2008, M/s Taparia Tools Ltd. (SC) dated 23.03.2015, M/s Torrent Pharmaceuticals Ltd.(HC) dated 27072016 where it was held that the ,interest expenses paid were wholly deductible where interest expenses were on account of Machinery purchase, one time up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income Tax Act, 1961 (herein after "the Act"). The AO, after considering necessary submissions of the assessee, opined that interest paid on loan borrowed for purchase of current assets cannot be allowed as deduction. The AO discussed the issue at length in light of nature of business of the assessee and principles of accountancy followed to treat purchase of asset in light of certain judicial precedence, including the decision of Hon'ble Supreme Court in the case of CIT Vs UP State Industrial Development Corporation (1997) 139 CTR 267, and observed that in order to determine the taxability of any income, the principles of accountancy have to be taken into account and as per which, when the assessee is in the business of developers and builders, it has to follow Accounting Standard 7 issued by The Institute of Chartered Accountant of India. As per said Accounting Standard, borrowing costs of a qualifying asset should be capitalized as part of the capital asset. Therefore, he opined that interest paid on loan and claimed as deduction u/s. 36(1)(iii) of the Act is not allowable and thus, out of total interest debited by the assessee, proportionate interest of Rs. 2,22,27,398/- has be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oject. The claim of interest of Rs. 2,52,80,905/- was against the "Land and Project Cost" of Rs. 20,57,54,359. During the appellant proceedings, the A.R. submitted that the company was engaged in the business of property development and its main object w4s to buy tracts of land which can be sold with or without any development. It was reasoned that the borrowed capital was commonly invested in business and it was not ear-marked for a single project. It was submitted that the appellant did not maintain the expenditure project-wise and instead all the expenses including the interest paid was taken into the p & L account. The company furnished a table regarding its income particulars for the A.Yrs. 2014-15 to 2017-18. S.No Asst Year Book Profit Income Declared in Tax return Tax Paid Remark 1 2014-15 1,72,42,313 1,72,42,313 55,94,268 2 2015-16 1,48,17,338 1,48,17,338 Nil Loss Return 3 2016-17 1,84,32,256 36,14,918 11,17,010 Carried forward loss of Rs. 1,48,17,338 was adjusted 4 2017-18 2,00,07,289 2,06,75,670 66,08,130 Thus the book profit, in these assessment years had been taken as Income which was declared in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , even if the amount is not actually paid but it is "incurred" according to the method of accounting, it would bet deemed to be paid. The apex court ruled that revenue expenditure incurred in a particular year is to be allowed in that year. In cases where the appellant, himself wants to spread the expenditure over a period of ensuing years, it |Dan be allowed only if the "matching concept" principle is satisfied, which up to now has been restricted to the case of debenture. In the instant case, the AO has noted the names and relevant details of the various parties who advanced unsecured loans to the appellant. It was stated by the AO, that the company paid interest on these loans. The opening Balance was Rs. 18,37,98,561 and the closing balance stood at Rs. 23,40,14;333. In consonance with the definition of "paid" in Section 43(2), the interest on borrowed capital has to be treated as "paid" as the appellant has followed the mercantile system of accounting. In order to ascertain the claim of the appellant, the final accounts of the appc!1la.nt were perused. As on 31.03.2014 the unsecured loans amounted to Rs. 18,37,98,561. They rose to Rs. 23,40,14,333 on 31.03.2015. Hence, there w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ooks of accounts that entire borrowed money has been utilized for purchasing of land and project cost, but not for stock in trade and thus, proportionate interest relatable to acquisition of any asset needs to be capitalized in the books of accounts of the assessee. 7. The Ld. AR for the assessee on the other hand strongly supporting the order of the Ld. CIT(A) submitted that the assessee is in the business of real estate development, has purchased a property and the same has been treated as stock in trade in the books of accounts of the assessee. The assessee has paid interest on capital borrowed for the purpose of business or profession and the same has been claimed as deduction u/s. 36(1)(iii) of the Act. Since, there is a direct nexus between borrowed capital and business activity of the assessee, any interest paid on such borrowed capital needs to be allowed for the year in which such interest has been paid. The Ld. CIT(A) after considering the submissions has rightly deleted additions made by the AO and thus, order of the Ld. CIT(A) should be upheld. 8. We have heard both the parties, perused materials available on record and gone through orders of the authorities below. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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