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TMI Blog2016 (11) TMI 1713X X X X Extracts X X X X X X X X Extracts X X X X ..... is opposed to law and facts of the case. 2. The Ld.CIT(A) has erred in allowing assessee's appeal and ignoring the fact that the assessee has taken loan for the business purpose i.e. development and construction of residential buildings which has resulted in saleable product or unsold stock lying as W.I.P during the year. The CIT(A)'s decision that loan taken was for working capital requirements and cannot be directly attributed to work in progress is not acceptable. 3. The ld.CIT(A) has erred in deleting the addition of excess expenditure on account of Higher rate of interest paid even after deleting the entire addition of Rs. 1,59,27,795/- as the advances to separate entity is against the basic principle of the business of earning profit." 3. The brief facts of the case are that the assessee is engaged in the business of real estate developers. At the outset, learned counsel for the assessee Shri A.A. Kulkarni, Advocate submitted that he is not pressing his C.O and the same may be dismissed as withdrawn. Shri Raviraj Y.V. learned DR submitted that he has no objection if C.O is dismissed as withdrawn. 4. After hearing both the parties, we hereby order dismissal of the C.O N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IP) of the assessee by the AO vide assessment order dated 27/3/2015 passed by AO u/s 143(3) of the Act. Secondly, without prejudice to the above addition, the AO observed that assessee had paid an interest of Rs. 1,59,27,795/- @18.25% p.a. to the Bank and assessee advanced loan to the sister concern M/s. Milroc Development Company LLP (hereinafter called 'MDC') @ 12% p.a.. The assessee was asked to explain that why excess interest was paid to the bank for the borrowed fund as against lower interest charged from the sister concern MDC. The assessee submitted that the assessee had paid interest to the bank amounting to Rs. 1,59,27,795/- @18.25% p.a, however it has earned interest income of Rs. 3,37,40,072/- from its associate concern MDC on the advance given to MDC. It was submitted that due to business link with the sister concern MDC, the assessee has charged interest @12% p.a. which has been charged by assessee from MDC on a total loan of approximately Rs. 30 Crores advanced by assessee. The AO rejected the contentions of the assessee by observing that the assessee is running business activities with a motive to earn profit out of business activities. The assessee has paid highe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee also submitted that as per Para 10 of Accounting Standard (AS 16) issued by ICAI, the borrowing cost is to be dealt as under:- "To the extent that funds are borrowed specifically for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalisation on that asset should be determined as the actual borrowing costs incurred on that borrowing during the period less any income on the temporary investment of those borrowings". The assessee also submitted that it has received interest income from the sister Concern MDC of Rs. 3,37,40,072/- during the previous year which is shown under the head 'Other Income' in the profit and loss account and offered for taxation, while payment of interest was made to the bank of Rs. 1,59,27,795/- and hence the net amount is negative and hence nothing is required to be added to W.I.P. It was submitted that assessee availed loan from Andhra Bank in the financial year 2010 - 2011 of Rs. 10 crores and advance of Rs. 8 Crore was given directly out of the OD account maintained with Andhra Bank by the assessee to MDC, a partnership firm engaged in construction and real estate business, wherein the assessee hold 50% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peal before the tribunal. The ld.DR submitted that two additions have been made by the Assessing Officer w.r.t interest paid by the assessee, firstly by adding to the closing work in progress to the tune of Rs. 1,59,27,795/- which amount was disallowed as expenses by the AO by adding to the income of the assessee, and secondly there was a disallowance of interest on loan to sister concern of MDC which was advanced by the assessee on interest @12% p.a. as against borrowings from Andhra Bank on OD account on interest @18.25% p.a., wherein differential amount of Rs. 54,54,724/- was added to the income without prejudice to the addition of Rs. 1,59,27,795/- made by the Assessing Officer and hence no separate disallowance was made by the Assessing Officer. It was submitted that credit facilities (OD) were availed by assessee from Andhra Bank @ 18.25% p.a. interest on overdraft and out of the same, Rs. 8 crores was advanced to MDC on interest @12% p.a. which led to the loss of Rs. 54,54,724/- to the assessee as the amount was lent to the sister concern by the assessee at lower rate than the borrowing cost. It was submitted that the assessee had advanced Rs. 20.7 crore in the financial yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be followed unless it is shown that they are inconsistent with the provisions of the Act and as per the Accounting Standards 2 (AS-2) issued by ICAI, interest cannot be added to the W.I.P. It was further submitted that net interest income is positive as interest received from MDC is of Rs. 3,37,40,072/- while interest paid to Andhra Bank on OD account by the assessee was only Rs. 1,59,27,795/- and hence no disallowance is warranted. It is submitted that the assessee is partner in MDC and entitled for share of profit to the tune of 50% and hence the amount was granted out of commercial expediency. Reliance is placed on decision of Hon'ble Supreme Court in the case of S.A. Builders Limited v. CIT(A) (2007) 288 ITR 1(SC). The ld. Departmental Representative in rejoinder conceded that no additions have been made towards disallowance of interest paid by the assessee to Andhra Bank on OD account in the preceding year by the Revenue in the assessment framed u/s 143(3) of the Act. 8. We have considered the rival contentions, we have perused the material on record including case laws relied upon by the rival parties. We have observed that assessee is engaged in the real estate and construc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view our above detailed reasoning, we are of the considered view that the addition of Rs. 1,59,27,795/- made by the Assessing Officer by disallowing the interest expenses and adding the same to WIP is not sustainable keeping in view peculiar facts and circumstances of the case. The revenue is also not able to show that inventories are acquired out of borrowings and interest is to be capitalised keeping in view AS-16 issued by ICAI. The AS-2 issued by ICAI clearly stipulates that generally the interest shall not be added to the inventories as the same does not usually bring the inventories to the present location and condition The assessee has earned interest income from MDC of Rs. 3,37,40,072/- which is offered for taxation, while interest paid for Andhra Bank on OD is Rs. 1,59,27,795/- and hence there is net interest income which had been earned by the assessee. We have also noted a peculiar fact that advances received from customer by the assessee as at 31-03-2012 is Rs. 68.57 crores, while closing WIP is Rs. 45.04 crores, thus advances from customer received by the assessee are higher than closing WIP as at 31-03-2012. Thus, keeping in view our detailed discussions and reasonin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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