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TMI Blog2022 (5) TMI 599X X X X Extracts X X X X X X X X Extracts X X X X ..... present case as the residential units are part of the stock in trade, and not the capital assets. Respectfully following the views so expressed by the coordinate benches, we approve the detailed and well-reasoned approach adopted by the CIT(A) and decline to interfere, in principle, in the matter. As regards the learned Departmental Representative s apprehension of double deduction, however, we consider it fit and proper to add that once these amounts are allowed as deduction in the year of incurring the expenditure, the same shall not be eligible for being allowed as deduction yet again as a part of the work in progress being debited to the profit and loss account in any subsequent year. The double deduction will thus not be permissible. The conclusions arrived at by the learned CIT(A), subject to this observation, are approved. Learned representatives fairly agree that whatever we decide for the assessment year 2013-14 will equally apply to the other two assessment years 2014-15 and 2015-16 as well. The conclusions arrived at by the learned CIT(A) for the other two years must also be approved, subject to the observations above, as well. Appeal dismissed. - ITA Nos. 792, 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest claimed as deduction. On these facts, the Assessing Officer has disallowed the claim for deduction following the Special Bench decision in the case of Wall Construction Co Ltd Vs JCIT (102 TTJ 505), and, while doing so, for example for the assessment year 2013-14 (the corresponding observations for the other years are materially similar), observed as follows: 6. The assessee's explanation has been perused; however, not found satisfactory. The assessee is developing one project only. The accounting of the construction activity is governed by the Accounting Standard 7 as well as guidance note on accounting for real estate transaction issued by the Institute of Chartered Accountants of India (ICAI). The said guidance note categorically states that all the expenses directly related to the project have to be carried over and debited to the cost of project. Such expenses can be claimed as deduction in the year in which the corresponding income of the project is credited in the books of account and offered to tax. It is interesting in the case of the assessee that it has allocated all other expenses to the work in progress except interest. If the assessee's content ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gment of the apex court in the case of the Taparia tools Ltd vs. DCIT (2015) 272 ITR 605 wherein the Supreme Court held that the only aspect which needed examination was as to whether the provisions of section 36 (1) (iii) read with section 43 (2) of the Act were satisfied or not. Once these are satisfied there is no question of denying the benefit of deduction in the year in which 'such an amount was actually paid or incurred. Further, the proviso introduced by the Finance Act 2003 prohibits the allowance of interest cost only if the borrowed funds have been utilized for acquisition of a capital asset even for existing business. In this case the borrowed funds have been utilized for stock in trade which is not a capital asset. The jurisdictional Bombay High Court in the case of Lokhandwala constructions Inds Ltd 260 ITR 579 held as under:- In the instant case, it was clear that the assessee undertook two-fold activities. It bought and sold flats. Secondly, the assessee was also engaged in the business of construction of buildings. The profits from both the activities were assessed under section 28. The assessee had undertaken the project of construction of flats. Ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the entire capital, even as no corresponding gain inures I terms of value addition to the project, which stands in fact completed, so as to increase its cost by loading the said cost thereon. It is for these reasons that interest (financing) cost is normally considered as only a period (fixed) cost, and charged to the operating statement for the year in which the same is incurred. As such, what in our view would prevail is the method of accounting being regularly followed by the assessee, i.e. on a year basis. The same a/so has the sanction of law inasmuch as sec. 145 clearly provides for determination of the business income on the basis of the method of accounting being regularly followed, with the mandate of sec 36(1)(iii) being also satisfied, and toward which the assessee relies on the decision in the case of CIT vs Lokhandwala Construction Inds. Ltd(supra), The same also clarifies that the interest cost is to allowed u/s 36(1)(iii), irrespective of whether it stands incurred in relation to stock-in-trade or on capital account, as the said section draws no such distinction. The issue, though, we may clarify, is not as to whether the borrowed capital stands utilized toward tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. That the utilization of capital was the relevant for the purpose of adjudicating the claim of deduction under section 36(1)(iii) of the Act. (referring to the judgment in the case of Calico) It was laid down that where an assessee claims deduction of interest paid on the capital borrowed all that the assessee was to show that the capital which was borrowed was used for business purpose in the relevant year of account and it did not matter whether capital was borrowed in order to acquire the revenue asset or a capital asset....... Considering the above settled position in the matter we are of the opinion that the assessee is entitled to claim entire interest deduction relatable to the capital borrowed and utilized for business purposes in the year under consideration. Resultantly, we disapprove the decision of the Assessing Officer/CIT(Appeals) in transferring the interest expenditure to WIP account. Therefore, assessee is justified in debiting the same to the P L accounts of the respective assessment years. Thus, we order the Assessing Officer to accept the claim as made in the return of income. Accordingly, this part of the ground No. 1 is allowed in favour of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i), irrespective of whether it stands incurred in relation to stock-in-trade or on capital account, as the said section draws no such distinction. The issue, though, we may clarify, is not as to whether the borrowed capital stands utilized toward trading operations or on capital account; the instant case being decidedly of the former, but whether the said cost, having been incurred, is to be capitalized as a part of the project cost and, thus, taken into account for the purpose of valuation of inventory (stock-in-trade) as at the year-end and, consequently, the determination of gross profit for the year. It is only the cost that is incurred and otherwise allowable, which, it may be appreciated, would stand to be considered thus, where it otherwise qualifies for being reckoned as a part of the cost of production/construction, and thus of the inventory or the project cost a sat the year-end. The deductibility of the said cost u/s 36(1)(iii) is thus neither in doubt nor in dispute. Further, it may also be in place to state that section 36(1)(iii) stands since amended by Finance Act, 2003 w.e.f. 01/04/2004, by way of insertion of a proviso thereto, so that any interest cost on capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal and find it is a self explanatory and the decision of the Tribunal supports the case of the assessee. Under comparable facts of the assessee, interest cost was allowed in favor of the assessee relying on binding jurisdictional High Court judgment in the case of M/s Lokhandwala Construction Industries Ltd. (supra). For the sake of completeness of this order we extract relevant para 3.2 of the order which is reproduced as under: 3.2 With regard to the interest expenditure............The interest cost on the corresponding capital borrowed would nevertheless continue to be incurred, without any corresponding increase in the value of the inventory or the project. Similarly, a project, or part thereof, may be partly sold or even. remain unsold for quite some time after its completion. While revenue would stand to be booked only on the part, if any, sold, the interest cost would continue to be incurred on the entire capital, even as no corresponding gain inures I terms of value addition to the project, which stands in fact completed, so as to increase its cost by loading the said cost thereon. It is for these reasons that interest (financing) cost is normally considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levant for the following conclusion - construction project undertaken by the assessee builder constituted its stock in trade and the assessee was entitled to deduction under section 36(1)(iii) of the Act in respect of the interest on the loan obtained for execution of said project . Relying on the another judgment of Hon'ble Bombay High Court in the case of Calico Dying and Printing Works 34 ITR 265 Bombay, Hon'ble Bombay High Court concluded that the interest expenditure relating to the borrowed capital is allowable u/s 36(1)(iii) of the Act. The relevant lines from the para 4 reads as under:- that, while adjudicating the claim for deduction under section 36(1)(iii) of the Act the nature of expense - whether the expenditure was on capital account or revenue account - was irrelevant as the section itself says that interest paid by the assessee on the capital borrowed by the assesses was an item of deduction. That the utilization of capital was the relevant for the purpose of adjudicating the claim of deduction under section 36(1)(iii) of the Act. (referring to the judgment in the case of Calico) It was laid down that where an assessee claims deduction of interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers a part of the revenue every year depending upon the percentage of completion. The funds have been borrowed for the purpose of construction and have gone into the projects of the assessee which are stock in trade and not capital asset of the assessee. Therefore, the amendment brought in the Act with effect from 2003 by way of introducing the proviso to section 36 (1) (iii) also does not affect the facts of the case of the assessee. In view of the binding judgment of the jurisdictional High Court in the case of Lokhandwala constructions and also of the jurisdictional ITAT in the cases of Ashish Builders Private Ltd and Rohan Estate Private Ltd (supra) and also the various judicial pronouncements relied upon by the assessee, the interest expenditure claimed by the assessee is held to be allowable. Therefore, the AO is directed to delete the addition made of Rs.7,77,81,219/-. This ground of appeal is ALLOWED. 5. The Assessing Officer is aggrieved by the relief so granted by the learned CIT(A) and is in appeal before us. 6. We have heard the rival contentions, perused the material on record and duly considered the facts of the case in the light of the applicable legal posi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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