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TMI Blog2022 (9) TMI 152X X X X Extracts X X X X X X X X Extracts X X X X ..... e on the amendment made by the finance act 2022 applies prospectively as held in PCIT versus Era infrastructure private limited [ 2022 (7) TMI 1093 - DELHI HIGH COURT . In view of this we do not find any infirmity in the order of the learned CIT A in deleting the disallowance u/s 14 A of the act. Accordingly, ground number 3 of the appeal of the learned AO is dismissed. Nature of expenditure - expenses towards software - revenue or capital expenditure - AO held it to be a capital expenditure - alternative plea of the assessee was adjudicated and depreciation was allowed at the rate of 60% - HELD THAT:- The assessee has incurred ERP expenditure and license fees for the software. Case of Raychem RPG Ltd [ 2011 (7) TMI 953 - BOMBAY HIGH COURT] covers the issue as decided this issue also in favour of the assessee and hold that this expenditure is revenue expenditure - Decided in favour of assessee. Claim of the assessee u/s 80GGB - assessee has given a donation to three different parties - HELD THAT:- Assessee has produced all the receipts except in case of ₹ 6,534,000 paid to Bharatiya Janta party. The transaction is demonstrated through the bank account of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. Whether on the fact and circumstances of the case and in law, the Ld. CIT(A) was correct while deleting the addition of Rs. 2,24,11,60,000/- made by the Assessing officer u/s 36(1)(iii) and capitalized the same to inventory. 2. Whether on the fact and circumstances of the case and in law, the Ld. CIT(A) was correct while deleting the addition of Rs.2,24,11,60,000/- relied upon the decision of the judgment of the jurisdictional High Court in the case of Lokhandwala Construction Inds Ltd 260 ITR 579 the same were rendered before the proviso to section 36(1)(iii) has been inserted vide Finance Act 2003. 3. On the facts and circumstances of the case and in law, the Ld. CIT(A) was correct while deleting the addition of Rs. 1,55,33,306/- that no exempt income was earned during the year, thereby ignoring the CBDT Circular no. 5 of 2014 dated 11.02.2014 wherein it is specifically stated that provision of section 14A of the Act are attracted even to cases where no exempt income has been earned during the year. 04. Assessee Company is engaged in the business of real estate construction and development. During the year, the assessee is developing a project named Palawa in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he rate of 25% is allowable. Therefore on the total expenditure of ₹ 35,977,997/ was considered as a capital expenditure and consequently depreciation thereon at the rate of 25% of ₹ 8,994,500/ was allowed on net disallowance of ₹ 26,983,497/ was made. iii. During the year the assessee has made up donation to political parties amounting to ₹ 116,534,000/ and claimed deduction at the rate of hundred percent u/s 80 GGB of the act. The assessee could produce only the receipt of ₹ 10 crores and therefore the learned that the assessing Officer disallowed the balance sum of Rs 1 65,34,000/-. iv. The assessee has also claimed deduction u/s 80 IB (10) of Rs.164,50,370/ the learned AO asked the assessee to prove the due compliance for claiming the above deduction however assessee could not substantiate and therefore the deduction was disallowed. v. Learned AO noted from the balance sheet that assessee has investment of ₹ 47.65 lakhs at the beginning of the year and ₹ 1192 lakhs at the end of the year, which could have resulted in exempt income, and no disallowance has been made by the assessee. Accordingly, he computed the disallowance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he order of the learned CIT A and therefore are in cross appeal before us. 08. Coming to the appeal of the learned assessing officer where ground number 1 and 2 are raised with respect to the disallowance of ₹ 2,241,160,000/ on account of interest expenditure deleted by the learned CIT A. 09. The learned departmental representative vehemently supported the order of the learned assessing officer and submitted that as the assessee is following the percentage completion method, the above interest should form part of work in progress and as soon as part of revenue is offered for taxation assessee is entitled to claim the same in that proportion deduction of the same. 010. The learned authorised representative submitted that identical issue arose in the case of assessee for assessment year 2014 15 where the revenue has raised identical ground in ITA number 147/M/2018 decided by order dated 20/2/2020 wherein the coordinate bench has dismissed the ground of appeal of the learned that AO. He referred to paragraph number 7 of that order. Accordingly, he submitted that this issue is covered in favour of the assessee in its own case by the order of the coordinate bench i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Therefore, the loan was obtained for obtaining stock-in-trade. The project constituted the stock-in-trade of the assessee. The project did not constitute a fixed asset of the assessee. Since the assessee had received loan for obtaining stock-in-trade, it was entitled to deduction under section 36(1)(iii). While adjudicating the claim for deduction u/s 36(l)(iii), the nature of expenses, whether the expenses are on capital account or revenue account is irrelevant as the section itself says that interest paid by the assessee on the capita! borrowed by the assessee is an item of deduction. The utilization of the capital is irrelevant for the purpose of adjudicating the claim for deduction u/s 36(l)(iii). The SLP filed by the Department against the Bombay High Court judgment has been rejected by the Supreme Court. The Hon'ble ITAT Mumbai in the case of M/S Ashish Builders Private Ltd vs. ACIT ITA number 310/M/2012 held as under: A) Interest on unsecured loans and fixed deposits: It is the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 rekoned as a part of the cost of production/construction, and thus of the inventory or the project cost a sat the year-end. The deducibility of the said cost u/s 36(l)(iii) is thus neither in doubt nor in dispute, Further, it may also be in place to state that section 36(l)(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 account is to be necessarily capitalized. Accordingly, it is only the interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment 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 assessee The Hon'ble ITAT in the case of ITO vs Rohan states ITA number 7200/MUM/2010 held as under: 3.2 With regard to the interest expenditure, though the Accounting Standard -2 (AS-2) on the valuation of inventories issued by the Institute of Chartered Accountant of India (ICAI) would suggest that the interest expenditure ought to be taken into account in the valuation of inventories where and to the extent there is a direct nexus, the said standard is not mandatory under the Act. In fact, even following AS-2 a direct nexus has to be established for the interest cost to form part of the cost of production or construction, as the case may be, and, thus, a part of the valuation of the unsold inventory or work-in-progress as at the year-end. This is as, to cite by way of an example from the civil construction itself, the work on a project may not be underway at all for the whole or a part of the year, or say as its optimum or normative level, on account of various business exigencies. The i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e that section 36(l)(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 account is to be necessarily capitalized. Accordingly, it is only the interest cost computing the business income qua the business of which the relevant asset is a or is to constitute a part (also refer Explanation 8 to s.43(l)). The said decision may, thus, in the given facts and circumstances of the case as, well as the amended law, not be of much assistance. In fact, even going by the Revenue s stand, another issue would arise and, accordingly, need to be determined apriori. Considering the said cost as includable in the project cost may have a direct bearing on the gross profit rate, and which may therefore stand to decline from the reported and accepted rate of 23%, and cannot be presumed be remain as such, i.e., unchanged. The Hon'ble ITAT Pune in the case of M/S Kolte Patil Developers Ltd erstwhile Corola reality Ltd merged with Kolte Patil Developers Ltd) also held as under: Further, we find the Mumbai Bench of the Tribunal in the case of M/s Ashish Builders Pvt. Ltd. (supra) has decided an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 also has the sanction nf 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(l)(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(l)(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 trading operations or on capital account; the instant case being decidedly of the former, but whether the said cost, h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 36(l)(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 f 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 assessee. 14. From the above, it is evident that any amount of the interest paid in respect of capital borrowe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ein the assessee explained that disallowance cannot be made u/s 36(l)(iii) of the Act, in view of the jurisdictional High Court's decision in the case of Lokhandwala Construction (supra). After considering the assessee's submissions, the AO accepted the same and did not raise objection in relation to interest claimed in the report u/s 245D (3) report filed before the ITSC. Further no disallowance/ adjustment was made by ITSC in relation to such interest claimed while passing the order. The addition made by the AO is directed to be deleted. These grounds of appeal are ALLOWED. 7. On a careful perusal of the order of Ld.CIT(A), we do not see any infirmity in allowing the claim of the assessee as the claim of the assessee is in tune with the decision of the Hon'ble Jurisdictional High Court in the case of Lokandwala Construction (supra) wherein it has been held that when the project constructed by the assessee is its stock in trade and not a fixed asset of the assessee the interest paid on loans obtained for stock in trade is an allowable deduction u/s. 36(1)(iii) of the Act. We also find that in the proceedings before the settlement commission the assessee claimed in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the provisions of rule 8D. However, the learned CIT A addition stating that there is no exempt income earned by the assessee during the year. 014. The learned departmental representative supported the order of the learned AO and submitted that even if there is no exempt income disallowances required to be made. He further supported the order by The Finance Act 2022 amendment made in Section 14 A of the act. 015. The learned authorised representative supported the order of the learned CIT A and submitted that when there is no exempt income there cannot be any disallowance u/s 14 A of the act. He further submitted that the amendment made by The Finance Act 2022 applies prospectively. 016. We have carefully considered the rival contention and perused the orders of the lower authorities. Undisputed fact shows that there is no exempt income and during the year by the assessee. If there is no exempt, income naturally there cannot be any disallowance u/s 14 A of the act because no expenditure has been incurred on any exempt income during the year. Further the reliance placed by the learned departmental representative on the amendment made by the finance act 2022 applies p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as attained finality. Moreover, the Tribunal in its order relating to the asst. yr. 2001-02 has allowed expenditure as revenue expenditure by recording thus: 7. When we apply this functional test suggested by the Special Bench of the Tribunal, we find that impugned software does not form part of the profit-making apparatus of the assessee and hence the same is to be disallowed as revenue expenditure. We hold so because we find that the business of the assessee company is that of manufacturing of telecommunication and power cable accessories and trading in oil retracing system and other products and impugned software is an enterprises resources planning (ERP) package and hence it facilitates the assessee's trading operations or enabling the management to conduct the assessee's business more efficiently or more profitably but it is not in the nature of profit-making apparatus. We, therefore, decide this issue also in favour of the assessee and we hold that this expenditure of Rs. 20.60 lakhs is revenue expenditure. We hold so by following the judgment of the Special Bench of the Tribunal relied upon by the learned Authorised Representative of the assessee. 3. In our v ..... X X X X Extracts X X X X X X X X Extracts X X X X
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