ITAT Upholds Deduction of Interest Expenses for Stock-in-Trade

The ITAT upheld the CIT(A)'s decision, allowing the deduction of interest expenses claimed by the assessee under Section 36(1)(iii) of the Income Tax Act. It was held that interest on borrowed funds used for stock-in-trade is deductible, following precedents and jurisdictional High Court decisions. The proviso to Section 36(1)(iii) was deemed inapplicable as the borrowed funds were utilized for stock-in-trade, not capital assets. The ITAT emphasized that interest expenses should be deducted in the year incurred and cannot be claimed again as part of the work in progress in subsequent years to avoid double deduction. The appeals by the Assessing Officer for the relevant assessment years were dismissed.

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Issues Involved:
1. Deletion of the addition of interest expenses under Section 36(1)(iii) of the Income Tax Act, 1961.
2. Applicability of the proviso to Section 36(1)(iii) introduced by the Finance Act 2003.
3. Treatment of interest expenses in the context of the percentage of completion method.

Issue-wise Detailed Analysis:

1. Deletion of the Addition of Interest Expenses under Section 36(1)(iii):
The primary issue revolves around whether the interest expenses claimed by the assessee under Section 36(1)(iii) should be allowed as a deduction. The assessee, engaged in real estate construction, followed the percentage of completion method for revenue recognition and claimed interest expenses as a deduction. The Assessing Officer disallowed this deduction, arguing that the interest should be capitalized to the work in progress (WIP) and allowed only when the corresponding income is offered to tax. This view was supported by the Special Bench decision in Wall Construction Co Ltd Vs JCIT (102 TTJ 505). However, the CIT(A) deleted the disallowance, relying on the Supreme Court judgment in Taparia Tools Ltd vs. DCIT (2015) 272 ITR 605 and the jurisdictional High Court's decision in Lokhandwala Construction Inds. Ltd. 260 ITR 579, which held that interest on borrowed funds used for stock-in-trade is deductible under Section 36(1)(iii).

2. Applicability of the Proviso to Section 36(1)(iii) Introduced by the Finance Act 2003:
The Assessing Officer argued that the proviso to Section 36(1)(iii), introduced by the Finance Act 2003, prohibits the allowance of interest costs if the borrowed funds are used for acquiring a capital asset. However, the CIT(A) found that the borrowed funds were used for stock-in-trade, not capital assets, making the proviso inapplicable. The CIT(A) relied on the Supreme Court's rejection of the SLP against the Bombay High Court's judgment in Lokhandwala Construction Inds. Ltd., which affirmed that interest on loans for stock-in-trade is deductible.

3. Treatment of Interest Expenses in the Context of the Percentage of Completion Method:
The Assessing Officer contended that the interest expenses should be capitalized to the WIP, as per the Accounting Standard 7 and the guidance note on accounting for real estate transactions issued by the ICAI. The CIT(A) disagreed, stating that interest expenses are a period cost and should be allowed as a deduction in the year incurred. The CIT(A) cited multiple ITAT decisions, including those in the cases of Ashish Builders Pvt Ltd vs. ACIT and Rohan Estates Pvt Ltd vs. ACIT, which supported the view that interest expenses should be charged to the profit and loss account in the year incurred, irrespective of their capitalization as WIP.

Conclusion:
The ITAT upheld the CIT(A)'s decision to delete the disallowance of interest expenses, agreeing that the interest on borrowed funds used for stock-in-trade is deductible under Section 36(1)(iii). The ITAT also noted that the proviso to Section 36(1)(iii) does not apply since the funds were used for stock-in-trade, not capital assets. The ITAT emphasized that the interest expenses should be allowed as a deduction in the year incurred, following the consistent view of the coordinate benches and the jurisdictional High Court's decision in Lokhandwala Construction Inds. Ltd. However, the ITAT clarified that once these amounts are allowed as a deduction in the year of incurring the expenditure, they should not be allowed again as part of the WIP in any subsequent year, to prevent double deduction.

Final Judgment:
The ITAT dismissed the appeals filed by the Assessing Officer for the assessment years 2013-14, 2014-15, and 2015-16, subject to the observation that double deduction of interest expenses is not permissible. The conclusions arrived at by the CIT(A) were approved, ensuring that the interest expenses claimed by the assessee were allowed as deductions in the respective assessment years.

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