Tribunal upholds deduction of interest expenses in real estate project under Income Tax Act

The tribunal affirmed the CIT(A)'s decision to delete the disallowance of interest expenses claimed as revenue expenditure by the assessee in a real estate development project. The tribunal held that the interest expenditure was deductible under Section 36(1)(iii) of the Income Tax Act as it was related to stock in trade and borrowed funds were utilized for the project. The appeals of the revenue were dismissed, and the order confirmed the allowance of interest expenses as a deduction in the year of incurrence.

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Issues Involved:
1. Justification of the deletion of disallowance of interest expenses by the CIT(A).

Issue-wise Detailed Analysis:

1. Justification of the Deletion of Disallowance of Interest Expenses by the CIT(A):

The core issue in these appeals was whether the CIT(A) was justified in deleting the disallowance of interest expenses, which the AO considered capital in nature. The appeals arose from the orders of the CIT(A), Mumbai, against the assessment orders passed under Section 143(3) of the Income Tax Act, 1961.

The assessee, engaged in real estate construction and development, was developing a residential project named 'Casa Royale' at Thane. The AO observed that the assessee had debited Rs. 5,00,78,994/- as interest cost retained in inventory, claimed as revenue expenditure. The assessee followed the Percentage of Completion Method (POCM) for recognizing revenue and had borrowed interest-bearing funds for construction. The AO noted that all expenses directly related to the project should be debited to the cost of the project and claimed as deduction in the year the corresponding income is credited and offered to tax. However, the assessee claimed the interest expenditure as revenue expenditure in the year of incurrence, relying on the decision of the Hon'ble Jurisdictional High Court in CIT vs. Lokhandwala Construction Ind. Ltd.

The CIT(A) granted relief to the assessee, relying on the tribunal's decision in the assessee's own case for the A.Y. 2014-15, where it was held that the interest expenditure could not be treated as capital expenditure nor added to the work in progress. The AO's reliance on the Special Bench decision in M/s Wall Street Construction Ltd., where the assessee followed the Project Completion Method, was found distinguishable as the assessee in the present case followed POCM.

The tribunal observed that the main controversy before the Hon'ble High Court in Lokhandwala Construction was identical to the present case, where the interest expenditure was related to stock in trade, and the loan obtained was for stock in trade. The Hon'ble High Court held that such interest expenditure is deductible under Section 36(1)(iii) of the Act and should not be added to the work in progress.

The tribunal further noted that the assessee's activity was solely the development of the residential project 'Casa Royale,' and the borrowed funds were utilized for this purpose, constituting the stock in trade. The tribunal also referred to its previous decisions in similar cases, including group entities, where it consistently allowed the deduction of interest expenditure under Section 36(1)(iii) of the Act.

In conclusion, the tribunal found no infirmity in the CIT(A)'s order granting relief to the assessee and dismissed the revenue's appeals, affirming that the interest expenditure should be allowed as a deduction in the year of incurrence.

Judgment:
The appeals of the revenue were dismissed, and the order pronounced on 21/09/2022 confirmed the CIT(A)'s decision to delete the disallowance of interest expenses.

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