TaxTMI 
TaxTMI 
2017 (11) TMI 1894
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....d the said disallowance of interest. 3. Briefly stated relevant facts of the case are that the assessee is a company engaged in the business of Real Estate business. During the year, assessee undertook the 'Ivy Estate' project at Mauze Wagholi, Pune and the same is in progress. Assessee purchased large tracks of land for the real estate business of the assessee and started the said 'Ivy Estate' project on small portion of the said land. In order to finance the said land cost and others, assessee floated the issue of debentures and also raised term loans apart from other unsecured loans. The total interest cost incurred by the assessee in the year under consideration works out to Rs. 8,19,23,638/-. It includes interest portion of Rs. 5,52,37,845/- towards interest relatable to the said debentures, Rs. 2,14,69,374/- towards interest on term loans, Rs. 51,51,137/- towards interest from unsecured loans and finally Rs. 65,282/- towards bank charges. Assessee claimed the entire interest expenditure as 'business expenditure' in two ways. The first way include direct debiting of interest cost of Rs. 5,18,66,672/- to the profit and loss account, copy of the profit and loss account is pla....
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.... method it has to be capitalized. This view is in accordance of auditor's report and method followed by assessee. vi. By making such arbitrary deviation from audit report and in deviation of method followed by assessee regularly assessee has reduced a taxable income of Rs. 3 crores to avoid paying taxes in current year and shifted it to subsequent year. Accordingly, the claim of assessee that interest cost of Rs. 3,00,57,566/-, reduced from computation sheet of income was correctly done has not merit and the same is disallowed and added back to the income of assessee. Penalty u/s.271(1)(c) is initiated separately for inaccurate particulars of income." 5. The above extract provides the information that the AO is under mistaken belief that the assessee follows Project Completion Method and not the Percentage Completion Method. This belief led him to the conclusion that deduction, if any, is allowable only at the end of the project, the year of recognition of the taxable income of the project. Accordingly, the assessee's claim of interest cost of Rs. 3,00,57,566/- was reduced from the computation sheet of income. The said decision of the AO was confirmed by the....
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....uction of interest u/s.36(1)(iii) of the Act on borrowed capital'. This is the case where Project Completion Method was followed by that assessee. Further, referring to the decision of Mumbai Bench of the Tribunal in the case of M/s. Rohan Estates Pvt. Ltd. in ITA No.7200/Mum/2010 order dated 16-01-2013, Ld. Counsel for the assessee submitted that similar view was pronounced following the above judgment. Further, referring to another decision of Mumbai Bench of the Tribunal in the case of M/s. Ashish Builders Pvt. Ltd. Vs. ACIT and vice versa in ITA Nos. 310/Mum/2012, ITA No.1566/Mum/2011, ITA No.7317/Mum/2013, ITA No.433/Mum/2012, ITA No.6658/Mum/2013 order dated 23-09-2016 (where one of us is the party), Ld. Counsel for the assessee submitted that the entire interest expenditure on the borrowed loan is held allowable in the case of the assessee who follows the Percentage Completion Method. The facts of this case are very close to the facts of the present case. In the said case, the Revenue did not allow the deduction of interest expenditure for the purpose of capitalising to the WIP account and strangely allowed the interest segment relatable to the loan attributable to the unuti....
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....ed in the business of construction of flats Engaged in the business of construction of flats 3 Utilisation of loan For execution of the project For execution of the project For purchase of development rights of the plot 4 Contention of the A.O. The interest relating to the area which is under construction should be capitalised to the work in progress The interest relating to the area which is under construction should be capitalised to the work in progress The interest paid on the loan purchase of development rights of the plot should be capitalized to the work in progress 5 Whether the construction of the project had commenced Yes Yes No 6 Claim of interest The assessee has contended that the entire interest incurred by it should be allowed as a deduction while computing its profits Even in the case of Ashish Builder, the assessee has claimed deduction of entire interest expenditure while computing its income The assessee has stated that the interest paid is to be allowed as a deduction while computing its income The above comparative chart advocates for allowing the interest expenditure on the capital borrowed for ....
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....art, if any, sold, the interest cost would continue to be incurred on the entire capital, even as no corresponding gain inures in 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 to year basis. The same also 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....
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.... 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 assessee 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 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....