TaxTMI 
TaxTMI 
2021 (4) TMI 115
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....putation of taxable of income without assigning proper reasons and justification. 3. The CIT (Appeals) failed to appreciate that the findings recorded in Page No.26 to Page No.32 of the impugned order to sustain the disallowance of interest expenses were wrong, erroneous, unjustified, incorrect invalid and not sustainable both on facts and in law. 4. The CIT (Appeals) failed to appreciate that the misconstruction of the provisions of section 36(1)(ii) of the Act would vitiate the decision rendered while ought to have appreciated that the non consideration of the allowability of the interest expenses u/s.37(1) of the Act should be reckoned as bad in law. 5. The CIT (Appeals) failed to appreciate that the misreading of AS16 had resulted in passing the wrong order on this issue and ought to have appreciated that there could not be any segregation of the projects undertaken by the appellant especially such projects were executed under common management, thereby vitiating the standalone treatment which led to the sustenance of the disallowance of the interest expenses. 6. The CIT (Appeals) failed to appreciate that the conclusion reached on the non co....
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....ate development segment of business is one and hence, when the assessee has started its business activity and realizing revenue from such business, then interest paid on loan borrowed for the purpose of said business has to be allowed as deduction, even though, proviso provided to section 36(1)(iii) of the Act, states that interest cost of loan borrowed for the purpose of acquisition of asset needs to be capitalized, till such asset is put to use in the business of the assessee, because the assessee has already put to use land purchased for the purpose of development of housing project. 4. The Assessing Officer however, was not convinced with the explanation furnished by the assessee and according to him, interest cost on loan borrowed for the purpose of acquisition of asset needs to be capitalized till such asset is put to use in the business of the assesse. Since, the land purchased in MRC Nagar, Chennai was not put to use in the business of the assesse, interest paid on loan borrowed for acquisition of property at MRC Nagar should be added to cost of the asset, but cannot be claimed as deduction under section 36(1)(iii) of the Act. The Assessing Officer has discussed the issu....
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....of Rs. 41 .37 Crore on this borrowal to the Work in Progress of MRC Nagar project Instead assessee chose to claim the entire interest expense as revenue expenditure for AY 2015-16. whereas no income was offered for the MP.C Nagar project. 11.6 Assessee's submission that the AS16 is applicable lot loan's obtained for acquiring fixed assets alone and not for inventory is not acceptable The definition of qualifying asset used in AS16 does not differentiate between the fixed asset and inventory. The words Put to use or interned for sale make it clear that the standard is applicable for both fixed asset as welt as inventory. 12 Decisions Relied on by Assessee: 12.1 Assessee placed reliance on the decision in the case of Core Health care Ltd(supra). This decision is about whether the proviso inserted in sec 36(1(iii) with effect from 01.04.2004 has to be read prospectively or not Thus his decision has no relevance to the facts and circumstances of the assessee's case. 12.2 Assessees reliance on the decision in the case of India Cements Ltd vs CIT I 960 60 ITR 52(SC) also does not come to the rescue. This decision is on allowability of expenditure on st....
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....f income only should be deducted Iron, such income so that a correct picture of the total income chargeable to tax can emerge Reliance is placed on the decision in the case of Taparia Tools Ltd vs. JCIT(2003) 260 lTR 102 It was held in this case as under:- Therefore, under the mercantile system of accounting in order t determine the net income of an accounting year the revenue and other incomes are matched with the cost of resources consumed (expenses),. Under the mercantile system of accounting, this matching is required to be done on accrual basis Under this matching concept, revenue and income earned during the accounting period irrespective of actual cash inflow. is required to be compared with expenses incurred during the same period irrespective of actual inflow of cash. 13.4 Reliance is also placed on the Hon'ble Supreme Court decision in the case or CIT vs. UP State Industrial Development Corporation (1997) 225 ITR 703 which held that in order to determine the question of taxability well settled legal principles as well as principles of accountancy have to be taken into account and that to, the purpose of ascertaining profits and gains, the ordinary princi....
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....the purpose of construction of housing project is nothing but an inventory in the business of the assessee and further, once inventory is acquired immediately the same would be put to use in the business of the assessee. Therefore, following the principles provided in AS-16 to disallow interest paid on loan borrowed for the purpose of business is incorrect, more particularly, when purpose of AS-16 is to give treatment of borrowing cost. 6. The learned CIT(A), after considering relevant submissions of the assessee rejected the arguments taken by the assessee in light of various decisions including the decision of Taparia Tools Ltd (supra) on the ground that when the assessee has not yet commenced its business, the question of deduction of interest u/s.36(1)(iii) of the Act does not arise. The learned CIT(A) further observed that loan borrowed from IFCI Ltd. was exclusively for MRC Nagar project and said project was not yet commenced its activities. Although, the assessee has started recognizing revenue from real estate segment, but revenue was coming from Atlantic project, Egmore, which is distinct from MRC Nagar project. Further, the assessee itself in its director's report f....
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.... of borrowing cost eligible for capitalization on that asset should be determined as the actual borrowing cost incurred on that borrowing- The A.O inferred that according to AS 16, capitalization of borrowing cost should cease when substantially all the activities necessary to prepare the qualifying assets for its intended use or sale are complete. The A.O held that as the appellant is following the Accounting Standards of ICAI. It ought to capitalize the interest cost of Rs. 41.37 crores on the loan of Rs. 300 crores from IFCl Ltd. Instead it was noted that the appellant claimed the entire interest expense as revenue expense for the AY 2015-16. It was pointed out by the AO that the definition of qualifying asset used in AS 16 does not differentiate between fixed asset and inventory, It was also held that the interest identifiable with the project should be allowed only in the year when the project was completed and the income from that project was offered for taxation. In their written submissions, the appellant held that the interpretation of AS 16 by the A.O was not in proper prospective since the A.O referred to those portions of the Accounting Standard which dealt wit....
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....s and judicial decisions pertaining to the appeal have been carefully considered. In order to get a clear picture regarding the factual maths, the appellant was asked to furnish a note on unsecured loans and a break-up of (I) the property development and construction WIP (ii) Bank Interest and (iii) Financial Institution/other interests. The loan taken from IFCI Ltd Chennai was recorded under the head Financial Institution/other interest'. The total amount outstanding as on 31/3/2015 was Rs. 30l,92,12,329/- and the interest amounted to Rs. 41,37,73,978/-. The total interest under this head stood at Rs. 41,60,53,605/-. The break-up of property development and construction WIP which amounted to Rs. 845.67 crores comprises two projects, Atlantic Egmore and MRC Nagar. In the case of Atlantic, Egmore, it was noted that a sum of Rs. 47,56.72,678/- was offered as profit and the closing WIP was Rs. 304,46,64,205/-. In the case of MRC Nagar, no profit was offered during the financial year 2014-15. The current year expenditure was Rs. 5,1768,617/- and the closing Work-in-Progress stood at Rs. 541,2134044)-. Thus) it is noticed that in the case of MRC Nagar Project the current year expenditur....
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....ively and not with the other projects as it is governed by a separate set of term, and conditions. The A.O had relied on Accounting Standard 16 proscribed by ICAl and held that these borrowing cost which are specifically meant for obtaining a qualifying asset i.e. the land at MRC Nagar should be capitalized as part of the cost of the asset. The appellant, on the other hand, had referred to Accounting Standard 2 and maintained that the appellant was justified in considering interest as a period cost and debiting it in its P& L Account. In order to resolve this debate, the various criteria adopted by these Standards are considered herewith: AS 16 This standard deals with borrowing cost- It was held that meeting a portion of business needs through borrowals was a well accepted form of financing. It dealt with situations where the time lag between building up of an asset and subsequent creation of earnings from the property is substantially long. Preamble to AS 16 stated that in such events under the accrual and matching principle, the interest paid on funds specifically for that purpose (Long Term or capital expenditure)should be so expensed as would match with futur....
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....s reflected in the Balance sheet- Items such as expenses, revenues or book debts can be recorded in the books of accounts with a fair degree of accuracy- But an element of subjectivity is involved in measurement of items such as depreciation or inventory value- Inventories are assets held for sale in the ordinary course of business, in the process of production for such sale or in the farm of materials or supplies to be consumed in production process or in the rendering of services. It also includes intangible items such as software. The AS 2 does not cover WIP under construction contracts. Hence, this Accounting Standard cannot be considered appropriate for determining the nature of borrowing cost in the appellants case. During the appellate proceedings, the AR furnished abstract of the expenses pertaining to MRC Nagar project for the AY 2015-16. A perusal of these expenses reveals that they were in the nature of advertisement expenses, architect fees CMDA charges, consultancy charges, electricity charges, legal lees, rent, security charges, site expenses, various labour charges and purchase of materials. The appellant had also furnished the ledger accounts for these expe....
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....re of the appellant during the FY ended 31/3/2015. The appellant relied on the decision of the Supreme Court in the case of Taparia Tools Ltd vs. JCIT (2015) 372 ITR 0605 (SC). The Apex Court ruled that any amount of interest paid becomes an admissible deduction u/s.36 if the interest was paid on the capital borrowed by the appellant and this borrowing was for the purpose of business or profession. In that case, the money raised on account of issuance of debentures would be capital borrowed and debentures were issued for the purpose of the business of the assessee. The Supreme Court ruled that when the interest was actually incurred by the appellant which follows the Mercantile system of Accounting, the appellant would be entitled to deduction of full amount in the assessment year in which it is paid. It was also held that once the genuineness is proved and the interest is paid on the borrowing it is not thin the powers of the A.O to disallow the deduction either on the ground that the rate of interest is unreasonably high or that the assessee had himself charged a lower rate of interest on the moneys he lent. It was further stated that normally the ordinary rule ....
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.... justified in claiming the sum of Rs. 41,37,73,978/- as admissible interest expenditure. The additions made by the A.O are upheld This ground of appeal is dismissed." 7. The learned AR for the assessee submitted that the learned CIT(A) has erred in sustaining the disallowance of deduction claimed towards interest expenses u/s.36(1)(iii)/ 37(1) of the Act, without appreciating the fact that interest paid on loan borrowed from IFCI Ltd. is for the purpose of business of the assessee and further, said business activity was commenced during the impugned assessment year. The AR further submitted that the Assessing Officer as well as the learned CIT(A) have completely erred in following AS-16 issued by ICAI, which is for recognizing borrowing cost ignoring specific provisions provided under the Act to treat interest paid on loan borrowed for the purpose of business, without appreciating the fact that AS-16 issued by ICAI cannot override the provisions of Income Tax Act . The AR further submitted that the Assessing Officer has applied provisions of section 36(1)(iii) of the Act and proviso provided thereto to disallow interest without appreciating the fact that the term 'put to use' wi....
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....cause AS-2 pertains to valuation of inventory and does not cover work in progress under construction contracts. The DR referring to pre-disbursement conditions of IFCI Ltd. imposed while granting loan submitted that lender has retained right to appoint an independent agency to verify sales of MRC Nagar project on a monthly basis and further, loan borrowed from IFCI Ltd. was exclusively for the MRC Nagar project. Therefore, even though the assessee has not maintained details separately pertaining to MRC Nagar project in its balance sheet, the fact remains that MRC Nagar project is a standalone project and has to be considered distinctively, as it is governed by a set a terms & conditions. The learned DR further referring to the decision of Hon'ble Supreme Court in the case of L.M.Chhabada & Sons Vs.CIT 65 ITR 638 and a decision of Hon'ble Calcutta High Court in the case of Ritz Continental Hotels Vs. CIT 114 ITR 554(Cal) submitted that MRC Nagar project should be treated as standalone project because there is no interlacing, interconnection, interdependence or dovetailing with other project at Egmore either operationally or financially or spatially. Further, mere classificati....
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....is one business of the assessee, but project at Egmore and MRC Nagar should be considered on standalone basis and if two projects are considered on standalone basis, the project at MRC Nagar is yet to commence its activities in the impugned assessment year and thus, any expenditure including interest paid on loan borrowed for the purpose of project needs to be capitalized and added back to work-in-progress account. The Assessing Officer has taken support from AS-16 issued by ICAI and principles of matching concept of accounting to support his finding and according to him; unless revenue is recognized from the project corresponding expenses cannot be allowed. The Assessing Officer has also relied on AS-16 issued by ICAI to come to the conclusion that borrowing cost of eligible asst should be capitalized as part of cost of that asset till such time all the activities necessary to prepare the qualifying asset for its intended use or sale are complete. 10. In light of above factual matrix, if you examine facts of the present case, it is necessary to understand the provisions of section 36(1)(iii) and proviso provided thereto.. The provisions of section 36(1)(iii) of the Act deals wi....
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....quisition of a capital asset. In the present case, land purchased by the assessee in the business of real estate segment is an inventory and further, the moment land was purchased it becomes inventory of the assessee and put to use in the business of the assessee. Therefore, in our considered view, it is incorrect to apply AS-16 to treat interest paid on loan borrowed for the purpose of acquisition of asset, which is in the nature of inventory in the business of the assessee. 12. Having said so, let us examine another reason given by the Assessing Officer in light of proviso to section 36(1)(iii) of the Act. As stated in earlier paragraphs the proviso was inserted u/s. 36(1)(iii) of the Act to disallow interest paid on loan borrowed for acquisition of asset till such time said asset was ready for use in the business of the assessee . The term 'put to use' used in the said proviso would have a far reaching consequence for negating thought process of revenue in the present case, inasmuch as the term 'put to use' would be applied to capital asset / income earning apparatus / facilitating the business activity and hence, the statute envisages importance of such capital asset should ....
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....d substantial income from other project namely Atlantic and hence, the attempt to apply matching concept principle is totally misconceived and would fall to the ground. Therefore, on the cumulative consideration, the reasons given by the Assessing Officer to disallow interest u/s. 36(1)(iii) of the Act in the computation of taxable income is not in accordance with law. 13. Coming to the case laws relied upon by the learned AR for the assessee. The AR has relied upon the decision of Hon'ble High Court of Rajasthan in the case of CIT Vs. Aditya Propcon Pvt. Ltd. (supra), where the Hon'ble High Court under identical circumstances held that interest on funds borrowed to purchase land which is part of inventory of the assessee is allowable deduction u/s. 36(1)(iii) of the Act. The Hon'ble High Court further held that proviso to section 36(1)(iii) of the Act specifically referred to the interest paid in respect of capital borrowed for acquisition of an asset for extension of existing business. The present case is acquisition of land for its development in the course of real estate activities of the assessee. The assessee is about to complete one project and to continuing its activitie....
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....rement of AS-16, not to capitalise the interest cost along with the cost of land if it is held without any associated development activity. Accordingly, the accounting treatment of the interest cost is perfectly in line with the Accounting Standards. We further find that despite any accounting treatment, the interest on capital borrowed for the purpose of business is allowable u/s 36(1) (iii). A proviso has been inserted w.e.f. 1.4.2004 which reads as under:- "Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalised in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction". The proviso specifically referred to the interest paid in respect of capital borrowed for acquisition of any asset for extension of existing business. The present case is of acquisition of land for its development in course of real estate activity of the assessee. Assessee is about to complete one projec....