TaxTMI 
TaxTMI 
2022 (5) TMI 599
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....s 8,77,48,747 for the assessment year 2015-16, and reads as follows: "1. Whether on the fact and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs.7,77,81,219/- 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) erred in deleting the addition of Rs.7,77,81,219/- relied upon the decision of the judgement 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. The issue in the appeal lies in a very narrow compass of material facts. The assessee is engaged in the business of real estate construction and development. The assessee is following the mercantile system of accounting and, so far as recognition of revenue is concerned, the assessee is following the percentage of completion method of accounting. When it comes to the treatment given to the interest paid by the assesseee, on its loans, is concerned, while the assessee takes it to the work in progress, but then i....
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....ble Special Bench Mumbai in the case of M/s Wall Street Construction Limited [102 TTJ 505] wherein the Hon'ble bench has held that the interest cost shall be debited to work in progress and allowed to be claimed as deduction only in the year in which corresponding income is offered to tax. The case laws relied upon by the assessee is distinguishable as in the case of Taparia (supra), the assessee was not a construction company so its distinguishable on facts. The judgment of Lokhandwala (supra) were rendered before the proviso to section 36(1)(iii) has been inserted vide Finance Act 2003. Therefore, both the cases are not applicable in the facts of the assessee. In view of the above facts and legal position, the interest cost of Rs.7,77,81,219/- is disallowed and added to the work in progress of the assessee." 4. When the matter travelled in appeal before the learned CIT(A), these disallowances were deleted. The line of reasoning adopted by the learned CIT(A), as evident from the observations in the assessment year 2013-14 and the observations in the other assessment years being materially identical, is as follows: 6.3. The submissions of the Ld. counsel have been c....
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....ld as under: "A) Interest on unsecured loans and fixed deposits: It is the claim of the assessee that the entire interest expenditure is allowable as it is a time related fixed finance cost on the borrowed capital. The claim of the assessee should be allowed in full in view of the various decisions on this issue. To start with, we perused the order of the Tribunal in the case of Rohan Estates Pvt Ltd. (supra) which is one of the sister concerns of the assessee. We perused the para 3.2 of the said order of the Tribunal and find it is a self explanatory and the decision of the Tribunal supports the case of the assessee. Under comparable facts of the assessee, interest cost was allowed in favor of the assessee relying on binding jurisdictional High Court judgment in the case of M/s Lokhandwala Construction Industries Ltd. (supra). For the sake of completeness of this order we extract relevant para 3.2 of the order which is reproduced as under: "3.2 With regard to the interest expenditure............The interest cost on the corresponding capital borrowed would nevertheless continue to be incurred, without any corresponding increase in the value of the inventory or the....
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.... 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(1)). 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." We have also perused the said binding High Court judgment in the case of M/s Lokhandwala Construction inds. Ltd. (supra) and find the same is relevant for the following conclusion - "construction project undertaken by the assessee builder constituted its stock in trade and the assessee was entitled to deduction under section 36(1)(iii) of the Act in respect of the interest on the loan obtained for execution of said project." Relying on the another judgment of Hon'ble Bombay High Court in the case of Calico Dying and Printing Works 34 ITR 265 Bombay, Hon'ble Bombay High Court concluded that the interest expenditure relating to the borrowed capital is allowable u/s 36(1)(iii) of the Act. The relevant lines from the para 4 reads as under; "that, while adjudicating the claim for deduction under sectio....
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.... say as its optimum or normative level, on account of various business exigencies. The interest cost on the corresponding capital borrowed would nevertheless continue to be incurred, without any corresponding increase in the value of the inventory or the project. Similarly, a project, or part thereof, may be partly sold or even remain unsold for quite some time after its completion. While revenue would stand to be booked only on the part, if any, sold, the interest cost would continue to be incurred on the entire capital, even as no corresponding gain inures I 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 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 fo....
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.... find the Mumbai Bench of the Tribunal in the case of M/s Ashish Builders Pvt. Ltd.(supra) has decided an identical issue in favour of the assesses. Relevant Paragraphs are being reproduced hereunder for better appreciation of the issue: "6. Ground No. 1 of the appeal relates to the addition of some of the expenses to the WIP account i.e. interest on unsecured loan/fixed deposit (sic-car loan), advertisement expenses, brokerage expenses and loan processing fees. AO considered the above expenses as relatable to the WIP account and recomputed the WIP account at Rs.5,33,28,399/-. Assessee contends that the above said expenditure is fully allowable in the year under consideration. In this regard, assessee relied on various ITA No. 80/PUN/2016 M/s Kolte Patil Developers Ltd., decisions. This issue is relevant for A Ys/appeals under consideration. We shall take up expenditure-account wise adjudication in the following paragraphs: "A) Interest on unsecured loans and fixed deposits: It is the claim of the assessee that the entire interest expenditure is allowable as it is a time related fixed 'finance cost on the borrowed capital. The claim of the assessee should be a....
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....erations or on capita! 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 deductibility of the said cost u/s 36(1)(iii) is thus neither in doubt nor in dispute. Further, it may also be in place to state that section 36(1)(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(1)). The said decision may, thus,....
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....assessee." 6.8. From the above, it is evident that any amount of the interest paid in respect of capital borrowed for the business purposes constitutes an allowable deduction. The said clause (iii) of section 36(1) of the Act supports the assessee's claim in the present case. This view is upheld in the case of CIT vs Lokhandwala Construction Industries Ltd. (supra) as well as the decision of the Tribunal in the case of M/s. Ashish Builders Pvt. Ltd. (supra) irrespective of the method of accounting of recognizing the income followed by the assessee. The present case involves the payment of interest of Rs.2469.34 lakh, the interest paid to debenture holders, Financial institutions, Unsecured loan etc. It is not the case of the Revenue that the interest claim of Rs.777.81 lakh and related capital borrowed was not utilized by the assessee for business purposes of the assessee. 6.9 The case of Wall Street constructions Ltd. (2006) 102 TTJ 505 is one where the assessee was following project completion method and therefore the ITAT held that the interest cost shall be debited to work in progress and allowed to be claimed as deduction only in the year in which the cor....
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....this factual verification. In any event, he vehemently relies upon the stand of the Assessing Officer and submits that the deduction of interest should not be allowed under section 36(1)(iii) in view of proviso thereto as also in view of the fact that at the point of time of booking related revenues, the WIP, which includes interest charges as well, the deduction is allowed anyway. We are, however, not inclined to approve his this plea in principle for the reason that the coordinate benches have consistently held that in view of the specific provisions under section 36(1)(iii), interest is to be allowed as a deduction irrespective of its capitalization as WIP, but while charging the WIP, corresponding reduction is to be allowed for the interest already claimed as deduction. In any event, the very foundation of disallowance is special bench decision in the case of Wall Street Construction (supra) which stands reversed by Hon'ble jurisdictional High Court in the case of CIT Vs Lokhandwala Construction Industries Limited (260 ITR 579) which holds good even today. The proviso to Section 36(1)(iii) does not come into play in the present case as the residential units are part of the stoc....