TaxTMI 
TaxTMI 
2022 (9) TMI 152
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....g the same under fixed assets and allowing depreciation. 2. On the facts and circumstances of the case as well as in law, the Learned CIT(A) has erred in confirming the action of the Learned Assessing Officer to the extent of limiting the deduction u/s 80GGB to Rs 11,00,00,000 against Rs 11,65,34,000 claimed by the Appellant in respect of donation given to political parties on the ground that the receipts are not available without appreciating the fact that bank statement discloses such contribution to the political party." 03. In appeal of ld AO following Grounds in ITA no. 1594/mum/2019 are raised :- "1. "Whether on the fact and circumstances of the case and in law, the Ld. CIT(A) was correct while deleting the addition of Rs. 2,24,11,60,000/- 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) was correct while deleting the addition of Rs.2,24,11,60,000/- relied upon the decision of the judgment of the jurisdictional High Court in the case of Lokhandwala Construction Inds Ltd 260 ITR 579 the same were rendered before the proviso to sectio....
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.... Ltd 260 ITR 579. The learned AO supported his view by the decision of special bench in Wall Street constructions limited 102 TTJ 505. Accordingly he disallowed the interest cost of Rs. 2,241,160,000/-. ii. The AO further found that assessee has incurred cost of 3,59,77,997/- on account of ERP expenses. AO noted that the same has enduring potential and can be treated as a capital expenditure. Assessee submitted copies of the bills for examination and stated that this is revenue expenditure. The learned AO rejected the contention of the assessee and held that the same expenditure is capital expenditure and depreciation at the rate of 25% is allowable. Therefore on the total expenditure of Rs. 35,977,997/- was considered as a capital expenditure and consequently depreciation thereon at the rate of 25% of Rs. 8,994,500/- was allowed on net disallowance of Rs. 26,983,497/- was made. iii. During the year the assessee has made up donation to political parties amounting to Rs. 116,534,000/- and claimed deduction at the rate of hundred percent u/s 80 GGB of the act. The assessee could produce only the receipt of Rs. 10 crores and therefore the learned that the assessing O....
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....espect to deduction Under Section 80 GGB of the act of Rs. 16,534,000/- he found that assessee has submitted the receipt of Rs 1 crore paid to Maharashtra Pradesh Rashtrawadi Party and therefore he deleted the addition to the extent of that sum and confirmed the disallowance of Rs. 6,534,000/-. iv. The assessee did not press grounds with respect to deduction u/s 80 IB and hence it was dismissed. v. With respect to the disallowance u/s 14 A of the act he directed the learned AO to delete the above disallowance on the ground that during the year there is no exempt income. 07. Both the parties are aggrieved with the order of the learned CIT - A and therefore are in cross appeal before us. 08. Coming to the appeal of the learned assessing officer where ground number 1 and 2 are raised with respect to the disallowance of Rs. 2,241,160,000/- on account of interest expenditure deleted by the learned CIT - A. 09. The learned departmental representative vehemently supported the order of the learned assessing officer and submitted that as the assessee is following the percentage completion method, the above interest should form part of work in progress and as soon ....
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....the year in which such an amount was actually paid or incurred. Further, the proviso introduced by the Finance Act 2003 prohibits the allowance of interest cost only if the borrowed funds have been utilized for acquisition of a capital asset even for existing business. In this case the borrowed funds have been utilized for stock in trade which is not a capital asset. The jurisdictional Bombay High Court in the case of Lokhandwala constructions Inds Ltd 260 ITR 579 held as under: "in the instant case, it was dear that the assessee undertook two-fold activities. It bought and sold flats. Secondly, the assessee was also engaged in the business of construction of buildings. The profits from both the activities were assessed under section 28. The assessee had undertaken the project of construction of flats. Therefore, the loan was obtained for obtaining stock-in-trade. The project constituted the stock-in-trade of the assessee. The project did not constitute a fixed asset of the assessee. Since the assessee had received loan for obtaining stock-in-trade, it was entitled to deduction under section 36(1)(iii). While adjudicating the claim for deduction u/s 36(l)(iii), th....
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.... 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 followed, with the mandate of sec 36(l)(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(l)(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 may clarify, is not as to whether the borrowed capital stands utilized toward trading operations or on capital 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 y....
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....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 accounts of the respective assessment years. Thus, we order the Assessing Officer to accept the claim as made in the return of income. Accordingly, this part of the ground No. 1 is allowed in favour of the assessee" The Hon'ble ITAT in the case of ITO vs Rohan states ITA number 7200/MUM/2010 held as under: "3.2 With regard to the interest expenditure, though the Accounting Standard -2 (AS-2) on the valuation of inventories issued by the Institute of Chartered Accountant of India (ICAI) would suggest that the....
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....mer, 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 deducibility of the said cost u/s 36(l)(iii) is thus neither in doubt nor in dispute. Further, it may also be in place to state that section 36(l)(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(l)). The said decision may, thus, in the given facts and circumstances of the case as, well as the amended la....
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.... 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 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 nf law Inasmuch as sec. 145 clearly pr....
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.... 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(l)(iii) of the Act. The relevant lines from the para 4 reads as under; "that, while adjudicating the claim for deduction under section 36(l)(iii) of the Act the nature of expense 0- whether the 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(l)(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 settl....
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.... of introducing the proviso to section 36 (1) (iii) also does not affect the facts of the case of the assessee. In view of the binding judgment of the jurisdictional High Court in the case of Lokhandwala constructions and also of the jurisdictional ITAT in the cases of Ashish Builders Private Ltd and Rohan Estate Private Ltd and also the various judicial pronouncements relied upon by the assessee the interest expenditure claimed by the assessee is held to be allowable, It is also to be mentioned here that during the proceedings before the Income Tax Settlement Commission, the AO had raised specific question in relation to claim on interest expenditure made by the appellant and reply was filed by the appellant explaining the same. Wherein the assessee explained that disallowance cannot be made u/s 36(l)(iii) of the Act, in view of the jurisdictional High Court's decision in the case of Lokhandwala Construction (supra). After considering the assessee's submissions, the AO accepted the same and did not raise objection in relation to interest claimed in the report u/s 245D (3) report filed before the ITSC. Further no disallowance/ adjustment was made by ITSC in relation to such....
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.... been taken is not a stock in trade and also the other findings of the Ld.CIT(A), we do not find any valid reason to interfere with the findings of the Ld.CIT(A) and accordingly we sustain the order of the Ld.CIT(A) on this issue. Grounds raised by the revenue are rejected. 012. We find that the order of the learned CIT - A is also on identical lines. Therefore, respectfully following the decision of the coordinate bench in assessee's own case, we confirm the order of the learned CIT - A in deleting the disallowance of Rs. 2,241,160,000/-. Accordingly, ground number 1 and 2 of the appeal of the AO is dismissed. 013. With respect to ground number 3 the learned assessing officer has disallowed expenses u/s 14 A of the act invoking the provisions of rule 8D. However, the learned CIT - A addition stating that there is no exempt income earned by the assessee during the year. 014. The learned departmental representative supported the order of the learned AO and submitted that even if there is no exempt income disallowances required to be made. He further supported the order by The Finance Act 2022 amendment made in Section 14 A of the act. 015. The learned authorised represen....
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....rder of the learned lower authorities. 021. We have carefully considered the rival contentions and perused the orders of the lower authorities. The assessee has incurred ERP expenditure and license fees for the software. Honourable Bombay High Court in 346 ITR 318 in case of CIT versus Raychem RPG Ltd covers the issue wherein it has been held as Under:- "2. As regards the first question, Tribunal relying upon its order in the assessee's own case relating to asst. yr. 2001-02 held that the software expenditure was revenue expenditure. The appeal filed by the Revenue for the asst. yr. 2001-02 has been dismissed for want of removal of office objections and thus the order passed by the Tribunal for the asst. yr. 2001-02 has attained finality. Moreover, the Tribunal in its order relating to the asst. yr. 2001-02 has allowed expenditure as revenue expenditure by recording thus: "7. When we apply this functional test suggested by the Special Bench of the Tribunal, we find that impugned software does not form part of the profit-making apparatus of the assessee and hence the same is to be disallowed as revenue expenditure. We hold so because we find that the busines....