TMI Blog2017 (11) TMI 1894X X X X Extracts X X X X X X X X Extracts X X X X ..... rposes of the assessee. The claim of the assessee in capitalising the interest expenditure to the WIP account which was the base for computing or recognising the taxable profits of the year is in accordance with the declared policy of Percentage Completion Method for income recognition.The claim of the assessee is fair and reasonable. Therefore, the order of CIT(A) on this issue is required to be reversed. Accordingly, Ground Nos. 1 to 6 raised by the assessee are allowed. - ITA No.80/PUN/2016 - - - Dated:- 15-11-2017 - Shri D.Karunakara Rao, AM And Shri Vikas Awasthy, JM Assessee by : Shri Nikhil Pathak Revenue by : Shri Mukesh Jha, CIT-DR ORDER D. Karunakara Rao, AM : This is the appeal filed by the assessee against the order of CIT(A)-11, Pune dated 05-11-2015 for the Assessment Year 2011-12. 2 Before us, bringing our attention to the grounds, Ld. Counsel for the assessee submitted that Ground Nos. 7 to 9 are not pressed . Therefore, they are dismissed as not pressed . Referring to Ground Nos. 1 to 6, Ld. Counsel for the assessee demonstrated that these grounds revolve around the core issue of disallowability of interest of ₹ 3,00,5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s sold stock of flats of ₹ 35.97 crores only and WIP of ₹ 98.56 crores is still with the assessee. Assessee has incurred interest expenses of ₹ 8.19 crores during the year and as per chart submitted by assessee, assessee has transferred ₹ 3 crores of financial expenses out of total expenses of ₹ 8.19 crores debited to profit and loss account applying the project completion method. ii. Auditors has also certified it that financial charge of ₹ 3 crores is to be part of WIP and accordingly the same has been reduced from total financial cost of ₹ 8.19 crores and balance financial cost of ₹ 5.19 crores was debited in profit and loss account. iii. However, it has been reduced from computation sheet of income in deviation of audit report and in deviation of method followed by assessee regularly. iv. It is not justifiable that all the financial cost was incurred for earning current year income only although construction of some project is still in progress and assessee has shown WIP of ₹ 98.56 crores in comparison of ready stock of ₹ 35.97 crores. v. the contention of assessee that once business is set up, entire inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure of ₹ 8,19,23,638/- (₹ 5,18,66,672 + ₹ 3,00,57,566/- ) constitutes an allowable expenditure within the meaning of section 36(1)(iii) of the Act. According to the clause (iii) of section 36(1), amount of interest paid in respect of capital borrowed for the purposes of the business or profession constitutes an allowable deduction . He also submitted that the proviso to said clause (iii) prohibits the claim of deduction of any amount of interest paid, in respect of capital borrowed for acquisition of asset . Otherwise, the interest expenditure incurred for the business purposes is an allowable deduction. According to the Ld. Counsel for the assessee who relied on various jurisdictional High Court judgments, amount of interest paid in respect of capital borrowed for the purposes of the business or profession constitutes an allowable deduction . This principles apply to both cases of income recognition (1) by Project Completion Method and (2) Percentage Completion Method. Accordingly, Ld. Counsel submit that this legal position does not change with the method of accounting followed by the assessee. 9. To support the above, Ld. Counsel for the assessee bro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO missed the fact that the assessee follows Percentage Completion Method, and allowed interest expenditure of ₹ 5,18,66,672/-, i.e. the interest relatable to the unutilised portion of the land purchased by the assessee for its business purposes in this year but finally AO is stuck up with the capitalised portion of interest of ₹ 3,00,57,566/- to the working capital account. It is unfortunate that AO s focus is on the allowability of the interest expenditure which is actually relatable to the utilised land for the business purposes in the year under consideration. Ignoring the same, we focus ourselves on the current issue of allowability of the interest claim of ₹ 3,00,57,66/- in the light of the facts and the judgments in force. 12. On perusal of the above jurisdictional High Court judgments as well as the Coordinate Bench decisions as well as the comparative chart containing the facts of the cases with the facts of the present case, we find the issue is already decided in favour of the assessee by the higher judiciary and the Coordinate Bench of the Tribunal. For the sake of completeness, we extract the comparison of the cases cited above : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of some of the expenses to the WIP account i.e. interest on unsecured loan/fixed deposits (sic- car loan), advertisement expenses, brokerage expenses and loan processing fees. Assessing Officer considered the above expenses as relatable to the work-in-progress account and recomputed the WIP account at ₹ 5,33,28,339/-. Assessee contends that the above said expenditure is fully allowable in the year under consideration. In this regard, assessee relied on various 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 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmination 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 reckoned as a part of the cost of production/construction, and thus of the inventory or the project cost as at 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. 01/4/2004, 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 for the period post acquisition of a capital asset, that would stand to be deductible in 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. 7. We have also perused the said binding High Court judgment in the case of M/s. Lokhandwala Construction Industrie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 recognising the income followed by the assessee. The present case involves the payment of interest of ₹ 8,19,23,638/-, the interest paid to debenture holders, Financial institutions, Unsecured loan etc. It is not the case of the Revenue that the interest claim of ₹ 3,00,57,566/- and related capital borrowed was not utilised by the assessee for business purposes of the assessee. Therefore, in our considered opinion, the claim of the assessee in capitalising the interest expenditure of ₹ 3,00,57,566/- to the WIP account which was the base for computing or recognising the taxable profits of the year is in accordance with the declared policy of Percentage Completion Method for income recognition. In our view, the claim of the assessee is fair and reasonable. Therefore, the order of CIT(A) on this issue is required to be reversed. Accordingly, Ground Nos. 1 to 6 raised by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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