TMI Blog2016 (11) TMI 1713X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee that the said amount was advanced keeping in view commercial expediency as stated above, thus keeping in view our above detailed reasoning, we are of the considered view that the addition made by the Assessing Officer by disallowing the interest expenses and adding the same to WIP is not sustainable keeping in view peculiar facts and circumstances of the case. The revenue is also not able to show that inventories are acquired out of borrowings and interest is to be capitalised keeping in view AS-16 issued by ICAI. The AS-2 issued by ICAI clearly stipulates that generally the interest shall not be added to the inventories as the same does not usually bring the inventories to the present location and condition The assessee has earned interest income from MDC f ₹ 3,37,40,072/- which is offered for taxation, while interest paid for Andhra Bank on OD is ₹ 1,59,27,795/- and hence there is net interest income which had been earned by the assessee. We have also noted a peculiar fact that advances received from customer by the assessee as at 31-03-2012 is ₹ 68.57 crores, while closing WIP is ₹ 45.04 crores, thus advances from customer received by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if C.O is dismissed as withdrawn. 4. After hearing both the parties, we hereby order dismissal of the C.O No.113/PAN/2016 arising out of the appeal ITA No.166/PAN/2016 as withdrawn. We order accordingly. 5. During the course of the assessment proceedings u/s.143(3) r.w.s. 143(2) of the Act, the assessee submitted profit and loss account along with the schedule which included administrative expenses. On perusal of the administrative expenses, it was observed by the AO that assessee has claimed interest of ₹ 1,59,27,795/- paid to Andhra Bank for availing overdraft facilities and it was claimed that the said amount has been utilized for the purpose of working capital requirements. It was observed by the AO that assessee has shown various items in closing stock of W.I.P, but did not included the interest expenses in the computation of closing work in progress. On being asked by the AO that why the interest is not included in the closing work in progress as the loan was utilized for the business purpose, assessee submitted that loan of ₹ 10 Crore taken from the Andhra Bank was for the purpose of working capital requirements as per sanction letter from the Bank and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee by observing that the assessee is running business activities with a motive to earn profit out of business activities. The assessee has paid higher rate of interest to bank and lower rate of interest is charged from the sister concern MDC which is against basic principles of the business of earning profits and hence AO made addition of excess interest of ₹ 54,54,724 being differential interest which addition was made by the Assessing Officer to the income of the assessee without prejudice to the disallowance of interest paid to bank of ₹ 1,59,27,795/- which was also directed to be added to the closing work in progress for the previous year, vide assessment order dated 27/03/2015 passed by the AO u/s.143(3) of the Act. 6. Aggrieved by the assessment order dated 27/03/2015 passed by the AO, the assessee filed first appeal before the ld.CIT(A) wherein the assessee submitted that bank overdraft was taken for the purpose of working capital requirements and utilised not only for construction related payments but also for payments such as administrative expenses including advertisement and publicity, business promotion, brokerage / commissions (sales) etc., and also for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s given directly out of the OD account maintained with Andhra Bank by the assessee to MDC, a partnership firm engaged in construction and real estate business, wherein the assessee hold 50% share in the profits of the firm as partner, the total advance given to MDC during the financial year 2010 -2011 was ₹ 20.70 Crores and it was submitted that advance to MDC was being given out of the commercial expediency and hence the assessee submitted that keeping in view the law and judicial precedents, additions made by the AO should be deleted. The Ld. CIT(A) considered the contentions of the assessee whereby ld.CIT(A) held that assessee had received interest income of ₹ 3,37,40,072/- from MDC on advances granted to MDC, as well the assessee paid interest of ₹ 1,59,27,795/- to the Andhra bank on overdraft account, the net interest is positive income, which interest income of ₹ 3,37,40,072/- has been disclosed as business income and offered for taxation. The loan was taken for working capital requirements which is evident from the sanction letter of the bank. The loan availed from Andhra Bank of ₹ 10 crore was utilised for making payment of ₹ 8 crores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MDC on interest @12% p.a. which led to the loss of ₹ 54,54,724/- to the assessee as the amount was lent to the sister concern by the assessee at lower rate than the borrowing cost. It was submitted that the assessee had advanced ₹ 20.7 crore in the financial year 2010-11 and the total lending was ₹ 30 crore till 31-03-2012. The ld Departmental Representative submitted that the AO has rightly disallowed the same. He drew our attention to the assessment order of the Assessing Officer and it was submitted that interest expenses of ₹ 1,59,27,795/- was also not included in closing W.I.P and interest expense should have been added to W.I.P. as the OD was availed for construction activities on which interest paid by the assessee was ₹ 1,59,27,795/-. With respect to the second issue, the learned Departmental Representative submitted that the assessee has paid interest of ₹ 1,59,27,795/- to Andhra Bank @ 18.25% p.a. and sister concern MDC has been charged interest @ 12% p.a. by the assesse. The ld.CIT(A) has given relief on the ground that the total interest received by the assessee from MDC which was to the tune of ₹ 3,37,40,072/- on total lending ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra Bank on OD account in the preceding year by the Revenue in the assessment framed u/s 143(3) of the Act. 8. We have considered the rival contentions, we have perused the material on record including case laws relied upon by the rival parties. We have observed that assessee is engaged in the real estate and construction business. The assessee had borrowed an amount of ₹ 10 Crores from the Andhra Bank in the financial year 2010-11 on interest @18.25 p.a., out of which ₹ 8 Crores was advanced by the assessee to sister concern MDC @12% p.a.. The said partnership firm is also engaged in real estate and construction and the assessee is partner in the said firm MDC having 50% share in profits. The assessee paid interest of ₹ 1,59,27,795/- to the Andhra Bank on OD of ₹ 10 crores which is stated by the assessee to be sanctioned for working capital purposes. The assessee has in all advanced ₹ 30 crores to its sister concern MDC as at 31-03-2012 on which interest income of ₹ 3,37,40,072/- @12% p.a. was earned by the assessee which was offered for taxation by the assessee. The statement has been made before us by learned counsel for the assessee that th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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