TMI Blog2022 (7) TMI 1254X X X X Extracts X X X X X X X X Extracts X X X X ..... ible expenditure. It is also fact on record that in the subsequent AY, these bonds were redeemed and the actual loss incurred due to exchange fluctuations. The assessee normally would have claimed the loss in the subsequent AY, since it has anticipated the loss by monitoring rate fluctuations (the Mark to Market), it predicted possible loss and it booked the loss prudently. We observe that the courts have held that the Mark to Market losses are revenue in nature and it should be treated as such. In the given case, the assessee has booked the loss in two parts and once part claimed in the present AY and balance part of actual loss was claimed in the subsequent AY. It is needless to say that the loss was allowed by the Assessing Officer in the subsequent AY as revenue. Therefore, the loss claimed by the assessee is part of actual loss and it may look as claimed on the basis of provision but it is part of actual loss. Therefore, in our considered view, the loss claimed by the assessee in this AY is claimable u/s 37 - Hence, we direct the AO to allow the foreign exchange loss claimed by the assessee. Accordingly, the ground raised by the assessee is allowed. Disallowance being 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee relating to the provision made in respect of TDR. We understand that assessee preferred an appeal before appellate authorities in the AY 2013-14, we direct Assessing Officer to verify the outcome of the appellate proceedings, in case it is rejected by the appellate authorities, the assessee may be given due benefit. In case assessee prefers to drop the proceedings initiated before the appellate authorities, then the Assessing Officer may pass the necessary benefit to the assessee and entertain the claim of the assessee. Accordingly, additional ground raised by the assessee is allowed for statistical purpose. Education cess deductible u/s. 37(1) - HELD THAT:- After considering the submissions and the latest amendments in the Finance Act, this issue is already reached finality. Accordingly, additional ground raised by the assessee is dismissed. - ITA NO. 2349/MUM/2018 And ITA NO. 2148/MUM/2018 - - - Dated:- 12-5-2022 - Shri S. Rifaur Rahman, Hon'ble Accountant Member And Shri Pavan Kumar Gadale, Hon'ble Judicial Member For the Assessee : Shri Rajan Vora And Shri Hemen Chandariya For the Department : Shri Sandeep Raj ORDER PER S. RIFAUR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SC), we admit the said additional grounds raised by the assessee. 6. The Assessee filed supplementary additional evidence before us with application for admission. Considered the rival submissions and observed that these evidences were relating to the grounds raised before us and these evidences were not submitted before lower authorities. It will have bearing on the issues contested before us therefore, we admit the additional evidences and these evidences are remitted back to the file of Assessing Officer for verification, these issues are discussed elaborately while adjudicating the respective grounds. 7. With regard to Ground No. 1 which is in respect of disallowance of foreign exchange loss of ₹.13,10,46,670 treating the same as capital loss. 8. Brief facts relating to above grounds are, during the year, the Assessee invested in bonds of Lodha Developers International (Netherlands) B.V. During F.Y.2014-15, the bonds were redeemed incurring a loss of ₹.52.43 crores due to change in foreign exchange rate of Rupees to GBP. However, the foreign exchange loss for period ending 31 March 2014 of ₹.13,10,46,670 was booked on mark to market basis on 31 March ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 015-16 has allowed loss of Rs. 37.72 crores on basis that the loss is actually realised, hence if the loss of Rs. 13.71 crores not allowable then the entire loss of Rs. 52.43 crores should be allowed as deduction and the Id. AO should be directed to make adjustments accordingly. 10. Ld.DR vehemently supported the orders of the Authorities below. 11. Considered the rival submissions and material placed on record, from the facts on record we observe that the assessee invested in the bonds of its foreign AE. In the financial year 2014-15 i.e., in the subsequent AY, assessee redeemed the same. Due to exchange fluctuation, it incurred the loss of ₹.52.43 crores. During this assessment year, the assessee observed that as per the mark to market rate, the projected loss as at 31.03.2014 was ₹.13.10 crores. Accordingly, assessee recorded the loss in the current AY. The issue before us is, whether the investment made by the assessee in the bonds, do we need to treat the investment as capital investment and any expenditure incurred in such investment to be treated as business expenditure or not. It is fact on record that the investments were made in the name of the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owance made by Assessing Officer. 15. Ld. Counsel for the assessee submits that Lodha UK had initially entered into an agreement with Lodha Novel Bulldfarma Pvt Ltd (Lodha Novel) and Lodha Crown Buildmart Pvt Ltd., (Lodha Crown) (refer page 98 to 100 of additional evidence), two group Companies of the Assessee, Wherein LD UK would be engaged in marketing of properties of Lodha Novel and Lodha Crown in India to potential customers in United Kingdom and other countries. The said expenses would then be recovered from the two companies in the ratio of 60:40 as provided in the agreement. In this regard, following documents were filed before lower authorities to substantiate that the expenses were for purpose of business. a) Copy of marketing agreement by the appellant with Lodha UK (refer page 98 to 100 of additional evidence) b) Table showing marketing and selling expenses incurred by Lodha UK (refer page 101 to 103 of additional evidence) c) Sample copies of invoices for the marketing expenses (refer page 104 to 113 of additional evidence). d) Copy of audited financials of Lodha UK (refer page 114 to 120 of additional evidence) 16. In addition to the above do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g expenses. The A.O found that the total payments/ reimbursements aggregated to Rs.87,78,309/- and the assessee could submit only marketing agreement in the assessment proceedings and supporting evidences of claim were not produced. Finally, the A.O was not satisfied with the submissions and information and restricted the claim to the extent of 50% of the expenses being Rs. 43,89,154/-. On appeal, the CIT(A) has confirmed the addition and dismissed the ground of appeal. On further appeal before the Hon ble Tribunal, the Ld. AR submitted that the assessee has appointed agents as per the agreement and there is increase in the revenue due to NRI customers investments in properties in India. The Ld. AR for the first time has filed the details of payments, marketing selling expenses incurred by the Lodha Developers U K Ltd, sample invoices of marketing expenses incurred in UK, and statement of sale of properties in India to NRI customers in the F.Y.2012-13 and prayed for allowing the claim based on the substantial evidence filed. The Ld.DR submitted that the A.O. should be provided an opportunity to verify and examine the additional evidence filed by the assessee. Further on perusal o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the assessee had not violated the provisions of any regulations/ laws. However, the approval got delayed due to the reasons beyond the control of the assessee. Accordingly, the TMC levied compensatory charges on the assessee and it can be noted that had this been violation of any law or construction of any unauthorized project, the TMC would have demolished the structure. However, in this Case as per the circular of TMC dated 3 April 2010 the regularization fees were paid to regularize the construction. The notices and receipts were issued in the name of Lodha Novel but is accounted and claimed by the assessee on account of amalgamation. The fine levied by TMC is more in nature of non-compliance with the procedural aspects and the fees were compensatory in nature. In this regard the assessee wishes to place reliance on the following documents: - a) Notice issued by Thane Municipal Corporation (TMC) for payment of compounding charges alongwith English translation (refer page 134 to 135 of additional evidence) b) Receipts of payment made to TMC (refer page 136 to 139 of additional evidence) c) Circular dated 3 April 2010 under which the regularization charges are paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de at the time of actual execution. As long the actual completion of the projects are within the parameters of approval, the corporation/approving authorities permit the projects as approved with the nominal fine or compounding fee. This is the reason, the corporation has the clause intact in the rules books. If the projects are illegal, which is an offence and cannot be cured, the whole project cannot be approved by the approving authorities, as the same is subject matter of public safety. The penalty can be classified as two types; one charged for violation of law in the nature of offence, which cannot be pardoned by compounding and the second is charged for violation of certain rules which are not in the nature of offences and can be cured by compounding. In the case of housing/commercial projects, the corporation aware that there will be certain deviations at the time of approval and no project can be completed without any deviation. The question is, the extent of deviation. In case it is within the permissible limits, the approving authorities, allow with compounding the deviation by levying compounding fees. In the given case, the project was completed and the deviations ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to 158 of additional evidence). 32. Ld. Counsel for the assessee submitted that the non-refundable deposit written off was a part of routine business and should be allowable as revenue expenditure. 33. Ld.DR vehemently supported the orders of the authorities below. However, he agreed to remit this issue back to Assessing Officer for verification. 34. Considered the rival submissions and material placed on record, we observe that the assessee had paid certain amount as initial deposit for the purpose of obtaining new electricity connection in the new projects it undertakes. Since assessee did not submit the relevant supporting documents before tax authorities, now, these documents were filed before us an additional evidence. We are inclined to admit these evidence and remitting this issue also to the file of Assessing Officer to verify the claim of the assessee, we direct him to allow the claim as per law after providing reasonable opportunity of being heard to the assessee. Accordingly, ground raised by the assessee is allowed for statistical purpose. 35. Coming to additional ground, which is in respect of Reversal of provision made in respect of Transferable Developm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urpose. 40. Second additional ground raised by the assessee relating to education cess deductible u/s. 37(1) of the Act. Even Ld. Counsel submitted that this issue is covered by the Hon'ble Bombay High Court decision in the case of Sesa Goa v. JCIT [423 ITR 426]. After considering the submissions and the latest amendments in the Finance Act, this issue is already reached finality. Accordingly, additional ground raised by the assessee is dismissed. 41. In the result, appeal filed by the assessee is partly allowed for statistical purpose. 42. Coming to the appeal of the revenue, revenue has raised following grounds in its appeal: - 1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs.58,99,99,069/- made by the Assessing Officer u/s 36(1)(iii) and capitalized the same to inventory? 2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is deleting the addition of Rs.58,99,99,069/- relied upon the decision of the judgement of the jurisdictional High Court in the case of Lokhandwala Construction India Ltd. 260 ITR 579 the same were rendered before the proviso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out of this ₹.105.13 Crores which were capitalised in the Books of Accounts. The assessee was required to explain as to why interest expenses claimed in the return of income shall not be disallowed. The assessee submitted that interest expenses have been claimed as deduction in the year of incurrence as the interest is periodic cost and pertains to the year for which it belongs to. It was further submitted that the said interest is allowable as deduction u/s. 36(1)(iii) of the Act being interest pertaining to stock in trade of the assessee. Reliance was placed on the decision of the Hon'ble Supreme Court in the case of Taparia Tools Pvt. Ltd., v. JCIT in Civil Appeal No. 6366/2003 dated 23.03.2015 and the decision of the Hon'ble Bombay High Court in the case of CIT v. Lokandwala Construction Industries Ltd., [260 ITR 579]. 2. Not convinced with the submissions of the assessee, the Assessing Officer placing reliance on the judgement of the Hon'ble Special Bench, Mumbai in the case of M/s. Wall Street Construction Limited [102 TTJ 505] wherein it has been held that the interest cost shall be debited to work in progress and allowed to be claimed as deduction onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness 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), the nature of expenses, whether the expenses are on capital account or revenue account is irrelevant as the section itself says that interest paid by the assessee on the capita! borrowed by the assessee is an item of deduction. The utilization of the capital is irrelevant for the purpose of adjudicating the claim for deduction u/s 36(l)(iii). The SLP filed by the Department against the Bombay High Court judgment has been rejected by the Supreme Court. The Hon'ble ITAT Mumbai in the case of M/S Ashish Builders Private Ltd vs. ACIT ITA number 310/M/2012 held as under: A) Interest on unsecured loans and fixed deposits: It is the claim o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount, 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 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 interest expenditure ought to be taken into account in the valuation of inventories where and to the extent there is a direct nexus, the said standard is not mandatory under the Act. In fact, even following AS-2 a direct nexus has to be established for the interest cost to form part of the cost of production or construction, as the case may be, and, thus, a part of the valuation of the unsold inventory or work-in-progress as at the year-end. This is as, to cite by way of an example from the civil construction itself, the work on a project may not be underway at all for the whole or a part of the year, or say as its optimum or normative level, on account of various business exigencies. The interest cost on the corresp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tands 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 law, not be of much assistance. In fact, even going by the Revenue s stand, another issue would arise and, accordingly, need to be determined apriori. Considering the said cost as includable in the project cost may have a direct bearing on the gross profit rate, and which may therefore stand to decline from the reported and accepted rate of 23%, and cannot be presumed be remain as such, i.e., unchanged. The Hon'ble ITAT Pune in the case of M/S Kolte Patil Developers Ltd erstwhile Corola reality Ltd merged with Kolte Patil Developers Ltd) also held as under: Further, we 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udgment 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 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 f 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. 14. From the above, it is evident that any amount of the interest paid in respect of capital borrowed for the business purposes constitutes an allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de 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 interest claimed while passing the order. The addition made by the AO is directed to be deleted. These grounds of appeal are ALLOWED. 7. On a careful perusal of the order of Ld.CIT(A), we do not see any infirmity in allowing the claim of the assessee as the claim of the assessee is in tune with the decision of the Hon'ble Jurisdictional High Court in the case of Lokandwala Construction (supra) wherein it has been held that when the project constructed by the assessee is its stock in trade and not a fixed asset of the assessee the interest paid on loans obtained for stock in trade is an allowable deduction u/s. 36(1)(iii) of the Act. We also find that in the proceedings before the settlement commission the assessee claimed interest expenses and as per the order dated 28.07.2014 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nfirmity in the decision and are not inclined to interfere with the order of the CIT(A) passed relying on the decision of Jurisdictional Honble High court and Honble Tribunal and we fallow the judicial precedence and up hold the decision of the CIT(A) on this disputed issue and dismiss the grounds of appeal of the revenue. 14. On the 3rd ground of appeal, the Ld. DR submitted that CIT(A) has erred in granting the relief on the disallowance U/sec14A r.w.r 8D(2)(ii).we find the CIT(A) has dealt at Para 8.4 of the order and directed the A.O to recompute as under: 8.4 In the appellants case, the appellant also has mixed funds and therefore some interest portion has to be attributed to the investments made. Therefore, this plea of the Ld. Counsel not to make a disallowance for the reason that the appellants own funds are greater than the investments is rejected. The Ld. Counsel has also taken without prejudice a plea that for the calculation of interest disallowance the net interest should be taken in place of the gross income. The Hon ble ITAT, Mumbai in the case of Morgan Stanley Securities Pvt Ltd Vs. CIT ITA No. 5072/Mum/2005 held that the net interest debited to the profi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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