TMI Blog2022 (4) TMI 1469X X X X Extracts X X X X X X X X Extracts X X X X ..... 20 (4) TMI 842 - ITAT MUMBAI] since the revenue could not controvert the findings of the Ld.CIT(A) that the project constructed by the assessee for which the loans have 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 Also in M/S. NATIONAL STANDARD PVT. LTD. [ 2021 (4) TMI 1308 - ITAT MUMBAI] it is undisputed fact that the assessee was engaged in real estate construction and had borrowed capital for business purposes. No other diversion of income has been alleged by Ld. AO. As noted by Ld. CIT(A), the interest was paid to debenture holders, financial institutions as well as unsecured loan creditors and the loan was utilized for business purposes. The funds were borrowed for the purpose of construction and have gone into the projects of the assessee which constitute assessee s stock-in-trade and not capital asset. In view of these clear cut findings, the adjudication of CIT(A) could not be faulted with. Another important fact is that the assessee has followed consistent accounting treatment to charge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come and the net interest expenses of Rs. 344.34 laksh has been debited to profit and loss account.The A.O dealt on the provisions of Sec. 36(1)(iii) of the Act and observed that the assessee has considered the interest component in the work in progress. The contention of the Ld. AR that the assessee has filed the explanations on 23.03.2016 mentioning that the interest expenses have been claimed as deduction in the year of incurrence and the interest is periodic cost and the claim has to be allowed u/s 36(1)(iii) of the Act. Further the contentions of the Ld. AR that the assessee is following the mercantile method of accounting and the revenue recognition is as per the project completion method of Accounting Standard of ICAI. But the A.O. was not satisfied with the explanations and disallowed the claim and added to the work in progress. Further the A.O has observed that there is violation of provisions of Sec.269SS/269T of the Act and is being dealt separately and worked out the assessed loss of Rs.(-)20,79,33,445/- and passed the order u/s 143(3) of the Act dated 30.03.2016. 3. Aggrieved by the order, the assessee has filed an appeal with the CIT(A). In the appellate proceeding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and net interest expenses were shown at ₹.122.15 crores. Assessing Officer noticed that out of this ₹.122.15 crores the assessee capitalizedan interest of ₹.105.13 crores and shown as work in progress. He further noticed that in the return of income interest of ₹.89.12 crores have been claimed as deduction 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.LokandwalaConstruction Industries Ltd., [260 ITR 579]. 4. Not convinced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k 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-intrade of the assessee. The project did not constitute a fixed asset of the assessee. Since the assessee had received loan for obtaining stock-intrade, 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)(ii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii) 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 (stockin- 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 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 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ings before the Income TaxSettlement 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 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 LokandwalaConstruction (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad borrowed funds from bank and group entities and paid aggregate interest of Rs.1887.29 Lacs. Af ter adjusting interest income of Rs.1447.80 Lacs there-from, it claimed deduction of net interest of Rs.439.49 Lacs from business income in statement of computation of income on the reasoning that interest expenditure was periodic cost and hence, an allowable deduction u/s 36(1)(iii). Reliance was placed on the decision of Hon ble Apex Court in Taparia Tools Pvt. Ltd (CA No.6366/2003) as well as on the decision of Hon ble Bombay High Court in CIT V/s Lokhandwala Construction Ind. Ltd. (260 ITR 0579) to support the said claim. 3.3 However, going by Accounting Standard 7 issued by Institute of Chartered Accountants of India ( ICAI), Ld. AO opined that expenses directly related to the project were to be debited to cost of project and could be claimed as deduction only in the year in which corresponding income of the project was credited in Books of Accounts and offered to tax. Notably, the assessee allocated all other expenses to work-in-progress except interest. These expenses were also periodic cost and would be allowable as deduction in toto on assessee s logic. Relying upon the dec ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
