9911796707
TMI Blog2025 (5) TMI 97X X X X Extracts X X X X X X X X Extracts X X X X ..... 017 determining the total income of the assessee at Rs. 1,07,78,02,630/- where the Assessing Officer made addition of Rs. 16,24,476/- on account of notional rent from house property. 3. Subsequently, the Assessing Officer reopened the case as per the provisions of section 147 by issuing notice u/s 148A(d) of the Act on 25.07.2022 by recording as under: "GOVERNMENT OF INDIA MINISTRY OF FINANCE INCOME TAX DEPARTMENT OFFICE OF THE ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE 7, PUNE To KOLTE-PATIL INTEGRATED TOWNSHIPS LIMITED SURVEY NO. 74, MARUNJI HINJEWADI MARUNJI, KASARSAI ROAD, TAL MULSHI PUNE PUNE 411057, Maharashtra India PAN: AABCI5807K Assessment Year: 2014-15 Dated: 25/07/2022 DIN & Order No ITBA/COM/F/17/2022-23/1044045890(1) Sir/Madam/M/s Subject: Proceedings u/s 148A(d) in consequence to Hon'ble SC Order dated 04.05.2022-Order 01. Brief Facts:- The assessee, Mis Kolte Patil Integrated Townships Ltd. (PAN AABCI5807K) is a Company. In this case, a notice u/s 148 for AY 2014-15 was issued on 23/06/2021. On the basis of information in possession of the AO after following the provisions of Taxation and Other laws (Relaxation and Amendme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion of Hon'ble Supreme Court of India, the information and the material was provided to the assessee on 24/05/2022 and time of two weeks was provided to the assessee for submitting the response/reply. The time was given upto 08/06/2022 for filing the response/reply. 04. Reply of the assessee:- In response to the notice dated 24/05/2022 the assessee filed his reply on 06.06.2022. In its reply the assessee had raised various technical issues and quoted the various case laws regarding proceeding u/s. 148. In this connection it is submitted that in this case notice u/s. 148 was already issued after recording reasons for reopening. However the current proceeding initiated in view of the decision of Hon'ble Supreme Court in the case of Union of India & Others Vs. Ashish Agrawal in Civil Appeal No. 3005/2022 and the decision of Hon'ble Bombay High Court in the case of Emcure Pharmaceuticals Ltd. Vs. ACIT, Central Circle 2(1), Pune and others in Writ Petition No. 5293 of 2022 and further instruction no. 01/2022, F. No. 279/, Misc./M-51/2022-ITJ dated 11/05/2022 issued by the CBDT. 05. Finding of the AO:- The matter was pointed out by the RAP. It is seen from Balance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see and therefore, u/s 36(1)(iii) the interest paid on the funds borrowed is allowable as deduction. The decision of the Hon'ble Bombay High Court in the case of Lokhandwala Construction Industries Ltd. 260 ITR 579 (Bom) was relied upon. It was submitted that in view of the above decision, borrowed funds, which are utilized for the purpose of business of the assessee, has to be allowed in the year in which the interest expenditure has been incurred. It was further submitted that since the interest is a period cost it is rightly debited as expenditure in the year in which it is incurred. 5. However, the Assessing Officer was not satisfied with the arguments of the assessee. Distinguishing the decision of the Hon'ble Bombay High Court in the case of Lokhandwala Construction Industries Ltd. (supra) and observing that after introduction of ICDS the assessee is required to recognize the revenue, cost and profit from transactions of real estate, he disallowed the interest of Rs. 15,11,87,548/- by observing as under: "The assessee also contended that the income computation and disclosure standard cannot overrule the provision of Act and in case, any conflict between ICDS and the provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se. As per the appellant it was merely change of opinion. This Ground is valid as there was no fresh material were brought on record by the AO to claim that the income has escaped the assessment. All the issue dealt in the reassessment orders were already before the AO at the time of original assessment. Hence, it is a clear-cut case of change of opinion. Hence this ground is allowed. 6.2. In Ground No. 2 the appellant challenged the notice u/s 148 of the IT Act dated 25.07.2022 by claiming that it was issued beyond 6 years from the end of relevant assessment year. This Ground is also valid on the fact that 6 years from the end of relevant assessment year AY 2014-15 ended on 31.03.2021. If so, issue of notice u/s 148 of the IT Act was beyond the time limit. This Ground is valid and it is allowed. 6.3 In Ground No. 3 the appellant raised another issue that there was no escapement of income in the form of asset exceeding Rs. 50,00,000/- that warrants reopening of assessment of AY 2014-15. This Ground was also raised as an objection before the AO during the course of assessment. In the present case the assessment was reopened on the main reason that the interest expenditure of R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case and in law, the CIT(A) is justified in holding that the reopening of assessment in the case of the assessee for A.Y. 2014-15 was invalid as there was no fresh material available with the Assessing Officer ? 2. Whether on the facts and circumstances of the case and in law, the CIT(A) is justified in holding that the reopening of assessment in the case of the assessee for A.Y. 2014-15 was barred by limitation of time? 3. Whether on the facts and circumstances of the case and in law, the CIT(A) has erred in holding that the quantification of disallowance of interest expenditure at the time of reopening of assessment was beyond the scope of provisions u/s 149 of the Act? 4. Whether on the facts and circumstances of the case and in law, the CIT(A) has erred in granting relief to the assessee by relying upon the decision of the Hon'ble Bombay High Court in the case of Hexaware Technologies Vs. ACIT, Circle 15(1)(2), Mumbai and others [2024] 162 taxmann.com 225? 5. Whether on the facts and circumstances of the case and in law, the CIT(A) has erred in granting relief to the assessee by deleting addition amounting to Rs.15,11,87,548/- while relying on the judgment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessing Officer, while reopening the case, has referred to the Balance Sheet and was of the opinion that the assessee has closing work-in-progress as well as sales and accordingly part of the interest expenditure should have been allocated to WIP. 12. He submitted that the original assessment was completed u/s 143(3) on 22.12.2017, copy of which is placed at pages 41 to 43 of the paper book. It is also clear from the Profit and Loss Account itself that the assessee has debited entire interest expenditure. Therefore, on the same set of facts, the Assessing Officer could not have reopened the assessment u/s 148 in absence of any fresh tangible material and therefore, the reopening of the assessment is not justified. Further, it is a change of opinion and on this ground also, the reopening is invalid. 13. Referring to para 6.1 of the order of Ld. CIT(A) / NFAC, the Ld. Counsel for the assessee submitted that the Ld. CIT(A) / NFAC has correctly appreciated the facts and held that the reopening of the assessment is not in accordance with law in absence of any fresh tangible material available with the Assessing Officer and due to the change of opinion of the Assessing Officer. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm of an asset has escaped assessment amounts to or is likely to amount to Rs. 50,00,000/- or more for that year. He submitted that as per the relevant provisions prevailing at the time of issue of notice, the notice u/s 148 could not have been issued since the reopening is after a period of 3 years but within 10 years, the assessee has debited the entire expenditure to the Profit and Loss Account and there is no reference of any income in the form of asset exceeding Rs. 50,00,000/- which has escaped assessment. He accordingly submitted that since there is no reference to any income represented in the form of asset which has escaped assessment, the notice issued by the Assessing Officer under clause (b) of section 149 is invalid. 16. Further, the Assessing Officer has issued notice on the ground that the entire interest expenditure has been debited to P & L Account which is not justified and the same should have been apportioned on the basis of sales and work in progress. Thus, it is very clear that there is no reference to any income represented in the form of an asset which has escaped assessment and accordingly, the notice issued by the Assessing Officer under clause (b) of sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f sub section (1) of section 149 or section 153A or section 153C, as the case may be, as they stood immediately before the commencement of the Finance Act, 2021. 19. The Ld. Counsel for the assessee submitted that in the present case, the assessee has disclosed fully and truly all material facts necessary for completion of the assessment. Thus, the case of the assessee could not have been reopened under the old provisions of section 147. Now, as per the proviso to section 149(1)(b), if the case of the assessee could not have been reopened under the old provisions of section 147, then no notice could be issued under the new regime of section 147. This principle has been accepted by Hon'ble Supreme Court in the case of Rajeev Bansal [167 taxmann.com 70]. In paras 48 to 72, Hon'ble Supreme Court has discussed this issue and has held that the notice under the new provision of section 148 have to be seen considering the proviso to section 149. He accordingly submitted that the notice issued u/s 148 is bad in law since no notice u/s 148 could have been issued under the old provision of section 147, therefore, the notice issued for A.Y. 2014-15 is bad in law. 20. The Ld. Counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sue of original notice u/s 148 under the old regime and the time upto 30.06.2021 is the time limit available which needs to be added to the date on which the reply of the assessee was received. Hon'ble Supreme Court has referred to this time limit as the surviving time limit available. Now, applying the same principle, as laid down by Hon'ble Supreme Court in the case of Rajeev Bansal, for A.Y. 2014 15, the Assessing Officer should have issued notice u/s 148 by 13.06.2022 and for A.Y. 2016-17 by 26.06.2022. For both the years, the learned A.O. has issued notice u/s 148 subsequent to those dates i.e. 25.07.2022 and 26.07.2022 respectively and therefore, the notices issued u/s 148 in the new regime for both the years are barred by limitation. 23. So far as the merit of the case is concerned, the Ld. Counsel for the assessee submitted that the assessee company is engaged in real estate business and had undertaken a project named 'Life Republic'. It is following percentage completion method for determining its income. Under this method, the income is recognised towards the years depending upon the percentage of work completed. He submitted that in the instant case the Asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is allowable as deduction. 26. Referring to the decision of Hon'ble Bombay High Court in the case of Lokhandwala Construction Industries Ltd. [260 ITR 579), he submitted that in that case also, the assessee was engaged in the real estate business and it had purchased a plot for construction of flats. The assessee had borrowed money for purchase of plot and the interest on the said borrowed funds was claimed as deduction. The Hon'ble Bombay High Court held that u/s 36(1)(iii), the interest expenditure is allowable in the year in which it is incurred provided the borrowed funds are used for the purpose of the business of the assessee. The Hon'ble High Court further held that simply because the project was not started on the said plot doesn't mean that the interest expenditure cannot be allowed as deduction. Accordingly, the claim of the assessee was allowed. He submitted that applying the same principle to the facts of the present case, the borrowed funds, which are utilized for the purposes of business of the assessee, should be allowed as deduction in the year in which the interest expenditure has been incurred. He submitted that since the interest is a period cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed only in a case where the money borrowed is for a qualifying asset. He drew the attention of the Bench to the definition of term 'qualifying asset' which is as under: "Qualifying asset" means: (i) land, building, machinery, plant or furniture, being tangible assets; (ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets; (iii) inventories that require a period of twelve months or more to bring them to a saleable condition." 31. He submitted that clauses (i) and (ii) of above definition refers to fixed asset which is not the case of the assessee. Clause (iii) refers to inventories that require a period of 12 months or more to bring them to a saleable condition. Referring to clause 8 of ICDS, he submitted that in case of inventory, the interest is not required to be capitalised when substantially all the activities necessary to prepare such inventory for its intended sale are complete. 32. He submitted that in the instant case, the inventories with the assessee are open land and land on which building development has commenced. Further, inventories also include ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y was not required to capitalise the interest and therefore, the Assessing Officer is not justified in capitalization of the part of the interest expenditure in WIP. He also relied on the following decisions: i) Bajaj Finance Ltd. vs. PCIT (2023) 152 taxmann.com 216 ii) DCIT vs. Sanathnagar Enterprise Ltd. (2022) 139 taxmann.com 557 (Mumbai - Trib.) iii) `DCIT vs. Lodha Developers Ltd. (2022) 143 taxmann.com 442 (Mumbai - Trib.) 35. We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and Ld. CIT(A) / NFAC and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the assessee company in the instant case is engaged in real estate business and follows percentage completion method. The original assessment was completed u/s 143(3) of the Act on 22.12.2017 determining the total income of the assessee at Rs. 107,94,27,110/- as against the returned income of Rs. 107,78,02,630/-. We find the Assessing Officer reopened the case by issuing a notice u/s 148 of the Act on 25.07.2022 by recording the reasons which have already been reproduced in the preceding paragraphs. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... test to check abuse of power by the Assessing Officer. As held in Dr. Mathew Cherian (supra), whether under old or new regime of reassessment, it is settled position that the issues decided categorically should not be revisited in the guise of reassessment. That would include issues where query have been raised during the assessment and query have been answered and accepted by the Assessing Officer while passing the assessment order. As held in Aroni Commercials Lad (supra) even if assessment order has not specifically dealt with that issue, once the query is raised it is deemed to have been considered and the explanation accepted by the Assessing officer. It is not necessary that an assessment order should contain reference and/or discussion to disclose his satisfaction in respect of the query raised. The Division Bench of this court in Aroni Commercials Lid (supra) held it is not necessary that the assessment order should contain reference and/or discussion to disclose its satisfaction in respect of thee query raised Paragraph 14 of Aroni Commercials Ltd. (supra) read as under. "14. We are of the view that once a query is raised during the assessment proceedings and the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer during the course of assessment proceedings vide a letter dated 6th December 2018. It is settled law that proceedings under section 148 cannot be initiated to review the earlier stand adopted by the Assessing Officer. The Assessing Officer cannot initiate reassessment proceedings to have a relook at the documents that were filed and considered by him in the original assessment proceedings as the power to reassess cannot be exercised to review an assessment. In petitioner's case the Assessing Officer having allowed the amount of software consumables as a revenue expenditure now seeks to treat the same as capital expenditure which is a clear change of opinion. Various judicial precedents have held that reassessment proceedings initiated on the basis of a mere change of opinion are invalid and without jurisdiction. 38. The Apex Court in Kelvinator of India Ltd. (supra) emphasised on the difference between a power to review and the power to reassess. The Apes Court held that the Assessing Officer has no power to review but has only the power to reassess. The concept of 'change of opinion' must be treated as an in-built test to check abuse of power by the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot constitute the justification to believe that the income chargeable to tax has escaped assessment. 39. We find the various other decisions relied upon by the Ld. Counsel for the assessee in the case law compilation also supports his case to the proposition that the re-assessment proceedings without any fresh tangible material and on account of change of opinion is not valid when the original assessment was completed u/s 143(3) of the Act and where all the details were available with the Assessing Officer and on the basis of the same material if he wants to reopen the assessment. 40. We further find the assessment year involved in the instant case is assessment year 2014-15 and the original assessment was completed u/s 143(3) of the Act. The notice u/s 148 of the Act was issued on 25.07.2022. Further, a perusal of the reasons recorded in the said notice does not show any allegation by the Assessing Officer of any failure on the part of the assessee to disclose fully and truly all material facts necessary for completion of the assessment. Therefore, the Assessing Officer could not have reopened the assessment beyond a period of 4 years from the end of the relevant assessment year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is placed at pages 49-50 of the paper book, the Assessing Officer is referring to the same facts and the Profit and Loss Account to hold that there is escapement of income. In the instant case, absolutely there is no allegation by the Assessing Officer of any failure on the part of the assessee to disclose fully and truly all material facts necessary for completion of assessment. As per the provisions of section 149(1)(b), no notice u/s 148 shall be issued at any time in a case for the relevant assessment year beginning on or before 1st of April, 2021 if a notice u/s 148 or section 153A or section 153C could not have been issued at that time on account of being beyond the time limit specified under the provisions of clause (b) of sub section (1) of section 149 or section 153A or section 153C, as the case may be, as they stood immediately before the commencement of the Finance Act, 2021. As per the old provisions of section 148, the case of the assessee could not have been reopened beyond four years from the end of the relevant assessment year since there was no allegation of any failure on the part of the assessee to disclose fully and truly all material facts necessary for comple ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces were validly issued according to the provisions of the new regime, the notices under section 148 of the new regime would have to be issued within the time limits extended by TOLA. As a corollary, the reassessment notices to be issued in pursuance of the deemed notices must also be within the time limit surviving under the Income-tax Act read with TOLA. This construction gives full effect to the legal fiction created in Ashish Agarwal (supra) and enables both the assesses and the Revenue to obtain the benefit of all consequences flowing from the fiction. See State of A P v. AP Pensioners Association [2005] 13 SCC 161. [This Court observed that the "legal fiction undoubtedly is to be construed in such a manner so as to enable a person, for whose benefit such legal fiction has been created, to obtain all consequences flowing therefrom."] 110. The effect of the creation of the legal fiction in Ashish Agarwal (supra) was that it stopped the clock of limitation with effect from the date of issuance of Section 148 notices under the old regime [which is also the date of issuance of the deemed notices]. As discussed in the preceding segments of this judgment, the period from the date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2017-2018. To assume jurisdiction to issue notices under section 148 with respect to the relevant assessment years, an assessing officer has to: (1) issue the notices within the period prescribed under section 149(1) of the new regime read with TOLA; and (if) obtain the previous approval of the authority specified under section 151. A notice issued without complying with the preconditions is invalid as it affects the jurisdiction of the assessing officer. Therefore, the reassessment notices issued under section 148 of the new regime, which are in pursuance of the deemed notices, ought to be issued within the time limit surviving under the Income-tax Act read with TOLA. A reassessment notice issued beyond the surviving time limit will be time-barred. G. Conclusions 114. In view of the above discussion, we conclude that: a After 1 April 2021, the Income-tax Act has to be read along with the substituted provisions, b TOLA will continue to apply to the Income-tax Act after 1 April 2021 if any action or proceeding specified under the substituted provisions of the Income-tax Act falls for completion between 20 March 2020 and 31 March 2021, c. Section 3(1) of TOLA overrides ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... However, for both the assessment years, the Assessing Officer has issued notice u/s 148 subsequent to those dates i.e. 25.07.2022 and 26.07.2022 respectively. Therefore, the notices issued u/s 148 in the new regime are barred by limitation for both years. We, therefore, hold that the notice issued u/s 148 of the Act being barred by limitation, such re-assessment proceedings are not in accordance with law and have to be quashed. 46. Even otherwise on merit also, we find the assessee has debited the entire interest expenditure to the Profit and Loss Account and the Assessing Officer has applied the provisions of ICDS IX which have been introduced w.e.f. assessment year 2016-17 and therefore, are not applicable to the assessment year 2014-15. Since the ICDS provisions are not applicable to assessment year 2014-15, the Assessing Officer was not at all justified in making the disallowance in the hands of the assessee based on the same provisions. 47. We further find the assessee is following the Percentage of completion method for recognizing the revenue. Under this method, the income is recognized on the basis of work completed and offered to tax. The interest is a period cost and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ake of brevity, as "Kandivali Project"). According to the Commissioner, loan was raised for securing land/development rights from the Mandal. That, the loan was utilised for purchasing the development rights, which, according to the Commissioner, constituted a capital asset. According to the Commissioner, since the loan was raised for securing capital asset, the interest incurred thereon constituted part of capital expenditure. This finding of the Commissioner was erroneous. In the case of India Cements Ltd. v. CIT [1966] 60 ITR 52, it was held by the Supreme Court that in cases where the act of borrowing was incidental to carrying on of business, the loan obtained was not an asset. That, for the purposes deciding the claim of deduction under section 10(2)(iii) of the Income-tax Act, 1922 [section 36(1)(iii) of the present Income-tax Act), it was irrelevant consider the purpose for which the loan was obtained. In the present case, the assessee was a builder. In the present case, the assessee had undertaken the Project of construction of flats under the Kandivali Project. Therefore, the loan was for obtaining stock-in-trade. That, the Kandivali Project constituted the stock-in-trade ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ICDS IX, it is clearly mentioned that in case of conflict between the provisions of the Income Tax Act, 1961 and the ICDS IX, the provisions of the Act would prevail to that extent. This view of ours is fortified by the decision of Pune Bench of the Tribunal in the case of Bajaj Finance Ltd. [152 Taxmann.com 216]. 52. We find the Mumbai Bench of the Tribunal in the case of DCIT vs. Sanathnagar Enterprises Ltd. (2022) 139 taxmann.com 557 (Mumbai - Trib.) has held as under: "6. We have heard the rival contentions, perused the material on record and duly considered the facts of the case in the light of the applicable legal position. 7. When learned Departmental Representative's attention was invited to the decisions of the coordinate benches in the cases of Ashish Builders Pvt Ltd Vs ACIT (ITA No 1566/Mum/2011), ACIT Vs Palava Dewellers Pvt Ltd (ITA No 2147/Mum/18), Kotle Patil Developers Ltd Vs DCIT (ITA No 80/Pune/16) wherein on the same set of facts it is held that irrespective of the capitalization of interest, as part of WIP, on account of following percentage of completion method, and even after insertion of proviso to Section 36(1)(iii), the interest has been allowed as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal in the case of DCIT vs. Lodha Developers Ltd. (2022) 143 taxmann.com 442 (Mumbai - Trib.) has held as under: "11. We have carefully considered the rival contention and perused the orders of the coordinate bench as well as the decision of the ITA T in assessee's own case for assessment year 2014 - 15 wherein the revenue challenged the deletion of the disallowance of Rs. 891,171,622/- made by the learned assessing officer u/s 36 (1) (iii) of the act on identical facts and circumstances. We find that the grounds of appeal raised by the learned AO are also identical worded. There is no change in the facts and circumstances of the case. The coordinate bench decided this issue as Under:- "6. We have heard the rival submissions, perused the orders of the authorities below and case laws relied on. This aspect of the matter has been elaborately considered by the Ld.CIT(A) with reference to the averments of the Assessing Officer and considering the submissions of the assessee and also the decision of Hon'ble Jurisdictional High Court in the case of CIT v. Lokandwala Construction Industries Ltd., (supra) and various other decision and allowed the claim of the assessee observ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under: "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 the Tribunal supports the case of the assessee. Under comparable facts of the assessee, interest cost was allowed in favor of the assessee relying on binding jurisdictional High Court judgment in the case of M/s Lokhandwala Construction Industries Ltd. (supra). 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. Similar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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." We have also perused the said binding High Court judgment in the case of M/s Lokhandwala Construction inds. Ltd. (supra) and find the same is relevant for the following conclusion - "construction project undertaken by the assessee builder constituted its stock in trade and the assessee was entitled to deduction under section 36(l)(iii) of the Act in respect of the interest on the loan obtained for execution of said project." Relying on the another judgment 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el, on account of various business exigencies. 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sh Builders Pvt. Ltd. (supra) has decided an identical issue in favour of the assessee. Relevant Paragraphs are being reproduced hereunder for better appreciation of the issue: "6. Ground No. 1 of the appeal relates to the addition of some of the expenses to the WIP account i.e. interest on unsecured loan/fixed deposit (sic-car loan), advertisement expenses, brokerage expenses and loan processing fees. AO considered the above expenses as relatable to the WIP account and recomputed the WIP account at Rs. 5,33,28,399/-. /Assessee contends that the above said expenditure is fully allowable in the year under consideration. In this regard, assessee relied on various ITA No. 80/PUN/2016 M/s Kolte Patil Developers Ltd., decisions. This issue is relevant for AYs/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 wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 nether 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of capital borrowed for the business purposes constitutes an allowable deduction. The said clause (Hi) of section 36(1) of the 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 recognizing the income followed by the assessee. The present case involves the payment of interest of Rs. 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 Rs. 3,00,57,566/- and related capital borrowed was not utilized by the assessee for business purposes of the assessee." However, the case of Wall Street construction is one where the assessee was following project completion method and therefore the ITAT held that the interest cost shall be debited to work in progress and allowed to be claimed as deduction only in the year in which the corresponding income is offered to tax. In the instant case, the assessee is following percentage completion method (POCM) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imed interest expenses and as per the order dated 28.07.2014 of the settlement commission and during verification proceedings u/s. 245D(3) of I.T. Act, the assessee informed the Assessing Officer that interest of Rs..124.02 crores as claimed in the computation of income on ground of interest expenses retained in inventory is deductible under provisions of section 36(1)(iii) of the Act. It was further informed that the said amount of interest paid was in respect of capital borrowed for the purpose of business or profession. It was further submitted that the construction and development having commenced, the business is in operation, therefore, interest is allowable u/s. 36(1)(iii) of the Act. It was also further brought to the notice of the Assessing Officer that in the case of CIT v. Lokandwala constructions Industries Ltd., [131 Taxman 810] the assessee's claim for deduction of interest, although the revenue was recognized only on project completion basis in subsequent year, was allowed in the year in which the claim of interest was made. Thus, it was contended that the interest expenditure incurred during the year is claimed and allowable as expenses even though the same has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion with the borrowing of funds and include: (i) commitment charges on borrowings; (ii) amortised amount of discounts or premiums relating to borrowings; (iii) amortised amount of ancillary costs incurred in connection with the arrangement of borrowings; (iv) finance charges in respect of assets acquired under finance leases or under other similar arrangements. (b) "Qualifying asset" means: (i) land, building, machinery, plant or furniture, being tangible assets; (ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets; (iii) inventories that require a period of twelve months or more to bring them to a saleable condition. (2) Words and expressions used and not defined in this Income Computation and Disclosure Standard but defined in the Act shall have the meaning assigned to them in the Act. Recognition 3. Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset shall be capitalised as part of the cost of that asset. The amount of borrowing costs eligible for capitalisation shall be determined ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e referred to in paragraph 5, from the date on which funds were borrowed; (b) in a case referred to in paragraph 6, from the date on which funds were utilised. Cessation of Capitalisation 8. Capitalisation of borrowing costs shall cease: (a) in case of a qualifying asset referred to in item (i) and (ii) of clause (b) of sub-paragraph (1) of paragraph 2, when such asset is first put to use; (b) in case of inventory referred to in item (iii) of clause (b) of sub-paragraph (1) of paragraph 2, when substantially all the activities necessary to prepare such inventory for its intended sale are complete. 9. When the construction of a qualifying asset is completed in parts and a completed part is capable of being used while construction continues for the other parts, capitalisation of borrowing costs in relation to a part shall cease:- (a) in case of part of a qualifying asset referred to in item (i) and (ii) of clause (b) of sub-paragraph (1) of paragraph 2, when such part of a qualifying asset is first put to use; (b) in case of part of inventory referred to in item (iii) of clause (b) of sub-paragraph (1) of paragraph 2, when substantially all the activities nece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause 8 of ICDS, capitalisation of interest shall cease in case of an inventory when all the activities necessary to prepare such inventory for its intended sale are complete. Even in case of units that are under construction, since the assessee is following the percentage completion method for recognizing the revenue, the units do not fall within the definition of 'qualifying asset' at all even though these are not complete in every respect. Further, as per clause 8 of ICDS, the borrowing cost is to be ceased to be capitalised when substantially all the activities necessary to prepare such inventory for its intended sale are complete. Since in the instant case at the time of passing the plan itself, the said activities are complete, therefore, there is no question of capitalization of interest. Therefore, we hold that even as per ICDS IX, the assessee company was not required to capitalize the interest and has rightly debited the same to the Profit and Loss Account. 58. In view of the above discussion and in view of the reasoning given by the Ld. CIT(A) / NFAC on this issue, we do not find any infirmity in the order of the Ld. CIT(A) / NFAC. So far as the grounds raised by the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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