ACIT CENT. CIR -6(4), MUMBAI vs. ELAN AVENUE LIMITED (FORMERLY KNOWN AS AIRMID DEVELOPERS LTD), DELHI

The revenue has filed this appeal challenging the order dated 27-09- 2021 passed by Ld CIT(A)-54, Mumbai and it relates to the assessment year 2017-18. The revenue is aggrieved by the decision of Ld CIT(A) in deleting the interest disallowance of Rs.5.48 crores made by the AO.

The facts relating to the above said issue are stated in brief. The assessee is engaged in real estate business. The AO noticed that the assessee has declared income from other sources of Rs.90,01,404/-, against which it has claimed interest expenditure of Rs.5,48,10,641/-. The AO took the view that the above said interest expenditure should have been included in the “work in progress” of the assessee and should not have been claimed 2 Elan Avenue Limited as revenue expenditure against income from other sources. Accordingly, the AO disallowed the above said claim of interest expenditure and correspondingly enhanced the value of Work in progress by the interest amount so disallowed.

Before Ld CIT(A), the assessee contended that the loan has been used for the general purposes of business and hence interest expenditure should be allowed as deduction u/s 36(1)(iii) of the Act. The Ld CIT(A) accepted the contentions of the assessee and directed the AO to allow the interest expenses as deduction instead of capitalising the same as Work in Progress. Hence the revenue has filed this appeal challenging the decision of Ld CIT(A).

We heard the parties and perused the record. On a perusal of the orders passed by the tax authorities, we notice that none of the authorities has examined the actual utilisation of loan funds. In our view, the actual utilisation of funds, whether it is used for the purpose of any specific project or generally for the purposes of business, would determine the claim for deduction of corresponding interest expenses. For example, if the loan funds have been used fully for general purposes of business, then the entire interest expenses should be allowed as deduction. On the other hand, if the entire loan funds or part thereof has been used for any specific project of real estate development, then the proportionate interest expenses may be included in the value of Work in Progress.

Hence, in our view, it is necessary to verify the actual utilisation of loan funds in order to resolve the dispute before us. Since no such detailed examination has been carried out, we deem it proper to restore this issue to the file of AO for examining it afresh in the light of discussions made supra. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of AO. After providing adequate opportunity of being heard to the assessee, the assessing officer may take appropriate decision in accordance with law.

In the result, the appeal filed by the revenue is treated as allowed for statistical purposes. Order pronounced in the open court on 4th May, 2023.