PADMAVATHY REALTY AND PROMOTERS P LTD,CHENNAI vs. THE PCIT,, CHENNAI

आदेश /O R D E R

PER MANJUNATHA. G, ACCOUNTANT MEMBER:

This appeal filed by the assessee is directed against the order passed by the Principal Commissioner of Income-tax, Chennai-4, dated 15.03.2021 u/s. 263 of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) for the assessment year 2015-16.

:-2-: ITA. No:195/Chny/2021 2. At the outset, we find that there is a delay of 32 days in appeal filed by the assessee. During the course of hearing, when defect was brought to the notice of the learned AR present, he has submitted that delay in filing of appeal is mainly due to lockdown imposed by the Govt. on account of spread of Covid-19 infections and in view of the Hon’ble Supreme Court suomotu Writ Petition No.3 of 2020, if the period of delay is covered within the period specified in the order of the Apex Court, then same needs to be condoned in view of specific problem faced by the public on account of Covid-19 pandemic.

:-3-: ITA. No:195/Chny/2021 noted that delay noticed by the Registry pertains to the period of general exemption provided by the Hon'ble Supreme Court extending limitation period applicable for all proceedings before Courts and Tribunals and thus, considering facts and circumstances of the case and also in the interest of natural justice, we condone delay in appeal filed by the assessee.

:-4-: ITA. No:195/Chny/2021 having completed the scrutiny assessment after considering the entire return of income, the presumption of non application of mind / inadequate enquiry on the said issue should be reckoned as wholly unjustified and not sustainable in law. 5. The PCIT failed to appreciate that the power of revision should be considered as narrow and ought to have appreciated that the issues scrutinized by the Assessing Officer as well decided in the assessment order/ proceedings could not be interfered with in the revisional jurisdiction while in this regard ought to have appreciated that the substitution of the view taken by the Assessing Officer would be outside the purview of the power of revision u/s 263 of the Act. 6. The PCIT failed to appreciate that the amortization of such premium payable on debentures was in accordance with the globally accepted principles of accounting and further ought to have appreciated that having not disputed the commencement of the real estate business, the charge of the premium payable for the previous year relating to the assessment year under consideration as part of the purchase cost of the land in the profit and loss account was correct and justified as per the prescription of the related accounting standards thereby vitiating the revisional order directing the Assessing Officer to add back such premium to the closing stock. 7. The PCIT failed to appreciate that the proviso to Section 36(1)(iii) of the Act had no application to the facts of the case especially in view of the undisputed fact that the Appellant was holding the said land as stock-intrade thereby vitiating the related findings and the judgment relied on by the PCIT while passing the impugned revision order. 8. The PCIT failed to appreciate that the action of the Assessing Officer to accept the one possible view of allowing the amortization of premium at the time of passing the assessment order would not tantamount to error within the Scope of Section 263 of the Act thereby vitiating the consequential revision order. 9. The PCIT failed to appreciate that there was no reasonable/proper opportunity given before passing of the impugned order and any order passed in violation of the principles natural justice would be nullity in law. 10. The Appellant craves leave to file additional grounds/arguments at the time of hearing.”

:-5-: ITA. No:195/Chny/2021 6. The brief facts of the case are that, the assessee company M/s. Namo Homes Pvt. Ltd, filed its return of income for the assessment year 2015-16 on 30.09.2015, declaring a total loss of Rs. 43,39,91,911/-. The assessment has been completed u/s. 143(3) of the Act on 22.12.2017 and assessed total loss as declared by the assessee at Rs. 43,39,91,911/-. The case has been subsequently, taken up for revision proceedings and consequently notice u/s. 263 of the Act, dated 18.03.2020 was issued and served on the assessee. In the said show cause notice, the PCIT observed that under scheme of demerger w.e.f. 01.04.2008, the assessee company formerly known as M/s. Padmavathy Reality and Promoters Pvt Ltd has taken over the debenture liability of M/s. Venkatanarayana Metals and Realtors Pvt Ltd (VMRL). It was further noted that in respect of 14,25,000 nos. optionally convertible cumulative debentures @ Rs. 1000/- per debenture for a period of 10 years amounting to Rs. 1,42,50,00,000/-. Further, an amount of Rs. 42,75,00,000/- towards amortization of premium on debentures was claimed and allowed. As this premium of Rs. 42,75,00,000/- was not included in the closing stock and was allowed as expenditure, the net profit was reduced to that extent in each year.

:-6-: ITA. No:195/Chny/2021 Therefore, the PCIT opined that the assessment order passed by the Assessing Officer without verifying the issue of liability of deduction towards amortization of premium on debentures rendered the assessment order to be erroneous and prejudicial to the interest of the revenue and thus, called upon the assessee to explain as to why the assessment order shall not be revised in terms of provisions of section 263 of the Act.

:-7-: ITA. No:195/Chny/2021 dated 06.08.2009. By virtue of demerger, the liability towards debentures to the tune of Rs. 142.50 crores got devolved on M/s. Padmavathy Realty and Promoters Pvt Ltd. Since, premium paid on debentures is a period cost and not a direct cost, the same has been charged upon to profit and loss account.

:-8-: ITA. No:195/Chny/2021 issue in light of relevant provisions of the Act, which rendered the assessment order to be erroneous and prejudicial to the interest of the revenue. Thus, rejected arguments of the assessee and set aside the assessment order passed by the Assessing Officer u/s. 143(3) of the Act dated 22.12.2017 and directed the Assessing Officer to undertake a fresh assessment by treating the amortized value of premium for the year of Rs. 42,75,00,000/- as direct cost and enhance the value of closing stock by such extent, after providing due opportunity to the assessee. The relevant findings of the PCIT are as under: “8. The only issue under consideration is whether an amount of Rs.42,75,00,000/- being amortisation on premium of debentures, allowed as finance cost is a direct cost so as to get added to the value of closing stock or is it an indirect cost which has to be allowed as a revenue expenditure during the year. The assessee claimed it as to be an indirect cost and debited the entire sum fully in the Profit and Loss account without making any adjustments to the value of closing stock. On careful consideration of the records available, it is clear that the debentures were issued in lieu of settlement of a portion of sale consideration due to land owners. While the cost of land admeasuring 58.44 acres is Rs.204.54 Crores, an amount of Rs.47.58 crores was settled by way of actual payment while the balance of Rs.157 Crores was discharged by issue of debentures to the sellers of land. Consequent to the demerger, a value of 142.50 Crores devolved as liability on the assessee company. A premium of Rs.42.75 Cores was amortised and charged to the P &L a/c. It was once again reiterated that amortisation of premium on debentures is a period cost and not a direct cost and hence no element of it is attributable to the stock of land. The contention of the assessee as expressed in the letter dated 19.02.2021 was carefully considered. On verification of

:-9-: ITA. No:195/Chny/2021 Schedule -8 which corresponds inventories, it is seen that the value of stock of land as on 31.03.2014 and 31.03.2015 stands unaltered at Rs.1,86,67,87,680/-. It is therefore abundantly clear that the stock of land has not been put to use and the income for the year credited to the P&L a/c relates to sale of vacant flats at Thaiyur and fall in value of capital work in progress for the year. Thus, being the case, when amortization of premium on debentures and the stock of land are irretrievably intertwined, the claim that it is a period cost irrespective of the fact that the stock of land acquired by issue of debentures has not been put to use, is an illogical claim and not backed by appropriate principles of revenue recognition or provision under the law. 9. In this regard, on an exactly similar aspect of c aim, referring to proviso to Sec.36(1)(iii), the Hon'ble Madras High Court disposing the Tax Case Appeal Nos.245,247 & 248 of 2019 dated 22.04.2019, in the case of Mahindra World City Developers Ltd. had held that "mere purchase of land in the years in question out of the borrowed capital does not entitle the assessee to claim such interest paid on borrowed capital as a deductible expenditure in the present assessment years". "The proviso to Sec.36(1)(iii) which says that the claim of deduction will be allowed in the assessment years when the asset is put to use will override all other provisions of the Act". The Hon'ble Madras High Court did not entertain the claim of revenue expenditure that related to interest on borrowed capital acquired to fund the cost of land, when such land so purchased out of borrowed funds was not put to use during the year under consideration. The position in the case under consideration is exactly similar and it is found that the Assessing Officer while concluding the assessment had failed to undertake appropriate enquiries with regard to the claim of interest cost as a revenue expenditure and as per Explanation- 2(a) to Sec.263, this order which is passed without making appropriate enquiries or verification which should have been done, to ascertain the nature and characteristics of the claim of revenue expenditure with regard to amortisation of premium of Rs.42.75 Crores, is deemed to be erroneous in so far as it is prejudicial to the interest of revenue. 10. Hence, in my considered view, the order passed u/s 143(3) dated 22.12.2017 for the Asst.Year 2015-16 is erroneous in so far as it is prejudicial to the interest of revenue. Thus, the conditions for invoking revisional jurisdiction u/s 263 of the Act

:-10-: ITA. No:195/Chny/2021 are satisfied and I hold that the Assessment Order passed u/s 143(3) of the Act can be subjected to revision u/s 263 of the Act. Hence, the Assessment Order is set aside with a direction to the Assessing Officer to undertake a fresh assessment within the stipulated time, by treating the amortised value of premium for the year of Rs. 42, 75,00,000/- as direct cost and enhance the value of closing stock by such extent, after providing due opportunity to the assessee.”

:-11-: ITA. No:195/Chny/2021 referring to provisions of section 36(1)(iii) of the Act and proviso provided therein submits that, said proviso has no application to the facts of the case established in view of the disputed fact that the appellant was holding the said land as stock in trade which clearly shows that the business of the assessee has been commenced. The Ld. Counsel for the assessee, referring to the decision of Hon’ble Madras High Court in the case of Mahindra World City Developers Ltd vs ACIT (Supra) and relied upon by the PCIT and also the decision of Hon’ble Madras High Court in the case of CIT vs Ceebros Hotels (P) Ltd (2022) 440 ITR 200 (Mad), submitted that if the business of the assessee was commenced even if there was no revenue from the particular project, it cannot be said that the assessee has not commenced the business activities. Further, amortization of premium on issue of debentures is a period cost not directly linked to acquisition of stock in trade and thus, when the business was commenced, the same can be charged to profit and loss account. The PCIT, without appreciating relevant facts has set aside the assessment order passed by the Assessing Officer.

:-12-: ITA. No:195/Chny/2021 10. The ld. DR, Shri. R. Clement Ramesh Kumar, CIT, supporting the order of the CIT(A) submitted that the facts brought on record by the PCIT in their order dated 18.03.2020, clearly established that the Assessing Officer has failed to carry out required enquiries he ought to have been carried out in light of relevant provisions of the Act, which is evident from assessment order passed by the Assessing Officer, where there is no specific reference to the issue of amortization of premium on issue of debentures. Further, the assessee could not file any evidence to prove that the Assessing Officer has called for necessary details by issuing specific notices, for which the assessee has explained how and why said expenditure is a period cost. The PCIT, after considering relevant facts has rightly held that the assessment order passed by the Assessing Officer is erroneous and prejudicial to the interest of the revenue. The ld. DR, further referring to the decision of the Hon’ble Madras High Court in the case of Mahindra World City Developers Ltd vs ACIT (supra), submitted that as per the provisions of section 36(1)(iii) of the Act, interest paid on loans borrowed for acquisition of capital asset cannot be allowed as deduction, whether or not capitalized in the books of accounts till such

:-13-: ITA. No:195/Chny/2021 asset is put to use. In the present case, facts brought on record clearly indicates that the assessee has not put to use the land purchased by issuing a debenture and thus, the Assessing Officer ought to have disallowed amortization of premium on issue of debentures and added to closing stock. He, further referring to the decision of Hon’ble High Court of Madras in the case of CIT vs Ceebros Hotels Pvt Ltd (supra), submits that facts of above case is entirely different because in the said case, it was the observation of the Hon’ble High Court that the assessee has carried out substantial activities in the new project which showed that said land purchased was put to use or put in the business of the assessee. In the present case, it is abundantly clear that there is no change in the value of land when compared to earlier financial year and thus, from the above it is very clear that the assessee has not put to use the asset. Therefore, amortization of premium on issue of debentures should have been added to stock in trade. The PCIT, after considering relevant facts has rightly set aside the assessment order passed by the Assessing Officer and their order should be upheld.

:-14-: ITA. No:195/Chny/2021 11. We have heard both the parties, perused materials available on record and gone through orders of the authorities below. The factual matrix of the impugned dispute are that the assessee has issued debentures in view of payment for purchase of land. Thus, premium if any on issue of debentures directly linked to purchase of inventory is a direct cost, but not the period cost. The period cost has been defined in Managerial and Cost Accounting, as per which period cost refers to cost that are not tied, or related to the production of inventory. For example, such cost includes selling, general and administrative expenses, marketing expenses and other indirect expenses etc. Therefore, the arguments of the assessee that amortization of premium on issue of debentures is a direct cost, not directly linked to acquisition of stock in trade is devoid of merits. Since, amortization of premium on issue of debentures is a direct cost, irretrievably intertwined with stock of land, the claim that it is period cost irrespective of the fact that the stock of land acquired by issue of debentures has not been put to use, is a illogical claim and not backed by appropriate principles of revenue recognition or provisions under the law. Since, amortization of premium on issue of debentures is directly

:-15-: ITA. No:195/Chny/2021 linked to acquisition of land, which is the stock in trade in the present case, in case the business of the assessee is not commenced or the asset is not put to use for the business of the assessee, then amortization of premium on issue of said debentures needs to be capitalized to stock in trade till such asset is put to use in the business of the assessee. In the present case, facts brought on record by the PCIT clearly indicated that the assessee has not put to use the impugned asset in the business of the assessee for the impugned assessment year, which is evident from the fact that the value of closing stock remains same when compared to the previous year ending 31.03.2014.

:-16-: ITA. No:195/Chny/2021 amortization of premium on issue of debentures. From the above, it is very clear that neither the AO called for necessary details nor the assessee has furnished any explanation as to how and why said expenditure is a period cost not directly linked to acquisition of asset. Therefore, we are of the considered view that the AO has failed to carry out required enquiries, he ought to have been carried out in light of relevant provisions of the Act while completing the assessment u/s. 143(3) of the Act, which rendered the assessment order passed by the AO as erroneous and prejudicial to the interest of the revenue. The PCIT, after considering relevant facts has rightly invoked his jurisdiction and set aside the assessment order passed by the AO.

:-17-: ITA. No:195/Chny/2021 followed by the assessee, in terms of provisions of section 145A of the Act, any interest paid on loan borrowed for acquisition of asset needs to be capitalized to stock in trade till such asset is put to use. The PCIT, has drawn support from the above decision in support of her conclusion. In our considered view, the case laws relied upon by the ld. PCIT supports the case of the revenue because when assets acquired out of borrowed funds was not put to use, then interest if any paid on such loan needs to be capitalized till such asset is put to use in the business of the assessee. In the present case, amortization of premium on issue of debentures is in the nature of interest on borrowed funds and hence, the assessee ought to have capitalized such amortization of premium to work-in-progress/stock in trade. Since, the assessee has directly debited amortization of premium on issue of debentures to profit and loss account, contrary to provisions of section 36(1)(iii) of the Act, and proviso provided therein, in our considered view, there is no error in the reasons given by the PCIT to set aside the assessment order.

:-18-: ITA. No:195/Chny/2021 14. Coming back to the case laws relied upon by the ld. Counsel for the assessee in the case of PCIT vs Ceebros Hotels Pvt Ltd (Supra). The Hon’ble High Court of Madras has considered an identical issue in light of provisions of section 36(1)(iii) of the Act and proviso provided therein. We have gone through the case laws relied upon by the ld. Counsel for the assessee in light of facts of the case and we find that in the said case, it was the observation of the authorities below that substantial activities were carried out in new project, which showed that the asset acquired was put to use in the business of the assessee and in light of those facts, the Hon’ble High Court held that interest expenditure on loan obtained for purchase of said land was to be allowed as deduction u/s. 36(1)(iii) of the Act. In the present case, facts brought on record clearly indicates that the asset acquired out of issue of debentures including premium is not put to use in the business of the assessee and thus, in our considered view amortization of premium on issue of debentures should have been added to stock in trade, instead of debiting into profit and loss account. Therefore, the case laws relied upon by the ld. Counsel for the assessee is not applicable to facts of the present case and thus, rejected.

:-19-: ITA. No:195/Chny/2021 15. In this view of the matter and considering facts and circumstances of this case, we are of the considered view that the PCIT has rightly invoked jurisdiction u/s. 263 of the Act and set aside the assessment order passed by the AO u/s. 143(3) dated 22.12.2017, because the assessment order passed by the AO is erroneous and prejudicial to the interest of the revenue, on the issue of amortization of premium on issue of debentures. Thus, we reject arguments of the assessee and upheld the order passed by the PCIT u/s. 263 of the Act.