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Facts
The assessee, a builder and developer, filed a return declaring nil income. The case was selected for scrutiny due to a high closing stock compared to turnover. The AO disallowed interest expenses of Rs. 3,72,10,899/- and added interest income of Rs. 6,16,438/-.
Held
The Tribunal held that interest on borrowings for acquiring land for business purposes should be capitalized until the commencement of business, even if the asset is not yet put to use. The addition of interest income was confirmed as conceded by the assessee, but the administrative expenses capitalization was partially allowed.
Key Issues
Whether interest expenses on borrowed funds for land acquisition should be disallowed if the land is not yet put to use, and whether interest income should be added to income from other sources versus netting against capitalised interest.
Sections Cited
143(3), 142(1), 143(2), 36(1)(iii), 133(6)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “H(SMC
Before: SMT. BEENA PILLAI & MS. PADMAVATHY S
Per: Smt. Beena Pillai, J.M.: The Present appeal filed by the assessee arises out of order dated 26/03/2025 passed by NFAC, Delhi for assessment year 2018-19 on following grounds of appeal:
1. The Learned CIT(A) has erred in dismissing the appeal a) without considering the written submission and documentary evidence placed on record by the Appellant A.Y. 2018-19 M/s Suravi Infrastructure b) without granting opportunity of personal hearing through video conferencing which was specifically requested for by the Appellant c) without dealing with each of the ground raised by the appellant On the facts and circumstances of the case and in law, the order passed by the CIT(A) is unjustified, illegal, against the provision of the Act and is also against the principal of natural justice.
2. The Learned CIT(A) has erred in not quashing the assessment order passed by the AO u/s 143(3) in violating the principle of natural justice by not providing adequate opportunity of being heard through video conferencing. On the facts and in the circumstances of the case and in law, the assessment order passed us 143(3) of the Act is bad in law and ought to be quashed.
3. The Learned CIT(A) has erred in confirming the action of the AO in disallowing interest expense of Rs. 3,72,10,899/- from the closing stock of "Work in Progress" to be carried forward to subsequent year on the ground that no business activity is being carried out and that disallowance is warranted as per section 36(1)(iii) of the Act. On the facts and in the circumstances of the case and in law, the disallowances made by the Ld.AO ought to be deleted and allowed to be capitalized with closing stock of "Work in Progress" as the interest was paid on the fund borrowed which was used for purchase of land in the course of business and same is forming part of closing stock of "Work in Progress".
4. The Learned CIT(A) has erred in confirming the action of Ld. AO in making addition of interest income amounting to Rs. 6,16.438/- under the head "Income from Other Sources" instead of allowing netting off against interest cost capitalized to WIP. On the facts and in the circumstances of the case and in law, the interest on Fixed Deposit sought to be netted off against interest capitalized to WIP.
5. The Learned CIT(A) has erred in confirming the action of the AO in allowing capitalisation of administrative expenses of Rs. 37,73,809/- only as against Rs. 50,06,684/- capitalised by the appellant. On the facts and in the circumstances of the case and in law, entire administrative expenses of Rs. 50,06,684/- ought to be capitalised.
6. The Appellant craves leave to add, alter, amend and/or rescind any grounds of appeal during the hearing.” Brief facts of the case are as under:
A.Y. 2018-19 M/s Suravi Infrastructure 2. The assessee is a partnership firm and is engaged in the business of builder and developers. It filed its return of income on 08/08/2018 and declared total income at nil. Subsequently, revised return was filed on 03/12/2018 without changing its total income at nil. The case was selected for scrutiny to examine income from real estate business, since the closing stock disclosed by the assessee was high, as compared to the turnover. 2.1 Subsequently, the notice under section 143(2) and 142(1) of the act was issued to the assessee. In response to the statutory notices, assessee filed documentary evidences as called for. 2.2 The Ld.AO on verification of the particulars filed observed that, the assessee disclosed work in progress of Rs.50,07,22,606/- as on year ended 31/03/2018 whereas, the work in progress for the immediately preceding assessment year was Rs.45,91,21,461/-. The Ld.AO observed that, the assessee included interest paid on capital to the partners, interest paid to the creditors and other miscellaneous expenses were also capitalised as per ICDS-IX. However, no income was offered to tax in the return filed for the past 3 assessment years. The Ld.AO further observed that, the assessee shown interest paid of Rs.2,79,37,770/- on unsecured loans and Rs.92,73,129/- towards interest paid on capital to the partners. 2.3 The assessee was therefore called upon to file details of the expenditure incurred that was capitalised during the year 2017- 18. The assessee in response to the notice submitted that, was formed on 08/08/2013 to carry on the business of building and developing. It was submitted that, the interest was paid to the partners on capital account and unsecured loan obtained from A.Y. 2018-19 M/s Suravi Infrastructure relatives and private parties during the financial year 2017-18 which were added to the opening work in progress of Rs.45,91,21,461/-. 2.4 The assessee categorically submitted that it had not obtained any secured loan from banks for the purpose of its business activities the Ld.AO issued notice under section 133(6) to the creditors and called for the details like ITR, computation of total income along with confirmation letter. The details sought for were furnished by the creditors, and the Ld.AO observed that assessee obtained unsecured loans during financial year 2013-14 onwards and the interest cost, was added to the work in progress every year. The Ld.AO observed that the interest of Rs.3,72,10,899/- was not utilised for the purpose of the business activities whereas, it was utilised for paying interest on outstanding loads which was utilised for buying land during early stage of business and paid interest on the loan to the partners capital account. 2.5 The Ld.AO thus came to the conclusion that, the assessee utilised entire borrowed funds for the purpose of investment made on purchase of property and that interest paid during the year on the borrowed fund was related to the investment made in the immovable asset. Further the Ld.AO observed that as land was not put to use the interest of Rs.3,72,10,899/- was to be disallowed.
The Ld.AO further noted that assessee had received interest on deposits of Rs.6,16,438/- which was not offered to tax during the year under consideration. Accordingly, the said income was A.Y. 2018-19 M/s Suravi Infrastructure also added in the hands of the assessee under the head “income from other sources”. Aggrieved by the order of the Ld.AO, assessee preferred the appeal before the Ld.CIT(A).
The Ld.CIT(A) some really rejected the appeal of the assessee. Aggrieved by the order of the Ld.CIT(A), assessee is in appeal before this Tribunal.
Ground number 1-2 raised by the assessee are general in nature and therefore do not require any adjudication.
Ground number 3, raised by the assessee is in respect of the disallowance of interest expenses of Rs.3,72,10,899/- from the closing stock of work in progress which is to be carried forward the subsequent year. 6.1 The Ld.AR submitted that assessee during the year had purchased freehold land admeasuring 1990.81 m² along with 3 buildings thereon situated at Prabhadevi Mumbai for total consideration of Rs.90.195 crores with an intention to construct residential apartments. It submitted that, for the purpose of acquiring land, the partners of the firm introduced capital and also took unsecured loan from family members and various other parties. The Ld.AR submitted that interest was incurred and paid on the borrowed funds and the partners along with the other parties who have advanced loan, have paid income tax on the same. The assessee also has deducted TDS and deposited as per the act. 6.2 The Ld.AR submitted that, the assessee was in the process of complying with various statutory requirements from A.Y. 2018-19 M/s Suravi Infrastructure authorities and local bodies, in order to start the project and accordingly permissions were sought. He submitted during the year under consideration assessee incurred various expenses including interest on loan amounting to Rs.2,79,37,770/- and interest on capital to the partners. These interest cost was accounted by the assessee as working progress and was not been claimed as an expenditure. It was submitted that the interest cost was carry forwarded to subsequent years. It is thus submitted that, question of disallowing the same under section 36(1)(iii) does not arise. The Ld.AR emphasised that no new loans were taken by the assessee during the year. 6.3 On the contrary the Ld.DR relied on the orders passed by authorities below. We have perused the submissions advanced by both sides in the light of the records placed before us.
It is an admitted fact that assessee purchased land with the help of the funds collected from the partners as well as loan from other parties. The interest cost incurred on such loan was shown as capital work in progress by the assessee. The Ld.AO disallowed the same as an expenditure by holding that, land purchased was not put to use. However, it is not undisputed by the authorities that the land was purchased for the purposes of business of the assessee.
Hon’ble Supreme Court in case of Challapalli Sugars Ltd. v. CIT reported in 98 ITR 167 and DCIT v. Core Health Care Ltd. reported in 298 ITR 194, has held that interest on borrowings used for acquisition of a capital asset is required to be capitalised up to the date of commencement of business; once business is A.Y. 2018-19 M/s Suravi Infrastructure set up, such interest is deductible u/s 36(1)(iii) even if the asset so acquired has not yet been put to use. In the present facts of the case the assessee was in the process of obtaining permission to start its construction. Therefore, since the land was purchased with borrowed funds, admittedly for business purposes, the disallowance made by the Ld.AO on the ground that the land was not put to use cannot be sustained.
In any event assessee has not claimed any expenditure in respect of the interest cost and therefore the question of disallowance u/s.36(1)(iii) by the Ld.AO does not arise.
Accordingly ground No.3 raised by assessee stands allowed.
Ground No.4 is by the assessee is to it in respect of addition of interest amounting to Rs.6,16,438/-under the head income from other sources. 10.1 The Ld.AR submitted that assessee concedes to the said interest income to be computed under the head income from other sources.
Accordingly, this ground raised by the assessee stands dismissed.
Ground No.5 raised by the assessee is in respect of restricting the capitalisation of administrative expenses to the extent of Rs.37,73,809/-as against Rs.50,06,684/-. 11.1 The Ld.AR submitted that while capitalising administrative expenses to work in progress, the assessee had reduced the interest income of Rs.6,16,438/- and had capitalised only Rs.43,90,246/-. It is a submitted that the action of the Ld.AO in again reducing the same amounts to double taxation. The Ld.AR A.Y. 2018-19 M/s Suravi Infrastructure submitted that the assessee has conceded the interest income of Rs.6,16,438/- be treated as “income from other sources”. He submitted that, as a consequence, the working progress must be increased to that extent. 11.2 On the contrary the Ld.DR relied on the orders passed by the authorities below.
On perusal of the submissions advanced by Ld.AR having regard to the statement of accounts and financials submitted by the assessee, we do not find any infirmity in the same. The Ld.AO is directed to consider the claim of assessee by increasing the WIP to the extent of the interest income offered to tax under the head “income from other sources”. Accordingly, ground No.5 raised by the assessee stands partly allowed. In the result the appeal filed by the assessee stands partly allowed. Order pronounced in the open court on 30/09/2025 Sd/- Sd/- (MS. PADMAVATHY S) (BEENA PILLAI) Accountant Member Judicial Member Mumbai: Dated: 30/09/2025 Poonam Mirashi, Stenographer Copy of the order forwarded to:
(1)The Appellant (2) The Respondent (3) The CIT (4) The CIT (Appeals) (5) The DR, I.T.A.T.