M/S. RACHNA ENTERPRISE,,SURAT vs. THE DY. COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-1,, SURAT

The grounds raised by the assessee as under: “1. On the facts and circumstances of the case as well as law on the subject, the ld. CIT(As) has erred in enhancing the assessment by disallowing the interest to the extent of Rs.46,36,800/- by erroneously holding that it is required to be capitalized to the work in progress. 2. It is therefore prayed that enhancement made by ld. CIT(Appeals) may please be deleted.”

Briefly, stated the facts of the case are that the assessee is a partnership firm engaged in business of real estate development. The Assessee filed its return of income on 30.09.2014 showing total income at Rs.6,06,380/-. The survey u/s. 133A of the Income Tax Act, 1961 was conducted on 18.02.2014 at the premises of associate concern Rachna Organisers. During the survey proceedings a loose paper pertaining to the assessee firm relating to the year under appeal was found and seized from the said premises. The partner of assessee firm Shri Viren Shah in his statement recorded in the course of survey proceedings on the basis of the said loose paper disclosed Rs.70 lacs being ‘on money’ received/receivable during the year under appeal from the whole project namely J-9, High Street, Canal Road, Vesu, Surat. The assessee has followed the percentage completion method of accounting to show profit on the basis of transfer of units of the projects since inception and it was regularly followed from year to year. Assessee has therefore not followed the completion method. It was indicated in the notes forming part of the accounts that the revenue was recognized in the year in which title in the property is transferred i.e. earlier of possession or conveyancing. As per method of accounting, assessee therefore recognized the sales as per the transfer of the title in the property. All the direct expenses are capitalized to WIP account and indirect expenses and interest expenses were claimed as deduction as revenue expenses. This method is consistently followed from year to year. The Ld.AO has disallowed Rs.60,50,226/- computed by him as proportionate expenses, alleging the same being claimed against the ‘on money’ in the assessment order passed u/s.143(3) dated 28.03.2016.

The assessee has carried the matter before CIT (A), wherein it was submitted that the assessee has claimed the total expenditure of Rs.2,08,24,076/- in the profit and loss account which includes the interest expenses of Rs.49,47,723/-. As against these expenses, assessee has disclosed total sales of Rs.2,40,93,000/- as under: Sales Rs.1,70,93,000/- Undisclosed amount Rs. 70,00,000/- Total Sales Rs. 2,40,93,000/-

The AO disallowed the proportionate expenses related to disclosure and thereby made the addition of Rs.60,50,244/-. However, the CIT (A) deleted this disallowance by giving the following finding at para no. 7.2: “ I agree with the assessee that the disallowance has been made by the AO is totally arbitrary and unlawful manner. The statement of Viren Shah dealt about undisclosed unrecorded income of Rs. 70 lacs being net income. Clearly, it was meant that no out of books expenses would be claimed from this income”. However, the ld. CIT(A) in the course of appellate proceedings observed that the total expenditure of Rs.2,08,24,076/- included the interest expenses of Rs.49,47,723/- that had been directly debited to profit and loss account and interest has not been capitalized to WIP. In the course of appellate proceedings, the assessee was asked why the borrowing cost should not be taken to WIP. The ld. CIT(A) didn’t issue the specific notice for enhancement. Assessee filed the detailed submission which has been reproduced by CIT(A) at para no.7.2.2. The ld. CIT(A) was not satisfied with the submission of the assessee and he held that project cost would include borrowing cost in accordance with AS-16 and the

Being, aggrieved the assessee filed this appeal before the Tribunal. The learned counsel for the assessee submitted the ld. CIT(A) has observed that the similar expenses were claimed in preceding year which has also not been capitalized. It is to be noted that the assessee’s claim of interest expenses of previous year of Rs.8,44,868/- was allowed in the scrutiny assessment by the same assessing officer by passing order on the same date i.e. 28.03.2016. Even in succeeding assessment year i.e. A.Y 2015-46, the AO has allowed the interest expenses of Rs.46,40,218/- in the scrutiny assessment passed u/s. 143(3) on 10.11.2017. This assessment order was passed after the order of the CIT(A). Accordingly, the interest expenses were allowed in preceding year and succeeding year. It was also allowed in other years. Accordingly, there is no reason to disallow the interest expenses in this year even on the basis of consistency. It is true that the strict rule of doctrine of res judicata does not apply to proceedings under the Income Tax Act. At the same time, it is equally true that unless there is a change of circumstances the authorities will not depart from previous decisions at their sweet-will in the absence of material circumstances or reasons for such departure. The learned counsel for the assessee further relied on the following i.e. Taraben Ramanbhai Patel v. ITO (1995)215 ITR 323 (Guj.) and

The learned counsel for the assessee submitted the Hon’ble Bombay High Court in case of Lokhandwala Construction Inds. Ltd. (supra) held that “while adjudicating the claim for deduction under section 36(1)(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 capital 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 under section 36(1)(iii).” This decision in the case of Lokhandwala Construction Inds. Ltd. Cited supra was followed in the case Ashish Builders cited supra. In the case of Ashish Builder, the decision of Mumbai bench in the case of Rohan Estates Pvt. Ltd. – ITA No. 7200/Mum/2010 was followed where it was held that the interest cost is the period cost and charged to the operating statement in the year in which the same was incurred. It was further held that the method of accounting regularly followed by the assessee will prevail. As stated above assessee followed the same method of accounting year to year. It was submitted that in the case of Tetron commercial Ltd., it was held that interest u/s. 36(1)(iii) is allowable even if there is one transaction of business and so long as money is utilized, interest is allowed as deduction. It was

Per contra, the ld. Sr. D.R. supported the order of Ld. CIT (A).

We have heard the rival contentions perused the material available on record. We find that the proportionate interest expenses disallowed by the ld. CIT (A) are relates to the cash credit limit availed by the assessee and therefore it is for the purpose of working capital. This interest expenses have not been incurred for the project loan availed by the assessee and therefore not directly attributable to the construction of qualifying assets as mentioned in AS-16. It is further seen that the Ld. CIT(A) has observed that this similar expenses were claimed in the preceding year which has not been capitalized. It is noticed that the interest expenses claim of assessee of previous year of Rs.8,44,868/- was allowed in the scrutiny assessment by the same AO by the passing order on the same day that is 28.03.2016. We also note that even in the succeeding assessment year that is A.Y. 2015-16 the AO has allowed the interest expenses of Rs.46,40,218/- in the scrutiny assessment year passed u/s. 143(3) on 10.11.2017. This assessment order was passed after the order of the CIT(A). Thus, the interest expenses were allowed in the preceding year as well as in succeeding year. Therefore, we do not find any plausible reason to disallow the proportionate interest expenses in the year under appeal as the principle of rule of consistency will be applicable as laid down by the Hon`ble Supreme Court in the case of Radhasaomi Satsang Saomi Bagh vs. CIT (1992) 193 ITR 321(SC). The learned

In the result, the appeal of the assessee is allowed. 11. The order is pronounced in the open Court on 30.04.2019.