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Income Tax Appellate Tribunal, “F” BENCH, MUMBAI
Before: SHRI PRASHANT MAHARISHI, AM & SHRI RAHUL CHAUDHARY, JM
PER PRASHANT MAHARISHI, AM: A.Y. 2014-15 01. ITA No. 1893/Mum/2022 is filed by the Asst. Commissioner of Income Tax, Central Circle 7(3), Mumbai [the learned Assessing Officer] for A.Y. 2014-15 against Appellate order passed by the Commissioner of Income- tax (Appeals)-49, Mumbai [the learned CIT (A)] dated 26th May, 2022, wherein the appeal filed by the Assessee against the assessment order under Section 143(3) of the Income-tax Act, 1961 (the Act) dated 28th December, 2016 passed by the Dy. Commissioner of Income Tax, Central Circle 7(3), Mumbai, (the learned Assessing Officer) was partly allowed.
The learned Assessing Officer is aggrieved with the order of the learned CIT (A) in deleting the disallowance of interest expenditure amounting to ₹6,33,67,881/-.
The brief fact of the case is that the assessee is a company engaged in the business of construction and development of real estate and was developing a residential project at Pune. Assessee filed its return of income on 30thNovember 2014 at a total income of ₹28,61,89,640/- which was the further revised on 9th
We have considered the rival submissions and perused the material available on record. In the present case, the assessee has followed percentage of completion method for the purposes of recognizing the revenue from its project. We find that in similar facts and circumstances, the Coordinate Bench of Tribunal in CIT v/s National Standard Private Limited in ITA No.3048/Mum/2019 vide order dated 5 April 2021 dismissed the appeal filed by the Revenue and allowed the claim of deduction
4.2 The Ld. CIT(A), after noticing the ratio of decisions of Hon'ble Bombay High Court in CIT V/S Lokhandwala Construction Ind. Ltd. (260 ITR 0579), decision of Tribunal in M/s. Ashish Builders Private Ltd (ITA No.310/M/ 2012): Rohan Estates (ITA ITA No. 3048/Mum/2019 M/s. National Standard India Private Limited Assessment Year 2013-14 No. 7200/Mum/ 2010) & Pune Tribunal in M/s Kolte Patil Developers Ltd. concurred with assessee's submissions and held as under
5.7. From the above, it is evident that any amount of the interest paid in respect of capital borrowed for the business purposes constitutes an allowable deduction. The said clause (iii) 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.
5.8. The case of Wall Street constructions Ltd. (2006) 102 TTJ 505 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) and therefore the judgment of Wall Street constructions Ltd. is not applicable to this case. The assessee is following percentage completion and offers a part of the revenue every year depending upon the percentage of completion. The funds have been borrowed for the
Upon due consideration of material facts, it is quite evident that the assessee was following percentage of completion method of accounting to recognize revenue from operations as against the case law of Tribunal Special Bench in M/s Wall Street Construction Limited (102 TTJ 505) which deal with a case wherein the
Proceeding further, it is undisputed fact that the assessee was engaged in real estate construction and had borrowed capital for business purposes. No other diversion of income has been alleged by Ld. AO. As noted by Ld. CIT(A), the interest was paid to debenture holders, financial institutions as well as unsecured loan creditors and the loan was utilized for business purposes. The funds were borrowed for the purpose of construction and have gone into the projects of the assessee which constitute assessee's stock-in-trade and not capital asset. In view of these clear cut findings, the adjudication of Ld. CIT(A) could not be faulted with. Another important fact is that the assessee has followed consistent accounting treatment to charge interest expenditure in the accounts. Therefore, the ground thus raised by the revenue stand dismissed."
Similarly, in DCIT v/s Palava Dwellers Pvt. Ltd. in ITA No.2147/Mum./ 2018 vide order dated 20 February 2020, following the decision of Hon'ble Jurisdictional High Court in
The learned DR could not show us any cogent reason to deviate from the aforesaid orders. Thus, respectfully following the aforesaid judicial precedence rendered by the Co-ordinate Bench of Tribunal in similar facts and circumstances, we direct the Assessing Officer to allow deduction under section 36(1)(ii) of the Act in respect of interest expenditure of Rs. 4,35,36,783
6.3.3 Since, the view taken by me on this issue in an earlier order in the case of another group concern as mentioned above did not find favour from the Hon'ble ITAT, as that has been reversed vide the order referred to above, respectfully following the judicial discipline and the decision of the Hon'ble Tribunal in the aforesaid case and other cases relied upon by the assessee, it is held that the assessee is eligible for claiming this deduction, and the learned AO is, accordingly, directed to allow the same. Grounds No.1 and 2 are, accordingly, ALLOWED”
The learned CIT (A) has also considered the decision of Special Bench in M/s Wall Street Construction Limitedreported in 102 TTJ 505.
On the argument of the revenue that the decision of the Honourable Bombay High Court was rendered prior to insertion of proviso to Section 36 (1) (iii) of the act by the
In the result, ITA No. 1893/Mum/2022 of learned Assessing Officer for A.Y. 2014-15 is dismissed.
A.Y. 2015-16 016. ITA No. 1885/Mum/2022 is filed by the Asst. Commissioner of Income Tax, Central Circle 7(3), Mumbai [the learned Assessing Officer] against the appellate order passed by the CIT (A)-49, Mumbai dated 26thMay 2022 raising solitary grounds of appeal with respect to the deletion of disallowance under Section 36(1)(iii) of the Act.
In ITA No. 1864/Mum/2022, assessee has also filed appeal for the same assessment year against the same appellate order raising following three grounds of appeal: -
“The following grounds of appeal are without prejudice to each other: - 1) On the facts and circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals)-49 [CIT(A)-49] erred in upholding the disallowance of interest to the tune of Rs 9,75,000/- under section 36(1)(iii) of the Income Tax Act, 1961 being difference between interest received on
2) Without prejudice to above, on the facts and circumstances of the case and in law, the learned CIT(A)-49 erred in not appreciating that the disallowance of the interest should be restricted to the sum of Rs. 69,062/- being amount of interest debited to profit and loss account.
3) On the facts and circumstances of the case and in law, the learned [CIT(A)-49] erred in not appreciating that no double disallowance of expense could be made by adding the disallowance to total income as well as reducing the same from Work-in-progress of inventories.
4) The appellant craves leave to add, amend, alter, or delete the said ground of appeal.”
Coming to the facts of the case, assessee filed return of income on 30thAugust 2015 declaring total loss of ₹7,08,642/-. The assessment order was passed in the name of Ishwar Realty and Technologies Pvt. Ltd. which was renamed as Lodha Developers Thane Pvt. Ltd and subsequently, renamed as Bellissimo Developers Thane Pvt. Ltd. merged into Macrotech Developers Ltd.
The learned Assessing Officer noted that assessee has unsecured loan of ₹1,13,242 lacs as on 31stMarch 2015. Assessee has also given advance of ₹8,000 lacs on which no interest was charged. Assessee has paid interest of ₹8.49 lacs out of which ₹1,485 lacs is reduced from interest income and ₹6,932 lacs was allocated to the cost
“5.2 The assessee has made its submission vide letter dated 28.12.2017. The relevant part is reproduced hereunder:
1.1 The assessee is a private limited company engaged in the business of construction and development of real estate properties. The assessee company is developing a project named as "Amara" at Thane. During the year under consideration, the assessee has purchased land for construction of its project and in order to meet the construction cost, the assessee company has borrowed Rs. 450 Crores from M/s. Indiabulls Housing Finance Limited (IHFL) at the interest rate of 14.94% and it has also borrowed funds from its holding company M/s. Lodha Developers Private Limited from time to time at the interest rate of 13.40%. As stated above, the above funds have been utilised for construction activity which is evident from the audited financial statement wherein work in progress (WIP) as on 31.03.2015 is shown at Rs. 1,525 Crores (refer schedule 10 of the audited financial statement) which has been carried forward to subsequent years.
1.2 From the audited financial statement, it is also apparent that the assessee company's own
1.3 The assessee further submits that its business has already been set up as it has bought the land at Thane and presently on the said land the assessee company is developing project Amara. Therefore, the assessee submits that interest income on commercial exploitation of fund after setting off of its business has been correctly netted off against the interest expenses and carried forward to the WIP.
1.4 While on the subject, the assessee also submits that funds advanced by the assessee company to JRPL has been used for the
its support the assessee has also relied on the following judicial pronouncements to establish that it has correctly netted off the interest expenses -
Eveready Industries India Limited vs CIT 323 ITR 0312 (Cal)
CIT vs Producin (P) Ltd (290 ITR 0598 Kar HC]
CIT vs Madras Refineries Limited (228 ITR 0354 Mad HC)
CIT vs Tirupati Woolen Mills Limited (193 ITR 0252 Cal HC)
Further, the assessee has submitted as under: -
2.1 In the alternative and without prejudice to the above submission the assessee submits that there is a direct nexus between the
(iii) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income;"
2.2 The assessee respectfully submits that what section 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. The assessee respectfully submits that in its case there is a direct nexus between the funds borrowed and utilization of same. The assessee therefore submits that the interest on borrowed fund was laid out or expended wholly and exclusively for the purpose of earning the interest income. Under the circumstance, entire interest expenses of Rs. 15,48,74,589/- on loan borrowed shall be allowed as deduction u/s 57(iii) of the Act. In support of the above submission, the assessee rely upon the following judicial pronouncements wherein under the identical facts the hon'ble
In this respect, the assessee has relied on the following judicial decisions -
CIT vs Rajendra Prasad Mody [115 ITR 0519 SC]
CIT VS. Modi Pvt. Ltd [208 ITR 31] (Bombay) CIT Vs. South India Corporation (Agencies) Ltd [290 ITR 217)(Madras)
R.K. Kabel Ltd Vs. Addl. CIT [66 DTR 250] (Mumbai)
The assessee has also further made the submission as under: -
3.1 The assessee would humbly submit that reducing the interest income from the WIP and taxing the same under the head income from other sources shall be tax neutral. The assessee submits that the reduction of interest income from WIP will result into increase in the value of WIP which shall be claimed in the respective years against the proportionate revenue recognized following percentage completion method of accounting. There would be only deferment in the year i.e. it would be taxed as income from other sources in the subjected year and shall be allowed as deduction. in respective years forming part of WIP. In view of the above facts, the assessee submits that its claim is duly allowed under the law; therefore,
4.1 In the alternative and without prejudice to the above submission, the assessee submits that of at all the disallowance is to made, then the same shall be restricted to Rs. 1,73,75,903/- which works out as under:
Particulars Amount Interest Rate Avg Amount Interest paid to IHFL 154,874,589 14.94% 1,036,643,835 Interest paid to Lodha Developers Limited 415,103,077 13.40% 3,097,784,157 569,977,666 4,134,427,991 Average interest rate on borrowing 13.79% Interest rate on lending 13.40% Difference in borrowing rate and lending rate 0.39%
Funds borrowed from IHFL and used for lending 4,500,000,000 Applying the differential interest rate on 17,375,903 borrowing (i.e. ₹450 Crores X .39%) 5.3 The assessee's submission has been perused carefully; however, same is not acceptable due to the reasons stated herein below. Assessee submitted that pending the utilization of borrowed fund, it has lent Rs. 450 Crores to M/s. Jawala Realties Private Limited (JRPL) for the period from January to March, 2015. It had borrowed funds at the interest rate of 14.94% whereas it has lent the fund at the interest rate of 13.40%. It is appropriate to state that to the extent of borrowed funds lent to JRPL, the borrowed fund has not been utilized by the assessee for its business purposes (i.e. construction activity) and also the fact that the assessee is not into lending business. Accordingly, Interest expenses of
The learned Assessing Officer further decreased the work- in-progress of ₹1,52,523/- lacs by the above sum and determined revised work-in-progress at ₹1,52,349/-lakhs. Assessment order under Section 143(3) of the Act was passed on 29thDecember 2017 determining the total income of the assessee at ₹1,66,67,260/- against the return loss of ₹7,08,643/- whereby the solitary addition is disallowance of interest expenditure of ₹1,73,76,903/-.
Assessee aggrieved with the above preferred the appeal before the learned CIT (A). The learned CIT (A) considered the explanation of the assessee that assessee has owned non-interest-bearing funds of ₹6,952 lacs as well as ₹350 crores from zero coupon redeemable preference shares and therefore, the above amount is far more than interest free advance given to other parties. Therefore, following the decision of the Hon'ble Bombay High Court in CIT Vs. Reliance Utilities 313 ITR 304 and CIT vs. HDFC Bank 366 ITR 505, the disallowance only of ₹9,75,000/- was confirmed.
Both the parties are aggrieved with the above order. 025. On the appeal of the learned Assessing Officer the learned Departmental Representative relied on the order of the learned Assessing Officer, whereas he relied on the order of the learned CIT (A) on appeal of the assessee. 026. The learned Authorized Representative on the appeal of the learned Assessing Officer relied upon the orders of the learned CIT (A) and of the orders of co-ordinate Benches in case of group concern as well as assessee. With respect to the appeal of the assessee, the learned Authorized Representative submitted that learned CIT (A) has restricted the disallowance to ₹9,75,000/- whereas the interest debited by the assessee only ₹69,062/- to the profit and loss account and therefore, disallowance cannot exceed more than that. He further stated that double disallowance of expenses also including the disallowance on the WDV from work-in-progress is not proper. 027. We have carefully considered the rival contentions and perused the orders of the lower authorities. We have also carefully considered the decision of the co-ordinate Benches relied upon.
In the result, all the appeals of learned Assessing Officer are dismissed and appeal of the assessee is partly allowed.
Order pronounced in the open court on 26.10.2022.
Sd/- Sd/- (RAHUL CHAUDHARY) (PRASHANT MAHARISHI) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) Mumbai, Dated: 26.10.2022 Sudip Sarkar, Sr.PS
Sr. Private Secretary/ Asst. Registrar Income Tax Appellate Tribunal, Mumbai