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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: Shri Chandra Poojari, AM & Shri George George K, JM
O R D E R
PER GEORGE GEROGE K, JM :
This appeal at the instance of the assessee is directed against the CIT(A)-1, Bengaluru’s order dated 26-09-2019. The relevant assessment year is 2008-09.
The solitary issue argued by the Ld.AR is whether the CIT(A) is justified in not deleting the entire disallowance of interest expenditure made by the AO (disallowance of interest expendtiure made by AO Rs.3,65,13,949/-).
The brief facts of the case are as follows:
The assessee is a partnership firm carrying on the business of hospitality services and property development. For the relevant assessment year, assessee filed the return of income on 29-09-2008 declaring total loss of Rs.11,44,43,470/-. The assessment was selected for scrutiny and notice U/s.143(2) of the Income Tax Act
(Act) was issued. During the course of assessment proceedings, it was noticed that assessee had borrowed a sum of Rs.39.50 Crores from various banks for construction of hotel and paid a total interest of Rs.5,12,47,468/- for the relevant assessment year. According to the assessee, it had commenced its business from 29-03-2007 (i.e., AY.2007-08) and claimed the interest expendtiure as allowable deduction. The AO held since the construction work was completed only in December, 2007, the interest expenditure till December, 2007 need to be capitalised proportionately and added to the value of building. The interest worked out upto December, 2007 was Rs.3,84,35,736/- (9 % 12 X 5,12,47,648/-). The said amount was disallowed and added to the value of building and accordingly depreciation was granted on interest disallowed at 5% (for six months). The balance of Rs.3,65,13,949/- was added to the total income. The relevant findings of the AO reads as under:
“Interest expenditure – pre-operative During the year, the assessee has started operation of the Hotel Electronics Inn. The hotel is claimed to have commenced business just before the beginning of the financial year on 29.03.2007. However, the assessee has claimed depreciation on building for 6 months only stating that the construction was finished in the month of December 2007. As verified from the details, there was no active busines in the initial months obviously for the reason that the construction work is not yet completed fully. The assessee has availed substantial amount of bank loan for the purpose of construction of hotel. It has claimed interest expenditure to the tune of Rs.5,12,47,648/- on the loan for the entire year. Since as stated by the assessee itself, the construction work was completed only in December 2007, the interest expendtiure till December 2007 needs to be capitalized and added to the value of the building. By adopting a proportionate working, the interest for 9 months till December works out to Rs.3,84,35,736/- (9/12 X 51247648). This amount is added to the value of the building and after giving 5% depreciation (for 6 months), the balance of Rs.3,65,13,949/- is added to income returned.
Aggrieved, the assessee filed an appeal before the First Appellate Authority. The CIT(A) noticed that the assessee had completed construction of hotel upto 4th floor in the month of March, 2007 and balance floors of 5th to 9th was completed during 31-12-2007. The CIT(A) directed the allowance of interest for the part of the asset which was capitalized and put to use as on 1st April, 2007. Further, the CIT(A)
directed the AO to allow interest on the balance cost to the asset completed during December, 2007 (i.e. floors 5th to 9th of the hotel). The relevant findings of the CIT(A) reads as under:
5.1. Having considered the submissions, it is seen that the only issue to be adjudicated in this appeal is regarding the allowability of the interest claim of Rs.5,12,47,648/-, on the borrowals of 39.5 Crores, during the construction period, which was disallowed by the AO to the extent of Rs.3,65,13,949/-. The appellant has constructed the Hotel and completed it by December 2007. As per the agreed facts, the Hotel was made operational from March 2007, after having completed the Hotel upto 4th floor. As per the Sales Tax and other records including the ITR the appellant has earned revenues from the room sales, restaurant, telephone, travel desk, etc (para (V) of WS supra) from the Hotel operations. And the balance floors 5th to 9th were finally completed by Dec 2007, during the current year. 5.2. Thus, the allowability of interest on borrowed funds, utilized for the construction of the Hotel project, depends on the date on which the connected Hotel asset was completed and put to use. Accordingly, on the value of that part of the Hotel completed by March 2007 (upto 4th floor), the interest on the loan during the current period (1st April 2007 to 31st March 2008), is an allowable expenditure since this part of the asset was capitalized and put to use as on 1st April 2007 (in the previous year). On the balance cost of the asset completed during the Dec 2007, the interest on the borrowed funds equivalent to the value of investment made in the balance floors 5th to 9th of the Hotel completed during the year upto 31st December 2007, need to be capitalized along with the cost of the asset. Having said that, the entire aset being put to use by Dec 2007, the balance interest for the period 1st January 2008 to 31st March 2008 is allowable as revenue expenditure. 5.3. Accordingly, the AO is directed to allow the entire interest cost on the value of that part of the Hotel already made operation during the previous year. Further, the AO is directed to allow depreciation on the Assets put to use as per the above findings in para 5.2, including the amount of interest disallowed on the cost of Hotel from 5th to 9th Floors for the period April 2007 to Dec 2007. However, the depreciation shall be for a period of six months for this asset and full for the Hotel upto 4th floor. The Appellant is directed to submit the details of the cost of construction of the Hotel, including the inteest cost, to the AO, within ten working days from the receipt of this order, in order to give effect to the findings in this order
The assessee being aggrieved, filed this appeal before the Tribunal. The assessee filed the Paper Book comprising of 53 pages inter alia enclosing written submisisons filed before the CIT(A), copy of the computation statement of the total income for the relevant assessment year, along with audited financials break-up of sales made by the assessee during the impugned assessment year, copy of the order passed under KVAT Act, 2003 and Luxury Tax Act, 1979 etc. The Ld.AR reiterated the submissions made before the Income Tax Authorities.
The Ld.DR strongly supported the findings of the CIT(A).
We have heard rival submissions and perused the material on record. The CIT(A) had allowed interest expenditure on the cost incurred for construction upto four floors of the hotel projects in its entirety. Further, the CIT(A) directed to allow proportionately the interest expenditure on the cost incurred for construction of 5 to 9 floors of the hotel project since same was completed by December, 2007. The CIT(A) directed the assessee to furnish necessary details as regards the cost of construction of the hotel and the interest expenditure incurred so as to give effect to the findings of the CIT(A). The findings of the CIT(A), we are of the view, is correct and no interference is called-for. We understand that the CIT(A)’s order has not been given effect to by the AO. We direct the assessee to submit the details of the cost of construction of the hotel, the interest cost on the same to the AO within reasonable period. The AO is directed to afford a reasonable opportunity of hearing to the assessee and shall comply with the directions of the CIT(A) as expeditiously as possible. It is ordered accordingly.
In the result, the appeal filed by the assessee is dismissed.
Pronounced in the open Court on 5th April, 2022