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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: SHRI AMARJIT SINGH & SHRI SANDEEP SINGH KARHAIL
The present appeal has been filed by the assessee against the order dated 20 May 2021 passed by the Commissioner of Income Tax (Appeals)- 49, Mumbai (“the CIT(A)”) for the assessment year 2014 – 15.
In this appeal, the assessee has raised following grounds:
“1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in holding that the claim made by the appellant for deduction of interest of Rs.4,35,36,783, under section 36(1)(iii) of the Act was not allowable.
MMR Social Housing Pvt. Ltd. ITA No.1310/Mum./2021
2. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in not following decisions of his predecessors as well as various decisions of the Hon’ble ITAT, which were admittedly on the same issue on identical set of facts and, hence, binding on the CIT(A).”
The only issue arising in present appeal is with regard to disallowance of deduction of interest under section 36(1)(iii) of the Act.
The brief facts of the case pertaining to this issue as emanating from the records are: The assessee is a private limited company and is engaged in the business of real estate construction and development. During the year under consideration, the assessee e-filed its return of income on 29 November 2014 declaring income of Rs. NIL. During the year under consideration, the assessee was developing residential project named as “Casa Royale” at Thane. The assessee being the company was following mercantile system of accounting and for the purposes of recognising the revenue from the above project, it was following percentage completion method of accounting. For the purpose of construction, the assessee had borrowed interest-bearing funds from the group concern and financial institutions. On the said funds, the assessee had paid the interest of Rs. 16.96 crores and after reducing the interest income of Rs. 5.58 crores net interest expenses of Rs. 11.38 crores was shown as expenses. Out of the total interest expenses of Rs. 11.38 crores, the assessee had capitalised an interest of Rs. 5.02 crores to work in progress. Out of the said interest of Rs. 5.02 crores, capitalised in the books of accounts, interest of Rs. 4.35 crores was claimed as deduction in the return of income. Accordingly,
MMR Social Housing Pvt. Ltd. ITA No.1310/Mum./2021 during the course of assessment proceedings, the assessee was asked to explain as to why the interest expenses claimed in the return of income should not be disallowed. In reply, assessee submitted that the interest expenses have been claimed as deduction in the year of incurrence thereof for the reason that the interest is periodic cost; hence, the claim in the year for which it belongs to. The assessee further submitted that such interest cost has been claimed as deduction under section 36(1)(iii) of the Act being interest pertaining to stock in trade of the assessee.
The Assessing Officer vide order dated 28 December 2016 passed under section 143(3) of the Act disagree with the submission made by the assessee and held that the assessee has not followed the correct method of accounting in respect of the expenses towards the project being developed by the assessee. The Assessing Officer further held that as per guidance note on accounting for real estate transaction issued by the Institute of Chartered Accountants of India, all expenses directly related to the project have to be carried over and debited to the cost of project. Such expenses can be claimed as deduction in the year in which the corresponding income of the project is credited in the books of accounts and offered to tax. The Assessing Officer also refer to the decision of Special Bench of Tribunal in the case of M/s Wall Street Construction Ltd [102 TTJ 505] in support of its conclusion. Accordingly, the Assessing Officer, inter-alia, disallowed the interest cost of Rs. 4,35,36,783 and added to the work in progress of the assessee.
MMR Social Housing Pvt. Ltd. ITA No.1310/Mum./2021
In appeal before the CIT(A), assessee, inter-alia, submitted that the issue is covered in favour of the assessee by decision of Hon’ble Jurisdictional High Court in case of CIT v/s Lokhandwala Construction Industries Ltd.: [2003] 260 ITR 579. The CIT(A) vide impugned order dated 20 May 2021 held that the aforesaid decision of Hon’ble Jurisdictional High Court was on a different issue and thus is not applicable to the present case. The CIT(A) further held that the issue was considered by Special Bench of Tribunal in Wall Street Construction Ltd. (supra) and same is applicable to the facts of the present case. The CIT(A) also held that the fact that in case of Wall Street Construction Ltd. (supra) the assessee was following Project Completion Method whereas the assessee follows percentage of completion method is of no consequence. Thus, following the decision of Special Bench of Tribunal cited supra, CIT(A), inter-alia, dismissed appeal filed by the assessee. Being aggrieved the assessee is in appeal before us
During the course of hearing, Shri Niraj D. Sheth, learned Authorised Representative (“learned A.R.”) submitted that the issue is covered in favour of the assessee by various decisions of Co-ordinate Bench of Tribunal rendered in cases of group concern.
On the other hand, Shri T. Shankar, learned Departmental Representative by vehemently relying upon the orders passed by the lower authorities submitted that principle of matching concept is to be followed and all the expenses are to be given similar treatment and thus the MMR Social Housing Pvt. Ltd. ITA No.1310/Mum./2021 expenses should be allowed in the year in which the corresponding income is offered to tax.
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 recognising the revenue from its project. We find that in similar facts and circumstances, the Co-ordinate 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 under section 36(1)(iii) of the Act, by observing as under:
“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 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. The present case involves the payment of interest of Rs.4,39,49,000/- the interest paid to debenture holders, Financial institutions, Unsecured loan etc. It is not the case of the Revenue that the interest claim of Rs.4,39,49,000/- and related capital borrowed was not utilized by the assessee for business purposes of 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
MMR Social Housing Pvt. Ltd. ITA No.1310/Mum./2021 depending upon the percentage of completion. The funds have been borrowed for the purpose of construction and have gone into the projects of the assessee which are stock in trade and not capital asset of the assessee. Therefore, the amendment brought in the Act with effect from 2003 by way of introducing the proviso to section 36 (1) (iii) also does not affect the facts of the case of the assessee. In view of the binding judgment of the jurisdictional High Court in the case of Lokhandwala constructions and also of the jurisdictional ITAT in the cases of Ashish Builders Private Ltd and Rohan Estate Private Ltd (supra) and also the various judicial pronouncements relied upon by the assessee, the interest expenditure claimed by the assessee is held to be allowable. Therefore, the AO is directed to delete the addition made of Rs.4,39,49,000/-. This ground of appeal is ALLOWED. ………….
5. 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 assessee was following completed contract method and therefore, the said decision was not applicable to the facts of the case, as rightly held by learned first appellate authority.
6. 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 Lokhandwala Construction (supra), another Co- ordinate Bench of Tribunal dismissed the appeal filed by the Revenue and allowed the claim of deduction under section 36(1)(iii) of the Act.
The learned DR could not show us any cogent reason to deviate from the aforesaid orders. Thus, respectfully following the aforesaid judicial
MMR Social Housing Pvt. Ltd. ITA No.1310/Mum./2021 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)(iii) of the Act in respect of interest expenditure of Rs. 4,35,36,783.
In the result, appeal by the assessee is allowed in terms of our aforesaid findings.
Order pronounced in the open court on 08/04/2022