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Income Tax Appellate Tribunal, ‘A’ BENCH, CHENNAI
Before: SHRI MAHAVIR SINGH & SHRI G. MANJUNATHA
PER G. MANJUNATHA, ACCOUNTANT MEMBER:
This appeal filed by the Revenue is directed against the order passed by the learned Commissioner of Income Tax (Appeals)-1, Chennai, dated 20.09.2019 and pertains to assessment year 2015-16.
The Revenue has raised the following grounds of appeal: “1, The order of the learned CIT(A) is contrary to law, facts and circumstances of the case.
:-2-: ITA. No: 3325/Chny/2019 2. The ld CIT(A) erred in deleting the disallowance made u/s 36(1)(iii) without appreciating the fact that the interest expense incurred of Rs. 2.52 crore for outstanding loan of Rs.23,40 Crore is directly relatable to the Land and project Cost' of Rs,20.57 Crore, classified under other current asset and also since assessee has followed accrual basis of accounting, the AO has rightfully disallowed the proportionate interest expense by following matching principle of accounting? 3. The ld CIT(A) erred in deleting the disallowance made u/s 36(1)(iii) without appreciating the fact that the assessee claimed that the borrowed money was utilized for purchasing Stock in Trade and not any fixed asset, on the contrary it was logically concluded by the AO in her assessment order that the most of portion of the borrowed money has not been utilized for purchasing Stock in Trade, which needs to be passed through P&L but for acquiring Other Current asset as 'Land and Project Cost' which exposes to balance sheet only not P&L, hence by following matching principle of accounting, the AO has rightfully disallowed the proportionate interest expense? 4. The ld CIT(A) erred in deleting the disallowance made u/s 36(1)(iii) by relying on The Judgments in the cases of M/s Core Health Care Ltd. (SC) dated 08.02.2008, M/s Taparia Tools Ltd. (SC) dated 23.03.2015, M/s Torrent Pharmaceuticals Ltd.(HC) dated 27072016 where it was held that the ,interest expenses paid were wholly deductible where interest expenses were on account of Machinery purchase, one time up front payment for interest on debentures and premium is deductible proportionately in each of years during life of debenture respectively, whereas in present case the facts and circumstances are different than the relied upon case laws, as the assessee in this case is in business of developers and builders and interest expense is not on account of Machinery purchased or Debenture issued but 'for Loan taken and the most of portion of the borrowed money has not been utilised for purchasing Non-Current Capital asset but for acquiring 'Land and Project Cost' classified as other current asset, also since the income component of ‘Land and Project Cost’ has not been offered to tax, hence by
:-3-: ITA. No: 3325/Chny/2019 following matching principle of accounting, the AO has rightfully disallowed the proportionate interest expense? 5. The ld CIT(A) erred in deleting the disallowance made u/s 36(1)(iii) in light of the Honble High Court Judgment in the case of North Eastern Electric Power Corporation Ltd in WP (C) No 279/2015 dated 23.10.2018 where it was held t.hat Interest accrued on running / not suspended / temporarily suspended projects has to be capitalized, similarly in this case of assessee proportionate interest expense shoulci have been capitalized under 'Land and Project Cost classified as OtherCurrent asset and not being done so, the AO has rightfully disallowed the proportionate interest expense by following matching principle of accounting? 6. The ld CIT(A) erred in deleting the disallowance made u/s 36(1)(111) in light of the Hon'ble High Court Judgment in the case of J C.T Ltd v Asstt. (1998) 65 ITD 169 (Cat) wherein it was held that deduction under Section 36(1)(iii) is not available if a different treatment has been given in the books of account. Other Current For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CIT(A) may be set aside and that of the Assessing Officer restored.”
The brief facts of the case are that the assessee company is engaged in the business of developers and builders filed its return of income for assessment year 2015-16 on 30.10.2015, declaring Nil total income. The case was taken up for scrutiny and during the course of assessment proceedings, the AO noticed that the assessee has paid interest on loan and the same has been claimed as deduction u/s. 36(1)(iii) of the Income Tax Act, 1961 (herein after “the Act”). The AO, after considering necessary submissions of the assessee, opined
:-4-: ITA. No: 3325/Chny/2019 that interest paid on loan borrowed for purchase of current assets cannot be allowed as deduction. The AO discussed the issue at length in light of nature of business of the assessee and principles of accountancy followed to treat purchase of asset in light of certain judicial precedence, including the decision of Hon’ble Supreme Court in the case of CIT Vs UP State Industrial Development Corporation (1997) 139 CTR 267, and observed that in order to determine the taxability of any income, the principles of accountancy have to be taken into account and as per which, when the assessee is in the business of developers and builders, it has to follow Accounting Standard 7 issued by The Institute of Chartered Accountant of India. As per said Accounting Standard, borrowing costs of a qualifying asset should be capitalized as part of the capital asset. Therefore, he opined that interest paid on loan and claimed as deduction u/s. 36(1)(iii) of the Act is not allowable and thus, out of total interest debited by the assessee, proportionate interest of Rs. 2,22,27,398/- has been added back to the total income.
Being aggrieved by the assessment order, the assessee preferred an appeal before the Ld. CIT(A). Before the Ld.
:-5-: ITA. No: 3325/Chny/2019 CIT(A), the assessee submitted that as per plain reading of section 36(1)(iii) of the Act, any amount of interest paid in respect of capital borrowed for the purpose of business or profession should be allowed as deduction in the year in which such interest has been paid. The assessee further submitted that the asssessee is in the business of developers and builders, has purchased properties and kept in stock in trade till it was sold. Therefore, the moment properties was purchased it partakes the nature of stock in trade and thus, interest paid on capital borrowed for the purpose of acquisition of stock in trade is deductable as and when such interest is paid.
The Ld. CIT(A) after considering the submissions of the assessee and also by relying upon certain judicial precedents including the decision of Hon’ble Supreme Court in the case of Taparia Tools Ltd Vs JCIT (2015) 372 ITR 605 (SC) observed that the assessee has borrowed loan for the purchase of land and project and the same was treated as current asset in the books of accounts of the assessee and thus, interest paid on loan borrowed for the purpose of business or profession needs to be allowed as and when such interest was paid. Therefore,
:-6-: ITA. No: 3325/Chny/2019 the Ld. CIT(A) opined that the AO has erred in disallowing proportionate interest u/s. 36(1)(iii) of the Act, accordingly, deleted additions made by the AO. The relevant findings of the Ld. CIT(A) are as under: “ The submissions of the appellant were considered vis-a-vis the findings of the AO. A sum of Rs 2,22,27,938/- was disallowed by the AO u/s 36(1)(iii) of the Act on the ground that was not eligible to claim the interest which pertains to the asset capitalized under the head "Landand Project cost". The appellant, on the other hand, contended that it was entltled to the claim of interest as it was in consonance with the 3 limbs of section 36(i)(iii).: (1)the interest was paid (2) the capital was borrowed (3) for the purpose of the business. The AO noted that the claim of interest expenditure of Rs.2,52,80,905/-was higher than the sale consideration of Rs 2,38,28,800/-. It was also found that the interest cost which pertains to all the projects undertaken by the appellant against the income of a single project. The claim of interest of Rs.2,52,80,905/- was against the "Land and Project Cost" of Rs. 20,57,54,359. During the appellant proceedings, the A.R. submitted that the company was engaged in the business of property development and its main object w4s to buy tracts of land which can be sold with or without any development. It was reasoned that the borrowed capital was commonly invested in business and it was not ear-marked for a single project. It was submitted that the appellant did not maintain the expenditure project-wise and instead all the expenses including the interest paid was taken into the p & L account. The company furnished a table regarding its income particulars for the A.Yrs 2014-15 to 2017-18. S. Asst Year Book Profit Income Tax Paid Remark N Declared in o Tax return 1 2014-15 1,72,42,313 1,72,42,313 55,94,268
:-7-: ITA. No: 3325/Chny/2019 2 2015-16 1,48,17,338 1,48,17,338 Nil Loss Return 3 2016-17 1,84,32,256 36,14,918 11,17,010 Carried forward loss of Rs. 1,48,17,338 was adjusted 4 2017-18 2,00,07,289 2,06,75,670 66,08,130
Thus the book profit, in these assessment years had been taken as Income which was declared in the tax return, The appellant reasoned that it only for the instant A.Y. 2015-16 that the revenue was insufficient to cover all the expenditure. The A. R., during the appellate proceedings, drew attention to the final accounts of the appellant as at 31St March 2015 and as at 31St March 2016. It was maintained that as at March 2015, the current assets comprising investments and `other current assets' amounted to Rs. 2,34,92,80,044. The net revenue from operations for the year ended Rs. 26,21,22,680. The appellant also furnished details of the projects undertaken till A.Y. 2017-18 and details regarding the cost and sale value of the various projects. It was also submitted that the appellant's case for A.Y. 2014-15 was selected for scrutiny and the appellant's claim of interest of Rs. 1,73,10,808/-was allowed u/s 36(i)(iii) of the Act. In order to galvanise its stand, the company referred to various judicial decisions regarding interest on borrowed capital. In the case of Core Health (Pare 298 ITR 194 (SC) it was held that it was immaterial whether the asset which was borrowed for business purpose. The ratio of the decision of the Gujarat High Court in the case of Torrent Pharmaceutical Ltd. 393ITR 625 was cited to underscore that interest is deductible even if capitalized. It was also submitted that there was no deferred revenue concept in the I.T. Act. The Hon'ble apex court in the case of Taparia Tools Ltd vas UCIT [2015] 3+2ITR605Y (SC) provided valuable touchstones for determining the admissibility of interest on borrowed capital. Under Section 36(i)(iii) of the I.T. Act, |any amount paid on account of interest becomes an admissible deduction if the interest was paid on
:-8-: ITA. No: 3325/Chny/2019 the capital borrowed by the appellant and this: borrowing was for the purpose of business on profession. While examining the allow ability of this deduction, the AO is to consider the genuiness of the business borrowing and that the borrowing was for the purpose {bf business and not an illusionary and colorable transaction. It was ruled that once the genuiness is proved and the interest is paid on the borrowing, the AO cannot disallow the deduction on the ground that the rate of interest is unreasonably high or that the appellant had himself charged lower rate of interest on the monies which he had lent. In consonance with the definition of "paid" in section 43(2) of the Act, even if the amount is not actually paid but it is "incurred" according to the method of accounting, it would bet deemed to be paid. The apex court ruled that revenue expenditure incurred in a particular year is to be allowed in that year. In cases where the appellant, himself wants to spread the expenditure over a period of ensuing years, it |Dan be allowed only if the "matching concept" principle is satisfied, which up to now has been restricted to the case of debenture. In the instant case, the AO has noted the names and relevant details of the various parties who advanced unsecured loans to the appellant. It was stated by the AO, that the company paid interest on these loans. The opening Balance was Rs.18,37,98,561 and the closing balance stood at Rs. 23,40,14;333. In consonance with the definition of "paid" in Section 43(2), the interest on borrowed capital has to be treated as "paid" as the appellant has followed the mercantile system of accounting. In order to ascertain the claim of the appellant, the final accounts of the appc!1la.nt were perused. As on 31.03.2014 the unsecured loans amounted to Rs. 18,37,98,561. They rose to Rs. 23,40,14,333 on 31.03.2015. Hence, there was an increase of Rs. 5,02,15,772/-by way of loans and advances from related parties during the F.Y. 2014-15. The Land and Project cost under the head `Other Current Assets' was enhanced from Rs.19,11,07,048 as 31.03.2014 to Rs. 20,57,54,359/-as on 31.03.2015. It was explained by the appellant that in the subsequent assessment year i.e. A.Y. 2016-17 the revenue from operations (gross) rose from Rs. 2,38,28,800/- (for the year ended 31/3/2015) to Rs, 26,20,72,800/-. The appellant
:-9-: ITA. No: 3325/Chny/2019 was, however, asked to explain why a sum of Rs. 2,00,00,000/- was shown as `short-term loans and advances' under the head `Current assets'. The company had borrowed money towards land and project cost but it was apparent that a portion of the borrowed funds was given by way of loans and advances to other parties. In their written response dated 19/9/2019, the appellant submitted that the company had paid Rs. 50,00,000/-to four persons towards purchase advance to buy 3.07 acres land at Kovalam, Chennai for their new project. Since the appellant could not mobilize the require funds to complete the purchase, the sellers of the land returned the money in the F.Y. 2015-16. The appellant stated that it paid TDS u/s 194 1A at 1% and a copy of the form 26AS for the A.Y. 2015-16 was enclosed. The ledger accounts of the parties were furnished. Taking Into account the facts and circumstances of the case and the prevailing judicial decisions, I am inclined to accept the contentions of the appellant regarding its eligibility to claim the interest u/s 36(1)(iii) of the I.T. Act. The disallowance amounting to Rs. 2,22,27,938/- requires to be deleted. This ground of appeal is allowed. In sum, the appeal for A.Y. 2015-16 is allowed.”
The Ld. DR submitted that the Ld. CIT(A) has erred in deleting the disallowance made u/s. 36(1)(iii) of the Act without appreciating the fact that interest expenses incurred for outstanding loan of Rs. 23.40 crores is directly relatable to the land and project cost, classified under other current asset and thus, the AO has rightly disallowed proportionate interest relatable to current asset which was not sold during the relevant assessment year. The Ld. DR further submitted that the Ld. CIT(A) has erred in not appreciating the fact that the AO has brought out clear facts in light of nature of assets
:-10-: ITA. No: 3325/Chny/2019 purchased by the assessee and accounting treatment in books of accounts that entire borrowed money has been utilized for purchasing of land and project cost, but not for stock in trade and thus, proportionate interest relatable to acquisition of any asset needs to be capitalized in the books of accounts of the assessee.
The Ld. AR for the assessee on the other hand strongly supporting the order of the Ld. CIT(A) submitted that the assessee is in the business of real estate development, has purchased a property and the same has been treated as stock in trade in the books of accounts of the assessee. The assessee has paid interest on capital borrowed for the purpose of business or profession and the same has been claimed as deduction u/s. 36(1)(iii) of the Act. Since, there is a direct nexus between borrowed capital and business activity of the assessee, any interest paid on such borrowed capital needs to be allowed for the year in which such interest has been paid. The Ld. CIT(A) after considering the submissions has rightly deleted additions made by the AO and thus, order of the Ld. CIT(A) should be upheld.
:-11-: ITA. No: 3325/Chny/2019 8. We have heard both the parties, perused materials available on record and gone through orders of the authorities below. The provisions of section 36(1)(iii) of the Act deals with interest paid on capital borrowed for the purpose of business or profession of the assessee. As per said provision, interest paid in respect of capital borrowed for the purpose of business or profession shall be allowed as deduction for the year in which such interest has been paid, except in the cases where interest paid in respect of capital borrowed for acquisition of an asset for extension of existing business or profession for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction. In this case, the assessee is in the business of developers and builders. The assessee has borrowed capital for the purpose of its business and interest paid on such capital has been claimed as deduction u/s. 36(1)(iii) of the Act in the year in which such interest has been paid. If you go through the nature of business of the assessee and the purpose for which loan was borrowed, then deduction claimed by the assessee in respect of interest paid on borrowed capital for the purpose of business or profession is deductable for the year in
:-12-: ITA. No: 3325/Chny/2019 which such interest has been paid, because as per provisions of section 36(1)(iii) of the Act, any interest paid on capital borrowed for the purpose of business shall be allowed as deduction in the year of payment unless such interest is paid in respect of capital borrowed for acquisition of an asset. In this case, although the assessee has paid interest for acquisition of an asset, the said asset is in the nature of stock in trade of business and the moment, the assessee acquires the asset which partakes the nature of stock in trade and thus, interest paid on capital borrowed for acquisition of stock in trade is deductable irrespective of the fact that said stock in trade was sold or not during the relevant financial year. This legal position is supported by the decision of the Hon’ble Supreme Court in the case of Taparia Tools Ltd Vs JCIT, (supra) where it was held that interest paid on capital borrowed for the purpose of business shall be allowed as deduction for the year of payment irrespective of accounting system given by the assessee in its books of accounts. The Hon’ble Gujarat High Court in the case of Torrent Pharmaceuticals vs CIT (393 ITR 625) has considered an identical issue and held that interest paid on capital borrowed for the purpose business shall be allowed as deduction in the
:-13-: ITA. No: 3325/Chny/2019 year of payment of said interest. In this case, the assessee has paid interest on borrowed capital for the purpose of business and the same has been claimed as deduction as and when the said interest was paid. The Ld. CIT(A) after considering the relevant facts has rightly deleted additions made by the AO. Hence, we are inclined to upheld findings of the ld. CIT(A) and dismiss appeal filed by the Revenue.
In the result, the appeal filed by the Revenue is dismissed.
Order pronounced in the court on 30th November, 2021 at Chennai. Sd/- Sd/- (जी. मंजुनाथ) (महावीर �संह ) (G. MANJUNATHA) (MAHAVIR SINGH) लेखासद�य/Accountant Member उपा�य� /Vice President
चे�ई/Chennai, �दनांक/Dated, the 30th November, 2021 JPV आदेश की �ितिलिप अ�ेिषत/Copy to: 1. अपीलाथ�/Appellant 2. ��थ�/Respondent 3. आयकर आयु� (अपील)/CIT(A) 4. आयकर आयु�/CIT 5. िवभागीय �ितिनिध/DR 6. गाड� फाईल/GF
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