DCIT CEN CIR 7(3), MUMBAI vs. M/S NATIONAL STANDARD INDIA PVT. LTD, MUMBAI

1. Whether on the facts and circumstances of the case and in law, the Ld CIT(A) erred in deleting the addition of Rs.4,39,49,000/- made by the Assessing Officer u/s 36(I)(iii) and capitalized the same to work in progress.

We have carefully heard the rival submissions and perused relevant material on record including orders of lower authorities. Our adjudication to the subject matter of appeal would be as given in succeeding paragraphs. As evident, the revenue is aggrieved on two issues viz. (i) deletion of interest disallowance u/s 36(1)(iii); (ii) Set-off of brought forward losses. 3.1 The material facts are that the assessee being resident corporate assessee stated to be engaged in real estate was assessed u/s 143(3) on 30/03/2016 wherein it was saddled with interest disallowance for Rs.439.49 Lacs. During assessment proceedings, it transpired that the assessee was developing projects namely Lodha Supremus (Commercial) and Lodha Grandezza in Thane district. The assessee followed mercantile system of accounting and for the purpose of recognizing revenue from the projects; it was following percentage of completion method of accounting. 3.2 The assessee had borrowed funds from bank and group entities and paid aggregate interest of Rs.1887.29 Lacs. After adjusting interest income of Rs.1447.80 Lacs there-from, it claimed deduction of net interest of Rs.439.49 Lacs from business income in statement of computation of income on the reasoning that interest expenditure was periodic cost and hence, an allowable deduction u/s 36(1)(iii). Reliance was placed on the decision of M/s. National Standard India Private Limited Assessment Year: 2013-14 Hon’ble Apex Court in Taparia Tools Pvt. Ltd (CA No.6366/2003) as well as on the decision of Hon’ble Bombay High Court in CIT V/s Lokhandwala Construction Ind. Ltd. (260 ITR 0579) to support the said claim. 3.3 However, going by Accounting Standard 7 issued by Institute of Chartered Accountants of India (ICAI), Ld. AO opined that expenses directly related to the project were to be debited to cost of project and could be claimed as deduction only in the year in which corresponding income of the project was credited in Books of Accounts and offered to tax. Notably, the assessee allocated all other expenses to work-in-progress except interest. These expenses were also periodic cost and would be allowable as deduction in toto on assessee’s logic. Relying upon the decision of Special Bench in the case of M/s Wall Street Construction Limited (102 TTJ 505), which held that interest cost was to be allowed as deduction only in the year in which the corresponding income was offered to tax, the interest expenditure thus claimed was disallowed and added back to work-in-progress as reflected by the assessee in the books of accounts. 3.4 The second issue is with respect to set-off of brought forward losses of Rs.741.37 Lacs. Though the assessee claimed this loss but Ld. AO restricted the same to Rs.308.48 Lacs in view of the fact that losses of earlier years were disallowed in assessment order for AY 2010-11 since entire shareholding of the assessee changed hands. Though Ld. CIT(A), in AY 2010-11, allowed assessee’s appeal on this issue but it was noted that the appeal was allowed on technical grounds and not on merits and therefore, the set-off M/s. National Standard India Private Limited Assessment Year: 2013-14 could not be granted to the assessee. Accordingly, in AY 2012-13, the claim of brought forward losses was restricted to Rs.308.48 Lacs while framing the assessment. Appellate Proceedings before Ld. CIT(A) 4.1 The assessee contested the stand of Ld. AO before Ld. CIT(A) by way of elaborate written submissions, which have already been extracted in the impugned order. The assessee relied upon favorable appellate orders for AY 2014-15 in group concerns cases and also on the decision of Tribunal in Ashish Builders Pvt. Ltd. & Rohan Estate Private Ltd. The assessee also relied upon various other judicial pronouncements to buttress the submissions and pleaded that interest was allowable in terms of Sec. 36(1)(iii). The proviso to Sec. 36(1)(iii) as inserted by Finance Act. 2003 was stated to be applicable only in case the funds were utilized for acquisition of capital assets and not to stock-in-trade as held by Hon’ble Bombay High Court in the case of CIT V/s Lokhandwala Construction Ind. Ltd. (260 ITR 0579). This decision was stated to be followed in subsequent decisions of various tribunals and courts as enumerated in assessee’s written submissions and extracted in the impugned order. The case law of Tribunal Special Bench in M/s Wall Street Construction Limited (102 TTJ 505) was stated to be not applicable to the facts of the case. 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 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.