NEELKANTH PALM REALTY,MUMBAI vs. DCIT CIR 15(3), MUMBAI

The first issue in this appeal of assessee is against the order of CIT(A) confirming the action of the AO in disallowing finance charges claimed on processing of loan by assessee as business expenses amounting to ₹ 40,03,250/-.

Briefly stated facts are that the assessee is engaged in the business of building and developing of real estates. The assessee is following project completion method of accounting for computing income. The AO noticed from the profit and loss account filed by assessee along with return of income as on 31.03.2010 that the assessee has debited a sum of ₹ 40,63,250/- under the head finance expenses. The bifurcation of the above finance charges relates to loan processing charges of ₹ 30,33,250, registration charges of ₹ 30,000/- and stamp duty charges of ₹ 10 lacs. According to AO, the assessee has sold parking lot aggregating to ₹ 4,52,500/- in classic project and opening stock of flats and parking lot aggregating to ₹ 4,23,81,367/- in the ‘Royale Housing Project’. He noted that no construction activity was carried out during the year in respect of these two projects. Even there is no new loan obtained during the year. Accordingly, he required the assessee to explain the co-relation of such finance expenses to the profit declared from these two projects. The assessee filed letter dated 19.12.2012 and claimed that finance charges of ₹ 40,63,250/- includes loan processing fees ₹ 30,33,250/-. The said charges are paid for sanctioning the working capital loan of ₹ 27.15 crores for the purpose of business and in the ordinary course of business. Working capital loan is released in the subsequent assessment year 2011-12 for the purpose of business. The assessee obtained sanction of loan from Kotak Mahindra in assessment year 2010-11. For sanctioning the loan the assessee incurred a sum of ₹ 30,33,250 as processing 3 charges, ₹ 30,000 as registration fees and ₹ 10,00,000/- as stamp duty. The said finance charges do not have any element of interest. The said charges paid are of the revenue in nature and are allowable business expenditure. In support of the above, the assessee relies on the following case laws including decisions of the Supreme Court. India Cement Ltd. versus Commissioner of Income Tax, 60 ITR 52(SC). DCIT versus Paramount Hotel Ltd. 76 ITD 25 ITAT Mumbai (SMC). But the AO has not accepted the claim of assessee and disallowed the claim of expenses of finance expenses of Rs. 40,63,250/-. Aggrieved, assessee came in appeal before CIT(A). The CIT(A) confirmed the action of the AO vide para 5.1 and 5.2 as under: - “5.1 Admittedly, the assessee follows ‘Project Completion Method’ for taxation of its income from various housing projects. Admittedly, working capital loan has been sanctioned for a new housing project and any income from this new project has not been offered for taxation during the year, neither any amount of any loan has been disbursed during the year. Thus, the working capital loan taken by the assessee is for a specific future project and it is not for the general business purpose and therefore, the cost of the sanction of the loan has to be capitalized towards the cost of such new project since it is a specific purpose loan.

We have heard rival contentions and gone through the facts and circumstances of the case. Before us, the learned Counsel for the assessee argued that the assessee is consistently following substantial Project Completion Method of accounting of Expenses on employee’s remuneration, professionals & consultancy fees relating to business in general, administration expenses. insurance expenses, electricity repairs & maintenance interest expenses (including finance charges comprising of loan processing fees, registration charges ore) are all periodic cost debited to general profit & loss account year to year and the same have been allowed year to year after due scrutiny. The loan processing charges and other related expenses which disallowance is the subject matter of appeal are fixed cost for the year which had to be incurred irrespective of the loan being disbursed or utilized. If the same was not incurred, the bank would have cancelled the sanction. The same are therefore expenses incurred in the normal and ordinary course of business allowable in the year in which the same has been incurred. Without prejudice to the above, Ld Counsel argued that these expenses are compulsorily to be incurred before bank disburse the funds No interest expenses have been 5 debited to profit & loss account for the year and therefore the said expenses i.e. loan processing charges etc. debited to the profit and loss account cannot be equated to the interest expenses.

On the other hand, the learned Sr. Departmental Representative argued that the working capital loan taken by the assessee is for a specific future project and it is not for the business purposes and therefore, the cost of the sanctioning of the loan i.e. processing charges has to be capitalized towards the cost of such new project since it is a specific purposes loan. She supported the orders of the lower authorities.

We noted from the above arguments and the case laws relied on the Hon’ble Bombay High court in the case of CIT vs. Lokhandwala Construction Inds. Ltd. [2003] 260 ITR 579 (Bombay) that the processing charges for loan are allowable expense. The learned Counsel for the assessee drew our attention to the relevant findings of Hon’ble Bombay High Court which read as under: - “In the present case, the assessee was a builder. In the present case, the assessee had undertaken the Project of construction of flats under the Kandivali Project. Therefore, the loan was for obtaining stock- in-trade. That, the Kandivali Project constituted the stock-in-trade of the assessee. That, the Project did not constitute a fixed asset of the assessee. In this case, we are concerned with deduction under section 36(1)(iii). Since the assessee had received loan for obtaining stock-in-trade (Kandivali Project), the assessee was entitled to deduction under section 36(1)(iii) of the Act. That, while adjudicating the claim for deduction under section 36(1)(iii) of the Act, the nature of the expense - whether the expense was on capital account or revenue account 6 - was irrelevant as the section itself says that interest paid by the assessee on the capital borrowed by the assessee was an item of deduction. That, the utilization of the capital was irrelevant for the purposes of adjudicating the claim for deduction under section 36(1)(iii) of the Act - Calico Dyeing & Printing Works v. CIT [1958] 34 ITR 265 (Bom.). In that judgment, it has been laid down that where an assessee claims deduction of interest paid on capital borrowed, all that the assessee had to show was that the capital which was borrowed was used for business purpose in the relevant year of account and it did not matter whether the capital was borrowed in order to acquire a revenue asset or a capital asset. The said judgment of the Bombay High Court applies to the facts of this case.”

We noted from the above that the loan obtained by the assessee in regard to continuous business proposition and assessee is following the project completion method of accounting being a builder, loan taken in future project but payment made in the relevant assessment on account of processing charges of the loan is liable as business expenditure. In view of the decision of Hon’ble Bombay High Court in the case of Lokhandwala Construction Inds. Ltd. (supra). In view of the above, we allow the claim of the assessee.

The next issue in this appeal of assessee is against the order of CIT(A) confirming the addition made by AO of undisclosed interest income of ₹ 5,92,005/-.

We have heard rival contentions and gone through the facts and circumstances of the case. The learned Counsel for the assessee before