TOWN & COUNTRY REALTY P.LTD,MUMBAI vs. ITO 11(3)(1), MUMBAI

The present appeal has been preferred by the assessee against the order dated 17.11.2016 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] relevant to assessment year 2013-14.

The grounds raised by the assessee are as under: “The Honorable Commissioner of Income Tax Appeals has erred in confirming disallowance of interest expenses of Rs.7,14,807/- debited to Profit & Loss Account by stating that the land shown as Inventory is agricultural land and as the same has not been converted to Non Agricultural land and therefore the income from agricultural land is exempt which is incorrect. Further, the learned assessing officer has failed to understand the concept of "qualifying asset" as per "Accounting Standard 16 -Borrowing Costs" and thereby disallowed the Interest

The facts in brief are that the assessee is engaged in the business of property development. The AO during the course of assessment proceedings observed that assessee has charged a sum of Rs.7,14,807/- to the P & L Account whereas the assessee has not earned any income during F.Y. 2012-13 relevant to A.Y. 2013-14 besides claiming other expenses. Accordingly, AO asked the assessee to explain as to how these expenses were allowable under the Act which was replied by the assessee vide letter dated 18.01.2016 submitting before the AO that according to the accounting standard-16 the land does not qualify for qualifying asset and therefore not capitalized and it is only for this reason the interest cost has been debited to the P & L Account. However, the AO found that the assessee purchased the agricultural land way back in 2007 and the income of the said agricultural land is tax free and the same has not been 3 M/s. Town & Country Realty Pvt. Ltd. (Merged with Attarchand Trading Co. Pvt. Ltd.) converted into non agricultural land. AO also observed that no developmental activities were carried out on by the assessee on the said land and therefore the expenses incurred for acquisition of the said land are not allowable and accordingly added back Rs.7,14,807/- on account of interest cost attributable to the acquisition of said land.

The Ld. CIT(A) dismissed the appeal of the assessee by observing and holding as under: “5. I have carefully gone through the assessment order, the contention the appellant and the facts of the case. Under this ground of appeal

Having heard both the parties and perusing the material on record as placed before us, we find that the assessee is engaged in the business of property developer and builder. In the ordinary course of business, the assessee acquired the agricultural land in 2007 by borrowing money on which the interest of Rs.7,14,807/- debited to P & L Account whereas there

The undisputed facts are that the assessee purchased the property for the purpose of development and shown the same as stock in trade. In our opinion, when the assessee is engaged in the business of property development, any interest cost which is incurred in connection with the acquisition of assets which is shown as inventories has to be allowed as expense even though no revenue is generated from the development of property/sale of the property. Moreover, capitalization of such assets is not necessarily to be made in order to capitalize the interest which is wrong as this is a case of assessee engaged in the business of development and trading of properties. We are, therefore, not in agreement with the conclusion drawn by the Ld. CIT(A) that the expenses incurred by way of interest of loan on acquisition of agricultural land in 2007 is not allowable either as revenue expenses or as capital expenses as asset is not capitalized. We, therefore, set aside the order of Ld. CIT(A) and direct the AO to allow the expenses as revenue expenses.