SANTOSH BUILDERS,MUMBAI vs. ITO 17(3)(2), MUMBAI

From the record, we also found that the assessee had also entered a contract with M/s CENZER Reality against purchase of 2500 sq.ft. of residential area in respect of building to be constructed at Lalbaug and Parel Sewri Division and assessee had paid Rs. 1.5 Crores. As per the terms of MOU dated 06.06.2008 the developer was to obtain the Commencement Certificate towards Free Sale Building within 12 month of the execution of the MOU and complete construction within 36 months of obtaining the Commencement certificate. Subsequently the project got delayed and as per the terms of the MOU the assessee exercised the option to get his money back and as per the letter dated 05.09.2011 assessee has received money back in September 2011.

We also found that in another MOU dated 06.06.2008 entered with Shanti & Santosh Builder against purchase of 20000 sq. ft. of residential area in respect of building to be constructed on SRA Land at Indira Nagar, 2164&2165/Mum/2017 M/s. Santosh Builders Jogeshwari bearing No. CTS No. 160A-1 of Village Majas and assessee has paid Rs. 10 Crores, however, on account-of various hurdles and delays in the project, the deal was cancelled and money has been received back by assessee firm on 05.09.2011.

In the year under consideration i.e. A.Y.2012-13 the assessee has filed its return of income declaring loss of Rs.62,284/-. The Assessing Officer made an Addition to the Income of the assessee to the extent of the Interest paid for AY 2012-13 on the plea that agreement under which advance was given had been cancelled. The AO also reopened the assessment u/s 147 for AY 10-11 & 11-12. After reopening, the AO added interest so paid in these two years also.

The addition of interest was confirmed by CIT(A), in all the three years under consideration, against which assessee is in further appeal before us.

We have considered rival contentions and carefully gone through the orders of the authorities below and found from record that assessee is in the business activity of construction and development residential and commercial buildings is a partnership firm. During the scrutiny assessment proceedings'. AO observed that the assessee has paid Rs. 1 Crore to M/s Lakadwala Developers P Ltd for acquiring development right under SRA scheme of the property at Wadala, Mumbai. For the same an MOU entered on 14.02.2008. Assessee has also entered a contract with M/s CENZER Reality against 2500 sq.ft. assessee had paid Rs. 1.5 Crores and so the deal was not completed as per the terms of MOU, 2164&2165/Mum/2017 M/s. Santosh Builders assessee has received money in month of September 2011. In another MOU entered with Shanti & Santosh Builder , assessee has paid Rs. 10 Crores, however, on account of cancellation of the deals money has been received back on 5.09.2011.Since the assessee is in the business of developer and builder, assessee had to make such sort of Investments in regular course of business for acquiring rights in the property and development right as the case may be. For this purpose the assessee had borrowed money from various lenders and paid to M/s Lakdawala Developers, Shanti & Santosh Builder and M/s CENZER Reality. Hence all the expenses incurred by it including interest expenses till date have been added to the Cost of Work-in-progress which stands at Rs. 4,81,76,888/- as on 31.03.2016 as the Project has not moved ahead at all.

From the record we found that assessee has made interest payment towards 32 loan creditors. The party-wise breakup of Interest paid has been provided to the AO with the letter dated 19.03.2015 and 23.03.2015. This amount has been added to Cost of Work in progress of Project at Wadala under Current Assets. This amount has not at all been claimed as expenditure in the years under consideration and was left to be claimed as expenditure when sales take place as per the Matching Concept of Income and Expenditure.

We had also gone through the terms of the MOU so entered by the assessee firm, we found that the construction activity could not be started due to environmental clearance and other permissions, deals were 2164&2165/Mum/2017 M/s. Santosh Builders cancelled subsequently 3 years later. The AO disallowed the interest expenditure treating the same as not in the course of current business of the assessee which is the development of the property at Wadala. We do not find any justification for the disallowance so made by the AO. Assessee had submitted all necessary details and supporting evidences before the AO and explained nature of activity and substantiated that the amount borrowed on interest are utilised for the purpose of business. Both borrowing as well as advancing of money for various projects were in the regular course of business of assessee as a builder. The lower authorities failed to understand that in the case of builders it is inherent risk of the business whether the project will materialise or not depending on the permissions and clearances from various Government departments. The lower authorities also failed to understand that not all investments entered into will attain completion. After giving a reasonable amount of time for the project to commence, if nothing moves ahead it is better to exit the project rather than continue with the Investment. Assessee had taken a prudent business decision to quit from the project so as to get back his money so invested. In fact, the transactions are in course of business, funds were borrowed on interest and was utilized for the purpose of business. Under these facts and circumstances there is no valid reason to disallow such interest expenditure which were even not claimed as expenditure in the P & L account but was added to work in progress.

Hon’ble Calcutta High Court in the case of Tetron Commercial Ltd., vs. CIT (261 ITR 422) (Cal.) held as under:-

2164&2165/Mum/2017 M/s. Santosh Builders “Whether capital is borrowed for the purpose of the business of the assessee, it is immaterial whether the same is in the nature if capital expenditure or revenue expenditure. Where assessee was in real estate business, interest paid on borrowed capital invested in immovable properties was allowable as deduction.”

Hon’ble Bombay High Court in the case of CIT v/s Lokhandwala Constructions Inds. Ltd (260 ITR 579)(Bom.) held as under:- “While adjudicating the claim for deduction u/s 36(1)(iii), the nature of the expenses, whether the expenses are on capital account or revenue account is irrelevant. On the facts the assessee undertook two fold activities. It bought and sold flats. Secondly the assessee was also engaged in construction business. As the loan was taken for obtaining stock in trade the assessee was entitled to deduction u/s 36(l)(iii)”.

Hon’ble Bombay Tribunal in in the case of Shah Rukh Khan observed as under:- In our considered opinion, it is not the legal necessity to spend the expenditure which is determinative of its allowability; rather, it is the existence or otherwise of commercial expediency which guides the allowability of expenditure under Seqtion 37(1} of the Act. The commercial expediency canvassed by the assessee in the instant case clearly establishes that the impugned expenditure falls within the scope of the expression "wholly and exclusively for the purpose of business or profession" within the meaning of section 37(1) of the Act

Further more Hon'ble Supreme Court in the case of S A Builders v CIT (288 ITR 1) held that "The expression 'commercial expediency' is an expression used is for the Section 37 that the expression 'for the purpose of business' includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby. The expression 'commercial expediency' is an expression of wide import and includes such expenditure as a prudent businessman incurs for the 2164&2165/Mum/2017 M/s. Santosh Builders purpose of obligation, yet is allowable as a business expenditure if it was incurred in grounds of commercial expediency.

Hon’ble Delhi High 'Court in the case of Dalmia Cements held "that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the armchair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its proflt. The income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. 16. From the material placed on record, we found that assessee has brought on record all the evidences to the effect that funds were borrowed for the purpose of business and investment was made for the purpose of business only and subsequently due to adverse market conditions the project did not materialise and the assessee was commercially completed to exit from the project. This act of cancellation alone cannot lead to the conclusion that there was no intention to do business, Therefore genuineness should not be doubted at all. 17. Guidelines issued by Institute of Chartered Accountants of India in respect of real estate transactions at para 2.2 reads as under:- "Project Costs - Project costs in relation to a project ordinarily comprise 2164&2165/Mum/2017 M/s. Santosh Builders a. Cost of land and cost of development rights -Ail costs related to the acquisition of land, deyelopment rights in the land or property including cost of land, cost of development rights, rehabilitation costs, registration charges, stamp duty, brokerage costs and incidental expenses. b. Borrowing Costs - In accordance with Accounting Standard (AS) 16, Borrowing Costs which are incurred directly in relation to a project or which are apportioned to a project. c. Construction and development costs - These would include costs that relate directly to the specific project and costs that may be attributable to project activity in general and can be allocated to the project."'

In accordance to the above Guidance Note, the Interest expenses incurred by the assessee have been added to the Closing Stock of Work in progress. Hence if this claim of expenditure is disallowed, it would result into reduction in the Cost of Work- in -progress. By any stretch of imagination this cannot be considered as income of the assessee as the same has only been carried forward as Cost to the future years and not been claimed as expenditure for this year. Since the amount is not at all debited to the Profit & Loss A/c, the addition of the Interest Paid to the income of assessee firm by the Assessing Officer is bad in law.

Pune Tribunal in the case of Gera Developments Pvt. Ltd., vs. JCIT (2014) (ITA No.598/PN/2013) held as under:- “There is no dispute to the proposition that the said payment has not been claimed as a revenue expenditure while computing the income chargeable under the head 'Profits and gains of business or profession' in this year and therefore the same would not fall for consideration in section 40(a)(i) of the Act. Thus, by adverting to the aforesaid short point, we do not find any justification to uphold the addition of Rs.2,78,20,447/- made by the lower authorities by invoking section 40(a)(i) of the Act. The order of the CIT(A) is set-aside and the Assessing Officer is directed to delete the addition of Rs.2,78,20,447/-. Thus, on this aspect assessee succeeds.”