Income Tax Appellate Tribunal - Chennai
M/S. Ceebros Hotels Pvt. Ltd.,, Chennai vs Dcit, Cc - 1 (2),, Chennai on 31 March, 2021
आयकर अपील य अ धकरण,'सी' यायपीठ,चे नई
IN THE INCOME TAX APPELLATE TRIBUNAL , 'C' BENCH, CHENNAI
ी वी. दग
ु ा राव, या यक सद य एवं ी जी.मंजुनाथ, लेखा सद य के सम$
BEFORE SHRI V. DURGA RAO, JUDICIAL MEMBER
AND SHRI G. MANJUNATHA, ACCOUNTANT MEMBER
आयकरअपीलसं./I.T. A.No.3372/Chny/2019
( नधारणवष / Ass essm ent Year: 2015-1 6)
M/s.Ceebros Hotels P.Ltd. Vs The Deputy Commissioner of
19/1, Sukriti, III Cross Road, Income Tax,
R.A.Puram, Corporate Circle-1(2)
Chennai-600 028. Chennai-34.
PAN: AAA CC 3051E
(अपीलाथ /Appellant) ( यथ /Respondent)
अपीलाथ क ओरसे/ Appellant by : Mr.S.Sridhar, Advocate
यथ क ओरसे/Respondent by : Mr. Abani Kanta Nayak, CIT
सुनवाईक तार ख/Da t e of h ear in g : 09.02.2021
घोषणाक तार ख /D at e of Pr on o unc e m en t : 31.03.2021
आदे श / O R D E R
PER G.MANJUNATHA, AM:
This appeal filed by the assessee is directed against the order of the learned CIT(A)-1, Chennai dated 05.12.2019 and pertains to assessment year 2015-16.
2. The assessee has raised the following grounds of appeal:-
"1. The order of the Commissioner of Income Tax (Appeals) 1, Chennai dated 05.122019 in l,T.A.No.37/CIT(A)-1/17-18, for the above mentioned Assessment year is contrary to law, facts, and in the circumstances of the case.
2. The CIT (Appeals) erred in sustaining the disallowance of the claim for deduction of interest expenses aggregating to ` 41,37,73,978/- u/s. 36(1)(iii) / 37(1) of the Act and 2 ITA No.3372/Chny/2019 consequently erred in sustaining the addition of such sum in the computation of taxable of income without assigning proper reasons and justification.
3. The CIT (Appeals) failed to appreciate that the findings recorded in Page No.26 to Page No.32 of the impugned order to sustain the disallowance of interest expenses were wrong, erroneous, unjustified, incorrect invalid and not sustainable both on facts and in law.
4. The CIT (Appeals) failed to appreciate that the misconstruction of the provisions of section 36(1)(ii) of the Act would vitiate the decision rendered while ought to have appreciated that the non consideration of the allowability of the interest expenses u/s.37(1) of the Act should be reckoned as bad in law.
5. The CIT (Appeals) failed to appreciate that the misreading of AS16 had resulted in passing the wrong order on this issue and ought to have appreciated that there could not be any segregation of the projects undertaken by the appellant especially such projects were executed under common management, thereby vitiating the standalone treatment which led to the sustenance of the disallowance of the interest expenses.
6. The CIT (Appeals) failed to appreciate that the conclusion reached on the non commencement of the project which was related to the claim of the interest expenses was wholly unjustified and ought to have appreciated that the commencement of the project/business under consideration should be reckoned from the date of the purchase of the land with structures meant for development while further ought to have appreciated that having not disputed the fact of the appellant engaged in the business of property development, the standalone approach by segregating the project under scrutiny for the purpose of considering the allowability of the interest expenses was erroneous, thereby vitiating the related findings.3 ITA No.3372/Chny/2019
7. The CIT (Appeals) failed to appreciate that the decisions cited were completely ignored and misconstrued and ought to have appreciated that the claim for deduction of interest expenses under consideration was proper and justified on the facts and in the circumstances of the case.
8. The CIT (Appeals) failed to appreciate that there was no proper opportunity given before passing the impugned order and any order passed in violation of the principles of natural justice is nullity in law."
3. Brief facts of the case are that the assessee company is engaged in the business of running hotel and real estate development filed its return of income for the assessment year 2015-16 on 27.09.2015 declaring total income as Nil. During the year under consideration, the assessee has claimed interest expenses of `41,37,73,978/- on term loan of ` 301.92 crores borrowed from IFCI Ltd. Chennai. The said loan has been taken for the purpose of purchase of 90.53 grounds of land at Satyadev Avenue, MRC Nagar Main Road, Raja Annamalaipuram, Chennai. The said land has been treated as inventory in the books of account of the assessee. The case has been taken up for scrutiny and during the course of assessment proceedings, the Assessing Officer has called upon the assessee to justify claim of interest expenditure of ` 4 ITA No.3372/Chny/2019 41.37 crores in light of provisions of section 36(1)(iii) and proviso provided thereto. In response, the assessee claimed that it is in the business of real estate development and is developing two housing projects at Chennai. The assessee has further claimed that it has started recognizing revenue from project of Atlantic, Egmore, Chennai and project at MRC Nagar is yet to be commenced its activities. However, real estate development segment of business is one and hence, when the assessee has started its business activity and realizing revenue from such business, then interest paid on loan borrowed for the purpose of said business has to be allowed as deduction, even though, proviso provided to section 36(1)(iii) of the Act, states that interest cost of loan borrowed for the purpose of acquisition of asset needs to be capitalized, till such asset is put to use in the business of the assessee, because the assessee has already put to use land purchased for the purpose of development of housing project.
4. The Assessing Officer however, was not convinced with the explanation furnished by the assessee and according to 5 ITA No.3372/Chny/2019 him, interest cost on loan borrowed for the purpose of acquisition of asset needs to be capitalized till such asset is put to use in the business of the assesse. Since, the land purchased in MRC Nagar, Chennai was not put to use in the business of the assesse, interest paid on loan borrowed for acquisition of property at MRC Nagar should be added to cost of the asset, but cannot be claimed as deduction under section 36(1)(iii) of the Act. The Assessing Officer has discussed the issue at length in light of provisions of section 36(1)(iii) of the Act along with Accounting Standard -16 issued by the ICAI and observed that as per AS-16 issued by ICAI borrowing cost that are directly attributable to the acquisition of a qualifying asset should be capitalized as part of the cost of that asset. Since the assessee has obtained loan specifically for the purpose of purchase of land at MRC Nagar for construction of residential project and project is not yet commenced its activities, relevant interest paid on loan borrowed for the purpose of acquisition of asset cannot be allowed as deduction. The Assessing Officer has also distinguished case laws relied upon by the assessee and further relied upon the decision of ITAT, Mumbai Special 6 ITA No.3372/Chny/2019 Bench in the case of Wallstreet Construction Ltd. Vs JCIT 101 ITD 156 to support his finding. The Assessing Officer has also distinguished the decision of the Hon'ble Supreme Court in the case of M/s.Taparia Tools Ltd. Vs., JCIT 260 ITR 102 relied upon by the assessee on the ground although, interest expenditure is revenue in nature, but because asset was not put to use in the relevant assessment year, as per proviso to section 36(1)(iii) of the Act, said interest expenditure should be added to the cost of asset. Further, the Assessing Officer has also rejected arguments of the assessee in light of matching concept principles of accounting on the ground that when there is no revenue recognized from the project, then expenditure incurred for said project cannot be allowed as deduction. Accordingly, rejected the arguments taken by the assessee and disallowed interest paid on loan borrowed u/s.36(1)(iii) of the Act. The relevant findings of the Assessing Officer are as under:-
"11.4 According to ASI6. capitalisation of borrowing cost should cease when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are compete.
11.5 In the present case the assessee has obtained the loan of Rs. 300 Crore from IFCI Ltd specifically for the purpose of purchase of land al MRC Nagar for construction of the residential project. The 7 ITA No.3372/Chny/2019 same is clearly evidenced form the loan sanction letter issued by IFCI Ltd vide the letter of intent dated 19.12.2013. Since the assessee is following the accounting standards of ICAI. the assesses is bound to capitalise interest cost of Rs. 41 .37 Crore on this borrowal to the Work in Progress of MRC Nagar project Instead assessee chose to claim the entire interest expense as revenue expenditure for AY 2015-16. whereas no income was offered for the MP.C Nagar project.
11.6 Assessee's submission that the AS16 is applicable lot loan's obtained for acquiring fixed assets alone and not for inventory is not acceptable The definition of qualifying asset used in AS16 does not differentiate between the fixed asset and inventory. The words Put to use or interned for sale make it clear that the standard is applicable for both fixed asset as welt as inventory.
12 Decisions Relied on by Assessee:
12.1 Assessee placed reliance on the decision in the case of Core Health care Ltd(supra). This decision is about whether the proviso inserted in sec 36(1(iii) with effect from 01.04.2004 has to be read prospectively or not Thus his decision has no relevance to the facts and circumstances of the assessee's case.
12.2 Assessees reliance on the decision in the case of India Cements Ltd vs CIT I 960 60 ITR 52(SC) also does not come to the rescue. This decision is on allowability of expenditure on stamps registration fee etc incurred for availing loan. The Apex Court held that the expenditure incurred in raising a Joan is revenue expenditure The facts and the legal matrix of the assessees case are totally different Iron, the facts of the Apex Court decision.
12.3 Assessee also cited the decision in the case of ACIT vs. Aditya Prop Con P Ltd in ITA No 762/JP/2012 8 ITA No.3372/Chny/2019 ITAT Jaipur bench. In the instant case the ITAT decided in favour of assessee stating that there was inordinate delay in the construction activity due to adverse market forces there was specific requirement of AS16 not to capitalise the interest cost along with the cost of land if it is held without any associated development activity. The facts of the present case of assessee are entirely different on his ground As mentioned in Para 8 above it could be seer' that the assessee has acquired the land at MRC Nagar for Rs 525.80 Crore did some construction activity and showed it as opening Work in- Progress amounting to Rs I0.23 Crore and also expended Rs 5.17 Crore during the current year towards the project In the case cited by the assessee, the land was kept idle, the land has been used in be construction activity by the assessee in its cwn case. Thus the facts of the assessee cited by the assessee are on different footing and hence not applicable to the present case.
13 Decision irn the case of Wallstreet Construction Ltd:
13 Instead the fact of the decision in the case of Wallstreet Construction Ltd, vs JCIT, Mumbai SB 101 lTD 156 (MUMBAI(SB). are more relevant to the present case of the assessee The ITAT answered the following question, In case of a builder following project completion method, engaged in simultaneous construction of multiple projects, whether interest cost is a period cost or .1 has to be added to the value of Work-in-Progress' in favour of the department.
13.2 The claim or interest expenditure from year to year u/s. 36(1)(iii) actually distorted the profits earned by the assessee of a particular project because the interest cost which pertains to one project has been claimed by the 9 ITA No.3372/Chny/2019 assessee against the income of another project. This resulted into claiming of huge losses by the assessee.
13.3 The matching concept of income and expenditure has to be followed or any accounting year The expenditure which is relevant to the earning of income only should be deducted Iron, such income so that a correct picture of the total income chargeable to tax can emerge Reliance is placed on the decision in the case of Taparia Tools Ltd vs. JCIT(2003) 260 lTR 102 It was held in this case as under:-
Therefore, under the mercantile system of accounting in order t determine the net income of an accounting year the revenue and other incomes are matched with the cost of resources consumed (expenses),. Under the mercantile system of accounting, this matching is required to be done on accrual basis Under this matching concept, revenue and income earned during the accounting period irrespective of actual cash inflow. is required to be compared with expenses incurred during the same period irrespective of actual inflow of cash.
13.4 Reliance is also placed on the Hon'ble Supreme Court decision in the case or CIT vs. UP State Industrial Development Corporation (1997) 225 ITR 703 which held that in order to determine the question of taxability well settled legal principles as well as principles of accountancy have to be taken into account and that to, the purpose of ascertaining profits and gains, the ordinary principles of commercial accounting should be applied.
13.5 The ITAT in the case of Wallstreet Construction Ltd, clearly held that in our view the true profits in such a case can be determined only when the entire costs of project 10 ITA No.3372/Chny/2019 direct or indirect including finance cost is added to the value of Work-in-Progress. This proposition is also fortified by the matching concept as profounded by the Hon'ble Bombay High Court in the case of Taparia Toots Ltd(supra).
We hold that the interest identifiable with that project should be allowed only in the year when the project is completed and the income from that project is offered for taxation'.
14. In view of the above discussions factual and legal propositions, the claim of interest expenditure of Rs. 41.37 Crore towards the loan obtained specifically for the purpose of purchasing land at MRC Nagar is disallowed and added to the Work-in-Progress of Inventory"
5. Being aggrieved by the assessment order, the assessee preferred an appeal before CIT(A). Before the learned CIT(A), the assessee has reiterated its arguments made before the Assessing Officer and also relied upon the decision of Hon'ble Gujarat High Court in the case of DCIT Vs. Core Healthcare Ltd., (2001) 251 ITR 61. The sum and substance of arguments of the assessee before the learned CIT(A) are that interest paid on loan borrowed for the purpose of business cannot be disallowed u/s.36(1)(iii) of the Act, when such business has been commenced and further revenue has been recognized 11 ITA No.3372/Chny/2019 from the business. The assessee further contended that the Assessing Officer has completely erred in disallowing interest by considering AS-16 issued by the ICAI without understanding the fact that accounting standard issued by ICAI cannot override income-tax provisions, because allowability or otherwise of expenses needs to be considered in light of provisions of the Act, where specific provision has been provided to allow interest expenditure, as per which interest paid on loan borrowed for the purpose of business should be allowed, unless, such interest is paid for acquisition of capital asset and further, said capital asset was not put to use in the business of the assessee for the relevant financial year. In this case, the assessee has proved with necessary evidences that business of the assessee has been commenced and further, purchase of land for the purpose of construction of housing project is nothing but an inventory in the business of the assessee and further, once inventory is acquired immediately the same would be put to use in the business of the assessee.
Therefore, following the principles provided in AS-16 to disallow interest paid on loan borrowed for the purpose of business is 12 ITA No.3372/Chny/2019 incorrect, more particularly, when purpose of AS-16 is to give treatment of borrowing cost.
6. The learned CIT(A), after considering relevant submissions of the assessee rejected the arguments taken by the assessee in light of various decisions including the decision of Taparia Tools Ltd (supra) on the ground that when the assessee has not yet commenced its business, the question of deduction of interest u/s.36(1)(iii) of the Act does not arise. The learned CIT(A) further observed that loan borrowed from IFCI Ltd. was exclusively for MRC Nagar project and said project was not yet commenced its activities. Although, the assessee has started recognizing revenue from real estate segment, but revenue was coming from Atlantic project, Egmore, which is distinct from MRC Nagar project. Further, the assessee itself in its director's report for the year ending 31.03.2015 stated that project at MRC Nagar is yet to start its activities. Since the project itself is not commenced expenses claimed on the said project cannot be treated as allowable under the Act. The learned CIT(A) has discussed the issue in light of AS-16 and principles of matching concept of accounting to distinguish case 13 ITA No.3372/Chny/2019 law relied upon by the assessee in the case of Taparia Tools Ltd. (supra) and held that allowability of deduction of interest expenditure can be considered only when the project at MRC Nagar would commence its business operations. Since the facts brought out by the Assessing Officer clearly indicate that two projects executed by the assessee are different and project at MRC Nagar is not started recognizing revenue for the impugned assessment year, then the expenditure incurred towards said project including interest paid on loan borrowed for acquisition of land cannot be allowed as deduction, but needs to be added to the cost of the asset. Accordingly, rejected the arguments taken by the assessee and confirmed additions made towards disallowance of interest expenditure of `41,37,73,978/- u/s.36(1)(iii) of the Act. The relevant findings of the learned CIT(A) are as under:-
"The submissions of the appellant were considered vis-a-vis the findings of the A,O. While examining the appellant's submissions regarding the interest of Rs.41,37,73,978/ claimed towards repayment of loan to IFCI Ltd. Chennai, it was noted that the appellant itself was following the recognition of income and expenditure as per the Accounting Standards of ICAI. The A.O discussed the guidelines as furnished in Accounting Standards 16. It was noted that borrowing cost which were directly attributable to the 14 ITA No.3372/Chny/2019 acquisition construction or production of a qualifying asset should be capitalized as part of that asset. it was also noted that other borrowing cost should be recognized as an expense in the period in which they were incurred. The qualifying asset, in this context, is an asset that necessarily takes substantial period of time to get ready for its intended use or sale. The A.O reasoned that AS 16 provides for capitalizing the borrowing cost not only for fixed assets but also for other assets like inventory It was also noted that AS l6 provides that Funds borrowed specifically for the purpose of obtaining a qualified asset, the amount of borrowing cost eligible for capitalization on that asset should be determined as the actual borrowing cost incurred on that borrowing- The A.O inferred that according to AS 16, capitalization of borrowing cost should cease when substantially all the activities necessary to prepare the qualifying assets for its intended use or sale are complete. The A.O held that as the appellant is following the Accounting Standards of ICAI. It ought to capitalize the interest cost of Rs.41.37 crores on the loan of Rs.300 crores from IFCl Ltd. Instead it was noted that the appellant claimed the entire interest expense as revenue expense for the AY 2015-16. It was pointed out by the AO that the definition of qualifying asset used in AS 16 does not differentiate between fixed asset and inventory, It was also held that the interest identifiable with the project should be allowed only in the year when the project was completed and the income from that project was offered for taxation.
In their written submissions, the appellant held that the interpretation of AS 16 by the A.O was not in proper prospective since the A.O referred to those portions of the Accounting Standard which dealt with fixed assets/investments whereas in the present case, the land on which the housing project was being undertaken was classified as stock-in-trade/inventory of the appellant due to its nature of business. The appellant also held that the A.Os reliance on the decision of Wallstreet Construction Ltd cited supra) was factually distinguishable as the said order was rendered in the case or project completion method whereas the appellant employed percentage 15 ITA No.3372/Chny/2019 completed method, The appellant while discussing Accounting Standard 2 referred to the decision of the Bangalore Bench of Hon'ble ITAT in a case reported in 71 taxmann.com 184. It was held by that Tribunal that normal interest and borrowing cost cannot form part of cost of inventory. The Tribunal cited that when an assessee is following a method of valuation of inventory as per Accounting Standards prescribed by ICAI, the appellant was justified in considering interest as a period cost and debiting it in its P&L. Account. The appellant also stated that the proviso to section 36(l)(iii lays down the test of putting to use the asset as the criteria for the claim of the cost of borrowing, It was submitted that the asset was already put to use by the appellant by way of commencement of the housing project. The appellant also raised the issue pertaining to "matching concept". The company cited the ratio of the decision of the Supreme Court reported in 372 ITR 605 in the case of Taparia Teds Ltd vs JCIT. The Apex Court had ruled that revenue expenditure incurred n a particular year had to be allowed in that year. Hence) it was claimed that the interest expenditure incurred during the A.Y ought to have been allowed in the computation of taxable total income. In their written submissions the appellant drew attention to the provisions of section 37(1) of the Act and held that the interest expenditure should be allowed as deduction. It was emphasized that the action of the A.O in segregating the business of the appellant project-wise was unknown to the Income tax Act, 1961. It was submitted that the appellant has income from the activity of construction/real estate. Hence, according to the appellant, the action of the A.O in segregating one project alone for the purpose of allowing the expenditure incurred in the course of carrying on the business was not as per the IT Act.
The material facts, arguments and judicial decisions pertaining to the appeal have been carefully considered. In order to get a clear picture regarding the factual maths, the appellant was asked to furnish a note on unsecured loans and a break-up of (I) the property development and construction WIP (ii) Bank Interest and (iii) Financial 16 ITA No.3372/Chny/2019 Institution/other interests. The loan taken from IFCI Ltd Chennai was recorded under the head Financial Institution/other interest'. The total amount outstanding as on 31/3/2015 was Rs.30l,92,12,329/- and the interest amounted to Rs.41,37,73,978/-. The total interest under this head stood at Rs.41,60,53,605/-. The break-up of property development and construction WIP which amounted to Rs.845.67 crores comprises two projects, Atlantic Egmore and MRC Nagar. In the case of Atlantic, Egmore, it was noted that a sum of Rs.47,56.72,678/- was offered as profit and the closing WIP was Rs.304,46,64,205/-. In the case of MRC Nagar, no profit was offered during the financial year 2014-15. The current year expenditure was Rs.5,1768,617/- and the closing Work-in-Progress stood at Rs.541,2134044)-. Thus) it is noticed that in the case of MRC Nagar Project the current year expenditure claimed was Rs.5,17,68,617/- as against Nil profit that was offered by the appellant It is inferred that the appellant has claimed expenses although no profit was offered for the MRC project. The profit offered by the appellant for the A.Y 2015- 16 pertains only to the project Atlantic, Egmore.
In order to ascertain the interest claimed by the appellant amounting to Rs.41,60,53,605/-. the terms and conditions of the loan sanctioned by IFCI were examined. It was stated that the corporate loan amount of Rs-300 crores was to be utilised for purchase of 90.53 grounds of land along with Partially constructed hotel asset situated at MRC Nagar. Since the transaction was yet to be completed it was laid down that the appellant shall provide an internal security by way of deposit of the title deeds of Atlantic Hotels property at Egmore. The aforesaid interim security deposit shall be released on the execution of sale deed for Viceroy Hotels Ltd in respect of MRC Nagar property. While examining the other conditions, it was noted that clause (xii) of pre disbursement conditions states that IFCL shall retain the right to appoint an independent agency to verify sales of MRC Nagar project space, rate/sq.ft and remittances to project account etc. on a monthly/quarterly basis.17 ITA No.3372/Chny/2019
A study of the factual matrix indicates that the loan borrowed from IFCI Ltd was exclusively for the MRC Nagar project. This project was distinct from that of Atlantic, Egmore. Hence, the appellants claim that the project wise distinction made by the A.O not in consonance with the Income tax Act is not justified. The terms and conditions given by IFCI clearly point out the fact that the project is an exclusive one and has to be accounted for separately. It is noted that the appellant has not maintained the details separately pertaining to the MRC Nagar project in its Balance sheet but has grouped the income as well as the expenditure of both the projects in a consolidated manner. It is also observed that the transactions with IFCI were still ongoing and has not yet been completed. The tenure of a loan was for a period of 5 years with effect from 19/12/2013, the date of the letter of intent issued by IFCI. Taking into account these material facts it is apparent that the amount spent towards MRC Nagar project has to be capitalized. Moreover, it has to be considered distinctively and not with the other projects as it is governed by a separate set of term, and conditions.
The A.O had relied on Accounting Standard 16 proscribed by ICAl and held that these borrowing cost which are specifically meant for obtaining a qualifying asset i.e. the land at MRC Nagar should be capitalized as part of the cost of the asset. The appellant, on the other hand, had referred to Accounting Standard 2 and maintained that the appellant was justified in considering interest as a period cost and debiting it in its P& L Account. In order to resolve this debate, the various criteria adopted by these Standards are considered herewith:
AS 16 This standard deals with borrowing cost- It was held that meeting a portion of business needs through borrowals was a well accepted form of financing. It dealt with situations where the time lag between building up of an asset and subsequent creation of earnings from the property is substantially long. Preamble to AS 16 stated that in such events under the accrual and matching principle, the interest 18 ITA No.3372/Chny/2019 paid on funds specifically for that purpose (Long Term or capital expenditure)should be so expensed as would match with future revenue. The Borrowing Cost (BC) as per AS 16 includes interest and commitment charges on bank borrowings. The Qualifying Asset (QA) is an asset that necessarily takes substantial period of time to get ready for its intended use (fixed assets or investment properties) or sale (inventory). In recognizing BC that can be capitalized, it was held that it was probable that the qualifying asset as a pan of which eligible SC is capitalized will result in future economic benefits. Costs other than eligible BC as well as costs incurred for assets other than QA should be charged off as an expense in the period in which it is incurred. The eligible items of SC were those that were directly attributable to the acquisition, constriction or production of a QA. The BC incurred on qualifying asset is to be capitalized only if all the three following conditions are fulfilled.
i)Expenditure on QA is being incurred ii Borrowing cost are incurred
iii) Activities are in progress As per AS 16, the Accounting policy following for treatment of BC and the amount of BC capitalized during the period have to be disclosed.
The appellant's case involves the purchase of land and construction of building. The borrowing from IFCI was towards acquisition of land at MRC Nagar for purposes of construction of residential apartments. The assets for which the borrowing cost were incurred are found to utilize substantial period of time to get ready for its intended use or sale. Hence, this Accounting Standard has been found to be appropriate for the appellant's case. The interest attributed to the acquisition of land in accordance with AS 16 has to be capitalized irrespective of whether they fall under the category of fixed assets/investment properties or inventory. It was also noted that capitalization of borrowing cost should cease when all activities necessary for making assets ready for intended use/sale were substantially complete. In the instant case, the cessat1on of capitaiization has not taken place. Hence, the BC on the QA should 19 ITA No.3372/Chny/2019 be considered as capitalized during the relevant previous year as per the criteria laid down under AS 16.
AS 2 This Accounting standard pertains to valuation of inventories. It may involve varying degrees of estimation and it affects both the results of operation as well as the financial position as reflected in the Balance sheet- Items such as expenses, revenues or book debts can be recorded in the books of accounts with a fair degree of accuracy- But an element of subjectivity is involved in measurement of items such as depreciation or inventory value- Inventories are assets held for sale in the ordinary course of business, in the process of production for such sale or in the farm of materials or supplies to be consumed in production process or in the rendering of services. It also includes intangible items such as software. The AS 2 does not cover WIP under construction contracts. Hence, this Accounting Standard cannot be considered appropriate for determining the nature of borrowing cost in the appellants case.
During the appellate proceedings, the AR furnished abstract of the expenses pertaining to MRC Nagar project for the AY 2015-16. A perusal of these expenses reveals that they were in the nature of advertisement expenses, architect fees CMDA charges, consultancy charges, electricity charges, legal lees, rent, security charges, site expenses, various labour charges and purchase of materials. The appellant had also furnished the ledger accounts for these expenses and they were a]so perused. According to the appellant, the qualifying asset should be considered as put to use [or the intended development of the housing project in view of the major work of demolition of the existing structure newly built by the previous order for hotel business by the appellant. Hence, it was submitted that there was nothing absolutely wrong in treating the property as inventory in the compilation of financial statements. It was also stated that the inventory in the business/holding of an inventory in the business by itself is a business activity in the normal course and in continuation of the business of construction pursued by the appellant The appellant 20 ITA No.3372/Chny/2019 had also claimed deduction of interest on borrowed capital u/s.36(1](hi) of the Act on the grounds that the appellant was carrying on the existing business of construction by virtue of purchase of inventory being the property at MRC Nagar for development purposes. The moot point concerns whether the MRC project had commenced its operations during the A.Y 2014- 15 for the purposes for which it had been conceived. Although the appellant has furnished details of expenses incurred for the project, it has to be ascertained whether these expenses can be considered as pertaining to the business of construction of residential buildings as proposed to be carried out in the MRC Nagar project. The Director's Report for the F.Y ended March 2015 provides details regarding the projects of the company. It was stated that the company had made substantial progress in the Atlantic Residential Project and that the project would he completed and handed over during the current financial year, As regards the MRC Nagar project, the Directors Report stated thus:
"Your Board has taken appropriate action and initiated all necessary steps to continence the project at MRC Nagar during the ensuing year."
It is thus ascertained from the Directors Report that the MRC Nagar project had not commenced during the relevant previous year. Since the project itself has not commenced, the expenses claimed by the appellant cannot be treated as inventory. They are to be treated as pro-operative expenses which have to be capitalized. The interest expenditure claimed by the appellant which is basically a borrowing cost cannot be claimed as revenue expenditure as it forms part of the pre operative expenditure of the appellant during the FY ended 31/3/2015.
The appellant relied on the decision of the Supreme Court in the case of Taparia Tools Ltd vs. JCIT (2015) 372 ITR 0605 (SC). The Apex Court ruled that any amount of interest paid becomes an admissible deduction u/s.36 if the interest was paid on the capital borrowed by the appellant and this borrowing was for the purpose of business or profession. In that case, the money raised on account of 21 ITA No.3372/Chny/2019 issuance of debentures would be capital borrowed and debentures were issued for the purpose of the business of the assessee. The Supreme Court ruled that when the interest was actually incurred by the appellant which follows the Mercantile system of Accounting, the appellant would be entitled to deduction of full amount in the assessment year in which it is paid. It was also held that once the genuineness is proved and the interest is paid on the borrowing it is not thin the powers of the A.O to disallow the deduction either on the ground that the rate of interest is unreasonably high or that the assessee had himself charged a lower rate of interest on the moneys he lent. It was further stated that normally the ordinary rule is to be applied i.e. the revenue expenditure incurred in a particular year is to be allowed in that year. In the instant case, the expenses incurred by the appellant for the MRC Nagar project cannot be considered revenue expenditure as the project itself had not commenced during the relevant previous year. The interest claimed by the appellant cannot be stated as being incurred for the purpose of business as the project was slated to commence only during the next F.Y i.e. 2015-
16. The deduction was disallowed not on the grounds that the rate of interest was unreasonably high or that the appellant had charged a lower rate of interest on the moneys which he lent but because the expenses were in the nature of pre-operative expenditure. Therefore the allowability of the deduction of interest expenditure can be considered only when the project at MRC Nagar would commence its business operations. Hence, the rule that revenue expenditure incurred in a particular year is to be allowed in that year itself is not found applicable in the instant case.
The appellant also had relied on the decision of the Bangalore Tribunal (2016) 71 taxmann.com 184 in the case of DCIT vs. JSR Constructions Pvt. Ltd. In that case, the assessee was doing road work based on contracts awarded to it. The Hon'ble Bangalore Tribunal 'C' Bench held that interest Cost attributed to loans taken for financing its normal trading activity is a period cost that has to be charged to P&L Account. The ITAT had referred to clause 12 of the 22 ITA No.3372/Chny/2019 Accounting Standard 2 and stated that normal interest and borrowing cost cannot form pan of costs of inventory. It was stated that when an assessee is following method of valuation of inventory which was in accordance with the prescribed Accounting Standards, the assessee cannot be made to adopt a different method and it cannot be said that the appellant had understated its Work-in-Progress or inventory by not charging interest relating to working capital loan to its valuation. In the instant case, the appellant had not yet commenced its business and hence the interest claimed cannot be considered a period cost that had to be charged to P&L Account. As per the Accounting Standard 16 prescribed by ICAI, the interest which is a Borrowing Cost has to be capitalized.
On the basis of the afore said facts and observations, I hold that the appellant is not justified in claiming the sum of Rs.41,37,73,978/- as admissible interest expenditure. The additions made by the A.O are upheld This ground of appeal is dismissed."
7. The learned AR for the assessee submitted that the learned CIT(A) has erred in sustaining the disallowance of deduction claimed towards interest expenses u/s.36(1)(iii)/ 37(1) of the Act, without appreciating the fact that interest paid on loan borrowed from IFCI Ltd. is for the purpose of business of the assessee and further, said business activity was commenced during the impugned assessment year. The AR further submitted that the Assessing Officer as well as the learned CIT(A) have completely erred in following AS-16 issued by ICAI, which is for recognizing borrowing cost ignoring 23 ITA No.3372/Chny/2019 specific provisions provided under the Act to treat interest paid on loan borrowed for the purpose of business, without appreciating the fact that AS-16 issued by ICAI cannot override the provisions of Income Tax Act . The AR further submitted that the Assessing Officer has applied provisions of section 36(1)(iii) of the Act and proviso provided thereto to disallow interest without appreciating the fact that the term 'put to use' will come into operation, when capital asset is acquired for the purpose of business of the assessee and further, said capital asset was not put to use in the business. In this case, asset acquired by the assessee is an inventory in the business of the assessee and the moment inventory is acquired, it will be put to use in the business of the assessee. Therefore, question of application of proviso to section 36(1)(iii) has no application in the given facts and circumstances of the case. The AR further referring to various documents filed in the paper book submitted that the assessee has treated real estate development segment as one business, which executes number of projects in different places. When the business of various real estate developments are considered as one segment, then segregation of the 24 ITA No.3372/Chny/2019 projects undertaken by the assessee is incorrect. The AR further submitted that the learned CIT(A) failed to appreciate that conclusion reached on non-commencement of project which was relating to claim of interest expenditure was wholly unjustified and ought to have appreciated that commencement of business under consideration should be reckoned from the date of purchase of the land with structures meant for development of while further ought to have appreciated that having not disputed fact of the assessee that assessee has engaged in the business of the property development, standalone approach by segregating the project under scrutiny for the purpose of considering allowability of interest expenses is erroneous. The AR for the assessee further referring to the decision of Hon'ble Gujarat High Court in the case of CIT Vs. Aditya Propcon Pvt. Ltd. vide order No.82 of 2014 dated 10.10.2017 submitted that under identical set of facts, the Hon'ble High Court held that interest on funds borrowed to purchase land which is part of inventory of the assessee is an allowable deduction u/s. 36(1)(iii) of the Act. In this case, land purchased by the assessee was part of inventory of the 25 ITA No.3372/Chny/2019 business and hence, question of application of proviso to section 36(1)(iii) of the Act is incorrect.
8. The learned DR, on the other hand, strongly supporting the order of learned CIT(A) submitted that interest attributable to acquisition of land is in accordance with AS-16 has to be capitalized irrespective of whether they have fall under the category of fixed assets / inventory, because AS-2 pertains to valuation of inventory and does not cover work in progress under construction contracts. The DR referring to pre- disbursement conditions of IFCI Ltd. imposed while granting loan submitted that lender has retained right to appoint an independent agency to verify sales of MRC Nagar project on a monthly basis and further, loan borrowed from IFCI Ltd. was exclusively for the MRC Nagar project. Therefore, even though the assessee has not maintained details separately pertaining to MRC Nagar project in its balance sheet, the fact remains that MRC Nagar project is a standalone project and has to be considered distinctively, as it is governed by a set a terms & conditions. The learned DR further referring to the decision of Hon'ble Supreme Court in the case of L.M.Chhabada & Sons 26 ITA No.3372/Chny/2019 Vs.CIT 65 ITR 638 and a decision of Hon'ble Calcutta High Court in the case of Ritz Continental Hotels Vs. CIT 114 ITR 554(Cal) submitted that MRC Nagar project should be treated as standalone project because there is no interlacing, interconnection, interdependence or dovetailing with other project at Egmore either operationally or financially or spatially. Further, mere classification in accounting by providing a consolidated figure will not alter substantive nature of the project per se. He further referring to financial statement of the assessee, more particularly, director's report for the financial year 31.03.2015 submitted that assessee itself in its director's report stated that project at MRC Nagar is yet to commence its activities during the year under consideration. Further, the assessee is not in the business of trading land parcels to treat the land acquired as inventory in the hands of the assessee. The expenses incurred by the assessee for the project cannot be considered as revenue expenditure because project itself had not commenced during the relevant previous year. Therefore, interest paid on loan borrowed for the purpose of purchase of land cannot be allowed as deduction u/s. 36(1)(iii) 27 ITA No.3372/Chny/2019 or alternatively 37(1) of the Act. The DR further referring to the decision of Hon'ble Supreme Court in the case of CIT vs. U.P State Industrial Development Corporation 225 ITR 703(SC), submitted that during the pre-commencement period interest paid on loan is not allowable as deduction, but it would go to increase cost of the asset. Therefore, he submitted that there is no error in the findings recorded by the learned CIT(A) to affirm disallowance of interest u/s. 36(1)(iii) of the Act by the Assessing Officer and hence, the order of learned CIT(A) should be upheld.
9. We have heard both the parties, perused the materials available on record and gone through orders of the authorities below along with various case laws cited by learned counsel for the assessee as well as the Revenue. The factual matrix of impugned dispute as borne out from records indicate that the assessee has borrowed loan from M/s. IFCI Ltd. for the purpose of purchase of land at MRC Nagar, Chennai and claimed interest paid on such loan u/s. 36(1)(iii) of the Act. The Assessing Officer has disallowed interest paid on loan borrowed from IFCI Ltd. by invoking provisions of section 28 ITA No.3372/Chny/2019 36(1)(iii) of the Act on the ground that land purchased at MRC Nagar was not put to use in the business of the assessee and thus, interest paid on loan borrowed for acquisition of any asset needs to be capitalized to the cost of the asset, till such time the asset was put to use in the business of the assessee. According to the Assessing Officer, although real estate segment is one business of the assessee, but project at Egmore and MRC Nagar should be considered on standalone basis and if two projects are considered on standalone basis, the project at MRC Nagar is yet to commence its activities in the impugned assessment year and thus, any expenditure including interest paid on loan borrowed for the purpose of project needs to be capitalized and added back to work-in- progress account. The Assessing Officer has taken support from AS-16 issued by ICAI and principles of matching concept of accounting to support his finding and according to him; unless revenue is recognized from the project corresponding expenses cannot be allowed. The Assessing Officer has also relied on AS-16 issued by ICAI to come to the conclusion that borrowing cost of eligible asst should be capitalized as part of 29 ITA No.3372/Chny/2019 cost of that asset till such time all the activities necessary to prepare the qualifying asset for its intended use or sale are complete.
10. In light of above factual matrix, if you examine facts of the present case, it is necessary to understand the provisions of section 36(1)(iii) and proviso provided thereto.. The provisions of section 36(1)(iii) of the Act deals with interest paid in respect of capital borrowed for the purpose of business or profession. Further, the proviso provided to section 36(1) deals with interest paid in respect of capital borrowed for acquisition of asset for any period beginning from the date on which capital asset was borrowed for acquisition of the asset till the date on which such asset was put to use shall not be allowed as deduction. Therefore, allowability or otherwise of interest paid on loan borrowed from M/s. IFCI Ltd. needs to be examined within the scope of section 36(1)(iii) of the Act. The provisions of section 36(1)(iii) of the Act permit claiming of interest cost in respect of capital borrowed for the purpose of business of the assessee. In this case, there is no doubts whatsoever, with regard to the 30 ITA No.3372/Chny/2019 fact that loan borrowed from IFCI Ltd., is for the purpose of business of the assessee. In fact, the Assessing Officer has categorically admitted that loan is borrowed for the purpose of business of the assessee. However, he has denied interest deduction only on the ground that asset purchased by the assessee was not put to use in the impugned assessment year for the purpose of business of the assessee.
11. We have given our thoughtful consideration to the reasons given by the Assessing Officer for disallowing interest paid on loan and find that there is no substance in the reasons given by the Assessing Officer in light of Accounting Standard- 16 issued by the ICAI, because AS-16 deals with issue of borrowing cost which is specifically for the purpose of treatment of interest paid on loan borrowed for acquisition of long term asset like asset that necessarily takes substantial period of time to get ready for intended use or sale. Although, it does not specifically says it is not applicable to an asset being inventory in the business of the assessee, but if you see definition of qualifying asset it specifically says asset which 31 ITA No.3372/Chny/2019 takes substantial period of time to get ready for intended use, that means any capital asset is acquired for the business of the assessee for use in said business, normally period taken for getting ready particular asset is longer in time and hence, it can be safely held that this standard is not applicable to asset being inventory in the business. Therefore, in our considered view As- 16 was issued to recognize interest paid on loans taken for acquisition of a capital asset. In the present case, land purchased by the assessee in the business of real estate segment is an inventory and further, the moment land was purchased it becomes inventory of the assessee and put to use in the business of the assessee. Therefore, in our considered view, it is incorrect to apply AS-16 to treat interest paid on loan borrowed for the purpose of acquisition of asset, which is in the nature of inventory in the business of the assessee.
12. Having said so, let us examine another reason given by the Assessing Officer in light of proviso to section 36(1)(iii) of the Act. As stated in earlier paragraphs the proviso was inserted u/s. 36(1)(iii) of the Act to disallow interest paid on loan borrowed for acquisition of asset till such time said asset 32 ITA No.3372/Chny/2019 was ready for use in the business of the assessee . The term 'put to use' used in the said proviso would have a far reaching consequence for negating thought process of revenue in the present case, inasmuch as the term 'put to use' would be applied to capital asset / income earning apparatus / facilitating the business activity and hence, the statute envisages importance of such capital asset should be put to use in the business in contra distinction to the inventory of the assessee. The inventory in the business / holding of inventory in the business by itself is a business activity in the normal course and in continuation of business of construction pursued by the assessee. Therefore, the attempt to apply the proviso to factual matrix of the case would lead to wrong interpretation of the intended law and hence, reasons given by the Assessing Officer to disallow interest expenditure by applying provisions of section 36(1)(iii) of the Act is not in accordance with law. Further, the assessee is into the business of real estate development and in the process executing two projects at different places. The Assessing Officer has considered two different projects on standalone basis and held that project at 33 ITA No.3372/Chny/2019 MRC Nagar is not yet commenced its activities. In our considered view, the reasons given by the Assessing Officer to treat MRC Nagar project on standalone basis is purely on presumption and cannot be accepted as correct approach, more particularly, when construction business is a separate vertical pursued by the assessee and in the said construction business, the said projects are executed. The acquisition of property at MRC Nagar cannot be equated to extension of existing business, with a view to consider disallowance of the claim of interest payments on the capital borrowed and on the contrary, acquisition of property should be equated to the inventory of the assessee and not as capital asset which treatment is correctly carried out in the financial statement pertaining to the financial year under consideration. The purchase of inventory in the course of carrying on existing business of construction should be reckoned as continuation of same business activity in the routine/normal course and cannot be equated or termed as extension of business activity. Therefore, we are of the considered view that since the business is a continuing business under the vertical of said 34 ITA No.3372/Chny/2019 construction business pursued by the assessee, the theory of matching concept adopted by the AO by isolating the MRC Nagar project is not legally sound as well as opposed to the principles of accounting. The mandate in such circumstances should take global view of financial operations of all the projects pursued by the assessee in the said segment. In fact, the assessee has offered substantial income from other project namely Atlantic and hence, the attempt to apply matching concept principle is totally misconceived and would fall to the ground. Therefore, on the cumulative consideration, the reasons given by the Assessing Officer to disallow interest u/s. 36(1)(iii) of the Act in the computation of taxable income is not in accordance with law.
13. Coming to the case laws relied upon by the learned AR for the assessee. The AR has relied upon the decision of Hon'ble High Court of Rajasthan in the case of CIT Vs. Aditya Propcon Pvt. Ltd. (supra), where the Hon'ble High Court under identical circumstances held that interest on funds borrowed to purchase land which is part of inventory of the assessee is 35 ITA No.3372/Chny/2019 allowable deduction u/s. 36(1)(iii) of the Act. The Hon'ble High Court further held that proviso to section 36(1)(iii) of the Act specifically referred to the interest paid in respect of capital borrowed for acquisition of an asset for extension of existing business. The present case is acquisition of land for its development in the course of real estate activities of the assessee. The assessee is about to complete one project and to continuing its activities has purchased another land to develop another project. The purchase of inventory is continuation of the same business activity in routine course and cannot be termed as extension of the business activity. The term 'put to use' applies to capital asset only because capital asset is held to facilitate the business activity and sometimes it needs to be prepared after its acquisition for being used to facilitate business activity. As against this, purchase and holding of inventory itself is a business activity. Therefore, interest paid on loan borrowed for purchase of land being inventory cannot be disallowed by invoking the provisions proviso to section 36(1)(iii) of the Act. The relevant findings of the Hon'ble High Court are as under:-
36ITA No.3372/Chny/2019
"9. He further contended that the Tribunal has also committed error in observing as under:-
"18. We have heard the parties and perused the material available on record and also the orders of the authorities below. We find that the books of accounts of the assessee are audited and the ld. Auditor has not given any adverse comment for not following the accounting standards which are mandatory for a company u/s 211 of the Companies Act, 1956. We also find that there is n dispute that the said land is part of inventory for the assessee and is not a capital asset. The assessee has produced evidences of no increase in the land price and AO has not brought anything on record to support that the assessee would be able to realise the interest cost incurred over and above the cost of purchase of land. In such circumstances, as per basic accounting principles of valuation of inventory that the inventory is to be valued at cost or net realisable value which -ever is lower. The uncontroverted evidences show that there is no buyer of the similar land in same vicinity at the price which is lesser than the price paid by the assessee and therefore, we are convinced with the CIT(A) and the A/R has stated that the assessee has not taken up the project activity even till 31.3.2013. The delay in project is for economic reasons. In such circumstances, the AS-16 does not allow capitalisation of interest cost along with the cost of land. It allows capitalisation of interest cost only during normally period of construction and not for inordinate delay in the construction activity due to adverse market forces. There is specific requirement of AS-16, not to capitalise the interest cost along with the cost of land if it 37 ITA No.3372/Chny/2019 is held without any associated development activity. Accordingly, the accounting treatment of the interest cost is perfectly in line with the Accounting Standards. We further find that despite any accounting treatment, the interest on capital borrowed for the purpose of business is allowable u/s 36(1) (iii). A proviso has been inserted w.e.f. 1.4.2004 which reads as under:-
"Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalised in the books of account or not); 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".
The proviso specifically referred to the interest paid in respect of capital borrowed for acquisition of any asset for extension of existing business. The present case is of acquisition of land for its development in course of real estate activity of the assessee. Assessee is about to complete one project and to continue the activities has purchased another land to develop another project. The argument of the ld. DR that the proviso would apply to the assessee's case cannot be accepted. We are of the considered opinion that the purchase of inventory is continuation of the same business activity in routine course and cannot be termed as extension of the business activity. The proviso has been inserted to disentitle claim of interest on funds borrowed for acquisition of capital assets for the period upto the asset is put to use. The term 'put to use' here applies to capital asset only 38 ITA No.3372/Chny/2019 because a capital assets is held to facilitate the business activity and sometimes it needs to be prepared after its acquisition for being used to facilitate the business activity. As against this, purchase and holding of inventory item itself is a business activity. In absence of this proviso, section 36(1) (iii) earlier entitled assessee to claim interest in respect of capital assets, even for the period during which they were under construction as held in various judgments pointed out by the ld. AR of the assessee. The interest was found allowable despite its capitalization in the books of accounts in the judgments. We are therefore, of the opinion that the interest on funds borrowed to purchase land which is part of inventory of the assessee company is an allowable deduction u/s 36(1)(iii). We accordingly reject this ground of the departmental appeal also."
10. Counsel for the respondent has supported the order of the authorities and contended that the both the authorities have rightly held in favour of the assessee inasmuch as even if the contentions which have been advanced by the department, no tax liability has been reduced or there is any case of evasion of tax."
14. The present case, acquisition of land for its development in the course of real estate activities of the assessee itself is a business activity. The assessee is about to complete one project and to continuing its activities has purchased another land to develop another project. The purchase of inventory is 39 ITA No.3372/Chny/2019 continuation of the same business activity in routine course and cannot be termed as extension of the business activity. The term 'put to use' applies to capital asset only because capital asset is held to facilitate the business activity and sometimes it needs to be prepared after its acquisition for being used to facilitate business activity. As against this, purchase and holding of inventory itself is a business activity.
15. In this view of the matter and considering the facts and circumstances of the case and also by respectfully following the decision of Hon'ble High Court of Rajasthan in the case of CIT Vs. Aditya Propcon Pvt. Ltd. (supra), we are of the considered view that interest paid on loan borrowed for purchase of land and holding it as inventory cannot be considered as acquisition of capital asset for the purpose of disallowing interest by invoking provisions of proviso to section 36(1)(iii) of the Act. The Assessing Officer well as the learned CIT(A) without appreciating legal position has disallowed interest paid on loans u/s. 36(1)(iii) of the Act. Hence, we set aside the order passed by the learned CIT(A) and direct the Assessing Officer to 40 ITA No.3372/Chny/2019 delete the addition made towards disallowance of interest under section 36(1)(iii) of the Act.
16. In the result, appeal filed by the assessee is allowed.
Order pronounced in the open court on 31st March, 2021
Sd/- Sd/-
( वी.दग
ु ा राव) (जी.मंजुनाथ)
(V.Durga Rao) (G.Manjunatha)
"या यक सद%य /Judicial Member लेखा सद%य / Accountant Member
चे"नई/Chennai,
(दनांक/Dated 31st March, 2021
DS
आदे श क त*ल+प अ,े+षत/Copy to:
1. Appellant 2. Respondent 3. आयकर आयु-त (अपील)/CIT(A)
4. आयकर आयु-त/CIT 5. +वभागीय त न1ध/DR 6. गाड फाईल/GF.