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04. Assessee Company is engaged in the business of real estate construction and development. During the year, the assessee is developing a project named Palawa in Dombiwali. Assessee filed its return of income on 31/3/2016 declaring a total income of ₹ 792,840,922/-. The return was picked up for scrutiny.

i. During the year under consideration, the assessee is developing the residential project and debited as interest of ₹ 2,241,160,000/- on account of interest cost shown in inventory as revenue expenditure. Assessee claimed the same as revenue expenditure. Assessee submits that interest expenses has been claimed as a deduction Page | 4 ITA no. 1539 & 1594/Mum/2019 Lodha Developers Ltd; A.Y. 15-16 in the year of incurrence of the expenditure for the reason that interest is a periodic cost and therefore is allowable as deduction in the year for which it belongs to and the year in which it is incurred. Therefore the claim of assessee is supported by Section 36 (1) (iii) of the act being interest pertaining to stock in trade. The learned assessing officer did not agree with the contention of the assessee. He held that assessee is developing one project and accounting of the construction activity is governed by accounting standard 7 as well as guidance note on accounting for real estate transaction issued by ICAI. According to that all the expenses directly related to the project held to be carried over, debited to the cost of project, and can be claimed as a deduction in the year in which the corresponding income of the project is shown in the books of account and offered for taxation. Therefore, according to the learned AO interest expenditure held to be carried over in the work in progress and shall be allowable as deduction in the year in which the revenue pertaining to sale interest shall be offered for taxation. He also rejected the reliance on the decision of honourable Bombay High Court in case of CIT versus Lokhandwala construction industries Ltd 260 ITR

05. Accordingly the assessment order u/s 143 (3) of the act was passed on 29/12/2017 at the total income of ₹ 310,95,22,095/-.

06. Assessee aggrieved with the order of the learned assessing officer preferred an appeal before the learned CIT - A. He passed an order on 19/12/2018 deciding the above issues as Under:-

i. interest disallowance of ₹ 2,241,160,000 was deleted holding that the borrowed funds have been utilized for stock in trade which is not a capital asset following the decision of the honourable Bombay High Court in case of local and constructions industries Ltd wherein the special leave petition filed by the revenue against that decision has been rejected by the honourable Supreme Court. He further relied upon the decision of the coordinate bench in case of Ashish builders private limited versus ACIT ITA number 310/M/2012, ITO versus Rohan Estates in ITA number 7200/M/2010 and Kolte Patil developers Ltd. He also held that the decision of the Wall Street construction does not apply to the facts of the case for the reason that assessee is following percentage completion method and not project completion method. He was also of the view that Page | 7 ITA no. 1539 & 1594/Mum/2019 Lodha Developers Ltd; A.Y. 15-16 this issue also arose in case of income tax settlement commission wherein the explanation of the assessee about allowability of interest expenditure has been accepted.

"3.2 With regard to the interest expenditure,...........The interest cost on the corresponding capital borrowed would nevertheless continue to be incurred, without any corresponding increase in the value of the inventory or the project. Similarly, a project, or part thereof, may be partly sold or even remain unsold for quite some time after its completion.

Page | 11 ITA no. 1539 & 1594/Mum/2019 Lodha Developers Ltd; A.Y. 15-16 While revenue would stand to be booked only on the part, if any, sold, the interest cost would continue to be incurred on the entire capital, even as no corresponding gain inures I terms of value addition to the project, which stands in fact completed, so as to increase its cost by loading the said cost thereon. It is for these reasons that interest (financing) cost is normally considered as only a period (fixed) cost, and charged to the operating statement for the year in which the same is incurred. As such, what in our view would prevail is the method of accounting being regularly followed by the assessee, i.e. on a year basis. The same also has the sanction of law inasmuch as sec. 145 clearly provides for determination of the business income on the basis of the method of accounting being regularly followed, with the mandate of sec 36(l)(iii) being also satisfied, and toward which the assessee relies on the decision in the case of CIT vs Lokhandwala Construction Inds. Ltd(supra). The same also clarifies that the interest cost is to allowed u/s 36(l)(iii), irrespective of whether it stands incurred in relation to stock-in-trade or on capital account, as the said section draws no such distinction. The issue, though, we may clarify, is not as to whether the borrowed capital stands utilized toward trading operations or on capital account; the instant case being decidedly of the former, but whether the said cost, having been incurred, is to be capitalized as a part of the project cost and, thus, taken into account for the purpose of valuation of inventory (stock-in-trade) as at the year-end and, consequently, the determination of gross profit for the year. It is only the cost that is incurred and otherwise allowable, which, it may be appreciated, would stand to be considered thus, where it otherwise qualifies for being rekoned as a part of the cost of production/construction, and thus of the inventory or the project cost a sat the year-end. The deducibility of the said cost u/s 36(l)(iii) is thus neither in doubt nor in dispute, Further, it may also be in place to state that section 36(l)(iii) stands since amended by Finance Act, 2003 w.e.f, 01/04/2004, by way of insertion of a proviso thereto, so that any interest cost on capital account is to be necessarily capitalized. Accordingly, it is only the interest cost computing the business income qua the business of which the relevant asset is a or is to constitute a part (also refer Explanation 8 to s.43(l)). The said decision may, thus, Page | 12 ITA no. 1539 & 1594/Mum/2019 Lodha Developers Ltd; A.Y. 15-16 in the given facts and circumstances of the case as, well as the amended law, not be of much assistance."

Page | 13 ITA no. 1539 & 1594/Mum/2019 Lodha Developers Ltd; A.Y. 15-16 Thus, we order the Assessing Officer to accept the claim as made in the return of income. Accordingly, this part of the ground No. 1 is allowed in favour of the assessee"

The Hon'ble ITAT in the case of ITO vs Rohan states ITA number 7200/MUM/2010 held as under:

"3.2 With regard to the interest expenditure, though the Accounting Standard -2 (AS-2) on the valuation of inventories issued by the Institute of Chartered Accountant of India (ICAI) would suggest that the interest expenditure ought to be taken into account in the valuation of inventories where and to the extent there is a direct nexus, the said standard is not mandatory under the Act. In fact, even following AS-2 a direct nexus has to be established for the interest cost to form part of the cost of production or construction, as the case may be, and, thus, a part of the valuation of the unsold inventory or work-in- progress as at the year-end. This is as, to cite by way of an example from the civil construction itself, the work on a project may not be underway at all for the whole or a part of the year, or say as its optimum or normative level, on account of various business exigencies. The interest cost on the corresponding capital borrowed would nevertheless continue to be incurred, without any corresponding increase in the value of the inventory or the project. Similarly, a project, or part thereof, may be partly sold or even remain unsold for quite some time after its completion. While revenue would stand to be booked only on the part, if any, sold, the interest cost would continue to be incurred on the entire capital, even as no corresponding gain inures I terms of value addition to the project, which stands in fact completed, so as to increase its cost by loading the said cost thereon. It is for these reasons that interest (financing) cost is normally considered as only a period (fixed) cost, and charged to the operating statement for the year in which the same is incurred. As such, what in our view would prevail is the method of accounting being regularly followed by the assessee, i.e. on a year basis. The same also has the sanction of law inasmuch as sec. 145 clearly provides for determination of the business income on the basis of the method of accounting being regularly followed, with the mandate Page | 14 ITA no. 1539 & 1594/Mum/2019 Lodha Developers Ltd; A.Y. 15-16 of sec 36(l)(iii) being also satisfied, and toward which the assessee relies on the decision in the case of CIT vs Lokhandwala Construction Inds. Ltd(supra). The same also clarifies that the interest cost is to allowed u/s 36(l)(iii), irrespective of whether it stands incurred in relation to stock-in-trade or on capital account, as the said section draws no such distinction. The issue, though, we may clarify, is not as to whether the borrowed capital stands utilized toward trading operations or on capital account; the Instant case being decidedly of the former, but whether the said cost, having been incurred, is to be capitalized as a part of the project cost and, thus, taken into account for the purpose of valuation of inventory (stock-in- trade) as at the year-end and, consequently, the determination of gross profit for the year. It is only the cost that is incurred and otherwise allowable, which, it may be appreciated, would stand to be considered thus, where it otherwise qualifies for being rekoned as a part of the cost of production/construction, and thus of the inventory or the project cost a sat the year-end.