Manoj Kumar Aggarwal ORDER
Manoj Kumar Aggarwal, Member (A)
1. Aforesaid appeal by Revenue for Assessment Year (AY) 2016-17 arises out of the order of learned Commissioner of Income Tax (Appeals)-1, Chennai [CIT(A)] dated 05-08-2020 in the matter of an assessment framed by Ld. Assessing Officer [AO] u/s.143(3) of the Act on 24-12-2018. The revenue has filed concise grounds of appeal which read as under:
1. The order of the CIT(A) is contrary to law, facts and circumstances of the case.
2. Whether the Id. CIT(A) had erred in deleting the addition made u/s. 36(1)(iii) by holding that the land is stock-in-trade, overlooking the rationale of the various case laws relied upon by the assessing officer which were discussed in the assessment order and especially in the wake of recent decision of jurisdictional high court in the case of M/s. Mahindra World City Developers Ltd. V. Assistant Commissioner of Income Tax, Company Circle IV(1), Chennai (TCA Nos. 245, 247 & 248 of 2019), where it has been held that- "Mere purchase of the land out of the borrowed capital does not entitle the assessee to claim such interest paid on borrowed capital as a deductible expenditure.
3. Whether the Id. CIT(A) has erred in relying on the Hon'ble Bombay High Court decision in the case of M/s. Jayantilal Investments v. Assistant Commissioner of Income-tax (IT Appeal No. 519 of 2003) where the assessment year involved was for AY 1988-89 i.e., prior to amendment by addition of proviso to Section 36(1)(iii) of the Act which is in effect from 01.04.2004 and since is not applicable in this present case of assessee.
2. The Registry has noted delay of 02 days in the appeal, the condonation of which has been sought by Ld. Sr. DR. Considering the period of delay, we condone the delay and admit the appeal for adjudication on merits.
3. The Ld. Sr. DR assailed the findings of Ld. CIT(A) in the impugned order and filed written submissions. Reliance has been placed on the decision of jurisdictional High Court in the case of Mahindra World City Developers Ltd. vs. ACIT MANU/TN/2122/2019 : (107 Taxmann.com 16; 22.04.2019). The Ld. Sr. DR submitted that as per proviso to Sec. 36(1)(iii) as introduced w.e.f. 01.04.2004, the amount of interest paid, in respect of capital borrowed for acquisition of any asset 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.
On the contrary, Ld. AR submitted that the disallowance would not be justified as held by jurisdictional High Court in the case of CIT vs. Ceebros Hotels (P.) Ltd. (MANU/TN/7432/2021 : 131 Taxmann.com 181; 05.10.2021). The copies of the decisions upon have been placed on record. Having heard rival submissions, our adjudication would be as under.
Assessment Proceedings
4.1. The assessee being resident corporate assessee is stated to be engaged in civil construction. The assessee held land of Rs. 853.52 Lacs and classified the same as 'current asset'. The assessee paid interest of Rs. 944.55 Lacs which led Ld. AO to compute disallowance u/s. 36(1)(iii). The Ld. AO held that the assessee did not capitalize any interest on such loans in respect of land classified as 'current asset'.
4.2. Upon perusal of details, it transpired that the variety of land was purchased during financial year 2012-13. Few parcels of land were sold as such whereas few parcels of land were kept for future development of residential projects. The residential construction was in progress in one of the land parcels. The assessee submitted that it was engaged in the business/infrastructure construction and construction of flats. Buying of land and sale thereof was part of its business activity.
4.3. The ld. AO alleged that the assessee has neither furnished any evidence to prove whether non-interest-bearing funds were available at the time of investment in the said land nor explained why proportionate interest was not capitalized. The Ld. AO also observed that to claim deduction u/s. 36(1)(iii), the capital must be borrowed for business purposes. The Accounting Standard-7 (AS-7) makes it clear that if finance costs are specifically attributable to a particular contract, the same has to be included as part of accumulated contract costs. Further AS-16 mandate that borrowing costs that are directly attributable to the acquisition, construction etc. of a qualifying asset should be capitalized as part of the cost of the asset. Finally, Ld. AO computed proportionate disallowance u/s. 36(1)(iii) for Rs. 151.89 Lacs and added the same to the income of the assessee.
Appellate Proceedings
5. The assessee submitted that as per applicable Accounting Standard, interest is a period cost and shall be allowed as deduction whenever it is incurred. Further, the interest is to be capitalized only in case of 'fixed asset' and not with respect to 'current asset', The assessee submitted that the land form part of stock-in-trade and therefore, any cost incurred in respect thereto would be revenue expenditure. The decision of Hon'ble Bombay High Court in the case of Jayantilal Investments vs. ACIT (MANU/MH/2554/2018 : 96 Taxmann.com 38) was referred to support the same. Concurring with assessee's submissions, Ld. CIT(A) allowed the issue in assessee's favor. Aggrieved, the revenue is in further appeal before us.
Our findings and Adjudication
6. From the fact it emerges that the assessee is engaged in civil construction. As part of its business activities, it held various land parcels. The land parcels are held as part of 'current asset' and constitute stock-in-trade for the assessee. Few land parcels have been sold as such whereas few land parcels have been retained for future development of residential projects. In few parcels, the residential construction was in progress. It could be seen that the assessee is engaged in the business of civil construction. All these land parcels would constitute stock-in-trade for the assessee. Undisputedly, the stock-in-trade are to be valued on conservative basis on lower of cost or market value. The interest costs are not to be capitalized along with stock-in-trade. This being so, the interest cost so paid by the assessee towards stock-in-trade would be revenue expenditure for the assessee. This situation would be akin to a situation wherein the assessee has borrowed working capital loans to procure stock and paid interest on such loans. In such a case, the interest costs are not to be capitalized with stock-in-trade but interest payment would become part of trading operations for the assessee and the same are allowable as revenue expenditure. The proviso to Sec. 36(1)(iii) as introduced w.e.f. 01.04.2004 would apply only in situation wherein the capital has been borrowed for acquisition of fixed assets and not otherwise. Therefore, the case law of Hon'ble Bombay High Court in Jayantilal Investments vs. ACIT (MANU/MH/2554/2018 : 96 Taxmann.com 38) would apply and the proviso would have no bearing on the issue.
7. The case law of Hon'ble High Court of Madras in CIT V/s. Ceebros Hotels (P.) Ltd. (MANU/TN/7432/2021 : 131 Taxmann.com 181) would also apply which has been rendered on identical factual matrix. The Hon'ble Court, inter-alia, confirmed the stand of Tribunal that the term 'put to use' in the proviso to Sec. 36(1)(iii) would apply to capital assets/income earning apparatus facilitating the business activity and therefore, the statute envisages the importance of such capital asset should be put to use in the business in contradistinction to the inventory of the assessee. The decision of Bangalore Tribunal in DCIT vs. Cornerstone Property Investment (P) Ltd. (MANU/IL/0275/2020 : 118 Taxmann.com 541) also support the view that interest paid on borrowed funds for acquisition of land which was an inventory would be allowable u/s. 36(1)(iii).
8. The decision of Hon'ble High Court of Madras in the case of Mahindra World City Developers Ltd. V/s. ACIT (MANU/TN/2122/2019 : 107 Taxmann.com 16), as referred to by Ld. Sr. DR, is a case wherein proviso to Sec. 36(1)(iii) has been found to be applicable and this case laws deals with interest on capital borrowed to acquire capital assets. Therefore, this case law does not apply to the facts of case before us.
9. Finally, considering the facts and circumstances of the case, the findings rendered in the impugned order could not be faulted with.
10. The appeal stand dismissed.
Order pronounced on 30th November, 2022.
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