Keystone Realtors Pvt. Ltd. Vs DCIT (ITAT Mumbai)
ITAT Mumbai held that the interest paid on such borrowing is allowable under section 36(1)(iii) of the Income Tax Act as the funds were borrowed for the purpose of construction project.
Facts- During the year, the assessee incurred finance cost of Rs. 108,75,77,612 out of which Rs. 6,69,81,882 was allocated to those contracts of which construction has been completed and the balance interest of Rs. 102,05,95,730 was debited to the profit and loss account and not capitalised to work in progress (‘WIP’). During the course of assessment proceedings, the assessee was asked to show cause as to why the balance interest should not be disallowed as revenue expenditure and capitalised to the WIP.
AO further held that once the interest is attributable to the project, the same is to be allowed as business expenditure in the ratio of revenue offered from the project and WIP at the end of the year. Accordingly, the AO disallowed the interest of Rs. 102,05,95,730 as revenue expenditure and further increased the closing WIP.
The CIT(A), vide impugned order dismissed the appeal filed by the assessee. Being aggrieved, the present appeal is filed.
Conclusion- Hon’ble jurisdictional High Court in CIT vs Lokhandwala Constructions Inds. Ltd., (2003) 260 ITR 579 (Bom.), in case of a builder held that where the loan was obtained for the project of construction of flats, which is stock in trade, the assessee is entitled to deduction under section 36(1)(iii) of the Act in respect of interest expenditure on such loans. The Hon’ble Court further held that while adjudicating the claim of deduction under section 36(1)(iii) of the Act the nature of the expense, whether the expense was on capital account or revenue account was irrelevant, as the section itself says that interest paid by the assessee on capital borrowed is allowable as a deduction.
In the present case, since the funds were borrowed for the purpose of projects undertaken by the assessee, therefore, the interest paid on such borrowing is allowable under section 36(1)(iii) of the Act, in view of the aforesaid decision of Hon’ble jurisdictional High Court. Accordingly, the AO is directed to grant the deduction under section 36(1)(iii) of the Act in respect of the interest expenditure claimed by the assessee.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The present batch of 4 appeals has been filed by the assessee challenging the separate impugned orders passed under section 250 of the Income Tax Act, 1961 (‘the Act‘) by the learned Commissioner of Income Tax (Appeals)–48, Mumbai [‘learned CIT(A)’].
2. Since these appeals pertain to the same assessee and the issues involved are also, inter-alia, common, therefore, as a matter of convenience, these appeals were heard together and are being disposed off by way of this consolidated order. With the consent of the parties, the assessee’s appeal for the assessment year 2013–14 is taken up as a lead case.
ITA No. 3004/Mum./2019
Assessee’s appeal – A.Y. 2013–14
3. This appeal has been filed by the assessee challenging the impugned order dated 28/02/2019, passed by the learned CIT(A), for the assessment year 2013–14.
4. In this appeal, the assessee has raised the following grounds:
“1. On the facts and circumstances of the case and in 17,62 law, the Hon’ble CIT(A) has erred in confirming the order of learned assessing officer with regards to disallowance u/s. 14A of the Income Tax Act, 1961 of Rs. 54,33,62,192/- in relation to exempt income earned during the year under consideration. It is submitted that the disallowance made by the learned assessing officer is incorrect.
Without prejudice to the above, it is submitted that no amount of interest on secured loan should be taken into consideration while making disallowance u/s. 14A r.w.r. 8D of the Income Tax Rules, 1962 for the year under consideration. Further it is submitted that the net interest expenses of Rs. 79,31,65,273/-(Interest expenses of Rs. 94,67,75,590 /-(except interest on secured loan) minus interest income of Rs. 15,36,10,317/-) should only be considered for working of disallowance u/s. 14A r.w.r. 8D of the Income Tax Rules, 1962 for the year under consideration. It is therefore prayed that in any case, disallowance u/s. 14A r.w.r. 8D of the Income Tax Act, 1962 should be reworked taking into consideration the above figures.
2. On the facts and circumstances of the case and in law, the Hon’ble CIT(A) has erred in confirming the order of learned assessing officer with respect to disallowance of interest expenses of Rs. 1,02,05,95,730/- as not admissible to be claimed as expenses and added the same to the WIP of the Project. It is submitted that the appellant has already capitalized finance cost of Rs.6,69,81,882/- on the basis of project inflows, project outflows, cumulative fund utilization and hence the balance portion of the finance cost is debited to P&L account and not capitalized to P&L account.
Without Prejudice to the above it is submitted that the appellant company has offered the income on the basis of the percentage completion method during the year under consideration and therefore proportionate allowance of interest expenses should be allowed during the year under consideration. It is therefore prayed that necessary direction should be given in this regard.
3. On the facts and circumstances of the case and in law, the Hon’ble CIT(A) has erred in confirming the order of learned assessing officer with respect to disallowance of commission expenses of Rs.97,30,774/- as not admissible to be claimed as expenses and added the same to the WIP of the Project.
4. On the facts and circumstances of the case and in law, the Hon’ble CIT(A) has erred in confirming the order of learned assessing officer with respect to disallowing interest on delayed expenses of Rs.48,53,314/- out of the total disallowance Rs.54,54,550/- as not admissible to be claimed as expenses u/s. 37 of the Income Tax Act, 1961.
5. Your appellant craves to add, alter, or amend any of the grounds of appeal on or before the date of hearing of appeal.”
5. The brief facts of the case are: The assessee is engaged in the business of construction and development of real estate. For the year under consideration, the assessee filed its return of income on 30/09/2013, declaring a total loss of Rs. 1,37,32,91,478. The return of income filed by the assessee was selected for scrutiny and notices under sections 143(2) and 142(1) along with questionnaire were issued. The Assessing Officer (‘AO‟) vide assessment order dated 30/03/2016, passed under section 143(3) of the Act computed the total income of the assessee at Rs. 20,62,41,284, after making certain disallowances/additions. In further appeal, learned CIT(A) vide impugned order dismissed the appeal filed by the assessee. Being aggrieved, the assessee is in appeal before us.
6. The issue arising in ground No. 1, raised in assessee’s appeal, is pertaining to disallowance under section 14A r/w Rule 8D of the Income Tax Rules, 1962.
7. The brief facts of the case pertaining to this issue are: During the course of assessment proceedings, the assessee was asked to show cause why the disallowance under section 14A of the Act be not made. In response, assessee submitted that it has already disallowed Rs. 7,49,654, under section 14A for the year under consideration. However, in absence of any details of the expenses disallowed by the assessee under section 14A of the Act and the basis of computing the above disallowance, the AO vide order passed under section 143(3) of the Act made the disallowance of Rs. 54,33,62,192, under section 14A r/w Rule 8D. The learned CIT(A) vide impugned order dismissed the appeal filed by the assessee on this issue. Being aggrieved, the assessee is in appeal before us.
8. During the hearing, the learned Authorised Representative („learned AR’) submitted that during the year no dividend income was earned by the assessee.
9. On the other hand, the learned Departmental Representative („learned DR’) vehemently relying upon the orders passed by the lower authorities submitted that the assessee has suo moto made disallowance under section 14A of the Act and it indicates that the assessee believes that some expenditure is attributable to the income which does not form part of the total income. The learned DR also submitted that in view of amendment by the Finance Act, 2022, section 14A is applicable even if no dividend income has accrued in the year under consideration.
10. We have considered the rival submissions and perused the material available on record. From the financial statement of the assessee, forming part of the paper book from pages 41 to 66, it is evident that no dividend income was earned by the assessee during the year under consideration. The aforesaid fact has also not been disputed by the Revenue. However, the Revenue has placed reliance upon the recent amendment vide Finance Act, 2022, whereby non-obstante clause and explanation have been inserted in section 14A of the Act to the effect that section shall apply even if no exempt income has accrued or arisen or has been received during the year. We find that while dealing with the issue of whether the aforesaid amendment by the Finance Act, 2022 is prospective or retrospective in operation, Hon’ble Delhi High Court in PCIT vs M/s Era infrastructure (India) Ltd, [2022] 288 Taxman 384 (Delhi) held that the amendment by Finance Act, 2022 in section 14A is prospective and will apply in relation to the assessment year 2022–23 and subsequent assessment years. Thus, in view of the aforesaid decision of Hon’ble Delhi High Court, we find no merits in the submission of learned DR.
11. We further find that the Hon’ble Delhi High Court in Cheminvest Ltd. v. CIT: [2015] 378 ITR 33 (Delhi) held that section 14A will not apply if no exempt income is received or receivable during the relevant previous year. Therefore, respectfully following the aforesaid decision, the AO is directed to delete the disallowance made under section 14A read with Rule 8D. As a result, ground No. 1 raised in assessee’s appeal is allowed.
12. The issue arising in ground No. 2, raised in assessee’s appeal, is pertaining to the disallowance of interest expenses.
13. The brief facts of the case pertaining to this issue are: During the year, the assessee incurred finance cost of Rs. 108,75,77,612 out of which Rs. 6,69,81,882 was allocated to those contracts of which construction has been completed and the balance interest of Rs. 102,05,95,730 was debited to the profit and loss account and not capitalised to work in progress (‘WIP’). During the course of assessment proceedings, the assessee was asked to show cause as to why the balance interest should not be disallowed as revenue expenditure and capitalised to the WIP. In response, the assessee submitted that it has followed the accounting policy for recognition and capitalisation of borrowing cost which is as per the Accounting Standards (‘AS’) 16. Therefore, the said interest expenses are not transferred to WIP and debited to the profit and loss account. The AO vide order passed under section 143(3) of the Act did not agree with the submissions of the assessee and held that there is a direct nexus between the borrowed fund and the projects undertaken and therefore the interest of the respective project fund can be attributed to the respective project on actual basis and the same should not be claimed as an expenditure. The AO further held that once the interest is attributable to the project, the same is to be allowed as business expenditure in the ratio of revenue offered from the project and WIP at the end of the year. Accordingly, the AO disallowed the interest of Rs. 102,05,95,730 as revenue expenditure and further increased the closing WIP.
14. The CIT(A), vide impugned order dismissed the appeal filed by the assessee on this issue by observing as under:
“The details filed by assessee only shows that how much interest expenses are on various types of funds raised – how much interest is on secured loans and how much on unsecured loans and how much are on debentures and others. But assessee has shied away and failed to give details as to where and how these funds (raised through secured / unsecured loans and through debentures etc.) are deployed. Which fund is related to which project and within a project, no bifurcations of application of funds as capital and Revenue is provided…. ”
Being aggrieved, the assessee is in appeal before us.
15. During the hearing, learned AR submitted that the assessee has followed the method of accounting as per AS 16 and capitalised the direct cost as WIP as it takes longer for the project to get complete. Further, the remaining cost was claimed as an expenditure.
16. On the other hand, learned DR vehemently relied upon the orders passed by the lower authorities.
17. We have considered the rival submissions and perused the material available on record. In the present case, insofar as the borrowing cost which was directly allocated to the project was capitalised and the balance cost which was not directly attributable to the project was debited by the assessee to the profit and loss account as revenue expenses. The AO disallowed the expenditure on the basis that interest expenditure has a direct nexus with the project undertaken and therefore same is to be allowed as business expenditure in the ratio of revenue offered from the project. The AO, however, admitted that finance cost as debited by the assessee is on borrowed funds, which are sanctioned on the basis of specific projects. However, as noted above, the learned CIT(A) dismissed the appeal filed by the assessee on this issue in absence of the details of the projects to which these funds were applied. Thus, the borrowing of funds for the purpose of business has not been doubted by any of the lower authorities. The assessee has now produced before us the details of parties from whom the loan was availed and projects as well as the purpose for which the loan was utilized.
18. In this regard, it is relevant to note that the Hon’ble jurisdictional High Court in CIT vs Lokhandwala Constructions Inds. Ltd., (2003) 260 ITR 579 (Bom.), in case of a builder held that where the loan was obtained for the project of construction of flats, which is stock in trade, the assessee is entitled to deduction under section 36(1)(iii) of the Act in respect of interest expenditure on such loans. The Hon’ble Court further held that while adjudicating the claim of deduction under section 36(1)(iii) of the Act the nature of the expense, whether the expense was on capital account or revenue account was irrelevant, as the section itself says that interest paid by the assessee on capital borrowed is allowable as a deduction.
19. In the present case, undisputedly funds were borrowed for the purpose of the projects undertaken by the assessee, and only based on accounting treatment, the claim of the assessee was denied. It is pertinent to note that the allowability of any deduction is to be decided based on the provisions of the Act. In the present case, since the funds were borrowed for the purpose of projects undertaken by the assessee, therefore, the interest paid on such borrowing is allowable under section 36(1)(iii) of the Act, in view of the aforesaid decision of Hon’ble jurisdictional High Court. Accordingly, the AO is directed to grant the deduction under section 36(1)(iii) of the Act in respect of the interest expenditure claimed by the assessee. As a result, ground No. 2 raised in assessee’s appeal is allowed.
20. The issue arising in ground No. 3, raised in assessee’s appeal, is pertaining to the disallowance of commission expenses.
21. The brief facts of the case pertaining to this issue are: During the year, assessee has debited commission and brokerage expenses of Rs. 1,31,46,860 to the profit and loss account. Following the matching principle, the assessee was issued show cause notice to explain why the commission and brokerage expenses in proportionate to cost of sales be not disallowed as revenue expenditure and capitalized in WIP. In reply, the assessee submitted that commission paid to brokers which is the selling and marketing expenses are not related to the single project directly. The assessee further submitted that commission expenses do not add value to or increase the cost of production and therefore the same cannot be added to the WIP. The AO vide order passed under section 143(3) of the Act did not agree with the submissions of the assessee and held that selling costs incurred in the business are based on the specific project and these are never in the nature of general advertisement/marketing. The AO further held that since the commission expenses are directly attributable to the projects, the same shall be debited to the cost of construction and is to be allowed in the proportion to revenue recognised from the project. Accordingly, the AO disallowed the amount of Rs. 97,30,774 under section 37 of the Act and added the same to the total income of the assessee. The learned CIT(A) vide impugned order dismissed the appeal filed by the assessee on this issue. Being aggrieved, the assessee is in appeal before us.
22. During the hearing, learned AR submitted that commission expenses are selling and marketing expenses and are incurred by the company irrespective of whether a project is implemented or not. It was further submitted that these costs are incurred by the assessee under all circumstances during the entire tenure of carrying on business operations and these costs are not associated with any particular project. In support of its submission, learned AR placed reliance upon the decision of the coordinate bench of the Tribunal in DCIT vs Rustomjee Evershine joint-venture private Ltd, ITA No. 5613/Mum/2014.
23. On the other hand, learned DR vehemently relied upon the orders passed by the lower authorities.
24. We have considered the rival submissions and perused the material available on record. The assessee claims that the commission expenses incurred by the assessee are not in respect of any particular project and these expenses are required to be incurred under all circumstances while carrying on the business. Further, as per AS 7 para 19 selling costs cannot be attributed to contract activity and the same cannot be allocated to the contract and therefore are to be excluded from the cost of the construction contract. We find that para 20 of AS 7 reads as under:
“20. Contract costs include the costs attributable to a contract for the period from the date of securing the contract to the final completion of the contract. However, costs that relate directly to a contract and which are incurred in securing the contract are also included as part of the contract costs if they can be separately identified and measured reliably and it is probable that the contract will be obtained. When costs incurred in securing a contract are recognised as an expense in the period in which they are incurred, they are not included in contract costs when the contract is obtained in a subsequent period.”
25. Thus, as per para 20 of AS 7 if the cost which is directly related to the contract and is incurred for securing the contract is also included as part of the contract cost if they can be separately identified and measured reliably and there is a possibility that the contract will be obtained. From the perusal of pages 67 – 68 of the paper book, we find that assessee has provided the details of commission and brokerage expenses, which were paid to various brokers in respect of flats in its various projects. The said details were further confirmed vide written submission filed by the learned AR. Thus it is evident that in the present case the commission expense has been identified by the assessee not only in respect of each project undertaken by it but also in respect of each flat for which such commission expenses were incurred. Insofar as the decision of the coordinate bench of the Tribunal in Rustomjee Evershine Joint-Venture Private Ltd (supra), we find that in para 7 the coordinate bench after perusal of AS-7 noted that general administrative costs and selling costs are not considered as part of the contract cost unless they are contract specific. Since in the present case the commission expense incurred by the assessee is separately identifiable therefore we are of the considered view that commission expenditure should be allowed proportionally to the revenue offered. Thus we find no infirmity in the impugned order passed on this issue. As a result, ground No. 3 raised in assessee’s appeal is dismissed.
26. The issue arising in ground No. 4, raised in assessee’s appeal, is pertaining to the disallowance of interest amounting to Rs. 48,53,314.
27. The assessee vide application dated 13/08/2022 has also raised the following additional ground:
“Additional Ground No. 1- On the facts and in the circumstances of the case and in law, the Ld. AO has erred in not allowing the Interest on late payment of TDS of Rs. 6,01,236 debited to profit and loss account”
28. As the issue raised by the assessee, by way of additional ground of appeal, is a legal issue that can be decided based on material available on record, we are of the view that the same can be admitted for consideration and adjudication in view of the ratio laid down by the Hon’ble Supreme Court in NTPC Ltd v/s CIT: 229 ITR 383.
29. The brief facts of the case pertaining to aforesaid two grounds are: During the year under consideration, assessee debited Rs. 89,54,967 towards interest on delayed payments of TDS, VAT, WCT, etc. The assessee was asked to justify the claim of these expenditures under provisions of section 37 of the Act. The assessee, in response, submitted the following breakup of interest of Rs. 89,54,967:
