Interest Expenditure not to be Treated as Capital Expenditure: ITAT upholds Allowance [Read Order]

The Income Tax Appellate Tribunal (ITAT), Mumbai Bench, has recently, in an appeal filed before it, held that interest expenditure is not to be treated as capital expenditure and hence that the same is entitled for the claim of allowance.

The aforesaid observation was made by the Tribunal when appeals were preferred before it by the Revenue, as against the order of the Commissioner of Income Tax (Appeals), Mumbai, in three appeals against the order of assessment passed u/s.143(3) of the Income Tax Act, 1961 dated 29/03/2016, 30/03/2016 & 29/12/2017 by the Dy. Commissioner of Income Tax, Central Circle, Mumbai.

The facts of the case were that the assessment order in the case had been passed in the name of M/s Lodha Buildcon Private Limited u/s 143(3) of the Act dated 29.03.2016, whose name was changed to MMR Social Housing Private Limited with effect from 06.12.2018.

Subsequently the company got merged with Macrotech Developers Limited vide merger order dated 20.04.2022 passed by the National Company Law Tribunal (NCLT) Mumbai, with effect from 30.04.2022, having appointed date as 01.04.2021, following which the assessee had duly intimated the fact of the aforesaid merger vide letter dated 24.06.2022.

The assessee being a company engaged in the business of real estate construction and development, during the year under consideration, was engaged in developing residential project named as ‘Casa Royale’ at Thane, wherein the AO noticed that assessee had debited Rs 5,00,78,994/- on account of interest cost retained in Inventory which was claimed as revenue expenditure by the assesse.

However, the AO having observed that the assessee is developing one project only and that the accounting of the Construction activity has been done in accordance with Accounting Standard 7 (AS-7) as well as the Guidance Note on Accounting for Real Estate Transaction issued by the Institute of Chartered Accountants of India (ICAI), noted that as per the Guidance Note issued by ICAI, all the expenses directly related to the project have to be carried over and debited to the cost of project, and that Such expenses can be claimed as deduction in the year in which the corresponding income of the project is credited in the books of account and offered to tax.

Thus, noting that the assessee had allocated all other expenses to the work in progress except interest, the A.O disallowed the interest of Rs 5,00,78,994/- by capitalizing it to work in progress, against which relief was granted by the CIT(A) to the assessee by placing reliance on the decision of this tribunal in assessee’s own case in ITA No. 1310/Mum/2021 for Asst Year 2014-15 dated 08.04.2022.

And it is against this deletion of disallowance by the CIT(A) that the Revenue has preferred the instant appeal before the Tribunal.

The issue involved in the appeal being the question as to whether the CIT(A) can be justified in deleting the disallowance of interest expenses which in the opinion of the ld. AO is capital in nature with regard to the facts and circumstances of the case, hearing the opposing contentions of the assessee as presented by Shri Niraj Seth and that of the Revenue as presented by Shri Ratnakar Shelke, the Bench consisting of Kavitha Rajagopal ,the Judicial Member and M.Balaganesh , the Accountant Member, observed :

“We find that all the factors as is raised here, had been considered by this tribunal in assessee’s own case for Asst Year 2014-15 in ITA No. 1310/Mum/2021 dated 08.04.2022, apart from factually distinguishing the heavy reliance placed by the ld. DR on the decision of Special Bench in the case of Wall Street Construction.”

“We further find similar decision has been rendered by this tribunal in the a number of cases, out of which, majority cases are group entities of assessee and some are non-group entities of the assesse”, the Tribunal commented.

Thus, finally dismissing the Revenue’s appeal, it ruled:

“In view of the aforesaid observations and respectfully following the judicial precedents relied upon hereinabove, we do not find any infirmity in the order of the ld. CIT(A) granting relief to the assessee. Accordingly, the grounds raised by the revenue are dismissed for ITA No. 1891/Mum/2022”.

To Read the full text of the Order CLICK HERE

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