Interest Paid is allowable u/s 36(1)(iii) of Income Tax Act When Funds are Borrowed for Construction Project: ITAT [Read Order]

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The Income Tax Appellate Tribunal( ITAT ), Mumbai Bench consisting of Prashant Maharshi, Accountant Member and Sandeep Singh Karhail, Judicial Member ruled that interest paid is allowable under Section 36(1)(iii) of the Income Tax Act when funds are borrowed for construction project.

The assessee, Keystone Realtors PvtLtd is engaged in the business of construction and development of real estate.During the year, the assessee incurred finance cost of Rs. 108 crores out of which Rs. 6 crores was allocated to those contracts of which construction has been completed and the balance interest of Rs. 102 crores 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 interest expenses are not transferred to WIP and debited to the profit and loss account. The AO passed an order under section 143(3) of the Income Tax Act 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.

Accordingly, the AO disallowed the interest of Rs. 102 crores as revenue expenditure and further increased the closing WIP. The CIT(A) also dismissed the appeal filed by the assessee.

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 Income Tax Act.

A Division Bench observed that “In the present case, since the funds were borrowed for the purpose ofprojects undertaken by the assessee, therefore, the interest paid on such borrowing is allowable under section 36(1)(iii) of the Income Tax Act. Accordingly, the AO is directed to grant the deduction under section 36(1)(iii) of the Income Tax Act in respect of the interest expenditure claimed by the assessee.”

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