Interest towards Closing Stock is Capital Expenditure, Grants from Government is not Taxable: ITAT Delhi [Read Order]


In a recent ruling, the Delhi bench of Income Tax Appellate Tribunal allowed expenditure on interest pertaining to closing stock since it is ‘capital’ in nature.The Tribunal, further allowed another claim of the assessee, which is a statutory authority who received grants from the UP Government.

The Tribunal ruled that, being a statutory authority,the grants received by it is not taxable from its hand under the provisions of the Income Tax Act, 1961. It was observed that the assessee was maintaining infrastructure, development and reserve fund (IDAR) as per the Notification dated 15.1.1998.

The factual settings of the instant case are that, the assessee, an urban development authority formed by an Act passed by the Uttar Pradesh Legislature Assembly, engaged in urban development of Meerut and for providing low cost housing to general public.The assessee challenged the orders of the lower authorities on the following two grounds. Firstly,the claim towards the interest pertaining to closing stock was disallowed by the authorities by treating the same as capital expenditure. Secondly, grants received from the Government of Uttar Pradesh were treated as revenue receipt by the AO. On appeal, the CIT(A) confirmed the assessment order.

While allowing the expenditure on interest on closing stock, the Tribunal accepted the contention of the assesse and directed the AO to exclude the interest incurred on loans from the valuation of closing stock and allow the same as deduction u/s 36(1)(iii) of the Act.The Tribunal, while treating the same as revenue expenditure, relied upon the decision of Bombay High Court in the case of Lokhandwala Constructions.

Regarding the second question, i.e, the nature of the amount of grants received from Government, the Tribunal noticed the decision of the jurisdictional High Court in the case of Lucknow Development Authority, in which it was emphasized that “From the record, it also appears that the ‘authority’ had been maintaining infrastructure, development and reserve fund (IDAR) as per the Notification dated 15.1.1998. The money transferred to this fund is to be utilized for the purpose of the object as specified by the committee having constituted by the Government under the said Notification and the same could not be treated to be belonging to the ‘authority’ or the receipt is taxable in its hands.”

In the light of the above decision, it was held that the amounts received by the assessee from Government of UP cannot be taxed as income of the assessee.

Read the full text of the order below.