Penal Interest due to delay in Payment of Lease amount: ITAT directs to Capitalize under Project Expenses [Read Order]

The Income Tax Appellate Tribunal (ITAT), New Delhi Bench directed to capitalize under project expenses as there was Penal Interest due to delay in payment of lease amount.

The assessee company, M/s. Logix Buildtech Private Limited is engaged in the activities of real estate business. A survey operation u/s 133A was conducted by investigation wing, Gurgaon on 29.05.2014. The case of assessee was taken up for limited scrutiny.

The company submitted that the year under consideration, no construction has been started and the all the expenses have been booked under work in progress, being capitalized. Assessee has shown lease rent Rs. 4,11,31,849/- and interest to Noida Authority Rs. 31,94,27,498/-. When details of interest paid by the assessee where inquired u/s 133(6) from Noida Authority it was found that normal interest at 11%, Rs. 9,71,44,878/- had become due and Rs. 2,78,01,838/- at 3% per month being penal interest was payable.

Accordingly, a notice u/s 142(1) of the Income Tax Act was issued to the assessee to show cause why penal interest may not be disallowed. The AO observed that assessee had made only book entries though no actual payment of interest has been made. Further, AO observed that only Rs. 17,45,55,175/- interest expense for the year under consideration has accrued and as assessee was maintaining accounts on mercantile basis, expenses were not admissible. Further, Rs. 2,78,01,838/- was a penal interest, so the AO disallowed the same.

The CIT(A) observed that the interest although penal in nature is not out of any offence or any prohibition under law but relates to delay in payment of lease amount. Also interest has been capitalized as work in progress, therefore, deleted the disallowances and directed the same to be capitalized under the project expenses.

A Division Bench consisting of N K Billaiya, Accountant Member and Anubhav Sharma, Judicial Member observed that “The CIT(A) was correct in observations that this interest is not payable on account of any offences or any prohibition in law or any infraction of law but relates to delay in payment of the lease amount as per the agreement.”

To Read the full text of the Order CLICK HERE

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates