The Kolkata Bench of the Income Tax Appellate Tribunal (ITAT) has held that the AO is not justified in disallowing the claim of interest expense and treating it for capitalization in the project cost.
The two-member bench of Rajpal Yadav (Vice President) and Girish Aggarwal (Accountant Member) has directed the AO to allow the claim of interest expenses of Rs.41,06,890.
The appellant/assessee is in the business of developing property. It filed its return, reporting a total income. During the course of assessment, the AO, inter alia, noted that the assessee had claimed a deduction in respect of interest on borrowed funds, out of which a sum of Rs. 2,50,880 was disallowed under section 14A of the Income Tax Act. The balance of Rs.41,06,890 was considered to be in respect of the "Sunny Fort" construction project undertaken by the assessee at Rajarhat, New Town, Kolkata, which, according to AO, had to be capitalized with the cost of the project.
The AO noted that the unsecured loans taken by the assessee were used towards the capital work in progress. Therefore, the interest could not be allowed as an expense and had to be capitalized with the cost of the project. The AO also noted that the assessee had earned an interest income of Rs.89,73,695 duly reported in the audited P&L Account from Williamson Services Ltd. against the Inter-corporate Deposit (ICD) advance to the company. The AO held the interest income as income from other sources. Thus, they completed the assessment at the assessed income.
The assessee went to appeal before the CIT(A), who, despite detailed submissions made by the assessee, confirmed the addition/disallowance made by the AO. Aggrieved, the assessee is on appeal before this Tribunal.
The appellant submitted that AO had wrongly re-characterized the interest income as income from other sources and disallowed the interest expenses towards capitalization of WIP in respect of construction projects at Rajarhat, New Town.
The appellant referred to the comparative chart of interest received/paid and other expenses to demonstrate that it has consistently reported its income from interest and claim of interest expenses as business income for which the returns have been filed accordingly and processed.
The department contended that since the project is within the development phase, the interest expense ought to be capitalized in the project cost, which has been rightly disallowed by the AO and upheld by CIT(A).
The CESTAT held that the assessee has consistently reported it's earning of interest income from ICDs as business income, which has been accepted by the department.
The tribunal noted that interest expenses claimed by the assessee are in respect of funds that were not deployed on the development project but were otherwise available to the assessee in its financing activities.
"We find that AO is not justified in disallowing the claim of interest expense and treating it for capitalization in the project cost. Accordingly, we direct the Ld. AO to allow the claim of interest expenses of Rs.41,06,890," the ITAT said.
Case Title: Sunny Rock Estates & Developers Pvt. Ltd. Versus Deputy Commissioner of Income-tax
Citation: ITA No.23/Kol/2022
Counsel For Appellant: Advocate Soumitra Choudhury
Counsel For Respondent: Sr. DR Biswanath Das