LODHA DEVELOPERS LTD.(SUCCESSOR TO PALAVA DWELLERS PVT. LTD.), MUMBAI V. DCIT, CC- 7(3), MUMBAI

ITA 1539/MUM/2019

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 0928 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 5 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-08-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2015-2016
• Appeal Filed On: 13-03-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Business income; Depreciation; Earning of tax free income; Revenue expenditure; Capital expenditure; Rule 8D
• Section: 14A; 36 (1) (iii); 43; 13; 22; 20

Judgement Text

Page | 1 ITA no. 1539 & 1594/Mum/2019 Lodha Developers Ltd; A.Y. 15–16 IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH, MUMBAI BEFORE SHRI AMIT SHUKLA, JM AND SHRI PRASHANT MAHARISHI, AM ITA No. 1539 & 1594/Mum/2019 (Assessment Year 2015–16) The Dy. Commissioner of Income Tax, CC–7(3) R. no.655, 6 th floor, Aayakar Bhavan MK road, Mumbai-400 020 Vs. Lodha Developers Ltd. (successor to Palava Dwellers Pvt. Ltd) 412 17–G, Vardhman Chambers Cawasji Patel Road Horniman Circle Fort, Mumbai-400 001 (Appellant) (Respondent) PAN No. AABCL1117D Assessee by : Mr. Niraj Seth, AR Revenue by : Mr. Praveen Shekhar, DR Date of hearing: 03.08.2022 Date of pronouncement : 30.08.2022 O R D E R PER PRASHANT MAHARISHI, AM: 01. ITA number 1594/M/2019 filed by the Deputy Commissioner of income tax Co Circle – 7 (3), Mumbai (the learned AO) and ITA number 1539/M/2019 filed by assessee are the cross appeals against appellate order passed by the Commissioner of income tax (appeals) – Page | 2 ITA no. 1539 & 1594/Mum/2019 Lodha Developers Ltd; A.Y. 15–16 49, Mumbai dated 19/12/2018 for assessment year 2015 – 16. 02. In Assessee’s appeal in ITA no. 1539/mum/2019 following grounds are raised :- “1. On the facts and circumstances of the case as well as in law, the Learned CIT(A) has erred in confirming the action of the Learned Assessing Officer in not considering expenditure of Rs.2,69,83,497/- towards software as a revenue expense but capitalizing the same under fixed assets and allowing depreciation. 2. On the facts and circumstances of the case as well as in law, the Learned CIT(A) has erred in confirming the action of the Learned Assessing Officer to the extent of limiting the deduction u/s 80GGB to Rs 11,00,00,000 against Rs 11,65,34,000 claimed by the Appellant in respect of donation given to political parties on the ground that the receipts are not available without appreciating the fact that bank statement discloses such contribution to the political party.” 03. In appeal of ld AO following Grounds in ITA no. 1594/mum/2019 are raised :- “1. "Whether on the fact and circumstances of the case and in law, the Ld. CIT(A) was correct while deleting the addition of Rs. 2,24,11,60,000/- made by the Assessing officer u/s 36(1)(iii) and capitalized the same to inventory. Page | 3 ITA no. 1539 & 1594/Mum/2019 Lodha Developers Ltd; A.Y. 15–16 2. "Whether on the fact and circumstances of the case and in law, the Ld. CIT(A) was correct while deleting the addition of Rs.2,24,11,60,000/- relied upon the decision of the judgment of the jurisdictional High Court in the case of Lokhandwala Construction Inds Ltd 260 ITR 579 the same were rendered before the proviso to section 36(1)(iii) has been inserted vide Finance Act 2003. 3. "On the facts and circumstances of the case and in law, the Ld. CIT(A) was correct while deleting the addition of Rs. 1,55,33,306/- that no exempt income was earned during the year, thereby ignoring the CBDT Circular no. 5 of 2014 dated 11.02.2014 wherein it is specifically stated that provision of section 14A of the Act are attracted even to cases where no exempt income has been earned during the year." 04. Assessee Company is engaged in the business of real estate construction and development. During the year, the assessee is developing a project named Palawa in Dombiwali. Assessee filed its return of income on 31/3/2016 declaring a total income of ₹ 792,840,922/–. The return was picked up for scrutiny. i. During the year under consideration, the assessee is developing the residential project and debited as interest of ₹ 2,241,160,000/– on account of interest cost shown in inventory as revenue expenditure. Assessee claimed the same as revenue expenditure. Assessee submits that interest expenses has been claimed as a deduction Page | 4 ITA no. 1539 & 1594/Mum/2019 Lodha Developers Ltd; A.Y. 15–16 in the year of incurrence of the expenditure for the reason that interest is a periodic cost and therefore is allowable as deduction in the year for which it belongs to and the year in which it is incurred. Therefore the claim of assessee is supported by Section 36 (1) (iii) of the act being interest pertaining to stock in trade. The learned assessing officer did not agree with the contention of the assessee. He held that assessee is developing one project and accounting of the construction activity is governed by accounting standard 7 as well as guidance note on accounting for real estate transaction issued by ICAI. According to that all the expenses directly related to the project held to be carried over, debited to the cost of project, and can be claimed as a deduction in the year in which the corresponding income of the project is shown in the books of account and offered for taxation. Therefore, according to the learned AO interest expenditure held to be carried over in the work in progress and shall be allowable as deduction in the year in which the revenue pertaining to sale interest shall be offered for taxation. He also rejected the reliance on the decision of honourable Bombay High Court in case of CIT versus Lokhandwala construction industries Ltd 260 ITR 579. The learned AO supported his view by the decision of special bench in Wall Street constructions limited 102 TTJ 505. Accordingly he disallowed the interest cost of ₹ 2,241,160,000/–. Page | 5 ITA no. 1539 & 1594/Mum/2019 Lodha Developers Ltd; A.Y. 15–16 ii. The AO further found that assessee has incurred cost of 3,59,77,997/– on account of ERP expenses. AO noted that the same has enduring potential and can be treated as a capital expenditure. Assessee submitted copies of the bills for examination and stated that this is revenue expenditure. The learned AO rejected the contention of the assessee and held that the same expenditure is capital expenditure and depreciation at the rate of 25% is allowable. Therefore on the total expenditure of ₹ 35,977,997/– was considered as a capital expenditure and consequently depreciation thereon at the rate of 25% of ₹ 8,994,500/– was allowed on net disallowance of ₹ 26,983,497/– was made. iii. During the year the assessee has made up donation to political parties amounting to ₹ 116,534,000/– and claimed deduction at the rate of hundred percent u/s 80 GGB of the act. The assessee could produce only the receipt of ₹ 10 crores and therefore the learned that the assessing Officer disallowed the balance sum of Rs 1 65,34,000/-. iv. The assessee has also claimed deduction u/s 80 IB (10) of Rs.164,50,370/– the learned AO asked the assessee to prove the due compliance for claiming the above deduction however assessee could not substantiate and therefore the deduction was disallowed. v. Learned AO noted from the balance sheet that assessee has investment of ₹ 47.65 lakhs at the beginning of the year and ₹ 1192 lakhs at the end Page | 6 ITA no. 1539 & 1594/Mum/2019 Lodha Developers Ltd; A.Y. 15–16 of the year, which could have resulted in exempt income, and no disallowance has been made by the assessee. Accordingly, he computed the disallowance under rule 8D of ₹ 15,553,306/– u/s 14 A. 05. Accordingly the assessment order u/s 143 (3) of the act was passed on 29/12/2017 at the total income of ₹ 310,95,22,095/–. 06. Assessee aggrieved with the order of the learned assessing officer preferred an appeal before the learned CIT – A. He passed an order on 19/12/2018 deciding the above issues as Under:- i. interest disallowance of ₹ 2,241,160,000 was deleted holding that the borrowed funds have been utilized for stock in trade which is not a capital asset following the decision of the honourable Bombay High Court in case of local and constructions industries Ltd wherein the special leave petition filed by the revenue against that decision has been rejected by the honourable Supreme Court. He further relied upon the decision of the coordinate bench in case of Ashish builders private limited versus ACIT ITA number 310/M/2012, ITO versus Rohan Estates in ITA number 7200/M/2010 and Kolte Patil developers Ltd. He also held that the decision of the Wall Street construction does not apply to the facts of the case for the reason that assessee is following percentage completion method and not project completion method. He was also of the view that Page | 7 ITA no. 1539 & 1594/Mum/2019 Lodha Developers Ltd; A.Y. 15–16 this issue also arose in case of income tax settlement commission wherein the explanation of the assessee about allowability of interest expenditure has been accepted. ii. He upheld the findings of the learned assessing officer with respect to the software expenditure as capital expenditure despite assessee showing that the expenditure has been incurred towards licenses or upgrading the annual maintenance contract. He accepted the alternative plea of the assessee to allow depreciation at the rate of 60%. iii. With respect to deduction Under Section 80 GGB of the act of ₹ 16,534,000/– he found that assessee has submitted the receipt of Rs 1 crore paid to Maharashtra Pradesh Rashtrawadi Party and therefore he deleted the addition to the extent of that sum and confirmed the disallowance of ₹ 6,534,000/-. iv. The assessee did not press grounds with respect to deduction u/s 80 IB and hence it was dismissed. v. With respect to the disallowance u/s 14 A of the act he directed the learned AO to delete the above disallowance on the ground that during the year there is no exempt income. 07. Both the parties are aggrieved with the order of the learned CIT – A and therefore are in cross appeal before us. Page | 8 ITA no. 1539 & 1594/Mum/2019 Lodha Developers Ltd; A.Y. 15–16 08. Coming to the appeal of the learned assessing officer where ground number 1 and 2 are raised with respect to the disallowance of ₹ 2,241,160,000/– on account of interest expenditure deleted by the learned CIT – A. 09. The learned departmental representative vehemently supported the order of the learned assessing officer and submitted that as the assessee is following the percentage completion method, the above interest should form part of work in progress and as soon as part of revenue is offered for taxation assessee is entitled to claim the same in that proportion deduction of the same. 010. The learned authorised representative submitted that identical issue arose in the case of assessee for assessment year 2014 – 15 where the revenue has raised identical ground in ITA number 147/M/2018 decided by order dated 20/2/2020 wherein the coordinate bench has dismissed the ground of appeal of the learned that AO. He referred to paragraph number 7 of that order. Accordingly, he submitted that this issue is covered in favour of the assessee in its own case by the order of the coordinate bench in assessment year 2014 – 15. 011. We have carefully considered the rival contention and perused the orders of the coordinate bench as well as the decision of the ITA T in assessee’s own case for assessment year 2014 – 15 wherein the revenue challenged the deletion of the disallowance of ₹ 891,171,622/– made by the learned assessing officer u/s 36 (1) (iii) of the act on identical facts and circumstances. We find that the grounds of appeal raised by the learned AO are also identical worded. There is no Page | 9 ITA no. 1539 & 1594/Mum/2019 Lodha Developers Ltd; A.Y. 15–16 change in the facts and circumstances of the case. The coordinate bench decided this issue as Under:- “6. We have heard the rival submissions, perused the orders of the authorities below and case laws relied on. This aspect of the matter has been elaborately considered by the Ld.CIT(A) with reference to the averments of the Assessing Officer and considering the submissions of the assessee and also the decision of Hon'ble Jurisdictional High Court in the case of CIT v. Lokandwala Construction Industries Ltd., (supra) and various other decision and allowed the claim of the assessee observing as under: - “The submissions of the learned counsel have been carefully considered. According to the learned counsel the interest claimed by the assessee is a period cost and has to be allowed under section 36 (1) (iii) of the Act. The assessee has relied upon the judgment of the apex court in the case of the Taparia tools Ltd vs. DCIT (2015) 272 ITR 605 wherein the Supreme Court held that the only aspect which needed examination was as to whether the provisions of section 36 (1) (iii) read with section 43 (2) of the act was satisfied or not. Once these are satisfied there is no question of denying the benefit of deduction in the year in which such an amount was actually paid or incurred. Further, the proviso introduced by the Finance Act 2003 prohibits the allowance of interest cost only if the borrowed funds have been utilized for acquisition of a capital asset even for existing business. In this case the borrowed funds have been utilized for stock in trade which is not a capital asset. The jurisdictional Bombay High Court in the case of Lokhandwala constructions Inds Ltd 260 ITR 579 held as under: "in the instant case, it was dear that the assessee undertook two-fold activities. It bought and sold flats. Secondly, the assessee was also engaged in the business of construction of buildings. The profits from both the activities were assessed under section 28. The assessee had undertaken the project of construction of flats. Therefore, the loan was obtained for obtaining stock-in-trade. The project constituted the stock-in- trade of the assessee. The project did not constitute a fixed asset of the assessee. Since the assessee had Page | 10 ITA no. 1539 & 1594/Mum/2019 Lodha Developers Ltd; A.Y. 15–16 received loan for obtaining stock-in-trade, it was entitled to deduction under section 36(1)(iii). While adjudicating the claim for deduction u/s 36(l)(iii), the nature of expenses, whether the expenses are on capital account or revenue account is irrelevant as the section itself says that interest paid by the assessee on the capita! borrowed by the assessee is an item of deduction. The utilization of the capital is irrelevant for the purpose of adjudicating the claim for deduction u/s 36(l)(iii)." The SLP filed by the Department against the Bombay High Court judgment has been rejected by the Supreme Court. The Hon'ble ITAT Mumbai in the case of M/S Ashish Builders Private Ltd vs. ACIT ITA number 310/M/2012 held as under: "A) Interest on unsecured loans and fixed deposits: It is the claim of the assessee that the entire interest expenditure is allowable as it is a time related fixed finance cost on the borrowed capital. The claim of the assessee should be allowed in full in view of the various decisions on this issue. To start with, we perused the order of the Tribunal in the case of Rohan Estates Pvt. Ltd. (supra) which is one of the sister concerns of the assessee. We perused the para 3.2 of the said order of the Tribunal and find it is a self explanatory and the decision of the Tribunal supports the case of the assessee. Under comparable facts of the assessee, interest cost was allowed in favor of the assessee relying on binding jurisdictional High Court judgment in the case of M/s Lokhandwala Construction Industries Ltd. (supra). For the sake of completeness of this order we extract relevant para 3.2 of the order which is reproduced as under: "3.2 With regard to the interest expenditure,...........The interest cost on the corresponding capital borrowed would nevertheless continue to be incurred, without any corresponding increase in the value of the inventory or the project. Similarly, a project, or part thereof, may be partly sold or even remain unsold for quite some time after its completion. Page | 11 ITA no. 1539 & 1594/Mum/2019 Lodha Developers Ltd; A.Y. 15–16 While revenue would stand to be booked only on the part, if any, sold, the interest cost would continue to be incurred on the entire capital, even as no corresponding gain inures I terms of value addition to the project, which stands in fact completed, so as to increase its cost by loading the said cost thereon. It is for these reasons that interest (financing) cost is normally considered as only a period (fixed) cost, and charged to the operating statement for the year in which the same is incurred. As such, what in our view would prevail is the method of accounting being regularly followed by the assessee, i.e. on a year basis. The same also has the sanction of law inasmuch as sec. 145 clearly provides for determination of the business income on the basis of the method of accounting being regularly followed, with the mandate of sec 36(l)(iii) being also satisfied, and toward which the assessee relies on the decision in the case of CIT vs Lokhandwala Construction Inds. Ltd(supra). The same also clarifies that the interest cost is to allowed u/s 36(l)(iii), irrespective of whether it stands incurred in relation to stock-in-trade or on capital account, as the said section draws no such distinction. The issue, though, we may clarify, is not as to whether the borrowed capital stands utilized toward trading operations or on capital account; the instant case being decidedly of the former, but whether the said cost, having been incurred, is to be capitalized as a part of the project cost and, thus, taken into account for the purpose of valuation of inventory (stock-in-trade) as at the year-end and, consequently, the determination of gross profit for the year. It is only the cost that is incurred and otherwise allowable, which, it may be appreciated, would stand to be considered thus, where it otherwise qualifies for being rekoned as a part of the cost of production/construction, and thus of the inventory or the project cost a sat the year-end. The deducibility of the said cost u/s 36(l)(iii) is thus neither in doubt nor in dispute, Further, it may also be in place to state that section 36(l)(iii) stands since amended by Finance Act, 2003 w.e.f, 01/04/2004, by way of insertion of a proviso thereto, so that any interest cost on capital account is to be necessarily capitalized. Accordingly, it is only the interest cost computing the business income qua the business of which the relevant asset is a or is to constitute a part (also refer Explanation 8 to s.43(l)). The said decision may, thus, Page | 12 ITA no. 1539 & 1594/Mum/2019 Lodha Developers Ltd; A.Y. 15–16 in the given facts and circumstances of the case as, well as the amended law, not be of much assistance." We have also perused the said binding High Court judgment in the case of M/s Lokhandwala Construction inds. Ltd. (supra) and find the same is relevant for the following conclusion - "construction project undertaken by the assessee builder constituted its stock in trade and the assessee was entitled to deduction under section 36(l)(iii) of the Act in respect of the interest on the loan obtained for execution of said project." Relying on the another judgment of Hon'ble Bombay High Court in the case of Calico Dying and Printing Works 34 ITR 265 Bombay, Hon'ble Bombay High Court concluded that the interest expenditure relating to the borrowed capital is allowable u/s 36(l)(iii) of the Act. The relevant lines from the para 4 reads as under; "that, while adjudicating the claim for deduction under section 36(l)(iii) of the Act the nature of expense 0- whether the expenditure was on capital account or revenue account - was irrelevant as the section itself says that interest paid by the assessee on the capital borrowed by the assessee was an item of deduction. That the utilization of capital was the relevant for the purpose of adjudicating the claim of deduction under section 36(l)(iii) of the Act. (referring to the judgment in the case of Calico) It was laid down that where an assessee claims deduction of interest paid on the capital borrowed all that the assessee was to show that the capital which was borrowed was used for business purpose in the relevant year of account and it did not matter whether capital was borrowed in order to acquire the revenue asset or a capital asset......." Considering the above settled position in the matter we are of the opinion that the assessee is entitled to claim entire interest deduction relatable to the capital borrowed and utilized for business purposes in the year under consideration. Resultantly, we disapprove the decision of the Assessing Officer/CIT(Appeals) in transferring the interest expenditure to WIP account. Therefore, assessee is justified in debiting the same to the P&L accounts of the respective assessment years. Page | 13 ITA no. 1539 & 1594/Mum/2019 Lodha Developers Ltd; A.Y. 15–16 Thus, we order the Assessing Officer to accept the claim as made in the return of income. Accordingly, this part of the ground No. 1 is allowed in favour of the assessee” The Hon'ble ITAT in the case of ITO vs Rohan states ITA number 7200/MUM/2010 held as under: “3.2 With regard to the interest expenditure, though the Accounting Standard -2 (AS-2) on the valuation of inventories issued by the Institute of Chartered Accountant of India (ICAI) would suggest that the interest expenditure ought to be taken into account in the valuation of inventories where and to the extent there is a direct nexus, the said standard is not mandatory under the Act. In fact, even following AS-2 a direct nexus has to be established for the interest cost to form part of the cost of production or construction, as the case may be, and, thus, a part of the valuation of the unsold inventory or work-in- progress as at the year-end. This is as, to cite by way of an example from the civil construction itself, the work on a project may not be underway at all for the whole or a part of the year, or say as its optimum or normative level, on account of various business exigencies. The interest cost on the corresponding capital borrowed would nevertheless continue to be incurred, without any corresponding increase in the value of the inventory or the project. Similarly, a project, or part thereof, may be partly sold or even remain unsold for quite some time after its completion. While revenue would stand to be booked only on the part, if any, sold, the interest cost would continue to be incurred on the entire capital, even as no corresponding gain inures I terms of value addition to the project, which stands in fact completed, so as to increase its cost by loading the said cost thereon. It is for these reasons that interest (financing) cost is normally considered as only a period (fixed) cost, and charged to the operating statement for the year in which the same is incurred. As such, what in our view would prevail is the method of accounting being regularly followed by the assessee, i.e. on a year basis. The same also has the sanction of law inasmuch as sec. 145 clearly provides for determination of the business income on the basis of the method of accounting being regularly followed, with the mandate Page | 14 ITA no. 1539 & 1594/Mum/2019 Lodha Developers Ltd; A.Y. 15–16 of sec 36(l)(iii) being also satisfied, and toward which the assessee relies on the decision in the case of CIT vs Lokhandwala Construction Inds. Ltd(supra). The same also clarifies that the interest cost is to allowed u/s 36(l)(iii), irrespective of whether it stands incurred in relation to stock-in-trade or on capital account, as the said section draws no such distinction. The issue, though, we may clarify, is not as to whether the borrowed capital stands utilized toward trading operations or on capital account; the Instant case being decidedly of the former, but whether the said cost, having been incurred, is to be capitalized as a part of the project cost and, thus, taken into account for the purpose of valuation of inventory (stock-in- trade) as at the year-end and, consequently, the determination of gross profit for the year. It is only the cost that is incurred and otherwise allowable, which, it may be appreciated, would stand to be considered thus, where it otherwise qualifies for being rekoned as a part of the cost of production/construction, and thus of the inventory or the project cost a sat the year-end. The deducibility of the said cost u/s 36(l)(iii) is thus neither in doubt nor in dispute. Further, it may also be in place to state that section 36(l)(iii) stands since amended by Finance Act, 2003 w.e.f. 01/04/2004, by way of insertion of a proviso thereto, so that any interest cost on capital account is to be necessarily capitalized. Accordingly, it is only the interest cost computing the business income qua the business of which the relevant asset is a or is to constitute a part (also refer Explanation 8 to s.43(l)). The said decision may, thus, in the given facts and circumstances of the case as, well as the amended law, not be of much assistance. In fact, even going by the Revenue’s stand, another issue would arise and, accordingly, need to be determined apriori. Considering the said cost as includable in the project cost may have a direct bearing on the gross profit rate, and which may therefore stand to decline from the reported and accepted rate of 23%, and cannot be presumed be remain as such, i.e., unchanged.” The Hon'ble ITAT Pune in the case of M/S Kolte Patil Developers Ltd erstwhile Corola reality Ltd merged with Kolte Patil Developers Ltd) also held as under: Page | 15 ITA no. 1539 & 1594/Mum/2019 Lodha Developers Ltd; A.Y. 15–16 "Further, we find the Mumbai Bench of the Tribunal in the case of M/s Ashish Builders Pvt. Ltd. (supra) has decided an identical issue in favour of the assessee. Relevant Paragraphs are being reproduced hereunder for better appreciation of the issue: "6. Ground No. 1 of the appeal relates to the addition of some of the expenses to the WIP account i.e. interest on unsecured loan/fixed deposit (sic-car loan), advertisement expenses, brokerage expenses and loan processing fees. AO considered the above expenses as relatable to the WIP account and recomputed the WIP account at ₹ 5,33,28,399/-. /Assessee contends that the above said expenditure is fully allowable in the year under consideration. In this regard, assessee relied on various ITA No. 80/PUN/2016 M/s Kolte Patil Developers Ltd., decisions. This issue is relevant for AYs/appeals under consideration. We shall take up expenditure-account wise adjudication in the following paragraphs: "A) Interest on unsecured loans and fixed deposits: It is the claim of the assessee that the entire interest expenditure is allowable as it is a time related fixed finance cost on the borrowed capital. The claim of the assessee should be allowed In full in view of the various decisions on this issue. To start with, we perused the order of the Tribunal in the case of Rohan Estates Pvt. Ltd. (supra) which is one of the sister concerns of the assessee. We perused the para 3.2 of the said order of the Tribunal and find it Is a self explanatory and the decision of the Tribunal supports the case of the assessee. Under comparable facts of the assessee, interest cost was allowed in favor of the assessee relying on binding jurisdictional High Court judgment in the case of M/s Lokhandwala Construction Industries Ltd. (supra). For the sake of completeness of this order we extract relevant para 3.2 of the order which is reproduced as under: "3.2 With regard to the interest expenditure............The interest cost on the Page | 16 ITA no. 1539 & 1594/Mum/2019 Lodha Developers Ltd; A.Y. 15–16 corresponding capital borrowed would nevertheless continue to be incurred, without any corresponding increase in the value of the inventory or the project. Similarly, a project, or part thereof, may be partly sold or even remain unsold for quite some time after its completion. While revenue would stand to be booked only on the part, if any, sold, the interest cost would continue to be incurred on the entire capital, even as no corresponding gain inures I terms of value addition to the project, which stands in fact completed, so as to increase its cost by loading the said cost thereon. It is for these reasons that interest (financing) cost is normally considered as only a period (fixed) cost, and charged to the operating statement for the year in which the same is incurred, As such, what in our view would prevail Is the method of accounting being regularly followed by the assessee, i.e. on a year basis, The same also has the sanction nf law Inasmuch as sec. 145 clearly provides for determination of the business income on the basis of the method of accounting being regularly followed, with the mandate of sec 36(l)(iii) being also satisfied, and toward which the assessee relies on the decision in the case of CIT vs Lokhandwala Construction Inds. Ltd(supra). The same also clarifies that the interest cost is to allowed u/s 36(l)(iii), irrespective of whether it stands incurred in relation to stock-in-trade or on capital account, as the said section draws no such distinction. The issue, though, we may clarify, is not as to whether the borrowed capital stands utilized toward trading operations or on capital account; the instant case being decidedly of the former, but whether the said cost, having been incurred, is to be capitalized as a part of the project cost and, thus, taken into account for the purpose of valuation of inventory (stock-in-trade) as at the year-end and, consequently, the determination of gross profit for the year. It is only the cost that is incurred and otherwise allowable, which, it may be appreciated, would stand to be considered thus, where it otherwise qualifies for being reckoned as a part of the cost of production/construction, and thus of the inventory or the project cost a sat the year- Page | 17 ITA no. 1539 & 1594/Mum/2019 Lodha Developers Ltd; A.Y. 15–16 end. The deducibility of the said cost u/s 36(l)(iii) is thus nether in doubt nor in dispute. Further, it may also be in place to state that section 36(l)(iii) stands since amended by Finance Act, 2003 w.e.f. 01/04/2004, by way of insertion of a proviso thereto, so that any interest cost on capital account is to be necessarily capitalized. Accordingly, it is only the interest cost computing the business income qua the business of which the relevant asset is a or is to constitute a part (also refer Explanation 8 to s.43(l)). The said decision may, thus, in the given facts and circumstances of the case as, well as the amended law, not be of much assistance." We have also perused the said binding High Court judgment in the case of M/s Lokhandwala Construction inds. Ltd. (supra) and find the same is relevant for the following conclusion - "construction project undertaken by the assessee builder constituted its stock in trade and the assessee was entitled to deduction under section 36(l)(iii) of the Act in respect of the interest on the loan obtained for execution of said project/' Relying on the another judgment of Hon'ble Bombay High Court in the case of Calico Dying and Printing Works 34 ITR 265 Bombay, Hon'ble Bombay High Court concluded that the interest expenditure relating to the borrowed capital is allowable u/s 36(l)(iii) of the Act. The relevant lines from the para 4 reads as under; "that, while adjudicating the claim for deduction under section 36(l)(iii) of the Act the nature of expense 0- whether the expenditure was on capital account or revenue account was irrelevant as the section itself says that interest paid by the assessee on the capital borrowed by the assessee was an item of deduction. That the utilization of capital was the relevant for the purpose of adjudicating the claim of deduction under section 36(l)(iii) of the Act. (referring to the judgment in the case of Calico) It was laid down that where an assessee claims deduction of interest paid on the capital borrowed all that the assessee was to show that the capital which was borrowed was used for business purpose in the relevant year of account Page | 18 ITA no. 1539 & 1594/Mum/2019 Lodha Developers Ltd; A.Y. 15–16 and it did not matter whether capital was borrowed in order to acquire the revenue asset or a capital asset....../' Considering the above settled position In the matter we are of the opinion that the assessee is entitled to claim entire interest deduction relatable to the capital borrowed and utilized for business purposes in the year under consideration, Resultantly, we disapprove f decision of the Assessing Officer/CIT(Appeals) in transferring the interest expenditure to WIP account. Therefore, assessee is justified in debiting the same to the P&L accounts of the respective assessment years. Thus, we order the Assessing Officer to accept the claim as made in the return of income. Accordingly, this part of the ground No. 1 is allowed in favour of the assessee." 14. From the above, it is evident that any amount of the interest paid in respect of capital borrowed for the business purposes constitutes an allowable deduction. The said clause (Hi) of section 36(1) of the Act supports the assessee's claim in the present case. This view is upheld in the case of CIT vs Lokhandwala Construction Industries Ltd. (supra) as well as the decision of the Tribunal in the case of M/s. Ashish Builders Pvt. Ltd. (supra) irrespective of the method of accounting of recognizing the income followed by the assessee. The present case involves the payment of interest of ₹ 8,19,23,638/-, the interest paid to debenture holders, Financial institutions, Unsecured loan etc. It is not the case of the Revenue that the interest claim of ₹ 3,00,57,566/- and related capital borrowed was not utilized by the assessee for business purposes of the assessee." However, the case of Wall Street construction is one where the assessee was following project completion method and therefore the ITAT held that the interest cost shall be debited to work in progress and allowed to be claimed as deduction only in the year in which the corresponding income is offered to tax. In the instant case, the assessee is following percentage completion method (POCM) Page | 19 ITA no. 1539 & 1594/Mum/2019 Lodha Developers Ltd; A.Y. 15–16 of therefore the judgment of Wall Street construction is not applicable to this case. The assessee is following percentage completion and offers a part of the revenue every year depending upon the percentage of completion. The funds have been borrowed for the purpose of construction and have gone into the projects of the assessee which are stock in trade and not capital asset of the assessee. Therefore, the amendment brought in the Act with effect from 2003 by way of introducing the proviso to section 36 (1) (iii) also does not affect the facts of the case of the assessee. In view of the binding judgment of the jurisdictional High Court in the case of Lokhandwala constructions and also of the jurisdictional ITAT in the cases of Ashish Builders Private Ltd and Rohan Estate Private Ltd and also the various judicial pronouncements relied upon by the assessee the interest expenditure claimed by the assessee is held to be allowable, It is also to be mentioned here that during the proceedings before the Income Tax Settlement Commission, the AO had raised specific question in relation to claim on interest expenditure made by the appellant and reply was filed by the appellant explaining the same. Wherein the assessee explained that disallowance cannot be made u/s 36(l)(iii) of the Act, in view of the jurisdictional High Court's decision in the case of Lokhandwala Construction (supra). After considering the assessee's submissions, the AO accepted the same and did not raise objection in relation to interest claimed in the report u/s 245D (3) report filed before the ITSC. Further no disallowance/ adjustment was made by ITSC in relation to such interest claimed while passing the order. The addition made by the AO is directed to be deleted. These grounds of appeal are ALLOWED.” 7. On a careful perusal of the order of Ld.CIT(A), we do not see any infirmity in allowing the claim of the assessee as the claim of the assessee is in tune with the decision of the Hon'ble Jurisdictional High Court in the case of Lokandwala Construction (supra) wherein it has been held that when the project constructed by the assessee is its stock in trade and not a fixed asset of the assessee the interest paid on loans obtained for Page | 20 ITA no. 1539 & 1594/Mum/2019 Lodha Developers Ltd; A.Y. 15–16 stock in trade is an allowable deduction u/s. 36(1)(iii) of the Act. We also find that in the proceedings before the settlement commission the assessee claimed interest expenses and as per the order dated 28.07.2014 of the settlement commission and during verification proceedings u/s. 245D(3) of I.T. Act, the assessee informed the Assessing Officer that interest of ₹.124.02 crores as claimed in the computation of income on ground of interest expenses retained in inventory is deductible under provisions of section 36(1)(iii) of the Act. It was further informed that the said amount of interest paid was in respect of capital borrowed for the purpose of business or profession. It was further submitted that the construction and development having commenced, the business is in operation, therefore, interest is allowable u/s. 36(1)(iii) of the Act. It was also further brought to the notice of the Assessing Officer that in the case of CIT v. Lokandwala constructions Industries Ltd., [131 Taxman 810] the assessee’s claim for deduction of interest, although the revenue was recognized only on project completion basis in subsequent year, was allowed in the year in which the claim of interest was made. Thus, it was contended that the interest expenditure incurred during the year is claimed and allowable as expenses even though the same has been inventorised in the Books of Accounts. These contentions were accepted by the revenue and no objection has been raised by the Assessing Officer and the settlement commission has accepted these contentions of the assessee. This fact was also taken note by the Ld.CIT(A) in allowing the claim of the assessee. Therefore, since the revenue could not controvert the findings of the Ld.CIT(A) that the project constructed by the assessee for which the loans have been taken is not a stock in trade and also the other findings of the Ld.CIT(A), we do not find any valid reason to interfere with the findings of the Ld.CIT(A) and accordingly we sustain the order of the Ld.CIT(A) on this issue. Grounds raised by the revenue are rejected. 012. We find that the order of the learned CIT – A is also on identical lines. Therefore, respectfully following the decision of the coordinate bench in assessee’s own case, Page | 21 ITA no. 1539 & 1594/Mum/2019 Lodha Developers Ltd; A.Y. 15–16 we confirm the order of the learned CIT – A in deleting the disallowance of ₹ 2,241,160,000/–. Accordingly, ground number 1 and 2 of the appeal of the AO is dismissed. 013. With respect to ground number 3 the learned assessing officer has disallowed expenses u/s 14 A of the act invoking the provisions of rule 8D. However, the learned CIT – A addition stating that there is no exempt income earned by the assessee during the year. 014. The learned departmental representative supported the order of the learned AO and submitted that even if there is no exempt income disallowances required to be made. He further supported the order by The Finance Act 2022 amendment made in Section 14 A of the act. 015. The learned authorised representative supported the order of the learned CIT – A and submitted that when there is no exempt income there cannot be any disallowance u/s 14 A of the act. He further submitted that the amendment made by The Finance Act 2022 applies prospectively. 016. We have carefully considered the rival contention and perused the orders of the lower authorities. Undisputed fact shows that there is no exempt income and during the year by the assessee. If there is no exempt, income naturally there cannot be any disallowance u/s 14 A of the act because no expenditure has been incurred on any exempt income during the year. Further the reliance placed by the learned departmental representative on the amendment made by the finance act 2022 applies Page | 22 ITA no. 1539 & 1594/Mum/2019 Lodha Developers Ltd; A.Y. 15–16 prospectively as held by the honourable Delhi High Court in PCIT versus Era infrastructure private limited [2022] 141 taxmann.com 289 (Delhi. In view of this we do not find any infirmity in the order of the learned CIT – A in deleting the disallowance u/s 14 A of the act. Accordingly, ground number 3 of the appeal of the learned AO is dismissed. 017. In the result, appeal filed by the learned assessing officer is dismissed. 018. Now we come to the appeal of the assessee. The ground number 1 of the appeal is with respect to the disallowance of software expenditure of ₹ 26,983,497/–. The learned assessing officer held it to be a capital expenditure. On appeal before the learned CIT – A, alternative plea of the assessee was adjudicated and depreciation was allowed at the rate of 60%. 019. The learned authorised representative submitted the party wise details of software expenses at page number 11 of the paper book along with the sample invoices. He submitted that these are the stand-alone license fees incurred by the assessee and assessee does not get any enduring benefit but the user right of such assets. He therefore submitted that this expenditure could not be held to be capital expenditure. He further referred to note on expenses incurred for software expenditure placed at page number 19 of the paper book and further relied on the decision of the honourable Bombay High Court in case of CIT versus Raychem RPG Ltd ITA 4176/2009 of honourable Bombay High Court, the decision of special Page | 23 ITA no. 1539 & 1594/Mum/2019 Lodha Developers Ltd; A.Y. 15–16 bench in case of Amway India Enterprises versus DCIT 1 11 ITD 112. 020. The learned departmental representative vehemently supported the order of the learned lower authorities. 021. We have carefully considered the rival contentions and perused the orders of the lower authorities. The assessee has incurred ERP expenditure and license fees for the software. Honourable Bombay High Court in 346 ITR 318 in case of CIT versus Raychem RPG Ltd covers the issue wherein it has been held as Under:- “2. As regards the first question, Tribunal relying upon its order in the assessee's own case relating to asst. yr. 2001-02 held that the software expenditure was revenue expenditure. The appeal filed by the Revenue for the asst. yr. 2001-02 has been dismissed for want of removal of office objections and thus the order passed by the Tribunal for the asst. yr. 2001-02 has attained finality. Moreover, the Tribunal in its order relating to the asst. yr. 2001-02 has allowed expenditure as revenue expenditure by recording thus: "7. When we apply this functional test suggested by the Special Bench of the Tribunal, we find that impugned software does not form part of the profit- making apparatus of the assessee and hence the same is to be disallowed as revenue expenditure. We hold so because we find that the business of the assessee company is that of manufacturing of telecommunication and power cable accessories and trading in oil retracing system and other products and impugned software is Page | 24 ITA no. 1539 & 1594/Mum/2019 Lodha Developers Ltd; A.Y. 15–16 an enterprises resources planning (ERP) package and hence it facilitates the assessee's trading operations or enabling the management to conduct the assessee's business more efficiently or more profitably but it is not in the nature of profit-making apparatus. We, therefore, decide this issue also in favour of the assessee and we hold that this expenditure of Rs. 20.60 lakhs is revenue expenditure. We hold so by following the judgment of the Special Bench of the Tribunal relied upon by the learned Authorised Representative of the assessee." 3. In our view, no fault can be found in the aforesaid order of Tribunal holding that software expenditure was allowable as revenue expenditure.” 022. Therefore, respectfully following the decision of the honourable Bombay High Court we direct the learned assessing officer to delete the disallowance of software expenditure of ₹ 26,983,497/– the AO is directed to allow the complete deduction of ₹ 35,977,997/– as revenue expenditure and withdraw the depreciation granted thereon. Accordingly, ground number 1 of the appeal is allowed. 023. Ground number 2 of the appeal is with respect to the claim of the assessee u/s 80GGB of the act. The learned assessing officer examined the total claim of assessee of ₹ 116,534,000 and granted deduction of ₹ 10 crores. On appeal before the learned CIT – A further disallowance of Rs 1 crore is further allowed. Therefore issue before us is with respect to the disallowance of only ₹ 6,534,000/–. Before us, the learned authorised representative Page | 25 ITA no. 1539 & 1594/Mum/2019 Lodha Developers Ltd; A.Y. 15–16 submitted that assessee has donated Rs. 65,34,00/- to Bharatiya Janata party. The amount of donation is paid by an account payee cheque. He further stated that this amount is verifiable from the bank account of the assessee. He submitted that it satisfies all the conditions prescribed under that Section. Therefore, merely because the receipt is not available but that the transaction of donation is verifiable from the bank statement, the deduction should be allowed. 024. The learned departmental representative submitted that when the assessee has not produced the receipt of the donation it could not be allowed. 025. We have carefully considered the rival contentions and perused the orders of the lower authorities. We find that assessee has given a donation of ₹ 116,534,002 three different parties. The donation of ₹ 200 lakhs is paid to Shivsena, ₹ 800 lakhs to Maharashtra Pradesh Rashtrawadi Party and ₹ 16,534,000 To Bhartiya Janta Party. Assessee has produced all the receipts except in case of ₹ 6,534,000 paid to Bharatiya Janta party. The transaction is demonstrated through the bank account of the assessee. In any way, the donation paid in cash is as such not allowable under that Section. The provision of Section 80GGB also speaks about the contribution is defined in Section 293A of the companies act 1956. As assessee has shown that the amount is of contribution paid by account payee cheque, merely because receipt is not available it cannot be denied. Therefore, we set-aside this issue to the file of the learned assessing officer to examine the claim of the assessee with respect to ₹ Page | 26 ITA no. 1539 & 1594/Mum/2019 Lodha Developers Ltd; A.Y. 15–16 6,534,000/– contribution made the political party by the assessee by examination of the bank account of assessee and assessee is directed to prove that same is contribution in terms of provisions of Section 293A of the companies act. Accordingly, ground number 2 of the appeal is set-aside to the file of the learned assessing officer to decide it afresh. 026. Appeal of the assessee is allowed with above directions. 027. In the result, appeal filed by the learned AO is dismissed and appeal of the assessee is allowed. Order pronounced in the open court on 30.08.2022. Sd/- Sd/- (AMIT SHUKLA) (PRASHANT MAHARISHI) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) Mumbai, Dated: 30.08.2022 Sudip Sarkar, Sr.PS Copy of the Order forwarded to : 1. The Appellant 2. The Respondent. 3. The CIT(A) 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. BY ORDER, True Copy// Sr. Private Secretary/ Asst. Registrar Income Tax Appellate Tribunal, Mumbai