M/S. CEEBROS HOTELS PVT. LTD., CHENNAI V. DCIT, CC - 1 (2), CHENNAI

ITA 3372/CHNY/2019

• Counselvise Citation: [2021] 108 COUNSELVISE.COM (IT) 7709 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 3 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-03-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2015-2016
• Appeal Filed On: 16-12-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Depreciation; Principle of natural justice; Revenue expenditure; Capital expenditure; Set aside
• Section: 37(1); 251; 13; 22; 101; 20

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , C B ENCH, CHENNAI . , . , $ BEFORE SHRI V. DURGA RAO, JUDICIAL MEMBER AND SHRI G. MANJUNATHA, ACCOUNTANT MEMBER ./ I.T.A.NO.3372/CHNY/2019 ( / ASSESSMENT YEAR: 2015-16) M/S.CEEBROS HOTELS P.LTD. 19/1, SUKRITI, III CROSS ROAD, R.A.PURAM, CHENNAI-600 028. VS THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE-1(2) CHENNAI-34. PAN: AAACC 3051E ( /APPELLANT) ( /RESPONDENT) / APPELLANT BY : MR.S.SRIDHAR, ADVOCATE /RESPONDENT BY : MR. ABANI KANTA NAYAK, CIT /DATE OF HEARING : 09.02.2021 /DATE OF PRONOUNCEMENT : 31.03.2021 / O R D E R PER G.MANJUNATHA, AM: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST THE ORDER OF THE LEARNED CIT(A)-1, CHENNAI DATED 05.12. 2019 AND PERTAINS TO ASSESSMENT YEAR 2015-16. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL:- 1. THE ORDER OF THE COMMISSIONER OF INCOME TAX ( APPEALS) 1, CHENNAI DATED 05.122019 IN L,T.A.NO.37/CIT(A)-1/ 17-18, FOR THE ABOVE MENTIONED ASSESSMENT YEAR IS CONTRARY TO LAW, FACTS, AND IN THE CIRCUMSTANCES OF THE CASE. 2. THE CIT (APPEALS) ERRED IN SUSTAINING THE DISA LLOWANCE OF THE CLAIM FOR DEDUCTION OF INTEREST EXPENSES AGGREG ATING TO ` 41,37,73,978/- U/S. 36(1)(III) / 37(1) OF THE ACT A ND 2 ITA NO.3372/CHNY/2019 CONSEQUENTLY ERRED IN SUSTAINING THE ADDITION OF SU CH SUM IN THE COMPUTATION OF TAXABLE OF INCOME WITHOUT ASSIGN ING PROPER REASONS AND JUSTIFICATION. 3. THE CIT (APPEALS) FAILED TO APPRECIATE THAT TH E FINDINGS RECORDED IN PAGE NO.26 TO PAGE NO.32 OF THE IMPUGNE D ORDER TO SUSTAIN THE DISALLOWANCE OF INTEREST EXPENSES WE RE WRONG, ERRONEOUS, UNJUSTIFIED, INCORRECT INVALID AND NOT S USTAINABLE BOTH ON FACTS AND IN LAW. 4. THE CIT (APPEALS) FAILED TO APPRECIATE THAT THE MISCONSTRUCTION OF THE PROVISIONS OF SECTION 36(1)( II) OF THE ACT WOULD VITIATE THE DECISION RENDERED WHILE OUGHT TO HAVE APPRECIATED THAT THE NON CONSIDERATION OF THE ALLOW ABILITY OF THE INTEREST EXPENSES U/S.37(1) OF THE ACT SHOULD BE RE CKONED AS BAD IN LAW. 5. THE CIT (APPEALS) FAILED TO APPRECIATE THAT T HE MISREADING OF AS16 HAD RESULTED IN PASSING THE WRONG ORDER ON THIS ISSUE AND OUGHT TO HAVE APPRECIATED THAT THERE COULD NOT BE ANY SEGREGATION OF THE PROJECTS UNDERTAKEN BY THE APPEL LANT ESPECIALLY SUCH PROJECTS WERE EXECUTED UNDER COMMON MANAGEMENT, THEREBY VITIATING THE STANDALONE TREATM ENT WHICH LED TO THE SUSTENANCE OF THE DISALLOWANCE OF THE IN TEREST EXPENSES. 6. THE CIT (APPEALS) FAILED TO APPRECIATE THAT THE CONCLUSION REACHED ON THE NON COMMENCEMENT OF THE PROJECT WHIC H WAS RELATED TO THE CLAIM OF THE INTEREST EXPENSES WAS W HOLLY UNJUSTIFIED AND OUGHT TO HAVE APPRECIATED THAT THE COMMENCEMENT OF THE PROJECT/BUSINESS UNDER CONSIDER ATION SHOULD BE RECKONED FROM THE DATE OF THE PURCHASE OF THE LAND WITH STRUCTURES MEANT FOR DEVELOPMENT WHILE FURTHER OUGHT TO HAVE APPRECIATED THAT HAVING NOT DISPUTED THE FACT OF THE APPELLANT ENGAGED IN THE BUSINESS OF PROPERTY DEVEL OPMENT, THE STANDALONE APPROACH BY SEGREGATING THE PROJECT UNDER SCRUTINY FOR THE PURPOSE OF CONSIDERING THE ALLOWAB ILITY OF THE INTEREST EXPENSES WAS ERRONEOUS, THEREBY VITIATING THE RELATED FINDINGS. 3 ITA NO.3372/CHNY/2019 7. THE CIT (APPEALS) FAILED TO APPRECIATE THAT T HE DECISIONS CITED WERE COMPLETELY IGNORED AND MISCONSTRUED AND OUGHT TO HAVE APPRECIATED THAT THE CLAIM FOR DEDUCTION OF IN TEREST EXPENSES UNDER CONSIDERATION WAS PROPER AND JUSTIFI ED ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE. 8. THE CIT (APPEALS) FAILED TO APPRECIATE THAT T HERE WAS NO PROPER OPPORTUNITY GIVEN BEFORE PASSING THE IMPUGNE D ORDER AND ANY ORDER PASSED IN VIOLATION OF THE PRINCIPLES OF NATURAL JUSTICE IS NULLITY IN LAW. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE CO MPANY IS ENGAGED IN THE BUSINESS OF RUNNING HOTEL AND REAL E STATE DEVELOPMENT FILED ITS RETURN OF INCOME FOR THE ASSE SSMENT YEAR 2015-16 ON 27.09.2015 DECLARING TOTAL INCOME AS NIL . DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAS CLAIMED INTEREST EXPENSES OF ` 41,37,73,978/- ON TERM LOAN OF ` 301.92 CRORES BORROWED FROM IFCI LTD. CHENNAI. THE SAID LOAN HAS BEEN TAKEN FOR THE PURPOSE OF PURCHASE OF 90.53 GROUNDS OF LAN D AT SATYADEV AVENUE, MRC NAGAR MAIN ROAD, RAJA ANNAMALAIPURAM, CHENNAI. THE SAID LAND HAS BEEN TRE ATED AS INVENTORY IN THE BOOKS OF ACCOUNT OF THE ASSESSEE. THE CASE HAS BEEN TAKEN UP FOR SCRUTINY AND DURING THE COURS E OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER HAS C ALLED UPON THE ASSESSEE TO JUSTIFY CLAIM OF INTEREST EXPE NDITURE OF ` 4 ITA NO.3372/CHNY/2019 41.37 CRORES IN LIGHT OF PROVISIONS OF SECTION 36(1 )(III) AND PROVISO PROVIDED THERETO. IN RESPONSE, THE ASSESSEE CLAIMED THAT IT IS IN THE BUSINESS OF REAL ESTATE DEVELOPME NT AND IS DEVELOPING TWO HOUSING PROJECTS AT CHENNAI. THE AS SESSEE HAS FURTHER CLAIMED THAT IT HAS STARTED RECOGNIZING REV ENUE FROM PROJECT OF ATLANTIC, EGMORE, CHENNAI AND PROJECT AT MRC NAGAR IS YET TO BE COMMENCED ITS ACTIVITIES. HOWEVER, REA L ESTATE DEVELOPMENT SEGMENT OF BUSINESS IS ONE AND HENCE, W HEN THE ASSESSEE HAS STARTED ITS BUSINESS ACTIVITY AND REAL IZING REVENUE FROM SUCH BUSINESS, THEN INTEREST PAID ON LOAN BORR OWED FOR THE PURPOSE OF SAID BUSINESS HAS TO BE ALLOWED AS DEDUC TION, EVEN THOUGH, PROVISO PROVIDED TO SECTION 36(1)(III) OF T HE ACT, STATES THAT INTEREST COST OF LOAN BORROWED FOR THE PURPOSE OF ACQUISITION OF ASSET NEEDS TO BE CAPITALIZED, TILL SUCH ASSET IS PUT TO USE IN THE BUSINESS OF THE ASSESSEE, BECAUSE THE ASSES SEE HAS ALREADY PUT TO USE LAND PURCHASED FOR THE PURPOSE O F DEVELOPMENT OF HOUSING PROJECT. 4. THE ASSESSING OFFICER HOWEVER, WAS NOT CONVINCED WITH THE EXPLANATION FURNISHED BY THE ASSESSEE AND ACC ORDING TO 5 ITA NO.3372/CHNY/2019 HIM, INTEREST COST ON LOAN BORROWED FOR THE PURPOSE OF ACQUISITION OF ASSET NEEDS TO BE CAPITALIZED TILL S UCH ASSET IS PUT TO USE IN THE BUSINESS OF THE ASSESSE. SINCE, THE LAND PURCHASED IN MRC NAGAR, CHENNAI WAS NOT PUT TO U SE IN THE BUSINESS OF THE ASSESSE, INTEREST PAID ON LOAN BORR OWED FOR ACQUISITION OF PROPERTY AT MRC NAGAR SHOULD BE ADDE D TO COST OF THE ASSET, BUT CANNOT BE CLAIMED AS DEDUCTION UN DER SECTION 36(1)(III) OF THE ACT. THE ASSESSING OFFICER HAS DI SCUSSED THE ISSUE AT LENGTH IN LIGHT OF PROVISIONS OF SECTION 3 6(1)(III) OF THE ACT ALONG WITH ACCOUNTING STANDARD -16 ISSUED BY TH E ICAI AND OBSERVED THAT AS PER AS-16 ISSUED BY ICAI BORROWING COST THAT ARE DIRECTLY ATTRIBUTABLE TO THE ACQUISITION OF A Q UALIFYING ASSET SHOULD BE CAPITALIZED AS PART OF THE COST OF THAT A SSET. SINCE THE ASSESSEE HAS OBTAINED LOAN SPECIFICALLY FOR THE PUR POSE OF PURCHASE OF LAND AT MRC NAGAR FOR CONSTRUCTION OF R ESIDENTIAL PROJECT AND PROJECT IS NOT YET COMMENCED ITS ACTIVI TIES, RELEVANT INTEREST PAID ON LOAN BORROWED FOR THE PURPOSE OF A CQUISITION OF ASSET CANNOT BE ALLOWED AS DEDUCTION. THE ASSESSIN G OFFICER HAS ALSO DISTINGUISHED CASE LAWS RELIED UPON BY THE ASSESSEE AND FURTHER RELIED UPON THE DECISION OF ITAT, MUMBA I SPECIAL 6 ITA NO.3372/CHNY/2019 BENCH IN THE CASE OF WALLSTREET CONSTRUCTION LTD. V S JCIT 101 ITD 156 TO SUPPORT HIS FINDING. THE ASSESSING OFFIC ER HAS ALSO DISTINGUISHED THE DECISION OF THE HON'BLE SUPREME C OURT IN THE CASE OF M/S.TAPARIA TOOLS LTD. VS., JCIT 260 ITR 10 2 RELIED UPON BY THE ASSESSEE ON THE GROUND ALTHOUGH, INTERE ST EXPENDITURE IS REVENUE IN NATURE, BUT BECAUSE ASSET WAS NOT PUT TO USE IN THE RELEVANT ASSESSMENT YEAR, AS PER PROVISO TO SECTION 36(1)(III) OF THE ACT, SAID INTEREST EXPEND ITURE SHOULD BE ADDED TO THE COST OF ASSET. FURTHER, THE ASSESSING OFFICER HAS ALSO REJECTED ARGUMENTS OF THE ASSESSEE IN LIGHT OF MATCHING CONCEPT PRINCIPLES OF ACCOUNTING ON THE GROUND THAT WHEN THERE IS NO REVENUE RECOGNIZED FROM THE PROJECT, THEN EXP ENDITURE INCURRED FOR SAID PROJECT CANNOT BE ALLOWED AS DEDU CTION. ACCORDINGLY, REJECTED THE ARGUMENTS TAKEN BY THE AS SESSEE AND DISALLOWED INTEREST PAID ON LOAN BORROWED U/S.36(1) (III) OF THE ACT. THE RELEVANT FINDINGS OF THE ASSESSING OFFICE R ARE AS UNDER:- 11.4 ACCORDING TO ASI6. CAPITALISATION OF BORRO WING COST SHOULD CEASE WHEN SUBSTANTIALLY ALL THE ACTIVITIES NECESSA RY TO PREPARE THE QUALIFYING ASSET FOR ITS INTENDED USE OR SALE ARE C OMPETE. 11.5 IN THE PRESENT CASE THE ASSESSEE HAS OBTA INED THE LOAN OF RS. 300 CRORE FROM IFCI LTD SPECIFICALLY FOR THE PU RPOSE OF PURCHASE OF LAND AL MRC NAGAR FOR CONSTRUCTION OF THE RESIDE NTIAL PROJECT. THE 7 ITA NO.3372/CHNY/2019 SAME IS CLEARLY EVIDENCED FORM THE LOAN SANCTION LE TTER ISSUED BY IFCI LTD VIDE THE LETTER OF INTENT DATED 19.12.2013 . SINCE THE ASSESSEE IS FOLLOWING THE ACCOUNTING STANDARDS OF I CAI. THE ASSESSES IS BOUND TO CAPITALISE INTEREST COST OF RS . 41 .37 CRORE ON THIS BORROWAL TO THE WORK IN PROGRESS OF MRC NAGAR PROJECT INSTEAD ASSESSEE CHOSE TO CLAIM THE ENTIRE INTEREST EXPENSE AS REVENUE EXPENDITURE FOR AY 2015-16. WHEREAS NO INCOME WAS O FFERED FOR THE MP.C NAGAR PROJECT. 11.6 ASSESSEES SUBMISSION THAT THE AS16 IS APPLICABLE LOT LOANS OBTAINED FOR ACQUIRING FIXED ASSETS ALONE AN D NOT FOR INVENTORY IS NOT ACCEPTABLE THE DEFINITION OF QUAL IFYING ASSET USED IN AS16 DOES NOT DIFFERENTIATE BETWEEN THE FIXED A SSET AND INVENTORY. THE WORDS PUT TO USE OR INTERNED FOR SAL E MAKE IT CLEAR THAT THE STANDARD IS APPLICABLE FOR BOTH FIXED ASSE T AS WELT AS INVENTORY. 12 DECISIONS RELIED ON BY ASSESSEE: 12.1 ASSESSEE PLACED RELIANCE ON THE DECISION IN TH E CASE OF CORE HEALTH CARE LTD(SUPRA). THIS DECISION IS AB OUT WHETHER THE PROVISO INSERTED IN SEC 36(1(III) WITH EFFECT FROM 01.04.2004 HAS TO BE READ PROSPECTIVELY OR NOT THUS HIS DECISION HAS NO RELEVANCE TO THE FACTS AND CIRCUMSTANCES OF THE ASSESSEES CASE. 12.2 ASSESSEES RELIANCE ON THE DECISION IN T HE CASE OF INDIA CEMENTS LTD VS CIT I 960 60 ITR 52(SC) ALS O DOES NOT COME TO THE RESCUE. THIS DECISION IS ON ALLOWABILITY OF EXPENDITURE ON STAMPS REGISTRATION FEE ETC INCURRED FOR AVAILING LOAN. THE APEX COURT HELD THA T THE EXPENDITURE INCURRED IN RAISING A JOAN IS REVENUE EXPENDITURE THE FACTS AND THE LEGAL MATRIX OF THE ASSESSEES CASE ARE TOTALLY DIFFERENT IRON, THE FACT S OF THE APEX COURT DECISION. 12.3 ASSESSEE ALSO CITED THE DECISION IN THE CASE OF ACIT VS. ADITYA PROP CON P LTD IN ITA NO 762/JP/201 2 8 ITA NO.3372/CHNY/2019 ITAT JAIPUR BENCH. IN THE INSTANT CASE THE ITAT DEC IDED IN FAVOUR OF ASSESSEE STATING THAT THERE WAS INORDI NATE DELAY IN THE CONSTRUCTION ACTIVITY DUE TO ADVERSE M ARKET FORCES THERE WAS SPECIFIC REQUIREMENT OF AS16 NOT T O CAPITALISE THE INTEREST COST ALONG WITH THE COST OF LAND IF IT IS HELD WITHOUT ANY ASSOCIATED DEVELOPMENT ACTIVITY . THE FACTS OF THE PRESENT CASE OF ASSESSEE ARE ENTIRELY DIFFERENT ON HIS GROUND AS MENTIONED IN PARA 8 ABOVE IT COULD BE SEER THAT THE ASSESSEE HAS ACQUIRED THE LAND AT MR C NAGAR FOR RS 525.80 CRORE DID SOME CONSTRUCTION ACT IVITY AND SHOWED IT AS OPENING WORK IN- PROGRESS AMOUNTIN G TO RS I0.23 CRORE AND ALSO EXPENDED RS 5.17 CRORE DURI NG THE CURRENT YEAR TOWARDS THE PROJECT IN THE CASE CI TED BY THE ASSESSEE, THE LAND WAS KEPT IDLE, THE LAND HAS BEEN USED IN BE CONSTRUCTION ACTIVITY BY THE ASSESSEE IN ITS CWN CASE. THUS THE FACTS OF THE ASSESSEE CITED BY THE ASSESSEE ARE ON DIFFERENT FOOTING AND HENCE NOT APPLICABLE TO THE PRESENT CASE. 13 DECISION IRN THE CASE OF WALLSTREET CONSTRUCT ION LTD: 13 INSTEAD THE FACT OF THE DECISION IN THE CASE OF WALLSTREET CONSTRUCTION LTD, VS JCIT, MUMBAI SB 101 LTD 156 (MUMBAI(SB). ARE MORE RELEVANT TO THE PRESENT C ASE OF THE ASSESSEE THE ITAT ANSWERED THE FOLLOWING QUESTION, IN CASE OF A BUILDER FOLLOWING PROJECT CO MPLETION METHOD, ENGAGED IN SIMULTANEOUS CONSTRUCTION OF MUL TIPLE PROJECTS, WHETHER INTEREST COST IS A PERIOD COST OR .1 HAS TO BE ADDED TO THE VALUE OF WORK-IN-PROGRESS IN FAVOU R OF THE DEPARTMENT. 13.2 THE CLAIM OR INTEREST EXPENDITURE FROM YEAR TO YEAR U/S. 36(1)(III) ACTUALLY DISTORTED THE PROFITS EARN ED BY THE ASSESSEE OF A PARTICULAR PROJECT BECAUSE THE INTERE ST COST WHICH PERTAINS TO ONE PROJECT HAS BEEN CLAIMED BY T HE 9 ITA NO.3372/CHNY/2019 ASSESSEE AGAINST THE INCOME OF ANOTHER PROJECT. THI S RESULTED INTO CLAIMING OF HUGE LOSSES BY THE ASSESS EE. 13.3 THE MATCHING CONCEPT OF INCOME AND EXPENDITURE HAS TO BE FOLLOWED OR ANY ACCOUNTING YEAR THE EXPENDITURE WHICH IS RELEVANT TO THE EARNING OF INC OME ONLY SHOULD BE DEDUCTED IRON, SUCH INCOME SO THAT A CORRECT PICTURE OF THE TOTAL INCOME CHARGEABLE TO T AX CAN EMERGE RELIANCE IS PLACED ON THE DECISION IN THE CA SE OF TAPARIA TOOLS LTD VS. JCIT(2003) 260 LTR 102 IT WAS HELD IN THIS CASE AS UNDER:- THEREFORE, UNDER THE MERCANTILE SYSTEM OF ACCOUNTIN G IN ORDER T DETERMINE THE NET INCOME OF AN ACCOUNTING Y EAR THE REVENUE AND OTHER INCOMES ARE MATCHED WITH THE COST OF RESOURCES CONSUMED (EXPENSES),. UNDER THE MERCAN TILE SYSTEM OF ACCOUNTING, THIS MATCHING IS REQUIRED TO BE DONE ON ACCRUAL BASIS UNDER THIS MATCHING CONCEPT, REVENUE AND INCOME EARNED DURING THE ACCOUNTING PER IOD IRRESPECTIVE OF ACTUAL CASH INFLOW. IS REQUIRED TO BE COMPARED WITH EXPENSES INCURRED DURING THE SAME PERIOD IRRESPECTIVE OF ACTUAL INFLOW OF CASH. 13.4 RELIANCE IS ALSO PLACED ON THE HONBLE SUPREME COURT DECISION IN THE CASE OR CIT VS. UP STATE INDU STRIAL DEVELOPMENT CORPORATION (1997) 225 ITR 703 WHICH HE LD THAT IN ORDER TO DETERMINE THE QUESTION OF TAXAB ILITY WELL SETTLED LEGAL PRINCIPLES AS WELL AS PRINCIPLES OF ACCOUNTANCY HAVE TO BE TAKEN INTO ACCOUNT AND THAT TO, THE PURPOSE OF ASCERTAINING PROFITS AND GAINS, THE ORDINARY PRINCIPLES OF COMMERCIAL ACCOUNTING SHOULD BE APPLI ED. 13.5 THE ITAT IN THE CASE OF WALLSTREET CONSTRUCT ION LTD, CLEARLY HELD THAT IN OUR VIEW THE TRUE PROFITS IN SUCH A CASE CAN BE DETERMINED ONLY WHEN THE ENTIRE COSTS OF P ROJECT 10 ITA NO.3372/CHNY/2019 DIRECT OR INDIRECT INCLUDING FINANCE COST IS ADDED TO THE VALUE OF WORK-IN-PROGRESS. THIS PROPOSITION IS ALSO FORTIFIED BY THE MATCHING CONCEPT AS PROFOUNDED BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF TAPARIA TO OTS LTD(SUPRA). WE HOLD THAT THE INTEREST IDENTIFIABLE WITH THAT PR OJECT SHOULD BE ALLOWED ONLY IN THE YEAR WHEN THE PROJECT IS COMPLETED AND THE INCOME FROM THAT PROJECT IS OFFER ED FOR TAXATION. 14. IN VIEW OF THE ABOVE DISCUSSIONS FACTUAL AND LE GAL PROPOSITIONS, THE CLAIM OF INTEREST EXPENDITURE OF RS. 41.37 CRORE TOWARDS THE LOAN OBTAINED SPECIFICALLY FOR THE PURPOSE OF PURCHASING LAND AT MRC NAGAR IS DISALLOW ED AND ADDED TO THE WORK-IN-PROGRESS OF INVENTORY 5. BEING AGGRIEVED BY THE ASSESSMENT ORDER, THE ASS ESSEE PREFERRED AN APPEAL BEFORE CIT(A). BEFORE THE LEAR NED CIT(A), THE ASSESSEE HAS REITERATED ITS ARGUMENTS MADE BEFO RE THE ASSESSING OFFICER AND ALSO RELIED UPON THE DECISIO N OF HONBLE GUJARAT HIGH COURT IN THE CASE OF DCIT VS. CORE HE ALTHCARE LTD., (2001) 251 ITR 61. THE SUM AND SUBSTANCE OF A RGUMENTS OF THE ASSESSEE BEFORE THE LEARNED CIT(A) ARE THAT INTEREST PAID ON LOAN BORROWED FOR THE PURPOSE OF BUSINESS CANNO T BE DISALLOWED U/S.36(1)(III) OF THE ACT, WHEN SUCH BUS INESS HAS BEEN COMMENCED AND FURTHER REVENUE HAS BEEN RECOGNI ZED 11 ITA NO.3372/CHNY/2019 FROM THE BUSINESS. THE ASSESSEE FURTHER CONTENDED T HAT THE ASSESSING OFFICER HAS COMPLETELY ERRED IN DISALLOWI NG INTEREST BY CONSIDERING AS-16 ISSUED BY THE ICAI WITHOUT UN DERSTANDING THE FACT THAT ACCOUNTING STANDARD ISSUED BY ICAI CA NNOT OVERRIDE INCOME-TAX PROVISIONS, BECAUSE ALLOWABILIT Y OR OTHERWISE OF EXPENSES NEEDS TO BE CONSIDERED IN LIG HT OF PROVISIONS OF THE ACT, WHERE SPECIFIC PROVISION HAS BEEN PROVIDED TO ALLOW INTEREST EXPENDITURE, AS PER WHIC H INTEREST PAID ON LOAN BORROWED FOR THE PURPOSE OF BUSINESS SHOULD BE ALLOWED, UNLESS, SUCH INTEREST IS PAID FOR ACQUISIT ION OF CAPITAL ASSET AND FURTHER, SAID CAPITAL ASSET WAS NOT PUT T O USE IN THE BUSINESS OF THE ASSESSEE FOR THE RELEVANT FINANCIAL YEAR. IN THIS CASE, THE ASSESSEE HAS PROVED WITH NECESSARY EVIDEN CES THAT BUSINESS OF THE ASSESSEE HAS BEEN COMMENCED AND FUR THER, PURCHASE OF LAND FOR THE PURPOSE OF CONSTRUCTION OF HOUSING PROJECT IS NOTHING BUT AN INVENTORY IN THE BUSINESS OF THE ASSESSEE AND FURTHER, ONCE INVENTORY IS ACQUIRED IM MEDIATELY THE SAME WOULD BE PUT TO USE IN THE BUSINESS OF THE ASSESSEE. THEREFORE, FOLLOWING THE PRINCIPLES PROVIDED IN AS- 16 TO DISALLOW INTEREST PAID ON LOAN BORROWED FOR THE PURPOSE OF B USINESS IS 12 ITA NO.3372/CHNY/2019 INCORRECT, MORE PARTICULARLY, WHEN PURPOSE OF AS-16 IS TO GIVE TREATMENT OF BORROWING COST. 6. THE LEARNED CIT(A), AFTER CONSIDERING RELEVANT SUBMISSIONS OF THE ASSESSEE REJECTED THE ARGUMENTS TAKEN BY THE ASSESSEE IN LIGHT OF VARIOUS DECISIONS INCLUDIN G THE DECISION OF TAPARIA TOOLS LTD (SUPRA) ON THE GROUND THAT WHE N THE ASSESSEE HAS NOT YET COMMENCED ITS BUSINESS, THE Q UESTION OF DEDUCTION OF INTEREST U/S.36(1)(III) OF THE ACT DOE S NOT ARISE. THE LEARNED CIT(A) FURTHER OBSERVED THAT LOAN BORROWED FROM IFCI LTD. WAS EXCLUSIVELY FOR MRC NAGAR PROJECT AND SAID PROJECT WAS NOT YET COMMENCED ITS ACTIVITIES. ALTHOUGH, THE ASSESSEE HAS STARTED RECOGNIZING REVENUE FROM REAL ESTATE SE GMENT, BUT REVENUE WAS COMING FROM ATLANTIC PROJECT, EGMORE, WHICH IS DISTINCT FROM MRC NAGAR PROJECT. FURTHER, THE ASSES SEE ITSELF IN ITS DIRECTORS REPORT FOR THE YEAR ENDING 31.03.201 5 STATED THAT PROJECT AT MRC NAGAR IS YET TO START ITS ACTIVITIES . SINCE THE PROJECT ITSELF IS NOT COMMENCED EXPENSES CLAIMED ON THE SAID PROJECT CANNOT BE TREATED AS ALLOWABLE UNDER THE AC T. THE LEARNED CIT(A) HAS DISCUSSED THE ISSUE IN LIGHT OF AS-16 AND PRINCIPLES OF MATCHING CONCEPT OF ACCOUNTING TO DIS TINGUISH CASE 13 ITA NO.3372/CHNY/2019 LAW RELIED UPON BY THE ASSESSEE IN THE CASE OF TA PARIA TOOLS LTD. (SUPRA) AND HELD THAT ALLOWABILITY OF DEDUCTIO N OF INTEREST EXPENDITURE CAN BE CONSIDERED ONLY WHEN THE PROJEC T AT MRC NAGAR WOULD COMMENCE ITS BUSINESS OPERATIONS. SINC E THE FACTS BROUGHT OUT BY THE ASSESSING OFFICER CLEARLY INDICATE THAT TWO PROJECTS EXECUTED BY THE ASSESSEE ARE DIFFERENT AND PROJECT AT MRC NAGAR IS NOT STARTED RECOGNIZING REVENUE FOR THE IMPUGNED ASSESSMENT YEAR, THEN THE EXPENDITURE INCU RRED TOWARDS SAID PROJECT INCLUDING INTEREST PAID ON LOA N BORROWED FOR ACQUISITION OF LAND CANNOT BE ALLOWED AS DEDUCTION, BUT NEEDS TO BE ADDED TO THE COST OF THE ASSET. ACCORDINGLY, REJECTED THE ARGUMENTS TAKEN BY THE ASSESSEE AND CONFIRMED ADDIT IONS MADE TOWARDS DISALLOWANCE OF INTEREST EXPENDITURE O F ` 41,37,73,978/- U/S.36(1)(III) OF THE ACT. THE RELEV ANT FINDINGS OF THE LEARNED CIT(A) ARE AS UNDER:- THE SUBMISSIONS OF THE APPELLANT WERE CONSIDERED V IS-A-VIS THE FINDINGS OF THE A,O. WHILE EXAMINING THE APPELLANT S SUBMISSIONS REGARDING THE INTEREST OF RS.41,37,73,978/ CLAIMED TOWARDS REPAYMENT OF LOAN TO IFCI LTD. CHENNAI, IT WAS NOTE D THAT THE APPELLANT ITSELF WAS FOLLOWING THE RECOGNITION OF I NCOME AND EXPENDITURE AS PER THE ACCOUNTING STANDARDS OF ICAI . THE A.O DISCUSSED THE GUIDELINES AS FURNISHED IN ACCOUNTING STANDARDS 16. IT WAS NOTED THAT BORROWING COST WHICH WERE DIRECTLY A TTRIBUTABLE TO THE 14 ITA NO.3372/CHNY/2019 ACQUISITION CONSTRUCTION OR PRODUCTION OF A QUALIFY ING ASSET SHOULD BE CAPITALIZED AS PART OF THAT ASSET. IT WAS ALSO NOTE D THAT OTHER BORROWING COST SHOULD BE RECOGNIZED AS AN EXPENSE I N THE PERIOD IN WHICH THEY WERE INCURRED. THE QUALIFYING ASSET, IN THIS CONTEXT, IS AN ASSET THAT NECESSARILY TAKES SUBSTANTIAL PERIOD OF TIME TO GET READY FOR ITS INTENDED USE OR SALE. THE A.O REASONED THAT AS 16 PROVIDES FOR CAPITALIZING THE BORROWING COST NOT ONLY FOR FIXED ASSETS BUT ALSO FOR OTHER ASSETS LIKE INVENTORY IT WAS ALSO NOTED THAT AS L6 PROVIDES THAT FUNDS BORROWED SPECIFICALLY FOR THE PURPOSE OF OBTA INING A QUALIFIED ASSET, THE AMOUNT OF BORROWING COST ELIGIBLE FOR CA PITALIZATION ON THAT ASSET SHOULD BE DETERMINED AS THE ACTUAL BORROWING COST INCURRED ON THAT BORROWING- THE A.O INFERRED THAT ACCORDING TO AS 16, CAPITALIZATION OF BORROWING COST SHOULD CEASE WHEN SUBSTANTIALLY ALL THE ACTIVITIES NECESSARY TO PREPARE THE QUALIFYING ASSETS FOR ITS INTENDED USE OR SALE ARE COMPLETE. THE A.O HELD THA T AS THE APPELLANT IS FOLLOWING THE ACCOUNTING STANDARDS OF ICAI. IT O UGHT TO CAPITALIZE THE INTEREST COST OF RS.41.37 CRORES ON THE LOAN OF RS.300 CRORES FROM IFCL LTD. INSTEAD IT WAS NOTED THAT THE APPELLANT C LAIMED THE ENTIRE INTEREST EXPENSE AS REVENUE EXPENSE FOR THE AY 2015 -16. IT WAS POINTED OUT BY THE AO THAT THE DEFINITION OF QUALIF YING ASSET USED IN AS 16 DOES NOT DIFFERENTIATE BETWEEN FIXED ASSET AN D INVENTORY, IT WAS ALSO HELD THAT THE INTEREST IDENTIFIABLE WITH THE P ROJECT SHOULD BE ALLOWED ONLY IN THE YEAR WHEN THE PROJECT WAS COMPL ETED AND THE INCOME FROM THAT PROJECT WAS OFFERED FOR TAXATION. IN THEIR WRITTEN SUBMISSIONS, THE APPELLANT HEL D THAT THE INTERPRETATION OF AS 16 BY THE A.O WAS NOT IN PROPE R PROSPECTIVE SINCE THE A.O REFERRED TO THOSE PORTIONS OF THE ACCOUNTIN G STANDARD WHICH DEALT WITH FIXED ASSETS/INVESTMENTS WHEREAS IN THE PRESENT CASE, THE LAND ON WHICH THE HOUSING PROJECT WAS BEING UNDERTA KEN WAS CLASSIFIED AS STOCK-IN-TRADE/INVENTORY OF THE APPEL LANT DUE TO ITS NATURE OF BUSINESS. THE APPELLANT ALSO HELD THAT THE A.OS RELIANCE ON THE DECISION OF WALLSTREET CONSTRUCTION LTD CITED SUPRA ) WAS FACTUALLY DISTINGUISHABLE AS THE SAID ORDER WAS RENDERED IN T HE CASE OR PROJECT COMPLETION METHOD WHEREAS THE APPELLANT EMPLOYED PE RCENTAGE 15 ITA NO.3372/CHNY/2019 COMPLETED METHOD, THE APPELLANT WHILE DISCUSSING AC COUNTING STANDARD 2 REFERRED TO THE DECISION OF THE BANGALOR E BENCH OF HONBLE ITAT IN A CASE REPORTED IN 71 TAXMANN.COM 184. IT W AS HELD BY THAT TRIBUNAL THAT NORMAL INTEREST AND BORROWING COST CA NNOT FORM PART OF COST OF INVENTORY. THE TRIBUNAL CITED THAT WHEN AN ASSESSEE IS FOLLOWING A METHOD OF VALUATION OF INVENTORY AS PER ACCOUNTING STANDARDS PRESCRIBED BY ICAI, THE APPELLANT WAS JUS TIFIED IN CONSIDERING INTEREST AS A PERIOD COST AND DEBITING IT IN ITS P&L. ACCOUNT. THE APPELLANT ALSO STATED THAT THE PROVISO TO SECTION 36(L)(III LAYS DOWN THE TEST OF PUTTING TO USE THE ASSET AS T HE CRITERIA FOR THE CLAIM OF THE COST OF BORROWING, IT WAS SUBMITTED TH AT THE ASSET WAS ALREADY PUT TO USE BY THE APPELLANT BY WAY OF COMME NCEMENT OF THE HOUSING PROJECT. THE APPELLANT ALSO RAISED THE ISSU E PERTAINING TO MATCHING CONCEPT. THE COMPANY CITED THE RATIO OF THE DECISION OF THE SUPREME COURT REPORTED IN 372 ITR 605 IN THE CASE O F TAPARIA TEDS LTD VS JCIT. THE APEX COURT HAD RULED THAT REVENUE EXPENDITURE INCURRED N A PARTICULAR YEAR HAD TO BE ALLOWED IN T HAT YEAR. HENCE) IT WAS CLAIMED THAT THE INTEREST EXPENDITURE INCURRED DURING THE A.Y OUGHT TO HAVE BEEN ALLOWED IN THE COMPUTATION OF TA XABLE TOTAL INCOME. IN THEIR WRITTEN SUBMISSIONS THE APPELLANT DREW ATTENTION TO THE PROVISIONS OF SECTION 37(1) OF THE ACT AND HELD THAT THE INTEREST EXPENDITURE SHOULD BE ALLOWED AS DEDUCTION. IT WAS EMPHASIZED THAT THE ACTION OF THE A.O IN SEGREGATING THE BUSINESS O F THE APPELLANT PROJECT-WISE WAS UNKNOWN TO THE INCOME TAX ACT, 196 1. IT WAS SUBMITTED THAT THE APPELLANT HAS INCOME FROM THE AC TIVITY OF CONSTRUCTION/REAL ESTATE. HENCE, ACCORDING TO THE A PPELLANT, THE ACTION OF THE A.O IN SEGREGATING ONE PROJECT ALONE FOR THE PURPOSE OF ALLOWING THE EXPENDITURE INCURRED IN THE COURSE OF CARRYING ON THE BUSINESS WAS NOT AS PER THE IT ACT. THE MATERIAL FACTS, ARGUMENTS AND JUDICIAL D ECISIONS PERTAINING TO THE APPEAL HAVE BEEN CAREFULLY CONSIDERED. IN OR DER TO GET A CLEAR PICTURE REGARDING THE FACTUAL MATHS, THE APPELLANT WAS ASKED TO FURNISH A NOTE ON UNSECURED LOANS AND A BREAK-UP OF (I) THE PROPERTY DEVELOPMENT AND CONSTRUCTION WIP (II) BANK INTEREST AND (III) FINANCIAL 16 ITA NO.3372/CHNY/2019 INSTITUTION/OTHER INTERESTS. THE LOAN TAKEN FROM IF CI LTD CHENNAI WAS RECORDED UNDER THE HEAD FINANCIAL INSTITUTION/OTHER INTEREST. THE TOTAL AMOUNT OUTSTANDING AS ON 31/3/2015 WAS RS.30L,92,12 ,329/- AND THE INTEREST AMOUNTED TO RS.41,37,73,978/-. THE TOTAL I NTEREST UNDER THIS HEAD STOOD AT RS.41,60,53,605/-. THE BREAK-UP OF PR OPERTY DEVELOPMENT AND CONSTRUCTION WIP WHICH AMOUNTED TO RS.845.67 CRORES COMPRISES TWO PROJECTS, ATLANTIC EGMORE AND MRC NAGAR. IN THE CASE OF ATLANTIC, EGMORE, IT WAS NOTED THAT A S UM OF RS.47,56.72,678/- WAS OFFERED AS PROFIT AND THE CLO SING WIP WAS RS.304,46,64,205/-. IN THE CASE OF MRC NAGAR, NO PR OFIT WAS OFFERED DURING THE FINANCIAL YEAR 2014-15. THE CURRENT YEAR EXPENDITURE WAS RS.5,1768,617/- AND THE CLOSING WORK-IN-PROGRESS ST OOD AT RS.541,2134044)-. THUS) IT IS NOTICED THAT IN THE C ASE OF MRC NAGAR PROJECT THE CURRENT YEAR EXPENDITURE CLAIMED WAS RS .5,17,68,617/- AS AGAINST NIL PROFIT THAT WAS OFFERED BY THE APPELLAN T IT IS INFERRED THAT THE APPELLANT HAS CLAIMED EXPENSES ALTHOUGH NO PROF IT WAS OFFERED FOR THE MRC PROJECT. THE PROFIT OFFERED BY THE APPELLAN T FOR THE A.Y 2015- 16 PERTAINS ONLY TO THE PROJECT ATLANTIC, EGMORE. IN ORDER TO ASCERTAIN THE INTEREST CLA IMED BY THE APPELLANT AMOUNTING TO RS.41,60,53,605/-. THE TERMS AND CONDI TIONS OF THE LOAN SANCTIONED BY IFCI WERE EXAMINED. IT WAS STATED THA T THE CORPORATE LOAN AMOUNT OF RS-300 CRORES WAS TO BE UTILISED FOR PURCHASE OF 90.53 GROUNDS OF LAND ALONG WITH PARTIALLY CONSTRUCTED HO TEL ASSET SITUATED AT MRC NAGAR. SINCE THE TRANSACTION WAS YET TO BE C OMPLETED IT WAS LAID DOWN THAT THE APPELLANT SHALL PROVIDE AN INTER NAL SECURITY BY WAY OF DEPOSIT OF THE TITLE DEEDS OF ATLANTIC HOTELS PR OPERTY AT EGMORE. THE AFORESAID INTERIM SECURITY DEPOSIT SHALL BE RELEASE D ON THE EXECUTION OF SALE DEED FOR VICEROY HOTELS LTD IN RESPECT OF M RC NAGAR PROPERTY. WHILE EXAMINING THE OTHER CONDITIONS, IT WAS NOTED THAT CLAUSE (XII) OF PRE DISBURSEMENT CONDITIONS STATES THAT IFCL SHALL RETAIN THE RIGHT TO APPOINT AN INDEPENDENT AGENCY TO VERIFY SALES OF MR C NAGAR PROJECT SPACE, RATE/SQ.FT AND REMITTANCES TO PROJECT ACCOUN T ETC. ON A MONTHLY/QUARTERLY BASIS. 17 ITA NO.3372/CHNY/2019 A STUDY OF THE FACTUAL MATRIX INDICATES T HAT THE LOAN BORROWED FROM IFCI LTD WAS EXCLUSIVELY FOR THE MRC NAGAR PRO JECT. THIS PROJECT WAS DISTINCT FROM THAT OF ATLANTIC, EGMORE. HENCE, THE APPELLANTS CLAIM THAT THE PROJECT WISE DISTINCTION MADE BY THE A.O NOT IN CONSONANCE WITH THE INCOME TAX ACT IS NOT JUSTIFIED . THE TERMS AND CONDITIONS GIVEN BY IFCI CLEARLY POINT OUT THE FACT THAT THE PROJECT IS AN EXCLUSIVE ONE AND HAS TO BE ACCOUNTED FOR SEPARATEL Y. IT IS NOTED THAT THE APPELLANT HAS NOT MAINTAINED THE DETAILS SEPARA TELY PERTAINING TO THE MRC NAGAR PROJECT IN ITS BALANCE SHEET BUT HAS GROUPED THE INCOME AS WELL AS THE EXPENDITURE OF BOTH THE PROJE CTS IN A CONSOLIDATED MANNER. IT IS ALSO OBSERVED THAT THE T RANSACTIONS WITH IFCI WERE STILL ONGOING AND HAS NOT YET BEEN COMPLE TED. THE TENURE OF A LOAN WAS FOR A PERIOD OF 5 YEARS WITH EFFECT FROM 19/12/2013, THE DATE OF THE LETTER OF INTENT ISSUED BY IFCI. TAKING INTO ACCOUNT THESE MATERIAL FACTS IT IS APPARENT THAT THE AMOUNT SPENT TOWARDS MRC NAGAR PROJECT HAS TO BE CAPITALIZED. MOREOVER, IT H AS TO BE CONSIDERED DISTINCTIVELY AND NOT WITH THE OTHER PROJECTS AS IT IS GOVERNED BY A SEPARATE SET OF TERM, AND CONDITIONS. THE A.O HAD RELIED ON ACCOUNTING STANDARD 16 PROSCR IBED BY ICAL AND HELD THAT THESE BORROWING COST WHICH AR E SPECIFICALLY MEANT FOR OBTAINING A QUALIFYING ASSET I.E. THE LAN D AT MRC NAGAR SHOULD BE CAPITALIZED AS PART OF THE COST OF THE AS SET. THE APPELLANT, ON THE OTHER HAND, HAD REFERRED TO ACCOUNTING STAND ARD 2 AND MAINTAINED THAT THE APPELLANT WAS JUSTIFIED IN CONS IDERING INTEREST AS A PERIOD COST AND DEBITING IT IN ITS P& L ACCOUNT. IN ORDER TO RESOLVE THIS DEBATE, THE VARIOUS CRITERIA ADOPTED BY THESE STANDARDS ARE CONSIDERED HEREWITH: AS 16 THIS STANDARD DEALS WITH BORROWING COST- IT WAS HELD THAT MEETING A PORTION OF BUSINESS NEEDS THROUGH BORROWA LS WAS A WELL ACCEPTED FORM OF FINANCING. IT DEALT WITH SITUATION S WHERE THE TIME LAG BETWEEN BUILDING UP OF AN ASSET AND SUBSEQUENT CREA TION OF EARNINGS FROM THE PROPERTY IS SUBSTANTIALLY LONG. PREAMBLE T O AS 16 STATED THAT IN SUCH EVENTS UNDER THE ACCRUAL AND MATCHING PRINC IPLE, THE INTEREST 18 ITA NO.3372/CHNY/2019 PAID ON FUNDS SPECIFICALLY FOR THAT PURPOSE (LONG T ERM OR CAPITAL EXPENDITURE)SHOULD BE SO EXPENSED AS WOULD MATCH WI TH FUTURE REVENUE. THE BORROWING COST (BC) AS PER AS 16 INCLU DES INTEREST AND COMMITMENT CHARGES ON BANK BORROWINGS. THE QUALIFYI NG ASSET (QA) IS AN ASSET THAT NECESSARILY TAKES SUBSTANTIAL PERI OD OF TIME TO GET READY FOR ITS INTENDED USE (FIXED ASSETS OR INVESTM ENT PROPERTIES) OR SALE (INVENTORY). IN RECOGNIZING BC THAT CAN BE CAP ITALIZED, IT WAS HELD THAT IT WAS PROBABLE THAT THE QUALIFYING ASSET AS A PAN OF WHICH ELIGIBLE SC IS CAPITALIZED WILL RESULT IN FUTURE ECONOMIC BE NEFITS. COSTS OTHER THAN ELIGIBLE BC AS WELL AS COSTS INCURRED FOR ASSE TS OTHER THAN QA SHOULD BE CHARGED OFF AS AN EXPENSE IN THE PERIOD I N WHICH IT IS INCURRED. THE ELIGIBLE ITEMS OF SC WERE THOSE THAT WERE DIRECTLY ATTRIBUTABLE TO THE ACQUISITION, CONSTRICTION OR PR ODUCTION OF A QA. THE BC INCURRED ON QUALIFYING ASSET IS TO BE CAPITALIZE D ONLY IF ALL THE THREE FOLLOWING CONDITIONS ARE FULFILLED. I)EXPENDITURE ON QA IS BEING INCURRED II BORROWING COST ARE INCURRED III) ACTIVITIES ARE IN PROGRESS AS PER AS 16, THE ACCOUNTING POLICY FOLLOWING FOR T REATMENT OF BC AND THE AMOUNT OF BC CAPITALIZED DURING THE PERIOD HAVE TO BE DISCLOSED. THE APPELLANTS CASE INVOLVES THE PURCHASE OF LAND AND CONSTRUCTION OF BUILDING. THE BORROWING FROM IFCI WAS TOWARDS AC QUISITION OF LAND AT MRC NAGAR FOR PURPOSES OF CONSTRUCTION OF RESIDE NTIAL APARTMENTS. THE ASSETS FOR WHICH THE BORROWING COST WERE INCURR ED ARE FOUND TO UTILIZE SUBSTANTIAL PERIOD OF TIME TO GET READY FOR ITS INTENDED USE OR SALE. HENCE, THIS ACCOUNTING STANDARD HAS BEEN FOUN D TO BE APPROPRIATE FOR THE APPELLANTS CASE. THE INTEREST ATTRIBUTED TO THE ACQUISITION OF LAND IN ACCORDANCE WITH AS 16 HAS TO BE CAPITALIZED IRRESPECTIVE OF WHETHER THEY FALL UNDER THE CATEGOR Y OF FIXED ASSETS/INVESTMENT PROPERTIES OR INVENTORY. IT WAS A LSO NOTED THAT CAPITALIZATION OF BORROWING COST SHOULD CEASE WHEN ALL ACTIVITIES NECESSARY FOR MAKING ASSETS READY FOR INTENDED USE/ SALE WERE SUBSTANTIALLY COMPLETE. IN THE INSTANT CASE, THE CE SSAT1ON OF CAPITAIIZATION HAS NOT TAKEN PLACE. HENCE, THE BC O N THE QA SHOULD 19 ITA NO.3372/CHNY/2019 BE CONSIDERED AS CAPITALIZED DURING THE RELEVANT PR EVIOUS YEAR AS PER THE CRITERIA LAID DOWN UNDER AS 16. AS 2 THIS ACCOUNTING STANDARD PERTAINS TO VALUATION OF INVENTORIES. IT MAY INVOLVE VARYING DEGREES OF ESTIMATION AND IT AF FECTS BOTH THE RESULTS OF OPERATION AS WELL AS THE FINANCIAL POSIT ION AS REFLECTED IN THE BALANCE SHEET- ITEMS SUCH AS EXPENSES, REVENUES OR BOOK DEBTS CAN BE RECORDED IN THE BOOKS OF ACCOUNTS WITH A FAIR DE GREE OF ACCURACY- BUT AN ELEMENT OF SUBJECTIVITY IS INVOLVED IN MEASU REMENT OF ITEMS SUCH AS DEPRECIATION OR INVENTORY VALUE- INVENTORIE S ARE ASSETS HELD FOR SALE IN THE ORDINARY COURSE OF BUSINESS, IN THE PROCESS OF PRODUCTION FOR SUCH SALE OR IN THE FARM OF MATERIAL S OR SUPPLIES TO BE CONSUMED IN PRODUCTION PROCESS OR IN THE RENDERING OF SERVICES. IT ALSO INCLUDES INTANGIBLE ITEMS SUCH AS SOFTWARE. TH E AS 2 DOES NOT COVER WIP UNDER CONSTRUCTION CONTRACTS. HENCE, THIS ACCOUNTING STANDARD CANNOT BE CONSIDERED APPROPRIATE FOR DETER MINING THE NATURE OF BORROWING COST IN THE APPELLANTS CASE. DURING THE APPELLATE PROCEEDINGS, THE AR FU RNISHED ABSTRACT OF THE EXPENSES PERTAINING TO MRC NAGAR PROJECT FOR TH E AY 2015-16. A PERUSAL OF THESE EXPENSES REVEALS THAT THEY WERE IN THE NATURE OF ADVERTISEMENT EXPENSES, ARCHITECT FEES CMDA CHARGES , CONSULTANCY CHARGES, ELECTRICITY CHARGES, LEGAL LEES, RENT, SEC URITY CHARGES, SITE EXPENSES, VARIOUS LABOUR CHARGES AND PURCHASE OF MA TERIALS. THE APPELLANT HAD ALSO FURNISHED THE LEDGER ACCOUNTS FO R THESE EXPENSES AND THEY WERE A]SO PERUSED. ACCORDING TO THE APPELL ANT, THE QUALIFYING ASSET SHOULD BE CONSIDERED AS PUT TO USE [OR THE IN TENDED DEVELOPMENT OF THE HOUSING PROJECT IN VIEW OF THE M AJOR WORK OF DEMOLITION OF THE EXISTING STRUCTURE NEWLY BUILT BY THE PREVIOUS ORDER FOR HOTEL BUSINESS BY THE APPELLANT. HENCE, IT WAS SUBMITTED THAT THERE WAS NOTHING ABSOLUTELY WRONG IN TREATING THE PROPER TY AS INVENTORY IN THE COMPILATION OF FINANCIAL STATEMENTS. IT WAS ALS O STATED THAT THE INVENTORY IN THE BUSINESS/HOLDING OF AN INVENTORY I N THE BUSINESS BY ITSELF IS A BUSINESS ACTIVITY IN THE NORMAL COURSE AND IN CONTINUATION OF THE BUSINESS OF CONSTRUCTION PURSUED BY THE APPELLA NT THE APPELLANT 20 ITA NO.3372/CHNY/2019 HAD ALSO CLAIMED DEDUCTION OF INTEREST ON BORROWED CAPITAL U/S.36(1](HI) OF THE ACT ON THE GROUNDS THAT THE AP PELLANT WAS CARRYING ON THE EXISTING BUSINESS OF CONSTRUCTION BY VIRTUE OF PURCHASE OF INVENTORY BEING THE PROPERTY AT MRC NAGAR FOR DEVEL OPMENT PURPOSES. THE MOOT POINT CONCERNS WHETHER THE MRC P ROJECT HAD COMMENCED ITS OPERATIONS DURING THE A.Y 2014- 15 FO R THE PURPOSES FOR WHICH IT HAD BEEN CONCEIVED. ALTHOUGH THE APPEL LANT HAS FURNISHED DETAILS OF EXPENSES INCURRED FOR THE PROJECT, IT HA S TO BE ASCERTAINED WHETHER THESE EXPENSES CAN BE CONSIDERED AS PERTAIN ING TO THE BUSINESS OF CONSTRUCTION OF RESIDENTIAL BUILDINGS A S PROPOSED TO BE CARRIED OUT IN THE MRC NAGAR PROJECT. THE DIRECTOR S REPORT FOR THE F.Y ENDED MARCH 2015 PROVIDES DETAILS REGARDING THE PROJECTS OF THE COMPANY. IT WAS STATED THAT THE COMPANY HAD MADE SU BSTANTIAL PROGRESS IN THE ATLANTIC RESIDENTIAL PROJECT AND TH AT THE PROJECT WOULD HE COMPLETED AND HANDED OVER DURING THE CURRENT FIN ANCIAL YEAR, AS REGARDS THE MRC NAGAR PROJECT, THE DIRECTORS REPORT STATED THUS: YOUR BOARD HAS TAKEN APPROPRIATE ACTION AND INITIA TED ALL NECESSARY STEPS TO CONTINENCE THE PROJECT AT MRC NAGAR DURING THE ENSUING YEAR. IT IS THUS ASCERTAINED FROM THE DIRECTORS REPORT TH AT THE MRC NAGAR PROJECT HAD NOT COMMENCED DURING THE RELEVANT PREVI OUS YEAR. SINCE THE PROJECT ITSELF HAS NOT COMMENCED, THE EXPENSES CLAIMED BY THE APPELLANT CANNOT BE TREATED AS INVENTORY. THEY ARE TO BE TREATED AS PRO-OPERATIVE EXPENSES WHICH HAVE TO BE CAPITALIZED . THE INTEREST EXPENDITURE CLAIMED BY THE APPELLANT WHICH IS BASIC ALLY A BORROWING COST CANNOT BE CLAIMED AS REVENUE EXPENDITURE AS IT FORMS PART OF THE PRE OPERATIVE EXPENDITURE OF THE APPELLANT DURING T HE FY ENDED 31/3/2015. THE APPELLANT RELIED ON THE DECISION OF T HE SUPREME COURT IN THE CASE OF TAPARIA TOOLS LTD VS. JCIT (2015) 372 I TR 0605 (SC). THE APEX COURT RULED THAT ANY AMOUNT OF INTEREST PA ID BECOMES AN ADMISSIBLE DEDUCTION U/S.36 IF THE INTEREST WAS PAI D ON THE CAPITAL BORROWED BY THE APPELLANT AND THIS BORROWING WAS FO R THE PURPOSE OF BUSINESS OR PROFESSION. IN THAT CASE, THE MONEY RAI SED ON ACCOUNT OF 21 ITA NO.3372/CHNY/2019 ISSUANCE OF DEBENTURES WOULD BE CAPITAL BORROWED AN D DEBENTURES WERE ISSUED FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE. THE SUPREME COURT RULED THAT WHEN THE INTEREST WAS ACTU ALLY INCURRED BY THE APPELLANT WHICH FOLLOWS THE MERCANTILE SYSTEM O F ACCOUNTING, THE APPELLANT WOULD BE ENTITLED TO DEDUCTION OF FULL AM OUNT IN THE ASSESSMENT YEAR IN WHICH IT IS PAID. IT WAS ALSO HE LD THAT ONCE THE GENUINENESS IS PROVED AND THE INTEREST IS PAID ON T HE BORROWING IT IS NOT THIN THE POWERS OF THE A.O TO DISALLOW THE DEDU CTION EITHER ON THE GROUND THAT THE RATE OF INTEREST IS UNREASONABLY HI GH OR THAT THE ASSESSEE HAD HIMSELF CHARGED A LOWER RATE OF INTERE ST ON THE MONEYS HE LENT. IT WAS FURTHER STATED THAT NORMALLY THE OR DINARY RULE IS TO BE APPLIED I.E. THE REVENUE EXPENDITURE INCURRED IN A PARTICULAR YEAR IS TO BE ALLOWED IN THAT YEAR. IN THE INSTANT CASE, THE E XPENSES INCURRED BY THE APPELLANT FOR THE MRC NAGAR PROJECT CANNOT BE C ONSIDERED REVENUE EXPENDITURE AS THE PROJECT ITSELF HAD NOT C OMMENCED DURING THE RELEVANT PREVIOUS YEAR. THE INTEREST CLAIMED BY THE APPELLANT CANNOT BE STATED AS BEING INCURRED FOR THE PURPOSE OF BUSINESS AS THE PROJECT WAS SLATED TO COMMENCE ONLY DURING THE NEXT F.Y I.E. 2015- 16. THE DEDUCTION WAS DISALLOWED NOT ON THE GROUNDS THAT THE RATE OF INTEREST WAS UNREASONABLY HIGH OR THAT THE APPELLAN T HAD CHARGED A LOWER RATE OF INTEREST ON THE MONEYS WHICH HE LENT BUT BECAUSE THE EXPENSES WERE IN THE NATURE OF PRE-OPERATIVE EXPEND ITURE. THEREFORE THE ALLOWABILITY OF THE DEDUCTION OF INTEREST EXPEN DITURE CAN BE CONSIDERED ONLY WHEN THE PROJECT AT MRC NAGAR WOULD COMMENCE ITS BUSINESS OPERATIONS. HENCE, THE RULE THAT REVENUE EXPENDITURE INCURRED IN A PARTICULAR YEAR IS TO BE ALLOWED IN T HAT YEAR ITSELF IS NOT FOUND APPLICABLE IN THE INSTANT CASE. THE APPELLANT ALSO HAD RELIED ON THE DECIS ION OF THE BANGALORE TRIBUNAL (2016) 71 TAXMANN.COM 184 IN THE CASE OF D CIT VS. JSR CONSTRUCTIONS PVT. LTD. IN THAT CASE, THE ASSESSEE WAS DOING ROAD WORK BASED ON CONTRACTS AWARDED TO IT. THE HONBLE BANGALORE TRIBUNAL C BENCH HELD THAT INTEREST COST ATTRIBUT ED TO LOANS TAKEN FOR FINANCING ITS NORMAL TRADING ACTIVITY IS A PERIOD C OST THAT HAS TO BE CHARGED TO P&L ACCOUNT. THE ITAT HAD REFERRED TO CL AUSE 12 OF THE 22 ITA NO.3372/CHNY/2019 ACCOUNTING STANDARD 2 AND STATED THAT NORMAL INTERE ST AND BORROWING COST CANNOT FORM PAN OF COSTS OF INVENTORY. IT WAS STATED THAT WHEN AN ASSESSEE IS FOLLOWING METHOD OF VALUATION OF INVENT ORY WHICH WAS IN ACCORDANCE WITH THE PRESCRIBED ACCOUNTING STANDARDS , THE ASSESSEE CANNOT BE MADE TO ADOPT A DIFFERENT METHOD AND IT C ANNOT BE SAID THAT THE APPELLANT HAD UNDERSTATED ITS WORK-IN-PROGRESS OR INVENTORY BY NOT CHARGING INTEREST RELATING TO WORKING CAPITAL L OAN TO ITS VALUATION. IN THE INSTANT CASE, THE APPELLANT HAD NOT YET COMMENC ED ITS BUSINESS AND HENCE THE INTEREST CLAIMED CANNOT BE CONSIDERED A PERIOD COST THAT HAD TO BE CHARGED TO P&L ACCOUNT. AS PER THE A CCOUNTING STANDARD 16 PRESCRIBED BY ICAI, THE INTEREST WHICH IS A BORROWING COST HAS TO BE CAPITALIZED. ON THE BASIS OF THE AFORE SAID FACTS AND OB SERVATIONS, I HOLD THAT THE APPELLANT IS NOT JUSTIFIED IN CLAIMING THE SUM OF RS.41,37,73,978/- AS ADMISSIBLE INTEREST EXPENDITUR E. THE ADDITIONS MADE BY THE A.O ARE UPHELD THIS GROUND OF APPEAL IS DISMISSED. 7. THE LEARNED AR FOR THE ASSESSEE SUBMITTED THAT T HE LEARNED CIT(A) HAS ERRED IN SUSTAINING THE DISALLOW ANCE OF DEDUCTION CLAIMED TOWARDS INTEREST EXPENSES U/S.36( 1)(III)/ 37(1) OF THE ACT, WITHOUT APPRECIATING THE FACT THA T INTEREST PAID ON LOAN BORROWED FROM IFCI LTD. IS FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE AND FURTHER, SAID BUSINESS ACTIVIT Y WAS COMMENCED DURING THE IMPUGNED ASSESSMENT YEAR. THE AR FURTHER SUBMITTED THAT THE ASSESSING OFFICER AS WEL L AS THE LEARNED CIT(A) HAVE COMPLETELY ERRED IN FOLLOWING A S-16 ISSUED BY ICAI, WHICH IS FOR RECOGNIZING BORROWING COST IG NORING 23 ITA NO.3372/CHNY/2019 SPECIFIC PROVISIONS PROVIDED UNDER THE ACT TO TREAT INTEREST PAID ON LOAN BORROWED FOR THE PURPOSE OF BUSINESS, WITHO UT APPRECIATING THE FACT THAT AS-16 ISSUED BY ICAI CAN NOT OVERRIDE THE PROVISIONS OF INCOME TAX ACT . THE AR FURTHER S UBMITTED THAT THE ASSESSING OFFICER HAS APPLIED PROVISIONS O F SECTION 36(1)(III) OF THE ACT AND PROVISO PROVIDED THERETO TO DISALLOW INTEREST WITHOUT APPRECIATING THE FACT THAT THE TER M PUT TO USE WILL COME INTO OPERATION, WHEN CAPITAL ASSET IS ACQ UIRED FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE AND FURTHER, S AID CAPITAL ASSET WAS NOT PUT TO USE IN THE BUSINESS. IN THIS C ASE, ASSET ACQUIRED BY THE ASSESSEE IS AN INVENTORY IN THE BUS INESS OF THE ASSESSEE AND THE MOMENT INVENTORY IS ACQUIRED, IT W ILL BE PUT TO USE IN THE BUSINESS OF THE ASSESSEE. THEREFORE, QUE STION OF APPLICATION OF PROVISO TO SECTION 36(1)(III) HAS NO APPLICATION IN THE GIVEN FACTS AND CIRCUMSTANCES OF THE CASE. THE AR FURTHER REFERRING TO VARIOUS DOCUMENTS FILED IN THE PAPER B OOK SUBMITTED THAT THE ASSESSEE HAS TREATED REAL ESTATE DEVELOPME NT SEGMENT AS ONE BUSINESS, WHICH EXECUTES NUMBER OF PROJECTS IN DIFFERENT PLACES. WHEN THE BUSINESS OF VARIOUS REAL ESTATE DE VELOPMENTS ARE CONSIDERED AS ONE SEGMENT, THEN SEGREGATION OF THE 24 ITA NO.3372/CHNY/2019 PROJECTS UNDERTAKEN BY THE ASSESSEE IS INCORRECT. T HE AR FURTHER SUBMITTED THAT THE LEARNED CIT(A) FAILED TO APPRECIATE THAT CONCLUSION REACHED ON NON-COMMENCEMENT OF PROJ ECT WHICH WAS RELATING TO CLAIM OF INTEREST EXPENDITU RE WAS WHOLLY UNJUSTIFIED AND OUGHT TO HAVE APPRECIATED THAT COMM ENCEMENT OF BUSINESS UNDER CONSIDERATION SHOULD BE RECKONED FROM THE DATE OF PURCHASE OF THE LAND WITH STRUCTURES MEANT FOR DEVELOPMENT OF WHILE FURTHER OUGHT TO HAVE APPRECI ATED THAT HAVING NOT DISPUTED FACT OF THE ASSESSEE THAT ASSE SSEE HAS ENGAGED IN THE BUSINESS OF THE PROPERTY DEVELOPMENT , STANDALONE APPROACH BY SEGREGATING THE PROJECT UN DER SCRUTINY FOR THE PURPOSE OF CONSIDERING ALLOWABILITY OF INTE REST EXPENSES IS ERRONEOUS . THE AR FOR THE ASSESSEE FURTHER REFERRING TO THE DECISION OF HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. ADITYA PROPCON PVT. LTD. VIDE ORDER NO.82 OF 2014 DATED 10.10.2017 SUBMITTED THAT UNDER IDENTICAL SET OF FA CTS, THE HONBLE HIGH COURT HELD THAT INTEREST ON FUNDS BOR ROWED TO PURCHASE LAND WHICH IS PART OF INVENTORY OF THE A SSESSEE IS AN ALLOWABLE DEDUCTION U/S. 36(1)(III) OF THE ACT. IN THIS CASE, LAND PURCHASED BY THE ASSESSEE WAS PART OF INVENTORY OF THE 25 ITA NO.3372/CHNY/2019 BUSINESS AND HENCE, QUESTION OF APPLICATION OF PROV ISO TO SECTION 36(1)(III) OF THE ACT IS INCORRECT. 8. THE LEARNED DR, ON THE OTHER HAND, STRONGLY SUPP ORTING THE ORDER OF LEARNED CIT(A) SUBMITTED THAT INTEREST ATTRIBUTABLE TO ACQUISITION OF LAND IS IN ACCORDANCE WITH AS-16 HAS TO BE CAPITALIZED IRRESPECTIVE OF WHETHER THEY HAVE FALL UNDER THE CATEGORY OF FIXED ASSETS / INVENTORY, BECAUSE AS- 2 PERTAINS TO VALUATION OF INVENTORY AND DOES NOT COVER WORK IN P ROGRESS UNDER CONSTRUCTION CONTRACTS. THE DR REFERRING TO P RE- DISBURSEMENT CONDITIONS OF IFCI LTD. IMPOSED WHILE GRANTING LOAN SUBMITTED THAT LENDER HAS RETAINED RIGHT TO A PPOINT AN INDEPENDENT AGENCY TO VERIFY SALES OF MRC NAGAR PRO JECT ON A MONTHLY BASIS AND FURTHER, LOAN BORROWED FROM IFCI LTD. WAS EXCLUSIVELY FOR THE MRC NAGAR PROJECT. THEREFORE, EVEN THOUGH THE ASSESSEE HAS NOT MAINTAINED DETAILS SEPARATELY PERTAINING TO MRC NAGAR PROJECT IN ITS BALANCE SHEET, THE FAC T REMAINS THAT MRC NAGAR PROJECT IS A STANDALONE PROJECT A ND HAS TO BE CONSIDERED DISTINCTIVELY, AS IT IS GOVERNED BY A SE T A TERMS & CONDITIONS. THE LEARNED DR FURTHER REFERRING TO THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF L.M.CHHABADA & SONS 26 ITA NO.3372/CHNY/2019 VS.CIT 65 ITR 638 AND A DECISION OF HONBLE CALCUT TA HIGH COURT IN THE CASE OF RITZ CONTINENTAL HOTELS VS. CIT 114 ITR 554(CAL) SUBMITTED THAT MRC NAGAR PROJECT SHOULD BE TREATED AS STANDALONE PROJECT BECAUSE THERE IS NO INTERLAC ING, INTERCONNECTION, INTERDEPENDENCE OR DOVETAILING WIT H OTHER PROJECT AT EGMORE EITHER OPERATIONALLY OR FINANCIAL LY OR SPATIALLY. FURTHER, MERE CLASSIFICATION IN ACCOUNTING BY PROVI DING A CONSOLIDATED FIGURE WILL NOT ALTER SUBSTANTIVE NATU RE OF THE PROJECT PER SE. HE FURTHER REFERRING TO FINANCIAL STATEMENT OF TH E ASSESSEE, MORE PARTICULARLY, DIRECTORS REPORT FOR THE FINANCIAL YEAR 31.03.2015 SUBMITTED THAT ASSESSEE ITSELF IN ITS DIRECTORS REPORT STATED THAT PROJECT AT MRC NAGAR IS YET TO COMMENCE ITS ACTIVITIES DURING THE YEAR UNDER CONSIDERATION. FU RTHER, THE ASSESSEE IS NOT IN THE BUSINESS OF TRADING LAND PAR CELS TO TREAT THE LAND ACQUIRED AS INVENTORY IN THE HANDS OF THE ASSESSEE. THE EXPENSES INCURRED BY THE ASSESSEE FOR THE PROJE CT CANNOT BE CONSIDERED AS REVENUE EXPENDITURE BECAUSE PROJEC T ITSELF HAD NOT COMMENCED DURING THE RELEVANT PREVIOUS YEAR . THEREFORE, INTEREST PAID ON LOAN BORROWED FOR THE P URPOSE OF PURCHASE OF LAND CANNOT BE ALLOWED AS DEDUCTION U/S . 36(1)(III) 27 ITA NO.3372/CHNY/2019 OR ALTERNATIVELY 37(1) OF THE ACT. THE DR FURTHER R EFERRING TO THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF C IT VS. U.P STATE INDUSTRIAL DEVELOPMENT CORPORATION 225 ITR 703(SC), SUBMITTED THAT DURING THE PRE-COMMENCEMENT PERIOD I NTEREST PAID ON LOAN IS NOT ALLOWABLE AS DEDUCTION, BUT IT WOULD GO TO INCREASE COST OF THE ASSET. THEREFORE, HE SUBMITTED THAT THERE IS NO ERROR IN THE FINDINGS RECORDED BY THE LEARNED CI T(A) TO AFFIRM DISALLOWANCE OF INTEREST U/S. 36(1)(III) OF THE ACT BY THE ASSESSING OFFICER AND HENCE, THE ORDER OF LEARNED CIT(A) SHOULD BE UPHELD. 9. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE MATE RIALS AVAILABLE ON RECORD AND GONE THROUGH ORDERS OF THE AUTHORITIES BELOW ALONG WITH VARIOUS CASE LAWS CITED BY LEARNED COUNSEL FOR THE ASSESSEE AS WELL AS THE REVENUE. THE FACTUAL MA TRIX OF IMPUGNED DISPUTE AS BORNE OUT FROM RECORDS INDICATE THAT THE ASSESSEE HAS BORROWED LOAN FROM M/S. IFCI LTD. FOR THE PURPOSE OF PURCHASE OF LAND AT MRC NAGAR, CHENNAI AND CLAI MED INTEREST PAID ON SUCH LOAN U/S. 36(1)(III) OF THE A CT. THE ASSESSING OFFICER HAS DISALLOWED INTEREST PAID ON L OAN BORROWED FROM IFCI LTD. BY INVOKING PROVISIONS OF SECTION 28 ITA NO.3372/CHNY/2019 36(1)(III) OF THE ACT ON THE GROUND THAT LAND PURCH ASED AT MRC NAGAR WAS NOT PUT TO USE IN THE BUSINESS OF THE ASS ESSEE AND THUS, INTEREST PAID ON LOAN BORROWED FOR ACQUISITIO N OF ANY ASSET NEEDS TO BE CAPITALIZED TO THE COST OF THE ASSET, T ILL SUCH TIME THE ASSET WAS PUT TO USE IN THE BUSINESS OF THE ASSES SEE. ACCORDING TO THE ASSESSING OFFICER, ALTHOUGH REAL E STATE SEGMENT IS ONE BUSINESS OF THE ASSESSEE, BUT PROJEC T AT EGMORE AND MRC NAGAR SHOULD BE CONSIDERED ON STANDA LONE BASIS AND IF TWO PROJECTS ARE CONSIDERED ON STANDAL ONE BASIS, THE PROJECT AT MRC NAGAR IS YET TO COMMENCE ITS AC TIVITIES IN THE IMPUGNED ASSESSMENT YEAR AND THUS, ANY EXPENDI TURE INCLUDING INTEREST PAID ON LOAN BORROWED FOR THE PU RPOSE OF PROJECT NEEDS TO BE CAPITALIZED AND ADDED BACK TO WORK-IN- PROGRESS ACCOUNT. THE ASSESSING OFFICER HAS TAKEN S UPPORT FROM AS-16 ISSUED BY ICAI AND PRINCIPLES OF MATCHIN G CONCEPT OF ACCOUNTING TO SUPPORT HIS FINDING AND ACCORDING TO HIM; UNLESS REVENUE IS RECOGNIZED FROM THE PROJECT CORRE SPONDING EXPENSES CANNOT BE ALLOWED. THE ASSESSING OFFICER H AS ALSO RELIED ON AS-16 ISSUED BY ICAI TO COME TO THE CONCL USION THAT BORROWING COST OF ELIGIBLE ASST SHOULD BE CAPITALIZ ED AS PART OF 29 ITA NO.3372/CHNY/2019 COST OF THAT ASSET TILL SUCH TIME ALL THE ACTIVITIE S NECESSARY TO PREPARE THE QUALIFYING ASSET FOR ITS INTENDED USE O R SALE ARE COMPLETE. 10. IN LIGHT OF ABOVE FACTUAL MATRIX, IF YOU EXAMIN E FACTS OF THE PRESENT CASE, IT IS NECESSARY TO UNDERSTAND THE PRO VISIONS OF SECTION 36(1)(III) AND PROVISO PROVIDED THERETO.. T HE PROVISIONS OF SECTION 36(1)(III) OF THE ACT DEALS WITH INTERES T PAID IN RESPECT OF CAPITAL BORROWED FOR THE PURPOSE OF BUSINESS OR PROFESSION. FURTHER, THE PROVISO PROVIDED TO SECTION 36(1) DEAL S WITH INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR ACQUISITION OF ASSET FOR ANY PERIOD BEGINNING FROM THE DATE ON WHICH CAPITAL ASSET WAS BORROWED FOR ACQUISITION OF THE ASSET TILL THE DATE ON WHICH SUCH ASSET WAS PUT TO USE SHALL NOT BE ALLOWED AS DEDUCT ION. THEREFORE, ALLOWABILITY OR OTHERWISE OF INTEREST PA ID ON LOAN BORROWED FROM M/S. IFCI LTD. NEEDS TO BE EXAMINED WITHIN THE SCOPE OF SECTION 36(1)(III) OF THE ACT. THE PROVISI ONS OF SECTION 36(1)(III) OF THE ACT PERMIT CLAIMING OF INTEREST C OST IN RESPECT OF CAPITAL BORROWED FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. IN THIS CASE, THERE IS NO DOUBTS WHATSOEVER, WITH R EGARD TO THE 30 ITA NO.3372/CHNY/2019 FACT THAT LOAN BORROWED FROM IFCI LTD., IS FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. IN FACT, THE ASSESSING OF FICER HAS CATEGORICALLY ADMITTED THAT LOAN IS BORROWED FOR TH E PURPOSE OF BUSINESS OF THE ASSESSEE. HOWEVER, HE HAS DENIED IN TEREST DEDUCTION ONLY ON THE GROUND THAT ASSET PURCHASED B Y THE ASSESSEE WAS NOT PUT TO USE IN THE IMPUGNED ASSESSM ENT YEAR FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. 11. WE HAVE GIVEN OUR THOUGHTFUL CONSIDERATION TO T HE REASONS GIVEN BY THE ASSESSING OFFICER FOR DISALLO WING INTEREST PAID ON LOAN AND FIND THAT THERE IS NO SUBSTANCE IN THE REASONS GIVEN BY THE ASSESSING OFFICER IN LIGHT OF ACCOUNT ING STANDARD- 16 ISSUED BY THE ICAI, BECAUSE AS-16 DEALS WITH IS SUE OF BORROWING COST WHICH IS SPECIFICALLY FOR THE PURPO SE OF TREATMENT OF INTEREST PAID ON LOAN BORROWED FOR ACQ UISITION OF LONG TERM ASSET LIKE ASSET THAT NECESSARILY TAKE S SUBSTANTIAL PERIOD OF TIME TO GET READY FOR INTENDED USE OR SA LE. ALTHOUGH, IT DOES NOT SPECIFICALLY SAYS IT IS NOT APPLICABLE TO AN ASSET BEING INVENTORY IN THE BUSINESS OF THE ASSESSEE, BUT IF Y OU SEE DEFINITION OF QUALIFYING ASSET IT SPECIFICALLY SAYS ASSET WHICH 31 ITA NO.3372/CHNY/2019 TAKES SUBSTANTIAL PERIOD OF TIME TO GET READY FOR I NTENDED USE, THAT MEANS ANY CAPITAL ASSET IS ACQUIRED FOR THE BU SINESS OF THE ASSESSEE FOR USE IN SAID BUSINESS, NORMALLY PERIOD TAKEN FOR GETTING READY PARTICULAR ASSET IS LONGER IN TIME AN D HENCE, IT CAN BE SAFELY HELD THAT THIS STANDARD IS NOT APPLICABLE TO ASSET BEING INVENTORY IN THE BUSINESS. THEREFORE, IN OUR CONSID ERED VIEW AS- 16 WAS ISSUED TO RECOGNIZE INTEREST PAID ON LOANS T AKEN FOR ACQUISITION OF A CAPITAL ASSET. IN THE PRESENT CASE , LAND PURCHASED BY THE ASSESSEE IN THE BUSINESS OF REAL E STATE SEGMENT IS AN INVENTORY AND FURTHER, THE MOMENT LAN D WAS PURCHASED IT BECOMES INVENTORY OF THE ASSESSEE AND PUT TO USE IN THE BUSINESS OF THE ASSESSEE. THEREFORE, IN OUR CONSIDERED VIEW, IT IS INCORRECT TO APPLY AS-16 TO TREAT INTER EST PAID ON LOAN BORROWED FOR THE PURPOSE OF ACQUISITION OF ASSET, W HICH IS IN THE NATURE OF INVENTORY IN THE BUSINESS OF THE ASSESSEE . 12. HAVING SAID SO, LET US EXAMINE ANOTHER REASON G IVEN BY THE ASSESSING OFFICER IN LIGHT OF PROVISO TO SECTI ON 36(1)(III) OF THE ACT. AS STATED IN EARLIER PARAGRAPHS THE PROVIS O WAS INSERTED U/S. 36(1)(III) OF THE ACT TO DISALLOW IN TEREST PAID ON LOAN BORROWED FOR ACQUISITION OF ASSET TILL SUCH TI ME SAID ASSET 32 ITA NO.3372/CHNY/2019 WAS READY FOR USE IN THE BUSINESS OF THE ASSESSEE . THE TERM PUT TO USE USED IN THE SAID PROVISO WOULD HAVE A FAR REACHING CONSEQUENCE FOR NEGATING THOUGHT PROCESS OF REVENUE IN THE PRESENT CASE, INASMUCH AS THE TERM PUT TO USE WOU LD BE APPLIED TO CAPITAL ASSET / INCOME EARNING APPARATUS / FACILITATING THE BUSINESS ACTIVITY AND HENCE, THE STATUTE ENVIS AGES IMPORTANCE OF SUCH CAPITAL ASSET SHOULD BE PUT TO USE IN THE BUSINESS IN CONTRA DISTINCTION TO THE INVENTORY OF THE ASSESSEE. THE INVENTORY IN THE BUSINESS / HOLDING OF INVENTOR Y IN THE BUSINESS BY ITSELF IS A BUSINESS ACTIVITY IN THE NO RMAL COURSE AND IN CONTINUATION OF BUSINESS OF CONSTRUCTION PURSUED BY THE ASSESSEE. THEREFORE, THE ATTEMPT TO APPLY THE PROVI SO TO FACTUAL MATRIX OF THE CASE WOULD LEAD TO WRONG INTERPRETATI ON OF THE INTENDED LAW AND HENCE, REASONS GIVEN BY THE ASSES SING OFFICER TO DISALLOW INTEREST EXPENDITURE BY APPLYI NG PROVISIONS OF SECTION 36(1)(III) OF THE ACT IS NOT IN ACCORDAN CE WITH LAW. FURTHER, THE ASSESSEE IS INTO THE BUSINESS OF REAL ESTATE DEVELOPMENT AND IN THE PROCESS EXECUTING TWO PROJEC TS AT DIFFERENT PLACES. THE ASSESSING OFFICER HAS CONSIDE RED TWO DIFFERENT PROJECTS ON STANDALONE BASIS AND HELD T HAT PROJECT AT 33 ITA NO.3372/CHNY/2019 MRC NAGAR IS NOT YET COMMENCED ITS ACTIVITIES. IN O UR CONSIDERED VIEW, THE REASONS GIVEN BY THE ASSESSING OFFICER TO TREAT MRC NAGAR PROJECT ON STANDALONE BASIS IS PURE LY ON PRESUMPTION AND CANNOT BE ACCEPTED AS CORRECT APPRO ACH, MORE PARTICULARLY, WHEN CONSTRUCTION BUSINESS IS A SEPARATE VERTICAL PURSUED BY THE ASSESSEE AND IN THE SAID CO NSTRUCTION BUSINESS, THE SAID PROJECTS ARE EXECUTED. THE ACQUI SITION OF PROPERTY AT MRC NAGAR CANNOT BE EQUATED TO EXTENSIO N OF EXISTING BUSINESS, WITH A VIEW TO CONSIDER DISALLOW ANCE OF THE CLAIM OF INTEREST PAYMENTS ON THE CAPITAL BORROWED AND ON THE CONTRARY, ACQUISITION OF PROPERTY SHOULD BE EQUATED TO THE INVENTORY OF THE ASSESSEE AND NOT AS CAPITAL ASSET WHICH TREATMENT IS CORRECTLY CARRIED OUT IN THE FINANCIAL STATEMENT PERTAINING TO THE FINANCIAL YEAR UNDER CONSIDERATIO N. THE PURCHASE OF INVENTORY IN THE COURSE OF CARRYING ON EXISTING BUSINESS OF CONSTRUCTION SHOULD BE RECKONED AS CONT INUATION OF SAME BUSINESS ACTIVITY IN THE ROUTINE/NORMAL COURSE AND CANNOT BE EQUATED OR TERMED AS EXTENSION OF BUSINESS ACTIV ITY. THEREFORE, WE ARE OF THE CONSIDERED VIEW THAT SINCE THE BUSINESS IS A CONTINUING BUSINESS UNDER THE VERTICA L OF SAID 34 ITA NO.3372/CHNY/2019 CONSTRUCTION BUSINESS PURSUED BY THE ASSESSEE, THE THEORY OF MATCHING CONCEPT ADOPTED BY THE AO BY ISOLATING THE MRC NAGAR PROJECT IS NOT LEGALLY SOUND AS WELL AS OPPO SED TO THE PRINCIPLES OF ACCOUNTING. THE MANDATE IN SUCH CIRCU MSTANCES SHOULD TAKE GLOBAL VIEW OF FINANCIAL OPERATIONS OF ALL THE PROJECTS PURSUED BY THE ASSESSEE IN THE SAID SEGMENT. IN FA CT, THE ASSESSEE HAS OFFERED SUBSTANTIAL INCOME FROM OTHER PROJECT NAMELY ATLANTIC AND HENCE, THE ATTEMPT TO APPLY MAT CHING CONCEPT PRINCIPLE IS TOTALLY MISCONCEIVED AND WOULD FALL TO THE GROUND. THEREFORE, ON THE CUMULATIVE CONSIDERATION, THE REASONS GIVEN BY THE ASSESSING OFFICER TO DISALLOW INTEREST U/S. 36(1)(III) OF THE ACT IN THE COMPUTATION OF TAXABLE INCOME IS NOT IN ACCORDANCE WITH LAW. 13. COMING TO THE CASE LAWS RELIED UPON BY THE LEAR NED AR FOR THE ASSESSEE. THE AR HAS RELIED UPON THE DECI SION OF HONBLE HIGH COURT OF RAJASTHAN IN THE CASE OF CIT VS. ADITYA PROPCON PVT. LTD. (SUPRA), WHERE THE HONBLE HIGH C OURT UNDER IDENTICAL CIRCUMSTANCES HELD THAT INTEREST ON FUNDS BORROWED TO PURCHASE LAND WHICH IS PART OF INVENTORY OF THE ASS ESSEE IS 35 ITA NO.3372/CHNY/2019 ALLOWABLE DEDUCTION U/S. 36(1)(III) OF THE ACT. THE HONBLE HIGH COURT FURTHER HELD THAT PROVISO TO SECTION 36(1)(II I) OF THE ACT SPECIFICALLY REFERRED TO THE INTEREST PAID IN RESP ECT OF CAPITAL BORROWED FOR ACQUISITION OF AN ASSET FOR EXTENSION OF EXISTING BUSINESS. THE PRESENT CASE IS ACQUISITION OF LAND F OR ITS DEVELOPMENT IN THE COURSE OF REAL ESTATE ACTIVITIES OF THE ASSESSEE. THE ASSESSEE IS ABOUT TO COMPLETE ONE PRO JECT AND TO CONTINUING ITS ACTIVITIES HAS PURCHASED ANOTHER LAND TO DEVELOP ANOTHER PROJECT. THE PURCHASE OF INVENTORY IS CONTINUATION OF THE SAME BUSINESS ACTIVITY IN ROUTI NE COURSE AND CANNOT BE TERMED AS EXTENSION OF THE BUSINESS ACTIV ITY. THE TERM PUT TO USE APPLIES TO CAPITAL ASSET ONLY BEC AUSE CAPITAL ASSET IS HELD TO FACILITATE THE BUSINESS ACTIVITY A ND SOMETIMES IT NEEDS TO BE PREPARED AFTER ITS ACQUISITION FOR BEIN G USED TO FACILITATE BUSINESS ACTIVITY. AS AGAINST THIS, PURC HASE AND HOLDING OF INVENTORY ITSELF IS A BUSINESS ACTIVITY. THEREFORE, INTEREST PAID ON LOAN BORROWED FOR PURCHASE OF LAND BEING INVENTORY CANNOT BE DISALLOWED BY INVOKING THE PROV ISIONS PROVISO TO SECTION 36(1)(III) OF THE ACT. THE RELE VANT FINDINGS OF THE HONBLE HIGH COURT ARE AS UNDER:- 36 ITA NO.3372/CHNY/2019 9. HE FURTHER CONTENDED THAT THE TRIBUNAL HAS ALS O COMMITTED ERROR IN OBSERVING AS UNDER:- 18. WE HAVE HEARD THE PARTIES AND PERUSED THE MATE RIAL AVAILABLE ON RECORD AND ALSO THE ORDERS OF THE AUTH ORITIES BELOW. WE FIND THAT THE BOOKS OF ACCOUNTS OF THE ASSESSEE ARE AUDITED AND THE LD. AUDITOR HAS NOT GI VEN ANY ADVERSE COMMENT FOR NOT FOLLOWING THE ACCOUNTIN G STANDARDS WHICH ARE MANDATORY FOR A COMPANY U/S 211 OF THE COMPANIES ACT, 1956. WE ALSO FIND THAT THERE IS N DISPUTE THAT THE SAID LAND IS PART OF INVENTORY FOR THE ASSESSEE AND IS NOT A CAPITAL ASSET. THE ASSESSEE H AS PRODUCED EVIDENCES OF NO INCREASE IN THE LAND PRICE AND AO HAS NOT BROUGHT ANYTHING ON RECORD TO SUPPORT TH AT THE ASSESSEE WOULD BE ABLE TO REALISE THE INTEREST COST INCURRED OVER AND ABOVE THE COST OF PURCHASE OF LAN D. IN SUCH CIRCUMSTANCES, AS PER BASIC ACCOUNTING PRINCIP LES OF VALUATION OF INVENTORY THAT THE INVENTORY IS TO BE VALUED AT COST OR NET REALISABLE VALUE WHICH -EVER IS LOWE R. THE UNCONTROVERTED EVIDENCES SHOW THAT THERE IS NO BUYE R OF THE SIMILAR LAND IN SAME VICINITY AT THE PRICE WHIC H IS LESSER THAN THE PRICE PAID BY THE ASSESSEE AND THER EFORE, WE ARE CONVINCED WITH THE CIT(A) AND THE A/R HAS ST ATED THAT THE ASSESSEE HAS NOT TAKEN UP THE PROJECT ACTI VITY EVEN TILL 31.3.2013. THE DELAY IN PROJECT IS FOR EC ONOMIC REASONS. IN SUCH CIRCUMSTANCES, THE AS-16 DOES NOT ALLOW CAPITALISATION OF INTEREST COST ALONG WITH TH E COST OF LAND. IT ALLOWS CAPITALISATION OF INTEREST COST ONL Y DURING NORMALLY PERIOD OF CONSTRUCTION AND NOT FOR INORDIN ATE DELAY IN THE CONSTRUCTION ACTIVITY DUE TO ADVERSE M ARKET FORCES. THERE IS SPECIFIC REQUIREMENT OF AS-16, NOT TO CAPITALISE THE INTEREST COST ALONG WITH THE COST OF LAND IF IT 37 ITA NO.3372/CHNY/2019 IS HELD WITHOUT ANY ASSOCIATED DEVELOPMENT ACTIVITY . ACCORDINGLY, THE ACCOUNTING TREATMENT OF THE INTERE ST COST IS PERFECTLY IN LINE WITH THE ACCOUNTING STANDARDS. WE FURTHER FIND THAT DESPITE ANY ACCOUNTING TREATMENT, THE INTEREST ON CAPITAL BORROWED FOR THE PURPOSE OF BUS INESS IS ALLOWABLE U/S 36(1) (III). A PROVISO HAS BEEN IN SERTED W.E.F. 1.4.2004 WHICH READS AS UNDER:- PROVIDED THAT ANY AMOUNT OF THE INTEREST PAID, IN RESPECT OF CAPITAL BORROWED FOR ACQUISITION OF AN ASSET FOR EXTENSION OF EXISTING BUSINESS OR PROFESS ION (WHETHER CAPITALISED IN THE BOOKS OF ACCOUNT OR NOT ); FOR ANY PERIOD BEGINNING FROM THE DATE ON WHICH THE CAPITAL WAS BORROWED FOR ACQUISITION OF THE ASSET T ILL THE DATE ON WHICH SUCH ASSET WAS FIRST PUT TO USE, SHALL NOT BE ALLOWED AS DEDUCTION. THE PROVISO SPECIFICALLY REFERRED TO THE INTEREST P AID IN RESPECT OF CAPITAL BORROWED FOR ACQUISITION OF ANY ASSET FOR EXTENSION OF EXISTING BUSINESS. THE PRESENT CASE IS OF ACQUISITION OF LAND FOR ITS DEVELOPMENT IN COURSE O F REAL ESTATE ACTIVITY OF THE ASSESSEE. ASSESSEE IS ABOUT TO COMP LETE ONE PROJECT AND TO CONTINUE THE ACTIVITIES HAS PURCHASE D ANOTHER LAND TO DEVELOP ANOTHER PROJECT. THE ARGUMENT OF TH E LD. DR THAT THE PROVISO WOULD APPLY TO THE ASSESSEES CASE CANNOT BE ACCEPTED. WE ARE OF THE CONSIDERED OPINION THAT THE PURCHASE OF INVENTORY IS CONTINUATION OF THE SAME B USINESS ACTIVITY IN ROUTINE COURSE AND CANNOT BE TERMED AS EXTENSION OF THE BUSINESS ACTIVITY. THE PROVISO HAS BEEN INSE RTED TO DISENTITLE CLAIM OF INTEREST ON FUNDS BORROWED FOR ACQUISITION OF CAPITAL ASSETS FOR THE PERIOD UPTO THE ASSET IS PUT TO USE. THE TERM PUT TO USE HERE APPLIES TO CAPITAL ASSET ONLY 38 ITA NO.3372/CHNY/2019 BECAUSE A CAPITAL ASSETS IS HELD TO FACILITATE THE BUSINESS ACTIVITY AND SOMETIMES IT NEEDS TO BE PREPARED AFTE R ITS ACQUISITION FOR BEING USED TO FACILITATE THE BUSINE SS ACTIVITY. AS AGAINST THIS, PURCHASE AND HOLDING OF INVENTORY ITEM ITSELF IS A BUSINESS ACTIVITY. IN ABSENCE OF THIS PROVISO, SECTION 36(1) (III) EARLIER ENTITLED ASSESSEE TO CLAIM INTE REST IN RESPECT OF CAPITAL ASSETS, EVEN FOR THE PERIOD DURING WHICH THEY WERE UNDER CONSTRUCTION AS HELD IN VARIOUS JUDGMENTS POI NTED OUT BY THE LD. AR OF THE ASSESSEE. THE INTEREST WAS FOU ND ALLOWABLE DESPITE ITS CAPITALIZATION IN THE BOOKS O F ACCOUNTS IN THE JUDGMENTS. WE ARE THEREFORE, OF THE OPINION THA T THE INTEREST ON FUNDS BORROWED TO PURCHASE LAND WHICH I S PART OF INVENTORY OF THE ASSESSEE COMPANY IS AN ALLOWABLE D EDUCTION U/S 36(1)(III). WE ACCORDINGLY REJECT THIS GROUND O F THE DEPARTMENTAL APPEAL ALSO. 10. COUNSEL FOR THE RESPONDENT HAS SUPPORTED THE ORDER OF THE AUTHORITIES AND CONTENDED THAT THE BOTH THE AUT HORITIES HAVE RIGHTLY HELD IN FAVOUR OF THE ASSESSEE INASMUC H AS EVEN IF THE CONTENTIONS WHICH HAVE BEEN ADVANCED BY THE DEPARTMENT, NO TAX LIABILITY HAS BEEN REDUCED OR TH ERE IS ANY CASE OF EVASION OF TAX. 14. THE PRESENT CASE, ACQUISITION OF LAND FOR ITS D EVELOPMENT IN THE COURSE OF REAL ESTATE ACTIVITIES OF THE ASSE SSEE ITSELF IS A BUSINESS ACTIVITY. THE ASSESSEE IS ABOUT TO COMPLET E ONE PROJECT AND TO CONTINUING ITS ACTIVITIES HAS PURCHA SED ANOTHER LAND TO DEVELOP ANOTHER PROJECT. THE PURCHASE OF IN VENTORY IS 39 ITA NO.3372/CHNY/2019 CONTINUATION OF THE SAME BUSINESS ACTIVITY IN ROUTI NE COURSE AND CANNOT BE TERMED AS EXTENSION OF THE BUSINESS ACTIV ITY. THE TERM PUT TO USE APPLIES TO CAPITAL ASSET ONLY BEC AUSE CAPITAL ASSET IS HELD TO FACILITATE THE BUSINESS ACTIVITY A ND SOMETIMES IT NEEDS TO BE PREPARED AFTER ITS ACQUISITION FOR BEIN G USED TO FACILITATE BUSINESS ACTIVITY. AS AGAINST THIS, PURC HASE AND HOLDING OF INVENTORY ITSELF IS A BUSINESS ACTIVITY. 15. IN THIS VIEW OF THE MATTER AND CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE AND ALSO BY RESPECTFULLY FOLLOWING THE DECISION OF HONBLE HIGH COURT OF RAJASTHAN IN TH E CASE OF CIT VS. ADITYA PROPCON PVT. LTD. (SUPRA), WE ARE OF TH E CONSIDERED VIEW THAT INTEREST PAID ON LOAN BORROWED FOR PURCHA SE OF LAND AND HOLDING IT AS INVENTORY CANNOT BE CONSIDERED AS ACQUISITION OF CAPITAL ASSET FOR THE PURPOSE OF DISALLOWING INT EREST BY INVOKING PROVISIONS OF PROVISO TO SECTION 36(1)(III ) OF THE ACT. THE ASSESSING OFFICER WELL AS THE LEARNED CIT(A) WITHOU T APPRECIATING LEGAL POSITION HAS DISALLOWED INTEREST PAID ON LOANS U/S. 36(1)(III) OF THE ACT. HENCE, WE SET ASIDE THE ORDER PASSED BY THE LEARNED CIT(A) AND DIRECT THE ASSESSING OF FICER TO 40 ITA NO.3372/CHNY/2019 DELETE THE ADDITION MADE TOWARDS DISALLOWANCE OF INTEREST UNDER SECTION 36(1)(III) OF THE ACT. 16. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST MARCH, 2021 SD/- SD/- ( . ) ( . ) (V.DURGA RAO) (G.MANJUNATHA) ' % / JUDICIAL MEMBER % / ACCOUNTANT MEMBER ' /CHENNAI, ( / DATED 31 ST MARCH, 2021 DS *+ ,+ /COPY TO: 1. APPELLANT 2. RESPONDENT 3. - () /CIT(A) 4. - /CIT 5. + 1 /DR 6. /GF .