Madras High Court
The Commissioner Of Income Tax vs M/S.Ceebros Hotels P Ltd on 5 October, 2021
Tax Case Appeal No.496 of 2021
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED : 05.10.2021
CORAM :
THE HON'BLE MR. JUSTICE T.S. SIVAGNANAM
AND
THE HON'BLE MR. JUSTICE SATHI KUMAR SUKUMARA KURUP
Tax Case Appeal No.496 of 2021
The Commissioner of Income Tax,
Chennai. ... Appellant
Vs.
M/s.Ceebros Hotels P Ltd,
19/1, Sukriti, III Cross Road,
R.A.Puram,
Chennai – 600 028. ... Respondent
Tax Case Appeal filed under Section 260A of the Income Tax Act,
1961, against the order of the Income Tax Appellate Tribunal, Madras "C"
Bench, Chennai, dated 31.03.2021 passed in I.T.A.No.3372/Chny/2019.
For Appellant : Mr.T.Ravi Kumar
Senior Standing Counsel
For Respondent : Mr.A.S.Sriraman
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Tax Case Appeal No.496 of 2021
JUDGMENT
(Judgment was delivered by T.S. SIVAGNANAM, J.)
This appeal by the Revenue filed under Section 260A of the Income
Tax Act, 1961 (“the Act” for brevity), is directed against the order, dated
31.03.2021, passed by the Income Tax Appellate Tribunal, Madras “C”
Bench, (“the Tribunal” for brevity), in I.T.A.No.3372/Chny/2019, for the
Assessment Year 2015-16.
2.The appeal has been filed by the Revenue, raising the following
substantial questions of law :
“1.Whether on the facts and in the circumstances of the
case, the Tribunal was right in deleting the additions made
without appreciating the fact that the work in progress
pertaining to MRC Nagar project is a qualifying project and
therefore interest cost should have been capitalized and should
have been reflected in the closing stock and shown in the profit
and loss account which had not been done by the assessee and
therefore the AO had rightly made the additions?
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Tax Case Appeal No.496 of 2021
2.Is not the finding of the Tribunal bad especially when
the interest expenditure pertaining to MRC Nagar project is
under-development and current year development expenses
had been added to the closing work in progress which makes it
a qualifying assets for the borrowing cost to be capitalized and
since the same was not done by the Assessee, the AO had
rightly disallowed the cost pertaining to MRC Nagar project?”
3.The assessee filed its return of income for the Assessment Year
under consideration, AY 2015-16, on 27.09.2015, admitting Nil Income.
The case was selected for scrutiny and notice under Section 143(2) of the
Act, dated 31.08.2015, was served on the assessee and thereafter, by another
letter dated 25.04.2016, details were called for. The details were furnished
and the assessment was completed by order dated 26.12.2017 under Section
143(3) of the Act.
4.The issue before the Assessing Officer was that the assessee was
running a Hotel and Real Estate business and offered a total income of
Rs.120.27 Crores from Rooms Revenue, Restaurants and Banquets Revenue,
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Tax Case Appeal No.496 of 2021
Contract Profits recognized, Other Operating Revenues, Rental Revenue, etc.
The major portion of the revenue was received from the Hotel business. For
the Assessment Year 2015-16, the assessee had offered income from the Real
Estate in respect of the project, namely, 'Atlantic' at Egmore. An amount of
Rs.41,37,73,978/- was claimed towards “Interest Payable” at 13.75% p.a. on
a loan amount of Rs.301.92 Crores, obtained from IFCI Limited, which was
outstanding as on 31.03.2015.
5.The Assessing Officer observed that the said loan was obtained for
the specific purpose of purchasing the land to an extent of 90.53 grounds in
MRC Nagar. According to the Assessing Officer, the assessee had entered
into the business of Real Estate for the first time during the Assessment Year
2015-16, in which, the assessee had offered some income from the Real
Estate business. In addition to the Hotel business, the assessee had two
residential projects and out of the two projects, in one project namely,
'Atlantic', Egmore, activities were commenced and so far as the MRC Nagar
project is concerned, the Assessing Officer observed that the assessee had
only purchased the land, and a perusal of the break-up of the Revenue from
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Tax Case Appeal No.496 of 2021
operations shows that a sum of Rs.47.56 Crores was offered as Revenue from
Real Estate business. Further, the Assessing Officer observed that the entire
amount was on account of the contract receipts earned from the project,
known as Atlantic, Egmore, and the assessee has shown the amount of
Rs.94.23 Crores as advance received on account of the Atlantic Project and
was shown under the head "Trade Payables". Thus, the Assessing Officer
held that the amount of Rs.94.23 Crores shown in the Balance Sheet as
“Trade Payables” related only to the 'Atlantic' project and the assessee has
not even started the project in MRC Nagar during the year 2015-16 and had
only purchased the land.
6.Thus, the question before the Assessing Officer was whether, the
claim of interest expenditure of Rs.41.37 Crores on loan obtained for the
purchase of land in MRC Nagar is allowable during AY 2015-16.
7.The Assessing Officer was of the view that the assessee, having not
commenced the project in MRC Nagar and had not offered any income from
the project, all the expenditures, which are specifically attributable to the
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Tax Case Appeal No.496 of 2021
project, have to be accounted as 'Work-in-Progress' and only when the
income is generated and offered from the project, the expenditure can be
claimed. Further, the Assessing Officer observed that no income was offered
from the MRC Nagar Project, therefore, any expenditure relatable to the Real
Estate project 'Atlantic', Egmore, could be allowed for AY 2015-16, and not
the expenditure related to MRC Nagar Project.
8.Further, in the Assessment Order, the Assessing Officer has noted
that the assessee accounted 'Property Development and Construction Work-
in-Progress' under the head “Inventories”. An amount of Rs.845.67 Crores
was shown as 'Property Development and Construction Work-in-Progress',
the break-up of which was relatable to Atlantic project and MRC Nagar
project. The assessee was called upon to explain and they have stated as to
how the asset in MRC Nagar was put to use. The Assessing Officer did not
agree with the submissions made by the assessee, since the assessee was
following Mercantile System of Accounting. According to the Assessing
Officer, as per the Accounting Standard 16 (“AS-16” for brevity), borrowing
costs that are directly attributable to the acquisition, construction or
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Tax Case Appeal No.496 of 2021
production of a qualifying asset should be capitalised as part of the cost of
that asset and the amount of borrowing costs eligible for capitalisation
should be determined in accordance with the AS-16, otherwise, borrowing
costs should be recognized as an expense in the period in which they are
incurred. Thus, the Assessing Officer held that the assessee is bound to
capitalise the interest cost of Rs.41.37 Crores on the borrowal to the Work-
in-Progress of MRC Nagar Project and instead of doing so, the assessee
chose to claim the entire expenditure as revenue expenditure, when no
income was offered for the MRC Nagar Project.
9.The Assessing Officer referred to the decision of the Special Bench
of the Tribunal in Wallstreet Construction Ltd. v. Joint Commissioner of
Income Tax, Mumbai [Mumbai (2006) 101 ITD 156 (Mumbai) (SB)].
Thus, the Assessing Officer disallowed the sum of Rs.41.37 Crores towards
the loan obtained for the purchase of the land in MRC Nagar and added the
same to Work-in-Progress of the Inventories and recomputed the interest
expenditure by adding a part of the same to the total income and arrived at a
Total Assessed Income for a sum of Rs.39,91,16,420/-.
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Tax Case Appeal No.496 of 2021
10.Aggrieved by the same, the assessee preferred an appeal to the
Commissioner of Income Tax (Appeals)-I, Chennai (“CIT(A)” for brevity).
The said appeal was dismissed by order dated 05.12.2019. Aggrieved by the
same, the assessee preferred an appeal before the Tribunal, which was
allowed and challenging the said order, the Revenue is before us by way of
this appeal, raising the above referred substantial questions of law.
11.We have elaborately heard Mr.T.Ravi Kumar, learned Senior
Standing Counsel appearing for the appellant/Revenue and Mr.A.S.Sriraman,
learned counsel appearing for the respondent/assessee.
12.The Revenue seeks to sustain the order passed by the Assessing
Officer, as confirmed by the CIT(A), by contending that the entire amount of
Rs.47.56 Crores offered as revenue from Real Estate business was on
account of the contract receipts earned from Atlantic Project at Egmore and
the assessee has shown the amount of Rs.94.23 Crores as advance received
towards the Atlantic Project, which was shown under the head “Trade
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Tax Case Appeal No.496 of 2021
Payables” for the year ended 31.03.2015 and the same relates only to the
Atlantic Project and not to MRC Nagar Project. Further, it is submitted that
the Tribunal committed an error in not considering the fact that, in the
Balance Sheet for the year ended 31.03.2015, the assessee had accounted the
'Property Development and Construction Work-in-Progress' under the head
“Inventories” and an amount of Rs.845.67 Crores was shown as 'Property
Development and Construction Work-in-Progress', out of which, Nil profits
were offered in MRC Nagar and Closing Work-in-Progress was shown,
which clearly shows that the project at MRC Nagar had not even
commenced. Further, it is submitted that, no distinction under Section
36(1)(iii) of the Act could be made between the capital borrowed for revenue
purpose and capital borrowed for the purpose of business. Further, the
Revenue seeks to rely upon the Director's Report and would submit that, in
terms of the report, it has been stated that the MRC Nagar project had not
commenced its operations during the relevant previous year and therefore,
the expenses claimed by the assessee cannot be treated as inventory and
ought to be treated as pre-operative expenses, which are required to be
capitalised.
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Tax Case Appeal No.496 of 2021
13.The learned counsel appearing for the respondent/assessee
submitted that the Tribunal, on considering the facts which were placed
before it, which is the Abstract of the expenses pertaining to the MRC Nagar
project, on perusal of the same, came to the conclusion that the property at
MRC Nagar was put to use. Further, the Tribunal has also taken note of the
various documents that were filed by the assessee in the form of paper-book
and held that the Real Estate Development should be treated as a segment of
the assessee's business, wherein, the assessee executes several projects in
different locations and if the same is done, then the segregation of the
projects undertaken by the assessee, as done by the Assessing Officer, is
incorrect. Further, the learned counsel submitted that the Tribunal had
rightly held that AS-16 would have no application to the facts and
circumstances of the case.
14.The facts which are not in dispute are that the assessee borrowed a
loan from IFCI Limited for the purpose of purchase of land in MRC Nagar
and claimed interest paid on such loan as a deduction under Section 36(1)(iii)
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Tax Case Appeal No.496 of 2021
of the Act. The Assessing Officer disallowed the claim on the ground that
the land purchased at MRC Nagar was not put to use in the business of the
assessee and thus, the interest paid on loan borrowed for acquisition of any
asset needs to be capitalised till such time the asset was put to use in the
business of the assessee.
15.The Assessing Officer, though admits that the assessee is in the
business of Real Estate Development, came to the conclusion that the MRC
Nagar project should be treated as stand-alone project, since no activity had
commenced in the MRC Nagar project and the expenditure including the
interest paid on the loan borrowed for the purchase of the land, needs to be
capitalised and added back to the Work-in-Progress account. In this regard,
the Assessing Officer has referred to the Form AS-16 issued by ICAI and the
principles of Matching Concept of accounting to support his findings and
according to the Assessing Officer, unless revenue is recognized from the
project, corresponding expenditure cannot be allowed.
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Tax Case Appeal No.496 of 2021
16.Section 36 of the Act deals with “Other deductions”. Sub-Clause
(1) of Section 36 states that the deductions provided for in the various
clauses enumerated thereunder, shall be allowed in respect of matters dealt
with therein, in computing the income referred to in Section 28 of the Act.
For the purpose of the case on hand, Clause (iii) could be relevant, which
states that the amount of the interest paid in respect of capital borrowed for
the purposes of the business or profession would be allowable as deduction.
The proviso in Section 36(1) states that, provided that any amount of the
interest paid in respect of capital borrowed for acquisition of an asset for
extension of existing business or profession (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 till the date on which such
asset was first put to use, shall not be allowed as deduction.
17.Therefore, the question which was examined by the Tribunal was
the allowability or otherwise of the interest paid on the loan borrowed by the
assessee from IFCI Limited and whether it would fall within the scope of
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Section 36(1)(iii) of the Act.
18.As rightly noted by the Tribunal, the loan which was obtained by
the assessee from IFCI Limited is for the purpose of business of the assessee
and having accepted the said fact, the deduction of interest was disallowed
only on the ground that the asset purchased by the assessee in MRC Nagar
was not put to use in the Assessment Year under consideration for the
purpose of business of the assessee. This appears to be factually incorrect, as
could be seen from the material facts which were placed before the CIT(A)
and noted by the CIT(A). When the appeal was being heard by the CIT(A),
the assessee furnished an Abstract of Expenses pertaining to MRC Nagar
project and the expenses were in the nature of advertisement expenses,
architect fees, CMDA charges, consultancy charges, electricity charges, legal
fees, rent, security charges, site expenses, various labour charges and
purchase of materials. The assessee had also furnished the ledger accounts
for these expenses and also the facts that they carried on major work of
demolition of the existing structure which was newly built by the previous
owner for Hotel business and this demolition was done by the assessee. This
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factual position would go to show that the land was put to use in the
Assessment Year under consideration. On this issue, the Tribunal had rightly
noted that the term “put to use” in the proviso in Section 36(1)(iii) would be
applied to capital asset/income earning apparatus/facilitating the business
activity and therefore, the Statute envisages the importance of such capital
asset should be put to use in the business in contra distinction to the
inventory of the assessee.
19.Further, the Tribunal noted that the inventory in the
business/holding of inventory in the business by itself is a business activity
in the normal course and in continuation of business of construction pursued
by the assessee. Therefore, it held that the attempt to apply the proviso to the
case of the assessee would lead to wrong interpretation of law and therefore,
the reasons given by the Assessing Officer to disallow the interest
expenditure by applying the provisions of Section 36(1)(iii) is not in
accordance with law. Further, the Tribunal noted that the assessee is into the
business of Real Estate Development and in the process of executing two
projects at different places and the Assessing Officer was not justified in
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treating the two projects on stand-alone basis and also that the property in
MRC Nagar was not put to use. Further, the Tribunal observed that the
purchase of inventory in the course of carrying on business should be
reckoned as continuation of same business activity in the normal course and
cannot be equated or termed as extension of business activity. Furthermore,
the Tribunal noted that the assessee has offered substantial income from the
Atlantic project and the attempt to apply Matching Concept principle is
misconceived.
20.So far as the decision of the Special Bench of the Tribunal in
Wallstreet Construction Ltd. is concerned, the issue was whether, where the
assessee has followed the Project Completion Method of accounting, the
interest identifiable with that project should be allowed as deduction in the
year when the project is completed and the income is offered from the project
or it should be allowed on a year to year basis. In our considered view, the
said question does not arise in the case on hand and therefore, the said
decision cannot be applied to the facts before us.
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21.Thus, we are of the view that the Tribunal was right in allowing the
appeal filed by the assessee and holding that the term “put to use” applies to
capital asset only because capital asset is held to facilitate the business
activity and sometimes, it needs to be prepared after it is acquired for being
used to facilitate the business activity and in the instant case, the assessee
was able to establish that substantial activities had been done in the project,
which would go to show that the property purchased has been put to use.
For all the above reasons, the Tax Case Appeal filed by the Revenue is
dismissed. Consequently, the substantial questions of law are answered
against the Revenue. No costs.
(T.S.S., J.) (S.S.K., J.)
05.10.2021
mkn
Internet : Yes
Index : Yes / No
Speaking order / Nonspeaking order
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Tax Case Appeal No.496 of 2021
To
1.The Income Tax Appellate Tribunal, Madras, "C" Bench
2.The Commissioner of Income Tax,
Chennai.
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Tax Case Appeal No.496 of 2021
T.S. SIVAGNANAM, J.
and
SATHI KUMAR SUKUMARA KURUP, J.
mkn
Tax Case Appeal No.496 of 2021
05.10.2021
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