The Commissioner Of Income Tax,Chennai v. M/S.ceebros Hotels P Ltd

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 05.10.2021 CORAM : THE HON'BLE MR. JUSTICE T.S. SIVAGNANAMAND THE HON'BLE MR. JUSTICE SATHI KUMAR SUKUMARA KURUP Tax Case Appeal No.496 of 2021 The Commissioner of Income Tax,Chennai. ...Appellant /Respondent Vs. M/s.Ceebros Hotels P Ltd,19/1, Sukriti, III Cross Road,R.A.Puram,Chennai – 600 028. ... Respondent/Appellant Tax Case Appeal filed under Section 260A of the Income TaxAct, 1961, against the order of the Income Tax AppellateTribunal, Madras "C" Bench, Chennai, dated 31.03.2021 passed inI.T.A.No.3372/Chny/2019, appeal preferred against the order ofthe Commissioner of Income Tax (Appeals)-1, Chennai, dated05/12/2019 made in ITA No.37/CIT(A)-1/2017-18 against the orderof the Deputy Commissioner of Income Tax, Corporate Circle 1(2),Chennai, dated 26/12/2017 made in PAN/GIR.No. for theAssessment Year 2015-16. For Appellant : Mr.T.Ravi Kumar Senior Standing Counsel For Respondent : Mr.A.S.Sriraman J U D G M E N T This appeal by the Revenue filed under Section 260A of theIncome Tax Act, 1961 (“the Act” for brevity), is directedagainst the order, dated 31.03.2021, passed by the Income TaxAppellate Tribunal, Madras “C” Bench, (“the Tribunal” forbrevity), in I.T.A.No.3372/Chny/2019, for the Assessment Year2015-16. 2.The appeal has been filed by the Revenue, raising thefollowing substantial questions of law : “1.Whether on the facts and in the circumstancesof the case, the Tribunal was right in deleting theadditions made without appreciating the fact that thework in progress pertaining to MRC Nagar project is aqualifying project and therefore interest cost shouldhave been capitalized and should have been reflectedin the closing stock and shown in the profit and lossaccount which had not been done by the assessee andtherefore the AO had rightly made the additions? 2.Is not the finding of the Tribunal badespecially when the interest expenditure pertaining toMRC Nagar project is under-development and currentyear development expenses had been added to theclosing work in progress which makes it a qualifyingassets for the borrowing cost to be capitalized andsince the same was not done by the Assessee, the AOhad rightly disallowed the cost pertaining to MRCNagar project?” 3.The assessee filed its return of income for the AssessmentYear under consideration, AY 2015-16, on 27.09.2015, admittingNil Income. The case was selected for scrutiny and notice underSection 143(2) of the Act, dated 31.08.2015, was served on theassessee and thereafter, by another letter dated 25.04.2016,details were called for. The details were furnished and theassessment was completed by order dated 26.12.2017 under Section143(3) of the Act. 4.The issue before the Assessing Officer was that theassessee was running a Hotel and Real Estate business and offereda total income of Rs.120.27 Crores from Rooms Revenue,Restaurants and Banquets Revenue, Contract Profits recognized,Other Operating Revenues, Rental Revenue, etc. The major portionof the revenue was received from the Hotel business. For theAssessment Year 2015-16, the assessee had offered income from theReal Estate in respect of the project, namely, 'Atlantic' atEgmore. An amount of Rs.41,37,73,978/- was claimed towards“Interest Payable” at 13.75% p.a. on a loan amount of Rs.301.92Crores, obtained from IFCI Limited, which was outstanding as on31.03.2015. 5.The Assessing Officer observed that the said loan wasobtained for the specific purpose of purchasing the land to anextent of 90.53 grounds in MRC Nagar. According to the AssessingOfficer, the assessee had entered into the business of RealEstate for the first time during the Assessment Year 2015-16, inwhich, the assessee had offered some income from the Real Estate 5.The Assessing Officer observed that the said loan wasobtained for the specific purpose of purchasing the land to anextent of 90.53 grounds in MRC Nagar. According to the AssessingOfficer, the assessee had entered into the business of RealEstate for the first time during the Assessment Year 2015-16, inwhich, the assessee had offered some income from the Real Estate business. In addition to the Hotel business, the assessee hadtwo residential projects and out of the two projects, in oneproject namely, 'Atlantic', Egmore, activities were commenced andso far as the MRC Nagar project is concerned, the AssessingOfficer observed that the assessee had only purchased the land,and a perusal of the break-up of the Revenue from operationsshows that a sum of Rs.47.56 Crores was offered as Revenue fromReal Estate business. Further, the Assessing Officer observedthat the entire amount was on account of the contract receiptsearned from the project, known as Atlantic, Egmore, and theassessee has shown the amount of Rs.94.23 Crores as advancereceived on account of the Atlantic Project and was shown underthe head "Trade Payables". Thus, the Assessing Officer held thatthe amount of Rs.94.23 Crores shown in the Balance Sheet as“Trade Payables” related only to the 'Atlantic' project and theassessee has not even started the project in MRC Nagar during theyear 2015-16 and had only purchased the land. 6.Thus, the question before the Assessing Officer waswhether, the claim of interest expenditure of Rs.41.37 Crores onloan obtained for the purchase of land in MRC Nagar is allowableduring 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 offeredany income from the project, all the expenditures, which arespecifically attributable to the project, have to be accounted as'Work-in-Progress' and only when the income is generated andoffered from the project, the expenditure can be claimed.Further, the Assessing Officer observed that no income wasoffered from the MRC Nagar Project, therefore, any expenditurerelatable to the Real Estate project 'Atlantic', Egmore, could beallowed for AY 2015-16, and not the expenditure related to MRCNagar Project. 8.Further, in the Assessment Order, the Assessing Officerhas noted that the assessee accounted 'Property Development andConstruction Work-in-Progress' under the head “Inventories”. Anamount of Rs.845.67 Crores was shown as 'Property Development andConstruction Work-in-Progress', the break-up of which wasrelatable to Atlantic project and MRC Nagar project. Theassessee was called upon to explain and they have stated as tohow the asset in MRC Nagar was put to use. The Assessing Officerdid not agree with the submissions made by the assessee, sincethe assessee was following Mercantile System of Accounting.According to the Assessing Officer, as per the AccountingStandard 16 (“AS-16” for brevity), borrowing costs that aredirectly attributable to the acquisition, construction orproduction of a qualifying asset should be capitalised as part ofthe cost of that asset and the amount of borrowing costs eligible for capitalisation should be determined in accordance with theAS-16, otherwise, borrowing costs should be recognized as anexpense in the period in which they are incurred. Thus, theAssessing Officer held that the assessee is bound to capitalisethe interest cost of Rs.41.37 Crores on the borrowal to the Work-in-Progress of MRC Nagar Project and instead of doing so, theassessee chose to claim the entire expenditure as revenueexpenditure, when no income was offered for the MRC NagarProject. for capitalisation should be determined in accordance with theAS-16, otherwise, borrowing costs should be recognized as anexpense in the period in which they are incurred. Thus, theAssessing Officer held that the assessee is bound to capitalisethe interest cost of Rs.41.37 Crores on the borrowal to the Work-in-Progress of MRC Nagar Project and instead of doing so, theassessee chose to claim the entire expenditure as revenueexpenditure, when no income was offered for the MRC NagarProject. 9.The Assessing Officer referred to the decision of theSpecial Bench of the Tribunal in Wallstreet Construction Ltd. v.Joint Commissioner of Income Tax, Mumbai [Mumbai (2006) 101 ITD156 (Mumbai) (SB)]. Thus, the Assessing Officer disallowed thesum of Rs.41.37 Crores towards the loan obtained for the purchaseof the land in MRC Nagar and added the same to Work-in-Progressof the Inventories and recomputed the interest expenditure byadding a part of the same to the total income and arrived at aTotal Assessed Income for a sum of Rs.39,91,16,420/-. 10.Aggrieved by the same, the assessee preferred an appealto the Commissioner of Income Tax (Appeals)-I, Chennai (“CIT(A)”for brevity). The said appeal was dismissed by order dated05.12.2019. Aggrieved by the same, the assessee preferred anappeal before the Tribunal, which was allowed and challenging thesaid 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 SeniorStanding Counsel appearing for the appellant/Revenue andMr.A.S.Sriraman,learnedcounselappearingfortherespondent/assessee. 12.The Revenue seeks to sustain the order passed by theAssessing Officer, as confirmed by the CIT(A), by contending thatthe entire amount of Rs.47.56 Crores offered as revenue from RealEstate business was on account of the contract receipts earnedfrom Atlantic Project at Egmore and the assessee has shown theamount of Rs.94.23 Crores as advance received towards theAtlantic Project, which was shown under the head “Trade Payables”for the year ended 31.03.2015 and the same relates only to theAtlantic Project and not to MRC Nagar Project. Further, it issubmitted that the Tribunal committed an error in not consideringthe fact that, in the Balance Sheet for the year ended31.03.2015, the assessee had accounted the 'Property Developmentand Construction Work-in-Progress' under the head “Inventories”and an amount of Rs.845.67 Crores was shown as 'PropertyDevelopment and Construction Work-in-Progress', out of which, Nilprofits were offered in MRC Nagar and Closing Work-in-Progresswas shown, which clearly shows that the project at MRC Nagar had not even commenced. Further, it is submitted that, nodistinction under Section 36(1)(iii) of the Act could be madebetween the capital borrowed for revenue purpose and capitalborrowed for the purpose of business. Further, the Revenue seeksto rely upon the Director's Report and would submit that, interms of the report, it has been stated that the MRC Nagarproject had not commenced its operations during the relevantprevious year and therefore, the expenses claimed by the assesseecannot be treated as inventory and ought to be treated as pre-operative expenses, which are required to be capitalised. not even commenced. Further, it is submitted that, nodistinction under Section 36(1)(iii) of the Act could be madebetween the capital borrowed for revenue purpose and capitalborrowed for the purpose of business. Further, the Revenue seeksto rely upon the Director's Report and would submit that, interms of the report, it has been stated that the MRC Nagarproject had not commenced its operations during the relevantprevious year and therefore, the expenses claimed by the assesseecannot be treated as inventory and ought to be treated as pre-operative expenses, which are required to be capitalised. 13.The learned counsel appearing for the respondent/assesseesubmitted that the Tribunal, on considering the facts which wereplaced before it, which is the Abstract of the expensespertaining to the MRC Nagar project, on perusal of the same, cameto the conclusion that the property at MRC Nagar was put to use.Further, the Tribunal has also taken note of the variousdocuments that were filed by the assessee in the form of paper-book and held that the Real Estate Development should be treatedas a segment of the assessee's business, wherein, the assesseeexecutes several projects in different locations and if the sameis done, then the segregation of the projects undertaken by theassessee, as done by the Assessing Officer, is incorrect.Further, the learned counsel submitted that the Tribunal hadrightly held that AS-16 would have no application to the factsand circumstances of the case. 14.The facts which are not in dispute are that the assesseeborrowed a loan from IFCI Limited for the purpose of purchase ofland in MRC Nagar and claimed interest paid on such loan as adeduction under Section 36(1)(iii) of the Act. The AssessingOfficer disallowed the claim on the ground that the landpurchased at MRC Nagar was not put to use in the business of theassessee and thus, the interest paid on loan borrowed foracquisition of any asset needs to be capitalised till such timethe asset was put to use in the business of the assessee. 15.The Assessing Officer, though admits that the assessee isin the business of Real Estate Development, came to theconclusion that the MRC Nagar project should be treated as stand-alone project, since no activity had commenced in the MRC Nagarproject and the expenditure including the interest paid on theloan borrowed for the purchase of the land, needs to becapitalised and added back to the Work-in-Progress account. Inthis regard, the Assessing Officer has referred to the Form AS-16issued by ICAI and the principles of Matching Concept ofaccounting to support his findings and according to the AssessingOfficer, unless revenue is recognized from the project,corresponding expenditure cannot be allowed. 16.Section 36 of the Act deals with “Other deductions”.Sub-Clause (1) of Section 36 states that the deductions providedfor in the various clauses enumerated thereunder, shall beallowed in respect of matters dealt with therein, in computingthe income referred to in Section 28 of the Act. For the purposeof the case on hand, Clause (iii) could be relevant, which statesthat the amount of the interest paid in respect of capitalborrowed for the purposes of the business or profession would beallowable as deduction. The proviso in Section 36(1) statesthat, provided that any amount of the interest paid in respect ofcapital borrowed for acquisition of an asset for extension ofexisting business or profession (whether capitalised in the booksof account or not); for any period beginning from the date onwhich the capital was borrowed for acquisition of the asset tillthe date on which such asset was first put to use, shall not beallowed as deduction. 17.Therefore, the question which was examined by theTribunal was the allowability or otherwise of the interest paidon the loan borrowed by the assessee from IFCI Limited andwhether it would fall within the scope of Section 36(1)(iii) ofthe Act. 18.As rightly noted by the Tribunal, the loan which wasobtained by the assessee from IFCI Limited is for the purpose ofbusiness of the assessee and having accepted the said fact, thededuction of interest was disallowed only on the ground that theasset purchased by the assessee in MRC Nagar was not put to usein the Assessment Year under consideration for the purpose ofbusiness of the assessee. This appears to be factuallyincorrect, as could be seen from the material facts which wereplaced before the CIT(A) and noted by the CIT(A). When theappeal was being heard by the CIT(A), the assessee furnished anAbstract of Expenses pertaining to MRC Nagar project and theexpenses were in the nature of advertisement expenses, architectfees, CMDA charges, consultancy charges, electricity charges,legal fees, rent, security charges, site expenses, various labourcharges and purchase of materials. The assessee had alsofurnished the ledger accounts for these expenses and also thefacts that they carried on major work of demolition of theexisting structure which was newly built by the previous ownerfor Hotel business and this demolition was done by the assessee.This factual position would go to show that the land was put touse in the Assessment Year under consideration. On this issue,the Tribunal had rightly noted that the term “put to use” in theproviso in Section 36(1)(iii) would be applied to capitalasset/income earning apparatus/facilitating the business activityand therefore, the Statute envisages the importance of suchcapital asset should be put to use in the business in contradistinction to the inventory of the assessee. 19.Further, the Tribunal noted that the inventory in thebusiness/holding of inventory in the business by itself is abusiness activity in the normal course and in continuation ofbusiness of construction pursued by the assessee. Therefore, itheld that the attempt to apply the proviso to the case of theassessee would lead to wrong interpretation of law and therefore,the reasons given by the Assessing Officer to disallow theinterest expenditure by applying the provisions of Section 36(1)(iii) is not in accordance with law. Further, the Tribunal notedthat the assessee is into the business of Real Estate Developmentand in the process of executing two projects at different placesand the Assessing Officer was not justified in treating the twoprojects on stand-alone basis and also that the property in MRCNagar was not put to use. Further, the Tribunal observed thatthe purchase of inventory in the course of carrying on businessshould be reckoned as continuation of same business activity inthe normal course and cannot be equated or termed as extension ofbusiness activity. Furthermore, the Tribunal noted that theassessee has offered substantial income from the Atlantic projectand the attempt to apply Matching Concept principle ismisconceived. 20.So far as the decision of the Special Bench of theTribunal in Wallstreet Construction Ltd. is concerned, the issuewas whether, where the assessee has followed the ProjectCompletion Method of accounting, the interest identifiable withthat project should be allowed as deduction in the year when theproject is completed and the income is offered from the projector it should be allowed on a year to year basis. In ourconsidered view, the said question does not arise in the case onhand and therefore, the said decision cannot be applied to thefacts before us. 20.So far as the decision of the Special Bench of theTribunal in Wallstreet Construction Ltd. is concerned, the issuewas whether, where the assessee has followed the ProjectCompletion Method of accounting, the interest identifiable withthat project should be allowed as deduction in the year when theproject is completed and the income is offered from the projector it should be allowed on a year to year basis. In ourconsidered view, the said question does not arise in the case onhand and therefore, the said decision cannot be applied to thefacts before us. 21.Thus, we are of the view that the Tribunal was right inallowing the appeal filed by the assessee and holding that theterm “put to use” applies to capital asset only because capitalasset is held to facilitate the business activity and sometimes,it needs to be prepared after it is acquired for being used tofacilitate the business activity and in the instant case, theassessee was able to establish that substantial activities hadbeen done in the project, which would go to show that theproperty purchased has been put to use. For all the above reasons, the Tax Case Appeal filed by theRevenue is dismissed. Consequently, the substantial questions oflaw are answered against the Revenue. No costs. Sd/- Assistant Registrar(CS VIII) //True Copy// mknTo Sub Assistant Registrar 1.The Income Tax Appellate Tribunal, Madras, "C" Bench. 2.The Commissioner of Income Tax, Chennai. 3.The Deputy Commissioner of Income Tax, Corporate Circle (2), Chennai. +1cc to M/s.T.Ravikumar, Advocate Sr.51902 Tax Case Appeal No.496 of 2021 cp[co]srg 27/10/2021