Short Overview : Where assessee had admittedly capitalized the interest paid on borrowed capital and also had not claimed that the land in question was put to use and mere purchase of land in question out of the borrowed capital did not entitle assessee to claim such interest paid on borrowed capital as a deductible expenditure only on the basis of method of accounting prescribed under section 145A, therefore, appeal of assessee was dismissed.

Assessee was engaged in the business of Real Estate. The sole issue arose as to whether Tribunal was right in law in holding that interest expenditure was Capital in nature since assessee had in its books, included interest portion related to projects as its work in progress in its books, and claimed them as a deduction in income computation memo for the purposes of tax payments.

It is held that Assessee had admittedly capitalized the interest paid on borrowed capital and also had not claimed that land in question was put to use. Mere purchase of land in question out of the borrowed capital did not entitle assessee to claim such interest paid on borrowed capital as a deductible expenditure only on the basis of method of accounting prescribed under section 145A. Method of accounting provided for valuation of inventory under section 145A does not determine the allowability of the expenditure. Proviso to section 36(1), which says that such claim of deduction would be allowed when it was put to use, would override the provisions contained in section 145A. Therefore, appeal of assessee was dismissed.

Decision: Against the assessee.

Referred: The Chamber of Tax Consultants & Anr. v. Union of India & Ors. (2018) 400 ITR 178 (Delhi) : 2017 TaxPub(DT) 4727 (Del-HC) and Shri Mahindra World City Developers Ltd. v. Asstt. CIT [I.T.A. Nos. 2084, 2085 & 2086/Chny/2016, dt. 27-6-2018].

 

IN THE MADRAS HIGH COURT

VINEET KOTHARI & C.V. KARTHIKEYAN, JJ.

Mahindra World City Developers Ltd. v. Asstt. CIT

Tax Case Appeal Nos. 245, 247 and 248 of 2019

22 April, 2019

Appellant by: R.Vijayaraghavan for M/s. Subbaraya Aiyar Padmanabhan

Respondent by: Karthik Ranganathan Senior Standing Counsel assisted by S. Rajesh

Vineet Kothari, J.

The assessee, Mahindra World City Developers Limited, Chennai has filed these Appeals under section 260A of the Act raising the following purported substantial questions of law arising from the order of the Income Tax Appellate Tribunal dated 27-6-2018 for the assessment years 2010-2011 to 2012-2013 :–

“(i) Whether in the circumstances of the case, the Tribunal was right in law in holding that the claim of Interest Expenditure was utilized in the business of the assessee?

(ii) Whether the Tribunal was right in law in holding that the impugned interest expenditure is Capital in nature since the assessee has in its books, included the interest portion related to the impugned projects as its work in progress in its books, and claimed them as a deduction in the income computation memo for the purposes of tax payments?

(iii) Whether the Tribunal was right in law in holding the accounting practice followed by the appellant in the books of account, in respect of the interest expenditure relating to the impugned projects, should also be followed for the purpose of computation of income under the Income Tax Act?”

2. The learned Tribunal disallowed the claim of interest on the borrowed capital to purchase the land in question by the assessee who is engaged in the business of Real Estate, making the following observation in the impugned order :–

“7.2 From the above, it is clear that the assessee is in the business of land development for industrial, commercial and residential use. It acquired land and incurs expenditure on its development and related infrastructure facilities for lease. The cost of land and related development expenditure is disclosed as workin- progress as the company expects to incur further costs on land and infrastructure development. Thus, the assessee capitalized the interest expenditure incurred on the loan raised and utilized towards purchase of land in NH5 & Phase-V projects, being long-term projects, from the period relevant to assessment year 2007-08 onwards it in its books of account in accordance with applicable accounting principles in India, the Accounting Standards issued by the Institute of Chartered Accountants of India and relevant provisions of the Indian Companies Act, 1956 as it has not received any income from these projects during the impugned assessment years.

The most important aspect is that the impugned project is still in project stage during the impugned assessment years and hence this business is yet to commence its operations. Further, it has not claimed such interest as an expenditure in assessment years 2007-08 & 2008-09. However, for assessment years 2010-11 onwards, it is claiming such interest expenditure that too, in the computation memo, i.e., outside the books of account. The Lower authorities rejected the assessee’s claim as it is neither in accordance with the Accounting Standards nor with the statutory provisions of the Income Tax Act. The assessee challenges it. Let us examine this claim as under.

…. …. ….

7.4 If we apply the above ratio to the facts of this case, as discussed supra, it is clear that the accounting practice followed by the assessee in its books of account, are in consonance with the general principles of accountancy as certified by their Auditors and the book results were also certified to give a true and fair view in conformity with the applicable accounting principles in India, the Accounting Standards issued by the Institute of Chartered Accountants of India and relevant provisions of the Indian Companies Act, 1956.

Therefore, the assessee has not made out a case. The Lower authorities are correct in not disturbing the book results and in rejecting the assessee’s claim through the income computation memo for the purposes of tax payment. Thus, the corresponding grounds of the assessee fail.

7.5 The above issue can be examined from another angle also. The assessee is not clear as to whether the impugned projects would be leased or sold. In the existing business, the assessee is admitting income from lease of land and properties constructed thereon only. It is seen from the materials furnished by the assessee that it has earned income from a single segment, namely, “lease of land and properties constructed thereon” till the end of assessment year 2015-2016.

From this i.e., from the assessee’s conduct, it is clear that the assessee has treated such expenditure as capital in nature and treated accordingly in its books of account which are consonance with the general principles of accountancy as certified by their Auditors and the book results were also certified to give a true and fair view in conformity with the applicable accounting principles in India, the Accounting Standards issued by the Institute of Chartered Accountants of India and relevant provisions of the Indian Companies Act, 1956. The assessee has capitalized the interest portion related to the impugned projects during the period in assessment years 2008-09 and 2009-2010 in its books but did not claim such interest in the income computed for the purposes of tax payment for these assessment years. For period relevant to assessment years 2010- 11 to 2012-13, though the assessee has capitalized the interest portion related to the impugned projects in its books, it claimed them as an expenditure through the income computation memo for the purposes of tax payment. During the period relevant to assessment year 2012-13, it reversed interest of Rs. 85,08,080 also in the income computation memo for the purposes of tax payment.

When the assessee has earned income from a single segment, namely, “lease of land and properties constructed thereon” till the end of assessment year 2015-16, it is clear that the impugned investments are still in project stage. Therefore, it is not known as to on what basis the assessee has undertaken all these changes in these assessment years that too in the income computation memo for the purposes of tax payment which is outside the books of accounts. Thus, when the entire facts and circumstances of this case are considered in its totality, it is clear that the impugned expenditure incurred by the assessee is in capital in nature. The accounting practice followed by the assessee in its books of account, are in consonance with the general principles of accountancy as certified by their Auditors and the book results were also certified to give a true and fair view in conformity with the applicable accounting principles in India, the Accounting Standards issued by the Institute of Chartered Accountants of India and relevant provisions of the Indian Companies Act, 1956 are also in accordance with the provisions of the Act read with section 36(1)(iii). Therefore, the assessee has not made out a case in these appeals. Hence, the Lower authorities are correct in their decisions that the assessee’s claim through the income computation memo, is neither in accordance with the Accounting Standards nor with the statutory provisions of the Income Tax Act. Therefore, the corresponding grounds of the assessee fail for all these assessment years.

7.6 Since the assessee’s claim is rejected for these assessment years the income if any, admitted by the assessee during these assessment years or in the subsequent years on reversal of interest claimed as deduction in the impugned years in the memo of computation of income, on due verification, be not charged to tax.”

3. Learned counsel for the Appellant-Assessee, Mr. Vijayaraghavan urged before us that since the assessee is engaged in the business of Real Estate, even though interest paid on the borrowed capital to purchase the land in question purchase of land in question was capitalized in the books of accounts and was shown as work in progress in the balance sheet, after insertion of section 145A with effect from 1-4-2017 by the Finance Act, 2018 provided for specific method of valuation of inventory (the land in question) by the assessee and the interest paid on capital borrowed, irrespective of it being capitalised or not, is required to be allowed as deduction while computing the income for the assessment years in question. He referred to the decision of the Delhi High Court in the case of The Chamber of Tax Consultants & Anr. v. Union of India & Others ((2018) 400 ITR 178 (Delhi) : 2017 TaxPub(DT) 4727 (Del-HC)) wherein the Division Bench of Delhi High Court struck down the CBDT Notification No. 87 of 2016, dated 29th September 2016 including the ‘Income Computation and Disclosure Standards’ (ICDS) in exercise of power conferred under section 145(2) of the Act. The Division Bench of the Delhi High Court held that there was no statutory basis or sanction for such notification issued by the CBDT and under section 119 of the Act, such notification could not have been issued and finding the same as ultra vires, the Division Bench of the Delhi High Court struck down the said Notification.

Consequently, the provisions of section 145A were inserted in the Act by Finance Act 18 with effect from 1-4-2017.

4. We are concerned with the assessment years 2010-11 to 2012-13 in the case of the assessee. Therefore, the provisions of section 145A, prior to 1-4-2017, are quoted below for ready reference :–

“145A. Method of accounting in certain case.–Notwithstanding anything to the contrary contained in Section 145–

(a) the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head “Profits and gains of business or profession” shall be–

(i) in accordance with the method of accounting regularly employed by the assessee; and

(ii) further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation.

Explanation.–For the purposes of this section, any tax, duty, cess or fee (by whatever name called) under any law for the time being in force, shall include all such payment notwithstanding any right arising as a consequence to such payment;

(b) interest received by an assessee on compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of the year in which it is received.”

5. The learned counsel for the Appellant-Assessee submitted that in view of the said provisions, irrespective of the Amendment of section 36(1)(iii) proviso of is quoted below, any “interest” paid in respect of borrowed capital has to be held as deductible expenditure in the assessment years in question. The said proviso to section 36(1)(iii) reads as under :–

“Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset 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.”

6. On the other hand, Mr. Karthik Ranganathan, learned Senior Standing Counsel for the Revenue, however, supported the impugned order and submitted that in view of the specific and clear language employed in the aforesaid provisions irrespective of the method of accounting followed by the assessee, whether such interest on borrowed capital is capitalised in the books of account or not, the deduction of the same can be allowed only in the year in which such asset was first put to use and since admittedly, the assessee has not sold the land in question or used it even by developing the plots in the assessment years in question, therefore, the land in question cannot be said to have been put to use in these years and thus, no such deduction can be allowed.

7. Having heard the learned counsel for the parties, we are of the opinion that there is considerable force in the submission of the learned Senior Standing Counsel for the Revenue. The Proviso to section 36(1) of the Act incorporated in Part D of Chapter IV of the Act providing for the “Method of Computation of Total Income”, quoted above, will, in our opinion, override the provisions of section 145A of the Act, which is incorporated in Chapter IV of the Act relating to “Procedure for Assessment”. The words in the Proviso to section 36(1) of the Act “whether capitalised or not” will override the accounting practice followed in the Books of Accounts by the assessee. The assessee has admittedly capitalised the interest paid on the borrowed capital in the present case. The assessee has also not claimed before us or before the Authorities below that the land in question was put to use in the assessment years in question. Mere purchase of the land in the Years in question out of the borrowed capital does not entitle the assessee to claim such interest paid on borrowed capital as a deductible expenditure in the present assessment years merely on the basis of method of accounting prescribed under section 145A of the Act, which was brought in the statute to undo the effect of the decision of the Delhi High Court which quashed the CBDT Notification finding it to be ultra vires.

8. The method of accounting provided for valuation of inventory under section 145A of the Act does not determine the allowability of the expenditure. The Proviso to section 36(1), which says that such claim of deduction will be allowed in the assessment years, when it was put to use, will override the provisions contained in section 145A of the Act. Since the position of law and the inter play of the above provisions are very clear, we do not find any substantial question of law to be arising in the present case for our consideration.

9. Thus, the Appeals filed by the assessee are liable to be dismissed and accordingly, they are dismissed. No costs.