Delhi High Court – Orders
Pr. Cit -3 vs Dlf Ltd. (Fomerly Known As Dlf Universal … on 6 March, 2025
Author: Yashwant Varma
Bench: Yashwant Varma
$~8 & 9
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ ITA 926/2016
PR. CIT -3 .....Appellant
Through: Mr. Sunil Agarwal, SSC with
Mr. Shivansh B. Pandya, Mr.
Viplav Achrya and Ms. Priya
Sarkar, JSCs and Mr. Utkarsh
Tiwari, Adv.
versus
DLF LTD. (FOMERLY KNOWN AS DLF UNIVERSAL
LTD. .....Respondent
Through: Ms. Kavita Jha, Sr. Adv. wtih
Mr. Akash Shukla and Mr.
Aditya Bali, Advs.
9
+ ITA 928/2016
PR. CIT -3 .....Appellant
Through: Mr. Sunil Agarwal, SSC with
Mr. Shivansh B. Pandya, Mr.
Viplav Achrya and Ms. Priya
Sarkar, JSCs and Mr. Utkarsh
Tiwari, Adv.
versus
DLF LTD. (FORMERLY KNOWN AS DLF UNIVERSAL
LTD.) .....Respondent
Through: Ms. Kavita Jha, Sr. Adv. wtih
Mr. Akash Shukla and Mr.
Aditya Bali, Advs.
CORAM:
HON'BLE MR. JUSTICE YASHWANT VARMA
HON'BLE MR. JUSTICE HARISH VAIDYANATHAN
SHANKAR
ORDER
% 06.03.2025
1. We had, by a detailed order of 23 September 2024 taken note of
ITA 926/2016 & ITA 928/2016 Page 1 of 20
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the principal question which was posited for our consideration and had
on hearing learned counsels for respective sides ultimately identified
„Question 3‟ alone as one which would survive for consideration. Our
order of 23 September 2024 for purposes of completeness is
reproduced in its entirety hereinbelow:
“ITA 926/2016 & 928/2016
1. The Principal Commissioner impugns the order of the Income
Tax Appellate Tribunal dated 11 March 2016. By order dated 24
August 2017 following questions of law were framed by this
Court:
ITA 926/2016
“1. Whether in the facts and circumstances of the case, the
revenue recognition under percentage completion method
should commence in that previous year when expenses reach
25% against the threshold of 30% of budgeted cost?
2. Whether the Tribunal erred in the facts and circumstances of
the case and prevailing law in holding that Internal
Development Costs/ External Development Costs have to be
included for the purposes of computing threshold limit for
recognition Revenue under the POCM?
3. Whether the Tribunal erred in the facts and circumstances of
the case and prevailing law in deleting the addition of
Rs.91,70,13,955/- on account of capitalization of interest
expense as per AS-16?
4. Whether the Tribunal erred in the facts and circumstances of
the case and prevailing law in deleting the addition of
Rs.8,15,68,758/- on account of reclassification if Income from
House Property?”
ITA 928/2016
“1. Whether in the facts and circumstances of the case, the
revenue recognition under percentage completion method
should commence in that previous year when expenses reach
25% against the threshold of 30% of budgeted cost?
2. Whether the Tribunal erred in the facts and circumstances of
the case and prevailing law in deleting the addition of
Rs.27,45,00,000/- on account of capitalization of interests?”
2. We note that insofar as the issues emanating from the adoption
of the Percentage Of Completion Method is concerned the
Tribunal has while dealing with this aspect observed as follows:
ITA 926/2016 & ITA 928/2016 Page 2 of 20
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“38. The brief facts of this ground are that during the year,
assesse has changed its method of accounting in case of
constructed properties from completed project method to
percentage completion method. It was noted by the AO that
despite change in method of accounting, the assesse has not
recognized any revenue on Mangolia Project as well as
Summit Project. Therefore, the AO worked out a profit
chargeable to tax from Mangolia Project of Rs.26,55,94,049/-
and from Summit Project of Rs.11,45,52,376/-. The
contention of the assesse is that construction of these two
projects based on the percentage completion method has not
reached threshold requirement of 30% as on 31.03.2006. It
was submitted that profits of these projects are offered for
taxation in subsequent years when the threshold yardsticks of
30% in terms of accounting policy of the assesse is achieved.
Against this, AO was of the view that assesse has himself
incurred expenses on land, such as, external development and
construction cost on both these projects the revenue should
have been recognized. Assesse further submitted that even
the special auditor appointed by the revenue have also not
recommended any recognition of revenue on Mangolia and
Summit projects. The assesse submitted comparative data of
other developers too where they are following threshold for
starting of revenue recognition in development projects when
30% of the project is completed. However, the AO rejected
all the contentions and held that Accounting Standard 9
issued by the ICAI and according to that Accounting
Standard, there is no justification for the assesse to adopt a
benchmark of 30% for recognition of the revenue and,
therefore, made a total addition of Rs.72,32,38,796/- from
Mangolia Project and Rs.30,52,54,713/- from Summit
Project. The assesse carried the matter before the CIT (A)
who in principle agreed with the contention of the assesse
that internal development charges allocated to these projects
have not been considered should be included in the cost of
project and, therefore, upholding the addition on the principle
restricting the addition to the extent of Rs.62,68,85,221/- on
account of Mangolia Project and Rs.16,08,95,700/- from
Summit Project. Aggrieved by this, the assesse is in appeal
before us.
39. Before us, ld. AR submitted that assesse has correctly laid
down a threshold limit of 30% which is in accordance with
the principles laid down in the Guidance Note issued by the
ICAI. He submitted that though the Guidance Note prescribes
the percentage of threshold as 25%, however, the assesse
based on the prevalent practices in the trade has adopted it @
30% as threshold. For this, he submitted that assesse has
given sufficiently large number of comparable developers’
ITA 926/2016 & ITA 928/2016 Page 3 of 20
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case where identical practice is being followed and accepted
by the revenue. His next argument was that there is no doubt
about the correctness of the profit of these two projects
merely revenue wants to prepone taxability of these projects
from subsequent years to earlier year and this is a revenue
neutral exercise. For this, he relied on the decisions of
Hon’ble Supreme Court in the case of CIT vs. Billahari
Investment Private Limited (supra). The next submission of
the ld. AR was that in case of special audit of the assesse for
AY 2010-11, revenue itself has accepted the criteria of 30%
of threshold completion for revenue recognition. He
submitted that the special auditor has stated that those
superficial yardstick of 30% of cost incurred has not been
prescribed anywhere in the publication of the ICAI, however
considering the spirit of the publication, it is accepted from
every assesse to calculate the correct amount of revenue for
recognition under the project completion method. However,
assesse who is not in the business of construction is required
to estimate reliably correct amount of revenue of the
respective year. The auditor further went to state that the
company has initially fixed the threshold limit of 30% effect
from AY 2006-07 for recognizing revenue and its method has
been consistently followed by the company every year
thereafter. Thereafter, auditor stated that, according to him it
is reasonable to adopt revenue under the Percentage of
completion (POC) Method where the level of expenditure
incurred is 30% or more of the estimated project cost. Hence,
auditor was of the view that the assesse company has adopted
the threshold limit of 30% going by the industry claims,
prudence and followed the same consistency and, therefore,
there is no postponement of tax. In nutshell, the ld. AR
argued that it is an opinion of the expert on accounting
practices for AY 2010-11 which has been accepted by the
revenue that 30% threshold limit is as per the industry norms,
provisions and consistency, same should not be disturbed in
this year.
40. Against this, ld. DR submitted that the CIT (A) as well as
the AO has correctly decided the issue and threshold limit of
30% is rejected by both the lower authorities. However, he
fairly agreed that fixing such threshold limit is required in
case of projects of such scale and if the total expenditure on
those projects has not crossed the threshold limit of 30% of
the total cost of the project, the revenue should not be
recognized. He submitted that as the AO has not examined
that whether these projects have crossed the threshold limit of
30% or not, this ground of appeal should be set aside to the
file of the AO for determination of income accordingly.
ITA 926/2016 & ITA 928/2016 Page 4 of 20
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41. To this argument, the ld. AR submitted that it has been
accepted by the lower authorities that both the projects have
not exceeded the threshold of 30% for the purpose of revenue
recognition and, therefore, he stated that the revenue cannot
be recognized. However, he also fairly agreed that though
data available at page 69 to 71 of the assessment order,
according to which both the projects are at the very primitive
stage i.e. Mangolia Project at approximately 10- 12% and
Summit Project is also less than 20%. However, he agreed
that there is no objection from the assesse side to determine
the threshold limit of 30% of the total project cost for the
purpose of revenue recognition.”
3. As is evident from the above, the assessee appears to have urged
that the 30% threshold is one which has been adopted by the
industry as a whole had also been consistently followed by the
assessee itself in subsequent years. The threshold of 30% as
adopted was also accepted by the Commissioner of Income Tax
(Appeals) in proceedings for the subsequent year.
4. It is on an overall conspectus of the aforesaid, that the Tribunal
while taking into account the stage of the two projects held that the
30% percentage as adopted would be in accordance with law for
the purposes of recognition of revenue. It further held that the
Accounting Standards only spoke of a minimum threshold and
that consequently, it was permissible for an assessee to bear in
consideration a higher threshold taking into consideration the stage
of completion that may have been reached as well as the
expenditure incurred. It further held that since in any case the
aspect of whether it was taken into consideration in a particular
Financial Year or subsequently would give rise to no additional tax
implications. It ultimately held that since the issue was rendered
revenue neutral it was liable to be laid to rest. The conclusions of
the Tribunal in this respect are reproduced below:-
“42. We have carefully considered the rival contentions and
also given a careful thought to the offer of ld. DR for setting
aside this ground of appeal to the file of the AO for
determination of threshold limit of 30% of the total project
cost incurred up to this year or not. Before that we would like
to address the issue of threshold percentages determined by
the assesse of 30 % instead of 25 % provided in the guidance
note on accounting for real estate transactions issued by ICAI
in 2012. Firstly assesse has submitted the instances where in
the identical facts and circumstances there is trade practice of
adopting threshold of 30 % of the achievement of total
project cost for commencement of recognising of revenue.
According to that guidance note it is provided that
“(a) All critical approvals necessary for commencement ofITA 926/2016 & ITA 928/2016 Page 5 of 20
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the project have been obtained. These include, wherever
applicable:
(i) Environmental and other clearances.
(ii) Approval of plans, designs, etc.
(iii) Title to land or other rights to development construction.
(iv) Change in land use
(b) When the stage of completion of the project reaches a
reasonable level of development. A reasonable level of
development is not achieved if the expenditure incurred on
construction and development costs is less than 25 % of the
construction and development costs as defined in paragraph
2.2 (c) read with paragraphs 2.3 to 2.5.
(c) At least 25% of the saleable project area is secured by
contracts or agreements with buyers.
(d) At least 10% of the total revenue as per the agreements of
sale or any other legally enforceable documents are realised
at the reporting date in respect of each of the contracts and it
is reasonable to expect that the parties to such contracts will
comply with the payment terms as defined in the contracts.
To illustrate – If there are 10 Agreements of sale and 10 % of
gross amount is realised in case of 8 agreements, revenue can
be recognised with respect to these 8 agreements”
According to the above guidance note the revenue of the
project can be recognised only when the above conditions
specified therein. According to one of the conditions
specified there in is reasonable level of development is not
achieved if the expenditure incurred on construction and
development costs is less than 25 % of the construction and
development costs as defined in paragraph 2.2 (c) read with
paragraphs 2.3 to 2.5. Therefore the threshold suggested by
ICAI is the minimum threshold and it is not prohibited that
looking to the business conditions assesse cannot fix up
higher threshold. More so when the assesse has stated that
many identical companies are also following similar
threshold of 30 % of the total project cost, no fault can be
found with the estimate made by the assesse. It is also
undisputed that in subsequent years the special auditor
appointed by revenue has accepted the threshold of 30 %
adopted by assesse and AO has accepted the same. In view of
above we are of the opinion that assesse has rightly accepted
the threshold of 30 % of achievement of total project cost for
commencement of revenue recognition. Further the working
of the total project should also include all types of
development charges required to be included in the same. Ld.
AR has stated that the details of percentage of completion ofITA 926/2016 & ITA 928/2016 Page 6 of 20
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project are available in the assessment order itself. However
after careful consideration and agreed by both the parties, we
set aside this issue to the file of the AO to determine with
respect to Magnolia Project and Summit Project following :-
(i) To determine the total project cost of both these projects
including the cost of internal and external development
charges of the project.
(ii) To determine whether the actual cost of expenditure
incurred up to 31.03.2006 is less than 30% of the total project
cost estimated by the assessee;
(iii) If the threshold limit of 30% is crossed then to determine
the income of both these projects on percentage completion
method in this year;
(iv) To give appropriate relief in subsequent years, if any
income is taxed on these projects in these years;
(v) If the project cost incurred up to this year has not crossed
threshold of the total project cost estimated then to delete the
addition of Rs. 1,02,84,93,509/-.
While deciding this issue AD may however keep in mind the
principle laid down by honourable Supreme court in case of
CIT v. Excel Industries Ltd. [2013] 358 ITR 295, if AD is
satisfied that issue is revenue neutral the matter may be set at
rest.
Therefore, ground no. 8 of the appeal is allowed with the
above direction”
5. We thus find no justification to interfere with the view as
expressed by the Tribunal.
6. The second aspect which was sought to be canvassed for our
consideration pertained to the treatment of Internal Development
Charges and External Development Charges and whether they
were liable to be included for the purposes of computation of the
threshold limit for recognizing revenue under the POCM. While
dealing with IDC the Tribunal has ultimately observed as under:
“111. We have heard the rival contentions of the parties.
Regarding taxability of these two projects was also the
ground no 8 of the appeal of the assesse. While this ground
of appeal on the request of both the parties we have set
aside the issue of determining threshold of 30% of incurring
the total project cost of these projects for commencement of
revenue recognition. Therefore the parties also requested to
set aside this issue to the file of the AO as this is a
connected issue. Therefore in the interest of justice we set
aside this ground of appeal of the revenue to the file of the
AO and to decide afresh according to our directionsITA 926/2016 & ITA 928/2016 Page 7 of 20
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contained therein. In the result Ground No 2 of the appeal of
the revenue is allowed with directions.”
7. In light of the fact that the matter has merely been remitted to the
Assessing Officer for the purposes of verification, we find no
justification to entertain the appeal on that score.
8. Similarly, and with respect to EDC the Tribunal has while
dealing with the aforesaid ground observed as under:
“126. We have carefully considered the rival contentions.
The brief facts of the case are that there is construction
account with respect of 13 projects which has a credit balance
of Rs.37,81,33,632/- tabulated at page 123 of the assessment
order. The assessee explained before the AO that these credit
balances are not appearing in the books of accounts of the
assessee but auditor has only picked up the credit side of such
ledgers without considering the debit balance in the part of
those ledgers. The explanation was submitted before the AO
but he did not consider this and made an addition of opening
credit balance of Rs.37,81,33,632/-. In fact, the CIT (A) has
considered this aspect and has held that there is an opening
debit balance of Rs.66,27,71,032/- which has been ignored by
the AO. Project wise details of the construction expenses
showing opening balances as at 01.04.2005 are added as
income of the assessee without granting credit for the debit
entries. Merely picking up some ledger balances and
excluding some ledger balances addition has been made by
the AO. Merely there are some ledgers of the main ledger
account, it cannot be said that they are income of the assessee
when they have been already considered by adjustment of the
main ledger account. In the remand report submitted by the
AO before the CIT (A), it was not controverted that the charts
submitted by the assessee considering all the accounts of the
trial balance and which was also before the AO vide its letter
dated 27.03.2009 is incorrect in any manner. Therefore, we
do not find any infirmity in the order of the CIT (A) and none
has been pointed out by the ld. DR. Now coming to the
argument of the Id. DR that the CIT (A) has set aside this
aspect about the verification of the amount to the AO is
beyond his powers. We disagree with the argument of the ld.
DR and without commenting on that much, we are of the
view that CIT (A) has given one more opportunity over and
above the opportunity of assessment and remand proceedings
for verification of these details, cannot be said that it is
against the revenue. In fact, according to us, it is in favour of
the revenue. Further, in the appeal effect order passed by the
AO on 20.11.20121, after verification of these facts, the AOITA 926/2016 & ITA 928/2016 Page 8 of 20
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has deleted the addition pursuant to the order of the CIT (A)
after verification. In view of the above facts, we are of the
view that the addition on account of Rs.37,81,33,639/- is
unsustainable and hence we confirm the order of CIT (A) on
this ground. Therefore, ground no.5 of the revenue’s appeal is
dismissed.”
9. The aforesaid findings are clearly of fact which have come to be
decided in favour of the assessee and merit no further consideration
by this Court.
10. Question no. 3 as proposed and which pertains to the
capitalization of interest expenses as per AS-16 read alongwith
Section 36(1)(iii) of the Income Tax Act, 1961, is stood over at
the request of learned counsels for respective sides.
11. That only leaves us to deal with the question of reclassification
of rental income which was earned with it being urged on behalf of
the appellants that it was liable to be treated as income from
business and profession. We note that the aforesaid question stands
answered in favour of the assessee itself by this Court in light of
the decisions rendered in Commissioner of Income Tax, Delhi-IV
vs. DLF Ltd. (Earlier DLF universal Ltd.); Commissioner of
Income Tax, Delhi – IV vs. DLF Universal Ltd.; Commissioner
of Income Tax vs. DLF Universal Ltd. and Commissioner of
Income Tax vs DLF Ltd.. We thus find no justification to take a
contrary view.
12. The appeals shall now be examined only with respect to
question no. 3 which survives.
13. Let these appeals be called again on 14.10.2024.
ITA 126/2019 & 32/2020
14. Since these appeals raise separate questions, let them be listed
on 25.11.2024.”
2. Question 3, as proposed, pertains to Section 36 (1) (iii) of the
Income Tax Act, 19611 and the issue of whether the Income Tax
Appellate Tribunal2 was justified in setting aside the disallowance of
INR 27.45 crores from the total interest expenditure which had been
borne by the respondent assessee. From the material facts which have
been noticed by the Tribunal itself, we find that the assessee was
1
Act
ITA 926/2016 & ITA 928/2016 Page 9 of 20
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aggrieved by the Commissioner of Income Tax (Appeals)3
undertaking a presumptive exercise of disallowing interest expenditure
in light of the fusion of funds that were available with the respondent
assessee and which comprised of not just borrowed funds but also its
own reserves and surplus.
3. Dealing with this issue, the Tribunal noted that the CIT(A) had
adopted a formula of 1/3rd of the advance being viewed as being
attributable to the own funds and 2/3rd of the advances being liable to
be characterized as borrowed funds. It is this issue which ultimately
travelled to the Tribunal for consideration. The Tribunal has in this
regard further noted that out of the loans taken for various
construction projects, the assessee had incurred total interest charges
of INR 119,56,56,108/- on fixed period loans and the other interest
component amounting to INR 16,41,67,222.
4. There does not appear to be any contestation with respect to the
loan having been duly utilized for acquisition of land as well as for
financing of projects which were being undertaken by the assessee.
Bearing in mind the provisions which are made in AS-16, the parties
appear to have proceeded further. The CIT(A), however, disagreeing
with the disallowance which was made by the Assessing Officer,
proceeded to delete the addition of INR 91,70,13,955 but confirmed
the disallowance to the extent of INR 27.45 crores.
5. As the Tribunal notes, the solitary reason underlying the
disallowance was based on it noting that although part of the interest
on borrowed funds was for the construction of projects, the same came
to be “mixed up with own funds and interest free funds”. It was this
2
Tribunal
3
CIT (A)
ITA 926/2016 & ITA 928/2016 Page 10 of 20
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which led to the CIT(A) undertaking an exercise of presumptive
apportionment between the interest component and liability on
borrowed funds and the own funds of the respondent assessee, which
may have been utilized in connection with the projects in question.
6. The Tribunal has pertinently taken note of para 17.39 as it
appears in the order of the CIT(A) and which reads as follows: –
“17.39 The above findings of the Special Auditors has not been
shown to have been incorrect by the AO. It is therefore quite
apparent that there is no diversion of interest bearing funds by the
appellant for non business purposes. Secondly, the funds that have
been given to subsidiary companies of the appellant have been
given at the rate of interest which is higher than the cost of
borrowing by the appellant. Admittedly, the appellant has a mixed
account and there is no direct nexus with allocation of interest
bearing funds and utilization thereof The admitted facts on record
show that the appellant has earned interest income of
Rs.132,27,14,859/- and has incurred expenses on fixed period loan
of Rs.119,54,22,543/-. Admittedly, this income is income from
‘profit or gains of business’ i.e. loans and advances given to
subsidiaries in the normal course of carrying on business of the
appellant. The appellant is in the business of real estate
development, either directly as well as indirectly through its
subsidiary companies. Therefore, the act of passing on interest
bearing monies to subsidiaries is also a part of the business model
of the appellant.”
7. We deem it apposite to preface the discussion which follows
with the observation that we are, in the facts of the present appeals,
not concerned with the interest that may have been earned or could be
said to have flowed to the respondent assessee from advances that may
have been made to its subsidiaries or other associated entities. This,
since Section 36(1)(iii) itself bids us to bear in consideration only
borrowed funds and where they were utilised for the purposes of
business. It is also pertinent to note that the Proviso which came to be
appended to Section 36(1)(iii) of the Act by Finance Act, 2003 with
effect from 01 April, 2004 would be of little significance since it is not
ITA 926/2016 & ITA 928/2016 Page 11 of 20
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the case of the appellants that the borrowed funds were not utilised for
the creation of assets and which were duly „put to use‟.
8. The Tribunal has, in our considered opinion, correctly
appreciated the question which stood posited bearing in mind the
indubitable position that Section 36(1)(iii) is concerned solely with the
borrowing of funds for the purposes of business and irrespective of
whether it be for incurring capital or revenue expenditure. It has while
dealing with this aspect pertinently observed as follows: –
“44. This ground is against the confirmation by CIT (A) of
disallowance of interest expenditure of Rs.27,45,00,000/- out of
total disallowance of expenditure of Rs. 1,19,15,13,955/-on
account of capitalization of interest expenses by holding that there
is no direct nexus which can be established to hold that the loans
are utilized for specific projects only and adopting a formula that
1/3rd of the advance has been given out of own funds and 2/3rd of
the advances have been given out of the borrowed funds. Assesse
was further aggrieved that despite of information available in
assessment order and in the remand report of the assesse, still CIT
(A) has set aside the ground to the file of the AD for verification
The assesse was also aggrieved by the non-appreciation of facts by
CIT (A) that borrowed funds have not been utilized for buying of
land or meeting of construction expenses because receipts from the
customers being advanced against sale are more than the
expenditure incurred on those projects. The assesse is also against
application of adopting artificial formula of bifurcation of
borrowed fund and own fund. The assesse has also taken an
alternative ground that the CIT (A) failed to appreciate that the
interest income earned by the assesse is Rs.138.57 crores whereas
the interest expenditure is only Rs.136 crores and, therefore, on
netting principle there is no interest expenditure incurred by the
assesse. Alternatively, it was also stated that CIT (A) did not give
direction to allow this interest expenditure based on the percentage
completion method against respective projects in this year or in
subsequent years, when revenue is recognized.
45. Briefly stated, the facts are that during the year, assesse has
incurred total finance charges of Rs.1,19,56,56,l08/- on fixed
period loans and other interest amounting to Rs.16,41,67,222/- .
The interest on loan is paid for acquisition of land and for
financing the project undertaken by the assesse. The AO took note
of the accounting policy of the assesse mentioned in Schedule 24
of the balance sheet wherein it is mentioned that borrowing costs
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that are attributable to the acquisition or construction of qualifying
assets are capitalized part of the cost of such assets. A qualifying
asset is one that necessarily takes substantial period of time to get
ready for its intended use. All other borrowing costs are charged to
the profit and loss account. According to the AD, as the loan from
ICICI Bank Ltd. of Rs.300 4rores is taken for project development
in its 100% subsidiary company which has acquired 23 acre plot.
Further, assesse has taken loan from GE Services and India
Limited for the purpose of Icon and Summit projects. Therefore,
according to him, these loans are taken for the construction projects
which remains unallocated and, therefore; required to be
capitalized. He held that Rs.1,19,15,13,155/- is the borrowing cost
i.e. attributable for acquisition of construction of qualifying assets
and required to be capitalized. The AO further rejected the
contention of the assesse that the amount of interest paid should be
adjusted against interest income earned u/s 57 of the Act for the
reason that income that is offered is taxed as business income and
not as an income from other sources and secondly, the land for
which these advances have been given are part of the inventory i.e.
closing stock of the assesse. Aggrieved by this, assesse carried this
matter in appeal before the CIT (A) who in turn deleted the
addition ofRs.91,70,13,955/- but confirmed the disallowance
ofRs.27.45 crores. The main reason for the confirmation of the
disallowance advanced by CIT (A) is that part of the interest on
borrowed funds is for the construction of the project and the
amount borrowed is mixed up with own funds and interest free
funds. Thus, there is no direct nexus which can be established to
hold that loans for which the money was borrowed were utilized
for such projects or not. Therefore, he devised a formula that one
portion out of three shall be considered being interest free funds
available and two portions shall be considered as interest bearing
funds. By applying this formula, he held that out of
Rs.1,19,15,13,155/-, Rs.70.10 crores of the interest is pertaining to
interest earned on loans and advances to group entities and,
therefore, net interest expenditure of Rs.49.46 crores shall be
capitalized. The findings of CIT (A) based on the special auditors’
report in para no 17.39 were as under :-
(a) There is no diversion of interest bearing funds for non-
business purposes.
(b) Amounts advanced to subsidiaries that are also in the
business of real estate and therefore amount advanced to
subsidiaries are a part of the business model of the
appellant.
(c) Funds given to subsidiaries of the assesse company are
at the rates of interest higher than the rates of interest of
borrowings.
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(d) Appellant has a mixed account of funds and there is no
nexus of the interest bearing funds and utilisation thereof.
(e) Appellant has earned interest income of Rs
1322714859/- and has interest expenditure of Rs.
1195422543/-. Income is charged to tax under the head
profits and gains of business and expenses are also
claimed as deduction u/s 36(1) 9iii) as business
expenditure.
(f) That part of the interest expenditure of Rs
1191513955/- is required to be capitalized because
purposes of the part of the borrowings is fo~ purchase of
land and construction purposes and there is no nexus of
the funds.
(g) Average Interest free funds are available to the assesse
of Rs. 159254 lacs and total interest bearing funds are Rs.
182350 lacs and cost of the project as at 31.3.2006 is Rs.
351.78 crores. Net interest expenditure is Rs. 49.46 crores.
Amount invested in group entities is Rs 132.27 Crores.
Based on above as in AY 2006-07, 44.51% of the revenue is
recognized out of total cost of project of Rs.351.78 crores, he
proportionately worked out that Rs.22.01 crores ,being 44.51% of
Rs.49.46 crores shall be interest expenditure allowable as
deduction to the assesse. The balance of Rs.27.45 crores, he held
that this interest expenditure is required to be capitalized towards
non-recognition of proportionate revenue from the projects.
46. Advancing argument against this ground, the Id. AR submitted
that the CIT (A) should have considered the netting of principal as
interest earned by the assesse is more than the interest expenditure
incurred by the assesse. He submitted that in assessee’s own case
for AY 2007-08, the CIT (A) has accepted this but for this year, he
has not accepted the plea of the assesse. He drew attention to para
no.9.6 where identical issue has been considered by the CIT (A).
He argued that CIT (A) has accepted the concept of netting of and
moreover after considering the decision of Hon’ble Supreme Court
in the case of SA Builders, wherein Hon’ble Supreme Court has
held that there is no diversion of money for non-business purposes
and loans to subsidiaries are at higher rates then rates of
borrowings paid by the assesse. He further submitted that
Accounting Standard 16 issued by ICAI does not have any
application on the facts of the case. The next argument was that the
case of the assesse is covered by the decision of Hon’ble Delhi
High Court in the ease of CIT vs. Tulip Star Hotels Limited
wherein if the interest expenditure is incurred for the purpose of
busneiss the deduction should be allowed u1s 36(I)(iii) of the Act.
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He further relied on the decision of Hon’ble Supreme Court in the
case of DCIT vs. Core Health Care Limited – 298 ITR 194 (SC)
wherein Hon’ble Supreme Court has stated that provisions of
section 36(1)(iii) has to be read on its own term and it is a code by
itself. The Hon’ble Supreme Court further held that it does not
make any difference whether the capital is borrowed for revenue
purposes or for acquisition of capital assets, requirement of section
is that the assesse must borrow capital for the purposes of its
business. Therefore, he submitted that as in the case of assesse, the
borrowing is for the purposes of business ofthe company, full
deduction should have been allowed u1s 36(1)(iii) of the Act. He
further stated that borrowing cost policy of the assesse is
mentioned with respect to accounting of capitalization of the
borrowing cost according to Accounting Standard 16 issued by
ICAI which does not apply to inventor and even if it applies, the
provision of law should prevail when there is conflict between
accounting standard and the taxation laws while deciding issue
under the Income Tax. Even otherwise, whole controversy is of
academic nature as there is no dispute that all the borrowed funds
have been used for the business and even if part of interest is
capitalised by linking the same with recognition of revenue, the
claim of interest so capitalised is to be allowed as deduction in the
AY 2007-08 as the entire receipt was duly subjected to tax in the
AY 2007-08. He further submitted that the finding of the CIT(A) in
the year under reference being not in conformity with accounting
and legal principles, the same has not been approved by the
successor CIT(A) in the assesse’s own case for A.Y. 2007-08. He
submitted that in the past years identical claim of interest has
always been allowed in the preceding years and there is no change
in facts of the case and nature of claim. He also argued that whole
controversy is of academic nature as there is no dispute that all the
borrowed funds have been used for the business and even if part of
interest is capitalised by linking the same with recognition of
revenue, the claim of interest so capitalised is to be allowed as
deduction in the AY 2007-08 as entire receipt was duly subjected
to tax in the AY 2007-08Therefore, he submitted that the
disallowance confirmed by CIT (A) of Rs.27.45 crores may be
deleted.
47. Against this, Id. DR submitted that the assesse has utilized
funds for the purpose of the project. As the funds are utilized for
the purchase of land and construction expenditure of specific
project, the expenditure is not of the revenue in nature and,
therefore, the same has been rightly disallowed. He further
submitted that AO has given detailed reasoning for each and every
argument advanced by the assesse for the purpose of making
disallowances and the CIT (A) also has worked out the nexus of
the funds in a reasonable manner. It was also one of his argument
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that the disallowances have been based on well accepted principles
of capitalization of borrowing cost in accordance with Accounting
Standard issued by the ICAI in Accounting Standard 16. He,
therefore, submitted that the disallowance confirmed by the CIT
(A) is correct.
48. In rejoinder, ld. AR submitted that now the issue is squarely
covered in favour of the assesse in view of the decision of Hon’ble
Supreme Court in the case of Hero Cycles Limited vs. CIT
reported in 63 taxman.com 308 (SC). He also relied on the decision
of Hon’ble Supreme Court in the case of DCIT vs. Core Healthcare
Limited (supra).”
9. Proceeding then to the issue of the disallowance itself, it has
correctly taken note of the presumption which operates in favour of
the assessee in cases where funds utilised for the purposes of business
may be fused with surplus capital that may be held by an assessee
itself. As has been repeatedly held by courts in this respect, the
presumption would be that an assesse would, at the outset, use the
interest free funds generated or available with it and if the same be
sufficient to meet the investments. However, this presumption which
precedents have propounded as being relevant for the purposes of
Section 36(1)(iii), clearly has no application since the same cannot
feed the presumptive exercise of apportionment which the CIT(A)
ultimately undertook.
10. It would be appropriate to refer to the following conclusions
which have come to be recorded by the Tribunal in this respect:-
“49. We have carefully considered the rival contentions. It appears
that the AO has made this addition mainly because of note
mentioned by assesse in its accounting policies with respect to
borrowing costs according to Accounting Standard 16 issues by
ICAI. We have perused notes attached to financial statements and
we are of opinion that these notes have arisen in the financial
statement of the assesse because of the issue of applicability of
Accounting Standard 16 issued by the ICAI. According to
Accounting Standard 1 i.e. disclosure of accounting policies, each
and every company is required to disclose the accounting policyITA 926/2016 & ITA 928/2016 Page 16 of 20
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with respect to various significant income, expenditure and assets
and liabilities etc. applicable to it. Borrowing cost is also one of
them. ICAI has issued Accounting Standard 16 Accounting for
Borrowing Cost wherein it is provided that in case of interest
expenditure incurred by the company, it is required to be
capitalized if the borrowing is related to the qualifying assets. In
this case the inventory is a qualifying assets as it is held for more
than 12 months and therefore interest attributable to it is required to
be capitalised in the books of accounts as per AS -16. Therefore we
do not agree with the arguments of AR that AS -16 does not apply
to inventory. However, those are the provisions which are
applicable for the maintenance of the accounts of the company and
interest is allowable according to provisions of section 36(1) (iii) of
the act. Further according to us, the provisions of Accounting
Standards and provisions of the Act are two different set of
regulations and while deciding this issue, it is well settled judicial
precedent that is if there is a contradiction between the two, the
provisions of the Act shall prevail. Provisions of section 36(1)(iii)
provides that the amount of interest paid in respect of capital
borrowed for the purposes of the business or profession deduction
is required to be allowed. Proviso inserted w.e.f. 01.04.2004 is the
only restriction if condition laid down u/s 36(1) (iii) are satisfied by
the assesse. The proviso says that any amount of the interest paid in
respect of capital borrowed for acquisition of an asset whether
capitalized in books of accounts or not for any period beginning
from the date on which the 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 deduction. The deduction is to be
disallowed even if the interest is capitalized in the books of
accounts or not. Hon‟ble Supreme Court in the case of Core
Healthcare [298 ITR 194] has held that provisions of section
36(1)(iii) is a code in itself. In the present case, the interest paid by
the assesse is not for the purpose of acquisition of any capital asset
but for its inventory. We do not find any restriction in provisions
contained u/s 36(1)(iii) which provides that the interest can be
disallowed if incurred for the purpose of inventory as provided
under Accounting Standard 16. Apparently, in this case, there is no
allegation that interest is not paid on capital borrowed for the
purpose of the business. Hon‟ble Mumbai High Court in the case
of CIT vs. Lokhandwala Constructions Industries Ltd. [131 taxman
810] has held as under :-
“4. From the facts found by the Tribunal on record, it is
clear that assessee undertook two-fold activities. It bought
and sold flats. Secondly, the assessee was also engaged in
the business of construction of buildings. The profits from
both the activities were assessed under section 28 of the
Income-tax Act. In this case, we are concerned with theITA 926/2016 & ITA 928/2016 Page 17 of 20
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second activity (hereinafter referred to, for the sake of
brevity, as “Kandivali Project”). According to the
Commissioner, loan was raised for securing
land/development rights from the Mandal. That, the loan
was utilised for purchasing the development rights, which,
according to the Commissioner, constituted a capital asset.
According to the Commissioner, since the loan was raised
for securing capital asset, the interest incurred thereon
constituted part of capital expenditure. This finding of the
Commissioner was erroneous. In the case of India
Cements Ltd. v. CIT [1966] 60 ITR 52 , it was held by the
Supreme Court that in cases where the act of borrowing
was incidental to carrying on of business, the loan
obtained was not an asset. That, for the purposes of
deciding the claim of deduction under section 10(2)(iii) of
the Income-tax Act, 1922 [section 36(1)(iii) of the present
Income-tax Act], it was irrelevant to consider the purpose
for which the loan was obtained. In the present case, the
assessee was a builder. In the present case, the assessee
had undertaken the Project of construction of flats under
the Kandivali Project. Therefore, the loan was for
obtaining stock-in-trade. That, the Kandivali Project
constituted the stock-in-trade of the assessee. That, the
Project did not constitute a fixed asset of the assessee. In
this case, we are concerned with deduction under section
36(1)(iii). Since the assessee had received loan for
obtaining stock-in-trade (Kandivali Project), the assessee
was entitled to deduction under section 36(1)(iii) of the
Act. That, while adjudicating the claim for deduction
under section 36(1)(iii) of the Act, the nature of the
expense – whether the expense was on capital account or
revenue account – was irrelevant as the section itself says
that interest paid by the assessee on the capital borrowed
by the assessee was an item of deduction. That, the
utilization of the capital was irrelevant for the purposes of
adjudicating the claim for deduction under section
36(1)(iii) of the Act -Calico Dyeing & Printing Works v.
CIT [1958] 34 ITR 265 (Bom.). In that judgment, it has
been laid down that where an assessee claims deduction of
interest paid on capital borrowed, all that the assessee had
to show was that the capital which was borrowed was used
for business purpose in the relevant year of account and it
did not matter whether the capital was borrowed in order
to acquire a revenue asset or a capital asset. The said
judgment of the Bombay High Court applies to the facts of
this case.”
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Further, in the following decisions of various coordinate
Benches, the deduction of interest has been allowed u/s
36(1)(iii) even where the assesse has followed the
projection completion method :-
(i) ACIT vs. Tata Housing Development
Company Ltd. – 45 SOT 9 (Bom.);
(ii) DCIT vs. Thakar Developers – 115 TTJ 841
(Pune);
(iii) DCIT vs. K. Raheja Pvt. Ltd. – (2006) TIOL
220 ITAT-MUM.;
(iv) K. Raheja Development Corporation vs.
DCIT in ITA No.240/Bang./97 dated 22.09.1997
– In this case, reference application filed by the
Department has also been rejected by the Hon‟ble
Karnataka High Court vide its order dated
08.11.2000 in Civil Petition No.832/2000 (IT).
Before us, ld. DR could not cite any decision against the claim of
the assesse, therefore, respectfully following the decision of
Hon‟ble Bombay High Court and as well as various coordinate
Benches, cited above, we do not concur with the view of CIT (A)
on disallowance of interest of RS.24.75 crores u/s 36(1) (iii) of the
Act. The alternative argument of the assesse regarding adoption of
any artificial formula for the purpose of computing interest
disallowance. Ld. CIT (A) has presumed proportion of utilisation
of funds in absence of the nexus holding that assesse has used
mixed funds. Honourable Bombay High court in case of CIT V
Reliance Utilities & Power limited 313 ITR 340 has held that
“The principle therefore would be that if there are funds available
both interest free and overdraft and/or loans taken, then a
presumption would arise that investments would be out of the
interest-free fund generated or available with the company, if the
interest-free funds were sufficient to meet the investments.”
Therefore we are of the view that presumption is to be assumed in
favour of the assesse and not against assesse. Hence, we reject the
formulae adopted by CIT (A) of working out proportionate
disallowance by adopting artificial formulae. Therefore
respectfully following decisions of Honourable Bombay High court
in CIT vs. Lokhandwala Constructions Industries Ltd. [ 131
taxman 810] and CIT V Reliance Utilities & Power limited [313
ITR 340] We reverse the order of the CIT (A) confirming the
disallowance of expenditure of Rs.27.40 crores and direct the AO
to allow this interest expenditure u/s 36(1) (iii) of the Act.”
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11. Quite apart from Section 36(1)(iii), not incorporating or even
envisaging such a presumption being raised, our attention was not
drawn to any other provision of the Act which would have sustained
the exercise of apportionment and consequential disallowance which
was undertaken by the CIT (A).
12. We would, therefore and for all the aforesaid reasons, answer
Questions 3 and 2 in ITAs no. 926/2016 and 928/2016 respectively in
the negative and against the appellant.
13. The two appeals aforenoted shall, consequently, dismissed on a
combined reading of our order of 23 September 2024 and the present
judgment that we have rendered on Question no. 3.
14. The appeals of the Revenue to be listed separately as per the
order passed by us.
YASHWANT VARMA, J.
HARISH VAIDYANATHAN SHANKAR, J.
MARCH 06, 2025/nd
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