IN INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : E : NEW DELHI BEFORE SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER AND MS SUCHITRA KAMBLE, JUDICIAL MEMBER ITA Nos.5455 to 5457/Del/2010 Assessment Years : 2003-04 to 2005-06 Meerut Development Authority, Vs. Addl.CIT, CA Anupam Sharma, Range-1, 16, Hans Plaza, Meerut. Opp. Amarpali Cinema, Garh Road, New Delhi. PAN: AAALM0124D (Appellant) (Respondent) Assessee By : Shri Kapil Goel, Advocate Department By : Shri S.K. Jain, Sr. DR Date of Hearing : 24.08.2016 Date of Pronouncement : 29.09.2016 ORDER PER J. SUDHAKAR REDDY, AM: All these appeals are filed by assessee for assessment years 2003-04, 2004-05 and 2005-06 are directed against orders of ITA Nos.5455 to 5457/Del/2010 CIT(A) dated 31.8.2010. As issues arising in all these appeals are common, for sake of convenience, they were heard together and are disposed of by way of this common order. 2. assessee is urban development authority formed by Act passed by Uttar Pradesh Legislature Assembly and is engaged in urban development of Meerut and for providing low cost housing to general public. Two grounds for all assessment years are identical. For assessment year 2004-05 one other ground has been taken by assessee, which relates to ad hoc disallowance of 56% of expenses. two common grounds that arise in all three appeals are: (a) disallowance of interest pertaining to closing stock; and (b) treatment of grants received from Government of Uttar Pradesh as revenue by AO. 3. We have heard Shri Kapil Goel, ld. counsel for assessee and Shri S.K. Jain, ld.Sr. DR. assessee has filed paper book running into 29 pages. He also filed copies of various decisions and argued his 2 ITA Nos.5455 to 5457/Del/2010 case at length. ld. DR made submissions on behalf of Revenue and mainly relied on order of ld.CIT(A). ld. DR also filed written submissions. 4. We have considered rival submissions. first issue that arises for our consideration is whether interest paid on loans taken should be capitalized and added to value of closing stock of assessee or not. AO held that interest on loans taken for development of schemes, from HUDCO, NCR, State Government, etc. (as per column No.6 of Schedule 1 of annual accounts) amounting to Rs.4,04,05,345.84, has to be included in valuation of closing stock as on 31.3.2003. assessee had disclosed this interest expenditure as development expenditure. first appellate authority held that expenditure in question was relatable to stock held by assessee. He further held that assessee has not demonstrated that interest claimed as revenue expenditure was allowable and not to be capitalized as cost of stock. He gave finding that AO has not interfered with method 3 ITA Nos.5455 to 5457/Del/2010 of valuation of stock, but, has only added interest cost to value of stock. 5. Before us, ld. counsel for assessee submitted that AO has disturbed method of valuation of stock followed by assessee year after year. He submitted that AO has only interfered with valuation of closing stock, but, has not disturbed valuation of opening stock and hence, such action is bad in law. He relied on decision of Hon ble Bombay High Court in case of Lokhandwala Construction, 131 Taxman 810, decision of B Bench of ITAT Delhi in ITA No.2677/Del/2011 for assessment year 2006-07 in case of DLF Ltd., Order dated 11th March, 2016, as well as decision of ITAT Kolkata B Bench, in ITA No.1101/Kol/2012, Order dated 19th February, 2014 in case of Cellica Developers Pvt. Ltd., and submitted that in all these cases, under similar circumstances, expenditure incurred on loans borrowed, were allowed as revenue expenditure and was not capitalized to value of closing stock. 4 ITA Nos.5455 to 5457/Del/2010 6. ld. DR, on other hand, opposed contentions of assessee and submitted that issue for adjudication is not whether amount in question is allowable u/s 36(1)(iii) or not and that only issue is whether interest incurred on loans taken was to be considered for purpose of valuation of closing stock or not. He submitted that expenditure is relatable to closing stock and hence, both AO as well as CIT(A) has correctly decided issue. He argued that onus is on assessee to prove that Market value of stock was less than cost so arrived by AO. He drew attention of Bench to page 2 of AO s order and submitted that value of opening stock cannot be interfered with. He distinguished case law relied upon by assessee. 7. After hearing rival submissions, we are of considered opinion that AO was wrong in changing method of valuation of closing stock. This method is being followed by assessee, year after year and has been accepted by Revenue. Loading of interest cost to closing stock is definitely changing method of valuation of stock. 5 ITA Nos.5455 to 5457/Del/2010 Interest expenditure incurred on loans used for acquiring current assets, which includes closing stock, is allowable u/s 36(1)(iii). Hon ble Bombay High Court in case of Lokhandwala Constructions, 260 ITR 579 (Bom), has held as follows:- 4. From facts found by Tribunal on record, it is clear that assessee undertook two-fold activities. It bought and sold flats. Secondly, assessee was also engaged in business of construction of buildings. profits from both activities were assessed under Section 28of Income-tax Act. In this case, we are concerned with second activity (hereinafter referred to, for sake of brevity, as "Kandivali Project"). According to Commissioner, loan was raised for securing land/development rights from Mandal. That, loan was utilised for purchasing development rights, which, according to Commissioner, constituted capital asset. According to Commissioner, since loan was raised for securing capital asset, interest incurred thereon constituted part of capital expenditure. This finding of Commissioner was erroneous. In case of India Cements Ltd. v. CIT, Madras, reported in 60 ITR Page 52, it was held by Supreme Court that in cases where act of borrowing was incidental to carrying on of business, loan obtained was not asset. That, for purposes of deciding claim of deduction under Section 10(2)(iii) of Income-tax Act 1922 [section 36(1)(iii) of present Income-tax Act], it was irrelevant to consider purpose for which loan was obtained. In present case, assessee was builder. In present case, assessee had undertaken Project of construction of flats under Kandivali Project. Therefore, loan was for obtaining stock-in-trade. That, Kandivali Project constituted stock-in-trade of assessee. That, Project did not constitute fixed asset of assessee. In this case, we are concerned with deduction under Section 36(1)(iii). Since assessee had received loan for obtaining stock-in-trade (Kandivali Project), 6 ITA Nos.5455 to 5457/Del/2010 assessee was entitled to deduction under Section 36(1)(iii) of Act. That, while adjudicating claim for deduction under Section 36(1)(iii) of Act, nature of expense - whether expense was on capital account or revenue account -was irrelevant as Section itself says that interest paid by assessee on capital borrowed by assessee was item of deduction. That, utilization of capital was irrelevant for purposes of adjudicating claim for deduction under Section 36(1)(iii) of Act (See judgment of Bombay High Court in case of Calico Dyeing and Printing Works v. CIT, Bombay City-II, reported in 34 ITR 265). In that judgment, it has been laid down that where assessee claims deduction of interest paid on capital borrowed, all that assessee had to show was that capital which was borrowed was used for business purpose in relevant year of account and it did not matter whether capital was borrowed in order to acquire revenue asset or capital asset. said judgment of Bombay High Court applies to facts of this case. (emphasis ours) 8. This decision was followed by Delhi Benches of Tribunal in case of DLF Ltd. (supra) and by Kolkata Bench of Tribunal in case of Cellica Developers Pvt. Ltd. (supra). No contrary decision has been brought to our notice by ld. DR. AO chose only to disturb valuation of closing stock, but, has not applied same yardstick to valuation of opening stock of assessee. 9. For all these reasons and respectfully following propositions laid down by Hon ble Bombay High Court in case of 7 ITA Nos.5455 to 5457/Del/2010 Lokhandwala Constructions to facts of this case, we direct AO to exclude interest incurred on loans from valuation of closing stock and allow same as deduction u/s 36(1)(iii) of Act. 10. In result, this ground of assessee for all three years are allowed. 11. second common ground for all three assessment years is whether amount of grants received from Government of Uttar Pradesh is to be treated as revenue in nature. amounts were received from Housing Department of Government of UP vide DO No.152/9-A-1998 dated 15.1.1998. ld.CIT(A) held that, on going through facts and Notifications of UP Government relied upon by assessee, he was of considered view that 90% of incomes were not collected on behalf of any other body or person and sums have been directed to be incurred on development of infrastructure by assessee. He records that impugned sums have been directed to 8 ITA Nos.5455 to 5457/Del/2010 be earmarked and spent on specific items only and not as per free will of assessee. CIT (A) upheld finding of AO. 12. ld. counsel for assessee relied on decision of jurisdictional High Court, Lucknow Bench in case of CIT, Lucknow vs. Lucknow Development Authority and other cases, 219 Taxman 162 and submitted that this very Notification of Government of UP was considered and Hon ble High Court held that sums received from Government of UP in pursuance of this Notification cannot be treated as belonging to authority and that receipt is not taxable in nature. He also relied on decisions of co-ordinate Bench G of Tribunal in ITA No.131 and 132/Del/2009 for AY 2003-04 and 2005-06 in case of Saharanpur Development Authority vs. ACIT, Order dated 8th April, 2010, wherein fund received has been held as not taxable as income of assessee. ld. DR relied upon order of AO as well as CIT(A) and submitted that amounts have been received by assessee from Government of UP for incurring of certain expenditure to develop infrastructure, and, merely because 9 ITA Nos.5455 to 5457/Del/2010 certain restrictions have been placed on application and utilization of income, it cannot be said that receipt in question is not income. He distinguished case law relied upon by assessee. 13. After hearing rival contentions, we find that jurisdictional High Court in case of Lucknow Development Authority, Gomti Nagar, Lucknow (supra), has observed as follows:- From record, it also appears that authority had been maintaining infrastructure, development and reserve fund (IDAR) as per Notification dated 15.1.1998. money transferred to this fund is to be utilized for purpose of object as specified by committee having constituted by Government under said Notification and same could not be treated to be belonging to authority or receipt is taxable in its hands. 14. Hon ble High Court was considering same DO No.15/9-A- 1998 dated 15.1.1998. This judgment is binding on us. 15. Delhi Bench G of Tribunal in case of Saharanpur Development Authority in ITA No.566/Del/2010, Order dated 5th April, 2010, held as follows:- 4. Upon assessee s appeal ld.CIT(A) noted assessee submissions that on identical issue in AY 2004-05 ITAT in order no.ITA 02/Del/2008 vide order dt. 23.12.2008 had deleted 10 ITA Nos.5455 to 5457/Del/2010 addition. Tribunal in that case has referred to decision of Hon ble Delhi High Court in case of CIT vs. Delhi Industrial Development Fund and also ITAT decision in case of Karnataka Urban Infrastructure Development and Finance Corporation. Tribunal also noted that said decision of ITAT was upheld by Hon ble High Court also in judgement reported in 284 ITR 582. Thereafter Tribunal held that case law relied upon assessee are squarely applicable on facts of present case. assessee had received funds under orders of Govt. of Uttar Pradesh and it was required to use such funds as per direction of high power committee. It has no control over funds. More so AO has not brought to tax principle amount as income of assessee. If his logic is accepted then all fees etc. over and above expenditure ought to have been examined as income of assessee Finding facts of case identical ld.CIT(A) deleted addition following ratio from ITAT order for AY 2004-05. 16. Consistent with view taken therein and respectfully following proposition of law laid down by jurisdictional High Court, we hold that amounts received by assessee from Government of UP cannot be taxed as income of assessee. AO is directed to exclude same from taxable income of assessee. 17. In result, this ground of assessee is allowed. 18. As stated, for AY 2004-05, one additional issue arises. AO in this year had disallowed on ad hoc basis 56% of development 11 ITA Nos.5455 to 5457/Del/2010 expenses. After hearing rival contentions, we find that AO has not given any reason whatsoever in his order as to why he has disallowed 56% of development expenditure. When matter was taken up before first appellate authority, same was dismissed without addressing contention of assessee that no reason whatsoever was mentioned in assessment order for making this disallowance. As AO has failed to give any reason whatsoever, for disallowing 56% of development expenses, and as ld.CIT(A) failed to address this issue, disallowance in question is hereby deleted and this ground of assessee is allowed. 19. In result, appeals of assessee for all three years are allowed. order pronounced in open court on 29.09.2016. Sd/- Sd/- [SUCHITRA KAMBLE] [J. SUDHAKAR REDDY] JUDICIAL MEMBER ACCOUNTANT MEMBER Dated, 29th September, 2016. 12 ITA Nos.5455 to 5457/Del/2010 dk Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI. 13 Meerut Development Authority v. Addl.CIT, Range-1, Meerut