Interest disallowance

No, IT officer is not correct and even if you havent utilized money for business purpose still you have to pay interest and as correctly done by you you transferred it to work in progress. You claimed only 35lacs which is for the amount utilized in current year right? so no issues you can show him via documentary proofs and engineer certificate of work completed. Is the loan taken for creation of Asset?

Total Interest paid for the year ended 31.03.2017 is Rs.7cr out of which 1.5Cr relating to 13Cr as mentioned above.

Out of 7Cr interest we have claimed only 35lakh 
@ shiva I don't understand this part
you have said that total interest paid is 7 cr and you have claimed only rs. 35 lakhs.

it means whether that 7 crs have been actually paid to bank?

interest of 6.65 crs have been transferred to work in progress? what it means ?
when it has been actually paid to bank then how the same could be transferred to wip?
PLS clarify

We are real estate business (plotted development ). 

Reply for Out of 7Cr interest we have claimed only 35lakh

We paid 7cr interest to the bank in the year 2016-17 month on month. The revenue generated in the year is only 1cr only which is 5% of total revenue which will be generated in future period. So Accordingly we charged 5% o f interest(i.e. 35laksh) to P&L statement and remaining 95% of expense trf to Preoperative/Workinprogress account under Current assets.

95% of expense will be charged to P&L statement at the time of revenue generate or accrued.