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Income Tax Appellate Tribunal, ‘C’ BENCH, CHENNAI
Before: SHRI MAHAVIR SINGH, VICE- & SHRI MANJUNATHA.G
: Mr. K.G.Raghunath, Advocate अपीलाथ"क"ओरसे/ Appellant by : Mr. P.Sajit Kumar, JCIT ""यथ"क"ओरसे/Respondent by 12.09.2023 : सुनवाईक"तार"ख/Date of hearing : 27.09.2023 घोषणाक"तार"ख /Date of Pronouncement आदेश / O R D E R PER MANJUNATHA.G AM:
This appeal filed by the assessee is directed against
order passed by the learned Commissioner of Income Tax (Appeals)-12, Chennai dated 28.11.2018 and pertains to assessment year 2015-16. 2. The assessee has raised following grounds of appeal:-
“1. The order passed by the Commissioner of Income Tax -Appeals 12 for the Assessment Year 2015-16, is contrary to law, evidence and facts and is arbitrary.
The Learned Commissioner of Income Tax, Appeals, had failed to comprehend that the interest paid amounting to Rs.64,25,874/- on the loan availed from M/s Fullerton, does not qualify for disallowance u/s 36(1)(iii) of the Act, and the provisions have been invoked and applied in an erroneous manner.
2 3. The Learned Commissioner of Income Tax, Appeals has also grossly erred in not appreciating that the new mandapam, representing a different though identical business/vertical, would not amount to extension of the existing business to invoke sec. 36(1)(iii), and hence the addition is erroneous and arbitrary.
The Learned Commissioner of Income Tax, Appeals , has also erred In not appreciating that there was total unity of control and interlacing of capital.
The Learned Commissioner of Income Tax, Appeals, has also erred in not appreciating that the expenditure also qualifies for consideration on the grounds of commercial expediency u/s 37(1) of the Income Tax Act.”
Brief facts are that the assessee firm M/s. Sri Mak & Co., has filed its return of income for the assessment year 2015-16 on 30.09.2015 declaring total income of Rs.1,31,50,650/-.
During the course of assessment proceedings, the Assessing Officer noticed that the assessee has claimed huge interest expenses to the tune of Rs.2,80,52,927/-, therefore, the assessee was asked to furnish details regarding interest payments and purpose for borrowing of loans. In response, the assessee submitted that firm has borrowed loan from M/s.
Fullerton India amounting to Rs.11,19,40,000/- and paid interest of Rs.1,26,29,967/-. The said loan has been taken for the purpose of construction of new mandapam in the name of M Weddings & Conventions. The construction of building was 3 completed and building was ready for use. Therefore, the assessee has claimed interest paid on said loan. The Assessing Officer, however, was not satisfied with the explanation furnished by the assessee and according to the Assessing Officer, building has been inaugurated only in February, 2016 and started booking from financial year 2016-17 and therefore, argument of the assessee that building was ready for use is not correct. Therefore, the Assessing Officer invoked provisions of section 36(1)(iii) of the Act and disallowed interest paid on loan borrowed for construction of new mandapam of Rs.64,25,874/- and added to total income of the assessee .
4. Being aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A). Before the CIT(A), the assessee has filed detailed written submissions on issues which has been extracted at para 6.3 on page 6 to 12 of the learned CIT(A) order. The sum & substance of the arguments of the assessee before the learned CIT(A) are that when business of the assessee has been commenced and the assessee has acquired new asset for expansion of existing 4 business in the same line of business, then interest paid on borrowed capital is to be allowed as deduction. The learned CIT(A), after considering the submissions of the assessee and also taken note of certain judicial precedents opined that as per provisions of section 36(1)(iii) and proviso provided therein, interest on capital borrowed for acquisition of new asset cannot be allowed till the date on which such asset was put to use, since new asset constructed by the assessee was not ready and put to use, interest paid on capital borrowed for acquisition of new asset cannot be allowed as deduction.
Therefore, the Ld.CIT(A) rejected arguments of the assessee and upheld additions made by the Assessing Officer towards disallowance of interest u/s.36(1)(iii) of the Act.
5. The learned counsel for the assessee submits that the learned CIT(A) erred in sustaining addition made towards disallowance of interest paid on capital borrowed for acquisition of new asset, even though, the asset was ready to use in the business of the assessee. The learned counsel further submitted that even assuming for a moment, asset was not put to use in the business of the assessee for the impugned 5 assessment year, but fact remains that amount borrowed for acquisition of new asset was in the existing business of the assessee which has already been commenced its activities.
Therefore, once unity of control in respect of two businesses are with one management, then even if, new business is not commenced, interest paid on borrowed capital for acquisition of new asset should be allowed as deduction.
The learned DR Shri P.Sajit Kumar, supporting order of the Ld.CIT(A) submitted that as per proviso to Section 36(1)(iii) of the Act, interest paid in respect of capital borrowed for acquisition of an asset for extension of existing business or profession for any period beginning from the date on which capital was borrowed for acquisition of asset, till the date on which such asset was put to use shall not be allowed as deduction. Since, new asset was not put to use in business of the assessee, interest paid on capital borrowed for acquisition of said asset needs to be disallowed. The Assessing Officer, after considering relevant facts has rightly disallowed interest paid on loans.
6 7. We have heard both the parties, perused material available on record and gone through orders of the authorities below. The factual matrix of impugned dispute are that the assessee firm is in the business of running mandapam and marriage halls. The firm was deriving income from running marriage hall for impugned assessment year. During the financial year relevant to assessment year 2015-16, the assessee has paid interest on borrowed capital taken for acquisition of new asset for expansion of its existing business.
As per the assessee, the assessee firm has constructed a new mandapam and availed loan from bank and construction of new mandapam was completed and ready for use. However, the same has been started generating revenue from next financial year, therefore, interest paid on borrowed capital needs to be allowed.
We have given our thoughtful consideration to the reasons given by the Assessing Officer to disallow interest paid on capital borrowed for acquisition of new asset in light of provisions of section 36(1)(iii) and proviso provided therein and we find that as per proviso, interest paid on capital 7 borrowed for acquisition of asset for expansion of existing business or profession cannot be allowed till date on which such asset was put to use in the business of the assessee. In the present case, new asset acquired by the assessee was ready for put to use in the business, even though, there is no revenue generated from the said new asset. It is well settle principles of law by the decisions of various courts that ‘set up of business’ and ‘commencement of business’ are two separate events. If a business has been set up, even it has not commenced its activities, then expenditure relatable to said business, including interest expenses, if any, should be allowed as deduction. In the present case, the Assessing Officer never disputed the fact that new asset was ready for use in the business of the assessee and also put to use in the business of the assessee. But, the Assessing Officer disallowed the interest only on the ground that booking has been started in new mandapam from financial year 2016-17 onwards. In our considered view, date of inauguration and date of booking of hall is not relevant to decide whether business has been set up or not. The moment, the assessee has kept its asset for ready to use in the business, it can be said that business has been set 8 up. Therefore, we are of the considered view that in the given facts and circumstances of the case, there is no doubt with regard to fact that business of the assessee has been set up and accordingly, the assessee has rightly claimed interest paid on capital for acquisition of asset. The learned CIT(A) without considering relevant facts has simply sustained additions made by the Assessing Officer. Thus, we set aside the impugned
order and direct the Assessing Officer to delete additions made towards disallowance of interest paid u/s.36(1)(iii) of the Act.
In the result, appeal filed by the assessee is allowed.
Order pronounced in the open court on 27th September, 2023 (महावीर "संह) (जी. मंजुनाथ) (Mahavir Singh) (G. Manjunatha ) उपा"य"/ Vice-President लेखा सद%य / Accountant Member चे'नई/Chennai, (दनांक/Dated :27.09.2023 DS