KOMAL ENTERPRISES,MUMBAI vs. INCOME TAX OFFICER 41(3)(1) , MUMBAI

The only effective ground raised by the assessee relates to challenging the order of the Ld. CIT(A) in upholding the disallowance made by the AO under Section 36(1)(iii) of the Act. In this regard, the ld. AR appearing on behalf of the assessee reiterated the same arguments as were raised before the Revenue Authorities and also relied upon the written submissions.

On the contrary, the ld. DR relied upon the orders passed by the Revenue Authorities.

We have heard the counsel for both the parties, perused the material placed on record, the judgments cited before us, and also the orders passed by the Revenue Authorities. From the records, we noticed that the disallowance under Section 36(1)(iii) of the Act was made by the AO on account of the fact that the assessee had not discharged the onus cast upon it. The assessee had failed to substantiate that the property purchased by it was actually used for business purposes. Therefore, the disallowance under Section 36(1)(iii) of the Act arose from the assessee's failure to conclusively establish that the borrowed funds were not utilised for acquisition of land and that the land was put to use for business purposes during the relevant previous year. In order to substantiate that the land in question, purchased 2 by the assessee out of borrowed funds, was in fact used for business purposes, the assessee relied upon the following documents:

We noticed that the assessee had taken loans from two banks and the disallowance of interest amounting to Rs. 23,00,731/- was made. The breakup of the interest disallowed is as follows:

It was submitted that the AO had incorrectly assumed that the land purchased by the assessee was not put to use for business purposes and was purchased out of borrowed funds. Our attention was drawn to the fact that the fund position in the assessee's case was as follows:

It was submitted that the assessee was having sufficient interest-free funds to finance the purchase of the land. Even otherwise, we noticed that the disallowance under Section 36(1)(iii) of the Act was made on the allegation that the borrowed funds were used for the purchase of land, but the said land had not been put to use for business purposes. Consequently, the interest paid on such borrowed funds was held to be not allowable.

As per the case set up by the assessee, it is a partnership firm engaged in the business of trading, import and consignment sale of tools, steel pipes, iron and steel straps, etc. According to the assessee, the nature of the goods dealt with requires substantial storage area because it trades in iron and steel rods, pipes, scrap and other heavy metallic goods, which are bulky, heavy and difficult to store in closed warehouses. Thus, the assessee submitted that large open spaces are required for stacking steel rods and pipes, movement of cranes and forklifts, and loading and unloading of trucks. It is, therefore, on account of the nature of its business and operational requirements that the assessee acquired land in the Cherlapally Industrial Area specifically for the purpose of storing inventories.

We find that disallowance under Section 36(1)(iii) of the Act is legally tenable only where the borrowed funds are not used for the purposes of business. However, in the present case, the assessee, by relying upon the documentary evidence and the submissions made, clearly proved on record that the land in question was used for storing trading inventories. Accordingly, the interest paid on the borrowed funds becomes an allowable deduction.

In the present case, the assessee purchased Plot No. 13, Cherlapally Industrial Area, Hyderabad, on 02.01.2011, and the purpose of acquiring the said plot was to store trading inventories. In order to substantiate that the land was used for business purposes, the assessee relied upon transport bills, which clearly depict that goods were transported to the Cherlapally land. For example, the transport documents issued by Venkateswara Cargo Movers contain the description of movement of goods from the industrial area to the Cherlapally godown. The transport bills also clearly mention transportation from Balanagar to Cherlapally and from Cherlapally to the godown. This establishes that the land was actively used as a storage yard for goods. The existence of such delivery documents clearly demonstrates that goods were delivered to the said land, inventories were stored there, and the land was used as a business storage facility.

So far as the legal proposition relating to deduction of interest under Section 36(1)(iii) of the Act is concerned, the basic requirement is that the capital must be borrowed and used for the purposes of business. Therefore, interest can be disallowed only where the borrowed funds are used for non- business purposes or where the capital asset has not yet been put to use. However, from the facts placed on record along with the supporting documents, we find that the land was actively used as a storage area for the assessee's business. Reliance in this regard is being placed upon the following decisions:

CIT vs Reliance Utilities & Power Ltd 313 ITR 340 (Bombay High Court)

Fairchem Organics Ltd. v. ACIT [2026] 184 taxmann.com 680 (ITAT Mumbai)

Deputy Commissioner of Income-tax v. Core Health Care Ltd. [2008] 167 Taxman 206 (SC) (SUPREME COURT OF INDIA)

Vardhman Polytex Ltd. v. Commissioner of Income-tax

Metro Exporters Ltd vs ITO 29 SOT 531 (ITAT Mumbai)

DCIT vs Subramanya Constructions & Development Co Ltd

Therefore, considering the totality of the facts and circumstances discussed above, we conclude that the nature of the iron and steel trading business carried on by the assessee requires large open yards for storage, particularly for stacking long steel rods and pipes, movement of forklifts, and loading and unloading of trucks. All these activities cannot be effectively carried out in small covered warehouses. Therefore, the use of industrial land as a storage yard is a common business practice. The assessee has thus established on record that the land in question was used for business purposes and that it had sufficient interest-free funds available. The AO has not pointed out any defect in the documents placed on record by the assessee, nor has any verification been brought before us to doubt the authenticity of the documents relied upon by the assessee. Accordingly, considering the overall facts, we find that the disallowance made by the AO and sustained by the Ld. CIT(A) under Section 36(1)(iii) of the Act is untenable. We, 8 therefore, direct the AO to delete the said disallowance and quash and set aside the order passed by the Ld. CIT(A). Thus the ground raised by the assessee stands allowed.

In the result appeal filed by the assessee stands allowed.