INCLINE REALTY PVT LTD,MUMBAI vs. DCIT, CENTRAL CIRCLE -4(1), MUMBAI

The issue raised in the present appeal pertains to interest of INR.1,56,06,164/- debited to the Profit & Loss Account claimed by the Assessee as deduction under Section 36(1)(iii) of the Act in the return of income for the Assessment Year 2015-2016.

During the assessment proceedings the Assessee was asked to show cause as to why the interest debited to the Profit and Loss Account should not be allocated to the cost of the real estate project. In response, the Assessee stated that the Assessee had raised INR.750 Crores for the Project by way of issuance of debentures. Funds were raised for the purpose of business of the Assesses. However, since the same were not required for 7 days, the same were invested in mutual funds and fixed deposits. The Assessing Officer observed that the Assessee had declared income from sale of units of mutual funds as Short Term Capital Gains. The Assessee-Company was involved in the business of developing of property and not in the business of investments/trading in shares. Therefore, the Assessing Officer concluded that the interest paid on funds utilized for the purpose of investment cannot be attributed to the business of the Assessee and hence, deduction for the same as business expenditure cannot be 3 Assessment Year 2015-2016 allowed under Section 36(1)(iii) of the Act. The Assessing Officer further observed that there was no provision in the Act for allowing deduction of interest expenses while computing capital gains. However, the Assessing Officer allowed as deduction under Section 57 of the Act in respect of interest expenses debited to the Profit & Loss Account to the extent of interest income of INR.2,51,029/- offered to tax by the Assessee as ‘Income for Other Sources’. Thus, the Assessing Officer assessed the total income of the Assessee at INR.1,33,46,321/- computed as under: S.No. Particulars Amount (INR) Amount (INR) I Business income as per the Computation (-) 1,72,85,691/- Add Disallowance of interest expense 1,53,55,135/- (-) 19,30,556/- II Short Term Capital Gains 1,52,76,877/- III Income from Other Sources 2,51,029/- Less: Deduction u/s.57 on account of interest 2,51,029/- NIL expenses Assessed Total Income 1,33,46,321/-

In appeal before the CIT(A), it was submitted on the behalf of the Assessee that the funds were borrowed for the purpose of business (i.e. the real estate project) and the same were to be utilized for the purchase of current asset (i.e. plot of land). The interest on debentures for the period of 7 days before making payment for the acquisition of plot of land was to be allowed as deduction under Section 36(1)(iii) of the Act even if funds were lying idle. Therefore, irrespective of the fact that the funds were temporarily deployed for a period of 7 days in mutual funds and fixed deposits, deduction under Section 36(1)(iii) of the Act was to be allowed. The Assessing Officer had incorrectly recorded that Assessee had claimed deduction for interest expenses against capital gains. As per Section 71 of the Act, the Assessee had set off the loss under the head Profit & Gains from Business or Profession against the Short Term Capital Gains and the income from other sources. For the purpose of claiming deduction under Section 36(1)(iii) of the Act all that an assessee needs to show is that the capital that was borrowed was used for business purpose during the relevant previous year. In the present case all the pre-conditions for claiming deduction for interest 4 Assessment Year 2015-2016 expenses of INR.1,56,06,164/- under Section 36(1)(iii) of the Act stand satisfied. Therefore, deduction claimed by the Assessee under Section 36(1)(iii) of the Act should be allowed.

The above submissions did not find favour with the CIT(A). The CIT(A) dismissed ground raised by the Assessee challenging the disallowance of interest expenses vide order dated, 13/11/2024, holding as under:

[2007] 18 SOT 130 (Mum ITAT), Income Tax Officer vs Vikram Sadanand Hoskote: "11.... it is held that the interest paid by the assessee for the period commencing from the date of acquisition of shares till the date of sale would not form part of the cost of acquisition".

[2015] 61 taxmann.com 297 (Mumbai - Trib), Natural Gas Company (P) Ltd vs Deputy Commissioner of Income Tax "The two, i.e., the interest cost and cost of the asset, are in any case independent of each other. So, however, it shall not be wrong to describe the interest cost as a period cost, chargeable against the income of the enterprise for the relevant period, against its income from the assets, including the asset under reference, deployed for its activity Coming back to the acquisition, the said process or event is complete on the transfer of the relevant capital asset to the assessee. The interest cost for the post- acquisition period, as would be apparent from the foregoing, does not in any manner contribute toward the same, which process stands completed on the transfer........ The cost of an investment is, again, as per the relevant accounting standard (AS-13), to include all the acquisition costs, including brokerage, 6 Assessment Year 2015-2016 fees and duties...... The interest cost, which is a time cost, and thus has only nexus with the time for which the relevant asset is held or rather, for which the corresponding loan outstands (and to the extent it does), has no bearing on the process of acquisition, which stands completed much earlier."

[2018] 92 taxmann.com 310 (Delhi - Trib), Analjit Singh vs Deputy Commissioner of Income Tax: "80...no other cost, like interest expenditure incurred on loan taken for purchase of 'right shares' could be allowed as deduction as cost of acquisition, while computing the capital gain on transfer of such shares.".

[2001] 251 ITR 575 (Delhi HC), Smt. Sita Nanda vs Commissioner of Income Tax: "The interest, as was noted by the Tribunal, had to be paid by the assessee as she made the payment of unearned increase belatedly. The crucial words in the provision are in connection with such transfer. The expression means intrinsically linked with the transfer. Such expenditure has to be wholly and exclusively in connection with the transfer. Even if such expenditure has some nexus with the transfer, it does not qualify for deduction unless it is wholly and exclusively in connection with the transfer. The Tribunal was, therefore, right in its conclusion that the payment of interest was in the shape of damages for late payment of unearned increase. That being so, the interest paid cannot be treated as expenditure incurred wholly and exclusively in connection with the transfer 8.10. For the sake of easy illustration. I ask myself as to what is the treatment of Interest expenses in case of purchase of house? a. If I purchase the house as a trader in purchase and sale of house, I am entitled to claim interest expenses as business expense and the net profit will be offered as business income. b. If I purchase the house as an investment interest cost will not be allowed except under S. 24(b) and that too within the limits prescribed Otherwise no other interest cost can be claimed as deduction 8.11. While it may seem counter intuitive that a person at scenario (a) above should be benefitted while the person at scenario (b) should lose out, there is nothing strange when one dwells deep into it. This is because of the concessional nature of capital gains taxation, subject to fulfillment of conditions laid out. The Hon'ble Supreme Court has held on many occasions that taxation and equity are strangers and it is the job of the 7 Assessment Year 2015-2016 courts to interpret the provisions only in the event of ambiguity or conflict and not where the provisions of the Ach are unequivocal. The ratio laid down by the Hon'ble Supreme Court in the case of N H Lakshmibhai vs CWT. 206 ITR 688 is relevant, wherein it was held that, it is settled law that a taxation statute in particular has to be strictly construed and that there is no equity in a taxing provision It is because of this that the strict interpretation of the proviso would cause hardship to small depositors as against the richer ones, even if true, has no relevant.

Being aggrieved, the Assessee has preferred the present appeal before the Tribunal on the grounds reproduced at Paragraph 2 above.

We have considered the rival submissions and have perused the material on record.

During the course of hearing, the Learned Authorized Representative for the Assessee reiterated the stand taken by the Assessee before the Assessing Officer/CIT(A) and submitted that since the funds were raised for the purpose of business of the Assessee deduction for the interest should be allowed under Section 36(1)(iii) of the Act. The deployment of the funds in mutual funds and fixed deposits was made with the object of earning income to offset the interest cost. On a without prejudice basis, it was contended that in case the claim of deduction under Section 36(1)(iii) of the Act was to be rejected, the Assessee was entitled to claim deduction for interest cost while computing Short Term Capital Gains arising from sale of mutual 8 Assessment Year 2015-2016 funds as the interest formed part of ‘cost of acquisition’. Reliance in this regards was placed on the following judicial precedents forming part of the Paper Book filed by the Assessee - Decision of the Hon’ble Delhi High Court in the case of Commissioner of Income Tax Vs. Mithelsh Kumari [92 ITR 9] - Decision of the Hon’ble Andhra Pradesh High Court in the case of Additional Commissioner of Income Tax Vs. K. S. Gupta [119 ITR 372] - Decision of the Hon’ble Karnataka High Court in the case of Commissioner of Income Tax Vs. Maithreyi Pai [152 ITR 247] - Decision of the Hon’ble Madras High Court in the case of Commissioner of Income Tax Vs. K. Raja Gopala Rao [252 ITR 459] - Decision of the Hon’ble Madras High Court in the case of Commissioner of Income Tax Vs. Trishul Investments Ltd. [305 ITR 434] - Decision of the Tribunal in the case of Neera Jain Vs. ACIT in dated 22/02/2010 - Decision of the Tribunal in the case of Dosch Pharmaceuticals (P.) Ltd. Vs. DCIT [(2023) 156 taxmann.com 728] - Decision of the Tribunal in the case of Bani Broto Banerjee Vs. CIT in ITA No.520/Mum/2023, dated 18/11/2024 - Decision of the in the case of DCIT Vs. Neville Tuli in ITA No.3203/Mum/2023, dated 26/11/2024 - Decision of the Tribunal in the case of Analjit Singh Vs. DCIT in ITA No.4737/Del/2017, dated 01/12/2017 - Decision of the Hon’ble Delhi High Court in the case of Sita Nanda Vs. CIT [251 ITR 575]

Per contra, the Learned Departmental Representative relied upon the decision of the CIT(A) and the Assessment Order. It was submitted that since the funds were deployed for making investment in mutual funds and shares deduction as claimed by the Assessee in respect of interest expenses under Section 36(1)(iii) of the Act could not be allowed. More so, when the funds were utilized for making investment in mutual funds and fixed deposits which was admittedly 9 Assessment Year 2015-2016 not the business of the Assessee. The Learned Departmental Representative also made reference to Paragraph 8.7 of the order passed by the CIT(A) to contend that interest amount on borrowed funds used for investment in mutual funds yielding exempt dividend income and Short Term Capital Gain cannot be allowed as business expenditure. It was pointed out that the CIT(A) had also rejected the alternative plea raised by the Learned Authorized Representative for the Assessee observing that interest expenses/finance charges cannot be treated as part of cost of acquisition of the asset. There was no provision in the Act mandating allowance of deduction of interest expenses while computing Short Term Capital Gains. Reliance in this regard were placed by the Learned Departmental Representative on judicial precedents cited by the Learned CIT(A) in Paragraph 8.9 of the impugned order.

We have heard the rival submissions and have perused the material on record. It was contended on behalf of the Assessee that the funds were borrowed for the purpose of business, the requirement of Section 36(1)(iii) of the Act stood fulfilled, and therefore, the deduction was correctly claimed under Section 36(1)(iii) of the Act. We note that the Assessing Officer did not dispute the fact that funds were borrowed for the purpose of business. The reason for disallowance made by the Assessing Officer was that the funds were utilized for the purpose other than business (i.e. for making investment in shares and securities). On perusal of records following facts emerges that the Assessee had raised debt capital of INR.750 Crores by way of issuance of debentures for the stated purpose of purchasing plot of land on 21/04/2014 and the payment for the acquisition of the said plot of land of was to be made on 28/04/2014. Thus, the Assessee had an interim period of 7 days for which the funds were idle. The Assessee was aware that the investment made by utilizing the aforesaid funds, would be liquidated on or before 28/04/2014 and funds received would be 10 Assessment Year 2015-2016 utilized for the purchase of plot of land. In our view, the Assessee had carried out the aforesaid activity in a systematic manner and the same would qualify as adventure in the nature of ‘business’ as defined in Section 2(13) of the Act. The Assessee was not seeking to earn gains on appreciation of the value of the investment. To the contrary, the intention of the Assessee was to earn income by way of purchase/sale of mutual funds and interest income from fixed deposits to offset the corresponding interest cost incurred in the aforesaid period of 7 days. Thus, the action of the Assessee to utilized funds for making investments/deposits was necessitated on account of commercial expediency. Therefore, we are of the considered view that the Assessee was correct in claiming deduction under Section 36(1)(iii) of the Act. Going by the aforesaid reasoning, the income earned by the Assessee from purchase/sale of mutual funds should have been offered to tax by the Assessee as business income. However, we note that the Assessee had offered the income from purchase/sale of mutual funds as Short Term Capital Gains taxable under the head ‘Capital Gains’, claimed dividend income as exempt income and offered interest income as ‘Income from Other Sources’. This was not objected to by the Assessing Officer during the assessment proceedings and the Assessing Officer accepted the income as characterized and offered to tax by the Assessee. The Assessing Officer only disallowed interest expenses under Section 36(1)(iii) of the Act. During the course of hearing, it was pointed out by the Learned Authorised Representative for the Assessee that since the Short Term Capital Gains were set off against the Business Loss (arising on account of the interest expenses debited to Profit & Loss Account), and therefore, the benefit of lower rate of tax was not claimed by the Assessee in respect of the Short Term Capital Gains. Computation of Income furnished by the Assessee supports the aforesaid submissions advanced on behalf of the Assessee. Therefore, even if the income from purchase/sale of investments 11 Assessment Year 2015-2016 was characterized as business income, there would have been no change in the final outcome. Instead of inter-head set off of business loss with Capital Gains under Section 71(2) of the Act, the income from purchase/sale of investment would offset the interest expenses debited to Profit & Loss Account. Accordingly, we accept Assessee’s claim for deduction of interest expenses under Section 36(1)(iii) of the Act. However, we note that the Assessee had claimed income of INR.4,54,581/- as exempt dividend income. Section 14A of the Act provides for disallowance of expenses incurred for earning exemption income. Accordingly, interest expenses pertaining to funds deployed in investments yielding exempt dividend income during the interim period of 7 days would be hit by the provisions of Section 14A of the Act. We note that the CIT(A) had also referred to the provisions contained in Section 14A of the Act in paragraph 8.7 of the impugned order. Accordingly, the Assessing Officer is directed to make disallowance of party of interest expense of INR.1,56,06,164/-,if any, attributable to investments yielding exempt income of INR.4,54,581/- under Section 14A of the Act. For the aforesaid, we direct the Assessee to furnish to the Assessing Officer the details of investments made during the interim period of 7 days in investments yielding exempt income, along with the date of purchase and sale of such investments and the source of such investments. It is clarified that the Assessee would be granted a reasonable opportunity of being heard. Accordingly, the Assessing Officer is directed to allow deduction claimed by the Assessee for interest expenses of INR.1,56,06,164/- under Section 36(1)(iii) of the Act after making disallowance under Section 14A of the Act, if any, as per the aforesaid directions. In view of the aforesaid, the deduction of INR. INR.2,51,029/- granted by the Assessing Officer while computing Income from Other Sources shall stand reversed/disallowed.

Before parting we would like to deal with the alternative contention 12 Assessment Year 2015-2016 raised on behalf of the Assessee. Since, the Assessing Officer had disallowed deduction claimed by the Assessee under Section 36(1)(iii) of the Act, it was contended on behalf of the Assessee that interest cost debited to the Profit and Loss Account should be treated as ‘cost of acquisition’ of investments and the same should be taken into account while computing the capital gains earned during the relevant previous year. In support of the aforesaid contention, the Assessee had placed upon the number of judicial precedents where the interest cost incurred for funds borrowed for acquisition of shares/securities was treated as part of cost of such shares/securities. On perusal of the said judicial precedents [placed at pages 33 to 123 of the Paper-book] we find that the same are distinguishable on facts. In the said judicial precedents the common fact is that the funds were borrowed as well as utilized for the purpose of purchase of shares, thus, creating a direct nexus between the purpose of borrowing and the actual utilization. Whereas, in the present case it was the contention of the Assessee that the fund were, admittedly, borrowed for the purchase of plot of land for the Project. Thus, the direct nexus of funds borrowed was with the plot of land. It is for the same reason, that the Assessee had allocated the interest cost of INR.75,46,76,285/- to Work-in- Progress of the Project. Thus, admittedly, in the present case the funds were not borrowed for making investments in mutual funds. Therefore, it cannot be said that the purchase of shares/securities necessitated the borrowing of funds. We have already concluded that the Assessee had entered into an adventure in the nature of trade by utilization of funds raised which were idle for an interim period of 7 days. It was on account of utilization of funds that the cost was attributed to the business activity carried out by the Assessee. Therefore, the alternative submissions made on behalf of the Assessee cannot be accepted.

In view of the above, Ground No.1 raised by the Assessee is partly 13 Assessment Year 2015-2016 allowed, Ground No. 2 raised by the Assessee is dismissed as having been rendered academic and Ground No. 3 raised by the Assessee is dismissed.

In result, the present appeal preferred by the Assessee is partly allowed.