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Facts
The Revenue appealed an order allowing the assessee's claim for deduction of interest expenses on borrowed capital. The Assessing Officer disallowed the deduction on the grounds that the assessee had not carried out any business activity during the year and the borrowed capital was not utilized for the business purpose, as the related project was cancelled. The assessee, a real estate developer, had borrowed funds for a project and incurred interest expenses.
Held
The Tribunal held that the Assessing Officer's disallowance was not justifiable. The Tribunal noted that the assessee was engaged in business and had incurred costs, and that not having revenue receipts does not negate the allowability of expenditure. Citing judicial precedent, the Tribunal concluded that the 'put to use' clause applies to capital assets only and that the assessee had established substantial activities in the project, demonstrating that the purchased property was put to use.
Key Issues
Whether interest expenses on borrowed capital are allowable as a deduction when the assessee claims not to have carried out significant business activity and the related project was cancelled, and whether 'put to use' clause applies to business stock-in-trade.
Sections Cited
36(1)(iii), 143(3), 28, 40
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “B” BENCH MUMBAI
Before: SHRI SAKTIJIT DEY, HON’BLE & SHRI GIRISH AGRAWAL
PER GIRISH AGRAWAL, ACCOUNTANT MEMBER:
This appeal filed by the Revenue is against the order of Ld. CIT(A), National Faceless Appeal Centre (NFAC), Delhi, vide order no. ITBA/NFAC/S/250/2023-24/1053429857, dated 01.06.2023, passed against the assessment order by Assistant Commissioner of Income-tax, Circle-12(1)(2), Mumbai, u/s. 143(3) of the Income-tax Act (hereinafter referred to as the “Act”), dated 15.12.2017 for Assessment Year 2015- 16.
Grounds taken by the Revenue are reproduced as under: “1. On the facts and circumstances of the case and in law the Id. CIT(A) erred in allowing deduction claimed u/s 36(1)(ill) of the Act, on account of interest expenses on borrowed capital ignoring the fact that the capital borrowed by the assessee was not utilized for the purpose of business as the project under taken by the assessee vide Joint Venture Agreement dated 22nd March 2007, for which capital was borrowed, was got cancelled in the F.Y 2015-16. 2. On the facts and circumstances of the case and in law the Id. CIT(A) erred in allowing deduction claimed u/s 36(1)(iii) of the Act, on account of interest expenses on borrowed capital ignoring the fact that the assessee had not carried out any actual work during the year under consideration or in any of the previous years since the execution of Joint Venture Agreement and also assessee had not claimed any sort of expenses related to the development project.”
Assessee is engaged in the business of real estate, development, etc. Assessee filed its return of income on 30.09.2015, reporting total loss at Rs.2,94,90,451/-. Details of expenditure claimed by the assessee in the computation of income is tabulated as under:
Particulars Amount Total Amount (in Rs.) (in Rs.) i) Finance Cost:
Interest in loan 2,93,26,421/- Bank charges 10,760/- Interest on statutory dues 1,89,628/- 2,95,26,809/- ii) Administrative Expenses:
Professional fees 1,37,675/- Rates & Taxes 4,675/- Auditors remuneration 10,000/- Other expenses 920/- 1,53,270/-
Total expenses charged to the 2,96,80,079/- P&L Account
Less: Inadmissible expenses disallowed 1,89,628/- u/s. 40 of the Act in the computation of income (interest on statutory dues)
Total expenditure claimed by the 2,94,90,451/- appellant company and disallowed by the A.O. in the assessment order dated 15th December, 2017.
3.1. The sole issue involved in the present appeal is whether the ld. Assessing Officer is justified in disallowing the expenditure claimed by the assessee on the ground that assessee allegedly did not carry out any business activity during the year under consideration.
3.2. In the total loss claimed by the assessee for the year, it includes interest on loans of Rs.2,93,26,421/- against short term borrowings of Rs.2,50,27,413/- and long-term borrowings of Rs.35,16,83,341/- taken by the assessee. Details of the borrowings are extracted below:
Particulars Amount Total Amount (in Rs.) (in Rs.) I) Long Term Borrowings: Unsecured term loan from the 2,50,27,413/- bank II) Short Term Borrowings:
1) Unsecured Loans and Advances from others: a) Intercorporate loan 1,95,00,000/- b) Others 2,50,00,000/- ii) Demand Loan from related parties: a) Directors 18,82,10,866/- b) Intercorporate loan 11,89,72,475/- 35,16,83,341/-
Total Borrowings [I + II] 37,67,10,754/- 3.3. Fact of the matter is that assessee was incorporated on 15.07.2004 and since then it had been carrying the business as builder and developer. It entered into Joint Development Agreement (JDA) dated 22.03.2007 with four individuals, namely Mr. M.R. Seetharaman, Mr. M.R. Pattabhiramn, Mr. M.R. Kodandaram and Mr. M.R. Anandaram, who were the land owners to develop the property situated at Survey No.1 to 41 of Akkalenhalli-Mallenahalli village of Kasaba Hobli, Devanahalli Taluk, Bangalore North Taluk, admeasuring to 191 acres and 17 Gunthas. The said property was to be developed with a master plan with view to construct residential building, commercial building and a hotel. Under the specific terms of JDA, assessee was required to pay Rs.36 Crores equally to the said four land owners as refundable security deposit. For this purpose, assessee had taken loans from bank and other parties including Directors which was utilised for payment to the land owners by making payments on various dates.
3.4. Assessee paid interest on its borrowings which was subjected to TDS wherever applicable. Confirmation from the parties were also furnished in the course of assessment. Assessee hired the services of foreign architects for the development of the said property and incurred various other expenditures for the same. Assessee claimed that it has incurred various expense in respect of the project undertaken under the JDA aggregating to Rs.6.74 Crores, which had been carried forward as loss for set off, duly reported in its return of income filed for the year under consideration, in Schedule-CFL. In the same Schedule, assessee also reported current year loss of Rs.2,94,90,451/- for carry forward, thus the total loss carried forward to future years reported in the Schedule is Rs.9,69,31,871/-. Assessee thus, claimed that it has started its business operation.
3.5. Ld. Assessing Officer adopted the view that assessee did not carry out any business activity during the year and therefore did not allow claiming of any expenditure by the assessee. In para 5.6 of his order, he noted that “As the assessee had not carried out any business activity and consequently there being no income under the head ‘Profits and Gains of the Business’ u/s. 28, therefore, the allowability of expenses claimed does not arise. Therefore, the assessee’s claim of loss of Rs.2,94,90,451/- is hereby disallowed and assessee’s income is addressed at other income of Rs. Nil.”
In the course of hearing before us, ld. Counsel pointed out that in the subsequent order, i.e., Assessment Year 2016-17, this carried forward loss was set off against the profits for the year and total income was reported at Rs.16,59,76,646/-. This year was also selected for scrutiny assessment wherein returned income has been accepted as assessed income vide order dated 20.12.2018 passed u/s. 143(3) of the Act. Income-tax return and assessment order for Assessment Year 2016-17 are placed on record. Thus, it was demonstrated that Revenue has accepted the loss which was brought forward from the earlier years, including the year under consideration and was allowed to be set off against the income.
4.1. The issue to be considered by us is whether actual receipt of revenue from the principal business activity could be considered as indication or a barometer to suggest the continuity of business which in turn would qualify the assessee to claim expenditure in its return of income. Can merely not having revenue be the yard stick to decide the allowability of expenditure?
4.2. Assessee has not earned any revenue, but has included expenditure in the nature of interest and loans availed and various other expenses as tabulated above. Significant portion of the total loss claimed by the assessee in the year pertains to interest cost on the borrowed funds, which according to the assessee have been utilised for its project. The project undertaken by it forms part of its stock in trade and is not a capital asset and thus, it is an allowable deduction u/s.36(1)(iii). There is no dispute in respect of borrowing of funds by the assessee. Also, all the facts are on record with corroborated documentary evidences to demonstrate that the borrowed funds have been utilised in respect of land on which the project had to be undertaken, under the JDA. Thus, the interest cost incurred by the assessee is for the purpose of its business.
4.3. The sole basis adopted by ld. Assessing Officer dislodging the claim of assessee is that, there is no income under the head ‘profit and gains’ of business and hence no business activity has been carried out by the assessee during the year, there by allowability of expenses does not arise. Such a stance adopted by ld. Assessing Officer is not justifiable as assessee had been into the business which includes costs which are fixed in nature and other wise. Merely not having revenue receipts cannot be the yard stick to decide allowability of the expenditure. Section 36(1)(iii) states that the amount of interest paid in respect of capital borrowed for the purpose of business or profession would be allowable as a deduction. Proviso to the said section provides that any amount of interest paid in respect of capital borrowed for acquisition of an asset or extension of existing business or profession or any period beginning from the date on which the capital was borrowed for acquisition of the asset, till the date on which such asset was put to use, shall not be allowed as deduction.
4.4. In the present case, before us, the proviso to the said section does not apply since, assessee has undertaken a project which forms part of its stock in trade and not a fixed asset. Similar issue had come up before the Hon'ble Court of Madras in the case of CIT(A) vs. Ceebros Hotels Pvt. Ltd. [2021] 131 taxmann.com 181 (Mad), fact of the case is extracted below: “The assessee-company was engaged in business of real estate development. During year, the assessee had obtained loan for the specific purpose of purchasing a land for starting a new residential project. It claimed interest paid on such loan as deduction under section 36(1)(iii). The Assessing Officer disallowed same on ground that since no activity had commenced in said new project and land was were not put to use, interest paid on loan borrowed for purchase of said land was to be capitalized and added back to work-in-progress account.”
4.5. On these facts, the questions which were considered by the Hon'ble Court was on the allowability cost of interest paid on the loans borrowed by the assessee and whether it would fall within the scope of section 36(1)(iii), as examined by the Tribunal. Hon'ble Court came to a conclusion in para-21, which is as under: “Thus, the Tribunal was right in allowing the appeal filed by the assessee and holding that the term "put to use" applies to capital asset only because capital asset is held to facilitate the business activity and sometimes, it needs to be prepared after it is acquired for being used to facilitate the business activity and in the instant case, the assessee was able to establish that substantial activities had been done in the project, which would go to show that the property purchased has been put to use. [Para 21]”
We also take note of the observations and findings of ld. CIT(A), who on similar view has deleted the disallowance made by ld. Assessing Officer. Considering the facts on record, discussion made above and the judicial precedent relied upon, we find no reason to interfere with the findings arrived at by ld. CIT(A), in allowing the claim of the assessee. Accordingly, grounds raised by the Revenue are dismissed.
In the result, appeal of the Revenue is dismissed.
Order is pronounced in the open court on 10 March, 2025