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Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
आदेश / O R D E R महावीर ससुंह, न्याययक सदस्य/ PER MAHAVIR SINGH, JM:
This appeal of assessee is arising out of the order of the Commissioner of Income Tax (Appeals)]-20, Mumbai [in short CIT(A)], in appeal No. CIT(A)-20/DCIT-12(1)(1)/IT-187/2015-16 vide dated
2 | P a g e 18.09.2017. The Assessment was framed by the Dy. Commissioner of Income Tax, Ward-12(1)(1) Mumbai (in short ITO/ AO) for the A.Y. 2012- 13 vide order dated 27.03.2015 under section 143(3) of the Income-tax Act, 1961 (hereinafter ‘the Act’).
The first issue in this appeal of assessee is against the order of CIT(A) confirming the action of the AO in disallowing the proportionate interest of ₹ 50,98,372/- relatable to land forming part of business assets treating the same as non-business expenditure. For this assessee has raised the following ground No. 1.1 as under: -
“1.1 disallowing land development expenditure of ₹ 3,14,050/- as non-business expenditure through the same was capitalized to the cost of the land and not claimed as an admissible deduction in computing loss for the year."
We have heard rival contentions and gone through the facts and circumstances of the case. We have gone through the assessment order and noted that the AO has disallowed the interest expenditure by invoking the provisions of section 14A of the Act Read with Rule 8D(2)(iii) of the Rules. Aggrieved, assessee preferred the appeal before CIT(A). The CIT(A) deleted the disallowance of expenses made by AO under section 14A of the Act read with Rule 8D(2)(iii). However, the CIT(A) retain the additions by invoking the provisions of section 36(1)(iii) of the Act and by stating that the proportionate interest of ₹ 50,98,372/- paid by the assessee is for non-business purposes. For this, he observed in para 6.2 and 6.3 as under: -
3 | P a g e “6.2 However, I find from Note 2.21 of the annual accounts of the appellant for the F.Y. 2011-12 that the appellant claimed net interest expenditure of Rs. 2,39,02,794/-for that previous year. I also rind that appellant bought a plot of measuring 73.21 hectares. Out of this, area used for the appellant's business, including the land on which the factory building is located, was 27.85 hectares. The remaining land (herein after referred to as 'the balance land*) was not used for either for appellant's business or for any other purpose. Therefore, the interest expenditure relatable to “the balance lad” is not allowable expenditure. Just because the land was purchased together with the industrial unit, it does not partake the character of a business asset. It is not the appellants case that the land was used in any manner in appellant's ongoing business during the relevant previous yea'. Though the appellant claimed that the land is an integral part of the existing unit, it could not substantiate its claim. In fact, this claim of the appellant contradicts its assertion that the balance land would be used for business to be set up in future (refer para 6.2 below).
6.3 The appellant claims that the balance land' would be used for its business in the future. But no such business for which 'the balance land'
4 | P a g e would be put to use had been set up. Therefore, as at 31-03.2012, 'the balance land" did not even constitute part of capital work-in-progress of any business. Therefore, interest attributable to the balance land" is not an allowable expenditure. In his order, the AO has calculated the amount of interest relatable to the balance land at Rs. 50,98,372/-. This amount is not allowable as deduction in the computation of the business income of the appellant. Further, the AO mentioned in para 3.1 of the Assessment Order that the appellant had incurred land development expenditure of Rs. 3,14,050/-. This expenditure was incurred in relation to the balance land" and therefore the same is not allowable. Thus, the total expenditure which was not incurred wholly and exclusively for the purpose of the appellant's business comes to Rs. 54,12,422/- (Rs. 50,98,372/- plus Rs. 3,14,050/-). Therefore, disallowance of Ks. 54,12422/- out of total disallowance of Ks. 65,26,198/- is confirmed. It is clarified that this disallowance has been confirmed without invoking the provisions of section 14A."
Aggrieved, assessee came in appeal before Tribunal.
Before us, the learned Counsel for the assessee sated that the assessee is in the business of manufacturing of sugar and allied products
5 | P a g e Nandurbar. According to assessee it has set up a factory for processing of sugar cane. The assessee stated that for the purpose of its business of manufacturing of sugar and allied products, it acquired land building and plant and machinery from Maharashtra State Co-operative Bank Ltd. under Scrutinisation And Restriction Of Financial Assets and Enforcement Security Interest Act, 2002 for a total consideration of ₹ 45.48 crores vide sale certificate dated 30.08.2011. The assessee enclosed relevant documents of acquisition of these land in its paper book as Annexure-A. It was contended that the total area of land is 73.21 hectares and out of the total land of 73.21 hectares, the factory building is situated for processing of sugar cane in 27.85 hectares. It was contended that the balance amount of 45.79 hectares, the assessee acquired entire land and not part and partial for the industrial undertaking purchased from Maharashtra State Co-operative Bank Ltd. under Scrutinisation And Restriction Of Financial Assets and Enforcement Security Interest Act, 2002. Accordingly, this land is one indivisible composite land of the industrial undertaking and that being so it forms part of the business assets. The learned Counsel for the assessee stated that entire purchase of asset i.e. land building and plant and machinery effected by sale certificate dated 30.08.2011, was financed by way of term loan obtained from State Bank of India and is collectively used for the purpose of assessee’s business. It was contended that the total interest cost in relation to said term loan (not of interest cost capitalized to respective fixed assets) debited to profit and loss account for the year noted 31.03.2012 is ₹1,44,28,421 out of interest cost of ₹ 50,98,372/- is in relation to land 45.79 hectares.
We noted that for the purpose of carrying on the business of manufacturing of sugar and allied products, the assessee acquired land
6 | P a g e Plant & Machinery for a total consideration of Rs.45.48 Crores. The entire land was acquired as part and parcel of the industrial undertaking purchased from Maharashtra State Co-operative Bank Ltd. under Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. Accordingly, this land is one indivisible composite land of the Industrial Undertaking. That being so, it forms part of business assets. As per Management's decision, said balance land of 45.79 Hectares is also be used for the purpose of expansion of the business of the assessee. Interest paid in respect of capital borrowed "for the purpose of the business" is an allowable deduction U/s. 36(l)(iii) in computing income under the head "Income from business or profession". The term "for the purpose of the business" is much wader in its scope than the term "for the purpose of earning profits". For the purpose of the business, it may take in not only day to day running of business but also the rationalization of its administration and modernization of its machinery, measures for preservation of the business, protection of its assets from expropriation, coercive process, payment of statutory dues and taxes imposed as a pre-condition to commence or for carrying on business etc. It may comprehend many other acts incidental to the carrying on of a business. The expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on business. The said proposition is endorsed by the Hon. Supreme Court of India in the matter of CIT V/s. Malayalam Plantation Ltd. 53 ITR 140.
From the above, we noted that in assessee's own case term loan obtained from State Bank of India is used for the purpose of its business i.e. to acquire fixed assets including carrying out its business operations. Thus, the utilization of the term loan for the purpose of the business has 7 | P a g e to be seen as a whole and not in isolation. Therefore, the act of attribution of interest cost on term loan to indivisible assets and more particularly to land on which factory building is situated on a composite land. There is no question of disallowance of any portion of interest on the given facts and circumstances. Hence, we allow this issue of assessee’s appeal.
In view of the above matter, we are of the view that this interest is allowable as business expenditure and we direct accordingly.
The next issue in this appeal of assessee is as regards to the disallowance of land development expenditure of ₹ 3,14,050/- as non- business expenditure. For this assessee has raised the following ground No. 1.2: -
“1.2 disallowing land development expenditure of ₹ 3,14,050/- as non-business expenditure though the same was capitalized to the cost of the land and not claimed as an admissible deduction in computing loss for the year.”
At the outset, the learned Counsel for the assessee sated that the assessee has not made any claim in the profit and loss account qua this expenditure and this fact can be verified by the AO and for this, the matter can be restored back to the file of the AO. On this the learned Sr. Departmental Representative has not objected.
After hearing both the sides and going through the facts, we direct the AO to verify whether the expenditure on account of land development charges is claimed by assessee in the P&L Account or not. In case, it is not claimed in the P&L Account, no disallowance can be made. In case, this is claimed, the AO can verify the evidences. Hence, this issue is set
8 | P a g e AO. This issue of assessee’s appeal is allowed for statistical purposes. 10. In the result, the appeal of assessee is partly allowed. Order pronounced in the open court on 21.08.2019