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Income Tax Appellate Tribunal, MUMBAI BENCH “D” MUMBAI
Before: SHRI RAVISH SOOD & SHRI N.K. PRADHAN
ORDER
PER N.K. PRADHAN, AM
This is an appeal filed by the assessee. The relevant assessment year is 2012-13. The appeal is directed against the order of the Commissioner of Income Tax-24, Mumbai [in short ‘CIT(A)’] and arises out of the assessment completed u/s 143(3) of the Income Tax Act 1961, (the ‘Act’).
Muthoot Agri Development
The grounds of appeal filed by the assessee read as under:
1. The Ld.CIT(A) has erred in confirming the addition / disallowance made by the Dy. Commissioner of Income Tax (15)(2)(2) of interest on loans taken from director wholly and exclusively for the purpose of business activities amounting to Rs.52,88,800/- .
2. Your appellant company was incorporated on 7.5.2010 for the purpose of carrying on real estate activities as per its main objects in the Memorandum of Association and it has effected purchase of land in the first year of operations for an amount of Rs.4,94,38,159/- which was financed out of unsecured loan obtained from the directors amounting to Rs.5,35,20,000/- outstanding as at 31.03.2011. The interest was paid on the above loan @ 10% and since the borrowing have been effected wholly and exclusively for the purpose of business activities of the company, the interest paid on loan during the AY. 2011-12 of Rs.52,88,000/- was claimed deduction as an expenditure u/s 36(1)(iii) of the Income Tax Act, 1961. 3. The Ld.CIT(A) has failed to consider the decision of the Hon, Delhi High Court that in the case of Commissioner of Income Tax Vs Dhoomketu Builders and Development Pvt. Ltd reported in (2014) 368 ITR 680 (Delhi) wherein it has been that in the case of real estate company, the business can be said to have been commenced on acquisition of land, since after acquisition of such land, the assessee was in a position to do business as the business has been set up.
The ratio above decision has been relied on and followed by Delhi 'B' Bench of ITAT in for assessment year 2009-10 in case of Dy. CIT, Circle 10(1), New Delhi vs DLF homes Panchkula Pvt. Ltd. New Delhi. Further, Hyderabad 'A’ Bench of ITAT held in the case of Hyderabad Metro Rail Ltd. vs DCIT Circle 2(2), that the expenditure incurred for purchase of land can be allowed deduction as business Muthoot Agri Development expenditure since the assessee has, on such an acquisition commenced business activities.
4. The Ld.CIT(A) has also erred in concluding that interest payable on borrowing for acquisition of fixed assets cannot be capitalized till the same is put to use. As per Accounting Standard 16 issued by ICAI, capitalization of borrowing costs should cease when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete. In the case of land, acquired for real estate activities there is no definite plan for development or construction and the same is carried forward for resale purposes also. Hence, borrowing cost incurred for acquisition of such land does not qualify for capitalization as per AS 16 also and has been correctly written off as revenue expenses.
Briefly stated, the facts are that the assessee filed its return of income declaring loss of Rs.51,86,548/-. The activities of the assessee are agriculture, seri-culture, horticulture and aqua-culture. During the course of assessment proceedings, the Assessing Officer (AO) noticed that the assessee has incurred expenses of Rs.52,88,800/- on account of loans taken from directors and disallowed it. The reason given by the AO is that the assessee failed to furnish any explanation for allowing the same as an expenditure attributable to business and further the impugned assessment year is the first year of operation of the assessee- company.
In appeal, the Ld. CIT(A) observed that the assessee has borrowed monies from its directors for purchasing the land, which has been capitalized in the books of the assessee and it has merely acquired the land but has not carried out any business activities during the year.
Muthoot Agri Development Further observing that the assessee has merely purchased the land and has not entered into any contract for the development of land or otherwise for sale of land, the Ld. CIT(A) confirmed the order of the AO disallowing the interest expenditure u/s 36(1)(iii) of the Act.
Before us, the Ld. counsel of the assessee files a copy of the audited accounts of the assessee and also the decision in Tetron Commercial Ltd. v. CIT (2003) 261 ITR 422 (Cal), DCIT v. Core Health Care Ltd. (2008) 298 ITR 194 (SC), CIT v. Dhoomketu Builders & Development (P.) Ltd. (2013) 368 ITR 680 (Del) and submits that the assessee-company is incorporated for the purpose of carrying on real estate activities and this is the second year of operation. It is stated that the company had effected purchase of land in the first year of operation i.e. from 07.05.2010 to 31.03.2011 for an amount of Rs.4,94,38,159/-, which was financed out of unsecured loan obtained from the directors amounting to Rs.5,35,20,000/- outstanding as at 31.03.2011. It is stated that the interest was paid on the above loan @ 10% and since the borrowings have been effected wholly and exclusively for the purpose of business activities of the company, it has rightly claimed deduction as an expenditure u/s 36(1)(iii) of the Act. The Ld. counsel submits that the confirmation of loan from the directors was filed before the AO in response to the written query dated 29.09.2014 issued by the AO u/s 142(1) of the Act. It is thus stated that the disallowance of Rs.52,88,800/- made by the AO be deleted. On the other hand, the Ld. DR supports the order passed by the Ld. CIT(A).
Muthoot Agri Development
We have heard the rival submissions and perused the relevant materials on record. In the instant case, the assessee-company was incorporated for the purpose of carrying on real estate activities as per its main objects in the ‘Memorandum of Association’. This is the second year of operation. We find that the assessee purchased land in the first year of operation for an amount of Rs.4,94,38,159/-, which was financed out of unsecured loan obtained from the directors amounting to Rs.5,35,20,000/- outstanding as at 31.03.2011. The assessee paid interest on the above loan @ 10% and the borrowing has been effected for the purpose of its business. In the case of Tetron Commercial Ltd. (supra), the assessee- company purchased some immovable properties, being land and flat, for undertaking of business of real estate. According to the ‘Memorandum of Association’, one of the main objects of the company was to carry on business in real estate. The assessee claimed deduction u/s 36(1)(iii) as interest on borrowed capital which was disallowed by the AO. The Tribunal rejected the claim on the basis that the business in real estate had not commenced and that it was the capital expense that was shown as advance against the immovable property. In appeal by the assessee, the Hon’ble High Court held that : “In the instant case, according to the Memorandum of Association, one of the main objects of the company was to carry on the business in real estate. That had commenced on the acquisition of the land or the flat. It was not necessary to show that it was intended for sale or otherwise. The fact remained that by 1994, the house constructed on the land and the flat were sold and shown in the return for the relevant year. That was shown as profit from business. It Muthoot Agri Development was not necessary to prove how it was dealt with at the stage of assessment. In CIT v. Associated Fibre & Rubber Industries (P.) Ltd. [1999] 236 ITR 471/102 Taxman 700 (SC), it was held that where the machinery acquired through borrowed capital had not been actually used in the business at the time when the assessment was made, even then the same were to be treated as business assets having been purchased for the purpose of the business only. Therefore, the interest paid on the amount borrowed for the purchase of such machinery is an amount deductible, once the other ingredients are fulfilled. It is shown in the balance sheet under the capital and asset heading as an asset but not a stock-in-trade. The description in the books of account would be immaterial. If it is a stock-in-trade, in that event, the amount invested would be a revenue expenditure and not a capital expenditure.
The amount borrowed may be utilized for the purpose of acquisition of stock- in-trade or for the purpose of acquisition of capital assets. So long the money is utilized for business purposes, the interest is allowable as deduction. It is well-settled that business expenditure is not confined to expenses incurred on revenue account. Capital expenditure may not be allowed as a deduction under section 37 because the section specifically bars any deduction of expenditure of capital nature. But section 36 is differently worded. There is no bar in section 36(1)(iii) to allowance of interest paid in respect of capital borrowed, which has been utilized for purchase of capital assets.”
In the case of Dhoomketu Builders & Development (P.) Ltd. (supra), it is held that “acts of applying for participation in tender, borrowing of fund on interest from holding company and deposit of borrowed monies on same day as earnest money clearly establish that business had been set up by assessee in relevant year”.
In Core Health Care Ltd. (supra), it is held that section 36(1)(iii) is attracted when the assessee borrows the capital for the purpose of his Muthoot Agri Development business and it does not matter whether the capital is borrowed in order to acquire a revenue asset or a capital asset, because all that the section requires is that the assessee must borrow the capital for the purpose of the business. It is further clarified therein that this dichotomy between the borrowing of the loan and actual application thereof in the purchase of a capital asset, seems to proceed on the basis that a mere transaction of borrowing does not, by itself, bring any new asset of an enduring nature into existence, and that it is the transaction of investment of the borrowed capital for the purchase of a new asset which brings that asset into existence; the transaction of borrowing is not the same as the transaction of investment and if this dichotomy is kept in mind, it becomes clear that the transaction of borrowing attracts the provisions of section 36(1)(iii) of the Act. As mentioned earlier the assessee filed before the AO the confirmation of loan from the directors in response to the written query dated 29.09.2014 issued by the AO u/s 142(1) of the Act. The assessee- company had effected purchase of land in the first year of operation i.e. from 07.05.2010 to 31.03.2011 for an amount of Rs.4,94,38,159/-, which was financed out of unsecured loan obtained from the directors amounting to Rs.5,35,20,000/- outstanding as at 31.03.2011. The interest was paid on the above loan @ 10%. The borrowing had been effected for the purpose of business activities of the company. The assessee has rightly claimed u/s 36(1)(iii) interest paid on the above loan during the impugned assessment year of Rs.52,88,800/-. The above claim of the assessee is supported by the ratio laid down in the decisions mentioned above.