PR.COMMISSIONER vs. M/S PRESTIGE GARDEN ESTATES PVT LTD

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ITA/841/2018HC KarnatakaKAHC01055786201810 October 2022Bench: P.S.DINESH KUMAR,C.M. POONACHA6 pages
AI SummaryDismissed

What did the High Court hold?

The Tribunal and CIT(A) held that the interest expenditure was deductible as it was incurred for business purposes and not for acquiring an asset for extension of business. The EMD was treated as stock-in-trade, and the interest received on it was offered to tax.

What were the facts?

The assessee, a real estate developer, claimed deduction for interest paid on borrowed capital used for business purposes. The Assessing Officer disallowed this, arguing the interest should be capitalized as it related to an Earnest Money Deposit (EMD) for asset purchase.

What were the issues?

Whether interest expenditure incurred on borrowed capital for acquiring assets for business purposes, which are treated as stock-in-trade, is deductible under Section 36(1)(iii) of the Income Tax Act.

Which sections of the Income-tax Act were involved?

Section 36(1)(iii)

AI-generated summary — verify with the full judgment below

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ITA No. 841 of 2018

IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 10TH DAY OF OCTOBER, 2022 PRESENT THE HON'BLE MR. JUSTICE P.S. DINESH KUMAR AND THE HON'BLE MR. JUSTICE C.M. POONACHA INCOME TAX APPEAL NO. 841 OF 2018 BETWEEN :

1.

PR.COMMISSIONER OF INCOME TAX-5, BMTC COMPLEX KORAMANGALA BANGALORE.

2.

THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-5(1)(2) BANGALORE …APPELLANTS

(BY SHRI. E.I. SANMATHI, ADVOCATE)

AND :

M/S PRESTIGE GARDEN ESTATES PVT LTD THE FALCON HOUSE, NO.1, MAIN GUARD CROSS ROAD, BANGALORE-560001 PAN AABCP2029H …RESPONDENT

(BY SRI. SUDHEENDRA B.R.,ADVOCATE) . . . .

THIS ITA IS FILED UNDER SEC.260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED:20/07/2018 PASSED IN ITA NO.2135/BANG/2017, FOR THE ASSESSMENT YEAR 2008-2009 PRAYING TO DECIDE THE FOREGOING QUESTION OF LAW AND / OR

Digitally signed by S P SUDHA Location: HIGH COURT OF KARNATAKA

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ITA No. 841 of 2018

SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BY THE HON'BLE COURT AS DEEMED FIT AND ETC.

THIS ITA, COMING ON FOR HEARING, THIS DAY, P.S.DINESH KUMAR J., DELIVERED THE FOLLOWING:

JUDGMENT

This appeal by the Revenue directed against the order

dated 20.07.2018 passed in ITA No.2135/Bang/2017, has been admitted to consider three questions of law framed by the Revenue. After hearing Shri. E.I. Sanmathi, learned Standing Counsel for the Revenue and Shri. B.R. Sudheendra, learned Advocate for the assessee, in our view, the following question alone arises for consideration: Whether on the facts and in the circumstances of the case, the Tribunal and the CIT(A) are justified in holding that interest expenditure is liable to be treated as capital expenditure and allowance under Section 36(1)(iii) of the Act on the ground that the assessee has incurred the same for business purpose?

2.

Brief facts of the case are, assessee is in the business of Real Estate development. It filed its returns

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ITA No. 841 of 2018

for the A.Y. 2008-09 and claimed deduction under Section 36(1)(iii) of the Income Tax Act, 1961, ('IT Act' for short) on the interest of Rs.16,68,11,932/-. The Assessing Officer disallowed the same on the ground that the assessee had deposited an EMD amount of Rs.293.61 Crores for the purchase of asset and therefore, interest payable on the monies borrowed should have been capitalized or shown as 'Work in progress'.

3.

On appeal, the CIT(A) held that the interest received on the EMD has been offered to tax in the subsequent assessment years treating it as Revenue in nature. Therefore, Assessing Officer's view that the interest paid to the Bank on the borrowings ought to have been capitalized, was not justified because, no asset was acquired nor any asset came into existence and accordingly allowed the appeal. Revenue unsuccessfully challenged the same before the ITAT. Hence, this appeal.

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ITA No. 841 of 2018

4.

Shri. Sanmathi, for the Revenue submitted that the assessee had borrowed money to acquire capital assets and shown the EMD as an asset in the balance sheet. Therefore, the Assessing Officer has rightly disallowed the interest paid on the borrowings.

5.

Shri. Sudheendra, learned Advocate argued opposing the appeal.

6.

We have carefully considered rival contentions and perused the records.

7.

Relevant portion of Section 36(1)(iii) of the IT Act and the proviso read as follows: "Sec.36(1): The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28-

(i) & (ii) …….. (iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession:

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ITA No. 841 of 2018

Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalized in the books of account or not); for 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 first put to use, shall not be allowed as deduction." (Emphasis Supplied)

8.

It is not in dispute that the EMD paid by the assessee has been received back with interest and the said interest has been offered to tax. It is also not in dispute that the assessee is in the business of Real Estate Development and the EMD amount was paid to acquire properties as a part of its business, which should be treated as Stock-in-trade. The Tribunal has rightly noticed that the proviso was inserted with effect from 01.04.2004 and the amount borrowed was not for acquisition of any asset for extension of existing business. Therefore, assessee was entitled for the benefit under Section 36(1)(iii) of the IT Act.

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ITA No. 841 of 2018

9.

In view of the above, we find no error in the impugned order and this appeal must fail. Hence, the following: ORDER

(a) Appeal is dismissed.

(b) The question of law is answered in favour of the assessee and against the Revenue.

No costs.

Sd/- JUDGE

Sd/- JUDGE

SPS List No.: 1 Sl No.: 42

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