ITO 9(1)(3), MUMBAI vs. ANCHOR RESIDENCY P.LTD, MUMBAI

15 ITA 4407/Mum/2015 the date on which such asset was first put to use shall not be allowed as deduction. In this case, admittedly, the assessee is in the business of real estate development, proposed to develop a commercial project at Chennai and also the expenditure incurred on the project has been capitalized in the books of account. It is also an admitted fact that the commercial project is in initiation stage. The assessee has capitalized all expenses incurred on the project including part of interest paid on loans borrowed from banks. It is also an admitted fact that the advance given to Simpleton Investrade Pvt Ltd relates to the proposed project to be developed by the assessee at Chennai which is evident from the fact that the assessee itself has admitted that it has given advances to the party for purchase of TDR / FSI. Therefore, once the advance has been given for the purpose of acquisition of TDR / FSI it is obvious that such advance is related to the commercial project to be developed by the assessee. Therefore, as per the Proviso provided to section 36(1)(iii), any amount of the interest paid in respect of capital borrowed for acquisition of an asset 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 u/s 36(1)(iii) of the Act. Admittedly, the assessee has capitalized part of interest attributable to the amount utilized for development of commercial project at Chennai. Therefore, we are of the considered view that the 16 ITA 4407/Mum/2015 interest attributable to advance given to Simpleton Investrade Pvt Ltd is coming under the Proviso to section 36(1)(iii) of the Act, as the assessee has not put to use the asset.

The other argument of the assessee that advance given to Simpleton Investrade Pvt Ltd is out of its own funds and no part of interest being funds has been used is having no merit as the assessee has failed to substantiate its arguments in the light of the clear findings of the AO that the assessee has borrowed huge funds from banks and diverted portion of funds to this party. Similarly, the arguments of the Ld.AR that the AO has taxed notional interest on interest free funds given to two group concerns also fails as the AO has brought out clear facts in his order that the assessee has borrowed amounts by paying interest and diverted interest bearing funds to sister concerns for non business purpose without charging any interest. The observations of the Ld.AR in respect of addition made by the AO under the head, ‘Income from other sources’ is only a technical error, but the substance of the findings of the AO in the light of provisions of section 36(1)(iii) clearly shows his intention and hence, we reject the arguments of the Ld.AR that the AO has taxed notional interest. Similarly, the case laws relied upon by the Ld.AR are also not applicable to the facts of the present case, as those cases are rendered under different set of facts.

Coming to advances given to M/s PIL Industries Ltd. The assessee claims that it has paid advance to PIL Industries for purchase of fabrics.

Having heard both the sides, we find merit in the arguments of the assessee for the reason that the assessee is also in the business of trading in fabrics which is evident from the fact that it has achieved a substantial turnover from trading in fabrics. We further observe that the AO has accepted the fact that the assessee has made purchase and sale of fabrics and also derived profit from sale of fabrics. We further observe that the fact that the assessee has given advances to PIL

In this view of the matter, we are of the considered view that the AO was correct in disallowing interest attributable to loan given to Simpleton Investrade Pvt Ltd and hence, we reverse finding of the CIT(A) and uphold addition made by the AO. Insofar as disallowance of interest in respect of advance to PIL Industries Ltd, we direct the AO to delete addition and hence, we uphold findings of CIT(A).

In the result, the appeal filed by the revenue is partly allowed.