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Income Tax Appellate Tribunal, DELHI BENCH: ‘A’ NEW DELHI
Before: SHRI J. SUDHAKAR REDDY & SHRI A.T. VARKEY
ORDER
PER J. SUDHAKAR REDDY, ACCOUNTANT MEMBER
This is an appeal filed by the Assessee directed against the order dated 12.3.2010 of Ld.CIT(A)-II, New Delhi pertaining to the Assessment Year (A.Y.) 2005-06.
Facts in brief:- The assessee is a company and is in the business of building and real estate development. It filed its return of income for the A.Y. 2005-06 on 16.6.2005 declaring ‘ nil’ income. Tax was paid u/s 115 JB of the Income Tax Act 1961 (the Act). The AO disallowed the interest paid by the assessee of Rs.29,15,992/- and the assured return given by the assessee of Rs.5,40,000/- totaling to Rs.34,55,992/- on the ground that the expenditure is capital in nature. He observed that the assessee company provided funds to other group companies through acquisition of land for the development of future projects without charging interest whereas, interest has been paid on borrowed funds. The AO was of the opinion that, as interest has been paid for amounts utilized in projects, which are yet to be ITA 2308/Del/2010 Aerens Builders P.Ltd. A.Y. 2005-06 started they have to be capitalized in view of S.36(1)(iii) of the Act and also in view of guide lines contained in A.S. 16.
On appeal the First Appellate Authority upheld the order of the A.O. by holding that (a) As these advances have been paid against collaboration agreement, there is business consideration for giving these advances to the sister concerns of the assessee. As a perusal of the Memorandum of Understanding (MOUs) demonstrate that the entire arrangement is made in such a way that in the name of the group concern, the assessee itself buys land, develops and sells it and only a token sum of Rs.10,000/- per gross acre is transferred to these sister concerns. (b) It is not a case on diversion of interest bearing funds for giving interest free advances to the sister concerns and these advances were given for business purposes. (c) In view of the amendment to S.36(1)(iii) the AO was correct in disallowing to claim of interest on the ground that it is capital in nature. (d) Similar view is to be taken in the case of assured returns of Rs.5,40,000/-, which was also paid on amounts borrowed by the assessee.
Aggrieved the assessee is in appeal before us on the following grounds . “1. That the Ld.CIT(A) has erred on facts and in law in sustaining the disallowance of interest paid of Rs.29,15,992/-.
2. That the Ld.CIT(A) has erred on facts and in law in holding that the interest bearing funds are advanced to sister concerns without charging interest.
3. That the Ld.CIT(A) has erred on facts and in law in sustaining the addition of Rs.5,40,000/- by holding that funds have been advanced to sister concerns only for purchase of land.
4. That the impugned appellate order is arbitrary, illegal, bad in law and in violation of rudimentary principles of contemporary jurisprudence.
5. That the appellant craves leave to add, alter, amend any/all grounds of appeal before or at the time of hearing of the appeal.”
ITA 2308/Del/2010 Aerens Builders P.Ltd. A.Y. 2005-06 5. We have heard Shri KK Jaiswal, Ld.Sr.D.R. on behalf of the Revenue and Shri PC Yadav, the Ld.Counsel for the assessee.
The undisputed fact is that the amounts in question have been routed by the assessee, through its group concerns for the acquisition of land for the purpose of undertaking real estate projects. This fact is not in dispute. The question that has to be adjudicated is whether, interest on borrowed funds utilized for the acquisition of inventories can be disallowed in view of Proviso to S.36(1)(iii) of the Act.
6.1. S.36(1)(iii) reads as follows: “The amount of interest paid in respect of capital borrowed for the purpose of business or profession: provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset (for extension of e4xisting business or profession) (whether capitalized in the books of accounts or not); for any period beginning from the date on which the capital was borrowed for acquisition of an asset till the date on which such asset was put to use, shall not be allowed as deduction.”
6.2. The phrase (for extension of existing business or profession) was omitted by the Finance Act, 2015 w.e.f. 1.4.2015.
6.3. A plain reading of the above provision shows that it is attracted when an asset is acquired by the assessee for the purpose of extension of existing business or profession. This is not a case of extension of business. On facts it is clear that the borrowed funds were used to acquire stock-in-trade, which in the case of the assessee is land. The Hon’ble Calcutta High Court
ITA 2308/Del/2010 Aerens Builders P.Ltd. A.Y. 2005-06 in the case of Tetron Commercial Ltd. vs. CIT (2003), reported in 261 ITR 0422 at para 5.1 held as follows. “Whether the amount is a capital expenditure or a revenue expenditure is immaterial if it is a stock in trade even though it is immovable property for being built upon. Business commences on the first step for commencement of the business if undertaken. In the business of real estate, there are three stages: one is the acquisition of land and other is the process of construction of building and the third is the actual distribution or sale of the building. Similarly, in other business also there are three stages. Here at the first stage, it has been acquired and works were in progress. Respondent’s counsel contended that there is nothing to indicate that the works were in progress. It is not necessary to show that the work is in progress. It is the nature of the expenses that would determine the character in whatever manner it might be shown in the accounts of the assessee. In this case the question was at the second stage and as such the business shall be deemed to have been commenced.”
6.4. The Hon’ble Delhi High Court in the case of CIT vs. Arcane Developers reported in 368 ITR 627 (Del.) held that in the case of real estate business, setting up of business is complete when the assessee look around and negotiate with parties. In this case land was acquired through sister concerns and hence the business was set up. Once the business is set up revenue expenses has to be allowed and these include financial expenses as held by the Hon’ble Delhi High Court in CIT vs. ESPN Software Industries Ltd. reported in 301 ITR 368 (Del.) and in CIT vs. Hughes Escorts Communications Ltd. (2009) reported in 311 ITR 253 (Del.).
6.5. Applying the propositions laid down in this case laws to the facts of this case, this claim of the assessee has to be allowed.
ITA 2308/Del/2010 Aerens Builders P.Ltd. A.Y. 2005-06
In the result the appeal of the assessee is allowed.
Order pronounced in the Open Court on 16th December, 2015.