D.C.I.T. CIR - 8,KOLKATA, KOLKATA vs. M/S PATTON DEVELOPERS PVT LTD, KOLKATA

आदेश /O R D E R

PER Waseem Ahmed, Accountant Member:-

This appeal by the Revenue is arising out of order of Commissioner of Income Tax (Appeals)-VIII, Kolkata in appeal No.163/CIT(A)-VIII/Kol/11-12 dated 17.10.2012. Assessment was framed by JCIT(OSD), Circle-8, Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 28.12.2011 for assessment year 2009-10. Revenue has raised following grounds:- “1. That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of AO Rs.2,11,44,914/- on account of disallowance of interest claimed by the assessee u/s24(b) of the Act. 2. That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of AO holding that Rs.1,53,45,722/- as a long term capital loss instead of the claim of assessee i.e. short

ITA No.90/Kol/2013 A.Y. 2009-10 DCIT Cir-8, Kol. V. M/s Patton Developers Pvt. Ltd. Page 2 term capital loss of Rs.55,64,950/- and business loss of Rs.97,80,772/- .” 2. First ground regarding the issue is that Ld. CIT(A) has erred in deleting the addition made by Assessing Officer for an amount of Rs.2,11,44,914/- on account of disallowance of interest claim by assessee u/s 24(b) of the Act.

ITA No.90/Kol/2013 A.Y. 2009-10 DCIT Cir-8, Kol. V. M/s Patton Developers Pvt. Ltd. Page 3 5. Aggrieved, assessee preferred appeal before Ld. CIT(A) where the Ld. AR demonstrated that the order of the AO was erroneous. For the sake of clarity, we reproduce submission of the Ld. AR as under:- Ïi) The Ld. A.O has also misinterpreted the decision of the Calcutta Bench of the Tribunal in the case of ITO v. Satya Co. Ltd. (1986) 19 ITD 596 (Cal-Tribunal). The brief fact of the case is that the assessee company purchased a house property out of borrowed money. Subsequently, the assessee repaid the said loan by taking loan from another party. Then it again repaid it after borrowing money from some other party and so on. In this context the Tribunal held “that the words ‘such capital’ in section 24(1)(vi) definitely refer to the borrowed capital and, as such, the section confines the benefits of borrowed capital to repay the original loan only. The language is not capable of being extended to second or any subsequent loan. However, the Board’s Circular No. 28 of 1969 dated 20.08.1969 (Taxman Direct Taxes Circulars, 1985) Vol. 1.P.171 refers to second loan to which the provisions of section 24(1)(vi) was extended by this circular. But this could not be extended to subsequent loans, as contended by the assessee.” In the instant case original loan was provided by M/s Patton International Ltd., (holding company) from time to time for the purpose of acquisition and construction of house property by its subsidiary company (Appellant). This is the original / first loan (first lender).Subsequently, the Appellant arranged from its banker, State Bank of Mysore, secured term loan (Under Rent Plus Scheme) from time to time for the purpose of acquiring/constructing house property/repayment of earlier loan. As per the banking norms, credit limit is enhanced from time to time depending upon the needs of the borrower and disbursement for additional limit is made after adjustment of the existing limit availed. This is exactly what happened here. Out of the enhanced limit of Rs.20.00 crores, Rs.8.37 crores being the existing outstanding loan, was repaid to State Bank of Mysore and the balance amount of Rs.11.60 crores was paid to the holding company as repayment of loan. The loan granted by State Bank of Mysore is the second subsequent loan (second lender). There are no other parties involved (as may be described as third or fourth) who have provided loan for repayment of earlier loan taken from State bank of Mysore. Therefore, the ratio of the decision of the above referred Tribunal Case is squarely applicable in the instant case since the loan taken from State Bank of Mysore represent only second loan for repayment of original loan. iii) The assessee also relies on the decisions of the following cases:

ITA No.90/Kol/2013 A.Y. 2009-10 DCIT Cir-8, Kol. V. M/s Patton Developers Pvt. Ltd. Page 4 (a) ITR vs. Makrupa Chemicals (P) Ltd. (2007) 108 ITD 95 (Mum) (b) ITO vs. Satya Co. Ltd. (1986) 19 ITD 596 (Cal.Tribunal) (c) V. Govindarjulu vs. ITO (1990) 32 ITD 1 (Mad-Trib) “in view of the above submissions, it is prayed that the disallowance of Rs.2,11,44,914 wrongly made by the Ld. A.O may please be deleted.”

On the basis of submission made by assessee Ld. CIT(A) has deleted the addition made by AO by observing that interest paid on any fresh loan taken to repay the earlier loan is fully covered u/s 24(b) of the Act.

Shri Alok Nag, Ld. Departmental Representative appearing on behalf of Revenue and both Shri Devkr Kothari & Sri Manohar Agarwal Ld. Authorized Representative are appearing on behalf of assessee.

From the aforesaid discussion, we find that the dispute is as to whether the assessee-company is entitled deduction for interest expenditure of Rs. 2,11,44,914/- from the income earned under the head house property u/s

ITA No.90/Kol/2013 A.Y. 2009-10 DCIT Cir-8, Kol. V. M/s Patton Developers Pvt. Ltd. Page 5 24(b) of the Act. The AO found that assessee has taken loan from SBM during the month of August, 2008 and repaid the loan of the holding company. The AO claimed that there is no provision under the Act to allow deduction of interest on a subsequent loan taken to repay the original loan. Therefore, he held that assessee-company was not entitled to claim deduction in respect of interest payable for fresh money borrowed to repay the earlier loan and accordingly, he disallowed. Before Ld. CIT(A) Ld. AR of assessee submitted that the fresh loan taken to repay the original loan was within the ambit of law and accordingly Ld. CIT(A) has deleted the addition which made by AO. It is also observed that no material has been brought on record by Ld. DR to controvert the above finding of Ld. CIT(A). A plain understanding of section 24 (b) of the Act reads as under:- “[Deductions from income from house property] 24. Income chargeable under the head “Income from house property” shall be computed after making the following deductions, namely:- (a) a sum equal to thirty per cent of the annual value; (b) where the property has been acquired, constructed, repaid, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital; Provided that in respect of property referred to in sub-section (2) of section 23, the amount of deduction shall not exceed thirty thousand rupees : Provided further that where the property referred to in the first proviso is acquired or constructed with capital borrowed on or after the 1st day of April, 1999 and such acquisition or construction is completed [within three years from the end of the financial year in which capital was borrowed], the amount of deduction under this clause shall not exceed [two lakh rupees]. Explanation. – Where the property has been acquired or constructed with borrowed capital, the interest, if any, payable on such capital borrowed for the period prior to the previous year in which the property has been acquired or constructed, as reduced by any part thereof allowed as deduction under any other provision of this Act, shall be deducted under this clause in equal installments for the said previous year and for each of the four immediately succeeding previous years;]

ITA No.90/Kol/2013 A.Y. 2009-10 DCIT Cir-8, Kol. V. M/s Patton Developers Pvt. Ltd. Page 6 [Provides also that no deduction shall be made under the second proviso unless the assessee furnishes a certificate, from the person to whom any interest is payable on the capital borrowed, specifying the amount of interest payable by the assessee for the purpose of such acquisition or construction of the property, or, conversion of the whole or any part of the capital borrowed which remains to be repaid as a new loan. Explanation - For the purposes of this proviso, the expression “new loan” means the whole or any part of a loan taken by the assessee subsequent to the capital borrowed, for the purpose of repayment of such capital.]” From the aforesaid explanation, it is very much clear that the subsequent loan taken by assessee to repay his original loan is very much covered for claim the deduction u/s. 24(b) of the Act. It is also important to note that assessee has taken a loan from SBM and same loan from the same bank was enhanced as a result of restructuring of the existing loan. Therefore, in this case no third loan was obtained by assessee. Therefore, we do not find any good and justifiable reason to interfere in the order of Ld. CIT(A). Hence, this ground of Revenue’s appeal is dismissed.

ITA No.90/Kol/2013 A.Y. 2009-10 DCIT Cir-8, Kol. V. M/s Patton Developers Pvt. Ltd. Page 7 FY 2008-09. The assessee-company sold these shares for an amount of Rs.53,03,228/-. As a result of sale, there was a business loss for an amount of Rs.97,80,772/- and assessee-company claimed this loss as business loss in the FY 2008-09. However, AO has disregarded the above transactions by observing that assessee has never been a trader in share and neither purchase nor sold any other shares during the year under consideration. So the conversion into stock-in-trade done by the assessee-company was not in normal course of the business of assessee. Accordingly, the AO treated the loss arising out of the purchase-sale transactions amounting to Rs.1,53,45,722/- (2,06,48,950 – 53,03,228/-) as LTCG loss and covered u/s 10(38) of the Act..

9 Aggrieved, assessee preferred appeal before Ld. CIT(A) who has deleted the addition made by AO by observing that as per CBDT Circular No. 4/2007 dated 15.06.2007 the assessee can have two portfolio i.e., an investment portfolio and another of trading portfolio and section 45(2) of the Act also provides that assessee can convert its capital assets in stock-in- trade. The Ld. CIT(A) has made reference to the following judgments :- i) ACIT v. Jehangir T. Nagree (2008) 23 SOT 512 (Mumbai) ii) CIT v. Walfort Share And Stock Brokers P. Ltd. (2010) 326 ITR 1 (SC) iii) Union of India v. Azadi Bachao Andolan (2003) 263 ITR 796 (SC)

ITA No.90/Kol/2013 A.Y. 2009-10 DCIT Cir-8, Kol. V. M/s Patton Developers Pvt. Ltd. Page 8 that Sec.45(2) of the Act provides the assessee to convert the capital asset into stock-in-trade at any time during the year. There is no prohibition under the Act, therefore the act of the assessee for converting the capital asset into stock-in-trade is within the ambit of law. Before us, Ld. AR drew our attention on page-78 of the paper book of assessee, wherein the details of share held as stock-in-trade was furnished. A plain reading of Sec. 45 sub-(2) allows as below:- “Capital gains. 45 [(1)] Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections [***] [54, 54B, [***] [54D, [54E, [54EA, 54EB,] 54F [54G and 54H]]] be chargeable to income-tax under the head “Capital gains”, and shall be deemed to be the income of the previous year in which the transfer took place. [(1A) … … .. [(2) Notwithstanding anything contained in sub-section (1), the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.] From the aforesaid Section 45, it is very clear that action done by assessee for converting the investment into stock-in-trade is within the purview of the law. Therefore, we dismiss the ground of Revenue’s appeal.

ITA No.90/Kol/2013 A.Y. 2009-10 DCIT Cir-8, Kol. V. M/s Patton Developers Pvt. Ltd. Page 9

आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. अपीलाथ� / Appellant-DCIT, Cir-8, Aayakar Bhawan, 5th Fl. P-7 Chowringhee Sq. Kol-69 2. ��यथ� / Respondent-Patton Developers Pvt. Ltd. 3C, Camac Street, Kolkata-16 3. संबं�धत आयकर आयु�त / Concerned CIT Kolkata 4. आयकर आयु�त- अपील / CIT (A) Kolkata 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, कोलकाता / DR, ITAT, Kolkata 6. गाड� फाइल / Guard file. By order/आदेश से, /True Copy/ उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, कोलकाता ।