RAJASTHAN ENTERPRISES P.LTD,MUMBAI vs. ITO WD 1(3)1, MUMBAI

The only grievance of the assessee relates to the disallowance of interest of Rs.19,44,520. Briefly stated the facts of the case are that the assessee is engaged in the business of exploiting leasehold rights of certain premises in the building `Raj Mahal’ and giving the said premises to various parties on leave and licence on higher compensation. While scrutinizing the return of income, the A.O. found that the assessee has claimed deduction for interest of Rs.19,44,520 paid on unsecured loans. During the course of assessment proceedings, the assessee was asked as to why the interest of M/s.Rajasthan Enterprises Pvt.Ltd. Rs.19,44,520 paid on the unsecured loans should not be capitalized. In its reply vide a letter dated 11.12.2008, the assessee explained that since it is engaged in the business of renting of property and in the course of carrying on the said business and for the purpose of business, the assessee has paid Rs.3 crore as security deposit to the land owners. The said deposit was given out of loan taken on interest and therefore, the interest paid on the borrowed capital was for the purpose of business and hence fully allowable. This submission of the assessee did not find any favour with the AO, who was of the opinion that the assessee has utilized the unsecured loan for making payments to the land owners in pursuance of the development agreement. Therefore, such interest expense is in the nature of capital expenditure. After drawing support from certain judicial decisions, the AO disallowed the claim of deduction of Rs.19,44,520. The assessee carried the matter before the CIT(A), but without any success.

Before us, the Counsel for the assessee reiterated what has been stated before the lower authorities strong reliance was placed on the decision of the Hon’ble High Court of Delhi in the case of CIT v. Dhoomketu Builders and Development P.Ltd. [(2014) 368 ITR 680 (Delhi)]. It is the say of the Counsel that on identical set of facts, the Hon’ble High Court of Delhi has held that loan taken and participation in tender for acquisition of land would amount to setting up of the business, and therefore, expenses incurred were to be allowed as business loss. Per contra, the learned Departmental Representative could not bring any distinguishing facts in favour of the Revenue.

We have carefully perused the orders of the authorities below. The undisputed facts is that vide development agreement dated 28th June, 2004, the assessee entered into the business of developing the impugned property. It is also undisputed fact that the claim of interest is being allowed by the Revenue Authorities since assessment year 2005-2006. Surprisingly, for assessment year 2012-2013, the assessment order of which is placed on record, we find that after thorough scrutiny the claim of expenditure has been allowed by the A.O. and the same has also been allowed in assessment year 2007-2008 to assessment year 2011-2012. This shows that only for the impugned assessment year, i.e., assessment year 2006-2007 the claim of interest has been denied by the AO. We find force in the contention of the learned Counsel that the decision of the Hon’ble High Court of Delhi (supra) is directly on the facts under issue before us. The relevant part of the said decision needs special mention and which read as under:-

“…..The commencement of real estate business would normally start with the acquisition of land or immovable property. When an assessee whose business it is to develop real estates, is in a position to perform certain acts towards the acquisition of land, that would clearly show that it is ready to commence business and, as a corollary, that it has already been set up. The actual acquisition of land is the result of such efforts put in by the assessee ; once the land is acquired the assessee may be said to have actually commenced its business which is that of development of real estate. The actual acquisition of the land may be a first step in the commencement of the business but section 3 of the Act does not speak of commencement of the business, it speaks only of setting up of the business. When the assessee, in the present case, was in a position to apply for the tender, borrowed money for interest albeit from its holding company and deposited the same with NGEF Ltd. on the same

In the result, the appeal filed by assessee is allowed.