2018 (11) TMI 111 - AT - Income Tax

Interest paid on a borrowed capital for acquiring land - expenditure before Commencement of busniss - assessee claimed this as business expenditure and allowable expenses as per provisions of Section 36(1)(iii) - AO disallowed the claim as this was the interest paid by the assessee before commencement of the business and it should be capitalized and the borrowed money was not utilized for business purposes - Held that - The acts of the assessee shows that he was pursuing the business of real estate during the relevant period. The land was purchased for the purpose of doing the business of real estate by developing the plots etc. Reflecting the land as investment in books does not reflect the true nature of the transaction. In fact the purchase of land, immediately applying for the conversion of land to residential and also getting the site plant approved establishes that the assessee was very much in the business of real estate during the relevant period and he had set up such business. The process of conversion of the land and then getting the approval of the site plan establishes that the assessee has already set up its business during the financial year relevant to assessment year 2012-13. The interest paid on the borrowed capital for acquiring land has been allowed to the assessee as business expenditure. In such a situation, we direct to delete the addition confirmed by the ld. CIT(A). - Decided in favour of assessee.

Summary

Issues Involved:
1. Jurisdiction and validity of additions and disallowances under Section 143(3).
2. Disallowance of interest on borrowed capital under Section 36(1)(iii).
3. Denial of benefit of set-off of unabsorbed business losses.
4. Charging of interest under Section 234B.

Issue-wise Detailed Analysis:

1. Jurisdiction and Validity of Additions and Disallowances under Section 143(3):
The assessee contested that the additions and disallowances made in the order under Section 143(3) were bad in law and on facts for want of jurisdiction and other reasons. However, this ground was general in nature and did not require adjudication, thus dismissed.

2. Disallowance of Interest on Borrowed Capital under Section 36(1)(iii):
The core issue was whether the interest paid on borrowed capital used for purchasing land could be allowed as a business expenditure. The assessee argued that the business was set up during the financial year 2012-13, and the interest on borrowed capital was a legitimate business expense under Section 36(1)(iii). The assessee provided evidence of various steps taken to set up the real estate business, including purchasing land, applying for land conversion, and obtaining site plan approval. The authorities initially disallowed the interest, claiming it was incurred before the commencement of business and should be capitalized. However, the Tribunal found that the business was indeed set up in the financial year 2012-13, and the interest paid on borrowed capital was allowable as a business expenditure. The Tribunal directed the deletion of the addition confirmed by the CIT(A), supporting its decision with various case laws that distinguish between the setting up and commencement of business.

3. Denial of Benefit of Set-off of Unabsorbed Business Losses:
The assessee did not press this ground during the hearing, and it was dismissed as not pressed.

4. Charging of Interest under Section 234B:
The assessee contested the charging of interest under Section 234B, denying any liability for such interest. The Tribunal noted that since the addition regarding the interest paid on borrowed capital was deleted, the issue of charging interest under Section 234B became consequential and did not require further adjudication.

Conclusion:
The Tribunal partly allowed the appeal, deleting the addition related to the interest on borrowed capital and noting that the business was set up in the financial year 2012-13. The issue of charging interest under Section 234B was deemed consequential and not adjudicated further. The appeal was pronounced in the open court on 24/07/2018.