2021 (4) TMI 115 - AT - Income Tax

Interest expenditure disallowance u/s 36(1)(iii) - as per AO interest cost on loan borrowed for the purpose of acquisition of asset needs to be capitalized till such asset is put to use in the business of the assessee - as per CIT-A when the assessee has not yet commenced its business, the question of deduction of interest u/s.36(1)(iii) does not arise - HELD THAT - The present case, acquisition of land for its development in the course of real estate activities of the assessee itself is a business activity. The assessee is about to complete one project and to continuing its activities has purchased another land to develop another project. The purchase of inventory is continuation of the same business activity in routine course and cannot be termed as extension of the business activity. The term put to use applies to capital asset only because capital asset is held to facilitate the business activity and sometimes it needs to be prepared after its acquisition for being used to facilitate business activity. As against this, purchase and holding of inventory itself is a business activity. Respectfully following the decision of case of CIT Vs. Aditya Propcon Pvt. Ltd. 2017 (11) TMI 392 - RAJASTHAN HIGH COURT , we are of the considered view that interest paid on loan borrowed for purchase of land and holding it as inventory cannot be considered as acquisition of capital asset for the purpose of disallowing interest by invoking provisions of proviso to section 36(1)(iii) - AO well as the learned CIT(A) without appreciating legal position has disallowed interest paid on loans u/s. 36(1)(iii) of the Act. Hence, we set aside the order passed by the learned CIT(A) and direct the Assessing Officer to delete the addition made towards disallowance of interest under section 36(1)(iii) of the Act. Appeal filed by the assessee is allowed.

Summary

Issues Involved
1. Disallowance of interest expenses claimed under sections 36(1)(iii) and 37(1) of the Income Tax Act.
2. Application of Accounting Standard (AS) 16 issued by ICAI.
3. Interpretation of the term "put to use" in the context of section 36(1)(iii) proviso.
4. Segregation of projects for tax purposes.
5. Consideration of pre-operative expenses.

Detailed Analysis

Issue 1: Disallowance of Interest Expenses Claimed Under Sections 36(1)(iii) and 37(1)
The assessee claimed interest expenses of ?41,37,73,978/- on a term loan borrowed from IFCI Ltd. for purchasing land at MRC Nagar, Chennai. The Assessing Officer (AO) disallowed the claim, stating that the land was not put to use in the business and thus, the interest should be capitalized as per section 36(1)(iii). The AO's decision was upheld by the CIT(A), who reasoned that the project at MRC Nagar had not commenced its activities during the relevant assessment year.

Issue 2: Application of Accounting Standard (AS) 16
The AO relied on AS-16 issued by ICAI, which mandates the capitalization of borrowing costs directly attributable to the acquisition of a qualifying asset. The AO argued that since the land at MRC Nagar was not put to use, the interest paid on the loan should be capitalized. The CIT(A) supported this view, stating that the interest should be capitalized until the asset is ready for its intended use or sale.

Issue 3: Interpretation of the Term "Put to Use"
The AO applied the proviso to section 36(1)(iii), which disallows interest paid on capital borrowed for acquiring an asset until it is put to use. The assessee argued that the land was inventory and thus immediately put to use upon acquisition. The Tribunal agreed with the assessee, stating that the term "put to use" applies to capital assets and not to inventory. The Tribunal emphasized that holding inventory is a business activity in itself.

Issue 4: Segregation of Projects for Tax Purposes
The AO treated the MRC Nagar project as a standalone project and argued that the interest expenses should be capitalized since the project had not commenced. The Tribunal rejected this approach, stating that the real estate development segment should be considered as one business. The Tribunal noted that the assessee had recognized revenue from another project (Atlantic, Egmore) and thus, the interest expenses should be allowed as a deduction.

Issue 5: Consideration of Pre-Operative Expenses
The CIT(A) treated the expenses related to the MRC Nagar project as pre-operative expenses, which should be capitalized. The Tribunal disagreed, stating that the purchase of land for development is a continuation of the existing business activity and not an extension. Therefore, the interest expenses should be allowed as a revenue deduction.

Conclusion
The Tribunal allowed the appeal filed by the assessee, holding that the interest paid on the loan borrowed for the purchase of land at MRC Nagar should be allowed as a deduction under section 36(1)(iii). The Tribunal emphasized that the land was inventory and thus immediately put to use in the business. The Tribunal also rejected the application of AS-16 and the segregation of projects for tax purposes, stating that the real estate development segment should be considered as one business. The order of the CIT(A) was set aside, and the AO was directed to delete the addition made towards the disallowance of interest.