2023 (1) TMI 124 - AT - Income Tax

Computing income in case of transfer of asset (other than capital asset) being land and/or building - Special provision for full value of consideration for transfer of assets other than capital assets in certain cases - Applicability of provision of section 43CA - whether there is transfer land or building by the Assessee to the tenant? - Whether providing carpet area in the re-developed building to the tenants cannot be taken into the purview of Section 43CA ? - HELD THAT - Provisions of Section 43CA would be attracted in case of transfer of land or building or both, the issue that arises for consideration is whether there is transfer land or building by the Assessee to the tenant. In our view whether allotment of area to a tenant/occupant on under a redevelopment project would result in transfer of land or building held as stock-in-trade would depend upon the facts and circumstances of each case that would require examination of the contractual arrangement between the owner, landlord, tenant, co-operative housing society and the developers. Coming to the facts of the present case, it is admitted position that the Assessee had undertaken redevelopment of the Old Building. Assessee was not the owner or either the land or the Old Building. On carrying out the redevelopment work the Assessee would have received some area in the new building in his capacity as the Developer. In order to resolve the deadlock the Assessee agreed to settle for a lesser area in the meeting held on 07.08.2006 which was attended by Deputy Chief Engineer, MBR RB who also signed the minutes of the meeting in this official capacity. In absence of any violation of specific provision of Maharashtra Housing Area Development Act, 1976 having been brought to our notice, we are not inclined to accept the contention of Revenue that the allotment of additional area to the tenants was contrary to law. The amount of area to be given to the tenants was agreed upon and finalized when the minutes of the meeting held on 07.08.2006 were recorded since Annexure A to the minutes of the meeting clearly provided for the details of the unit in the new building and the carpet area to be allotted to each tenant. Thus, the additional area that was allotted to tenants could not be considered as stock-in-trade for the Assessee as the Assessee was never entitled to hold/sale the same. We concur with the CIT(A) that the area allotted to the tenants (including the additional area) cannot be regarded as stock-in-trade of the Assessee and therefore, the provisions of Section 43CA would not be attracted. In view of the aforesaid, we decline to interfere with the order passed by the CIT(A) on this issue. Ground No. 1 raised by the Revenue is, therefore, dismissed. Deduction of interest expenditure of INR u/s 36(1)(iii) - HELD THAT - Assessee has been following project completion method and had capitalized all cost relating to construction till part completion certificate was obtained during the previous year 2014-15 relevant to the AY 2015-16. Though the Assessee has not offered any profits to tax during the Assessment Year 2016-17, deduction for interest of INR 1,55,42,291/- has been claimed by the Assessee as period cost under Section 36(1)(iii) of the Act. We note that the Assessee has undertaken only one redevelopment project. It is not disputed that interest cost is directly related to the project As per Accounting Standards 7 on Construction Contracts and Accounting Standard 16 on Borrowing Cost, the borrowing cost having direct nexus with the project needs to be treated as project cost and capitalized. Appeal of Revenue is dismissed.

Summary

Issues Involved:
1. Applicability of Section 43CA of the Income Tax Act, 1961 for addition of INR 2,18,84,138/-.
2. Allowability of deduction for interest expenditure under Section 36(1)(iii) of the Income Tax Act, 1961.

Detailed Analysis:

Ground No. 1: Applicability of Section 43CA of the Income Tax Act, 1961

Facts and Background:
The Assessee, a private limited company engaged in land development and building construction, undertook a redevelopment project for an old tenanted residential building. The redevelopment plan required the Assessee to construct a new building and rehabilitate tenants by allotting units with specified carpet areas. The Mumbai Building Repair & Reconstruction Board (MBR&RB) issued a "No Objection Certificate" (NOC) specifying the minimum and maximum carpet areas to be allotted to tenants. However, due to some tenants demanding more carpet area, a consensus was reached in a meeting held on 07.08.2006, attended by the Deputy Chief Engineer (S), MBR&RB, to allot additional area to certain tenants.

Assessing Officer's Decision:
The Assessing Officer invoked Section 43CA of the Income Tax Act, 1961, and made an addition of INR 2,18,84,138/- by taking the stamp duty value of the additional area allotted to tenants as the full value of consideration for the sale of stock-in-trade.

CIT(A)'s Decision:
The CIT(A) deleted the addition, holding that the provisions of Section 43CA were not applicable as the additional area allotted to tenants could not be considered as stock-in-trade. The CIT(A) noted that the area was given to tenants as part of the redevelopment agreement and not as a sale.

Tribunal's Analysis:
The Tribunal examined the applicability of Section 43CA, which pertains to the transfer of assets other than capital assets, specifically land or building. The Tribunal noted that Section 43CA creates a deeming fiction where the stamp duty value is considered the full value of consideration. However, this provision applies only to the transfer of land or building or both, not to any right in land or building. The Tribunal cited various judgments, including those from the Delhi and Mumbai Benches, supporting the view that Section 43CA does not apply to the transfer of rights in land or building.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, concluding that the additional area allotted to tenants could not be considered as stock-in-trade and, therefore, Section 43CA was not applicable. The Tribunal dismissed Ground No. 1 raised by the Revenue.

Ground No. 2: Allowability of Deduction for Interest Expenditure under Section 36(1)(iii) of the Income Tax Act, 1961

Facts and Background:
The Assessee claimed a deduction for interest expenditure of INR 1,55,42,291/- incurred on a loan taken from Bajaj Finance Limited, which was used to repay loans taken from shareholders and directors for the construction project. The Assessing Officer disallowed the deduction, arguing that the interest cost violated the matching principle and was utilized for personal purposes.

CIT(A)'s Decision:
The CIT(A) allowed the deduction, holding that the Assessing Officer failed to provide evidence that the loan was used for personal purposes. The CIT(A) also noted that the absence of income in the relevant year was not a valid reason to disallow the interest expenditure.

Tribunal's Analysis:
The Tribunal examined the provisions of Section 36(1)(iii) and the related proviso, which disallows interest on capital borrowed for asset acquisition until the asset is put to use. The Tribunal noted that the Assessee followed the project completion method and had capitalized all construction costs until the part completion certificate was obtained. The Tribunal cited the Bombay High Court's decision in Lokhandwala Construction Industries Ltd., which held that interest on loans used for business purposes is deductible, irrespective of whether the loan was for acquiring a capital or revenue asset.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, allowing the deduction for interest expenditure under Section 36(1)(iii). The Tribunal dismissed Ground No. 2 raised by the Revenue.

Final Order:
The appeal filed by the Revenue was dismissed in its entirety.