2023 (10) TMI 203 - AT - Income Tax

Disallow interest paid on capital borrowed for acquisition of new asset in light of provisions of section 36(1)(iii) and proviso provided therein - HELD THAT - We find that as per proviso, interest paid on capital borrowed for acquisition of asset for expansion of existing business or profession cannot be allowed till date on which such asset was put to use in the business of the assessee. In the present case, new asset acquired by the assessee was ready for put to use in the business, even though, there is no revenue generated from the said new asset. It is well settle principles of law by the decisions of various courts that set up of business and commencement of business are two separate events. If a business has been set up, even it has not commenced its activities, then expenditure relatable to said business, including interest expenses, if any, should be allowed as deduction. In the present case, AO never disputed the fact that new asset was ready for use in the business of the assessee and also put to use in the business of the assessee. AO disallowed the interest only on the ground that booking has been started in new mandapam from financial year 2016-17 onwards. Date of inauguration and date of booking of hall is not relevant to decide whether business has been set up or not. The moment, the assessee has kept its asset for ready to use in the business, it can be said that business has been set up. There is no doubt with regard to fact that business of the assessee has been set up and accordingly, the assessee has rightly claimed interest paid on capital for acquisition of asset. CIT(A) without considering relevant facts has simply sustained additions made by the AO - Thus, we set aside the impugned order and direct the Assessing Officer to delete additions made towards disallowance of interest paid u/s. 36(1)(iii) - Appeal filed by the assessee is allowed.

Summary

Issues involved:
The issues involved in the judgment are the disallowance of interest paid on a loan borrowed for the construction of a new mandapam under section 36(1)(iii) of the Income Tax Act, and the applicability of provisions related to commercial expediency under section 37(1) of the Act.

Disallowance of Interest under Section 36(1)(iii):
The assessee had borrowed a loan for constructing a new mandapam and claimed interest paid on the loan as a deduction. The Assessing Officer disallowed the interest amount of Rs. 64,25,874 under section 36(1)(iii) as the building was inaugurated in February 2016 and bookings started from the financial year 2016-17. The CIT(A) upheld this disallowance, stating that interest on capital borrowed for the acquisition of a new asset cannot be allowed until the asset is put to use. The assessee argued that since the new asset was ready for use in the business, the interest should be allowed. The Tribunal held that once the asset is ready for use in the business, even if revenue is not generated immediately, the interest on borrowed capital should be allowed as a deduction. The Tribunal set aside the CIT(A) order and directed the Assessing Officer to delete the disallowance.

Commercial Expediency under Section 37(1):
The assessee also contended that the expenditure qualifies for consideration on the grounds of commercial expediency under section 37(1) of the Income Tax Act. However, the Tribunal did not delve into this issue as the disallowance under section 36(1)(iii) was found to be unjustified and was consequently deleted.

In conclusion, the Appellate Tribunal ITAT Chennai allowed the appeal filed by the assessee, directing the Assessing Officer to delete the disallowance of interest paid under section 36(1)(iii) of the Income Tax Act.