2015 (12) TMI 1224 - AT - Income Tax

Addition under section 36(1)(iii) - interest paid on loan borrowed during the year under consideration - CIT(A) deleted the addition - Held that - The proviso to sec.36(1)(iii) specifically deals with two situations first there should be acquisition of an asset and secondly such acquisition is for extension of existing business. In the instant case expenditure have been incurred for some repairs and replacement works which included replacement of flooring and lift and such replacements are for the smooth conduct of the existing business and not for the extension thereof and even otherwise that can not be construed as Extension of building because it is admitted fact that the Assessee has not constructed or added some new rooms or restaurants or some other new facility and even otherwise the Ld. A.O. has not disputed the nature of work undertaken or has made any case that any new facility has been constructed, there fore the work carried by the Assesses can not be treated as extension of existing business. Contention of Ld D.R that the work carried out by the Assessee was certainly in the nature of extension of business because the value of business and property would be increased and it amounts to capital expenditure having no essence and not tenable under the facts and circumstances as demonstrated and evident. There fore, taking all facts and circumstances into consideration, We are of the opinion that the work undertaken by the appellant does not include acquisition of an asset for the purpose of extension of its business therefore, proviso to sec.36 (1)(iii) is not applicable in this case and the addition is not justified. - Decided in favour of assessee.

Summary

Issues:
1. Whether the Commissioner of Income Tax (Appeals) was justified in deleting the addition made under section 36(1)(iii) of the Income Tax Act on account of interest paid on a loan borrowed during the year under consideration.

Detailed Analysis:

Issue 1:
The primary issue in this case is whether the Commissioner of Income Tax (Appeals) was correct in deleting the addition of Rs. 17,45,918 made under section 36(1)(iii) of the Income Tax Act, 1961. The dispute arose from the assessment year 2008-09, where the Assessing Officer disallowed the interest expenses claimed by the assessee, treating the loans received as inclusion for the acquisition of an asset for business extension. The Commissioner of Income Tax (Appeals) disagreed with this assessment and deleted the addition, stating that the work undertaken did not involve acquiring an asset for the extension of the business. The Commissioner emphasized that the nature of the work, which included repairs and replacements for the smooth conduct of the existing business, did not amount to an extension. Moreover, there was no new facility added to the property. The Commissioner concluded that the proviso to sec. 36(1)(iii) was not applicable in this case.

Detailed Analysis Continued:
The Appellate Tribunal, after considering arguments from both sides, upheld the decision of the Commissioner of Income Tax (Appeals). The Tribunal found that the Assessing Officer erred in interpreting the situation as an extension of the existing business, leading to the disallowance of interest amount. The Tribunal reiterated that for the proviso to sec. 36(1)(iii) to apply, there must be an acquisition of an asset for the extension of the existing business. In this case, the repairs and replacements made by the assessee were deemed necessary for the smooth operation of the current business and did not constitute an extension. The Tribunal emphasized that the work undertaken did not involve adding new rooms, restaurants, or facilities, which would indicate business extension. Consequently, the Tribunal concluded that the addition made by the Assessing Officer was not justified, and the proviso to sec. 36(1)(iii) did not apply. Therefore, the Tribunal dismissed the appeal, affirming the order of the Commissioner of Income Tax (Appeals) without imposing any costs.

This comprehensive analysis highlights the key legal arguments, interpretations, and conclusions drawn by the Commissioner of Income Tax (Appeals) and the Appellate Tribunal regarding the deletion of the addition under section 36(1)(iii) of the Income Tax Act.