2018 (7) TMI 953 - HC - Income Tax

Capitalize the interest expenditure incurred towards Lucky Shoppe acquired as stock in trade - Held that - It is an undisputed position that the appellant-assessee has filed return of income declaring income under the head income from business. The appellant has various projects executing construction projects and, therefore, interest expenditure is to be allowed as deduction to arrive at profits and gains of business or profession of builders carried out by the Appellants. It is not a case where the only project of the appellant was the Lucky Shoppe project Admittedly, in this case the business of the Appellant as developer had already commenced and income offered to tax. We find no merit in the Revenue s objection that these are issues of fact, which this Court should not go into as the finding of fact, by the Tribunal is final. We have decided this issue on a question of law viz. applicability of Section 36(1)(iii) of the Act. - decided in favour of the appellant-assessee and against the respondent-revenue.

Summary

Issues:
Challenge to order of Income Tax Appellate Tribunal regarding capitalization of interest expenditure for 'Lucky Shoppe' project in Assessment Year 1988-89.

Analysis:
The appellant, a partnership firm engaged in construction activity, declared income in its return for the subject Assessment Year but later revised it to show a loss and claimed interest expenditure under Section 36(1)(iii) of the Income Tax Act. The Assessing Officer doubted the deduction claimed for interest expenditure related to the 'Lucky Shoppe' project, stating that work had not commenced on the project during the relevant year. The appellant argued that the interest paid for the open plot of land forming stock-in-trade should be allowed as revenue expenditure, but the Assessing Officer disagreed, leading to disallowance of the deduction. The Commissioner of Income Tax (Appeals) later found in favor of the appellant, citing precedents to support the allowance of interest as expenditure. However, the Tribunal upheld the Assessing Officer's decision, stating that work had not commenced on the 'Lucky Shoppe' project, thus disallowing the deduction.

The appellant contended that the interest paid on the borrowed amount for investing in land should be allowed as a deduction, as it was incurred for business purposes. The respondent argued that the disallowance was correct based on the Tribunal's finding that no work had started on the 'Lucky Shoppe' plot of land. The appellant maintained that the interest should be allowed as revenue expenditure since it was paid to acquire stock-in-trade. The Tribunal's decision was criticized for ignoring key findings and focusing on the commencement of work as a criterion for allowing the deduction, contrary to accounting principles.

The Court referred to Section 36(1)(iii) of the Act before its amendment in 2004, which allowed all interest paid for business purposes to be deducted, regardless of whether it was on capital or revenue account. The Court highlighted that the interest paid for the 'Lucky Shoppe' project plot of land, being essential for the business, should be allowed as a deduction. The respondent's argument that no income was earned from the project was dismissed, as the appellant had declared income under the head income from business, making the interest expenditure deductible to calculate business profits. The Court differentiated the present case from precedents cited by the respondent, emphasizing that the interest was paid after the business had commenced, making it a valid deduction.

In conclusion, the Court ruled in favor of the appellant, allowing the appeal and rejecting the disallowance of the interest expenditure deduction for the 'Lucky Shoppe' project. The Court emphasized that the interest paid for acquiring stock-in-trade was a legitimate revenue expenditure, as it was incurred for business purposes, and not contingent on the commencement of work on the project.