2018 (11) TMI 128 - AT - Income Tax

Interest expenditure as an allowable claim U/s 36(1)(iii) - expenditure incurred by the assessee on account of financial charges are an allowable business expenditure and consequently the losses brought forward from the assessment year 2005-06 would be set off against the income if any for the A.Y. 2005-06 - AO is directed to allow the claim of carry forward of loss for setting off against the income of the succeeding year - Held that - It is clear from the earlier order of this Tribunal dated 04/06/2010 that the AO was directed to verify the fact whether the land in question was shown as stock in trade in past and consequently the sale proceeds to be treated as business receipt. The scope of enquiry in the remand proceedings was only to ascertain whether the land in question was shown by the assessee as stock in trade and therefore, any income or expenditure incurred in respect of the stock in trade would be revenue in nature. Even if there is no sale transaction after purchasing of land in question, but when the lands in question is shown as stock in trade in the books of account then whenever the assessee sales the land or any part of the land in question, the same will be business income of the assessee and the expenditure which is incurred for taking loan for purchase of land in question cannot be disallowed on the ground that after purchasing the land, the assessee has not carried out any business activity. Hence, in view of the undisputed fact that the assessee has right from the year in which the land in question was purchased treated the same as stock in trade in the books of account then the Assessing Officer cannot substitute the business decision of the assessee merely because there was no subsequent activity of sale of land. Accordingly, the claim of the assessee is an allowable revenue expenditure and in absence of any business income, the same would be allowed as carry forward of the losses for the A.Y. 2004-05.

Summary

Issues Involved:
1. Disallowance of financial expenses as revenue expenses.
2. Treatment of land as a capital asset versus stock in trade.
3. Allowability of carry-forward losses for set-off against succeeding assessment years.

Detailed Analysis:

1. Disallowance of Financial Expenses as Revenue Expenses:
The assessee appealed against the disallowance of various financial expenses, including interest on term loans, other interest, loan processing fees, and bank charges, which were claimed as revenue expenses. The Assessing Officer (A.O.) disallowed these expenses, treating them as capital in nature and adding them to the assessee's income. The assessee argued that these expenses should be allowed as revenue expenses under Section 36(1)(iii) of the Income Tax Act, 1961. The Tribunal noted that the land was shown as stock in trade by the assessee, and hence, the interest expenditure incurred for the purchase of land should be considered a revenue expense. The Tribunal directed the A.O. to verify whether the land was shown as stock in trade and to treat related expenses as revenue in nature if confirmed.

2. Treatment of Land as Capital Asset vs. Stock in Trade:
The core issue was whether the land purchased by the assessee should be treated as a capital asset or stock in trade. The A.O. and CIT(A) treated the land as a capital asset, disallowing the financial expenses as revenue expenses. The assessee contended that the land was shown as stock in trade in its books of accounts since its purchase. The Tribunal emphasized that the intention of the assessee, as evidenced by the consistent treatment of the land as stock in trade in the books of accounts, should be the determining factor. The Tribunal concluded that the land should be treated as stock in trade, and consequently, the related financial expenses should be allowed as revenue expenses.

3. Allowability of Carry-Forward Losses for Set-Off Against Succeeding Assessment Years:
The assessee also contested the disallowance of losses for the assessment years 2002-03 and 2003-04, which were not allowed to be carried forward for set-off against succeeding assessment years. The Tribunal held that since the land was treated as stock in trade and the related expenses were revenue in nature, the losses incurred should be allowed to be carried forward and set off against the income of succeeding years. The Tribunal directed the A.O. to allow the carry-forward of losses for the assessment years 2004-05 and 2005-06.

Conclusion:
The Tribunal allowed both appeals of the assessee, directing the A.O. to treat the land as stock in trade, allow the financial expenses as revenue expenses, and permit the carry-forward of losses for set-off against future income. The decision emphasized the importance of the assessee's consistent treatment of the land as stock in trade in its books of accounts and the necessity to align tax treatment with the true nature of transactions.