2023 (2) TMI 1071 - AT - Income Tax

Disallowance towards interest u/s.36(1)(iii) - Funds borrowed for purchase of land and shown as stock-in-trade in the balance sheet - interest expenditure on borrowed funds incurred by the assessee for purchase of land at Pali has to be capitalized as work-in-progress (WIP for short) - HELD THAT - The said capital was borrowed for the purpose of the business of the assessee by way of purchase of land at Pali for its real estate purchase. AR has also relied on the decision of Tetron Commercial Ltd. 2003 (1) TMI 67 - CALCUTTA HIGH COURT wherein the said proposition was reiterated by the fact that the borrowed capital utilized for the purchase of business of the assessee, whether or not the same is in the nature of capital expenditure or revenue expenditure, the interest payable for the said loan is to be allowed u/s. 36(1)(iii) of the Act. From the above observation and by respectfully following the cited decision, we are of the view that the assessee s claim of expenditure u/s. 36(1)(iii) of the Act is to be allowed. We do not find any infirmity in the order of the ld. CIT(A) and, therefore, ground no.1 raised by the Revenue is dismissed. Interest paid on borrowings for investments in equity shares and assessed under the head short term capital gain - AO made disallowance as expenditure incurred subsequent to the purchase of assets cannot be considered as cost of acquisition - CIT(A) held that the assessee can capitalize the impugned interest as part of cost of acquisition u/s. 48 of the Act which is to be allowed as deduction against the STCG on transfer of shares - HELD THAT - As relying on TRISHUL INVESTMENTS LTD. 2007 (7) TMI 252 - MADRAS HIGH COURT we are of the considered view that the assessee s claim of interest on borrowings against STCG is to be allowed. We find no infirmity in the order of the ld. CIT(A) and we hereby dismiss ground no.2 filed by the Revenue.

Summary

Issues Involved:
1. Disallowance of interest claimed by the assessee under Section 36(1)(iii) of the Income Tax Act for the purchase of land.
2. Deletion of interest paid on borrowings for investments in equity shares assessed as Short Term Capital Gain (STCG).

Detailed Analysis:

1. Disallowance of Interest Claimed by the Assessee under Section 36(1)(iii):

The Revenue challenged the order of the Commissioner of Income Tax (Appeals) [CIT(A)], which deleted the disallowance of Rs. 5,52,50,000/- towards interest under Section 36(1)(iii) of the Income Tax Act. The interest was claimed by the assessee for funds borrowed to purchase land shown as stock-in-trade. The Assessing Officer (A.O.) had disallowed this interest, arguing it should be capitalized as 'work-in-progress' (WIP), based on the proviso to Section 36(1)(iii) and a precedent set by the case of M/s. Agritech Pvt. Ltd. vs. DCIT.

The CIT(A) countered this by referencing the tribunal's decision in the assessee's favor for the previous assessment year 2013-14, where it was established that the assessee was engaged in real estate and infrastructure development, making the purchase of land a part of its business activity. The tribunal had allowed the interest claim, noting that the borrowed capital was used for business purposes, and this was supported by the Hon'ble Jurisdictional High Court's decision in CIT vs. Lokhandwala Constructions Inds. Ltd., which held that the interest on borrowed money for business purposes is deductible regardless of whether the loan was for acquiring a revenue or capital asset.

2. Deletion of Interest Paid on Borrowings for Investments in Equity Shares Assessed as STCG:

The Revenue also contested the deletion of Rs. 2,15,30,797/- in interest paid on borrowings for investments in equity shares, which were assessed as STCG. The A.O. had disallowed this claim, stating that interest expenses incurred after the purchase of shares do not relate to the transfer of the asset and thus cannot be included in the cost of acquisition under Section 48 of the Act.

The CIT(A) disagreed, allowing the capitalization of the interest as part of the cost of acquisition, referencing decisions from the co-ordinate bench in DCIT vs. Shri Fritz D. Silva and the Hon'ble Delhi High Court in CIT vs. Mithilesh Kumari. The tribunal upheld this view, citing the Hon'ble Madras High Court in CIT vs. Trishul Investments Ltd., which stated that interest paid for acquiring shares is part of the cost of acquisition and should be capitalized.

Conclusion:

The tribunal dismissed both grounds raised by the Revenue. For the first issue, it was determined that the interest on borrowed funds for purchasing land was deductible under Section 36(1)(iii) as it was for business purposes. For the second issue, it was decided that interest paid on borrowings for acquiring shares could be capitalized as part of the cost of acquisition, thus deductible against STCG.

Final Judgment:

Both appeals filed by the Revenue for the assessment years 2014-15 and 2015-16 were dismissed, affirming the CIT(A)'s order. The tribunal found no infirmity in the CIT(A)'s decisions on both issues.