Bachangada Nachappa Monnappa Vs DCIT (ITAT Bangalore)
Plant & Machinery Can Be Capital Asset for the Seller but Stock-in-Trade for the Buyer — Interest of ₹7.42 Crore Allowed
The Bangalore Bench of the ITAT has held that the character of an asset must be determined with reference to the business and intention of the person acquiring it. Plant, machinery, land and building acquired from a company under liquidation may have been capital assets in the hands of that company, but they can constitute stock-in-trade or current assets in the hands of a buyer whose business is to purchase and resell such assets.
Consequently, interest paid on borrowings used for purchasing those assets was allowable u/s 36(1)(iii). The proviso requiring capitalisation of interest until the asset is first put to use was held inapplicable because the assessee had acquired the assets for sale and not for use in manufacturing.
The assessee, Bachangada Nachappa Monnappa, filed his return for AY 2023-24 declaring a total income of approximately ₹7.79 crore under the heads house property, capital gains and income from other sources. The case was selected for scrutiny because the assessee claimed a substantial business loss for set-off against income under other heads.
The assessee had acquired the assets of M/s Falcon Tyers Ltd., a company undergoing liquidation under the Insolvency and Bankruptcy Code, through an e-auction on an “as is where is” basis. The total consideration, including GST, was approximately ₹136.36 crore.
Out of this amount, approximately ₹79.23 crore related to industrial land and building, ₹2.80 crore represented interest payable for delay in completing the acquisition, and approximately ₹54.32 crore related to old plant, machinery and other scrap.
The acquisition was partly financed through an HDFC Bank term loan of ₹30 crore and private borrowings of ₹27 crore. The total borrowed funds thus amounted to ₹57 crore.
During the year, the assessee paid interest aggregating to ₹7,41,50,562. This comprised approximately ₹2.42 crore on the HDFC loan, ₹2.63 crore on private borrowings and ₹2.37 crore as interest connected with the delayed payment of the auction consideration.
The assessee also incurred expenditure of ₹56,06,000 comprising loan-processing charges, property tax, security charges, professional fees and other business expenses.
The assessee explained that he was not engaged in tyre manufacturing and had neither the intention nor the capacity to revive Falcon Tyers as a manufacturing unit. His business was to acquire the assets of the liquidated company and thereafter sell the plant, machinery and scrap and commercially exploit or dispose of the other properties.
The assessee treated the plant, machinery and scrap as trading assets. Out of purchases of approximately ₹46.04 crore excluding GST, stock costing about ₹12.63 crore was sold during the year and the corresponding sales were credited to the profit & loss account. The balance of approximately ₹33.40 crore was disclosed as closing stock.
The other assets were also reflected as current assets in the balance sheet. Thus, the assessee contended that the borrowings had been utilised for acquiring stock-in-trade in the ordinary course of his business. The interest was therefore deductible u/s 36(1)(iii).
The AO rejected the contention. He proceeded on the footing that the assessee had acquired land, building, plant and machinery, which were capital assets. Since the plant and machinery had not been put to use and no operational income had been generated, the AO invoked the proviso to section 36(1)(iii) and disallowed interest of ₹7.42 crore as capital expenditure.
The expenditure of ₹56.06 lakh was also disallowed u/s 37(1) on the same reasoning. The assessment was completed at approximately ₹15.77 crore, as against the returned income of ₹7.79 crore. The CIT(A) confirmed both disallowances.
Before the Tribunal, the Department argued that the proviso to section 36(1)(iii) refers to the acquisition of an “asset” and not merely a fixed or capital asset. Therefore, irrespective of the classification adopted in the books, interest relating to assets not yet put to use had to be capitalised.
The Tribunal, however, examined the nature of the assessee’s business and the treatment of the assets in his accounts. It found that the assessee’s business itself consisted of purchasing and selling the assets acquired through the liquidation auction. The Revenue had accepted the trading activity and the profit arising from the assets sold during the year.
The Tribunal emphasised that the assessee was not carrying on the business of manufacturing tyres. Therefore, there was no question of waiting for the old plant and machinery to be installed and put to use in a manufacturing operation. The assets were acquired for resale and were already available for sale.
The character of an asset cannot be mechanically imported from the previous owner. Plant and machinery that constituted fixed assets in Falcon Tyers’ hands became trading assets in the assessee’s hands because of the purpose for which they were acquired and held.
The Tribunal accordingly held that the borrowings were used for the assessee’s business of buying and selling assets. The interest of ₹7,41,50,562 was revenue expenditure deductible u/s 36(1)(iii), and the proviso concerning the pre-use period did not apply.
For the same reason, the incidental business expenditure of ₹56,06,000 could not be regarded as capital expenditure and was allowable u/s 37(1). Both disallowances were deleted.
Author’s Comments
The decision demonstrates that the physical nature of an item does not conclusively determine its tax character. A building is ordinarily a capital asset, but it may be stock-in-trade for a property developer. Similarly, machinery may be a productive fixed asset for a manufacturer but trading stock for a person engaged in buying and dismantling industrial units.
The decisive factors are the purchaser’s intention, nature of business, accounting treatment and actual conduct. Here, part of the machinery had already been sold, the sale was credited to the trading account, the balance was carried as closing stock and the Revenue accepted the resulting business receipts.
The AO’s “put to use” test proceeded on the assumption that the assessee intended to manufacture tyres. That assumption was contrary to the commercial reality. Stock-in-trade is meant to be sold, not put to use. Once the acquired assets were available for sale in the assessee’s trading business, denial of interest merely because the machinery was not operated became conceptually misplaced.
However, merely describing an asset as current asset in the balance sheet may not always be sufficient. The taxpayer must demonstrate an established or commenced business of dealing in such assets, a clear intention to resell them and consistent accounting treatment. In this case, actual sales during the year provided the strongest evidence that the acquisition formed part of the assessee’s trading operations.
Cases Discussed
- India Cements Ltd. Vs CIT (1966) 60 ITR 52 (SC)
- CIT Vs Lokhandwala Constructions Industries Ltd. (2003) 260 ITR 579 (Bom.)
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT BANGALORE BENCH
1. This appeal has been filed by Bachangada Nachappa Monnappa (the assessee/appellant) for the assessment year 2023-24 against the appellate order dated 24 September 2025 passed by the National Faceless Appeal Centre, Delhi [the ld. CIT [A]]. By that order, the appeal filed by the assessee against the assessment order dated 19 March 2025 passed under section 143(3) read with section 144B of the Income-tax Act, 1961[The Act] by the National Faceless Assessment Centre was dismissed by the learned CIT(A).
2. The Assessee has raised the following grounds of appeal:
1. The orders of the authorities below in so far as they are against the appellant are opposed to law, equity, weight of evidence, probabilities, facts and circumstances of the case.
2. The learned CIT(A) is not justified in upholding the disallowance a sum of Rs. 7,41,50,562/- claimed by the appellant towards interest holding that the claim for deduction was not allowable under section 36[1][iii] of the Act as the interest paid was relating to capital expenditure for purchase of assets and for the reason that the assets so purchased by the appellant were not put to use during the year under appeal under the facts and circumstances of the appellant’s case.
3. The learned CIT(A) is not justified in upholding the disallowance of a sum of Rs. 56,06,000/- claimed u/s. 37[1] of the Act being expenses incurred in course of business dealing in old plant and machinery and scrap carried on by the appellant during the year under appeal by erroneously treating the said expenditure as capital expenditure under the facts and in the circumstances of the appellant’s case.
4. Without prejudice to the above, the disallowances made are excessive and liable to be reduced substantially.
5. Without prejudice to the right to seek waiver with the Hon’ble CGIT/DG, the appellant denies himself liable to be changed to interest u/s. 234-B and 234-D of the Act, under the facts and in the circumstances of the appellant’s case.
6. For the above and other grounds that may be urged at the time of hearing of the appeal, your appellant humbly prays that the appeal may be allowed and Justice rendered and the appellant may be awarded costs in prosecuting the appeal and also order for the refund of the institution fees as part of the costs.
3. Facts of the case shows that assessee is an individual filed his return of income on 31 October 2023 at a total income of ₹ 77,907,760 showing income under the head income from house property, capital gains and income from other sources which was selected for scrutiny and notice under section 143 (2) of the act was issued on 19 June 2024. During the course of the assessment proceedings it was found that the assessee has acquired assets of M/s Falcon Tyers Ltd which was liquidated under liquidation process under the Insolvency and bankruptcy code [ IBC] provisions on ‘as is where is Basis’ for a total consideration of ₹136,35,54,905 including of goods and service tax at the rate of 18%. Out of the above consideration ₹ 792,314,140 is towards land and building, ₹ 28,001,885 was towards interest on acquisition for delay in payment and the balance sum of ₹ 543,238,960 was towards purchase of old plant and machinery and other scraps of that company. For acquisition of the assets and properties of Falcon Tyers, assessee incurred expenses in the nature of interest on loan, legal charges, security charges and other incidental expenses. Thus, the assessee has claimed the large business losses set off against other heads of income and for which the scrutiny took place.
4. The assessing officer questioned the assessee which was replied on 7 March 2025. The assessee further submitted that purchases of ₹ 460,372,000 exclusion of goods and service tax for sale of old plant and machinery on as is where is basis out of the total stocks of ₹ 460,372,000, ₹ 126,330,527 of stock was sold during the year and he has disclosed as sales in profit and loss account balance sum of ₹ 334,041,173 was closing stock lying of plant and machinery and scrap. The assessee submitted the copies of the purchase invoices issued by the liquidator for the acquisition of assets of the above company along with the registered sale deed. The assessee also explained that to acquire the above company has obtained HDFC bank term loans of ₹ 30 crores and private finance of Rs. 27 crores aggregating in all to ₹ 57
5. The learned assessing officer perused the profit and loss account of the assessee and found that sales of ₹ 126,330,527 and purchase of ₹ 460,372,000 and closing stock of ₹ 334,041,473 has also the indirect expenses for interest and others of ₹ 79,756,562 which are claimed as a deduction and resulting into a net loss of ₹ 79,756,562 set off against other heads of income in the computation of total income.
6. Assessing Officer thereafter issued a show cause notice on 15 March 2025 stating that that assessee has incurred expenditure of interest of ₹ 74,150,562 is of capital nature as the same are related to the acquisition of assets and plant and machinery of falcon Tyers Limited during the year through the auction. Therefore, the above interest expenditure incurred by the assessee is of capital nature assessee has claimed it as a revenue expenditure on profit and loss account. The learned assessing officer further noted that the assets of plant and machinery were not put to use for business purpose during the impugned assessment year and the assessee has not declared any operational income from these assets i.e. plant and machinery, the interest expenditure of ₹ 74,150,562 incurred on borrowed loans for acquisition of assets and plant and machinery is not found acceptable in view of the provisions of section 36 (1) (iii) of the act and therefore it was proposed to be disallowed. The assessing officer further found that assessee has incurred other expenditure of ₹ 5,606,000 which are comprising of loan processing charges, other business expenditure, property tax, scrutiny charges and professional fees which are claimed as deduction under section 37 (1) of the act same are also not allowable as revenue expenditure in view of the provisions of section 37 (1) holding them to be a capital expenditure.
7. In response to the above show cause notice assessee submitted that the interest expenditure claimed by the assessee of ₹ 74,150,562 is incurred on borrowed funds exclusively used to acquire the old plant and machinery being in stock in trade held for sale in the ordinary course of business and as per the ICD IX, of the borrowing cost interest paid on borrowings for acquiring stock in trade is deductible as business expenses. The assessee relied on the decision of the honourable Supreme Court in case of India cements Ltd versus CIT (60 ITR 52 and the decision of the honourable Bombay High Court in case of CIT versus Lokhandwala constructions industries Ltd (260 ITR 579. The claim of the assessee was that since the borrowed funds were exclusively used for acquiring stock in trade, and the various assets of that company, which is the business of the assessee, the interest expenses are completely revenue expenditure and are allowable in accordance with the provisions of section 36 (1) (iii) of the act. The assessee also explained that the amount of expenditure claimed by the assessee of ₹ 5,606,000 is also not a capital expenditure on the same footing and therefore both these expenditures are allowable to the assessee as revenue expenditure.
8. The learned assessing officer did not accept the contention of the assessee and disallowed the sum of ₹ 74,150,562 interest expenditure holding that such interest expenditure is incurred for acquisition of assets and plant and machinery of Falcon Tyers Limited during the year through E auction and accordingly such expenditure is capital in nature. For the same reasoning he also disallowed ₹ 5,606,000 of expenditure.
9. Accordingly, the assessment order was passed on 19 March 2025 determining the total income of the assessee at ₹ 157,664,322 against the returned income of ₹ 77,907,760.
10. The assessee aggrieved with the same preferred an appeal before the learned CIT – A. The argument of the assessee remains the same with respect to both the disallowances. As were before the AO. The learned CIT – A by paragraph No. 6 of his order confirmed the above disallowance holding that the learned assessing officer’ treatment is in alliance with the provisions of section 36 (1) (iii) of the income tax act which allows interest expenditure only when it is wholly and exclusively for the purpose of the business or profession. Since the expenditure relates to acquisition of capital asset, not yet operational, it cannot be treated as revenue expenditure. Therefore, the interest disallowance of ₹ 74,150,562 was confirmed. For similar reasons the disallowance of expenditure of ₹ 5,606,000 was also confirmed accordingly the appeal filed by the assessee was dismissed.
11. Aggrieved with the appellate order the assessee is in appeal before us. The learned authorised representative Shri V Srinivasan, advocate furnished paper book containing 214 pages wherein a written submission containing nine pages was also filed. With respect to the interest disallowance, his argument was that interest is paid for buying the assets of Falcon Tyers and assessee is not in the business of manufacturing of Tyers, but it is the business of the assessee to buy such asset and sell them. Therefore, there is no acquisition of any capital asset by the assessee and therefore it could not have been disallowed as a capital expenditure. He further referred to the paper book page No. 6 to state that the total interest was paid by the assessee of ₹ 74,150,522 is comprising of the interest paid to borrowing from private parties of ₹ 26,265,000, interest paid on acquisition of the auction of ₹ 23,730,411 and interest paid on HDFC bank loan of ₹ 24,155,151. He further submitted that assessee has paid a total sum of ₹ 1,363,554,985 has a total consideration of the assets out of which ₹ 79.23 crores is towards industrial land and building, ₹ 28,001,885 is towards acquisition for delay in payment and further ₹ 543,238,960 is towards purchase of old plant and machinery and scrap. He further submitted that the total sum paid of ₹ 74,150,562 is allowable under section 36 (1) (iii) of the act. The same was his argument for the disallowance of expenditure of ₹ 5,606,000. He submitted that the learned assessing officer and the learned CIT – A has considered as if the assessee is going to manufacture the Tyers as he has Acquired the assets of the Falcon Tyers Limited. He submitted that the assessee is only intention for acquisition of the Falcon Tyres’ assets is to sell the plant and machinery, the stock and to exploit the land and building acquired by assessee of that unit. Assessee was never a manufacturer of tyre, never in future did he manufactured any such thing. Nor does the assessee have capacity to manufacture tyres. Therefore, the order of the learned lower authorities holding it that that assessee has acquired the capital asset is incorrect. That capital asset might have been in the hands of the Falcon tyres, but assessee is not concerned with that treatment. It was further his argument that the learned lower authorities considered it as a capital asset without looking into the facts of the case. He submits that these assets may be stock in trade or other assets are not put to use but are held for sale. Therefore, the first proviso to section 36 (1) (iii) does not apply to the assessee. He referred to the balance sheet of the assessee, computation of the total income and various documents in the paper book.
12. The learned Senior Departmental Representative, Shri N. Balusamy, Joint Commissioner of Income-tax, strongly supported the orders of the lower authorities. He submitted that the interest expenditure was not allowable because the assessee had acquired capital assets, and the interest was required to be capitalized until those assets were put to use. The assessee, according to him, had failed to establish that the assets were put to use during the year. He contended that the lower authorities had correctly applied the law. Referring to section 36(1)(iii), he argued that the proviso refers not merely to “capital assets” but to “assets” in general. Therefore, once the assessee had acquired assets and they were not put to use, the related interest had to be capitalized.
13. We have carefully considered the rival submissions and perused the orders of the lower authorities.
14. Briefly stated, the facts narrated above clearly show the following:
a. The assessee acquired the assets of M/s Falcon Tires Ltd., which was under liquidation under the Insolvency and Bankruptcy Code, through an e-auction on an “as is where is” basis for a total consideration of ₹ 1,363,554,985. Of this amount, ₹ 792,314,140 related to industrial land and building, ₹ 28,001,885 represented interest for delayed payment on the acquisition, and the balance ₹ 543,238,960 related to the purchase of old plant, machinery, and other scrap.
b. The assessee incurred expenditure, including interest, legal charges, and other related costs, to finance the acquisition of the assets and properties. For this purpose, the assessee obtained a term loan of ₹ 30 crores from HDFC Bank and borrowed ₹ 27 crores from private financiers, aggregating to ₹ 57 crores.
c. The assessee used the borrowed funds for acquiring the assets. On these borrowings, the assessee paid interest of ₹ 2.42 crores on the HDFC term loan and ₹ 2.63 crores on private loans, aggregating to ₹ 5.05 crores. In addition, under the terms of the e-auction, the assessee paid interest of ₹ 23,730,411 in connection with the acquisition of the assets.
d. The assessee disclosed the old plant and machinery as stock-in-trade, sold some of those items, and reported the resulting profit. The assets acquired by the assessee including the land and building were shown as assets in the balance sheet under the head current assets
e. The assessee claimed the entire interest paid as a deduction on the ground that the borrowings were made for business purposes and, therefore, the interest was allowable under section 36(1)(iii) of the Act. The assessee further contended that the assets acquired from Falcon Tyers constituted stock-in-trade in its hands.
f. The assessee is not engaged in manufacturing tyres, has no intention of doing so, and admittedly does not have the capability to manufacture tyres.
g. Business of the assessee is buying and selling such assets which were acquired by the assessee in the e-auction, profits on which have already been shown in the trading account of the assessee and accepted by revenue.
15. Looking at the law for deciding this issue, Section 36 of the Income-tax Act provides for deductions while computing income chargeable to tax under section 28. Under clause (iii), interest paid on capital borrowed for the purposes of business or profession is allowable as a deduction. However, the proviso inserted with effect from 1 April 2004 provides that where such interest is paid on capital borrowed for acquiring an asset, it shall be treated separately, irrespective of whether such interest is capitalized in the books of account. The disallowance is linked to the period for which the interest is paid interest from the date of borrowing until the date on which the asset acquired with such borrowing is first put to use shall not be allowed as a deduction. The interest may relate to the acquisition of any asset, whether a current asset, fixed asset, or asset of any other nature.
16. Applying the facts to the above legal provision, the facts clearly show that the assessee borrowed capital and paid interest thereon. It is also undisputed that the borrowing was for the purposes of the assessee’s business. The assessee’s business was to purchase the assets of Falcon Tyers Ltd., acquired through the IBC route, and sell them. The assessee is neither a tyre manufacturer nor intends to use the acquired assets for manufacturing tyres or any other goods. Thus there is no requirement of putting to use such assets for such business of manufacturing of tyres, these assets are held for sale by the assessee. The spare parts and stock are reflected as closing stock in Schedule E of the annual accounts at ₹ 334,041,473, and other assets are shown as current assets at ₹ 397,380,676. The balance sheet placed on page 16 shows only current assets. Further, the accounting policy forming part of the accounts states that borrowing costs relating to working capital are charged to the profit and loss account in the year in which they are incurred, while costs attributable to the acquisition, construction, or manufacture of qualifying assets are to be capitalized. Since the assets purchased from Falcon Tyers Ltd. were current assets held for sale and were not intended to be put to use for manufacturing, the proviso to section 36(1)(iii) does not apply. This is also evident from the fact that the entire plant and machinery, after reducing sales and the corresponding cost of goods sold of ₹ 126,330,527 from total purchases of ₹ 460,372,000, was shown as closing stock of ₹ 334,041,473. Further As already held, the plant and machinery were not acquired for tyre manufacturing, which is not the assessee’s business. The assessee acquired them for sale, and the purchase and sale of these assets constituted his business. Accordingly, the borrowings were also made for the assessee’s business of buying and selling such assets. Thus, we hold that the interest paid by the assessee is not capital expenditure, but revenue expenditure incurred on capital borrowed for the purposes of its business. Since the acquired assets were held for sale or were available for sale, and no asset was required to be put to use by the assessee, the proviso to section 36(1)(iii) does not apply.
17. In view of this, we direct the learned assessing officer to grant assessee the deduction of interest expenditure of ₹ 74,150,562 under section 36 (1) (IIA) of the act. Thus ground No. 2 of the appeal of the assessee is allowed.
18. Ground No. 3 relates to the assessee’s claim for deduction of ₹ 5,606,000 under section 37(1) of the Act, which the lower authorities disallowed as capital expenditure for reasons similar to those adopted for disallowing the interest claim. Section 37(1) does not permit deduction of capital expenditure. However, as we have already held that the expenditure was incurred on the assessee’s business in acquiring current assets, it cannot be treated as capital expenditure and is allowable as revenue expenditure. Accordingly, Ground No. 3 is allowed, and the Assessing Officer is directed to delete the disallowance of ₹ 5,606,000 under section 37(1) of the Act.
19. Ground No. 1, 4 – 6 are general or consequential in nature, no arguments were advanced, therefore, those grounds are dismissed.
20. In the result, the appeal filed by the assessee is partly allowed.
Order pronounced in the open court on 21st August, 2026.
