DCIT Vs M/s. Prestige Garden Estates Pvt. Ltd. (ITAT Bangalore)
Conclusion: Deduction was allowable under section 36(1)(iii) on interest on borrowing to pay earnest money deposits (EMD) to purchase properties being lands, flats, etc. as the same was for purpose of assessee’s business of acquiring properties.
Held: In the present case, assessee-company was engaged mainly in the business of purchase of lands and to construct, sell flats, apartments, dwelling-houses, shops, etc. In the course of its business, it participated in the bids invited for sale of properties by NGEF and HUDA during financial year 2005-06 and 2006-07 respectively. Accordingly, it had made earnest money deposit (EMD) of Rs 186 crores and Rs 107.60 crores with NGEF and HUDA respectively. In order to arrange the finance for making the deposits, assessee signed Memorandum of understanding (MOU) with various persons whereunder it received share application money from such persons. In addition, assessee also accepted Inter Corporate Deposits (ICDs) for financing the payment of EMD. During the year under consideration, assessee paid interest of Rs 16,68,11,932 in respect of share application monies received and the said interest expenditure was claimed as deduction while computing income under the head ‘income from business or profession’. AO rejected claim of the assessee and he held that interest expense had to be capitalised and could not be allowed as deduction. It was held the first condition for applicability of the proviso was that there should be acquisition of an asset. The second condition was that such acquisition should be for extension of existing business. In the present case, both the conditions were not satisfied. There was no acquisition of any asset by assessee from NGEF or HUDA and both the transactions did not ultimately fructify. Assessee had to abandon its idea of carrying out development on these properties and was already in the business of acquiring properties and constructing flats. In the ordinary course of its business, assessee sought to acquire properties from NGEF and HUDA. Therefore it could not be said that assessee indulged in any extension of existing business or profession. Thus, interest expenditure was for the purpose of business of assessee and an allowable deduction under section 36(1)(iii).
FULL TEXT OF THE ITAT JUDGEMENT
This is an appeal by the revenue against the order dated 27.07.2017 of the CIT(Appeals)-5, Bengaluru relating to assessment year 2008-09.
2. The grounds of appeal raised by the revenue reads as follows:-
“1. The order of the Commissioner of Income Tax(Appeals) – 5, Bangalore, is opposed to the law and not on the facts and circumstances of the case.
2. Whether the CIT(A) is justified in law by allowing relief to the assessee by erroneously observing that condition (c) of section 36(1)(iii) has not been satisfied”?
3. Whether the CIT(A) is justified in allowing capital expenditure as revenue expenditure simply because the acquisition of capital asset was aborted”?
4. The appellant craves leave to add, alter, amend or delete any other grounds on or before hearing of the appeal.”
3. The assessee is a Company. It is engaged mainly in the business of purchase of lands and to construct, sell flats, apartments, dwelling-houses, shops, etc. The assessee in the course of its business participated in the bids invited for sale of properties by (i) the official liquidator of New Government Electric Factory Ltd. (NGEF) and (ii) Hyderabad Urban Development Authority (HUDA) during financial year 2005-06 and 2006-07 respectively. The assessee accordingly had made earnest money deposit (EMD) of Rs 186 crores and Rs 107.60 crores with NGEF and HUDA respectively. In order to arrange the finance for making the deposits, the Assessee signed Memorandum of understanding (MOU) with various persons whereunder it received share application money from such persons. In addition, the assessee also accepted Inter Corporate Deposits (ICDs) for financing the payment of EMD.
4. During the year under consideration, the assessee paid interest of Rs 16,68,11,932 in respect of share application monies received. The said interest expenditure was claimed as deduction while computing income under the head ‘income from business or profession’.
5. The AO called upon the assessee to show cause as to why interest of Rs. 16,68,11,932 claimed as deduction be not disallowed as no income other than dividend income from mutual funds have been offered to tax during year under consideration.
6. In response, the assessee submitted that the interest payout was compensation to the parties who had advanced monies for financing the EMD’s made with NGEF and HUDA. The assessee submitted that interest paid on share application money/ICD was claimed as expenditure in accordance with generally accepted accounting principle as well as on prudence. The assessee also submitted that by paying EMD the Assessee became qualified to bid at the auction and did not acquire any interest in any immovable property and therefore the Assessee could not capitalize the interest paid as part of the cost of any asset. The assessee also submitted that any interest it might receive on the EMD would be offered to tax.
7. The AO however rejected the plea of the assessee and he held that interest expense has to be capitalized and cannot be allowed as deduction. According to the AO, the EMD was made with the purpose of acquiring an asset and therefore interest payout should have been capitalized or in the alternative shown as work-in-progress. The AO accordingly denied the claim of assessee and disallowed interest of Rs.16,68,11,932 holding the same as capital expenditure.
8. The details of interest paid and other relevant details are as under:-
