ACIT Vs Frontline Realty Pvt. Ltd. (ITAT Mumbai)
Section 36(1)(iii) of The IT Act provides as under-
(iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession :
Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset (whether capitalised in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction….
This section was amended twice viz: by Finance Act 2003 and Finance Act 2015. Before the amendments, a deduction was allowed in respect of interest on capital borrowed for the purposes of business or profession. The said provision has been prone to litigation on the issue of allowability of interest on borrowings for acquisition of assets for extension of business for the period during which the asset was not yet put to use. It was therefore, provided that with effect from assessment year 2004-05, no deduction will be allowed in respect of any amount of interest paid, in respect of capital borrowed for acquisition of asset for the period beginning from the date on which the capital was borrowed for the acquisition of the asset till the date on which such asset was first put to use.
By the Finance Act 2015, the words “for extension of existing business or profession” in proviso was omitted. The provisions of proviso to clause (iii) of sub-section (1) of section 36 of the Income-tax Act had been amended so as to provide that the borrowing cost incurred for acquisition of an asset shall be capitalised up to the date the asset is put to use without making any distinction as to whether an asset is acquired for extension of existing business or not.
The question is whether interest on Borrowing for Purchase of land is allowed Section 36(1)(iii) of the Act. The same was taken up in the case of ACIT, CIRCLE-3(1) (2) Vs M/s. FRONTLINE REALTY PVT. LTD. [2023-VIL-311-ITAT-MUM]. While adjudicating claim for deduction under Section 36(1)(iii), the nature of expense was held irrelevant, as Section itself says that interest paid by assessee on capital borrowed was an item of deduction. It was held that where an assessee claims deduction of interest paid on capital borrowed, assessee had to show that capital which was borrowed was used for business purpose in relevant year and it did not matter either capital was borrowed in order to acquire a revenue asset or a capital asset. Only disallowance can be as per provisio to Section 36(1)(iii) i.e. for the period beginning from the date on which the capital was borrowed for the acquisition of the asset till the date on which such asset was first put to use.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
These appeals are filed by the Revenue, challenging the order of the learned Commissioner of Income Tax (Appeals)-8, Mumbai (‘ld.CIT(A) for short), passed u/s.143(3) of the Income Tax Act, 1961 (‘the Act’), pertaining to the Assessment Years (‘A.Y.’ for short) 2014-15 and 2015-16.
2. As the facts are identical in both these appeals, we hereby pass a consolidated order by taking ITA No. 7472/Mum/2018 as the lead case.
3. The Revenue has challenged the grounds of disallowance of an amount of Rs.5,52,50,000/- towards interest u/s.36(1)(iii) of the Act, pertaining to funds borrowed for purchase of land and shown as stock-in-trade in the balance sheet without considering the fact that the 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). The Revenue has also challenged the deletion of the interest paid on borrowings of RS.2,15,30,797/- for investments in equity shares and assessed under the head ‘short term capital gain’ (STCG for short).
4. The brief facts are that the assessee company is engaged in the business of real estate and has filed its return of income for the impugned year dated 20.09.2014, declaring total loss of Rs.4,22,62,577/-. The assessee’s case was selected for scrutiny and the assessment order u/s. 143(3) of the Act was passed on 30.11.2016, determining the total income at Rs.3,45,18,220/-, by making various additions/disallowances.
5. The assessee challenged the said order before the ld. CIT(A) who deleted the said disallowance on the ground that the issue was already dealt with by the tribunal in assessee’s case for A.Y. 2013-14 in favour of the assessee and also by relying on the other decisions.
6. The Revenue is in appeal before us as against the order of the ld. CIT(A), deleting the impugned additions made by the Assessing Officer (A.O. for short).
7. Ground no.1 – This ground pertains to the disallowance of interest claimed by the assessee for purchase of land u/s. 36(1)(iii) of the Act. It is observed that the assessee has declared an amount of Rs.5,52,50,000/- in its profit and loss account, pertaining to the interest expenses on long term borrowings. The A.O. had stated that for A.Y. 2013-14, the Pr.CIT-3, Mumbai has disallowed the said interest expenses related to long term borrowings during the proceeding u/s.263 of the Act. The A.O. has stated that the assessee had purchased land at Pali for the purpose of its real estate business and held that the purchase of land for its business should be capitalized as ‘work-in-progress’, thereby disallowing the claim of interest expenses on capital borrowed for purchase of land by relying on the proviso to section 36(1)(iii) of the Act. The A.O. also relied on the decision of the co-ordinate bench in the case of M/s. Agritech Pvt. Ltd. vs.DCIT 21 Taxmann 174, which held that the interest expenses towards purchase of land which was to be developed should be capitalized under ‘WIP’. The A.O. thereby disallowed Rs.5,52,50,000/- u/s.36(1)(iii) of the Act. The A.O. recomputed the WIP of the project as below:
