Deputy Commissioner of Income Tax Circle-5(1)(2), Bangalore V. M/s Prestige Garden Estates Pvt Ltd , Bangalore

ITA 2135/BANG/2017

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 7639 (ITAT-BANGALORE)
• Duration Of Justice: 8 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-07-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2008-2009
• Appeal Filed On: 07-11-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Revenue expenditure; Capital expenditure
• Section: 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ , ACCOUNTANT MEMBER I TA NO. 2135/BANG/2017 ASSESSMENT YEAR : 2008 - 09 THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 5(1)(2), BANGALORE. VS. M/S. PRESTIGE GARDEN ESTATES PVT. LTD., THE FALCON HOUSE, NO.1, MAIN GUARD CROSS ROAD, BANGALORE 560 001. PAN: AABCP 2092H APPELLANT RESPONDENT APPELLANT BY : SHRI C.H. SUNDAR RAO, CIT(DR - I )(ITAT), BENGALURU. RE SPONDENT B Y : SHRI PADAMCHAND KHINCHA, CA DATE OF HEARING : 12 .06 .201 8 DATE OF PRONOUNCEMENT : 20 .07.2018 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS IS AN APPEAL BY THE REVENUE AGAINST THE OR DER DATED 27.07.2017 OF THE CIT(APPEALS)-5, BENGALURU RELATIN G TO ASSESSMENT YEAR 2008-09. 2. THE GROUNDS OF APPEAL RAISED BY THE REVENUE REA DS AS FOLLOWS:- 1. THE ORDER OF THE COMMISSIONER OF INCOME TAX(APP EALS) - 5, BANGALORE, IS OPPOSED TO THE LAW AND NOT ON THE FACTS AND CIRCUMSTANCES OF THE CASE. ITA NO.2135/BANG/2017 PAGE 2 OF 12 2. WHETHER THE CIT(A) IS JUSTIFIED IN LAW BY ALLOWI NG RELIEF TO THE ASSESSEE BY ERRONEOUSLY OBSERVING THAT CONDI TION (C) OF SECTION 36(1)(III) HAS NOT BEEN SATISFIED'? 3. WHETHER THE CIT(A) IS JUSTIFIED IN ALLOWING CAPI TAL EXPENDITURE AS REVENUE EXPENDITURE SIMPLY BECAUSE T HE 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 APPEA L. 3. THE ASSESSEE IS A COMPANY. IT IS ENGAGED MAINLY IN THE BUSINESS OF PURCHASE OF LANDS AND TO CONSTRUCT, SELL FLATS, APA RTMENTS, DWELLING-HOUSES, SHOPS, ETC. THE ASSESSEE IN THE COURSE OF ITS BUSI NESS PARTICIPATED IN THE BIDS INVITED FOR SALE OF PROPERTIES BY (I) THE OFFI CIAL LIQUIDATOR OF NEW GOVERNMENT ELECTRIC FACTORY LTD. (NGEF) AND (II) HY DERABAD URBAN DEVELOPMENT AUTHORITY (HUDA) DURING FINANCIAL YEAR 2005-06 AND 2006-07 RESPECTIVELY. THE ASSESSEE ACCORDINGLY HAD MADE EAR NEST MONEY DEPOSIT (EMD) OF RS 186 CRORES AND RS 107.60 CRORES WITH NG EF AND HUDA RESPECTIVELY. IN ORDER TO ARRANGE THE FINANCE FOR M AKING THE DEPOSITS, THE ASSESSEE SIGNED MEMORANDUM OF UNDERSTANDING (MOU) W ITH VARIOUS PERSONS WHEREUNDER IT RECEIVED SHARE APPLICATION MO NEY FROM SUCH PERSONS. IN ADDITION, THE ASSESSEE ALSO ACCEPTED IN TER CORPORATE DEPOSITS (ICDS) FOR FINANCING THE PAYMENT OF EMD. 4. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSE E PAID INTEREST OF RS 16,68,11,932 IN RESPECT OF SHARE APPLICATION MON IES 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 DI SALLOWED AS NO INCOME OTHER THAN DIVIDEND INCOME FROM MUTUAL FUNDS HAVE B EEN OFFERED TO TAX DURING YEAR UNDER CONSIDERATION. ITA NO.2135/BANG/2017 PAGE 3 OF 12 6. IN RESPONSE, THE ASSESSEE SUBMITTED THAT THE INT EREST PAYOUT WAS COMPENSATION TO THE PARTIES WHO HAD ADVANCED MONIES FOR FINANCING THE EMD'S MADE WITH NGEF AND HUDA. THE ASSESSEE SUBMITT ED THAT INTEREST PAID ON SHARE APPLICATION MONEY/ICD WAS CLAIMED AS EXPENDITURE IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINC IPLE AS WELL AS ON PRUDENCE. THE ASSESSEE ALSO SUBMITTED THAT BY PAYIN G EMD THE ASSESSEE BECAME QUALIFIED TO BID AT THE AUCTION AND DID NOT ACQUIRE ANY INTEREST IN ANY IMMOVABLE PROPERTY AND THEREFORE THE ASSESSEE C OULD 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 B E ALLOWED AS DEDUCTION. ACCORDING TO THE AO, THE EMD WAS MADE WITH THE PURP OSE OF ACQUIRING AN ASSET AND THEREFORE INTEREST PAYOUT SHOULD HAVE BEE N CAPITALIZED OR IN THE ALTERNATIVE SHOWN AS WORK-IN-PROGRESS. THE AO ACCOR DINGLY 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:- SI. NO PARTY NAME INTEREST PAID (RS.) TDS (RS.) DATE OF PAYMENT OF TDS AMOUNT DISALLOWED UNDER SECTION 40(A)(IA) IN AY 2008-09 FOR LATE PAYMENT OF TDS 1 HDFC INDIA REAL ESTATE FUND (SHARE APPLICATION MONEY) 5,32,61,680 1,20,69,097 1.1.2009 5,32,61,680 ITA NO.2135/BANG/2017 PAGE 4 OF 12 2 DHARTI INVESTMENT AND HOLDINGS LIMITED (SHARE APPLICATION MONEY) 5,23,68,931 1,18,66,800 13.5.2008 - 3 VINAMRA UNIVERSAL TRADERS P LTD (SHARE APPLICATION MONEY) 38,87,542 8,80,917 13.5.2008 - 4 PRESTIGE ESTATE PROJECTS LTD (SHARE APPLICATION MONEY) 5,61,42,300 1,27,21,845 3.1.2009 5,61,42,300 5 PRESTIGE ESTATE PROJECTS LTD (INTER CORPORATE DEPOSIT) 11,51,479 2,60,925 14.5.2008 - TOTAL 16,68,11,932 3,75,38,659 10,94,03,980 9. BEFORE THE CIT(APPEALS), THE ASSESSEE POINTED OU T THAT DURING 2005- 06, IN RESPONSE TO THE PUBLIC NOTICE INVITING SEALE D TENDERS BY THE OFFICIAL LIQUIDATOR OF NEW GOVERNMENT ELECTRIC FACTORY LIMIT ED (NGEF), A GOVERNMENT OF KARNATAKA UNDERTAKING, UNDER LIQUIDAT ION BEFORE THE HONBLE HIGH COURT OF KARNATAKA FOR SALE OF ITS MOVABLE AND IMMOVABLE ASSETS, THE ASSESSEE SUBMITTED ITS TENDER AND ACCORDINGLY REMIT TED THE EARNEST MONEY DEPOSIT (EMD) OF RS. 186 CRORES. ON COMPLETION OF T HE TENDERING PROCESS, THE OFFICIAL LIQUIDATOR REPORTED TO THE HONBLE HIG H COURT OF KARNATAKA OF THE ASSESSEES TENDER BEING THE HIGHEST BID. SUBSEQUENT LY, PURSUANT TO AN APPLICATION FILED BY THE GOVERNMENT OF KARNATAKA SE EKING TO REVIVE AND PLEADING NOT TO PROCEED WITH THE SALE OF NGEF ASSET S, THE HONBLE HIGH ITA NO.2135/BANG/2017 PAGE 5 OF 12 COURT OF KARNATAKA VIDE ITS ORDER DATED 22ND DECEMB ER 2005 TERMINATED THE SALE PROCEEDINGS AND ORDERED REFUND OF EMD ALON G WITH INTEREST UPTO 31ST DECEMBER 2005 TO THE BIDDERS. THE ASSESSEE BEI NG AGGRIEVED BY THE SAID ORDER REFUSED TO ACCEPT REFUND OF THE EMD AND PREFERRED AN APPEAL BEFORE THE DIVISION BENCH OF THE HONBLE HIGH COURT ON 30TH DECEMBER 2005. BASED ON THE ORDER OF THE DIVISION BENCH DATE D 28 TH FEBRUARY 2006, THE ASSESSEE FILED BEFORE THE SINGLE JUDGE IMPLEADI NG APPLICATION AND ALSO A PETITION TO RECALL THE ORDER TERMINATING OF SALE OF NGEF ASSETS. SUBSEQUENTLY, ON 13 TH SEPTEMBER 2006, THE LEARNED SINGLE JUDGE DISMISSED THE ASSESSEES PETITION AND THE ASSESSEE PREFERRED FURTHER APPEALS WITH THE DIVISION BENCH OF THE HONBLE HIGH COURT FOR RELIEF ON THE MATTER. THE DIVISION BENCH VIDE ITS ORDER DATED 30 TH MARCH 2007 ALLOWED THE ASSESSEES APPEAL RECALLING THE EARLIER ORDER DATED 22ND DECEM BER 2005 AND TEMPORARILY KEPT THE SALE PROCEEDINGS IN ABEYANCE. 10. SUBSEQUENTLY, DIVISIONAL BENCH DISMISSED THE AS SESSEE'S APPEAL. THE ASSESSEE PREFERRED FURTHER APPEAL BEFORE THE HO NBLE SUPREME COURT WHICH WAS ALSO DISMISSED VIDE ITS ORDER DATED 25TH SEPTEMBER 2008 DIRECTING THE OFFICIAL LIQUIDATOR TO REFUND THE EMD OF RS.186 CRORES ALONG WITH INTEREST. THESE FACTS ARE EVIDENT FROM THE NOT ES TO ACCOUNTS FORMING PART OF AUDITED FINANCIAL STATEMENTS FOR THE YEAR E NDING 31 ST MARCH 2009. 11. SINCE THE MATTER ATTAINED FINALITY WITH DISMISS AL OF THE APPEAL BY THE SUPREME COURT DURING THE FINANCIAL YEAR 2008-09, TH E ASSESSEE RECOGNIZED GROSS INTEREST INCOME AMOUNTING TO RS. 46,35,12,695 /- (INTEREST RECEIVED RS. 35,84,80,718 + TDS ON ESTIMATED BASIS RS. 10,50 ,31,977) IN THE FINANCIAL STATEMENTS FOR THE YEAR ENDING 31ST MARCH 2009 AND THE SAME WAS OFFERED FOR TAX IN THE IT RETURN FOR AY 2009-10 . THE RELEVANT PARA FROM NOTES TO ACCOUNT WAS AS UNDER:- ITA NO.2135/BANG/2017 PAGE 6 OF 12 'HENCE, INTEREST EARNED ON THE EARNEST MONEY DEPOS IT (EMD) IS RECOGNIZED DURING THE YEAR CONSIDERING THE AMOUNTS RECEIVED RS. 35,84,80,718/-, GROSSED UP FOR TAXES DEDUCTED AT SO URCE BY RS. 10,50,31,977/-, ON AN ESTIMATED BASIS. ANY CHANGE I N THE ESTIMATE OF AMOUNT RECOGNIZED AS TAX DEDUCTED AT SOURCE WILL BE RECORDED IN THE YEAR IN WHICH SUCH CHANGE IS DETERMINED.' 12. FROM THE AFORESAID FACTS, IT WOULD BE EVIDENT T HAT ENTIRE EMD OF RS.186 CRORES WAS RECEIVED BACK WITH INTEREST. THE INTEREST PAID ON BORROWINGS WAS FOR THE PURPOSE OF BUSINESS OF THE A SSESSEE AND THE DEDUCTION U/S.36(1)(III) OF THE ACT OUGHT TO HAVE B EEN ALLOWED BY THE AO. THE ASSESSEE SUBMITTED THAT SINCE THERE WAS NO ASSE T ACQUIRED OUT OF THE ENTIRE TRANSACTION, THE QUESTION OF ASSET BEING FIR ST PUT TO USE UNDER PROVISO TO SECTION 36(1)(III) DID NOT ARISE. IN OTHER WORDS , PROVISO TO SECTION 36(1)(III) WAS NOT AT ALL APPLICABLE. THE ASSESSEE THEREFORE S UBMITTED THAT THE DISALLOWANCE MADE BY THE AO SHOULD BE DELETED. 13. IN RESPECT OF EMD AND INSTALLMENTS PAID TO HUDA , THE SUBMISSIONS OF THE ASSESSEE WAS THAT DURING THE YEAR 2006-07, I N RESPONSE TO THE PUBLIC NOTICE INVITING SEALED TENDERS BY THE HYDERABAD URB AN DEVELOPMENT AUTHORITY (HUDA) FOR SALE OF LANDS AT KOKAPET VILLA GE, THE ASSESSEE SUBMITTED ITS TENDER FOR 3 PLOTS UNDER AUCTION AND REMITTED THE EARNEST MONEY DEPOSIT (EMD) OF RS. 6.00 CRORES ON JULY 20 2 006. ON COMPLETION OF THE TENDERING PROCESS, THE HUDA INFORMED THAT TH E ASSESSEE HAS BEEN AWARDED THE BID. ACCORDINGLY THE ASSESSEE PAID FIRS T AND SECOND INSTALLMENTS DULY AGGREGATING TO RS. 101.60 CRORES TOWARDS THE SAID LANDS. MEANWHILE, A WRIT PETITION WAS FILED BEFORE THE HON BLE HIGH COURT OF ANDHRA PRADESH IN WHICH THE PETITIONER IN THE WRIT PETITION CLAIMED TITLE TO THE SAID LANDS AS AGAINST HUDA AND ALSO MADE THE AS SESSEE A PARTY TO THE LITIGATION PENDING BETWEEN THE HUDA AND THE PET ITIONER. WHILE THE MATTER WAS PENDING WITH HIGH COURT, THE ASSESSEE VI DE ITS LETTER DATED NOVEMBER 27, 2006 TO HUDA, INFORMED ITS DECISION TO TERMINATE THE LAND ITA NO.2135/BANG/2017 PAGE 7 OF 12 PURCHASE AGREEMENTS AND SOUGHT FOR REFUND OF THE AM OUNTS PAID SO FAR AGGREGATING TO RS. 107.60 CRORES TOGETHER WITH INTE REST @ 24% PER ANNUM AND HAS ALSO RESERVED ITS RIGHT TO CLAIM DAMAGES FO R BREACH OF CONTRACT. 14. SUBSEQUENTLY, THE HONBLE HIGH COURT OF ANDHRA PRADESH VIDE ITS ORDER DATED APRIL 22, 2010, DIRECTED HUDA TO REFUND THE AMOUNT DEPOSITED BY THE COMPANY WITHIN THREE MONTHS AND IN CASE OF D ELAY OF REFUNDING THE AMOUNT BEYOND THREE MONTHS TOGETHER WITH INTEREST A T 9% P.A FROM THE DATE OF DEPOSIT. HUDA FILED A WRIT APPEAL AGAINST THE AB OVE ORDER AND OBTAINED STAY ORDER FROM HONBLE HIGH COURT OF ANDHRA PRADES H VIDE ORDER DATED JUNE 28, 2010. THE WRIT APPEALS WERE DISPOSED BY TH E HIGH COURT OF AP BY COMMON ORDER DATED 27.12.2012 SETTING ASIDE THE ORD ERS OF THE LD. SINGLE JUDGE IN THE WRIT PETITIONS. AGAINST THIS ORDER THE ASSESSEE PREFERRED SLP TO SUPREME COURT AND THE MATTER IS NOW PENDING FOR FIN AL ADJUDICATION BEFORE THE HON'BLE SUPREME COURT. 15. THE ASSESSEE SUBMITTED THAT ENTIRE EMD AND INST ALLMENTS PAID AMOUNTING TO RS. 107.60 CRORES DID NOT RESULT IN AC QUISITION OF ANY ASSET. THERE WAS NO ASSET ACQUIRED OUT OF THE ENTIRE TRANS ACTION. CONSEQUENTLY, THE QUESTION OF ASSET BEING FIRST PUT TO USE UNDER PROVISO TO SECTION 36(1)(III) DID NOT ARISE. IN OTHER WORDS, PROVISO TO SECTION 3 6(1)(III) WAS NOT AT ALL APPLICABLE. 16. ON THE ABOVE SUBMISSIONS, THE CIT(APPEALS) WAS OF THE VIEW THAT DEDUCTION CLAIMED BY THE ASSESSEE ON ACCOUNT OF PAY MENT OF INTEREST WAS ALLOWABLE U/S. 36(1)(III) OF THE INCOME-TAX ACT, 19 61 [THE ACT]. THE CIT(APPEALS) HELD AS FOLLOWS:- (I) THAT THE AMOUNTS BORROWED WERE USED FOR THE P URPOSE OF MAKING PAYMENT OF EMD TO NGEF AND HUFDA FOR ACQUISITION OF ASSET. THE ASSESSEE COULD NOT ULTIMATELY ACQUIRE THE ASSET S AND THE ITA NO.2135/BANG/2017 PAGE 8 OF 12 ASSESSEE GOT BACK ONLY REFUND OF EMD TOGETHER WITH INTEREST FOR WHICH THE EMD WAS WITH NGEF. THIS INTEREST INCOME WAS OFFERED TO TAX DURING THE RELEVANT ASSESSMENT YEAR AND THE INTEREST EXPENDITURE INCURRED IN BORROWING MONIES FOR THE PU RPOSE OF MAKING DEPOSIT OF EMD WAS ALSO CLAIMED AS AN EXPEND ITURE. THE CIT(A) THEREFORE HELD THAT PAYMENT OF INTEREST ON BORROWING FOR THE PURPOSE OF MAKING EMD WAS FOR THE PURPOSE O F BUSINESS OF ASSESSEE. (II) THE LIABILITY OF DEDUCTION U/S. 36(1)(III) O F THE ACT IS NOT CONDITIONAL UPON CORRESPONDING INCOME BEING OFFERED TO DURING T HE SAME PERIOD. THE FACT THAT THERE WERE NO BUSINESS RECEI PTS DURING THE PREVIOUS YEAR CANNOT BE A GROUND FOR DISALLOWING EX PENDITURE INCURRED IN CARRYING ON BUSINESS. THE CIT(APPEALS) THUS DIRECTED THE AO TO ALLOW CLAI M OF ASSESSEE FOR DEDUCTION ON ACCOUNT OF INTEREST EXPENSES. 17. AGGRIEVED BY THE ORDER OF CIT(APPEALS), THE REV ENUE HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. THE LD. DR REITERATED THE STAND OF THE AO AS CONTAINED IN THE ORDER OF ASSESSMENT. AC CORDING TO HIM, THE PROVISO TO SECTION 36(1)(III) OF THE ACT IS APPLICA BLE IN THE PRESENT CASE AND THEREFORE THE INTEREST EXPENSES OUGHT TO HAVE BEEN CAPITALIZED IN THE BOOKS OF ACCOUNT. THE LD. COUNSEL FOR THE ASSESSEE, ON T HE OTHER HAND, RELIED ON THE ORDER OF CIT(APPEALS) AND FURTHER SUBMITTED THA T PROVISO TO SECTION 36(1)(III) OF THE ACT IS NOT APPLICABLE AND THAT TH E INTEREST EXPENSES IN THE PRESENT CASE IS ADMITTEDLY INCURRED FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE AND IRRESPECTIVE OF THE FACT WHETHER THE B ORROWING IS FOR CAPITAL OR REVENUE PURPOSES, DEDUCTION HAS TO BE ALLOWED. THE LD. COUNSEL FOR THE ASSESSEE IN THIS REGARD RELIES ON THE DECISION OF T HE HONBLE SUPREME COURT IN THE CASE OF DCIT V. CORE HEALTH CARE LTD., 298 ITR 194 (SC) . ITA NO.2135/BANG/2017 PAGE 9 OF 12 18. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE RI VAL SUBMISSIONS. SECTION 36(1)(III) AND PROVISO THERETO IS AS FOLLOW S: SEC.36(1): THE DEDUCTIONS PROVIDED FOR IN THE FOL LOWING CLAUSES SHALL BE ALLOWED IN RESPECT OF THE MATTERS DEALT WITH THE REIN, IN COMPUTING THE INCOME REFERRED TO IN SECTION 28 (I) & (II) ..... (II) 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 R ESPECT OF CAPITAL BORROWED FOR ACQUISITION OF AN ASSET FOR EXTENSION OF EXISTING BUSINESS OR PROFESSION (WHETHER CAPITALIZED 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 DEDUC TION. PROVISO WAS INSERTED BY THE FINANCE ACT, 2003 W.E.F .1.4.2004. BEFORE INSERTION OF PROVISO W.E.F. 01.04.204, IT WAS SETTL ED LAW BY VARIOUS COURT DECISION THAT ANY INTEREST PAID ON BORROWING FOR BU SINESS & PROFESSION CAN BE CLAIMED AS A DEDUCTION IRRESPECTIVE OF THE FACT WHETHER THE BORROWING IS FOR THE PURPOSE OF MEETING CAPITAL OR REVENUE EXPEN DITURE. SO LONG AS THE BORROWING IS FOR THE PURPOSE OF BUSINESS, INTEREST PAID ON SUCH BORROWING WAS TO BE ALLOWED AS DEDUCTION. IN DY. CIT V. CORE HEALTH CARE LTD. [2008] 167 TAXMAN 206 (SC), THE HONBLE SUPREME COURT HELD THAT SECTION 36(1)(III) HAS TO BE READ ON ITS OWN TERMS. IT IS A CODE BY ITSELF. SECTION 36(1)(III) IS ATTRACTED WHEN THE ASSESSEE BORROWS T HE CAPITAL FOR THE PURPOSE OF HIS BUSINESS. IT DOES NOT MATTER WHETHER THE CAP ITAL IS BORROWED IN ORDER TO ACQUIRE A REVENUE ASSET OR A CAPITAL ASSET, BECA USE ALL THAT THE SECTION REQUIRES IS THAT THE ASSESSEE MUST BORROW THE CAPIT AL FOR THE PURPOSE OF HIS BUSINESS. THERE BY MEANING THAT THE TRANSACTION OF BORROWING IS NOT THE SAME AS THE TRANSACTION OF INVESTMENT. THE PROVISO HOWEVER RESTRICTS THE CLAIM FOR DEDUCTION ON ACCOUNT OF INTEREST ON AMOUN T BORROWED FOR ACQUISITION OF AN ASSET FOR EXTENSION OF EXISTING B USINESS OR PROFESSION. ITA NO.2135/BANG/2017 PAGE 10 OF 12 THE SECTION DOES NOT DEFINE WHAT IS ACQUISITION OF AN ASSET FOR EXTENSION OR WHAT IS EXTENSION OF EXISTING BUSINESS. THE PURPOS E OF THE AMENDMENT HAS BEEN SPELT OUT IN THE MEMORANDUM EXPLAINING THE PRO VISIONS WHICH STATES THAT 'IT IS, THEREFORE, PROPOSED TO PROVIDE THAT NO DEDU CTION WILL BE ALLOWED IN RESPECT OF INTEREST PAID, IN RESPECT OF CAPITAL BORROWED FOR ACQUISITION OF NEW ASSET FOR EXTENSION OF EXIST ING BUSINESS OR PROFESSION (WHETHER CAPITALISED IN THE BOOKS OF ACC OUNT OR NOT) 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.' THE LOGIC BEHIND PROVISION IS ONLY TO ENSURE THAT W HEREVER INTEREST IS CAPITALISED FOR BOOKS OF ACCOUNTS, IT REMAINS CAPIT ALISED FOR THE PURPOSE OF INCOME-TAX. THIS INTEREST CANNOT BE CLAIMED AS A DE DUCTION UNDER SECTION 36(1)(III) OF THE ACT. 19. THE FIRST CONDITION FOR APPLICABILITY OF THE PR OVISO IS THAT THERE SHOULD BE ACQUISITION OF AN ASSET. THE SECOND CONDITION I S THAT SUCH ACQUISITION SHOULD BE FOR EXTENSION OF EXISTING BUSINESS. IN T HE PRESENT CASE BOTH THE CONDITIONS ARE NOT SATISFIED. THERE WAS NO ACQUISI TION OF ANY ASSET BY THE ASSESSEE FROM NGEF OR HUDA AND BOTH THE TRANSACTION S DID NOT ULTIMATELY FRUCTIFY. THE ASSESSEE HAD TO ABANDON ITS IDEA OF CARRYING OUT DEVELOPMENT ON THESE PROPERTIES. THE ASSESSEE WAS ALREADY IN T HE BUSINESS OF ACQUIRING PROPERTIES AND CONSTRUCTING FLATS. IN TH E ORDINARY COURSE OF ITS BUSINESS, THE ASSESSEE SOUGHT TO ACQUIRE PROPERTIES FROM NGEF AND HUDA. THEREFORE IT CANNOT BE SAID THAT THE ASSESSE E INDULGED IN ANY EXTENSION OF EXISTING BUSINESS OR PROFESSION. 20. FROM THE FACTS OF THE CASE IT IS CLEAR THAT AT NO POINT OF TIME THE ASSESSEE WAS CERTAIN OF ACQUIRING THE PROPERTIES EI THER FROM NGEF OR HUDA. AS FAR AS THE TRANSACTION WITH NGEF IS CONCE RNED, THE DIVISION ITA NO.2135/BANG/2017 PAGE 11 OF 12 BENCH DISMISSED THE ASSESSEES CLAIM FOR ACQUIRING THE PROPERTY MUCH PRIOR TO THE END OF THE RELEVANT PREVIOUS YEAR. TH OUGH THE ASSESSEE PREFERRED APPEAL BEFORE THE HONBLE SUPREME COURT A GAINST THE ORDER OF THE DIVISION BENCH OF THE KARNATAKA HIGH COURT, THE SAM E WAS ULTIMATELY DISMISSED ON 25.9.2008 AND THE ASSESSEE WAS TO GET BACK ONLY THE EMD PAID BY IT TO THE OFFICIAL LIQUIDATOR TOGETHER WITH INTEREST. THE INTEREST INCOME WAS OFFERED TO TAX BY THE ASSESSEE IN AY 200 8-09 AND THE INTEREST EXPENDITURE IN CONNECTION WITH BORROWING FUNDS FOR PAYING THE EMD WAS ALSO CLAIMED AS DEDUCTION AND REVENUE EXPENDITURE F OR THE RELEVANT PREVIOUS YEAR. THE INTEREST EXPENDITURE WAS THEREF ORE RIGHTLY HELD BY THE CIT(A) TO BE FOR THE PURPOSE OF BUSINESS OF THE ASS ESSEE AND AN ALLOWABLE DEDUCTION U/S.36(1)(III) OF THE ACT. AS FAR AS THE EMD PAID TO HUDA IS CONCERNED, THE ASSESSEE AS EARLY AS 27.11.2006 HAS RESCINDED THE AGREEMENT TO ACQUIRE PROPERTY FROM HUDA. THEREFORE THE EXPENDITURE INCURRED IN THE FORM OF INTEREST ON BORROWINGS TO P AY THE EMD TO HUDA HAS TO BE CONSIDERED AS BORROWING FOR THE PURPOSE OF BU SINESS OF THE ASSESSEE ALLOWABLE U/S.36(1)(III) OF THE ACT. 21. WE FIND NO GROUNDS TO INTERFERE WITH THE ORDER OF THE CIT(A). CONSEQUENTLY, THE APPEAL BY THE REVENUE IS DISMISSE D. 22. IN THE RESULT, APPEAL BY THE REVENUE IS DISMISS ED. PRONOUNCED IN THE OPEN COURT ON THIS 20 TH DAY OF JULY, 2018. SD/- SD/- ( JASON P. BOAZ ) ( N.V. VASUDEVAN ) ACCOUNTANT MEMBER JUDICIAL MEMBER BANGALORE, DATED, THE 20 TH JULY, 2018. / D ESAI S MURTHY / ITA NO.2135/BANG/2017 PAGE 12 OF 12 COPY TO: 1. APP ELL ANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY ITAT, BANGALORE.