MUTHOOT AGRI DEVELOPMENT & HOSPITALITIES PRIVATE LIMITED, MUMBAI V. DCIT 15(2)(2), MUMBAI

ITA 2249/MUM/2018

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 5936 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 3 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-07-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2012-2013
• Appeal Filed On: 10-04-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Business expenditure; Revenue expenditure; Capital expenditure
• Section: 143(3); 142(1); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH D MUMBAI BEFORE SHRI RAVISH SOOD (JUDICIAL MEMBER) AND SHRI N.K. PRADHAN (ACCOUNTANT MEMBER) ITA NO. 2249/MUM/2018 ASSESSMENT YEAR: 2012 - 13 MUTHOOT AGRI DEVELOPMENT & HOSPITALITY PVT. LTD., M/S VARMA & VARMA, CHARTERED ACCOUNTANTS, E - 3, SAHASRAM, ELANKOM GARDENS, SASTH AMANGALAM, THIRUVANANTHAPURAM - 69 5010 VS. THE DEPUTY COMMISSIONER OF INCOME TAX - 15(2)(2), MUMBAI. PAN NO. AAGCM5045A APPELLANT RESPONDENT ASSESSEE BY : MR. SUKHSAGAR SYAL, AR REVENUE BY : MR. RAJESH OJHA , DR DATE OF HEARING : 23 /07/2019 DATE OF PRONOUNCEMENT : 29/07/2019 ORDER PER N.K. PRADHAN, AM THIS IS AN APPEAL FILED BY THE ASSESSEE . THE RELEVANT ASSESSMENT YEAR IS 201 2 - 1 3 . THE APPEAL IS DIRECTED AGAINST THE ORDER OF T HE COMMISSIONER OF INCOME TAX - 24 , MUMBAI [IN SHORT CIT(A)] AND ARISES OUT OF THE ASSESSMENT COMPLETED U/S 143(3) OF THE INCOME TAX ACT 1961, (THE ACT). MUTHOOT AGRI DEVELOPMENT ITA NO. 2249/MUM/2018 2 2. THE GROUND S OF APPEAL FILED BY THE ASSE SSEE READ AS UNDER: 1. THE LD.CIT(A) HAS ERRED IN CONFIRMING THE ADDITION / DISALLOWANCE MADE BY THE DY. COMMISSIONER OF INCOME TAX (15 ) (2 ) (2) OF INTEREST ON LOANS TAKEN FROM DIRECTOR WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS ACTIVITIES AMOUNTING TO RS.52,88,800/ - . 2. YOUR APPELLANT COMPANY WAS INCORPORATED ON 7 . 5.2010 FOR THE PURPOSE OF CARRYING ON REAL ESTATE ACTIVITIES AS PER ITS MAIN OBJECTS IN THE MEMORANDUM OF ASSOCIATION AND IT HAS EFFECTED PURCHASE OF LAND IN THE FIRST YEAR OF OPERATIONS FOR AN AMOUNT OF RS.4,94,38,159/ - WHICH WAS FINANCED OUT OF UNSECURED LOAN OBTAINED FROM THE DIRECTORS AMOUNTING TO RS.5, 35,20, 000/ - OUTSTANDING AS AT 31. 03.2011. THE INTEREST WAS PAID ON THE ABOVE LOAN @ 10% AND SINCE THE BORROWING HAVE BEEN EFFECTED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS ACTIVITIES OF THE COMPANY, THE IN TEREST PAID ON LOAN DURING THE A Y. 2011 - 1 2 OF RS.52,88 ,000 / - WAS CLAIMED DEDUCTION AS AN EXPENDITURE U/ S 36( 1 )(III) OF THE INCOME TAX ACT, 196 1. 3. THE LD.CIT(A) HAS FAILED TO CONSIDER T HE DECISION OF THE HON, DELHI HIGH COURT THAT IN THE CASE OF COMMISSIONER OF INCOME TAX VS D HOOMKETU BUILDERS AND DEVELOPMENT PVT . LTD REPORTED IN (2014) 368 ITR 680 (DELHI) WHEREIN IT HAS BEEN THAT IN THE CASE OF REAL ESTATE COMPANY, THE BUSINESS CAN BE S AID TO HAVE BEEN COMMENCED ON ACQUISITION OF LAND, SINCE AFTER ACQUISITION OF SUCH LAND, THE ASSESSEE WAS IN A POSITION TO DO BUSINESS AS THE BUSINESS HAS BEEN SET UP. THE RATIO ABOVE DECISION HAS BEEN RELIED ON AND FOLLOWED BY DELHI 'B' BENCH OF ITAT IN ITA NO.4344/DE L/2 0 12 FOR ASSESSMEN T YEAR 2009 - 10 IN CASE OF DY. CIT, CIRCLE 10(1), NEW DELHI VS DLF HOMES PANCHKULA PVT . LTD. N EW DELHI. FURTHER, HYDERABAD 'A BENCH OF ITAT HELD IN THE CASE OF HYDERABAD METRO RAIL LTD . VS DCI T CIRCLE 2(2), THAT THE EXPEN DITURE INCURRED FOR PURCHASE OF L AND CAN BE ALLOWED DEDUCTION AS BUSINESS MUTHOOT AGRI DEVELOPMENT ITA NO. 2249/MUM/2018 3 EXPENDITURE SINCE THE ASSESSEE HAS, ON SUCH AN ACQUISITION COMMENCED BUSINESS ACTIVITIES. 4. THE LD.CIT(A) HAS ALSO ERRED IN CONCLUDING THAT INTEREST PAYABLE ON BORROWING FOR ACQUISITIO N OF FIXED ASSETS CANNOT BE CAPITALIZED TILL THE SAME IS PUT TO USE. AS PER AC COUNTI NG STANDARD 16 ISSUED BY ICAI, C APITALIZATION OF BORROW ING COSTS SHOULD CEASE WHEN SUBSTANTIALLY ALL THE ACTIVITIES NECESSARY TO PREPARE THE QUALIFYING ASSET FOR ITS INTEND ED USE OR SALE ARE COMPLETE. IN THE CASE OF LAND, ACQUIRED FOR REAL ESTATE ACTIVITIES THERE IS NO DEFINITE PLAN FOR DEVELOPMENT OR CONSTRUCTION AND THE SAME IS CARRIED FORWARD FOR RESALE PURPOSES ALSO. HENCE, BORROWING COST INCURRED FOR ACQUISITION OF SUCH LAND DOE S NOT QUALIFY FOR CAPITALI Z ATION AS PER AS 16 ALSO AND HAS BEEN CORRECTLY WRITTEN OFF AS REVENUE EXPENSES . 3. BRIEFLY STATED, THE FACTS ARE THAT THE ASSESSEE FILED ITS RETURN OF INCOME DECLARING LOSS OF RS.51,86,548/ - . THE ACTIVITIES OF THE ASSESSEE ARE AGRICULTURE, SERI - CULTURE, HORTICULTURE AND AQUA - CULTURE. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSES SING OFFICER (AO) NOTICED THAT THE ASSESSEE HAS INCURRED EXPENSES OF RS.52,88,800/ - ON ACCOUNT OF LOANS TAKEN FROM D IRECTOR S AND DISALLOWED IT. THE REASON GIVEN BY THE AO IS THAT THE ASSESSEE FAILED TO FURNISH ANY EXPLANATION FOR ALLOWING THE SAME AS AN EX PENDITURE ATTRIBUTABLE TO BUSINESS AND FURTHER THE IMPUGNED ASSESSMENT YEAR IS THE FIRST YEAR OF OPERATION OF THE ASSESSEE - COMPANY. IN APPEAL, THE LD. CIT(A) OBSERVED THAT THE ASSESSE E HAS BORROWED MONIES FROM ITS D IRECTORS FOR PURCHASING THE LAND, WHICH HAS BEEN CAPITALIZED IN THE BOOKS OF THE ASSESSEE AND IT HAS MERELY ACQUIRED THE LAND BUT HAS NOT CARRIED OUT ANY BUSINESS ACTIVITIES DURING THE YEAR. MUTHOOT AGRI DEVELOPMENT ITA NO. 2249/MUM/2018 4 FURTHER OBSERVING THAT THE ASSESSEE HAS MERELY PURCHASE D THE LAND AND HAS NOT ENTERED INTO ANY CONTRACT FOR THE DEVELOPMENT OF LAND OR OTHERWISE FOR SALE OF LAND, THE LD. CIT(A) CONFIRMED THE ORDER OF THE AO DISALLOWING THE INTEREST EXPENDITURE U/S 36(1)(III) OF THE ACT. 4. BEFORE US, THE LD. COUNSEL OF THE ASSESSEE FILES A COPY OF THE AUDITED ACCOUNTS OF T HE ASSESSEE AND ALSO THE DECISION IN TETRON COMMERCIAL LTD. V. CIT (2003) 261 ITR 422 (CAL), DCIT V. CORE HEALTH CARE LTD. (2008) 298 ITR 194 (SC) , CIT V. DHOOMKETU BUILDERS & DEVELOPMENT (P.) LTD. (2013) 368 ITR 680 (DEL) AND SUBMITS THAT THE ASSESSEE - COM PANY IS INCORPORATED FOR THE PURPOSE OF CARRYING ON REAL ESTATE ACTIVITIES AND THIS IS THE SECOND YEAR OF OPERATION. IT IS STATED THAT THE COMPANY HAD EFFECTED PURCHASE OF LAND IN THE FIRST YEAR OF OPERATION I.E. FROM 07.05.2010 TO 31.03.2011 FOR AN AMOUNT OF RS.4,94,38,159/ - , WHICH WAS FINANCED OUT OF UN SECURED LOAN OBTAINED FROM THE D IRECTORS AMOUNTING TO RS.5,35,20,000/ - OUTSTANDING AS AT 31.03.2011. IT IS STATED THAT THE INTEREST WAS PAID ON THE ABOVE LOAN @ 10% AND SINCE THE BORROWING S HAVE BEEN EFFECT ED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS ACTIVITIES OF THE COMPANY, IT HAS RIGHTLY CLAIMED DEDUCTION AS AN EXPENDITURE U/S 36(1)(III) OF THE ACT. THE LD. COUNSEL SUBMITS THAT THE CONFIRMATION OF LOAN FROM THE D IRECTOR S WAS FILED BEFORE THE AO IN RESPONSE TO THE WRITTEN QUERY DATED 29.09.2014 ISSUED BY THE AO U/S 142(1) OF THE ACT. IT IS THUS STATED THAT THE DISALLOWANCE OF RS.52,88,800/ - MADE BY THE AO BE DELETED. ON THE OTHER HAND, THE LD. DR SUPPORTS THE ORDER PASSED BY THE LD. CIT(A). MUTHOOT AGRI DEVELOPMENT ITA NO. 2249/MUM/2018 5 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIALS ON RECORD. IN THE INSTANT CASE, THE ASSESSEE - COMPANY WAS INCORPORATED FOR THE PURPOSE OF CARRYING ON REAL ESTATE ACTIVITIES AS PER ITS MAIN OBJECTS IN THE MEMORANDUM OF ASSOCIATION . T HIS IS THE SECOND YEAR OF OPERATION. WE FIND THAT THE ASSESSEE PURCHASED LAND IN THE FIRST YEAR OF OPERATION FOR AN AMOUNT OF RS.4,94,38,159/ - , WHICH WAS FINANCED OUT OF UN SECURED LOAN OBTAINED FROM THE D IRECTORS AMOUNTING TO RS.5,35,20,000/ - OUTSTANDING A S AT 31.03.2011. THE ASSESSEE PAID INTEREST ON THE ABOVE LOAN @ 10% AND THE BORROWING HAS BEEN EFFECTED FOR THE PURPOSE OF ITS BUSINESS. IN THE CASE OF TETRON COMMERCIAL LTD . (SUPRA), THE ASSESSEE - COMPANY PURCHASED SOME IMMOVABLE PROPERTIES, BEING LAND A ND FLAT, FOR UNDERTAKING OF BUSINESS OF REAL ESTATE. ACCORDING TO THE MEMORANDUM OF ASSOCIATION , ONE OF THE MAIN OBJECTS OF THE COMPANY WAS TO CARRY ON BUSINESS IN REAL ESTATE. THE ASSESSEE CLAIMED DEDUCTION U/S 36(1)(III) AS INTEREST ON BORROWED CAPITAL WHICH WAS DISALLOWED BY THE AO. THE TRIBUNAL REJECTED THE CLAIM ON THE BASIS THAT THE BUSINESS IN REAL ESTATE HAD NOT COMMENCED AND THAT IT WAS THE CAPITAL EXPENSE THAT WAS SHOWN AS ADVANCE AGAINST THE IMMOVABLE PROPERTY. IN APPEAL BY THE ASSESSEE, THE HO NBLE HIGH COURT HELD THAT : IN THE INSTANT CASE, ACCORDING TO THE MEMORANDUM OF ASSOCIATION, ONE OF THE MAIN OBJECTS OF THE COMPANY WAS TO CARRY ON THE BUSINESS IN REAL ESTATE. THAT HAD COMMENCED ON THE ACQUISITION OF THE LAND OR THE FLAT. IT WAS NOT NE CESSARY TO SHOW THAT IT WAS INTENDED FOR SALE OR OTHERWISE. THE FACT REMAINED THAT BY 1994, THE HOUSE CONSTRUCTED ON THE LAND AND THE FLAT WERE SOLD AND SHOWN IN THE RETURN FOR THE RELEVANT YEAR. THAT WAS SHOWN AS PROFIT FROM BUSINESS. IT MUTHOOT AGRI DEVELOPMENT ITA NO. 2249/MUM/2018 6 WAS NOT NECESSARY TO PROVE HOW IT WAS DEALT WITH AT THE STAGE OF ASSESSMENT. IN CIT V. ASSOCIATED FIBRE & RUBBER INDUSTRIES (P.) LTD. [ 1999 ] 236 ITR 471/102 TAXMAN 700 (SC ) , IT WAS HELD THAT WHERE THE MACHINERY ACQUIRED THROUGH BORROWED CAPITAL HAD NOT BEEN ACTUALLY USED IN THE BUSINESS AT THE TIME WHEN THE ASSESSMENT WAS MADE, EVEN THEN THE SAME WERE TO BE TREATED AS BUSINESS ASSETS HAVING BEEN PURCHASED FOR THE PURPOSE OF THE BUSINESS ONLY. THEREFORE, THE INTEREST PAID ON THE AMOUNT BORROWED FOR THE PURCHASE OF SUCH MACHINERY IS AN AMOUNT DEDUCTIBLE, ONCE THE OTHER INGREDIENTS ARE FULFILLED. IT IS SHOWN IN THE BALANCE SHEET UNDER THE CAPITAL AND ASSET HEADING AS AN ASSET BU T NOT A STOCK - IN - TRADE. THE DESCRIPTION IN THE BOOKS OF ACCOUNT WOULD BE IMMATERIAL. IF IT IS A STOCK - IN - TRADE, IN THAT EVENT, THE AMOUNT INVESTED WOULD BE A REVENUE EXPENDITURE AND NOT A CAPITAL EXPENDITURE. T HE AMOUNT BORROWED MAY BE UTILIZ ED FOR THE PU RPOSE OF ACQUISITION O F STOCK - IN - TRADE OR FOR THE PURPOSE OF ACQUISITION OF CAPITAL ASS ETS. SO LONG THE MONEY IS UTILIZ ED FOR BUSINESS PURPOSES, THE INTEREST IS ALLOWABLE AS DEDUCTION. IT IS WELL - SETTLED THAT BUSINESS EXPENDITURE IS NOT CONFINED TO EXPENSE S INCURRED ON REVENUE ACCOUNT. CAPITAL EXPENDITURE MAY NOT BE ALLOWED AS A DEDUCTION UNDER SECTION 3 7 BECAUSE THE SECTION SPECIFICALLY BARS ANY DEDUCTION OF EXPENDITURE OF CAPITAL NATURE. BUT SECTION 36 IS DIFFERENTLY WORDED. THER E IS NO BAR IN SECTION 36( 1)(III ) TO ALLOWANCE OF INTEREST PAID IN RESPECT OF CAPITAL BORROWED, WHICH HAS BEEN UTILIZ ED FOR PURCHASE OF CAPITAL ASSETS. IN THE CASE OF DHOOMKETU BUILDERS & DEVELOPMENT (P.) LTD . (SUPRA), IT IS HELD THAT A CTS OF APPLYING FOR PARTICIPATION IN TENDER, BORROWING OF FUND ON INTEREST FROM HOLDING COMPANY AND DEPOSIT OF BORROWED MONIES ON SAME DAY AS EARNEST MONEY CLEARLY ESTABLISH THAT BUSINESS HAD BEEN SET UP BY ASSESSEE IN RELEVANT YEAR. IN CORE HEALTH CARE LTD. (SUPRA), IT IS HELD THAT SECTION 36(1)(III) IS ATTRACTED WHEN THE ASSESSEE BORROWS THE CAPITAL FOR THE PURPOSE OF HIS MUTHOOT AGRI DEVELOPMENT ITA NO. 2249/MUM/2018 7 BUSINESS AND IT DOES NOT MATTER WHETHER THE CAPITAL IS BORROWED IN ORDER TO ACQUIRE A REVENUE ASSET OR A CAPITAL ASSET, BECAUSE ALL THAT THE SECTION REQUIRES IS THAT THE ASSESSEE MUST BORROW THE CAPITAL FOR THE PURPOSE OF THE BUSINESS. IT IS FURTHER CLARIFIED THEREIN THAT THIS DICHOTOMY BETWEEN THE BORROWING OF THE LOAN AND ACTUAL APPLICATION THEREOF IN THE PURCHASE OF A CAPITAL ASSET, SEEMS TO PROCEED ON THE BASIS THAT A MERE TRANSACTION OF BORROWING DOES NOT, BY ITSELF, BRING ANY NEW ASSET OF AN ENDURING NATURE INTO EXISTENCE, AND THAT IT IS THE TRANSACTION OF INVESTMENT OF THE BORROWED CAPITAL FOR THE PURCHASE OF A NEW ASSET WHICH BRINGS THAT ASSET INTO EXISTENCE; THE TR ANSACTION OF BORROWING IS NOT THE SAME AS THE TRANSACTION OF INVESTMENT AND IF THIS DICHOTOMY IS KEPT IN MIND, IT BECOMES CLEAR THAT THE TRANSACTION OF BORROWING ATTRACTS THE PROVISIONS OF SECTION 36(1)(III) OF THE ACT. AS MENTIONED EARLIER THE ASSESSEE FILED BEFORE THE AO THE CONFIRMATION OF LOAN FROM THE D IRECTOR S IN RESPONSE TO THE WRITTEN QUERY DATED 29.09.2014 ISSUED BY THE AO U/S 142(1) OF THE ACT. THE ASSESSEE - COMPANY HAD EFFECTED PURCHASE OF LAND IN THE FIRST YEAR OF OPERATION I.E. FROM 07.05.2010 TO 31.03.2011 FOR AN AMOUNT OF RS.4,94,38,159/ - , WHICH WAS FINANCED OUT OF UN SECURED LOAN OBTAINED FROM THE D IRECTORS AMOUNTING TO RS.5,35,20,000/ - OUTSTANDING AS AT 31.03.2011. THE INTEREST WAS PAID ON THE ABOVE LOAN @ 10%. THE BORROWING HAD BEEN EFFECTE D FOR THE PURPOSE OF BUSINESS ACTIVITIES OF THE COMPANY. THE ASSESSEE HAS RIGHTLY CLAIMED U/S 36(1)(III) INTEREST PAID ON THE ABOVE LOAN DURING THE IMPUGNED ASSESSMENT YEAR OF RS.52,88,800/ - . THE ABOVE CLAIM OF THE ASSESSEE IS SUPPORTED BY THE RATIO LAID D OWN IN THE DECISIONS MENTIONED ABOVE. MUTHOOT AGRI DEVELOPMENT ITA NO. 2249/MUM/2018 8 IN VIEW OF THE ABOVE, WE DELETE THE ADDITION OF RS.52,88,800/ - MADE BY THE AO. 6. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 29/07/2019. SD/ - SD/ - (RAVISH SOOD) (N.K. PRADHAN) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED: 29/07/2019 RAHUL SHARMA, SR. P.S. COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A) - 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE . BY ORDER, //TRUE COPY// (SR. PRIVATE SECRETARY) ITAT, MUMBAI