Manish Dharsibhai Parmar, Aurangabad V. Additional Commissioner of Income-tax,

ITA 302/PUN/2014

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 0343 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 10 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-12-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 17-05-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 14-02-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: P L KUREEL
• Keywords: Sale consideration of property below Jantri Value; Capital asset; Depreciation; Business expenditure; Question of law; Bad and doubtful debts; Revenue expenditure; Capital expenditure
• Section: 37(1); 32; 37; 28

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE ! '# $ BEFORE SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM / ITA NO. 302/PUN/2014 #% & '& / ASSESSMENT YEAR : 2010-11 MANISH DHARSIBHAI PARMAR, PLOT NO.127, VAISHNAVI, N 3, CIDCO, AURANGABAD, MAHARASHTRA. PAN : ABVPP6750C . / APPELLANT V/S ADDL.CIT., RANGE 2, AURANGABAD. . / RESPONDENT / APPELLANT BY : SHRI SUHAS BORA / RESPONDENT BY : SHRI P.L. KUREEL ( / ORDER PER VIKAS AWASTHY, JM : THE PRESENT APPEAL HAS BEEN FILED BY THE ASSESSEE AGAIN ST THE ORDER OF COMMISSIONER OF INCOME-TAX (APPEALS), AURANGABAD DATED 31.12.2013 FOR THE ASSESSMENT YEAR 2010-11. 2. THE BRIEF FACTS OF THE CASE AS EMANATING FROM RECORD S ARE: THE ASSESSEE IS ENGAGED IN THE BUSINESS OF RUNNING HOTEL. THE ASSESSEE FILED / DATE OF HEARING :19.10.2016 / DATE OF PRONOUNCEMENT: 15.12.2016 2 ITA NO.302/PN/2014 HIS RETURN OF INCOME FOR THE IMPUGNED ASSESSMENT YEAR ON 29.07.2010 DECLARING TOTAL INCOME OF RS.3,67,91,580/-. THE CASE OF A SSESSEE WAS SELECTED FOR SCRUTINY AND ACCORDINGLY NOTICE UNDER SEC.14 3(2) OF INCOME TAX ACT, 1961, (HEREINAFTER, REFERRED TO AS THE ACT) WAS ISSUED TO THE ASSESSEE ON 29.09.2011. DURING THE COURSE OF SCRUTINY A SSESSMENT PROCEEDINGS, THE ASSESSING OFFICER INTER ALIA MADE ADDITION/DISALLOWANCE ON ACCOUNT OF : 1. BAD DEBTS CLAIMS RS.2,93,611/-. 2. PAYMENT OF INTEREST ON LOAN TAKEN FOR ACQUIRING HOTEL RS.19,76,823/- . AGGRIEVED BY THE ADDITIONS MADE DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSEE FILED APPEAL BEFORE THE CIT (A) AG AINST ASSESSMENT ORDER DT.25.02.2013. THE FIRST APPELLATE AUTH ORITY PARTLY ACCEPTED THE APPEAL OF ASSESSEE BUT DENIED TO INTERFERE WITH FINDINGS OF AO WITH RESPECT TO DISALLOWANCE OF BAD DEBTS AND INTEREST ON LOAN. AGAINST THE FINDINGS OF CIT(A), THE ASSESSEE IS IN SECOND APPEAL BEFORE T HE TRIBUNAL. THE ASSESSEE HAS ASSAILED THE FINDINGS OF CIT(A) O N THE FOLLOWING GROUNDS : 1) DISALLOWANCE OF THE BAD DEBTS CLAIM RS.2,93,611/-. 2) DISALLOWANCE OF INTEREST ON LOAN RS.16,64,716 AND PRE-PAYMEN T CHARGES RS.3,12,107/-. 3. SHRI SUHAS BORA APPEARING ON BEHALF OF THE ASSESSEE S UBMITTED THAT THE ASSESSEE HAD ACQUIRED HOTEL DURING THE PERIOD RELEVANT TO ASSESSMENT YEAR 2008-09 AGAINST CONSIDERATION OF RS.1.27 CRORES. THE ASSESSEE PAID RS.1,24,02,000/- TOWARDS THE CONSIDERATION. FURTHER, THE ASSESSEE PAID RS.5,91,611/- ON ACCOUNT OF VARIOUS CHARGE S TO MIDC, 3 ITA NO.302/PN/2014 PROPERTY TAX ETC. ON BEHALF OF THE VENDOR WITH AN UNDERS TANDING TO GET THE REIMBURSEMENT OF SAME FROM VENDOR. SUBSEQUENTLY, TH E VENDOR DECLINED TO REIMBURSE THE SAME, THE ASSESSEE COULD ADJUS T RS.2,98,000/- FROM THE BALANCE CONSIDERATION PAYABLE BY ASSESSEE TO TH E VENDOR. THE ASSESSEE COULD NOT RECOVER THE BALANCE AMOUNT OF RS.2,93 ,611/- FROM THE LESSOR DESPITE BEST EFFORTS. THE ASSESSEE HAD NO OT HER OPTION BUT TO WRITE OFF THE BALANCE AMOUNT AS BAD DEBTS AS IT HAD BECO ME IRRECOVERABLE. THE LD. AR MADE AN ALTERNATE SUBMISSION T HAT THE AMOUNT NOT RECOVERABLE FROM THE VENDOR MAY BE ALLOWED AS BUSINESS LOSS U/S. 28 OF THE ACT. IN RESPECT OF GROUND NO.2, THE LD. AR SUBMITTED THAT THE ASSESSEE HAD TAKEN LOAN FOR ACQUIRING THE PROPERTY (HOTEL) FROM ICIC I BANK LIMITED. THE ASSESSEE HAD PLANNED TO EXPAND THE EXISTING BUSINESS. THE CONSTRUCTION OF THE SAID PROPERTY WAS COMPLETED IN THE FINANCIAL YEAR 2008-09. THE COMPLETION CERTIFICATE DT.25.07.2008 IS PLACED ON RECORD AT PAGE 34 OF THE PAPER BOOK. THE INTEREST EXPENDITURE ON THE LOAN WAS CLAIMED BY THE ASSESSEE AS BUSINESS EXPENDITURE UNDER S EC.37 OF I.T. ACT. FURTHER, THE BANK HAD CHARGED PRE-PAYMENT CHARG ES ON EARLY CLOSURE OF LOAN ACCOUNT. THE SAID CHARGE WAS ALSO CLAIMED AS BUSINESS EXPENDITURE. THE ASSESSING OFFICER DISALLOWED THE CLAIM OF THE ASSESSEE ON THE GROUND THAT INTEREST EXPENDITURE AND PRE-PAYME NT CHARGES WERE INCURRED FOR THE ACQUISITION OF CAPITAL ASSET. THE ASSESS ING OFFICER FURTHER OBSERVED THAT SINCE THE ASSESSEE HAS NOT PUT THE HOTEL TO USE, AS NO INCOME HAS BEEN SHOWN FROM THE USE OF ASSET, THE SAID EXPENDITURE IS NOT ALLOWABLE IN THE YEAR UNDER CONSIDERATION. THE LD. AR IN ORDER TO SUBSTANTIATE HIS ARGUMENTS HAS FILED WRITTEN SUBMISSIONS. T HE SAME ARE REPRODUCED AS UNDER :- 4 ITA NO.302/PN/2014 APPELLANTS SUBMISSION ON GROUND NO. 1 : 1. THE APPELLANT HAD ENTERED INTO A LEASE AGREEMEN T IN RESPECT OF COMMERCIAL PLOT NO. P-1/2 WHICH IS SITUATED AT M.I. D.C. INDUSTRIAL AREA, CHIKALTHANA, AURANGABAD. THE LEASEHOLD RIGHTS WERE ACQUIRED BY THE APPELLANT BEFORE 31.08.2007. THERE WAS NO TRANSFER OF ASSET, WHAT WAS TRANSFERRED TO THE APPE LLANT WAS RIGHTS IN RESPECT OF THE LEASEHOLD LAND. 2. THE CONTENTION OF THE AO AS WELL CIT (A) THAT TH E APPELLANT HAD PAID THE SAID AMOUNT FOR A CAPITAL ASSET IS NOT CORRECT. THE EXPRESSION 'ENDURING BENEFIT' IS EXTREMELY IMPORTANT IN DECIDI NG WHETHER EXPENDITURE IS REVENUE OR CAPITAL IN NATURE. IF THE ASSESSEE ACQUIRES AN 'ENDURING BENEFIT', THE EXPENDITURE IS CAPITAL I N NATURE. WHEN AN EXPENDITURE IS MADE WITH A VIEW TO BRING INTO EXIST ENCE AN ASSET OR AN ADVANTAGE FOR THE ENDURING BENEFIT OF A TRADE, T HERE IS GOOD REASON FOR TREATING SUCH AN EXPENDITURE AS PROPERLY ATTRIBUTABLE NOT TO THE REVENUE BUT TO CAPITAL. BUT A PAYMENT MADE T O REMOVE THE POSSIBILITY OF A RECURRING DISADVANTAGE CANNOT BE C ONSIDERED AS PAYMENT MADE TO SECURE AN ENDURING ADVANTAGE. 3. WHERE THE ASSESSEE HAS AN EXISTING RIGHT TO CARR YON A BUSINESS, ANY EXPENDITURE MADE BY HIM DURING THE COURSE OF BU SINESS FOR THE PURPOSE OF REMOVAL OF ANY RESTRICTION OR OBSTRUCTIO N OR DISABILITY WOULD BE ON REVENUE ACCOUNT, PROVIDED THE EXPENDITU RE DOES NOT ACQUIRE ANY CAPITAL ASSET. PAYMENTS MADE FOR REMOVA L OF RESTRICTION, OBSTRUCTION OR DISABILITY MAY RESULT IN ACQUIRING B ENEFITS TO THE BUSINESS, BUT THAT BY ITSELF WOULD NOT ACQUIRE ANY CAPITAL ASSET. SIMILARLY, CHARGES TO MIDC AND PROPERTY TAXES PAID B Y THE APPELLANT ON BEHALF OF THE LESSOR OF THE PROPERTY D ID NOT RESULT IN ANY BENEFIT OF ENDURING NATURE TO THE APPELLANT. IT WAS MADE SO AS TO ENSURE CONTINUED AVAILABILITY (WITHOUT ANY IMPED IMENT DUE TO NON-PAYMENT OF PROPERTY TAX ON THE SUBJECT PREMISES ) OF THE LEASE USER FOR THE PREMIS.ES, AND THEREFORE FOR THE SMOOT H AND EFFICIENT RUNNING OF THE DAY-TO-DAY BUSINESS OF THE APPELLANT WITHOUT ANY RESTRICTIONS AND OBSTRUCTIONS FROM THE LOCAL BODY. 4. THE APPELLANT RELIES ON THE FOLLOWING JUDICIAL P RONOUNCEMENTS IN SUPPORT OF THE ABOVE SUBMISSION WHEREIN A VIEW WAS TAKEN THAT IF AN EXPENDITURE WAS INCURRED FOR THE PURPOSE OF BUS INESS OF THE ASSESSEE AND IF INCIDENTALLY THOSE EXPENDITURE BENE FITS THE OTHER PARTY, THEN NO PART OF THOSE EXPENDITURE COULD BE D ISALLOWED ON THE 5 ITA NO.302/PN/2014 GROUND THAT THE ASSESSEE DID NOT INCUR SUCH EXPENDI TURE WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF ITS BUSINESS E XCLUSIVELY FOR THE PURPOSE OF ITS BUSINESS. (I) CIT V. CHANDULAL KESHAVIA & CO. (38 ITR 601) (S C) (II) SASSON J. DAVID AND CO. LTD V. CIT [118 ITR 2 61) (SC) (III) STAR INDIA (P) LTD V. ADDL. CIT (2006) (103 I TD 73) (ITAT MUMBAI) (TM) (IV) MARUTI COUNTRYWIDE AUTO FINANCE SERVICES [2011 -TIOL-283] (ITAT DELHI) 5. IT IS ALSO SUBMITTED, WITHOUT PREJUDICE TO THE A BOVE SUBMISSION THAT ALL ENDURING BENEFITS ARE NOT IN THE CAPITAL FIELD. IN THIS REGARDS, THE APPELLANT WOULD LIKE TO DRAW YOUR ATTENTION TO THE DECISION IN CASE OF DCII V. M/S. EDELWEISS CAPITAL LTD. (ITA NO. 397 1/MUM/2009) ITAT, MUMBAI. WHEREIN, IN THE CONTEXT OF WRITE-OFF OF ADVANCES PAID TOWARDS CREATING A WEBSITE (WHICH DID NOT MATERIALIZ E), THE HON'BLE ITAT, ALLOWING SUCH WRITE-OFF AS DEDUCTION, FURTHER OBSERVED THAT 'EVEN IF THE WEBSITES HAD MATERIALIZED, THE EXPENDI TURE COULD NOT HAVE BEEN VIEWED AS CAPITAL EXPENDITURE BECAUSE THE WEBSITE IS PUT UP FOR THE PURPOSE OF DAY-TO-DAY RUNNING OF THE BUSINESS AND EVEN IF ONE WERE TO VIEW THAT SOME ENDURING BENEFIT IS OBTAINED BY THE ASSESSEE, THE BENEFIT CANNOT BE SAID TO ACCRUE TO THE ASSESSEE IN THE CAPITAL FIELD'. 6. WITHOUT PREJUDICE TO THE ABOVE CAPITAL ASSET WAS ALREADY ACQUIRED IN F.Y 2007-08 AND USED FOR THE BUSINESS OF THE APP ELLANT. THE PAYMENTS MADE ON BEHALF OF THE LESSOR WERE MADE NOT ONLY ON BEHALF OF THE LESSOR BUT ALSO IN THE COURSE OF THE BUSINESS OF THE APPELLANT. ACCORDINGLY, IT IS SUBMITTED THAT THE SA ID UNRECOVERED OUTSTANDING IS ALLOWABLE U/S 37(1) OF THE ACT AS LO SS INCIDENTAL TO THE BUSINESS. 7. ALTERNATIVELY, IT IS ALSO SUBMITTED THAT SAID 'B USINESS LOSS' IS ALLOWABLE U/S 28(IV) OF THE ACT AND IN SUPPORT OF T HIS CONTENTION WE HAVE RELIED UPON THE DECISION OF HONBLE RAJASTHAN HIGH COURT IN THE CASE OF CIT VS. ANJANIKUMAR COMPANY LTD 259 ITR 114. IN THE CASE OF THE APPELLANT WE SUBMIT THAT EVEN THOUGH TH E APPELLANT HAS ACQUIRED LEASEHOLD RIGHTS, AS THE SAME ARE ACQUIRED IN F.Y.2007-08 THE EXPENDITURE INCURRED ON BEHALF OF LESSOR COULD NOT BE VIEWED AS CAPITAL EXPENDITURE BECAUSE THE LEASEHOLD RIGHTS ON THE PLOT OF LAND IS PUT UP FOR THE PURPOSES OF DAY TO DAY RUNNING OF THE BUSINESS 6 ITA NO.302/PN/2014 AND EVEN IF ONE WERE TO VIEW THAT SOME ENDURING BEN EFIT IS OBTAINED BY THE APPELLANT, THE BENEFIT CANNOT BE SAID TO ACC RUE TO THE APPELLANT IN THE CAPITAL FIELD. 8. IT IS SUBMITTED THAT THE LOSS IS THUS ALLOWABLE AS BUSINESS LOSS IN TERMS OF SECTION 28 OF THE ACT. APPELLANTS SUBMISSION ON GROUND NO. 2 : 1. THE APPELLANT OWNS AND RUNS A HOTEL. THE APPEL LANT HAD ACQUIRED A PROPERTY FOR THE EXPANSION OF THE EXISTING HOTEL BUSINESS. SUCH PROPERTY WAS ACQUIRED IN AY. 2008-09. FURTHER, COST INCURRED IN DEVELOPING THE PROPERTY WAS INCURRED IN AY. 2009-10 AND THE ASSET WAS READY FOR USE AS PER THE COMPLETION CERTIFICATE DATED 25/7/2008 (REFER PG NO. 34 OF PB). APPELLANT'S BALA NCE SHEET ALSO REFLECTS THE COST OF THE SAID PROPERTY CAPITALIZED, LEAVING NO WORK IN PROGRESS (REFER PG NO. 5 OF PB). SINCE, THE ASSET WAS READY FOR USE DURING AY. 2009-10, EXPENDITURE INCURRED AFTER THE ASSET IS READY FOR USE SHOULD BE TREATED AS REVENUE EXPENDITURE AN D THEREFORE, ALLOWABLE AS REVENUE EXPENDITURE. 2. THE TERM 'PUT TO USE' MEANS 'KEPT READY FOR USE' AND NOT 'ACTUAL USE'. IT IS SUBMITTED THAT THE CONDITION OF THE ASSETS 'P UT TO USE' IN THE ACT INCLUDES 'ACTIVE' AND 'PASSIVE' USE. IN OTHER WORDS , THE SCOPE FOR CLAIMING INTEREST EXPENSES IN RESPECT OF LOANS WHIC H WAS ACQUIRED FOR ASSESSEE IS ALSO IN LINE WITH THE PROVISIONS OF THE ACT. MERELY BECAUSE THE ACQUISITION OF ASSETS AND WHICH WERE NO T CURRENTLY USED BY THE HE ASSET WAS NOT ACTIVELY USED IN THE R ELEVANT FINANCIAL YEAR DOES NOT DENOTE THAT IT WAS NOT AVAILABLE FOR USE IN THAT YEAR. THE ASSESSEE IS THEREFORE ENTITLED TO CLAIM INTERES T EXPENSE ON ASSETS WHICH WERE NOT IN 'ACTIVE' USE. RELIANCE IS PLACED ON THE FOLLOWING AUTHORITIES IN THIS REGARD: CIT VS. D.P. KHANNA & SONS (140 ITR 558)(P&H), WHEREIN IT HAS BEEN HELD THAT AFTER ARRANGING FOR THE BUILDING, AN Y STEPS TAKEN BY THE ENTREPRENEUR TO SET THE BUILDING INTO GEAR FOR RUNNING THE UNIT, WOULD BE NOTHING BUT PUTTING IT TO 'USE'. THE ASSES SEE AFTER PURCHASE OF THE BUILDING AT CHANDIGARH HAD INSTALLE D ELECTRICAL FITTINGS TO RUN THE UNIT AND WAS ABLE TO SHIFT HIS BUSINESS INTO THE SAID BUILDING WITHIN A FEW MONTHS. THERE IS THUS NO DIFFICULTY IN HOLDING THAT DURING THIS TRANSITORY PERIOD, THE BUI LDING PURCHASED BY THE ASSESSEE HAD BEEN USED'. 7 ITA NO.302/PN/2014 THE ABOVE PRINCIPLE HAS ALSO BEEN CONFIRMED BY P&H HIGH COURT IN THE CASE OF CIT VS. NAHAR EXPORTS LTD. (163 TAXMAN 518). CIT VS. GEO TECH CONSTRUCTION CORPORATION (244 ITR 452) (KER) (HC) WHEREIN IT HAS BEEN HELD THAT THE EXPRESSION 'USED' IS TO BE GIVEN WIDER MEANING AND IT INCLUDES 'PASSIVE USER'. AN AS SET COULD BE SAID TO BE USED, WHEN IT WAS KEPT READY FOR USE. T HEREFORE, THE TERM 'PUT TO USE' IS TO BE CONSTRUED IN THE SAME SE NSE AS 'READY FOR USE'. THE AO IN ORDER STATES THAT 'ASSESSEE HAS SHOWN NO RECEIPTS FROM 'HOTEL SUMAN' DURING THE YEAR UNDER CONSIDERATION, AND HENCE THE SAME HAS NOT BEEN PUT TO USE DURING THE YEAR UNDER CONSIDERATION'. IT IS SUBMITTED THAT IT IS A SETTLED LEGAL POSITION THAT IT IS NOT NECESSARY CONDITION THAT EVERY EXPENDITURE SHOULD R ESULT IN INCOME IN ORDER TO BE AN ALLOWABLE EXPENDITURE. IN CASE OF CIT V. RAJENDRA PRASAD MOODY (1978) 115 ITR 519 (SC) IT WAS HELD THAT THERE IS NO GENERAL PRINCIPLE OF LAW THAT NO EXPENDITURE CAN BE' ALLOWED AS A DEDUCTION FROM THE PROFITS OF A BUSINESS UNLESS THE PART OF THE BUSINESS TO WHICH T HE EXPENDITURE IS ATTRIBUTABLE IS CAPABLE OF PRODUCING INCOME OR PROF ITS LIABLE TO BE TAXED UNDER THE ACT. FURTHER THE ABOVE CONTENTION IS ALSO UPHELD IN: CIT V. INDIAN BANK LTD. (1965) 56 ITR 77 (SC) HUGHES V. BANK OF NEW ZEALAND (1938) 6 ITR 636 (HL) CIT V. MADAN LAL JAIN (1982) 136 ITR 5409 (DEL.) 3. CIT(A) HAS RELIED UPON THE DECISION OF HORI'BLE MUMHAI HIGH COURT IN CASE OF DINESHKUMAR GULABCHAND AGARWAL VS CIT (2004) 267 ITR 168 THE RELEVANT EXTRACT OF THE ABOV E DECISION IS PRODUCED AS UNDER:- 'LEARNED COUNSEL APPEARING ON BEHALF OF THE APPELLA NT HAS RAISED A QUESTION AS FRAMED IN THE APPEAL MEMO AND TRIED T O CONTEND THAT EVEN IF THE VEHICLE WAS NOT ACTUALLY USED BUT SINCE IT WAS READY FOR USE, THE ASSESSEE WAS ENTITLED TO CLAIM T HE BENEFIT OF DEPRECIATION ON SUCH ASSETS. HE SOUGHT TO PLACE REL IANCE ON THE JUDGMENT OF THIS COURT IN THE CASE OF WHITTLE ANDER SON LTD. VS. CIT (1971) 79 ITR 613 (BOM). IN THE ABOVE JUDGMENT THIS COURT 8 ITA NO.302/PN/2014 WAS CONCERNED WITH THE INTERPRETATION OF THE EXPRES SION 'USE' OR 'USED', WHEREAS WE ARE CONCERNED WITH THE INTERPRET ATION OF THE WORD 'USED'. IT APPEARS THAT AFTER THE ABOVE JUDGME NT, THERE WAS AN AMENDMENT TO S. 32 OF THE IT ACT. THE WORD 'USED ' DENOTES ACTUALLY USED AND NOT MERELY READY FOR USE. THE EXP RESSION 'USED' MEANS ACTUALLY USED FOR THE PURPOSES OF THE BUSINESS. THE VIEW IS TAKEN BY THE TRIBUNAL. IN THIS VIEW OF THE MATTER, NO SUBSTANTIAL QUESTION OF LAW IS INVOLVED. THE APPEAL IS DISMISSED IN LIMINE WITH NO ORDER AS TO COSTS.' IN THE ABOVE DECISION ALSO IT IS CLEARLY STATED THA T THE EXPRESSION 'USE' AND 'USED' BEAR TWO DIFFERENT MEANINGS. THE W ORD 'USED' MEANS ACTUALLY USED AND THE WORD 'USE' MEANS READY TO USE. PROVISO TO SECTION 36(1)(III) OF THE INCOME TAX ACT 1961 CLEARLY STATES TO THAT DEDUCTION OF THE INTEREST PAID, IN R ESPECT OF CAPITAL BORROWED FOR ACQUISITION OF AN ASSET SHALL NOT BE A LLOWED TILL THE ASSET IS PUT TO USE, WHICH CLEARLY STATES THAT IF T HE ASSET IS READY FOR USE THE ASSESSEE IS LIABLE FOR CLAIMING THE EXP ENDITURE OF INTEREST PAID. 4. WE HAVE ALSO RELIED ON THE DECISION IN CASE OF C .T. DESAI V CIT (1979) 120 ITR 240 (KAR) . CIT V ASSOCIATED FIBRE & RUBBER INDUSTRIES (P) LTD (1999) 236 ITR 471 (SC) THE RELEVANT EXTRACT OF C.T. DESAI V (IT (1979) 120 ITR 240 (KAR) IS AS UNDER:- 'ON THE FACTS OF THIS CASE, THERE CAN BE NO DOUBT T HAT THE MONEY WAS BORROWED FOR THE PURPOSE OF ACQUIRING THE LEASE HOLD RIGHT IN A NEW THEATRE AND, THEREFORE, IT WAS CAPITAL BORROW ED AND INVESTED DURING THE RELEVANT ACCOUNTING YEAR FOR PU RPOSES OF BUSINESS OF THE ASSESSEE. THE FACT THAT THE THEATRE ACTUALLY WAS READY AND WAS OCCUPIED BY THE ASSESSEE ON 7TH FEB., 1969, DOES NOT MAKE ANY DIFFERENCE, FOR CLAIMING DEDUCTIO N OF INTEREST PAID ON SUCH CAPITAL BORROWED. UNDER S. 36(1)(III) OF THE ACT, IT IS NOT NECESSARY THAT THE ASSESSEE MUST HAVE USED THE BUSINESS ASSET FOR DOING BUSINESS IN THE RELEVANT ACCOUNTING YEAR; THE SPENDING OF CAPITAL BORROWED FOR PURPOSES OF ACQUIS ITION OF BUSINESS ASSET, DURING THE RELEVANT ACCOUNTING YEAR IS SUFFICIENT, FOR THE ENTITLEMENT, TO THE DEDUCTION OF INTEREST P AID UNDER S. 36(1)(III) OF THE ACT.' 9 ITA NO.302/PN/2014 THE RELEVANT EXTRACT OF CIT V ASSOCIATED FIBRE & RU BBER INDUSTRIES (P) LTD (1999) 236 ITR 471 (SC) 'WE DO NOT FIND ANY MERIT IN THIS APPEAL. WE FIND T HAT THE REASONING OF THE TRIBUNAL IS CORRECT. EVEN THOUGH T HE MACHINERY HAS NOT BEEN ACTUALLY USED IN THE BUSINESS AT THE T IME WHEN THE ASSESSMENT WAS MADE, THE SAME HAD BEEN TREATED AS B USINESS ASSET AND IT WAS PURCHASED ONLY FOR THE PURPOSES OF THE BUSINESS. IN THE CIRCUMSTANCES, THE INTEREST PAID O N THE AMOUNT BORROWED FOR PURCHASE OF SUCH MACHINERY IS CERTAINL Y A DEDUCTIBLE AMOUNT. CONSEQUENTLY, THE VIEW TAKEN BY THE TRIBUNAL IS CORRECT. FROM THE ABOVE TWO DECISIONS IT IS CLEAR THAT FOR C LAIMING THE DEDUCTION OF INTEREST PAID, UNDER SECTION 36, IT IS NOT NECESSARY THAT THE ASSET MUST HAVE BEEN 'USED' (I.E. PUT TO U SE) THE NECESSARY ELEMENT IS THE SPENDING OF CAPITAL BORROW ED FOR PURPOSES OF ACQUISITION OF BUSINESS ASSET, DURING T HE RELEVANT ACCOUNTING YEAR. 5. ON APPLICABILITY OF EXPLANATION 8 TO SECTION 43( 1) RELIED UPON BY AO. A. SECTION 36(1)(III) HAS TO BE READ ON ITS OWN TER M. IT IS A CODE BY ITSELF AND IS ATTRACTED WHEN THE ASSESSEE BORROWS THE CAPITAL FOR PURPOSE OF BUSINESS. TRANSACTION OF BORROWING IS NOT THE SAME AS TRANSACTION OF INVESTMENT. B. EXPLANATION 8 TO SECTION 43(1) HAS NO RELEVANCE TO SECTION 36(1)(III). IT HAS RELEVANCE ONLY TO SECTI ON 32, 32A, 33 AND 41 WHICH DEALS WITH CONCEPT LIKE DEPRECIATION. C. PROVISION OF SECTION 36(1)(III) MAKES NOT DISTIN CTION BETWEEN THE MONEY BORROWED TO ACQUIRE CAPITAL OR REVENUE ASSET. D. IN THIS RESPECT RELIANCE IS PLACED UPON THE DECI SION IN THE CASE OF CORE HEALTH CARE LTD. VS. DCIT 298 ITR 194. 10 ITA NO.302/PN/2014 4. ON THE OTHER HAND, SHRI P.L. KUREEL REPRESENTING THE DEPARTMENT VEHEMENTLY SUPPORTED THE FINDINGS OF CIT(A) IN REJECTING T HE CLAIM OF ASSESSEE ON BOTH THE GROUNDS. THE LD. DR SUBMITTED TH AT THE ASSESSEE HAS NOT FILED ANY EVIDENCE BEFORE THE AUTHORITIES BELOW TO SHOW THAT THE ASSET WAS READY TO USE. THE LD. DR POINTED THAT TH E COMPLETION CERTIFICATE AT PAGE 34 OF THE PAPER BOOK ON WHICH HEAVY RELIANCE H AS BEEN PLACED IS DATED 23.08.2003. THE DATE ON CERTIFICATE SEEMS TO BE WRONG. IT CANNOT BE ASCERTAINED FROM THE SAID DOCUMENT THE DA TE ON WHICH THE BUILDING WAS READY TO USE. IN RESPECT OF VARIOUS CASE LA WS RELIED BY THE ASSESSEE, THE LD. DR SUBMITTED THAT ALL THE CASE LAWS A RE DISTINGUISHABLE ON FACTS AND HENCE, THE RATIO LAID DOWN THEREIN WOULD NO T APPLY IN THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE. 5. WE HAVE HEARD THE SUBMISSIONS MADE BY THE REPRESEN TATIVES OF RIVAL SIDES AND HAVE PERUSED THE ORDERS OF THE AUTHORITIE S BELOW. WE HAVE ALSO CONSIDERED THE WRITTEN SUBMISSIONS FILED BY THE ASSESSEE AND THE VARIOUS CASE LAWS ON WHICH THE LD. A.R. HAS PLACED RELIA NCE TO RE- INFORCE HIS SUBMISSIONS. IN APPEAL THE ASSESSEE HAS RAISE D PRIMARILY TWO GROUNDS. THE FIRST GROUND IN APPEAL RELATES TO DISALLOWANCE OF RS.2,93,611/-. THE ASSESSEE HAS WRITTEN OFF THE SAID AMOUN T AS BAD DEBTS. THE LD. A.R. OF THE ASSESSEE HAS MADE ALTERNATIV E PRAYER TO TREAT THE SAID AMOUNT AS BUSINESS LOSS IN TERMS OF SEC.28 OF THE ACT. THE ASSESSEE HAD PURCHASED HOTEL SUMAN IN FINANCIAL YEAR 200 7-08 VIDE AGREEMENT DT.01.10.2007. THE CONSIDERATION FOR PURCHASE O F HOTEL WAS AGREED AT RS.1,27,00,000/-. THE ASSESSEE PAID RS.1,24,02,00 0/-. THE BALANCE AMOUNT PAYABLE TOWARDS PURCHASE CONSIDERATION O F HOTEL WAS RS.2,98,000/-. THE ASSESSEE PAID RS.5,91,611/- TO THE LOCAL AUTHORITIES TO DISCHARGE PROPERTY TAX LIABILITY ETC., ON BEHALF OF THE VEN DOR. THE 11 ITA NO.302/PN/2014 ASSESSEE ADJUSTED OUTSTANDING AMOUNT OF RS.2,98,000/- FRO M THE AMOUNT PAID ON BEHALF OF THE VENDOR AND CLAIMED THE REMAI NING AMOUNT OF RS.2,93,611/- FROM VENDOR. SINCE, THE ASSESSEE COULD NO T RECOVER THE SAID AMOUNT FROM THE VENDOR, THE ASSESSEE DECIDED TO WR ITE OFF THE SAME AS BAD DEBTS. 6. THE A.O. DISALLOWED THE SAME AS THE AMOUNT WRITTEN OFF A S BAD DEBT WAS NOT SHOWN IN THE BOOKS OF THE ASSESSEE IN ACC ORDANCE WITH THE PROVISIONS OF SEC.36(2)(I) OF THE ACT. IN FIRST APPEAL THE LD. C IT(A) REJECTED THE CLAIM OF THE ASSESSEE ON THE PREMISE THAT THE EXPEN DITURE INCURRED BY THE ASSESSEE IS OF CAPITAL NATURE AND HENCE THE SAME CANNOT BE ALLOWED EITHER AS BAD DEBT OR AS EXPENDITURE U/S 37 OF THE ACT. 7. IT IS AN UNDISPUTED FACT THAT THE ASSESSEE HAD PAID RS.2,93,611/- OVER AND ABOVE THE AGREED CONSIDERATION FOR PURCHASE O F HOTEL. IT IS ALSO NOT DISPUTED THAT THE SAID AMOUNT WAS PAID ON BEHALF OF T HE VENDOR TO DISCHARGE CERTAIN LIABILITIES SUCH AS MIDC CHARGES, PROPERTY TAX ETC., IN RESPECT OF THE HOTEL BUILDING PURCHASED BY THE ASSESSEE. THE SAID AMOUNT WAS PAID BY THE ASSESSEE TO MAKE THE BUILDING FRE E FROM ALL ENCUMBRANCES. THEREAFTER, THE ASSESSEE COULD NOT RECOV ER THE EXCESS AMOUNT PAID ON BEHALF OF THE VENDOR OF THE HOTEL BUILDING. SECTION 36(2) PROVIDES THAT THE DEDUCTION FOR BAD DEBTS C AN BE ALLOWED ONLY IF THE AMOUNT CLAIMED AS BAD DEBT HAS BEEN O FFERED AS INCOME IN THE EARLIER YEARS. BEFORE ANY DEDUCTION FOR BAD DEBTS IS ALLOWED, ONE OF THE FOLLOWING CONDITIONS MUST BE SATISFIED : (I) THE DEBT HAS BEEN TAKEN INTO ACCOUNT IN COMPUTING THE INCOME OF THE ASSESSEE OF THE PREVIOUS YEAR IN WHICH IT IS WRITTEN OFF OR IN EARLIER PREVIOUS YEAR; OR 12 ITA NO.302/PN/2014 (II) THE DEBT REPRESENTS MONEY LENT IN THE ORDINARY COURSE OF BUSINESS OF BANKING OR MONEY LENDING, WHICH IS CARRIED ON B Y THE ASSESSEE. SINCE NONE OF THE CONDITIONS ENVISAGED U/S 36(2)(I) ARE SATISFIE D IN THE PRESENT CASE, THE ASSESSEE CANNOT CLAIM THE AMOUNT AS BAD DEBT. THE ASSESSEE HAS INCURRED THE EXPENDITURE ON BEHALF OF THE VENDOR TO MAKE THE HOTEL BUILDING ENCUMBRANCE FREE. IF THE ASSESSE E IS UNABLE TO RECOVER THE AMOUNT FROM VENDOR, THE ASSESSEE CAN CLAIM THE SAID AMOUNT AS LOSS WHILE COMPUTING PROFITS AND GAINS OF BUSINESS OF PROFE SSION U/S 28 OF THE ACT. 8. THE HONBLE RAJASTHAN HIGH COURT IN THE CASE OF CIT VS. ANJANI KUMAR COMPANY LTD., (SUPRA) ALLOWED IRRECOVERABLE ADVANCE PAYMENT MADE BY ASSESSEE FOR ACQUIRING A CAPITAL ASSET WHICH DID NOT MATERIALIZE AS BUSINESS LOSS. IN THE SAID CASE ADVANCE WAS PAID FOR ACQUIRING AGRICULTURAL LAND TO SET UP A FACTORY. THE ACQUISITION OF LAN D DID NOT MATERIALIZE AND THE AMOUNT PAID AS ADVANCE WAS ALSO NOT RECOVERED BY THE ASSESSEE. THE HONBLE COURT HELD THAT IF ANY ASSET IS ACQUIRED AND IF IT IS BENEFIT OF ENDURING NATURE, THEN OF-COURSE ASSESSEE CANNOT GET THE DEDUCTION OF AMOUNT FOR ACQUISITION OF ASSET AS REVENUE EX PENDITURE. IN A CASE WHERE CAPITAL ASSET IS NOT REQUIRED AND ANY PAR T-PAYMENT IS MADE WHICH IS IRRECOVERABLE THAN THE SAID AMOUNT HAS TO BE ALLO WED AS BUSINESS LOSS. THE RELEVANT EXTRACT OF THE FINDINGS OF THE HONBLE HIGH COURT ARE AS UNDER : 5. THE ADMITTED FACTS ARE THAT THE ADVANCE WAS PAI D FOR ACQUIRING THE AGRICULTURAL LAND TO SET UP A FACTORY, BUT WHEN THE AGRICULTURAL LAND WAS NOT ACQUIRED, NO CAPITAL ASSET CAME INTO EXISTENCE, THEREFORE, THERE IS NO QUESTION OF ALLOWING DEPRECIATION ON SUCH ASSET. I F ANY ASSET IS REQUIRED 13 ITA NO.302/PN/2014 AND IF IT IS A BENEFIT OF ENDURING NATURE, THEN OF COURSE ASSESSEE CANNOT GET THE DEDUCTION OF AMOUNT FOR ACQUISITION OF LAND AS REVENUE EXPENDITURE. WHEN LAND WAS NOT ACQUIRED, NO CAPITAL ASSET HAS BE EN ACQUIRED, THEREFORE, THE PAYMENT OF RS.50,489/- IS TO BE ALLO WED AS BUSINESS LOSS. WE AGREE WITH THE VIEW TAKEN BY THE TRIBUNAL. NO I NTERFERENCE IS CALLED FOR. IN THE RESULT, WE ANSWER THE QUESTION IN AFFIRMATIV E I.E., IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. IN THE PRESENT CASE, THE AMOUNT RS.2,93,611/- PAID BY T HE ASSESSEE IN EXCESS OF AGREED CONSIDERATION TO DISCHARGE THE LIABILITY OF VENDOR OF CAPITAL ASSET HAS NOT BEEN RECEIVED BACK BY T HE ASSESSEE. OSTENSIBLY, THE SAID AMOUNT HAS BECOME IRRECOVERABLE, TH EREFORE, THE SAME IS ALLOWABLE AS BUSINESS LOSS UNDER THE PROVISIONS OF S ECTION 28 OF THE ACT. THE AMOUNT PAID BY ASSESSEE TO DISCHARGE THE LIABILITY OF VENDOR THAT HAS BEEN ADJUSTED AGAINST SALE CONSIDERATION PART AKES THE CHARACTER OF CAPITAL EXPENDITURE. 9. THUS IN VIEW OF THE FACTS OF THE CASE AND THE DECISIONS DISCUSSED ABOVE, WE ARE OF THE CONSIDERED OPINION THAT ALTHOUGH THE AMOUNT OF RS.2,93,611/- EXCESS PAID BY THE ASSESSEE CANNOT BE ALLOW ED TO WRITE OFF AS BAD DEBT HOWEVER, THE SAID AMOUNT CAN BE CONSIDERED AS BUSINESS LOSS U/S 28 OF THE ACT. ACCORDINGLY, WE ACCEPT THE ALTER NATIVE SUBMISSION OF THE LD. A.R. AND PARTLY ALLOW GROUND NO.1 RAISE D IN THE APPEAL. 10. THE SECOND GROUND IN APPEAL IS WITH RESPECT TO DISALLOW ANCE OF INTEREST ON LOAN RS.16,64,716/- AND PRE-PAYMENT CHARGES TO BANK RS.3,21,107/-. THE CONTENTION OF THE ASSESSEE IS THAT PAY MENT OF INTEREST AND PRE-PAYMENT CHARGES ARE REVENUE IN NATUR E AS THE HOTEL WAS 14 ITA NO.302/PN/2014 READY TO USE BEFORE ACCRUAL OF INTEREST AND PRE-PAYME NT CHARGES. THE LD. A.R. HAS DRAWN OUR ATTENTION TO THE BUILDING COMPLETION CERTIFICATE AT PAGE 34 OF THE PAPER TO SHOW THAT THE HOTEL BUILDING WAS COMPLETE IN EVERY RESPECT AND WAS READY TO USE DURING THE PERIOD RELEVANT TO THE ASSESSMENT YEAR UNDER APPEAL. THE LD. A.R. AT THE TIME O F MAKING SUBMISSIONS AND EVEN IN WRITTEN SUBMISSIONS HAS STATED TH AT THE COMPLETION CERTIFICATE IS DATED 25.07.2008. HOWEVER A CLOSE SCRUTINY OF BUILDING COMPLETION CERTIFICATE AT PAGE 34 OF THE PAPER BOOK SHOWS THAT THE SAME IS DT.23.08.2003. THE SAID DATE IS MENTIONED AT P AGE 2 OF THE CERTIFICATE. IN ALL CERTAINTY THE DATE IS INCORRECT. ON PAG E 1 OF THE CERTIFICATE, IT HAS BEEN STATED THAT THE BUILDING PLANS WERE APPROVED VIDE OFFICE LETTER NO/DB/1334/08 DT.25.07.2008. IF THE BUILDING PLA NS WERE APPROVED ON 25.07.2008 THEN CERTAINLY BUILDING COMPLETION C ERTIFICATE WOULD BE SUBSEQUENT TO THE SAID DATE. THE LD. A.R. COULD NOT PLACE ANY OTHER DOCUMENT TO SHOW THAT THE BUILDING WAS COMPLETE IN EVERY RESPECT AND WAS READY TO USE DURING THE PERIOD RELEVANT TO THE ASSESSMENT YEAR UNDER APPEAL. THE ONLY DOCUMENT I.E., BUILDING COMPLETION CE RTIFICATE ON WHICH THE LD. A.R. HAS PLACED HEAVY RELIANCE COULD NOT SUPP ORT THE CASE OF ASSESSEE. THE MATTER HAS TRAVELLED THREE STAGES. TH E ASSESSEE COULD NOT OBTAIN THE RECTIFIED OR THE CORRECT BUILDING COMPLETION CERTIFICATE EITHER AT THE TIME OF ASSESSMENT OR AT THE TIME OF FIRST APPEAL PROCEEDINGS. EVEN DURING THE SECOND APPEAL STAGE, THE A SSESSEE HAS FILED THE SAME DOCUMENT. THERE IS NO OTHER DOCUMENT ON RECORD TO SUBSTANTIATE THE CLAIM OF ASSESSEE. THUS, WE ARE OF CONS IDERED VIEW THAT THE BUILDING WAS NOT READY DURING THE PERIOD UNDER CONSID ERATION. UNDER SUCH CIRCUMSTANCES, THE INTEREST PAID AND PRE-PAY MENT CHARGES PAID BY THE ASSESSEE CANNOT BE ALLOWED AS REVENUE EXPE NDITURE. WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF LD. CIT(A) IN REJECTING T HE CLAIM OF 15 ITA NO.302/PN/2014 THE ASSESSEE AND TO TREAT THE EXPENDITURE AS REVENUE IN NATURE. ACCORDINGLY GROUND NO.2 RAISED IN THE APPEAL BY ASSESSEE IS DISMISSED . 11. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED IN THE AFORESAID TERMS. ORDER PRONOUNCED ON THURSDAY, THE 15 TH DAY OF DECEMBER, 2016. SD/- SD/- (R.K. PANDA) ( VIKAS AWASTHY) / ACCOUNTANT MEMBER # / JUDICIAL MEMBER / PUNE; ! DATED : 15 TH DECEMBER, 2016. YAMINI/RK ()*#+,!-!'+ / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. CIT(A) , AURANGABAD 4. 5. 6. CIT , AURANGABAD #$% &&'(, * '(, / DR, ITAT, B PUNE; %+, - / GUARD FILE. //TRUE COPY// (% / BY ORDER, ./0 &1 '2 / SR. PRIVATE SECRETARY * '( , / ITAT, PUNE