By AJAY R. SINGH
Advocate
The assessee filed its return of
income for the subject A.Y. declaring an income of Rs.15,280/. Subsequently
revised return of income was filed by the assessee declaring a loss of Rs.2.30
lakh. In the revised return, the appellant had claimed amount of Rs.9.52 lakh
as interest expenditure allowable u/s. 36(1)(iii) of the Act. During the course
of assessment proceedings on being so called upon by the A.O, the assessee
explained that so far as interest is concerned, it capitalises interest to the
extent it is expended, till the commencement of the project, therefore the
interest is taken as revenue expenditure. However, the A.O still entertained
doubts about allowing as deduction Rs.6.98 lakh being the interest expenditure
claimed on account of its construction project ‘Lucky Shoppe’. The assessee
pointed out that the above amount of Rs.6.98 lakh was debited to profit & loss
account but was wrongly capitalised in the original return of income, as during
the previous year relevant to the subject assessment year the work in the Lucky
Shoppe project had commenced. This was not accepted on the ground that mere
placing of orders would not amount to commencing of the project. Thus, not
allowable as revenue expenditure. The alternate submission of the appellant
that open plot of land in respect of ‘Lucky Shoppe’ forms stock in trade.
Therefore, the interest paid on the loan taken to purchase open plot of land
for Lucky Shoppe project is allowable as revenue expenditure being its
stock-in-trade. This alternative submission was negatived by the A.O on the
ground that purchase of plot of land is capital in nature. Hence, interest must
also be capitalised. Thus, the A.O disallowed the deduction of Rs.6.98 lakh
being interest paid on plot of land of Lucky Shoppe project.
The CIT(A) found that interest paid
on land was being allowed as revenue expenditure in the earlier Assessment
Years and it was only in the subject Assessment Year that the A.O for the first
time treated the same as work in progress and capitalised the same. The CIT(A)
held that the interest paid on the loan taken for the purpose of its
stock-in-trade i.e., plot of land for the ‘Lucky Shoppe’ project has to be
allowed as expenditure to determine its income. In support reliance was placed
on the decision of this Court in S.F.Engineer & Ors. vs. CIT 57 ITR 455 (Bom). Consequently, the
CIT(A) deleted the disallowance made by the A.O in respect of interest paid on
‘Lucky Shoppe’ project.
The Revenue filed an appeal to the
Tribunal. The Tribunal held that the assessee has not shown any work had
commenced on ‘Lucky Shoppe’ project plot of land during the previous year
relevant to the subject Assessment Year. Thus, it concluded that the A.O was
justified in coming to conclusion that interest expenditure in respect of Lucky
Shoppe project (plot of land) could not be allowed as revenue expenditure.
Thus, the Tribunal allowed the Revenue’s appeal and disallowed deduction of
interest in respect of ‘Lucky Shoppe’ project.
Being
aggrieved with the order of the ITAT, the assessee filed an appeal to the High
Court. The Court found that the plot of land which was purchased out of
borrowed funds on which interest was paid, forms part of its stock-in-trade.
Therefore, interest paid on purchase of stock-in-trade is to be allowed as
revenue expenditure. This was negatived by the A.O on the ground that purchase
of plot is necessarily capital in nature and, therefore, interest thereon is
also to be capitalised. However, the fact is that the loan on which interest of
Rs.6.98 lakh is paid was taken for purchase of plot of land in the course of
its business. Therefore, the interest has been paid to acquire stock-in-trade.
In the above circumstances as held by the CIT(A), the same has to be allowed as
revenue expenditure. In view of section 36(1)(iii) of the Act as existing prior
to amendment with effect from 1.4.2004 all interest paid in respect of capital
borrowed for the purpose of business or profession has to be allowed as
deduction while computing income under had income from business. Prior to
amendment made on 1.4.2004, there was no distinction based on whether the
borrowing is for purchase of capital asset or otherwise, interest was allowable
as deduction in determining the taxable income. It was only after introduction
of proviso to section 36(1)(iii) of the Act w.e.f. 1.4.2004 that the purpose of
borrowing i.e. acquisition of assets then interest paid would be capitalised.
The Supreme Court in Dy. CIT vs. Core Healthcare Ltd. 218 ITR 194 has
held that prior to 1.4.2004 interest paid on borrowings for purchase of asset
i.e. machinery is to be allowed as a deduction u/s. 36(1)(iii) of the Act. This
even if the machinery is not received in the year of booking. It held that the
restriction introduced in the proviso to section 36(1)(iii) of the Act was
effective only from A.Y 2004-05 and not for earlier Assessment Years. In this
case, the A.Y 1988-89 i.e., prior to amendment by addition of proviso to
section 36(1)(iii) of the Act. Therefore, the interest paid on the borrowings
to purchase the ‘Lucky Shoppe’ project plot of land is allowable as a deduction
u/s. 36(1)(iii) of the Act. This is so as it was incurred for the purposes of
its business. Accordingly, Assessee appeal was allowed.
