47. Jayantilal Investments vs. ACIT; [2018] 96 taxmann.com 38 (Bom): Date of order: 4th July, 2018 A. Y.: 1988-89 Section 36(1)(iii) – Business expenditure – Interest on borrowed capital – Where assessee, engaged in construction business, purchased plot of land out of borrowed funds for implementation of a project, since plot of land was purchased in course of business of assessee, same formed part of its stock-in-trade, and, therefore, interest paid on borrowings for purchase of said land was to be allowed as revenue expenditure

The assessee partnership firm was
engaged in construction activity. The assessee had taken a loan to purchase
open plot of land for its project named, ‘LS’. The assessee had claimed an
amount paid as interest on said loan as revenue expenditure. The Assessing
Officer held that purchase of plot of land was capital in nature. Hence,
interest must also be capitalised. Thus, he disallowed the deduction on amount
being interest paid on loan for acquisition of land.

On appeal, the Commissioner
(Appeals) found that interest paid on borrowings for purchase of land was
allowed as revenue expenditure in the earlier assessment years and it was only
in the subject assessment year that the Assessing Officer for the first time
treated the same as work-in-progress and capitalised the same. He held that the
interest paid on the loan taken for the purpose of its stock-in-trade, i.e.,
plot of land for the ‘LS’ project had to be allowed as expenditure to determine
its income. Consequently, he deleted the disallowance made by the Assessing
Officer. The Tribunal held that crucial question to be decided was whether the
assessee could be said to have commenced work on project ‘LS’ during the
previous year relevant to subject assessment year. On facts it held that the
assessee had not shown any work had commenced on LS project plot of land during
the previous year relevant to the subject assessment year. Thus, the Tribunal
concluded that the Assessing Officer was justified in coming to conclusion that
interest expenditure in respect to ‘LS’ project (plot of land) could not be
allowed as revenue expenditure.

On appeal by the assessee, the
Bombay High Court reversed the decision of the Tribunal and held as under:

“i)  In
view of section 36(1)(iii) 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 head ‘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)
with effect from 1-4-2004 that the purpose of borrowing, i.e., acquisition of
assets then interest paid would be capitalised. In this case, concern is with
the A. Y. 1988-89, i.e., prior to amendment by addition of proviso to section
36(1)(iii). Therefore, the interest paid on the borrowings to purchase the plot
of land for LS project is allowable as a deduction u/s. 36(1)(iii) as it was
incurred for the purposes of its business.

ii)   The
revenue’s submission is that the deduction u/s. 36(1)(iii) will not be
available as no income has been earned in respect of LS project. This cannot be
appreciated. It is an undisputed position that the appellant-assessee has filed
return of income declaring income under the head income from business. The
assessee has various projects executing construction projects and, therefore,
interest expenditure is to be allowed as deduction to arrive at profits and
gains of business or profession of builders carried out by the assessee. It is
not a case where the only project of the assessee was the LS project.
Admittedly, in this case the business of the assessee as developer had already
commenced and income offered to tax.

iii)  In the above view, substantial question of law is answered in
negative, i.e., in favour of the appellant-assessee and against the
respondent-revenue.”