Tribunal Upholds Disallowance of Expenses, Capitalizes Expenditure

The Tribunal upheld the disallowance of interest and administrative expenses, as the business was not set up during the relevant assessment year. It confirmed the plot as a capital asset and the applicability of the proviso to section 36(1)(iii). The Tribunal directed the disallowed expenditure to be capitalized, partially allowing the appeal.

---

---

Issues Involved:
1. Disallowance of interest expenses.
2. Disallowance of administrative and other expenses.
3. Right to transfer or sell the plot or building.
4. Applicability of proviso to section 36(1)(iii).

Detailed Analysis:

1. Disallowance of Interest Expenses:
The assessee, a private limited company and a wholly owned subsidiary of DLF Ltd., acquired a plot of land from the Delhi Development Authority (DDA) through a perpetual lease deed and took a loan from DLF Ltd. to finance this acquisition. The interest paid on this loan, amounting to Rs. 8,35,88,700/-, was claimed as an expenditure under section 36(1)(iii) of the Income Tax Act. The Assessing Officer disallowed this interest expenditure, stating that it was incurred prior to the commencement of the business and thus was not allowable under the proviso to section 36(1)(iii). The Commissioner of Income Tax (Appeals) upheld this view, noting that merely acquiring land on lease does not constitute the commencement of business. The Tribunal agreed with this finding, emphasizing that the business must be ready to start functioning, and since the assessee had not started constructing the hotel or obtained necessary sanctions, the business was not set up during the relevant assessment year.

2. Disallowance of Administrative and Other Expenses:
The assessee claimed administrative and other expenses, including fees and taxes, bank charges, audit fees, and preliminary expenses under section 35D. The Assessing Officer disallowed these expenses, treating them as prior period expenses since the business had not been set up. The Commissioner of Income Tax (Appeals) upheld this disallowance, and the Tribunal agreed, stating that these expenses were incurred before the business was set up and thus were not allowable.

3. Right to Transfer or Sell the Plot or Building:
The Commissioner of Income Tax (Appeals) observed that the assessee was restricted from transferring the plot or the building constructed thereupon without prior approval from the lessor (DDA). This restriction, along with the object clause of the Memorandum of Association, indicated that the plot was a capital asset for the assessee, despite being shown as stock in the balance sheet. The Tribunal upheld this view, stating that the substance of the transaction is more important than its treatment in the books of account.

4. Applicability of Proviso to Section 36(1)(iii):
The assessee argued that the proviso to section 36(1)(iii), which disallows interest paid for acquiring an asset for extension of existing business until it is brought to use, should not apply as there was no extension of existing business. The Tribunal rejected this argument, stating that the proviso applies to both new and existing businesses. The Tribunal concluded that the interest expenditure was not allowable as the business was not set up during the relevant year. However, the Tribunal directed that the disallowed expenditure be allowed to be capitalized.

Conclusion:
The Tribunal upheld the disallowance of interest and administrative expenses, agreeing with the lower authorities that the business had not been set up during the relevant assessment year. The Tribunal also confirmed that the plot was a capital asset and that the proviso to section 36(1)(iii) applied. However, the Tribunal allowed the disallowed expenditure to be capitalized, partially allowing the appeal.

---