Business set-up and borrowed capital interest: land development costs remained deductible despite no full commercial commencement.

Interest on borrowed capital used to acquire and develop land for a real estate venture was deductible once the business had been set up, even though full commercial sales had not yet commenced. The distinction between setting up of business and actual commencement was decisive: where the assessee had purchased land, pursued conversion, paid approval-related charges and obtained site plan approval, the business was regarded as already set up. The accounting description of the land as an investment did not control its legal character, which had to be determined from the surrounding facts and business conduct. Interest was therefore allowable as business expenditure and the disallowance was deleted.

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Issues: Whether interest on borrowed capital used for acquisition and development of land for a real estate venture was allowable as business expenditure when the business had been set up though its full commercial commencement had not yet occurred.

Analysis: The assessee had purchased land, initiated conversion proceedings, deposited conversion and approval charges, and obtained site plan approval, all of which showed that the real estate business had already been set up during the relevant year. The distinction between setting up and commencement of business was material, and expenditure incurred after setting up could not be disallowed merely because commercial sales had not yet begun. The description of the land as investment in the accounts was not ative of its true character, because the real nature of the transaction had to be gathered from the surrounding facts and business conduct.

Conclusion: The interest on borrowed capital was allowable under section 36(1)(iii) and the disallowance was deleted in favour of the assessee.

Ratio Decidendi: Once a business is set up, interest on capital borrowed for business purposes is deductible under section 36(1)(iii), and the true character of the transaction depends on the surrounding facts rather than its accounting treatment.

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