Interest on Borrowed Funds for Land Purchase Deductible for Business | Capitalization of Share Acquisition Interest Allowed

The tribunal dismissed both grounds raised by the Revenue. It held that the interest on borrowed funds for purchasing land was deductible under Section 36(1)(iii) as it was for business purposes. Additionally, it determined that interest paid on borrowings for acquiring shares could be capitalized as part of the cost of acquisition, thus deductible against Short Term Capital Gains. Both appeals filed by the Revenue for the assessment years 2014-15 and 2015-16 were dismissed, affirming the Commissioner of Income Tax (Appeals)'s order.

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Issues Involved:
1. Disallowance of interest claimed by the assessee under Section 36(1)(iii) of the Income Tax Act for the purchase of land.
2. Deletion of interest paid on borrowings for investments in equity shares assessed as Short Term Capital Gain (STCG).

Detailed Analysis:

1. Disallowance of Interest Claimed by the Assessee under Section 36(1)(iii):

The Revenue challenged the order of the Commissioner of Income Tax (Appeals) [CIT(A)], which deleted the disallowance of Rs. 5,52,50,000/- towards interest under Section 36(1)(iii) of the Income Tax Act. The interest was claimed by the assessee for funds borrowed to purchase land shown as stock-in-trade. The Assessing Officer (A.O.) had disallowed this interest, arguing it should be capitalized as 'work-in-progress' (WIP), based on the proviso to Section 36(1)(iii) and a precedent set by the case of M/s. Agritech Pvt. Ltd. vs. DCIT.

The CIT(A) countered this by referencing the tribunal's decision in the assessee's favor for the previous assessment year 2013-14, where it was established that the assessee was engaged in real estate and infrastructure development, making the purchase of land a part of its business activity. The tribunal had allowed the interest claim, noting that the borrowed capital was used for business purposes, and this was supported by the Hon'ble Jurisdictional High Court's decision in CIT vs. Lokhandwala Constructions Inds. Ltd., which held that the interest on borrowed money for business purposes is deductible regardless of whether the loan was for acquiring a revenue or capital asset.

2. Deletion of Interest Paid on Borrowings for Investments in Equity Shares Assessed as STCG:

The Revenue also contested the deletion of Rs. 2,15,30,797/- in interest paid on borrowings for investments in equity shares, which were assessed as STCG. The A.O. had disallowed this claim, stating that interest expenses incurred after the purchase of shares do not relate to the transfer of the asset and thus cannot be included in the cost of acquisition under Section 48 of the Act.

The CIT(A) disagreed, allowing the capitalization of the interest as part of the cost of acquisition, referencing decisions from the co-ordinate bench in DCIT vs. Shri Fritz D. Silva and the Hon'ble Delhi High Court in CIT vs. Mithilesh Kumari. The tribunal upheld this view, citing the Hon'ble Madras High Court in CIT vs. Trishul Investments Ltd., which stated that interest paid for acquiring shares is part of the cost of acquisition and should be capitalized.

Conclusion:

The tribunal dismissed both grounds raised by the Revenue. For the first issue, it was determined that the interest on borrowed funds for purchasing land was deductible under Section 36(1)(iii) as it was for business purposes. For the second issue, it was decided that interest paid on borrowings for acquiring shares could be capitalized as part of the cost of acquisition, thus deductible against STCG.

Final Judgment:

Both appeals filed by the Revenue for the assessment years 2014-15 and 2015-16 were dismissed, affirming the CIT(A)'s order. The tribunal found no infirmity in the CIT(A)'s decisions on both issues.

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