2023 (2) TMI 1071 - AT - Income Tax

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 ... Deductibility of interest under section 36(1)(iii) - Capitalization of interest as work-in-progress - Interest forming part of cost of acquisition for short-term capital gains under section 48 - Utilisation of borrowed funds for business purpose - Precedential weight of coordinate bench and High Court decisionsDeductibility of interest under section 36(1)(iii) - Capitalization of interest as work-in-progress - Utilisation of borrowed funds for business purpose - Claim for interest on funds borrowed for purchase of land at Pali is allowable under section 36(1)(iii) and need not be capitalized as work-in-progress. - HELD THAT: - The Assessing Officer disallowed interest on the ground that funds borrowed for purchase of land should be capitalized as WIP. The Tribunal (for A.Y. 2013-14) had earlier allowed interest after quashing the order passed under section 263, finding that the assessee's primary business was real estate and that acquisition of land formed part of business activity; ledger entries and agreements evidenced borrowing and use for business. The Bench followed binding and persuasive authorities, including the Bombay High Court in Lokhandwala Constructions (applying Calico Dyeing & Printing Works), which held that for allowance under section 36(1)(iii) it is sufficient that the borrowed capital was used for business purposes in the relevant year and that the character of the asset (capital or revenue) is irrelevant. Applying those conclusions to the facts (loan taken for land purchase in furtherance of the assessee's real estate business and prior tribunal findings), the claim for interest is allowable and the CIT(A)'s deletion of the disallowance is sustained. [Paras 13]Disallowance of interest of Rs.5,52,50,000/- for purchase of land is deleted and the interest claim is allowed.Interest forming part of cost of acquisition for short-term capital gains under section 48 - Precedential weight of coordinate bench and High Court decisions - Interest on borrowings for acquisition of equity shares is to be capitalised as part of cost of acquisition and allowed against short-term capital gains under section 48. - HELD THAT: - The A.O. disallowed interest on the ground that subsequent interest could not be treated as part of cost of acquisition and thus was not deductible under provisions governing computation of capital gains. The CIT(A) relied on tribunal and High Court decisions holding that interest paid for acquisition of shares partakes the character of cost of acquisition and can be capitalised. The Bench accepted those precedents (including the Madras High Court in Trishul Investments and relevant tribunal rulings) and found that where borrowed money was used for acquisition of shares, the interest payable thereon should be added to the cost of acquisition and allowed against STCG on transfer. Applying that principle to the facts, the disallowance could not be sustained. [Paras 17]Disallowance of interest of Rs.2,15,30,797/- incurred for acquisition of shares (assessed as STCG) is deleted and the interest claim is allowed.Final Conclusion: Revenue appeals for A.Y. 2014-15 and A.Y. 2015-16 are dismissed; the CIT(A)'s deletions of the interest disallowances (interest on funds for land purchase and interest on borrowings for purchase of shares) are upheld. 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.