Business Deduction for Interest: proportionate interest on advances for development rights held deductible as ordinary business expenditure.

Whether interest on funds borrowed and used as advances to acquire development rights by a real estate developer is deductible as business expenditure under Section 36(1)(iii) was decided by applying the proviso barring deduction only where money is borrowed for acquiring a capital asset until put to use; the tribunal applied a Coordinate Bench precedent holding such advances form part of the development business and that proportionate interest is deductible as an ordinary business expenditure, displacing an assessment-stage disallowance under Section 24(b), and allowing the assessee's appeal.

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Issues: Whether proportionate interest on funds borrowed and routed as advances for acquisition of development rights by a real estate developer is allowable as a business deduction under section 36(1)(iii) of the Income-tax Act, 1961, notwithstanding assessment-stage disallowance under section 24(b) of the Income-tax Act, 1961.

Analysis: The matter involves application of Section 24(b) and Section 36(1)(iii) of the Income-tax Act, 1961 to funds borrowed and used to make advances for acquiring development rights by an assessee engaged in real estate development. The statutory text distinguishes allowability of interest for computing income from house property (Section 24(b)) and allowability of interest as business expenditure (Section 36(1)(iii)) subject to the proviso disallowing interest on money borrowed for acquiring a capital asset until the asset is put to use. A Coordinate Bench decision in the assessee's own case for an earlier assessment year addressing identical facts held that acquisition of development rights and advances made in the course of property development business amount to activities forming part of the business, and that interest on funds so borrowed is deductible under Section 36(1)(iii). The present appeal involves identical question of law and substantially similar facts; the revenue did not contest coverage by the earlier decision.

Conclusion: The proportionate interest on borrowed funds routed as advances for acquisition of development rights is allowable as a deduction under Section 36(1)(iii) of the Income-tax Act, 1961; the assessment-stage disallowance under Section 24(b) is set aside and the appeal is allowed in favour of the assessee.

Final Conclusion: Following the Coordinate Bench decision on identical facts, the assessee's appeal is allowed and the disallowance of proportionate interest is deleted, resulting in a decision favourable to the assessee.

Ratio Decidendi: Where a taxpayer engaged in real estate development borrows funds and applies them as advances for acquisition of development rights in the ordinary course of the development business, interest on such borrowed funds is deductible as an ordinary business expenditure under Section 36(1)(iii) of the Income-tax Act, 1961, and is not to be disallowed under Section 24(b) when the funds were not used for acquisition or construction of the particular house property in question.

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