2024 (4) TMI 455 - AT - Income Tax

Interest-free loans for commercial expediency cannot be disallowed under section 36(1)(iii); capital gains holding period starts from flat allotment date

Design Forum International Versus JCIT, Range-61, New Delhi

ITAT DELHI ruled in favor of the assessee on two issues. First, regarding disallowance of interest under section 36(1)(iii) for interest-free loans ... Disallowance of interest u/s 36(1)(iii) - Interest free loans granted - AO observed that on one hand, assessee is paying interest on its loans borrowed and on the other hand, it had given interest free loans to some parties - HELD THAT:- This issue is decided in favour of the assessee by the co-ordinate bench of this Tribunal in assessee’s own case [2019 (11) TMI 581 - ITAT DELHI] Payment was made from the current account held with the bank, are duly reflected in the ledger accounts. The details of party wise interest paid also reveals that no interest was paid to such bank. The said bank account is reflecting under the head current assets in the balance sheet. It is the case of the assessee that the assessee had to apply for the flat as a measure of commercial expediency in order to recover the fees amount. As mutually agreed between the assessee and the respective parties that the payment for fees will be made subject to the condition that the assessee applies for allotment of flat. Thus, assessee had to apply for allotment of flat as a measure of commercial expediency. The ledger account of such parties where in the receipt of money is reflecting was also placed on record. Further, a summary sheet reflecting the date of receipt of amount and the date of payment for flat is also submitted by the assessee. Assessee had applied the fees amount towards the purchase of flat as per the terms agreed upon. It can further emerges from the records that the assessee had duly offered such receipt amount to its income on cash basis in accordance with its method of accounting which is also evident from the ledger accounts of such parties. CIT(A) was not right in sustaining the addition in respect of interest incurred on account of amount standing as advance in respect of interest incurred on account of amount standing as advance in respect of such parties. Decided in favour of assessee. Capital gain computation - determination of holding period of asset - Date of reckoning of holding of capital asset - whether the date of allotment of flat or the date of buyer’s agreement, would have to be considered for the purpose of considering the holding period of asset by the assessee? - HELD THAT:- This issue is no longer res integra in view of the decision of Vembu Vaidyanathan [2019 (1) TMI 1361 - BOMBAY HIGH COURT] wherein it was held that for computing capital gain tax, date of allotment of flat by DDA would be the date on which purchaser of flat can be stated to have acquired property. We allow the Ground raised by the assessee and direct the ld. AO to accept the long term capital loss reported by the assessee. Issues Involved:The appeal involves challenges to the disallowance of interest u/s 36(1)(iii) of the Income-tax Act, 1961 and the determination of the holding period of a capital asset for the purpose of computing capital gains.Issue 1: Disallowance of Interest u/s 36(1)(iii):The assessee firm, engaged in providing architectural services, challenged the disallowance of interest payment on proportion basis u/s 36(1)(iii) of the Act. The Assessing Officer (AO) disallowed interest payment of Rs 19,24,311/-, as the assessee had given interest-free loans to some parties while paying interest on borrowed loans. The Tribunal found in favor of the assessee, citing commercial expediency and previous tribunal decisions in the assessee's favor. The Tribunal noted that the funds advanced were towards the purchase of a flat as a commercial expediency to recover fees, and the disallowance was unjustified both on law and facts.Issue 2: Determination of Holding Period for Capital Asset:The dispute centered on whether the holding period of a capital asset should be calculated from the date of allotment of a flat or the date of the buyer's agreement. The AO considered the period from the buyer's agreement date, resulting in short-term capital gains for the assessee. However, the Tribunal referred to a Bombay High Court decision, holding that the date of allotment of the flat should be the relevant date for computing capital gains tax. The Tribunal allowed the assessee's appeal, directing the AO to accept the long-term capital loss reported by the assessee.In conclusion, the Tribunal allowed the appeal of the assessee, setting aside the disallowance of interest u/s 36(1)(iii) and determining the holding period of the capital asset from the date of allotment of the flat for computing capital gains tax.