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

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 granted, the Tribunal held that payments made from current account for commercial expediency to recover fees cannot be disallowed, following previous coordinate bench decision. Second, for capital gains computation, the Tribunal determined holding period should be calculated from date of flat allotment by DDA rather than buyer's agreement date, following Bombay HC precedent in Vembu Vaidyanathan case, directing AO to accept long-term capital loss.

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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.

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