TaxTMI 
TaxTMI 
2026 (9) TMI 840
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....,450/- u/s. 36 (1) (iii) which Your Honour is requested to kindly order to delete the same and provide relief to the Appellant. 2. Appellant craves leave to add, alter, amend, delete and / or modify any or all the aforesaid grounds of appeal either at the time of hearing or at any time before the date of hearing. 3. Briefly stated, the assessee is a partnership firm engaged in the business of trading, import and consignment sale of tools, alloys, pipes, steel and scrap. For the year under consideration, the assessee filed its return of income on 22.08.2014 declaring a total income of Rs. 5,88,490/-. The case was selected for scrutiny and the assessment was ultimately completed under section 143(3) of the Act on 22.12.2016 after making a disallowance of interest expenditure of Rs. 23,05,452/- under section 36(1)(iii) of the Act. The Assessing Officer determined the total income at Rs. 28,93,940/-. 4. The controversy relates to the interest expenditure incurred in connection with the funds which, according to the Assessing Officer, were utilised for the acquisition of land situated at Cherlapally, Andhra Pradesh. The Assessing Officer recorded that during the financial....
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....pally as the place at which the goods were unloaded. The assessee also furnished an electricity bill relating to Plot No. 13 at Cherlapally. On the basis of these documents, the assessee claimed that the land had been put to use for the purposes of its business and, consequently, the interest expenditure could not be disallowed under section 36(1)(iii) of the Act. Without prejudice to its contention regarding the actual business use of the land, the assessee also submitted that the land had not been acquired out of borrowed funds and, therefore, no part of the interest expenditure was liable to be disallowed. 9. The Assessing Officer did not accept the explanation of the assessee. He referred to the note furnished by the assessee during the assessment proceedings for the assessment year 2012-13, wherein the assessee had stated that the land had been purchased for the construction of a godown and that it intended to shift its major operations from Balanagar to the premises at Cherlapally. In the said note, the assessee had also stated that the construction activity had commenced in the subsequent years and was still in progress. 10. The Assessing Officer observed that the asse....
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....,05,452/-, consisting of interest of Rs. 15,12,841/- paid to HDFC Bank and interest of Rs. 7,92,611/- attributable to the overdraft facility originally obtained from ING Vysya Bank and subsequently shifted to ICICI Bank. The assessee submitted that the disallowance proceeded on the erroneous premise that interest-bearing bank funds had been utilised for acquiring the land and that the land had not been put to business use during the relevant previous year. 13. The assessee submitted that Plot No. 13, admeasuring 3,741.83 square yards, situated in the industrial area of Cherlapally, Hyderabad, had been purchased on 02.07.2011 for storing its inventory. During the financial year 2013-14, the land was used for storing steel rods, steel pipes, steel scrap, tools and other trading material. Considering the nature, size and weight of such goods, an open plot with basic security arrangements was sufficient for their storage and no superstructure was required for such use. It was further submitted that the plot was situated in the heart of an industrial belt and was accessible by roads on three sides, making it suitable for loading, unloading and other logistical activities. The assesse....
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....re furnished to the bank. It was, therefore, contended that it was neither possible nor commercially prudent to utilise the working-capital facility for acquiring a capital asset of substantial value, thereby exhausting the sanctioned overdraft limit and depriving the business of liquidity. 17. As regards the HDFC Bank loan, the assessee submitted that the loan had been obtained for its business and working-capital requirements and was secured against the personal properties of its partners. According to the assessee, the fact that the loan proceeds had been credited to the overdraft account maintained with ING Vysya Bank did not establish that the loan had been utilised for acquiring the land. It was argued that if the loan had been intended for acquiring the land, the assessee could have offered the land itself as security instead of the personal properties of its partners. The assessee contended that where own funds and borrowed funds formed part of a common pool and the available interest-free funds were sufficient to cover the investment, the investment should be presumed to have been made from the interest-free funds. In support of this proposition, the assessee placed rel....
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....efore the lower authorities. He submitted that the issue under consideration is recurring in nature and identical additions were made by the Assessing Officer for the assessment years 2012-13, 2013-14, 2014-15 and 2015-16. The common issue in all these years concerns the disallowance of interest expenditure under section 36(1)(iii) of the Act on the allegation that interest-bearing borrowed funds were utilised for purchasing land which had not been put to use for the purposes of the assessee's business. 22. The learned AR submitted that the addition was initially made in the assessment year 2012-13, which constitutes the foundational year of the dispute, and the same reasoning was thereafter consistently followed by the Assessing Officer in the succeeding assessment years. It was stated that the appeals for the assessment years 2012-13 and 2013-14 are pending before the learned CIT(A), whereas the present appeal relates to the assessment year 2014-15. 23. The learned AR submitted that the assessee had furnished all the relevant supporting documents before the learned CIT(A) in each of the four assessment years and that the said documents had also been compiled in the paper bo....
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.... for the acquisition of the land and the alleged non-use of the land for business purposes. In support of the aforesaid contentions, the learned AR placed reliance upon the order of the Co-ordinate Bench in the assessee's own case for the assessment year 2015-16 in Komal Enterprises v. Income Tax Officer-41(3)(1), ITA No. 753/Mum/2026. He submitted that, on identical facts and in relation to the same land, the Tribunal had deleted the disallowance made under section 36(1)(iii) of the Act. 27. The learned AR accordingly submitted that the issue involved in the present appeal is squarely covered by the decision of the Coordinate Bench in the assessee's own case concerning the same land and an identical disallowance in the immediately succeeding assessment year. He, therefore, prayed that the disallowance of interest expenditure sustained by the learned CIT(A) be deleted. 28. Per contra, the learned Departmental Representative relied upon the assessment order and supported the disallowance made by the Assessing Officer. He specifically invited our attention to paragraph 5.6(ii) of the assessment order and submitted that the schedule of fixed assets showed that construction of th....
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.... interest paid in respect of capital borrowed for the purposes of the business or profession is allowable as a deduction, subject to the proviso concerning interest for the period up to the date on which the acquired asset is first put to use. Thus, the material questions are whether the borrowed capital was utilised for acquiring the asset and, if so, whether the asset had been put to use for the purposes of the assessee's business during the relevant previous year. 33. The Assessing Officer disallowed the interest on two grounds. First, he relied upon the finding recorded in the assessment order for the assessment year 2012-13 that the HDFC Bank loan and a part of the overdraft facility were utilised for purchasing the Cherlapally land. Secondly, he observed from the fixed asset schedule that construction of the godown was in progress and was shown as capital work-in-progress. On this basis, he concluded that the land had not been put to use and that the interest was required to be capitalised until completion of the godown. 34. The material placed on record, however, indicates that the assessee's case was not that the godown under construction had been completed and put to....
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....d to show that the goods were not delivered to or stored at the Cherlapally premises. The material produced by the assessee could not, therefore, have been rejected merely by describing it as selective or insufficient, without pointing out any specific defect or contradiction therein. 38. We also find that the assessee had disclosed interest-free loan funds of Rs. 1,15,16,180/- and capital of Rs. 85,96,380/-, aggregating to Rs. 2,01,12,560/-, which was equivalent to the stated cost of the land. The learned CIT(A) rejected this contention principally because all the funds were routed through a common overdraft account and no further fund-flow statement was furnished. However, where sufficient interest-free funds and borrowed funds are available in a common pool, the presumption recognised by the Hon'ble jurisdictional High Court in CIT v. Reliance Utilities and Power Ltd., 313 ITR 340 (Bom), operates in favour of the assessee. The relevant extract reads: "If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest free funds a....