Bombay H.C : the CIT was wrong in directing the AO to disallow the said interest and treat the same as capital expenditure as a part of work-in-progress, thereby quashing the order under s. 263 of the Act of the CIT

High Court Of Bombay

CIT vs. Lokhandwala Construction Inds. Ltd.

Sections 36(1)(iii)

Asst. Year 1987-88

S.H. Kapadia & J.P. Devadhar, JJ.

IT Appeal No. 101 of 2001

15th January, 2003

Counsel Appeared

R.V. Desai with V.H. Kantharia i/b K.B. Rao, for the Appellant : P.J. Pardiwala with Ms. M. Sarkar i/b M. Munim & Co., for the Respondent

JUDGMENT

S.H. KAPADIA, J. :

This appeal is filed by the Department against the order of the Tribunal under s. 260A of the IT Act in respect of asst. yr. 1987-88.

Facts

2. The assessee-company was engaged in the business of construction of buildings. As stated above, we are concerned with asst. yr. 1987-88. The assessee followed mercantile system of accounting. The assessee followed modified project completion method for computing its profits. The assessee had secured development rights from Bombay Gaw Rakshak Mandal under agreement dt. 13th Dec., 1984, in respect of a plot of land situate at Kandivali admeasuring 7,88,000 sq. mts. for total consideration of Rs. 11 crores or Rs. 50 per sq. ft of FSI that may be sanctioned by BMC. A sum of Rs. 1.10 crores was paid by the assessee to the transferor. Till the end of the accounting period relevant to the asst. yr. 1987-88, the conveyance was not executed and, therefore, survey fees, professional fees, etc. incurred by the assessee, amounting to Rs. 1.29 crores was shown as work-in-progress upto asst. yr. 1986-87. During the assessment year in question, no activities were carried out and, therefore, work-in- progress came to be carried forward. The assessee had taken loans amounting to Rs. 1.15 crores, out of which an amount of Rs. 1.10 crores came to be utilised during the assessment year in question for payment to the Mandal. The assessee claimed deduction of Rs. 14,09,942 paid as interest on moneys borrowed under s. 36(1)(iii) of the IT Act. By assessment order dated 30th Sept., 1986, the deduction was allowed. However, the CIT, exercising his authority under s. 263 of the IT Act, came to the conclusion that the loan of Rs. 1.15 crores was utilised by the assessee for acquiring an asset and, therefore, the claim for deduction under s. 36(1)(iii) could not have been allowed; that it was not a revenue expenditure because it was a loan raised for acquiring a capital asset and, therefore, the interest incurred cannot (sic) form part of capital expenditure. Accordingly, the CIT cancelled the assessment order disallowing the interest of Rs. 14.09 lakhs. Being aggrieved, the assessee preferred appeal to the Tribunal, which, following its earlier decision, held that the interest paid by the assessee cannot be treated as capital expenditure. Accordingly, the Tribunal restored the assessment order dt. 29th March, 1990. Being aggrieved, the Department has come by way of appeal to this Court under s. 260A of the IT Act.

3. On the above facts, the following question of law arises for our determination: “Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the interest claimed as revenue expenditure amounting to Rs. 14,09,942 cannot be treated as capital expenditure and added to work-in-progress in spite of the fact that other expenses on prothe CIT was wrong in directing the AO to disallow the said interest and treat the same as capital expenditure as a part of work-in-progress, thereby quashing the order under s. 263 of the Act of the CIT?ject were being capitalised by the assesee itself and holding that “

Findings

From the facts found by the Tribunal on record, it is clear that assessee undertook two-fold activities. It bought and sold flats. Secondly, the assessee was also engaged in the business of construction of buildings. The profits from both the activities were assessed under s. 28 of the IT Act. In this case, we are concerned with the second activity (hereinafter referred to, for the sake of brevity, as “Kandivali project”). According to the CIT, loan was raised for securing land/development rights from the Mandal. That, the loan was utilised for purchasing the development rights, which, according to the CIT, constituted a capital asset. According to the CIT, since the loan was raised for securing capital asset, the interest incurred thereon constituted part of capital expenditure. This finding of the CIT was erroneous. In the case of India Cements Ltd. vs. CIT (1966) 60 ITR 52 (SC), it was held by the Supreme Court that in cases where the act of borrowing was incidental to carrying on of business, the loan obtained was not an asset. That, for the purposes of deciding the claim of deduction under s. 10(2)(iii) of the IT Act, 1922 [s. 36(1)(iii) of the present IT Act], it was irrelevant to consider the purpose for which the loan was obtained. In the present case, the assessee was a builder. In the present case, the assessee had undertaken the project of construction of flats under the Kandivali project. Therefore, the loan was for obtaining stock-in-trade. That, the Kandivali project constituted the stock-in-trade of the assessee. That, the project did not constitute a fixed asset of the assessee. In this case, we are concerned with deduction under s. 36(1)(iii). Since the assessee had received loan for obtaining stock-intrade (Kandivali project), the assessee was entitled to deduction under s. 36(1)(iii) of the Act. That, while adjudicating the claim for deduction under s. 36(1)(iii) of the Act, the nature of the expense—whether the expense was on capital account or revenue account—was irrelevant as the section itself says that interest paid by the assessee on the capital borrowed by the assessee was an item of deduction. That, the utilization of the capital was irrelevant for the purposes of adjudicating the claim for deduction under s. 36(1)(iii) of the Act [see judgment of the Bombay High Court in the case of Calico Dyeing & Printing Works vs. CIT (1958) 34 ITR 265 (Bom)]. In that judgment, it has been laid down that where an assessee claims deduction of interest paid on capital borrowed, all that the assessee had to show was that the capital which was borrowed was used for business purpose in the relevant year of account and it did not matter whether the capital was borrowed in order to acquire a revenue asset or a capital asset. The said judgment of the Bombay High Court applies to the facts of this case.

For the reasons given hereinabove, we answer the above question in the affirmative i.e., in favour of the assessee and against the Department. The appeal is accordingly disposed of. No order as to costs.

[Citation : 260 ITR 579]

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