Bombay High Court
Commissioner Of Income Tax vs Lokhandwala Construction Inds. Ltd. on 15 January, 2003
Equivalent citations: (2003)180CTR(BOM)136, [2003]260ITR579(BOM), 2003(1)MHLJ979
Author: S.H. Kapadia
Bench: S.H. Kapadia, J.P. Devadhar
JUDGMENT S.H. Kapadia, J.
1. This Appeal is filed by the department against the Order of the Tribunal under Section 260-A of the Income-tax Act in respect of Assessment Year 1987-88.
FACTS :--
2. The assessee-company was engaged in the business of construction of buildings. As stated above, we are concerned with Assessment Year 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 dated 13th December 1984 in respect of a plot of land situate at Kandivali admeasuring 788000 sq. metres 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 assessment year 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 Assessment Year 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 Section 36(1)(iii) of the Income-tax Act. By Assessment Order dated 30th September 1986, the deduction was allowed. However, the Commissioner of Income-tax, exercising his authority under Section 263 of the Income-tax 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 Section 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 form part of capital expenditure. Accordingly, the Commissioner of Income-tax 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 dated 29th March 1990. Being aggrieved, the department has come by way of Appeal to this Court under Section 260-A of the Income-tax 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 project were being capitalised by the assesee itself and holding that the Commissioner of Income Tax was wrong in directing the Assessing Officer to disallow the said interest and treat the same as capital expenditure as a part of work-in-progress, thereby quashing the order under Section 263 of the Act of the Commissioner of Income Tax?"
FINDINGS :
4. 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 the both the activities were assessed under Section 28 of the Income-tax 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 Commissioner, 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 Commissioner, constituted a capital asset. According to the Commissioner, since the loan was raised for securing capital asset, the interest incurred thereon constituted part of capital expenditure. This finding of the Commissioner was erroneous. In the case of India Cements Ltd. v. CIT, Madras, reported in 60 ITR Page 52, 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 Section 10(2)(iii) of the Income-tax Act 1922 [section 36(1)(iii) of the present Income-tax 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 Section 36(1)(iii). Since the assessee had received loan for obtaining stock-in-trade (Kandivali Project), the assessee was entitled to deduction under Section 36(1)(iii) of the Act. That, while adjudicating the claim for deduction under Section 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 Section 36(1)(iii) of the Act (See judgment of the Bombay High Court in the case of Calico Dyeing and Printing Works v. CIT, Bombay City-II, reported in 34 ITR 265). 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.
5. 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.