The Income Tax Appellate Tribunal (ITAT), Bangalore Bench while deleting the disallowance of interest held that the acquisition of the capital asset is not for the extension of an existing business.
The assessee, M/s.Golf View Homes Limited is engaged in property development, trading in immovable property and renting of immovable property. The immovable properties are treated as stock in trade by the assessee.
The Assessing Officer disallowed interest cost to the extent of Rs.82,49,994 on the ground that the funds borrowed have been utilized for giving interest free advances to related parties for purchase of property and these properties are in the nature of capital assets.
Since the same has not been acquired and put to use during the year, the interest on such loans is disallowed under section 36(1)(iii) of the Act.
The assessee contended that the advances were also for the purpose of business and they are not classified as ‘Capital WIP’ or ‘Capital Advance.’ The assessee is in real estate development.
The advances given to purchase the immovable property should not be considered as advances given for purchase of capital assets. The advances given to sister concerns for purchase of property will not fall under the purview of Section 36(1)(iii) of the Act.
The advances given to related parties are to be presumed as interest free funds sufficient to meet the investments and advances to related parties, the assessee added.
The assessee urged that the extension of business means starting a new business activity and in the present case, the advances are made in the regular course of business. Therefore, on this ground also the disallowance under section 36(1)(iii) of the Act has to be deleted.
The coram headed by the Vice President, N.V.Vasudevan clarified that the interest paid on capital borrowed for acquisition of an asset for any period beginning from the date on which the capital was borrowed for acquisition of the asset till date on which such an asset was put to use shall not be allowed as deduction only from AY 2016-17. For the period prior to AY 2016-17, the disallowance can be made only if the interest paid is in respect of capital borrowed for acquisition of an asset for extension of existing business or profession.
However, the ITAT noted that the acquisition of capital assets is not for extension of existing business of the Assessee.
The ITAT held that the disallowance of interest cannot be sustained as otherwise the interest paid is regarded even by the AO as for the purpose of the business of the Assessee. Therefore the disallowance of Rs.82,49,994 made by the AO and the action of the CIT(A) in sustaining a sum of Rs.17,12,616 out of the disallowance made by the AO, cannot be sustained and the same is directed to be deleted.
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