Can interest paid on capital borrowed for the purposes of business be claimed as deduction under Section 36(1)(iii) of the Income Tax Act, 1961 once business has commenced?

Learned Senior Standing Counsel for the appellant has filed a memo dated 06.08.2024 seeking permission to substitute the name of the respondent. In light of there being no objection, the said memo is ordered.

Heard Mr.T.Ravikumar, learned counsel for the appellant/Revenue and Mr.R.Venkata Narayanan, learned counsel for the respondent/assessee.

The first substantial question of law raised for our consideration in these appeals relating to Assessment Year (‘AY’) 1996-97 is as follows: 1. Whether in the facts and circumstances of the case, the Tribunal was right in holding that interest on loans taken for 'land development' is to be treated as revenue expenditure?

The assessee had claimed allowance of interest of a sum of Rs.5,06,78,000/- (Rs.5.06 crores approx.) paid to banks and financial institutions. According to it the interest related to loans taken for property development under the head ‘land for property development’ and hence, the amount had been rightly claimed in terms of the Income tax Act 1961 (‘Act’).

The Assessing Authority denied the exemption claimed despite reliance by the assessee on the case of India Cements V. Commissioner of Income Tax¹. The Officer was of the view that no evidence had been produced by the assessee to establish that the lands had acquired only for the purpose of property development. The case of India Cements² was distinguished on facts.

That apart, the Assessing Authority was of the view that if at all the case of the assessee was that interest was to be paid for lands acquired for business expansion, such claim ought to have been in terms of Section 36(i)(iii) and not Section 37 of the Act. The assessment was finalised in the aforesaid terms.

As against the order of assessment, first appeal was filed where the assessee had reiterated that the borrowings had directly related to purchase of stock-in-trade and hence the claim was allowable.

As regards the reference to Section 36(1), the assessee had pointed out that property development was not a new venture as it had been carrying on this line of activity since 1988-89 when it had engaged in its maiden project at Gandhi Nagar, Adyar, Chennai. However, that project had been a non-starter, since the property had been taken over by the Appropriate Authority in terms of Section 269UC under Chapter XX C of the Act.

The Commissioner of Income Tax (Appeals) had gone into the matter in detail returning findings that one of the objects of the assessee company related to property development, the resources for various lines of businesses carried on by the assessee was drawn from a central pool and that the borrowings in question had been for business purposes. Thus, he found merit in claim of interest in terms of Section 37 or Section 36(1)(iii) of the Act and allowed the same.

The matter was carried in appeal by the Revenue before the Tribunal. The Tribunal found that the Assessing Authority had blown hot and cold on the issue. While on the one hand he had stated that interest related directly to funds borrowed for the acquisition of property, he had also stated that the activity of property development was a new line of activity.

After looking into the records before it, the Tribunal, the final fact finding authority, found that property development found place as one of the objects of the Assessee. The Tribunal notes that the identical issue had come up for consideration for the previous year and evidence had been placed by the assessee before the CIT(A) in regard to identical activity being carried on for the earlier year as well. Referring to the decision of this Court in CIT V. R.M.Maruthai Naidu & Sons³, the order of the Commissioner of Income Tax (Appeals) was confirmed.

Before us, no material is placed to dislodge the concurrent factual findings of the first and second appellate authorities to the effect that the assessee is in the business of property development. There is also no material to contradict the position that the loans have been availed from banks for any purpose other than for acquisition of land for property development.

The relevant portions of the orders of the Commissioner of Income Tax (Appeals) and Tribunal are extracted below for completion of narration:, Order of the Commissioner of Income Tax (Appeals) dated 31.08.1999: Further, I am of the opinion that the interest is chargeable under a definite and specific section being section 36(1)(iii) and the only condition for admissibility is that the money should be borrowed for the purpose of business. Once it is established that the money has been borrowed for the purpose of business then the claim of interest is to be allowed. Here, I find that all the conditions are satisfied: (1) It is one of the objectives of the assessee company; (2) The management and funding is done from a centralized source;

The Delhi High Court, after noticing the ratio of the judgments of the Supreme Court in India Cements⁴, Challapalli Sugars Ltd. V.CIT⁵ and of the Bombay High Court in Calico Dyeing and Printing Works V. CIT⁶ has, in the case of Commissioner of Income Tax. V. Monnet Industries Ltd⁷ set out following guidelines in matter of claims relating to loans/interest.

The aforesaid decision of the Delhi High Court has been confirmed by the Supreme Court in Commissioner of Income Tax. V. Monnet Industries Ltd⁸ in the following terms:

In light of the discussion as above, the first question of law is answered in favour of the assessee and against the revenue.

The second common question of law that arises for consideration is as follows: 2. Whether in the facts and circumstances of the case, the Tribunal was right in holding that the assessee is entitled to depreciation on assets in a sale cum lease transaction, which was clearly only a financial transaction, especially where the value of the old machinery which were financed has not been proved?”

At the threshold, we may say that the question of law is as vague as can be. The assessee has claimed depreciation on various assets. We have tabulated below the details of the transactions of sale and lease back in respect of which depreciation has been claimed including the details of the vendors and lesses: T.C.No.1301 of 2008: Sl Asset Purchased from Leased to No Particulars 1 1) Slitting Industrial M/s. Rajinder Steels Ltd, Line Enterprises, Kanpur Machine Fazalganj, Kanpur 2. Hydro Testing Machine 2 Fabricated Chamundi UP Tannery Co Ltd., Delhi Machine Engineers Pvt Ltd., Mysore 3 Machinery M/s. Assam M/s. Sitapur Plywood Mfg. Solvex Pvt Ltd., Ltd, Lucknow Dibrugarh, Assam 4 Machinery Style Syntax Pvt M/s. ShamkenMultifab Ltd Ltd., UP 5 Static M/s. Isha SKS Ltd., New Delhi Thystor Enterprises, Control DC Mumbai Drives 6 Heat Pump Sethi Enterprises, M/s. Sakura Seimitsu Ltd Azadpur, New Delhi 7 Imported Concern from M/s. Moser Baer India Ltd Machinery New York - USA 8 Machinery M/s Systek M/s. Amtek Auto Ltd, Machines India Gurgaon Pvt Ltd., Chennai T.C.No.1302 of 2008: Sl Asset Purchased from Leased to No Particulars 1 Plastic M/s. Videocon M/s. Videocon International Injection International Pvt Pvt Ltd., Aurangabad Moulds Ltd., Aurangabad 2 Recouperato M/s Rajasthan M/s Rajasthan State rs and Air State Electricity Electricity Board Pre – Board Heaters

The conclusion of the Tribunal in 5 out of 10 of the transactions is a remand of the issue to the Assessing Officer for re-examination. No submissions have been made before us in the context of why the remand prejudices the revenue. In 5 of the transactions, the case of assessee has been accepted and there are specific findings of the Tribunal confirming the aspects of existence of asset and genuinety of transactions. No material is placed before us to disturb/dislodge the factual findings of the Tribunal.

The question of law is itself general in nature, not addressing any specific transaction. It is incumbent on the revenue in such circumstances such as the present, where the order of the Tribunal relates to multiple transactions, to have identified the specific transaction where they believe that the conclusion of the Tribunal is erroneous and frame a substantial question of law accordingly. No such attempt has been made and instead a generic question of law has been framed without reference to any specific transaction.

The submissions made have also been substantially generic without drawing attention to any error in law or perversity in the order of the Tribunal. Upon a perusal of the orders of the lower authority, we find that the conclusions of the Tribunal align with the records that have been produced before the authorities and there is no material placed before us to persuade us to conclude that the conclusions arrived at are erroneous or perverse.

Learned counsel for the assessee relies on a decision of this Court in the case of First Leasing Co. of India Ltd. V. Assistant Commissioner of Income Tax and another⁹, touching upon taxability of sale and lease back transactions. The ingredients of sale and lease back transaction, as noted by this Court in that matter, have been looked into by the Tribunal in the present cases. The 2nd question of law is also answered in favour of the assessee and against the revenue.

These Tax Cases are dismissed. No costs. (A.S.M.,J) (G.A.M.,J) 12.08.2024