TMI Blog2012 (5) TMI 110X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of hotel is one of the its main objects and not its other object - the assessee can use the hotel plot leased to it only for construction and running of hotel, with no right to transfer the same - although the assessee company has shown it as a stock in its balance sheet and profit and loss account it will not alter the legal position because the substance of a transaction is important and not its entry in the books of account or its treatment by the assessee company - against assessee. Disallowed expenditure to be allowed to be capitalized - in favour of assessee. - IT Appeal No. 4779 (Delhi) of 2011 - - - Dated:- 4-5-2012 - RAJPAL YADAV, SHAMIM YAHYA, JJ. ORDER Shamim Yahya, Accounting Member This appeal by the Assessee is directed against the order of the Ld. Commissioner of Income Tax (Appeals)-VI, New Delhi dated 24.8.2011 pertaining to assessment year 2007-08. 2. The grounds raised read as under:- "1.1 That on the facts and in the circumstances of the case and contrary to the provisions of law, the Ld. Commissioner of Income Tax (Appeals) has erred in dismissing the appeal of the appellant company. 1.2 That on the facts and circumstances of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessing Officer, the assessee company submitted the memorandum of association of the company and the copies of lease deed entered into with the Delhi Development Authority. As per the assessee, the aforesaid interest was paid for the purpose of its business and the same expenditure was incurred after setting up of it's business / commencement of the business and therefore the same was an allowable expenditure u/s. 36(1)(iii) of the IT Act. However, the Assessing Officer was of the view that there was no business activity carried on by the assessee company during the relevant assessment year. Since the interest expenditure was incurred prior to the commencement / setting up of the business, therefore, in view of the proviso to section 36(1)(iii) the same is not an allowable expenditure and accordingly disallowed the interest expenditure at the time of assessment. 4. Upon assessee's appeal Ld. Commissioner of Income Tax (Appeals) considered the issue. Ld. Commissioner of Income Tax (Appeals) observed that assessee company has leased a plot of land from DDA through a perpetual lease deed dated 4.9.2006. For taking this plot of land on lease the assessee took a loan of Rs. 103,94,6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r even change in its Memorandum of Association without the prior approval of the lessor. That this restriction alongwith the restriction on transfer of plot or the building constructed thereupon absolutely bar the assessee from making any use of the impugned plot except for construction of hotel and running the same. That the object clause of the Memorandum of Association provides for both the objects - Business of real estate and the business of running of hotel. Ld. Commissioner of Income Tax (Appeals) opined that the since the assessee can use the hotel plot leased to it only for construction and running of hotel, with no right to transfer the same, the hotel plot is indeed a capital asset for the assessee company. That although the assessee company has shown it as a stock in its balance sheet and profit and loss account, however, this will not alter the legal position because the substance of a transaction is important and not its entry in the books of account or its treatment by the assessee company. 4.2 Ld. Commissioner of Income Tax (Appeals) further observed that during the relevant assessment year assessee company has merely taken land on lease which by any stretch of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ightly disallowed the interest expenditure claimed by the assessee in its P L account as the business has not been set up during the year. Further, Ld. Commissioner of Income Tax (Appeals) observed that Assessing Officer has rightly disallowed the administrative and other expenses i.e. fees and taxes of Rs. 3484/-, bank charges of Rs. 9025/- and audit fees of Rs. 5056/-, preliminary expenses of Rs. 1162/- u/s. 35D claimed by the assessee company as the hotel business was not found to be set up during the relevant assessment year. In view of the above observation, Ld. Commissioner of Income Tax (Appeals) upheld the Assessing Officer's action. 5. Against the above order the assessee is in appeal before us. 6. We have heard the rival contentions in light of the material produced and precedent relied upon. 7. Ld. counsel of the assessee contended that the said land has been shown as stock-in-trade by the assessee. Ld. counsel of the assessee contended that the business of the assessee can be said to be set up, as the assessee obtained the land on lease. Further ld. counsel of the assessee contended that proviso of section 36(1)(iii) cannot be applied in the case of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Commissioner of Income Tax (Appeals) observed that the object of the proviso is to disallow interest paid for acquiring an asset even for extension of the existing business till the date on which it is brought to use irrespective of the accounting treatment adopted by the assessee in its book. In this regard, ld. counsel of the assessee had contended that proviso to clause 36(1)(iii) cannot be applied to the assessee's case as there was no extension in the existing business of the assessee's case. Ld. counsel has pleaded that the entire business has been setup and there is no extension involved. So he claimed that the proviso is not applicable in the case of the assessee. We can gainfully refer the provision of section 36(1)(iii) in this regard. The said section reads as under:- "(iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession: Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalized in the books of account or not); for any period beginning from the date on which the capital was borrowed for ac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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