TMI Blog2018 (11) TMI 111X X X X Extracts X X X X X X X X Extracts X X X X ..... ishes that the assessee has already set up its business during the financial year relevant to assessment year 2012-13. The interest paid on the borrowed capital for acquiring land has been allowed to the assessee as business expenditure. In such a situation, we direct to delete the addition confirmed by the ld. CIT(A). - Decided in favour of assessee. - ITA No. 696/JP/2017 - - - Dated:- 24-7-2018 - Shri Vijay Pal Rao, JM And Shri Bhagchand, AM For the Assessee : Shri Mahendra Gargieya (Adv) For the Revenue : Shri P.P. Meena (JCIT) ORDER PER: BHAGCHAND, A.M. The appeal filed by the assessee emanates from the order of the ld. CIT(A), Ajmer dated 22/06/2017 for the A.Y. 2013-14. 2. The assessee is individual, the return of income was electronically filed on 30/09/2013 declaring total income of ₹ 4,66,990/-. The case was selected for scrutiny and notice U/s 143(2) of the Income Tax Act, 1961 (in short the Act) was issued on 03/09/2014. The Assessing Officer finalized the assessment U/s 143(3) of the Act by assessing total income of assessee at ₹ 30,63,685/- and the same has been sustained by the ld. CIT(A). 3. Now the assessee is in appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e has filed the copy of order U/s 143(3) of the Act dated 29/12/2017. He has also placed reliance on the various case laws. The ld AR has also filed written submissions, the contents of the same are reproduced as under: 1. At the outset, we strongly rely upon our detailed written submission filed before CIT(A) dated 28.03.2017 (PB 39-43) , dated 17.04.2017 (PB 44) , dated 24.04.2017 (PB 51-52 PB 53) (reproduced in the order of CIT(A) also) and the counter comments submitted vide letter dated 13.06.2017 (PB 54-56) (reproduced at order of CIT(A) pg 22) as also the written submission filed before the AO (reproduced at pg 3 of AO). 2. Business already set up: 2.1 The only issue which appears to be involved in the present case is whether the expenditure incurred by the assessee in the shape of interest on borrowed capital which was utilized for the purchase of the land, could be allowed as a business expenditure or not. For that purpose the authorities below have made the disallowance mainly on the reason that such expenditure was incurred prior to the commencement of business and therefore should have been capitalized. However, the authorities below have proce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ricultural to non-agricultural use. (PB 13-14) Copy of demand raised by ADA vide its letter no.1651 dated 18.06.2015 (PB 16).Such expenditure were debited in the land A/c dated on 23.06.2015 24.06.2015 when deposited. Receipt of patta on dated 15.07.2015 for A.Y. 2016-17 Thereafter, in later years, the assessee incurred further expenses (viz. road constructions, boundary and gate, drainage, light Pole etc.) of ₹ 60 Lacs approx. on the development/development charges. Although the first sale of the plot could be in A.Y. 2016-17 yet however, that did not mean that the business was not in existence in the subjected year AY 2013-14 because it was already set up in A.Y.2012-13, as aforesaid. The second full year sale for A.Y. 2017-18 for ₹ 7,91,806/-. The assessee declared a huge gross profit of ₹ 39,68,069/- (PB 34) in A.Y.2016-17and ₹ 20,59,727/- in A.Y.2017-18which, has proved the fact that the real estate business which was set up in A.Y.2012-13 was going on in full swings. 2.3 In the business of real estate, there are three stages viz first is the acquisition of land; second is the process of construction of building and the th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeal by the revenue, the hon ble high court also affirmed the view taken by the tribunal. 4.2 Kindly refer CIT v/s Dhoomketu Builders Development Pvt. Ltd(2013) 87 DTR 0249 (Del)(DPB 6-13) wherein, it was held that: Loss-Business set-up-Commencement of business-Distinction- Carry forward of loss-Determination-Assessee was to carry on business of real estate development, including purchase sale of land- Assessee had taken a loan to participate in tender to buy land-However failed to buy land-Interest was received on earnest money submitted for tender-Assessee filed its return declaring loss under head business which represented difference between interest received on earnest money and interest paid on loan obtained-AO opined that assessee was not successful in acquiring land, it cannot be said that business was set-up in relevant A.Y.-He assessed interest income under head income from other sources did not allow interest paid by assessee against interest income-Carry forward of loss was not permitted-CIT (A) allowed deduction of interest paid while computing income under residual head but carry forward was not allowed-Tribunal allowed assessee s appeal holding tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... borrowed for the purpose of the business of the assessee, the interest payable thereon is admissible under s. 36(1)(iii). It is immaterial whether the same is in the nature of capital expenditure or revenue expenditure. If the expenditure is a business expenditure relates to any of the stage of the business activity carried on by the assessee, whether isolated transaction or not, is admissible for deduction under the said section . A business commences with the activities undertaken even at the preparatory stage for setting up of the business. Acquisition of immovable property for being used in the business by borrowed capital entitles the assessee to claim benefit of the section on the interest paid thereon, even if the asset acquired is not utilized for the purpose of business in the relevant previous year.In the business of real estate, there are three stages : one is the acquisition of land and other is the process of construction of building and the third is the actual distribution or sale of the building. Similarly, in other business also there are three stages. Here at the first stage, it has been acquired and works were in progress. It is not necessary to show that the w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal. The aforesaid facts have been examined and highlighted by the first appellate authority. The said findings of fact have been affirmed by the tribunal. A pragmatic and a practical view has to be taken. 4.6 In CIT v/s Samsung India Electronics Ltd. (2013) 356 ITR 354 (Del) had held as under: 7. The aforesaid distinction is relevant when we examine and refers to the definition of previous year . Following the said judgment, in the case of CIT v. L.G. Electronic (India) Ltd. [2006] 282 ITR 545 (Delhi), it has been observed that the date of setting up of business and date of commencement of business may be two separate dates. This decision in the case of L.G. Electronics (supra) has been followed in CIT v. ESPN Software India P. Ltd., [2008] 301 ITR 368 (Delhi) wherein it has been held that a business will commence with the first purchase of stock-in-trade and the date on which the first sale is made is immaterial. Similarly, for manufacturing, several activities in order to bring or produce finished products have to be undertaken, but business commences when the first of such activities is taken. 4.7 In CIT v/s ESPN Software India (P) Ltd(2008) 218 CTR 0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the AO. 6. Further the title of column 51 is NO ACCOUNT CASE of the ITR Form (PB 7), wherein the assessee is supposed to give the details of such business for whose accounts are not being maintained. In such column, the assessee has shown the profit which arose on account of the conversion of the silver hitherto kept by the assessee as its capital asset which was now converted into stock-in-trade as also the commission income of ₹ 1.66 lakhs earned in connection with commission agency business and has also claimed the subjected interest of ₹ 20,22,110/-. The very fact of showing such receipt and expenditure in column 51 of the ITR Form goes to show that such transaction were related to a business (though account were not maintained) hence it was the business income only from the two other business namely commission agency real estate. Had it been shown by the assessee himself in the ITR in the column relating to other sources or capital gain of the ITR then position might have been different. This fact has been admitted by the AO also. Similar was the position in AY 2012-13 also (Kindly refer column 51 at PB- 61) i.e. the first year when the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Balance Sheet. Similarly, the commission income (relating to the commission business of gold and silver) of ₹ 1,66,000/- was also credited to same very (personal) Capital A/c. Further, the profit of the other proprietary namely Sanwaliya Seth Jewellers of ₹ 22,84,225/- was also credited to the same Capital A/c. If the AO was correct why he should have taxed commission income. If the AO was correct why he should have taxed commission income. However, in the later years, when the real estate business picked up the momentum and the assessee was able to sell plot and volume of activities increased, the receipts crossed the prescribed limit for getting the accounts tax audited u/s 44AB (i.e. from A.Y. 2016-17) and the assessee prepared separate accounts for M/s Shree Ji Vihar. The law does not require the assessee to always maintain separate accounts however, if with the help of the existing account itself one is able to ascertain and compute the income of the claimed business, merely presentation and accounting entries made by the assessee in its own manner, is not decisive of the true nature of the transaction. After all the substance always prevail over the form, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ingredients are fulfilled. It is shown in the balance sheet under the capital and asset heading as an asset but not a stock-in-trade. The description in the books of account would be immaterial. If it is a stock-in-trade, in that event, the amount invested would be a revenue expenditure and not a capital expenditure. [Para 8] 8.2.3 Also refer CIT vs Axis Pvt. Equity Ltd. (2017) 98 CCH 38 (Mum HC)(DPB 1-5 Pr. 7 8). 9. After effects of the implication if AO s stand is accepted: Further alternatively also, the implication flowing from the stand of the revenue, if assuming, is accepted shall be resulting into a loss in as much as if the subjected asset is treated as a capital asset, the resultant gain would attract tax @ 20% only and the benefit of the indexation in addition thereto, whereas the assessee had already been paying tax @ 30% (when it has already offered a huge amount of gross profits of ₹ 39,68,069/- in A.Y. 2016-17 (PB 34) and ₹ 20,59,727/- in A.Y.2017- 18in the real estate business) . Thus, there is a direct loss of revenue. 10.1 Past history: Similarly, in A.Y.2012-13 also i.e. the first year when the land was purchased and intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Polytex Ltd. vs. CIT (2012) 349 ITR 0690/(2012) 254 CTR 0102 (SC) (DPB 49-50) following their earlier decision in the case of Core Health Care Limited (2008) 298 ITR 194/3 DTR 49 (SC). 12. However, despite these detailed submissions filed before the ld. CIT(A) and the various decisions cited, the ld. CIT(A) has very summarily rejected the grounds by merely repeating what the AO held. His first ground of rejection that borrowed funds were not utilized in running the business of wholesale trading of jewellery, is nothing but a purported misconception assumed by him, without appreciating that real estate business had already been set up. His second ground that transactions were entered into the personal set/capital a/c is again ignoring the settled law that substance always prevails over the form. So would be the reply to the third ground that no real estate business or land development was carried out by the appellant. 7. On the other hand, the ld DR has relied on the orders of the authorities below. 8. We have heard both the sides on this issue. The Assessing Officer has disallowed the interest paid on the borrowed capital for the reason that this was the interest ..... X X X X Extracts X X X X X X X X Extracts X X X X
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