Interest on borrowed funds for Earnest Money Deposit is Allowed as Revenue Exp : High Court

HIGH COURT OF KARNATAKA

Principal Commissioner of Income-tax

v.

Prestige Garden Estates (P.) Ltd.

P.S. DINESH KUMAR AND C.M. POONACHA, JJ.

IT APPEAL NO. 841 OF 2018

OCTOBER  10, 2022

JUDGMENT

P.S. Dinesh Kumar, J. – This appeal by the Revenue directed against the order dated 20-7-2018 passed in ITA No. 2135/Bang/2017, has been admitted to consider three questions of law framed by the Revenue. After hearing Shri. E.I. Sanmathi, learned Standing Counsel for the Revenue and Shri. B.R. Sudheendra, learned Advocate for the assessee, in our view, the following question alone arises for consideration:

Whether on the facts and in the circumstances of the case, the Tribunal and the CIT(A) are justified in holding that interest expenditure is liable to be treated as capital expenditure and allowance under section 36(1)(iii) of the Act on the ground that the assessee has incurred the same for business purpose?

2. Brief facts of the case are, assessee is in the business of Real Estate development. It filed its returns for the A.Y. 2008-09 and claimed deduction under section 36(1)(iii) of the Income-tax Act, 1961, (‘IT Act’ for short) on the interest of Rs. 16,68,11,932/-. The Assessing Officer disallowed the same on the ground that the assessee had deposited an EMD amount of Rs. 293.61 Crores for the purchase of asset and therefore, interest payable on the monies borrowed should have been capitalized or shown as ‘Work in progress’.

3. On appeal, the CIT(A) held that the interest received on the EMD has been offered to tax in the subsequent assessment years treating it as Revenue in nature. Therefore, Assessing Officer’s view that the interest paid to the Bank on the borrowings ought to have been capitalized, was not justified because, no asset was acquired nor any asset came into existence and accordingly allowed the appeal. Revenue unsuccessfully challenged the same before the ITAT. Hence, this appeal.

4. Shri. Sanmathi, for the Revenue submitted that the assessee had borrowed money to acquire capital assets and shown the EMD as an asset in the balance sheet. Therefore, the Assessing Officer has rightly disallowed the interest paid on the borrowings.

5. Shri. Sudheendra, learned Advocate argued opposing the appeal.

6. We have carefully considered rival contentions and perused the records.

7. Relevant portion of section 36(1)(iii) of the IT Act and the proviso read as follows:

“Sec.36(1): The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28-

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 acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction.”

(Emphasis Supplied)

8. It is not in dispute that the EMD paid by the assessee has been received back with interest and the said interest has been offered to tax. It is also not in dispute that the assessee is in the business of Real Estate Development and the EMD amount was paid to acquire properties as a part of its business, which should be treated as Stock-in-trade. The Tribunal has rightly noticed that the proviso was inserted with effect from 1-4-2004 and the amount borrowed was not for acquisition of any asset for extension of existing business. Therefore, assessee was entitled for the benefit under section 36(1)(iii) of the IT Act.

9. In view of the above, we find no error in the impugned order and this appeal must fail. Hence, the following:

No costs.