By TIOL News Service

JAIPUR, OCT 24, 2018: THE ISSUE IS - Whether when the assessee is in real estate business, interest paid on capital borrowed for purchase of land is to be allowed as business expenditure. YES is the VERDICT.

Facts of the case

The assessee an individual, had filed return of income for relevant AY. During assessment, the AO made the addition of Rs. 20,22,110/-, which was interest paid on a borrowed capital. The assessee claimed this as business expenditure and allowable expenses as per provisions of Section 36(1)(iii) of the Act. The assessee had set up the business during the FY 2012-13 and the assessee made payment of interest of Rs. 7.00 lacs on borrowed capital. On appeal, CIT(A) uphold the order of AO.

Tribunal held that,

++ the AO has disallowed the interest paid on the borrowed capital for the reason that this was the interest paid by the assessee before commencement of the business and it should be capitalized and the borrowed money was not utilized for business purposes. The assessee has purchased agricultural land on 14/12/2011 and 30/01/2012 during the period relevant to assessment year 2012-13. The assessee has also started the process of getting the land converted from agriculture to residential by applying for conversion of Section 90A of Rajasthan Land Revenue Act, 1956. The assessee has also produced evidence of payment of Rs. 2.00 lacs towards the security for conversion U/s 90A of Rajasthan Land Revenue Act, 1956 on 15/2/2013. The assessee has further deposited Rs. 50,000/- to the UIT towards the approval layout plan on 05/3/2013. The assessee has also submitted site plan approved by the Ajmer Development Authority on 15/3/2013. Due to some dispute arose in respect of land, the construction was delayed. Thus, the acts of the assessee shows that he was pursuing the business of real estate during the relevant period. The land was purchased for the purpose of doing the business of real estate by developing the plots etc. Reflecting the land as investment in books does not reflect the true nature of the transaction. In fact the purchase of land, immediately applying for the conversion of land to residential and also getting the site plant approved establishes that the assessee was very much in the business of real estate during the relevant period and he had set up such business. The process of conversion of the land and then getting the approval of the site plan establishes 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, it was decided to direct CIT(A) to delete the addition confirmed by the CIT(A). In the result, appeal of the assessee is partly allowed.

(See 2018-TIOL-1904-ITAT-JAIPUR)