The Income Tax Appeals Tribunal (ITAT), Bangalore Bench, while removing the denial of interest, ruled that the acquisition of the asset was not intended for the extension of a existing business.
The appraised, M / s.Golf View Homes Limited, is engaged in real estate development, real estate trading and leasing of real estate. The buildings are treated as goodwill by the appraised.
The valuation officer rejected the interest charge up to 82 49 994 rupees on the grounds that the borrowed funds were used to make interest-free advances to related parties for the purchase of goods and that these goods are of the nature of fixed assets.
Since the same was not acquired and used during the year, interest on these loans is withheld under section 36 (1) (iii) of the Act.
The assessor argued that the advances were also intended for business purposes and are not classified as “Capital WIP” or “Capital Advance”. The appraised is in real estate development.
Advances made for the purchase of real estate should not be considered as advances made for the purchase of fixed assets. Advances to sister companies for the purchase of property will not be covered by section 36 (1) (iii) of the Act.
Advances to related parties should be presumed to be interest-free funds sufficient to meet investments and advances to related parties, added the assessor.
The assessor insisted that expanding the business means starting a new business activity and in this case the advances are made in the normal course of business. Therefore, for this reason also, the disallowance provided for in Article 36 (1) (iii) of the Law should be deleted.
The coram headed by the vice president, NVVasudevan clarified that the interest paid on the capital borrowed for the acquisition of an asset for any period beginning from the date on which the capital was borrowed for the acquisition of the ‘active until the date on which such an asset was put into use will not be allowed as a deduction only from YY 2016-17. For the period prior to YY 2016-17, the refusal can only be made if the interest paid relates to the capital borrowed for the acquisition of an asset for the extension of an existing business or profession.
However, ITAT noted that the acquisition of fixed assets is not intended to extend the existing activities of the appraised.
The ITAT held that the denial of interest cannot be sustained because otherwise the interest paid is considered even by the OA to be for the purpose of the business of the appraised. Therefore, the denial of Rs. 82 49,994 made by the OA and the action of CIT (A) by supporting a sum of Rs. 17 12,616 on the disallowance made by the OA, cannot be supported and the same is addressed to be deleted.
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