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Sri Mak & Co., Chennai vs. ACIT - (Income Tax Appellate Tribunal) (27 Sep 2023)

If a business has been set up, even it has not commenced its activities, then expenditure relatable to said business, including interest expenses should be allowed as deduction


Direct Taxation

The assessee firm has filed its return of income for the assessment year 2015-16 on 30.09.2015 declaring total income of Rs.1,31,50,650. During the course of assessment proceedings, the Assessing Officer noticed that the assessee has claimed huge interest expenses to the tune of Rs.2,80,52,927, therefore, the assessee was asked to furnish details regarding interest payments and purpose for borrowing of loans.

The Assessing Officer, however, was not satisfied with the explanation furnished by the assessee and according to the Assessing Officer, building has been inaugurated only in February, 2016 and started booking from financial year 2016-17 and therefore, argument of the assessee that building was ready for use is not correct. Therefore, the Assessing Officer invoked provisions of Section 36(1)(iii) of the Income Tax Act, 1961 and disallowed interest paid on loan borrowed for construction of new mandapam of Rs.64,25,874 and added to total income of the assessee.

Being aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A). The learned CIT(A) upheld additions made by the Assessing Officer towards disallowance of interest under Section36(1)(iii) of the Act.

The assessee firm is in the business of running mandapam and marriage halls. The firm was deriving income from running marriage hall for impugned assessment year. During the financial year relevant to assessment year 2015-16, the assessee has paid interest on borrowed capital taken for acquisition of new asset for expansion of its existing business. As per the assessee, the assessee firm has constructed a new mandapam and availed loan from bank and construction of new mandapam was completed and ready for use. However, the same has been started generating revenue from next financial year, therefore, interest paid on borrowed capital needs to be allowed.

It is well settled principles of law by the decisions of various courts that, 'set up of business' and 'commencement of business' are two separate events. If a business has been set up, even it has not commenced its activities, then expenditure relatable to said business, including interest expenses, if any, should be allowed as deduction. In the present case, the Assessing Officer never disputed the fact that, new asset was ready for use in the business of the assessee and also put to use in the business of the assessee.

But, the Assessing Officer disallowed the interest only on the ground that booking has been started in new mandapam from financial year 2016-17 onwards. Date of inauguration and date of booking of hall is not relevant to decide whether business has been set up or not. The moment, the assessee has kept its asset for ready to use in the business, it can be said that business has been set up. Therefore, in the given facts and circumstances of the case, there is no doubt with regard to fact that business of the assessee has been set up and accordingly, the assessee has rightly claimed interest paid on capital for acquisition of asset.

The learned CIT(A) without considering relevant facts has simply sustained additions made by the Assessing Officer. Thus, the impugned order is set aside and the Assessing Officer is directed to delete additions made towards disallowance of interest paid under Section 36(1)(iii) of the Act. Appeal filed by the assessee is allowed.


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