JAYANTILAL INVESTMENTS Vs. ASSTT. COMMISSIONER OF INCOME

JUDGEMENT

(1.) This appeal under Section 260A of the Income Tax Act, 1961 (Act) challenges the order dated 26.2.2003 of the Income Tax Appellate Tribunal (Tribunal). It was admitted on 20.7.2004 on the following substantial question of law:

(2.) This appeal relates to Assessment Year 1988-89.

(3.) The appellant is a partnership firm and engaged in construction activity. The appellant filed its return of income for the subject Assessment Year declaring an income of Rs. 15,280/. Subsequently revised return of income was filed by the appellant declaring a loss of Rs. 2.30 Lakhs. In the revised return, the appellant had claimed amount of Rs. 9.52 Lakhs as interest expenditure allowable under Section 36(1)(iii) of the Act and an amount of Rs. 2.16 of interest was capitalized. During the course of assessment proceedings on being so called upon by the Assessing Officer, the appellant explained that so far as interest is concerned, it capitalizes interest to the extent it is expended, till the commencement of the project, therefore the interest is taken as revenue expenditure. However, the Assessing Officer still entertained doubts about allowing as deduction Rs. 6.98 Lakhs being the interest expenditure claimed on account of its construction project 'Lucky Shoppe'. The appellant pointed out that the above amount of Rs. 6.98 Lakhs was debited to profit and loss account but was wrongly capitalized in the original return of income, as during the previous year relevant to the subject Assessment Year the work in the Lucky Shoppe project had commenced. This was accepted on the ground that mere placing of orders would amount to commencing of the project. Thus, allowable as revenue expenditure. The alternate submission of the appellant that open plot of land in respect of 'Lucky Shoppe' forms stock intrade. Therefore, the interest paid on the loan taken to purchase open plot of land for Lucky Shoppe project is allowable as revenue expenditure being its stockintrade. This alternative submission was negatived by the Assessing Officer on the ground that purchase of plot of land is capital in nature. Hence, interest must also be capitalized. Thus, by Assessment order dated 31.3.1993 the Assessing Officer disallowed the deduction of Rs. 6.98 Lakhs being interest paid on plot of land of Lucky Shoppe project while determining the taxable income of Rs. 7.76 Lakhs.