Interest paid to get a clear title to a property may be deducted from the purchase price

Fact and issue of the case

These cross appeals by the assessee and the revenue are against the order of the Commissioner of Income-tax (Appeals)-40, Mumbai (in short, ‘the CIT(A)’) dated 26/02/2024 for A.Y. 2010-11.

The assessee is a widely held public limited company which was earlier owning a textile mill land near Byculla which was converted into residential house and the assessee entered into real estate business. The assessee entered into an agreement with Godrej Properties Limited (GPL) dated 24/09/2004 for the development of a residential project in which there was an arrangement to share the surplus from the project at an agreed percentage. The project comprised of 5 towers having approximately saleable are of 6,50,000 sq.ft. The assessee followed percentage completion method in which the income was offered based on the flats sold during the year and the cost of acquisition against the same was based on the estimated cost as agreed with GPL. There was a substantial delay in the project on account of various changes in the development control rules and litigation relating to the development of mill land which led to increase in the cost of construction. GPL from time to time has been issuing letters regarding the revised cost of construction to the assessee based on which, the assessee has been computing the profit for the relevant assessment years.

For the assessment year 2010-11, the assessee filed the return of income declaring an income o Rs.25,73,24,91 8/- on 30/09/2010. The case was selected for scrutiny and the statutory notices were duly served on the assessee.

Observation of the court

I have carefully considered the issue. The Id. AR drew my attention to the valuation report in which the rate of’ 260/- adopted by the valuer is based on the rate notified by the town planning department @ ‘ 650/- per sq ft in 1990. As per the circular issued on 18.11.1991, the rate to be adopted for valuation in 1981 is @ 40% of the notified rate in 1990. Hence, according to the Id. AR, the valuation given by the approved valuer at 260/- per sq. ft. should be accepted. He also argued that the valuation given by the AO was based on surmises and conjectures and did not have any logical or scientific basis. As regards the applicability of ULC laws, he submitted that the Id. AO was totally misguided in interpreting and applying the compensation payable under the said law as the market value as on 1. 4. 1981. He heavily relied on the ratio laid down by the Bombay High Court in Lady Hirabai’s Case to support the view that the valuation has to be carried out as per the facts and the circumstances prevailing on the valuation date. Since as on 1.4.1981 there was no vacant surplus land, if would not be proper to build in a hypothetical assumption of applicability of ULCRA and adopt the valuation. The Pune Tribunal decision in the case of Ajit Mehta is clearly distinguishable. In that case, the land in question was purchased by the assessee and subsequently developed. Admittedly the land was vacant and, hence, the provisions of ULCRA were applicable. In the case of the appellant, there was a running textile mill on the said land and there was no vacant land on the date of the “valuation. Also the valuation given by the appellant is based on a scientifically” drawn up valuation report. In the result, – the valuation adopted by the appellant at ” 260/- per sq ft is held to be proper and the addition made on this account is directed o .be deleted. This ground of appeal is, therefore, allowed.”

In this regard, the Ld.DR submitted that the CIT(A) has followed his own decision for the earlier year without considering the issue independently for the year under consideration

The Ld.AR on the other hand, submitted that the facts are identical for AY 2010-11 also since the land in question is the same land. The ld AR submitted that the whole basis on which the disallowance is made by the assessing officer is that the land is covered by Urban Land Ceiling & Regulation Act, 1976 (ULC) which the CIT(A) has clearly held as incorrect in AY 2009-10. Further issue is not specifically contested by the revenue before the Tribunal for the assessment year 2009-10 and therefore, the decision of the CIT(A) has become final. The Ld.AR accordingly prayed that the CIT(A) was correct in deleting the disallowance. We heard the parties and perused the material on record. We notice that the Assessing Officer in AY 2009-10 has disallowed the claim of cost of land for the reason that the land was vacant and as per the ULC regulations certain area of the land in excess of the limits prescribed under ULC. The AO accordingly held the land to be vacant land within the meaning of ULC its fair market value as on 01 .04.1981 was taken at Rs. I.O/- per sq.mfr. i.e @ Rs. 0.93/-. The CIT(A) in his order for AY 2009-10 has given a clear finding that the land was not vacant as on the valuation date of 01.04.81 (since the factory building was there) and that the status as on the valuation date is what needs to be considered for the purpose of valuation by relying on the decision of the Bombay High Court. It is also noticed from the perusal of records that the revenue in the appeal filed before the Tribunal for AY 2009-10 had not raised any specific ground in this regard and therefore we see merit in the submission of the ld AR that the issue has reached finality. Considering the facts of the present case, we see no reason to interfere with the decision of the CIT(A) in allowing the claim of cost of acquisition at Rs.260 based on the valuation report. Accordingly this ground of the revenue is dismissed.

The next ground raised by the revenue is with respect to the deletion of addition of Rs.48,72,474/- by the CIT(A) in respect of interest on loans. The CIT(A) allowed the claim of the assessee for the reason that the interest is paid wholly and exclusively for the purpose of business and, therefore, allowable under section 36(1)(iii) of the Act. The CIT(A) further relied on the order of his predecessor for A.Ys 2008-09 & 2009-10 where a similar disallowance has been deleted. Accordingly, the CIT(A) allowed the claim for the year under consideration by holding that –

1 am completely in agreement with the finding of my learned predecessor .on this issue and hold that this expenditure is relating to business of the appellant and is fair and reasonable and therefore should be allowed to the appellant.

• In any case, the interest expenditure is relating to the funds borrowed for the purposes of repayment of old loans to banks and financial institutions and also for payment of VRS amount to workers, which are allowable expenses. It has already been held by my learned predecessor that the appellant in question merely hived off the Akola and Gondia units and, therefore, the continuity of payment of interest for business stands at par with other payment like VRS, etc.”

The Ld.DR relied on the order of the Assessing Officer.

We heard the parties and perused the materials on record. The CIT(A) while allowing the claim of the assessee for A.Ys 2008-09 & 2009-10 had held that the interest paid by the assessee to the financial institutions is incurred wholly and exclusively for the purposes of business and that the expenses are incurred for the development cost of the project on percentage completion method. It is also noticed that the assessee has paid the interest on the loan taken from HDFC Bank which was borrowed for the purpose of settling employee dues so that the vacant land without any encumbrance can be handed over to the developer. Therefore we see merit in the submission that the interest is claimed as part of development cost since as per the terms of the agreement the assessee is required to given a clear and marketable title of the land to the developer. Further it is a settled position that interest cost incurred towards acquisition of the clear tiltle of the property can be claimed as part of cost of acquisition. In the light of these discussions we uphold the decision of CIT(A) in allowing the claim of interest cost as part of development cost while computing the income.

In the result, appeal of the assessee is allowed and appeal of the revenue is partly allowed.

Order pronounced in the open court on 28/07/2023.