I am a developer. I borrowed to buy land for the next project and the Assessing Officer has capitalised the interest because the project has not started. Does the proviso to section 36(1)(iii) apply to land held as stock?
On this reasoning it does not. The Tribunal held that the expression "put to use" in the proviso applies to a capital asset, an income earning apparatus that facilitates the business activity, in contradistinction to inventory; the purchase and holding of inventory is itself a business activity, so interest on a borrowing used to buy land held as stock in trade cannot be disallowed under the proviso.
Decided by the ITAT (V. Durga Rao, Judicial Member and G. Manjunatha, Accountant Member (Chennai "C" Bench)) on 2021-03-31, reported as I.T.A. No. 3372/Chny/2019; Assessment Year 2015-16; heard 9 February 2021. It bears on section 36(1)(iii), section 36(1)(iii) proviso of the Income Tax Act 1961, in Deductions & Disallowances matters.
This is the argument for real estate and construction assessees whose interest is being capitalised project by project, and it has two limbs which have had different fates. The first limb — that acquiring land for development in the course of the same construction business is a continuation of that business and not an extension of it — rested on the words "for extension of existing business or profession" in the proviso and on the Rajasthan High Court in CIT v Aditya Propcon Pvt. Ltd. Section 13 of the Finance Act 2015 omitted those words from the proviso with effect from 1 April 2016. For AY 2016-17 onwards that limb is gone, and an argument built on it will fail. The second limb survives: that "put to use" is language apt only for a capital asset, and inventory is put to use in the business the moment it is acquired. Also useful is the Tribunal's refusal to let the Assessing Officer isolate one project and apply a matching concept to it, where the assessee runs a construction vertical with several projects and has offered substantial income from another of them. Accounting Standard 16 was held inapplicable because a qualifying asset under that standard is one that takes a substantial period to get ready for its intended use, which does not describe inventory.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
Read aloud by your device. Press again to stop.
The assessee was in the business of real estate development, executing two projects at different places, one at MRC Nagar and one called Atlantic. It borrowed from IFCI Ltd. and used the borrowing to purchase land at MRC Nagar, which it carried in its financial statements as inventory. The Assessing Officer accepted in terms that the loan was borrowed for the purpose of the assessee's business, but disallowed the interest on the ground that the asset purchased had not been put to use in the year for the purpose of the business, invoking the proviso to section 36(1)(iii) and Accounting Standard 16, and treating the MRC Nagar project on a standalone basis as not having commenced. The Commissioner (Appeals) confirmed the disallowance. The assessee had offered substantial income from the Atlantic project.
The appeal was allowed. Interest paid on a loan borrowed for the purchase of land held as inventory cannot be treated as interest on capital borrowed for the acquisition of a capital asset so as to attract the proviso to section 36(1)(iii). The Commissioner (Appeals) order was set aside and the Assessing Officer was directed to delete the addition.
Section 36(1)(iii) permits interest on capital borrowed for the purpose of business, and the business purpose of the IFCI borrowing was admitted by the Assessing Officer; the only objection was that the asset had not been put to use (para 10). Accounting Standard 16 deals with borrowing cost on a qualifying asset, defined as one that necessarily takes a substantial period of time to get ready for its intended use, which is language directed at capital assets; land purchased in a real estate business becomes inventory the moment it is purchased and is thereby put to use in the business, so the standard was wrongly applied (para 11). The proviso was inserted to disallow interest on a borrowing for acquisition of an asset until that asset is ready for use in the business, and the term "put to use" is apt for a capital asset or income earning apparatus that facilitates the business activity, in contradistinction to inventory; holding inventory is itself a business activity in the normal course and in continuation of the construction business (para 12). Treating the MRC Nagar project on a standalone basis was presumption, since the construction business was a single vertical within which the projects were executed, and acquisition of the property was not an extension of the existing business but an acquisition of inventory correctly so treated in the financial statements; the matching concept applied by isolating one project was misconceived where substantial income had been offered from another (para 12). The Rajasthan High Court in CIT v Aditya Propcon Pvt. Ltd. had held on identical circumstances that interest on funds borrowed to purchase land forming part of inventory is deductible under section 36(1)(iii), and that the proviso speaks of acquisition of an asset for extension of existing business (paras 13 to 15).
The term 'put to use' applies to capital asset only because capital asset is held to facilitate the business activity and sometimes it needs to be prepared after its acquisition for being used to facilitate business activity. As against this, purchase and holding of inventory itself is a business activity.
Upload it and we will read it, work out your deadline and draft the reply. A CA reviews before anything is filed.
Handle my notice → Ask a CA on WhatsAppOn this reasoning it does not. The Tribunal held that the expression "put to use" in the proviso applies to a capital asset, an income earning apparatus that facilitates the business activity, in contradistinction to inventory; the purchase and holding of inventory is itself a business activity, so interest on a borrowing used to buy land held as stock in trade cannot be disallowed under the proviso. This was decided by the ITAT (V. Durga Rao, Judicial Member and G. Manjunatha, Accountant Member (Chennai "C" Bench)) and bears on section 36(1)(iii), section 36(1)(iii) proviso of the Income Tax Act 1961. It is reported as I.T.A. No. 3372/Chny/2019; Assessment Year 2015-16; heard 9 February 2021. This is the argument for real estate and construction assessees whose interest is being capitalised project by project, and it has two limbs which have had different fates. The first limb — that acquiring land for development in the course of the same construction business is a continuation of that business and not an extension of it — rested on the words "for extension of existing business or profession" in the proviso and on the Rajasthan High Court in CIT v Aditya Propcon Pvt. Ltd. Section 13 of the Finance Act 2015 omitted those words from the proviso with effect from 1 April 2016. For AY 2016-17 onwards that limb is gone, and an argument built on it will fail. The second limb survives: that "put to use" is language apt only for a capital asset, and inventory is put to use in the business the moment it is acquired. Also useful is the Tribunal's refusal to let the Assessing Officer isolate one project and apply a matching concept to it, where the assessee runs a construction vertical with several projects and has offered substantial income from another of them. Accounting Standard 16 was held inapplicable because a qualifying asset under that standard is one that takes a substantial period to get ready for its intended use, which does not describe inventory. If it applies to you, the first step is this: Establish the accounting treatment first. Show the land in the financial statements as inventory or stock in trade of the construction business, not as a capital work in progress.
The assessee was in the business of real estate development, executing two projects at different places, one at MRC Nagar and one called Atlantic. It borrowed from IFCI Ltd. and used the borrowing to purchase land at MRC Nagar, which it carried in its financial statements as inventory. The Assessing Officer accepted in terms that the loan was borrowed for the purpose of the assessee's business, but disallowed the interest on the ground that the asset purchased had not been put to use in the year for the purpose of the business, invoking the proviso to section 36(1)(iii) and Accounting Standard 16, and treating the MRC Nagar project on a standalone basis as not having commenced. The Commissioner (Appeals) confirmed the disallowance. The assessee had offered substantial income from the Atlantic project. The matter was decided on 2021-03-31 by the ITAT (V. Durga Rao, Judicial Member and G. Manjunatha, Accountant Member (Chennai "C" Bench)). On those facts the ITAT held as follows. The appeal was allowed. Interest paid on a loan borrowed for the purchase of land held as inventory cannot be treated as interest on capital borrowed for the acquisition of a capital asset so as to attract the proviso to section 36(1)(iii). The Commissioner (Appeals) order was set aside and the Assessing Officer was directed to delete the addition.
Section 36(1)(iii) permits interest on capital borrowed for the purpose of business, and the business purpose of the IFCI borrowing was admitted by the Assessing Officer; the only objection was that the asset had not been put to use (para 10). Accounting Standard 16 deals with borrowing cost on a qualifying asset, defined as one that necessarily takes a substantial period of time to get ready for its intended use, which is language directed at capital assets; land purchased in a real estate business becomes inventory the moment it is purchased and is thereby put to use in the business, so the standard was wrongly applied (para 11). The proviso was inserted to disallow interest on a borrowing for acquisition of an asset until that asset is ready for use in the business, and the term "put to use" is apt for a capital asset or income earning apparatus that facilitates the business activity, in contradistinction to inventory; holding inventory is itself a business activity in the normal course and in continuation of the construction business (para 12). Treating the MRC Nagar project on a standalone basis was presumption, since the construction business was a single vertical within which the projects were executed, and acquisition of the property was not an extension of the existing business but an acquisition of inventory correctly so treated in the financial statements; the matching concept applied by isolating one project was misconceived where substantial income had been offered from another (para 12). The Rajasthan High Court in CIT v Aditya Propcon Pvt. Ltd. had held on identical circumstances that interest on funds borrowed to purchase land forming part of inventory is deductible under section 36(1)(iii), and that the proviso speaks of acquisition of an asset for extension of existing business (paras 13 to 15). In the words reproduced by the source cited on this page: "The term 'put to use' applies to capital asset only because capital asset is held to facilitate the business activity and sometimes it needs to be prepared after its acquisition for being used to facilitate business activity. As against this, purchase and holding of inventory itself is a business activity." The decision followed or applied CIT v Aditya Propcon Pvt. Ltd. (Raj.) — followed.
It was decided by the ITAT on 2021-03-31 and is reported as I.T.A. No. 3372/Chny/2019; Assessment Year 2015-16; heard 9 February 2021. Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 36(1)(iii), section 36(1)(iii) proviso, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeal was allowed. Interest paid on a loan borrowed for the purchase of land held as inventory cannot be treated as interest on capital borrowed for the acquisition of a capital asset so as to attract the proviso to section 36(1)(iii). The Commissioner (Appeals) order was set aside and the Assessing Officer was directed to delete the addition. It arises in Deductions & Disallowances matters, on section 36(1)(iii), section 36(1)(iii) proviso of the Income Tax Act 1961, and was decided by V. Durga Rao, Judicial Member and G. Manjunatha, Accountant Member (Chennai "C" Bench). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Argue the "put to use" limb, which is unaffected by the 2015 amendment, and lead with it. Do not lead with "this is not an extension of existing business" for AY 2016-17 or later. Meet a matching-concept disallowance by putting the whole vertical before the officer, including income offered from other projects in the same segment, rather than defending the project in isolation. If Accounting Standard 16 is invoked against you, take the officer to the definition of a qualifying asset, an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. For an AY 2016-17 or later year, obtain and read CIT v Aditya Propcon Pvt. Ltd. before relying on it; this order follows it but the retrieved text does not carry the extract of that judgment.
Still good law. This order has been affirmed on appeal. The Revenue took it to the Madras High Court under section 260A and lost: CIT v M/s Ceebros Hotels P Ltd (Madras High Court, 5 October 2021) is an appeal against ITA No.3372/Chny/2019 dated 31 March 2021 for AY 2015-16, raising whether interest on borrowings for the MRC Nagar project had to be capitalised into work-in-progress; the appeal was dismissed and the questions answered against the Revenue, the Court agreeing that 'put to use' in the proviso to section 36(1)(iii) governs capital assets only, so interest on funds borrowed to acquire land held as inventory in the ordinary course of a real-estate business stays deductible. The 23 documents thrown up by the citedby: index are all clones of one ITAT Bangalore order in John Distilleries which, on being opened, does not mention Ceebros at all - an index artefact, not treatment. Nothing overruling, doubting or confining the order was found. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Paragraph 13 ends "The relevant findings of the Hon'ble High Court are as under:-" and the retrieved text does not carry the extract that should follow; paragraphs 13 and 14 substantially repeat the same sentences, which suggests the report is imperfect at that point. I could not read the Rajasthan High Court decision in CIT v Aditya Propcon Pvt. Ltd. and have not stated its citation. Paragraph 10 paraphrases the proviso and omits the words "for extension of existing business or profession", although those words were part of the proviso for AY 2015-16 and the Tribunal in fact relies on them at paragraphs 12 and 13; the omission is the Tribunal's, not mine. The Finance Act 2015 amendment mentioned in this entry is taken from the text of that Act and not from the order. The lender is named in the order as M/s. IFCI Ltd.; the amount of interest in dispute is not stated in the paragraphs I read. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was allowed. Interest paid on a loan borrowed for the purchase of land held as inventory cannot be treated as interest on capital borrowed for the acquisition of a capital asset so as to attract the proviso to section 36(1)(iii). The Commissioner (Appeals) order was set aside and the Assessing Officer was directed to delete the addition.
TaxSphere, “Ceebros Hotels P Ltd v DCIT”, https://taxnotice.vittsphere.com/caselaw/case/ceebros-hotels-36-1-iii-proviso-land-held-as-inventory/ (validity last checked 2026-09-08)
The judgment itself is a government work and may be quoted freely. The summary, the validity note and the reasoning on this page are this library's own writing: quote them with attribution, and please do not present either as the words of the court — this page keeps the two apart and so should a quotation of it.
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
The Assessing Officer has disallowed interest on plant under erection at a flat 12 per cent. I say I funded it out of cash accruals. Who has to prove what?
I bought the assets of my business and left part of the price outstanding on interest. Is that interest deductible as interest on borrowed capital?
I borrowed to buy and install my plant and paid interest before production started — can I add that interest to the cost of the plant and claim depreciation on it?
The lender wrote off the principal of a loan I used to buy machinery. Is that taxable?
