PRIDE PURPLE BUILDERS PRIVATE LTD.,,PUNE vs. DEPUTY COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE - 1 (1),, PUNE

ORDER

PER DR. DIPAK P. RIPOTE, AM:

Pride Purple Builders Private Limited [A] “1. The order of the Ld CIT (A) -11, Pune in the case is opposed to establish law and the judicial pronouncement.

, if deemed necessary.” Brief Facts of the case :

2. The brief facts of the case are that the appellant is a Private Limited Company engaged in the business of Construction and Real Estate activity. It was incorporated on 21/02/2002 as per the certificate of registration issued by ROC. The return of income for A.Y. 2015-16 was filed by the assessee on 28/09/2015 by declaring a total income of Rs.28,770/-. The case was selected

Pride Purple Builders Private Limited [A] for scrutiny and notice u/s.143(2) was issued on 13/04/2016. The assessment u/s.143(3) of the Act was completed by making an addition of Rs.1,27,82,145/- on account of interest claimed as deduction against the interest earned by the assessee company. In this manner, the total income was assessed at Rs.1,28,10,915/- .The facts leading to this addition are that the assessee company is following ‘project completion method’ for the purpose of recognition of revenue and since project was not complete during the year, no revenue was recognized in the P&L Account. The expenses incurred by the appellant during the year were capitalized as work in progress and closing work in progress was shown at Rs.33,99,79,976/-. The Assessing Officer, however, noticed that the total amount of expenses incurred by the assessee during the year under consideration were Rs.35,27,62,121/-. Thus, a part of expenses amounting to Rs.1,27,82,145/- was not capitalized as WIP by the assessee. Accordingly, the assessee company was requested to explain the same. In response to this, the assessee submitted that it received an interest income of Rs.1,27,82,145/- from its sister concern and the said interest income was set-off against the interest paid on loan taken by the assessee company. Therefore, the said

Pride Purple Builders Private Limited [A] amount was not capitalized as WIP. The assessee company further submitted that the company earned interest from the idle fund lying with the company in order to protect the interest of the company and therefore, such setting-off should be allowed.

3. The Assessing Officer(AO) following the Hon'ble Supreme Court decision in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. Vs. CIT 227 ITR 172 (SC) held that the interest income earned by the assessee company is taxable as income from other sources and accordingly rejected claim of the assessee of deduction of Rs.1,27,82,145/- and the said amount of Rs.1,27,82,145/- was added to the closing work-in-progress by the AO. The Ld.AO also added Rs. 1,27,82,145/- to the Total Income of the Assessee. The ld.CIT(A) confirmed the assessment order. The ld.CIT(A)’s Para 10 & 13 are as under : “10. These decisions clearly held that normally the interest income earned by an assessee through investment of its surplus fund will be taxed as ‘Income from Other Sources’ unless making of investment or earning of interest income is a separate business activity. It is also held by the Hon. Bombay High Court that in peculiar facts of case, if an assessee is able to prove the linkage of making such investment with his business, in that case only, such interest income can be considered as business income. In the present case, the contention of the appellant is that the earning of interest

Pride Purple Builders Private Limited [A] income out of borrowed fund not immediately required for the business is definitely a business activity. Besides this,the appellant has not furnished anything to substantiate that the funds were given to its sister concern for business purposes or has not furnished anything to substantiate that the interest was earned during the course of business. Since, the appellant has failed to substantiate that the earning of interest income has any linkage to its business activities, the contention of the appellant that the interest income is business income, cannot be accepted? ……………… 13. Coming to the second issue as to whether the interest paid on the bank loan can be set off against the Income from Other Sources as claimed by the appellant. The said issue has been discussed in detail by the Hon. Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilisers Ltd. vs CIT 227 ITR 172 (SC) wherein after discussing the various provisions of the Income Tax Act, the Hon. Supreme Court has held that the assessee cannot claim interest expenses paid on business loan, against interest income assessable u/s 56 of the Act. The relevant portion of the said judgment has been reproduced by the Ld. Assessing Officer in the assessment order. It is the claim of the appellant that the funds borrowed from bank were diverted to the sister concern and therefore the interest paid on the borrowings should be set off against the interest income. A perusal of the loan sanction letter dated 27.01.2014, issued by SBI suggests that one of the terms and condition of the credit facility sanctioned by the bank was that the funds were to be utilised for genuine requirements of the company only with no diversion. In fact, there is another condition that advance or money received from the customers was required to be first utilised for repayment of bank interest and loan. In such situation, thecontention of the appellant that borrowed funds were diverted to the sister concern cannot be accepted because it will be a violation of terms and condition ot credit—f facility granted by the bank which cannot be allowed by the bank. Considering the 1 facts of the case and the legal positionjaid down by the_Hon. Supreme Court in the case of Tuticorin Alkali (supra), the contention of the appellant that set off of interest 111 paid should be granted against the interest income received from the sister concern, is rejected.

Pride Purple Builders Private Limited [A]

4. Aggrieved by the order of ld.CIT(A), the assessee filed appeal before this Tribunal.

Submission of ld.Authorised Representative(ld.AR) : 5. The ld.AR submitted that assessee had borrowed loan from State Bank of India for the project of the assessee. However, since the funds were not required, the assessee gave temporary loan to its sister concern i.e. Pride Purple Infrastructure through banking channel. The assessee company earned interest from idle fund. Earning an interest income out of borrowed funds not immediately required for the business is definitely part of business and hence, interest received by assessee should not be treated as income from other sources. The ld.AR filed copy of Audit Report, Loan sanctioned letter, copy of ledger account. The ld.AR relied on the decision of the Hon'ble Bombay High Court in the case of CIT Vs. Lok Holdings 308 ITR 356 and CIT Vs. Lokhandwala Construction Inds 260 ITR 579 (BOM).

5.1 Ld.AR submitted that the Decision of the Hon’ble SC in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd Vs. CIT is distinguishable on facts and hence not applicable to the Pride Purple Builders Private Limited [A] case of the assessee. Ld.AR submitted that in the case of Tuticorin Alkali Chemicals And Fertilizers Ltd, the Company had not commenced its business, where as in the case of the Assessee Pride Purple Builders Pvt. Ltd., it was incorporated on 21/02/2002 and had commenced business. The assessee is in the business of construction of housing project, the construction had already started. The Assessee had received Booking Advance of Rs.19,57,99,420/- as on 31.03.2015 and Rs.2,88,52,242/- as on 31.03.2014. The Assessee follows project completion method. The Ld.AR submitted that based on these facts the case relied by the AO is distinguishable on facts.

5.2 Ld.AR submitted that the assessee availed Loan from State Bank of India for its business purpose, the project called “Park Ivory”. The project was stock in trade of the assessee and not a capital asset. 5.3 The Ld.AR also relied on the order of Hon’ble Delhi High Court in the case of PCIT Vs Jubilant Energy NELP-V Pvt. Ltd., ITA 1440/2018 order dated 12/12/2018. In that case the Assessee had paid interest on Borrowed funds and had also earned interest from Fixed Deposits and Inter Corporate

Pride Purple Builders Private Limited [A] Deposits. The Hon’ble Delhi High Court held that Interest paid to earn interest has to be allowed as deduction under Section 57 of the Act. 5.4 The Ld. AR also relied on following decisions:  Vodafone South Ltd vs CIT ITA 334/2014 (Del High Court)  ITO vs Brahma Associates ITAT Pune ITA 133/PN/2014  DLF Info City Development vs ACIT ITA 894/Del/2018  Triumph Reality Pvt Ltd [2023] 148 taxmann.com 196 (Delhi)

Submission of ld.Departmental Representative(ld.DR) : 6. The ld.Departmental Representative read out the relevant portion of the Hon'ble Supreme Court’s decision in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. Vs. CIT (supra). The ld.DR also submitted that the Hon'ble Bombay High Court’s decision in the case of CIT Vs. Lok Holdings(supra) is distinguishable on facts. The ld.DR submitted that in the case of CIT Vs. Lok Holdings the assessee Lok Holdings had received certain advances from customers on account of purchase of flats. Since these amounts were not immediately required for the business of the assessee. Assessee temporarily invested with banks. However, in the case of the assessee, the assessee has Pride Purple Builders Private Limited [A] borrowed money from State Bank of India and that borrowed amount has been diverted to sister concern. Therefore, the Hon'ble Bombay High Court in the case of CIT Vs. Lok Holdings is distinguishable on facts and not applicable to the case of the assessee.

6.1 Ld.DR strongly relied on the order of the AO and Ld.CIT(A).

Findings and Analysis : 7. We have heard both the parties and perused the records. The assessee is a Private Limited Company and in the business of construction of real-estate. During the year Assessee was constructing residential Project called “Park Ivory”. It is an admitted fact by the assessee that assessee follows ‘Project Completion Method’ for recognition of revenue and has not recognized any revenue for taxation during the year. It has been shown as part of closing work-in-progress. Assessee has incurred expenses of Rs.35,27,62,121/-. However, assessee has capitalized expenses of Rs.33,99,79,976/- as closing work-in- progress. Assessee has not capitalized the interest expenses of Rs.1,27,82,145/-. It is observed that as per the Profit and Loss

Pride Purple Builders Private Limited [A] Account, assessee had incurred interest expenses of Rs.1,85,90,273/- out of which Rs.58,08,120/- has been capitalized as part of closing work-in-progress. Assessee claimed that assessee had received interest of Rs.1,27,82,145/- from its sister concern on account of loan given by the assessee to sister concern and the said amount has been reduced from the total interest income payable. The details of work-in-progress submitted by assessee are as under :

Particulars Rs. Rs. Opening stock 20,21,58,776 Add: All costs 35,27.62,121 Material cost 31,76.89.411 Finance expense 2,84.80,273 Other Expense 64,77,073 Depreciation 1,15,364 Add: Profit 38,766 Less: Other Income 1,28,20,911 Closing WIP 33,99,79,976 8. Analysis of Assessee’s Balance Sheet shows following facts : As on 31.3.2015 As on 31.3.2014 Share Capital 2,19,00,000/- 2,19,00,000/- Reserve & Surplus 31,56,82,188/- 31,56,43,422/- Advance against 19,57,99,420/- 2,88,52,242/- Bookings Secured Loan 25,29,71,951/- 0 Unsecured Loan 0 5,36,00,000/-

Pride Purple Builders Private Limited [A] 8.1 The State Bank of India Industrial Finance Branch Pune vide its letter dated 27/01/2014 had sanctioned Credit facility of FBWC (Fund Based Working Capital) limit of Rs.80 crores to the assessee. (page 21 of the paper book). During the year, the Assessee had availed credit facility from State Bank of India of Rs.25,29,71,951/- for its business. Assessee already had its own available fund of Rs.33,75,82,188/- (Rs.2,19,00,000/- + Rs.31,56,82,188/-) and Advance of Rs.19,57,99,420/-.

Pride Purple Builders Private Limited [A] 9.1 There are transactions on other pages of the Bank statement also, however we do not intend to reproduce all pages. Thus, it can be seen that there is clear nexus between the Investment made by the assessee in sister concern Pride Purple Infrastructure and the credit facility availed by the assessee.

10.1 In the Balance Sheet, in Note Number 7, the assessee has shown as under : “Investment in Pride Purple Infrastructure : Rs.22,71,62,710/-” 10.2 Thus, assessee has shown Rs.22,71,62,710/- as investment in sister concern Pride Purple Infrastructure.

11.1 In these facts and circumstances of the case, we agree with the Ld.AR that the case law relied by the AO in the case of Tuticorin Alkali Chemical (supra) is distinguishable on facts as in that case the business was not commenced, where as in the Pride Purple Builders Private Limited [A] case of the Assessee the business was already started in earlier years.

11.2 The Hon’ble Bombay High Court in the case of CIT Vs. Lok Holdings 308 ITR 356 (Bombay)[15-01-2008]has held as under : Quote, “ 2. The brief relevant facts of the case are that the respondent M/s. Lok Holdings was, at the relevant time, a firm involved in the business of development of properties. In the course of its business, the assessee-firm received monies in advance from customers intending to purchaseflats in the properties as developed by the assessee. These monies were of the nature of booking/advances. Since these monies received could not be immediately utilised for the business of the firm, the surplus amounts from such money received came to be temporarily invested with banks and other concerns. Such deposits with accrued interest thereon which was received by the assessee-firm was deducted from the work-in-progress till the conclusion of the project. For the assessment year 1992-93, the income from such interest was Rs.52,28,289. The Assessing Officer assessed this interest income as income from other sources and thus made an addition in this regard under the head "Income from other sources". On an appeal by the assessee, the Commissioner of Income-tax (Appeals), following the decision of the Tribunal dated 29-04-2002, delivered in the case of East Coast Enterprise, deleted the income. The revenue preferred an appeal against the order passed by the Commissioner of Income-tax (Appeals) and by a judgment and order dated 14-6-2004, the Income-tax Appellate Tribunal dismissed the appeal filed by the revenue. It is in such circumstances, that the present appeal came to be filed…………………………

Pride Purple Builders Private Limited [A] the Apex Court held that there could be no income from business.

7. The advocate appearing for the respondent relied upon a judgment of the Division Bench of this Court in the case of CIT v. Paramount Premises (P.) Ltd.[1991] 190 ITR 259 . The facts of Paramount Premises (P.) Ltd.'s case (supra) were almost similar to the facts before us. The assessee in that case had received deposits in instalments from prospective purchasers while the work of construction was in progress. If the purchasers failed to make deposits by stipulated dates, they were required to pay interest. Idle amounts were deposited with the bank or given on temporary loans until such time as they were required for construction. Thus, interest was earned on these amounts. In due course the assessee's appeal was considered by the Tribunal and the Tribunal recorded a finding that the entire interest sprang from the business activity of the assessee and did not arise out of any independent activity. This Court held that the aforesaid interest was assessable as income from business and affirmed the correctness of the view of the Tribunal that the interest so earned was "Income from business". In our view, the law as laid down in Paramount Premises (P.) Ltd.'s case (supra) is squarely applicable to the facts of the present case. ” Unquote. 11.3. The Hon’ble Bombay High Court in the identical facts held that the Interest Income earned is business income. Hon’ble Bombay High Court also distinguished the Hon’ble Supreme Court’s decision in the case of Tuticorin Alkali chemical (supra).

Pride Purple Builders Private Limited [A] 11.4. In the present case i.e. Pride Purple Builders Pvt. Ltd the Assessing Officer in concluding paragraph has held that the Interest of Rs.1,27,82,145/- is Income from other Sources and accordingly taxed it. However, we have already observed in earlier paragraphs that the Assessee’s business had commenced prior to F.Y.2014-15 (A.Y.2015-16), the Assessee had earned Interest Income during the course of business of the Assessee on strategic investment in Pride Purple Infrastructure.

12.1 The Hon’ble Supreme Court has discussed the issue of chargeability of Interest Income in the case of National Cooperative Development Council Vs. CIT CIVIL APPEAL No.5105 of 2009 as under : Quote, “21. The first aspect which we would advert to is whether interest on loans or dividends would fall under the head of ‘Income from other sources’ under Section 56 of the IT Act or would it amount to income from ‘Profits and gains of business or profession’ under head ‘D’ of Section 14 of the IT Act. In terms of Section 28 of the IT Act such profits and gains of any business or profession under the head ‘D’ of Section 14 of the IT Act would be chargeable to income tax if the income

Pride Purple Builders Private Limited [A] is relatable to profits and gains of business or profession carried out by the assessee 18 at any time during the previous year [Clause (i) of Section 28 of the IT Act]. Section 56 of the IT Act is in the nature of a residuary clause, i.e., if the income of every kind which is not to be excluded from total income under the IT Act would be chargeable under this head if it is not chargeable under Section 14 heads ‘A’ to ‘E’. ” Unquote. 12.2 Thus, Interest income would be chargeable as Business Income if it is directly related to business of the assessee.

14 The Hon’ble Delhi High Court in the case of CIT Vs U K Bose [2013] 29 taxmann.com 219 (Delhi) has held as under : Quote , “ 15. That leaves us with the second substantial question of law in which is as under: - (ii) Whether the ITAT was correct in law in deleting the addition of Rs. 10,12,529/- made by the assessing officer on account of interest paid by the assessee on loan taken for purchase of an exempted asset?" We may notice the facts giving rise to the question. The assessee received interest of Rs. 17,87,426/- from Sahara India Commercial Corporation Ltd. (SICCL) against which it claimed deduction of Rs. 10,12,524/-, being interest paid to the sameentity i.e. SICCL and declared the net interest of Rs.7,74,897/- as his income………………………….. This Court held that the interest which had to be excluded from the business profits was not the gross amount of interest, but only the net interest after adjusting the Pride Purple Builders Private Limited [A] expenditure incurred by the assessee to earn such interest. There was reference made to the judgment of the Supreme Court in Keshavji Ravji & Co. ( Supra) and it was observed by this Court in paragraph 51 of the judgment that the underlying principle of netting would get attracted as no prudent business man would allow taxation of interest income without the expenditure incurred for earning the same being taken into account. There is also the overriding principle in tax law that it is not the gross receipt that falls to be assessed but it is only the net income, after all the expenditure to earn the income is deducted, that can be assessed to tax. Strictly speaking, in the present case it is not a question of any deduction being allowed from the interest receipt; it is really a question of adjusting or setting off both the interest received and the interest paid, since both have close link or nexus with each other. The Tribunal has recorded a finding that the agricultural land was sold by the assessee in the month of February, 1999 to SICCL. From the date of sale of the land till the remittance of the sale proceeds the assessee was to pay interest of Rs.10,12,529/- on the loan which he had taken for purchase of the land. It is in respect of the same period that he was entitled to interest income of Rs.17,18,426/- from SICCL. Had there been no delay by SICCL in the remittance of the sale proceeds, there would have been no interest liability. The right to receive the interest and the liability to pay interest arose in respect of the same period and out of the same event i.e. non-payment of the sale proceeds in time. The delay in payment of the sale proceeds and the delay in repayment of the borrowing are both intertwined; one gives rise to interest income and the other gives rise to interest liability. We are of the view that this affords sufficient nexus between the two so as to justify the applicability of the principle of netting.

Pride Purple Builders Private Limited [A]

Pride Purple Builders Private Limited [A] the question as framed in favour of the assessee and against the Revenue……"

6. The aforesaid principle has also been reiterated by this Court in Pr. CIT v. Facor Power Ltd. [2016] 66 taxmann.com 178/237 Taxman 613/380 ITR 474.