SABARMATI RIVER FRONT DEVELOPMENT CORPN.LTD.,,AHMEDABAD vs. THE DY.CIT,CIRCLE-8,, AHMEDABAD

These two appeals have been filed by the Assessee are directed against the order of the Ld. CIT(A)-9, Ahmedabad dated 11.03.2015 & 22.03.2016 pertaining to A.Ys. 2011-12 & 2012-13. Since issues are common, therefore for & 1297/Ahd/16 2 . A.Ys. 2011-12-2012-13 the sake of brevity, we would like to dispose of this order by way of common order.

First of all, we would like to A.Y. 2011-12. The assessee has taken following grounds of appeal:

Facts of the case are that the assessee company is engaged in the process of development of both sides of Sabarmati River. During the year under consideration for development of project which was under construction and all the expenditure relating to this project incurred during the year under consideration have been transferred to work in progress account. Further, it is seen that 50% of certain expenses have been transferred to WIP and the balance amount has been taken to the Profit & Loss Account.

In reply to show cause notice, assessee stated that the project of development of both sides of Sabarmati River in the City of Ahmedabad and the said project is under consideration and as per Note B(1) to Notes to accounts the consideration in respect of development work being carried out by the company is to be worked out on completion of development work and realization of proceeds from lease/sale of developed land of the Sabarmati & 1297/Ahd/16 3 . A.Ys. 2011-12-2012-13 Riverfront Project by AMC. During the year under consideration, no sale/lease has taken place nor has any advances/deposits been received. Thus, no income on account of activities taken by the company has been offered in the profit and loss account. Therefore, according to the very basic principle of accounting, all the expenses having long term bearing upon the project ( other than day to day expenses) must be transferred to WIP. However, on perusal of Schedule 1 of Annual Accounts, it is seen that a number of expenses have been debited in the P & L account which are not in the nature of day to day or regular expenses. For example ‘Advertisement and Publicity’ and ‘Legal & Professional fees’ debited in P & L a/c are not in the nature of day to day expenses and are directly related to development of the project having a long term bearing upon it. Therefore, these expenses should be transferred to balance sheet and cannot be claimed in the P & L a/c.

In reply to this notice, assessee submitted following reply: "1. With reference to the above, we are in receipt of your letter dated 16.09.2013, wherein you have given to the reference of our letter dated 16.08.2013, wherein we have stated that the development of the Project is under construction stage and all the expenditures relating to this Project incurred during the year under consideration have been transferred to work-in-progress account. It has also been explained that during the year neither any sale or lease has taken place nor any advance or booking deposit has been received. In letter dated 16.09.2013, in para 6, you have stated that our contention is not correct because the expenditure of Rs.1,52,57,043/-has been debited to Profit and Loss Account being administrative expenses. In this regard, we would like to clarify that direct expenditures in relation to the project have been debited to work-in- progress; whereas indirect expenditures like staff salary, telephone, vehicle hire charges, security charges, office expenses, refreshment, miscellaneous expenditure etc. are capitalized to the extent of 50% and 50% has been debited to the Profit & Loss Account, which is constantly followed by the company since commencement of Sabarmati River Front Project and this is in accordance with Accounting Standards issued by the Institute of Chartered Accountants of India. & 1297/Ahd/16 4 . A.Ys. 2011-12-2012-13 We have in our letter dated 13.09.2013 duly explained this issue in para 2. This stand has been continuously taken by the company and the same has been accepted by the Department in earlier assessment year."

But contention of the assessee were not accepted by the A.O. and made disallowance of Rs. 1,12,20,240/- as pre-Operative Expenses.

Thereafter, assessee preferred first statutory appeal before the ld. CIT(A) in which action of the A.O. was sustained.

We have gone through the relevant record and impugned order. Undisputedly, actual business of the assessee has not yet commenced and same are to be considered as pre-Operative Expenses.

We also draw support from the order of ITAT wherein action of lower authorities was affirmed with the following observation: 6. We have heard the rival contentions and perused the material on record. During the year under consideration, there was no business. The appellant had shown only income from tender fees and interest income under the head "income from other sources". Even assessee's plea accepted that kite flying festival expenses were related to it not AMC, no evidence has been substantiated by the appellant that those expenses as directly benefitted the business of the assessee. As such, no business has been commenced by the appellant during the year under consideration. It has been capitalizing the all the expenses in work in progress except legal and professional fees and filing fees. The only receipt of Rs.1,85,959/- has been shown after charging of related expenses of facilitating the AMC for its 330 MLD water intake well project. The publicity expenditure was claimed to be related to Savarmati River Development Project. The appellant had not booked or taking any advance for taking of any residential space or it has not & 1297/Ahd/16 5 . A.Ys. 2011-12-2012-13 started to allow any public utility for general public. This publicity is not related to any generating of revenue of the company. The case law referred by the Id. CIT(A) are squarely applicable as no business started, no expenses is allowed. The CIT(A) further relied upon the decision of Hon'ble Gujarat High Court in case of CIT vs. Navsari Cotton & Silk Mills (1982) 135 ITR 546, wherein Hon'ble Court had given eight positive and thirteen negative tests for allowablity/disallowability of the expenditure u/s. 37 of the IT Act, is squarely applicable. The Hon'ble Supreme Court in case of CIT vs. Chandulal Keshavlal & Co. (1960) 38 ITR 601, held that "if the expense is incurred for fostering the business of another only or is made by way of distribution of profits or is wholly gratuitous or for some improper or oblique purpose outside the course of business, then expenses is not deductable." Thus, we have considered view that the expenditure claimed by the appellant under the head "advertisement expenses" is not incurred wholly and exclusively for business purposes. As such, no income has been booked by the appellant. The assessee incurred expenditure on publicity at Rs.55,06,198/- as per p&l account not Rs.65,06,198/-. Thus, CIT(A) was wrong in enhancing the disallowance under this head. Accordingly, we confirm the order of the CIT(A) and dismiss the assessee's appeal in ground no.1.

Thus, in facts and circumstances of the case and in parity with the Co-ordinate Bench decision in assessee’s own case in 1790/Ahd/2011 & 1187/Ahd/2012 dated 31.07.2013, we dismiss this ground of appeal of the Assessee.

And before the Assessing Officer, assessee could not furnish any explanation as to why TDS has not been deducted in respect of said payment and payment of Rs. 3,62,608/- was disallowed.

Thereafter, assessee preferred first statutory appeal before the ld. CIT(A) who confirmed the action of the A.O.

We have gone through the relevant record and impugned order. Since the above said amount is inclusive in the ground no. 1, therefore, the same is consequential and at this stage, same cannot be adjudicated however statistical purpose, this ground of appeal is dismissed.

The assessee company s earned interest amounting to Rs. 33,87,663/- on fixed deposits with the Bank which was offered for taxation as income from other & 1297/Ahd/16 8 . A.Ys. 2011-12-2012-13 sources. The assessee company borrowed funds from HUDCO for which the company paid interest of Rs. 20,99,91,930/-. The company did not claim it as expenditure in the books of account and also in the return. Vide notice u/s. 142(1) dated 5th August, 2013, assessee was issued following notice: "-As per Note 3 to Statement of income submitted by you, your company intends to claim interest expenditure of Rs.20,99,91,930/- under the head 'Income from Other Sources' u/s. 57(iii) 'at appropriate time'. Please furnish justification for the same in view of the facts of the case, legality involved and assessment order of AY 2009-10 "

In reply, assessee stated as follows: "The company has earned interest of Rs.33,87,663/- on FDRs of the banks. Receipts included under the head of Income from other sources. Interest is earned on FDRs made out of funds borrowed on which Corporation has paid interest of Rs.20,99,91,930/- and therefore, the same is eligible for deduction from interest earned on FDRs. However, in the Return of income, interest earned is offered to tax and by way of note claim of deduction in respect of interest paid has been made and, therefore, while finalizing the assessment, deduction in respect of interest paid may kindly be allowed. Reliance is placed on the decision in the case of J. F. Laboratories Ltd. V ITO [96 ITD 448 (Mum)].

But ld. A.O. was not agree with the contention of the assessee and held that interest of Rs. 20,99,91,930/- has been paid on the loan raised from HUDCO and other corporations, as per the details given by the assessee under the head of “ Incidental Expenditure during construction”. It is not the case of the assessee that the funds have been borrowed for investments. Rather the loan has been raised for business purposes only. Therefore, relying on the decision of Supreme Court decision in the case of Goetz India Ltd. 284 ITR 323 : & 1297/Ahd/16 9 . A.Ys. 2011-12-2012-13 20. And Assessing Officer had disallowed the similar claim of the assessee which was again confirmed by the ld. CIT(A) on similar ratio of decision relied by the ld. CIT(A) and disallowed the interest expense.

Thereafter, assessee preferred first statutory appeal before the ld. CIT(A) who confirmed the action of the A.O.

We have gone through the relevant record and impugned order. Similar matter also came before the ITAT for A.Ys. 2006-07, 2007-08 & 2009-10 in 1790/Ahd/2011 & 1187/Ahd/2012 Co-ordinate Bench set aside this issue to the file of ld. CIT(A) to pass the specific order and bring in out clearly applicability of the provisions of section 57(iii) of the I.T. Act and as to whether or not borrowed fund had not indeed been utilized in purchasing FDs. Thus, in parity with the above said ITAT order, we set aside this issue to the file of the ld. CIT(A) to decide this matter as per order of Co-ordinate Bench directions in the above said judgment.

Now we come to for A.Y. 2012-13. In this appeal, solely ground has been taken that ld. CIT(A) has erred in law and on facts of the case by confirming the disallowance of interest expenditure of Rs. 36,51,287/- by Assessing Officer as deduction u/s. 57(iii) of I.T. against interest earned by the appellant.

In connected similar issue we have set aside to the file of the ld. CIT(A) to pass the specific order and bring in out clearly applicability of the provisions of section 57(iii) of the I.T. Act and as to whether or not borrowed fund had not indeed been utilized in purchasing FDs. & 1297/Ahd/16 10 . A.Ys. 2011-12-2012-13 The issue is identical in all the years. By following the orders of respected Co- ordinate Bench in assessee’s own case on the same issue, matter was set aside by the Co-ordinate Bench. Thus, in parity with the Co-ordinate Bench decision, we set aside this issue to the file of the ld. CIT(A).

In the result, both the appeals of the assessee are partly allowed in terms and stated above therein.