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Facts
The assessee, engaged in real estate, earned interest on fixed deposits kept as security for a bank guarantee. The Assessing Officer added this interest income, and also disallowed interest claimed under Section 24(b). The CIT(A) upheld these additions. The assessee appealed.
Held
The Tribunal held that interest earned on FDRs kept as security for a bank guarantee is business income and can be set off against project expenses, following a Coordinate Bench decision. For the second ground regarding Section 24(b), the Tribunal admitted additional evidence and remitted the matter back to the AO for fresh adjudication.
Key Issues
Whether interest earned on FDRs provided as bank guarantee security is business income, and whether interest claimed under Section 24(b) is allowable.
Sections Cited
24(b), 143(3), 250(6)
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Income Tax Appellate Tribunal, DELHI BENCH ‘B’’ : NEW DELHI
Before: SHRI SHAMIM YAHYA & SHRI SUDHIR PAREEK
ORDER
PER SHAMIM YAHYA, AM:
The Assessee has filed the instant Appeal against the Order of the Ld. CIT(A)-16, New Delhi dated 06.12.2019, relating to assessment year 2015-16 on the following grounds:- 1. Addition on account of interest earned by the assessee on fixed deposits given to DG town and country planning Haryana for bank guarantee claimed by assessee as business income of Rs. 12,61,455/- is totally unlawful and arbitrary and needs to be quashed.
2. Disallowance of interest claimed u/s. 24(b) of Rs. 35,41,233/- of the Act are unlawful and arbitrary and needs to be quashed. The assessee claimed interest of Rs. 35,41,233/- u/s. 24(b). This expense was incurred by way of interest paid to financial institution on loan taken by the assessee for purposes of the property.
2. Brief facts of the case are that assessee is engaged in the business of real estate. The assessee company e-filed its return of income for AY 2015-16 declaring income of Rs. 20,53,620/-. Thereafter, the case was assessed u/s. 143(1) on 1.3.2016. The case was selected for e-assessment proceedings for type of scrutiny ‘Limited’ through CASS and the e-assessment proceeding and addition was made of Rs. 48,02,688/- on account of interest earned on FDRs amounting to Rs. 12,61,455/- and disallowance on interest claimed u/s. 24(b) amounting to Rs. 35,41,233/- and assessed the income at a total amount of Rs. 68,56,308/-. Against the above, assessee preferred the appeal before the Ld. CIT(A) who dismissed the appeal of the assessee.
Against the above order, assessee is in appeal before us.
4. Apropos ground no. 1 relating to Addition on account of interest earned is concerned. In this case, the assessee had kept FDRs in lien against Bank Guarantee for real estate project. Hence, interest on FDRs have been deducted from the value of inventory (work in progress) claiming that it was capital in nature. AO and CIT(A) did not accept this proposition and the same was disallowed. Ld. Counsel for the assessee submitted that this issue is squarely covered 2 | P a g e in favour of the assessee by the decision of the Coordinate Bench in the case of NCML Varanasi Private Limited vs. ITO and Ors. decided in & 348/Del/2022 (AY 2018-19) and NCML Bhattu Pvt. Ltd decided vide order common order dated 14.11.2022. Ld. DR did not controvert the aforesaid proposition.
We have heard both the parties and perused the records. We find that facts of the present case are identical to that of NCML Varanasi Private Limited vs. ITO and Ors. (Supra) wherein, the Coordinate Bench of this Tribunal has decided the issue in dispute in favour of the assessee by holding as under:- “3. I have considered rival submissions and perused material on record. In so far as the factual aspect relating to the issue in dispute are concerned, it is a fact that both the assessee have entered into concession agreements with FCI for construction, operation and maintenance of Silo Complex. In terms of the concession agreements, the assessee are required to furnish bank guarantees for which the concerned banks have kept securities by way of fixed deposits. Thus, it cannot be denied that the fixed deposits kept with banks are in connection with the business activity of the assessee. That being the factual position emerging on record, the interest income earned has a direct nexus with the business activity of the assesse. In that view of the matter, the interest income earned by the assessee has to be treated as income from business and can be set off against the cost of construction. There is no doubt that the interest income pertained to the impugned assessment year and the concerned banks have deducted tax at source while crediting the interest income to the account of the assessee. The only reason on which the departmental authorities have rejected to grant refund of the TDS amount is, the interest income has been adjusted against the construction expenses. This, in my view, is unacceptable. In case of CIT vs. Japyee DSC 3 | P a g e Ventures Ltd. (2012) 17 taxmann.com 257 (Delhi) the Hon’ble Jurisdictional High Court while considering identical nature of dispute has held that the interest income earned on fixed deposits kept as security for performance guarantee is taxable as business income and can be set off against project expenses. The ratio laid down by the Hon’ble Jurisdictional High Court, as aforesaid, squarely applies to the fact of the present appeal. In view of the aforesaid, I direct the Assessing Officer to refund the TDS amount to the assessee.
In the result, the appeals are allowed.”
6. Respectfully following the aforesaid precedent, we direct that this treatment of interest income as adjustment from work-in-progress is correct, hence, we set aside the orders of the authorities below and decide the issue in favour of the assessee.
7. Apropos ground no. 2 relating to disallowance of interest u/s 24(b) is concerned, the interest income u/s. 24(b) amounting to Rs. 35,41,233/- against rental income on property was added back to the income of the assessee company. In appeal, Ld. CIT(A) observed that nexus between loan and purchase of house property was not established as the interest is on Loan Against Property and not loan for purchase of property, hence, he upheld the fining of the AO that the interest of Rs. 34,41,233/- does not fall within the ambit of section 24(b) of the Act.
We have heard both the parties and perused the records. Before us, Ld. Counsel for assessee has filed a Paper Book containing pages 1-25 consisting of Application under Rule 29 of ITAT Rule, 1963 for production of additional evidence before us with Affidavit; Annexure-A – relating to detail showing source for repayment of loan to PNB i.e. lenders details for getting property free from loan and copies of A/cs of ledger
4 | P a g e maintained in petitioner books of a/cs and copy of bank statement; Annexure-B – Utilization of loan received from Reliance House Finance Ltd. for repayment to lenders who had given loan to repay PNB loan and Annexure-C – copy of order passed in Civil Appeal No. 4096 of 2022 passed by Hon’ble Apex Court dated 17.5.2022 in the case of Levaku Pedda Reddamma & Ors. Vs. Gottumikkala Venkata Subbamma & Anr. The contents of the said Application filed under Rule 29 of the ITAT Rules, 1963 for production of additional evidence before the ITAT are reproduced as under:- “ 1. Appellant had filed appeals against order dated 06.12.2019 passed by CIT (A)-16, New Delhi U/s 250(6) of the Income Tax Act wherein the Assessment Order passed by Assessing Officer had been confirmed, where Assessing Officer had determined the income of the applicant are Rs.68,16,310/- making an addition of Rs.48,02,688/-. The amount disputed in appeal before ITAT is Rs.48,02,688/-, whichis listed for 25.05.2023before this Hon'ble Tribunal.
Appellantwants to place the Additional evidence on record of this Tribunal and will be relying on these Addl. Evidence while arguing the case on merits. THE BRIEF FACTUAL MATRIX IS AS UNDER: - (A-i) Assessee had earned Rs. 12,61,455/- as interest from fixed deposit receipts which were made to be kept in lien against Bank Guarantee issued in favour of Director General Town and Country planning Haryana. This was against EDC/IDC/IDW charges payable by the Company for release of its real estate license. The Assessee under business requirements was obliged to do it i.e. make these FDR to be submitted for deferment of this charges.
5 | P a g e (A-ii) Assessee has rightly deducted the interest released on FDR from the value of Inventory (work in progress) in Books of A/cs and duly reflected in A/cs of Balance- sheet in respect of Assessment Year 2014-2015 and same is permissible in law in view of judicial guidelines laid by higher courts / Tribunal. (A-iii)As such not allowing the appeal on this score is without authority of law and same needs to be allowed by this Honble ITAT to Assessee as deduction from being reduced from W.I.P. (work in progress). Assessee places, reliance on judicial decisions or higher authority according to which interest earned on FDR kept in the Bank for issuance of Bank Guarantee "Business purpose" cannot be treated as interest income of main business of Company. Ld. CIT. erred in law in not deleting the addition as prayed before him.
(B) The second limbs of appellant contention relates i.e. to disallowance of deduction U/s 24(b) of the Income Tax Act amounting to Rs.35,41,233/-. Present Application for production of Addl. Evidence relating to this point of adjudication i.e. disallowances of deduction U/s 24(b) of the Income Tax Act. The denial was incorrect as the appellant had established that loans taken were actually put to use for clear cut finding relating to the debt taken for getting the property free from any lien in respect of impugned immovable property on which rental income was received.
4. The core issue is whether repayment made out of loan against property to other lender from whom loan was taken in turn and paid to PNB amounts to acquiring of property out of borrowed fund and falls for claim of interest U/s 24(b) of the Income Tax Act which had been overlooked by CIT. The factual aspect viz-a-viz amount utilized out of 2nd loan for repayment to lender from whom amount
6 | P a g e was taken and repaid to PNB Bank is annexed in the Table marked Annexure A &Annexure B with supporting documents alongwith this application (addl. Evidence).
5. Appellant was prevented by sufficient cause for not placing the same before CIT (A)-16, New Delhi. The earlier counsel had made efforts in proceedings before lower authority but inadvertently the counsel could not place the documents annexed in Annexure A and Annexure B (para 4) with supporting documents even though same were clearly visible from record. The earlier counsel had tried to explain in earlier situation (attention is invited to page 4 and 5 of CIT Order) of the order, but this aspect as escaped attention of earlier counsel that he is required to explain this part i.e. Annexure A and B as stated in Para 4 and not original investment. Hence present application for production of Addl. Evidence is being made for a substantial cause in the interest of justice.Moreover State is entitled for legitimate tax.Besides the same stand reflected in Books of Account which had been accepted and no harm will occur to Respondent.
The Addl. document i.e. Annexure A relating to detail showing source for repayment of loan to PNB i.e. lenders details for getting property free from loan and copies of A/cs of Ledger maintained in petitioner Books of A/cs and copy of Bank Statement and Annexure B i.e. utilization of loan received from Reliance House Finance Ltd. for repayment to lenders who had given loan to repay PNB loan. These private lenders in truth had replaced PNB for short time. Copy of Ledger A/cs of Reliance House Finance Ltd. as per Books of A/cs of petitioner and disbursement to lenders with copies of ledger A/cs of private lenders as per Books of A/cs maintained in petitioner Books of A/cs and the Bank statement arerelevant for succeeding in appeal.
Besides in earlier years, the Assessee had been allowed the deduction U/s 24(b) of the Income Tax Act
7 | P a g e in an Assessment framed U/s 143(3) of the Income Tax Act and the explanation of the Assessee had been accepted for Assessment Year 2013-14. There is no reason with Respondent to disallow the deduction as Assessee had been regularly and bonafidely claiming the said deduction. Computation of income / balance sheet of earlier assessment year 2013-14 is enclosed with this submissions.
8. It is submitted that no prejudice will be caused to the respondent on allowing present application i.e. allowing Addl. Documents as mater is yet to be heard on merits and both sides have to argue the same and this Hon'ble Tribunal in the last fact finding authority.
PRAYER: - In view of the above it is humbly prayed that above additional evidence as prayed in this application be allowed to be produced and same be taken on record and be considered while adjudicating the present appeal or grant any other relief as deemed fit in the facts and circumstances of the cast.” 8.1 Ld. DR relied upon the orders of the authorities below on this issue.
After hearing both the sides and perusing the records, we find considerable cogency in the contention of the Assessee for admission of additional evidences under Rule 29 of the ITAT Rules, 1963. Therefore, we deem it fit and proper to admit the aforesaid additional evidences filed by the assessee before us, and in the interest of justice, remit back the matter to the file of the AO with the directions to consider the aforesaid contention of the Ld. AR and decide the issue in dispute, afresh, in accordance with law, after giving adequate opportunity of being heard to the assessee, after considering all the additional evidences filed by the Assessee u/R 29 of the ITAT Rules, 1963 before the Tribunal. 8 | P a g e