BALKRISHNA CONSTRUCTION ,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX 24(1), MUMBAI

The assessee has raised following ground of appeal:-

At the outset, it is noticed that there is a delay of 294 days in filing the present appeal before the Tribunal. The assessee has filed a condonation petition supported by an affidavit explaining the reasons for delay. The Ld. AR submitted that the appellate order was delivered to the email account of an ex-employee and consequently remained unnoticed by the management. It was submitted that the assessee became aware of the appellate order only upon receipt of communication relating to appeal effect proceedings. The delay was thus neither intentional nor deliberate. The Ld. DR relied upon the order of the Ld. CIT(A).

We have considered the rival submissions. Having regard to the explanation furnished in the affidavit and considering that substantial justice should prevail over technical considerations, we are satisfied that the assessee was prevented by sufficient cause from filing the appeal within the prescribed period. Accordingly, the delay of 294 days is condoned and the appeal is admitted for adjudication.

Briefly stated, the facts of the case are that the assessee is a partnership firm engaged in the business of builders and developers. The assessee filed its return of income declaring total income of Rs.28,08,236/-. During the course of scrutiny assessment, the Assessing Officer made various additions including disallowance of proportionate interest, addition on account of estimated profit, assessment of interest on fixed deposit under the head 2

The Ld. AR submitted that the advance of Rs.2,50,000/- to Mrs. Prerana Gawade was made on 07.03.2008 out of interest-free funds available with the assessee. Referring to the Balance Sheet, he submitted that the partners' capital amounted to Rs.15,29,265/- and no interest was payable thereon. He further submitted that the assessee had also received advances against flats which were interest free in nature. Relying upon the decision of the Hon'ble Bombay High Court in Reliance Utilities & Power Ltd. and the decision of the Hon'ble Supreme Court in Reliance Industries Ltd., he submitted that where sufficient interest-free funds are available, no disallowance of interest can be made.

In respect of Ground Nos.2 and 3, the Ld. AR submitted that the fixed deposit was maintained as margin money for obtaining a bank guarantee in connection with the Vikhroli redevelopment project. It was submitted that furnishing of bank guarantee was one of the conditions of the development agreement entered into with the society and therefore the fixed deposit was intrinsically connected with the business activity of the assessee. He further submitted that in assessee's own case for Assessment Years 2009-10, 2010- 11 and 2011-12, the appellate authorities had accepted the claim that such interest income should be adjusted against project cost/work-in-progress.

In respect of Ground No.4, the Ld. AR submitted that the Assessing Officer had mixed up the figures relating to labour payments and material purchases made from M/s Sitara Enterprises. He invited our attention to the

The Ld. DR relied upon the orders of the lower authorities.

We have heard the rival submissions and perused the material available on record.

Ground No.1 relates to disallowance of proportionate interest of Rs.30,000/-. We find that the advance of Rs.2,50,000/- was granted on 07.03.2008. The Balance Sheet reflects partners' capital amounting to Rs.15,29,265/-. The Assessing Officer has not brought any material on record to establish a direct nexus between the borrowed funds and the advance granted by the assessee. The Hon'ble Bombay High Court in the case of Reliance Utilities & Power Ltd. (313 ITR 340) has held that where both interest-free funds and interest-bearing funds are available and the interest- free funds are sufficient to cover the investments or advances, a presumption arises that such investments or advances have been made out of interest-free funds. In the present case, the interest-free funds available with the assessee were substantially more than the amount advanced. Therefore, applying the aforesaid legal principle, we hold that the advance is to be presumed to have been made from interest-free funds. Consequently, no disallowance of interest is warranted. The Assessing Officer is directed to delete the addition of Rs.30,000/-. Ground No.1 is allowed.

Ground Nos.2 and 3 being interconnected are taken up together.

The issue for consideration is whether interest of Rs.2,54,470/- earned on fixed deposits maintained for obtaining bank guarantee is assessable under

We find that the fixed deposits were maintained as margin money for obtaining bank guarantee which was required to be furnished under the redevelopment agreement. Therefore, the fixed deposits were not made as an independent investment for earning income but were necessitated by the business requirements of the project undertaken by the assessee. In our considered opinion, where a fixed deposit is inextricably linked with the business activity and is maintained as a condition precedent for carrying on the project, the interest earned thereon assumes the character of business receipt. The Revenue has not brought any material on record to demonstrate that the deposits represented surplus funds lying idle with the assessee.

We further find that in assessee's own case for Assessment Years 2009- 10, 2010-11 and 2011-12, identical treatment has been accepted by the appellate authorities. In the absence of any distinguishing feature, the principle of consistency also requires a similar view to be adopted. Accordingly, we hold that the interest of Rs.2,54,470/- earned on fixed deposits maintained for obtaining bank guarantee is liable to be adjusted against project expenditure/work-in-progress and cannot be assessed separately under the head "Income from Other Sources".

Once the aforesaid interest is directed to be adjusted against project cost, the consequential addition of Rs. 21,438/- made while computing estimated profit also cannot survive. The same is directed to be deleted. Ground Nos.2 and 3 are allowed.

Ground No.4 relates to disallowance of labour/material charges amounting to Rs.32,03,875/-.

We find from the assessment order that the Assessing Officer proceeded on the basis that out of payments of Rs.39,07,235/- made to M/s 5

In the result, the appeal filed by the assessee is allowed.