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Income Tax Appellate Tribunal, MUMBAI BENCH ‘C’, MUMBAI
ORDER
PER GAGAN GOYAL, AM:
This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals)-53, Mumbai [hereinafter referred to as CIT (A)] vide order dated 26.10.2021 for the Assessment Year (AY) 2017-18. The solitary issue disputed in appeal is as under: “1. The CIT(A) erred in confirming the action of AO in treating the Interest income earned on Fixed Deposits (FD) of Rs. 60,49,527/- as “Income from Other Sources” for the year as against reducing the same from the total cost of Work in Progress.
The Appellant submits that on the facts and circumstances of the case the interest income earned on FD of Rs. 60,49,527/- reduces the interest cost on funds borrowed for the project and thus has been rightly reduced from the Cost of project. 3. Your Appellant craves leave to add, to alter, or to amend the aforesaid grounds of Appeal.
2 M/s Courtyard Real Estate Pvt. Ltd. 2. Brief facts of the case are that the assessee-company is in the business of Real Estates Development and construction. It filed its return of income for AY 2017- 18 on 30.3.2018 declaring income for the year at Rs. 56,72,910/-. During the year under consideration, the assessee was constructing a residential Project at Pokhran Road No 2, Thane. It was following Percentage Completion Method (PCM) of accounting for Revenue Recognition.
3. The assessee’s case has been selected for scrutiny assessment. During the course of assessment proceeding, the AO observed that the assessee has earned an interest income of Rs. 60.49 lacs which has been reduced from the closing work in progress. The assessee was asked to explain as to why an interest income of Rs. 60.49 lacs has been reduced from work in progress and why the same shall not be treated as income from other sources. The assessee-company explained that during the year under consideration it has borrowed Rs. 175 Crores from Piramal Finance Limited (PFL) by way of debenture as well as it was sanctioned Inter Corporate Deposits (ICD) of Rs. 75 crores for land acquisition and project development of its residential project at Thane. One of the conditions as per “Indicative Term Sheet” entered between the assessee and PFL was that the assessee shall maintain an Interest Service Reserve Account (ISRA) of upto 3 months interest on the sanctioned Inter Corporate Deposit. The said amount of has been deducted from the ICD given to the assessee and kept as investment in Fixed Deposit with HDFC Bank Limited. The amount was invested in FD mainly to safeguard timely interest payments by assessee to PFL. On the ICD taken from the PFL, the assessee has paid the interest of Rs. 6771.67 lacs which is debited to the Finance Cost forming part of Work in Progress (WIP) shown at note 10 of the Audited Financial Statement. Similarly, on the fixed deposit, the assessee has earned the interest of Rs. 60.49 lacs which has 3 M/s Courtyard Real Estate Pvt. Ltd.
been reduced from the WIP as the same was inextricably linked to the project. However, not impressed with the submission of the assessee, the AO disallowed the interest by adding the same to the WIP and taxing the same as income from other sources. Operative discussion in the assessment order is as under: “5.3,The above reply of the assessee has been considered carefully but is not acceptable. First of all, the business of the assessee is building construction. As per the submission of the assessee, it has been stated that the assessee has been following POCM for it’s business for the purpose of revenue recognition. Since, the assessee has not attained the threshold limit of recognition of revenue, all expenditure which are directly attributable to the cost of the project are required to be capitalized. The assessee had also submitted this method of accounting in respect of interest expenditure which was paid to the bank on loans of almost of Rs. 250 crores. Thus, the assessee had also added the amount of interest paid to the bank which was taken for the very business purpose of the assessee to the cost of the project i.e. WIP. As stated by the assessee that one of the conditions of the sanction of the loans was to maintain certain amount of FDs with the bank, it had kept huge amount of FDR with bank which fetched interest of Rs. 60,49,527/-. The assessee had claimed it as business related income and set off the same against interest expenditure capitalized. However, such set off of interest income against interest expense capitalized i.e. by crediting WIP is not allowed because the very nature of interest is income from other sources. Such income is not derived from the business funds given to any party as advance which had fetched any interest income. Therefore, the fundamental nature of earning of interest income on FDR which is falling under the head income from other sources cannot be treated by the assessee as income from business or profession, simply because the bank has kept a condition for keeping the FDR. Since, the assessee has not recognized any revenue from its business, the assessee is not eligible for any set off of income against any other head for the year under consideration”
Being aggrieved, assessee preferred an appeal before the Ld. CIT (A)-53, Mumbai. Before the CIT(A), the assessee reiterated the same submission as made before the AO. The CIT(A) confirmed the action of the AO vide order dated 26.10.2021.
4 M/s Courtyard Real Estate Pvt. Ltd.
Being aggrieved by the CIT(A)’s order, the assessee has filed present appeal before us. The learned Authorized Representatives argued that the assessee has rightly reduced the interest income from WIP by treating the same as business income. It was explained that it was pre-condition to obtain the fund from PFL that the assessee shall keep fixed amount into FD. In-fact, the amount which was required to be kept in the FD was deducted from the total fund paid to the assessee and kept as FD in HDFC Bank. The term sheet entered into PFL was filed at page 47 – 71 of the paper book. In order to buttress the submission, the AR relied upon following judicial pronouncements: Bokaro Steel Limited [236 ITR 315 SC] CIT Vs. Karnal Co-Operative Sugar Mills Ltd [243 ITR 2 SC] CIT Vs. Jaypee DSC Ventures Ltd [335 ITR 132](Delhi) CIT Vs. Paramount Premises (P) Ltd [190 ITR 0259 (Bom HC)
The Ld. DR vehemently argued and relied upon the CIT(A)’s order.
We have heard both the parties and perused the paper book filed by the assessee. The undisputed facts of the present case are that the assessee is engaged in the business of real estate construction and development. The assessee has borrowed money by way of debenture and ICD from PFL. The pre-condition of availing the fund from the PFL was that the assessee shall keep FD with the Bank. Most importantly, the amount of FD was deducted from the fund provided to the assessee. This fact of disbursement along with the term sheet entered into with the PFL which is filed in paper book makes it abundantly clear that the assessee has kept the FD for business purposes i.e. for procuring the fund for construction activities. Having understood the fact, I am of the view that this issue is no more res integra as 5 M/s Courtyard Real Estate Pvt. Ltd.
the same is decided by the series of judgment of Hon’ble Supreme Court as well as jurisdictional High Court. Some of them are quoted below: (a) CIT vs Bokaro Steel Limited [236 ITR 315 SC] “7. The appellant, however, relied upon the decision of this Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT (supra). That case dealt with the question whether investment of borrowed funds prior to commencement of business, resulting in earning of interest by the assessee would amount to the assessee earning any income. This Court held that if a person borrows money for business purposes, but utilises that money to earn interest, however temporarily, the interest so generated will be his income. This income can be utilised by the assessee whichever way he likes. Merely because he utilised it to repay the interest on the loan taken, will not make the interest income as a capital receipt. The Department relied upon the observations made in that judgment (at p. 179) to the effect that if the company, even before it commences business, invests surplus funds in its hands for purchase of land or house property and later sells it at profit, the gain made by the company will be assessable under the head "capital gains". Similarly, if a company purchases rented house and gets rent, such rent will be assessable to tax under s. 22 as income from house property. Likewise, the company may have income from other sources. The company may also, as in that case, keep the surplus funds in short-term deposits in order to earn interest. Such interest will be chargeable under s. 56 of the IT Act. This Court also emphasised the fact that the company was not bound to utilise the interest so earned to adjust it against the interest paid on borrowed capital. The company was free to use this income in any manner it liked. However, while interest earned by investing borrowed capital in short-term deposits is an independent source of income not connected with the construction activities or business activities of the assessee, the same cannot be said in the present case where the utilisation of various assets of the company and the payments received for such utilisation are directly linked with the activity of setting up the steel plant of the assessee. These receipts are inextricably linked with the setting up of the capital structure of the 6 M/s Courtyard Real Estate Pvt. Ltd. assessee-company. They must, therefore, be viewed as capital receipts going to reduce the cost of construction.”(Emphasis Supplied)
(b) CIT Vs. Karnal Co-Operative Sugar Mills Ltd [243 ITR 2 SC] “2. In the present case, the assessee had deposited money to open a letter of credit for the purchase of the machinery required for setting up its plant in terms of the assessee’s agreement with the supplier. It was on the money so deposited that some interest has been earned. This is, therefore, not a case where any surplus share capital money which is lying idle has been deposited in the bank for the purpose of earning interest. The deposit of money in the present case is directly linked with the purchase of plant and machinery. Hence, any income earned on such deposit is incidental to the acquisition of assets for the setting up of the plant and machinery. In this view of the matter the ratio laid down by this Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT (1997) 141 CTR (SC) 387 : (1997) 227 ITR 172 (SC) : TC S38.3460, will not be attracted. The more appropriate decision in the factual situation in the present case is in CIT vs. Bokaro Steel Ltd. (1999) 151 CTR (SC) 276 : (1999) 236 ITR 315 (SC). The appeal is dismissed. There will be no order as to costs.” (c) CIT vs Paramount Premises (P) Ltd [190 ITR 0259 (Bom HC)] “2. The Tribunal has given the following findings of fact. The assessee was engaged in the business of building construction. For the asst. yr. 1978-79, the assessee was engaged in the construction of three buildings. The assessee 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 had to pay interest. Secondly, the authorised capital of the assessee was small but the amounts received as deposits were large. 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. The assessee was also required to give a guarantee to the State Bank in respect of the land taken on lease for construction work. For this purpose, certain amounts were kept in fixed deposits 7 M/s Courtyard Real Estate Pvt. Ltd. on which the assessee earned interest. In these circumstances, the Tribunal has given a finding of fact to the effect that the entire interest sprang from the business activity of the assessee and did not arise out of any independent activity. Accordingly, interest income was considered as the business income of the assessee.
In view of this finding given by the Tribunal, the answer to the question referred to us is obvious. We, therefore, discharge the rule which was issued in this case and dismiss the application.” (d) CIT vs Lok Holdings [308 ITR 0356 (BOM HC)] “7. The advocate appearing for the respondent relied upon a judgment of the Division Bench of this Court in the case of CIT vs. Paramount Premises (P) Ltd. (1991) 190 ITR 259 (Bom). The facts of Paramount 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 CIT vs. Paramount Premium (P) Ltd. (supra) is squarely applicable to the facts of the present case.”
On perusal of the facts of the assessee and in the light of principle laid down by the Hon’ble Supreme Court and Hon’ble jurisdictional High Court, we are of the view that the issue disputed in present appeal is covered by the 8 M/s Courtyard Real Estate Pvt. Ltd. principle settled in above decisions and respectfully following the above judgment, the appeal of the assessee is allowed.
In the result, appeal of the assessee is Allowed. Order pronounced in the open court on 26th of July, 2022.