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Income Tax Appellate Tribunal, “A’’ BENCH: BANGALORE
Before: SHRI B. R. BASKARAN & SMT. BEENA PILLAI
PER B.R. BASKARAN, ACCOUNTANT MEMBER:
All the 3 appeals filed by the assessee are directed against orders passed by Ld. CIT(A)-1, Bengaluru and they relate to the assessment year 2012-13 to 2014-15. Since the issues urged in these appeals are identical in nature, they were heard together and are being disposed of by this common order, for the sake of convenience.
In all the three years, the assessee is aggrieved by the decision of Ld. CIT(A) in confirming the disallowance of business expenditure holding that the assessee has not commenced its business operations. The assessee is also aggrieved by the decision of Ld. CIT(A) in confirming the interest income under the head “income from other sources”.
The facts relating to the case are stated in brief. The assessee company was incorporated in the year 2007 with the object of carrying on the business of real estate development. The assessee acquired 314 acres of land in Uttarpara, West Bengal from the year 2007 onwards. The acquisition of land was completed by September 2009. In all the 3 years under construction, the assessee did not declare any business income. It has declared other income in assessment years 2012-13 & 2013-14, which consisted of interest income earned by it. The assessee, however, claimed expenses incurred by it as deduction in the profit & loss account. The assessee set off interest income against the expenses and accordingly declared loss from business in all the 3 years. Thus, the assessee treated interest income as part of its business income.
ITA No.1341/Bang/2017 & Bengal Shriram Hitech City Pvt. Ltd., Bangalore Page 3 of 18
The A.O. noticed that the assessee has not declared any business income in all the three years. Accordingly, he took the view that the expenses claimed by the assessee are not allowable as deduction. In assessment years 2013-14 & 2014-15, the A.O. also took the view that the assessee has not set up his business at all. Accordingly, he disallowed the expenditure claimed by it. Accordingly, the A.O. assessed interest income declared by the assessee as income under the head “income from other sources” in AY 2012-13 and 2013-14. The profit & loss account relating to these 3 years have been extracted as under by the A.O in the assessment order passed for AY 2013-14:-
Item, For the year For the year For the year ended 31.3.2014 ended 31.3.2013 ended 31.3.2012 (Rs.) (Rs.) (Rs.) Income Sales - - - Other Income - 1,13,912 17,99,099 Expenditure Employee costs 69,44,754 76,29,613 1,26,14,418 and benefits Finance cost 10,76,42,880 9,23,82,796 8,62,56,952 Depreciation and 5,79,337 7,88,397 10,45,871 amortization Other expenses 1,70,82,727 6,83,03,568 2,96,43,966 Loss before tax 13,22,49,698 16,89,90,462 12,77,62,108
The Ld. CIT(A) confirmed the orders passed by the A.O. and hence the assessee has filed these appeals before us.
6. The Ld. A.R. invited our attention to the detailed submissions made by the assessee before Ld. CIT(A) in assessment year 2012-13. For the sake of convenience, we extract below the submissions made before Ld. CIT(A) in assessment year 2012-13.
ITA No.1341/Bang/2017 & Bengal Shriram Hitech City Pvt. Ltd., Bangalore Page 4 of 18
“WRITTEN SUBMISSION BEFORE THE CIT - II, BANGALORE 1. Arguments in support of the Grounds that the business expenditure claimed by the appellant is allowable: , 1.1. The appellant has been carrying on the business of real estate development. It had acquired about 314 Acres of land in Uttarpara Dist .of West Bengal. The Appellant had applied for plan sanction., It appointed various consultants and started all the required activities for the development of the land. It had carried out various activities like land filling, canal cleaning, laying of access roads etc., and had' incurred huge expenditure, 1.2. Further, the Appellant had started marketing and selling of the units from 2009. Upto the Previous Year relevant to the Asst Year 2012-13, the Appellant had sold about 100 flats. 1.3. The above details can be verified from the copy of the submissions made to the learned Assessing Officer on 02-02-2015 and is enclosed Annexure-1.
1.4, The Appellant had collected an amount of Rs. 3,53,32,000/- from various customers who had booked the apartments. The list of advances received from customers as on 31-03-2012 is enclosed as Annexure — 2.
1.5. The audited accounts of the Appellant as at 31-03-2012 is enclosed as Annexure — 3. From Schedule 7 to the audited accounts, it can be seen that as on 31-03-2011, the Appellant had collected an amount of Rs. 72,50,000/- from the customers and as on 31-03-2012, it had collected 3,53,32,000/-. This clearly indicates that the Appellant has been booking the apartments. From para 1.5 of the Accounting Policies, it can be seen that the Appellant Company follows %ge completion method and it is only when the project reaches at least 15% of the total estimated cost, the Revenue is recognised. Since during the Financial Year 2011-12, relevant to the Asst year under appeal, the project had not reached 15% of the estimated cost, it did not recognise the Revenue. From the P&L account, it can be seen that the expenses debited are normal running expenses such as employee cost, finance cost, depreciation and other expenses in the nature of professional fees, advertisement, publicity, rent, travel & conveyance etc 1.6. All the above activities would clearly establish the fact that the appellant had not only set up the business but also commenced the same.
1..7.-The Learned - Assessing Officer disallowed these expenses only on the premise that the Appellant had not declared any income. It is settled principle of law that there is no requirement that there should be immediate
ITA No.1341/Bang/2017 & Bengal Shriram Hitech City Pvt. Ltd., Bangalore Page 5 of 18 benefit to the assessee or there should be earning of income in order to allow the expenditure. The following a few cases are cited in this regard: Eastern Investments Ltd. Vs. CIT (20 ITR 1) (SC) J.R. Patel & Sons Pvt. Ltd. 69 ITR 782 (Guj) Raipur Mfg. Co. Ltd. (84 !TR 508,516) (Guj) Security Printers of India Pvt. Ltd. (78 ITR 766,774) (All) Tatasons Ltd. (18 ITR 460,467) (Born) Walchand & Co. P. Ltd.(65 ITR 381, 385) (SC) J.K. Woolen Manufactures (72 ITR 612) (SC) Aluminium Corp. of India Ltd. (86 ITR 11, 17) (SC) Orissa Cement Ltd. (73 ITR 14, 17) (Del) CIT vs IBC Knowledge Park Pvt Ltd [2016] 385 ITR 346 (Kar)
1.8. It is also decided principle of law that once the business is set, all the expenses should be allowed.
1.9. In C/T v. Sarabhai Sons (P.) Ltd. [1973] 90 ITR 318 the Gujarat High Court noticed the clear distinction between "commencement of business" and "setting it up" for the purposes of section 3(1)(d) of the Income-tax Act, 1961 (as it stood at the relevant time). What is required to be considered is the setting up of a business. It is observed that when a business is established and is ready to start business it can be said to be set up. The business must be put into such a shape that it can start functioning as a business manufacturing organization. The Gujarat High Court, relying upon the decision in Western India Vegetable Product Ltd. v. CIT119541 26 ITR 151 (Boni.) and the decision of Supreme Court in CWT v. Ramaraju Surgical Cotton Mills Ltd. [1967] 63 ITR 478, observed :
. . . the new business which was sought to be established by the assessee was a business of manufacturing scientific instruments and communication equipment and it could not be said to be ready to discharge the function for which it was being established, viz., manufacture of scientific instruments and communication equipment, until the machinery necessary for the purpose of manufacture was installed. It is only when the machinery was installed that the business could be said to be put into such a shape that it could start functioning as a manufacturing organisation. It was not sufficient that the assessee obtained the land on lease from Gujarat Industrial Development Corporation. . . or placed orders for purchase of raw materials and the source or ordered out the necessary machinery and equipment. These were merely operations for the setting up of the business. The business could be set up only as a culmination of these operations when all that was necessary for the' setting up of the business was done. . . .
[Emphasis supplied] (p. 322)
ITA No.1341/Bang/2017 & Bengal Shriram Hitech City Pvt. Ltd., Bangalore Page 6 of 18 1.10. In Western India Vegetable Product Ltd.'s case (supra) Bombay High Court noticed clear distinction between a person commencing business and a person setting up a business and held that for the purposes of Indian Income-tax Act the setting up of the business and not the commencement of the business that is to be considered. It is observed that it is only after the business is set up that the previous year of that business commences and any expenses incurred prior to the setting up of a business would not be a permissible deduction. It observed :
. . The distinction is this that when a business is established and is ready to commence business then it can be said of that business that it is set up. But before it is ready to commence business it is not set up. But there may be an interregnum, there may be an interval between a business which is set up and a business which is commenced and all the expenses incurred after the setting up of the business and before the commencement of the business, all expenses during the interregnum would be permissible deductions under section 10(2). . .
(p. 158) 1.11. In Sarabhai Management Corpn. Ltd. v. Commissioner of Income-tax (1976) 102 ITR 25 (Guj), the Gujarat High Court held that as soon as the company acquired immovable property and carried on various activities for procuring necessary facilities, the business was said to commence even though the actual letting of the property took place in the subsequent previous year. This decision has been approved by the Supreme Court as reported in 192 1TR 151.
1.12. The Andhra Pradesh High Court in CIT vs Coromandal Fertilizers Ltd., after applying the various decisions referred above, held as follows: "9. In our considered opinion the set up of a business is not the same as commencement of business. It is not necessary for an assessee to claim the benefit of deduction of expenditure and also depreciation and investment rebate on the ground of its commencement of business. It would be enough if the assessee establishes that it had set up of a business. in the instant case it would have been enough for claiming the benefit that the assessee had already set up df a business of manufacturing cement" 1.13. In a recent decision the Delhi High Court also held once the business is set up all the revenue expense are to be allowed as deduction. In CIT Vs. Hughes Escorts Communications Ltd., 311 ITR 253.
1.14. The Court held that once the assessee placed the order for purchase of VSAT equipments the business should held to have been set up. The held as follows:
ITA No.1341/Bang/2017 & Bengal Shriram Hitech City Pvt. Ltd., Bangalore Page 7 of 18
"12. Turning the facts of the present case, it is clear that the business of the assessee involved, different activities in which the first step was the purchase of the VSAT equipment. There was no question of assessee having to place a purchase order with Hughes Network Systems, USA for a purpose other than that of its business. The said purchase order was placed on 28-7-1994. The application to DOT for licence and the receipt of the satellite signals were the consequential stages. The signals were to be received after the VSAT equipment was installed in the premises of the customer. In the circumstances, we are the View that the businss of the assessee should be held to have been set up on 28-7- 1994. This is the relevant date for determining the nature of the e- expenses incurred thereafter. The expenses incurred in the previous year, prior to the commencement of the business but after the setting up its business, which two dates need, not be the same, would be deductible as revenue expenses." 1.15. The Delhi High Court followed principle laid down in Hughes Escorts Communications Ltd., while ruling in favour of the assessee in the case of WHIRLPOOL OF INDIA LTD.
1.16. From the above decisions it can be categorically said that once the business is set up, all the expenses incurred subsequent to the same, including depreciation are allowable even if the business had not commenced.
1.17. In the case of Commissioner of Income Tax & Anr. Versus MFAR Construction Ltd 2010 (9) TMI 1091 - KARNATAKA HIGH COURT, the expenditure incurred by a construction company at the time of setting up of the business was allowed even though no income was generated. 1.18. In the case of IBC Knowledge Park (supra), the High Court held that 'Sale of construct property is not a sine qua non for commencement of business" and it allowed the expenses incurred by the Assessee though there was no sale. 1.19. The above principles have been followed by the Hon'ble Delhi High Court in the case of CIT vs Arcene Developers Pvt Ltd [2014] 368 ITR 627 (Del) and CIT vs Dhoomketu Builders & Development Pvt Ltd [2014] 368 1TR 680 (Del). 1-.20.In the case of Dhoomketu Builders (supra), the Hon'ble Delhi High Court held that the commencement of the real estate business would normally start with acquisition of land or immovable property and when an Assessee whose business is to develop real estate is in a position to perform certain acts towards the acquisition of land, that would clearly show that it is ready to commence the business and as a corollary, it is already been set up.
ITA No.1341/Bang/2017 & Bengal Shriram Hitech City Pvt. Ltd., Bangalore Page 8 of 18
1.21. From the above decisions it can be categorically said that once the land is acquired, the business of real estate is deemed to have been set up, and all the expenses incurred subsequent to the same, including depreciation are allowable even if there is no Revenue recognised.
1.22.In this case, the business was not only set up by the appellant but it had also commenced. As mentioned in para 1.1 to 1.5 supra, the land has been acquired by the appellant. It had incurred expenditure on the development arid. Other 'construction related activities. It had also started Marketing. of the flats and received advances. Under these circumstances, the business of the appellant was not only set up in the previous year relevant to the asst year under appeal but also had commenced.
1.23 The learned Assessing Officer without appreciating these facts and also the law declared by the Supreme Court and various High Courts erred in disallowing the expenses claimed by the appellant. Therefore, the disallowance of the expenditure needs to be deleted based on the above arguments.
1.24. The Learned Assessing Officer disallowed the claim of the appellant only on the ground that the appellant had not offered any income from business. This is against the law as declared by the Supreme Court and various High Courts.
1.25 In view of the above, it is submitted that the disallowance of the expenditure made by the Learned Assessing Officer including the depreciation be deleted.”
7. The Ld A.R submitted that the issue arising for consideration of the Tribunal in these three appeals are:-
(a) whether the business activity of the assessee is set up or not?
(b) whether the expenses incurred after setting up of business is allowable as deduction?
(c) Whether the interest income earned by the assessee is forming part of its business activities or not?
The Ld A.R submitted that the assessee is carrying on the business of developing housing colony and other real estate activities. Hence the ITA No.1341/Bang/2017 & Bengal Shriram Hitech City Pvt. Ltd., Bangalore Page 9 of 18 business of the assessee is set up as soon as the land is acquired for the purpose of real estate activities. He submitted that an identical issue was examined by the co-ordinate bench in the case of ACIT vs. M/s Valmark Developers Pvt Ltd (2018)(4) TMI 1565 (Bang) and it was held that when the assessee is carrying on the business of real estate development and the assessee has acquired properties for the purpose of development, the business of the assessee ought to have been considered as having been set up. Accordingly, it was held that all the revenue expenses have therefore to be allowed as deduction in computing income from business. Accordingly, he submitted that the assessee’s business was set up in 2007 itself, when it started acquiring lands for real estate development. Hence the tax authorities are not correct in observing that the assessee has not set up its business. Accordingly, he submitted that all the revenue expenses claimed by the assessee should be allowed as deduction.
The Ld A.R submitted that the AO has observed that the assessee has not declared any business income. He submitted that the assessee is following the accounting standards and guidance notes issued for recognizing income. He submitted that the policy adopted by the assessee for revenue recognition is given in Annual Report as under:-
1.5 Revenue Recognition
Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Company and the Revenue can be reliably measured. Revenue from operations is net of sales tax/value added tax/service tax and net of adjustments on account of cancellation/returns.
ITA No.1341/Bang/2017 & Bengal Shriram Hitech City Pvt. Ltd., Bangalore Page 10 of 18
Revenue from real estate development is recognized upon transfer of all significant risks and rewards of ownership of such real estate/property, as per the terms of contract entered into with the buyers, which generally coincides with the firming of the sales contracts/agreements. Where the company still has obligations to perform substantial acts even after the transfer of all significant risks and rewards, revenue in such cases is recognized by applying the percentage of completion method only if the following thresholds have been met:- a) all critical approvals necessary for the commencement of the project have been obtained. b) the stage of completion of the project has reached a reasonable level of development, i.e., 25% or more of the construction and development cost related to project has been incurred. c) atleast 25% of the saleable project area is secured by sales contracts/agreements with buyers d) atleast 10% of the revenue as per each sales contract/agreement with buyers are realized at the balance sheet date….
The Ld A.R submitted that the assessee’s project has not reached 25% level and hence the assessee has not recognized any income.
With regard to interest income earned by the assessee, the Ld A.R contended that the same is required to be set off against the expenses incurred by the assessee. Accordingly he submitted that the AO/CIT(A) are not justified in assessing the interest income separately under the ITA No.1341/Bang/2017 & Bengal Shriram Hitech City Pvt. Ltd., Bangalore Page 11 of 18 head income from other sources. In support of this contention, the Ld A.R placed his reliance on the decision rendered by Hon'ble Karnataka High Court in the case of in the case of CIT vs. Hewlett Packard Global Soft Ltd (2018)(403 ITR 453)(Kar-FB), wherein it was held that the interest income earned by the assessee from deposits kept with banks for temporary period and the interest earned on staff loans were business income of the assessee. Accordingly, he submitted that the tax authorities are not justified in the instant case in assessing the interest income as income under the head Income from other sources.
The Ld D.R, on the contrary, submitted that the assessee has not commenced its business activities and hence the expenses claimed by it cannot be allowed as deduction. He submitted that the Ld CIT(A) has examined the issues in proper perspective and hence his decision does not call for any interference. With regard to interest income, the Ld D.R submitted that the assessee has failed to show the business compulsion for making deposits and hence the interest income was rightly assessed as income under the head Income from other sources.
We heard rival contentions and perused the record. The first issue relates to the disallowance of expenses claimed by the assessee. We notice that the tax authorities have disallowed the claim holding that the assessee has not set up its business. The settled principle is that the expenses incurred after setting up of business and when it is ready for actual commencement of business, is allowable as deduction.
The assessee is engaged in the business of real estate development, i.e., it is engaged in the business of acquiring land and developing the same into residential/commercial properties. The ITA No.1341/Bang/2017 & Bengal Shriram Hitech City Pvt. Ltd., Bangalore Page 12 of 18 question as to when the business can be set up in this kind of business was examined by the co-ordinate bench in the case of Valmark Developers P Ltd (supra):-
“12. We have heard the rival submissions. The ld DR relied on the order of the AO. The ld counsel for the assessee relied on the order of the CIT(A).We have given careful consideration to the rival submissions. Before us, the assessee has cited the decision of the jurisdictional ITAT in the case of Bangalore Goa Estate Pvt. Ltd., in dated 31.08.201 wherein it was held as under: "10. We have heard both sides of the argument and perused the material on record and learned Assessing Officer has relied on the judgment of Hon 'ble Supreme Court M/s. Tuticorin Alkali Chemicals and Fertilizers Ltd., (supra) while evaluating this case with the present case. We find that the major question is when a business can be considered as set up and commenced. The concept of set up and commencement will differ industry to industry. M/s. Tuticorin Alkali Chemicals and Fertilizers Ltd. (Supra) was a manufacturing concern. Setting up and commencement in case of the real estate business is entirely different. The concept of setup and commencement are different. The first is capacity to start its earning capacity whereas the latter is actual commercialization of the business. Normally, a manufacturing business requires turnaround time of less than six months, whereas a real estate business may require more than one accounting year.
11. We find that the case of Dhoom Ketu (Supra) of Hon'ble Delhi High Court is similar to the relevant case in hand. We are of the view that the commencement of real estate business will start with acquisition of land property, by an assessee whose intention is develop it and do real estate. Assessee had spent considerable sum for developing the piece of land. This would clearly show that it had set up the business...... 13. It is clear from the decision of the Hon'ble Delhi High Court in the case of Dhoom Ketu (supra) that business of real estate developer can be considered as set up when properties are acquired. In the case of the Assessee, the AO has accepted the fact that the Assessee has acquired properties for the purpose of development. Therefore the business of the Assessee ought to have been considered as having been set up. All revenue expenses have therefore to be allowed as deduction in computing income from business. Respectfully following the views expressed by ITA No.1341/Bang/2017 & Bengal Shriram Hitech City Pvt. Ltd., Bangalore Page 13 of 18 .2648 to 2653/B/17 the Hon'ble ITAT, it is held that the acquisition of lands for purposes of real estate development would amount to setting up and commencement of business and the expenses claimed by the appellant are allowable. We find no grounds to interfere with the order of the CIT(A). The appeal for AY 13-14 is dismissed.” We notice that the co-ordinate bench, in the above cited case, has followed the decision rendered by another co-ordinate bench in the case of Bangalore Goa Estate Pvt Ltd (supra), which in turn has followed the decision rendered by Hon’ble Delhi High Court in the case of CIT vs. Dhoomketu Builders and Development P Ltd (2014)(368 ITR 680)(Delhi).
In the case of Dhoomketu Builders and Development P Ltd (supra), the Hon’ble Delhi High Court has examined an identical issue and decided the same as under:-
“9. The Tribunal has observed that having regard to the business of the assessee, which is the development of real estates, the participation in the tender represents commencement of one activity which would enable the assessee to acquire the land for development. If the assessee is in a position to commence business, that means the business has been set-up. The acts of applying for participation in the tender, the borrowing of monies for interest from the holding company, the deposit of the borrowed monies on the same day with NGEF Ltd. as earnest money were all acts which clearly establish that the business had been set-up. The commencement of real estate business would normally start with the acquisition of land or immoveable property. When an assessee whose business it is to develop real estates, is in a position to perform certain acts towards the acquisition of land, that would clearly show that it is ready to commence business and, as a corollary, that it has already been set-up. The actual acquisition of land is the result of such efforts put in by the assessee; once the land is acquired the assessee may be said to have actually commenced its business which is that of development of real estate. The actual acquisition of the land may be a first step in the commencement of the business, but section 3 of the Act does not speak of commencement of the business, it speaks only of setting-up of the business. When the assessee in the present case was in a position to apply for the tender, borrowed money for interest albeit from its holding company and deposited the same with NGEF Ltd. on the same day, it shows that the assessee‟s business had been set-up and it was ready to ITA No.1341/Bang/2017 & Bengal Shriram Hitech City Pvt. Ltd., Bangalore Page 14 of 18 commence business. The learned senior standing counsel for the revenue would, however, state that till the land is acquired, the business is not set- up. The difficulty in accepting the argument is that an assessee may not be successful in acquiring land for long period of time though he is ready to commence his business in real estate, and that would result in the expenses incurred by him throughout that period not being computed as a loss under the head "business" on the ground that he is yet to set-up his business. That would be an unacceptable position. The other argument of the learned standing counsel for the revenue that the tax auditors of the assessee have themselves pointed out that the assessee is yet to commence its business is also irrelevant because of the distinction between the commencement of the business and setting-up of the same.”
In the instant case, there is no dispute with regard to the fact that the assessee has started acquiring lands in 2007 itself. Accordingly, as per the ratio laid down in the above said cases, the assessee has already set up its business. Accordingly, the view taken by the tax authorities are liable to be set aside. Accordingly, we set aside the view expressed by Ld CIT(A) on this point and direct the AO to hold that the assessee has set up its business.
As stated earlier, the settled position of law is that, when the business is ready to commence, then the expenses incurred thereafter is allowable as deduction. Since we have held that the assessee has already been set up, expenses incurred in running the business of the assessee is allowable as deduction, even though no business income is available and declared by the assessee. Since the assessee was in the stage of construction of the buildings, as per the policy for revenue recognition under percentage of completion method and also as per the guidance notes issued in this regard, the assessee has decided to recognise income only when the work is completed atleast 25%. Since the stage of construction was less than 25%, the assessee did not declare any business income. However, the same cannot debar the assessee to claim revenue expenses as deduction.
ITA No.1341/Bang/2017 & Bengal Shriram Hitech City Pvt. Ltd., Bangalore Page 15 of 18
The Ld D.R submitted that the assessee is engaged in development of residential/commercial project and hence most of the expenses may be related to the project. He submitted that the project related expenses should be taken to “work in progress” account and cannot be claimed as deduction. The Ld A.R also agreed with the submissions made by Ld A.R. He submitted that the interest expenses constitute major component of the expenses claimed by the assessee and it may be considered as part of work in progress. With regard to the remaining expenses, the Ld A.R submitted they are allowable as deduction.
The Ld D.R, on the contrary, submitted that the remaining expenses should also be examined as to whether they are related to the project or not. He submitted that the AO did not have occasion to carry out this exercise, since the entire expenses were disallowed. Accordingly, he submitted that the entire expenses should be restored to the file of the AO for examining them.
We agree with the contentions of ld D.R. We are of the view that all the expenses related to the project should be taken to “Work in Progress”. Remaining expenses should be allowed as deduction. If any common expenses have been incurred, then it may be split into project related item and general item on a rational basis. Since this exercise has to be carried out, we restore this issue to the file of AO. The assessee is also directed to furnish a statement bifurcating the entire expenses into project related nature and general nature. After affording adequate opportunity of being heard, the AO may take appropriate decision in accordance with law.
The next issue relates to the assessment of interest income as income from other sources. We notice that an identical issue was examined by the co-ordinate bench in the case of Global Entropolis
ITA No.1341/Bang/2017 & Bengal Shriram Hitech City Pvt. Ltd., Bangalore Page 16 of 18 (Vizag) Pvt Ltd (ITA Nos.2927 & 2928/bang/2018 dated 12-07-2019) and it was decided as under:-
“5. The Ld A.R submitted that the assessee has made deposits into the bank and advanced loans to other persons out of business funds and hence the interest income constitutes business income of the assessee. He further placed his reliance on the decision rendered by Hon’ble Karnataka High Court in the case of CIT vs. Hewlett Packard Global Soft Ltd (2018)(403 ITR 453)(Kar-FB) and submitted that the interest income earned by the assessee from deposits kept with banks for temporary period and the interest earned on staff loans were held to be business income of the assessee in the above said case. Accordingly he submitted that the tax authorities are not justified in the instant case in assessing the interest income as income from other sources.
On the contrary, the Ld D.R submitted that the assessee has not shown that the deposits/loans are inextricably connected with the business activities of the assessee. He further submitted that the issue before Hon’ble Karnataka High Court was whether the interest income can be said to have been derived from the export business in the context of deduction allowed u/s 10A of the Act. The Hon’ble Karnataka High Court held that the incidental activity of parking of surplus funds with the banks or advancing of staff loans by such special category of assessees covered u/s 10A or 10B of the Act is the integral part of their export business activity and business decision taken in view of the commercial expediency. Accordingly it was held that the interest income cannot be de- linked from its profits and gains derived by the undertaking engaged in the export of articles and hence cannot be taxed separately u/s 56 of the Act.
We heard rival contentions and perused the record. We earlier noticed that the assessee has earned interest income of Rs.3,86,678/- only from banks and the balance amount of interest income was earned on loans given to related party and others. It is well settled proposition of law that the assessee should demonstrate that there was business compulsion to make the deposits or advance loans to support its claim that the interest income forms part of its business profits. Admittedly, the assessee herein has not demonstrated that such kinds of business compulsions did exist. As rightly pointed out by Ld D.R, the decision in the case of Hewlett
ITA No.1341/Bang/2017 & Bengal Shriram Hitech City Pvt. Ltd., Bangalore Page 17 of 18
Packard Global Soft Ltd (supra) has been rendered by Hon’ble Karnataka High Court on the basis of facts prevailing in that case and since the Hon’ble High Court found that the parking of funds in banks and advancing of staff loans are integral part of carrying on of export activities, it was held that the interest income cannot be de-linked from Profits and gains derived from export of articles. No such facts prevail in the instant case. Accordingly we are of the view that the assessee cannot take support from the above said decision. In the instant case, the assessee is engaged in the business of constructing residential complexes and the assessee has failed to demonstrate any business compulsion nor did it show that the advancing of loans or depositing of money in fixed deposits are integral part of its business activities. Hence we are of the view that the Ld CIT(A) was justified in confirming the assessment of interest income as income of the assessee from income from other sources.” In the instant case also, the assessee has failed to demonstrate the business compulsion for making deposits with banks. Accordingly, following the above said decision, we hold that the Ld CIT(A) was justified in assessing the interest income under the head Income from other sources in assessment years 2012-13 and 2014-15.
In the result, all the appeals of the assessee are treated as partly allowed. Order pronounced in the open court on 12th Oct, 2020