THE INDIAN FILM COMBINE P.LTD,MUMBAI vs. PRINCIPAL COMMISSIONER OF INCOME TAX 16, MUMBAI

स्थधयी लेखध सं./जीआइआर सं./PAN/GIR No. :AAACI3611E (अपीलाथी /Appellant) (प्रत्यथी / Respondent) .. Assessee by: Shri Prakash Jothwani (AR) Revenue by: Shri Awungshi Gimson (DR) सुनवाई की तारीख / Date of Hearing: 06/08/2019 घोषणा की तारीख /Date of Pronouncement: 13/09/2019 आदेश / O R D E R

PER AMARJIT SINGH, JM:

2. The assessee has raised the following grounds: - “

I. The Principal Commissioner of Income Tax -16 ("hereinafter referred to as the PCIT"), ignoring the relevant facts on record, has erred in passing order under section 263 of the Income Tax Act, 1961 by holding that the assessment order passed by the ITO 16(1)(5) ("hereinafter referred to as the learned AO") u/s 143(3) of the Act dated 26.12.2016 is erroneous so as to be prejudicial to the interest of the revenue and directing the AO to decide all the issues afresh. The Appellant submits that the order u/s.263 of the Act for modifying the order u/s.143(3) of the Act is bad in law, illegal, ultra-virus, in excess of and/or in want of jurisdiction and otherwise void.

2. The PCIT failed to appreciate that the A.O. while passing order u/s 143(3) has considered the facts of the case and had taken the legally correct view. The PCIT erroneously observed that there is at least some 2 A.Y. 2014-15 part of the Interest income on Fixed Deposit from ICICI Bank (Rs.3,88,60,916) which is not attributable to the project under development and hence cannot be reduced from the Interest cost of the project.

3. The POT has failed to appreciate and ignore the fact that the amount of Rs.5,54,34,177 received on behalf of proposed body of purchasers is not the income of the assessee company.

4. The PCIT has failed to appreciate and ignore the fact that amount of Rs.1,82,196 reflected as rent on plant & machinery, received on behalf of proposed body of purchasers is not income of the assessee company and that these amounts have already been included in the amount of Rs.5,54,34,177 as per Ground No.3 above, hence reflected twice.

5. The PCIT has failed to appreciate and ignore the fact that amount of Rs.16,667/- reflected as profession Fees, received on behalf of proposed body of purchasers, is not income of the assessee company and these amounts have already been included in the amount of Rs.5,54,34,177 as per Ground No.3 above, hence reflected twice.

6. The PCIT has failed to appreciate and ignore the fact that in respect of License compensation as reflected in Form 26AS of Rs.1,58,05.468, only amount of Rs.93,65,940 is related to license compensation and the same has been offered for tax under the head income from house property. In respect of balance amount of Rs.64,39,528, these amounts have been received on behalf of proposed body of purchasers and the same is not income of the assessee company. These amounts have already been included in the amount of Rs.5,54,34,177 as per Ground No.3 above, hence reflected twice.

7. The PCIT has failed to appreciate and ignore the documentary evidence on record available with the learned AO, reply submitted by the learned AO during the 263 proceedings, explanations filed during 263 proceedings, with regard to additions in capital work in progress of Rs.98.82 crores during the year.

8. The PCIT has erred in restoring the matter relating to interest paid on term loan back to the file of the assessing officer to decide the issue afresh, without examining the documents and explanations filed during the course of 263 proceedings and ignoring the reply submitted by the learned AO.

9. The appellant submits that the order and direction given by PCIT are totally unwarranted and no interference is called for in the assessment order u/s 143(3) passed by the A.O. 10.Your appellant craves leave to add, alter, or amend any grounds of appeal

on or before the date of the hearing.”

3. The brief facts of the case are that the assessee filed its return of income on 22.08.2014 declaring total income to the tune of Rs.76,72,340/- for the A.Y. 2014-15. The return was processed u/s 143(1) of the I.T. Act, 1961. Thereafter, the case was selected for scrutiny. Notices u/s 143(2) & 3 A.Y. 2014-15 142(1) of the Act were issued and served upon the assessee. Thereafter, the AO completed the assessment by assessing the income to the tune of Rs.76,77,339/-. Thereafter, the Principal CIT examined the order and found the same as erroneous and prejudicial to the interest of the revenue. The PCIT issued the show-cause notice us/ 263 of the Act dated 26.08.2018 on following points: - “1. You have invested part of loan amount raised in FDRs and earned interest on FDRs at c's 3,88,60,9161- during the year under consideration- The same was not offered as income being income from other sources. You have reduced this interest amount front interest paid on term loan and after netting off the same, included in WIP. Since the interest earned on FDRs is not at all related to the project the same needs to be taxed as income from other sources.

2. As per 26AS you have received an amount of Ps. 5,54.34,277/- from various entities on which TDS of Rs. 16,99,3881- was deducted and the you claimed the 7'DS in your return also. In the reply you said that it was collecting outgoings front various purchasers and has been incurring expenses towards the outgoing and maintenance of Phase-I. You have also submitted that deposits and outgoings have been deposited in two separate bank accounts and once the society will be formed the complete record be transferred to the society. Since, the TDS has been claimed by you, the corresponding receipts must be brought to the books of accounts. No documentary evidences are placed on record as to how this Rs.5,54,34,777/- has been brought to the books of account and how the same has been offered for the tax.

3. As per ITS you have received interest on income tax refund at Ps. 4,87,4431. whereas you have offered only a sum of Rs.2,48,595/- as interest received. The remaining No.2,38,848/-needs to be added to the income as income from other sources.

4. As per 26AS you have received Rs.1,82,196/- as rent on plant 86 Machinery however, the same has not been offered for tax by you.

5. As per 26AS you have received professional fees of Rs.16,667/- the same has not been offered for the tax by you.

6. In the P&L, account you have declared the receipts of Rs.93,65,940/- as being licenses compensation. In the computation after claiming deduction u/ s24 declared income of Rs.65,56,258/- as income from House Property. As per 26AS you have received rental income of Rs.1,58,05,468/, To claim the deduction u/ s. 24 of the 17' Act, you must be the owner of the properly. No documentary evidences regarding ownership of the property, rent agreement, etc. from which rental income of Rs.1,58,05,468/- received are placed on record. For want of any 4 A.Y. 2014-15 documentary evidences, the entire receipts of Rs. 1,58,05,465/- is taxable under income from other sources.

7. You have deposited huge cash in ICICI Bank on various dates. As per 26AS you have deposited total cash of Rs.618.19 crore. During F. Y. 2013-14 you have submitted that those entries pertain to FDRs and no cash was deposited in its account. However, no third party evidences such as bank statement or confirmation from the bank are placed on record to substantiate the claim of the assessee that it has not deposited cash. Further, no communication was made with the concerned bank to either confirm or negate the reporting in ITS.

8. You have raised loan of Rs.300 crores during the year under consideration. However, no documentary evidences such as loans sanction and disbursement letter, assets hypothecated against the same loan, how the loans were utilized for business purposes, etc. are placed on record.

4. After the receipt of notice, the assessee filed the reply which is hereby reproduced as under: - 5 A.Y. 2014-15 Date 05.10.2018 To, Principal Commissioner of Income Tax -16 Aayakar Bhawan, Mumbai-400020 Dear Sir, Assessee: The Indian Film Combine Pvt. Ltd./PAN.AAACI36IIE Subject Proceeding u/s. 263 of the Income Tax Act for A.Y. 2014-15, Notice dated 28.6.18 With reference to the above and under the instructions from our above named client, we submit as under- Return of Income for A.Y. 2014-15 was filed on 22.8.2014. Notice u/s.143(2) of the Income tax Act dated 28.8.20 15 was received by the Assessee Company, for selection of case for scrutiny, oil Subsequently During the course of scrutiny Assessment proceedings Details, Documents and clarifications were filed before the Assessing officer as required from time to time. Assessment was completed and Assessment order was passed on 26/12/2016 u/s. 143(3) of the Income Tax Act. Assessee Company is executing a Project namely Maker Maxity on its leasehold land at I3andrakurla Complex. Project is being completed in Two phases. Phase 1 comprise of construction of 5 office Buildings. Phase I of the project being office Buildings has been completed in A.Y. 2010-11 and all the units have been sold to various purchasers in A.Y. 2009-10 & A.Y. 2010-I1. The Phase II of the project consists of a Hospitality and Entertainment complex comprising of Hotels Club, Retail Mall and Multiplex to be held by the company as capital assets on completion of Project. Phase II of the project is still under construction. All the Expenses incurred in respect of the project are capitalized and shown as Capital Work in Progress, pending complain of the Project. In respect of Phase I of the project, pending formation of society / Body of Purchasers, as per requirements of Maharashtra ownership of Flats Act, Developer is required to maintain office premises and common area, on behalf of Body of Purchasers, for which separate Bank Accounts are being maintained on behalf of Body of Purchasers. Collections taken from purchasers towards outgoings are deposited in these Bank Accounts and Expenses for maintenance of the office complex are incurred from these Bank Accounts on behalf of the Body of Purchasers. After formation of society / Body of Purchasers — complete account of Amounts received from Purchasers and Expenses incurred on behalf of Purchasers, will be handed over to the society / Body of Purchasers and remaining balance including various deposits collected will be handed over to Society / Body of Purchasers. Thus all the receipts received in these bank accounts maintained on behalf of the body of purchasers, belongs to purchasers and are not part of receipts of the company and hence does not form part of the accounts of the Assesses Company'.

6 A.Y. 2014-15 As per clauses 12.3.3 and 12.7 of the Agreement for sale with purchasers it is clearly stated that on formation of the society/ Body of Purchasers complete account of Receipt & Payments on Accounts of outgoings will be handed over to the body of Purchasers and all the remaining Bank Balances will be handed over to Body of Purchasers. As per section 5 of the Maharashtra ownership Flats act 1963 it is a requirement that Developer will maintain separate Bank account in respect of Amounts collected from Purchasers towards outgoings, pending formation of Society and will be trustee on behalf of the Purchasers and will disburse Amounts collected for purposes for which these amounts have been taken. Thus in respect of amounts collected from Purchasers towards outgoings, Developer being Assessee Company is acting as trustee and these amounts are received on behalf of proposed Body of Purchasers, receipts received does not belong to Assessee Company. With reference to your notice dated 28/06/2018 our point wise reply is as under. I. Interest Income earned on FDRS ( Rs.3,88,60,916) Assessee Company is Developing a project in Bandra Kurla Complex, on its leasehold land known as Maker Maxity. Project comprises of Two Phases. Phase 1 of the project, being construction of 5 office Building has been completed in A.Y.2010-11. Phase 2 of the project comprises of construction of hotel, Shopping Centre, Club and Multiplexes. This Project is under construction. Pending completion of construction, All the direct & indirect expenses incurred for the project are capitalized and shown as capital work in progress. For construction of the project company has Borrowed Funds from ICICI Bank led consortium. Total amount sanctioned as per sanction letter is Rs 1600 Crores. As per the Terms of Agreement with Banks, these funds are specific funds and cannot be utilized for purposes other than for which these were given, [Clause No.5.7 of the Facility Agreement Copy of Agreement attached.] so these Funds are inextricably and intrinsically linkedwith the construction of project at Maker Maxity as the same have been raised for that purpose alone. As per the terms of Facility Agreement with Banks Company has to park Funds as required by the Facility Agreement with Banks in Debt service reserve Account [DSRA] for service of the Debts. [Clause No.40 of Facility Agreement] These funds are kept as Fixed deposits with Banks from whom funds have been Borrowed. Similarly Funds Borrowed from Banks which are not required immediately for construction activity are kept in Ultra short term Utilization Account Fixed Term Deposits [Clause No.5.7(b) and 5.8 of the Facility Agreement. On these Utilization Account Fixed Term Deposits interest is earned. So the funds borrowed and interest earned are inextricably and intrinsically linked to the construction of the project. In the notice it has been stated that interest earned on FDRs is not at all related to the project and the same needs to be taxed as income from other sources.

7 A.Y. 2014-15 As stated above we submit that the funds borrowed and the interest earned are inextricably and intrinsically linked to the construction of the project. We hereby submit that during the course of assessment proceedings in respect of query raised by the assessing officer in respect of interest income of Rs3,88,60,916/, reply given by the assessee company is as under. "With reference to your query regarding High ratio of refund to TDS, we hereby submit that Reason for high ratio of refund to TDS is due to the fact that TDS has been deducted on interest from fixed deposits with Banks. These deposits have been made out of 7'erin loans received from Banks for Assesses ongoing project known as Maker MaxityBandra Kura Complex. Pending utilization of amounts these amounts have been kept as fixed deposits temporarily. This project consists of a hospitality and entertainment complex to be held by the company as capital assets. hence the expenditure incurred for the project has been accounted as capital work in progress till it is completed. Total interest expenditure incurred by the company on Term loans is Rs. 39684.1 Lacs. Total interest on fixed deposits earned is Rs. 38816 lacs. Net Interest Expenditure of Rs. 3579.80 lacs has been debited to capital work in progress. Thus Interest Expenses have been shown on net basis. So there is not any net income in respect of interest receipts, on which TDS of Rs.3886 Lacs has been deducted." Accordingly, Interest income earned on Fixed deposits made with Banks on account of Debt Security Reserve Account and on account of ultra- short term bank deposits amounting to Rs. 3,88,60,916 has been correctly reduced from Interest paid on Borrowed Funds for the project and Net Interest Expenditure has been rightly capitalized and same is not taxable under the head income from other does not represent income of the company. Some of the Purchasers who have made payments towards outgoing, have deducted TDS 9 A.Y. 2014-15 u/s.194C, some have deducted u/s. 1941A, some u/s. 194J, but all relates to TDS on collection of outgoing. These amounts have been received on account of outgoings by the Assessee Company on behalf of the proposed body of the purchasers. Hence these receipts do not belong to Assessee Company and hence is not part of the income of the company. After formation of Body of Purchasers a complete record of amounts received from purchasers and expenses incurred towards maintenance will be handed over to Body of Purchasers and all the bank balances relating to purchasers will be handed over to society I Body of Purchasers - Thus Rs. 5,45,41,317/- is not income of the Assessee Company. These have been received on behalf of body of purchasers. A complete account of receipts & payments received & paid will he handed over to Body of purchasers after formation. A note to that effect has been given in the financial statements of the company which is as under [Note no 19 of the Financial Statement] 1. pending formation of the Body of purchasers in respect of Phase I (comprising of office Building and the portion of the land in respect thereof along with their common facilities) Company has on behalf of the proposed Body of Purchasers been collecting outgoings from various purchasers and has been incurring expenses towards the outgoings and maintenance. Amounts collected from various purchasers towards outgoing and deposits have been deposited in two separate Bank Accounts, one for the deposits and one for the outgoing. In respect of collection of Outgoings, some of the purchasers have deducted tax at source amounting to Rs. 15.96 lacs, (previous year Rs.26.46. Lacs). Accordingly the accounts of the proposed Body of purchasers are not reflected in these Accounts." In the Notice it has been stated that No Documentary evidences are placed on Record as to how This Rs 5,54,34,177/-has been brought to the Books of accounts and how the same has been offered for the Tax During the course of Assessment proceedings Assessee Company has explained about these credits in 26AS which is as under. "Similarly Assessee Company had earlier constructed 5 office buildings phase) on the portion of the land at BKC. Pending formation of the body of the purchaser‟s company has, on behalf of the proposed body of purchasers, been collecting outgoing from various purchasers and has been incurring expenses towards the outgoing & maintenance of phase I. Amounts collected from purchasers towards deposits and outgoings have been deposited in two separate bank accounts one for deposit and other for the outgoing. In respect of collection of outgoings some of the purchasers have deducted tax at source amounting to Rs 15.96 lacs. After formation of the society A complete record of amounts received from purchasers and expenses incurred towards maintenance will be handed over to society and all the bank balances relating to purchasers on account of society will be transferred to society. Outgoing collected from purchasers is not income of the Assessee Company as these have been collected on behalf of the proposed body of purchasers. After formation of society a 10 A.Y. 2014-15 complete record of all receipts received and expenses incurred will be handed over to society." Since these collections of outgoings from purchasers has been made on behalf of Body of purchasers, and assessee company is acting as Trustee, these amounts does not belong to Assessee company and hence does not form part of the accounts of the company hence not reflected in company's financials. We submit that Accounts Relating to amounts Received and Expenses incurred on behalf of Proposed Body of Purchasers are being separately maintained as accounts of Proposed body of Purchasers as Required by Provisions of Maharashtra Ownership flats act,1963. As per Provisions of Maharashtra Ownership Flats act, Till the Body of Purchasers is formed Developer is required to Maintain the Building premises by way of collecting outgoings from purchasers. As per section 5 of the Maharashtra Ownership Flats act 1963, Developer has to maintain separate bank account in respect of amount collected from purchasers towards, Deposits, outgoings etc received from purchasers and shall hold the money as Trustee for the purpose for which they were given and shall disburse the moneys for those purposes for which given. Accordingly, these Receipts are not part of the books of the accounts of the assessee company and hence not income of the assessee company. Since money has been collected in the name of assessee company on behalf of the body of purchasers, some of the purchasers have wrongly deducted tax at source which is reflected in 26AS 3. Interest on Income Tax Refund - As per ITS / 26AS The Assessee received Interest on Income Tax Refund amounting to Rs. 4,87,443 These amounts have been offered for tax in the return of income filed by the Assessee Company. Rs. 2,38,848 has been reflected as interest on income tax refund under the heading other income (schedule 17 of the financials). Balance amount of Rs.2,48,595 has been offered for tax in the computation of income separately under the heading — amounts not credited to profit & loss A/c but taxable, amounting to Rs. 2,48,595 Thus income of interest on income tax refund Rs.4,87,443 has been taxed correctly.

4. Rent on plant & machinery (Rs.1,82,196) As per 26AS amounts shown as received under section 194IA is as follows United Overseas Bank Limited Sr. No 20(5)& 20(6) of 26AS 1,82,196 These amounts have already been Reflected in Point No 2 As part of Total Receipts of Rs 5,54,34,177/, These amounts are included in Sr No X as per Break up given in point no 2 and explanation in respect of the same has been given in Point No 2.Thus these amounts have been mentioned twice in the notice.

5. Professional Fees(Rs.16,667) — As per 26AS amounts shown as received under section1941 is as follows. BNP PARIBAS Sr.No.8(11) of 26AS 16,667 These amounts have already been Reflected in Point No 2 As part of Total Receipts of Rs5,54,34,177/, These amounts are included in Sr No XIII as per Break up given in point no 2 and explanation in respect 11 A.Y. 2014-15 of the same has been given in Point No 2. Thus these amounts have been mentioned twice in the notice 6. License Compensation (Rs. 1,58,05,468) As per 26AS amounts shown as received under section 1941B is as follows (i) GEF Advisors India Pvt. Ltd (S.No.11) of 26A5 84,73,080 (ii) NATIXIS — S. No. 13 of 26AS 8,92,860 93,65,940 (iii) UBS AG S. No. 18 of 26AS 34,70,681 (iv) UBS Securities India Pvt. Ltd (S.No.19) of 26AS 29,68,847 64,39,528 Total 1,58,05,468

5. After the reply of the assessee, the PCIT was of the view that the reason served through notice u/s 263 of the Act dated 26.08.2018 were sufficient to invoke the provisions u/s 263 of the Act being the order was erroneous and prejudicial to the interest of the revenue. Feeling aggrieved, the assessee has filed an appeal before us.

1. 1. Copy of Return of Income for A.Y,2014-15 is attached along with this letter.

2. Computation of total income for A Y.2014-15 is attached along with this letter 3. Copy of audited Balance Sheet, Profit & Loss Account is attached along with this letter.

4. Details of Bank Accounts is attached along with this letter. 5. letter of Authority is attached along with letter. Thanking You,

Date:17/11/2016 To, Income Tax officer, l6(l)(5),Mumbai-400020 Dear Sir, Assesses: M/s, The Indian Film Combine Pvt. Ltd./PANAAACI361IE Subject: Assessment proceeding for the A-Y. 2014-15. With reference to the above, we submit as under-

1. 1. Point No 1 submitted Letter dated 16/08/2016* 2. Point No 2 submitted letter dated 16/08/2016.

3. Point No 3 submitted letter dated 16/08/2016, 13 A.Y. 2014-15 4. Point No 4 Assesses company is in the business of development of Real Estate and of hospitality Retail, entertainment etc.

5. Point No 5 attached 6. Point No 6 attached 7. Point No 7 NA.

1. 1. Reconciliation of Income as per 26AS 15 attached herewith.

2. In respect of transactions mentioned in GIB compulsory code transactions and CIB old code transactions, we hereby submit that these transactions relates to fixed deposits made by the company with the ICICI Bank and Electricity Bills. We hereby submit that Assesses company has not made any deposits in cash with Bank. There seems to be wrong reporting in AIR, all the deposals have been made by cheque transactions only. Assessee company has taken term loans from ICICI Bank and other Banks. Pending utilization of money borrowed for projects these amounts have been kept in fixed deposits with Banks. In respect of Electricity Bills, wherever these bills relates to company 14 A.Y. 2014-15 these are paid by assesses company. In respect of offices sold to third parties, wherever Electricity meters have still not been changed in the name of unit purchasers, electricity bills are raised in the name of assessee company, however the relevant payment is made by respective purchasers. We are attaching along with this letter, details of fixed deposits made with ICICI Bank and details of Electricity Bills above 20000. As on 31.03,2014 total amount of fixed deposits with Bank were -Rs.16777.80 lacs. 3, Interest on income tax refund as per AIR amounting to Rs. 4,87,443 has been offered for taxation. An amount of Rs 2,38,849 has been shown in profit & loss A/c under the heading other income and an additional amount of Rs. 2,48,595 has offered for tax in computation of total income. Thanking. Date:09.12.2016 To, Income Tax officer, l6(l)(5),Mumbai Dear Sir, Assesses M/s. The Indian Film Combine Pvt. Ltd./PAN.AAACl3611E Subject; Assessment proceeding for the A/Y. 2014-15. With reference to the above, we submit as under.