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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI RAMIT KOCHAR
PER RAMIT KOCHAR, Accountant Member
This appeal, filed by Revenue, being 03.06.2014 passed by learned Commissioner of Income Tax (Appeals)-26, Mumbai (hereinafter called “the CIT(A)”), for assessment year 2008-09, the appellate proceedings had arisen before learned CIT(A) from penalty order dated 18.03.2013 passed by learned Assessing Officer (hereinafter called “the AO”) u/s 271(1)(c) of the Income-tax Act, 1961 (hereinafter called “the Act”) for AY 2008-09.
The grounds of appeal
raised by Revenue in the memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called “the tribunal”) read as under:- 1."On the facts and in the circumstances of the case and in law , the Ld. CIT(A) erred in holding that the claim of the appellant treating income from other sources as business income is bonafide, ignoring the relevant facts in the assessment order and also in the penalty order.” 2."On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in not appreciating that the action of the assessee in treating the interest as business income goes to the root of the taxability of the interest income in the facts of the case and the right head of the income under which it is taxable in law is 'Income from the other sources.” 3. "On the facts and circumstances of the case, the Ld. CIT(A) has erred in deleting penalty levied U/s 271(l)(c) merely relying upon case law (Bennett Coleman & Co. Ltd. Bombay High Court) facts of which are totally different from this case.
4. "The appellant craves leave, add, amend, alter or vary any of the grounds of appeal at the time and/or before the hearing of the appeal"
3. This appeal is filed by Revenue against deletion of penalty of Rs. 23,34,033/- which was levied by the AO u/s 271(1)(c) of the 1961 Act and was deleted by learned CIT(A) in his appellate orders dated 03.06.2014. The brief facts are that the assessee is builder and developer. The assessee has received building advances from booking of flats and amounts were advanced to various parties which has remained outstanding for long period of time. However , the assessee charged interest of Rs. 56,23,221/- on such loans and advances which was treated as business income by the assessee. The said interest was held by the AO to be income assessable under the head „Income from other sources‟ as in the opinion of the AO these are not business advances but should be charged to income-tax under the head „income from the other sources‟. Further, the AO made additions of Rs. 32,71,584/- by increasing WIP by Rs. 32,71,584/- being interest cost worked out at 58.18% of the total interest paid at Rs. 56,32,211/- There was some relief granted by Ld. CIT(A) who held that the interest income should be charged to the tax under the head „income from other sources‟ but restricted the addition on account of increase in WIP to only 10% of increased WIP of Rs. 32,71,584/- as the assessee was showing only 10% of the profit in the return of income. The AO had initiated penalty proceedings u/s. 271(1)(c) which led to the levy of the penalty to the tune of Rs. 23,34,033/- u/s. 271(1)(c) of the Act by the AO vide orders dated 18.03.2013 passed u/s 271(1)(c), by holding as under:- “ 5. The explanation of the assessee is considered but not accepted. The interest income is generally assessed under the specific head of 'income from other sources' unless it is accrued as an integral part of the business. The assessee advanced funds to sister concern with the sole motive of earning of interest income, which is taxable under the head income from other sources only. Since this income is assessable under the 'income from other sources', it cannot be set off against interest paid on borrowings for business purposes. Had the case not been selected for scrutiny, this fact would have gone unnoticed leading to loss of revenue. So, the assessee is liable for penalty u/s 271(1)(c) Income Tax Act, 1961 in respect of amount of Rs. 56,23,221/- assessed under the head "Income from other sources" for filing inaccurate particulars of income and concealing his income 6. The Assessing Officer did not allow set off of interest paid by the assessee and entire interest received at Rs. 56,23,2117- was added to WIP of the assessee. Accordingly there was increase of WIP by Rs. 56,23,211/-. Since 58.18% of this interest pertains to the project on which 10% GP was disclosed by the assessee so proportionate increase in WIP of such project amount to Rs. 32,71,584/- (i.e. 58.18% of Rs.56,23,211). The AO added the whole figure of WIP of Rs. 32,71,584/- in income of assessee. The C!T(A) restricted the addition to 10% of the increase in WIP i.e. to Rs. 3,27,158/-. The assessee by not including interest amount of Rs. 32,71,5847- in its WIP tried to decrease its GP by Rs.3,27,158/-. The assessee thus filed inaccurate particulars of its income and concealed its income. The assessee is thus liable to penalty u/s 271(1)(c)lncome Tax Act, 1961.”
4. The assessee went in appeal before learned CIT(A) who deleted the penalty levied by the AO u/s 271(1)(c), vide appellate order dated 03.06.2014, by holding as under:-
“ 3.7 The facts of the case and submission of the Ld. A.R have been considered accordingly. The facts are not in dispute. The interest income has been considered by the assessee under the head 'Business Income' whereas the same has been found assessable under the head 'Income from Other Sources'. The increased income on account of increase in WIP is due to the assessment of interest income under the head 'Income from Other Sources'. 3.8 Assessability of interest income as business income or as income from other sources is a debtable issue and therefore, it cannot be said that the claim of the assessee was not bonafide. Therefore, the case of the assessee is covered by the decision of Hon'ble Bombay High Court in the case of Bennett Coleman & Co. Ltd., supra wPierein Hon'ble Bombay High Court has held as under :- 3 "2. So far as question (i) is concerned, the respondent- assessee has claimed deduction of interest on tax free bonds of Rs.5,60,11,644/-. During the course of the assessment proceedings, the assessee was asked to give details of interest on tax free bonds. While preparing the said details, it was noticed that 6 percent Government of India Capital Index Bonds purchased during the year had inadvertently been categorized as tax free bonds and, therefore, interest of Rs.75,00,000/- earned on such bonds had also inadvertently escaped tax. The assessing officer levied penalty under Section 271(1)(c) of the Income Tax Act, 1961 (the Act). The CIT(A) upheld the order of the Assessing Officer. On further appeal, the Tribunal in the impugned order records a finding of fact that by inadvertent mistake interest at 6 percent on the Government of India Capital Index Bonds was shown as tax free bonds. The Tribunal concluded that there was no desire on the part of the respondent-assessee to hide or conceal the income so as to avoid payment of tax on interest from the bonds. In that view of the matter, the Tribunal deleted the penalty imposed upon the respondent- assessee under Section 271(1)(c) of the Act In view of the fact that the decision of the Tribunal is based on finding of fact that there was an inadvertent mistake on the part of the assessee in including the interest received of 6 percent on the Government of India Capital Index Bonds as interest received on tax free bonds. It is not contended by the Revenue that above finding of fact by the Tribunal is perverse. In these circumstances, we see no reason to entertain the proposed question (i).
So far as question (ii) is concerned, the respondent- assessee had claimed premium on redemption of debentures as income from capita! gains. Whereas the assessing officer held that the redemption of debentures is revenue receipt assessable to tax under the head income from other sources. The CIT(A) confirmed the order of the assessing officer. The respondent-assessee did not file any further appeal on the quantum proceedings. Thereafter, the assessing officer levied penalty under Section 271(1)(c) of the Act on the respondent-assessee. The CIT(A) also confirmed the levy of penalty upon the respondent-assessee. On further appeal, the Tribunal held that there is no dispute with regard to the fact that the respondent- assessee had disclosed that the amount received as premium on redemption of debentures in its computation of income. Further, the Tribunal records that it is not the case of the department that the respondent-assessee had concealed any particulars of income or furnished inaccurate particulars of income by stating incorrect facts. The assessing officer considered the said premium received on redemption of debentures to be taxable under the head income from other sources while the respondent-assessee considered the same to be taxable under the head capital gains. In view of the fact that there is only a change of head of income and in the absence of any facts that the claim of the assessee was not bonafide, the Tribunal deleted the penalty imposed under Section 271(l)(c) of the Act. The revenue has not been able to point out that the finding of the Tribunal is perverse. In these circumstances, we see no reason to entertain the proposed question (ii)".
3.9 Considering the facts of the case and aforesaid order of the Hon'ble Bombay High Court, penalty levied u/s. 271(l)(c) is directed to be deleted.”
Aggrieved by the deletion of penalty by learned CIT(A), the Revenue has come in an appeal before the tribunal . None appeared on behalf of the assessee when appeal was called for hearing before the tribunal . The Ld. DR has relied upon order levying penalty passed by the AO and has pleaded that assessee has granted loans and advances which were not in the nature of the business advances but the assessee treated interest income as „income from business‟ which was rightly treated as „income from the other sources‟ and the same was confirmed by learned CIT(A) in quantum proceedings. The learned DR drew our attention to both the orders of the authorities below .
We have heard Ld. DR and perused the material on record . We have observed that assessee is builder and developer. The assessee has received booking advances and certain portion of the said advances were advanced to various parties from which interest income to the tune of Rs. 56,23,221/- was earned by the assessee claiming the said income to be „income from the business‟ while the authorities below treated the said interest income as „income from other sources‟ . The AO has made adjustment to work in progress by adding the interest expenses while learned CIT(A) restricted the same to 10% of WIP being 10% of the profit on sale of flat in quantum proceedings. We have observed that the matter travelled to tribunal in for AY 2008-09 against quantum assessment and the tribunal vide orders dated 19.05.2017 has restored the matter back to the file of the AO for denovo adjudication of the issue on merits , by holding as under:- “ 7. We have heard the rival submissions and perused the relevant material on record. We begin with the decision relied on by the learned counsel of the assessee. In the case of Lok Holdings (supra), the assessee firm was involved in the business of development of properties. In the course of its business, the assessee-firm received monies in advance from customers intending to purchase flats in the properties as developed by the assessee. These monies were of the nature of booking / advances. Since these monies received could not be immediately utilised for the business of the firm, the surplus amounts from such money received came to be temporarily invested with banks and other concerns. Such deposits with accrued interest thereon which was received by the assessee-firm was deducted from the work-in-progress till the conclusion of the project. For the A.Y. 1992-93, the income from such interest was Rs. 52,28,289/-. The A.O. assessed this interest income from other sources and thus made an addition under the head ‘Income from other Sources’. The Hon'ble Bombay High Court has held that the interest earned on deposits of surplus money is business income and cannot be assessed as income from other sources.
In Shree Krishana Polyster Ltd. (supra), the assessee was engaged in the business of manufacture of synthetic yarn and money lending was never the business activity of the assessee. The assessee received surplus money in public issue and the said money was invested in bank deposits for a period of 45 days. The Hon'ble High Court has observed that the facts which have been found by the Tribunal lead to the conclusion that the interest which the assessee earned from short term investment of surplus money received in public issue did not spring or emanate from the business activity of the assessee. The Hon'ble High Court has held that the income of interest earned by the assessee by investing surplus money received in public issue in bank deposits for a period of 40 days was assessable as income under the head ‘income from other sources’.
In Paramount Premises (P) Ltd. (supra), for the A.Y. 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. Of 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 of India in respect of the land taken on lease for construction work. For this purpose, certain amounts were kept in fixed deposits 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 Chhaganlal Khimji & Co. Pvt. Ltd. (supra), appellant was in to business of real estate and it required fund for making investment and to carry on the construction activity. Funds borrowed from MNRPL was in turn invested in PPL which was engaged in construction of a commercial complex by name Marathone Future X. Appellant being one of the JV partner the borrowal was utilized only in the construction activity and there was no room for any doubt. Alternatively it could be treated as part of activity in construction business. The A.O., did not controvert this claim of the appellant. The appellant did not receive any interest from PPL for the investment made. Mere non-receipt of interest income during the year cannot lead to the conclusion that the appellant is not into finance activity. The CIT(A) held that the assessee company was engaged in the business of construction as well as lending of money, both constituted its main business activity. Both these objects were clear from the ‘Memorandum and Articles of Association’ of assessee-company. As per clause 55 of ‘Memorandum and Articles of Association’, assessee was authorized to carry business of money lending.
Both construction as well as lending constituted the business activity hence, the claim of the appellant that the interest income earned was from business was in order. The ITAT held the interest earned as business income.
7.1 Now we come to the decision relied on by the learned DR. In M/s. The Totgar’s Co-op Sale (supra), the assessee-society was assessed to tax as a Co-operative Society. Its business was to provide credit facilities to its members and to market the agricultural produce to its members. The Hon'ble Supreme Court held as under: “Interest on such investments, therefore, cannot fall within the meaning of the expression “profits and gains of business”. Such interest income cannot be said also to be attributable to the activities of the society, namely, carrying on the business of providing credit facilities to its members or marketing of the agricultural produce of its members. When the assessee-society provides credits facilities to its members, it earns interest income. As stated above, in this case, interest held as ineligible for deduction under Section 80P(2)(a)(i) is not in respect of interest received from members. In this case, we are only concerned with interest which accrues on funds not required immediately by the assessee(s) for its business purposes and which have been only invested in specified securities as “investment”. Further, as stated above, assessee(s) markets the agricultural produce of its members. It retains the sale proceeds in many cases. It is this “retained amount” which was payable to its members, from whom produce was bought, which was invested in short-term deposits/securities. Such an amount, which was retained by the assesseesociety, was a liability and it was shown in the balance-sheet on the liability side. Therefore, to that extent, such interest income cannot be said to be attributable either to the activity mentioned in section 80P(2)(a)(i) of the Act or in section 80P(2)(a)(iii) of the Act. Therefore, looking to the facts and circumstances of this case, we are of the view that the Assessing Officer was right in taxing the interest income, indicated above, under section 56 of the Act.”
7.2 Now we go back to the facts of the present case. In the submission before the A.O. vide letter dated 10.12.2010 , the learned AR of the assessee has explained that (i) the assessee is engaged in the business of construction and development of housing project, (ii) the assessee has followed the percentage completion method of accounting, (iii) the assessee has earned interest income of Rs. 56,23,221/- for giving loan or advance during the normal course of business to associates or other concerns; the assessee has netted off the interest earned Rs. 56,23,221/- from the value of interest paid Rs. 86,04,016/- and the net amount of Rs. 29,80,795/- has been charged to the work-in-progress for the A.Y. 2008-09 and this method of valuation has been followed in A.Y. 2009-10 also.
7.3 The learned AR of the assessee has submitted before the learned CIT(A) that the assessee is a partnership firm and the business clause as per the partnership deed of the firm is as under: “That the partnership shall carry on the business of Builders and Contractors, Construction Contractors, Developers of Land and Estates and Construction of Residential Flat, Colonies, Office Building, Commercial and Multi-storied Complexes, Prefabricated and Pre-cast Houses, and to acquire by purchases, lease, exchange or otherwise land, building and hereditments of any tenure or description and any estate or interest therein and any rights over or connected with land, and in turn the same to account as may seem expedient and in particular by preparing building sites and by constructing, reconstructing, altering, improving, repairing, decorating, furnishing and maintaining offices, flats, houses, factories, warehouses, shops, wharves, buildings, works and convenience of all kinds and by consolidating or connecting or subdividing properties and by leasing and disposing of the same in any manner and / or any other business under the name & style of M/s. SHUBH ENTERPRISES or such other name or names as my be mutually decided by and between the partners from time to time.”
7.4 We observe that the assessee has not disputed before the learned CIT(A) (i) the details of loan mentioned at page 4 of the assessment order for the A.Y. 2008-09 and at page 6-7 of the assessment order for the A.Y. 2009-10 and (ii) the details of loan given by the assessee where there was no transaction during the F.Y. 2008-09 mentioned by the A.O. at page 6 of the assessment order for the A.Y. 2009-10.
7.5 We find that there is merit in the finding of the A.O. that the loan advanced for more than three/four years to M/s. Vijay Parikh & Associates, Arpit Samani, Parikh Granito, M/s. Nisha Enterprise cannot be treated as a temporary investment of the borrowed funds. Even the loan provided to M/s. Shri Shankar Sanitation, Shubh Hotel P. Ltd. and Shub Builders P. Ltd. has crossed the limit of more than two years. Thus there is merit in the finding of the A.O. that “AS-16: Borrowing Costs” is not applicable in the present case.
7.6 Let us illustrate the funds advanced by the assessee to its two sister concerns i.e. M/s. Shub Hotels Pvt. Ltd. and Shree Shubh Builders Pvt. Ltd. In the case of Shub Hotels Pvt. Ltd. the loan was Rs. 15,36,003/- as on 31.03.2007, Rs. 1,43,83,433/- as on 31.03.2008 and Rs. 2,08,07,427/- as on 31.03.2009. In the case of Shree Shub Builders P. Ltd. the loan was Rs. 1,72,71,840/- as on 31.03.2007, Rs. 2,73,09,016/- as on 31.03.2008 and Rs. 3,60,26,172/- as on 31.03.2009.