M/S.TANGLIN DEVELOPMENTS LTD.,,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX, BANGALORE

The present appeal is filed by the assessee against the order of the CIT (A)-7, Bengaluru, dt.08.07.2016, for the assessment year 2011-12.

The assessee has raised the following grounds of appeal :

Ground no.1 is general in nature. Ground no.2 pertains to interest income of Rs.2,11,860/- towards interest received from Mangalore Electric Supply Co. (MESCOM for short). It is the case of the assessee that the assessee, owner of STP at SEZ Mangalore. The building is let out to M/s. Mphasis. The income received from Mphasis was shown as revenue in the books of account under the head ‘licence fee’. The assessee has deposited certain amount as security deposit with MESCOM, for which the assessee has received interest of Rs.2,11,860/- and taxes were deducted at source u/s.194A of the Act. It is the case of the assessee that as the assessee owned the building and as per the record of MESCOM the security deposit was in the name of the assessee, therefore the interest was deducted at source by MESCOM and was shown in 26AS of the company. However, it is the case of the assessee that MESCOM while issuing the bills to the tenant had adjusted the interest accrued on the on the deposit against the electricity dues payable by the tenant and issued bill for the remaining balance amount. Therefore the assessee submitted that the tenant, namely Mphasis has stood benefitted to the extent of the interest. However, the AO was not convinced and added the interest to the income of the assessee and the same was upheld by the CIT (A).

Before us the same argument was addressed and it was submitted that the deposit was made to MESCOM by the landlord (assessee) and the amount deposited by the assessee was recovered by the assessee from the tenant and therefore, though the TDS was ITA.1701/Bang/2016 Page - 4 deducted in the name of the assessee, but the interest belongs to the tenant. The Ld. DR on the other hand relies upon the order passed by the CIT(A).

We have heard the rival contentions and perused the record. It is not disputed that as per 26AS, the interest income of Rs.2,11,860/- accrued on the deposit made by the assessee. However for the purposes of appreciating the contention of the assessee, it was incumbent upon the assessee to produce evidence in any form of any document showing that the amount initially paid as deposit with Electricity Company/ MESCOM was recovered by the assessee from the tenant. No such evidence was produced before us or shown during the course of argument. Therefore, argument of the assessee is rejected as the person who had made the security deposit would only be entitled to not only the interest accrued on the security deposit but also refund of the security deposit. It was the inter se arrangement between the tenant and the owner as to how the benefit had been passed to the tenant by the assessee. But for the purpose of IT Act, income will be chargeable in the hands of the person in whose favour interest is accrued, unless otherwise is proved. In the light of the above, ground no.2 is dismissed.

Ground nos.3 and 4 pertain to the expenditure on flood relief project to the tune of Rs.37,02,233/-. In this regard, it was the submission before us by the Ld. AR that during the year 2010-11, major portion of Karnataka, especially the northern region had faced ITA.1701/Bang/2016 Page - 5 unprecedented floods which resulted in loss of human lives and properties. The assessee stood to the call of the nation and gave huge relief in the form of food, clothing etc., The assessee has also built low-cost houses to the flood affected people and the documents pertaining to such construction were produced. It was the case of the assessee that the entire expenditure was incurred for the benefit of the people at large in the State of Karnataka. Hence such expenditure was required to be treated as incurred wholly and exclusively for the benefit of the business of assessee. It was submitted that the conclusion of the AO in para 3 and the decision of the CIT (A) in para 7.4 are without any merit. The Ld. AR relies upon the judgment of the Hon’ble jurisdictional High Court in the case of CIT v. Infosys Technologies Ltd [(2014) 360 ITR 714], as well as on the decision of the ITAT, Raipur Bench in dt.23.06.2016 in the case of ACIT v. Jindal Power Ltd.

On the other hand, the Ld. DR submitted that there is no commercial expediency for allowing this expenditure u/s.37 of the Act, as there the expenditure incurred is not directly relatable to the business of the assessee.

We have heard the rival contentions and perused the record as also the case laws relied upon by the Ld. AR. Though it is correct that the expenditure was incurred in relation to granting relief to the citizens at large, on account of flood havoc in Bagalkot district of North Karnataka. However the same cannot be allowed being done ITA.1701/Bang/2016 Page - 6 on account of commercial expediency. The principle mentioned in section 37, are required to be applied, i.e., unless there is a commercial expediency for incurring the expenses and the expenses are incurred wholly and exclusively for the purposes of business of the assessee, it cannot be allowed. In view of the above, we do not find any merit in the contention of the assessee. Ground nos.3 and 4 are dismissed.

Ground no.5 pertains to disallowance of professional charges paid to an NRI to an extent of Rs.69,90,000/-. The AO has disallowed the professional charges and has given the following reasoning :

The CIT (A) has upheld the finding given by the AO in para 9.6 to the following effect :

The assessee before us relied upon pages 24 to 27 of the paper book which is in the form of a Consultancy Service Agreement entered between the assessee and B. Ravi Singh, for providing the consultancy services for setting up of the software technology park and for which the consultancy services were rendered, so as to make it energy conservation efficient. In our view, the conclusion recorded by the first appellate authority was on the terms that as per the provisions of DTAA, the services rendered by B. Ravi Singh was in the nature of FTS and therefore the tax is required to be deducted on interest, at the time of credit of such income to the account of the payee. It was also held that as the same was not done by the payer (assessee), therefore, the whole of the amount is liable to be deducted. The grievance before us was two-fold, viz., the CIT (A) has on its own decided the issue of applicability of DTAA without seeking a remand report from the AO and the CIT (A) has not given an opportunity to this effect. In our view, the submissions of the assessee dt.16.12.2015, in the appellate proceedings were reproduced in verbatim by the CIT (A) in para 9.1 of the CIT (A)’s order :

Ground no.6 is not pressed and hence dismissed.