JOYOUS HOUSING LTD,MUMBAI vs. DCIT CEN CIR 5(1), MUMBAI

Per Amit Shukla, Judicial Member:

“1. On the facts and circumstances of the case and in law, the CIT(A) has erred in confirming disallowance of expenses amounting to Rs.67,04,063/- out of total expenses claimed of Rs.69,77,956/- on the ground that the appellant was not engaged in any business activities during the year and therefore claim of expenses should not be allowed.

including loan/advances given incidentally from which the appellant is earning interest income of Rs.48,00,000/- 3. On the facts and circumstances of the case and in law, the CIT (A) has erred in directing without prejudice, disallowance of interest cost exceeding 12% of the borrowed fund (Disallowance figure not quantified in assessment order). The disallowance made, without prejudice and in the event that ground no 1 and 2 is deleted at appellate proceedings, is unfair and illogical and against natural principle of law and justice.” Apart from the above, the assessee has also filed an additional ground of appeal

, vide petition dated 13.12.2016, which reads as under:- “Alternative, the Learned CIT(A) ought to have directed the AO to allow capitalization of interest expense amounting to Rs.62,52,905/- (i.e. to include it in ‘Work in progress’ of the project) in the same manner he directed to capitalize the other expenses like transport charges, professional fees, advertising expenses etc.”

2. The brief facts are that the assessee company is a closely held public limited company, engaged in the business of construction of building and development of properties. The AO noted that the assessee company has earned interest income of Rs.48,92,066/-, which was shown as ‘Income from other sources’ and against such income, the assessee has claimed various expenses. It was further noted by him that the assessee company was in the process of development of its project at Tulsiwadi at Tardeo, Mumbai. Since the assessee had not commenced its business, therefore, the AO held that the expenditure cannot be allowed as business expenditure. Further the expenditure allowable u/s 57 against ‘Income from other sources’ is only those expenses which are incidental to the earning of the interest income. He held that since single development project was being executed by the assessee during the year, therefore, it should have capitalized all these expenses to ‘work-in-progress’ and should not have claimed the same in the Profit & loss account. Accordingly, all the business expenditure aggregating to Rs.69,77,956/- was disallowed. The AO thus, treated the entire interest income of Rs.48,92,066/- as ‘Income from other sources’ and business income was computed at ‘nil’.

3. Before the Ld. CIT (A) the assessee had submitted that the project undertaken by the assessee was under construction and all these construction expenses were capitalized to the work-in-progress account. Apart from that, the assessee had also given ICD of Rs.4 crores to M/s. Radiant Tradevest Private limited, a body corporate at simple interest rate of 12% p.a. The assessee had also debited interest expenses on loan amounting to Rs.62,52,903/- and contended that it was directly attributable to the earning of interest income of Rs.48 lakhs. The other cost of expenditures aggregating to Rs.7,25,051/- were fixed cost and was claimed that it has nothing to do with the existence of any project. The learned CIT(A) noted that out of total expenses debited to the Profit & loss account, the major component consists of Rs.62,52,905/- which is on account of interest expenditure and other expenses aggregating only to Rs.7,25,051/-. Out of the said expenses, Ld. CIT (A) partly allowed as revenue expenditure and partly held that the same needs to be capitalized. One item of 34,140/-, which was on account of ‘interest on delayed payment of taxes’ was disallowed as the assessee itself had disallowed the said amount. However, as regard the claim of deduction of interest expenses of Rs.62,52,905/- against the interest income of Rs.48 lakhs from ICD deposit (assessed under the head ‘income from other sources’), he observed that the interest has been received @12% p.a. while the payment of interest has been made at weighted average rate of 16.75%, which was later on clarified by the assessee that it is 14.20%. On perusal of the bank statement, he noted that the amount of Rs.4 crores, which was advanced as ICD on 10.10.2008, @ 12% p.a., was out of the fund of Rs.11.25 crores received by the assessee from M/s. Chinsha Property Pvt. Ltd. (an associate company) on 29.08.2008. On this fund the assessee has not paid any interest, hence it was interest free fund, whereas the assessee has incurred interest expenditure of Rs.62,52,905/- which cannot be said to be incurred wholly and exclusively for the purpose of earning interest income of Rs.48 lakhs. Accordingly, he confirmed the action of the AO.

4. Before us the learned counsel, Shri Vijay Mehta though did not pressed ground no.1, however, he mainly contended that the issue raised in additional ground should be admitted, because if the interest expenditure has been held to be not relatable to earning of interest income, then it, inter alia, it means that it is for the purpose of on-going project and, hence, such an interest expenditure also needs to be capitalized as done by the CIT (A) with regard to certain other expenses.

5. On the other hand, learned CIT-DR strongly relying upon the order of the CIT (A), submitted that the issue raised in additional ground has not been taken either before the AO or before the ld. CIT (A), albeit, the assessee’s case had been that the interest expenditure is attributable to earning interest income of Rs.48 lakhs and, therefore, the same should be allowed as deduction. If the assessee is claiming that the interest pertained to the project, then the matter should go back to the AO for a proper verification and examination and assessee needs to prove the nexus between the interest expenditure and its utilization in the project.

iii. Professional Fees 1,81,995 iv. Expenses written off 81,153 v. Advertising Expenses 22,385 vi. Statutory Audit Fees 1,68,540 vii. Limited Review Fees 33,090 viii. Office Expenses 500 ix. Professional Tax 2,500 x. Bank Charges 35,123 xi. Interest on delayed payment of taxes 34,140

Total 69,77,957 Out of the aforesaid expenditure, those given at Sr. nos. ii to v have been allowed by the ld. CIT (A) to be capitalized and those at Sr. nos. vi to x have been allowed as revenue expenditure. The item at Sr. no. xi has been disallowed by the assessee itself. The major issue before us is mainly the interest cost, which has been apportioned towards advance given to Radiant Tradevest Private Limited in the form of ICD for sums aggregating to Rs.62,52,905/-. The learned CIT (A) has given a very categorical finding that this interest expenditure has no co-relation with the earning of Rs.48 lakhs of interest income from ICD, because the funds advanced for ICD was out of the interest free fund of Rs.11.25 crores received from the associate company. Now the only contention, which has been raised by the learned counsel Shri Vijay Mehta before us is that, this interest expenditure Rs.62,52,905/- should be capitalized, because it pertains to the on- going project. It is purely a new plea/ground, which has been taken for the first time at this stage, but at the same time it goes to the root of the issue involved because, whence, this interest expenditure is not attributable to ‘income from other sources’, then it indicates that the same may have been for the purpose of construction business/ongoing project. Being a core issue which goes to the determination of correct tax liability of the assessee, we therefore deem fit to admit the additional ground. Since this aspect has neither been contented by the assessee before the AO nor has been examined by the AO, therefore, in the interest of justice, we remit back the matter to the file of the AO, who shall examine the utilization of the borrowed fund for the purpose of business and the nexus of interest expenditure which has been incurred on such borrowed funds. If the interest expenditure is on the borrowed funds, which has been utilized for the business purpose, then the same need to be capitalized as part of work-in-progress, if not, then AO can draw adverse inference. Accordingly, we agree with the contention of the learned CIT-DR and set aside this issue to the file of the AO to decide the same in the light of the directions given above.

Order pronounced in the open court on 10th March, 2017.