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Income Tax Appellate Tribunal, “B” BENCH, MUMBAI
Navi Mumbai SEZ P. Ltd Commissioner of Income Tax, Jai Centre, 1st Floor, 34 PD Circle-7, Mumbai Vs. Mello Rd, Opp Rd Gate Mumbai Appellant .. Respondent PAN No. AACCN0042N Assessee by .. S/Shri Vijay Mehta & Anuj Kisnadwala, AR Revenue by .. Shri N. P. Singh, CIT DR Date of hearing .. 09-03-2017 Date of pronouncement .. 09-03-2017 O R D E R PER MAHAVIR SINGH, JM:
This appeal by the assessee is arising out of the order of CIT(A)-7, Mumbai, in appeal No Nil dated 30-03-2011. The Assessment was framed by ITO Ward 7(1)(1), Mumbai for the A.Y. 2006-07 vide order dated 22-12-2008 under section 143(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’).
At the outset the learned Counsel for the assessee drew our attention to ground No. 5 and 6 which reads as under: -
“5. The learned CIT erred in directing for fresh verification of the expenses incurred by promoter viz CIDCO and DIPL and transferred through the Debit Notes. Relevant details and explanations already provided and examined by the AO.
6. the learned CIT erred in directing for fresh verification of applicability of provisions of Tax deductions at source and disallowance of the same under section 40(a)(i). Relevant details and explanations already provided and examined by the AO.”
Navi Mumbai SEZ P. Ltd. A.Y:06-07
The learned Counsel for the assessee stated that the AO has accepted the claim of the assessee after verifying the facts of the case and allowed the expenses claimed by the assessee hence, this ground has become only academic. The assessee filed a copy of assessment order before us. We find that the AO in consequence to order u/s 263 of the Act framing assessment under section 143(3) of the Act has allowed the claim of expenses. Hence, these two grounds have become academic and need no adjudication.
The only issue remains for adjudication is disallowance of interest expenses under section 57(3) of the Act. For this assessee has raised following ground No.4: -
“4. The learned CIT erred in directing for fresh verification of the nexus of interest expenses under section 57(iii) of the Income Tax Act which has been claimed in the Computation & explained to the AO.”
The learned Counsel for the assessee first of all took us through the revision order passed by CIT(A) under section 263 of the Act wherein the first point raised reads as under: -
“(i) Huge interests on deposits have been received and set off against expenses for capitalization where the same were liable for taxations as ‘income from other sources’.”
The learned Counsel for the assessee took us through Para 3 of the revision order of CIT(A) which reads as under: -
“3. (ii) In Tuticorin Alkalies 227 ITR 172 the Hon'ble Supreme Court has held that interest income is always of a revenue in nature, if a person borrows money for business purposes but utilizes that money to earn, interest, however temporarily, the interest so generated will be his income. The Hon'ble Apex Court further held that the income can be utilized 3)' the assessee whichever Page 2 of 7
Navi Mumbai SEZ P. Ltd. A.Y:06-07 way lie likes hut it does not cease to be his income. Accounting practice cannot over write section 56 and total income has to be computed in accordance with the provisions of the Act. Such interest will be chargeable u/s.56. In view of the principles laid down by the Hon'ble Apex Court, assessee's objections are rejected and the Assessing Officer is directed to treat the interest received on deposits of Rs.5,93,84,234/- as interest income taxable under the head. 'income front Other Sources'. On the issue of allowing deduction u/s.57(iii) on the borrowings from non-convertible debentures and Financial Institutions the same can be allowed as deductions if direct nexus is established by the assessee with evidence. However, u./ s 57(ii) the borrowing having been made for setting up of SEZ, the expenditure towards interest has to be restricted to the interest income, as per provision of section 57(iii).”
The learned Counsel for the assessee narrate the facts in brief that the assessee is engaged in the business of setting up and developing special economic zone project in the state of Maharashtra and accordingly incorporated Navi Mumbai SEZ P. Ltd. as on 15-06-2004. It was explained that during the year under consideration, no Profit & Loss Account is prepared since the project is at the start up stage of development and the company was yet to commence its revenue operations. The expenditure incurred (net of income) during the period are classified as "Project Development Expenditure" pending allocation and will be apportioned to the assets on completion of the project. The Company has temporarily parked its project surplus funds in units of Mutual Fund and in Inter Corporate Deposits. These investments and advances would be encashed for requirement of funds for project execution. The Company has borrowed interest bearing funds from various banks which were utilized by the company for making inter-corporate deposits on which the company had earned interest income. Similarly, the investment made by the company in various companies
Navi Mumbai SEZ P. Ltd. A.Y:06-07 and mutual funds had fetched dividend income. On the sale of investments, the company has also earned profit. The said income is credited to Profit & Loss Account. The company had borrowed money from various banks and others in respect of which the company had paid interest. The said interest bearing funds have been utilized for making inter-corporate deposit from which the company has earned interest income. There is direct nexus between the amount borrowed and utilization thereof for inter-corporate deposits.
During the period under consideration, the company has borrowed interest bearing funds in the form of 7.5% Non-Convertible Debentures and secured loan from Financial Institution. These funds have been utilised by the Company for making inter corporate deposits and investment in mutual funds and shares of various companies. The Company has earned interest income of Rs. 5,93, 84,234/- on these inter corporate deposits given. The company has also earned income in the nature of profit on sale of current investments of Rs. 15, 84,965/-. The said income is reduced from Capital Work-in-Progress in Balance Sheet as the company has not commenced its revenue operations during the year under consideration. While filing the return of income for AY 2006-2007, the profit on sale of investment has been offered for taxation as Short Term Capital Gains under the head "Income from Capital Gains". The Interest income of Rs. 5, 93, 84,234/- is offered for taxation under the head "Income from Other Sources". Against this interest income, the company has claimed deduction to the extent of interest income under section 57(iii) of the Act. During the period under consideration, the company has borrowed Interest bearing funds in the form of 7.5% Non-Convertible Debentures and secured loan from Financial Institution. These funds have been utilized by the Company for making inter corporate deposits and investment in mutual funds and shares of various companies. The interest income earned by the company from inter corporate deposits has not been emanated from the business activity of the company. This income is chargeable under the head "Income from Other Sources" as per the provisions of Section 56(1) of the Act. The interest expenditure incurred by the company is fully and exclusively for the purpose of earning interest income and hence such Page 4 of 7
Navi Mumbai SEZ P. Ltd. A.Y:06-07 expenditure is allowable u/s. 57 (iii) of the Act. The company has claimed the interest expenditure to the extent of interest income i.e. Rs.5,93,84,234/- out of the total interest expenditure of Rs.20,28,76,357/-.
Learned Counsel for the assessee drew our attention to the revised computation of income which is filed on page 9 of assessee’s paper book wherein interest in ICD/Staff advances/Misc. Income of Rs.5,93,84,233/- was declared and claimed expense under section 57(iii) of the Act on interest and financial charges paid to bank at Rs Rs.5,93,84,233/-. The learned Counsel for the assessee also drew our attention to page 1 i.e. balance sheet of the assessee wherein capital work in progress at schedule D at Rs. 108,97,88,764/- is declared and claimed the assessee as interest income and other at Rs. 5,93,84,233/- in capital work in progress which is given at pages 1 to 5 of assessee’s paper book i.e. the account of assessee. The learned Counsel for the assessee took us through the original computation of income wherein no such claim was made. But this claim was made in the revised computation. He also stated that a specific query was raised by the AO and answered by assessee vide letter dated 15-12-2008, which is enclosed at Pages 10 of assessee’s paper book, and the relevant given by assessee reads as under: -
“Deduction under Section 57
During the FY 2005-06, the company has borrowed the funds and temporarily parked it to the investment so that it can get earn other income. The company has paid interest to the tune of Rs. 202,876,37/- during the year and has earned interest income to the tune of Rs. 59,365,403/- from Inter Corporate Deposits. As there is direct nexus between amount borrowed and amount given as inter corporate Deposits, the company has claimed deduction under section 57(iii) in respect of interest paid on borrowed funds to the extent of Interest Income.”
Navi Mumbai SEZ P. Ltd. A.Y:06-07
The learned Counsel for the assessee took us through the original assessment order which is given at pages 11-12 of the assessee’s paper book which proves that the revise computation was available with the AO while making assessment. In view of the above given facts and circumstances, we find that the issue of taxing interest earns on deposits under the head income from other sources is as per the provisions of the Act and accordingly deduction for interest paid on borrowed funds utilized to earn such interest on deposit was duly considered by the AO.
We find from the above facts that the CIT has given directions merely to verify the expenses claim u/s 57(iii) of the Act in the computation of income by the assessee and the same have been explained earlier also. We also find that issue of taxing of interest earned on deposits under the head income from other source and granting of deduction for interest paid on borrowed funds utilized to earn such interest on deposits had been duly considered by the AO while completing assessment u/s 143(3) of the Act. We find that the AO had examined this issue and the facts of the case during assessment proceedings and as such the CIT has no power to direct the AO to reexamine the same by passing a revision order u/s 263 of the Act merely because CIT(A) holds a different view from the view taken by the AO. Hence, we quash the revision proceedings passed u/s 263 of the Act and allow the appeal of the assessee.
In the result, the appeal of assessee is allowed. Order pronounced in the open court on 09 -03-2017.