DCIT 7(2), MUMBAI vs. SWAN ENERGY LTD, MUMBAI

O R D ER PER R.C. SHARMA, ACCOUNTANT MEMBER :

This is an appeal filed by the Revenue against the order of Ld. CIT(A) for the AY 2008-09 in the matter of order passed under section 143(3) of the Income Tax Act.

“2.3 I have considered the facts of the case. During the year the appellant earned interest income of Rs. 2,56,44,218/- which was claimed by appellant as business income. The source of generation of such interest income has been explained by the appellant as under:- “ The bookings amount / advance received from the buyers of the property is credited to an escrow account jointly operated by the assessee company and the developer Peninsula land Ltd. The disbursement from this account is monitored by the monitoring committee constituted by the state government of Maharashtra to monitor the sale and development of lands belonging to the Cotton Textile Mills. The committee gives approval for disbursement of funds from the escrow account in its meeting which is held monthly and on certain occasions it was held after a gap of 3 to 4 months. During the period between the approvals of the committee, the funds lying in the escrow account gets converted into fixed deposits to avoid a financial loss, generating interest income to the assessee company.” The AO has also accepted that the excess balance in the account of the appellant was on account of advances received from parties was converted into fixed deposits and the interest income was earned on the same. The AO has also accepted that the appellant was in the activity of construction & development of properties and the excess amount ( on which interest was earned) was on account of advance received from the parties. Thus it was an undisputed fact that the amount (on which interest was earned) was business receipts. It was also an undisputed fact that the amount (on which interest was earned) was not surplus/idle funds but was booking amount of construction activity which could not be appropriated by the appellant without the approval of the committee constituted by the state government of Maharashtra. Pending approval of such committee, the booking funds were available for earning the interest income. The question for consideration is as to whether this interest was assessable under the head “Business Income” as claimed by the appellant or under the head “ Income from other Sources” as held by AO. In the case of Tuticorin Alkaline Chemicals, 227 ITR 172 (SC) the interest earned before commencement of business was held to be income fro other sources. In the case of Bokaro Steel Ltd. 236 ITR 315 (SC) the rent received from contractor for hiring accommodation and other things were held to be capital receipts deductible from cost of construction. Such rent was also received prior to commencement of business. In the case of CIT Vs. Karnal Co-op Sugar Mills 243 ITR 2(SC), interest on money deposited to open letter of credit for purchase of machinery was held to be capital receipt to be capitalized with the cost of machinery and not assessable as income from other sources. In the case of Bongaigaon Refinery and Petrochemicals 251 ITR 329, (SC), the income received in the pre-commencement period was held not chargeable to tax to be adjusted against project cost. In the case of Karnatakla Power Corporation, 247 ITR 268 (SC), the pre-commencement period receipts were held to be adjustable against construction cost not chargeable to tax. In the case of consolidated Fibers and Chemicals, 273 ITR 253 (Cal), the assessee borrowed funds for constructions of project and invested the surplus amount in short term deposit. The interest income was held as assessable under the head “Business Income.” In the case of Chandanpur Sugar Co. Ltd., 280 ITR 612, (All) interest on short term deposit was held to be assessable under the head “Income from other sources.” In the case of CIT Vs. Lok Holdings 308 ITR 356(Bom), the assessee firm was engaged in the business of development of properties and received advances from intending purchases. The assessee temporarily invested the surplus amounts with banks. The interest earned thereon was held to be business income. In the case of Indian Oil Panipat Power Consortium Ltd. 315 ITR 255 (Del), interest on share capital put in fixed deposits during preoperative period was held to be capital receipt to be set off against preoperated expenses. In the case of DCIT Vs. Times Guaranty Ltd, (2010), 41 DTR (Mum)(SB) 193, The Spl. Bench Mumbai I.T.A.T. held that if surplus funds are deposited in a bank, the interest income partakes the character of income from other sources irrespective of the nature of assessee business. In the case of CIT Vs. Indo Swiss Jewels, 284 ITR 389 wherein High Court held that short term inter-corporate deposits made out of surplus funds kept for importing the machinery for business purposes, hence the interest earned on deposits had to be treated as business income and not income from other sources . In the case of Snam Progetti SPA Vs. Addl. CIT, 133 ITR 70, the Del High Court held that interest on bank deposits was also business income. In the case of CIT vs. Tirupati Woolen Mills, 193 ITR 252, Madras High Court in the case of Tamilnadu Dairy Development, 216 ITR 355, and Mumbai Tribunal in the case of ACIT Vs. Niru Impex held that the interest income was business income. Recently, the ITAT Mumbai has decided the case of M/s. West Gujarat Expressway Ltd. Vs. DCIT 10(1) in A.Y. 2007-08 order dated 27/02/2013. In this case, the appellant earned interest of Rs. 46,21,295/- out of unutilized borrowed funds after the commencement of business and was reduced from the capital work-in-progress treating the interest cost as part of capital WIP. In this case, there were no surplus funds and the unutilized borrowings were temporarily parked for earning interest income. It was claimed that interest income was inextricably linked up with setting up of project. The ITAT considered the decision of Spl. Bench Mumbai in the case of Times Guaranty (supra) and also in the case of Varun Shipping Co. 334 ITR 262 and held that the assessee had earned interest from bank deposits temporarily made out of borrowed funds which has not been utilized in the business. Following the decision of Bombay HC in the case of Varun Shipping Co., the interest income was held to be assessable as “Business Income”. I have considered the decisions of courts and Tribunals on this issue. The interest income has been earned by the appellant after the commencement of business. The funds, on which interest income was earned, were admittedly business receipts (booking amount of construction business). These funds were not idle/surplus funds but were available (for earning interest) on account of special circumstances. Thus, appellant‟s case was directly covered by the decisions of courts as mentioned above and specially by the decisions of Bombay High Court in the case of Lok Holdings and Varun Shipping Co. (supra). The decision of special bench of ITAT in the case of „Times Guarantee‟ was not applicable since the funds were not surplus funds. The AO is therefore, directed to assess the interest income under the head “business income”. This ground of appeal is therefore, allowed.”

5. We have considered rival contentions and found from record that assessee is in the business of construction of buildings. The assessee has executed a Development agreement with M/s. Peninsula Land Ltd. (PLL) to develop Company's properties in Mumbai. Accordingly all the bookings amounts / advances received from the buyers of the property are credited to an Escrow Account jointly operated by the assessee company and PLL. The disbursement from this account is monitored by the Monitoring Committee constituted by the State Government of Maharashtra to monitor the sale and development of lands belonging to the Cotton Textile Mills. The committee gives approval for disbursement of funds from the Escrow Account in its meeting which is held monthly and on certain occasions it was held after a gap of 3 to 4 months. To avoid financial loss, the funds Iying in the Escrow A/c. are put into Fixed Deposits whereby assessee earns interest income pending receipt of approvals of the committee. The business of the assessee requires funds. During the year, the assessee company has paid interest on the term loan taken for construction activity amounting to Rs 2042.19 lakhs which is debited to the Construction Account in progress - Schedule 11 of the Audited Statement of Accounts. Had these funds been made available immediately, the assessee company would have utilized the same for the purpose of business and thereby reduced the interest cost and the cost of construction. If interest paid of Rs 2042.19 lakhs is set off against interest received of Rs 256.44 lakhs, there is net interest payable and no interest received will remain.

6. Issue under consideration is squarely covered by the decision of Bombay High Court in the case of Lok Holdings-308 ITR 356 and Varun Shipping Company – 334 ITR 263, wherein it was held that assessee is engaged in business of development of properties received advance from intending purchaser, interest earned thereon is business income and not income from other sources. Respectfully applying the proposition laid down by Jurisdictional High Court to the facts of the instant case, we do not find any infirmity in the order of CIT(A) for treating the interest income as income from business.

7.Next grievance of Revenue relates to deletion of additional 22% of share of rental receipt, belonging to the Developers in terms of Development Agreement, in the hands of assessee.

However AO did not aggrieved with the assessee’s contention and added 22% additional share of rental receipt. By the impugned order Ld. CIT deleted the addition after having the following observation:

3.3. I have considered the facts of the case. This issue was also there in appellant‟s case in AY 2009-10. The original appeal for AY 2008-09 was filed on 25-01-2011 whereas appeal for A.Y. 2009-10 was filed on 20/01/2012. The appeal for AY 2008-09 was dismissed being not signed by the Managing Director/Director of the appellant company. However, the appeal order for AY 2009-10 was passed on 16/01/2013. In the appeal order of AY 2009-10, the undersigned did not accept appellant‟s claim of diversion of 22% of rentals to M/s Piramal Holdings Ltd. The undersigned held that the entire rental receipts were to be assessed in the hands of appellant under the head “Income from house property”. Against the appeal order of AY 2009-10, the appellant filed appeal to the ITAT. The ITAT „E‟ bench Mumbai in dated 03/05/2013 has held that “thus, by virtue of same clause of the development agreement, if the assessing officer is accepting the sale on net basis i.e., removing 22% of the share of developer, then by the same logic the rental income also has to be accepted in the same proportion i.e. net of 22% of the share of developer. Thus, for this reason alone, we set aside the impugned order passed by the Learned Commissioner (Appeals) and allow the ground raised by the assessee.” Thus, by following the order of ITAT, the AO is directed to assess 78% of rentals in the hands of appellant allowing appellant‟s claim of diversion of 22% of rentals to M/s Peninsula land Ltd. This ground of appeal is therefore, allowed. The appellant has also claimed full credit of TDS deducted by the lessee on the lease rent paid to the appellant. This issue was also there in AY 2009-10. In appeal order of AY 2009-10, the undersigned directed to the AO to allowed full credit of TDS, since the undersigned held that the entire lease rent was assessable in the hands of the appellant. However, the ITAT in its order passed for AY 2009-10 has directed that only 78% of lease rent was assessable in the hands of the appellant since 22% of the same diverted to M/s. PLL. I have considered the facts of the case for this year. The deductor has issued the TDS certificate in the name of the appellant. The credit of TDS can be taken only by the person in whose name the certificate has been issued i.e. by the appellant. On the other hand, M/s PLL have confirmed that though they have received 22% of the total rent receivable amount to Rs. 1,19,60,903/- and included the same in their income, but they have not claimed the TDS credit relating to the same. In the facts and circumstances, the appellant is entitled for credit of full amount of TDS in their hands. The AO is directed to allow full credit of TDS to the appellant. In the result, this ground of appeal is allowed.”

10. We have considered rival contentions. The issue under consideration is squarely covered by the decision of Tribunal in assessee’s own case for the assessment year 2009-2010 dated 16/01/2013. By relying on the decision of the Tribunal, CIT(A) has deleted the addition. As the facts and circumstances during the year under consideration are same, respectfully following the order of the Tribunal, we confirm the findings recorded by CIT(A) deleting the addition made on account of rental income.

11. Next grievance of Revenue relates to deletion of disallowance made by the Assessing Officer under section 40(a)(ia) of the Act.

9. Rival contention have been heard and record perused.

“ 4.3 I have considered the facts of the case. I have perused the balance sheet and P&L account of AY 2007-08 and observed that the appellant has debited construction expenses i.e. purchase of material, construction material, construction expenses and various other expenses in P&L account. In the facts and circumstances the AO's observation was incorrect that the expenditure had not passed through P&L account. It was an admitted fact that in AY 2007-08, the appellant was in the construction activity. In AY 2007-08 the appellant offered disallowance of Rs. 12,25,83,521/- u/s 40(a)(ia) of the Act. In AY 2007-08 and 2008-09, the appellant had not offered income from construction activity, since it was following “Project Completion Method”. Even in “Project Completion Method” also, the provisions of section 40(a)(ia) are applicable wherever the payments required deduction of tax at source. The appellant was in the construction activity and in assessment of AY 2007-08, the AO had accepted this fact and had also accepted such offer of disallowance u/s 40(a)(ia). In the facts and circumstances, in the year under consideration, the appellant had rightly claimed deduction of Rs. 12,25,83,521/- on TDS payment basis u/s 40(a)(a) of the Act. Without prejudice to above findings, the disallowance of Rs. 12,25,83,521/- u/s 40(a)(ia) made by AO in assessment order had no tax effect. Had the appellant not claimed deduction of Rs. 12,25,83,521/- u/s 40(a)(ia) in the return of income of AY 2008-09, the returned income would have been Rs. 7,86,66,793/- + Rs. 12,25,83,521/- which would have got adjusted in the brought forward losses of AY 2000-01 of Rs. 23,35,95,694/-. The set off of B/f losses of AY 2000-01 could have been claimed by the appellant upto AY 2008-09 only. In view of above, the AO is directed to allow appellant‟s claim of deduction of Rs. 12,25,83,521/- u/s 40(a)(ia) of the Act. This ground of appeal is therefore allowed.

14. We have considered rival contentions and found from record that as per schedule 11 of Audited Profit & Loss Account, the assessee company has debited all the expenses incurred i.e. purchase and other expenses incurred towards construction activity to the Profit & Loss A/c. The details of operating & other expenses totaling to Rs.12,261,32 lacs is also given and similar expenses debited in the earlier year, aggregating to Rs.7536.58 lacs. Therefore, the finding of the AO that expenses on account of which TDS is to be deducted are not passed through the P&L A/c. is obviously wrong.

15. We also found that while passing the assessment order for A.Y.2007-08 u/s.143(3) dated 17-12-2009 the AO has accepted the said disallowance made u/s.40(a)(ia). Thereafter on deduction and payment of TDS, the assessee has claimed deduction of expenses disallowed earlier of Rs.12,25,83,521/- u/s. 40(a)(ia) in A.Y.2008-09.

16. Had the assessee not claimed deduction of Rs.12,25,83,521 under section 40(a)(ia) in the return of income for AY2008-09, the returned income would have been Rs.7,86,66,793 + Rs. 12,25,83,521 = Rs.20,12,50,314 which would have got adjusted against brought forward losses of AY 2000-01 of Rs.23,35,95,694/- which in any case would lapse after AY 2008-09. The CIT(A) has deleted the addition after recording detailed finding at para 4.3 which has not been controverted by learned DR by bringing any positive material on record. Accordingly, we do not find any reason to interfere in the finding of CIT(A).

17. AO also made an addition on protective basis in respect of income on sale of TDR receipt.

18. By the impugned order Ld. CIT(A) deleted the addition after observing as under : “During appellate proceedings, the appellant has filed confirmation of M/s Peninsula Land Ltd. confirming payment of Rs. 11.60 crores by them to appellant towards their share of cost of additional FSI to be utilized in the Real Estate Development Project. In remand report dated 06/08/2012, the AO has verified the genuineness of this confirmation certificate.

5.3 I have considered the facts of the case. The appellant was owner of land (Mill land) at Kurla, Mumbai. Being owner, the appellant intended for development of said land for construction of buildings/flats/real Estate. The appellant(owner) entered into development agreement with M/s Peninsula Land Ltd. (PLL). As per agreement, the FSI to the extent of Rs. 2,50,000/- Sq. ft was to be arranged by the developer M/s. PLL at their own cost. The clause 8B(XI) of the agreement is as under:-

“In the event the developers require transfer of Development rights (TDR) beyond 2,50,000 Sq. ft. consumption on the said land properties , the owners shall be responsible to procure the aforesaid TDS at their own cost.”

Thus, the developer (PLL) was to arrange FSI/TDR at their own cost to the extent of 2,50,000 sq. ft. The FSI/TDR beyond the extent of 2,50,000 sq. ft. if required, was to be arranged by the appellant(owner). In the project, the FSI/TDR consumed was less than 2,50,000 sq. ft which consequently resulted in saving to the developer (PLL) or reducing their (PLL‟s) cost on account of arranging less FSI/TDR (2,50,000 sq. ft. (-) FSI/TDR consumed) for the project. In the entire agreement, there is no clause clarifying the situation of Rights / Liabilities, if the FSI/TDR consumed in the project would be less than 2,50,000 Sq. ft. In the facts and circumstances, in strict sense, the developer M/s. PLL could not have been legally enforced by the appellant for sharing its savings(saving of cost of reduced FSI/TDR) to share its saving with the appellant by agreeing to pay Rs. 20 crore to the appellant. Thus, it could be said to be a windfall to the appellant.

M/s PLL, the developer agreed to pay Rs. 20 crore to the appellant (actual amount received Rs. 11.60 crore). This receipt was on account of lesser consumption of TDR. Thus, the receipt was relating to construction activity having direct nexus with the appellant‟s business. However, in my view, it could not have been reduced from the Work-in-progress, since, it was a sort of windfall to the appellant. The FSI/TDR was to be arranged by PLL and therefore, less consumption of FSI/TDR did not result in saving of any expenditure of the appellant. Therefore, it could not have been reduced from the W.I.P. The appellant has claimed that it had offered such receipts as income for taxation as an abundant caution. The appellant has claimed that it could have reduced the said receipt from Work-in-progress thereby, lowering cost of project.

However, in my view, the said windfall/receipt could not have been reduced from the Work-in-progress for the reasons that such windfall was not related to any expenditure required to be incurred by the appellant. The appellant‟s argument is correct that it had offered such receipt taking an abundant caution. Had the appellant reduced this receipt of Rs. 20 crores from the Work-in-progress, in that case, the AO could have taken a stand that such receipt was taxable as income in the year under consideration and the AO would have made such addition. Therefore, the appellant has correctly offered such receipts in the year under consideration.

The AO was of the opinion that such receipt of 20 crores was assessable on completion of project. Without prejudice to this finding, the AO has assessed such amount of 20 crore in the hands of the appellant on protective basis. Thus, as per AO, such receipt of Rs. 20 crores was assessable, on substantive basis, as and when the income of project was offered by the appellant. I have considered the A.O‟s this finding. It has been observed that the appellant has offered income from project partly in A.Y. 2009-10, A.Y. 2010-11 & in subsequent year. The assessment of A.Y. 2009-10, 2010-11 etc have been completed by the AO under scrutiny u/s. 143(3) of the Act. However, in the assessment order of these years, no addition has been made by the AO in respect of such receipt of 20 crores. Thus, in A.Y. 2008-09, the AO held that such receipt was assessable in subsequent year. But as explained above, in subsequent year, no such additions has been made. In the facts and circumstances, the protective addition made by the AO in the year under consideration has assumed the character of substantive addition. Though, the project was partly completed in those subsequent years, in the facts and circumstances, if the year under consideration i.e. in A.Y. 2008-09, the same would remain unassessed / would ecape assessment on account of n addition made in subsequent years. Thus, in the interest of revenue, this receipt of Rs. 20 crores is required to be assessed in the year under consideration only. In the result, the AO is directed to assess such receipts of Rs. 20 crores on substantive basis in the year under consideration as appellant‟s business income. This ground of appeal

, is therefore allowed.”

19. We have considered rival contentions and found from record that during the year, the assessee company has shown income of Rs.20 crores in the P&L A/c. as received from M/s. PLL. The same was offered to tax in the return filed for AY 2008-

09. The AO has discussed the issue in para 6 of his order and has held as follows - (i) In the assessment year 2004-05, the assessee company has received 32 crores from PLL and not offered the same for tax in that year on the ground that it will be offered to tax as and when the project is completed, in that case, how this income of Rs 20 crores which is also connected to is project, is offered as income in this year?

(ii) He has further held that there is no agreement between the assessee company and PLL, the assessee has only filed the ledger copy of PLL as appearing in their books of account and as per that, the assessee company has received Rs 10 crores during the year.

(iii) This income has been offered to claim the set off of brought forward business loss for AY 2000-01 which would get time barred after AY 2008-09.

21. We found that the assessee had entered into a development agreement dated 31-3-2004 with Piramal Holdings Ltd. [now known as Peninsula Land Ltd. (PLL). As per the said agreement, PLL will be entitled to 22% of the sale proceeds and 78% will belong to the assessee company. In the development agreement entered with PLL it is clearly mentioned in clause 8B(xi) that it is the obligation of the developer to arrange at its own cost for Transfer Development Rights to the extent of 2,50,000 sq. ft. for the construction in the said property and if the TDR is required more than 2,50,000 sq. ft., the same shall be provided by the assessee company. However, during the course of development, the project did not require any such TDR and accordingly, after due negotiations with PLL, it was agreed that they shall pay a sum of Rs.20 crores to the assessee company on account of reduction in costs to be borne by PLL as per the obligations agreed between the parties. The said amount was shown under the head other income in the Profit & Loss A/c and was offered to tax in return filed for AY 2008-09 being year of arriving at the settlement amount. Though the assessee follows project completion method of accounting, however the income Rs.20 crores was a windfall to the assessee as the assessee did not have an obligation to arrange the TDR to the extent of 2,50,000 sq ft and hence the same was not be treated as construction expenses for the assessee. Accordingly the said income has not arisen during the course of construction activity and hence was correctly offered in the year of arriving at the settlement being year of accrual.

“6.3 I have considered the facts of the case.

6.3(a) In respect of foreign travel expenses of Rs. 8,82,130/-, though, the AO has disallowed the foreign travel expenses, but the AO has not clarified as to how the expenses were not related to appellant‟s business. The appellant has filed details of travelling details and supporting evidences of vouchers etc. explaining that the foreign tours were conducted by Directors and others for development of Textile business, investments etc. In the facts and circumstances, the appellant has explained that the expenses were incurred for the purpose of business. The disallowance made by the AO on this account is therefore, deleted.

6.2(b) In respect of local travelling expenses, the appellant has satisfactorily explained that the expenses were incurred for the purpose of business of Textile, warehousing, expenses were incurred on legal matters. In the facts and circumstances, the appellant has satisfactorily explained that the expenses were incurred for the purpose of business. The disallowance made by the AO is therefore, deleted.

In the result, this ground of appeal

, is allowed.

27. We have considered rival contentions and found that AO has disallowed the foreign travelling expense of Rs.8,82,130/- and 75% of remaining travelling expenses i.e., 75% of Rs.10.88 lakhs of Rs.8.16 lakhs on adhoc basis by holding that the same is not related to the business of the assessee. Regarding local travelling expenses, it has been held by the AO that the assessee company is carrying on the business activity of trading in textile on a small scale and major activity of the assessee is development of property and further expenses are incurred for directors and consultants and, therefore, 75% of the expenses are disallowed as they are not related to the business activity of the trading in textiles.

28. By the impugned order CIT(A) deleted the disallowance after recording finding at para 6.3 as reproduced above. From the record, we found that in view of the above discussion, any infirmity in the order of CIT(A) for deleting the disallowance made on account of travelling expenses.

29. AO also disallowed Rs. 1,55,00,000/- debited by the assessee under the head legal / processing/ consultation fees.

“7.3 I have considered the facts of the case. The AO has made disallowance of expenses holding that the expenses were not related to the textile business of the appellant. The AO indirectly assumed that such expenses were incurred for the purpose of appellant‟s construction activity, the income from which was to be offered in subsequent year on completion f project. However, the appellant has satisfactorily explained that the legal/processing/consultation fees relating to construction activity were separately debited in the P&L A/c and those expenses were carried to the work-in- progress of construction business. The appellant has satisfactorily explained that the expenses disallowed by the AO were related to its textile business, warehousing business etc. and therefore, were allowable as revenue expenses of the year under consideration. In its submissions above, the appellant has satisfactorily explained the justification of claiming such expenses against its business carried out during the year. Such expenses were neither capital in nature nor personal. Deduction of these expenses are therefore, allowable to the appellant u/s. 37(1)of the Act. The disallowance made by the AO is therefore, deleted.

In the result, this ground is allowed.”

We also found that the expenses were not personal or capital in nature and therefore, should be allowed. All these payments made to various consultants relating to the construction activities were debited to the construction expenses a/c. and were carried forward under the head work in progress. The same can be seen from Schedule 11 of the audited statement of accounts in respect of Purchase and Other Expenses and under the said head, the following expenses are debited.

(i) Architect Fees & Consultancy charges Rs. 82.49 Lacs (ii) Consultancy charges Rs. 133.41 Lacs Therefore, the contention of the AO that these were relating to the construction activity was not correct. Further, the AO has not doubted the incurring of these expenses and all these payments which were made to consultants and Advocates were duly supported by their bills and vouchers and complete details i.e. name, address and purpose for which it is paid were already given to the AO. In view of the above circumstances, the disallowance of Rs. 155 lakhs out of legal, professional and consultancy charges made by the AO was not justified. Even the AO has tabulated these expenses in his assessment order on the various purposes for which it is paid. From the above, it is very clear that these expenses are incurred towards payment to various consultants, advocates, etc. during the course of business, hence, they are allowable as deduction u/s. 37 of the I.T. Act.

Order pronounced in the open court on 24/10/2016.