BOMBAY ISLE DEVELOPERS P. LTD,MUMBAI vs. ITO WD 9(1)(2), MUMBAI

The Present Appeal has been filed by the assessee against the order of Commissioner of Income Tax (Appeals)- 19, dated 11.08. 2011 on the grounds of appeal mentioned herein below.

The brief facts of the case are that assessment in this case was completed u/s 143(3) of the I.T. Act, 1961 on 29.12.2008 thereby assessing total income at Rs.19,58,40/-. However it was noticed that disallowance of net interest on account of enhanced WIP amounting to Rs.15,45,880/- was not added to the business income. Therefore after serving notices, the ITO passed order u/s 154 of the Act thereby revised the total income of the assessee.

Aggrieved by the order of the ITO, assessee filed the appeal before CIT(A) and the CIT(A) after considering the case of the assessee dismissed the appeal of the assessee vide order dated 29.12.2008 thereby upholding the order of ITO passed u/s 154 of the Act.

Aggrieved by the order of CIT(A), the assessee filed the present appeal before us on the grounds mentioned herein above.

Both the grounds raised by the assessee are inter-connected and inter-related therefore we thought it fit to dispose off the same through the present common order. At the very outset, ld. AR appearing on behalf of assessee submitted that the (A.Y. 2006-07) Bombay Isle Developers P. Ltd. Vs. ITO CIT(A) erred in confirming addition of Rs.15,45,880/- being interest cost by not appreciating the fact that the matter is debatable and cannot become subsequent matter of rectification u/s 154 of the Act. Ld. AR further submitted that the assessee is a builder and developer and had two project under construction during the year called “Lata Soni C.H.S.” and “Kamal Vishranti Kutir” at Bandra and during the year under consideration both the projects were under construction and the assessee had received interest income of Rs.15,45,880/-. The assessee has debited, under the head ‘Financial Expenses’ an amount of Rs.31,13,778/- on account of interest and fiancé brokerage. It was further submitted that closing stock of W.I.P. is valued at cost and cost includes all expenses including administrative and net interest cost incurred to finance the project as per clause 12(a) regarding method of valuation of closing stock of Tax Audit Report. This is just matter of accounting policy which is consistently followed by company. So the assessee has correctly charged net interest cost to closing W.I.P. It was further submitted that during normal course of business any surplus fund utilized by the company as advances to director and interest earned on that advances is liable to set off against interest cost incurred by the company to the extent interest earned by the company and that is what assessee has done by capitalizing net interest cost to the project by reducing interest cost to the extent interest received by the company on advances made out of surplus fund.

We have heard the counsels for both the parties on this ground and we have also perused the material placed on record as well as the orders passed by the revenue authorities. After considering the entire facts as well as circumstances of the present case, we are of the considered view that the issue of taxability of a receipt under the head business income or income from other sources is a debatable issue and hence the same is not a mistake apparent to be rectified u/s 154. Even the revenue authorities have failed to appreciate that the interest receipt are business receipt of the assessee and because of that WIP is reduced as per the consistent method of accounting followed by assessee. Therefore, on that account additions of Rs.15,45,880/- had not at all justified to be added by virtue of an order passed u/s 154 of the Act as the same cannot be held as a “mistake apparent” to be rectified u/s 154 of the Act more particularly when the assessment in this case was completed u/s 143(3) on 29.12.08. Ld. AR also drawn out attention to page no. 1 to 39 of the paper book which consist of Audited Financial Statements for the financial year 2005-06, Report of the Auditor in form 3CA containing particulars in Form 3CD with Annexure for AY 2006-07.